The taxpayer's onus of proof in tax litigation: A Canadian tax lawyer's analysis
Tax lawyer and accountant David Rotfleisch looks at the case law for taxpayers challenging the Canada Revenue Agency
Success in tax litigation will often hinge on the ability of the taxpayer to "demolish" some or all of the Minister's assumptions that form the basis of the assessment, says David J. Rotfleisch, CA, CPA, JD, of Rotfleisch & Samulovitch P.C.
TORONTO – When a taxpayer is not content with a tax assessment or reassessment raised by the Canada Revenue Agency (CRA), he or she may file a Notice of Appeal in the Tax Court of Canada to initiate an appeal pursuant to subsection 169(1) of the Income Tax Act. The Canadian tax lawyer representing CRA will then file a Reply to the Notice of Appeal, which will contain responses to the Notice of Appeal and state the assumptions upon which the tax assessment or reassessment is based. To successfully challenge a tax assessment, the taxpayer must establish either that the CRA's assumptions of fact were incorrect, or that the CRA has made an error of law. For the purposes of this article we will focus on the CRA's factual assumptions in reassessment. In order to be successful on an Appeal, the taxpayer must "demolish" the assumptions of the CRA by leading evidence to disprove the assumption.
Case Law – Evolution of the Taxpayer's Onus of Proof in Tax Litigation
One of the early cases that dealt with the taxpayer's burden was Johnston v Minister of National Revenue. In this case, the Supreme Court of Canada considered the following question: Does the initial burden of proof fall on the taxpayer or the Canadian tax lawyer representing the tax department? The Court held that the assumption of the Minister of National Revenue (Minister) must be deemed true by the Court unless challenged by the taxpayer. In other words, the Court stated that the initial onus is on the taxpayer to challenge the Minister's factual assumptions on which a tax assessment is based.
Subsequent case law elaborated on how the taxpayer may challenge the assumption of the Minister. In MNR v Pillsbury Holding Ltd, the Exchequer Court of Canada reaffirmed the Johnston decision, in particular, that the Minister's assumptions must be accepted by the Court unless questioned by the taxpayer. The Court stated that the taxpayer may accomplish this in one of three ways:
- By challenging that the Minister in fact relied upon the stated assumptions in coming to the assessment;
- By demolishing one or more of the Minister's assumptions on which the assessment is based; and
- By contending that, the Minister has made an improper application of the law to the facts – even if the assumptions are justified, they do not support the assessment.
The Court held that if the taxpayer is successful in raising these arguments, the taxpayer will succeed in the tax appeal unless the Minister can show that the reassessment is otherwise valid.
The methodology of "demolishing the Minister's assumptions" in Pillsbury was further elaborated in Hickman Motors Ltd v R. In this case, the Supreme Court of Canada held that the initial onus is on the taxpayer to "demolish" the Minister's assumptions in the assessment. The Court stated that this initial onus is met when the taxpayer makes a prima facie case. The Court held that if the Minister's assumptions have been demolished by the taxpayer, then the onus shifts to the Minister to rebut the prima facie case. The Court stated that if the Minister adduces no evidence, then the taxpayer is entitled to succeed.
The Tax Court of Canada in Stewart v Minister of National Revenue, defined a prima facie case as "one supported by evidence which raises such a degree of probability in its favour that it must be accepted if believed." The Federal Court of Appeal in Voitures Orly Inc. / Orly Automobiles Inc. v. R. held that the burden of proof on the taxpayer should not be "lightly, capriciously or casually shifted." The Court stated that the initial burden is on the taxpayer because the taxation system is self-reporting – the taxpayer knows and possesses information that the Minister does not.
The British Columbia Court of Appeal summarized the onus of proof in tax appeals in its decision, Northland Properties Corp. v British Columbia. The Court stated that a proper approach on the appeal of a tax assessment includes asking the following questions:
- What are the Minister's assumptions?
- Have some or all of the assumptions been disproven by the taxpayer?
- If the taxpayer has disproved the assumption or assumptions, then has the Crown shown that the assessment is valid?
Success in tax litigation will often hinge on the ability of the taxpayer to demolish some or all of the Minister's assumptions that form the basis of the assessment. To accomplish this, the experienced Canadian tax lawyer representing taxpayers need to draft a well-written legal pleading that defines the facts and issues in dispute and the remedies sought by the taxpayer. However, this is not always an easy task:
- Even if some assumptions are demolished, the remaining assumptions themselves may be sufficient to support the Minister's assessment; and
- The Crown may adopt different positions from that taken by the Minister in the assessment. Thus, there may be alternative legal grounds for upholding the assessment.
Tax litigation is often a very stressful process. It is unique and subject to nuanced rules and failing to retain experienced tax counsel can prejudice a case.
David J. Rotfleisch, CA, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm and is a Certified Specialist in Taxation Law. 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, 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 litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.