CRA Not Entitled to Rectification Application

The Ontario Superior Court of Justice recently held that in certain circumstances the Canada Revenue Agency (CRA) is not entitled to notice of a rectification application as it pertains to a trust.

Since the specific issue of the CRA’s standing in these circumstances had never been challenged before, Brogan Family Trust is clear authority that the CRA is not automatically granted standing as an affected party in rectification applications.

The taxpayer in Brogan settled a family trust in 2004. Six years later, in 2010, the trustees realized an error in the trust agreement that inhibited the distribution of trust property to certain minor beneficiaries. In November 2010 the trust applied for rectification of the agreement in order to distribute the property of the trust as intended at its inception.

The trust sold a business just prior to the rectification order being granted. For its 2010 tax return the trust allocated the proceeds of that sale to the beneficiaries, who reported the income in their respective returns for that year. Legal counsel for the trust advised that it was not necessary to inform the CRA of the rectification. 

During an audit of the trust in June 2012 the CRA discovered the existence of the 2010 rectification order. The CRA was provided with a copy of the order in August 2012, but did not bring a motion to set it aside until May 2013.

At paragraph 8 of the reasons for judgment, the Court stated the issues to be determined in these circumstances as follows:

1. Did the CRA bring the motion “forthwith” after learning of the rectification order?
2. Did the CRA have standing to bring the motion as a party “affected by a judgment”?
3. Should the CRA have been notified of the rectification application?
The CRA argued that it was a creditor affected by the rectification order, that the delay was not unreasonable because of some internal confusion at the agency due to the inexperience of the auditor, and that they should have been notified of the order in the first place. It was further argued by the CRA that its interests were affected since the rectification was to reduce tax payable to it, whereas the taxpayer claimed the rectification application was to correct the lawyer’s error.

Regarding the delay in bringing the motion to set aside the rectification order, the Court opined that the 10-month interval between the discovery of the order and the motion to set it aside was not “forthwith”. Further, the delay was attributable solely to the CRA, and even after the rectification order was referred to counsel, it took another two months for the motion to be commenced.
It was held that taxpayers are only required to give notice to the CRA of a proposed rectification proceeding when the CRA’s legal interests might be directly affected by the outcome of the rectification proceeding, such as when the CRA is a creditor and the rectification would affect its rights.
For a thorough review of what is required in a rectification application see the decision of Kanji v. Canada (Attorney General) 2013 ONSC 781, [2013] O.J. No. 504