Citation: 2013 TCC 333
Date: 20131023
Docket: 2010-1473(IT)G
BETWEEN:
CHARLES ROSS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1474(IT)G
AND BETWEEN:
SUSANNE E. GREENHALGH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2010-1475(IT)G
AND BETWEEN:
JOHN W. MARTINIUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
CONSOLIDATED REASONS FOR JUDGMENT
Bocock J.
I.
Introduction
and Partial Agreed Facts
a) Background
[1]
Each Appeal involves an
Appellant who, after working some three decades, retired from a public service.
At the time of retirement, each was a contributing member of either the Ontario
Municipal Employees Retirement System (“OMERS”) or the Ontario Teachers’
Pension Plan (the “Teachers’ Plan”). Following professional advice regarding
pension planning, business ventures and retirement, each Appellant incorporated
a personally owned limited liability company. Each respective company received
the individual’s commuted pension plan benefits as a transfer under section
147.3 of the Income Tax Act (“Act”). In each case, the Appellant
was the only member of the plan and each also received a surplus distribution from
the plan pursuant to the requisite actuarial opinion. The Minister of National
Revenue (“the Minister”) eventually revoked each Appellant’s own plan. The
Minister asserts that the tax immune pension funds reverted into income
retroactively in the year each plan was otherwise created through the combined
effect of subsections 56(1), 56(2) and Regulation 8502 of the Act. Each
Appellant was then reassessed to include such income in the taxation year in
which each personal pension plan was registered. Although not relevant to the
matters before this Court, collateral judicial review applications were
launched challenging the Minister’s revocation decisions and the applications
were dismissed in the case of each Appellant.
b) Procedure at Hearing
[2]
The foregoing Appeals
were not heard on a consolidated basis, but were heard one immediately after
the other. Although they were not heard on the basis of common facts, there are
certain facts which are materially common to each. The legal issues were
sufficiently common to the Appeals to justify these consolidated reasons for judgment.
However, the reasons, where warranted, identify the different facts among each
of the otherwise completely unrelated and unassociated Appellants.
II.
Three Appeals –
Similar, but Not Identical
a) Common Basis for Reassessment
[3]
In each case the reassessments
were outside the normal statutory period for reassessment. In each case, the
Minister alleged misrepresentation attributable to neglect, carelessness or
wilful default in supplying information under the Act. The Minister
contends these misrepresentations bring the reassessments within the ambit of
subparagraph 152(4)(a)(i) of the Act and permits reassessment
beyond the normal assessment period.
[4]
The Minister’s position
is that misrepresentations were made in the course of the supply by each Appellant
or their advisors of information relating to the registration and audit of the
plan: as to the primary purpose of the plan, the level of remuneration and the
employment relationship of each Appellant with their plan administrator (the
limited company).
[5]
The Minister contends
that the misrepresentations had a causal relationship with the registration of
the plans in the first instance. This initial registration of the plans
precluded inclusion into income of the transferred assets at the time of
transfer and during the registration period. The misrepresentations supported
the plan registration and shielded each Appellant from tax otherwise payable. Respondent’s
counsel summarized the issue as to whether each Appellant “misrepresented to
CRA facts upon which the registration of the plans rested and gave untrue,
misleading or inaccurate responses to questions from CRA regarding those same
facts.” (Respondent’s written submissions at paragraph 2).
b) Distinguishing Facts
[6]
The specific facts
regarding the alleged misrepresentations (the “Misrepresentation Issue”) in each
matter are different. Therefore, the following facts relevant to the
Misrepresentation Issue, as among each Appeal, are individually summarized as
follows.
(i)
Ross Appeal
A. Agreed Facts
[7]
Mr. Ross was a police
officer of 28 years when he retired and transferred the commuted value of his
OMERS pension, $674,513.00, to Jordan Financial Inc. (“JFI”). JFI administered
the new pension plan (the “JFI Plan”) registered effective November 1, 2000
(“Registration Date”), in respect of which Mr. Ross was the sole member.
Ultimately the JFI Plan was revoked on May 9, 2008 retroactively to the
Registration Date.
B. Testimony at Trial
[8]
In providing evidence at
trial surrounding the Misrepresentation Issue, Mr. Ross testified forthrightly
and credibly. Factually, Mr. Ross had no intention to cease working at the time
of retirement from policing. He avidly sought to become a mutual fund advisor. This
evidence is relevant to the determination of the primary purpose, status of
employment and expectation of salary in the new endeavour.
[9]
His new endeavour would
be as an employee of Jordan Financial Inc. (“JFI”), which in turn would
contract its services with a local mutual fund investment brokerage.
Coincidentally, Mr. Ross would market financial plans for retiring police
officers and firefighters not unlike his own. He laid out a business plan,
promoted the structures and ultimately became a registered mutual fund advisor.
He transferred the sum of $754,513.00 being the committed value of his pension
benefits from OMERS to the JFI Plan. Regrettably, the business, like any number
of other new ventures, was not successful.
[10]
To the issue of primary
purpose, the Canada Revenue Agency (“CRA”) required Mr. Ross to estimate his
expected annual income, describe his relationship with JFI and the nature of
the business.
[11]
The representations
within a letter dated December 28, 2000 stated JFI would enter into various
business relationships in order to generate profits whereby Mr. Ross would be
paid expected annual earnings of not less than $66,500.00 (being an
approximation of his final year’s salary as a police officer). The application
also identified the expected difficulty of projecting revenue which would
determine salary, but since this was a requirement of the CRA, Mr. Ross,
nonetheless, attempted to comply when establishing the JFI Plan.
[12]
Subsequently and
beginning in 2001, CRA began to express “concern surrounding the establishment
of this plan and the potential consequences that could arise.” Some two years
later, notice of an audit was delivered by the CRA. Mr. Ross, through his
advisor, responded confirming Mr. Ross received salary equal to compensation
received from the previous employer and advising CRA that Mr. Ross had to take an
unpaid leave of absence. When provided at that time, such facts were incorrect.
[13]
In 2004, an actuarial valuation
dated as of January 1, 2003 was filed indicating annualized pensionable earnings
of $65,000.00. This was also an incorrect statement concerning 2003. In
addition, Mr. Ross testified that he did not report all of his income in his
T-1 tax returns. Although he wished to receive this income in his capacity as
an employee of JFI, it was instead received directly from the mutual fund
dealer. Mr. Ross filed an amended tax return correcting this error. The
Minister does not allege otherwise.
[14]
After its audit, in
November 2004 (the “2004 Preliminary Opinion”), the CRA preliminarily stated
that the “primary purpose” had not been met since the JFI Plan failed to
provide lifetime retirement benefits to “employee(s) in respect of their
service with the employer.”
[15]
Mr. Ross testified that
he received a surplus payment from the JFI plan of $80,000.00 in 2001 which Mr.
Ross appropriately included in income. This ultimately drew the ire of CRA, as reflected
in the 2004 Preliminary Opinion in which the agency stated that the apparent
purpose of the Plan was to shelter previous pension benefits in order to avoid
the transfer rules and to access the funds at will. Mr. Ross testified that,
although a surplus payment was received, he learned of such a mechanism during
the transfer period. Factually, although an intention and plan to receive
employment income from JFI existed, it was not entirely clear from the evidence
that any was received by Mr. Ross in that capacity. The Responded led no
contradicting evidence regarding the valuations of the surplus distributions in
the JFI Plan or any of the other plans relevant to the other appeals.
(ii) Greenhalgh Appeal
A. Agreed Facts
[16]
Ms. Greenhalgh was a
teacher for approximately 30 years before retiring. During her employment she
was a member of the Ontario Teachers’ Pension Plan (“Teachers’ Plan). She is
also the only member of the Pension Plan for the presidents of 1346687 Ontario
Inc. (the “1346687 Plan”). On January 20, 2000 the sum of $564,478.00 was
transferred from the Ontario Teachers Superannuation Fund to the 1346687 Plan.
She did not report the amount she transferred and reported a surplus payment from
the 1346687 Plan in the amount of $14,478.00 on her tax return in that year.
B. Testimony at Trial
[17]
Prior to retiring, Ms.
Greenhalgh had a vision of entering into the craft vinegar business. She
resides in the Niagara Peninsula where a proximate supply of a necessary
ingredient, surplus grapes, exists.
[18]
In response to
promotional materials, she met with financial planners and learnt of a
structure which would allow her to transfer her pension benefits to a company,
develop her new business as an employee of that new company and recoup the
profits in the form of income and enhanced contributions to the 1346687 Plan.
[19]
The 1346687 Plan was
established; Ms. Greenhalgh retired from teaching, transferred her commuted
pension benefits and began her new life in the vinegar production business in
October of 1999. In her application to register the 1346687 Plan, she projected
income of $65,000.00 per annum which she testified she believed she could earn
through dedication, effort and strategy. Instead, she ultimately reflected only
three months income which she recorded as income and upon which she paid tax. As
with most such entries, she could not identify these funds as having been
received in the commonly understood method of cash or cheque as opposed to accrual.
[20]
Within 12 months, the
CRA requested evidence of a primary purpose to generate pension benefits, a
bona fide employer/employee relationship and expected comparable earnings. The
letter was not received by Ms. Greenhalgh, but was responded to in June, 2001
by her advisors. Although the letter contained expectational assertions, it
also contained some misstatements of fact. Subsequent submissions in 2003 and
2004 also contained incorrect information regarding annualized pensionable
earnings, subsequent employment status and employment income.
[21]
Previously, in early
2002, Ms. Greenhalgh’s business suffered irrevocable set backs. Her husband and
co-venturer in the business had a stroke, never really recovered and the two
separated. Notwithstanding attempts to continue, she effectively wound the
business up in early 2004, whereafter she retired and began drawing her pension
benefits from the 1346687 Plan.
(iii)
Martiniuk Appeal
A. Agreed Facts
[22]
Mr. Martiniuk was a
police officer for approximately 30 years when he retired, during which time he
was a member of the OMERS. He was also the only member of the pension plan for
the presidents of 1354339 Ontario Inc. doing business as Excalibur (the “Excalibur
Plan”). On February 8, 2000 Mr. Martiniuk transferred $546,913.00 from the
OMERS to the Excalibur Plan. He did not report the amount he transferred as
income. However during 2000 Mr. Martiniuk received a series of surplus payments
from the Plan in the aggregate amount of $38,881.80 which he reported in his
tax return for that year.
B. Testimony at Trial
[23]
In 1999, as a soon to
be retired police officer, Mr. Martiniuk chose to train and ultimately become a
paralegal in the area of defending Highway Traffic Act charges. In
August of 1999, his advisors submitted the application to register the
Excalibur Plan. As with the two other Plans, Mr. Martiniuk indicated the new
entity had no earnings record and salaries would be contingent upon revenue,
both items of which were then unknown. Although Mr. Martiniuk found it
“ridiculous” to be asked to say with certainty what the revenue of his new
company would be, he nonetheless stated strongly that it had “great” earning
potential. To learn the trade, in early 2000 he shadowed a then working
paralegal, opened a bank account, acquired certain assets for the purposes of
undertaking the endeavour.
[24]
In June 2000, CRA
expressed its concerns regarding the Excalibur Plan and the consequences which
could arise. Mr. Martiniuk’s advisors submitted that the earnings potential was
sizeable with Mr. Martiniuk as its sole employee.
[25]
Correspondence and the
supply of information ensued between CRA and Mr. Martiniuk between 2002 and
2008. During that period, certain misstatements as to then current facts were
made in the content of information supplied: current remuneration and plan contributions.
In 2008, the Excalibur Plan was revoked and Mr. Martiniuk was reassessed in his
2000 taxation year for income equal to the value of the original assets
transferred from the OMERS Plan to the Excalibur Plan.
[26]
As to his business, Mr.
Martiniuk pursued his new career, but experienced very slow growth. He wished
to draw pension benefits, which he did in 2001, but recorded nominal income
from Excalibur to himself for three months in early 2000 prior to drawing pension
benefits. Ultimately, Mr. Martiniuk gave up his business and in 2005 joined the
City of Durham as a provincial offences prosecutor. At that time, the assets in
the Excalibur Plan were transferred and thereby returned to OMERS as trustee,
from which to this day Mr. Martiniuk draws pension benefits.
III.
The Issues Before
The Court
a) Misrepresentation Issue
[27]
The first ground upon
which the Appellants pursue this Appeal is that the Respondent has not
established that the information supplied by each Appellant under the Act
does not in the first instance constitute a misrepresentation in the supply of
information under the Act (the “Misrepresentation Issue”). This
factual ground of Appeal stands quite apart from the legal issues (described
below as the “Interpretation Issues”). On the Misrepresentation Issue, each
Appellant’s respective facts will be determinative to any finding of this Court
as to whether a “misrepresentation in supplying of information under the Act”
has occurred relative to the grounds alleged.
b)
Interpretation
Issues
(i) “Information Supplied” relates
only to Fraud
[28]
Although the
determination of whether a misrepresentation attributable to neglect,
carelessness or wilful default has occurred depends on the factual record, the
reliance by the Minister on subparagraph 152(4)(a)(i) is the common
basis for reaching beyond the normal reassessment period and back to the year
of registration. In the Replies, each reassessment is limited to the issue of
misrepresentation in the supply of information under the Act and does
not rely upon any allegation of fraud or any misrepresentation in filing the
return. The relevant subparagraph permitting reassessment beyond the normal
period provides as follows [emphasis added]:
152(4) The Minister may at any time make an assessment, reassessment or
additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s
normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that
is attributable to neglect, carelessness or wilful default or has committed
any fraud in filing the return or in supplying any information under this Act,
or
[…]
[29]
Central to the issue is
whether misrepresentation committed solely in respect of supplying information under
the Act is sufficient to allow the Minister to reopen the assessment
beyond the normal reassessment period for the relevant year.
[30]
In each Appeal, the
parties agree that there is no misrepresentation in filing the return nor is
there any fraud (in the return or in information supplied). The Appellants
assert that since there was no misrepresentation contained within the return,
subparagraph 152(4)(a)(i) of the Act does not permit reassessment
outside the normal reassessment period (where misrepresentation in filing the
return is not alleged) unless or until a taxpayer has committed “fraud in
filing the return or in supplying any information under the Act.”
Based upon the wording of the subparagraphs, the Appellants state that the commission
of misrepresentation attributable to neglect, carelessness or wilful default as
a precondition to assessment outside the normal period must have occurred in
filing the return. The Appellants assert it is insufficient if misrepresentation
only occurred within information supplied under the Act.
[31]
The Respondent takes
the position that subsection 152(4) permits reassessment outside the normal
reassessment period where misrepresentation attributable to neglect,
carelessness or wilful default has occurred in supplying any information under
the Act. Once a taxpayer has committed such a misrepresentation, then
the Minister by virtue of subparagraph 152(4)(a)(i) is permitted to
reassess, and in these specific matters, require the taxpayers to include in
income, in the year of the transfer (usually the year of registration), the
entire amount transferred from the public pension plan to the private pension
plan pursuant to the combined effect of subsections 56(1) and 56(2) and
Regulation 8502 of the Act. In effect, that revocation retroactively
removes the relief afforded by subsection 147.3(9) from including into income
(by deeming the transfer a contribution) the transfer of assets from one registered
plan to another registered plan.
[32]
As regards this fraud only
issue, assuming there is a primary finding of misrepresentation of information
supplied under the Act; each Appellant’s case succeeds or fails on the
result of the interpretation of this issue, subject only to the issue below.
(ii) Timing and Transfer Issues
[33]
A separate issue exists
in relation to retroactivity and timing of the transfer made pursuant to
subsection 147.3(9) of the Act which provides as follows:
147.3(9)
Where an amount is transferred in accordance with any of subsections
147.3(1) to (8),
(a) the amount shall not, by reason only of that transfer, be
included by reason of subparagraph 56(1)(a)(i) in computing the income
of any taxpayer; and
(b) no deduction may be made under any provision of this Act
in respect of the amount in computing the income of any taxpayer.
[34]
Each Appellant argues
that at the time of the transfer the plan was registered and therefore any transfer
is not taxable during that year. The retroactive effect of revocation of the
plan affects only the plan and subsequent returns the pension plan and
taxpayer must file. Each Appellant argues that he or she is entitled to have
his or her income assessed on the basis of the facts as they existed at the
time that each individual tax return was filed (“Timing Issue”).
[35]
As a second alternative
argument within the context of whether an amount was received, Appellants’ counsel
submits that the transferred funds, even after revocation of the plans, were neither
directly destined to, nor permitted to be held by, the Appellants. Although the
transferred property was effected by the trustee, pursuant to the direction of
the taxpayer, such transfer was made directly to a substitute plan with a
different trustee, but for the same taxpayer/beneficial owner. This prevented
the application of the constructive receipt concept contained with subsection
56(2) of the Act. Accordingly, the taxpayer/beneficial owner was not at
that time seized of any then current entitlement to receive those funds given
the prohibition under the terms of the trust agreement. The terms prevented the
benefits from being paid to the taxpayer, save and except in accordance with
the terms of the pension plan and relevant pension legislation (the “Transfer
Issue”). It is upon the occurrence of this permitted payment that each
Appellant would become liable for tax under subsection 56(2).
IV.
Analysis
a)
Misrepresentation
Issue “Supplying any Information” under the Act
[36]
In respect of asserting
a misrepresentation in supplying any information of the Act, different
factual assessments and assertions were made by the Minister in respect of each
of the three Appeals.
[37]
It is established law
that the Respondent must prove that each Appellant, or his or her advisors,
made misrepresentations to the Minister in accordance with those pleaded in the
Reply relevant to “facts upon which the registration rested.”
(i) Ross Appeal
[38]
In the Ross Appeal, subparagraphs
11(a), (b) and (c) and (d) of the Reply provide the basis for the allegations
of misrepresentations, namely:
11. In determining that the appellant made misrepresentations
attributable to neglect, carelessness or wilful default in filing his return or
in supplying information under the Act, the Minister relied on the
following facts:
a) The appellant was advised by the Canada Revenue Agency
(“CRA”) as early as at the time of the registration of the Plan that its
primary purpose may not be compliant with paragraph 8502(a) of the Regulations
and that the Plan may be in a revocable position.
b) In the course of the audit of the Plan, the appellant
made multiple misrepresentations to the CRA in respect of his status as an
employee of Jordan Financial Limited and the purpose of the Plan.
c)
The appellant misrepresented to the CRA the
nature of his employment relationship with Jordan Financial Limited and the
amount of employment remuneration received or to be received by Jordan
Financial Limited.
d) The appellant misrepresented to the CRA the primary
purpose of the Plan when he stated that its primary purpose was to provide
lifetime retirement benefits to him in respect of his services as an employee.
[39]
Counsel mutually agree
these paragraphs embody the three concepts of primary purpose, employee status
and remuneration.
[40]
Appellant’s counsel
made nuanced reference to Mr. Ross being unaware of certain CRA requests or
assertions and of his advisor’s responses. The Court does not accept such an
allusion as a softening agent with respect to any misrepresentation made. Subsection
152(4) is clear on this point. To the extent Mr. Ross hired an advisor and such
advisor provided information in Mr. Ross’ name in furtherance of any retainer,
then Mr. Ross must live with same to the extent misrepresentations were made on
his own behalf and not on behalf of the plan or any other entity. This
conclusion also holds for the other Appellants in relation to any similar
argument.
[41]
With respect to the
allegation of misrepresentation on primary purpose, reference must be had to
information submitted and Mr. Ross’ business intentions, both at the time of
initial registration and during the audit process in respect of the facts upon
which the registration was originally based.
[42]
Since the Respondent
bears the onus on this issue, it must establish a misrepresentation as to
“primary” purpose: that Mr. Ross made misrepresentations by providing or
withholding information concerning contrary intention or actions relevant to
primarily providing lifetime retirement benefits as defined in Regulations 8502
and 8504 (the “Lifetime Benefit Purpose”).
[43]
Evidence exists that
other purposes, either directly referenced or subsequently undertaken existed:
the ability to devolve residual pension benefits to his children upon death,
the ability to pay surplus benefits, the ability to domicile all pension
benefits in one vehicle and the ability to ultimately pay pension benefits
through a more proximate plan. Mr. Ross recognized each of these possibilities
and acknowledged them, along with the Minister, as goals or purposes. The
question remains however: has the Minister introduced evidence as a
misrepresentation which elevates any one of these purposes to a “primary
purpose” which topples the Lifetime Benefit Purpose from the highest pedestal?
[44]
The Court is not
satisfied that the presence of the purposes related to surplus benefit
distribution and succession benefits have done so. The surplus benefit
distribution is allowed at law and has occurred in many registered pension
plans, including potentially the OMERS plan from which the commuted benefits
were initially transferred. It cannot be suggested that such a distribution is supercedeous
to the primary purpose, when the very calculation undertaken to determine
whether a surplus distribution may be made is whether sufficient assets will
remain to satisfy the Lifetime Benefits Purpose. Not dissimilarly, succession
planning with respect to the assets is completely compatible with the Lifetime
Benefit Purpose, since succession rights only become choate upon the
pensioner’s death, after which time the Lifetime Benefit Purpose has logically
expired. These disclosed facts, when coupled with the sincere and definitive
testimony of Mr. Ross that his pension and its goal of a Lifetime Benefit
Purpose were not only primary, but paramount, shows that the primary purpose
(albeit coupled with other subordinate purposes), remained the provision of lifetime
retirement benefits to Mr. Ross in respect of his service as an employee.
[45]
The Minister’s
reasonable conclusions (as held on judicial review) related to these other
purposes, while relevant to the decision regarding the revocation of the JFI
Plan, are neither determinative to nor binding on the issue before this Court
as to whether misrepresentations were made to permit reassessment outside the
normal period.
[46]
As to remuneration and
employee status, the Respondent asserts that the comparatively small income
generated by JFI and paid to Mr. Ross, the lack of long term existance of a
business and the non-existing expressed leave of absence constitute
misrepresentations of his status as employee and level of remuneration.
[47]
Aside from the plain
fact that the Minister was never confused by any such assertions, the question
remains as to whether these factual references can constitute
misrepresentations at all in the context of information supplied under the Act
relevant to the 2001 registration and the “facts upon which the registration
rested.”
[48]
The comparatively small
income generated and the short life of the business relate to the fact that the
business failed. This fact was not misrepresented, nor was the Minister
confused. There were reasons for its failure -- sluggish financial markets
after the 9/11 attacks, the delay in Mr. Ross’ accreditation or lack of
attractiveness of the financial products he attempted to sell – but none amount
to a misrepresentation as to the reasonably held belief regarding Mr. Ross’
projected income. Factually, based upon Mr. Ross’ evidence and the Minister’s
absence of evidence suggesting otherwise, it was reasonable for Mr. Ross to
conclude that his remuneration would approximate his previous income if the
business were successful. The Minister has not asserted she did not know of the
embryonic nature of the enterprise. Instead, the JFI Plan was registered on the
basis of both parties understanding the inherent business risk. As with each
Appellant, the Minister, not the Appellant, chose to certify the JFI Plan in
the company’s start-up phase. Similarly, the Minister chose to delay revocation
and reassessment beyond the normal assessment period.
[49]
Moreover, on the basis
of Taylor v Minister of National Revenue, 88 DTC 1571, Justice
Rip, as he then was, concluded that the receipt of remuneration is not
essential to the finding at law that an officer is an employee. Additionally,
in the present case, Mr. Ross on balance likely did receive a salary and, if
so, the determination by the Federal Court of Appeal in Scott v Canada, [1994] FCJ No. 3 (QL), would not be necessary. Mr. Ross was an employee within
the ordinary and legal sense of the word based upon the facts before the Court
and his unshakeable reasonably held belief.
[50]
As to employee status,
Mr. Ross was an employee of the enterprise, likely earned and was allocated T-4
income and certainly accrued it and paid tax on it. This subsequent affirming
conduct, while not to the extent of his expectations, or to the Minister’s for
the matter, demonstrated he was an employee of the enterprise within the
ordinary sense and meaning of the words. The proffered “window dressing”
argument is relevant to the Minister’s decision to revoke the registration not
to the factual issue of whether misrepresentation has occurred in connection
with that fact. As to the factual error regarding the leave of absence, the
Minister was not in the least misled by it, nor frankly at the stage it arose
did it assuage, dissuade, expedite or delay the Minister’s audit, conclusions,
revocation or reassessment. It was simply an incorrect statement and not germane
to the onus the Minister has to show a misrepresentation surrounding
remuneration or status of relationship in information supplied relevant to the basis
for the registration of the JFI Plan and the ability to reassess in the 2001
taxation year. This is demonstrated by the complete non-effect it had on the
process, arising when it did, in 2003.
[51]
As to the issue of
reasonableness of belief and the clearly differing view, interpretation and
emphasis placed by each of Mr. Ross and the Minister on the issue of employment
status and expectation of comparable income, the Court references Justice Lamarre
in the case of Petric v Canada, 2006 TCC 306, [2006] TCJ No. 230 (QL).
Although the matters before the Court in Petric dealt with fair market
value rather than employment status and projected income, the following
conclusions are helpful in describing the degree of ministerial reliance upon
the alleged misrepresentation. Specifically at paragraph 38 and a portion of
paragraph 40 as follows:
38 […]
The matter of fair market value is a controversial issue, to be settled on the
basis of the interpretation of the facts in evidence, as is the question of
whether proceeds of disposition should be characterized as income or as a
capital gain (Regina Shoppers Mall Limited) or of whether corporations
are associated (1056 Enterprises Ltd.). The mathematical error in Nesbitt,
by contrast, is a clear-cut issue, which even the taxpayer in that case
conceded to be non-controversial.
40 […]
Although fair market value is ultimately a question of fact to be resolved by
the trier of fact, it is mostly a question of opinion answered by analysing
different methodological approaches. Certainly the Minister is entitled to
disagree with a taxpayer’s view of fair market value and can reassess, within
the limitation period, on the basis of his own evaluation. However, where the
issue is whether the Minister should be allowed the benefit of an exception to
the application of the limitation period, it must be shown that the taxpayer
made a misrepresentation in filing his or its tax return. In the case at bar, I
am of the view that unless it can be said that the appellants’ view of fair
market value was so unreasonable that it could not have been honestly held,
there was no real misstatement. […] Besides, even if the Minister was of the
opinion that there was misrepresentation, the fact is that he did not rely on
the misstatement as he obtained his own appraisal, knowing of the existence of
the emphyteutic lease, and even reassessed the appellants on the basis of that
appraisal in 2000, within the limitation period. At that point, there was no
further reliance on any representation made by the appellants in filing their
tax returns.
[52]
While Mr. Ross was not
ultimately correct as to the level of comparable remuneration he obtained, the longevity
of his tenure as an employee or the future accretions to the JFI Plan of
pension benefits, his view in 2000 and 2001 was sufficiently bona fide when
compared to the evidence which must be tendered by the Minister to prove
misrepresentation in information supplied relevant to that period and the
“facts upon which the registration rested.” Information supplied in 2003 about income
in 2003 was incorrect, but unless it can be said that Mr. Ross’ view of the
primary purpose, his employment status and expected income at the time of, and
as the basis for, registration could not be honestly held during the time such
statements were relevant, then there is no material misrepresentation relative
to the return or, as is relevant in this matter, the information supplied under
the Act relative to primary purpose, remuneration and employee status.
[53]
Logically and legally,
one might ask why should any misrepresentation in information supplied be
tethered temporally to the registration of the JFI Plan. Logically, just as a
2003 misrepresentation on a return cannot reopen a 2001 tax return (with
certain exceptions), information supplied, dated and reflective of a 2003 state
of affairs should not impact, as misrepresentations, the registration process
where the misrepresentations are otherwise unrelated in substance and time to the
“facts upon which the registration rested.” Legally, the 2001 tax year in
question is outside the normal reassessment period. To allow the Minister to
utilize information supplied, dated and reflective of a 2003 state of affairs (as
a misrepresentation) where the misrepresentation is not contrary to the “facts
upon which the registration rested” would enhance reassessment rights outside
the normal reassessment period beyond those afforded the Minister where a 2003
return contained a then current misrepresentation, but a previous year, which
contained none, is beyond the normal reassessment period.
[54]
Subsection 152(4.01) of
the Act [with emphasis added] likely provides some instruction in this
regard.
152(4.01)
Notwithstanding subsections (4) and (5), an assessment, reassessment or
additional assessment to which paragraph (4)(a), (b) or (c)
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,
(a) where paragraph 152(4)(a) applies to the
assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who
filed the taxpayer’s return of income for the year that is attributable to
neglect, carelessness or wilful default or any fraud committed by the
taxpayer or that person in filing the return or supplying any information
under this Act, or
(ii) a matter specified in a waiver filed with the Minister in
respect of the year; and
[55]
In Hans v Canada, 2003 TCC 576, 2003 DTC 1065 at paragraph 8, Justice Bowie expands, by analogy, upon
this point;
8 In
my view, the approach that was taken by Mr. Mutch and Mr. Bozyk does not give
proper effect to subparagraph 152(4.01)(a)(i) of the Act. Generally, a
taxpayer becomes immune to reassessment by the Minister for any taxation year
when three years have passed since the initial assessment for that year.
Subparagraph 152(4)(a)(i) creates an exception to permit reassessment in
those cases in which the taxpayer has misled the Minister. Subparagraph
152(4.01)(a)(i) was enacted to ensure that the effect of any such
reassessment is confined to those matters as to which the taxpayer had misled
the Minister. In other words, proof that the taxpayer misled the Minister as to
one category of expense does not become a licence for the Minister to disallow
some or all of the expenses of another category that were allowed in arriving
at the previous assessment, and require that the taxpayer discharge the onus of
proving each one of them on appeal. Proof of misrepresentation of a fact
relating to the computation of the taxpayer’s automobile expenses will reopen
for the Minister all the elements that make up the claim for automobile
expenses in the year, and she may reassess accordingly, but it will not permit
her to revise the previously allowed expenses in other categories such as rent
or utilities.
[56]
Although the reference
is again to misrepresentation in filing the return it is easily applicable and analogous
to information dated, supplied and relevant after the time in question.
By analogy, proof that a taxpayer incorrectly stated a fact referable to and
dated in a subsequent period does not license the Minister to reopen the
assessment in a previous taxation year to which the later dated
misrepresentation does not temporally relate or misrepresent the “facts upon
which the registration rested.”
[57]
Stated slightly
differently, the misrepresentation (whether in a return or in the supply of
information) affording a reassessment beyond the normal reassessment period
must reasonably be regarded as relating to a return or information applicable
to the reassessed tax year. Misrepresentations reasonably related to a period
subsequent cannot be regarded as extending, by virtue of the limitation in
subsection 152(4.01) of the Act, reassessment rights to a previous
taxation year otherwise beyond normal reassessment where such facts do not
relate to the basis upon which registration rested.
[58]
In conclusion, the
evidentiary onus for opening a reassessment beyond the normal period has not
been met factually by the Minister in the Ross Appeal. That hurdle is embedded
in the requirement to establish a misrepresentation material in scope and time
to the reassessment in question: the primary purpose of the JFI Plan, the status
as employee or the level of remuneration all upon which registration of the JFI
Plan rested. To do otherwise creates a “time machine” effect where then current
statements about facts in 2003 may be applied to years and bases for decisions
which are outside the normal reassessment periods notwithstanding that reasonable
beliefs held and facts available in 2001 had not yet been blessed with the
corrective certainty of the fullness of time. Accordingly, reassessment of the
taxpayer was indeed afforded to the Minister in respect of Mr. Ross for
taxation year 2001, just not outside the usual period given the timing and
facts of the pleaded misrepresentations within information supplied under the Act
which do not relate to the “facts upon which the registration rested.”
(ii) Greenhalgh Appeal
[59]
In the Greenhalgh Appeal,
subparagraphs 11(a), (b), (c) and (d) of the Reply also contain the assertions
of facts related to the basis for reassessment. Such assertions are materially
identical to those contained in the Ross Appeal.
[60]
Evidence certainly
exists through admissions that Ms. Greenhalgh had other purposes in mind other
than the Lifetime Benefit Purpose in establishing the 1346687 Plan and
transferring the assets from the Teacher’s Pension Plan to it. Nonetheless, the
question remains: did these additional purposes supplant, through Ms.
Greenhalgh’s conduct, the pre-eminent Lifetime Benefits Purpose? On the basis
of the evidence summarized previously in these reasons and heard at the hearing
of this Appeal, the Minister has not discharged this onus and the primary
Lifetime Benefit Purpose has not been dislodged.
[61]
As to the issue of
misrepresentation as to employee status and remuneration, it is also reasonable
for the Court to conclude the following facts:
a)
the craft vinegar
business did employ Ms. Greenhalgh to the extent she worked aggressively and
diligently for her company in the sincere hope and anticipation of being paid
from revenue;
b)
the business failed,
not because of lack of effort, but unforeseen personal circumstances: her
spouse/business partner had a stroke, her marriage ultimately dissolved and the
economy was not robust during that period;
c)
the Minister appreciated
the novelty of the business and its inherent risk and controlled the registration,
revocation and reassessment process;
d)
employment income,
albeit notional and perhaps unrecognizable, was accrued and tax was paid
thereon by Ms. Greenhalgh;
e)
all businesses must
commence at some point in a vacuum of historical financial data and the
presence of a real possibility of failure; and
f)
whatever the relatively
minor misstatements filed by the plan administrator, these were quickly
corrected (for example, the suggestion of a leave of absence within 60 days)
and came at a point when their effect was de minimis as to the employee
status and remuneration paid in 2000 and 2001 and as to the “facts upon which
the registration rested.”
[62]
It is not necessary to
repeat the extracts from the authorities cited above, but each of Taylor
and Petric support the Court’s finding that the lack of income, business
failure and lack of benefits paid into the 1346687 Plan do not dislodge Ms.
Greenhalgh’s bona fide belief and tangible actions that she was, during the
relevant years at the outset of the venture, an employee of the Company who
would have been, but for the business failure, reasonably remunerated for her
services. A misrepresentation as to primary purpose has not been established.
[63]
Similarly, a review of
the materials supplied in 2003 and beyond do not purport to misrepresent salary
or status in the relevant period to the “facts upon which the registration
rested.” To that extent, and for the reasons referenced above, facts asserted
and dated in 2003 related to 2003 cannot be retroactively utilized as a
misrepresentation in supplying information relevant to a process and decision
whose factual bases were not altered.
[64]
If in 2003, a statement
made regarding a period or the “facts upon which the registration rested”
constituted a misrepresentation, this would be an entirely different matter,
but this Court finds such is not the case. Therefore, the reassessment of the
taxpayer is statute-barred on the basis of no misrepresentation having been
made in supplying information under the Act relevant to the decision of
registration and the related basis upon which it rested.
(iii)
Martiniuk Appeal
[65]
Likewise in the
Martiniuk Appeal, identical factual assertions were made by the Respondent in
subparagraphs 11(b), (c) and (d) of the Reply regarding misrepresentations
regarding employee status, primary purpose and remuneration.
[66]
Similar to the other
two appeals, there is ample evidence that Mr. Martiniuk was pleased to learn of
additional collateral benefits possibly conferred by establishing the Excalibur
Plan: succession benefits, surplus funds distribution and more proximate
financial decision making. Again, the Court asks, did these additional benefits
dislodge, on the basis of conduct and reasonable belief of Mr. Martiniuk at the
time of formation, the paramountly of the Lifetime Benefit Purpose. The direct
testimony of Mr. Martiniuk and his overall actions at the time as described
above lead the Court to the balanced conclusion that Mr. Martiniuk did not
misrepresent the primary nature of the Lifetime Benefits Purpose.
[67]
In assessing the
evidence of Mr. Martiniuk regarding employee status, and remuneration, the
following conclusive summary may be made:
a)
Mr. Martiniuk pursued
and worked at his new employment as a paralegal, firstly with another paralegal
service provider and then as an employee of Excalibur.
b)
Mr. Martiniuk accepted
cases and otherwise undertook the usual steps of beginning the business in June
of 2000.
c)
As a result of the
business’ slow progression, Mr. Martiniuk began drawing his pension in 2001,
declared same as pension income and paid the tax; he paid tax on his small
salary attributed to him during a similar reporting period.
d)
After resuming work for
another public body in 2005, Mr. Martiniuk transferred his pension back into
OMERS from which he drew a pension which he has done continuously since 2001.
e)
The business, which
factually operated, never achieved the anticipated level of income nor general
success, but it did operate.
f)
Minor misstatements and
errors made in subsequent communications never departed from the consistent
view of the primary Lifetime Benefits Purpose of the Excalibur Plan and Mr.
Martiniuk’s view of his status as an employee.
g)
Mr. Martiniuk’s record
of his being an employee and his anticipated and desired level of future
earnings existed and were documented, all of which bear the hallmarks of
credibility and consistency.
[68]
In fact, Mr.
Martiniuk’s credibility was enhanced by his balanced view of the possibility of
doing well against the “ridiculous” clairvoyant exercise of predicting income
for a new start up business. The Respondent suggests this is evidence of a lack
of consistency and commerciality. Factually, based upon Mr. Martiniuk’s
demeanour and evidence on the point, the Court finds the opposite.
[69]
As with the other
appeals, the facts contained in any information dated and supplied in 2003 and
beyond related to then current or subsequent periods and were not referable to
the relevant earlier periods or basis of registration in respect of which the
reassessment is now sought. No misrepresentation was made in respect of the
supply information relative to the reassessed taxation year nor to the basis
upon which the registration rested. Accordingly, based upon the facts and the
onus which the Respondent bears and has not discharged, the reassessment is not
permitted beyond the normal reassessment period.
b) Interpretation Issues
(i) Fraud Only Issue
A. Alternative views of
subparagraph 152(4)(a)(i)
[70]
In light of the factual
findings above, the Fraud Only Issue will not determine the outcome of these
appeals. However, given the genuine legal dispute related to the subparagraph in
question and the amount of time allocated by the parties on this issue, the
Court feels bound to make some general observations. The Appellants’ joint position
is that misrepresentations made in supplying information under the Act
do not, in the absence of misrepresentations in the return, allow the Minister
to reassess outside the normal period. Unsurprisingly, the Respondent argues the
plain wording of the section allows reassessment outside the normal period
where misrepresentation occurs only in respect of information supplied. Presently,
this singular issue has not been directly considered by any Canadian court.
B. Absence of Clear Legal
Authority
[71]
The implications of
these two positions highlight two different standards of conduct for taxpayers.
Aside from minor authority in obiter dicta, courts have not considered
whether paragraph 152(4)(a) requires fraud or only misrepresentation in
the supply of information under the Act : Cooper v Canada, [1998]
TCJ No. 919 (QL), [1999] 1 CTC 2312, and Ridge Run Developments Inc. v
Canada, 2007 TCC 68, 2007 DTC 734. Therefore, the consequences of such an
interpretation ought to be examined to see if the object, spirit, and purpose
of the provision are complied with. If the Appellant’s interpretation is
correct, there is a different standard of conduct for the taxpayer in filing the
return, as opposed to supplying information outside the return. Mere
misrepresentations (due to neglect, carelessness, or wilful default) are only
sufficient to reassess outside the normal period if those misrepresentations are
made in the return. The consequence of this interpretation is that taxpayers
may be neglectful, careless, or even commit wilful default in representations
made to the Minister (provided same are not made within the return) without
triggering the unlimited period for reassessment allowed in subparagraph
152(4)(a)(i).
[72]
On the other hand, the
tax system must encourage candour on the part of taxpayers in dealing with the
Minister, if the Minister subsequently decides to audit the taxpayer’s filing.
According to the Respondent’s interpretation, paragraph 152(4)(a)
provides such a mechanism. The Minister’s ability to accurately administer and
enforce the Act may be seriously impeded if the Minister’s right to reassess
outside the normal period is removed where the Minister’s officers have been
misled by the taxpayer’s misrepresentations in supplying information during the
audit or appeals process.
C.
Textual, Contextual and
Purposive Analysis
[73]
The Appellants’
position is that the Minister never had the inceptive right to reassess outside
the normal period in such circumstances. The Appellants’ interpretation of
paragraph 152(4)(a) requires that misrepresentations made outside the
return must rise to the level of fraud before the unlimited period for
reassessment is triggered. Similarly, a taxpayer might reasonably rely on the
provision, as currently drafted, to apply a higher standard to information
provided in filing a return, as opposed to information supplied in registering
a pension. This interpretation is possibly supported in the context of pension
registrations, since the pension registrations require taxpayers to estimate
future earnings. Other less formal representations might be made verbally to
CRA officials upon questioning, in which case the taxpayer might not have documentation
to verify the verbal representation at hand. Tax returns, by contrast, require
a taxpayer to report known amounts from the past tax reporting period.
[74]
It is at least arguable
that a taxpayer, in reporting known amounts in filing a return, should be held
to a high standard of accuracy and care, such that a mere misrepresentation
(attributable to neglect, carelessness or wilful default) in a return supports
reassessment outside the normal period. The estimation of possible future
amounts and collateral information, such as estimates made in a pension
registration or in verbal representations to CRA officials, might reasonably
allow for a more lenient standard. Paragraph 152(4)(a) as presently read
may provide for such distinct standards.
[75]
The Respondent’s submissions
are that a textual, contextual and purposive analysis supports the Crown’s
interpretation of paragraph 152(4)(a). In re-formatting the subsection
for clarity, the Respondent argues that “the Minister may reassess beyond the
normal reassessment period in cases where a taxpayer”;
a)
has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default in filing the return or in supplying any information under the Act;
or
b)
has committed any fraud
in filing the return or in supplying information under the Act”
[paragraphing added for clarity].
[76]
The Respondent’s
submissions state that one of the purposes of paragraph 152(4)(a) is to
promote candour in taxpayer as in Cooper. However, if the purpose of the
provision were to apply the same standard of candour to information supplied in
the return as to information supplied outside the return, the provision ought
to have been worded unambiguously to apply that standard uniformly (as
reflected by the necessary re-ordering of the subsection above for the purpose
of illustration and precision). The provision, as currently drafted, can be
read to support different standards of candour. The Respondent’s submission
reflected by the proposed wording above is itself indicative of the type of
unambiguous wording that might have been enacted in order to give effect to a
uniform standard.
D. Conclusion
[77]
A purposive interpretation
of paragraph 152(4)(a) may lead to the conclusion that there is no
appreciable difference in the context of information supplied within or outside
a return sufficient to justify different standards of conduct for providing the
two types of information. The primary question is not whether different
standards should or should not be applied; the question is whether or not the Appellants’
reading of the statute can be supported or refuted by the longstanding
principles of statutory interpretation. In the present case, there is ambiguity
in the wording of the Act that cannot be resolved by applicable principles
of statutory interpretation alone. Where there is such ambiguity in the wording
of tax legislation, the benefit of the ambiguity goes to the taxpayer: Placer
Dome Canada Ltd v Ontario, 2006 SCC 20 at paragraph 23. Applying
that logic, if it were necessary to determine in this matter, the Minister
would not be entitled to reassess outside the normal period under paragraph
152(4) where the taxpayers’ only misrepresentations were made outside the
returns and occurred solely in supplying information under the Act.
(ii)
Timing and
Transfer Issues
A.
Timing Issue
[78]
On the issue of the
non-retroactivity of the deemed receipt by the taxpayer as asserted by the
Appellant, the Appellant could not have succeeded for the following reasons. In
both Astorino v Canada, 2010 TCC 144, 2010 DTC 1112, and Bonavia v
Canada, 2009 TCC 289, 2009 DTC 1167, this Court and the Federal Court of
Appeal have stated that a revoked registered pension plan will create a taxable
income inclusion to the taxpayer retroactive to the year of transfer, subject
to the different periods of reassessment described in detail above. It is noted
that each taxpayer has conceded that he or she directed the transfer. Given the
Court’s findings on different grounds above, this point is moot.
B. Transfer Issue
[79]
Again, and although no
longer relevant to the outcome of these Appeals, the Supreme Court of Canada in
Neuman v Canada, [1998] 1 S.C.R. 770, has established that the beneficial
receipt of the property in the hands of a trustee is sufficient for the
purposes of subsection 56(2) (deemed receipt) provided that:
a)
the funds constitute a
payment or transfer made to a person other than the beneficiary;
b)
the beneficiary directed
or concurred with the transfer;
c)
the payments were for
the benefit of the beneficiary;
d)
had payment been made
directly to the beneficiary, such payments would have been taxable under
subparagraph 56(1)(a)(i) of the Act.
[80]
Factually, all of these
criteria have been met in these Appeals since, respectively,
a)
funds were transferred
from one plan to another;
b)
the Appellants directed
the transfer;
c)
no other persons were
in the plans and therefore only the Appellants could be beneficiaries; and
d)
if paid directly (as
were the surplus payments) same would have been taxable,
Therefore the Appellant would not have otherwise
succeeded on these grounds.
V. Summary
[81]
For the reasons above,
the Appeals are allowed on the basis that the Minister has not proven on
balance that misrepresentations were made by any of the respective Appellants,
in the context of information supplied under the Act, relevant to the
taxation years reassessed or to the factual basis upon which the plan
registrations rested. The Appellants are awarded their costs in accordance with
Schedule II of the Tax Court Rules (General Procedure) on a party and
party basis.
Signed at Ottawa, Ontario, this 23rd
day of October 2013.
“R.S. Bocock”
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