Judge slams CRA and Justice Department for 'egregious' conduct in epic Tax Court battle

A Tax Court judge has slammed the Canada Revenue Agency and the Justice Department for "egregious" conduct that threatened to deny three taxpayers the right to a fair trial in an epic battle over millions of dollars worth of tax penalties.

In a scathing decision that could have widespread implications, Judge Patrick Boyle found the CRA committed an "intentional and deliberate" pattern of ignoring court rules to "frustrate" the right that all Canadians have to get a full picture of an opponent's case before heading to court.

The three taxpayers — a Manitoba psychiatrist, an Ontario nurse and a B.C. Air Canada pilot — were appealing three million dollars' worth of gross negligence penalties levelled against them, for rejected returns filed through a pair of disgraced tax consultancy firms.

But after years of pre-trial delays resulting from the CRA's repeated failure to comply with his orders, Boyle took the extraordinary measure of allowing the appeals without having a trial on the merits of the case this week, to "protect the integrity of the judicial process."

"I find the [CRA's] egregious approach to pre-trial discovery in these appeals to prejudice all three appellants who have been denied," Boyle wrote in his ruling.

"These abuses of the discovery process ... have caused considerable delay and expense to three Appellants in respect of their appeals. They have also led to an inefficient use of public resources financed by all Canadians."

Boyle's decision is the latest chapter in a saga that has seen hundreds of Canadians slapped with gross negligence penalties after filing returns through DeMara Consulting and Fiscal Arbitrators.

The principals of both companies were jailed for tax fraud for promoting schemes Boyle says "resemble in many respects the de-taxation practices of sovereign citizens, though with less of the non-fiscal cultish aspects."

According to court records, B.C.-based DeMara's scheme was called "the remedy" and essentially involved claiming personal expenditures and debts as expenses and capital losses for a non-existent business.

Canada's Income Tax Act gives CRA the ability to levy penalties against Canadians who make false statements and omissions on their tax returns, either knowingly or under circumstances that amount to gross negligence.

The penalties in the DeMara and Fiscal Arbitrators case have reached into the millions, leading to a huge backlog of appeals that have been making their way through tax court since 2013.

Jeff Pniowsky, the Winnipeg-based lawyer who represented all three plaintiffs, said fighting a decade-long court battle with the threat of financial ruin hanging over their heads has cost his clients "years of happiness."

"This was fundamentally a case about justice. Justice for the taxpayers who had to endure years of gamesmanship and chicanery by one of Canada's most powerful institutions: the CRA," Pniowsky told the CBC.

Pniowsky, who has four children, said Boyle's ruling reminded him of a line from one of his family's favourite superhero movies: Spiderman.