This is the second instalment of Arguably the Best, our year-long series on improving your litigation skills.
Since most disputes between taxpayers and the Canada Revenue Agency settle out of court, “tax litigation” is a bit of a misnomer. “Tax dispute resolution” is a better description. This practice area requires counsel to navigate complex technical issues and manage the colourful dynamics that can emerge when an immovable object (the taxpayer) meets an irresistible force (the CRA auditor).
The “reverse onus” is one of the most salient aspects of tax dispute resolution. The “presumption of innocence” does not apply; rather, a CRA assessment is usually considered presumptively correct unless the taxpayer proves otherwise. This is decidedly inconvenient for the taxpayer, and counterintuitive for anyone familiar with civil litigation, where the party who initiates the litigation is obliged to move the case forward. Your first task may be to correct any misconceptions your client has about his role in the process. Clients often assume that if their position is “correct,” or at least defensible, they will ultimately prevail. But both clients and counsel must be proactive in dealing with the CRA.
For counsel, managing the audit dynamic and the flow of information is critical. Taxpayers are often suspicious of the CRA and fearful of disclosing too much, but resisting an auditor’s requests for information is a bad strategy. Tax disputes can erupt simply because of a taxpayer’s reluctance or inability to locate and produce what the auditor has requested. Audits can also go awry if the information provided is incomplete, inaccurate or simply not understood.
Know your place
Taking the lead in negotiations with the CRA is often necessary where the issues raised by the audit are complex or involve questions of statutory interpretation. Intervention may also be required if the CRA has requested documents that are irrelevant or privileged. But every case is unique, and in some circumstances the presence of a lawyer can signal to the CRA that your client has something to hide.
In the early stages of an audit, you may be more effective counselling the client from behind the scenes. Letters to the CRA may have to be ghostwritten, especially in response to inquiries about sensitive or contentious issues. Even a cover letter enclosing documents may require input from a lawyer if the significance of the documents may not be readily apparent to the auditor.
Know your audience
In the assessment/objection stage, the challenge is to figure out how best to make your pitch to the person dealing with your client’s file, whether it is a novice fresh out of training or a seen-it-all 20-year veteran of the audit division.
Your client’s position may be supported by the case law, but a written submission that merely cites the relevant cases is not enough. Many CRA officials are disinclined to search out and read case law for themselves. They may be more inclined to do so if you reproduce key excerpts in your submission and enclose copies of the cases.
If the facts are complicated, set them out cleanly and concisely. Stick with short sentences and bullet points. You may need to use diagrams to illustrate a series of complex transactions — whatever is necessary to get the point across. Communicating with the CRA is like approaching a toll booth: You can’t just blindly toss your coins out of the car and hope to pass through. You can only get somewhere if your coins land in the basket.
Be tenacious
In all cases, but particularly those in which the issues are complex, it is important to check in with the CRA officer regularly to make sure he understands your client’s position and to ensure there are no misunderstandings regarding material facts. Following up by phone should allow you to gauge his or her response to your client’s position — and to make sure he or she has actually read your submissions. If not, you may have to insist on meeting with him or her simply to review the submission.
Credibility is frequently a source of disagreement. Many cases go to trial because an auditor believes the taxpayer has provided inaccurate or misleading information. If your client is credible and can stand up to questioning, arrange a meeting so that the CRA officer can assess the client’s demeanour in a setting that you can control.
If the auditor is being unreasonable or arbitrary, consider requesting that his team leader sit in on the meeting. Your request may be resisted, but team leaders ordinarily have final approval over settlements, so issues are more likely to be resolved if one is present. Even if the meeting does not result in a resolution, it typically reduces the number of issues in dispute.
Make your best case early
Once a CRA official renders a decision in writing, the Law of Bureaucratic Inertia comes into play: any decision made in writing becomes difficult to reverse, because the official is now personally invested in it. The best settlements are often achieved at the assessment proposal stage. Unfortunately, this means that your biggest professional victories may never make it into print.
Pick your moments
There are certain windows of opportunity in which a settlement offer is more likely to be considered by the CRA. These are (1) at the assessment proposal stage; (2) after the objection has been assigned to an appeals officer; (3) after the exchange of pleadings when an appeal has been initiated; (4) after examinations for discovery have been completed; and (5) just prior to trial.
You can create another window of opportunity by bringing the Crown to the table for a case management, trial management, or settlement conference. One or more of these types of conferences can help to narrow down the issues and shorten the length of trials. At the very least, you can use the settlement conference to obtain a judge’s frank assessment of the merits of your client’s case, and identify and address any weaknesses in advance.
Agree to disagree
Settlements are not always possible. In civil litigation, parties often seek the least expensive resolution possible, viewing court as a last resort. Not so in the case of tax disputes. High litigation costs are not typically a deterrent for the CRA, because the cost of paying the Department of Justice lawyer assigned to the case is the same whether a case settles or goes to trial. A big win for the CRA can also be a significant source of tax revenue.
In other cases, settlement is impossible because the litigation officer assigned to oversee the case is entrenched, and will not consider a compromise. Sometimes the case involves an all-or-nothing dispute, and there is no settlement that can be made that is in accordance with the Income Tax Act. If any of these factors are in play, the CRA will not be moved by sympathy for your client’s predicament, or even the prospect of a bad precedent. Some cases are destined for court, and learning to spot them early will save your clients a great deal of time and frustration.
Keep it simple
Tax issues are often extremely technical. This can make it difficult to draft a notice of appeal that is both clear and compelling. Keep the language as simple as possible. Keep it brief. Make the paragraphs short, with only a sentence or two in each. Doing so will make it easier for the Crown to respond meaningfully to each fact alleged, and for you to identify all of the points in contention.
When in doubt, show your draft notice of appeal to any non-tax lawyer you know. If they can follow the argument, chances are it is ready to file. If they have no idea what you’re talking about, it is time to go back to the drawing board.
Pick your best argument and run with it
Thoroughness is a virtue in tax planning, but a good tax litigator knows when to get rid of excess baggage. Pleading everything but the kitchen sink in your notice of appeal will signal to the Crown and the judge that you lack confidence even in your strongest argument. Rarely will you be able to pull off more than one alternative argument.
Play nicely with others
Confer with the Crown on an agreed statement of facts, and start this process early so you are not still quibbling over wording on the eve of trial. Judges are often grateful for an agreed statement because it eliminates a lot of flipping back and forth between the pleadings to determine what has been admitted and denied by each party.
You should also determine whether the Crown disputes the authenticity or relevance of any of the documents you intend to rely upon at trial. You can easily address this issue at the examination for discovery. It makes the conduct of the trial much smoother if you can agree that both parties will enter their books of documents as exhibits.
Keep an eye on costs
Cost recovery is notoriously poor in the Tax Court. The existing tariff rates bear no resemblance to the billable rates of most intermediate or senior counsel. But you may be able to take advantage of the new rule that provides for solicitor-client costs to a party that makes a settlement offer in writing and then obtains a judgment as or more favourable than the terms of the offer. (See proposed rule 147(3.1) to (3.3) of the Tax Court of Canada Rules (General Procedure).)
Of course, where the case involves an all-or-nothing issue, no settlement may be possible. In order to protect your right to argue for increased costs, you might make an offer simply to allow the appeal without costs, or for a nominal amount of costs. It remains to be seen how generously the Tax Court will interpret this rule, but most tax practitioners will agree: any taxpayer with the chutzpah to take on the CRA and win will feel more than entitled to receive a healthy cheque back from the government.
Adrienne K. Woodyard is a tax litigator with Davis LLP in Toronto and a member of The Advocates’ Society.
Since most disputes between taxpayers and the Canada Revenue Agency settle out of court, “tax litigation” is a bit of a misnomer. “Tax dispute resolution” is a better description. This practice area requires counsel to navigate complex technical issues and manage the colourful dynamics that can emerge when an immovable object (the taxpayer) meets an irresistible force (the CRA auditor).
The “reverse onus” is one of the most salient aspects of tax dispute resolution. The “presumption of innocence” does not apply; rather, a CRA assessment is usually considered presumptively correct unless the taxpayer proves otherwise. This is decidedly inconvenient for the taxpayer, and counterintuitive for anyone familiar with civil litigation, where the party who initiates the litigation is obliged to move the case forward. Your first task may be to correct any misconceptions your client has about his role in the process. Clients often assume that if their position is “correct,” or at least defensible, they will ultimately prevail. But both clients and counsel must be proactive in dealing with the CRA.
For counsel, managing the audit dynamic and the flow of information is critical. Taxpayers are often suspicious of the CRA and fearful of disclosing too much, but resisting an auditor’s requests for information is a bad strategy. Tax disputes can erupt simply because of a taxpayer’s reluctance or inability to locate and produce what the auditor has requested. Audits can also go awry if the information provided is incomplete, inaccurate or simply not understood.
Know your place
Taking the lead in negotiations with the CRA is often necessary where the issues raised by the audit are complex or involve questions of statutory interpretation. Intervention may also be required if the CRA has requested documents that are irrelevant or privileged. But every case is unique, and in some circumstances the presence of a lawyer can signal to the CRA that your client has something to hide.
In the early stages of an audit, you may be more effective counselling the client from behind the scenes. Letters to the CRA may have to be ghostwritten, especially in response to inquiries about sensitive or contentious issues. Even a cover letter enclosing documents may require input from a lawyer if the significance of the documents may not be readily apparent to the auditor.
Know your audience
In the assessment/objection stage, the challenge is to figure out how best to make your pitch to the person dealing with your client’s file, whether it is a novice fresh out of training or a seen-it-all 20-year veteran of the audit division.
Your client’s position may be supported by the case law, but a written submission that merely cites the relevant cases is not enough. Many CRA officials are disinclined to search out and read case law for themselves. They may be more inclined to do so if you reproduce key excerpts in your submission and enclose copies of the cases.
If the facts are complicated, set them out cleanly and concisely. Stick with short sentences and bullet points. You may need to use diagrams to illustrate a series of complex transactions — whatever is necessary to get the point across. Communicating with the CRA is like approaching a toll booth: You can’t just blindly toss your coins out of the car and hope to pass through. You can only get somewhere if your coins land in the basket.
Be tenacious
In all cases, but particularly those in which the issues are complex, it is important to check in with the CRA officer regularly to make sure he understands your client’s position and to ensure there are no misunderstandings regarding material facts. Following up by phone should allow you to gauge his or her response to your client’s position — and to make sure he or she has actually read your submissions. If not, you may have to insist on meeting with him or her simply to review the submission.
Credibility is frequently a source of disagreement. Many cases go to trial because an auditor believes the taxpayer has provided inaccurate or misleading information. If your client is credible and can stand up to questioning, arrange a meeting so that the CRA officer can assess the client’s demeanour in a setting that you can control.
If the auditor is being unreasonable or arbitrary, consider requesting that his team leader sit in on the meeting. Your request may be resisted, but team leaders ordinarily have final approval over settlements, so issues are more likely to be resolved if one is present. Even if the meeting does not result in a resolution, it typically reduces the number of issues in dispute.
Make your best case early
Once a CRA official renders a decision in writing, the Law of Bureaucratic Inertia comes into play: any decision made in writing becomes difficult to reverse, because the official is now personally invested in it. The best settlements are often achieved at the assessment proposal stage. Unfortunately, this means that your biggest professional victories may never make it into print.
Pick your moments
There are certain windows of opportunity in which a settlement offer is more likely to be considered by the CRA. These are (1) at the assessment proposal stage; (2) after the objection has been assigned to an appeals officer; (3) after the exchange of pleadings when an appeal has been initiated; (4) after examinations for discovery have been completed; and (5) just prior to trial.
You can create another window of opportunity by bringing the Crown to the table for a case management, trial management, or settlement conference. One or more of these types of conferences can help to narrow down the issues and shorten the length of trials. At the very least, you can use the settlement conference to obtain a judge’s frank assessment of the merits of your client’s case, and identify and address any weaknesses in advance.
Agree to disagree
Settlements are not always possible. In civil litigation, parties often seek the least expensive resolution possible, viewing court as a last resort. Not so in the case of tax disputes. High litigation costs are not typically a deterrent for the CRA, because the cost of paying the Department of Justice lawyer assigned to the case is the same whether a case settles or goes to trial. A big win for the CRA can also be a significant source of tax revenue.
In other cases, settlement is impossible because the litigation officer assigned to oversee the case is entrenched, and will not consider a compromise. Sometimes the case involves an all-or-nothing dispute, and there is no settlement that can be made that is in accordance with the Income Tax Act. If any of these factors are in play, the CRA will not be moved by sympathy for your client’s predicament, or even the prospect of a bad precedent. Some cases are destined for court, and learning to spot them early will save your clients a great deal of time and frustration.
Keep it simple
Tax issues are often extremely technical. This can make it difficult to draft a notice of appeal that is both clear and compelling. Keep the language as simple as possible. Keep it brief. Make the paragraphs short, with only a sentence or two in each. Doing so will make it easier for the Crown to respond meaningfully to each fact alleged, and for you to identify all of the points in contention.
When in doubt, show your draft notice of appeal to any non-tax lawyer you know. If they can follow the argument, chances are it is ready to file. If they have no idea what you’re talking about, it is time to go back to the drawing board.
Pick your best argument and run with it
Thoroughness is a virtue in tax planning, but a good tax litigator knows when to get rid of excess baggage. Pleading everything but the kitchen sink in your notice of appeal will signal to the Crown and the judge that you lack confidence even in your strongest argument. Rarely will you be able to pull off more than one alternative argument.
Play nicely with others
Confer with the Crown on an agreed statement of facts, and start this process early so you are not still quibbling over wording on the eve of trial. Judges are often grateful for an agreed statement because it eliminates a lot of flipping back and forth between the pleadings to determine what has been admitted and denied by each party.
You should also determine whether the Crown disputes the authenticity or relevance of any of the documents you intend to rely upon at trial. You can easily address this issue at the examination for discovery. It makes the conduct of the trial much smoother if you can agree that both parties will enter their books of documents as exhibits.
Keep an eye on costs
Cost recovery is notoriously poor in the Tax Court. The existing tariff rates bear no resemblance to the billable rates of most intermediate or senior counsel. But you may be able to take advantage of the new rule that provides for solicitor-client costs to a party that makes a settlement offer in writing and then obtains a judgment as or more favourable than the terms of the offer. (See proposed rule 147(3.1) to (3.3) of the Tax Court of Canada Rules (General Procedure).)
Of course, where the case involves an all-or-nothing issue, no settlement may be possible. In order to protect your right to argue for increased costs, you might make an offer simply to allow the appeal without costs, or for a nominal amount of costs. It remains to be seen how generously the Tax Court will interpret this rule, but most tax practitioners will agree: any taxpayer with the chutzpah to take on the CRA and win will feel more than entitled to receive a healthy cheque back from the government.
Adrienne K. Woodyard is a tax litigator with Davis LLP in Toronto and a member of The Advocates’ Society.
