Case Commentary: Uppal Estate v. the King upholds procedural fairness for Canadian taxpayers in tax litigation

Introduction: Striking Tax Court Pleadings

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.

The Tax Court of Canada's decision in Uppal Estate v. The King (2025) 2024-816(IT)G, a motion to strike pleadings brought by the lawyer for the taxpayer, addresses procedural fairness in tax litigation, particularly regarding the assumptions by the Canada Revenue Agency of fact and the court's jurisdiction over penalties not initially assessed. The ruling underscores the importance of clarity in pleadings and reaffirms the Tax Court's limited role in assessing penalties beyond those originally imposed by the CRA.

Background: Uppal Estate Pleadings

The lawyer for the taxpayer brought a motion to strike portions of the CRA 's amended reply, arguing that:

1. Certain assumptions of fact should be struck because they were pleaded in the alternative, leading to different potential amounts of unreported income.
2. Other portions should be struck because they proposed penalties under Income Tax Act sections 162(7) and 162(10) for failure to file T1134 and T1135 information returns, despite the Minister not initially assessing these penalties (the "Alternative Penalties").

The case arose from a dispute over alleged unreported income from the sale of shares in a company.

Key Issues and Findings

Alternative Assumptions of Fact

1. The Court found that pleading alternative assumptions of fact could create undue prejudice to the taxpayer by leading to different potential assessments of unreported income.
2. While alternative pleadings can be acceptable, they must not impose an undue burden on the taxpayer to disprove multiple conflicting factual scenarios.
3. The Court, therefore, struck the relevant portions of the CRA's reply.

Jurisdiction Over Alternative Penalties

1. The Court ruled that it does not have the authority to order the CRA to assess a penalty not originally imposed.
2. It held that the Alternative Penalties under sections 162(7) and 162(10) were distinct from the gross negligence penalties under section 163(2) that had been assessed.
3. Section 171(1) of the ITA does not grant the court authority to refer a matter back to the CRA for the purpose of imposing a new penalty.
4. As a result, the Court struck the paragraphs in the CRA's reply that referenced the Alternative Penalties.

This decision reinforces key principles in tax dispute litigation:

• Clarity in Assumptions of Fact: The CRA must ensure that assumptions of fact are clearly stated and do not create unnecessary confusion or prejudice to the taxpayer.
• Judicial Limits on Penalties: The Tax Court cannot impose or direct the imposition of penalties beyond those initially assessed by the CRA, reinforcing the importance of the CRA's initial assessment decision and emphasizing the importance of clearly reviewing and challenging inappropriate pleadings.
• Pre-Trial Strategy: Taxpayers should carefully review the CRA's pleadings to challenge overly broad or prejudicial assumptions of fact and ensure that the penalties sought align with those properly assessed in the original reassessment.

Lessons Learned from Uppal Estate

The Uppal Estate decision emphasizes the duty of the CRA in Tax Court pleadings and serves as a procedural safeguard for Canadian taxpayers by ensuring that they are not unfairly burdened by unclear assumptions or improperly introduced penalties. It also reaffirms the Tax Court's limited jurisdiction, emphasizing the distinction between its adjudicative role and the CRA's assessment powers. Moving forward, this case may serve as precedent for challenging procedural deficiencies in tax litigation.

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 david@taxpage.com.

Read the original article in full on Tax Page. Author photo courtesy Rotfleisch & Samulovitch P.C. Title image: iStock ID:155392441.