The Tax Court Appeal Process

Tax court appeals arise in the federal Tax Court of Canada after a final adverse decision is made by the Canada Revenue Agency. The taxpayer challenges the CRA’s tax assessment of liability, interest and penalties primarily by  challenging the assumptions made in deciding what is owed by the taxpayer. These appeals often involve the traditional technique of interpretating the tax code as well as situations where the  broader principles  of statutory interpretation become relevant to determine the intent of the particular tax legislation that may be under dispute.

A further level of appeal can be made to the Federal Court of Appeal. After this stage, the only other court application is a leave to appeal application to the Supreme Court of Canada. Most cases are finalized at the first level of the Tax Court. GST assessments are also challenged in this manner.

All information exchanged with the lawyer is subject to privilege and remains confidential. This information is not available to Canada Revenue Agency under the law. The privilege is not recognized with respect to information exchanged with any other professionals including accountants.  The solicitor-client privilege remains a sacrosanct principle of fundamental law which is the basis of our legal system.

Tax appeals are technical and invariably involve case law analysis which is widely utilized in decisions of the Tax Court. Having a lawyer in a tax court can be of considerable benefit.  Given the details of numbers that are at stake in the Tax Court, and the minute distinctions in statutory language, it is easy to see how,  in this particular area of the law, success indeed lies in the details.

If you have a tax court appeal matter, you would benefit from reading the Civil Litigation Section of this website to understand the initial process that commences the litigation and  the subsequent discovery process.

A tax court appeal begins with the taxpayer’s Notice of Appeal filed in th Tax Court, to which the government files in response a Reply within 60 days of receiving the Notice of Appeal.  The appellant can within 30 days of receiving this Reply file an Answer. These legal steps are called pleadings, which seek to  identify the essential facts, law, sections in the Income Tax Act relied upon, and the remedies sought by a taxpayer.

CRA, as a responding party, represented by the Department of Justice, must identify the assumptions on which the appealed assessment is based.   Allegations which are not specifically denied run the risk of being admitted if it is not clearly stated that there is no knowledge of the facts on which the allegations are based, when such knowledge does not exist.  Thus, allegations must either be denied, admitted or clearly stated to be unknown, with paragraph reference as to lack of knowledge of contents.

When you are filing an Answer to the Reply, you must admit, deny or claim no knowledge of the new facts that are stated in the Reply but were not in your original Notice of Appeal.   You must also state any other material facts, reasons and statutory provisions not stated in the original Notice of Appeal that you now rely upon.  Alternative positions can be stated in pleadings.

These pleadings are followed by the discovery process, which explores legal issues and facts related to the overall litigation.  The section of the discovery process and judicial pre-trial in the Civil Litigation section of this website applies here as well, given the substantive similarity in the legal principles with Tax Court procedures that run parallel to the provincial court procedures.

Tax Court is governed by federal jurisdiction and specifically the Tax Court of Canada Act, which has similar rules pertaining to the court’s truth-seeking function as do provincial courts.  The Act and the Rules made under it, must, however,  be consulted for timings, specific forms, and specific relief and steps needed to obtain it.  The wesbite is intented to explain what is involved generally.

It is useful to understand the principles that can apply in a tax court appeal.  Though called an appeal, the trial process of a court system is engaged, and the process of drafting a claim commences.

This means having sufficient evidence beforehand or preparing and arranging for it for the Tax Court, sketching its story line to fulfill the requirements of the law in respect of overturning CRA’s decision, and timely filing the claim in the form of an appeal in the Tax Court.

The Tax Court appeal process is thus a subset of the civil litigation trial process, and differs from the traditional idea of an appeal in law which engages purely issues of law, which are generally the domain of a separate higher appeal court.

A tax court appeal is actually a trial of tax matters of relevant issues where the appellant is like a plaintiff starting a case with full permission to prove its facts which will come to light to the Tax Court judge for the first time without prior notions of the case.  Since the judges have long experience in all legal matters and full familiarity with the breadth of all legal principles, the process is an opportunity to present one’s case fully and can expect a complete hearing of the issues.

Arguing the facts and the law in optimum combination before the judge, is the best technique in proving your case.  An appeal of such a decision to the next level will be a pure appeal where the facts of the first Tax Court decision will not be subject to a trial process, and the issues there would be decided without new evidence.

If you already have a Tax Court decision, then the Appeals section of this website would be useful in understanding the tests and processes applied in pure appeals under the law, should your matter be one of an appeal of a Tax Court decision to the Federal Court of Appeal.

Reading the Civil Litigation section of this website will help to have a basic understanding of the pre-trial and the trial process, which is what a first level Tax Court appeal is actually about, despite being called an appeal.

After reading that section, it is suggested you read the integrated blog entitled How to Prepare for a Court Trial or Tribunal Hearing, to which the Civil Litigation section will link you.

The blog will assist in the actual preparation for the trial that will take place after pleadings, discovery and judicial pre-trial are completed in the Tax Court case.  This trial will  determine the outcome of your Tax Court appeal in the form of a Tax Court judge’s decision that will generally be decided some time after the trial itself upon reflection time by the judge.

The blog explains the legal and psychological elements of the evidentiary process, and what you can do to maximize your opportunity to succeed at this final and crucial stage.

It is useful to equip yourself with all of the important procedural information that is central to all types of appeals at the Tax Court, involving documentary evidence and its presentation, the testimony of the appellant and possibly others, and the concurrent application of legal principles upon which the Tax Court trial process is based.  This will hopefully provide you the confidence needed in your preparation for all components of the pre-trial as well as the final trial.

Specialty courts and tribunals often permit a full opportunity to litigate.  The notion of an appeal here arises because you are challenging CRA’s findings.  But the process is one of trial, since it permits fresh findings of fact to be made by the Tax Court.

This could result in the Tax Court setting aside the assumptions made by the government, and reordering and varying assessments improperly made against you as the taxpayer.

The following characteristics of the Tax Court should be noted:

SUPERIOR COURT WITH EXCLUSIVE JURISDICTION

The Tax Court of Canada is a superior court of record and has general original and exclusive jurisdiction regarding tax matters, with branches throughout the country.  Though the Tax Court Rules and Regulations concerning its operations are similar to the provincial court rules of court, it is important to review the Tax Court of Canada Act and to appreciate its distinct approach to Informal and General Procedure.

INFORMAL AND GENERAL PROCEDURE

The Tax Court allows Informal Procedure to be followed where the rules of evidence are not strictly applied in cases where the aggregate of all  amounts in issue is equal to or less than $25,000, or where the amount of the loss that is determined under the Income Tax Act  and that is in issue is equal to or less than $50,000.  Informal Procedure also applies if the only subject matter of the appeal is an amount of interest assessed under the Income Tax Act.

Note that you as the taxpayer must elect Informal Procedure as a choice at the time of filing the Notice of Appeal, or under extended time as is permitted under the rules of Court, which are different from the Tax Court Act, though made under its authority.

If the Attorney General of Canada applies to the Court to have General Procedure apply where the outcome of the appeal is likely to affect any other appeal of the appellant or any other assessment or proposed assessment even if in a different tax year, of the appellant, in a total amount higher than $25,000, then the court must grant that application.  Also, if the amount of interest in issue in the appeal exceeds $25,000, then the Court must grant the application.  Interest accruing after the date of the notice of assessment is not part of this calculation.

The taxpayer can limit the aggregate of the amounts in issue to less than $50,000 and have the Court apply Informal Procedure.

The technical rules of forms of pleadings do not apply if the procedure is informal, though the filing deadline is critical to ensure the Tax Court Registry will accept the Notice of Appeal.

Where the Court assesses during a hearing that the amount in issue is less than $25,000, it can adopt the Informal Procedure.

In cases where the taxpayer files a Notice of Appeal with election of General Procedure, and the Attorney General considers Informal Procedure should apply, it can apply for such a determination by the court instead of filing a Reply within the time usually allotted to respond.

The Court will try to schedule an Informal Procedure appeal within 6 months or 12 months of the government’s Reply.

Generally, an Informal Procedure appeal is decided within 90 days of hearing.  Reasons need not be in writing.

WHETHER DISCOVERY NEEDED

If the total of all amounts in issue in an appeal under the Income Tax Act is $50,000 or less, or if the amount of loss determined under that Act and that is in issue is less than $100,000, no oral examination in the form of discovery is required unless the government and the taxpayer agree to have one, or unless the court upon application by a party considers one to be necessary for the proper conduct of that case. A similar disputed cut off limit of $50,000 for HST for determining if discovery would be needed, applies.

COSTS AWARDED BY COURT

If the Minister of National Revenue appeals such a decision of the Tax Court to the Federal Court of Appeal under the Federal Courts Act, then the reasonable and proper costs of the taxpayer in the appeal shall be paid by the government.

This would be rare.  After the Notice of Appeal is filed, offers of settlement are discussed, since these are taken into account by the court after the trial in determining if costs should be awarded by the court against a party.  The Court examines if a case ought to have been settled under the offer.

This means the litigation must be carefully organized and your position needs to be well-articulated to show at the end of the case that you were always reasonable even if unsuccessful.

The above statutory commentary applies equally in GST/HST matters under Part IX of the Excise Tax Act, and Informal Procedure can be elected where the amount in dispute does not exceed $50,000.

If the Attorney General requests the Court to apply General Procedure where Informal Procedure would normally apply in a GST/HST appeal matter where the amount in dispute does not exceed $7,000 and the aggregate of  supplies for the prior fiscal year of the person did not exceed one million dollars, then the Court will order all reasonable and proper costs of the person to be borne by the government.

Where the amount in dispute does not exceed $7,000 in HST and the aggregate of supplies in the previous fiscal year of the person does not exceed one million dollars, the Court may also award costs if the judgment reduces the amount in dispute by more than one half.

HOW A CONSTITUTIONAL QUESTION IS RAISED

A notice of constitutional question must be served on the Attorney General of Canada and the Attorney General of each province if the constitutional validity, applicability or operability of the Act of Parliament or of its regulations is at stake before the Court.

STATISTICAL FINDINGS OF CRA

CRA’s 2012 Final Report of the Corporate Audit and Evaluation Branch, Program Evaluation Division, states that 48% of cases filed in the Tax Court had hearings before a judge and 28% of these heard cases were partly or wholly successful, under its latest available data.

REASONED LEGAL STRATEGY

The reasoned legal strategy is to have an early assessment of your case, organize your documents for effective presentation throughout, and prepare witnesses, including an expert witness if necessary, and possibly having a lawyer prepare your accountant to testify if the case warrants it.  It is important to file a well considered Notice of Appeal and often an Answer to the Department of Justice’s Reply to show the flawed assumptions of the CRA’s position.

Equally important is to know the cases that support your position and to infuse and integrate their principles in the facts in your pleadings, as well as to show how they apply during oral presentation in the Tax Court.

We have succeeded in reversing government penalty and reducing tens of thousands of dollars through the appeal process.