Revenu Québec announced its action plan to respond to the highly critical Protecteur du citoyen 2014-2015 Annual Report (“Report”).
The main critiques of Revenu Québec raised by the Report were that:
- in its audit practices, it failed to duly consider the explanations provided by taxpayers;
- its collection methods caused unfair prejudice to debtors, especially insolvent debtors; and
- it failed to correct its own errors once it became aware of them.
The type of behavior criticized by the report was well-illustrated by Agence du Revenu du Québec c. Groupe Enico inc.,1 a case recently decided by the Québec Court of Appeal. This decision represents the first in which a taxpayer was awarded compensatory and punitive damages against Revenu Québec. The action resulted from a tax audit conducted by Revenu Québec based on an anonymous tip that Groupe Enico inc. (“Enico”) was filing false sales tax returns. Enico successfully argued before the Québec Superior Court and the Québec Court of Appeal that Revenu Québec’s behavior both during the audit, which lasted several years, and later when seeking to collect the amounts assessed, caused significant financial damage and led to its bankruptcy.
The Court of Appeal accepted Enico’s submissions, concluding that Revenu Québec’s behavior was abusive on two grounds. First, on numerous occasions Revenu Québec violated its duty to the taxpayer with regards to the audit and collections processes. For example, the Revenu Québec employee who conducted the audit, an auditor with over 20 years of experience, was presented to Enico as an intern. The auditor then proceeded to conduct an audit in secret, using a highly inexact audit technique (the “bank deposit” method) to review Enico’s financial records. Moreover, he duplicated $95,000 worth of entries in Enico’s general ledger and caused a box of documents to “disappear”. The Court deemed this behavior to amount to “carelessness, recklessness, and significant incompetence tantamount to bad faith”.
The second category of abuse concerned Revenu Québec’s treatment of Enico’s tax credits and subsequent bankruptcy. The Court emphasized that Revenu Québec withheld nearly $1 million in research and development tax credits to which Enico was entitled, to compensate itself for a debt which Revenu Québec had erroneously concluded was owed by Enico. The Court found that at the time Revenu Québec made these withholdings it both knew that the debt did not actually exist, and that by not refunding these credits it would likely push Enico into bankruptcy. To add insult to injury, Revenu Québec then seized Enico’s line of credit without judicial authorization, once again based on erroneous information. Revenu Québec later discovered its error and released the line of credit, but the damage was already done; the seizure had made Enico’s lender suspicious enough that it rescinded the loan.
At that time, Enico sought protection under the Bankruptcy and Insolvency Act, but was unable to resolve the tax dispute with Revenu Québec or even establish what amounts, if any, were still owing, which was information that it required to obtain the auditors’ and court’s approval of the proposal. Consequently, Enico brought the Court proceedings against Revenu Québec and also applied to Revenu Québec requesting the cancellation of the interest, penalties and collections costs. This request represented one last opportunity for Revenu Québec to remedy the situation. Revenu Québec chose to deny the request.
The Court of Appeal found a causal link between Revenu Québec’s fault and Enico’s financial damage, and awarded Enico $1.4 million in compensatory damages. It also upheld the trial judge’s award of $1 million in punitive damages. According to the Court, Revenu Québec’s “administrative relentlessness” violated Enico’s right to peaceful enjoyment of its property under section 6 of the Québec Charter of Human Rights and Freedoms, and the violation was intentional. The Court acknowledged that the amount of punitive damages awarded was high, but held that given the extreme abuse of power and Enico’s vulnerability it was justified.
In response to the negative attention garnered by such cases and the Protecteur du citoyen report, Revenu Québec released an action plan laying out how it will change its practices to treat taxpayers equitably. The main points of the plan are summarized below.
First, Revenu Québec intends to adopt a “Charter of Taxpayer Rights” by March, 2016. The Charter will be based on the obligations prescribed by the Administrative Justice Act, as well as the values of integrity, respect, equity and excellence of service. Revenu Québec intends to integrate the new Charter into its audit and recovery processes.
Second, Revenu Québec plans to consider a legislative amendment which would create an independent supervisory agency. This agency would be tasked with reviewing the decisions rendered by Revenu Québec on objections from assessments, to ensure that the principles of fundamental justice are upheld.
Third, Revenu Québec will administratively suspend collection actions against a taxpayer who has been denied input tax refunds (“ITRs”) or who is being assessed for the failure to collect Québec Sales Tax (“QST”) while he objects or appeals the decision. This will allow the appeal process to proceed without the taxpayer being required to immediately pay the assessed amounts. This administrative concession is consonant with Canada Revenue Agency’s collection policies where an objection or appeal from a Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) assessment is in progress. This is a welcome measure, given Revenu Québec’s increased scrutiny of claims for ITRs and the recent Court of Appeal ruling in Agence du Revenu du Québec c. Système intérieur GPBR inc.2 clarifying that the recipients of taxable supplies are under an obligation to verify that the person who is issuing the invoices with respect to which they are claiming the ITRs is not issuing a false invoice.
Fourth, Revenu Québec will seek a legislative amendment to permit small and medium sized corporations to submit disputes to small claims court when the amounts in dispute are less than $4,000. Currently, only individuals can submit such claims. Revenu Québec is also considering proposing an amendment to raise the $4,000 admissibility threshold for actions in small claims. As a comparison, informal procedures before the Tax Court of Canada may be brought where the amount of federal tax and penalties in dispute is less than $25,000 (or $50,000 in a GST appeal).
Fifth, Revenu Québec plans to publish statistics concerning the proportion of new assessment notices that are maintained following an objection or appeal. Such statistics are currently not publicly available and their publication would go a long way towards showing the correctness of Revenu Québec’s assessment practices given the allegations in the media and the Groupe Enico case that its auditors are incentivized by their compensation packages to inflate assessments or to issue unfounded assessments.
The next point in the plan, very much in response to cases such as Groupe Enico, is to ensure the respect of the rights of taxpayers when they are being audited. Revenu Québec acknowledges that a taxpayer undergoing an audit is entitled to receive comprehensive, clear and precise information in a timely manner. Taxpayers may also expect that Revenu Québec be held accountable for its actions, explain its decisions and be open to the taxpayers’ input. These obligations will be set out in a letter provided to every taxpayer undergoing an audit, but it is not clear what the remedies would be in case of a breach.
Finally, Revenu Québec plans to pre-audit a sample of new GST/HST and QST registrants to reduce instances of false tax registrations. To this end, Revenu Québec will require new registrants to provide proof that they are engaged in commercial activities in Québec.
It remains to be seen whether the measures announced in Revenu Québec’s action plan will result in a more equitable treatment of taxpayers. Based on early indications, it appears that, at least in certain cases, the contrary may be true. For example, the intensified measures to verify GST/HST and QST registrants have already led to an increase in requests for information and documentation from registrants soon after registration. These burdensome requests require that registrants provide to Revenu Québec, among other things, copies of bank account statements, supplier and customer invoices and business leases. Taxpayers who fail to comply with the requests risk having their tax registration cancelled. Early evidence therefore indicates that the new measures are increasing, rather than alleviating, the compliance burden imposed on taxpayers in Québec. Other points of the plan, moreover, appear to be non-committal or vague, and it remains to be seen whether they will reduce the types of taxpayers’ problems with Revenu Québec that were criticized in the Protecteur du citoyen report and the Groupe Enico case. Consequently, while reform of Revenu Québec policies is welcome and overdue, the proof of the pudding is in the eating.