Canada v. Wesbrook Management Ltd., [1997] 1 CTC 124, 96 DTC 6590

Hugessen J.A.: — This is an appeal from a judgment of Rowe D.J.T.C.C. which allowed the respondent’s appeal and vacated an assess- ment dated February 18, 1992 in which the Minister assessed the respondent pursuant to subsections 159(2) and (3) of the Income Tax Act [1] in respect of the tax liability of 323466 B.C. Ltd. (“466”) for the latter’s taxation year ending May 7, 1988.

Subsections 159(2) and (3) read:

159(2) Every person (other than a trustee in bankruptcy) who is an assignee, liquidator, receiver, receiver-manager, administrator, executor, or any other like person, (in this section referred to as the “responsible representative”) administering, winding-up, controlling or otherwise dealing with a property, business or estate of another person, before distributing to one or more persons any property over which he has control in his capacity as the responsible representative, shall obtain a certificate from the Minister certifying that all amounts

(a) for which any taxpayer is liable under this Act in respect of the taxation year in which the distribution is made, or any preceding taxation year, and

(b) for the payment of which the responsible representative is or can reasonably be expected to become liable in his capacity as the responsible representative

have been paid or that security for the payment thereof has been accepted by the Minister.

(3) Where a responsible representative distributes to one or more persons property over which he has control in his capacity as the responsible representative without obtaining a certificate under subsection (2) in respect of the amounts referred to in that subsection, the responsible representative is personally liable for the payment of those amounts to the extent of the value of the property distributed and the Minister may assess the responsible representative therefor in the same manner and with the same effect as an assessment made under section 152.

The judgment of the learned Tax Court judge was the result of his having answered in the negative the following question put to him by way of a motion under Rule 58(1) of the Tax Court of Canada Rules (General

Procedure) [2] :

Does the Minister of National Revenue (the “Minister”) have the authority to issue an assessment to a person pursuant to subsection 159(3) or subsection 160(3) of the Income Tax Act (the “Act”) in respect of an alleged tax liability of another person that:

(a) has never been the subject of an assessment or reassessment issued to that other person; and

(b) can never be the subject of an assessment or reassessment issued to that other person because the limitation period in subsection 152(4) has expired?

The subject of the appeal to the Tax Court was thus the assessment, of February 18, 1992, issued by the Minister to the respondent pursuant to subsection 159(2) of the Act, in respect of an alleged tax liability of 466 for its taxation year ended May 7, 1988. The background facts are briefly stated and are not in dispute.

466 was incorporated pursuant to the Company Act of British Columbia. In September, 1988, the respondent acquired all the shares of 466 and on December 28, 1988, caused it to be liquidated and its assets distributed. In August, 1993, 466 was restored to the register of Companies in British Columbia upon an application to that end made by the appellant. Pursuant to subsection 286(2) of the Company Act, the effect of such restoration is that 466 is “deemed to have continued in existence”.

On November 4, 1988, 466 had filed its return of income for its taxation year ended May 7, 1988. In computing its income for that year, 466 deducted $1,594,828 which was its share of an alleged loss, referred to as the “Grand Bell loss”, flowing from the Grand Bell Partnership.

On March 9, 1989, the Minister issued an assessment to 466 for its taxation year ended May 7, 1988, confirming the income as reported on filing. On April 28, 1989, 466 filed its final tax return for the period ending December 28, 1988.

On July 4, 1989, the Minister assessed 466 for its taxation year ended December 28, 1988, confirming the income as reported. At the same time the Minister reassessed 466 for its taxation year ended May 7, 1988 by allowing the deduction of a loss carry back from the terminal taxation year but making no other changes. In summary therefore, the Minister has allowed the deduction of the Grand Bell loss both in the initial assessment dated March 9, 1989, and in the reassessment dated July 4, 1989. The Minister has not reassessed 466 since July 4, 1989 so as to disallow the deduction of the Grand Bell loss and he is now statute- barred from doing SO.

As previously stated, on February 18, 1992, the Minister issued the assessment which is the subject matter of this litigation claiming from the respondent tax and interest that would have been payable by 466 for its May 7, 1988 taxation year had the deduction of the Grand Bell loss been disallowed.

The appellant’s principal argument turns on the proposition, which is undoubtedly good law, that liability to pay tax flows from the Income Tax Act itself and not from any assessment or reassessment. See Simard-Beaudry Inc. v. The Queen (sub nom. R. v. Simard-Beaudry Inc. y [3]

As to his second argument, namely that the debt arising from re-assessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer’s debt is created by his taxable 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 taxable income is earned, the debt is supposed to originate at that point. Here the re-assessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgement of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.

per Noël, A.C.J. at page 5515.

[Emphasis added.]

See also subsection 152(3):

152(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.

It follows from this proposition, says the appellant, that the liability of a “responsible representative” for the amount for which some other taxpayer is liable under the Act does not depend upon such other taxpayer having been assessed for such amount. That also is a proposition with which we

would be inclined to agree but, since, for the reasons which follow, it is not germane in our view to the decision of the present appeal, we prefer to leave the matter open.

The difficulty which the Minister faces in this case and which renders the foregoing propositions irrelevant is that 466 was both assessed and reassessed in respect of its 1988 taxation year and, there being no question of fraud or misrepresentation, no further reassessment could be issued to 466 after March 9, 1992. While an assessment is by no means a condition of liability to pay tax, an assessment, once issued, and unless and until varied by competent authority, has the effect of fixing the liability for tax. See Terra Nova Properties Ltd. v. Minister of National Revenue: [4]

The fallacy that underlies the appellant’s contention, in my view, is the failure to distinguish between the actual amount of the taxpayer’s income tax liability for a particular year as imposed by the substantive provisions of the Act, on the one hand, and, on the other hand, the determination of that amount by the Minister’s assessment thereof, while it remains in force, by the judgment of the Tax Appeal Board, while it remains in force, or by the judgment of this Court, while it remains in force, or, ultimately, by the Supreme Court of Canada. The actual liability is a constant amount that does not change as long as the facts and the substantive law remain unchanged. The assessed amount as varied by judicial decision, which is the amount which the Minister and all others concerned are bound to assume to be the actual amount of the liability, can change from time to time by virtue of new assessments or judicial decisions.

per Jackett P. at page 86.

[Emphasis added.]

This is equally the result of subsection 152(8):

152(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.

Once, as is the case here, an assessment can no longer he varied or vacated on objection or appeal and no further reassessment can be issued, the last assessment is deemed valid and is binding on both the taxpayer and the Minister. That is the case with the reassessment of 466 issued on July 4 1989.

While it may be the case, as argued by the appellant, that a person who is made liable for the taxes due by another is able to dispute the other’s liability even when the latter could no longer himself have done so, [5] that does not alter the fact that an assessment, until validly varied, binds both the Minister and the taxpayer in respect of whom it is issued.

In the result, 466’s tax liability for the 1988 taxation year having been fixed at nil by the reassessment of July 4, 1989, the assessment of the respondent under section 159 in respect of 466’s liability could only be made if the Minister was in a position to vary it by issuing a further reassessment, and in fact did so. Since that did not happen with respect to the Grand Bell loss, and now cannot happen, the learned Tax Court judge was right to answer the question in the negative and to allow the respondent’s appeal.

We note that the question as put to the Tax Court judge also dealt with section 160. That section appears to us to have no relevance to this case and should form no part of either the question or the answer.

The appeal will be dismissed with costs.

Appeal dismissed.