In the recent case of Noran West Developments Ltd. v. The Queen1, the Tax Court of Canada (TCC) quashed the appeal because the appellant had waived its right to object or appeal from the reassessment in issue. Noran should serve as a warning to taxpayers to be cautious about limiting their appeal rights during the dispute resolution process.
In Noran, the appellant's sole shareholder, Mr. Ayers, signed a waiver confirming that if the CRA reassessed in accordance with the terms set out in the waiver the appellant would waive all appeal rights respecting:
- Income adjustments for the disposition of certain condominium units; and
- The application of gross negligence penalties.
Mr. Ayers' affidavit asserted that he believed the waiver was not a complete resolution of all outstanding issues, but only dealt with the fair market value of the condominium units. In his view, other issues remained outstanding, including whether:
- The appellant had transferred beneficial ownership of certain condominium units to Ayers;
- Ayers held title as a bare trustee for the appellant;
- GST was payable when the condominium units were transferred; and
- Gross negligence penalties should be assessed.
After providing the waiver, the appellant was reassessed to reduce both its income and a related gross negligence penalty. Despite the waiver, it appealed the reassessment to the TCC. The Crown argued that the appeal was barred because of the waiver, relying on ss. 169(2.2) of the Income Tax Act (Canada) (Act), which provides that a taxpayer may not appeal an assessment where it has waived in writing its rights of objection or appeal.
The appellant raised a number of arguments, as follows:
- The waiver was not an agreement in writing because the appellant's name was not on the waiver and it could not be identified as a party to the agreement;
- The reassessment made pursuant to the agreement was not enforceable because it was not justifiable on the facts and law;
- There was no meeting of the minds or mutual understanding of the agreement;
- The agreement was unreasonable and unconscionable; and
- Even if there was an agreement, the appellant was appealing issues not covered by the waiver.
The TCC gave short shrift to the first argument, holding that the requirement that the waiver be in writing merely distinguishes it from an oral waiver. Whether the terms of the waiver accomplish their purported goals is a matter of interpreting the waiver to ascertain the parties' intentions as expressed in the document, together with other evidence concerning the relevant circumstances. In this case, the waiver was held to apply to the appellant since it appeared that the parties intended for the appellant to be bound.
The TCC also did not accept the appellant's second argument, that the reassessment made pursuant to the agreement was not in accordance with the law. The reasoning on this point was difficult to comprehend. The TCC seemed to conclude that although a previous reassessment may not have been in accordance with law for a number of reasons, the agreement to vary that reassessment was not contrary to the Act. This reasoning raises the question of whether the Court would or should approve settlements of tax appeals involving adjustments of otherwise illegal reassessments and whether an enhanced cost award might be allowable in the same circumstances. It would be interesting to see whether future cases dealing with the legality of settlements and cost awards further consider the effect of adjustments to otherwise illegal underlying reassessments.
The third argument, that there was no agreement because the parties did not share a mutual understanding of the waiver, was also rejected on the facts. The TCC found it difficult to accept that Mr. Ayers did not understand the scope of the waiver, or that it applied only to the appellant, and drew a negative inference from the dearth of evidence adduced on this point. The appellant argued that a miscalculation of the penalty in the reassessment issued pursuant to the agreement vitiated the agreement. However, the TCC held that although an appeal from a reassessment made after a waiver is permitted, it is only permitted to the extent of the inconsistency and such a minor error could not justify entirely repudiating the waiver.
The TCC equally found no merit in the argument that the waiver was unconscionable. The TCC held that this type of argument seeks relief against unfair advantage gained by a stronger party's unconscionable use of power against a weaker party, which could not be established by the evidence.
Finally, the TCC considered the argument that the appellant was appealing issues not covered by the waiver. The appellant argued that the waiver should be strictly construed against the Minister and that any ambiguity must be resolved in the appellant's favour. The TCC rejected this approach, holding that a waiver of appeal rights should be interpreted the same way as a waiver of the normal reassessment period, and that the interpretative task is to "seek to ascertain the intention of the parties as expressed in that document together with any relevant circumstances for which evidence is available." The TCC's approach was to search for intention in the waiver in the same way as for any contract on the basis of the parties' manifest intention. The TCC quoted from contract case law which held that regardless of a person's purported intention, if he conducts himself in a manner that a reasonable man would believe he was agreeing to the proposed terms of the agreement, and the other party enters into an agreement upon that belief, the parties are bound. Ultimately, the TCC held that the waiver was clear and unambiguous and an objectively reasonable person would have concluded that the appellant would not seek to challenge the gross negligence penalty.
One might reasonably wonder why a taxpayer would waive its objection and appeal rights. Presumably, the waiver would be given in the context of a give-and-take resolution of a tax dispute. Therefore, it is reasonable that the CRA would seek to ensure that any negotiated resolution of a tax dispute is final, rather than making concessions to resolve a dispute only to have the taxpayer subsequently appeal the reassessed amount. Consequently, an appeal waiver is similar to a waiver of the normal reassessment period, meaning that it is not necessarily a concession made by the taxpayer, but rather is a mutually agreeable arrangement with the CRA made in the course of seeking to resolve a tax dispute2. The Noran judgment makes it clear that resiling from a waiver of appeal rights may be difficult and taxpayers would therefore be well advised to provide such waivers cautiously.
1.2012 TCC 434 (Noran).
2.CRA officials have stated that a waiver of the normal reassessment period is not granted by the taxpayer, but to the taxpayer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.