Contributed By EY Law LLP
The Canadian tax system is essentially a self-assessment system: taxpayers prepare and file tax returns applying the legislation to their facts. However, some taxpayers (eg, employers; persons paying amounts to non-residents of Canada) are required to voluntarily register, collect or withhold, and remit taxes to the Canada Revenue Agency (the "CRA") on behalf of others.
Controversies that arise in Canadian federal tax administration fall into one of two categories:
Once a return is filed, it is typically assessed as filed, subject to corrections of obvious errors or missing information that the CRA is aware of based on various third party reporting requirements. Disputes typically arise when the CRA subsequently audits the taxpayer during the "normal reassessment period" permitted under the applicable legislation. If the matter is not settled during the audit by the CRA, disputes in respect of reassessments are subject to an administrative review by the CRA’s Appeals Division, and if the matter is not resolved at that stage, the taxpayer can file an appeal with the Tax Court of Canada ("TCC").
Tax controversies arise under all Canadian tax statutes, including the Income Tax Act, R.S.C. 1985, c.1 (the "ITA"), Part IX of the Excise Tax Act, R.S.C. 1985, c. E-1 (the "ETA") concerning goods and services tax ("GST"), and various other federal and provincial tax statutes, though most disputes generally fall under the ITA so the focus in this chapter is on disputes under the ITA. The appeals process under the ETA is substantially similar to that under the ITA. Disputes involving various provincial tax statutes are handled by the provincial ministry of finance, and appeals are made to the provincial superior court.
The CRA recently reported on the audit results for the year ending 31 March 2018 in respect of the following projects:
Taxpayers can reduce their chances of being drawn into tax disputes in several ways. Among them, they can:
Canada has an extensive treaty network and is also a member of several of the OECD and other tax networks (eg, JITSIC), which seek to find ways for member countries to share information and to co-ordinate actions, in order to promote worldwide tax compliance and find ways to counter international tax evasion and aggressive tax avoidance.
As a consequence of that membership, Canada has enacted many of the OECD’s base erosion and profit shifting (“BEPS”) recommendations, including adopting country-by-country (“CbC”) reporting and the Common Reporting Standard (“CRS”) with respect to financial accounts held by non-residents. By early 2018, Canada had exchanged CbC reports with 46 other participating jurisdictions. Starting in September 2018, Canada also began exchanging information under the CRS framework. Canada is also a signatory to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (referred to as the multilateral instrument or MLI).
Canada has not made substantive changes to tax legislation as set out in various BEPS recommendations, primarily on the basis that such changes are not considered necessary as the existing legislation (including the general anti-avoidance rule or GAAR, as well as specific anti-avoidance rules or SAARs) already applies to the impugned behaviour.
Generally speaking, if a taxpayer objects to or appeals a reassessment, the collection of amounts due is suspended while the objection or appeal is outstanding, although interest will continue to accrue on any unpaid balance. However, in certain circumstances a taxpayer may be required to pay half of the amount due (if the taxpayer is a "large corporation" under the ITA) or the entire amount due (eg, if the reassessment relates to withholding tax). In certain circumstances where the collection of tax is usually suspended, the CRA may apply to a court to permit it to take collection action where the collection of the assessed amount would be jeopardised by delay.
The income tax legislation contains various "civil penalties" – for example, for the failure to file a tax return or information return or comply with various other requirements under the legislation, and for gross negligence in failing to report certain income. The income tax legislation also contains provisions pursuant to which the CRA may impose penalties against third parties (tax return preparers or tax advisers) who knowingly, or in circumstances amounting to culpable conduct, make, participate in, or assent to the making of a false statement.
Where circumstances warrant it, a taxpayer may be charged with a criminal offence under certain provisions in the ITA or under the federal Criminal Code (see further 7 Administrative and Criminal Tax Offences, below).
In determining who to audit, the CRA utilises a combination of electronic and manual risk assessment and audit file selection processes.
In respect of large corporate taxpayers, taxpayers are assigned a risk rating of low, medium or high for certain types of activities. These risk ratings are supposedly used to determine the frequency and scope of audits for a particular taxpayer. In determining a large corporate taxpayer’s risk rating, the CRA uses a number of risk-evaluation techniques, including the following:
From time to time, the CRA also launches projects that target specific groups of taxpayers or types of transactions. These may include targeting tax structures that are regularly utilised by high net worth taxpayers or multinational entities, or targeting certain industries or businesses where there appears to be a high incidence of tax avoidance.
The ITA specifies the time period in which a taxation year may be normally reassessed (referred to as the "normal reassessment period"), which is either three years or four years from the date of the original assessment of the taxation year depending on the nature of the taxpayer; an additional three years may be added, depending on the circumstances under audit. The statutory limitation period may also be affected by an applicable tax treaty, which may shorten the period in which the CRA may reassess a taxpayer (absent fraud or wilful default on the part of the taxpayer). However, the ITA does not specifically limit the periods that may be audited since the normal reassessment period does not apply if there has been a misrepresentation in a tax return that is attributable to neglect, carelessness, wilful default or fraud. There are other circumstances – such as the failure to withhold tax on payments to a non-resident – where there is no limitation period applicable to an assessment by the CRA.
Technically, an audit of a particular taxation year or period may be initiated at any time. However, the CRA has an audit period policy known as the common audit period or the one-plus-one, under which it would generally audit the most recent fiscal period for which an income tax return was filed and assessed, plus the immediately preceding 12-month period.
The duration of an audit may vary and can depend on the state of the books and records being reviewed, the size and complexity of the business and potential delays for missing records.
Audits may be completed with or without a visit to the taxpayer’s premises. The CRA will not visit a taxpayer’s premises if they conduct a 'desk audit', which involves the CRA requesting information to be submitted for review through telephone calls and written requests. On the other hand, the CRA may conduct a field audit, which typically involves a visit to the taxpayer’s premises, unless the taxpayer is an individual that does not have business premises outside of that individual’s personal home (in which case, that individual must consent before the CRA will conduct such a visit). For certain large taxpayers that are essentially continuously under audit, the CRA may occupy office space at the taxpayer’s premises.
Auditors have or may request access to a wide variety of information in conducting an audit, including printed records as well as electronic records.
Offshore non-compliance involving low- or no-tax jurisdictions continues to be an area of focus for the CRA. In particular, the CRA targets this issue by reviewing resource allocations given the type and level of risk(s) involved; obtaining better access and use of taxpayer and third-party information and data; and increased international collaboration. Furthermore, the CRA is focused on identifying high-risk wealthy individuals and promoters of aggressive tax schemes.
In respect of international and large business taxpayers, the CRA has focused its audit activities on what it perceives to be aggressive/abusive tax avoidance and transfer pricing issues.
Other issues of interest to the CRA include incentive income, digital currency and the "gig" economy.
Canada has implemented rules concerning cross-border exchanges of information and mutual assistance between tax authorities. Canada’s first exchange of information in relation to the OECD CRS and CbC commenced in 2018. As such, it is too early to determine whether Canada’s participation in such exchanges has increased tax audits in Canada. However, in recent history, some multinational taxpayers have encountered tax audits that have involved both Canadian and foreign auditors, who undertake a joint audit.
The expectation is that audits of international transactions (eg, transfer pricing) will continue to increase. Over the past few years, the federal government has added more than CAD1 billion to the CRA’s budget, the bulk of which is to be used to target international tax avoidance and tax evasion.
Effective preparation for an audit begins before an audit has even started. Care should be taken that transactions are appropriately documented, that irrelevant and inaccurate materials are purged from files, and that documents subject to solicitor-client privilege are identified and kept separate from other documents.
Taxpayers should also proactively consider the risks associated with their various tax positions. If a taxpayer has a tax position that it feels is particularly risky, they should consult their tax adviser before an audit is initiated.
The flow of information and documents provided to the CRA should be actively managed, ensuring that queries and answers are appropriately documented.
When a taxpayer disagrees with an assessment or a reassessment issued by the CRA, they must first follow the administrative appeals process. This phase is mandatory prior to initiating judicial proceedings.
A notice of objection must be filed with the chief of appeals at the taxpayer’s tax services office or tax centre within statutory time limits. For a taxpayer that is an individual or a testamentary trust, the deadline for filing an objection is either 90 days from the day the notice of assessment was sent, or the day that is one year after the taxpayer’s filing due date for the year, whichever is later. For any other taxpayer (eg, a corporation or inter vivos trust), the statutory deadline to file an objection is 90 days from the date of the assessment. The notice of objection should state all of the relevant facts and reasons for the taxpayer’s objection, especially for large corporations.
A taxpayer that fails to file an objection within the time allowed generally has no further recourse. However, a taxpayer may apply to the Minister for an extension of time in which to file an objection, although certain requirements must be met before such extension will be granted.
Once the notice of objection has been duly filed with the CRA, the appeals officer must complete his or her review of the matter and issue a recommendation to the chief of appeals, who has the authority to confirm, vary, or vacate the CRA’s reassessment. A decision letter is then sent to the taxpayer with the outcome of the taxpayer’s appeal. At that point, the taxpayer may decide to continue to dispute an unfavourable decision by appealing to the TCC.
A taxpayer can also choose to "skip" the administrative appeals process for income tax appeals by filing a notice of appeal to the TCC any time after 90 days has expired after filing the notice of objection.
Where the taxpayer has filed a notice of objection, the ITA directs the Minister to reconsider the assessment with all due dispatch and either vacate, confirm, or vary the assessment, or reassess. As mentioned, the CRA will assign an officer from the Appeals Branch to review the taxpayer’s objection. However, there is no statutory time period in which an appeal must be decided and, in practice, it may take many months before a taxpayer’s file is even assigned to an appeals officer for consideration. The Taxpayer Bill of Rights reiterates the taxpayer’s entitlement to the timely processing of its objection by the CRA, although the only recourse a taxpayer has (other than filing an appeal with the TCC) is to file a complaint with the ombudsman.
A taxpayer that wishes to appeal the CRA’s decision from a notice of objection (or lack of decision any time after 90 days from the filing of its notice of objection) must appeal to the TCC. A taxpayer must appeal within 90 days of the issuance of the CRA’s decision (whether a notice of confirmation of the assessment or a notice of reassessment).
A taxpayer that misses the 90-day deadline may request an extension of time to file an appeal to the TCC. To do so, the taxpayer must make an application to the TCC within one year after the expiry of the 90-day deadline and provide good reasons why it was not possible to commence the appeal in time.
The taxpayer can file the notice of appeal online using the TCC’s electronic filing system. The TCC will then arrange for the service of the notice of appeal on the Minister through the office of the Deputy Attorney General of Canada.
There are two procedures for appealing to the TCC: the general procedure and the informal procedure (if the amount of tax in dispute is CAD25,000 or less, or if the loss in dispute is CAD50,000 or less). Under the general procedure, formal court procedures are followed, and a taxpayer may represent himself or herself (if an individual) or be represented by a lawyer. The informal procedure is intended to simplify the appeal process where the amount in dispute is small. No particular form is required, although a model form is provided in the TCC’s informal procedure rules.
An appeal made under the informal procedure is significantly different from an appeal under the general procedure. In particular, under the informal procedure, a taxpayer may choose to be represented by an agent who is not a lawyer. No special form of pleading is required to initiate an informal procedure appeal, and the court hearing the case is not bound by the rules of evidence. Moreover, there is no right of discovery of documents or of examinations for discovery, and costs cannot be awarded against the taxpayer if they lose their case.
When an appeal of an assessment is made through the general procedure, the formal court procedures must be followed, as set out in the Tax Court of Canada Rules ("Rules") and the Tax Court of Canada Act. Once the notice of appeal is filed and served, the Crown has 60 days to file its reply, although it may request an extension. If no reply is filed, the taxpayer’s allegations of fact in the notice of appeal are presumed to be true for purposes of the appeal (this presumption is rebuttable).
Once filed, the Crown’s reply must be served on the taxpayer within five days after the 60-day period (or later on the taxpayer’s consent or with the court’s permission). The taxpayer may file and serve an answer to the Crown’s reply within 30 days after the service of the reply.
The pleadings phase of the tax litigation process closes when the taxpayer (the appellant on the appeal to the TCC) has filed and served the answer, or when the time for the taxpayer to do so has expired. This first phase allows the parties to define the issues in the tax appeal.
The parties would then agree on a timetable that would provide for deadlines for each stage of the discovery process. The parties will have to provide a list of documents (or, in some cases, an affidavit of documents, which is a more onerous requirement) and undertake examination for discoveries, whereby each party has the opportunity to examine the other party or its representative.
If the witness at an examination for discovery does not know the answer to a question posed by counsel for the opposing party, or if the opposing party requests a relevant document that has not previously been disclosed, the witness (on the advice of counsel) may undertake to find the answer or provide the document requested at a later date. Following the completion of undertakings, the parties have to communicate with the TCC in order to fix the time and place for the hearing.
At the hearing of the case before a TCC judge, the judge’s role is to determine the correctness of the assessment at issue. Judgment may be rendered immediately following the hearing (ie, from the bench) or may be reserved. Where judgment is reserved, it may be several weeks or months before the judgment is issued.
As discussed above, the parties to a tax appeal under the general procedure must prepare a list of documents that need to be filed with the TCC and served upon the opposing party prior to the hearing. Such documents produced by the parties remain highly relevant throughout the proceedings and may be used at the hearing as evidence once their authenticity is proven (or accepted).
There are a number of other ways in which evidence may be led at the hearing. One of these is through oral testimony of a witness speaking to the facts of the case. Each witness is examined orally in the TCC hearing, with the examination consisting of direct examination, cross-examination, and re-examination. Other ways include oral testimony of an expert witness and use of evidence obtained during examination for discoveries or, where ordered by the Court, other testimony obtained prior to the hearing.
Presenting a convincing case supported by sufficient evidence is essential for a taxpayer since the taxpayer has the burden of proof to demolish the Minister’s assumptions of fact upon which an assessment is based (except in specific situations that require the reversal of the burden of proof). As such, the taxpayer would normally present its case first.
Following the evidentiary stage at the TCC hearing, the parties present oral arguments in the same order that evidence was presented. The party heard first in argument has the option of replying to the opposing party’s argument, and the opposing party is then given an opportunity to answer a new point of law that was raised in that reply.
The taxpayer typically bears the onus at trial to "demolish" the Crown’s assumptions. Once that burden is successfully discharged, the burden shifts to the Crown to prove that the assessment was correct. The Crown usually adduces its own evidence at the hearing, to prove that the assumptions made were correct and that the assessment is correct.
There are some situations that justify a shift or reversal of the onus – for instance, where it would be inappropriate to place a burden on the taxpayer, such as where the Minister reassesses the taxpayer beyond the normal reassessment period or assesses gross negligence penalties.
In a tax appeal, the judge makes a determination of the factual evidence on a balance of probabilities and, as noted above, the taxpayer typically bears the burden of proof. Although the jurisprudence refers to the taxpayer’s obligation to "demolish" the facts assumed by the minster, the burden of proof is no higher than in any other civil proceeding.
In a criminal proceeding – eg, where a taxpayer has been criminally charged with tax evasion – the Crown bears the burden of proving the taxpayer’s guilt beyond reasonable doubt (ie, the same burden as in other criminal proceedings).
As discussed above, documentary evidence is disclosed during the discovery stage of a general procedure appeal. Documents not disclosed during this stage cannot be tendered in evidence at the hearing, except with the Court’s consent.
Many appeals to the TCC are settled before reaching the hearing stage. There are two ways in which a settlement may be effected: a consent to judgment may be filed with the TCC for an order implementing the consent, or the parties may reach an agreement (set out in minutes of settlement), after which the taxpayer withdraws the appeal completely. Unlike a consent to judgment, the minutes of settlement are not a public document and do not require the approval of the TCC.
The Rules provide that, if a written offer to settle is made by a party and refused by the opposing party, and subsequently the TCC’s judgment is at least as favourable as the terms of the settlement offer, the party that made the offer is entitled to party-and-party costs up to the date of service of the offer, and to substantial indemnity costs after that date (plus the party’s reasonable disbursements and the applicable taxes). In order for such rule to apply, the settlement offer must be made in writing, must be served no later than 90 days before the start of the hearing, and must not expire earlier than 30 days before the hearing.
A party that loses at trial may be required to pay a much greater portion of the other side’s legal costs, in addition to its own legal fees, if it fails to obtain a better result than it would have if it had accepted the proposed settlement. As such, a settlement offer is a strategic element that should be considered in a TCC appeal.
Since arrears interest continues to accrue after an assessment has been issued, even where a taxpayer may not be obliged to pay the amount in dispute, it may be prudent to pay the amount, depending on the relative strength of the taxpayer’s case.
There are various strategic decisions that must be made in terms of marshalling the evidence for a TCC hearing. Apart from decisions as to which documents are necessary to substantiate the taxpayer’s case and which witnesses of fact to call, in some cases it may be advisable to call expert witnesses. Expert witnesses will be necessary in any case in which the application of a foreign law is relevant. They may also be necessary in other cases, and are typically called in transfer-pricing cases and in cases involving certain research and development tax incentives under the ITA.
Judges have the discretion to consider and apply any jurisprudence they see fit, whether it emanates from the TCC itself or from other Canadian courts or foreign courts or international tribunals. Given the doctrine of precedence in Canada, prior decisions of a higher court – whether the Supreme Court of Canada or the Federal Court of Appeal – are considered to be binding on the TCC where the issue before the court is the same. The jurisprudence of other courts – whether provincial courts (including the court of appeal of a province), foreign courts or international tribunals – does not bind the TCC, but the decisions of such courts may be considered relevant by the judge hearing the case, and may be cited in the reasons for judgment.
Other authorities – eg, the CRA’s published administrative practice, scholarly articles or books, publications from the OECD, as well as the history behind the tax provisions in issue, including explanatory notes prepared by the Minister of Finance as well as evidence from Parliamentary debates or hearings – may also be cited by the judge, although the relative weight attached to such evidence is a matter for the judge.
The TCC may dispose of an appeal by dismissing it or allowing it and vacating the assessment, varying the assessment, or referring the assessment back to the Minister for reconsideration and reassessment. The court cannot increase the tax owing by a taxpayer above the amount assessed by the Minister, since the Minister cannot appeal his own assessment.
TCC decisions arrived at through either the general or informal procedure may be appealed to the Federal Court of Appeal (the "FCA") within 30 days from the date of judgment. FCA judgments may be appealed to the Supreme Court of Canada (the "SCC" or the "Supreme Court"), provided the SCC grants leave to appeal (the application for leave to appeal is decided by a three-judge panel of the SCC). The application for leave to appeal must be filed within 60 days from the date of the FCA judgment.
The CRA has stated that it will normally not seek review of TCC decisions rendered under the informal procedure since these decisions do not generally have precedential value. An appeal of an informal procedure decision of the TCC to the FCA is heard in a summary way.
In practice, a party that wishes to appeal a TCC decision must file a notice of appeal with the FCA within 30 days after the pronouncement of the judgment (the months of July and August are not considered part of the 30-day period). All parties affected will be served with the notice of appeal.
The parties submit to the FCA a memorandum of fact and law not exceeding 30 pages, and a book of authorities. At the hearing, both parties have a specific amount of time to present their case, during which the judges will often ask questions. No additional evidence may be tendered before an appellate court, except with leave of the court.
The TCC is a specialised tribunal established in 1983, and is a superior court that has the exclusive jurisdiction to hear federal tax appeals in Canada. It is a court that can sit anywhere and for which no judge has a permanent seat in a particular location. The TCC consists of the Chief Justice, the Associate Chief Justice and not more than 20 other judges. The Chief Justice is in charge of appointing a judge to each case heard. Each hearing is presided over by one judge, who then renders his or her decision in writing.
A judgment of the TCC can be appealed to the FCA. This independent appellate court was created in 1971 and is an itinerant court, which sits in 18 cities across Canada. An appeal of a judgment rendered by the TCC is heard before a panel of no fewer than three judges, and always before a number of uneven judges. The FCA is composed of a Chief Justice and 12 puisne judges. The Chief Justice appoints the panel of judges for each case, based on their expertise and schedules.
A judgment rendered by the FCA may be appealed to the SCC upon leave being granted by the SCC. There is only one location for this court, in Ottawa, but the SCC may permit the parties to present their arguments to the panel of nine judges via tele- or video-conference. The SCC is the final appellate court in Canada: if it does not grant leave to appeal, that is the end of the matter.
Generally speaking, Canada does not have alternative dispute resolution (ADR) mechanisms for tax appeals. However, taxpayers that do not wish to appeal a particular tax assessment may seek discretionary relief of interest and penalties (but not tax) under the taxpayer relief provisions of the ITA.
Taxpayers that do wish to appeal an assessment under the ITA or ETA may be subject to some form of ADR. For example, some provincial courts may require mediation as a necessary step for all civil matters (including provincial tax matters), and the TCC and some provincial courts may have specific provisions permitting a settlement conference, which is presided over by a judge of the relevant count (if the matter is not settled, that judge would be precluded from hearing the appeal).
As described in 6.1 Mechanisms for Tax-related ADR in This Jurisdiction above, taxpayers that appeal a certain tax assessment may be required to participate in mediation as part of the litigation process, or may opt into an ADR process. Those processes generally entail the taxpayer and the Crown exchanging briefs of the relevant facts, issues and positions taken, followed by a meeting between the taxpayer and a representative of the Crown along with a facilitator (a judge or a mediator). There is no binding ADR mechanism under the ITA or ETA.
Tax disputes are generally settled through informal discussions and/or written correspondence.
Settlements can be reached in relation to the amount of tax assessed and the application of penalties. Under the ITA and ETA, a settlement must be "principled", in the sense that the settlement reached must be based on the application of the legislation to the facts. Thus, a settlement based solely on "litigation risk" may be overturned by the TCC if it is challenged. Settlements under other tax legislation (for example, involving certain provincial tax matters) may not necessarily be so constrained.
Interest and/or penalty relief may be granted by the Crown, but such relief cannot be used in support of a bargaining position.
The CRA may provide an advance income tax ruling, on application by a taxpayer, if certain conditions are met.
The CRA generally considers itself bound by an advance income tax ruling that it has given to the particular recipient taxpayer in respect of the described transaction(s), but only to the extent that there are no material omissions or misrepresentations in the relevant facts, proposed transactions or other information described in the ruling and/or related request. The CRA is not legally obliged to provide an advance ruling, and will not issue on in relation to a completed transaction. If a legislative change or a court decision rendered after an advance ruling is issued conflicts with the interpretation of that ruling, that ruling will cease to bind the CRA. Furthermore, the CRA may revoke a ruling in other circumstances (eg, if it changes its view as to the correct interpretation and application of the law to the facts), although it will not typically do so if the taxpayer has completed the transaction for which the ruling was given.
As noted above, ADR is not typically available outside of the court litigation process.
In respect of transfer-pricing cases, beyond the administrative and judicial appeal processes, taxpayers may also seek relief under the mutual agreement procedure (MAP) of the applicable income tax treaty (if one exists), whereby the relevant competent authorities will determine the appropriate transfer price in relation to a particular transaction. If reached, such an agreement will set the transfer price for the taxpayer and the foreign affiliate that is party to the transaction.
The CRA can also enter into an advance pricing arrangement ("APA") on a unilateral, bilateral or multilateral basis, which will determine the appropriate transfer-pricing methodology for the transactions governed by the APA for a certain number of years. In some cases, the APA methodology may be "rolled back" to cover open years that have not yet been reassessed by the CRA; it may also be applied to earlier years that are being considered under a MAP.
The ITA contains a series of rules imposing penalties where certain requirements are not met and/or tax is not paid, including failure to file a return of income, failure to file an information return, repeated failure to file, failure to provide foreign-based information, failure to withhold and remit tax, filing false statements or omissions, etc, all of which are considered civil penalties.
A gross negligence penalty applies if a taxpayer knowingly, or under circumstances amounting to gross negligence, makes – or participates in, assents to, or acquiesces in the making of – a false statement or omission in a return, form, certificate, statement, or answer. The penalty is either CAD100 or 50% of the understated tax, whichever is greater.
Although not considered punitive, the Minister may assess a taxpayer on the basis of the GAAR or a SAAR. Assessments based solely on the GAAR do not typically result in penalties, as taxpayers cannot self-assess under the GAAR.
The ITA also contains a number of criminal offences for more serious conduct, and, in cases of tax evasion, a taxpayer may be charged with an offence under the federal Criminal Code. In some circumstances, a taxpayer may be found guilty of an offence and be liable, on summary conviction, to a fine or imprisonment (or both). The attorney general has the option to prosecute certain offences under a more formal procedure (known as prosecution on indictment) that may subject the taxpayer (if convicted) to heavier fines and a longer prison term. Some of the more common examples are failure to file, tax evasion, false refund or credit claims, etc.
The civil penalties are imposed by the Minister as part of the tax assessment process so, when a criminal charge is laid against a taxpayer, the taxpayer has normally already been assessed for a civil penalty. When this is the case, any punishment imposed by the court on criminal conviction is in addition to the civil penalty.
The decision to pursue a criminal charge involves a judgment by the CRA and the Department of Justice that the civil penalty would be an inadequate punishment for the taxpayer’s conduct in the particular case, and that there is sufficient evidence to prosecute.
There is an important distinction between compliance audits by the CRA and criminal investigations. Once the "predominant purpose" of CRA inquiries has passed into criminal investigation, the auditor’s compliance powers may no longer be used by the CRA. Instead, CRA officials must at this point seek search warrants to further pursue their investigations.
An administrative investigation that evolves into a criminal investigation must be done in accordance with both the ITA and the Criminal Code. Since the CRA auditors have broad administrative rights under the ITA to obtain information needed to conduct an audit (including the right to inspect, audit, request or examine a taxpayer’s or any other related books and records, at any reasonable time), the courts have held that these broad rights cannot be used to obtain information for a criminal investigation. If the CRA does not exercise appropriate caution, evidence obtained through the use of administrative investigative powers may be excluded from evidence in a criminal prosecution.
The ITA contains various types of offences to which the procedural provisions of the Criminal Code apply. While the imposition of civil penalties provided under the ITA section is an administrative act of the CRA, the ITA also provides for penalties which involve criminal law and, accordingly, are prosecuted in the provincial courts in accordance with criminal procedure, rather than in the TCC.
A taxpayer charged with a tax offence cannot obtain a reduced fine by making an upfront payment of the additional tax assessed.
A taxpayer cannot necessarily avoid a criminal prosecution by paying the tax assessed, plus interest and civil penalties under the ITA (or other taxing statute), although in practice the CRA may agree to drop criminal charges in such circumstances.
However, in circumstances where a taxpayer has failed to report income or file tax returns and the CRA has not yet commenced any enforcement action that could lead to discovery of such failings, a taxpayer may avoid criminal prosecution by making a voluntary disclosure.
The Crown in a criminal case must prove the guilt of the accused person beyond reasonable doubt (rather than on the balance of probabilities, which is the standard of proof in civil cases). The accused also enjoys a presumption of innocence, along with the other protections afforded for criminal matters by the Canadian Charter of Rights and Freedoms. These protections exist because of the serious implications of a criminal conviction.
If a taxpayer is found guilty, an appeal of the criminal conviction can be sought through the provincial appellate court and, ultimately, in the SCC.
A criminal trial must be held within a reasonable amount of time or else the charges may be stayed due to a violation of the accused’s Charter rights.
The GAAR is a unique piece of legislation in that it permits the Minister to bypass the provisions of the ITA on the basis of an abuse of policy – a policy that it is up to the Minister to prove in supporting a GAAR assessment – and then impose whatever tax consequences are reasonable.
The GAAR (and any SAAR) is aimed at protecting against tax avoidance, not tax evasion. As such, transactions and arrangements that have been challenged under the GAAR (or a SAAR) are not considered criminal tax cases, and a taxpayer’s appeal from a reassessment imposing tax as a consequence of such provisions is considered by the TCC.
In cases in which the CRA has assessed tax that may not be in accordance with an applicable income tax treaty (eg, a transfer-pricing adjustment), it is common to seek relief under both the applicable MAP and the administrative appeals process (in the event that the result obtained under the MAP is not considered satisfactory to the taxpayer). The following steps are followed in these circumstances:
In these circumstances, the MAP relief will be processed by the CRA’s Appeals Division.
If the taxpayer is not satisfied with the MAP resolution, they can request the continuation of their administrative (or judicial) appeal.
The GAAR and a SAAR can apply to cross-border transactions involving jurisdictions that are covered by bilateral tax treaties. For example, if a particular payment is deemed to be a dividend under a SAAR, such characterisation would typically apply for tax treaty purposes (due to the term’s definition in tax treaties or the application of domestic law in the absence of a complete definition under the tax treaty).
The CRA’s application of the GAAR in a treaty context has been challenged in several court cases, in which the CRA has been largely unsuccessful. However, the application of a SAAR (such as Canada’s thin-capitalisation provisions, which apply a simple 1.5:1 debt to equity ratio) has typically been found not to be contrary to a treaty.
In Canada, the vast majority of cross-border transfer-pricing adjustments made by the CRA have been ultimately resolved under the MAP of the relevant bilateral tax treaty, although a few transfer-pricing cases have been heard by the TCC.
As indicated in 6.6 Use of ADR in Transfer Pricing and Cases of Indirect Determination of Tax above, unilateral and bilateral advance pricing agreements (APAs) are available in Canada.
The main steps involved in obtaining an APA are as follows:
Transfer-pricing issues continue to be the predominant source of tax disputes in a cross-border context, and the MAP under an applicable bilateral tax treaty (if any) continues to be the main avenue to resolve matters without going through the litigation process. However, the MAP can be an expensive process and can take years to complete. The use of APAs can alleviate tax controversies on a go-forward basis, although APAs are also expensive and can take years to complete.
Expediting and reducing the costs associated with the MAP and APA processes under tax treaties would make them more accessible to taxpayers generally.
There are no fees payable to the CRA for an administrative review of an objection by the CRA Appeals Division.
Before the TCC, there are no court fees to commence an appeal under the informal procedure. Under the general procedure, a taxpayer must pay a fee at the time of filing a notice of appeal, which depends on the amount (tax, interest and penalties assessed) that is in dispute:
Filing fees are also charged to commence an appeal in the FCA (CAD150) and to seek leave to appeal to the SCC (CAD75).
All filing fees are not refundable, regardless of whether the taxpayer is successful. However, a taxpayer may be able to recover disbursements, including the filing fees, if it is awarded costs in the appeal.
A taxpayer can request the TCC to award costs if it is successful in its appeal. The TCC has the discretion to award costs in an appeal, against a taxpayer or the Crown, which may be awarded in accordance with or by reference to Tariffs A and B of Schedule II of the Rules (which set out specific amounts that may be awarded in respect of fees or other amounts allowed on taxation of party and party costs). The amounts set out in the Tariffs in respect of legal fees are nominal compared to the actual legal fees of bringing an appeal. The Court has complete discretion to depart from the Tariffs in awarding fees, including the award of a lump sum in lieu of or in addition to any taxed costs.
Where a taxpayer and the CRA settle a tax appeal (eg, through a consent to judgment or by minutes of settlement), it is inevitably on a "without costs" basis – that is, both parties agree to bear their own costs.
The Courts Administration Service of Canada ("CAS") is responsible for administering the Canadian federal courts, including the TCC and the FCA. CAS releases some limited statistics every year regarding active and resolved disputes before those courts (CAS does not release information respecting the values of such disputes). The most recent statistics provided to the public reflect data gathered up to the end of March 2018, and reveal that the total number of dispositions by the TCC in that year (ie, April 2017 – March 2018) was 5,359, which is only slightly above the five-year average. However, the total number of active proceedings is on the rise over that same period, reaching 10,378 pending cases. The total number of active tax proceedings that were appealed to the FCA was 126, which is, again, only slightly above the five-year average.
Over the years, the CAS statistics have consistently shown that the vast majority of cases brought before the TCC relate to disputes of income tax matters (consistently 80% or more). The year ending 31 March 2018 was no different. Of the 10,378 active cases, 8,431 were income tax disputes under the ITA, 1,529 were GST disputes under the ETA, and 418 related to other disputes.
The vast majority of all tax disputes are resolved either at audit or by administrative appeal to the CRA. The CRA releases some limited statistics every year regarding active and resolved administrative disputes (like CAS, the CRA does not release information on the values of such disputes). The most recent statistics provided to the public reflect data gathered up to the end of March 2018. The CRA reports that it resolved 93,577 income and commodity tax objections, and reduced the inventory of outstanding regular objections by 11,025, or 21%, over the period from 1 April 2016 to 31 March 2018.
Neither the CRA nor CAS reports on taxpayers’ successes in respect of judicial appeals to the TCC. However, general anecdotal evidence suggests that, over the years, about one third of appeals to the TCC commenced under the general procedure were settled, one third were withdrawn by the taxpayer, and about one third actually proceeded to trial. Of those that proceeded to trial, the taxpayer was successful less than 45% of the time.
There are many strategic decisions that must be made during the course of a particular tax dispute, which can help taxpayers engage in effective negotiations, reduce the number of days in court and, ultimately, reduce the overall costs to reach a satisfactory resolution. Key strategic decisions to consider include the following:
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