Court and Parties
COURT OF APPEAL FOR ONTARIO DATE: 20220407 DOCKET: C69359
Pardu, Paciocco and Thorburn JJ.A.
BETWEEN
Jayco, Inc. Plaintiff (Appellant)
and
Her Majesty the Queen in Right of Canada and The Canada Revenue Agency Defendants (Respondents)
Counsel: David Douglas Robertson, Jonathan Ip and Brittany Rossler for the appellant Nancy Arnold, Kevin Dias and Benjamin Chamberland, for the respondents
Heard: March 21, 2022 by video conference
On appeal from the order of Justice Frederick L. Myers of the Superior Court of Justice, dated March 22, 2021, with reasons reported at 2021 ONSC 2120.
Pardu J.A.:
Reasons for Judgment
[1] Jayco, Inc. [Jayco] manufactures recreational vehicles in the United States and sells them to Canadian dealers. The Canada Revenue Agency [the CRA] took the position that delivery occurred in Canada and that Jayco was obliged to and failed to collect and remit GST/HST from the dealers. It assessed Jayco for almost $14 million in taxes.
[2] Jayco was successful in the Tax Court of Canada in establishing that delivery occurred in the United States, and the assessment was set aside. Jayco incurred legal costs in contesting the assessment and interest charges on the security posted for the taxes claimed pending the hearing of the appeal. It sued for recovery of these expenses but its action was dismissed pursuant to r. 21.1(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, on motion by the defendants. The motion judge accepted the argument of the respondents that the CRA had no duty to indemnify the appellant for costs incurred in dealing with a GST/HST audit and had no private law duty of care which could found a claim for recovery of expenses incurred in contesting an audit by the CRA.
[3] The appellant submits that the motion judge erred in striking its two claims, which it defined in the following terms in its factum:
Whether the respondents, as principal, owe a duty to indemnify their agent (the appellant) for damages caused as a result of the agent following the principal’s instructions. The appellant claims that it was the statutory agent of the respondent under the Excise Tax Act, R.S.C., 1985, c. E-15 [the ETA].
Whether the respondents owe a duty of care to GST/HST registrants who are appointed under the ETA to be agents of Her Majesty the Queen in right of Canada, thus permitting an action in negligence to proceed.
[4] It is common ground that the standard of review is correctness. Furthermore, there is no dispute that the legal test for determining whether a claim should be struck under r. 21.01(1)(b) is whether it is plain and obvious that the statement of claim discloses no reasonable cause of action, or put another way, that the claim has no reasonable prospect of success. Novel but arguable claims should be allowed to proceed to trial: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 21; Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959.
The Nature of the Tax
[5] In Quebec (Revenue) v. Caisse populaire Desjardins de Montmagny, 2009 SCC 49, [2009] 3 S.C.R. 286, at para. 10, the court described the operation of the GST/HST:
The GST, which was implemented in 1990 by legislation that amended the ETA (S.C. 1990, c. 45), replaced the former federal manufacturers’ sales tax. The GST can be regarded as a value-added tax. It is collected at every stage of the manufacturing and marketing of goods and services and is payable by the recipient, who is regarded as the debtor in respect of the tax liability to the Crown (s. 165 ETA). However, the supplier is responsible for collecting and remitting the tax (s. 221(1) ETA). The supplier is deemed to hold the amounts so collected in trust for Her Majesty (s. 222(1) and (3) ETA) and must periodically file returns and make remittances. In addition, the Act establishes a system under which input credits can be claimed, at each step of the marketing and supply of the good, in respect of the taxes the supplier has had to pay to his or her own suppliers (ss. 141.01 and 169(1) ETA). The ultimate recipient bears the full burden of the tax. [Citation omitted.]
The Claim for Indemnity
[6] The appellant relies on s. 221(1) of the ETA, which requires a supplier to collect the tax payable by a recipient:
221(1) Every person who makes a taxable supply shall, as agent of Her Majesty in right of Canada, collect the tax […] payable by the recipient in respect of the supply.
[7] The appellant argues that this provision made it an agent of the respondents when it carried out the instructions of the CRA to either pay or secure the taxes claimed. Accordingly, the appellant argues that it is entitled to an indemnity owed by a principal to an agent when the principal’s instructions turn out to be based on an erroneous view of tax liability. The appellant acknowledges that the weight of authority has concluded that auditors carrying out administrative duties under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) [the ITA] owe no duty of care to taxpayers, but it argues that s. 221(1) of the ETA makes the present relationship different.
[8] It is plain and obvious that this claim could not succeed.
[9] The motion judge held that the Supreme Court of Canada resolved the issues of indemnity raised by this appeal in Reference re Goods and Services Tax, [1992] 2 S.C.R. 445. The appellant, however, submits that reference questions are advisory opinions which are not a decision by a court on the merits and which bind no one: In Re Statutes of Manitoba relating to Education (1894), 22 S.C.R. 577, at pp. 677-678; Reference re Secession of Quebec, [1998] 2 S.C.R. 217, at para. 25.
[10] In Reference re Goods and Services Tax, Alberta argued that since suppliers were designated as agents of the government for the collection of the GST/HST, the common law duties of principals to agents were triggered, including a duty to reimburse agents for all costs and liabilities incurred in the course of the agency. The court found this to be an exaggeration of the common law duty of principals to agents, and adopted the language of Professor Fridman in The Law of Agency (5th ed. 1983), at p. 164:
The most important duty of the principal is to remunerate the agent for services rendered. The obligation to pay such remuneration – the agent’s “commission” – exists only where it has been created by an express or implied contract between principal and agent.
[11] The court concluded that the duty to remunerate the agent for costs incurred in the course of the agency does not arise automatically, and only arises in cases in which the principal and the agent contract, expressly or by implication, for such remuneration to be paid. In the case of the GST/HST, it concluded that there was no contractual duty of reimbursement arising expressly or by implication, although it left open the case of whether “there could ever arise a case in which governments would be under a duty to reimburse agents unilaterally created by statute for the costs incurred in the course of their agency”: at p. 476.
[12] The court went on to consider the common law right of indemnification for agents who inadvertently cause tortious injury to others in the course of their agency, and concluded that the collection of taxes as an agent in compliance with the ETA could not give rise to a right to indemnification: at pp. 476-477.
[13] Finally, the court noted that any right to remuneration for the time and trouble involved in collecting the GST/HST would have to flow from the Act itself. The Act was silent on compensation, though it provided for a one-time transitional credit. Since Parliament had directed its mind to the issue of compensation for the costs of compliance with GST/HST collection, and established a scheme for compensation, “common law rights which might have operated but for the statute cannot be relied upon”: at p. 478.
[14] Here, there is no question of express or implied contractual entitlement to reimbursement. There is no tortious liability to a third party which is the subject of a claim for indemnification. Section 221(1) of the ETA limits the agency to the “collection” of the tax from a recipient of a supply.
[15] Both the ITA and the ETA rely on self-reporting by taxpayers. Those acts establish administrative structures for the assessment and audit of taxpayers. When the CRA delivers a Notice of Assessment or Reassessment claiming that more taxes are owing and the taxpayer delivers a Notice of Objection, the parties are taking opposing positions. Under these circumstances, it cannot be said that the taxpayer is acting as agent of the tax authority when it incurs interest or legal costs in the course of asserting its position.
[16] Interest paid to post security for the taxes claimed, and legal fees incurred to contest the assessment, are not incurred for the “collection” of the tax from a recipient of a supply.
[17] In the face of the comprehensive statutory scheme providing for Notices of Objection, appeals to the Tax Court of Canada, judicial review and some remedies for overpayment, such as interest on refunds and awards of costs, the absence of statutory provisions for indemnification for other interest paid and other legal costs is telling. Here, the Tax Court of Canada awarded solicitor and client costs to Jayco. Section 221 does not provide a basis to infer a statutory entitlement to more costs and interest beyond that provided in the ETA and the Tax Court of Canada Act, R.S.C., 1985, c. T-2. [1]
[18] Reference re Goods and Services Tax is not binding, but it is persuasive. The motion judge was correct to conclude that it is plain and obvious that there is no right of indemnity arising from s. 221 of the ETA for the expenses claimed by the appellant.
Does the CRA owe a duty of care in relation to its administrative and audit functions?
[19] The motion judge held that there was ample case law rejecting the proximity required to formulate a private law duty of care between the CRA and taxpayers facing an audit. While he noted that there could be a private law duty of care where the CRA undertook a criminal investigation, an investigator of criminal offences did not have the same relationship of an auditor to a taxpayer while carrying out administrative duties in an audit. This conclusion is so clearly right that the motion judge came to the correct decision in dismissing Jayco’s duty of care claim pursuant to r. 21.1(1)(b).
[20] Resolution of this issue turns on whether there is sufficient proximity between a taxpayer and the CRA to establish a prima facie duty of care. The relationship between the parties and broad questions of policy are relevant here: Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, at para. 30. The second stage of the inquiry asks whether there are residual policy considerations which should negate or limit that duty of care.
[21] Where a statutory regulator is mandated to protect the public interest, the creation of a private law duty of care may conflict with the regulator’s public duties. As noted in Imperial Tobacco, at paras. 43-45:
A complicating factor is the role that legislation should play when determining if a government actor owed a prima facie duty of care. Two situations may be distinguished. The first is the situation where the alleged duty of care is said to arise explicitly or by implication from the statutory scheme. The second is the situation where the duty of care is alleged to arise from interactions between the claimant and the government, and is not negated by the statute.
The argument in the first kind of case is that the statute itself creates a private relationship of proximity giving rise to a prima facie duty of care. It may be difficult to find that a statute creates sufficient proximity to give rise to a duty of care. Some statutes may impose duties on state actors with respect to particular claimants. However, more often, statutes are aimed at public goods, like regulating an industry (Cooper), or removing children from harmful environments (Syl Apps). In such cases, it may be difficult to infer that the legislature intended to create private law tort duties to claimants. This may be even more difficult if the recognition of a private law duty would conflict with the public authority’s duty to the public: see, e.g., Cooper and Syl Apps. As stated in Syl Apps, “[w]here an alleged duty of care is found to conflict with an overarching statutory or public duty, this may constitute a compelling policy reason for refusing to find proximity” (at para. 28; see also Fullowka v. Pinkerton’s of Canada Ltd., 2010 SCC 5, [2010] 1 S.C.R. 132, at para. 39).
The second situation is where the proximity essential to the private duty of care is alleged to arise from a series of specific interactions between the government and the claimant. The argument in these cases is that the government has, through its conduct, entered into a special relationship with the plaintiff sufficient to establish the necessary proximity for a duty of care. In these cases, the governing statutes are still relevant to the analysis. For instance, if a finding of proximity would conflict with the state’s general public duty established by the statute, the court may hold that no proximity arises: Syl Apps; see also Heaslip Estate v. Mansfield Ski Club Inc., 2009 ONCA 594, 96 O.R. (3d) 401. However, the factor that gives rise to a duty of care in these types of cases is the specific interactions between the government actor and the claimant.
[22] Here, the mandate of the CRA is to ensure that taxpayers pay taxes that are lawfully owed, for the benefit of all taxpayers and the country as a whole. The ETA establishes a comprehensive regime to deal with disputes over taxes owing, including appeals and judicial review. Recognition of a private law duty here would conflict with the agency’s duty to the public; there is nothing in the legislative scheme to suggest that such a duty was contemplated. The administrative regime for enforcement of the GST/HST is broadly similar to that in place to enforce the ITA.
[23] There are many instances where courts have held that broad statutory public duties foreclose a private law duty of care. As noted in Reference re Broome v. Prince Edward Island, 2010 SCC 11, [2010] 1 S.C.R. 360, such public duties do not generally, in and of themselves, give rise to private law duties of care: at para. 13; see also Eliopoulos v. Ontario (Minister of Health & Long Term Care) (2006), 82 O.R. (3d) 321 (Ont. C.A.); and River Valley Poultry Farm Ltd. v. Canada (Attorney General), 2009 ONCA 326, 95 O.R. (3d) 1.
[24] Nor is there anything in the specific relationship between the appellant and the CRA that suggests that a finding of sufficient proximity would be appropriate. That the CRA was ultimately shown to have been wrong to assess the appellant for the taxes it claimed is not enough.
[25] The appellant argues that McCreight v. Canada (Attorney General), 2013 ONCA 483, 116 O.R. (3d) 429 holds that in some circumstances, revenue authorities will owe a duty of care to a taxpayer.
[26] In McCreight, the CRA was concerned that taxpayers and their accountants were applying for fraudulent research and development credits. It obtained search warrants for the homes and businesses of the taxpayers, their lawyers and accountants. It was authorized to retain the materials seized until July 1999. It had not completed its examination of the materials by then and applied for an extension. It was ordered to return the original materials by November 9, 1999.
[27] On November 9, 1999, criminal charges were laid against various taxpayers and advisors alleging fraud and conspiracy. There was a judicial finding that the information in support of the charges was sworn “primarily to retain possession of the seized documents”: at para. 6. The criminal charges were ended by discharges, withdrawals or stays.
[28] The plaintiffs sued for a variety of causes of action, including negligence. This court overturned the motion judge’s ruling that it was plain and obvious that the CRA investigator owed no duty of care to the plaintiffs, at paras. 60-62:
In my view, in this case, the motion judge erred in concluding that it was plain and obvious that the respondent CRA investigators did not owe a duty of care to McCreight and Skinner, policy considerations would foreclose such a duty in any event and, therefore, the negligence claim had no reasonable prospect of success and should be struck.
Firstly, given the Supreme Court's ruling in Hamilton-Wentworth that, in certain circumstances, police officers may owe a duty of care to their suspects, surely it is not plain and obvious that a CRA investigator owes no such duty when operating under ITA provisions that attract criminal sanction and under the Criminal Code. The same analogical reasoning applies to any residual policy rationale that could negate such a duty.
Secondly, I see no relevant distinction between the above-cited case of Leroux and this case. That case that involved a claim of negligence against CRA employees as well and the British Columbia Court of Appeal dismissed an appeal of an order permitting the cause of action to proceed to trial. The Court was not persuaded that the claim should be struck because it was at least arguable that such a cause of action could succeed and the issue was to be considered at trial.
[29] The critical distinction that made McCreight different from the present case was the institution of criminal proceedings. Hill v. Hamilton‑Wentworth Regional Police Services Board, 2007 SCC 41, [2007] 3 S.C.R. 129 established that police officers have a duty in certain circumstances to an identified suspect to conduct a reasonable investigation.
[30] This court’s approval of Leroux v. Canada Revenue Agency, 2012 BCCA 63, 347 D.L.R. (4th) 122 as a basis to allow the action to proceed where criminal charges have been laid does not amount to affirmation that a duty of care also exists when the CRA undertakes administrative assessments and audits.
[31] As the court noted in McCreight, it is not plain and obvious that CRA investigators owe no duty of care to those they are investigating when operating under ITA provisions that attract criminal sanction and under the Criminal Code: at para. 61.
[32] Here, the appellant’s proximity claim was “made in a non-criminal investigation where only its economic interests were at stake. Any liberty interests it might have had were not threatened and it asserted no Charter rights”: River Valley, at para. 51.
[33] Policy reasons also favour rejection of a private law duty of care in relation to administrative assessments and audits. Such a duty would expose the government to unlimited liability to a practically unlimited class: taxpayers.
[34] I agree with the views expressed in Grenon v. Canada Revenue Agency, 2017 ABCA 96, 49 Alta. L.R. (6th) 228, at para. 25, leave to appeal refused, [2017] 2 S.C.R. vii (note):
[I]t is plain and obvious that an action in negligence cannot succeed. It is clear that, because of the inherently adverse relationship between auditors who are exercising a statutory function and taxpayers, a finding of sufficient proximity to ground a private law duty of care does not exist.
[35] I conclude that the motion judge was correct to conclude that the CRA did not owe a private law duty of care to Jayco when it assessed Jayco for the taxes it claimed were owing.
[36] A taxpayer may not be left without a remedy where it can establish the ingredients of an intentional tort, such as misfeasance in public office, which requires a showing of deliberate unlawful conduct in the exercise of public functions and awareness of the unlawfulness of the conduct and the likelihood of injury to the plaintiff: Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, at para. 23. Here, the appellant has not established any such intentional tort.
[37] Accordingly, I would dismiss the appeal by Jayco, with costs to the respondent fixed at $10,000 inclusive of disbursements and taxes.
Released: April 7, 2022 “G.P.” “G. Pardu J.A.” “I agree David M. Paciocco J.A.” “I agree J.A. Thorburn J.A.”
[1] Section 296 of the ETA provides for interest on overpayments of tax, at a prescribed rate. Section 18.26 of the Tax Court of Canada Act allows that court to award costs to a taxpayer.