Bechthold Resources Ltd. v. MNR, 86 DTC 6065, [1986] 1 CTC 195 (FCTD)

Addy, J.:—The present application is for certiorari pursuant to section 18 of the Federal Court Act to quash an assessment of the applicant for income tax purposes made by notice of assessment dated the March 26,1985 and also to quash a subsequent decision by the respondent to effect a garnishment by means of a "Requirement to Pay” pursuant to section 224 of the Income Tax Act, addressed to the Canada Trust Company.

The facts, which are undisputed, are as follows. The applicant was, at all relevant times, and is presently carrying on the business of scientific research and development in Canada. On January 17, 1985 pursuant to subsection 194(4) of the Income Tax Act regarding scientific research tax credits, it designated amounts totalling $30 million, being the consideration received by it on the issuance of certain of its securities on that date. The designation was made on Revenue Canada Form 21113 and showed $15 million as Part VIII tax payable at 50 per cent of the total amount designated. The Canada Trust Company was constituted the Trustee of an excrow account held pursuant to an agreement of the same date. An assessment of the applicant was subsequently issued by the respondent on March 26, 1985 indicating a corresponding amount of $15 million as Part VIII tax being unpaid and due and requesting payment of same. No payment was made and on July 16, 1985, a requirement to pay was addressed to the Canada Trust Company claiming an amount of $15,592,602, which represented the $15 million plus, presumably, the accumulated interest thereon from the date when the payment was claimed by the respondent to have been due and payable. A further requirement to pay was delivered in September and a third one on December 15, 1985, purporting to attach the sum of $16,225,479, representing the principal and total accumulated interest to that date.

The fiscal year of the company will only end on January 22, 1986. The notice of assessment issued in March was therefore given two months after the commencement of the current fiscal year. The ordinary tax returns would not be due to be filed in respect of the company’s current year until July 22, 1986.

Since, at the time the assessment was made, the fiscal year of the applicant had not ended it was argued that the respondent had no authority nor jurisdiction to issue an assessment for taxes due and that, as a result, the assessment was a complete nullity and the requirement to pay addressed to the trust company which was based on the assessment was also a nullity and subject to being quashed.

The fundamental question of whether certiorari is available in the present case pursuant to section 18 of the Federal Court Act depends on the interpretation of section 29 of the Act which reads as follows:

29. Notwithstanding sections 18 and 28, where provision is expressly made by an Act of the Parliament of Canada for an appeal as such to the Court, to the Supreme Court, to the Governor in Council or to the Treasury Board from a decision or order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except to the extent and in the manner provided for in that Act. [Emphasis added.]

The applicant relies on a recent and as yet unreported decision of the Trial Division of this Court dated December 18, 1985, namely, W.T.C. Western Technologies Corporation v. M.N.R. — File No. T-2626-85 [since reported at [1986] 1 C.T.C. 110; 86 D.T.C. 6027], where it was held that certiorari was available to the applicant, and the assessment and requirement to pay were quashed.

Counsel for both parties agreed that no logical distinction on the facts could be drawn between the W. T. C. Western case and the case at bar. The issue, however, has not been finally determined as the case is presently being appealed. I am also informed that at least four relevant cases on which the respondent presently relies were not brought to the attention of the judge at the hearing.

My colleague, Mr. Justice Collier, in the W. T. C. Western case stated at pages 3 and 4 of his reasons 1 C.T.C. 111 (D.T.C. 6028):

I make this comment. The Notice of Assessment is, purportedly based on subsection 195(2). That subsection does not impose a tax, or a tax liability. It merely imposes a duty on the taxpayer to make interim payments of “amounts” on account of tax payable.

The applicant’s position is that while there may be an ultimate liability to pay tax of $12,437,500, or less, the Minister cannot assess the taxes owing until the return, earlier referred to, is filed: Applying subsection 152(1), the Minister is required to examine a return and then assess the tax for the year.

The applicant says the Minister here, in his decision to assess before the end of the taxpayer’s fiscal period, and before any return was required to be filed, was made without statutory authority; the Minister therefore exceeded his jurisdiction; certiorari is the appropriate remedy.

I agree with this contention.

He then went on to distinguish the decision of the Federal Court of Appeal in M.N.R. v. Parsons et al., [1984] C.T.C. 352; 84 D.T.C. 6345, which reversed a decision of the honourable Mr. Justice Cattanach reported in [1983] C.T.C. 321; 83 D.T.C. 5330, on the grounds that a question of jurisdiction was not involved in the Parsons case but rather the simple question of whether the assessment was a proper one at law.

With all due respect, I am not at all satisfied that the distinctin can be drawn. Mr. Justice Cattanach in the Parsons case stated at 323 (D.T.C. 5331) of the above-mentioned report:

The basic contention advanced by counsel on behalf of the applicants is that the assessments called into question are not authorized by law and as such are illegal and void. [Emphasis added.]

and further at 325 (D.T.C. 5332-33):

An error in law which goes to jurisdiction is alleged in which event certiorari is the appropriate remedy and, in my view, that remedy is available despite the appeal process provided against quantum and liability therefor which is the purpose of the assessment process. That is an appeal provided from a matter far different from the lack of authority in law to make the assessment.

For that reason section 29 of the Federal Court Act, in my view, does not constitute a bar to the certiorari and injunctive proceedings taken by the applicant. [Emphasis added.]

Mr. Justice Pratte, in delivering judgment on behalf of the Court of Appeal in the Parsons case, when it reversed the above-mentioned decision of the Trial Division stated:

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. [Emphasis added.]

It seems to me that where there is no legal authority to perform either an administrative or judicial act, then there is no jurisdiction to do so. A lack of authority to make an assessment necessarily involves a lack of jurisdiction to do so. Yet the Court of Appeal, based on the premise that the Minister had no legal authority to make assessment held that, because of section 29 of the Federal Court Act, the assessments in the Parsons case could not be reviewed, restrained or set aside by the Court under either section 18 or 28 of the Act.

Based on the law as stated by the Court of Appeal in the Parsons case, I would therefore be prepared to find that the assessment made by the Minister of National Revenue can only be reviewed and set aside by way of a regular appeal, either to this Court or to the Tax Court following confirmation of the assessment after the filing of a notice of objection or, with the consent of the Minister, directly to this Court by way of appeal without the formality of a notice of objection.

However, since the validity of the assessment and of the garnishment by means of a notice entitled requirement to pay issued to the Canada Trust was extensively argued by both parties on the merits, some useful purpose might well be served by dealing with the arguments raised.

Counsel for the applicant submits that, until a tax return has been filed in a regular manner after the end of the fiscal year of the applicant, that is, sometime before July 22, 1986, no taxes can be determined as due and payable and any assessment for same is premature and without jurisdiction. He argues further that there is nothing in Part VIII of the Act which requires interest to be paid other than on tax payable and determined at the end of the fiscal period.

For reasons which will be apparent later, I shall leave aside for the moment the question of the validity of the assessment to deal with the question of the liability to pay tax and the validity of the requirement to pay.

Part VIII is obviously a special part of the Act, passed with the very laudable object of providing for a refundable tax on corporations in respect of scientific research tax credits. Subsection 194(1) provides for tax at 50 per cent of all designated amounts. It reads:

194(1) Every corporation shall pay a tax under this Part for a taxation year equal to 50% of the aggregate of all amounts each of which is an amount designated under subsection (4) in respect of a share or debt obligation issued by it in the year or a right granted by it in the year.

Subsection 194(2) defines the nature of a refund provided for in the section and, in my view, can only relate to a refund of tax paid. Subsection 194(3) defines the expression “refundable Part VIII tax on hand.” Subsection 194(4) deals with the designated amounts mentioned in subsection 194(1). It reads as follows:

194(4) Every taxable Canadian corporation may, by filing a prescribed form with the Minister at any time on or before the last day of the month immediately following a month in which it issued a share or debt obligation or granted a right under a scientific research financing contract (other than a share or debt obligation issued or a right granted before October 1983, or a share in respect of which the corporation has, on or before that day, designated an amount under subsection 192(4) designate, for the purposes of this Part and Part I, an amount In respect of that share, debt obligation or right not exceeding the amount by which

(a) the amount of the consideration for which it was issued or granted, as the case may be, exceeds

(b) in the case of a share, the amount of any assistance (other than an amount included in computing the scientific research tax credit of a taxpayer in respect of that share) provided, or to be provided by a government, municipality or any other public authority in respect of, or for the acquisition of, that share.

Subsection 195(2) obliges any qualified corporation issuing any share or debt obligation to pay before the last day of the following month an amount equal to 50 per cent of the designated amounts. That subsection reads:

195(2) Where, in a particular month in a taxation year, a corporation issues a share or debt obligation, or grants a right, in respect of which it designates an amount under section 194, the corporation shall, on or before the last day of the month following the particular month, pay to the Receiver General on account of its tax payable under this part for the year an amount equal to 50% of the aggregate of all amounts so designated.

The words “shall . . . pay" obviously create a strict obligation to pay. An amount "on account of its tax" must mean a part of the tax. In other words it must relate to a payment on account of the total tax ultimately determined to be payable. Subsection 195(3) provides for payment of interest. It stipulates:

195(3) Where a corporation is liable to pay tax under this Part and has failed to pay all or any part or instalment thereof on or before the day on or before which it was required to pay the tax, it shall, on payment of the amount in default, pay interest thereon at the prescribed rate for the period beginning on the day following the day on or before which it was required to make the payment and ending on the day of payment. [Emphasis added.]

The interest mentioned in the above subsection, in my view, pertains not only to the tax ultimately calculated at the end of the fiscal year but to the amounts of tax payable pursuant to subsection 195(2). In other words, 195(2) and 195(3) must be read together. This becomes clear in reading the following subsection 195(4):

195(4) For the purposes of computing interest payable by a corporation under subsection (3) for any month or months in the 14 month period ending 2 months after the end of a taxation year in which period the corporation has designated an amount under section 194 in respect of a share or debt obligation issued, or right granted, by it in a particular month in the year, the corporation shall be deemed to have been liable to pay, on or before the last day of the month immediately following the particular month, a part or an instalment of tax for the year equal to that proportion of the amount, if any, by which its tax payable under this Part for the year exceeds its Part VIII refund for the year that . . .

Liability to pay tax or to pay any amount on account of tax does not depend on any notice of assessment. It has long been firmly established that liability is created by statute and exists regardless of whether there has been an assessment by the Minister. The leading and oft quoted decision on that issue is that of former Associate Chief Justice Noël in the case of The Queen v. Simard Beaudry et al., 71 D.T.C. 5511, wherein he states at 5515:

As to his second argument, namely that the debt arising from re-assessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or re-assessment. In fact, the taxpayer’s liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point.

The principle was upheld by our Court of Appeal in Oneil Lambert v. The Queen, [1976] C.T.C. 611; 76 D.T.C. 6373 (F.C.A.). It was also stated, at least incidentally, by Collier, J. in the case of The Queen v. Cyrus J. Moulton Limited, [1976] C.T.C. 416; 76 D.T.C. 6239 (F.C.T.D.) wherein he stated at 424 (D.T.C. 6244):

A judgment against a defaulting taxpayer can be entered in the Federal Court before assessment, appeal, and hearing. [Emphasis added.]

The same reasoning must be taken to have governed the earlier Exchequer Court decision of Jackett, P., as he then was, in the case of Coleman C. Abrahams v. M.N.R., [1966] C.T.C. 690; 66 D.T.C. 5453 (Ex. Ct.).

Finally, subsection 152(3), which is incorporated into Part VIII by subsection 195(8), states that liability is not affected by the fact that no assessment has been made.

Since an indebtedness of $15 million arose on January 17, 1985 when the designation was signed and delivered by the applicant and since payment of that sum was required to be made pursuant to subsection 195(2) on February 28, 1985, the respondent was fully entitled, following that last mentioned date, to take whatever legal steps were available to ensure payment. Section 222 of the Act provides as follows:

222. All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to Her Majesty and recoverable as such in the Federal Court of Canada or any other court of competent jurisdiction or in any other manner provided by this Act.

It is to be noted that not only taxes but "other amounts payable under the Act are debts due Her Majesty?" It therefore is not really important whether the $15 million is to be considered as taxes or not, although I would find that it was. Authority for garnishment is found in subsection 224(1):

224 (1) Where the Minister has knowledge or suspects that person is or will be, within 90 days, liable to make a payment to another person who is liable to make payment under this Act (in this section referred to as the “tax debtor”) he may, by registered letter or by a letter served personally, require that person to pay forthwith, where the moneys are immediately payable, and, in any other case, as and when the moneys become payable, the moneys otherwise payable to the tax debtor in whole or in part to the Receiver General on account of the tax debtor’s liability under this Acct.

The amount is clearly recoverable under that subsection since the applicant was a person liable to make a payment of $15 million under the Act and since the liability includes interest, I would find that the three requirements to pay addressed to the trust company were authorized by law.

Turning now to the notice of assessment itself, subsection 195(8) provides:

195 (8) Sections 151, 152, 158, 159 and 162 to 167 and Division J of Part I are applicable to this Part, with such modifications as the circumstances require.

Subsections 4 and 7 of section 152 allow the Minister to assess at any time. It is true that such an assessment is to be made normally after an income tax return has been filed or should have been filed. However, subsection 7 does mention "information supplied by taxpayer"" and subsection 195(8) does specifically provide that section 152 is to be applied to Part VIII with such modifications as the circumstances require. By its designation of $30 million, showing $15 million as tax payable under Part VIII, the applicant admitted liability for that amount and the Minister might well have been entitled to assess the applicant as it did following receipt of the designation

As indicated in the style of cause, the applicant originally intended to rely on certain sections of the Constitution Act, 1982. At the opening of the hearing before me, however, he indicated that the provisions of that Act would neither be invoked nor argued.

The application is dismissed with costs.

Application dismissed.