Feigenbaum Law

Taxpayer Unsuccessful In Attempt To Recoup Litigation Costs From CRA

Tax Disputes & Litigation
July 16, 2021

Many people may reasonably assume that in the event they are successful in litigation they will be able to recover some or all of their costs from the unsuccessful party. However, a recent decision from the Ontario Superior Court of Justice shows that it’s not always the case. In this situation, a taxpayer was successful in appealing an audit by the CRA which had ordered him to pay $14 million for uncollected HST. He went to the courts to try to recover over $1 million he says he spent defending himself.

CRA issues $14 million in penalties against taxpayer

The issue arose after the plaintiff, a company that manufactures recreational trailers, was subject to an audit and HST assessment by the CRA, which concluded that the plaintiff had failed to collect $14 million in HST for products it sold into Canada. The plaintiff tried to appeal through the CRA’s internal appeal process, but the original assessment was upheld. The next step for the plaintiff was to appeal to the Tax Court of Canada, which required the plaintiff to pay or secure the $14 million pending the appeal. The plaintiff secured a line of credit, which it had to increase as interest was added to the original amount, ultimately reaching $19 million.

Tax Court of Canada rules in favour of plaintiff

The plaintiff was successful in its appeal, but during that time it incurred interest charges of $1,231,984 on the line of credit as well as consulting fees amounting to just under US $250,000.

The plaintiff asked the court to order the government to pay back these fees, stating that the issue on appeal was not difficult and that it should not have taken so long, or such an expensive process, to resolve the matter.

HST is not the same as income tax

The court noted before its analysis that in this case, the issue revolved around HST rather than income tax. This means that the plaintiff is not the taxpayer in this situation. Instead, it’s responsible for collecting tax from the purchasers and then turning those funds over to the government.

The court noted that this type of issue has already been addressed by the Supreme Court of Canada, which ruled in 1996 that neither common law nor statute provides GST/HST collectors “any entitlement to indemnity for costs incurred in carrying out their duties.” The court stated that “If the government committed a tort for which it is liable to (the plaintiff), that liability is independent of any obligation for it to indemnify (the plaintiff) for tort liability that (the plaintiff) might incur to third parties from whom it collects HST.”

The court also ruled against the plaintiff in its negligence claim against the CRA, stating there is plenty of case law that rejects the proximity required to formulate a private law duty of care between the CRA and taxpayers.

Contact the tax law team at Feigenbaum Law for information on how we can help you reduce your overall tax burden, shield your business from liabilities and avoid pitfalls that result from improper tax planning. We provide full tax services with respect to your cross-border business initiatives. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the US, Canada and around the world. Contact us at mark@feigenbaumlaw.com, or call us at (905) 695-1269 or toll free at (877) 275-4792 to learn more about how we can help.