In Bakorp Management Ltd. v. R., the company owned shares of another corporation that were redeemed in 1992 for $338 million. As the proceeds from the redemption were received over a number of years, Bakorp reported in 1995 the portion of the deemed dividend related to proceeds received in 1995.
The minister reassessed Bakorp’s 1995 tax year to reduce the deemed dividend to $25 million from $53 million, a reduction of $28 million. Bakorp objected to the reassessment but the minister confirmed the reassessment.
The corporation then filed a notice of appeal, taking the position the $28-million deemed dividend remaining in its 1995 income was actually received in 1993 and should be included in the corporation’s 1993 tax year, not 1995.
Bakorp took the position for the first time at the Tax Court stage that the entire $53-million deemed dividend should have been reported in the 1993 taxation year.
The CRA, surprised by the company’s position to reduce the 1995 deemed dividend to zero, brought a motion to dismiss Bakorp’s appeal, arguing the issue and relief set out in the notice of appeal were not those set out in the notice of objection.
“The court was not buying it and said: ‘You’ve just taken an about face, effectively, on this’,” says Cheryl Gibson, a partner with Dentons’ tax group in Edmonton. “I think the government was mighty shocked. If you’re sitting there as the minister and you’re expecting this appeal is going to be about the remaining $23 million of income and all of a sudden they’re talking about 100 per cent of it — that would be quite shocking. That wasn’t the appeal they were expecting.”
Gibson says if a company is going to take that position they have to have taken it in the notice of objection — they can’t then turn around and take it in the appeal.
Since 1995, the Large Corporation Rules of the Income Tax Act have applied to discourage large corporations from objecting to tax assessments as a means of keeping tax years “open.”
The Large Corporation Rules were enacted to discourage large corporations from engaging in a full reconstruction of their income tax returns for a particular year, after the objection or appeal process has started, based on developing interpretations and the outcome of court decisions in litigation involving other taxpayers.
“This was all designed because corporations were just filing objections; they didn’t even know what they wanted to object about — they wanted to take a different position and they wanted to leave these years open,” explains Gibson. “If it was that general, these rules wouldn’t be effective.”
Gibson says the lesson learned in Bakorp is that companies need to carefully assess what position they are going to take before they make their objection.
“You’ve got to really talk specifically about what you’re objecting to and I think that’s what the court found offensive here — they tried to argue in the case that it was just about an amount of deemed dividend,” says Gibson.
So why did Bakorp make the appeal it did? Developing jurisprudence or changes in interpretation of the law can spark an attempt at a new approach, says Salvatore Mirandola, a tax litigator and partner with Borden Ladner Gervais LLP in Toronto.
“This sort of thing has happened to me before in the sense that while you’re disputing something with the Canada Revenue Agency, either a case gets decided or an argument arises or the facts of your clients change in a way such that it becomes advantageous to make an argument that hadn’t been made before,” he says. “It happened to me after we had filed an objection and a case indirectly allowed us to raise new arguments nobody had thought of before.”
Mirandola says Bakorp clearly saw there was an advantage to be gained by taking the position that the entire $53-million deemed dividend should have been included in income in 1993, and it may have been a statute barred issue.
To make objections effective, often more work needs to be done at the time of the assessment, before, and immediately after to identify precisely what issues are in dispute.
“For companies that fall within the meaning of a ‘large corporation’ the way the Income Tax Act works is you essentially need to define your issues and the relief that you want from the Canada Revenue Agency at the objections stage. You need to do a lot of your thinking up-front when you decide to dispute an assessment,” says Mirandola.
If there’s a doubt about how to define an issue you’re better off including it in your objection to the CRA.
“Even if you’re not going to end up fighting it down the road, just so that it’s there and you have the ability to fight it in the Tax Court if you end up going to that stage,” he says.
A notice of appeal has been filed with the Federal Court of Appeal, so the Tax Court’s decision may not be the final word on this case.
Gibson says she can see why counsel for Bakorp thought that if it was just talking about deemed dividends and what the right amount was, why couldn’t it take the position that it’s somewhere between zero and what was filed?
“Why isn’t that good enough? I assume that’s what the appeal is going to be about,” she says.