On June 28, 2024, the Supreme Court of Canada released its decisions in Dow Chemical Canada ULC v. Canada1 and Iris Technologies v. Canada,2 which addressed the question of jurisdiction in tax matters.
Tax Jurisdiction in Canada
Two courts in Canada have jurisdiction to hear tax matters: the Tax Court of Canada ("Tax Court") under the Tax Court of Canada Act, R.S.C. 1985 c. T-2 and the Federal Court under the Federal Courts Act, R.S.C. 1985, c. F-7 ("FCA").
The Tax Court has jurisdiction over various tax matters, including under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) ("ITA") and Excise Tax Act, R.S.C., 1985, c. E-15 ("ETA"), dealing with the Goods and Services Tax ("GST"). The Tax Court has exclusive jurisdiction over the correctness of tax assessments under the ITA and ETA and has jurisdiction to hear appeals and references regarding tax matters. However, the Tax Court has limited remedial powers; it cannot provide administrative law remedies and can only remit a decision back to the Minister of National Revenue (the "Minister") for reconsideration.
The Federal Court has jurisdiction to judicially review decisions from federal boards and tribunals, including discretionary decisions made by the Minister regarding tax matters. However, the Federal Court does not have jurisdiction to hear appeals of tax assessments or other non-discretionary decisions relating to tax matters. Unlike the Tax Court, the Federal Court has broad remedial powers, may grant administrative law remedies, and can compel the Minister to take, or refrain from taking, certain actions.
Dow Chemical Canada ULC v. Canada
Facts
In Dow Chemical, Dow Chemical Canada ULC ("Dow") entered into a non-arm's length loan agreement with a related Swiss company. As a result, Dow incurred expenses for its 2006 and 2007 taxation years and reported income for the 2006 taxation year in respect of the toll manufacturing services it provided to the Swiss company.
Following a review of the transactions between Dow and the Swiss company, the Minister reassessed Dow for its 2006 taxation year, applying the transfer pricing rule set out in s. 247(2) of the ITA and significantly increasing Dow's income for that year. Section 247(2) states that where a taxpayer is dealing with a non-arm's length and non-resident person, the amounts in a given transaction will be adjusted to reflect what would have been agreed to if the person was at arm's length.
Dow requested that the Minister use her discretion under s. 247(10) of the ITA to make a downward transfer pricing adjustment. Section 247(10) provides that where an amount is identified that would decrease the taxpayer's income, a downward adjustment cannot be made unless the Minister decides that the circumstances are appropriate. Here, the Minister refused. Dow sought judicial review of the Minister's discretionary decision in the Federal Court and appealed the 2006 reassessment to the Tax Court.
In the appeal for reassessment, the parties referred a question of law to the Tax Court:
"Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act ("ITA") to deny a taxpayer's request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under section 12 of the Tax Court of Canada Act and section 171 of the ITA?"3
The Tax Court determined that the Minister's discretionary decision under s. 247(10) was a necessary component of the tax assessment, and thus could be reviewed by the Tax Court under their jurisdiction to review the correctness of assessments. The Federal Court of Appeal allowed the appeal, stating that the Federal Court had exclusive jurisdiction to judicially review discretionary decisions by the Minister under s. 247(10).
Decision
In a 4-3 majority, the Supreme Court of Canada dismissed the appeal.
Justice Kasirer, writing for the majority, noted that a decision under s. 247(10) is distinct from a tax assessment; a "tax assessment" is "a purely non-discretionary determination by the Minister of the taxpayer's tax liability for a particular taxation year."4 In contrast, a decision under s. 247(10) allows for discretion and is "based on policy considerations rather than the strict application of the law to the facts."5 If the Court accepted Dow's proposed expanded definition of "assessment," which would include discretionary decisions that it claims are directly linked to assessments, this would create significant legal uncertainty.6 Accordingly, challenges to the Minister's discretionary decisions must be heard by the Federal Court.
Justice Kasirer then turned to the issue of remedies. Dow sought an order for reconsideration and reassessment; however, such an order cannot compel the Minister to reconsider her discretionary decision under s. 247(10) because the decision was not an assessment nor part of one. In contrast, the Federal Court has access to administrative law remedies; the Federal Court may grant a declaration to quash the Minister's discretionary decision under s. 247(10) upon a judicial review of the decision. The Minister then will have to reconsider and possibly issue a new decision, which may affect the amount of tax owing and thus impact the correctness of the assessment, which is reviewable by the Tax Court.7 As such, there may be an occasion where a matter will proceed under the jurisdiction of both courts.
Iris Technologies v. Canada
Facts
Iris Technologies Inc. ("Iris Technologies") filed GST returns claiming tax refunds under the ETA. The Minister audited the reporting periods and issued assessments disallowing some of the tax credits claimed and imposing penalties.
Iris Technologies applied for judicial review of the Minister's assessment in the Federal Court. Iris Technologies sought three declarations:
- The Minister failed to afford procedural fairness in the audit and failed to provide Iris Technologies with an opportunity to respond to the proposed adjustments;
- The assessments were made without evidentiary foundation and were contrary to findings of fact made by the Minister; and
- The assessments were made for the improper purpose of seeking to deprive the Federal Court of the jurisdiction in a related application.8
The Attorney General moved to strike the application for judicial review. The prothonotary dismissed the motion, stating that the application was not bereft of any chance of success. The Federal dismissed the Attorney General's appeal. The Federal Court of Appeal allowed the appeal and struck out the application on the grounds that it was, essentially, a collateral challenge to the correctness of an assessment, which is a matter within the exclusive jurisdiction of the Tax Court.
Decision
The Supreme Court of Canada unanimously dismissed the appeal and granted the Attorney General's motion to strike the application. The Court agreed that the Federal Court lacked jurisdiction to hear the first two of Iris Technologies' claims. For the third claim, all agreed that it should be struck, but were split 4-3 on the reason for doing so.
Justice Kasirer, writing for the majority, confirmed that, notwithstanding the issuance of a tax assessment, the Federal Court has exclusive jurisdiction to conduct judicial review of the Minister's discretionary decisions, including those that directly impact tax liability.9 The Federal Court has jurisdiction to hear applications for judicial review under section 18.1 of the FCA. Section 18.5 of the FCA provides an exception to this jurisdiction if Parliament expressly provides an appeal to another court; s. 302 of the ETA provides taxpayers an opportunity to appeal the correctness of tax assessments to the Tax Court.10 Here, a tax assessment under the ETA is not a discretionary power; it is a non-discretionary determination where the outcome is dictated by statute.11
The first two claims alleged by Iris Technologies regarding procedural unfairness and lack of an evidentiary foundation for the assessment were within the jurisdiction of the Tax Court. Justice Kasirer determined that "they are best characterized as attacks on the correctness of the assessment which is the proper subject matter of an appeal to the Tax Court."12 As the Tax Court has exclusive jurisdiction over challenges to the correctness of assessments per s. 302 of the ETA, s. 18.5 of the FCA applies and ousts the Federal Court's jurisdiction.13
While the third claim alleging that the Minister acted with an improper purpose could fall within the jurisdiction of the Federal Court, Justice Kasirer determined that it should be struck. Iris Technologies did not allege facts that, if assumed to be true, would give any support to the claim. Iris Technologies did not demonstrate any motive or conduct of the Minister besides to allege that the assessment was issued to deprive the Federal Court of jurisdiction in a related proceeding. Justice Kasirer rejected this argument; the mere fact that an assessment was issued does not oust the Federal Court's jurisdiction. If the true purpose of the application is to seek practical relief against the exercise of ministerial discretion, the bar in s. 18.5 of the FCA does not apply and the Federal Court retains jurisdiction.14
In obiter, Justice Kasirer also stated that the declaratory relief sought by Iris Technologies would have no practical effect.15 A declaration will only be granted if it will have practical utility and settle a 'live controversy' between the parties.16 Here, the declaration would not quash or vacate the assessments; as such, it would serve little to no purpose.
The State of Tax Jurisdiction Post Dow Chemical and Iris Technologies
These decisions demonstrate several important principles for determining jurisdiction for tax matters:
- Appeals of tax assessments, which are objective and non-discretionary, are properly the jurisdiction of the Tax Court.
- In contrast, appeals involving discretionary decisions made by the Minister, including whether to make a downward adjustment under s. 247(10) of the ITA, must proceed via a judicial review application in the Federal Court.
- However, if a discretionary decision involves a tax assessment, the decision in Dow Chemical indicates that it may be necessary to seek relief in both the Federal Court and Tax Court.
- The Tax Court does not have jurisdiction in an application for judicial review where the true purpose of the application is to seek practical relief against the exercise of ministerial discretion. In such circumstances, s. 18.5 of the FCA ousting Federal Court jurisdiction does not apply and the Federal Court retains jurisdiction over the matter.
While it remains important for taxpayers to commence proceedings in the proper jurisdiction, the question of jurisdiction remains murky and unclear. This is particularly true for cases such as Dow Chemical which may require a taxpayer to seek a remedy in both the Federal Court and Tax Court. In Dow Chemical, Justice Kasirer noted that "Parliament has turned its mind to the difficulties that arise from the fractured jurisdiction of the Tax Court and the Federal Court over tax matters...In my view, it falls to Parliament to respond, if appropriate, to the[se] concerns."17 While we await further clarification from Parliament, the jurisdictional debate will continue to plague taxpayers and tax lawyers alike.
The line of cases underscores the importance of commencing tax litigation in the correct jurisdiction. If you have a tax matter, please reach out to our tax law department by calling 416-449-1400 or emailing info@devrylaw.ca to schedule a consult.
Footnotes
1 Dow Chemical Canada ULC v Canada, 2024 SCC 23 [Dow Chemical].
2 Iris Technologies Inc. v Canada, 2024 SCC 24 [Iris Technologies].
3 Dow, supra at para 17.
4 Ibid at paras 41-43.
5 Ibid at para 50.
6 Ibid at paras 57 and 78.
7 Ibid at paras 104-107.
8 Iris Technologies, supra at para 16.
9 Ibid at para 7.
10 Ibid at paras 33-34.
11 Ibid at para 7.
12 Ibid at para 10.
13 Ibid at paras 37-38.
14 Ibid at paras 41-44.
15 Ibid at para 57.
16 Ibid at para 58, citing Daniels v Canada (Indian Affairs and Northern Development), 2016 SCC 12 at para 11.
17 Dow, supra at paras 114-115.
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