Gibbs v. MNR, 84 D.TC. 6418, [1984] CTC 434 (FCTD)

Rouleau, J:—The issue in this case is whether or not the applicant may apply to the Trial Division of the Federal Court under section 18 for an order quashing assessments made against him and thereby restraining the Minister and his servants from taking further action pursuant to the assessments.

By a document in writing, dated April 2, 1979, the taxpayer entered into an agreement with a development corporation to purchase a condominium townhouse. Pursuant to section 2 of the agreement, he was to pay $35,978 for the building, $4,783 for land acquisition, and $1,550 for chattels. In addition to the purchase price, he undertook to pay additional sums for interest expense during construction, legal fees, mortgage brokerage fees, mortgage guarantee fees, mortgage appraisal fees, mortgage buydown fee, mortgage commitment fee for arrangement of the mortgage, a leasing fee, pooling and property management fee, landscaping costs, property taxes and insurance during construction and repair and maintenance undertaking. All of these amounts were set out; but it was further stipulated in the agreement that, should any amount spent be greater than the agreed amount, the excess amounts of money would be deducted from the purchase price of the building and land. In other words, the taxpayer knew exactly how much he would have to pay for this condominium. There is no doubt that it was an arm’s length transaction.

The taxpayer filed his return for the taxation year 1979 and was reassessed in 1983. The Minister, in his reassessment, applied what he called the reasonableness approach and reallocated certain amounts of money with respect to the costs incurred, disallowing some, allowing others, and reallocating the purchase price of the building as well as the land.

The applicant argues that the Minister is not entitled to apply his unchallenged approach to reapportion expenses or costs when there is an arm’s length transaction. He further states that the Department cannot apply its reasonableness to this type of transaction and is precluded from reallocating purchase price with respect to lands and buildings. The applicant professed that there was a policy within the Department wherein it would not arbitrarily disallow the taxpayer from deducting an expense when it was for the purpose of earning income, regardless of the period over which the taxpayer was to benefit. He further argues that, should the Minister be allowed arbitrarily to reallocate or disallow certain expenses with respect to the acquisition of this type of property, when it was an arm’s length transaction, the Minister would be interfering with the public right to enter into contractual agreements and would reserve to himself the right to construe them as he pleased.

The Minister of National Revenue argues that this Court has no authority to entertain an application under section 18 of the Federal Court Act at this stage of the proceeding; that a procedure is provided for under section 169 of the Income Tax Act; that pursuant to section 152 of the Income Tax Act; he must assess and subsection 152(8) deems the assessment binding until varied or vacated. The reassessment is deemed valid until challenged and the proper procedure is to follow the procedures outlined in the Act.

He argues that it is the Minister’s duty to assess the tax return, pursuant to subsection 152(1); that it is part of the Minister’s review process to examine expenses and outlays and to question the reasonableness pursuant to section 18 of the Income Tax Act; that the Minister has the power to reallocate amounts which taxpayers have submitted in the disposition of property; all this pursuant to section 68 of the Income Tax Act.

The Minister submits that any taxpayer who objects to an assessment may serve his notice of objection pursuant to subsection 165(1) of the Act. Pursuant to that notice, the matter will either go to the Tax Court of Canada or the Federal Court of Canada.

The applicant did not suggest to the Court that the authority for his present application was based on a decision of the Trial Division of this Court in A W C Parsons et al v MNR, [1983] CTC 321; 83 DTC 5329. The matter was heard on appeal June 12, 1984 by the Appeal Division of the Federal Court of Canada (No A-1206-83) and the learned justices reversed the trial judge’s decision. Their finding in that case is on all fours with this particular application.

The Court of Appeal states that an assessment made against a taxpayer can only be challenged pursuant to the provisions of section 169 and following, of the Income Tax Act. Pratte, J states as follows:

The learned judge of first instance held that, in this case, section 29 did not deprive the Trial Division of the jurisdiction to grant the application made by the respondents under section 18 of the Federal Court Act because, in his view, the appeal provided for in the Income Tax Act was restricted to questions of “quantum and liability” while the respondents’ application raised the more fundamental question of the Minister’s legal authority to make the assessments. We cannot agree with that distinction. The right of appeal given by the Income Tax Act is not subject to any such limitations.

In our view, the Income Tax Act expressly provides for an appeal as such to the Federal Court from assessments made by the Minister; it follows, according to section 29 of the Federal Court Act, that those assessments may not be reviewed, restrained or set aside by the Court in the exercise of its jurisdiction under sections 18 and 28 of the Federal Court Act.

I shall not deal with the issues of reasonableness or whether or not the Minister has the power to reassess.

For the reasons mentioned above and the decision of the Court of Appeal of the Federal Court of Canada in the Parsons case, (supra), I hereby dismiss this application with costs.