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

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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.