CRA Not Liable for $1M in Costs Incurred by Taxpayer During Audit, Court Rules

May 27, 2021

Mark Feigenbaum

In a recent Ontario decision, the court ruled that a taxpayer could not hold the Canadian government responsible for the costs it incurred during an audit process, even after it was successful in a subsequent court proceeding. 

Taxpayer Company Incurs $1 Million in Fees During Audit

The taxpayer business operates in both Canada and the United States. As such, it is registered under the Excise Tax Act.  

However, the Canadian government alleged that the taxpayer had not been charging and collecting HST on some of its sales in Canada. The Canada Revenue Agency (“CRA”) therefore conducted an HST audit for the period June 1, 2007 to December 31, 2009. During the audit, the taxpayer hired professional tax consultants.

In March 2012, the CRA issued an assessment against the taxpayer for almost $14 million for uncollected HST on products sold into Canada during the audit period. 

The taxpayer appealed the assessment through the CRA’s internal appeal process, but the tax branch upheld the assessment.

The taxpayer then appealed to the Tax Court of Canada and was required to obtain a letter of credit for the amount of the assessment pending the appeal, which amounted to $19 million. 

Ultimately, the taxpayer was successful at trial and the Tax Court upheld the taxpayer’s position. 

By the time the taxpayer was able to terminate its letter of credit, it had incurred interest charges of US$1,231,984 and consulting fees of US$242,634.

The taxpayer then applied to court, suing the government for indemnity and for negligence in forcing it to incur over $1 million in interest expense and professional fees to defend the audit and HST assessment, which it alleged were undertaken and conducted in bad faith. The taxpayer commenced the action because the interest expense and professional fees were not recoverable as costs in the Tax Court proceeding.

In response, the government argued that it has no duty to indemnify the taxpayer for costs it incurred in the HST audit and it had no private law duty of care to protect the taxpayer from incurring costs in a tax audit under the applicable statutory scheme.

Court Dismisses Taxpayer’s Claim

At the outset, the court explained that the Supreme Court of Canada had previously resolved the indemnity issue. In fact, in its 1992 decision Reference re Goods and Services Tax, the Supreme Court of Canada held that neither the common law nor legislation provides GST/HST collectors any entitlement to indemnity for costs incurred in carrying out their duties. 

As such, the court rejected the taxpayer’s claims for indemnity. 

Moving on to the issue of a private law duty of care, the court observed that there exists ample case law rejecting the proximity required to formulate a private law duty of care between the CRA and taxpayers facing an audit, stating:

“The cases generally agree that the relationship of an auditor to a taxpayer while carrying out administrative duties in an audit is not the same as the relationship between tax investigators who are investigating criminal offences. The cases hold that auditors in an audit do not owe a private law duty of care to the taxpayers. […]

[T]he cases that have looked at the relationship between CRA auditors and taxpayers have consistently held that their relationship is adverse in interest. The CRA’s job is to enforce the taxation statutes. To that end, unlike the police, the taxman is not your friend. His job is to maximize your tax burden within the bounds of the various statutory schemes.”

While the court recognized there exist outlier cases that would support the taxpayer’s claim on negligence, it ultimately rejected the line of argumentation to follow precedent on the issue.

In the result, the court therefore rejected the taxpayer’s claims.

Get Advice

Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.

Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.

With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.

If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.


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