Earlier this week, the Supreme Court of Canada heard two tax appeals that may help clarify the jurisdictional boundaries between the Tax Court of Canada and Federal Court: Dow Chemical Canada ULC v His Majesty the King (SCC File No. 40276) (“Dow Chemical”) and Iris Technologies Inc v Attorney General of Canada (SCC File No. 40346 ) (“Iris Technologies”). The two appeals from the Federal Court of Appeal (“FCA”) offer Canada’s highest court an opportunity to provide certainty to taxpayers and the Minister of National Revenue (“Minister”) about the appropriate path for their tax disputes. We hope the decision will reduce the need for parties to initiate parallel proceedings or bring motions in cases that do not fall clearly (or exclusively) within either court’s jurisdiction.
Dow Chemical ULC v His Majesty the King
The unclear jurisdictional boundaries between the Tax Court and Federal Court were on full display in Dow Chemical. Following an audit of Dow Chemical’s transactions with related non-residents, the Minister concluded that some of the transactions did not take place on arm’s length terms and proposed certain transfer pricing adjustments. This included both “upward adjustments” (i.e., adjustments that increased Dow Chemical’s income) and a “downward adjustment” (i.e., an adjustment that, if made, would have decreased Dow Chemical’s income). Of note, the provision in the federal Income Tax Act that deals with downward adjustments, subsection 247(10), is unique in that it provides that no downward adjustment shall be made unless “in the opinion of the Minister”, the circumstances are such that it would be appropriate to do so.
The Minister proposed the downward adjustment after concluding that Dow Chemical would have incurred a higher interest expense on one of its loans if that loan had been issued by an arm’s-length lender. However, when the Minister issued a reassessment of Dow Chemical’s 2006 taxation year, only the upward adjustments were included.
Dow Chemical appealed that reassessment to the Tax Court. However, because the correctness of the reassessment was arguably subject to the Minister’s discretion under subsection 247(10) whether to apply the downward adjustments, Dow Chemical also initiated a judicial review application in the Federal Court. It sought to have the dispute heard in that court if the Tax Court proceedings confirmed the Federal Court was the correct forum for Dow Chemical’s dispute.
The discretionary nature of subsection 247(10), which impacts the computation of income, is what gave rise to the jurisdictional ambiguity in Dow Chemical. The present proceedings arose from a pre-trial application to the Tax Court under rule 58 of the Tax Court of Canada Rules (General Procedure) to determine whether the correct forum for disputing the denied downward adjustment is the Tax Court or Federal Court. The Tax Court held that the decision falls within its jurisdiction because the decision goes to the correctness of the assessment, a matter that falls squarely within the Tax Court’s exclusive jurisdiction. The Tax Court rejected the Minister’s argument that the issue is outside the Tax Court’s jurisdiction simply because it involves an element of ministerial discretion.
The FCA reached the opposite conclusion. It held that the decision falls within the Federal Court’s jurisdiction because the Minister’s decision is part of the process of the assessment, and the Tax Court only has jurisdiction to hear appeals of the product of that process, not the process itself. The FCA acknowledged Dow Chemical may be required to pursue parallel proceedings in both courts to achieve its desired outcome of having the downward adjustment applied. We summarized the FCA’s reasons in our earlier blog post.
Brief summary of the arguments raised in the parties’ factums on appeal
In the factum it filed with the Supreme Court (“Appellant’s Factum”), Dow Chemical submits that it is appealing the product of the assessment process, rather than the process itself. In essence, Dow Chemical is challenging whether the amounts shown on the 2006 reassessment were properly computed. The Appellant’s Factum invites the Supreme Court to broadly interpret the Tax Court’s jurisdiction in this case so that it is “clear to all taxpayers which court has jurisdiction to hear their dispute and that court should be the Tax Court where the taxpayer is appealing the amount of tax, interest or penalties assessed, including where that assessment is based on the Minister’s exercise of discretion” (Appellant’s Factum at pages 34-35).
Conversely, the Minister advocates in her factum (“Respondent’s Factum”) for a narrower interpretation of the Tax Court’s jurisdiction. The Minister argues that the determination under subsection 247(10) is separate from – and does not go to the correctness of – the assessment, and is “a discretionary relieving provision akin to a waiver of tax” (Respondent’s Factum at page 32). This separate discretionary determination is, according to the Minister, within the Federal Court’s jurisdiction because “[b]y legislative intent, the Tax Court is not a one-stop forum for tax related matters” […] “it has been the legislator’s long standing intent that the question of liability for tax under the ITA and discretionary decisions be separate and reviewed by different courts” (Respondent’s Factum at page 26). The Minister therefore cautions the Supreme Court against adopting a restrictive interpretation of the discretionary nature of the power granted to the Minister under subsection 247(10). In the Minister’s view, doing so would effectively exclude the nature or quantum of the downward transfer pricing adjustment from the Minister’s decision-making powers.
Iris Technologies Inc v Attorney General of Canada
Iris Technologies was heard by the Supreme Court alongside Dow Chemical. While also an appeal from the FCA, Iris Technologies involves an application for judicial review that was initiated in the Federal Court. The underlying subject matter was an order of mandamus requiring the Minister to issue GST assessments, and consequently grant refunds, for a particular reporting period. During the Federal Court proceedings, the Minister issued an assessment that denied all refund claims sought.
In its application for judicial review, Iris Technologies asked the court to declare that it was denied procedural fairness in the audit and assessment process and that the Minister issued the assessments for the improper purpose of preventing the Federal Court from having jurisdiction over the matter. The FCA dismissed Iris Technologies’ application on the basis that, when properly characterized, the application was in substance a challenge to the validity of the assessment itself and therefore fell within the Tax Court’s jurisdiction. Iris Technologies has asked the Supreme Court to reverse the FCA’s decision.
These cases emphasize the importance – and difficulty in some cases – of selecting the appropriate court in which to bring certain tax disputes. We are hopeful that the Supreme Court will take this opportunity to clarify the boundaries between the jurisdictions of the Tax Court and Federal Court in tax matters. Regardless, taxpayers should seek competent legal advice regarding questions about jurisdiction to ensure they can obtain an efficient and timely resolution of their tax disputes.