Zhang - Tax Court of Canada finds that a settlement agreement, which could be reasonably inferred, was enforceable by it – and s. V-I-4(b) requiring a previous supply does not require its assessment

Mr. Tan and his spouse, Mrs. Zhang, moved into a residence (the Eldora property) in July 2014 when its reconstruction by them was completed. They then sold the property in February 2015. In July 2017, one month after having received an occupancy permit therefor, they sold a second residential property (the Olive property) after having completed its reconstruction in September 2016.

After the appellants’ appeal of CRA reassessments of both sales transactions on the basis that they were taxable rather than exempt and imposing a gross negligence penalty on Mr. Tan, the appellants’ counsel (Mr. Laregina) sent a proposal to the Justice lawyer that the matter be settled principally on the basis that the sale of the Eldora property was an exempt supply pursuant to s. V-I-4(b), and that the sale of the Olive property be treated as taxable; and that the gross negligence penalty be reversed.

Ultimately, the Justice lawyer responded, agreeing to those terms except for the deletion of the gross negligence penalty, to which Mr. Laregina responded with his acceptance. However, when the Justice lawyer drafted the minutes of settlement, it became apparent that she considered the settlement agreement to also include an agreement that the couple would be assessed under the self-supply rule under s. 191(1) in respect of the substantial completion of the Eldora property in October 2014 (a month which CRA had not audited or assessed) and that they would be expected to waive the right to object to such assessments.

They then brought this motion to enforce the settlement agreement, which they claimed had been entered into upon Mr. Laregina's acceptance of the counteroffer. Before finding that the appellants’ interpretation of the terms of the settlement agreement (i.e., excluding any agreement re the pre-2015 period) was correct and granting their motion, Rabinovitch J rejected the Crown’s submission that the Tax Court lacked jurisdiction to enforce a settlement agreement in this case because no signed consent to judgment had been filed pursuant to s. 170 of the Rules.

Rabinovitch J went on to find that instead the question in this case was whether a settlement agreement was reached under the common law of contract in Ontario. This question was illuminated by the Apotex decision (2016 FCA 155), which indicated that the parties not having signed a more formal document to record their agreement after the fact did not prevent them from having formed a binding contract before any such a document was prepared. Furthermore, under the Apotex test as to what a reasonable person would have concluded from what the parties said or did, the appellants had established that there was matching offer and acceptance on all essential terms; and that although there may have been a unilateral mistake on the part of the Crown regarding the terms of the agreement, a unilateral mistake as to terms is generally insufficient to render a contract void at common law unless the other party knows that the mistaken party is operating under an invalid assumption or voidable under the law of equity where it ought to have known of such mistake. No such circumstance had been established here.

Finally, regarding the Crown’s claim that the principled settlement rule was not complied with under the alleged terms of the agreement because the appellants had not in fact been assessed under the s. 191(1) rule, so that the settlement agreement violated the policy of s. 4(b), Rabinovitch J stated:

Subsection 4(b) of Schedule V … covers the sale of a single unit residential complex made by a builder who has “was deemed under subsection 191(1) or (2) of the Act to have received a taxable supply of the complex or unit by way of sale, and that supply was the last supply of the complex or unit made by way of sale to the builder.” It does not require an assessment to have been issued in respect of that supply.

Neal Armstrong. Summary of Zhang v. The King, 2026 TCC 71 under ETA s. 309.