Canada v. CBS Canada Holdings Co. – FCA: Crown bound by the terms of settlement agreement it entered into with taxpayer

Canada v. CBS Canada Holdings Co. – FCA:  Crown bound by the terms of settlement agreement it entered into with taxpayer

Canada v. CBS Canada Holdings Co. (January 10, 2020 – 2020 FCA 4, Pelletier, Woods (Author), Laskin JJ.A. ).

Précis:   The taxpayer entered into a settlement agreement with the Crown in the course of a Tax Court appeal.  After the settlement agreement was executed the Crown advised the taxpayer that it had concluded that one of the proposed reassessments could not be issued.  The taxpayer successfully brought a motion in the Tax Court to allow the appeal.  The Crown appealed to the Federal Court of Appeal.  The Court of Appeal dismissed the Crown’s appeal with costs to the taxpayer fixed at $15,000 (including disbursements).

Decision:   The Court of Appeal found that the Galway principle (Galway v. Minister of National Revenue, [1974] 1 F.C. 600 at 602, 1974 D.T.C. 6355 (C.A.) ) did not apply to allow the Crown to resile from the settlement agreement:

[34]  In my view, the Crown’s reliance on Galway in this case is misplaced. Further, the Crown does not suggest any means other than Galway for providing relief.

[35]  The general rule is that parties should be bound by the agreements that they make. There is no good reason to create an exception here. As suggested by the Tax Court in 1390758 Ontario Corp. v. R., 2010 TCC 572, 2010 D.T.C. 1385, this would be very unfair to CBS: “[b]oth sides of a dispute are entitled to know that if they invest the time and effort required to negotiate a settlement, then their agreement will bind both parties” (at para. 37).

[36]  The Crown entered into the settlement agreement believing that it was in its best interest to do so. It should be required to live up to its bargain. In my view, it would not be appropriate for the Court to wade into the merits of the agreement.

Secondly the Court rejected the Crown’s technical arguments based on an alleged increase in tax payable and the alleged inclusion of taxation years not under appeal:

[55]  First, there is no reason why an increase in tax payable should preclude the Tax Court from granting the remedy sought. The Crown suggests that doing so is prohibited because the Tax Court cannot increase tax payable in a statute-barred year. However, the principle against increasing tax on an appeal has nothing to do with the statute bar provisions. The principle, as outlined in Harris, is that the ITA does not give the Minister the right to appeal to the Tax Court from their own assessments. This principle does not concern the statute bar rules. Moreover, I have outlined above that the Harris principle does not apply given the circumstances of this case.

[56]  Second, the Crown suggests that the motion impermissibly involves taxation years that are not the subject of an appeal to the Tax Court. This refers to the part of the settlement agreement in which allowable capital losses for later taxation years are to be disallowed. It is suggested that only the Federal Court has jurisdiction in these circumstances.

[57]  The Crown suggests that the motion “involves” the later taxation years. I disagree. The motion is not for an order to enforce the settlement agreement wholesale. The later taxation years are not “involved” because the motion only seeks an order with respect to the 2007 taxation years and the issue raised in the motion is discrete to these years. The parts of the settlement agreement dealing with the later taxation years are relevant for the motion only to provide general context and background. Accordingly, no jurisdictional question arises as a result of the reference to other taxation years in the settlement agreement.

Accordingly the appeal was dismissed with costs to the taxpayer fixed at $15,000 (including disbursements).