Suing the Canada Revenue Agency for negligence

The Case of Gordon v Queen and the existence of a duty of care

Courts have typically been reluctant to hold CRA agents liable for negligent conduct, says David J. Rotfleisch, CPA, JD, of Rotfleisch & Samulovitch P.C.

In the recent case of Gordon v Queen, the Federal Court of Canada dove into the rarely explored issue of suing the Canada Revenue Agency ("CRA") for damages in tort. Here, the plaintiffs were chartered accountants and accounting firm which specialized in claiming scientific research and experimental development (SR&ED) credits. Their methods involved backdating records to support transactions in order to maximize the value of the SR&ED claims on behalf of their clients. Consequentially, the CRA opened up an investigation in 1995 which culminated in the indictment and prosecution of the plaintiffs on five counts of fraud, attempted fraud and possession of the proceeds of crime. After several years of prosecution and inquiry, the Crown ultimately stayed the charges. The plaintiffs sought damages from the Government of Canada pursuant to allegations of tortious conduct arising out of a CRA criminal investigation including negligent investigation, breach of Charter rights, misfeasance in public office, malicious prosecution, and intentional interference with contractual relations.

While the appeal was ultimately unsuccessful, the court did acknowledge the existence of a duty of care for CRA Investigations, which if not met could lead to a finding of negligence, similar to the duty of care laid out in McCreight v Canada (Attorney General) in relation to police investigations. While the court also made clear that this duty of care did not necessarily apply in the case of CRA tax audits since doing so might infringe on the regulatory context of the CRA's authority, the court found that the serious harm that a negligent CRA tax investigator could cause justified imposing a standard of care. After all, someone investigated by the CRA faces the possibility of being imprisoned and can have their livelihoods and their reputations seriously damaged. As such, it was found that CRA tax investigators could be sued for negligence.

Suing the CRA For Negligence

As an agent of the Crown, the CRA is generally immune from tort actions for the exercise of any power conferred onto it by the prerogative of the Crown or an act of Parliament such as the Income Tax Act. Of course, this immunity is not absolute. Under the Crown Liability and Proceedings Act, plaintiffs can sue the Crown when one of its agents is liable in tort to that victim. Therefore, the CRA can be technically be held liable for the negligence of its tax agents in respect of a taxpayer if a court finds that those tax agents are liable. But while CRA agents can be held liable for negligent conduct, in practice, courts have typically been reluctant to do so.

As acknowledged in Gordon v Queen, there is little definitive recognition in Canada of a private law duty of care for the CRA. For example, the question of what standard of care the CRA's tax agents owe to taxpayers is a question of law that neither Parliament nor the Supreme Court have addressed at this point in time. Both the Federal Court and various provincial Superior Courts have attempted to answer this question but have only confused the situation even more by reaching conflicting answers. For example, in the case of Leroux v Canada Revenue Agency, the Supreme Court of British Columbia found that the auditors of the CRA did owe the standard of care of a "reasonably competent tax auditor in the circumstances." On the other hand, the Supreme Court of Nova Scotia found in the case of Canus v Canada, that there could be no duty of care for the CRA since interests of the taxpayers and the interests of the CRA were inherently opposed.

Furthermore, even in cases where such a duty of care was recognized, plaintiffs often fail due to the burden of evidence. For example, in the case of Leroux the plaintiff first had to establish on a balance of probabilities that the CRA was negligent, meaning that the agency did not reach its standard of care. The plaintiff also had to prove that the CRA's action legally caused the damages that he or she suffered and that the law provides remedies for those types of damages. In the case of Leroux, the court found that the CRA breached their duty of care when they unjustifiably reopened the taxpayer's statute-barred years and acted as though the burden was on the taxpayer to prove that he wasn't negligent. However, the action was dismissed since the taxpayer was unable to prove on a balance of probabilities that the economic harm that he suffered was due solely to the CRA's negligence. There were too many other intervening factors that had nothing to do with the CRA and contributed to the taxpayer's financial situation. As a result, the taxpayer's lawsuit failed.

David J Rotfleisch, CPA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, 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 litigation. Visit www.Taxpage.com and email David at david@taxpage.com.