Leroux v Canada Revenue Agency, 2014 BCSC 720
Link to Supreme Court of British Columbia document
Tax Haiku:
Perhaps they will smile
Now that they can be sued
Play nice, CRA
Introduction
In an 89-page decision, Leroux v Canada Revenue Agency,[1] the Supreme Court of British Columbia (“BCSC”) contradicted the long-standing position that the Canada Revenue Agency (“CRA”) does not owe a duty of care to an individual taxpayer. The BCSC held that the CRA did, in fact, owe a duty of care to the taxpayer, specifically Mr. Leroux, the had breached this duty with respect to the imposition of gross negligence penalties. The case was a long, complicated struggle that made Odysseus’ journey home to Ithaca look like a layover. Mr. Leroux’s 13-year plight with the CRA, and its sequence of audits, assessments, reassessments and collection procedures, ultimately cost him his business, his home, and his health.
Summary of Facts
Between 1989 and 1993, Mr. Leroux purchased land with the intention of operating an RV park. He was audited by the CRA in 1996. In 1998, he received a reassessment in the amount of $82,193 in respect of GST for the 1993, 1994, and 1995 taxation years. The CRA was statute barred from reassessing Mr. Leroux for the 1993 taxation year. However, they justified opening up that year by imposing “gross negligence” penalties on Mr. Leroux based on the number of personal items they had found when looking at his claimed business expenses.[2] After reassessments were issued, the CRA claimed that Mr. Leroux owed more than $600,000 in taxes, interest and penalties.
After an appeal to the Tax Court of Canada, payments by Mr. Leroux, and a successful application for interest relief, Mr. Leroux was actually refunded $25,000. But the CRA’s damage was already done. At this point, Mr. Leroux had lost his business and home, and his health was suffering. Seeking civil remedies, Mr. Leroux sued the CRA for misfeasance in public office.
Negligence Claim
In order to make out a claim in negligence, five elements must be proven: i) a duty of care was owed to the injured party; ii) the standard of care has been breached (or duty of care violated); iii) some sort of damage was suffered by the injured party; iv) that damage suffered was caused by the negligent conduct; and v) the damage suffered caused by the negligence is not too remote.[3] It appeared that courts at all levels had previously accepted the CRA’s position that they owe no duty of care to taxpayers, which had been a major deterrence to bringing a civil claim against CRA.
In Leroux, the BCSC found that the CRA owed a duty of care to Mr. Leroux and had breached this duty.[4] The BCSC held that the CRA’s duty to their employer, Minister of National Revenue, did not conflict with a duty to take reasonable care in assessing taxes, auditing taxpayers, and particularly in imposing penalties.”[5] However, Mr. Leroux’s claim was dismissed because the BCSC found that there was no clear causal connection between Mr. Leroux’s losses and the negligent conduct of CRA.[6]
Discussion of Issues
Although the plaintiff lost, the BCSC was disconcerted with how the CRA characterized Mr. Leroux as “grossly negligent” when they cited complexity as a reason why their decisions on exactly the same issue could never be negligent.[7] If the CRA considers the area of law to be in a state of flux or ambiguous, how can they impute this knowledge on Mr. Leroux? The BCSC stated, “[i]t is simply not logical for CRA to assess penalties against Mr. Leroux for being grossly negligent in having characterized his income in a particular way and to resist the application of the concept of negligence to their own characterization of the same income, one which was ultimately agreed to be wrong.”
The BCSC was also displeased (to put it mildly) by the “disproportionality” between the tax owed and the penalties. The BCSC found that this should have alerted the CRA to take a closer look at the file, but instead they “proceeded with no apparent care or comprehension as to what they were doing to the taxpayer.” [8] The BCSC stated that the “CRA must [use] a little common sense” when the result is so obviously devastating to the taxpayer.[9]
The CRA frequently asserts that they base their assessments off CRA policy, and not the law. However, the BCSC considered it objectionable for the CRA to say “we put together our position without regard to the law; leave it to the taxpayer to appeal to Tax Court because we are immune from accountability.”[10] The Canadian tax system gives the CRA almost unchecked powers; CRA officials are not accountable to any independent body for their actions, except through an appeal to the Tax Court. The BCSC recognized merits of holding the CRA to a standard of care that might make them more careful in the future.[11] Certainly, the CRA’s egregious “misuse and misapplication” of the term “grossly negligent” contributed to this sentiment.[12]
The BCSC also took a very dim view of some fairly standard CRA practices. First of all, they found it to be negligent for the CRA to use the application of penalties as a means to bootstrap themselves into being able to reassess for periods that would otherwise be “statute barred”.[13] Lastly, the BCSC also took the position that it was negligent for the CRA to allow the auditors to threaten to reassess a year (and apply penalties to “open up the year”) if a taxpayer such as Mr. Leroux refuses to sign a waiver, allowing the CRA to audit a year that would otherwise be out of time. The BCSC referred to this practice as threatening the taxpayer with “a punitive quid pro quo”, which is the politest euphemism I have ever heard for “extortion”.[14]
Conclusion
Contrary to the CRA’s long held position that auditors only owe a duty to the Minister, the Leroux decision recognizes a duty of care on the part of those conducting tax audits. The BCSC also clearly decided that there is a duty on the part of the CRA to assess penalties with some kind of logic, consideration for the law, and proportionality to the amount of tax at issue, without using penalties as a means to an end or a form of extortion, because of the damage this may cause to the taxpayer. As a result, even though Mr. Leroux lost his case, the decision is a win for all taxpayers.
This matter did not cost the Crown money, and is therefore unlikely to deter them from some of the behaviour they were found to have been tortious of by the BCSC. But I think this judgement has applications beyond just this case. For example, in the so called “Fiscal Arbitrators” cases, many of the people were hit with “gross negligence” penalties that would seem to perhaps be disproportionate, and also seem to be based on the assumption that they ought to have known better, when in fact they may not have. We do not actually know, because the CRA just “reassessed them all, and let the tax court sort’em out”. Indeed this case seems to stand for the proposition that taxpayers have right to have their matters handled on an individualized, rather than on a “I was just following policy”, basis by CRA auditors.
[1] 2014 BCSC 720 [Leroux].
[2] Ibid at para 339.
[3] Mustapha v Culligan of Canada, 2008 SCC 27.
[4] Leroux, supra note 1 at paras 301-306.
[5] Ibid at para 306.
[6] Ibid at para 399.
[7] Ibid at para 348.
[8] Ibid at para 353
[9] Ibid.
[10] Ibid.
[11] Ibid at para 306.
[12] Ibid at para 348.
[13] Canada does not have a statute of limitations on tax matters. Rather there is the normal reassessment period (3 years for individuals, 4 for corporations, plus additional years if the situation involves non-resident parties) but if there is a misrepresentation arising from fraud, wilful blindness, carelessness or neglect on the part of the taxpayer then the CRA can go back to the War Income Tax Act of 1917 if they wanted.
[14] Leroux, supra note 1 at paras 351.