The Queen v. Riendeau, 90 DTC 6076, [1990] 1 CTC 141 (FCTD), aff'd 91 DTC 5416 (FCA)

Cullen, J.: —

Background:

This is an application by notice of motion to determine a preliminary question of law. On May 2, 1989, the Associate Chief Justice made an order pursuant to Rule 474(1)(a) of the Federal Court Rules that the following question of law be set down for determination:

Was the Minister of National Revenue entitled to confirm reassessments in respect of the plaintiff's 1979, 1980 and 1981 taxation years on the basis that they were made in accordance with Sections 3 and 9 of the Income Tax Act when the said reassessments were made on the basis that the amounts in issue were properly includable in the plaintiff's income in accordance with a repealed provision of the said Act, namely, subsection 74(5)?

In support of this application, an agreed statement of facts and an agreed book of exhibits was submitted. I have attached a copy of the agreed statement of facts but not the exhibits to these reasons.

Facts:

The defendant Riendeau runs a grain farming operation at Viscount, Saskatchewan. The defendant contends that his wife was very involved in the farming operation and therefore the business was a partnership. These are the events leading up to this determination on a question of law:

On the basis of the partnership, the defendant filed returns for the 1979-1981 taxation years. The defendant, by way of notices of reassessments dated December 6, 1982 (Exhibits 4, 5, 6) was reassessed by the Minister of National Revenue for his 1979, 1980 and 1981 taxation years. Revenue Canada indicated that the amounts were reallocated in accordance with subsection 74(5) of the Income Tax Act, S.C. 1970-71-72, c. 63 (hereinafter cited as the "Act"). On February 14,1983 the defendant filed notices of objection to the said reassessments objecting to the reallocation of income under subsection 74(5), for that section had been repealed (Exhibits 10, 11, 12). The Minister of National Revenue confirmed the reassessments on August 16, 1983, acknowledging his error in relying on subsection 74(5), but confirming the assessments under section 3, subsection 9(1), and sections 152 and 248 of the Act, on the basis that the farming operation was a sole proprietorship and not a partnership with the defendant's spouse.

On October 25, 1985, Judge Brule of the Tax Court ordered that the reassessments did not apply because subsection 74(5) had been repealed. On August 21, 1987 Madame Justice Reed determined that a motion to strike under Federal Court rule 419 was not appropriate in this case. However, she left it open to the defendant to bring a motion under Federal Court rule 474 for the determination of a question of law which could be determinative of the appeal. The defendant did so, and the Associate Chief Justice then set the question to be determined.

Plaintiffs Position:

The plaintiff argues that the Minister is entitled to confirm a reassessment that was initially based upon a repealed section of the Act, and cites the case of Belle-Isle v. M.N.R., 31 Tax A.B.C. 420 (T.A.B.); 63 D.T.C. 347 (Ex. Ct.); [1964] C.T.C. 40; 64 D.T.C. 5041 (S.C.C.); [1966] C.T.C. 85; 66 D.T.C. 5100 (hereinafter cited as Belle-Isle) as authority for this proposition. The plaintiff submits that as long as the taxed amount remains the same, and the reassessment can be supported by other provisions of the Act, the said reassessments shall not be a nullity.

Therefore, the plaintiff submits that despite this initial error, it has correctly confirmed reassessment on the basis that the defendant conducted his farming operation as a sole proprietor and therefore all profits from the farm operation are his income.

Defendant's Position:

The defendant argues that the Minister is not entitled to rely upon the reassessments. The defendant is not challenging his liability to pay tax, but rather the method used here to determine the liability. The defendant submits that the amount owing determined by an assessment must be based upon a provision of the Act in force at the time of reassessment, and cannot be saved by the operation of subsection 152(8) of the Act.

Belle-Isle, he feels, can be distinguished in this case. In Belle-Isle the initial reassessment was based upon a provision that actually was in force at the time; this is not the same for the case at bar.

The defendant is attacking a method whereby the Minister used a section already repealed at the time of the assessment. If assessed, the defendant states, "we are entitled to know what section the Minister is relying on" and refers to Kit-Win Holdings (1973) Ltd. v. The Queen, [1981] C.T.C. 43; 81 D.T.C. 5030 wherein Cattanach, J., at page 55 (D.T.C. 5038) states:

Mr. Justice Rand also made it clear at page 490 that there is a duty to have fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy. That is one of the few remaining rights accorded to the taxpayer in the legislation the preponderance of which imposes obligations.

The defendant states that no valid assessment has ever been made and that the Minister cannot access the aforementioned sections and therefore this assessment is a nullity.

Issue:

Under Rule 474(1)(a) of the Federal Court Rules, the Associate Chief Justice clearly set out the question of law to be determined.

Rule 474(1)(a) is set out below:

Rule 474

474. (1) The Court may, upon application, if it deems it expedient so to do,

(a) determine any question of law that may be relevant to the decision of a matter, or

(b) determine any question as to the admissibility of any evidence (including any document or other exhibit),

and any such determination shall be final and conclusive for the purposes of the action subject to being varied upon appeal.

Rule 474 provides for the determination of a question of law in a two- stage procedure: first, there is an application for an order that a question be determined, and second, argument takes place at a time specially set aside by the Court. (Jamieson v. Carota, [1977] 2 F.C. 239; 13 N.R. 390 (C.A), affirming [1977] 1 F.C. 504 (T.D.). Mr. Justice Jerome has set the question; I am to answer the question.

Essentially, the question before me is whether these reassessments can stand when they were initially based on a repealed section of the Act.

It should first be noted that the definition of "assessment" also includes a reassessment, (subsection 248(1) of the Act, Pupatello Bros. et al. v. M.N.R., [1977] 1 C.T.C. 499; 77 D.T.C. 5350 (F.C.T.D.).

In Pure Spring Company Ltd. v. M.N.R., (Ex. Ct.) [1946] Ex. C.R. 471; [1946] C. T.C. 169; 2 D.T.C. 844, at page 198 (D.T.C. 857), Cattenach, J. states:

The assessment is different from the notice of assessment; the one is an operation, the other a piece of paper. The nature of the assessment operation was clearly stated by the Chief Justice of Australia, Isaacs, A.C.J., in Federal Commissioner of Taxation v. Clarke (1927) 40 C.L.R. 246 at p.277:

"An assessment is only the ascertainment and fixation of liability.”

a definition which he had previously elaborated on in The King v. Deputy Federal Commissioner of Taxation (S.A.); ex parte Hooper (1926) 37 C.L.R. 368 at 373):

"An 'assessment' is not a piece of paper; it is an official act or operation; it is the Commissioner's ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount he sends by post a notification thereof called 'a notice of assessment' . . . But neither the paper sent nor the notification it gives is the 'assessment'. That is and remains the act of operation of the Commissioner.”

It is the opinion as formed, and not the material on which it was based, that is one of the circumstances relevant to the assessment. The assessment, as I see it, is the summation of all the factors representing tax liability, ascertained in a variety of ways, and the fixation of the total after all the necessary computations have been made.

[Emphasis added.]

The Minister has a broad discretion and nowhere is that better enunciated than in the case of Provincial Paper, Ltd. v. M.N.R., [1954] C.T.C. 367; 54 D.T.C. 1199, at page 373 (D.T.C. 1201) by Thorson, P.:

There is no justification in any of the statements made in these cases for counsel's contention that the Minister did not make any assessment prior to July 27, 1951. There are several errors implicit in it. It is erroneous to say that unless the Minister has done all the acts that he may possibly do in the performance of his administrative function of assessment he has not made an assessment at all. There is no standard in the Act or elsewhere, either express or implied, fixing the essential requirements of an assessment. It is, therefore, idle to attempt to define what the Minister must do to make a proper assessment. It is exclusively for him to decide how he should, in any given case, ascertain and fix the liability of the taxpayer. The

extent of the investigation that he should make, if any, is for him to decide. Of necessity it will not be the same in all cases.

Later at page 374 (D.T.C. 1202):

The Minister may, therefore, properly decide to accept a taxpayer's income tax return as a correct statement of his taxable income and merely check the computations of tax in it and without any further examination or investigation fix his tax liability accordingly. If he does so it cannot be said that he has not made an assessment.

It may happen that it will subsequently appear that an assessment so made is inaccurate and that a re-assessment is desirable. But there is a vast difference between an assessment that has turned out to be erroneous and an act that is not an assessment at all. It is for the Minister to decide in each case what he shall do. Indeed, in the vast majority of cases he accepts the taxpayer's statement of taxable income as correct and fixes his liability accordingly. It would be fantastic to say that in such cases he has not made an assessment at all.

[Emphasis added. I]

In the case cited by the plaintiff, Belle-Isle, the Minister had amended his reply to the notice of appeal at the hearing. The Tax Appeal Board, referring to subsection 46(3) (now subsection 152(3)), and other sections, noted that liability for tax is not affected by an incorrect or incomplete assessment. Hence, if the transaction entered into by the appellant attracted tax, it did not escape tax because the Minister availed himself of one section of the Act rather than another. The Board noted “it matters little under what section of the Act an assessment is made. What does matter is whether tax is due." This case was appealed to the Supreme Court of Canada, but on a different point of law, therefore implying that the statement on the Minister's error is still correct. (Belle-Isle v. M.N.R., supra).

Other cases have also recognized that an assessment may be valid although the reason assigned by the Minister for making it may be erroneous. In M.N.R. v. Beatrice Minden, [1962] C.T.C. 79; 62 D.T.C. 1044 (Ex. Ct.), Thorson, P. states, at page 89 (D.T.C. 1050):

But before I set out the reasons for so finding I should refer to the fact that in the statements accompanying the notices of re-assessment the respondent was said to be "deemed to be in the business of lending money on the security of mortgages and agreements for sale”. This was erroneous. She did not lend any money on the security of mortgages or agreements for sale nor did Mr. Minden do so on her behalf. The agreements for sale and the interest in the mortgages were purchases outright. But the fact that there was this error in the statements accompanying the notices of re-assessment does not affect the validity of the assessments. In considering an appeal from an income tax assessment the Court is concerned with the validity of the assessment, not the correctness of the reasons assigned by the Minister for making it. An assessment may be valid although the reason assigned by the Minister for making it may be erroneous. This has been abundantly established.

Certain provisions in the Act were designed to relieve the Minister from detrimental consequences of errors in his department. For example, subsection 152(3) reads:

(3) Liability for the tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

subsection 152(8) further states:

(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto.

These sections make it clear that one's liability for tax is not affected by ministerial error. Furthermore, in a related provision, section 166 of the Act deals with irregularities in an assessment:

166. An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act.

Subsequent cases went on to narrow these provisions, recognizing that certain substantial and fundamental errors should not be subject to shelter (Guaranty Properties Ltd. v. The Queen, [1987] 1 C.T.C. 242; 87 D.T.C. 5124, (F.C.T.D.)). Another case, one which the defendant has relied upon, Optical Recording Corporation v. The Queen et al., [1986] 2 C.T.C. 325; [1986] 86 D.T.C. 6465, (F.C.T.D.), involved the Minister issuing an assessment but also advising the taxpayer that the taxes were not yet owing. Later, without warning, the Minister took action which effectively froze the taxpayer's funds because of their non-payment. This application was raised on questions of “administrative illegality, unfair treatment and estoppel". Here the court found that the actions of the Minister and his officials was so infected with "error of law, illegal conduct, excess jurisdiction and unfair pouncing without reasonable notice" that the assessment was declared a nullity. On appeal, the Minister's application was dismissed and the trial judge's decision was upheld. (The Queen et al. v. Optical Recording Corporation, [1987] 1 C.T.C. 417; [1987] D.T.C. 5248 (F.C.A.)).

Another case in point is that of Stephens v. The Queen, [1984] C.T.C. 111; 84 D.T.C. 6114 (F.C.T.D.), affirmed [1987] 1 C.T.C. 88; 87 D.T.C. 5024 (F.C.A.). In this case five notices of reassessment were argued as void because they bore the incorrect department name and incorrect Deputy Minister's name. The court held that the reassessments were valid, for the alleged defects here were not confusing or prejudicial to the taxpayer; they were mere irregularities that could be cured. The Court determined that these were not defects, but, even if they were, relying on subsection 152(8), they could be cured by this provision of the Act. And, in The Queen v. Simard-Beaudry Inc., 71 D.T.C. 5511 (F.C.T.D.), at page 5515, Noël, A.C.J. states:

. . . the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his table income, not by an assessment or re-assessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the table income is earned the debt is supposed to originate at that point.

Conclusions:

The Act and the cases make it clear that liability for tax is not affected by an incorrect or incomplete assessment. Subject to being varied or vacated on an objection or appeal, or voluntarily reassessed by the Minister, an assessment is deemed to be valid and binding notwithstanding any error, defect or omission therein.

Error will be a matter of degree. Subsections 152(3), 152(8) and section 166 combined clearly indicate that this error by the Minister of National Revenue is far from fatal. The cases only limit these sections where there is substantial and fundamental error; in such cases, the court will not allow the Minister to hide behind the provisions.

In the case before me, the Minister has not committed an error of sufficient seriousness to put it into the same category as cases like Optical Recording, supra. The defendant has tried to distinguish Belle-Isle, supra, but upon my reading of the case I cannot agree. The Act and the cases, Belle-Isle, Minden, supra, show than an assessment can be valid even if the original reasons assigned were erroneous or because the Minister initially availed himself of one section (subsection 74(5)) instead of another (sections 3 and 9 of the Act).

Therefore, it is my opinion that in answer to the question to be determined, the Minister of National Revenue was entitled to confirm these reassessments under sections 3 and 9 of the Act even though the initial reassessment was based upon a repealed provision (subsection 74(5)) of the Act.

Question answered accordingly.