A Canadian tax lawyer's perspective on Tax Court of Canada minutes of settlement vs. consent to judgment
David J Rotfleisch on settling a dispute prior to a hearing in Tax Court
Tax Court Settlement Process
A taxpayer who proceeds to Tax Court to resolve an ongoing tax dispute will want to consider settling the dispute prior to hearing. A settlement occurs where the taxpayer and Canada Revenue Agency agree to a particular outcome for the ongoing dispute without the involvement of a judge. As a matter of technicality, the taxpayer's dispute is with the Minister of National Revenue. The Canada Revenue Agency acts on behalf of the Minister and is represented in the Tax Court process by the Canadian tax litigation lawyers at the Department of Justice.
Unlike most other areas of law, settlement offers at Tax Court must be principled. A principled settlement offer is one which has a legal basis, meaning the settlement offer is based on technically correct interpretation of the appropriate legislation such as the Income Tax Act or Excise Tax Act, and previously decided cases. A taxpayer cannot simply, for example, offer to pay half of the disputed taxes in exchange for the Canada Revenue Agency deleting the other half. A settlement offer which is not principled will be rejected and will not result in a cost reward in favour of the taxpayer.
Settlements are often advantageous for the taxpayer as proceeding all the way to a Tax Court of Canada trial is a costly process both in terms of professional fees, if the taxpayer is being represented by an experienced Canadian tax litigation lawyer, and time. Settlement offers can also impact cost rewards if the dispute proceeds to hearing. Generally, if the taxpayer obtains a better outcome at hearing than what was offered in the settlement offer, the Canada Revenue Agency will be required to pay a large percentage of the taxpayer's costs associated with the dispute incurred after the date of the settlement offer. Settlement offers themselves usually require each party to pay their own costs if accepted.
A formal written settlement offer can first be submitted once pleadings are closed. An offer can be advanced by either the taxpayer or the Canada Revenue Agency or both. Once the settlement offer is served, there are generally settlement discussions which lead to acceptance of the settlement offer, withdrawal of the settlement offer, counter-offers, amendments to a previous offer or rejection of the settlement offer. Most settlement offers will have a deadline to respond. If the settlement offer is not agreed to by that deadline, the offer is treated as if it was rejected. To obtain the cost rewards described above, the settlement offer must stay open until at least 30 days prior to trial and cannot be withdrawn during that period.
If the parties agree to a settlement offer, they will jointly execute either "Minutes of Settlement" or "Consent to judgment". These two options will be discussed in greater detail below. The tax court will be informed that the dispute has been resolved. The Canada Revenue Agency will then make any necessary adjustments based on the "Minutes of Settlement" or "Consent to judgment", and pursue the taxpayer for any outstanding tax, interest and penalties as result of the dispute.
Tax Litigation Minutes of Settlement
Tax litigation Minutes of Settlement are a private agreement between the taxpayer and the Canada Revenue Agency setting out the terms on which the ongoing dispute will be resolved. The Minutes of Settlement are not filed with the Tax Court. Instead, the taxpayer will withdraw their dispute or the parties may jointly discontinue the dispute. The Canada Revenue Agency will then make the necessary adjustments to the taxpayer's tax affairs according to the Minutes of Settlement, and pursue the taxpayer for any outstanding tax, interest and penalties.
The main benefits of the Minutes of Settlement are flexibility and privacy. Because the court is not rendering a judgment, the settlement reached can involve relief or changes the Tax Court cannot grant. For example, the Tax Court will only deal with years properly under dispute. By not seeking a judgment from the court, the Canada Revenue Agency could agree to amend a tax year which is not under dispute as part of the settlement offer. Moreover, any document filed with the court becomes part of the public record. Since Minutes of Settlement are not filed with the court, the terms on which the taxpayer and Canada Revenue Agency resolved their dispute will not be part of the public record.
Tax Court Consent to Judgment
A Consent to Judgment is a joint agreement between the taxpayer and the Canada Revenue Agency agreeing to allow the Tax Court to issue a judgment consistent with the terms of the Consent to judgment. In most cases, the court will issue the judgment requested and the case will be resolved. The Canada Revenue Agency will then make the necessary adjustments to the taxpayer's tax affairs according to the judgment, and pursue the taxpayer for any outstanding tax, interest and penalties. In the unusual case that the court declines to issue the judgment, the taxpayer and Canada Revenue Agency will need to either go to hearing or amend the Consent to judgment.
The Canada Revenue Agency tends to prefer consents to judgment because, as documents filed with the Tax Court, they become part of the public record.
Get a Legal Opinion on Settlement Offers
Individual taxpayers are permitted to represent themselves in Tax Court disputes with some exceptions for disputes being heard under the general procedure. Under the general procedure, unless the tax court allows otherwise, a taxpayer who is either not an individual or is an individual but does not have the capacity to represent themselves must be represented by legal counsel. In informal procedure, the taxpayer can also be represented by an agent such as an accountant. Note that accountants are not trained to represent taxpayers in tax court. A legal opinion can ensure the taxpayer's offer is suitably principled and advantageous to the taxpayer's case, or identify any errors or deficiencies in a Canada Revenue Agency settlement offer.
Taxpayers who choose to represent themselves, or to be represented by an agent because of concerns over legal costs should consider this option as well. An experienced Canadian tax litigation lawyer can be brought in on a limited engagement to deal with settlement review without being involved in the dispute as a whole. This will allow the taxpayer to control costs while still receiving legal tax advice which could assist in resolving the dispute in a timely and advantageous manner.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and 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. Visit www.Taxpage.com and email David at firstname.lastname@example.org.
Photo David Rotfleisch courtesy Rotfleisch & Samulovitch P.C. Read the original version of this article on TaxLawCanada.com.