In Ficek v the Queen,(1) the Canada Revenue Agency (CRA) was taken to task for delaying assessments (and refunds) against taxpayers who had participated in a tax shelter scheme. The evidence included internal CRA communications to the effect that it felt that it had the relevant taxpayers "over a barrel"(2) by withholding assessments and refunds in order to deter further participation in the tax shelter. The Federal Court concluded that this was an improper reason to delay assessment and held that the CRA had failed to comply with its duty to assess taxpayers within a reasonable time. The case is another recent example of the CRA unsuccessfully using its administration or enforcement powers to try to shape taxpayers' behaviour by 'chilling' participation in transactions of which it does not approve.
Under the Income Tax Act, the CRA is required to assess a taxpayer's return "with all due dispatch".(3) Courts have been lenient in defining this standard, holding that there is no fixed period of time within which the CRA must assess, so long as it assesses "with all due diligence" or "within a reasonable time".(4) However, the CRA's broad discretion is not unlimited, because the delay in assessing must also be for the proper purpose of ascertaining and fixing the liability of the taxpayer.(5) After all, taxpayers are entitled to have certainty with respect to their financial affairs as soon as reasonably possible.
In Ficek, the taxpayer was one of several taxpayers who had participated in a tax shelter scheme that the CRA did not like. Participants in the scheme received charitable donation receipts. The CRA had concluded that the related charitable donation tax credits should be denied for several reasons. The evidence in the case was that the CRA's longstanding policy across Canada was to allow the charitable donation tax credits in the initial assessment, to conduct an audit and then to issue a reassessment to deny the credits. Nevertheless, the CRA's Winnipeg Tax Centre decided to depart from this national policy by delaying the initial assessments, even though the CRA had already concluded that the credits would be denied. This had the effect of depriving the relevant taxpayers of refunds.(6) The court found that internal CRA communications showed that the true purpose of delaying the assessments was "to discourage participation in tax shelters generally and [the tax shelter in question] in particular".(7)
The court held that discouraging taxpayers from participating in tax shelters was not a proper reason for delaying assessment, finding that "the audit [was] so tainted by the real reason for [delaying the assessments] that the audit is the excuse for delay not a reason for delay".(8) By employing this remarkable administrative tactic to avoid having to issue refunds – a tactic that was inconsistent with the CRA's national policy to assess within a reasonable time and then to deny credits by way of audit and reassessment – the CRA's Winnipeg office was acting inconsistently with the federal and national nature of its obligation to assess with all due dispatch. In the end, the court declared that the CRA did not meet this obligation.
In other words, the CRA must issue its initial assessment in cases such as this within a reasonable time, giving the taxpayer the right to challenge the correctness of the assessment – a right that the taxpayer could not exercise while the CRA was delaying the assessment to achieve its improper objectives.
Ficek is not the only recent example of the CRA using its administration or enforcement powers to try to discourage taxpayers from participating in transactions that it does not like. In Minister of National Revenue v RBC Life Insurance Company,(9) the Federal Court of Appeal cancelled several judicial authorisations that the CRA had obtained, on an ex parte basis, to require RBC Life Insurance Company and others to provide certain information about their customers. The appeal court cancelled the authorisations because the lower court judge had not been informed that the primary purpose of the document requests was to 'chill' participation in a particular insurance product known as the "10-8 plan". Chilling participation in the insurance product was not a valid audit purpose.(10)
These cases highlight several issues. First, the CRA has broad powers of administration and enforcement. Second, these powers are not unlimited, and taxpayers should be vigilant to assert their judicial and other remedies where the CRA has overstepped its bounds. Third, courts are an increasingly effective forum in which taxpayers can level the playing field with the CRA.
For further information on this topic please contact Salvatore Mirandola at Borden Ladner Gervais LLP's Toronto office by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email (firstname.lastname@example.org). Alternatively, contact Patrick Lindsay at Borden Ladner Gervais's Calgary office by telephone (+1 403 232 9500), fax (+1 403 266 1395) or email (email@example.com).
(6) Currently, most taxpayers are not required to pay amounts in dispute while an objection or an appeal in the Tax Court of Canada is pending. See generally Section 225.1 of the Income Tax Act. The 2013 federal budget, released on March 21 2013, proposes to give the CRA the power to collect 50% of the disputed amount where a taxpayer has objected to an assessment of tax, interest or penalties because of the disallowance of a deduction or tax credit claimed in respect of a tax shelter that involves a charitable donation. The budget also proposes to extend the limitation period for assessing taxpayers that participate in tax shelters in certain circumstances. See Canada, Jobs, Growth and Long-Term Prosperity: Economic Action Plan 2013 [2013 federal budget] at pages 337-38.
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