Revenue Quebec was ordered to pay $2.4 million, including $1 million in punitive damages, to a Montreal business after the Quebec Court of Appeal found that the provincial fiscal authority abused its powers and acted maliciously and in bad faith.
In a decision that sternly rebukes the provincial tax authority for abusing its “extraordinary powers,” the appeal court ruling held that Revenue Quebec owes a general duty of care and good faith to taxpayers as well as an “obligation to compensate” taxpayers who were the victims of wrongful conduct, according to tax lawyers.
Montreal’s Groupe Enico Inc., a company specializing in industrial automation and robotics, first came under the scrutiny of Revenue Quebec in 2007. By the end of the ordeal, owner JeanYves Archambault had to close his firm.
The decision marks the third time this year that Canadian appellate courts have held that fiscal authorities have a duty of care towards taxpayers, a development that may signal the end of non-accountability for both the Canada Revenue Agency (CRA) and Revenue Quebec, observed Ētienne Gadbois, a Montreal tax lawyer with Dentons.
Earlier this year, in Canada v. Scheuer, 2016 FCA 7, the Federal Court of Appeal concluded that “liability may attach” if public officials act in a manner “inconsistent with the proper and valid exercise” of their statutory duties, in bad faith or in some other improper fashion. In the other case, the British Columbia Court of Appeal accepted an agreement between Prince George businessman Irvin Leroux and the CRA that ends a long-running legal battle, leaving intact the finding by B.C. Supreme Court that the CRA breached the expected standard of care in its assessment of penalties for alleged income tax violations.
“The Enico decision is definitely in line with the Leroux case which too held that tax authorities have a general duty of care to taxpayers,” said Gadbois. “The Quebec appeal court also said that Revenue Quebec has a duty of good faith under the Civil Code. So while Revenue Quebec have discretionary powers, there are limits. It’s clear that tax authorities will have to be more aware of taxpayer rights.”
Enico’s Kafkaesque bureaucratic nightmare began in 2007 when two Revenue Quebec employees, one who incredulously posed as an intern even though he was an auditor with over 20 years of experience, paid a visit to the company’s headquarters after a disgruntled employee who launched his own competing business denounced the company. When the tax department claimed he owed $325,000 in back taxes, Archambault testified that his life was “turned upside down.” Compounding the situation, the tax department held on to nearly $1 million in research and development tax credits Enico was counting on to carry on business and obtain further financing.
The situation then took a dramatic turn for the worse. Revenue Quebec lost track of a payment Enico made but nevertheless forwarded Enico’s tax file to its collection department, which quickly lead Enico to be considered delinquent. Other inexplicable and costly transgressions took place. Files and notes were either lost or intentionally destroyed.
François Boudrias, the same auditor who masqueraded as an intern, was especially taken to task by the appeal court. Boudrias should have identified himself as a tax auditor and should have told Enico and Archambault that he was carrying out an income tax audit, said appeal court Justice Dominique Bélanger in a unanimous 38-page ruling in Agence du revenu du Québec c. Groupe Enico inc. 2016 QCCA 76. Boudrias, who used the bank deposit method to audit Enico, also had the duty to inform Enico the method he intended to use to conduct the audit and “the burden this method” would place on Enico and Archambault. His “silence constituted a trap for Archambault,” said Justice Bélanger. Boudrias also displayed gross malice with respect to Enico’s expense accounts, which he “knowingly” counted twice. This conduct constituted carelessness, recklessness, or serious incompetence tantamount to bad faith, concluded Justice Bélanger. (Boudrias heeded the recommendation of his union and resigned on November 2009. At the time, he had a disciplinary record for inappropriate consultations and for illegally passing on files to his spouse, an accountant. He is now being sued by Archambault.)
Incredibly, Enico’s miseries got even worse. In February 2008, Revenue Quebec proceeded with two bank seizures, including the company’s line of credit, only to realize that it made an error and rescinded one of the seizures. But the damage was done. Enico’s bankers lost confidence, with one recalling its loan and credit line as well as refusing to make good on Enico’s pay cheques. Employees then lost confidence in the firm, and many quit. Numerous clients and partners of the firm also ended their business relationship with the company.
The firm was healthy before the upheaval. Its revenues rose from $1.8 million in 2001 to $5.6 million in 2007. Following Revenue Quebec’s gaffes, it was forced to close shop in November 2010. When Enico filed for creditor protection, Revenue Quebec continued to hound the firm, going so far as to refuse an offer of 80 cents to the dollar unless Archambault dropped his lawsuit against the tax department. “Abuse of power may take many forms,” said Justice Bélanger. In this case, Revenue Quebec used its “extraordinary powers” to keep Enico’s scientific research and development tax credits “in its own coffers,” seized a bank account without judicial authorization, “imposed its views” during meetings of the company’s creditors, and obtained a judgment against Enico under section 13 of the Tax Administration Act, which amounted to harassment. “The evidence established a causal connection between Revenue Quebec’s faults and Enico’s financial problems,” held the appeal court.
“This ruling reiterates the principle that a right holder cannot use its rights in an abusive manner, even if the right holder is the government or a government institution – and even if the nature of the right is discretionary,” noted Louis Tassé, a Montreal tax lawyer with Couzin Taylor LLP. “The appeal court also confirmed that there was improper conduct, some of which is indefensible like hoarding Enico’s tax credits. I don’t understand how Revenue Quebec could believe that such conduct was acceptable.”
But the appeal court also mildly rebuked the trial judge for criticizing Revenue Quebec’s internal management policies. Quebec Superior Court Justice Steve Reimnitz reproached the provincial tax department for failing to investigate the merits of the denunciation, particularly since it was the denunciation that drew Revenue Quebec’s attention to Enico and its founder. Evidence during the trial revealed that Revenue Quebec took no steps to determine whether the denunciation had valid grounds or whether it was done to cause harm. The appeal court said his criticisms were unfounded. “Revenue Quebec is not required to verify allegations or inform the respondents of its existence,” said Justice Bélanger. Nor did the trial judge have any reason to examine whether Revenue Quebec uses a quota system to reward auditors as that was beyond the scope of the issues at hand in the Enico case.
“According to the appeal court these are not legal issues,” said Gadbois. “The fact that an auditor receives a fixed salary plus a bonus at the end of the year was deemed by the appeal court to be irrelevant to the determination as to whether damages should be paid in this case.”
But that position is problematic, and may hamper access to justice, said Yacine Agnaou, a Montreal tax lawyer with Dupuis Paquin. According to tax experts, the Enico case is far from unique. What makes it exceptional is the accumulation of faults, said Agnaou who asserts his law firm meets with entrepreneurs literally every day who face Revenue Quebec’s scrutiny – and the majority of them don’t have the means or the will to battle the provincial tax department.
Indeed, Lyne Guilbault, Enico’s lawyer, said that the company’s founder would not have battled the tax department had he known the price he would have paid. His life is in shambles, and his health poor. Archambault would have declared bankruptcy, as many entrepreneurs do when faced with the prospect of fighting Revenue Quebec, said Guilbault. “The important thing about the ruling is that it holds the State to account,” remarked Guilbault. “It does not enjoy total immunity but rather its immunity is relative. When you have extraordinary powers, it must be used with great care.”