Introduction – Notable victory for the taxpayer against the CRA's VDP abuse
In September 2024, the Federal Court delivered a notable victory for the taxpayer in Milgram Foundation v. Attorney General of Canada and Minister of National Revenue, 2024 FC 1405. The Federal Court declared that the CRA's decision to reassess the taxpayer after the CRA had already accepted the voluntary disclosure application filed by the taxpayer, an abuse of process. The decision, therefore, was quashed, and the CRA was ordered to "consider the Court's declaration and to take necessary actions to give effect to the reconsidered decision."
Background – Milgram Foundation filed a Voluntary Disclosure Application That Was Accepted
Milgram Foundation was established in 1964 in Liechtenstein and did not file tax returns in Canada before 2015. After considering it might be deemed a Canadian tax resident, Milgram submitted an application under the Voluntary Disclosure Program to the CRA for the 2003-2014 taxation years. In the application, Milgram disclosed that it was established in 1964.
The CRA accepted Milgram's application and proceeded to issue notices of assessment for the 2003-2014 taxation years in 2016. Then, in 2018, the CRA, in a proposal letter to Milgram, informed that upon further review, it had discovered a misrepresentation that amounted to "neglect, careless or wilful default" on the part of the taxpayer and thus proposed to reassess Milgram for the 1998-2002 taxation years (recall that the concerning taxation years in the Voluntary Disclosure application were 2003-2014).
The CRA also said in the letter that the proposal would "correct the fiscal situation of [Milgram] from its creation to December 31, 2014." Milgram applied to the Federal Court for a judicial review.
The Proposal to Reassess Can be a Reviewable Matter
A major point of contention in this case is whether a proposal to reassess is a decision or matter subject to judicial review. The CRA argued that a proposal is not a final decision. It only informs the taxpayers of the intention of the Minister to reassess and invites the taxpayers to respond. The CRA relied on Prince v Canada (National Revenue), 2020 FCA 32 (Prince), where the CRA's proposal to reassess was held not to be a reviewable decision.
The Federal Court asserted that the subject matter for judicial review is a "matter," per subsection 18.1(1) of the Federal Courts Act, which is more than a decision. The CRA's conduct or process leading to the proposed reassessment is a matter of fact.
The Federal Court distinguished the case at bar with Prince. In Prince, the CRA had already initiated an audit of the taxpayer and hence rejected the taxpayer's Voluntary Disclosure application. The Federal Court's decision to dismiss the taxpayer's judicial review application was, therefore, reasonable and did not need to be reviewed.
On the contrary, in this case, the CRA accepted Milgram's Voluntary Disclosure application as voluntary and complete and then reversed and proposed to reassess. The CRA's conduct in reviewing the taxpayer's Voluntary Disclosure application was troubling and thus needed to be examined.
Judicial Review is Not a Collateral Attack on Tax Assessment Jurisdiction
The CRA also argued that, by bringing the judicial review application to the Federal Court, the taxpayer was launching a "collateral attack" on the legal validity of tax assessments, over which the Tax Court of Canada (TCC) has exclusive jurisdiction.
The Federal Court dismissed this argument, saying that the CRA mischaracterized the essence of Milgram's judicial review application. The application was not to ask for a judgment on tax assessments. The underlying process, the Voluntary Disclosure application, does not affect tax liability, and is only to request relief in respect of interests and penalties.
Rather, the application was to ask for a review of the fairness of the CRA's conduct in the process, a matter of administrative law principle over which the Federal Court clearly has jurisdiction.
The CRA's Conduct is an Abuse of Process
The Federal Court found the CRA's conduct in proposing a reassessment of Milgram's prior year returns an abuse of the voluntary disclosure process.
The CRA already accepted Milgram's application as voluntary and complete. The CRA carried out a review and audit of the taxpayer, finding no errors, before accusing the taxpayer of misrepresentation as a pretext for reassessment. The CRA's allegation of misrepresentation relied on the fact that Milgram was established in 1964 (whereas the application was for the 2003-2014 taxation years), information that was provided voluntarily by Milgram in its application and was accepted as complete by the CRA.
Furthermore, in the letter, the CRA said the proposal to reassess Milgram for the 1998-2002 taxation years would correct Milgram's fiscal situation from its creation (in 1964). When asked about the timeline discrepancy, the CRA said it could re-open the matter and issue further assessments in the future. This position, according to the Federal Court, reinforces the arbitrariness of the CRA's approach and the lack of finality in the process.
Pro Tax Tip – Federal Court, a venue to keep the CRA in check
Finally, the Federal Court quashed the CRA's proposal to reassess, granted Milgram declaratory relief because the CRA's conduct was unreasonable, and required the CRA to reconsider its decision.
This case demonstrates the power of the Federal Court and the scope of judicial review. When it comes to tax, the TCC is not the only venue. While the Federal Court cannot invalidate or make a judgment on tax assessments, it can, however, sometimes review the decision of the CRA in the assessment process.
Where the CRA acts in a way that is arbitrary, unfair, or abusive towards the taxpayers, the taxpayer's experienced Canadian tax litigation lawyers can seek recourse at the Federal Court, forcing the CRA to conduct its administrative power in a just and reasonable manner.
Taxpayers will need to consult with experienced Canadian tax lawyers to determine if a Tax Court of Canada appeal should be launched or judicial review should be sought in the Federal Court of Canada.
FAQ
I have received a proposal letter from the CRA to reassess me. Can I challenge the CRA in court?
It depends. A proposal to reassess is technically not a final decision to be reviewed by the Federal Court. If, however, you believe that you have been treated unfairly or abused by the CRA during the process, you can file a judicial review application to the Federal Court to request a review of the CRA's conduct of its administrative powers.
You can also wait for the reassessment and file an objection against the reassessment and potentially file an appeal to the Tax Court of Canada. You should seek counsel from experienced Canadian tax lawyers to see what is best for your case.
The CRA has been abusive in reassessing me. Could the Federal Court quash the reassessment?
Generally speaking, the Tax Court of Canada has exclusive jurisdiction over the validity of tax assessments. If you believe the reassessment is incorrect, you need to file an objection with the CRA, and if the CRA does not resolve the objection to your satisfaction, you may appeal to the Tax Court of Canada.
If the CRA has indeed been unreasonable in its conduct of the reassessment, you can seek declaratory relief from the Federal Court via a judicial review application. You would not want to knock on the wrong door and jeopardize your chance at the right one. Hence, it is highly recommended that you seek counsel from experienced Canadian tax lawyers before taking action.
I submitted a Voluntary Disclosure application that was rejected by the CRA. Can this rejection be challenged?
Yes. While there is no right of objection to dispute the rejection of a voluntary disclosure application, you can request that the CRA carry out a second review. Please note that if your application is denied for being incomplete, due to information not submitted within the stipulated time frame, the CRA will not consider your request for a second review.
The CRA's rejection of a voluntary disclosure application is also a decision reviewable by the Federal Court. So, if you are still not satisfied with the result after the second review, or if the CRA has refused a second review, you can file a judicial review application, and the Federal Court will assess the reasonableness of the CRA's determination.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.