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Tax Court: CRA Employee May Not Testify as Expert

In HLP Solution Inc. v. The Queen (2015 TCC 41 ) the Tax Court held that a CRA employee lacked the necessary impartiality to testify as an expert witness because of her prior involvement in auditing the taxpayer.


The taxpayer was a software company that claimed Scientific Research and Experimental Development (SR&ED) tax credits for the 2009 taxation year. The CRA reassessed to deny the SR&ED credit claims.

In the Tax Court, the taxpayer challenged the qualification of the CRA’s expert witness on the basis that she did not have the necessary impartiality to testify as an expert witness in the appeal. The Tax Court held a voir dire to determine whether the Crown’s proposed expert witness could testify in the appeal.

The proposed expert witness held a doctorate in computer science and was employed with the CRA as a Research and Technology Advisor (RTA). The taxpayer’s allegation of impartiality was not based on the fact that the proposed expert witness was employed with the CRA. Rather, the taxpayer argued that it was the proposed expert witness’s involvement in every stage of the file that impugned her impartiality.

The Crown submitted that it is rare for a court to refuse to hear the testimony of an expert witness, and that there must be clear evidence of bias, which, according to the Crown, was not present in this case. Moreover, the Crown submitted that it was in the capacity as an expert that the opinion was given, irrespective of whether this occurred at the audit stage, objection stage, or during appeal.


In analyzing whether to admit the evidence by the Crown’s witness, the Tax Court reviewed the leading case on the admission of expert evidence, the Supreme Court of Canada decision R. v. Mohan ([1994] 2 SCR 9), in which the Court set out the criteria for determining whether expert evidence should be admitted, namely: relevance, necessity in assisting the trier of fact, the absence of an exclusionary rule, and a properly qualified expert.

In Mohan, the Supreme Court established that the question of relevancy is a threshold requirement for the admission of expert evidence and a matter to be decided by the judge as a question of law. There must first be logical relevance in order for the evidence to be admitted. The judge must then perform a cost-benefit analysis to determine whether the value of the testimony is worth the costs, in the sense of its impact on the trial process.

The Tax Court also reviewed R. v. Abbey (2009 ONCA 624), in which the Ontario Court of Appeal applied Mohan but also distinguished between the preconditions to admissibility and the judge’s role as a gatekeeper. The Ontario Court of Appeal noted that while the inquiry into the preconditions to admissibility is a rules-based analysis that tends to yield “yes” or “no” answers, the gatekeeper function does not involve the application of bright line rules and frequently requires the exercise of judicial discretion. The gatekeeper function is more subtle and involves weighing the benefits of the probative value of the evidence against the prejudice associated with admitting the evidence.

In HLP, the Tax Court held that it was preferable to disqualify the expert at the qualification stage. The Court based its conclusions on many of the taxpayer’s allegations, including the following:

  • the proposed expert witness was involved with the audit and objection;
  • the proposed expert witness delivered the opinion (the technical review report) that served as the basis for the assessment;
  • following the taxpayer’s representations, the proposed expert witness also wrote an addendum to the technical review report in which she maintained the same position;
  • the proposed expert witness participated in every meeting with the taxpayer as the CRA’s representative;
  • the proposed expert witness confused her role as an RTA with that as an expert witness; and
  • the proposed expert witness reproduced word-for-word paragraphs from her technical review report.

The Tax Court was careful to note that it was not disqualifying the expert on the basis of her employment with the CRA but rather on the basis of her close involvement throughout the audit and objection stages of the file.

The Tax Court allowed the Crown to submit a new expert report.

The Tax Court’s decision in HLP will have a direct impact on future cases in which proposed expert witnesses were involved in the audit and objection processes as CRA employees. Such employees – though they may have the required professional qualifications to testify as an expert witness – cannot be qualified as expert witnesses because they lack the necessary impartiality to testify.

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Tax Court: CRA Employee May Not Testify as Expert

CRA Publishes Reminder on Charities’ Political Activities

Political activities have been a hot topic for the CRA’s Charities Directorate in the last few years.

In the CRA’s 2015 Program Update, the Charities Directorate stated that its recent political activity audit included 60 charities, with various results (i.e., education letters, compliance agreements, revocations, etc.).

Generally, a registered charity may not engage in partisan political activities, but a modest amount of political activities are permitted (i.e., those political activities that are non-partisan and connected and subordinate to the charity’s purposes). As a general guideline, a registered charity cannot devote more than 10 percent of its total resources to political activities (the CRA applies slightly different percentages to small charities).

Political activities were revisited again recently when the Charities Directorate published an “Advisory on partisan political activities”, which stated:

Since we are in an election period, we remind registered charities that they are prohibited from devoting any of their resources to partisan political activities. A partisan political activity is one that involves the direct or indirect support of, or opposition to, any political party at any time, whether during an election period or not, or a candidate for public office.

Given the time and resources spent by the CRA educating the charitable sector on the subject, most or all charities should not be surprised to see this latest update from the CRA.

However, a surprising part of the Advisory may be the following statements:

Charities that use the Internet or social media to post information should ensure the information does not contain partisan political statements. Also, the information should not link to statements made by a third party that support or oppose a candidate or political party.

When a charity invites comments on its website, blogs, or on social media, it should monitor them for partisan political statements and remove, edit, or moderate such statements within a reasonable time.

Charities should be aware of the CRA’s views on social media and political activities, and during the 2015 federal election charities should be careful to ensure that any invited comments on a charity’s website, blog, Facebook page or Twitter account do not conflict with the CRA’s views on partisan political activities.

Charities may wish to consult their professional advisers if there are any questions about compliance with the Income Tax Act and the CRA’s views.

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CRA Publishes Reminder on Charities’ Political Activities

Beware of Telephone Tax Scams

Several clients have contacted me in recent weeks after receiving telephone calls from individuals who claim to be from the Canada Revenue Agency.

Typically, the caller will provide his name, an employee ID, a CRA office address and telephone number with a Canadian area code.

The caller is aggressive, alleges that the taxpayer owes an amount to the CRA, and demands immediate payment. The caller also threatens arrest or other punishments if the amount is not paid.

These telephone calls are a scam. If you receive one of these calls, do not provide or confirm any personal data.

The CRA has recently issued a warning about this type of telephone scam, and a news report on the scam is available here.

These telephone tax scam calls should be reported to the Canadian Anti-Fraud Centre.

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Beware of Telephone Tax Scams

FCA Dismisses Appeal of Revocation of Charity Status

In Public Television Association of Quebec v. M.N.R. (2015 FCA 170), the Federal Court of Appeal dismissed the appeal by the Public Television Association of Quebec (“PTAQ”) of the CRA’s decision to revoke PTAQ’s registered charity status.


PTAQ was constituted to advance education through the production, distribution and promotion of non-commercial, educational television programs and films.

Generally, PTAQ carried out its charitable activities through an intermediary: Vermont ETV Incorporated (aka Vermont PBS) (“VPT”) pursuant to a fundraising agreement and a broadcasting agreement.

Under these agreements, PTAQ would purchase a slate of educational programming from VPT, and such programming would then be broadcast on certain television stations. VPT would, in the course of various fundraising activities, raise funds from Canadian donors as an agent of PTAQ, which would issue donation receipts to the Canadian donors.

Charitable Activities

Generally, a Canadian charity may carry out its charitable activities in two ways: directly, or through the use of an intermediary. If the charity uses an intermediary to carry out charitable activities, the charity must maintain direction and control of its resources (see CG-004 “Using an Intermediary to Carry out a Charity’s Activities within Canada” (June 20, 2011)). The CRA’s scrutiny of a charity’s use of an intermediary is greater where the activities are carried on outside Canada (see CG-002 “Canadian Registered Charities Carrying Out Activities Outside Canada” (July 8, 2010)).

In this case, the CRA reviewed PTAQ’s corporate objects and activities and determined that PTAQ had failed to devote all of its resources to its own charitable activities. The CRA issued a Notice of Intention to Revoke pursuant to paragraph 168(1)(b) of the Income Tax Act. PTAQ filed a Notice of Objection under subsection 168(4) of the Act, and the CRA confirmed the proposal to revoke PTAQ’s registration.

Pursuant to subsection 172(3) of the Act, an appeal of the CRA’s decision to revoke a charity’s registration is made directly to the Federal Court of Appeal (rather than the Tax Court).


On appeal of a proposed revocation in respect of a charity that has used an intermediary to carry out charitable activities, the charity must adduce evidence that it was carrying on charitable works on its own behalf and not merely acting as a conduit (i.e., the charity must establish that it maintained direction and control of its resources).

The Court of Appeal dismissed the appeal and held that PTAQ had failed to establish the CRA’s conclusion that PTAQ was not devoting all of its resources to its own charitable activities – which was a question of mixed fact and law – was unreasonable.

The Court of Appeal stated:

[55] Based on the evidence outlined above, I conclude that it was reasonable for the Minister to determine that PTAQ failed to maintain direction and control over its resources as it did not devote all its resources to its own charitable activities. The provisions of the broadcasting and fundraising agreements were not followed or respected. PTAQ has not adduced evidence that it exercised proper control over the activities of its agent by demonstrating how it monitored the cost of the broadcasting activities, the donations received and the fundraising. It has not established how the Minister erred in coming to the conclusion that PTAQ is only used to issue receipts for donations received by VPT from Canadian donors, as the documentation contained in the record does not overturn the factual findings noted above with respect to the broadcasting and fundraising agreements.

The CRA’s revocation and the Court of Appeal’s decision are stern reminders of the necessity for Canadian charities that are essentially “friends of” foreign charitable organizations to implement measures that will ensure that direction and control of the Canadian charity’s resources remain with the Canadian charity.

Further, such direction and control must in fact be exercised by the Canadian charity, and evidence of such direction and control should be recorded in the Canadian charity’s corporate documents (i.e., meeting minutes, reports, correspondence, etc.).

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FCA Dismisses Appeal of Revocation of Charity Status

SCC Dismisses Appeal in Tax Advisor Penalty Case

The Supreme Court of Canada has dismissed the appeal of the taxpayer and determined that the tax advisor penalty in section 163.2 of the Income Tax Act is administrative in nature.

The Court’s 4-3 decision in Guindon v. The Queen (2015 SCC 41) (Docket No. 35519) has far-reaching implications for Canadian taxpayers and their professional advisors.

While the majority of the Court (Rothstein, Cromwell, Moldaver and Gascon) exercised its discretion to consider the taxpayer’s constitutional arguments despite the taxpayer’s failure to provide notice of constitutional question, the Court held that the penalty under section 163.2 was not criminal in nature:

[89] We conclude that the proceeding under s. 163.2  is not criminal in nature and does not lead to the imposition of true penal consequences. We agree with Stratas J.A., writing for the Federal Court of Appeal, that “the assessment of a penalty under s. 163.2  is not the equivalent of being ‘charged with a [criminal] offence.’ Accordingly, none of the s. 11  rights apply in s. 163.2  proceedings”: para. 37.

[90] Finally, we note that even though s. 11  of the Charter  is not engaged by s. 163.2  of the ITA , those against whom penalties are assessed are not left without recourse or protection. They have a full right of appeal to the Tax Court of Canada and, as the respondent pointed out in her factum, have access to other administrative remedies: R.F., at para. 99; see, e.g., ITA , s. 220(3.1) .

In a concurring opinion that dissented on the issue of the notice requirement, Justices Abella, Karakatsanis and Wagner held that the taxpayer’s failure to provide notice of constitutional question in the Tax Court or Federal Court of Appeal was fatal to her appeal.

See our previous posts on the Guindon case here and here.

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SCC Dismisses Appeal in Tax Advisor Penalty Case

SCC to Decide Tax Advisor Penalty Case on July 31

What is the nature of the third-party penalty in section 163.2 of the Income Tax Act? That question will be answered by the Supreme Court of Canada when it decides the case of Guindon v. The Queen (Docket No. 35519) on Friday July 31.

See our previous posts on the Guindon case here and here.

In Guindon, the Tax Court found that the penalty imposed under section 163.2 is a criminal penalty, not a civil one, and therefore subject to the protection of (inter alia) section 11 of the Charter of Rights and Freedoms.

The Federal Court of Appeal reversed on the basis that Ms. Guindon did not provide notice of a constitutional question, and thus the Tax Court lacked jurisdiction to make an order on the nature of section 163.2. In any event, the Federal Court of Appeal also stated that the penalty under section 163.2 was not criminal in nature, and hence, was not subject to Charter protections.

The Supreme Court heard arguments in Guindon in December 2014, and the Court’s decision will have significant implications for tax professionals across Canada.

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SCC to Decide Tax Advisor Penalty Case on July 31

Zhang: BC SC Refuses to Rectify Share Transfer

In Zhang v. Canada (A.G.) (2015 BSCS 1256), the British Columbia Supreme Court refused to grant rectification of a transaction in respect of which the taxpayers had no common intention to avoid capital gains tax on a share transfer.

The taxpayer was resident in British Columbia. He carried on a business of manufacturing and distributing laser equipment. In 2002, the taxpayer incorporated LABest Optronics Co. Ltd. (“LABest”) in China to carry on the business.

In 2003, the taxpayer met with his accountant to discuss his 2002 Canadian tax return. In the course of this discussion, the taxpayer asked about the distribution of income from LABest, and the accountant suggested that income earned in the company could be taxed in China and distributed to a Canadian corporate shareholder as exempt surplus dividends without further Canadian tax being imposed, and then later paid to the taxpayer.

Subsequently, the taxpayer incorporated Beamtech Optronics Co. Ltd. (“Beamtech”), a B.C. company. The accountant suggested that the shares of LABest be transferred to Beamtech. The taxpayer sought and obtained regulatory approval for the share transfer from the Chinese government, and such approval included a transfer value (determined by the government) of $150,000 USD. Beamtech paid $150,000 USD cash to the taxpayer, and no section 85 rollover of the shares was undertaken.

The CRA subsequently reviewed and assessed the transaction on the basis that the fair market value of the LABest shares was $661,164 CDN, resulting in a capital gain of $221,950 for the taxpayer in 2003.

The taxpayer sought rectification of the share transfer to substitute a section 85 rollover of the LABest shares to Beamtech.

The Court stated that the “proper approach” to rectification under B.C. law is as follows:

  1. The focus of the analysis in tax cases is on the intention of the related parties when they entered the transaction. This is because the “mistake” in the written instrument is usually a mistake as to the tax consequences of the transaction. It matters not if the mistake was caused by misinformation from the taxpayer to his advisors, or mistaken advice provided by a professional advisor to the taxpayer.
  2. There is nothing objectionable about taxpayers attempting to avoid tax.
  3. The real question which must be considered is whether the taxpayer is able to establish a specific continuing intention to avoid the particular tax in question. A general intention to avoid taxes is not sufficient. The determination of what constitutes sufficient specificity of intention will depend on the context and the circumstances of each case.
  4. Where rectification is aimed at a wholly distinct kind of tax avoidance, which was not specifically contemplated at the time the written instrument was formed, rectification will not be granted.
  5. A common specific intention is one which existed before the formation of the instrument in question and continued since that time. It must be a “precise” and “clearly-defined object” before rectification will be granted.

In the present case, the Court was concerned that there were significant inconsistencies in the evidence of the taxpayer and his accountant. Further, the evidence established only that the taxpayer intended to implement a corporate structure (i) for the tax-efficient movement of funds from LABest to Beamtech, and (ii) that was acceptable to the Chinese government. The taxpayer had only consulted his accountant about discrete tax issues, but never retained his accountant to provide a comprehensive review of all tax issues that may arise in respect of the transaction. The Court held that the taxpayer had no specific intention to avoid capital gains tax on the share transfer.

The Court dismissed the taxpayer’s application.

The more challenging aspect of Zhang is the Court’s discussion of the requirements for rectification – i.e., whether a specific or general intention to avoid tax must exist for rectification to be granted. The B.C. Court referred to the leading tax rectification case, Juliar v. A.G. (Canada) ((2000), 50 O.R. (3d) 728 (Ont. C.A.), leave to appeal to the Supreme Court of Canada dismissed (File No. 28304)) (Dentons was counsel for the successful taxpayer), and the B.C. cases that have interpreted Juliar (see, for example, McPeake v. Canada (A.G.) (2012 BCSC 132)). The Court stated that, in B.C., “Rectification will not be granted where there is only a general intention to avoid taxes.”

The Alberta Court of Queen’s Bench reached a similar conclusion in Graymar Equipment (2008) Inc. v A.G. (Canada) (2014 ABQB 154) and Harvest Operations Corp. v. A.G. (Canada) (2015 ABQB 237)).

This may conflict with the reasoning in Juliar and other Ontario cases (see TCR Holding Corporation v. Ontario (2010 ONCA 233) and Fairmont Hotels Inc. v. A.G. (Canada)(2015 ONCA 441) in which the Ontario Court of Appeal has clearly stated that rectification was available where the taxpayers had a general intent to carry out their transactions on a tax-efficient (or tax-neutral) basis and had no expectation as to the specific manner in which the transaction would be carried out.

However, Zhang raises the question as to whether the distinction between specific and general intent is meaningful at all. On any rectification application, a court’s focus will always be on the nature of the mistake, the circumstances of the error, and the evidence of the taxpayer’s intent. Whether their intent is described as “specific” or “general”, taxpayers who are careless or cavalier about the Canadian tax implications of a transaction likely cannot establish that they intended to minimize or avoid taxes and cannot expect to obtain relief from the courts.

As of the time of the writing of this post, the taxpayer had not appealed to the B.C. Court of Appeal.

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Zhang: BC SC Refuses to Rectify Share Transfer

CRA: Bitcoins may be Specified Foreign Property

The CRA recently provided its views on whether digital currency, including Bitcoins, are considered “specified foreign property” under the foreign property reporting rules in section 233.3 of the Income Tax Act.

See our previous posts on the tax treatment of Bitcoins and digital currency here, here and here.

Under the foreign property reporting rules in the ITA, if a Canadian taxpayer owns certain foreign property the aggregate cost of which exceeds $100,000 CDN, the taxpayer must file a Form T1135 on which the amount of “specified foreign property” is reported. “Specified foreign property” is defined in subsection 233.3(1) to include certain tangible or intangible property held outside Canada (subject to several exceptions – i.e., that the property is not held or used exclusively in carrying on an active business).

In CRA Document No. 2014-0561061E5 “Specified Foreign Property” (April 16, 2015), the CRA was asked whether digital currency or an interest in a foreign partnership holding digital currency are specified foreign property.

The CRA stated that, in its view, digital currency would be funds or intangible property, and would be specified foreign property if situated, deposited or held outside Canada and not used or held exclusively in the course of carrying on an active business.

Further, an interest in a partnership that owns or holds specified foreign property would itself be specified foreign property unless the partnership was a “specified Canadian entity” (i.e., a partnership wherein the total of all non-resident members’ shares of the income or loss of the partnership for the fiscal period is less than 90% of the total income or loss of the partnership for the period).

The CRA stated that, in this case, the digital currency would likely be specified foreign property and the partnership interest would be specified foreign property of the Canadian corporate owner.

This is helpful guidance from the CRA on the tax treatment of digital currency and a reminder of the many tax issues that arise in respect of digital currency and the reporting of foreign property.


CRA: Bitcoins may be Specified Foreign Property

Tax Court Continues “New Approach” to Cost Awards

The Tax Court’s approach to cost awards has evolved significantly in recent years. The Court’s interpretation and application of the factors under subsection 147(3) and the new settlement offer rules in subsections 147(3.1) to (3.8) of the Tax Court of Canada Rules (General Procedure) indicate that the Court continues to formulate a “new approach” to costs that is much closer to the manner in which other Canadian courts use cost awards to compensate successful parties and control the conduct of the parties during litigation.

The Tax Court’s new approach can be traced to the costs decision in Velcro Canada Inc. v. The Queen (2012 TCC 273) (see our previous blog post here), in which the Court articulated an approach to costs that provided for a reduced role for the “Tariff” amounts (see in Tariff B of Schedule II of the General Procedure Rules) and much greater emphasis on and consideration of the factors under subsection 147(3). Further, the new settlement offer rules in subsections 147(3.1) to (3.8) create a default entitlement to substantial indemnity costs (i.e., 80% of solicitor and client costs) after the date of a settlement offer for a successful party that achieved a result in the appeal that was as good or better than the settlement offer.

This new approach is a welcome development in that it creates a fair system in the Tax Court for compensating a winning party, and raises the stakes for both parties to an appeal.

Three recent costs decisions of the Tax Court provide good examples of the Court’s analysis and awards under this new approach.

Repsol Canada Ltd. 

In Repsol Canada Ltd. v. The Queen (2015 TCC 21) (under appeal), the Tax Court allowed the taxpayer’s appeal and held that certain of the taxpayer’s assets were Class 43 assets for the purposes of the capital cost allowance provisions in the Income Tax Act. The Court awarded costs to the taxpayer.

On its motion for increased costs, the taxpayer asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, an additional 10% of legal fees incurred after the issuance of its settlement offer, 75% of its legal fees incurred before the issuance of its settlement offer, and reasonable disbursements.

The Tax Court (2015 TCC 154) refused to reduce the taxpayer’s costs that would be subject to the substantial indemnity rule in subsection 147(3.1), held that the substantial indemnity rule applies to the legal fees for a costs motion, and refused to grant additional costs above the substantial indemnity amount for fees incurred after the issuance of its settlement offer.

The Court awarded post-settlement offer costs at 80% of solicitor-client costs ($264,334), pre-settlement offer costs at 50% of solicitor-client costs ($262,051), disbursements ($35,308), and 80% of solicitor-client costs plus reasonable disbursements for the costs motion.

The Crown has appealed the costs decision to the Federal Court of Appeal.

Standard Life Assurance Company of Canada

In Standard Life Assurance Company of Canada v. The Queen (2015 TCC 97) (under appeal), the Tax Court dismissed the taxpayer’s appeal and held that the taxpayer was not entitled to a bump in the cost base of certain insurance properties. The Court awarded costs to the Crown.

On its motion for increased costs, the Crown asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, 50% of legal fees incurred before the issuance of its settlement offer, and reasonable disbursements throughout.

The Tax Court (2015 TCC 138) held that the Crown’s settlement offer was a valid settlement offer that contained an element of compromise (see also the earlier case of Mckenzie v. The Queen (2012 TCC 329)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

The Tax Court made a minor adjustment for the hourly rate of junior counsel and awarded a lump sum amount of $474,663 (which included $37,818 in disbursements).

Sun Life Assurance Company of Canada

In Sun Life Assurance Company of Canada v. The Queen (2015 TCC 37), the Tax Court allowed the taxpayer’s appeal and held that the taxpayer was entitled to certain input tax credits. The Court awarded costs to the taxpayer.

On its motion for a enhanced costs, the taxpayer asked for a lump sum amount of $200,000, which approximated 80% of counsel fees of $157,430, plus taxes of $20,465 and disbursements of $21,365.

The Tax Court (2015 TCC 171) considered the taxpayer’s settlement offer, and concluded that it was a valid settlement offer that was capable of being accepted by the Crown (see also the earlier case of CIBC World Markets Inc. v. The Queen (2012 FCA 3)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

However, the Court reduced the amount of legal fees that would be subject to the 80% substantial indemnity rule because there was no evidence that the client had agreed to pay its counsel’s hourly fees (rather the fee charged to the client was a percentage of the amount recovered). Also, the taxpayer had not provided a detailed breakdown of the fees incurred before and after the issuance of the settlement offer.

Accordingly, the Court awarded substantial indemnity costs of $91,792, plus $1,050 for the Tariff amount for services rendered prior to examination for discovery, plus HST on these amounts (less any amount recoverable as an input tax credit), and disbursements of $21,356.


Tax Court Continues “New Approach” to Cost Awards

McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

In McNally v. Canada (National Revenue) (2015 FC 767), the taxpayer brought an application to the Federal Court for an order requiring the Minister to assess his tax return. The Federal Court allowed the taxpayer’s application and ordered the Minister to examine the taxpayer’s tax return and issue a Notice of Assessment within 30 days.


The taxpayer invested funds in a gifting tax shelter in respect of which he claimed a number of deductions.

The taxpayer filed his 2012 federal income tax return in April 2013. Two months later – in June 2013 – he received a letter stating that his return had not been assessed because the CRA was undertaking an audit of the gifting tax shelter program. In July 2013, the taxpayer filed an application for judicial review of the CRA’s decision not to assess his return. Two years later, the taxpayer’s 2012 return still had not been assessed.


Under subsection 152(1) of the Income Tax Act, the CRA shall examine a taxpayer’s return of income and assess the tax for that taxation year “with all due dispatch.”

The taxpayer argued that the CRA was deliberately delaying the assessment for the improper purpose of discouraging participation in gifting tax shelters. The court noted that, in the CRA’s view, widely-marketed tax shelters are generally invalid. In this case, the CRA admitted that it chose not to assess the tax returns of participants in the gifting tax shelters in order to discourage participation in such investments, to undertake an audit the tax shelter, and to educate the public about gifting tax shelters.

The CRA admitted that the main reason the taxpayer’s return was not reassessed was to discourage participation in gifting tax shelters. The CRA submitted that this motive did not conflict with its duty under subsection 152(1) of the Act.


In allowing the application, Justice Harrington of the Federal Court followed the decision in Ficek v Canada (Attorney General) (2013 FC 502) in which the Court held that the Minister had failed to assess the taxpayer’s return “with all due dispatch.”

In Ficek, a delay in examining the taxpayer’s return arose from a new policy of discouraging certain types of tax shelter investments. In Ficek, the court acknowledged that the CRA has discretion in assessing taxpayers but noted “…the discretion is not unfettered, it must be reasonable and for a proper purpose of ascertaining and fixing the liability of the taxpayer” (para. 21). Importantly, the Court held that there should be some certainty to the taxpayer’s financial affairs (para. 34).

In McNally, Justice Harrington followed this reasoning. He held that the phrase “with all due dispatch” does not imply a specific time period before which the Minister must make an assessment. However, he found that while the Minister has discretion, it is not unfettered. The determination of whether the Minister has examined a taxpayer’s return “with all due dispatch” is a question of fact.

The Federal Court ultimately determined that the Minister had failed to assess the taxpayer’s tax return “with all due dispatch.”  The court held:

[41] … Although the Minister is responsible for administrating the Income Tax Act, ultimately it falls upon the courts to decide whether a claimed deduction is valid or not. It is plain and obvious that Mr. McNally’s rights have been trampled upon for extraneous purposes.

[42] The Minister owes Mr. McNally a statutory duty to examine his return “with all due dispatch.” There may well be circumstances in which it will take some time to reach a conclusion with respect to a given return. It may well be appropriate to await the audit of third parties. However this is not one of those cases.

[43] The CRA is entitled to express concerns with respect to certain shelters and to warn that such shelters will be audited. In Mr. McNally’s case, however, the resulting delay is capricious and cannot be allowed to stand. Even assuming these secondary purposes to be valid, they are overwhelmed by the primary main purpose and cannot save the day.

Interestingly, McNally goes a step further than the Court in Ficek, in which the Court had simply declared that the CRA had failed to assess with all due dispatch. McNally is a good example of the Federal Court exercising its judicial review authority to compel the CRA to carry out its statutory duty. This does not assure the taxpayer that he is entitled to his charitable donation claims, but at least he will be able to commence a challenge of the disallowance of the claims.

While the McNally decision does not go so far as to tell us what “with all due dispatch” means, the decision is the second important reminder that the CRA’s discretion in assessing taxpayers, while broad, is not unfettered.

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McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment