Factual assumptions by CRA in tax assessments can be mixed fact and law, says Federal CA
A recent Federal Court of Appeal decision will likely make fighting tax assessments much trickier, says Robert Kreklewetz.
In Canada v. Preston, 2023 FCA 178, the Federal Court of Appeal overturned a ruling from the Tax Court that an assumption by the Minister of Revenue (MNR) in a tax assessment should be struck if it is a statement of mixed fact and law.
“Essentially, the appeal of tax assessments is difficult because the CRA is allowed to make factual ‘assumptions’ which the taxpayer is then required to disapprove,” says Kreklewetz, an indirect tax, customs, and trade lawyer at Millar Kreklewetz LLP. “In tax cases, the CRA is presumed to have made proper factual assumptions, and the burden of disapproving those assumptions falls to the taxpayer.”
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Before Canada v. Preston, the MNR could not include any statements of law or statements that mixed fact and law in their factual assumptions, and the Federal Court of Appeal has either reversed or reinterpreted that to allow certain such assumptions, says Kreklewetz.
“For example, if a taxpayer is assessed for a capital gain on a house, the CRA now is allowed to assume what the fair market value of the house is, and the taxpayer is left with having to disapprove that,” he says. “Before, the CRA could make the factual assumptions necessary to support the assessment, but it would actually have to prove to the judge that the fair market value of the house was whatever the CRA said it was.
“This sets a higher bar for taxpayers, trying to defeat CRA assessments.”
Canada v. Preston originated with the MNR’s reassessments of transactions involving John and Monika Preston and their family trust in 2014. The Prestons filed a notice of appeal to the Tax Court, and the MNR filed a reply. The Prestons moved to strike certain of the assumptions in the reply, arguing that they were conclusions of law or mixed fact and law. The Prestons argued that the MNR had not identified the factual basis underneath the conclusions, which prevented them from knowing the case to be met.
The Prestons primarily relied on Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294 and Canadian Imperial Bank of Commerce v. Canada, 2013 FCA 122, to argue that legal statements or conclusions cannot form part of the MNR’s factual assumptions because the taxpayer then has the onus of demolishing them.
The Tax Court agreed with the Prestons. It said the MNR may not plead a conclusion of mixed fact and law as an assumption of fact because it would be the same as telling the taxpayer that the onus was on them to disprove the legal elements of the MNR’s theory.
On appeal, the MNR argued that the pleadings should be struck out “only in the most plain and obvious cases” and that the Tax Court failed to consider “whether it was plain and obvious that the assumptions as plead prejudice the respondents or would delay the fair hearing of the appeals.”
The Federal Court of Appeal’s panel consisted of Justices Siobhan Monaghan, John Laskin, and Judith Woods. Justice Monaghan wrote the reasons.
The court found that no principle of law says an assumption cannot be a statement of mixed fact and law and that the assumptions at issue did not place any additional onus on the taxpayer. Also, in failing to apply the test for striking out pleadings under Rule 53(1) of the Tax Court of Canada Rules (General Procedure), the Tax Court erred in law, said Monaghan. Under Rule 53(1), a pleading may be struck out where it “may prejudice or delay the fair hearing of an appeal; is scandalous, frivolous, or vexatious; is an abuse of process; or discloses no reasonable ground for appeal or opposing the appeal.”
The appeal court disagreed with the Tax Court’s reading of Anchor Pointe and Canadian Imperial Bank of Commerce v. Canada. In both cases, the problem was not that the assumptions were of mixed fact and law but that they were “entirely conclusory” and presented without factual underpinnings, said Monaghan.
Kreklewetz says that any assumption of mixed fact and law should be struck under rule 53(1)(b) for being frivolous and vexatious, and it is an abuse of process counter to 53(1)(c).
He says it is a foundational principle of the law that the person making the allegation is responsible for proving it. In 1948, the Supreme Court of Canada made an exception to this standard in Johnston v. Minister of National Revenue, establishing that in tax cases, “the facts are really in the realm of the taxpayer.” So, the MNR can make certain factual assumptions, and it is up to the taxpayer to demolish those assumptions.
“The way the court put it in Anchor Pointe is you don't want the implication that the taxpayer is required to disprove statements of law,” says Kreklewetz. “There was nothing in the Johnston case in 1948 that talked about anything other than fact.”
“This technical-ist decision sort of loses the forest for the trees, in my view, and is really problematic for taxpayers.”
He adds that most cases in the Tax Court are informal procedure cases where the taxpayer is self-represented, and in these situations, they will have to grapple with assumptions of mixed fact and law that will be more difficult to strike out.
“Not every taxpayer out there is going to have a team of lawyers representing them.”