Rosenberg v MNR (2016 FC 1376) shows that the FC will uphold a contractual agreement entered into by the minister and a taxpayer.
Rosenberg was the sole common shareholder of two corporations, which he used to set up straddling transactions that gave rise to business losses in 2006 and capital gains in 2007. Rosenberg thus achieved an advantage because the inclusion rate for business losses (100 percent of the loss) differs from the inclusion rate for capital gains (only 50 percent are taxable).
In October 2008, the CRA audited Rosenberg and his corporations. Over the next year and half, Rosenberg and the CRA met and exchanged information and documentation. In February 2010, the CRA and Rosenberg signed an agreement in which the minister agreed not to proceed with any reassessments for the 2006 and 2007 taxation years and in which Rosenberg agreed to “refrain, abstain and terminate” the practice of engaging in any similar straddling transactions for Canadian tax purposes under the federal Act.
The agreement included two provisions for termination: the agreement would be null and void if Rosenberg engaged in further straddling transactions or if the fact pattern changed enough to merit a CRA change of position.
In January 2013, an auditor sent a new demand for 2006 and 2007 information to Rosenberg. Rosenberg applied to the FC for judicial review of the demand letter. Rosenberg argued that, absent a breach on his part or a change of fact pattern, the agreement was binding and barred the minister from re-auditing and re-assessing him for the 2006 and 2007 taxation years.
In response, the minister argued: (a) the agreement only applied to the date when it was signed, and did not create a future or on-going obligation on the minister’s part; (b) the agreement barred conducting a reassessment, but did not bar a new audit; and (c) in the alternative, even if the agreement barred a new audit, the agreement was void because it was illegal: contrary to the Actand to public order.
The FC considered the agreement based on the rules governing contractual interpretation in the Civil Code of Quebec (CCQ).
In its analysis, the FC considered whether the agreement was void because it effectively required that the minister violate the Act. The FC observed that although the Act says that the minister shall administer and enforce the Act, in doing so Parliament is merely signaling what area of the federal jurisdiction the minister is responsible for. In using the word “shall”, Parliament is not saying that the minister is not to exercise any discretion. As the FC explained, “The Minister cannot decline to administer and enforce the Act, it is her duty…How she decides to perform her duty is another matter”.
The FC also considered jurisprudence on the question of whether the minister can enter into a compromised settlement with a taxpayer. The FC considered two distinct lines of case law: the first, beginning with Galwayv M.N.R. ( 1 FC 593), maintains that when the facts and law are clear, the minister cannot reassess for part of the amount of tax in question, and thus cannot agree to a compromised settlement. In contrast, a second line of case law, including Consoltex Inc v The Queen (97 DTC 724) and 1390758 Ontario Corporation v The Queen (2010 TCC 572), affirms and applauds the existence of a compromised settlement between a taxpayer and the minister.
The FC emphasized that the Galway line of cases contemplate circumstances where the facts and the law are clear, and either the taxpayer owes, or does not owe, a tax debt. This line of cases considers a binary – an all or nothing - situation. The FC distinguished Rosenberg’s case from Galway, observing that the binding nature of the agreement did not relate to a binary tax debt question, making Galway’s prescription against a compromised settlement inapplicable. The FC further explained that an agreement that does not violate Galway should be upheld in order to promote legal certainty. Ultimately, the FC concluded that the agreement did not contravene Galway and that it bound the minister.
In upholding the agreement, the FC clearly signaled that compromised settlements are necessary and will be accepted by the courts if there is no evidence of a binary circumstance of fact or of law. In other words, if the minister can reasonably conclude that there is a lack of certainty with regard to facts or law, then a compromised settlement should be available.
Kathryn Walker and Robert G. Kreklewetz
Millar Kreklewetz LLP, Toronto
A version of this article appeared in the February 2017 issue of Canadian Tax Highlights.