Tax & Trade Blog
No Relief Against Collections Actions – Hammer out a deal!
Judicial review applications for injunctive relief attempting to circumscribe or prohibit the CRA’s collections powers are usually doomed to failure – the test requires a high threshold to meet! Such matters must be dealt with immediately on audit, as unlike in the Income Tax situation, all GST/HST is due and payable immediately and cannot be delayed by filing a Notice of Objection!
In Iris Technologies Inc. v. Canada (National Revenue), the Federal Court denied a motion for injunctive relief to prohibit the CRA’s collections actions after a $79 million GST/HST Assessment – demonstrating in spades how difficult it is to obtain an order prohibiting CRA collections!
Iris Technologies Inc. (“Iris”) was a retail and wholesale telecommunications provider assessed for an alleged “carousel scheme”, resulting in $79 million GST/HST Assessment. As usually happens with large GST/HST assessments, the CRA commenced collections actions immediately, registering a writ of seizure.
While Iris objected and appealed the matter to the Tax Court of Canada (“TCC”), it also filed various judicial review applications in the Federal Court on the basis of the CRA’s conduct during audit, and among other things, asking for preliminary injunction against the CRA’s collections actions.
Background: Test for Injunctive Relief
By way of background, the test for injunctive relief is a five-pronged test, requiring the Applicant to demonstrate that:
- There is a serious issue to be tried;
- The application is not vexatious;
- The Applicant has exhausted alternate remedies;
- Irreparable harm would result without the order; and
- The balance of convenience favours granting the injunction.
The Federal Court’s Decision
The Federal Court denied the application, essentially on the basis that Iris Technologies had not provided sufficient and compelling evidence to demonstrate on a balance of probabilities that “irreparable harm” (e.g., bankruptcy) would be caused by Minister’s collections actions. The affidavit filed by Iris only showed that Iris would suffer cashflow issues and the collections action would “end” Iris. In the Federal Court’s view, the Affidavit did not portray a clear picture of Iris’s financial position, and thus did not persuade the Court on the issue of irreparable harm.
The Federal Court also concluded that it was not just and equitable to grant the judicial relief, since doing so would leave the CRA empty handed!
The Federal Court’s decision in Iris is an excellent example of the Mt. Everest type of mission that is required to attempt to forestall CRA collections actions. On one alternative view of the case, the Federal Court’s decision on the “irreparable harm” might be regarded as absurd. How many corporations out there, short of the largest public corporations, can withstand an $80 million hit. Yet, if the Affidavit provided to the Federal Court was indeed insufficient on these points, it may be hard to appeal the Federal Court’s decision.
Cases like Iris put a fine point on getting proper and specialize GST/HST legal advice during one’s audit, and using that legal advise to craft one’s Notice Objection. Large corporations like Iris are subject to special “specified person” rules, which required all “issues, fact and reasons” to be sufficiently disclosed in the Notice of Objection. Where these rules are not met the ability to appeal the matter to the TCC may be extinguished!
As to the collections point, and unlike the situation for income tax purposes, there is no provision in the ETA or any internal policy to withhold the collections action pending appeals except for a discretionary relief. Collections arrangements need to be negotiated, and monies generally need to start flowing, unless sufficient security is provided to CRA.
As a final point, and as bad as the GST/HST situation is, it is not as bad as the situation encountered by persons assessed for Customs duties. There all amounts assessed are required to be paid or secured BEFORE right to appeal arises!
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