Occasionally, the CRA agrees with a taxpayer, in advance, to assess tax in a particular way. Those agreements arise most frequently in the context of advance income tax rulings but, as in Szymczyk v. The Queen, 2014 TCC 380, other instances can arise. Are assessing agreements binding on the CRA?
In 1981, the Department of Finance substantially revamped the Income Tax Act rules determining the amount of employee automobile benefits. General Motors, concerned with the complexity of the new rules and the administrative costs that would be incurred in tracking and computing the auto benefits for its executives and senior managers, approached Revenue Canada (predecessor of the CRA) with a proposal to use a simplified calculation for computing auto benefits. In 1982, Revenue Canada issued a letter agreeing with GM’s proposal, and the simplified formula was used by GM without incident for many years.
In 2010, CRA audited the GM executives and senior managers. CRA determined that the simplified formula contained in the letter agreement was not mandated by the Income Tax Act, and reassessed to include additional standby charges and operating expense benefits in the employees’ incomes. Mr. Szymczyk took issue with the government reneging on its agreement, and appealed.
His first appeal was to the Federal Court of Canada (2013 FC 1219 (CanLII)). There he argued that the CRA was estopped from assessing past years contrary to the agreement. The Federal Court held that it did not have jurisdiction, and that Mr. Szymczyk ought to go to the Tax Court to determine the correctness of the assessment. So he did.
The Tax Court appeal was heard under the informal procedure, reserved for small amounts in issue and theoretically having no precedential value. In the end, the case was decided on a technical pleadings issue (which will be of no use to others who were assessed on the same basis as Mr. Szymczyk). However, the Tax Court did make some useful comments about the scope of an assessing agreement.
On the issue of estoppel, the Court stated (para 38): “Although the Minister cannot be bound if an approval is contrary to law, in my view, an approval should not be set aside by courts too readily on grounds that it is contrary to law. Latitude should be given to the approval unless it is clearly not supportable by the law.” This is a sensible view of the effect of an assessing agreement. If there is some support for the position, it should be upheld.
Despite apparently upholding the validity of the letter agreement, the Tax Court went on to state that the facts and the law had materially changed since 1982 when the letter agreement was issued. These changes were sufficiently material to invalidate further reliance upon the letter agreement. Absent the pleadings point, it appears that the CRA would have otherwise succeeded. This will encourage CRA, where it does not like the result, to strive to find “material” differences between the represented facts and the actual facts. Beware in drafting advance income tax ruling requests.
It remains to be seen whether another case from this group will be pushed forward to be determined on the merits.