After approximately two years of litigation, Jeff Li recently settled a tax court case with the Department of Justice of Canada (DOJ), avoiding a trial that could have lasted 5-6 days. In this case, the client is the owner of a family-run business. Having reported a very low income and bought a house at approximately the same time, she was audited by the Canada Revenue Agency (CRA) at both corporate and individual levels.
As usual, CRA took an aggressive, and oftentimes, unreasonable position in the auditing. It disregarded a lot of legitimate business expenses by disallowing them as deduction of the income. As the client mixed up her personal accounts with her business accounts, the client was assessed of a large amount of shareholder benefits as well. Finally, the CRA imposed a gross negligence penalty pursuant to section 163(2) of the Income Tax Act. This penalty is regularly imposed on every taxpayer who is audited by CRA. Basically, CRA will say that the taxpayer ought to have known that it under-reported incomes in the tax returns, and therefore the penalty is warranted.
After taking on the file, the legal team at the Law Office of Jeff Li and the client did tremendous amount of work. As Jeff Li was retained towards the deadline of the appeal period, he quickly prepared and filed two Notices of Appeal with the Tax Court of Canada, listing all possible grounds of appeal. The client had to collect all the past expense records and bank accounts, and an accountant was hired to assist in the preparation and presentation of the case.
The CRA was represented by the DOJ. Like the CRA, DOJ took an aggressive position in the litigation at the beginning. However, after the examination for discovery, the DOJ loosened its position, as concrete proof was presented with some of the errors made by the CRA auditor. A settlement meeting was held at the DOJ offices in downtown Toronto.
However, DOJ changed counsel after this. The new lawyer took the same position as the previous counsel at the beginning of the case, as if the examination for discovery had never happened. The settlement discussion was off the table, and the parties had to take all the steps to prepare a full-fledged trial. During the handling of this file, Jeff Li had to deal with 3 different lawyers at the DOJ. “This added the costs to the litigation, and was sometimes frustrating to explain the work that had been done and the consensus that had been made,” said Jeff Li.
One day before the scheduled trial, Jeff Li convinced the DOJ lawyer to schedule another meeting, with both the taxpayer and the auditor present. The meeting bore fruit: the assessed amounts of unreported incomes were significantly reduced, and all gross negligence penalties were removed. The client is more than satisfied.
Jeff Li explains that “It is normal that the CRA and DOJ take a very aggressive position when a taxpayer is selected for audit. Any settlement will ultimately depend on the strength of the taxpayer’s case and trial preparation. Once CRA makes a decision, it will be final unless it is changed by CRA itself at the objection stage, or vacated by the tax court. At the appeal stage, only the Tax Court has the power to vacate the CRA decision. If you cannot win at the court, DOJ (CRA’s lawyer) will not settle with you. So you need to take every procedural step and present a strong case that you can win at trial in order for CRA to consider a settlement”.
Jeff Li added, “There is no shortcut to settlement. The client’s and the law firm’s hard work and persistence deserve a credit in this litigation”.
Related Articles