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Feb 2010 - Gavin Laird, Legal Counsel, Donald Smetheram, CA
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Feb 2010 - Gavin Laird, Legal Counsel, Donald Smetheram, CA


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Tax and Business Law - Smetheram & Company

Tax and Business Law - Smetheram & Company

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  • 1. Tax Litigation 101 Presentation to Fraser Valley CA Association Abbottsford, BC February 4, 2010 Gavin Laird Legal Counsel Donald W. Smetheram, CA Legal Counsel
  • 2. Introduction
    • Welcome
    • Topics:
      • The basics
      • Moving beyond the basics
      • The Tax Court of Canada
      • Assumptions
      • The Sunnyside of the Street
      • Rectification
      • Audit Issues (requirements, procedural fairness and document production)
  • 3. Logistics
    • 45 minutes
    • Hopefully these slides will provide a reference tool even if we run out of time to cover all the material covered
    • Questions are welcome
  • 4. The Basics
    • Normal reassessment period:
      • 3 years for income tax, ITA 152(3.1)(b)
      • 4 years for income tax, ITA 152(3.1)(a) if corporation other than CCPC or mutual fund trust
      • 4 years for G.S.T., ETA 298(1)(a)
    • But the CRA can reassess beyond the normal reassessment period in certain circumstances:
      • misstatements attributable to neglect, carelessness and/or willful default have been made, ITA 152(4)(a), ETA 298(4)(b)
      • waivers have been signed, ITA 152(4)(a), ETA 298(4)(a)
      • fraud, ITA 152(4)(a), ETA ss. 298(4)(b)
  • 5. The Basics
    • Most disputes arise over reassessments from audits but don’t forget that taxpayers can also challenge initial assessments, loss determinations, and, to a lesser extent, adjustment requests
    • Typically, the period in which to file an objection is 90 days ,
    • ITA 165(1), ETA 301(1.1)
    • BUT the period for filing an objection can possibly be extended for up to one year ITA 166.1(7), ETA 303(7)
    • Making a prompt extension request is very important (get help if you need it)
  • 6. The Basics
    • An appeals officer may vary or confirm the disputed assessment
    • In rare instances, an appeals officer may also seek an upwards adjustment
    • The appeals officer’s decision may be challenged by appeal to the Tax Court of Canada, ITA 169, ETA 306
  • 7. Moving Beyond the Basics
    • After filing an objection, a taxpayer may appeal directly to the Tax Court of Canada if the Minister has not made a decision within a specified period of time:
      • 90 days for income tax, ITA 169;
      • 180 days for GST, ETA 302
    • Why would you do this?
      • Cost
      • Delay
      • Probability of success
      • Anchor Pointe Energy Ltd v. The Queen, 2007 FCA 188 (more later)
    • [Anchor Pointe #2]
  • 8. The Tax Court of Canada
    • The Tax Court of Canada (“TCC”) has exclusive jurisdiction to determine the correctness of assessments,
        • Tax Court of Canada Act , s. 12
        • Canada v. Roitman, 2006 FCA 266 (CanLII)
    • The TCC is a superior court
    • The TCC is the most efficient Court in the country
    • The jurisdiction may increase (i.e. taxpayer relief requests are currently with the Federal Court but that may change)
  • 9. The Tax Court of Canada
    • There are two types of hearings:
      • Informal Procedure
        • $12,000 in issue or $24,000 of losses [Informal Procedure Rule 17]
        • Potentially unlimited GST (but ‘bump-up’ provisions)
        • Rules of evidence are relaxed (but not gone)
        • A lot of concern over lay-litigants (both competence and objectivity)
        • Pro bono representation may be possible (Pro Bono BC can help)
      • General Procedure
        • No cap on disputes
        • Very formal rules (subject to the Court’s inherent jurisdiction to control its process)
        • Lawyers or self-representation required (Tax Court of Canada GP Rule 30)
  • 10. Assumptions
    • Tax litigation is unique in civil litigation because of the rules surrounding assumptions
    • In a nutshell, because Canada has a self-assessing system, the Minister may generally make assumptions which are accepted as correct by the Court unless they are “demolished” in Court
    • The importance of assumptions in tax litigation cannot be over-stated.
  • 11. Assumptions
    • Assumptions are like any powerful tool: they tend to be over-used and often abused
    • Assumptions of law should not be plead:
    • [25] I agree that legal statements or conclusions have no place in the recitation of the Minister's factual assumptions. The implication is that the taxpayer has the onus of demolishing the legal statement or conclusion and, of course, that is not correct. The legal test to be applied is not subject to proof by the parties as if it was a fact. The parties are to make their arguments as to the legal test, but it is the Court that has the ultimate obligation of ruling on questions of law.
    • Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294 (CanLII)
    • [Anchor Pointe #1]
  • 12. Assumptions
    • Similarly, the assumptions plead should be:
      • Precise (not ambiguous)
      • Accurate (not just convenient)
      • Not contradictory (the same car can’t be assumed to be blue and green)
    • If an assumption is outside the scope of a taxpayer’s knowledge then there is no reverse onus
          • Transocean Offshore Ltd. v. Canada , 2005 FCA 104
          • Redash Trading Incorporated v. The Queen , 2004 TCC 446
    • Also, assumptions should not be used to support penalties (Crown onus)
  • 13. Assumptions
    • Auditors can make assumptions, but what about appeals officers?
    • Former Chief Justice Bowman thought:
    • 28 … there are additional reasons for not saddling the taxpayer with the onus of disproving new " assumptions " that the Minister has come up with at the objection level. It is a simple matter of procedural fairness. The cards are already stacked in favour of the Crown, with the presumption of correctness of assessments, the Crown's right to plead unproved assumptions and the reverse onus of proof. I see no reason for stacking the cards any further by extending that reverse onus to " assumptions " made at the confirmation stage .
    • Anchor Pointe Energy Ltd v. The Queen , 2006 TCC 424 (CanLII)
  • 14. Assumptions
    • However, C.J. Bowman was reversed by the Federal Court of Appeal
    • Canada v. Anchor Pointe Energy Ltd ., 2007 FCA 188,
    • [Anchor Pointe #2]
    • Anchor Pointe #2 really changed the landscape: now appeals officers really can ‘buttress the Minister’s assessment’
    • Recall that it is possible to proceed directly to the Tax Court of Canada after 90/180 days (IT/GST)
  • 15. The Sunnyside of the Street
    • Many taxpayers feel that the burden of demolishing assumptions is unjust and too onerous
    • Are things so bad? Is the sky falling? Hardly.
    • Remember
      • The CRA is on the outside trying to look in at your clients’ affairs
      • The CRA often does not understand the realities of your clients’ business
      • Sometimes training is an issue
  • 16. The Sunnyside of the Street
    • The taxpayer can win
      • Marshall the evidence (witnesses witnesses witnesses)
      • Demolish the assumptions (positive evidence, not just denials)
      • Trust in the judges to be fair and to understand human nature
      • Common sense is alive and well
    • Many tax court judges were practitioners
  • 17. Rectification
    • In The Queen v. Friedberg 92 DTC 6031, Linden J.A. speaking for the Court said:
    • In tax law, form matters . A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterizations of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to "correct" documents which clearly point in a particular direction.
  • 18. Rectification
    • Why is Friedberg important?
    • Form cuts both ways
    • But wait, what if a taxpayer could fix mistakes that triggered tax problems?
    • The caselaw in this area has been evolving since the Ontario Court of Appeal’s decision in Juliar
    • A.G. of Canada v. Juliar , 2000 CanLII 16883 (ON C.A.)
  • 19. Rectification
    • Rectification is not a magic wand that can cure anything
    • The equitable remedy of rectification must be established
    • Documents can be fixed to accord with the intent of the parties
    • Where Juliar appears to expand rectification is that it considers the intent of the parties to achieve a tax efficient result (a very broad level of intent)
    • There is a process for rectification:
      • Notice should be provided to the Crown (to do otherwise is very unwise)
      • The Crown will often assist taxpayers to obtain rectification where appropriate
      • Capital Dividend Account mistakes are routinely rectified
  • 20. Audit Disputes
    • The Minister’s agents act pursuant to powers provided for in the statutes such as the Income Tax Act
    • For example, section 231.1 of the ITA may be viewed as the general audit power with heightened powers under other sections such as 231.2 ( requirements both named and unnamed)
    • Taxpayer often feel powerless – they shouldn’t
  • 21. Audit Disputes
    • The Supreme Court of Canada has made it abundantly clear that the CRA has broad sweeping powers when conducting civil tax audits because not everyone wants to pay their taxes
    • However , broad powers are not the same as unfettered powers.
    • The CRA must act reasonably, professionally, and use their civil audit powers only for civil audits – not for conducting audits when they have an ‘investigative mindset’ and are considering criminal prosecution
  • 22. Audit Disputes
    • It is very important to understand that issues of procedural fairness must be addressed as they arise (within 30 days that a decision is “clearly communicated”)
    • Reasonableness and fairness are not so much legal standards as common sense standards yet they inform the applicable legal tests
    • Whatever your view of which side is the dark side, remember everyone deserves to be treated fairly, respectfully and courteously, CRA auditor and taxpayer alike
    • Thank you for your time