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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

Tax Court Continues “New Approach” to Cost Awards

The Tax Court’s approach to cost awards has evolved significantly in recent years. The Court’s interpretation and application of the factors under subsection 147(3) and the new settlement offer rules in subsections 147(3.1) to (3.8) of the Tax Court of Canada Rules (General Procedure) indicate that the Court continues to formulate a “new approach” to costs that is much closer to the manner in which other Canadian courts use cost awards to compensate successful parties and control the conduct of the parties during litigation.

The Tax Court’s new approach can be traced to the costs decision in Velcro Canada Inc. v. The Queen (2012 TCC 273) (see our previous blog post here), in which the Court articulated an approach to costs that provided for a reduced role for the “Tariff” amounts (see in Tariff B of Schedule II of the General Procedure Rules) and much greater emphasis on and consideration of the factors under subsection 147(3). Further, the new settlement offer rules in subsections 147(3.1) to (3.8) create a default entitlement to substantial indemnity costs (i.e., 80% of solicitor and client costs) after the date of a settlement offer for a successful party that achieved a result in the appeal that was as good or better than the settlement offer.

This new approach is a welcome development in that it creates a fair system in the Tax Court for compensating a winning party, and raises the stakes for both parties to an appeal.

Three recent costs decisions of the Tax Court provide good examples of the Court’s analysis and awards under this new approach.

Repsol Canada Ltd. 

In Repsol Canada Ltd. v. The Queen (2015 TCC 21) (under appeal), the Tax Court allowed the taxpayer’s appeal and held that certain of the taxpayer’s assets were Class 43 assets for the purposes of the capital cost allowance provisions in the Income Tax Act. The Court awarded costs to the taxpayer.

On its motion for increased costs, the taxpayer asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, an additional 10% of legal fees incurred after the issuance of its settlement offer, 75% of its legal fees incurred before the issuance of its settlement offer, and reasonable disbursements.

The Tax Court (2015 TCC 154) refused to reduce the taxpayer’s costs that would be subject to the substantial indemnity rule in subsection 147(3.1), held that the substantial indemnity rule applies to the legal fees for a costs motion, and refused to grant additional costs above the substantial indemnity amount for fees incurred after the issuance of its settlement offer.

The Court awarded post-settlement offer costs at 80% of solicitor-client costs ($264,334), pre-settlement offer costs at 50% of solicitor-client costs ($262,051), disbursements ($35,308), and 80% of solicitor-client costs plus reasonable disbursements for the costs motion.

The Crown has appealed the costs decision to the Federal Court of Appeal.

Standard Life Assurance Company of Canada

In Standard Life Assurance Company of Canada v. The Queen (2015 TCC 97) (under appeal), the Tax Court dismissed the taxpayer’s appeal and held that the taxpayer was not entitled to a bump in the cost base of certain insurance properties. The Court awarded costs to the Crown.

On its motion for increased costs, the Crown asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, 50% of legal fees incurred before the issuance of its settlement offer, and reasonable disbursements throughout.

The Tax Court (2015 TCC 138) held that the Crown’s settlement offer was a valid settlement offer that contained an element of compromise (see also the earlier case of Mckenzie v. The Queen (2012 TCC 329)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

The Tax Court made a minor adjustment for the hourly rate of junior counsel and awarded a lump sum amount of $474,663 (which included $37,818 in disbursements).

Sun Life Assurance Company of Canada

In Sun Life Assurance Company of Canada v. The Queen (2015 TCC 37), the Tax Court allowed the taxpayer’s appeal and held that the taxpayer was entitled to certain input tax credits. The Court awarded costs to the taxpayer.

On its motion for a enhanced costs, the taxpayer asked for a lump sum amount of $200,000, which approximated 80% of counsel fees of $157,430, plus taxes of $20,465 and disbursements of $21,365.

The Tax Court (2015 TCC 171) considered the taxpayer’s settlement offer, and concluded that it was a valid settlement offer that was capable of being accepted by the Crown (see also the earlier case of CIBC World Markets Inc. v. The Queen (2012 FCA 3)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

However, the Court reduced the amount of legal fees that would be subject to the 80% substantial indemnity rule because there was no evidence that the client had agreed to pay its counsel’s hourly fees (rather the fee charged to the client was a percentage of the amount recovered). Also, the taxpayer had not provided a detailed breakdown of the fees incurred before and after the issuance of the settlement offer.

Accordingly, the Court awarded substantial indemnity costs of $91,792, plus $1,050 for the Tariff amount for services rendered prior to examination for discovery, plus HST on these amounts (less any amount recoverable as an input tax credit), and disbursements of $21,356.


Tax Court Continues “New Approach” to Cost Awards

Baytex: ABQB Grants Rectification

In Baytex Energy Ltd. et  al. v. The Queen (2015 ABQB 278), the Alberta Court of Queen’s Bench considered whether rectification and/or rescission were available to address mistakes that could result in the taxpayer being taxed on additional resource income of $135 million for 2003-2006 and $528 million for 2007-2010.

The Court determined that the requirements for rectification had been satisfied and thus granted the rectification of certain documents to accord with the parties’ original intention.


Baytex Energy Trust (the “Trust”) was a publicly-traded mutual fund trust (the Trust later converted to Baytex Energy Corp. (“BEC”), a publicly-traded dividend-paying corporation). The Trust wholly-owned Baytex Energy Ltd. (“BEL”), which owned and operated oil and gas properties prior to transferring the properties to Baytex Energy Partnership on January 1, 2010.

The Baytex companies were subject to the pre-2007 oil and gas royalty regime in the Income Tax Act, which required certain additional resource income for an oil and gas producer (referred to in the judgment as “Phantom Income”) and denied certain deductions for provincial Crown royalties and taxes. A 25% resource allowance was available to the producer. The Phantom Income could be transferred by the producer to another party, and a non-deductible and off-setting reimbursement would be made back to the producer. In this case, BEL and the Trust agreed that BEL would transfer 99% of its income and cash flow to the Trust.

In the Budget of February 18, 2003, the federal government announced the phase-out of the oil and gas royalty regime and the elimination of the regime as of January 1, 2007.

Parties’ Agreements

BEL and the Trust executed a Net Profits Interest Agreement (the “Original Agreement”) in September 2003 for the transfer of income and the off-setting reimbursement. However, the written terms of the Original Agreement failed to address the transfer of Phantom Income. A subsequent agreement (the “Collateral Agreement”) – not all of the terms of which were reduced to writing – addressed the transfer of Phantom Income.

The parties intended that the transfer and reimbursement would cease effective January 1, 2007 because of the elimination of the oil and gas royalty regime in the Income Tax Act.

However, from January 1, 2007 to December 31, 2010, the parties continued the practice of transferring and reimbursing the Phantom Income. When this error was initially discovered in 2008, the Baytex companies’ tax professionals advised that the Original Agreement should be amended to provide for the reimbursement beyond 2006 to be consistent with the practice of the parties. The Baytex companies were told this amendment would have no adverse tax consequences. Based on this advice, the parties entered into an Amended Agreement.

The CRA reviewed the Baytex companies’ arrangements and concluded that an additional $135 million was taxable income to BEL for 2003-2006, and that the Trust earned an additional $528 million of taxable income for 2007-2010.


The Baytex companies sought rectification of the agreements. The CRA did not oppose the rectification of the agreements for the pre-2007 period, but did oppose the rectification for the post-2006 period on the basis that the Baytex companies had intentionally amended the Original Agreement, based on professional advice, to reflect the practice of transfer and reimbursement, and thus the parties mistaken assumption about the tax consequences would not meet the test for rectification. The taxpayers argued that the evidence (which consisted of two affidavits of BEC’s Chief Financial Officer) established that the parties always intended to transfer and reimburse the Phantom Income and that no transfers would occur after January 1, 2007.

The Court considered the authorities on rectification and concluded that the test for granting rectification had been met. The uncontroverted evidence was that the parties’ common intention was to transfer BEL’s income to the Trust, and that this practice would cease as of January 1, 2007. The Original Agreement and the Amended Agreement were inconsistent with this common intention. The precise form of the corrected agreement was not in dispute. And there were no other considerations that would limit/prevent the availability of rectification. Accordingly, the Court granted the rectification.

While this determination was sufficient to dispose of the application, the Court did go on to consider whether, if the Court was wrong on rectification, rescission was available to the parties. The Court held that the Amended Agreement triggered an unintended tax consequence that constituted a fundamental mistake that went to the root of the contract. The Court concluded that rescission was available to rescind the Amended Agreement, which would restore the parties to their Original Agreement, which the Crown had agreed should be rectified.

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Baytex: ABQB Grants Rectification

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion

SCC Clarifies Law on Admissibility of Expert Evidence

The Supreme Court has released its decision in White Burgess Langille Inman v. Abbott and Haliburton (2015 SCC 23) in which it considered whether the standards for admissibility of expert evidence should take into account the proposed expert’s (alleged) lack of independence or bias.

The Supreme Court’s decision brings some much-needed clarity to the issue of whether a trial judge can disqualify an expert based on impartiality and lack of independence at the qualification stage (i.e., Mohan).  Until now, there has been conflicting case law on this issue, with the majority of the cases supporting the conclusion that, at a certain point, expert evidence should be ruled inadmissible due to the expert’s lack of impartiality and/or independence.

The important questions that remained unanswered, and that trial courts struggled with, were (1) should the elements of an expert’s duty (i.e., independence and impartiality) go to admissibility of the evidence rather than simply to its weight? (2) If so, is there a threshold admissibility requirement in relation to independence and impartiality?

The Supreme Court unanimously answered both questions with “yes.”

(1)   The Expert’s Duty

The Supreme Court stated that expert witnesses have a duty to the court to give fair, objective and non-partisan opinion evidence.  They must be aware of this duty and be able and willing to carry it out.  Underlying the various formulations of the duty of an expert are three related concepts:

(i)        Impartiality: The expert’s opinion must be impartial in the sense that it reflects an objective assessment of the questions at hand.

(ii)        Independent: It must be independent it in the sense that it is the product of the expert’s independent judgment, uninfluenced by who has retained him or her or the outcome of the litigation.

(iii)        Absence of Bias: It must be unbiased in the sense that it does not unfairly favour one party’s position over another.  The “acid test” is whether the expert’s opinion would not change regardless of which party retained him or her.

However, the Supreme Court recognized that these concepts must be applied to the realities of adversary litigation.  Experts are generally retained, instructed and paid by one of the adversaries. According to the Court, “these facts alone do not undermine the expert’s independence, impartiality and freedom of bias.”

(2)   The Framework

The Court concluded that concerns related to the expert’s duty to the court and his or her willingness and capacity to comply with it are best addressed at the “qualification of expert” element of the Mohan framework (which is part 4 of that test).  A proposed expert witness who is unable and unwilling to fulfill his or her duty to the court is not properly qualified to perform the role of an expert.  If the expert witness does not meet this threshold admissibility requirement, his or her evidence should not be admitted.  Once this threshold is met, however, remaining concerns about an expert witness’s compliance with his or her duty should be considered as part of the overall cost-benefit analysis which the judge conducts to carry out his or her gatekeeping function.

The Supreme Court essentially adopted the 2-part test set out by the Ontario Court of Appeal in R. v. Abbey (2009 ONCA 624) and added its own gloss with respect part 4 of that test:

Step 1

The proponent of the expert evidence must establish the threshold requirements of admissibility.  These are the four Mohan factors (relevance, necessity, absence of an exclusionary rule, and properly qualified expert).

In addition, in the case of an opinion based on novel or contested science or science used for a novel purpose, the reliability of the underlying science for that purpose (see R. v. J.-L.J. (2000 SCC 51) per Binnie J.).

After reviewing Canadian, British, Australian, and U.S. authorities, the Supreme Court concluded that an expert’s lack of independence and impartiality goes to the admissibility of the evidence in addition to being considered in relation to the weight to be given to the evidence if admitted.  In reaching this conclusion, it relied upon Justice Binnie’s oft cited quote in R. v. J-L.J.: “The admissibility of the expert evidence should be scrutinized at the time it is proffered, and not allowed too easy an entry on the basis that all of the frailties could go at the end of the day to weight rather than admissibility”.

The Court concluded that concerns related to the expert’s duty to the court and his or her willingness and capacity to comply with it are best addressed initially in the “properly qualified expert” element of the Mohan framework.  In another recent decision, the Supreme Court held that for expert testimony to be inadmissible, more than a simple appearance of bias is necessary.  The question is not whether a reasonable person would consider that the expert is not independent.  Rather, what must be determined is whether the expert’s lack of independence renders him or her incapable of giving an impartial opinion in the specific circumstances of the case (Mouvement Laïque Québécois v. Saguenay (City) (2015 SCC 160) at para. 106).

Evidence that does not meet these threshold requirements should be excluded.

Step 2

Finding that expert evidence meets the basic threshold does not end the inquiry. At the second discretionary gatekeeping step, the judge balances the potential risks and benefits of admitting the evidence in order to decide whether the potential benefits justify the risks (put another way, whether otherwise admissible expert evidence should be excluded because its probative value was overborne by its prejudicial effect).  This is a residual discretion to exclude evidence based on a cost-benefit analysis. The Court adopted Doherty J.A.’s summary of this balancing exercise in Abbey – that the “trial judge must decide whether expert evidence that meets the preconditions to admissibility is sufficiently beneficial to the trial process to warrant its admission despite the potential harm to the trial process that may flow from the admission of the expert evidence.”

(3)   The Threshold

The Court also discussed the appropriate threshold for admissibility.  If a witness is unable or unwilling to fulfill his or her duty, they do not qualify to perform the role of an expert and should be excluded.  The expert witness must, therefore, be aware of this primary duty to the court and be able and willing to carry it out.  While the Court wouldn’t go so far as to hold that the expert’s independence and impartiality should be presumed absent challenge, the Court did state that absent such challenge, the expert’s attestation or testimony recognizing and accepting the duty will generally be sufficient to establish that this threshold is met.

Once the expert testifies on oath to this effect, the burden is on the party opposing the admission of the evidence to show that there is a realistic concern that the expert’s evidence should not be received because the expert is unable and/or unwilling to comply with that duty. If the opponent does so, the burden to establish on a balance of probabilities this aspect of the admissibility threshold remains on the party proposing to call the evidence.  If this is not done, the evidence, or those parts of it that are tainted by a lack of independence or by impartiality, should be excluded.

The Court held that this threshold requirement is not particularly onerous and it will likely be quite rare that a proposed expert’s evidence would be ruled in admissible for failing to meet it. The trial judge must determine, having regard to both the particular circumstances of the proposed expert and the substance of the proposed evidence, whether the expert is able and willing to carry out his or her primary duty to the court.  It is the nature and extent of the interest or connection with the litigation or a party thereto which matters, not the mere fact of the interest or connection.  The Court further stated that the existence of some interest or a relationship does not automatically render the evidence of the proposed expert inadmissible.  For example, a mere employment relationship with the party calling the evidence will be insufficient to do so.

The Court went on to provide some examples of types of interests/relationships that may warrant exclusion of the expert’s evidence:

  • A direct financial interest in the outcome of the litigation will be of some concern;
  • A very close familial relationship with one of the parties;
  • Situations in which the proposed expert will probably incur professional liability if his or her opinion is not accepted by the court; or
  • An expert who, in his or her proposed evidence or otherwise, assumes the role of an advocate for a party.

The decision as to whether an expert should be permitted to give evidence despite having an interest or connection with the litigation is a matter of fact and degree.  The concept of apparent bias is not relevant to the question of whether or not an expert witness will be unable or unwilling to fulfill its primary duty to the court.  When looking at an expert’s interest or relationship with a party, the question is whether the relationship or interest results in the expert being unable or unwilling to carry out his or her primary duty to the court to provide fair, non-partisan and objective assistance.

The Court emphasized that exclusion at the threshold stage of the analysis should occur only in very clear cases in which the proposed expert is unable or unwilling to provide the court with fair, objective and non-partisan evidence.  Anything less than clear unwillingness or inability to do so should not lead to exclusion, but be taken into account in the overall weighing of costs and benefits of receiving the evidence.


SCC Clarifies Law on Admissibility of Expert Evidence

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

Westerhoff and McCallum: More from the OCA on Expert Evidence

The Ontario Court of Appeal released its decision last week in Westerhof v. Gee Estate and McCallum v. Baker (2015 ONCA 206), which are the companion cases to Moore v. Getahun.  All three appeals were heard together.

The legal issue before the Court in Westerhof  and McCallum was whether participant experts and non-party experts could give opinion evidence without having to comply with Rule 53.03, which describes the deadlines and content requirements for expert reports.

The Court of Appeal held that the Divisional Court erred in concluding that the type of evidence – whether fact or opinion – is the key factor in determining to whom Rule 53.03 applies.

Rather, the Court of Appeal was unanimous in that participant experts and non-party experts may give opinion evidence without complying with Rule 53.03.  As a result, Rule 53.03 does not apply to the opinion evidence of a non-party expert or participant expert where he or she has formed a relevant opinion based on personal observations or examinations relating to the subject matter of the litigation for a purpose other than the litigation.


At the trial of Mr. Westerhof, the plaintiff proposed to call evidence from nine medical witnesses.  From the outset, the trial judge ruled that the medical witnesses who treated or assessed the plaintiff but did not comply with Rule 53.03 would not be entitled to give opinion evidence concerning their diagnosis or prognosis, even though they had not been retained for the purpose of the litigation. Those witnesses were also prevented from giving evidence of the history they had taken from Westerhof. The Divisional Court upheld the trial judge’s conclusion.  The Court of Appeal did not agree and reversed the decision, ordering a new trial.

At the trial of Mr. McCallum, the defendant appealed that decision on the basis, inter alia, that the trial judge erred by allowing treating medical practitioners who had not complied with Rule 53.03 to give “an avalanche” of opinion evidence.  The Court of Appeal dismissed this appeal.

Principles set out by the Court of Appeal

Simmons J.A., writing on behalf of the Court of Appeal, concluded that a witness with special skill, knowledge, training or experience who has not been engaged by or on behalf of a party to the litigation may give opinion evidence for the truth of its contents without complying with Rule 53.03 where:

  • The opinion to be given is based on the witness’s observation of or participation in the events at issue; and
  • The witness formed the opinion to be given as part of the ordinary exercise of his or her skill, knowledge, training and experience while observing or participating in such events.

The Court also tried to clear the confusion that often arises from referring to these witnesses as “fact witnesses” because their evidence is derived from their observations of or involvement in the underlying facts.  Simmons J.A. preferred to refer to these witnesses as “participant experts,” which takes into account that in addition to providing evidence relating to their observations of the underlying facts, they may also give opinion evidence admissible for its truth.  As with all evidence, and especially opinion evidence, the Court reiterated that it retains its gatekeeper function in relation to opinion evidence from participant experts and non-party experts.

Six factors were cited by the Court as reasons why the Divisional Court erred:

  1. The Divisional Court failed to refer to a single case under the pre-2010 jurisprudence, which support the conclusion that Rule 53.03 does not apply to opinion evidence given by participant experts. The Court reiterated its view in Moore that “the 2010 amendments to rule 53.03 did not create new duties but rather codified and reinforced … basic common law principles.”  The Court found no basis for the Divisional Court to conclude that the pre-2010 jurisprudence did not continue to apply following the 2010 amendments to the Rules relating to expert witnesses.
  2. Apart from Westerhof, no cases were brought to the Court’s attention that support the view that participant experts are obliged to comply with Rule 53.03 when giving evidence concerning treatment opinions.
  3. There was nothing in Justice Osborne’s Report on the Civil Justice Reform Project that indicated an intention to address participant experts or non-party experts; rather, the focus was litigation experts – expert witnesses engaged by or on behalf of a party to provide opinion evidence in relation to a proceeding.
  4. The use of the words “expert engaged by or on behalf of a party to provide [opinion] evidence in relation to a proceeding” in Rule 4.1.01 and Form 53 makes it clear that an expert must be “engaged by or on behalf of a party to provide [opinion] evidence in relation to the proceeding before the rule applies.  The Court concluded that witnesses, albeit ones with expertise, testifying to opinions formed during their involved in a matter, do not come within this description.  They are not engaged by a party to form their opinions, and they do not form their opinions for the purpose of the litigation.
  5. The Court was not persuaded that disclosure problems exist in relation to the opinions of participant experts and non-party experts requiring that they comply with Rule 53.03.  Quite often, these experts will have prepared documents summarizing their opinions about the matter contemporaneously with their involved, which can be obtained as part of the discovery process.  In addition, it is open to a party to seek disclosure of any opinions, notes or records of participant experts and non-party experts the opposing party intends to rely on at trial.
  6. Requiring participant witnesses and non-party experts to comply with Rule 53.03 can only add to the cost of the litigation, create the possibility of delay because of potential difficulties in obtaining Rule 53.03 compliant reports, and add unnecessarily to the workload of persons not expected to have to write Rule 53.03 compliant reports.


Westerhoff and McCallum: More from the OCA on Expert Evidence

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