A right once waived is gone

A taxpayer’s failure to have its waiver of appeal set aside reaffirms that validly negotiated settlements between taxpayers and the Canada Revenue Agency (CRA) are not to be questioned by the courts.

In a recent Tax Court of Canada case, Noran West Developments v. The Queen 2012 (TCC 434), Noran asked to have the settlement agreement it had negotiated with the Appeals Division of the CRA set aside — even though it had waived its right of appeal. In his decision, Justice B. Paris upheld Noran’s waiver of appeal, a reassuring notion because it applies equally to the government: validly negotiated settlements between the CRA Appeals Division and taxpayers cannot be undone by the courts.

Background. On April 21, 2011, the CRA reassessed Noran, a real estate developer, adding $640,000 of taxable income to its 2005 taxation year. The CRA maintained that Noran had unreported income from a condominium joint venture that involved non-arm’s length dispositions. The CRA also applied gross negligence penalties under subsection 163(2) of the Income Tax Act.

Noran’s representative and the CRA Appeals Officer discussed the reassessment and the Appeals Officer offered to settle the matter by reducing the income inclusion by $50,000 (on the basis of a reduced valuation of the relevant condominium units) and, accordingly, the amount of the gross negligence penalty.

A standard waiver letter was sent to Noran’s sole shareholder, who signed it on behalf of Noran. It included the usual language in which the signatory attests that he or she is “familiar with subsection 165(1.2) and 169(2.2) of the Income Tax Act and understands that [he or she] will be precluded from filing an objection or an appeal with respect to those issues.”

Issue. The CRA reassessed Noran on the basis of the agreed settlement, but the taxpayer appealed to the Tax Court. The relevant statutory provision for the court to apply was subsection 169(2.2) of the Act, which provides: “Notwithstanding subsections 169(1) and 169(2), for greater certainty a taxpayer may not appeal to the Tax Court of Canada to have an assessment under this Part vacated or varied in respect of an issue for which the right of objection or appeal has been waived in writing by the taxpayer.”

Noran made six contentions but none of them had much strength or posed a problem to the court. One argument of interest was that the agreement was vitiated by the CRA because it did not satisfy the terms of the waiver agreement completely. Noran argued that the subsection 163(2) penalty was incorrectly calculated on the second reassessment; the penalty was based on unreported income in the amount of $599,760 rather than on the agreed-upon $589,760.

Justice Paris did not agree with Noran’s argument that any inconsistency between the reassessment and the waiver agreement should allow a taxpayer to appeal any aspect of the reassessment, as if no waiver had been given. After a review of the authorities, Justice Paris stated: “It does not make sense that any error in reassessing, however minor, could permit a taxpayer to repudiate the waiver entirely.”

The prevailing notion throughout the litigation was that certainty and consistency must be present in dealings between the CRA and taxpayers. The court quoted with approval the words of Justice Eric Bowie in 1390758 Ontario Corp v. The Queen (2009)  at paragraph 36: “The reality is that tax disputes are settled every day in this country. If they were not, and every difference had to be litigated to judgment, unmanageable backlogs would quickly accumulate and the system would break down.”

Conclusion. While it is comforting and reassuring to know that any settlements made with the CRA Appeals Division will be respected by and uncontested in the Tax Court, the one somewhat unsettling aspect of this decision was the failed argument pertaining to the incorrect calculation of the gross negligence penalty in the second assessment. This aspect leaves uncertain the degree of error permissible when a waiver has been signed and a subsequent reassessment issued. It is hoped that any subsequent litigation on this matter could be distinguished from the facts of this case on the basis that the error in the reassessment was raised by Noran’s counsel only shortly before the hearing of the motion. Consequently, the CRA advised the Court that it was unable to obtain the exact amount of the error. Therefore, Justice Paris used his reasonable discretion in not allowing this small discrepancy to be fatal to the agreement between Noran and the CRA Appeals Division.

Greer Jacks is updating jurisprudence in EverGreen Explanatory, an online research library of assistance to tax and financial professionals in working with their clients.