July 21, 2020
By Selena Ing, Associate and Boris Stanislav, Associate, Farber Tax Law
In the recent Federal Court decision of Iris Technologies Inc. v Minister of National Revenue, the Applicant, Iris Technologies Inc. (“Iris Technologies”) sought a refund of $62.3 million remitted to the Minister of National Revenue (the “Minister”) pursuant to the Excise Tax Act (the “ETA”) for the periods between September 1, 2019 to February 29, 2020.
Iris Technologies is a Canadian telecommunications company that services individuals and companies throughout Canada and abroad. The Canada Revenue Agency (the “CRA”) first audited the company’s GST/HST returns for the periods between January 1, 2017 to December 31, 2018. No adjustments were made to the returns.
During the audit, the CRA withheld Iris Technologies’s GST/HST refunds for periods following December 31, 2018. Iris Technologies’ Chief Executive Officer made a request to the Minister to release GST/HST refunds due to financial hardship. The Minister agreed to release the refunds for the periods between November 1, 2018 to March 31, 2019.
On October 30, 2019, the CRA began auditing Iris Technologies for its GST/HST returns for the period ending September 30, 2019. By December 3, 2019, the audit expanded to include all periods between January 1 and October 31, 2019.
During the audit, the CRA withheld Iris Technologies’ GST/HST refunds for periods after September 2019. Iris Technologies sought a release of a net tax refund of $62.3 million the periods between September 1, 2019 to February 29, 2020, which was needed to alleviate the heightened financial hardship brought on by the COVID-19 pandemic.
On March 27, 2020, Iris Technologies filed an application for Judicial Relief, which sought:
- an order directing the Minister to assess its GST/HST returns for the periods between September 1, 2019 and February 29, 2020;
- an order directing the Minister to pay its net tax refunds for the periods between September 1, 2019 to February 29, 2020 and any subsequent refunds for following periods until the conclusion of the Minister’s audit; and
In addition, on March 30, 2020, Iris Technologies also filed a Notice of Motion on an urgent basis, which sought:
- an interim order requiring the Minister to release $62,300,000 of GST/HST refunds and refunds for subsequent periods pending the hearing of the application for judicial review; and
- an order for confidentiality with respect to the contents of the exhibits and affidavits (withdrawn prior to hearing of the motion); and
- costs of the motion.
On April 9, 2020, the Minister issued Notices of Reassessment for the months of January to August 2019 and issued Notices of Assessments for months of September 2019 to November 2019 (only three of the six months at issue). Gross negligence penalties and interest were imposed in the Notices of Reassessment and the Notices of Assessment.
On April 10, 2020, the Minister also filed a Notice of Motion to dismiss Iris Technologies’s motion on grounds of mootness. The Minister argued that since the GST/HST returns for the period between September 2019 to November 2019 were assessed and the imposition of the gross negligence penalties and interest caused Iris Technologies to owe moneys to the Minister, Iris Technologies’s motion for relief was moot.
The Federal Court dismissed the Minister’s motion for mootness and stated that a “concrete dispute” remained between the parties since the Minister did not assess the returns for the period between December 2019 to February 2020 based on the test set out in Borowski v Canada (Attorney General).
In addition, the Federal Court also dismissed Iris Technologies’s motion for interim relief pursuant to section 18.2 of the Federal Courts Act. To succeed in obtaining interim relief, Iris Technologies would have to show that there is a strong prima facie case in its underlying judicial review application per RJR-MacDonald Inc. v Canada (Attorney General) and R. v Canadian Broadcasting Corp. The Federal Court held that Iris Technologies did not meet the elevated test for “serious issue” for the requirements of a successful mandamus application based on the test for granting such an order in Apotex Inc. v Canada (Attorney General). The Court stated that while the Minister is under a legal duty to assess these returns pursuant to subsection 229(1) of the Act, the Minister is entitled to a reasonable time to assess these returns. As such, the Court concluded that the mandamus application was premature.
However, this decision to dismiss Iris Technologies’s motion for interim mandatory injunction was appealed to the Federal Court of Appeal. In addition, the Minister cross-appealed the dismissal of the Minister’s motion to strike Iris Technologies’s interim relief and judicial review application on the basis that they were moot.
With respect to Iris Technologies’s appeal on the decision to dismiss the motion for interim mandatory injunction, Iris Technologies argued that:
- the motions judge erred in its interpretation of subsection 229(1) of the ETA, which should not be read to include a duty to assess. Rather, the provision only imposed a duty on the Minister to pay a refund and in contrast, the duty to assess is found in section 296 of the ETA;
- the motions judge also erred in its finding that the application for interim relief was premature. Iris Technologies argued that the elements outlined in Apotex were met for the unassessed periods between December 2019 and February 2020. Further, the first branch of the RJR-MacDonald test was met, as well as the second and third branches of the test; and
- the Minister acted in bad faith by assessing the returns for the September to November 2019 reporting periods after the application for judicial review was filed and then bringing an application to dismiss the motion for interim relief and underlying judicial relief application as moot. Since the Federal Court retains jurisdiction to control abuse of power and to redress administrative law claims of a substantive and procedural nature, Iris Technologies submits that the Court should order the Minister to pay $62,300,000.
In response, the Minister argued that:
- the motions judge was correct in finding that the first branch of the RJR-MacDonald test was not met. The Minister did not unreasonably refuse or delay the discharge of her duty to pay net tax refunds with “all due dispatch” as per subsection 229(1) of the ETA. “All due dispatch” is an elastic standard laden with discretion (The Queen v Imperial Oil Ltd), which allows the Minister a reasonable time to exercise her power (Jolicoeur v Minister of National Revenue). Given this standard, it was not an error for the motions judge to hold that the amount of time elapsed since the filing of the December 2019 to February 2020 GST/HST returns did not exceed a reasonable time for paying the refunds claimed; and
- Iris Technologies’s claims of bad faith is unwarranted and the application for mandamus is a covert attempt to have the Federal Court review the Minister’s decision to issue the assessments, which are matters for the Tax Court of Canada, not the Federal Court.
With respect to the Minister’s cross-appeal to dismiss the motion for interim injunction on the basis of mootness, the Minister argued that argued that:
- the motions judge made an error in finding that a concrete dispute remained between the parties. Since the assessments created an obligation for the appellant to repay nearly $41,000,000 of net tax refunds the Minister previously paid (just over $52,100,000 once interest and penalties are included), Iris Technologies owes the Minister more than the $34,289,554 it claims in the December 2019, January 2020, and February 2020 GST/HST returns that remain outstanding. Therefore, even if the Minister were to accept the refunds claimed for those reporting periods, she would be required to apply those refunds against the appellant’s existing debt under subsection 296(3) of the ETA.
In response, Iris Technologies argued that:
- the motions judge was correct to find that its request for interim relief was not moot. Since section 318 of the ETA is a discretionary provision, the Minister has no duty to offset amounts due against amounts owed. Moreover, the Minister can postpone, under subsection 315(3) of the ETA, the collection of any amount of GST/HST that is the subject of a dispute between the taxpayer and the Minister.
The Federal Court of Appeal dismissed both the appeal and the cross-appeal based on the following analysis:
Did the Federal Court err in dismissing the Minister’s mootness motion?
The Federal Court of Appeal held that a dispute remains between the parties regarding the amounts owed to the appellant in relation to its January 2020 and February 2020 returns, even if the appellant is not owed a net refund. Therefore, the Federal Court did not err in concluding that the motion was not moot.
Did the Federal Court err in dismissing the appellant’s motion for interim relief?
Where a mandatory interlocutory injunction is sought, a court is required to assess whether the applicant has shown a strong prima facie case, not merely that there is a serious issue for trial that is neither frivolous nor vexatious (Canadian Broadcasting Corp.).
To determine whether a strong prima facie case exists in this case, the test for granting an order of mandamus, as set out in Apotex, was reviewed. The dispute revolved around the third step of the mandamus test: whether Iris Technologies has a right to compel the performance of the Minister’s duty under subsection 229(1) of the ETA, and whether this duty requires that a refund be paid before an assessment or audit is completed.
The Federal Court of Appeal agreed with the motions judge’s conclusion that Iris Technologies failed to show a strong prima facie case since that the Minister “is entitled to a reasonable amount of time in which to assess these returns”. Therefore, Iris Technologies’ application for mandamus was premature.
The Federal Court of Appeal relied on the decision and analysis in the recent Federal Court decision of Express Gold v Minister of National Revenue, which concluded that the obligation to pay a refund with all due dispatch did not displace the Minister’s obligation to verify that the refund is in fact payable under the ETA. The Court further stated that it would be reasonable for the CRA to take approximately ten months to verify the refunds with respect to the assessments pertaining to January and February 2020, which had not elapsed at the date of the judgment.
In addition, the Federal Court of Appeal stated that it retained jurisdiction to consider the application of administrative law principles and obligations to the exercise of discretion by the Minister in the application of the ETA, which included allegations of acting for an ulterior purpose or in bad faith, abuse of his or her powers or not proceeding in a reasonable time frame. Determining whether the Federal Court or Tax Court has jurisdiction is a fact specific exercise, and the Federal Court should be alert of artful pleading disguised as an attack on the assessment. The fact that the Minister has issued an assessment does not oust the Federal Court’s jurisdiction under section 18.1 or 18.2 of the Federal Courts Act.
As a result, the Federal Court of Appeal dismissed both the appeal and the cross-appeal.