NEW STANDARD FOR THE CRA NEEDING TO BE “REASONABLE”

March 25, 2020
All Tax Articles

Most disputes between taxpayers and the Canada Revenue Agency, if not resolved, can be appealed to the Tax Court of Canada (after first filing a Notice of Objection with the CRA). That is the appeal route you use if the CRA issues an “assessment” or “reassessment”, and you take the position that the (re)assessment is incorrect.


However, some matters are for CRA discretion: the CRA can choose to grant you relief, or not. One example is waiving, or cancelling interest and penalty: the Income Tax Act gives the CRA discretion to do that, and the CRA has “Taxpayer Relief” guidelines that it will apply in deciding whether or not to waive some or all of the interest and penalty.


Another example is a request to open up an old tax year to allow deductions or credits not previously claimed. The Income Tax Act allows this for up to 10 years, but the CRA has discretion as to whether to do so (and again will apply its “Taxpayer Relief” guidelines).


What can you do if the CRA refuses to provide relief?


You can’t appeal to the Tax Court. The assessment isn’t legally incorrect. You just think that the CRA was unfair in not providing the relief you asked for.


But you can apply to the Federal Court for “judicial review” of the CRA’s decision. It has been well understood for decades that, if the CRA decision was “unreasonable”, the Federal Court can order the CRA to have a different Taxpayer Relief official make a new decision. (The Court cannot substitute its own decision.)


But what does “unreasonable” mean?


In 2019, based on a case, the Supreme Court decided, in a 7-2 ruling, to make new law for a Court to determine whether a government action was “reasonable”. The new rules will require the CRA (and other government agencies) to be more transparent and careful in issuing reasons for denying a request. While CRA’s Taxpayer Relief letters usually do provide detailed reasons, the Vavilov decision may require the CRA to be more thorough.

The Vavilov decision is extraordinarily long: 239 pages (though the decision of the majority is summarized in “only” 17 pages). Applying it to future disputes with the CRA will be challenging. Here are some of the key new points to apply from the reasons of the 7-judge majority, in determining whether the CRA has acted reasonably in, say, refusing to waive interest or to allow a late claim for a deduction:


• The CRA must “adopt a culture of justification and demonstrate that their exercise of delegated public power can be justified” (para. 14).


• The Federal Court must ensure that the “decision as a whole is transparent, intelligible and justified” (para. 15).


• The Court does not ask what decision it itself would have made, ascertain the range of possible conclusions, conduct a new analysis or seek the correct solution; but must consider only whether the CRA’s decision, including both rationale and outcome, was unreasonable (para. 83).


• Two fundamental flaws that can render a decision unreasonable (para. 101) are a “failure of rationality internal to the reasoning process” (e.g. irrational chain of analysis, or if the reasons in conjunction with the record do not make it possible to understand the reasoning on a critical point, or exhibit clear logical fallacies: paras. 103-104) and “when a decision is in some respect untenable in light of the relevant factual and legal constraints”, taking into account the governing statutory scheme, other relevant law, the principles of statutory interpretation, the evidence before the CRA and facts of which the CRA may take notice, the parties’ submissions, the CRA’s past practices and decisions, and the decision’s potential impact on the taxpayer (para. 106).


• Furthermore, the CRA must consider the evidentiary record and the general factual matrix, and its decision must be reasonable in light of them (para. 126).


• Whether a particular decision is consistent with past CRA decisions is also a constraint the Court should consider (para. 131).


• Finally, individuals are entitled to greater procedural protection when the decision involves potentially significant personal impact or harm, including threatening one’s “livelihood” (para. 133), and if the impact is severe, the CRA’s reasons must explain why the decision best reflects Parliament’s intention in enacting the rule that gives the CRA discretion to make a decision.


As you can see, due to the number of factors above, there will be lots of room for arguing in a particular case that a CRA decision was unreasonable. Overall the Vavilov case will likely improve the chances of a taxpayer being able to challenge a CRA discretionary decision.

This letter summarizes recent tax developments and tax planning opportunities from a third-party affiliate; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this blog post, which are appropriate to your own specific requirements. Please feel free to get in touch with Lee & Sharpe to discuss anything detailed above, we would be pleased to help.
Douglas K. DeBeck

Hello, my name is Douglas K. DeBeck, I am a partner at Lee & Sharpe.

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