PRINCE GEORGE, B.C. — Canada Revenue Agency must live up to its responsibilities to the Canadian public and apply “a little common sense” when auditing and re-assessing taxpayers, the Supreme Court of British Columbia said in a decision released on May 1, 2014.
Taxpayer Irvin Leroux sued the CRA for negligence in 2007 after the CRA imposed “huge penalties” on him following an audit of his income tax returns—penalties that were ultimately reversed in Tax Court. The CRA made repeated attempts to have the negligence lawsuit thrown out at preliminary stages, but the trial was finally held before Madam Justice M.A. Humphries of the BC Supreme Court in late 2013.
The judge had stern criticism of the CRA’s handling of Leroux’s audit. “[T]he very disproportionality of [the penalties] should have prompted CRA to take a closer look at this file,” she wrote. “Instead they simply proceeded with no apparent care or comprehension as to what they were doing to the taxpayer . . . ” even though the result would be “so obviously devastating to the taxpayer.”
The court held that the CRA auditors owed a duty of care to Leroux, even though courts in previous cases have been reluctant to impose this legal obligation on the tax department. Furthermore, there was “a clear breach of the standard of care expected of an auditor of CRA in relation to a taxpayer.”
This was “a misuse of statutory powers,” the judgment states.
Citing a 2011 case from the Tax Court of Canada, Justice Humphries said that CRA must have clear evidence of taxpayer recklessness or wrongful intent in order to justify a penalty. “The taxpayer gets the benefit of the doubt,” she wrote.
Leroux was assisted in bringing his lawsuit by the Canadian Constitution Foundation (CCF), a registered charitable organization that engages in public interest litigation on a pro bono basis.
Karen Selick, the CCF’s litigation director, called the decision a precedent-setting victory for taxpayers. “We agree heartily with the court that holding CRA personnel to a standard of care that might make them more careful of taxpayers’ rights is a good thing. This was one of the results the CCF hoped to achieve by supporting Irvin through this lawsuit.”
“Unfortunately, despite the invaluable service that Irvin has rendered to other taxpayers, the court was unable to award him any damages. The evidence did not meet the high standard necessary to prove that the CRA caused his financial downfall.”
Selick continued: “We’re very grateful to Laurie Armstrong, the lawyer who represented Irvin at trial, for helping to achieve this landmark decision.”
The court ordered each side to bear its own legal costs of the trial, although Leroux had earlier been awarded some costs from the CRA in several preliminary motions and appeals.
The decision in Leroux v. Canada Revenue Agency 2014 BCSC 720 can be downloaded from the BC courts website.
The Canadian Constitution Foundation (“Freedom’s Defence Team”) is a registered charity, independent and non-partisan, whose mission is to defend the constitutional freedoms of Canadians through education, communication and litigation.