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Judicial review applications challenging Minister’s alleged violation of Voluntary Disclosure Policy and MAP agreement allowed to proceed: Sifto Canada Corp. v. MNR

In Sifto Canada Corp. v. Minister of National Revenue, 2013 FC 214, Prothonotary Aalto of the Federal Court rejected the Crown’s motion to strike out judicial review applications filed by Sifto Canada Corp. challenging decisions made by the Minister of National Revenue to:

(a) assess penalties contrary to the terms of the Voluntary Disclosure Program; and

(b) assess transfer pricing adjustments contrary to an agreement between the Competent Authorities of Canada and the United States on the appropriate transfer price under Article XXVI of the Canada-U.S. Tax Treaty (known as the “Mutual Agreement Procedure” or “MAP”).

The Crown made the usual argument that section 18.5 of the Federal Courts Act precludes such judicial review applications (for background, see our earlier post on the JP Morgan decision mentioned below).  Prothonotary Aalto had this to say about the Crown’s argument:

[8]    One of the mantras of the Minister of National Revenue is that the judicial review process should not be used to circumvent the comprehensive code for the assessment and collection of taxes set out in the Income Tax Act (ITA) and for which the Tax Court of Canada (TCC) is given exclusive jurisdiction.  As a general proposition, this is a correct approach to the taxation regime in Canada.  However, cases such as Chrysler Canada [2008 FC 727, aff’d 2008 FC 1049], JP Morgan Asset Management [2012 FC 651, aff’d 2012 FC 1366] and Canadian Pacific Railway [2012 FC 1030; aff’d 2013 FC 161] come to this Court and fall within this Court’s jurisdiction because of their unique factual circumstances.  This case, like those, revolves around a factual scenario which takes it out the pure assessment or appeal regime of the ITA and the jurisprudence recognizes that such matters can come within the jurisdiction of this Court.

Prothonotary Aalto explained his reasoning for allowing the applications to proceed:

[22]    In this case there are agreements which are alleged to have been entered into between Sifto and the Respondent which are alleged to have been breached.  These facts on their face do not engage issues of the correctness of assessments or appeals under the ITA.  They are therefore not bereft of any chance of success.  To the extent the breach of agreements and other allegations made in these applications engage matters beyond the scope of the correctness of an assessment or re-assessment they are not within the jurisdiction of the TCC.

[23]    The conduct of officials in CRA cannot be considered in determining the correctness of assessments [footnote omitted].  Such matters must be asserted in another Court.  Thus, the conduct of CRA officials as asserted by Sifto in this case relating to understandings and agreements cannot be considered by the TCC.

[24]    These applications engage more than a review of assessments to determine their correctness.  Therefore, it cannot be said that these applications are bereft of any chance of success.

In addition to arguing that the applications should be struck out in their entirety, the Crown argued in the alternative that certain allegations should be struck out or that the applications be stayed (by way of ”extension of time”) until the final determination of appeals against the assessments issued as a result of the impugned decisions.  Prothonotary Aalto had little difficulty dismissing each of the Crown’s alternative arguments.

The Crown has already made a motion asking a Federal Court judge to set aside the Prothonotary’s decision.  In light of the decisions of the Federal Court in Chrysler Canada, JP Morgan and Canadian Pacific, the Crown may very well be facing an uphill battle.

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Judicial review applications challenging Minister’s alleged violation of Voluntary Disclosure Policy and MAP agreement allowed to proceed: Sifto Canada Corp. v. MNR

Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed

In a decision released on November 26, 2012 in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency (Docket T-1278-11), Justice Leonard Mandamin of the Federal Court dismissed the Crown’s appeal of an order by Prothonotary Aalto in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency in which the Crown moved unsuccessfully to strike out a judicial review application on the basis that the taxpayer had no possibility of success in seeking to set aside the decision of the Minister of National Revenue (the “Minister”) to assess Part XIII tax in a manner contrary to the Minister’s own policy.

This decision is the latest in a series of defeats for the Crown on this issue.  Since the decision of the Supreme Court of Canada in Canada v. Addison & Leyen Ltd., [2007] 2 S.C.R. 793, there has been a vigorous debate around the limits of judicial review of Ministerial action involving the decision to issue an assessment and the scope of section 18.5 of the Federal Courts Act which reads as follows:

Despite sections 18 and 18.1, if an Act of Parliament expressly provides for an appeal to the Federal Court, the Federal Court of Appeal, the Supreme Court of Canada, the Court Martial Appeal Court, the Tax Court of Canada, the Governor in Council or the Treasury Board from a decision or an order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except in accordance with that Act.

The Minister has consistently intepreted the decision of the Supreme Court in Addison & Leyen and section 18.5 of the Federal Courts Act as precluding judicial review of the Minister’s decision to issue an assessment.  Thus far, however, the Crown has been largely unsuccessful in striking out such judicial review applications in Federal Court.  See, for example, the decision of Prothonotary Aalto in Chrysler Canada Inc. v. Canada and the decision of Justice Hughes on appeal in Chrysler Canada Inc. v. Canada.

By way of background, the Minister assessed Part XIII tax against JP Morgan in respect of fees it had paid to non-resident affiliates between 2002 and 2008.  JP Morgan applied for judicial review of the Minister’s decision to assess it for amounts payable under Part XIII of the Income Tax Act.  In particular, JP Morgan alleged that in exercising discretion to assess for years other than the current year and the two immediately preceding years

. . . CRA did not consider, or sufficiently consider, CRA’s own policies, guidelines, bulletins, internal communiqués and practices which would otherwise have limited assessments to the current tax year and the two (2) immediately preceding years.  CRA thus acted arbitrarily, unfairly, contrary to the rules of natural justice and in a manner inconsistent with CRA’s treatment of other tax payers.

The Crown moved to strike the application for judicial review, relying on section 18.5 of the Federal Courts Act.  Citing his earlier decision in Chrysler Canada, the Prothonotary dismissed the Crown’s motion.  He held that JP Morgan’s judicial review application dealt with:

. . . the discretion to assess as described in various policies of CRA.  That decision to apparently depart from policies and assess is subject to judicial review and is the type of situation that is contemplated by Addison & Leyen.  The ITA provides that the Minister “may” assess not “shall” assess which connotes a discretionary decision.  The decision of the Minister to apparently depart from policies is not otherwise reviewable [by the Tax Court of Canada] and therefore is subject to judicial review.

Consistent with his earlier decision in Chrysler Canada, the Prothonotary held that “JP Morgan only seeks judicial review of the decision to reassess which is alleged to be contrary to policies of CRA which were in place.  No attack on the reassessments is in play.” In his view, the case was about the Minister’s discretion to assess, not the assessments themselves.

Justice Mandamin dismissed the Crown’s appeal of the Prothonotary’s decision as he did not find that the Prothonotary’s Order was clearly wrong in that the exercise of discretion was based upon a wrong principle or a misapprehension of the facts and there was no improper exercise of discretion on a question vital to the case arising with the Prothonotary’s dismissal of the Crown’s motion to strike.

It is not yet known whether the Crown will appeal the decision of Justice Mandamin in JP Morgan, but it would not be surprising in light of the fact that several Crown motions to strike such judicial review applications are currently before the Federal Court.

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Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed