Szymczk v. The Queen (2014 TCC 380) is a recent decision from the Tax Court of Canada that addressed whether the taxpayer, Mr. Richard Szymczk, correctly reported standby charge and operating expense benefits in his 2008 and 2009 taxation years as an employee of General Motors of Canada Ltd. ("GM"). The issue at the heart of the decision was whether the CRA could renege on a long-standing agreement it had with GM that allowed it to use a simplified method to compute standby charge and operating expense benefits of its employees.
The taxpayer argued that the CRA was estopped from assessing him contrary to that agreement. The Tax Court did not agree.
GM's Agreement with the CRA
For more than 28 years, the CRA had allowed GM to report its standby charge and operating expense benefit for employees using a simplified, averaging method rather than computing the benefit separately for each individual employee. The CRA issued the administrative authorization (the "Authorization") following what were significant changes to the Income Tax Act (Canada)(the "Act")in 1981 which increased income inclusions for employer-supplied automobiles.
The Authorization provided that the standby charge would be 2% of the average cost (inclusive of sales tax) of all cars in the Product Evaluation Program ( the "PEP"). Operating expense benefit would ½ of the amount so determined (i.e., 50% business / 50% personal).
GM relied on this authorization to determine its standby charge and operating expense benefit for ensuing years – including those for the taxpayer.
Overview of Standby Charge and Operating Expense Benefit
There are two income inclusions for employer-supplied automobiles: 1) standby charge for supply of car: 2) an operating expense benefit for the payment of operating costs.
Standby charge is generally calculated as a 2% monthly inclusion of the cost of the automobile inclusion subject to reduction if the vehicle is used primarily for employment and personal use is limited (less than 1,667 km per month) as per clause 6(1)(e), 6(2) of the Act.
The operating expense benefit is a $0.24/km inclusion for personal use if an employer pays all or part of the operating expenses of an automobile that is subject to a standby charge. Alternatively, where the car is used primarily for employment the employee may designate the benefit as ½ the standby charge but the employee must notify the employer before the end of year.
GM's Product Evaluation Program
During the relevant period, GM required its executives and senior managers like Mr. Szymczyk to participate in a program designed to evaluate and promote their fleet of automobiles in the PEP. An employee would select a car and use it for travel to and from work and short-term business travel. The employee would report on any deficiencies and would be encouraged to promote the car to their network of family and friends. The car was required to be changed every 5,000 km or three months, whichever was earlier.
The taxpayer drove four different cars in each year under appeal.
CRA Audit of GM
The CRA conducted its first major audit of GM in 2010 about 28 years after the Authorization was issued. Approximately 350 employees were potentially affected. Following their audit, the CRA concluded that the Authorization was no longer valid because of changed circumstances and issued assessments to the taxpayer and others for the 2008 and 2009 tax year.
The taxpayer, Mr. Szymczyk, was the first of those re-assessed to appeal to the Tax Court.
GM and the taxpayer sought relief at Federal Court where they argued in separate applications that the CRA was estopped from setting assessing contrary to the Authorization. Both applications were dismissed for lack of jurisdiction as the Tax Court of Canada had exclusive jurisdiction. (Reported at 2013 FC 1219.) Appeals to the Federal Court of Appeal were placed in abeyance pending the outcome of this decision.
CRA not bound by the Authorization
The Tax Court concluded that the CRA was not bound to follow the Authorization because there were material changes to the underlying law and in the facts from the time of the agreement. However, the Court stated that the CRA would have been bound to follow the Authorization unless the approval was not clearly supportable by law.
The Court highlighted two major changes to the circumstances that invalided the authorization:
1) Paragraph 6(1)(k) of the Act was enacted in 1993 to provide a specific rule to calculate operating expense benefit at $0.24/km for non-employment use; and
2) GM changed its policy on the frequency that cars were to be exchanged from 5,000km to 12,000 km or 3 months, whichever was earlier.
These changes were material and the agreement was set aside as unsupportable by law.
Due to a technical error in the Minister's pleading, the taxpayer's appeal as to the standby charge was allowed but this is very unlikely to occur for other taxpayers.
Final Comments
It should be noted that Szymczk v. The Queen was an informal procedure decision and does not carry precedential value. Nevertheless, it does raise many questions as to when the CRA may renege on an agreement with a taxpayer. If the agreement is reflected in an advance income tax ruling, the CRA agrees to be bound by it even though the law does not strictly speaking bind the CRA. However, for administrative reasons the CRA may agree with taxpayers on a range of administrative matters not reflected in an advance ruling. What is the taxpayer's position if the CRA decides to change its mind with respect to such agreements? This case highlights the fact that the CRA will not be bound by any agreement that is not supportable by law. So, as was the case here, where the law changes at a date after the effective date of the agreement, CRA may assess contrary to the terms of the agreement. The same result would seem to follow where the facts on which the agreement is based have changed. It would seem that CRA is not required as a matter of fairness to notify the taxpayer that it no longer feels bound by an agreement. In this case, the reassessments were retroactive to years prior to that in which the CRA first decided to disregard the agreement. While general fairness principles might suggest that the CRA ought not to have done so retroactively, it seems clear that in law it was entitled to act the way it did. Taxpayers operating under an administrative agreement with CRA will need to consider the possible ramifications of this case on their agreements. Two obvious questions are: (1) What qualifies as a material change in the facts? (2) Do the parties have an obligation to inform the other of such a change?
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