By Allan Lanthier

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Opinion: Dithering by Canada Revenue Agency leads to million-dollar loss Back to video

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Play Video

Deceit. Tax avoidance. Marriage vows abandoned and then renewed. All are part of a tax court decision released last month in which the Canada Revenue Agency didn’t collect a penny of the nearly one million dollars it was seeking. Why? In large part because of its own dithering.

Here’s the background: please fasten your seatbelts.

Charles Csak (Mr. C) moved from Hungary to Canada when he was in his fifties. His financial position flourished: his romantic interests not so much. At the tax court, his wife Maria Csak (Mrs. C) explained she had planned to marry her husband in 1988 or 1989 but, without her knowledge, he married someone else! That marriage was short-lived: the blushing bride called it quits two days later and moved to Europe. A divorce followed.

Love is blind, and Mr. and Mrs. C reconciled. She was concerned, however, that she might be double-crossed again. What if the first wife returned and claimed Mr. C’s home in Mississauga? She advised Mr. C she would not marry unless he gave her the home. They married in October 1992 and shortly after Mr. C gave her the property.

While this love triangle was playing out, Mr. C had gotten himself into a tax pickle. In 1988, he participated in an aggressive tax avoidance scheme and claimed significant tax losses, primarily for the 1988 and 1989 taxation years. That case went to court and, in a 2006 decision, the tax losses were denied.

By that time, Mr. C had passed away. Though his estate owed the CRA almost $5 million as a result of the court decision, there were few assets for CRA collectors to go after. But the tax act has a rule for such situations. If a person (in this case, Mr. C) transfers property to a related person at less than fair value, the transferee (Mrs. C) is on the hook for any taxes owing by the transferor or his estate up to the value of the property received. The estimated value of the home in Mississauga was $950,000 when Mrs. C received it, and the CRA said she owed that amount.

But Mrs. C argued that her husband and his estate had no tax debt at all, because the CRA had waited too long to reassess her husband. The CRA generally has three years from the date of the first assessment for any taxation year to either issue further reassessments or secure a waiver from the taxpayer extending the three-year limit. Pressing up against the limit, the CRA had asked for waivers for both 1988 and 1989.

But when the CRA received the 1988 waiver from Mr. C, it did not stamp the date received on it. The court decided there was insufficient evidence to determine when exactly the waiver was received: as a result, 1988 had become “statute-barred” and the CRA’s subsequent assessment for that year was null and void.

The 1989 waiver form had been stamped. But it was received by the CRA on a Monday, exactly one day past the deadline. Or was it? Canada’s Interpretation Act says that where the deadline for doing something expires on a Sunday or holiday it can be done the following day.

To the surprise of the CRA, and many in the tax community, the court decided the waiver was invalid. The purpose of the one-day grace period, it ruled, is to grant relief to a person facing a deadline to do something, such as file a tax objection or appeal. In this case however, the waiver would have granted relief solely to the CRA in the form of a longer period in which to assess tax. The party who “did something” (Mr. C) was not seeking relief, and so the grace period was not relevant.

In short, the CRA missed the deadlines for both 1988 and 1989, and its $950,000 claim against Mrs. C was denied. It took many years for Mrs. C to finally have her day in court — in part because Mr. C had passed away leaving a messy state of affairs — but she prevailed.

We see this type of CRA dithering too often. The agency mulls over whether to take action or not; issues are referred back and forth between the local CRA office and Ottawa; and it waits as long as possible to dot the i’s and cross the t’s. It is time for a change.

Allan Lanthier, retired partner of an international accounting firm, has been an adviser to both the Department of Finance and the Canada Revenue Agency.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters financialpost.com.