Written By Alison Gray
The CRA issued reassessments to Leroux for GST and income tax totalling more than $600,000, after interest and penalties. Following an appeal to the Tax Court, some payments made by Leroux and a successful application for interest relief, Leroux received a refund of $25,000. However, Leroux did lose his business and home. He sued the CRA for misfeasance in public office, and in response, the CRA argued it owed no private law duty of care to an individual taxpayer.
Prior to the decision in Leroux, courts for the most part accepted CRA's position and found it owed no private law duty of care to taxpayers. Absent a duty of care, taxpayers are prohibited from pursuing the CRA in negligence.
In Leroux, the Court rejected the CRA's position and held the CRA did owe a duty of care to Leroux, and by extension, other taxpayers. The Court also held that the CRA breached the duty of care owed to Leroux in imposing gross negligence penalties. In doing so, the Court found the auditor used the wrong standard for imposing penalties and that the penalties were applied to the whole of the income, including that resulting from issues the CRA itself argued were difficult and complex. The CRA could not characterize the issues as difficult and complex and at the same time, characterize the contrary positions taken by Leroux on those issues as grossly negligent. The Court went on to find that the CRA's conduct in characterizing Leroux's position as grossly negligent and assessing huge penalties, apparently for the purpose of avoiding a limitation period, was "unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors. What was objectionable, in the Court's opinion, was not that the CRA was wrong, or that the auditor made mistakes in fact and law, but that the CRA misused and misapplied the term "grossly negligent" and proceeded to assess penalties that were as much as 900%.
Ultimately, Leroux was not successful in his claim against the CRA because he could not prove that his losses were caused by the CRA's negligent conduct. However, for Canadian taxpayers, Leroux is a winning decision, as it reinforces the CRA's accountability in issuing assessments, auditing and imposing penalties. While it will rarely be the case that the CRA's conduct is actionable, the Leroux decision provides an additional check on what can and cannot be done by employees of the CRA in the course of their duties. Hopefully, Leroux will be the first in a line of cases that will further and better define the scope of the CRA's civil law duties to taxpayers.