Raising New Arguments And Issues In Tax Litigation

• Published date: 11 January 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Arbitration & Dispute Resolution, Tax Authorities
• Law Firm: Stikeman Elliott LLP
• Author: Ms Margaret Nixon

Due to the complexity of Canadian tax law, it is not uncommon for taxpayers and the minister of national revenue to refine their respective positions and identify new arguments and issues in the course of the tax dispute resolution process. However, the playing field between the minister and taxpayers is not even. The minister's unfair advantage derives from two sets of rules: (1) the "large corporation" rules, introduced in 1994; and (2) the "alternative basis" rule, introduced in 1998 and broadened in 2016. The large corporation rules prohibit large corporations from advancing alternative arguments and issues in the TCC that were not "reasonably" described in their notices of objection. In contrast, the alternative basis rule gives the minister significant latitude to raise new arguments and issues at almost any stage of a dispute. This asymmetry gives the minister an unfair procedural advantage that sometimes results in outcomes that are not based on the merits of a case.

Background to the Introduction of the Rules

Large corporation rules

Before 1994, corporations could challenge an assessment by filing a vaguely worded notice of objection (for example, "the assessment is erroneous in fact and in law") that did not identify the issues in dispute. This practice was eliminated for large corporations after the FCA decision in Gulf Canada (92 DTC 6123). Following this decision, other resource companies amended their notices of objection to raise the issues decided in the taxpayer's favour, and to obtain refunds. According to the 1993 auditor general's report, the minister estimated the total cost of the Gulf Canada decision to be $1.2 billion.

New rules were introduced (principally subsections 165(1.11) and 169(2.1)) to require large corporations to reasonably describe in their notices of objection the issues to be decided and the quantum of the relief sought. The rules bar large corporations from pursuing new issues or obtaining relief beyond what is specified in their notices of objection. According to a 1994 press release from the minister of finance, the objective of the rules was "to speed the resolution of objections and appeals, particularly by large corporations." The explanatory notes published by the Department of Finance clarified that the rules were not intended to prevent large corporations from relying on new reasons after filing a notice of objection.

Alternative basis rule

The restrictions imposed on large corporations are in striking contrast to the minister's right to...