Practice National Taxation

Another historical development in claiming negligence against the CRA

Canadian accountant and tax lawyer David J Rotfleisch on the Myers ruling

Author: David J. Rotfleisch
David Rotfleisch, CPA, JD
David J Rotfleisch, CPA, JD is the founding tax lawyer of and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

THE entitlement of Canadian taxpayers to hold the Canada Revenue Agency ("CRA") liable for egregious tax audit and tax enforcement action remains a new and blossoming concept in Canadian law. Canadian courts only first recognized that the CRA owes a duty of care to Canadian taxpayers in 2014, following the judgment of the B.C. Supreme Court in Leroux v Canada Revenue Agency, 2014 BCSC 720. The Quebec Superior Court took an even bolder step when it recognized in Ludmer et al c. Attorney General of Canada, 2018 QCCS 3381 that the CRA could be held liable for negligence, for the manner in which it exercises its powers when conducting a tax audit of Canadian taxpayers. 

The CRA is afforded broad powers to investigate and make assumptions concerning a Canadian taxpayer's income and tax liabilities, with or without supporting documentation. Under subsection 152(7) of the Canadian Income Tax Act, the CRA is not bound by the information provided by a taxpayer when issuing an assessment or reassessment of that taxpayer's income. The CRA is thus entitled to look elsewhere than the books and records of the taxpayer, and to external and third-party sources of information, to complete an audit of a taxpayer. 

On the extreme end of CRA tax audit powers, the "Net Worth" audit methodology has been developed as a tool by CRA to determine a taxpayer's unreported income where the taxpayer has inadequate books and records to support their filed returns, or there is a serious discrepancy in a taxpayer's financial affairs and spending habits when compared with reported income. Under the Net Worth audit methodology, a tax auditor may examine a taxpayer's liabilities, assets, and expenditures over an audit period. This may include making third-party demands to financial institutions, credit card companies and suppliers for any information about the spending habits of the taxpayer. Where any increase in wealth over that period cannot be explained by the income reported by the taxpayer, the CRA will assume that the difference is unreported income of the taxpayer. 

The Net Worth audit methodology is a particularly blunt and inaccurate tax method of assessing a taxpayer's income and has been recognized by Canadian courts as a method of "last resort" to audit a taxpayer where no other available method will fulfill CRA's mandate. Once the CRA issues an assessment or a reassessment of a taxpayer, under subsection 152(8) of the Canadian Income Tax Act, that assessment remains valid until it is successfully vacated or varied on objection by the taxpayer. 

Challenging a Net Worth assessment can be an extremely time-consuming and expensive process because of the blunt nature of the methodology. A taxpayer is typically left to challenge the assumptions and calculations of the CRA on a line-by-line and item-by-item basis, and to perform an assessment of their own assets and liabilities over the tax audit period to refute the CRA's assumptions. 

The decision to use the Net Worth audit methodology should never be one that the CRA takes lightly.

Where the CRA oversteps boundaries and takes controversial legal positions against a taxpayer, the results can be absolutely devastating for a taxpayer. The right to hold the CRA accountable for missteps and abuses of power, and in particular when faced with the full force of the CRA's powers through a Net Worth audit, has now come to a head in the case of Myers v Canada (Attorney General)

Following a successful appeal before the B.C. Court of Appeal, the taxpayer Appellants in Myers have earned the right to continue their negligence claim against the CRA for their treatment by the CRA during a Net Worth audit. While the taxpayer's civil claims against the CRA have not yet been heard in court, that they have earned the right to continue their case against the CRA is another victory for Canadian taxpayers against unreasonable, careless and potentially malicious tax audits. 

The Facts of Myers v Canada (Attorney General)

The Appellants (Darell Myers, Leah Murchie-Myers) were subject to a search warrant executed by the RCMP in 2008 on a property owned and rented out by the Appellants, which led to discovery of a cannabis grow operations. Neither of the Appellants were charged with a criminal offence as a result of the search. Over the following years, the Appellants were subjected to increasingly aggressive CRA tax audits. 

CRA initiated a tax audit of the Appellants 2010 and 2011 tax years (the "First Audit"), alleging they were involved in organized crime, and issued tax reassessments in 2013 on the basis of a Net Worth assessment. The tax reassessments were upheld on objection and were appealed in 2015 to the Tax Court of Canada. CRA subsequently audited Darell Myers' GST/HST returns for 2010 and 2011, following the results of the First Audit, reactivated Darell Myers' sole proprietorship GST/HST account, converted it to a partnership account for the Appellants, and issued a reassessment for $80,000 in unpaid GST. The Appellants twice requested that the CRA release the tax audit records to them. CRA refused, alleging they could not be released due to a criminal investigation against the Appellants. 

CRA commenced a new tax audit in 2018 on Ms. Murchie-Myers income tax returns and a related company for 2014-2016 (the "Second Audit") and compelled her to provide records under subsection 231.1(1) and 231.2(1) of the Income Tax Act. On an application for judicial review concerning the initiation of the 2018 tax audit, CRA did not stay its action and completed the tax audit, assessing her an additional tax payable of $435,209, while judicial review was pending. Judicial review was stayed, and a notice of objection filed. CRA officials then proceeded to call the sister of Darell Myers, threatening her student loan repayment plan unless she answered questions about his activities. 

The Appellants launched a civil claim in 2019 against the CRA alleging Charter breaches (on the basis they were colluding with the RCMP to share information retrieved under subsection 231.1(1) and 231.2(1), violating their right to freedom from self-incrimination) and abuse of process (which have since been abandoned), negligence, and misfeasance in public office. The Appellants had based at least part of their claim of the unlawful use of the Net Worth audit methodology by CRA during the First and Second Audits. 

The Ruling of the B.C. Supreme Court

The Appellants' Pleading was a Collateral Attack on the CRA's Audit

At the B.C. Supreme Court, the CRA argued the notice of claim should be struck, arguing that the claim was a collateral attack. Specifically, the orders and decisions made could only be dealt with by the Tax Court and the Federal Court. 

The hearing judge stayed the misfeasance and negligence claims relating to the First Audit and struck the claims related to the Second Audit. The judge concluded the challenge to the use of the Net Worth methodology was in essence an appeal of the tax assessments resulting from the First and Second Audits, and that ruling on the continuation of the Second Audit was a matter exclusively for the Federal Court. The claims for the First Audit were stayed until the Tax Court appeal could be heard, and use of the Net Worth methodology ruled on. 

The Ruling of the B.C. Court of Appeal:

The Appellants' Pleading was NOT a Collateral Attack and can Proceed to Trial

On appeal, the Appellants argued that the B.C. Supreme Court judge erred in two ways:

  1. It was an error to characterize the civil claims as an attempt to avoid the effect of the Canadian tax assessment; and,
  2. Assuming the Tax Court and Federal Court had exclusive jurisdiction to determine the lawfulness of tax assessments and decisions made by CRA officials.

The Court of Appeal allowed the appeal in full for the Appellants for the following reasons:

  1. The hearing judge mischaracterized the Appellants' pleading as a collateral attack.
  2. The hearing judge erred in finding that only the Tax Court and the Federal Court have jurisdiction to determine the lawfulness of the CRA's actions in the course of auditing the Appellants' taxes, including the use of the Net Worth audit methodology. 

With respect to 1), the hearing judge was correct to conclude the Tax Court had exclusive jurisdiction to hear certain appeals under the Income Tax Act and Excise Tax Act. However, the hearing judge had found the Appellants did not allege the assessment of taxes and penalties were harmful. Deficiencies in the Appellants' harm or loss pleaded to claim damages were amended, and it was clearly at the hearing the Appellants were not seeking to avoid payment of the assessments and penalties. 

With respect to 2), the Court of Appeal found that the Appellants' pleadings could be correctly characterized as a challenge to CRA's use of the Net Worth audit methodology. However, the Court of Appeal concluded that Federal Courts Act, which defines the jurisdiction of the Federal Courts, does not restrict the power of provincial superior courts to rule on lawfulness of the exercise of statutory authority by federal decision makers in the context of a civil trial. The Court of Appeal also observed that the Tax Court of Canada Act is absent statutory language reserving jurisdiction over the lawfulness of CRA decisions and assessments with the Tax Court. 

The mistake made by the hearing judge was ultimately conflating a challenge to the legal force and effect of a government decision, and the lawfulness of the decision. The Court of Appeal found that there was concurrent jurisdiction to rule on the unlawfulness of the decision as part of a civil tort claim, because the Appellants were not challenging the legal force of the decision itself (i.e. the correctness of the tax assessments) in order to avoid the effects of the decision all-together. 

The Court of Appeal cited Greengen Holdings Ltd. v British Columbia (Ministry of Forests, Lands and Natural Resource Operations), 2018 BCCA 214, which concerned allegations of misfeasance in public office. In Greengen, the B.C. Court of Appeal concluded "it is no longer the law that a civil action constitutes a collateral attack only because it alleges that a government decision is unlawful; it matters not that the issue of unlawfulness is an element of the cause of action pleaded." The Court of Appeal acknowledged the Appellants were claiming that the use of the Net Worth audit methodology was unlawful as part of their misfeasance and negligence claims, but that the defense of collateral attack would only be available to the CRA if the Appellants sought to recover damages for the taxes and penalties payable under their assessments. 

The Future of Myers v Canada (Attorney General)

With a successful ruling from the B.C. Court of Appeal in favour of the litigants, Mr. Myers and Mrs. Murchie-Myers are free to pursue their negligence case against the CRA before the B.C. Supreme Court. While the litigants' civil case has yet to be heard at trial, Canadian taxpayers are nevertheless sure to benefit from this victory at the B.C. Court of Appeal. This victory is an important one in the growing body of case law reinforcing the right of taxpayers to hold CRA accountable for misconduct.

David J Rotfleisch, CPA, JD is the founding tax lawyer of and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit and email David at

Read the original article on Taxpage. Author photo courtesy Rotfleisch & Samulovitch P.C.

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