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A recent test case from the Federal Court says the CRA can’t use delayed assessments to discourage the use of tax shelters it doesn’t like

By Patricia Chisholm |

The Canada Revenue Agency (CRA) can't delay an individual's assessment by using an audit of the tax shelter used by the taxpayer as an excuse for the delay, according to a recent court ruling.

The May decision from the Federal Court of Canada comes as a pointed rebuke to the CRA and seems to suggest that the agency should not be trying to change policy or legal goals, especially related to tax avoidance schemes, which is the job of the courts or the legislature.

In particular, the Federal Court makes it clear that the CRA may not delay an assessment for the purpose "discouraging" the use of a particular tax shelter. The decision also concludes that specific regions (in this case the CRA's Winnipeg Tax Centre) cannot pursue a new policy that is purely local and which deviates from an established national policy used by the CRA.

As the court noted, the decision in Alice Ficek v. The Attorney General of Canada is "something of a test case." It deals with a charitable tax shelter known as Global Learning Gifting Initiatives (GLGI). The shelter, which used a trust and the distribution of "coursework" (software) to generate large refunds for taxpayers who made a cash payment to the charity, had been audited between 2004 and 2008; all of the claims for refunds in that period were denied.

The tax shelter had been popular; as a result of the denied refunds, between 27,000 and 28,000 notices of objections (appeals of the denied refunds) are outstanding for the years 2004 to 2006 alone. The Tax Court of Canada has yet to rule on whether the amounts claimed are deductible.

The particular taxpayer in this case, Alice Ficek, had made a cash payment to GLGI with her husband, in 2010. The receipts were for $10,000 for a cash donation to the charity and $50,019.86 for the donation of "courseware licences," the decision says. Tax receipts were issued in the name of the husband, who transferred $35,100 of his total donation to his wife. The husband's return was assessed in 2011 and his charitable tax credit was allowed. But the wife received a notice from CRA saying that her return would not be assessed until the 2010 audit of GLGI was complete.

As a result, the wife sought judicial review to compel the CRA to assess her return "with all due dispatch" as required by s.152.(1) of the Income Tax Act. In November of 2012, the Attorney General said that the 2010 audit of GLGI could not be completed until June of 2013. However, that audit was completed within a few weeks of the judicial review hearing in November.

The wife then asked for further clarification from the court, namely: "a declaration that the Minister [of National Revenue] has no authority to delay the examination of the [wife's] return ... to deter or reduce taxpayer participation in a registered tax shelter (namely the Global Learning Gifting Initiative); or to pursue goals other than those directly related to examining the [wife's] return and ascertaining her tax, interest and penalties payable under the Income Tax Act."

The decision notes that the "long-standing" national policy of the CRA is to first issue refunds for charitable donation tax credits and require refunds if a subsequent audit finds that a deduction should not have been allowed. But, under what the decision refers to as the "new policy," the Winnipeg Tax Centre decided to conduct such audits before completing individual assessments.

CRA officials tried to argue that the assessment of the wife's return was delayed by the need to verify the donations. The court, however, disagreed, and was clearly unhappy about internal correspondence from the Winnipeg Tax Centre. "Even allowing for a certain degree of hyperbole or ‘piling on' in internal communications," the decision states, "the officials in the [Winnipeg Tax Centre] wrote that they had GLGI participants ‘over a barrel' and that ‘withholding refunds for even a year or two may be sufficient to deter further participation' in the GLGI."

The federal court concluded that, whatever the CRA's concerns about the validity of the GLGI program, that was an issue to be decided by the Tax Court of Canada. Therefore, the failure to assess was not related to her return, but to discourage others from using the GLGI program. The court thus declared that the CRA had failed in its duty to assess the wife's return "with all due dispatch."