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Federal Court Calls CRA’s Reasons “Inadequate” on Denial of Fairness Request

On October 21, 2011, the Federal Court (Justice Sandra Simpson) released her decision on an application for judicial review in Dolores Sherry v. The Minister of National Revenue. The applicant requested judicial review pursuant to section 18.1 of the Federal Courts Act of a decision of the Canada Revenue Agency (“CRA”) in which the CRA refused to cancel or waive interest and penalties related to the applicant’s taxes for 1989 to 2000. The decision is important because the Federal Court held that the reasons provided to the applicant by the CRA were inadequate.

The applicant had sought judicial review of the refusal by the CRA and on October 25, 2005, the Minister commenced a review of the applicant’s file in accordance with the terms of an order by Justice Heneghan on April 25, 2005. Justice Heneghan made an order on consent referring the matter to the Minister for redetermination. Upon completing its redetermination, the CRA told the applicant that it declined to reduce the interest charged to the applicant from 1989 to 2000 for the following reasons:

In reviewing your financial circumstances, we conducted a cash flow analysis to determine your ability to meet your tax obligations from 1989 to 2000. In conducting this analysis we have applied the direction in the Court Order and excluded the $100,000 you reported as taxable capital gain in our cash flow analysis and included your rental loses for years 1989 to 1994 as cash outflow. Our cash flow analysis shows that your net cash flow (funds received less expenses paid during the applicable years) was sufficient to meet your tax obligations from 1989 to 2000, except for the negative cash flow years 1991, 1992, and 1993. However, we considered the fact that you had significant equity in properties that you owned during the years 1991 to 2000 and could use this equity to meet your tax obligations and to cover the negative cash flows. Therefore, your request for interest relief under financial hardship is denied.

Justice Simpson held that those reasons were inadequate as CRA “extrapolated” from her income and expenses in 2001 a cash flow summary for the years 1989 to 2000 and CRA relied, in part, on its own appraised value of the applicant’s properties when it considered whether she had equity in her real estate holdings.

Justice Simpson concluded that although the CRA’s decision, as originally communicated to the applicant, did not offer adequate reasons, a more detailed “Fairness Report” prepared by the CRA did provide an adequate explanation. Although, by the time of the hearing, the applicant had a copy of the “Fairness Report”, she was not given a copy when the CRA first told her about its decision. Therefore, the application for judicial review was allowed.

As the applicant was required to initiate a judicial review application before she received the “Fairness Report”, the Court granted her costs for the preparation of the application. Once the “Fairness Report” was secured by the applicant, the only issue on which the applicant was successful was resolved and therefore, no relief beyond the cost award was granted.

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Federal Court Calls CRA’s Reasons “Inadequate” on Denial of Fairness Request

Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

On October 21, 2011, the Tax Court of Canada (Justice Valerie Miller) released her decision on a motion brought by the Crown for commission evidence to be taken in California from an art dealer (see our earlier post). The Court held that the art dealer’s testimony is material to the appeal, which deals with the valuation of artwork in the context of a charitable donation program, and ordered that a Commission and a Letter of Request be issued to allow the examination of Mr. Sloan in California under section 112 of the Tax Court of Canada Rules (General Procedure).

The Court took into account the following factors in exercising its discretion to make the order:

(a) the convenience of the person whom the party seeks to examine,

(b) the possibility that the person will be unavailable to testify at the hearing by reason of death, infirmity or sickness,

(c) the possibility that the person will be beyond the jurisdiction of the Court at the time of the hearing,

(d) the expense of bringing the person to the hearing,

(e) whether the witness ought to give evidence in person at the hearing, and

(f) any other relevant consideration.

The Court was satisfied that the Crown had fulfilled the traditional tests for commission evidence, namely:

1. the application is made bona fide;

2. the issue is one which the court ought to try;

3. the witnesses to be examined can give evidence material to the issue;

4. there is some good reason why he or she cannot be examined here.

The only real issue was materiality of the dealer’s evidence.  The Crown submitted that its:

. . . theory of the case is that there was no identifiable market for the prints before Coleman, Silver and Artistic [the promoters] created a market through the donation program. Mr. Sloan is able to give evidence concerning the origins of the donation program and the absence of any discernible market for the artwork before it was packaged as part of the Artistic program. His testimony is also necessary to authenticate documents necessary to challenge the appellant’s anticipated expert evidence.

The Court also noted that the Crown is entitled “to put its best foot forward in this litigation” and should be allowed to obtain the evidence necessary to accomplish that objective.

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Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen

On October 14, 2011, the Tax Court of Canada heard a Crown motion requesting an order for commission evidence in the case of Sackman v. The Queen (Court file 2002-4824(IT)G). The issue in the appeal is whether the amount Mr. Sackman is entitled to claim as a charitable deduction for artwork obtained from Artistic Ideas Inc. and donated to various charities is (a) the appraised value of the artwork or (b) the purchase price of the artwork.

The motion was brought by the Crown so that the Tax Court may receive the evidence of Mr. Paul Sloan (who lives in California) prior to the hearing pursuant to Section 119 of the Tax Court of Canada Rules (General Procedure). Mr. Sloan had provided works of art to Artistic Ideas Inc., which he obtained through past ownership of various art galleries in the United States.

The Crown argued that Mr. Sloan’s evidence is material. In light of the fact that Mr. Sackman obtained the artwork from Mr. Sloan, Mr. Sloan could provide evidence as to the true value of the artwork. The Crown described the test in GlaxoSmithKline Inc. v. The Queen, which sets out the factors the Tax Court will consider in determining whether to grant a request for commission evidence. The Crown submitted that the request satisfied those criteria.

Counsel for Mr. Sackman submitted that the crux of the GlaxoSmithKline test is to determine whether the evidence is relevant to the case. Counsel argued that the Crown had not provided any evidence or support, either in its written or oral submissions, to demonstrate why Mr. Sloan’s evidence will be material. Counsel also submitted that should the Court grant the request for commission evidence, Mr. Sackman would be prejudiced through yet another delay (the Notice of Appeal was filed on December 16, 2002). Finally, counsel argued that the value of the artwork was supported by reputable appraisers and the manner in which the artwork was acquired or the individual from whom it was acquired should have no bearing on the decision of the Court.

Justice Valerie Miller reserved judgment on the motion.

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Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen

Federal Court of Appeal Hears Arguments in CIBC World Markets Inc. v. The Queen: Judgment Reserved

On September 21, 2011, the Federal Court of Appeal (Sharlow, Layden-Stevenson, and Stratas, JJ.A.) heard an appeal by CIBC World Markets Inc. (“CIBC”) from a judgment of the Tax Court of Canada dismissing the taxpayer’s appeal of an assessment by the Minister of National Revenue under the Excise Tax Act.  For further details, see our earlier post.

The Appellant’s oral argument dealt with many of the points raised in the reasons for judgment of the Tax Court judge (Rip, CJ), specifically the interpretation of subsection 141.01(5) and section 225 of the Excise Tax Act.  Counsel for the Appellant was asked only a few questions from the bench during his submissions.

Counsel for the Respondent faced a number of questions from the panel.  Counsel for the Respondent argued that the Appellant had not adduced evidence to show that its revised input tax credit (“ITC”) allocation methodology was “fair and reasonable” within the meaning of subsection 141.01(5) of the Excise Tax Act.  The panel observed that the revised ITC allocation methodology had already been accepted by the Minister as a “fair and reasonable” method for subsequent years.  The panel was interested in hearing the Respondent’s submissions on what statutory basis exists in the Excise Tax Act precluding a taxpayer from using an alternative “fair and reasonable” allocation methodology in respect of prior years.

After a brief reply by Appellant’s counsel, the hearing concluded and the panel reserved judgment.

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Federal Court of Appeal Hears Arguments in CIBC World Markets Inc. v. The Queen: Judgment Reserved