FCA Confirms Minister Cannot Make a “Deal”

On January 10, 2012, the Federal Court of Appeal (FCA) released its decision in CIBC World Markets Inc., 2012 FCA 3. The issue before the FCA was whether the appellant, CIBC, was entitled to an increased cost award in respect of its successful appeal from a Tax Court of Canada (TCC) decision regarding the appellant’s right to claim input tax credits (ITCs) under the Excise Tax Act.

Prior to the hearing at the TCC, the appellant made an offer to settle the case on the basis that the appellant was entitled to deduct 90% of the ITCs claimed. The FCA ultimately held that the appellant was entitled to deduct 100% of the ITCs, and the appellant asked for an increased cost award. The FCA held that the appellant was not entitled to increased costs because as a matter of law the Minister could not have accepted the appellant’s offer of settlement.

The FCA reasoned that the Minister could not have accepted the appellant’s offer to settle because the outcome of the litigation admitted of only two possibilities: either a deduction of 100% of the ITCs or a deduction of 0% of the ITCs. Since the appeal could not possibly have resulted in the appellant being entitled to a deduction of 90% of the ITCs, the Minister could not make that “deal” in order to settle the dispute. In coming to this conclusion, the FCA confirmed earlier decisions that the Minister has a duty to apply the law to the facts of a particular case.

This case serves as a reminder regarding how settlements should be structured in tax disputes. Even if the intent is to make a “deal”, settlement negotiations should focus on new facts, better characterizations of the overall situation, and richer appreciations of the applicable law. The Minister cannot simply agree to an arbitrary amount of tax to be paid.