MacMillan Bloedel Ltd. v. Min. of Fin. (B.C.), [1982] CTC 269 (BCCA)

Lambert, JA:—This is an appeal on two points of law under section 25 of the Logging Tax Act. Both points of law relate to capital cost allowance in ascertaining income derived from logging operations.

As required by the Logging Tax Act, the appellant taxpayer filed returns of its income derived from logging operations for the 1972 and 1973 taxation years. It claimed capital cost allowance on an accelerated basis for pollution equipment and production machinery. It also claimed capital cost allowance on assets under construction but not yet in use. Those claims were all in accordance with the Income Tax Act and Regulations of Canada. No one could tell whether they were in accordance with the Logging Tax Act because that question fell to be decided by the application of Part 1 of the regulations under the Logging Tax Act, which read, in its relevant part, as follows:

Expenses Not Allowable in Arriving at a Profit from Logging Operations

Income derived from logging operations shall be ascertained by deducting from the gross income of the taxpayer all expenses incurred in the production thereof except:

(i) Provision for capital cost allowance not approved by the Minister:

When the taxpayer filed its returns no capital cost allowance had yet been approved or disapproved. By the way in which it filed its returns the taxpayer was asked for approval, by the Minister, of capital cost allowance on the same basis as permitted under the Canadian Income Tax Act and Regulations.

Notices of assessment for each of the taxation years were issued on July 9, 1974. They recorded the assessment of taxable income and the assessment of tax on taxable income in each case. The income and the tax were as shown on the returns filed by the taxpayer. That meant that the assessments had adopted the capital cost allowance claimed by the taxpayer. Both of the notices of assessment were marked “Subject to Audit”.

Notices of reassessment for each of the taxation years were issued on August 28, 1974. Those notices recorded assessments of taxable income and of tax on taxable income on a basis that disallowed the accelerated capital cost allowance and the capital cost allowance on assets not yet in use. The notices were accompanied by a letter signed by William H Boyce for the Commissioner of Income Tax stating that those capital cost allowances were not recognized for logging tax purposes. Again the notices of reassessment were marked “Subject to Audit”.

Further notices of reassessment for the 1972 and 1973 taxation years were issued on July 25, 1979. The assessments reflected further small changes in the capital cost allowances.

The taxpayer appealed the August 1974 reassessments in 1974 and the July 1979 reassessments in 1979. The 1979 appeal superseded the 1974 appeal. The Minister disallowed the appeal. A further appeal was taken to the Supreme Court of British Columbia where it was disallowed by Mr Justice Munroe, whose reasons are reported at (1980), 20 BCLR 248.

At the hearing before Mr Justice Munroe an affidavit of The Honourable Evan Wolfe, the Minister of Finance for the period from December 22, 1975 to November 23, 1979, was filed. He said that on July 3, 1979 he had considered claims of the taxpayer for its 1972 and 1973 taxation years, with respect to capital cost allowance, for the first and only time. He said he had reached decisions about approval or disapproval of capital cost allowance and that he had directed the Commissioner of Income Tax to issue reassessments. Presumably that direction provided both the calculation of capital cost allowance and the impetus for the reassessments of July 25, 1979. Mr Wolfe said that he did not think that the claim for capital cost allowance had been considered by the Deputy Minister of Finance. There is no evidence of whether any consideration was given to the capital cost allowances of the taxpayer for the 1972 and 1973 years, prior to the July 1974 assessments or the August 1974 reassessments, by the then Minister of Finance or the then Deputy Minister of Finance.

In 1978 the Logging Tax Act was amended in two principal respects. The first was to make the calculation of income from logging operations correspond with the calculation of income from those operations for the purposes of the Income Tax Act of Canada. The second was to reduce the rate of tax from 15% to 10%. The effect of the first of those changes on the taxpayer was that it lost forever the opportunity to claim capital cost allowance for logging tax purposes on the assets which had been given an accelerated allowance for the purposes of the Income Tax Act but no accelerated allowance for logging tax purposes. The same loss occurred on the assets that were not in use for logging tax purposes. In effect, as of 1978, the difference between undepreciated capital cost of assets for logging tax purposes and undepreciated capital cost of the same assets for income tax purposes became a Capital cost that was undepreciable for logging tax purposes.

The amounts involved for the taxpayer and associated companies for the years up to 1978 are very substantial. Other taxpayers may be in the same position as the appellant. But this problem is not a continuing one, nor one that is likely to be cured by legislative action, since the regulations relating to the calculation of income derived from logging operations, upon which this appeal turns, have been revoked as part of the 1978 legislative changes.

The taxpayer raises two points of law. It must succeed on both. The first is that the initial assessment of July 1974 recorded a decision of the Minister approving the capital cost allowance claimed in the returns and reflected in the assessments. The second is that after the Minister made a decision approving capital cost allowance he became functus officio and could not later make a new and different decision for the same taxpayer for the same year. With respect to the second point, counsel for the Minister concedes, in the face of authority, that the Minister is functus officio after he has made a decision, but, contesting the first point, he says that no decision was made by the Minister in this case until July 1979 when his one and only decision was made.

Common to both points of law is the question of the nature of the Minister’s power. Neither counsel said that it was legislative, that is, that it was a power to prescribe rules and rates in general terms for the calculation of capital cost allowance for all taxpayers to whom those rules and rates applied. No such general rules and rates have been made. If they had been made in the exercise of legislative power then they would have had to be publicized or otherwise dealt with under the Regulations Act. The power to make regulations under the Logging Tax Act is given only to the Lieutenant Governor in Council. While the point was not argued, I think that the posi- tions taken by both counsel reflect the view that if the Minister’s power was legislative then that power would have been ultra vires as an unauthorized sub-delegation.

So the Minister’s power is administrative. It is what Lord Thankerton in Pioneer Laundry and Dry Cleaners Ltd v MNR, [1938-39] CTC 411 at 416; 2 DTC 595 calls “an administrative duty of a quash-judicial character”. It is a power to decide on the capital cost allowance for a particular taxpayer for a particular year. It is a power that rests only in the Minister and not in the Commissioner, in contrast to all but one other of the powers of disallowance of expenses set out in paragraphs (a) to (r) of Part 1 of the regulations. The only other power conferred on the Minister in Part 1 of the regulations is the power in paragraph (e) to set an allowance for doubtful accounts in much the same way as paragraph (i) confers on the Minister the power to set the allowance for capital costs. The remaining paragraphs deal with the disallowance of expenses on the basis of an objective test which would be administered by the Commissioner in setting his assessments and which would be the subject of the appeal process.

I turn now to the first point of law. Having regard to the grammatical structure of the relevant part of the regulations, as I have quoted it at the beginning of these reasons, it is my opinion that no capital cost allowance can be deducted from gross income in ascertaining income derived from logging operations unless it is first approved by the Minister. It follows that the first assessment of July 1974, which reflected the capital cost allowance Claimed by the taxpayer must, on the one hand, be considered to have incorporated a decision of the Minister or, on the other hand, be considered to have been either wrong, or void, or both, as having granted an allowance for capital costs without a decision of the Minister.

Counsel for the taxpayer says that the first assessment operated as a decision of the Minister. Once the power is treated as being an administrative power, to be exercised for each taxpayer for each year, then the conclusion seems to be inevitable that the power has been exercised when an assessment has been made that grants an allowance for capital costs. Counsel for the taxpayer refers to section 46 of the Logging Tax Act, RSBC 1960, c 225 and to section 20 of the Interpretation Act, SBC 1974, c 42, as they were in effect on July 9, 1974. Each deals with delegation of powers. But he says that those provisions do not exhaustively state the law with respect to delegated administrative powers. He says that if the power is an administrative power which must in the practical conduct of affairs be delegated then there is a common law principle that the power is delegabie and may be exercised by an appropriate subordinate. He refers to Carltona, Ltd v Commissioner of Works, [1943] 2 All ER 560 at 563 (English Court of Appeal) and to Regina v Harrison, [1976] 3 WWR 536 at 542 (Supreme Court of Canada). I consider that this submission is correct. Once an assessment is issued it carries with it a statutory liability for the tax assessed. I do not think it can have been the intent of the Legislature or of the Lieutenant Governor in Council to put into effect a legislative scheme that would require that all assessments involving capital cost allowance or doubtful accounts be the subject of a specific determination for each taxation year by the Minister himself, or be considered either wrong or void.

I note that if the Minister’s position were correct then both the July 1974 assessment and the August 1974 reassessment would have been known to be wrong when they were made. There would have been no assessment that was considered by the Minister to be correct until July 1979, though all the fiscal consequences of the 1974 assessments would have been visited on the taxpayer.

In reaching my conclusion I would distinguish Tahsis Co Ltd v Minister of Finance (1959), BCTS 11-225 and MNR v Grieve, [1960] Ex CR 11; [1959] CTC 320; 59 DTC 1186, on the basis that in each of those cases a perfectly valid and correct assessment could be issued and was issued without the necessity for any ministerial decision. The ministerial decision was made under a power that applied only to particular cases; it was administratively simple for the Minister to apply his own mind to each individual instance where the power might be exercised. Once the ministerial decision was made in those cases then the ministerial decision would justify the issuance of a new assessment. But in this case the initial assessment could not be valid and correct without a ministerial decision first having been made; and the legislative scheme could not contemplate that the Minister would turn his own mind personally to the decision that had to precede each assessment dealing with capital cost allowance or an allowance for doubtful accounts.

It is my opinion, on the first point of law, that the capital cost allowances that formed the basis for the first assessment of July 1974 were capital cost allowances approved by the Minister through his appropriate subordinate officers on the staff of the Commissioner for Income Tax.

The second point of law is whether the Minister can change his mind.

If the point were free from authority I would have thought it not unreasonable that the legislative scheme would have contemplated that the power of the Commission to reassess and the power of the Minister to grant an allowance for capital costs should work in harmony so that so long as the Minister changed his mind within the six-year period when the Commissioner could reassess, then a change of mind of the Minister would require a reassessment by the Commissioner. The alternative view of the legislative scheme would, of course, contemplate only one decision by the Minister because the nature of the issue he is deciding is discretionary and involves policy considerations and is not one that is measured by objective standards which can be the subject of an appeal based on evidence and argument.

But of those two conflicting views the latter has been given judicial approval in a decision that is binding on this Court. In Re Herman Sawmills Ltd v Minister of Finance (1972), 24 DLR (3d) 476, Macfarlane, J, in the Supreme Court of British Columbia, considered the question of capital cost allowance following a recovery of insurance money on destruction of the asset. In that case there was evidence that the Minister himself made the first approval of capital cost allowance before the first assessment and Mr Justice Macfarlane dealt with the case on that basis. The Minister then sought to revoke his first approval and substitute a different and lower allowance. Mr Justice Macfarlane said this at 483:

It was further contended by the appellant that the Minister, having exercised his discretion when the original assessments were made, and there being no new relevant facts brought to his attention with respect to the matter that he was functus officio and could not re-exercise his discretion: see Clarke v MNR, [1952] 7 Tax ABC 137 at p 152.

In my opinion there were no grounds upon which the Minister could properly re-exercise his discretion in regard to the granting of capital cost allowance in this case.

It is to be noted that the Regulations exclude, as an expense “provision for capital cost allowance not approved by the Minister”. If the contention of the respondent was sound, one would expect the Regulation to provide expressly for a proper review of such approval, and for a disallowance of the capital cost allowance earlier approved in the light of new facts. The Regulations do not so provide.

Accordingly, I find that the amounts of capital cost allowance originally approved by the Minister and later disallowed, should now be allowed.

The Minister appealed to this Court. The appeal was heard by a Division comprised of Chief Justice Farris, Mr Justice Nemetz and Mr Justice Robertson. In oral reasons for judgment, Chief Justice Farris said this:

With respect to the question of capital cost allowances, I agree with the conclusions of Macfarlane, J and I would dismiss the appeal.

Mr Justice Nemetz and Mr Justice Robertson agreed. In my opinion the decision of Mr Justice Macfarlane is supported by the decision of Thorson, P in Pure Spring Co Ltd v MNR, [1946] Ex CR 471; [1946] CTC 189; 2 DTC 844, particularly at 857, and, in any case, having been adopted by this Court, is binding on me.

In the course of argument my brother Hutcheson referred to subsection 23(3) of the Interpretation Act. It reads:

(3) Where in an enactment a power is conferred or a duty imposed, the power may be exercised and the duty shall be performed from time to time as occasion requires.

That subsection has been in the British Columbia Interpretation Act since 1934. There is an equivalent section in the Canadian Interpretation Act, and there has been a similar section in the English Act since 1888.

That subsection was not specifically referred to in the reasons of Mr Justice Macfarlane in the Herman Sawmills case.

But in my opinion it is not clear that subsection 23(3) applies to an administrative power of a quasi-judicial character that is exercised by a Minister in relation to a particular taxpayer for a particular year. It could be said that notwithstanding the general terms in which subsection 23(3) is couched, it may be overridden by the application of a legislative scheme that contemplates the contrary approach of a single exercise of the power for one taxpayer for one year. In short, so the argument goes, the second and subsequent occasions do not require the exercise of the power. Having regard to that argument, it is my opinion that the fact that subsection 23(3) is not referred to in the reasons of either Mr Justice Macfarlane or this Court in the Herman Sawmills case does not permit me to regard that decision as having been made per incuriam and, as such, not to be binding on the three- member Division of this Court in this appeal.

I would allow this appeal and direct that the reassessments for the taxpayer’s 1972 and 1973 taxation years, dated August 28, 1974 and July 25, 1979 be vacated, and that the assessments of July 9, 1974 be restored. If the parties cannot agree on the amount to be refunded to the taxpayer then I would permit them to speak to that question.