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Correcting Tax Mistakes after Fairmont and Jean Coutu

I was very glad to be a panelist for the Canadian Tax Foundation’s conference on the Supreme Court of Canada’s decisions in Fairmont and Jean Coutu.

During the discussion the panelists were asked about the ways taxpayers may correct tax mistakes after these two decisions of the Supreme Court.

In my remarks, I suggested taxpayers would be wise to review the revised requirements for rectification, and to consider the other remedies that may be available. I cited a list of potential remedies and, as a starting point, a selection of cases on these remedies:

The Supreme Court’s decision in Fairmont did not diminish or alter the other remedies that may be available to a taxpayer following an intended tax result. I suggest that these other remedies may become more significant as taxpayers and their professional advisers determine how a particular tax mistake may be corrected following Fairmont and Jean Coutu.

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Correcting Tax Mistakes after Fairmont and Jean Coutu

OCAC Publishes Report on Voluntary Disclosure Program

The Offshore Compliance Advisory Committee (OCAC) has published its report on the CRA’s Voluntary Disclosure Program, the first of several anticipated OCAC reports in furtherance of the OCAC’s mandate to provide advice to the Minister of National Revenue and the Canada Revenue Agency (CRA) on administrative strategies to deal with offshore compliance.

The OCAC’s recommendations in respect of the voluntary disclosure program include:

  • Less generous VDP relief in certain circumstances
  • Limited access for repeat users
  • Requirement to pay tax and interest within specific time frames
  • Insistence on all necessary and relevant information
  • No relief from transfer pricing penalties (see subsection 247(3) of the ITA)
  • Disclosure of identity of advisors who assisted with non-compliance
  • Consideration of higher-level approval requirements
  • Introduction of procedures for review by specialists in complex cases
  • Elimination of right of objection in respect of VDP reassessments
  • Consideration of amending VDP in respect of failure to file T1135 forms
  • Continuation of similar treatment for domestic and offshore non-compliance

In response, the Minister of National Revenue Hon. Diane Lebouthillier stated,

“I welcome the Offshore Compliance Advisory Committee’s first report and wish to thank the committee for its unique insight and for providing its invaluable experience to help improve the tax system for the benefit of hard-working middle class Canadians.”

“Our government has made it a priority to make the tax system fairer for middle class Canadians and to crack down on those who cheat and who do not pay their share. That is why we created the Offshore Compliance Advisory Committee – to advise us on the best ways to improve our tax system. We will continue with our efforts to crack down on tax cheats. My message is clear: the trap is closing.”

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OCAC Publishes Report on Voluntary Disclosure Program

SCC Rectification Decisions to be Released on Friday December 9

The Supreme Court of Canada’s decisions in two rectification cases, AG (Canada) v. Fairmont Hotels Inc. (Docket #36606) and Jean Coutu Group (PJC) Inc. v. AG (Canada) (Docket #36505), will be released on Friday December 9, 2016 at 9:45 a.m.

See our previous posts on Fairmont here and here.

The Supreme Court’s decisions in Fairmont and Jean Coutu will be the first decisions from the Court on rectification since AES and Jean Riopel.

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SCC Rectification Decisions to be Released on Friday December 9

Wilson: SCC Overhauls Standard of Review?

Tax professionals who advise clients on judicial review of the CRA’s discretionary decisions should monitor developments in the standard of review in light of the Supreme Court of Canada’s decision in Wilson v Atomic Energy of Canada Ltd (2016 SCC 29).

In Wilson, the appellant was a non-unionized procurement specialist who worked for Atomic Energy of Canada Ltd. for four and a half years. He was dismissed in November 2009 and filed an unjust dismissal complaint under the Canada Labour Code. At issue was whether the significant severance package provided to Mr. Wilson rendered the dismissal just.

The labour adjudicator found that a severance payment did not exempt an employer from a determination with respect to whether a dismissal was just. Applying a standard of review of reasonableness, the application judge reversed the decision of the labour adjudicator, finding that the Code permitted the dismissal of non-unionized employees without cause. The Federal Court of Appeal agreed, but held that the appropriate standard of review was one of correctness.

The Supreme Court of Canada allowed the appeal and restored the decision of the labour adjudicator. The Court split 5-3 and issued several sets of reasons in its decision.

On the merits, Justice Abella wrote for the Court that the standard of review with respect to a labour arbitrator was one of reasonableness, to be assessed in the specific context under review. In this case, Justice Abella found the interpretation of the labour adjudicator was reasonable. However, Justice Abella remarked – albeit in obiter – that the line between reasonableness and correctness had begun to blur in the case law. A single standard of reasonableness, she stated, would operate to both protect deference and give effect to one correct answer where the rule of law required it. This would give effect to the different gradations of deference to be given to administrative decision makers in different contexts.

Chief Justice McLachlin and Justices Karakatsanis, Wagner and Gascon concurred with Justice Abella’s reasons and expressed appreciation for her attempt to galvanize constructive conversation about the standard of review. However, they declined to recast the standard of review. Justice Cromwell also concurred in the result, but rejected Justice Abella’s attempt to define a new framework, finding that the correctness/reasonableness distinction that emerged in Dunsmuir was still appropriate.

Justices Cote, Brown and Moldaver dissented. Agreeing with the Federal Court of Appeal, they stated that a standard of correctness applied and that the contradictions inherent in a growing body of labour decisions called for judicial clarity. Specifically, they held that “where there is lingering disagreement on a matter of statutory interpretation between administrative decision-makers, and where it is clear that the legislature could only have intended the statute to bear one meaning, correctness review is appropriate”.

What does Wilson mean for tax litigators? First, even though four members of the Court declined to overhaul the Dunsmuir framework, they lauded Justice Abella’s attempt to refine this area of law. The views expressed in the reasons indicate that the Court may be willing to revisit and clarify Dunsmuir (which also contained three sets of reasons).

Second, to the extent that members of the Court wish to supplant the Dunsmuir test with a single standard of reasonableness (containing gradients of deference), attempts to challenge the CRA’s discretionary decisions could be met with increased difficulty in the future.

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Wilson: SCC Overhauls Standard of Review?

CRA Creates New Offshore Compliance Advisory Committee

The CRA continues its efforts to strengthen tax compliance in Canada.

Following the CRA’s recent announcement of its efforts to crackdown on international tax evasion, the CRA announced the creation of a new Offshore Compliance Advisory Committee. From the CRA’s news release:

… The Offshore Compliance Advisory Committee (OCAC) will be composed of seven independent experts with significant legal, judicial and tax administration experience.

The members will provide input to the Minister and the CRA on additional administrative strategies for offshore compliance to build on the Budget 2016 investment.

The OCAC’s first meeting will be in spring, 2016, and its initial areas of focus will include:

  • Strategies to help alleviate and discourage offshore non-compliance;
  • Administrative policies being used by other tax administrations to address this global issue
  • Advice to the CRA in moving forward with its measurement of the tax gap;
  • Additional strategies and practices related to promoters of tax schemes; and
  • Potential ways to improve the CRA’s criminal investigation functions.

The OCAC will be chaired by Dr. Colin Campbell. Dr. Campbell is currently Associate Professor of Law at Western University and a published author on tax matters. The Committee’s Vice-Chair is Kimberley Brooks, Associate Professor of the Schulich school of Law at Dalhousie University. Ms. Brooks, a member of the Canadian Tax Foundation Board of Governors and a member of the International Fiscal Association, practiced law in Toronto and the United Kingdom.

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CRA Creates New Offshore Compliance Advisory Committee

CRA Provides Update on Efforts to Combat Tax Evasion

Following the release of the “Panama Papers” and the Canadian federal government’s budget announcement that additional resources will be directed to the CRA to collect existing tax debts and combat tax evasion, the CRA has provided an update on its “crack down on tax evasion and tax avoidance”.

The CRA stated that the first jurisdiction that will be investigated is the Isle of Man, which the CRA had identified as the recipient of CDN$860 million of electronic funds transfers by approximately 800 taxpayers. Additional jurisdictions and financial institutions will be included in a second investigative project starting in May 2016.

The CRA also announced several other aspects of its program including the hiring of new auditors/specialists, a focus on tax schemes targeted to wealthy taxpayers, investigations of high-risk multinational corporations, use of investigative tools and technology, larger investigation teams, international collaboration, and the formation of an independent advisory committee on tax evasion and aggressive tax planning.

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CRA Provides Update on Efforts to Combat Tax Evasion

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.

Background

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.

Analysis

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

CRA Appoints New Ombudsman

The CRA has appointed a new Taxpayers’ Ombudsman, the second since the position was created in 2008.

From the CRA news release:

April 10, 2015 – Ottawa – Canada Revenue Agency

The Honourable Kerry-Lynne D. Findlay, P.C., Q.C., M.P., Minister of National Revenue, today announced the appointment of the new Taxpayers’ Ombudsman, Ms. Sherra Profit. Minister Findlay underscored the Canada Revenue Agency’s (CRA) commitment to maintain its strong relationship with the Office of the Taxpayers’ Ombudsman in order to provide Canadians with fair, equitable and respectful service.

The Office of the Taxpayers’ Ombudsman was established in 2008 and operates independently from the CRA. Its mandate is to uphold the Taxpayer Bill of Rights and provide an impartial review of unresolved taxpayer service complaints. This Government created the Taxpayer Bill of Rights, as well as the Office of the Taxpayer’s Ombudsman, and is committed to offering the highest level of service to Canadians.

Ms. Profit has more than 15 years of experience practicing law in a wide range of areas. Ms. Profit holds a Bachelor of Laws Degree from the University of Saskatchewan, and a Bachelor of Arts Degree from St. Francis Xavier University. She was called to the bar on April 14, 2000, in Prince Edward Island.

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CRA Appoints New Ombudsman

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

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