Pre-Litigation Steps for a Taxpayer's Appeal to the Tax Court of Canada
Introduction
If your client is unsatisfied with the result they obtained from an objection to the CRA, and they wish to continue the dispute to the Tax Court of Canada, filing a Notice of Appeal is the first step. But your client needs to know that it is not straight to trial after that. There are several obligatory steps prior to a hearing before a judge.
Ignorance is not bliss in this case. It is better if your client understands all the work ahead of them. The good news is that the same steps that are required before a trial also facilitate settlement agreements, which avoid the cost, stress, and risk of appearing before a judge.
This article outlines the steps that are required prior to a trial under the Tax Court’s General Procedure. Smaller appeals involving disputes of less than $25,000 of income tax per year or $50,000 of GST/HST per year are governed by the Informal Procedure, which is not covered in this article.
Notice of Appeal
Your client has 90 days to file a Notice of Appeal with the Tax Court once CRA concludes their objection (either via a Notice of Reassessment or a Notice of Confirmation). Your client’s Notice of Appeal will need to outline the facts and explain why the judge should decide in your client’s favour.
If we are your client’s legal representative, we will base our arguments on the legislation and case law as well as the information and documents the client has provided us. The client will need to review the Notice of Appeal meticulously before we file it with the Tax Court, confirming that our summary of the facts is accurate and complete.
Reply to the Notice of Appeal
Within 60 days of receiving our Notice of Appeal, a Department of Justice lawyer (“DoJ lawyer”) representing the CRA must file a Reply addressing our arguments. The Reply will tell the story from CRA’s perspective.
Reading the Reply is often extremely frustrating for clients. The CRA is entitled to make assumptions about the facts, which can make clients feel like CRA is being accusatory and abusing their power. We warn clients of this in advance so that they do not become discouraged. We will have opportunities to prove CRA’s assumptions wrong.
Timetable for the Litigation Process
Once the Reply is filed, we will jointly agree with the DoJ lawyer to a timetable for the following pre-hearing steps:
Exchanging Lists and Books of Documents
Completing Examinations for Discovery
Fulfilling Undertakings
Informing the Tax Court as to whether we have settled the file or need to schedule a trial
While we do not have total control over the timetable, we push our clients' files through the litigation steps as quickly and efficiently as possible.
Exchange of Lists and Books of Documents
The purpose of exchanging lists and books of documents is to compile and share all the documents that we will rely on to prove our case, and to receive the same from the CRA. We must provide all the documents that we may use to prove the facts in our Notice of Appeal or refute CRA’s allegations in their Reply, even if you or your client already provided these documents to the CRA during the audit or objection stage.
Examinations for Discovery
The most demanding pre-trial step is the Examinations for Discovery. Discoveries narrow the scope of the dispute, which is an important step to a favorable settlement. Your client will have to answer the DoJ lawyer’s questions under oath, which some people find quite stressful. We can also pose questions to the CRA representative.
The DoJ lawyer will decide whether they examine your client orally or in writing. During oral discoveries, a court reporter records the discoveries. For written discoveries, your client must answer the questions in a sworn statement. If the tax dispute goes to trial, a judge may rely on answers from either side during the discoveries as evidence.
Preparing for discoveries takes substantial work from both the client and their legal counsel. Being well prepared is critical to convincing the DoJ lawyer to concede the appeal or agree to a favourable settlement. Discoveries also prepare us for trial in the event that we do not agree to a settlement.
Undertakings
Undertakings are legal obligations to provide additional information and documents that the DoJ lawyer requests during discoveries. Undertakings can be frustrating because DoJ lawyers can ask for documents that are impossible to retrieve or take a lot of time and effort to gather. Typically, however, the more prepared we are for the discoveries, the fewer undertakings the DoJ lawyer requests.
In some cases, the CRA will send follow-up questions based on the information they received in our answers to undertakings. This can add addition time and work to the dispute process.
Pre-Trial Settlement
Trials are laborious, expensive, and inherently risky, which means negotiating a settlement is often the best way to resolve your client’s tax dispute. While settlements can occur at any time, they often happen after discoveries and undertakings are complete.
Either side can make a settlement offer. But DoJ lawyers are prohibited from agreeing to concessions based on general arguments such as reasonableness or efficiency. For example, “let’s both save legal costs and just agree to reduce the disputed amount by 50%” is not a settlement offer that a DoJ lawyer can accept. Instead, DoJ lawyers can only settle based on specific evidence that is consistent with legal principles.
Communicate with the Hearings Coordinator
If we cannot come to a settlement agreement with the DoJ lawyer that we find satisfactory, we will have the Tax Court schedule a trial. Currently, the Tax Court is scheduling two-day trials for at least seven to twelve months in the future.
Conclusion
During the litigation process, interest on the disputed amount will continue to accrue, so your client should make payments against the purported amount owing if possible. Such payments are not an admission of guilt or a sign of weakness. After the dispute is resolved, CRA will refund any amount that turns out to have been an overpayment, plus some interest.
Litigation is daunting. Being well informed and prepared for all the litigation steps will help your client make informed decisions, reduce the stress, and lead to the best outcome possible.