The accountant seemed to think that the Tax Court was just another division of the CRA. Fortunately for the taxpayer, the Court was willing to bend over backwards to construe what the accountant had sent to the Court (by way of the CRA!) as an application for extending the time within which to file an appeal. Why?

It is appropriate, in my view, for the Court to view applications to extend time compassionately. It is desirable that taxpayers have their appeals adjudicated on the merits to the extent practicable and within the legislative requirements of s. 167(5). Unfortunately, many taxpayers, and even their advisers, have difficulty in following the proper procedures to institute an appeal, even when these procedures are communicated to the taxpayer as they were in this case.

The Tax Court generally prefers substance over form in dealing with the disputes before it, and so it will sometimes give the benefit of the doubt to the taxpayer in cases like this.

The Honourable Jim Flaherty, Minister of Finance, and the Honourable Rob Nicholson, Minister of Justice and Attorney General of Canada, today invited stakeholders to comment on proposals to improve the caseload management of the Tax Court of Canada.

The proposals would:

• Update the monetary limits for access to the informal appeal procedure, providing taxpayers with greater access to a simplified and cost-effective judicial process and enabling a better balance in the Tax Court of Canada’s caseload. Under this proposal, a taxpayer could elect to proceed by way of Informal Procedure where the aggregate of all amounts in issue in an income tax appeal is equal to or less than $25,000 (or where a loss does not exceed $50,000). Also, under a new monetary limit for GST/HST appeals, an appeal involving an amount in dispute in excess of $50,000 would be required to proceed by way of the General Procedure.
• Allow the Tax Court of Canada to dispose of issues raised in an appeal of an assessment separately, so that some issues can be resolved independently from others and to allow the Minister of National Revenue to give effect to the decision of the Court in respect of those discrete issues.
• Permit the Tax Court of Canada to hear a question affecting a group of two or more taxpayers that arises out of substantially similar transactions, and provide that the resulting judicial determination is binding across the group.

I worked on a tax shelter dispute involving several thousand taxpayers where I represented only a couple of hundred of them, and so the latter possibility is of real interest to me. The “backgrounder” says the following about the proposal:

• [I]t is proposed to amend the Income Tax Act to allow, on application by the Minister, the Tax Court to also hear a question arising out of identical or substantially similar transactions and cause the resulting judicial determination to be binding across the group.
• It is also proposed that the Income Tax Act be amended to specify that the Minister can serve notice of the application by way of regular mail or may seek direction from the Tax Court as to alternate means of service.

Interestingly enough, the decision under appeal was in response to a motion for summary judgment in an action under the Class Proceedings Act, 1992, in which “The Plaintiffs [sought] recovery from the Federal Crown of goods and services tax … collected since April 29, 2002 on fees charged by professional portfolio managers who manage investments accounts on a fully discretionary basis.” To a tax lawyer, it would seem pretty obvious that that kind of claim is within the exclusive jurisdiction of the Tax Court. The problem, however, is that the amounts of GST for any particular individual in circumstances like those of the Sorbaras were likely to be relatively small, and so an appeal to the Tax Court would not have been economic for any particular taxpayer. The Tax Court does not have a class proceedings procedure, which means that, in theory, each taxpayer must litigate his or her own appeal.

In practice, Tax Court appeals involving groups are possible. Our firm has considerable experience with “group appeals”, mainly with tax shelters. The difficulty is in putting together a group and preventing free-rider problems, especially in cases where the amount at stake for each taxpayer is relatively small. Statutes like the The Class Proceedings Act, 1992, are meant to address these kinds of problems, which probably explains why counsel for the Sorbaras tried to bring the matter before the Ontario Superior Court, without success.

In 2009 32% of self-represented appellants before the Tax Court of Canada (TCC) were successful in their appeals.  Appellants represented by counsel had a 41% chance of success before the TCC, and appellants represented by agents had a 39% chance of success.  These numbers were compiled by going through rulings for 2009, randomly selecting 7-9 rulings per month—100 cases in total—and extracting the disposition and the representation.  Cases were chosen randomly though an effort was made to screen out cases with an obvious corporate appellant and cases published in French due to translation difficulties. 

The numbers show that, while representation makes a major impact, the real key to avoiding a loss before the TCC is to avoid being brought before the TCC.  Overall the CRA won 51% of the cases before the TCC outright and rulings were split in 11% of cases with overall average wins for appellants at 36%.  With odds like those the best way to win seems to be not to play and get solid tax advice before filing to avoid court. 

If there is no choice but to take the issue to court is representation needed?  The answer is that it depends, and economics play a large part in the question.  What is the amount in dispute and what is the nature of the dispute?  For a fact-based appeal where $10,000 is at risk a lawyer isn’t going to be able to do much and the cost of litigation could be worse than a negative finding (and most of the time appellants get stuck with both a big legal bill and a big tax bill).  On the other hand, if fighting a point of law, victory is an up-hill battle without representation.  In the cases examined self-represented litigants tended to be fighting over both small amounts and factual issues and represented litigants tended more to be fighting larger cases on points of law.

In the end it seems to come down to the context of the case to determine if a lawyer is economically efficient: if you’re in a plane that’s going to crash the expensive parachute is better, but if all you can get is a cheap parachute it’s better than nothing.

According to a long line of cases, the Tax Court cannot render a judgment that increases the amount owing under the assessment under appeal. In Skinner, the taxpayer was appealing from the Minister’s reduction of the taxpayer’s income, which was the result of the refusal to give effect to the reported 15(2) inclusion. The Tax Court held that it must dismiss the appeal from the 2001 reassessment because allowing the appeal would increase the taxpayer’s liability under the Act.

[30] As I read the jurisprudence, however, the governing factor in determining the Court’s jurisdiction is not who is seeking the order or the nature of the remedy sought, but rather, whether the ultimate result would be an increase in the quantum assessed in the assessment under appeal. If that question is answered in the affirmative, the “effect” is, by definition, to permit the Minister to appeal his own assessment and the Court is without authority to make such an order. As shown by both Pedwell and Petro‑Canada, the Court stands in no better position than the Minister where the order granted results in an increase in the taxpayer’s assessment. The effect of an order vacating that assessment is still to increase the tax assessed in that year, an outcome beyond the Court’s power to impose. Thus, whether the request originates with the taxpayer or the Minister and whether the order is to vary or vacate, the effect of ordering such a remedy is the same.

[31] As there is no question that if the Appellants were successful in their appeals of the 2001 Reassessment the result would be an increase in the quantum of their tax liability for that year, I am bound by the jurisprudence to conclude that the Court is without jurisdiction to hear their appeals. The Respondent’s motion to dismiss the appeals of the 2001 Reassessment is therefore granted.

The Tax Court then felt bound to dismiss the appeal for 2002 because the Minister’s reassessment for the previous year reversed the 15(2) inclusion. One of the prerequisites of a deduction under 20(1)(j) is that an amount was included in the taxpayer’s income in a previous year under 15(2). The result of the dismissal of the appeal for 2001 was that no amount was included in the taxpayer’s income under that subsection. Accordingly, the taxpayer’s appeal for 2002 could not succeed because the conditions in paragraph 20(1)(j) were not met.

The subtext of the appeal was that the taxpayer had attempted to engage in what the Minister regarded as abusive tax planning. Unfortunately for the taxpayer, the Minister was able to avoid a hearing on the merits because the taxpayer’s planning required an increase in income for one of the years in question. The Minister simply needed to reverse that increase to undo all of the planning.

The Tax Court is a place where highly technical rules are applied in a highly technical manner. This makes Tax Court judges sound cold, and from time to time, in their judgments, one gets the distinct impression that they see themselves this way, and they don’t always like it. But this aspect of the system is, in part, the creation of taxpayers collectively and their advisers. The CRA will rely on highly technical rules to impose tax; but taxpayers in turn rely on those same rules to avoid it. The government responds with more and more technical rules to combat avoidance, and a plethora of technical rules seems to entail a technical approach to the adjudication of tax disputes without much regard for the individual enmeshed in the gears of the machine.

I used “seems” in the previous sentence because, of course, the Tax Court’s approach is also dictated by its jurisdiction. The Court is a statutory creature, and its jurisdiction over income tax matters is spelled out clearly in the Income Tax Act and the Tax Court of Canada Act. The Court has no jurisdiction to consider anything other than the black letter of the law. Does it have to be that way, though? What if the Income Tax Act permitted judges some discretion to depart from the black letter, to take into account individual circumstances? A taxpayer might be liable for tax under the black letter, but perhaps bad advice or other difficult circumstances did more than anything else to create that liability. Do we trust Tax Court judges to do the Right Thing in those circumstances?

The current answer is no, we don’t, and so they can’t. Taxpayers need to understand this basic fact about the tax dispute resolution system when fighting an assessment.

Valid Appeals

The Court explained the relevant provisions as follows:

[16] Subsection 152(4.2) of the Act is part of the “Taxpayer Relief” legislation formerly known as the “fairness” legislation and introduced on May 24, 1991 as part of the “Fairness Package”. That subsection as it now reads is intended to provide relief to an individual taxpayer who becomes aware, after the normal reassessment period, that he may be entitled to a refund or a reduction of an amount payable. The application for such a determination must be made within ten calendar years after the end of the taxation year. Notwithstanding a taxpayer’s right to object to an assessment under section 165 of the Act, subsection 165(1.2) precludes a taxpayer from objecting to an assessment made under certain provisions of the Act, including subsection 152(4.2). The reasoning behind that is that a reassessment under subsection 152(4.2) is made at the Minister’s discretion.

Subsection 169(1) of the Income Tax Act, which governs the filing of income tax appeals, does not expressly prohibit an appeal from a relief reassessment, but it is a condition of filing an appeal that the taxpayer first object. In Kubbernus, the taxpayer filed an objection despite the prohibition in subsection 165(1.2), and the Minister considered it. Did that matter for the purposes of the appeal to the Tax Court? The taxpayer argued that the Minister, by considering the objection, was estopped now from taking the position that the taxpayer couldn’t appeal. The Court disagreed.

[34] In the present fact situation, I do not believe that the appellant was misled by the Minister when he decided to file a notice of objection. In fact, it was he himself who set the wheels in motion by ignoring the prohibition set out in subsection 165(1.2) of the Act and referred to in the 2006 reassessment. As noted by Judge Bowman (as he then was) in Goldstein, supra, this Court has an obligation to decide cases (or motions) in accordance with the law. I am therefore not bound by erroneous representations or interpretations of the Act by CRA officials. Accordingly, no estoppel can be said to have arisen in the instant case if the representations were not in accordance with the law. The situation in the cases cited by the appellant differs from that in the instant case as, in those cases, they were in accordance with the law.

Valid Objections

In a post on objections, I wrote

There is no prescribed form for an income tax objection. The Income Tax Act (Canada) simply requires that the objection be in writing and that it set out “the reasons for the objection and all relevant facts”. The CRA has created a form for objections (the T400A), but the taxpayer need not use it. That said, we always do, if only because it makes the CRA feel better, and using the form helps to ensure that the objection will end up in the right CRA pigeon-hole.

In fact the Tax Court is often quite lenient about what will constitute a valid objection, and this is well illustrated in Schneidmiller v. The Queen, 2009 TCC 354. In that case, the CRA reassessed the taxpayer, who called the CRA to complain that the reassessments were incorrect. The CRA sent the taxpayer T1ADJ’s, a “Request to Adjust”, which the taxpayer completed and sent to the CRA at its Surrey Tax Centre (cf my post on this point entitled “Arguing with the CRA While the Clock Ticks“). The CRA lost the forms and told the taxpayer as much 18 months later. The taxpayer resubmitted the forms. The taxpayer followed up two and a half months later, at which point the CRA told him to file an objection, which he promptly did. The CRA then informed the taxpayer that he was out of time for filing an objection! (Kafka couldn’t have made this up.)

Justice Beaubier responded as follows:

[2] The application was heard in Regina Saskatchewan on June 26, 2009. The Applicant was the only witness. He resides in Gull Lake, about 300 km west of Regina, a land of open range, where big farms meet big ranches and the deer and the antelope play and the skies are not cloudy all day.

Was it a slow day at the office?

Anyway, the Justice also wrote:

[9] An “Objection” or a “Notice of Objection” is not defined or described in either Section 165 or 248 of the Act. Nor should it be. It is a matter of substance, not form. The Shorter Oxford Dictionary, 3rd Edition, defines “Objection” as:

“The action of starting something in opposition to a person or thing… an adverse reason, argument or contention. Now often merely: An expression, or feeling, of disapproval, disagreement or dislike…”

[10] That is what the Applicant did when he sent his request respecting the 2002, 2003 and 2004 Reassessments of 27 April 2006 to CRA which they received on 12 May 2006. They constituted timely Notices of Objection.

[11] As a result, the Applicant does not need an extension of time in which to file Notices of Objection. He has done that.

[...]

[13] In these circumstances, this Application is dismissed because it is not necessary. Mr. Schneidmiller has the right to appeal these reassessments to the Tax Court of Canada now.

Uh, what about subsection 165(2), which states that “a notice of objection under this section shall be served by being addressed to the Chief of Appeals in a District Office or a Taxation Centre of the Canada Revenue Agency and delivered or mailed to that Office or Centre”? The requirement respecting service on a Chief of Appeals is mandatory. I’m guessing the taxpayer didn’t meet this condition because he didn’t send the T1ADJs to the Chief of Appeals at the Surrey Tax Centre. Why would he, when the form itself doesn’t say anything about that requirement?

Anyway, it doesn’t appear that the Crown has filed an appeal from this decision. No doubt Mr. Schneidmiller had the full sympathy of the Court for obvious reasons, but any other taxpayer should think twice before emulating his example in dealing with a reassessment.