Federal Court of Appeal blocks Crown from reneging on tax settlement

22 April 2020

CBS Canada[1] confirmed that the Crown is bound by its settlement agreements with taxpayers. A deal is a deal. The case has other important ramifications for future tax disputes and is recommended reading for anyone who practices tax and tax dispute resolution.

Background

The Federal Court of Appeal ("FCA") upheld the 2018 Tax Court of Canada ("TCC") enforcement of a settlement agreement negotiated over the course of several months between CBS Canada Holdings Co. ("CBS") and the Crown. After lengthy consideration, the Crown signed binding minutes of settlement, then tried to renege after the CRA supposedly concluded that non-capital losses ("NCLs") included in the settlement were unavailable. The NCLs were incurred by CBS's predecessor companies. CBS and its predecessors amalgamated on March 8, 2007 and, as a result, the amalgamated CBS had two year-ends in 2007 (March 7 and December 31). CBS deducted NCLs carried forward in the amounts of $25,751,078 and $7,557,852 for each of the 2007 year-ends, respectively. The CRA reassessed CBS, allowing NCLs of only $893,260 and $382,594 for each of the respective 2007 year-ends. CBS appealed, eventually offering to concede certain amounts with some NCLs being allowed and applied. As noted, the Crown considered and signed off on the settlement following negotiations involving the CRA conducted over the course of months. The CRA then refused to issue the resulting reassessments and tried to weasel out of the deal.

CBS brought a motion and the TCC enforced the settlement, despite the Crown's plea that the settlement agreement was "factually indefensible with no bearing in reality, therefore, illegal and non-binding on the Minister". The TCC concluded that the agreed facts in the minutes of settlement were grounded in objective reality, defensible on the facts and law and the settlement agreement was therefore binding, valid and enforceable. The Crown appealed to the FCA.

Issues in the Appeal

The three issues before the FCA were whether:

(1) the TCC had erred in allowing CBS' appeal and enforcing the settlement;

(2) the reassessment outlined in the settlement agreement resulted in an impermissible increase in tax payable; and

(3) the TCC had jurisdiction to hear CBS' motion.

Discussion

Private practitioners may at times be ill at ease when settling TCC appeals, cognizant of the risk that the Crown might change its mind and try to renege, citing the "principled basis" doctrine.[2] CBS Canada is significant, because it eliminated that risk. Under CBS Canada, if the Crown enters into a settlement agreement with a taxpayer on what it believes at the time to be a principled basis, it is bound by its deal. That is so even if a CRA official later decides that the deal was not sufficiently favourable or included a mistake. As a result, CBS Canada has brought certainty to a troubling area in tax litigation. Of course, the principle works both ways and taxpayers who discover errors in executed settlement documents will likely find their pleas falling on deaf(er) ears going forward.

The Crown relied on Galway[3] for the proposition that a Court could only approve a principled settlement that accorded with the facts and law. Galway involved an application for a consent judgment that accorded with the parties' settlement agreement but that, on its face, appeared to be a pure compromise and thus unprincipled. In CBS Canada, the FCA distinguished Galway and, while that case remains good law, its application was limited. In Galway, the Court intervened on its own motion when the parties filed the consent to judgment, and the case merely stands for the proposition that a Court would intervene only in limited circumstances where it is evident on the face of the consent that the settlement did not accord with the facts and law. Galway does not speak to whether a party to a settlement agreement can renege. Parsing CBS Canada further, the FCA confirmed that parties should not expect TCC judges to ordinarily review or question the merits of a settlement agreement – there must be a patent error on the face of a consent to judgment before a TCC judge might be expected to intercede. However, to be clear, CBS Canada did not eliminate the principled basis requirement for achieving a settlement. Rather, CBS Canada affirmed that when parties enter into a settlement agreement they believe is principled, the deal cannot be undone. The FCA offered the following helpful statements:

"The general rule is that parties should be bound by the agreements that they make. There is no good reason to create an exception here. As suggested by the Tax Court in 1390758 Ontario (citation omitted), this would be very unfair to CBS: "[b]oth sides of a dispute are entitled to know that if they invest the time and effort required to negotiate a settlement, then their agreement will bind both parties" … The Crown entered into the settlement agreement believing that it was in its best interest to do so. It should be required to live up to its bargain …"

The second issue in the case was whether reassessing in accordance with the settlement agreement resulted in an impermissible increase in tax payable. The FCA's conclusion was essentially that the prohibition on the TCC increasing tax payable is a shield for taxpayers, not a cudgel with which the Crown may beat them. The principle against a judgment resulting in more tax payable is founded in the Harris case.[4] In that case, the Exchequer Court held that the Minister of National Revenue has no right to appeal a tax assessment, and for the Minister to seek to increase tax payable in a litigation context is tantamount to her doing just that. In CBS Canada, the FCA explained Harris in a new but compelling way: the FCA said that CBS was seeking an increase in tax payable for one year included in the settlement and a taxpayer is allowed that luxury – Harris is merely a bar to the Crown seeking more tax, or a Court increasing tax on its own motion.

The third issue, the jurisdictional question, was easily dispensed with. The Crown argued that the TCC lacked jurisdiction to enforce the settlement agreement because the agreement involved reassessments of taxation years that were not part of the TCC appeal. However, the FCA held that the TCC motion was limited to the reassessed taxation years. Furthermore, references to other taxation years in the settlement agreement were for general context only and did not cause any jurisdictional concerns for the FCA. CBS Canada appears to be the first time a case involving a Crown attempt at "reneging" was put to the FCA and the result affirms the TCC's jurisdiction to enforce settlement agreements.

What lessons can be gleaned from CBS Canada? Parties must always be cautious when signing minutes of settlement, because it is highly unlikely that a Court would be motivated to save a party from the effect of its own mistake or from "buyer's remorse". Further, when drafting consents to judgment, parties should (as always) be cognizant of the possibility that a Court might intercede if the consent reflects a compromise solution. Where a compromise is practical, economical and desired by both sides, there is probably no reason to confuse a Court with unnecessary or extraneous details.


[1] The Queen v CBS Canada Holdings Co, 2020 FCA 4 ("CBS Canada").

[2] The "principled basis" means that a tax appeal must be resolved in accordance with the facts and law, rather than on the basis of a pure compromise.

[3] Galway v MNR, 1974 DTC 6355.

[4] Harris v MNR, 64 DTC 5332.


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