Rothstein J.: —
Introduction
This is an appeal from a decision of the Tax Court of Canada (Sarchuk J.T.C.C.) dated December 3, 1990 dismissing the plaintiffs appeal.
The matter comes before me by way of a special case pursuant to Rule 475 of the Federal Court Rules. The question framed 1s:
Was the certificate issued by the Minister on November 12, 1987 in the principal amount of $500,000 “for the amount of Hitec’s liability under Part VIII of the Act” as required by paragraph 227.1(2)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the “Act”)?
The ultimate issue is whether the plaintiff, a director of a corporation, may be assessed for Part VIII income tax which the corporation failed to pay. The answer to this question depends on whether the Minister complied with the mandatory conditions precedent to assessing a director as laid out in the Income Tax Act and in particular whether the certificate referred to in the question as framed was in compliance with the Act. These issues were not addressed in the Tax Court as they were not raised by either of the parties.
Before turning to the facts of this case, I think it is desirable to outline the relevant legislative framework so as to provide some context within which the facts may be better appreciated.
LEGISLATIVE FRAMEWORK
(a) Part VIII Tax and Refunds
Part VIII of the Act is entitled “Refundable Tax on Corporations in Respect of Scientific Research and Experimental Development Tax Credit”. The Scientific Research and Experimental Development Tax Credit was developed to assist firms in obtaining external financing for research and development purposes. It provided a mechanism permitting corporations making scientific research and development expenditures but which were not in a position to otherwise utilize those expenditures as deductions for income tax purposes, to renounce those expenditures in favour of investors who purchased securities or loaned funds to the corporation.
As will become readily apparent, the relevant legislation is complex. As this case does not involve the tax liability of investors in the corporation or the relationship between investors and the corporation, the legislative outline will be restricted to the taxation provisions applicable to the corporation and its directors only.
A corporation may, for the purposes of raising funds for scientific research, issue shares or debt obligations. In the case of a debt obligation, the corporation may, by filing a prescribed form, designate an amount up to the consideration for which the debt obligation was issued. Subsection 194(4) provides:
194(4) Every taxable Canadian corporation may, by filing a prescribed form with the Minister at any time on or before the last day of the month immediately following a month in which it issued a share or debt obligation or granted a right under a scientific research and experimental development financing contract (other than a share or debt obligation issued or a right granted before October, 1983, or a share in respect of which the corporation has, on or before that day, designated an amount under subsection 192(4)) designate, for the purposes of this Part and Part I, an amount in respect of that share, debt obligation or right not exceeding the amount by which
(a) the amount of the consideration for which it was issued or granted, as the case may be,
exceeds
(b) in the case of a share, the amount of any assistance (other than an amount included in computing the scientific research and experimental development tax credit of a taxpayer in respect of that share) provided, or to be provided by a government, municipality or any other public authority in respect of, or for the acquisition of, that share.
The corporation is then required to pay tax, for the taxation year, in the amount of fifty percent (50 per cent) of the total amounts it designated. Subsection 194(1) provides:
194(1) Every corporation shall pay a tax under this Part for a taxation year equal to 50 per cent of the total of all amounts each of which is an amount designated under subsection (4) in respect of a share or debt obligation issued by it in the year or a right granted by it in the year.
The tax payable under subsection 194(1) must be paid on or before the last day of the month following the issuance of the debt obligation. Subsection 195(2) provides:
195(2) Where, in a particular month in a taxation year, a corporation issues a share or debt obligation, or grants a right, in respect of which it designates an amount under section 194, the corporation shall, on or before the last day of the month following the particular month, pay to the Receiver General on account of its tax payable under this Part for the year an amount equal to 50 per cent of the total of all amounts so designated.
As an offset to the tax payable under subsection 194(1), a corporation may claim a refund of up to fifty percent (50 per cent) of the total qualifying scientific research expenditures for the year up to the amount of tax payable under subsection 194(1). Subsection 194(2) provides:
194(2) In this Part, the “Part VIII refund” of a corporation for a taxation year means an amount equal to the lesser of
(a) the total of
(i) the amount, if any, by which the scientific research and experimental development tax credit of the corporation for the year exceeds the amount, if any, deducted by it under subsection 127.3(1) from its tax otherwise payable under Part I for the year, and
(ii) such amount as the corporation may claim, not exceeding 50 per cent of the amount, if any, by which
(A) the total of all expenditures made by it after April 19, 1983 and in the year of the immediately preceding taxation year each of which is an expenditure (other than an expenditure prescribed for the purposes of the definition “qualified expenditure” in subsection 127(9)) claimed under paragraph 37(1 )(a) or (b) to the extent that the expenditure is specified by the corporation in its return of income under Part I for the year
exceeds the total of
(B) the total of all expenditures each of which is an expenditure made by it in the immediately preceding taxation year, to the extent that the expenditure was included in determining the total under clause (A) and resulted in
(I) a refund to it under this Part for the immediately preceding taxation year,
(ID) a deduction by it under subsection 37(1) for the immediately preceding taxation year, or
(III) a deduction by it under subsection 127(5) for any taxation year, and
(C) twice the portion of the total of amounts each of which is an amount deducted by it in computing its income for the year or the immediately preceding taxation year under section 37.1 that can reasonably be considered to relate to expenditures that were included in determining the total under clause (A); and
(b) the refundable Part VIII tax on hand of the corporation at the end of the year.
When the corporation has a refund for the taxation year, the refund is deemed to be paid on account of the corporation’s Part VIII tax on the last day of the second month following the end of the corporation’s taxation year. Subsection 194(5) provides:
194(5) For the purposes of this Act, the Part VIII refund of a corporation for a taxation year shall be deemed to be an amount paid on account of its tax under this Part for the year on the last day of the second month following the end of the year.
A corporation liable to pay Part VIII tax must file a return under Part VIII on or before the date it is required to file its income tax return under Part I of the Act. Subsection 195(1) provides:
195(1) Every corporation that is liable to pay tax under this Part for a taxation year shall, on or before the day on or before which it is required to file its return of income under Part I for the year, file with the Minister a return for the year under this Part in prescribed form.
If a corporation fails to pay tax or any instalment of tax when it is required to do so, interest is payable on the amount it failed to pay computed from the required payment date to the date of payment.
Subsection 195(3) provides:
195(3) Where a corporation is liable to pay tax under this Part and has failed to pay all or any part or instalment thereof on or before the day on or before which the tax or instalment, as the case may be, was required to be paid, it shall pay to the Receiver General interest at the prescribed rate on the amount that it failed to pay computed from the day on or before which the amount was required to be paid to the day of payment.
However, subsection 195(4) limits the corporation’s liability to pay interest by making the corporation’s refund, for interest purposes, retroactive to the end of the month following the month in which it has issued a debt or share obligation. This is the same date upon which it is liable to pay tax pursuant to subsection 195(2). As a result, the interest payable by the corporation is calculated monthly only on the net amount of tax payable over and above the amount of the refund. Subsection 195(4) provides:
195(4) For the purposes of computing interest payable by a corporation under subsection (3) for any month or months in the period commencing on the first day of a taxation year and ending two months after the last day of the year in which period the corporation has designated an amount under section 194 in respect of a share or debt obligation issued, or right granted, by it in a particular month in the year, the corporation shall be deemed to have been liable to pay, on or before the last day of the month immediately following the particular month, a part or an instalment of tax for the year equal to that proportion of the amount, if any, by which its tax payable under this Part for the year exceeds its Part VIII refund for the year that
(a) the total of all amounts so designated by it under section 194 in respect of shares or debt obligations issued, or rights granted, by it in the particular month
is Of
(b) the total of all amounts so designated by it under section 194 in respect of shares or debt obligations issued, or rights granted, by it in the year.
(b) General Assessment Provisions Applicable to Part VIII Tax
Under subsection 195(8) the general assessment provisions of the Act are made applicable to Part VIII. Subsection 195(8) provides:
195(8) Sections 151, 152, 158 and 159, subsection 161(11), sections 162 to 167 (except subsections 164(1.1) to (1.3)) and Division J of Part I are applicable to this Part with such modifications as the circumstances require and, for greater certainty, the Minister may assess, before the end of a taxation year, an amount payable under this Part for the year.
(c) Collection Procedures
Commencing at section 222 of the Act are provisions relating to collection. Under section 222 all taxes and interest payable are debts due to Her Majesty and are recoverable as provided by the Act. Section 222 provides:
222. All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to Her Majesty and recoverable as such in the Federal Court of Canada or any other court of competent jurisdiction or in any other manner provided by this Act.
Under subsection 223(1) “an amount payable” means an amount payable under the Act. Paragraph 223(1 )(a) provides:
223(1) For the purposes of subsection (2), “an amount payable” by a person means any or all of
(a) an amount payable under this Act by the person;
Under subsection 223(2) the Minister may certify an amount payable by a taxpayer. Subsection 223(2) provides:
223(2) An amount payable by a person (in this section referred to as a “debtor”) that has not been paid or any part of an amount payable by the debtor that has not been paid may be certified by the Minister as an amount payable by the debtor.
Subsection 223(3) provides that a certificate under subsection 223(2) may be registered in the Federal Court. Once registered, the certificate has the same effect as a judgment of the Federal Court. Collection proceedings may be taken against the debtor for the amount certified plus interest. Subsection 223(3) provides:
223(3) On production to the Federal Court, a certificate made under subsection (2) in respect of a debtor shall be registered in the Court and when so registered has the same effect, and all proceedings may be taken thereon, as if the certificate were a judgment obtained in the Court against the debtor for a debt in the amount certified plus interest thereon to the day of payment as provided by the statute or statutes referred to in subsection (1) under which the amount is payable and, for the purpose of any such proceedings, the certificate shall be deemed to be a judgment of the Court against the debtor for a debt due to Her Majesty, enforceable in the amount certified plus interest thereon to the day of
payment as provided by that statute or statutes.
Under subsection 225.1(1) of the Act, generally the Minister may not certify an amount under section 223 until 90 days after the mailing of a notice of assessment. This provision precludes collection action being taken while a taxpayer is entitled to dispute his or her liability for the tax. However, this restriction on the Minister does not apply with respect to tax payable under Part VIII. Paragraph 225.1(6)(a) provides:
225.1 (6) Subsections (1) to (4) do not apply with respect to
(a) an amount payable under Part VIII;
(d) Vicarious Liability of Directors
Included in the collection procedures of the Act is section 227.1 which renders directors of a corporation vicariously liable for taxes the corporation has failed to pay. Subsection 227.1(1) provides in part:
227.1 (1) Where a corporation has failed to...pay an amount of tax for a taxation year as required under Part...VIII, the directors of the corporation at the time the corporation was required to...pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.
Subsection 227.1(2) provides that a director is not vicariously liable for income tax imposed on a corporation unless the Minister has registered a certificate “for the amount of the corporation’s liability” under subsection 223(3) and execution “for such amount” has been returned unsatisfied in whole or in part. Subsection 227.1(2) provides in part:
227.1(2) A director is not liable under subsection (1), unless
(a) a certificate for the amount of the corporation’s liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
Facts
The plaintiff Robert E. Kyte was a director of Hitec Control Corporation (“Hitec”). On January 1, 1985 Hitec issued a Scientific Research Promissory Note in the principal amount of $1,000,000 to By- Way Stores Limited. On or about January 31, 1985 Hitec designated $1,000,000 under subsection 194(4) of the Act by filing the appropriate form with the Minister of National Revenue (“the Minister”).
By virtue of subsection 195(2) of the Act, Hitec was required, by February 28, 1985, to pay on account of its tax payable under Part VIII of the Act, fifty percent of the designated amount, that is $500,000. Hitec did not pay this amount.
Under subsection 194(2) Hitec was entitled to a refund, on account of its $500,000 income tax liability, of up to fifty percent of its qualifying scientific research expenditures for 1985. Although its 1985 return was due on or before June 30, 1986 Hitec did not file its 1985 return until December 30, 1986. In the return it filed on December 30, 1986, Hitec claimed scientific research expenditures of $1,481,512. Assuming the other requirements of subsection 194(2) were met, and the Minister accepted Hitec’s return as filed, the result would have been a refund wiping out Hitec’s tax payable of $500,000 under Part VIII.
On November 12, 1987, by virtue of subsection 223(2) of the Act, and presumably without regard for Hitec’s 1985 income tax return filed on December 30, 1986, the Minister registered a certificate against Hitec for $500,000 in the Federal Court of Canada in respect of Hitec’s Part VIII tax liability plus interest. On November 27, 1987 the Minister caused a writ of fieri facias to be issued against Hitec for $500,000 plus interest.
On February 24, 1988 the Minister issued a notice of assessment to Hitec in respect of its Part VIII tax for 1985. Although the notice of assessment did not accept Hitec’s refund claim with respect to scientific expenditures as set forth in its return, a refund of Part VIII tax of $284,826.50 was still allowed, leaving a balance of tax owing of $215,173.50 plus interest.
On March 28, 1988 the Sheriff of British Columbia returned the writ of fieri facias issued on November 27, 1987 advising “we are unable to locate any assets”.
On October 25, 1988, pursuant to subsection 227.1(1) of the Act the Minister issued a notice of assessment to Robert Kyte assessing him for $298,473.30 which constituted Hitec’s unpaid tax of $215,173.50 plus interest. It is this amount which 1s under dispute in this Court.
Analysis
The question:
Was the Certificate issued by the Minister on November 12, 1987 in the principal amount of $500,000 “for the amount of Hitec’s liability under Part VIII of the Act” as required by paragraph 227.1(2)(a) of the Income Tax Act?
must be considered in two parts. The first is whether, when the certificate was issued, it was for the amount of Hitec’s liability under Part VIII of the Income Tax Act. The second is whether, if it was not for the amount of Hitec’s liability, a correct certificate was required under paragraph 227.1(2)(a) of the Act in order for a director to be vicariously liable for the corporation’s unpaid tax liability.
(1) Was the certificate for the correct amount of Hitec’s liability
As to whether the certificate was issued for the correct amount of Hitec’s liability under Part VIII of the Income Tax Act, it is first necessary to determine how and when Hitec’s liability arises. The case law is clear that liability for income tax is created by the Act and not by a notice of assessment. In R. v. Riendeau (sub nom. Riendeau v. Minister of National Revenue), [1991] 2 C.T.C. 64, 91 D.T.C. 5416 (F.C.A.), Stone J.A. states at
page 65 (D.T.C. 5417):
As the cases and statutory provisions which were cited by Cullen, J. well show, liability for tax is created by the Income Tax Act...not by a notice of assessment. A taxpayer’s liability to pay tax is just the same whether a notice of assessment is mistaken or is never sent at all.
By the same reasoning, a refund of tax, i.e. a negative liability, is created by the Act as well.
Further, it logically follows that the date when the liability or refund arises is also determined by the Act. This is made amply clear in the Part VIII provisions which specify when amounts of tax are to be paid thereunder, when a refund is deemed paid on account of unpaid tax, and the dates from which interest runs for non-payment of taxes owed. Liability for fifty percent of designated amounts arises on the last day of the month following the month in which a corporation issued a debt obligation. Any refund to which the corporation is entitled 1s deemed paid on account of tax owing on the last day of the second month following the corporation’s year end.
What then is the effect of a notice of assessment issued by the Minister? An assessment is the Minister’s opinion as to the liability of the taxpayer for income tax under the Act. The assessment is subject to challenge by reason of the objection and appeal provisions of the Income Tax Act that are available to the taxpayer. However, whether the determination of tax payable is the taxpayer’s in his or her return, the Minister’s in his notice of assessment, or the court’s on any decision rendered on an appeal, those determinations are calculations of the tax liability of the taxpayer created by the Act. Further, they are determinations that will have a retroactive effect if relevant provisions of the Act stipulate when the tax liability arose.
Thus, in the case at bar, Hitec’s initial liability for tax under Part VIII was created by reason of subsection 194(1) of the Act which provided that Hitec had to pay fifty percent of the amount of the debt obligation it issued or $500,000. By virtue of subsection 195(2), the sum of $500,000 had to be paid on or before February 28, 1985.
In its tax return for 1985, Hitec claimed a refund for the entire $500,000. The Minister did not accept Hitec’s claim and by his February 24, 1988 notice of assessment, allowed Hitec a refund of $284,826.50 leaving a balance of tax owing of $215,173.50. In allowing this refund and assessing for the balance of tax owing, the Minister must be taken to be applying the relevant provisions of the Income Tax Act. The relevant provisions would include subsection 194(5), which would make the refund paid on account of tax as of February 28, 1986. As a result, as of February 28, 1986, Hitec’s liability for income tax was $215,173.50 and not $500,000 as stated in the certificate of the Minister filed in the Federal Court of Canada on November 12, 1987.
Apparently, Hitec objected to the Minister’s calculation of its refund and the balance of tax that it owed but the Minister confirmed his assessment. No further appeal proceedings were taken by Hitec.
Had Hitec appealed, it might have settled with the Minister for a different refund or the Court might have determined that it was entitled to a different refund and that a different amount of tax was owing. However, whenever the process ends, with the Minister or by settlement or by a court judgment, the determination of the refund and balance of tax payable will be one that is made in accordance with the Income Tax Act as to the amount of the refund, balance of tax payable and the date when the refund was effected and balance of tax established.
I therefore reject the argument of the Minister that a refund only arises and is deemed paid on account of unpaid taxes when the Minister makes a determination of that refund. No matter when the Minister makes that determination, the refund is deemed paid on account of unpaid taxes when the Income Tax Act so provides. In this case, that would be February 28, 1986.
I also do not accept the Minister’s argument that subsection 194(5) of the Act is to be interpreted as rendering the refund deemed paid on account of tax as of February 28, 1986 for the purposes of interest only. Such an interpretation requires a reading down of the literal words of subsection 194(5). However, as affirmed by the Supreme Court of Canada in Friesen v. R. (sub nom. Friesen v. Canada), [1995] 3 S.C.R. 103, [1995] 2 C.T.C. 369, 95 D.T.C. 5551, the words of the Income Tax Act are to be given their plain meaning. It would have been a simple matter for Parliament to have limited the provision by use of words such as “for the purposes of the calculation of interest...” instead of using the words “for the purposes of this Act...”. Parliament did not do so. For the Court to adopt the Minister’s interpretation would be tantamount to the Court purporting to legislate.
The Minister’s alternative argument, that the relevant amount for inclusion in a certificate is, forever, the liability of the corporation on the day it failed to pay the. amount it was initially required to pay, cannot be accepted. The words of subsection 227.1 themselves do not support the Minister’s argument. Certainly, the words “at the time” contained in the subsection refer to the time when the corporation was required and failed to make the payment, but the purpose of this section is not to establish for all time the amount a corporation is liable to pay. Its purpose is to ensure that it is the directors in office at the time the liability arose who are rendered vicariously liable. I cannot read the subsection to say those directors would remain liable for the amount the corporation initially failed to pay even if the corporation subsequently paid some amount on account or a refund was deemed paid on account of unpaid taxes.
Hitec’s liability for income tax as of February 28, 1986, was $215,173.50. When the Minister registered a certificate for $500,000 in the Federal Court on November 12, 1987, the certificate was not for the amount of Hitec’s liability under Part VIII of the Income Tax Act.
(2) Was a correct certificate a requirement for director liability I now turn to the question of whether a director is liable under section 227.1 for income taxes owing and unpaid by a corporation if the certificate registered by the Minister in the Federal Court was not for the correct amount of the corporation’s liability. This question involves a consideration of section 166 of the Income Tax Act:
166. An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act.
Section 166 requires a determination as to whether an error is in the observance of a directory or mandatory provision of the Act. If a mandatory provision is involved, the error would not be excused by section 166. However, if the error is with respect to a directory provision of the Act the Minister may avail himself of the benefit of section 166.
As to what constitutes a directory as opposed to a mandatory provision of legislation, I am guided by the comments of Lord Penzance in Howard v. Bodington (1877), 2 P.D. 203 at page 211, as quoted by Joyal J. in Cal Investments v. R. (sub nom. Cal Investments v. Canada), [1990] 2 C.T.C. 418, 90 D.T.C. 6556, at page 427, (D.T.C. 6563}:
I believe that as far as any rule is concerned you cannot safely go further than that in each case you must look to the subject matter; consider the importance of the provision that has been disregarded and the relation of that provision to the general object intended to be secured by the Act; upon a review of the case in that aspect decide that the matter is what is called imperative or only directory.
[Emphasis added.]
The same approach is stated in Halsbury’s Laws of England, (4th Ed.), Vol. 44, paragraph 933:
No universal rule can be laid down for determining whether provisions are mandatory or directory; in each case the intention of the legislature must be ascertained by looking at the whole scope of the statute and, in particular, at the importance of the provision in question in relation to the general object to be secured.
[Emphasis added.]
The general object intended to be secured by sections 223 and 227 is the collection of income tax. The specific object of paragraph 227.1(2)(a) is to ensure that before a director is made vicariously liable for the unpaid income taxes of a corporation, the Minister take steps to try to recover from the corporation. The legislation is clear that the taking of such steps is a condition precedent to the vicarious liability of directors and therefore, such steps are mandatory. Indeed, the failure to take such steps could result in a director, not directly liable for the corporation’s income tax, being called upon to pay that tax before recourse against the corporation has been exhausted. That would be inconsistent with the object of the
provision.
However, while the steps to exhaust recourse against the corporation are mandatory, whether the certificate is for the correct amount owing is not of the same importance. As long as the certificate is registered and execution is attempted, the basic object of the provision is respected. The fact that the amount on the certificate is incorrect does not derogate from adherence to the object of the legislation.
This view, I think, accords with practicality. As I have indicated, an assessment may have retroactive effect. Thus a taxpayer corporation, after a certificate has issued, could, by filing an amended return which was assessed as filed by the Minister, change the amount of its income tax liability. That changed liability would have retroactive effect. The certificate issued prior to the amended return having been filed and assessed would be in error. The taxpayer corporation itself could therefore be the cause of an incorrect certificate. If a correct certificate was a mandatory requirement of the Act, vicarious director liability could be avoided solely by actions of the corporation. This would not be a reasonable result.
In the same context, an error of a few dollars or cents could, if the requirement that the certificate be correct was mandatory, render a director free from vicarious liability. That would not be consistent with practicality nor the general object of the sections, which is to collect tax, or the specific purpose of paragraph 227.1(2)(a), which is only to require an attempt at recovery against the corporation before seeking recovery from a director. Again, the result would not be reasonable.
The plaintiff relies on Local Improvement District (No. 26 A 5) v. Walters, [1908] 1 Alta. L.R. 188 (C.A.), in which Beck J., at page 196, accepts a general principle laid down in A. & E. Ency. of Law, 2nd ed., vol. 26; tit. “Statutes,” pages 689-90:
Provision in regard to the assessment and collection of taxes, and the measures preliminary thereto which are intended for the protection of the taxpayer, to ensure an equality of taxation, and to prevent a sacrifice of his property, are mandatory; while, on the other hand, those intended simply for the guidance of the officers and to promote the efficiency of their work are directory.
Assuming that this is a correct current statement of the law in respect of the Income Tax Act (which I do not necessarily accept), the description of mandatory provisions would clearly apply to the requirements to register the certificate and issue execution. These are provisions intended for the protection of the director. But the reference in subsection 227.1(2) to the amount of the certificate is a direction to the Minister’s officials as to how to complete the certificate. The taxpayer is not unprotected and his or her property is not sacrificed by reason of an incorrect certificate.
For these reasons, the requirement that a certificate be for the amount of the corporation’s liability is a directory provision only.
While I think this disposes of the matter, in view of the approach of other courts as to the types of errors excused by section 166 (and subsections 152(3) and 152(8)), I should add the following comments.
Gaitens v. R. (sub nom. Gaitens v. Canada), [1993] 1 C.T.C. 2168, 93 D.T.C. 54 was a case similar to the one at bar in which Kempo J.T.C.C. found that a certificate that failed to take account of a refund deemed paid on account of tax under subsection 194(5) of the Act was not correct. She rejected the Minister’s argument based on sections 152(3) and 166 stating at page 2176 (D.T.C. 59):
The erroneous amount in the Certificate in the case at bar is fundamental. It goes beyond mere error or irregularity contemplated within 166 or 152(3).
[Emphasis added.]
The “fundamental” test seems to have originated with cases such as R. v. Riendeau, [1990] 1 C.T.C. 141, 90 D.T.C. 6076 (upheld on appeal, supra) in which Cullen J. stated at pages 146-47 (D.T.C. 6079):
Error will be a matter of degree. Subsections 152(3), 152(8) and section 166 combined clearly indicate that this error by the Minister of National Revenue is far from fatal. The cases only limit these sections where there is substantial and fundamental error; in such cases, the court will not allow the Minister to hide behind the provisions.
In Stephens Estate v. R. (sub nom. Stephens Estate v. The Queen), [1984] C.T.C. Ill, 84 D.T.C. 6114 (F.C.T.D.) affirmed [1987] 1 C.T.C. 88, 87 D.T.C. 5024, Reed J. refused to invalidate an assessment where there was no evidence of the taxpayer being misled or prejudiced by errors of the Minister.
I deduce from these cases that the Court, in considering subsections 152(3), 152(8) and section 166, must have in mind whether there was some bad faith, unfairness, or injustice on the part of the Minister or prejudice to the taxpayer. If so, there is more than just a simple error by the Minister which would otherwise, by reason of the plain meaning rule in Friesen v. Canada, supra, be excused by the saving provisions of the Act.
This is not a case in which there is evidence of any prejudice or injustice to Hitec or to Mr. Kyte arising from the error. The Minister simply failed to take account of the refund which was deemed paid on account of tax as of February 28, 1986. While the Minister had Hitec’s return, and might have assessed it before registering the certificate on November 12, 1987, there is no evidence of anything sinister because the Minister did not do so. In fact, Hitec itself filed its income tax return for 1985 approximately six months late. It may well have been Hitec’s late filing that delayed the Minister’s assessment.
The retroactive provisions of the Act in respect of refunds indicate that errors in certificates may be inevitable. The Minister may consider it necessary to register a certificate before a corporation’s return 1s filed, or at least before he has had an opportunity to properly consider a claimed refund. Or a taxpayer corporation may itself file an amended return after a certificate is issued which, if assessed by the Minister as filed, would retroactively change the corporation’s liability and render the certificate incorrect. There are undoubtedly other circumstances that could give rise to incorrect certificates. In enacting section 166, Parliament must have had regard for such circumstances. I am satisfied that what occurred here was an error contemplated by section 166.
I am mindful that in Gaitens, supra, a case similar to the one at bar, Kempo J.T.C.C. was not prepared to permit the Minister to avail himself of the benefit of section 166. I am not aware of all the facts of that case, but I must say, with respect, that if the relevant facts were the same as in the case at bar, I would have come to a different conclusion on this point than did Kempo J.T.C.C.
Counsel for the plaintiff says that section 166 does not apply to errors in certificates because section 166 is not expressly incorporated by reference into section 223 of the Act. However, as plaintiffs counsel also points out, section 166 is incorporated by reference into subsection 227(10) which provides:
227(10) The Minister may assess
(a) any person for any amount payable by that person under subsection (8), or 224(4) or (4.1) or section 227.1 or 235, and
(b) any person resident in Canada for any amount payable by that person under Part XIII,
and, where he sends a notice of assessment to that person, Divisions I and J of Part I are applicable with such modifications as the circumstances require.
Section 166 is contained in Division I of Part I of the Act.
It is the assessment under section 227.1 that makes that provision operative and renders the plaintiff vicariously liable for Hitec’s income tax liability. The registration of a certificate under section 223 is a condition precedent to liability of a director under section 227.1. Accordingly, the Minister must observe section 223. However, if a portion of section 223 is directory in nature, an error by the Minister in respect of the directory provision will be excused under section 166. I think there is sufficient linkage between section 223 and section 227.1 for the purpose of the Minister availing himself of the assistance of section 166 when a certificate which is a condition precedent to a director’s liability under paragraph 227.1(2)(a) is in error. Therefore, while the certificate was in error, the plaintiffs assessment should not be vacated or varied and his liability excused by reason of such error.
CONCLUSION
The question as framed under section 475 of the Federal Court Rules is answered in two parts:
1. The certificate issued on November 12, 1987, in the principal amount of $500,000 was not for the amount of Hitec’s liability under Part VIII of the Income Tax Act.
2. It was not a mandatory requirement of paragraph 227.1(2)(a) of the Act that a certificate be for the amount of Hitec’s liability under Part VIII of the Act. For this reason, the plaintiffs assessment should not be vacated or varied by reason of the error in the certificate registered on November 12, 1987.
Order accordingly.