Resolving tax disputes, A Canadian primer

National revenue authorities – particularly in Western countries – have expanded their respective powers to enforce tax law compliance and collection. Canada is one of the more aggressive nations when it comes to this subject. The three main levels of government that deal with tax are national taxes (in many jurisdictions commonly referred to as federal taxes); provincial taxes (also known in some jurisdictions as state taxes); and municipal (or local) taxes. At every level, the Canadian taxpayer has the right to challenge the government’s assessing position.
 
The focus of this article is the taxpayer’s right to challenge a federal tax assessment. The two major Canadian federal tax acts are the Income Tax Act[1] and the Excise Tax Act[2] (more commonly referred to as the Goods and Services Act, the “GST” and in other jurisdictions known as the Value Added Tax (or VAT, for short).
 
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The word “taxpayer” has a broad definition, and it includes both individuals and corporations. At the Federal level, the Canada Revenue Agency (the “CRA”) has responsibility for the administration and enforcement of the taxing statutes. The Income Tax Act is a voluntary self-assessing law. It is presumed that all taxpayers will comply correctly with the requirements of the taxing statutes. The CRA carries our random and targeted audits to ensure taxpayer compliance.
 
A taxpayer can be assessed as filed or be subject to an audit resulting in either an assessment or reassessment. As part of the audit process, the taxpayer is given the opportunity to challenge the CRA auditor’s initial findings. Even at this stage of the process, it is absolutely in the taxpayer’s best interests to retain the help of a tax expert in order to properly and effectively interface with the CRA auditor. Often taxpayers do not know how to properly self-represent, and this reality can just lead to greater costs in every respect. In some situations, a taxpayer may be able to resolve the tax dispute at the audit stage. However, this is not always the case for numerous reasons. Hence, the auditor completes the audit process and directs that a Notice of Assessment or Notice of Reassessment be issued to the taxpayer.
 
Once issued, the taxpayer has a limited amount of time as prescribed by statute to challenge the Notice of Assessment or Notice of Reassessment by filing a Notice of Objection. The Notice of Objection is handled internally by the CRA. However, the matter is assigned to a different section of the CRA (known as appeals division) and it is assigned to an appeals officer that deals with the taxpayer’s Notice of Objection. Thus, there is independence from the initial CRA audit, and its work and determination. The objection process can take months to years. In the end, the taxpayer’s Notice of Objection may be allowed in full, varied or confirmed as correct by the CRA appeals officer.
 
The taxpayer can challenge the outcome of the Notice of Objection by filing a Notice of Appeal with the Tax Court of Canada. The Notice of Appeal contains the facts, the issue or issues that are in dispute, the sections of the taxing statute that are relevant and the legal reasons why the Court should allow the taxpayer’s appeal. On behalf of the Minister of National Revenue (“Minister”), a Federal Department of Justice lawyer specialising in tax litigation files a Reply outlining the Minister’s opposing position. This Reply responds to the facts and law as stated in the Notice of Appeal. The Reply sets out the Minister’s assumptions of fact that directly relate to the assessing or reassessing position, the issues as the Minister’s counsel sees it, and the reasons why, in law, the CRA’s assessing or reassessing position was correct. In sum, the Notice of Appeal and the Reply frame the legal and factual basis for the differing positions of the parties.
 
The actual Court process can be lengthy. Some tax cases can take years to complete. Once the Tax Court produces its reasons for judgment and decision, it is open to either party to further challenge the Tax Court outcome by filing an appeal with the Federal Court of Appeal. This is not a regular occurrence, but it does happen. Finally, a further Court challenge is possible following the decision and reasons for judgment of the Federal Court of Appeal. A taxpayer can file a Leave Application with the Supreme Court of Canada. Leave Applications are not commonplace and very few tax cases are ever heard by the Supreme Court of Canada.
 
This article has focused on the process of challenging a civil assessment or reassessment at the federal tax level. It is worth noting that in the event a taxpayer is charged with a criminal tax offence such as tax evasion or fraud, a whole separate regime and process takes place including the fact that such matters are heard in the provincial court system (in other words, not the Tax Court), and the Criminal Code of Canada[3] and the respective provincial procedural rules come into play.
 
As this brief primer suggests, taxpayers would be well advised to retain professional expertise when dealing with the Canadian revenue authority, be it in the civil or criminal tax context.