From: AlanBaggett@volcanomail.com   
      
   The Ludmer decision represents a judicial thawing of Canada Revenue Agency   
   liability :CRA SOTW   
      
      
   Sep 25, 2018 Author: David J. Rotfleisch    
      
   September 25, 2018 – It used to be that fighting the Canada Revenue Agency   
   (CRA) was like fighting city hall — soul-sucking and futile — and the CRA   
   could not be held liable for negligence.    
      
   No more! On July 31, 2018, the Honourable Judge Stephen W. Hamilton of the   
   Québec Superior Court released an historic legal decision on the issue of the   
   CRA being liable for damages for the tort of negligence. At the root of the   
   case were the    
   investments of two wealthy Montreal businessmen, Irving Ludmer and Arnold   
   Steinberg, in St. Lawrence Trading Inc., and an audit that the CRA abandoned   
   in 2014.    
      
   This precedent-setting ruling culminates the process started with Irving   
   Léroux (Léroux v Canada Revenue Agency) in 2014, who had convinced the Court   
   that a duty of care existed between the CRA's audit division and the taxpayers   
   whom it audits. The B.C.   
    Supreme Court admitted that the potential power imbalance between most   
   taxpayers and the CRA could result in a business going bankrupt due to   
   aggressive CRA audit and enforcement actions.    
      
   The case was a pyrrhic victory for Mr. Leroux since the court was not   
   convinced that his damages were caused by the behaviour of CRA personnel.    
      
   Recently, in Samaroo v CRA, two taxpayer spouses were successful in holding   
   the CRA liable for damages under the seldom used tort of misfeasance of public   
   office. However, the CRA had avoided a judgment for damages for the normal   
   common-law tort of    
   negligence.     
   Bermuda and the billionaires’ audit   
   There was a sea change with what appears to be little fanfare in the media   
   upon the release of Ludmer c. Attorney General of Canada, 2018, which held   
   that the CRA can and will be held liable for damages in negligence where its   
   actions create a measurable    
   harm to taxpayers when it abuses its powerful audit mandate. The claim was   
   granted and the CRA was forced to pay approximately $4.8 million in damages   
   for negligence exercised throughout a protracted and abusive tax audit.    
      
   In 2005, the CRA began the Related Party Initiative, known as the   
   "billionaires' audit." The CRA audited a number of high net-worth individuals   
   who had a history of paying low income tax.    
      
   Between 2006 and 2012, the CRA engaged in a massive audit. In May 2012, it   
   issued final tax reassessments against certain investors totaling more than   
   $25 million. The audit report contained four different grounds to support the   
   reassessments, which were    
   promptly objected to by the plaintiffs and subsequently appealed to the Tax   
   Court of Canada.    
      
   After the appeals were instituted, the CRA attempted to gather evidence of   
   gross negligence to substantiate the gross-negligence penalties levied. The   
   CRA wrote to the Bermuda tax authorities to gather information related to a   
   "criminal tax matter." The    
   plaintiffs’ lawyer caught wind of the request and demanded that it be   
   withdrawn, which the CRA did, in time.    
      
   Based on the length of the tax audit and actions of the CRA, the plaintiffs   
   sued for negligence, suing for damages and punitive damages. Although the   
   Court did not allow all of the plaintiff's arguments, this case is a watershed   
   that proved that the CRA    
   does have an obligation to the public when it exercises its audit powers and,   
   should it overextend its powers, it will be forced to pay recompense.    
      
   The role and core policy of the CRA   
   The Court held that, although there was a long common-law tradition of the CRA   
   being immune to negligence claims during the performance of an audit, the   
   plaintiffs had the advantage of having been residents of Québec. The Court   
   held that common-law    
   concepts of duty of care, proximity, etc. had no effect and instead the   
   Québec Civil Code applied.    
      
   The Civil Code, in conjunction with the Crown Liability and Proceedings Act   
   and the Supreme Court of Canada's decision in the R v Imperial Tobacco case   
   led to a finding that the CRA could only be immune from a negligence claim if   
   it were taking action in    
   accordance with its true core policy.    
      
   The true core policy of the CRA is limited to the calculation and collection   
   of taxes, and the CRA itself is not charged with exercising a legislative or   
   regulatory power or setting tax policy — this is the core policy only of the   
   Department of Finance.   
    The Court held that the CRA could not claim immunity from an action in   
   negligence in Québec and that it is subject to the regular civil standard of   
   fault in that province.   
      
   The CRA must act reasonably when it performs an audit.    
      
   The Taxpayer Bill of Rights is an important document that speaks to how   
   auditors must conduct themselves during the audit, which is merely an   
   administrative function. Negligence is sufficient to establish fault and it is   
   not necessary to establish that    
   the CRA acted maliciously. Intentional conduct is only necessary for a finding   
   of punitive damages. The CRA can be wrong without being at fault; it is not at   
   fault if it takes a reasonable position which later turns out to be incorrect.   
   The CRA’s    
   powers under the tax statutes must be exercised reasonably and not in an   
   abusive way.    
      
   The CRA was negligent and had improperly conducted its tax audit by creating   
   and refusing to abandon clearly untenable tax reassessment positions; failing   
   to provide notice of forthcoming tax reassessments after promising to do so;   
   making a request to    
   the Bermuda authorities with reference to a "criminal tax matter"; acting   
   improperly in attempting to railroad through a settlement on issues it had   
   already decided to abandon during the Tax Court Appeals; and the failure to   
   properly disclose information    
   through the Access to Information Directorate.    
      
   The Court found no intentional malice on behalf of the CRA, so did not award   
   any punitive damages.   
      
   Outside of Québec, taxpayers face common-law decisions of the various Courts   
   where caselaw still supports the proposition that the CRA cannot be sued for   
   negligence, the sole exception being the Leroux case, which resulted in a   
   finding of a duty of care    
   by the CRA but no actual negligence.    
      
   Ludmer represents a judicial thawing of the concept that the CRA cannot be   
   held liable for damages in negligence. We expect that taxpayers will be able   
   to hold the CRA accountable in the common-law courts in time, given the   
   correct factual circumstances.    
      
      
      
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