A recent decision by a provincial superior court outlines an overzealous audit by the agency
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A legal battle between the Canada Revenue Agency and a group of high-wealth taxpayers — which ended with the agency being ordered to pay damages of close to $5 million — offers a glimpse of how aggressive tax collection efforts could lead to overzealous and incorrect auditing.
In a column for the Financial Post, tax policy expert Allan Lanthier described the case of SLT, a company that was incorporated in the British Virgin Islands. Among the company’s initial investors and directors of the company were two Montreal businessmen, Irving Ludmer and the late Arnold Steinberg.
“In 2001, the company was reorganized under the name SLT,” Lanthier wrote, adding that SLT managed assets of about $1 billion. “Its structure was intended to defer Canadian tax for 15 years, and to result in capital gains rates for any accumulated income and gains at that future time.”
As part of a project aimed at high-wealth individuals, the CRA undertook an audit of shareholders of SLT in 2005. In time, a number of holding companies owned by Ludmer and Steinberg and family members were audited for the years 2005 to 2010; the agency abandoned and reversed most of the assessments.
Taking the view that the CRA had adopted the strongest possible assessing positions simply to gain leverage for a possible settlement, the taxpayers sued the agency for damages. In its decision on the case, the Quebec Superior Court found that the SLT structure was made significantly for the purpose of tax reduction, but “taxpayers are entitled to organize their affairs in order to pay the least amount of tax.”
Examining the CRA’s conduct during its audit, the court found that it had applied an arcane tax provision — regulation 7000 — in a manner inconsistent with assessing positions that it had taken with other taxpayers. The agency was also deemed to have purposely bungled foreign-exchange calculations so that the total income for SLT shareholders over the years was incorrectly assessed at $434 million rather than $44 million. The CRA’s assessment for the 2005 had also included income that accrued for many years prior to 2005, even though 2005 was the first year that was open to assessment and there was no legislative support for the inclusion.
“In seeking information from the Bermudian authorities, the CRA stated that its request related to a ‘criminal tax matter’ when it clearly did not,” Lanthier added. “And the CRA was painfully slow in responding to the taxpayers’ requests for CRA documents under the ‘access to information’ provisions.
“The CRA’s conduct in this matter is troubling. More troubling are the facts that ordinary Canadians without deep pockets are often at the mercy of the CRA,” he said.
