The Supreme Court Of Canada Clarifies The Jurisdiction Between The Tax Court Of Canada And The Federal Court

On June 28, 2024, the Supreme Court of Canada released its long-anticipated companion decisions in Dow Chemical Canada ULC v. Canada¹ and Iris Technologies Inc. v. Canada². These decisions clarify the jurisdictional boundaries between the Tax Court of Canada and the Federal Court in tax disputes.

Central to the majority's reasons in both decisions is the distinction between a tax assessment and the exercise of discretionary powers by the Minister of Revenue ("Minister") under tax legislation. According to the Supreme Court:

• The Tax Court has exclusive jurisdiction to determine the correctness of a tax assessment, which involves a non-discretionary determination of a taxpayer's tax liability. The assessment is the "product" of the relevant tax legislation, meaning the amount of tax assessed, and not the "process" leading to the assessment.
• The Federal Court has exclusive jurisdiction to review discretionary decisions of the Minister, except where Parliament has expressly provided otherwise. The Federal Court may not consider an application that is in essence an attack on the correctness of an assessment, although it may provide relief to taxpayers in appropriate circumstances where a discretionary decision of the Minister is unreasonable.

Dow Chemical

The underlying dispute in Dow Chemical relates to income adjustments made under the transfer pricing rules set out in section 247 of the Income Tax Act ("ITA"). Where parties to a transaction are not dealing at arm's length, subsection 247(2) allows the Minister to adjust certain transaction amounts (e.g., purchase price) to what "would have been determined" if the participants were dealing at arm's length. However, subsection 247(10) prevents a downward adjustment under subsection 247(2) unless "in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made".

Dow Canada, a Canadian resident corporation, incurred interest expenses under a loan agreement with a related Swiss company ("Dow Europe"), and also earned income from services provided to Dow Europe. The Minister reviewed the transactions between Dow Canada and Dow Europe and reassessed Dow Canada to increase its services income under subsection 247(2) of the ITA. In response, Dow Canada requested a downward transfer pricing adjustment to account for the additional interest expenses it would have incurred under the loan agreement if it had been dealing at arm's length with Dow Europe. The Minister refused the requested adjustment under subsection 247(10).

Dow Canada appealed the reassessment to the Tax Court, and challenged the Minister's decision to deny the downward adjustment under subsection 247(10). In the course of the proceedings, the parties submitted a question of law to determine the jurisdiction of the Tax Court to hear Dow Canada's challenge under subsection 247(10).

The Tax Court held that it had jurisdiction to consider decisions made by the Minister under subsection 247(10) of the ITA due to the Tax Court's exclusive jurisdiction to determine the correctness of an assessment.³ According to the Tax Court, the Minister's decision is "an essential component of the assessment" and, where the Minister exercised discretion "on incorrect principles, the assessment cannot be said to be correct".⁴

The Federal Court of Appeal overturned the decision. It held that absent an express statutory right to appeal to the Tax Court, the Federal Court retains jurisdiction to judicially review the Minister's discretionary decisions.⁵ Although the Minister's decision on the downward adjustment will impact the tax liability of Dow Canada, such discretion is separate from the assessment and may only be quashed by the Federal Court.⁶

The Supreme Court of Canada upheld the Federal Court of Appeal's decision. Writing for a narrow 4 - 3 majority, Justice Kasirer held that the Minister's opinion under subsection 247(10) to deny a downward pricing adjustment is a discretionary decision that falls outside the Tax Court's jurisdiction.⁷ The Supreme Court distinguished the Tax Court's jurisdiction to determine the correctness of an assessment, which is a "purely non-discretionary determination" that flows from the facts and the law,⁸ from the Federal Court's jurisdiction to review other discretionary decisions guided by policy considerations.⁹

In reaching the conclusion that the Tax Court cannot review a Minister's decision under subsection 247(10), the Supreme Court noted that the Minister's opinion will not always result in an assessment.¹⁰ It would be "untenable" if the Federal Court would retain jurisdiction where an assessment is not issued but would lose jurisdiction if an assessment is issued.¹¹ Moreover, a tax assessment is the "product" of the relevant tax legislation, meaning the amount of tax owing and not the "process" of determining a taxpayer's liability.¹²

It was important to the Supreme Court that appeals to the Tax Court under section 169 of the ITA are conducted de novo, meaning the Tax Court can consider evidence that was not before the Minister.¹³ According to the SCC, it would be inappropriate for the Tax Court to review the Minister's discretionary decision de novo when the decision should be reviewed on a more deferential standard of reasonableness.¹⁴ Since Parliament has not created express appeal routes in the ITA to permit the Tax Court to consider the Minister's discretionary decisions, it would not be appropriate for the Court to do so.¹⁵

Writing for the dissent, Justice Côté concluded that a challenge of the Minister's decision under subsection 247(10) could be considered by the Tax Court as it directly impacts the amount of tax owing and therefore the correctness of a taxpayer's assessment. The dissenting opinion maintained that subsections 247(2) and (10) impose an obligation on the Minister to consider whether a downward adjustment is appropriate under the circumstances.¹⁶ It reasoned that parallel proceedings should be avoided and judicial review should not serve to develop incidental litigation designed to circumvent the system of tax assessments and appeals.¹⁷

Iris Technologies

The issue in Iris Technologies dealt with which Court has jurisdiction to hear complaints about the process leading up to an assessment.

The taxpayer ("Iris") claimed substantial input tax credits under the Excise Tax Act, which the Minister disallowed by way of assessment.¹⁸ Iris brought an application for judicial review to the Federal Court, seeking three declarations regarding the conduct of the Minister in issuing the assessments: (1) the Minister failed to afford procedural fairness in the audit; (2) the assessments were issued without evidentiary foundation; and (3) the assessments were issued for improper purpose to deprive the Federal Court of jurisdiction.¹⁹

The crown brought a motion to strike Iris's application on the basis that the essential character of the application was a challenge to the correctness of the assessments,²⁰ which falls within exclusive appellate jurisdiction of the Tax Court.

The crown's motion to strike was dismissed by the prothonotary, and the prothonotary's decision was upheld by the Federal Court. The Federal Court concluded that the taxpayer's application for judicial review of the Minister's conduct was "not an attack on the assessment but on the procedural fairness of the assessment".²¹

However, the Federal Court of Appeal allowed the appeal and overturned the Federal Court's decision. The Federal Court of Appeal held that Iris's application for judicial review was essentially a collateral attack on the validity of the assessments, which falls within the exclusive jurisdiction of the Tax Court, and thus the application for judicial review to the Federal Court had no reasonable possibility of success.²²

The Supreme Court upheld the decision, with four judges issuing majority reasons and three judges agreeing with the result but providing concurring reasons. All of the judges, however, agreed that the essential nature of the application for judicial review was an attack on the correctness of the assessment which was within the exclusive jurisdiction of the Tax Court.²³

According to the majority, the express appeal route to the Tax Court precludes Iris's application for judicial review to the Federal Court for its first two complaints.²⁴ Since Iris would have an opportunity to respond on appeal, an appeal to the Tax Court constitutes an "adequate, curative remedy" to the procedural fairness claim.²⁵ The Tax Court could also consider the alleged lack of evidentiary support underlying the assessments on an appeal before it.²⁶ As for Iris's third claim, that the Minister acted with an improper purpose, the majority of the SCC stated that the Federal Court could consider an application for judicial review on this basis.²⁷ However, Iris's claim should nevertheless be struck because Iris did not allege facts in its application that, if taken to be true, would give any support to this claim.²⁸

The concurring reasons found that the issuance of assessment did not oust the Federal Court's jurisdiction per se, but nevertheless held that Iris's application was a collateral attack on the correctness of the assessments, which ought to be appealed to the Tax Court.²⁹

The Supreme Court was unanimous in concluding that Iris's application should also be struck because the requested declarations would have no practical effect.³⁰ The only live controversy remaining between the parties is the amount of tax under the assessments.³¹

Takeaways

There are three key takeaways from these decisions:

1. Appeals to the Tax Court are available from assessments only. Assessments are the "product" of the audit process. Complaints about the Minister's decisions during the course of the audit "process" cannot be appealed to the Tax Court.
2. Decisions assigned by statute to the Minister's "opinion" or discretion are properly understood as part of the "process" and are reviewable by the Federal Court.
3. Judicial review is not permitted if it amounts to an attack on the Minister's assessment, even where the relief sought is strictly declaratory.

Taxpayers must carefully choose the appropriate forum for advancing their grievances. Depending on whether the question at issue is the Minister's discretionary decision, the correctness of an assessment for tax owed, or perhaps the conduct or neglect of the CRA, a taxpayer may be required to seek judicial review before the Federal Court, appeal an assessment to the Tax Court, or potentially bring a civil suit before a provincial Superior Court.

Where a civil suit is not appropriate,³² a taxpayer should also consider whether the Minister's pre-trial conduct is relevant to costs following an appeal to the Tax Court.³³

The fractured jurisdiction in tax disputes is frustrating to many taxpayers, and continues to cause confusion when considering where and whether to advance a tax dispute. A taxpayer grievance may appear to involve one set of issues (the amount of tax assessed), but in reality involve other issues (the Minister's opinion or discretion) for a different forum. Being too slow to select the correct forum can result in the taxpayer losing their dispute rights.³⁴ Accordingly, jurisdiction and procedure in tax disputes remain complicated and, as we've written about recently, can be an ongoing barrier to justice. The Supreme Court of Canada is aware of these concerns and has called on "Parliament to respond, if appropriate".³⁵

Footnotes

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