Two significant tax case wins for Couzin Taylor
On Friday, July 13, the Federal Court of Appeal released its decision dismissing the Crown's appeal in The Queen v. Sommerer, a case concerning the application of s. 75(2), one of the oldest attribution rules in the Income Tax Act. The taxpayer was represented by Roger Taylor and Daniel Sandler of Couzin Taylor. In upholding the Tax Court's decision, the significant cost award obtained at the Tax Court level was also preserved. On Monday, July 16, the Tax Court of Canada released its judgment allowing the taxpayer's appeal in Blackburn Radio Inc. v. The Queen, a case concerning whether consequential reassessments were statute-barred. The taxpayer was represented by Daniel Sandler and Sharona Ishmael of Couzin Taylor. Both cases represent significant wins for the taxpayer and set important judicial precedents.
The Queen v. Sommerer, 2012 FCA 207
Sommerer involves a long-standing dispute over the scope of s. 75(2) of the Income Tax Act (the “Act”), one of the oldest attribution rules in the Act. The provision applies to attribute income from property to a person where the property is held by a trust and can revert to the person from whom the property was received or that person essentially controls to whom such property is distributed by the trust.
In this case, the taxpayer was assessed under s. 75(2) on taxable capital gains realized by an Austrian private foundation from the sale of shares that were sold to the foundation by the taxpayer for fair market value and the taxpayer was a potential beneficiary of the foundation.
The Tax Court concluded that the foundation was a corporate trustee of a trust so that it was potentially within the ambit of s. 75(2), but concluded that s. 75(2) did not apply to a beneficiary vendor-for-value and even if it did, Article XIII (5) of the Canada-Austria Income Tax Convention precluded Canada from taxing the gain in the hands of the taxpayer since that provision restricted the jurisdiction to tax the gain to the country of residence of the alienator of the property (i.e., the foundation). The Crown appealed to the Federal Court of Appeal.
Justice Sharlow, writing for the unanimous court, dismissed the Crown’s appeal, holding that s. 75(2) did not apply to a beneficiary vendor-for-value because to interpret s. 75(2) so that it could apply in these circumstances leads to outcomes that are absurd, and that could not have been intended by Parliament. Only a settlor could be “the person” in s. 75(2), and the sale of shares by the taxpayer to the foundation was not a settlement on the foundation.
In obiter, the Federal Court of Appeal agreed that Article XIII (5) of the Convention prevented Canada from taxing the gain in Mr. Sommerer’s hands. According to the Court, Article XIII (5) was intended to prevent double taxation, both juridical double taxable (the taxation of the same person in two jurisdictions on the same income) and economic double taxation (the taxation of the same income in two different jurisdictions in the hands of two different taxpayers).
Justice Sharlow also doubted the Tax Court’s conclusion that the foundation was a trust (or a corporate trustee), although this issue was not argued before the Court.
Blackburn Radio Inc. v. The Queen, 2012 TCC 255
This case concerned whether consequential assessments issued by the Canada Revenue Agency (“CRA”) following a court judgment dealing with an earlier year were statute-barred. The Tax Court originally allowed an appeal regarding the taxpayer’s 1999 taxation year and ordered that the reassessment at issue (for 1999) be vacated. The CRA issued a new 1999 reassessment, based on the Tax Court’s decision, supposedly in order to process a refund owing to the taxpayer. The CRA then issued consequential reassessments for the 2000 and 2005 taxation years. The taxpayer did not dispute the amount of tax assessed in the consequential reassessments but argued that they were statute-barred because they were not issued within a year and 90 days from the date of the Tax Court’s judgment dealing with the 1999 taxation year, as required under s. 152(4.3). They were issued within a year and 90 days of the new 1999 reassessment, but the taxpayer argued that that reassessment was itself statute-barred and, even if valid, did not change a balance of the taxpayer, as required in order for s. 152(4.3) to apply.
Justice Woods agreed with the taxpayer that the new 1999 reassessment was statute barred because the Tax Court had vacated the 1999 reassessment and the Minister therefore had no authority to issue a further reassessment. In response to the Minister’s argument that the reassessment was necessary in order to process the refund owing to the taxpayer, Justice Woods concluded that the refund was mandated under s. 164(4.1) of the Act. The Tax Court found that an out-of-time reassessment is void absent an allegation of fraud or misrepresentation and there was no such allegation in this case. The Minister had one year after the appeal rights with respect to the Tax Court decision for the 1999 taxation year to issue consequential reassessment, and because it had not done so, it was out of time.
In the alternative, Justice Woods agreed with the taxpayer that even if the new 1999 reassessment was valid, it did not change a balance of the taxpayer. Rather, the balance was changed by virtue of the Tax Court judgment vacating the 1999 reassessment, and the new 1999 reassessment therefore did not change any balance because the balances underlying that reassessment were identical to the 1999 reassessment that preceded the vacated reassessment (and was “resurrected” as a consequence of the earlier Tax Court decision).
As a result, the Tax Court vacated the consequential reassessments for the 2000 and 2005 taxation years.