Overview

Legislation

What is the relevant legislation relating to tax administration and controversies? Aside from legislation, are there other binding rules for taxpayers and the tax authority?

The legislative framework for tax administration and controversy is primarily located in specific chapters or divisions of the acts and regulations that also govern substantive tax issues, such as the Income Tax Act for income tax or the Excise Tax Act for value added tax (referred to as the goods and services or harmonised sales tax, or GST/HST).

In addition to the foregoing, certain provinces have specific acts that govern tax administration (such as the Tax Administration Act in Quebec), and courts have their own sets of rules and procedures that govern tax cases. The most important legislation in this regard would be the Tax Court of Canada Act and the Tax Court of Canada Rules, which are supplemented with Practice Notes and Directions issued by the Tax Court of Canada.

Canada has entered into a network of international tax treaties, generally based on the Organisation for Economic Co-operation and Development model, the most important of which is with the United States.

The Canadian tax authorities publish a large number of interpretations each year, both on substantive and administrative tax issues, either to clarify the relevant tax authority’s view of the law or to issue advance tax rulings requested by taxpayers. Courts are permitted to consider but are generally not bound to follow or pay deference to the interpretation of tax law by the relevant administrative authority.

Taxpayers can also refer to the Taxpayer Bill of Rights, which set out the Canada Revenue Agency’s (CRA) commitment to professionalism, courtesy and fairness.

Relevant authority

What is the relevant tax authority and how is it organised?

The primary tax authority is the CRA, which administers the federal income tax, the GST/HST, and the employment insurance and pension plan programmes across the country. The CRA also administers a number of social benefit and tax credit programmes on behalf of the federal, provincial, territorial and First Nations governments.

The CRA also conducts enforcement activities, including audit, investigation and tax collection.

The governance structure of the CRA includes a Minister, a board of management, and a Commissioner. The Auditor General of Canada acts as an external auditor for the CRA. There is also the Taxpayers' Ombudsman that works independently from the CRA.

The Minister of National Revenue is responsible to the federal Parliament for the CRA, and also reports to the Executive Branch. The Minister does not direct the CRA on how to interpret the law in individual cases or audits.

The board of management is responsible for the CRA’s business plan and advises the Minister of National Revenue on matters relating to the general administration and enforcement of the legislation. It is not involved in the day-to-day management of the CRA.

The Commissioner heads the CRA, is responsible for its day-to-day management and acts as its chief executive officer.

In working independently from the CRA, the Taxpayers’ Ombudsman provides a service complaint mechanism for individual taxpayers in respect of certain matters under the Taxpayer Bill of Rights, and is also tasked with identifying broader systemic issues related to service matters.

The CRA’s programmes are administered and delivered through approximately 50 local tax services offices that handle a lower volume of more complex work, as well as call centres and four regional tax centres located in every region of the country that mainly process a higher volume of less complex cases and tax return processing.

There are also provincial tax authorities that administer certain local taxes, such as the provincial sales taxes in British Columbia, Saskatchewan, Manitoba, and Quebec, or the land transfer taxes levied in some provinces.

Enforcement

Verification of compliance with tax laws

How does the tax authority verify compliance with the tax laws? Does this vary for different taxpayers or taxes?

Canada relies significantly on a self-assessment system. The the Canada Revenue Agency (CRA) is generally required to issue a notice of assessment within a reasonable period of time following the filing of a tax return. These original assessments are usually based on a limited review of the underlying tax returns. 

Tax legislation is frequently enforced through audits, where the CRA examines the books and records, documents, and information of taxpayers to reassess their liability for the tax in question.

Most files are selected for audit based on risk assessment metrics used by the CRA for the purpose of focussing its resources on high-risk taxpayers and conducting fewer audits to generate additional tax revenues.

After the audit, the CRA will either issue a completion letter confirming that no adjustments are required, or will issue a proposal letter explaining the reason for the proposed reassessment for additional tax. Taxpayers generally have 30 days to respond. Following the issue of the notice of assessment or reassessment, taxpayers also have a right to appeal.

The time required to conduct and finalise an audit depends on its scope (with international matters generally taking more time than domestic matters), the state of the taxpayer’s records and the delays in obtaining and communicating those records to the CRA. Often, considerable delays result from internal consultations within the CRA.

In general, an audit for a large corporation will last from about six months to a few years.

Tax return review procedure and limitation periods

What is the typical procedure for the tax authority to review a tax return and how long does the review last? What limitation periods apply?

The Canadian self-assessment system relies on detailed reporting requirements based on the type of taxpayer or business organisation. Depending on the tax at issue, the CRA can generally review a taxpayer’s return at any time, but is frequently limited to three or four years for issuing a notice of assessment, reassessment, or additional assessment of tax, interest, or penalty. The commencement of the period for reassessment will generally not commence until the original notice of assessment is issued.

Even after the assessment period has expired, the CRA is often permitted to issue a notice of assessment, reassessment or additional assessment if the taxpayer has made a misrepresentation in its return that is attributable to neglect, carelessness, or willful default, or if the taxpayer has issued a waiver of the assessment period.

Tax authority requests for information

What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?

The books and records commonly audited by the CRA include previously filed tax returns; credit history; property registers; business records including ledgers, journals, minute books, invoices, receipts and contracts; rental records; bank and credit card statement; adjustments made by accountants or tax professionals; and publicly available information from traditional news media and, more broadly, from the internet.

Taxpayers must keep adequate books and records to determine their tax obligations and entitlements, generally for a period of six years after the end of the relevant period.

The CRA has broad powers to obtain information from a taxpayer during the course of an audit, where taxpayers may be asked to provide complete and timely answers to the auditor’s questions. However, the CRA cannot compel extensive oral interviews. The federal government recently proposed an amendment to the Income Tax Act to permit the CRA to compel taxpayers to sit for oral interviews during the course of an audit in certain circumstances.

Taxpayer failure to provide information

What actions may the tax authority take if the taxpayer does not provide the required information?

Relevant legislation grants the CRA a variety of methods to gather information to verify taxpayer compliance.

The CRA can require the production of information or documents for any purpose related to the administration or enforcement of the tax legislation. This general power does not require court authorisation. However, the CRA does need court authorisation to require a person to provide information relating to one or more unnamed third parties.

If a person fails to provide information or documents, the legislation allows the CRA to seek a compliance order from a court. To grant a compliance order, the court must be satisfied that the person was required by law to provide information or documents and did not do so, and that the information or documents are not protected from disclosure by solicitor–client privilege. Failure or refusal to comply with a compliance order may result in a finding of contempt of court and may constitute an offence.

As a general rule, failure to provide information or documents will trigger the issuance of tax reassessments based on negative assumptions drawn from the taxpayers’ refusal to comply. The burden is generally on the taxpayer to disprove the tax authority’s assumptions.

Protecting commercial information

How may taxpayers protect commercial information, including business secrets or professional advice, from disclosure? Is the tax authority subject to any restrictions concerning what it can do with the information disclosed?

Information and documents subject to solicitor–client privilege, in accordance with the laws of each province, are protected from disclosure to the CRA. Generally, solicitor–client privilege applies to communications that involve giving or receiving legal advice intended to be confidential. It also covers in-house counsel.

Solicitor–client privilege can extend to third-party communications (including auditors) whose work is in furtherance of the solicitor’s work for the client.

Accountant–client privilege does not exist in Canada.

Taxpayers do not have to disclose to the CRA tax accrual working papers used to establish contingent tax liabilities for financial statements and accounting purposes. Recent proposals would require large corporate taxpayers to report uncertain tax treatments reflected in their audited financial statements.

Finally, the legislation prevents the CRA from disclosing taxpayer information to third parties, other than in the course of tax administration or enforcement activities or in limited circumstances authorised by law, including to validate requests for information pursuant to Canada’s extensive treaty network.

Limitation period for reviews

What limitation period applies to the review of tax returns?

Generally, the CRA can reassess a return for a tax year within three years of the date of the original notice of assessment for that year. Corporations that are not private corporations controlled by Canadian residents have a four-year normal reassessment period. Accordingly, no limitation period applies when taxpayers have failed to file a tax return for the relevant period.

The normal reassessment period is extended for an extra three years where a non-arm’s length transaction involving a Canadian corporation and a non-resident affects the corporation’s tax, as well as in other international situations.

The CRA can reassess after the expiration of the normal reassessment periods where the taxpayer has filed a waiver in respect of the tax year or has made a misrepresentation that is attributable to neglect, carelessness or wilful default. In these circumstances, no time limit applies.

Alternative dispute resolution

What (if any) alternative dispute resolution (ADR) or settlement options are available

The central dispute resolution mechanism is the objection to a reassessment. The reassessment can also eventually be challenged in court if the taxpayer is not satisfied with the result of the objection process.

Taxpayers generally have 90 days after a reassessment to object, in writing, to the CRA. The assessment and objection is then reviewed internally by the appeals division that is, to a certain extent, impartial of the audit division.

The objection process gives the taxpayer the opportunity to file additional submissions and discuss with the CRA once an agent has been assigned to the matter. For corporations with a total taxable capital in Canada in excess of CAD$10 million, the objection must provide a reasonable description of each issue, the facts and reasons relied upon, and the relief sought in dollars. Objections for individuals, trusts and other corporations can be less formal.

Depending on the tax, a taxpayer may be required to pay some or all of the tax upon assessment. Large corporations that object to reassessments of income tax are liable to pay 50 per cent of the disputed amount, but other taxpayers pay none. The entire amount of GST/HST, among certain other taxes, is payable upon assessment.

For a reasonably complex case, the delays associated with the objection process will vary between nine months and a few years.

If the taxpayer is not satisfied with the result of the objection process, the taxpayer generally has 90 days to file an appeal to court. Depending on the tax, taxpayers can often also file an appeal to court before the CRA issues a decision within 90 or 180 days of the date of the tax objection, which is often the case.

At the Tax Court of Canada, procedures have been developed to expedite the tax dispute resolution process. Pursuant to the Preliminary Ruling Docket Procedure, parties can receive a non-binding preliminary ruling in respect of an appeal from a judge. Settlement conferences are also available.

Collecting overdue payments

How may the tax authority collect overdue tax payments following a tax review?

The CRA has several mechanisms available to collect overdue payments following a tax review. The CRA will typically not start the collection process until 90 days after the mailing date of the notice of reassessment. The CRA is also required to make at least one attempt to provide a verbal warning by phone and to provide at least one written warning that the payment is overdue and that the collection process may begin.

Once that occurs, the CRA may garnish wages or other income to collect the outstanding amount; seize assets or put liens on property belonging to the taxpayer, starting with bank accounts.

Penalties - scope of application

How are penalties calculated?

Penalties are generally calculated as a percentage of the taxes owing. However, in certain circumstances, penalties are calculated as fixed amounts, amounts per omission or amounts per units of time. For example, the penalty for not filing the tax return of certain corporations electronically is C$1,000 per return, and the penalty for failure to file a partnership tax return is C$25 per day of default, with a C$1,000 minimum and a C$2,500 maximum.

What defences are available if penalties are imposed?

A defence of due diligence is available against penalties. The CRA’s acceptance of the defence requires evidence that the taxpayer has made a sincere and demonstrable attempt that a reasonably prudent person in similar circumstances would be expected to make to comply with the tax requirement at issue.

Generally, the CRA does not accept a due diligence defence where a person has relied solely on the advice of a third party that turns out to be technically inaccurate.

In what circumstances may the tax authority impose penalties?

The relevant legislation authorises the CRA to levy a number of different penalties depending on the failure or offence in question. Some penalties can apply by default, such as when a taxpayer fails to file a return, whereas others require the tax authority to establish that the taxpayer made a false statement knowingly or under circumstances amounting to gross negligence.

Penalties – calculation

How are penalties calculated?

Penalties are calculated on different bases. While some penalties are fixed dollar amounts, other penalties are calculated as a percentage of the taxes due. See the following examples.

  • The penalty for failure to file an information return on time amounts to the greater of $100 and the product obtained when $25 is multiplied by the number of days (not exceeding 100) during which the failure continues.
  • The penalty for failure to file an income tax return on time amounts to 5 per cent of the year’s unpaid tax, plus 1 per cent per complete month (up to 12 months) from the due date. The penalty is doubled for a repeated failure to file.
  • Gross negligence penalties amount to 50 per cent of the understated income tax or the overstated income tax credits, or 25 per cent of the unreported GST/HST or over-claimed input tax credits, that is related to the false statement or omission made knowingly or under circumstances amounting to gross negligence.
Penalties – defences

What defences are available if penalties are imposed?

A due diligence defence is available provided both subjective and objective tests are satisfied. First, the taxpayer must prove an actual belief as to a non-existent state of facts, which, if it had existed, would have made the act or omission innocent. Second, the taxpayer must show that the mistaken belief was reasonable in the circumstances. The taxpayer may also prove that he or she took all reasonable measures to avoid the event leading to the imposition of the penalty.

The CRA bears the burden of proof for the imposition of penalties such that in some cases, it can be a sufficient defence to establish that the CRA has not satisfied its burden.

The Minister also has the discretion to waive penalties.

Collecting and calculating interest

In what circumstances may the tax authority collect interest and how is it calculated?

The CRA charges compound daily interest on any unpaid amounts of tax. Interest is also charged on any balance owing further to an assessment. The rate of interest can change every three months and is now set at 6 per cent for overdue income tax, GST/HST, and certain other taxes. 

The interest rate to be refunded to the taxpayer on corporate overpayments is currently 2 per cent, while the interest rate to be paid on non-corporate taxpayer overpayments is currently 4 per cent.

Criminal consequences

Can criminal consequences arise as a result of tax non-compliance? Are these different for different types of taxpayers?

The CRA’s Criminal Investigations Program investigates alleged cases of tax evasion and, in certain circumstances, transfer cases to Public Prosecution Service of Canada for criminal prosecution.

Tax evasion is the commission or omission of an act, conspiracy to commit such an act, or accommodating someone else to commit such an act, which can result in criminal charges under the tax legislation or the Criminal Code.

Some of the main tools relied upon by the CRA to investigate tax evasion are court-sanctioned searches and seizures (dawn raids) where CRA investigators, assisted by law enforcement, seize books, records, electronic data and computer equipment from business premises and residential properties. The execution of search warrants by the CRA generally receive news coverage.

Tax evasion convictions in Canada regularly lead to fines up to 200 per cent of the taxes evaded, potential jail time and criminal records.

The CRA administers both national and international lead programmes allowing individuals to report perceived instances of tax evasion.

Tax avoidance

Are there specific rules or provisions regarding perceived tax avoidance?

Multiple specific anti-avoidance provisions are included in Canadian tax legislation to curtail tax planning opportunities.

Both the Income Tax Act and Excise Tax Act also include a general anti-avoidance rule (GAAR). Pursuant to the GAAR, a tax benefit resulting from the ordinary application of the tax laws can be denied, provided that it was obtained through an abusive avoidance transaction.

For GAAR purposes, an avoidance transaction represents a transaction completed principally for tax purposes. The burden to demonstrate abuse is the burden of the relevant tax authority.

Enforcement record

What is the recent enforcement record of the authorities?

The CRA advises the media and the public about cases in which taxpayers have been convicted for tax evasion.  For example, there have been eight cases to date in which Canadian taxpayers have been convicted of tax evasion in 2021, compared with 21 in 2020 and 25 in 2019. 

Third parties and other authorities

Third-party involvement with tax reviews

Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?

The CRA works cooperatively with tax authorities both in Canada and other countries to monitor and ensure compliance with Canadian tax laws. This includes sharing confidential information about Canadian taxpayers with both Canadian and foreign authorities. For instance, the CRA has joined England, the United States, Australia and the Netherlands in the Joint Chiefs of Global Tax Enforcement Group. This group shares intelligence and conducts joint operations into suspected tax evasion in member countries. Canada is also one of 60 countries taking part in a country-by-country reporting programme that allows countries to share revenue and profit information about large multinational corporations, as part of an initiative to help the CRA better assess whether these corporations are paying an appropriate amount of tax in Canada.

Also, the CRA cooperates very broadly with foreign tax authorities and generously communicates Canadian taxpayer information to treaty partner countries.

Can a tax authority involve third parties as part of the authority’s review of a taxpayer’s returns?

Yes, the Canada Revenue Agency (CRA) has broad powers to request information during the course of an audit to enforce the requirements of the Income Tax Act, Excise Tax Act, or other applicable legislation. This includes the power to examine information or documents belonging to third parties that relate or may relate to the information that is or should be in the taxpayer's books and records. However, this power to obtain information or documents from third parties may be subject to limitation where solicitor–client privilege applies. 

Cooperation with other authorities

Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries? (Describe, for example, tax information exchange agreements.)

Legislation prevents the CRA from disclosing taxpayer information to other persons, other than in the course of tax administration or enforcement activities or in limited circumstances authorised by law. Such circumstances can include criminal proceedings or the administration or enforcement of federal or provincial taxes that were not originally contemplated when the CRA acquired the information obtained from the taxpayer. However, the CRA cannot use its regular audit powers to acquire information once a tax matter has converted into a criminal investigation.

Canada has an extensive treaty network and is party to and is negotiating a number of tax information exchange agreements. The CRA is able to and does cooperate with tax authorities in counterparty countries to those agreements that are in force, which are currently listed on the Canada Department of Finance website: https://www.canada.ca/en/department-finance/programs/tax-policy/tax-information-exchange-agreements.html

The CRA generally does not rely on its ability to request information from other countries unless it determines its ability to collect taxpayer information is insufficient in the circumstances.

Financial or other hardship

Voluntary disclosure and amnesties

Do any special procedures apply in cases of financial or other hardship, for example when a taxpayer is bankrupt?

The Canada Revenue Agency (CRA) may grant or recommend relief to taxpayers from amounts owing in cases of extraordinary circumstances, inability to pay or financial hardship. There are separate processes for relief requests from interest and penalty and other requests for relief via a 'remission order'. Either request for relief must be made in writing and set out the circumstances giving rise to the request. The decision to grant or recommend relief, or not, is discretionary and is made on a case-by-case basis.

If the CRA refuses to grant or recommend relief, the taxpayer can apply for judicial review of that decision to the Federal Court within 30 days of the CRA decision.

For taxpayers who are bankrupt, income tax debts are typically unsecured debts and are, therefore, discharged once the taxpayer files for and obtains bankruptcy protection, although the CRA has a history of taking an active and aggressive stance in tax-driven bankruptcy proceedings.

Are there any voluntary disclosure or amnesty programmes?

The CRA has a voluntary disclosure programme that grants relief on a case-by-case basis to taxpayers who voluntarily come forward to fix errors or omissions in their tax filings before the CRA becomes aware of them. Under this programme, the taxpayer is required to pay outstanding taxes owed plus interest but will be entitled to relief from prosecution, penalties and some interest on the amounts owing. 

Rights of taxpayers

Rules protecting taxpayers

What rules are in place to protect taxpayers when dealing with the tax authority?

The Canada Revenue Agency (CRA) has published a Taxpayer Bill of Rights (described in the CRA's Taxpayer Bill of Rights Guide: Understanding your rights as a taxpayer, available here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc17.html), which currently sets out 16 rights, including:

  • the right to receive entitlements and to pay no more and no less than what is required by law
  • the right to service in both official languages (French and English);
  • the right to privacy and confidentiality;
  • the right to a formal review and a subsequent appeal;
  • the right to have the law applied consistently; and
  • the right to lodge a service complaint against the CRA and request a formal review without fear of reprisal.

 

The CRA encourages taxpayers who have concerns in their dealings with a CRA employee to try to resolve the concerns with the employee him or herself or the employee’s supervisor. Failing resolution, a taxpayer may file a service complaint by filing form RC193 with the CRA. Information about this process is available here: https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/make-a-service-complaint.html#hwtsbmt.

If the taxpayer’s concerns are still not resolved, the taxpayer can contact the Office of the Taxpayers’ Ombudsman to attempt to resolve complaints that involve certain of the service-related rights set out in the Taxpayer Bill of Rights. The process for submitting a complaint to the Ombudsman is available here: https://www.canada.ca/en/taxpayers-ombudsperson/services/submit-complaint.html  .

Canadian jurisprudence suggests that, although the Taxpayer Bill of Rights may support the availability of certain procedural protections for taxpayers (such as the right to receive reasons for a decision), it does not create substantive legal rights for taxpayers.

Requesting information from tax authority

How can taxpayers obtain information from the tax authority? What information can taxpayers request?

Canada’s Income Tax Act permits the CRA to disclose taxpayer information to a taxpayer, or to a third party with the taxpayer’s consent. Similar rules are contained in other Canadian taxation statutes.

Canada’s Privacy Act allows most taxpayers to obtain access to their own personal information, subject to limited and specific exemptions. Canada’s Access to Information Act allows taxpayers to access other types of records of government institutions, such as the CRA, that are subject to this legislation. Requests for information can be made by mail or online. Instructions are available here.

In practice, taxpayers that are under audit or have challenged assessments may obtain information relevant to the assessments by making informal requests with the relevant auditor or appeals officer. Also, once a taxpayer has commenced a judicial challenge of an assessment, or has judicially challenged a discretionary decision of the CRA, the taxpayer will typically obtain information relevant to the disputed assessment or discretionary decision through the discovery or equivalent process of the Tax Court of Canada or Federal Court.

Oversight of tax authority governance

Is the tax authority subject to non-judicial oversight?

The Minister of National Revenue is the minister of Canada’s government who is accountable to Parliament for all of the CRA’s activities, including the administration and enforcement of taxation statutes such as the Income Tax Act. 

The CRA is overseen by a board of management, whose members are appointed by the Governor in Council. The Board, whose members include persons nominated by Canada’s provinces and territories, oversees the organisation and management of the CRA, including the development of the CRA’s corporate business plan, and policies related to resources, services, property and personnel. The Board does not have the authority to administer or enforce tax legislation. One member of the board is the Commissioner and Chief Executive Officer of the CRA, who is responsible for the day-to-day operations of the tax authority.

Oversight is also provided by the Taxpayers’ Ombudsman, an independent and impartial officer appointed by the federal government who acts at arm’s length from the CRA and reports directly to the Minister of National Revenue. The Taxpayers’ Ombudsman reviews and assesses service-related complaints about the CRA, and identifies and reports on systemic service and fairness issues with respect to the CRA.

Court proceedings

Competent courts

Which courts have jurisdiction to hear tax disputes?

The Tax Court of Canada has exclusive original jurisdiction to hear and determine appeals and references arising under Canada’s federal tax laws, including the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan, and Part IX of the Excise Tax Act (for GST/HST). The Tax Court of Canada has 18 registry offices across Canada, and sits in locations across Canada (a list is available here). A list and biographical information about the judges of the Tax Court of Canada is available here. In broad terms, the Tax Court of Canada has the exclusive jurisdiction to determine the correctness of an assessment.

The Tax Court of Canada does not have jurisdiction to review discretionary decisions of the Canada Revenue Agency (CRA). Such decisions may instead be reviewed in the Federal Court by way of application for judicial review under the Federal Courts Act.

There is a body of case law that helps define the jurisdictional boundaries between the Tax Court of Canada and the Federal Court. According to that case law, taxpayers may not instigate proceedings in the Federal Court that in substance are collateral attacks on an assessment. The correctness of assessments may only be adjudicated by the Tax Court of Canada.

Lodging a claim

How can tax disputes be brought before the courts?

Taxpayers that disagree with an assessment issued by the CRA and who have not resolved their dispute through the administrative appeal (objection) process, may commence an appeal in the Tax Court of Canada to dispute the assessment. An appeal is commenced by filing a Notice of Appeal with the Tax Court of Canada. In most cases, a Notice of Appeal must be filed within 90 days after the CRA has confirmed the assessment in issue or reassessed at the end of the objection process. Taxpayers can also file Notices of Appeal if 90 days (for income tax appeals) or 180 days (for GST/HST appeals) have elapsed after the taxpayer commenced the administrative appeal (objection) process and the CRA has not vacated or confirmed the assessment in dispute or reassessed.

Although there is no monetary threshold for filing a Notice of Appeal, the Tax Court of Canada has two sets of procedural rules, depending on the amount at issue. The more streamlined and less expensive Informal Procedure is limited to cases in which the amount of federal tax and penalties in dispute for each taxation year or reporting period, excluding interest, is CAD$25,000 or less (income tax appeals) or CAD$50,000 or less (GST/HST appeals). The Tax Court’s General Procedure applies for all other appeals.

Where the Tax Court of Canada does not have jurisdiction to adjudicate a dispute over a decision of the CRA, such as a decision relating to the exercise of CRA discretion, the taxpayer may challenge the CRA’s decision by filing a Notice of Application for Judicial Review in the Federal Court. The Notice of Application for Judicial Review must normally be filed within 30 days of when the decision in issue was first communicated to the taxpayer.

Combination of claims

Can tax claims affecting multiple tax returns or taxpayers be brought together?

Although taxpayers who dispute multiple CRA assessments are required to file separate administrative appeals (objections) in respect of each assessment in dispute, administratively, the CRA will typically deal with multiple assessments issued to a single taxpayer simultaneously if the assessments arise from the same facts. If the reassessments are appealed to the Tax Court of Canada, a single appeal involving multiple assessments in dispute for a single taxpayer is generally permitted.

Under the Income Tax Act and Excise Tax Act, the Minister of National Revenue may apply to the Tax Court of Canada for a determination of a question if the Minister is of the opinion that the question is common to assessments or proposed assessments in respect of two or more taxpayers and is a question of law, fact or mixed law and fact arising out of the same or similar transactions.

Under the General Procedure Rules of the Tax Court of Canada, if two or more appeals have been filed, the Court has not made a decision disposing of any of the appeals, and the appeals give rise to one or more common or related questions of fact or law, the Court may specify one or more of the appeals as a lead case or lead cases and order a stay of the other related appeals. Once there is a direction to designate a lead case or lead cases, taxpayers in the related appeals are given the opportunity to agree to be bound by the decision in the lead case or cases. If a taxpayer in a related appeal does not agree to be bound by the lead case or cases, the related taxpayer’s appeal is no longer stayed.

Pre-claim payments

Must the taxpayer pay the amounts in dispute into court before bringing a claim?

Taxpayers are not required to pay the amounts in dispute into court as a condition for bringing a claim. 

For income tax appeals, the CRA is precluded from taking most kinds of collection action while an assessment is under administrative appeal (objection) or while the matter is before the Tax Court of Canada. However, for companies that are ‘large corporations’ (as defined in the Income Tax Act), the CRA can enforce collection of one-half of the amount in controversy even if the assessment in issue is under administrative appeal (objection) or while the matter is before the Tax Court of Canada. Also, for amounts in controversy (other than one-half of the amount in controversy for ‘large corporations’), taxpayers can provide security to the CRA. For amounts not in controversy, the CRA has the discretion to accept security from the taxpayer.

For appeals relating to GST/HST, there are no collection restrictions imposed on the CRA that correspond to the restrictions for income tax disputes under administrative (objection) or judicial appeal. However, for disputed amounts, taxpayers can provide security to the CRA. For undisputed amounts, the CRA has the discretion to accept security from the taxpayer.

Taxpayers may choose to pay all or a portion of an assessment in dispute in order to stop further interest from accruing on unpaid balances.

Cost recovery

To what extent can the costs of a dispute be recovered?

Under the General Procedure Rules of the Tax Court of Canada, costs may be awarded to either (or neither) party in a tax appeal. In exercising its discretion in awarding costs, the Court may consider the results of the proceeding; the amounts in issue; the importance of the issues; any offer of settlement made in writing; the volume of work; the complexity of the issues; the conduct of any party that tended to shorten or lengthen unnecessarily the duration of the proceeding; whether any stage in the proceeding was improper, vexatious or unnecessary or taken through negligence, mistake or excessive caution; whether the expense of having an expert witness was justified; and any other matter relevant to the question of costs. There are also rules for increased cost awards if certain written settlement offers are made in the course of litigation.

Under the Informal Procedure Rules of the Tax Court of Canada, the Court also has broad discretion in making a cost award. However, cost awards in favour of the Crown are restricted, and are awarded only if the actions of the taxpayer unduly delayed the prompt and effective resolution of the appeal.

The rules relating to cost awards in the Federal Court and Federal Court of Appeal are comparable to the rules for cost awards in the General Procedure Rules of the Tax Court of Canada.

Third-party funding

Are there any restrictions on or rules relating to third-party funding or insurance for the costs of a tax dispute, including bringing a tax claim to court?

There are no formal restrictions on the use of third-party funding or insurance for the costs of a tax dispute. 

Availability of jury trials

Who is the decision maker in the court? Is a jury trial available to hear tax disputes?

An appeal before the Tax Court of Canada is heard and decided by an individual judge. An application for judicial review before the Federal Court is also heard and decided by an individual judge. An appeal from either Court is generally heard by a panel of three justices of the Federal Court of Appeal. Appeals to the Supreme Court of Canada are heard by a panel of five to nine justices of that Court.

A jury trial is not available to hear federal non-criminal tax disputes.

Time frames

What are the usual time frames for tax hearings?

The time between the commencement of an appeal to the Tax Court of Canada and the hearing of the appeal can vary tremendously, depending upon factors such as the nature and complexity of the issues before the court, whether there are pretrial matters that must be determined, whether the matter is case-managed by the court, and the court’s own schedule. It is not unusual for two to three years to pass between the commencement of an appeal and the hearing of the appeal.

Applications for judicial review before the Federal Court from discretionary decisions of the tax authority are often heard within one to two years from the commencement of the application.

Disclosure requirements

What are the requirements concerning disclosure or a duty to present information for trial?

As part of the discovery process for appeals before the Tax Court of Canada, a party to an appeal may be required to serve on the other party and file a ‘partial disclosure’ list of documents or a ‘full disclosure’ list of documents.

A partial disclosure list of documents contains a list of the documents of which the party has knowledge that might be used in evidence (1) to establish or to assist in establishing any allegation of fact in any pleading filed by the party, or (2) to rebut or assist in rebutting any allegation of fact in any pleading filed by another party.

A full disclosure list of documents contains a list of all the documents that are or have been in the party’s possession, control or power and that are relevant to any matter in question between or among the parties to the appeal.

Normally, parties serve and file partial disclosure lists of documents. Parties may agree to file and exchange full disclosure lists of documents or, in the absence of an agreement, either party may apply to the Tax Court of Canada for an order directing that the parties file and exchange full lists of documents.

Discovery examinations may be conducted orally or by written questions. If a party chooses to conduct oral examinations for discovery, the party generally may examine the adverse party once, and the adverse party must select a knowledgeable current or former officer, director, member or employee to be examined on the party’s behalf. If a party chooses to conduct discovery by written questions, responses to the written interrogatories are normally required to be served within 30 days of receipt of the list of questions.

For applications for judicial review of discretionary decisions of the tax authority, there are no lists or affidavits of documents. However, each party in an application may file supporting evidence by way of affidavit. The affidavit may contain exhibits of documents that are relevant to the determination of the application. Each party in an application for judicial review may choose to cross-examine the affiant of the other party. A request can also be made to obtain all material relevant to the application that is not already in the applicant’s possession.

Permitted evidence

What evidence is permitted in tax hearings?

Oral and documentary evidence are both permitted in a hearing before the Tax Court of Canada. The taxpayer is not required to testify, but usually does testify. Experts, and expert reports, are permitted in tax trials, subject to meeting the legal and court-imposed tests for admissibility (such as relevance and necessity, and service of the expert’s report not less than 90 days before the commencement of the hearing).

Parties in a tax appeal before the Tax Court of Canada often prepare statements (or partial statements) of agreed facts to narrow those facts that might otherwise have to be proven.

In applications for judicial review before the Federal Court, evidence is typically provided by way of affidavit (and exhibits to the affidavits).

If requested, the Tax Court of Canada and Federal Court will provide interpreters for translating from English to French or French to English (ie, between Canada’s official languages). If the services of an interpreter are required for translation from or to any other language, the party requiring the translation is normally required to bear the associated costs.

Permitted representation

Who can represent taxpayers in a tax trial? Who represents the tax authority?

In the Tax Court of Canada and the Federal Court, taxpayers who are individuals may act in person or be represented by legal counsel. Other taxpayers must generally be represented by legal counsel except with leave of the Court.  A representative of a party under a legal disability before the Tax Court of Canada must be represented by legal counsel, except where the representative him or herself is also counsel acting in that capacity.

In informal procedure appeals in the Tax Court of Canada, parties may also be represented by an agent.

Publicity of proceedings

Are tax hearings public?

Appeals before the Tax Court of Canada, and applications for judicial review before the Federal Court, are normally open to the public. 

For proceedings before the Tax Court of Canada, the taxpayer may apply to the Court for permission to hold the hearing in camera, if it is established to the satisfaction of the Court that the circumstances of the case justify an in camera hearing. Similarly, the Federal Courts Rules provide that, on motion, the Court may direct that all or a part of a proceeding be heard in camera if the Court is satisfied that the hearing should not be open to the public. 

Burden of proof

Who has the burden of proof in tax hearings?

The Supreme Court of Canada has described the burden and onus of proof in a tax case as follows:

  • The burden of proof in a tax case is the balance of probabilities.
  • The taxpayer has the initial onus to ‘demolish’ the assumptions on which Minister of National Revenue (via the CRA) relies for the assessment in issue. This initial onus is met if the taxpayer makes a prima facie case.
  • Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by proving, on a balance of probabilities, the Minister’s assumptions.

 

In recent years, some justices of the Federal Court of Appeal and judges of the Tax Court of Canada have expressed the view that the onus and burden of proof in taxation cases should be rearticulated as follows:

  • A taxpayer should have the burden to prove, on a balance of probabilities, any facts that are alleged by that taxpayer in their notice of appeal and that are denied by the Crown.
  • If there are facts that were assumed by the Minister in reassessing a taxpayer and that are not inconsistent with the facts as pled by the taxpayer, the taxpayer should also prove, on a balance of probabilities, that such facts are not correct.
  • If the Minister alleges a fact that is not part of the facts that were assumed by the Minister in assessing a taxpayer or confirming an assessment, the Minister will have the onus of proof with respect to such facts.

 

It can be expected that, in the coming years, more judges will express their views on whether the onus and burden of proof in tax cases should be rearticulated as described above.

Case management process

What is the case management process for a tax hearing?

The General Procedure Rules of the Tax Court of Canada provide the Court with a broad authority to manage cases and trials.

In a typical tax appeal, the Court will request that the parties submit a timetable for the remaining steps in the appeal, failing which the Court will convene a status hearing. Parties may request amendments to timetables. The Court may also choose to require the parties to appear before a judge to, among other items, set deadlines for completion of the remaining steps of an appeal; determine the advisability of amending the pleadings; identify any issue and shorten the hearing; and determine whether the parties are ready to proceed with the hearing of the appeal.

The Court may, on its own initiative or at the request of a party, order that an appeal be subject to case management. If an appeal becomes subject to case management, one or more case management conferences can be scheduled for setting a timetable for the conduct of the appeal or a group of appeals; consolidating appeals; determining pretrial motions; setting deadlines for the completion of any steps in the appeal; or any other order in relation to the management of the appeal. A case management judge will not preside at the hearing of the appeal except with the consent of the parties.

A trial management conference may also be held as soon as a date for the hearing has been fixed, at the request of one of the parties to an appeal or on the initiative of the judge presiding at the hearing. During a trial management conference, the judge may, among other things, obtain from the parties the names and contact information of the anticipated witnesses and the substance of their testimony; consider the possibility of obtaining admissions that may facilitate proof of non-contentious issues; and identify and hear any pretrial motions. 

The General Procedure Rules and practices of the Tax Court of Canada also provide for settlement conferences at which settlement is encouraged under judicial oversight.

Appeal

Can a court decision be appealed? If so, on what basis?

General Procedure judgments of the Tax Court of Canada may be appealed to the Federal Court of Appeal. An appeal is commenced by filing a Notice of Appeal setting out the grounds of appeal, which may include errors of law, errors of fact, or mixed errors of law and fact. Notices of Appeal must generally be filed within 30 days of the pronouncement of the judgment of the Tax Court of Canada, though extensions of this deadline may be sought.

Informal Procedure judgments of the Tax Court of Canada may also be appealed to the Federal Court of Appeal by filing a Notice of Appeal setting out the grounds of appeal, which are more restricted for appeals of Informal Procedure judgments than for appeals of General Procedure judgments. Informal Procedure judgments can only be appealed on the basis that the Tax Court of Canada:

  • acted without jurisdiction, acted beyond its jurisdiction or refused to exercise its jurisdiction;
  • failed to observe a principle of natural justice, procedural fairness or other procedure that it was required by law to observe;
  • erred in law in making a decision or an order, whether or not the error appears on the face of the record;
  • based its decision or order on an erroneous finding of fact that it made in a perverse or capricious manner or without regard for the material before it;
  • acted, or failed to act, by reason of fraud or perjured evidence; or
  • acted in any other way that was contrary to law.

 

Notices of Appeal from Informal Procedure judgments of the Tax Court of Canada must generally be filed within 30 days after the pronouncement of the judgment of the Tax Court of Canada, though extensions of this deadline may be sought.

Final judgments of the Federal Court, such as judgments relating to applications for judicial review of discretionary decisions of the CRA that cannot be appealed to the Tax Court of Canada, may also be appealed to the Federal Court of Appeal.

Leave to appeal to the Supreme Court of Canada may be sought from decisions of the Federal Court of Appeal. Leave to appeal to the Supreme Court of Canada will generally only be granted for matters that are of national importance.

Update and trends

Key developments of the past year

What are the current trends in enforcement of tax controversies? What are the current concerns of the authorities and taxpayers in relation to the enforcement and handling of tax controversies and are these likely to change? Are there proposals to change the relevant legislation or other rules?

The Canada Revenue Agency (CRA) continues to place a high priority on identifying and challenging what it considers to be aggressive or abusive tax planning. The CRA’s requests for documents and information during audits continue to become increasingly broad and detailed in scope.

Judicial appeals continue to become more and more complex and costly for taxpayers, and the time it takes for a matter to be brought to hearing has increased significantly over the years.

As a result of the covid-19 pandemic, Canadian tax authorities and courts are alive to the need to facilitate alternative ways to interact with taxpayers and their representatives who may need to work remotely. Courts have introduced several safety measures to protect judges, court staff, litigants and their representatives.

Coronavirus

What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

Canada has implemented numerous legislative and administrative measures to address the effects of the pandemic. In relation to tax disputes, among other things:

  • Canada’s Parliament enacted legislation to suspend the computation of many judicial deadlines for the period from 13 March 2020 to 13 September 2020. The legislation also gives the Minister of National Revenue limited powers to extend certain periods within which the Minister can issue reassessments with respect to a particular taxation year.
  • The Tax Court of Canada, the Federal Court, the Federal Court of Appeal and the Supreme Court of Canada administratively implemented suspension periods during which the computation of deadlines for many steps in judicial proceedings were suspended. 
  • The CRA extended the filing or payment deadlines for various types of returns remittances and, in some cases, the deadlines for commencing administrative appeals (objections).
  • The CRA generally reduced its enforcement activities in relation to outstanding amounts.
  • The CRA suspended many audits and requests for information or documents.

 

Similar measures have been taken by Canada’s provincial taxation authorities.

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