National Post (National Edition)
When CRA’S bullying bit CRA
How do so many wealthy Canadians avoid tax on offshore income? And why isn’t the Canada Revenue Agency (CRA) more aggressive in its pursuit of offshore tax planning? A recent decision of the Quebec Superior Court offers some answers. The court ordered the CRA to pay damages of close to $5 million to a group of taxpayers following an overzealous offshore tax audit.
Irving Ludmer and the late Arnold Steinberg were friends and successful Montreal businessmen. In 1987, a company was incorporated in the British Virgin Islands to manage a global portfolio of investments. Ludmer and Steinberg were among the initial investors, and were directors of the company. In 2001, the company was reorganized under the name SLT. SLT had approximately 160 Canadian shareholders, and assets under management of about US$1 billion. Its structure was intended to defer Canadian tax for 15 years, and to result in capital gains rates for any accumulated income and gains at that future time.
In 2005, the CRA undertook a project targeted at high-wealth individuals and, as part of that initiative, shareholders of SLT came under audit. After a long and tortuous audit, a number of holding companies belonging to Ludmer and Steinberg and family members were assessed for the years 2005 to 2010. In 2014, the CRA abandoned and reversed most of those assessments.
The taxpayers took the position that the assessments never had a reasonable prospect of success, and that the CRA had taken the strongest possible assessing positions simply to gain leverage for a possible settlement. The taxpayers sued the CRA for damages.
The court concluded that tax reduction was one of the main reasons for the SLT structure. However, the court also noted that, in principle, taxpayers are entitled to organize their affairs in order to pay the least amount of tax. The court then turned to the conduct of the CRA, and found it wanting in a number of respects.
The CRA’S case rested largely on how best to interpret an arcane tax provision — regulation 7000. The CRA argued that this provision applied, and that Canadianresident shareholders of SLT were therefore taxable on an annual basis. The court concluded that this argument was inconsistent with the CRA’S longstanding position on this matter, and that the CRA had therefore applied an assessing position to the taxpayers that it had never applied to any other taxpayer.
The court was also troubled by other aspects of the CRA’S argument. For example, the court concluded that CRA auditors had tried to “bully” the Rulings Division into supporting their argument, instead of acting with caution in the face of reservations expressed by Rulings. The court noted that this creates doubts as to whether, at a certain point, the audit started being conducted in a way to maintain the CRA’S position, rather than to reach the correct conclusion.
The court found that the CRA was at fault in other matters as well. The CRA purposely bungled its foreign-exchange calculations (when converting SLT’S annual U.S. income and gains into Canadian dollars) with the result that SLT shareholders were incorrectly assessed for total income of $434 million over the years, rather than an amount of $44 million. Separately, for the 2005 taxation year (the first year that was still open to assessment), the CRA included income that had accrued for many years prior to 2005, even though there was no legislative support for this inclusion.
In seeking information from the Bermudian authorities, the CRA stated that its request related to a “crimin- al tax matter” when it clearly did not. And the CRA was painfully slow in responding to the taxpayers’ requests for CRA documents under the “access to information” provisions.
While the court concluded that the above were all faults committed by the CRA in the course of its audit, it rejected the taxpayers’ argument that these faults were the result of any hostility or ill will on the part of CRA employees.
The taxpayers had claimed damages of $117.5 million. About $87.6 million of this total involved claims that the court rejected (including punitive damages of $40 million). This left a claim of $29.9 million. Of this amount, the court awarded the taxpayers about $4.8 million, representing a portion of lost interest on tax payments, a portion of professional fees, and $250,000 in total to Ludmer and Steinberg for reputational loss, and for stress, trouble and inconvenience.
The CRA’S conduct in this matter is troubling. More troubling are the facts that ordinary Canadians without deep pockets are often at the mercy of the CRA and that, had the case been governed by the laws of any other province or territory instead of Quebec civil law, the taxpayers might not have prevailed: In 2017, the Alberta Court of Appeal held that the CRA cannot be sued for negligence in the performance of an audit.
THE COURT CONCLUDED THAT CRA AUDITORS HAD TRIED TO ‘BULLY’ THE RULINGS DIVISION.