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506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

On a procedural motion in 506913 N.B. Ltd. v. The Queen (2016 TCC 286), the Tax Court ordered the Respondent to answer all questions refused on discovery, reattend at a further discovery, and pay the Appellant’s costs on the motion.

The Tax Court also referred to the fictional interminable estate case of Jarndyce v. Jarndyce from Charles Dickens’ novel Bleak House in describing the slow progress of the litigation in 506913.

In 506913, the taxpayers filed their appeals in 2003 in respect of GST/HST for reporting periods in 1998 to 2000. The parties filed amended Notices of Appeal and Replies in 2010, and the Respondent was permitted to file further amended Replies in 2015.

The Tax Court judge’s reasons address the scope of discovery under sections 95 and 107 of the Tax Court of Canada Rules (General Procedure) and the test to be applied on a refusals motion. The Court considered the leading cases on this issue (see Canada v. Lehigh Cement Limited (2011 FCA 120)Canadian Imperial Bank of Commerce v. The Queen (2015 TCC 280)Baxter v. The Queen (2004 TCC 636) and Shell Canada Ltd. v. Canada, [1996] T.C.J. No. 1313), and included a comprehensive summary of the applicable principles (see para. 11 of 506913).

Additionally, regular observers of the Tax Court will be interested to see the Court’s reference to Jarndyce:

[34]        These are appeals that, in Dickensian language, drag their weary length before the Court. There have been several case management and motions judges involved in the more than thirteen years these appeals have been before this Court. A previous case management judge ordered that no further motions or other proceedings could be brought before the Court in these appeals prior to the hearing of the appeals. The Respondent’s motions to amend its replies were brought just before the deadline imposed on further motions. These appeals can be expected to proceed promptly to a hearing — and it would be best if the parties make that happen themselves.

The text of the first chapter of Bleak House states ” … but Jarndyce and Jarndyce still drags its weary length before the court, perennially hopeless.”

The only other reference in a Tax Court decision to Jarndyce that we’re aware of is found in the reasons of former Chief Justice Donald G.H. Bowman in Garber v. The Queen (2005 TCC 635) (see para. 6).

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506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

Fairmont: SCC Revises Common Law Test for Tax Rectifications

In a 7-2 decision in AG (Canada) v. Fairmont Hotels Inc. (2016 SCC 56), the Supreme Court of Canada has modified the common law test for rectification where the taxpayer has suffered an unintended and adverse tax result. The Court also clarified the standard of proof in respect of evidence of the parties’ intent on a rectification application.

A general intent to avoid or minimize tax is no longer sufficient to support an application for rectification.

In the companion case of Jean Coutu Group (PJC) Inc. v. AG (Canada), the Supreme Court reached a similar conclusion regarding tax intent and the modification of documents under the Quebec Civil Code (we shall follow-up with another post on this decision).

In Fairmont, the taxpayer brought an application to rectify certain share redemptions and to substitute a loan arrangement. The taxpayer argued that its intent at all times was to unwind some earlier loan arrangements on a tax-neutral basis.

The Ontario Superior Court of Justice (2014 ONSC 7302) cited Juliar et. al. v A.G. (Canada) (50 O.R. 3d 728) (Ont. C.A.) (Dentons was counsel to the successful taxpayers in Juliar) and other tax rectification cases. The Superior Court of Justice allowed the taxpayer’s application and unwound the impugned steps in the transaction and substituted the proper steps that accorded with the parties’ intention to avoid tax.

The Ontario Court of Appeal dismissed the Crown’s appeal (2015 ONCA 441).

See our previous posts on Fairmont here and here.

In the Supreme Court, the Crown argued that the result in Juliar conflicts with the Supreme Court’s decision in Performance Industries. The Crown urged the Court to import the requirements from Performance Industries to tax rectification cases.

In response, the taxpayer noted that Juliar (and most other tax rectification applications) are cases of mutual mistake, whereas Performance Industries was a case of unilateral mistake. Previous lower court decisions had rejected this attempt to import the Performance Industries requirements to tax rectifications. Further, the taxpayer noted the irony that the Crown was suggesting the result in Performance Industries should limit the availability of rectification when the Court’s decision in that case had in fact broadened the application of rectification as a remedy.

For the majority, Justice Brown stated that, under the new stricter test for tax rectification, a court may not modify an instrument merely because a party has discovered that its operation generates an adverse and unplanned tax liability. The Court stated:

[16] As I have recounted, both courts below considered the Court of Appeal’s decision in Juliar, coupled with the chambers judge’s findings, to be dispositive. In my respectful view, however, Juliar is irreconcilable with this Court’s jurisprudence and with the narrowly confined circumstances to which this Court has restricted the availability of rectification. …

[23] … Juliar does not account for this Court’s direction, in Shell Canada Ltd. v. Canada[1999] 3 S.C.R. 622, at para. 45, that a taxpayer should expect to be taxed “based on what it actually did, not based on what it could have done”. While this statement in Shell Canada was applied to support the proposition that a taxpayer should not be denied a sought-after fiscal objective merely because others had not availed themselves of the same advantage, it cuts the other way, too:  taxpayers should not be judicially accorded a benefit based solely on what they would have done had they known better. …

[30] This Court’s statement in Performance Industries (at para. 31) that “[r]ectification is predicated on the existence of a prior oral contract whose terms are definite and ascertainable” is to the same effect. The point, again, is that rectification corrects the recording in an instrument of an agreement (here, to redeem shares). Rectification does not operate simply because an agreement failed to achieve an intended effect (here, tax neutrality) — irrespective of whether the intention to achieve that effect was “common” and “continuing”. …

On the standard of proof, the Court stated:

[36] In my view, the applicable standard of proof to be applied to evidence adduced in support of a grant of rectification is that which McDougall identifies as the standard generally applicable to all civil cases: the balance of probabilities. But this merely addresses the standard, and not the quality of evidence by which that standard is to be discharged. As the Court also said in McDougall (at para. 46), “evidence must always be sufficiently clear, convincing and cogent”. A party seeking rectification faces a difficult task in meeting this standard, because the evidence must satisfy a court that the true substance of its unilateral intention or agreement with another party was not accurately recorded in the instrument to which it nonetheless subscribed. A court will typically require evidence exhibiting a high degree of clarity, persuasiveness and cogency before substituting the terms of a written instrument with those said to form the party’s true, if only orally expressed, intended course of action.

In conclusion, the Court stated:

[38] To summarize, rectification is an equitable remedy designed to correct errors in the recording of terms in written legal instruments. Where the error is said to result from a mistake common to both or all parties to the agreement, rectification is available upon the court being satisfied that, on a balance of probabilities, there was a prior agreement whose terms are definite and ascertainable; that the agreement was still in effect at the time the instrument was executed; that the instrument fails to accurately record the agreement; and that the instrument, if rectified, would carry out the parties’ prior agreement.

The Court allowed the Crown’s appeal, with the result that the taxpayer’s application for rectification of the impugned transactions failed.

In dissent, Justice Abella stated that, in her view, there was no reason to impose a stricter standard in tax cases, and on the facts of the Fairmont case rectification should have been granted:

[71] It is true that a taxpayer should expect to be taxed based on what is actually done, not based on what could have been done (Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622, at para. 45), but this principle does not deprive equity of a role where what a party or parties genuinely intended to do was transcribed or implemented incorrectly.

[72] On the other hand, parties should not be given carte blanche to exploit rectification for purposes of engaging in retroactive tax planning.  Courts will not permit parties to undo decisions simply because they have come to regret them later.  Allowing parties to rewrite documents and restructure their affairs based solely on a generalized and all-encompassing preference for paying lower taxes is not consistent with the equitable principles that inform rectification. …

[83] The requirements for rectification in the tax context articulated in AES are, in my respectful view, functionally equivalent to the test under the common law.  Civil law and common law rectification in the tax context are clearly based on analogous principles, namely, that the true intention of the parties has primacy over errors in the transcription or implementation of that agreement, subject to a need for precision and the rights of third parties who detrimentally rely on the agreement.

[84] That means that there is no principled basis in either the common or civil law for a stricter standard in the tax context simply because it is the government which is positioned to benefit from a mistake.  The tax department is not entitled to play “Gotcha” any more than any other third party who did not rely to its detriment on the mistake.

The implications of the Supreme Court’s decisions in Fairmont and Jean Coutu are far-reaching, as they significantly change the threshold requirements for granting rectification in tax cases.

The result in these cases also raises the issue of whether other equitable remedies (i.e., rescission, declaratory orders, etc.) may be available, and whether taxpayers may seek alternative remedies if the requirements for rectification may not be satisfied.

The broader impact of the Court’s decision in Fairmont is also unclear. Fairmont was a case in which the taxpayer sought to correct various documents relating to steps in a commercial transaction. How will the Fairmont principles in respect of intent in the commercial context impact rectification applications in respect of wills and trusts?

Tax professionals should consider this new test for tax rectifications to determine the appropriate manner for correcting mistakes that result in unintended and adverse tax consequences.

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Fairmont: SCC Revises Common Law Test for Tax Rectifications

OCAC Publishes Report on Voluntary Disclosure Program

The Offshore Compliance Advisory Committee (OCAC) has published its report on the CRA’s Voluntary Disclosure Program, the first of several anticipated OCAC reports in furtherance of the OCAC’s mandate to provide advice to the Minister of National Revenue and the Canada Revenue Agency (CRA) on administrative strategies to deal with offshore compliance.

The OCAC’s recommendations in respect of the voluntary disclosure program include:

  • Less generous VDP relief in certain circumstances
  • Limited access for repeat users
  • Requirement to pay tax and interest within specific time frames
  • Insistence on all necessary and relevant information
  • No relief from transfer pricing penalties (see subsection 247(3) of the ITA)
  • Disclosure of identity of advisors who assisted with non-compliance
  • Consideration of higher-level approval requirements
  • Introduction of procedures for review by specialists in complex cases
  • Elimination of right of objection in respect of VDP reassessments
  • Consideration of amending VDP in respect of failure to file T1135 forms
  • Continuation of similar treatment for domestic and offshore non-compliance

In response, the Minister of National Revenue Hon. Diane Lebouthillier stated,

“I welcome the Offshore Compliance Advisory Committee’s first report and wish to thank the committee for its unique insight and for providing its invaluable experience to help improve the tax system for the benefit of hard-working middle class Canadians.”

“Our government has made it a priority to make the tax system fairer for middle class Canadians and to crack down on those who cheat and who do not pay their share. That is why we created the Offshore Compliance Advisory Committee – to advise us on the best ways to improve our tax system. We will continue with our efforts to crack down on tax cheats. My message is clear: the trap is closing.”

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OCAC Publishes Report on Voluntary Disclosure Program

SCC Rectification Decisions to be Released on Friday December 9

The Supreme Court of Canada’s decisions in two rectification cases, AG (Canada) v. Fairmont Hotels Inc. (Docket #36606) and Jean Coutu Group (PJC) Inc. v. AG (Canada) (Docket #36505), will be released on Friday December 9, 2016 at 9:45 a.m.

See our previous posts on Fairmont here and here.

The Supreme Court’s decisions in Fairmont and Jean Coutu will be the first decisions from the Court on rectification since AES and Jean Riopel.

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SCC Rectification Decisions to be Released on Friday December 9

Auditor General Provides Recommendations for Improving CRA Review of Objections

Under the federal Income Tax Act, the Canada Revenue Agency must consider a taxpayer’s objection and must vacate, confirm or vary the underlying tax assessment. This review must be completed “with all due dispatch”.

Unfortunately, no specific timeline is required for the CRA’s review of an objection (unlike the many specific deadlines imposed on taxpayers pursuant to the Income Tax Act or otherwise). Generally, a taxpayer’s only recourse in a case of excessive delay is to request interest relief or make a service complaint to the Office of the Taxpayer’s Ombudsman. The CRA has stated that it is aware of these potential delays, and has implemented service standards in respect of the various types of objections it receives each year

On November 29, 2016, the Office of the Auditor General of Canada released its report on the CRA’s review of income tax objections and included the following summary of its conclusions:

We concluded that the Canada Revenue Agency did not process income tax objections in a timely manner.

Although the Agency had developed and reported performance indicators for the objection process, the indicators were incomplete and inaccurate. Specifically, there was no indicator or target for the time that taxpayers should wait for decisions on their objections.

In addition, the Agency did not adequately analyze or review decisions on income tax objections and appeals, and there was insufficient sharing of the results of these objection and court decisions within the Agency.

This issue is very well-known to many Canadians (and their professional tax advisors) who have filed and pursued objections, and it is not surprising when you consider the CRA currently has an inventory of more than 171,000 objections in respect of personal and corporate income taxes totaling more than $18 billion.

Interestingly, the report notes that the amount of federal income tax dollars in dispute more than tripled from $6.2 billion in 2005-06 to $18.8 billion in 2013-14, and the amount in dispute has remained around $18 billion in 2014-15 and 2015-16.

The report recommends the following:

  • The CRA should provide timelines for resolving objections
  • The CRA should develop and implement an action plan with defined timelines and targets for reducing the inventory of objections
  • The CRA should review the objection process to identify and implement modifications to improve the timely resolutions of objections
  • The CRA should modify its performance indicators so that it may accurately measure and report on its performance
  • The CRA should review and share the results where objections are decided in favour of taxpayers in such a way that may improve the quality of audit results

Minister of National Revenue Hon. Diane Lebouthillier released a statement in response to the Auditor General’s report, and stated (in part): “An action plan is already underway to reduce processing times and it will be ready at the beginning of 2017.”

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Auditor General Provides Recommendations for Improving CRA Review of Objections

CRA Creates New Offshore Compliance Advisory Committee

The CRA continues its efforts to strengthen tax compliance in Canada.

Following the CRA’s recent announcement of its efforts to crackdown on international tax evasion, the CRA announced the creation of a new Offshore Compliance Advisory Committee. From the CRA’s news release:

… The Offshore Compliance Advisory Committee (OCAC) will be composed of seven independent experts with significant legal, judicial and tax administration experience.

The members will provide input to the Minister and the CRA on additional administrative strategies for offshore compliance to build on the Budget 2016 investment.

The OCAC’s first meeting will be in spring, 2016, and its initial areas of focus will include:

  • Strategies to help alleviate and discourage offshore non-compliance;
  • Administrative policies being used by other tax administrations to address this global issue
  • Advice to the CRA in moving forward with its measurement of the tax gap;
  • Additional strategies and practices related to promoters of tax schemes; and
  • Potential ways to improve the CRA’s criminal investigation functions.

The OCAC will be chaired by Dr. Colin Campbell. Dr. Campbell is currently Associate Professor of Law at Western University and a published author on tax matters. The Committee’s Vice-Chair is Kimberley Brooks, Associate Professor of the Schulich school of Law at Dalhousie University. Ms. Brooks, a member of the Canadian Tax Foundation Board of Governors and a member of the International Fiscal Association, practiced law in Toronto and the United Kingdom.

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CRA Creates New Offshore Compliance Advisory Committee

CRA Provides Update on Efforts to Combat Tax Evasion

Following the release of the “Panama Papers” and the Canadian federal government’s budget announcement that additional resources will be directed to the CRA to collect existing tax debts and combat tax evasion, the CRA has provided an update on its “crack down on tax evasion and tax avoidance”.

The CRA stated that the first jurisdiction that will be investigated is the Isle of Man, which the CRA had identified as the recipient of CDN$860 million of electronic funds transfers by approximately 800 taxpayers. Additional jurisdictions and financial institutions will be included in a second investigative project starting in May 2016.

The CRA also announced several other aspects of its program including the hiring of new auditors/specialists, a focus on tax schemes targeted to wealthy taxpayers, investigations of high-risk multinational corporations, use of investigative tools and technology, larger investigation teams, international collaboration, and the formation of an independent advisory committee on tax evasion and aggressive tax planning.

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CRA Provides Update on Efforts to Combat Tax Evasion

Tax Court Introduces Common Books of Authorities Project

The Tax Court has implemented a new common books of authorities program for its Toronto courtrooms that will eliminate the need for taxpayers to print copies of certain frequently-cited (and lengthy) authorities. The pilot project will apply only to general procedure appeals in which both parties are represented by counsel.

Parties will not be required to include in their book of authorities those cases that are included in the Court’s list of 27 commonly-cited decisions (i.e., those on statutory interpretation, source, onus of proof, capital/income, GAAR, CPP/EI, etc.). However, the Court will require the parties to include in their book of authorities printed copies of the passages from those cases on which they intend to rely (rather that the entire decision). A list of the cases included in the Court’s common books of authorities is detailed on the Court’s Notice to the Public and the Profession (March 31, 2016).

The Tax Court stated that this pilot project may be expanded to other cities in the future.

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Tax Court Introduces Common Books of Authorities Project

CRA: Drones Depreciable at 25%

Aerial drones appear to have many commercial uses. If you use a drone in your business, you may be able to deduct capital cost allowance in respect of the drone.

In CRA Document 2016-0633111E5 “CCA Class of a Drone” (March 11, 2016), the CRA provided its views on the correct classification of a drone for the purposes of the capital cost allowance (“CCA”) provisions of the Income Tax Act.

Under the CCA provisions of the Act, a taxpayer may deduct an amount in respect of the cost of certain property used in a business. The classes of property and the applicable allowance rates are described in section 1100 and Schedule II of the Income Tax Regulations.

The CRA stated that, where the cost of a property qualifies for inclusion in the classes of property described in Schedule II, the specific class of the property is determined by reference to the specific functions of the property and the circumstances of its usage.

The CRA stated that “drone” is not defined in the Act or Regulations, but that the CRA understands that an aerial drone is a type of unmanned aircraft. The CRA also stated that the Canadian Aviation Regulations “describe aerial drones as a type of aircraft” (ed. note: we were unable to find a reference to “drone” in the Canadian Aviation Regulations, but the definition of “unmanned air vehicle” appears to include aerial drones).

Accordingly, in the CRA’s view, an aerial drone would be included in Class 9(g) (“an aircraft”) of Schedule II of the Regulations, which has a CCA rate of 25 percent of the undepreciated capital cost of the property in the class.

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CRA: Drones Depreciable at 25%

Kruger: Appeal Allowed … Crown Awarded Costs

How should the Tax Court award costs where the taxpayer’s appeal was allowed but no changes were made to the assessment at issue?

This unusual situation was considered by the Tax Court in Kruger Incorporated v. The Queen (2016 TCC 14).

In the main appeal (2015 TCC 119, under appeal to the Federal Court of Appeal (A-296-15)), the Tax Court had allowed the taxpayer’s appeal on the basis that certain foreign exchange option contracts should be valued in accordance with subsection 10(1) of the Income Tax Act (see our previous post here). However, success in the appeal was divided because certain of the taxpayer’s other foreign exchange option contracts were to be valued on a realization basis, as assessed.

The Tax Court asked the parties to provide submissions on costs.

The taxpayer asked for costs on the basis that the appeal had been allowed. The Crown asked for costs on the basis that the result of the proceeding was substantially in its favour as to the amounts in issue and the determination of the issue.

Interestingly, after the Court’s decision allowing the appeal, the parties discovered that the underlying assessment would not change. The Tax Court called this an “anomaly”.

The Tax Court stated that, despite its decision allowing the appeal, the Crown was the successful party. The case law on costs cautions against awarding amounts based on the success of particular arguments (see, for example, General Electric Capital Canada Inc. v. The Queen (2010 TCC 490)). However, the Tax Court noted that this was not a case in which a party won a Pyrrhic victory, as each party had been successful to different degrees.

The Court considered the factors listed in section 147 of the Tax Court of Canada Rules (General Procedure), including the amounts in issue, the volume of work, the complexity of the matter, and the conduct of the parties. The Court noted that two of the Crown’s witnesses were of significant assistance to the Court.

The Court concluded that no rule prohibits a judge from distributing costs between the parties, although this is not encouraged. In this case, it was appropriate to recognize the Crown’s success.

The Court awarded costs to the Crown in respect of two witnesses, and 50 percent of all other costs. In the Court’s view, this was an unconventional but reasonable award.

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Kruger: Appeal Allowed … Crown Awarded Costs