Alberta Court rejects CRA's duty of care to taxpayers
David Rotfleisch explains the Signal Hill Manufacturing case and duty of care
TORONTO – Dealing with the Canada Revenue Agency is a stressful and often expensive process. When the CRA blatantly mishandles a taxpayer's file, the taxpayer will often want to pursue civil litigation against the CRA for negligently handling his or her file. However, the existence of a duty of care is one of the key and necessary elements that must be established for a successful negligence lawsuit . With few exceptions, Canadian courts are usually hesitant to recognize instances where CRA owed the taxpayer a duty of care.
In Signal Hill Manufacturing v CRA, the taxpayer, Signal Hill Manufacturing, sued the CRA as well as one of CRA's employees for negligence for mishandling its tax collection activities. The CRA filed a summary judgment application to dismiss Signal Hill's lawsuit, taking the position that even if the facts alleged by Signal Hill were all true, there will would not be any legal basis for this lawsuit as CRA did not owe Signal Hill a duty of care to begin on the facts in this case.
CRA's application was initially granted, and recently the Court of Queen's Bench of Alberta confirmed the initial decision and sided with the CRA. This article will briefly review this decision and some of its implications for the issue of filing civil lawsuits against the CRA.
Signal Hill – The Facts
Signal Hill Manufacturing and its director Peter Rasmussen have been dealing with the CRA over Signal Hill's tax debt since 1997. Over the course of time, CRA and Signal Hill had entered into a number of payment arrangements whereby Signal Hill would pay its tax debts in installments. In exchange, CRA would not escalate its collections actions such as placing a Requirement to Pay ("RTP") on one of Signal Hill's customers.
A Requirement to Pay would force a Signal Hill customer to transfer all or some of his or her payments to Signal Hill to the CRA to enable the CRA to forcibly collect Signal Hill's tax debts. Furthermore, a Requirement to Pay could seriously damage Signal Hill's reputation in the eyes of its customers.
In 2000, after Signal Hill failed to pay its tax debts in accordance with its payment arrangement agreement with the CRA, the CRA delivered a RTP order to one of Signal Hill's key clients, Chariot, and insinuated to Chariot that Signal Hill might be out of business soon. Signal Hill lodged a complaint with the CRA for how this Requirement to Pay was issued but the CRA did not resolve the complaint in favor of Signal Hill.
In the meanwhile, the CRA had been applying the money it collected from Signal Hill inconsistently. The CRA would often apply payments to Signal Hill's current amount owing as opposed to its past debts.
Eventually, the Canadian tax litigation lawyer acting for Signal Hill filed a civil lawsuit against the CRA for economic damages caused by CRA's negligent handling of Signal Hill's files. The CRA pushed for the lawsuit to be dismissed, alleging there was no genuine issue to be tried.
Duty of Care owed by the CRA to Taxpayers
The Court here found CRA to have owed no duty of care to Signal Hill in administering collection and enforcement activities against Signal Hill. As a result, Signal Hill did not have a prima facie case for negligence against the CRA.
The legal test for private law negligence in Canada is known as the Anns test and is articulated as follows:
- Was the harm that occurred the reasonably foreseeable consequence of the defendant's act?
- Are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here?
The Alberta Court of Appeal has previously ruled that the CRA owed no prima facie duty to a taxpayer under audit in Grenon v Canada Revenue Agency. In the Grenon case, the Court ruled that since the relationship between an auditor and a taxpayer is inherently adversarial, the CRA generally cannot be in a sufficiently close proximity to the taxpayer to establish a private law duty of care.
Furthermore, the Grenon case ruled that even if there is a prima facie duty of care between the CRA and the taxpayer, the court would have strong policy reason to mitigate against that finding on the second branch of the Anns test.
Other Cases Regarding CRA Negligence
The Court in Signal Hill addressed cases where the Canadian courts did find the CRA to owe at least a prima facie duty of care to the taxpayer. Some of the cases under discussion are addressed by our articles here: the BC case Leroux is discussed here and the Quebec case Ludmer is discussed here.
The Ludmer case was dismissed as a Quebec case based on Quebec civil law. The Leroux case was dismissed by quoting the Ontario Superior Court's recent decision in Jayco Inc. v Her Majesty the Queen. The Court in Jayco ruled that there are strong policy considerations against finding the CRA to owe a duty of care to taxpayers. Furthermore, the Court in Jayco ruled that there are already administrative and legal procedures set up under the Income Tax Act to adjudicate between the CRA and Canadian taxpayers. The courts would tip the advantage to the taxpayer if they allowed the CRA to be sued for negligence.
Pro Tax Tips – Suing the CRA for Negligence
Although the Court in Signal Hill declined to find a civil case of negligence in favour of the taxpayer, the possibility for suing the CRA for negligence under private law is not closed. Ludmer and Leroux gave compelling reason why courts should at least find the CRA to owe a prima facie duty of care to Canadian taxpayers when administering tax collections and assessments.
The Signal Hill case seems to demonstrate the current division and fracture in Canadian private law when it comes to holding CRA liable for negligence committed against Canadian taxpayers.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com, Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, 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 audit representation and tax litigation.