Tax Appeals

When a taxpayer disagrees with an assessment or reassessment, in order to dispute it they must file a formal Notice of Objection. The objection process is administered by the CRA’s Appeals Division and can result in either the assessment being confirmed, vacated or varied as discussed in our article on objections.

If an assessment is upheld after objection, the CRA must issue a formal letter explaining their reasoning called a Notice of Confirmation. If the assessment is to be vacated or varied, a reassessment will be issued to the taxpayer.

In either case, if the taxpayer still disagrees with the CRA’s decision, their next step is to proceed to the Tax Court of Canada.  Depending on the amounts in dispute, a taxpayer may proceed by way of the general procedure, or the informal procedure. Conceptually, these can be thought of as the difference between a normal civil court and the small claims court.  For the purposes of this article, all references are to the general procedure; our sister article on the informal procedure outlines the limits and differences and can be referenced separately.

In either case, when a taxpayer files an Appeal to the Tax Court of Canada, they are in essence now a plaintiff in a civil claim with the CRA as a defendant; in many respects filing such an Appeal can be thought of as “suing” the CRA – the Tax Court is a superior court akin to the provincial courts, though with a less broad jurisdiction as detailed below.

Limitation Period – when a reassessment or confirmation is issued, the Income Tax Act or Excise Tax Act deems the amounts assessed to be valid and binding by operation of law in the same manner as an audit reassessment. Having gone through the CRA Appeals Division’s decision-making process, subject to some limited exceptions the taxpayer’s only course of action to preserve the dispute is to file a Notice of Appeal to the Tax Court of Canada.  As a general rule, the limitation period for doing so is ninety (90) days from the date of the reassessment or confirmation, the same as the period for filing the initial objection.

Extension of Time – if this initial ninety (90) day deadline is missed then there is still a statutory mechanism whereby which a taxpayer can file a valid Appeal. So long as a taxpayer files an Application for an Extension of Time within which to File a Notice of Appeal within one year of the expiry of the initial ninety (90) day deadline to object, the Court may still deem the Appeal as validly filed.

As with objections, an extension of time application is not approved as of right – rather, the acts contain certain conditions precedent that the taxpayer must demonstrate they have met in order to have their Appeal accepted as valid. As with the conditions for an extension of time in the case of an objection, the taxpayer must prepare the formal Notice of Appeal and application to be filed together, and the taxpayer must be able to prove:

  • that they were unable to act or instruct another to act to file the objection;
  • that they had a bona fide intention to object to the reassessment;
  • that it would be “just and equitable” to allow the extension of time; and
  • that the application is made as soon as circumstances permit.

However, unlike in the case of late-filing an objection whereby which, if the above conditions are met the application, must be granted, there is an additional requirement when late-filing an Appeal: the taxpayer must prove that there are “reasonable grounds” for bringing the Appeal.  The reasonable grounds requirement is similar to the civil law concept of requiring a lawsuit to demonstrate a true “cause of action” on its face.  This means that there must be a validly supportable and obvious legal or factual issue in dispute for the Appeal on the presumption that all of the facts and arguments set out in the Notice of Appeal are taken as truth.

The Notice of Appeal/Pleadings – as above, Tax Court litigation can be viewed as analogous to bringing a civil claim against a defendant. The process begins with preparing and submitting the formal Notice of Appeal; the appeal must clearly and concisely set out the salient facts, the issues to be decided, the legal arguments that the Appellant intends to bring and the relief requested.

Once the Notice of Appeal is filed with the Court, it will review and confirm that it conforms to the requirements and then serve it on the Attorney General of Canada, by way of the Department of Justice.  The Crown then has a period of sixty (60) days within which to file and serve a rebuttal by way of a formal “Reply” in much the same form as the Notice of Appeal.

Once the Reply is filed and served, the Appellant will then have a period of thirty (30) days to file a formal “Answer” if deemed necessary. The rules of the Tax Court of Canada deem the Appellant to deny all the allegations of fact in the Reply if no Answer is filed, so it is often rare that a formal Answer should be filed.

Together, the Notice of Appeal, the Reply and the Answer are referred to as the “Pleadings”, and they form the basis for the litigation; the Pleadings are generally the only documents or information that a judge presiding at the final hearing has access to in advance, so it is important to ensure that they are drafted with skill and care by an experienced professional.  Pleadings are deemed to close at the time an Answer is filed and served or the time for doing so expires.

Discoveries and Other Interlocutory Steps – as with any other civil litigation, once the Pleadings have closed the interlocutory steps must be completed.  This normally begins with the Court requesting that the parties agree to a formal timetable setting out dates by which the discoveries steps will be completed.  Once the timetable is agreed to and approved by the Court, the parties then proceed with the discoveries process.

The discoveries generally proceed first with an exchange of the list of documents and evidence upon which the party intends to rely at the hearing.  This will be followed by an exchange of copies of the relevant documentation and evidence for review by the opposing counsel.  Once this is complete, examinations for discovery are conducted in the same manner as in civil litigation; the answers to the questions provided can be entered into evidence at the hearing and used to impeach any witness testimony if there are contradictory answers.

The purpose of the examination is the same as any other court as it allows the parties to determine the opponent’s case, and possibly the strategy that they mean to implement as a part of the litigation.  In some cases having new or more complete information can lead to a settlement or even abandonment of the litigation by one of the parties.

The Hearing & Decision of the Court – the hearing of the Appeal takes place at the conclusion of the interlocutory steps and the parties then have the ability to present their evidence, witnesses and legal arguments to the Court. Depending on the complexity of the appeal and the number of witnesses called, hearings can last a single day or even several weeks. It is important to remember that as the Appellant, the taxpayer almost always bears the burden of proof – they must prove their case by rebutting the CRA’s assessment on the balance of probabilities.

Once the hearing is concluded the judge will typically recuse themselves and issue written reasons at a later date.  This is generally where the dispute is resolved, but either the taxpayer or the CRA still has the option to appeal to the Federal Court of Appeal, though that court’s review powers are much more limited than the Tax Court’s as it cannot reweigh the evidence.

It should be noted that in issuing its decision, the Tax Court of Canada’s jurisdiction is limited by the respective legislation; it has no equitable powers, and the relief available is limited to:

  • Dismissing the Appeal; or
  • Allowing the Appeal and
    • vacating the assessment;
    • varying the assessment; or
    • referring the assessment back to the CRA for reconsideration and reassessment.

As such, there is no way to seek damages or other claims for economic loss beyond litigation costs as the Tax Court has no power to grant such requests.  It can only order that the assessment of tax that ought to have been imposed under the legislation be substituted for the CRA’s.

Settlement Offers – at any time after the Pleadings close, either party can prepare and serve a formal settlement offer. The underlying philosophy for doing so is to preserve scant judicial resources and to save time and money for the litigants.  However, doing so can also be a strategic choice – the rules of the Tax Court state that where a party serves a formal settlement offer to the opposing party and that the offering party does as well or better at hearing then the losing party will have to pay substantial indemnity costs to the successful party from the date of the settlement offer.  This rule creates a major incentive for settlement as costs and awards can be very high.

It should be noted that settlement in the tax context is not the same as civil litigation – in order to be effective as a proper settlement, the proposal must be supportable by the legislation.  In other words, a settlement offer will be rejected by the Court if the amounts are not justifiable under the enabling statute such as the Income Tax Act. This requires a significant amount of fine-tuning and knowledge so proper legal advice is paramount.

Proper Experienced Advice – if you disagree with a reassessment or have received a Notice of Confirmation and wish to dispute the amounts, proper advice and representation are invaluable to ensure both that the formal requirements of the acts are met, and that you are in the best position to present a logical and winning case to the Tax Court of Canada.  It should also be noted that corporate taxpayers must be represented by counsel – non-lawyers, accountants or agents cannot represent taxpayers in a general procedure appeal.  The tax lawyers at Devry Smith Frank LLP have years of experience practicing in the Tax Court and can advise you expertly, keep professional costs down and maximize your chances of success.

Call us at 416-449-1400 for available options or to