Tax Settlement Agreements: Lessons to be Learned

When the CRA has made an assessment of tax and the taxpayer has started an appeal in the Tax Court, the taxpayer and the CRA can agree to settle the appeal without proceeding with an actual trial in court. This is usually done by way of a joint application to have the appeal allowed and the matter referred back to the CRA for reassessment on the terms in the settlement agreement. A recent Tax Court case – SoftSim Technologies Inc. et al v The Queen, 2012 TCC 181 [SoftSim Technologies Inc. v. The Queen,]   – shows that when a client authorizes counsel to enter into a settlement agreement on its behalf and counsel does so, the client will be bound by the terms of the agreement notwithstanding it has a last minute change of heart. Here, the client attempted to repudiate an agreement made on its behalf by its counsel, on the basis that it had only authorized him to engage in settlement negotiations, but had reserved to itself the right to formally accept or reject any of the negotiated terms.

The court decision is a useful read for the detailed summary of the initial instructions to counsel, the negotiations between counsel and the Crown, the taxpayer’s several (changing) reactions to the settlement terms as they emerged from the negotiations, its decision to approve the terms as negotiated, and its last minute attempt to repudiate the settlement altogether. In the end, the court held the taxpayer to the terms of the agreement. It did so based on the testimony of the tax counsel and the Crown counsel involved, and a review of a series of emails between tax counsel and his client that documented the progress of the negotiations. There are lessons to be learned from this case.

The most important one is that when tax counsel accepts a retainer to attempt a settlement with the CRA, it is very important to document the scope of the retainer in a written document of some kind. Increasingly, we all use emails for a variety of purposes, and an email may suffice as a retainer if it is carefully drafted. It is essential that the retainer specifically set out the authority to be exercised by counsel. The client may wish to reserve to itself the right to reject or accept any proposed settlement terms. If so, the retainer should say so. Prudent counsel will ask the client to approve in writing the terms of any recommended settlement before proceeding with it, provided the time for accepting the settlement permits. If time is short and the client’s approval is given orally, counsel should confirm the approval by an email, fax or similar written advice to the client so that there is a contemporaneous record of the client’s agreement with the terms.

Tax counsel in the SoftSim case took all of the appropriate steps in advising his client of the progress of the negotiations as they went along, and in confirming the client’s wish to settle on the negotiated terms. Notwithstanding, at the very end the client reneged and refused to accept the agreement made by counsel on its behalf. (It is not immediately apparent from the case why the client changed its mind.) Counsel had no option but to withdraw from the file. The client then retained another counsel who argued that the original instructions were limited to an attempt to negotiate the terms of a possible settlement, but did not include the authority to enter into a formal agreement on the client’s behalf. The court rejected this argument on the facts, and held the client to the terms of the settlement.

The lesson here for the client is: be sure you understand what you have instructed your counsel to do for you. If you do authorize him to make a settlement agreement on your behalf, don’t expect the Tax Court to be sympathetic if you change your mind at the last minute.

Sometimes as counsel you wind up in a difficult situation with the client notwithstanding your best efforts on his behalf. In this case, counsel had to withdraw from the case at the end of an involved negotiation process and then be a witness in a Tax Court hearing into the binding nature of the settlement agreement. There is a lesson here, too. Doing everything right won’t always be enough to prevent this sort of mess from happening.