The Queen v. B. & J. Music Ltd., 80 DTC 6219, [1980] CTC 287 (FCTD)

Grant, DJ:—(1) This is an appeal by the Deputy Attorney General of Canada on behalf of Her Majesty the Queen from the decision of the Tax Review Board in respect of the defendant’s 1974 taxation year dated January 19, 1978, whereby that Board allowed the defendant’s appeal and directed the Minister to either delete the cumulative deduction account calculation from the notice of assessment issued for that year or if on consideration he considered some calculation was required as from June 24, 1974, to make such calculation and amend the assessment accordingly.

(2) The parties agreed upon a Statement of Facts which had been signed by the solicitors for both parties, and filed that it may be treated as evidence of all the facts therein set forth. As the same covered all relevant matters no evidence was heard vive voce. Such statement read as follows:

STATEMENT OF FACTS

1. The Defendant is a company incorporated under the laws of the Province of Ontario.

2. Prior to June 24, 1974 the Defendant was controlled by non-residents of Canada.

3. On June 24th, 1974, there occurred a transfer of all of the shares of the Defendant so that on that date it qualified as a Canadian-controlled private corporation as defined by s 125(6)(a) of the Income Tax Act RSC 1952 c 148 as amended by s 1 of c 63, SC 1970-71-72 (the “Income Tax Act”).

4. The Defendant was not a Canadian-controlled private corporation throughout its 1972, 1973 and 1974 taxation years and therefore did not qualify for the small business deduction in its 1972,1973 and 1974 taxation years within the meaning of s 125(1) of the Income Tax Act.

5. The Defendant was assessed for its 1974 taxation year by Notice dated August 27, 1975 and numbered 0469724 (the “Assessment”).

6. The Assessment did not change the total Federal tax payable in the amount of $71, 066.12 originally reported by the Defendant.

7. The form attached to the Notice of Assessment and described as the T7W disclosed that the Minister of National Revenue (“the Minister’) had made a calculation in respect of the Defendant’s cumulative deduction account.

8. The Defendant objected to the Assessment, which Assessment was confirmed by Notification of the Minister.

9. The Defendant appealed the Assessment, to the Tax Review Board.

10. The Defendant’s Notice of Appeal to the Tax Review Board submitted:

that the cumulative deduction account calculation be deleted from the Notice of Assessment issued for the 1974 taxation year, which calculates the Cumulative deduction account for each of the taxation years 1972, 1973 and 1974.

11. The tax Review Board allowed the Defendant’s appeal thereto and in its decision directed the Minister to either delete the cumulative deduction account calculation from the Notice of Assessment issued for the 1974 taxation year entirely, or if on reconsideration he considered that some calculation was required under the Income Tax Act as from June 24, 1974, to make such calculation and amend the assessment accordingly.

12. The Defendant’s taxable incomes for its 1972, 1973 and 1974 taxation years respectively were $148,864.07, $255,675.84 and $175,252.58.

13. The Defendant paid no dividends in its 1972, 1973 and 1974 taxation years.

14. The Defendant in filing its income tax returns for its 1972, 1973 and 1974 taxation years did not calculate its cumulative deduction account as defined in s 125(6)(b) of the Income Tax Act.

15. The Minister in computing the balance in the Defendant’s cumulative deduction account as of the 31st of December 1974, included therein in accordance with his interpretation of s 125(6)(b) of the Income Tax Act, the sums of $148,864.07, $255,675.84 and $175,252.58.

16. Attached hereto as Exhibit “A” is a true copy of the Defendant’s 1974 Corporation Income Tax Return with relevant documents.

17. Attached hereto as Exhibit “B” is a true copy of the Notice of Assessment dated August 27th, 1975, in respect of the Defendant’s 1974 taxation year with the attached T7W form.

The appellant’s first ground of appeal was that the Tax Review Board had no jurisdiction to entertain this appeal or render the direction that it did. The following sections of the Income Tax Act, RSC 1952 c 148 as amended by section 1 of c 63, SC 1970-71-72 are relevant to this submission:

Assessment

Section 152

152.(1) The Minister shall, with all due despatch, examine each return of income and assess the tax for the taxation year and the interest and penalties, if any, payable.

IDEM

(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

Objections to Assessment

section 165

165.(1) A taxpayer who objects to an assessment under this Part may, within 90 days from the day of mailing of the notice of assessment, serve on the Minister a notice of objection in duplicate in prescribed form setting out the reasons for the objection and all relevant facts.

SERVICE

(2) A notice of objection under this section shall be served by being sent by registered mail addressed to the Deputy Minister of National Revenue for Taxation at Ottawa.

DUTIES OF THE MINISTER

(3) Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess, or

(b) not applicable

and he shall thereupon notify the taxpayer of his action by registered mail.

APPEAL

section 169

169. Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Review Board to have the assessment vacated or varied after either

(a) the Minister has confirmed the assessment or reassessed, or

(b) not applicable,

but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed.

DISPOSAL OF APPEAL

Section 171

171.(1) The Board may dispose of an appeal by

(a) dismissing it, or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

APPEAL

Section 172

172.(1) The Minister or the taxpayer may, within 120 days from the day on which the Registrar of the Tax Review Board mails the decision on an appeal under section 169 to the Minister and the taxpayer, appeal to the Federal Court of Canada.

The return filed by such taxpayer for the year 1974 indicated total federal tax payable by it for such year as $71,000.12. The Minister in his notice of assessment did not change the amount of such tax as calculated by the taxpayer but rather confirmed it. The taxpayers complaint herein will be better understood after studying the sections of the Act which provides some relief from income tax to Canadian-controlled private corporations.

SMALL BUSINESS DEDUCTION

Section 125

125.(1) There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the year, a Canadian- controlled private corporation, an amount equal to 25% of the least of

(a) the amount, if any, by which

(i) the aggregate of all amounts each of which is the income of the corporation for the year from an active business carried on in Canada,

exceeds

(ii) the aggregate of all amounts each of which is a loss of the corporation for the year from an active business carried on in Canada,

(b) not applicable,

(c) the corporation’s business limit for the year, and

(d) the amount, if any, by which the corporation’s total business limit for the year exceeds its cumulative deduction account at the end of the immediately preceding taxation year,

except that in applying this section for a taxation year after the 1972 taxation year, the reference in this subsection to “25%” shall be read as a reference to “24%” for the 1973 taxation year, “23%” for the 1974 taxation year, “22%” for the 1975 taxation year, and “21 %” for the 1976 and subsequent taxation years.

AMOUNT OF BUSINESS LIMIT AND TOTAL BUSINESS LIMIT

125.(2) For the purposes of this section,

(a) a corporation’s “business limit” for a taxation year is $50,000, and

(b) its ‘‘total business limit” for a taxation year is $400,000,

unless the corporation is associated in the year with one or more other Canadian- controlled private corporations in which case, except as otherwise provided in this section, its business limit for the year is nil and its total business limit for the year is nil.

DEFINITIONS

Section 125

(6) In this section,

CANADIAN-CONTROLLED PRIVATE CORPORATION

(a) “Canadian-controlled private corporation” means a corporation that is a Canadian corporation other than a corporation controlled, directly or indirectly in any manner whatever, by one or more non-resident persons, by one or more public corporations or by any combination thereof; and

CUMULATIVE DEDUCTION ACCOUNT

(b) “cumulative deduction account” of a corporation at the end of any taxation year means the amount, if any, by which the aggregate of

(i) the corporation’s taxable incomes for taxation years commencing after

1971 and ending not later than the end of the particular year, and

(ii) 4/3 of the amount deductible under section 112 or subsection 113(1) from the corporation’s incomes for those years

exceeds the aggregate of

(iii) 4/3 of the taxable dividends paid by the corporation in those years, and

(iv) 4 times the amount, if any, by which the corporation’s refundable dividend tax on hand (within the meaning assigned by subsection 129(3)) at the end of the particular year exceeds its dividend refund (within the meaning assigned by subsection 129(1)) for the particular year.

The defendant herein complains that the Minister had added in the portion of the Income Tax form provided for calculation of the cumulative deduction account of the taxpayer, when it is applicable, the figure of $404,539.91 as the amount thereof which was the total of the company’s taxable income for the two previous years, 1972 and 1973. The defendant at such part of the form had carried out the sum of $175,252.82. The Minister had also at the bottom of such form inserted the sum of $579,792.47 which was a total of such taxable income for such three years and indicated such sum to be the amount of the taxpayers cumulative deduction account at the end of the 1974 tax year.

In a further memorandum attached to the notice of assessment the Minister had given particulars of such amount as follows:

The amount of $579,792.47 in the cumulative deduction account represents the following:

	TAXABLE INCOME
1972	$148,864.07
1973	$255,675.84
1974	$175,252.58
	$579,792.49

These amounts are the corporations taxable income for the taxation years commencing after 1971. If these figures had been binding on the taxpayer in subsequent years it would have lessened or probably extinguished the deduction to which that company might have been entitled to under paragraph 125(1)(d) in subsequent years after it had become a Canadian- controlled private corporation. The company’s “corporate business limit” under the above subsection 125(2) was $100,000 and its “total business limit” was $500,000. When the latter figure is reached in the cumulative deduction account then a company which is entitled to the benefits of the Small business deduction has no further rights to such tax deduction.

There is no requirement in the Act that a taxpayers “cumulative deduction account” be calculated in the returns except in the case of a Canadian- controlled private corporation which in that year is seeking to avail itself of the benefits of subsection 125(1). The Respondent was not seeking and was not entitled to any such relief in its 1974 year of taxation because it had not qualified as a Canadian-controlled private corporation throughout that year. Such calculation by the Minister did not effect in any way the amount of tax payable by the company in that year. If in some future year when the defendant had become a Canadian-controlled private corporation, the amount of the company’s cumulative deduction account should become a factor in assessing the amount of income tax payable by it, it would be open to the company at that time to have such question decided and the Ministers calculation on the company’s 1974 income tax would not in any way be a barr thereto or binding either upon the company or the Minister.

In the present case the Minister has made no change in the amount of tax calculated by the taxpayer but has rather confirmed it. In Vineland Quarries and Crushed Stone Limited v MNR, [1970] CTC 12; 70 DTC 6043, Cattanach, J at 15 [6045] stated:

As I understand the basis of an appeal from an assessment by the Minister, it is an appeal against the amount of the assessment.

In Harris v MNR (1965), 2 Ex CR 653 (64 DTC 5332) my brother Thurlow said at page 662:

. . . On a taxpayer’s appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. . ..

In Her Majesty the Queen v Garry Bowl Limited, [1974] CTC 457; 74 DTC 6401, Thurlow, J (as he then was) stated at 459 [6402]:

In the present case as it was admitted that the respondent’s appeal to the Tax Review Board was nil assessments for the years 1967,1968 and 1969 the question arises whether in view of the decision of the Supreme Court of Canada in Okalta Oils Ltd v MNR, 1955 SCR 824 (55 DTC 1176), there is any serious or fairly arguable question of law remaining to be argued as to the respondent’s right to appeal therefrom. In my opinion there is not.

This Court has jurisdiction in this appeal to reverse the Board even though the latter had no power, jurisdiction or authority to make the order in question. MNR v Gunnar Mining Limited, [1970] CTC 152; 70 DTC 6135 where Jackett, P stated at 154 [6137]:

In my view, this right of appeal extends to a case where the attack is based on a lack of jurisdiction in the Tax Appeal Board to deliver the judgment attacked** and, that being so, it follows that it extends to a case where, as I conceive it to be here, the attack is really based on a contention that while the matter falls within the Board’s jurisdiction, that Court had no power or authority to deliver the judgment under attack.

** See Provincial Secretary of Prince Edward Island v Egan, [1941] SCR 396, per Duff, CUC at 399:

The Respondent relied upon the cases of Earl W Gardner v MNR, 39 Tax ABC 162; 65 DTC 591: where it was said at 163 [591]:

The material on which counsel for the Minister based his motion consisted of an affidavit made by one of the solicitors employed in the Department of National Revenue who had knowledge of all the documents which are or have been in the custody or possession of the Minister relating to the matters in question in this appeal. After pointing out that the appellant was finally re-assessed for the amount of tax declared by him in his returns covering the respective taxation years 1959 and 1961, he stated that the appellant was not claiming in his Notice of Appeal—“that the amount of tax payable assessed by the respondent herein be increased or be varied”. In other words, as already mentioned, the Minister’s position was that, since there was no dispute as to the amount of tax actually payable in the years under appeal, the Board had no jurisdiction to entertain the appeal. Admittedly, the Minister had introduced matters into his computation of the appellant’s tax in each of the taxation years 1959 and 1961 which, while they did not change the amount of tax payable, were obviously included with the hope of enabling the Minsiter to comply in due course with the provisions of section 85B of the Act dealing with special reserves.

and Antoine Hullman and Gabrielle Hullman v MNR, [1973] CTC 2106; 73 DTC 94; where it was said at 2107 [95]:

However, if in spite of nil assessment the taxpayer’s rights pursuant to the Income Tax Act have not been exhausted in respect of the taxation year to which the nil assessment pertains, and the provisions of the Act confer rights to the taxpayer notwithstanding the nil assessment such as, for example, the right of a taxpayer to carry business losses back to a previous year or to dispute a reserve which the Minister had set up in order to arrive at the nil assessment although the taxpayer had not claimed the reserve, I am of the opinion that the taxpayer cannot be precluded from appealing the nil assessment in order to establish and exercise an existing right conferred on him by the Act because it might be of great importance to him at that time to find out how large the loss is which he may apply to the previous or future years or how great a reserve he has to account for in future years.

as authority for the proposition that an appeal can be properly taken by a taxpayer where the assessment of the Minister is nil or is one showing no tax payable. Both these cases are decisions of the Tax Review Board and in each of them the assessment made by the Minister effected some existing legal rights of the taxpayer which were relevant for the returns for the year in question.

In the present case no legal right of the taxpayer is affected by the Ministers calculation or his statement as to the status of the taxpayer’s cumulative deduction account sent with his confirmation of the company’s tax liability as shown in its return for that year.

The Gardner decision above referred to was a judgment on an interim motion and is at variance with the judgment at trial which is reported Gardners MN R, [1967] Tax ABC 293; 67 DTC 246 at 296 [248] the Assistant Chairman of the Board’s giving judgment stated:

There is much to be said for this point of view, but it suffices to hold, as is now done, that, despite the somewhat unusual procedure followed in the assessing done during the period involved, the true tax position of the appellant was not altered or affected thereby and there is no relief indicated that this Board can properly be expected to grant.

I would therefore hold that the Board had no jurisdiction to render the decision it did, because the amount of the tax payable for the year 1974 by the company was not in issue before the Board. The appeal should therefore be allowed and the appeal from the assessment of the Minister dismissed but without costs.