Settlements are an important aspect of tax administration and enforcement, as it would be costly and impracticable for every tax dispute to be litigated in court. When engaging in settlement discussions with the CRA, there are a number of important factors for taxpayers to consider, including the type of settlements that are binding on the minister, and the potential cost consequences of making or refusing a settlement offer.
The FCA has long held that the MNR cannot be bound by so-called “compromise settlements” (Galway v. MNR, [1974] 1 FC 600 (CA) and CIBC World Markets Inc. v. Canada, 2012 FCA 3). To be valid, a settlement agreement must have been reached on a principled basis and must be defensible on the facts and the law. A “compromise settlement” refers to a settlement that is based on an arbitrary compromise on the issues or the quantum, and does not reflect the application of the law to the facts. For instance, if the sole issue is whether a particular supply is exempt of GST/HST, a settlement in which the MNR agrees to reduce the assessment by half would be a compromise settlement. This is an all-or-nothing question – the supply is either exempt or taxable – so a 50/50 settlement would not be principled. The outcome is not one that could have resulted from a court’s decision in the matter.
Another consideration is that even where a settlement agreement is not ultimately reached, settlement offers can have a significant impact in terms of cost consequences to the parties. Rules 147(3.1) and (3.2) of the TCC Rules (General Procedure) allow a party to recover substantial indemnity costs (defined as 80% of solicitor and client costs) after the date of its offer to settle, if the party obtains a judgment that is as favourable or more favourable than the terms of the offer.
However, in McKenzie v. The Queen (2012 TCC 329), the TCC held that for the purposes of granting increased costs, a settlement offer must offer a “degree of compromise” (not to be confused with a compromise settlement as discussed above). What this means is that a taxpayer cannot merely make an offer to settle that does concede any part of its claim (effectively proposing that the other party abandon the appeal, with the only “offer” being not to seek costs), and then rely on this to obtain substantial indemnity costs if the settlement offer is refused and the appeal is subsequently allowed by the court. On the other hand, in Standard Life Assurance Company of Canada v. The Queen (2015 TCC 138), the TCC suggested that the broad principle set out in McKenzie should be viewed more narrowly based on the circumstances of that case. It may therefore be possible for a waiver of costs alone to constitute a proper settlement offer for the purposes of seeking substantial indemnity costs – particularly where the situation does not engage the court’s concerns about such an offer being used to circumvent the ordinary rules and considerations applicable when awarding costs. This remains an open question: see the article by Derrick Hosanna and Erica Hennessey in the Canadian Tax Journal in 2020 for more details.
Taxpayers may experience difficulties in trying to make a settlement offer that both contains a degree of compromise while being principled, particularly in all-or-nothing cases – which many tax cases often are. Settlement may be more viable where the reassessment involves multiple issues; a settlement could allow the taxpayer to be successful on some of the issues and the minister to be successful on other issues. For other factors conducive to settlement, see “All About Settlements,” in the CTF’s 2019 Conference Report. Still, these limitations likely result in fewer cases being settled than would otherwise be desirable, and it may be that the TCC ought to revisit its rules in light of this caselaw.
Rebecca D. Loo and Robert G. Kreklewetz of Millar Kreklewetz LLP, Toronto can be reached at rdl@taxandtradelaw.com and rgk@taxandtradelaw.com, respectively.