David J. Rotfleisch Opinion Taxation

Canada Revenue Agency farcical in treatment of taxpayers

David Rotfleisch on CRA behaviour, from malicious prosecution to the dead parrot voluntary disclosures program

Author: David J. Rotfleisch

TORONTO, March 21, 2018 – The Canada Revenue Agency made headlines last week and not in a good way. The B.C. Supreme Court awarded over $1.6 million in damages, including punitive damages, against the CRA, having found that its agents had committed the tort of malicious prosecution. The judgment chronicles the type of prosecutorial blinders that I see all too often in my practice. 

The CRA investigations officer made up his mind that the couple who owned a restaurant and nightclub in Nanaimo, B.C. (the Samaroos), had unreported cash sales. Once he made up his mind, he did whatever he could to secure a conviction — and the facts be damned! 

I cannot do better than to quote The Honourable Mr. Justice Punnett from his blistering 70-page ruling, in which he called the CRA’s behaviour “reprehensible and malicious.” 

In my opinion, CRA auditors, appeals officers and investigators routinely ignore the facts and the law in blind pursuit of the theory of the case that they have formed, often from limited or wrong facts or assumptions. Cash deposits into a bank account are invariably assessed as unreported income, as in the Samaroo case, no matter how plausible the explanation and evidence provided. 

I have a case right now where my client is being assessed as not a shareholder of a corporation affiliated with his employer due to a discrepancy in the share register (which the CRA is assuming means my client is not a shareholder), even though my client declared dividend income and a capital gain on the eventual disposition of the shares. 

There is no legal basis for the payor to have given funds to my client if he was not a shareholder. Yet the CRA is ignoring all of this to assess my client on a different basis. The latest representations went in last week. If unsuccessful, we will go to appeals and probably straight to Tax Court. There is no doubt in my mind that we will prevail in court but my client will have an unnecessary legal bill. 

A farce of Monty Python proportions

Remember the old Monty Python sketch in which an outraged man complained that he’d bought a dead parrot? And the shopkeeper kept insisting the bird was just “resting”? Well … 

The new voluntary disclosures program (VDP) rules went into effect on March 1, 2018. One aspect of the former rules, the very successful no-names voluntary disclosure, was abolished. It allowed the disclosure of facts, from the date of filing, without providing the taxpayer’s name, and requested the CRA to opine if the circumstances met the criteria for protection under the program. 

It was replaced with a consultative program. No protection was granted but it purported to allow taxpayers or their representatives to call in and discuss facts and find out how the new rules would apply. Remember that, under the new rules, there are two tracks with different levels of relief. 

We were speaking to a somewhat senior VDP officer last week and he was clearly ashamed, and upset, when he told us how the new consultative process would work. The consultation or “preliminary discussions” will now take place over the telephone with a General Enquiries (GE) staff member. 

These are the front-line troops who answer general phone calls and have minimal training; our source at the VDP indicated that the CRA has created a general (and limited) training program for the General Enquiries staff members to facilitate this. 

Our advice to Canadians is, do not consult with them because they are frequently wrong on all aspects of tax law, including disclosure requests. The Auditor General has confirmed this as well

If the VDP question is one they think they cannot answer, they are supposed to refer it to a VDP officer who will provide a response for the GE officer to convey to the taxpayer (or professional). Our source was unable to give us any estimate on the time this process could take, meaning that, while we wait, the potential for enforcement action that would disqualify the taxpayer continues to exist. 

In other words, instead of having a dedicated group of knowledgeable, trained staff handle these consultations, there is no process in place. If my tax lawyers, having reviewed the Information Circular and the facts of our client’s situation in detail, need to consult with someone, what advice can an uneducated GE staffer provide to us? 

When the proposed changes to the VDP were announced last year, many stakeholders, including our firm, made extensive submissions to the Minister of National Revenue. Most of those comments were ignored, leading me to predict the effective demise of the program. 

This cavalier treatment of the consultation process leads me to suspect that the VDP is a Norwegian Blue parrot that would be lying on the floor of the cage if its feet had not been nailed to the perch. 

Shame on you, CRA. 

David J Rotfleisch, CPA, CA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Contact David at Taxpage.com and david@taxpage.com.

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