Lambert v. R. - FC: Mixed success on judicial review of farm loss relief

Lambert v. R. - FC:  Mixed success on judicial review of farm loss relief

Lambert v. Canada (Attorney General)  (October 30, 2015 – 2015 FC 1236, Manson J.).

Précis:   Three different taxpayers (Mr. Gillespie, Ms. Lambert and Mr. Sobey) applied in 2013 for relief in respect of their horse racing losses incurred during the period from 2003 to 2011.  This happened after the Supreme Court of Canada’s 2012 decision in R v Craig, 2012 SCC 43 which over-ruled its earlier decision in Moldowan v R, [1978] 1 SCR 480 and broadened the circumstances under which farming losses (which included losses from horse racing activities) could be deducted against other sources of income.  The Minister denied all three applications for relief on the basis that they were solely motivated by the Craig decision.  The Minister’s standing policy was not to grant relief solely on the basis of a change in the case law.

The Federal Court allowed two of the applications, with costs, holding that they were not solely motivated by the Craig decision.  Mr. Gillespie’s application however was dismissed with costs to the Crown on the basis that there was evidence that his application was solely based on the Craig decision.

Decision:   The facts were straightforward:

[1]               This is an application for judicial review of three second level decisions by a delegate of the Minister of National Revenue [the Delegate], represented here by the Attorney General of Canada [the Respondent], dated December 1, 2014, exercising his discretion to deny the Applicants’ taxpayer relief requests to reassess their income tax returns for the 2003 through 2011 taxation years. Ashley Lambert, Leslie Sobey and Brian Gillespie [the Applicants] filed separate Notices of Application on December 30, 2014. Given that their applications are identical, they seek the same relief and their memoranda differ only marginally, this decision will deal with the three proceedings jointly, noting any differences where required.

I.                   Background

[2]               The Applicants were in the business of training and racing horses during the 2003 through 2011 tax years, during which they did not report the horse operations because they were allegedly unaware it should be reported as a farm. In each of the relevant tax years the horse operation resulted in net farming losses.

[3]               In February and March of 2013, the Applicants, through their representative, submitted letters to the Canada Revenue Agency [CRA] requesting adjustments to their 2003 – 2011 tax returns to reflect the farming losses [First Level Taxpayer Relief Requests]. The letters reference the Supreme Court of Canada decision in R v Craig, 2012 SCC 43 [Craig], the change in law it created, and claim the “[Applicants’] situation is comparable to the circumstances in Craig”. The letters state the Applicants were unaware they should report their horse operations as a farm. The cumulative reassessment amount claimed for the years 2003 to 2011 by each Applicant is:

  • Ms. Lambert: $102,596.96
  • Mr. Sobey: $234,314.80
  • Mr. Gillespie: $214,779.41

    [4]               In response to this request, on August 1, 2013, an auditor at the Winnipeg Tax Services Office informed the Applicants that the income tax returns submitted for the pertinent years had been selected for audit. An Audit Report was prepared, denying the Applicants’ First Level Taxpayer Relief Requests on the basis that CRA policy does not permit income tax return adjustments if the request is made as a result of a court decision. This was communicated to the Applicants by letter in March and April of 2014, to which the Applicants requested that CRA undertake a second review of the first request [Second Level Taxpayer Relief Requests].

    [5]               The files were transferred and assigned to the Saskatchewan Tax Services Office in Saskatoon for a review independent of the Winnipeg office. Following a review of the files, relevant CRA policies and guidelines, applicable case law, and an inquiry with the Technical Section of Business Audit of CRA, the auditor assigned to the files made a recommendation to deny all three Applicants’ requests on the same basis as the first denial: that a court decision, Craig, had prompted the taxpayer relief requests and it would be against CRA policy to accept the requests for that reason [the Recommendation Reports]. In Ms. Lambert and Mr. Sobey’s case, the auditor found it was possible they were unaware the horse operation constituted operating a farming business, but was not convinced of this in the case of Mr. Gillespie.

    [6]               The Recommendation Reports rely in part upon CRA guidelines and policies, including:

  • Information Circular 07-1 – Taxpayer Relief Provisions [IC07-1];
  • Information Circular 75-7R3 – Reassessment of a Return of Income [IC75-7R3]; and
  • Communication ATR-2014-02 – Retroactive Application of an Adverse Court Decision and Taxpayer Requested Reassessments, issued by the Taxpayer Relief and Service Complaints Directorate, Appeals Branch on July 28, 2014 [ATR 2014-02].

[7]               Mr. Wayne Turgeon, Acting Assistant Director of Audit in the Saskatchewan office [the Delegate], confirmed the recommendations to deny the Second Level Taxpayer Relief after reviewing the documents and correspondence set out above [the Decisions]. This was communicated to the Applicants by letter dated December 1, 2014 [the Decision Letters].

The Court acknowledged the public policy behind denying relief solely based on changes in the case law:

[59]           I agree with the Applicants that a policy purporting to ignore stare decisis, jurisprudence and the proper interpretation of legislation would quite obviously be unreasonable. However, in my view, which coincides with the FCA’s interpretation, that is not what the policy purports to do. Its purpose is to “prevent persons seeking reassessment after the normal deadlines have expired from taking advantage of later changes in the law or its application” (Abraham, at para 57). The policy has as its underlying objective promoting certainty and finality in an area of law that deals annually with individual taxpayers’ situations and the law as it applies in those years. In my opinion, that fact, and the policy’s narrow application (only being relevant when a request is based solely on a court decision) does not make the policy – if applied appropriately – contrary to law.

The Court held that in the case of Ms. Lambert and Mr. Sobey the Delegate’s decision that their applications were solely based on the Craig decision was unreasonable:

[61]           The record demonstrates that it was not entirely evident the requests (at least for Ms. Lambert and Mr. Sobey) were filed in response to a court case. In the memo to the file of Ashley Lambert, Mr. Omaga, auditor at the Winnipeg office who audited the First Level Taxpayer Requests, stated in his November 29, 2013 note (excerpt):

I advised AM of Joe’s recommendation and AM confirmed that I should seek the opinion from one of the contacts listed on Memorandum, Subject: Farm Losses, ITA Section 31, Supreme Court ruling on The Queen v. Craig, and Budget 2013. Although, AM stated that we cannot wait too long for them to get back to us. AM indicated that we have to carefully looked at the issue and Joe Gaspar confirmed that there is no basis to deny the TPR as no solid evidence that it was filed in response to a court case.

[62]           Moreover, the policy states that the Minister is to disallow reassessments based solely on a court decision. I am sympathetic to the Applicants’ arguments that by simply referring to a court decision, they were deemed to have “solely” relied on it. As well, there appears to be evidence, (and in the case of the Lambert and of the Sobey Decisions, the Report indeed found) that it is possible they were unaware they should claim their horse operations as farm property until early 2013, the date of their request. This constitutes an explanation for their request for reassessment, and thus reliance on a court decision cannot reasonably be said to be the sole reason for the Applicants’ requests. A determination that it was the sole motivation is unreasonable given the evidence and Report’s findings.

In the case of Mr. Gillespie however the decision was not unreasonable:

[64]           In contrast, the auditor did not accept that Mr. Gillespie was unaware he should claim his horse operation as a farm, finding he simply chose not to claim his losses until this application. Further, his evidence shows that he told CRA in response to a questionnaire that a court case prompted his request. The application of the policy to his situation is not unreasonable on the facts.

As a result the Lambert and Sobey applications were allowed with costs and the matters were remitted back to the Minister for reconsideration and redetermination in accordance with the Court’s reasons.  The Gillespie application was dismissed with costs.