Jurisprudence: How Taxpayers Fare in Court

Danielle Doan and Evelyn Jacks

When it comes to CRA, it will almost always be very costly to challenge reassessments in court.  Two recent court cases proved an old adage:  you win some, you lose some.  In the first case, a taxpayer tried to shift the burden of proof to their accountant and in another case when hardship was given as the reason for filing GST/HST and T1135 returns late. The silver lining is that the legal costs are deductible.  Here’s what happened:

Stringent Fairness Rules. Hajar Properties Inc. V AGC, ITA 220(3.1).  This case is from July 2023 and is an example of the onus placed on the taxpayer to file their tax returns and their inability to transfer filing obligation to their accountant.

The taxpayers had provided information to their accountant on April 12, 2019, but unfortunately the return was not filed on time – in fact, not til June 30, 2019. The taxpayer requested taxpayer relief under subsection 220(3.1), stating the accountant’s office move as the reason the return was not filed on time.

The court denied the request, however.  The reason: the accountant’s move did not constitute either an extraordinary or exceptional circumstance that prevented the timely filing of the taxpayer’s return.

The judge opined:  “. . .under Canada’s self-assessment tax system, corporations are responsible for ensuring their tax returns are … filed on time.… Although you may use the services of a professional, the relationship between a taxpayer and a tax preparer is one of choice, and any negative consequences of that choice remains between those parties. Relying on a professional, does not absolve you from your responsibility.”

That clears up the burden of proof and responsibility for filing:  it’s on the taxpayer.

CRA inconsistent with taxpayer relief applications Thomas v AGC, 2023 Federal Courts Rules 120

If your request for relief is turned down by the CRA, you can request a review by a second CRA official. If your request is again rejected, you can apply to the Federal Court for a judicial review. The court will determine whether the CRA “exercised its discretion in a reasonable and fair manner,” with the power to send it back to the CRA, once again, for reconsideration by a new officer.

This is exactly what happened in August of 2023.  The taxpayer had filed T1135 and GST returns late, and had applied for taxpayer relief for each, siting the same medical reasons for her inability to file the returns on time.

In addition, she had contacted the CRA to request information and clarify which forms were missing, and she didn’t receive a response. So she had to contact them a second time. After a second attempt, CRA responded and she filed the T1135 returns a month later.

Here’s what’s especially interesting: Two different agents reached opposite conclusions, based on the same evidence. The CRA officer handling the taxpayer relief request regarding her late GST filings had approved her request and cancelled penalties and interest.

The CRA agent reviewing the relief request for the late filed T1135 forms denied her request stating that since she was able to continue to function in her capacity as an interior designer, she was also able to manage her tax filing obligations.

The taxpayer sought judgement by the Federal Court.  The judge sided with the taxpayer, concluding that  CRA’s refusal to grant relief for the late-filed T1135s was the result of “faulty inferences.” The judge allowed the application and ordered the matter be sent back to CRA for reconsideration.

Bottom line:  Appeals cost may well be worth it, factoring in the deductibility of legal fees.   As British writer Charles Stross famously said: “You win some, you lose some. And when you lose, you have to pull yourself together and go back for more. Otherwise, the other side wins by default.”

Additional Educational Resources:  The New CE Savvy Audit Defence Collection:  the best $295 investment you’ll make in your continuing professional development.  It’s a great way to understand the issues faced by advisors and their clients in the context of proposed new rules under GAAR, the UHT and intergenerational transfers of businesses.