I INTRODUCTION

Under the Constitution Act 1867, taxation is a shared jurisdiction. The federal parliament can enact laws for the purpose of levying taxes, both directly and indirectly. Provincial legislatures can enact laws for the purpose of levying direct taxes within the province only.2 The first income tax statute – the Income War Tax Act – was enacted in 1917 as a temporary federal measure meant to finance the expenses related to the Canadian efforts in the context of World War I. Today, the measure is permanent, and both federal and provincial governments have enacted tax measures meant to finance a variety of government services (including healthcare and education) and support targeted business and social sectors. The principal taxes are imposed on income as well as goods and services (also referred to as commodity taxes or value added taxes).3 Specific taxes also apply to fuel and tobacco.4

The principal tax authority in Canada is the Canada Revenue Agency (CRA), which has the mandate of collecting most federal and provincial income taxes (both personal and corporate) and commodity taxes. The notable exception is the province of Quebec, which is in charge of collecting its own provincial taxes, through the Quebec Revenue Agency.5

Although these taxes may have substantial differences in terms of, inter alia, base, rates, taxpayers and reporting periods, the compliance and dispute resolution process is basically the same, both federally and provincially. As described further below:

  1. it starts with a return that the taxpayer is required to file;
  2. a first (or quick) assessment is then issued;
  3. the return can be audited by a tax auditor who may issue a reassessment(s) within the normal reassessment;
  4. should the taxpayer disagree with the reassessment, he or she may object pursuant to a notice of objection; and
  5. if the matter cannot be resolved at the objection stage, the taxpayer may appeal to the Tax Court of Canada, and beyond to the Federal Court of Appeal and, with leave, to the Supreme Court of Canada.6

II COMMENCING DISPUTES

i Income tax returns

Canada has a self-reporting system. Pursuant to Section 150 of the Income Tax Act,7 a return of income that is in prescribed form and that contains prescribed information shall be filed with the CRA, without notice or demand for the return, for each taxation year of a taxpayer.8 The filing deadline will vary in accordance with the taxpayer's nature and status, for example, 30 April (individuals), 15 June (individuals carrying on a business), six months after the end of the financial year (corporations) and 90 days from the end of the year (trusts and estates). In accordance with Section 151, the taxpayer required by Section 150 to file a return of income shall, in the return, estimate the amount of tax payable. Pursuant to Section 241, any information disclosed to the CRA in this context is confidential and, except as provided by law, no official or other government representative shall knowingly provide, or knowingly allow to be provided to any person, any taxpayer information. Confidentiality in tax matters is a pillar of Canada's self-reporting system.

Shortly after the return is filed, a first assessment will be issued by the CRA (sometimes referred to as a quick assessment) in accordance with Section 152. There is no mandatory deadline for the first assessment; the CRA must assess with all due dispatch. Typically, the first assessment will be a reproduction of the numbers disclosed in the return and it will not be the result of an audit. The first assessment has, in the legal sense, the same status as an assessment or reassessment issued further to an audit. As such, it is, inter alia, deemed valid and subject to objection and appeal.

ii Audits and access to tax information

Once a return is filed, the CRA has vast audit powers to ensure that it has been truthfully prepared, that income has been fully declared and that taxes have been computed in accordance with the law. Under Section 231.1 of the Income Tax Act, an auditor may at all reasonable times, for any purpose related to the administration of the Act, inspect, audit or examine the books and records of a taxpayer, and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books and records of the taxpayer or to any amount payable by the taxpayer under the Act.9 In R v. McKinlay Transport Ltd,10 the Supreme Court of Canada concluded that these powers amounted to a seizure that was acceptable under the Canadian Charter of Rights and Freedoms on the basis that the taxpayer has a very low expectation of privacy in relation to the kind of information contained in its books and records for tax purposes. The Court concluded that the Minister of National Revenue must be capable of exercising his audit powers whether or not he has reasonable grounds for believing that a particular taxpayer has breached the Act. A spot check or a system of random monitoring may be the only way in which the integrity of the system can be maintained.

This is true to the extent that audit powers are used only for the ultimate purpose of issuing a reassessment (taxes, penalties and interest) (i.e., civil matters). These powers cannot be used in the context of a criminal investigation because of the liberty interest that is at stake. In R v. Jarvis,11 the Supreme Court of Canada stated that there must be some measure of separation between the audit and investigative functions within the CRA. Where the predominant purpose of a particular inquiry is the determination of penal liability (as opposed to tax liability) CRA officials must relinquish the authority to use the audit powers under Section 231.1. In such a case, evidence must be gathered in accordance with the rules applicable in criminal matters and comply with the Canadian Charters of Rights of Freedoms (including the right to remain silent, presumption of innocence and proof of culpability beyond reasonable doubt).

A notable exception to the general rule that the CRA has access to any document and information relevant to a purpose of the Act in the course of a tax audit is if the document is protected by solicitor–client privilege. In Descoteaux v. Mierzwinski,12 the Supreme Court of Canada established the substantive conditions precedent to the existence of the right of the lawyer's client to confidentiality: where legal advice of any kind is sought from a professional legal adviser in his or her capacity as such, the communications relating to that purpose, made in confidence by the client, are permanently protected from disclosure by him or her or by the legal adviser, except the protection be waived. Not all communications are privileged; the communication must be made to the lawyer in his or her professional capacity to obtain legal advice. Of course, communications made to facilitate the commission of a crime or fraud will not be confidential.

In Canada, the practice of taxation is shared among two major professional bodies: lawyers and chartered professional accountants (CPA). (See the recent Supreme Court case of Barreau du Quebec, 2017 SCC 56, Cote J, dissenting). Although both professions have substantially the same rights in terms of the professional acts they can make, communications between a taxpayer and a CPA are currently not protected by solicitor–client privilege. Therefore, arguably, the CRA could use its powers under Sections 231.1 et seq. to access an accountant's file, but certainly not in a routine, uncontrolled manner. A recent example is the case of BP Canada Energy Company, 2017 FCA 61, in which the Federal Court of Appeal denied the CRA's application pursuant to Section 231.7 to get a copy of the tax accrual working papers prepared for the purpose of consolidated financial statements, which contain a list of uncertain tax positions (the issues list), on the basis that financial reporting rules protect the inherent confidentiality of the process through which CPAs obtain and analyse tax information in order to opine on the reliability of financial information disclosed to the public. (Also see Atlas Tube Canada ULC, 2018 FC 1086.)

iii Normal reassessment period

The period of time within which the CRA is expected to carry out its tax audit and issue a reassessment is the normal reassessment period defined under Sections 152(3.1) and 152(4) of the Income Tax Act. The normal reassessment period starts with the issuance of the first assessment. Depending upon the taxpayer's status and the nature of the transactions under review, the normal reassessment period ends three (for an individual or private corporation), four (for a public corporation) or seven (for transactions involving a non-resident) years later. Within the normal reassessment period, the CRA can issue as many reassessments as it sees fit, and the subsequent reassessment cancels the previous one unless it is an additional assessment.

Pursuant to Sections 152(4) and (4.01), the CRA can issue a reassessment beyond the normal reassessment period only if the reassessment can reasonably be regarded as relating to either misrepresentation in the taxpayer's return attributable to neglect, carelessness or wilful default, or fraud.13 The CRA must prove misrepresentation on the balance of probabilities, and misrepresentation must take place when filing the return, not at another time.14 The standard of care is that of a reasonably prudent taxpayer. In other words, the CRA must prove simple negligence of the taxpayer when filing his or her income tax return. According to the Federal Court of Appeal in The Queen v. Johnson,15 when it is said that the standard of care is that of a wise and prudent person, it must be understood that wisdom is not infallibility and prudence is not perfection.16

III THE COURTS AND TRIBUNALS

i Tax appeals to the Tax Court of Canada

Pursuant to Section 169 of the Income Tax Act, where a taxpayer has served a notice of objection to an assessment under Section 165, the taxpayer may appeal to the Tax Court of Canada to have the assessment vacated or varied within 90 days after the CRA has confirmed the assessment or reassessed. The Tax Court of Canada is based in Ottawa and can sit basically anywhere in Canada, upon request of the taxpayer. It is composed of 22 judges, including the chief justice and the associate chief justice. The Tax Court is a superior court of record the judges of which are appointed by the governor general in council (i.e., the federal cabinet). Unlike the provincial superior courts, it does not have an inherent jurisdiction; in income tax appeals, its jurisdiction is limited to Section 171, which states that it 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 CRA for reconsideration and reassessment.17

The appeal is instituted by a notice of appeal prepared in accordance with Section 21 of the Rules of the Tax Court of Canada (General Procedure) (Rules).18 The taxpayer's notice of appeal must summarise the relevant facts, state the question at issue, list the relevant statutory provisions relied upon, state the taxpayer's arguments and, finally, the reliefs sought.

Within 60 days (subject to an extension), the CRA has to file a reply to the notice of appeal in accordance with Sections 44–49 of the Rules. The reply contains the same items as the notice of appeal, in addition to a section containing the assumptions based on which the assessment was made by the CRA (the basis of the assessment). This section is of utmost importance to the whole tax litigation process, because the assumptions will determine what the taxpayer will have to demonstrate to quash the assessment.

Once the reply is filed, the parties have to agree on a timetable for the remaining steps of the litigation: the exchange of lists of documents (partial or integral),19 the examination for discovery,20 the satisfaction of undertakings made at discovery and the request for a date of hearing.21 Once the date of hearing is scheduled by the hearings coordinator, the parties have 90 days from that date to serve their expert reports,22 if they deem it necessary.

ii Burden of proof

Pursuant to Subsection 152(8) of the Income Tax Act, an assessment is deemed valid and can be vacated or varied only through the specific mechanisms provided for in the Act: objection, appeal or reassessment by the CRA. The assessment's presumption of validity is applicable notwithstanding any error, defect or omission in the assessment.

Once the assessment has been appealed to the Tax Court and the CRA has filed its reply, the debate on the validity of the assessment will focus on the assumptions specifically listed in the reply. Another facet of the assessment's presumption of validity is that the assumptions relied upon in the reply are presumed (and not deemed) valid. In the latter case, it is a simple presumption that can be countered by a prima facie case. The authority on this issue is Hickman Motors Ltd v. Canada,23 in which the Supreme Court of Canada stated that the CRA, in making assessments, proceeds on assumptions, and the initial onus is on the taxpayer to demolish the CRA's assumptions in the assessment. The initial burden is only to demolish the exact assumptions made by the CRA but no more.24 The initial onus of demolishing the assumptions is met where the taxpayer makes out a prima facie case. Where the CRA's assumptions have been demolished by the taxpayer, the onus then shifts to the CRA to rebut the prima facie case made out by the taxpayer and to prove the assumptions. If the CRA adduces no evidence, the taxpayer is entitled to succeed.

In Amiante Spec Inc v. The Queen,25 the Federal Court of Appeal developed a little further the concept of prima facie case, stating that it is one supported by evidence that raises such a degree of probability in its favour that it must be accepted if believed by the judge unless it is rebutted or the contrary is proved. As such, it may be contrasted with conclusive evidence, which excludes the possibility of the truth of any other conclusion than the one established by that evidence.

IV PENALTIES AND REMEDIES

Typically, interest and penalties are directly related to the imposition of taxes and have no autonomous standing. As such, the result of the tax appeal will normally be determinative for interest and penalties as well.26

However, some penalties imposed under the Income Tax Act are not applied automatically when an assessment is issued; rather, these penalties require proof of a specific behaviour of the person being reassessed. Subsection 163(2) applies to the taxpayer, while Section 163.2 applies to third parties, including tax professionals.

In Guindon v. Canada,27 the Supreme Court of Canada had to consider the constitutional substance of the Section 163.2 penalty, and concluded that the standard for both penalties must be at least as high as gross negligence. These penalties are meant to capture serious conduct, not ordinary negligence or simple mistakes. Applying the traditional test developed in Venne v. The Queen,28 the Supreme Court said that these penalties are intended to apply to a behaviour that amounts to indifference as to whether the law is complied with and a high degree of negligence tantamount to intentional acting.

Pursuant to Section 163(3), in the case of penalties assessed under Subsections 163(2) and Section 163.2, the burden of establishing the facts justifying the assessments of the gross negligence penalties is on the CRA, on the balance of probabilities.29

V TAX CLAIMS

i Notice of objection

Once a notice of assessment is issued, pursuant to Subsection 165(1) of the Income Tax Act, the taxpayer has 90 days from the date of mailing (presumably, the date on the notice of assessment) to file an objection. There is no prescribed form, but the Act requires that the objection be in writing, and that it sets out the reasons for the objection and the relevant facts.

An important exception to this apparent flexibility in preparing notices of objection is with respect to large corporations. Pursuant to Subsection 165(1.11), a large corporation's30 notice of objection must reasonably describe each issue to be decided, specify in respect of each issue the relief sought expressed as the amount of a change in a balance, and provide facts and reasons relied on by the corporation in respect of each issue.31 Failure to comply with these rules may result in the rejection of the notice of objection (there is a 60-day grace period) or the legal impossibility to appeal an issue not validly raised in the notice of objection.

Pursuant to Subsection 165(3), on receipt of the notice of objection, the CRA shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess. The taxpayer must be notified in writing.

The objection process is not mandatory and can be bypassed. What is required per se is the notice of objection, but if 90 days have elapsed after service of the notice of objection and the CRA has not notified the taxpayer that it has vacated or confirmed the assessment or reassessed, the taxpayer can appeal directly to the Tax Court of Canada, pursuant to Paragraph 169(1)(b).

ii Loss determination request

An assessment should not be confused with a notice of assessment. Pursuant to Subsection 152(1) of the Income Tax Act, the assessment is the administrative act made by the CRA, pursuant to which it establishes the amount of tax payable as well as penalties and interest applicable thereto. The notice of assessment is the piece of paper intended to convey the result to the taxpayer. The separation between the administrative act and the physical support may seem trivial, except for in a situation where a taxpayer receives a notice of assessment with respect to a taxation year during which it incurred a loss. The amount of tax established under the circumstances will be nil and, legally speaking, there is no assessment under those circumstances.

Since losses can be carried back and forward to reduce taxable income for previous and subsequent taxation years, there is an incentive to confirm the quantum of the losses for each taxation year. In this regard, the notice of assessment is of no use. What is required is a notice of determination of losses that can be issued by the CRA upon a request made pursuant to Subsection 152(1.1), typically through a letter. If the quantum of the losses determined by the CRA in furtherance of this process is inaccurate, an objection can be filed in essentially the same manner as an objection to an assessment.32 (Valiant Cleaning Technology Inc, 2018 TCC 637.)

iii Request for extension of time

Where no notice of objection to an assessment has been served within the 90-day period, the taxpayer may apply to the CRA to extend the time for serving the notice of objection. Pursuant to Section 166.1 of the Income Tax Act, the request should be granted if it complies with the following conditions: the application is made within one year of the expiration of the deadline to serve the notice of objection, the taxpayer demonstrates that he or she was unable to act within the deadline or had a bona fide intention to object within the deadline, it is just and equitable to grant the application, and the application was made as soon as circumstances permitted.

The key issue in most applications for extension of time is whether the taxpayer was unable to act. In Patterson Dental Canada Inc v. The Queen,33 the Tax Court of Canada confirmed that the concept of impossibility to act must be analysed subjectively and not objectively: in other words, whether this specific taxpayer in his or her specific context was unable to act, as opposed to the reasonably prudent taxpayer.

If the CRA rejects the application, the taxpayer can appeal to the Tax Court of Canada.

VI COSTS

Pursuant to Subsection 147(1) of the Rules, the court may determine the amount of the costs of all parties involved in any proceeding, the allocation of those costs and the persons required to pay them. Costs may be awarded to or against the CRA. In exercising its discretionary power to award costs, the court may consider, inter alia, the result of the proceeding, the amounts in issue, the importance of the issues, any offer of settlement made in writing, the volume of work, the complexity of the issues, and the conduct of any party that tended to shorten or lengthen unnecessarily the duration of the proceeding.

Unless otherwise ordered by the court, if a taxpayer makes an offer of settlement and obtains a judgment as favourable as or more favourable than the terms of the offer of settlement, the appellant is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, as determined by the court, plus reasonable disbursements and applicable taxes. 'Substantial indemnity' costs means 80 per cent of solicitor and client costs.

VII ALTERNATIVE DISPUTE RESOLUTION

Taxation is proverbially complex, and mistakes do happen in spite of the taxpayers' and their advisers' best efforts to comply with their obligations. When a series of transactions was intended to respect the conditions provided for in the Income Tax Act to take advantage of a specific tax treatment and unintended tax consequences are triggered by a mistake in the design or implementation of the transactions, taxpayers should consider the possibility of an application to rectify the erroneous writings.

Such applications are made before provincial superior courts and are governed by civil law in Quebec and common law in the rest of Canada. In civil law, the authority is the Supreme Court of Canada's judgment in Quebec v. Services environnementaux AES Inc.34 This case stands for the principle that, as a general rule, the writing is not an autonomous act; the writing is not the contract. A contract is an agreement of wills for the purpose of carrying out juridical operations. The formation of a contract is subject to the principle of consensualism: a contract is formed by the exchange of consents. Therefore, to determine what are the bona fide legal relationships to which tax consequences will apply, one must go beyond the allegedly erroneous writing and focus on the parties' common intention. If a writing contains an error that triggers unintended tax consequences,35 the court must, once the error is proved in accordance with the rules of evidence in civil matters, note the error and ensure that it is remedied. Most importantly, the Supreme Court ruled that the tax authorities do not have an acquired right to benefit from an error made by the parties to a contract after the parties have corrected the error by mutual consent.36 The recent case of Groupe Jean Coutu, 2016 SCC 55, has expended on the conditions to be satisfied for a successful tax-driven rectification, namely (1) the unintended tax consequences were originally and specifically sought to be avoided; and (2) the obligations, if properly expressed and the corresponding prestations, if properly executed, would have succeeded in doing so. Importantly, Groupe Jean Coutu has specifically recognised a taxpayer's right to include the insertion of transactions into a rectification plan.

As for common law, the precedent is the Supreme Court case of Fairmont, 2016 SCC 56, which stands for the principle that where an error is said to result from a mistake common to both or all parties to an agreement, rectification of the instrument is available upon the court being satisfied that there was a prior agreement whose terms are definite and ascertainable; the agreement was still in effect at the time the instrument was executed; the instrument fails to accurately record the agreement; and the instrument, if rectified, would carry out the parties' prior agreement.

VIII ANTI-AVOIDANCE

i Construction of tax statutes

In Canada, as a result of the Duke of Westminster principle,37 taxpayers are entitled to arrange their affairs to minimise the amount of tax otherwise payable. This principle has been consistently recognised in case law38 as well as by the CRA.39 In Canada, there is no substance over form doctrine pursuant to which a series of transactions could be revisited by the CRA to ignore the transactions implemented specifically to avoid or minimise taxes. The way in which taxes are applied to transactions has been developed over a series of cases, as described below.

In Shell Canada Ltd v. Canada,40 the Supreme Court of Canada stated that the economic realities of a situation cannot be used to recharacterise a taxpayer's bona fide legal relationships. Absent a specific provision of the Income Tax Act to the contrary or a finding that they are a sham, the taxpayer's legal relationships must be respected in tax cases.

Recharacterisation is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect. The authority on this question is Continental Bank Leasing Corp v. Canada,41 in which the Supreme Court of Canada established the following approach. After it has been found that the sham doctrine does not apply,42 it is necessary to examine the documents outlining the transaction to determine whether the parties have satisfied the requirements of creating the legal relationships that they sought to create. Once the documents are accepted as genuinely representing the transaction into which the parties have entered, its proper legal categorisation is a matter of construction of the documents. The parties' agreement must be found, first, in the language used by the parties. However, if, when properly construed, the effect of the document as a whole is inconsistent with the terminology used by the parties, then ill-chosen language must yield to the substance.

The seminal exercise of determination of the bona fide legal relationships cannot be made in abstracto. It can only be made within the context of the laws of general application (common law, civil law, corporate law, international law, etc.) based on which the legal relationships emerge. Markevich v. Canada 43 recognises the principle that the Income Tax Act is not a complete code and, accordingly, it must be informed by laws of general application. In other words, the Act does not and cannot operate in a legislative vacuum; it relies implicitly on the general law. (Also see BP Canada Energy Company, 2017 FCA 61.) As a result, the exercise of determination of the bona fide legal relationships commanded by the Supreme Court of Canada in Shell and Continental Bank must take into account legal concepts that are outside the Act and that may require a reconciliation of legal concepts that have nothing to do with tax (e.g., contract law, trust law or bankruptcy law).

ii Tax avoidance

Although the Duke of Westminster principle is still trite law, taxpayers wishing to arrange their affairs to minimise the amount of Canadian tax otherwise payable must be aware of an important exception to the rule: abusive tax avoidance.

The general anti-avoidance rule (GAAR) enacted in 1988 in Section 245 of the Income Tax Act recognises the principle that the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation and, as a result, where parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe. However, this remains true only if the transactions entered into by the taxpayer had bona fide purposes (other than obtaining a tax benefit) and the series of transactions do not amount to a misuse or abuse of the Act.

According to the Supreme Court of Canada in Canada Trustco Mortgage Co v. Canada,44 three requirements must be established to permit the application of the GAAR:

  1. a tax benefit resulting from a transaction or part of a series of transactions;
  2. the transaction is an avoidance transaction in the sense that it cannot be said to have been reasonably undertaken primarily for a bona fide purpose other than to obtain a tax benefit; and
  3. there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benefit would be consistent with the object, spirit and purpose of the provisions relied upon by the taxpayer.

The burden is on the taxpayer to refute the existence of a tax benefit and of an avoidance transaction (essentially, questions of facts), and on the CRA to establish the existence of abusive tax avoidance (a question of law).

This rather complex exercise must take place in accordance with the modern approach to the construction of statutes, pursuant to which the interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act read as a whole.

Once it is established that the GAAR is applicable, its effects are serious. Pursuant to Subsection 245(5), the CRA can recharacterise the series of transactions so as to suppress the tax benefit.

IX DOUBLE TAXATION TREATIES

Canada currently has double taxation treaties in force with 93 countries.45 Four treaties are signed but not yet in force.46 Eight treaties are under negotiation or renegotiation.47

Canada also has tax information exchange agreements with 24 countries.48

One treaty is signed but not yet in force (Antigua and Bermuda). Five treaties are currently under negotiation.49

Canada has adopted the OECD treaty model.

X AREAS OF FOCUS

Three areas of focus should be closely watched in the coming years.

The first area is the CRA's growing appetite for tax information. In recent years, we have seen a growing number of mandatory requirements by the CRA to obtain tax information, including requests sent to tax professionals and third parties (including financial institutions and retailers) (Rona Inc, 2017 FCA 118). Allocation of human resources seems to be an issue, and the CRA intends to carry out its audits more efficiently. As a result, it is clear that access to planning memoranda and tax opinions prepared by professionals are prime targets and may even become road maps for tax auditors. This new trend raises important issues, including the taxpayers' legitimate expectation of confidentiality when they deal with their tax advisers, as well as the duty of loyalty in relation to one's clients. Barreau du Quebec and BP Canada Energy Company, two seminal 2017 cases, are a testament to this trend. Atlas should be watched closely.

Second, a variation on the theme of access to and – most importantly – protection of tax information, the future clearly lies on treaty-based information request in the context of internationally coordinated efforts to get taxpayers' information, especially when domestic laws are deemed inefficient by the local tax authorities. The next steps seems to be full access and exchange among countries through centralised databases.

Finally, a recently observed trend nationally is the taxpayer's almost contant impossibility to win a judicial challenge of a GAAR assessment. Oxford Properties, 2018 FCA 30; Satoma Trust, 2018 FCA 74; and Pomerleau, 2018 FCA 129, have all been found in favour of the CRA. This is a source of concern. Time will tell whether it is a temporary setback or a change of scope of a permanent nature.

XI OUTLOOK AND CONCLUSIONS

The Canadian tax system is a mature and equitable system for both Canadian taxpayers and the tax authorities. The system is administered by professional public servants dedicated to ensure that taxpayers file truthful returns, voluntarily. It is adjudicated by an independent and efficient judiciary that we can be proud of. In years to come, we will see further improvements in our system with the construction of a penalty system based on Guindon, the convergence of the rectification process inspired by AES, Groupe Jean Coutu and Fairmont and the continuing evolution of confidentiality rules consistent with BP Canada Energy Company and Barreau du Quebec. This is just an excerpt of what may happen in the coming years.


Footnotes

1 Dominic C Belley is a partner at Norton Rose Fulbright Canada LLP.

2 For a discussion on the distinction between direct and indirect taxes, see Reference re Quebec Sales Tax [1994] 2 SCR 715. See also GV La Forest, The Allocation of Taxing Power under the Canadian Constitution, 2nd Ed (Toronto: Canadian Tax Foundation, 1981).

3 For example The federal goods and services tax (GST), the harmonised sales tax applicable in certain Canadian provinces and collected by the federal government, and the Quebec sales tax (QST) applicable in Quebec.

4 For further reading on the distinction between taxes and regulatory charges, see Westbank First Nation v. BC Hydro and Power Authority [1999] 3 SCR 134.

5 Pursuant to a federal–provincial agreement, the Quebec Revenue Agency is also in charge of the collection of federal GST in addition to the provincial QST.

6 To simplify the text, this chapter will present the federal income tax litigation process.

7 Income Tax Act, RSC, c 1 (5th Supplement).

8 Taxpayers are individuals, corporations and trusts. Partnerships do not pay income tax per se; income is computed at the partnership level, and is attributed to the partners who are liable to tax. Partnerships must file income statements, as opposed to income tax returns.

9 Pursuant to Section 231.2, the CRA can issue a mandatory requirement to produce information and documents. A taxpayer who fails to comply with a mandatory requirement can be prosecuted before a tribunal of criminal jurisdiction pursuant to Section 238. The Crown would have to prove the failure (actus reus) but not the intention (mens rea); the taxpayer could present a due diligence defence. See City of Levis v. Tetreault [2006] 1 SCR 420. Under Section 231.6, the CRA can require the production of foreign-based documents. The CRA can also obtain a compliance order under Section 231.7.

10 R v. McKinlay Transport Ltd [1990] 1 SCR 627.

11 R v. Jarvis [2002] 3 SCR 73.

12 Descoteaux v. Mierzwinski [1982] 1 SCR 860.

13 A reassessment can also be made beyond the normal reassessment period pursuant to a waiver signed by the taxpayer in prescribed form.

14 Vachon v. The Queen, 2014 FCA 224.

15 The Queen v. Johnson, 2012 FCA 253.

16 On the standard of prudence, see also Balthazard v. The Queen, 2011 FCA 331.

17 The Tax Court has no jurisdiction on interest.

18 The Tax Court has several rules of practice, including an informal procedure. Only the general procedure is presented herein.

19 Sections 81–82 of the Rules.

20 Section 92 et seq. of the Rules.

21 Section 123 of the Rules.

22 Section 145 et seq. of the Rules. In tax appeals, experts are often called upon to testify on the following questions: accounting principles, forensic accounting, valuation, foreign law. See also Drouin v. The Queen, 2010 TCC 94 and R v. Mohan (1994) 2 SCR 9.

23 Hickman Motors Ltd v. Canada (1997) 2 SCR 336.

24 For historical background, see Johnston v. MNR (1948) SCR 486.

25 Amiante Spec Inc v. The Queen, 2009 FCA 139.

26 Pursuant to Subsection 220(3.1) of the Income Tax Act, the Minister of National Revenue may, upon request from the taxpayer, waive or cancel, partially or totally, interest and penalties applied to the taxes assessed. The Minister's discretion is exercised administratively in accordance with guidelines published by the CRA. It is subject to judicial review before the Federal Court in accordance with administrative law principles. Based on Dunsmuir v. NB (2008) 1 SCR 190, the Minister's decision must be reasonable and legally correct. For a comprehensive review of the relevant case law, see Lafarge v. Quebec, 2011 QCCS 7391. In Genetec Inc v. Quebec, 2018 QCCA 730, the Quebec Court of Appeal concluded that a taxpayer has no constitutional guarantee to a reasonable decision and, accordingly, the provincial legislature could enact laws to restrict the ability of the Superior Court to revisit the ministerial decision. This case is under appeal before the Supreme Court of Canada.

27 Guindon v. Canada, 2015 SCC 41.

28 Venne v. The Queen (1984) CTC 223 (FCTD).

29 See also Fourney v. The Queen, 2011 TCC 520 and Lacroix v. Canada, 2008 FCA 241.

30 Pursuant to Section 225.1(8), a corporation is a large corporation if, at the end of a given taxation year, its taxable capital employed in Canada exceeds C$10 million.

31 For the historical background on the reason for these requirements, see Potash Corp of Saskatchewan v. The Queen (2004) 2 CTC 91 (FCA).

32 It should be noted that an objection to a nil assessment can nevertheless be filed if the objection is with respect to refundable tax credits.

33 Patterson Dental Canada Inc v. The Queen, 2014 TCC 62.

34 Quebec v. Services environnementaux AES Inc (2013) SCR 838.

35 An error is defined at Paragraph 53 of AES as the erroneous expression of the parties' common intention in all the writings prepared to carry out the tax plans on which they had agreed.

36 At Paragraph 54 of its reasons in AES, the Supreme Court of Canada mentioned that the judicial recognition of rectification in civil law should not be viewed as an invitation to engage in bold tax planning on the assumption that taxpayers will always be allowed to redo their contracts retroactively should that planning fail.

37 Named after the English case of CIR v. Duke of Westminster [1936] AC 1 (HL).

38 Canada Trustco Mortgage Co v. Canada [2005] 2 SCR 601.

39 CRA, 'Third-Party Civil Penalties', IC 01-1, 18 September 2001.

40 Shell Canada Ltd v. Canada [1999] 3 SCR 622.

41 Continental Bank Leasing Corp v. Canada [1998] 2 SCR 298.

42 If the documents are a sham intended to mask the true agreement between the parties, the court must disregard the deceptive language.

43 Markevich v. Canada [2003] 1 SCR 94.

44 Canada Trustco Mortgage Co v. Canada [2005] 2 SCR 601.

45 Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belgium, Brazil, Bulgaria, Cameroon, Chile, China, Colombia, Croatia, Cyprus, the Czech Republic, Denmark, the Dominican Republic, Ecuador, Egypt, Estonia, Finland, France, Gabon, Germany, Greece, Guyana, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, the Ivory Coast, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, the Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Peru, the Philippines, Poland, Portugal, Romania, Russia, Senegal, Serbia, Singapore, the Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, the United Arab Emirates, the United Kingdom, the United States, Uzbekistan, Venezuela, Vietnam, Zambia and Zimbabwe.

46 Belgium, Lebanon, Madagascar and Namibia.

47 Australia, Brazil, China, Germany, Malaysia, the Netherlands, San Marino and Switzerland.

48 Anguilla, Aruba, Bahamas, Bahrain, Bermuda, the British Virgin Islands, Brunei, the Cayman Islands, Cook Islands, Costa Rica, Dominica, Grenada, Guernsey, the Isle of Man, Jersey, Liechtenstein, Netherlands Antilles, Panama, San Marino, Saint Lucia, St Kitts and Nevis, St Vincent and the Grenadines, Turks and Caicos Islands and Uruguay.

49 Belize, Gibraltar, Liberia, Montserrat and Vanuatu.