Estoppel

The taxpayer, who had appealed reassessments of three of her taxation years for which CRA had added approximately $2.8M in shareholder benefits to her income, brought a motion pursuant to Rule 86 to compel the Financial and Consumer Affairs Authority of Saskatchewan (“FCAA”) to turn over certain documents that she considered to be relevant to her appeal.

Graham J found that, with one minor exception, issue estoppel applied to preclude the taxpayer from again seeking to have such documents produced by the FCAA given that in a number of proceedings before a panel to consider allegations that she had breached a number of provisions of the Securities Act (Saskatchewan) the panel had concluded that the FCAA no longer had such documents in its possession.

The appellant (“Carvest”), which was in the business of developing, owning and renting out apartment buildings in southern Ontario, had self-assessed under s. 191(3) regarding a 12-storey apartment building containing 137 units and located in London, Ontario (the “Richmond property”), which was ready for occupancy at the end of 2008. It valued the Richmond property for such purposes by applying the “cost plus 6%” method that had been agreed to seven years’ previously with a CRA auditor (Mr. Shannon) regarding two other apartment buildings (and any other buildings that were nearing completion at the time), i.e., adding the costs of construction to an estimate of the market value of the land, and adding 6% to reflect a notional builder’s profit margin, and then allocating the resulting global amount to the 137 units. In finding that CRA was not bound to apply this method to the Richmond property, St-Hilaire J stated (at paras. 45-46):

I find that there was no “representation intended to induce a course of conduct,” related to the Richmond property. On the contrary, the Shannon letter expressly limits the application of the cost plus 6% approach to the two properties that are the subject of dispute at the time and to projects under or nearing construction. The Appellant knew that those projects did not include the Richmond property. …

Estoppel cannot override the law. … It is an established principle that the Minister has a duty to assess tax on the facts as she finds them in accordance with her understanding and interpretation of the law. …

Smith J rejected the Appellant’s argument that because the Minister had accepted its 1998 to 2008 returns in which it had reported itself as a non-resident of Canada, she was now estopped from treating the Appellant as having been a Canadian resident in those years. He stated (at para. 54):

Jarvis confirms that the Minister may subsequently reassess or make an additional assessment of a taxpayer’s liability. Furthermore, a reading of Goldstein and Jarvis, both suggest that the Minister is not estopped from so doing, subject to the limitation period set out in subsection 152(4).

A corporation (“Garmeco”) had made timely claims for input tax credits for GST on legal invoices (based on alleged advice of a CRA official that it was the right person to make the claims), but was found by the Tax Court of Canada not to be entitled to them. A subsidiary of Garmeco (“IHI”) then claimed the ITCs on the basis that the Tax Court judgment had found that it was the right party to make the claims.

The Tax Court then found that IHI also was precluded from claiming the ITCs because it had made the claims beyond the four-year period set out in s. 225(4)(b). Russell J stated (at para. 13):

[T]he assertion (unchallenged by the Respondent) that a CRA officer several years ago advised IHI and Garmeco that the subject ITCs should be claimed by Garmeco (as was in fact done, as discussed), does not assist IHI in this appeal. Jurisprudence has well established that estoppel cannot override the law. “The doctrine [of estoppel in pais] had no application where a particular interpretation of a statute had been communicated to a subject by an official of the government, relied upon by that subject to his or her detriment and then withdrawn or changed by the government.” (Goldstein v. Her Majesty, 96 DTC 1029 (TCC) at 1034.) Thus, a taxpayer claiming reliance on errant advice by a CRA official does not help IHI. The law must be applied, notwithstanding that an official responsible for administering the law misinterpreted it in communicating to a taxpayer.

A private corporation that sold eligible capital property in 2008 declared a capital dividend in the year in an amount which included the untaxed portion of this sale receipt. This was a mistake, as the addition to the capital dividend account for this amount does not occur until the beginning of the following year. When CRA discovered this mistake a number of years later, it indicated that it would not assess the corporation for Part III tax provided that the mistake was rectified through an order of the Quebec Superior Court.

CRA might have contemplated a court order that merely changed the dividend due dates. Only a small portion of the dividend made payable in 2008 was actually paid in 2008, so that the CDA addition from the sale was not needed to cover that dividend payment. Accordingly, all that was necessary to remedy the problem for the Superior Court to declare the payable date for most of the dividend to be on or after January 1, 2009.

What the corporation instead sought and obtained was a Court order dated January 6, 2014 that retroactively annulled the dividend and ordered the individual shareholder to repay the dividend, which he then did, and with a fresh capital dividend then being declared and paid. The corporation’s counsel sought this nullification order notwithstanding that CRA, on being apprised of this nullification plan, had a number of months previously assessed the individual under s. 15(2).

Favreau J upheld the s. 15(2) assessment, on the basis that he considered that the dividend payments gave rise to indebtedness of the individual to the corporation under the unjust enrichment principle.

In rejecting an argument that the Minister was estopped from relying on s. 15(2), Favreau stated (at paras 68, 70 and 71, TaxInterpretations translation):

The CRA informed counsel for the appellant as of March 1, 2013 that it intended to reassess the appellant and offered him the opportunity to delay the assessment to a date subsequent to the judgment of the Court and to be able to discuss the findings of the judgment. The appellant declined the offer … .

… I am not satisfied that the CRA acted in bad faith, misled the Appellant, trapped or abused procedures that were unjustified in the circumstances. …

The concept of estoppel is a common law concept that has no equivalent in Quebec civil law. The only type of estoppel that would be of interest to us in this case, if this concept were applicable in Quebec, would be estoppel because of the conduct of the parties, specifically that of the CRA. Given the findings in the preceding paragraph, I do not see how estoppel in the conduct of the CRA could apply in the circumstances.

The appellants and Mr. Adam Stelmaszynski were convicted on two counts of fraud and two counts of attempted fraud for claiming false ITCs in GST returns, thereby committing offences contrary to paragraph 327(1)(d) of the ETA. Mr Stelmaszynski’s appeal of his conviction to the Ontario Court of Appeal was dismissed.

Favreau J. found that the doctrine of issue estoppel should apply to the appellants and to Mr. Stelmaszynski in respect of the improper claims for ITCs. He noted (at para. 20) that in Golden, [2008] 5 C.T.C. 2440 Boyle J. commented:

[25] The doctrine of issue estoppel should only be applied in a tax appeal in this Court in respect of a prior criminal tax evasion conviction in clear cases. It should not be applied indiscriminately once the preconditions are met. The Court should be satisfied that the issue of quantum in each particular taxation year was decided in the criminal proceedings.

Favreau J. found that as the trial jury’s verdict indicated it was satisfied that amounts alleged in indictment had been proven by the Crown, that quantum requirements had therefore been met. The real purpose of these appeals appeared to be relitigation of the criminal case, and failure to apply issue estoppel would violate principles of judicial economy, consistency and finality and integrity of administration of justice.

A debtor transferred assets to an affiliated creditor in order to repay debt of approximately $170 million owing by it. However, the conveyance only included partnership interests worth $158 million and did not include the balance of the debtor's assets of $12 million (the "Other Assets"). CRA assessed on the basis that the debt forgiveness rules applied to the debtor in the amount of $12 million as its debt had been settled in full on the repayment of an inadequate amount.

Dario J declined to issue a rectification order to have the assets transferred retroactively. After finding that rectification would be inappropriate in any event (see summary under General Concepts - Rectification), Dario J stated (at para. 93):

The Applicant had been relying on the non-transfer of the Other Assets to seek a tax benefit, and now seeks the transfer of such assets to obtain a different one. Rectification is a discretionary equitable remedy… . "He who seeks equity must do equity"…[B]y taking advantage of the capital cost allowance of the Other Assets, instead of immediately seeking a rectification order, I find [the debtor] undertook a course of conduct akin to acquiescence, precluding the remedy it now seeks.

The taxpayer's employer, General Motors of Canada Limited, assigned a new vehicle to the taxpayer and about 350 other senior managers or executives no less frequently than every three months for their personal and business use, but on the basis that they would identify shortcomings in the models and promote them to friends and acquaintances. The Director of Accounting and Collections Division of Revenue Canada, Taxation authorized GM in 1982 to use a simplified method for calculating the value of employee benefits, based on the average cost of all GM passenger vehicles sold in Canada and assuming 50% personal use of all vehicles in the pool. The Minister reassessed the taxpayer for 2008 and 2009 on a basis less favourable than the method in the 1982 authorization.

After quoting (at para. 36) a statement in Ryan v. Moore, 2005 SCC 38, that "estoppel by convention operates where the parties have agreed that certain facts are deemed to be true and to form the basis of the transaction," and stating (at para. 37) "that estoppel will not apply if an approval given by a tax authority is contrary to law," Woods J rejected the taxpayer's argument that the Minister was estopped from assessing contrary to the 1982 authorization. She stated (at para. 38):

...[A]n approval should not be set aside by the courts too readily on grounds that it is contrary to law. Latitude should be given to the approval unless it is clearly not supportable by the law. The administration of the tax system would be significantly adversely affected if this were not the case.

The authorization when made in 1982 was not contrary to law, as it "provided a reasonable determination of employee benefits" (para. 41). However, it was clearly invalidated by the enactment of s. 6(1)(k) in 1993 "to provide a specific rule for operating expenses" (para. 47). Furthermore, there had been a material change in factual circumstances (i.e., the turnover of vehicles in 1982 had been more frequent) (para. 49).

The taxpayer argued that he was not bound by a consent judgment divorce settlement because he had not signed the underlying minutes of settlement, nor authorized his counsel to do the same. Masse DJ stated (at paras. 17-18):

This is not the first time Mr. Yourkin has been before this Court on this very same issue. He unsuccessfully challenged his assessments for his 2001, 2002, 2003, 2005, 2006 and 2009 taxation years. In all these prior appeals, the parties were the same, the issues were exactly the same, and the facts relied upon were the same except for the taxation years and perhaps the amount in dispute. ...

Whether one looks at this situation through the lens of res judicata or issue estoppel, the result is the same. ... The matter has been finally decided.

The taxpayer's husband was reassessed in 2002 to include $500,000 in income, but died intestate in 2007 before his appeal was heard. His estate discontinued the appeal, and the taxpayer was assessed personally in 2011 to give effect to the $500,000 inclusion. One of the taxpayer's grounds for appeal was essentially to challenge the initial $500,000 assessment. The Minister moved to strike those arguments from pleadings, as the appeal of that assessment was abandoned in 2008.

C Miller J declined to strike the pleadings challenging the initial assessment. It was not plain and obvious that they would fail - it was unclear that issue estoppel would apply (stating, at para. 8, that there was "a contentious issue as to whether a discontinuance of a matter, without further judicial determination, meets one of the requirements") and, even if it did, a judge would still have discretion to hear the issue for reasons of justice and fairness (para. 8).

The taxpayer had been convicted of tax evasion by the Ontario Superior Court. He appealed his assessment of those same taxation years to the Tax Court, arguing on Charter grounds that the evidence against him had been collected in an unconstitutional manner. Pizzitelli J granted the Minister's motion to dismiss the appeal because, among other reasons, issue estoppel applied. Agreeing to hear the Charter arguments would put the Tax Court in the "ridiculous" position of essentially hearing an appeal from the Ontario Superior Court (para. 34).

The taxpayer had succeeded in an appeal from a prior taxation year, in which the taxpayer's motor vehicle expenses were deductible under s. 8(1)(h.1) in respect of his substitute teaching job. D'Auray J. found that neither the res judicata doctrine nor issue estoppel could block the Minister from denying the taxpayer's s. 8(1)(h.1) deductions in subsequent years. Res judicata cannot apply between appeals involving different taxation years because each taxation year is a different cause of action.

Issue estoppel did not apply because the Minister had new evidence (a witness for the school board). D'Auray J. noted that, "since in income tax appeals we often deal with recurring issues," it would be inappropriate to apply issue estoppel to prevent the Minister (or the taxpayer) from introducing new evidence simply because a deduction was allowed or disallowed previously (para. 80).

In a prior decision, the Tax Court had found that the taxpayer's directors were protected from liability for unremitted source deductions under s. 227.1(1) because they had a due diligence defence under s. 227.1(3). The question in the present case was whether the taxpayer would be liable under s. 227(9)(b). The taxpayer argued that its reassessment should be barred, because the question of source deduction liability on the present facts had already been settled by the prior Tax Court decision.

Bowie J. found that the Minister's reassessment was not barred by issue estoppel. In issue estoppel, the case must involve the same parties and the same issue. The present case engaged a different party (the taxpayer rather than its directors) and a different issue (s. 227(9) liability rather than s. 227.1(1) liability). Neither did the doctrine of res judicata bar the Minister's reassessment - the change in issues and parties meant that the present case could not be construed as a relitigation of the prior decision.

The doctrine of issue estoppel barred the Minister from asserting in the Federal Court that Ministerial review requests made by the taxpayer were filed late, given that the Tax Court had already found that the requests for Ministerial review of assessments were not filed late.

The taxpayer was convicted by the Ontario Court of Justice under s. 239 for misrepresenting his income. The Minister then reassessed the taxpayer's tax under s. 163(2). The taxpayer brought an appeal against the reassessment.

Lamarre J. granted the Minister's motion to quash the appeal. The taxpayer had introduced no new evidence that would undermine the conclusions reached by the Ontario Court of Justice. Applying Golden, Lamarre J. found that the taxpayer was estopped from relitigating the Ontario court's findings.

Issue estoppel applied to preclude the taxpayer from litigating before the Tax Court the question whether an amount of $34,000 should have been included in his income. Although the finding of a jury that he had committed tax evasion in respect of this amount did not turn on the particular quantum of the amount that he had failed to report, that quantum was part of the sentencing process made by the judge in that criminal proceeding. Furthermore, given that there had been proof of criminal mens rea beyond a reasonable doubt, this satisfied the onus on the Crown respecting the s. 163(2) gross negligence penalty.

It also would have been an abuse of process for the taxpayer's wife to re-litigate whether a $217,000 shareholder loan should be included in her income given that the only alleged unfairness was that in the criminal proceedings, there had been an agreement that Mr. and Mrs. Golden would be treated as one taxpayer, so that no particular finding was made as to whose income the amount should be included in.

Before going on to reject the taxpayer's argument respecting estoppel, Tardif J. found (at p. 3179) that the doctrine of estoppel cannot be applied to cases from Quebec, and that the case before him was to be reviewed instead in light of Article 1457 of the CCQ (which was essentially to the same effect as the doctrine of estoppel in Pais).

After referring to the principle that no estoppel can arise where representations made are not in accordance with the law, Bowman C.J. found that advice given to the taxpayer by officials in the local office could not bind the Court.

The Crown was unsuccessful in a submission that the taxpayers were estopped from alleging that properties held by them were inventory rather than being held on capital account as originally characterized in their income tax returns. McArthur TCJ. stated (at p 1760):

"... Appellants' description of the properties as capital is a statement of law and not fact. A representation of law is not grounds for estoppel."

The taxpayer was estopped from disputing the existence of a partnership between her and her husband, having previously induced the Minister to assess on the basis that such a partnership existed.

The Department was not bound by what was found to be an erroneous interpretation of the definition of "earned income" in s. 146(1)(c). Bowman, TCJ. stated (at p. 1034) that although it was not accurate to say that estoppel does not lie against the Crown and that:

"The question is not whether the Crown is bound by an earlier interpretation upon which a taxpayer has relied. It is more to the point to say that the courts, who have an obligation to decide cases in accordance with the law, are not bound by representations, opinions or admissions on the law expressed or made by the parties."

The doctrine of promissory estoppel was found to be inapplicable to supposed agreements of the Minister not to assess penalties and interest, as well as to the taxes themselves.

In reliance upon a letter of the taxpayer stating that he resigned as director of a corporation on August 1, 1985, the Minister did not assess the taxpayer under s. 227.1 until May 6, 1987, i.e., within the two-year period referred to in s. 227.1(4). In finding that the taxpayer was later estopped from amending his pleadings to allege that he had resigned on January 24, 1985, Rip J. stated (pp. 932-933):

"... A representor need only intend that the representee act upon the representation in some way, and not in any particular way, to plant the seeds of estoppel. In addition, a representation need not be given wilfully as long as the representation is of such a character to induce a reasonable and prudent person to believe that it was meant to be acted on or it was made under such circumstances that he should have known that it was both natural and probable that it would be acted on."

In obiter dicta, Lord Russell of Killowen "venture[d] to doubt the ability of the Crown ... having levied a tax on the basis that the transaction was a dealing in capital, then to assert that it can indirectly, by counteraction be treated as giving rise to taxable income."