Tax changes could flood court, warn chief justices

The current chief justice and a former chief justice of the Tax Court of Canada are warning that a “reasonableness test” inside the federal government’s proposed tax changes aimed at private companies could lead to a higher volume of appeals from taxpayers, swamping the already overburdened legal system.

“I think it’s going to substantially increase the number of cases that go to the court because it’s going to be a battle between the CRA and the taxpayers as to what ‘reasonable’ means in various situations,” former chief justice Gerald Rip said in an interview. His comments mirror those made by current Chief Justice Eugene Rossiter in a speech in November, according to several people who attended the event.

Their warnings come as the federal government prepares to implement its tax changes for private Canadian corporations, initially proposed in July, which include a provision that limits income sprinkling between family members. They also come amid major processing delays at the CRA, partly as a result of record levels of appeals to the agency. The chief justices have said that the higher number of appeals now threatens to spill over into the courts.

Some owners of private corporations fiercely opposed the government’s tax changes after they were proposed this summer, forcing it to retreat from its plans. Opposition became so heated that Finance Minister Bill Morneau in October introduced a so-called “reasonableness test” aimed at determining whether family members have a valid right to earn income. It measures capital and equity contributions, labour contributions, the financial risks assumed and the past contributions of family members to determine the validity of their claims.

“It’s very subjective and very open to litigation,” Rip said.

The two chief justices have voiced concerns over the higher number of appeals entering the court system. They also say the volume of appeals is likely to rise after the federal government implements its proposed tax changes, as well as boosting funding for the auditing division of the CRA. The government recently boosted funding to the agency by about $1 billion, much of which is earmarked for the auditing and collections divisions in a bid to crack down on tax evaders.