56 LEXPERT MAGAZINE
|
JUNE 2016
| TAX LITIGATION |
the finances to fight governments.
Indeed, even clients flush enough to be
susceptible to multimillion-dollar assess-
ments might conclude that pursuing a
claim for breach of duty isn't worth it.
"I have a successful client who recently
got a $50-million assessment based on one
of the most insane positions I have ever
seen in 23 years of practice," Boddez says.
"We've just closed the file and he owes
nothing, but he won't sue for what was
clearly a negligent audit because the way
the system is structured, he'd just be spend-
ing a whole lot of legal fees to try to recover
what he paid us."
Legal fees, in fact, are
becoming a concern through-
out the tax dispute resolution
system. "ere's no question
that the expense of litigation
has become a much larger is-
sue for all litigants, including
governments, than they used
to be," Rossiter says.
As tax disputes become
more common, they are also
becoming more complex,
more lengthy, more costly
and increasingly immersed
in an environment that lacks
the collegiality it had before.
"When I started out,
cases rarely took more than two days and
usually lasted one half day," Rip says. "But
the GlaxoSmithKline transfer-pricing case
went on for 20 years and took up 47 days
of trial."
By way of demonstrating how quickly
things are moving, it wasn't long before the
47-day length-of-trial record was eclipsed:
Rossiter recently presided over a 62-day
hearing that engaged 120 bankers' boxes
holding 220,000 documents.
If anyone at all is benefitting from this
trend, it's probably the CRA. "ey likely
don't mind because they can bleed people
to death," says Jack Blackier of Cox &
Palmer in Saint John. "In many cases, it
becomes cheaper to write the cheque to the
CRA than to pay lawyers."
As it turns out, transfer-pricing cases are
a particular problem, largely because there
are no easy ways for companies to take ad-
vantage of the rules.
"Recent decisions have made it clear that
"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.
Still, Sorensen is careful to point out that
Enico featured "outrageous" facts. ey in-
cluded information withheld from the tax-
payer, destroyed notes, lost evidence, audi-
tors operating under false pretenses, fraud-
ulent entries in Revenu Québec working
papers and revelations about "quotas"
imposed on Revenu Québec personnel.
"e evidence also showed that Revenu
Québec continued 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 and it opens a small window in
egregious cases and perhaps cases in which
CRA assessments and conduct run con-
trary to its own internal policies."
But it doesn't open even the smallest of
windows at the TCC, which can't award
damages or grant relief from penalties or
interest. e upshot is that so long as tax-
payers have to run around to various courts
to assert the duty of care, the duty could
well remain in the realm of theory, dusted
off only when taxpayers have the will and
unsophisticated transfer-pricing schemes
won't work," says Greg Gartner of Moodys
Gartner Tax Law LLP in Edmonton.
Almost by definition, then, transfer-
pricing programs and policies must be
quite complicated.
"e CRA's heightened emphasis on
transfer pricing is causing taxpayers to doc-
ument their obligations and transactions
correctly," says Glenn Ernst of Goodmans
LLP in Toronto. "Getting full and detailed
transfer-pricing reports is more prevalent
than ever."
In the event of a dispute, of course, the
complexities invariably find their way into
the courtroom. "e courts are dealing
with massive audits and huge money," says
David Chodikoff, who practises with Mill-
er omson LLP in Toronto. "e cases are
slow to get to court, get bogged down when
they get there and require enormous effort
to be resolved."
And if the recent uncertainties created
by the federal budget are any indication,
things are likely to get worse before they get
better. Among the measures announced by
the federal government was its intention
to adopt certain BEPS transfer-pricing
guidelines without amending s. 247 of
the Income Tax Act, which articulates the
"arm's-length principle" that is the basic
statutory rule governing transfer pricing
in Canada. But adopting the international
standards without legislative action flies in
the face of the Supreme Court of Canada's
pronouncement that the OECD transfer
guidelines are not per se law in Canada
and subsequent judicial interpretations
that enunciate a domestic standard for the
arm's-length principle that differs from the
BEPS standards.
"e budget indicates that the CRA
intends to effectively ignore the Supreme
Court and try to use BEPS transfer-pricing-
related recommendations in its interpreta-
tion and enforcement of the ITA, a move
that quite likely will increase disputes and
litigation between multinationals and the
CRA," says Nathan Boidman of Davies
Ward in Montréal.
Resolving matters, not just trans-
fer-pricing matters, at the audit stage would
undoubtedly make a serious dent in the liti-
gation explosion. But that's not happening.
"e gloves are coming off more fre-
"Recouping money that's going
outside the country by focusing on
offshore tax havens and aggressive
tax planning is where we'll see
the most vigorous enforcement,
and there's going to be a lot
of litigation around that."
TOM BODDEZ
>
THORSTEINSSONS LLP
