When a taxpayer enters into an agreement with the CRA in the course of an audit of a particular taxation year, the taxpayer likely expects that the CRA will not come back to audit and reassess that same year again. In an ongoing case in the Federal Court, Rosenberg v. Canada, the CRA is challenging this expectation, asserting that such an agreement does not and cannot limit its audit powers.
The taxpayer in Rosenberg was audited between 2008 and 2010 in relation to his 2006 and 2007 taxation years, with a focus on certain “straddle loss” transactions undertaken in those years. The taxpayer ultimately reached an agreement with the CRA in 2010. The taxpayer alleges that the CRA agreed not to reassess the 2006 and 2007 taxation years, except to make one specific adjustment, on the condition that the taxpayer agree not to engage in any similar straddle loss transactions in the future.
In January of 2013, the CRA commenced a second audit of the taxpayer’s 2006 and 2007 tax years and, as part of the second audit, served the taxpayer with a request for information under section 231.1 of the Income Tax Act. The information requested was in relation to the transactions that were the subject of the 2010 agreement.
The taxpayer’s challenge to the CRA’s second audit had a clumsy procedural start, beginning with an application to the Quebec Superior Court, which concluded that it did not have jurisdiction over the matter. Once that decision was affirmed by the Quebec Court of Appeal, the taxpayer commenced an action in Federal Court to enforce the agreement by seeking declaratory and injunctive relief. The Crown moved to strike the action on the basis that, inter alia, it disclosed no cause of action.
In Rosenberg v. Canada, 2015 FC 549, Madam Justice Bédard refused to strike out the action. Instead, she converted it into an application for judicial review of the Minister’s exercise of her audit powers, which is the proceeding the taxpayer ought to have commenced in the first place. Bédard J. ordered that the matter be specially managed so that a hearing on the merits can be scheduled as soon as possible.
The Crown’s positions are as follows:
- The CRA denies that it agreed never to reassess the 2006 and 2007 taxation years under the 2010 agreement. Rather, the agreement was that the CRA would not reassess beyond the agreed upon adjustment at that particular time on the basis of the information it had received from the taxpayer up to that point.
- Even if the CRA did agree never to reassess the taxpayer for those years, such an agreement did not operate to waive the CRA’s audit powers.
- Even if the CRA did agree never to exercise its audit powers against the same transactions in 2006 and 2007, such an agreement would be unenforceable. It would be illegal for the Minister of National Revenue to waive the audit powers conferred on her by the Income Tax Act because she has a duty to administer and enforce the Act and the audit powers are necessary to carry out those responsibilities.
The majority of income tax disputes are settled, whether at the audit stage, on objection, or after an appeal has been commenced in the Tax Court of Canada. Settlements at the litigation stage are enforceable under subsection 169(3) of the Income Tax Act (SoftSim Technologies Inc. v. The Queen, 2012 TCC 181), but there is no similar provision giving the CRA the authority to bind the Minister to an agreement in the course of an audit or objection.
In the vast majority of cases, an agreement with the CRA will be honoured and will resolve a dispute about a particular taxation year. Typically, the CRA agrees to reassess the taxpayer in a particular way and the taxpayer signs a waiver of her appeal rights in respect of that reassessment. However, taxpayers should be aware that the matter is not necessarily at an end, as such an agreement may not bind the CRA never to reassess that year.