What can a taxpayer do if a CRA decision letter is unclear?

Introduction: Federal Court rules on whether CRA's decision to not process the amended returns was reasonable

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.

In 4431472 Canada Inc v Canada (Attorney General), 2021 FC 812, the Federal Court reviewed the Canada Revenue Agency's (CRA) decision to not process the amended tax returns filed by the corporate applicant for its 2008 to 2011 taxation years. The Court was asked to determine whether the Agency's decision was reasonable and whether to set aside the Agency's decision.

Background

Although there are several parties involved in this case, we shall distill the facts of the case to their bare bones.

4431472 Canada Inc. ("443 Inc.") is a holding company with one shareholder, Mr. Ludmer, and no operating business. 443 Inc. is one of the beneficiaries of a trust called Thames Trust. The Trust receives payments from a Bermuda-based corporation called GAM Ltd. Based on the payments received from the Bermuda-based GAM Ltd. [Global Asset Management], Thames Trust would then make distributions of the trust property to the beneficiaries, including 443 Inc. From 2008 to 2011, and in 2014 and 2015, Thames Trust made distributions totaling nearly $17.63 million to its beneficiaries, including 443 Inc.

For the 2008 to 2011 taxation years, 443 Inc. filed its T2 tax returns and reported the distributions it received from the Trust as taxable income. The CRA then assessed the corporation based on its submitted filing position and the corporation never objected to the assessments that were issued for the years in question. This all changed in November 2010 when 443 Inc. discovered that it had mischaracterized the distribution. Rather than reporting the distribution as taxable income, it realized that it should have reported the distribution as non-taxable voluntary payments.

Consequently, 443 Inc. proceeded to file requests for refunds and submitted amended T2 tax returns for the 2008 to 2010 taxation years, holding that the distribution it received from the Trust was not considered income from a source under the Canadian Income Tax Act. Because 443 Inc. never heard back from the CRA regarding its amended returns for the 2008 to 2010 taxation years, it decided to report the income it received from the Trust as taxable income for the 2011 taxation year as a cautionary measure. In June 2012, the corporation submitted a request for a refund and an amended return. Through the amended returns, the sum of the refunds claimed by 443 Inc. for the 2008 to 2011 taxation years totalled nearly $2.8 million.

From 2012 to 2014, 443 Inc. regularly followed up with the CRA to see if the Agency has granted or denied its request for refunds for the 2008 to 2011 taxation years. However, the CRA did not respond to the corporation's requests in a timely manner nor did the Agency issue new notices of assessment for the applicable years in question.

Finally, on May 26, 2014, the CRA sent Mr. Ludmer a proposal letter notifying him that the Agency considered the payments received by Thames Trust from the Bermuda-based corporation, GAM Ltd, as income from property or business for the purposes the Income Tax Act. Thereafter, a series of exchanges occurred between 443 Inc. and the CRA. This ultimately led to the CRA to issue a proposal letter on July 6, 2017, where the tax agency held that the distributions received by the corporation were taxable receipts and therefore, the CRA was disallowing the deductions claimed by the Trust for the 2011 taxation and subsequent years. This in turn affected the amended returns filed by 443 Inc. The proposal letter also provided that the CRA would not decide whether to grant 443 Inc.'s requests for refunds and processing of its amended returns until a "final and appealable" determination has been made (presumably by the Tax Court) regarding the payments Thames Trust received in 2011 and onwards.

On February 20, 2019, 443 Inc. filed an application seeking an order of mandamus to push the CRA to determine the corporation's tax liability for the 2008 to 2011 taxation years. This then led to the CRA to issue a decision letter on May 7, 2019 where the CRA stated that corporation's initial filing position of treating the payments from the Trust as income was the correct position at law, that the CRA was not obliged to process the amended returns, and that the CRA was to "postpone its final decision" on the amended returns until a final resolution of all related tax matters has been reached, but that the Agency decided to render a "final decision on the [a]mended returns, that is, not to reassess 443 Inc." As can be seen, the CRA's letter is unclear as to whether the Agency was rendering a final decision.

Federal Court sets aside CRA's decision as the agency's decision was unclear

As the Federal Court was asked to review the CRA's May 7, 2019 decision, the standard of review that the Court adopted was reasonableness as there was no particular reason to warrant departure from this standard. The Court held that the way the CRA drafted its decision letter was unclear and subject to two different interpretations. As such, the Court ruled that the CRA's decision was unreasonable and must be set aside. The Court explained that the letter was unclear as to whether the CRA was definitively refusing to reassess 443 Inc. or whether the Agency was simply cementing its earlier proposal to postpone rendering a decision on whether to process 443 Inc.'s amended returns until the Tax Court addressed the payment