Published: June 8, 2026
Overview—Despite the CRA Attempting to Deny That a Binding Agreement Had Been Reached, the Taxpayers Won
In the decision of Zhang v. The King, the Tax Court of Canada delivered an important and highly practical decision for taxpayers engaged in disputes with the Canada Revenue Agency (CRA). The Court confirmed a vital principle: a binding tax settlement can exist—and be legally enforced—even in the absence of a formally signed agreement.
This case did not turn on complex tax calculations. Instead, it focused on critical procedural and strategic issues: when does a settlement become legally binding, and can the CRA walk away after appearing to accept a deal?
The Court confirmed two key principles. First, the Tax Court has jurisdiction to enforce settlement agreements, even without a signed consent to judgment. Second, a binding settlement can arise from informal communications, including emails, if the essential elements of contract law are met—even if the CRA later changes its position.
While this dispute originated from GST/HST tax reassessments under the Excise Tax Act relating to real estate, its implications extend to all areas of tax litigation.
For taxpayers, this decision represents both an opportunity and a risk. It reinforces the significance of every communication made during negotiations. It also highlights why retaining an experienced Canadian tax lawyer is essential, as precise communication can be the difference between a binding agreement and a missed opportunity.
The CRA Denied There Was a Binding Settlement
The dispute arose from GST/HST tax reassessments under the Excise Tax Act relating to two real estate properties. The taxpayers challenged the tax reassessments and entered into settlement negotiations with the CRA.
The Canadian tax lawyer acting for the taxpayers submitted a detailed settlement proposal, and the CRA responded with a counteroffer accepting the proposal except for gross negligence penalties. When the taxpayers’ Canadian tax lawyer accepted that counteroffer in clear terms, the matter appeared settled from their perspective.
However, the situation changed when the CRA Canadian tax lawyer later circulated formal settlement documents containing additional terms that had never been agreed upon. These new conditions included expanding the settlement to other taxation years and limiting the taxpayers’ future objection rights.
When the taxpayers refused to accept these new terms, the CRA took the position that no binding settlement existed because the agreement had not been formally signed, not all terms were finalized, and no consent judgment had been filed with the Court. This led to a central procedural dispute over whether a binding agreement had already been reached.
The Court Can Dispose of an Appeal in Accordance with a Valid Settlement Agreement
The Court confirmed its jurisdiction to enforce settlement agreements. This authority arises from section 309 of the Excise Tax Act (or section 171 of the Income Tax Act), read together with section 12 of the Tax Court of Canada Act, which gives the Tax Court the power to dispose of an appeal by dismissing it, allowing it and vacating the tax assessment, or allowing it and referring the matter back to the CRA for reconsideration and tax reassessment.
The Court also referred to section 171 of the Income Tax Act, emphasizing that the Tax Court does not need to be a court of equity to grant such remedies, as it already has statutory authority to do so. This reinforces that enforcing settlements is not an extraordinary remedy but part of the Court’s core function.
The Test for a Binding Tax Settlement with the CRA
The Tax Court applied basic principles of contract law to determine whether a binding settlement had been formed. To establish a valid agreement, the Court looked for the following elements:
- Intention to create legal relations
- Consideration
- Certainty of terms
- Matching offer and acceptance
- Any additional legal requirements
Importantly, the Court emphasized that a signed document is not required for a binding settlement. Instead, it applies an objective test: what would a reasonable person conclude from the parties’ communications? Emails, letters, and other informal exchanges can be sufficient to form a contract, provided that the essential terms are clear.
Application Granted: The Settlement Was Enforced
The Tax Court ultimately ruled in favour of the taxpayers and enforced the settlement. The Court concluded that all elements of a binding contract were satisfied and granted the taxpayers’ motion.
The test for intention is objective: would a reasonable bystander conclude that the parties intended to be legally bound? On the facts, the Court found that the language used in the parties’ email correspondence was formal, deliberate, and precise. The communications reflected a clear legal commitment rather than casual or exploratory discussion. Importantly, the Court confirmed that the expectation that a more formal agreement would later be prepared does not prevent a binding contract from already coming into existence.
The Court then addressed consideration and found no difficulty. There was clear consideration on both sides: the taxpayers agreed to resolve the dispute and accept certain liabilities, while the CRA agreed to abandon portions of its claims, including penalties. As the Court noted, settlements are, by their nature, compromises and almost always satisfy this requirement.
With respect to certainty, the Court emphasized that it requires precision, not perfection. The agreement must be sufficiently clear to be enforceable, but need not address every contingency. Here, the terms were sufficiently certain. The taxpayers’ 21-page proposal, prepared with the assistance of a knowledgeable Canadian tax lawyer, was detailed and comprehensive. The CRA’s response clearly identified the only point of disagreement—the treatment of penalties. There was no vagueness or open-ended negotiation, and the requirement of certainty was met.
The issue of matching offer and acceptance was the most contested. The CRA argued there was no meeting of the minds, but the Court rejected this and reaffirmed the objective approach to contract formation. The relevant question is what a reasonable person would have understood from the parties’ words and conduct. Applying this standard, the Court concluded that the CRA offered to settle on the terms of the proposal, subject only to penalties, and the taxpayers unequivocally accepted. There was therefore matching offer and acceptance on all essential terms.
The Court also noted that the proposal was exhaustive and carefully drafted, containing no language suggesting additional terms or further negotiation. The outcome was commercially reasonable and consistent with the parties’ positions, reinforcing the conclusion that a binding agreement had been reached.
The CRA’s argument that it misunderstood the agreement was rejected. The Court held that a unilateral mistake does not invalidate a contract unless the other party knew or ought to have known of the error. There was no evidence that the taxpayers were aware of any such misunderstanding. Accordingly, the agreement remained valid and enforceable.
Finally, the CRA argued that the settlement was inconsistent with tax policy, particularly regarding the exemption under subsection 4(b) of Part I of Schedule V of the Excise Tax Act. The Court rejected this argument and reaffirmed the principled settlement rule: the CRA’s duty is to assess based on facts and law, not abstract policy considerations. As long as the settlement reflects a reasonable application of the law, it is valid and enforceable, even if it results in a compromise.
Pro Tax Tips – How to Protect Your Right to Enforce a Tax Settlement with the CRA
Treat every communication as potentially binding and do not assume that emails are informal. Before sending or accepting any settlement terms, ensure that the language is clear and confirm exactly what you are agreeing to. It is important to consult an experienced Canadian tax lawyer before engaging with the CRA regarding any tax issues.
Define the scope of the settlement precisely. Many disputes arise from ambiguity. Always specify which taxation years are included, which issues are resolved, and whether penalties or interest are covered.
Do not assume you can renegotiate later. Once a binding agreement is formed, neither party can unilaterally change the terms. It is advisable to confirm the agreement promptly in writing. Although not strictly required, a formal written agreement helps prevent misunderstandings and reduces the risk of later disputes.
Settlement negotiations with the CRA involve legal and strategic risks. A top Canadian tax lawyer can ensure that the agreement is enforceable, protect you from unintended terms, and advocate for your position if the CRA backs out.
FAQ – Key Questions on Tax Settlement Agreements with the CRA
Can a tax settlement be binding without being signed?
Yes. As confirmed in Zhang v. The King, a settlement can be legally binding if there is clear offer and acceptance, even in the absence of a signed agreement. The key question is whether the essential elements of contract formation have been satisfied.
Can the CRA or the taxpayer change the terms after agreeing?
No. Once a binding agreement has been formed, neither party can unilaterally alter its terms. Any modification requires mutual consent.
What if the CRA claims it made a mistake?
A unilateral mistake will generally not invalidate a contract unless the other party knew or ought to have known of the error. Without such knowledge, the agreement remains enforceable.
What should I do if the CRA backs out of a settlement?
If the CRA refuses to honour a binding agreement, you may be able to bring a motion before the Tax Court to enforce the settlement. An experienced Canadian tax lawyer can assess your situation and guide you through the process of protecting your rights.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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