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