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 CRA 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 CRA had failed to comply with its duty to assess taxpayers within a reasonable time. The case is another recent example of CRA unsuccessfully using its administration or enforcement powers to try to shape taxpayers’ behaviour by “chilling” participation in transactions of which CRA does not approve.
Under the Income Tax Act, 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 CRA must assess, so long as CRA assesses “with all due diligence” or “within a reasonable time”.4 However, 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 CRA did not like. Participants in the scheme received charitable donation receipts. CRA had concluded that the related charitable donation tax credits should be denied for several reasons. The evidence in the case was that CRA’s long-standing 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, CRA’s Winnipeg Tax Centre decided to depart from this national policy by delaying the initial assessments, even though 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 CRA’s national policy to assess within a reasonable time and then to deny credits by way of audit and reassessment – CRA’s Winnipeg office was acting inconsistently with the federal and national nature of CRA’s obligation to assess with all due dispatch. In the end, the Court declared that CRA did not meet this obligation.
In other words, CRA must issue its initial assessment in cases like this one within a reasonable time, giving the taxpayer the right to challenge the correctness of the assessment if he or she so chooses – a right that the taxpayer could not exercise while CRA was delaying the assessment to achieve its improper objectives.
Ficek is not the only recent example of CRA using its administration or enforcement powers to try to discourage taxpayers from participating in transactions that CRA does not like. In Minister of National Revenue v. RBCLife Insurance Company et al.,9 the Federal Court of Appeal cancelled several judicial authorizations that 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 authorizations 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 things. First, CRA has broad powers of administration and enforcement. Second, these powers are not unlimited powers, and taxpayers should be vigilant to assert their judicial and other remedies where CRA has overstepped its bounds. Third, courts are an increasingly effective forum in which taxpayers can even the playing field with CRA.