Dispute Record Risk at CRA Reassessment

Unless challenged early, audit and objection assumptions will influence the outcome. Zelkova Design Ltd. v. HMK.

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By the time the CRA issues the reassessment, the record is already taking shape. During the objection, the CRA will reinforce its interpretation of the facts and how they apply. That view appears in audit and objection working papers and in what the auditor or appeals officer later states they assumed.

The DoJ builds on the CRA's position. It decides what to include in the pleading and what to leave out. What enters the Court record remains unless a party asks the Court to apply the rules and the Court agrees to remove it.

The Situation

In Zelkova Design Ltd. v. The King, the dispute involved denied deductions, penalties, and a reassessment outside the normal period. However, in its reply, the DoJ added information about prior audits, charges, and a guilty plea tied to different years and a different entity.

The taxpayer brought a motion under Rule 53(1)(a) to strike those allegations. The Tax Court granted the motion and removed them without leave to amend. The Court held that the material did not advance the determination of liability for the years under appeal and did not meet the rules governing relevance and restricted reasoning.

What Made the Difference

Statements that do not relate to the legal issues do not belong in the dispute record. When a party's pleading expands the dispute record, it serves no proper purpose.

In Zelkova, the DoJ pleaded material that did not bear on the deductions, the limitation period issue, or the penalties. The DoJ did not need that material to prove its case, and it risked influencing how the record would be read, in the DoJ's favour, contrary to the Rules.

The Court found no connection between that material and the issues under appeal. It came from different years, different conduct, and a different entity.

The Court struck it at the pleading stage, without leave to amend.

Why This Matters When a CRA Reassessment Arrives

For the DoJ, adding material early carries little immediate pushback. By the time the pleading is filed, the Court record has already been shaped.

What happens turns on two points.

First, the objection. It influences what the CRA and DoJ will attempt to leverage and bring forward.

Second, timing. What is identified early can be challenged and limited. What is not identified can be carried forward and becomes harder to remove.

Case Reference: Zelkova Design Ltd. v. The King, 2026 TCC 66.

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