When can the federal court quash abusive CRA decisions to assess taxes?

Introduction: Challenging CRA Decisions

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 Canada Revenue Agency, responsible for administering tax and related programs for Canada, is expected to provide accurate, fair, timely, and professional service, pursuant to the Taxpayer Bill of Rights. When a taxpayer disagrees with a CRA decision, the taxpayer may be required to use different methods to challenge the CRA decision. The first step, in general, is to dispute the decision administratively. Depending on the type of decision made by the CRA, the taxpayer can file an objection or request a second review. Once the taxpayer meets certain requirements or exhausts administrative avenues, the taxpayer can then appeal the decision to the Canadian courts.

This article will discuss 2024 case law in relation to the Federal Court's jurisdiction to quash abusive CRA decisions, including Milgram Foundation and Dow Chemical. After the Supreme Court of Canada clarified the boundaries between jurisdictions of the Tax Court of Canada and the Federal Court in Dow Chemical, Milgram Foundation, is now considered a remarkable victory for taxpayers in Canada, which narrowed the definition of a "collateral attack" on tax assessments and granted taxpayers opportunities to challenge abusive CRA decisions to assess at the Federal Court.

What Qualifies as Abusive CRA Decisions

A taxpayer's interaction with the CRA can give rise to a variety of emotions and results, some of which can be very bad due to CRA's conduct. Abusive CRA decisions therefore refer to situations where the CRA engages in conduct that is unreasonable, unfair, or goes beyond CRA's legal authority when handling a taxpayer's issues. While specific decisions vary on a case-by-case basis, common examples of CRA actions or decisions that may be considered abusive include unfair assessments or reassessments, failure to provide proper notice, unreasonable delay in processing, harsh enforcement actions, errors, negligence, bias, bad faith, and failure to provide reasons for CRA's decisions. In certain circumstances, even the CRA's decision to reassess can be abusive. One of such circumstances involves an accepted application under the CRA's Voluntary Disclosure Program (VDP), which will be further discussed in the sections below via the examination of existing case law.

A taxpayer can file a service complaint to the CRA if he or she believes that he or she has not been treated fairly by the CRA personnels working on the taxpayer's case. For example, if a filed objection has not been worked on for an extended period of time, a service complaint may prompt the CRA Appeals Division to reassign the file to a new officer or to alert the officer assigned to the file to start working on the objection as soon as possible. However, to challenge an abusive CRA decision, a taxpayer commonly is required to appeal the decision to the Tax Court of Canada or to the Federal Court.

Jurisdiction of the Tax Court of Canada and the Federal Court

The Tax Court of Canada is a specialized court that deals primarily with disputes between taxpayers and the Canada Revenue Agency, including income tax disputes, Goods and Services Tax/Harmonized Sales Tax (GST/HST) disputes, employment insurance, Canada Pension Plan (CPP), and other tax-related matters under specific federal tax statutes. Pursuant to section 12 of the Tax Court of Canada Act, the specific federal tax statutes include: Income Tax Act, Employment Insurance Act, Part IX of the Excise Tax Act, Old Age Security Act, Canada Pension Plan, Petroleum and Gas Revenue Tax Act, Cultural Property Export and Import Act, Customs Act (Part V.1), Air Travellers Security Charge Act, Excise Act (2001), Softwood Lumber Products Export Charge Act (2006), War Veterans Allowance Act, Civilian War-related Benefits Act, Section 33 of the Veterans Review and Appeals Board Act, Disability Tax Credit Promoters Restrictions Act, Greenhouse Gas Pollution Pricing Act, Underused Housing Tax Act, and Select Luxury Items Tax Act.

The Federal Court has broader jurisdiction with matters of public law and its tax-related jurisdiction primarily includes judicial review of CRA's decisions and actions, focusing on procedural fairness.

Dow Chemical Canada ULC v Canada, 2024 SCC 23

The Tax Court of Canada does not have jurisdiction to set aside an assessment on the basis of reprehensible CRA conduct

Dow Chemical Canada ULC v Canada ("Dow Chemical") is a Supreme Court of Canada decision released on June 28, 2024, clarifying the jurisdictional boundaries between the Tax Court of Canada (TCC) and the Federal Court. Specifically, the SCC found that the Tax Court of Canada has exclusive jurisdiction to determine the correctness of a tax assessment, which involves a non-discretionary determination of a taxpayer's tax liability. Specifically, the Tax Court should review the "product" of the relevant tax legislation, namely the tax assessment, but not the "process" in relation to the issuance of the assessment. The Federal Court has exclusive jurisdiction to review discretionary decisions of the CRA, except where the Parliament has expressly provided otherwise. Specifically, the Federal Court may not consider an application that is in essence an attack on the correctness of an assessment.

The companion appeal of Dow Chemical, Iris Technologies Inc. v Attorney General of Canada, 2024 SCC 24, also confirmed the jurisdiction of the Federal Court over challenges to discretionary decisions made by the Minister.

Milgram Foundation v Canada (Attorney General), 2024 FC 1405

Federal Court has the jurisdiction to quash an abusive CRA decision to assess, even though the resulting assessment was objected to

Following Dow Chemical and Iris Technologies, Milgram Foundation, decided in September 2024, is considered by to be a remarkable victory for taxpayers in Canada, which narrowed the definition of a "collateral attack" on tax assessments and granted taxpayers opportunities to challenge at the Federal Court abusive CRA decisions to assess taxes.

Milgram Foundation is a non-resident entity in Liechtenstein. It did not file tax returns in Canada between its establishment in 1964 and 2015. In 2015, Milgram Foundation filed a voluntary disclosure application under the VDP covering 2003 to 2014, after it considered it might be a deemed Canadian resident for income tax purposes. The CRA eventually accepted the application and determined that the application met all requirements under the CRA's VDP in 2016. However, in 2018, two years later, the CRA alleged that Milgram Foundation made misrepresentations and proposed to issue further reassessments. The CRA found that Milgram Foundation has undisclosed investment income and proposed to reassess Milgram Foundation for its 1998 to 2002 taxation years. The CRA subsequent adjustments required Milgram Foundation to pay additional tax and penalties.

Milgram Foundation subsequently appealed the CRA's decision to reassess to the Federal Court based on an abuse of process, seeking to judicially review the CRA's decision to reassess. Milgram Foundation asked the Court to consider whether the decision breached its legitimate expectations, whether the decision amounted to an abuse of process, and whether the decision was unreasonable. The CRA, represented by the Department of Justice, argued that the Federal Court had no jurisdiction to hear the matter.

The Federal Court divided the issues into two parts: 1) what the "decision" under review is and whether it is a reviewable decision; and 2) whether Milgram Foundation's application is a collateral attack on a tax assessment. The court eventually ruled that although an acceptance under the VDP program does not equate to a binding agreement between the CRA and the taxpayer, the CRA ought to make sure that the decisions are consistent with past practice and administrative adjudications. The court also accepted that the doctrine of abuse of power can be used to protect the integrity of any adjudicative process and can be used in this context. The CRA's conduct, namely, to reassess the taxpayer without any justifications after acceptance of the taxpayer's VDP application, violated a sense of fair play and the decision to reassess amounted to an abuse of process.

In Milgram Foundation the Federal Court recognized the finality of CRA's acceptance of a voluntary disclosure application, while the CRA reserves the right to audit or verify any information provided in a VDP application. In other words, once the CRA decided to accept a taxpayer's voluntary disclosure application for a certain period of time, unless the CRA finds any misrepresentation due to neglect, carelessness, wilful default, or fraud, the CRA should not arbitrarily reassess the taxpayer for the relevant period of time. An unjustified arbitrary reassessment conducted by the CRA after a VDP application has been accepted will therefore be considered a departure from the CRA's longstanding practices or established internal authority. If the CRA cannot provide a reasonable explanation in support of the arbitrary reassessment, then the Federal Court can quash the decision to reassess. Therefore, taxpayers should be aware of their rights once an acceptance letter has been issued by the CRA for their submitted VDP application. So long as there is no misrepresentation or fraud, the CRA should not reassess the tax years disclosed by the taxpayer in the VDP application.

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 Law Canada. Author photo courtesy Rotfleisch & Samulovitch P.C. Title image: iStock (Canada Revenue Agency headquarters).