The Standards That Enable Settlement in Tax Disputes

This article appeared in Thomson Reuters’ Tax Disputes & Resolution Centre, alongside leading resources on managing complex tax controversies.

The Shared Challenge

Counsel on both sides of tax disputes face the same challenge: how to resolve cases in ways that are fair, objective, and justifiable — settlements that withstand internal and external review. 

Too often, one or both sides miscast the principled basis for settlement or misunderstand what defensibility requires. When both standards are applied together, settlement space expands and agreements are more likely to withstand review — protecting professional judgment, preserving credibility, and aligning with institutional goals.

The DoJ regularly articulates what an effective resolution should achieve. In “Tax Dispute Result: The Crown Perspective”, Deen Olsen, General Counsel of the DoJ’s Tax Law Services, states the Crown’s standard that every settlement should aim to:

1. reach certainty earlier,
2. focus on significant and material positions,
3. improve relationships, and
4. use resources efficiently.

These benchmarks reinforce that defensibility is not abstract — it is the mechanism by which the Crown achieves its goals. And, when both sides adopt this approach, they set the stage for productive settlement discussions and opportunities.

Principled settlements: the floor

Courts and DoJ leadership emphasize that all settlements must be principled. This means no tax dispute settlement can contravene the law. It is the floor that closes off certain possibilities. A principled settlement does not compromise legal principles.

That requirement is taken as a given. The practical challenge, and the focus of this discussion, is defensibility — the standard counsel must work within the principled boundary.

Defensible settlements: the working standard

Defensibility builds on principled settlement. When legality is assured, counsel must still resolve how agreements will withstand both legal and institutional review. Defensible settlements open and fill that space. They have two components:

• Legally defensible: rests on facts, and on characterizations or weightings of those facts, that a court could sanction — even if not the outcome the court would ultimately reach.
• Internally defensible: can be explained as fair, objective, and justifiable to
  • supervisors, managers, and program areas on the Crown side; and
  • executives, boards, or other governance bodies on the taxpayer side.

Both DoJ and the private bar recognize that defensibility, not perfection, is the operative standard for settlements. The DoJ counts such settlements as litigation wins in its performance metrics, and credible private bar counsel treat them similarly. Acceptable levels are sufficient; the standard is disciplined defensibility, not perfection.

Defensibility enables agreement within the principled floor. It gives counsel the opportunity to apply judgment, reframe, reweight, and evolve their positions while remaining connected to reality.

Exhibit 0. Principled vs. Defensible

Where settlements fall on the spectrum

The question is how defensibility operates in practice, and how it shapes the space in which agreements can be reached.

In practice, settlements fall along a spectrum. At one end are expedient trade-offs that collapse under review. At the other are agreements so tightly aligned with the record and law that they resemble court outcomes. Most defensible settlements sit in the middle of this spectrum.

Exhibit 1. Spectrum of settlement defensibility

The spectrum shows that defensibility lowers the barrier to settlement rather than raising it. Level 3 (Acceptable) and Level 4 (Good) settlements are viable successes. They withstand review and demonstrate disciplined judgment.

CRA states openly that settlement is the preferred resolution of factual disputes. Its Settlement Process guidance notes that taking these cases to a Tax Court hearing "generally does not add much value to the subsequent administration or interpretation of the law by taxpayers or the CRA" and that they "should only be resolved in court where valid attempts to settle are not fruitful".

The message is straightforward: CRA leadership expects DoJ counsel to find a defensible settlement in these cases before they reach a hearing. The court process remains critical — it provides the framework, oversight, and discipline that make principled and defensible settlements possible. But for factual disputes, the hearing itself should not be the destination. The expectation is that resolution occurs through defensible settlement in the pre-hearing stages.

How to achieve defensibility

The most effective settlement discussions begin when counsel align on the Crown's benchmarks. If fairness, objectivity, and justifiability are accepted as common ground, defensibility becomes the lens through which the facts and their characterizations are interpreted and shaped — a normal process of professional judgment that avoids spin or invention.

Three mechanics illustrate how defensibility opens space within the principled floor:

• Reframing. The same record can support different lawful characterizations. A recurring payment stream may be treated as cost-sharing, management fees, or dividends. Courts have accepted each, depending on context. DoJ confirms the frame is legally defensible for CRA, while private counsel confirms it for the taxpayer. On each side, CRA officials and taxpayer executives, boards, or governance bodies must be able to accept it as internally defensible.
• Re-weighting. Facts are rarely binary. Occasional personal use of corporate property, for instance, can be treated as decisive by one side or incidental by the other. The fact is undisputed; its weight is debated. Courts resolve cases this way. DoJ confirms the weighting is legally defensible for CRA, while private counsel confirms it for the taxpayer. On each side, CRA officials and taxpayer executives, boards, or governance bodies must be able to accept it as internally defensible.
• Exclusion. Weak or marginal facts can be dropped. Courts do this routinely by disregarding evidence. Excluding in a responsible way keeps settlements tethered to reality. DoJ ensures exclusions are legally sustainable for CRA, while private counsel ensures the same for the taxpayer. On each side, CRA officials and taxpayer executives, boards, or governance bodies must be able to accept the exclusion as internally defensible.

Defensibility accommodates evolution

Defensibility is something the parties explore, both individually and together. It is dynamic; it accommodates the natural evolution of a file as facts, assumptions, and beliefs are clarified, re-weighted, or set aside.

As stated, the Crown cannot compromise on the law but may compromise on facts — provided they have some “bearing on reality.” That does not mean certainty or full proof; it means plausibly tied to the record, even if incomplete, contested, or open to interpretation.

The courts themselves recognize this flexibility. In CIBC World Markets Inc. v. R., the Tax Court observed that settlement negotiations often bring forward new facts, better characterizations, and richer appreciation of the law. Similarly, in 1390758 Ontario Corp. v. R., the court emphasized that the Crown may revise an initial view of the facts and law.

In Principled Settlements: There’s More Room To Negotiate Than You Think, Shubir (Shane) Aikat and Gregory B. King reinforced the point: settlements are not expected to mirror the CRA’s or DoJ’s preferred position, the taxpayer’s, or even the outcome counsel predict a court would reach. They need only represent a defensible permutation that a court could sanction.

This point is counter-intuitive because settlement is often treated as splitting the difference or predicting the court’s decision; in reality, defensibility allows broader outcomes, so long as they remain tethered to the record and law.

Avoiding an improperly high bar

When stakeholders handling a dispute shift the test from whether a court could sanction an agreement to whether it reflects their preferred position, or what a court would ultimately decide, the bar is improperly raised. Shifting the test beyond defensibility — to preferred positions or predicted outcomes — undermines the principled and defensible standards both sides are expected to apply.

Raising the bar in this way is not only inefficient; it exposes counsel, officers, and executives to risks at multiple levels: judgment, credibility, and institutional alignment.

Individually, raising the bar prolongs files unnecessarily. On the Crown side, DoJ counsel and CRA officers carry heavier caseloads, adding stress and exposing their judgment to reversal if a defensible settlement is later accepted. Similarly, on the taxpayer’s side, executives and advisors commit capital and management time longer than necessary, with boards left to question whether judgment was exercised effectively.

Socially, reputations suffer. On the Crown side, counsel risk being seen as rigid or overly adversarial within their own organizations, with professional counterparts across the bar, and before the Court. Similarly, on the taxpayer’s side, executives risk appearing inflexible to boards, investors, and regulators.

Institutionally, the consequences are clear. On the Crown side, raising the bar undermines DoJ’s success ratio and CRA Appeals’ “good management” mandate, while consuming resources that leadership expects to be redeployed. On the taxpayer’s side, it delays planning certainty, ties up liquidity, and undermines governance credibility.

Exhibit 2. Risks of raising the bar improperly

Insisting on “preferred” or “predicted” outcomes instead of defensible ones creates risks for the Crown and the taxpayer.

Exhibit 3. Avoiding an improperly high bar

Operating inside defensibility

Judgment and professional credibility are the assets that counsel trade on. Discipline protects these assets. Discipline in defensibility does not mean perfection. It means keeping agreements tethered to facts and lawful characterizations, while letting go of confirmation bias, rigid views, fragile assumptions, and personal stake.

Exhibit 4. Trigger questions for defensibility

Simple prompts help counsel drop weak positions and keep settlements review-ready.

Exhibit 5. Best practices for settlements that survive internal review

Sound settlements select facts and treat them as fixed, assumptions as provisional, and beliefs as malleable.

Exhibit 6. Phrases that make defensibility explicit in internal review

Disciplined responses protect credibility and ease internal approval.

When counsel use these tools, defensibility is not just achieved but made visible. That visibility — internally, institutionally, and in court — is what creates confidence to settle.

Closing thought

Principled is the floor: it constrains by ensuring no agreement contravenes the law. Defensible is the working standard: it opens, allowing settlements to be fair, objective, and tethered to the record — outcomes a court could sanction, even if not the outcome it would ultimately reach.

Defensibility, when treated as common ground, is where counsel exercise judgment with discipline and protect their credibility under review.

When both sides align on this frame, settlement becomes not only possible but expected — achieving earlier certainty, conserving resources, and strengthening trust. When they do not, costs are borne on both sides: DOJ counsel and CRA officers face heavier caseloads, reputational risk, and scrutiny from leadership; private bar counsel and executives face prolonged capital exposure, credibility risk with boards, and questions about judgment.

In both cases, oversight tests two things: the defensibility of the settlement and the judgment of counsel who advanced it. Failures on either measure do not withstand review. When DOJ or private counsel reject defensible settlements within the zone, the consequences are predictable: heavier caseloads, capital at risk, reputational strain, and institutional scrutiny.