Savics – Tax Court of Canada infers that a settlement agreement referring to partnership loss allocations included partnership gains allocations
The taxpayer was allocated losses for the initial years of his membership of three LPs and income-account gains for a subsequent year. CRA initially reassessed to deny both the taxpayer’s allocated losses and to reverse the subsequent year’s gains allocation on the basis that the LPs did not exist (i.e., on the basis that the partners were not carrying on business in common with a view to profit). A subsequent settlement agreement provided for the reinstatement of much of the losses but was silent on the treatment of the gains (although it did reference an ability of CRA to reassess to make “consequential” adjustments).
In agreeing to the settlement, the taxpayer provided a waiver of any right of appeal of an implementing assessment. Sommerfeldt J indicated that “if a settlement-implementing reassessment is not in keeping with the agreement that the taxpayer and the fiscal authority have reached, a waiver of the right to appeal will not preclude the taxpayer from appealing in respect of the aspect of the reassessment that does not coincide with the settlement agreement.”
However, he went on to find that it accorded with the settlement agreement for CRA, in its reassessments to implement the agreement, to reinclude the subsequent year’s gains in the taxpayer’s income. The settlement agreement was based on the premise that the LPs existed after all, and the gains inclusions reassessed by CRA were “consequential” on this premise. Furthermore, implementing a settlement agreement that was based on the proposition that a partner was to be allocated his share of the LP losses, but not gains, would have violated the Galway principle, which “precludes a taxpayer and the Crown from arriving at a settlement that has no basis in the ITA.”
Neal Armstrong. Summary of Savics v. The Queen, 2019 TCC 71 under s. 169(3).