Introduction: A Milestone Case for Canadian Income Tax Law
Recently, the Federal Court of Appeal handed down its decision in Bakorp Management Ltd. v Her Majesty the Queen ("Bakorp") to little fanfare in the tax community. However, the decision itself is likely one of the most important of the past few years for the valuable lessons that it can teach taxpayers and their Canadian tax lawyers. A thorough reading of the case reveals three valuable points of tax law and administration, and how to avoid issues with all three. The Federal Court of Appeal's ("FCA") decision covers issues related to statutory interpretation, jurisdiction, administrative decision making and provides a warning for those who may wish to use aggressive income tax filing strategies related to their ongoing tax disputes and litigation. In this first of a three part article, we will examine the first and perhaps most obvious issue which was addressed by the FCA, that of jurisdiction. Parts II and III will cover the administrative decision making issue and the filing strategy problem respectively.
Jurisdiction: Why Choice of Venue Matters in Tax Cases
That Canada's Income tax and GST/HST laws are complicated is accepted as self-evident by knowledgeable Canadian tax lawyers and accountants. It is likely that the choice of venue for a taxpayer who feels they have been mistreated as to when and where to proceed with bringing a dispute to Court is one of the more confusing aspects of our tax system. Although Canada does have a court specifically created for hearing tax disputes, the Tax Court of Canada, its jurisdiction is actually surprisingly smaller than such a nebulous name would imply; because the Tax Court of Canada Act delineates only three powers, to confirm, vacate or reassess an assessment of tax, matters related to discretionary decision making by employees of the Canada Revenue Agency are beyond its power. In these cases, the jurisdiction is maintained by the Federal Court of Canada, which, while a statutory Court, maintains powers in the nature of Canada's Superior Courts.
Misunderstanding this distinction can lead to serious issues for taxpayers, as the Appellant discovered recently at the Federal Court of Appeal in Bakorp Management Ltd. v Her Majesty the Queen ("Bakorp"). The case also stands for the proposition that taxpayers should err on the side of filing a Notice of Objection to a tax assessment if there is any doubt that a current period in dispute could have an effect on the taxes payable, refunds or losses claimed in a previous or subsequent period, a position that has always been taken by our Certified Specialist in taxation Law Canadian tax lawyer.
Bakorp: The Facts and History of the Appeal
the story begins in 1989 when the Appellant claimed a non-capital loss on its income tax return for that year. That noncapital loss, almost five million dollars worth, was then claimed by the predecessor corporation Seven Up Canada Inc. in its January 1992 tax year-end. As a result of claiming that loss in the January 1992 tax year-end, no taxes were payable by Seven Up Canada Inc. However, in March of that year, Seven Up Canada Inc. was amalgamated with a second corporation to become Bakorp Management Ltd. ("Bakorp"). This triggered another year-end for Bakorp as of the date of amalgamation, in March of 1992, as set out under paragraph 87(2)(a) of the Income Tax Act.
The litigation related to the non-capital losses claimed in the 1989 tax year-end was not resolved until 2010. Due to the uncertainty, Bakorp did not file the T2 income tax return for the March 1992 taxation year until the dispute was resolved. On December 7, 2010, Bakorp sent a letter to the Canada Revenue Agency ("CRA") requesting that the January 1992 tax year-end be reassessed to request an adjustment to the non-capital losses claimed in that year end to lower the claim by $492,581 and to claim an investment tax credit to offset the increase to income. The request for an adjustment was made under subsection 152(4.3) of the Tax Act, which allows a taxpayer to request that the CRA make adjustments to years not under dispute, but that may be affected by the outcome of a dispute related to a different taxation year. The purpose of this section is essentially to ensure continuity over tax year-ends, though this is not necessarily a strict requirement under the Act.
Before hearing back from the CRA, on February 10, 2011, Bakorp finally filed its March 1992 T2 income tax return. In that return, it claimed the $492,581 of non-capital losses that it assumed would be available once the January 1992 tax year-end was reassessed in line with its request under paragraph 152(4.3).
On November 23, 2011, the CRA denied the request to adjust the January 1992 tax return, and as such, assessed Bakorp's March 1992 tax year-end deducting the claimed carryforward of $492,581. Bakorp objected to the March 1992 assessment and subsequently Appealed to the Tax Court of Canada. At both the CRA's Appeals Division and the Tax Court, the assessment for the March 1992 tax year-end was confirmed.
The Federal Court of Appeal Denies Bakorp's Appeal
Bakorp proceeded to file an Appeal to the Federal Court of Appeal. At both the Tax Court of Canada, and the Federal Court of Appeal, the Crown's argument was that based on the language of subsection 152(4.3), the decision to reassess Bakorp's January 1992 tax year-end was a discretionary one on the part of CRA. As such, the Tax Court did not have the jurisdiction to reassess the March 1992 tax year-end to claim the losses in that year, because they had already been claimed in January 1992. Both the Tax Court of Canada and the Federal Court of Appeal examined the specific language of subsection 152(4.3), which reads:
- (4.3) Notwithstanding subsections (4), (4.1) and (5), if the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or if the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable by the taxpayer, redetermine an amount deemed to have been paid or to have been an overpayment by the taxpayer or modify the amount of a refund or other amount payable to the taxpayer, under this Part in respect of the subsequent taxation year, but only to the extent that the reassessment, redetermination or modification can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
The use of the word "may" in any tax legislation always points to a discretionary decision that is left in the hands of the CRA. The confusion, which led to the loss on the part of Bakorp in this case was that the word "shall" is also used in this subsection. However, careful examination of the language of the entire subsection makes it clear that there is a condition precedent that must be met by the taxpayer in order for the adjustment to be mandatory. In this case the condition precedent required that the subject to the request for adjustment must be related to an amount claimed or filed in a subsequent tax return. Both the Tax Court of Canada and the Federal Court of Appeal found that this condition precedent had not been met, and thus, Bakorp's only legal right of redress was to file an Application for Judicial Review of the decision to deny the adjustment to the January 1992 tax year-end. As such, the carryforward was denied and the assessment confirmed.
Why Choice of Venue Matters
The issue of which Court a Taxpayer needs to seek redress in is not a new one. There have been countless cases that stand for the principle that the word "may" means one should proceed to the Federal Court of Canada, while "shall" means that the Tax Court can provide a remedy. However, in this case, there were several confusing intersections of conflicting principles with respect to the ability of Bakorp to claim the loss in the March 1992 tax year-end. As pointed out above, the Courts held that in order for Bakorp to be able to force the reassessment of its assessment of the January 1992 tax year-end, it needed to fulfill a condition precedent. Failure to do so would mean that they would have to rely upon the goodwill of the CRA to allow them to do so. The exact nature of this condition precedent will be discussed in Part II of this article, and it stands for another important principle that should be understood and applied by all tax practitioners, Canadian tax lawyers and accountants alike.
Because Bakorp did not meet this condition precedent, the January 1992 year was not adjusted, and thus the $492,891 was not available to claim in the March 1992 tax year-end. In essence, the taxpayer lost in this case because they objected to the wrong year, and thus the Tax Court, even if it did have jurisdiction to review said decision could not consider an adjustment to a year that was not validly under Appeal.
Tax Tips: Always Keep Any Affected Years in Dispute
If the above analysis seems confusing, don't despair; Canada's income tax regime is complicated and as the Bakorp case illustrates, even senior Canadian tax lawyers get it wrong.
The lesson that should be gleaned from the discussion of the jurisdiction issue is that one always needs to consider what venue may or may not be appropriate for a tax dispute from the very beginning. If a taxpayer has the advice of our Certified Specialist in Canadian tax lawyer, , our advice would be to always keep every affected year in dispute to ensure you don't run into issues with a jurisdictional question. In Bakorp, had the taxpayer objected to the January 1992 taxation year in anticipation of the adjustment being required at a later date, the Tax Court would have no doubt had jurisdiction to apply the loss to the March 1992 tax year-end.
If you are having issues related to elections or decisions of the CRA, come speak with one of our knowledgeable Canadian tax lawyers. We have the knowledge, experience and foresight to always advise our clients as to what steps need to be taken to protect your tax rights; as a matter of course our philosophy is to always object to an assessment if there is ever any small doubt it could have an effect.
In Part II of this article, we will discuss the condition precedent of subsection 152(4.3) that we identified above and explain why it led to such a costly mistake for the taxpayer.