Notable Tax Court and Federal Court (tax related) decisions released in 2017.
Hurd Dentistry v HMQ, 2017 TCC 142 – This case concerned the tax treatment of orthodontic supplies under the Excise Tax Act. Specifically, whether there is one supply of orthodontic treatment to a dental patient or two supplies—the orthodontic appliance and the orthodontic service. The CRA’s position was that that appellant was providing one exempt supply (which prevents the appellant from claiming input tax credits). The appellant’s position was that he was providing two supplies, one of which was zero-rated, which would allow the taxpayer to claim input tax credits. The appellant relied on a CRA policy to support his dual supply position.
The Court, after a review of the relevant case law and legislation, ultimately accepted the CRA’s position. The Court added that the CRA policy was not binding on the Court. The Court found the CRA policy to be misleading and incorrect.
Hurd Dentistry exemplifies that CRA policies and administrative concessions which are not supported by law will not be binding on the courts. Taxpayers should seek out proper tax advice.
Burlington Resources Finance Company v The Queen, 2017 TCC 144 – This decision concerned the practise of taking questions at examinations for discovery “under advisement.” In tax litigation, parties conduct “examinations for discovery.” Discovery is intended to enable the parties to know the case they have to meet at trial, to know the facts upon which the opposing party relies, to narrow or eliminate issues, to obtain admissions and to avoid surprises at trial. A party or its nominee (in the case of a corporation) is required by the Tax Court Rules to answer any proper question relevant to any matter in issue. According to the Tax Court Rules the only proper responses to a question on discovery are the party/nominee answers the question, refuses to answer and provides an explanation for the refusal or gives an undertaking if she/he does not know the answer. According to the Court, “under advisement” is a quasi-objection used as a tactic to gain time to reflect on which basis the question will be refused.
In Burlington Resources, 4122 questions were posed, 1700 were taken under-advisement and, of those, 1200 were later refused. The TCC took a strong position against the practice of taking questions under-advisement explaining that it is a practice that needs to stop and it amounts to a “refusal.” The Court further noted that the tactic of taking questions under advisement without explanation impedes the examination and could lead to cost consequences.
Minister of National Revenue v Cameco Corporation, 2017 FC 763 – The CRA was conducting a transfer pricing audit of Cameco and insisted on oral interviews with 25 personnel from Cameco. At the time, Cameco was involved in transfer pricing litigation with the CRA. During that litigation, the CRA was relying on oral interviews it had done with Cameco employees during the audit. The CRA would not agree to the interviews being recorded and the CRA and Cameco had different recollections of the interviews. Based on this experience, Cameco refused oral interviews and insisted on written interviews.
The CRA sought a compliance order to compel the 25 individuals to attend oral interviews. The Federal Court refused to grant the order. The Court noted that CRA’s power to audit was not unlimited. If the CRA had unlimited power to compel interviews, the CRA would have a right to a much wider form of examination than is available under the Tax Court Rules and, further, procedural safeguards under the Tax Court Rules would not be available.
While conducting audits, CRA usually insists on oral interviews. This decision is a well-received expression that the CRA’s audit powers are not unlimited and that there is no statutory authority to compel an oral interview.
BP Energy Company v MNR, 2017 FCA 61 – This is another case in which the CRA’s audit powers have been restricted. BP prepared financial statements and internal documents to set out uncertain tax positions as well as the analysis which underlay contingent tax reserves (usually referred to as tax accrual working papers [TAWPs]). During an audit, the CRA requested the working papers. BP refused and the CRA sought a compliance order. The federal court judge found that the request fell within the statutory scope of the CRA’s audit powers.
BP appealed to the Federal Court of Appeal. The FCA allowed the appeal and noted that 231.1(1) (the provision which provides CRA with its audit powers) “could not have been drafted in broader terms.” The FCA noted that on a “plain reading” of the statutory language, the document sought by the CRA would be captured. However, the FCA said that these conclusions do not settle the debate and that the real issue is whether 231.1(1) allows a general and unrestricted access to this [the TAWPs] information.”
On May 31, 2017, the CRA announced that it would not seek leave to the Supreme Court to Appeal the BP Energy Company decision.