Calgary, Alberta, September 14, 2006
PRESENT: The Honourable Mr. Justice Mosley
BETWEEN:
Applicant
and
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR JUDGMENT AND JUDGMENT
[1] Greenpipe Industries Ltd. (“Greenpipe”) discovered late that it was entitled to file claims for tax credits under the Scientific Research and Experimental Development (SR&ED) program for the 1996, 1997 and 1998 tax years but had not done so. In 2003 it asked that the respondent accept the filing of amended T2 returns to include SR&ED claims for those years. The respondent refused on the ground that the claims were statute barred. Requests for reconsideration were denied. This is Greenpipe’s application for judicial review of the respondent Minister’s decision under the fairness provisions of the Income Tax Act, R.S. 1985, c. 1 (5th supp.) (the “Act”) dated August 25, 2005.
[2] In 1995, Greenpipe, a corporation registered in Alberta, entered into an agreement with Imperial Oil Resources Ltd. (“Imperial”) for development of a pipeline integrity management computer program. In 1995, the prescribed forms to make SR&ED claims were filed by the applicant on time and were accepted by the respondent. Imperial initially funded the work for three years during which T2 returns were filed by the applicant but the available SR&ED tax credits with respect to the software development program were not claimed. The applicant submits that during that period it was believed that Imperial owned the software copyright and that Greenpipe could not, therefore, claim the SR&ED credits for those years.
[3] Imperial stopped funding Greenpipe in 1999. Greenpipe filed SR&ED claims in relation to the software for the 1999- 2001 tax years. These were filed on time, audited and accepted by the respondent.
[4] In June 2000, Imperial clarified by letter that it made no claim to ownership of the software but only to use of the source code, under conditions to be negotiated with Greenpipe. The applicant thereafter sought a legal opinion which in December 2000, confirmed that it had the sole ownership of the copyright in the software. No action was taken immediately to claim the SR&ED credits for the three years during which they were not claimed. The applicant asserts that the reason for the delay was that the firm was engaged in another copyright ownership issue which was not resolved in their favour until September 2002.
[5] On August 26, 2003, the applicant requested that the respondent accept the filing of amended T2 returns to include SR&ED claims for 1996, 1997 and 1998. In a letter dated September 10, 2003 the respondent disallowed the filing of the amended T2 returns. In brief, that letter stated that the fairness provisions of the Act did not permit an adjustment to the filing requirements for a corporate tax return.
[6] On November 20, 2003, the applicant requested that the time limits for filing SR&ED claims in the Act be waived. Several meetings and further written submissions followed leading to a third request for waiver by the applicants through counsel in May 2005. That request was denied by letter dated August 25, 2005. That letter constitutes the decision which is the subject of these proceedings.
[7] The August 25, 2005 letter refers to explanations provided by the respondent in correspondence dated March 7, 2005. The March 7, 2005 letter outlines the background to the controversy in some detail and describes the analysis conducted by the respondent’s officials with respect to the representations submitted by the applicant on several occasions.
ISSUES
[8] The issues can be identified as follows:
1. Did the respondent err in concluding that the claims in 2003 for the 1996, 1997 and 1998 tax years were barred by operation of the statute?
2. Assuming the claims were not statute barred, did the respondent fetter his discretion and fail to consider the applicant’s submissions?
RELEVANT STATUTORY PROVISIONS
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Income Tax Act, R.S. 1985, c. 1 (5th Supp.) |
Loi de l’impot sur le revenue, L.R. 1985, ch. 1 (5e Suppl.) |
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37. (11) Subject to subsection 37(12), no amount in respect of an expenditure that would be incurred by a taxpayer in a taxation year that begins after 1995 if this Act were read without reference to subsection 78(4) may be deducted under subsection 37(1) unless the taxpayer files with the Minister a prescribed form containing prescribed information in respect of the expenditure on or before the day that is 12 months after the taxpayer's filing-due date for the year.
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37. (11) Sous réserve du paragraphe (12), un montant n'est déductible en application du paragraphe (1) au titre d'une dépense qu'un contribuable engagerait, compte non tenu du paragraphe 78(4), au cours d'une année d'imposition qui commence après 1995 que s'il présente au ministre, au plus tard douze mois après la date d'échéance de production qui lui est applicable pour l'année, un formulaire prescrit contenant les renseignements prescrits relativement à la dépense.
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37. (12) If a taxpayer has not filed a prescribed form in respect of an expenditure in accordance with subsection 37(11), for the purposes of this Act, the expenditure is deemed not to be an expenditure on or in respect of scientific research and experimental development.
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37. (12) Pour l'application de la présente loi, la dépense à l'égard de laquelle un contribuable n'a pas produit un formulaire prescrit en conformité avec le paragraphe (11) est réputée ne pas être une dépense relative à des activités de recherche scientifique et de développement expérimental |
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152. (1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer's tax payable under this Part for the year.
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152. (1) Le ministre, avec diligence, examine la déclaration de revenu d'un contribuable pour une année d'imposition, fixe l'impôt pour l'année, ainsi que les intérêts et les pénalités éventuels payables et détermine: a) le montant du remboursement éventuel auquel il a droit en vertu des articles 129, 131, 132 ou 133, pour l'année
b) le montant d'impôt qui est réputé, par les paragraphes 120(2) ou (2.2), 122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) ou 210.2(3) ou (4), avoir été payé au titre de l'impôt payable par le contribuable en vertu de la présente partie pour l'année.
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152. (4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return (i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or
(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and (i) is required pursuant to subsection 152(6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, (ii) is made as a consequence of the assessment or reassessment pursuant to this paragraph or subsection 152(6) of tax payable by another taxpayer,
[…]
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152. (4) Le ministre peut établir une cotisation, une nouvelle cotisation ou une cotisation supplémentaire concernant l'impôt pour une année d'imposition, ainsi que les intérêts ou les pénalités, qui sont payables par un contribuable en vertu de la présente partie ou donner avis par écrit qu'aucun impôt n'est payable pour l'année à toute personne qui a produit une déclaration de revenu pour une année d'imposition. Pareille cotisation ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans les cas suivants: a) le contribuable ou la personne produisant la déclaration: (i) soit a fait une présentation erronée des faits, par négligence, inattention ou omission volontaire, ou a commis quelque fraude en produisant la déclaration ou en fournissant quelque renseignement sous le régime de la présente loi, (ii) soit a présenté au ministre une renonciation, selon le formulaire prescrit, au cours de la période normale de nouvelle cotisation applicable au contribuable pour l'année;
b) la cotisation est établie avant le jour qui suit de trois ans la fin de la période normale de nouvelle cotisation applicable au contribuable pour l'année et, selon le cas: (i) est à établir en conformité au paragraphe (6) ou le serait si le contribuable avait déduit un montant en présentant le formulaire prescrit visé à ce paragraphe au plus tard le jour qui y est mentionné, (ii) est établie par suite de l'établissement, en application du présent paragraphe ou du paragraphe (6), d'une cotisation ou d'une nouvelle cotisation concernant l'impôt payable par un autre contribuable, […]
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152. (4.3) Notwithstanding subsections 152(4), 152(4.1) and 152(5), where the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or where the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable, or redetermine an amount deemed to have been paid or to have been an overpayment, under this Part by the taxpayer in respect of the subsequent taxation year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
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152. (4.3) Malgré les paragraphes (4), (4.1) et (5), lorsqu'une cotisation ou une décision d'appel a pour effet de modifier un solde donné applicable à un contribuable pour une année d'imposition donnée, le ministre peut ou, si le contribuable en fait la demande par écrit, doit, avant le dernier en date du jour d'expiration de la période normale de nouvelle cotisation pour une année d'imposition subséquente et de la fin du jour qui tombe un an après l'extinction ou la détermination de tous les droits d'opposition ou d'appel relatifs à l'année donnée, établir une nouvelle cotisation à l'égard de l'impôt, des intérêts ou des pénalités payables, ou déterminer de nouveau un montant réputé avoir été payé, ou payé en trop, en vertu de la présente partie par le contribuable pour l'année subséquente, mais seulement dans la mesure où il est raisonnable de considérer que la nouvelle cotisation ou la détermination se rapporte à la modification du solde donné applicable au contribuable pour l'année donnée.
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220. (2.1) Where any provision of this Act or a regulation requires a person to file a prescribed form, receipt or other document, or to provide prescribed information, the Minister may waive the requirement, but the person shall provide the document or information at the Minister's request.
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220. (2.1) Le ministre peut renoncer à exiger qu'une personne produise un formulaire prescrit, un reçu ou autre document ou fournisse des renseignements prescrits, aux termes d'une disposition de la présente loi ou de son règlement d'application. La personne est néanmoins tenue de fournir le document ou les renseignements à la demande du ministre. |
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220. (3) The Minister may at any time extend the time for making a return under this Act. However, the extension does not apply for the purpose of calculating a penalty that a person is liable to pay under section 162 if the person fails to make the return within the period of the extension.
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220. (3) Le ministre peut en tout temps proroger le délai fixé pour faire une déclaration en vertu de la présente loi. Toutefois, il n'est pas tenu compte de la prorogation pour ce qui est du calcul d'une pénalité prévue à l'article 162 si la personne qui est passible de cette pénalité ne fait pas la déclaration dans le délai prorogé.
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ANALYSIS
Standard of Review
[9] The parties agree that the applicable standard of review to decisions taken under the fairness provisions of the Act is reasonableness: Lanno v. Canada (Customs and Revenue Agency), 2005 D.T.C. 5245, 2005 FCA 153. In light of the Court of Appeal’s application of a pragmatic and functional analysis in that decision, I see no reason to repeat the exercise. In so far as this matter concerns a fairness decision, I accept that the standard of review should be one of reasonableness.
[10] As stated by Justice Iacobucci in Canada (Director of Investigation and Research) v. Southam, [1997] 1 S.C.R. 748 at para. 56, “an unreasonable decision is one that, in the main, is not supported by any reasons that can stand up to a somewhat probing examination. Accordingly, a court reviewing a conclusion on the reasonableness standard must look to see whether any reasons support it.”
[11] My colleague Justice Sean Harrington discussed the reasonableness standard in Maloshicky v. Canada (Customs and Revenue Agency), [2005] F.C.J. No.1203 (QL), 2005 FC 978 at para. 10, a case also arising under the fairness provisions of the Income Tax Act, as follows:
…A reasonable decision is not necessarily a correct decision. There can be more than one reasonable decision. It does not matter whether or not I would have made the same decision. The reasonableness standard means that the decision should not be interfered with unless clearly wrong in the sense of being based on a wrong principle or a misapprehension of the facts. [Citations excluded]
[12] The first issue to be determined is whether the respondent erred in concluding that the claims were statute barred. That is a question of law which calls for review on the standard of correctness: Barrie Public Utilities v. Canadian Cable Television Assn., [2003] 1 S.C.R. 476, 2003 SCC 28 at para. 66; Mugesera v. Canada (Minister of Citizenship and Immigration), [2005] 2 S.C.R. 100, 2005 SCC 40 at para. 37.
Are the claims statute barred?
[13] The respondent's position is that section 37 (11) and paragraph 127 (9)(m) of the Act provide that no amounts may be allowed for SR&ED expenditures and investment tax credits, unless prescribed forms for such claims are filed within one year after the taxpayer's filing due date for the particular year. In the case of the applicant, this deadline was eighteen months after each taxation year ended. Section 220 of the Act allows the Minister to accept late filed forms, but it does not provide the Minister with authority to reassess tax years otherwise precluded by section 152 (4) of the Act. Refunds for refundable investment tax credits are made pursuant to section 164 of the Act, and require the minister to make an assessment or reassessment.
[14] The applicant submits that this is not a case of assessment or reassessment of the 1996, 1997 and 1998 taxation years but rather a request to determine under paragraph 152 (1) (b) of the Act the amount of tax deemed by subsection 127.1 (1) to be paid on account of the taxpayer's tax payable under Part l of the act for SR&ED claims for those years where the applicant was unsure of its entitlement and as a consequence did not apply for the refund.
[15] There is no reference, the applicant submits, in subsection 152 (4) to any time limit to “determine” or to “re-determine”. Once any amount is determined under paragraph 152(1)(b) of the Act, the amount of tax deemed by subsection 127.1(1) to be paid on account of the taxpayer's tax payable under part one of the Act for the year may give rise to a change in taxable income for subsequent years which the respondent may reassess under subsection 152 (4.3) of the Act.
[16] The applicant cites Alex Parallel Computers Research Inc. v. Canada (1998), 157 FTR 247 (F.C.), [1998] F.C.J. No. 1742 (QL) (Alex Parallel) for the proposition that the Minister may waive the filing of any form required by the Act, including the forms prescribed for the filing of a SR&ED claim. Alex Parallel is a case involving the interpretation of subsection 220 (2.1) of the Act. The respondent had taken the position that the section applied only to electronic filing. Justice Yvon Pinard concluded that the Minister’s discretion under the section was not limited to such filings.
[17] In my view, Alex Parallel is not of assistance to the applicant as the parties in that case had reached an agreement to deduct research expenditures from the taxpayer's taxable income upon the filing of supporting information by a certain date. The taxpayer was one month late in filing. It is clear from the decision that the tax year was "open" in the sense that the tax owing for that year was being reassessed pursuant to an audit. In this case, there was no audit and no reassessment.
[18] The applicant’s argument that what is sought is neither an assessment nor reassessment but a determination is novel but not persuasive. It is clear that section 37 of the Act permits the deduction of an expenditure made by the taxpayer in the year, or a preceding year, on scientific research and experimental development from the taxpayer's taxable income. The object is to reduce the taxable income and hence the tax payable on that income. To obtain the benefit of that reduction, the taxpayer is required by subsection 37 (11) to file the prescribed forms within 12 months of the taxpayer's filing deadline. Failing that, the taxpayer's income is calculated without the deduction and the tax payable is assessed. Any recalculation of the income and tax payable, in my view, requires a reassessment. The Minister may at any time make an assessment, reassessment or additional assessment for a taxation year pursuant to subsection 152(4), subject to the limitations set out therein. The enactment does not provide for the redetermination of the taxpayer's taxable income in any given year absent such an assessment.
[19] I conclude, therefore, that the respondent's decision was correct and that the Minister had no discretion under the statute to waive the filing requirements and reassess the applicant’s taxable income for the 1996, 1997 and 1998 taxation years. In the event that I am wrong in finding that the Minister lacked such discretion, I will proceed to consider whether the Minister exercised it fairly.
Did the respondent fetter his discretion and fail to consider the applicant’s submissions?
[20] The applicant submits that in the September 10, 2003 decision letter responding to the initial request to amend the previously filed returns, the respondent fettered his discretion by treating internal guidelines as binding and excluding other valid or relevant reasons for the exercise of his discretion.
[21] The September 10, 2003 letter referred to the fairness provisions of the Income Tax Act and stated that the legislation allowed for an adjustment of penalties and/or interest charges where extraordinary circumstances such as a natural disaster or a serious illness have prevented compliance by the taxpayer or the charges arose because of actions of the Revenue Agency. This was a reference to guidelines adopted by the respondent and not to any legislative criteria.
[22] Similar guidelines considered in the respondent’s fairness review process were addressed by the Court in Dorothea Knitting Mills Ltd. v. Canada (M.N.R.), 2005 D.T.C. 5177 (F.C.), 2005 FC 218 (Dorothea) at para. 8. In that case, the Minister had taken the position that an extension of time would be granted, pursuant to subsection 220(2.1) of the Act, where one of three criteria are met: that there were “extenuating circumstances”, that the applicant had taken “reasonable steps” to comply with the law or that the applicant “acted on incorrect written information given by the Agency”.
[23] In Dorothea, the taxpayer had filed the prescribed form for a SR&ED claim within the 18 months time limit but submitted the supporting technical documentation three months late. The Court concluded that in considering the request for an extension of time the Minister's delegate had elevated the guideline criteria to the level of determinative factors and had not considered the arguments put forward by the applicant. While it was open to the delegate to consider the arguments, and to accept or reject them, it was not open to the delegate to refuse the request simply because it did not meet criteria that have no foundation in the enabling legislation.
[24] That is not what happened in this case. While the September 10, 2003 letter might lead one to the conclusion that the respondent had fettered his discretion by confining his consideration of the request to whether there were extraordinary circumstances, as described, that was neither the beginning nor the end of the matter. The September 10, 2003 letter was precipitated by the applicant's request of August 26, 2003 to amend its previous filings. That request contained no submissions which could have justified a fairness determination by the Minister. It appears from the record that submissions were put forward subsequently in a series of meetings and exchanges of correspondence between the applicant’s representatives and the respondent’s staff. In any event, the September 10, 2003 letter is not the decision under review.
[25] The key document, in my view, is the respondent's 11 page letter of March 7, 2005 which sets out the applicant's case in support of a waiver and the respondent's analysis of those submissions. That analysis was not limited in scope to the type of extraordinary circumstances cited in the September 10, 2003 letter or the extenuating factors referred to in Dorothea. The March 7, 2005 letter demonstrates that the Minister did not close his mind to the arguments put forward by the applicant but considered them fully. I see nothing in the subsequent letter from applicant's counsel dated May 24, 2005 that would have required further consideration by the Minister. The respondent’s reply dated August 25, 2005, containing the decision under review, refers back to the detailed analysis contained in the March 7, 2005 letter and the rationale provided for denying the request for a waiver and extension of time. In these proceedings, the applicant has been unable to identify any significant factor advanced on its behalf that was not considered by the respondent in arriving at his decision.
[26] It is regrettable that the applicant has been unable to take advantage of the credits to which it would have been entitled had the ownership issue been resolved in its favour earlier and the prescribed forms and supporting documentation filed within time. However, the Court’s task is not to determine whether the decision to deny a waiver of the filing requirement for the 1996, 1997 and 1998 SR&ED claims was fair to the applicant but rather whether it was a reasonable decision applying the standard of review described above. On the record before me, there are no grounds upon which I could conclude that the decision was based on the application of the wrong principles or from a misapprehension of the facts, or, is unsupported by any reasons that can stand up to a somewhat probing examination. The application will therefore be dismissed.
[27] Considering that the public purse has benefited considerably from these events, the Court shall exercise its discretion to make no order as to costs.
JUDG M ENT
IT IS ORDERED AND ADJUDGED that the application is dismissed. No order is made as to costs.
FEDERAL COURT
SOLICITORS OF RECORD
DOCKET: T-2213-05
STYLE OF CAUSE: Greenpipe Industries Ltd. v. MNR
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: September 12, 2006
APPEARANCES:
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Mr. James Dunphy Ms. Bianca Kratt
Mr. David Besler
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FOR THE RESPONDENT |
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SOLICITORS OF RECORD:
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Warren Tettensor Amantea LLP Calgary, Alberta
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John H. Sims, Q.C. Deputy Attorney General of Canada
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FOR THE RESPONDENT |
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