The Federal Court of Appeal Denies Bakorp’s Appeal
Bakorp proceeded to file an Appeal to the Federal Court of Appeal. At both the Tax Court of Canada, and the Federal Court of Appeal, the Crown’s argument was that based on the language of subsection 152(4.3), the decision to reassess Bakorp’s January 1992 tax year-end was a discretionary one on the part of CRA. As such, the Tax Court did not have the jurisdiction to reassess the March 1992 tax year-end to claim the losses in that year, because they had already been claimed in January 1992. Both the Tax Court of Canada and the Federal Court of Appeal examined the specific language of subsection 152(4.3), which reads:
- (4.3) Notwithstanding subsections (4), (4.1) and (5), if the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or if the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable by the taxpayer, redetermine an amount deemed to have been paid or to have been an overpayment by the taxpayer or modify the amount of a refund or other amount payable to the taxpayer, under this Part in respect of the subsequent taxation year, but only to the extent that the reassessment, redetermination or modification can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.
The use of the word “may” in any tax legislation always points to a discretionary decision that is left in the hands of the CRA. The confusion, which led to the loss on the part of Bakorp in this case was that the word “shall” is also used in this subsection. However, careful examination of the language of the entire subsection makes it clear that there is a condition precedent that must be met by the taxpayer in order for the adjustment to be mandatory. In this case the condition precedent required that the subject to the request for adjustment must be related to an amount claimed or filed in a subsequent tax return. Both the Tax Court of Canada and the Federal Court of Appeal found that this condition precedent had not been met, and thus, Bakorp’s only legal right of redress was to file an Application for Judicial Review of the decision to deny the adjustment to the January 1992 tax year-end. As such, the carryforward was denied and the assessment confirmed.
Why Choice of Venue Matters
The issue of which Court a Taxpayer needs to seek redress in is not a new one. There have been countless cases that stand for the principle that the word “may” means one should proceed to the Federal Court of Canada, while “shall” means that the Tax Court can provide a remedy. However, in this case, there were several confusing intersections of conflicting principles with respect to the ability of Bakorp to claim the loss in the March 1992 tax year-end. As pointed out above, the Courts held that in order for Bakorp to be able to force the reassessment of its assessment of the January 1992 tax year-end, it needed to fulfill a condition precedent. Failure to do so would mean that they would have to rely upon the goodwill of the CRA to allow them to do so. The exact nature of this condition precedent will be discussed in Part II of this article, and it stands for another important principle that should be understood and applied by all tax practitioners, Canadian tax lawyers and accountants alike.
Because Bakorp did not meet this condition precedent, the January 1992 year was not adjusted, and thus the $492,891 was not available to claim in the March 1992 tax year-end. In essence, the taxpayer lost in this case because they objected to the wrong year, and thus the Tax Court, even if it did have jurisdiction to review said decision could not consider an adjustment to a year that was not validly under Appeal.
Tax Tips: Always Keep Any Affected Years in Dispute
If the above analysis seems confusing, don’t despair; Canada’s income tax regime is complicated and as the Bakorp case illustrates, even senior Canadian tax lawyers get it wrong.
The lesson that should be gleaned from the discussion of the jurisdiction issue is that one always needs to consider what venue may or may not be appropriate for a tax dispute from the very beginning. If a taxpayer has the advice of our Certified Specialist in Canadian tax lawyer, , our advice would be to always keep every affected year in dispute to ensure you don’t run into issues with a jurisdictional question. In Bakorp, had the taxpayer objected to the January 1992 taxation year in anticipation of the adjustment being required at a later date, the Tax Court would have no doubt had jurisdiction to apply the loss to the March 1992 tax year-end.
If you are having issues related to elections or decisions of the CRA, come speak with one of our knowledgeable Canadian tax lawyers. We have the knowledge, experience and foresight to always advise our clients as to what steps need to be taken to protect your tax rights; as a matter of course our philosophy is to always object to an assessment if there is ever any small doubt it could have an effect.
In Part II of this article, we will discuss the condition precedent of subsection 152(4.3) that we identified above and explain why it led to such a costly mistake for the taxpayer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.