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Federal Tax - Assessments. Hud v. Canada
In Hud v. Canada (Fed CA, 2024) the Federal Court of Appeal granted a motion to summarily dismiss (effectively quash) an appeal from the Tax Court, where the Federal Rules do not have any express quashing authority.
Here the court considers the role of the Minister of National Revenue in assessing a taxpayer, their 'assumption' system, appeals to the Tax Court and errors made by the appellant at that appeal stage:[27] Before I address these alleged errors, an explanation about the role of the Minister’s assumptions may be helpful.
[28] When assessing a taxpayer, the Minister makes certain assumptions. The Minister’s assumptions underlying the assessment must be described in the reply to the appellant’s notice of appeal in the Tax Court: Tax Court of Canada Rules (Informal Procedure), SOR/90-688b, s. 6(1)(d). To succeed before the Tax Court, a taxpayer has the onus of demolishing those assumptions (Lacroix v. Canada, 2008 FCA 241 at para. 18; Hickman Motors Ltd. v. Canada, 1997 CanLII 357 (SCC), [1997] 2 S.C.R. 336, 148 D.L.R. (4th) 1 at paras. 92-93), or establishing that, even if true, they do not support the assessment under appeal.
[29] To demolish the assumptions, the taxpayer must convince the Tax Court, on a balance of probabilities, that the assumptions are incorrect, typically by leading relevant, credible evidence that does so. If the Tax Court is not convinced that the Minister’s assumptions of fact are incorrect, it is obliged to treat those assumptions as true: Pollock v. R. (1993), 161 N.R. 232, 94 D.T.C 6050 (F.C.A.) at para. 21.
[30] Here, in the absence of returns from the appellant, the Minister made assumptions about the amount of income he earned based on information obtained from other sources. The Minister also assumed the appellant had not filed tax returns for 2017, 2018 and 2019. The Minister assessed tax on that income and late filing penalties.
[31] With that context, I return to the three errors alleged by the appellant.
[32] I cannot agree that the Tax Court assumed the appellant’s taxable income was the same as income. (Here, I understand the appellant to mean "“net income”" and "“gross income”", respectively, because the only deduction he raised before the Tax Court was depreciation—capital cost allowance in tax terms—which is a deduction in computing income, not taxable income.) Rather, the effect of the Minister’s assumptions is that the Minister assumed that the appellant’s income and net income were the same. Put another way, the Minister assumed the appellant had income from three sources in amounts specified. The Minister computed the appellant’s liability for taxes on the basis that those amounts constituted his only income and that he had no depreciation deduction.
[33] Before the Tax Court, the appellant conceded that he received income of the nature assessed. Although he was not certain the amounts were correct, he led no evidence to dispute them. While he asserted an entitlement to depreciation, the Tax Court described that evidence as not "“cogent”." In other words, based on the totality of the evidence, the Tax Court was not persuaded, on a balance of probabilities, that the Minister’s assumptions or the assessments concerning his income were incorrect.
[34] If the appellant believed the income amounts were incorrect, that he had a balance entitling him to capital cost allowance, or that other assumptions of fact underlying the assessments were wrong, the time to lead evidence to establish that was before the Tax Court. An appeal based on this first alleged error has no prospect of success.
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[39] Where an assessment of income tax is appealed to the Tax Court, the only issue before the Tax Court is the validity of the assessment based on the relevant provisions of the Income Tax Act: Main Rehabilitation Co. v. Canada, 2004 FCA 403 at para. 8; Ereiser v. Canada, 2013 FCA 20 at para. 31. It is "“clear that the Tax Court of Canada does not have the jurisdiction to cancel an established assessment based on improper conduct by the Minister”" (Robertson v. Canada, 2017 FCA 168 at para. 59) or any other government representative, even if that conduct is proven and might be viewed as "“reprehensible conduct…such as abuse of power or unfairness”": JP Morgan Asset Management (Canada) Inc. v. Canada (National Revenue), 2013 FCA 250 at para. 83, and cases there cited.
[40] Thus, an appeal based on the Tax Court’s failure to take into account the appellant’s allegations regarding the seizure of his property has no prospect of success.
[41] "The third alleged error is that the Tax Court ordered the appellant to file returns for the 2020, 2021, and 2022 taxation years. While in the course of its oral reasons, the Tax Court urged the appellant to file those returns, it did not order him to do so. The Tax Court’s clear motivation was to warn the appellant that failure to file them could result in further assessments of penalties for failure to file. Importantly, the Tax Court’s judgment does not order the appellant to file tax returns; it only dismisses "“the appeal from the assessment made under the Income Tax Act for the 2017, 2018 and 2019 taxation years…without costs.”" An appeal alleging the Tax Court erred in making an order it did not make has no prospect of success."
C. Did the Tax Court’s Judgment Address the Relevant Taxation Years?
[42] I must address one final point. The appellant’s notice of appeal filed with the Tax Court purported to appeal his 2012 to 2023 taxation years. However, the Tax Court judgment clearly only addresses assessments of the 2017, 2018 and 2019 taxation years. While the appellant claims this was an error, he cannot appeal assessments of taxation years to the Tax Court simply by listing them on his notice of appeal.
[43] An assessment may be appealed to the Tax Court only after a notice of objection to that assessment has been filed with the Canada Revenue Agency: Income Tax Act, s. 169(1). Moreover, the time within which an objection may be filed is limited: Income Tax Act, ss. 165, 166.1(1), 166.2(1).
[44] I have carefully read the transcript of the proceeding before the Tax Court, the notice of appeal filed in the Tax Court, and the Minister’s reply to that notice of appeal. I am satisfied that the only taxation years properly before the Tax Court were the 2017, 2018 and 2019 taxation years. Obviously, his 2022 and 2023 assessment could not be before the Tax Court given he filed his notice of appeal on April 6, 2023.
[45] However, even if the other taxation years referred to in his notice of appeal were properly before the Tax Court, the Tax Court’s judgment only dismisses the appeals of the 2017, 2018 and 2019 assessments. Had they properly been before the Tax Court, nothing in the decision under appeal suggests they are not still before it.
[46] Thus, an appeal based on the Tax Court’s failure to address any other taxation years has no prospect of success. . Iris Technologies Inc. v. Canada
In Iris Technologies Inc. v. Canada (Fed CA, 2023) the Federal Court of Appeal considered the (surprisingly non-existent) evidentiary basis that can underlie an Excise Tax Act (and ITA as well) assessment. Here, the issue arose in the context of a R170.1 motion ['Judgments on Admissions or Certain Documentary Evidence'] under the Tax Court of Canada Rules (General Procedure):
[4] Iris appealed the assessments to the Tax Court and moved for judgment to allow its appeal under Rule 170.1. Paragraph (a) of Rule 170.1 provides that a party may apply for judgment “upon any admission in the pleadings or other documents filed in the Court, or in the examination of another party […] without waiting for the determination of any other question between the parties.”
[5] The basis of Iris’ motion, and of the appeal before this Court, is that during cross-examination at the Federal Court, the affiant testified that the Minister had not completed the audit when she issued the notices of assessment, thereby admitting that the Minister made no findings of fact to support her assessments. Iris argues that without a factual foundation, the assessments were “made contrary to law”: Appellant’s memorandum of fact and law, at para.
[6] The Tax Court reviewed the evidence and concluded that there was no clear admission, if any, which would eliminate controversy between the parties for the purposes of Rule 170.1. In this regard, the Tax Court noted that the cross-examination of the affiant should not be considered an examination of another party under paragraph (a) of Rule 170.1 since the affiant was not testifying on behalf of the Minister in the course of the appeal before the Tax Court. With respect to the argument that the assessments lacked a factual foundation and thus, were contrary to law, the Tax Court stated that the Minister often does not have a complete factual matrix within which she must act. The Court added that subsection 299(3) of the Act deems an assessment to be valid and binding, subject to being vacated on an objection or appeal. On that basis, and relying on this Court’s decision in Canada v. Lux Operating Limited Partnership, 2020 FCA 162, the Tax Court concluded that the issue of the validity of the assessments should proceed to trial on its merits.
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[8] We would add that the Supreme Court of Canada’s decision in Western Minerals Ltd. v. Minister of National Revenue, 1962 CanLII 70 (SCC), [1962] S.C.R. 592, 34 D.L.R. (2d) 163 [Western] supports the conclusion that an assessment remains valid even if the Minister has not completed, or even begun, her audit. In so concluding, the Supreme Court agreed with the following comments:[T]here is no standard in the [Income Tax] Act or elsewhere, either express or implied, fixing the essential requirements of an assessment. It is exclusively for the Minister to decide how [s]he should, in any given case, ascertain and fix the liability of a taxpayer. The extent of the investigation [s]he should make, if any, is for [her] to decide.(Western at p. 596.) [9] While Western was decided in the context of the Income Tax Act, its reasoning applies to the Excise Tax Act. We do not see Western as being inconsistent with J.P. Morgan Asset Management (Canada) Inc. v. Canada (National Revenue), 2013 FCA 250, [2014] 2 F.C.R. 557.
[10] Even if there was a clear admission that the Minister made no findings of fact in assessing, the Minister would bear the burden of proving at trial facts to support the assessments: Loewen v. R., 2004 FCA 146, [2004] 4 F.C.R. 3 at para. 11. The admission would not, in itself, determine the input tax credits, if any, to which Iris is entitled. What matters here is the determination of the input tax credits—not the Minister’s mental process: R. v. Riendeau, 1991 CanLII 14206 (FCA), [1991] 2 C.T.C. 64, 45 D.T.C. 1416 (Fed. C.A.) at para. 4. This requires a trial.
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