Today, no one seems to doubt the existence of tax havens. But tax hell... does it exist? Based on the testimony of taxpayers and tax practitioners, one might wonder. Reports of abuse and misconduct by the tax authorities seem increasingly common.
The fierce fight against tax evasion led by Canadian tax authorities in recent years seems relevant to this issue. The pressure on tax officials to bring money into state coffers is enormous. To achieve its tax recovery objectives, is the taxman slowly turning into a big bad wolf, taking a bite out of everything that happens to fall under his teeth, indiscriminately and sometimes even without grounds?
It would probably be unwise to answer that question positively. Having said that, in the presence of gross negligence or abusive behaviours by tax officials, one should not refrain from denouncing the situation. Some taxpayers go even further and claim damages against the state. This is a treacherous path. Few have succeeded with such claims. Tenacity and stamina are sometimes the only tools available to taxpayers who engage the Canadian tax authorities in this way.
At the federal level, the state is treated as a person for any damage caused by its servants. However, it is not liable for anything done or omitted in the exercise of authority conferred by statute. The jurisprudence is uncertain regarding acts or omissions of officials of the Canada Revenue Agency (CRA). While many taxpayers have been authorized by judgments on interim motions to maintain their lawsuits against the state, judgments on the merits are rare. Damages have been awarded in the cases of Chhabra v. The Queen and Longley v. MNR.
In Chhabra, the state was ordered to pay the taxpayer $1,000 in general damages and $10,000 in exemplary damages for abuse of power committed with malice by CRA agents. The agents failed in their responsibility to uncover the truth when they used tainted documents against the taxpayer, after the taxpayer had voluntarily surrendered the documents and advised that they may be suspect. Collection agents of the CRA also abdicated their responsibility by taking recovery action against the taxpayer on the grounds that an assessment had been issued against him, while totally ignoring the pleas and the particular circumstances of the taxpayer's situation, in clear violation of the CRA's guidelines. In addition, the agents knew that the assessment would be "wiped out" and replaced by a new assessment for an unknown amount. Finally, the agents were dishonest and took malicious action when they garnisheed 75 percent of the taxpayer's gross monthly professional income. Provincial legislation, though not applicable to the situation but mentioned by the court for guidance, permitted a maximum garnishment of 30 percent.
In Longley, the state was ordered to pay the taxpayer $5,000 in general damages and $50,000 in punitive damages. The taxpayer had put forward a plan to benefit from the federal political contribution tax credit. The CRA refused to acknowledge the legitimacy of the plan, despite knowing the plan did not offend the Income Tax Act. Consequently, the taxpayer not only lost an opportunity to enhance his political reputation, but also suffered damage to his political reputation. In addition, the CRA was held to have "intentionally misled" the taxpayer when it falsely denied that it had received legal advice that the taxpayer was on good ground. The court held that the CRA's response to the taxpayer's requests amounted to misfeasance in public office.
Claims for damages based on the negligence of CRA agents were rejected in the cases of Canus Fisheries Ltd. v. Canada and Leighton v. Canada. In both cases, the courts concluded that CRA officials do not owe any duty of care to taxpayers. In Leighton, the court stated: "There are residual policy considerations that would militate against recognizing a duty of care...[as] the effect of recognizing a duty of care would conflict with the CRA's broad duties under the Income Tax Act to ensure that all taxes lawfully owing are correctly assessed and collected."
In contrast, claims for damages based on the negligence of CRA agents were recently allowed to continue in Leroux v. Canada Revenue Agency, Gordon v. The Queen and McCreight v. Canada.
In Quebec, provincial liability for acts or omissions of Revenu Québec and its agents is governed by the Civil Code of Québec. Damages have been awarded in the cases of Construction M.D.G.G. Inc. v. SMRQ (M.D.G.G.), Joncas v. Agence du Revenu du Québec and Groupe Énico Inc. v. Agence du Revenu du Québec.
In M.D.G.G., Revenu Québec was ordered to pay the taxpayer $67,863 as general damages, $10,000 as reimbursement of legal fees and $5,000 for trouble and inconvenience after having recovered penalties that the court had ordered cancelled. In its defense against the claim for damages, Revenu Québec argued that it did not have to comply with the terms of the judgment cancelling the penalties, as that judgment contained an error. The court held that Revenu Québec's proper course was to appeal the judgment, rather than to disregard it. The judgment awarding the damages is currently under appeal.
In Joncas, the court cancelled assessments issued against the taxpayer and held unequivocally that Revenu Québec had committed a "flagrant foul." An auditor had taken refuge behind premises that he knew were false and had consistently refused to see what he ought to have seen before issuing the assessments. Following this judgment, the taxpayer sent a formal demand to Revenu Québec requesting the payment of $38,664 as reimbursement of court fees and disbursements, and for damages. When Revenu Québec refused to comply with the demand, the taxpayer sued. The court concluded there was an abuse of legal proceedings by Revenu Québec and ordered the reimbursement to the taxpayer of legal fees and disbursements in the amount of $28,634. It also awarded the taxpayer the reimbursement of $995 in notary fees incurred in the preparation of a mortgage that the taxpayer had to take out on his home to cover legal fees, as well as $6,352 in interest fees paid on that mortgage. Amounts of $3,000 for trouble and inconvenience and $5,000 for punitive damages were also awarded.
Finally, in Groupe Énico the taxpayers claimed more than $12 million against Revenu Québec following an audit conducted by a dishonest auditor that ultimately led to the taxpayers' ruin. In a judgment of over 200 pages, the Quebec Superior Court granted them compensation of nearly $4 million plus interest, of which $2 million was for punitive damages. The facts of the case and the taxpayers' allegations against Revenu Québec are numerous and complex and, frankly, hard to believe. In its judgment, the court's criticism of Revenu Québec is particularly harsh, describing falsely inflated assessments, planted evidence, wrongdoing, inflexibility on the part of its audit department, abuse of power, unreasonable approach, malicious seizure, uncommon and unjustified administrative relentlessness, misfeasance, gross negligence, reckless conduct amounting to bad faith and unlawful violation of the taxpayers' property and dignity.
Revenu Québec appealed the Superior Court judgment in November 2013. On January 10, 2014, following a motion from one of the plaintiffs, Justice Morissette of the Court of Appeal of Quebec ordered the partial provisional execution of the Superior Court judgment, ordering the amount of $450,000 be paid to the plaintiff to avoid an immediate bankruptcy and enable him to instruct lawyers on appeal. The other plaintiff did not appear, having no financial resources to pay for lawyers' fees.
It now remains to be seen whether or not the judgment of the Superior Court will be upheld. If so, the scope of the judgment might require Revenu Québec and probably even the CRA to review their agents' tactics. For taxpayers, although the case is based on very specific facts, the judgment will certainly serve as a precedent for future damage claims against the tax authorities.
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.
