Instead of filing a notice of objection, a taxpayer may enter into negotiations with the Canada Revenue Agency (CRA) with the purpose of resolving tax issues in dispute. When a settlement is reached, the CRA may request the taxpayer to sign a waiver, agreeing to the proposed changes to the assessment and confirming that the taxpayer will not appeal the assessment (made on the agreed terms) to the Tax Court of Canada (TCC). Such waiver of right is expressly provided for in sections 301(1.6) and 306.1(2) of the Excise Tax Act (ETA) and sections 165(1.2) and 169(2.2) of the Income Tax Act (ITA).
Like any contractual agreements, undue pressure, lack of proper legal advice, or unconscionable bargains may void a settlement agreement. The Federal Court of Appeal (FCA) recently confirmed in Taylor v. The Queen (2012 FCA 148) that a waiver of right to object or appeal an assessment signed by a taxpayer pursuant to a settlement is valid and binding on the taxpayer.
In Taylor, the Taxpayer, an experienced businessman, was assessed by the CRA under the ETA and ITA. The Taxpayer filed a notice of objection to the assessments. After a lengthy objection process, the Taxpayer and the CRA reached a settlement, which was evidenced by two documents signed at the settlement meeting: (1) an offer by the CRA officials to vacate gross negligence penalties and (2) a waiver of right to object or appeal by the Taxpayer (Settlement Agreement). A couple of days later, the Taxpayer communicated with the CRA that the Settlement Agreement was invalid because the waiver was signed under undue pressure and he had not been able to obtain legal advice. The CRA rejected that position, and proceeded to issue the reassessments. The Taxpayer appealed the reassessments to the TCC.
Pursuant to section 310 of the ETA and section 173 of the ITA, the CRA and the Taxpayer agreed to refer the question regarding validity of the Settlement Agreement directly to the TCC for a determination (2010 TCC 246).
In considering the matter, the TCC began by reviewing what had transpired between the parties during the 19-month objection process. The TCC then considered a number of cases which found that waivers of this nature were in fact valid, considering in particular the following passage from its decision in Nguyen v. the Queen (2005 TCC 697):
It is clear to me that a waiver of the right to object and appeal signed by a taxpayer cannot be set aside except on a preponderance of evidence that the taxpayer did not freely consent to the waiver or was unduly pressured.
After reviewing the Taxpayer’s testimony, the TCC found it to be self-interested and not in accord with the evidence as a whole. Instead, the TCC found that the Taxpayer, who had extensive finance and administration experience, was very knowledgeable about the tax issues involved and had been aware of the amounts of tax at issue. It rejected the Taxpayer’s evidence that he felt “lost” or “devastated” at the settlement meeting, and did not understand the ramification of the settlement. Instead, the TCC concluded that the Settlement Agreement was freely made as the Taxpayer understood what he was agreeing to, and had ample opportunity to consult his lawyer prior to the settlement meeting. The TCC also concluded that the Taxpayer was not unduly pressured into making the settlement as the settlement meeting took place at the request of the Taxpayer and the Taxpayer quickly accepted the CRA’s offer at the meeting without asking more time to consider it.
In considering the Taxpayers position that the Settlement Agreement ought to be overturned as an “unconscionable bargain”, the TCC concluded that the principle of unconscionable bargains did not apply as its two main requirements (as discussed in Klassen v. Klassen, 2001 BCCA 445)were in fact missing in this case: namely (1) proof of inequality of bargaining power, i.e., one party being dominated by another by reason of his ignorance, need or distress, and (2) the arrangement being clearly in one party’s favour.
Regarding the Taxpayer’s allegation that he did not understand the statutory provisions referred in the waiver, the TCC dismissed this as a ground for invalidating the settlement as the TCC found that the Taxpayer had a sufficient understanding of the provisions relevant to his situation.
As a result, the TCC concluded that the Settlement Agreement was valid.
The Taxpayer appealed to the FCA. The FCA reviewed the record and determined that the evidence before the TCC supported the conclusion that the waiver was valid. Accordingly, the FCA dismissed the Taxpayer’s appeal.
The Taylor decision is a good reminder to taxpayers that waivers, when properly made, will be binding on them. A waiver may be a valuable tool to finalize resolution of disputed tax issues, but taxpayers, before signing it, should consult their lawyers to make sure any proposed terms of settlement are right for the taxpayers, in view of their specific situation. It is prudent for taxpayers to think twice before signing off their statutory right to object or appeal their assessments.
Robert G. Kreklewetz & Jenny Siu
Millar Kreklewetz LLP, Toronto