When a CRA auditor thinks the CRA can take a bigger share of your capital, other CRA agents and the CRA’s lawyers will fight to extract it.
The idea the CRA must follow the rules or treat you fairly during a tax dispute is false to the facts. The CRA agents sometimes bend and break the rules to win. But while the CRA can play the game in any way they see fit, there are consequences at the Tax Court stage. The outcome in Choptiany v HMK provides an example of these consequences.
In Choptiany, CRA agents and DoJ lawyers chose to violate the rules and ignore Justice Boyle’s orders. We imagine they acted in this way because: (1) they did not believe anyone would enforce a serious consequence; and (2) they wanted to win. Well, they were wrong, and they lost.
Justice Boyle’s reasons in Choptiany are well-written and fun, and the bad actors (eventually) got what was coming to them. It’s a good story. After reading the case, we felt inspired and we respect Justice Boyle even more. But it will not do anyone any good to get caught up in righteous outrage and Justice Boyle’s writing. Instead, we want to focus on the value that learning about this case brings to taxpayers facing a tax dispute.
So, this article will use Choptiany to point out the ideas that surface for us when we read this case. And we will point out a couple of ideas we suggest you let go. If you keep any of these things in mind during your tax dispute, you will lose less capital and lower your direct and indirect costs.
The idea the CRA must follow the rules or treat you fairly during a tax dispute is false to the facts. The CRA agents sometimes bend and break the rules to win. But while the CRA can play the game in any way they see fit, there are consequences at the Tax Court stage.
- Peter Aprile, Partner, Tax Litigation
The law does not require the CRA to adhere to many rules at the audit and objection stages. And there are no real consequences if the CRA chooses to ignore the rules to win at the audit and objection stages. But the Tax Court appeal stage is very different. It has rules and a Tax Court judge who can enforce consequences. This reality levels the playing field and changes the game.
In Choptiany, the CRA agents and DoJ lawyers used improper tactics to win a tax dispute. They broke the Rules, refused to disclose information, and used stonewalling and other offensive tactics to win. And they ignored two Tax Court Orders directing them to comply.
The CRA’s Improper Conduct and Justice Boyle’s First Warning
At the first examination for discovery, the DoJ put forward a CRA agent who was not knowledgeable, refused to answer proper questions, and refused to provide documents. Rule 93 requires the CRA to select a knowledgeable CRA officer. And Rule 95 requires them to answer appropriate questions and avoid improper objections.
It seems the CRA chose an officer without knowledge to obstruct the process. We guess the DoJ lawyers objected to proper questions for the same reason. The taxpayers’ filed a motion in the Tax Court to ask Justice Boyle to require the CRA to rectify the issues, answer the questions, and hand over the documents.
Justice Boyle expressed frustration with the CRA’s and DoJ’s conduct, pointing out the improper conduct and advantage the CRA was attempting to gain. At best, the government tried to set up a “trial by ambush”.
Justice Boyle issued a warning to the CRA and DoJ. And he gave an Order demanding the CRA and DoJ to comply with the rules, re-attend with a knowledgeable CRA officer, and rectify the other non-compliance.
The Tax Court’s Second Warning
The CRA’s and DoJ’s behaviour did not change. Justice Boyle’s warning (and Order) had little effect. They kept ignoring the rules and Justice Boyle to win.
The taxpayers filed a second motion asking Justice Boyle to enforce consequences. Again, Justice Boyle agreed the CRA’s and DoJ’s conduct was contrary to the Order, against the rules, and sought to gain an advantage. He stated the government’s conduct was “unreasonable and intentional” and “outrageously misleading and inappropriate”. Also, the judge noted the CRA agent was “thoroughly unprepared, uncooperative, or untruthful”.
Justice Boyle believed the Crown deliberately disregarded his warning and the Order. But he did not enforce a more severe consequence. Instead, Justice Boyle (again) criticized the Crown’s behaviour, warned them again, and issued another Order. He demanded the Crown submit to discovery again, answer the questions, and hand over the documents.
Enforcing a Consequence Against the CRA
The CRA’s and DoJ’s behaviour did not change. The taxpayers filed a third motion. They asked the Tax Court to allow their appeals and vacate the reassessments in full, with costs.
Justice Boyle felt awe-struck and angry. The Crown’s conduct was remarkable. In most cases, Tax Court judges will not publicly chastise any party in their written reasons. A judge might admonish a party in court, but it is rare for a judge to rebuke a party in their reasons for judgment. Only the parties know most of the things that occur during a tax dispute. The reasons for judgment rarely tell the whole story. It is easy to see why Justice Boyle did not follow that custom in this case.
Justice Boyle wrote (roughly) 20 pages citing examples of the Crown’s improper actions. He stated the CRA or DoJ:
- used tactics to hide information from the taxpayers;
- omitted vital data and documents;
- made a mockery of the Rules;
- showed a pattern of intentional or reckless disregard for the Rules and Court’s Orders; and
- wasted the Court’s and taxpayers’ time and money.
Justice Boyle did not believe it would make sense to rebuke the CRA a third time, award costs, and issue another Order demanding the CRA comply.
"No party in such a position … should expect to simply be ordered again to comply with the Court’s discovery rules and orders already made. To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: “Stop! Stop!-Stop, or I’ll yell stop again!"
No party in such a position … should expect to simply be ordered again to comply with the Court’s discovery rules and orders already made. To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: “Stop! Stop!-Stop, or I’ll yell stop again!".
- The Honourable Patrick J. Boyle.
Choices, Rules, and Tax Court Consequences
As stated, the CRA can play the game in any way they see fit. Choptiany makes that fact clear.
In Choptiany, the CRA agents and DoJ lawyers chose to (repeatedly) break the rules to win. We guess they didn’t care the Tax Court rules are different than the audit and objection stage “rules”. We guess they didn’t care this stage has a role with the power to hold them accountable.
The CRA chose to play the game a certain way, and Justice Boyle helped them own the results and consequences. Justice Boyle held the logical consequence – based on the CRA’s repeated, intentional, and egregious behaviour – was to allow the taxpayers’ appeals in full, with solicitor-client costs.
If the spirit moves you, we invite you to pause reading this article and applaud Justice’s Boyle decision (and his writing).
The CRA chose to play the game a certain way, and Justice Boyle helped them own the results and consequences.
- Peter Aprile, Partner, Tax Litigation
Eight Insights from Choptiany
Now that you’ve read our Choptiany summary, it is the right time to list eight insights that emerged for us when we read this case.
Keeping these eight insights in mind will give you more purpose, competence, and clarity during your tax dispute. And you will lose less capital and lower your direct and indirect costs.
- The CRA and DoJ are your adversaries. They want to win. They will argue their actions adhere to the rules or are justified. It is naïve to expect anything less.
- You cannot force anyone to do anything against their will unless they believe they will suffer a severe consequence.
- The CRA agents and DoJ lawyers engaged used these tactics because they firmly believed: (1) no one was likely to enforce a significant consequence; and (2) no consequence (if enforced) would harm them. What culture, experiences, assumptions, and beliefs led them to hold those conclusions? Our answer to these questions is outside the scope of this article. But, if you ask us, we will share our thoughts.
- Likely, Choptiany was a “slam dunk case” for the CRA. They didn’t need to be very smart to win this case; they just needed to avoid arrogance and stupidity.
- Choptiany will help cool aggressive tactics and de-escalate tax conflicts. Choptiany will benefit taxpayers.
- The CRA’s strategies and tactics have become more aggressive in the past year. Choptiany is an extreme example, but it is a good signal. We sense a “hostility shift”. It reminds us of a shift we felt before and during the last recession.
- The Tax Court is the only stage and arena with a neutral third-party overseeing the process, meaningful rules, and anyone with the power (or desire) to enforce consequences. At the very least, we believe the observer-expectancy effect benefits taxpayers in every case.
- The Tax Court stage and arena is the higher ground. It gives taxpayers a better edge. If the result matters, competing at the audit and objection stages is unwise.
The CRA’s strategies and tactics have become more aggressive in the past year. Choptiany is an extreme example, but it is a good signal. We sense a “hostility shift”. It reminds us of a shift we felt before and during the last recession.
- Peter Aprile, Partner, Tax Litigation
Good luck to you, and thank you Justice Boyle.