Executive Summary: Key Legal and Evidentiary Issues

• Sam Prince, a Canadian resident, sought a credit of $790,961.82 for Part XIII Tax allegedly withheld on dividends from Canadian Corporations deposited in two Israeli bank accounts.

• The Minister of National Revenue refused the Credit Request under section 221.2 of the Income Tax Act, finding insufficient evidence that Part XIII Tax was actually withheld and remitted to the CRA on the Applicant's behalf.

• Admissibility disputes arose over the NR4 Example document, which the Court ruled inadmissible as it was never provided to the decision maker and its relevance to the judicial review was not established.

• Evidence submitted, including Israeli bank statements in Hebrew and accountant calculations, failed to demonstrate that the sums withheld were in fact Part XIII Tax or that they were remitted to the CRA on the Applicant's behalf.

• The Applicant's "have it both ways" argument — that the CRA accepted the same evidence for the Audit but rejected it for the Credit Request — was deemed a new argument not properly raised before the decision maker.

• Costs of $15,141.08 were awarded in favor of the Respondent, the Attorney General of Canada, following the dismissal of the application.

Background and the parties involved

Sam Prince, a Canadian resident, held shares in various Canadian public corporations in two Israeli bank accounts at Bank Hapoalim and Bank Leumi. He received dividends from these corporations, which he alleges were subject to Part XIII Tax withholdings under the Income Tax Act (ITA) in the amount of $790,961.82. Mr. Prince claimed the Canadian Corporations incorrectly assumed he was a non-resident of Canada and withheld income tax pursuant to Part XIII of the ITA. The case was heard before the Federal Court of Canada, with Mr. Prince as the Applicant and the Attorney General of Canada (AGC) as the Respondent, presided over by the Honourable Madam Justice Ferron.

The CRA audit and the credit request

In February 2015, the Canada Revenue Agency (CRA) commenced an audit of Mr. Prince's obligations under the ITA for the years 2006 to 2014. The audit established that Mr. Prince had received dividends from the Canadian Corporations deposited in his Israeli bank accounts but that they had not been properly reported to the CRA. Reassessments were issued on January 19, 2018. In parallel, Mr. Prince made an oral Credit Request in 2017, later confirmed in writing on September 21, 2017, by way of a letter sent by the Applicant's lawyers, pursuant to section 221.2 of the ITA. Mr. Prince requested that the Part XIII Tax allegedly withheld be credited to the Part I taxes that would become due further to the Audit and related Reassessments. Given that a refund needs to be requested within two years of the sums being withheld pursuant to subsection 227(6) of the ITA, a credit request under section 221.2 was the avenue pursued instead.

Years of correspondence and evidentiary challenges

What followed was almost seven years of exchanges between the Applicant's representatives and the CRA. The Applicant's accountant sent the Credit Request along with voluminous supporting documentation to the CRA's non-resident section on March 28, 2018. In a correspondence dated September 27, 2018 (amended on November 27, 2018), the CRA explained that the Non-Resident Section could not process the application since Mr. Prince was a Canadian resident. The CRA also explained that Canadian residents must send an amendment request and/or T1ADJs with NR4 tax slips, or alternatively fill out NR7-R forms if no NR4 tax slips were issued by the Canadian payers. The Credit Request application, with over 400 pages of supporting documentation, was eventually assigned to Mr. Joel Cormier, a team leader in the non-resident verification department, the decision maker for the Minister in this matter. With the assistance of Mr. Jodoin, an agent under his supervision, Mr. Cormier reviewed the Applicant's file and its voluminous documentation. The decision maker found the evidence still insufficient to support the Credit Request. While the Applicant provided bank statements, many of which in Hebrew, and bank certificates indicating that dividends were received and that some sums were withheld, there was no mention in these documents establishing that the sums withheld were in fact Part XIII Tax. The CRA also verified its systems under Mr. Prince's name and the names of the Israeli Banks, as well as under any Israeli beneficiary for amounts corresponding with the amounts claimed by the Applicant, to attempt to locate any potentially related NR4 Form, the whole to no avail. Further to the Applicant's request, Mr. Cormier consulted with someone he considered to be the most knowledgeable expert in Part XIII Tax in Canada, who after discussing the Applicant's case, agreed with Mr. Cormier's findings concerning the evidence required to potentially grant the request. On October 17, 2023, the Applicant submitted complementary documentation, but not the documents required by the CRA.

The Minister's decision and section 221.2 of the ITA

On March 22, 2024, the Minister rendered the Decision declining to use his discretionary power to grant the Credit Request pursuant to section 221.2 of the ITA. The Decision explained that the required documents are necessary to preserve the integrity of the tax system. Any Canadian payer who withholds a tax on a dividend paid to a non-resident must remit this withholding tax to the Agency and, at the end of the year, file an NR4 slip with the Agency with a copy sent to the taxpayer. This slip serves as proof of the remittance of the withholding tax and of the identification of the non-resident taxpayer for whom the withholding tax is paid, allowing the Agency to avoid granting multiple credits or refunds for the same withholding tax received. The Decision noted that the Canadian companies did not know Mr. Prince was a Canadian shareholder even though he always resided in Canada, indicating that the information provided by the two institutions in Israel did not contain the required details about the ultimate beneficiary of the accounts. Despite the numerous documents provided, the Decision stated there was no indication that a payer made remittances to the Agency for non-resident withholdings related to Mr. Prince.

Preliminary evidentiary issues at judicial review

The Court addressed several preliminary issues before turning to the merits. On December 13, 2024, the Applicant filed a motion to dismiss objections raised by the Respondent during cross-examinations so that he could include an example of an NR4 Form (NR4 Example) as an exhibit. The Court denied this motion on multiple grounds: both parties agreed that a copy of the NR4 Example was never provided to the decision maker prior to the Decision; the NR4 Example was not specifically mentioned in any affidavit nor attached as an exhibit; questions about it during cross-examination went beyond the permissible scope of examination on affidavit; and the Court was far from convinced that the NR4 Example was relevant to the present matter. Additionally, Exhibits JM-10 and JM-14 filed in support of Mr. Morrisey's affidavit, both relating to the Audit, were ruled inadmissible because they were not before the decision maker. The Applicant's argument that the CRA tried to "have it both ways" — accepting the Israeli banks' accounts statements and certificates as sufficient to assess his Part I tax liability during the Audit but then finding them insufficient for the Credit Request — was also found to be a new argument not properly put before Mr. Cormier before the Decision was rendered.

The Court's analysis on reasonableness

Both parties agreed, and the Court confirmed, that the applicable standard of review was reasonableness as established in Vavilov. The Court found the Decision to be reasonable. While the evidence demonstrated that dividends were deposited in Mr. Prince's accounts with the Israeli Banks and that sums were withheld, the documents provided did not clearly or expressly indicate that Part XIII Tax was in fact withheld, let alone remitted to the CRA and if so, on whose behalf. The Applicant's accountant, Mr. Morrisey, confirmed during cross-examination that his calculations were based on partial Israeli Banks' statements written in Hebrew; that he does not read Hebrew; that he based himself on a translation provided by an unnamed bank representative occupying an unknown role; and that his calculations were never corroborated by the Israeli Banks or the Canadian Corporations. Furthermore, the bank statements and certificates did not refer to Part XIII Tax and did not mention the CRA. The Court agreed with the AGC that it was the Applicant's responsibility to put his best foot forward to establish the basis of his Credit Request, and that he did not do so. Mr. Morrisey admitted that tracing the funds withheld was impossible without affidavits from the Israeli Banks, and that had he acted sooner, he would have been able to obtain them, at least for the period of seven years during which the banks retained their records, but failed to do so. The Court noted that section 221.2 of the ITA does not confer any rights to the taxpayer but only a large discretionary power to the Minister, and that while the provision is meant to give taxpayers some leeway in how they repay outstanding debts, CRA officials are not bound to exercise their discretion to grant credits when the taxpayer has not proven his entitlement.

Ruling and outcome

The Federal Court dismissed Mr. Prince's application for judicial review, finding the Minister's Decision to be reasonable. The Court held that the decision maker did not exercise his discretion in a manner incompatible with the remedial nature of section 221.2 of the ITA, but rather exercised his discretion in a way consistent with other purposes of the ITA, including the need to preserve the integrity of the Canadian tax system. While it is possible that Mr. Prince may end up paying more income tax than the correct amount required by law, the Court noted this has not been established and is mostly the result of Mr. Prince's lack of diligence and the fact that the necessary documentation was not obtained to support his claim. The application was dismissed with a lump sum cost award of $15,141.08, inclusive of disbursement and tax, ordered in favor of the Respondent, the Attorney General of Canada, following an agreement reached between the parties.