In Bekesinski v The Queen, 2014 TCC 245, the Tax Court of Canada ("TCC") allowed a director's liability appeal to eliminate a personal liability totaling over $477,000, despite serious misgivings about the appellant's evidence, by assiduously applying basic tax litigation principles. Mr. Bekesinski's defense was that he resigned more than two years before the assessments were issued and was therefore protected by the two-year limitation period in ss. 227.1(4) of the Income Tax Act ("Act"). The Minister of National Revenue ("Minister") argued that the resignation was not effective because it was backdated, thus fabricated. Despite the TCC's belief that the resignation had been backdated, Mr. Bekesinski's appeal was allowed based on the evidence before the TCC, through a correct albeit strict application of tax litigation principles.
Mr. Bekesinski first claimed that he had previously resigned as a director shortly after he was assessed personally and after "numerous dealings" with the CRA over the years, which raised the CRA's suspicions. At the hearing, the CRA called as an expert witness a forensic document chemist who tested the resignation document by ink date testing. However, the expert report did not comply with Rule 145 of the Tax Court of Canada Rules (General Procedure). After the expert report was excluded the hearing was terminated and no evidence was led by the Crown to support the assumption that the resignation document was backdated. Mr. Bekesinski argued that the backdating allegation was highly unusual and that there is a heightened onus on the Crown when such an unusual allegation is made. However, the TCC stated that an allegation of backdating would not be unusual in a tax appeal in which documents of convenience are often part of the evidence.
The case turned on credibility, in the absence of both corroborating evidence supporting the resignation on the one hand and expert evidence challenging the date of the resignation document on the other. The TCC confirmed that the appropriate "judicial test of truth" is the harmony, or lack thereof, between the facts and circumstances in the particular case. Citing Nichols v The Queen, 2009 TCC 334, the TCC confirmed that credibility is assessed by considering "internal inconsistencies" in testimony (changes in evidence given on the stand and/or as compared to evidence given on examinations for discovery), prior inconsistent statements and "external inconsistencies" (the differences between the evidence of one witness and another). The attitude and demeanor of a witness may be considered, as well as whether the witness would have the motivation to fabricate or mislead. Finally, a judge may consider the overall sense of the evidence, meaning whether the facts seem probable based on common sense.
With those guidelines in mind, the TCC held that Mr. Bekesinski's evidence was consistent with that of other witnesses and there were no significant contradictions between the witnesses – although there was a significant lack of memory around important events. On the other hand, Mr. Bekesinski's evidence was internally inconsistent and he had a motivation to fabricate. The TCC stated that Mr. Bekesinski's failure to notify the CRA that he resigned as a director was suspect. However, he offered the plausible explanation that he did not think that the resignation would affect his past liability. Overall, the TCC held that Mr. Bekesinski's testimony, though flawed, was corroborated and the explanations were plausible and possible, although weakened by the lack of specific memory. Although the TCC stated that it was likely that the resignation document was, in fact, backdated, in the absence of expert evidence and without any significant gaps or contradictions in the evidence, Mr. Bekesinski successfully refuted the Minister's assumption that he was a director. The Minister thus assumed the burden of proving the fact of the backdating, which the Minister was unable to accomplish. The TCC concluded: "In the end, I must deal with what is before me in evidence, despite my belief that the Resignation has been backdated." Therefore, despite the TCC judge's belief that the resignation may have been backdated, in the absence of evidence she could not uphold the Minister's assessment.
In our respectful view, the TCC's approach was correct and principled. The TCC declined to engage in a results-driven analysis to achieve a particular result and the principles of tax litigation were observed and strengthened. A TCC hearing is not an "assessment de novo". Although the TCC's ultimate duty is to determine the correctness of an assessment, the TCC does not stand in the Minister's shoes to find facts and rule on the application of the law without reference to the Minister's assumptions. Rather, the TCC's jurisdiction is to determine the correctness of an assessment based on the case put before the TCC. The Crown's reply pleading always includes a paragraph of Ministerial assumptions, which are considered proven facts unless: demolished on a balance of probabilities; shown to be improper questions of law or mixed fact and law; irrelevant; or shown to have never been made at all. The Minister should plead all facts upon which an assessment was based, not merely the facts that would support the assessment, and should plead clearly and accurately so taxpayers know the case they have to meet. When an appellant overwhelms the Minister's case, the Minister must either rise to meet the challenge or the appellant should prevail. If TCC judges overlook this essential aspect of tax litigation and purport to determine the correctness of assessments de novo, without reference to the demolition of Ministerial assumptions, the entire foundation of tax litigation would be jeopardized.
Bekesinski provides helpful guidance regarding the principles of tax litigation and evidence in tax appeals. However, despite being a "big win" for Mr. Bekesinski, the case is by no means an endorsement of backdating, which remains fraudulent and must be carefully and assiduously avoided by tax advisors and their clients alike. The TCC should be equally careful and assiduous to properly apply basic tax litigation principles.
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