Is the CRA entitled to notice of a rectification application?
In Brogan Family Trust (2014 ONSC 6354), the Ontario Superior Court of Justice said "no", and dismissed the Crown's motion to set aside an earlier rectification order on the basis that the CRA had not been notified of the proceeding.
In Brogan, the taxpayer had restructured his business and settled a trust for family tax planning purposes in 2004. Subsequently, in 2010, the trustees became aware of an error in the trust agreement that prevented the distribution of trust property to intended minor beneficiaries. The trust made an application for rectification of the trust agreement so that the trust property could be distributed as intended. The trust's tax litigation counsel advised that no notice to the CRA was required.
The rectification application proceeded in November 2010. Shortly before the rectification order was granted, the trust sold a business. In its 2010 tax return, the trust allocated the proceeds to the beneficiaries, who in turn reported the income in their returns.
The CRA commenced an audit of the sale of the business and the trust in June 2012, at which time it became aware of the 2010 rectification order that had corrected the trust agreement. In August 2012, the CRA was provided a copy of the rectification order. And then in May 2013, the CRA brought its motion for an order setting aside the 2010 rectification order.
The Court considered three issues:
- Did the CRA bring the motion "forthwith" after learning of the rectification order?
- Did the CRA have standing to bring the motion?
- Should the CRA have been notified of the rectification application?
The Crown argued that (i) the delay was not inordinate because there had been internal confusion at the CRA in respect of the rectification order, (ii) the CRA was a creditor and thus was affected by the rectification order, and (iii) the CRA's own view and the custom among tax litigators is that the CRA should be given notice (see, for example, Income Tax Technical News No. 22, at pg. 6).
The taxpayer argued that (i) the CRA's 10-month delay was unreasonable and not "forthwith", (ii) the CRA was not affected by the rectification application, and (iii) in any event, there was no requirement the CRA be notified of the rectification application.
The Court agreed with the taxpayer and dismissed the Crown's motion.
The Court stated that the CRA was not a creditor and thus was not affected by the rectification order. The Court contrasted the current case with Snow White Productions Inc. v. PMP Entertainment Inc. (2004 BCSC 604), in which the rectification proceeding had been launched in response to an adverse ruling by the CRA and it was thus appropriate for the CRA to receive notice and participate (see also Aim Funds Management Inc. v. Aim Trimark Corporate Class Inc. (2009 CanLII 29491 (ON SC)).
On the issue of delay, the Court stated that the CRA had not brought the motion forthwith. The 10-month delay was the fault of the CRA, and even after the rectification order was referred to counsel, it still took two months for the motion to be launched.
And finally, on the issue of whether notice should be provided to the CRA, the Court stated that it had been directed to no authority on the point that the CRA should be given notice, nor on the point that notice is required if the CRA is not a creditor. The Court was not persuaded that providing notice to the CRA was the practice of tax litigators, and nor was it the law.
Rather, in the Court's view, the delivery of a Notice of Assessment creates rights for the CRA to participate in a rectification proceeding as a creditor (see, for example, Canada (A.G.) v. Juliar ((2000) 50 O.R. (3d) 728 (C.A.) (a case on which Dentons was counsel for the successful taxpayer)).
The Court concluded as follows:
[22] ... the CCRA is only required to be given notice of a proposed rectification proceeding when the CCRA's legal interests might be directly affected by the outcome of the rectification proceeding, such as where the CCRA is a creditor and the rectification would affect its rights. Otherwise, the CCRA might be made a party when so advised by counsel that notice should be given to the CCRA.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
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