From: AlanBaggett@volcanomail.com   
      
   Tax court forces Canada Revenue Agency to expand disclosure   
   Julius Melnitzer | Feb 13, 2013 4:40 AM ET    
      
   An important and precedent-setting decision by the Tax Court of Canada compels   
   the Canada Revenue Agency (CRA) to provide greater disclosure when litigating   
   a case under the Income Tax Act’s powerful anti-loophole provision, the   
   general anti-avoidance    
   rule (GAAR).   
      
   The ruling means the CRA must retreat from its historical refusal to disclose   
   which tax policy it is relying on when it accuses taxpayers of abusing tax   
   policy.   
      
   The GAAR provision enables the government to attack transactions that would   
   otherwise seem to comply with the law, but would also seem to “abuse” the   
   broader policies that underlie the Income Tax Act (ITA).   
      
   Endless pronouncements from a frequently divided Supreme Court of Canada have   
   demonstrated that there are no bright lines here. When it comes to the thin   
   strip between non-abusive tax avoidance and abusive tax evasion, abuse is   
   often in the eyes of the    
   beholder.   
      
   To succeed in a GAAR case, the CRA must prove that the policy abuse did indeed   
   exist and that the transactions in question abuse it. Until the December   
   release of a decision called Birchcliff Energy Ltd. v. The Queen, however,   
   there was no obligation on    
   the CRA to disclose the core policy it was relying on until the case was   
   actually heard.   
      
   In Birchcliff, the CRA alleged that certain transactions abused 10 sections of   
   the ITA, but refused to identify the policy that explained why the   
   transactions were supposedly abusive.   
      
   In the court’s view, that defied common sense. “In a GAAR challenge why should   
   a taxpayer not know what policy the assessment was based on?” the court asked.   
   According to Alan Kenigsberg, a tax lawyer in Stikeman Elliott LLP’s Toronto   
   office, identifying the policy goes beyond assisting the taxpayer to focus on   
   the real issues earlier in the case.   
      
   “It’s also useful from a strategic perspective,” Mr. Kenigsberg says. If the   
   CRA first says it is relying on one policy, then later in the case says it is   
   relying on something else, the government will have a hard time trying to   
   demonstrate that the    
   taxpayer abused a clear policy.   
      
   Still, it’s clear from the judgment that the government is not bound by the   
   policy that the assessor relied on.   
      
   “There will be, as in any GAAR litigation, a significant massaging of the   
   issues and the argument, with the ultimate aim of ensuring at trial there are   
   no surprises,” the court noted.   
      
   In other words, the CRA doesn’t have to pin itself down to specifics at an   
   early stage.   
   Still, Claire Kennedy, a tax lawyer in Bennett Jones LLP’s Toronto office,   
   says the judgment will not really change the framework for GAAR litigation.   
      
   “While the CRA does have to broadly stipulate the policy that’s been violated,   
   they don’t have to say how it’s been violated,” Ms. Kennedy says. “So I don’t   
   think this case is revolutionary, but I do believe that forcing the CRA to   
   provide some form of    
   disclosure makes it unlikely that they’re going to change horses in midstream   
   — and that helps.”   
      
   Financial Post   
      
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