Canada Trustco Mortgage Co. v. Canada, 2011 SCC 36

This is a Supreme Court of Canada case concerning the power of the CRA to garnish and intercept funds that are to be paid to the taxpayer by a third party. In this instance, a garnishment was in place that required the Canada Trustco to pay to directly to the Receiver General any funds otherwise payable to the taxpayer. A cheque payable to the taxpayer as an individual was given to Canada Trustco with instructions to deposit it to a joint bank account the taxpayer held with a business partner. The key question was who the bank became liable to make a payment to as a result of the cheque - the payee of the cheque or the holders of the joint account to which it was deposited? Interestingly, the CRA conceded that funds in a joint bank account would not fall under the garnishment of an individual taxpayer which is not an argument they give up so readily at the early stages of most collection efforts. As a result the case came down to the technicalities of the banking process and in a 4-3 split decision, the majority of the Court determined that the bank was only contractually obligated to the holders of the joint account and not to the individual to whom the cheque was initially made payable. This meant that the cheque could be deposited to the joint account without the bank having to forward the payment to the Receiver General under the garnishment.

Before taxpayers who owe money to the CRA start rushing to ask their spouses to deposit cheques for them, the practical application of this precedent is likely not as advantageous as you may think. Firstly, if there is a garnishment in place, many banks will forward funds from joint accounts without turning their mind to the legal details. Secondly, depositing funds to another person’s account or to a joint account can create issues with Section 160 or other provisions through which the CRA can hold third parties responsible for another person’s tax debt. Using someone else’s account in this fashion could cause the CRA to look at their affairs as well as your own. In addition, making such deposits is likely to only be possible as a short term solution. The CRA can easily access bank records and once they find out where the cheques are coming from, the source would likely also receive a garnishment letter so the funds can be intercepted. In effect, there would eventually be no remaining source to still be sending cheques to a taxpayer in this position.

Although the fact scenario in this case is likely to be a fairly unique situation, an extrapolation of the principles in the decision suggest that anyone wanting to avoid a garnishment could either deposit cheques to a joint account or to an account in someone else’s name. While this may not be of significance for garnishments relating to tax, as was pointed out by the minority in the case this could have significant repercussions in other areas of law such as child and spousal support.

You can read the full case on CanLII - Canada Trustco Mortgage Co. v. Canada, 2011 SCC 36

Federal Court of Appeal sides with taxpayer on interpretation of 10 year limit for penalty and interest relief applications – Bozzer v. Canada

In an interesting decision for anyone who is involved in taxpayer relief requests, the Federal Court of Appeal issued a decision in June 2011 that went against the Canada Revenue Agency’s restrictive interpretation of the 10 year rule.

Since 2004, the discretionary power of the CRA to waive or cancel interest and penalties has been limited to amounts “in respect of” the ten taxation years preceding the date of an application for relief (s. 220(3.1)). The CRA have interpreted this 10 year rule to mean they do not have the discretion to cancel interest charges in situations where the underlying tax debt occurred outside of the 10 year period (see paragraph 39 of IC07-1). This has been disputed by many taxpayers and academics who believe that because interest accrues daily under the Income Tax Act, any interest accruing in the past 10 years would fall within the legislated discretion regardless of the date of the original tax debt.

After both of his internal CRA applications to cancel interest charges were denied on the grounds they were outside of the 10 year period for relief, Mr. Bozzer sought Judicial Review of the CRA’s interpretation of the legislation. He was initially unsuccessful as the Federal Court agreed with the Minister that the 10 year period started in the year of assessment of the original debt. On appeal, the Federal Court of Appeal noted that the section did not clearly stipulate the year of assessment as a starting point and found that the words of the section could potentially support either interpretation. As such, the language was ambiguous and the Court embarked on a “textual, contextual and purposive analysis” to find a meaning that is harmonious with the Act as a whole. The Court concluded that the 10 year limit enacted in 2004 represented a restriction of a right previously enjoyed by the taxpayer and that any ambiguity should rightfully be resolved in favour of the taxpayer. As such, the Court confirmed that the 10 year limit should be interpreted to allow for consideration of relief for interest that has accrued in the previous ten years without reference to the year in which the tax was originally payable.

Although the granting of relief remains at the discretion of the Minister, this interpretation will help those taxpayers who have previously been told their situation is outside of the discretion of the CRA and will hopefully broaden the circumstances in which the CRA will be willing to grant relief. The CRA do not seem to have issued an official response to the case and leave to appeal to the Supreme Court is still possible, as is an amendment to the legislation to clarify Parliament’s intentions. The CRA may change their administrative policies but this remains to be seen. For now the situation is unclear but it would be a good time for anyone who would benefit from the extended time period to get an application to the CRA as soon as possible.

You can read the full case on CanLII and are welome to contact me if you think this affects your case.