TAX EXECUTIVES INSTITUTE SETTLING TAX DISPUTES

1. TAX EXECUTIVES INSTITUTESETTLING TAX DISPUTES ED KROFT, Q.C.BLAKE, CASSELS & GRAYDON LLP September 19, 2013 KROFT/SEPTEMBER 2013

2. Settling Tax Cases Clients always want to know about prospects of settling tax controversies Settlement is an art – there is no one formula for success Many factors affect the methodology, content and timing of a settlement and the strategy associated with it KROFT/SEPTEMBER 2013

3. Settling Tax Cases Tax statutes do not fully outline the methodology of how to settle disputes – they refer to procedural rules relating to the powers of the Minister to reassess and waivers of objection and appeal rights (ITA 169(3), 164(4.1), 165(1.2), 165(3), 165(5), 165(1.2), 169(2.2), 152(4.2), 152(4.3), 220(3.1)) Parties only rely on these rules to effect a resolution of a dispute KROFT/SEPTEMBER 2013

4. There are many “tools” that may assist with facilitating a settlement First and foremost, the key to crafting and obtaining a successful settlement requires clarity regarding what a “win” is for each party to the controversy Settling Tax Cases KROFT/SEPTEMBER 2013

5. To get to this place, realism is required and the timetable may be longer than one of the parties might expect – so patience is critical to success “Maximizing” a settlement will differ in every case. “Win” will look different to different people Settling Tax Cases KROFT/SEPTEMBER 2013

6. What Might Be Considered A “Win”? Some Elements What is a “win” for the taxpayer? What is a “win” for the tax authority? What is at stake for the taxpayer? Money, principle, time, political capital, someone’s job, certainty, public scrutiny? Settling Tax Cases KROFT/SEPTEMBER 2013

7. What Might Be Considered A “Win”? Some Elements What is at stake for the tax authority? The same things Money: Nothing owing or some amount? (Both sides) Settling Tax Cases KROFT/SEPTEMBER 2013

8. What Might Be Considered A “Win”? Some Elements Court proceedings or not? (time, money) – Both sides Lengthy process or not? (time, someone’s job) – Both sides Availability of personnel to work on the tax controversy? (time, political capital) – Both sides Settling Tax Cases KROFT/SEPTEMBER 2013

9. What Might Be Considered A “Win”? Some Elements Costly process or not and the need to hire people? (money) – Both sides Reputational risk or not? (someone’s job, money) – Both sides Settling Tax Cases KROFT/SEPTEMBER 2013

10. What Might Be Considered A “Win”? Some Elements Certainty for future years or not? (principle, someone’s job) – Both sides Consistency with published practices/precedent (principle) – Tax authorities Settling Tax Cases KROFT/SEPTEMBER 2013

11. What Might Be Considered A “Win”? Some Elements Are amounts owing to tax authorities creditable elsewhere? Has full provision been made on financial statements? (Does “winning” really matter?) – Taxpayer (Bonus allocations) Settling Tax Cases KROFT/SEPTEMBER 2013

12. What Might Be Considered A “Win”? Some Elements Overall: Formulation of a “maximum amount you can live with” will help to determine the strategy and the tools needed to obtain the result – This analysis is done consciously or unconsciously, rationally or irrationally, by both sides. The answer is fluid and can change at different times because the relative importance of the elements will change. Settling Tax Cases KROFT/SEPTEMBER 2013

13. “Maximizing” and “winning” therefore are not always about just money How can you “maximize” a settlement? Understand what factors and issues affect your settlement prospects Understand that factual, legal, practical and strategic factors lead to or prevent settlement Settling Tax Cases KROFT/SEPTEMBER 2013

14. Settlement Factors The following is a checklist of factors which play a role within the settlement process: Costs of litigation/dispute resolution (professional costs and opportunity costs) Stress and distraction of litigation/dispute resolution (loss of time) Settling Tax Cases KROFT/SEPTEMBER 2013

15. Settlement Factors The expected benefits of winning (present and future) The chances/magnitude of winning (based on an analysis of the facts, evidence, law, and business issues) The personality, approach, bias and experience of persons acting for/on behalf of the taxpayer Settling Tax Cases KROFT/SEPTEMBER 2013

16. Settlement Factors The personality, approach, bias and experience of persons acting for the Crown: CRA (audit, appeals, designated appeals) Department of Justice lawyers The nature of the dispute Technical (legal interpretation) Factual Judgmental (e.g. quantum, valuation) Is it an “all or nothing” type of issue? Does the matter lend itself to a compromise? (e.g. valuation, expenses) Settling Tax Cases KROFT/SEPTEMBER 2013

17. Settlement Factors The personality, approach, bias and experience of judges The need to meet deadlines By the taxpayer (to provide information/documents, limitation periods, procedural limitations) By CRA (limitation periods, internal constraints, procedural limitations) Publicity of the dispute and reputational risk Settling Tax Cases KROFT/SEPTEMBER 2013

18. Settlement Factors Nature and tone of the communications between the tax authority and the taxpayer (meetings, telephone calls, written responses) Personal/corporate profile of the taxpayer (education, sophistication, experience, wealth) The necessity of technical compliance with applicable tax legislation Settling Tax Cases KROFT/SEPTEMBER 2013

19. Settlement Factors The prospect of accountability by the taxpayer (to shareholders, to lenders, to competitors, to the public) by the tax authority (internally, to the Auditor-General, to the public) Possible taxpayer mistakes (lack of courtesy/respect, inconsistent stories, lack of interest, absence of proof/evidence, non-compliance with procedural or substantive requirements) Settling Tax Cases KROFT/SEPTEMBER 2013

20. Settlement Factors Possible CRA mistakes (missing statute-barred deadlines) The effluxion of time and the age of the dispute (battle fatigue, maturing perspectives) The need for a “principled” or legal settlement Settling Tax Cases KROFT/SEPTEMBER 2013

21. Legal Basis for Settlement The necessity for a legal basis of settlement: can you compromise? Can a Taxpayer or CRA repudiate a settlement? Settlement Strategies KROFT/SEPTEMBER 2013

22. Legal Basis for Settlement Jurisprudence Cohen, Smerchanski, Galway, Enterac, Garber 1390758 Ontario Huppe CIBC World Markets Potash Corporation Hine McKenzie Transalta Softsim Settlement Strategies KROFT/SEPTEMBER 2013

23. “Maximizing” Based on the previous list of factors and the particular “maximization” in the circumstances, how can you “maximize” a settlement? Understand your adversary and their position Establish and maintain credibility and integrity with your adversary – trust creates the environment for a deal or it has to be mediated by a judge or foreign government Understand and anticipate what implications a settlement will have Settling Tax Cases KROFT/SEPTEMBER 2013

24. “Maximizing” Stick within risk tolerance and expectation Determine when to settle Identify who has the authority to settle Be creative and assume nothing is impossible Be prepared to litigate Settling Tax Cases KROFT/SEPTEMBER 2013

25. Tools in the Settlement Toolbox Commitment to “win” Preparation Good relationships with tax authorities - trust Effective documentation retention and recovery Ability to listen well and other “soft” skills – it’s a “people” process and not a robotic one Knowledge of your case and the facts Settling Tax Cases KROFT/SEPTEMBER 2013

26. Tools in the Settlement Toolbox Ability to secure witnesses including those who are no longer in organizations Knowledge of the prevailing law and sensitivity to movements in judicial trends Knowledge of how to create a “legal” and “principled” settlement Settling Tax Cases KROFT/SEPTEMBER 2013

27. Tools in the Settlement Toolbox Knowledge of court process and proper forum for dispute Tax Court (settlement conference, case management, costs, motions) Federal Court (judicial review of ministerial action including challenge to compellability of documents) Provincial Court/Superior Court (privilege, rectification, provincial assessment) Settling Tax Cases KROFT/SEPTEMBER 2013

28. Tools in the Settlement Toolbox Knowledge of tax authority administrative practice and personnel Taxpayer relief provisions Real time audits Structure of the tax authority and its mechanics Settling Tax Cases KROFT/SEPTEMBER 2013

29. Tools in the Settlement Toolbox Knowledge of remedies available to facilitate the settlement Administrative (waiver of interest and penalties) Judicial (tax court hearing/motion) Statutory (court, remission order) Patience – when should a settlement be rejected? Knowing when to hold or fold Settling Tax Cases KROFT/SEPTEMBER 2013

30. What are the possible effects of the settlement? Certainty for past Reduction of tax, interest, penalties Elimination of reputational risk, cost savings, better deployment of corporate resources Settling Tax Cases KROFT/SEPTEMBER 2013

31. When can you settle? Anytime (audit, appeal, court) At the Tax Court level After pleadings After Discovery process Settlement Conference Pre-trial Conference Just before Trial Settling Tax Cases KROFT/SEPTEMBER 2013

32. How do you settle? “Without Prejudice” written offers Indefinite or limited? Non-disclosure? Costs? Do you need a “compromise” position to get enhanced costs or can you get such costs in an “all or nothing” situation? (Blackburn Radio 2013) Trial balloons? Oral communications – are they useful? Settling Tax Cases KROFT/SEPTEMBER 2013

33. How do you settle? Waiver of objection/appeal rights – tough to reverse (Noran West, 2012 TCC) Within the Tax Court process Consent to Judgment (public) Subsection 169(3) of the ITA Minutes of Settlement (not public) Settling Tax Cases KROFT/SEPTEMBER 2013

34. Questions KROFT/SEPTEMBER 2013