Federal Court blocks attempt to reassess income subject to past voluntary disclosure

The Federal Court has granted a judicial review application seeking declaratory relief and has quashed the Minister of National Revenue’s decision to reassess a foundation’s tax liability based on an abuse of process and procedural unfairness.

The applicant in this case was the Milgram Foundation, which was established in 1964 as a non-resident entity in Liechtenstein. It first filed Canadian tax returns in 2015. It became concerned that it might be considered a Canadian resident for tax purposes under the Income Tax Act, 1985.

Due to this concern, the foundation made a voluntary disclosure of its financial records under the Canada Revenue Agency’s voluntary disclosure program for the 2003–14 taxation years. It also paid the assessed taxes.

In December 2015, the minister accepted the foundation’s disclosure but reserved the right to audit or to verify the tax returns. After an audit in 2016, the minister found no discrepancies in the returns for the 2003–14 tax years.

However, in September 2018, the minister informed the foundation of an intention to reassess its tax liability for the 1998–2002 tax years. The minister claimed that there was undisclosed investment income and misrepresentation attributable to neglect, carelessness, or wilful default.

Abuse of process found

The foundation filed a judicial review application challenging the minister’s proposed reassessment. In Milgram Foundation v. Canada (Attorney General), 2024 FC 1405, the Federal Court granted the application seeking declaratory relief.

The court declared the proposed reassessment arbitrary, procedurally unfair, and abusive of process. The minister was reversing its original decision that already accepted the applicant’s voluntary disclosure, the court found. The minister based its 2018 letter on information that the foundation had already disclosed in 2015, the court noted.

The court thus quashed the minister’s decision to reassess the foundation’s tax liability for the 1998–2002 tax years. It directed the minister to consider the court’s declaration and to take the actions needed to give effect to the judgment.

The court ruled that it had jurisdiction to hear the case. The court rejected the minister’s argument that it lacked jurisdiction under s. 18.5 of the Federal Courts Act, 1985 because the 2018 letter was not reviewable.

The court cited case law that allowed it to review the minister's conduct in exercising discretionary powers under the voluntary disclosure program. The foundation was challenging the minister’s process, not the reassessment itself, the court noted.

However, the court disagreed with the foundation’s argument that the minister’s acceptance of the disclosure under the voluntary disclosure program amounted to a binding agreement. The minister’s administrative and discretionary powers under s. 220(3.1) of the Income Tax Act allowed the waiver of penalties or interest for disclosures under the voluntary disclosure program, the court said.

This discretionary decision fell within the jurisdiction of the Federal Court, the court reiterated.