Federal Court Orders CRA to “Reconsider” an Assessment: Milgram Foundation v Canada (Attorney-General), 2024 FC 1405

Federal Court Orders CRA to “Reconsider” an Assessment: Milgram Foundation v Canada (Attorney-General), 2024 FC 1405

Introduction

“I do not think so ill of our jurisprudence as to suppose that its principles are so remote from the ordinary needs of civilised society and the ordinary claims it makes upon its members as to deny a legal remedy where there is so obviously a social wrong.”

—Lord Atkin[1]

In a remarkable victory for taxpayers, in Milgram Foundation,[2] the Federal Court quashed a decision from the Canada Revenue Agency (“CRA”)[3] to assess a taxpayer as an “abuse of process”. The Court ordered the CRA to “reconsider” the decision to issue the assessments and “to take such actions as are necessary to give effect to the reconsidered decision”.

The decision has popped eyes among tax counsel given that for over forty years, the Federal Court of Appeal (“FCA”) has zealously guarded the exclusive jurisdiction of the Tax Court of Canada (“TCC”) to hear appeals of assessments. Accordingly, the FCA has held that taxpayers cannot seek judicial review in Federal Court of decisions to issue assessments or even of decisions to collect on assessments—such challenges generally being characterised as a “collateral attack” on the assessment itself.[4]

However, notwithstanding this exclusivity, the TCC does not actually have the jurisdiction to deal with all issues relating to assessments, given that a separate line of jurisprudence has limited the TCC’s jurisdiction in an appeal of an assessment to determining the “correctness” of the amount of tax, interest and penalties assessed by the Minister.[5] Accordingly, the case law has consistently held that TCC has no jurisdiction to vacate an assessment on the grounds—for example—of discretionary decisions by the CRA that affect the assessment,[6] of abusive or unreasonable conduct by the CRA in the audit process leading up to the assessment,[7] or that the taxpayer reasonably relied on CRA guidance in planning their affairs.[8]

The combined results of these two lines of jurisprudence is, essentially, that revenue officials can act with impunity vis-à-vis a taxpayer and rely on the limited jurisdiction of both the Federal Court and the TCC to escape judicial oversight.[9]

The Court had other ideas, however, finding that CRA’s decision to assess the taxpayer—even for amounts that may well have been owing under the ITA—was taken in such an egregiously unfair and abusive manner that a judicial remedy was required. If the decision is upheld on appeal, it will offer a new—and potentially very welcome—avenue to seek to hold the CRA accountable for its conduct in its dealings with taxpayers.

The Facts

Milgram Foundation concerned a Liechtenstein foundation (the “Foundation”) constituted in 1964 that originally did not file Canadian tax returns. However, in 2015, the Foundation determined that it might be a deemed resident of Canada for tax purposes and thus submitted a disclosure application under the CRA’s voluntary disclosure program (“VDP”) covering 2003-2014. The CRA determined the application to be in compliance with the VDP and assessed the Foundation accordingly—waiving penalties and apparently reducing arrears interest in accordance with VDP guidelines. The CRA audited the Foundation’s 2003-2014 taxation years and found no errors in its tax returns.

Over two years later—in 2018—the CRA alleged that the Foundation had made “misrepresentations” and proposed to issue further assessments, with interest and penalties, covering the 1998-2002 taxation years. Since the CRA had no documents or records with respect to those years, it proposed to estimate the Foundation’s income with reference to its historical rate of return and Swiss long-term interest rates.

The Foundation sought judicial review of the CRA’s proposal, claiming that it had made no misrepresentations to the CRA, and that the CRA’s decision to assess years prior to 2003—three years after accepting the Foundation’s voluntary disclosure and confirming that it contained no errors—was unreasonable, abusive and also contrary to an implied term of a binding agreement that came into existence when the CRA accepted the Foundation’s voluntary disclosure.

While the judicial review proceedings were pending, the CRA assessed the Foundation’s 1998-2002 taxation years, apparently in accordance with its proposal. The Crown thus argued that the Federal Court had no jurisdiction to entertain the Foundation’s judicial review application, given that its assessments were presumed to be valid and binding and could be only vacated or varied by the TCC.[10]

The Decision

The Federal Court held that there was “insufficient evidence” to support the Foundation’s argument that a binding contract came into existence when CRA accepted the Foundation’s voluntary disclosure. Accordingly, it rejected the Foundation’s argument based on a breach of contract.[11]

On the other hand, the Court accepted the Foundation’s argument that the CRA’s decision to assess the 1998-2002 taxation years constituted an “abuse of process”. Central to this conclusion was the Court’s finding of fact that the Foundation made no “misrepresentations” in its voluntary disclosure. Instead, the Court found that the CRA “reneged” on its own prior decision by “impugning, without any justification” the Foundation—an act that, “violate[d] the community’s sense of fair play” and “amount[ed] to an abuse of power”.[12] As the Court noted:

[102]    In other words, the Minister attempted to pin her decision to reassess on an alleged misrepresentation based on information that was in fact disclosed by the Applicant at the time of the Disclosure. Devoid of any justification, the Decision is arbitrary; it violates the community’s sense of fair play, as well as the principles of judicial economy, consistency, finality and the integrity of the administration of justice. It therefore amounts to an abuse of power.

With respect to its jurisdiction to hear the Foundation’s application, the Court rejected the Crown’s argument that the Foundation’s application constituted a “collateral attack” on the 1998-2002 assessments, since the TCC’s jurisdiction is limited to the correctness of an “assessment”, meaning “the amount of tax at issue, not the process that resulted in the determination of that amount”.[13] Consequently, the only place where a taxpayer can challenge a discretionary decision of the CRA leading up to an assessment was in the Federal Court:

The appropriate forum for appealing the tax assessment itself, the amount of taxes owing or the product, is before the Tax Court. Whereas to challenge the Minister’s discretionary decision—her conduct, or process leading up to the tax assessment—the taxpayer should seek judicial review at the Federal Court.[14]

The Court also noted that the CRA has discretion to waive a tax liability by simply “decid[ing] not to assess [it], in the absence of sufficient information”.[15] The Court gave weight to eight affidavits proffered by the Foundation from tax lawyers who have experience with the VDP—all of whom testified that they had never known the CRA, after accepting a voluntary disclosure, to re-open a case and assess older years on an estimated basis.[16]

The Court also noted that the VDP is “a tool to promote compliance with Canada’s tax laws”[17] that operates by allowing the CRA “to reduce a taxpayer’s tax burden if the taxpayer voluntarily acknowledges their past failures to comply with Canadian tax obligations and agrees to rectify their noncompliance according to the program’s guidelines and requirements”.[18] The Court noted that is settled law that the Federal Court can review decisions from the CRA to reject VDP applications as incomplete, such that it would be “a tad incongruous” to hold that the Federal Court had no jurisdiction to review a decision from the CRA to essentially treat a VDP application as incomplete three years after deeming it complete.[19]

In terms of remedy, the Court acknowledged that it had no jurisdiction to vacate tax assessments. On the other hand, it held that it had the power to quash discretionary decisions from the CRA and require that they be reconsidered. It thus issued an order quashing the CRA’s decision to reassess the Foundation’s 1998-2002 taxation years and ordering the CRA to reconsider that decision and “to take such actions as are necessary to give effect to the reconsidered decision”.

Observations

The decision represents a resounding victory for fairness in tax administration—particularly if one assumes that the CRA should not be able to gaslight taxpayers with false accusations of dishonesty, especially in the context of a long-established program designed to bring non-compliant taxpayers back into compliance.

On the other hand, the decision also runs contrary to almost four decades of case law that has held that: (a) the Federal Court has no jurisdiction to hear challenges to assessments or legal consequences resulting from assessments, and that (b) abusive or illegal conduct from the CRA cannot affect the validity of an assessment. Federal Court judges have actually attempted several times over the years to challenge these principles, but have been repeatedly shut down by the FCA (as well as by the Supreme Court of Canada last June in Iris Technologies).[20] Accordingly, one may expect Milgram Foundation to face strong headwinds on appeal, although much may depend on whether the FCA judges are as dismayed by the conduct of the CRA as the Federal Court judge was.

Indeed, much of the Court’s analysis—both on the jurisdictional issue and the merits—was based on the CRA’s disingenuous attempt to justify assessing the 1998-2002 taxation years on the basis of supposed “misrepresentations” in the Foundation’s VDP disclosure. The CRA’s unapologetic dishonesty formed a major part of the Court’s conclusion that the CRA’s decision to assess the 1998-2002 taxation years was arbitrary and abusive. One is left to wonder, however, whether the Court would have reached the same conclusions had the CRA simply informed the Foundation in 2016, openly and candidly, that upon further consideration and notwithstanding the fact that the taxpayer made a compliant voluntary disclosure and cooperated fully with the CRA’s subsequent audit, it believed it would be appropriate to go further back in time with respect to the Foundation’s tax liabilities. If it is assumed that CRA had never, in fact, committed not to assess taxation years prior to 2003, the Court would have likely had a harder time concluding that the CRA had acted in an abusive and arbitrary manner by doing so. And indeed, if Milgram Foundation survives appeal and the CRA is obliged to “reconsider” its decision to assess the Foundation for its 1998-2002 taxation years after having accepted the Foundation’s voluntary disclosure, it may well purport to reach the same decision for more defensible reasons, thus bringing the parties back to Court.

In this regard, it is potentially instructive to contrast Milgram Foundation with the somewhat similar case of Gauthier back in 2017.[21] Gauthier involved a taxpayer with an undisclosed bank account in the Bahamas dating back 1978. The taxpayer made a voluntary disclosure in 2015, which was accepted and resulted in the reassessment of unreported income from 2005-2014, with waiver of penalties and reduction of arrears interest in accordance with the parameters of the VDP in effect at the time. Over a year later, however, the CRA commenced an audit of the taxpayer’s 1980-2004 taxation years, which led to a proposal to assess significant additional taxes and penalties with respect to the Bahamas bank account. The taxpayer sought judicial review of the proposal—specifically a writ of prohibition against the issuance of any assessments of his taxation years prior to 2005. The Federal Court denied a request for an interlocutory injunction largely on the grounds that the taxpayer would have a possible remedy in the TCC (which, as discussed above, would necessarily be limited to the quantum of tax owing in each year). Gauthier produced a fair amount of consternation among tax practitioners who expressed concerns that for the CRA to accept voluntary disclosures and then institute aggressive audit action with respect to earlier periods undermined the effectiveness of the VDP—especially given that under the ITA, the CRA is only permitted to waive interest and penalties arising in the 10-year period preceding the application.[22]

Taxpayers considering voluntary disclosures with respect to situations dating back extended periods of time need to consider whether, even if their disclosure is accepted, it will completely regularise their affairs with the CRA. Professional guidance should always be sought on how best to ensure that a voluntary disclosure is accepted and achieves finality for all past periods of non-compliance.

[1] Donoghue v Stevenson, [1932] AC 562 at 583.
[2] Milgram Foundation v. Canada (Attorney General), 2024 FC 1405 (“Milgram Foundation”).
[3] The CRA exercises, by delegation, powers conferred upon the Minister of National Revenue (“Minister”) by the Income Tax Act, RSC 1985, c 1 (5th Supp) (the “ITA”) and other pieces of fiscal legislation. For practical purposes, the terms “CRA” and “Minister” are largely interchangeable when discussing tax administration.
[4] For a review of the case law through to 2013, see Guy Du Pont & Michael H. Lubetsky, “The Power to Audit is the Power to Destroy: Judicial Supervision of the Exercise of Audit Powers” (2013) 61:3 Canadian Tax Journal 81, 61:3 (2013). This said, in Canada (National Revenue) v Sifto Canada Corp, 2014 FCA 140, paragraph 25, the FCA suggested, in the context of dismissing a motion to strike, that the Federal Court could issue an order precluding the Minister from enforcing a penalty assessment or collecting a tax debt if the Minister acted unreasonably in assessing it.
[5] This said, it is long-settled law that the TCC’s jurisdiction includes the ability to vacate an otherwise correct assessment on the grounds it was issued outside of the statutory time period during which the Minister is permitted to issue it.
[6] See generally the Supreme Court of Canada’s recent decision in Dow Chemical Canada ULC v. Canada, 2024 SCC 23 (“Dow Chemical”), which is discussed in more detail in the McMillan Bulletin “No ‘One-Stop Shopping’ to Resolve Tax Disputes” (July 30, 2024).
[7] The leading case on this principle is Main Rehabilitation Co v Canada, 2004 FCA 403, leave to appeal to the SCC ref’d [2005] 1 SCR xii. For discussion, see generally Du Pont & Lubetsky, supra note 4 and Michael H. Lubetsky, “The Fractured Jurisdiction of the Courts in Income Tax Disputes,” in Tax Disputes in Canada, Canadian Tax Foundation (2022) at 46-47.
[8] Ibid at 20-21 (review of jurisprudence).
[9] Civil suits against for damages resulting from abusive or negligent conduct during an audit remain possible, and there have been a number of recent victories for taxpayers, such as Ludmer c Attorney General Canada, 2020 QCCA 697, leave to appeal to the SCC refused (CRA ordered to pay damages of $4,844,658). However, prosecuting such civil suits can be very costly and present a number of procedural and evidentiary obstacles that limit their effectiveness.
[10] ITA, subsection 152(8).
[11] Milgram Foundation, supra note 2 76-84.
[12] Ibid 91.
[13] Ibid 44, 68-69.
[14] Ibid 46.
[15] Ibid 54, 60.
[16] Ibid 57-60. The motion from the Crown to strike these affidavits was previously dismissed (Milgram Foundation v. Canada (Attorney General), 2023 FC 1499).
[17] Milgram Foundation, supra note 2 16, 17.
[18] Ibid 20.
[19] 37 (“I find it a tad incongruous that had the Minister, from day one, refused to accept to the Applicant’s Disclosure as voluntary and complete, that decision would have been subject to judicial review. Yet, since the Minister decided to reverse her own decision three years down the road, she now argues the matter lies outside of this Court’s jurisdiction.”)
[20] See Parsons v MNR, 83 DTC 5329 (FCTD), rev’d 84 DTC 6345 (FCA); Optical Recording Laboratories Inc v The Queen, 86 DTC 6465 (FCTD), rev’d 90 DTC 6647 (FCA); Devor v MNR, 88 DTC 6370 (FCTD) rev’d 93 DTC 5098 (FCA); Canada (Attorney General) v Webster, 2003 FCA 388, leave to appeal to the SCC ref’d; Tele-Mobile Company Partnership v Canada (Revenue Agency), 2010 FC 839, rev’d 2011 FCA 89, leave to appeal to the SCC ref’d; Iris Technologies Inc. v Canada (National Revenue), 2021 FC 597, rev’d 2022 FCA 101, rev’d 2024 SCC 24.
[21] Gauthier v. Canada (National Revenue), 2017 FC 1173. Note that according to the Federal Court online docket, the applicant discontinued the judicial review proceeding soon after his motion for an interlocutory injunction was dismissed.
[22] ITA, subsection 220(3.1). For a discussion of this 10-year limitation, see Michael H. Lubetsky, “Bending Limitation Periods to Achieve Equity” (2023) 71:1 Canadian Tax Journal 281.

by Michael H. Lubetsky

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2024