In Bakorp Management Ltd. v. The Queen (2014 FCA 104), the Federal Court of Appeal upheld a decision of the Tax Court dismissing the taxpayer’s appeal for failure to comply with the rules relating to objections and appeals filed by large corporations.
The result in Bakorp is a reminder to large corporations and their advisors of the need for careful consideration of the issues and relief sought in objections and appeals. In this regard, it would be good practice to have a Notice of Objection of a large corporation reviewed by a tax litigation lawyer before the objection is filed with the Canada Revenue Agency.
The taxpayer was a large corporation under subsection 225.1(8) of the Income Tax Act (ITA). In 1992, five Class A shares of a corporation not connected with the taxpayer were redeemed by that corporation for $338,213,849 resulting in a deemed dividend pursuant to subsection 84(3). A portion of the proceeds was not payable until 1995, and the taxpayer reported that portion ($52,912,264) as taxable income in 1995, resulting in $13,333,059 of Part IV tax.
The CRA reassessed the taxpayer’s 1993-1995 tax years (only the 1995 tax year was at issue in the appeal), and for the 1995 tax year the CRA reduced the amount of the deemed dividend included as taxable income by $25,332,237, and the Part IV tax was reduced accordingly.
The taxpayer filed a Notice of Objection and claimed that its original filing position should be restored (namely that the entire $52 million deemed dividend should be included in income in 1995). The CRA issued a Notice of Confirmation stating that $28 million of the deemed dividend should be included in income in 1995.
The taxpayer filed a Notice of Appeal to the Tax Court and argued that no amount of the deemed dividend should be included in its income in 1995. In response, the Crown brought a motion under section 53 of the Tax Court Rules (General Procedure) for an order dismissing the appeal on the basis the taxpayer had failed to comply with subsection 169(2.1) of the ITA (and thus the appeal was not validly constituted).
Under the ITA, large corporations are subject to specific rules regarding the content of their objections and appeals. Under subsection 165(1.11) of the ITA, a large corporation in its objection must reasonably describe each issue, specific the relief sought for each issue, and provide facts and reasons in support of the taxpayer’s position. Under subsection 169(2.1), a corporation may appeal to the Tax Court only with respect to the issues and relief sought in the objection.
In the Tax Court, the Appellant argued the objection was clear that the issue was the particular amount of the redemption proceeds that were to be included in income in 1995. However, the Tax Court disagreed and stated that the taxpayer was taking too general an approach in identifying the issue. Further, the Tax Court held the taxpayer was seeking entirely different relief in respect of the issue. The Tax Court allowed the Crown’s motion and dismissed the taxpayer’s appeal (2013 TCC 94).
Federal Court of Appeal
The taxpayer appealed to the Federal Court of Appeal. The taxpayer argued that the large corporations rules require the taxpayer to describe the “point in question”, and in this case the objection was clear the debate was about the share redemption proceeds added to income as a deemed dividend. Further, less specificity is required in respect of the relief sought, and in this case that was simply relief in respect of the taxpayer’s Part IV tax liability. The Crown argued that the determination of whether the issue and relief sought were the same in the objection and the appeal was a question of fact, and on these factual issues the Tax Court made no palpable and overriding error.
Of the question of what was meant by “issue”, the Court of Appeal noted the large corporation rules require the taxpayer to reasonably describe each issue, which will differ in each case and will depend on the degree of specificity required to allow the CRA to know each issue to be decided. In the present case, the Court stated that the issue must be described in a manner that would result in the quantification as a specified amount of the relief sought.
The Court of Appeal criticized the taxpayer’s characterization of the issue in its Notice of Objection, but concluded that the issue was whether the taxpayer was correct in concluding that it had received $52 million in dividends in 1995. Accordingly, the taxpayer’s appeal was limited only to this issue. However, the Court of Appeal noted that the issue raised in the Notice of Appeal was not the issue raised in the taxpayer’s objection.
Although it was not necessary to dispose of the appeal, the Court commented on the question of whether or not the relief sought was the same in the objection and appeal. The Court noted that the taxpayer had challenged the reduction of Part IV tax in the objection, but on appeal the taxpayer was asking the court to eliminate the Part IV tax entirely. In the Court’s view, this was not the same relief.
The Court of Appeal dismissed the appeal.