Executive Summary: Key Legal and Evidentiary Issues

• Jwalantkumar Pathak sought judicial review of the Minister of National Revenue's denial of his request for relief from arrears interest and penalties under subsection 220(3.1) of the Income Tax Act for the 2019 and 2020 taxation years.

• Penalties and interest were imposed under subsection 163(2) of the ITA after Pathak failed to report taxable capital gains arising from the disposition of shares, allegedly because his financial institutions did not provide T5 information sheets.

• Although subsequent reassessments substantially reduced Pathak's total tax from $286,752.30 to $26,080.51, the CRA did not adjust the penalties and the bulk of the interest remained applicable, prompting the Applicant's disproportionality argument.

• The Federal Court found the Minister's decision reasonable, holding that the taxpayer bore the responsibility to obtain necessary documents and that the Minister was not restricted to considering only financial hardship in exercising discretion.

• Jurisdictional boundaries between the Federal Court and the Tax Court were central, with the Court concluding that challenges to the correctness of penalty calculations belong before the Tax Court, not in a discretionary relief review.

• A supplementary judgment on costs awarded the Respondent $7,740.00 for the application and $1,260.00 for a dismissed reconsideration motion, after the Court rejected several of the Applicant's arguments for a departure from the ordinary costs-follow-the-cause rule.

The taxpayer's background and the unreported capital gains

Jwalantkumar Pathak, a Canadian taxpayer, filed his income tax returns for the 2019 and 2020 taxation years within the required timeframe. The Canada Revenue Agency initially assessed these returns as filed. However, on March 2, 2023, the CRA reassessed Pathak's taxes after discovering he had failed to report taxable capital gains from the disposition of shares in both years. These interim reassessments totalled $258,234.65 for 2019 (comprising tax of $150,643.21, penalties of $75,321.60, and interest of $32,269.84) and $118,533.91 for 2020 (comprising tax of $66,122.03, penalties of $35,587.38, and interest of $11,711.75). The CRA also assessed the Applicant as owing $86,894.39 for the 2021 taxation year for similar unreported gains.

Pathak's explanation and the missing T5 slips

Pathak maintained that his income was originally reported incorrectly because the financial institutions through which he invested had failed to provide him with T5 information sheets for the relevant years. He asserted that because his investments were on a downward trend, he had estimated when filing that there would ultimately be very little or no tax owing. In 2023, Pathak discovered he had access to his T5 data through the CRA and identified 80 tax slips related to the relevant investments. He then hired an accountant and refiled his tax returns, taking into account large capital losses that he had incurred.

The substantially reduced assessments and the persistent penalties

As a result of Pathak's refiled returns, the CRA issued final reassessments on June 22, 2023, and the applicable taxes were substantially reduced, such that the total tax assessed for all three years was reduced from $286,752.30 to $26,080.51. While the interest was somewhat reduced, the penalties were not adjusted and the bulk of the interest remained applicable. This significant disparity between the reduced tax obligation and the unchanged penalties became a central point of contention in the litigation.

The taxpayer relief requests and the Minister's denials

On March 12, 2023, Pathak submitted a request to the Minister of National Revenue under subsection 220(3.1) of the Income Tax Act to cancel or waive the penalties and interest assessed for the 2019 and 2020 taxation years. He asserted that he had not received the relevant T5s from his stockbroker before filing his returns, that he was a responsible citizen and devoted family man who had been facing financial difficulties due to unforeseen circumstances, and that he was unable to keep up with his tax payments due to a series of unfortunate events including a significant loss in the stock market creating a severe financial setback and the poor health of his father. On August 4, 2023, the Minister denied this first-level request, finding that Pathak should have reported the capital gains he had earned and that it was his responsibility to contact his stockbroker for the necessary information. The Minister also found that the Applicant had given other creditors priority over his tax debt, had continued to contribute to his RRSP, and had been making more than the minimum monthly payments on his credit cards.

On August 15, 2023, Pathak submitted a second-level request for relief under subsection 220(3.1) of the ITA for the 2019 and 2020 taxation years. He asserted that the major capital losses he had incurred had impacted his well-being and job security and provided further details about his financial circumstances, including being laid off from his job for six months during the COVID-19 pandemic and bearing substantial debt. He also emphasized that the penalties and interest he had been assessed were calculated based on the tax amounts from the interim reassessments and argued that it would be fair for the penalties and interest to align with the lesser tax amount for which he had subsequently been reassessed. In a letter dated March 27, 2024, the Minister denied the second-level review request, reasoning that Pathak had not exercised reasonable care to obtain his investment income amounts in order to file accurately, that investment losses were at his own risk, that the CRA had not charged interest from March 18, 2020 to September 30, 2020 in consideration of the pandemic, and that financial hardship was not supported given his sufficient income, RRSP contributions, available bank balances, and assets.

The judicial review application and the reasonableness standard

Pathak filed a Notice of Application on April 26, 2024, seeking judicial review of the Minister's decision. The case was heard on November 13, 2025, before the Honourable Mr. Justice Southcott of the Federal Court. The Court applied the reasonableness standard of review as informed by Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65. Several issues were narrowed before and at the hearing: the Applicant was no longer seeking relief from the Court in relation to the decision applicable to the 2021 taxation year, because the Minister had made only a first-level decision and recourse to a second-level review remained available. Additionally, the CRA accepted the Applicant's communications with the CRA as objections for purposes of challenging the correctness of the assessments for the 2019 and 2020 taxation years, eliminating a procedural fairness argument that the Applicant had advanced.

The Court's analysis of the Minister's decision

The Court addressed multiple arguments raised by the Applicant. Regarding the timing of the decision, the Court found no merit to the position that the review was improperly rushed, noting that the portion of the Certified Tribunal Record that the Applicant referenced was approximately 270 pages and that it was plausible a CRA officer could have reviewed this volume of material in two days. On the alleged consideration of incorrect or irrelevant facts, the Court held that both the Fact Sheet and the Decision Letter expressly noted the Applicant's submission that he did not receive the necessary documentation from his stockbroker, and therefore the Minister did not overlook this information. The Court cited Morrison v Canada (Attorney General), 2018 FC 141, which supported the broad principle that a taxpayer has the responsibility to ensure all income is reported and that relief can be reasonably denied if the taxpayer is unable to demonstrate that they were prevented from meeting that obligation. The Court also found the Minister's reasoning intelligible in analysing the Applicant's financial hardship based on his gross income rather than net income calculated for tax purposes following deduction of capital losses, and found no basis to conclude that this approach was unreasonable.

The disproportionality argument and jurisdictional boundaries

The Applicant's most significant argument was what the Court termed the "Disproportionality Submission" — that the penalties and interest were disproportionate to his reduced tax obligation and that the Minister failed to properly consider this submission. The Court accepted that this represented a significant argument advanced by the Applicant in support of his request for discretionary relief. However, the Court found that the Minister did not overlook this request. The Decision Letter noted the Applicant's request for his tax returns to be re-evaluated and directed the Applicant to contact the CRA's general enquiries line. The Fact Sheet referred to a telephone conversation between Ms. Rivera and the Applicant on February 15, 2024, in which the disproportionality submission was discussed and Ms. Rivera advised the Applicant to contact the CRA's general inquiries line to explore a path to have his tax returns reassessed. The Court interpreted the Decision as demonstrating that the Minister concluded the disproportionality submission sought relief that was appropriately addressed through a reassessment rather than under subsection 220(3.1) of the ITA. The Court agreed with the Respondent's emphasis on the distinction between the Minister's role as a tax assessor — performing assessments correctly in accordance with legislation and without any exercise of discretion, subject to appeal to the Tax Court — and the Minister's distinct discretionary role under subsection 220(3.1), subject to judicial review by the Federal Court. The Court found that the disproportionality submission was difficult to characterize other than as disagreements with the calculation of the penalties and whether the Applicant deserved to be subjected thereto, which engaged the same considerations as the formula and mental element set out in subsection 163(2). Finding the Decision intelligible and reasonable, the Court declined to interfere on judicial review.

The reconsideration motion and the costs determination

The Federal Court dismissed the application for judicial review on December 23, 2025, finding the Decision reasonable. Pathak subsequently filed a motion for reconsideration under Rule 397(1)(b) on January 15, 2026, arguing the Court had overlooked his procedural fairness argument. The Court dismissed this motion on February 5, 2026, finding that Rule 397(1)(b) did not afford the Court jurisdiction to reconsider the Judgment on the basis that the Applicant requested. The supplementary judgment dated March 27, 2026, then addressed costs. After considering multiple factors under Rule 400(3) — including the result of the proceeding, written offers to settle, the public interest in litigating the issues, conduct of parties that lengthened the proceeding, failure to admit facts, improper or unnecessary steps, and other relevant matters — the Court concluded that none of the Applicant's arguments discharged his burden of demonstrating why the Court should depart from the ordinary practice of costs following the event. The Respondent, the Attorney General of Canada, was awarded $7,740.00 in costs for the application and $1,260.00 for the reconsideration motion. The Applicant has appealed both the Judgment and the Order to the Federal Court of Appeal.