Canada: Leroux: CRA Owes Duty Of Care To Taxpayer

Last Updated: May 19 2014
Article by Alexander Coombes

* This article was co-authored with Mr. Christopher Funt of Funt & Company.

Can a Canadian taxpayer successfully sue the Canada Revenue Agency?

In recent years, taxpayers have brought a number of civil actions against the Canada Revenue Agency (the "CRA").  The allegations in such cases ranged from negligence to fraud, extortion and deceit.  Often, taxpayers' claims are brought as the tort of misfeasance in public office or as claims in negligence.  So far, the courts have not clearly determined the scope of CRA's civil liability.  The recent decision of the British Columbia Supreme Court in Leroux v. Canada Revenue Agency (2014 BCSC 720) provides guidance on the application of common law torts to CRA conduct.

Mr. Leroux, the taxpayer, alleged that he was threatened, deceived and blackmailed by a CRA auditor who was reviewing Mr. Leroux's GST and income tax returns. After reassessments were issued, the CRA claimed Mr. Leroux owed more than $600,000 in taxes, interest and penalties. After an appeal to the Tax Court, some payments by Mr. Leroux and a successful application for interest relief, Mr. Leroux was actually refunded $25,000. In the meantime, Mr. Leroux lost his business and home. He sued the CRA for misfeasance in public office. The CRA argued that it owed no private law duty of care to an individual taxpayer.

In several other cases before Leroux, the courts have agreed with the CRA's position. A successful negligence action requires a finding of a duty of care to the injured party.  As such, judicial acceptance of CRA's position has presented a major barrier to bringing a civil claim against CRA.

In Leroux, the court splashed cold water on the CRA's long-standing position and held the CRA did owe a duty of care to Mr. Leroux. The court also held the CRA had breached its duty of care to Mr. Leroux with respect to the imposition of gross negligence penalties. In a stinging rebuke to the case put forth by the CRA and its counsel, the court stated:

[348] To call Mr. Leroux's tax characterizations "grossly negligent" is especially objectionable because, as mentioned above, CRA now uses the complexity of the issues involved in these characterizations as a reason why their decisions on exactly the same issue could never be termed negligent.  It is simply not logical for CRA to assess penalties against Mr. Leroux for being grossly negligent in having characterized his income in a particular way and to resist the application of the concept of negligence to their own characterization of the same income, one which was ultimately agreed to be wrong.  Or, to put it in the reverse, since CRA now takes the position that the characterization of capital loss versus revenue and the issue of "matching" are difficult and complex, it cannot be said that the assumption of contrary positions by Mr. Leroux, positions that were eventually accepted as correct, was grossly negligent.  To call them so, and to assess huge penalties as a result, ostensibly for the purpose of getting around a limitation period, is unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors.  While being wrong is not being negligent, nor are [the auditor's] mistakes in fact or law negligent, it is the misuse and misapplication of the term "grossly negligent" that is objectionable.

The court continued:

[353] ... CRA must live up to their responsibilities to the Minister and to the Canadian public, nearly all of whom are taxpayers, by applying a little common sense when the result is so obviously devastating to the taxpayer.  It is a poor response to say "we put together our position without regard to the law; leave it to the taxpayer to appeal to Tax Court because we are immune from accountability."

Despite the finding that CRA owed a duty of care to Mr. Leroux, and that the CRA had breached this duty, the taxpayer's claim was dismissed because the court held that Mr. Leroux's losses were not the result of the CRA's negligent conduct.

The Leroux judgment is a welcome development in the law regarding the CRA's accountability for its assessing actions. Most CRA agents are diligent and very well-intentioned.  It is a rare case where the CRA's conduct can properly be alleged to be actionable.  That said, the principles of civil liability shape what can and cannot be done by the CRA in the course of a tax assessment. While Leroux offers very insightful guidance, the broader scope of CRA's civil law duties to taxpayers remains to be fully defined.

For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com

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