Changes to taxes risk swamping courts

‘Reasonableness test’ likely to boost appeals

OTTAWA • The current chief justice and a former chief justice of the Tax Court of Canada are warning that a “reasonableness test” inside Ottawa’s proposed tax changes aimed at private companies could lead to a higher volume of appeals f rom 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. Rip had also made s i milar c omments in a speech in September.

Their warnings come as Ottawa 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 Ottawa’s tax changes after they were proposed this summer, forcing the government 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 Ottawa 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.

Chief Justice Rossiter made his comments during a speech in November hosted by the Canadian Tax Foundation. The CTF would not release video of the speech, which was closed to the public and most media, and the Tax Court of Canada declined an interview request with Chief Justice Rossiter. However, the Financial Post spoke to three accountants and tax lawyers who attended the speech and took written notes during the event.

Cathie Brayley, a partner at Clark Wilson LLP in Vancouver, quoted Rossiter as saying that “litigation will ensue” following Ottawa’s proposed changes, and that because of a rise in appeals and shortage of resources, “access is going down, and stress is going up,” for people involved in Tax Court of Canada proceedings.

Rossiter also suggested that a current shortage of judges at the tax court could force it to dial back the frequency of sittings, as well as restrict the number of locations that the court visits, the people in attendance said.

The Tax Court of Canada is different from other courts in that judges travel to various locations around Canada in order to hear appeals from taxpayers. The court currently has 23 judges who visit 59 communities around Canada, according to its website.

“( Rossiter’s) comments were very open and honest, and there was a sense of frustration,” said Peter Weissman, a partner at Cadesky Tax and Associates LLP in Toronto, who also attended the speech.

The Liberal Party shuttered the judicial advisory committee ( JAC) of the Tax Court of Canada soon after it entered office in late 2015. The committee is responsible for vetting applicants for tax court judges. A new JAC was not appointed until early November 2017, causing a backlog in new appointments.

Two judges left their positions in 2016, and another is expected to leave in February, according to former chief justice Rip.

Lawyers and tax professionals say Ottawa’s tax changes for Canadian private corporations are likely to cause more companies to dispute CRA decisions.

“It’s invariably going to lead to more reassessments,” said Dean Blachford, a tax litigation lawyer at HazloLaw Professional Corporation in Ottawa.

Taxpayers request reassessments from the CRA to dispute their income tax statements. If they disagree with the reassessment, they can then file an objection. If the issue is still not resolved after the objection, it is passed on to the courts.

Rossiter reportedly said in November that the number of appeals to the tax court had grown 42 per cent between 2012 and 2017.

Morneau has not yet released the final details of the tax changes.