How Rotfleisch & Samulovitch Protected a Corporation’s Right to Judicial Review – Saving Millions in Penalties

Rotfleisch & Samulovitch P.C. was retained to represent an Ontario corporation (the “Corporation”) after the Canada Revenue Agency (“CRA”) denied its request for penalty and interest relief under the CRA’s Voluntary Disclosures Program. The Corporation began operating in 2003 and earned significant income for nearly two decades without filing any T2 corporate tax returns or GST/HST returns. In 2007, the Corporation was involuntarily dissolved for failing to file its annual information returns with the Ontario Ministry of Finance, yet the business continued operating. In 2020, the Corporation submitted a voluntary-disclosure application under the CRA’s Voluntary Disclosures Program to address and correct its long-standing compliance issues.

The Corporation’s proprietors attempted to revive its corporate status after submitting the voluntary-disclosure application. These efforts were quickly derailed due to errors by both the Ontario Ministry of Finance and the CRA. The proprietors believed the Corporation’s tax year-end aligned with the calendar year-end of December 31 and prepared its corporate returns on that assumption. However, the Ontario Ministry of Finance and the CRA had each recorded different fiscal year-ends for the Corporation. As a result, the Corporation needed formal consent from both authorities to consolidate these three conflicting year-ends before it could accurately prepare and file the outstanding returns required for its voluntary-disclosure application.

The CRA denied the initial request for a year-end correction without any justification and took roughly 18 months to overturn its initial decision. After that, communication essentially stopped. Despite the Corporation’s repeated updates on its revival efforts, the CRA remained silent.

After nearly three years of silence from the CRA, the agency issued a letter concerning the Corporation’s voluntary-disclosure application demanding its articles of revival within 15 days. The letter, which was sent by regular mail, arrived late, and the Corporation missed the deadline.

Upon receiving no response by the imposed deadline, the CRA immediately denied the VDP application as “incomplete.” Even worse, the letter stated that the Corporation had no right to a second administrative review and no right to seek judicial review. As a result of the CRA’s decision, the Corporation risked facing millions of dollars’ worth of penalties and interest, on top of the extensive tax debt it would owe after filing its outstanding returns.

Our office was retained nearly a month after the denial to determine whether a remedy existed.

Approach

We gathered all available evidence and promptly filed an application for judicial review with the Federal Court of Canada. In the application, we argued that the CRA’s decision to deny the Corporation’s request for relief under the Voluntary Disclosures Program and its refusal to grant a second administrative review must be set aside.

Our office argued that the CRA’s decision was unintelligible and deprived the Corporation of its procedural fairness rights. As an administrative decision affecting the Corporation’s rights and privileges, the CRA’s determination carried a clear duty of procedural fairness – requiring an intelligible rationale and a genuine opportunity for the applicant to make submissions and present evidence.

We maintained that the CRA’s conduct amounted to a complete denial of natural justice and breached the Corporation’s right to procedural fairness considering the principles above. First, the CRA imposed a 15-day response deadline by regular mail after nearly three years of silence regarding the Corporation’s voluntary-disclosure application. This effectively ambushed the Corporation and provided no meaningful opportunity to respond. Second, the Corporation could not have met the CRA’s request in any event, because the CRA’s own refusal to correct the Corporation’s tax year-end had made compliance impossible. The CRA created the very barrier it later relied on to justify its denial.

Third, and most concerning, was that the CRA’s decision explicitly stripped the Corporation its right to recourse. The decision letter not only refused the Corporation a second administrative review but also, more covertly, its right to seek judicial review. The right to apply for judicial review is guaranteed under section 18.1 of the Federal Courts Act, and the CRA cannot take away a statutory remedy. The disconnect between the CRA’s reasoning and the outcome it imposed was indefensible and rendered the decision wholly unreasonable.

Result

The CRA’s legal counsel at the Department of Justice engaged in settlement discussions with our office to resolve the Corporation’s judicial review prior to cross-examinations. A settlement was reached: the VDP application would be sent back for reconsideration, and the Corporation would continue its revival process without penalty.

As a result, the Corporation avoided millions in potential penalties and interest, and its VDP application was restored to proceed on its merits.