In the Bakorp Management Ltd. v. The Queen (2014 FCA 104) case, the Federal Court of Appeal (FCA) chose to uphold the Tax Court of Canada’s decision to dismiss the taxpayer’s appeal, because the company failed to comply with rules related to objections and appeals lodged by large corporations. Under subsection 225.1(8) of the Income Tax Act (the Act); Bakorp Management meets the criteria to be considered a large corporation.
The taxpayer redeemed five Class A shares valued at over C$338 million ($310 million), in 1992, resulting in a deemed dividend pursuant to subsection 84(3) of the Act. This allowed the taxpayer to spread out its tax liability over a few years. The company chose to pay the largest portion during the company’s 1993-taxation year. Another was then made in 1994 and a final payment in 1995.
In 1995, the taxpayer reported C$52,912,264 as a dividend that was subject to Part IV tax, resulting in the company reporting a Part IV tax liability of C$13,333,059. However, the CRA reassessed the taxpayer and decided to reduce the deemed dividend, which was included as part of the companies taxable income to C$27,580,027. Naturally, this resulted in a reduction of the Part IV tax liability to C$6,333,059.
The taxpayer sent a Notice of Objection to the CRA. In it, they requested for the original amount of the deemed dividend paid in 1995 (C$52,912,264 million) be restored, but the authority denied their request.
Bakorp lodged a Notice of Appeal with the Tax Court of Canada (TCC), but in it, they argued that no amount of the deemed dividend be included in its income for 1995 tax year. The discrepancy in the amount payable between the taxpayer’s objection and appeal lost them the case in both the TCC and FCA.
Precise rules regarding the content of objections and appeals apply to large corporations under the Canadian Income Tax Act. Under subsection 165(1.11) of the act, a large corporation in its Notice of Objection is expected to reasonably describe each issue, specify the relief it seeks and provide both facts and reasons to support its position. Furthermore, under subsection 169(2.1), a large corporation may only appeal to the TCC regarding issues and relief contained in its Notice of Objection.
“This rule is one of several rules that effectively require large corporations to specify, at the initial objection stage, precisely what they are objecting to and what relief they are seeking in dollar terms,” said Martin Sorensen of Bennett Jones. “If the matter goes to court, the corporation is then generally precluded under subsection 169(2.1) from raising any new issues or seeking any new relief at that stage.”
“The court in this case obviously felt that the rule applied and that the taxpayer was precluded from taking the position it was trying to take. In this case, it was fatal to the taxpayer's whole case,” added Sorensen.
The TCC and FCA held that the taxpayer trying to seek very different relief in its Notice of Appeal to that of its Notice of Objection. The taxpayer had challenged the reduction of Part IV tax in the objection, but on appeal, the taxpayer was asking the courts to eliminate the Part IV tax. In the court’s view, this was not the same relief. Therefore, as a result of subsection 169(2.1) the TCC and FCA dismissed the taxpayer’s appeal.
“The lessons to be taken from Bakorp are that the courts are very willing to dismiss tax appeals that do not comply with the rules,” said John Sorensen of Gowling Lafleur Henderson. “In particular, the courts will dismiss appeals where the taxpayer adopts a course of action that directly contravenes the object and purpose of the rules for tax disputes involving large corporations.”
“Going forward, taxpayers will need to be more careful than ever when considering the issues raised and relief sought from the outset of their tax appeals,” added Sorensen.
When asked if he thought Bakorp would take the decision to the Supreme Court, Brandon Siegal of McCarthy Tétrault LLP stated that such a move would be unlikely.
“In order to be accepted by the Supreme Court (granted leave) the case must involve either a question of public importance or raise an important issue of law,” said Siegal. “Even if leave were granted success is unlikely.”
