Tax Cases: Why Adequate Reasons for a Decision Matter

In a recent case, the Federal Court of Appeal was asked to consider the adequacy of the reasons for judgment delivered by the Tax Court in an income tax appeal (SRI Homes Inc. v The Queen, 2012 FCA 208). The matter came before the Court by way of an appeal from a decision of the TCC. At issue was whether the trial judge had erred in law in failing to provide adequate reasons for his decision.

Why does the adequacy of a trial judge’s reasons matter? This question has been answered by the Supreme Court of Canada: reasons are given to inform the parties of the basis of the decision, to provide public accountability, and to permit meaningful appeal. Statements to this effect have been made by the SCC in both civil and criminal matters. However, to my knowledge this is the first tax case in which the point has been raised as the basis for an appeal.

The corporate taxpayer in the SRI case claimed a deduction for an alleged loss realized on the disposition of certain receivables. The receivables were owed to the taxpayer by companies in which it owned shares. It sold the receivables for an amount below the face amount of the receivables on the basis that the debtor company’s shares had declined in value. It claimed the loss on income account. The CRA disallowed the loss. In the TCC, counsel for the taxpayer and counsel for the Crown each advanced arguments in support of their respective positions. The trial judge dismissed the appeal. He summarized the arguments of both counsel and said that he preferred those of the Crown. He did not explain why he did so, nor why he did not accept the arguments on behalf of the taxpayer.

The Court of Appeal held that the judge erred in law by failing to provide adequate reasons for his decision. Because the judge did not explain why he preferred the Crown’s arguments to those of the taxpayer, the Court was unable to determine whether the judge’s decision to dismiss the appeal was correct in law. On this basis, the appeal was allowed and the matter referred back to the Tax Court for redetermination by a different judge.

It is significant that the Court of Appeal has adopted this functional approach to the importance of adequate reasons for a decision in the TCC. Litigants in a tax case are entitled to know more than what the judge has decided, they must also be told the why. The why is also critical to the operation of the appeal process. Without it, an appellate court cannot determine whether a judge’s decision is correct as a matter of law.

Two concluding observations. The first is that with very few exceptions, the quality of the judgments being given by the TCC is very high. This case is an exception, and is not likely to be repeated any time soon. Second, although the taxpayer won this appeal, it has not yet won the right to deduct the loss. That question remains to be determined when the matter is reargued in the Tax Court.