Citation: 2012TCC186
Date: 20120601
Docket: 2011-2015(IT)G
BETWEEN:
CLEARWATER SEAFOODS HOLDINGS TRUST,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
D'Arcy J.
[1]
The Appellant, Clearwater Seafoods
Holdings Trust (the “Trust”), has brought a motion for a direction by the
Court, pursuant to section 29 of the Tax Court of Canada Rules (General
Procedure), to allow the appellant in the appeal to be changed to
Clearwater Seafoods Incorporated (“Seafoods Inc.”).
[2]
The issue raised by the motion arises
where a corporation has, in the course of the implementation of a plan of
arrangement, acquired the assets and assumed the liabilities of an income trust.
The issue is whether the corporation may become the appellant in an appeal
commenced by the income trust prior to the implementation of the plan of
arrangement.
[3]
It is the Appellant’s position
that Seafoods Inc., as the successor in title and interest to the Trust, should
be entitled to replace the Trust as the Appellant in this appeal. Counsel for
the Appellant argued that “[ . . . ] the requested Rule 29 direction is
consistent with the objective of Parliament and the federal Department of
Finance to facilitate the conversion of income trusts to public corporations on
a time sensitive and tax-neutral basis.”
[4]
It is the Respondent’s position
that Seafoods Inc. cannot take the place of the Trust as the Appellant in the
appeal. She argues that a taxpayer cannot transfer an income tax liability. In
addition, the Respondent argues that the Appellant in this appeal was
terminated and, as a result, no longer has the legal capacity to proceed in the
appeal.
Summary
of Facts
[5]
The Trust filed an appeal with the
Court on June 10, 2011 in respect of reassessments issued for its 2002 and 2003
taxation years.
[6]
The reassessments
increased the income tax payable by the Trust. The Trust has not paid the
additional taxes assessed by the Minister.
[7]
The Trust was involved in a plan
of arrangement that was drawn up under section 192 of the Canada Business
Corporations Act
and whose implementation was completed on October 2, 2011 (the “Plan of
Arrangement”).
[8]
The parties did not inform the
Court of what the actual activities of the Trust had been prior to the
execution of the Plan of Arrangement. Article 2.5 of the Declaration of Trust
states that the Trust is a limited purpose trust. Article 4.1 of the
Declaration of Trust sets out the trust’s purposes, which appear to relate
primarily to the purchase and holding of securities and the holding of cash.
[9]
Prior to the implementation of the
Plan of Arrangement, all of the units of the Trust were held by Clearwater
Seafoods Income Fund (the “Fund”), an unincorporated open-ended investment
trust governed by the laws of Ontario.
[10]
As a result of changes in the
taxation of income trusts, the Fund and the Trust (together with certain
investors in the Fund) entered into the Plan of Arrangement. The purpose of the
plan was to convert the income trust into a corporation.
[11]
On October 2, 2011, in the course
of implementing the Plan of Arrangement, Seafoods Inc. acquired all of the
units of the Fund, and all of the unit holders of the Fund became shareholders
of Seafoods Inc. Immediately following this step, the following occurred:
-
the Trust distributed all of its
assets to the Fund and the Fund assumed all of the liabilities of the Trust;
and,
-
the Fund then distributed all of
its assets to Seafoods Inc. and Seafoods Inc. assumed all of the
liabilities of the Fund.
[12]
The Plan of Arrangement states
that after the Trust distributes its assets to the Fund and the Fund assumes
all of the liabilities of the Trust, “[ . . . ] the Trust will be dissolved in
accordance with applicable law and the [Trust’s] Declaration of Trust.”
[13]
Article 14 of the Trust’s
Declaration of Trust contains the procedures for the termination of the Trust.
The
Law
[14]
Section 29 of the Tax Court of
Canada Rules (General Procedure) reads as follows:
(1) Where at
any stage of a proceeding the interest or liability of a person who is a party
to a proceeding in the Court is transferred or transmitted to another person by
assignment, bankruptcy, death or other means, no other proceedings shall be
instituted until the Registrar is notified of the transfer or transmission and
the particulars of it.
(2) On receipt
of the notice and particulars referred to in subsection (1) the Registrar shall
consult with the parties regarding the circumstances under which the proceeding
shall continue and he shall report on these consultations to the Chief Justice.
(3) The Chief
Justice or a judge designated by him to deal with the matter may direct the
continuation of the proceeding or give such other direction as is just.
[15]
The issue I must address is
whether the Appellant transferred or transmitted to Seafoods Inc., by
assignment, bankruptcy, death or other means, its interest in the appeal or its
liability in respect of the subject matter of the appeal.
[16]
In order to make this
determination, the Court must look to the common law and any relevant statutory
provisions. Section 29 does not itself provide authority for the assignment or
devolution of an interest in a proceeding.
[17]
I will first consider the relevant
provisions of the Income Tax Act
(the “Act”).
[18]
The liability to pay
income tax is a statutory liability. Income tax is levied under the Act
on the taxable income of a person.
[19]
As a result, a person
who earns taxable income is the taxpayer in respect of such income, that is,
the person liable to pay the income tax.
This liability arises the moment the income is earned, regardless of when the Canada
Revenue Agency issues an assessment.
[20]
As Justice Sharlow
noted in Garron Family Trust (Trustee of) v. Canada [appeal
by Fundy Settlement(Trustee of)], 2010 FCA 309, 2010 DTC 5189, at
paragraph 5, “[ . . . ] a taxpayer may be an individual, a corporation or a
trust. Although a trust is not a person as a matter of law, the Income Tax
Act treats the trust for income tax purposes as though it were an
individual.”
[21]
It is the taxpayer that is
assessed under section 152 of the Act and it is the taxpayer that has
the right to file a notice of objection under section 165 of the Act.
Further, it is the taxpayer who has the right, after serving the notice of
objection, to appeal the assessment (or reassessment) to this Court.
[22]
In the present appeal, the
Minister assessed the Trust in respect of taxable income allegedly earned by
the Trust. Further, it was the Trust that filed the notice of objection and the
appeal to this Court.
[23]
Counsel for the Appellant did not
take me to any provisions in the Act that would allow the Trust to
assign its appeal rights to a third party, such as Seafoods Inc., nor I am
aware of any such provisions.
[24]
Counsel for the Appellant
confirmed that the Trust, the Fund and Seafoods Inc. relied upon the provisions
of section 88.1 of the Act to avoid tax on the transfer of the assets of
the Trust to the Fund and the subsequent transfer of the assets of the Fund to
Seafoods Inc.
[25]
Counsel for the Appellant did not
argue that section 88.1 of the Act resulted in Seafoods Inc. being a
continuation of the Trust or that the section provided for the transfer of the
Trust’s appeal rights to Seafoods Inc. In fact, counsel for the Appellant
acknowledged that section 88.1 incorporates the winding-up provisions contained
in subsection 88(1) of the Act.
[26]
In summary, it is my view that the
assignment/assumption of any potential tax debt of the Trust does not result in
Seafoods Inc. acquiring the rights of an appellant in this appeal. As discussed
previously, the Minister assessed the Trust and it was the Trust that exercised
its appeal rights by filing the appeal to this Court. There are no provisions
in the Act that allow the Trust to substitute Seafoods Inc. as the Appellant
in this appeal.
[27]
I will next consider the common
law.
[28]
Article 2.2 of a Conveyance and
Assumption Agreement between the Trust and the Fund states the following:
The Fund
hereby assumes undertakes to pay and discharge and to indemnify and save
harmless the Trust in respect thereof, all of the outstanding debts,
obligations, liabilities, contracts and engagements of the Trust of every
nature and kind, and liability for all taxes, interest or penalties that have
been assessed or may properly be assessed against the Trust under the Income
Tax Act (Canada).
[29]
In my view, an agreement by which
a party assumes another party’s tax liability cannot be binding on the
Minister.
[30]
In The Law of Contracts in
Canada,
Fridman distinguishes the assignment of the burdens or liabilities under a
contract from the assignment of the benefits of a contract. Regarding the
former, he writes:
In strict speech, as well as in point of law, it is incorrect to talk
of the assignment of the liabilities or burdens placed upon a contracting party
by a contract. As was clearly stated in National Trust Co. v. Mead, a
party to a contract may assign rights but not liabilities so as to relieve
himself of a contractual obligation. The party obliged under a contract is
always under that personal obligation to perform, and will be liable should
performance not occur. [ . .
. ]
[Footnotes excluded.]
[31]
In National Trust Co. v. Mead, Wilson J. wrote the
following:
The common law has long recognized that while one may be free to assign
contractual benefits to a third party, the same cannot be said of contractual
obligations. This principle results from the fusion of two fundamental
principles of contract law: 1) that parties are able to make bargains with the
parties of their own choice (freedom of contract); and 2) that parties do not
have to discharge contractual obligations that they had no part in creating
(privity of contract). [ . . . ]
[32]
That Seafoods Inc. may now have
the legal obligation, as between itself and the Trust, to pay any income tax
debt of the Trust does not change the fact that any such debt is still owed by
the Trust to the Crown. Further, the assumption/assignment of any such debt
does not result in the transfer by the Trust of its rights of appeal in respect
of the relevant assessments.
[33]
For the foregoing reasons, the motion
is dismissed without costs.
[34]
There is one other issue raised by
the parties. During her argument, counsel for the Respondent stated that the
Trust has been terminated. Counsel for the Appellant noted that if the Court
dismisses the appeal on the basis that the Trust has been terminated, then the
Minister will be required to issue a third party assessment under subsection
160(1) of the Act, “thereby causing the substantive dispute to return to
square one.”
[35]
The difficulty I have with these
arguments is that the issue of whether the appeal should be dismissed or
discontinued is not before the Court.
[36]
Further, it is not possible, on
the basis of the limited evidence before me, to determine whether the Trust has
standing to complete the appeal. In addition, before making such a
determination, the Court must address certain legal issues not raised by the
parties during the hearing of this motion. For example, in light of the Federal
Court Trial Division’s decision in 460354 Ontario Inc. et al. v. The Queen,
92 DTC 6536, the parties must address, in my view, the question of whether, in
the fact situation here, the Court should deny a taxpayer its right of appeal
in respect of a validly issued assessment.
[37]
If the Respondent believes that
the Court should dismiss the appeal, then she must file the appropriate motion
within 30 days of the date of the Order herein. If the Respondent does not file
such a motion, the parties shall submit to the Court a mutually agreeable
timetable, in writing, within 45 days of the date of the Order herein.
Signed at Antigonish, Nova
Scotia, this 1st day of June 2012.
“S. D’Arcy”
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