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FRASER VALLEY CHARTERED ACCOUNTANTS ASSOCIATION

SETTLING TAX DISPUTES

ED KROFT, Q.C.BLAKE, CASSELS & GRAYDON LLP

November 7, 2013

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Settling Tax Cases

· Clients always want to know about prospects of settling tax controversies

· Settlement is an art – there is no one formula for success

· Many factors affect the methodology, content and timing of a settlement and the strategy associated with it

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Settling Tax Cases

· Tax statutes do not fully outline the methodology of how to settle disputes – they refer to procedural rules relating to the powers of the Minister to reassess and waivers of objection and appeal rights (ITA 169(3), 164(4.1), 165(1.2), 165(3), 165(5), 165(1.2), 169(2.2), 152(4.2), 152(4.3), 220(3.1))

· Parties only rely on these rules to effect a resolution of a dispute

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· There are many “tools” that may assist with facilitating a settlement

· First and foremost, the key to crafting and obtaining a successful settlement requires clarity regarding what a “win” is for each party to the controversy

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· To get to this place, realism is required and the timetable may be longer than one of the parties might expect – so patience is critical to success

· “Maximizing” a settlement will differ in every case. “Win” will look different to different people

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What Might Be Considered A “Win”?

Some Elements· What is a “win” for the taxpayer? What is a “win” for the

tax authority?

· What is at stake for the taxpayer? Money, principle, time, political capital, someone’s job, certainty, public scrutiny?

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What Might Be Considered A “Win”?

Some Elements· What is at stake for the tax authority? The same things

· Money: Nothing owing or some amount? (Both sides)

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What Might Be Considered A “Win”?

Some Elements· Court proceedings or not? (time, money) – Both

sides

· Lengthy process or not? (time, someone’s job) – Both sides

· Availability of personnel to work on the tax controversy? (time, political capital) – Both sides

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What Might Be Considered A “Win”?

Some Elements· Costly process or not and the need to hire people?

(money) – Both sides

· Reputational risk or not? (someone’s job, money) – Both sides

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What Might Be Considered A “Win”?

Some Elements· Certainty for future years or not? (principle, someone’s

job) – Both sides

· Consistency with published practices/precedent (principle) – Tax authorities

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What Might Be Considered A “Win”?

Some Elements· Are amounts owing to tax authorities creditable

elsewhere? Has full provision been made on financial statements? (Does “winning” really matter?) – Taxpayer (Bonus allocations)

Settling Tax Cases

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What Might Be Considered A “Win”?

Some Elements· Overall: Formulation of a “maximum amount you can live

with” will help to determine the strategy and the tools needed to obtain the result – This analysis is done consciously or unconsciously, rationally or irrationally, by both sides. The answer is fluid and can change at different times because the relative importance of the elements will change.

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· “Maximizing” and “winning” therefore are not always about just money

· How can you “maximize” a settlement?– Understand what factors and issues affect your settlement

prospects– Understand that factual, legal, practical and strategic factors

lead to or prevent settlement

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Settlement Factors· The following is a checklist of factors which play a role

within the settlement process:1. Costs of litigation/dispute resolution (professional costs and

opportunity costs)2. Stress and distraction of litigation/dispute resolution (loss of

time)

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Settlement Factors3. The expected benefits of winning (present and

future)• The chances/magnitude of winning (based on an analysis

of the facts, evidence, law, and business issues)• The personality, approach, bias and experience of persons

acting for/on behalf of the taxpayer

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Settlement Factors4. The personality, approach, bias and experience of

persons acting for the Crown:• CRA (audit, appeals, designated appeals)· Department of Justice lawyers

5. The nature of the dispute• Technical (legal interpretation)• Factual• Judgmental (e.g. quantum, valuation)• Is it an “all or nothing” type of issue?• Does the matter lend itself to a compromise? (e.g.

valuation, expenses)

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Settlement Factors

6. The personality, approach, bias and experience of judges

7. The need to meet deadlines· By the taxpayer (to provide information/documents,

limitation periods, procedural limitations)

· By CRA (limitation periods, internal constraints, procedural limitations)

8. Publicity of the dispute and reputational risk

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Settlement Factors9. Nature and tone of the communications between

the tax authority and the taxpayer (meetings, telephone calls, written responses)

10.Personal/corporate profile of the taxpayer (education, sophistication, experience, wealth)

11. The necessity of technical compliance with applicable tax legislation

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Settlement Factors12.The prospect of accountability

– by the taxpayer (to shareholders, to lenders, to competitors, to the public)

– by the tax authority (internally, to the Auditor-General, to the public)

13.Possible taxpayer mistakes (lack of courtesy/respect, inconsistent stories, lack of interest, absence of proof/evidence, non-compliance with procedural or substantive requirements)

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Settlement Factors14.Possible CRA mistakes (missing statute-

barred deadlines)

15.The effluxion of time and the age of the dispute (battle fatigue, maturing perspectives)

16.The need for a “principled” or legal settlement

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Legal Basis for Settlement· The necessity for a legal basis of settlement: can you

compromise?

· Can a Taxpayer or CRA repudiate a settlement?

Settlement Strategies

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Legal Basis for Settlement· Jurisprudence

– Cohen, Smerchanski, Galway, Enterac, Garber– 1390758 Ontario– Huppe– CIBC World Markets– Potash Corporation– Hine– McKenzie– Transalta– Softsim

Settlement Strategies

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“Maximizing”Based on the previous list of factors and the particular “maximization” in the circumstances, how can you “maximize” a settlement?· Understand your adversary and their position· Establish and maintain credibility and integrity with your

adversary – trust creates the environment for a deal or it has to be mediated by a judge or foreign government

· Understand and anticipate what implications a settlement will have

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“Maximizing”· Stick within risk tolerance and expectation· Determine when to settle· Identify who has the authority to settle· Be creative and assume nothing is impossible· Be prepared to litigate

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Tools in the Settlement Toolbox· Commitment to “win”

· Preparation

· Good relationships with tax authorities - trust

· Effective documentation retention and recovery

· Ability to listen well and other “soft” skills – it’s a “people” process and not a robotic one

· Knowledge of your case and the facts

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Tools in the Settlement Toolbox· Ability to secure witnesses including those who

are no longer in organizations

· Knowledge of the prevailing law and sensitivity to movements in judicial trends

· Knowledge of how to create a “legal” and “principled” settlement

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Tools in the Settlement Toolbox· Knowledge of court process and proper forum

for dispute– Tax Court (settlement conference, case

management, costs, motions)– Federal Court (judicial review of ministerial action

including challenge to compellability of documents)– Provincial Court/Superior Court (privilege,

rectification, provincial assessment)

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Tools in the Settlement Toolbox· Knowledge of tax authority administrative practice and

personnel– Taxpayer relief provisions– Real time audits– Structure of the tax authority and its mechanics

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Tools in the Settlement Toolbox· Knowledge of remedies available to facilitate

the settlement– Administrative (waiver of interest and penalties)– Judicial (tax court hearing/motion)– Statutory (court, remission order)

· Patience – when should a settlement be rejected? Knowing when to hold or fold

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· What are the possible effects of the settlement?– Certainty for past– Reduction of tax, interest, penalties– Elimination of reputational risk, cost savings, better deployment

of corporate resources

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· When can you settle?– Anytime (audit, appeal, court)– At the Tax Court level

• After pleadings• After Discovery process• Settlement Conference• Pre-trial Conference• Just before Trial

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· How do you settle?– “Without Prejudice” written offers

• Indefinite or limited?• Non-disclosure?• Costs? Do you need a “compromise” position to get

enhanced costs or can you get such costs in an “all or nothing” situation? (Blackburn Radio 2013)

• Trial balloons?– Oral communications – are they useful?

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· How do you settle?– Waiver of objection/appeal rights – tough to reverse (Noran

West, 2012 TCC)– Within the Tax Court process

• Consent to Judgment (public)• Subsection 169(3) of the ITA• Minutes of Settlement (not public)

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Questions

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