This is article is part of a series dealing with draft legislation released for comment by the Department of Finance on July 29th. Read the complete series:
- The evolving taxation of derivatives
- Sales of linked notes
- Taxation of switch fund shares
- Changes coming to country-by-country transfer pricing documentation requirements
- Proposed replacement of eligible capital property rules by new depreciable property class
The Minister may not reassess after the normal reassessment period unless the taxpayer has filed a waiver, or the taxpayer’s return included a misrepresentation attributable to carelessness, negligence or wilful default, or fraud was committed in filing the return. A number of provisions in the ITA reinforce the exceptional nature of an assessment beyond the normal reassessment period. For example, where a reassessment made after the normal reassessment period is based on misrepresentation or fraud, ss. 152(4.01) generally requires that the reassessment must be limited to the applicable misrepresentation or fraud. Subsection 152(5) states that after the normal reassessment period the Minister may not include any amount in computing a taxpayer’s income that was not included for the purpose of an assessment during that period. Subsection 152(9) concerns the ability of the Minister to advance an alternative argument in support of an assessment after the normal reassessment period. Limits on the Minister’s powers are obviously desirable to provide certainty for taxpayers and impose diligence on tax auditors. Regrettably, amendments have been proposed to ss. 152(9) which undermine the integrity of these limits.
The draft amendments which were released on July 29, 2016 can be traced to the notice of ways and means motions included with Budget 2015. That Budget proposed a perplexing “amendment”, which stated that the ITA would be modified in accordance with certain proposals relating to “alternative arguments in support of assessments”. The promise to amend the ITA was reiterated in Budget 2016, and resulted in the release of the following draft amendment to ss. 152(9):
The Minister may advance an alternative basis or argument in support of all or any portion of the total amount determined on assessment to be payable or remittable by a taxpayer under this Act at any time after the normal reassessment period unless, on an appeal under this Act …
These amendments are the government’s response to the FCA’s judgment in The Queen v Geoffrey Last (2014 FCA 129 - leave application dismissed November 13, 2014). In Last, the TCC held in the taxpayer’s favour on two issues for his 2002 taxation year, while refusing to change the character of a capital gain to business income. The TCC decided that re-characterizing a capital gain was not an alternative “basis” or “argument” in support of a reassessment under ss. 152(9) but rather an outcome requiring a reassessment that would not be permitted after the normal reassessment period. The FCA upheld the TCC, relying on Harris v MNR ( 2 Ex CR 653; aff’d  SCR 489 on different grounds). There are three principles in Harris:
- The Minister may not appeal her own assessment; and
- The result of an appeal cannot increase the assessment; because
- That outcome would be tantamount to allowing the Minister’s appeal.
The Crown’s unsuccessful argument in Last was that a tax appeal concerns only the correctness of an assessment, where an assessment is the amount of tax payable: as long as the appeal does not increase tax payable, the Crown should have latitude to set amounts off against one another. According to the Crown, since re-characterizing the capital gain as income would have more than offset the reductions favouring Mr. Last, the appeal for the 2002 taxation year should have been dismissed. The Crown’s argument was rejected, thus Last confirmed that the Harris principles against the Minister appealing her own assessment apply to each separate source of income. The proposed ss. 152(9) amendment would establish that an alternative “basis” or “argument” may be relied on to support the entire assessed amount or its constituent parts.
It is unclear why the word “basis” was included in the proposed amendment. In Anchor Pointe Energy Ltd v R (2003 FCA 294), the FCA stated that seeking to distinguish a new basis from a new argument supporting an assessment was an unproductive “semantical argument”. The FCA also noted that Anchor Pointe was distinguishable from Pedwell v R (2000 DTC 6405). In Pedwell, the TCC upheld the assessment relying on transactions other than those forming the “basis” for the assessment, which outcome the FCA reversed. The outcome in Pedwell was affirmed in Walsh v The Queen (2007 FCA 222), namely, the Minister cannot include transactions that did not form the basis of the reassessment. Further, Walsh confirmed that the Minister may not use ss. 152(9) to reassess after the normal reassessment period.
The explanatory note to the proposed amendment refers to alterative arguments that may result in an “increase or adjustment to an amount included in the assessment”, which is somewhat reassuring in the sense that it suggests that the government of Canada is not seeking to reverse the principles in Pedwell and Walsh. However, the broad wording of the actual proposed amendment is concerning to the extent that it may threaten the Pedwell and Walsh principles (since, of course, explanatory notes are not law).
While the inclusion of the word “basis” is concerning, the proposed amendment is also troubling because of what is omitted. There is no express mention of the limitations imposed by ss. 152(4.01) or (5) which are provisions to which ss. 152(9) must be subject. The explanatory note states that ss. 152(9) is subject to other limitations in the ITA, but explanatory notes are merely context and not legislation, as noted above. Further, it is unclear how the rules governing appeals by large corporations would be affected. Large corporations must set out issues under appeal with specificity in their notices of objection and new issues may not be raised or argued later. It is unclear what may occur if the Crown were to raise new bases/arguments in an appeal by a large corporation, and it would be outrageous for the Crown to take the position that a large corporation could not appeal because it did not raise the “new” issues in its initial objection.
The principles from Harris and Last are not artificial shields for clever litigators to argue over. They enforce discipline on the Minister’s delegates and ensure a fair dispute resolution process. Empowering the government of Canada to shore up assessing positions in the course of the dispute resolution process could easily result in undisciplined auditors coming up with untenable results, with the understanding that at some distant future date an appeals officer or government litigator would find some way to make the assessment stick. Further, there is a risk that auditors may rush to reassess rather than negotiating a waiver of the normal reassessment period if the Crown has greater latitude to support a reassessment under ss. 152(9) than it would have pursuant to a waiver, given the restrictions imposed by ss. 152(4.01). The broad wording of the amendments, qualified by comments in the explanatory notes, should give tax professionals cause for some concern as to whether the government of Canada may make an end-run around ss. 152(4.01) or (5) or other well-established case law principles.