Court of Appeal Dismisses Charter Challenge of CRA Audit

Last fall, we let you know about an Ontario Superior Court decision that dismissed a Charter challenge of Canada Revenue Agency’s (CRA) Review and Analysis Division (RAD) audit process because the case was made too early, or prematurely.

We also noted that the decision was appealed to the Ontario Court of Appeal (ONCA) and that we’d keep you posted on the case. The ONCA recently released its decision. It dismissed the appeal, affirming the outcome of the lower court’s decision. Here is a summary of the ONCA’s findings in Muslim Association of Canada v Attorney General of Canada, 2024 ONCA 541.

Summary

The Muslim Association of Canada (MAC) appealed a lower court decision that dismissed MAC’s constitutional challenge to a CRA audit. The ONCA agreed with the lower court that MAC’s case was “premature”. MAC needed to go through all the stages of the CRA process and receive a final decision before going to court.

Background

MAC is a registered Canadian charity with over 500 members and 1500 volunteers that help operate 22 mosques and community centres and 30 schools across Canada. In doing so, MAC serves more than 150,000 members of the Canadian Muslim community.

CRA regulates registered charities in Canada. This involves selecting charities for audit and sometimes imposing sanctions, from financial penalties up to revoking charitable status, for those charities that do not follow regulations. These audits are conducted by either the Compliance Division or RAD. RAD is responsible for preventing terrorist groups from abusing the favourable tax treatment given to registered charities.

RAD selected MAC for an audit. MAC argued that its Canadian Charter of Rights and Freedoms (Charter) freedoms of religion, expression, association, and right to equality were infringed by the audit in three specific ways: RAD’s risk-based assessment process was biased, RAD’s Audit Referral Analysis relies on highly questionable sources, and RAD’s audit and resulting Administrative Fairness Letter profoundly misunderstands Islam.

The lower court dismissed MAC’s challenge because it was premature. MAC needed to go through all the stages of the CRA process and receive a final decision before going to court. MAC appealed that decision.

Issues & Analysis

The ONCA had to decide two issues: was it wrong for the lower court to (1) apply the principle of prematurity to a Charter claim, and (2) find the administrative (CRA) process was an effective way for MAC’s concerns to be addressed.

Issue One: Does the Principle of Prematurity Apply to Charter Claims?

The lower court held that prematurity has little to do with the technical form or type of court case than with the appropriate use of judicial resources. The ONCA agreed. It affirmed that courts can typically manage their own processes as they see fit and have discretion to refuse to decide a case if there is an insufficient record. In this case, the lower court judge “found the factual record … to be preliminary and incomplete.” The ONCA found no error in this decision.

Issue Two: Does the CRA Process Provide an Effective Way for MAC’s Concerns to be Addressed?

The lower court held that MAC needed to go through all the stages of the CRA process and appeals before coming to court, and that this was an effective way for MAC’s concerns to be addressed. The ONCA agreed with the lower court for four reasons:

• CRA had not yet decided whether to impose a penalty and on what grounds it might do so. As such, the reasons for appealing any CRA decision are yet unknown;
• CRA is obliged to consider Charter rights and underlying values in its decisions;
• If a CRA assessment is appealed to the Tax Court, the Tax Court can grant Charter remedies; and
• If a CRA assessment (audit outcome) is appealed to the Tax Court, it does not preclude a separate Charter-based appeal of the audit process to another court.

Findings

The lower court was not wrong to dismiss MAC’s case due to prematurity.

Key Takeaways

First, as we noted in our summary of the lower court decision, even if the government’s process shows some evidence of bias, is long, and/or is potentially costly, courts will not readily intervene until the administrative process is complete.

Second, government decision-makers, CRA included, have an obligation to take into account Charter rights and freedoms. This, of course, includes religious freedom.

Third, a charity may have to go to more than one court to challenge the process and outcome of an audit. Tax penalty assessments are appealed to the Tax Court; however, challenging the audit process itself is not within the Tax Court’s jurisdiction.

Finally, the ONCA only briefly mentioned the lower court judge’s references to a lack of standards or criteria against which to measure the facts of the case. We discussed this at length in an article, Why we need the CRA to publish advancement of religion guidance. Though the lower court judgment raises this important issue, the lack of standards was not central to the grounds of appeal and so it comes as no surprise that it was mentioned only briefly.

For more on the judgment from MAC’s perspective and its response to the decision, see MAC’s July 10 official statement.