Recently published in the Canadian Tax Highlights, a Canadian Tax Foundation Publication and reposted with permission here:
In
Edwards (2012 FCA 330) the FCA reversed
the TCC motions judge and granted to the taxpayer an adjournment of the hearing
of his appeal to the TCC on the merits. The taxpayer sought to adjourn the
trial pending enactment of proposed ITA amendments.
In
2003 the taxpayer contributed cash of $3,150 to a leveraged donation program;
he was provided with a charitable donation receipt in the amount of $10,000 and
claimed the receipted amount for a donation credit. Upon reassessment the minister
denied the full credit on the basis that the donation did not qualify as a gift
within the meaning of section 118.1 because the taxpayer was deemed to have
received a benefit and, alternatively, because section 245 denied the credit.
In 2002 the federal government had announced its intention – effective from the
date of announcement - to amend the act to deal with leveraged donation
programs and the 2012 budget showed an intention to enact those amendments. The
CRA had been treating those proposals as if they were enacted, but a taxpayer
who is not assessed favourably based on proposals cannot appeal and challenge
the minister’s view because the proposals are not in fact law.
On
April 23, 2008, the taxpayer commenced an appeal to the TCC under the informal
procedure but it was moved to the general procedure upon the Crown’s request. The
Maréchaux case was proceeding through
the courts at the same time and the taxpayer in Edwards received an abeyance when the taxpayer in Maréchaux was denied leave to appeal to
the SCC. The taxpayer in Edwards sought
a further abeyance and in July 2012 moved to adjourn the TCC hearing for a
maximum of one year from November 26, 2012 on the possibility that the December
2002 proposed amendments would be enacted by then.
Proposed
subsections 248(30), (31) and (32) may allow a credit for the actual cash donated
net of the “advantage” received as a result: on the facts the taxpayer argued
that he should receive a credit for $3,150, the amount of cash he donated. The
technical notes provide that the amendments “are intended to reflect the policy
that the amount eligible for an income tax benefit to a donor, by way of a
charitable donation deduction or credit or a political contributions tax
credit, should reflect the economic impact on the donor (before considering the
income tax benefit) of the gift or contribution.” The CRA said that Mr. Edwards
lacked the donative intent required to establish the existence of any donation.
The
motions judge concluded that denying the adjournment would potentially
prejudice the taxpayer by denying him the benefit of arguing that the
legislation applied and possibly making the CRA more receptive to settlement.
Also the denial might necessitate further litigation for other taxpayers.
However, that potential prejudice was outweighed by the public interest in the
administration of justice that was inherent in tax litigation proceeding in a timely
manner, particularly because tax deductions for $500 million of donations might
be affected. According to the TCC, about 18,000 taxpayers participated in
similar programs and some 8,000 had been reassessed. Mr. Edwards’ case was
selected as the lead case for 8 other appeals held in abeyance pending his
appeal to the FCA. The motions judge said that “thousands of other taxpayers
are waiting in the wings.” Furthermore the motions judge noted that the appeal
involved transactions that occurred almost 9 years ago and the appeal was first
set down over two years ago. At the time of the motion’s hearing, “there was
very little indication that the legislation will be enacted soon” or if the proposals
even applied to Mr. Edwards.
The
FCA acknowledged that the granting of an adjournment is generally within the motions
judge’s discretion and discretionary decisions of a trial or motions judge are
generally subject to significant deference on appeal. The FCA concluded that
the motions judge did not commit an error in principle, misapprehend the facts,
or otherwise reach an unreasonable decision in the exercise of the broad
discretion conferred on her. The trial in Edwards
was meant to be a test case: thousands of taxpayers were situated similarly. Perhaps
most significantly, on November 26, 2012 - five days before the appeal’s
hearing - the proposals and other technical amendments received first reading as
Bill C-48; this was a new fact that had not and could not reasonably have been
put before the motions judge in July 2012. Moreover if Mr. Edwards’ appeal was
heard before the proposals were enacted, another lead case would have been
chosen and therefore refusing the adjournment would not promote judicial
economy. The introduction of Bill C-48 substantially reduces the uncertainty around
the proposals’ enactment and thus an adjournment would cause less prejudice to
the public interest in the timely administration of justice. Moreover further
delay may have been inevitable because it was not clear that the TCC could
reschedule a hearing within the next 12 months in any event.
The
FCA went on to say 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. A taxpayer is not able to challenge a decision by the CRA that the
proposed amendments do not apply to the circumstances of the taxpayer. I
emphasize, however, that I am expressing no view as to whether Mr. Edwards will
benefit from the proposed amendments when and if they are enacted.
It
seems appropriate for the government to make tax changes retroactive to their announcement
in order to prevent taxpayers from re-organizing their affairs to avoid a change’s
intended effect. However, in this case the government announced a statement of its
intent – which may differ from the court-determined legislative intent – and
for a decade the CRA seems to have adopted that stated intent and treated the
proposals as if they were enacted law.
The
FCA did not offer insight into any recourse that the taxpayer might have in
such cases other than to say that the result seemed fundamentally unfair. Retroactivity
is an expectation by a government that its citizens will govern their behaviour
based on rules that are not yet law and is also a concession to practical
realities: (a) a government must annually decide fiscal priorities, and how to
achieve them; (b) the process of transforming priorities into enacting legislation
takes time; and (c) the effectiveness of fiscal policy suffers without retroactivity
to prevent tax planning and other devices from circumventing policy during the
gap between announcement and enactment. However, this rationale assumes that
the intervening period is a reasonable length of time. What is a reasonable
time frame is a matter for further discussion but is not likely to be made
specific by the courts. The FCA has commented on the unfairness of the
situation; whether the government will respond and give taxpayers some means of
redress is yet to be seen.
Sunita D. Doobay
TaxChambers
LLP, Toronto
Darcy L.
MacPherson
Faculty
of Law, University of Manitoba, Winnipeg
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