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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

There’s A Litigation App For That?

We were intrigued to learn that KosInteractive LLC has created the U.S. “Fed Courts” app for Android and Apple devices which contains helpful information about U.S. federal courts rules of procedure and court information. The app provides access to the PACER (Public Access to Court Electronic Records) database, and the procedural rules for appellate, bankruptcy, civil, and criminal proceedings. The federal rules of evidence and the U.S. Supreme Court procedural rules are also available. One drawback – the information isn’t searchable or indexed with hyperlinks.

In any event, there seems to be no Canadian equivalent for litigation or procedural apps.

A quick search in the Apple iTunes stores for “Canada tax” returns 54 results, including an array of federal and provincial tax calculators. ”Canada courts” returns five items, including apps related to the Controlled Drugs and Substances Act, mortgage foreclosures, U.S. Miranda warnings, and a car dealership. A search for “Ontario civil procedure” returns one item, and “Canada tax court” returns zero items.

We are reminded of the very helpful event app developed by the Canadian Tax Foundation that has become a regular feature of the Foundation’s national and regional conferences.

We are confident that Canadian tax professionals would welcome a broader array of court and litigation procedure apps that would provide mobile access to most or all of the court and procedural information we’re stuffing into our oversized litigation bags.

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There’s A Litigation App For That?

The Crown Succeeds on a Motion to Strike a Portion of the Taxpayer’s Pleading: Golini v. The Queen

In Paul C. Golini v. The Queen (2013 TCC 293) the Tax Court of Canada agreed to strike out portions of a taxpayer’s pleading suggesting that a protective reassessment issued by the Canada Revenue Agency (“CRA”) was invalid.

In June 2012, the CRA informed the taxpayer that his 2008 income tax return had been selected for an audit. In the following months, both parties continued to correspond and exchange information. In August 2012, the CRA asked the taxpayer to provide a waiver extending the limitation period to reassess the 2008 taxation year. The taxpayer declined to do so.

In September 2012, the Minister reassessed the taxpayer and informed him that the reassessment was a “protective reassessment;” supporting documentation would be provided upon completion of the audit.

The Crown brought a motion to strike out the allegation that the reassessment was invalid. The taxpayer contended that a “protective reassessment” was inconsistent with the assessing provisions of the Income Tax Act as it was issued solely to allow the Minister additional time to complete an audit.

The Tax Court judge looked to Karda v. HMQ (2006 FCA 238) for guidance on the issue. In that case, the Federal Court of Appeal held that the Minister may issue a protective reassessment where a taxpayer declines to provide a waiver so long as the CRA has completed “some review” and has requested further information. The Tax Court judge held that:

There is no law . . . to the effect that a protective assessment is invalid if issued for the sole purpose of leaving the door open to conduct or continue an audit.

He went on to note that:

. . . the law, I find, is clear that some review by the CRA followed by inquiries for more information and a request for a waiver, subsequently refused, is sufficient for a protective assessment to be a valid assessment. And that is exactly what we have here.

Whenever a taxpayer declines to grant the CRA a waiver, the CRA almost invariably reassesses before the “normal reassessment period” expires.  There is nothing surprising about that.  What is noteworthy here, though, is the willingness of the Tax Court to entertain the Crown’s request to strike out, before trial, an argument put forward by a taxpayer. As we noted in our blog post on the Federal Court of Appeal’s decision in Canadian Imperial Bank of Commerce v. The Queen:

Parties are generally given the opportunity to make whatever arguments they consider necessary to their case with the ultimate determination being made by the trial judge who is in the best position to decide questions of relevance and weight in light of all the evidence.  It is rather unusual for a legal theory, novel though it is, to be taken off the table at such an early stage.  At the same time, courts are increasingly concerned about “proportionality” and are reluctant to allow scarce judicial resources to be spent on matters that are unlikely to have any effect on the outcome of the hearing.

This decision is, therefore, consistent with recent jurisprudence from the Federal Court of Appeal and should reduce the number of issues to be decided at trial.

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The Crown Succeeds on a Motion to Strike a Portion of the Taxpayer’s Pleading: Golini v. The Queen

Will the Tax Court of Canada entertain a determination of a question of law where the focus is on future assessments?

In Sentinel Hill Productions IV Corporation v. The Queen (2013 TCC 267), Justice Judith Woods of the Tax Court of Canada said no. In so doing, she shed light on the requirements for making an application for a determination of a question of law under Rule 58 of the Tax Court of Canada Rules (General Procedure).

Rule 58(1) states:

58. (1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law, a question of fact or a question of mixed law and fact raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or

(b) to strike out a pleading because it discloses no reasonable grounds for appeal or for opposing the appeal,

 and the Court may grant judgment accordingly.

The question proposed by the appellants involved the issue of whether notices of determination under subsection 152(1.4) of the Income Tax Act issued in respect of certain partnerships for 2000 and 2001 should be vacated and the appeals allowed on the basis that the Minister subsequently concluded that the partnerships did not exist for these years. Importantly, the Court found that “the focus of the Proposed Question is on whether the Minister of National Revenue is now statute barred from issuing reassessments to partners by virtue of subsection 152(1.8) of the Income Tax Act.” (para. 7)

The Court decided not to allow the Rule 58 application to proceed as it did not meet the two conditions in Rule 58(1)(a). First, the statute-barred issue had not been raised as an issue ”by a pleading”. Second, the proposed question would not have disposed of or shortened the proceeding or saved costs.  Although the validity and correctness of an assessment can be determined by the Tax Court of Canada, the proposed question would have challenged the validity of assessments not yet issued and, therefore, the determination of the question of law (whether the Minister is statute-barred from issuing future assessments) would not have disposed of or shortened the proceeding or saved costs.

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Will the Tax Court of Canada entertain a determination of a question of law where the focus is on future assessments?

Get it right the first time: Newfoundland Transshipment Ltd. v. The Queen

In Newfoundland Transshipment Ltd. v. Queen (2013 TCC 259), the Tax Court of Canada dismissed an application by Newfoundland Transshipment (“NTL”) for an order to extend time to serve notices of objection for its 2002 to 2005 taxation years. The application was filed in 2012, several years after the deadline for serving the objections had expired.

NTL had originally filed its returns for 2002 to 2005 on the basis that its pipeline was a Class 1 asset, with a depreciation rate of 4%.  By the time it filed its 2006 return, it came to the conclusion that the pipeline was a Class 6 asset, with a depreciation rate of 10%. Accordingly, in April 2007, NTL filed amended tax returns for its 2002 to 2005 taxation years reclassifying the pipeline from Class 1 to Class 6 and filed its 2006 to 2010 returns on the basis that the pipeline was a Class 6 asset. In February 2012, the CRA wrote to NTL, refusing to accept the amended filings for 2002 to 2005 and proposing to reassess 2006 to 2010.

In August 2012, NTL asked the Minister to issue notices of reassessment to enable it to serve notices of objection for 2002 to 2005. The Minister responded by saying that the time to serve notices of objection and applications for orders extending time had expired. Section 166.1 of the Income Tax Act allows the Minister to grant an extension of time to serve an objection only if an application is filed within one year after the expiration of the normal 90 day period.

In arguing that its application for an extension of time should be granted, NTL argued that a letter from the CRA in February 2012 rejecting the amended returns constituted a “reassessment”. In the alternative, NTL claimed that it had relied on CRA policy that an amended return was a de facto waiver.

The Tax Court disagreed. In Armstrong v. The Queen (2006 FCA 119), the Federal Court of Appeal held that a request by a taxpayer to amend its return is “merely a request” and need not result in an assessment. In addition, the Tax Court held that it was not bound by a CRA policy and had no jurisdiction to grant an extension of time as the relevant taxation years were statute-barred by the time the taxpayer attempted to serve the objections.

This decision is a useful reminder that, depending on when it is filed, there may be no recourse when an amended return is rejected by the Minister – all the more reason to get it right the first time!

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Get it right the first time: Newfoundland Transshipment Ltd. v. The Queen

Out with the Old, In with the New: Clearwater Seafoods Holdings Trust v. The Queen

In the recent decision in Clearwater Seafoods Holdings Trust (2013 FCA 180), the Federal Court of Appeal considered the scope and purpose of Rule 29(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”).  When a trust ceases to exist during the course of a tax appeal, with tax liability shifting to a new person, may the new person continue the appeal?  The Court answered that question in the affirmative and unanimously held that this scenario falls within the language and intended purpose of Rule 29(1).

In 2011, Clearwater Seafoods Holdings Trust (the “Trust”) appealed an income tax assessment to the Tax Court of Canada.  In 2012, the Trust transferred all of its assets to Clearwater Seafoods Income Fund, which subsequently transferred the assets to Clearwater Seafoods Incorporated (the “Corporation”).  This transfer occurred in the context of the Trust “converting” to avoid application of the SIFT rules under the Income Tax Act.

At the Tax Court (2012 TCC 186), both parties accepted that the Trust had been terminated as a result of the disposition of all its property; however, this did not automatically bring the income tax appeal to an end.  The issue in Clearwater was whether the tax appeal could be continued with the Corporation as appellant in place of the Trust.  To obtain an order permitting the Corporation to assume the position of appellant going forward, a motion was brought by the Trust pursuant to section 29 of the Rules, which states,

29 (1) Where at any stage of a proceeding the interest or liability of a person who is a party to a proceeding in the Court is transferred or transmitted to another person by assignment, bankruptcy, death or other means, no other proceedings shall be instituted until the Registrar is notified of the transfer or transmission and the particulars of it. [emphasis added]

Once notice has been given to the Registrar, Rule 29 provides that the Chief Justice or a judge designated by him may direct the continuation of the proceeding.  At the Tax Court, the taxpayer brought a motion arguing that the Corporation is the appropriate party to continue the tax appeal as it now owned the property and would be liable if the appeal is unsuccessful.  The Crown argued that the tax appeal should be dismissed for want of an appellant.  The Tax Court held that the matter were not within the scope of Rule 29(1) and the motion was dismissed.  The order was appealed to the Federal Court of Appeal.

The Court of Appeal held that the lower court had construed Rule 29(1) too narrowly.  In arriving at this conclusion, the Court of Appeal addressed the rule’s underlying rationale.  The Court found that the purpose of Rule 29(1) is to deal with instances in which the circumstances of a litigant have changed and special accommodations are required in order to continue the proceeding.  Such changes may include bankruptcy, incapacity due to illness or injury, death of a litigant or the dissolution of a litigant that is a corporation.  The Court also considered such changes to include circumstances where a litigant that is a trust is terminated as a result of the disposition of all of its property.

The Federal Court of Appeal found that the transfer of the property to the Corporation, in effect, placed tax liability on the Corporation and the trustees in the event of an unsuccessful tax appeal.  The termination of the existence of the Trust was found to be within the meaning of “other means” in Rule 29(1).  Consequently, it was held that there was a transmission of liability from the Trust to “another person” by “other means”. The Court held that this scenario falls within the language and purpose of Rule 29(1).  As a result, the appeal was allowed and the matter was sent back to the Tax Court to be reconsidered with a view to directing the continuation of the proceedings.

The decision in Clearwater highlights the Court’s willingness to interpret Rule 29(1) in a broad manner.  It also raises the question of what constitutes “other means” for the purposes of Rule 29.  As a result, it is important for any taxpayer, or party which may acquire tax liability, to consider the implications of Clearwater prior to an income tax appeal.

Out with the Old, In with the New: Clearwater Seafoods Holdings Trust v. The Queen

The importance of a notice of objection: Salisbury v. The Queen

In Salisbury House of Canada Ltd. et al. v. The Queen (2013 TCC 236), the Tax Court of Canada reiterated the importance of the statutory preconditions that must be met before a taxpayer may appeal to the Court. These statutory requirements should be kept in mind by taxpayers who wish to ensure their disputes are heard on the substantive merits rather than dismissed for procedural reasons before they have an opportunity to argue their case.

In Salisbury, the corporate taxpayer operated several restaurants in the Winnipeg area. The company was assessed additional GST for the period February to June, 2006 but did not object to those assessments. Around the same time, a new board of directors was elected. Due to financial difficulties, the company made a proposal under the Bankruptcy and Insolvency Act and attempted to negotiate an agreement with the CRA pertaining to the GST arrears. The parties eventually agreed that a portion of the GST liability would be paid. Importantly, at this point, no directors’ liability assessments had been issued under s. 323 of the Excise Tax Act. Payment was remitted, but the directors sought to have their potential liability for tax determined “by a court of competent jurisdiction”.

The company and the individual directors each filed a Notice of Appeal in the Tax Court. In response, the Crown brought a motion to dismiss the appeals pursuant to paragraph 53(b) of the Tax Court of Canada Rules (General Procedure) on the grounds that (inter alia) the appeals were scandalous, frivolous or vexatious.

Under section 306 of the Excise Tax Act, a taxpayer must file a notice of objection before a Notice of Appeal may be filed in the Tax Court. In Salisbury, the GST assessments against the corporate taxpayer had not been challenged by way of objection and there had been no assessments issued against the directors.  The Minister argued that the appellants had no statutory right of appeal because the requirements of section 306 had not been met.

The Tax Court granted the Minister’s motion and dismissed the appeals. Since no notices of objection had been filed by the company, this precluded an appeal from the original GST assessments. In respect of the appeals by the individual directors, the Court held that they too could not succeed – no assessments had been issued, and no notices of objection filed.

The Salisbury decision is consistent with a long line of jurisprudence reflecting the requirement that taxpayers must satisfy the statutory preconditions before appealing to the Tax Court. In Roitman v. The Queen (2006 FCA 266), the Federal Court of Appeal stated that a court “does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.” More recently, in Goguen v. The Queen (2007 DTC 5171), the Tax Court reiterated that, as “a matter of law, the failure of the [taxpayer] to serve a notice of objection on the Minister deprive[s] the Tax Court of Canada of the jurisdiction to entertain an appeal in relation to the assessment” (see also Whitford v. The Queen (2008 TCC 359), Bormann v. The Queen (2006 FCA 83), and Fidelity Global Opportunities Fund v. The Queen (2010 TCC 108)).

Salisbury reminds corporate and individual taxpayers of the need to obtain proper advice from tax professionals with respect to their rights and obligations under the Excise Tax Act and the Income Tax Act. This is all the more important in cases where the corporation is experiencing financial difficulty and/or contemplating protection under the Bankruptcy and Insolvency Act (i.e., as the CRA may be a primary creditor). In Salisbury, the directors may not have been personally liable for corporate taxpayer’s GST liability. However, because of the manner and timing of the payment of GST arrears, their “appeal” to the Tax Court was defeated on procedural rather than substantive grounds and they were, unfortunately, precluded from presenting their case.

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The importance of a notice of objection: Salisbury v. The Queen

Tax Court of Canada issues a comprehensive ruling on privilege issues and the appropriate exercise of remedies to address deficient lists of documents

In a recent Tax Court of Canada ruling on a motion heard in Imperial Tobacco Canada Limited v. The Queen, 2013 TCC 144 the Court considered a motion for an Order directing the Appellant to attend and be cross-examined on its List of Documents pursuant to subsection 82(6) and paragraph 88(a) of the Tax Court of Canada Rules (General Procedure) (the “Rules”). Justice D’Arcy heard and dismissed the motion, choosing instead to exercise other remedies available to the Court under section 88 of the Rules. A portion of the Respondent’s motion dealt with privileged documents. In ruling on these documents, the Court addressed several issues in the area of solicitor-client privilege and made a notable finding that email communications between the taxpayer and its lawyer lost privileged status as a result of the taxpayer’s accountant being included on the communications.

Background

The Appellant in Imperial Tobacco is a subsidiary of British American Tobacco p.l.c. The Appellant acquired preferred shares of affiliated subsidiaries (the “Affiliated Companies”) and the Minister disallowed the Appellant’s deductions of dividends received from those Affiliated Companies which was appealed to the Tax Court of Canada.

The Respondent had concerns with the Appellant’s List of Documents, specifically with respect to identifying necessary metadata (electronic data relating to specific documents referred to in Schedule “A” including author, when the document was created and history of changes to the document), deleted documents referred to in Schedule “C”, and privileged documents listed in Schedule “B”. As a result of these concerns, the Respondent moved for an Order allowing cross-examination on the Appellant’s List of Documents in order to gather further information relevant to its concerns. The Respondent relied upon the following provisions under the Rules:

82(6)   The Court may direct a party to attend and be cross-examined on an affidavit delivered under this section.

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88.       Where the Court is satisfied by any evidence that a relevant document in a party’s possession, control or power may have been omitted from the party’s affidavit of documents, or that a claim of privilege may have been improperly made, the Court may,

(a) Order cross-examination on the affidavit of documents,

(b) Order service of a further and better affidavit of documents,

(c) Order the disclosure or production for inspection of the document or a party of the document, if it is not privileged, and

(d) Inspect the document for the purpose of determining its relevance or the validity of a claim of privilege.

Other Remedies under Section 88 should be considered before Cross-examination

Although the Court acknowledged that cross-examination should be considered if it has concerns that a List of Documents does not satisfy the requirements under the Rules, it agreed with the Appellant that subsection 82(6) takes away the automatic right to cross-examine. Instead, the Court found that all of the remedies under section 88 must first be considered before issuing an Order for cross-examination on a List of Documents. In this case, the Court found that perceived deficiencies in the Appellant’s List of Documents could be better addressed by ordering the service of a further and better List of Documents. The Court went on to also make specific orders which required the parties to exchange information to pinpoint what documents the metadata would be required for, and to work towards an agreement on search terms to resolve the deleted documents concern.

The Court’s Analysis and Rulings in respect of Privilege Issues

Since the parties agreed to provide the Court with a book of privileged documents, Justice D’Arcy was able to address the privilege concerns without the need for cross-examination through the remedy available to the Court under paragraph 88(d) which permits the Court to inspect a document for the purpose of determining a claim of privilege.

Several privilege issues were raised by the Respondent which afforded the Court an opportunity to canvass the applicable law in making its ruling. The issues and the Court’s determination of each are listed below:

1. Internal communications between the Appellant’s employees – The Court discussed the circumstances in which internal communications between employees of a company may be privileged, namely, if the communications reflect confidential legal advice provided by the company’s lawyer or if the lawyer marks or makes a note on a disseminated document. The Court then went on to analyze what specific internal communications were privileged.

2. Solicitor-client communications disclosed to employees of the Affiliated Companies – The Court discussed common interest privilege under this issue and explained that privilege may be maintained where one party to a commercial transaction provides privileged documents to another party of the transaction to further their common interest of having the transaction concluded. In this case, the Court concluded that several documents exchanged between the Affiliated Companies were privileged on this basis.

3. Solicitor-client privileged documents disclosed to an accountant – This issue centered on disclosure of legal communications by the Appellant, its counsel and the Affiliated Companies to PriceWaterhouseCoopers Australia (“PWC Australia”). Relying on the principles espoused by the Exchequer Court in Susan Hosiery Limited v. M.N.R., the Appellant argued that solicitor-client privilege extended to the communications with PWC Australia on the basis that PWC Australia’s input was necessary to the provision of legal advice by counsel. The Court accepted this principle of law but found a lack of evidence establishing that PWC Australia’s role extended to any function which could be said to be integral to the solicitor-client relationship. Therefore, the disclosure of the documents to PWC Australia constituted disclosure to a third party which amounted to waiver of privilege. The Court placed some emphasis on the fact that there was no evidence of any accounting information that could only be provided by PWC Australia.

4. Implied waiver – The Respondent argued that there was implied waiver of solicitor-client privilege since the Appellant, in denying that tax avoidance was the principle purpose for its investments, placed its state of mind in issue and any legal advice obtained to help form that state of mind was waived. The Court disagreed, and found that state of mind waiver only applies where a party relies on legal advice as part of its claim or defence which had not been put into issue by the Appellant in this appeal. In that regard, the Court noted that nowhere in the Appellant’s pleadings was there any reference to legal advice previously obtained.

5. Legal advice vs. business advice – Communications between a lawyer and client will only be privileged if it is in the course of providing legal advice, not advice relating to purely business matters. The Court found that the issue does not arise in the appeal.

Concluding Remarks

Justice D’Arcy’s decision reflects what the Court likely regarded as a pragmatic approach to the exercise of remedies available to it. It is open to the Court to order cross-examination, but other less costly steps are available to it, and should be first considered. This aspect of the decision should be considered by counsel before deciding to pursue cross-examination. Counsel should first aim to reach agreement on other steps to address concerns relating to production issues.

The privilege discussion contained in this decision highlights the range of such issues that arise in tax appeals. The decision highlights that internal client communications and external communications with accountants and other experts needs to be carefully managed. Counsel should discuss privilege issues with clients at the front end of litigation so they are alert to the pitfalls of waiver.

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Tax Court of Canada issues a comprehensive ruling on privilege issues and the appropriate exercise of remedies to address deficient lists of documents

Tax Court of Canada Appeal of Large Corporation Thwarted by Wording of Objection

Since 1995, the Large Corporation Rules found in subsections 165(1.11), 169(2.1) and 152(4.4) of the Income Tax Act (Canada) have applied to discourage large corporations from objecting to tax assessments as a means of keeping tax years “open”. In Bakorp Management Ltd. v. The Queen, 2013 TCC 94, the Minister brought a motion to dismiss the corporation’s tax appeal on the basis that it failed to comply with the Large Corporation Rules. Basically, these rules require that an objection fled by a large corporation must reasonably describe each issue to be decided and, for each issue, must specify the relief sought as the amount of change in a balance. The rules also limit the issues and relief sought in a subsequent appeal to those set out in the objection. The locus classicus on the interpretation of these provisions is the decision of the Federal Court of Appeal in The Queen v. Potash Corporation of Saskatchewan Inc., 2003 FCA 471.

In Bakorp, the corporation owned shares of another corporation that were redeemed in 1992 for $338M. As the proceeds from the redemption were received over a number of years, Bakorp reported in 1995 the portion of the deemed dividend related to proceeds received in 1995. The Minister reassessed Bakorp’s 1995 tax year to reduce the deemed dividend from $53M to $25M, a reduction of $28M. The corporation objected to the Minister’s reassessment and the Minister confirmed the reassessment. The corporation then filed a Notice of Appeal taking the position that the $28M deemed dividend remaining in its 1995 income was actually received in 1993 and should be included in the corporation’s 1993 tax year, not the 1995 year.

The Minister was, no doubt, surprised by Bakorp’s position to reduce the 1995 deemed dividend to zero. In response, the Minister brought a motion to dismiss the corporation’s appeal, arguing that the issue and relief set out in the Notice of Appeal were not those set out in the Notice of Objection.

Bakorp argued that it had complied with the Large Corporation Rules because the issue in both its objection and appeal was, fundamentally, the amount of deemed dividend to be included in its 1995 income. The Court disagreed noting that it could not “imagine a fuller reconstruction than making a 180 degree turn in what is to be included in income.” In the Court’s view, applying such a general approach to identifying the issue would render the Large Corporation Rules meaningless. In respect of specifying the relief sought, the Court was not prepared to accept that a complete reversal from wanting $53M included in income to wanting nothing included in income could be seen as complying with the Large Corporation Rules.

As a notice of appeal has been filed with the Federal Court of Appeal, the Tax Court’s reasoning will not be the last word in this particular matter. However, it is safe to say that the Bakorp decision is a timely reminder that large corporations must take particular care in preparing a Notice of Objection. Failure to do so may seriously impact a later appeal to the Tax Court of Canada.

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Tax Court of Canada Appeal of Large Corporation Thwarted by Wording of Objection

Nuances of a tax appeal make it unlike a typical civil trial

A tax dispute with the Canada Revenue Agency may be an unwelcome and unpleasant experience for a taxpayer. In addition to the potentially complex tax issues, the dispute resolution process itself can be a nuanced and challenging process. However, an appeal to the Tax Court of Canada offers taxpayers a chance to have their disputes considered by “fresh eyes,” which could result in a victory, settlement or other efficient resolution.

In the March 15, 2013 issue of The Lawyers Weekly, I discuss some of the ways a tax appeal differs from a typical civil trial.

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Nuances of a tax appeal make it unlike a typical civil trial