Gross v. MNR, 89 DTC 660, [1990] 1 CTC 2005 (TCC)

Taylor, T.C.J.: — This is an appeal heard in Toronto, Ontario on August 30, 1989 against an income tax assessment for the year 1986 in which the Minister of National Revenue disallowed a deduction of $70,000 to the Mocus Foundation, claimed as a charitable donation. According to the notice of appeal the following circumstances obtained:

By notice of assessment dated September 4, 1987 the Minister assessed the appellant in respect of the 1986 taxation year and denied the deductibility of the Donation by the Appellant in computing his income for the 1986 taxation year on the basis that no official receipt for the Donation had been submitted by the Appellant to the Minister.

By a Notice of Confirmation dated September 13, 1988, the Minister confirmed the said Notice of Assessment on the basis that:

the amount of $70,000 claimed as a deduction from income in respect of charitable donations was not in respect of gifts made to a charitable organization registered in Canada in the year within the meaning of paragraphs 110(1)(a) and 110(8) of the Act.

In reply thereto the respondent stated:

The respondent relies, inter alia, upon paragraphs 110(1)(a) and 110(8)(c) and subsection 110(2.2) of the Income Tax Act, R.S.C. 1952, c.148 as amended (“the Act").

The Respondent respectfully submits that the donation, if any, to Mocus Foundation was not a gift made to a registered charity at the time the gift was made.

In the alternative, the Respondent puts the Appellant to the strict proof of the timing and the value of the gift to Mocus Foundation.

Mr. Wolfgang J. Pazzula, lawyer, gave testimony regarding the status of the “registered charity”. I am satisfied there remained no outstanding question with regard to that point.

Mr. J. Graf, chartered accountant, was offered to the Court as an expert witness with regard to valuation. His qualifications for this role were rejected by the Court. It remains an open question in my mind in the light of the analysis of this situation which follows, whether there was any requirement in the first place for counsel for the appellant to consider calling any such evidence.

Counsel for the respondent did not call evidence, and that brought to the fore the real question for the Court.

The point of dispute between the parties finally rested on whether the respondent was entitled to require “strict proof of the timing and the value of the gift—”, supra, in light of the fact that all other matters respecting the nature of the gift had been resolved.

On this point, the fundamental position of counsel for the appellant was stated in argument:

Turning first to the Kit-Win Holdings Limited, [1] at page 5039, the second column —I guess it’s the second to last paragraph starting on the right-hand column:

A taxpayer is entitled to know the findings and assumptions upon which the Minister, or his assessors based the assessment when it was made.

When assumptions are pleaded (or otherwise determined as in Tobias v. Queen [2] . . . then the onus is on the taxpayer as Rand, J. has said "to demolish” the exact assumptions made by the Minister at the time of assessment and no more.

If the Minister has failed to allege as a fact an essential ingredient to the validity of the assessment under the applicable statutory provision there is no onus on the taxpayer to disprove that fact for the assumptions which were made do not of themselves support the assessment.

Finally, in Hiwako [3] at page 6283, the last two lines on page 6283 in the right-hand column:

The question remains, however, as to whether, on the pleadings, there was an onus on the appellant, that was undischarged, to establish that he was not motivated in making the purchase by an intention to use the property in an adventure or operation in the nature of trade.

Such an onus would have to arise from the fact that the assessments were based on an assumption of facts that would support such a conclusion.

Part A of the Statement of Defence, which is headed "Statement of Facts", alleges that, in making the assessments, the Minister of National Revenue assumed inter alia that the appellant purchased the property in question “with the intention of re-selling the same at a profit". l doubt whether such an assumption would be sufficient to support the assessments.

My basic submission, your Honour, is that the assessment was made on the basis that there was no charity in existence in '86 and no gift to that charity.

Ms. Boris indicated that the Minister's second position in this appeal was simply that the shares had no value. I come back to the assessment, your Honour: no where in the assumptions is it stated that the Minister made any assumption as to value; there simply was no assumption as to the fact of value. And the Respondent's initial ground is that, in paragraph 6:

The Respondent submits that the donation was not a gift made to a registered charity at the time when the gift was made.

Again, paragraph 7, —"in the alternative, the Respondent puts the Appellant to strict proof”. That, your Honour, is the essential situation which arose in Brewster [4] . The Minister argued in the alternative and the Trial Division of the Federal Court found that the Minister did so and was required to lead evidence. Ms. Boris this morning has chosen not to lead any evidence as to value but the Minister’s Reply does not contain any assumption as to the fact of value.

In response thereto counsel for the respondent noted:

. . . the taxpayer, the Appellant, since February the 8th, 1959 has been quite aware that the Minister was prepared to reconsider the position on the charity and that the issue indeed was value, and that was mentioned in our Reply.

Now, the Minister may well have made this assumption on the basis that there was no charity in existence at the time the alleged gift was made. He didn't bother looking at value at that stage. Obviously, if he thought there was no charity, there was no looking at value.

At the time the pleadings were filed in February, prior to the pleadings being filed, it was clear to the Appellant that the issue was the value of any alleged donation. The Appellant has adduced no affirmative evidence whatsoever before your Honour as to value and, in that regard, he has not proved that the assessment, as made, would simply deny a charitable donation. The assessment merely disallowed the deduction and he has not shown the Court that the disallowance of a charitable deduction was wrong. And that, in my respectful submission, is the only issue this Court has to decide: Was the assessment wrong?

Counsel for the respondent also supplied the Court with a copy of the following case law, with particular emphasis on the quotation given:

Vineland Quarries and Crushed Stone Limited v. M.N.R., [1970] C.T.C. 12; 70 D.T.C. 6043 at page 6048:

In M.N.R. v. Beatrice Minden, [1962] C.T.C. 79; 62 D.T.C. 1044, Thorson P., the former President of this Court, said at page 1050:

. . . In considering an appeal from an income tax assessment the Court is concerned with the validity of the assessment, not the correctness of the reasons assigned by the Minister for making it. An assessment may be valid although the reason assigned by the Minister for making it may be erroneous. This has been abundantly established.

In effect the Minister says that for a reason he thinks to be correct he assessed the appellant to income tax at "X" dollars. The appellant says that the reason assigned by the Minister was incorrect. The Minister then says if the Court should hold the basis for his assessment of "X" dollars is erroneous, then for what the Court might find to be the correct reason, he would assess the appeal at "X" minus "Y" dollars.

This I think the Minister is entitled to do and accordingly I would allow the motion and permit the Minister to amend his Reply to the Notice of Appeal as requested. The costs of the motion shall be costs in the cause.

Analysis

I am quite satisfied from the context of the evidence and argument that the disputed assessment was indeed struck (September 4, 1987) and confirmed (September 13, 1988) by the respondent on the basis of the respondent's understanding that Mocus Foundation was not a registered charity during the year in issue, and accordingly could not provide an acceptable official receipt to Revenue Canada. It also appears clear that by the time of filing the reply to notice of appeal (July 18,1989) the respondent had reason to question that particular basis (no charitable foundation) as being sufficient to support the assessment used for a trial, and thereupon included as an alternative reason for disallowing the amount the "timing and the value of the gift”, and referenced subsection 110(2.2) of the Act dealing with the “fair market value”. As I grasp the position of counsel for the Minister, on this issue, she is saying that since the point was at least raised in the reply to notice of appeal, supra, the Minister is entitled to leave the onus for proof with the appellant, on a basis for the assessment quite different than that upon which the assessment was struck.

I am aware that certain jurisprudence would appear to leave considerable latitude for the Minister in requiring just such "proof" from a taxpayer, but I fail to see how the Minden, supra, case provides support for counsel's contention in this case, that "the onus in fact of disproving the assessment, as opposed to the respondent's reasons therefor (rests with the appellant)”. In Minden, supra, the basic issue was whether the taxpayer was engaged in a profit making scheme, thereby placing the taxpayer under certain taxing provisions of the Act. The respondent's error was in stating that the taxpayer was "deemed to be in the business of lending money on the security of mortgages and agreements for sale”, whereas the facts clearly showed "the agreements for sale and the interest in the mortgages were purchased outright" page 89 (D.T.C. 1050). The issue, however, remained the same as noted on page 81 (D.T.C. 1045):

The issue in the appeal is thus a familiar one, namely, whether the profits realized by the respondent from the transactions into which she had entered were capital accretions from investment as claimed by her, and, therefore, not subject to income tax or profits from a business or an adventure in the nature of trade, as found by the Minister, and, therefore, taxable income . . .

The facts or assumptions underlying an assessment, at the time an assessment is made, are those vital to the process before the Court. To substitute for these, some other facts or assumptions (even if termed "reasons") at a later point in time, simply because these new reasons appear to be more soundly based, is not a procedure which I find acceptable. There is no indication in the information before the Court in this matter that the question of "value" was ever considered by Revenue Canada in assessing the appellant, let alone as sufficient to invalidate totally the deduction claimed by the appellant. The respondent at trial has no right to put it forward, as if it had been so considered. I do not believe these thoughts are in contradiction to Minden, supra, or the text of Vineland Quarries, supra, when these are read properly. The quotation given earlier for the jurisprudence submitted by counsel for the appellant sustains this view. I would add the judgment of this Court in del Valle v. M.N.R., [1986] 1 C.T.C. 2288; 86 D.T.C. 1235 and quote from page 2290 (D.T.C. 1237):

While it was possible for the respondent to have alleged further and other facts the respondent did not choose to do so in this case but simply relied on the facts assumed at the time of the reassessments. I emphasize that if the respondent has alleged such further or other facts the onus would have been on him to establish them. (See M.N.R. v. Pillsbury Holdings Limited [1965] 1 Ex. C.R. 678; [1964] C.T.C. 294; 64 D.T.C. 5184.)

In light of the fact that the Court has not been provided with any evidence regarding value, and based on the above observations, the appeal is allowed and the entire matter is referred back to the respondent for reconsideration and reassessment. The appellant is entitled to party-and-party costs.

Appeal allowed.