Bishay v. MNR, 95 DTC 5619, [1996] 1 CTC 2286 (FCTD)

MacKay J.:— This is an appeal pursuant to the former section 172 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”) from a decision of the Tax Court of Canada, dated March 18, 1991, which allowed, in part, the plaintiff’s appeal in relation to her 1984, 1985 and 1986 income tax returns. By that decision the plaintiffs appeal was allowed in relation to charitable donations which the Minister had previously refused to allow as deductions and in that regard the matter was remitted to the Minister for reconsideration and reassessment, but the decision confirmed the assessments by the Minister for these years in all other respects.

The plaintiff appeals from that decision, seeking an order of this Court that would require the Minister to assess income tax in accord with returns submitted which purport to amend the original tax returns that were assessed by the Minister. The later amending returns would effect a change of the plaintiff’s fiscal period. For the record, I note there was no appeal by the Minister of the Tax Court judgment in relation to charitable donations.

Background

When this matter came on for hearing unusual arrangements were made for presentation of the plaintiffs appeal. The plaintiff is a medical doctor whose husband, not a lawyer, is the operating head of a corporation whose business is to manage the plaintiffs medical practice. On October 1, 1991 the plaintiffs husband had filed an application with this Court requesting an Order allowing him to represent her in this action. That motion was denied on October 9, 1991. An appeal from that motion was denied by the Associate Chief Justice on December 2, 1991. Thereafter the plaintiff retained counsel to deal with the appeal.

A hearing date of March 7, 1995 was set down by an Order dated May 5, 1994. Thereafter an Order was issued on May 9, 1994 removing the plaintiffs then solicitor, at his request, as solicitor of record in this matter, as he was unable to receive instructions directly from the plaintiff and felt that he could not properly prepare her case because the plaintiff and her husband had lost confidence in him. No record of his replacement as solicitor of record appears on the Court’s file.

An application to adjourn the hearing, scheduled for March 7, was filed on March 1, 1995 and dismissed by the Associate Chief Justice on March 3, 1995. On March 6, 1995, in response to a further application brought on behalf of the plaintiff by her husband, that he be permitted to represent her, I ordered that the parties, their counsel or their representatives appear at the time set for trial on March 7, 1995.

On March 7, 1995, the plaintiffs husband arrived at court to represent her in this appeal despite prior dismissals by the Court of applications that he be permitted to do so. Neither the plaintiff, nor legal counsel representing her were present. This Court convened a pre-trial conference. The Crown, through counsel, indicated a desire that the trial proceed and be disposed of since it involved assessments of tax years commencing a decade ago, but also expressed reluctance to proceed unless counsel representing the plaintiff, or the plaintiff herself were present to carry the appeal. After discussion, counsel for the Crown and Mr. Bishay agreed to proceed on terms proposed by the Court. These were:

The trial would commence on March 9, 1995, if counsel representing the plaintiff, or the plaintiff herself, were present.

If neither were present, the Court would hear any motions counsel for Her Majesty might then propose.

If the plaintiff were present without counsel representing her she would be reminded of her right to retain and instruct counsel and would be advised to do so. If she declined, she could conduct the appeal herself, or if she so directed her husband could present the appeal on her behalf provided she remain throughout the hearing and at the conclusion of proceedings she adopt his words as her own. If the hearing were to proceed on this basis the only evidence before the Court would be the evidence before the Tax Court, i.e., the transcript of oral testimony and the documentary evidence filed at the hearing before that Court, and the decision of the Tax Court Judge.

When Court convened on March 9, the plaintiff was present without counsel. She elected to proceed with Mr. Bishay presenting her appeal. At the end of the hearing, after remaining in the courtroom throughout, she adopted his words as her own.

The plaintiff was employed as a medical practitioner at the Hospital for Sick Children in Toronto. Thereafter, in June 1984 she established her own practice as a medical practitioner. She originally worked solely out of her home, but she has since expanded to an office in Hamilton as well. By arrangements agreed between the plaintiff and her husband, Mr. Bishay assumed responsibility for managing the business side of the plaintiff’s practice.

From the period when the plaintiff began her own practice in June 1984 until December 1987 no income tax returns relating to her medical practice were submitted. In 1987 Revenue Canada contacted the plaintiff and sent her a letter advising her to submit tax returns.

The plaintiff’s husband assured Revenue Canada that the income tax returns would be submitted. He then took the plaintiff’s financial records to Mr. Fox, a chartered accountant, to complete her financial statements and prepare her tax returns for the years 1984, 1985 and 1986.

Mr. Fox prepared the income tax returns for the years in question. The returns were signed by Mr. Bishay on the plaintiff’s behalf and filed in January 1988, though the date with his signature, earlier filled in by Mr. Fox was December 31, 1987.

On the income tax returns, the year end for the plaintiffs fiscal period for her medical practice was indicated as December 31 for each of the years 1984, 1985 and 1986. For the plaintiff it was alleged that Mr. Fox had chosen this year end of his own accord and that this was a mistake as the accountant had been instructed to choose a fiscal year end which would permit the plaintiff to pay the least amount of tax legally possible, as a January 1 year end would be more likely to do. In contrast to the plaintiff’s position, Mr. Fox has stated that he chose the December 31 year end after discussions with the plaintiff’s husband who agreed to that date; he stated that given the short amount of time allotted to prepare and submit the returns, choosing a December year end was preferable as it made the calculations easier and faster than if another year end were chosen.

After submitting the returns, Mr. Bishay met with another accountant who advised him that the plaintiff could realize significant tax savings if she were to choose January 1 as her fiscal year end. He suggested that Mr. Bishay file amended returns using a fiscal period ending on January 1. Amended income tax returns reflecting the January 1 fiscal year end were submitted to Revenue Canada in June 1988.

By notice dated June 22, 1988 Revenue Canada advised the plaintiff that a refund for 1984, to which she would otherwise have been entitled, was denied as being statute-barred pursuant to subsection 164(1) of the Act which provides that once a three-year period has lapsed, a taxpayer is no longer entitled to receive a refund. There is no appeal before the Court on that assessment and notice.

By notice of assessment dated July 28, 1988 Revenue Canada assessed the plaintiff for the 1985 taxation year advising her that she was assessed at $32,194.56 in federal taxes, $14,957.52 in provincial taxes, $8,144.98 in late filing penalties, $10,575.89 in interest arrears and had an outstanding balance owing of $16,632.55. On that same date a further notice of assessment to the plaintiff for the 1986 taxation year advised that she had been assessed at $66,184.21 in federal taxes, $30,904.37 in provincial taxes, $12,572.69 in late filing penalties, $11,884.75 in interest arrears and had an outstanding balance owing from that year of $89,288.68.

Notices of objection to the assessments for 1985 and 1986 were filed by the plaintiff alleging that the assessments had been completed after the amended returns had been submitted and that the assessments did not reflect the January 1 fiscal year ends.

On April 14, 1989 a letter was sent to the plaintiff advising her that the amended returns purported to change her fiscal year end and that that could not be done on a retroactive basis. Following this letter, on July 26, 1989 the Minister sent a letter to the plaintiff advising her that her fiscal year end could only be changed with the concurrence of the Minister and that, since she did not have the concurrence of the Minister, her fiscal period had been properly assessed as ending December 31. A notice of confirmation upholding the Minister’s earlier assessments was sent to the plaintiff on July 26, 1989.

The plaintiff appealed this assessment to the Tax Court of Canada. King D.J.T.C.C. confirmed the Minister’s assessments in relation to 1985 and 1986 taxation years, finding that the Act clearly requires the consent of the Minister to change a fiscal period, and that, as the plaintiff was here seeking to change her chosen fiscal year end of December 31 without the consent of the Minister, Revenue Canada correctly assessed her based on a fiscal period ending December 31.

From that decision the plaintiff appealed to this Court.

Analysis

There are two issues to be resolved in this case:

(1) Is the plaintiff, by submitting the amended forms, requesting a change in her fiscal period, or is she simply correcting a mistake in the tax returns filed originally?

(2) Does this Court have the authority to require the Minister to assess only the amended returns or to effect a change in the plaintiffs fiscal period for the years in question?

Subsection 248(1) of the Act defines “fiscal year” as follows:

“fiscal period”. - “fiscal period” means the period for which the accounts of the business of the taxpayer have been ordinarily made up and accepted for purposes of assessment under this Act and, in the absence of an established practice, the fiscal period is that adopted by the taxpayer (but no fiscal period may exceed

(a) in the case of a corporation, 53 weeks, and

(b) in the case of any other taxpayer, 12 months,

and no change in a usual and accepted fiscal period may be made for the purposes of this Act without the concurrence of the Minister);

For the plaintiff it was submitted that writing “December 31” on her original tax returns was a mistake. It was submitted that Mr. Fox erred in choosing a fiscal period ending December 31 since he was instructed to choose a year end that would result in the least amount of tax legally payable. The plaintiff was simply trying to correct this mistake in submitting the amended returns. She was not trying to effect a change in her year end as she had never intended to adopt December 31 as her fiscal year end.

It was also argued for the plaintiff that the dates and signatures on the returns were incorrect. It was urged that, as these returns contained numerous errors, they should be discarded and replaced by the amended returns. Finally, it was urged that in light of the “Fairness Package”, an information bulletin relating to practices where mere mechanical errors were made by taxpayers, providing for discretion to permit late filing of corrections, the applicant’s amended returns warranted favourable consideration. The “Package” referred to was not before the Court but I accept the advice of counsel for the respondent that it was not applicable in situations where the Act vests discretion in the Minister, as in this case.

For the Minister it was urged that the plaintiff had clearly adopted a December 31 fiscal year end in her returns and that she could not unilaterally and retroactively alter that by submitting amended returns. It was asserted that once a fiscal period had been adopted, it could only be changed prospectively, with the consent of the Minister. The Minister himself does not have the authority to retroactively change a fiscal period.

In applying the definition found in subsection 248(1), counsel for the Minister urged that the plaintiff’s fiscal period did not fall within the part of the definition described as “the period for which the accounts of the business of the taxpayer have ordinarily been made up and accepted for purposes of assessment under this Act” because her accounts were in no particular order and no accounts had previously been submitted for taxation purposes prior to the plaintiff’s retaining Mr. Fox and making the initial submissions. Rather, the plaintiffs fiscal period falls within the part of the definition of fiscal period described as “...in the absence of an established practice, the fiscal period is that adopted by the taxpayer...”. Particularly by her original tax returns, but also from accompanying income statements from her business, and through Mr. Bishay’s calculations of her income as her financial manager, which were all based on a December 31 year end, the plaintiff had effectively adopted a December 31 fiscal year end.

On behalf of the Minister it was submitted that once a person has filed an income tax return for the year, a choice has been made regarding the applicable fiscal period and an amended return, with a different year end, is nothing more than a request for a retroactive change in the fiscal period.

It was also submitted for the Minister that the relief that may be awarded by this Court is set out in the former section 177, applicable to this appeal, which states:

177. The Federal Court may dispose of an appeal, other than an appeal to which section 180 applies, by

(a) dismissing it; or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment,

(iii) restoring the assessment, or

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

Thus, it was urged, this Court does not have the authority to require the Minister to accept an amended return or to effect a change of a fiscal period.

I find that the plaintiff here had adopted a fiscal period ending December 31 in her original tax returns for the years 1984, 1985 and 1986. The Minister is entitled to assess any income tax returns filed and to disregard amended returns indicating a different fiscal period than that filed on the original returns where the amended returns simply seek to reduce the taxpayer’s tax liability by choosing a different basis for assessment; Szczupak v. Minister of National Revenue (1959), 59 D.T.C. 119 (Tax App. Bd.). By the act of filing the original income tax returns, the plaintiff adopted a fiscal period for the years in question as indicated on those returns.

In addition, once the Minister has assessed a taxpayer on the basis of a fiscal year for the purposes of one taxation year, the fiscal period has been “established” for the purposes of the Act and the Minister is entitled to assess the taxpayer using the same fiscal period the following year; Vumbaca v. Minister of National Revenue (1967), 67 D.T.C. 365 (Tax App. Bd.). On the basis of the plaintiff’s 1984 tax return in which the plaintiff adopted a December 31 fiscal year end, and which was assessed before the amended returns were received and considered, the Minister was entitled to assess the 1985 and 1986 returns using the December 31 fiscal year end, and to rely on the original return submitted to determine the plaintiffs fiscal period.

Here, the original income tax returns clearly indicate that the plaintiff’s business had a fiscal year period ending December 31. The Minister is entitled to rely on these and to conclude from these returns that the plaintiff had adopted a year end of December 31.

The fact that, subsequent to filing these returns, the plaintiffs husband received advice that the plaintiff would have realized tax savings with a January fiscal year end demonstrates that, at the time of filing, it was her intention to be assessed in accord with a December 31 year end. It was only at a later date, upon realizing the tax advantages available, that the plaintiff attempted to alter the year end. Thus, the adoption of December 31 on the original returns was not a mistake on the part of the plaintiff, it was simply her choice of fiscal period at that time. In submitting the amended forms the plaintiff is seeking to have the fiscal period which she originally adopted changed retroactively by the Minister.

The Act clearly requires that any change to a fiscal period be made with the concurrence of the Minister. There is no authority for a taxpayer to unilaterally change a fiscal period, nor is there authority for Revenue Canada to assess a taxpayer in accord with a new year end, except where the change in the fiscal period is concurred in by the Minister. The plaintiff did not obtain the consent of the Minister for a revised year end for the years in question. Thus it was appropriate for the Minister to assess her based on a December 31 fiscal year end.

Section 177 of the Act does not give this Court authority to direct the Minister to disregard certain income tax returns and to assess amended returns, nor does it give the authority to effect a change in the fiscal period of a plaintiff or to direct the Minister to do so. The Act clearly requires that the Minister, and the Minister alone, consent to a change in a fiscal period. That decision is within his discretion.

Even if I were to agree that the plaintiff’s original returns were submitted by mistake or with a misstated year end, which I do not, the Court cannot grant any relief requiring the Minister to accept a change to the fiscal period of the plaintiff.

For these reasons the plaintiff’s appeal is dismissed.

Appeal dismissed.