Alex Kotel paid CRA $150,000. He still owed that amount for taxes, interest and penalties, even after CRA cancelled $38,156.75 of interest because it had taken three years to deal with his Notice of Objection. He asked CRA to cancel more interest and the $13,000 of late filing penalties he owed for not filing his 1999-2002 personal tax returns on time. It refused, in part because it didn’t think he suffered financial hardship by having paid his tax debts, given that his family worth was still just under $300,000 and, though he could no longer work due to illness, his wife could support him and their three children, who were in university, after finishing private school.
Given those facts, it’s no surprise that the Federal Court dismissed Mr. Kotel’s judicial review application. (This was his second; he won the first because the original second reviewers had been involved in the initial relief application.)
What makes this decision interesting is that Mr. Kotel complained that CRA should not look at his wife’s income or assets when assessing his personal financial hardship or ability to pay taxes. Justice McVeigh confirmed that it is reasonable for CRA to consider family income. Though Justice McVeigh seems to have put more emphasis than normal on the authority of CRA’s Information Circular for setting the tests one must satisfy to get interest or penalty relief, she seems right to say that CRA need not waive interest if a taxpayer’s spouse can afford to carry the family, especially where the family has significant assets.
Justice McVeigh also agreed with CRA that a taxpayer’s inability to pay for his children’s university education is not financial hardship justifying taxpayer relief. This view highlights an interesting principle of “financial hardship”: penalties and interest should not interfere with one’s ability to pay necessary expenses. Clearly, though, only the basic necessities of living are contemplated — i.e., the ones essential to survival. Other expenses, though they may be important, such as university education for oneself or one’s children, are not the kind that justify CRA’s waiving interest and penalties for a taxpayer, given that the rest of taxpayers, who do pay on time, must pick up the extra cost.
Mr. Kotel also complained that CRA should have excused his failure to report 4 years of US-source income on time because he relied on advice from his US accountant. Justice McVeigh noted that Federal Courts support CRA’s refusal to excuse taxpayers based on third party errors, referring to this paragraph from Quastel v Canada Revenue Agency, 2011 FC 143 at para 29:
“[29] The Applicants did not detail in what respect third-party mistakes and omissions contributed to the situation; it was only alleged in general. In any event, case law recognizes as reasonable the conclusion by which people are held responsible for mistakes of third parties made before CRA, and that these are not “circumstances beyond their control” (Jones Estate v Canada (Attorney General), 2009 FC 646 (CanLII), 2009 FC 646; Northview Apartments Ltd. v Canada (Attorney General), 2009 FC 74 (CanLII), 2009 FC 74; Légaré v Canada (Customs and Revenue Agency), 2003 FC 1047 (CanLII), 2003 FC 1047). As this same Court has noted in Babin v Canada (Customs and Revenue Agency), 2005 FC 972 (CanLII), 2005 FC 972, a recourse against this third-party may exist, but is independent of the case at bar.”