Introduction – Amending Replies During Tax Litigation
In the course of an appeal to the Tax Court of Canada by a Canadian taxpayer against the CRA, the Canadian tax litigation lawyers for both the taxpayer and the CRA may amend their pleadings under the Tax Court of Canada Rules (General Procedure). A pleading is a formal written statement of a party’s claim or defenses to another party’s claim in the course of litigation. Under section 54 of the Tax Court of Canada Rules (General Procedure), the amending party must either secure the consent of all parties or the discretion of the Court in order to amend a pleading.
During an appeal to the Tax Court, both the taxpayer and the CRA may want to amend their pleading for a number of reasons. The CRA may be faced with limited facts at the onset of the appeal. As more facts are made available to the CRA during the discovery process, it may wish to amend its pleading to account for these new facts. Furthermore, either the taxpayer or the CRA may wish to introduce new legal arguments during the middle of an appeal to the Tax Court.
In The Queen v Pomeroy Acquireco Ltd, the CRA asked the Tax Court permission to amend its reply. The request was initially rejected by the Tax Court judge, the Canadian tax litigation lawyer for CRA appealed to the Federal Court of Appeals and won.
Pomeroy – the Facts
The CRA filed a motion in an ongoing Tax Court litigation to amend its reply to include two new arguments: an argument related to valuation and an argument related to sham transactions. The taxpayer opposed CRA’s motion to amend, and the Tax Court judge agreed with the taxpayer on the following grounds:
- The CRA’s proposed amendment to its reply is not vital to the case at hand.
- The CRA’s existing pleadings already contained the facts to support both the sham transaction argument and the valuation argument.
- The sham transaction argument relied on proving the subjective intention of Mr. Robert Pomeroy, who had passed away on June 11, 2020. Therefore, allowing the CRA to advance its proposed amendments would be unfair to the taxpayer corporation.
The CRA appealed the decision to the Federal Court of Appeals. The Federal Court of Appeals ruled in favor of the CRA. The Federal Court of Appeals ruled that the correct legal test for whether an amendment to a pleading should be allowed is not whether the amendment would be vital to the case at hand, but whether the amendment would assist in determining the real questions in controversy between the parties, provided the amendment would not result in an injustice not compensable in costs and that the amendment would serve the interests of justice.
Based on the correct legal test, the Federal Court of Appeals decided the proposed CRA amendment to its reply would not result in injustice not compensable in costs despite the fact Mr. Pomeroy had passed away. The Tax Court judge had already concluded that the CRA’s current pleadings already called into question the true nature of the transaction as well as calling into question issues regarding valuation. Since the issues addressed by the proposed amendment were already contained in CRA’s existing pleadings, the amendment could not be prejudicial to the taxpayer.
Pro Tax Tips – Beware of Rules Surrounding Pleadings
The Federal Court affirmed the basic rules governing amendment of pleadings. Both parties may amend their pleadings if amendment would assist in determining the real questions in controversy between the parties, provided the amendment would not result in an injustice not compensable in costs and that the amendment would serve the interest of justice.
It is important to keep in mind that while the introduction of new arguments or new theories based on the same set of evidence would require an amendment to a party’s pleadings, the reverse is not true. A party may rely on new evidence disclosed during the litigation process to booster his or her existing argument without needing to amend the pleadings.
Tax dispute and litigation is a complex and time-consuming process. Canadian taxpayers should retain professional Canadian tax litigation representation as early as possible in the tax dispute and litigation process. Our expert Toronto tax litigation lawyers can guide you through every step of your tax audit, objection and tax litigation to ensure you achieve the satisfactory result in a cost-efficient manner.
"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."