NATIONWIDE - CANADA: An Introduction to Tax: Litigation

Navigating the Evolution of Tax

In 2025, the tax litigation and controversy landscape continues to face meaningful unpredictability. Many of the most often litigated tax provisions have recently been revised, and others are expected to be changed soon. Audit powers have been expanded, and there are proposals to expand them further. The tax judiciary, too, has seen change with many retirements and new appointments.

Remarkably, the tax landscape in Canada was shaken by an unexpected trade war with the United States (instead of being driven by tax policy). Pillar Two has been partially implemented in the Global Minimum Tax Act, but will likely be dialled back for US-based MNEs (multi-national enterprises) as a result of pressure from the United States. The Digital Services Tax Act came into force, and then was suddenly “halted”. New tariffs (and retaliatory tariffs) have been announced regularly and at seemingly random intervals. 

In light of all of the above, this is a time of broader tax uncertainty. In-house tax professionals and GCs have to choose which tax issues to challenge in an ever-shifting environment.

New (and recently revised) substantive tax rules

Many recent changes to Canadian tax law will require further clarification from the courts. One example is the recently revised General Anti-Avoidance Rule (the GAAR). Historically, that rule has been heavily litigated, and the revised GAAR now contains an economic substance analysis that taxpayers must grapple with, penalties to consider when planning, and extended reassessment periods if transactions are not disclosed to the Canada Revenue Agency (CRA) in mandatory forms.

Looking ahead, substantive changes that were proposed for Canada’s transfer pricing rules in 2023 remain a possibility on the horizon and, if enacted, will likely lead to further disputes.

Many other sets of new rules (EIFEL (Excessive Interest and Financing Expenses Limitation), mandatory reporting, Pillar Two, and others) are now in effect or will be in effect soon. As many regimes are completely novel, with no judicial interpretations clarifying how they operate, they each create areas of uncertainty and litigation risk for businesses doing their best to comply.

Increases to audit powers

With increased funding over the past four years and sizeable headcount of 60,000 employees (compared to the IRS’s 90,000), the CRA continues to prioritise audit activity to deliver a return on government investment. Recently, the Department of Finance released draft legislation to allow the CRA to compel answers under oath or affirmation, issue new “Notices of Non-Compliance” to taxpayers, and assess significant penalties for non-compliance. The legislation also extends reassessment periods where taxpayers fail to comply with certain requests.

Historically, courts have balanced the CRA’s broad audit powers with minimum standards of fairness and reasonableness. This trend continues in 2025. In Shopify (2025), where the CRA had made broad requests for swaths of information about Shopify’s users, the Federal Court (FC) refused to grant the CRA’s request. The decision underscores the Court’s gatekeeping role, and that judicial authorisation is not a mere formality, particularly where privacy and third-party interests are at stake. As the CRA’s powers continue to expand, we hope the judiciary will continue to apply these fairness principles when interpreting revised audit powers legislation.

Clarified standards (and streamlined process) for judicial review

The CRA’s discretionary decisions continue to be reviewed for reasonableness regularly in 2025. The FC (and appeal courts) continue to develop a robust concept of “reasonableness” to test the appropriateness of the CRA’s actions, following guidance from the Supreme Court of Canada (SCC) (in Vavilov (2019) and Mason (2023)). It is now clear that for the CRA’s discretionary decisions to pass judicial muster, they must be justified, transparent, and intelligible, with reasoning that meaningfully addresses the issues raised by affected parties. For a decision to be reasonable, the CRA must engage with the legal and factual context and provide coherent explanations.

In June 2025, the FC amended its practice guidelines to allow certain applications for judicial review to be decided entirely on a written record, without an oral hearing. This change is expected to reduce costs and help alleviate the backlog of cases in the Federal Court system.

Changes in the judiciary

The Tax Court of Canada (TCC) (our main tax forum) has seen a most dramatic refresh. Since 2022, 15 new judges have been appointed. From 2024 on, a new chief justice was appointed, and several judges retired or transitioned to supernumerary status. By mid-2025, the TCC had filled all vacancies, with recent appointments drawn from private practice, the Department of Justice, and academia.

At the Federal Court of Appeal (FCA), a number of the justices have substantial tax experience. A taxpayer who wishes to appeal an unfavourable decision from the TCC to that court now has reasonable odds of at least one of the judges on the panel having real-world, lived tax experience.

The SCC, our highest court, in a span of 12 years, has transformed to an entirely new bench: none of the justices that heard the recent GAAR appeal in Deans Knight (2023), for example, were on the bench when the seminal GAAR appeals, Canada Trustco (2005) and Copthorne (2011), were decided.

Litigation trends and developments – income tax

GAAR, transfer pricing, sham, and legal effectiveness continue to be frequently disputed.

Jurisprudence under the old GAAR (which still applies to historical transactions) has continued to develop this year, as lower courts follow and apply the SCC’s relatively recent guidance in Deans Knight (2023) and Alta (2021). In late 2024 and early 2025, the FCA found the GAAR applied in Total Energy Services Inc., Madison Properties, and Margen Holdings. That court is expected to hear the DAC Investments Holdings Inc. appeal this year, following the taxpayer’s favourable TCC 2024 decision.

The SCC has granted leave to appeal in Bank of Nova Scotia, a case that will address the correct calculation of interest in the context of a loss carryback.

Litigation trends and developments – indirect tax

The treatment of loyalty programmes for Harmonised Sales Tax (HST) purposes continues to be a hot topic and the FCA will hear Toronto-Dominion Bank’s Goods and Services Tax (GST)/HST appealin early fall in that regard.

Courts and the CRA also continue to grapple with whether transactions constitute single or multiple supplies, and whether services are financial services (or incidental to such services).

Taxpayers also continue to litigate whether they have met the requirements for obtaining input tax credits under the Excise Tax Act. The CRA often challenges who is the “true supplier” and what is the correct supply on taxpayers’ receipts.

Conclusion

The latter half of 2024 and early 2025 have been defined by sweeping changes to Canada’s tax controversy and litigation landscape:

• new substantive rules;
• expanded audit powers;
• refreshed courts; and
• increased judicial review of the CRA’s administration.

Businesses can expect more aggressive CRA audits, evolving procedural strategies, and an increased likelihood of litigation as courts interpret many measures for the first time. Early planning and proactive risk management will be essential to navigating this period of heightened complexity and uncertainty in a continually changing world.