Tax: Jurisdiction; Standard of Review; Transfer Pricing

Dow Chemical Canada ULC v. Canada2022 FCA 702024 SCC 23 (40276)

“Dow Chemical Canada ULC, a Canadian resident corporation, entered into, as a borrower, a non‑arm’s length revolving loan agreement with a related Swiss company as the lender. As a result of this loan agreement, Dow incurred interest expenses for its 2006 and 2007 taxation years. It also reported income for the 2006 taxation year in respect of toll manufacturing services provided to the Swiss company. Following a review of the transactions between Dow and the Swiss company, the Minister reassessed Dow for its 2006 taxation year, applying transfer pricing rules set out in s. 247(2) of the Income Tax Act (“ITA”). Under s. 247(2), where a taxpayer is dealing with a non-resident person with whom it is not at arm’s length, the amounts in a given transaction will be adjusted to reflect what would have been agreed to had the persons been dealing with one another at arm’s length. The application of s. 247(2) resulted in a significant increase in Dow’s income in the 2006 taxation year.

Dow believed that its income should be decreased to reflect an amount of interest that would have been paid had the parties been at arm’s length. Where an amount is identified that would decrease the taxpayer’s income, s. 247(10) of the ITA provides that a downward adjustment is not to be made unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made. Dow requested that the Minister exercise her discretion under s. 247(10) and make a downward transfer pricing adjustment, but the Minister refused. Dow sought judicial review in the Federal Court of the Minister’s discretionary decision. It also objected to the reassessment for the 2006 taxation year and eventually appealed the reassessment to the Tax Court.

In the context of the appeal of the reassessment, the parties referred a question of law to the Tax Court, asking it to determine whether, where the Minister has exercised her discretion pursuant to s. 247(10) of the ITA to deny a taxpayer’s request for a downward transfer pricing adjustment, the decision by the Minister falls outside the exclusive original jurisdiction of the Tax Court. The Tax Court held that the Minister’s discretionary decision under s. 247(10) is an essential component of the taxpayer’s assessment and goes to the correctness of that assessment, and may therefore be reviewed by the Tax Court under its exclusive appellate jurisdiction to determine the correctness of the assessment. The Federal Court of Appeal allowed the Minister’s appeal and held that the Federal Court has exclusive jurisdiction to judicially review discretionary decisions by the Minister under s. 247(10).”

The SCC (4:3) dismissed the appeal. 

Justice Kasirer wrote as follows (at paras. 1-2, 4, 8-13, 15-16, 90, 121):

“This appeal concerns the jurisdiction of the Tax Court of Canada, sitting in appeal of a taxpayer’s assessment, to review the Minister of National Revenue’s decisions under s. 247(10) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“ITA”). Parliament has conferred on the Minister discretionary authority to decide whether “the circumstances are such that it would be appropriate” to make a downward transfer pricing adjustment. A downward adjustment can only be made in accordance with the ITA where the Minister has come to the opinion that it is appropriate. When the taxpayer seeks to challenge the Minister’s discretionary decision, should that challenge be brought by an appeal to the Tax Court, pursuant to that court’s exclusive statutory jurisdiction to decide on the correctness of the taxpayer’s income tax assessment? Or should the taxpayer’s challenge be brought instead before the Federal Court of Canada, pursuant to that court’s exclusive statutory jurisdiction over judicial review, proceeding on the presumptively applicable standard of reasonableness?

Dow Chemical Canada ULC argues that a review of the Minister’s decision under s. 247(10) of the ITA falls within the exclusive jurisdiction assigned to the Tax Court because that decision directly affects or is inextricably linked to the assessment of tax liability. Dow says its position advances the cause of fairness and convenience for all taxpayers, including multinational corporations like itself, that might benefit from one-stop judicial shopping in the Tax Court. Accordingly, Dow asks this Court to enlarge the statutory jurisdiction of the Tax Court on appeal by providing it with a new power to conduct what amounts to judicial review of the Minister’s decision on a reasonableness standard.



With the utmost respect, however, I am unable to agree with the view that the Minister’s decision under s. 247(10) can be appealed as part of an assessment to the Tax Court. Allowing this matter to be heard on appeal in the Tax Court as part of an assessment would require this Court to accept Dow’s expansive jurisdictional theory, based not on an express provision of an act of Parliament as s. 18.5 of the Federal Courts Act requires, but on what Dow claims is fair and best for access to justice. In my view, ousting the Federal Court’s jurisdiction in the absence of express direction by statute and enlarging the Tax Court’s review function would prompt new controversy over jurisdictional boundaries, all in service of supposed benefits for access to justice that strike me as largely illusory. Parliament plainly did not intend for the Tax Court to serve as an exclusive forum for taxation matters; it expressly granted by statute some jurisdiction over taxation matters to the Federal Court, some to the Tax Court, and even some original jurisdiction in taxation matters to the Federal Court of Appeal.


 

The foundational principles of administrative law set forth by this Court in Vavilov dictate that the Minister’s discretionary decision, the authorization for which was conferred by statute, is presumptively subject to judicial review on the standard of reasonableness. Dow argues that this decision can be reviewed before the Tax Court as part of an appeal from an assessment and that in this context a reasonableness standard applies. Indeed, Dow goes as far as to assert that “[t]he description by this Honourable Court in Vavilov of a ‘reasonableness review’ is equally apposite to the review that the Tax Court would undertake in an appeal of an assessment based on the Minister’s exercise of discretion under a provision like s. 247(10)” (A.F., at para. 97, citing Vavilov, at para. 15; see also transcript, at pp. 10-15). This directly contradicts the principle, made clear in Vavilov, at para. 37, that the availability of a recourse other than judicial review indicates that the legislature intends for the reasonableness standard to be displaced. In the case of “appeals” of assessments to the Tax Court under s. 169(1) of the ITA, Parliament has put in place a de novo review process which is in the nature of a trial, in which both sides adduce evidence and make submissions and in which the Tax Court decides factual questions on the balance of probabilities. A review of ministerial decisions for reasonableness has no place in the context of Tax Court “appeals”. Accepting Dow’s approach would give the Tax Court the power to review not just the application of tax law to the facts, but the power to review discretionary tax policy decisions of the Minister.

In service of its view of the Tax Court’s appeal jurisdiction founded on this expanded notion of assessment, Dow advances a framework of analysis where deference to the Minister based on reasonableness or another deferential standard would apply to the s. 247(10) decision. This cannot be reconciled with the principle from Vavilov that the appeal mechanism the legislature has crafted — here the de novo process under s. 169(1) of the ITA — determines the applicable standards of review (paras. 36 et seq.). Whether the applicable standards for the review of the s. 247(10) discretionary decision are those in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, or some other appellate standard developed for reviewing administrative action by analogy to the exercise of judicial discretion raises issues of broad significance for the applicable standard of review in administrative law. The Tax Court judge also proposed a different standard from that in Vavilov and that associated with the de novo appeal proceeding under s. 169(1). She said the Minister must form her opinion “judicially” or “properly” and, if this was not done, it could be corrected by the Tax Court rather than on a reasonableness standard upon judicial review to the Federal Court (2020 TCC 139, [2021] 2 C.T.C. 2063, at paras. 142-44 and 165). I respectfully disagree with these characterizations of the applicable standard of review which I see as errors of law.

Equally problematic is Dow’s position on available remedies which, in the end, invites this Court to expand the Tax Court’s powers by giving “guidance . . . as to whether the Tax Court has the ability to substitute its opinion . . . for that of the Minister” under s. 247(10) (A.F., at para. 101). In ruling on the assessment, the Tax Court cannot quash a discretionary decision of the Minister and cannot substitute its own opinion for that of the Minister acting under her delegated statutory authority. It bears recalling too that the remedies provided for in the Federal Courts Act may only be obtained on an application for judicial review to the Federal Court.

These are all signs, I fear, that an embrace of Dow’s position would undermine basic administrative law principles on standard of review and remedy and leave the dividing line between the Federal Court and the Tax Court’s respective jurisdictions in disarray. These complications are avoided if it is recognized, contrary to Dow’s argument, that this distinct, discretionary decision-making power of the Minister, conferred upon her by Parliament in s. 247(10) of the ITA, is subject to judicial review in the Federal Court on a reasonableness standard, where there is an appropriate set of available statutory remedies, pursuant to the Federal Courts Act.

Dow’s position also puts in jeopardy settled principles governing the jurisdiction of the Federal Court which, like the Tax Court, is a creature of statute. The Federal Court’s exclusive jurisdiction to conduct judicial review of federal administrative action — such as the Minister’s discretionary decisions under s. 247(10) — can only be excluded where there is an “express” statutory appeal mechanism in accordance with s. 18.5 of the Federal Courts Act that ousts the supervisory jurisdiction of the Federal Court. By setting the high bar that the route of appeal must be provided for expressly, Parliament ensured that exceptions to the Federal Court’s jurisdiction would flow from considered legislative direction rather than ad hoc development in the courts. Dow’s argument that jurisdiction can be conferred on the Tax Court by “necessary implication” rather than by “express” legislative provision ought to be rejected as being plainly inconsistent with the language, context, and purpose of s. 18.5. Dow’s theory would lower this bar by interpreting s. 18.5 to exclude the Federal Court’s jurisdiction not just where a decision is subject to an express statutory appeal, but also where it is merely captured by an appeal provision by implication. Beyond its significant encroachment on the Federal Court’s jurisdiction in tax law, Dow’s theory is likely to provoke litigation about which discretionary decisions are caught, implicitly, by statutory appeal provisions in other settings. This does not appear consonant with the aspirations for efficient access to justice.

Dow nevertheless says it advances its theory in service of the public good of access to justice, invoking the advantages its proposed innovation would achieve for unrepresented litigants before the Tax Court. This Court must of course always be mindful of the challenges to access to justice in the matters before it. It is trite law in this field that “parallel proceedings” are to be avoided and that the statutory rules should, insofar as possible, be interpreted accordingly (Walker v. Canada Customs and Revenue Agency, 2005 FCA 393, 344 N.R. 169, at para. 11). And judicial review is of course an avenue of last resort in our law. But as important as it is, access to justice cannot displace settled understandings of Parliament’s intended division of jurisdiction between the Tax Court and the Federal Court that have meaningful purpose. Here, the proceedings challenge a decision of the Minister in a way that the Tax Court is neither charged nor equipped to undertake. “One-stop shopping” at the Tax Court would come at the expense of the remedies the taxpayer can find in the Federal Court based on considerations of relief available on judicial review, including quashing a ministerial decision. By proceeding to the Tax Court as a single venue, the taxpayer would find no redress and lose the opportunity to ask a competent court to supervise the Minister’s exercise of statutory power to ensure that the administrative actor did not overstep their legal authority in arriving at the discretionary decision. Moreover, even on Dow’s expansive view of the assessment, in circumstances in which the Minister’s decision under s. 247(10) leads to no assessment, the Tax Court has no power whatsoever to do the work that rightly should be done by the Federal Court. Respectfully stated, I am unmoved by Dow’s claim that it is before us to fight the fight of the unrepresented litigant who would benefit from the simplified procedure before the Tax Court. It is indeed those taxpayers who, in many circumstances, need the protection that judicial review and judicial review alone can provide against the wayward exercise of ministerial discretion.


 

When asked at the hearing what the effect of recognizing a jurisdiction for the Tax Court to review discretionary decisions of the Minister would be, counsel for Dow acknowledged that it would be “a bit of a revolution” (transcript, at p. 85). But, he said, that was why Dow brought the case to the Supreme Court. In my view, this Court should decline this invitation and leave the matter to Parliament and its informed measure of the public policy implications of any such change to the Tax Court’s and the Federal Court’s respective jurisdictions.

Applying the settled principles that govern the nature of a tax assessment, the divided statutory jurisdiction between the Federal Court and the Tax Court in income tax matters, and the standard of review and remedial relief associated with general principles of judicial review in administrative law, I conclude that the challenge to a decision of the Minister under s. 247(10) is outside the appellate jurisdiction of the Tax Court. It is the proper and exclusive subject matter of judicial review before the Federal Court.



In sum, this is not an appeal in which we are well placed to create a novel standard of review in order to avoid fundamental defects in Dow’s theory. Doing so in the absence of adequate argument by the parties and analysis in the courts below could give rise to unintended consequences. Parliament did not provide any basis in the ITA to depart from the presumptive standard of reasonableness (Vavilov, at para. 25), because discretionary decisions are not assessments nor part of assessments. As I have said, assessments are to be reviewed by the Tax Court de novo in accordance with the settled nature of a tax appeal. In this case, holding that any standard other than reasonableness applies to exercises of the Minister’s discretion under s. 247(10) would undercut the certainty and predictability that Vavilov brought to this Court’s jurisprudence on the standard of review.



In answer to the question posed under s. 58, I conclude that when the Minister has exercised her discretion under s. 247(10) of the ITA to deny a taxpayer’s request for a downward pricing adjustment, that decision falls outside of the jurisdiction of the Tax Court in respect of an appeal, under statute, of the taxpayer’s assessment. As there is no express right of appeal from this decision to the Tax Court, the proper forum to challenge the Minister’s decision is the Federal Court, pursuant to its exclusive jurisdiction in judicial review under its home statute. The Federal Court of Appeal was therefore right to allow the appeal from the Tax Court, to set aside the order granted by that court and, in granting the order the Tax Court should have issued, to answer the question in the affirmative.”
 


Tax: Jurisdiction; GST

Iris Technologies Inc. v. Canada (Attorney General), 2022 FCA 1012024 SCC 24 (40346)

“Iris Technologies Inc. filed GST returns claiming tax refunds under the Excise Tax Act (“ETA”). The Minister audited a reporting period, issued an assessment disallowing input tax credits, and assessed penalties. Iris applied for judicial review in Federal Court and sought declarations that the Minister failed to afford procedural fairness and opportunity to respond to the proposed adjustments contrary to published policy and a specific guarantee, that the assessments were made without evidentiary foundation and contrary to the findings of fact made by the Minister and that the assessments were made for the improper purpose of seeking to deprive the Federal Court of jurisdiction in a related application. The Attorney General brought a motion to strike the application for judicial review. The prothonotary dismissed the motion, holding that the application for judicial review was not bereft of any chance of success. The Federal Court dismissed the Attorney General’s appeal, but the Federal Court of Appeal allowed its subsequent appeal and struck out Iris’s application for judicial review on the basis that it was, in essence, a collateral challenge to the correctness of the assessments, a matter within the exclusive jurisdiction of the Tax Court.”

The SCC (7:0) dismissed the appeal. 

Justice Kasirer wrote as follows (at paras. 1-5, 9-11, 58):

“This appeal, like the appeal in Dow Chemical Canada ULC v. Canada, 2024 SCC 23, which was heard by the Court on the same day, highlights the shared statutory jurisdiction in tax matters of the Tax Court of Canada and the Federal Court of Canada.

It brings into plain focus the divide between the exclusive jurisdiction of the Tax Court to hear “appeals” relating to the correctness of tax assessments and the exclusive jurisdiction of the Federal Court to conduct judicial review in tax matters. The appeal in this case helps explain why the appeal in Dow should — as the Federal Court of Appeal held — give rise to a different outcome, based on a principled understanding of the distinct statutory foundations for the exclusive jurisdiction of these two courts established by Parliament.

In the result, I agree with the conclusion of my colleague Côté J. to dismiss the taxpayer’s appeal before our Court but, with respect, my conclusion rests on different reasons.

In my view, the Federal Court of Appeal’s reasoning is entirely well founded, including its statement that the Tax Court does not have jurisdiction where the true purpose of an application for judicial review is to “seek practical relief against the exercise of a discretion” by the Minister of National Revenue (2022 FCA 101, [2022] 1 F.C.R. 401, at para. 13). As Rennie J.A. observed, in the circumstance of ministerial discretion, the statutory rule ousting Federal Court jurisdiction in judicial review in favour of the Tax Court does not apply. This explains, as Rennie J.A. said for the court, why the outcome of the Federal Court of Appeal’s decision in Canada v. Dow Chemical Canada ULC, 2022 FCA 70, [2022] 5 C.T.C. 1 (“Dow FCA”), is favourable to the Federal Court’s jurisdiction where the discretionary ministerial decision under s. 247(10) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (“ITA”), was at the centre of the jurisdictional debate.

In other words, the Federal Court of Appeal in this case confirmed its decision in the partner case of Dow FCA in which it recognized the exclusive jurisdiction of the Federal Court over a ministerial discretionary decision provide for by the ITA. In this case, the Federal Court of Appeal recognized the exclusive jurisdiction of the Tax Court in appeals of the assessments where no such ministerial discretion was involved. Importantly, Rennie J.A. said, at para. 13 of his reasons, that the decisions of the Federal Court of Appeal in the two companion cases, with their apparently divergent outcomes, are entirely compatible.


 

When juxtaposed against Dow, as Rennie J.A. sought to do at para. 13 of his reasons, this case presents a further opportunity to confirm the view that it is Parliament’s intention that jurisdiction in tax matters is shared between the two courts and that the Tax Court is not a one-stop judicial shop for resolving tax disputes.

On the specifics of the Attorney General of Canada’s motion to strike the application for judicial review brought by the taxpayer, I agree with the Federal Court of Appeal that two of the claims raised by the appellant, Iris Technologies Inc., in its application — those alleging procedural unfairness and a lack of an evidentiary foundation — are properly within the exclusive jurisdiction of the Tax Court. They are best characterized as attacks on the correctness of the assessment which is the proper subject matter of an appeal to the Tax Court under the express authority of the ETA. Since the Tax Court has exclusive jurisdiction over challenges to the correctness of assessments, the bar in s. 18.5 of the Federal Courts Act, R.S.C. 1985, c. F-7 (“FCA”), applies to these two aspects of the application. Accordingly, the Federal Court has no jurisdiction over these aspects. This is because of an express statutory grant of jurisdiction to the Tax Court from the assessment in s. 302 of the ETA and not, as the appellant proposed in Dow, based on an extension of the Tax Court’s jurisdiction by “necessary implication”. Iris’ third claim, that the Minister acted with an improper purpose, could, in some circumstances, be the basis for an application for judicial review. But the improper purpose claim should nevertheless be struck here because Iris did not allege facts in its application that, if taken to be true, would give any support to this claim.



It is settled law that “[a] declaration can only be granted if it will have practical utility, that is, if it will settle a ‘live controversy’ between the parties” (Daniels v. Canada (Indian Affairs and Northern Development), 2016 SCC 12, [2016] 1 S.C.R. 99, at para. 11). No such live controversy was disclosed here. Rennie J.A. observed that in this instance, “[i]ssuing a declaration that does not quash or vacate the assessments would serve little or no purpose” (para. 18). He added that a declaration will not be issued “where there exists an adequate alternative remedy” (ibid.). Declarations with no practical effect will not issue, and a claim seeking such declarations cannot therefore succeed. This is another basis for which the Federal Court of Appeal rightly struck Iris’ application for judicial review.”