Introduction
Administrative decision-makers are authorized by statute and given varying degrees of discretion. If a decision-maker has broad discretionary power and can show that the facts were considered when coming to a decision, it is extremely difficult – if not impossible – to overturn the decision in a judicial review application. However, if a decision-maker has discretion, and blindly follows a guideline or policy without turning their mind to the demands of fairness in the specific circumstances, then upon judicial review, it may be found that the decision-maker fettered their discretion. A recent GST/HST case, Gordon v AGC (2016 FC 643), heard before the Federal Court, shows that courts are willing to quash administrative decisions in cases where the decision-maker has fettered their discretion.
For years, the CRA has consistently assessed taxpayers for GST/HST and interest in circumstances where, although there was technical non-compliance with the rules, there was no true financial impact to the government. Examples of such situations (i.e., so called “wash transactions”) would include the wrong person collecting and remitting the GST/HST in a closely related group, or GST/HST not being collected in circumstances where the recipient would have been entitled to a full Input Tax Credit in any event.
The practice of demanding interest for monies that the CRA already had in its possession, albeit received from another person, is viewed as patently unfair by many of the taxpayers so assessed. In Gordon, the Federal Court questioned the fairness of the CRA’s approach, and found that the CRA must consider waiving interest in these circumstances on a case by case basis.
In doing so, the court emphasized that while the CRA’s administrative guidelines on reduction of penalties and interest in wash transactions can beneficially enhance consistency, transparency and fairness in the decision making process, they are not law and must not be relied on as if they were.
Facts
The taxpayer, Mr. Gordon, purchased and imported a number of vehicles for resale. Although the facts are not particularly clear, it appears Mr. Gordon was operating his business as a sole proprietorship, but using the dealer licence of a local auto dealership, Coastal Collision. After Mr. Gordon refurbished the vehicles, they would be resold at Coastal Collision’s dealership.
Following consultation with their accountants, Mr. Gordon and Coastal Collision both came to the mistaken belief that Coastal Collision was responsible for remitting the GST/HST related to the sales of the refurbished vehicles, which Coastal Collision did in a timely manner.
Subsequently, Mr. Gordon was reassessed and charged interest on the GST/HST remittances submitted by Coastal Collision, with CRA taking the position that Mr. Gordon ought to have collected and remitted the GST/HST on the vehicle sales. At the time of his reassessment Mr. Gordon had a history of compliance with the ETA.
Minister’s decision
Mr. Gordon applied to the Minister to have the interest portion of his GST/HST Assessment cancelled. His position was that it was unfair to charge him interest on GST/HST payments that were already in the CRA’s possession – having been previously remitted by Coastal Collision – and which had been made in full and on time, albeit by the wrong registrant. Mr. Gordon relied on the CRA’s GST/HST Memoranda Series 16.3.1: Reduction of Penalty and Interest in Wash Transaction Situation, to support his characterization of the transaction and his claim for interest relief.
While the Minister agreed that the transaction qualified as a “wash transaction,” the Minister’s delegate took the position that Guideline 16.3.1 only allowed cancellation of the interest above the standard four per cent applied in wash transactions, and that the delegate could not therefore cancel any of the four per cent “standard” interest.
Federal Court analysis
Mr. Gordon then applied to the Federal Court for judicial review, arguing that in relying on Guideline 16.3.1, and declining to cancel the four per cent“standard” interest charged on a wash transaction, the Minister’s delegate had fettered her discretion.
The Minister took the position that in following Guideline 16.3.1 the Minister’s delegate did not fetter her discretion because Guideline 16.3.1:
- sets out a limit for relief on wash transactions (e.g., interest over four per cent was to be waived, but a minimum of four per cent interest was to be charged),
- allows the Minister to provide further relief only in cases where the taxpayer can establish a basis for relief other than the existence of a wash transaction.
In other words, according to the Minister, Guideline 16.3.1 does not give the Minister’s delegate power to cancel the four per cent interest in wash transactions.
The Federal Court first looked to subsection 281.1(1) of the ETA, which provides the Minister and her delegates with a broad discretionary power to waive or cancel interest owed by a taxpayer. The court noted that since the ETA was silent on the criteria that should be used to determine whether interest should be cancelled, the CRA was permitted to develop reasonable parameters to assist the Minister in this determination, with Guideline 16.3.1 serving as one such parameter.
The Federal Court then noted the fundamental principle that discretion is “fettered” when a decision-maker treats a guideline as binding, when in fact it is not binding. In doing so, the Court emphasized that “Administrative guidelines do not have the force of law”: (at para 29).
In viewing the facts of the case as a whole, the Federal Court concluded that the Minister’s delegate had in fact fettered her discretion, by blindly following Guideline 16.3.1 without applying any independent analysis to the matter at hand. In doing so, the Federal Court noted that the Minister’s delegate failed to give any consideration to Mr. Gordon’s individual circumstances, including his history of compliance with the ETA.
In addition, the Federal Court expressly rejected the Minister’s argument that the automatic application of Guideline 16.3.1 does not fetter discretion because it allows additional relief when taxpayers can show a basis for relief other than a wash transaction. Here the court held that the Minister’s position lacked statutory foundation, and undermined the administrative law requirement that the Minister cannot apply a uniform rule to all taxpayers and must consider each request for relief individually on its own merits.
Commentary
In ruling for Mr. Gordon and in agreeing that the Minister’s delegate had fettered her discretion, the Court reminds us of the limits of administrative guidelines, and that discretionary decision-makers must not shirk their statutorily granted powers. Specifically, when making use of administrative guidelines, even discretionary decision-makers must exercise the full breadth of their discretionary power to determine a fair response to the particular facts at hand.
From a GST/HST perspective, it remains to be seen what practical effect this decision will have on the CRA’s assessment practices in the future. On the one hand, the unfairness of demanding interest from one person where the CRA already had the money in its possession, albeit from another person, seems obvious. On the other, when dealing with a multi-stage transactional tax one needs to have a system of penalties (through interest or otherwise) to ensure that tax is collected, reported, and remitted on every transaction by the correct parties – making it difficult to wholeheartedly criticize the CRA’s approach.
Kathryn Walker & Rob Kreklewetz are with Millar Kreklewetz LLP