David Rotfleisch on the Worldwide "Buzz" Behind the Automation of Tax Filing and Assessment Processes and the Reasonability Requirement for Administrative Suspension of EFILE Rights: Virgen V Canada (Attorney General)

In order to increase the number of taxpayers who can comply with tax rules with little or no difficulty, tax authorities are continually adopting measures aimed at simplifying the tax payment procedure. Global tax authorities have responded by taking an increasing number of steps to automate and streamline the filing and payment of taxes as a result. The cost of compliance and enforcement for the taxpayer and the tax authorities, respectively, is thought to be declining due to technological advances. The spread of e-filing around the world serves as both a compliance-easing tool and a means of preventing tax evasion in Canada from occurring at all. It’s interesting to note that e-filing measurements record each step of the process, from filing through evaluation to administrative procedures.

Tax authorities throughout the world are incorporating automated procedures into tax administration and enforcement, and the Canadian Revenue Agency (CRA) isn’t left out of the worldwide “buzz”. The CRA introduced the electronic filing (EFILE) system as a result of the foregoing trend. The EFILE is an automated service that gives tax preparation companies and discounters a way to submit customers’ income tax return data directly to the CRA from tax preparation software that has earned the EFILE seal of approval. By serving as a bridge between taxpayers and the tax authorities, this supports the representative system where representatives provide services to taxpayers. As a result, tax preparation service providers and discounters can file tax returns for the clients they are serving via the EFILE. Taxpayers need just bring their tax slips and other necessary supporting documentation to a registered tax preparer, pay the expert, and then the tax expert will complete their returns and submit them to the CRA through the EFILE.

Even though this process appears to be simple and easily explained, there are a number of complications and legal issues that must be addressed and clarified when using the EFILE, especially with regard to tax preparers’ adherence to the standards established by the Minister of National Revenue (the Minister) under section 150.1(2) of the Income Tax Act (ITA). This article will focus on the case of Virgen v. Canada (Attorney General), in which the Federal Court of Canada was challenged regarding the suspension of EFILE rights and privileges for violating “Criterion 13” of the Minister’s criteria for acts related to “having engaged in fraud, dishonesty, breach of trust, or other conduct of a disreputable nature.”

How Far Does the Tax Authority Reserving the Right to Suspend a Taxpayer’s Participation in the CRA’s Electronic Filing (EFILE) System as Seen in Virgen v. Canada (Attorney General)

The EFILE system assigned EFILE account number Q9080 to the applicant, Maribel Acevedo Virgen, who participated in the system. According to the system, it was the CRA’s responsibility to carry out monitoring procedures aimed at making sure that program participants adhere to all of its requirements. The CRA may ask participants to submit copies of different pertinent papers as part of this normal monitoring procedure, particularly the T183 form, which is the document used by participants to file a tax return on behalf of another individual.

Through a letter dated May 6, 2021, the CRA had begun an investigation into the Applicant’s electronic filing procedures. In the letter, it was claimed that the CRA was evaluating her completed T183 forms for the 2019 tax year and that the Agency had requested copies of those forms from her for each person whose name appeared on a list that was attached, all of whose behalf she had filed tax returns. Later, on October 27, 2021, the CRA notified the applicant that her EFILE credentials had been terminated because she had been previously warned to stop submitting on behalf of a certain type of taxpayers who were not eligible for electronic filing. Despite this, the applicant nevertheless persisted. As used above, the following taxpayers are excluded:

1. Non-residents or those who are presumed to be non-residents who are foreign workers working in Canada under the Seasonal Agricultural Workers Program (SWAP);
2. Taxpayers who are presumed to be residents (not subject to provincial or territorial tax).

The Applicant continued to initiate an administrative review, but it was unsuccessful because the suspension was affirmed by CRA on the grounds that the Applicant was aware of the list of exclusions yet continued to submit electronic returns for these taxpayers despite knowing they were excluded. The applicant was successful in his subsequent request for judicial review of the CRA’s judgment. However, the Court was certain that a participant in an EFILE may have their right suspended.

Section 150.1(2) of the ITA, which states that the written criteria established by the Minister and made available on the CRA website, was the pertinent provision that was brought to the Court’s attention. This section states that in order to be eligible to file a return of income for a tax year electronically, a person must meet the requirements set forth in the written criteria as published on the CRA website. The Minister has complete power to grant or withdraw the privilege of electronic filing, according to Justice Martineau in Paterson v. Canada (Revenue Agency), 2010 FC 644.

The “Suitability screening” form available on the CRA’s website includes a list of pertinent criteria controlling the use of the minister’s discretion. This demonstrated that the requirements, including Criterion 13, must be followed when filing electronically and that the tax authorities may suspend EFILE rights if there is a violation. But it was not the main point of contention – rather, it was whether the tax authority or the Minister could suspend the mentioned rights. The stallion in the case who received the most horse whips was the decision to suspend, regardless of its propriety.

Under the EFILING System, an administrative decision to suspend a taxpayer’s rights and privileges must be reasonable.

In this instance, the applicant argued that (i) the CRA’s decision appeared to be based on administrative Criterion 13, which states that anyone who has engaged in forgery, dishonesty, a betrayal of trust, or other unethical behavior is ineligible to participate in the EFILE program, and (ii) the CRA failed to make it clear how Criterion 13 related to the reasoning behind the decision. On the other hand, the CRA maintained that the judgment was not made in reliance on Criterion 13 but rather on the legal information included in the list of taxpayers who were excluded that was made available on the CRA’s website. The judgment was deemed irrational by the court.

Reviewing a decision’s reasonableness entails “identifying an internally consistent and rational chain of analysis that is justified in relation to both the facts and the law that constrains the decision-maker,” as stated in Canada (Minister of Citizenship and Immigration) v. Vavilov (2019 SCC 65 at para. 15). The decision’s clarity, justification, and transparency must be determined by the court. Due to the fact that arbitrary judgments undermine the fairness principle, which is crucial to a just and equitable tax system, this requirement is required to ensure that no arbitrary decisions are made. In the judgment of the Minister, the Court found a lack of “intelligibility and integrity.”

The judgment’s clarity and transparency imply that there should at least be assurance on the criteria that were relevant in making the choice and how one particular criterion came to be the main factor in the decision. These requirements were also imposed in Paterson v. Canada (Revenue Agency) as a way to verify the CRA’s discretion. The CRA is mainly to blame for how challenging it was to determine the decision’s transparency and understandability. The decision was made based primarily on the list of “Excluded Taxpayers” published on the CRA website under the heading “suitability screening,” which had the legal consequences envisioned by paragraph 150(1)(2) of the ITA. The decision letter issued by the CRA did not specifically state that Criterion 13 was used.     

Could Criterion 13 have been seen as just incidental to the reasoning behind the decision? And may the failure to communicate an ancillary ground lead to an unreasonable decision?

One of the controversial issues in Virgen was the misinterpretation of the decision’s justifications. Regardless of the number of days these seasonal workers from a treaty country have spent in Canada, Virgen was not permitted to claim ignorance of the excluded list’s existence since she had been informed of it. Neither was she permitted to assert that seasonal agricultural workers who normally reside in Mexico were neither non-residents nor deemed non-residents who fall under the categories of excluded taxpayers.

The lack of communication about Criterion 13 was a concern, but the Court determined that the CRA had focused on Criterion 13 when making its conclusion. The record leading up to the Minister’s conclusion plainly suggested a reliance on Criterion 13. When the CRA argued that the references to Criterion 13 in the Report before the Court only related to the manner in which Virgen was able to perform the impugned electronic filings, that is, through the “care of” options in the EFILE program, the CRA argued that the said reference only related to the manner in which Virgen was able to perform the impugned electronic filings. The Canadian litigation tax lawyer for CRA claimed that Virgen could have raised the issue of whether the published list of exclusions met the requirements of subsection 150.1(2) of the ITA during the administrative review, but that claim was rejected by the court because it believed that the issue should have been addressed in order to benefit both the court and the parties during the judicial review.

Additionally, the assertion that Criterion 13 was incidental would not have disproved its application in assessing reasonableness. In Saber & Sone Group v. Canada (National Revenue) 2014 FC 1119, the Court held that even if an administrative judgment only provides a few or no reasons, it can nevertheless be viewed as providing information about the decision’s justifications. This was reaffirmed in paragraphs 37–38 of Sketchley v. Canada (Attorney General), 2005 FCA 404. Notably, Criterion 13 made reference to the 5-year restriction from using the EFILE system. As a result, the conclusion was irrational due to the ambiguity around the application of Criterion 13 and the absence of specifics demonstrating how it did so.

The Effect of the Suspension of EFILE Rights Affirmed by the Court in Virgen v. Canada (Attorney General)

Paterson v Canada (Revenue Agency) has long established the standard for rigorous analysis of administrative judgments terminating EFILE privileges. However, the decision in Virgen appears to just require that the administrative decision’s reasoning be adequately stated. The communication of the rationale for the suspension of EFILE privileges has been emphasized as a minimal criterion for upholding the decision in a judicial review. Thus, in this case, the Court decided in favor of Virgen and supported her claim that her EFILE rights were unjustly stopped. This decision removes any type of arbitrariness in tax administration and, at the same time, protects against the use of the EFILE system to perpetrate any sort of tax fraud.

Pro Tax Tips from our Experienced Canadian Tax Lawyers to perpetrate any type of tax fraud.

To avoid filing returns in a way inconsistent with the “suitability screening” criteria, tax preparers and taxpayers must make sure that the criteria are followed. These criteria may be found on the CRA website.

In order to eradicate any suggestion of arbitrariness and unreasonableness, the EFILE administrative review process must be carried out in a way that provides thorough explanations for every decision. Contact one of our top tax lawyers to challenge the CRA’s judgment if it doesn’t follow these guidelines.

In order for the CRA to make timely tax assessments or monitor the usage of the EFILE system, you must promptly provide all essential documentation.

Frequently Asked Questions (FAQs):

Question: I am a seasonal agricultural worker from abroad who is not a resident of Canada and who is working there under the SWAP program. Does the EFILE system allow me to utilize it?

Answer: Non-residents or deemed residents of another country who are working in Canada under the Seasonal Agricultural Workers Program (SWAP) are ineligible. There is a lengthy list of exempt taxpayers on the CRA website. It is urged that tax preparers refrain from submitting returns on behalf of these people. On this part of the CRA website, you may find the whole list of disqualified people: Exclusions

Question: In accordance with the records of the Canada Revenue Agency, I am a tax preparer who has been submitting returns through EFILE on behalf of individuals who have been classified as bankrupt as well as for emigrants or non-resident taxpayers. I have not, however, received an official warning. What penalties are there if this is found out, and how can I appeal the penalties?

Answer: Before punishing defaulting EFIEL users, the CRA will issue a warning to them. The penalty is often a temporary suspension of the taxpayer’s ability to use EFILE and its associated rights and privileges. Five (5) years had passed in Virgen. A tax return preparer who feels unjustly treated might request that CRA cancel or uphold the suspension by starting administrative review procedures. It is strongly advised that you contact our experienced Canadian tax litigation lawyers to defend yourself and make sure that you are no longer in default.

Disclaimer:

“Only general information is provided in this article. Only as of the publishing date is it current. It hasn’t been updated, therefore it could no longer be relevant. It cannot or ought not to be relied upon since it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should speak with a lawyer if you have particular legal inquiries.”