Law in Quebec

“Revenue Quebec must never lose sight of the need to respect citizens’ rights,” underscored the report. “Yet based on the complaints it received the Quebec Ombudsman finds that Revenue Quebec’s attitude toward taxpayers has become more intransigent. The lofty goals of recovering tax dollars must not be achieved by disregarding respect for taxpayers, procedural fairness and the principles of administrative justice.

The provincial taxman is under increasing fire. This spring the Godbout Commission, a blue-ribbon panel of tax experts that proposed a bold overhaul of Quebec’s tax system, noted that Revenue Quebec’s approach towards tax audits has “raised questions and concerns.” The Godbout Commission recommended several simple initiatives to “ensure better follow-up to the processing of taxpayers’ files during an audit,” including evaluating its customer service after each audit. More recently still, Lucienne Robillard, the head of Quebec’s budget review committee, urged the provincial government last September to pay close attention to Revenue Quebec’s relationship with taxpayers.

Following the publication of the Ombudsman’s report last month, Quebec Finance Minister Carlos Leitão demanded that Revenue Quebec come up with a “sustainable and long-term action plan” to mend “once and for all” the “unacceptable” situation. “In light of the report’s findings, it is obvious that certain practices and certain acts by Revenue Quebec towards taxpayers has deteriorated,” said Leitão. Nathalie Roberge, a spokesperson for the finance minister, said that Revenue Quebec has submitted the report and it is now being analysed. Revenue Quebec’s plan is expected to be made public in the near future, added Roberge.

“Regardless of the reasons why they have not corrected some of its practices, they have to do so – and that’s why we appreciated the Finance Minister’s reaction,” said Claude Dussault, the deputy ombudsman. “It will be interesting to see how they will deal with it tangibly over the coming year.”

The ombudsman’s report brings to light questionable practices that accountants and tax lawyers have long complained about. Growing numbers of taxpayers, tax experts, and business lobbying groups alike have wondered aloud whether the provincial tax department has gone too far in its battle to fight tax avoidance and tax evasion. When the Quebec government announced five years ago its intention to return to a balanced budget by 2013-2014, it increased pressure on Revenue Quebec to recoup more monies. And it has. The taxman recouped $3.61 billion in fiscal 2013-2014 compared to $2.76 billion in fiscal 2010-2011, representing more than a 30 per cent increase, according to the Robillard Commission.

“The fight against tax evasion is being conducted on the backs of taxpayers and small enterprises, and unfortunately it is not a fair fight – not at all,” said Martine Hébert, senior vice-president of the Canadian Federation of Independent Business. “There is no doubt that successive governments, regardless of political stripe, have put enormous pressure on Revenue Quebec through its provincial budgets by increasing its tax recovery targets, under the guise of tax evasion. But the problem is that this fight against tax evasion is being conducted to the detriment of respect and fairness that a government agency like Revenue Quebec owes to its taxpayers.”

The ombudsman received 1,355 complaints over the provincial tax department’s conduct and practices over the past fiscal year, a 17 per cent increase over fiscal 2013-2014. Many complaints were lodged by businesses who were audited because the taxman suspected them of being involved in fake invoicing schemes. The Quebec ombudsman found that in these cases Revenue Quebec was employing inadequate, and even abusive, auditing methods and refused to consider evidence substantiating their business dealings with suppliers for no other reason than they assumed existence of a fake invoicing scheme, noted the report. “The Quebec ombudsman strongly condemns these practices, as they go against the principles of procedural fairness and seriously affect the viability of the businesses concerned,” said the report.

The ombudsman also rebuked Revenue Quebec for needlessly going to court to resolve tax disputes. In some cases, the tax department also assumed and maintained a strict stance despite being aware that different courts had rendered contradictory decisions, asserts the ombudsman. A case in point is the way it dealt with insolvent debtors. The tax department applied amounts owed to individuals and corporate taxpayers facing insolvency against tax debts pre-dating approved proposals made to creditors, a ploy that prompted complainants to forcefully argue that this practice unilaterally and unlawfully changed the terms of the proposal and deprived them of much-needed money during an insolvency. That practice is the subject of a Quebec class action against the provincial taxman. The Supreme Court of Canada ruled that “set-off” is in bankruptcy matters is illegal in Quebec but Revenue Quebec refused to extend its application to proposals, notes the ombudsman. The tax department nevertheless agreed to follow the ombudsman’s recommendation and has suspended its set-off practice until the class action is decided.

Following yet another series of complaints, the Quebec ombudsman also chastised Revenue Quebec for infringing case law. In spite of a 2013 Court of Quebec ruling in Fréchette v. l’Agence de revenu du Québec 2013 QCCQ 8360 that invalidated the tax department’s practice of assessing social security contributions of self-employed workers who had gone bankrupt during the year based on the workers’ total income for the calendar year, Revenue Quebec nonetheless issued 231 notices of assessment in 2013-2014. What makes the practice even more objectionable is that the tax department waived its right to appeal the Fréchette ruling, said the ombudsman. “This was a direct infringement of the case law established by the Fréchette case and breached the right of citizens to be treated fairly,” said the ombudsman report.

“Revenue Quebec systematically seeks the legal interpretation that is favourable to recoup monies for the State,” observed Dussault. “We believe that they should instead be fair, and read case law in a manner that is neutral and objective.”

None of which is surprising to Hébert. The Canadian Federation of Independent Business  conducted a survey this year that revealed that seven out of ten entrepreneurs believe that Revenue Quebec abuses its powers, and 81 per cent believe that it seeks above all to fill the government coffers instead of helping taxpayers to meet their obligations. That is why the CFIB, just like the Godbout Commission, urges Revenue Quebec to introduce a tax mediation or dispute settlement program. “Revenue Quebec issues notices of assessment that are completely inflated, without any justification – something that has been denounced by tax experts,” said Hébert. “And they tell taxpayers that if they want to contest the notice of assessment to file a notice of objection, which can long and expensive for business.”

Alternative dispute resolutions can work, notes Natalie St-Pierre, a tax partner with Richter in Montreal. Along with her colleagues, St-Pierre conducted a meticulous survey of 40 enterprises who were assessed between $25,000 and $8 million by Revenue Quebec. But thanks to back-and-forth negotiations between the accounting firm and the tax department, their assessments were slashed by a staggering 89 per cent. Indeed, in half the cases the notices of assessment were reduced to zero. “It’s not acceptable that the notices of assessment were reduced by 89 per cent,” said St-Pierre. “There are many reasons to explain this but one of the principal ones is that they treat entrepreneurs as if they are potential fraudsters. Revenue Quebec is there to serve my clients – that is something that they have not well understood.”