Takesies-backsies are permitted-Landbouwbedrijf Backx B.V.
In Landbouwbedrijf Backx B.V. v. The Queen, the Federal Court of Appeal (FCA) and the Tax Court considered estoppel as protection against the Canada Revenue Agency (CRA) taking inconsistent positions in different years.
via lauramusikanski
In the recent decision, the FCA allowed an appeal by the taxpayer. One key issue was whether the appellant, an LLC established under the laws of the Kingdom of Netherlands, was a resident of Canada for tax purposes in 2009.
The taxpayer was successful at the FCA. The victory was however somewhat hollow, because the FCA agreed with the TCC that the taxpayer was resident in Canada in 2009 (a key year under consideration) and sent the decision back to the Tax Court to consider certain other issues. Spoiler alert: the taxpayer was unsuccessful with respect to the redetermination in Tax Court.
Takesies Backsies - Estoppel
What is interesting is that the FCA and Tax Court commented on the issue of estoppel in the assessment context. Note the following:
For ten years, 1998 to 2008, the taxpayer reported its share of the partnership income and filed income tax returns as a non-resident of Canada. CRA issued notices of assessment as filed. Those years are not under appeal.
In 2009, the taxpayer sold its partnership interest to a newly formed Ontario corporation owned and controlled by the same individuals. It is an agreed-upon fact that this sale resulted in a capital gain of approximately $1.7M.
The Minister took the position that the taxpayer was a resident of Canada in 2009 and the capital gain was not treaty-protected property. CRA reassessed the taxpayer for Part I tax on the capital gain.
In the appeal, the taxpayer made the argument that the doctrine of estoppel and reasonable expectations barred the CRA from treating the taxpayer’s residency status in 2009 differently than it had in 1998-2008. Namely, “CRA, you treated me as a non-resident for 10 years, no takesies-backsies for 2009!”
The Tax Court disagreed. Takesies-backsies are allowed in Tax Law, in this context. See below its analysis:
14] As noted by the FCA, the Appellant argued that this Court had failed to consider the doctrine of estoppel and reasonable expectations in relation to the Appellant’s residency and that “the Minister’s acceptance of the Appellant’s residency as being the Netherlands for previous years binds the Minister.” It was argued that the Appellant should be able to rely on the “position taken by the Minister in 1998 to 2008 when he taxed and assessed the appellant as a non-resident of Canada” and that the Minister was now estopped and precluded “from assessing it as a Canadian resident in 2009.”
[15] The FCA did not agree, relying on Ludmer v. Canada, [13] (“Ludmer”) and indicating that “it is well-established law that the doctrine of estoppel cannot be invoked to preclude the exercise of a statutory duty” and that “a concession made in one year in the absence of any statutory provisions to the contrary, does not preclude the Minister from taking a different view in a later year.” It also held that “an assessment is conclusive as between the parties only in relation to the assessment for the year in which it was made.”
[16] The FCA added that “how the Minister may have treated similar facts in previous years does not bind the Court” and that “the respondent is not the arbiter of what is right or wrong in tax law” before concluding that “although the Tax Court did not address the estoppel argument in its reasons, it nonetheless reached the correct conclusion.”
[17] The FCA concluded that the Tax Court had committed “no palpable or overriding errors in finding that the appellant’s central management and control in 2009 actually abided in Canada.”
[18] I therefore conclude, as I did in paragraph 47 of the TCC Decision and in accordance with the FCA decision, that the Appellant was a resident of Canada in 2009.
…
[51] I agree with the Respondent that this assertion is misguided since the Appellant chose to file as a non-resident of Canada from 1998 to 2008. This constituted its filing position. The Minister was free to accept or reject the tax return as filed and issue an assessment or reassessment based on its understanding of the facts and interpretation of the law at the relevant time. The fact that the Appellant’s filing position was accepted by the Minister, as evidenced by the notices of assessment for those years, is not binding on this Court and, as noted by the FCA or by Bowman J. in Goldstein, this Court is not estopped from reaching a different conclusion.
Comments on 152(8)
The taxpayer also made certain arguments about Income Tax Act (Canada) subsection 152(8), which provides that “an assessment shall, subject to being varied or vacated on an objection or appeal (…) be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto”.
The Court held “…it is established that the provision cannot be used to prevent the Crown from taking a position in a Reply that is inconsistent with an earlier assessment that has not been appealed…” (see para. 65 of the decision).
There you have it, the Minister and her agent, the CRA, can suck in some years and blow in others. This complicates tax planning and is something that I often note to clients. It doesn’t matter that [filing position X] was accepted in prior years, or that the CRA did not take issue with [filing position X] in other audits or reviews, each year is a fresh game, with new rules, and new audit risks.
When working on a tax plan, it is prudent to always turn your mind to preparing an audit file to defend each and every filing position.