Tax Cases

Canada Revenue Agency (CRA) administers tax-related legislations such as the Income Tax Act, the Excise Tax Act and the Employment Insurance Act. Laws are legislated in the Parliament and are interpreted by case law. We archive tax related cases that we considered informative to our clients and browsers. Please feel free to submit court decisions on tax laws that you think our browsers may be interested to read.

While CRA recognizes that taxpayers' right to minimize tax liability within the parameters of law, aggressively pushing the limits creates a risk of crossing the line between acceptable tax planning and what is considered abusive tax planning. Technically, abusive tax planning may have some legal basis but have gone beyond the legislative intent. In general, abusive tax planning avoid paying the required taxes, and thus infringing law. These plans may include tax shelters, tax havens or outright tax avoidance. Taxpayers found using illegitimate schemes are penalized and sometimes prosecuted criminally.

Federal Court Judge Roger T. Hughes awarded a retired couple Robert Gangnon and his wife Margaret, both 70 as of February 21, 2010, who live in Ajax, Ontario costs of $1,200 in their dispute of $950 interest in arrears on a miscalculated spousal RRSP payment. Their legal battle lasted 5 years. CRA maintains its position and decides to drag this case before court.

This case demonstrates the following:

1. The legal and court costs in pursuing the Gangnons highly exceeds the dispute amount ($950). It appears that CRA bureaucrats are fighting this case on principle in maintaining its absolute authority in imposing interest and penalties.
2. Court has little or no power in restricting CRA's discretion in imposing interest and penalties.
3. Taxpayers are often forced into a dilemma of incurring much higher legal costs to challenge a government agency with unlimited resources if they think that they have been wronged.

Hal Neumann of Saanich, B.C. was never the subject of a CRA investigation, but an innocent third party. In 2004, his business went through a successful audit. During the audit, the CRA learned that Leah Bonnar, an Alberta woman with whom Neumann did business with, had received commission cheques from him. She became the focus of a CRA tax-evasion investigation. Neumann gave the auditor his original documents concerning Bonnar. Neumann was at home on September 7, 2005, when he saw the police cars. When he answered the door, a CRA investigator told him she had a warrant to search his home for records regarding the Bonnar investigation. Neumann complied with orders to show all the cash he had in the house and data stored in his computer at home. Neumann felt bullied and terrorized in his own home by the activities of CRA. He launched a civil suit against the Attorney General of Canada and the CRA to seek damages for suffering from depression, paranoia and post-traumatic stress disorder ever since. A B.C. Supreme Court jury awarded Neumann $1.3 million in damages and costs on Scale B after finding the CRA search violated his privacy.

As of April 2010, the CRA has been appealing the decision. In a written statement to CBC, CRA alleged:

The Supreme Court of Canada handed down a split decision and denied Earl Lipson's appeal to deduct interest on a home mortgage for income tax purposes. Mr. Lipton took the following steps to establish a scheme that he believed will render mortgage interest paid for his home deductible:

1. Mrs. Jordanna Lipson obtained a demand loan and purchased shares of the family's company from Mr. Lipson. Since the direct use of the funds was to buy the investment, interest on this loan would be deductible.
2. Mr. Lipson then used the funds to buy the home.
3. The couple took out permanent financing secured by a mortgage from a bank for $562,500 on the new home, and used the proceeds to repay the demand loan the same day. Under a specific tax rule, a new loan will be treated in the same way as the loan it replaces when determining whether interest is deductible.

The Court held that using spousal rollover and thereby triggering the income attribution rules through a series of transactions they created was an abuse. However, it would seem inappropriate for CRA to use general anti-avoidance rule (GAAR) to deny an interest deduction based on a perceived overall ineligible purpose for a loan. In addition, for spousal transfers in particular, it appears that the planning used by the Lipsons would be acceptable as long as the spousal rollover and therefore, the income attribution rules do not apply. [archived on April 29, 2009]

Wayne Stein and Malka Stein of British Columbia separated in 2003 after 12 years of marriage during which the wife remained home to care for their two children. The Supreme Court of Canada handed down the decision on June 12, 2008 that the Court of Appeal's order be set aside and held that contingent tax liabilities should be shared equally by the estranged spouses. This sets a new benchmark in family law regarding division of contingent liability. [archived on May 1, 2009]

On February 26 2009, the Federal Court of Appeal upheld the decision of the Tax Court of Canada in the case of Prevost Car Inc. v. The Queen, 2008 TCC 231.

The only issue before the court of appeal was the interpretation of the term "beneficial owner" in the Canada-Netherlands treaty. Lower tax court ruled that the beneficial owner of a dividend is the person who assumes and enjoys all attributes of ownership of the dividend, including control of the dividend received. The court of appeal affirmed this interpretation.

The Crown's argument that beneficial owner should be the person who ultimately benefits from the dividend was rejected. The court stated that such a pejorative view of holding companies had not been adopted under Canadian law nor by the international community.

The Prevost decision is a welcome reaffirmation that choosing to locate a holding company in a tax-efficient jurisdiction is a legitimate tax planning. [archived on May 18, 2009]

Jacques Dagenais appealed against the assessment from CRA regarding the deductibility of U.S. capital gain tax paid from winning lotteries in 1995.

The tax court held that foreign tax paid in this circumstance is not deductible in Canada citing that lottery gains within the meaning of paragraph 126(1)(a) of the Income Tax Act are not taxable in Canada. Double dipping is improper. The appeal was dismissed on March 22, 1999. [archived on May 21, 2009]

Yin Li appealed against denial under the federal Income Tax Act (Act) of claimed employment expenses of $55,945 and $50,793 respectively for his 2015 and 2016 taxation years.

The tax court dismissed his appeal due to a lack of T2200 Declaration of conditions of employment, bona fide payments of employment expenses claimed. [archived on May 21, 2009]