Paramount Productions Inc. v. The Queen, 93 DTC 5285, [1993] 2 CTC 47 (FCTD)

Reed, J.:—The issue in this case is whether the day of mailing of a notice of original assessment of the income tax payable by Paramount Pictures Corporation (Canada) Ltd. for the fiscal year ending July 31, 1980, occurred in 1981 or in 1984. If it took place in 1981 then the subsequent notice of assessment to the taxpayer dated October 26, 1987 is statute barred. The relevant provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") provide:

152. (1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine. . . .

(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

(3) Liability for the tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within four years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within four years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

[Emphasis added.]

The factual background to this case involves a series of amalgamations in which the successor corporation in each instance retained the name Paramount Pictures Corporation (Canada) Ltd. or a variant thereof. Retention of the name was done to protect the trade value of that name.

On July 31, 1979, Paramount Pictures Corporation (Canada) Ltd. (”P-l") amalgamated with Communikon Services Ltd. The successor corporation was named Paramount Pictures Corporation (Canada) Ltd. ( P-lI"). On February 22, 1980, P—ll amalgamated with Paramount Films, the successor corporation being Paramount Pictures Corporation (Canada) Ltd. (”P-Ill”). On July 31, 1980, P-III amalgamated with 98818 Canada Ltd. which had been incorporated on May 28, 1980. The successor corporation was Paramount Pictures Corporation (Canada) Ltd. ("P-IV"). On May 10, 1982, P-IV changed its name to Paramount Productions Inc. On July 29, 1982, Paramount Productions Inc. amalgamated with 116624 Canada Inc. The successor corporation was Paramount Productions Inc. ("P-V").

Under the Income Tax Act, upon amalgamation, each amalgamating company must file a return for the part of its fiscal year during which it existed (a stub end return). Amalgamating companies have six months from the date of the amalgamation during which to file returns but instalments with respect to the taxes payable must be paid within two months.

On April 25, 1980, a cheque for $792,000 was sent to Revenue Canada as an instalment on the tax payable by P-II for its fiscal year which ended on February 22, 1980. This was credited by Revenue Canada to an account carrying the internal file number 7-949-811-9. This was Revenue Canada’s account number for P-ll.

On July 15, 1980, a letter was sent to Revenue Canada notifying it that P-II had amalgamated with Paramount Films to become P—lll and that P-III’s fiscal year would end on July 31, 1980. Stub end tax returns for P-II and Paramount Films were also filed at that time. The return for P—ll declared a total tax payable of $640,200. It referred to instalments of $642,000 which had been paid and claimed a refund of $1,800. The situation of Paramount Films is not relevant for present purposes.

On September 30, 1980, an instalment cheque in the amount of $250,000 was sent to Revenue Canada with respect to taxes payable by Paramount Pictures Corporation (Canada) Ltd. This was credited by Revenue Canada to its internal account numbered 7-949-811-9. On November 13, 1980, Revenue Canada issued a notice to Paramount Pictures Corporation (Canada) Ltd. showing total instalment payments of $1,042,000 ($792,000 + $250,000) which had been credited to account number 7-949-811-9. That account was identified as relating to the Paramount company which had a fiscal year end of February 22, 1980 (i.e., P-Il).

On November 20, 1980, a letter was sent back to Revenue Canada by Gulf- Western on behalf of the Paramount companies stating that with respect to the instalment of $792,000 which had been remitted in April, $647,000 of that should be allocated to the Paramount Company whose fiscal year ended on February 22, 1980 (i.e., P-11) and that the remaining $145,000 together with the $250,000 which had been remitted in September 1980, should be credited to the Paramount company whose fiscal year ended July 31, 1980 (i.e., P-lll). Gulf- Western at the time was the holding company, in Canada, for Paramount Communications U.S., and as such had responsibility for preparing and filing tax returns and dealing generally with tax matters for the various companies.

On January 13 and 30, 1981, respectively, tax returns for 98818 Canada Ltd. (in existence from May 28, 1980 to July 31, 1980) and P-Ill were filed. The tax return for 98818 Canada Ltd. showed nil income and nil tax payable. P-III declared taxes payable of $303,864. It referred to instalments of $395,000 and claimed a refund of $91,136. In both tax returns the date of the incorporation of the company, the date of its fiscal year end, July 31, 1980, and the fact that it was a new corporation was stated. In the boxes at the top of the first page of the returns, where a place exists for the relevant account number when such had been assigned by Revenue Canada, the taxpayer put in bold letters NEW CORPORATION.

On July 13, 1981, Revenue Canada wrote explaining that the assessment of P-H's return for the fiscal period ending February 22, 1980 (account number 7-949-811-9) was delayed because while the taxpayer claimed instalment credits of $642,000, Revenue's records showed no instalments had been paid. On September 2, 1981, a letter was sent to Revenue Canada again explaining that the instalment paid on April 25, 1980 should be credited in the amount of $642,000 to P-Il and the rest together with the instalment of $250,000 which had been paid in September 1980 should be credited to P—Ill.

On November 4, 1981, Revenue Canada wrote again to Gulf-Western stating this time that Revenue Canada’s records showed instalment credits of $1,042,000 but the tax return which had been filed claimed no such credits. Gulf-Western replied yet again in a letter dated November 9, 1981 giving the same explanation as previously.

On December 28, 1981, Revenue Canada issued a notice of assessment for Paramount Pictures (Canada) Ltd. with a year end of February 22, 1980 (i.e., P-ll) showing taxes payable of $648,436.19 and no instalments having being paid. This carried the internal Revenue Canada account number 71961221. A total of taxes plus interest in the amount of $797,330.73 was therefore assessed. On the same date a notice of assessment for Paramount Pictures (Canada) Ltd., with a year end of July 31, 1980, was sent showing nil taxes payable and instalments plus interest totalling $1,155,392.44. The Revenue Canada account number which was assigned to this notice of assessment was 7-949-811-9. At the same time, a cheque was issued by Revenue Canada, repaying to Paramount, the instalments and interest of $1,155,392.44.

On January 19, 1992, a letter was sent back to Revenue Canada by Gulf- Western together with copies of the notice of assessment and the refund cheque. The letter reads [in part]:

Paramount Pictures Corporation (Canada) Ltd. received a cheque in the amount of $1,555,392.44 pursuant to a notice of assessment dated December 28, 1981 (copies attached) [not reproduced].

A portion of the instalments of $1,042,000, namely $642,000, was to be credited to the fiscal period ended February 22, 1980. This matter was communicated to Revenue Canada Taxation, Taxation Centre, Ottawa through the completion of their two letters dated July 13, 1981 and November 4, 1981 respectively, requesting an allocation of the instalments made between the fiscal periods 22-02-80 and 31-07-80. Despite these letters the $642,000 pertaining to fiscal 22-02-80 was refunded.

Also attached is a notice of assessment dated December 28, 1981 indicating an unpaid balance of $797,330.73. This balance is split as follows:

Federal Tax	$648,436.19
Instalment Interest	20,881.74
Arrears Interest	126,307.95
Previous Balance	1,704.85
	$797,330.73

A cheque in the amount of $648,436.19 is enclosed, being the amount of federal taxes owing. Also enclosed is a copy of the Letters Patent for the amalgamation between Paramount Pictures Corporation (Canada) Ltd. & Communikon Services Ltd. on July 31, 1979. This new corporation carried on business under the name Paramount Pictures Corporation (Canada) Ltd. with the first fiscal period ending 22-02-80. An instalment payment of $792,000 of which $642,000 belonged to this company was made in April, 1980, two months after the end of the fiscal period in accordance with the Income Tax Act.

In this regard we ask that the instalment arrears be waived as the instalments were properly made, and also that the arrears interest on the $642,000 be waived in that it was inadvertently returned to us. We understand that some interest will be owing on the federal tax in excess of instalments. Upon receipt of an invoice detailing the appropriate amount owing we will gladly pay this balance.

On cross-examination, the individual who wrote this response was questioned and answered as follows:

Q. Am I correct that in this letter there is no reference at all to the balance of that refund cheque—

A. No, no, in the first paragraph I state that we received the cheque for the 1.1 million dollars pursuant to a notice of assessment dated December 28, 1981, and I would have attached both a copy of the notice and assessment and the cheque.

Q. Yes.

A. Yes.

Q. But the balance of the letter does not refer to any tax liability of Paramount 3—

A. I didn't have one.

Q. Based on the notice of assessment.

A. Based on the notice of assessment.

Q. And you make no reference though in the letter to that tax liability as reported in—

A. Well, it was a question of . . . Revenue Canada had refunded us this money. There was a meeting at that time between myself and a senior Paramount Pictures Corporation (Canada) Ltd. official to determine what our action should be.

In that there was no legal requirement to pay in that we fully anticipated (a) either receiving a statement of changes which would support Revenue Canada’s notice of assessment legitimizing the fact that our return was filed incorrectly or (b) upon annual audit, because it was certainly a corporation of a size that received audits on an annual basis, that the matter could be straightened out then.

It was a large amount of money in a time when interest rates were extremely high, and the company was in a borrowing position and Revenue Canada had essentially given us a half a million dollars to be used without penalty, and so we wanted to say listen guys here's your notice of assessment, you want to have a look at it, here's a copy of our cheque, you [sic] sure you want to do this, but we weren't going to be jumping up and down. We had tried to give you the money, we'd written letters saying put it to this account, put it to this account.

Q. And at this point if I understand what you said correctly the two returns that you're looking at are the return of Paramount for the year ending February 22, 1980 and the return of Paramount for the year ending July 31, 1980.

A. That's right.

Q. And you have not looked at the return at all of 98818 Canada.

A. No.

Q. No. There was no reference to that return.

A. No.

I do not find it necessary to describe in detail the events which followed. It is sufficient to say that on December 12, 1984, a notice of reassessment (according to the plaintiff) or assessment (according to the defendant) was issued. Then, on October 26, 1987, P—Ill was issued a notice of reassessment showing federal tax payable of $54,190.09. It is this reassessment which is in issue. If the notice of assessment which was sent in December of 1981 was a notice of Original assessment pursuant to subparagraph 152(4)(a)(ii), then, the reassessment of October 26, 1987 is statute barred. If the notice of original assessment did not occur until December 12, 1984, then it is not.

It is conceded by both parties that the notice of assessment respecting P-III which was issued in December of 1981 was erroneous. The defendant argues that that notice cannot be characterized as a notice of original assessment because no assessment of P-III’s return was in fact done at that time.

The errors which occurred were the result of a number of factors. In the first place, it is Revenue Canada's practice to assign separate account numbers to each taxpayer. While this should have been done for the various Paramount companies, it was not. In addition, at the time in question, responsibility for assessing the T2 forms was being transferred, on a gradual basis, from the regional taxation centres to Ottawa. When the tax return of 98818 Canada Ltd. was filed, instead of assigning that company its own account number, it was assigned number 7-949-811-9. Then, an employee of Revenue Canada crossed out the name of the taxpayer and inserted instead the name of Paramount Pictures Corporation (Canada) Ltd. This return was processed through the computer and it carried a fiscal year end date of July 31, 1980. Thus the notice of assessment dated December 28, 1981 was generated and sent to the taxpayer.

I do not think it necessary to describe in detail the processing of the claims and the internal confusion which resulted from the failure to properly assign each new taxpayer a separate account number and from the crossing out by a Revenue Canada employee of the name of the taxpayer appearing on the return and substitution of the taxpayer's name. It suffices to say that a number of different people were involved with various aspects of the tax returns so that no one Revenue Canada employee had the whole picture in front of him or her. Also, at the time in question, most of the T2 tax returns were being assessed by computer. The more complicated ones would have been done manually. None of the tax returns in question were of a complicated nature. Once the information which was fed into the computer resulted in a showing that P-III had been assessed for the fiscal year ending July 31, 1980 that was accepted and relied upon by Revenue Canada employees.

The question then is whether the notice of assessment which was issued on December 28, 1981 to Paramount Pictures (Canada) Ltd. with a year end of July 31, 1980, was a notice of original assessment of P-III’s tax liability for the purposes of subsection 152(4).

I shall deal first with three aspects of the evidence and the arguments of the defendant related thereto. The defendant made much of the fact that the plaintiff knew in December of 1981 that the notice of assessment which had been issued was erroneous. It is therefore argued that the plaintiff should not be allowed to rely on that notice as a notice of original assessment with respect to P-Ill. This argument might be relevant if the plaintiff were relying on an estoppel argument or on one related to reasonable expectations but I am not convinced that it is relevant to the statutory interpretation of subsection 152(4). The fact that a taxpayer might know that the notice which was issued was erroneous, insofar as the amount of tax payable is concerned, does not, in my view, detract from its status as a notice of original assessment. I would note in this regard that Gulf-Western at the time had approximately 34 companies for which tax returns were being filed and several of these were in the same position as 98818 Canada Ltd.: they had a year end of July 31, 1980 with no revenue and no tax payable. While Gulf-Western knew a mistake had been made, I certainly could not conclude that it should have known or even guessed at what had happened. The taxpayer considered the notice of assessment to be a notice of original assessment of P-Ill, and cannot be faulted for doing so. That is what the document appeared to be from its terms.

The second aspect of the argument relates to the defendant's position that the December 1981 assessment was indeed correct and that it related to 98818 Canada Ltd. but had been issued in the name of the successor corporation. At the time, Interpretation Bulletin, IT-474, paragraph 31, gave notice to the public that the Minister of National Revenue would be issuing assessments in the case of an amalgamation, in the name of the amalgamated corporation. At the same time, evidence from a relevant departmental official indicates that this policy was not firm but was “flip-flopping” during the period in question. It is not credible to assume that Revenue Canada would have issued a notice of assessment in this manner without stating on the notice of assessment that it was doing so. The argument that the notice of assessment was sent by Revenue Canada in reference to the taxes payable by 98818 Canada Ltd. but was issued in accordance with the policy set out in the ITA Bulletin, in the name of the successor company, is not credible.

Thirdly, two officials of Revenue Canada gave evidence asserting that P-III’s tax return had not been assessed until 1984 and thus the notice of original assessment was not sent until December 12, 1984. These statements are after- the-fact and self-serving. No evidence was called from employees who dealt with the various returns in 1981 and whether they were of the view, at that time, that in sending the notice of assessment in 1981, a notice of original assessment was being sent to P-Ill. I am not convinced that the evidence of what occurred in 1984 undercuts the status of the 1981 notice as a notice of original assessment for the purposes of subparagraph 152(4)(a)(ii).

The taxpayer, P-III, filed a return for the fiscal year ending July 31, 1980. A notice of assessment was received relating thereto. The taxpayer knew a mistake had been made in the amount of tax which was being assessed. The mistake was not the result of the taxpayer having carelessly or purposely acted in a manner so as to cause the mistake. The taxpayer did not know the cause of the mistake. From the taxpayer's point of view it was entitled to assume and did assume that this was a notice of original assessment.

Internally, from Revenue Canada’s point of view once the assessment data, as altered by the Revenue Canada employee, had been fed into the computer, the computer recorded and displayed an assessment for P-III for the fiscal year end in question. When the error was being traced back, internal documents refer to the erroneous assessment of P-lll. The testimony of Mr. Jones on the confusion at Revenue Canada is revealing:

Q. If you would turn to Tab 71 which is the letter of July 9, 1985 which is actually two years after it [re. P-lll] became Paramount Productions. . . . Is that correct?

A. That’s correct.

Q. And this is after the new account numbers were issued in 1984 when there was a change of account numbers you would give the 79 number to Paramount 2. Is that correct?

A. Yes.

Q. Now, in this letter Mr. Nesbitt of Revenue Canada refers to the fiscal period of February 22, 1980 isn't that true?

A. Yes, it is.

Q. And he speaks of an incorrect assessment. Is that true. That's the first full paragraph, "our departmental records show that when the incorrect assessment for fiscal period end February 22, 1980.”

A. That reference is made, yes.

Q. Okay. Now, he refers to a refund of $1,155,392 which was issued in error on December 28, 1981 including a refund of interest of $113,392.

A. That's correct.

Q. I refer you to Exhibit 1, Tab 21 and 22. Now, at Tab 21 you have the notice of assessment of Paramount 2 which has a year-end of February 22, 1980 which is what Mr. Nesbitt is referring to. Now, I have a hard time seeing the refund of $1 million and the refund interest of $113,000 in this notice of assessment. However, if I turn to Tab 22 which is the notice of assessment of Paramount Pictures Corporation for the period ending July 31, 1980 then we see the right number. Then we see the $1 million and $113,000 of interest. Is that correct?

A. That’s correct.

Q. So essentially when he was referring to the incorrect assessment because, I should say you changed numbers on him, his computer is now referring to the fiscal period February 22, 1981 instead of the right fiscal period because that number used to be the number of Paramount 3. Isn't that correct?

A. The 7949 number?

Q. Yes. Well, what I'm proposing to you is that clearly Mr. Nesbitt is making a mistake here.

A. Yes.

Q. He's referring to the wrong fiscal period.

A. That’s true.

Q. Because essentially he should be referring to the July 31, 1980 fiscal period.

A. That's true.

Q. And not knowing again your system I can only presume that such a blatant mistake was caused by the importance that you had internally for your reference numbers which has just been a year ago attributed to Paramount 2 and therefore up comes the wrong fiscal period. Isn't that correct?

A. I believe that’s correct. [1]

Mr. Williams for the plaintiff testified that Revenue Canada did not advise the taxpayer of its position that the assessment of December 28, 1981 was in fact the notice of assessment of 98818 Canada Ltd. until 1989. Mrs. Dorothy Hall who was the employee with Gulf-Western who had been responsible for filing the relevant tax returns and communicating with Revenue Canada concerning them, testified that until she was contacted to testify for the hearing before the Court, she had never been advised that the notice of assessment of December 1981 pertained to 98818 Canada Ltd. Finally, Mr. Jones testified that after a thorough review of the file, the only document emanating from Revenue Canada advising the taxpayer that a mistake had occurred was a letter dated August 27, 1984 which contains the following statement:

Notices of assessment for taxation years ending February 22, 1980 and July 31, 1980 and refund of $1,155,392.44 were issued under the wrong account number. The necessary corrections have been completed. New notices of assessment will be issued taking into consideration the amount of refund which was previously issued.

Testimony was given by Mr. Williams for the plaintiff that had the taxpayer been told that the notice of assessment of December 1981 was the assessment of 98818 Canada Ltd., the taxpayer would have contested the 1984 assessment as not having been issued with all due dispatch.

I conclude that the notice of assessment which was sent on December 28, 1981 was a determination by the Minister of the taxes payable by P-III for the relevant fiscal period, even if that determination was erroneous" as to the amount of tax payable. This is clear from the references used in the notice of assessment (e.g., name, account number) and also from letters and the cheque sent by Revenue Canada to P-lll at the relevant time as well as the internal documents of Revenue Canada. The evidence clearly establishes that both the taxpayer and Revenue Canada believed at the time that on December 28, 1981, a notice of original assessment was being issued to Paramount Pictures Corporation (Canada) Ltd. with a fiscal year end of July 31, 1980. This notice of original assessment which determined that no taxes were payable by Paramount Pictures Corporation (Canada) Ltd. for its July 31, 1980 taxation year, began the limitation period to assess or reassess that corporation pursuant to paragraph 152(4)(b) of the Income Tax Act.

For the reasons given the plaintiff's claim is allowed and the notice of assessment dated October 26, 1987 will be vacated. The plaintiff is entitled to the costs of its action.

Appeal allowed.