The Federal Court of Appeal decision in Canada (Attorney General) v. Iris Technologies Inc. (2022) FCA 101, which deals with Tax and Federal Court jurisdictions exemplifies the need for determining the appropriate forum at which to resolve your tax grievance with the Canada Revenue Agency (CRA). It also highlights the court's approach of holistically reviewing Judicial Review applications for what they purport to do rather than how they are 'worded'.
Case Facts and Legal Issues before the Federal Court
Iris Technologies Inc. was assessed by the CRA with respect to GST under the Excise Tax Act, RSC 1985. C-15 (ETA). Iris Technologies Inc. filed a Judicial Review Application to the federal court claiming that the CRA had not provided them with procedural fairness and natural justice. Most notably their Judicial Review Application claimed:
- The CRA denied Iris Technologies Inc. procedural fairness during the tax audit and assessment process
- There was no evidentiary foundation upon which the tax assessment could be issued under the ETA
- The tax assessments were issued for the improper purpose of depriving the Federal Court of jurisdiction in the matter and preventing Iris from availing Administrative Law remedies.
The experienced Canadian tax litigation lawyers acting for Iris Technologies Inc. asserted that they challenged the conduct of the CRA in issuing the tax assessment, rather than the assessment itself. Iris Technologies submitted that this was the purview of the Federal Court under s.18 and s.18.1 of the Federal Courts Act, RSC 1985, c F-7 since they deal with unfairness and improper use of tax audit assessments. They sought relief under Rule 64 of the Federal Court Rules which provides declaratory relief.
The CRA's Canadian tax litigation lawyers moved to strike out the Judicial Review Application arguing that the Application was an attack on CRA's tax assessment under the Excise Tax Act itself. The CRA claimed that the Federal Court was precluded from matters that were under the jurisdiction of specialized courts i.e., the Tax Court of Canada.
Federal Court or Tax Court: Determine the Appropriate Forum for your Tax Appeals
The appropriate forum to address most taxpayer grievances is the Tax Court of Canada. The legislative intention underlying the creation of the Tax Court is that tax matters should be adjudicated in a specialized court, that has the requisite technical expertise to make efficient and informed judgments.
However, there are two main exceptions which allow the taxpayer to approach the Federal Court instead of the Tax Court:
- Where taxpayers have been issued penalties because of CRA's reassessment, as in Canada v Sifto Canada Corp., 2014 FCA 130.
- Situations where CRA exercises its powers of discretion.
In Canada v. Iris Technologies Inc., the CRA neither issued penalties due to a reassessment nor did the CRA have discretionary powers when issuing tax assessments under the Excise Tax Act. Therefore, the appropriate forum for Iris Technologies Inc to address their grievances would have been the Tax Court of Canada.
Why do taxpayers approach the Federal Court for their tax matters, when these exceptions do not apply? In the case of Iris Technologies, it seems that challenging the assessment in the Tax Court would likely have been unsuccessful. Therefore, a challenge to how the tax assessment was done may allow the taxpayer a greater chance of relief from the assessment. Additionally, taxpayers may wish to seek Administrative Law remedies which are not available in the Tax Court.
In Iris Technologies even if the Federal Court were to provide administrative remedies, they would be purely academic; since the assessment would still be binding on Iris Technologies unless it was vacated by the Tax Court.
The Federal Court of Appeal looks at the "Substance" rather than the "Form" of your application
The CRA submitted to the Federal Court of Appeal that the Federal Court had erred in not recognizing that the purpose of Iris Technologies' Judicial Review Application was to strike down the CRA Assessment. If Iris Technologies Inc. wished to strike down the CRA assessment it would have to go through the Tax Court.
The Federal Court of Appeal in analyzing the Judicial Review Application by the taxpayer looked at what the Application purported to do rather than strictly focusing on the words within the Application. The Court recognized that the motivation behind an Assessment cannot be separated from the Assessment itself; however, a holistic view of Iris Technologies' Application demonstrates their intention to invalidate the tax Assessment on 'technicalities'.
The Court addressed each of Iris Technologies' claims:
- Procedural Unfairness. The Court held that while procedural fairness is important in the Tax assessment process, procedural defects are insufficient in invalidating the entire tax assessment itself. These procedural unfairness claims should have been appealed to the Tax Court with evidence of the specific conduct of the CRA that was prejudicial. The CRA is bound by the Excise Tax Act and policy considerations cannot supersede and Assessment under the ETA.
- Without Evidentiary Foundation. The case of Canada vs JP Morgan Asset Management (Canada) Inc., 2013 FCA 250 highlights that evidentiary foundation issues are under the direct purview of the Tax Court. The Courts are told to toss out Judicial Review Applications that are bereft of any success such as those of Iris Technologies.
- Improper Purpose. Even if the Assessments under the ETA were improperly made, the correct forum to address them would have been the Tax Court of Canada. The Court holds that these assessments were not issued for improper purpose since the CRA has the authority to assess net tax under the Excise Tax Act.
Pro tax tips – Ensure the Court you choose to address your grievances in has jurisdiction over the matter
The success of any legal action is contingent on filing an application in the correct forum. Iris Technologies highlights the need to identify the Court that can provide you with the relief you seek. Even if Iris Technologies' claims of procedural unfairness were merited, approaching the 'wrong' Court eviscerated any chances of their Claims' success. It is important to retain the services of a competent Canadian Tax Litigation Lawyer to determine which forum is most appropriate to your particular case.
The success of your claims in a Judicial Review Application are also contingent upon your ability to provide material evidence demonstrating the accuracy of your claims. Claiming prejudicial treatment by the Canada Revenue Agency but being unable to single out the exact conduct that was unfair will virtually eliminate the chances of a successful Application. Therefore, it is important to have an experienced Canadian Tax Lawyer advising you on the merits of your claims and your chances of success.
FAQ:
What happens if I file my Judicial Review Application in the incorrect Court?
Filing any Application in the incorrect court greatly reduces the chances of the Application's success. Even if you are successful in the court of first instance, it is highly likely that the higher courts will quash any relief you were granted, on appeal. Furthermore, litigation is a costly endeavour, litigating in the 'incorrect' court can be even costlier since you may have to pay CRA litigation costs upon losing.
Since Tax cases are highly fact specific, retaining the services of a competent Canadian Tax Lawyer can greatly reduce the issues of filing your applications at the wrong forum.
Are there any Tax issues that can be decided by the Federal Court?
Yes. Section 18.5 of the Federal Courts Act (the section that precludes the Federal Court from granting relief on tax issues), does not apply to cases where the CRA has issued penalties after a reassessment, and where the CRA has exercised its discretionary powers i.e., in Taxpayer relief applications. However, there may be scenarios where these general exceptions do not apply to your facts. This necessitates the keen analytical skills of a top tax lawyer in Toronto to analyze your specific circumstances.
