The Queen v. Optical Recording Laboratories Inc., 90 DTC 6647, [1990] 2 CTC 524 (FCA)

Urie, J.A.: —This appeal is from orders of certiorari and prohibition granted by the Trial Division on September 4, 1986 [reported at [1986] 2 C.T.C. 325; 86 D.T.C. 6465]. The relevant facts which are not in dispute, are these.

The Facts

The respondent was incorporated under the name of Information Tunnel Research Inc. on August 17, 1984. Its name was subsequently changed to Optical Recording Corporation and later changed again to that shown in the style of cause, namely, Optical Recording Laboratories Inc. Counsel for the respondent at the opening of the appeal advised the Court that the respondent had made an assignment in bankruptcy and filed a letter from the trustee apparently authorizing him to appear on his behalf. Counsel for the appellant did not object so that we agreed to hear him.

An agreement was entered into on March 25, 1985 by the respondent with Digital Recording Corporation ("Digital") whereby Digital sold and Optical bought a development system at a price of $21,500,000. On the same day, the respondent designated amounts totalling $21.5 million pursuant to subsection 194(4) [1] of Part VIII of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). That sum was the amount received by it upon its issuance of shares and debt obligations. The designations filed by the respondent with the Minister of National Revenue ("the Minister”) on the same date were not accompanied by an amount payable to the Receiver General of Canada in the sum of 50 per cent of the amount designated, namely, $10,750,000, nor was such an amount paid on or before April 30, 1985, as required by subsection 195(2) [2] of the Act.

On June 3, 1985, the Minister sent to the respondent a notice of assessment “in respect of Part VIII assessment levied under subsection 195(2) of the Income Tax Act" requesting payment of the unpaid sum of $10,750,000. Attached to the notice of assessment was an advice to the taxpayer reading as follows:

The attached notice of assessment reflects Part VIII tax payable on account, as a result of filing of designation(s) in respect of the issuing of shares, or debt obligations or the granting of certain rights to finance scientific research and development.

Corporations that have issued scientific research or share-purchase tax credit securities are technically liable to pay the related Part VIII tax by the end of the month following the transaction. However, under the terms of this special credit program, the tax liabilities may be reduced or extinguished through the use of qualifying expenditures or tax credits. Since these Part VIII tax liabilities may be reduced, Revenue Canada, Taxation is prepared to modify or withhold its usual collection action with respect to these assessments where the corporation is able to satisfy Revenue Canada that its liability will be eliminated by the end of the year, or provide acceptable security.

An officer from Revenue Canada, Taxation will be contacting you to discuss the method in which the liability will be satisfied.

Also attached is a copy of a recent press release which outlines Revenue Canada, Taxation's position in this matter.

[Emphasis added.]

No notice of objection was ever served on the Minister with respect to the notice of assessment. Nor did the Minister ever advise the respondent that he was Satisfied that the respondent's Part VIII liability would be extinguished by the end of its 1986 taxation year nor has it done so since. Moreover, despite the request of representatives of the Minister for collateral security made at a meeting with a representative of the respondent held on October 10, 1985, no such security has ever been provided.

On March 18, 1986, requirements to pay issued pursuant to section 224 [3] of the Act were issued by the Minister to the Royal Bank of Canada and to Canada Permanent Trust Company in respect of moneys of the respondent held in these institutions.

On April 1, 1986, the Minister registered a certificate in the Federal Court of Canada pursuant to section 223 [4] of the Act in respect of the respondent's indebtedness of $10,750,000.

On June 18, 1986, an originating notice of motion was filed in the Trial Division on behalf of the respondent seeking writs of certiorari or for an order for relief in the nature thereof to quash the Minister's decision to

(a) issue the notice of assessment dated June 3, 1985

(b) issue the requirements to pay dated March 18, 1986, and

(c) issue a certificate pursuant to section 223 of the Act.

It sought, as well, a writ of prohibition or relief in the nature thereof, prohibiting the Minister from continuing his collection proceedings against the respondent “until lawful to do so”. A request for a declaration was abandoned at the hearing of the motion in the Trial Division.

On September 4,1986 Muldoon, J. in the Trial Division quashed the assessment, the two requirements to pay, and the section 223 certificate and prohibited the Minister from continuing with the collection proceedings or actions against the respondent “until it is lawful to do so”.

It is from this order that this appeal has been brought. Toward the end of his reasons for disposition of the motion, the learned motions judge made the following comment at page 339 (D.T.C. 6475):

It is far too late now for the applicant to make timely compliance with subsection 195(2) of the Income Tax Act from which it was counselled and induced by the Minister. The reasonable course now would be to perform a real assessment of tax, including Part VIII tax, if any, upon the applicant's now filed income tax return, in order to determine whether or not the applicant actually did eliminate its liability for those Part VIII taxes.

Presumably as a result of this comment, on January 17, 1989 the Minister issued a notice of assessment in respect of the respondent's Part VIII tax liability for its 1986 taxation year. That notice assessed Part VIII tax in the sum of $10,750,000 together with interest of $4,277,925. The respondent filed a notice of objection to this assessment on March 13, 1989. Apparently the objection was not upheld so that the respondent appealed the second assessment to the Trial Division by filing its statement of claim on June 29, 1989.

Mootness

In his memorandum of fact and law, counsel for the respondent argued for the first time that the second assessment is a reassessment in respect of the respondent's Part VIII tax liability for its 1986 tax year. The effect, thereof, counsel submitted, was to render the first assessment and the collection proceedings instituted with respect thereto, a nullity. At the opening of the appeal the Court called upon respondent's counsel to argue the mootness issue as a preliminary objection. After hearing his argument, as well as that of counsel for the appellant, judgment was reserved on the issue and the Court proceeded to hear argument of counsel on the merits of the appeal, upon which judgment was also reserved.

I propose, therefore, to deal with the mootness issue first. In support of his contention that the second assessment invalidated the first, counsel for the respondent relied on the decision of Jackett, P. (as he then was) in the Exchequer Court of Canada in Abrahams (No. 1) v. M.N.R., [1966] C.T.C. 690; 66 D.T.C. 5451.

In that case, a reassessment had been issued which became the subject of an appeal to the Exchequer Court. Shortly thereafter the Minister issued a further reassessment which became the subject of a separate appeal. At page 692 (D.T.C. 5452) of the judgment, Jackett, P. had this to say:

Assuming that the second reassessment is valid, it follows, in my view, that the first reassessment is displaced and becomes a nullity. The taxpayer cannot be liable on an original assessment as well as on a reassessment. It would be different if one assessment for a year were followed by an “additional” assessment for that year. Where, however, the "reassessment" purports to fix the taxpayer's total tax for the year, and not merely an amount of tax in addition to that which has already been assessed, the previous assessment must automatically become null.

I am, therefore, of opinion that, since the second reassessment was made, there is no relief that the Court could grant on the appeal from the first reassessment because the assessment appealed from had ceased to exist. There is no assessment, therefore, that the Court could vacate, vary or refer back to the Minister. When the second reassessment was made, this appeal should have been discontinued or an application should have been made to have it quashed.

The Abrahams judgment was considered in this Court in the 1976 appeal of Oneil Lambert v. The Queen, [1976] C.T.C. 611; 76 D.T.C. 6373, where Jackett, C.J. speaking for the Court said at pages 614-15 (D.T.C. 6375-76):

With that much of the statute in mind, reference must be made to a line of jurisprudence in the Exchequer and Federal Courts—not because it is pertinent but because it has given rise to some confusion—that has held that where there has been a reassessment for a taxation year as opposed to a further assessment— ie, a re-determination of the total amount payable for the year as opposed to a determination of an additional amount payable for the year—the reassessment displaces the previous assessment so as to nullify from that time forward the previous assessment and, consequently, any appeal from that previous assessment. (See, for example Abrahams v MNR (No 2), [1967] 1 Ex CR 333; [1966] CTC 694; 66 DTC 5453.)

The learned trial judge appears to have rejected these contentions on the ground that the new assessments were not reassessments but were further assessments.

On examining the new assessments, we are inclined to the view that they are not further assessments but are reassessments. This question did not, however, have to be decided because, in our view, whichever they are, they do not, in themselves, affect the validity of the section 223 certificate or operate automatically to confer on the appellant a right to have the section 223 certificate nullified.

As appears from our review of the provisions of the Act, there is a difference between

(a) a liability under the Act to pay tax, and

(b) an "assessment" (including a reassessment for a further assessment), which is a determination or calculation of the tax liability.

It follows that a reassessment of tax does not nullify the liability to pay the tax covered by the previous [assessment] as long as that tax is included in the amount reassessed. As there can be no basis for the appellant's contention on this motion unless the "amount payable" on which the certificate was based had ceased to be “payable” and as the material before us does not show that it had ceased to be payable, in our view, the appeal had to be dismissed. Indeed, the appeal was argued, as we understood the argument, on the assumption that the amounts on which the certificate was based were carried forward into the new assessments.

[Emphasis added.]

Two things appear clear from the above two cases. First, if the second assessment is a reassessment, as it appears to be since it adds nothing to the tax assessed and only sets forth the statutorily prescribed accrued interest payable thereon, it renders void the assessment dated June 3, 1985.

Secondly, while I confess some difficulty in understanding why the collection proceedings undertaken pursuant to that unpaid assessment, are not also rendered void, the Lambert decision seems to so hold and is binding on us, i.e., the void assessment does not affect the requirement to pay. Its life is maintained. That being so, to the extent that the present appeal arises from the orders for certiorari relating to moneys, if any, held by the Royal Bank of Canada and the Canada Permanent Trust Company and to the order of prohibition arising out of the section 223 certificate, it is not moot. The appeal must on those issues, be heard on its merits. It is thus unnecessary, at least with respect thereto, to discuss the principles applicable in determining whether an appeal has been rendered moot as those principles are set forth in Borowski v. A.-G. Canada, 57 D.L.R. (4th) 231. It is necessary, however, to first determine the jurisdiction of the Trial Division to entertain the originating motion brought before it pursuant to section 18 of the Federal Court Act, R.S.C. 1985, c. F-7.

Jurisdiction under Section 18

Very simply, it had been the respondent's position on the hearing of the originating motion that, relying on the advice given on the attachment to the notice of assessment dated June 3, 1985, as quoted earlier herein, the respondent's president and major shareholder, Mr. Adamson, expecting that his company's tax liability would be eliminated before the tax year end, it would not be required to do anything in response to the notice of assessment. No notice of objection was served on the Minister. Indeed, Mr. Adamson was not aware that such an appeal procedure existed until after the time limit for filing it had passed. I should reiterate that at no time did the respondent satisfy the Minister that its tax liability, if any existed in law, (a question which could not properly be decided in this appeal), would be extinguished before the end of the 1986 tax year nor did it provide satisfactory or any security for any such liability.

The Minister's equally simple position was that at the time the respondent filed the designations under subsection 194(4) of the Act, supra, the respondent knew or ought to have known that its Part VIII tax liability could be as much as 50 per cent of the total amount designated. As a result, by virtue of subsection 195(2) of the Act, supra, it was liable to make a payment in respect thereto or, in accordance with the policy of the Minister as explained in the advice attached to the notice of assessment, provide security for the amount due on account of tax or satisfy the Minister that its tax liability would be extinguished before the end of the 1986 tax year.

The learned trial judge began his resolution of those competing positions by considering the jurisdiction of the Court to adjudicate on the respondent's originating motion, an issue which had apparently been raised during argument. At pages 332-33 (D.T.C. 6470-71), inclusive, of the case, he made the following finding:

At first blush that question might seem to be already concluded. The Appeal Division in its unanimous decision in M.N.R. v. Parsons, [1984] 2 F.C. 331; [1984] C.T.C. 352; 84 D.T.C. 6345, (reversing the Trial Division judgment [1984] 1 F.C. 804; [1983] C.T.C. 321; 83 D.T.C. 5329) held:

We are all of opinion that the appeal must succeed on the narrow ground that the only way in which the assessments made against the respondents could be challenged was that provided for in sections 169 and following of the Income Tax Act. This, in our view, clearly results from section 29 of the Federal Court Act.

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.]

Since the release of the Parsons judgment, there have been apparently conflicting decisions of the Trial Division in WTC Western Technologies v. M.N.R., [1986] 1 C.T.C. 110; 86 D.T.C. 6027, and in Bechthold Resources v. M.N.R., [1986] 1 C.T.C. 195; 86 D.T.C. 6065.

The case at bar raises issues about the paragraph attached to the purported notice of assessment (Exhibit "D", above recited) and the respondent Minister’s policy of collections (Exhibit "A" to Mr. Adamson's affidavit), which are quite beyond the scope of the appeal provisions of the Income Tax Act upon which the Appeal Division relied in order to invoke section 29 of the Federal Court Act in derogation of the Trial Division’s jurisdiction in the Parsons case.

The issues to be determined here are much broader than, and different from, matters of extension of time of appeal, the validity of a notice of assessment and appeal therefrom. The issues here raise questions of fundamental administrative illegality, unfair treatment and estoppel which engage the superintending jurisdiction of a superior court, such that even if this Court's disposition of them be ultimately adjudged to be wrong, the Court's decision to entertain them should be seen to be correct. The case at bar is therefore quite distinct from the Parsons case. It will be seen, as well, to be distinguishable from the W.T.C. Western and Bechthold Resources decisions. For these reasons, which are more fully developed hereinafter, the Court accepts and exercises jurisdiction in, upon and over the subject of this motion.

I am of the opinion that the motions judge erred in finding that he had jurisdiction to entertain the originating motion brought by the respondent pursuant to section 18 of the Act. The proceedings which it instituted arose out of an assessment issued by the Minister. That assessment is deemed by subsection 152(8) to be valid, subject only to a reassessment, or to it being varied or vacated by a successful objection thereto (subsections 165(1) and 165(2)) or by a successful appeal of the assessment brought to the Tax Court pursuant to section 169 of the Act or to the Trial Division of this Court pursuant to subsection 172(2). As held in M.N.R. v. Parsons, [1984] 2 F.C. 331; [1984] C.T.C. 352; 84 D.T.C. 6345; rvg [1984] 1 F.C. 804; [1983] C.T.C. 321; 83 D.T.C. 5329, since the Act expressly provides for an appeal from assessments made by the Minister, it follows that section 29 of the Federal Court Act precludes not only applications under section 28 of the Act in respect of such assessments but also applications brought pursuant to section 18, as was done in the case, to challenge not only the assessments per se but the collection proceedings or actions taken in respect of those deemed valid assessments.

Accordingly, it matters not whether the assessment made on June 3, 1985 is at this stage moot or not. By virtue of section 29 of the Federal Court Act the Trial Division lacked jurisdiction to grant the relief sought in the section 18 application since the Income Tax Act provides the appropriate procedure for appealing the assessment. In those proceedings all issues relating to the assessment, including its validity and mootness, may be raised. This appeal, therefore, in my view, must be allowed.

Legality of Minister's Collection Policy

While not strictly necessary for the foregoing determination of this appeal, it would be unwise, I believe, to fail to comment on what was said by the motions judge in the following passages in particular from his reasons for disposition of the motion (at pages 334-35 (D.T.C. 6471-6472):

In oral argument, counsel for the respondents indicated that the way the SRTC system works, if the Minister started insisting on payment pursuant to subsection 195(2) the working of the scheme would be affected. He noted that the respondent Minister tries to facilitate the working of the scheme, but not to jeopardize the security of tax revenues; and he asserted that if the Minister is strict, the legislative provisions will not work. So, the Minister provides, extra-legally, for voluntary arrangements, of which there is no parliamentary approval.

On page 8 of the respondent's points of argument there is this passage:

Form 12113 [already mentioned] indicates that payment of Part VIII tax and penalty is to accompany the filing.

It does indicate that, but at the filing, no tax is necessarily assessed or due. Subsection 195(2) exacts payment merely "on account of its tax payable under this Part". The passage continues:

Strictly speaking a form, without the payment of Part VIII tax accompanying it, cannot be said to be validly filed. But the Minister does not take that strict an approach, he accepts such forms as validly filed. Nor does he insist on payments mandated by subsection 195(2) if the corporation could show that the liability for Part VIII tax would be satisfied.

In terms only of the Minister’s indulgent approach to the law, the applicant has always maintained that it would lawfully succeed in eliminating its Part VIII tax liability, and it exhibits a copy of its return for its taxation year ending February 28, 1986 (at page 00110 of the motion record) to verify its contentions. The Minister has not yet assessed the Part VIII tax in this regard.

Since, as the respondent's counsel conceded, the Minister's invitation to disregard the legislative command to pay 50 per cent within the stated time is "extra- legal”, it is obviously wholly beyond the contemplation of the Income Tax Act, and is obviously not engaged by the objection and other appeal provisions therein enacted by Parliament. As well, the Minister receives no lawful or any authority to thwart subsection 195(2) by means of the provisions of subsections 153(1) or (1.1) of that Act, nor yet by any means provided in section 17 of the Financial Administration Act, R.S.C. 1970, c. F-10.

One is left with the conclusion that the Minister’s "extra-legal" policy is quite illegal. It runs directly against subsection 195(2) of the Income Tax Act. That Act, moreover, makes no procedural provision for contesting by litigation such an illegal irregularity.

The policy of which the motions judge is critical is that which is referred to in the advice given in the attachment to the 1985 notice of assessment to which earlier reference has been made. It is the procedure suggested in that notice which he terms "extra-legal" and thus “illegal”.

With great respect, it is my view that the learned judge in so viewing the Minister's actions misconstrued the role of the Minister in the collection of moneys due the Crown. Subsection 220(1) requires the Minister to "administer and enforce [the] Act and control and supervise all persons employed to carry out or enforce [the] Act . . .”. Subsection 220(4) states that:

The Minister may, if he considers it advisable in a particular case, accept security for payment of any amount that is or may become payable under this Act.

The power which he is so given is to ensure that payment of the indebtedness by the debtor is ultimately secure. Normally the security provided would be monetary in nature. But the Minister’s power is not limited to the statutory power to take security of that nature. He is empowered by virtue of his office, to manage his department, not exclusively from an administrative point of view but also from the point of view of what has in England been described as "management of taxes" which I take it means that as a creditor he has the right to arrange payment for a tax indebtedness in such a manner that best ensures that the whole will ultimately be paid. For example, if insistence on payment in full when due might jeopardize the solvency of the taxpayer, with consequent loss of potential for payment in full, and if the taxpayer can continue in business by giving him time to pay, in his discretion the Minister might arrange for payment in instalments with such security, if any, as he deems necessary. Effectively, such a course protects the Revenue and, as well, the taxpayer's solvency and continued ability to pay taxes. It applies too to the taxpayer satisfying the Minister in Part VIII tax situations that the taxpayer will eliminate its liability by year end. Such a course of conduct ought to be encouraged, not discouraged.

Lord Roskill put the proposition neatly in the following passage from his speech in the House of Lords in /.R.C. v. National Federation of Self- Employed and Small Business Ltd., [1981] 1 All E.R. 93 at 119 (admittedly in a different fact context) when he said:

. . . . No question of any dispensing power is involved. The Revenue were in no way arrogating to themselves a right or inviting assumption of an arrogation to themselves of a right not to comply with their statutory obligations under the statutes to which I have referred. On the contrary, their whole case was that they had made a sensible arrangement in the overall performance of their statutory duties in connection with taxes management, an arrangement made in the best interests of everyone directly involved and, indeed, of persons indirectly involved, such as other taxpayers, for the agreement reached would be likely to lead ultimately to a greater collection of revenue than if the agreement had not been reached or "amnesty" granted.

[Emphasis added.]

Such a management discretion in making suitable collections arrangements undoubtedly exists under our Act and is not, as the motions judge found, illegal.

Accordingly, I would allow the appeal with costs both here and below, I would set aside the judgment of the Trial Division and quash each of the orders of certiorari and the order of prohibition granted therein.

Stone, J.A.: —I agree.

Décary, J.A.: —I agree.

Appeal allowed.