http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/71856/index.do 
The Minister of National Revenue v. Sifto Canada Corp. (May 28, 2014 – 2014 FCA 140) is a rare case where the Federal Court of Appeal allowed a taxpayer to proceed with a judicial review of a portion of a reassessment issued by the Minister of National Revenue.
Sifto sold rock salt to a related party in the United States in its 2004, 2005 and 2006 taxation years. On April 11, 2007 Sifto submitted a voluntary disclosure application to the Minister in respect of these sales. That application was accepted by the Minister on March 18, 2008. Sifto understood this to mean that the Minister would not impose any penalties on the rock salt sales in those taxation years. The Minister and Sifto then entered into a settlement of Siftco’s transfer pricing liability for the rock salt during the same period; this was done pursuant to the mutual agreement procedure under Articles IX and XXVI of the Canada-US Tax Convention.
Subsequently the Minister advised Sifto that she did not consider herself bound by the agreement and would be issuing reassessments for a different transfer price and imposing penalties pursuant to subsection 247(3) of the
Income Tax Act (the “
Act”). Those reassessments were in fact issued on August 1, 2012.
Sifto then commenced two judicial review proceedings in respect of the reassessments on August 31, 2012. Application T-1618-12 was the “Improper Penalties” application. Application T-1619-12 was the “Breach of Agreements” application. The Crown moved on September 12, 2012 to strike both applications; they were unsuccessful before Prothonotary Aalto (2013 FC 214 – March 1, 2013). The Crown then unsuccessfully attempted to appeal the Prothonotary’s ruling before Justice Rennie (2013 FC 986 – September 26, 2013). This decision was an appeal from the decision of Justice Rennie.
On March 7, 2014 Sifto appealed the reassessments in the Tax Court and moved in the Federal Court of Appeal to stay this appeal pending the outcome of the Tax Court proceedings. That application was denied by Justice Noël (2014 FCA 120 – April 17, 2014). On May 23, 2014 Sifto filed a notice of discontinuance of the Breach of Agreements application, leaving only the Improper Penalties application before the court.
This appeal was heard on May 26, 2014 and the judgment was issued two days later on May 28, 2014 dismissing the Crown’s appeal.
[Note: Unfortunately at this time neither the decision of Prothonotary Aalto, Justice Rennie or Justice Noël seem to be available on the web sites of the Federal Court and the Federal Court of Appeal.]
The recent decision of the Federal Court of Appeal in JP Morgan seemed to virtually rule out judicial reviews of assessments:
http://decisions.fca-caf.gc.ca/site/fca-caf/decisions/en/item/63847/index.do
The same could be said of
Szymczyk et al. v. Canada (National Revenue) which followed shortly after JP Morgan:
http://decisions.fct-cf.gc.ca/site/fc-cf/decisions/en/item/65082/index.do
The distinction in Sifto seems to arise out of the Minister’s stated public policies in respect of voluntary disclosures [Information Circular IC 00-1R2, paras. 8, 10, 11 and 17] together with the Minister’s authority to waive or cancel penalties under subsection 220(3.1) of the Act.
One intriguing thing about this decision is that although applications in the Federal Court to review the Minister’s handling of a taxpayer relief application are routine, here there was no antecedent application to the Minister. Nonetheless the Federal Court of Appeal dismissed that concern:
[24] The Minister argues that the application is premature. I do not accept that argument as a basis for striking the application. The sparse record before this Court indicates that a request to cancel the penalties would be futile. But if the Minister is inclined to cancel the penalties it is open to him or her to do so at any time on the basis that the cancellation request is implicit in the application for judicial review, and that the penalties should not have been assessed in the face of an accepted voluntary disclosure.
Moreover the court held that while it might not have power to set aside a reassessment it did have power to do essentially the same thing using various administrative remedies:
[25] The Minister also takes issue with the remedies sought by Siftco in the Improper Penalties application, arguing that the Federal Court cannot grant the relief sought. I do not accept that argument because it is based on a technical and microscopic reading of the notice of application. The proper approach is to read the application holistically with a view to understanding its essential character, rather than fastening on matters of form (JP Morgan at paragraph 50). Thus, for example, while it is true that the Federal Court cannot invalidate an assessment (which is one of the remedies sought), the Federal Court may grant a declaration based on administrative law principles that the Minister acted unreasonably in failing to waive the penalties, or a declaration that the penalties should not have been assessed in the face of the valid voluntary disclosure. Similarly, the Federal Court may on the same basis grant another of the remedies sought, which [sic] an order precluding the Minister from enforcing the penalty assessment or collecting the resulting tax debt. And if the application is not perfectly drafted at this stage, the Federal Court has ample scope for permitting amendments if required to ensure that the actual dispute is properly before the Court.
[Emphasis added]
The court went on to say that it might be best to defer the Improper Penalties application until the conclusion of the Tax Court proceeding but that this was a case management matter for the Federal Court.
As a result the appeal was dismissed with the parties to make submissions as to costs.
Comment: This decision is difficult to reconcile in the wake of JP Morgan and Szymczyk. The suggestion in Sifto is that where the Minister has breached an agreement with respect to penalties the Federal Court has the power to preclude the collection or enforcement of the resulting tax debt. The Sifto decision appears to hang on the somewhat slim reed of subsection 220(3.1) of the Act and moreover permits a remedy in the case of the Minister’s anticipated refusal to provide relief. In the case of anything other than penalties and interest it would seem that taxpayer would be forced to sue in a provincial superior court for redress of the same conduct that the Federal Court of Appeal found potentially actionable in Sifto. One would think that considerations of judicial economy should dictate otherwise.