Reprinted from Tax Notes Int'l, November 30, 2015, p. 767
The Federal Court of Canada has overturned an ex parte jeopardy order by the Tax Court of Canada to the Canada Revenue Agency, which feared that a C $283 million tax debt was at risk because a trust beneficiary had become a nonresident of Canada. There is no appeal to the Federal Court's judgment.
In MNR v. RRSP Trust of Grenon, 2015 FC 1050, the Federal Court of Canada struck down an ex parte jeopardy order granted to the Canada Revenue Agency (CRA) on March 7, 2013. The agency sought that order on the basis that the trust beneficiary was no longer a resident of Canada and that the collection of the assessed income tax of $283 million owed by the trust was in jeopardy.
James Grenon is the annuitant of a self-directed Canadian trust having CIBC Trust Corp. as its trustee. In 2012 Grenon canceled his Alberta driver's license, sold his principal residence, and moved to New Zealand with his partner. After his move, the CRA became concerned with transactions wherein $55 million of the trust's funds was moved to New Zealand. In February 2013 a transfer of $15 million was made to an account, presumably in Canada. Based on the movement of those funds, the CRA successfully received an ex parte jeopardy order.
An ex parte jeopardy order is an extraordinary remedy and is granted only when there is concern that the taxpayer will abscond, liquidate, or transfer assets during the legal process so as to thwart the CRA's attempt to collect the debt owed by the taxpayer. The Federal Court said, ''When jeopardy orders have been upheld, the factual circumstances frequently contain an element of criminality or otherwise questionable or nefarious behaviour.''
The Federal Court said that ''given the absence of the taxpayer's submission before the judge when an ex parte application for a jeopardy order is made, when seeking such an order, the Crown must make the application in good faith and ensure full and frank disclosure that is reasonable in the circumstances.''
In Canadian National Revenue v. Robarts, 2010 FC 875, the Federal Court interpreted the phrase ''full and frank disclosure'' to include an obligation on the Crown to point the court to the relevant jurisprudence; to draw attention to all relevant facts, even those that it might consider unhelpful or inconvenient; and to disclose reasonably foreseeable weaknesses in its case.
''The suspicion or mere concern that the taxpayer's assets will vanish into thin air'' does not constitute reasonable grounds to believe that collection would be delayed and is insufficient for a court to issue an ex parte order.1
The Income Tax Act generally restricts the CRA from engaging in collection activities until 90 days after a notice of assessment has been sent. There is an exception if the taxpayer is a large corporation, defined as a corporation having at the end of the tax year taxable capital exceeding C $10 million. ITA subsections 225.1(7) and (8) state that a large corporation must pay half the CRA assessment regardless of whether an objection was filed or an appeal is before the tax court.
Similarly, filing an objection or appeal to the tax court does not stave off collection actions for goods and services tax/harmonized sales tax or payroll assessments, and the CRA can continue with collection actions. For income tax collections, the CRA can sidestep the 90-day restriction in ITA subsection 225.1(1.1)(c) by filing a request for an ex parte jeopardy order.
Once the Federal Court issues an ex parte jeopardy order, the taxpayer has only 30 days to initiate review by the Federal Court. There is no appeal to the Federal Court's judgment. Under Tennina v. Canada (National Revenue), 2010 FCA 25, once a jeopardy order has been confirmed, set aside or varied by a reviewing judge, that decision is final and is not subject to further appeal.
At the Federal Court, to overturn an ex parte jeopardy order, the taxpayer has the burden of establishing whether there are reasonable grounds to doubt that collection of the amount assessed is in jeopardy. If the taxpayer establishes doubt, the burden shifts to the CRA to justify the order by demonstrating that it is more likely than not that the collection would be jeopardized by delay. Also relevant to the Federal Court is whether the CRA made full and frank disclosure on its original ex parte motion at the tax court.
In RRSP Trust of Grenon, the taxpayer's appeal to the Federal Court was successful primarily because the trust was a Canadian trust with a Canadian trustee. That the beneficiary was a nonresident did not mean collection could not take place on Canadian soil. The Court pointed out that trustee CIBC Trust Corp. was not only jointly liable for the tax debt if the trust assets were distributed and a tax debt remained, but also that under ITA subsection 159(2), the trustee had to be in possession of a clearance certificate before it could distribute those assets. Further, if distribution were to take place without a clearance certificate, under subsection 159(3), the legal representative would be personally liable for the value of the assets distributed up to the tax debt.
The problem with ex parte jeopardy orders is that assessments issued against taxpayers are not necessarily correct.
1 See Services ML Marengère Inc. (Re), 1999 CanLII 9004 at para.
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