The recent judgment Naples Pizza (1981) inc. c. Agence du revenu du Québec, 2019 QCCS 710 delivers some developments of interest, particularly with respect to prescription and the extra-contractual liability of Revenu Québec.
In this case, the Superior Court ruled on actions for damages instituted by a corporation operating a pizzeria and by one of its shareholders who was also a director. Revenu Québec was reproached for using an alternative audit method and for having cancelled tax assessments the day before a hearing. Ultimately, the Court declared the shareholder's action inadmissible and rejected the corporation's action, which sought compensation for its professional fees incurred.
In 2006, the restaurant was subject to a tax audit (GST / QST). Revenu Québec chose to use an alternative method of reconstructing sales based on two of the products offered by the pizzeria, namely pizzas and steaks.
Notices of assessments amouting to nearly $260,000, including penalties, were issued against the corporation in 2007. Subsequently, an out-of-court settlement cancelling the QST assessment occurred in 2010. The GST assessment met the same fate following consent to judgment before the Tax Court of Canada.
In the judgment, Bédard J. of the Superior Court noted that the shareholder of the pizzeria did not have the interest to act with respect to his action for damages, as required by Article 85 of the Code of Civil Procedure. It should be noted that the individual in question had not been assessed (only the corporation had been assessed) and that the faults alleged against Revenu Québec related to the dispute over the pizzeria. The harm suffered by the shareholder resulting from the faults of the tax authorities, if any, would have been indirect damage not liable to compensation (article 1607 of the Civil Code of Québec).
Moreover, with respect to the corporation's action for damages against Revenu Québec, the Court concluded that it was statute-barred and therefore inadmissible. In fact, the action for damages was instituted in 2013 while the three-year prescription period (Cf. 2925 C.c.Q.) began to run following the upholding of the notices of assessment in 2008, hence the inadmissibility. This suggests that the filing of court applications before the Court of Quebec and the Tax Court of Canada to challenge tax assessments does not suspend the prescription of a separate action for damages against the tax authorities.
Although the action was prescribed, Bédard J. nevertheless commented on Revenu Québec's liability in the circumstances. Recalling that the tax authorities' behaviour must be weighed on the standard of the reasonable person, normally prudent and diligent in similar circumstances, the Court stresses that tax auditors and opposition officers enjoy some latitude or wriggle room. In this case, the taxpayer failed to demonstrate that recourse to an alternative audit method was unreasonable in the circumstances. It should be noted that the taxpayer, through his director, had destroyed the relevant documentation before the end of the tax audit.
This judgment is reminiscent of the fact that the cancellation of notices of assessment in an out-of-court settlement does not necessarily entail monetary compensation for the taxpayers involved.
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