Remission orders are the Hail Mary of tax litigation, but they don't come easy.

If you've been battling the tax man, but have been unsuccessful after pursuing all normal avenues of objection and appeal, your last resort may be to apply for a remission order, the Hail Mary of tax litigation.

The Canada Revenue Agency describes a remission order as “an extraordinary measure that allows the government to provide full or partial relief from a tax or penalty, or other debt, under certain circumstances, when such relief is not otherwise available under the existing laws.” Each remission request is considered “on its own merits to determine whether collection of the tax or enforcement of the penalty is unreasonable or unjust, or if remission is in the public interest.” To assist CRA officials in making that assessment, guidelines have been developed as to when remission may be granted. These include cases of extreme hardship, incorrect action or advice on the part of CRA officials, financial setback coupled with extenuating factors, or unintended results of the legislation.

If the CRA denies your request for a remission order, you can apply for a judicial review of its decision by the Federal Court of Canada. That's what happened in a recent case involving an Ontario taxpayer, decided in late 2020.

The taxpayer, a Hamilton architect, operated his business as sole proprietor. His other source of income was rental properties. In late 2008, the CRA conducted an audit of his 2005 and 2006 tax returns. After examining his financial books and records, the CRA auditor identified what he determined to be a number of “unsubstantiated business expenses” that the taxpayer had claimed as well as unreported income. The conclusion of the audit resulted in the CRA issuing a reassessment in 2009 totalling $155,224, including tax arrears, interest and penalties.

Regrettably, the CRA's audit and reassessment coincided with several other problems in the taxpayer's personal and professional life. He was involved in a child custody and spousal support dispute, two of his mortgages were facing foreclosure, he was suffering from health challenges, and a major building renovation for which he was responsible was “literally on the brink of collapse.”

As the taxpayer was preoccupied with these matters, he turned to tax professionals to respond to the CRA's reassessment on his behalf. The taxpayer hired an accountant who formally objected to the CRA's reassessment in August 2009, but, shortly thereafter, the accountant informed the taxpayer that he was unable to assist him further because he was having personal difficulties of his own.

Consequently, the following month, the taxpayer hired another accountant to fight the reassessments. The second accountant obtained the CRA's audit working papers and provided an opinion to the CRA regarding the soundness of the audit's conclusions but he failed to deliver a promised detailed review of the taxpayer's finances and didn't take any other steps to pursue the objections. The CRA ultimately set a deadline of July 30, 2010 to finalize the objections to the reassessments, but this deadline came and went without any further action by the new accountant.

On Aug. 10, 2010, the CRA confirmed the reassessed amounts and told the taxpayer that if he disagreed with the decision, he could appeal it to the Tax Court of Canada. The second accountant failed to take any action after the taxpayer forwarded this letter to him. The taxpayer then began dealing with CRA himself, but took no steps to file an appeal with the Tax Court.

Eventually, in late 2012, the taxpayer re-engaged the first accountant, who attempted to appeal the matter to the Tax Court in Sept. 2014, but by then, it was too late as the deadline for appeal had passed. The accountant then attempted to request relief under the taxpayer relief provisions of the Income Tax Act, on the basis that there were errors in the CRA's audit and reassessment. Under the taxpayer relief provisions, the CRA has the discretion to cancel or waive either all or a portion of any interest or penalties (but not the actual tax) payable during the previous 10 tax years, if the penalties and interest resulted from circumstances beyond a taxpayer's control. In January 2016, the CRA denied his request for relief.

At this point, the taxpayer retained a tax lawyer to deal with the CRA, who in February 2016 requested that the CRA reconsider its decision to refuse administrative relief. The CRA again denied his request but suggested that the taxpayer apply for a remission order. So, in January 2017, the taxpayer's lawyer did just that, requesting relief of taxes, interest and penalties related to the 2005 and 2006 tax years.

In his request, the taxpayer argued that the reassessments were inaccurate because, due to circumstances beyond his control, the taxpayer had not been able to respond effectively to the concerns raised by the CRA's auditor or to contest the reassessed amounts. Specifically, the taxpayer had relied on tax professionals to deal with the matter for him because he was unable to do so at the time, but the first accountant was unable to respond to the audit and the second accountant inexplicably failed to pursue the matter. As he explained, “If he had been able to respond effectively, he would have been able to show that the income and expenses he reported were as filed. He remains able to show that the income and expenses he reported were as filed and that the Reassessments were incorrect.”

In 2019, after reviewing the background to the matter and examining the merits of the request, the CRA concluded that remission was “not recommended as none of the criteria apply and there are no other circumstances which would support relief.” The taxpayer appealed the CRA's decision to the federal court which heard the case by video conference in August 2020, with the judge in Ottawa and the taxpayer in Toronto.

At trial, the judge is tasked to determine whether the CRA's decision was “reasonable.” As the Supreme Court elaborated in a landmark 2019 case, the decision should be “one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.” After a lengthy legal analysis and review, the judge concluded that the CRA's decision “lacks the hallmarks of reasonableness — namely justification, transparency, and intelligibility — because it fails to engage meaningfully with the main basis of the (taxpayer's) request for remission.”

Consequently, the judge ordered the decision of the CRA to be set aside, and the matter be returned to the CRA for reconsideration by a different decision maker.