After a four-month trial, Quebec Superior Court Stephen Hamilton concluded that the federal tax authority committed several faults while conducting an investigation into St. Lawrence Trading Inc., an investment vehicle owned by Arnold Steinberg and Irving Ludmer, two “close friends” that drove the success of the Montreal grocery chain Steinberg’s. The audit lasted for several years before the CRA abandoned its position in 2014.
The judicial saga began in 2006 when CRA launched an audit into the businessmen’s investment vehicle, based in the British Virgin Islands. The CRA completed its audit in May 2012, and issued final reassessments with respect to St. Lawrence Trading Inc., demanding almost $26 million in unpaid taxes, interest and penalties. Those reassessments were issued without any advance notice to Ludmer and Steinberg.
The two businessmen objected to the notices of reassessment but nevertheless paid in full and under protest the full amount of the reassessments. They also launched a $117 million suit against CRA, alleging that the CRA’s conduct was abusive and led to the failure of the offshore investment vehicle.
In an extremely detailed and long ruling, running at 148 pages excluding appendixes, Justice Hamilton faults CRA for taking unreasonable assessment positions and final reassessments and for failing to follow advice from the Income Tax Rulings Directorate. The directorate has a mandate to provide CRA with the technical interpretation of the Income Tax Act, its regulations and related statutes.
Justice Hamilton also faulted the tax agency for refusing to apply certain rules such as coming-into-force or “grandfathering” provisions and in the way it calculated interest and foreign exchange. Moreover, Justice Hamilton found fault with the CRA’s approach to Bermudan authorities. The CRA claimed they were seeking information on a “criminal tax matter,” which was not true. Justice Hamilton also chastised CRA for tardy disclosures of relevant documents.
But Justice Hamilton held that the reassessments were not “issued maliciously in an attempt to harm Ludmer or Steinberg.” He also concluded that the mention of a criminal investigation to Bermudan authorities was negligent but not intentional.
As a result of its faults, CRA was ordered to pay $4.8 million to the Ludmer and Steinberg’s estate, including $1.5 million on a pro rata basis to reimburse them for the lost interest on the mandatory payments they were required to make on the reassessments, $3.1 million in damages to cover professional fees they incurred, $100,000 to Ludmer and $50,000 to Steinberg for damage to their reputations, and $50,000 each to Ludmer and Steinberg for stress, trouble and inconvenience.
Here are some excerpts from the decision in Ludmer c. Attorney General of Canada, 2018 QCCS 3381.
- If the Income Tax Rulings Directorate (Rulings) expresses reservations about a position, the Aggressive Tax Planning Division should act with caution, said Justice Hamilton. The aggressive tax planning division identifies emerging tax avoidance issues, arrangements and products, and it handles cases requiring a remedy for tax avoidance.
- “What it must not do is try to bully Rulings in order to maintain a particular position. This creates doubts as to whether the process, starting at the latest in June 2011, was led in such a way as to reach the right conclusion, or whether it was led in order to maintain a certain result,” added Justice Hamilton.
- “The St. Lawrence Trading reassessments might have been characterized as aggressive in the early years, but by May 2014 the CRA had decided to abandon them. The settlement offer was an attempt to extract concessions from the Plaintiffs in exchange for abandoning a position that the CRA knew that it would abandon anyways. That is not how the CRA is supposed to operate. If it has a position that it knows it must abandon, it should do so without attempting to extract concessions,” held Justice Hamilton.
- He added: “However, the situation is aggravated by the fact that the settlement offer was timed to avoid the obligation to file responses to follow-up questions. This is not a proper reason for settling a tax claim.”