Tax Settlements in Canada: Is it Time to Adopt US Style ADR?


Settlement is about compromise.  It’s about grabbing what you can and getting out with a deal you know you can live with.  So it’s important that the client understand that.  It’s all about compromise.[1]

The vast majority of legal disputes are settled prior to trial. This is axiomatic in virtually every area of law, be it personal injury, contract disputes, commercial litigation, family disputes, etc.  This is no less true in the tax law context.  Very few tax disputes make it to trial.  In many circumstances this makes logical sense.  Given that most tax disputes involve numbers, it is quite appropriate that parties are able to reach a number during the course of the litigation that makes sense to everyone.  And by this I mean both parties are usually required to make some concession.  After all, there is the old adage that a successful settlement leaves both parties feeling slightly less than happy.

In the context of settlements, it becomes critical to first identify the stakeholders and to determine their respective desires.  The taxpayer will want to pay as little as possible.  The Minister will want to ensure that the taxpayer is paying its fair share.  And the Court itself will primarily be concerned with reducing the number of cases pushed to trial.

One thing that is likely agreed upon by all interested parties (at least tacitly) is that trial should be avoided where possible.  Usually with very little experience in Court, the taxpayer will understandably try to avoid appearing in a courtroom setting to be cross-examined by the Crown.  By avoiding trial, the Minister may reduce costs by ensuring only the most necessary issues make it to Court.  But most importantly, the Court itself operates with limited resources and encourages parties to settle.

In this article, I will examine the apparatus available to parties seeking to explore the prospects of settlement prior to trial.  I will initially examine the process of informal settlements.  Following this will be an examination of both the Tax Court of Canada (“TCC”) settlement conferences pursuant to section 126.2 of the Tax Court of Canada Rules (General Procedure) and the fast track settlement conferences provided for in Practice Note 24. The impact of the Preliminary Rulings Docket on the potential for settlement will be reviewed.  A comparative analysis will take place between the Canadian and American settlement apparatuses will be provided.  Last, I will explore a few innovative ways to try to achieve a settlement early on in the litigation process.

The purpose of this discussion is to highlight the various ways in which settlement of a simple or a complex tax dispute may be achieved using existing means.  Ultimately, it should be apparent that there are many ways to settle a tax court appeal and it is likely in everyone’s interests for matters to settle as early as possible.

Informal Settlements

It is abundantly clear that settlement involves compromise.  A compromise is possible in most tax cases.  A transfer pricing dispute can be settled – with assistance from expert opinion evidence – on the basis that an arm’s length party would pay x dollars for the goods or services at issue.  A net worth appeal can be settled on a variety of bases, including amounts that can be proven to not have been personal expenditures.

There will, on occasion, be tax disputes where there can be no settlement based solely on quantum.  For example, a capital versus income case would be difficult to settle on a principled basis[2], since each party will ostensibly have taken a position on the essential character of the asset or transaction.  However, the tax bar has been quite creative in settling even this type of appeal.  In other words, there is virtually no remaining tax issue that cannot be resolved early in the litigation.  Without using the avenues afforded by the TCC, issues are often times settled informally by the parties as a result of discussions between their legal counsel in the course of litigation steps and before trial.

Settlement Authority

In the tax litigation context, the Department of Justice (“DOJ”) is instructed by a team of Canada Revenue Agency (“CRA”) litigation officers.  DOJ counsel will usually make recommendations on settlement but the final word rests with the litigation officer with carriage of the matter.

The CRA has issued many administrative policies on settlement.  An important policy was released in 2010, which provided significant guidance on settlements by the DOJ.[3]  The settlement protocol acknowledges that the earliest possible resolution of a dispute benefits all parties, and that an informal settlement provides significant advantages over one that is court-imposed.

This settlement protocol is especially important because it grants the DOJ authority to settle low-impact cases before the TCC without the need to seek instructions from the CRA.  It authorizes the DOJ to settle both income tax and GST/HST Class A general procedure appeals where the issue is factual in nature, and most informal procedure cases.[4]

The purported reasoning behind the protocol is obvious.  Prior to the issuance of this policy, the CRA was inundated with DOJ counsel requests seeking instructions for informal procedure settlements.  This protocol effectively eliminated a significant amount of relatively minor communications between the DOJ and the CRA.  Both the DOJ and the CRA have been operating in an environment with limited resources, and so the settlement protocol was a welcomed development.

Furthermore, it gave the DOJ the ability to settle Class A general procedure appeals where the issues were primarily factual.  Since most cases at that level involve unreported income and disallowed expenses, and since most of those cases are factually driven, it followed that many of the cases handled by junior counsel could now be settled more efficiently.


Most tax litigators are familiar with how to communicate a settlement offer.  It will usually contain a recitation of relevant facts, the issue, a legal analysis, supporting documents and in most cases a reference to Rule 147(3.1) of the Tax Court Rules.[5] The question becomes, when is the best time to offer to settle? This will in most cases hinge on the appeal itself.  If it is a relatively straight-forward issue and is not document-intensive, it may be appropriate to offer to settle early in the litigation process.  The reality is that both parties will want to complete examinations for discovery prior to any settlement discussions.  That way all the cards are laid out and both parties should know the strengths and weaknesses of both sides.

For the purposes of Rule 147(3.1) or (3.2) , it will make sense to offer to settle the appeal as early as possible.  Those rules read as follows:

(3.1) Unless otherwise ordered by the Court, if an appellant makes an offer of settlement and obtains a judgment as favourable as or more favourable than the terms of the offer of settlement, the appellant is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, as determined by the Court, plus reasonable disbursements, and applicable taxes.

(3.2) Unless otherwise ordered by the Court, if a respondent makes an offer of settlement and the appellant obtains a judgment as favourable as or less favourable than the terms of the offer of settlement or fails to obtain judgment, the respondent is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, as determined by the Court, plus reasonable disbursements, and applicable taxes.

That way, the offeror is able to maximize its opportunity to be awarded substantial indemnity costs from the date of the settlement offer onward.  More importantly, citing this rule prompts the party receiving the offer to settle to seriously consider the offer, lest it be left in the unenviable position of having to pay enhanced costs following a trial.

The types of cases that are generally more capable of being resolved early include those involving a valuation issue, reasonability of expenses, the purpose of an expenditure or the timing of an event.[6]

Best Practices

It is important to look for opportunities to settle at every stage of the litigation.  In some circumstances, this may be quite early in the process.  As counsel for the taxpayer in a tax appeal, a quick call to the Crown to determine the battleground can not only set the goal posts of the dispute but can also lead to early settlement discussions.

Trying to settle an appeal is much like planning for a trial; preparation is key. Carefully review the facts, supporting evidence and all relevant legislation before pitching settlement.  Approach settlement discussions with integrity and honesty.  Given the unique characteristics of tax appeals, it is possible you may be involved in other files with that same opposing counsel on other occasions.  As wiser counsel have said, the system is human and negotiations should be approached by looking at and appreciating the position of the other side.

Settlement Conferences

Apart from informal settlements, the conventional settlement conference is the preferred apparatus most used by parties trying to settle a tax appeal. A settlement conference is a confidential conference where the parties and their counsel confer in a boardroom in the presence of a TCC Judge and is governed by section 126.2 of the Tax Court Rules.  The Rule contains a series of operating principles and conditions that must be satisfied if a settlement conference is to be ordered.

It is important to note that the settlement conference can be set down by the Court on its own initiative.[7]  The usual course however is that one or both parties will request that a settlement conference be held to consider the possibility of settling any or all of the outstanding issues. It is usually in the case management context where a TCC judge is able to order a settlement conference.[8]

The judge presiding over the settlement conference is not permitted to preside over the ultimate hearing of the appeal and shall not communicate with the judge hearing the appeal concerning anything that was said or done at the settlement conference. The rationale is obvious.  The judge presiding over the settlement conference will have been privy to information and documentation that may not be adduced at trial.

The Court wants the parties themselves at the settlement conference.  It would not be fruitful to only compel the attendance of counsel since counsel cannot settle without instructions.  Also, the conference is a much more effective tool when the parties can face each other, observe body language, and speak candidly about their respective cases.[9]

Settlement Briefs

Each party is required to serve and file with the Court a 10-page settlement conference brief two weeks in advance of the settlement conference.  The brief must contain

(a) an explanation of the party’s theory of the case;

(b) a statement of the material facts that the party expects to establish at the hearing of the appeal and how they will be established;

(c) a statement of the issues to be determined at the hearing; and

(d) a statement of the law and authorities that the party will rely on at the hearing of the appeal.

When issuing an order for a settlement conference, the Court will append a checklist that must be included as part of the settlement brief.  This checklist asks the party, among other things, whether settlement offers have been exchanged, whether there are any remaining motions contemplated, and what each party feels is the greatest hindrance to settlement.

Parties should be thoroughly prepared prior to the settlement conference.  No stone should be left unturned.  The TCC judges are trying to learn the minutiae of the file, such that they are in a position to assist in settlement.  In order for the Court to be creative in its suggestions, all relevant facts and issues must be before it.

The Judge’s Role

Each judge is different in her or his approach to settlement conferences.  Some divide the groups up and act as a go-between so that the parties are not forced to reveal their positions to the other side.  Some will request that the parties engage in (sometimes heated) settlement discussions, with client involvement actively encouraged.  And there are also judges who will simply ask if one of the parties has a winning or losing case.  The various approaches all differ in their effectiveness.  However, in my personal experience, cases tend to settle rather quickly following a judge’s opinion on the merits of an appeal.

The Judge’s Goal

The judge is trying to:

  • find the real issue;
  • find what the parties have in common;
  • look at alternative ways to put an agreement together;
  • get the parties talking and keep them talking;
  • talk to the parties about the worst case and best-case scenario should they go to trial;
  • talk to the parties about the cost of litigation;
  • keep the lines of communication open; and
  • try to determine where the log jams might be and how this might be breached.[10]

Ancillary Benefits

The parties do not necessarily need to settle the particular appeal in order to benefit from participating in a settlement conference.  There is the possibility that the parties are able to settle one or two issues and enter into a partial consent to judgment prior to trial. It may even lead to the abandonment of one or more issues, narrowing the trial down to a single, distinct issue.   If the parties do not settle their appeal as a result of the conference, then they at least have a much better understanding of their respective cases. This may also result in a reduction in the amount of documentary and viva voce evidence eventually adduced at trial.

An added benefit is for the client to directly hear about the weaknesses of its position from the judge.  This is effective in situations where a client has stuck doggedly to a position, despite being advised of its weaknesses by their counsel.  It can be incredibly compelling to hear about the weaknesses of one’s case from a TCC judge.

Practice Note 21

Due in part to the conduct of many settlement conference participants, the TCC found it necessary to release Practice Note 21: Settlement Conferences.  It is a pithy practice note dated November 20, 2018, directly addressing problematic issues experienced by the TCC in the context of settlement conferences.  The Practice Note reads:

  1. Settlement conferences will not be scheduled unless parties to the litigation have confirmed that a written offer of settlement has been made and that a written reply has been
  2. Both parties must be present at all times during the settlement
  3. Parties to the settlement conference must ensure that a representative with full authority to settle the appeal is present at all times.
  4. The Court may award costs against a party where it deems the conduct of that party to have impeded on the efficient functioning of the settlement conference.

For the most part, items 1-3 have been more or less required of parties for the conduct of a settlement conference. The fourth item was a new consideration introduced.  It is presumably meant to address situations where a settlement conference brief is not satisfactory or where the behaviour of a party at the conference has been inappropriate.


In 2018, the TCC indicated that about 70% of appeals subject to a settlement conference ended in a settlement.[11]  This would seem to indicate that the settlement conference is an effective tool in the movement toward quicker and earlier resolution of tax appeals.

The TCC provided recent statistical information regarding conventional settlement conferences.  Between 2016 and 2021, there were 547 files with settlement conferences.  There were 117 Consents to Judgment filed prior to hearing. Surprisingly, there were 309 withdrawals filed prior to a hearing.  And lastly, 121 of the files were adjourned prior to the hearing for numerous reasons.  This statistical information suggests that not only are settlement conferences effective means of grouping the litigsants together for settlement discussions, but the appeals are often times very settlable.

Fast-Track Settlement Conferences

The traditional settlement conference is widely acknowledged to be a helpful and effective method to resolve tax disputes.  During the pandemic, the Court took the settlement conference into uncharted territory by creating an expedited and slightly modified settlement conference option called the fast-track settlement conference procedure, intended to help relieve the backlog of outstanding appeals created by pandemic-related delays.

Practice Note 24

The fast-track settlement conference process was introduced by the TCC pursuant to Practice Note 24[12] (“PN 24”).  PN 24 opens with a statement indicating that the fast-track settlement conference was introduced in large part to offer parties an additional avenue to resolve their tax appeals, given the severe delays the TCC was experiencing at the time in advancing and hearing appeals.

The fast-track conference eliminated the condition that a written settlement offer must have been made prior to the request for the conference.


There were three main conditions to be eligible for the fast-track system.  Only general procedure appeals would qualify; a Reply must have been filed; and both parties must have jointly applied for a fast-track settlement conference.

How to Apply

Parties are required to file a joint request addressed to Chief Justice Rossiter or Associate Chief Justice Lamarre.  Interestingly, the request doubles as a settlement brief, since it requires a considerable degree of detail, including:

  • The amounts in issue;
  • The material facts in dispute;
  • The key issues to be discussed at the settlement conference;
  • Each party’s position on the issues to be discussed;
  • Why the parties believe their appeal is suitable for a settlement conference;
  • Any settlement offers that have been made to date;
  • The appeal’s current stage of discovery;
  • The parties’ preferred venue for a settlement conference, being one of Vancouver, Toronto, or Montreal.

Scheduling Details

The TCC employs a novel approach to determine whether an appeal is suitable for a fast-track settlement conference.  The Court indicates in PN 24 that a judge may consult with the parties jointly or individually as would be done in a breakout session during a standard settlement conference.  This was certainly a welcomed step since it allows the TCC to vet both the parties themselves and the potential for settlement prior to the conference.

If the judge is of the view that there are settlement possibilities that would be amenable to a fast-track settlement conference, the Court would contact the parties with a date and location.  The TCC would also confirm attendance by all relevant parties and discuss the settlement brief requirements.  The entire system was predicated on the expectation that the fast-track settlement conference would be scheduled within 90 days of the date of the parties’ joint written request.

If Appeal Fails to Settle

If the parties fail to settle their appeal after the fast-track settlement conference, the appeal is placed in the scheduling queue at the same state as it was prior to the conference.  Furthermore, the judge who conducted the settlement conference would not sit as the trial judge (if a trial is required) and is not permitted to communicate with the eventual trial judge concerning any aspect of the fast-track settlement conference process.

Permanent Fast-track Settlement Conference System

Many members of the tax litigation bar welcomed the fast-track settlement conference system, and many believe it should be a permanent fixture.  It could be incredibly beneficial for parties to be able to submit to a settlement conference at anytime during the course of litigation.

Preliminary Ruling Docket

The Preliminary Ruling Docket (“PRD”) is quite possibly the most innovative early resolution system released by the TCC.  It was introduced as a pilot project pursuant to Practice Note 23[13].  Interestingly, the PRD procedure was introduced in response to requests made by the tax litigation bar.  Not only then is the PRD innovative, but incredibly responsive to the wishes expressed by those litigating tax appeals.

The PRD procedure was introduced in part due to the high cost of litigation.  In particular, the TCC recognized that litigation costs increase with each step in the litigation and that in many circumstances the parties would benefit from an expedited process allowing for a less costly resolution of the dispute.

A few years ago, some studies found that files between $25,000 and $300,000 at issue were not coming before the Tax Court.  It was assumed that this was because of the cost of litigating  those matters.  Thus, the motivation behind the project was to make litigation before the Tax Court more accessible and more cost-efficient.[14]

The pilot project was set to operate for a period of two years, beginning January 1, 2020.  The Court would then decide whether to make the PRD procedure a permanent fixture.

PRD Procedure in Practice

The PRD Procedure involves the issuance of a non-binding preliminary ruling from a TCC judge.  Parties are expected to apply jointly and the joint application must be brought within 120 days of the close of pleadings.

Joint Application

The joint application itself requires considerable detail.  The parties are required to provide the reasons why they believe that a preliminary ruling hearing would be beneficial.  The PRD procedure would be beneficial if the parties expect the litigation to be costly.  The parties must also include the estimated length of a potential trial if it were to go to trial and the estimated length of the preliminary ruling hearing.  Parties are required to include the amount in issue; whether there are any related appeals; the number of witness each party intends to call at the preliminary ruling hearing; reasoning behind calling an expert if a party desires to call one; and a list of documents each party intends to submit at the preliminary ruling and an explanation as to why the selected documents are relevant to the issue to be considered by the Court.

Minimum Criteria

In order to qualify for the PRD procedure, the parties must satisfy several basic conditions:

  1. The trial of the appeal is expected to last more than two days;
  2. The preliminary ruling hearing is expected to last no more than two days;
  3. Both parties are represented by counsel;
  4. The appeal is a general procedure appeal;
  5. The appeal only involves questions of fact or mixed fact and law;
  6. If it is an income tax appeal, the amounts at issue must fall within the $25k-$300K range per taxation year;
  7. If the case involves losses, the amount of the loss must fall within the $50K-$600K range; and
  8. If it is a GST/HST appeal, the amounts at issue must fall within the $50k-$300K range per reporting period.

Related appeals may also be placed in the PRD procedure and heard on common evidence[15], provided the related appeal involves the same or a related appellant; the issues are related; the same counsel acts for all related appellants; no sole questions of law are at issue and the addition of the related appeal does not extend past the two-day limit for a preliminary ruling hearing.  This is a necessary accommodation, since in many cases with the amounts in paragraphs f-h above at issue, the tax appeals will involve a corporation and an individual.  For example, we see cases where additional income is assessed to a corporation, with a related assessment (and appeal) in respect of the shareholder of that corporation.

Additional Principles

The Court does not permit examinations for discovery for the preliminary ruling hearing[16].  Of course, if discovery were permitted, the parties would not benefit from the expedited nature of the PRD procedure, which explicitly does away with the litigation steps following pleadings. The PRD procedure is intended to be “…stripped down, and, it is hoped, very cost-efficient for taxpayers.”[17]

Parties are not permitted to rely on any documents at the preliminary ruling hearing unless a copy has been provided to the opposing party at least 30 days prior to the hearing.  This principle avoids trial by ambush, which is ordinarily avoided through the exchange of documents and the discovery process.

The Court discourages the use of experts in the PRD procedure.  However, the Court has indicated that it may permit expert evidence with leave, and that leave would only be granted in exceptional circumstances.[18]

Each party is expected to file and serve a pre-hearing brief at least 15 days prior to the hearing.[19]  The brief is expected to be brief (not to exceed 20 pages) and must set out the facts, issues, law, and analysis the parties intend to rely on. This would likely be quite similar to a settlement conference brief, both in form and substance.

An interesting principle of the PRD procedure is that the TCC is not bound by any legal or technical rules of evidence in conducting the preliminary ruling hearing.[20]  The Court has taken the expeditious nature of the PRD program quite seriously, and this is proof.  By dispensing with the need to strictly abide by the rules of evidence, the Court is signalling that it is more interested in getting to the heart of the issue, and not getting bogged down by objections on evidentiary points.  This is likely to be one of the more important aspects to the PRD procedure. The relaxed informal procedure rules regarding evidence will be used in the preliminary ruling hearings.[21]

The hearing is not to extend past the two-day limit[22], and the judge shall issue the preliminary ruling within 60 days of the completion of the hearing.  The ruling could be issued orally or in writing.[23]

Response to the Preliminary Ruling

Within 30 days of the final ruling, the parties can either file a consent to judgment agreeing to settle the appeal without costs pursuant to the preliminary ruling or they can jointly write to the court advising that either one or both parties do not accept the ruling. If the ruling is not accepted, then the parties must submit a timetable to complete the remaining steps. [24]

If the ruling is not accepted, the preliminary ruling judge is not permitted to preside at the hearing of the appeal nor communicate with any judge involved with the appeal concerning anything that was said or done at the preliminary ruling hearing.  The parties are likewise not permitted to disclose anything that occurred at the preliminary hearing to any other judge involved with the appeal.

As an additional measure, the Court would seal the transcripts of the hearing and the ruling and all related documents.[25]  This measure preserves the integrity of the PRD procedure and would encourage a high degree of candour at the preliminary ruling hearing.

There are two important exceptions contained in PN 23 relating to the transcripts.[26] The evidence given by a witness at a preliminary ruling may be used for the purpose of impeaching the testimony of that witness in the same manner as any previous inconsistent statement by that witness.  This is important to note.  Unlike a settlement conference, where the entire conference is sealed and cannot be used by either party, the testimony in a preliminary ruling can be used for the distinct purpose of impeaching any inconsistent statements made at the ultimate hearing of the appeal.


If both parties reject the ruling, then no costs will be awarded to either party in respect of the preliminary ruling.  If only one party rejects the ruling and the other party accepts it, then for the purposes of section 147 of the Tax Court Rules the preliminary ruling shall be deemed to have been a written settlement offer served on the other (non-accepting) party 30 days after the issuance of the preliminary ruling.

The second exception to the sealed record involves the determination of costs.  Specifically, the parties may disclose what happened at the preliminary ruling hearing to assist the Court in its determination of costs.[27]  This makes sense.  The judge hearing the appeal should be privy to matters of the PRD procedure when awarding costs, especially if the party who accepted the preliminary ruling is ultimately successful at trial.  Furthermore, the conduct of both parties at the preliminary ruling would be quite relevant in the determination of costs.

The Tax Court of Canada provided statistical information suggesting that recently there have been three cases submitted by way of PRD.  One will be heard soon and another request was denied. One of the three cases was heard and a Consent to Judgment was filed shortly thereafter reflecting the Court’s preliminary ruling.

American Apparatus

It is relevant to acknowledge how our American neighbours approach tax dispute settlements, and the apparatus they exploit to resolve the innumerable tax appeals dealt with there.

A US tax dispute begins with a notice of deficiency.  The taxpayer then objects, which is followed by an appeal to the US Tax Court.  Before the matter ends up in the US Tax Court, the parties may use alternative means to resolve their disputes. In the US, “…mediation is becoming more mainstream.  The IRS has institutionalized it, and many courts mandate it.  Attorneys for taxpayers and the government are growing more comfortable with ADR as a tool for reaching compromise.”[28]  It is important to provide a bit of detail regarding the various parties and the nature of an American tax dispute prior to examining their various settlement protocols, including the ADR procedure.

US Tax Reporting and Enforcement  

Much like Canada, the US administers a self-reporting tax system.  Taxpayers file their returns, advising the IRS what they owe.  Any assessment other than a self-assessment by the taxpayer only arises following the IRS’ deficiency procedures.  Once the IRS has completed its deficiency procedures, the taxpayer can seek judicial review of the IRS’ proposed assessments.[29]

The IRS will send out a statutory notice of deficiency to the taxpayer and starts the 90-day clock within which the taxpayer has the right to petition the US Tax Court.  The US Tax Court permits taxpayers to challenge the deficiency without first paying the tax.

IRS at a glance

The IRS requires no real introduction.  Functionally, it is equivalent to Canada’s CRA.  The IRS is a federal agency within the US Department of Treasury.  The IRS Commissioner and the Chief Counsel of the IRS together determine the programs and policies of the IRS, including early tax dispute settlements.  The IRS is divided into four operating divisions[30], namely:

  • Wage and investment;
  • Small business/self-employed;
  • Large business and international division; and
  • Tax exempt and government entities.


As in Canada, the IRS’ primary enforcement mechanism is the audit.  The IRS uses a statistical method – which is not disclosed to the public – to decide which returns will be audited.[31]

The IRS’s audit authority is contained in various sections of the Internal Revenue Code.  Specifically, Section 6001 provides the IRS authority to regulate records retention requirements.  Section 6201 authorizes the IRS to make enquiries, determinations, and assessments.  Section 7602 is much like section 231 of the Income Tax Act; in that it permits the IRS to examine the books and records of taxpayers.

The IRS administers two types of audits, face-to-face and correspondence.  They are similar in form and substance to the CRA’s field and desk audit.  Generally, corporate taxpayers and higher net-worth individual taxpayers are examined through a field examination, whereas lower net worth taxpayers will be subject to an office examination.[32]

There are a range of possible outcomes that may occur after an audit.  The IRS can agree and issue a ‘no change’ letter.  This means the IRS has accepted the return.  The IRS could propose adjustments, and if the taxpayer agrees, the file is closed.  A taxpayer may partially or fully disagree with the IRS’ findings, which will lead to a revenue agent’s report (RAR) and the taxpayer has time limits to protest that outcome.

IRS Office of Appeals

The IRS Office of Appeals is functionally identical to the Canadian CRA Appeals division, since it resolves disputes stemming from an audit. The mission of the Office of Appeals is to “..resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.”[33]

The taxpayer will have their file opened in the Appeals Office by way of protest letter, which is similar to the Canadian Notice of Objection.  Interestingly, and in contrast to the Canadian system, the appeals officer is required to objectively evaluate the taxpayer’s case based on the hazards of litigation.[34]  This is far different from the Canadian Appeals division, which does not have as one of its mandates to review cases based on litigation risk.  This would be a welcomed departure from the current system.

If a settlement is reached, the case effectively ends there.  If however no settlement is reached, the appeals officer will prepare a notice of deficiency (similar to a notice of confirmation) which then gives the taxpayer the opportunity to escalate the dispute. [35]

US Courts

Once the taxpayer has been through the audit and appeals stages, the next stage is to take the matter to one of many relevant courts with jurisdiction to hear tax appeals.  The four potential venues include the US Tax Court, the US Court of Federal Claims, a federal district court or bankruptcy court.[36]  It is widely acknowledged that early settlements occur much more frequently in the context of the US Tax Court than any other Court[37], since the IRS (rather than the Department of Tax Division) controls the litigation in the US Tax Court.  The IRS typically does not require the same level of discovery as required by the Department of Justice.

Alternative Dispute Resolution (ADR)


The US is at the forefront of utilizing ADR methods in the tax dispute context.[38] The two most prominent methods are the fast-track settlement and post-appeals mediation.  The fast track settlement[39] is the more well-known of the two, but both have resulted in innumerable settlements.

Fast Track Settlement (FTS)

Purpose: Fast Track Settlement (FTS) was developed as an alternative dispute resolution (ADR) process that furthers the Service’s goal of resolving tax controversies fairly and impartially to both the government and the taxpayer in an expeditious manner. A primary objective of the Service is to resolve tax differences at the earlier stages of the exam without sacrificing the quality and integrity of the examination. FTS improves business practices by addressing disputes as early as possible to expedite case closing and reduce taxpayer burden. FTS provides LB&I and taxpayers an opportunity to resolve their disputes with an Appeals Official using mediation skills and settlement authority.[40]

The FTS is a voluntary mediation program where an independent Appeals mediator will assist the taxpayer and the IRS agent to reach an agreement on all or some of the disputed issues.  The Appeals mediator facilitates settlement discussions and may offer settlement proposals.[41]

As in most mediations, the suggestions or proposals are not mandatory.  They need not be accepted by either party.  But the benefits are tremendous.  Choosing an FTS could lead to a quick result at a lower cost, and the settlement itself could be flexible and innovative.

The IRS has listed cases and issues which would not be appropriate for the FTS system, including docketed issues, issues challenging the constitutionality of tax laws, or cases for which the taxpayer has expressed unwillingness to compromise or explore a mutual concession resolution.[42]

Post-Appeals Mediation (PAM)

The PAM procedure allows the taxpayer and the Appeals Officer to resolve disputes while the taxpayer’s case is still being considered by Appeals.  A trained mediator from the IRS Office of Appeals is assigned to the case.  The mediator is specifically trained in mediation techniques.[43]  The mediator will attempt to offer proposals to help settle the appeal prior to the case getting into the litigation stream.  Cases that do not qualify for PAM include:

  • Offer-In-Compromise (OIC) cases considered by an IRS campus site;
  • Issues docketed in any court, designated for litigation, or under consideration for designation for litigation;
  • “Whipsaw” issues, which are issues for which resolution with respect to one party might result in inconsistent treatment without the participation of the other party;
  • Collection cases, except for certain offer in compromise and Trust Fund Recovery Penalty cases as provided for in Revenue Procedure 2014-63; and
  • Other issues listed in Revenue Procedure 2014-63.[44]

If a settlement was not achieved through the PAM procedure, participation would nevertheless likely work to narrow the issue down for trial.[45]

Tax Court ADR

Pursuant to Treasury Regulations[46], a case that has not been reviewed by the Appeals Office is automatically referred by the Tax Court for settlement.  The process is governed by the US Tax Court’s Rule 124[47].  The Tax Court ADR process takes one of three forms, namely:

Rule 124(a) – Voluntary Binding Arbitration (“VBA”)

VBA can only be requested at any time a case is in litigation but before trial, and only in cases involving a factual issue. One or both parties can bring a motion to resolve the matter through binding arbitration.  It is a motion with a stipulations requirement.  Both parties are required to include (but are not limited to) the following in the stipulation:

  • Statement of the issues to be resolved by arbitrator
  • An agreement to be bound the arbitrator’s findings
  • Cost allocations

The parties then include the findings of the VBA procedure in their report to the Court.

Rule 124(b) – Voluntary non-binding mediation (“VNBM”)

The parties can move jointly or solely for a VNBM at any time after the case is in litigation and before the decision in the case is final.

Rule 124(c) –  Other Methods

The Rule leaves the possibility open for parties to employ other methods to voluntarily dispose of their case.

ADR in US Court of Federal Claims (USFC)

Much like the Federal Court of Canada, the USFC hears various types of cases, including constitutional, federal government employment and some tax refund actions.  Through a Court Statement[48], the USFC automatically refers some cases to a settlement judge, where ADR and settlement proceeding are held in parallel with normal litigation proceedings of the case.[49] The USFC uses various ADRF methods, including mediations, mini-trials, and non-binding arbitration.  The appointed settlement judge is able to act as a mediator or conduct a mini-trial and issue a mock ruling.[50]

DOJ Tax Division Settlement Reference Manual (“SRM”)[51]

The SRM is extensive in its guidance to Department of Justice counsel in their required approach to tax appeals.  In addition to explicating relevant principles of settlement authority, the settlement process and evaluating settlement offers, the SRM discusses ADR in detail.  The SRM generally recommends that DOJ counsel employ ADR techniques in an attempt to resolve tax disputes early in the process.

From the outset of a case and throughout its development, Trial Attorneys should consider the question of litigation or settlement.  Trial Attorneys should continually reevaluate the desirability of settlement and whether alternative dispute resolution might be useful, taking into account factual and legal developments in the case.  When evaluating the litigation and settlement posture of a case, all litigation hazards, including equities, must be taken into account.[52]

In the SRM it is recognized that ADR is the preferred option in situations where the parties through their legal counsel were not able to resolve the matter.  The SRM cites an Executive Order issued by President Bill Clinton advising that all litigation counsel should try to settle before trial, and furthermore should recommend ADR to their clients wherever appropriate.

The SRM contains an entire section on the role of mediation.  It advised DOJ counsel about the benefits of mediation.  The main benefits as expressed in the SRM are the ability to learn of the various considerations motivating a particular taxpayer (i.e. unfair treatment by the IRS) or the potential for early resolution.  Interestingly, the SRM indicates that the DOJ is so committed to ADR that it maintains a fund to pay for mediators.[53]

It is certainly arguable that the number of tax settlements in Canada would increase if the appeals were subject to mediation at particular stages of the appeal.  It further follows that self-represented litigants may not incur the costs of mediator if Canada were to adopt the US policy whereby the DOJ incurs the expense of mediators.

Proposals to Improve Tax Settlements in Canada

Improving the tax settlement processes will reduce costs, lead to less trials and will reduce the strain on our overburdened court system. Discussed below are some suggestions to try and increase the number of settlements from a Canadian tax litigation perspective.

American ADR

First and foremost, Canadian adoption of the American ADR systems discussed above would likely increase the number of settlements of tax cases.  We could implement the mediation system at two levels, namely, at the objections stage and at the litigation stage.  Just as the Americans have done, Canada should look to implement both the FTS and PAM. It could be incredibly beneficial to deal with the appeals division to the extent possible, and then prior to the reassessments being confirmed or varied, requesting a mediation session.  The mediator would look at the results of the appeals process, listen to the parties, and then propose various bases for settlement.  Given that the next step in the process would be litigation at the TCC, the privilege of a mediation session with an independent third-party mediator could at least raise awareness of the expected litigation costs and effect settlement.

Furthermore, enacting a rule similar to the US Tax Court Rule 124 would be ground-breaking in Canada. Both parties would benefit tremendously if they were able to submit their appeal to binding arbitration on a factual issue prior to the final trial. The option to enter into non-binding mediation at any time before the pronouncement of the final judgment would also be beneficial.

The potential to resolve the hearing after evidence and argument but before the pronouncement of the final judgment would be valuable.

Permanent Preliminary Ruling Docket

The PRD program is incredibly innovative, and the TCC should be commended for initiating such an effective tool.  Of course, more data is required to determine if the PRD program is effective.  The TCC should extend it for a 5-year term with a view to extending the procedure indefinitely.  There are many reasons why the PRD procedure makes sense, but the most important is that cases involving $50K – $300K at issue will get their day in Court.

Permanent Fast-Track Settlement Conferences

A massive swath of tax cases would benefit from a settlement conference prior to discoveries.  It may make sense to extend the FTSC program for a 5-year term with adequate parameters to ensure only the cases which qualify can access the program.  Placing restrictions on monetary amounts or the types of issues the TCC will consider would reduce the number of cases making their way into the fast-track settlement conference system.

Increasing Judicial Discretion

The TCC should exercise the discretion it has been granted by rule 126.2(1) and send the primarily fact-driven appeals to a mandatory settlement conference prior to trial.  Giving the Court the discretion and resources to order mandatory settlement conferences would likely result in an increase in settlements.  Many fact-based cases settle a few days before trial. Often times, the TCC is unable to fill the now open space on the schedule with a different hearing on such short notice.

Other Methods to Encourage Early Settlement

Often times, a party to litigation will not discuss settlement until after discoveries.  Section 147(3.1) and (3.2) could be amended to provide for substantially more costs in the event that a settlement offer is made prior to discovery and the offering party does as well or better than the substance of the settlement offer at trial. The potential for a punitive cost consequence may discourage a party from insisting on costly discoveries prior to considering settlement.

The TCC should be able to consider the conduct of CRA auditors and appeals officers when awarding costs.  If the taxpayer offers to settle the matter at either the audit or appeals stage, and does as well or better at trial, then any cost award should be increased accordingly.  This would stand as the exception to the widely acknowledged principle that the conduct of the auditor (or the CRA generally) is not relevant to the correctness of the assessment.

The Rules could be amended to allow for the awarding of costs in informal procedure appeals in situations where a party was not willing to entertain a reasonable settlement proposal. Additional measures could be enacted to account for cases where the appellant is self-represented.

Concluding Remarks

All parties benefit from early resolution of appeals.  Taxpayers and the Crown reduce their litigation costs. The Court’s resources are not used beyond capacity.  And the fisc does not experience delays in collecting large amounts of tax.

It seems to be the case that increasing the number of ways in which a party may settle an appeal leads to more settlements.  We need look no further than the US, where they offer a robust cache of settlement procedures to resolve disputes and to resolve them as early in the process as possible.

The TCC has shown that it can be innovative in its attempts to assist parties in their settlement objectives.  The fast-track settlement conference and the PRD are examples of the TCC trying to divert settleable cases from trial.  As the number of appeals grow and the Court correspondingly expands, the adoption of at least part of the US ADR procedures are likely to find their way into the Canadian tax dispute system.

[1] Rossiter C.J., Judge’s Panel, CTF 69th Tax Conference Report (Toronto: Canadian Tax Foundation, 2018), 2:1-20.

[2] As required in the tax law context – see CIBC World Markets v. HMQ 2012 FCA 3.

[3] Revenue Canada Administrative Policy Regarding Settlement (“Settlement Protocol”), dated January 29, 2010.

[4] Settlement Protocol, page 1.

[5] Or a reference to 147(3.2) if the settlement offer is made by the Crown.

[6] All About Settlements, CTF 2019 Conference Report, Page 14.4.

[7] Rule 126.2(1).

[8] All About Settlements, supra note 5, Hogan J., at p. 14.5.

[9] Rule 126.2(3).

[10] Settlement Conferencing Presentation to IATJ 2nd Assembly, Paris, France September 9 and 10, 2011, pages 10-11 of 13.

[11] Hogan J, Negotiating Tax Settlements (CTF Conference: Preventing, Navigating & Resolving Tax Disputes), Montreal, Canada, May 2018.

[12] Practice Note 24 dated July 21, 2020 (“PN 24”).

[13] Practice Note 23 (amended) signed on September 3, 2020 (“PN 23”).

[14] MacPhee J., Judge’s Panel, 2019 CTF Conference Report, 2:1.

[15] PN 23, supra note 13, at para. 5.

[16] PN 23, supra note 13, at para. 6.

[17] MacPhee J., Judge’s Panel, 2019 CTF Conference Report, 2:1.

[18] PN 23, supra note 13, at para. 8.

[19] PN 23, supra note 13, at para. 9.

[20] PN 23, supra note 13, at para. 10.

[21] MacPhee J., Judge’s Panel, 2019 CTF Conference Report, 2:2.

[22] PN 23, supra note 13, at para. 11.

[23] PN 23, supra note 13, at para. 12.

[24]  PN 23, supra note 13, at para. 13.

[25] PN 23, supra note 13, at para. 14.

[26] The second exception is discussed in the context of costs below.

[27] PN 23, supra note 13, at para 16(b).

[28] Alternative Dispute Resolution for Tax Disputes: International Perspectives, CTF 2012 Tax Dispute Resolution Compliance and Administration Conference Report, 2012, at 11:9.

[29] The Tax Disputes and Litigation Review, 2nd Ed, Simon Whitehead, Law Business Research, Ltd, Chapter 26, page 328.


[31] Disputes Review, supra note 29, at page 330.

[32] Ibid, at 333.


[34] Disputes Review, supra note 29, at 341.

[35] At this point in the dispute, the taxpayer receives either a notice of deficiency or a Form 870.  The Form 870 is basically the taxpayer’s consent to immediate assessment and collection of tax.  Taxpayers will often request the Form 870 so that they can pursue the case in Tax Court after paying the tax.

[36] An analysis of the differing courts and respective jurisdiction is beyond the intended scope of this chapter.

[37] Dispute Review, supra note 29, at 344.

[38] Kirsten J. McDonough Resolving Federal Tax Disputes Through ADR- Dispute Resolution Journal  – vol. 48, no. 2, at 3.


[40] IRS Internal Revenue Manual, 4.51.4LB&I/Appeals Fast Track Settlement Program (FTS), Program Scope.


[42] IRS Manual, supra note 40, at

[43] – Post Appeals Mediation.

[44] Ibid.

[45] Please also see Internal Revenue Bulletin 2014-53, and specifically Rev. Proc. 2014-63 for more detail on the purpose, background, and recent changes to the IRS’ various mediation programs.

[46] Treasury Regulation Section 601.106(a)(1)-(2).


[48] US Court of Federal Claims, General Order #44.

[49] Disputes Review, supra note 29, at 351.

[50] Ibid.

[51] Seidman et al., DOJ Tax Division Settlement Reference Manual, September 2012 edition.

[52] Reference Manual, supra note 51, at 4.

[53] Reference Manual, supra note 51, at 46.