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Bolton Steel Tube: TCC Orders Crown to Reassessment in Accordance with Settlement‏

In Bolton Steel Tube Co. Ltd. v. The Queen (2014 TCC 94), the Tax Court of Canada allowed the taxpayer’s motion requesting an Order that would require the CRA to reassess the taxpayer in accordance with the terms of a settlement agreement. In doing so, the Tax Court discussed certain principles regarding settlement agreements and the resulting reassessments.

In Bolton Steel Tube, the CRA reassessed the taxpayer for its 1994, 1995, 1996 and 1997 taxation years on the basis that the taxpayer failed to report income in each of those taxation years (the “2007 Reassessment”).

In 1996, the taxpayer reported $1.2 million of income. The CRA added approximately $600,000 of unreported income for total income of $1.8 million. During examinations for discovery, the CRA’s representative admitted that approximately $200,000 of the $600,000 increase should not have been made. Accordingly, for the 1996 taxation year, the maximum amount of income the CRA could have added as unreported income was $400,000. The CRA further confirmed this admission in its Reply.

On June 15, 2012, the taxpayer delivered to the Crown an offer to settle which proposed to settle the appeals on the basis that (i) the CRA would vacate the reassessments for 1994, 1995 and 1997, and (ii) the CRA would reassess the 1996 taxation year to add $403,219 to the taxpayer’s income and impose a penalty under subsection 163(2) of the Income Tax Act (the “Act”). The Crown accepted this offer without further negotiation, and the parties entered Minutes of Settlement on these terms.

Following the settlement, the CRA issued a reassessment that calculated the taxpayer’s income for its 1996 taxation year to be $2,266,291, essentially adding $403,219 to the $1.8 million that had been previously assessed (the “2012 Reassessment”). The result was illogical: The agreed amount of unreported income – $403,219 – was added twice, and the $200,000, which the CRA had admitted was not to be added to the taxpayer’s income, was included as well.

In requesting the Order, the taxpayer argued that:

The 2012 Reassessment was not supported on the facts and the law;

The 2012 Reassessment violated the principle that the CRA cannot appeal its own assessment; and

The 2012 Reassessment was made without the taxpayer’s consent, which would be required pursuant to subsection 169(3) of the Act.

The Crown argued that if the 2012 Reassessment was varied or vacated then there had been no meeting of the minds, the settlement was not valid, and the 2007 Reassessment should remain under appeal.

The Tax Court agreed with the taxpayer on all three arguments.

With respect to the first argument, the Tax Court found the CRA’s interpretation of the Minutes of Settlement to be “divorced from the facts and law”. The Crown’s position was unsupportable since settlements must conform with the long-standing principal from Galway v M.N.R. (74 DTC 6355 (Fed. C.A.)) that settlements must be justified under, and in conformity with, the Act. In Bolton Steel Tube, the Tax Court went as far to say “even if both parties consented to settling in this manner, it could not be permitted” and “there is nothing to support the [Crown's] interpretation and nothing to support the [Crown's] further contention that the [taxpayer] offered this amount in exchange for other years to be vacated”.

With respect to the arguments surrounding subsection 169(3) of the Act, the Tax Court found that the taxpayer had not consented to having its income increased by the amount in the 2012 Reassessment.

The Crown argued that subsection 169(3) of the Act, which allows the CRA to reassess an otherwise statute-barred year upon settlement of an appeal, also allows the CRA to increase the amount of tax which the CRA could reassess despite subsection 152(5) of the Act. Subsection 152(5) of the Act is the operative provision that prevents the CRA from increasing an assessment of tax. Here, the Tax Court maintained the longstanding principle that a reassessment cannot be issued that results in an increase of tax beyond the amount in the assessment at issue. This is tantamount to the CRA appealing its own reassessment, which is not permitted, and thus renders the 2012 Reassessment void. We note that the Tax Court also considered the 2012 Reassessment to be void on the basis that it was an arbitrary assessment.

The Tax Court rejected the Crown’s argument that the settlement was ambiguous and therefore there was no meeting of minds as would be required for a valid contract. The Crown argued that the settlement was not valid and therefore the years under appeal should remain in dispute. The Tax Court turned to fundamental principles of contractual interpretation and found that the contract validly existed since it could reasonably be expected that the Crown would have known that the addition of $403,219 was to be added to the appellant’s income as originally reported (i.e., $1.2 million) and not to the income amount in the 2007 Reassessment (i.e., $1.8 million).

Accordingly, the Tax Court rejected the Crown’s argument, found that the settlement was valid and that the Minister should reassess on the basis that $403,219 should be added to the taxpayer’s income as originally reported. Since the 2012 reassessment was not valid, and therefore did not nullify the 2007 reassessment, and a notice of discontinuance had not yet been filed, the Tax Court continued to have jurisdiction over the appeal.

The result of this motion was a clear victory for the taxpayer and for common sense. It serves as a reminder that precision is essential when entering into settlement agreements.

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Bolton Steel Tube: TCC Orders Crown to Reassessment in Accordance with Settlement‏

Waiving rights of objection and appeal: SCC declines to hear the taxpayer’s appeal in Taylor v. The Queen

On August 15, 2013, the Supreme Court of Canada dismissed the application for leave to appeal in Terry E.Taylor v. Her Majesty the Queen (2012 FCA 148).

In Taylor, the issue was whether a signed settlement agreement under which the taxpayer waived his right to appeal was binding. In that case, the taxpayer was assessed for income tax and GST, as well as gross negligence penalties and interest. He signed a settlement agreement under which the Minister of National Revenue would vacate the gross negligence penalties and, in exchange, he would waive his right to object or appeal in accordance with subsections 165(1.2) and 169(2.2) of the Income Tax Act and subsections 301(1.6) and 206.1(2) of the Excise Tax Act. The taxpayer, who did not have counsel advising him at the time, later claimed that he was under duress when he signed the agreement. Having already disposed of the penalties, he went to Tax Court to challenge the amount of tax assessed.

Justice Judith Woods held that the taxpayer’s testimony that he was “scared” and pressured into signing the agreement lacked credibility given his qualifications as a Certified Management Accountant and his extensive business and financial experience. He had ample time to consult with counsel prior to meeting with the CRA. The Tax Court held that the settlement agreement was “freely made” and signed without “undue pressure.”  The Tax Court dismissed the taxpayer’s appeal (2010 TCC 246) and the Federal Court of Appeal affirmed at 2012 FCA 148. As noted above, the Supreme Court of Canada has declined to hear Mr. Taylor’s appeal.

Taylor adds to an existing body of case law on the question of whether, and under what circumstances, settlement agreements between taxpayers and the CRA can be set aside. The Tax Court has held that in certain limited circumstances a settlement agreement may not be binding. For example, in 1390758 Ontario Corporation v. The Queen (2010 TCC 572) and Huppe v. the Queen (2010 TCC 644), agreements were held to be binding so long as they were made on a “principled” basis (see, for example, Daniel Sandler and Colin Campbell, “Catch-22: A Principled Basis for the Settlement of Tax Appeals“, Canadian Tax Journal (2009), Vol. 57, No. 4, 762-86).

Given that a significant portion of tax disputes are settled and never reach the courtroom, professional advisors should ensure that taxpayers understand the implications of signing settlement agreements under which they relinquish rights of objection or appeal.

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Waiving rights of objection and appeal: SCC declines to hear the taxpayer’s appeal in Taylor v. The Queen