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A Canadian Revenue Agency audit found that the taxable-benefit amounts GM was calculating were too low.MARK BLINCH/Reuters

About 350 General Motors of Canada Ltd. managers are each facing thousands of dollars in back taxes and interest charges after the Canada Revenue Agency decided that a 31-year-old letter it sent advising the automotive giant how to account for its company cars no longer applies.

GM has taken the CRA to court after the tax authority surprised GM executives and managers – some of whom have retired or died – with new tax bills in 2012 for 2008 and 2009, saying the car company underestimated the taxable-benefit amounts it was supposed to include on its employees' T4 tax slips.

GM says it calculated the taxable benefit amounts using the formula from a letter it received from the CRA in 1982. But in its court filings, the agency says that, because times have changed, GM should not be relying on advice it gave 31 years ago, when GM had complained that it was "administratively impossible" to precisely track the use of its fleet of 700 company cars.

Some tax lawyers say the case raises broader issues of whether the CRA should be free to disregard previous assurances it has given taxpayers, and if taxpayers can effectively challenge allegedly heavy-handed behaviour from the tax authority in court.

"If the CRA sends you a letter saying 'Do it this way,' and you do it that way, you would like to think you're going to be okay," Al Meghji, a tax lawyer retained by GM to fight the case, said in an interview.

GM lost the latest round of its battle before the Federal Court last month, and is now taking the matter to the Federal Court of Appeal.

Mr. Meghji said his client does not dispute the CRA's ability to tear up the 1982 agreement for future tax years, but argues that doing so retroactively is simply unfair.

"The issue here is not whether [the CRA] can terminate the letter going forward," Mr. Meghji said. "… But we think it is dirty pool for them to say, 'Well, we're going to go backwards.'"

The CRA disagrees, arguing that it was legally obligated to issue reassessments after an audit found that the taxable-benefit amounts GM was calculating were too low. It denies that GM or its managers have been mistreated.

The 1982 letter gave GM permission to use an average price for a car, instead of tracking individual cars, to calculate the value of the taxable benefit because employees would rotate through several different cars a year. And it allowed GM to assume that the cars were driven 50 per cent of the time for personal use, and 50 per cent for business.

But 31 years later, the CRA says, computers have improved to allow vehicle use to be easily tracked. Plus, the rules for calculating this taxable benefit have changed twice – changes about which GM knew, and actually applied to its company car program for non-managerial employees.

GM says the company car program is meant to allow GM to get firsthand feedback on its own products, and show off new automobiles. The test case that GM's lawyers, Mr. Meghji and Martha MacDonald of Osler Hoskin & Harcourt LLP, have taken to court involves long-time GM employee Richard Szymczyk, the manager of an engineering team that works on hybrid engines.

According to court documents, he drove several different GM cars in 2008, including a Saturn Vue hybrid and a Chevy Tahoe, which GM said cost between $26,000 and $50,000. But in calculating Mr. Szymczyk's taxable benefit for his T4 that year, GM used an average price of just $19,385. So the CRA has demanded that he pay an extra $4,456.41, which includes $631.69 in interest. And Mr. Szymczyk says he has since received a reassessment for 2009, demanding another $2,600.

"It was certainly a significant surprise," he said in an interview, calling the situation "profoundly unfair."

At issue is also a legal question of whether taxpayers can challenge alleged mistreatment by the CRA in Federal Court. Rulings in this case and in another recent battle involving JP Morgan Asset Management Canada have said no, that this kind of fight belongs in Tax Court.

But Mr. Meghji said Tax Court, where he is also pursuing GM's case, is meant to deal with the narrower issue of how much tax is owed, not alleged bad behaviour by the CRA: "The implication of the CRA not being accountable to any court for behaving badly, that's pretty alarming."

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