Holding Revenue Canada to its Word: Estoppel in Tax Law
Glen Loutzenhiser
ABSTRACT
This article considers whether a taxpayer who has relied upon an erroneous representation from the taxation authorities can invoke the doctrine of estoppel to prevent the authorities from assessing tax in a manner contrary to their original representation. The first section of this article provides an introduction to the law of estoppel by representation. Generally, estoppel prevents a party from doing something that in ordinary circumstances the party is legally entitled to do, on the basis that it would be unjust or unfair to allow the party to enforce his or her usual rights. The essential elements of an estoppel by representation claim are also described in this section.
Section II analyzes the essential elements of estoppel in the context of income taxation. The reasons why taxpayers might rely on a representation from a government official, and how a taxpayer could be harmed by reliance on a representation that later proves to be in error, are described. There are many forms of representation from government officials upon which a taxpayer might rely in determining the tax consequences of a proposed undertaking. One special type of representation is an advance income tax ruling. An advance income tax ruling is a written statement given by Revenue Canada to a taxpayer stating how Revenue Canada will interpret and apply specific provisions of existing Canadian income tax law to a definite transaction or transactions that the taxpayer is contemplating. This section concludes by describing the ways that a taxpayer can be harmed financially when the taxpayer relies upon a representation that later proves to be in error. These harms include penalties and interest for non-compliance with the law, out-of-pocket expenses related to aborted transactions, and harm from paying more tax than might otherwise have been the case were it not for the erroneous representation.
Section III provides an overview of the leading Canadian tax cases in which estoppel has been raised. The cases reveal that taxpayers have been largely unsuccessful in invoking estoppel against the Minister of National Revenue. Section IV examines the policy reasons for and against estoppel protection for taxpayers. It is suggested that the heretofore limited role of estoppel in tax may be generally appropriate. However, a number of factors, including the potential damage to the ruling process itself from a revocation, suggest estoppel relief should be available in the special case of reliance upon an advance income tax ruling. In this circumstance, it is argued, the tax authorities should be held to their word. The article concludes with a discussion of three specific forms of estoppel arguments--entrapment, officially induced error, and abuse of power--that could be advanced by a taxpayer in order to estop the Minister of National Revenue from taxing in a manner contrary to the position taken by the Minister in an advance income tax ruling upon which the taxpayer has relied.
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Citation: (1999) 57(2) U.T. Fac. L. Rev. 127.
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