In Uppal Estate v The King, 2025 TCC 34, the Tax Court of Canada (the "Tax Court") concluded that the respondent (the "Crown") must accurately state assumptions of fact made by the Minister of National Revenue (the "Minister") in assessing the taxpayer. The Crown cannot add assumptions of fact at the appeals stage that are inconsistent with the Minister's primary assessment position. While the Crown can add additional facts for alternative positions, it must do so elsewhere in its reply pleading and not in the "Assumptions" section. The onus is on the Crown to prove those additional facts, while assumptions are presumed accurate (if no evidence is introduced to contradict them). In addition, the Tax Court concluded that the Crown cannot, as an alternative basis for assessment, ask the court to impose a penalty that was not assessed by the Minister.
This case is important because it makes it clear that the Crown cannot, under the guise of an alternative argument, try to craft assumptions of its own or impose penalties that were not previously imposed.
Facts
Mr. Uppal passed away. Thus, the taxpayer was his estate. The Minister alleged that the taxpayer failed to report income from the sale of shares of Ranger Gold Corp ("Ranger"), because Mr. Uppal was the beneficial owner of both the shares in his own name and the shares in the name of Chambord Media Inc. ("Chambord"), a company owned by Mr. Uppal. The Minister also assessed gross negligence penalties. The taxpayer appealed to the Tax Court.
In its reply to the taxpayer's Notice of Appeal, the Crown stated that:
- The Minister's primary assessing position was that Mr. Uppal was the beneficial owner of both the shares in his name and the shares in the name of Chambord, and
- The Minister's alternative position was that Chambord was the beneficial owner of the shares in its name.
The Crown also stated that the Minister, in assessing the taxpayer, assumed as a fact in the alternative that the taxpayer acted "either singly or jointly with Chambord" in the purchase of the shares. The Crown also pleaded in the alternative that the taxpayer should be liable for additional penalties for failing to file T1134/T1135 forms, even though the Minister only assessed gross negligence penalties and no other penalties.
The taxpayer moved to strike the assumptions pertaining to the single or joint beneficial ownership of the shares on the basis that the assumption of fact was inconsistent with the Minister's primary assessing position that Mr. Uppal was the beneficial owner of the shares and that the Minister cannot make assumptions of fact in the alternative. The taxpayer also sought to strike the alternative penalties because the Crown was asking the Tax Court to apply penalties that were not imposed by the Minister on assessment.
Analysis
Graham J found for the taxpayer on both issues, allowing the motion to strike with permission for the Crown to amend its reply.
On the assumptions issue, Graham J highlighted the unique role that assumptions of fact play in a Crown's reply. The taxpayer bears the onus to rebut assumptions of fact that make up the Minister's primary assessing position, which are deemed to be true. The taxpayer does not bear the onus to rebut facts pled by the Crown that do not make up the Minister's primary assessing position. The Crown should have pled the assumptions that support the Minister's primary assessing position in the assumptions of fact and pled the alternative facts necessary to support the alternative assessing position in a separate part of the Reply.
Graham J found the Crown's inappropriate use of assumptions of fact to be prejudicial to the taxpayer as they were inconsistent. It cannot be true that both Mr. Uppal was the beneficial owner of the shares (the primary assessing position), and that Chambord was the beneficial owner of the shares (the alternative position). The tax results from the two different assumptions of fact would be different:
- If Mr. Uppal was the beneficial owner of the shares, his unreported income could be reduced by the cost of the shares and his unreported income would be a taxable capital gain if the shares were held on capital account.
- If Chambord was the beneficial owner of the shares, Mr. Uppal's unreported income could be based on the entire sale ;proceeds without any reduction of the cost of the shares, and would have been a taxable benefit of the entire proceeds of sale and not a taxable capital gain.
On the penalties issue, Graham J concluded that the Tax Court does not have the power to either increase the amount of an assessment, or impose a penalty that was never imposed by the Minister. The Income Tax Act only gives the power to impose penalties to the Minister and if the Minister wishes to exercise that power, it must do so on the assessment. The alternative basis of an assessment or alternative basis in subsection 152(9) cannot require the Tax Court to assess new penalties. As the T1134/T1135 penalties have nothing to do with gross negligence penalties, Graham J allowed the reply to be struck where it alleges these new penalties.
Takeaway
In a self-assessing tax system, the Minister is permitted to make assumptions of fact based on the Minister's primary assessing position. The onus is then on the taxpayer to disprove those assumptions of fact that resulted in the assessment. If the Minister has alternative theories, the Crown should be separately pleading additional facts – the onus of which is on the Crown to prove.
Only the Minister can impose penalties, not the Tax Court, so the Crown cannot ask the Tax Court to impose new penalties that were never imposed by the Minister.
To view the original article click here
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
