If a taxpayer finds that they have not resolved their issue after having gone through the appeals process, the only way forward is to appeal to the Tax Court of Canada. If there is no success at the Tax Court, a case could potentially be taken to the Federal Court of Appeals and then the Supreme Court of Canada, however it is rare to take a tax case that far.
What is interesting about the Tax Court of Canada is that it is a travelling court. It sits in a number of different cities across the country and the judges move around from city to city to hear cases. And unlike objecting to the CRA, where a taxpayer can receive an extension on a late objection for up to 12 months, the Tax Court of Canada is strict with its timing and often required taxpayers to appear in court to justify why their application for an extension is warranted. It is best to be on time and avoid this process altogether.
And unlike the provincial courts, such as the Ontario Superior Court, the Tax Court of Canada IS NOT a court of “equity”. This means that while they have certain discretion, the judges on the bench of the Tax Court of Canada cannot make a decision based on what would be fair or equitable under the circumstances. On the other hand, a Superior Court judge can. Consider a criminal conviction – A Superior Court judge has broad discretion to be fair and issue a sentence based on personal circumstances of the convicted. For the same crime they may have the discretion to either send somebody to prison or give them a small fine or community service. A Tax Court judge must make their decision based on the law – regardless of how punitive the decision may be to any one person. So in the case of a gross negligence penalty a judge of the Tax Court of Canada does not have the ability to reduce a penalty from 50% to 10% for example.
There are two streams of cases in the Tax Court of Canada – The “general” procedure and the “informal” procedure. While still fairly formal, the informal procedure is like the small claims court of the tax court world. The limit for the informal procedure is $25,000. And while there is a $25,000 limit, a taxpayer with a $30,000 problem can still elect to go through the informal process and limit their case to $25,000.
The other big difference between the informal and the general procedure besides the limit is that a lawyer is almost always required for the general procedure, especially where the appellant is a corporation, where a lawyer is always required.
In the informal procedure it is easier to self-represent. It is also possible to have an accountant or somebody else (including your mom) act as a representative. But in the general procedure it is only lawyers and well-equipped self-represented appellants. In fact, for an appellant to self-represent they must be able to convince a judge to allow it.
Either way, the case before the Tax Court of Canada is initiated by the filing of a “Notice of Appeal” to the court. Fees apply depending on how large the case is. It is in the Notice of Appeal where the taxpayer sets out their case. What is not referred to in the Notice of Appeal may not be admissible later on, so it is important to be thorough and to do a proper job at this stage.
Once the Notice of Appeal is filed, a lawyer from the Department of Justice (the “DOJ”) is assigned to be the lawyer on the other side. They represent the CRA, and their first job is to reply to the Notice of Appeal. Within a number of weeks of filing the appeal, the taxpayer should receive a reply from the DOJ lawyer, which sets out the CRA’s case.
In all matters other than the assessment of gross negligence penalties, the onus is on the taxpayer to prove their case. Unlike with the CRA auditors, in court there are a lot of other means of justifying an expense without actually having the original receipt. While the CRA can let their assumptions prevail, what has to prevail in court is evidence. And even a taxpayer’s own testimony about an expense is evidence. And evidence, if credible, should prevail over assumptions. That is what we count on.
In the time following the filing of the Notice of Application, the taxpayer and their counsel have the task of building the case and determining exactly what kind of evidence is available to support the case.
If a taxpayer is going through general procedure, a book of documents outlining each party’s evidence is exchanged. And also with the general procedure “examinations for discovery” follow the sharing of books of documents, and entail sitting down in a court reporter’s office to answer dozens of questions from the other side. Each party gets to examine one witness and ask them dozens of questions to learn about their case and what they know.
After examinations are complete, each party should have a very good idea of the other side’s position and evidence. This is the prime time to settle a case. Those cases which do not settle at this point are then “set down” (scheduled) for trial. And while I always take the earliest position to settle a client’s case out of court, it is usually only after the examinations have come to a close that the DOJ lawyer is willing to discuss a settlement. And a settlement is not like haggling for a used car. It is not a battle of negotiating skills. Rather the settlement has to be based on principles – It has to be a “principled settlement.” For example, if the taxpayer has great evidence on three out of four issues and the fourth one is a bit of a stretch, a principled settlement may be for the CRA to concede the three points and not the fourth.
In my experience I have found that the vast majority (well over 90%) of my cases settle in a client’s favour prior to going to trial. This is because most cases which end up before the court are there not because of an issue with respect to the interpretation of a section of the ITA, but because of trivial matters like a bad audit. Once the taxpayer’s counsel is able to show the DOJ convincing evidence to support the taxpayer’s position that the auditor was wrong, there is usually no reason why the DOJ counsel would want to go to trial. And voilà, a settlement.
Those cases going to trial are generally where the evidence may not be so clear or where a settlement could not be agreed upon or where the case could go either way and is contentious. And while many trials can be done in a day or less, other more complicated trials can last for days. And on top of that, it is common to have to wait weeks for the judge to issue their decision. Of course, sometimes the outcome is clear and the judge will render a verdict on the spot. But expect to wait for a decision. And depending on which party wins their case in court, the judge may award costs to the winning party. And while these “costs” generally don’t cover a taxpayer’s true legal costs, they are always helpful.
Informal procedure
There is no fee to file an appeal under the informal procedure and there is also no need for a corporation to have a lawyer as a representative. Many litigants choose to self-represent, while others have their accountant or lawyer represent them.
Once the notice of appeal has been filed with the court, the taxpayer will receive an acknowledgement of receipt. Soon thereafter the “reply” to the notice of appeal will be sent to the taxpayer from the DOJ counsel. The reply sets out the CRA’s case and according to rule 6(1) of the Tax Court of Canada Rules (informal procedure), the reply will include the following elements:
- Any facts that are admitted (they usually admit very few facts presented by the taxpayer)
- The facts that are denied (they usually disagree with most of the facts)
- Any facts of which the respondent has no knowledge and puts in issue
- The findings or assumptions of fact made by the Minister when making the assessment.
- Any other material facts
- The issues to be decided
- The statutory provisions relied on
- The reasons the respondent intends to rely on
- Relief sought
Following the receipt of the reply, the taxpayer may choose to provide the DOJ lawyer with a book of documents outlining their evidence, although it is not necessary. It may seem counterintuitive to provide all of one’s evidence right away, but in fact it will increase the chances of an early settlement of the case. Once the DOJ has all the documents, I recommend that all appellants (taxpayers) or their representatives make a concerted effort to settle the case through meaningful dialogue with the DOJ lawyer. There is plenty of time to come to a settlement as the court typically issues a Notice of Hearing six months after the reply is filed. This Notice of Hearing advises the parties of the time and place for the hearing of the matter.
Being simpler cases, and not precedent setting, typically, informal case decisions are often rendered by the judge at the end of the day and parties do not have to always wait lengthy periods of time for a written judgment.
General procedure
For a corporation, unless it has received permission of the court to allow an officer to represent it, there is no choice but to engage a lawyer as its representative. For those who still insist on self-representing (sole proprietorships or corporate officers/directors), they are well-advised to become very knowledgeable about all the rules governing the general procedure. The court will expect that self-represented litigants in the general procedure are able to conduct the case efficiently without being a drain on court resources. As such, self-represented litigants will not receive much assistance from the court or its registrars. And unlike the informal procedure, the general procedure has many more specifically-timed steps. To navigate the system, an appellant must know precisely what is expected of them and when.
At the time of filing a notice of appeal, appellants must pay a fee ranging from $250 to $500, depending on how much tax is being disputed. The fee is $250 for matters under $50,000, $400 for $50,000 to $149,999 and $500 for $150,000 and up.
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