Assessments Beyond Statute-Barred Years
Inwest Investments Ltd. v, Canada (National Revenue) 2015 BCSC 1375 (hereinafter ‘Inwest’) came before the British Columbia Supreme Court by way of summary application.
The central issue in Inwest was whether there had been a misrepresentation in the taxpayer’s return when it took the position that it did not have a permanent establishment in British Columbia. A finding of misrepresentation attributable to neglect or carelessness would have allowed a reassessment beyond the normal reassessment period.
Inwest was a privately held corporation with headquarters in BC. Its business was the operation of Future Shops. In 2001 Best Buy offered to buy the Future Shop stake of Inwest and its subsidiaries. In 2002, the transaction took place.
In a sophisticated tax scheme, Inwest realized the gain outside of the province, by affecting a tax plan that had Wesbild (shares of Wesbild held by Inwest and two of its subsidiaries) become a non-resident of BC (with non-resident directors appointed as well). As a non-resident of BC, it was no longer subject to provincial tax. The gain realized on the Future Shop shares would thus only be recognized federally.
On Wesbild’s 2002 T2, it entered “OC”, which means outside Canada, as its jurisdiction. The effect of this entry was that Wesbild had no permanent establishment in Canada, and therefore, it was not liable to any income tax in BC. Wesbild was assessed as filed in 2003. The normal reassessment period expired on June 2, 2006. CRA then identified the return for audit in 2008, and after some other delays the reassessment position was crystallized in 2010 and issued in 2011, or 5 years after the limitation period had expired. The basis for the reassessment was that Wesbild did have a permanent establishment in BC and was thus taxable there.
The central question in determining the correctness of the assessment is whether Wesbild had a permanent establishment in BC in 2002. But before this could be considered, the Crown would first need to establish that it was entitled to reassess beyond the normal period. The Crown was required to prove a) Wesbild made a misrepresentation in its 2002 return when it said it had no permanent establishment in BC and b) the misrepresentation was attributable to Wesbild’ carelessness or neglect.
Wesbild argued that it relied on a body of case law, the statute and legal opinions in arriving at its filing position. Therefore, its 2002 filing position was reasonable and did not constitute a misrepresentation. The Court in Inwest relies on Envision Credit Union (at para. 132) to support the proposition that the issue is not whether the taxpayer’s filing position is correct, but whether the taxpayer bona fide believes that it was correct.
The Court stated that you must find a misrepresentation before determining whether it was attributable to carelessness or neglect. And in this case there was no misrepresentation. The Court found that a reasonable filing position cannot be considered a misrepresentation. A “…difference of opinion between the CRA and the taxpayer is not sufficient to amount to a misrepresentation.”
The five important principles arising from the Inwest judgment (at para. 126) are as follows:
- A statement of fact on a tax return can be a misrepresentation;
- A statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable;
- The requirement that the filing position is reasonable will involve a consideration of the legal/factual issues and the actions of the taxpayers, including obtaining professional advice;
- The fairness objective of the legislation is achieved if that reasonable filing position is evident from the tax return so that the Minister may consider that position. IN turn, the objectives of finality and certainty compel the Minister to consider that filing position within the normal reassessment period; and
- A difference of opinion between the CRA and the taxpayer is not sufficient to amount to a misrepresentation.
What this seems to suggest is that if a taxpayer relies on legal advice, and indeed obtains legal and tax opinions, they can be said to have been duly diligent, such that their filing position would be considered reasonable.
In Ver v R.  TCJ no. 593, Justice Bowman was reviewing the Minister’s reassessment beyond the normal reassessment period, on the basis that expenses incurred by the appellants were personal or were not incurred. Justice Bowman made the following statement:
(a)The respondent has not established that there was a misrepresentation in the returns of income. A misrepresentation within the meaning of subparagraph 152(4)(a((i) means a misrepresentation of fact. The French version uses the words “une présentation erronée des faits”. There is no evidence and no suggestion that any of the figures in the statement of income and expense were falsified, that the goods were not bought and sold in the amounts disclosed or that the amounts claimed as expenses were not in fact incurred. The respondent’s criticism of the reporting of the loss is based upon certain propositions of law or mixed law and fact that the amounts were “not laid out for the purpose of gaining or producing income” that there was “no reasonable expectation of profit” and that the expenses were “personal or living expenses”. These points might be arguable in support of the merits of the assessments and they might form a basis for disallowance of some of the expenses, but matters of judgement such as allocation of expenses between business and personal are one thing that the Minister ought to pick up in the normal assessment process and within the three years that are given him. They are not the subject of misrepresentation within the meaning of subparagraph 152(4)(a)(i).
These cases are important to consider in situations where the Minister reassesses beyond the normal reassessment period.