TAX LITIGATION 101: TAXPAYER RELIEF AND OTHER EQUITABLE REMEDIES

AMANDA S.A. DOUCETTE

STEVENSON HOOD THORNTON BEAUBIER LLP

LAUREN E. SCHARFSTEIN

STEVENSON HOOD THORNTON BEAUBIER LLP

This is the last article of a series of 3 articles on the topic of tax litigation. In Part 1 of the Series, we discussed filing objections and appeals with Canada Revenue Agency, and in Part 2 of the Series, we discussed various issues relating to collection of taxes.

If a taxpayer disagrees with the content of his or her Notice of Assessment/ Reassessment, the typical remedy is to file a Notice of Objection with Canada Revenue Agency (“CRA”). However, if the taxpayer’s dispute is with respect to the imposition of interest, and/or if the taxpayer cannot pay the amount owing, and/or if the assessment/reassessment is the result of a mistake or error, other remedies should be considered.

Taxpayer Relief The Minister of National Revenue (“MNR”) has the legislative authority to grant relief to a taxpayer from tax, interest and penalties in four key circumstances:

1. Waiving or cancelling of penalties and interest; 2. Extending a filing due date for elections; 3. Authorizing a refund of tax to an

individual even though a return is filed past the statute-barred period; and 4. Authorizing a reassessment or redetermination for an individual past the three-year reassessment period, where the adjustment would result in a refund or reduction in the amount payable. The forms of relief mentioned above are subject to the discretion of the MNR. An application must be made within 10 years of the relevant tax year in which relief is sought. The MNR may grant relief from penalties and interest in any of the following circumstances:

(a) Extraordinary circumstances beyond the taxpayer’s control (ex: natural disaster or serious accident or illness to the taxpayer); (b)Actions of the CRA that contributed or impacted the penalties/interest; or (c) Inability to pay or financial hardship 1 . A taxpayer’s application for relief from penalties and interest should be made using Form RC4288 (and Form RC376 if financial hardship is argued). In determining whether relief is merited, the MNR will consider the taxpayer’s history of tax compliance and knowledge of the balance and accrual of interest, and whether the taxpayer acted quickly to remedy the matter.

Rectification and Rescission If the assessed amount is otherwise correct but is disputed because there is an error/mistake in the underlying legal documentation or transaction, then consideration should be given as to the applicability of the equitable remedies of rectification and rescission.

Rectification is an equitable remedy granted by the superior court of each province. This remedy is utilized when there is a legal document that does not match the original intention of the parties. If rectification is granted, the legal document is amended retroactive to the date of the original document. The following evidence is required (at a minimum) to make such an application: (1) proof of the original intention of the parties; (2) an admission from the person who made the mistake; and (3) an underlying legal document that can be amended.

Rescission is also an equitable remedy granted by the superior court of each province. This remedy allows a transaction to be retroactively cancelled, annulled or set aside. An application for rescission requires: (1) a mistake; and (2) evidence that the mistake is of sufficient gravity that it would be unconscionable, unjust or unfair to leave it uncorrected. If rescission is granted, the transaction or document at issue is cancelled and the parties are returned to their precontract positions.

The scope of rectification was narrowed significantly following the release of the Supreme Court of Canada’s decision in Fairmont Hotels 2 and Jean Coutu 3 . At one extreme, it has been suggested that rectification can only be used to fix clerical errors. Similarly, there was speculation that the scope of rescission had also been narrowed. However, recent case law in British Columbia suggests that rectification and rescission may still be available in broader circumstances. 4

Remission Orders Remission orders are issued by the Governor in Council, pursuant to the Financial Administration Act 5 . This is one of the only ways to obtain relief from payment of underlying income taxes and goods and services taxes that are otherwise owing. In addition, remission orders can sometimes include interest and penalty relief.

Very little has been published on the topic of remission orders. 6 When seeking relief from in connection with tax debt, an applicant is required to fit within one of the categories set out by CRA in its “Remission Guide”, namely: (1) extreme hardship; (2) financial setback coupled with extenuating factors; (3) incorrect action or advice on the part of CRA officials; or (4) unintended results of the legislation. The process for requesting a remission order is very informal and can be completed

without the use of any prescribed forms. Commentary on these orders suggests that a remission application should be a last resort and should not be sought if one of the other remedies is available in the circumstances.

As set out above, taxpayer relief is only available for a 10-year period, and only extends to relief from penalties and interest. Therefore, if a taxpayer is looking for relief from underlying taxes and/or in connection with debt that has been outstanding for over 10 years, an application for remission would be appropriate.

1 Income Tax Information Circular IC07-1R1 outlines the CRA’s general administrative guidelines applied in determining whether to grant or deny relief. See also ss. 220(3.1) of the Income Tax Act (Canada). 2 2016 SCC 56. 3 2016 SCC 55. 4 See for example, Crean, 2019 BCSC 146, and Collins, 2019 BCSC 1030. 5 R.S.C., 1985, c. F-11, section 23. 6 The most recent comprehensive study on the issue was published in the Dalhousie Law Journal, see: Samuel Singer, “Evaluating Canadian Tax Remission Orders: A Debt Relief Vehicle for Taxpayers” (2019) 42:2 Dal LJ 397. Prior to Mr. Singer’s article, the last comprehensive review of remission orders was completed in 1986 by Arnold and Jeffrey Sherman.