[1] This is an appeal by SMX Shopping Centre Ltd. of a judgment of the Tax Court dated October 8, 2002, dismissing an appeal from a reassessment made under the Income Tax Act, R.S.C. 1985, c. 1 (5^th supp.). The Tax Court decision is reported as SMX Shopping Centre Ltd. v. Canada, [2002] T.C.J. No. 698 (QL), 2003 D.T.C. 487, [2003] C.T.C. 2672 (T.C.C.). The only issue before this Court is whether the reassessment was made within the statutory time limit.

Facts

[2] SMX is a corporation that is resident in Canada for income tax purposes. The shares of SMX are registered in the names of Mr. Amir Malekyazdi and his wife, Ms. Mahin-Touss Malekyazdi, who at all material times lived in France. They hold the shares in trust for their four adult children, who live in Canada. The Tax Court Judge refers to the four children as the owners of the shares. I assume that he means that they are the beneficial owners. Mr. Malekyazdi and his son Shahram are directors of SMX. Shahram Malekyazdi was the only witness in the Tax Court.

[3] It is claimed for SMX that in 1993, it undertook a business venture jointly with an Iranian corporation named Golbanoo Canning Company Limited. There were two shareholders of Golbanoo, each owning 50% of the shares. One was Mr. Moussavizadeh, the brother of Ms. Malekyazdi. The other was Mr. Nahavandi, a business acquaintance of Mr. Malekyazdi. There was no evidence of any family relationship between Mr. Nahavandi and any member of the Malekyazdi family.

[4] According to SMX, the joint venture with Golbanoo involved the acquisition in Spain of aseptic drums containing tomato paste, which would be exported to Iran and sold there. SMX claimed that the joint venture failed in 1994 because of poor market conditions, resulting in a loss to SMX of $1,180,542.

[5] SMX, in filing its income tax returns for 1993 and 1994, claimed deductions for management fees paid to Amir Malekyazdi, in the amount of $85,500 in 1993 and $42,500 in 1994, for services rendered in connection with the Golbanoo joint venture. For 1994, SMX also claimed a deduction of $1,180,542 as its loss on the Golbanoo joint venture. The 1994 deductions resulted in a non-capital loss for that year.

[6] The 1993 income tax return of SMX was first assessed on August 5, 1995. SMX claimed a deduction in 1993 for its 1994 non-capital loss, which was allowed by reassessment dated September 28, 1995.

[7] The Minister later reviewed the 1993 and 1994 returns and concluded that the management fees and the Golbanoo joint venture loss were not deductible, and reassessed both returns accordingly on November 9, 1998. The disallowance of the 1994 management fee and the Golbanoo joint venture loss resulted in the reduction of the 1994 non-capital loss and a corresponding reduction, in 1993, of the 1994 non-capital loss carry-back.

[8] The reassessments increased the tax liability of SMX for 1993. There was no change in the tax payable for 1994. SMX appealed both reassessments to the Tax Court. As there was no tax payable for 1994, only the 1993 reassessment was properly before the Tax Court. The Tax Court dismissed the appeal, and SMX now appeals to this Court.

[9] The threshold issue before the Tax Court, and the only issue in this Court, is whether the November 9, 1998 reassessment for 1993 was out of time.

Discussion

[10] Most of the rules governing assessments and reassessments appear in section 152 of the Income Tax Act. Section 152 is long, and it has been amended many times over the years. In considering how section 152 applies in a particular situation, care must be taken to refer to the correct version of section 152. In this case, the applicable version is section 152 as it read after the enactment of S.C. 1998, c. 19 (the relevant parts of which are applicable after April 27, 1989).

[11] Subsection 152(4) of the Income Tax Act deals with the Minister's authority to reassess the tax payable for a particular taxation year. The opening words of subsection 152(4) give the Minister unlimited authority to reassess within the "normal reassessment period", a term defined in subsection 152(3.1). Paragraphs 152(4)(a) and (b) limit the authority of the Minister to reassess after the normal reassessment period.

[12] The normal reassessment period for a particular taxation year begins on the date of the first assessment for that year, or the date of the first notification that no tax is payable for that year, whichever is earlier. The normal reassessment period ends four years later, if the taxpayer is a mutual fund trust or a corporation other than a Canadian controlled private corporation, or three years later in any other case.

[13] Although the shares of SMX were registered in the names of Amir Malekyazdi and his wife, who are both non-residents, it appears to be undisputed that, for the 1993 taxation year of SMX, the normal reassessment period was three years from the date of the initial tax assessment for that year. I assume that SMX claimed to be a Canadian controlled private corporation at the relevant time, and the Minister agreed.

[14] The 1993 income tax return of SMX was assessed for the first time on August 9, 1995. Therefore, the normal reassessment period expired on August 9, 1998. The reassessment under appeal was made on November 9, 1998. That is too late, unless the reassessment was permitted by paragraph 152(4)(a) or (b).

[15] Paragraph 152(4)(a) permits a reassessment to be made at any time to the extent that the requisite degree of fraud or negligence is established, or to the extent that the taxpayer has formally waived its entitlement to rely on a limitation period. The Minister has made no allegation that could support the application of paragraph 152(4)(a).

[16] Paragraph 152(4)(b) permits certain reassessments to be made within three years after the normal reassessment period (I refer to this as the "extended reassessment period"). For the 1993 taxation year of SMX, the extended reassessment period expired on August 9, 2001. The date of the reassessment under appeal is November 9, 1998. Therefore, the reassessment can stand only to the extent it was permitted by paragraph 152(4)(b).

[17] The Minister argued in the Tax Court that the reassessment under appeal was permitted by subparagraph 152(4)(b)(iii), the relevant parts of which read as follows:

152. (4) ... an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

152. (4) ... Pareille cotisation ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans les cas suivants:

...

(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and

b) la cotisation est établie avant le jour qui suit de trois ans la fin de la période normale de nouvelle cotisation applicable au contribuable pour l'année et, selon le cas:

...

(iii) is made as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length ....

(iii) est établie par suite de la conclusion d'une opération entre le contribuable et une personne non résidente avec laquelle il avait un lien de dépendance ....

[18] Subparagraph 152(4)(b)(iii) asks whether there is reason, "as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length," to assess or reassess the taxpayer's tax for any relevant taxation year. If the answer is yes, the reassessment can be made within the extended reassessment period but, according to paragraph 152(4.01)(b)(iii), only to the extent that the reassessment may reasonably be regarded as relating to the transaction referred to in subparagraph 152(4)(b)(iii).

[19] The situations in which parties are considered for income tax purposes to deal with each other at arm's length are stated in subsection 251(1) of the Income Tax Act, which read as follows at the relevant time:

251. (1) For the purposes of this Act,

251. (1) Pour l'application de la présente loi:

(a) related persons shall be deemed not to deal with each other at arm's length; and

a) des personnes liées soit réputées avoir entre elles un lien de dépendance;

(b) it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length.

b) la question de savoir si des personnes non liées entre elles n' avaient aucun lien de dépendance à un moment donné est une question de fait.

[20] Subsection 251(2) of the Income Tax Act specifies the relationships that must exist between persons if they are to be considered related to each other for income tax purposes. Paragraph 251(2)(a) provides that persons who are connected by blood, marriage or adoption are related to each other. Thus, Amir Malekyazdi, his wife Mahin-Touss Malekyazdi, and their four children are related to one another. A corporation is related to each member of a related group that controls the corporation (subparagraph 251(2)(b)(ii)), and is also related to any person who is related to any member of that related group (subparagraph 251(2)(b)(iii)). A related group is defined in subsection 251(4) as a group of persons each member of which is related to every other member. "Control" in this context is de jure control. In the case of SMX, de jure control is in the hands of a related group consisting either of Amir Malekyazdi and his wife, Mahin-Touss Malekyazdi, who are the legal owners of the SMX shares, or their four children, who are the beneficial owners. In either case, SMX is related to Amir Malekyazdi.

[21] SMX correctly conceded that the Minister was permitted to reassess SMX during the extended reassessment period to disallow the deduction of the management fees. The management fees were said to be payable by SMX to Amir Malekyazdi, a resident of France. Thus, the payment of fees to Mr. Malekyazdi were transactions between SMX and Mr. Malekyazdi, a non-resident person with whom SMX did not deal at arm's length. It follows that the Minister was entitled to reassess during the extended reassessment period to disallow the deduction of the management fees.

[22] However, SMX argues that the same cannot be said of the disallowance of the deduction of the 1994 non-capital loss resulting from the Golbanoo joint venture loss. The Tax Court Judge disagreed with SMX on that point, and also concluded that SMX had failed to prove that it had suffered the loss claimed, or that the amounts said to be management fees were amounts paid for the purpose of earning income. For those reasons, he dismissed the appeal of SMX.

[23] In this Court, counsel for SMX made two arguments in support of his submission that the reassessment was not permitted by subparagraph 152(4)(b)(iii). First, he argued that the Minister did not discharge its burden of proving that the Golbanoo joint venture loss was the result of a transaction between SMX and a person dealing at arm's length with SMX. Second, he argued that once the Tax Court Judge found that SMX had not incurred the Golbanoo joint venture loss, there was no transaction that could provide a basis for the application of subparagraph 152(4)(b)(iii).

[24] There is no merit in the second argument. In the context of subparagraph 152(4)(b)(iii) of the Income Tax Act, the word "transaction" must be interpreted to include a transaction that the taxpayer alleges forms the factual foundation for a deduction claimed in an income tax return. Thus, for example, if a taxpayer claims to be entitled to a deduction for a particular expense it has paid, and the payment of the expense (assuming it occurred), would have involved the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length, the Minister has the legal authority to reassess within the extended reassessment period to disallow the deduction. That legal authority does not disappear if the taxpayer later denies that the expense was paid, or fails to prove that it was paid.

[25] In this case, SMX claimed a deduction of $1,180,542, which it said represented expenditures made by SMX in the failed joint venture with Golbanoo. SMX attempted to prove that Amir Malekyazdi caused those expenditures to be made to Golbanoo on behalf of SMX, and that Golbanoo spent and lost the money on the joint enterprise. Those alleged expenditures were the transactions upon which SMX based its claim for a deduction, and so they were also the transactions that permit the Minister to rely on subparagraph 152(4)(b)(iii) to disallow the deduction by reassessing within the extended reassessment period.

[26] The other argument made for SMX is more substantial. It requires consideration of the relationship between SMX and Golbanoo. Those two corporations are deemed by paragraph 251(1)(a) to deal with each other at arm's length if they are "related to each other" for income tax purposes, and they are related to each other only if their relationship is one of those described by paragraph 251(2)(c) of the Income Tax Act, which reads as follows:

251.(2) For the purpose of this Act, "related persons", or persons related to each other, are

251.(2) Pour l'application de la présente loi, soit des « personnes liées » ou des personnes liées entre elles :

...

c) deux sociétés:

(i) if they are controlled by the same person or group of persons,

(i) si elles soit contrôlées par la même personne ou le même groupe de personnes,

(ii) if each of the corporations is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation,

(ii) si chacune des sociétés est contrôlée par une personne et si la personne contrôlant l'une des sociétés est liée à la personne qui contrôle l'autre société,

(iii) if one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation,

(iii) si l'une des sociétés est contrôlée par une personne et si cette personne est liée à un membre d'un groupe lié qui contrôle l'autre société,

(iv) if one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation,

(iv) si l'une des sociétés est contrôlée par une personne et si cette personne est liée à chaque membre d'un groupe non lié qui contrôle l'autre société,

(v) if any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation, or

(v) si l'un des membres d'un groupe lié contrôlant une des sociétés est lié à chaque membre d'un groupe non lié qui contrôle l'autre société,

(vi) if each member of an unrelated group that controls one of the corporations is related to at least one member of an unrelated group that controls the other corporation.

(vi) si chaque membre d'un groupe non lié contrôlant une des sociétés est lié à au moins un membre d'un groupe non lié qui contrôle l'autre société.

[27] There was considerable argument at the hearing of this appeal as to whether the Minister had the burden of proving that the two corporations were related, or whether SMX had the burden of proving that they were not related. The resolution of that debate may determine the outcome of some income tax appeals, but not this one.

[28] In this case, the evidence establishes that (1) neither corporation is controlled by a single person, (2) the two corporations are not controlled by the same group of persons, and (3) SMX is controlled by a related group (members of the Malekyazdi family) but Golbanoo is not. Thus, the Tax Court Judge erred in concluding that SMX and Golbanoo are related to each other for income tax purposes. It follows that they are not deemed by paragraph 251(1)(a) to deal with each other at arm's length.

[29] Therefore, subparagraph 152(4)(b)(iii) of the Income Tax Act did not permit the Minister to reassess the 1993 return of SMX to disallow the Golbanoo joint venture loss within the extended reassessment period.

Factual non-arm's length

[30] At the hearing of this appeal, counsel for the Minister argued that it is open to this Court to consider whether, as a matter of fact, SMX and Golbanoo did not deal with each other at arm's length. She cited paragraph 251(1)(b) of the Income Tax Act (sometimes referred to as the "factual non-arm's length rule"), which is quoted above.

[31] This argument is based on findings of fact made by the Tax Court Judge in the context of a different question, which was whether SMX had actually incurred the loss it claimed to have incurred. None of the evidence presented in the Tax Court was directed at establishing whether the factual non-arm's length rule could apply. No doubt that is because SMX had no indication prior to the Tax Court proceedings that the factual non-arm's length rule would be argued. The factual non-arm's length rule does not appear in the pleadings in the Tax Court. It was raised by counsel for the Minister in closing argument in the Tax Court, apparently with no objection from counsel for SMX, but the Tax Court Judge did not deal with that argument. He does not say whether he declined to deal with it because he considered it unnecessary to do so, or because it had not been raised in the pleadings.

[32] There are circumstances in which a new argument may be raised for the first time in this Court. Generally, that may be done if the argument is supported by evidence on the record, and the other party is not prejudiced by having had no opportunity to adduce evidence that could, if accepted, defeat the argument. Typically, such a situation may arise if the new argument is purely a point of law. It is obvious that the application of the factual non-arm's length rule in paragraph 251(5)(b) is, at its highest, a question of mixed law and fact. In my view, it is impossible to say that SMX would suffer no prejudice if this Court were to consider the Minister's argument that the factual non-arm's length rule applies in this case. I therefore decline to deal with that argument.

Reassessment within the extended reassessment period to reduce a non-capital loss

[33] Another new issue was raised on the motion of this Court, based on the following facts established by the record: (1) SMX filed its income tax returns for 1993 and 1994. (2) The 1993 return was initially assessed on August 5, 1995. (3) A non-capital loss was reported in the 1994 return. (4) A deduction for that non-capital loss was requested for 1993 (such loss carry-backs are permitted by section 111). (5) The 1993 deduction of the 1994 non-capital loss was allowed by reassessment dated September 28, 1995. (6) The deduction of the non-capital loss was disallowed by the reassessment under appeal dated November 8, 1998.

[34] Given those facts, a question arises as to whether the Minister was entitled to reassess for 1993 during the extended reassessment period to disallow the deduction of the 1994 non-capital loss because of the combined operation of subparagraph 152(4)(b)(i), subparagraph 152(4.01)(b)(i), and paragraph 152(6)(c) of the Income Tax Act. The relevant parts of those provisions read as follows:

152. (4) ... an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if

152. (4) ... Pareille cotisation ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans les cas suivants:

...

(b) the assessment, reassessment or additional assessment is made before the day that is 3 years after the end of the normal reassessment period for the taxpayer in respect of the year and

b) la cotisation est établie avant le jour qui suit de trois ans la fin de la période normale de nouvelle cotisation applicable au contribuable pour l'année et, selon le cas:

(i) is required pursuant to subsection 152(6) or would be so required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, ....

(i) est à établir en conformité au paragraphe (6) ou le serait si le contribuable avait déduit un montant en présentant le formulaire prescrit visé à ce paragraphe au plus tard le jour qui y est mentionné, ....

152. (4.01) Notwithstanding subsections 152(4) and 152(5), an assessment, reassessment or additional assessment to which paragraph ... 152(4)(b) applies in respect of a taxpayer for a taxation year may be made after the taxpayer's normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to, ...

152. (4.01) Malgré les paragraphes (4) et (5), la cotisation, la nouvelle cotisation ou la cotisation supplémentaire à laquelle s'appliquent les alinéas ... b) relativement à un contribuable pour une année d'imposition ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans la mesure où il est raisonnable de considérer qu'elle se rapporte à l'un des éléments suivants: ...

(b) where paragraph 152(4)(b) applies to the assessment, reassessment or additional assessment,

b) en cas d'application de l'alinéa (4)b):

(i) the assessment, reassessment or additional assessment to which subparagraph 152(4)(b)(i) applies ....

(i) la cotisation, la nouvelle cotisation ou la cotisation supplémentaire à laquelle s'applique le sous-alinéa(4)b)(i) ....

152. (6) Where a taxpayer has filed for a particular taxation year the return of income required by section 150 and an amount is subsequently claimed by the taxpayer or on the taxpayer's behalf for the year as ...

152. (6) Lorsqu'un contribuable a produit la déclaration de revenu exigée par l'article 150 pour une année d'imposition et que, par la suite, une somme est demandée pour l'année par lui ou pour son compte à titre de: ...

c) déduction ... en application de l'article 111, relativement à une perte subie pour une année d'imposition ultérieure;

...

by filing with the Minister, on or before the day on or before which the taxpayer is, or would be if a tax under this Part were payable by the taxpayer for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer's tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed.

...

en présentant au ministre, au plus tard le jour où le contribuable est tenu, ou le serait s'il était tenu de payer de l'impôt en vertu de la présente partie pour cette année d'imposition ultérieure, de produire en vertu de l'article 150 une déclaration de revenu pour cette année d'imposition ultérieure, un formulaire prescrit modifiant la déclaration, le ministre doit fixer de nouveau l'impôt du contribuable pour toute année d'imposition pertinente (autre qu'une année d'imposition antérieure à l'année donnée) afin de tenir compte de la déduction demandée.

[35] The Minister did not rely on these provisions in making the reassessment under appeal, or in argument before the Tax Court. Counsel for the Minister explained at the hearing of this appeal that, to her knowledge, they had not been considered. Both parties were asked to provide written submissions on the following questions:

(1) Does paragraph 152(4)(b)(i) of the Income Tax Act give the Minister 6 years to reassess 1993 to disallow the carry-back of the 1994 non-capital loss?

(2) Is there any reason why this Court should not consider that question at this stage?

[36] The submissions were received and have been reviewed. As expected, counsel for SMX submits that the Court should not consider this new issue, and counsel for the Minister takes the opposite view. Having reviewed those submissions and having considered the history of these proceedings, I have concluded that the Court should not consider this new issue.

Conclusion

[37] This appeal should be allowed with costs, the judgment of the Tax Court should be set aside, and the reassessment under appeal should be referred back to the Minister for

reassessment on the basis that the Minister was not entitled to reassess 1993 to disallow the deduction of the 1994 non-capital loss.

"K. Sharlow"

J.A.

"I agree

Alice Desjardins J.A."

"I agree

Robert Décary J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-620-02

STYLE OF CAUSE: SMX Shopping Centre Ltd v. The Queen

PLACE OF HEARING: Vancouver, BC

DATE OF HEARING: October 23, 2003

REASONS FOR JUDGMENT BY: Sharlow J.A.

CONCURRED IN BY: Desjardins and Décary JJ.A.

DATED: December 16, 2003

APPEARANCES:

Mr. Timothy Clarke

FOR THE APPELLANT/

APPLICANT

Ms. Linda Bell

FOR THE RESPONDENT

SOLICITORS OF RECORD:

Bull Housser and Tupper

FOR THE APPELLANT/

APPLICANT

Dept. Of Justice

FOR THE RESPONDENT

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SMX Shopping Centre Ltd. v. Canada, 2003 FCA 479

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2003 FCA 479