Nov 05, 2024
INTRODUCTION
Understanding Your Tax Affairs and Vigilance to CRA Communications is Necessary To Avoid Tax Liabilities
Failure to understand your tax affairs or check your CRA online account regularly could cause you significant tax liabilities. Ignorance of CRA practices and procedures may also deny you certain procedural rights. At least, that was the effect of the court’s judgment in Fang v. AGC, 2024 FC 1399 (“Fang“). The Federal Court was charged with reviewing a CRA decision, which refused to waive taxes and interests arising from over-contributions into Fang’s Tax-free Savings Account (TFSA). The issue before the court was whether the CRA’s decision was reasonable and in conformity with the principles of procedural fairness.
While the Court’s decision in Fang is accurate, based on current positions of the law, the courts and the CRA ought to consider the general impact of this decision on the Canadian public. This is especially so, where the impact of this decision has the tendency of imposing tax liabilities on taxpayers, simply for failure to check their CRA online account or to familiarize themselves with CRA practices and procedures.
We will commence this commentary with a brief summary of the facts and decision in Fang; we will disclose the legal significance of the decision; we will canvass the legal background upon which the Fang decision was made; thereafter, we will make our comments. Pro tax tips and frequently asked questions are provided at the end.
Always feel free to reach out to our top Canadian tax lawyers if you need guidance or representation on any legal problems which relate to the subject(s) to which this article, or our other various articles, refer.
THE SUMMARY OF FACTS AND THE JUDGMENT OF THE FEDERAL COURT IN FANG
In 2019, Fang had a TFSA account with a cumulative contribution room of $34,619.57. Fang fully contributed to her TFSA account and exhausted this room. In 2020, Fang’s contribution room was increased by $6,019.57. However, Fang continued contributing, and exceeded the contribution room by $40,619. In July of 2021, CRA sent a Notice of Assessment to Fang’s CRA online account, imposing over-contribution taxes and interest for late payments, all totalling $7,307.97.
Fang did not check her online account until February of 2022. On seeing the Notice of Assessment, Fang immediately withdrew the excess amount and filed a request with the CRA for a waiver of the taxes and interest. This request was denied.
In May of 2022, the CRA imposed further taxes and interest against Fang (for the year 2021), totalling $9,718.31. Fang applied for another waiver for this second series of taxes and interest. The CRA Reviewer acknowledged that Fang’s over-contribution was unintentional, and that the over-contribution was not communicated to Fang by an education letter to her physical address. However, the CRA reviewer still ruled that Fang’s error was not reasonable.
The CRA explained that Fang was responsible to have an understanding of her TFSA limit. The CRA further took the position that the Notice of Assessment sent to Fang’s CRA online account is proper notification of the over-contribution, as long as an accompanying email notification is also sent. Although Fang argued that she did not see the accompanying email notification, the CRA reviewer refused to hold the CRA responsible for the inability of a taxpayer to access or receive email notifications.
Fang applied to the federal court to review this second CRA decision.
RULING OF THE FEDERAL COURT IN FANG
The Court Upheld the CRA Decision
The federal court held that the decision of the CRA was reasonable. The court explained that the CRA reviewer gave adequate reasons for the decision and that the decision was responsive to Fang’s submissions. The court further clarified that there is a presumption that decision-makers have considered all evidence before them, even though they may not respond to every submission with explicit findings.
The court further held that the CRA decision conformed with the principles of procedural fairness. This was because the decision gave adequate reasons, and that Fang was properly notified of the over-contribution by the Notice of Assessment sent to her online account (as opposed to education letters to her physical address). The court also held that Fang had no legitimate expectation to an education letter, since she was not even aware of that CRA procedure. Finally, the court held that Fang was given an opportunity to be heard; the CRA decision was also not biased, since there was no evidence of bias or a probability of a pre-determined outcome as a result of the decision of the first CRA Reviewer.
LEGAL SIGNIFICANCE OF FANG’S CASE
Fang’s case is legally significant because it sets a precedent that taxpayers are deemed notified of CRA actions, once a notice is sent to their CRA online account, with an accompanying notification to their email address. The case further establishes that if a taxpayer is not aware of a CRA procedure, then such a taxpayer cannot claim to be entitled to that procedure, since the taxpayer will have no legitimate expectations to it. Finally, Fang’s case further reinforces the responsibility of taxpayers to have an understanding of tax affairs, especially when it is applicable to them.
LAWS APPLICABLE TO FANG’S SITUATION
In order to appreciate the decision in Fang, we will now provide a contextual background of the relevant positions of the laws the court had to consider in reaching Fang‘s decision.
On TFSA Contribution Limits and Waivers for Over-contribution:
Every Canadian tax resident above 18 years automatically accrues annual TFSA contribution room. As of 2024, this room will increase by $7,000 every year and will add to the taxpayer’s available cumulative TFSA room. Over- contribution above the TFSA’s cumulative room limit will result in taxes of 1% of the excess contribution for every month, until this excess is withdrawn. These taxes also accrue interest when they remain unpaid. A taxpayer who is in over-contribution must file a return reporting the tax and disclosing the fact of the over-contribution; otherwise, penalties may also accrue for failure to file the return.
A taxpayer may be granted relief from these taxes, interest or penalties where the taxpayer over-contributed as a result of a reasonable error and immediately withdrew the excess without delay, as set out in section 207 of the Income Tax Act.
Reasonable error is judged by an objective view of a reasonable person, looking at the taxpayer’s circumstances. Various courts have held that reasonable error does not include situations where over-contribution was as a result of:
- Ignorance, negligence or carelessness;
- Misunderstanding of the CRA notice;
- Poor advice from professionals; or
- Misunderstanding one’s contribution room.
On the other hand, the phrase “withdrawal without delay” is codified in the CRA manual (as cited in Fang) to mean a withdrawal within 30 days from when the taxpayer is notified of the over-contribution.
Furthermore, where a decision is made following an administrative body’s manuals or guidelines, such decisions are deemed by the courts as presumptively reasonable, except where the taxpayer can show justifiable reasons to the contrary.
Judicial Review of CRA Decisions and Standards of Review
Where a taxpayer is not satisfied with the decision of a CRA official, the taxpayer can apply to the Federal court for a review of the decision. This is because the federal court has exclusive jurisdiction to review the discretionary decisions of the Minister of National Revenue (CRA). See Dow Chemical Canada ULC v. The King, 2024 SCC 23.
During the review, the court usually considers the framework which was laid down in Canada v. Vavilov, 2019 SCC 65. This framework will uphold a CRA decision which is reasonable, except where the law requires the decision to be correct. There are five situations where the law requires a decision to be correct, rather than reasonable. They are as follows:
- Where the statutory scheme provides a right of appeal to a court.
- Where the law expressly demands correctness.
- Where the decision relates to a legal matter of central importance to the legal system as a whole.
- Where the interpretation of the Constitution is involved.
- Where there is a determination regarding the administrative body with jurisdiction to deal with a matter.
Under the Vavilov framework, a decision will be found to be reasonable where it is justified within the applicable factual and legal constraints, and is coherent, understandable and accessible. Where the court applies this test and finds that the decision falls within the range of acceptable outcomes, the court will not interfere with the decision (except where the decision is tainted by bad faith).
Duty and Principles of Procedural Fairness
In order to reach an administrative decision, proper procedures must also be followed. A fundamental aspect of this procedure is the principles of procedural fairness. Procedural fairness is derived from the rules of natural justice, and forms part of Common Law. It also forms part of Canadian Charter values (especially Section 7 of the Charter on fundamental justice.)
Generally, a person will be entitled to procedural fairness where a ministerial decision, like that of the CRA, will impact the person’s rights and interests. For a decision to be procedurally fair, it must conform to certain standards. These standards include:
- The decision must be unbiased;
- The decision must be given upon adequate notice;
- There must be an opportunity to be heard before the decision is made;
- The legitimate expectations of the parties must be accorded; and
- There must be reasons for the decision, where applicable.
When is a Decision Biased?
A decision is biased when it is made based on irrelevant considerations or illegitimate interests. To determine if a decision is biased, the court does not look into the mind of the decision maker; neither does the court attempt to inquire whether the decision will be fair or not.
Rather, the court will look to see if a reasonable person will, based on the circumstances, feel that there is a real likelihood that the decision was made based on self-interest or pre-determined to favour one party over another. If a decision is tainted by bias, it will become void. See R v. Inner West London Coroner, ex parte Dallaglio, [1994] 4 All ER 139.
When is a Notice Adequate?
When an administrative body is about to make a decision, it must provide notice to any person who is likely to be affected by that decision. Notice will be adequate where it is reasonable and provides sufficient opportunity to be heard.
The manner of service of the notice has to be such that the person is notified of the hearing. The federal court has held that the CRA does not need to confirm that the taxpayer received notice, as long as such notice was served at the taxpayer’s latest address. See Singh v. Canada, 2022 FC 346.
Nevertheless, failure to provide notice does not invalidate a hearing, as long as there was an opportunity to be heard. However, where both notice and opportunity to be heard are absent, the decision will be void.
What Expectations of a Party Are Considered Legitimate?
A person will be entitled to specific procedural rights from an administrative body where certain representations have been made to that person of such rights by the administrative body.
The representation must be clear, unambiguous or unqualified. This includes representations made on the body’s websites or even past practices of that body. If a person has a legitimate expectation that a certain procedure will be followed, then the duty of fairness will require that the procedure be followed, as long as it does not contravene any existing laws.
However, a person cannot claim a legitimate expectation to a procedure which the person was not aware of. This was the essence of the decision in Therrien v. The Queen, 2005 CanLII 92642. The doctrine of Legitimate Expectation aims to guide against non-discrimination or arbitrariness in public administration.
When Will the CRA Be Required to Give Reasons for Their Decision?
It is not mandatory for an administrative body to give reasons for a decision. However, where a decision will be of significant importance to a person, reasons will be mandatory. Reasons need not include a response to all the details or arguments made by the person, but they must have sufficient details to enable a reviewing court to understand why the administrative decision was made and whether it falls within the range of acceptable outcomes. See Dunsmuir v. New Brunswick, (2008) SCC 9
COMMENTARY ON THE FANG DECISION
The Federal Court’s decision in Fang is accurate and within applicable laws. However, concerns may be raised regarding the manner of service of the Notice of Assessment and the legitimate expectations of taxpayers from representations made in CRA publications.
The Court’s Decision in Fang was Accurate
The CRA decision in Fang was within the range of acceptable outcomes, and was rightly upheld by the court.
Guided by the facts and governing laws, as discussed above, it was reasonable for the CRA to hold that Fang’s failure to understand her TFSA limit was not a reasonable error, and that a Notice of Assessment sent into Fang’s CRA online account was proper notification. The decision was coherent, understandable and accessible. It also responded to Fang’s submissions on the issue. We will now offer some explanations.
The Canadian tax system is based on self-assessment. This requires that taxpayers act diligently and be conversant with their tax affairs. Therefore, Fang ought to have an understanding of her TFSA contribution limits and be vigilant towards all channels of communication with the CRA. The decision of the court was, therefore, right since Fang was unable to show any reasonable error beyond ignorance, negligence, poor professional advice, or misunderstanding of contributions. These are situations that have variously been held by the courts as not amounting to reasonable error.
It is, therefore, not the duty of a reviewing court (the Federal court) to substitute a CRA decision for a decision the court would have made under the same circumstances. Where the CRA decision falls to reason and is within the range of acceptable outcomes (absent bad faith), the reviewing court must uphold the decision. See the Vavilov case.
The court was also right in its finding that there was no evidence of an apprehension of bias that was disclosed by the taxpayer. This was because Fang failed to adduce evidence to either suggest that the CRA reviewer was governed by self-interest or that the decision had a pre-determined outcome. See the Inner West case.
Moreover, the decision of the second reviewer responded to the core of Fang’s submissions, which were unintentional over-contribution and failure to send notification to Fang’s physical address. The CRA decision also proffered sufficient reasons to enable the federal court to understand why the decision was made and whether it fell into the range of acceptable outcomes.
The CRA’s reasons were that it is the duty of taxpayers to understand their tax affairs, and that a Notice of Assessment to the taxpayer’s CRA online account (with an accompanying email notification) was proper notice.
Some Concerns with the Fang Decision
Based on the current jurisprudence, the CRA is not required to confirm receipt of notices. The CRA can simply send notices to the last known address of the taxpayer, and that suffices. See the Singh case.
This logic could extend by analogy to notifications sent to CRA online accounts, as in Fang’s case. Although the court and CRA did not cite the Singh case in support of this line of argument in Fang, the decision in Fang seems to have taken a similar position with the Singh decision. The court held in Fang that the Notice of Assessment sent to Fang’s CRA online account was sufficient notice of over-contribution, as long as a corresponding email notification was also sent.
Certain concerns arise from the foregoing. Does this manner of serving CRA notices mirror the Charter standards on procedural fairness? Could such a notice be considered adequate – to a taxpayer?
This stance of the court and the CRA seems worrying when applied to the average taxpayer. A lot, if not most, Canadians usually check their CRA portals only when they wish to file their taxes for the preceding year. At this point, they may have unwittingly accrued interest based on taxes which were levied by the CRA, sometime in the middle of the preceding year. Fang was also confronted with this situation. It is also very easy not to receive a CRA email notification due to a technical error or to receive the notification as a spam message. In fact, in Fang’s case, she stated that she did not see the email notification.
The CRA is probably aware of these foregoing difficulties with electronic notifications. This explains why they made provisions for Education Letters to be sent to a taxpayer’s physical address whenever over-contribution arises. Similar undertakings are still currently on the CRA website. Fang argued that she was entitled to these Education Letters; however, the court dismissed Fang’s arguments.
The reasoning of the court was that Fang had no legitimate expectation to the Education Letter procedure, since she was not aware of the procedure until she began preparing for proceedings for the Tax Court of Canada; therefore, Fang cannot be said to have an expectation, or a legitimate one, to a procedure she was not aware of. This position could be gleaned from the Therrien case, which was cited in Fang.
The foregoing is also concerning. Since the doctrine of legitimate expectation aims to guide against discrimination and arbitrariness, what will be the case when some taxpayers who are confronted with the same circumstance as Fang will be entitled to an Education Letter and others will not?
A flip side to this argument may be that the Canadian tax base will be seriously eroded, where payment of taxes depends on the CRA’s ability to comply with all its representations. However, this should not be the case because the CRA has the capacity to comply with its representations in the same manner in which it complies with all applicable laws, especially since these representations were voluntarily made by the CRA.
Conclusions of Commentary About the Fang Case
Fang’s case has made it compulsory for taxpayers to be vigilant about CRA communication through their online accounts. The fact that the taxpayer did not receive a “sent” email notification from the CRA, on such communication, is irrelevant.
The taxpayer must, therefore, proactively inquire about the existence of such communication. The Fang case also makes it compulsory for taxpayers to be aware of CRA procedures if they seek to benefit from them.
In addition, Fang’s case reiterates the duty of taxpayers to have an understanding of their tax affairs. While the court’s decision in Fang is accurate in light of the current positions of the law, the court and the CRA must be wary of the wider impact of the Fang decision on the average Canadian taxpayer. The court and CRA must seek to balance its hardline stance in Fang with the tax attitude of the average Canadian taxpayer in Fang’s circumstance.
PRO TAX TIPS: I have unintentionally over-contributed to my TFSA; what should I do?
Sometimes taxpayers are confronted with a situation where they have inadvertently over-contributed to their TFSA. Two options are usually available in these situations:
- The taxpayer may stop further contributions and allow the TFSA tax room to increase and catch up with the over-contribution. The taxpayer may be able to take this position where the accruing taxes and penalties are not high. This is because taxes and penalties will continue to accrue until the tax room catches up and overcomes the over-contribution.
- On the other hand, the taxpayer may take steps to withdraw the excess contribution without delay. The taxpayer must learn from Fang’s mistake, and do so vigilantly and timeously. This may earn the taxpayer a waiver of both taxes and penalties, as the CRA sometimes has the mind to do.
If you need guidance or representation in navigating or confronting these complexities, feel free to reach out to our experienced Canadian tax lawyers.
Frequently Asked Questions (FAQs)
Aside from reasonable error and immediate withdrawal, in what other circumstances does the CRA grant taxpayer relief?
There are numerous circumstances for taxpayer relief. It is dependent on the taxpayer’s peculiar circumstances. However, the CRA has issued publications that it will be willing to exercise its discretion in favour of granting tax relief in situations where the taxes result from the mistakes of the CRA, the taxpayer is unable to pay as a result of financial hardship, and in exceptional or other circumstances.
Do the principles of procedural fairness apply with equal standards to all ministerial decisions?
The answer is No. The level of procedural fairness to be accorded to matters usually differs. It will depend on factors like the importance of that decision to the person, the legitimate expectations of the person, the nature of the statutory scheme, the nature of the procedures chosen by the decision maker, and the nature of the decision and procedures followed in making it. The circumstances of each case will determine the level of procedural fairness to be accorded in the process of making the decision.
If I have issues with a CRA decision, in what situations should I approach the Federal Court, as opposed to the Tax Court of Canada (TCC)?
The Tax Court of Canada has exclusive jurisdiction to determine the correctness of CRA assessments. In situations where the taxpayer believes that the CRA did not correctly assess the taxpayer’s taxes, the taxpayer’s recourse will be to the TCC. However, where the issue deals with the discretionary decision of the CRA, only the Federal court has jurisdiction to review it. For example, where the taxpayer does not challenge the correctness of the assessment, but seeks to urge the CRA to use their discretion to waive some or all of the tax liability. In such situations, the proper forum will be the Federal court.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
