Tax disputes follow many stages and phases. Tax disputes with the CRA often begin with the audit process. As part of the audit process, the CRA may contact the taxpayer by letter or phone to gather information so that the taxpayer's assessment can be substantiated. After the audit process is complete, a reassessment may be issued where the CRA determines that an adjustment to the original assessment is warranted. The taxpayer may object to the reassessment by filing a notice of objection with the CRA. By objecting to the reassessment, the dispute is referred to CRA appeals, a separate division of the CRA that is meant to provide taxpayers a second review of their matter by an impartial appeals officer who was not part of making the assessment that is under dispute. Following the objection process, a taxpayer may appeal to the Tax Court of Canada. Each phase of a tax dispute from CRA audit and appeals to appealing to the Tax Court of Canada includes different considerations for taxpayers.
CRA Audit and Appeals
During the CRA audit process the taxpayer can expect to receive questions and provide information about their affairs as the CRA tries to gather facts to determine if the assessment for the taxpayer is correct. These can include in-person examinations and written correspondence. During the CRA appeals process, taxpayers can expect to explain errors in the assessment. While interacting with the CRA as part of these processes, taxpayers may rely on the Taxpayer Bill of Rights to ensure they are treated fairly by the CRA. It is important to note that the Taxpayer Bill of Rights does not have the force of law. Hence, while the Taxpayer Bill of Rights may guide interactions with the CRA it does not guarantee any particular process outcomes for taxpayers.
Tax Court of Canada Appeals
A taxpayer can appeal to the Tax Court of Canada once their assessment is confirmed by CRA appeals or if 90 days have elapsed after objecting and the assessment has not been confirmed, vacated, or reassessed. Once a taxpayer's dispute reaches the Tax Court of Canada, a much more defined process will apply to the dispute. There are two processes before the Tax Court of Canada, the informal appeals process and the general appeals process, each with their own rules. For income tax appeals, the informal appeals process is currently limited to cases where the federal tax and penalties in issue do not exceed $25,000 for each taxation year or $50,000 with respect to losses. For GST appeals, the limit is $50,000. Despite these limits, if a taxpayer chooses to limit their claim, they can elect to follow the informal process. The general appeals process is for appeals in excess of the informal procedure limits.
Process at the Tax Court of Canada
The informal process at the Tax Court of Canada is more simple and driven towards efficiently providing taxpayers their day in court. In contrast, the Tax Court of Canada rules applicable to general procedure appeals provide a more robust framework for guiding process and in relation to establishing evidence. In the general appeals process, a case management judge may also be assigned to the matter. The case management judge can work with the parties to establish a timetable for the conduct of the proceeding and to assist with resolving issues that arise in advance of the hearing, including giving direction for the efficient determination of the appeal, the hearing of motions, and setting time for the completion of steps in the appeal. These processes are in contrast to the less formal processes with CRA audit and appeals which are guided instead by service promises contained in the Taxpayer Bill of Rights rather than formal rules and judicial oversight. Judicial oversight allows judges to consider the materials, positions, and process before them. Judges are interested in seeing the efficient use of judicial resources and guiding proceedings in furtherance of that objective.
Application of the Law and the Tax Court of Canada
CRA positions and guidelines always remain subject to the law which is set out in legislation that is applied and interpreted by the Tax Court of Canada and the Federal Court of Appeal and Supreme Court of Canada as appellate courts, as applicable (for certain matters, the Federal Court instead has jurisdiction, as further discussed below). At the Tax Court of Canada, taxpayers have the opportunity to both convince the Court of their position but can also succeed in expanding or changing existing jurisprudence. Further, in the case of novel issues, the Tax Court of Canada may offer the most appropriate avenue where lawyers and the judge can evaluate the current state of legislation and statute with a view to considering how a novel situation should be decided.
The Role of the Department of Justice
When an appeal proceeds to the Tax Court of Canada, the matter is assigned to a lawyer at the Department of Justice. The Department of Justice lawyer will look at the matter with a different lens than did the CRA auditor or appeals officer. Inherently, lawyers have a different skill set than do auditors and appeals officers and will perform a different risk assessment, looking at the application of the law to the facts and the evidentiary record. There may be a greater willingness to engage in settlement given a new risk assessment where the Department of Justice lawyer may advise the CRA that they believe the law would favour the taxpayer. Of note, settlements must occur on a "principled" basis meaning that settlements must be based in law and fact - a settlement accepting 50% of tax owing is not possible simply to avoid further resources dedicated to the matter. Some creativity is possible in reaching a principled settlement - for example, positions on one issue can be accepted in favour of the taxpayer, while positions on another issue can be accepted in favour of the Minister, provided such settlement is supported.
Jurisdiction of the Tax Court of Canada
It is important to remember that the jurisdiction of the Tax Court of Canada is primarily determining whether the assessment of tax is correct. For issues that relate to the discretion of the Minister, and whether that discretion has been exercised reasonably, the Federal Court instead has jurisdiction. A common example illustrating the exercise of discretion is where the Minister may choose to grant an extension of time for a deadline. Appealing to a court that does not have jurisdiction is likely to result in the dispute becoming time barred by the time the taxpayer becomes aware of the jurisdictional issue.
Conclusion
Each step of a tax dispute follows a different process with different qualitative considerations that shape strategy. Where a taxpayer disagrees with positions and processes while at the CRA audit and appeals steps, the Tax Court of Canada offers an important check on the application of tax law. In addition to more robust rules and procedures at the Tax Court of Canada, judicial oversight can help ensure a fairer process for taxpayers when compared to the Taxpayer Bill of Rights. Adding the perspective of Department of Justice lawyers when appealing to the Tax Court of Canada can also facilitate settlement by providing a new risk assessment for the Minister.
Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.