We regularly give you news about tax cases decided in the Courts. Why are they important?
First, you need to understand the legal basis on which our tax system operates. Tax is imposed by the Income Tax Act, which is legislation passed by Parliament (and amended every year). The Department of Finance proposes changes to the Act in the annual federal Budget and throughout the year, and drafts amendments to the legislation, but the changes do not become law until Parliament passes them.
When we have a majority government, it is almost a foregone conclusion that all proposals from Finance will be enacted. Even under a minority government, it is almost certain that technical amendments that are not politically charged will be enacted eventually, although this can take years. And when they are enacted, they are usually made retroactive to the date indicated when they are first announced.
But the Income Tax Act is very complex — about 2,000 pages of difficult and sometimes unintelligible language. It takes a lot of interpretation, and its application in many situations is unclear.
The Canada Revenue Agency publishes extensive materials to help us interpret the Act. Most of this material can be found on its Web site, at cra.gc.ca. CRA publications include Interpretation Bulletins, Information Circulars, Income Tax Folios, guides, pamphlets and other documents. These can be used by taxpayers and their advisers in deciding how the Income Tax Act will apply to any given situation. They are also used by CRA assessors, auditors and appeals officers in deciding how to assess or reassess taxpayers in any given situation.
However, the CRA does not make the law. As noted above, the law is made by Parliament. The CRA merely interprets the law. Its interpretations are not legally binding. There are many situations where taxpayers (and their advisors) disagree with CRA interpretations. (See the Conocophillips case discussed under “Around the Courts” below for an example.)
This is where the Courts come in. Any taxpayer who disagrees with an assessment or reassessment can file a Notice of Objection within 90 days of the date on the Notice of (Re)Assessment. For an individual, the deadline is the later of this 90-day period and one year after the filing-due date for the year in question. The matter is then considered by a CRA appeals officer; this is a purely administrative process, very informal, with telephone discussions and correspondence but no formal hearing.
If after discussing the case with the taxpayer or the taxpayer’s representative and reviewing their written submissions, the appeals officer believes that the assessment was correctly based on the rules in Income Tax Act, the appeals officer will “confirm” the assessment. Or the appeals officer may “vary” the assessment to reduce it, but perhaps not as much as the taxpayer would like.
At this point, a taxpayer who still wants the assessment changed has to go to Court. Appeals of income tax (and GST) assessments are filed in the Tax Court of Canada.
There is nothing wrong with appealing a case to the Tax Court. It will not cause the CRA to look at you as a “problem”, nor will it result in extra audit attention to you in the future. If you genuinely have a good legal case, you should appeal. But you should consult a tax lawyer or other qualified professional to determine whether you do have a good case. Without expert advice it’s very easy to go wrong in trying to interpret the Act.
The Tax Court of Canada is an excellent Court: well run, efficient, humane and friendly, especially to taxpayers who do not have a lawyer and are appealing a relatively modest amount of tax. Where the amount of federal tax and penalty does not exceed $25,000 for each taxation year, an income tax appeal can be filed under the Tax Court’s “Informal Procedure”. (The same goes for a GST/HST appeal of up to $50,000.) The process is a formal Court hearing that follows the rules of Court, but the judge is able to bend the rules of evidence and to be more flexible in reaching his or her decision. At the end of the day, however, the decision must still be based on the rules in the Income Tax Act, and the Tax Court will not allow a taxpayer’s appeal merely because the result is otherwise unfair. There has to be a legal basis in the Act for allowing the appeal.
For larger appeals, the Court’s General Procedure is used. While human taxpayers are allowed to represent themselves, it is highly advisable to retain a tax litigation lawyer to deal with the procedures, which include formal pleadings, Lists of Documents, discoveries, Status Hearings and various other procedural steps, as well as organizing and presenting the evidence and making the correct legal arguments.
If you are not happy with the Tax Court’s decision, you can appeal to the Federal Court of Appeal, but normally only on a question of law. Any findings of fact reached by the Tax Court are binding (unless you can show that no judge could reasonably have reached that conclusion based on the evidence presented — a “palpable and overriding error”). You are not normally allowed to bring any new evidence to the Federal Court of Appeal — the decision is based on the written record of the evidence at the Tax Court trial.
If you win at the Tax Court, the CRA can appeal to the Federal Court of Appeal, under the same rules as above.
From the Federal Court of Appeal, an appeal is possible to the Supreme Court of Canada, but only with “leave” of that Court. Either side can file an “Application for leave to appeal”. Leave is granted only when the issue is of “national importance”. Only a very few tax cases a year are heard by the Supreme Court.
Now, what does all this mean in terms of understanding Court decisions?
- Decisions of higher courts are more precedent-setting. Lower courts are required to follow legal principles set out by the higher courts.
A decision of the Supreme Court of Canada on a tax issue is extremely important — and rare, as the Supreme Court hears very few tax appeals. Decisions of the Federal Court of Appeal are also very important, especially where they make statements as to principles of law.
Tax Court decisions under the General Procedure are less important but are still valuable. Even Informal Procedure decisions, which technically are not binding for future cases, are a good indication of where the Court is going on an issue, and in practice the CRA and other judges of the Tax Court will often follow them.
- The Courts will not give much weight to CRA publications such as Interpretation Bulletins. The judge will take note of such documents, but will not consider himself or herself in any way bound to follow the CRA’s interpretation — since the CRA is one of the litigants before the Court. The law is found in the Income Tax Act and the case law, not in CRA publications.
- If the government does not like a Court decision, they can effectively overrule it with legislation, by introducing amendments to the Income Tax Act that Parliament then enacts. Many “schemes” that have succeeded in the Courts have been subsequently shot down by amendments to the Act. However, in the interim, taxpayers can still take advantage of the Court decision — unless the legislative changes are made retroactive, which they sometimes are.