Here was an interesting attempt — failed — to get the Crown to pay the interest and legal fees related to the audit for HST of Jayco’s cross-border recreational vehicle business. (Jayco successfully appealed to the TCC but it failed there in its effort to get the Tax Court to order CRA to pay interest costs related to posted security.) (D’Auray J. was the TCC judge.)
“By the time Jayco was able to terminate its letter of credit, it had incurred interest charges of US$1,231,984.52 and consulting fees of US$242,634.” [15]
[19] It is essential to Jayco’s claim that this is an HST issue and not one of income tax. Jayco is not the taxpayer. It collects HST on qualifying sales as agent for Her Majesty. As an agent, Jayco claims it is entitled to indemnity from its principal for costs incurred in fulfilling its assigned duties.
[22] The Supreme Court of Canada has authoritatively resolved the indemnity issue previously. In Reference re Goods and Services Tax, 1992 CanLII 69 (SCC), the Court found that neither the common law nor the statute provides GST/HST collectors any entitlement to indemnity for costs incurred in carrying out their duties.
[23] The Supreme Court left open the possibility of claims for reimbursement by tax collector agents for tort liabilities that they may incur in fulfilling their duties. That is not a reference to torts committed by CRA. Rather, it is offering the possibility that tax collector agents who commit torts in the course of collecting HST could have a right to indemnity against CRA. That has nothing to do with the claims in this case.
[This would be a somewhat unusual tort action: a GST registrant, somehow sued for collecting tax or for its conduct in doing so, would be able to claim over against the Crown for indemnity. It’s hard to imagine how such a liability could arise for the collecting registrant, because of ETA s. 224.1, which says:
” 224.1 No action [against supplier] for collection of tax — No person, other than Her Majesty in right of Canada, may bring an action or proceeding against any person for acting in compliance or intended compliance with this Part by collecting an amount as or on account of tax. “]
“Leroux as approved in McCreight
[26] The claims for negligence fare no better. There is ample case law rejecting the proximity required to formulate a private law duty of care between the CRA and taxpayers facing an audit.1
[Footnote 1 is an extensive list of cases, including Grenon v. Canada Revenue Agency, 2017 ABCA 96, leave to appeal denied.]
[28] The cases generally agree that the relationship of an auditor to a taxpayer while carrying out administrative duties in an audit is not the same as the relationship between tax investigators who are investigating criminal offences. The cases hold that auditors in an audit do not owe a private law duty of care to the taxpayers. [That’s a more forceful statement than one might have thought could be made, in part because of Leroux, which Myers will discuss more in his reasons. It means no action for negligence possible, at least in Ontario, to the extent it relates to audit.]
But then FL Myers J. goes on, seemingly contradictorily, to acknowledge that negligence might be possible in Ontario in respect of audits:
[31] The [McCreight] case involved an investigation and held, like many others, that a claim in negligence is available when the CRA conducts an investigation. The reference to Leroux then was obiter dicta. However, McCrieght certainly suggests that if an audit case comes along Leroux may well be followed in Ontario.
[However, he treats Leroux as an aberration and quotes from Grenon ABCA to explain the better view of the law.]
At paragraph 34, by the way, Myers J. parenthetically notes that taxpayers can appeal to the FC if CRA improperly insists on security for HST. Impliedly he directs that comment at Jayco, which, obviously, did not make such a federal court application. (He repeats the point at paragraph 41.)
[35] … In my view, imposing a super-added private law duty of care on the CRA just imposes more costs on the government and gives taxpayers more procedural tools to defer tax.
[After first noting that the ETA does not indemnify CRA agents from lawsuits absent bad faith, he goes on:]
[39] … But, if what the plaintiff means is that the CRA employees deliberately assessed it taxes and forced it to post security with a foreseeable cost, knowing that doing so was illegal and intending to act illegally, that could be pleaded as the tort of intentional malfeasance in public office. However, as noted above, Jayco has decided not to advance that tort.
[Note that Myers J. is not going to allow Jayco leave to amend its pleading. So it won’t get the chance to plead a tort of misfeasance in public office arising from knowingly doing an illegal act by the audit. Yet, his reason for refusing amendment was that there would be no point to allowing an amendment: para. [4]. This perhaps arises because the different claim might be statute barred.]
A principle basis for Jayco’s claim was that, as a deemed agent of the Crown [ETA s. 221(1)], Jayco’s position was different from taxpayers under the Income Tax Act. Myers J. rejected that distinction in para. 40.
Under the heading “Reconciling the Two Lines of Authority”, he explains why he thinks he is not required to follow the obiter dicta from the ONCA in McCreight. First, it was obiter dicta and so only persuasive. Second, the ONCA recently said that ONSC judges should be respectful of decisions of other judges on the same court and Dunphy J. had rejected a private law duty of care for CRA officers in Deluca v. Canada, 2016 ONSC 3865, which Myers had discussed at paras. 35-36, with its quote of Grenon.
In the result, Myers J. effectively says that he must, properly, follow Dunphy J. in Deluca and leave it for the Court of Appeal to overturn him on appeal or deal directly with the issue of CRA liability in negligence on another case. So one would expect Jayco will take up that challenge and appeal to the ONCA.