Plea of tax law ignorance falls on deaf ears: Fairness appeal denied

National Post


It's often said ignorance is bliss. While that maxim may hold true for some,
it may not be the best tactic to use with the taxman, as Satish Khanna found out
in court earlier this month.

The case involved Mr. Khanna's application for judicial review of the Canada
Revenue Agency's decision to deny his "fairness" application. Under the fairness
provisions contained within the Income Tax Act, the CRA has the discretion to
cancel any penalties or interest (but not tax) you may be assessed, due to
"extraordinary circumstances" beyond your control.

Mr. Khanna's submitted a fairness application requesting the CRA cancel
arrears interest he was charged going back to his 1997 tax return.

In 1993, Mr. Khanna bought a small business. He expanded its operating space
and renovated its premises thereby increasing its fair market value. When the
federal government eliminated the lifetime $100,000 capital gains exemption in
1994, Mr. Khanna could have chosen to elect to crystallize the accrued gain from
his purchase date to Feb. 22, 2004 by filing an election form and essentially
realizing the increase in value as a tax-free capital gain. Unfortunately, Mr.
Khanna was unaware of this election at the time.

In 1997, he sold his business. It was only in 1998 when he filed his 1997 tax
return did he discover the election he could have made to shelter from tax part
of his capital gain on the sale of the business. Mr. Khanna then attempted to
file the election but it was not accepted by the CRA since the deadline
permitted to file had long since passed.

Some time in 2000, Mr. Khanna's 1997 tax return was audited and he was
assessed tax on the capital gain as well as charged interest on the tax owing
from April, 1998.

That was when Mr. Khanna submitted a fairness application to the CRA. The CRA
denied his application "on the ground there was no reason to grant relief
arising from (his) ignorance of the deadline."

In court, Mr. Khanna freely admitted that failing to claim the capital gains
exemption on his tax return was "entirely attributable to his own lack of
knowledge of the brief 'window of opportunity' that had been provided taxpayers
under the Act."

As a result, the judge dismissed his request for fairness relief.

A plea of legal ignorance in court is not a new tactic. In an 1802 decision
in England, Lord Ellenborough wrote "every man [sic] must be taken to be
cognizant of the law; otherwise there is no saying to what extent the excuse of
ignorance might not be carried. It would be urged in almost every case."

Canada's Supreme Court, echoing the words of Lord Ellenborough, concurred,
writing in a 1989 decision that "ignorance of the law is no excuse. The citizen
is deemed to know the contents of legislation."

As a result, taxpayers who are less familiar with the myriad of tax rules and
regulations are well-advised to seek qualified, professional advice to ensure
they are not caught ignorant before the law.