tax executives institute settling tax disputes ed kroft, q.c. blake, cassels & graydon llp...

TAX EXECUTIVES INSTITUTE

SETTLING TAX DISPUTES

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

September 19, 2013

KROFT/SEPTEMBER 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 ElementsWhat 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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Some ElementsWhat is at stake for the tax authority? The same things

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

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Some ElementsCourt 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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Some ElementsCostly 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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Some ElementsCertainty for future years or not? (principle, someone’s job) – Both sides

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

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Some ElementsAre amounts owing to tax authorities creditable elsewhere? Has full provision been made on financial statements? (Does “winning” really matter?) – Taxpayer (Bonus allocations)

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Some ElementsOverall: 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 FactorsThe 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 deadlinesBy 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 Factors

14.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 SettlementThe 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 SettlementJurisprudence

– 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 positionEstablish 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 governmentUnderstand and anticipate what implications a settlement will have

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“Maximizing”Stick within risk tolerance and expectationDetermine when to settleIdentify who has the authority to settleBe creative and assume nothing is impossibleBe prepared to litigate

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Tools in the Settlement ToolboxCommitment 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 ToolboxAbility 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 ToolboxKnowledge 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 ToolboxKnowledge 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 ToolboxKnowledge 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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tax executives institute settling tax disputes ed kroft, q.c. blake, cassels & graydon llp...

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