Stevan Novoselac
Associé
Cochef, groupe Règlement de différends fiscaux
Webinaires sur demande
FPC/FJC :
28
Steve: Welcome, everyone, to our session and Happy New Year. This is our first session for 2022. Please note our next session will be on February 22 and, being lawyers, we again of course need to start with our disclaimer. While you can take a moment to read this, the essential message is that these webinars cover the topics presented only generally and are not intended to provide legal advice as every situation is different. My name is Steve Novoselac and I serve as Co-Leader of Gowling WLG's tax dispute resolution practice in Canada. I'm joined today by Michael Bussmann and Pierre Alary. Michael is a tax partner and a former leader of the firm's tax practice group in Canada. He specializes in all kinds of Federal and Provincial indirect tax matters, including managing audits and dispute resolution. We're joined again today by our partner, Pierre Alary, who works out of our Ottawa office. Pierre specializes in resolving tax disputes, along with transfer pricing issues. As we mentioned at our previous sessions, we launched these webinars internally for our firm's national tax practice group, over 6 years ago, to discuss new CRA policies, legislation and case law and now that we've expanded them to an external audience, we're pleased to see that others are finding them helpful as well, to stay up to date with current developments in tax dispute resolution. So again, please feel free today to submit questions throughout with the question feature, and we're again aiming to wrap today by no later than 12:30. Depending on our timing we'll try to answer questions at the end of today's session, and if not then, at our next session in February. Please also feel free to submit topics that you'd like us to discuss at future webinars. Today's session we have the following three topics. Number one, GST/HST audits, how the CRA gets started which Michael will be discussing. Second, suing CRA. Does CRA owe taxpayers a duty of care, which Pierre will describe, and thirdly, how to effectively resolve tax disputes, Part 2, which I'll be discussing. So Michael, with that, please go ahead and tell us how the CRA gets started with GST/HST audits.
Michael: Great, thank you so much, Stevan. CRA audits can get started in a lot of ways. Some taxpayers seem to get audited every year. Other taxpayers never seem to be audited at all or only at really long intervals. The CRA is quite secretive about what triggers audits and we know some audits are triggered by algorithms that the CRA has. Others seem to be originated when competitors complain or neighbours complain. From my experience in the GST/HST I've learned, however, that one thing does trigger a GST/HST audit. We'll get to that and learn about how to potentially avoid the trigger, as well as discuss what CRA is auditing for, and how to deal with these audits once they are triggered. But first a little background to the workings of the GST/HST which is going to be helpful to what follows. A GST/HST return has to be filed on a monthly, quarterly or an annual basis. It depends on the past volume of taxable supplies that the taxpayers made and any election that the taxpayer might have made to file more frequently. I'll refer to these as periodic returns or just as returns. In most cases these periodic returns are quite straightforward. They have three main lines. The first main line allows you to enter the GST/HST collected, or collectable by the taxpayer, in the reporting period. GST has to be reported on an invoiced basis and so the phrase "collected and collectable captures" GST/HST that has to be reported. The second main line allows you to enter any income tax credits that the taxpayer wishes to claim. This is for GST/HST both paid and payable. The third main line sets out the difference or the net of these first two lines. The netting of the GST/HST collectable against the input tax credits claimed can result in the taxpayer having so-called net tax to report and remit or being entitled to a net tax refund. If the GST/HST collected and collectables is greater than the input tax credits, the taxpayer has a net tax remittance to make equal to the positive net tax, however, if the input tax credits claimed are greater than the GST/HST collected and collectable then the taxpayer is entitled to a refund of the negative net tax. It's this refund of net tax that's of interest to us today.
In our experience, when the taxpayer first files a periodic return with a net tax refund owing, that return will very nearly always be assigned to a special form of audit. There are exceptions for taxpayers who regularly file net tax refund returns. This can be the case, for example, for an exporter who regularly pays GST/HST ... to its suppliers but doesn't collect any GST/HST from its customers because all of its goods are for export. Now an audit of a particular return with a negative tax amount is technically known as a review. It's undertaken by the Refund Integrity Unit of the CRA. The goal of the Refund Integrity Unit is to ensure that the GST/HST refund is going to be valid and this has two aspects. First, the Refund Integrity Officer is trying to confirm that the refund is not fraudulent. Incredibly the GST/HST, like any other value added tax around the world, is subject to a fair amount of fraud. The fraud can take various forms but it usually involves a refund claim for net tax and since a refund of net tax does not, strictly speaking, require the supplier to have remitted the GST/HST. The tax could be refunded and a fraudulent taxpayer can abscond. Second, a Refund Integrity Officer is trying to confirm that the invoicing requirements to claim input tax credits have been met. There's various information that's required to support a valid claim for input tax credits. The scope of the information required increases depending on the amount of the invoice with the least information required for invoices of less than $100.00. More for invoices of $100.00 to less than $500.00 and the most for invoices of $500.00 or more. Now these two audit goals, fraud detection and invoice requirements, very much limit the scope of the audit. Typically on issuing its review letter, the CRA will request a very confined scope of information. The nature of taxable supplies, copies of invoices and agreements, etcetera, however, even this narrower scope of information can allow a Refund Integrity Officer to identify issues that warrant a further audit and this is how full-blown CRA audits get started.
We see many situations where Refund Integrity audit of a periodic return results in a referral by the Officer to a full-blown GST audit of multiple years of the taxpayer. Now, the Refund Integrity Officer is allocated a relatively limited amount of time to complete the review and to write up the report. This can be used to the advantage of the taxpayer in a couple of ways. First, it's important to make written submissions that are tailored to the goals of the Refund Integrity audit. On the one hand it's important to position the taxpayer, the taxpayer's business, and the taxpayers net tax refund claimed in a context that's understandable. The auditor wants to know who the taxpayer is to satisfy their concern that this is a legitimate business. The auditor wants to know what the taxpayer does? What does it typically supply and to whom? Finally the auditor wants to know why the taxpayers entitled to claim tax credits that exceed the GST/HST collected and collectable in that reporting period. This final piece can be an explanation related to a large purchase, say of equipment, or it can be related to a seasonal or unusual drop in sales. However it is it's worth explaining how you got into this debt refund situation in an intuitive way, whether or not it's asked for in the audit letter. Second, within the limits of the information provided, the taxpayer should provide enough documentation to satisfy the request and the audit goals but no more information than is necessary.
Now, I want to conclude with a tax tip. Since a Refund Integrity Review is triggered on a net tax refund, a Refund Integrity Review may be avoided entirely if the taxpayer does not claim input tax credits that exceed the GST/HST collected and collectable in the period. Input tax credits generally remain available to be claimed for up to 4 years. This allows a taxpayer that is not in need of the cash from a refund to defer the claiming of input tax credits from a period with lower GST/HST collected and collectable to a period with higher GST/HST collected and collectable, thereby avoiding the net tax refund and the inevitable Refund Integrity Review. I'm now going to pass the baton to Pierre Alary.
Pierre: Thanks, Michael, and Michael as you know I own a small business and I can attest that the CRA is very quick to start an HST audit if you file a refund return, so that is a useful tip that I'll be using going forward. So thanks for that. In an earlier episode of these webinars I discussed in which types of cases a taxpayer should consider filing a service complaint against the CRA to the taxpayer's ombudsperson. Now, filing a service complaint is one thing and our advice is generally to only do so if you believe that it will help advance your tax dispute. But some taxpayers sometimes want to take things one step further and I'm referring to cases where taxpayers sue the CRA. Over the last 10 years we have seen several attempts by taxpayers to bring a claim against the CRA in various courts across the country. This all started with the Leroux decision in 2012, from the BC Supreme Court where the Court ruled that the CRA owed a duty of care to the taxpayer and that the CRA had acted negligently. Now this was of course music to Canadian taxpayers ears but since that time Canadian taxpayers have not had much success with similar claims. A few notable decisions have come along in the last year which will hopefully help bring some clarity on the issue. But first we will look at the starting point in the analysis.
So when the existence of a duty of care owed by a regulator is at issue, the starting point for the analysis is the Cooper/Anns test which was described by the Supreme Court of Canada as follows: First we must answer two questions. Was the harm that occurred the reasonably foreseeable consequence of the defender's act? In this case the defendant would be the CRA. Second, are there reasons, notwithstanding the proximity between the parties established in the first part of this test, that tort liability should not be recognized here? Now this first part of the test is established, the question still remains whether there are residual policy considerations, outside the relationship of the parties, that may negate the imposition of a duty of care? So let's look at some of the cases since that 2012 Leroux decision which have considered this issue.
We will first look at the Grenon case which is a 2017 decision from the Court of Appeal of Alberta. In Grenon, the taxpayer sued the CRA by alleging various causes of action including negligence, misfeasance in public office and interference of his contractual relations. With regard to the Cooper/Anns test, the Court was of the view that in the regulatory context the weight of authority is that your regulator does not owe a private law duty of care to plaintiffs who might be damaged by activities of regulated parties. So generally speaking, there is insufficient foreseeability in proximity to establish a private law duty of care in those situations. The Court concluded that, in its view, it is plain and obvious that an action in negligence cannot succeed and it is clear that because of the inherently adverse relationship between auditors and taxpayers, a finding of sufficient proximity to ground a private law duty of care does not exist. Now in 2021 we saw notable decisions from courts in Ontario and Alberta. First came the decision of the Ontario Superior Court in Jayco Inc. versus Her Majesty the Queen. In Jayco, the plaintiff sued the government for indemnity and for negligence in forcing it to incur over one million dollars in interest expense and professional fees to defend an audit in HST assessment, which were eventually set aside in Tax Court. In this case, in interest expense and the professional fees incurred, were not recoverable. The government argued that it has no duty to indemnify the plaintiff for costs incurred in an HST audit and it has no private law duty of care to protect plaintiffs from incurring costs in a tax audit under the applicable statutory scheme. The Court agreed and stated that in the case of the claims for negligence there is ample case law rejecting the proximity required to formulate a private law duty of care between the CRA and taxpayers facing an audit. However, the Court did make two noteworthy remarks. It noted that there is one wrinkle in the case law which is that cases have recognized that when CRA is undertaking a criminal investigation it can owe a private law duty of care analogous to the duty owed by police officers to suspects. The second wrinkle is that there is an outlier case in the jurisprudence and the Court here was referring to the Leroux decision. The Court notes that the Leroux decision has often been distinguished or regarded as unique, however, it was mentioned favourably in 2013, in the Ontario Court of Appeal decision in McCreight versus Canada. Again, the Jayco case here is before the Ontario Superior Court. So the Court says that other than the Leroux case, cases that have looked at the relationship between CRA auditors and taxpayers have consistently held that their relationship is adverse in interest.
The CRAs job is to enforce taxation statutes and to that end, unlike the police, the tax man is not your friend. The CRAs job is to maximize your tax burden within the bounds of the various statutory schemes. Unlike police officers investigating crimes, there is already a comprehensive regulatory scheme in place to ensure that the CRA obeys the rules. Taxpayers can file an objection in response to the CRAs reassessment if they disagree with it and they can file an appeal to the Tax Court thereafter. Also, judicial review is available to taxpayers if the government makes a decision that is not appealable. In the Courts opinion in Jayco, imposing negligence liability on top of that is inconsistent with the statutory scheme and just imposes more costs on the government and gives taxpayers more procedural tools to defer tax. So in the end, the Ontario Superior Court did not follow the Leroux decision and stated that it may well be that the Court of Appeal will follow McCreight and Leroux on appeal and overturn this decision. If so, that would be an example of the common law developing as it should. Now this decision was soon followed by decision from the Alberta Court of Queen's Bench in Signal Hill Manufacturing versus the CRA. In Signal Hill the plaintiff argued that the law is unclear on whether a duty of care was owed by the CRA. Whereas the CRA argued that the law is well settled in Alberta. The CRA was referring to the Grenon case, which is the Alberta decision we discussed earlier, whereas the plaintiff relied primarily on the Leroux case, which again is a BC decision. In the Court's opinion, the Leroux case from British Columbia has been expressly rejected by the Court of Appeal of Alberta in Grenon, as having been founded upon insufficient footing and bad policy. The Court also mentioned that Leroux was rejected by the Ontario Superior Court of Justice in Jayco, which we just discussed. In the end the Court was satisfied that the Grenon case, and not the Leroux case, sets out the law in Alberta and that the law in Alberta is settled and that no duty of care exists in the circumstances of this case. So where does that leave us? Well, since the Leroux decision in 2012, taxpayers have not had much success in making the case that CRA owes them a duty of care. Provinces such as Alberta have stated that it is now settled law, that a CRA auditor does not owe a duty of care to taxpayers, whereas other courts have certainly been leaning in that direction. In my view, there would need to be some truly egregious behaviour on the CRAs part for a taxpayer to have any chance of success in this type of litigation. It is actually difficult to imagine a situation where I would advise a client to proceed with such a suit. With that I will pass it back to Steve who will discuss how to effectively resolve tax disputes.
Steve: Thank you, Pierre. Yes, this discuss will focus on how to negotiate a settlement or a tax dispute. This is Part 2 on this topic and we'll cover aspects that are in addition to those that were discussed in Part 1 in our last webinar. So this first slide depicts an overview of the three stages of a typical tax dispute with the CRA. First is the audit where the file is being handled, of course, by the auditor and the auditor's manager or the audit team. Second is once the notice of objection gets filed after notice for reassessment, it's issued by the auditor, the carriage of the matter gets transferred to an appeals officer and then, assuming that there's a confirmation of the reassessment or there are still unresolved issues, then an appeal will be launched with the Tax Court of Canada and that will be handled by a Department of Justice counsel, along with the CRA litigation officer. So, firstly at the audit stage, here are some factors to consider when approaching settlement negotiations. It's likely the auditor will raise an assessment. That's what they do, however, there can be resolutions reached and especially where there's a term that the taxpayer will waive the right to object and that, of course, would avoid the additional costs of the later stages in the process. You'll get a good sense often if the auditor's position is entrenched, or whether there may be some new case or arguments for information that may be persuasive to reduce the assessment, or perhaps to limit the scope of the reassessment and the decision needs to be considered whether it would simply be preferable to present those submissions to an Appeals Officer.
Next is the notice of objection stage where again the CRA Appeals Officer is assigned a file. The Appeals Officer is mandated to conduct a complete professional and impartial review of the matter. Filing the notice of objection gives rise to a threshold issue. It's probably one of the main strategic issues to be considered at the notice of objection stage, and that is whether to firstly make submissions to the CRA Appeals Officer and try to negotiate the resolution at this stage, or secondly, to forego or I often say leapfrog the notice of objection stage and appeal directly to court. This can typically be done after 90 days has passed from the date of the reassessment. In our view, the optimal strategy should be determined on a case by case basis rather than invariably going with one or the other of the options. Today I'm going to delve more into some of the considerations that inform that decision.
Here are some of the reasons why it would be advisable to negotiate with the Appeals Officer rather than immediately appealing further to the court. The majority of objections are resolved so this certainly does present an opportunity to settle. You may not want to forego. Of course you would be avoiding the significant delay and costs of the court appeal. There are certain arguments, and sometimes case law, that it can be more persuasive to an Appeals Officer than perhaps to an auditor, an audit team, and again you can at least resolve or narrow some of the issues at this stage. Here are some further reasons as well. Again, certain arguments dealing with statute barred years and penalties is often an area where there can be a reduction in the reassessment at the objection stage.
The other important consideration is the opportunity to address deficiencies. So while I won't take the time today to describe them in detail, there are specific requirements for notices of objection filed on behalf of large corporations, as defined in the Income Tax Act, and if a notice of objection has previously been filed that has deficiencies, submissions can be made to try to buttress them. We occasionally will be retained by a taxpayer after a notice of objection's been filed and when we look at it, it becomes apparent that there are some issues and some aspects that really should have been included in the objection that weren't. So this is one way to try to solve that problem and to correct those deficiencies by making those types of supplementary submissions. If the CRA considers them, that can effectively become treated as a supplementary notice of objection, or as part of your notice of objection. Certainly sometimes taxpayers want to avoid any publicity or to jeopardize their competitive position. The last thing they want to do is have a hearing in open court, and even worse, the reasons for decision that may spell out some information that they would prefer not become public, then they may therefore have a strong preference to avoid a court appeal. It's generally quite difficult to meet the test to get a sealing order that would prevent that type of information from potentially becoming public. Lastly, the catch more flies with honey than vinegar approach, and that is sometimes taxpayers prefer to be less confrontational in terms of future dealings with the CRA. There are, however, also reasons to appeal directly to court. It can sometimes, especially where it may appear pointless to you, try to negotiate with the Appeals Officer. There may be this tendency to circle the wagons and, again, especially if an auditor's obtained input from other levels, or where they're relying on a published administrative policy that makes their position well entrenched. This immediate appeal can also send quite a clear signal that the matter is being vigorously pursued which may enhance the atmosphere that's conducive to negotiating a settlement. It may be simply more effective to negotiate with a Department of Justice counsel which we'll touch on further in a minute. Some further reasons you avoid the delay associated with dealing with an Appeals Officer, typically once a notice of objection is filed there can be a delay in the order of 9 months or longer, even a year, before an Appeals Officer even gets assigned to the file. So that delay can be effectively avoided by simply appealing directly to court. You can also avoid issues while this delay is ongoing, further years can tick forward and there can be further assessments that are similar in nature, especially if you have an issue that is an ongoing on. This can exacerbate collections issues, especially for large corporations who have to pay half the amount of any assessment. Of course, while this delay is ongoing, if there isn't a payment made the taxpayer loses the use of the money and so that is certainly a definite cost to the taxpayer. Lastly, and importantly, the cost that would otherwise be devoted to towards trying to negotiate with an Appeals Officer can be deployed instead at the litigation stage.
Finally is the tax litigation stage where again a Department of Justice counsel and a CRA litigation officer are handling the file and this stage has its own considerations that informs settlement negotiation strategy. This is the stage where it can be most impactful to be put the case forward on the strongest possible terms to really create the impression that the court will likely allow the taxpayer's appeal. In those types of cases settlement becomes more likely and, importantly, the cost. So costs are only generally recoverable by taxpayers if you go all the way to court. There's a hearing, there's a judgment and the court orders costs in favour of the taxpayer. The CRA is on record that essentially they won't settle a case at any earlier stages of process where there's a term of a settlement that requires a payment to be made to the taxpayer for cost. So there are a number of procedural stages in the appeal where you can pursue settlement even before the reply gets filed. After discovery is a good stage because both of the parties have all of their positions disclosed and all the facts and documents are sort of on the table. Also settlement conferences. We've had some success recently with those. Those can, again, afford a good venue within which to negotiate a settlement, and also near the start of the trial, but of course at that stage it's less desirable in the sense that most of the costs will have already been incurred.
Next I want to touch on offers to settle because this is a really important tool, at this stage of the process, to try to foster or facilitate a settlement. You'll see on this slide the requirements for an offer of settlement to trigger these potential cost consequences. But essentially the way that it works is where there's an offer of settlement made, and it's not accepted, the matter goes all the way to court and there's a hearing and a decision, and the terms of the decision are more favourable to the taxpayer than the basis upon which the taxpayer is willing settle, so they've beaten their offer to settle if you will, then the taxpayer becomes entitled to an enhanced cost award from the date of the offer of settlement up to until the end of the process. So this can really be effective in terms of creating additional exposure to the CRA which can enhance the potential for settlement.
In conclusion, years ago this practice area was commonly called tax litigation but I think tax dispute resolution is a much better descriptor. Taxpayers generally don't relish the idea of litigating with the CRA. They just want their dispute resolved as quickly and painlessly as possible. So with that, thank you very much. I'm going to check to see whether we have any questions. So there is a question here which says, if a notice of objection is deficient and the taxpayer is a large corporation, what incentive does an Appeals Officer to have accept information that should have been submitted in the objection? Well, again I would say that, that at the notice of objection stage the Appeals Officer does have a mandate to try to resolve matters. An Appeals Officer, in my view acting reasonably, should afford the taxpayer an opportunity to present submissions at that stage and consider them because their objective should be to get to the right result. The right outcome. Not necessarily trying to raise as much tax revenue as possible. With that, please don't miss our next webinar in our series, on February 22. Watch out for that invitation and we would be grateful if you could please take a moment to scan the QR code here to complete a short survey. We would love to get your input on it and that wraps up today's session. Thank you very much for your attendance again and for your attention throughout. Have a great rest of your day. Goodbye.
With the Canada Revenue Agency deploying massive resources to crack down on perceived tax avoidance, it's now more important than ever to stay up to date with new CRA policies, legislation and case law. Please join Gowling WLG's Tax Dispute Resolution Group for Gowling WLG's 30 minute interactive monthly tax dispute resolution (TDR) webinars, to keep up with current developments and learn practical insights on how to successfully resolve tax disputes with the CRA.
To submit a question or topic to be covered in future webinars, please email TDR@gowlingwlg.com.
Topics discussed at session 4 included:
This webinar is part of our Tax Dispute Resolution Monthly Update. Watch more from the series »
*This program is eligible for up to 30 minutes of substantive CPD credits with the LSO, the LSBC and the Barreau du Québec. If you require a certificate of participation please contact Shannon Wadsworth.
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