Addison: Reassessing the Availability of Judicial Review

On July 12, 2007, the Supreme Court of Canada (“SCC”) released a judgment dealing with the jurisdiction of the Federal Court in relation to s. 160 of the Income Tax Act, RSC 1985, c 1 (5th Supp), pursuant to tax liability issues. Canada v Addison & Leyen Ltd., [2007] 2 SCR 793 is an appeal from the Federal Court of Appeal that considers whether judicial review in the Federal Court should be implemented instead of the regular appeal process through the Tax Court of Canada in the case of a delayed tax assessment following a non-arm’s length transfer of property.

The respondents, Addison & Leyen Ltd., Concrest Corporation Ltd., John and Jeannette Dietrich, Rofamco Investments Ltd., and Wilfrid and Helen Roach, held shares either directly or indirectly in York Beverages (1968) Ltd., a company that sold its bottling business in 1988. In 1989, the respondents sold their shares to another company, Synergy Inc., who intended to buy seismic data and reduce York’s tax liability to zero by utilizing York’s cash in hand. In 1992, after learning that the seismic data had been overvalued, the Minister of Revenue reassessed York’s 1989 taxation year in accordance with s. 152 of the Income Tax Act. This resulted in a figure over three million dollars including penalty and interest. Following the reassessment, York filed a notice of objection; the Minister, however, failed to respond and York did not appeal to the Tax Court of Canada.

In February, 2001, pursuant to s. 160 of the Income Tax Act, the Minister sent notices of assessment to the respondents claiming York’s entire tax liability, jointly and severally, after determining that they would be unable to recover anything from York. This claim, including interest, now exceeds six million dollars. In 2001, the respondents filed notices of objection, but did not appeal to the Tax Court of Canada. After Revenue Canada failed to respond to the objections, they applied under s. 18.5 of the Federal Courts Act, RSC, 1985, c F-7 for judicial review of the Crown’s actions regarding its use of s. 160 of the Income Tax Act for their assessment. They claimed that this long delay in assessment was abusive and not only restricted their efforts to challenge the legitimacy of the assessment in Tax Court, but also prevented them from possibly receiving compensation by the primary taxpayer.

The Federal Court granted the Crown’s motion to strike the application for judicial review, finding that the respondents should have exercised other options. At the Federal Court of Appeal, however, the judgment was reversed and it was determined that the Federal Court had jurisdiction, and that judicial review may be available with respect to the Minister’s discretion to assess the respondent taxpayer under s. 160.

The SCC allowed the Crown’s appeal, setting aside the judgment of the Federal Court of Appeal. While the SCC explained that the Minister may fall subject to judicial review by the Federal Court under s. 18.5 to control abuses of power, this will occur only if the “matter is not otherwise appealable.” In this case, judicial review was not available. While the exercise of discretion to use s. 160 of the Income Tax Act to reassess may be reviewable in some circumstances, the grounds for reassessment by the respondents, namely, a lengthy delay, are not valid. In s. 160 the Minister may reassess a taxpayer “at any time”; hence, the period of delay for such a decision does not form a basis for judicial review. Further, the SCC found no reason why the respondents should not have used the regular appeal process through the Tax Court of Canada, rather than filing for judicial review. As explained in paragraph 11,

Parliament has set up a complex structure to deal with a multitude of tax-related claims and this structure relies on an independent and specialized court, the Tax Court of Canada. Judicial review should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court. Judicial review should remain a remedy of last resort in this context.

This judgment serves to narrow the opportunity for judicial review by the Federal Court as it relates to delayed tax assessments. While this judgment may be interpreted as harsh by some taxpayers since it is increasingly difficult to challenge a delayed reassessment in the Tax Court of Canada, the SCC reminds us that the discretionary assessment tool under s. 160 of the Income Tax Act is very narrowly targeted. This tool, which allows the Minister to reassess “at any time,” applies only to very specific circumstances where the transfer of property is for less than fair market value, and hence, a “non-arm’s length” transaction. While the SCC confirms that judicial review of this exercise of discretion is not an impossibility, the length of time before a decision to reassess a taxpayer is not an appropriate basis for judicial review. Moreover, taxpayers should exercise alternative avenues, such as the appeal process through the Tax Court of Canada, which specializes in dealing with such issues, before applying for judicial review by the Federal Court.

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