Case Overview:

The client was a self-employed musician who applied in good faith for a number of COVID-19 benefits released by the Federal Government of Canada, including the Canada Emergency Response Benefit (“CERB”) and Canada Recovery Benefit (“CRB”). The musician’s business was almost entirely halted due to COVID-19 lockdown restrictions on public performances.

The Canada Revenue Agency had initiated a review of the musician’s entitlement to those benefits. The musician’s benefits were denied at first review and second review because the musician purportedly failed to satisfy the minimum threshold of $5,000 in net income prior to the beginning of the COVID-19 pandemic.

However, the Canada Revenue Agency agents reviewing the musician’s case failed to provide a meaningful time to respond to requests and provided no reasons for rejecting the musician’s supporting documents showing at least $5,000 in net income during the relevant periods. The Canada Revenue Agency’s attempts to reach the musician were limited to a handful of phone calls.

The musician self-filed a Notice of Application for judicial review with the Federal Court, but mistakenly filed supporting evidence with those pleadings. The musician subsequently missed the deadline to serve supporting documents for that judicial review Application. Rotfleisch & Samulovitch was retained to bring the Application back on track, and to preserve the musician’s legal rights.

The Problem:

The Minister of National Revenue is granted the authority under law to verify an applicant’s eligibility for the CERB and CRB. If the Minister of National Revenue determines a person was not entitled to receive an income support payment, the Minister can choose to deny eligibility for those benefits. The Canada Revenue Agency exercises these powers on the Minister’s behalf.

Discretionary decisions of the Minister can be challenged by way of judicial review to Federal Court. With judicial review, the Federal Court is not responsible for reconsidering, reweighting, or reassessing information reviewed by a decision-maker.  Rather, the Federal Court must evaluate if the decision made was reasonable after weighing the rationale provided by a decision-maker against available evidence. The Federal Court is also empowered to protect the procedural fairness of a review process. If a decision was unreasonable or a proceeding was procedurally unfair, the Federal Court can “quash” that decision, and send the case back for a redetermination. The Federal Court cannot make a decision for the Minister and can only require the Minister to reconsider the matter with additional guidance.

Judicial review is a fast process. Within 30 days of filing a Notice of Application, the Applicant must serve and file any affidavits and supporting evidence. Failing to meet any deadlines under the Federal Courts Rules can result in an Application being dismissed. And the right to extend deadlines is very limited.

Our Approach

Our Canadian tax litigation lawyers immediately contacted the Department of Justice Canadian tax lawyer assigned to our client’s file, and negotiated an extension of time to serve the client’s affidavit and supporting evidence.

We also undertook a thorough review of the client’s evidence, and filed a Rule 317 Request to obtain the full tribunal record reviewed by the Canada Revenue Agency agents who denied the client’s benefits. On reviewing those materials, it was discovered those agents had never actually contacted the client as suggested in their file notes. The client could produce phone records corroborating that phone calls purportedly made by the Canada Revenue Agency’s agents had never occurred, and that purported voicemails had never been left at the client’s phone number. While the evidentiary record at judicial review is usually constrained to what the decision-maker had available at the time, this evidence highlighted procedural defects not found in the tribunal record and was admissible.

We then immediately pushed for a settlement with the Department of Justice to have our client’s file sent back for a new review by an independent agent. We executed the Minutes of Settlement to obtain a new review, and filed a Notice of Discontinuance with the Federal Court shortly after, ending the Application.

The Result

The client’s file was sent back for a redetermination on its merits, with a new opportunity to submit supporting documents and to respond to further requests for information. In doing so, the musician was saved the full costs of a hearing before the Federal Court, while obtaining the exact remedy our client sought.

Lessons Learned

1. Federal Court timelines for judicial review are unforgiving. Always make sure deadlines are met.
2. The certified tribunal record is crucial for any judicial review case. The Federal Court rarely considers fresh evidence at a judicial review hearing. All supporting documents that can be submitted should be submitted on time during the initial review process to develop the tribunal record early.
3. A hearing is not always required to win. Settlement can present a path to victory for a fraction of the cost.
4. Do not undertake court proceedings without at a minimum advice from a tax lawyer and generally without fully retaining a lawyer to act on your behalf.

Case Overview:

A client retained Rotfleisch & Samulovitch to handle his TFSA related issue outstanding since 2016. The client had mistakenly overcontributed to his TFSA account and subsequently suffered significant losses in his TFSA investment account. As a result, the balance in his TFSA went down so much that the client had insufficient funds to withdraw the full excess contribution amount from his TFSA account. Further, the client has previously submitted a TFSA waiver request on his own, which was rejected by the Canada Revenue Agency. Due to the negative TFSA contribution room limit, the client continued to accrue interest and had no way to resolve the issue.

The Problem

The law A taxpayer’s TFSA contribution room is the maximum amount that a taxpayer can contribute to his or her TFSA account(s). Once the contribution room is used, withdrawals, excluding qualifying transfers and specified distributions, do not reverse the used contribution room. At any time in the year, if a taxpayer contributes more than his or her available TFSA contribution room, the taxpayer will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount stays in the taxpayer’s TFSA account(s).

A taxpayer is required to withdraw any excess contribution from his or her TFSA account(s) as soon as the taxpayer becomes aware of the issue, in order to qualify for relief via a TFSA waiver request. Other conditions must also be met for the relief to be granted by the CRA.

However, in the event that a taxpayer cannot withdraw the full amount of excess TFSA contribution due to investment loss, a taxpayer remains liable for the 1% tax of the highest excess TFSA amount in the month.

Normally, CRA takes the position that “only new TFSA contribution room that becomes available to the individual in future years will serve to reduce the excess TFSA amount.”

Our Approach:

We prepared and submitted a detailed second TFSA waiver request, including requesting a special one-time contribution room limit adjustment, asking the Canada Revenue Agency to allow an adjustment to the client’s TFSA contribution room limit, due to the client’s inability to remove the full amount of excess TFSA contribution. This is not an option set out or recognized by CRA. However, we made forceful arguments about the client being that it would be unfair to continue to penalize and charge the client a monthly tax indefinitely. As TFSA waiver request generally take several months to be processed, we actively followed up with the Canada Revenue Agency to have the client’s TFSA issue resolved as soon as possible.

The Result:

The client’s TFSA contribution room limit was adjusted to nil from -$125,561.91, once the TFSA waiver request has been accepted by the Canada Revenue Agency, saving the client over $4,000 in payable taxes and preventing any further monthly interest and penalties. The client also remained entitled to the annual increase of TFSA contribution room limit.

Case Issue

Our office was approached to represent an Ontario corporation (the “Corporation”) after its request for penalty and interest relief under the Canada Revenue Agency’s (“CRA”) Voluntary Disclosures Program was denied. The Corporation began operating in 2003, and earned significant income over the course of nearly two decades without filing any T2 corporate tax returns or GST/HST returns. The Corporation was involuntarily dissolved in 2007 for failure to file yearly information returns with the Ontario Ministry of Finance, but the Corporation’s proprietors continued to operate its business. The Corporation eventually filed a voluntary-disclosure application in 2020 under the CRA’s Voluntary Disclosures Program to correct its non-compliance issues.

The Corporation’s proprietors sought to administratively revive the Corporation after its voluntary-disclosure application was filed. These efforts were thwarted very quickly, however, because of errors on the part of the Ontario Ministry of Finance and the CRA. Specifically, the Corporation’s proprietors believed that the Corporation had a tax year-end that matched a calendar year-end of December 31. The proprietors prepared the Corporation’s tax returns on this basis. However, the Ontario Ministry of Finance and the CRA had each registered the Corporation with a different fiscal year-end. The Corporation therefore required the consent of the Ontario Ministry of Finance and the CRA to consolidate its three different tax year-ends, so that it could prepare and file its outstanding returns correctly for its voluntary-disclosure application.

The Corporation’s efforts were stonewalled by the CRA, who denied its initial request without any justification and subsequently took close to a year and a half to review and overturn its initial decision. The CRA subsequently ceased communicating with the Corporation and its representatives, while the Corporation’s proprietors and representatives continued to provide ongoing disclosure with respect to their efforts to revive the Corporation for its voluntary-disclosure application.

After nearly three years of silence from the CRA, it issued a letter concerning the Corporation’s voluntary-disclosure application. That letter requested the Corporation provide its articles of revival so that the CRA could continue to process its voluntary-disclosure application. That letter imposed a 15-day deadline to respond, and was sent exclusively by regular mail to the Corporation and its representatives. The CRA’s request was received late and was not replied to within the 15-day deadline imposed.

After receiving no response by the imposed deadline, the CRA quickly moved to deny the Corporation’s voluntary-disclosure application on the basis its application was incomplete. Curiously, that letter also stated the Corporation would not be entitled to apply for a second administrative review of the denial by an independent CRA decision-maker. And even more egregious, the decision letter stated that the Corporation’s right to judicial review of the CRA’s decision would be denied. As a result of CRA’s decision, the Corporation risked facing millions of dollars worth of penalties and interest, on top of the extensive tax debt it would owe after filing its outstanding returns.

Our office was engaged by the Corporation’s proprietors almost a month after the CRA’s decision to deny the Corporation relief under the Voluntary Disclosures Program, to determine if a solution could be found.

Approach

Our office immediately gathered all available evidence and filed an application for judicial review with the Federal Court of Canada. In that application, we argued that the CRA’s decision to deny the Corporation’s request for relief under the Voluntary Disclosures Program, and to deny the Corporation a second administrative review of that decision, should be set aside.

Our office argued that the CRA’s decision was unintelligible and that it deprived the Corporation of its rights to procedural fairness. The CRA’s decision regarding the Corporation was an administrative decision that affected the rights and privileges of the Corporation, and which attracted a duty of procedural fairness. Under the rules of procedural fairness, an adjudicator’s decision must be intelligible. Further, an applicant must have the right to make submissions and to present evidence.

Our office argued the CRA’s decision was a complete denial of natural justice and breached the Corporation’s right to procedural fairness in light of the principles above. First, the CRA’s letter imposed only a 15-day deadline to reply, and was issued by regular post. After nearly three years of silence from the CRA concerning the status of the Corporation’s voluntary-disclosure application, the Corporation was effectively ambushed with the CRA’s request, and which failed to provide the Corporation any meaningful opportunity to respond to its request for information. Second, the Corporation would have been unable to meet the CRA’s request for information in large part because of the inadvertence of the CRA itself. By denying the Corporation’s reasonable requests to have its tax year-end adjusted, the CRA itself had prevented the Corporation from being able to meet the CRA’s demands.

Third, and perhaps most egregious, was that the CRA’s decision explicitly denied the Corporation’s right to recourse. The decision letter denied the Corporation’s right not only to a second administrative review of CRA’s decision, but surreptitiously the Corporation’s right to file an application for judicial review. That right to file for judicial review is enumerated under section 18.1 of the Federal Courts Act, and the CRA had no right to deny the Corporation its statutory rights. The severe disconnect between the CRA’s reasoning and the outcome of its decision was untenable and rendered its decision wholly unreasonable.

Result

The CRA’s legal counsel at the Department of Justice engaged in settlement discussions with our office to resolve the Corporation’s judicial review prior to cross-examinations. The CRA consented to a settlement offer where the Corporation’s voluntary-disclosure application would be referred back for reconsideration, and the Corporation would be allowed to continue seeking its articles of revival. As a result, the avoided millions in penalties and interest owing for denial of relief under the Voluntary Disclosures Program, and its application was allowed to proceed on its merits.

Problem: Principal residence exemption denied

Rotfleisch & Samulovitch Professional Corporation represented a client who had been denied the principal residence exemption during a CRA income-tax audit.

The client had entered into an agreement to purchase the property in British Columbia a few years before the client was able to move in. Approximately six months after the property became available for possession, the property was sold after the client had resided at the property for four months. The client designated the property as the principal residence and filed a Principal Residence Exemption claim.

The CRA tax auditor initially intended to reject the client’s Principal Residence Exemption claim of $184,580 and added this amount to the client’s income in the original tax audit letter proposal.

However, as a result of the detailed tax submissions by our top Toronto tax lawyers the CRA tax auditor accepted the full Principal Residence Exemption claim.

Our Approach: Client was not a “house flipper”

Our experienced Canadian tax lawyers filed detailed submissions in response to the CRA tax audit to demonstrate that the property was intended to be the client’s principal residence and that the client was not in the business of “house flipping”.

Specifically, we argued that the relatively short period of time (i.e., four months) that the client resided in the property, prior to the sale of property, was due to unforeseen circumstances and health concerns.

The client’s intention to use the property as the principal residence should not be denied in consideration of the practical limitations. Therefore, the client should be entitled to claim the property as the principal residence.

Result: Complete tax victory over CRA

Our knowledgeable Canadian tax lawyers successfully defeated the tax audit without proceeding to the notice of objection stage. The CRA Audit Division adjusted its original proposal, reducing the client’s income by $184,580 (from $184,580 to nil) and allowing the full Principal Residence Exemption claim during the sale of the client’s property.

Client’s Situation:

Rotfleisch & Samulovitch PC, Canadian tax lawyers in Toronto, were retained by a property investor who intended to purchase a property that needed renovation. As a result of problems with the documentation, our client and her partners were assessed for HST in the amount of $459,286.

To raise funds, our client entered into a partnership agreement with four other individuals and purchased the property via a corporation created under the partnership’s ownership. Once the renovation was completed, the taxpayer decided to buy the property from the other four partners and made payments to each of them directly.

Challenges:

These partnership arrangements and documentation were all made without prior tax planning or consultation with a Canadian tax lawyer so the documentation of the transactions was inconsistent. The Agreement of Purchase and Sale between the taxpayer and her partners indicated the taxpayer

purchased the property from the corporation, while the Full and Final Release indicated the other four partners were the transferors. The CRA seized on these documentation inadequacies and then assessed the corporation for GST/HST on the sale of the property and reassessed the four other partners for the total amount of $459,286 under s.325 of the Excise Tax Act, which imposes joint and several liability for the unpaid GST/HST on the transferee where a person transfers property at less than fair market value on a non-arms length basis.

Our Approach:

Our experienced Canadian tax lawyers filed detailed notices of objection on behalf of the other four partners and made additional substantive and lengthy 52-page submissions in response to the appeals officer’s request to demonstrate that, despite the documentation inconsistency, the reality of the transaction was that the taxpayer only purchased the partnership and share interests from the other four individuals. Therefore, there was no taxable supply (sale in GST/HST language) hence no GST/HST should be owing.

The Result:

After three years and six months from the date we filed the notices of objection, the CRA finally allowed our objections in full and reversed the previous assessment for $459,286.

Case Issue

Our office was approached to represent a family trust (the “Trust”) following an incorrect audit undertaken by CRA’s Audit Division for the Trust’s 2013 to 2016 tax years. The Trust was a discretionary trust, and under the terms of the trust deed, the trustees were entitled to distribute any part or all of the Trust’s annual income and Trust capital at the trustee’s discretion to its beneficiaries (who were all the children of one of the trustees).

The Trust held dividend-paying shares in two very successful private Canadian companies. The Trust also earned business income by performing due diligence and management services for those companies and lending funds to them when necessary. From 2013 to 2016, the Trust earned substantial dividend income and business income from management fees. Further, in 2014, the Trust received payment back on a loan made to one of the companies, earning $3,000 in interest. And in 2015, the Trust sold shares in one company to an arm’s-length purchaser for substantial capital gains.

The Trust resolved (by way of a Deed of Distribution) in each tax year to allocate its income from each source fully to its beneficiaries. The Trust issued a demand promissory note to its beneficiaries totalling the income it had earned, rather than paying those amounts in cash. The Trust’s beneficiaries fully reported these amounts as personal income for their corresponding taxation years. These amounts were therefore deductible by the Trust under paragraph 104(6)(b) because they consisted of the Trust’s income “that became payable in the year to, or that was included under subsection 105(2) in computing the income of, a beneficiary.” As a result, the Trust had next to no taxable income from 2013 to 2016. In 2015, the Trust also elected to make a capital distribution of $50,000 to one beneficiary on a tax-free basis, which was made payable by way of a promissory note as well (and which was not included in any deed of distribution issued by the Trust).

Following an audit by CRA’s Audit Division, the CRA proposed and reassessed the Trust as follows:

• The auditor disallowed deductions that the Trust claimed under subsection 104(6) for: $32,234 in 2013; $19,500 in 2014; $60,000 in 2015; and $100,000 in 2016 (a total of $211,734). The auditor denied these deductions because, in his view, the demand promissory notes underlying these deductions failed to satisfy subsection 104(24), which deems an amount to not be deductible from a trust’s income unless the amount “was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.” More specifically, the auditor compared the amounts that the Trust allocated to its beneficiaries with the Trust’s year-end bank balances. The auditor then concluded that subsection 104(24) precluded the Trust from claiming the deductions because the Trust did not maintain sufficient liquidity in its bank account to pay debts owed to its beneficiaries.
• The auditor disallowed a deduction of $41,744, which the Trust claimed for the 2014 taxation year, because the amount was paid to a non-listed beneficiary of the Trust (one of the trustee’s mother, who was not a beneficiary under the terms of the trust deed).
• The auditor assumed the $3,000 in interest income earned by the Trust was unreported dividend income, and included $4,140 in income for the Trust’s 2014 taxation year.
• The auditor disallowed a deduction for $50,000 claimed by the Trust in its 2015 tax year, on the basis the $50,000 payment to the Trust’s beneficiary could not have been a capital distribution, because the Trust’s opening and closing bank balance for 2015 were nearly identical.

By the time our office was contacted by the client, the trust’s accountant had already filed a notice of objection. Each argument presented in that objection had been flatly rejected by the CRA Appeals Division.

Approach

Our office immediately filed additional detailed submissions, and presented the following arguments to the CRA’s Appeals Division:

1. The auditor had misunderstood and misapplied the terms of subsection 104(24), which does not deny a deduction under 104(6) if “the beneficiary was entitled in the year to enforce payment of [the amount deducted under 104(6)].” Rather, because the Trust had issued demand promissory notes, each recipient beneficiary “was entitled in the year to enforce payment of” the amounts that the Trust deducted, and so the amounts were fully deductible by the Trust because they consisted of the Trust’s income “that became payable in the year to a beneficiary.” The auditor had erroneously adopted a liquidity test and conflated the beneficiary’s entitlement to payment with the Trust’s ability to pay in a given year, which flew in the face of not only a plain reading of the statutes, but also case law and the CRA’s own published views on the subject.
2. The $50,000 distribution made to a beneficiary of the Trust in 2015 was truly a capital distribution, and in effect the CRA intended to deny a deduction for a distribution by the Trust for which it did not otherwise claim a deduction. We demonstrated through analogy that the auditor’s assertion the Trust’s opening and closing bank balances alone were determinative of whether the Trust had made capital distributions was incorrect and a misapprehension of the law. Rather, by walking the CRA Appeals Division through the documentary evidence, we demonstrated that the capital distribution could be traced through the Trust’s bank balance. In fact, the auditor had arrived at the erroneous conclusion to disallow a deduction to the Trust because the auditor had actually mixed up two beneficiaries of the Trust, one of whom received a capital distribution (for which the Trust did not take a deduction) and the other who received an income distribution (and for which the Trust did take a deduction).

Result

The CRA Appeals Division agreed with our position and reversed the auditor’s decisions, reducing the Trust’s taxable income in 2013, 2015 and 2016 to almost nil. The Trust still recognized taxable income in 2014, in relation to distributions made to a non-beneficiary of the Trust that were erroneously deducted from its income, and for which there was no legal basis to dispute. In total, the CRA Appeals Division reduced the Trust’s taxable income by nearly $200,000 in total.

Case issue

A client approached Rotfleisch & Samulovitch P.C. and sought tax-planning advice about an imminent $1 million payout from a foreign pension. 

Approach

Rotfleisch & Samulovitch P.C. recommended a payout structure allowing the client and the client’s ex-spouse to divide the pension per their separation agreement and qualify for the RRSP foreign-pension rollover under paragraph 60(j) of the Income Tax Act. 

Result

By following Rotfleisch & Samulovitch P.C.’s advice, they each saved $250,000 in income tax—a total tax savings of $500,000.

Case issue

Alleging receipt of unpaid shareholder loans, the CRA increased our client’s taxable income by $567,000. 

Approach

We filed a notice of objection, convincing the CRA appeals officer to reduce the amount by $61,500. We then filed a notice of appeal to the Tax Court of Canada. We secured an additional reduction of $373,000 during a pre-trial settlement with the Canada Revenue Agency and the Department of Justice. 

Result

Our client’s taxable income was reduced by a total of $434,500.

Case issue

A client requested Rotfleisch & Samulovitch P.C.’s assistance after the CRA denied ITCs claimed by the client’s corporation. 

Approach

Rotfleisch & Samulovitch P.C. filed a notice of objection and delivered additional legal submissions to the Canada Revenue Agency’s Appeals Division. 

Result

The client saved $35,800 in GST/HST.

Case issue

A client asked our firm for advice after a GST/HST auditor proposed to apply $174,240 in gross-negligence penalties. 

Approach

We provided the GST/HST auditor with a legal analysis showing that the auditor had misinterpreted the Excise Tax Act’s provisions on gross-negligence penalties. In response, the auditor rescinded the gross-negligence penalties. 

Result

The client avoided the $174,240 and the interest that would have accrued on that amount.