http://www.courts.gov.bc.ca/jdb-txt/SC/14/07/2014BCSC0720.htm#_Toc386116075 
Leroux v. Canada Revenue Agency (April 30, 2014 – 2014 BCSC 720) is an exceedingly long (413 paragraphs) decision of the British Columbia Supreme Court dealing with claims against CRA arising out of alleged misfeasance in public office and alleged negligence. CRA was unsuccessful in a prior (2012) appeal to the British Columbia Court of Appeal seeking to strike these claims.
The underlying facts are complex and sprawl over a long period of time. Perhaps the most succinct statement of alleged facts is to be found in the earlier Court of Appeal decision:
[3] The claims for misfeasance and negligence are founded on the misconduct of CRA employees, to which Mr. Leroux attributes the collapse of his business. This is alleged to have occurred during a 13-year-long sequence of audits, assessments, reassessments and collection procedures, relating to the liability of Mr. Leroux for both income tax and goods and services tax (“GST”). At the root of the losses Mr. Leroux alleges, is a failed attempt at extortion (in December 1998) by an auditor employed by the CRA at its Prince George office, now deceased.
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[27] … The fundamental claim Mr. Leroux makes is that the failed extortion attempt in December 1998 gave rise to an audit report by the alleged extortioner (“the Original Audit Report”) which resulted in $86,000 owing in additional GST and $618,438 owing in additional income tax, including interest and penalties. These tax re-assessments and their related enforcement activities led to the collapse of his business and loss of his home by July 2008. The GST assessment was finally adjusted to $20,431 owing (above the $18,138 of refunds Mr. Leroux had claimed). The income tax was varied by consent to a credit of $24,302, which was used to offset the GST debt.
At trial Mr. Leroux did not seem to pursue his claim based on misfeasance in public office, other than as a form of support for his claim based on negligence:
[233] CRA takes the position that the claim of misfeasance is limitation barred. While acknowledging that a claim can be delayed until the final Tax Court decision, here the behaviour that is alleged to form the basis of the misfeasance has nothing to do with the assessment. Counsel for Mr. Leroux says the claim is not so much a standalone claim as an additional factual basis to shore up the claim in negligence.
CRA took the position that no duty of care was owed to Mr. Leroux by the officials involved, i.e., that their only duty of care was to their employer, CRA. The court rejected this position:
[301] The reasoning in
Hill is pertinent in the context of the relationship between Mr. Leroux and CRA. An audit may not necessarily place a taxpayer in a close and direct relationship with the auditors. In the vast majority of cases, the required degree of proximity may well not exist. There may not be the extended and personal relationship between the auditors and the taxpayer, the close and direct nexus between the pivotal discretionary decisions taken by the auditors and the harm alleged, or the foreseeably huge and devastating effects of these discretionary decisions on the taxpayer, obvious to the auditors at the time they made them. When all these factors do exist it is not a sufficient answer to say the only remedy available is for the taxpayer to attempt to get the assessment corrected in the Tax Court, thus ensuring that CRA auditors will never be held accountable for their decisions, however careless or devastating they may be.
[302] In this case, the audit was a focussed and intensive one taking place over many years, covering three years of statute barred taxes, involving three auditors, many face to face meetings and phone calls, significant changes in tax characterization between the T-1s and the assessments as a result of discretionary decisions, and huge penalties. The results were foreseeably and obviously devastating to Mr. Leroux.
[303] The close causal connection between the alleged misconduct and the harm is another indicator of proximity, according to
Odhavji. The foreseeability of devastating consequences to Mr. Leroux in a general sense was evident to everyone involved at the time the assessment was levied, particularly in view of the extremely large penalties and the daily compounding of interest, even if the specifics of Mr. Leroux’s business difficulties were not known to them. The fact that Mr. Leroux had reciprocal and perhaps even more important duties under the Income Tax Act, does not detract from the duty on the CRA employees to conduct themselves as reasonably careful professionals in these circumstances. There is nothing in the statutory scheme of the Income Tax Act that would suggest otherwise.
[304] Applying the test in Anns to this set of facts, it is difficult to see how the employees of CRA could escape an obligation to be mindful of the plaintiff’s legitimate interests in conducting his affairs, and to take reasonable care to avoid doing him harm. As well, the close and direct relationship necessary for proximity exists in this case.
[305] Thus I conclude that a
prima facie duty of care exists.
[306] The next consideration is whether policy considerations should prevent a duty of care from being imposed. While there is a duty to the public and to the Minister of National Revenue to collect taxes that are properly payable, as recognized in the cases above, I am unable to see that this duty conflicts with a duty to take reasonable care in assessing taxes, auditing taxpayers, and particularly in imposing penalties. It is true, as CRA contends, that the Canadian tax system depends on self-assessment, and therefore the honesty and full disclosure of taxpayer is crucial. However, within that scheme, CRA is given almost unchecked powers. CRA officials are not accountable to any independent body for their actions, except through an appeal to the Tax Court of Canada. As the Supreme Court of Canada observed at para. 56 of Hill, holding police officers to a standard of care that might make them more careful is not necessarily a bad thing. The same reasoning applies in this case.
The court turned to the particulars of negligence alleged by Mr. Leroux. It rejected claims based on the characterization of his income and expenses, the handling of his notice of objection and the conduct of the GST audit. In the case of the imposition of penalties and opening up statute-barred years however the court concluded that there was evidence of negligence:
[339] The large penalties associated with the reassessment arose because Mr. Leroux was found to be grossly negligent. This issue had surfaced during a discussion with Mr. Hansen on June 11, 1997. Mr. Hansen told Mr. Leroux that CRA was statute barred from reassessing him for 1993, but they would be justified in opening up that year and assessing penalties based on gross negligence because of the number of personal items they had found when looking at his claimed business expenses. Mr. Hansen’s notes read:
I explained that if he was to sign the waiver, there is a possibility that gross negligence would be charged, but that if he did not sign the waiver, we would have to open 1993 due to gross negligence and the penalty would have to be charged.
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[347] However, the penalty report purports to cover all of the taxes for each year, including those reassessed as a result of the capital gains and “matching” issues. This cannot be so. Those issues, as CRA repeated many times in its defence of Ms. Quance, are complicated. The law was in state of flux regarding “matching”. To characterize Mr. Leroux’s chosen tax treatment as grossly negligent is not simply wrong; it is a misuse of statutory powers, not only to allow huge penalties to be imposed on issues that simply could not be “grossly negligent”, but to open up statute barred years, which will be discussed further below.
[348] To call Mr. Leroux’s tax characterizations “grossly negligent” is especially objectionable because, as mentioned above, CRA now uses the complexity of the issues involved in these characterizations as a reason why their decisions on exactly the same issue could never be termed negligent. It is simply not logical for CRA to assess penalties against Mr. Leroux for being grossly negligent in having characterized his income in a particular way and to resist the application of the concept of negligence to their own characterization of the same income, one which was ultimately agreed to be wrong. Or, to put it in the reverse, since CRA now takes the position that the characterization of capital loss versus revenue and the issue of “matching” are difficult and complex, it cannot be said that the assumption of contrary positions by Mr. Leroux, positions that were eventually accepted as correct, was grossly negligent. To call them so, and to assess huge penalties as a result, ostensibly for the purpose of getting around a limitation period, is unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors. While being wrong is not being negligent, nor are Ms. Quance’s mistakes in fact or law negligent, it is the misuse and misapplication of the term “grossly negligent” that is objectionable.
Mr. Leroux was not however successful in persuading the court that the negligence gave rise to compensable damages:
[372] I have found that the actions of CRA in the assessment of penalties for income tax breached the expected standard of care. The next question is whether that breach caused any loss to Mr. Leroux.
[373] There must be a causal connection between the breach of the standard of care and the compensable damage suffered. If the compensable damage would not have occurred but for the negligence, then the causation requirement is met (
Clements v. Clements, 2012 SCC 32).
[374] It is Mr. Leroux’s contention that the presence of the CRA judgments impaired his credit and prevented him from renewing his mortgage or obtaining financing.
[375] Unfortunately for Mr. Leroux, there are difficult hurdles to overcome on the issue of causation, with additional issues of contributory negligence or failure to mitigate.
[376] There were two processes going on simultaneously, one in respect of GST and one in respect of income tax. The GST timeline was considerably ahead of the income tax timeline. There was no issue of statute barred years in respect of GST, and there is no stay of collections procedures once GST is assessed, even if the assessment is appealed. Mr. Leroux’s attempt to challenge this difference under the
Charter was unsuccessful in earlier proceedings (2012 BCCA 63 @ para. 47).
[377] I have not been persuaded that there was any breach of a duty of care in respect of the GST assessments.
In essence the court found that there were numerous factors that contributed to Mr. Leroux’s troubles and there was no clear causal connection between his losses and the negligent conduct of CRA in opening up statute-barred years and imposing large penalties. That conclusion also extended to his health problems:
[397] Mr. Leroux did not provide any medical evidence to support his decline in health, but I accept his evidence that he felt healthy and well when he began his RV project, and he now feels tired, stressed, and discouraged.
[398] CRA cited
Healey v. Lakeridge Health Corp., 2011 ONCA 55 for the proposition that psychological stress not associated with a recognizable psychiatric illness is not compensable, nor is stress associated with the litigation process (
McCreight v. Canada (Attorney General), 2013 ONCA 483).
[399] I accept those propositions, but in any event, there are simply too many factors that affected Mr. Leroux and which occurred during this period to find CRA liable for the state of his health – the loss of his house on Quince Street, the filing of other charges on his property, the filing of liens on his property, the problems over the property taxes, default of payments on his mortgage, the problems with the contractors, the foreclosure, all of which had nothing to do with CRA.
As a consequence the action was dismissed, with each party bearing their own costs.
Comment: This is the most recent in a growing number of cases dealing with negligent investigations and audits. The tort was first recognized by the Ontario Court of appeal in a brief decision in 1997: Beckstead v. Ottawa (City) Chief of Police, (1997), 37 O.R. (3d) 62. The Ontario Court of Appeal revisited the issue in 2005 in the case of Hill v. Hamilton Wentworth Regional Police Services Board, 76 OR (3d) 481; 259 DLR (4th) 676; 33 CR (6th) 269; 202 OAC 310 and reaffirmed the existence of the tort by a 3-2 decision (although concluding that a case for liability had not been made out). The Supreme Court of Canada dismissed an appeal (and cross-appeal) in a 6-3 decision released in 2007: Hill v. Hamilton Wentworth Regional Police Services Board, [2007] 3 S.C.R. 129, 2007 SCC 41. In 2008 the Ontario Court of Appeal extended the tort to cover the case of negligent investigation by a firm of private investigators retained to investigate employees: Correia v. Canac Kitchens, 91 OR (3d) 353; 294 DLR (4th) 525; 67 CCEL (3d) 1; 240 OAC 153.
The Leroux decision recognizes a duty of care on the part of those conducting tax audits. It also illustrates that establishing a causal link between an auditor’s negligence and damages suffered by the taxpayer will often be an uphill battle. Nevertheless in the case of a taxpayer with fewer concurrent difficulties than Mr. Leroux establishing causation may not be an insurmountable hurdle.