CRA's ex parte jeopardy order application must provide full and frank disclosure

Editor's Note: For general background on this case, read Montreal's controversial arms broker wins round one of $7.6 million tax battle (National Post).

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.

JEOPARDY orders authorize the Canada Revenue Agency (CRA) to initiate immediate collection actions, bypassing the collections limitations outlined in the Income Tax Act. These orders are secured through ex parte applications, wherein only the legal representative for the CRA presents their case to a Federal Court judge, without any representation or prior notification to the taxpayer. The CRA is obligated to transparently present all pertinent and significant information in her court submissions. In essence, the CRA must convince the court that there are valid reasons to believe that any delay would put the collection at risk.

Federal Court granted taxpayer's motion to set aside CRA's ex parte jeopardy order application

In Minister of National Revenue v Ben-Menashe [1], the Federal Court initially granted the CRA a jeopardy order in response to the CRA's ex parte application under s.225.2(2) of the Income Tax Act in March 2022, which authorized the CRA to take collection actions against the taxpayer regarding his tax debt of $7,663,570.71. In April 2022, the Canadian tax litigation lawyer for the taxpayer brought a motion on the basis that the CRA failed to disclose information in connection with three central grounds that were relied on to obtain the jeopardy order:

1. Large disbursements from the bank accounts of the taxpayer's spouse.
2. The taxpayer's tax behaviour showed carelessness and negligence according to the CRA; and
3. The taxpayer's lifestyle was deemed to be incompatible with his declared income.

The taxpayer's Canadian tax lawyer argued his spouse's bank account was used to receive payments for his services as well as payment for his business expenses. With respect to his alleged unorthodox tax behaviour and business expenses, the taxpayer argued the CRA misled the court by categorizing all his business expenses as personal expenses and ignored the fact that the taxpayer received an inheritance from abroad. After examining all three issues raised by the taxpayer, the Federal Court granted the motion to set aside the CRA's ex parte application because the CRA had not met the obligation of full and frank disclosure.

The Federal Court allowed supplementary affidavit and its exhibits

The Federal Court first analyzed a preliminary issue — whether supplementary affidavit and its exhibits submitted by the taxpayer should be admitted. After reviewing the material, the court found that the supplementary affidavit and its exhibits would assist the court because the taxpayer only requested these materials to be admitted to support his arguments challenging the CRA's ex parte order, which is a valid purpose. Therefore, admitting the evidence would not result in substantial and serious prejudice to the CRA.

The court found there was a lack of full and frank disclosure from the CRA

The Federal Court first clarified that the central issue of the case was whether the CRA had fulfilled the initial obligation for full and frank disclosure because that was a stand-alone basis for review of an ex parte jeopardy order. The court then examined the three issues the taxpayer raised one by one.

As for the taxpayer's use of his spouse's bank account, the court agreed with the taxpayer that CRA only mentioned expenses paid by the taxpayer's spouse's account but ignored the fact that the taxpayer also used the spouse's account to receive payment deposits. Although the court acknowledged the CRA's disclosure didn't need to be perfect, it still had an obligation to present a complete portrait of the good and bad of the case.

Regarding the taxpayer's alleged unorthodox behaviour, the court found the CRA appeared to be conflating reliability with relevance because the CRA failed to provide an exhibit containing a preliminary analysis of the taxpayer's business expenses. Although the CRA applied for the jeopardy order when it hadn't completed the tax audit against the taxpayer, the preliminary analysis would still be relevant to the case.

As for the third issue that the CRA contended the taxpayer's lifestyle was deemed to be incompatible with his declared income, the court agreed with the taxpayer and found the CRA failed to disclose both sides of the coin. First of all, the taxpayer admitted to spending a significant amount on both personal and business travel, but due to the difficulty of differentiating them, the CRA simply put an emphasis on the taxpayer's high spending on the personal side. Furthermore, the taxpayer also inherited a family fortune through a Russian bank account, but the CRA didn't disclose any details of this inheritance.

Overall, the court found the CRA omitted crucial evidence that was critical to the court's decision to grant the jeopardy order.

Taxpayers can apply to the Federal Court to review a jeopardy order

A jeopardy order authorizes the CRA to take various collection actions including but not limited to: the commencement of legal proceedings to recover the outstanding amount; the garnishment of the taxpayer's bank accounts or wages; the seizure of the taxpayers' property; even going so far as to seize any illegal income attributed to the taxpayer and in possession of the police. The mere doubt or apprehension that the delay may jeopardize collection is not sufficient to uphold a jeopardy order.

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 TaxPage. Title image: iStock. Author photo courtesy Rotfleisch & Samulovitch P.C.