The great majority of Tax Court of Canada appeals never reach a trial. They settle — sometimes within weeks of filing, more often after discovery, occasionally on the courthouse steps. But settlement in tax litigation is not the free-form negotiation familiar from ordinary civil disputes. It is constrained by a principle that runs through the whole field: the Crown can only settle a tax appeal on a basis the law and the facts can actually support. This guide explains who you negotiate with, the principled-settlement rule and the cases behind it, how a settlement is documented, and the situations where settlement is and is not possible.
Who you settle with: Department of Justice counsel
Once an appeal is filed, the Minister of National Revenue is no longer represented by CRA Appeals officers — the dispute has left the agency. The Crown is now represented by counsel from the Department of Justice. This change of counterpart matters. Department of Justice counsel are lawyers who understand the law of evidence, who assess each file for its litigation risk, and who must answer for a loss and a possible costs award at trial. Where the Crown's position rests on a weak assumption with little evidence behind it, and a judge would likely find for the taxpayer, Justice counsel are often open to a reasonable, principled resolution rather than risking trial. This sober, evidence-aware assessment is one reason files that went nowhere at the CRA level can move once they reach litigation.
The principled-settlement rule
The defining constraint on settling a tax appeal is that the Crown cannot settle on just any number. A tax settlement must reflect a result that is legally and factually defensible — an outcome the law could actually produce on the facts of the case. The Crown does not, as a rule, settle by simply splitting the difference the way private litigants sometimes do, because the Minister has no authority to assess tax other than in the amount the law requires.
The Galway principle
The foundational authority is the Federal Court of Appeal's decision in Galway, which established that the Minister has a statutory duty to assess in accordance with the law and cannot agree to an assessment that the facts and the law do not support. A settlement, in other words, has to produce a legally correct result — not a compromise figure plucked from the middle.
The CIBC principle
Later jurisprudence, including the CIBC line of cases, refined how the rule applies in practice. The principle that emerged is that a settlement must have a principled basis in fact and law — there must be a defensible factual and legal foundation for the settled amount — but the Crown is not required to litigate every issue to the bitter end where a reasoned, evidence-based compromise on the facts is available. A principled settlement can resolve a multi-issue appeal by conceding the issues the evidence supports and maintaining the ones it does not.
What a principled settlement looks like in practice
Because the settlement has to be defensible, the most common shape is issue-by-issue rather than a blanket percentage. Suppose a reassessment raises four issues. If the taxpayer's evidence is strong on three and weak on the fourth, a principled settlement may have the Crown concede the three and the taxpayer accept the fourth. The result is defensible on each issue, even though the overall dollar movement resembles a compromise. What the Crown will not do is agree to "70 cents on the dollar" across the board with no factual reason for the figure, because that would not be an assessment the law supports.
Minutes of settlement
When the parties reach agreement, the settlement is documented in minutes of settlement — a written agreement, signed by both sides, setting out the terms on which the appeal will be resolved. The minutes typically specify how each issue is dealt with, the resulting adjustments, the treatment of costs, and the disposition of the appeal (usually that the matter will be referred back to the Minister for reassessment in accordance with the minutes, and the appeal then discontinued or allowed on consent). The minutes of settlement are the instrument that turns a negotiated resolution into a binding outcome, and they are drafted with care because they govern the corrected reassessment the CRA will issue.
When settlement is possible
Settlement tends to be achievable when:
- the dispute is fact-driven — denied expenses, an unreported-income allegation, a valuation disagreement — so that new evidence can move the Crown's assessment of its risk;
- the taxpayer has built a credible documentary and evidentiary record that demolishes one or more of the Minister's assumptions;
- the issues divide cleanly, so some can be conceded on a principled basis while others are maintained; and
- both sides see, after discovery, where the case is genuinely strong and genuinely weak.
When settlement is not possible
Settlement is harder, or unavailable, when:
- the dispute is a pure question of law — a statutory interpretation point on which the Crown is unlikely to move and on which there is no factual middle ground; either the provision applies or it does not;
- there is no principled basis for any number other than the assessed amount or nil — the facts admit of only one legally correct answer;
- the case is one the Crown views as having precedential importance and wishes to have decided by the Court; or
- the evidence simply does not support a different result, in which case the Crown has no authority to settle for less than the law requires.
Where settlement is not available, the appeal proceeds to a hearing — described in What to Expect at a Tax Court Hearing — and is decided on the evidence, with the taxpayer carrying the onus discussed in Evidence and Burden of Proof in Tax Court.
The role of timing
Settlement can happen at almost any stage, but the most productive moment is usually after discovery, once both sides have tested the evidence and can see the case clearly. Building a strong record early — and using discovery to expose the weakness in an assumption — is what creates the conditions for a favourable principled settlement. The discovery stage and undertakings that feed it are covered in The Tax Court General Procedure, Explained.
How we help
Barrett Tax Law negotiates settlements with Department of Justice counsel on a principled basis, builds the evidentiary record that makes a favourable settlement possible, and drafts the minutes of settlement that govern the corrected reassessment. Where a principled settlement is not available, we take the appeal through to a hearing. You can read more on our Tax Court of Canada page, and on the broader process in The Tax Court of Canada Appeal Process.