The Federal Court of Canada’s recent judgment in Minister of National Revenue v. Robarts,1 addresses the limitations in the Minister of National Revenue’s (“Minister”) ability to take aggressive steps to collect assessed tax in situations where a taxpayer is otherwise shielded from collection actions. In Robarts, the Court took a dim view of the Minister’s failure to provide complete and accurate facts and fair interpretations of the relevant legal principles and therefore ultimately halted the collections actions.
The Minister generally has broad powers to collect assessed tax, subject to certain limitations. However, those limitations may not apply in situations where the Minister is satisfied that there are reasonable grounds to believe that collection of an amount assessed would be jeopardized by any delay. In those circumstances, the Minister can seek to take immediate collection actions against a taxpayer by obtaining a so-called “jeopardy order”. Jeopardy orders are obtained by an application to the Federal Court, without any notice to the taxpayer. When the Minister obtains a jeopardy order, the taxpayer can later apply to the Federal Court to review and reconsider the order.
Facts in Robarts
Mr. Robarts was a businessman from Kelowna, B.C. He was assessed for his 2005, 2006 and 2008 taxation years by notices of reassessment dated February 1, 2010. On April 6, 2010, the Minister applied for a jeopardy order to collect the assessed amount, based on an affidavit (“Affidavit”) by the Canada Revenue Agency (“CRA”) officer assigned to Mr. Robarts’ collection file. That Affidavit asserted that:
- funds in Mr. Robarts’ bank accounts were his only significant asset;
- he was in a position to withdraw those funds before the CRA could take collection actions;
- he had under-reported his income for the taxation years in issue and failed to report income in the past;
- he had conducted his tax affairs in an unorthodox way and had dissipated assets after being notified of the reassessments against him; and
- collection actions were not possible by law because of the 90-day statutory stay on collection which follows an assessment or reassessment.
Relying on the Affidavit, the Federal Court granted a jeopardy order to enable the CRA to deploy immediate collections actions against Mr. Robarts. Mr. Robarts then brought an application to have the jeopardy order reviewed.
In his application, Mr. Robarts stated that his bank accounts included long-term investments which were not readily dissipated. Moreover, one of the substantial amounts that had been withdrawn from his bank account after he was reassessed had been returned to the account six weeks later. Further, the allegation that he had under-reported his income was a matter in dispute, and was the issue which the CRA appeals division and potentially the Tax Court of Canada would be called upon to determine. In Mr. Robarts’ submission, he did not conduct his affairs in an unorthodox way, and he alleged that the Minister did not provide all of the relevant evidence with respect to his finances when the Minister applied for the jeopardy order.
Legal Principles on a Court’s Review of a Jeopardy Order
In reviewing and reconsidering the jeopardy order against Mr. Robarts, the Federal Court relied on the following two-step test.
First, the taxpayer must establish that there are reasonable grounds to doubt that collection of assessed tax would be jeopardized by delaying collection. However, even if the taxpayer is not able to establish that position, a judge may set aside the jeopardy order where the Minister has not met his obligation to make full and frank disclosure of all relevant facts and law to the Court on the initial application for the jeopardy order.
Second, if the taxpayer establishes that collection is not in jeopardy, the onus shifts back to the Minister to prove that the jeopardy order is justified. At this point, the Court reviews all of the evidence and considers whether, on the whole, there are reasonable grounds to believe that collection of an assessed amount would be jeopardized by delay.
The Court Applies the Legal Principles to the Facts in Robarts
The Court held that the Minister failed in his obligation to provide full and frank disclosure to the Court. The Court explained that the Minister has the duty to exercise utmost good faith and to ensure full and frank disclosure of all relevant facts, even those facts which are unhelpful or inconvenient or which demonstrate weaknesses in his own case. This is because a jeopardy order is granted without notice to or representations from the taxpayer. The Court found that the Minister omitted relevant facts from the Affidavit. For example, although the Affidavit alleged that $109,000 was withdrawn from Mr. Robarts’ bank account after he was reassessed, the Affidavit omitted to state that the amount was re-deposited about six weeks later. In the Court’s view, this was the single most important fact in the Affidavit. The Court further held that the Minister’s representative had failed to seek and obtain the necessary information that would have properly informed the Affidavit.
The Court also held that the Minister did not make full and frank disclosure of the factual and legal elements of the case law he relied on in his submissions to obtain the jeopardy order. Moreover, the Court stated that although good faith on the Minister’s part must be presumed, the Minister’s representations left “a sour taste” and “important omissions on relevant case law from the Minister’s written submissions are certainly not compliant with the spirit of these extraordinary [jeopardy order] procedures”.
Consequently, the jeopardy order was based on misleading, incomplete or incorrect facts and law, and had to be vacated.
The Court further considered whether the Minister had, in the first place, demonstrated that there were reasonable grounds to be believe that the collection of assessed tax would be jeopardized by delay. On this question, the Court found that the Affidavit contained factual allegations that went beyond the reassessments that were in issue, “in an effort to taint the taxpayer’s character and form the basis for the issuance of the Order”. The Court held that it would be wrong to draw a negative inference regarding Mr. Robarts’ management of his tax affairs, since the issues were litigious questions that were not yet settled.
The Robarts decision should provide useful guidance for both the CRA and taxpayers. For the CRA, it is hoped that the decision will serve as a reminder of the strict and vigorous standards to be applied when seeking jeopardy orders. For taxpayers, it could certainly be used as further support to challenge any jeopardy orders that may be obtained based on incomplete or wrong facts and/or statements of law.