In Canada (National Revenue) v. Boguski, 2021 FCA 118 affirming 2018 TCC 236, the Federal Court of Appeal (the “FCA”) affirmed the decision of the Tax Court of Canada (the “Tax Court”) to dismiss the Minister’s application for an order under section 174 of the Income Tax Act (Canada) (the “Act”).
Pursuant to subsection 174(1) of the Act, the Minister may apply to the Tax Court for the determination of a question if the Minister is of the opinion that the question is common to assessments or proposed assessments in respect of two or more taxpayers and is a question of law, fact or mixed law and fact arising out of:
a. one and the same transaction or occurrence of series of transactions or occurrences; or
b. substantially similar transactions or occurrences or series of transactions or occurrences.
If the common question is determined by the Tax Court, the determination is binding on all taxpayers named in the order pursuant to subsection 174(4) of the Act.
Section 174 was most recently amended in 2013 to extend the circumstances under which the Minister may apply to the Tax Court for a determination of a common question. Before the 2013 amendment, subsection 174(1) only allowed the Minister to apply to the Tax Court to determine a question arising out of one and the same transaction.
Under the current rules, a section 174 order can bind a large group of unrelated taxpayers who entered into substantially similar transactions with a third party. The new section 174 is a caseload management tool for the courts which may be especially useful in dealing with the tax shelter appeals that are making their way through the court system where up to hundreds of investors are involved.
Reasons for Dismissing Section 174 Order
Boguski is the first application under section 174 of the Act heard by the Tax Court since the provision was amended in 2013. In this case, the Tax Court refused to make a section 174 order for two reasons:
a. the Minister had not led sufficient evidence to show there was a question common to all the taxpayers involved, which is a precondition of a section 174 order; and
b. although there was a question common to some of the taxpayers, the Tax Court considered it inefficient and procedurally unfair to proceed under section 174 of the Act.
This section 174 application involved 81 taxpayers and the Minister asked the Tax Court to determine whether the claimed Canadian development expenses related to certain mining rights the taxpayers had purchased from Royal Crown Reserve Inc. constituted a “tax shelter” as defined in subsection 237.1(1) of the Act. Of the 81 taxpayers, only 14 had filed appeals to the Tax Court in respect of assessments issued by the Minister. The remaining 67, many of whom were self-represented, were still at the objection stage. Of the taxpayers who had filed appeals to the Tax Court, only two taxpayers were proceeding under the Tax Court’s general procedure rules. The Tax Court designated those two taxpayers as the lead cases (the “Lead Cases”). If the section 174 order was granted, all 81 taxpayers (including those who had not yet appealed to the Tax Court) would be bound by the outcome of the two Lead Cases.
The Tax Court found that there was a question common to certain taxpayers (42 of the 81 taxpayers) for certain taxation years. However, the Tax Court chose not to answer the question on the basis that this would not be fair to the taxpayers involved, many of whom were self-represented and did not understand the purpose of the proceedings. The Tax Court held that proceeding under section 174 would result in an extremely inefficient use of the Tax Court’s resources, and that it would be impossible to conduct a fair a hearing involving 42 different taxpayers across five different provinces. With respect to the remaining 39 taxpayers, the section 174 application was dismissed by the Tax Court on the basis that there was no common question.
The Tax Court also found that the Minister’s section 174 application constituted an abuse of process. In particular, the Tax Court determined that the application was inconsistent with its ruling with respect to the Lead Cases, and would effectively circumvent previous rulings with respect to Rule 58 of the Tax Court of Canada Rules (General Procedure), which allows for the hearing of a question in the context of an appeal.
Appeal to the FCA
The Minister appealed the Tax Court’s decision to the FCA and raised the following arguments:
a. the Tax Court’s failure to take into account all relevant factors constitutes a reversible error;
b. the Tax Court made sweeping statements that must be corrected, including statements on the legal test and evidentiary standard applicable to a section 174 application; and
c. the Tax Court erred by finding that the application was an abuse of process.
The FCA dismissed the Appeal.
The FCA found that the Tax Court was entitled to take into account factors such as efficiency and procedural fairness in determining whether to grant a section 174 order, and held that the Tax Court had a basis for finding that a section 174 order would be unfair to many taxpayers. It was also clear to the FCA that the Tax Court did not make any sweeping statements about a legal test or an evidentiary standard that needed to be corrected. According to the FCA, reasons of first-level courts should be read holistically with regard to the efforts they have made to synthetize large amounts of information and evidence.
Absent an error of law or principle or a palpable and overriding error, the FCA cannot interfere with the Tax Court’s exercise of its broad discretion under section 174 of the Act. The FCA found that the Tax Court identified a non-exhaustive number of factors and considerations relevant to its review of the section 174 application and did not commit reversible error. The FCA also noted it should defer to the Tax Court’s factual and discretionary findings in this case since the Tax Court was case-managing the proceeding and as such was in a privileged position to appreciate the subtleties and dynamics of the case given the number of parties involved.
Finally, the FCA found it was not necessary to comment or address the Minister’s last argument that the Tax Court erred in finding the application to be an abuse of process.
The legislative intent behind the 2013 amendments to section 174 was to promote efficiency in the court system where there are multiple taxpayers involved in substantially similar transactions. However, the Minister’s first section 174 application following those amendments proved unsuccessful on the basis that allowing the Minister’s application would have the opposite effect, making the proceedings less efficient. It is also worth noting that the Tax Court’s finding of an abuse of process stands, since the FCA did not comment on this portion of the Tax Court’s decision.