Restaurant Le Relais – Quebec Court of Appeal finds that the mere erroneous exercise of audit discretion did not ground damages against the ARQ/CRA

The Tax Court had been critical of the ARQ auditor for using an arbitrary alternative method for determining the sales of a Quebec restaurant company for GST/QST purposes, and allowed its appeal. The company then brought an action against the ARQ and CRA for damages.

Bélanger JCA found that the prescription period for this damages action did not start running until the Tax Court judgment, since it was only at that point that “the injury actually manifested itself” - so that the company’s action was not time-barred. However, she found that the ARQ/CRA should not be liable for damages for the improper exercise of the ARQ auditor’s discretion in choosing an inappropriate audit method, stating:

It is therefore not in all cases where discretion has not been properly exercised that the government authority can be held liable for damages. It is the abusive or unreasonable exercise of discretion, marked by bad faith or amounting to gross negligence, carelessness or serious recklessness, that may lead to holding the State liable, as contrasted to the erroneous exercise of the discretion.

Neal Armstrong. Summary of Restaurant Le Relais de Saint-Jean Inc. v. Agence du revenu du Québec, 2020 QCCA 823 under General Concepts – Negligence, fiduciary duty and fault.