Tax season isn’t just the time of year where we pay our fair share to the government. It’s also that time when we butt heads with the powers that be when it comes to how much we owe.
Tax disputes are evidentiary disputes that require digging to prove a case. They are also legal disputes based on the interpretation of certain tax provisions, and always occur between the government (the Canadian Revenue Agency) and taxpayers.
One high profile tax dispute which has received attention as of late can be seen between Amazon.com Inc and the IRS–where over $2 billion in tax adjustments has been called into question. The IRS believed Amazon undervalued specific assets (i.e. intellectual property) and is arguing against the transferring of such assets to Amazon’s European headquarters. Amazon argues the IRS tried to regulate the company after the fact, placing a restriction to make the case for its dispute. This is just one example of a tax case, and as tax lawyer Yoni Moussadji explains, a lot of tax disputes are about avoidance and the shuffling of assets, often overseas.
“Over the past few years, CRA has placed significant focus on international tax avoidance, so we’ve seen a marked increase in tax disputes relating to Canadians that own assets outside of Canada and to Canadian businesses that operate internationally,” says Yoni Moussadji to Yahoo Finance Canada.
Moussadji is part of the Toronto-based firm, Counter Tax Lawyers, which operates through a legal lens and also draws on analytics and automation to “generate better strategies and win better litigation results,” says Moussadji. Tax dispute resolution is the firm’s focus. Moussadji says most of their clients are fighting reassessments of at least $150,000, and the largest dispute they’ve handled is $25 million.
“We usually get involved when CRA sends a letter threatening a large reassessment or demanding money,” says Aprile. And the majority of disputes he handles are made on behalf of families and owner-managed businesses.
Moussadji notes that those who receive a reassessment from CRA, one they have contention with, need to file the objection notice (the “Objection Stage”) within 90 days of the date of the reassessment. During this stage, which is part of an internal process of information gathering, an appeals officer from CRA will review the dispute and decide whether to change the reassessment or not. It takes typically nine to 12 months to assign an appeals officer to then review an objection, adds Aprile. Most of the exchanges between the client and appeals officer are done so in writing or over the phone.
“We find that appeals officers want to see new evidence or documents to support that the reassessment was wrong because the burden is on the taxpayer to show that the reassessment is wrong,” explains Moussadji.
The next step is to bring the case to the Tax Court of Canada. A person has 90 days after the CRA’s decision at the objection stage and the process in Tax Court stage roughly takes 18 months, but, it also often takes a long time to secure a court date if you are going to a hearing. Moussadji reminds that frequently Tax Court appeals settle before a hearing.
“It is normal to see a settlement within a year of filling the notice of appeal,” he says.
The government is prohibited from settling appeals based on dollars and cents, and most simple tax disputes can be resolved as part of CRA’s objection process, which requires written submissions to the government and then working with the government lawyer to negotiate a settlement.
“CRA and the Tax Court of Canada are heavily backlogged and it can take a long time to resolve a tax dispute,” Moussadji says. And taxpayers who wish to correct prior omissions to their financial assessment can do so through the Voluntary Disclosures (“VDP”). If you know you have made an error, this is the step to take.
A taxpayer must come forward before the CRA takes any action to audit or assess the taxpayers for the disclosure to be considered valid, though, explains Moussadji. He also notes a significant changes in the VDP that came into effect in March 2018. Relief aid was reduced, for one. The CRA also now has the power to impose penalties even for valid voluntary disclosures, says Moussadji.
It’s set up in a two-track program too: the general (for minor omissions) and the limited program (for major or intentional omissions). Under the limited program, CRA will impose late-filing penalties and only cancel the gross-negligence penalties. CRA can determine which program a taxpayer falls into, too, but regardless of which program one falls into, Moussadji says it is important to act quickly.
A hot presser dispute seen currently is the contention with the carbon tax, which Ontario Premier Doug Ford is currently challenging in court.
“In all cases, it comes down to building the case, identifying and filling the gaps, and being persuasive,” adds Moussadji.