Litigation – Corporate Tax

Corporate tax litigation involves disputes engaging tax planning for high-net-worth individuals; individual types of tax such as HST, income, and withholding tax; taxation of commercial transactions; corporate structures, reorganizations, and financing; taxation of particular industries; and international tax matters such as transfer pricing.

CRA’s Duty of Care

The Québec Court of Appeal’s award of $2.4 million, including $1 million in punitive damages, in favour of a company destroyed by Revenue Québec’s abuse of its powers has gone a long way to imposing a duty of care on Canadian fiscal authorities.

To be sure, Agence du revenue du Québec c. Groupe Enico inc., released in early 2016, turned on the duty of good faith enshrined in Québec’s Civil Code. But the decision is in line with two common law rulings on the point: both the Federal Court of Appeal’s decision in Canada v. Scheuer, released just weeks before Enico, and the British Columbia Supreme Court’s 2014 judgment in Leroux v. Canada Revenue Agency affirmed that CRA has a duty of care to taxpayers.

In considering the scope of the duty, however, it’s important to note that Enico featured outrageous facts. They included information withheld from the taxpayer, destroyed notes, lost evidence, auditors operating under false pretenses, fraudulent entries in CRA working papers, and revelations about quotas imposed on Revenue Québec personnel. The evidence also showed that Revenue Québec continued to seize assets even after it knew that the assessments against Enico were grossly inflated.

The BC case involved Irvin Leroux, a Prince George businessman who fought a 19-year battle seeking compensation against CRA for wrongfully imposing tax assessments that exceeded $1 million. During its audit, CRA took original documents without authorization, shredded them accidentally, and then asked Leroux to provide further documentation. 

Even after CRA reduced the assessment, Leroux continued his claim for compensation, alleging that the Agency’s actions had caused him to lose his business. The Canadian Taxpayers Federation supported Leroux in his fight. 

Leroux won the battle but lost the war. Tax professionals called the BC court’s ruling a milestone for taxpayers seeking to hold CRA accountable for its actions. The hard facts, however, are that not only did Leroux fail in his drive to receive compensation, but the Court ordered him to pay the CRA’s legal fees as well. The case has now settled on appeal with Mr. Leroux paying $10 towards those fees.

The key difference between the results in Leroux and Enico is that the BC court found that CRA’s actions did not cause Leroux’s losses. By contrast, the Québec Court of Appeal found a direct link between CRA’s conduct and the collapse of Enico’s business, which had grown substantially and enjoyed more than $5 million in sales before CRA came along.

Federal Court Mandates Disclosure of Reserves for Contingent Tax Liabilities

A decision of the Federal Court requiring public companies to disclose to the Canada Revenue Agency the reserves they take for contingent tax liabilities has had the business community and its advisors up in arms. The case, Minister of National Revenue v. BP Canada Energy Company, marked the first time that the CRA has gone to court to compel a taxpayer to turn over its UTP analysis of potential tax exposures for the purpose of being used by the CRA as an audit roadmap.

To comply with their reporting obligations, public companies’ consolidated financial statements must calculate reserves to account for contingent tax liabilities, including an estimate of the liability the company and its subsidiaries would face if the CRA challenged uncertain positions in the tax returns. 

The calculations are supported by working papers that identify the issues that the company knows might be subject to challenge. These are known as “Issues Lists” or “UTPs” (uncertain tax positions) and represent the areas at highest risk for loss of tax revenue. Historically, CRA has not sought production of Issues Lists while conducting audits of corporation. In May 2010, the government effected a policy change requiring production of “tax accrual working papers,” including those relating to reserves for contingent tax liabilities. The policy stated that these documents were “not routinely required” but that officials “may request” them.

During the course of an audit of BP Canada, the company redacted the Issues List from responses to CRA enquiries. CRA brought a motion to compel production of the redactions. There was no evidence that CRA had special concerns that led to the request: its position before the Court was that it sought the Issues List “no matter what.” The Agency’s submissions to the Court, however, justified the request as “required to verify whether BP’s uncertain tax positions are compliant with the [Income Tax] Act.” The court granted the CRA’s request.

In light of the decision, the best recourse for taxpayers may be to assert legal privilege over UTP documentation by running the analysis and documents through a law firm. The danger, of course, is that the information must go to the auditor at some point and that could threaten the solicitor–client privilege. Lawyers suggest, however, that taxpayers should be able to rely on the doctrine of limited waiver which holds that the waiver of privilege given for use by the auditor is not necessarily a waiver of privilege against the world at large.


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