During any type of tax dispute resolution process, a taxpayer's priority should always be to meet the deadlines prescribed by the relevant legislation. One important deadline is the 90 day limitation period under section 165 of the Income Tax Act1 for a taxpayer to serve a notice of objection in response to a notice of reassessment. If a taxpayer misses this deadline, section 166.1 provides an additional year to request an extension of time to object to the reassessment, which the Minister of National Revenue ("Minister") may grant at her discretion if she determines it is just and equitable to do so. If a taxpayer fails to request an extension of time within this additional 12 month period, the options to contest the reassessment are foreclosed. This was the situation facing a Canadian corporation as a result of the mismanagement of an audit by its tax manager, which was the subject of the recent Federal Court judicial review application Amdocs Canadian Managed Services Inc.2
- Amdocs Canadian Managed Services Inc. ("ACMS") is a Canadian corporation and is part of the Amdocs group of companies ("Amdocs Group"). The Amdocs Group provides software and related services internationally for communications, media and entertainment service providers.
- The Amdocs Group employed a global head of tax ("Global Head of Tax") responsible for all of the global tax matters involving the Amdocs Group, including ACMS.
- ACMS employed a tax manager ("Tax Manager") who was required to update the Global Head of Tax about significant Canadian tax matters affecting ACMS, including any audits and assessments by the Canada Revenue Agency ("CRA"), and respond to queries and correspondence received from the CRA.
- The Tax Manager was the sole contact person provided by ACMS to the CRA.
- In 2013, the CRA commenced an audit of ACMS' 2012 taxation year ("2012 Audit").
- The Tax Manager responded sporadically to the CRA's correspondence and at times failed to respond to queries entirely.
- On January 19, 2017, after not having heard from the Tax Manager since May, 2016, the CRA issued a proposal letter outlining its position to ACMS regarding the proposed reassessment of its 2012 taxation year ("Proposal Letter").
- On February 28, 2017, the Department of Justice wrote a letter to ACMS' counsel ("DOJ Letter") which stated that ACMS had been uncommunicative and uncooperative during the 2012 Audit and encouraged ACMS to respond to all of the outstanding queries.
- The DOJ Letter was brought to the attention of the Global Head of Tax. However, he did not contact the CRA to discuss the 2012 Audit and did not take any steps to provide the CRA with an additional authorized contact person for ACMS. As a result, all CRA correspondence relating to ACMS continued to be sent solely to the attention of the Tax Manager.
- The Tax Manager did not respond to the Proposal Letter within the requested 30 days and did not inform the Global Head of Tax about the Proposal Letter.
- On March 2, 2017, the Minister issued a notice of reassessment of ACMS' 2012 taxation year ("2012 Reassessment"), consistent with the proposed reassessment outlined in the Proposal Letter. The 2012 Reassessment increased ACMS' income tax payable by over $3.3 million.
- The Tax Manager did not inform the Global Head of Tax about the 2012 Reassessment. The Tax Manager further failed to file a notice of objection within the limitation period outlined in section 165 (i.e. 90 days after the notice of reassessment) or request an extension of time to file a notice of objection pursuant to section 166.1.
- In July, 2019, the Global Head of Tax became aware of the 2012 Reassessment when a customer of ACMS received a garnishment order from the CRA. The Tax Manager's employment with ACMS was terminated in August, 2019.
By the time the 2012 Reassessment was brought to the attention of the Global Head of Tax, ACMS' rights to file an objection or appeal in response to the 2012 Reassessment had long since lapsed. However, by the time the 2012 Reassessment was surfaced, the 2012 year was arguably not yet statute-barred and thus the Minister had jurisdiction to reconsider the assessing position. More specifically, the original assessment for ACMS' 2012 taxation year was dated November 9, 2012. The period during which the Minister may issue a notice of reassessment is referred to as the normal reassessment period. This period is generally three years following the date of the initial notice of assessment in the case of a Canadian-controlled private corporation ("CCPC") or four years in most other cases, such as ACMS'. However, the normal reassessment period may be extended. Under subsection 152(4)(b)(iii), the Minister may reassess a taxpayer within three years after the end of the taxpayer's normal reassessment period if the reassessment is made as a consequence of a transfer pricing transaction. A transfer pricing transaction can be defined as a transaction between a Canadian taxpayer and a non-resident with whom the Canadian taxpayer does not deal at arm's length.
The 2012 Reassessment was made as a consequence of a transaction between ACMS and a non-arm's length member of the Amdocs Group resident in Cyprus. As a result, ACMS' original four-year normal reassessment period was extended, by an additional three years, to November 9, 2019. Therefore, ACMS took the position that the Minister still had the authority to issue a notice of reassessment for ACMS' 2012 taxation year until that date. On this basis, ACMS met with the CRA officials in July, 2019 to request that the CRA reopen the 2012 Audit and reassess ACMS' 2012 taxation year following its review of additional information to be provided by ACMS. After all, it is trite law that the Minister may reassess a taxation year more than once, if the normal reassessment period remains open.
The Minister agreed that it had the authority to reopen the 2012 Audit and to reassess ACMS' 2012 taxation year. However, the Minister refused to reopen the 2012 Audit and in turn, reassess ACMS' 2012 taxation year. The Minister arrived at its decision ("Minister's Decision") based on several reasons, including:
- ACMS was, at all times, informed of all audit actions and correspondence for the 2012 taxation year;
- ACMS had opportunities to make representations and submit information during the 2012 Audit, but failed to do so; and
- ACMS failed to respond to all of the CRA's requests and queries, reply to the Proposal Letter and the 2012 Reassessment and object to the 2012 Reassessment.
ACMS filed an application to the Federal Court to review the Minister's Decision.
The Court's analysis
The Court first had to rule on the nature of the Minister's Decision. ACMS was of the view that the Minister decided not to reassess ACMS' 2012 taxation year while the Minister argued that it decided not to reopen the 2012 Audit. The Court ruled that the Minister's Decision was both a decision not to reopen the 2012 Audit and a decision not to reassess the 2012 taxation year. Therefore, the Court reviewed the exercise of the Minister's discretion with respect to both decisions. The sole issue before the Court was whether the Minister's Decision was reasonable, and in particular, whether the Minister's Decision was transparent, intelligible and justified in relation to the facts and law.
The Court ultimately decided that the Minister's Decision was justified on all fronts. While the Court's analysis considered other issues that are not the focus of this article, the main takeaway for our purposes is that the Court determined that the Minister's decision was justified in relation to ACMS' history of non-cooperation. ACMS had ample opportunities to respond to the CRA's correspondence, queries and Proposal Letter prior to the 2012 Reassessment, but failed to do so. There was no question as to whether ACMS, through the Tax Manager, received the CRA's various correspondence. When ACMS requested that the 2012 Audit be reopened in 2019, it was hopeful that the Minister would be sympathetic to its situation, which was largely caused by the questionable actions, or inactions, of the Tax Manager. The Court, in arriving at its conclusion that the Minister's Decision was justified, referred to the DOJ Letter which alerted ACMS, including Amdocs Group's Global Head of Tax, that the Tax Manager was being uncommunicative and uncooperative. Had the Global Head of Tax taken appropriate measures at that time to rectify the situation, the 2012 Reassessment may not have been issued in a manner consistent with the Proposal Letter and a failure to file a notice of objection would have likely been avoided.
While ACMS deserves a tip of the hat for its creative attempt to reopen a completed audit on the basis that the normal reassessment period had not expired, its earlier failings left its ability to contest a $3.3 million reassessment to the discretion of the Minister. ACMS was given ample opportunities to engage with the CRA over the course of this audit, which spanned several years. The Department of Justice even took the extraordinary step to bring the Tax Manager's unresponsiveness to other members of the Amdocs Group, yet no corrective action was taken. The framework of the ITA operates in a manner that allows both taxpayers and the Minister to have a certain degree of finality once the legislated steps for an audit, objection or appeal are completed. Had the Minister exercised its discretion to reopen the 2012 Audit, or had the Court ruled in favour of ACMS, it would have created uncertainty in the tax community and opened the door to a slew of similar requests by taxpayers to reopen audits for years that are not yet statute-barred. If a corporation delegates its tax obligations to a single individual, it is ultimately the corporation's problem, and not the CRA's, if this individual's failures place the company in a dire situation.
1 All statutory references are to the Income Tax Act (Canada) ("ITA").
2 2021 FC 707 ("Amdocs").
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