Lexpert Magazine

LEXPERT MAGAZINE | APRIL 2016 17 steps against them. "ese decisions should over time result in a difference in the way the CRA treats taxpayers and their rights," says tax lawyer David Rotfleisch of Rot- fleisch & Samulovitch PC in Toronto. Still, Sorensen is careful to point out that Enico featured "outrageous" facts, such as destroyed notes, lost evidence, auditors operating under false pretences, information withheld from the taxpayer, fraudulent entries in CRA working papers, and revelations about "quotas" imposed on Revenue Q uébec personnel. "e evidence also showed that Revenue Q uébec contin- ued to seize assets even aer it knew that the assessments against Enico were grossly inflated," Sorensen says. "It was a perfect storm of facts in favour of a duty of care." Indeed, both Scheuer and Enico dem- onstrate that win- ning in principle doesn't mean win- ning in substance. In Scheuer, the taxpayers, who had purchased tax shel- ters, had their case dismissed because the FCA held that the duty of care does not extend to warn- ing investors about the potential dangers of tax shelters even when the CRA has cause for concern about particular schemes. e court did, however, give the investors leave Taxman owes duty of care Québec ruling awards $1 million in punitive damages for abuse of powers BY JULIUS MELNITZER to change their pleadings so as to assert a lawful basis for their claims. e BC case involved Irvin Leroux, a businessman who fought a 19-year battle against the CRA for wrongfully impos- ing tax assessments that exceeded $1 mil- lion. During its au- dit, the CRA took documents without authorization, shred- ded them accidental- ly, then asked Leroux to provide further documentation. Even aer the CRA reduced the assess- ment, Leroux continued his claim for com- pensation, alleging that the CRA's actions had caused him to lose his business. e Canadian Taxpayers Federation supported Leroux in his fight. Tax professionals called the BC court's ruling a milestone for taxpayers seeking to hold CRA accountable for its actions. But while Leroux won the battle, he lost the war. Not only did he fail in his drive to re- ceive compensation, but the court ordered him to pay the CRA's legal fees as well. e case has now settled on appeal with Leroux paying $10 towards those fees. e key difference between the results in Leroux and Enico is that the BC court found that CRA's actions did not cause Leroux's losses. By contrast, the Q uébec Court of Appeal found a direct link be- tween CRA's conduct and the collapse of Enico's business, which had grown sub- stantially and enjoyed more than $5 mil- lion in sales before CRA came along. e lessons to be learned? "Enico opens a small window in egregious cases and per- haps cases in which CRA assessments and conduct run contrary to its own internal policies," Sorensen says. THE QUÉBEC COURT of Appeal's recent award of $2.4 million, including $1 million in punitive damages, in favour of a company destroyed by Revenue Q ué- bec's abuse of its powers has gone a long way to imposing a duty of care on Canadian fis- cal authorities. "It will now be easier for businesses and individuals to argue that the Canada Revenue Agency and other tax au- thorities must administer the law in good faith and refrain from behaviour that is abusive or irrational," says Martin Sorensen of Bennett Jones LLP in Toronto. To be sure, Agence du revenue du Qué- bec c. Groupe Enico turned on the duty of good faith enshrined in Q uébec's Civil Code. But the decision is in line with two common-law rulings on the point. Both the Federal Court of Appeal's decision in Canada v. Scheuer, released just weeks before Enico, and the British Columbia Supreme Court's 2014 judgment in Ler- oux v. Canada Revenue Agency affirmed that CRA has a duty of care to taxpayers. "Generally speaking, the duty of care is well-known to the common law, and the principles discussed in Enico are similar to those dealt with in Leroux," Sorensen says. e decisions might make the CRA and other tax authorities easier to deal with be- cause they suggest that the agency is not at liberty to intimidate and threaten taxpay- ers as it chooses and has a responsibility to take appropriate care in deciding to take MARTIN SORENSEN > BENNETT JONES LLP DAVID ROTFLEISCH > ROTFLEISCH & SAMULOVITCH PC ON THE CASE ENICO FEATURED 'OUTRAGEOUS' FACTS, SUCH AS DESTROYED NOTES, LOST EVIDENCE, AUDITORS OPERATING UNDER FALSE PRETENCES, INFORMATION WITHHELD FROM THE TAXPAYER, FRAUDULENT ENTRIES IN CRA WORKING PAPERS, AND REVELATIONS ABOUT 'QUOTAS' IMPOSED ON REVENUE QUÉBEC PERSONNEL. ... 'IT WAS THE PERFECT STORM OF FACTS IN FAVOUR OF A DUTY OF CARE.' > MARTIN SORENSEN, BENNETT JONES LLP

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