Date: 20080610
Docket: T-2040-07
Citation: 2008 FC 727
BETWEEN:
CHRYSLER
CANADA INC.
Applicant
and
HER MAJESTY THE QUEEN IN RIGHT
OF CANADA,
THE MINISTER OF NATIONAL REVENUE,
AND THE CANADA REVENUE AGENCY
Respondents
REASONS FOR
ORDER AND ORDER
[1]
This motion
brought by the Respondents seeks to strike out the notice of application essentially on the
ground that the Federal Court is without jurisdiction in this application as it
is a “direct attack on the validity of reassessments issued by the Minister”. This,
the Respondents argue, is outside the jurisdiction prescribed by s. 18.5 of the
Federal Courts Act and can only be raised by the Applicant in a
proceeding in the Tax Court of Canada.
[2]
Thus, the
issue for determination is whether or not the specific relief sought by the
Applicant in this application lies solely within the jurisdiction of the Tax
Court of Canada or whether it is the proper subject matter of an application
under s. 18.5 of the Federal Courts Act. Section 18.5 of the Federal
Courts Act provides as follows:
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18.5 Despite sections 18 and 18.1,
if an Act of Parliament expressly provides for an appeal to the Federal Court,
the Federal Court of Appeal, the Supreme Court of Canada, the Court Martial
Appeal Court, the Tax Court of Canada, the Governor in Council or the
Treasury Board from a decision or an order of a federal board, commission or
other tribunal made by or in the course of proceedings before that board,
commission or tribunal, that decision or order is not, to the extent that it
may be so appealed, subject to review or to be restrained, prohibited,
removed, set aside or otherwise dealt with, except in accordance with that
Act.
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18.5 Par
dérogation aux articles 18 et 18.1, lorsqu'une loi fédérale prévoit
expressément qu'il peut être interjeté appel, devant la Cour fédérale, la
Cour d'appel fédérale, la Cour suprême du Canada, la Cour d'appel de la cour
martiale, la Cour canadienne de l'impôt, le gouverneur en conseil ou le
Conseil du Trésor, d'une décision ou d'une ordonnance d'un office fédéral,
rendue à tout stade des procédures, cette décision ou cette ordonnance ne
peut, dans la mesure où elle est susceptible d'un tel appel, faire l'objet de
contrôle, de restriction, de prohibition, d'évocation, d'annulation ni
d'aucune autre intervention, sauf en conformité avec cette loi.
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THE NOTICE OF APPLICATION
[3]
In the Notice of Application, the
Applicant seeks, inter alia:
. . . judicial review of acts or
proceedings, including administrative action of the Canada Revenue Agency, (the
“CRA”) as directed by the Minister of National Revenue (the “Minister”),
including persons acting on his behalf and having, exercising, or purporting to
exercise jurisdiction or powers conferred under the Income Tax Act
(Canada) (the “ITA”) and the Canada United States Income Tax Convention
(1980), as amended (the “Treaty”).
[4]
The
additional or alternative relief sought by the Applicant is “judicial review of
the Minister’s decision to issue reassessments, dated October 19, 2007 and
mailed by the CRA on October 23, 2007 (the “Reassessments”) which purport to
adjust the Applicant’s tax liability for its 1996, 1997 and 1998 taxation years
in respect of, inter alia, related party transactions which the
Applicant entered into with an affiliate in the United States (“Transfer
Pricing Transactions”)”.
[5]
The Notice
of Application specifically states that “[t]he Reassessments constitute the
culmination of the administrative action which is the subject of this
Application”. The relief sought by the Applicant also includes a declaration
“that the Reassessments are invalid to the extent they relate to the Transfer
Pricing Transactions for 1996 – 1998 taxation years”; and, a declaration that
“by issuing the Reassessments with adjustments for the Transfer Pricing
Transactions that are substantially inconsistent with the 2002 and 2004
letters, the Minister exercised his discretion unfairly, for an improper
purpose, and based upon irrelevant considerations inconsistent with established
policies”.
[6]
The 2002
and 2004 letters are a key element of the judicial review sought by the
Applicant in this Application and are letters upon which the Applicant relied
in asserting rights under the Treaty.
JURISDICTION OF THE TAX COURT
[7]
There is
no doubt, as the Respondents vigorously argue, that the ITA contains a complete
code for the assessment of income taxes and appeals taken from assessments.
Section 169(1) of the ITA and Section 12 of the Tax Court of Canada Act,
R.S.C. 1985, c. T-2, s. 12 (the “TCC Act”) support the proposition that the Tax
Court has exclusive jurisdiction to hear appeals relating to assessments of
income tax and to determine the correctness of income tax assessments. Section
12.(1) of the TCC Act provides as follows:
Jurisdiction
12.(1) The Court has exclusive original jurisdiction to hear and
determine references and appeals to the Court on matters arising under the Air
Travellers Security Charge Act , the Canada Pension Plan , the Cultural
Property Export and Import Act , Part V.1 of the Customs Act ,
the Employment Insurance Act , the Excise Act, 2001 , Part
IX of the Excise Tax Act , the Income Tax Act , the Old
Age Security Act , the Petroleum and Gas Revenue Tax Act and
the Softwood Lumber Products Export Charge Act, 2006 when references
or appeals to the Court are provided for in those Acts.
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Compétence
12.(1) La Cour a compétence exclusive pour entendre les renvois et
les appels portés devant elle sur les questions découlant de l'application de
la Loi sur le droit pour la sécurité des passagers du transport aérien ,
du Régime de pensions du Canada , de la Loi sur l'exportation et
l'importation de biens culturels , de la partie V.1 de la Loi sur
les douanes , de la Loi sur l'assurance-emploi , de la Loi
de 2001 sur l'accise , de la partie IX de la Loi sur la taxe
d'accise , de la Loi de l'impôt sur le revenu , de la Loi
sur la sécurité de la vieillesse, de la Loi de l'impôt sur les
revenus pétroliers et de la Loi de 2006 sur les droits d'exportation
de produits de bois d'oeuvre , dans la mesure où ces lois prévoient un
droit de renvoi ou d'appel devant elle.
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[8]
There are
many authorities cited by the Respondents for the proposition that the Tax
Court has exclusive original jurisdiction to hear matters related to
assessments [see for example, M.N.R. v. Parsons (1984), 84 D.T.C. 6345
(F.C.A.)]. In their submissions, however, the Respondents concede that another
court cannot assume jurisdiction over the validity of an assessment except over
matters ancillary to the assessment which are otherwise within that court’s
jurisdiction. The Respondents also concede that the Tax Court’s jurisdiction
is limited in that it “cannot set aside an assessment on alleged impropriety on
the part of the Minister, or because the Minister acted unfairly or violated
his own policies.”
[9]
Thus, in
order to determine if the Application is, in
pith and substance, an attack on the validity of assessments or the correctness
of assessments it is necessary to review the underlying facts alleged in the
Notice of Application, which, for purposes of a motion in this nature, must be
accepted as true.
BACKGROUND
[10]
The Applicant is a corporation resident in Canada for purposes of the ITA.
During the 1996 - 1999 taxation years the Applicant was a wholly owned
subsidiary of Chrysler Corporation, a U.S. Corporation.
[11]
During the
relevant taxation years the Applicant’s business consisted of, inter alia,
the assembly of vehicles for Chrysler Corporation and the sale of such vehicles
for Chrysler Corporation. Thus, the Applicant and Chrysler Corporation entered
into related party cross border transactions relating to the assembly of
vehicles and sale of vehicles, the Transfer Pricing Transactions.
[12]
Transfer
Pricing Transactions give rise to Transfer Pricing Adjustments as permitted
under the Treaty. Notice of exercising such rights must be given within six
years of the taxation year. In 2002 and 2004 CRA issued letters to the
Applicant regarding proposed Transfer Pricing Adjustments to the income it
earned from the Transfer Pricing Transactions for its 1996 – 1998 taxation years
(the “Prior Letters”). The Prior Letters indicated that their purpose was to
enable the parties to the Transfer Pricing Transactions to avail themselves of
rights available under the Treaty. The Applicant did so and notified the
Internal Revenue Service (“IRS”) of the Prior Letters. Rights available to the
Applicant under the Treaty enable the Applicant to avoid the imposition of
double taxation on the Transfer Pricing Transactions.
[13]
Subsequently,
on April 29, 2005, CRA issued new letters to the Applicant that proposed
entirely different Transfer Pricing Adjustments for the 1996 - 1998 taxation
years (it is to be noted that the 1999 taxation year is not in dispute in this
Application). The new CRA letters proposed substantial increases to the
Applicant’s income subject to tax which fundamentally altered the methodology
for determining the Applicant’s income for the Transfer Pricing Transactions
and included transactions that were not identified in the Prior Letters.
[14]
Although
the new CRA letters were issued within the six year period required under the
Treaty for the 1999 taxation year, for the1996 – 1998 taxation years, they were
issued outside the requisite six year time frame which would have allowed the
Applicant to exercise its Treaty rights. Thus, the Applicant was deprived of
its entitlement to require the IRS to provide relief from double taxation for
the 1996-1998 taxation years as contemplated by the Treaty. The Applicant
alleges that the Minister’s decision to issue the Reassessments on the basis of
the new CRA letters constitute an improper, discriminatory exercise in the
discretion to the Minister under the Treaty. The conduct of the Minister in
issuing the Reassessments essentially forecloses the exercise of rights by the
Applicant.
[15]
As the
Applicant notes, it is the decision to issue the Reassessments for the 1996 –
1998 tax years that are the focus of the Application since “this resulted from
improper exercise of the Minister’s discretion granted by paragraph 4 of
article 9 of the Treaty.” It is the improper exercise of discretion by the
Minister that the Applicant argues is the essence of this Application and not
the Reassessments themselves although they are the culmination of the improper
exercise of the discretion.
[16]
The
Applicant alleges that the improper exercise of discretion by the Minister
arises from administrative action relating to the two new CRA letters to the
Applicant that propose significantly different Transfer Pricing Adjustments to
the income the Applicant earned from the Transfer Pricing Transactions for the
taxation years 1996 – 1998.
[17]
As argued by the Applicant it does not
challenge the ability of the Minister to issue the Reassessments provided that
those Reassessments are issued on the basis of a discretion that is consistent
with the Prior Letters. Thus, the Application does not seek to challenge the
correctness of the Reassessments which result in the alleged double taxation,
it only seeks to judicially review the Minister’s exercise of discretion in
determining to issue the Reassessments contrary to the Prior Letters.
[18] The importance of the
inter-relationship between the ITA and the Treaty for the Applicant is
described in the following example and description set out in the Notice of
Application:
For the purposes of calculating income
tax liability, the tax authorities in Canada and the United States are
generally entitled (pursuant to the respective taxing statues and subject to
any tax treaty obligations) to adjust the income of an entity subject tax in
its jurisdiction arising on cross-border transactions between related parties
to the amounts that would have been charged had the parties been dealing at arm’s
length.
For example, if a corporation in one
country transferred goods to a related corporation in a second country for $100
that an arms length party would only agree to transfer for $1,000 in comparable
circumstances, the tax authority in the first country would increase the income
of the transferor corporation by $900 for purposes of computing that corporation’s
income tax liability for the year in which the transfer occurred. Such
adjustments are typically referred to as Transfer Pricing Adjustments.
[19] One of the purposes of the treaty
is to deal with such Transfer Pricing Adjustments so that international double
taxation does not occur. International double taxation can occur if an
adjustment by the CRA to the increase in the sale price of the goods sold by a
Canadian transferor for Canadian income tax purposes is made without a
corresponding adjustment by the IRS that would increase the purchase price paid
by the U.S. transferee for U.S. income tax purposes. That is what the
applicant alleges is occurring in this case as a result of discretionary
decisions made by the Minister which amount to abuse of power and are therefore
the subject of judicial review.
TEST ON A
MOTION TO STRIKE
[20]
As this is a motion to strike,
the allegations in the notice of application must be accepted as true. The
test on a motion to strike is well known. Simply put, the test is whether the
application, if allowed to proceed, would be “clearly futile” or that it is
“plain and obvious” that it does not have any possibility of success [see, for
example, David Bull Laboratories (Canada) Inc. v. Pharmacia Inc.,
[1995] 1 F.C. 588 (C.A.) at pp. 596-598 and 600; Amnesty International
Canada et al. v. Chief of Defence Staff et al., [2007] FC 1147; and
Sanofi-Aventis Canada Inc. v. Novopharm Ltd. (2007), 59 C.P.R.
(4th) 416 (F.C.A.) at pars. 31 - 34]. If the Tax Court has exclusive original jurisdiction
over the issues in this Application then this Application is “clearly futile” and
it is “plain and obvious” that it is bereft of any possibility of success.
However, in my view of the Application, it is not plain and obvious that this Court
is without jurisdiction to entertain this Application.
ANALYSIS
[21]
Of the many authorities cited by
the parties in both the written submissions and during the course of argument,
the two most helpful decisions are Addison & Leyen Ltd. v. Canada,
(2007) SCC 33 and Canada v. Roitman, 2006 DTC 6514. In Addison, the taxpayer sought judicial
review of the Minister’s decision to issue a reassessment under section 160 (2)
of the ITA, which applies to a taxpayer alleged to be vicariously liable for
the tax debts of a non-arm’s length party. Section 160(2) allows such a
reassessment to be issued “at any time”. The taxpayers in question were
reassessed under section 160(2) more than twelve years after the tax years to
which the reassessments related. The taxpayers alleged that the decision to
reassess them at that late date resulted in undue hardship and was an abuse of
the Minister’s discretion.
[22]
Addison was an application commenced
in the Federal Court that sought judicial review of the reassessments alleging
delay, unfairness and abuse of process. The Minister brought a motion for an
Order dismissing the application for want of jurisdiction. The motions
judge found that by operation of section 18.5 of the Federal Courts Act,
the Federal Court lacked jurisdiction to hear applications for judicial review
for matters for which an appeal lies to the Tax Court of Canada “to the extent
that [they] may be appealed”.
[23]
The Applicants appealed to the
Federal Court of Appeal which overturned the decision of the motions judge.
The appellate court found that section 18.5 of the Federal Courts Act is
not sufficient to exclude judicial review of actions taken under section 160 of
the ITA. The Federal Court of Appeal found, inter alia that the Federal
Court had the authority to quash an assessment in light of the fact that no
alternate remedy was readily available. The Minister appealed to the Supreme
Court of Canada. The appeal was allowed. However, the Supreme Court of Canada
allowed the appeal on very narrow grounds which arose solely from the facts of
the case and the application of Section 160(2) of ITA to those facts. The
Supreme Court of Canada did not determine that the Federal Court had no
jurisdiction to judicially review a decision of the Minister on issues relating
to tax. The Court observed as follows:
8. We need not engage in a lengthy
theoretical discussion on whether s.18.5 can be used to review the exercise of
ministerial discretion. It is not disputed that the Minister belongs to the
class of persons and entities that fall within the Federal Court’s jurisdiction
under s.18.5. Judicial review is available, provided the matter is not
otherwise appealable. It is also available to control abuses of power,
including abusive delay. Fact-specific remedies may be crafted to address the
wrongs or problems raised by a particular case.
9. Nevertheless, we find that
judicial review was not available on the facts of this case. As Rothstein J.A.
pointed out, the interpretation of s. 160 by the majority of the Federal Court
of Appeal amounted to reading into that provision a limitation period that was
simply not there. The Minister can reassess a taxpayer at any time. In the
words of Rothstein J.A.:
While in the sense identified by the
majority, subsection 160(1) may be considered a harsh collection remedy, it is
also narrowly targeted. It only affects transfers of property to persons in
specified relationships or capacities and only when the transfer is for less
than fair market value. Having regard to the application of subsection 160(1)
in specific and limited circumstances, Parliament’s intent is not obscure.
Parliament intended that the Minister be able to recover amounts transferred in
these limited circumstances for the purpose of satisfying the tax liability of
the primary taxpayer transferor. The circumstances of such transactions mak[e]
it clear that Parliament intended that there be no applicable limitation period
and no other condition on when the Minister might assess. [para. 92]
10. The Minister is granted the
discretion to reassess a taxpayer at any time. This does not mean that the
exercise of this discretion is never reviewable. However, in light of the
words “at any time” used by Parliament in s.160 ITA, the length of the
delay before a decision on assessing a taxpayer is made does not suffice as a
ground for judicial review, except, perhaps inasmuch as it allows for a remedy
like mandamus to prod the Minister to act with due diligence once a notice of
objection has been filed. Moreover, in the case at bar, the allegations of
fact in the statement of claim do not disclose any reason why it would have
been impossible to deal with the tax liability issues relating to either the
underlying tax assessment against York or the assessments against the respondents
through the regular appeal process.
11. Reviewing courts should be very
cautious in authorizing judicial review in such circumstances. The integrity
and efficacy of the system of tax assessments and appeals should be preserved.
Parliament has set up a complex structure to deal with a multitude of
tax-related claims and this structure relies on an independent and specialized
court, the Tax Court of Canada. Judicial review should not be used to develop
a new form of incidental litigation designed to circumvent the system of tax
appeals established by Parliament and the jurisdiction of the Tax Court.
Judicial review should remain a remedy of last resort in this context. [emphasis
added]
[24]
It is to
be noted from these passages that the Supreme Court of Canada left open the
door for judicial review of a discretionary decision of the Minister in certain
circumstances. The Federal Court is not precluded from hearing judicial review
applications in relation to discretionary decisions to issue assessments under
the ITA. Nor is the Federal Court without jurisdiction in tax cases to grant
fact-specific remedies such as those requested in this Application. The only
limitation placed on the Federal Court’s jurisdiction to hear a judicial review
application is that it is not available if the matter is otherwise appealable.
Even so, judicial review is available to control an abuse of power. This approach
to judicial review not only preserves the integrity and efficiency of the
system of tax assessments and the exclusive jurisdiction of the Tax Court to
deal with those matters, but also avoids unnecessary and incidental litigation.
[25]
Thus,
while the Minister has a discretion to reassess a taxpayer at any time it does
not preclude a review of the Minister’s discretion where a matter is not
otherwise appealable. Such is the case here. The Applicant concedes that the
Minister has the right to issue reassessments. However, the Applicant is not
seeking to review the reassessments but rather the Minister’s discretionary
decision, his prior conduct and his general discretion to provide relief from
double taxation. These are not matters which fall within the exclusive
jurisdiction of the Tax Court.
[26]
Further
support for this conclusion can be found in the Roitman case. In that
case the Applicant was a businessman who was a director of a company engaged in
the business of buying and selling automobiles. The Minister disallowed
certain claims for expenses. Roitman and the company objected to the
reassessments and ultimately a settlement with the Minister was reached. Both
Roitman and the company were parties to the settlement and Roitman was
reassessed in accordance with the terms of the settlement. Subsequently,
Roitman commenced a claim as a proposed class action against the Minister in
which it was alleged that the Minister engaged in “deliberate conduct…to
deny…the Plaintiff the benefit of the law”. The cause of action was
misfeasance in public office. A motion was brought to strike the action. The
motion was dismissed essentially because the claim did not seek to set aside
the reassessment but was in essence a claim for damages for the fraudulent
actions of the Minister. An appeal was taken to the Federal Court of Appeal.
That Court reviewed at length the jurisdiction of the Federal Court and the Tax
Court. In its decision, the Federal Court of Appeal noted that “[i]t is
settled law that the Federal Court does not have jurisdiction to award damages
or grant any other relief that is sought on the basis of an invalid
reassessment of tax unless the reassessment has been overturned by the Tax
Court. To do so would be to permit a collateral attack on the correctness of
an assessment.” [citations omitted]
[27] The Court
also observed that “it is also settled law that the Tax Court of Canada does
not have jurisdiction to set aside an assessment on the basis of abuse of process
or abuse of power (see Main Rehabilitation Cole v. R., 2004 FCA 403
(F.C.A.), para. 6; Obonsawin v. R., 2004 G.T.C. 131 (TCC [General
Procedures]); Burrows v. R., 2005 TCC 761 (T.C.C.) [General Procedures]);
Hardtke v. R., 2005 TCC 263 (T.C.C.) [General Procedures])”. This
observation applies equally to the relief sought in this Application. The focus
of this Application is the abuse of process of the Minister in the exercise of
the discretion relating to double taxation. The correctness of the reassessments
is not the issue. While in Roitman, the Federal Court of Appeal held
that the Statement of Claim was an abuse of process and therefore was struck,
they did so on the basis that the correctness involved in the Notice of
Reassessment was the primary issue in the Statement of Claim and thus was
properly a matter to be dealt with by the Tax Court. At best, the Federal
Court of Appeal noted that the Statement of Claim in Roitman was
premature.
[28] In my view of
this Application, it is not the reassessments which are central to the judicial
review. Rather, it is the alleged impropriety on the part of the Minister in
relation to the Transfer Pricing Transactions which flows from the alleged
improper, unfair and discriminatory exercise of the discretion to proceed with
reassessments which are alleged to amount to double taxation.
[29] The motion is
therefore dismissed with costs in any event of the cause to the Applicant.
ORDER
THIS
COURT ORDERS that the motion is dismissed with costs to the Applicant
in any event of the cause.
“Kevin
R. Aalto”
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