In a recent interview with Legal Feeds, an online legal magazine, Justice Minister and Attorney General Peter MacKay said that he would like to "reduce the number of civil cases in which the government is in conflict with the people of Canada."
"There's a lot of value added in trying to lessen that number and trying to settle some of these cases out of court, through arbitration," MacKay told Legal Feeds.
Mr. MacKay, I hope you're reading this, because I've got a great suggestion for a first case on which you could practice this new policy: it's the case of Leroux v. Canada Revenue Agency. In fact, it's a lawsuit that would probably never have been launched had the plaintiff Irvin Leroux not been led to believe years ago, by a different Conservative cabinet minister, that a policy of settlement would be pursued.
Mr. Leroux owned a flourishing business in Valemount, B.C., back in the mid-1990s. He had built a recreational vehicle park and campground, as well as an 11-site residential subdivision. He filed his tax returns just like any respectable business owner would.
But trouble struck in 1996, when the Canada Revenue Agency (CRA) sent auditors out to his business office. Leroux made the mistake of trusting them alone in the office while he was out tending to his business. When he returned, he found that the auditors had removed boxes full of original documents which they had no permission to take. Six weeks later, he was told that the documents had been misplaced: possibly left on a pile headed to the shredder. They have never been seen since.
The CRA insisted it was Leroux's responsibility to provide replacement documents. When he did so, they lost these, too.
The CRA's eventually assessed Leroux for taxes, penalties and interest totaling almost $1 million. One of the auditors even had the audacity to demand a bribe of $25,000 to make some of the tax problems "go away."
Leroux fought those assessments in tax court for years. Finally, in 2005, the CRA conceded that he didn't owe them any money. In fact, they owed him a small refund.
But the nine-year battle had taken a toll. Leroux's enormous legal and accounting fees had rendered him unable to make all his business loan payments. His lenders had been spooked by the CRA's claim for a million dollars. They started pulling his financing -- foreclosing on mortgages on his home and RV park. Land that had been independently appraised at $3.4 million was sold off at $1.3 million. His debts got paid, but nothing was left for Leroux. The actions of the CRA had ruined him financially.
Leroux's federal member of parliament, Dick Harris, was appalled to learn how his constituent had been treated. In 2006, Harris met with Carol Skelton, the then revenue minister in the Harper cabinet. He was told that the CRA does not have a "mechanism to proactively pay damages", but that they could "settle out of court" if Leroux sued them.
Based on that suggestion, Leroux commenced his claim in the Supreme Court of British Columbia in late 2006. But the settlement negotiations he expected never materialized. Instead, Canada Revenue Agency filed a statement of defence denying his claims of negligence, public misfeasance and abuse of power.
After almost seven years, the case will finally go to trial on Sept. 23, 2013. Meanwhile, the CRA -- using lawyers from the Department of Justice (DOJ) -- have spared no effort or expense to try to defeat Leroux's claim. They have brought motion after motion, and appeal after appeal, trying to blow this case out of the water. (Example.)
No matter how many politicians in Ottawa may prefer to settle cases, the hired guns at the DOJ don't seem to have been copied on that memo. Their mandate is to litigate, and their client -- the CRA -- has infinitely deep pockets. So there is no reason to settle, and no reason to refrain from motions and appeals, regardless of how many lawyer-hours are spent.
Normally, defendants in civil litigation do a cost-benefit analysis, weighing the cost of continued legal fees against the probability of ultimately having to pay damages. Defendants who aren't the government generally feel pressured by their own mounting legal expenses to reach a settlement. But the government has its own permanent, salaried legal team. It's impossible to know who is calling the shots about how they allocate their resources.
Indeed, a 1993 report of the Auditor General of Canada stated that "There is insufficient incentive to manage the cost of litigation services." When the Auditor General revisited the issue in 2007, it reported that "There is no consolidated report to Parliament on the total costs incurred by government for legal services. We were not able to estimate this amount as the data is not available from Justice Canada."
Irvin Leroux is being assisted in pursuing his claim against the CRA by the Canadian Constitution Foundation. (Full disclosure: the CCF is my employer.) Further details about the Leroux case can be found here.
Click through the slides to see some of the famous tax cheats...
After being pursued by the FBI for years, legendary mob kingpin Al Capone was finally jailed for failing to pay taxes for four years. In 1931, he was sentenced to 11 years and an $80,000 fine. Capone famously joked that he couldn't be prosecuted because "the government can't collect legal taxes on illegal money."
Richard Hatch, the first "Survivor" winner failed to pay taxes on his $1 million grand prize. He was convicted in 2006 of tax evasion and was sentenced to 51 months in prison, plus three years of supervised release after serving his sentence.
Leona Helmsley, the late "Queen of Mean," was found guilty of tax fraud in 1992 and spent four years in prison after claiming $2.6 million in phony business expenses. During her trial, a witness testified that Helmsley once said: "We don't pay taxes. Only the little people pay taxes."
Currently serving a 25-year sentence, former Tyco CEO Dennis Kozlowski was indicted for failing to pay New York sales taxes on $13 million worth of paintings for his Manhattan apartment.
In 1974, Richard Pryor served 10 days in a Los Angeles county jail for failing to pay taxes, telling the judge at his trial: "You know, I forgot."
Wesley Snipes was sentenced to three years in prison in 2007 following his conviction on three misdemeanor tax charges. Snipes was accused of failing to file tax returns from 1999 through 2004. Snipes allegedly tried getting fraudulent tax refunds using the "861 argument," a theory that domestic income is not taxable (which is commonly used by tax protesters).
Film legend Sophia Loren served an 18-day sentence for tax evasion in an Italian prison in 1982.
Willie Nelson owed $16.7 million in back taxes, leading the IRS in 1990 to confiscate and auction off his assets.
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