In its recent decision in Choptiany,1 the Tax Court of Canada ("TCC") granted the extraordinary relief of allowing three taxpayers' appeals, without them being considered on their merits, due to the Canada Revenue Agency's ("CRA") serious and repeated procedural non-compliance with the TCC's rules and previous orders. Accordingly, the taxpayers won their appeals, at a preliminary hearing, called a motion, before the appeals were heard by the TCC at a trial. This article discusses the background facts and the motion to allow the appeals and provides some practical considerations.
The case involved three appellants who were serving as lead cases for a large number of taxpayers, meaning that it was intended that the outcomes in their appeals would inform the resolution for all of the other cases. The TCC was clearly unsympathetic with what the taxpayers had done, describing what they participated in as "... tax schemes that resemble in many respects the de-taxation practices of sovereign citizens, though with less of the non-fiscal cultish aspects – schemes for which at least one promoter has been convicted and sentenced to a jail term."
The appeals had at least a ten year procedural history, with the first notices of appeal having been filed with the TCC in 2012. This history featured a long series of serious procedural defaults and non-compliance by the CRA and this was the third motion dealing with essentially the same issues. The TCC certainly appeared to have finally lost patience with the CRA.
Essentially, the grounds for the motion seeking to allow the appeals were the CRA's repeated failures to comply with:
- Rules for examinations for discovery; and
- Two previous TCC orders.
In TCC appeals, both parties are entitled to conduct examinations for discovery, where they are entitled to ask the opposing party any questions relevant to the issues in the appeal. This questioning is done under oath and is used to discover the basis for the other party's position, with the answers being available to read into the record at trial. The respondent is required to put forward a knowledgeable CRA official to be examined and to answer all relevant and proper questions, either at the examination or later by way of answers to undertakings.
The CRA's (and to a limited extent their counsel's) failures to comply with the TCC's rules and previous orders were harshly criticized over dozens of pages of the TCC's reasons for decision and included:
- Not correcting answers previously given on examination for discovery, with one example being that the CRA official initially claimed not to have been aware of any activities by CRA Criminal Investigations against these appellants, despite the respondent later advising that one of the lead investigators was to be the only witness called by the respondent at the trial and would be using the investigation's file to refresh his memory;
- Providing answers to undertakings only two business days before the trial had been scheduled to start;
- Restrictively interpreting the TCC's orders, including having "... inappropriately restricted the scope of CRA's search for ordered documents by wrongly, unreasonably and intentionally inserting restrictive words in what they had CRA look for ..." and that they "... wrongly, inappropriately and intentionally did not disclose an actual investigation by CRA Criminal Investigations into one of the Appellants ... by choosing to interpret a reference to any investigation as a reference only to 'full scale investigations'"; and
- Failing to answer proper questions and generally obfuscating.
Regarding the CRA official put forward for examination, the TCC stated: "These documents demonstrate how unprepared and uninformed, or uncooperative and misleading, the Respondent's nominee was at both the Second Discovery and the Third Discovery."
In his analysis, the TCC Judge affirmed that he "may not be able to force parties to be cooperative at the discovery stage, but I can and will enforce its rules and orders, and otherwise ensure that both parties' rights to a fair process are respected." The TCC further confirmed the trite proposition that it has inherent jurisdiction to deal appropriately with parties abusing its processes. However, after reviewing the jurisprudence, the TCC also acknowledged the principle that the least extreme appropriate sanction should be chosen first, stating that: "Allowing or dismissing an appeal is a drastic step given its finality and generally reserved for defaults that are multiple, egregious and intentional."
The TCC's conclusions included that the Respondent:
- Adopted and demonstrated a consistent pattern of non-compliance with the TCC's orders and rules;
- Repeatedly failed to have its nominees at any of the three oral examinations be knowledgeable and prepared; and
- Caused prejudice to the Appellants and undue delay.
Finally, the TCC concluded that it would be pointless to merely make yet another order for the Respondent to comply: "The Respondent has, without excuse or reason, continued to not comply with my repeated orders for the same disclosure. No party in such a position, appellant or respondent, should expect to simply be ordered again to comply with the Court's discovery rules and orders already made. To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: 'Stop! Stop! – Stop, or I'll yell stop again!'"
Although we understand this TCC decision is not going to be appealed, it remains to be seen what impact it will have, if any, on the large number of other taxpayers with the same or similar pending issues and specifically the extent to which those other taxpayers may be able to seek similar relief, given the passage of time and consequential prejudice to them, while awaiting the outcome of these long delayed appeals.
In terms of practical considerations, the most obvious takeaway from this case is the importance of scrupulously complying with all of the TCC's rules and orders, because the TCC has the power to and will control its own process. Although litigation is of course an adversarial process that can be vigorously contested, this case also demonstrates how important it is to work as cooperatively as possible with opposing counsel. Finally, it's critical for the entire system to function that justice be done and be seen to be done. It can be unsettling for a taxpayer to observe that everyone in the courtroom, other than the taxpayer's counsel, is paid by the Federal government. Cases like this, where the ultimate sanction on the merits is granted, commensurate with the extent of the serious and repeated procedural non-compliance, go a long way towards enhancing the public's respect for the judicial process.
1. Choptiany v. H.M.K., 2022 TCC 112.
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.