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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

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

Fairmont: OCA Dismisses Crown’s Appeal in Rectification Case

The Ontario Court of Appeal has dismissed the Crown’s appeal in Fairmont Hotels Inc. v. A.G. (Canada) (2015 ONCA 441).

In Fairmont (2014 ONSC 7302), the taxpayer was successful on an application for rectification of certain corporate transactions (see our previous post here).

On appeal, the Crown argued that the lower court had misapplied the test for rectification because the parties had not determined the specific manner in which their intention to avoid tax would be carried out. In the Crown’s view, the lower court’s judgment sanctioned retroactive tax planning.

The Court of Appeal disagreed:

[8]          In these circumstances, relying on this court’s decision in Juliar, the application judge held that the respondent was entitled to rectify the relevant corporate resolutions to correct the mistaken share redemptions.  This result, the application judge noted, would avoid the imposition of an unintended tax burden that the respondent had sought to avoid from the outset, as well as an unintended tax revenue windfall to the CRA arising from the mistaken share redemptions.

[9]          On the factual findings of the application judge, set out above, and the binding authority of Juliar, we see no basis for intervention with the application judge’s discretionary decision to grant rectification.

[10]       Juliar is a binding decision of this court.  It does not require that the party seeking rectification must have determined the precise mechanics or means by which the party’s settled intention to achieve a specific tax outcome would be realized. Juliar holds, in effect, that the critical requirement for rectification is proof of a continuing specific intention to undertake a transaction or transactions on a particular tax basis.

[11]       In this case, on the application judge’s findings, the respondent had a specific and unwavering intention from the outset of its dealings with Legacy to ensure that the Legacy-related transactions were tax neutral and, to that end, that no redemptions of the relevant preference shares should occur.  Nonetheless, by mistake, the redemptions were authorized by corporate resolutions.

[12]       Contrary to the appellant’s argument, in these circumstances, it was unnecessary that the respondent prove that it had determined to use a specific transactional device – loans – to achieve the intended tax result.  That the respondent mistakenly failed to employ an appropriate transactional device to achieve the intended tax result does not alter the nature of the respondent’s settled tax plan: tax neutrality in its dealings with Legacy and no redemptions of the preference shares in question.

[13]       At the end of the day, therefore, Juliar and the application judge’s factual findings, described above, are dispositive of this appeal.  It is not open to a single panel of this court to depart from a binding decision of this court.

[14]       The appeal is dismissed. …

The Court of Appeal’s decision in Fairmont is an important affirmation of the result and reasoning in Juliar v. A.G. (Canada) ((2000), 50 O.R. (3d) 728 (Ont. C.A.)) (Dentons was counsel for the successful taxpayer).

Recently, the Crown has been aggressively arguing in rectification cases that Juliar was either wrongly decided or should be narrowly applied (two Alberta cases have followed this argument – see, for example, Graymar Equipment (2008) Inc. v A.G. (Canada) (2014 ABQB 154) and Harvest Operations Corp. v. A.G. (Canada) (2015 ABQB 237)).

However, in TCR Holding Corporation v. Ontario (2010 ONCA 233) and Fairmont, the Ontario Court of Appeal has clearly rejected those arguments. This should put an end to the Crown’s arguments about Juliar – at least in Ontario.

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Fairmont: OCA Dismisses Crown’s Appeal in Rectification Case

BP Canada: CRA Entitled to Tax Accrual Working Papers

In BP Canada Energy Company v. Minister of National Revenue (2015 FC 714), the Minister brought an application pursuant to subsection 231.7(1) of the Income Tax Act (Canada) (the “Act”) before the Federal Court of Canada.

The Minister sought a compliance order requiring BP Canada to provide tax accrual working papers prepared by BP Canada’s own employees which were requested by the Canada Revenue Agency (“CRA”) during its audit pursuant to subsection 231.1(1) of the Act.

The Federal Court allowed the application and granted the compliance order.


Under subsection 230(1) of the Act, a taxpayer must keep books and records in such form and containing such information as will enable the taxes payable under the Act to be determined.

Under sections 231.1 to 231.7, the CRA may request and a taxpayer may be required to produce such book and records. Additionally, the CRA has routinely made broad requests for tax accrual working papers.

Taxpayers are generally reluctant to produce tax accrual working papers to tax auditors because these documents could provide a roadmap of the taxpayer’s tax positions, an estimate potential exposure for tax, and an outline the possible assessing position the tax authorities may take. Moreover, these documents are required to be prepared pursuant to securities regulations and accounting standards rather than pursuant to the Act or for the determination of taxes payable.

In “Acquiring Information from Taxpayers, Registrants and Third Parties” the CRA stated that it will follow a policy of restraint in requesting tax accrual working papers during its regular income tax audits – namely, that it would only request them if a proper examination could not be carried out without access to those files.

In BP Canada, the CRA explicitly stated that it sought to obtain BP’s tax accrual working papers to assist the CRA in expediting its audit not only for the years for which the tax accrual working papers were prepared but also for subsequent tax years – thus implying that the documents were not required for the audit but were simply helpful as a matter of convenience for the auditor.


BP Canada submitted that tax accrual working papers are subjective opinions regarding tax filing positions and are not required to establish the tax payable under the Act and therefore do not qualify as books and records that are required to be provided to support a tax filing position.

Moreover, BP Canada submitted that, even if the statutory requirements for a compliance order are met, the Federal Court must justify the exercise of its discretion to grant the order.

In this case, BP Canada argued that such discretion could not be justified because it would constitute a compulsory self-audit by the taxpayer and would violate the Minister’s own policy not requiring such documents to be produced.


In granting the compliance order, the Federal Court found while the Minister may not need the tax accrual working papers to complete an audit, if the Minister wants them, she should have them.  The Federal Court did not accept BP’s “roadmap” argument and put weight on the fact that the tax accrual working papers are already prepared and thus no additional work would be required by the taxpayer.

The Federal Court also stated even though the Act does not require these types of documents be retained, if they are maintained for another reason they can be requested by the Minister.

Finally, the Federal Court relied on the Federal Court of Appeal case Tower v. MNR (2003 FCA 307) in finding that tax accrual working papers do fit within the scope of subsection 231.1(1) which provides that the CRA may request “the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act”.

The Federal Court endorsed the Minister’s audit approach in this case, stating that the Minister’s request for tax accrual working papers is not part of a fishing expedition if the Minister knows that she wants a clear roadmap to be used for current and future audits (see para. 38) (we note, however, that the decision does not consider whether a clear sign of a fishing expedition may be a broad request by the CRA for a roadmap of the taxpayer’s tax considerations).

The decision in BP Canada clearly outlines the Federal Court’s opinion that tax accrual working papers should be produced when requested pursuant to section 231.1 of the Act. The decision serves as an important reminder that taxpayers should be cautious in preparing and maintaining tax accrual working papers.


BP Canada: CRA Entitled to Tax Accrual Working Papers

TCC: Unpaid Dividend Refund Is Not a Refund

A pair of recent Tax Court of Canada judgments highlight the unsustainable position taken by the CRA that a statute-barred dividend refund that cannot be recovered by the taxpayer nonetheless reduces taxpayer’s “refundable dividend tax on hand” (“RDTOH”) balance.

We have written in this space before about the Tax Court’s strict interpretation of the three-year time limitation to receive a dividend refund under subsection 129(1) of the Income Tax Act. A consequence of this limitation is that where a taxpayer has missed the three-year filing deadline to obtain a dividend refund there can be “trapped” RDTOH which will require that the corporation pay a taxable dividend at some point in the future in order receive a dividend refund. The CRA, though, continues to take the position that the original taxable dividend reduces the RDTOH balance even where the dividend refund cannot be paid due to the three-year window being missed.

This issue was recently considered in two cases:  Presidential MSH Corporation v. The Queen (2015 TCC 61) and Nanica Holdings Limited v. The Queen (2015 TCC 85). In both cases, the issue was the same – whether the definition of “dividend refund” in subsection 129(3) refers to an amount that was paid or credited to the corporation or is merely a notional account that is automatically reduced notwithstanding that the corporation did not receive a refund. This latter position had been explicitly rejected by the Tax Court in Tawa Developments Inc. v. The Queen (2011 TCC 440). In Presidential and Nanica, the Tax Court held that an unpaid dividend refund is not a refund at all.

Yet the CRA apparently continues to enforce the Act as though the dividend refund is notional – no amount is required to be paid in order for the corporation to obtain a “dividend refund” and therefore the RDTOH balance is reduced without payment.

Fortunately, the Tax Court takes a more sensible interpretation in the recent decisions.

In Presidential, the Court undertook a textual, contextual and purposive analysis of the dividend refund concept, concluding that a payment was required before the RDTOH balance could be reduced. In rendering his judgement, however, Justice David Graham noted that the relevant provisions lack clarity and urged Parliament to take corrective measures to clear up the language in this area.

In Nanica, which was released after the decision in Presidential, Justice Valerie Miller reached the same conclusion, ultimately agreeing with the earlier decisions that “the phrase ‘dividend refund’ in section 129 is the refund of an amount”. There is no reduction of the RDTOH balance where the corporation does not receive a refund.

In light of these decisions, we hope the CRA will align its assessing position with the clear interpretation of the Tax Court.


TCC: Unpaid Dividend Refund Is Not a Refund

FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

The Tax Court has in recent years demonstrated a willingness to use cost awards to control the parties’ conduct. This includes awarding lump-sum amounts, which may depart markedly from the “tariff” amounts described in Tariff B of Schedule II of the Tax Court’s General Procedure Rules. Further, the Court has wrestled with the weight – if any – that the parties’ conduct prior to an appeal should carry in respect of a cost award.

In Martin v. The Queen (2013 TCC 38), the taxpayer successfully challenged a section 160 assessment in respect of certain amounts paid to her by her spouse. There was evidence the auditor had deliberately misled the taxpayer during an audit, and the taxpayer had spent considerable time and money enduring the audit and objection process before her ultimate success in the Tax Court.

On the issue of costs, the taxpayer asked for (i) solicitor-client costs, or (ii) a fixed amount under Rule 147, or (iii) the tariff costs. The Crown argued that only tariff costs should be awarded. Describing the case as “very unusual, difficult, and hopefully exceptional, case”, the Tax Court considered the pre-appeal conduct of the CRA (among other factors) and awarded the taxpayer a lump sum amount of $10,635 (2014 TCC 50).

The Tax Court repeated its view that costs may be awarded against the Crown where it pursues a meritless case in the Tax Court:

[21] … There are perhaps some arguments and some cases that the Canada Revenue Agency just should not pursue. The Crown is not a private party. By reassessing a taxpayer and failing to resolve its objection, the Crown is forcing its citizen/taxpayers to take it to Court. If the Crown’s position does not have a reasonable degree of sustainability, and is in fact entirely rejected, it is entirely appropriate that the Crown should be aware it is proceeding subject to the risk of a possibly increased award of costs against it if it is unsuccessful.

The Crown appealed and the taxpayer cross-appealed.

The Federal Court of Appeal noted that a discretionary cost award should only be set aside if the judge made an error in principle or if the award is plainly wrong (see Hamilton v. Open Window Bakery (2004 SCC 9) and Sun Indalex Finance LLC v. United Steelworkers (2013 SCC 6)).

In the Court of Appeal, the Crown alleged that the Tax Court judge had made an error of fact  (i.e., the finding that the CRA auditor had been deceitful in providing incorrect information), and an error of law (i.e., relying on the auditor’s deceitful conduct as a basis for awarding increased costs).

On the first issue, the Court held there was no error of law because the Crown admitted the auditor had engaged in deceitful behavior. On the second issue, the Court noted that conduct that occurs prior to a proceeding may be taken into account if such conduct unduly and unnecessarily prolongs the proceeding (see Merchant v. Canada (2001 FCA 19) and Canada v. Landry (2010 FCA 135)). However, the Court stated that the audit and objection stages are not a “proceeding”, which is defined in section 2 of the Rules as an appeal or reference. Accordingly, the Court stated, “the Judge erred in principle in allowing an amount incurred in respect of costs unrelated to the appeal which were incurred at the objection stage. Those expenses, by definition, were not incurred as part of the appeal ‘proceeding'”.

In respect of the cross-appeal, the Court of Appeal considered whether the lower court had erred in declining to award solicitor-client costs. The Court held there was no error because such costs could not include pre-appeal costs, and even if such costs could be awarded, solicitor-client costs are awarded only where there has been reprehensible, scandalous or outrageous misconduct connected with the litigation (see also Scavuzzo v. The Queen (2006 TCC 90)).

The Court allowed the appeal, dismissed the cross-appeal, set aside the lower court’s cost award and substituted a cost award of $4,800 plus disbursements and taxes (2015 FCA 95).

The Court of Appeal decision in Martin may have failed to address all relevant provisions of Rule 147, which arguably provide for very broad discretion for awarding costs. For example, paragraph 147(3)(j) of the Tax Court Rules states the Court may consider “any other matter relevant to the question of costs”.

The Court of Appeal’s decision also raises an issue regarding the circumstances in which deceitful pre-appeal conduct may unduly or unnecessarily prolong a proceeding – wouldn’t such a hindrance follow in every case of deceitful conduct by a party?

Further, the Court of Appeal appeared particularly concerned that the taxpayer’s pre-appeal expenses could not be addressed in the cost award, but it seems clear that the Tax Court had exercised its discretion to award a lump sum based not only on the quantum of the pre-appeal costs but on the existence of the auditor’s deceitful behavior and the Crown’s obstinate approach and refusal to resolve – at any stage – an uncomplicated tax dispute.

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FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

Loss Determinations: No Time Like the Present

Under subsection 152(1.1) of the Income Tax Act, a taxpayer may apply for a determination of losses for a tax year.

A taxpayer typically requests a loss determination after the CRA has issued a nil assessment. This is because no objection may be filed against a nil assessment, and thus one of the ways to challenge the adjustments underlying the nil assessment (i.e., the adjustments to losses or other tax balances) is to force the issuance of a Notice of Determination/Redetermination of Losses, which then triggers the right to file a Notice of Objection. If the taxpayer does not request a loss determination, the taxpayer may challenge the quantum of the losses in a subsequent year in which the losses are applied.

However, the timing of the loss determination request is an important issue – if the losses cannot be applied until several years after the tax year at issue, this could create uncertainty and additional (and perhaps burdensome) record-keeping requirements for the taxpayer.

This issue was considered in CRA Document No. 2014-0550351C6 (November 18, 2014), in which the CRA was asked whether it would issue a determination of loss to a taxpayer who requests one upon filing of its return (i.e., rather than at the later time when a nil assessment is issued).

Under subsection 152(1.1), where the CRA ascertains the amount of a taxpayer’s non-capital loss or net capital loss (or certain other losses), and the taxpayer has not reported that amount on the taxpayer’s return, the taxpayer may request that the CRA determine the amount of the loss and the CRA must make that determination and send a notice of determination to the taxpayer.

In the present case, the CRA stated that subsection 152(1.1) provides that two requirements must be satisfied before a loss determination may be made: First, the CRA must ascertain the amount of the taxpayer’s loss to be an amount that differs from the amount reported by the taxpayer in its return, and (ii) the taxpayer requests the loss determination.

In Inco Limited v. The Queen (2004 TCC 373), the Tax Court stated,

[13] … subsection 152(1.1) of the Act clearly contemplates and establishes a procedure involving sequential steps or events that must take place in order for there to be a valid loss determination. These steps are: (a) the Minister ascertains the amount of a taxpayer’s non-capital loss for a taxation year in an amount that differs from the one reported in the taxpayer’s income tax return; (b) the taxpayer requests that the Minister determine the amount of the loss; (c) the Minister thereupon determines the amount of the loss and issues a notice of loss determination to the taxpayer.

We also note that, in a previous technical interpretation (CRA Document No. 2011-0401241I7 “Adjustments outside the normal assessment period” (September 7, 2011)), the CRA stated,

Paragraph 4 of Interpretation Bulletin IT-512 “Determination and redetermination of losses” also clarifies the CRA’s position on the requirements for a loss determination to be issued:

4. Where at the initial assessing stage or as a consequence of a reassessment arising from an audit or other investigative action by the Department the Minister ascertains a loss in an amount other than that reported by the taxpayer, a notice of assessment or reassessment (including a notice of “nil” assessment or reassessment) will be issued with an explanation of the changes. As well, the notice will inform the taxpayer that upon request the Minister will make a determination of the loss so ascertained and issue a notice of determination/redetermination. In this context, the Minister will not be considered to have ascertained that the amount of a loss differs from an amount reported by the taxpayer where the difference fully reflects a change requested by the taxpayer as a result of amended or new information.

Therefore, where the difference in the amount of a loss for the year reflects an amendment by the taxpayer, this is not considered to be “ascertained” by the Minister, and therefore, on its own, does not meet the requirements for subsection 152(1.1) loss determination. Therefore, in this case, because the taxpayer is requesting the changes and the Minister would not be “ascertaining” the amount of the loss, the taxpayer cannot request a loss determination.

In CRA Document No. 2014-0550351C6, the CRA restated that, if it accepts the amount of the loss reported in the taxpayer’s return, the CRA has not ascertained the loss to be an amount that differs from the amount reported in the return. Accordingly, the first condition of subsection 152(1.1) would not be met, and the CRA could not issue a loss determination at the time the return was filed.

In the CRA’s view, the Act would need to be amended to allow for the issuance of a loss determination at the time the taxpayer files its return.

In other words, the present is no time to request a loss determination. Unless the Act is amended to alter the timing requirements, such a request must wait until the time at which the CRA determines the taxpayer’s loss to be an amount different from the amount reported in the return.


Loss Determinations: No Time Like the Present