http://decisions.fct-cf.gc.ca/fc-cf/decisions/en/109655/1/document.do 
Michael Rosenberg v. Canada Revenue Agency (April 28, 2015 – 2015 FC 549, Bédard, J.).
This commentary is provided by guest contributor, Andrew Skodyn of Lenczner Slaght LLP.
The decision in
Rosenberg is on the cutting edge of jurisprudence dealing with the Federal Court’s jurisdiction to review CRA’s audit powers. It will be interesting to see whether CRA appeals this decision and, if so, how the Federal Court of Appeal will deal with the issues raised by this unusual set of facts.
Précis: This is an interesting decision on a motion to strike brought by the Defendant CRA. It raises issues of the validity and enforceability of agreements with the Minister, as well as issues of practice in the Federal Court.
The action had been brought by the taxpayer, Michael Rosenberg (“Rosenberg”) for declaratory and injunctive relief against CRA. Also in play was a summary application brought by CRA under section 231.7 of the
Income Tax Act for an order compelling Rosenberg to provide certain documents and information in respect of Rosenberg’s 2006 and 2007 taxation years.
Rosenberg’s action sought to prevent CRA from engaging in any audit of his 2006 and 2007 taxation years (and certain “straddling” transactions during those years). The basis for the claim was that CRA had previously commenced an audit of those years (and the “straddling” transactions) and had reached an Agreement in February 2010 whereby it undertook not to reassess those years and Rosenberg undertook not to engage in any similar transactions. In 2013, CRA advised Rosenberg that it was auditing those taxation years and transactions again and sought information and documentation from him, leading to a series of disputes and proceedings, first in the Quebec courts and then the Federal Court.
At issue in the motion was whether an action in the Federal Court was the appropriate forum for Rosenberg’s claims, whether his claims that the Agreement was valid and binding should be struck or whether the Minister could instead proceed with its section 231.7 application.
The Court found that it was not plain and obvious that Rosenberg’s position could not succeed and therefore dismissed the motion to strike. The Court held that the validity and enforceability of the Agreement was an open question, as while the Minister cannot enter into agreements that violate the law, no authority had been submitted as to whether an agreement waiving or restricting the Minister’s auditing powers was valid or invalid. However, the Court also held that the proceeding should not have been brought by way of action and converted it into an application for judicial review. To ensure that the application is heard as soon as possible (as the section 231.7 application had been adjourned), the Court also ordered that the application be specially managed by a Case Management Judge.
Decision:
The Court describes the various proceedings brought by Rosenberg and the CRA, both in the Quebec courts and the Federal Court and explains the basis of the motion to strike, including the well-known test that “the Court will not allow a motion to strike unless it is plain and obvious that the action cannot succeed.”
The Court then briefly describes the facts of the claim and Rosenberg’s position as to the Agreement, which is that it is “a contract by which the parties prevented the challenge of the tax assessments for 2006 and 2007 through mutual concessions and undertakings and that this agreement ended all possible disputes regarding the taxes he had to pay for 2006 and 2007.”
After setting out the arguments of the parties, the Court concludes that the motion to strike must be dismissed, as the arguments of both sides have some chance of success, particularly given that no authority directly on point had been submitted:
[35] I believe that the proceeding brought by the plaintiff cannot succeed in its current form, but that there is nonetheless a live issue between the parties and in this respect it is not plain and obvious that the plaintiff’s position cannot succeed in the context of an appropriate proceeding.
[36] I find that the real dispute between the parties stems from the Minister’s decision to undertake a new audit of the straddling transactions that Mr. Rosenberg participated in during the 2006 and 2007 taxation years. It is not disputed that the audit commenced by the CRA covers, at least in part, the straddling transactions that Mr. Rosenberg participated in during 2006 and 2007 that were already subject to the audit conducted from 2008 to 2010 and which led to the Agreement.
[37] Mr. Rosenberg contends that the Minister is bound by the Agreement and that this agreement restricts her power to conduct a new audit of the same transactions that led to the conclusion of the Agreement. The CRA, in contrast, claims that it did not commit to never reassessing the plaintiff for the 2006 and 2007 taxation years, and even less to restricting or waiving her audit powers. Moreover, she argues that an agreement that would limit her audit powers or in which she would waive the exercise of her audit powers would be null and invalid.
[38] I consider it to be neither plain nor obvious that Mr. Rosenberg’s position, or the CRA’s position for that matter, is entirely unfounded and has no chance of success.
[39] The dispute between the parties raises different issues including the binding nature of the Agreement and the impact it could, or could not, have on the extent of the audit powers that the Minister wants to exercise. The parties acknowledge that, with respect to assessments, the Minister may conclude an agreement as long as the agreement is justifiable on the facts and the law (CIBC World Markets Inc v Canada, 2012 FCA 3 at paras 22-24, [2012] FCJ No 30; JP Morgan at para 79). The issue in this instance consists, among others, in determining whether the Agreement concluded in February of 2010 constitutes such an agreement and whether the CRA undertook to never re-assess Mr. Rosenberg for 2006 and 2007.
[40] The parties have not submitted any decisions in which the courts have decided on the validity of agreements between the Minister and taxpayers that would involve a waiver or restriction on the Minister’s auditing powers, but the question is raised in this case. The dispute involves determining whether the Agreement deals with the Minister’s audit powers and if so, whether it restricts the Minister’s power to proceed with a new audit of the straddling transactions in which Mr. Rosenberg was involved in 2006 and 2007, and whether the Agreement is valid.
[41] It is not up to the Court, at this stage in the proceedings, to interpret the Agreement, or to rule on the binding nature and, if applicable, the scope of the Agreement. However, I consider that these issues are important for the parties and for Mr. Rosenberg in particular who states that he made commitments that still bind him in consideration of those made by the CRA under the Agreement. In this context, I find that it is not plain and obvious that Mr. Rosenberg’s position cannot succeed.
Having concluded that the claim should survive, the Court goes on to conclude that an action is not the correct manner of proceeding. Rather, it should be converted into an application for judicial review. In that context, despite CRA’s decision to again audit the 2006 and 2007 taxation years having been communicated to Rosenberg in early 2013, the Court finds that the 30 day time limit for commencing a judicial review does not apply or, if it does, an extension should be granted.
In the result, the action was converted to a judicial review application. Given that the Court had already adjourned CRA’s section 231.7 application until final disposition of this proceeding, the Court also ordered that the judicial review application be specially managed and heard as soon as possible.
TAGS: Judicial Review, Agreement not to Audit, Tax Litigation, Income Tax Act