Jurisdiction for Contesting Assessments: Reprehensible Conduct, the Supreme Court, and Ongoing Confusion

In a pair of decisions last summer, the Supreme Court (SCC) addressed a perennial issue in Canadian tax litigation: the jurisdictional boundaries between the Tax Court (TCC) and Federal Court (FC).

The SCC confirmed the courts’ traditional understanding of this question. The TCC has jurisdiction to address disputes over the correctness of an assessment, which per section 18.5 of the Federal Courts Act ousts FC jurisdiction over assessments, along with the processes by which they come about. The FC has jurisdiction to review the Minister’s decision whether or not to exercise discretionary powers, even if the discretionary powers may affect the correctness of an assessment.

Despite seeking to clarify the law, the SCC's reasons include a turn of phrase that has already caused confusion in courts below. The Supreme Court either quietly expanded the scope of judicial review in tax cases, or it misconstrued a prior authority.

In Iris and Dow, the SCC referred to the Federal Court of Appeal (FCA) in JP Morgan Asset Management (Canada) Inc. (JP Morgan) for the proposition that “the Tax Court does not have jurisdiction to set aside an assessment ‘on the basis of reprehensible conduct by the Minister leading up to the assessment, such as abuse of power or unfairness’”. Because the TCC did not have jurisdiction, the Federal Courts Act did not bar the FC from acting. So, the SCC concluded that the appropriate forum for relief from “reprehensible conduct” fell to the FC.

But this is not quite what the FCA held in JP Morgan. The FCA did conclude that TCC lacked jurisdiction to address "reprehensible conduct", and as such, section 18.5 did not bar judicial review.

But, it explained that even then, the taxpayer cannot generally resort to judicial review, because the TCC process provides an adequate alternative forum for issues relating to the assessments themselves. Available tort remedies, such as for breach of contract or misfeasance in public office, can provide remedies for procedural concerns that prevent taxpayers from proceeding through judicial review.

The FCA did not foreclose judicial review relating to audits and assessments entirely. But the situations it suggested, in obiter, that judicial review might be available were extreme: audits used as a tool of political persecution, or discriminatory director’s liability assessments. Even in those circumstances, the Crown could point to alternative forums the Taxpayer should resort to before seeking a certiorari remedy in judicial review.

In the former case, the taxpayer appears to have a reasonable basis to allege misfeasance or abuse of office, and the additional discovery afforded by filing an action may help them get to the bottom of their claim. In the latter, despite CRA’s discriminatory conduct, the discriminated-against director still faces joint-and-several liability for the corporation’s arrears. The issue is that their co-directors were not pursued by the CRA, which can be remedied through a suit against them for contribution (ITA 227.1(7)), or potentially a mandamus application compelling the CRA to pursue them

So, the availability of judicial review to redress “reprehensible conduct” is much narrower under JP Morgan than the SCC suggests. In the authors’ view, the SCC likely did not intend to change the law. But taxpayers could use the SCC’s phrasing to attempt to challenge assessments in FC on the basis of “reprehensible conduct”.

This has already happened. In September, the FC allowed a taxpayer’s judicial review application, seeking to prevent the Minister from assessing tax years not included with a voluntary disclosure after agreeing that the disclosure was complete. The SCC’s comments discussed above figured prominently in the FC concluding it had jurisdiction.

This FC decision is currently under appeal, and practitioners should watch the outcome to see whether Iris and Dow changed the substantive law on this question. But it is unfortunate that the Supreme Court weighing in did not fully resolve this uncertainty.