Canada: Canadian Civil Tax Disputes: Taxpayer Opportunities To Resolve Tax Issues

Introduction

Civil tax disputes are primarily all about money. Occasionally, a Canadian Charter of Rights and Freedoms¹ issue finds its way into the process of challenging the government's taxpayer assessment, but it is not common. From the government's perspective, a civil tax dispute generally involves a principled approach, applying both the language of the taxing statute and the relevant common law. More often than not, while a taxpayer seeks to comply with the law, the primary concern is how much will it cost; 'What do I have to pay in tax, if anything?' This dynamic sets the stage for the majority of civil tax disputes. No one needs to be told that challenging a tax dispute is an expensive, time-consuming and not entirely efficient process. In Canada, there are a few ways to resolve a tax dispute. This article provides the reader with an overview of the options to resolve Canadian tax disputes.

Assessment periods

Pursuant to subsection 152(4) of the Income Tax Act (the 'Act'), the Minister of National Revenue (the 'Minister') is prohibited from reassessing outside the 'normal period of reassessment' unless one of the conditions contained therein is satisfied.² The Canada Revenue Agency's (CRA's) normal reassessment period is determined by reference to the Act's characterisation of the taxpayer. Paragraph 152(3.1)(b) establishes that the normal reassessment period that applies to a mutual fund trust or a corporation other than Canadian-controlled private corporation (CCPC) is four years after the day the CRA sends the original notice of assessment.³ In all other cases, including individual taxpayers and CCPCs, paragraph 152(3.1)(a) of the Act provides that the normal reassessment period is three years from the day the CRA sends the original notice of assessment.⁴

The reassessment periods that apply to foreign-controlled corporations are different from their domestic counterparts. More precisely, the reassessment period for foreign affiliates of Canadian corporations, such as members of multinational enterprises (MNEs), is extended for an additional three years beyond the normal reassessment period as established by clause 152(4)(b) (iii)(B) of the Act.⁵

Limitation periods

In the absence of fraud or misrepresentation on the part of the taxpayer, the Minister is only permitted to reassess a taxpayer within the normal period of reassessment articulated in subsection 152(4) of the Act.⁶ Thus, when applied to MNEs, the Minister is generally only permitted to reassess within four years of the date of the original notice of assessment and reassessments beyond the expiry of the normal reassessment period are statute-barred. However, where an MNE fails to withhold proper amounts of goods and services tax (GST)/harmonised sales tax (HST), the Minister is not bound by the typical limitation periods under the Excise Tax Act.

Disagreeing with the government determination and existing opportunities to resolve the tax dispute

To begin with, the Canadian income tax system is based on the principle of self-assessment whereby a taxpayer declares his, her or its income and provides an estimated tax liability. Under the auspices of the Minister, the CRA is responsible for the administration (including the collection of monies) in accordance with the provisions of the federal taxing statutes.⁷ The CRA verifies the information contained in the taxpayer's return of income and issues an assessment or reassessment that either confirms or varies the taxpayer's determination of tax liability under the Income Tax Act.⁸

Advance rulings

An advance tax ruling (ATR) is a written statement proffered by the CRA, which confirms the CRA's interpretation of how specific provisions of the Act will apply to a proposed transaction that a taxpayer is contemplating. The Income Tax Rulings Directorate (the 'Directorate') is responsible for providing taxpayers with these advance rulings, and is empowered with the discretion to determine whether or not it will accept a taxpayer's request for an ATR. There is no legal requirement for the Directorate to issue an ATR.⁹ Nevertheless, the CRA will generally accept a taxpayer's request for an advance ruling provided that the request does not fall within one of the CRA's enumerated prohibited categories,¹⁰ so that it may provide tax certainty to the taxpayer.¹¹

Generally, an ATR will be binding on the CRA provided that the law remains unchanged at the time that the transaction is undertaken. Unlike an Interpretation Bulletin, which is provided in response to a hypothetical situation, an ATR is given in response to a set of specific facts and circumstances, which enables the CRA to make binding statements on how the Act will apply to the specific transactions contemplated by the taxpayer.¹²

Footnotes

1 Part 1 of the Constitution Act 1982, being Sch B to the Canada Act 1982 (UK), 1982, c 11.

2 RSC 1985, c 1 (5th Supp), as amended, s 152(1).

3 Ibid s 152(3.1)(b).

4 Ibid s 152(3.1)(a).

5 Ibid s 152(4)(b)(iii)(B).

6 Ibid s 154(2).

7 The Canada Revenue Agency Act, RSC 1999, c 17 sets out the mandate of the CRA. In practice, the CRA has the responsibility for the administration of the Income Tax Act, the Excise Tax Act and other legislation dealing with the Canada Pension Plan, Employment Insurance, Softwood Lumber and Tobacco.

8 See n 2 above, s 152(1).

9 CRA, 'IC70-6R11 Advance Income Tax Rulings and Technical Interpretations' (1 April 2021) para 12, www.canada.ca/en/revenue-agency/services/forms-publications/ publications/ic70-6/ic70-6-advance-income-tax-rulings-and-technical-interpretations.html accessed 21 October 2021.

10 See n 9 above, para 19 for a non-exhaustive list of the circumstances under which the Directorate will not entertain a taxpayer's request for an advance ruling.

11 Diane Lebouthillier, 'Report on progress: commitments made in the government's response to the sixth report of the standing committee on finance' (1 June 2017) www.canada.ca/en/revenue-agency/corporate/about-canada-revenue-agency-cra/ report-on-progress-commitments-made-government-s-response-sixth-report-standingcommittee-on-finance.html accessed 21 October 2021.

12 Douglas Cannon et al, 'CRA Session on Advance Tax Rulings: 2017 and Beyond' in Report of the Proceedings of the 69th Tax Conference (Canadian Tax Foundation 2018) 34:1, 34:2.

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