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CRA tax disputes and COVID-19

Monday, May 25, 2020 @ 11:45 AM | By James Alvarez

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James Alvarez %>
James Alvarez
As the ongoing COVID-19 outbreak makes far-reaching changes across Canadian society, the tax system is feeling the effects. In particular, it has immediately suspended swaths of the dispute resolution mechanisms under tax legislation. This has upsides and downsides for taxpayers involved in contentious tax matters.

First, Canada Revenue Agency (CRA) has hit the pause button on audit activity of small and medium sized businesses. For taxpayers who are waiting to get a response to their defence against an audit, this can cause additional stress while waiting for a decision. Tax is only very rarely collectible during this time, so it does buy additional time for taxpayers who hope to defer collections. But this is not all upside for taxpayers.

In addition to the unpleasantness involved of having an audit looming over one’s head, a common response to the reassessment of one year is to amend another year’s taxes (e.g., where expenses are claimed in the wrong period) and the relevant deadlines for doing so under both income tax and GST/HST legislation are very strict.

CRA has also temporarily shuttered the appeals division. This both manages objections and provides direction to the Department of Justice in tax appeals. Taxpayers can expect that it will take significantly longer to receive confirmation of receipt of or decisions on objections and can expect delays in response time for settlement offers in Tax Court appeals.

Suspension of the appeals division does not suspend statutory deadlines for objections. While the federal government extended the filing deadline for a broad range of tax returns, it has the statutory power to do so under s. 220(3) of the Income Tax Act. The CRA does not have this power under the related s. 220(2.1) with respect to objections filed more than one year and 90 days after an assessment or reassessment following a decision in Canada (National Revenue) v. ConocoPhillips Canada Resources Corp. 2017 FCA 243. As such, absent a legislative amendment, taxpayers should be very careful about meeting objections deadlines, notwithstanding a significant backlog in resolving them.

CRA recently stated that it is “effectively extending the deadline” for all notices of objection due on March 18 to June 30. However, as written, this would not apply to the one-year-and-90-day period within which to file an objection and request an extension. Taxpayers should still try to file prior to the 90-day deadline, or at least include an extension application, to make sure their rights are protected — technically, it is not obvious that the CRA has the statutory authority to grant blanket extensions, so it’s better for one to dot their i’s and cross their t’s.

In a recent Zoom call with the tax bar, Chief Justice of the Tax Court of Canada Eugene Rossiter suggested that legislative amendments may be on the way to extend the deadlines for objections and appeals — but it’s hard to say what form this will take or how long it will last.

In terms of appeals, the Tax Court of Canada recently released a series of practice directions suspending the effect of timelines provided for under the court’s rules. This relieves both the Department of Justice and taxpayers’ representatives from their obligations to meet deadlines imposed under the court’s rules (including, for example, the 60-day period for Justice to file a reply to the taxpayer’s appeal) and under orders (for example, the parties’ obligations to list documents they intend to disclose).

However, taxpayers should be very cautious about putting off the filing of appeals, notwithstanding these directions. Taxpayers generally have 90 days from the date of a notice of confirmation or reassessment following an objection to file a Notice of Appeal; they can request an extension for up to a year. The Tax Court does not have jurisdiction to extend this additional one-year deadline and, absent legislative amendments, taxpayers may be left out in the cold if they do not handle tax disputes for the duration of the pandemic.

Unlike some courts, the Tax Court has a very limited ability to operate during the pandemic. Its files are not fully digitized, preventing it from hearing matters remotely. The court has indicated that it has limited space for administrative staff at the best of times, preventing staff from mitigating risk should they return to work. And as the court deals solely with fiscal issues, and not with any issues of health, safety or liberty, it is also well positioned to pause its operation without causing irreparable harm.

The court has indicated that prior to opening it will need authorization from the federal Courts Administration Service, as well as the full resumption of business in the province it is sitting, before it continues hearing motions and trials. The Tax Court is typically a travelling court that hears cases across the country, but the reopening will commence with hearings scheduled in the court’s larger offices (e.g., Toronto, Vancouver, Montreal, Halifax), with hearings in smaller centres to be moved or delayed.

The Federal Court, which handles some tax matters including judicial reviews and the exercise of CRA’s audit powers, and the Federal Court of Appeal, which handles appeals from both courts, have issued similar practice directions, although it appears that the Federal Courts are better positioned to operate remotely, as they continue to release decisions and deal with non-fiscal issues.

James Alvarez is an associate lawyer and tax counsel with Kalfa Law. Alvarez’s practice is focused in tax controversies and litigation. In addition to tax litigation, Alvarez works on cases that lie at the intersection between corporate and tax law.

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