Canada: Taxpayer Remedies: Canada v. United States

In Leroux v. Canada Revenue Agency 2012 BCCA 63 (CanLII), a British Columbia Supreme Court judge ruled that the Canada Revenue Agency ("CRA") owed a duty of care to the plaintiff taxpayer and that in some instances CRA acted negligently. This included the imposition of gross negligence penalties for alleged behaviour justifying CRA's reassessment of statute-barred years.

The Leroux decision was the first time a Canadian court found a duty of care to exist in a claim against CRA. However, the judge also ruled that the plaintiff did not establish causation and was not entitled to damages or costs. According to the BC court, it was not clear that the actions of CRA resulted in the plaintiff's massive damages. Most experienced tax practitioners would disagree. And since the Leroux decision, Canadian courts have varied on the duty of care question. It is still not firmly established in Canadian law; a Supreme Court of Canada decision is necessary.

Taking into consideration the differing political contexts of Canada and the United States, you might assume that the United States, because of its small government bent, provides greater recourse for the injured in the area of tax law and administration. If so, you are correct. Canadian taxpayers are relatively limited in their ability to obtain compensation for damages as a result of the actions of CRA. And in the few successful cases, CRA has fought the taxpayer every step of the way. In contrast, Americans can avail themselves of multiple, yet imperfect, options if damages are suffered due to actions of the Internal Revenue Service ("IRS").

Canada

A frustrating example, for a democracy, is taken from the Auditor General of Canada's review of CRA operations in the 2018 tax year. The data reviewed in that particular year demonstrated that CRA auditors ended the majority of their audits near CRA's tax revenue target deadlines. In other words, if a taxpayer was mid-audit and the file was closed by the auditor before being given the chance to advocate their position, the tax assessment would most likely be inaccurate and more often than not, inflated. A common CRA occurrence at any time. According to the Office of the Auditor General:

The majority of audit files were closed between December and March, coinciding with the Canada Revenue Agency's deadline to meet its annual targets for additional revenues by 31 March.

Unfortunately for taxpayers, subsection 152(8) of Canada's Federal Income Tax Act provides that a tax assessment, subject to dispute, is "deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto."

Tax & Federal Court

The Tax Court of Canada has the sole jurisdiction to consider the correctness of an assessment of taxes. Its jurisdiction does not go beyond that. A taxpayer cannot seek damages in Tax Court. Therefore, the Tax Court will not consider if the process that led to the impugned tax assessment was flawed or negligent, outside of when awarding costs. In the lower Federal Court, a taxpayer can seek judicial review of a discretionary decision of the CRA, such as the denial of a voluntary disclosure. However, the court does not have the jurisdiction to consider the correctness of a tax assessment. In addition, a judicial review decision in favour of a taxpayer results in the matter being sent back to CRA for reconsideration. It is not a ruling on the correctness of the decision but of the manner in which the discretionary decision-making process was undertaken.

CRA Complaints

Canada has a Taxpayer Bill of Rights, not legally binding, and CRA has relatively recently implemented what is purported to be a more stringent complaints process. In the past, complaints about CRA employees were made directly to their manager or team leader and were, anecdotally, more often than not insufficiently addressed. CRA currently has a separate division to address taxpayer complaints. A complaint can even be submitted online. Nevertheless, complaints are still managed internally, and absent extreme circumstances, will likely not result in much more than an apology and a promise that the impugned employee will follow the policy and law as obligated.

In some cases, it is possible to leverage a positive audit or objection outcome based on the actions of the auditor or appeals officer. For example, a CRA Research & Technology Advisor (SR&ED auditor) once remarked during a audit meeting that there was "no more SR&ED in software." The SR&ED claim was subsequently accepted on his team leader's insistence.

Office of Taxpayer's Ombudsperson

Canada's Office of Taxpayer's Ombudsperson is an independent organization to which a taxpayer can submit a complaint if they do not feel it has been properly addressed by the CRA complaints division. However, for example, if an auditor closes a file to meet a government-imposed revenue deadline, resulting in an inflated and unsubstantiated tax assessment, and the respective CRA collection activities destroy a business, there is little the Ombudsperson can do to compensate for the damages.

Civil Court

To achieve compensation for damages incurred as a result of the CRA, a taxpayer must seek remedy in a civil court, an expensive proposition considering opposing counsel will come from the taxpayer funded Department of Justice. Moreover, Canadian courts have failed to decisively uphold a duty of care owed to taxpayers by the CRA. Accordingly, CRA employees can and do act with impunity in many cases. Only in the proven extreme can a taxpayer file a claim and be somewhat optimistic that they may be reimbursed for damages incurred.

A more recent case was decided in the Quebec Court of Appeal in Restaurant Le Relais de Saint-Jean inc. vs. Quebec Revenue Agency, 2020 QCCA 823 (CanLII). The plaintiff's suffered massive financial losses and experienced personal stress due to an incorrect and inflated audit assessment of Quebec Sales Tax (like GST/HST, deemed to be held in trust by the taxpayer for the government and therefore collectible even if in dispute). Despite the assessment being proven incorrect, a business was destroyed in the interim. Leave to appeal to the Supreme Court of Canada was denied (Restaurant Le Relais de Saint-Jean inc., Et al. vs. Quebec Revenue Agency, et al., 2021 CanLII 37634 (SCC)).