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

Our tax system is complex, with many potential procedural pitfalls that taxpayers need to navigate.  One such issue is the jurisdictional boundaries between the Tax Court and the Federal Court for tax disputes.  Recent Supreme Court’s companion decisions in Dow Chemical Canada ULC v. Canada (“Dow Chemical”), and Iris Technologies Inc. v. Canada (“Iris”) provide clarifications on this issue.  However, these “clarifications” may result in a less streamlined and more costly process and thus may not be good news for taxpayers.

We have blogged here and here about the real estate projects that the CRA is currently working on, usually resulting in assessments of GST/HST on sales of renovated homes or short-term rental housing.

In a recent Tax Court case involving Cheema, the CRA was permitted to open up statue-barred periods in order to assess a homeowner for taxable income generated from a short-term purchase and resale of a house in Calgary.  This case serves as a warning for taxpayers in similar situations: treating housing like “inventory” to produce gains will result in CRA assessments —even many years later, making Voluntary Disclosures the only viable strategy for addressing past exposure.

As announced in the Liberal-NDO Coalition Government’s 2024 Budget, and at a time when the government seems hard-pressed to increase taxation in Canada to deal with the massive spending over the last few years, the Canada Revenue Agency (“CRA”) has been given some brand new tax Audit powers – which to some respects are downright frightening.

A common theme of our direct selling blogs is that direct selling businesses should pay close attention to the wording of their key documents (compensation plans, contracts, and policies and procedures, etc.) to ensure that plan participants are properly characterized as independent contractors and not as employees.

While not in a direct selling context, a recent decision at the Tax Court of Canada serves as a cautionary tale for businesses that fail to examine the details of their documents – their workers may be characterized contrary to their intentions!

All taxpayers under audit should be aware of both the scope and limitations of Canada Revenue Agency’s audit powers, as well as the consequence of failing to respond to a CRA Auditor’s valid request for documents or information.

The Federal Cout decisions in Canada v. Money Stop Ltd. (2013 FC 133), and Canada v. Money Stop Ltd. (2013 FC 684) are poignant reminders that ignoring the demands of a CRA auditor may land the Director(s) of the Corporation in prison!

Tax assessments are difficult to appeal in Canada because the Canada Revenue Agency (“CRA”) is allowed to make factual ‘assumptions’ which the taxpayer must disprove – or lose its case!

Two recent Federal Court of Appeal (FCA) decisions have seemingly expanded these powers to assumptions of “mixed fact and law” – although the second FCA seemingly walks back the first.

In Ghermezian v. MNR, 2023 FCA 183, the Federal Court of Appeal may have put the last nail in the coffin for taxpayers trying to dispute the broad reach of the CRA’s audit powers.

CRA’s Use of 3^rd Party Requests for Information

The case revolved around the CRA’s Related Party Initiative, and the CRA’s issuance of various requests and requirements for information under section 231.1 of the Income Tax Act (and parallel provisions in section 289 of the Excise Tax Act (alternatively, the “RFIs” and the “Demands”, and the “ITA” and “ETA”).