Quebec taxman launches program that rewards whistleblowers

More than four years after the federal government introduced an offshore tax evasion tip line to fight offshore tax evasion and aggressive tax avoidance, Quebec’s tax authority is following suit by launching a whistleblower program that will offer monetary rewards.

The new whistleblower program will pay whistleblowers rewards of up to 15 per cent of anything above $100,000 the Quebec taxman recovers in a tax fraud investigation. The exact percentage of the whistleblower’s reward will depend on the “quality and usefulness” of the information, according to a Revenue Quebec interpretation bulletin. The informant’s “level of cooperation” too will play a role but the provincial taxman does not stipulate, not even in its bulletin, what that entails. Neither does the Quebec tax authority explain what it means that it is offering a reward to “offset the potential personal, social and professional consequences of reporting another taxpayer.”

The program, which complements Canada Revenue Agency’s Offshore Tax Informant Program (OTIP), only deals with information involving anti-avoidance or shams. Anonymous whistleblowers will not be rewarded by the program. Instead, informants must identify themselves and if the information is deemed to be pertinent, the whistleblower must sign a contract to “define the parties’ respective commitments,” according to Revenue Quebec documentation. The reward will be paid only once amounts have been recovered and all deadlines for objection or appeal by the taxpayers have elapsed. The reward will be taxed.

Confidentiality, always a sticky point, is not promised. While the Quebec taxman says it will protect the informant’s identity, it does leave open the door for confidentiality to be breached. Revenue Quebec says there is a possibility that informants may be called to testify as a witness in legal proceedings. In such cases, the tax authority will notify the informant before deciding whether to continue the proceedings

Revenue Quebec already has an existing whistleblower program that allows taxpayers to report, even anonymously, a person or business they suspect is not meeting its tax obligations. But it does not offer financial incentives.

The new whistleblower program was launched as part of the “Tax Fairness Action Plan” tabled by Quebec’s minister of Finance, Carlos Leitao on November 2017. The action plan contains 14 actions that address tax havens, aggressive tax planning, transfer pricing and e-commerce with suppliers having no significant presence in Quebec.

“Offering a reward, in a well-structure framework, could be an efficient enticement to encourage people who have pertinent information to transmit it to Revenue Quebec,” said Leitao in a statement. “This information will allow it to act more efficiently to detect more rapidly tax avoidance strategies.”

Revenue Quebec’s expectations may have to be dampened. While the U.S. taxman’s whistleblowing program has led to recovery of “significant” unreported tax dollars and successful tax prosecutions, the CRA’s program has “to date had limited success,” points out David Chodikoff, a Toronto civil and criminal tax litigator with Miller Thomson LLP in an article published last year in the Canadian Tax Journal. But Chodikoff hastens to add that though it may too early in the program’s existence to pass judgment on its efficacy, the program faces unique challenges that Americans do not. Namely, the Canadian Charter of Rights and Freedoms.

“Once the predominant purpose of an inquiry by the CRA is the determination of penal liability, the taxpayer’s rights as secured by the Charter are fully engaged” thanks to sections 7 through 11 of the Charter, notes Chodikoff. And Charter challenges, he adds, are common in criminal tax matters.

The landmark ruling by the Supreme Court of Canada in the Jordan case further complicates matters due to the introduction of a numerical ceiling. “It is hard to imagine that the Jordan decision would not have an impact on the potential conduct of a tax prosecution in Canada,” said Chodikoff, Miller Thomson’s national leader in tax litigation.

Revenue Quebec can issue demand letters to third parties outside of the province

The Quebec Court of Appeal has ruled the province’s tax authority can issue demand letters and request the disclosure of financial information from third parties outside the province to determine whether a taxpayer is subject to the province’s tax laws.

The precedent-setting ruling will potentially have a substantial impact as it is widely expected to spur Revenue Quebec to issue more demand letters to third parties outside the province even though questions remain over the scope of the ruling, tax lawyers say.

“Demand letters are a very powerful tool,” pointed out Nicolas Simard, a Montreal tax litigator with Fasken Martineau DuMoulin LLP. “They are used to obtain information and documents of a person in the course of an audit and while tax authorities generally use them correctly, there have audits that have gone awry and that transmuted into a fishing expedition with auditors asking for documents they had no right to obtain. Given that this is sometimes the case, it is frightening that following this decision Revenue Quebec will have the power to issue demand letters in other provinces.”

In January 2014, Revenue Quebec launched an investigation of an Alberta trust it suspected had activity in Quebec. During an audit of several Quebec corporations, a Revenue Quebec investigator discovered a cheque signed by a beneficiary of the trust who lives in Montreal. As part of its investigation, the tax authority issued a demand letter for the disclosure of banking information of a numbered company, 1068754 Alberta Ltd., which was the sole trustee of DGGMC Bitton Trust, held by a National Bank branch in Calgary. The demand, issued under s. 39 of the Tax Administration Act, sought to determine whether the trust was subject to the Quebec Taxation Act. The National Bank did not contest the demand and provided the requested documents which were held under seal pending the outcome of the court case.

The trustee challenged the demand and argued that it was ultra vires of Revenue Quebec’s powers under s. 92 of the Constitution Act, 1867 because Quebec is entitled to direct taxation only within the province. The trustee also argued that under ss. 461(1) and 462(2) of the Bank Act that the demand, issued under penalty of prosecution, was invalid because it was sent to a bank branch outside Quebec and was therefore extraterritorial.

The Court of Appeal dismissed the arguments and upheld the decision of Superior Court Justice Thomas Davis. The court noted that both the Quebec Tax Administration Act and the Bank Act are silent over whether the Quebec tax authority has the power to issue demand letters to parties outside the province.

Nevertheless, the court found that Revenue Quebec did not exceed its territorial authority nor did it exercise its powers of taxation or of audit outside Quebec by issuing a demand letter to the National Bank’s Calgary branch. That’s because the demand was a not a legal measure that falls within the scope of ss. 461(1) and 462(2) of the Bank Act. Rather a demand is an administrative proceeding and “such communication is purely accessory,” said Justice Marie-Josée Hogue in 1068754 Alberta Ltd. c. Agence du revenu du Québec 2018 QCCA 8. Justices Paul Vézina and Geneviève Marcotte concurred with the reasons.

The court also found that while Revenue Quebec sent a demand to a branch outside the province, it in fact constitutes notice to the bank as a whole, given the branch is not a separate legal entity for the purposes of the demand. It is a “notification sent to a bank with respect to a customer of a bank” within the meaning of s. 462(2) of the Bank Act. In other words, s. 462 (2) does not confer a branch with a “distinct legal personality,” said Justice Hogue.

Moreover since a demand only seeks to obtain information and documents in the bank’s possession and is not intended to have an “effect” on the goods belonging to the client, it too is not covered by subsection 462(2) of the Bank Act, explained Martin Delisle, a Montreal tax lawyer with De Grandpre Chait LLP.

“Almost certainly the decision will encourage Revenue Quebec to relay demand letters more frequently outside of Quebec and more specifically to the other provinces,” remarked Delisle.

But it is far from clear whether the Appeal Court’s decision will apply to Canadian financial institutions whose headquarters are not in Quebec, added Delisle. The Appeal Court pointed out that because the National Bank’s headquarters is based in Quebec, the demand was not extraterritorial. But the court did not explicitly state whether its finding applies to Canadian financial institutions whose headquarters are not in Quebec, noted Deslisle.

It may be time therefore for Revenue Quebec to seriously consider signing a Tax Information Exchange Agreement (TIEA) with the other provinces, said Simard.

As of the end of 2017, Canada had signed 23 TIEAs with countries that are in force, two that are signed but not in force, and five that are under negotiation.

“If states are obliged to sign tax information exchange agreements with other nations to obtain information why not the provinces when the information that tax authorities are seeking is found in another jurisdiction?” wondered Simard, a position that Delisle, too, holds.

“There’s a reason why these exchange agreements exist and are necessary — and that’s because Canada has no jurisdiction outside of its borders to demand information from another state,” Simard added.

To the surprise of tax lawyers, the Court of Appeal also held that bank documents are documents that carry with them an expectation of privacy. A formal demand constitutes a seizure when the taxpayer has a reasonable expectation of privacy in respect of the documents and information required, held the court. “That is a very important finding because it applies to companies as well,” said Delisle. “Since a formal demand constitutes a seizure, it must be examined whether the demand letter was exercised without violation or was validly exercised.”

This story was originally published in The Lawyer’s Daily.

Revenue Quebec intends to improve dealings with taxpayers

An action plan unveiled by Revenue Quebec to improve its dealings with taxpayers after the Quebec ombudsman accused the provincial tax department of becoming more intractable and less respectful is viewed with cautious optimism by business and tax professionals.

The action plan was ordered by Quebec Finance Minister Carlos Leitão to remedy an “unacceptable situation” following a scathing report by Quebec ombudsman Raymonde Saint-Germain who for the second year in a row found that Revenue Quebec frequently failed to apply the principles of natural justice or fundamental rules of procedural fairness, rigidly interpreted fiscal legislation despite being aware of jurisprudence contrary to its position, and provoked needless court action to resolve tax disputes with taxpayers. The ombudsman also criticized the provincial tax department for failing to provide adequate information to taxpayers in support of its assessing positions, refusing to admit and correct its own mistakes, and employing “inadequate, and even abusive” auditing methods. Shortly after the publication of the report, Revenue Quebec president Gilles Paquin resigned and was eventually replaced by deputy minister Éric Ducharme in mid-February, two weeks after the release of the action plan.

Revenue Quebec’s comprehensive action plan aims to improve customer service, ensure and strengthen its respect for the principles of administrative justice, make it easier to settle disputes without recourse to the courts, and calls for the implementation of a new business assistance program to ensure voluntary compliance.

“It’s a step in the right direction,” remarked Norma Kozhaya, vice-president of research and chief economist at the Quebec Employers’ Council, an influential business lobby group. “There were many irritants in the way things were being done. We can only hope that the action plan will lead to concrete results, reduce the burden for enterprises, and lead to less problematic relationships with Revenue Quebec.”

Following in the footsteps of  the Canada Revenue Agency (CRA) and other European nations such as France and Germany, the Quebec tax department intends to introduce this month a taxpayer’s charter of rights. Besides ensuring that the “principles of administrative justice are respected,” the charter of rights is expected to outline Revenue Quebec’s commitment and obligations to taxpayers, including assurances that it will provide excellent service with integrity, equity and respect. The provincial tax administration has also made a commitment to train employees by year end over the principles and obligations resulting from the implementation of the taxpayer’s charter.

But questions remain over the legal effect – if any – the charter will have. A Montreal tax lawyer asserts that the CRA taxpayer bill of rights, introduced in 2007, has not helped taxpayers. “Every time you bring it up with CRA officials, it does no good,” said the seasoned lawyer. “The taxpayer charter of rights has not from my personal experience been helpful and has not helped to solve issues around assessment.” An example that Revenue Quebec should look at is France, where the taxpayers’ charter has the force of law, according to Michel Mongrain, the president of the Montreal-based Fiscal and Financial Planning Association (APFF). “It’s going to be interesting to see if the taxpayer’s charter proposed by Revenue Quebec will have legal weight or whether it will be merely wishful thinking,” said Mongrain, who’s also a lawyer.

The provincial tax department however has already taken steps to eliminate a source of longstanding grief for Quebec business. Up until this past February, Revenue Quebec required the payment of the amount in dispute over the Quebec Sales Tax (QST) regardless if an objection was filed. Now, under certain circumstances, Revenue Quebec has suspended the collection procedure for assessments pertaining to the QST when objections are filed. “That is a concrete gesture that will be appreciated by business,” noted Mongrain.

Auditors will also be under the spotlight following the implementation of the action plan. Auditors will be expected to provide taxpayers with “exact and complete” information” and use “simple and clear language” to explain laws and policies applicable to the taxpayer’s situation. As of July 2016, Revenue Quebec will evaluate the quality of service provided by auditors after the completion of each audit.

The tax department is now also examining legislative amendments that will lead to the creation of an independent body that will review decisions made by its objections department. The so-called Revision Bureau would try to resolve issues that arise from misunderstandings of a taxpayer’s situation without having to go to the courts. The person who would oversee the Revision Bureau would be named by the provincial government, and would be operating at arm’s length from the tax department – a development that has been well received by the business world.

So too is Revenue Quebec’s intention to examine legislative amendments that would allow small business to challenge decisions issued by its objections department to small claims court instead of filing appeals before the Court of Quebec. This would however apply to assessments less than $4,000. Still, the Montreal tax lawyer said that the move is auspicious because it would streamline the process while allowing taxpayers to defend themselves without incurring the expense of hiring an accountant or a lawyer. “We may be talking about small amounts but it’s definitely a positive development that will be welcome by small business,” he said.

By the end of the year Revenue Quebec also hopes to emulate CRA’s liaison officer initiative and introduce a new assistance program designed to help small and medium-sized businesses meet their tax obligations. A team of newly trained specialists will visit the premises of a business to provide taxpayers with education and support. Such visits do not constitute an audit, and should not result in any changes to past filings.

Martine Hébert, senior vice-president at the Canadian Federation of Independent Business applauds the initiative but believes that the provincial tax administration will discover that it will have its work cut out because taxpayers are so mistrustful of Revenue Quebec. A CFIB survey conducted last year revealed that seven of 10 respondent entrepreneurs believe 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.

“Revenue Quebec will have to take important tangible actions, particularly its tax collection department, to build the confidence of entrepreneurs before the new assistance program will become popular,” said Hébert, who was hoping that the action plan was going to introduce a tax mediation or dispute settlement program. “It’s obvious that if enterprises do business with the assistance program and tax officials discover anomalies that will lead to changes in past filings, the program won’t work.”

The Canadian Tax Foundation too believes that the action plan is a step forward but much remains to be done. “They have to bring some important changes before its image will change,” said Jane Meagher, the Quebec regional director of the Canadian Tax Foundation. “A lot of Revenue Quebec’s issues deal with the perception that they are only after collecting money, and not collecting the right amount of tax. They have to change the culture all the way from the top to the bottom, and that takes time.”

Revenue Quebec ordered to pay $2.4 million

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.”

Ombudsman comes down hard on Revenue Quebec

A blistering report by Quebec ombudsman recently accused Revenue Quebec of becoming more intransigent and less respectful report towards taxpayers, prompting an immediate reaction from the provincial finance minister who ordered the tax department to come up with a “concrete action plan” to remedy the “unacceptable” situation.

Revenue Quebec “frequently failed” to apply the principles of natural justice or the fundamental rules of procedural fairness while recovering tax dollars, rigidly interpreted fiscal laws which often resulted in needless court action to resolve tax disputes with taxpayers, and “employed inadequate, and even abusive,” auditing methods, according to the latest report by the Protecteur du citoyen, the second year in a row that the taxman was castigated by the ombudsman.

“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.”

Quebec tax authorities target construction sector

A targeted program launched by Revenue Quebec to recover monies from employers and employees in the construction industry recouped nearly $1.2 billion in the past three fiscal years but critics say that the tax authority could recover more monies and curb black market activities more efficiently by introducing a series of easy-to-implement measures.

Despite numerous initiatives introduced over the past couple of years by the Quebec government to thwart tax evasion, money laundering, collusion and corruption, particularly in the construction industry, “tax losses remain high,” according to the 2015-16 provincial budget. The taxman and the Ministry of Finance estimate that the government loses $1.5 billion annually due to tax evasion in the construction industry alone, the sector where tax losses are the highest.

The last provincial budget introduced yet more new measures to bolster its fight against tax evasion, principally targeting temporary work agencies and the construction industry. Besides launching another consumer awareness campaign, the government intends to strengthen collaboration between different government agencies and departments who are part of the so-called ACCES Construction Committee to develop yet more monitoring tools to thwart the underground construction economy.

Revenue Quebec. Controle fiscaleIn 2012, the provincial government established ACCES to improve the exchange of information between Revenue Quebec, the Quebec Ministry of Finance, Director of Criminal and Penal Prosecutions, the Quebec workers’ compensation board, and two provincial agencies that oversee the construction industry. As part of its efforts, Revenue Quebec was given the go-ahead to hire 316 auditors who work exclusively on private and public construction sites across the province. These auditors examine the financial books of construction firms working on construction sites, and go so far as to meet with employers and employees alike to gather information and data. According to Revenue Quebec figures, these auditors were directly responsible for enabling the tax man to recuperate $100 million in taxes.

The provincial budget also announced new measures that will tighten the authentication of construction contractor’s licence – something that Quebec should have done far more stringently from the beginning of its fight against the black market, said Louis-Frédéric Côté, a Montreal tax litigator with Spiegel Sohmer. Quebec’s 46,000 construction contractors must hold a licence issued in accordance with the Quebec Building Act. While the provincial agency that oversees construction contractors, the Régie du bâtiment du Québec, carries out nearly 22,000 verifications upon the issuance or maintenance of a contractor’s licence, many contractors are nevertheless still able to bypass the system by providing bogus addresses and telephone numbers. That ploy allows them to circumvent Revenue Quebec audits as well as provincial sales tax registration, and in turn creates legal and tax headaches for honest entrepreneurs who have done business with them.

Revenue Quebec. Controle fiscale 2In a position that has long befuddled tax lawyers and practitioners, Revenue Quebec maintains that business have a so-called duty to investigate. The provincial tax authority has over the past several years refused to refund input tax credits if it deemed that a business did not conduct proper due diligence on its suppliers. In one case Revenue Quebec withheld $4-million in input tax credits from a company because some 30 out of 6,000 suppliers it was dealing with were apparently not legit, said a Montreal tax lawyer.

But besides withholding input tax credits, Revenue Quebec will go after contractors who have done business with dishonest sub-contractors and expect them to remit provincial sales tax owed by the sub-contractor to the tax authority, according to tax professionals.

Though the Quebec government announced that it will tighten certification verifications, and share the results with Revenue Quebec, Côté asserts that unless the authentications are carried out almost in real-time, it will not solve the problem. “The big challenge is to convince fiscal authorities to conduct these verifications in real time,” said Côté, who used to work at Revenue Quebec’s legal department. “So long as these verifications are not done in real time, business will continue to be at risk and people may have hear from Revenue Quebec two, three, four years down the line with bad news.”

Revenue Quebec. Construction. RestaurantThe same kind of checks should also be conducted by Revenue Quebec when construction contractors register for the goods and services tax and provincial sales tax, adds Côté. He believes that the tax authority could easily conduct swift investigations on construction contractors within 60 days, ideally 30 days, who register for GST/QST. All they would have to do is investigate whether the contractor has a real address, a real telephone number, and a real bank account. “The heart of the problem again is real-time verification but I believe that there is a lack of vision and leadership in the organization,” said Côté. “Their efforts are focused on introducing aggressive tax measures rather than preventative measures.”

One tool that Revenue Quebec has at its disposal that seems to have been put on the backburner is a software program that culls information from more than 300 provincial sources to identify taxpayers who do not declare their total revenues, noted Natalie St-Pierre, a tax partner with Richter in Montreal. The software program also measures and compares declared revenues with levels of wealth. Since fiscal-year 2009-2010, the program has recouped on average $30 million in tax monies. But it has the potential to be far more effective, said St-Pierre. “I am a big fan of this program because Revenue Quebec has at its disposal all the information the government has on its citizens, and the tax authority should use it more effectively in order to track down fraudsters,” said St-Pierre. “It appears that they have forgotten this program exists.”

Revenue Quebec. Indices de richesseThe provincial government could also introduce tax credits for home renovations to thwart the thriving residential construction black market, said Luc Lacombe, a tax partner with Raymond Chabot Grant Thornton in Montreal. Lacombe notes that the series of measures the provincial government has introduced over the past five years has made it extremely difficult for construction firms in the commercial sector to avoid paying taxes. Not so in the residential sector, where the incentive for both consumers and contractors alike to bilk the government is relatively easy. “As a general rule, consumers who have residential work done don’t want to pay the 15 per cent provincial sales tax,” noted Lacombe. “But if the government introduced a 20 per cent tax credit, as it did in the past, it would recuperate the 15 per cent QST that it’s now losing, and would ensure that the contractor who is doing the work is declaring his revenues, and therefore recoup even more monies from them in the form of income taxes. As far as I’m concerned, these programs cost nothing to the government and even brings in more money into the government coffers.”

Revenue Quebec. Temporary work agencies. Divulgation voluntairesIn the meantime, Montreal tax lawyer Jules Brossard urges his clients who work with sub-contractors to protect themselves at all costs. In order to prevent Revenue Quebec from chasing honest entrepreneurs years later for unremitted taxes by sub-contractors, Brossard recommends that they write two separate cheques to sub-contractors – one for services rendered, and another payable both to the sub-contractor and Revenue Quebec for the taxes. “This way if the sub-contractor hasn’t remitted the taxes, he can’t cash the cheque,” said Brossard, a partner with De Grandpré Chait LLP. “And even if Revenue Quebec goes after the contractor and says you haven’t remitted the taxes, the contractor can say to the tax authorities I’ll be happy to send you a cheque again. At least this way the contractor doesn’t have to pay twice, and nor pay penalties.”

Ruling extends reach of taxman’s demand letters

Quebec’s tax authorities can issue demand letters and request the disclosure of financial information from third parties located outside of the province to determine whether the taxpayer is subject to the province’s tax laws, ruled Quebec Superior Court.

The ruling illustrates the daunting challenge taxpayers face when trying to quash formal demand letters and requests for information by tax authorities, particularly when they are trying to ascertain the residency of corporations or trusts in order to establish where it makes its management decisions, according to tax experts.

“The courts have always been reluctant to cancel or quash demand letters or requests for information, and one of the reasons is that it is not a collection measure per se but rather it is part of an investigation conducted by tax authorities,” noted Étienne Gadbois, a Montreal tax lawyer with De Grandpré Chait LLP. “It’s impossible for tax authorities like Revenue Quebec to make a determination if the taxpayer is liable to pay tax based on where the central management and control is exercised if it does not have access to certain types of documents to complete the analysis.”

The case began in January 2014 when the Quebec taxman launched an investigation into an Albertan trust that it believed had activity in Quebec. A Revenue Quebec investigator came across during the audit of certain Quebec corporations a cheque signed by a beneficiary of the trust who lives in Montreal. As part of its investigation, the tax authority issued a demand for the disclosure of certain banking information of a numbered company,1068754 Alberta Ltd., which was the sole trustee of DGGMC Bitton Trust, held by a National Bank branch in Calgary. The demand, issued under section 39 of the Quebec Tax Administration Act, sought to determine whether or not the trust was subject to the Income Tax Act. The National Bank did not contest the demand and furnished the requested documents, but it was held under seal in the court file.

The trustee contested the demand and argued that the demand was ultra vires of the powers Revenue Quebec has under section 92 of the Constitution Act, 1867 as Quebec is entitled to direct taxation only within the province. The trustee also argued that under sub-section 461(1) and 461(2) of the Bank Act that the demand, issued under penalty of prosecution, was invalid because it was sent to a bank branch located outside of Quebec and was therefore extraterritorial.

“The case is not about whether Revenue Quebec has the power to send these demand letters (nor) is about whether non-residents are subject to (Quebec) fiscal laws or not,” explained Stéphane Eljarrat, a Montreal tax and white collar crime litigator who unsuccessfully argued the case. “The real question is whether or not they can send demand letters under penalty of prosecution to a third party, who is not the subject of an audit and who is located in another province, without judicial authorization.”

Quebec Superior Court Justice Thomas Davis dismissed the arguments. He held that to deny Revenue Quebec the power to investigate under these circumstances would be the equivalent of allowing corporations and trusts to do all their banking at a branch outside of Quebec and potentially avoid taxation, even if all the management decisions were taken in the province. “The Court cannot conclude that they stand for the proposition that a person who resides outside of Quebec may not be asked for information,” said Justice Thomas in a ten-page ruling in 10856 Alberta Ltd. v. Agence de revenu du Quebec 2015 QCCS 1135. “Their scope is limited to the fact that a non-resident may not be charged for failing to file an income tax return.”

The ruling makes perfect sense, according to tax litigator Caroline Desrosiers. It’s not as if Revenue Quebec went on a fishing expedition to obtain information without any grounds, added the founder of CD Legal. As with corporations, a trust is resident in the jurisdiction where it makes its management decisions, otherwise that would open the door to tax evasion, said Desrosiers. “I am convinced that we are going to see more and more of these cases,” said Desrosiers. “Many companies have put in place fiscal strategies where they set up offshore accounts but the central management and control is exercised here. The goal is to avoid paying taxes. But their real residence is here when you look at where management decisions are taken.”

But other tax lawyers wonder about the scope of the ruling. Justice Davis held that for requests for information to be effective, the tax authority must send it to the branch of the bank that has the information sought by the taxman. But once it is sent to the branch, it constitutes notice to the bank as a whole, given that the branch is not a separate entity for the purposes of the demand. He concludes that while the demand seeks information about an Alberta trust, the information is being sought to determine where the decisions of the trust are taken. “Therefore, it is perhaps premature to call the demand extra-territorial. However, even if the demand has an extra-territorial effect, that effect is incidental to Quebec’s power to tax within the province,” said Justice Davis.

That finding seems to imply that because the National Bank’s headquarters is based in Quebec, the demand was not extra-territorial, said Geneviève Léveillé, a tax lawyer with Wilson & Partners LLP, a law firm affiliated with PricewaterhouseCoopers LLP. “The question that arises following this ruling is whether the judge would have come to the same conclusion if the bank was not based in Quebec, like the Bank of Alberta or Toronto-Dominion Bank – I’m not sure,” said Léveillé, a former interim Deputy Director of the Tax Law Services branch of the Department of Justice. She points out that in another case, Agence du revenu du Québec c. SAP Canada inc., 2013 QCCQ 4206, Revenue Quebec sought to obtain documents that were held outside of Quebec and was denied on the basis that section 39.2 of the Quebec Tax Administration Act did not apply outside of Canada.

“It’ll be interesting how Revenue Quebec will interpret this ruling,” said Léveillé. “Will it use this decision to expand its investigative powers and issue more demand letters? I think they will have to be prudent.”

Eljarrat, a partner with Davies Ward Phillips & Vineberg LLP, believes that’s exactly what will happen. He says it will provide Quebec tax authorities with a “new avenue” to issue extra-provincial demand letters. But the ruling will most likely be appealed, he added. “We disagree with the judge’s conclusion on the interpretation of the Bank Act, and there appears to be a discrepancy between the arguments that were put forward before the court and the way they were reflected in the decision.”

Montreal tax lawyer fights federal whistleblower watchdog

Yacine Agnaou is one of a handful of Canadian lawyers who took on Quebec tax authorities and plead a case so successfully that now others are trying to follow suit. Last year Agnaou won a precedent-setting ruling that condemned Revenue Quebec to pay nearly $4 million, including a staggering $2 million in punitive damages, to a businessman who was forced to shut down his business after it mishandled his case. Lawyers from different firms, evidently emboldened, are now working together to plead a case before the Quebec Court of Appeal to stop Revenue Quebec’s controversial policy of holding companies liable for the tax delinquencies of its suppliers.

Now Agnaou is immersed in another legal battle against another government department, and once again the odds of winning are stacked against him. Agnaou, a former Crown prosecutor, has filed a motion for leave to appeal before the Federal Court of Appeal in a bid to force the federal whistleblower watchdog to investigate his allegations of wrongdoing against the Public Prosecution Service of Canada.

Agnaou, the second former federal lawyer to go public in the past year with serious allegations against the federal government, claims that while he worked as a federal Crown prosecutor in the economic crime team he was thwarted in 2008 by his supervisors at the Quebec regional office from prosecuting a Canadian subsidiary of a multinational company. Agnaou, now working for the boutique law firm Groupe Dupuis Paquin in Laval, felt he had a strong case to file charges under s.238 of the Income Tax Act against the Canadian company for failing to provide information to the Canada Revenue Agency.

But Agnaou’s supervisors disagreed, even though Agnaou maintained that the facts submitted in support of his recommendation to prosecute were more than sufficient to satisfy anyone that there was a reasonable likelihood of conviction and that it was in the public interest to prosecute. Agnaou, alleging that the file was mismanaged and that managers at both the Quebec regional office and the national headquarters failed to comply with several laws, brought up the matter before the head of the Public Prosecution Service of Canada. “That began the move that lead to my expulsion at work,” said Agnaou. He asserts that he was then subjected to harassment and reprisals, including missing out on a promotion and being forced to take a medical exam by management allegedly under the guise that they had to take prescribed steps to prevent and protect against violence in the workplace as per the Canada Labour Code.

“If it was a divergence of opinion, do you really think I would have proceeded with a disclosure that exposed me the way it did,” asked rhetorically Agnaou. “I have many elements that establishes the position taken by the hierarchy to create a category of taxpayers who were immunized from prosecutions under s.238 of the Income Tax Act.”

On October 2011, Agnaou decided to disclose the alleged wrongdoing to the Office of the Public Sector Integrity Commissioner, an independent organization created in 2007 under the Public Servants Disclosure Protection Act (PSDPA) to establish a safe and confidential way for public servants to disclose wrongdoing in federal organizations. Agnaou also filed a complaint of reprisals with the Office. An analyst from the Office analyzed Agnaou’s disclosure and recommended not to deal with the disclosure, a position upheld by a case analysis manager, its legal service department, and the Deputy Commissioner. The Deputy Commissioner, in a letter dated September 2012, said the Office refused to deal with disclosure because there was no information to suggest that any wrongdoing had been committed. It also declined to look into his complaint of reprisal

Agnaou did not back down. He then turned to the Federal Court of Canada, seeking judicial review. “The fact that one of the applicant’s superiors, an expert in the field of question, did not agree with the applicant on the file in question does not mean that wrongdoing was committed,” wrote Federal Court Justice Peter Annis in a 17-page ruling issued this past January in Agnaou and Attorney General of Canada 2014 FC 86. “It is entirely normal for there to be disagreements between counsel, such as the applicant and his superiors, but this does not mean that a wrongdoing was committed or that the Office of the PSIC is obliged to investigate.”

Despite the setbacks, Agnaou is not acquiescing. He recently filed a motion for leave to appeal before the Federal Court of Appeal to overturn Justice Annis’ ruling. He is also seeking an order that will compel the Office of the PSIC to investigate his wrongful disclosure and reprisal complaint. “My loyalty is to the public interest, to society – there is no personal interest that is driving me,” said Agnaou. He believes that Crown prosecutors should have a forum to file voice their concerns if they believe that a case they have been overseeing has been mishandled by management. “The power of Crown prosecutors to prosecute is essentially discretionary,” pointed out Agnaou. “But my point is that the decision can be exercised in an irregular fashion, be it in bad faith or against the public interest, and that should be controlled. One must allow Crown prosecutors the power to contest any interference by management in a decision. One must allow Crown prosecutors to complain if this interference runs contrary to public interest.”

Agnaou is also hopeful that the Federal Court of Appeal will provide guidance over the decision-making powers of the Integrity Commissioner and the criteria he should apply to determine whether a wrongful disclosure warrants an investigation. Critics contend that at present the Integrity Commissioner has too much discretionary power to decide the fate of disclosures and complaints of reprisals. The Integrity Commission can refuse to deal with any disclosure on the grounds that he believes that a whistleblower is not acting in good faith, is not in the public interest, or any other “valid reason,” noted David Hutton, the former head of the non-profit whistleblower advocacy group Federal Accountability Initiative for Reform (FAIR). “These vague and subjective provisions give the Commissioner far too much discretion to ultimately do nothing,” said Hutton, who along with three other advocacy groups, recently called for the resignation of Integrity Commissioner Mario Dion following a scathing report by the Auditor General of Canada.

In a report published last April Auditor General Michael Ferguson found Dion, his deputy and an investigator guilty of “gross mismanagement” and wrongdoing in the handling of two whistleblowers’ complaints made against the whistleblower’s watchdog office. Dion is the second integrity commissioner in a row accused of incompetence and mismanagement by the auditor general. In December 2010, the auditor general criticized Dion’s predecessor, Christiane Ouimet, who was found to have retaliated against employees and generally acted inappropriately while in office.

“This says that there is a need for a broader audit of the Integrity Commissioner’s Office, and not just looking at individual files,” said Hutton. “Important cases are not being looked into. Cases that are looked into are frequently mishandled. Whistleblowers are not being taken seriously or treated with respect. It’s ugly.”

Integrity Commissioner Dion acknowledged that there were “unacceptable procedural delays” in dealing with the cases. A spokesperson of the Office of the PSIC said that improved oversight measures to ensure complaints would be processed quicker and reviewed by senior managers was put in place before the Auditor General began his investigations.

But the latest Auditor General report reveals that there are serious problems with the way that the Integrity Commissioner’s Office conducts its investigations, said David Yazbeck, an Ottawa lawyer who is working on a number of high-profile whistleblower cases, including Edgar Schmidt, a former senior lawyer with federal Department of Justice who filed a suit against the Attorney General of Canada accusing it of circumventing a legal requirement to properly review the constitutionality of draft legislation. Schmidt’s case is now scheduled to be heard by the Federal Court this October. “It’s an important piece of legislation and it ought to be applied in the most effective way possible, otherwise you have situations where people might disclose wrongdoing and there is not a proper investigation of it,” said Yazbeck.

Agnaou, like the vast majority of whistleblowers, has paid a price for disclosing an alleged wrongdoing. “It’s very painful for whistleblowers,” said Agnaou. “They know they will come out losing. They lose because their employers will sanction them. And they lose because they become radioactive elements. Even friends, your entourage, are afraid to be with you for fear of being associated with a whistleblower. What is unfortunate in all of this is that when you turn to the Integrity Commissioner, you come to realize how difficult it is for them to investigate disclosures and complaints of reprisals.”

Quebec tax authorities chastised for expecting business to act as “tax police”

The Tax Court of Canada, in yet another legal blow to Quebec’s tax authorities, chastised Revenue Quebec for expecting business to act as a “taxation police” after it withheld input tax credits from a meat processing company because it ostensibly had not been diligent in its dealings with its suppliers.

The precedent-setting ruling, the third to harshly castigate the Quebec taxman in recent months, found that nothing in the Excise Tax Act (ETA) allows tax authorities to hold a company liable for the tax delinquencies of its suppliers. In uncharacteristically blunt language, Justice Alain Tardif noted that it would be unreasonable to expect business to perform complete background checks on all its suppliers, especially since legislation grants tax authorities large powers to investigate and demand information.

“If Parliament had intended that a taxpayer doing business with a delinquent subcontractor would be held solidarily liable for the amounts the subcontractor owes to the state, it would have expressly stated that as the legislator did for contributions owed to the CSST,” said Justice Tardif in Salaison Lévesque Inc. v. The Queen, 2014 TCC 36. “It is not for the Court to usurp the function of Parliament.”

This ruling, coupled with another two very critical rulings issued late against Revenue Quebec last fall, has prompted tax lawyers to question whether the provincial tax department has gone too far in its battle to fight tax evasion. When the Quebec government announced four years ago its intention to “return to a balanced budget by 2013-2014,” it increased the pressure on Revenue Quebec to recoup more monies.

“Revenue Quebec employees are under a lot of pressure to recoup monies, and that leads to problems in the market,” noted Paul Ryan, a tax lawyer with Ravinsky Ryan Lemoine LLP in Montreal. “Ever since the provincial government introduced the return to a balanced budget program, the government is running Revenue Quebec like a business. I don’t know if it is appropriate for a tax department with all the powers they have in hand to be run like a business.

In a position that has long befuddled tax lawyers and practitioners, Revenue Quebec maintains that business have a so-called duty to investigate. Over the past several years it has compelled business claiming input tax credits to investigate the integrity of its suppliers, notes Louis Tassé, a tax lawyer with Couzin Taylor LLP who successfully argued the Salaison case. “I find it incomprehensible that Revenue Quebec tells its taxpayers three, four, five years down the line that you should have known what your obligations were when they were not written in law, its regulations or its information bulletins.”

Revenue Quebec has refused to refund input tax credits if it deemed that a business did not conduct proper due diligence on its suppliers. Indeed, in one case Revenue Quebec withheld $4-million in input tax credits from a company because some 30 out of 6,000 suppliers it was dealing with were apparently not legit, said a Montreal tax lawyer.

That’s what happened to Salaison Levesque, a Quebec family-run business that resorts to staffing agencies during the high-peak season in order to maintain its production. Between 2005 and 2009, the Montreal-based firm retained the services of four staffing agencies, and in accordance with the ETA, Salaison Levesque paid the GST on the invoices issued by the agencies for services rendered. The agencies, which had an obligation to remit taxes to the tax authorities, apparently did not. Revenue Quebec withheld Salaison’s input tax credit because it claimed that the staffing agencies could not have rendered the services identified on the invoices and paid by Salaison because the agencies did not have the resources to do so.

The tax authority also contended that the agencies outsourced the work and had not provided the services themselves. In the absence of a payroll registry, Revenue Quebec maintained that the agencies did not have any employees to provide the services, and therefore the invoices they issued were “invoices of accommodation” – the issuance of invoices where no service was rendered or supplies traded. Finally, Revenue Quebec asserted that Salaison did not act diligently in its dealing with the staffing agencies, and that it should have known that the agencies were fraudulent and did not remit the sales taxes that were collected.

Justice Tardif dismissed Revenue Quebec’s arguments, noting that its position was contradictory, farfetched, and ridiculous. Pointing out that there is a clear distinction between a lack of resources and non-declared resources, Justice Tardif noted that the fact that workers were not declared by the agencies did not change the fact they were employees of the staffing agencies. That the agencies did not remit the taxes and used undeclared resources to provide the services should not be attributed to a business that had no knowledge of the fraud and that acted in good faith.

“Under our tax laws, a declared or undeclared business, whether illegal or not, is subject to all tax legislation,” explained Tassé. “Revenue Quebec has even assessed drug dealers because they did not remit GST and QST. No kidding.”

Justice Tardif also held that the fact that the agencies may have hired unidentified subcontractors to provide the services made no difference. Regulations, noted Justice Tardif, allow for an invoice to include either commercial name of the supplier or its intermediary. Since the family-run business complied with the regulations, it could not held liable for the fraud committed by the agencies.

Justice Tardif also dismissed Revenue Quebec’s contention that Salaison should have been more diligent in its efforts to investigate its suppliers. The first mission of a business is to generate revenues, “and not act as a taxation police,” held Justice Tardif. “Nothing in the ETA provides that a business must act as a police officer or investigator to ensure that the business whose services have been retained complies with the ETA. Indirectly, Revenue Quebec wanted the appellant to do its own work.” Justice Tardif added that it would be not realistic to expect business to perform complete background checks on its suppliers, given the tools, personnel, and technical resources the tax authority has to uncover and sanction fraudsters.

“The important thing that comes out of this judgment is the fact that the court reiterates on more than one occasion that the first objective of a business is to generate revenues and not to be the tax authority’s police,” said Alexandre Dufresne, a tax lawyer and managing partner of Spiegel Sohmer in Montreal. “That to me is key because in the cases we have been seeing lately Revenue Quebec seems to impose more on taxpayers than what is imposed by law — and that is verify the legitimacy of their subcontractors.”

Justice Tardif also points out that under the Quebec Civil Code if an agent is acting for the government, as is any business collecting GST and PST, there is a presumption of good faith.

According to Etienne Gadbois, a tax lawyer with De Grandpré Chait in Montreal, that reasoning will likely give tax professionals added munitions in its legal tangles with Revenue Quebec. “I have never seen that particular reasoning,” said Gadbois. “Everyone who is collecting GST or QST are acting as agents for Revenue Quebec. Under the Civil Code, there is a presumption that the agent is acting in good faith so even though a subcontractor is delinquent the government cannot presume I am participating in the scheme. This reasoning adds value to the position that if your services are value-rendered you should be able to claim your input tax credits.”

The key part of the ruling for Montreal tax lawyer Emmanuelle Campeau is that Justice Tardif held that there is a clear distinction between an administrative stance adopted by tax authorities and what the law and its regulations demand of taxpayers.

“This duty to investigate does not emanate from the law,” said Campeau of Ravinsky Ryan Lemoine LLP. “It stems from Revenue Quebec’s administrative policies. At this moment Revenue Quebec is applying their administrative policies instead of the law. They are interpreting the law as it sees fit.”

Revenue Quebec ordered to pay $2 million in punitive damages

A Montreal businessman who was forced to shut down his business after Quebec tax authorities mishandled his case was awarded nearly $4 million, including a staggering $2 million in punitive damages, following a precedent-setting ruling by Quebec Superior Court.

In an extremely harsh judgment that sheds light on Revenue Quebec’s tax collection policies and questions its administrative practices, Justice Steve Reimnitz held that the provincial tax agency abused its powers, acted maliciously and in bad faith, and exhibited unjustified and blameworthy administrative doggedness in the way it handled the tax file of Groupe Enico Inc. and its founder Jean-Yves Archambault. The comprehensive 197-page ruling in Groupe Enico inc. c. Agence du revenu du Québec 2013 QCCS 5189 details a series of bizarre and improbable events, triggered by a dishonest auditor,  that has been likened by Quebec tax lawyers to an absurd “horror story” that “was bound to happen.”

“There have not been many decisions that have been rendered by the courts where Revenue Quebec has been sued for damages,” pointed out Alexandre Dufresne, a Montreal tax lawyer and managing partner of Spiegel Sohmer. “Not only that, Revenue Quebec lost and the damages were very substantial so in that sense it is a very important decision. The judgment outlines what I would call a horror story – it really was an abusive audit.”

The Enico ruling, coupled with another ruling issued in mid-October by the Court of Quebec that also castigated Revenue Quebec for taking a far too aggressive stance against a family business, has prompted tax lawyers to question whether the provincial tax department has gone too far in its battle to fight tax evasion. When the Quebec government announced four years ago its intention to “return to a balanced budget by 2013-2014,” it increased the pressure on Revenue Quebec to recoup more monies. It is expected to recoup $3.9 billion in fiscal 2013-14, $600 million more than fiscal year 2012-13, and a significant increase over the $2.3 billion it was expected to recover in 2009-10, according to Revenue Quebec figures. The results have been mixed. Last year the taxman recovered nearly $3.5 billion, a sizeable increase over the $2.35 billion it reclaimed in fiscal year 2009-10. Indeed, Revenue Quebec boasts that for every dollar it invested it recouped $9.30 last year. But tax debts have surged as well, from $2.2 billion in 2010 to $7.6 billion last year. In short, as one tax lawyer put it, there is a huge gap between the amounts assessed and the amounts actually collected.

“Revenue Quebec employees are under a lot of pressure to recoup monies, and that leads to problems in the market,” noted Paul Ryan, a tax lawyer with Ravinsky Ryan Lemoine LLP in Montreal. “Ever since the provincial government introduced the return to a balanced budget program, the government is running Revenue Quebec like a business. I don’t know if it is appropriate for a tax department with all the powers they have in hand to be run like a business. But the attitude they have is that we fight everything; this time they got burnt.”

Yacine Agnaou, a Montreal tax lawyer who successfully plead the Enico case, concurs. “The Enico case is not unique; it is the accumulation of faults that makes it exceptional,” remarked Agnaou, who previously worked for the Canada Revenue Agency and the economic crimes team of the Public Prosecution Service of Canada. “We are currently facing in Quebec a tax authority that has put in place a tax collection system that crushes everything because the objectives set out by the government are too ambitious.”

Archambault’s Kafkaesque bureaucratic nightmare began when two tax department civil servants, one who incredulously posed as an intern even though he was an auditor with over 20 years of experience, paid him a visit to his company’s headquarters to examine his federal and provincial sales tax payments in 2007 after a former 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. An auditor deliberately doubled the amount owed by Enico, leading to an erroneous notice of assessment.

“A notice of assessment, even one that is erroneous, is not a fault,” explained Justice Reimnitz. “The current case is very far from being a simple case of an erroneous assessment. We are speaking here about an assessment that was falsely inflated, and that was not corrected within a reasonable time even though they knew there were no grounds for these assessments. We are speaking here of assessments following intentional and malicious work. That is what is in question in this case.”

Matters 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 paycheques. 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, which specialized in industrial automation and robotics, 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 – conduct that Justice Reimnitz described as symptomatic of the taxman’s conduct towards Enico and Archambault.

“Revenue Quebec argues that the applicants must demonstrate, both in respect to the assessment notices and the administrative seizure, that their representatives committed an intentional fault, acted in bad faith or abused its powers,” said Justice Reimnitz. “In the opinion of the Court, that is what was done. The applicants demonstrated serious carelessness, the equivalent of abuse of power. The reckless conduct by Revenue Quebec is the equivalent of bad faith, without regard to the predictable consequences that its conduct caused.”

Justice Reimnitz also reproached Revenue Quebec for failing to investigate the merits of the denunciation, particularly since it was the denunciation that drew the tax department’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. Nor did Revenue Quebec inform Archambault that the audit was spurred by a denunciation. “From this denunciation followed a decision to conduct an audit, which was not revealed to the taxpayer,” noted Justice Reimnitz. “The fact that Revenue Quebec dealt with the denunciation without examining the interests of the whistleblower and approached the taxpayer without informing him of the existence of the denunciation and of the real goal behind the audit leaves the Court perplexed with regards to the respect of the taxpayer’s rights to obtain a full and complete defence during the auditing process.”

Justice Reimnitz also examined a practice that to this day Revenue Quebec vehemently denies exists – a quota system that rewards auditors. “We categorically deny that there is a quota system in place,” said the tax department’s spokesperson Stéphane Dion. Justice Reimnitz however found that objectives are dictated by the government, and that the objectives are dispatched to different departments within Revenue Quebec. Each department has a fixed amount to recuperate. Auditors who fulfill objectives stand to earn between $1,000 and $1,200. Employees who perform exceptionally can be rewarded with a 3.5 per cent bonus, based on their salary.

“The principle is clear,” remarked Justice Reimnitz. “If one compensates a civil servant for the amounts that he recuperates, it will incite him to recover more, with the risk that it can bias his judgment when doing his auditing work. His interest is evident. That is all the more serious since the auditor is also a decision-maker. The role of a decision-maker and the role of an auditor are in the opinion of the Court incompatible with the notion of objectives or quotas. A decision-maker cannot have an interest in a decision he makes. That seems to be common sense.”

But that logic seems to escape the provincial tax authority, said Agnaou. “It is such an unhealthy pressure to place in the hands of a civil servant who has so much power and to tell him that if he doesn’t generate a product, it will have a negative impact on his professional career,” noted Agnaou. “Revenue Quebec doesn’t understand all the pain they can cause with their power.”

Etienne Gadbois, a tax lawyer with Montreal law firm De Grandé Chait LLP , is hoping that the ruling will lead Revenue Quebec to adopt some changes in the way it deals with taxpayers. “It’s going to be interesting to see if the relationships between taxpayers and Revenue Quebec at the collection level, audit level and objection level will change in light of these cases,” said Gadbois. “But I don’t think we will see a drastic change tomorrow. It is a big agency.”

Revenue Quebec is still studying the ruling, and has yet to decide whether it will seek leave to appeal before the Quebec Court of Appeal.