Fairness Provisions

Volume No. 05-31

“If CRA does not consider all facts, the courts are willing to reverse their decisions.”

In the case of Singh vs. The Queen(T-293-05), the Court had to decide whether the CRA had applied the Fairness Provisions appropriately with respect to the waiver of penalties and interest.

The taxpayer had received a loan of $70,000 from an arm’s length Canadian company during the years 1994 to 1996, to be used for the taxpayer’s education at a university in the United States. The loan was to be forgiven equally over a four-year period. The amount forgiven would be added to the taxpayer’s income while the taxpayer worked for the corporation. The taxpayer never worked for the corporation because of outside circumstances. The corporation wrote off the loan as a bad debt in 1997. A CRA auditor determined that, because the loan was written off in 1997, it should have been included in the taxpayer’s income in that year.

The taxpayer did not know that the loan had been written off, since he was not living in Canada at that time. He found out when he received a letter from the CRA advising him that he had to include the $70,000 loan write-off in his 1997 income.

The Court was concerned about several points. Even though the Court was not asked to determine whether the loan write-off had been appropriately included in the taxpayer’s income, this was of concern to the Court, noting that a loan write-off would only be considered income when the loan is “non arm’s length, low interest or forgiven,” and none of these characteristics applied. The Court observed that the debt should not have been included in the taxpayer’s income. Even though the Court did not have jurisdiction to make this determination, the CRA had the ability, pursuant to subsection 152(4.2), to make an appropriate adjustment. The Court suggested that the taxpayer make an application under that subsection that the CRA make an adjustment.

The Court clarified that the loan was never forgiven. Even though it was written off, the corporation was still actively pursuing the debtor, and the CRA auditor was well aware of this. The Court was concerned about the year in which the income was allocated to the taxpayer. In its analysis of which year the loan was to be included in the taxpayer’s income, the Court indicated that the CRA’s choice of year was incomprehensible, and asked: “How can one arbitrarily attribute the amount to the taxation year 1997 or tax it as forgiven until such time as the facts indicate that such was the case?” The Court made several references to the fact that the auditor had provided an incorrect report to the Fairness Officer.

The Court determined that “the forgiveness officer clearly ignored relevant facts or took into consideration irrelevant facts and the decision is contrary to law.” The penalties and interest were waived. This is another example of the CRA making observations and arriving at conclusions regardless of the facts. When a fairness decision is patently wrong, it appears that the Court is more and more willing to look at the facts to ensure a correct decision.

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