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Update: TCC and FCA Appointments

Tax Court of Canada

Associate Chief Justice Eugene Rossiter has been appointed as the next Chief Justice of the Tax Court of Canada. Justice Rossiter replaces current Chief Justice Gerald Rip, who has elected to become a Supernumerary Judge of the Tax Court.

Federal Court of Appeal

C. Michael Ryer has been appointed as a Judge of the Federal Court of Appeal. Justice Ryer served as Judge of the Court of Appeal from 2006 to 2009, after which he became counsel to Deloitte Tax Law LLP in Calgary. Justice Ryer replaces Justice Karen Sharlow, who retired from the Court in September 2014.

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Update: TCC and FCA Appointments

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

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

McKesson: Respondent’s Factum Filed

Earlier this year, McKesson Canada Corporation appealed the decision of the Tax Court of Canada in McKesson Canada Corporation v. The Queen (2013 TCC 404) (see Federal Court of Appeal File Nos. A-48-14 and A-49-14).

At issue was the appropriate discount rate paid under a receivables sales agreement between McKesson Canada and its parent company, MIH, under section 247 of the Income Tax Act (Canada). A secondary issue was the assessment of withholding tax on a deemed dividend that arose as a result of the lower discount rate. For our earlier blog post on the Tax Court decision see here.

In the Federal Court of Appeal, the Appellant’s Memorandum of Fact and Law was filed on June 11, 2014. For our earlier post summarizing the appellant’s memorandum see here.

The Respondent’s Memorandum of Fact and Law was recently filed on August 11, 2014.

In its Memorandum, the Respondent states that the trial judge’s “carefully reasoned decision” and findings were “amply supported” by the evidence at trial and no palpable and overriding error can be found in the trial judge’s conclusions.

The Respondent summarizes its points at issue at paragraph 56 of its Memorandum:

  • The trial judge applied the correct test. His decision was based on what arm’s-length persons would agree to pay for the rights and benefits obtained and not on findings of tax avoidance, lack of need for funds, or group control.
  • Ample evidence supports the trial judge’s determination of the arm’s-length discount rate. Since no palpable and overriding error was committed, his decision should not be disturbed.
  • The trial judge did not commit an error of law in concluding that the five-year limitation period in Article 9(3) of the Canada-Luxembourg Tax Treaty does not apply to the Part XIII tax reassessment at issue.

No hearing date has yet been set for the hearing in the Federal Court of Appeal.

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McKesson: Respondent’s Factum Filed

Health Quest: Appeal allowed where Crown failed to properly plead assumptions

What is the result of the Crown’s failure to properly plead its assumptions in the Reply? This issue was considered by the Tax Court in Health Quest Inc. v. The Queen (2014 TCC 211) in which the Crown’s Reply included “assumptions” that were statements of mixed fact and law rather than facts alone.

The taxpayer was a distributor of modified and “off-the-shelf” therapeutic footwear for relief of various disabling conditions of the feet. During the reporting periods at issue, section 24.1 in Part II of Schedule VI of the Excise Tax Act stated that zero-rated supplies included footwear designed for use by an individual who has a crippled or deformed foot or other similar disability when the footwear is supplied on the written order of a medical practitioner. (The provision was amended in 2012 to broaden the definition to include written orders by a “specified professional”.) The taxpayer considered that most or all of the footwear it sold was zero-rated under s. 24.1.

The CRA audited the taxpayer for the period of January 1, 2008 to December 31, 2009. Based on a sampling of the taxpayer’s sales (in the months of August and December 2009), the CRA assessed additional GST owing of $42,274.72 for the period.

In the Tax Court, the taxpayer argued that all of the shoes it sold were for a prescribed diagnosis and thus zero-rated. The Respondent argued that the “off-the-shelf” shoes sold by the taxpayer (i.e., sold “as-is” without modification) were not zero-rated and thus subject to GST.

Under section 6 of the Tax Court of Canada Rules of Procedure Respecting the Excise Tax Act (Informal Procedure), every Reply to a Notice of Appeal must contain (among other things) a statement of the findings or assumptions of fact made by the CRA when making the assessment and the reasons the Crown intends to rely on in support of the assessment. (The Tax Court’s other procedural rules contain substantially identical provisions – see, for example, section 49 of the Tax Court of Canada Rules (General Procedure)).

In Health Quest, the Crown’s Reply stated, “In so assessing the Appellant, the Minister relied on the following …

(a)        the facts stated and admitted above;

(b)        the Appellant was a GST/HST registrant;

(c)        the Appellant was required by the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the “Act”) to file its GST/HST returns on a quarterly basis;

(d)       the Appellant was a corporation involved in the supply of footwear which were specially modified by the Appellant or were specially designed by the manufacturer for persons with physical disabilities;

(e)        the products described in subparagraph 7(d) above are zero-rated for HST pursuant to Schedule VI of the Act;

(f)        the Appellant also supplied other products which were not zero-rated pursuant to Schedule VI of the Act; and

(g)        during the periods under appeal, the Appellant failed to collect tax of not less than $42,274.72 on its supply of products which were not zero-rated pursuant to Schedule VI of the Act.”

The Tax Court noted that paragraphs (f) and (g) were problematic in that they both contained statements of mixed fact and law, which the Federal Court of Appeal has stated have no place in the Minister’s assumptions (see Anchor Pointe Energy Ltd. v. the Queen (2003 FCA 294) and Canadian Imperial Bank of Commerce v. The Queen (2013 FCA 122)). In Anchor Pointe, the Court of Appeal stated,

[23] The pleading of assumptions gives the Crown the powerful tool of shifting the onus to the taxpayer to demolish the Minister’s assumptions. The facts pleaded as assumptions must be precise and accurate so that the taxpayer knows exactly the case it has to meet.

In Health Quest, the Tax Court determined the Crown’s key “assumptions” were merely the Respondent’s view on the application of the law to the facts of the appeal.

The Court noted that where the Crown has not set out any proper assumptions of fact in the pleadings, the evidentiary onus reverts to the Crown to establish the correctness of the assessment (see Pollock v. Minister of National Revenue (94 DTC 6050 (Fed. C.A.) and Brewster v. the Queen (2012 TCC 187)). In other words, the normal requirement that a taxpayer must adduce evidence to “demolish” the Crown’s assumptions is reversed and the Crown must prove its case.

In Health Quest, the Respondent’s only evidence was the testimony of the appeals officer. The Tax Court held the testimony did not establish, on a balance of probabilities, that the footwear in question was not zero-rated. The Court noted that it would have been beneficial to have product literature, scientific studies, or the testimony of medical professionals, and this type of evidence would have been essential to engage in a meaningful textual, contextual and purposive analysis of the applicable legislation (there are no previous cases that have considered the interpretation of section 24.1).

The Tax Court allowed the appeal.

The Court’s decision in Health Quest is a helpful reminder of the importance of including only facts and not legal arguments in the assumptions in a Reply. Taxpayers and their counsel should closely scrutinize the assumptions and reasons described in a Reply to ensure the pleading conforms with the Tax Court’s rules.

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Health Quest: Appeal allowed where Crown failed to properly plead assumptions

McKesson: Appellant’s Factum Filed‏

On January 10, 2014, McKesson Canada Corporation appealed the decision of the Tax Court of Canada in McKesson Canada Corporation v. The Queen (2013 TCC 404) (see Federal Court of Appeal File Nos. A-48-14 and A-49-14).

In McKesson, the Tax Court upheld the CRA’s transfer price adjustments (made pursuant to section 247 of the Income Tax Act (Canada)) that had reduced the discount rate paid under a receivables sales agreement between McKesson Canada and its parent company, MIH, from 2.206% to 1.013%. The Tax Court also upheld the assessment of withholding tax on a deemed dividend that arose in a secondary adjustment resulting from the lower discount rate.

The Appellant’s Memorandum of fact and law was filed on June 11, 2014.

In its Memorandum, the Appellant states that the Trial Judge made a “fundamental error of law” and requests that the appeal be allowed with costs and the matter be remitted to the Tax Court for a new trial before a different judge. The Appellant describes the issues on the appeal as follows:

Did the Trial Judge err in law by stepping outside the pleadings and the case put forward and as developed by the parties over the course of the trial to find against McKesson Canada, thereby depriving McKesson Canada of its right to know the case it had to meet and its right to a fair opportunity to meet that case?

Did the Trial Judge err in law when he misconstrued the arm’s-length principle by holding that, in determining what terms and conditions arm’s length parties would have made or imposed, he was to assume that one party (purchaser) controls the other (seller)?

As a result of stepping outside of the pleadings and the case put forward and as developed by the parties over the course of the trial and committing an error of law, did the Trial Judge calculate the discount rate in a manner that ignored the assumption of risk by MIH, contrary to the terms of the Agreement and resulted in a discount rate that is commercially absurd?

Did the Trial Judge err in permitting the Minister to assess non-resident withholding tax after the expiry of the applicable limitation period and in contravention of Canada’s obligations under a bilateral tax treaty?

See our previous commentary on the Tax Court’s McKesson decision here.

 

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McKesson: Appellant’s Factum Filed‏

Galachiuk: TCC Clarifies Due Diligence Defence Under 163(1)‏

Subsection 163(1) of the Income Tax Act (the “Act”) imposes a penalty of 10% on an amount that a taxpayer fails to report in his/her return where there has been a previous failure to report income in any of the three preceding taxation years.

The penalty under subsection 163(1) has been described as “harsh” due to the 10% federal penalty, a potential 10% provincial penalty, and the fact that the penalty may apply even where minimal or no additional tax is owing by the taxpayer (i.e., the tax relating to the unreported amount was withheld at source and remitted to the CRA).

In several cases, the courts have held that a taxpayer that is the subject of a penalty under subsection 163(1) has a due diligence defence. A taxpayer can satisfy the due diligence test in one of two ways: (i) By establishing that he/she made a reasonable mistake of fact (i.e., the taxpayer was mistaken as to a factual situation and the mistake was reasonable), or (ii) by establishing that he/she took reasonable precautions to avoid the event leading to the imposition of the penalty (see Les Résidences Majeau Inc v The Queen (2010 FCA 28)).

Some court decisions on the due diligence defence under subsection 163(1) appear to have reached inconsistent conclusions on the issue of whether the taxpayer’s due diligence must exist in respect of (i) either of the two years in which the failure occurred (see, for example, Franck v. The Queen (2011 TCC 179), Symonds v. The Queen (2011 TCC 274), Chan v. The Queen (2012 TCC 168) , and Norlock v. The Queen (2012 TCC 121)) or (ii) only the year upon which the penalty is imposed (i.e., the second failure) (see, for example, Chendrean v. The Queen (2012 TCC 205), and Chiasson v. The Queen (2014 TCC 158)).

This was the question considered by the Tax Court in Galachiuk v. The Queen (2014 TCC 188). In Galachiuk, the taxpayer failed to report portions of income in two consecutive taxation years: $683 in his 2008 tax return and $436,890 in his 2009 tax return. Given Mr. Galachiuk’s failure to report income on two separate occasions, the Minister imposed a penalty under subsection 163(1).

The taxpayer argued that he had been duly diligent in 2008 because he had taken steps to inform his investment broker and advisors of a change of residence, and had also arranged with Canada Post to have his mail forwarded to his new address. Despite these efforts, one T3 slip had not been forward to or received by the taxpayer. The Crown argued that the fact that some T-slips had the incorrect information should have alerted the taxpayer to the need to take additional steps to ensure he had all of his T-slips for the year.

For 2009, the taxpayer argued that he had received a T4 slip and a T4A slip from his former employer, and had concluded that no additional slips were forthcoming from the former employer and that the two slips he received had included all of the income he had received from the former employer in 2009. The Crown argued that a reasonable person would not have made this mistake in the circumstances.

In respect of the legal test, the Tax Court stated that subsection 163(1) is a harsh provision and the absence of language that would limit the due diligence defence made it clear that Parliament had intended that the defence was available to explain the omission in either year. The Court noted that there was no requirement in the provision that the penalty could only be imposed if the taxpayer had first been reassessed in respect of his/her first failure to report (see such a precondition exists in the language of subsections 162(1) and (2) regarding repeated failures to file returns). Accordingly, the defence can be made out where the taxpayer was duly diligent in respect of either of the failures to report income.

In the present case, the Court stated that the taxpayer had been duly diligent in 2008 because he had taken steps to ensure he received his T-slips, he carefully prepared his 2008 tax return, and the unreported amount was a “tiny portion” of his income for the year. Accordingly, the taxpayer was duly diligent in reporting his income in 2008, and the Court allowed the taxpayer’s appeal and ordered that the CRA reassess to delete the penalty imposed in 2009.

Additionally, the Court went on to consider whether the taxpayer had been duly diligent in 2009. On this issue, the Court concluded that it was not reasonable for the taxpayer to believe that his former employer would issue only one T4A in respect of the various amounts paid to him in the year. Further, there was a material difference between the amounts the taxpayer knew his former employer had paid to him in 2009 and the amount that had appeared on the single T4A slip he received. Accordingly, the taxpayer was not duly diligent in preparing and filing his 2009 return.

Interestingly, the Tax Court noted in a brief comment that it expected that there was a reasonable chance the Crown may appeal the decision to the Federal Court of Appeal in order to obtain clarity on the interpretation of subsection 163(1). As of the publication of this article, no appeal had yet been filed with the Court of Appeal.

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Galachiuk: TCC Clarifies Due Diligence Defence Under 163(1)‏

FCA Cautions Parties on Adjournment Requests

In recent years the Tax Court of Canada has strictly applied the requirements for adjournments and timetable amendments as described in the Court’s Practice Note No. 14. We understand this may have been prompted by a practice that had developed over time whereby the parties to an appeal would consent to extensions of time or adjournments and then informally seek the Court’s approval.

The Federal Court of Appeal appears to have been wrestling with similar scheduling and adjournment issues. In UHA Research Society v. Canada (2014 FCA 134), the Appellant sought an adjournment of a hearing date due to the unavailability of counsel.

In a lengthy discussion of the Court’s scheduling process, the Court’s expectations of counsel and the test for an adjournment request (i.e., there must be significant new developments, marked changes in circumstances, or compelling reasons of fairness), Justice Stratas provided a reminder about the Court’s procedure and practice regarding adjournments.

In UHA, Justice Stratas granted the adjournment request, but cautioned:

[18] Having written these reasons – reasons written in response to a spate of recent incidents of lack of regard for scheduling orders of this Court – I may well be less accommodating in a future case.

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FCA Cautions Parties on Adjournment Requests

Spruce Credit: Avoidance Transactions and the Duke of Westminster

In Spruce Credit Union v. The Queen (2014 FCA 143) the Federal Court of Appeal upheld the lower court’s interpretation and application of the inter-corporate dividend deduction under subsection 112(1) of the Income Tax Act (Canada) (the “Act”). The Court of Appeal also considered the interpretation of “avoidance transaction” for purposes of the general anti-avoidance rule (“GAAR”) in section 245 of the  Act.

Spruce Credit Union (“Spruce”) was a member of a network of credit unions providing financial services to individuals in British Columbia. Two separate provincially-owned entities were responsible for insuring the deposits of B.C. credit unions during the relevant period: the Credit Union Deposit Insurance Corporation (“CUDIC”) and the Stabilization Central Credit Union of British Columbia (“STAB”).

Certain regulatory changes required that funds held by STAB were to be transferred to CUDIC. After considering alternatives, it was decided that CUDIC would assess the member credit unions the amount in aggregate necessary to meet the fund requirement, and STAB would pay a dividend on its Class A shares to the credit unions, roughly equal to the assessment. In fact, two dividends were declared and paid: (a) “Dividend A”, from STAB’s “aggregate cumulative investment income”, and (b) Dividend B, from STAB’s “aggregate cumulative assessment income”.

The Canada Revenue Agency (the “CRA”) reassessed Spruce, denying the inter-corporate dividend deduction (under subsection 112(1) of the Act) in respect of Dividend B (Dividend A was not reassessed). The CRA assessed Spruce on two grounds: (a) the dividend was not deductible under ordinary rules, but rather was governed by specific rules in the Act pertaining to credit unions, and (b) the GAAR applied.

The Tax Court (2012 TCC 357) held the deduction under subsection 112(1) was available to Spruce in respect of Dividend B. Further, there was no “avoidance transaction” and therefore the GAAR could not apply. (Note: The Tax Court’s costs award in Spruce Credit (2014 TCC 42) was not considered in the present case. That decision is the subject of a separate appeal before the Federal Court of Appeal (Court File No. A-96-14).)

On appeal, the Crown argued that the Tax Court erred because it was “inappropriate to consider whether the taxpayer chose the particular transaction among alternatives primarily based on tax considerations”. In the Crown’s view, the Federal Court of Appeal’s decision in MacKay v. The Queen (2008 FCA 105) required the Court to consider whether the non-tax objective could have been obtained without the particular impugned transaction or through an alternative transaction.

In the present appeal, the Federal Court of Appeal held the lower court had made no error in respect of its findings regarding the availability of the deduction under subsection 112(1). Further, the Court of Appeal rejected the Crown’s arguments regarding the GAAR.

The Court held that when determining whether a particular transaction is an avoidance transaction, the existence of an alternative transaction that may have attracted additional tax is only one factor to consider. The very existence of such alternative transaction is not, in and of itself, determinative of whether there has been an avoidance transaction. The fact that this alternative transaction exists is only one consideration in determining whether any transaction in a series in an avoidance transaction.

The Federal Court of Appeal noted that the Crown’s suggested interpretation would undermine the long-standing Duke of Westminster principle in Canadian tax law that taxpayers are free to organize their affairs in a manner to pay the least amount of tax within the bounds of the law. The Supreme Court of Canada has affirmed the validity of the Duke of Westminster principle in numerous GAAR decisions.

It is not entirely clear what distinction may be made between the facts and reasoning in the present case and those in MacKay. In Spruce Credit, there was a regulatory regime that required compliance and which necessitated the transfer of funds from STAB to CUDIC. The taxpayers chose a tax-efficient manner in which to achieve the regulatory compliance. In MacKay, the taxpayers choose a course of tax-efficient planning based on a voluntary acquisition of certain real property. That said, in neither case is this distinction particularly clear.

Perhaps future court decisions may provide some guidance on this point and on the interpretation of “avoidance transaction” generally. At the time of publication of this article, the Crown had not yet sought leave to appeal the decision to the Supreme Court of Canada.

A longer version of this article will appear in an upcoming edition of CCH’s Tax Topics.

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Spruce Credit: Avoidance Transactions and the Duke of Westminster

Bakorp: Appeal Dismissed for Failure to Comply with Large Corporations Rules

In Bakorp Management Ltd. v. The Queen (2014 FCA 104), the Federal Court of Appeal upheld a decision of the Tax Court dismissing the taxpayer’s appeal for failure to comply with the rules relating to objections and appeals filed by large corporations.

The result in Bakorp is a reminder to large corporations and their advisors of the need for careful consideration of the issues and relief sought in objections and appeals. In this regard, it would be good practice to have a Notice of Objection of a large corporation reviewed by a tax litigation lawyer before the objection is filed with the Canada Revenue Agency.

Background

The taxpayer was a large corporation under subsection 225.1(8) of the Income Tax Act (ITA). In 1992, five Class A shares of a corporation not connected with the taxpayer were redeemed by that corporation for $338,213,849 resulting in a deemed dividend pursuant to subsection 84(3). A portion of the proceeds was not payable until 1995, and the taxpayer reported that portion ($52,912,264) as taxable income in 1995, resulting in $13,333,059 of Part IV tax.

The CRA reassessed the taxpayer’s 1993-1995 tax years (only the 1995 tax year was at issue in the appeal), and for the 1995 tax year the CRA reduced the amount of the deemed dividend included as taxable income by $25,332,237, and the Part IV tax was reduced accordingly.

The taxpayer filed a Notice of Objection and claimed that its original filing position should be restored (namely that the entire $52 million deemed dividend should be included in income in 1995). The CRA issued a Notice of Confirmation stating that $28 million of the deemed dividend should be included in income in 1995.

Tax Court

The taxpayer filed a Notice of Appeal to the Tax Court and argued that no amount of the deemed dividend should be included in its income in 1995. In response, the Crown brought a motion under section 53 of the Tax Court Rules (General Procedure) for an order dismissing the appeal on the basis the taxpayer had failed to comply with subsection 169(2.1) of the ITA (and thus the appeal was not validly constituted).

Under the ITA, large corporations are subject to specific rules regarding the content of their objections and appeals. Under subsection 165(1.11) of the ITA, a large corporation in its objection must reasonably describe each issue, specific the relief sought for each issue, and provide facts and reasons in support of the taxpayer’s position. Under subsection 169(2.1), a corporation may appeal to the Tax Court only with respect to the issues and relief sought in the objection.

In the Tax Court, the Appellant argued the objection was clear that the issue was the particular amount of the redemption proceeds that were to be included in income in 1995. However, the Tax Court disagreed and stated that the taxpayer was taking too general an approach in identifying the issue. Further, the Tax Court held the taxpayer was seeking entirely different relief in respect of the issue. The Tax Court allowed the Crown’s motion and dismissed the taxpayer’s appeal (2013 TCC 94).

Federal Court of Appeal

The taxpayer appealed to the Federal Court of Appeal. The taxpayer argued that the large corporations rules require the taxpayer to describe the “point in question”, and in this case the objection was clear the debate was about the share redemption proceeds added to income as a deemed dividend. Further, less specificity is required in respect of the relief sought, and in this case that was simply relief in respect of the taxpayer’s Part IV tax liability. The Crown argued that the determination of whether the issue and relief sought were the same in the objection and the appeal was a question of fact, and on these factual issues the Tax Court made no palpable and overriding error.

Of the question of what was meant by “issue”, the Court of Appeal noted the large corporation rules require the taxpayer to reasonably describe each issue, which will differ in each case and will depend on the degree of specificity required to allow the CRA to know each issue to be decided. In the present case, the Court stated that the issue must be described in a manner that would result in the quantification as a specified amount of the relief sought.

The Court of Appeal criticized the taxpayer’s characterization of the issue in its Notice of Objection, but concluded that the issue was whether the taxpayer was correct in concluding that it had received $52 million in dividends in 1995. Accordingly, the taxpayer’s appeal was limited only to this issue. However, the Court of Appeal noted that the issue raised in the Notice of Appeal was not the issue raised in the taxpayer’s objection.

Although it was not necessary to dispose of the appeal, the Court commented on the question of whether or not the relief sought was the same in the objection and appeal. The Court noted that the taxpayer had challenged the reduction of Part IV tax in the objection, but on appeal the taxpayer was asking the court to eliminate the Part IV tax entirely. In the Court’s view, this was not the same relief.

The Court of Appeal dismissed the appeal.

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Bakorp: Appeal Dismissed for Failure to Comply with Large Corporations Rules