Executive Summary: Key Legal and Evidentiary Issues

• The Minister's Delegate denied taxpayer relief from interest and penalties under the Income Tax Act and Excise Tax Act, finding no connection between the Applicant's legal proceeding and its tax non-compliance.

• Reasonableness of the Decision was challenged on the basis that the Delegate focused solely on the timing of the Statement of Claim rather than its substantive content.

• Financial hardship was deemed unsubstantiated by the Delegate, despite the Applicant reporting revenues of no more than $500.00 per year since 2018.

• New affidavit evidence submitted by the Applicant during judicial review was ruled inadmissible as it was not before the original decision maker and did not fall within the recognized exceptions.

• Procedural fairness concerns were raised but the Court confined its analysis to the unreasonableness finding, noting the procedural fairness submissions were without merit in any event.

• The Delegate misinterpreted financial documents, including mistakenly concluding that the Applicant had instituted a series of dramatic wage increases for its remaining Officer.

The business and its downfall

6857559 Manitoba Ltd. was incorporated in the province of Manitoba in 2014. The business provided local delivery and courier services and began to experience difficulties in August 2015, when one of the corporation's officers resigned as director and employee of the company and began providing similar services independent of the corporation. This triggered a downward spiral for the company, which experienced increasing losses of revenue, and resulted in the corporation's Treasurer resigning in September 2015. This left Justin Mitchell, referred to throughout as the Representative, as the sole director and employee of the corporation. In or around 2015, the Applicant began civil legal proceedings against the former director, Daniel Leblanc, alleging that he had appropriated its client list and was illegitimately competing with the Applicant. The company sought damages to recoup this lost business revenue. From 2018 onward, the Applicant reported revenues of no more than $500.00 per year.

Tax non-compliance and CRA correspondence

Owing to its financial situation and the Representative's lack of expertise with respect to the tax process, the Applicant was assessed, late-filed or failed to file certain of its T4, payroll and GST returns and remittances beginning in the 2016 taxation year. The Applicant accordingly incurred tax penalties and interest for certain of these infractions. The CRA sent correspondence notifying the Applicant of the source deductions arrears and unremitted GST, including requests to file overdue documents, notices of assessments and reassessment, and statements of arrears and accounts. On January 15, 2019; February 11, 2020; February 4, 2022; and December 13, 2023, the CRA issued legal warnings to the Applicant. By December 13, 2023, the Applicant had received legal warnings about the tax debts for source deductions in the amount of $36,445.91 and its GST/HST debt of $4,726.26. At one point, the Applicant entered into a payment arrangement and temporarily began to pay to defray the debt.

The first and second requests for relief

On June 30, 2023, the Applicant submitted its first request for relief to the CRA in relation to the associated penalties and interest owed. The Applicant explained that it had been unable to meet its tax obligations because of the diversion of business revenue due to the actions of the former director, and noted that it was involved in a legal proceeding against this party which it hoped would alleviate the situation and facilitate being able to make a payment plan for the tax obligations. By letter dated December 7, 2023, a delegate of the Minister denied the request. The Applicant then requested a second review on December 3, 2024, seeking relief from late remitting penalties, failure to remit, and arrears interest for the payroll deductions remitting period ending January 31, 2016, to December 31, 2024, as well as the failure to file penalty for GST/HST for the reporting period ending March 31, 2016, and arrears interest for the reporting period ending March 31, 2016, to December 31, 2024. The Applicant cited financial hardship, inability to pay, and other circumstances, stating that it had been involved in an ongoing legal claim working to recover lost revenues and damages. The Applicant further noted that in the first request for relief, it was not able to provide completed financial statements or a copy of the Statement of Claim, and expressed that these updated documents would help prove the company's inability to pay.

The Delegate's second review decision

By a letter dated January 31, 2025, a Delegate of the Minister found that financial hardship had not been substantiated and that relief was not warranted. The Delegate addressed the Applicant's legal proceeding, noting that a review of the accounts and court document filed and dated January 21, 2020, showed the plaintiff, 6857559 Manitoba Ltd., making claims against defendant Daniel Leblanc, and that this was after the remittance due dates for the 2016 to 2019 tax years. The Delegate concluded that the review failed to find a connection between the court case and the Applicant's ability to fulfill its tax obligations. The Delegate also noted that a lawsuit or legal claims are generally not a ground for the extension of tax relief, as this is a circumstance within the taxpayer's control. The Decision further noted that sales tax source deductions cannot be used as cash flow for businesses as they are considered deemed trust amounts required to be held separate and apart. The Delegate held that the Applicant did not demonstrate reasonable care and did not act quickly to avoid or limit delay despite being advised of their tax obligations. Regarding financial hardship, the Delegate referred to the Applicant's financial statements and asserted that these indicated the existence of a cash flow that could have been used to offset penalties and interest without putting the business in jeopardy.

Admissibility of new evidence on judicial review

The Respondent argued that the Applicant's Affidavit of Justin Mitchell, sworn on April 3, 2025, contained information that was not before the Delegate. The exhibits appended to the Affidavit included, among others, a resignation letter from the treasurer dated September 15, 2011; a demand letter from a law firm for Windsor Investments Ltd. to Daniel LeBlanc dated March 2, 2016; income statement information for taxation year end December 31, 2021; and yearly financial statements for 2017 through 2021. With the exception of the CRA Second Review Decision dated January 31, 2025 (Exhibit B), all exhibits did not appear in the Certified Tribunal Record and were not previously submitted to the Delegate. The Court agreed that the general rule against the admissibility of new evidence on judicial review applied, citing the exceptions set out in Association of Universities and Colleges of Canada v Canadian Copyright Licensing Agency (Access Copyright), 2012 FCA 22. The Court found that the exhibits did not fall into any of these exceptions, and ruled them inadmissible.

The standard of review and applicable legal framework

The Court applied the presumptive standard of reasonableness as set out in Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65. Under this standard, a reasonable decision must be transparent, intelligible and justified and based on an internally coherent and rational chain of analysis. The Minister of National Revenue has broad discretion under subsection 220(3.1) of the Income Tax Act and section 281.1 of the Excise Tax Act to waive or cancel all or any portion of any penalty or interest payable under the relevant provisions of those acts. Two non-binding guidelines are applicable to the exercise of this discretion: Information Circular 07-1R1 pertaining to section 281.1 decisions under the ETA, and the GST/HST Memoranda Series, Chapter 16.3, Cancellation or Waiver of Penalties and/or Interest pertaining to decisions of subsection 220(3.1) under the ITA. These guidelines provide for three categories of circumstances upon which the Minister may grant relief: extraordinary circumstances, actions of the CRA, and financial hardship.

The Court's finding of unreasonableness

Justice Thorne found the Delegate's Decision unreasonable. The Decision specifically purported to address the issue of the legal proceeding the Applicant was embroiled in, the circumstances underlying which the Applicant had explained were ultimately responsible for its inability to meet its tax remission obligations. The Court found that the Delegate solely considered the timing of the legal proceeding as the reason for not granting tax relief, concluding that because the Applicant's Statement of Claim was dated January 21, 2020, and this date was after the missed tax remittance due dates, there was no connection between the legal proceeding and the Applicant's capacity to meet its tax obligations. The Court found this reasoning unintelligible, as at no point did the Delegate consider the substance of the lawsuit — that a former director of the Applicant diverted revenue by utilizing the Applicant's client list to target and steal its clientele, resulting in severe financial difficulties. The record established that the CRA had been informed of the legal process and dispute by the Applicant multiple times dating back to both 2015 and 2016, long preceding the date of the final Statement of Claim. For example, the CRA's own Taxpayer Relief Fact Sheets recorded that the owner had been a plaintiff in an ongoing legal dispute since 2015, and that business income had been diverted into a different company against the Applicant's will. The Court also noted issues in the Delegate's analysis of financial hardship, including the clear misinterpretation of certain financial documents submitted by the Applicant, such as mistakenly concluding that the Applicant had instituted a series of dramatic wage increases for its remaining Officer.

Ruling and outcome

The Federal Court granted the application for judicial review in favor of the Applicant, 6857559 Manitoba Ltd. The January 31, 2025, Second Review Decision was set aside and the matter was returned for redetermination by a different Delegate of the Minister. The Court directed that, prior to the redetermination, the Applicant shall be given an opportunity to provide updated submissions and documentation in support of its request. Although the Applicant had requested that the Court waive its tax penalties and interest, the Court declined to do so, noting that in judicial review the remedy normally granted is simply to quash the decision and remand the file for reconsideration before a new decision maker, and that the Court does not typically step into the shoes of the administrative decision maker to replace the decision with its own. The title of proceedings was amended to name the Attorney General of Canada as the Respondent. No costs were awarded, and no specific monetary amount was ordered, as the ultimate determination of whether relief from penalties and interest will be granted remains to be decided on redetermination.