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.