Tax Court Holds CRA to Deal It Claimed Was Made in Error
November 13, 2020
There’s an old saying that goes, “a deal is a deal.” It means simply that when someone makes a deal, they should honour it, even if they later change their mind. It’s not quite the law when it comes to contracts, but the principle of abiding by the terms of a deal one enters into can be enforced from time to time. A perfect example of this is seen in a recent decision from the Federal Court of Appeal, in which the Canada Revenue Agency was told that it must stick to the terms of a deal it made with a taxpayer, even though the facts the deal were based upon turned out to not be true.
The CRA Makes a Deal With the Taxpayer
The issue first appeared in a trial before the Tax Court of Canada in 2018. The taxpayer is a corporation that was formed after a number of companies amalgamated. The corporation deducted non-capital losses in its computing income over a number of years, claiming the losses were incurred by its predecessors and were available to carry forward.
The CRA reassessed the tax years in question and reduced the carry-forward amounts from $25,0751,078 to $893,260 one year and from $7,.557,852 to $382,594 another year.
The taxpayer appealed the reassessments, and prior to trial made an offer to settle. The CRA accepted the offer after a short negotiation period. One of the terms was that the government was to reassess one of the taxation years to allow an additional non-capital loss to be carried forward and other, smaller losses, to be disallowed.
The CRA Realizes it Made a Mistake
It was only after the agreement was signed that the CRA realized that “Contrary to its prior understanding, the CRA has recently discovered that there are no non-capital losses available for carry forward to the taxation years under appeal.” The CRA asked the taxpayer to provide support for its position that the $24 million loss should be allowed to carry forward.
During the original trial, the Crown submitted that the agreement was “factually indefensible with no bearing in reality, therefore, illegal and non-binding on the Minister.” However, the court ruled in favour of the taxpayer and was critical of the evidence provided by the appeals officer.
Should the Terms of the Settlement Stand?
The Crown submitted that the settlement agreement was factually and legally indefensible and they should not be bound by the terms of the reassessment, and that the Tax Court erred in applying too high a standard of review. The taxpayer, meanwhile, argued that the Tax Court was correct in relying on the terms of the settlement agreement, and that the Crown should not be able to allege any errors at this late a stage.
The court wrote that “the general rule is that parties should be bound by the agreements that they make. There is no good reason to create an exception here.” The court added that allowing the Crown’s appeal would be unfair to the taxpayer, adding “both sides of a dispute are entitled to know that if they invest the time and effort required to negotiate a settlement, then their agreement will bind both parties”.
If you are facing a legal challenge regarding your personal or corporate taxes, contact Feigenbaum Law for superior representation. Our team will take the time to understand the details of your case and create a nuanced plan to achieve results. We serve clients in the US, Canada and around the world in a variety of tax litigation matters. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.