Category Archives: 152(4)

Settlement Agreements with the CRA – Assumptions

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Settlement Agreements with the CRA – Assumptions

Burg Properties Ltd v Canada, 2014 FCA 154

In this short decision, the Federal Court of Appeal identified the assumptions that will apply when interpreting a settlement agreement entered into by a taxpayer with the CRA.   This case highlights the importance of exact wording and the necessity to identify amounts and items in settlement agreements.

The taxpayer has appealed from a TCC decision quashing its Notices of Appeal on the basis that the settlement agreement included a clause whereby the taxpayer waived his objection and appeal rights.

The settlement agreement did not provide final amounts but rather set out how various amounts were to be increased or decreased in the final assessment.  The Appellant argued that the basis of the reassessment was to be the original and amended return filed by it, while the CRA argued that the basis was to be its reassessment.

The FCA held that:

  • On appeal, the court is limited to searching for an error of fact, mixed fact and law, or law on the appropriate standards: Housen v. Nikolaisen, 2002 SCC 33;
  • The phrase “we are prepared to offer the following settlement offer without prejudice with respect to the reassessments “was as expressly advising that “if accepted, the adjustments would be applied to the reassessments which resulted from the audit and which were the subject of notices of objection” (paras 10-11);
  • Terms that include cancellation of gross negligence penalties (and, one would assume any penalties and interest) were seen as indicating reassessment in the settlement on the basis of the CRA’s reassessment because the “penalties were imposed in the reassessments that gave rise to the notices of objection, not in the appellant’s amended tax returns” (para 14); and
  • Given that by operation of section 152 of the ITA and 299 of the ETA the Minister is not bound by a taxpayer’s return and its assessments are valid and binding (absent being vacated or reassessed), the Court felt that there “is no reason to believe that the Minister would enter into a settlement agreement that varied a non-binding tax return when she had already made a reassessment which was valid and binding on issuance” (para 15).

These findings indicate that the FCA will operate using a rebuttable presumption that a settlement agreement is meant to reassess on the basis of the CRA’s position and not the taxpayers.

Sas Ansari, JD LLM PhD (exp)

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Applying Statutory Limitation Periods – Sas Ansari

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Applying Statutory Limitation Periods in the ITA

Klemen v The Queen, 2014 TCC 244

The taxpayer argued that the reassessment was statute barred because it was made outside of the normal reassessment period.  The Minister argued that the normal reassessment period did not apply because the second reassessment was made following the consideration of the Appellant’s Notice of Objection.  At issue was the interaction of the normal reassessment period in subsection 152(4) and the exception in subsection 165(5).  A secondary issue was whether the amount was on account of capital or income.

The TCC disagreed with the Minister’s argument. In referring to the FCA decision in The Queen v Anchor Pointe Energy Ltd, 2003 FCA 294the court held that subsection 165(5) could not have the effect of supporting a reassessment beyond the normal reassessment period where the result is an increase in the taxpayer’s tax payable (para 23).  Thus, the Minister cannot use subsection 165(5) to include in assessment or reassessment an amount not included in the original assessment.

With reference to the categorization of the amount as capital or income, the court listed a number of factors and held that the amount was on account of capital.

[31] […] criteria enunciated by Justice Rouleau in Happy Valley Farms Ltd. v. The Queen, [86 DTC 6421 (F.C.T.D.) at pp. 6423-24], for the purpose of deciding whether a gain is on income or on capital account:

1.     The nature of the property sold. [Is the property customarily a capital asset, or is it a commodity that is bought and sold?]

2.     The length of period of ownership. [Inventory is generally disposed of shortly after acquisition, while capital assets are not.]

3.     The frequency or number of other similar transactions by the taxpayer. [Does the taxpayer routinely sell such property?]

4.     Work expended on or in connection with the property realized. [If the taxpayer completes steps to improve the property for resale, it is more likely inventory.]

5.     The circumstances that were responsible for the sale of the property. [Was this a routine disposition, or were there overriding business considerations?]

6.     Motive. [Why did the particular disposition occur?]

[32]        Linden J.A. identified the following additional factors in considering on appeal the Continental Bank of Canada v Canada decision [ [1995] 1 C.T.C. 2135 (TCC); affirmed [1998] 2 S.C.R. 358]:

(a)   The intention of the parties;

(b)   Whether the conduct of the vendor was similar to that of an ordinary trader;

(c)   The nature and quantity of the property in question;

(d)  Whether the transactions were isolated ones; and

(e)   The uniqueness of the transactions when compared to the taxpayer’s normal   activities.

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