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Assumptions in Tax Cases

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Tax assessments are difficult to appeal in Canada because the Canada Revenue Agency (“CRA”) is allowed to make factual ‘assumptions’ which the taxpayer must disprove – or lose its case!

Two recent Federal Court of Appeal (FCA) decisions have seemingly expanded these powers to assumptions of “mixed fact and law” – although the second FCA seemingly walks back the first.


The CRA’s power to “assume facts” was first articulated by the Supreme Court of Canada in the 1948 Johnson decision, allowing the CRA to “assume facts” in tax litigation. The logic was that taxpayers had the full picture of their own tax affairs, but not the CRA – so that power imbalance could be addressed by allowing CRA assumptions.

Modern Developments

Unfortunately, the CRA has taken its “power to assume” to new levels in modern tax litigation – perhaps with the assistance of a compliant Department of Justice (“DOJ”).

CRA now makes assumptions across a wide range of facts, some having NOTHING to do with the taxpayer’s affairs at all (facts unknown to taxpayer; facts known only to third parties). In one case, the CRA assumed the taxpayer’s third party supplier did not have any insurance! How does a taxpayer disprove something like that?   To us, the modern power to assume has now put the taxpayer into a tax litigation fight with one-hand tied behind its back.

Recent FCA Jurisprudence

The FCA has entered this fray, releasing two recent decisions that first vastly expanded the CRA’s powers to include “assumptions of mixed fact and law” (Preston, criticized by us here) and then seemingly walking back Preston by allowing “assumptions of mixed fact and law” to be struck out where going to the “heart of the litigation” (Adboss), perhaps suggesting that the Preston case could be distinguished as involving “simple facts”.

An assumption of fact is “the house sold for $2M”. An “assumption of mixed fact and law” would be “the house sold for $2M, its fair market value.” (“Fair market value” is a legal concept, often at issue in tax cases).

The Bottom Line

While Adboss was seemingly a welcomed “walk back”* of Preston, the two decisions can still be criticized as a whole.

* We view Adboss as a “walk back” because the assumption upheld by the FCA in Preston (and seemingly rightly struck down in the first place by Tax Court Justice Spiro) involved “fair market value”:   a legal concept that surely was “heart of the litigation”! Indeed, in the sense the two cases cannot in our view be reconciled.

The decisions, with some recent others, diverge from a very workable “bright-line test established in the FCA’s 2003 Anchor Pointe decision:   assumptions may only contain facts. Why now put the taxpayer’s second-hand behind its back?

Hopefully the SCC will get involved in this discussion, as a bright-line test is preferred and would certainly address the Tax Court’s long-time concern that too many resources may be tied up attacking assumptions in preliminary motions.   The fix? That same bright-line test that tells the DOJ – Canada’s largest and most well-equipped law firm – to get things right:   just plead assumptions of “fact”!

Easy fix!! (And get rid of “third party” assumptions as well!)

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