Executive Summary: Key Legal and Evidentiary Issues

• Failure to file T1135 Foreign Income Verification Statement forms for 2021 and 2022 taxation years resulted in late filing penalties and arrears interest under section 162(7) of the Income Tax Act

• Applicant sought taxpayer relief under section 220(3.1) of the Income Tax Act based on alleged technical difficulties and financial hardship

• CRA's Second Reviewer denied relief after finding insufficient evidence of extraordinary circumstances preventing timely filing

• Judicial review challenged whether the CRA properly considered the applicant's submissions regarding technical issues with filing software and claimed financial hardship

• Reasonableness standard of review applied pursuant to Vavilov, requiring decision to be justified, intelligible and transparent based on facts and law

• Court assessed whether administrative decision-maker's reasons demonstrated rational analysis responsive to central issues raised by applicant

Background and procedural history

Sameer Ebadi found himself subject to late filing penalties and arrears interest after failing to file mandatory T1135 Foreign Income Verification Statement forms for his 2021 and 2022 taxation years. The Canada Revenue Agency requires individuals who hold foreign investment property costing more than $100,000 to file a T1135 form for each relevant taxation year. While Mr. Ebadi had filed his T1 income tax returns on time for both the 2021 and 2022 taxation years, he did not file the corresponding T1135 forms until July 5, 2023, well past the statutory deadline.

This "failure to comply" under section 162(7) of the Income Tax Act triggered automatic late filing penalties and arrears interest. By the time of the judicial review hearing, the total amount of late filing penalties and arrears interest owed by Mr. Ebadi had reached approximately $4,500.

The taxpayer relief application

Seeking relief from these financial consequences, Mr. Ebadi submitted a request to the CRA under section 220(3.1) of the Income Tax Act, which grants the Minister discretion to waive or cancel penalties and interest in appropriate circumstances. His request was based on two primary grounds: first, that he had attempted to file the required forms in each year but encountered technical difficulties with the filing software; and second, that the penalties would cause him financial hardship given his current circumstances.

The CRA initially denied Mr. Ebadi's request. He then challenged that decision through the CRA's internal review process, but a second reviewer at the CRA refused his request once again. It was this Second Reviewer's decision that became the subject of the judicial review application before the Federal Court.

Mr. Ebadi's arguments on judicial review

Mr. Ebadi's challenge to the Second Reviewer's decision focused on the substance of the decision rather than any procedural deficiencies in how the CRA conducted its review. He argued that the CRA had failed to properly consider his submissions and the evidence he had provided in support of his relief request.

With respect to the technical difficulties he claimed to have experienced, Mr. Ebadi maintained that he had made genuine attempts to file the T1135 forms but was prevented from doing so by problems with the filing software. Regarding financial hardship, he pointed to evidence of his debt levels and recent financial losses as demonstrating that the penalties would cause him genuine hardship.

The Second Reviewer's analysis

The Second Reviewer's reasons for denying relief were set out in a refusal letter and accompanying notes in the Taxpayer Relief Fact Sheet. On the issue of technical difficulties, the Second Reviewer noted that Mr. Ebadi had successfully used the same software system to file his income tax returns for the two taxation years in question. This raised doubts about whether technical issues had truly prevented him from filing the T1135 forms. The Second Reviewer also pointed to Mr. Ebadi's failure to act quickly to remedy the late filing situation, despite having been warned that late penalties would be imposed if the T1135 forms were not filed.

Turning to the claimed financial hardship, the Second Reviewer applied the CRA's definition of financial hardship as "the prolonged inability to afford basic necessities such as food, clothing and shelter and reasonable non-essentials." The Second Reviewer acknowledged and considered Mr. Ebadi's submissions and evidence regarding his debt and recent financial losses, but concluded this did not meet the threshold for financial hardship. In reaching this conclusion, the Second Reviewer noted several relevant factors: during the relevant taxation years, Mr. Ebadi had continued to invest in his RRSP and TFSA accounts; he maintained significant assets and income; and in the 2023 taxation year, he had obtained a tax refund in an amount greater than the total penalties and interest he owed.

The reasonableness standard of review

Justice Sadrehashemi conducted the judicial review applying the reasonableness standard established by the Supreme Court of Canada in Canada (Minister of Citizenship and Immigration) v Vavilov. Under this standard, a reasonable decision is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law constraining the decision-maker. Administrative decision-makers must ensure their exercise of public power is justified, intelligible and transparent to the individuals subject to it.

The starting point for reasonableness review is the decision-maker's reasons themselves. The Court emphasized that it would not reweigh the factors considered by the CRA, as that is not the role of a reviewing court on judicial review. Rather, the question was whether there were sufficiently serious shortcomings in the decision such that it could not be said to exhibit the requisite degree of justification, intelligibility and transparency.

The Court's assessment

Justice Sadrehashemi carefully considered Mr. Ebadi's arguments but was not persuaded that the CRA had failed to consider or been unresponsive to the central issues raised in his submissions and evidence. The Court found that the Second Reviewer had been "alive to the concerns and the evidence raised by Mr. Ebadi and addressed these issues in their reasons." The Second Reviewer had explained in an intelligible and transparent way why the arguments advanced by Mr. Ebadi were not persuasive.

The Court noted that Mr. Ebadi's arguments were essentially asking the Court to reweigh the factors the CRA had considered in deciding whether relief should be granted. This fell outside the proper scope of judicial review under Vavilov. The Court found no sufficiently serious shortcomings in the Second Reviewer's decision that would justify setting it aside.

Outcome and costs

The Attorney General of Canada was the successful party, with the application for judicial review dismissed. However, Justice Sadrehashemi exercised discretion under Rule 400 of the Federal Court Rules to decline the Respondent's request for costs against Mr. Ebadi. This decision was made in light of Mr. Ebadi's personal circumstances and his conduct throughout the proceeding, with the Court citing Lucas v Canada (Attorney General) and Showers v Canada (Attorney General) as precedents for declining to award costs in similar circumstances. No monetary award was granted to either party, and Mr. Ebadi remained liable for the approximately $4,500 in late filing penalties and arrears interest that had accumulated.