Sometimes it’s Not Fairness That Matters

Once in a while I read a tax case and say to myself: “That’s not fair!” If I’m otherwise having a good day, I’ll stop and think about it for a minute before blowing my stack about another injustice imposed on a poor, unsuspecting taxpayer. When I do, I often find that my initial reaction was misplaced and the decision that initially irked me was in fact appropriate. This pretty much describes what happened earlier this week. Before describing the case, though, let me give you a hypothetical situation and ask you to assess how you would react to it.

Suppose you have duly filed your tax returns for many years on the basis that amounts you received each year were subject to tax. You paid tax on these amounts, were assessed in accordance with your returns as filed, and so saw no reason to file notices of objection to the assessments. Just recently, you become aware for the first time that an unrelated person circumstances just like yours has successfully appealed to the Tax Court on the basis that amounts of this kind are not subject to tax. You know that the CRA has discretion (in the case of individual taxpayers) to refund taxes paid in prior years where the time for filing an objection has passed, so you apply for a refund on the basis that it’s only fair that you (and any other similarly positioned taxpayer, for that matter) get a refund of taxes that it is now clear did not have to be paid. What would you say to the CRA when informed that, sorry, we don’t make refunds in this sort of a case?

If you said, hey, that’s not fair! your reaction is the same as mine when I first read the decision of the Federal Court of Appeal in the Abraham  case (2012 FCA 2012). The taxpayer in that case, after being rejected by the CRA on a claim for a discretionary refund, applied to the Federal Court (Trial Division) for a review of the CRA’s decision under the so-called “fairness” provisions of the Act. That court allowed the application and ordered the CRA to reconsider its refusal. Instead of doing that the CRA appealed the decision to the Federal Court of Appeal, and that court said that the CRA acted properly in refusing the refunds in the first place. So Mr. Abraham was out of luck. Was this unfair? Why would the FCA agree that the CRA had acted properly in this case?

Note that I have used the word “properly” (not “fairly”) in describing the result. An important point that comes out of the case is that when the question is whether the CRA has exercised its discretion to do (or not do) something that the Tax Act gives it authority to do (or not, as the case may be), the “fairness” of the result is not the important criterion to be applied. Rather, as the FCA emphasized it is whether the CRA acted “reasonably” in deciding not to exercise its discretion. In the Abraham case, the CRA proceeded on the basis of a policy set out in Information Circular 07-1, Taxpayer Relief Provisions” to the effect that the CRA will not exercise its discretionif the only basis for the request is a successful appeal by another taxpayer. Before the CRA will exercise its discretion to refund prior years taxes, it has to be satisfied that it would have agreed in those years that the amounts were not taxable, had the taxpayer filed a timely objection to assessments for those years. In this way of looking at things, it is immaterial that the court in the recent case establishes that the amounts are not taxable when dealing with another taxpayer even though to most ‘ordinary’ persons this seems like an unfair result.

And probably in a non-technical way it is “unfair.” But in the real world, there’s lots of unfairness in the application of the tax rules. In this case, the CRA justifies its policy on the basis that it would be overwhelmed if it had to reopen everybody’s tax return each time a taxpayer was successful in an individual case. And they’re probably right. That’s not to say that the CRA will never agree to voluntarily reassess a prior year when asked to do so. If the taxpayer discovers an overpayment was made in an earlier year, and it appears that the CRA would have agreed to a make a refund if asked to do so at that earlier time, then it’s likely the CRA will make the refund now. Two concluding points: any request of this kind must be made within ten years of the year in respect of which the refund is claimed, and only individuals, not corporations, can take advantage of this relief.