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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

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

McKesson: Taxpayer Seeks to Raise Additional Issue on Appeal

“Judges are expected to decide cases as framed by the parties, then step back and allow the appellate process to unfold. In this case, the trial judge did neither.”
- Taxpayer’s Supplemental Memorandum of Fact and Law

The transfer pricing case of McKesson v. The Queen has raised procedural issues that are without precedent in Canadian tax cases. This week, those procedural issues became a central part of the matters that will be considered by the Federal Court of Appeal.

In a Notice of Motion (and other materials) filed this week, the taxpayer has asked for a new trial before the Tax Court.

Background

McKesson is a case involving transfer pricing adjustments under section 247 of the Income Tax Act (Canada) in respect of the factoring of accounts receivable as well as the limitation period in Article 9(3) of the Canada-Luxembourg Tax Convention. The Tax Court dismissed the taxpayer’s appeal.

After the taxpayer had commenced an appeal in the Federal Court of Appeal, Tax Court Justice Patrick Boyle recused himself (2014 TCC 266) from the two remaining issues before the lower court (i.e., costs and the content of the Tax Court’s public file) on the basis that the taxpayer had, in its materials filed in the Court of Appeal, accused of him of bias (see our previous post here).

Notice of Motion

On November 3, the taxpayer filed a Notice of Motion in the Federal Court of Appeal for leave to file (i) an Amended Notice of Appeal, and (ii) a Supplementary Memorandum of Fact and Law. In its Motion, the taxpayer states that Justice Boyle’s reasons for recusal raise a further ground of appeal in addition to those already set out in the original Notice of Appeal. The proposed Amended Notice of Appeal and Supplementary Memorandum of Fact and Law address the following additional ground of appeal:

Do the trial judge’s Recusal Reasons compromise the appearance and reality of a fair process in this case such that a new trial is necessary?

Specifically, the proposed Amended Notice of Appeal states,

8. The Trial Judge’s Reasons for Recusal dated September 4, 2014 interfere with the fairness of the appellate process and compromise the appearance and reality fairness of both the trial and appeal.

The taxpayer has also hired additional counsel in respect of the motion, namely Henein Hutchison LLP, a Toronto-based litigation law firm.

Taxpayer’s Arguments

The taxpayer’s Written Representations in support of its Motion argue that the recusal reasons were directed at the Court of Appeal and have compromised the fairness of the case. The taxpayer argues that this “improper intervention” has compromised the integrity of the appeal process.

The taxpayer’s Supplementary Memorandum of Fact and Law states that the trial judge’s “intervention in this appeal was ill-advised and improper”. The taxpayer argues that the trial judge should have remained “above the fray” and should not have “put himself into the appellate arena”.

The taxpayer characterizes the recusal reasons as a “post-hoc attempt to justify to an appellate court a decision given many months earlier” [emphasis in original]. The taxpayer states that the “Recusal Reasons are nothing less than an explicit attempt by the trial judge to insert himself into the appellate process as an advocate against the Appellant and its lawyers.”

The taxpayer argues that the recusal reasons must be considered part of the record in the case before the Federal Court of Appeal. A new trial would, in the taxpayer’s view, give it “an opportunity to make its case at trial, free of the unfairness that has now tainted this proceeding.”

The taxpayer also argued that the recusal reasons have undermined the solicitor-client relationship, and retrospectively reveal the trial judge’s disposition against the taxpayer.

The taxpayer has requested that the appeal be allowed and the matter remitted to the Tax Court for a new trial before a different judge.

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The Crown has not yet filed its response to the taxpayer’s Notice of Motion.

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McKesson: Taxpayer Seeks to Raise Additional Issue on Appeal

1057513 Ontario Inc.: The Clear Meaning of Subsection 129(1)

At the heart of tax integration in Canada is the refundable tax and dividend refund mechanism in subsection 129(1) of the Income Tax Act (the “Act”).

Generally, to avoid undue deferral of tax on investment income earned through a “Canadian-controlled private corporation”, such corporations must pay refundable tax on investment income (either under Part I or Part IV of the Act), which effectively brings the corporate tax rate on such income to the same rate had the income been earned directly by the Canadian shareholder.

In order to ensure that such income once distributed to an individual shareholder is not subject to double taxation, the Act provides that taxable dividends paid by a private corporation entitle the corporation to a refund of the lesser of 1/3rd of the taxable dividends paid and the balance of the corporation’s “refundable dividend tax on hand” (“RDTOH”) account. Importantly, the Act imposes a strict deadline for obtaining the refund: the return for the year in which the refund is claimed must be filed within three years of the end of the year in which the dividend is paid.

Despite this seemingly clear-cut limitation period, a number of taxpayers over the years have turned to the courts to seek what amounts to a judicial extension of the filing deadline. 1057513 Ontario Inc. v. The Queen (2014 TCC 272) is the latest in a line of recent decisions considering whether the three-year refund limitation period is absolute.

In 1057513, the taxpayer declared and paid dividends to its shareholder in the 1997-2004 tax years. The taxpayer’s director and officer was unaware that a personal holding corporation had an obligation to file a tax return in the years in question. Upon the filing of the tax returns in 2008, the CRA assessed Part IV dividend tax (and interest and penalties) and denied the dividend refund claim.

On appeal, the taxpayer made three arguments: (i) the language in subsection 129(1) was ambiguous (or “at least not unambiguous”), (ii) a textual, contextual and purposive (“TCP”) analysis of the provision reveals latent ambiguities which should allow for a late refund, and (iii) the filing deadline is directory, not mandatory, meaning that not filing the return on time is not fatal to the refund claim.

Not surprisingly, the Tax Court dismissed the appeal. Relying on Tawa Developments Inc. v. The Queen (2011 TCC 440) and other relevant decisions, the Tax Court determined that there was nothing textually unambiguous about the requirement to file a return within three years, finding the statutory language to be “strikingly lucid and abundantly clear”.

Under the TCP argument, the taxpayer argued that the Court should read out the deadline because it was “antipodal” to the integration principal. The Court disagreed, and concluded that the rule was necessary in the context and for the purpose of achieving an effective self-assessing system. Finally, the Court was not swayed by the taxpayer’s argument that a filing deadline without a penalty is directory and not mandatory. The Court noted that while there may be no penalty per se, there was certainly a consequence of the failure to file – that being the inability to access the dividend refund.

It seems clear from the jurisprudence to date that the three-year filing deadline for obtaining a dividend refund under subsection 129(1) is absolute. Taxpayers and their advisors are encouraged to file returns as soon as possible to avoid the potential punitive double-taxation.

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1057513 Ontario Inc.: The Clear Meaning of Subsection 129(1)

McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

In McKesson v. The Queen (2014 TCC 266), Justice Patrick Boyle recused himself from the two remaining issues with which he was seized in the transfer pricing case – costs and the content of the court’s public file (i.e., the determination of whether certain information may be confidential).

This unusual decision arises as a result of the content of the Appellant’s factum filed in the Federal Court of Appeal in the appeal of Justice Boyle’s trial decision in McKesson (see our posts on the Tax Court case here and the Federal Court of Appeal proceeding here and here).

In his recusal reasons, Justice Boyle wrote:

[4]        As detailed below, I have, of my own motion, decided that I am compelled to consider whether I need to recuse myself from the two remaining issues before this Court. A consideration of this issue is required because I became aware that the Appellant and Appellant’s counsel, together with its co-counsel in the Federal Court of Appeal in respect of the appeal of the trial decision, had made certain public written statements about me in its factum in the Federal Court of Appeal (the “Factum”) which, upon reflection, appear to me to clearly include:

(i)         allegations that I was untruthful and deceitful in my Reasons;

(ii)         clear untruths about me, what I said and heard in the course of the trial, as well as the existence of evidentiary foundations supporting what I wrote in my Reasons; and

(iii)        allegations of impartiality on my part.

[5]        This requires me to consider whether:

(i)         I believe that a reasonable person reading the Factum, my Reasons, and the relevant portions of the transcript would believe that the trial judge so strongly complained of by McKesson Canada might not be able to remain impartial in his consideration of costs and confidential information;

(ii)         I believe I can impartially consider, weigh and decide the costs and confidential information issues before me; and

(iii)        whether the public challenge of my impartiality expressed by McKesson Canada and its co-counsel in the Factum is itself sufficient to warrant recusing myself at this stage.

 …

[133]     I view these as public allegations by a party to the costs and confidential information matters remaining before this Court that, regardless of the merits of their reasoning or their thoughts, I am unable to decide the remaining matters impartially. I believe that a reasonable person reading only these phrases from the Factum, without reviewing my Reasons or the trial Transcript, would believe that such strong complaints by McKesson Canada and its counsel may give rise to a serious doubt that I will be seen to be able to dispose of the two remaining issues and discharge my duties on an impartial basis.

[136]     For the Reasons identified above, I have decided I have to recuse myself from the remaining costs and confidential information issues in McKesson Canada’s proceeding in this Court.

[137]     It may be that some of the perceived untruths about the trial judge described above under heading II might individually not warrant recusal, and may be within an appellate advocate’s licence to overstate through the use of absolutes like ‘never’, ‘only’ and ‘any’.

[138]     However, I am satisfied that a reasonable fair-minded Canadian, informed and aware of all the issues addressed above, would entertain doubt that I could remain able to reach impartial decisions. I believe that such a reasonable fair-minded and informed person, viewing this realistically and practically would, after appropriate reflection, be left with a reasoned suspicion or apprehension of bias, actual or perceived. Canadians should rightly expect their trial judges to have broad shoulders and thick skins when a losing party appeals their decision, but I do not believe Canadians think that should extend to accusations of dishonesty by the judge, nor to untruths about the judge. Trial judges should not have to defend their honour and integrity from such inappropriate attacks. English is a very rich language; the Appellant and its counsel could have forcefully advanced their chosen grounds for appeal without the use of unqualified extreme statements which attack the personal or professional integrity of the trial judge.

[139]     For these reasons, I will be advising my Chief Justice that I am recusing myself from completing the McKesson Canada proceeding in the Tax Court. This extends to the consideration and disposition of the costs submissions of the parties in this case, as well as to the 2010 confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry.

No date has been set for the hearing of the main matter by the Federal Court of Appeal.

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McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

Communications With Experts: Moore v. Getahun and the Advocates’ Society Report

An expert does not draft his/her report in a vacuum. Communication with counsel is required. Ultimately, an expert must provide independent and objective evidence at a hearing. So the question arises as to what amount of communication is appropriate between counsel and the expert during the drafting stage. This was an issue considered by the Ontario Superior Court of Justice in Moore v. Getahun (2014 ONSC 237).

In Moore, the plaintiff suffered a wrist injury in a motorcycle accident, and claimed medical negligence against the treating doctor. The defendants called an expert to testify on the medical treatment of the plaintiff following the accident. During the preparation of the expert’s report, the expert and defence counsel had a 90-minute conference call during which the draft report was discussed.

In 2010, sections 4.1 and 53.03 of the Ontario Rules of Civil Procedure were amended to (among other things) codify the expert’s duty to the court and to require the execution and filing of an expert’s certificate acknowledging this duty.

These amendments are similar to the recent amendments to the Tax Court of Canada Rules (General Procedure): Section 145 (“Expert Witnesses”), Form 145(2) (“Certificate Concerning Code of Conduct for Expert Witnesses”) and Schedule III (“Code of Conduct for Expert Witnesses”).

In Moore, the court considered the Ontario Rules of Civil Procedure amendments and concluded:

Whether it is appropriate for counsel to review experts’ draft reports

[519]      Defence counsel reviewed Dr. Taylor’s draft report during a one-and-a-half-hour telephone conference call.

[520]      The purpose of Rule 53.03 of the Rules of Civil Procedure is to ensure the independence and integrity of the expert witness. The expert’s primary duty is to the court. In light of this change in the role of the expert witness under the new rule, I conclude that counsel’s practice of reviewing draft reports should stop. There should be full disclosure in writing of any changes to an expert’s final report as a result of counsel’s corrections, suggestions, or clarifications, to ensure transparency in the process and to ensure that the expert witness is neutral.

(See also the court’s discussion of this issue at paragraphs 47-52 of the Moore decision.)

Not surprisingly, the Ontario court’s narrow interpretation of Rule 53.03 attracted the attention of litigators across the country.

In response, the Advocates’ Society has drafted a position paper (and a set of nine principles) regarding communications with expert witnesses. The Advocates’ Society has taken the position that the view expressed by the court in Moore (i.e., that the amendments constitute a change in the role of expert witnesses) is mistaken. The case law prior to Moore on the subject of experts’ testimony had established that experts must testify independently and objectively. Further, the amendments were likely responding to the specific problem of “hired guns” or “opinions for sale”, and thus codified the expert’s duty and imposed the certificate requirement so that testifying experts clearly understand their duty to the court.

The report also notes the problems and unintended consequences of the court’s ruling in Moore – namely, that the ruling fails to recognize the “important and entirely appropriate role” of advocates in ensuring that expert evidence is presented in a cogent, succinct and well-organized fashion that will assist the trier of fact; further, a “one-size-fits-all” approach to communications with experts is discordant with the realities of modern litigation.

Given the similar language in the Tax Court’s rules regarding expert evidence, Moore could have an impact on the manner in which expert reports are to be prepared for a Tax Court proceeding.

Moore has been appealed to the Ontario Court of Appeal.

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Communications With Experts: Moore v. Getahun and the Advocates’ Society Report

Marzen: Tax Court Upholds Transfer Pricing Adjustments

The decision of the Tax Court of Canada in Marzen Artistic Aluminum Ltd. v. The Queen (2014 TCC 194) is the latest addition to a growing body of Canadian judgments on the application of the transfer pricing rules in section 247 of the Income Tax Act (Canada) (the “Act”).

In a lengthy set of reasons, the Tax Court upheld all but a fraction of the CRA’s reassessment of the taxpayer, such reassessments having disallowed the deduction of approximately $7.1M of fees paid by the Canadian taxpayer to its Barbados subsidiary. The Court also upheld the imposition of a penalty under subsection 247(3) of the Act.

The taxpayer was in the business of designing, manufacturing and selling aluminum and vinyl windows. Beginning in 1999, the taxpayer implemented what the Court referred to as the “Barbados Structure”. Under this structure, the taxpayer entered into a “Marketing and Sales Services Agreement” (“MSSA”) pursuant to which the taxpayer’s Barbados subsidiary (“SII”) would provide certain marketing and other sales-related services to the taxpayer in respect of certain jurisdictions, notably the U.S. The fee was calculated as the greater of $100,000 or 25% of sales originated by SII. In total, amounts paid by the taxpayer to SII under the MSSA and related agreements was $4.1M for 2000 and $7.8M for 2001. These amounts were deducted by the taxpayer in computing its Canadian income. SII paid nominal income tax in Barbados on this income. SII then declared dividends to the taxpayer, which were generally received tax-free as dividends out of exempt surplus, pursuant to the deduction in section 113 of the Act.

The Canada Revenue Agency reassessed under section 247 of the Act to disallow a portion of the deduction and imposed a penalty.

In considering the transfer pricing rules in section 247, the Court stated the issues were as follows: (i) whether the terms and conditions imposed in respect of the MSSA differed from what would have been agreed to by persons dealing at arm’s-length, (ii) if so, what adjustments should be made to the quantum of the fees paid under the MSSA so that it was equivalent to the price that would have been paid had the parties been at arm’s-length, and (iii) whether the taxpayer was liable to penalty under subsection 247(3) for the 2001 tax year.

The Court determined that the terms and conditions of the arrangement were not consistent with what arm’s-length parties would have agreed to. In the Court’s view, SII provided few or no marketing and sales services (such services having been subcontracted to another of the taxpayer’s foreign subsidiaries). Further, the Barbados Structure was purely tax-motivated, allowing deductible fees to be repatriated as tax-free exempt surplus dividends. These “attractive advantages” in the Court’s view, would not be available to arm’s-length parties. In the Court’s opinion, applying the “comparable uncontrolled price” method of determining the transfer price, as argued by the Crown, provided the most accurate arm’s-length price.

In this case, the taxpayer was entitled to deduct certain of the fees paid to SII plus $32,500 in each year for corporate and directorship services provided to SII by its director. In the result, the vast majority of the fees paid by the taxpayer to SII were denied and added back into the taxpayer’s income. The Court also found that the transfer pricing penalty was applicable, as the taxpayer failed to make reasonable efforts to determine and use arm’s-length transfer prices in 2001 (the 2000 adjustment did not meet the $5 million threshold for imposing a penalty under subsection 247(3) of the Act).

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Marzen: Tax Court Upholds Transfer Pricing Adjustments

Morris Meadows: Judge Declines Job Offer and Workers Were Employees

In Morris Meadows Country Holidays and Seminars Ltd. v. M.N.R. (2014 TCC 191), the Tax Court considered whether certain hospitality workers were employees or independent contractors for the purposes of the Employment Insurance Act and the Canada Pension Plan.

Morris Meadows offered meeting facilities, sleeping facilities and dining facilities. In doing so it hired workers, as required, to perform certain duties such as cleaning, gardening, maintenance, cooking and serving food.

The CRA classified the workers as employees, and assessed the taxpayer for additional CPP contributions and EI premiums. The taxpayer appealed on the basis that the workers were (i) independent contractors or (ii) casual employees not employed for the purposes of Morris Meadows’ business.

In respect of the evidence, the Tax Court made this comment on a witness’s testimony:

[3] Mr. Morris, the moving force behind Morris Meadows, was the only witness for the Appellant. He was refreshingly forthright in his testimony to the point of offering me work as a cook at Morris Meadows. I declined the offer.

On the issue of the classification of the workers, the Tax Court considered the applicable tests in 671122 Ontario Ltd. v Sagaz Industries Canada Inc. (2001 SCC 59) and 1392644 Ontario Inc. o/a Connor Homes v Minister of National Revenue (2013 FCA 85) (see our previous post on Connor Homes).

In the present case, the Court held there was no written agreement expressing intent and thus no mutual intent (as per the Connor Homes analysis). The Court then pursued the traditional Sagaz/Wiebe Door analysis to determine whether the workers performed their services in business on their own account. On this point, the Court concluded that all but one of the workers were employees.

On the issue of whether the workers were engaged in employment of a casual nature other than for the purpose of the employer’s trade or business (see subsection 5(2) of the Employment Insurance Act and subsection 6(2) of the Canada Pension Plan), the Tax Court cited the Federal Court of Appeal’s decision in Roussy v Minister of National Revenue ([1992] F.C.J. No. 913), which stated:

[7] … the duration of the time a person works is not conclusive in categorizing employment as casual; the length of time may be a factor to be considered, but a more important aspect is whether the employment is “ephemeral” or “transitory” or, if you will, unpredictable and unreliable. It must be impossible to determine its regularity. In other words, if someone is spasmodically called upon once in a while to do a bit of work for an indeterminate time, that may be considered to be casual work. If, however, someone is hired to work specified hours for a definite period or on a particular project until it is completed, this is not casual, even if the period is a short one.

The Tax Court held that the workers were engaged in unpredictable “part-time” work rather than casual employment. Further, the Court noted that Morris Meadows advertised its dining facilities (available for business meetings or weddings), hired workers to serve the food, and profited from such commerce. In the Court’s view, Morris Meadows was in a business to which the employment related, and the casual employment was for the purpose of Morris Meadows’ business. The Court held the workers were not engaged in casual employment for the purposes of the EI Act and the CPP.

The Court allowed the appeals only in respect of the one worker who was an independent contractor.

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Morris Meadows: Judge Declines Job Offer and Workers Were Employees

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.

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Tax Court Upholds Penalties Imposed for False Statements