MNR v Zhao – Guidance from a Canadian Tax Lawyer on the Canada Revenue Agency’s Collection Action When There Are Reasonable Grounds for Delay

The Canada Revenue Agency filed an ex parte application to take collection action against Mr. Zhao

In MNR v Zhao, the Canada Revenue Agency (CRA) filed an ex parte application for a jeopardy order authorizing CRA to take collection action with respect to amounts of income tax owing that were assessed against a taxpayer. Mr. Zhao, a businessman who was born in China, immigrated to Canada in September 2014. In 2018, the CRA launched a net worth audit of him and reassessed his personal income on the basis that he failed to report his foreign income for the 2014 and 2015 taxation years. The taxpayer then left Canada in 2022 and there was no proof that he would return to Canada. As of June 20, 2022, the total amount of tax plus interest and penalties owed by the taxpayer was $770,710.19.

The Tax Court of Canada granted the CRA the jeopardy collection application on the basis that there were indeed reasonable grounds to believe taxpayer may transfer the proceeds of sale from the property in order to make them unavailable to the CRA. In addition, the Tax Court also found that the taxpayer had not conducted his affairs in an orthodox fashion, which would it make it difficult for the CRA to trace or recover the tax debt.

The CRA argued there were potential jeopardy concerns regarding its collection action

The CRA argued that there were several reasons that the collection would be jeopardized for delay:

1. The reassessment was due to the taxpayer’s failure to report his worldwide income and indicated a range of income out of scale with the incomes disclosed on his tax returns,
2. The taxpayer’s lifestyle did not match his reported income;
3. The taxpayer had no known active business and
4. There were indications that the only exigible asset held by the taxpayer was in jeopardy.

The CRA also conducted several searches against the taxpayer and found only his real property located in BC and a Range Rover. Apart from these two assets, the CRA was not aware of any other assets held by the taxpayer or any other source of income. Furthermore, Mr. Zhao left Canada around April 2022 and his accountant told the CRA that he would not provide any security for the tax debt.

The Tax Court found there were reasonable grounds for the CRA’s application

Under section 225.1 of the Income Tax Act, if a taxpayer is liable for the payment of an amount assessed under the Income Tax Act, the CRA should not take any of the collection actions listed under s.225.1(1.1) before the day that is 90 days after the mailing of the notice of assessments with certain exceptions. If the taxpayer files a notice of objection or an appeal of the assessment, then the CRA may not take any of those collection actions until the objection, or the appal, has been finally determined.

However, s.225.2(2) provides that, where on an ex parte application by the CRA, a judge is satisfied that there are reasonable grounds to believe that the collection of all or any part of an amount assessed in respect of a taxpayer would be jeopardized by a delay in the collection of that amount, the judge shall, on such terms as the judge considers reasonable in the circumstances, authorize the CRA to take forthwith any of the collection actions described in s.225(1.1) with respect to the amount.

The Tax Court found that the evidence supported the CRA’s concern that the collection would be jeopardized by the delay. The taxpayer was already in the process of liquidating his only significant exigible asset in Canada and his assets did not reflect his income on the level he declared from 2014 to 2015. In addition, there was compelling evidence as to the dissipation of the taxpayer’s assets out of the jurisdiction out of the CRA’s reach. Furthermore, the taxpayer never intended to provide any security even though he no longer resided in Canada.

Pro tax tips: A notice of objection or appeal will stop the CRA’s collection action subject to certain exceptions

In this case, the court sided with the CRA because the taxpayer already left Canada and there was risk to him to transfer the proceeds of sales from his only real property in Canada. Still, the CRA’s collection activities may be halted if a taxpayer chooses to provide securities for his tax debt. Although the CRA was able to enforce its collection action in this case, generally speaking a notice of objection or appeal will stop the CRA from taking its collection action until the objection or appeal has been determined under the context of Income Tax Act unless the amount owing is placed in jeopardy if the restriction period is adhered to. It is very important that the Notice of Objection be drafted with legal arguments in mind and with references made to the Income Tax Act, as it is possible that any further appeals will be developed on the basis of the arguments contained within the Notice of Objection, and it is highly recommended for a taxpayer to consult with experienced Canadian tax lawyers in Toronto if he or she wants to dispute a tax debt.

FAQ

What collection powers does the CRA have?

If a taxpayer fails to file a Notice of Objection and has a balance owing, the file will be forwarded to a Collections Officer at the CRA. Unlike normal collections agencies, the Income Tax Act gives the CRA’s Collections Officers a number of powers that often take taxpayers by surprise.

CRA Collections Officers will generally begin with threatening phone calls to the taxpayer in a manner similar to private collections agencies. If there’s no result, the CRA still has the following powers:

• Requesting a third-party who owes a debt to the taxpayer to pay the CRA instead by issuing a Requirement to Pay request,
• Seizure of accounts receivable,
• Seizing bank accounts,
• Wage garnishment, and
• Seizing and selling taxpayer assets.

Is there a limitation period on CRA’s collection actions?

The Income Tax Act at section 222(3) provides that the CRA may not commence or continue an action to collect a tax debt after the end of the limitation period (10 years) for the collection of the debt. That means after 10 years, the CRA is legally prevented from collecting on a tax debt. However, the Income Tax Act also specifically allows for the CRA to extend the limitation period to reset the clock if certain conditions are met.

About the Author

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David J. Rotfleisch

David J. Rotfleisch, a leading Canadian tax lawyer, is not only a certified specialist in taxation but also a chartered professional accountant. Most recently, David is a pioneer in Canadian crypto taxation.

As of April 2020, he was one of 12 Ontario Certified Specialists In Taxation™.

Learn more about David J. Rotfleisch