Dow Chemical – Federal Court of Appeal confirms limited jurisdiction of Tax Court

In Canada v Dow Chemical Canada ULC, the Federal Court of Appeal (the “FCA”) confirmed that the jurisdiction of the Tax Court of Canada does not extend to varying or quashing an “opinion”.  Rather, the FCA held that the Tax Court’s jurisdiction remains limited to determining the correctness of an assessment.  Consequently, opinions must instead be challenged by way of a judicial review proceeding brought in the Federal Court.

Dow Chemical centered around subsection 247(10) of the Income Tax Act (the “ITA”), which reads as follows:

(10) An adjustment (other than an adjustment that results in or increases a transfer pricing capital adjustment or a transfer pricing income adjustment of a taxpayer for a taxation year) shall not be made under subsection (2) unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.

In essence, an adjustment that decreases a taxpayer’s income under the transfer pricing rules (referred to as a “downward adjustment”) can only be made if, “in the opinion of the Minister”, the adjustment is appropriate.

Background

In 2011, the Minister reassessed Dow’s 2006 taxation year to add approximately $307 million to its income under the ITA’s transfer pricing rules.  Dow objected to the reassessment.  In March 2012, the Minister issued a proposal letter which proposed to allow additional interest expenses to Dow (i.e. to reduce Dow’s income) in its 2006 taxation year, but subsequently reversed this position and refused to allow the additional interest expenses in its 2006 taxation year on the basis of a limitation period in the Canada-Switzerland Tax Treaty.

In 2013, Dow submitted a formal request to the Minister under subsection 247(10) of the ITA to have the additional interest expenses allowed in its 2006 taxation year; that is, Dow requested a downward adjustment.  The Minister refused Dow’s request.  Accordingly, Dow filed an application in the Federal Court seeking judicial review of the Minister’s refusal to grant the downward adjustment.  Dow also appealed the reassessment of its 2006 taxation year to the Tax Court.

By motion under Rule 58 of the Tax Court of Canada Rules (General Procedure), the parties asked the Tax Court to answer the following question:

Where the Minister … has exercised her discretion pursuant to subsection 247(10) of the [ITA] to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive jurisdiction granted to the [Tax Court] under section 12 of the Tax Court of Canada Act and section 171 of the ITA?

The Tax Court concluded that the Minister’s exercise of discretion under subsection 247(10) was within the Tax Court’s jurisdiction, so long as the assessment resulting from that exercise was properly appealed to the Tax Court.  The Crown appealed that decision to the FCA.

Applicable Legislation 

Section 12 of the Tax Court of Canada Act provides that the Tax Court has exclusive jurisdiction to hear appeals on matters arising under the ITA to the extent appeals are provided for in the ITA.

Section 169 of the ITA provides for an appeal to the Tax Court to have an assessment vacated or varied.  Section 171 of the ITA provides the remedies that the Tax Court can grant in an appeal of an assessment: dismissing the appeal, vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment.

Sections 18 and 18.1 of the Federal Courts Act, in combination, grant the Federal Court exclusive jurisdiction to grant remedies in judicial review applications related to federal tribunals (including the Minister).  Section 18.5 of the Federal Courts Act states that the Federal Court does not have jurisdiction to review a matter where another statute (such as the ITA) expressly provides for an appeal to the Tax Court or another specified court.

Analysis

The FCA agreed with the Tax Court that subsection 247(11) of the ITA does not provide an express right of appeal of an opinion of the Minister under subsection 247(10).  Subsection 247(11) generally states that the assessment, objection, and appeal provisions in Part I of the ITA also apply to the transfer pricing provisions.  Therefore, section 18.5 of the Federal Courts Act does not expressly prevent the Federal Court from reviewing an opinion of the Minister under subsection 247(10).

The FCA then reviewed the remedies that can be granted by the Tax Court and the Federal Court.  In doing so, the FCA drew a distinction between the “process” leading to an assessment (i.e. the actions of the Minister or officials of the Canada Revenue Agency, which are not reviewable by the Tax Court) and the “product” of that process (i.e. the assessment itself, the correctness of which is reviewable by the Tax Court).  The FCA held that an opinion of the Minister under subsection 247(10) of the ITA falls under “process”, not “product”.  In other words, the Minister’s opinion is not an assessment, and as such it is not reviewable by the Tax Court.  The FCA held that the power to quash or vary an opinion of the Minister under subsection 247(10) of the ITA instead falls within the jurisdiction of the Federal Court under a judicial review application.

The FCA also rejected the argument that the power conferred on the Tax Court to determine to correctness of an assessment must by implication include the power to vary or quash an opinion rendered by the Minister under subsection 247(10).  While noting that “it may be more convenient” if the Tax Court had this power, it is not a necessary component of its jurisdiction over assessments.

The FCA therefore allowed the appeal and held that an opinion of the Minister under subsection 247(10) of the ITA is outside of the exclusive jurisdiction of the Tax Court.

Takeaways

The FCA’s decision exemplifies the complexity faced by taxpayers and practitioners in tax litigation.  Given the differing jurisdictions of the Tax Court and the Federal Court, taxpayers must be careful to choose the correct court depending on the remedy they are seeking (our previous posts here and here on the Iris Technologies cases highlight similar pitfalls).  In certain cases, taxpayers may need to bring parallel proceedings in both courts in order to ensure they can receive their desired remedy.  Indeed, the FCA noted at paragraph 91 of Dow Chemical that “the remedies available to both courts may be required if Dow is to succeed” in achieving the desired downward adjustment.

Unless and until Parliament enacts legislative amendments which sufficiently expand the powers of the Tax Court, taxpayers will continue to face fundamental jurisdictional questions and should seek professional advice as to the proper court(s) in which to bring tax litigation.