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Moore v. Getahun: Expert Witnesses

On January 29, 2015, the Ontario Court of Appeal released its widely-anticipated reasons in Moore v. Getahun (2015 ONCA 55).

In the lower court’s controversial decision released last year, the court criticized the practice of counsel reviewing draft expert reports and communicating with experts. The court stated that counsel should not review or comment on draft expert reports because of the risk that such reports could be shaped by the views expressed by counsel. This criticism caused considerable concern in the legal profession, as well as in the community of expert witnesses (see our previous post on the Moore case here).

The Court of Appeal dismissed the appeal, holding that the determinations made on the expert evidence issue by the lower court judge did not affect the actual outcome of the trial.

Importantly, Justice Sharpe, writing for the majority of the Court of Appeal, held that the trial judge erred in concluding that it was improper for counsel to assist an expert witness in the preparation of the expert’s report.

Justice Sharpe stated that “the ethical and professional standards of the legal profession forbid counsel from engaging in practices likely to interfere with the independence and objectivity of expert witnesses” and that “it would be bad policy to disturb the well-established practice of counsel meeting with expert witnesses to review draft reports.”

Justice Sharpe further stated that “[C]ounsel play a crucial mediating role by explaining the legal issues to the expert witness and then by presenting complex expert evidence to the court.  It is difficult to see how counsel could perform this role without engaging in communication with the expert as the report is being prepared.”

With respect to the issue of continuous disclosure of consultations regarding draft reports, Justice Sharpe held that “absent a factual foundation to support a reasonable suspicion that counsel improperly influenced the expert, a party should not be allowed to demand production of draft reports or notes of interactions between counsel and expert witnesses.”  In Justice Sharpe’s view, making preparatory discussions and drafts subject to automatic disclosure would be contrary to existing doctrine and would inhibit careful preparation.  Further, compelling production of all drafts, good and bad, would discourage parties from engaging experts to provide careful and dispassionate opinions, but would instead encourage partisan and unbalanced reports.  Moreover, allowing open-ended inquiry into the differences between a final report and an earlier draft would run the risk of needlessly prolonging proceedings.

Accordingly, the Court of Appeal rejected the trial judge’s holding that counsel should not review draft reports with experts, as well as her holding that all changes in the reports of expert witnesses should be routinely documented and disclosed.

The Court of Appeal’s decision in Moore seems to have lifted the haze caused by the trial judge’s decision and clarified the role of the expert and the manner in which expert reports are to be prepared under the 2010 amendments to rule 53.03 of the Ontario Rules of Civil Procedure. Further, the Court of Appeal’s decision is important guidance in respect of the preparation and presentation of expert reports in trial courts across the country.

Moore v. Getahun: Expert Witnesses

ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

In ConocoPhillips Canada Resources Corp. v. The Queen (2014 FCA 297), the Federal Court of Appeal overturned a Federal Court decision (2013 FC 1192) and dismissed an application for judicial review by the taxpayer finding that the Federal Court lacked jurisdiction in this case.

ConocoPhillips had commenced an application for judicial review as a result of a dispute between the CRA about whether a Notice of Reassessment had been validly sent to the taxpayer.  The CRA alleged that it mailed a Notice of Reassessment on November 7, 2008. ConocoPhillips alleged that it never received the Notice of Reassessment and that it first learned of the reassessment on April 14, 2010.

Accordingly, when ConocoPhillips filed a Notice of Objection on June 7, 2010, the CRA advised that it would not consider the objection on the grounds that it was not filed within 90 days of the alleged mailing date (i.e., November 7, 2008) and that no request for an extension of time was made within the year following the alleged mailing date of the reassessment.

The Federal Court considered the question of jurisdiction and found that it had jurisdiction because the Court was not being asked to consider the validity of the reassessment (which can only be determined by the Tax Court of Canada) but rather, was only being asked to review the CRA’s decision not to consider the objection.

Based on the standard of reasonableness, the Federal Court found in favour of ConocoPhillips on the basis that the CRA had not sufficiently engaged the evidence to appropriately render an opinion whether or not the reassessment was mailed on the alleged date. The Court set aside that decision.

The Crown appealed to the Federal Court of Appeal on the basis that the Federal Court lacked jurisdiction on this issue.  The Federal Court of Appeal allowed the appeal.

Section 18.5 of the Federal Courts Act provides that judicial review in the Federal Court is not available where, inter alia, an appeal is permitted on the issue before the Tax Court of Canada.  In the present case, the Federal Court of Appeal stated that, pursuant to subsection 169(1)(b) of the Income Tax Act (Canada), ConocoPhillips could have appealed to the Tax Court after 90 days had elapsed following the date its objection was initially filed and the Tax Court would have been the correct forum to determine if, or when, the Notice of Reassessment was mailed and when the time for filing a Notice of Objection expired.

The Federal Court of Appeal clarified that the Minister’s obligation to consider a Notice of Objection is triggered regardless of whether a Notice of Objection may have been filed within the required time-frame. Further, the Minister’s decision on this issue is not an impediment to filing an appeal to the Tax Court pursuant to paragraph 169(1)(b) of the Income Tax Act (Canada). Accordingly, judicial review of this issue was not available in the Federal Court.

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ConocoPhillips: FCA Confirms Tax Court’s Jurisdiction to Determine Questions of Timing and the Validity of a Notice of Objection

McKesson: Taxpayer Files Supplementary Factum

As expected, the taxpayer has filed a Supplementary Memorandum of Fact and Law in its transfer pricing appeal in the Federal Court of Appeal.

Earlier, the Federal Court of Appeal allowed the taxpayer’s motion to add a new ground of appeal and to file a supplementary factum.

(See our previous posts on the McKesson transfer pricing appeal here and here.)

The taxpayer’s Supplementary Memorandum of Fact and Law is substantially identical to the draft factum that it had filed with its motion materials. The original draft factum was 30-pages, whereas the taxpayer’s filed Supplementary Memorandum of Fact and Law has been, on the instructions of the Court of Appeal, reduced to 20-pages. In its Order on the motion, the Court stated,

[24] Unnecessarily lengthy, diffuse submissions are like an unpacked, fluffy snowball. Throw it, and the target hardly feels it. On the other hand, short, highly focused submissions are like a snowball packed tightly into an iceball. Throw it, and the target really feels it. Shorter written submissions are better advocacy and, thus, are much more helpful to the Court.

In its supplementary factum, the taxpayer has stated:

  • The trial judge’s recusal reasons compromise the appearance or reality of a fair process such that a new trial is necessary;
  • A trial judge has no right or duty to intervene in the conduct of an appeal;
  • The trial judge in this case “put himself into the appellate arena in a direct and sustained manner”;
  • The recusal reasons raise “serious concerns” and would cause “any reasonable observer to doubt the impartiality” of the trial judge;
  • The recusal reasons “stack the deck” against the taxpayer;
  • An intervention by the trial judge interferes with the autonomy of the parties to frame the issues before the Court of Appeal on their own terms;
  • This interference is a deliberate attempt to meddle in the case on its merits;
  • The trial judge has suggested to the Court of Appeal that it must choose between allowing the taxpayer’s appeal and upholding the trial judge’s honesty and integrity;
  • A reasonable person would conclude the trial judge harbours some animus against the taxpayer that pre-dates the trial judge’s reading of the taxpayer’s factum in the Court of Appeal;
  • The trial judge was not detached and even-handed in how he dealt with this case;
  • A litigant in the taxpayer’s position could not reasonably believe it had received a “fair shake” from a process that produced “such an extraordinary intervention” in the appeal by the trial judge; and
  • The trial judge’s conduct calls into question the fairness of the entire process and must be remedied by a new trial before a different judge.

The Crown’s responding memorandum has not yet been filed.

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McKesson: Taxpayer Files Supplementary Factum

Lau: BC SC Corrects Articles of Incorporation After $17.3 Million Reassessment

Many tax rectification cases address situations in which certain transaction documents contain errors that do not accord with the parties’ intent to minimize or avoid taxes. However, there are several cases in which the courts are asked to correct errors in a company’s constating documents – errors that lead to unintended and adverse tax results for the company or its shareholders.

In Lau v. A.G. (Canada) (2014 BCSC 2384), the British Columbia Supreme Court considered whether a mistake in the drafting of a company’s Articles of Incorporation could be corrected under BC corporate law and/or the doctrine of rectification.

0777020 B.C. Ltd. was incorporated in 2006. The Articles of the company stated, among other things, that the Class E preferred shares could be issued (i) as a stock dividend, or (ii) in exchange for property. The directors of the company could establish the redemption amount of the Class E shares, but the Articles stated that this power of the directors existed only in respect of the issuance of the shares for property (i.e., no redemption amount could be determined where such Class E shares were issued as a stock dividend).

In 2008, the company issued 100 Class E shares as a stock dividend. The directors determined the redemption value to be $17,635,000. There were several subsequent transfers of these Class E shares among the individual shareholders and companies in the corporate group, and certain pre-existing liabilities were cancelled as a result of the Class E share transfers.

Subsequently, the CRA alleged the Class E shares had never been validly issued because no power to determine a redemption value existed in the company’s Articles. The CRA reassessed an individual shareholder to include $17.3 million in his income for 2008.

The individual shareholder objected and eventually appealed to the Tax Court. In the meantime, the company brought proceedings in the British Columbia provincial court to correct certain errors in the corporate documents, including the provision in the Articles addressing the directors’ power to determine the redemption value of the Class E shares. There were several proceedings that addressed the various errors:

  • May 21, 2013 – Taxpayers initiate first proceeding to correct various corporate documents
  • September 17, 2013 – Court grants requested relief in first proceeding
  • December 4, 2013 – Taxpayers initiate second proceeding to correct various corporate documents and Articles
  • April 10, 2014 – Taxpayer amends second proceeding to remove requested relief in respect of Articles
  • April 30, 2014 – Court grants requested relief in second proceeding
  • May 2, 2014 – Taxpayers initiate third proceeding to correct provision in Articles addressing Class E share redemption value

In the third proceeding, the taxpayers had revived the relief originally requested in the second proceeding in respect of the Articles. However, they adduced and relied on more extensive evidence concerning the drafting error. In response, the CRA argued that (i) the issue was barred by cause of action estoppel, (ii) the BC Court should decline jurisdiction, and (iii) rectification should not be granted.

On the first two issues, the BC Court held that (i) cause of action estoppel did not apply to prevent the taxpayers from seeking rectification of the Articles, and (ii) the BC provincial courts have exclusive jurisdiction to consider the requested relief (i.e., under the British Columbia Business Corporation Act or the doctrine of rectification) and it was not appropriate to decline jurisdiction in favour of the Tax Court of Canada.

On the third issue, the BC Court noted that the taxpayers had sought relief based on ss. 229 and 230 of the BC BCA and the court’s equitable jurisdiction. The BC Court held that the evidence of the individual shareholders and their counsel clearly established that the parties intended for the company’s directors to have the power to determine the redemption price of the Class E shares when issued as a stock dividend and in exchange for property. The absence of language in the Articles in respect of this power was a result of an error by the company’s solicitor.

The BC Court stated that ss. 229 and 230 of the BC BCA provide a court with the ability to correct any corporate mistake. Further, the BC Court was satisfied that the taxpayers had proven they had a common intention to empower the directors to determine the redemption amount and that the company’s Articles did not reflect this true intention.

The BC Court ordered that the Articles were corrected nunc pro tunc from 2006 to include language that established the proper powers of the directors.

On a sub-issue, the BC Court considered whether the CRA should have been named as a party in the third proceeding (the taxpayers had named the CRA as a party in the first two proceedings, but had refused to name the CRA as a party in the third).

The BC Court noted that there did not appear to be any consensus or consistent approach on this issue. The BC Court stated that the CRA need not be named as a party in every BC BCA or rectification proceeding. In the appropriate circumstances, the CRA may apply to be named as a party, and a court may exercise its discretion to join the CRA as a party. In this case, it was appropriate that the CRA be named as a party.

In light of the mixed success on the application, the BC Court did not award costs to either party.

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Lau: BC SC Corrects Articles of Incorporation After $17.3 Million Reassessment

Fairmont: Ont SCJ Unwinds Share Redemption and Substitutes Loan Arrangement

The common law doctrine of rectification operates to correct mistakes in transactions that produce (or may produce) unintended and adverse tax results. This was established in the landmark case of Juliar et. al. v A.G. (Canada) (50 O.R. 3d 728) (Ont. C.A.) (Dentons was counsel to the successful taxpayers).

In Fairmont Hotels Inc. et al. v A.G. (Canada) (2014 ONSC 7302) the Ontario Superior Court of Justice has provided another example of the manner in which rectification can be used to unwind certain impugned steps in a transaction and substitute the proper steps that accord with the parties’ intention to avoid tax.

Legacy Hotels REIT owned a collection of hotels, which were purchased from Fairmont in or around 1997. Fairmont continued to manage these hotels. In 2002 and 2003, Fairmont was involved in the financing of Legacy’s purchase of two hotels in Washington and Seattle. Through the use of several reciprocal loans between Legacy, Fairmont and several subsidiary companies, Legacy purchased the Washington hotel for $67 million USD and the Seattle hotel for $19 million USD. Fairmont hedged its loans to eliminate or reduce its foreign exchange tax exposure in Canada.

In 2006, Fairmont was acquired by two companies and its shares ceased to be publicly traded. This acquisition of control could have frustrated the parties’ intention that no entity would realize a foreign exchange gain or loss in connection with the reciprocal loan arrangements. A tax and accounting plan was created that would have allowed the companies to complete the acquisition and continue the full hedge of the foreign exchange exposure. However, this plan was modified before implementation with the result that certain foreign exchange exposure was not hedged.

In 2007, Legacy asked Fairmont to terminate the reciprocal loan arrangements on an urgent basis so that the Washington and Seattle hotels could be sold. A Fairmont officer mistakenly believed that the original 2006 plan had been implemented (i.e., the plan that continued the full hedge of the foreign exchange exposure) and agreed to the unwinding of the loans (which involved the redemption of certain preferred shares of the subsidiaries involved in the loan arrangements). Subsequently, the CRA reviewed the transactions and reassessed Fairmont on the basis that the 2007 share redemptions triggered a foreign exchange gain.

Fairmont brought an application to rectify the 2007 share redemptions and to substitute a loan arrangement. Fairmont argued that its intent from 2002 was to have the original reciprocal loan arrangements unwound on a tax-neutral basis. In response, the Crown argued that Fairmont had never intended the proposed substituted loan arrangement and thus was engaged in retroactive tax planning.

Fairmont relied on the Ontario Court of Appeal decision in Juliar for the principle that the exact method to achieve a common intention to avoid tax is not required at the time of the transaction. In response, the Crown argued that the Alberta Court of Queens’ Bench in Graymar Equipment (2008) Inc. v A.G. (Canada) (2014 ABQB 154) had been critical of Juliar and had stated that rectification is granted to restore a transaction to its original purpose and not to avoid an unintended effect.

However, in the present case, the Ontario Superior Court of Justice stated that, unlike the Alberta court, Ontario courts “do not have the luxury of ignoring” the Ontario Court of Appeal’s decision in Juliar. Further, the Ontario court stated that the Alberta court had not accurately described what happened in Juliar, and that another recent Alberta decision had in fact followed the reasoning in Juliar.

In the present case, the Ontario Court held that Fairmont’s intention from 2002 was to carry out the reciprocal loan arrangements on a tax- and accounting-neutral basis so that any foreign exchange gain would be offset by a corresponding foreign exchange loss. This intention remained unchanged when Fairmont was sold in 2006 and when the reciprocal loans were unwound in 2007. A mistake had caused the unintended tax assessments.

The Court also stated that this was not a situation in which the taxpayer was engaging in retroactive tax planning after a CRA audit. The parties intended to unwind the loans on a tax-free basis.

The Court allowed the application and rectified the corporate resolutions as requested. The Court awarded $30,000 of costs to the Applicants.

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Fairmont: Ont SCJ Unwinds Share Redemption and Substitutes Loan Arrangement

McKesson: FCA Allows Taxpayer’s Motion

The Federal Court of Appeal has allowed the taxpayer’s motion to amend its Notice of Appeal to add a new ground of appeal and to file a Supplementary Memorandum of Fact and Law.

(See our previous posts on the McKesson transfer pricing appeal here and here.)

The Court of Appeal stated that the lower court’s recusal reasons “depart from the norm”, and were a “new, material development ” in the appeal and “have become part of the real issues at stake”. The Court stated that it was neither clear cut nor obvious that the new ground raised by the taxpayer would fail. Further, there were no reasons to refuse the entry of the new ground into the appeal.

The Court of Appeal also ordered that a Supplementary Appeal Book be filed, which shall contain the Tax Court’s recusal reasons and the Court of Appeal’s Order on the motion.

Finally, the Court of Appeal allowed the taxpayer to file a Supplementary Memorandum of Fact and Law, and the Crown to file a responding memorandum. Interestingly, the Court of Appeal limited the length of the memorandum to no more than 20 pages. The Court of Appeal stated,

[22] In the circumstances, 20 pages is generous. Parties normally make all of their written submissions for all grounds of appeal in less than the 30 page limit in Rule 70. And many of those appeals are more complex than this one. However, in this case, the new ground is somewhat novel and the circumstances are somewhat unusual, so I am prepared to grant the appellant some leeway.

[23] The difference between what the appellants propose in page length and what I am willing to grant is nine pages. Some might wonder, “What’s the big deal about nine pages?”

[24] Unnecessarily lengthy, diffuse submissions are like an unpacked, fluffy snowball. Throw it, and the target hardly feels it. On the other hand, short, highly focused submissions are like a snowball packed tightly into an iceball. Throw it, and the target really feels it. Shorter written submissions are better advocacy and, thus, are much more helpful to the Court.

[25] Structures that lead to repetition, over-elaboration of arguments, block quotations, and rhetorical flourishes make submissions diffuse. Simple but strategic structures, arguments presented only once and compactly, tight writing that arranges clinical details in a persuasive way, and short snippets from authorities only where necessary make submissions highly focused. The former dissipates the force of the argument; the latter concentrates it.

[26] If the parties can make their submissions on the new ground in fewer than 20 pages, so much the better.

*     *     *

No date has been set for the hearing of the full appeal.

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McKesson: FCA Allows Taxpayer’s Motion

FCA Dismisses Lord Black’s Tax Appeal

Earlier this year, in Black v. HMQ (2014 TCC 12), Lord Conrad Black unsuccessfully argued in the Tax Court of Canada that, due to his U.K. residency status, he should not be subject to Canadian tax on certain income and taxable benefits (see our previous post here).

In the case, the Tax Court held that a liberal and purposive approach must be adopted when interpreting tax treaties (i.e.Canada-United Kingdom Income Tax Convention). Applying this approach, the Tax Court held that Lord Black could be deemed a U.K. resident for the purposes of the Canada-UK Treaty and also a Canadian resident for the purposes of the Income Tax Act (Canada) (the “Act“).

Further, the Tax Court held that Article 27(2) of the Canada-UK Treaty applied to enable the CRA to assess a Canadian resident’s non-Canadian office and employment income. Consequently, the Tax Court held that Lord Black was liable for tax on the income and benefits in question.

Both parties had agreed that subsection 250(5) of the Act, the tie-breaker rule which deals with the deemed non-residency of a Canadian where the individual is deemed to be a resident in another country by virtue of a tax treaty, did not apply. At the time the subsection came into force in 1999, the provision was not applicable to a Canadian resident individual who was (i) a resident of two countries and (ii) deemed resident of one of those countries under a tax treaty. Had subsection 250(5) applied, Lord Black would not be a resident of Canada for the purposes of the Act.

On appeal, the Federal Court of Appeal considered the following issues:

(a) whether the Tax Court correctly determined that Lord Black could be deemed both a U.K. resident under the Canada-UK Treaty and a Canadian resident for the purposes of the Act; and

(b) whether the Tax Court correctly determined that Article 27(2) of the Canada-UK Treaty applied.

The Court of Appeal dismissed the taxpayer’s appeal and affirmed the Tax Court’s decision on both issues (2014 FCA 275).

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FCA Dismisses Lord Black’s Tax Appeal

Legge: Improper Pleading Fatal to Crown’s Case

What must the Crown plead and how must she plead it?

This question became an issue in the Tax Court’s recent decision in Legge v. The Queen (2014 TCC 360), in which the Tax Court allowed a taxpayer’s appeal due to the Crown’s failure to properly plead its case in the Reply.

In Legge, the taxpayer received pension and business income in 2006 and 2007. On November 27, 2008, the taxpayer filed income tax returns for 2006 and 2007. In these returns, the taxpayer reported business losses from self-employment, and thus pensionable earnings was reported as nil.

Subsequently, on November 12, 2012, the taxpayer filed T1 adjustment requests for 2006 and 2007 and changed the business losses to business income. The taxpayer reported self-employed pensionable earnings of $5,524 and $5,116 in 2006 and 2007, respectively.

Under the Canada Pension Plan, a person must make CPP contributions on the amount of his/her self-employed earnings (which include income from a business and certain other amounts). Under section 30 of the Canada Pension Plan, a taxpayer who must make a contribution in respect of self-employed earnings must file a return with certain information. Importantly, subsection 30(5) states as follows:

(5) The amount of any contribution required by this Act to be made by a person for a year in respect of their self-employed earnings for the year is deemed to be zero where

(a) the return of those earnings required by this section to be filed with the Minister is not filed with the Minister before the day that is four years after the day on or before which the return is required by subsection (1) to be filed; and

(b) the Minister does not assess the contribution before the end of those four years.

 In Legge, the Crown argued that subsection 30(5) applied in this case because the taxpayer had failed to file a return of self-employed earnings within four years of the filing due date. Rather, the taxpayer reported losses rather than earnings.

The Tax Court rejected this argument on the basis that subsection 30(5) applies only if there is a failure to file and the CRA had not assessed contributions within the four-year period. The Tax Court noted that, in the present case, the assessment requirement was not mentioned in the Reply and was not mentioned by Crown counsel at the hearing. Since there was no assumption as to what assessments (if any) were made, the Crown had the burden to adduce evidence that the requirement in paragraph 30(5)(b) had been satisfied. The Crown had not adduced evidence on this point.

The Tax Court noted that this result was “in a sense a windfall” to the taxpayer, but “the Crown is well aware of the requirement to properly plead its case and to establish the facts supporting its position, either by evidence or by assumptions.”

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Legge: Improper Pleading Fatal to Crown’s Case

McKesson: Additional Submissions on Motion

“The Order and Reasons for Recusal do not and should not form part of the record before this Court. Their existence in the public domain does not compromise the ability of this Court to adjudicate the appeal or the appearance and reality of a fair process.”
-Crown’s Written Representations

In the most recent developments in the McKesson transfer pricing case, the Respondent has filed its Written Representations in response to the Appellant’s motion to raise new issues on appeal, and the Appellant has filed a Reply submission.

In the Written Representations, the Respondent has argued that the trial judge’s Order and Reasons for Recusal are irrelevant to the issues to be decided on appeal and do not properly form part of the record before the Federal Court of Appeal. The Respondent has also argued that the Order and Reasons for Recusal do not compromise the appearance and reality of a fair process in the appeal.

In its Reply, the Appellant has argued that the Respondent’s “remarkable position” that the Reasons for Recusal are not part of the record on appeal cannot be right. Rather, the Appellant argues, the Court of Appeal should perform a “meaningful review” of the Reasons for Recusal, as such reasons should not be “immune from review” or “shielded from appellate scrutiny”. The Appellant states, “The panel of this Court hearing the Appellant’s appeal must be given the opportunity to adjudicate [the Recusal Reasons'] legal effect.”

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McKesson: Additional Submissions on Motion

Brogan Family Trust: CRA Not Entitled to Notice of Rectification Application

Is the CRA entitled to notice of a rectification application?

In Brogan Family Trust (2014 ONSC 6354), the Ontario Superior Court of Justice said “no”, and dismissed the Crown’s motion to set aside an earlier rectification order on the basis that the CRA had not been notified of the proceeding.

In Brogan, the taxpayer had restructured his business and settled a trust for family tax planning purposes in 2004. Subsequently, in 2010, the trustees became aware of an error in the trust agreement that prevented the distribution of trust property to intended minor beneficiaries. The trust made an application for rectification of the trust agreement so that the trust property could be distributed as intended. The trust’s tax litigation counsel advised that no notice to the CRA was required.

The rectification application proceeded in November 2010. Shortly before the rectification order was granted, the trust sold a business. In its 2010 tax return, the trust allocated the proceeds to the beneficiaries, who in turn reported the income in their returns.

The CRA commenced an audit of the sale of the business and the trust in June 2012, at which time it became aware of the 2010 rectification order that had corrected the trust agreement. In August 2012, the CRA was provided a copy of the rectification order. And then in May 2013, the CRA brought its motion for an order setting aside the 2010 rectification order.

The Court considered three issues:

  1. Did the CRA bring the motion “forthwith” after learning of the rectification order?
  2. Did the CRA have standing to bring the motion?
  3. Should the CRA have been notified of the rectification application?

The Crown argued that (i) the delay was not inordinate because there had been internal confusion at the CRA in respect of the rectification order, (ii) the CRA was a creditor and thus was affected by the rectification order, and (iii) the CRA’s own view and the custom among tax litigators is that the CRA should be given notice (see, for example, Income Tax Technical News No. 22, at pg. 6).

The taxpayer argued that (i) the CRA’s 10-month delay was unreasonable and not “forthwith”, (ii) the CRA was not affected by the rectification application, and (iii) in any event, there was no requirement the CRA be notified of the rectification application.

The Court agreed with the taxpayer and dismissed the Crown’s motion.

The Court stated that the CRA was not a creditor and thus was not affected by the rectification order. The Court contrasted the current case with Snow White Productions Inc. v. PMP Entertainment Inc. (2004 BCSC 604), in which the rectification proceeding had been launched in response to an adverse ruling by the CRA and it was thus appropriate for the CRA to receive notice and participate (see also Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc. (2009 CanLII 29491 (ON SC)).

On the issue of delay, the Court stated that the CRA had not brought the motion forthwith. The 10-month delay was the fault of the CRA, and even after the rectification order was referred to counsel, it still took two months for the motion to be launched.

And finally, on the issue of whether notice should be provided to the CRA, the Court stated that it had been directed to no authority on the point that the CRA should be given notice, nor on the point that notice is required if the CRA is not a creditor. The Court was not persuaded that providing notice to the CRA was the practice of tax litigators, and nor was it the law.

Rather, in the Court’s view, the delivery of a Notice of Assessment creates rights for the CRA to participate in a rectification proceeding as a creditor (see, for example, Canada (A.G.) v. Juliar ((2000) 50 O.R. (3d) 728 (C.A.) (a case on which Dentons was counsel for the successful taxpayer)).

The Court concluded as follows:

[22] … the CCRA is only required to be given notice of a proposed rectification proceeding when the CCRA’s legal interests might be directly affected by the outcome of the rectification proceeding, such as where the CCRA is a creditor and the rectification would affect its rights. Otherwise, the CCRA might be made a party when so advised by counsel that notice should be given to the CCRA.

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Brogan Family Trust: CRA Not Entitled to Notice of Rectification Application