Tax Insights: Supreme Court of Canada confirms the limited jurisdiction of the Tax Court of Canada

Issue 2024-23

In brief

Two recent Supreme Court of Canada (SCC) cases address the distinction between the Tax Court of Canada’s (TCC’s) exclusive jurisdiction over appeals relating to the correctness of tax assessments and the Federal Court’s jurisdiction to dispose of a taxpayer’s challenge of a discretionary decision by the Minister of National Revenue (the Minister). 

In Dow Chemical Canada ULC v. The King, 2024 SCC 23 (Dow), the taxpayer had originally appealed to the TCC its reassessment and the Minister’s refusal to allow a downward transfer pricing adjustment pursuant to subsection 247(10) of the Income Tax Act (ITA). In Iris Technologies Inc. v. Canada, 2024 SCC 24 (Iris), the taxpayer asked the Federal Court to review the Minister’s assessment, which had denied tax refunds claimed under the Excise Tax Act (ETA).

On June 28, 2024, the SCC rendered its decisions in both cases, dismissing both appeals. The SCC reaffirmed the TCC’s exclusive jurisdiction to determine the correctness of an assessment,¹ but emphasized that the TCC does not have jurisdiction to review the Minister’s discretionary decisions. Under ss. 18(1) of the Federal Courts Act, the Federal Court has exclusive jurisdiction to conduct a judicial review of discretionary decisions delegated to the Minister by Parliament, including those that directly affect a taxpayer’s tax liability.

Writing for the majority in Dow, Justice Kasirer held that the Minister’s discretionary decision under ITA ss. 247(10) is not part of the assessment and, thus, that decision falls outside of the TCC’s jurisdiction. The issuance of a tax assessment and the existence of an appeal before the TCC do not justify a departure from the settled meaning of “assessment” and Parliament’s intended division of jurisdiction between the TCC and the Federal Court.

In detail

Dow Chemical Canada ULC v. The King

Facts

The taxpayer (Dow), a Canadian resident corporation, entered into (as a borrower) a non-arm’s length loan agreement with a related Swiss resident company as the lender. As a result of this loan agreement, Dow incurred interest expenses. Dow also reported income in respect of toll manufacturing services provided to the Swiss company.

Following an audit of the transactions between Dow and the Swiss company, the Minister reassessed Dow, applying ITA ss. 247(2) to reflect what the Minister considers would have been agreed to had the parties been dealing with one another at arm’s length. The application of ITA ss. 247(2) resulted in a transfer pricing adjustment that increased Dow’s income.

In accordance with ITA ss. 247(10), Dow requested that the Minister exercise her discretion and allow a downward transfer pricing adjustment to reduce its income by the amount of interest that would have been paid had the parties been at arm’s length. Under ss. 247(10), a downward transfer pricing adjustment is not to be made unless, in the opinion of the Minister, “the circumstances are such that it would be appropriate.” The Minister refused Dow’s request for a downward transfer pricing adjustment. As a result, Dow sought judicial review by the Federal Court of the Minister’s refusal to allow the downward transfer pricing adjustment. Dow also objected to the reassessment resulting from the application of ITA ss. 247(2) and subsequently appealed the reassessment to the TCC.

TCC and Federal Court of Appeal decisions

In the context of the appeal of the reassessment, the parties referred a question of law to the TCC: Where the Minister has exercised her discretion pursuant to ITA ss. 247(10) to deny a taxpayer’s request for a downward transfer pricing adjustment, does the Minister’s decision fall outside the TCC’s exclusive original jurisdiction?

The TCC held that the Minister’s discretionary decision under ss. 247(10) is an essential component of the taxpayer’s assessment and goes to the correctness of that assessment. As a result, it may be reviewed by the TCC under its exclusive appellate jurisdiction to determine the correctness of the assessment.

On the other hand, the Federal Court of Appeal allowed the Minister’s appeal and set aside the TCC’s order, maintaining that the Federal Court has exclusive jurisdiction to judicially review discretionary decisions made by the Minister under ss. 247(10).

SCC decision – 4 against 3

Majority

Writing for the majority, Justice Kasirer held that the TCC has jurisdiction to review the correctness of tax assessments. He clarified that the term “assessment” has a meaning that is settled in law and that a tax assessment is a “product,” being the amount of tax at issue, as opposed to the “process” itself that resulted in the determination of that amount. In preparing an assessment, the Minister’s role is simply to determine what the law requires the taxpayer to pay by applying a fixed statutory formula to taxable income. It is a purely non-discretionary determination of the taxpayer’s tax liability for a particular taxation year. There is no discretion exercised by the Minister.

On the other hand, when making discretionary decisions, the Minister provides her opinion, guided by policy considerations rather than strictly applying the law to the facts. As such, discretionary decisions are qualitatively distinct from assessments and result from tasks that are fundamentally different. Discretionary decisions are not assessments, nor are they part of assessments. Discretionary decisions also involve distinct standards of review.  The TCC determines the correctness of an assessment based on a statutory de novo review, whereas the Federal Court, following the teachings of the SCC in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, has jurisdiction to review a discretionary decision based on a standard of reasonableness. The TCC does not have access to the appropriate range of administrative law remedies to judicially review discretionary decisions made by the Minister under ss. 247(10). It has no remedial power to quash ministerial decisions.

Dissent

In dissent, Justice Côté wrote that Dow’s challenge to the Minister’s exercise of discretion should proceed before the TCC as part of the appeal from the reassessment. In reaching this conclusion, Justice Côté held that, unlike other discretionary powers in the ITA, the power that the Minister has under ss. 247(10) is not permissive. While a taxpayer is not entitled to a downward adjustment in all circumstances, a taxpayer is entitled to the Minister’s opinion as to whether the downward adjustment is appropriate when one is sought and/or established.

Guided by the objectives of avoiding a multiplicity of proceedings and of promoting efficiency and access to justice, Justice Côté accepted Dow’s expansive jurisdictional theory. She held that the Minister’s exercise of discretion is inextricably linked to the assessment. Given that the resulting decision goes directly to the correctness of the assessment, it is within the scope of the TCC’s appellate jurisdiction. Importantly, she viewed the right of appeal provided for in ITA s. 169 in Dow’s circumstances to arise from the assessment, not from the exercise of discretion per se. In other words, the amount of tax assessed was the direct result of the Minister’s determination under ss. 247(10). The real substance of the issue to be determined was the correctness of the amount of tax owing and ITA subparagraph 171(1)(b)(iii) is better suited to address this. In referring the assessment back for reconsideration and reassessment, the TCC could remit the matter of the downward pricing adjustment to the Minister as part of a “reconsideration” (or, in French – “nouvel examen”).

Iris Technologies Inc. v. Canada 

This appeal was heard by the SCC on the same day as the Dow appeal. The SCC’s decision in Iris is unanimous, although the Court’s conclusion rests on different reasons. Essentially, the SCC confirmed the TCCs jurisdiction for two of the taxpayer’s claims:

• procedural unfairness grounded in the timing of the Minister’s assessments, and
• lack of an evidentiary foundation

The SCC concluded that these were attacks on the correctness of the assessments that could be dealt with through a de novo review. Importantly, Justice Kasirer reiterated the well-accepted principle that judicial review is a remedy of last resort and the Federal Court will not have jurisdiction to entertain an application for judicial review where a matter is otherwise appealable to the TCC. The taxpayer’s application for judicial review failed, because it was held to be a collateral attack on the correctness of the assessments.

As for the allegation that the Minister acted with an improper purpose, Justice Kasirer held that, while in some circumstances this could be the basis for an application for judicial review within the Federal Court’s exclusive jurisdiction, in the present case the claim had to be struck on the basis that the taxpayer did not allege facts in its application that, if taken to be true, would give any support to this claim. 

The takeaway

In 2007, the SCC had examined the question of the TCC’s and the Federal Court’s jurisdictions in Canada v. Addison & Leyen Ltd., 2007 SCC 33. The SCC had then refused to enlarge the TCC’s statutory jurisdiction, insisting that judicial review should remain a remedy of last resort within the Federal Court’s exclusive jurisdiction. In 2023, the SCC granted leave to appeal to both Dow and Iris, leaving some with the impression that the SCC might be ready to overturn or at least nuance this long‑standing position. In 2024, the SCC has now refused to disturb settled jurisprudence and has closed the door to the idea of a simplified procedure before the TCC.

 The main takeaway for:

• Dow, is that the Minister has the right to allow or deny downward transfer pricing adjustments and the TCC does not have any jurisdiction in respect of discretionary decisions under ITA ss. 247(10)
• Iris, is that the TCC has jurisdiction over claims of (i) procedural unfairness grounded in the timing of the Minister’s assessments, and (ii) lack of an evidentiary foundation, because both are collateral attacks on the correctness of the assessments

At this point, any extension of the TCC’s jurisdiction would require legislative amendments. The SCC has clearly held that enlarging the TCC’s jurisdiction by necessary implication, rather than by express statutory language, ought to be rejected. The TCC and the Federal Court are both creatures of statute. The two cases discussed above confirm the view that it is Parliament’s intention that jurisdiction in tax matters be shared between the two courts and that the TCC is not a one-stop judicial shop for resolving tax disputes. As such, notwithstanding the parallel proceedings, taxpayers will have to continue challenging policy-based decisions separately from their appeals of non-discretionary assessments, and this will be required even if there is a ministerial decision affecting the tax assessment.

^{1. According to s.12 of the Tax Court of Canada Act, ITA s.169 and ETA s.302.}