Tax & Trade Blog

One thing that usually goes undiscussed when contemplating appeals to the Tax Court of Canada (“TCC”) is what happens if a taxpayer loses.

One thing that CAN happen is a “costs award” against the taxpayer, which is where a TCC judge orders the taxpayer to pay a portion of the Department of Justice (“DOJ”) costs in defending the appeal – which puts a significant premium on understanding one’s “chances of success” BEFORE filing the appeal!

Unexpected Costs

As a result of the COVID-19 pandemic, the Tax Court of Canada (the "TCC") has been closed with all hearings cancelled since March 16, 2020.

A recent Notice to the Public and Profession (the "Notice") issued by the TCC has indicated this cancellation of hearings will extend to July 17, 2020 (which would have been the last day of hearings before the TCC's previously scheduled 4-week summer recess).

The Notice also reveals that the TCC has been preparing to re-open.

Given the tight tax timelines under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”), it is not uncommon for tax appeal deadlines to be inadvertently missed. While it is possible to obtain an extension under certain circumstances, there are strict deadlines that must be adhered to in order to do so.

In the recent decision in Canada (National Revenue) v. ConocoPhillips Canada Resources Corp., 2017 FCA 243 (“ConocoPhillips”), the Federal Court of Appeal (“FCA”) confirmed that the Minister of National Revenue (the “Minister”) has no authority to grant an extension to the deadline for filing a Notice of Objection if an extension is not sought within one year of the expiration of the general deadline for doing so.

Given the tight timelines under the Excise Tax Act (“ETA”) it is not uncommon for tax appeal deadlines to seemingly come and go. Fortunately, sometimes even when it appears that a deadline has been missed an extension may be granted or it may not have actually expired due to procedural missteps by the Canada Revenue Agency (“CRA”).

In Masa Sushi Japanese Restaurant Inc. v. The Queen, 2017 TCC 239 (“Masa Sushi”), the Tax Court of Canada (“TCC”) confirmed that lawyers are the only representatives that are authorized to represent tax appellants in court under General Procedure tax appeals.

In Canada, legal costs are generally awarded to the successful litigant in a tax appeal (or in most civil cases for that matter) based on actual costs incurred, but are often a mere fraction of the actual costs that a litigant has incurred. As such, the first thing that many taxpayers contemplate when deciding whether to appeal a CRA assessment is whether or not it is worth it, particularly where it appears likely that the costs of a tax appeal will probably exceed the amount of tax in dispute.

While the decision on whether or not to appeal a tax assessment should be made on a case by case basis, the Tax Court of Canada (“TCC”) in Ike Enterprises Inc. v. The Queen, 2017 TCC 160 (“Ike Enterprises”) recently confirmed that in appropriate circumstances, a taxpayer can be awarded legal costs that exceed the amount of tax in dispute. In fact, the CRA was ordered to pay costs equal to approximately 140% of the amount in dispute!

During a tax appeal it is quite common for a tax appellant and the CRA to disclose information and to formally agree on certain facts. For example, at the outset of most tax appeal trials the parties often prepare a document commonly referred to as a “Statement of Agreed Facts” or “Partial Statement of Agreed Facts” that outlines the facts that the parties agree on. 

The Tax Court of Canada (“TCC”) decision in Athabasca University v. The Queen, 2016 TCC 252 (“Athabasca”) is a perfect example of why it is imperative that no concessions or agreement of facts be made without a careful analysis of the potential implications that this could have on the ultimate issues in dispute in the tax appeal.

A common step in the Tax Court of Canada litigation process is the Examination for Discovery (“Discovery”).  A Discovery is where each side (the taxpayer and the Canada Revenue Agency or “CRA”) will have the opportunity to examine witnesses from the other side, under oath.  This is typically done with the assistance of a tax lawyer, and affords each side the opportunity to ask questions and request documents relevant to the issues in the tax appeal.  The Witnesses are under oath and must answer questions truthfully, with the Discovery recorded, and transcripts produced after-ward.

Registrants are required to keep adequate books and records that provide the information necessary to ensure taxes payable under the Excise Tax Act (“ETA”) can be determined. What may happen if a taxpayer has failed to file tax returns, filed patently deficient ones and/or a taxpayer’s books and records are not reliable or do not exist?  Subsection 299(1) of the ETA states that the Minister is not bound by the contents of the return, but may assess by alternative means including the use of estimates or net worth approach. (Parallel provisions can be found under subsection 152(7) of the Income Tax Act.)

The discovery process allows litigating parties to collect and consider all pertinent facts, to use those facts to assess the strengths and weaknesses of their case and to otherwise prepare for trial.  A general exception to the requirement to disclose relevant documentation and information during the discovery process relates to documents or information that are “privileged”. 

The recent decision of the Chief Justice of the Tax Court of Canada in CIBC v. The Queen (2015 TCC 280) is an excellent review of the strict rules surrounding privilege in this context, and a cautionary tale for litigants taking an overly obstructionist approach to the principles of full and proper disclosure.

Rules regarding cost awards and settlement offers are important tools to promote settlement in the context of general civil litigation and are generally seen as an important tool to minimize use of scarce court resources. 

In tax cases, settlement offers have historically tended not to play as important a role, which is perhaps attributable to the fact that tax appeal outcomes tend to be mostly binary in nature (i.e. a complete success or complete failure).  This differs markedly from most other civil litigation where the quantum of damages is often the central contested issue.  Furthermore, Canada’s Tax Court Rules have historically only considered settlement offers as one of many factors to be considered when making a costs award, without setting out more definite implications of settlement offers for awarding costs.

This may be changing under new Tax Court Rules 147(3.1) and (3.2) which grant a party “substantial indemnity” costs after the date of its offer to settle (defined to be 80% of solicitor and client costs in Rule 147(3.5)), if judgment is as or more favourable than the offer. 

Although these rules have recently operated in favour of successful appellant taxpayers (see for example: Sunlife (2015 TCC 171) and Repsol Canada Ltd. (2015 TCC 154))  the TCC’s cost award in Standard Life (2015 TCC 138) serves as a warning to taxpayers that they may be liable for significant costs, where a settlement offer from the Crown has been rejected.

As a general rule in tax litigation, the initial onus is on the appellant-taxpayer to “demolish” the Minister’s assumptions that form the basis of the disputed assessment. This initial onus is met where the appellant makes out at least a prima facie case. If this is done, the burden then shifts to the Minister to prove, on a balance of probabilities, that the assumptions were correct.  The primary reason for this rule is that the taxpayer generally has the best knowledge of his/her own affairs in a self-reporting tax system.

However, the TCC has held that the initial onus may not be on the taxpayer in the context of so-called “derivative assessments” such as assessments against directors pursuant to director’s liability provisions for underlying corporate assessments (ss. 323 ETA and 227.1 ITA) and against transferees pursuant to non-arm’s length transfer rules for underlying assessments against the transferor (ss. 325 ETA and 160(1) ITA).  

When all else fails, taxpayers will often take the path of last resort to recover taxes, interest or penalties, called "Remission Applications", which are made under the Financial Administration Act (FAA).  Specifically, section 23 of the FAA confers discretion on the Governor in Council, exercisable on the recommendation of the Minister, to remit any tax or penalty when it considers that the collection of the tax would be “unreasonable or unjust” or that it is “otherwise in the public interest to remit the tax or penalty” – a hugely powerful discretion.

Yet the Canada Revenue Agency (CRA) tends to administer these provisions with an alarmingly tight fist, essentially allowing such applications only in instances of (their words):  extreme hardship, incorrect action or advice by the CRA, financial setback combined with extenuating factors, or the unintended result of legislation.

What is really required for GST ITC Claims?

For more years that we can remember, “ITC Documentation” has been a “Top 10” Audit Issue with Canada Revenue Agency GST Audits. This is a reference to the evidentiary requirements imposed by ss. 169(4) of the Excise Tax Act (ETA) and the Input Tax Credit Information (GST/HST) Regulations (the “ITC Regulations”) – which the CRA has been prone to interpret as a “documentation requirement”, reviewing and disallowing ITCs claimed for “lack of required documentation”.

The law in this area is fortunately changing, with a recent decision of the Tax Court of Canada (TCC) Forestech Industries v. The Queen. (2009 TCC 591) providing a helpful review on the actual requirements of subsection 169(4) -- which pointedly are not exactly what many CRA auditors would have taxpayers believe.

Both the “Large Corporation rules” in the Income Tax Act (the “ITA”) and the “Specified Person rules” under the Excise Tax Act (the “ETA”) are probably unfamiliar to most people other than experience tax practitioners.  However, they can impact the ability of large corporations to properly appeal income tax and GST issues, since if they are not complied with - to the letter - the government will take steps towards barring the taxapyer from further appealing the matter beyond the Canada Revenue Agency's Appeals Process. 

Generally, the overall effect of these provisions is to attempt to prevent a Specified Person (or a Large Corporation) from appealing to the Tax Court of Canada where the Notice of Objection does not contain certain required pieces of information.