Both the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”) include an increased burden on entities considered “large corporations” or “specified persons”, respectively, when it comes to the level of detail required in a notice of objection. Specifically, the “large corporation rule” in section 165(1.11) of the ITA requires that a large corporation, inter alia, “reasonably describe each issue to be decided” and “provide facts and reasons relied on by the corporation in respect of each issue” in its notice of objection. The “specified person rule” in section 301(1.2) of the ETA includes the same requirements. In each instance, the taxpayer is only allowed to appeal to the tax court in respect of the issues described in its notice of objection that meet the requirements of the large corporation/specified person rule.
Prior to the enactment of these rules, a number of large corporations had their tax years left open through outstanding notices of objection or appeals such that they had been able to raise new issues based on emerging interpretations and court decisions challenged by other taxpayers. The rules were intended to identify disputed issues sooner so that a taxation year's ultimate tax liability can be timely determined, and avoid appeals from dragging on.
Recently, in Ford Motor Company of Canada v. The Queen, 2015 TCC 39, Justice Boyle of the Tax Court of Canada (“TCC”) considered a Crown motion to strike portions of a Notice of Appeal under the ETA on the basis that the issues identified in the Notice of Appeal were not “reasonably described” in the Notice of Objection. The decision includes a thorough analysis of the existing case law on the rule and a serves as an example of its sound, practical application.
The facts were as follows. The particular paragraphs from the Notice of Appeal related to (1) a claim for input tax credits (ITCs) not claimed by Ford when initially filing its returns in the amount of $498,386; and (2) Ford’s ability to revise the foreign exchange conversion methodology used in computing ITCs for its US dollar denominated inputs from the methodology used when filing its initial returns.
The Notice of Objection (completed and filed without the aid of legal counsel) included a heading entitled “Objection of denial to be audited to net tax” and had subheadings thereunder for unclaimed ITCs and foreign exchange adjustment. It noted that unclaimed ITCs and the foreign exchange conversion methodology were not taken into consideration during the audit and identified the relevant amounts as $760,195.71 and $1,095,712.24, respectively. It made multiple references to the Minister’s failure to audit to net tax.
The Report on Objection referenced each of the above issues and their amounts. An adjustment was made respecting the first issue which resulted in granting ITCs of $261,809.42. The Decision on Objection reflected same and identified each of the two issues and their amounts.
The specific issue was whether Ford’s Notice of Objection “reasonably describes each issue to be decided” as required by paragraph 301(1.2)(a) of the ETA.
The Crown took issue with the fact that the Notice of Objection did not raise unclaimed ITCs as an issue, and only included blanket statements raising the fact that Ford was seeking to claim additional ITCs that it had not previously claimed in its relevant reporting periods. It argued that that issue was broadly stated and the lack of facts and reasons to advance its position only served to frustrate the Minister’s understanding of the question to be determined. In that regard, the Notice of Objection simply stated that the unclaimed ITCs related to taxable purchases made during the audit period and not taken into consideration during the audit and under the conclusion heading asked the Minister to take the allowable credits into account and reduce the assessment accordingly – the only other reference to aid in the Minister’s understanding of the issue was reference to a GST Memorandum and reference to section 296(2) of the ETA.
This motion was one of several brought by the Crown to strike various Ford Notices of Appeal under section 301(1.2) of the ETA.
The TCC quoted extensively from existing caselaw dealing with both the large corporation rule and the specified person rule, noting that there appear to be no material differences in the application of the two sections. The TCC also noted that the French version of the provision merely requires that the issue be sufficiently described. It was noted that a court can seek to find and identify the issue described in the notice of objection having regard to the contents of the objection read as a whole, including references to filings, the reassessment and quantum identified. The TCC cited the FCA decision in Potash (2003 FCA 471) for the proposition that the taxpayer is not required to describe the issue exactly, it is only required to describe it reasonably or sufficiently, having regard to the particular facts, which could include reference to the items in the same fashion as the Minister did on reassessment or audit.
The TCC ultimately held that it is the Minister, in the form of the CRA, who needs to be able to understand the scope and quantum of the issue from its description in the notice of objection – not the hypothetical Canadian or Tax Court Judge.
The TCC agreed with Ford that the two issues raised by Ford in its Notice of Appeal were the same issues that were reasonably and sufficiently described in its Notice of Objection. The Minister objectively ought to have understood the issues from the Notice of Objection and subjectively, in fact, did know them. In that regard, the TCC noted that even the Auditor’s Affidavit filed in support of the Minister’s motion identified the two issues and their amounts and that these issues were considered in addressing Ford’s Notice of Objection. Further, an audit review specifically recommended over $800,000 in additional ITCs to be allowed in light of the Notice of Objection, however, CRA Appeals further reviewed the issue and did not accept the recommendation. The Notice of Objection identified each issue as part of its right to be audited to net tax and the amounts identified by Ford in its Notice of Objection were “precise – to the penny – for each of the issues.”
The TCC characterized the Minister, in bringing the motion, as “trying opportunistically to use the large corporation/specified person rules, whose purpose and design are to protect and shield the fisc, as a sword against the taxpayer.”
In our view, this is the correct conclusion on the facts of this case. Ford’s position regarding the assessment remained the same from the initial filing of the Notice of Objection, through to the positions taken in the Notice of Appeal. All of the evidence (including the auditor’s own Affidavit) established that the Minister in fact knew that Ford was objecting regarding its originally unclaimed ITCs and the foreign exchange methodology. The large corporation/specified person rules were not designed to apply to such a circumstance. A decision to the contrary would have established a very high bar for large corporations/specified persons to meet in their Notice of Objection, and do absolutely nothing to contribute to the rationale behind the rules. Justice Boyle clearly recognized this.
Hopefully, this decision will result in the Crown opting against advancing these motions in circumstances outside which were contemplated by the specified person/large corporation rules – specifically, where the CRA ought to have been aware of or in fact was aware of the specific issues at the Notice of Objection stage. This would avoid wasting time and resources, therefore, promoting one of the underlying purposes behind the rules in the first place, being the timely resolution of tax liability for the taxation year.
Justice Boyle’s conclusion could have application outside of the context of the specified person/large corporation rules, insofar as how the purpose of tax legislation was considered in its application. Specifically, it suggests that legislation designed to shield the Minister from a certain taxpayer tactic, ought not to be used as a sword to limit a taxpayer’s rights.
[Rob Kreklewetz and John Bassindale represented Ford Motor Company of Canada on this motion.]
An alternate version of this article appeared in the May 2015 edition of Canadian Tax Highlights.