Judicial Reviews, Keeping CRA honest
Canadian courts are keeping the CRA honest!
As per Baker & McKenzie
October 31 2013
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A few months ago, an esteemed member of the Canadian Judiciary delivered a powerful address to a local group of Canadian tax practitioners. The message from Justice David W. Stratas, who sits on the Federal Court of Appeal (“FCA”), was straightforward: taxpayers should not be shy to take the Canada Revenue Agency (“CRA”) to court to have CRA decisions reviewed. In his view, judicial review of CRA decisions affecting all aspects of tax administration and, in particular, those made pursuant to an exercise of discretion, will be an area of growth in the near future. Having said that, he urged tax practitioners to learn the language of administrative law and pave the way for its development in the tax area.
Justice Stratas’ enthusiasm was no coincidence. Earlier in the year, he wrote the unanimous decision of the FCA in M.N.R. v. RBC Life Insurance Company et al, 2013 FCA 50, “knocking out” the CRA because of its attempts to enforce requirements for documents and information. In that case, the CRA sought information from RBC Life Insurance about unnamed customers who purchased a particular insurance-product known as the “10-8 plan”. Under Canadian legislation, requirements concerning unnamed persons are required to obtain the prior judicial authorization which until recently was granted on an ex parte basis. RBC Life sought the review of that authorization and in its challenge, successfully demonstrated that the CRA failed to make full disclosure to the judge who authorized the issuance of the requirements. In particular, the undisclosed evidence was that the requirements were primarily issued to chill the 10-8 plan, which the CRA disliked on some policy grounds. In light of this information, the CRA was unable to show that the requirements were necessary to verify compliance under the Income Tax Act (the “ITA”), the test for their issuance. The court noted that “the enforcement and investigation part of the ITA also aims to ensure the fair and proper treatment of taxpayers” and given that the CRA did not meet a “high standard of good faith” by being coy with the authorizing judge, the requirements were subsequently quashed.
Another successful intervention by the taxpayers occurred in Ficek v. the Attorney General for Canada, 2013 FC 502. In Ficek, the taxpayer sought to compel the CRA to issue a notice of assessment (and the tax refund) 18 months after the filing of her tax return. In that return, Ms. Ficek claimed credits for certain charitable donations (which gave rise to a refund) and, under Canadian law, the return must be processed promptly after its filing with the CRA. Instead of processing the return and either allowing the claim (and refund) or disallowing it, the CRA simply stalled everything. In particular, the hold up affected all aspects of the taxpayer’s return and not only the disputed donation. Thus, the entire return (including non-contentious items) was left up in the air at the whim of the CRA.
As we all learned, the inaction was not due to laziness on the part of the CRA or the actual time needed to process the return. Instead, the real reason for the CRA’s inaction was that the donation was part of a wide-scale donation program that the CRA disliked. By not processing the return, the CRA’s goal was to have the taxpayer (and the thousands of other donors involved in the same donation program) “over a barrel” and to deter taxpayers from further participating in the program. As in RBC Life, the court zoomed in on the real motive behind the CRA’s (in)action and, given its impropriety, found in favour of Ms. Ficek.
These two recent decisions are good news for all taxpayers, both large and small. Historically, requirement for documents and information as well as refusals to provide interest or penalty relief have been prime cases in which courts have intervened against the CRA’s discretion. These cases help further broaden the scope in which judicial review of administrative action will be a relevant tool in tax disputes. Tax executives of multinationals under audit by the CRA, for example, may now have additional ammunition if the CRA crosses the line during an audit.
In fact, every time the CRA makes a judgment call on a decision affecting the administration of the ITA, that decision can be scrutinized and challenged before the courts if it is improper. For instance, discretionary decisions on the non-eligibility of a multinational for the various programs administered by the CRA (e.g. Advance Pricing Agreements, Competent Authority or Voluntary Disclosures) could be additional areas for judicial intervention. Also, negative or harsh decisions from the CRA on collection matters are prime candidates for judicial review when the CRA’s discretion is not exercised properly. Collections decisions with harsh consequences can arise, for example, when large transfer pricing adjustments are made by the CRA and the company does not have the liquidity to cover the bill.
As a take-away, tax directors should keep judicial review at the forefront of their minds when an audit or other interactions with the CRA get strained—either as a dispute resolution tool, when the circumstances are right, or simply as a wedge to keep the process from going off the rails.