The Federal Court has recently reiterated the importance of both a properly defined class and a proper representative plaintiff at the certification stage. In Rae v Minister of National Revenue, 2015 FC 707, Justice St-Louis refused to certify a proposed class action on the basis that the class was too narrowly defined and the representative plaintiff would not fairly and adequately represent the interests of the class.
The Proposed Class Action
In 2013, Ms. Rae, the proposed class representative, participated in a widely-marketed gifting tax shelter called Pharma Gifts International Inc. This gifting tax shelter was registered with the Minister and in 2013 the CRA undertook an audit of the gifting tax shelter.
The CRA audit of Pharma Gifts resulted in Ms. Rae not receiving a Notice of Assessment for the 2013 taxation year. Moreover, Ms. Rae was informed that her 2013 income tax and benefit return could not be assessed until the audit was completed, which could take up to two years. The only recourse to a more timely assessment would be if Ms. Rae withdrew her donation claim and agreed to a proposed waiver agreement under which she would waive any right of objection or appeal related to the issue of her eligibility to the claim for the 2013 taxation year.
Ms. Rae refused to agree to the waiver and instead brought a motion to the Federal Court to certify a class proceeding. The class proceeding sought a writ of mandamus requiring the Minister to assess Ms. Rae and the other class members' 2013 tax returns forthwith, issue a corresponding tax assessment and send a proper Notice of Assessment.
The Certification Decision
The Federal Court, noting that Ontario and British Columbia decisions may guide the Court in certifying class actions under Rule 334.16(1) of the Federal Courts Rules in respect of class actions, assessed each of the 5 criteria that must be satisfied in order to certify a class action:
1. Reasonable Cause of Action
The parties submitted, and the Court agreed, that the threshold under this criterion is very low, and was satisfied in the case at bar.
2. Identifiable Class of Two or More Persons
The proposed class was defined as:
Any person who is not a non-resident of Canada, as defined by the Income Tax Act, who participated in a widely-marketed gifting tax shelter in 2013 and transmitted their 2013 income tax return to the Minister. Excluded from the class would be any taxpayer who otherwise meets the proposed definition but who has since accepted and/or acted on any waiver offered by the Minster, and any taxpayer who otherwise meets the proposed definition but who is assessed before the hearing of the application on the merits.
The Court found that the proposed class was too narrowly defined. While over or under-inclusion is not fatal to certification, illogical or arbitrary class definitions are fatal. In this instance, the Court found that the exclusion of taxpayers assessed before the hearing of the merits is illogical or arbitrary since these taxpayers share the same interest in the resolution of the common issue regardless of whether or not they have received a Notice of Assessment.
3. Common Question of Law or Fact
The Court found that the resolution of the common question – receipt of a Notice of Assessment and a corresponding tax assessment – was necessary to the resolution of each class members' claim, and each would benefit from the successful pursuit of the class action.
4. Preferable Procedure
Since all taxpayers that would be affected by the common issue – approximately 2,500 persons – would have to bring this matter before the Court individually, the Court found that a class action would be the preferable procedure for the resolution of the common issue.
5. Appropriateness of the Representative Plaintiff
The Court found that Ms. Rae's refusal to answer questions on cross-examination with regards to third-party funding raised concerns with regards to her appropriateness as representative plaintiff. Moreover, both the litigation plan and the fee arrangement submitted by Ms. Rae failed to satisfy the requirements set out in the jurisprudence.
Though this decision is fact specific, there are some key points that can be distilled:
- In contrast with a number of cases in the class actions context, the Court in Rae v Minister of National Revenue did not amend the proposed class definition so that it would satisfy the certification criteria. It will be interesting to monitor subsequent decisions from the Federal Court, as well as from various superior courts, to see if this refusal to re-draft a proposed class definition becomes a trend.
- It will also be interesting to monitor how third-party funding and the information about such funding that courts require to be disclosed impacts certification.
- Given the paucity of class actions arising in the tax context, this decision reminds potential representative plaintiffs of the importance of satisfying the certification criteria and defining the class appropriately. In what the court says is a highly individual area of law, it remains unclear when the court would be willing to certify a tax class action.
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.