Parsons v. MNR, 83 DTC 5329, [1983] CTC 321 (FCTD), rev'd 84 DTC 6345, [1983] CTC 352 (FCA)

Cattanach, J:—By notice of motion pursuant to Rule 603 the applicants move for an order that:

(a) three assessments made by the Deputy Minister of National Revenue and dated February 8, 1983 against each of the applicants herein in the like amount of $454,425.27 made under subsection 159(3) of the Income Tax Act consequent upon a purported failure by them to comply with subsection 159(2) of that Act “being the amount of unpaid tax is payable by or in respect of North Carleton Land Company Limited (hereafter referred to as “North Carleton”) for the taxation years 1978 and 1979” should be removed into this Court and quashed.

(The statement common to the notices of assessment that $454,425.27 is the amount of unpaid tax payable by North Carleton is wrong. The taxes ultimately assessed against North Carleton were $681,321.67 for its 1978 taxation year and $36,758.72 for its 1979 taxation year, a total for the two years of $718,080.39 not $454,425.27 or $1,363,275.81.)

(b) an injunction restraining the Minister, his agents, servants and employees from taking any further action pursuant to the said assessments or otherwise attempting to enforce or realize the same.

North Carleton is a company incorporated pursuant to the law of New Brunswick of which the applicants, A W C Parsons and Hugh J Flemming Jr as was the late Hugh John Flemming Sr who died on October 16, 1982, were the directors.

On June 14, 1979 the 1978 tax return of North Carleton was assessed by the Minister as “NIL”.

Some four months later the board of directors consisting of A W C Parson, Hugh John Flemming Sr, Hugh John Flemming Jr, William L Hoyt, QC (now Mr Justice Hoyt) and F G Flemming convened in meeting on October 16, 1979 and declared a dividend in respect of the common shares in the capital stock of North Carleton of $908.85 per share for a total of $454,425.27, the entire amount being paid to Flemming Industries Limited, the sole shareholder except for directors qualifying shares held in trust.

Mr Justice Hoyt and F G Flemming were not present. Hoyt, J, waived notice and consented to the transaction of such business as came before the meeting.

Subsequent to the filing of North Carleton’s return for the 1979 taxation year, on May 27, 1981, by notice of that date, the Minister reassessed the taxpayers in the amount of $681,321.67 inclusive of interest in the amount of $138,489.19 for its 1978 taxation year which had been previously assessed on June 14, 1979 with no tax being payable and on the same date also reassessed North Carleton for its 1979 taxation to an amount of $36,758.72 a total for the two years of $718,080.39.

On August 20, 1981, North Carleton filed a notice of objection.

On July 6, 1982 the Minister disallowed the objection and confirmed the assessments.

On September 27, 1982 a notice of appeal to the Tax Review Board was filed by North Carleton with respect to the assessments for its 1978 and 1979 taxtion years dated May 27, 1981.

On October 16, 1982 Hugh John Flemming Sr died. By his last will and testament he appointed Hugh John Flemming Jr, A W C Parsons, The Honourable Mr Justice William L Hoyt and the Royal Trust Corporation of Canada to be his executors and trustees.

On January 27, 1983 the Royal Trust renounced its right and title to participate in the administration of the Estate as executor and trustee.

As at February 1, 1983 the matter had been before the Department of National Revenue for two years.

On February 8, 1983 the Minister issued notices of assessment pursuant to subsection 159(3) of the Income Tax Act against A W C Parsons and Hugh John Flemming Jr in their personal capacities as directors of North Carleton, each in the amount of $454,425.27 being the amount of the dividend declared on October 16, 1979 by the Board of Directors of North Carleton of which they were members participating in the declaration and against the Estate of the late Hugh John Flemming Sr in the same amount.

These are the assessments presently sought to be removed into this Court and quashed.

Like assessments were not issued against Mr Justice Hoyt and F G Flemming perhaps because the Minister considered it expedient not to do so as they were not present at the meeting of the Board at which the dividend was declared.

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.

There seems little likelihood that the facts upon which the assessments are based are susceptible of dispute between the parties or variation on trial.

In the light of these circumstances the suggestion was made by counsel for the applicants to expedite the matter by resort to subsection 173(1) of the Income Tax Act, of which reads:

173. (1) Where the Minister and a taxpayer agree in writing that a question of law, fact, or mixed law and fact arising under this act should be determined by the Federal Court, that question shall be determined by the Court pursuant to subsection 17(3) of the Federal Court Act.

The Minister spurned that suggestion as it is his right to do but which refusal inspired the applicants to seek the expeditious remedy of certiorari by the present motion.

The matter turns upon the proper interpretation of section 159 of the Income Tax Act particularly subsections 2 and 3 thereof.

The purpose of the section is clear. Persons who are obliged by section 150 to file a return of income on behalf of another person or persons acting within the fiduciary capacity contemplated by subsection 159(2) may be held personally liable for unpaid taxes, interest and penalties if that person has not first obtained a clearance certificate from the Minister before the distribution of any property under his control.

Whether a director is such a person is a question of the interpretation of the Statute. A determination based upon an erroneous interpretation of a Statute is an error of law patent on the face of the record and as such is subject to relief by way of certiorari almost ex debito justicia (an unfortunate expression for the reasons outlined by Beetz, J in Harlekin v University of Regina, [1979] 2 SCR 561 at 576).

The contention by counsel for the respondent is that a privative provision exists in section 29 of the Federal Court Act which reads:

29. Notwithstanding sections 18 and 28, when provision is expressly made by an Act of 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.

The moot question is whether section 29 of the Federal Court Act is applicable to the appeals from an assessment provided for in the Income Tax Act.

The applicability of section 29 in a particular circumstance is dependant on the nature of the appeal provided by the statute in question.

In many instances the jurisdiction of the Court under section 18 of the Federal Court Act extends to matters which are subject to appeal and as well to those which are not.

By section 18 of the Federal Court Act the Trial Division has exclusive Original jurisdiction to issue an injunction and a writ of certiorari, which is the relief sought by the applicants herein, against any Federal board, commission or other tribunal. The Mnister in exercising or purporting to exercise powers conferred by the Income Tax Act, is such a board.

The act of assessing has been held by Thorson, P (confirmed by the Privy Council) in Pure Spring Co v MNR,[1946] CTC 169; 2 DTC 844, to be an administrative act and not one of a judicial nature. It is the assessment which fixes the quantum of the tax and liability therefor by a taxpayer. It is the act of calculation of the tax.

Since the act is administrative it is not within section 28 of the Federal Court Act but it is within section 18. That has been resolved in Martineau v Matsqui Institution Disciplinary Board (No 2), [1980] 1 SCR 602.

Section 18 differs from section 28 in that the grant of the equitable and prerogative relief therein provided is from its very nature inherently discretionary.

The fact that an appeal may be provided is but one circumstance to be considered in the exercise of that discretion and is not of itself conclusive.

Section 165 of the Income Tax Act provides that a taxpayer who objects to an assessment (as all tapayers do) may file a notice of objection setting forth the reasons therefor and all relevant facts.

Upon receipt of a notice of objection it is the duty of the Minister with all due despatch to reconsider the amount.

This has been referred to by counsel or the respondent as an “in-house” appeal.

In my opinion it is not an appeal. It continues to be part and parcel of the assessment process.

If vacated that would no doubt satisfy a taxpayer and end the matter.

However, if the assessment is confirmed or varied somewhat provision is made in section 169 for an appeal by the taxpayer to the Tax Review Board or to the Federal Court of Canada pursuant to subsection 172(2).

But the filing of a notice of objection to the assessment is a condition precedent to an appeal either to the Tax Review Board or the Fedeal Court and it remains a condition precedent even if the taxpayer wishes to circumvent reconsideration by the Minister and appeal directly to the Board or the Court in accordance with paragraph 165(3)(b) of the Act.

The assessment by the Minister, which fixes the quantum and tax liability, is that which is the subject of the appeal.

The quantum is not the basis of the attack by the applicants in this instance.

The basis of the attack upon the assessments is that the Minister did not have the power by law in the circumstances to make the assessments and accordingly they are void as well as illegally made.

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 assessement 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 applicants.

Having concluded that this Court is vested with jurisidiction the question arises as to whether the Court ought to exercise that jurisdiction or decline to do so.

The prerogative and equitable relief sought by the applicants is discretionary and being discretionary the discretion must be exercised upon sound judicial principles.

A gound traditionally relied upon to warrant the refusal to grant discretionary remiedies is the applicants’ failure to exhaust an alternate remedy of appeal if provided.

However where there has been a wrongful assumption of authority, as a result of an error of law, as is alleged to be the case here, the courts have exhibited a marked reluctance to compel resort to statutory appeal procedures. In such circumstances the fact that the applicant has not taken advantage of a statutory right of appeal is not normally regarded as relevant in the consideration of the exercise of judicial discretion.

An error in jurisdiction or an error of law in the record almost invariably and automatically results in the grant of certiorari.

The power of the Minister to make assessments must be based upon the legal authority to do so and can be set aside by reason of the wrongful interpretation and application of the provision of the statute upon which the Minister relies.

As I have concluded and as I view the matter the applicants have three avenues of recourse available to them.

The first avenue would be to lodge notices of objection, pursue that step in the assessment process to its end, and in the event that this end resulted in confirmation of the assessments to appeal to the Tax Review Board and possibly thence to the Federal Court or directly to the Federal Court. The appeal to the Federal Court is a trial de novo with all the rights applicable in and procedures incident to the trial of an action.

I do not overlook that the continuation of the assessment process within the Department of National Revenue can be circumvented and the notice of objection serve as an appeal directly to the Tax Review Board or to the Federal Court with the notice of objection serving as the originating pleading.

The second recourse, which was initiated by the applicants, is for the taxpayer and the Minister to agree that a question of law should be determined by the Federal Court. For reasons best known to the Minister he did not agree to the initiative of the taxpayers which was accordingly aborted.

The third remaining avenue of recourse available to the taxpayers was that presently invoked by them that is by notice of motion pursuant to Rules 603 and 319 for relief by way of certiorari and injunction against the Minister provided for by section 18 of the Federl Court Act.

The question which is posed for answer is which of the two methods available is more appropriate to resolve the issue to be decided, which is whether it was within the power of the Minister to assess the applicants as he purported to do pursuant to subsections 159(2) and (3) of the Income Tax Act or, put another way, was the Minister wrong in law in assessing the applicants as he did.

To ascertain which is the more appropriate regard must be had to all the circumstances of the case paramount amongst which is the relief sought by the remedy invoked and the adequacy of the alternate remedy.

Certiorari is the prerogative writ adopted to quash a decision based upon an error of law which is apparent from the record. The question therefore resolves itself into one of law. None of the facts antecedent to the assessment are susceptible of dispute. Those facts have been set forth at the outset. A full dress trial is not necessary to establish those salient facts.

I am convinced that the statutory appeal provided in the Income Tax Act predicated as it is by a condition precedent involving time and expense to the applicants does not afford the applicants a more adequate remedy than the present remedy elected by them.

There can be no question that it is more convenient in terms of cost and expedition.

Time is of particular significance to one of the applicants who is engaged in a professional occupation.

Upon assessment by the Minister liability for the quantum thereof is immediate upon the mailing of notice thereof and payment is likewise immediate regardless of an objection lodged or an appeal outstanding. The amount of the assessment is a debt due the Crown and is recoverable as such with interest running thereon. There is no equity in a taxing statute nor in the administration thereof. Thus to be a debtor to the Crown in such a substantial amount is detrimental to this particular applicant in his professional capacity. This is a consideration to which no weight can be attached other than the principle expressed in the maxim that justice delayed is justice denied.

The remedy presently adopted by the applicants is available to them subject only to this remedy being barred by the provision of a more adequate remedy.

The more adequate remedy advanced by the Minister is the filing of a notice of objection. It is not my function to decide the efficacy thereof which was the subject of comment by counsel for the rival parties. As I have said before it is not an appeal but merely a prolongation of the process of assessment by the Minister but it is, without exception, a condition precedent to an appeal.

In the event of confirmation in this objection process there remains an appeal to either the Tax Review Board and/or to the Federal Court.

That objection and ultimate appeal is to and from the assessment, the validity of which would arise only incidentally.

Rather than adopt this circuitous route the applicants elected the more direct route of going directly to the heart of the matter which is, as repeatedly stated before, whether the Minister erred in law in assessing the ppli- cants as he did.

I am not satisfied that the alternate route propounded by the Minister is the more appropriate.

On the other hand it appears more appropriate that the circuitry consequent upon prosecuting an appeal in the manner prescribed in the Income Tax Act is not necessary or convenient, expeditious and beneficial to the applicants’ clear ultimate end, that is to demonstrate an error in law on the part of the Minister, and is available by the more direct course to which the applicants have had resort.

For the cumulative effect of these circumstances I entertain the application for prerogative and injunctive relief.

This then brings me to the consideration of the crux of the matter which is the straightforward question of law in the circumstances outlined which is did the Minister err in law in assessing the applicants.

By virtue of subsection 152(1) of the Income Tax Act it is the duty of the Minister to forthwith examine a taxpayer’s income tax return for a taxation year and assess the tax for the year, the interest and penalties, if any, payable and determine the amount of refund or tax. That tax becomes a debt due the Crown immediately payable by virtue of section 222. The nature of debts due the Crown and their collection is a matter of Royal prerogative which stems, not from the Income Tax Act, but from the common law where the Sovereign’s and the subject’s title concur the Sovereign’s share prevail. Here the respondent’s title is disputed.

Within the all encompassing net case by the Income Tax Act since the Income War Tax Act were provisions like those now included in subsections 159(1), (2) and (3) which are reproduced.

159. (1) Every person required by section 150 to file a return of the income of any other person for a taxation year shall, within 30 days from the day of mailing of the notice of assessment, pay all taxes, penalties and interest payable by or in respect of that person to the extent that he has or had, at any time since the taxation year, in his possession or control property belonging to that person or his estate and shall thereupon be deemed to have made that payment on behalf of the taxpayer

(2) Every assignee, liquidator, administrator, executor and other like person, other than a trustee in bankruptcy, before distributing any property under his control, shall obtain a certificate from the Minister certifying that taxes, interest or penalties that have been assessed under this Act and are chargeable against the payment thereof has, in accordance with subsection 220(4), been accepted by the Minister.

(3) Distribution of Property without a certificate required by subsection (2) renders the person required to obtain the certificate personally liable for the unpaid taxes, interest and penalties.

Subsections 159(2) and (3) under which the Minister has assessed the applicants herein are essentially penal in nature.

If the persons who are in control of assets which do not belong to them distribute those assets without first paying any taxes owing by the beneficial owner or first ascertaining that no taxes are payable and obtain a certificate by the Minister to that effect in accordance with subsection 159(2) renders the person who distributes any property under his control personally liable for the unpaid taxes.

Being essentially penal in nature the sections must be strictly construed and the person sought to be penalized must be brought precisely within the terms of the subsections.

It will be recalled that North Carleton filed its income tax return for its 1978 taxation year.

On June 14, 1979 the Minister by his notice of assessment affirmed that no tax was payable by North Carleton.

On October 16, 1979, four months later, the board of directors declared a dividend payable to the common shareholders of North Carleton.

The Board did so after the receipt of an assessment by the Minister dated June 4, 1979 that no taxes were assessed and accordingly no taxes were payable.

Long later on May 27, 1981 upon the filing of the tax return by North Carleton for its 1979 taxation year the Minister assessed North Carleton for its 1979 taxation year in an amount of $36,758.72 and at the same time reassessed North Crleton for its 1978 taxation year in an amount of $681,321.67.

Naturally these assessments to income tax have been appealed by North Carleton.

But because the board of directors of North Carleton, after having received a nil assessment, declared a dividend of $454,425.27 to the common shareholders, three members of that board, the applicants herein, were each personally assessed for taxes in that amount under subsection 159(3) because they had not obtained certificates that no taxes were payable under subsection 159(2).

By Interpretation Bulletin IT-368 dated March 28, 1977 and entitled, “Corporate Distributions — Clearance Certificates” a wide application is given to subsections 159(2) and (3) by the Minister,

Paragraphs 1, 2 and 3 of that Bulletin are those relevant in this matter.

Paragraph 1 reads:

1. By virtue of subsection 159(2) every assignee, liquidator, administrator, and other like person (except a trustee in bankruptcy) must request and obtain a clearance certificate before distributing any property under his control if he wishes to avoid being personally liable for the unpaid taxes, interest, and penalties of a corporation pursuant to subsection 159(3). A clearance certificate is issued on form TX21.

This paragraph reproduces the substance of subsection 159(2).

Paragraph 2 reads:

2. The term “and other like person” includes any person acting in the capacity of liquidator, whether or not a formal appointment was made. In a voluntary dissolution, there may be no formally appointed liquidator and responsibility may have been assumed by an auditor, director, or other person. Whether or not a person falls within the scope of subsection 159(2) will be determined in accordance with the facts of the particular case.

The Minister’s interpretation is not relevant in the circumstances of this matter. North Carleton has not been placed in liquidation nor has it gone into voluntary liquidation. It is a subsisting corporation. Accordingly no director has assumed any responsibility in connection with a voluntary liquidation to infect him with the capacity of a liquidator nor have any acts been done by the directors which are susceptible of that interpretation.

What the board of directors has done was to declare a dividend. It is an established principle of common law, implemented in the applicable corporate legislation in Canada and the Provinces, that a declaration of a dividend which would impair the capital of the company is void.

Here the dividend was declared at a duly constituted meeting of the Board of Directors on October 16, 1979.

The maxim, “Omnia praesumuntur legitime facta donee probetur in con- trarium” is appliable.

The presumption that the dividend had been properly declared has not been contradicted as was the privilege of the respondent to do if circumstances so warranted but which the respondent did not choose to exercise.

Paragraph 3 of the Bulletin reads:

3. According to subsection 159(3), where no clearance certificate is obtained, a person described in subsection 159(2) could be held liable to all taxes, interest, and penalties, whether or not assessed prior to the distribution of property. However, the liability of the person under subsection 159(3) is limited to the value of the property he distributed.

It states that according to subsection 159(3), where no clearance certificate is obtained, a person described in subsection 159(2) could be held liable to all taxes, interest and penalties, whether or not assessed prior to the distribution of property.

The crucial words in this paraphrase of subsection 159(3) are, “all taxes, interest and penalties whether or not assessed prior to the distribution of property”.

The language of subsection 159(3) is to the effect that distribution of property without the Minister’s certificate renders the person required to obtain the certificate “personally responsible for the unpaid taxes, interest and penalties”. The definite article “the” precedes the words “unpaid taxes”. How there can be specific taxes unpaid without an obligation to pay first arising, which is, under the Income Tax Act, by assessment by the Minister, cannot in logic follow.

An interpretation bulletin is precisely what it is stated to be. It is nothing more than some departmental officer’s interpretation of subsections 159(2) and (3) of the Act and has no legal effect whatsoever other than it is directed to employees of the Department responsible for assessing taxpayers who will follow it without question. The limit of their discretion is to do what they are told.

That interpretation does violence to the clear language of subsection 159(2).

Subsection 159(3) imposes liability if distribution of property is made “without the certificate required by subsection 2”.

Thus to render a person liable for all the unpaid taxes, interest and penalties that person must have failed to obtain a certificate contemplated by subsection 159(2).

A person within the categories mentioned in subsection (2) before distributing any property under his control shall obtain a certificate from the Minister that taxes, interest and penalties “that have been assessed under this Act” have been paid or secured.

That language on its face creates a liability only when distribution of property has been made after an assessment has been made. The language is clear and is susceptible of no other meaning. Certainly taxes do not become payable before assessment.

In this instance an assessment of North Carleton was made on June 14, 1979. As at that date no “taxes, interest or penalties” had been assessed under the Income Tax Act from which it follows that there was no necessity to obtain the Minister’s certificate and no impediment to the distribution of property by way of declaration of dividends by the Board of Directors of North Carleton if the creation of a right is susceptible of meaning a distribution of property within the definition of the word “property” in subsection 248(1) which is dubious.

Further subsection 159(2) provides that the “taxes, interest or penalties” that have been assessed must be “chargeable against or payable out of the property”. The “property” must be that “under the control” of the person who distributes it.

Naturally the question arises as to what “property” a director has under his control.

The directors of a company form a board to which the duty is delegated by the shareholders of managing the general affairs of the company. They have the power of management and the conduct of the business of the company. Put at its very broadest it is conceivable that all assets of the company are under the control of the board of directors, but subject to the control of the board by the shareholders. Ultimate control reposes in the shareholders.

Accepting the dubious assumption that it is all assets of the company that are under the control of the directors as a board, how then are taxes which have been assessed chargeable against or payable out of the assets of the company The Income Tax Act does not impose a lien on property for the payment of taxes unless one of the collection procedures was taken with a resultant charge.

Further the question arises as to whether a “director”, as each of the applicants is, falls within the initial language of subsection 159(2) reading, “Every assignee, liquidator, administrator, executor and other like person, other than a trustee in bankruptcy’ who ae obligated to obtain a certificte of the Minister before distributing property under their control.

A trustee in bankruptcy is excepted being elsewhere covered.

The word “director” is a term of art and accordingly has a technical meaning in respect of corporations. Use is made of the word “director” in other provisions of the Income Tax Act but the word is not included in the initial words of subsection 159(2).

Prima facie if it is not included it is excluded unless included in the words, “and other like person” on the doctrine of ejusdem generis.

General words following specific words are ordinarily construed as limited to things ejusdem generis with those before enumerated.

The general words in subsection 159(2) are “and other like person”. The use of the word “and” and the word “person” in the. singular is unusual draftsmanship. The more frequent use would be the word “or” and the word “persons” in the plural. It is conceivable that the word “and” should join only the word “executor” as well as the word “person” being in the singular.

However a “director” is not “like” any of the preceding persons let alone an “executor” exclusively.

The specific words which are to govern the general words “and other like person” are “assignee, liquidator, administrator, executor” all of which are terms of art having a specific meaning in their legal context and are so used in subsection 159(2).

An assignee is a person to whom an assignment is made and assignment means that property is transferred to another. The assignee is the recipient of that property.

A liquidator is a person appointed to carry out the winding up of a company whose duty is to get in and realize the property of the company, to pay its debts and to distribute the surplus (if any) among the shareholders.

An executor is the person to whom the execution of a will is entrusted by a testator. Strictly speaking an executor is bound to satisfy all claims on the estate before distributing it among the legatees and other beneficiaries.

An administrator is the person to whom the property of a person dying intestate is committed for administration and whose duties with respect thereto correspond with those of an executor.

Basically the directors of a company are those persons acting collectively to whom the duty of managing the general affairs of the company is delegated by the shareholders. Their duty is to conduct the business of the company for the greatest benefit of the shareholders.

Directors have been described as “agents”, “trustees”, and “managing partners” but each such description has been judicially negated.

They have been held not to be exactly agents, not exactly trustees, not exactly managing partners. They are not the masters of the shareholders; neither are they servants of the shareholders. Their relationship is one requiring an exercise of fidelity having in view of the purposes for which they are appointed and the statutory provisions under which their appointment is made.

The position of a director is very different from that of an agent or an ordinary trustee. The property of the company may not be legally vested in the directors.

Likewise the duties, rights and obligations of a director and the position of a director generally is also far different from those of an assignee, a liquidator, an administrator or an executor, so different in fact as to be unlike those of such persons from which it follows that a director is not “another like person” to those specific persons preceding these general words as used in subsection 159(2).

A director is not a person obligated to file an income tax return under section 150 of the Income Tax Act to which reference is made in subsection 159(1).

The obligation of the applicants here to obtain a certificate of the Minister certifying that taxes that have been assessed have been paid is governed by subsection 159(2).

For the reasons expressed in the circumstances which have also been described no such obligation was incumbent upon the applicants.

Accordingly the assessments made by the Minister on February 8, 1983 against the applicants herein are quashed and the Minister, his agents, servants and employees are restrained from taking any further action or steps pursuant to the said assessments or to otherwise attempt to enforce or realize upon the said assessments.

The plaintiffs shall be entitled to their costs.