Imagine that you run a successful business and report a net income of tens of thousands on revenues of several hundred thousand dollars a year. You hire a respected accounting firm to prepare your financial statements and tax returns each year. All appears to be going well.
Now imagine that a CRA “investigator” shows up on your doorstep intimating that you are under investigation for tax evasion. He suggests that you have intentionally under-reported your business income by $1.7 million over a three year period. However, he also says that you can reduce the civil reassessment of tax to less than $100,000, if you just plead guilty to tax evasion charges. You refuse, maintaining that you have done nothing wrong. The CRA later reviews the civil reassessment proposal, noting several manifest errors in it, but issues the reassessments as proposed, errors and all, forcing you to contest them in the Tax Court of Canada.
Sound farfetched? Those are the facts alleged in Ereiser v. The Queen, a case decided by the Federal Court of Appeal (FCA) on February 4, 2012. Mr. Ereiser was reassessed and pleaded the facts above, and more. The Crown sought to strike virtually all his pleadings on the basis that the Tax Court’s jurisdiction is limited to merely reviewing the correctness of a valid assessment, not the process by which the assessment arose.
The FCA agreed with the lower court in striking a portion of Mr. Ereiser’s pleadings. In doing so, it held that a civil servant such as a CRA auditor may act completely outside the scope of his authority – giving rise, perhaps, to the tort of misfeasance in public office – but the reassessment resulting from his actions is still subject to the same appeals process in the Tax Court as any other validly raised assessment. It matters not that the process by which the assessments were raised may have been corrupt.
Does this mean that Mr. Ereiser has no recourse? The FCA suggested that it was still open to Mr. Ereiser to pursue a civil remedy such as a tort claim or an administrative law remedy in either a provincial superior court, or in the Federal Court, on the basis of the CRA’s wrongdoing. If Mr. Ereiser can prove his allegations, he will have a strong case in another court. Those facts will not, however, assist him in his Tax Court appeal.