Lornport Investments Limited v. Her Majesty The Queen and Project Construction Limited v. Her Majesty The Queen, 91 DTC 5044, [1991] 1 CTC 57 (FCTD)

Rouleau, J.:—These matters came before me as motions set down pursuant to Rule 474 of the Federal Court Rules for determination of a question of law. The two cases were heard together and consequently, this order will apply to both.

The plaintiff corporations sold their interests in the Royal York Centre, a shopping centre, in the 1983 taxation year. As a result, the Minister of National Revenue endeavoured to assess the amount of capital gains owed by each plaintiff. It is the procedural strategy of the issuance of subsequent reassessments by the Minister which led to this debate. In both files, the parties submitted an agreed statement of facts setting out the relevant dates particular to the procedure followed. Although they differ slightly at times, the same issues prevail in both cases. In brief, what gives rise to the dispute is that a prescribed limitation period was not adhered to when the second notices of reassessment were issued. A chronicle of the events will clarify the consequences of this error.

Pursuant to subsection 152(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the Minister of National Revenue issued an original notice of assessment against each plaintiff in March 1984 for the 1983 taxation year. A first notice of reassessment was then sent to each plaintiff early in the year 1987.

On April 6, 1987, the plaintiffs objected to the reassessment by filing notices of objection pursuant to section 165 of the Act. They also indicated their desire to appeal immediately against the reassessment before this Court, thereby waiving their right to reconsideration of the reassessment. The plaintiffs attempted to receive the Minister's consent on the waivers but were unsuccessful. On June 7, 1988, the plaintiffs instituted their appeals before this court by filing statements of claim.

Shortly thereafter, each plaintiff received a second notice of reassessment in July 1988 which increased the total amount of tax assessed for its 1983 taxation year. They again responded to these second reassessments in the same manner as they had previously done. Once again each filed a second notice of objection and instituted an appeal before this Court. The basis of these appeals was that the second reassessments were not made within three years from the day of mailing of the notices of original assessment, a fundamental requirement pursuant to paragraph 152(4)(c) of the Act. This Court agreed. On April 20, 1989, both plaintiffs were successful in having their respective second notice of reassessment vacated by order of the associate senior prothonotary on the grounds that it had not been made in compliance with paragraph 152(4)(c) of the Act.

The query remains whether the orders of the associate senior prothonotary setting aside the second notices of reassessment have any repercussions as to the validity of the first notices of reassessment. On May 17, 1990, the question of law to be determined was set down by order of the Associate Chief Justice thus:

(1) Was the reassessment made by way of the First Notice of Reassessment superseded and displaced by the reassessment made by way of the Second Notice of Reassessment and ceased to exist from the time of issuance of the Second Notice of Reassessment forward (as the Plaintiffs contend), or

(2) Was the reassessment made by way of the First Notice of Reassessment currently subsisting notwithstanding the issuance thereafter of the Second Notice of Reassessment (as the Defendants contend)?

The parties have agreed that if the first question is answered in the affirmative, that is to say that the first notices of reassessment are deemed to be no longer in effect, the Minister will accept that determination; the plaintiffs will voluntarily discontinue their appeals before this Court and will be entitled to costs. If, however, the conclusion reached is that the first notices of reassessment are indeed still in force and effect, then the parties have concurred that the appeals before this Court will continue to be prosecuted and defended.

The issue can be resolved fairly easily. A quick review of certain provisions of the Act indicate that minor errors in assessments and reassessments on the part of the Minister are to be overlooked [1] . Subsection 152(3) of the Act asserts that “ (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". Furthermore, section 166 of the Act provides that" (an) assessment shall not be vacated or varied on appeal by reasons only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act". And finally, subsection 152(8) of the Act maintains that

(an) assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omissions therein or in any proceeding under this Act relating thereto".

It is established therefore that an assessment, no matter how poorly construed [sic], will be deemed valid and binding, subject to a reassessment. However, this is not a case where the Court is required to overlook an irregularity or mere procedural deficiency in the reassessment. The question I must answer is whether the second notices of reassessment replaced and nullified the prior reassessments. A recent decision by Mr. Justice Martin entitled Bowater Mersey Paper Co. v. The Queen, [1986] 1 C.T.C. 535; 86 D.T.C. 6293 perused the jurisprudence to determine the effect of a subsequent reassessment in regards to an incurred liability for the same taxation year. Martin, J. referred to a leading case, Coleman C. Abrahams (No. 1) v. M.N.R., [1966] C.T.C. 690; 66 D.T.C. 5451, in which Jackett, P. elaborated the following principle at page 692 (D.T.C. 5452):

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.

[Emphasis added.]

The general proposition stands that a subsequent reassessment for the same taxation year nullifies and replaces a previous assessment for the same year. At first blush, it would appear that the second reassessments that were issued in these cases displaced the previous ones. The second reassessments were undoubtedly meant to fix the taxpayer's total tax. Since they cannot be perceived as a mere addition to the amount already assessed, they do not fall within the scope of the first exemption to the general rule. However, one must not forget that Jackett, P.'s pronouncement begins with the cautionary assumption that the second reassessment be valid. That is clearly not the case here and hence, the general principle does not apply. The second notices of reassessment have been vacated, invalid because of prescription; as a result, they neither displaced nor nullified the first notices of reassessment.

Such an analysis falls plainly within the ambit of the second exception to the general rule as enunciated by Mr. Justice Walsh in Mary E. Walkem v. M.N.R., [1971] C.T.C. 513; 71 D.T.C. 5288, at 520 (D.T.C. 5292):

On the contrary, I find that the real distinction lies, as implied in the Abrahams case (supra), in deciding whether or not the new reassessment completely replaces all previous assessments or reassessments so that there is no longer any issue before the Board or Court on those previous assessments or reassessments, in which case the Board or Court no longer has any jurisdiction to hear the original appeal (. . .)

There is indeed still an issue on the previous reassessments which has yet to be addressed and settled by the Court, that is to say the amount of capital gains owing by the plaintiffs. To arrive at any other conclusion would allow the taxpayers to avoid all tax liability. Taxpayers should not be granted such a windfall simply due to a slight tactical error on the part of the Minister.

I therefore find that the reassessments made by the first notices of reassessment are currently subsisting notwithstanding the subsequent issuance of the second notices of reassessment. This conclusion was reached without reference to the classification of the second reassessments as either void ab initio or voidable. It was not necessary to do so in light of Jackett, P’s precautionary statement discussed earlier. Counsel for the plaintiffs argued that the first reassessments could only be "revived" if the second ones were deemed void ab initio. I disagree. In obiter, I would like to stress that I do recognize that notices of reassessment can only be described as voidable. On that point, I rely on the finding of Mr. Justice Joyal in Canadian Marconi Co. v. Canada, [1989] 2 C.T.C. 128; 89 D.T.C. 5370 (F.C.T.D.), at 136 (D.T.C. 5379) where he said the following:

Counsel urges the Court to find that the safeguards found in subsection 152(4) are there as a shield to protect the taxpayer. Outside of the limits imposed, the Minister must prove either fraud or waiver. In the absence of either, the taxpayer can resist any notice of assessment and have it declared null and of no effect. It does not follow, however, that such notice of assessment would be void ab initio. It

would simply be voidable and its voidable character would only be crystallized if the taxpayer decided to avail himself of this statutory defence.

[Emphasis added.]

It is obvious that reassessments will stand until challenged by the taxpayer. As such, reassessments are undeniably voidable not void ab initio. That factor is irrelevant in this instance since the tax liability concerning the first assessments continues to exist.

I hereby order that part 1 of the question of law be answered in the negative and part 2, in the affirmative. On that basis, the motions are dismissed with costs.

Motions dismissed.