Jurisdiction For Tax Cases: Supreme Court Of Canada Draws The Line Between Federal Court And Tax Court Of Canada

Questions on tax jurisdiction currently cause headaches for many taxpayers attempting to resolve a tax issue. It can be difficult to determine whether the Tax Court of Canada (“TCC”) or Federal Court (“FC”) is the correct jurisdiction for the appeal to be heard. This jurisdictional ambiguity has led to taxpayers concurrently commencing proceedings in both the TCC and FC, holding one proceeding in abeyance until the other is resolved.

The Supreme Court of Canada (“SCC”) has recently clarified the blurry jurisdictional boundaries between the TCC and the FC. The SCC released its decisions on June 28, 2024, for Dow Chemical Canada ULC v. The King, 2024 SCC 23 [Dow] and Iris Technologies Inc. v A.G of Canada, 2024 SCC 24 [Iris]. The two cases were heard together by the SCC on November 9, 2023, leaving practitioners and taxpayers eagerly waiting for the release of the decisions.

Background

The key issue explored in both Iris and Dow was the division of powers between the TCC and FC with respect to tax cases. The TCC and FC are both statutory courts, meaning the powers conferred upon each court is determined by the enabling statute (the Tax Court of Canada Act, RSC 1985, c T-2 and Federal Courts Act, RSC 1985, c F-7 respectively).

Section 12 of the Tax Court of Canada Act grants the TCC exclusive jurisdiction over a variety of tax matters, including tax assessments arising under the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] or Part IX of the Excise Tax Act, RSC 1985, c E-15 [ETA], which deals with goods and services tax (“GST”). However, the TCC is conferred limited remedial powers which do not include administrative law remedies.

In contrast, the FC is empowered broadly to review decisions of administrative decision makers — such as federal boards and tribunals — including review of discretionary decisions made by the Minister of National Revenue (the “Minister”) in relation to tax matters. The FC has no jurisdiction to hear appeals pertaining to the correctness of tax assessments themselves. Unlike the TCC, the FC has access to administrative law remedies, such as Mandamus, which can be used to order an administrative decision maker to reconsider or change a decision.

Dow Chemical Canada ULC v. The King

Facts

Section 247 of the ITA sets out the rules on transfer pricing, which were triggered when Dow engaged with a Swiss Company with whom it was not dealing at arm’s length. Section 247(2) deems the amounts in the transaction adjusted to amounts that would have been agreed to had the transaction taken place between parties dealing with one another at arm’s length. The operation of  s 247(2) in this case resulted in a significant increase to Dow’s income for the 2006 taxation year.

Section 247(10) of the ITA provides the Minister with a discretionary power to make an adjustment that might be favorable to a taxpayer. Dow asserted that s 247(10) should have been exercised to provide a downward adjustment to reflect an amount of interest that would have been paid in the circumstances. The Minister denied the downward pricing adjustment related to interest paid by Dow to the related Swiss company. 

Dow sought judicial review in the FC of the Minister’s decision to deny the transfer pricing adjustment which was stayed pending the result of Dow’s appeal of the Reassessment for the 2006 taxation year in the TCC.

Dow both appealed the related Reassessment to the TCC and sought judicial review of the Minister’s decision to deny the downward transfer pricing adjustment in FC. The FC proceedings were stayed pending the result of the TCC decision.

Judicial History

At the TCC, the key issue was whether a challenge to the Minister’s decision under s 247(10) was an attack on the correctness of the resulting assessment. The TCC held that the Minister’s discretionary decision under s 247(10) formed an essential part of the taxpayer’s assessment which goes to the correctness of that assessment, for which the TCC alone has jurisdiction.

The Federal Court of Appeal disagreed with the TCC, holding that the FC has exclusive jurisdiction to judicially review discretionary decisions by the Minister under s 247(10). Webb J.A. stated that since the ITA does not expressly provide for an appeal on the opinion of the Minister to the TCC, the FC retains jurisdiction to review that opinion. Further, Webb J.A. concluded that the TCC does not have the applicable remedy to resolve the appeal to quash the Minister’s decision, which in itself did not constitute an “assessment.”

Decision

The majority dismissed Dow’s appeal on the basis that the discretionary decision of the Minister falls outside the meaning of “assessment” in law, placing it outside of the jurisdiction of the TCC. A challenge to a discretionary decision of the Minister is to be judicially reviewed in FC, which has access to the appropriate standard of review and administrative law remedies to resolve the challenge.

Kasirer J, writing for the majority (Martin, Jamal, and O’Bonsawin JJ. concurring), disagreed with Dow’s assertion that the Minister’s decision is so inextricably linked to the assessment as to form part of the assessment. An assessment is a purely non-discretionary determination of the tax liability of a taxpayer by the Minister for a particular taxation year. The liability flows from the ITA itself and is not based on Ministerial discretion. Kasirer J contrasted the preparation of an assessment with provisions which enable the use of Ministerial discretion — which operate outside of an assessment. The Minister makes discretionary decisions related to these provisions by providing her opinion, which is largely based on policy considerations (rather than by non-discretionary determination under the ITA). 

The majority saw Dow’s argument as going against the intention of Parliament, effectively expanding the TCC’s jurisdiction beyond the scope set out in statute. Additionally, the lack of appropriate remedies available to the TCC compared to the FC for discretionary decisions makes the integration of such decisions into the assessment untenable. 

Côté J, writing for the dissent (Karakatsanis and Rowe JJ. concurring), contended that if s 247(10) is not exercised or improperly exercised, the related assessment cannot be correct, due to the impact on the computation of tax liability.

Iris Technologies Inc v. A.G. of Canada

Facts

Iris filed GST returns claiming substantial tax refunds under the ETA for a period ending in 2020. The Minister commenced an audit of the relevant reporting period and refused to pay the refunds claimed pending the result of the audit. The Minister then issued assessments which disallowed the claimed input tax credits and assessed gross negligence penalties against Iris.

Iris brought an application for judicial review to the FC in relation to the assessments issued by the Minister. The Attorney General of Canada brought a motion to strike Iris’ application for judicial review, claiming the application was a challenge to the correctness of the assessments made under the ETA and the FC thus did not have jurisdiction over it.

Judicial History

The prothonotary in the FC dismissed the motion to strike due to the subject matter of the application being the conduct of the Minister as it relates to the issuance of the assessment, rather than the assessment itself.

The FC dismissed the subsequent appeal brought by the Attorney General of Canada. The FC agreed with the prothonotary that the application was related to the procedural fairness of the assessment rather than the assessment itself.

The Federal Court of Appeal allowed the appeal. Rennie J.A highlighted the unique context of judicial review in tax cases, where Parliament has established a specialized court for tax appeals — conferring exclusive jurisdiction to the TCC when an appeal lies from an assessment. Rennie J.A concluded that the application was essentially a collateral attack on the validity of the assessments issued under the ETA, which is the exclusive jurisdiction of the TCC. 

Decision

Kasirer J, writing for the majority (Martin, Jamal, and O’Bonsawin JJ. concurring),  agreed with the Federal Court of Appeal that the essential nature of the application was an attack on the assessment. In order to pursue judicial review in the FC, the application must have been within the “legislative mandate of the Minister under the ETA and the respective jurisdictions of the Tax Court and the Federal Court” (Iris para 29, citing Canada (Attorney General) v Iris Technologies Inc, 2022 FCA 101, para 6). Subsection 296(1) of the ETA enabled the Minister to assess net tax payable along with interest and penalties. The resulting liability for net tax payable by Iris flowed from the ETA rather than the Minister’s assessment  (s. 229(2)). 

The majority held that the allegation that the Minister breached procedural fairness in the audit and assessment process did not mean that judicial review was the true nature of the application. The underlying claim was based on the timing of the assessment, which prevented the Iris from responding to the Minister’s proposed adjustments. The SCC noted that Iris was entitled to respond through an appeal of the assessment under section 302 of the ETA. Further adding that an appeal to the TCC would have addressed Iris’s assertion that the assessments were made without evidentiary backing.

Kasirer J acknowledged that there are some circumstances where allegations of improper purpose against the Minister may sustain an application of judicial review for tax matters. However, Iris was unable to allege facts which support a claim of improper purpose. The SCC distinguished this case from applications where the true purpose is to seek practical relief against the exercise of a discretion, such as in Dow.

The majority found that the assessment of net tax pursuant to the ETA was not an exercise of a discretionary power of the Minister as seen in Dow. The Minister was instead making a non-discretionary determination of what the proper net tax of Iris would be for the applicable period. The calculation is entirely dictated by the statute, and coming to a determination that a registrant has failed to report or remit the proper amount of net tax under the ETA is not discretionary. The Minister’s obligation of assessing tax is a mandatory duty imposed by sections 275 and 296 of the ETA. Judicial review is only available to control the Minister’s exercise of discretion conferred by statute, whereas the correctness of an assessment is non-discretionary and thus is only subject to challenge in the TCC. Since the present case was a challenge to the correctness of the assessment, the SCC dismissed Iris’s appeal.

Côté J, writing a concurring decision (Karakatsanis and Rowe JJ. concurring), found that the application was a collateral attack on the correctness of the assessments. A holistic reading must “look beyond the words used, the facts alleged and the remedy sought” in determining whether judicial review is available (para 92).

Analysis

The decisions in Iris and Dow confirm that the jurisdictional boundaries between the TCC and FC are drawn based on whether the appeal attacks the discretionary decision of the Minister, or the correctness of the underlying assessment. However, the SCC does not directly address where the line is drawn on discretionary decisions which go to the heart of the assessment.

In Dow, the court appears to indicate that the assessment would have been considered correct whether or not discretion under s 247(10) was exercised. Resulting in the opinion of the Minister on s 247(10) being a discretionary decision which chose between two “correct” outcomes, thus under the jurisdiction of the FC. However, this reasoning might leave the decision in Dow narrowly applicable to s 247(10). 

Côté J’s dissent in Dow illustrates how parties may reasonably disagree on whether a discretionary decision is found to be “inextricably linked” to the resulting assessment. The majority in Dow provides clear reasons for 247(10) not being “inextricably linked”, but fails to provide clear guidance on a more standard approach for evaluating whether provisions outside of 247(10) are discretionary. The failure of the court to delineate a clear approach leaves ambiguity in insteances where the decision of the Minister does not lead to multiple “correct” assessments. The SCC’s decision in Dow potentially perpetuates the need for taxpayer’s to appeal to both the FC and TCC in borderline instances which have not been ruled on by the court.