Canadian Income Tax – Canada Revenue Agency and the Private Law Duty of Care to Taxpayers– Toronto Tax Lawyer Analysis
Introduction – CRA Duty of Care
Any Canadian taxpayer who has ended up on the wrong side of a dispute with the Canada Revenue Agency (“CRA”) is likely aware of the broad powers given to the Tax Man by the Canadian Income Tax Act. Revenue Canada auditors can make assumptions about a taxpayer’s tax liability in the absence of documentary evidence to the contrary and have the power to levy significant penalties and interest that often exceed the actual underlying taxes owing. CRA income tax collections officers have one directive, to collect, and are not concerned with the validity of the underlying income tax assessment. Income tax collectors can garnishee taxpayer bank accounts by simply mailing a letter and can register a certificate in Federal Court, without notice, and put a lien on a taxpayer’s home for the full amount of an unsatisfied tax debt, even if the income taxes owing turn out to be less than the original income tax assessment shows. Not surprisingly, the actions of the Canadian income tax department can have disastrous effects on the lives of Canadian taxpayers, but in the past there has been little no recourse against CRA for taxpayers once the damage is done.
Historically, Canadian courts have been hesitant to recognize that governmental bodies such as CRA are capable of being sued privately by Canadian citizens for the damage their actions cause; ostensibly because of the “chilling effect” the fear of legal liability would have on their duty to perform their statutory directives. However, in Leroux v Canada Revenue Agency, 2014 BSSC 720, the British Columbia Supreme Court ruled that employees of Revenue Canada owe a “duty of care” to Canadian taxpayers that requires them to exercise reasonable care when performing their functions at CRA. This article will analyze the Leroux decision and subsequent case law to track the development of the duty of care recognized in Leroux.
The Hurdles to Recognizing a CRA Duty of Care for Regulators
Regulators in Canada are created and empowered by their constituting legislation, which in the case of CRA is the Canadian Income Tax Act or the Excise Tax Act for GST/HST. Statutes like the Income Tax Act often impose broad public welfare duties on the regulator, which are often hard to reconcile with duties to individual citizens. This issue was discussed by the Ontario Court of Appeal in Taylor v Canada, 2012 ONCA 479. In Taylor, a group of Canadians were attempting to hold Health Canada responsible for alleged irreversible and catastrophic biomedical consequences they suffered from the insertion of surgical joint implants, which had been endorsed by Health Canada. The Court of Appeal reviewed the lengthy jurisprudence on duties owed by governmental regulators and commented that “schemes under which regulators operate almost inevitably impose public duties on those regulators”, and that such broad public duties necessarily “conflict with a private law duty of care to an individual”, a conflict which usually precludes a conclusions that a given governmental body “owes a private law duty of care to an individual”.
Applying the reasoning in Taylor to Canadian tax law, it is clear CRA has an overarching duty to the Canadian public to collect income tax revenues in order to fund government projects and works, and Revenue Canada lives up to this duty through the rigorous enforcement of the provisions of the Tax Act. CRA’s duty to collect tax revenues for the government is difficult to reconcile with a duty of care to individuals, as the broad and rigid policies required to gather tax revenues are often not able to adapt to the unique circumstances of individual taxpayers, which may warrant relief in certain situations. Our experienced Toronto Tax Lawyers are experts on the Income Tax Act and the programs of CRA. If a resolution exists for your tax problem, we will identify and implement it.
The Leroux Decision: The Recognition of the CRA Duty of Care
In Leroux, a taxpayer sought to hold CRA responsible for the damages he suffered, most notably the loss of his home and business, as the result of the negligent actions taken by Revenue Canada auditors in the issuing of an income tax assessment against Mr. Leroux, a tax assessment which was eventually overturned at the Tax Court of Canada. The Canadian tax department took the position that Mr. Leroux’s action should be dismissed because CRA did not owe a private law duty of care to an individual taxpayer.
The British Columbia Supreme Court was rather creative in coming to the conclusion that a private law duty of care exists. Justice Humphries was careful to point out that it is the individual CRA auditors that owe Canadian taxpayers a duty of care and not the agency as a whole. By framing the duty narrowly, the Court was able to sidestep previous jurisprudence that refused to impose private law duties of care on regulators since “the individual employees of CRA are not regulators...their duties are operational”.
Note that the Mr. Leroux was not successful in recovering compensation from CRA, largely because the Court was not convinced that the poorly conducted audit actually caused Mr. Leroux to lose his business and home: he was in dire financial straits prior to the income tax audit. However, the mere fact that the Court in Leroux recognized that a private law duty of care existed is a huge victory for individual taxpayers and a massive development in the common law. Even though each province is responsible for administering their respective private law, the Courts often draw from, and give deference to, rulings given in separate provinces. As a result, it is very likely that Leroux will be cited in Courts across Canada for the principle that CRA employees owe a duty of care to individual taxpayers. Our Toronto tax lawyers have had numerous enquiries about this CRA duty of care to taxpayers.
CRA and the Duty of Care in Granting Charitable Donation Status to Tax Shelters
Our Toronto tax law firm frequently deals with clients who have been reassessed by Revenue Canada to deny previously claimed charitable donation tax credits with respect to donations the clients made to charities registered by CRA. These reassessments often result in significant taxes owing and can have disastrous effects on the lives of taxpayers.
In Canada v Scheuer, 2016 FCA 7, a group of taxpayers who had been reassessed to deny several years of donation tax credits sought compensation from the Canadian government and CRA for the damages they suffered as a result of the reassessments. The taxpayers claimed that CRA owed a duty of care “to all Canadians when issuing tax shelter numbers or a duty to warn all Canadians that participation in a given tax shelter may lead to the denial of the income tax deductions”.
In denying the plaintiff’s assertion that a duty of care exists, the Federal Court of Appeal relied heavily on the provisions of the Income Tax Act. Central to the Court’s decision was the fact that the decision of CRA to grant charitable status to any given donation program is not discretionary: under subsection 237.1(3) of the Tax Act, when Revenue Canada receives an application for charitable status containing the prescribed materials, “the Minister shall issue an identification number for the tax shelter”. Thus, a finding that CRA is negligent for issuing a tax shelter number to a charity would be illogical because CRA has no choice in the matter: once it receives a proper application, it is bound by statute to issue a tax shelter number to the applicant. Similarly, the Federal Court of Appeal addressed the taxpayers’ argument that CRA and Canada had a duty to warn them about tax shelters by again relying on the Tax Act. Subsection 237.1(5) mandates each tax shelter to, on the information returns, warn taxpayers that the issuance of a tax shelter number “does not in any way confirm the entitlement of an investor to claim any tax benefits associated with the tax shelter”.
The Court ultimately arrived at its conclusion by citing public policy. To recognize that Parliament and CRA owe duties of care to investors in tax shelters would effectively create an insurance policy for investors at the expense of the tax paying public, which would be completely contrary to the legislative intent behind section 237.1 of the Tax Act, which the Court interpreted as Parliament essentially stating that “taxpayers should participate in tax shelters at their own peril”.
Punitive Damages Awarded Against Revenue Quebec
In Agence du Revenu du Québec c. Groupe Enico inc., 2016 QCCA 76, the Quebec Court of Appeal upheld the judgment of the Superior Court in part, including the $1 million punitive damage award against Revenue Quebec, payable to the taxpayer corporation, for Revenue Quebec’s role in the issuance of an abusive and incorrect tax assessment against the taxpayer, which in turn led to overly aggressive collections action based on the assessment. The Court of Appeal reversed the Superior Court’s $1 million punitive damage award against Revenue Quebec that was to be paid to the owner of the taxpayer Corporation. In total, the damages awarded to the plaintiffs approached $3 million. Though the punitive damage award was cut in half on appeal, the very fact that punitive damages were levied at all is noteworthy because in Canada, unlike the United States, punitive damages are extremely rare at common law, and the reason for their imposition in Enico is likely due to the fact that the action was tried in Quebec, a civil law jurisdiction.
Other Lawsuits Initiated Against CRA
In early 2015, Calgary-based development company Cardel Construction initiated a lawsuit against CRA for $32 million for the alleged damages suffered by two of the company’s five shareholders, who “suffered mental anguish and stress as a result of multiple CRA audits that ‘threatened to impose unreasonable and punitive levels of … income tax, both corporate and personal, for the sole purpose of intimidating’ a settlement on Ottawa’s preferred terms”. Litigation is currently ongoing, and the success of the plaintiff will likely depend on their ability to show that the underlying tax audits done by Revenue Canada employees were incorrect and that the proposed penalties and interest were baseless as a matter of law.
Individuals trying to sue governmental bodies such as CRA for negligence will inevitably find themselves marching up the steepest of hills. If CRA is acting according to the provisions of the Income Tax Act, any action against it for the damages suffered by an individual taxpayer is likely doomed from the outset.
The recognition in Leroux that CRA auditors owe a duty of care to Canadian taxpayers was a major development in the common law, but the recognition of a general duty of care, as was the case in Leroux, is a far cry from a Court admitting that there is a specific duty to warn about the pit falls of tax shelters, which the Federal Court of Appeal ruled against in Scheuer.
A very large damage award was awarded to the plaintiffs in the Enico case, largely as a result of the palpable errors committed by Revenue Quebec, and the subsequent refusal to adequately rectify said errors, during the audit process. However, Quebec is not a common law jurisdiction and any decisions originating therefrom must be differentiated when trying to determine their application in other Canadian jurisdictions. In particular, it would be very unusual for punitive damages to be awarded against Revenue Canada in Canadian common law jurisdictions.
If a taxpayer is ever going to successfully collect damages from CRA due to the failings of its employees, the actions of the offending CRA agent would likely have to be shockingly egregious in addition to being causally linked to the damage suffered by the taxpayer. Engaging one of our experienced Toronto income tax lawyers early on in the tax audit process can ensure your rights are respected by Revenue Canada and help you attain an optimal outcome.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."