Traditionally, the Tax Court only awarded costs that deviated from the Tariff annexed to the Tax Court of Canada Rules (General Procedure) (the “Rules”) in the presence of reprehensible, scandalous or outrageous conduct on the part of one of the parties. The Tax Court’s new approach to costs, as articulated by the now Chief Justice of the Court in Velcro Canada Inc. v. R., 2012 TCC 273, allows the judges to fix costs on a principled basis in accordance with the factors enumerated in Rule 147(3) instead of by reference to the Tariff. A review of the Court’s recent costs awards shows that among the various factors taken into account by the judges in the exercise of their discretionary power to award costs in excess of the Tariff, considerable weight is given to the conduct of the parties.
In Ford Motor Company of Canada, Limited v. R., 2015 TCC 185, the Court awarded the taxpayer a lump-sum of $40,000, which represented about 63% of the taxpayer’s estimated aggregate costs incurred in successfully defending the Crown’s motion to strike very substantial portions of its amended notice of appeal pursuant to the specified corporation rules under the Excise Tax Act (Canada). The Court justified its costs award by relying on its finding that the Crown had tried to “use the specified corporation rules opportunistically, as a sword against a taxpayer appellant, notwithstanding that the clear purpose and design of the rules are to protect and shield the fisc.” The Court also qualified the Crown’s failure to file any written submissions or other advance notice of its arguments (even though it had committed at least twice to do so) as “disappointing”.
The Court further criticized the Crown for adopting the position that there was no basis for enhanced costs in excess of the Tariff as there was no responsible, scandalous or outrageous conduct on its part. The Court held that it is “not acceptable for the Crown to simply recite that tired old phrase, clearly taken out of context upon a proper review, without even acknowledging the considerable jurisprudence to the contrary, much less actually seeking to challenge it.” In addition to the lump-sum of $40,000, the taxpayer was awarded 75% of its reasonable actual costs incurred in seeking to resolve the issue of costs.
In The Standard Life Assurance Company of Canada. v. R., 2015 TCC 138, the Court deviated from the Tariff in part because it determined that although the trial itself had been conducted in an efficient and professional manner by both sides, the taxpayer had engaged in window dressing throughout the proceeding to enable it to argue that it met the factual criteria of the judicial tests for carrying on business when it did not. The Court held that the taxpayer’s actions to create and rely on an illusion to obtain a tax benefit was “reprehensible and should be discouraged.”
The Court’s propensity to use costs awards to express disapproval of a party’s conduct is further illustrated by the Court’s decision in Martin v. R., 2014 TCC 50, where the Court found evidence that the auditor had deliberately misled the taxpayer in the course of the audit. Being critical of the conduct of the Canada Revenue Agency (the “CRA”), the Court included in the costs award an allowance for costs the taxpayer incurred during the audit and objection stages of her dispute with the CRA. The inclusion of the costs allowance was overturned in 2015 FCA 95, where the Federal Court of Appeal held that conduct that occurs prior to a proceeding may only be taken into account in a costs awards if that conduct impacts on the “proceeding”, defined to mean “an appeal or reference”. The taxpayer sought leave to appeal to the Supreme Court on June 15, 2015.
These cases, however, must be contrasted with the decision in Invesco Canada Ltd. v. R., 2015 TCC 92, where the Court rejected the taxpayer’s argument that because the taxpayer had been cooperative throughout and was ultimately successful in the appeal, the Crown should have known the frailties of its own case and allowed the taxpayer’s objection. The Court held that the finding that a party’s legal position was erroneous should not amount to misconduct on the party’s part or mean that its position was frivolous or vexatious.
Since the new costs approach is relatively recent, it remains to be seen to what extent the significant weight given to the conduct of the parties by the Tax Court judges in the exercise of their discretion to award costs in excess of the Tariff may influence the conduct of the parties in future proceedings.
One Appellant’s Unsuccessful Attempt to Strike GAAR From the Minister’s Pleadings and the Potentially Far Reaching Results
In litigation there are winners and losers. In Deans Knight Income Corp. v. The Queen, 2015 TCC 143 the Appellant lost in its attempt to have the court strike GAAR from the Minister’s pleadings and the court’s reasons leading to the result are worth noting.
In this case the Appellant claimed certain losses and was reassessed on grounds that included that GAAR precluded the losses from being claimed. On appeal, the Minister’s Reply continued to assert reliance upon GAAR and the Appellant applied to strike the Reply or portions of it on the basis that it disclosed no proper grounds on which the appeal could be opposed.
In arriving at the result, the Court applied the well- known test for striking pleadings, which is that a pleading will be struck only if it is “plain and obvious, assuming the facts to be true, that the pleading discloses no reasonable causes of action.” On the basis of this test, the Court denied the Appellant’s application and permitted the GAAR related pleadings to remain intact. The Court held:
I disagree with the Appellant’s position. The object, spirit or purpose of the provisions in question is something that the trial judge has to determine. It is not something that simply comes from the object, spirit or purpose that has been culled from the Act by judges in previous GAAR cases. It can hardly be said that the courts have completed an exhaustive analysis and description of the object, spirit and purpose of all provisions in the Act. As a result, I find it very difficult to conceive how it could ever be said that it was plain and obvious that the Respondent could not succeed on a GAAR argument in respect of a series of transactions of a type that had not previously been ruled upon. By its very nature, the misuse or abuse test in GAAR is something that can only be determined after the detailed analysis that a trial permits. Accordingly I dismiss the Appellant’s motion to strike the Respondent’s GAAR argument. (Emphasis added)
In 2005, in Canada Trustco Mortgage Co. v. Canada the Supreme Court of Canada said of GAAR that it “draws a line between legitimate tax minimization and abusive tax avoidance [however] [t]he line is far from bright.” Six years later not much had improved in terms of bringing clarity and certainty to the application of GAAR and in Copthorne Holdings Ltd. v. Canada the Supreme Court of Canada observed: “It is relatively straightforward to set out the GAAR scheme. It is much more difficult to apply it.”
The result in Deans Knight Income Corp. is certainly consistent with the observations by the Supreme Court of Canada that the line between legitimate tax minimization and abusive avoidance is far from bright and that GAAR is difficult to apply. However, this result also illustrates the very practical legal issues that can arise from such a broad and uncertain principle of law.
The purpose that is served by allowing a court to strike pleadings is that it is both unfair to a litigant and a poor use of resources for time and effort to be spent on pleadings that are destined to fail. In Deans Knight Income Corp. the Court held that as long as a specific application of GAAR has not been determinatively ruled upon, a GAAR based pleading by the Minister will never be struck because the application of the rule “is something that can only be determined after the detailed analysis that a trial permits.” In other words, as long as the Minister is able to draft a GAAR based pleading in a manner that is at least marginally different from any previously decided case, the pleading will not be struck and the issue will have to be decided by a judge, after discoveries and after trial.
With the potential that arises from this judgement for making some GAAR related litigation to become more protracted, it is that much more unfortunate that the line between legitimate tax minimization and abusive avoidance is not a little brighter from what has so far been drawn.
The short answer to the question of the connection between Canada’s new anti-terrorism laws and taxes is that recent amendments to the Income Tax and Excise Tax Acts which arise through the Anti-Terrorism Act permit more extensive disclosure and sharing of private and confidential taxpayer information. The longer answer is that this is part of a trend of CRA offering greater levels of cooperation and assistance with other agencies, both domestically and internationally, with the result that the phrase, “except as authorized by law”, which qualifies the prohibition upon disclosure of taxpayer information has once again grown in scope.
Bill C 51, which is now the Anti-Terrorism Act received Royal Assent on 18 June 2015. Along the way to becoming law, debate and popular discussion revealed a significant division of opinion on whether the Bill represented the proper balance between the protection of individual rights and the collective need for security.
Two changes, which are now law and which received less public attention than many other features of the Act are tax related. Tax and taxpayer information is private and confidential and the use and dissemination of that information is controlled by section 295 of the Excise Tax Act and section 241(9) of the Income Tax Act.
The Anti-Terrorism Act amended these provisions to expand the list of circumstances under which this information may be shared. Under the amendments, this information may now be shared when there are reasonable and probable grounds for believing that the information is relevant to the investigation of a terrorism related offence.
As a first point, it should be noted that the test for disclosure, which is that the information is relevant to an investigation, is a very low threshold and easy to satisfy. It is only necessary that the information be a piece, if only a very small piece of the investigative puzzle. As long as this precondition has been satisfied, disclosure is permitted.
The increased sharing of confidential taxpayer information is consistent with a trend that continues to develop. For example, the Canadian and U.S. governments entered into an agreement to implement FATCA which requires Canadian financial institutions, under specified circumstances to provide account information to CRA and requires CRA, under specified circumstances, to in turn provide the information to the IRS.
Similarly, in June of this year the Minister of National Revenue issued a news release announcing that she signed an international Multilateral Competent Authority Agreement which is described as “an important step towards implementing the Common Reporting Standard for the automatic exchange of financial account information with other tax jurisdictions.” According to the announcement, the Agreement is part of the government’s commitment to addressing international tax evasion and improving tax compliance.
Canada has also entered into treaty agreements with several countries, some of which have not yet been ratified, through which Canada can accept a request from another country to commence collection action against a person in Canada, who has a tax debt to that other country. Through these agreements and with this cooperation, the reach of a foreign jurisdiction can, in some circumstances, now extend into Canada for the purpose of tax debt collection.
There can be no doubt that a government’s ability to detect, investigate and prosecute tax evasion, and to take enforcement measures against non-compliance will be enhanced through the increased sharing of financial information collected through financial institutions and taxpayer information collected through the relevant tax authorities. Equally, it is likely that Canadian courts will one day be called upon to examine the use of information by the CRA in civil or criminal tax proceedings which was shared and collected in these ways. Finally, there can be no doubt that the trend toward increased sharing of information between tax authorities, and cooperation between countries is not about to change and, in this way, for purposes of either lawful tax planning or unlawful tax evasion, the world is becoming a much smaller and more transparent place than it used to be.
In Discovery Trust v. Minister of National Revenue, 2015 NLTD(G)86, the Newfoundland Supreme Court issued Canada’s first decision involving the provincial residency of a trust. This is also the first decision to apply the test for trust residency articulated by the Supreme Court of Canada in St. Michael Trust, 2012 SCC 14. In applying this test (which states that a trust is resident where its “central management and control” is located), the Newfoundland Court recognized the reality of the trust relationship. It was not prepared to find that the trustee gave up management and control in the context of a fairly typical case where the trustee appears to have discharged its duties prudently and in accordance with its fiduciary obligations and commercial reality.
The trust in this case, the Discovery Trust, was settled in 2002 by Craig Dobbin, founder of CHC Helicopter Corporation (CHC). Mr. Dobbin’s children were the initial beneficiaries and trustees of Discovery Trust. Following its formation, Discovery Trust acquired shares of Discovery Helicopters Inc. (DHI), the holding corporation for the Dobbin family’s shares of CHC.
In 2006, prior to Mr. Dobbin passing away, the Dobbin children were replaced as trustees by the Alberta office of Royal Trust Corporation of Canada (Royal Trust Corp). Two years later, CHC was sold. The proceeds of the sale (which were received by DHI) were distributed to Discovery Trust by way of dividends on the DHI shares and a redemption of DHI shares. Following the execution of a request for distribution by the Dobbin children, Discovery Trust disbursed the trust capital to them. In filing its tax return for 2008, Discovery Trust took the position it was resident of Alberta. By filing as a resident of Alberta rather than Newfoundland, Discovery Trust saved approximately $9 million in tax in 2008.
Following an audit that the Court found was driven by the auditor’s perception that emigrating Discovery Trust to Alberta was abusive (more on this below), the Canada Revenue Agency (CRA) reassessed Discovery Trust on the basis that it was resident, and therefore taxable on the gain, in Newfoundland. The CRA claimed that the “management and control” (and therefore residence) of Discovery Trust continued to be exercised by the Dobbin children in Newfoundland, even after Royal Trust Corp became the trustee in 2006: the beneficiaries (or their advisors) continued to make all the decisions relating to transactions concerning, investments of, and distributions from Discovery Trust, while Royal Trust Corp only performed administrative tasks.
The Court vacated the reassessment on the basis that Discovery Trust was resident in Alberta, as claimed by the appellant. The Court analyzed the residency issue by examining each action taken by Discovery Trust from the perspective of management and control. In so doing, the Court adopted a view of the trustee’s role that is consistent with commercial reality and common trust relationships. For example, the Court acknowledged that the expected level of activity by a trustee will depend on the nature of the particular trust.
In the course of reviewing the relevant transactions undertaken by Discovery Trust, the Court made the following observations:
- Informed consent by a trustee (to a transaction driven by another person) is not tantamount to submission by the trustee to the direction of the other person. As the Court states, “[i]ndependence of the Trustee is maintained by its review of the transaction, acquiring explanation sufficient that an informed decision can be made, ensuring the decision has no negative consequence and is in the best interest of the beneficiaries.”
- A document executed by the beneficiaries requesting an encroachment of the trust’s capital (effectively requesting that funds from the sale of CHC be disbursed to them) did not conflict with the trustee’s independent exercise of their authority. The Court observed that it is “not unusual” for the trustee to require such a written request to formally indicate the beneficiaries’ desire to take funds out of the trust before making a distribution.
- Acquiescence to a beneficiary’s request does not mean that the trustee has given up management and control to the person making the request. In this case, Royal Trust Corp agreed to the beneficiaries’ request to hold back estimated tax on the disbursement of funds, rather than 25% as Royal Trust Corp had initially proposed.
- A trustee cannot always be expected to know the value of the trust’s investments. In this case, the value of the DHI shares was entirely dependent on the value of the CHC shares. The Court observed that “operational knowledge of CHC is not in the Trustee’s possession of control.” As a result, the Court did not consider this issue relevant to whether there was an infringement on Royal Trust Corp’s authority to manage and control Discovery Trust.
- Consultation with a beneficiary regarding a decision to be made by the trustee does not constitute a delegation of authority or responsibility by the trustee. In this case, Royal Trust Corp and one of the beneficiary’s advisors discussed the short-term investment of the holdback for taxes from the CHC sale proceeds.
In addition to dealing with the substantive matters raised by the reassessment, the judge had harsh words about the audit that led to the reassessment. In particular, the judge found that the outcome of the audit was essentially a foregone conclusion as it was conducted with an “overall negative view of the motive for minimization of tax.” The judge concluded that this “improper motive entered the discernment process and compromised in an apparent manner the integrity of an independent rationale for the findings upon which the reassessment could be based.”
In making these comments, the Court reminded tax authorities of the basic Duke of Westminster principle: taxpayers have the right to order their affairs as they see fit to minimize tax payable. The tax authority’s views as to the “morality” of tax planning should not enter into and dictate the result of the audit process.
When a taxpayer enters into an agreement with the CRA in the course of an audit of a particular taxation year, the taxpayer likely expects that the CRA will not come back to audit and reassess that same year again. In an ongoing case in the Federal Court, Rosenberg v. Canada, the CRA is challenging this expectation, asserting that such an agreement does not and cannot limit its audit powers.
The taxpayer in Rosenberg was audited between 2008 and 2010 in relation to his 2006 and 2007 taxation years, with a focus on certain “straddle loss” transactions undertaken in those years. The taxpayer ultimately reached an agreement with the CRA in 2010. The taxpayer alleges that the CRA agreed not to reassess the 2006 and 2007 taxation years, except to make one specific adjustment, on the condition that the taxpayer agree not to engage in any similar straddle loss transactions in the future.
In January of 2013, the CRA commenced a second audit of the taxpayer’s 2006 and 2007 tax years and, as part of the second audit, served the taxpayer with a request for information under section 231.1 of the Income Tax Act. The information requested was in relation to the transactions that were the subject of the 2010 agreement.
The taxpayer’s challenge to the CRA’s second audit had a clumsy procedural start, beginning with an application to the Quebec Superior Court, which concluded that it did not have jurisdiction over the matter. Once that decision was affirmed by the Quebec Court of Appeal, the taxpayer commenced an action in Federal Court to enforce the agreement by seeking declaratory and injunctive relief. The Crown moved to strike the action on the basis that, inter alia, it disclosed no cause of action.
In Rosenberg v. Canada, 2015 FC 549, Madam Justice Bédard refused to strike out the action. Instead, she converted it into an application for judicial review of the Minister’s exercise of her audit powers, which is the proceeding the taxpayer ought to have commenced in the first place. Bédard J. ordered that the matter be specially managed so that a hearing on the merits can be scheduled as soon as possible.
The Crown’s positions are as follows:
- The CRA denies that it agreed never to reassess the 2006 and 2007 taxation years under the 2010 agreement. Rather, the agreement was that the CRA would not reassess beyond the agreed upon adjustment at that particular time on the basis of the information it had received from the taxpayer up to that point.
- Even if the CRA did agree never to reassess the taxpayer for those years, such an agreement did not operate to waive the CRA’s audit powers.
- Even if the CRA did agree never to exercise its audit powers against the same transactions in 2006 and 2007, such an agreement would be unenforceable. It would be illegal for the Minister of National Revenue to waive the audit powers conferred on her by the Income Tax Act because she has a duty to administer and enforce the Act and the audit powers are necessary to carry out those responsibilities.
The majority of income tax disputes are settled, whether at the audit stage, on objection, or after an appeal has been commenced in the Tax Court of Canada. Settlements at the litigation stage are enforceable under subsection 169(3) of the Income Tax Act (SoftSim Technologies Inc. v. The Queen, 2012 TCC 181), but there is no similar provision giving the CRA the authority to bind the Minister to an agreement in the course of an audit or objection.
In the vast majority of cases, an agreement with the CRA will be honoured and will resolve a dispute about a particular taxation year. Typically, the CRA agrees to reassess the taxpayer in a particular way and the taxpayer signs a waiver of her appeal rights in respect of that reassessment. However, taxpayers should be aware that the matter is not necessarily at an end, as such an agreement may not bind the CRA never to reassess that year.
We will continue to monitor the Rosenberg case with interest.
A recent case out of the Federal Court is causing a stir in the tax community. In Canada (National Revenue) v. Revcon Oilfield Constructors Incorporated, 2015 FC 524, Mr. Justice Mosley made the following statements, which might suggest that a lawyer’s advice on tax planning matters is not subject to solicitor-client privilege:
Tax planning communications are not privileged. Also, facts that exist independently of a communication are not privileged: Belgravia, above, at paras 44-45.
Advice given by an accountant (or, I would add, by a lawyer for accounting or tax planning purposes) does not fall within the scope of solicitor-client privilege: Canada (National Revenue) v Grant Thornton, 2012 FC 1313 at para 22.
Read in isolation, these statements are alarming. Tax is an area in which clients often need extensive professional legal advice in order to understand and comply with the law. The Income Tax Act is the longest and most complex piece of legislation in Canada. While taxpayers are entitled to structure their affairs in order to minimize their tax obligations, running afoul of the requirements of Income Tax Act can result in severe penalties and even criminal charges.
Solicitor-client privilege has long been held to be an essential part of the Canadian legal system and is close to absolute. Special protection is afforded to communications between solicitors and clients to promote open communication between the lawyer and client, ensuring the client’s interests can be fully represented.
Despite initial appearances, the decision does not represent a radical erosion of privilege in relation to tax advice. When read in the context of the facts of the case and in light of the existing jurisprudence, there is no suggestion that a lawyer’s legal advice in relation to tax matters falls outside the scope of solicitor-client privilege.
As the judge in Revcon notes, a communication between a solicitor and a client is privileged where:
- legal advice is sought from a lawyer in her capacity as such;
- the communications relate to that legal advice; and
- the communications are made in confidence.
The “tax planning communication” referred to by the judge is an instance in which a lawyer gives accounting or business advice or deals with administrative transactional matters as opposed to giving legal advice. In this regard, it is useful to look at the facts and result in Revcon for clarity.
In the course of an audit, the CRA sought the production of documents from the taxpayer in relation to a corporate restructuring. The taxpayer refused to produce the documents, claiming solicitor-client privilege. The judge viewed the disputed documents for the purpose of determining whether they were privileged. While the judge held that the contents of a closing book (such as corporate board resolutions, shareholder agreements, and share purchase agreements) are not privileged as they are evidence of completed transactions as opposed to legal advice, he found that the following documents are protected by privilege:
- a series of emails between a lawyer and the client pertaining to legal advice;
- a letter from a lawyer to the client regarding income tax reporting requirements and tax consequences of the transactions;
- charts illustrating the corporate structure before and after the reorganization; and
- reporting letters from law firms containing advice relating to the tax obligations of the taxpayer’s directors and shareholders arising from the corporate reorganization.
Despite the judge’s statements that tax planning communications are not privileged, he did not conclude that any document containing legal advice was not privileged because it was a tax planning communication. His conclusions are exactly what one would expect in light of the well-established principles of solicitor-client privilege.
Thus, there is little cause for concern over the judge’s comments about tax planning. The case confirms that where a tax lawyer provides advice in relation to the tax consequences of a transaction or provides advice on the most tax efficient method of structuring a transaction –commonly referred to as tax planning advice – that advice will be privileged.
A recent amendment to British Columbia’s Provincial Sales Tax Act extends the requirement to register for, and collect, the 7% provincial sales tax (“PST”) to any business located outside BC that holds inventory in BC for sale to a person in BC.
The new section 172.1, which will start to apply on September 1, 2015, generally requires PST registration and collection by a person that:
- accepts purchase orders originating in BC;
- sells goods to a customer in BC for the customer’s use (not resale); and
- holds the goods in inventory in BC at the time of sale.
Any person caught by this rule who fails to register once the amendment is in force may be subject to a penalty equal to the PST not collected, plus an additional 25% penalty along with other penalties and interest.
We understand the change was designed primarily for non-resident sellers that hold inventory in third-party warehouses in BC for sale to BC consumers. We note, however, that the change applies to more than just consumer sales; for example, sellers of industrial goods, including those whose goods are being held in BC on consignment, may also be required to register and either collect PST or obtain the appropriate exemption certificates from their customers. Section 172.1 does not apply to a person that sells only tax exempt goods, such as food.
This blog was co-written by Rosemary Anderson and Noah Sarna
In the recent decision of Samaroo v. Canada Revenue Agency, 2015 BCCA 116 (18 March 2015), the appeal court considered whether a party suing CRA for malicious prosecution must satisfy a threshold evidentiary burden of showing there is merit to the claim before being entitled to discovery. The court held, against the arguments advanced on behalf of CRA, that there was no such threshold in law and therefore no such basis upon which CRA may object to the discovery.
In Samaroo, the plaintiffs were charged with and acquitted of tax evasion. They sued CRA and the prosecutor for malicious prosecution and sought discovery. Discovery was resisted on the basis of R. v. Anderson, 2014 SCC 41, a criminal case in which an accused applied for a stay of proceedings on grounds that conduct of the Crown amounted to a violation of s.7 of the Charter and an abuse of process.
In Anderson, the court held that the exercise of prosecutorial discretion, which includes decisions such as the commencement or termination of criminal proceedings, can only be reviewed on the grounds of abuse of process. Further, where such an abuse of process application is advanced, it is appropriate for the court to require that the accused/applicant make a preliminary showing that there is an air of reality to the application, prior to the court entering into the Charter based application itself. Where the applicant fails to satisfy the threshold evidentiary burden, the right to proceed with the Charter application may be denied.
On the basis that the rationale in Anderson applies equally to discovery in cases of malicious prosecution, CRA argued that before the plaintiffs might be entitled to discovery, the court should require the plaintiffs to satisfy a threshold test of showing there is substance to their claim.
The appeal court rejected the argument that Anderson applies to civil proceedings on several grounds including that, Anderson was a criminal case; “the pragmatic considerations in criminal cases are different from civil cases”, and; “the reasons in Anderson do not evince any intention of diminishing the tort of malicious prosecution, which surely would be the effect of imposing a threshold evidentiary burden prior to discovery.”
In arriving at this result the court observed that in civil proceedings there are mechanisms for having meritless claims struck before trial. The court concluded:
If a threshold burden were imposed on the tort, it would virtually eliminate such claims, because the claimant would be unable to conduct examinations for discovery and discovery of documents to make out a case for malice. In most cases, if malice exists it will be found by probing the exercise of prosecutorial discretion through discovery. This is particularly important in exploring the prosecutor’s state of mind. The imposition of this additional burden would amount to the absolute immunity that was rejected in Nelles.
This result is surely correct and consistent with basic demands of fairness. While it may be that the tort of malicious prosecution will succeed only where conduct of the Crown has been egregious, that is distinct from whether CRA and the Crown should be subject to discovery. If, after discovery, there is no substance to a claim for malicious prosecution, a court hearing an application can strike the claim. However, there is no entitlement in law that CRA should be exempt from discovery and, as the Supreme Court of Canada in Nelles cautioned, rules should not be crafted which would in effect grant the Crown immunity.
Clarifying The Elements of, and Defending Against the Offence Of Failure to Comply with Requirements for Information
Section 231.2(1) of the ITA (and s.289(1) ETA) gives the Minister a broad power to compel the disclosure of information or documents. In language which imposes some but little restriction, the section provides that the Minister may “for any purpose related to the administration or enforcement of this Act…require that any person provide, within such reasonable time as stipulated in the notice” any information or document.
Section 238 of the ITA (326(1) ETA) makes it an offence to fail to comply with a Requirement.
Until the recent decision in R. v. Sedhu, 2015 BCCA 92 (03 March 2015) there has been inconsistency in decided cases with respect to whether, in a prosecution for non-compliance with a Requirement, Crown must prove beyond a reasonable doubt that the time stipulated in the notice was reasonable because the reasonableness of the stipulated time is an essential element of the offence.
In Sedhu the appellant was given 90 days to file tax returns for a corporate entity. The Requirements to file were not complied with. At trial the appellant argued, and the trial judge accepted that the time provided for compliance was not reasonable and an acquittal was entered on that basis. The trial judge held “because that period of time was not proved to be reasonable before the court, evidence is lacking on that one point, and there must be an acquittal as a result of a missing part of an essential element.”
The result and the trial judge’s legal analysis on this point was overturned on summary conviction appeal and, on further appeal to the British Columbia Court of Appeal, the court held that reasonableness of the time given to comply with a Requirement is not an element of the offence that the Crown must prove. Instead, it is relevant to a defence that may be available to a person charged.
At the outset, the appeal court observed that “[t]his is a case of first instance…[and] [t]here is no settled jurisprudence on the actus reus of the offences in question or the onus of proof of reasonableness.”
After considering existing previously decided cases and principles of statutory interpretation the appeal court concluded:
In their grammatical and ordinary sense, the words used in these statutes suggest that the Minister is directed by Parliament, when making a demand, to stipulate a reasonable time for compliance. The offence, as described by the statute, is not failure to comply with a demand within a reasonable time… but, rather, failure to comply with the demand. It does not state the individual must comply with a notice that contains a reasonable time to comply, but rather within the time specified in the notice. It does not express that the individual has an entitlement to a reasonable time to respond to the notice.
Therefore, according to the appeal court, for there to be a conviction under these provisions in the ITA or ETA, Crown must prove beyond a reasonable doubt: (1) identity; (2) jurisdiction; (3) service of the notice, and; (4) failure to comply with the notice.
The court also addressed available defences. Because the offences are offences of strict liability, “an accused person must have an opportunity to demonstrate due diligence; that the time provided to comply with the requirement was unreasonable; or that the demand was not made for purposes related to the administration or enforcement of the Act.”
It is interesting and significant that the defence of due diligence is distinct from whether the time given for compliance is unreasonable. And, while according to the appeal court in Sedhu the reasonableness of the time requirement is to be determined objectively, the clear recognition of this as a defence will undoubtedly give rise to interesting litigation in relation to what is objectively reasonable on the facts of a given case.
Trial courts confronted with this interpretive task will undoubtedly be guided by Sedhu in which the appeal court noted that “the words used in these statutes suggest that the Minister is directed by Parliament, when making a demand, to stipulate a reasonable time for compliance” and that the “time requirements are not pre‑determined but are to be fixed with reference to the nature of the demand made when it is made.”
These passages suggest that in being directed to stipulate a reasonable time for compliance, the Minister will be required to consider factors which include, but are not limited to, “the nature of the demand”. And whether the Minister has considered appropriate factors or has stipulated a time period which is objectively reasonable will be the grist for future litigation.
The recent decision of the Tax Court of Canada (TCC) in Miedzi Cooper Corporation v. The Queen, 2015 TCC 26, should put to bed a needlessly ongoing debate with the Canada Revenue Agency (CRA) on the scope of input tax credit (ITC) entitlements of holding companies in connection with the commercial activities of their subsidiaries.
Miedzi is a holding company headquartered in Vancouver that carries on a mineral exploration business through several subsidiaries. It has no activities other than holding the shares of a Luxembourg company (Luxco), which in turn holds the shares of companies (Opcos) in Poland engaged directly in mineral exploration. Miedzi funded the operations of the Opcos by making loans to Luxco, which in turn made loans to the Opcos. The funds for the loans were raised by Miedzi undertaking a private placement. It incurred considerable expenses, such as fees for legal, accounting and consulting services as well as other miscellaneous costs. It then claimed ITCs in respect of all GST/HST it paid on those expenses.
The CRA denied a significant portion of the ITCs on the basis of its restrictive interpretation of section 186 of the Excise Tax Act (ETA). Miedzi had relied on a broad interpretation of section 186 in support of its ITC claim.
For the purposes of determining an ITC, subsection 186(1) essentially deems a holding company to have acquired certain property or services for use in the course of commercial activities of the company, which is the main ITC requirement under subsection 169(1). However, this deeming rule only applies to the extent the holding company can reasonably be considered to have acquired the property or services for use “in relation to” the shares or indebtedness of a related company that is engaged exclusively in commercial activities. Subsection 186(3) allows for the existence of an intervening holding company, such as Luxco, without limiting the claimant’s ITC entitlement.
The Crown argued that the phrase “in relation to” should be interpreted narrowly and that the provision should only apply to the extent the property or service is acquired for the holding company to do something in respect of the shares or indebtedness of the subsidiary, such as selling a portion of the shares. Corporate costs of the holding company that do not relate necessarily to the subsidiary are excluded. Regarding Miedzi, while certain of its expenses indeed related to the shares of Luxco, the Crown claimed that many did not.
This approach was neatly rejected by Paris J. based on the decisions of the TCC and the Federal Court of Appeal (FCA) in Stantec Inc. v. The Queen, 2008 TCC 400 and 2009 FCA 285. Paris J. maintained that subsection 186(1) was intended by Parliament “to be a look-through rule”, which was intended to avoid a loss of ITCs where a commercial activity is conducted through a holding company structure; consequently, subsection 186(1) should not be interpreted narrowly. He reasoned that everything Miedzi did could be said to have been done “in relation to” the shares or indebtedness of Luxco. Consequently, it was entitled to full ITCs.
In the past, the CRA has asserted that its restrictive interpretation was correct in spite of Stantec. The TCC’s decision in that case was made under the court’s Informal Procedure (and therefore is generally not binding on the court as precedent) and was upheld by the FCA on other grounds. Although the decision in Miedzi was also made under the Informal Procedure, it nonetheless affirms yet again a broad judicial interpretation of section 186, which it is hoped the CRA will finally accept.