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.

While we will focus on the GST “Specified Person” rules rules below -- they are essentially the same as the "Large Corporation" rules for income tax purposes. 

For example, under section 301 of the ETA, a Specified Person is defined as persons who are listed financial institutions described in subparagraphs 149(1)(a)(i) to (x) for the reporting period in question, or persons who are not a charity and whose threshold amount under subsection 249(1) exceeds $6 million for the fiscal year including the reporting period in question and the previous fiscal year. When filing a notice of objection subsection 301(1.2) of the ETA requires Specified Persons: (a) reasonably describe each issue to be decided; (b) specify in respect of each issue, the relief sought, expressed as the change in any amount that is relevant for the purposes of the assessment; and (c) provide the facts and reasons relied on by the person in respect of each issue.

Failure to include the information from (b) and/or (c) in the Notice of Objection may be “cured” under subsection 301(1.3) of the ETA if the Minister requests the information, and it is provided within 60 days after the request is made. Note that there is no ability to satisfy the requirement in (a) through late compliance.

Section 306.1 generally limits the right of appeal to the Tax Court for Specified Persons to only those issues in respect of which the Specified Person has complied with subsection 301(1.2) or (1.21) in their Notice of Objection. The relief sought by the Specified Person on Appeal is also limited to the relief specified in the Notice of Objection.

While the Specified Person rules have been around for some time, caselaw has been sparse, and has tended to focus only on those situations where, perhaps, the Specified Person’s failure to raise an issue was clear: see for example, see Canada v. Telus Communications (Edmonton) Inc. (2005 FCA 159) where the Notice of Appeal raised a due diligence defence not previously raised in the Notice of Objection. The caselaw suggests - and perhaps understandably – that the Crown will be less successful where new facts and reasons are introduced, as the matters are refined through the court process: see for example British Columbia Transit v. The Queen (2006 TCC 437).

In some instances, however, the Crown takes a more technical and formalistic approach to the Specified Person rules, closely examining the form and contents of the Notice of Objection to ensure that the words used match the words in the Notice of Appeal. Whether that level of symmetry is required is doubtful, but some taxpayers are being forced to court to defend their Notices of Appeal on that basis.

This approach raises a number of issues, not the least of which is the degree of specificity provided by Notices of Assessment under the Income Tax Act and the Excise Tax Act – and whether the differences in assessing practices makes a difference in the application of the two sets of nearly identical rules.   One also begins to worry that a picky interpretation of the words used in a Notice of Appeal, relative to the Notice of Objection, leaves Large Corporations and Specified Persons with the right to object, but no effective right to appeal (because the basis for initial assessment is so unclear, that it is only really understood after the Notice of Objection process).

The problem is compounded when one contrasts the typical income tax assessment with the typical GST assessment. In the latter, the Notice of Assessment typically provides little detail about the issues forming the basis of the Assessment under the ETA.

Another problem is that the Crown is permitted under both pieces of legislation to advance new arguments at any time (see subsection 298(6.1) of the ETA and 152(9) of the ITA), perhaps making it imperative of taxpayers to plead their cases broadly and not narrowly.

These are real questions for persons in the tax practice, and will only be resolved through further judicial consideration. In the interim, in these large matters, we would advise there is no substitute for independent legal advice early on in the litigation process, and indeed, well before the Notice of Objection is due to be filed.  

Authors:  John Bassindale & Robert G. Kreklewetz

Millar Kreklewetz LLP