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Speaker's Corner: Rulings on CRA general duty of care a positive development

The Canada Revenue Agency has historically had a wide prerogative in its interactions with Canadian taxpayers.

Past decisions have always held that CRA owed a duty of care only to the minister of revenue with no private law duty of care owed to taxpayers. Two recent cases, however, may signal the end of the era of non-accountability at the CRA as a general duty of care may be developing.

McCreight v. Canada (Attorney General) holds that CRA investigators may owe a duty of care to suspects under investigation even if they are not the taxpayers themselves. According to the case, the CRA had been conducting an investigation into two tax advisers, a chartered accountant and a research and development consultant retained by taxpayers, and seized boxes of materials. The CRA did not complete its investigation by the deadline for it to return the materials. The CRA investigator sought approval to lay an information charging various taxpayers as well as the tax advisers with fraud and conspiracy under the Income Tax Act and the Criminal Code.

The Department of Justice approved.

A year later, the Justice Department withdrew all charges against the tax advisers but not before the CRA investigator swore another information alleging 23 additional offences. It was not until six years later that the court, following a preliminary inquiry, discharged the tax advisers on all counts. In later proceedings, the court held that the CRA investigator had sworn the information primarily to retain possession of the seized documents.

Among other claims, the tax advisers brought a cause of action for negligence by the CRA investigator. Following the test set out in Hill v. Hamilton-Wentworth Regional Police Services Board, the Ontario Court of Appeal held it was “at least arguable” that a cause of action for negligence by the CRA investigator could succeed and allowed the tax advisers’ action for negligence to proceed to trial.

Similarly, the Supreme Court of British Columbia, in Leroux v. Canada Revenue Agency, held that the CRA owed the taxpayer a duty of care. In Leroux, a prolonged CRA audit resulted in, among other things, the imposition of gross negligence penalties. Along the way, the CRA seized the taxpayer’s original documents without authorization and refused to return them. The CRA later told the taxpayer the originals had been shredded accidentally and he had to provide further supporting documentation. The court found the CRA owed a duty of care that it had breached. However, the taxpayer’s claim failed on causation as he could not prove his losses were the result of the CRA’s negligence. The taxpayer has since appealed to the B.C. Court of Appeal, and the CRA has cross-appealed the finding of a duty of care.

What Leroux and McCreight suggest is a potential shift in how the courts will review the actions taken by CRA employees in the context of civil claims arising from a regular or criminal tax investigation. It is worth noting that the court in Leroux emphasized that “while being wrong is not being negligent, nor are [the auditor]’s mistakes in fact or law negligent, it is the misuse and misapplication of the term ‘grossly negligent’ that is objectionable.”

We have yet to see how widely or narrowly courts will interpret Leroux and McCreight. The court in Leroux cautioned that “an audit may not necessarily place a taxpayer in a close and direct relationship with the auditors” and McCreight simply allows the negligence claim to proceed to benefit from a full factual record at trial. That said, both of these cases are highly germane to any discussion on whether the CRA owes a general duty of care to a subject of an investigation and are a welcome development for taxpayers and counsel alike who have experienced the department’s increasingly aggressive tactics.

David Rotfleisch is the founding tax lawyer of Rotfleisch & Samulovitch PC, a Toronto-based boutique tax law firm. With more than 30 years of experience as both a lawyer and chartered professional accountant, he has helped startup businesses, resident and non-resident business owners, and corporations with tax, wills, and estate planning matters as well as voluntary disclosures and tax dispute resolution.

  • taxpayer

    mike naraine
    march 31, 2016.
    Can the CRA process or behavior remedied? No. Not from my personal experience in which I had no alternative but to act on my own. A matter that went all the way from investigation to the Tax Court of Canada, and finally to the Federal Court of Appeal.
    In essence the Agency's investigator and their counsel massaged the facts to obtain the required result.
    The Transcript of the Hearings before the Tax Court on December 8, 2014 makes for informative reading
    Mike Naraine.
  • CRA accountability non-existent

    Henry F
    CRA has little accountability and the attitude of their employees reflect that they are very aware of that. A service complaint is likely to be handled by the employee's senior. I've gotten responses such as "I trust in my team so I find no one is at fault..." The ombudsman is a toothless tiger and the case law holds that any deficiency in CRA process or behaviour (absent extreme circumstances) can be remedied by a successful appeal to tax court. Uh huh, well lady justice not everyone can afford a tax lawyer. Shame on our legal system.
  • Stephen Scott
    There is a long history of abuses within governmental institutions, federal and provincial , often of long duration, and often injuring helpless people, even those to whom fiduciary duties have been owed (e.g., residential-school victims), Institutional reforms are needed, including severe sanctions on those who act in bad faith and or commit other misconduct.

    But a broad civil remedy is needed for maladmunistration, well beyond anything now in the Crown Liability statutes. Indemnity should be payable for damage whether (1) direct or indirect, (2) proximate or remote, (3) forseeable or not,-- properly attributable to any act or omission constituting maladministration, including solicitor-and-client costs.

    Judgments should be directly chargeable on the relevant Consolidated Revenue Fund
  • reg dahl
    When ANY agency (like CRA) ACTS with criminal negligence and we/ taxpayers are blocked from any court to present and prove facts what is this called? Calling the CRA's criminal negligence -tactics- is an assault against fact and truth.
    When ANY CRA staff create FALSE/ FAKED information against any taxpayer , CHARGES against those responsible MUST be laid. Review the DOOKHAN case in Massachusates re FAKED info. She was sentenced to 5 years.
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