The taxpayer participated in a government fishing licence retirement program in which he was paid a lump sum to surrender his commercial fishing licence and retire from fishing. CRA advised participants that the licence was a capital asset and therefore the entire payment was a taxable capital gain, and the taxpayer filed his return on that basis. A subsequent CRA external interpretation indicated that the payment was income from a business. CRA subsequently settled with other taxpayers on the basis that the 50% allocated to the fishing licence was a capital gain, and the other 50% was not taxable at all; a position affirmed by a subsequent Tax Court decision (the correctness of the 50/50 division between the licence and the retirement agreement had not itself been raised by either party). The taxpayer applied under s. 152(4.2) for a correction to his taxes, noting the difference in treatment.
The Assistant Director and Director at the first and second levels of the review denied the application, citing that the taxpayer could have filed an objection before the deadline and had not done so, and that CRA does not change a taxpayer's tax treatment only because of a settlement or court decision arrived at with another taxpayer. Heneghan J. found that the Director's decision should be referred back for redetermination. The decision had breached the taxpayer's right to procedural fairness, as the reasons given were not responsive to the taxpayer's claim of different treatment. In addition to the procedural problems, the decision itself "fail[ed] to meet the standard of reasonableness because the reasons lack[ed] justification, transparency, and intelligibility." (Para. 75.) Heneghan J. stated (at para. 84):
[T]he Minister is not entitled to make settlements with taxpayers that do not have a principled basis in law. In December 2003, in connection with a number of fish harvesters, the CRA offered to treat half of their [licence retirement program] payments as non-taxable, and the other half as capital gains. In order to do so, that offer must have accorded with the CRA's understanding of the Act and its application to the [licence retirement program] payments.