Case Comment on Canada (AG) v Maloney, 2025 FCA 165, reversing 2024 FC 1474 and Rotfleisch v Canada (AG), 2025 FC 1529
"Those who knowingly fail to pay a tax debt pending a decision normally cannot complain [...] that the imposition of interest and penalties is unfair".1 – FCA Justice Stratas
On September 17, 2025, the Federal Court of Appeal ("FCA") and the Federal Court ("FC") issued judgements in two separate cases that remind taxpayers that, although they may not have to pay disputed income tax liabilities until their dispute is resolved, non-deductible arrears interest continues to accrue at punitive rates, and taxpayers who choose to delay payment until a final resolution of the dispute do so at their peril.
Both cases concerned tax "schemes" that operated in the early 2000s and generated extensive litigation during which a taxpayer's objection or appeal was held in abeyance.
Maloney
Maloney concerned "an offshore scheme" (the "Morrison Scheme") whose promoter (a Charles Morrison) "was ultimately convicted of fraud by the Manitoba Securities Commission".2 The promoter apparently filed returns on behalf of the taxpayer improperly claiming losses for the 2000- 2003 taxation years, which resulted in refunds of some $213,000 that the promoter purported to invest in some offshore structure.3 It is not clear what, precisely, was done with the funds.
The Canada Revenue Agency (the "CRA"), as agent for the Minster of National Revenue, reassessed the taxpayer, apparently in 2007, to disallow the losses claimed for the 2000-2003 taxation years. The taxpayer objected and the taxpayer's objection was apparently held in abeyance pending the outcome of other disputes involving other taxpayers involved in the Morrison Scheme.4 In February 2015—over seven years later—the CRA rejected the taxpayer's objection and confirmed the reassessments (the "Objection Period").5
The taxpayer filed a notice of appeal in the Tax Court of Canada and appointed the promoter as his agent; however, the promoter took no action and the appeal was summarily dismissed in February 2016.6
Over a decade of arrears interest accrued on the assessed amounts as the audit, objection and appeal unfolded, and the taxpayer applied to the CRA for discretionary interest relief on September 7, 2018.7 It bears note that, under subsection 220(3.1) of the Income Tax Act (the "ITA"),8 the CRA could only cancel interest that had accrued in the 10 years preceding the application—thus from the 2008 taxation year onward.9
The taxpayer's interest relief request itself took over five years to resolve over two reviews. In February 2024, the CRA granted interest relief for the period following the confirmation of the reassessments on February 3, 2015 (amounting to nine years of relief), apparently on the basis of financial hardship.10 However, the CRA denied interest relief for the Objection Period on the grounds that the taxpayer "had the option to make payments towards his tax debt and chose not to do so."11
The taxpayer sought judicial review of the refusal in in the Federal Court, which found the CRA's denial of interest relief to have been unreasonable, in particular because it failed to properly evaluate whether the seven-year Objection Period was reasonable under the circumstances.12 The Court also found that the CRA had denied the taxpayer procedural fairness by refusing to disclose information related to its investigation of the Morrison Scheme and its decision to treat the taxpayer in a manner similar to other victims.13
The FCA unanimously reversed this decision in a perfunctory judgement on the basis that:
- The taxpayer "was warned over many years about his debt but chose not to pay it, letting the interest accumulate".14
- The CRA has "a very wide, unconstrained discretion under subsection 220(3.1) of the [Income Tax] Act to determine what is fair (itself a rather subjective and impressionistic concept that cannot be concretely defined)".15
- "[O]bjections involving a tax shelter are more complex and in such situations the Minister cannot guarantee how long an objection will take to complete".16
- The Federal Court erred by "form[ing] its own views of what was an appropriate delay and impos[ing] those views upon the matter before it."17
- The various documents that the CRA declined to disclose were not relevant to the "real issues in play".18
The FCA concluded its judgement with a stern reminder that "those who knowingly fail to pay a tax debt pending a decision normally cannot complain that they should not have to pay interest or penalties or that the imposition of interest and penalties is unfair".19
Rotfleisch
Rotfleisch concerned a leveraged donation program offered by the Ideas Canada Foundation (the "Ideas Program") that has been the subject of extensive litigation dating back over twenty years.20 The Ideas Program essentially allowed donors to a registered charity to obtain 25-year interest-free loans to supplement their donations, thereby enabling donors to "claim charitable donations in amounts five times higher than what they actually transferred to the charity from their own funds".21
The taxpayer participated in the Ideas Program in 2000 with a $75,000 donation (including a cash portion of $15,000 and a leveraged portion of $60,000) and he claimed a charitable donation credit accordingly. In 2004, the CRA reassessed the taxpayer to deny a tax credit for the $60,000 leveraged portion.22 The taxpayer objected, and his objection was held in abeyance pending the disposition of an appeal involving another Ideas Program donor (the Kossow case)—a case which only ended in 2014 with a dismissal of an application for leave to appeal to the Supreme Court of Canada.23 Soon afterwards, the CRA rejected the taxpayer's objection and confirmed the reassessment.24
The taxpayer paid the reassessed amounts, but, in December 2014, applied for interest relief on the grounds of undue delay in processing his objection.25 The taxpayer's interest-relief application took nine years to resolve over two reviews.26 Ultimately, the CRA granted interest relief for the eleven-month period between the dismissal of Kossow by the FCA and the confirmation of the reassessment.27 The CRA denied any further relief, noting, among other things ,that the taxpayer "made the conscious choice to wait for the outcome of the relate[d] Kossow file at the TCC before paying [the] outstanding balance"28 and that "no undue delay occurred during the course of the Kossow file [...] the timeframe for the litigation process, while [it] may seem long, was reasonable and justified".[29]
The taxpayer sought judicial review of this decision and the FC found the CRA's conclusions reasonable, noting a long line of previous cases that have held that holding a taxpayer's case in abeyance to allow a test case to be litigated does not constitute undue delay,30 and also noting that the taxpayer "knowingly allowed a balance to exist on which arrears accrued".31
Observations
Because amounts owing under the ITA generally do not need to be paid while under objection or appeal (with key exceptions including assessments of "large corporations"—from whom half of amounts in dispute are collectible—and assessments of unpaid withholding taxes),32 taxpayers are very often tempted to delay payment until their liability becomes final and definite.
However, as Chief Justice Roberts of the United States Supreme Court has sagaciously remarked, "Bad things happen if you fail to pay federal income taxes when due".33 In the case of taxes due under the ITA, arrears interest continues to accumulate at punitive rates that exceed what the CRA pays out on refunds,34 and that arrears interest is not deductible from income.35 Given that each stage of a CRA dispute can potentially take years to resolve, arrears interest can come to exceed the amount of tax at issue, thus raising significantly the impact of the dispute on the financial (and often physical) well-being of the taxpayer.
For this reason, taxpayers are often well-advised to pay all amounts assessed by the CRA—even in dispute—to the extent that their finances allow. In most cases (subject to some exceptions, such as in certain cases involving non-residents or taxpayers who have not filed returns)—any amounts overpaid will be refunded with interest if the taxpayer ultimately succeeds in having the assessments reversed or reduced. Any taxpayer in a dispute with the CRA should have a frank and detailed discussion with their financial advisors about the merits of paying the disputed amounts as quickly as possible.
Footnotes
1. Maloney (FCA) ¶8 (internal punctuation omitted).
2. Maloney (FC) ¶7.
3. Maloney (FC) ¶7-9.
4. Maloney (FC) ¶33, 44.
5. Maloney (FC) ¶10-12.
6. Maloney (FC) ¶10-12; Tax Court of Canada online docket:2015-3685(IT).
7. Maloney (FC) ¶14.
8. RSC 1985, c 1 (5th Supp).
9. For a discussion of this rule, as well as how it might potentially be circumvented, see Michael H. Lubetsky "Bending Limitation Periods to Achieve Equity: Case Comment on Barrs v. Canada (National Revenue)," Canadian Tax Journal 281, 71:1.
10. Maloney (FC) ¶24; Maloney (FCA) ¶1, 8.
11. Maloney (FC) ¶24.
12. Maloney (FC) ¶40-45.
13. Maloney (FC) ¶33-37, 50.
14. Maloney (FCA) ¶8.
15. Maloney (FCA) ¶6.
16. Maloney (FCA) ¶8.
17. Maloney (FCA) ¶5.
18. Maloney (FCA) ¶3.
19. Maloney (FCA) ¶8 (internal punctuation omitted).
20. The earliest reported judgement involving the Ideas Canada Program appears to be an interlocutory judgement from the late Chief Justice Bowman in Gould v The Queen, 2005 TCC 556.
21. Rotfleisch¶3.
22. Rotfleisch¶4.
23. Rotfleisch¶5.
24. Rotfleisch¶6-7.
25. Rotfleisch ¶8-9.
26. Part of the reason for the delay may have been that the taxpayer apparently filed an appeal to the Tax Court with respect to the reassessment, which he only withdrew in 2020 (Rotfleisch ¶9 Tax Court of Canada online docket: 2015-524(IT)G. Standard procedure at the CRA would be to only process his interest-relief application after the underlying tax liabilities are definitively determined.
27. Rotfleisch ¶10.
28. Rotfleisch¶14.
29. Rotfleisch¶13.
30. Rotfleisch¶30.
31. Rotfleisch¶33.
32. ITA, subsection 225.1(1).
33. Hinck v US, 550 US 501 (2007), at 501.
34. Currently, the CRA charges 7% of overdue taxes, while paying only 3% or 5% on taxpayer overpayments (https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates.html).
35 ITA, paragraphs 12(1)(c) and 18(1)(t).
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
