Choptiany v. The King, 2022 TCC 112
The case of Choptiany v. The King, 2022 TCC 112 involved a tax scheme promoted by DeMara Consulting Inc. and Fiscal Arbitrators. It centered on convincing some taxpayers to unwittingly claim fictitious business losses and expenses to create large tax refunds. The Canada Revenue Agency (CRA) reassessed the taxpayers and imposed significant gross negligence penalties. The taxpayers appealed the imposition of penalties to the Tax Court of Canada (TCC).
What followed, however, was not simply a dispute about whether penalties applied, but a much broader clash over procedural fairness, highlighting CRA’s failure to play by the rules of fair litigation. The TCC set aside the penalties and awarded costs, citing, at paragraph 97, the CRA’s “egregious history of defaults and non-compliance” and emphasizing that upholding fairness during the Tax Court process required allowing the appeals. In contrast, the TCC does not have the jurisdiction to consider process issues within the CRA.
The Penalty Framework
Gross negligence penalties under subsection 163(2) of the Income Tax Act, RSC 1985, c 1 (5th Supp) and section 285 of the Excise Tax Act, RSC 1985, c E-15 apply where a taxpayer knowingly, or in circumstances amounting to gross negligence, makes a false statement. The penalties are severe. For example,
- 50% of understated income tax
- 25% of understated GST/HST
- accrued interest
Importantly, the ultimate burden rests with the CRA to justify a penalty.
Discovery Gone Wrong
In Choptiany, procedural conduct, not substantive tax law, ultimately decided the outcome. It was alleged that during pre-trial discovery, the CRA and Department of Justice (DOJ) lawyers engaged in repeated non-compliance:
- Discovery representatives appeared unprepared with evasive or misleading answers;
- A concurrent CRA criminal investigation was not disclosed; and
- Multiple court orders to correct deficiencies were ignored.
Justice Patrick Boyle described the government’s conduct as “outrageously misleading and inappropriate,” suggesting that it verged on contempt.
The Court’s Response
According to the TCC, at paragraphs 96 and 97:
The Respondent has, without excuse or reason, continued to not comply with my repeated orders for the same disclosure. No party in such a position, appellant or respondent, should expect to simply be ordered again to comply with the Court’s discovery rules and orders already made. To make such an order would conjure up memories of the Pythonesque skit of the British bobby of another era yelling at a scofflaw: “Stop! Stop!-Stop, or I’ll yell stop again!”.
The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reason enough to allow these appeals. This disposition is also necessary to protect the integrity of the judicial process and the rules of law that apply to all parties…
Faced with persistent non-compliance, Justice Boyle invoked the TCC’s inherent jurisdiction to prevent abuse of process. The result was extraordinary:
- The appeals were allowed in full;
- Millions in penalties were vacated; and
- Solicitor-client costs were awarded against the Crown.
The decision underscores that courts will not permit “litigation gamesmanship” to displace the duty of candour and respect owed to the judicial process.
Why Procedural Ethics Matter
Tax litigation is not only about whether the CRA’s reassessment is correct. Courts also safeguard the fairness of the process, protecting taxpayer rights and public confidence in the system.
Choptiany illustrates three central principles:
- Government bears a higher duty of candour. The Crown is expected to act with scrupulous fairness, given its institutional power;
- Ethics and efficiency go hand in hand. Proper disclosure avoids costly delays and mistrials, while breaches can derail proceedings entirely; and
- Lawyers are officers of the court. Lawyers, whether representing taxpayers or the government, must be honest and transparent in court—using obstructive tactics can cross ethical lines.
Key Takeaways
- CRA/DOJ must follow the rules. Even in cases involving aggressive tax schemes, CRA and its counsel are not above the law or court rules.
- Discovery is critical. Being misleading or obstructive during discovery can make or break a case.
- Penalties require proof. Gross negligence penalties require solid evidence, and mistakes in following procedure can overturn even strong cases against the taxpayer.
- Representation matters. Competent tax lawyers do not just challenge the numbers in a tax assessment, but also any misuse of the process.
The decision in Choptiany affirms that the integrity of tax litigation depends on both parties, and that the CRA and its counsel, no less than taxpayers, are bound to play by the rules.
In our experience the overwhelming majority of DOJ counsel we work with are professional and fair. However, there are exceptions who appear to be more appropriately suited for civil litigation.
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.