Smerchanski v. Minister of National Revenue, 76 DTC 6247, [1976] CTC 488, [1977] 2 SCR 23

The Chief Justice (concurred in by Martland, Judson, Ritchie, Spence, Dickson and de Grandpré, JJ):*—The two appeals to this Court, one by the individual taxpayer Smerchanski and the second by Eco Exploration Company Limited, a company under his control, raise the same question, namely, whether the two taxpayers are entitled to pursue appeals from certain reassessments for income tax (such reassessments including interest and penalties) in the face of waiver agreements which each signed under seal on July 10, 1964 after taking independent legal advice upon which they acted. In seeking to appeal from the reassessments in the face of the waiver agreements which were witnessed by their advising counsel, the taxpayers contended that the waiver of rights of appeal, otherwise open to them under the Income Tax Act, was not binding upon them because

(1) the waivers were based upon an illegal consideration, namely, the

“For concurring reasons by Pigeon, J (concurred in by Beetz, J) see p 496. stifling of a prosecution for fraudulent tax evasion; (2) they were procured by undue influence or coercion under an implicit threat of such prosecution; and (3) they were contrary to public policy and contrary to statutory policy reflected in income tax legislation respecting a taxpayer’s right to challenge unjust tax assessments or reassessments through the courts. It was the respondent Minister’s contention that even if the waiver agreements were not binding, the taxpayers were, in the circumstances, estopped from pursuing appeals against the reassessments that are in issue here.

Collier, J, before whom the issue of the validity of the waivers came, noted in his extensive reasons, that counsel for the taxpayers abandoned the submission that the agreements of July 10, 1964 were invalid as involving the stifling of a prosecution. That counsel had stated that there was no evidence to support the contention and Collier, J agreed with this view. The learned judge of first instance also concluded that the agreement were not contrary to public policy and morality, that it was open to a taxpayer to waive statutory rights of appeal otherwise available for his benefit if he chose to invoke them, and that, on the evidence, there was no undue influence or duress upon the taxpayers to make the agreements voidable. The individual taxpayer was not an untutored person but a mining geologist who had been active in public life, and he had had competent legal advice from more than one lawyer—indeed, he had had the opinion of accountants as well—and he had accepted the advice and acted upon it. In view of his finding that the taxpayers were bound by their waiver agreements, Collier, J made no finding on the respondent’s assertion of estoppel.

The Federal Court of Appeal, by a majority, dismissed the appeals on the central issue of the binding effect of the waiver agreements. Thurlow, JA (as he then was) for the majority noted that the issue of illegality of consideration had been abandoned at trial, and he said also that the trial judge’s finding against undue influence, duress or coercion was not challenged on appeal, leaving for argument only the question whether the waiver agreements were contrary to public policy and to the provisions of the Income Tax Act. On this issue the majority held against the appellants. MacKay, DJ, who agreed with Thurlow, JA, was also of the opinion that the respondent was entitled to succeed on his submission on estoppel.

In dissent, Bastin, DJ proceeded on grounds which the majority thought were either abandoned or not contested. Since counsel for the appellants relied heavily on the dissent, I set out the conclusions thereof which sufficiently highlight the issue that was argued in this Court. They are as follows:

The inference must be drawn from all these facts that the Minister used the threat of prosecution to compel the taxpayer to relinquish every safeguard inserted in the Act to protect the subject from unjust exactions and to place his assets unreservedly at the disposal of the Minister. This amounted to the imposition of an illegal and unprecedented punishment which he has no power to inflict with or without the consent of the taxpayer.

If the actions of the Income Tax Department in relation to this taxpayer were legal and proper then it follows that a similar course of conduct may be employed to obtain the same surrender of his rights in the case of any delinquent taxpayer of sufficient prominence for the mere threat of prosecution to be an effective form of compulsion. In my opinion this is not justified by the Income Tax Act and is an abuse of the power of the Minister which it is our duty to prevent.

I hold that the document dated July 10, 1964 is invalid on the ground that it was obtained by duress, that it was executed as part of a bargain to stifle a prosecution and that the Minister of National Revenue cannot avoid the duty to assess income taxes according to law, to reveal to the taxpayer the nature of the tax, to permit the taxpayer to question the assessment and to have the assessment reviewed on appeal.

It is well settled law that the doctrine of estoppel cannot successfully be invoked to support an illegal contract. Since I hold that the document in question is invalid no question of estoppel arises. . . .

The appeal to this Court raised only the question of undue influence, duress or coercion as an answer to the waiver agreements and also challenged the respondent’s reliance on estoppel. On the argument as to undue influence, duress or coercion, counsel for the appellants conceded that duress in its common law significance could not be pressed, and he rested mainly on undue influence which, in effect, became a submission that brought back the threat or the stifling of prosecution as the ground for impeaching the waiver agreements.

It will be convenient to deal only with the position of Smerchanski because that of the company is no different save as to the number of and the particular taxation years involved in the two appeals. The document executed by Smerchanski and the statement at the foot of it signed by the witnessing lawyer who acted for Smerchanski are in the following terms:

I, Mark Gerald Smerchanski, of the City of Winnipeg, in Manitoba, Mining Engineer, do hereby acknowledge receipt of Notices of Re-assessment made under the Income War Tax Act, being Chapter 97, Revised Statutes of Canada, 1927, The Income Tax Act, being Chapter 52, Statutes of Canada, 1948, and the Income Tax Act, being Chapter 148, Revised Statutes of Canada, 1952, in regard to my income tax for the taxation years 1945 to 1959, both inclusive, in the following amounts:

1945	$124,453.47
1946	173,413.76
1947	47,303.19
1948	2,292.65
1949	4,562.24
1950	3,751.45
1951	6,046.75
1952	16,125.99
1953	10,304.69
1954	12,567.53
1955	94,231.07
1956	288,994.87
1957	96,739.51
1958	54,858.82
1959	15,964.82
	$951,610.81

I do hereby approve of and consent to the individual amounts involved in each re-assessment which I understand are inclusive of taxes, interest and penalties for each of the said years. I do hereby admit my liability for the amount of the same and I do hereby waive any right of appeal I now or may have in regard to any of the said re-assessments.

I do hereby further acknowledge that the said re-assessments for the years 1955 to 1958, both inclusive, are in substitution for the provisional re-assessments made for those years under dates March 14, 1960, May 1, 1961, April 16, 1962, and June 28, 1963, and I do hereby withdraw the Notices of Objection dated June 10, 1960, June 8, 1961, June 5, 1962 and September 23, 1963, I previously filed in regard to the said provisional re-assessments.

It is understood and agreed that this document is binding upon my heirs, executors and administrators.

IN WITNESS WHEREOF I have hereunto set my hand and seal at Winnipeg, in Manitoba, this 10th day of July, 1964.

“Harry Walsh”	“M G Smerchanski (Seal)
Witness	Mark Gerald Smerchanski

The above acknowledgement, consent and waiver was voluntarily executed before me by the said Mark Gerald Smerchanski of his own free will and accord. The said Mark Gerald Smerchanski has further acknowledged to me that he understands and is fully aware of the nature and effect of the said document.

DATED at Winnipeg, in Manitoba, this 10th day of July, 1964.

“Harry Walsh”

A Barrister-at-Law entitled to practise in and for the Province of Manitoba.

I see no profit, for the purposes of the appeals here, to canvass the facts in any detail. There are two approaches which are open, one of which was that taken by the respondent, whose contention was accepted by the trial judge, and the other that advanced by the appellants. The first view is that the overtures for settlement of a very large tax liability came from the legal advisers of the appellants—and this is conceded by counsel for the appellants before this Court—and that the taxpayers were not directly threatened with prosecution for fraudulent tax evasion but having been made aware of the probability of prosecution they knowingly acted upon the advice of counsel to seek a settlement with the tax authorities to forestall probable prosecution and accordingly accepted, in the light of the facts known to them and to the tax authorities, the terms of settlement proposed by the tax authorities which included immediate payment of the reassessments for tax, interest and penalties without question as to particulars and with waiver of rights of appeal.

Counsel for the appellants urged that the settlement was forced as to its conditions, and especially as to the waiver of right of appeal, by a threat of prosecution which was either not seriously meant, but was used rather as a means of extorting a million dollar settlement without recourse to question or appeal, or, if serious, was an abuse of power by the tax department in its coercive effect to accomplish an end which was open to achievement through lawful processes provided by law.

That the tax authorities took a serious view of Smerchanski’s tax evasion cannot be open to question. The appointment of special counsel to examine the file and to advise on prosecution and his advice to that effect supports this beyond doubt. There were a series of meetings which the taxpayers and their counsel sought and obtained with the tax authorities, and they culminated in a payment by Smerchanski on account of tax liability and in a letter of commitment of July 2, 1964 which was a prelude to the waiver agreements of July 10, 1964. This letter of commitment was signed by counsel for Smerchanski as well as by that taxpayer, and must be regarded as unusual in counsel’s acceptance of an obligation to discharge Smerchanski’s tax liability unless it be that the money for that purpose was already in hand. I set out the letter of commitment which was written to the special counsel retained by the tax department; it is as follows:

Mr C Gordon Dilts,

Barrister & Solicitor,

503 Electric Railway Chambers,

WINNIPEG, Manitoba.

Dear Mr Dilts:

Re: Mark Gerald Smerchanski and

Eco Exploration Company Limited

(no personal liability)

We, Mark Gerald Smerchanski and Harry Walsh, hereby jointly and severally commit ourselves unconditionally to the payment in cash of the total income tax liability of Mark Gerald Smerchanski and Eco Exploration Company Limited (no personal liability) (including interest and penalties) for the years 1945 to 1959, both inclusive, as determined by the Department of National Revenue, such payment to be made upon our being advised by the said Department of the total amount of such liability. It is agreed and understood that the total amount of such liability will be accepted and approved by us without question or reservation and without any demand whatsoever being made of the Department of National Revenue for particulars of the total amount involved. It is further agreed and understood that Mark Gerald Smerchanski will personally assume payment of the total liability as assessed against Eco Exploration Company Limited (no personal liability).

We, Mark Gerald Smerchanski and Exo (sic) Exploration Company Limited (no personal liability) do hereby further unconditionally waive any and all right of appeal from the income tax assessments or re-assessments that are now made or about to be made by the Department of National Revenue for the said years.

This letter will also serve to confirm that all counsel and accountants that have been retained for or on behalf of Mark Gerald Smerchanski and Eco Exploration Company Limited (no personal liability) have been familiarized with the contents of this letter, and that they are all in accord with it and are prepared to the extent applicable to be bound by it.

It is further agreed and understood that the commitments contained in this letter are binding upon the heirs, executors and administrators of Mark Gerald Smerchanski and upon the successors and assigns of Eco Exploration Company Limited (no personal liability).

DATED at Winnipeg, in Manitoba, this 2nd day of July, 1964.

“M G Smerchanski”

“Harry Walsh”

ECO EXPLORATION COMPANY LIMITED

(NO PERSONAL LIABILITY)

Per: “P N Smerchanski”

President

“Phillip Smerchanski”

Secretary

Since it is not contested that a taxpayer may validly waive his rights of appeal against a tax assessment and that no question of public policy is involved to preclude such a waiver, the only issue of importance in this appeal is whether the tax authorities, seriously contemplating prosecution, and by indictment as in the present case, are entitled to exact a waiver of rights of appeai as a binding term of settling a clear tax liability when overtures for settlement are made by the taxpayer and, in consequence, to abandon their intention to prosecute.

There could be no doubt in the present case of the taxpayer’s liability to a large amount of tax even if there be some doubt in his mind that he owed all that the tax authorities claimed. There is no doubt of the enforceability of compromise agreements on liability for disputed debt as an escape from litigation, absent vitiating circumstances. I return then to the one factor that is said to make the waiver agreements herein voidable, and that is that the threat of prosecution lay behind them. I think that leading counsel for the respondent could not have been more candid on this matter and it is clear to me, on the record, that Smerchanski was in jeopardy of a prosecution, of a conviction and of the likelihood of a gaol term unless he could persuade the tax authorities to accept a settlement in full of their tax claim against him, even if this meant a complete capitulation to the terms that were proposed. He knew, and his advisers knew that he was in deep trouble in respect of his tax obligations. The investigation had gone on for some time and, according to the tax authorities, if there was going to be a settlement it would have to be a final one without further recourse. I may note that a successful tax prosecution would not itself have wiped out the tax liability, whatever be the effect that it would have had on unassessed penalties at that time.

I am content to act on the view, which is perhaps somewhat in between the positions taken on the facts by the respective parties, that the tax authorities held the threat of prosecution over Smerchanski but with good grounds and that the latter was aware of this and knowingly made a settlement, however draconian it may look to him in retrospect, which he was only too glad to make to escape the prospect of a conviction and of a gaol term.

Given that the tax department had good grounds for proceeding against Smerchanski and that Smerchanski himself knew it, and indeed acknowledged a tax liability even before the letter of commitment was signed and before the waiver agreement was executed, I cannot agree that the settlement made on the terms of a waiver of rights of appeal is either illegal or voidable. We deal here with a public authority which is under a duty to collect taxes from persons under a duty to pay them and who are subject to penalties for failure to pay and to criminal prosecution for wilful or frauduient tax evasion. The threat of prosecution underlies every tax return if a false statement is knowingly made in it and, indeed, this is inscribed on the face of the tax form. It cannot be that the tax authorities must proceed to prosecution when faced with a dispute on whether there is a wilful tax evasion rather than being amenable to a settlement, be it a compromise or an uncompromising agreement for payment of what is claimed. Here there was not even such a dispute but an acknowledgement of evasion and the taxpayer’s position cannot be stronger when he is a confessed evader than when he has disputed wilful evasion.

I leave to one side situations where the tax authorities, having no substantial case against a taxpayer, nonetheless importune and harass him with the threat of prosecution in order to exact an unjustified settlement. That is not the present situation. Nor is this a situation where a Crown prosecutor, to vindicate a private claim against another, threatens him with prosecution to force a favourable settlement of the claim. The evidence falls very short of any malice against Smerchanski, of any attempt to settle a private grudge, of any use of the powers of the State for private ends.

I did not understand counsel for Smerchanski to contend that the size of the tax settlement itself cast any reflection on the propriety of the waiver agreement. It is idle to speculate what would have happened if he could not have raised the money, or to wonder whether a person in less affluent circumstances would have escaped prosecution when unable to meet the tax authorities’ terms of settlement. There is a good deal of discretion reposed in the tax authorities as to enforcement of the Income Tax Act, and I have no doubt that the courts. within the limits of discretion open to them, would monitor what might appear to be unnecessary severity in dealing with taxpayers despite the fact that they might have been guilty of some wilful breach of the law. There are no such considerations in the present case.

Although I do not think that undue influence exists in this case as a separate basis for impeaching the waiver agreements, it is my view that, assuming that they would be voidable on that ground, Smer- chanski’s conduct would disentitle him to any relief.

In the circumstances I do not find it necessary to deal with the respondent’s assertion of estoppel.

The result to which I would come in this case is encased in broad statutory provisions in both England and the United States. Author- ization for pecuniary settlements instead of instituting criminal proceedings has been part of the tax law in England since 1944 and is now found in the Taxes Management Act, 1970 (UK), c 9, section 105. In the United States, sections 7121 and 7122 of the Internal Revenue Code of 1954 authorize settlements and compromises of tax liability as against civil or criminal proceedings prior to reference to the Department of Justice for prosecution or defence. I do not regard these provisions as necessarily pointing to the common law invalidity of all contractual settlements made in the knowledge of probable prosecution and in order to avoid it. Rather they represent an acknowledgement of practice by seeking to put beyond dispute the power of the tax collector to settle or compromise tax liability, even if there be wilful evasion leaving the taxpayer open to possible or probable prosecution.

I would dismiss the appeals with costs.

Pigeon, J (concurred in by Beetz, J):—I agree with the Chief Justice that these appeals should be dismissed but solely on the view he has expressed that, assuming the waiver agreements would be voidable on the ground of undue influence, Smerchanski’s conduct would disentitle him to any relief.

The appellants abandoned at trial any issue of illegality and they restricted their appeal in this Court to the issue of duress and undue influence. It is apparent that there was no duress in the legal sense and, therefore, undue influence was the only basis on which the appellants really claimed relief from their waiver of the right of appeal from the tax reassessments in issue.

I wish to stress that the question whether the commitments signed by the taxpayers and one of their legal advisers on July 2, 1964 were valid does not arise in this case. The situation here is that, subsequently, reassessment notices were issued and the taxpayers paid in full the amounts assessed as tax, interest and penalties. They have waived their right of appeal to the Court from the reassessments. Such waiver is not illegal or invalid in itself and the only question is whether these taxpayers can obtain relief from these waivers on account of the kind of pressure under which they were executed. Until they obtain such relief their appeals cannot be considered. I agree with the Chief Justice that Smerchanski’s conduct was such as to disentitle them to such relief in any case. In saying this I have particularly in mind the alteration of documents after their return by the Minister subsequent to the reassessments.