Due to the complexity of Canadian tax law, it is not uncommon for taxpayers and the minister of national revenue to refine their respective positions and identify new arguments and issues in the course of the tax dispute resolution process. However, the playing field between the minister and taxpayers is not even. The minister's unfair advantage derives from two sets of rules: (1) the "large corporation" rules, introduced in 1994; and (2) the "alternative basis" rule, introduced in 1998 and broadened in 2016. The large corporation rules prohibit large corporations from advancing alternative arguments and issues in the TCC that were not "reasonably" described in their notices of objection. In contrast, the alternative basis rule gives the minister significant latitude to raise new arguments and issues at almost any stage of a dispute. This asymmetry gives the minister an unfair procedural advantage that sometimes results in outcomes that are not based on the merits of a case.
Background to the Introduction of the Rules
Large corporation rules
Before 1994, corporations could challenge an assessment by
filing a vaguely worded notice of objection (for example, "the
assessment is erroneous in fact and in law") that did not
identify the issues in dispute. This practice was eliminated for
large corporations after the FCA decision in Gulf
Canada (92 DTC 6123). Following this decision, other
resource companies amended their notices of objection to raise the
issues decided in the taxpayer's favour, and to obtain refunds.
According to the 1993 auditor
general's report, the minister estimated the total cost of
the Gulf Canada decision to be $1.2
New rules were introduced (principally subsections 165(1.11) and 169(2.1)) to require large corporations to reasonably describe in their notices of objection the issues to be decided and the quantum of the relief sought. The rules bar large corporations from pursuing new issues or obtaining relief beyond what is specified in their notices of objection. According to a 1994 press release from the minister of finance, the objective of the rules was "to speed the resolution of objections and appeals, particularly by large corporations." The explanatory notes published by the Department of Finance clarified that the rules were not intended to prevent large corporations from relying on new reasons after filing a notice of objection.
Alternative basis rule
The restrictions imposed on large corporations are in striking
contrast to the minister's right to raise new arguments and
issues under the alternative basis rule in subsection 152(9). This
provision was introduced in response to the SCC decision
in Continental Bank of Canada ( 2 SCR 358). In that case, the
court held that the minister could not advance a new basis for
assessment after the expiry of the limitation period.
As originally enacted, subsection 152(9) allowed the minister to advance an alternative argument (rather than an alternative basis) in support of an assessment at any time after the expiry of the normal reassessment period, subject to limited restrictions. In 2016, following the decision in Last (2014 FCA 129), the provision was amended to explicitly allow the minister to raise an alternative argument or basis in support of all or any part of the total amount of tax assessed. Before this amendment, the issue of whether the minister had raised an alternative argument or basis was the subject of frequent litigation.
Judicial Interpretation of the Rules
The courts' interpretation of the large corporation rules
and the alternative basis rule has resulted in a procedural
imbalance between large corporations and the minister, with the
scales tipped firmly in favour of the minister. Two key decisions
that have considered the large corporation
rules, Bakorp (2014 FCA 104)
and Devon (2015 FCA 214),
demonstrate that the courts have largely conflated the concepts of
"issue" and "reasons" and have interpreted and
applied the rules in a manner that is inconsistent with their
legislative intent. In contrast, the decisions that have considered
the alternative basis rule confirm that the minister is generally
permitted to raise new issues or arguments at virtually any stage
of the dispute process, regardless of the potential prejudice
suffered by taxpayers.
In Bakorp, the taxpayer had raised in its notice of objection the issue of whether its part IV tax liability on a dividend received in 1995 should be reduced. In its appeal to the TCC, the taxpayer raised the issue of whether it had received any dividend at all in 1995 and, therefore, whether it had any part IV tax liability that year. The FCA held that the only issue the taxpayer could have raised in its notice of appeal was the exact amount of dividend it had received in 1995. As this was not the issue described by the taxpayer in its notice of objection, the FCA held that the taxpayer had failed to comply with the large corporation rules. Thus, the FCA dismissed the taxpayer's appeal. In reaching this conclusion, the FCA ignored the word "reasonably" in the requirement to "reasonably describe" each issue to be decided. The FCA's decision is also inconsistent with the legislative intent of the rules as set out in the explanatory notes, which state that an "issue" is distinct from a "reason" and that the rules were not intended to prevent taxpayers from relying on new reasons after filing a notice of objection.
In Devon, the taxpayer had raised in its notice of objection the issue of whether certain payments were deductible under section 9. On appeal, the taxpayer sought to argue in the alternative that the payments were deductible under different provisions that allow a deduction (paragraph 20(1)(e) or (b)). The FCA held that the taxpayer was precluded from arguing that the other provisions applied because it was raising new issues not mentioned in its notice of objection. The FCA concluded that the "nature" of the litigation and, consequently, the "issue" for the purposes of the large corporation rules was the statutory provision relied on by the taxpayer in its notice of objection. The FCA's conclusion was based on its view that the purpose of the rules is to permit the minister to know the "nature" of the litigation and the "quantum" of tax in issue at the notice of objection stage. In interpreting the word "issue," the FCA cited previous FCA decisions that had determined the purpose of the rules by improperly relying on statements of the CRA's Appeals Branch and by ignoring appropriate extrinsic aids such as the minister of finance's press release and the explanatory notes, neither of which contain any reference to the "nature" of the litigation.
A review of the decisions that have considered the alternative basis rule reveals that the rights accorded to large corporations are asymmetrical with those accorded to the minister. Even before the 2016 amendment that broadened subsection 152(9), the courts frequently interpreted this provision as allowing the minister to advance an alternative argument or basis in support of an assessment at almost any stage of the litigation. In addition, the courts have narrowly construed the statutory restrictions on the minister's ability to advance an alternative argument or basis and have been dismissive of the potential prejudice to taxpayers when the minister relies on a new argument or basis late in the litigation process.
No principled reason exists for allowing the minister to raise new arguments and issues at virtually any stage of the litigation while severely curtailing a large corporation's ability to do so. Moreover, the fact that a large corporation may not be able to respond to a new argument raised by the minister on appeal because the corporation did not raise the argument as an issue in its notice of objection demonstrates the illogical and unintended results that flow from the courts' inconsistent interpretation of the large corporation rules and subsection 152(9).
Given that the courts have not interpreted the large corporation
rules in accordance with the provisions' original intent,
amendments to the ITA should be made. The courts have given the
word "issue" in the large corporation rules and the word
"argument" in subsection 152(9) identical meanings, even
though the presumption of consistent expression is a longstanding
principle of statutory interpretation (for example,
see Frank,  1 SCR 95).
Under this principle, the same words in a statute should be given
the same meaning, and different words should be given different
The ITA should be amended to define the word "issue" in the large corporation rules. The definition should make it explicit that where a new argument or statutory provision relied on by the corporation relates to the same facts as those described in the notice of objection or represents a different legal conclusion flowing from those facts, the new argument or provision is not a new issue for the purposes of these rules. This would eliminate the inconsistency in the rules applicable to large corporations and the minister relating to the raising of new arguments and issues in the tax litigation process. Such an amendment would also better align the rules of tax litigation with the rules in the non-tax litigation context, where the SCC has held that a genuinely new issue is one that is legally and factually distinct from issues that were previously raised (Quan v. Cusson, 2009 SCC 62).
Other amendments to the Act that should be considered include (1) giving large corporations the right to amend a notice of objection before the end of the notice of objection stage; (2) authorizing the court to waive compliance with the large corporation rules where it considers doing so to be just and equitable; and (3) requiring the CRA to provide the corporation with access to the CRA's full audit file within a certain period of time after the issuance of a notice of assessment. The latter amendment would reduce some of the unfairness in the existing system by helping large corporations and their representatives ensure that they have reasonably described every potential issue in a notice of objection.
An administrative change that could similarly mitigate the current unfairness would be to require the CRA's Appeals Branch to undertake a detailed review of a large corporation's notice of objection and to notify the corporation promptly of any information that is required by the rules but has not been included in the objection. Improving communication between the CRA and large corporations and providing timely access to the CRA's audit files not only would mitigate the inequity of the large corporation rules but also could lead to an increase in the resolution of disputes at the notice of objection stage. More generally, these changes would ensure that more disputes are decided on their merits rather than on procedural grounds.
The asymmetry in the rules that apply to large corporations and the minister raises serious questions about the fairness of the tax litigation process. An examination of the reasons for the introduction of the large corporation rules and the alternative basis rule reveals that Parliament did not intend to create an uneven playing field between large corporations and the minister. Rather, it is the courts' interpretation of these rules that has led to unintended outcomes and consequences. Legislative change is required to redress the imbalance and ensure that Canada's largest tax disputes are decided in accordance with the fundamental principles of fairness and consistency.
Reprinted with permission from Perspectives on Tax Law & Policy, vol. 2, no. 4 (December 2021), ©2021 Canadian Tax Foundation.
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