TaxMatters@EY - April 2013

CRA compelled to disclose basis of assessment in GAAR case

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Birchcliff Energy Ltd. v The Queen (2012-1087(IT)G)

Jennifer Smith, Ottawa


The CRA reassessed the taxpayer and applied the GAAR to a series of transactions intended to avoid the acquisition control rules in the Act and enable the taxpayer to utilize the tax pools of an unrelated company. The taxpayer objected to the reassessment.

The Minister’s reply to the taxpayer’s notice of appeal alleged that the series of transactions had abused 10 different provisions of the Act — in particular, sections 4, 9, 111, subsections 37(6.1), 87(2.1), 111(5) and 127(9.1), paragraphs 37(1)(h), 87(2)(l) and 111 (1)(a).

However, the CRA followed its usual practice and did not identify the purpose underlying each of these provisions or how that purpose was allegedly abused. The reply also alleged that the Act as a whole had been abused, but did not indicate how.

The CRA denied the taxpayer’s request for disclosure of the tax policy that was allegedly abused. The taxpayer sought an order under Rule 52 of the Tax Court of Canada Rules (General Procedure) directing the respondent to comply with a demand for particulars, specifically the following:

  • The Minister’s assumption of fact regarding the purpose of each of the 10 provisions alleged to have been abused
  • The Minister’s assumption of fact regarding how such purpose was abused
  • The Minister’s assumption of fact regarding how the Act as a whole was abused.

The taxpayer argued, among other things, that the Tax Court rules require disclosure of “the findings or assumptions of fact made by the Minister when making the assessment” and “any other material fact.” The taxpayer also argued that disclosure of the tax policy would be consistent with the purpose of providing “particulars” in litigation: to allow the taxpayer to prepare for discoveries and trial knowing the case against it, prevent surprises, and reduce time and expenses involved. Further, there was a heightened obligation on the Minister to be specific when dealing with matters such as misconduct, negligence or misrepresentation, which includes misuse or abuse.

The Minister argued the following:

  • Granting the order would be overly onerous, in that it would open the door for taxpayers to demand the Minister’s policy analysis in every case requiring legislative interpretation.
  • Only the trial judge will ultimately hear representations and make a ruling, and it serves no purpose to tell the other side at the pleading stage what the Minister believed was the policy on which to base its assessment.
  • The issue of whether a tax policy exists is a question of law as opposed to a question of fact and is not required to be set out in pleadings.

Tax Court decision

The Tax Court granted the taxpayer’s motion in part. Justice Campbell Miller dealt with the Crown’s fears of a “slippery slope” by pointing out that the GAAR is a unique piece of legislation in that it allows the government to bypass provisions of the Act based on an abuse of policy. Jurisprudence has established that the Crown must prove a policy in GAAR cases and that such policy is an integral starting point in conducting a GAAR analysis. Therefore, if the taxpayer’s motion were granted, it would not set a precedent for requiring the Crown to provide its policy analysis in every case requiring legislative interpretation.

The judge also noted that simply because it’s the trial judge who ultimately hears representations, interprets the law and makes a policy determination does not mean that it serves no purpose to tell the taxpayer at the pleading stage what the Minister believed was the policy on which to base his assessment. The taxpayer is still entitled to know the case against it as soon as possible, even though new arguments may be brought forward at a later date.

Finally, Justice Miller agreed with the taxpayer that the question of what policy the Crown actually relied on was a question of fact:

This is a different question than what is the Policy itself, which is a question of law, which will ultimately be determined by the Court. But, in a GAAR challenge why should a taxpayer not know what Policy the assessment was based upon? Given the significant open-ended consequences of a GAAR ruling, and given the Supreme Court of Canada’s direction to the Government to prove the Policy, I conclude it is imperative that the Court’s Reply set out as a material fact, not an assumption, but the fact the Minister relied upon x or y policy underlying the legislative provisions at play in the case. (para 18)

That being said, Justice Miller found the taxpayer’s request for the policy of each of the 10 provisions to be overreaching. He assumed that the Minister must have looked at these provisions collectively and relied on the policy gleaned from such collective view. This was the policy that must be disclosed to the taxpayer.

Justice Miller also refused the taxpayer’s request for particulars of how this policy was abused:

Abuse, however, is not a question of fact either but is a determination to be made by the Court, having concluded what the Policy is and then whether the facts are such that they in some fashion abuse that Policy. This is a different kettle of fish than the Policy itself. If the Minister pleads all the facts assumed, not otherwise within the Minister’s knowledge and pleads the Policy relied upon, what more need be laid out in the assumptions or other material facts. (para 20)


Justice Miller ordered the Crown to disclose what policy the assessor relied on in making the assessment as a material fact. However, this did not bind the Crown or prevent it from relying on a different policy at trial.

As noted, this decision sets an important precedent and will assist taxpayers engaged in GAAR litigation in understanding and challenging the case against them.