A Pointed Observation By The Federal Court Of Appeal On The CRA’s Approach To Proposed Legislation

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The recent Federal Court of Appeal decision of Edwards v. The Queen (2012 FCA 330) includes an interesting observation dealing with the Canada Revenue Agency’s policy with respect to proposed legislation.

In Edwards, the taxpayer was involved in a charitable donation scheme. Essentially, the taxpayer was able to obtain a charitable donation tax credit in an amount greater than his outlay or gift. The taxpayer was one of approximately 8,000 taxpayers that had been reassessed, and Edwards was the lead case for eight other appeals.

In the Tax Court, the taxpayer brought a motion for an adjournment of the hearing pending the enactment of proposed amendments to the Income Tax Act. The proposed amendments would be retroactive to when they were first announced. They may have allowed the taxpayer to claim all or a portion of the denied credit.

The CRA had been applying the proposed amendments as if they were law. However, the CRA refused to apply the amendments in the taxpayer’s case. The CRA took the view that the rules did not apply in his situation. As this was an administrative position on proposed amendments rather than law, the taxpayer could not challenge this decision.

The Tax Court denied the taxpayer’s adjournment request (2012 TCC 264).

The Federal Court of Appeal held that the motions judge made no error in denying the application for adjournment. At the time of the hearing of the motion it was not clear if the amendments would be enacted. However, the amendments were subsequently included in a bill to amend the Income Tax Act that received first reading on November 26, 2012. The Federal Court of Appeal found that this new information was a sufficient basis for reversing the motions judgment and granting the adjournment.

In obiter, Justice Evans noted that “there seems something fundamentally unfair in the CRA’s administration of proposed amendments to the Income Tax Act for the past ten years as if they were already law.”

Another example is proposed section 56.4. It has been in draft form since 2005. The proposed rule governs the tax treatment of restrictive covenants. As a matter of existing statute and case law, until proposed section 56.4 is enacted, it is arguable that restrictive covenants should receive the tax treatment described in case law such as the decision of the Federal Court of Appeal in Manrell v. the Queen (2003 FCA 128).

However, advisors and clients – mindful that the proposals will likely become law with retroactive effect – instead find themselves complying with legislative proposals that change over time and impose compliance burdens that are not clear. Proposed section 56.4 includes election provisions referencing prescribed forms that have not actually been prescribed. Taxpayers must satisfy themselves that they have provided sufficient supporting information, a matter over which the CRA retains discretion.

Sometimes the administration of proposed law for long periods of time becomes itself the subject of legislative proposals. For example, for close to a decade there were proposed changes to section 94.1, which deals with certain offshore investments. Ultimately, the proposed changes were withdrawn. Ironically, this has caused the need for new proposed legislation to provide a mechanism for relief for taxpayers who had complied with the unenacted original proposals.

Worse still, taxpayers and advisors must sometime rely only on press releases describing proposed legislation in arranging their tax affairs. For example, recent changes to rules respecting “stapled securities” were announced on July 20, 2011, with intended effect for some taxpayers one year from that date. The proposed legislation itself was released mere days after the intended effective date on July 25, 2012. To echo Justice Evan’s comments there seems to be something “fundamentally unfair” about the proposed laws a taxpayer must comply with being released days after compliance must begin.

It is hoped that the rather pointed remarks by Justice Evans lead to a review of this unsatisfactory state of affairs by the Department of Finance and the Canada Revenue Agency.