Canadian Tax Haiku of the week:

Tax Court appeals: 

Be sure you are advised

The stakes are too high


A few weeks ago we discussed the process of handling disputes with the Canada Revenue Agency (hereinafter, CRA) once they have initiated an audit and up to the point where the taxpayer files a Notice of Objection (Objection). Unfortunately, most of the time, the process is far from complete upon filing the Objection. Increasingly we are seeing a pattern in which the CRA takes anywhere from a year to two years, depending on the issue and the tax office involved, to deal with Objections. Meanwhile, interest continues to accrue and taxpayers have an unresolved tax issue hanging over their head.

It is also important to note that, despite what anyone may suggest, one cannot simply “negotiate with the CRA” neither during an audit nor after an Objection has been filed about how much you owe. First of all, they do not make deals because auditors do not have the power to make a deal; they just apply the policies and procedures of the CRA as written.[1] Secondly, once the Objection is in, the matter (eventually) goes to a second level reviewer[2] in a regional or national head office. Just because your tax service provider might “know all the guys” at the local CRA office, it does not mean that they will have any “pull” with the second level review. No one has any pull with the second level review anyway, because they just take a second look at the file on paper in light of the policy and procedure manuals.

If, on the facts, the taxpayer did not deal with the initial audit well in terms of providing information or explaining their situation, or new documents have been found or become available, then sometimes it is possible for a tax professional to make a difference at the second level review level. However, this is usually not the case. We are increasingly seeing that the CRA second level review team just checks the math, and then virtually always confirms the auditors assessment as filed, even if new documents or further information/explanations are provided. Which begs the question, if all the second level review does is check the math, then what is the point? Not much, other than to protect the auditor from scrutiny if the matter is appealed, but more on that later.

From the taxpayers perspective, the point of waiting for the CRA to get around to confirming the objection really depends on the strength of their case. If the taxpayer’s case is not that strong, and you will likely have to pay up anyway, then the point of waiting for the objection (eventually and inevitably) to be confirmed is that it could take two years. Meanwhile, you do not have to pay (unless it is a corporate matter, in which case you only have to pay half), and maybe your circumstances improve, putting you in a position to be able to pay later.

However, in most cases where the client has a case, we strongly recommend appealing the matter to the Tax Court of Canada (Tax Court) as quickly as possible.

Tax Litigation – Step by Step

The following is a list of the typical steps in an appeal to the Tax Court under the general procedure rules.[3] These procedures are governed by the Income Tax Act,[4] Tax Court Rules,[5] and Tax Court Act.[6] This is a complicated process, and taxpayers not only need to be aware of the timelines, but also the procedures. Filing a Notice of Appeal (Appeal) is very different than filing an Objection.[7]

The Notice of Appeal

If (when) the CRA denies the Objection (or “confirms the (re-)assessment”)[8], a taxpayer (called the Appellant) may appeal to the Tax Court.[9] The taxpayer will have 90 days from the date of the confirmation to file the Appeal in the ordinary course. These timelines are very important. If an Appeal to the Tax Court has not been initiated within 90 days, it becomes much more difficult to move forward.[10] However, if filed in a timely manner the proceedings follow in their regular course as set out below. Once the Appeal has been filed, the CRA is represented by the federal Department of Justice (Justice) and the real games begin.

Kicking the Appeal Into Gear after 90 Days

What happens to taxpayers who have a strong case and know (and can prove) that they do not owe what the CRA claims (or even worse, the CRA owes them money)? Most taxpayers are unaware that they have the right to file an Appeal to the Tax Court 90 days after the Objection has been served.[11] That’s right; taxpayers can take their matter directly to the Tax Court without even waiting for the CRA to review it. We strongly recommend this option in instances where the taxpayer has a good case. There are clear tactical advantages in the litigation process to doing so, in addition to the increased speed in getting the matter resolved.

Extension of Time to Appeal

If a taxpayer does not file an Appeal within the 90-day deadline, but still wants to contest the assessment of tax, the taxpayer must file an application for an extension of time to appeal to the Tax Court.[12]

There are four requirements that must be met in order for a taxpayer to obtain an extension:[13]

  1. the application must be made within one year after the 90-day period for appealing has expired;
  2. the taxpayer had a bona fide intention to appeal within the 90-day period;
  3. it is just and equitable to grant the application for an extension; and
  4. the application was made as soon as practicable.

Examples of bona fide intention include retaining tax lawyers, cooperating with the CRA, pursuing remedies diligently without committing a single error or omission.[14] An application for an extension of time is a last resort. There is no guarantee that it will be allowed. It is best to contact tax advisors in a timely manner when looking to take matters to the Tax Court.

The Reply

Justice must file with the Tax Court the CRA’s reply within 60 days after service of the Appeal and serve it on the taxpayer within 5 days after the 60 day deadline.[15] Generally, the Reply sets out which facts in the Appeal that the CRA admits (likely not many), which facts that the CRA denies (pretty much everything), which facts that the CRA claims no knowledge of and the CRA’s facts and assumptions that for the basis of the assessment.[16] We have previously blogged about an instance where the Reply contained assumptions which contained mixed questions of law and fact, rather than facts alone.[17] This resulted in a successful appeal for the taxpayer in that instance, despite not having a very strong case. Thus, while the Reply is usually fairly standard, it is important to review.

The process of generating a Reply and the timelines thereof is also the first tactical advantage stemming from moving the case forward 90 days after serving the Objection. Justice is busy; they do not always have a lot of time to deal with well-crafted appeals. If an Appeal is promptly filed on the 91st day, it makes it harder for Justice to deal with it because they do not have the benefit of the CRA’s review file and decision-making process for rejecting the Objection. Although they work with the CRA, Justice is therefore more on their own and under time pressure, increasing the likelihood of something being missed or mistaken. Of course, Justice may ask the taxpayer for more time and receive an extension of time to file the Reply “on consent”.

Although it is customary, common (because often taxpayer is in no rush to have the matter resolved) and considered “proper form and collegial” for the taxpayers counsel to grant Justice an extension to file the Reply, it is not necessarily in the taxpayer’s best interest to do so. Our clients, if they have a case, often instruct us to tell Justice “no”, and force them to apply to the Tax Court for an extension of time. Of course, playing hardball may have its disadvantages if the taxpayer later on wants some consideration from the other side on a deadline.

Also the Tax Court may well grant Justice the extension they seek (and we have one such application outstanding right now). However, in our view, sending the signal that you want to move this matter to trial and will not abide by delays is a sign of strength. Justice and the CRA hate to lose, and even worse, hate to have adverse precedents out in the world for all to see and use for their benefit. Taking a hard line and showing that the taxpayer has a case and wants to go to court is somewhat unusual, and not what Justice and the CRA are used to seeing. It could throw them off their game, rattle their assumptions and start to make them think about wanting to settle this before it goes “bad” for them.

The Answer

The taxpayer has 30 days after service of the Reply to file with the Tax Court the Answer.[18] It is not mandatory to file an Answer. The Answer identifies new facts that must be provided in light of the Reply. Generally, the Answer sets out which facts in the Reply that the taxpayer admits, which facts that the taxpayer denies, which facts that the taxpayer claims no knowledge and additional relevant facts that will be put forth by the taxpayer in the proceedings.[19] If the taxpayer does not file an Answer, then they are deemed to deny all the allegations of fact put forward in the Reply.

The key thing for the Answer stage is to make sure that Justice does not attempt to re-characterize the taxpayers’ position. In a recent matter, Justice took the position in the Reply that the taxpayer admitted he had severed his employment on a particular date, when we had stated in the facts were that he had merely not been reassigned to a particular post as of that date. We had to respond in the replay to re-iterate that the taxpayer still maintained, pursuant to the applicable rules and contracts, an employee-employer relationship after his failure to obtain an assignment. As this issue is important to the overall position, we could not just let this go without a correction on the record.

The close of pleadings occurs either once the Answer is served or the time for the filing and serving of an Answer has expired.[20]

List of Documents, Affidavit of Documents and Experts’ Reports

Both the taxpayer and Justice file and serve a list of relevant documents within 30 days of the close of pleadings.[21] The list of documents is a list and not the documents themselves. At the next stage, the parties have to provide an affidavit of documents containing all of the documents upon which they intend to rely. Effectively the taxpayer has to provide the documents that they intend to rely on to prove their case, and then they have to swear that the documents presented are in fact correct, complete and proper.

In some cases, there are issues that are in dispute that fall into the territory of being subject to the opinion of an expert. For example, while a document may show on what day a transaction took place, only an expert can determine if that transaction was properly priced at market terms for transactions of that sort at that time in that particular market. Or, for another example, Justice may have assumed that because of this document or fact, the taxpayer must have had a particular level of income, known a particular fact, or had a particular legal right with regard to property of some sort. An expert could testify that the assumption is mistaken because they are basing their position on perhaps an outdated view of the market, or that making any such assumption would be false in the actual circumstances, or that the document did not either legally or factually result in such rights in another jurisdiction.

Examinations for Discovery

Both the taxpayer and Justice are entitled to ask questions to discover what testimony may be provided in the case and to attempt to narrow the issues to be decided in the case. [22] Often Justice asks to examine the taxpayer (if an individual) or the key personnel (if the taxpayer is a business entity).[23]

The taxpayer may examine the auditor, the CRA’s appraiser, an appeals officer or another relevant person. This is where appealing a case 90 days after the Objection has been filed really yields benefits. If the CRA is allowed the time to review the objection, they will have assigned a second-level review officer to the file. This person will have very little direct knowledge of the file, but they will be the person that the CRA will nominate for discovery. This means that the taxpayer’s examination for discovery becomes effectively useless. The review officer then merely agrees to “undertake” (legally enforceable obligation) to provide an answer to virtually all of counsel’s questions about the way the CRA dealt with the file. This never-ending series of undertakings eventually yields a series of written denials of knowledge about, well, just about everything. It is very frustrating and a complete waste of the taxpayer’s time and money, which is exactly the point, as far as the CRA is concerned.

Conversely, if filed quickly, and there has been no review officer assigned to the file, then the taxpayer is much more likely to be able to discover the actual auditors. This can be much more revealing. In one case, we discovered that the auditor had based some of his audit positions on the fact that he had actually been looking at the wrong business premises. The taxpayer was part of a corporate group, but the operations that the auditor had deemed to not be consistent with the original tax filings belonged to a different taxpayer. The case settled a couple of weeks later to the substantial advantage of the taxpayer.

A court reporter records the examination if it is in oral form. The testimony is given under oath.[24] There is no timeline for the examinations for discovery. Cases can often languish at this stage, unless there are concerted efforts to move things along.


Sometimes examinations for discovery may be frustrated by refusals to answer questions and legal issues arising. When problems arise in the process, they are generally dealt with by a motion to the Tax Court. Motions have their own prescribed form and procedures.[25]

In addition, other types of motions include motions to strike parts of other parties’ pleadings, motions to bring jurisdictional questions to the court, motions to compel production of certain documents, etc.

Settlement Conference

Justice is usually unwilling to settle a case until after discoveries have been completed, and for good reason. It is really only at that point that both sides know the strength of the other side’s case as well as their own. Following discoveries, the parties proceed to the settlement conference stage. Both sides draft up a 10-page document setting out basically how they are going to run their case, and what evidence they are going to call. We usually draft these as “will-says”, referring to the fact that we indicate that X witness, under oath, “will say Y” which will prove point Z of our statement of facts and/or Z legal argument”.

Prior to the settlement conference, a Tax Court judge, who is not the judge deciding the case, will review the pleadings and the settlement conference documents. At the conference, which usually takes place in an ordinary board room with none of the usually trappings of court, both parties will briefly state their positions and advocate their positions. The judge will then proceed in a very informal, collegial and friendly manner to try to bash some sense into the heads of both or either party (if they think they are being stupid or do not have a case) and try to resolve the matter as efficiently as possible.

Some judges like to have the taxpayer and CRA litigation officer in the room so that counsel can get authorization to “make a deal” right then and there. Others like to keep settlement conferences to just the lawyers, so that neither party feels that they have to grandstand or make a good show for the client, and to allow for “frank and forthright discussions”. In either case, settlement conferences usually result in either both parties standing up and saying “see you in court”, or there is a handshake at the end and the case is over.

Sometimes even if the parties cannot be arm-twisted from the bench into a settlement, the settlement conference judge can narrow the issues, or convince the parties to drop weak aspects of their case, or get an understanding on a partial or complete “agreed statement of facts” (which cuts down court time because less has to be proven). But usually the settlement conference is either a wonderful boon or a total bust. Either way, by the time it is done, you will know how good of a case you really have.

In our view, the settlement conference, regardless of the extent to which the judge tries to strong-arm the parties into a settlement, or the format, are actually very helpful.

Hearing Date Application

The parties, individually or jointly, apply for a hearing date to be set after the examination for discoveries. [26] A Trial Management Conference may be held as soon as a date for hearing the appeal has been fixed, at the request of one of the parties or on the initiative of the judge presiding at the hearing.[27]


After several months of preparation, it’s finally game time. The witnesses testify and the arguments are presented. Both parties will be required to file documents and books of authorities and detailed arguments prior to the hearing. During this time, settlement discussions often occur.

Representation by Counsel

A taxpayer appealing to the Tax Court may act in person or be represented by counsel. At the “informal procedure” level (matters under $12,000 in tax or $24,000 in losses) taxpayers are often not represented because it would cost more to pay counsel than is at stake. If you have a small matter we would recommend that you contact us so that we can try put you in contact with a pro bonostudent tax law clinic, which may be able to help you. Law students, properly mentored by practicing tax lawyers, can be a lot of help at this level. No promises, because it is pro bono, but we will try to refer you to clinic.

The General Procedure, where much more money is at stake, is a different matter. While individuals can represent themselves, corporations must be represented by counsel unless they are granted leave by the court. However, although information like this is available in the internet (just like brain surgery!) it is not advisable to do it yourself.

Jonathan N. Garbutt, Barrister & Solicitor & Raminder Pandher, Student-at-law.

[1] And FYI, it is a generally a “career limiting move” for any CRA officer to give up on tax that they think is owed.

[2] Generally speaking, the CRA refers to the process of dealing with an objection as “appeals” and the file goes to an “appeals officer”. We find this wording to be confusing and not technically accurate. “Appeals” sounds like some form of tribunal where you can tell your side of the story, before an impartial third party, but that is not at all the case. Hence we use the term “second level review” because that is what it is, and because to us it makes more sense to say that the “the appeal” starts with the “Notice of Appeal”.

[3] The General Procedure is similar to an Informal Procedure appeal, with a few exceptions.

[4] Income Tax Act, RSC 1985, c 1 (5th Supp) [Income Tax Act].

[5] Tax Court of Canada Rules (General Procedure), SOR/90-688a [Tax Court Rules].

[6] Tax Court of Canada Act, RSC 1985, c T-2 [Tax Court Act].

[7] Tax Court Rules, supra note 3 Form 21(1)(a).

[8] Ibid, at para 169(1)(a).

[9] Income Tax Actsupra note 2 at s. 169.

[10] Ibid, at ss. 169(1).

[11] Ibid, at para 169(1)(b).

[12] Income Tax Actsupra note 2 at s. 166.1.

[13] Income Tax Actsupra note 2 at ss. 166.1(7).

[14] Breathe E-Z Homes Ltd. v. M.N.R., 2014 TCC 122.

[15] Tax Court Rules, supra note 3 at s. 44.

[16] Ibid, s. 49.

[17] Health Quest Inc. v. The Queen, 2014 TCC 211.

[18] Tax Court Rules, supra note 3 s. 45.

[19] Ibid, s. 49.

[20] Ibid, s. 46.

[21] Ibid, s. 81.

[22] Ibid, s. 92.

[23] Ibid, s. 93.

[24] Ibid, s. 102.

[25] Ibid, Form 65.

[26] Ibid, s. 123.

[27] Ibid, ss. 126.1(1)