Date: 20060727
Docket: A-535-05
Citation: 2006 FCA 266
CORAM: DÉCARY J.A.
LINDENJ.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JULIUS ROITMAN
Respondent
REASONS FOR JUDGMENT
DÉCARY J.A.
[1] This appeal raises once again the issue of the respective jurisdictions of the Federal Court and of the Tax Court of Canada in claims related to income tax assessments.
The facts
[2] The respondent, Mr. Roitman is a businessman who at all material times was a Director, the President, Manager and sole shareholder of Gold Seal Motors Ltd. ("Gold Seal"). Gold Seal carried on a business of buying and selling automobiles. Some of its inventory was sold by way of public auction, in which case Gold Seal deducted, for income tax purposes, the amounts it paid to individuals for driving the vehicle to the auction site.
[3] The Minister of National Revenue (the "Minister") disallowed certain claims for expenses. Mr. Roitman and Gold Seal objected to the reassessments of their 2000, 2001 and 2002 taxation years and provided the Minister with submissions in support of their position.
[4] The Minister accepted the submissions in part and responded with a settlement proposal. He advised Mr. Roitman that, if he did not agree with the settlement proposal, the Minister would confirm the assessment and Mr. Roitman could then pursue the issue in the Tax Court of Canada. At all material times Mr. Roitman and Gold Seal were represented in the settlement negotiations by a chartered accountant.
[5] On December 23, 2004, both Mr. Roitman and Gold Seal accepted the Minister's settlement proposal. They signed a settlement agreement whereby the Minister would reassess Mr. Roitman and Gold Seal in accordance with the Minister's proposed settlement.
[6] In signing the agreement, Mr. Roitman and Gold Seal acknowledged that they were "familiar with subsections 165(1.2) and 169(2.2) of the Income Tax Act" and that they understood that in accepting the proposal, they "will be precluded from filing an objection or an appeal under the Income Tax Act" (A.B. p. 81).
[7] Mr. Roitman was reassessed in accordance with the terms of the settlement agreement on January 24, 2005. Pursuant to those terms, Mr. Roitman filed no objection to the reassessment.
[8] On June 15, 2005, Mr. Roitman filed the Statement of Claim which is at issue in this appeal.
[9] The Statement of Claim identifies the claim as a Proposed Class Action. Mr. Roitman, "on his own behalf and on behalf of all class members", seeks damages against Her Majesty the Queen "joined herein as a representative of the Federal Government of Canada and more specifically the Canada Customs and Revenue Agency (the "Agency")". Mr. Roitman alleges that in reassessing him, the Crown engaged in "deliberate conduct ... to deny ... the plaintiff the benefit of the law". The damages sought are "damages for misfeasance in public office", "special damages, including costs of defending the proposed income tax assessments and in prosecuting the civil income tax appeal" and "punitive, exemplary and aggravated damages".
[10] On August 2, 2005, the Crown filed a Statement of Defence.
[11] On August 26, 2005, the Crown filed a motion pursuant to Rule 221 of the Federal Court Rules, 1998 (the "Rules") on the ground that the Statement of Claim was immaterial, redundant, scandalous, frivolous and vexatious, and was otherwise an abuse of the process of the Court. The Crown argued, essentially, that the Statement of Claim was to be struck out because in effect it challenges the legality of assessments of income tax by the Minister, a matter which is exclusively within the jurisdiction of the Tax Court of Canada and with respect to which, in any event, Mr. Roitman had waived his right to object and appeal.
[12] In the alternative, the Crown was requesting a hearing for a preliminary determination on a question of law pertaining to the interpretation of the Federal Court of Appeal's decision in The Queen v. Franklin, 2002 D.T.C. 6803 (F.C.A.).
[13] The motion was heard on September 23, 2005. Reasons were issued on October 14, 2005 and the Order was made on November 8, 2005 (2005 FC 1385). The Federal Court Judge dismissed the motion to strike out the Statement of Claim. Relying exclusively on the decision of this Court in Swift v. Her Majesty the Queen, 2004 D.T.C. 6651 (F.C.A.), he implicitly reached the view that the claim did not seek to set aside the assessment but was in essence a claim for damages for fraudulent actions of the Agency. He then went on to order that the following question of law be determined prior to the trial:
Does the decision of the Federal Court of Appeal in Franklin v. Minister of National Revenue, 2002 D.T.C. 6803, require the Minister of National Revenue to apply a set-off between a s. 15(1) benefit and any shareholder loan as recorded by the taxpayer, regardless of any surrounding circumstances, and preclude the Minister from considering individual s. 15(1) cases on their own particular facts in any case and in any circumstances?
[14] The Crown filed a Notice of Appeal on November 9, 2005.
Treatment of a motion to strike
[15] This motion to strike is based on the ground that "the Statement of Claim is immaterial, redundant, scandalous, frivolous and vexatious, and is otherwise an abuse of the process of the Court". A claim may be said to be frivolous when, assuming the facts in a statement of claim to be true, it is plain and obvious or beyond reasonable doubt that it cannot succeed (Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959, Wilson J. at page 980). A claim found not to be within the jurisdiction of the court in which it is filed will be struck out as being frivolous, as having no reasonable cause of action or as being an abuse of process.
[16] A statement of claim is not to be blindly read at its face meaning. The judge has to look beyond the words used, the facts alleged and the remedy sought and ensure himself that the statement of claim is not a disguised attempt to reach before the Federal Court a result otherwise unreachable in that Court. To paraphrase statements recently made by the Supreme Court of Canada in Vaughan v. Canada, [2005] 1 R.C.S. 146 at paragraph 11, and applied by this Court in Prentice v. Canada (Royal Canadian Mountain Police), 2005 FCA 395, at paragraph 24, leave to appeal denied by the Supreme Court of Canada, May 19, 2006, SCC 31295, a plaintiff is not allowed to frame his action, with a degree of artificiality, in the tort of negligence to circumvent the application of a statute.
The Statement of Claim
[17] The Statement of Claim is a document carefully drafted by experienced counsel. It clearly puts the validity and merits of the reassessment squarely at issue. Paragraphs 21 through 26 demonstrate that the claim is based on the assertion that the Minister had no legal authority to raise the reassessment. The crux of the cause of action is set out at paragraphs 25 and 26:
25. The Plaintiff says that the actions of the CCRA through its officers at Head Office Appeals Division and Head Office Audit Division and through its officers and employees throughout the various TSOs amounts to a deliberate misapplication of the law as established in Franklin and in doing so the CCRA has engaged in deliberate and unlawful conduct in its capacity as a Public Officer. Further, it is the Plaintiff's position that the CCRA was aware that its conduct was unlawful and that it was likely to harm the Plaintiff.
26. The Plaintiff says that the aforesaid deliberate conduct by the CCRA to deny taxpayers, and the Plaintiff in particular, the benefit of the law, constitutes a breach of statutory authority, misfeasance in public office, negligent statutory administration, abuse of power and a disregard of fundamental justice which resulted in loss and damage to the Plaintiff and unjust enrichment to the Defendant.
[18] Counsel for Mr. Roitman all but conceded at the hearing that the claim could go nowhere unless the notice of reassessment is found to be wrong in law, as well as the result of the unlawful exercise of the Minister's statutory authority. His position is that the Minister does not have the right to knowingly misinterpret the law, which, the argument goes, is precisely what the Minister did in not applying the teaching of this Court in Franklin. Counsel also confirmed that no fraud was alleged and that the Statement of Claim does not refer to, or seek to set aside, the settlement agreement or the waiver of the taxpayer's right to file an objection or an appeal.
Jurisdiction of the Federal Court and of the Tax Court of Canada
[19] Subsection 152(8) of the Income Tax Act deems an assessment to be valid and binding unless varied or vacated in accordance with the appeal process under the Act. The Tax Court has exclusive jurisdiction to determine the correctness of tax assessments. This exclusive jurisdiction is established by a combination of ss. 152(8) and 169 of the Income Tax Act, s. 12 of the Tax Court of Canada Act and ss. 18, 18.1 and 18.5 of the Federal Courts Act.
[20] It is settled law that the Federal Court does not have jurisdiction to award damages or grant any other relief that is sought on the basis of an invalid reassessment of tax unless the reassessment has been overturned by the Tax Court. To do so would be to permit a collateral attack on the correctness of an assessment. (See M.N.R v. Parsons, 84 D.T.C. 6345 (F.C.A.) at p. 6346; Khan v. M.N.R., 85 D.T.C. 5140 (F.C.A.); Optical Recordings Corp. v. Canada, [1991] 1 F.C. 309 (C.A.), at pp. 320-321; Bechtold Resources Limited v. M.N.R. 86 D.T.C. 6065 (F.C.T.D) at p. 6067; A.G. Canada v. Webster (2003), 57 D.T.C. 5701 (F.C.A.); Walker v. Canada, 2005 FCA 393; Sokolowska v. The Queen, 2005 FCA 29; Walsh v. Canada(M.N.R.), 2006 FC 56; Henckendorn v. Canada, 2005 FC 802; Angell v. Canada (M.N.R.), 2005 CF 782.)
[21] It is also settled law that the Tax Court of Canada does not have jurisdiction to set aside an assessment on the basis of abuse of process or abuse of power (see Main Rehabilitation Co. Ltd. v. The Queen, 2004 FCA 403, at paragraph 6; Obonsawin v. The Queen, 2004 G.T.C. 131 (T.C.C.); Burrows v. Canada, 2005 TCC 761; Hardtke v. Canada, 2005 TCC 263).
[22] In Walker (supra), this Court, in deciding that the "legal efficacy" of a notice of reassessment could only be challenged in the Tax Court of Canada, stated at paragraph 13 that:
"Section 18.5 of [The Federal Courts] Act should be interpreted, as far as possible, to preclude parallel proceedings in the Federal Court and the Tax Court of Canada in respect of substantially the same underlying issue".
[23] In Addison & Leyen Ltd. v. Canada, 2006 FCA 107, Sharlow J.A., writing for the majority, held that the exercise by the Minister of National Revenue of his discretion under section 160 of the Income Tax Act to make a third person jointly and severally liable to pay the primary tax liability of a taxpayer, could be challenged in the Federal Court. She did so essentially on the basis that the use of section 160 is discretionary and "that section 160 of the Income Tax Act is primarily a collection tool rather than an assessment tool" (at paragraph 71). She was careful to state at paragraph 74:
"It goes without saying that such an extreme remedy would not be granted lightly, and only in the most egregious of circumstances"
[24] In the case at bar, the income tax assessment in issue is an assessment of Mr. Roitman's own tax liability. The true ground for the relief sought is the allegation that the assessment is contrary to the alleged teaching of this Court in Franklin. The damages are in reality sought on the basis of an invalid reassessment made on the basis of a wrong interpretation of the law. For all practical purposes, then, it is the very legality or correctness in law of the notice of reassessment which is at issue. This, clearly, is a matter within the exclusive jurisdiction of the Tax Court of Canada.
[25] Counsel for Mr. Roitman alleges abuse of process on the part of the Minister in issuing the notice of assessment. The alleged abuse is that of a deliberate incorrect interpretation of the law. The allegation assumes that the law has been incorrectly interpreted, which in turn assumes that the reassessment is invalid, a determination that can only be made by the Tax Court of Canada. To paraphrase the words of Hugessen J. in Walsh (supra, at paragraph 5), the relief based on the alleged deliberate actions of the Minister or of the Agency "would be a meaningless exercise when divorced, as is must be, from the substantial question as to the validity of the assessment itself". It is remarkable that the very question the Judge ordered to be decided prior to trial by the Federal Court is precisely the type of legal question that would normally fall within the very expertise and domain of the Tax Court of Canada. It is clear in the end that the claim for damages can only succeed if the reassessment is first found to be invalid. The Statement of Claim is, at best, premature.
[26] Furthermore, as the notice of reassessment was issued on January 24, 2005 and as the Statement of Claim was filed on June 15, 2005 it cannot even be said that Mr. Roitman had no knowledge of the alleged improper conduct of the Minister within the time period contemplated by subsection 166.1(7) of the Income Tax Act during which a taxpayer may seek an extension of time from the Minister to challenge a reassessment. It goes without saying that the Federal Court does not acquire jurisdiction in matters of income tax assessments simply because a taxpayer has failed in due course to avail himself of the tools given to him by the Income Tax Act.
[27] The Federal Court Judge relied exclusively on the decision rendered by this Court in Swift. With respect, the decision in Swift, which was rendered in brief oral reasons from the bench, cannot be extended beyond the particular facts which were before the Court. The taxpayer was alleging inter alia that the Agency had "knowingly made false claims for G.S.T.", that the Minister had issued "imaginary and fraudulent assessments" and that the Agency had "arranged" with the taxpayer's trustees in bankruptcy to discontinue his appeals against the assessments. The Court simply gave the taxpayer the benefit of the doubt in exercising its discretion at the stage of a motion to strike. In the Court's view, since the Statement of Claim was "a rather rambling discourse related to the action taken by CCRA" and was "lacking in detail as to the allegation of fraud", it was "not totally (my emphasis) clear that the Statement of Claim is frivolous and vexatious" (at paragraph 9). In the case at bar, counsel has acknowledged that no fraud is alleged.
[28] The conclusion I have reached is akin to that reached by the Court of Appeal of British Columbia in Smith et al. v. Canada (Attorney General) et al., 2006 BCCA 237, where a taxpayer had brought a class action in the Supreme Court of British Columbia against the Queen in right of Canada, the Minister of National Revenue, Canada Customs and Revenue Agency and others. The essence of the claim was that truck drivers should be allowed deductions for meals at the rates the federal government pays its employees, when they travel on business. In dismissing the claim as disclosing no reasonable cause of action, Donald J. A. stated as follows:
[10] The appellants also plead other causes of action: negligence; breach of fiduciary duty; unjust enrichment; breach of trust; and, as added by appellants' counsel in argument on appeal, abuse of public office, although that does not appear in the pleadings.
[11] The causes of action all have a common element: they allege that the respondents acted wrongfully toward the appellants in the rule-making and administration of the tax scheme regarding their meal expenses. This is, in reality, a challenge to the assessments by the Canada Revenue Agency. Since the Income Tax Act provides administrative remedies for disputed regarding income tax assessments, the issues lie outside the jurisdiction of the Supreme Court.
[29] Additionally, I find this Statement of Claim to be an abuse of process. Mr. Roitman has expressly relinquished his ability to exercise his statutory objection and appeal rights in respect of the tax assessments. Yet, there is no mention of the settlement agreement and the waiver in the Statement of Claim, no suggestion is made that they were not properly consented to and no attempt is made to have them set aside. This, in my view, is a clear abuse of process which in and by itself mandates the striking out of the Statement of Claim. This issue was not addressed by the Federal Court Judge.
Disposition
[30] I would allow the appeal, set aside the decision of the Federal Court, grant the Crown's motion and strike out the Statement of Claim, the whole with costs here and below.
"Robert Décary"
"I agree
A.M. Linden"
"I agree
K. Sharlow"
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