Tax Jurisdiction in Canada
In Canada, two main courts handle tax matters:
- Tax Court of Canada: This court has exclusive jurisdiction over the validity of tax assessments under the Income Tax Act and the Excise Tax Act and can hear appeals and references relating to tax matters. Conversely, it is limited, given that it cannot solve administrative rights and can only refer a decision to the Minister of National Revenue for reconsideration.
- Federal Court: This court has jurisdiction to judicially review decisions of federal boards and tribunals, including discretionary decisions of the Minister relating to tax matters. It does not have jurisdiction to hear appeals of tax assessments or other non-discretionary decisions in tax matters. Unlike the Tax Court, the Federal Court has broad remedial powers and can order the Minister to take or refrain from specific actions.
On June 28, 2024, the Supreme Court of Canada issued key decisions in the “Dow Chemical Canada ULC v. Canada” and “Iris Technologies v. Canada” cases, addressing tax jurisdiction issues. These decisions clarify the respective powers of the Tax Court of Canada and the Federal Court in tax matters.
Dow Chemical Canadá ULC vs. Canada
Facts
Dow Chemical Canada ULC (Dow) entered into a loan agreement with a related Swiss company on non-competitive terms, which resulted in filing certain income and expenses in the fiscal years 2006 and 2007. The Minister of National Revenue reviewed these transactions under Article 247(2) of the Income Tax Act (ITA), applying the Transfer Pricing rule, which increased Dow’s income significantly for 2006.
Dow applied for a downward Transfer Pricing adjustment under Article 247(10), which provides discretion to the Minister to adjust if circumstances are appropriate, but the Minister refused the application. Dow challenged this decision judicially in the Federal Court and appealed the 2006 reassessment to the Tax Court.
Legal Issue
The issue was whether the Minister’s discretionary decision under Article 247(10) was part of the tax assessment, which would have allowed the Tax Court to review it, or whether this decision fell under the exclusive jurisdiction of the Federal Court.
Decision
The Supreme Court of Canada, by a 4-3 majority, dismissed Dow’s appeal. Judge Kasirer explained that a “tax assessment” is a non-discretionary determination of tax liability, and a discretionary decision under Article 247(10) is based on policy considerations and not strictly on the law. Therefore, this decision does not belong to the tax assessment and must be reviewed by the Federal Court.
The judge also clarified that, although the Federal Court has jurisdiction to review discretionary decisions, the Minister must not reconsider the decision under Article 247(10). If the Federal Court overturns the discretionary decision, the Minister could reconsider it and issue a new decision, which could affect the tax assessment, which the Tax Court can review.
Iris Technologies vs. Canada
Facts
Iris Technologies Inc (Iris Technologies) filed tax returns applying for refunds under the Excise Tax Act (ETA). Following an audit, the Minister issued assessments disallowing some of the requested tax credits and imposed penalties. Iris sought judicial review of the case in the Federal Court, bringing three claims:
- Procedural unfairness during the audit prevented Iris from having an opportunity to respond to the proposed adjustments.
- The appraisals were unfounded and inconsistent with the Minister’s findings of fact.
- The assessments were made for the improper purpose of depriving the Federal Court of jurisdiction in a related proceeding.
The Attorney General applied to dismiss the application for judicial review. The Federal Court dismissed the Attorney General’s appeal, but the Federal Court of Appeal allowed the appeal and dismissed the application.
Decision
The Supreme Court of Canada unanimously dismissed the appeal and granted the Attorney General’s motion. The Federal Court did not have jurisdiction to review the first two claims as they concerned the accuracy of the tax assessment, which is the exclusive jurisdiction of the Tax Court. The Tax Court has exclusive jurisdiction to deal with challenges regarding the correction of tax assessments under Article 302 of the ETA.
Concerning the third claim, which alleged improper purpose of the Minister, all judges agreed to dismiss it. Iris Technologies presented no facts to support this claim beyond the allegation that the assessment was issued to deprive the Federal Court of jurisdiction in a related proceeding. Judge Kasirer emphasized that the Federal Court retains jurisdiction unless there is practical relief against a ministerial discretion.
Finally, Judge Kasirer noted that Iris Technologies’ application would have no practical effects, as the requested declaration would not resolve the dispute or set aside the assessments.
Decisions’ Implications
The Supreme Court’s decisions in these cases underscore the importance of understanding the specific powers of each court when addressing tax disputes. Taxpayers and legal professionals must identify the appropriate forum for their cases, as choosing the wrong court may result in delays and additional costs.
Conclusion
These rulings provide valuable guidance on jurisdiction in tax matters in Canada. Understanding the roles and limitations of the relevant courts is crucial to managing tax disputes effectively.
Source: Mondaq