The Federal Court recently released an important ruling that paves the way for taxpayers to seek judicial reviews of decisions by the Minister of National Revenue to issue reassessments under the intersection between the Canada-United States Tax Convention (1980) and the Income Tax Act. See Chrysler Canada Inc. v. Canada, 2008 FC 727 (CanLII).
Traditionally, there has been uncertainty concerning the Federal Court’s jurisdiction to hear judicial reviews of ministerial decisions that culminated in tax assessments issued pursuant to the Income Tax Act. The court often took the view that its judicial review jurisdiction under s. 18.5 of the Federal Courts Act did not extend to these matters, since the Income Tax Act sets out a comprehensive appeal procedure to the Tax Court of Canada that enables taxpayers to challenge the substantive correctness of an assessment.
However, in Canada v. Addison & Leyen Ltd., 2007 SCC 33 (CanLII), the Supreme Court of Canada confirmed that the Federal Court may judicially review the exercise of discretion by the Minister, even where the discretion pertains to the issuance of a tax assessment, provided that the manner in which the discretion is exercised is not otherwise appealable. In practical terms, the court’s ruling suggests that judicial reviews are available in relation to allegations that the Minister has abused a statutory discretion, since such misconduct cannot be appealed to the Tax Court of Canada (whose appellate jurisdiction is limited to the substantive correctness of an assessment). Some uncertainty continued to persist about the exact scope of the Federal Court’s judicial review jurisdiction after Addison. However, the matter was recently clarified in Chrysler.
The taxpayer in Chrysler had applied for a judicial review of the Minister’s decision to issue reassessments to increase the company’s income taxes for a number of taxation years through adjustments in the pricing of transactions between the taxpayer and its US parent corporation (Pricing Adjustments). The application alleged that the reassessments constituted an abuse of the Minister’s discretion under Article IX, Paragraph 4 of the Canada-United States Tax Convention (1980). One of the remedies sought by the taxpayer was a declaration that the reassessments were invalid.
Under Paragraph 4, Article IX, the CRA has discretion to provide the taxpayer with unilateral relief from double taxation in cases where it fails to notify the taxpayer of Pricing Adjustments within six years from the end of the taxation year affected. The CRA has historically exercised this discretion in a pre-emptive manner, through the application of a "Timely Notice Policy," whereby it will not issue reassessments in respect of a Pricing Adjustment if the taxpayer has not received adequate notice of the proposed Pricing Adjustment within the six-year period. In Chrysler, the CRA had failed to follow the Timely Notice Policy. Accordingly, the taxpayer argued that the CRA’s decision to issue the reassessments was an abuse of its discretion under Paragraph 4 of Article IX.
The Crown brought a motion to strike out the application on the ground that it was beyond the jurisdiction of the Federal Court. However, the Crown’s motion was dismissed. The Prothonotary, applying the reasoning in Addison, held that the Minister’s decision to issue the reassessments was a potentially improper, unfair and discriminatory exercise of his discretion under the Canada-United States Tax Convention (1980). Because this discretionary decision could not be the subject of an appeal to the Tax Court, the Prothonotary concluded that it must be judicially reviewable in the Federal Court. An appeal from the Prothonotary’s decision was dismissed by the Federal Court. The application is now proceeding to a judicial review.
McCarthy Tétrault Notes:
This decision clarifies the reach of Addison, holding that the Minister’s discretionary decisions are open to judicial reviews in the Federal Court, even where they culminate in a reassessment issued under s. 152(4) of the Income Tax Act whose substantive correctness may be appealed to the Tax Court of Canada. The fact that the taxpayer in Chrysler sought a declaration of the reassessment’s invalidity was not determinative of the Federal Court’s judicial review jurisdiction.