Tax Insights: Tax Court of Canada's Preliminary Ruling Docket pilot project launches January 1, 2020

Issue 2019-43

In brief

On December 12, 2019, the Tax Court of Canada (TCC) published Practice Note No. 23 announcing the start of the Preliminary Ruling Docket (PRD) pilot project. The TCC had previously described the PRD project in a letter dated March 27, 2019.¹ The PRD will run for one year, starting January 1, 2020, for cases in Toronto and Vancouver.

The PRD is intended to provide a cost-effective alternative for resolving tax appeals where the amount in dispute is generally between $25,000 and $300,000 per taxation year. The parties will be able to apply, on joint consent, to have their General Procedure appeal participate in the PRD. For a preliminary ruling, the TCC will issue a ruling on questions of fact or mixed fact and law. The hearing of such matters will not exceed two days, with no discovery, documentary disclosure, or (generally) expert evidence. The parties may accept this ruling as final, or refuse the ruling and continue with the General Procedure appeal.

In detail

Existing options at the TCC

Appeals in the TCC proceed by way of the rules of the Informal Procedure or the General Procedure. Most of the TCC’s caseload is Informal Procedure appeals, which are heard and resolved by the TCC in a reasonable timeframe. However, scheduling delays or challenging issues of fact may prolong the resolution of General Procedure appeals.

The Informal Procedure rules are designed for expedited resolution, akin to small claims procedure (i.e. no documentary disclosure, no examinations for discovery, relaxed rules of evidence). The wait time for short hearings (i.e. a half day or less) and the hearing itself are considerably shorter. However, the Informal Procedure is only available where the amount of disputed tax is less than $25,000.

The General Procedure typically involves documentary disclosure and examinations for discovery, followed by a full trial. These are costly and time‑consuming. Recently, due to the large caseload at the TCC, General Procedure hearings can take over a year to schedule in some cities.

The General Procedure rules do allow for the resolution of legal issues under Rule 58, which may shorten the resolution process. However, the TCC has generally only decided matters under Rule 58 where such matters are limited in scope and do not require a full factual record.

Accordingly, the cost and delay under the General Procedure make it challenging for many tax appeals with moderate amounts at stake.

None of these options are satisfactory for tax appeals with a moderate amount of tax in dispute where there are factual issues or mixed issues of fact and law to be decided.

The Preliminary Ruling Docket (PRD)

The TCC has introduced the PRD pilot project to provide a cost‑effective solution for such cases. The PRD will also facilitate access to justice, and reduce delays.

An appeal to the TCC will qualify for the PRD if:

• it is a General Procedure appeal
• both parties are represented by counsel
• the hearing is expected to last longer than two days
• the preliminary ruling hearing is expected to last no more than two days
• the appeal only involves questions of fact or of mixed fact and law, and
• the amount in dispute per taxation year or reporting period is between:
  • $25,000 and $300,000, for an income tax appeal
  • $50,000 and $300,000, for an excise tax appeal, or
  • $50,000 and $600,000, for a loss determination under the Income Tax Act

An appeal regarding issues of fact or mixed fact and law that does not meet the above criteria may be heard together with a qualifying PRD appeal if:

• it involves the same or related parties, the same counsel, and related issues, and
• the combined hearing will not last more than two days

The parties to a qualifying appeal (the taxpayer and the Minister of National Revenue) must jointly file an application within 120 days of the close of pleadings, to have the appeal participate in the PRD. The TCC will have discretion on whether to grant the application.

Where the issue in dispute is strictly an issue of law, General Procedure Rule 58 should be used and not the PRD.

Required information and evidence

Under the PRD, each party must provide:

• 30 days before the hearing date, any documentation on which it intends to rely, and
• 15 days before the hearing date, a legal brief of up to 20 pages with respect to the facts, issues, law and analysis

There is no documentary disclosure or discovery process under the PRD.

The hearing will be based on these written materials and oral evidence given at the hearing, and must not last more than two days. The TCC will not be bound by any rules of evidence in conducting the hearing. Expert evidence will only be heard, with leave of the TCC, in exceptional circumstances.

Preliminary hearing and non‑binding preliminary ruling

Within 60 days following the hearing, the TCC will issue a non‑binding preliminary ruling. The parties will then have 30 days to agree or disagree, in writing, to be bound by the preliminary ruling.

If both parties agree, the preliminary ruling will become a consent judgment of the TCC, with no costs being awarded. If either party disagrees, the matter will continue under the General Procedure with a different judge and the PRD file will be sealed.

Neither the parties nor the judge will be permitted to disclose anything that occurred at the preliminary hearing to any judge involved with the appeal, except that:

• the trial judge may consider the preliminary ruling as if it were a settlement offer when determining costs at the conclusion of the trial, and
• any inconsistent testimony given by a witness at the preliminary hearing may be used in the appeal to impeach that witness

Implementation

The PRD will run as a pilot project, starting January 1, 2020, for cases in Toronto and Vancouver. 

The takeaway

Tax controversy in Canada has increased significantly as part of a global trend of tax authorities becoming more aggressive in assessing tax. This has led to more complexity in the Canadian tax dispute resolution system, often making justice inaccessible to taxpayers with matters above the current Informal Procedure limit, but for which a full appeal under the General Procedure could become unnecessarily expensive.

In many cases, an early ruling on some or all factual disputes could accelerate a resolution. The TCC's initiative is a recognition of this challenge and an effort to provide greater access to justice. It should be welcomed as an opportunity for both taxpayers and the tax authority to resolve disputes more efficiently in appropriate cases. If the pilot project is effective in resolving cases, the TCC may adopt the PRD on a permanent basis.

If you are disputing a tax assessment between $25,000 and $300,000 in each of one or more taxation years, the PRD pilot project may provide a cost‑effective way of resolving your appeal.

^{1. This Tax Insights replaces our May 10, 2019 Tax Insights “TCC announces Preliminary Ruling Docket pilot project to provide non‑binding rulings,” which describes the details of the March 27, 2019 letter.}