Citation: 2009 TCC 310
HER MAJESTY THE QUEEN,
REASONS FOR JUDGMENT
Hugessen D. J.
This is an appeal pursuant to paragraph
169(1)(b) of the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.) (the
Act). The Appellant appealed reassessments issued by the Minister for the 2000
and 2004 taxation years in respect of losses accruing to the Appellant arising
from investments in a limited partnership. The appeal in respect of the year
2004 was subsequently abandoned and is no longer in issue.
The parties have filed
with the Court a Statement of Agreed Facts. In addition some evidence was heard
but it added little to what was revealed in the documents. Those facts which
are relevant to my analysis are as follows.
At all times relevant to this appeal, the
Appellant owned units in a tax shelter limited partnership (the Norfolk
Partnership, herein “Norfolk”). The general partner of Norfolk is Norfolk GP. Pursuant to subsection 165(1.15) of
the Act, Norfolk GP was also the “Designated Partner” of Norfolk. (Under subsection
165(1.15) of the Act, the Designated Partner of a partnership is vested with
certain rights on behalf of all members of a partnership. This includes the
sole right to object to assessments made in respect of the partnership.
For the taxation year ending December 31, 2000,
the Appellant was allocated, and claimed on his personal income tax a
proportionate share of Norfolk’s partnership losses.
The Norfolk Partnership was involved in the
production of films and television shows with other limited partnerships
including the Sentinel Hill Alliance Equicap Millennium Limited Partnership
(the Sentinel Hill Partnership), and Glenelg 2000-1 Master Limited Partnership
(Glenelg-1) and Glenelg 2000-2 Master Limited Partnership (Glenelg-2). All of these partnerships were “associated” in the sense that
they had common promoters.
The Minister, acting through the Canada Revenue
Agency (the CRA) conducted an audit of Norfolk,
as well as the Sentinel Hill and Glenelg Partnerships in respect of losses
claimed for the 2000 taxation year. The auditor of the Norfolk
partnership was the witness Mr. Chan.
During the course of March 2004, counsel for the
CRA and the Norfolk, Sentinel Hill and Glenelg Partnerships
engaged in settlement discussions to resolve adjustments proposed by the CRA
arising from the audit. This resulted in a letter “agreement” signed by both
counsel dated March 31, 2004. The text of that letter is as follows:
March 31, 2004
Mr. Neil H. Harris
Barristers & Solicitors
250 Yonge Street
Dear Mr. Harris:
Re: Sentinel Hill Alliance
Limited Partnership (the
We refer to your settlement
letter of March 29, 2004, and your covering letter of the same date, and
subsequent discussions. We confirm the agreement reached that follows, but
before doing so, we do mention to you that it has been our firm position
throughout that we cannot, and have not communicated to you any information
including possible assessing positions regarding the treatment of other
taxpayers involved in potentially similar transactions. You have understood
and agreed with this position, although we are aware that you emphasized the
importance from your perspective that similar principles be applied to other transactions.
The Canada Revenue Agency (“CRA”)
has agreed to make determinations of the income and loss of the Partnership
(“Sentinel Hill 2000”) and its related production services limited partnership
(the “PLPs”) for their 2000 and 2001 taxation years in respect of production
services transactions carried out by the Partnership and the PLPs, on the
as set out below, the losses realized by the Partnership and the PLPs will be
allowed as claimed by each of them in respect of their 2000 and 2001 taxation
paid by the PLPs to various movie and television production studios, totaling
approximately $55.8 million in 2000, will be accorded Class 14 treatment and
deductible under paragraph 20(1)(a) of the Income Tax Act (Canada) (the
“Act”) on the following basis:
respect to the total remaining fees claimed by the Partnership and the PLPs in
their 2000 taxation years of approximately $109 million in the aggregate:
1. $55,494,000 of Management fees will be allowed as claimed.
million of the aggregate of the amounts claimed as Producer Referral Fees and
financing Fees will be disallowed.
With respect to the 2001 taxation year for the Partnership and the PLPs,
the deductibility of the Management Fee will be treated on a basis consistent
with the treatment set out in paragraph 3 above. The Financing Fee will be
disallowed by the amount of $14,250,000.
upon the issuance of notices of determination pursuant to subsection 152(1.1)
of the Act in accordance with paragraphs 1 to 4 above, the Partnership
and the PLPs will not pursue their rights to appeal such determinations and,
accordingly, will not file Notices of Objection to such determinations pursuant
to section 165 of the Act.
agrees to make determinations of the income or loss of the two Glenelg Limited
Partnerships and the Norfolk Master Limited Partnership (or assessments of
individual investors should determinations not be possible), on the basis
consistent with paragraphs 1 to 4 above provided that the production services
transactions carried out by these partnerships and their related production
services limited partnerships were substantially similar to the transactions
carried out by the Partnership and the PLPs; the CRA has the right to audit to
determine if the transactions are substantially similar. The aforementioned
Partnerships and or investors will not object or appeal.
Partnership and the PLPs will not seek any interest waiver with respect to
determinations of the income and loss for their 2000 and 2001 taxation years in
respect of production services transactions carried out by the Partnership and
the PLPs determinations.
determinations of the income and loss of Sentinel Hill Partnerships and related
production services limited partnerships (the “PLPs”) for their 1998 and 1999
taxation years in respect of production services transactions carried out by
the Partnership and the PLPs, remain with the Appeals Division of the CRA, to
be determined through the normal process.
And it is agreed that any
assessments or determinations of the income and loss of any “2001” Sentinel
Hill Partnership and related production services limited partnerships (the
“PLPs”) for their 2001 and following taxation years in respect of production
services transactions carried out by the Partnership and the PLPs, remain open
to audit by the CRA.
Kindly approve and fax back to Ian MacGregor (613) 941-1221 as soon as
Ian S. MacGregor
Assistant Deputy Attorney General
Tax Law Services
Accepted by: Dated:
Neil H. Harris March
It is common ground that the date of the letter March 31, 2004, was the
last day by which the CRA could issue a determination pursuant to subsection
152(1.4) of the Act.
On the same day, shortly after the settlement
letter was issued and signed by both parties, the CRA issued and posted a
determination for the Norfolk Partnership.
About a month later on April 29, 2004, a Ms.
Chadwick, representing the promoters of Sentinel Hill and the other
partnerships got in touch with Mr. Chan, the auditor for CRA, to advise that
she had discovered an error in the determinations. The amount was relatively
minor in the overall scale of these transactions and amounted to an expense of
approximately $230,000 too much having been allowed to the taxpayer. Mr. Chan
in his evidence readily admitted the error and, since the time for the
determination had expired, he found another, if somewhat irregular, way if not
of correcting the error but of arriving at an approximately similar overall
result. There is no issue on this appeal concerning Mr. Chan's actions.
On June 24, 2004, Norfolk
filed an objection to the March 31st determination in respect of the Norfolk
Partnership. The objection was subsequently “withdrawn” on November 10, 2004
and the Minister shortly thereafter confirmed the determination on November 26,
On August 22, 2005, the CRA issued Notices of
Reassessment against the Appellant in respect of the 2000 and 2004 taxation
years in order to give effect to the March 31, 2004 determination in respect of
the Norfolk Partnership. Further reassessments against the Appellant (the Final
Reassessments) were issued on May 30, 2006. On August 30, 2006, the Appellant
served the CRA with a Notice of Objection to the Final Reassessments and in due
course appealed to this Court. As earlier indicated, the appeal in respect of
the 2004 taxation year has now been withdrawn.
POSITIONS OF THE PARTIES AND THE ISSUES
As indicated, the appellant had claimed his
share of the partnership expenses in his return for the year 2000 and had
initially been assessed on that basis. The
“normal reassessment period”, defined in subsection 152(3.1) of the Act, had
expired prior to the August 25, 2005 reassessment of the Appellant’s 2000
taxation year because more than three years had elapsed since the date of the
initial assessment. The Minister’s right to reassess, if it exists, can
therefore only be in virtue of the operation of paragraph 152(1.7)(b):
152. (1.7) Where the
Minister makes a determination under subsection 152(1.4) or a redetermination
in respect of a partnership,
b) notwithstanding subsections 152(4), 152(4.01), 152(4.1)
and 152(5), the Minister may, before the end of the day that is one year
after the day on which all rights of objection and appeal expire or are
determined in respect of the determination or redetermination, assess the
tax, interest, penalties or other amounts payable and determine an amount
deemed to have been paid or to have been an overpayment under this Part in
respect of any member of the partnership and any other taxpayer for any
taxation year as may be necessary to give effect to the determination or
redetermination or a decision of the Tax Court of Canada, the Federal Court
of Appeal or the Supreme Court of Canada.
152. (1.7) Les règles suivantes s’appliquent lorsque le ministre détermine
un montant en application du paragraphe (1.4) ou détermine un montant de
nouveau relativement à une société de personnes :
b) malgré les paragraphes
(4), (4.01), (4.1) et (5), le ministre peut, avant la fin du jour qui tombe
un an après l’extinction ou la détermination des droits d’opposition et
d’appel relativement au montant déterminé ou déterminé de nouveau, établir
les cotisations voulues concernant l’impôt, les intérêts, les pénalités ou
d’autres montants payables et déterminer les montants réputés avoir été
payés, ou payés en trop, en vertu de la présente partie relativement à un
associé de la société de personnes et à tout autre contribuable pour une
année d’imposition pour tenir compte du montant déterminé ou déterminé de
nouveau ou d’une décision de la Cour canadienne de l’impôt, de la Cour
d’appel fédérale ou de la Cour suprême du Canada.
The appellant's position is that his right to object to the Minister’s
determination of March, 31, 2004, was waived by paragraph 6 of the settlement
letter of the same date. Accordingly, the appellant’s rights to object to the
determination had “expired or were determined” on that date and the
reassessment made August 22, 2005, was more than one year later and out of
The Minister’s position is that the appellant did not unconditionally waive
all his rights to object or appeal in the March 31, 2004 letter and that such
waiver was only effective provided that the redetermination with respect to
Norfolk was made on a “basis consistent with paragraphs 1 to 4” of the
settlement letter. It is argued that this proposition is demonstrated by the
fact that an objection to the determination was in fact made on Norfolk’s
behalf and was dealt with by the Minister in the months following March 2004.
The one year period set out in paragraph 152(1.7)(b) accordingly did not start
to run until the appellant's rights to appeal the Minister’s confirmation of
the determination (said to be one year and 90 days after the date of such
To the extent that it is necessary to decide
the point, I do not agree with the construction placed by the appellant on the
words of paragraph 152(1.7)(b). It is his view that because his rights of objection
and appeal had been waived by Norfolk in the March 31, 2004 letter those rights
had expired and been determined by that waiver. But the evidence is clear, and
the internal logic of the text of the letter itself confirms this, that the
“settlement letter” was prior in time to the Minister’s determination of the
same date. It is difficult to see how a right of objection or appeal can be
said to have “expired” or been “determined” before it has ever even come into
existence which manifestly could not have happened until the determination
itself had been issued.
The purpose of paragraph 152(1.7)(b) is clearly
to extend the time in which the Minister may reassess in the given
circumstances. That extension is triggered not by the Minister himself but by the
taxpayer’s own action or inaction in objecting or appealing the Minister’s
moves (in this case the determination) or in failing to do so. If the taxpayer
objects or appeals the Minister’s time for reassessing is extended to one year
after the time when that objection or appeal is determined; if the taxpayer
does nothing, the Minister’s time for reassessment is extended to one year
after the last day on which the taxpayer could have acted.
While the English version of the statute uses the
verb “expire” the French text uses the noun “extinction”. This carries with it
the same notion of time sensitivity although slightly different: what has
expired has done so because of the passage of time; what is extinct is
something which has previously existed but now exists no more. In neither case,
however, would we talk of something expiring or becoming extinct if that thing
had never come into being in the first place.
By the same token, I am satisfied that when
the text (in both languages) speaks of rights of objection or appeal being
“determined” it is referring not to the mere procedural right to launch an
appeal but rather to the substantive right which is the basis thereof. Only the
Act itself creates and lays down the procedures for objection and appeal which
are accordingly effectively immutable and “determined” in advance; when an
objection or appeal is launched, however, the various bodies named in the Act
(including this Court) are empowered to “determine” and decide the substantive
rights asserted. And it is only after that has happened that both parties know
what their respective rights are and the Minister can assess or reassess the
tax due. That, of course, may be many years after the Minister would, but for
the text of paragraph 152(1.7)(b), have lost any right to reassess.
But whatever may be the reach of the words of
paragraph 152(1.7)(b), I am satisfied that the words of paragraph 6 of the
March 31, 2004 letter did not have the effect contended for them by the
appellant. That letter is referred to by both parties, and in the text of the
document itself, as a “settlement” and as an “agreement”. While it is common
ground and I accept that the normal rules of the interpretation of contracts
should apply and that the Court’s task is to search out what the parties
intended by the words they used read in their total context, it is important to
bear in mind that, despite appearances, the letter is not a contract in any
ordinary sense of the word. It does not bind the Minister who is under a
statutory obligation to assess tax in accordance with the facts as he
understands them and with the terms of the Act. (See Cohen v. Queen, 80 DTC 6250, (FCA)).
And since the Minister cannot be held to the
terms of his “agreement” neither can the taxpayer. The words of former Chief
Justice Bowman in Consoltex Inc. v. Canada, 97 DTC 724, are apt.
The result of the decision in Cohen is
that the Minister is free to repudiate any agreement that he has made with
respect to the manner in which he assesses a taxpayer. It follows necessarily
that a taxpayer who has made a deal with the Minister is equally free to do so.
Any conclusion that the Minister is not bound by agreements but the taxpayer is
would be wholly
unacceptable as a matter of principle. Binding agreements must be premised upon
mutuality and reciprocity of obligations between the parties. There can
obviously be no agreement where one party is bound and one is not.
this mean then that the letter agreement of March 31, 2004, is simply to be
treated as void and a nullity? I think not. It was negotiated by experienced
and senior tax counsel and it is repugnant to think that they would knowingly
have signed a meaningless scrap of paper. Furthermore, there is an obvious
public interest to be served in encouraging the parties to any litigation to
settle their differences without going to the expense (much of it borne by the
public purse) of a trial and this is arguably even more compelling a
consideration in litigation involving income tax. Within the constraints imposed
by the rationale of the Cohen case, the Court should strive to encourage
and give effect to settlements freely arrived at by the parties to tax
litigation. Fortunately, in my view, the means of doing so are not difficult to
find. Settlements of this kind, and this one is no exception, commonly involve
a waiver by the taxpayer of his rights to appeal. Such waivers are specifically
permitted by the Act and there is nothing to prevent them being made subject to
in my view, the Court can and should read the provisions of paragraph 6 of the
March 31, 2004 letter in this case in a way which will give them meaning and
effect in law as being a waiver by the taxpayer subject to the stated condition
that the CRA will issue a determination “on
the basis consistent with paragraphs 1 to 4 above”.
Furthermore, this seems
to have been the construction which was placed on the March 31, 2004 letter by
both Norfolk and the Minister. In the Notice of
Objection filed by the former the operative paragraphs of the Notice set forth
the grounds of the objection as follows:
4. The Determination was purportedly issued by the CRA in
accordance with a negotiated settlement agreement entered into between the CRA
and the Partnership on March 31, 2004 (the “Agreement”).
5. The Determination does not however, accurately represent
the terms of the Agreement.
The Minister, for his part, also treated the objection in the normal way
and not as being, as the appellant now argues, “void ab initio”.
Thus, while I do not find the letter to be difficult to
interpret in such a way as to give it meaning and validity, any possible
ambiguity would be resolved by the conduct of the parties to it in the months
immediately following its date. The evidence of such conduct is largely documentary
but to the extent that it relies on the evidence of witnesses called by the
Minister and objected to by the appellant, those objections, having been
reserved by me, are now dismissed.
Thus, the appellant, who had no rights of objection or
appeal in respect of the March 31, 2004 determination (those rights belonging
exclusively to and having been exercised by Norfolk GP) was bound by the
results of that determination. Norfolk’s rights of objection were determined when the
Minister issued his confirmation on November 26, 2004, and it did not exercise
its further rights of appeal therefrom. The very existence of those rights,
however, whether or not they were exercised, has the effect of even further
extending the period within which the Minister could issue his reassessment.
The Minister’s reassessment of the appellant’s tax for the 2000 year on August
22, 2005, was accordingly well within the time limit set by paragraph
152(7.4)(b) and the appeal must be dismissed.
The appeal is dismissed
Signed at Ottawa, Canada, this 5th day of June 2009.
“James K. Hugessen”