The Discretion/Determination Distinction and Questions of Institutional Design: Dow Chemical Canada ULC v. Canada, 2024 SCC 23 and Iris Technologies Inc. v. Canada, 2024 SCC 24

In a pair of cases decided this summer, the Supreme Court of Canada addressed the division of jurisdiction between Canada’s tax court and federal courts. In both Dow Chemical Canada ULC v. Canada, 2024 SCC 23 and Iris Technologies Inc. v. Canada, 2024 SCC 24, the Court had to determine the appropriate venue for judicial review of federal taxation decisions made by the Minister (or, more accurately, by civil servants in the Canada Revenue Agency).

In Canada, the judicial review jurisdiction over federal administrative decision-makers (“any body, person or persons having, exercising or purporting to exercise jurisdiction or powers conferred by or under [federal legislation]”) is vested exclusively in the Federal Court and Federal Court of Appeal: Federal Courts Act, RSC 1985, c F-7, ss. 18(1), 28.

However, s. 18.5 of the Federal Courts Act provides that judicial review is not available where there is a statutory right of appeal. And s. 169(1) of the Income Tax Act, RSC 1985, c 1 (5th Supp), creates a statutory right of appeal to the Tax Court of Canada in respect of assessments (essentially, calculations of one’s liability to income tax). In both Dow Chemicals and Iris Technologies, the question was whether the decision at issue related to an “assessment” and thus fell within the jurisdiction of the Tax Court of Canada or, alternatively, was a separate decision subject to judicial review in Federal Court.

In Dow Chemicals, s. 247(10) of the Income Tax Act was at issue:

An adjustment (other than an adjustment that results in or increases a transfer pricing capital adjustment or a transfer pricing income adjustment of a taxpayer for a taxation year) shall not be made under subsection 247(2) unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.

This is known as a downward transfer pricing adjustment. The particular question in Dow Chemicals was whether a decision made under this section relates to the taxpayer’s assessment or whether it involves an exercise of discretion by the Minister. A majority of the Court held that this is a discretionary decision reviewable by the Federal Court.

In Iris Technologies, the question related to the Minister’s calculation of liability under the Excise Tax Act, RSC 1985, c E-15. Here, all nine judges concluded that this part and parcel of an assessment and thus appealable to the Tax Court.

In both cases, the questions were raised on motions to strike, i.e. as preliminary motions before any determination had been made about the taxpayers’ applications for judicial review.

In Dow Chemicals, Kasirer J distinguished the discretionary power in relation to adjustments from the determination of a taxpayer’s liability:

Plainly, when preparing an assessment, the Minister does not exercise any discretion. As Stratas J.A. explained, “[w]here the facts and the law demonstrate liability for tax, the Minister must issue an assessment” (JP Morgan Asset Management (Canada) Inc. v. Canada (National Revenue), 2013 FCA 250, [2014] 2 F.C.R. 557, at para. 77; see also Ludmer v. Canada, 1994 CanLII 3547 (FCA), [1995] 2 F.C. 3 (C.A.), at p. 17). As Professor Annick Provencher has observed, “a discretionary decision of the minister could undergo judicial review. However, assessments do not generally require such discretion” (“Fifty Years of Taxation at the Federal Court of Appeal and the Federal Court”, in M. Valois et al., eds., The Federal Court of Appeal and the Federal Court: 50 Years of History (2021), 543, at p. 551). Indeed, this Court has confirmed that the Minister’s preparation of an assessment is not an exercise of discretion because “taxpayers should have confidence that the Minister is administering and enforcing the same tax laws in the same way for everyone” (Collins Family Trust, at para. 25). While the ITA empowers the Minister to exercise discretion in some matters, including over whether to issue downward transfer pricing adjustments under s. 247(10), these discretionary decisions are not assessments nor are they part of assessments. When the Minister makes discretionary decisions, she provides her opinion, guided by policy considerations.This is a task that is fundamentally different than the non-discretionary act of preparing an assessment. Accordingly, when a court reviews the Minister’s opinion reflecting these policy considerations, it should do so on the basis of reasonableness rather than the statutory standard of de novo correctness that applies to assessments (at para. 46).

There are two distinct points here. First, the exercise of discretion is qualitatively different from the making of a determination. As a conceptual matter, this point is entirely correct. The best discussion in the jurisprudence of the distinction between discretion — the choice between alternative courses of action — and determination — the application of legal standards to facts — is found in Shiller c. Bousquet, 2017 QCCA 276:

[35]        Il y a ainsi exercice d’un pouvoir discrétionnaire lorsque la conduite du décideur administratif n’est pas dictée à l’avance par le droit, lorsqu’il dispose d’une marge de choix et d’une liberté d’agir dans un sens ou l’autre, en fonction de ce qu’il considère être dans l’intérêt public.

[36]        Par opposition, un pouvoir lié, et donc non discrétionnaire, ne laisse aucune latitude au décideur administratif; sa conduite est prédéterminée par des conditions objectives fixées par le législateur. Bref, « lorsqu’il se trouve en face de telle ou telle circonstance de fait, l’administrateur est tenu de prendre telle ou telle décision; il n’a plus le choix entre plusieurs décisions, sa conduite lui est dictée d’avance par la règle de droit ».

Here, for Kasirer J, an assessment involves “the correctness of the Minister’s determination of the amount of tax owing, applying the rules in the ITA to the facts as she finds them” (at para. 47) whereas the discretion under s. 247(10) does not require the Minister “to apply the facts and the law in exactly the same way to every taxpayer” but is “based on policy considerations rather than the strict application of the law to the facts” (at para. 50) (as is confirmed by the Canada Revenue Agency’s guidance: at para. 56).

Moreover, the discretion and the assessment are not, as the appellant had argued, inextricably linked:

In my view, the “inextricably linked” argument loses much of its persuasive force when one considers what happens with the taxpayer’s assessment should a discretionary decision made under s. 247(10) be found to have been made improperly. When that decision is quashed, it does not automatically follow that the tax liability is wrong and that the assessment is incorrect, since it is open to the Minister to make the same decision upon reconsideration. By contrast, whenever a non-discretionary determination is found to have been made in error, the Minister has no choice but to make the correct determination; she cannot make the same determination that has been found to be incorrect by the Tax Court. When the rectification implies a change in the tax liability, it then automatically follows that the assessment is incorrect. In other words, as soon as a non-discretionary determination is found to have been made in error, it is possible to know whether the assessment remains correct or not. The same cannot be said when a discretionary decision is found to have been made in error. I conclude that while discretionary decisions under s. 247(10) may well “directly affect” the product of the assessment, they cannot be considered to be “inextricably linked” to it the same way as non-discretionary determinations (at para. 59).

Second, the exercise of discretion should be reviewed on the basis of the reasonableness standard rather than for correctness. This point also makes conceptual sense and fits with the established approach to judicial review set out in Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65. Appeals of assessments to the Tax Court are conducted de novo: “The Tax Court reviews the correctness of assessments through “trial[s] in which both sides adduce evidence on issues of fact and make submissions on issues of law” (J. Li, J. Magee and J. S. Wilkie, Principles of Canadian Income Tax Law (10th ed. 2022), at p. 483″ (at para. 79). But this would not be an appropriate standard of review for exercises of discretion as it would upset Parliament’s institutional design choices (at para. 83):

If a discretionary decision under s. 247(10) were part of an assessment, it would thus be reviewed de novo by the Tax Court like any other part of that same assessment. However, absent legislative direction, it would be inappropriate for the Tax Court to review the Minister’s decision de novo. It is, as this Court emphasized in Vavilov, “the very fact that the legislature has chosen to delegate authority which justifies a default position of reasonableness review” (para. 30 (emphasis in original)) … If the Minister’s decision is truly part of an assessment, the only option allowed by statute would be for the Tax Court to review it de novo for correctness. The Tax Court cannot apply a deferential standard of review such as reasonableness to part of an assessment. Accordingly, the Federal Court is the only court that has jurisdiction to undertake this review on reasonableness (at para. 80).

Crafting a unique standard, somewhere between Vavilovian reasonableness review and de novo review, would create confusion (at paras. 85, 95) and be in tension with Parliament’s intent about the role of the Tax Court (at para. 88). I am persuaded on the ‘confusion’ point, ambivalent on the legislative intent point: the de novo review contemplated here, with correctness review on issues of law and issues of fact (at para. 89) is itself different from an “appeal” under Vavilov, where deference is owed on issues of fact. Pace Kasirer J, there is already some novelty in the statutory scheme (at para. 90).

Côté J dissented on both points, albeit that she did not quibble that much with Kasirer J’s conceptual framework. First, she saw the discretionary power and determination at issue here as intertwined:

A taxpayer’s objection to a decision of the Minister under s. 247(10), which must be made before an assessment can be issued, is directed at the amount of tax owing. The Minister’s exercise of discretion in this context is inextricably linked to the correctness of the assessment (T.C.C. reasons, at paras. 171).

…

The Minister’s decision to deny a downward transfer pricing adjustment that would otherwise be mandated by s. 247(2) is inextricably linked to the correctness of the resulting assessment. That decision relates to the computation of a taxpayer’s income or taxable income and directly affects the amount of tax payable for a taxation year. It is a fact on which the application of the relevant statutory provisions necessarily rests and which results in the assessment. In circumstances such as those in the instant appeal, it is clear that the amount of tax assessed as being payable can be determined only once the Minister has made her decision regarding the requested downward pricing adjustment (at paras. 180, 185).

Note that there is no dissent here from Kasirer J’s conceptual proposition that discretion and determinations are qualitatively different: her point is that, within the context of tax assessments, the two cannot be meaningfully separated.

Second, for Côté J, questions relating to jurisdiction should not be influenced by standard of review considerations (at para. 180). She acknowledged that formulating an appropriate standard for Tax Court review of ministerial discretion under s. 247(10) raised a “delicate” question (at para. 211) and recognized that appellate standards of review — correctness on extricable questions of law; palpable and overriding error on everything else — are ill-suited to review of discretion. For her, the optimal response in these circumstances would be to craft a standard appropriate to the context of an assessment appeal:

In challenging the Minister’s decision under s. 247(10) of the ITA, a taxpayer must establish a factual foundation to support the submission that the decision was wrong in principle, that it ignored relevant evidence or that it was based on irrelevant evidence. The focus is not necessarily on whether the exercise of discretion was reasonable at the time the Minister formed her opinion (as would be the case on judicial review), but rather on whether the exercise of discretion remains a valid fact on which to rest the correctness of the assessment in view of the evidence before the Tax Court. For example, there may be new evidence presented by the taxpayer (such as a subsequent tax assessment by a foreign jurisdiction) or by the Minister (such as evidence that tax was not assessed in the foreign jurisdiction). Or the interpretation of the provisions of Canada’s tax treaties on the basis of which the Minister made her decision may be in dispute (at para. 220).

Again, I do not see this point as striking at the heart of Kasirer J’s conceptual framework. Côté J did not set out to upset the Vavilovian applecart (at para. 212) and, again, sought to craft a solution that was good for one scenario only, namely the unique jurisdiction of the Tax Court.

For my part, I will say only that I found this to be a difficult case — glad not to have had to decide it — but that both opinions are full of useful analytical insights.

In Iris Technologies, the analysis was more straightforward. Here, the taxpayer argued that the Minister had breached procedural fairness, made findings without an evidentiary foundation and exercised his powers for an improper purpose. On these bases, the taxpayer contended that judicial review in Federal Court was its appropriate recourse.

For the majority of the Supreme Court, Kasirer J rejected the taxpayer’s contentions, as each of them either fell within the purview of the Tax Court’s statutory mandate over the correctness of assessments or the appeal to the Tax Court was an adequate remedy (and, by virtue of s. 18.5 of the Federal Courts Act, precluded judicial review):

I further agree with Rennie J.A. that Iris’ allegation that the assessments were made without evidentiary foundation is “precisely within the legislative mandate of the Tax Court” (para. 11). Here again, an appeal to the Tax Court under s. 302 of the ETA constitutes an adequate, curative remedy because the court can cure any evidentiary defects in the Minister’s assessment as part of the appeal

…

It is true that an allegation of improper purpose can, in some circumstances, sustain an application for judicial review in tax matters. By way of example, as Stratas J.A. wrote in JP Morgan, the Tax Court does not have jurisdiction to set aside an assessment “on the basis of reprehensible conduct by the Minister leading up to the assessment, such as abuse of power or unfairness” (para. 83). Instead, jurisdiction to provide relief from reprehensible conduct of the Minister would fall to the Federal Court exercising its exclusive jurisdiction in judicial review under s. 18.1 of the FCA.

However, I agree with Rennie J.A. that this allegation of improper purpose should nevertheless be struck. Iris has failed to allege facts in its application that, if true, could support its allegation that the Minister acted here with an improper purpose. As Rennie J.A. noted, “Iris has not pointed to any particular motive or conduct of the Minister other than to say that the Minister issued the assessments to deprive the Federal Court of jurisdiction in the related Federal Court proceeding” (para. 14).

(at paras. 37-38, 41-42).

Kasirer J underpinned this analysis by reference to the discretion/determination distinction developed in Dow Chemicals:

In this case, the Minister’s assessment of net tax pursuant to the ETA is not the exercise of a discretionary power. Instead, she is making a non-discretionary determination where the outcome, the assessment, is dictated by statute and does not depend on the exercise of discretion (see in particular s. 296 ETA). If the Minister determines that a registrant like Iris has failed to report or remit completely the amount of net tax under the ETA, the Minister’s assessment is not a discretionary decision (at para. 47).

Determinations go to the Tax Court; discretion goes to the Federal Court (at para. 50).

Unsurprisingly, given her analysis in Dow Chemicals, Côté J agreed that the Tax Court had exclusive jurisdiction here:

Iris alleges a breach of procedural fairness in the Minister’s failure to honour her guarantee that she would advise Iris of any proposed adjustments and would provide Iris with an opportunity to respond during the audit process (A.F., at paras. 19‑20). While Iris may not have had an opportunity to respond to the proposed adjustment before the assessments were issued, it can challenge the adjustment by way of an appeal from the resulting assessments under s. 302 of the ETA.

Second, the question of whether the evidence supports an assessment is precisely the object of a taxpayer’s recourse in the Tax Court. Under s. 302 of the ETA, the Tax Court is tasked with determining the taxpayer’s tax liability de novo on the basis of a full evidentiary record (Johnston v. Minister of National Revenue, 1948 CanLII 1 (SCC), [1948] S.C.R. 486, cited in Hickman Motors Ltd. v. Canada, 1997 CanLII 357 (SCC), [1997] 2 S.C.R. 336, at para. 92). Iris’s allegation that the assessments were made without evidentiary foundation and contrary to the findings of fact made by the Minister is properly within the legislative mandate of the Tax Court and cannot be entertained by the Federal Court.

Third, whether an allegation of improper purpose in issuing an assessment is a cognizable administrative law claim is a fact‑specific inquiry that turns on the allegation made by the taxpayer. Indeed, such claims are not normally entertained by the Federal Court because the Minister generally has no discretion in the fulfillment of her statutory responsibilities (see, e.g., Canada (Attorney General) v. Collins Family Trust, 2022 SCC 26, at para. 25, citing Harris v. Canada, 2000 CanLII 15738 (FCA), [2000] 4 F.C. 37 (C.A.), at para. 36) (at paras. 99-102).

These decisions are, in my view, conceptually useful for administrative lawyers even if the outcomes turn on questions of tax law. The determination/discretion distinction is an important one and now there is a Supreme Court case on point. Equally, attention to considerations of institutional design can be an important component of any statutory interpretation exercise that seeks to distinguish between the powers of different appellate and reviewing bodies (a point that applies with as much force to internal appeals within administrative structures: see Part II here).

This content has been updated on September 9, 2024 at 19:46.