Tax Court rule changes and higher dollar amounts at stake are among reasons for trend, say lawyers
More disputes between taxpayers and the Canada Revenue Agency are being settled outside of court, according to tax-law experts.
Tax lawyers point to several factors leading to the trend, including Tax Court rule changes, the CRA taking more aggressive assessment positions and increasingly higher amounts at stake in disputes.
In 2014, to enhance frugality with court resources, Tax Court rule changes allowed the court to order a settlement conference either by request of the parties or through its own initiative, says Margaret Nixon, a partner and litigator in Stikeman Elliott LLP’s tax group. Nixon adds the amendments also allowed for larger costs awards where a settlement offer has been made.
Also encouraging parties to avoid trial is the CRA’s increasingly aggressive assessment positions, says Ron Choudhury, national lead for Miller Thomson LLP’s sales tax speciality group.
The amounts at issue are also on the rise.
“The dollars at stake with tax disputes in Canada are increasing in quantum and magnitude, and as a result, there's a natural tendency to have the certainty that a settlement would provide,” says Larry Nevsky, a partner in Dentons national tax group.
The trend is exemplified in two recent high-profile cases, involving significant sums, says Nixon. CIBC and the CRA had been fighting for years after the bank tried to deduct from their business income the approximately $3 billion in settlement, interest and legal costs they owed from a class-action lawsuit which stemmed from the bankruptcy of Enron. After years of pre-trial motions, the parties were set for a “lengthy trial” but then settled the appeal earlier this year, says Nixon. Another example is the settlement reached in Dec. 2018 between the CRA and Wheaton Precious Metals, which had appealed a reassessment which found income earned by the company’s foreign subsidiaries should been taxed in Canada. The Wheaton case involved hundreds of millions of dollars, says Nixon.
The trend towards more settlements is largely being driven by the Tax Court, she says. Before the 2014 rule-change, costs in tax disputes would be awarded “in accordance with the tariff,” which was a problem because “the amounts in the tariffs are very small and do not even come close to compensating parties for the actual cost of the litigation,” she says.
Under the new rules, if the taxpayer makes a settlement offer at least 90 days before trial and their subsequent judgment is as much or more than the settlement offer, they are entitled to 80 per cent of the legal costs incurred after they made the offer, Nixon says.
“There's a similar rule for settlement offers made by the Crown. The awarding of higher costs in tax cases was a strong motivating factor for parties to settle,” she says.
Nixon adds that the court is also taking more frequent advantage of the power to convene settlement conferences, which, along with the rule change increasing cost awards, was done to “encourage settlement” and “preserve judicial resources.”
“Most taxpayers are willing to settle at the right price,” Nixon says. “The challenge is that the Crown can only settle tax disputes on a principled basis. This means that the settlement must be in accordance with the law on the facts as the CRA understands them.”
A settlement in the tax court is unlike a settlement in civil litigation, as the Tax Court is a statutory court, rather than a court of equity, says Choudhury. Unlike settlements in other lawsuits, if the CRA has assessed a taxpayer for $1 million and the taxpayer’s position is that they owe $100,000, they cannot meet in the middle and settle for $550,000. In tax matters, the settlement amount reached is the result of one or the other side conceding on one or more aspects of their case – for example the CRA forgoing a particular taxation year or reporting period – and those concessions must be based on there being no legal justification for the issue conceded to, he says.
As to why these concessions are becoming more numerous, Choudhury says society’s increasing wealth is a key factor, with greater income, leading to larger tax bills and more expensive consequences when losing a fight with the CRA.
“In the past, a $100-million deal used to be a big deal. Nowadays, that's a mid-sized deal. A $500-million deal is a big deal, he says.
Now, with businesses – many owner-operated – seeing GST assessments worth $5 and $10 million, they are increasingly attracted to the certainty of a settlement to avoid litigation and, possibly, a larger assessment, he says.
The higher dollar amounts are exacerbated by a more aggressive tax man, says Choudhurry.
“The CRA is taking an increasingly aggressive assessment position,” he says. “We're seeing that they are taking assessment positions that are sometimes just not sustainable.”
Whether caused by the money at stake, the rule changes or the positions taken by the CRA, the higher rate of settlements are a step in the right direction and welcomed by the tax bar, says Nixon.
“Overall the tax bar has reacted positively to the trend towards settlement,” she says. “Many practitioners felt that the rule change regarding enhanced cost towards where a settlement offer has been made was long overdue, the tariff was simply inadequate to address the rising cost and complexity of tax disputes.”