1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

Crown bound by settlement agreement to allow losses it claimed to be a fiction

In the recent decision Her Majesty the Queen v. CBS Canada Holdings Co., 2020 FCA 4, the Federal Court of Appeal held that the Crown (i.e., Her Majesty the Queen, representing the Minister of National Revenue and her agent the Canada Revenue Agency) could not resile from a settlement agreement with a taxpayer into which it had entered freely, simply because the Crown’s assumptions on which it had decided to enter into the agreement turned out to be wrong (or at least may have been wrong).

The taxpayer had claimed a non-capital loss-carry-forward, which the Minister denied by way of an assessment. The taxpayer appealed the assessment to the Tax Court of Canada. Before trial, the parties reached an out-of-court settlement under which the Crown agreed to allow the loss carry-forward.

After signing the agreement, the Crown refused to implement it on then basis that it was “factually indefensible with no bearing in reality, therefore, illegal and non-binding on the Minister”. In short, the Crown now took the position that there were no losses and hence the agreement agreeing to allow such losses to be carried forward could not be enforced. The Crown relied on an old case called Galway for the principle that the Tax Court will not implement a settlement agreement or Consent Judgement unless it reflects a “principled” approach to the appeal, that is, unless it reflects terms that the Court itself might have granted in a Judgment had the matter gone to trial (one wonders what led the Crown to agree to the agreement in the first place, but that is irrelevant for present purposes).

The taxpayer applied to the Tax Court for an order requiring the CRA to reassess in accordance with the agreement. The Tax Court held and the Federal Court of the Appeal agreed, that the Crown could not resile from the agreement; the Crown entered into the agreement freely and believed the agreement to be in accordance with the facts and the law at the time it did so. The Courts held that the general principle is that parties, including the Crown, should be bound by agreements into which they enter. As for Galway, the FCA held that it was still good law but did not apply on these facts, primarily because it was not self-evident that the settlement agreement was wrong or invalid or contained terms that the Tax Court could not have found had the matter gone to trial. As the FCA said: “Galway intended that courts would intervene only in very limited circumstances where it was evident on the face of the limited material before the Court there was a factual or legal problem with the settlement.”

The Courts’ decisions provide surety to a taxpayer who enter into a settlement agreement with the Crown, as the Crown will not be able refuse to implement it if it later learns or believes that the factual basis of the settlement was incorrect.

The Crown argued also that it could not reassess the taxpayer in accordance with the settlement agreement because that would result in the taxpayer owing an increased amount of tax in one of the years in issue. However, the FCA held that this was irrelevant: it was the taxpayer, not the CRA, that was seeking an order that would result in an increase in taxes payable. This did not violate the rule that the CRA cannot appeal its own assessment so as to increase the tax assessed.

Crown bound by settlement agreement to allow losses it claimed to be a fiction

McIntyre: Not What You Bargained For?

When are the parties to a civil tax dispute bound by agreed facts from a criminal proceeding?

This was the question considered by the Tax Court of Canada on a Rule 58 motion made by the taxpayers in McIntrye et al v. The Queen (2014 TCC 111). Specifically, the taxpayers argued the principles of issue estoppel, res judicata, and abuse of process applied to prevent the Minister of National Revenue (the “Minister”) from assuming facts inconsistent with agreed facts from a prior criminal guilty plea.

In McIntyre, two individuals and their corporation were audited for the 2002 to 2007 tax years. The individuals and the corporation were charged with criminal income tax evasion. As part of a plea bargain, one individual and the corporation plead guilty based on certain agreed facts, and the court imposed sentences accordingly. The other individual was not convicted.

Subsequently, the Minister issued GST reassessments of the corporation, and further reassessments of the individuals for income tax. In issuing the reassessments, the Minister refused to be bound by the agreed facts from the criminal proceeding. In the Notices of Appeal in the Tax Court, the taxpayers argued the reassessments must be consistent with the agreed facts.

The taxpayers brought a motion under section 58 of the Tax Court Rules (General Procedure) for a determination of a question of law or mixed fact and law before the hearing of the appeals. Specifically, the taxpayers asked (i) whether the doctrines of issue estoppel, res judicata and abuse of process prevented the Minister from making assumptions inconsistent with the agreed facts, and (ii) whether the parties were bound by the agreed facts in respect of the calculation of certain capital gains, shareholder debts, losses and shareholder benefits.

The taxpayers argued that it was appropriate to deal with these issues before the hearing, whereas the Crown argued that these issues could not be determined on a Rule 58 motion because, in this case, the facts arose from a plea bargain rather than a determination by a court, the agreed facts did not address the GST liability of the corporation or the other individual’s income tax liability, and the facts (and tax liability) of a criminal proceeding would only prohibit the parties from alleging a lower tax liability in a civil proceeding.

The Tax Court dismissed the taxpayer’s motion. The Court considered the applicable test on a Rule 58 motion, namely that there must be a question of law or mixed fact and law, the question must be raised by a pleading, and the determination of the question must dispose of all or part of the proceeding (see HSBC Bank Canada v. The Queen, 2011 TCC 37).

The Court stated that, in this case, only the first two requirements were met:

[35] I agree with the Respondent’s analysis of the caselaw. It confirms that prior convictions in criminal proceedings resulting from plea bargains, although a factor that may go to weight in a civil tax proceeding, are not determinative of the relevant facts and issues in a subsequent tax appeal.

[38] In MacIver v The Queen, 2005 TCC 250, 2005 DTC 654, Justice Hershfield also concluded that a question is best left to the trial Judge where the motion is merely to estop a party from contesting certain facts that will not dismiss an entire appeal. As noted in his reasons, unless such a question can fully dispose of an appeal by finding that issue estoppel applies, a Rule 58 determination could do little more than split an appeal and tie the hands of the trial Judge.

The Court noted that the agreed facts did not address the corporate GST liability or the second individual’s income tax liability, dealt only with the 2004 to 2007 tax years, and did not address the imposition of gross negligence penalties. The Court concluded that issue estoppel would not apply because there was not a sufficient identity of issues between the criminal and civil proceedings. It would be unfair, the Tax Court stated, to prohibit the parties from adducing evidence in the civil tax appeals where there had been no introduction and weighing of evidence in the criminal proceeding.

McIntyre: Not What You Bargained For?

Tax Court Upholds Penalties Imposed for False Statements

In Morton v. The Queen (2014 TCC 72), the Tax Court of Canada upheld penalties imposed by the Minister of National Revenue (the “Minister”) under subsection 163(2) of the Income Tax Act (Canada) (the “Act””) despite novel arguments by the taxpayer to the contrary.

In this case, the taxpayer originally filed his income tax returns for the relevant years and paid taxes on the reported income.  After the normal reassessment periods expired, utilizing the taxpayer “fairness” provisions in subsection 152(4.2) of the Act, the taxpayer filed T1 Adjustment Requests containing false information in the form of additional income and expenses that would place the taxpayer in a tax loss position in each year. If the Minister had accepted the adjustments, the taxpayer would have received refunds in excess of $202,000.

However, the taxpayer’s plan did not work out as expected. The Minister not only denied the T1 Adjustment Requests, but also levied penalties in excess of $75,000 pursuant to subsection 163(2) of the Act.  These penalties were the subject of the appeal to the Tax Court.

During testimony, the taxpayer admitted to supplying false information in the T1 Adjustment Requests intentionally, knowingly and without reliance on another person. In defense of his actions the taxpayer claimed that he was under stress due to financial difficulties, a marriage breakdown and loss of access to his business books and records. At trial, the Tax Court found as a matter of fact that the misrepresentations were made fraudulently and rejected the taxpayer’s defense since no documentary evidence could be supplied in respect of the alleged stress.

The remainder of Justice Bocock’s decision contained a thorough analysis of the provisions of subsection 152(4.2) of the Act in the context of levying a penalty pursuant to subsection 163(2) of the Act. Justice Bocock provided the following insights:

  • Even where information is supplied to the Minister outside of the context of filing a return for a particular taxation year, if the taxpayer makes fraudulent misrepresentations sufficient to assess under subparagraph 152(4)(a)(i) of the Act, for instance in requesting that the Minister reopen the taxation year under subsection 152(4.2) of the Act, the Minister may assess penalties for a statute barred year.
  • The penalty provisions in subsection 163(2) of the Act apply even in the absence of the Minister issuing a refund or reassessment that relies upon the incorrect information. The Tax Court found it would be absurd to require the Minister to rely on the fraudulent misrepresentations before levying a penalty; and
  • The meaning of the words “return”, “form”, “certificate”, “statement” and “answer” in subsection 163(2) of the Act should be defined broadly to include documents such as the T1 Adjustment Request. Limiting the application of penalties to prescribed returns and forms ignores the plain text, context and purpose of the Act and would lead to illogical results.

It should come as no surprise that the Tax Court upheld the penalties. Nevertheless, the decision provides an enjoyable and thought provoking analysis of the provisions contained in subsections 152(4.2) and 163(2) of the Act.

, ,

Tax Court Upholds Penalties Imposed for False Statements