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October 17, 2013 -Shaira Nanji, Tax Associate with the Toronto office of Dentons Canada LLP

Number 2171

Canadian taxpayers who are mistreated by the Canada Revenue Agency ("CRA") in the course of an audit are likely troubled by the noticeable absence of mechanisms in taxing statutes by which the CRA may be held accountable for its behaviour or supervision.

Canadian case law is clear that a taxpayer may not launch a "collateral attack" on a tax assessment by  authority that has yet foreclosed the possibility that a taxpayer may bring a civil claim for damages against the CRA for negligence in the course of administering or enforcing various taxing statutes.

In fact, several recent decisions have wrestled with the question of whether a negligent act or negligent supervision by the CRA in the course of administering a taxing statute can give rise to a private law remedy. The courts have determined that the answer to that question depends on whether a duty of care should be imposed on the CRA towards

Recent Cases

In three recent cases, Leroux v. Canada Revenue Agency ("Leroux"),2 Gordon v. R. "Gordon("),3 and McCreight v. Canada (Attorney General) ("McCreight"),4 the courts have opened the door (slightly) to the possibility that such a duty of care may exist at law.

In all three cases, the courts dismissed the Crown's motions to strike certain of the taxpayers' claims including negligenceand, in doing so, demonstrated that some civil actions against the CRA may have a reasonable chance of success at trial. Although the trial judgments are yet to be rendered, the courts explored several factors which, if factually substantiated, may be persuasive in establishing that CRA officials acted negligently.

Such negligence could exist where the CRA:

● prematurely targets taxpayers without proper investigation;

● uses deceptive tactics;

● appoints an underqualified auditor;

● unnecessarily interferes with contractual relations with clients and harms the

reputation of taxpayers;

● wrongfully seizes and destroys documents;

● triggers improper collection procedures; or

● acts maliciously or intends to cause loss.


The CRA has a standard response to civil lawsuits alleging negligence or other misconduct: a motion to strike the claim on the basis that it is plain and obvious the claim cannot succeed. Generally, the CRA makes the following two arguments.

Firstly, the taxpayer's negligence claim cannot be successful because no "duty of care" exists between the taxpayer and the CRA officials. Part XV of the Income Tax Act ("ITA")5 outlines the administration and enforcement provisions which empower the CRA officials to review taxpayer filings and to ensure compliance in a self-assessing system. There is no provision in the ITA that creates a statutory "duty" to taxpayers.

Secondly, there is no reason to justify the creation of a novel duty of care between the CRA officials and the taxpayers under the Anns/Cooper test. This two-step test, created in tort law to give legal recognition to a relationship not yet recognized in law, examines whether the proximity of parties is sufficient to justify the imposition of a duty of care and whether any residual policy considerations will negate or reduce the scope of this duty. Either there is insufficientproximity between the taxpayer and CRA officials or, alternatively, any duty of care found by the courts should be overruled for policy reasons.

In Leroux, Gordon, and McCreight, the courts did not agree with these arguments put forth by the CRA.


Leroux has garnered significant media attention and is one of the more public cases on CRA negligence. The story has been featured in news magazines and CBC radio and even has its own Facebook account, YouTube channel, and website:http://wwww. lerouxed.com.

In this case, the CRA conducted a prolonged income tax and GST audit on Mr. Leroux, who owned a recreational vehicle park business. In what was termed by the British Columbia Supreme Court a "series of Kafkaesque events", the CRA not only seized Mr. Leroux's original documents during an initial audit without authorization and refused to return the documents when requested, but also subsequently informed Mr. Leroux that the original documents had been accidentally shredded and that it was his responsibility to provide more documents to substantiate his tax returns.

Mr. Leroux alleged that, during the audit, a Prince George auditor requested a cash bribe of $25,000 to resolve his "tax problem". When Mr. Leroux refused to pay, the auditor triggered an unjustified collection action and ignored his requests to refinance. This resulted in severe cash flow problems for Mr. Leroux's business. After 13 years of audit, assessment, reassessment, and collections activities, the taxpayer's business was financially ruined.

Mr. Leroux brought an action against the CRA for negligent behaviour during the audit, reassessment, and collection process. The British Columbia Supreme Court dismissed the CRA's motion to strike portions of the claim. The British Columbia Court of Appeal confirmed the lower court decision that it was not plain and obvious that the claims of negligence would fail. It held that whether a duty of care was owed by the CRA to the taxpayer is an issue that should be decided by the trial court when a full matrix of facts was available.

The British Columbia courts' refusals to strike actions of negligence indicates that wrongful seizure and destruction of documents, improper collection procedures, abusive behaviour of audit officials, and actions by the CRA done for malicious purposes with intent to cause loss or harm to the taxpayer are factors that may form the basis of a successful negligence claim against the CRA.


In McCreight, the CRA audited two accountants, their accounting firm, and some of the firm's corporate clients. The CRA alleged that the accountants helped their clients apply for fraudulent research and development tax credits. During the investigation, the CRA investigators obtained warrants for and seized over 60 boxes of documents from the corporate clients and the accountants. The CRA was authorized to retain these documents until July 1999 but failed to complete its investigation on time and requested a judicial extension of the warrants. The Ontario Superior Court of Justice denied the request and ordered the return of the documents. Two weeks later, the CRA investigator charged various individuals with fraud and conspiracy under the ITA and the Criminal Code.9 In subsequent court proceedings, it was determined that there was no legitimate basis for the criminal charges and the primary purpose of those charges was to retain the seized documents and circumvent the judicial order.

The plaintiffs brought an action against the CRA for, among other matters, claims of negligence, misfeasance in public office, and abuse of process. The Ontario Superior Court of Justice allowed the CRA's motion to strike portions of the claim but this was overturned in part on appeal. The Ontario Court of Appeal noted that it was not plain and obvious that CRA officials who operated under provisions in the ITA that attract criminal sanction did not owe a duty of care to the taxpayers who were the subject of investigations.

The McCreight decision suggests that the premature targeting of taxpayers with criminal charges without proper investigation or for deceptive purposes (such as surreptitiously circumventing judicial orders) could provide a basis for a negligence claim against the CRA.


In Gordon, the CRA laid fraud-related criminal charges against two accountants and their accounting firm with respect to SR&ED claims. The case continued for seven years until the charges were stayed at the request of the Crown.

The accountants and their firm brought claims against the CRA for misfeasance, abuse of authority, negligence, and engaging in a fraudulent scheme against them. They sought compensation for loss of income, loss of clients, and general and punitive damages. The taxpayers alleged that, during the audit, the CRA threatened existing and potential customers with criminal charges and read the accountants their rights in front of clients. Consequently, the company lost significant potential earnings and business opportunities. In addition, they alleged that the CRA was negligent in assigning and failing to supervise an unqualified auditor.

The Crown brought a motion to strike substantial portions of the claims. The Prothonotary struck out a number of claims with the exception of two, namely, intentional interference with contractual relations and negligence. The Crown appealed to a judge of the Federal Court. The Crown's appeal was dismissed.

The Federal Court refused to strike the claims for intentional interference with contractual relations and negligence.

Importantly, the Court held that the Prothonotary had correctly concluded that it was not plain and obvious there was no duty of care owed by the CRA to the taxpayers. The Court stated, "The case law is clearly evolving in this area, and the last word has yet to be written by an appellate court. The continuation of this claim at this stage of the proceedings is not unduly burdensome. The matter is proceeding in any event, and the relevant facts will have to be established and considered in dealing with the other claims. I decline to strike this claim at this stage of the actions".

The Gordon decision suggests that a negligence claim may be well-founded where the CRA unnecessarily interferes with contractual relations with clients to the extent that the taxpayer's reputation is harmed or where the CRA appoints an underqualified auditor without adequate supervision.


The litigation in this area has not yet progressed beyond preliminary motions. The taxpayers, however, have been successful in fighting the CRA's repeated attempts to dismiss civil claims on the basis that it is plain and obvious that the claims must fail. The three decisions seem to foreshadow a new tort. A court determination that the CRA owes a duty of care to taxpayers would undoubtedly provide a helpful deterrent mechanism against potentially negligent administration and enforcement actions by the CRA.


1 See Main Rehabilitation Co. v. R., 2004 DTC 6762 (FCA) and Ereiser v. Canada, 2013 DTC 5036 (FCA).

2 2012 DTC 5050 (BCCA).

3 2013 DTC 5112 (FC).

4 2013 ONCA 483.

5 R.S.C. 1985, c.1 (5th Supp.), as amended.

6 A cause of action in respect of negligence is to be examined using the Anns/Cooper test. This test originated in the House of Lords decision Anns v. Merton

London Borough Council, [1978] AC 728 (UK HL) and was further developed by the Supreme Court of Canada in Cooper v. Hobart, [2001] 3 SCR 537.

7 See, for example, the National Post article entitled "I want my life back: After more than a decade, B.C. man still fighting to right damages wrought by tax agency", April 26, 2013, http://news.nationalpost.com/2013/04/26/irvin-leroux-still-fighting-to-right-damages-wrought-by-canada-revenue-agency/.

8 Leroux v. Canada Revenue Agency, 2010 DTC 5123 (BCSC).

9 R.S.C., 1985, c. C-46.

10 The Court of Appeal found that the duty owed by police officers to criminal suspects could be analogous to the CRA and certain taxpayers. See Hill v. Hamilton-Wentworth Police Services Board, 2007 SCC 41.

11 The claims in Gordon were brought via the Federal Court, which shares concurrent jurisdiction with the provincial superior courts with respect to claims by and against the federal Crown.

12 Supra note 3, paragraph 39.

A number of tax lawyers from Dentons Canada LLP write commentary for CCH's Canadian Tax Reporter and sit on its Editorial Board as well as on the Editorial Board for CCH's Canadian Income Tax Act with Regulations, Annotated.
Dentons Canada lawyers also write the commentary for CCH's Federal Tax Practice reporter and the summaries for CCH's Window on Canadian Tax. Dentons Canada lawyers wrote the commentary for Canada-U.S. Tax Treaty: A Practical Interpretation and have authored other books published by CCH: Canadian Transfer Pricing (2nd Edition, 2011);
Federal Tax Practice; Charities, Non-Profits, and Philanthropy Under the Income Tax Act; and Corporation Capital Tax in Canada. Tony Schweitzer, a Tax Partner with the Toronto office of Denton's Canada LLP and a member of the Editorial Board of CCH's Canadian Tax Reporter, is the editor of the firm's regular monthly feature articles appearing in Tax Topics.
For more insight from the tax practitioners at Dentons Canada LLP on the latest developments in tax litigation, visit the firm's Tax Litigation blog at http://www.canadiantaxlitigation.com/.

Leroux: CRA owes duty of care to taxpayer

Alexander Coombes

Posted on May 16th, 2014 By

Categories: Canada Revenue Agency, Duty of Care, Judicial Review, Provincial Superior Courts

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* This article was co-authored with Mr. Christopher Funt of Funt & Company.

Can a Canadian taxpayer successfully sue the Canada Revenue Agency?

In recent years, taxpayers have brought a number of civil actions against the Canada Revenue Agency (the "CRA").  The allegations in such cases ranged from negligence to fraud, extortion and deceit.  Often, taxpayers' claims are brought as the tort of misfeasance in public office or as claims in negligence.  So far, the courts have not clearly determined the scope of CRA's civil liability.  The recent decision of the British Columbia Supreme Court in Leroux v. Canada Revenue Agency (2014 BCSC 720) provides guidance on the application of common law torts to CRA conduct.

Mr. Leroux, the taxpayer, alleged that he was threatened, deceived and blackmailed by a CRA auditor who was reviewing Mr. Leroux's GST and income tax returns. After reassessments were issued, the CRA claimed Mr. Leroux owed more than $600,000 in taxes, interest and penalties. After an appeal to the Tax Court, some payments by Mr. Leroux and a successful application for interest relief, Mr. Leroux was actually refunded $25,000.

In the meantime, Mr. Leroux lost his business and home. He sued the CRA for misfeasance in public office. The CRA argued that it owed no private law duty of care to an individual taxpayer.

In several other cases before Leroux, the courts have agreed with the CRA's position. A successful negligence action requires a finding of a duty of care to the injured party.  As such, judicial acceptance of CRA's position has presented a major barrier to bringing a civil claim against CRA.

In Leroux, the court splashed cold water on the CRA's long-standing position and held the CRA did owe a duty of care to Mr. Leroux. The court also held the CRA had breached its duty of care to Mr. Leroux with respect to the imposition of gross negligence penalties. In a stinging rebuke to the case put forth by the CRA and its counsel, the court stated:

[348] To call Mr. Leroux's tax characterizations "grossly negligent" is especially objectionable because, as mentioned above, CRA now uses the complexity of the issues involved in these characterizations as a reason why their decisions on exactly the same issue could never be termed negligent.  It is simply not logical for CRA to assess penalties against Mr. Leroux for being grossly negligent in having characterized his income in a particular way and to resist the application of the concept of negligence to their own characterization of the same income, one which was ultimately agreed to be wrong.  Or, to put it in the reverse, since CRA now takes the position that the characterization of capital loss versus revenue and the issue of "matching" are difficult and complex, it cannot be said that the assumption of contrary positions by Mr. Leroux, positions that were eventually accepted as correct, was grossly negligent.  To call them so, and to assess huge penalties as a result, ostensibly for the purpose of getting around a limitation period, is unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors.  While being wrong is not being negligent, nor are [the auditor's] mistakes in fact or law negligent, it is the misuse and misapplication of the term "grossly negligent" that is objectionable.

The court continued:

[353] ... CRA must live up to their responsibilities to the Minister and to the Canadian public, nearly all of whom are taxpayers, by applying a little common sense when the result is so obviously devastating to the taxpayer.  It is a poor response to say "we put together our position without regard to the law; leave it to the taxpayer to appeal to Tax Court because we are immune from accountability."

Despite the finding that CRA owed a duty of care to Mr. Leroux, and that the CRA had breached this duty, the taxpayer's claim was dismissed because the court held that Mr. Leroux's losses were not the result of the CRA's negligent conduct.

The Leroux judgment is a welcome development in the law regarding the CRA's accountability for its assessing actions. Most CRA agents are diligent and very well-intentioned.  It is a rare case where the CRA's conduct can properly be alleged to be actionable.  That said, the principles of civil liability shape what can and cannot be done by the CRA in the course of a tax assessment. While Leroux offers very insightful guidance, the broader scope of CRA's civil law duties to taxpayers remains to be fully defined.