Regina Shoppers Mall Ltd. v. The Queen, 90 DTC 6427, [1990] 2 CTC 183 (FCTD)

Addy, J.:—The plaintiff appealed against an income tax assessment issued by the defendant against it for the 1979 taxation year. Another action was also- instituted pursuant to which it contested the assessment for 1980. Both actions were ordered to be tried together.

I shall deal firstly with the assessment for 1979. The plaintiff, a Saskatchewan corporation, disposed of a piece of real estate in 1976 and treated the proceeds of the sale as a capital gain in its T-2 corporate returns for the three years 1976 to 1978 inclusively and also treated the reserve for each year in accordance with subparagraph 40(1)(a)(iii) of the Act which provides for reserves on capital gains.

In May 1980, the Minister advised the plaintiff of his intention to assess it for those three years on the basis that the gain was in fact on income account and inquired whether, in computing its income for those years, the plaintiff wished to claim a reserve against income gain pursuant to paragraph 20(1)(n) which covers income reserves. On May 28, 1980 the plaintiff, through its agents, advised that if it was to be reassessed as proposed it did wish to deduct such reserves. Reassessment notices were duly issued and notices of objection dated September 12, 1980, were filed objecting to the reassessments which were issued on the basis that the proceeds were to be charged to income. The plaintiff in its objections continued to maintain the position that the gain was a capital one and not attributable to income.

On or about October 14, 1980, the plaintiff filed its return for the 1979 taxation year and continued to claim that the 1976 sale was a capital gain and that the reserve for uncollected proceeds should be calculated pursuant to subparagraph 40(1)(a)(iii). On December 29, 1980, the Minister issued an original assessment pursuant to which no changes were made in the calculations as submitted by the plaintiff for 1979.

The issue of the nature of the 1976 sale and the reassessments of the plaintiff for the three years 1976 to 1978 following trials before the Tax Court of Canada and then the Trial Division of the Federal Court was eventually disposed of pursuant to an appeal to the Federal Court of Appeal on September 21, 1989. The Court of Appeal held that indeed the gain from the sale was to be considered as an income receipt as claimed by the Minister and not as a capital gain. This was the only issue before the Courts. Any reserves claimed or allowed were not in issue. The deductibility of the reserves was left to follow the outcome of the actions.

Meanwhile, by notice of reassessment dated November 3, 1987, the Minister purported to reassess the plaintiff for the 1979 taxation year by adding to the latter's income $963,431 being the reserve deducted pursuant to paragraph 20(1)(n) of the Act in computing the plaintiff's income for 1978 in the reassessment for that year. By notice of objection filed on December 2, 1987, the plaintiff objected to the reassessment for 1979 on the basis that it was invalid as being beyond the time prescribed by paragraph 152(4)(c). In the notice of objection the plaintiff claimed alternatively that, should the reassessment not be statute barred, it be entitled to deduct by virtue of paragraph 20(1)(n) of the Act a reserve of $699,751. This last alternative claim was admitted by further reassessment dated October 12, 1988.

The determination of the issue of whether the reassessment for 1979 is in fact statute-barred as being over four years after the date of the original assessment, depends entirely on whether the plaintiff, in filing its T-2 return for that year, made any misrepresentation attributable to either neglect, carelessness, wilful default or fraud. The Minister reassessed the plaintiff on July 30, 1980 for the years 1976 to 1978 on the basis that the proceeds of the 1976 sale were to be considered as income and the plaintiff filed its notices of objection on the September 12, 1980. It was only one month later, namely on October 14, 1980, that the plaintiff filed its T-2 return for the year 1979.

When the Minister issued his original assessment in December 1980 confirming the income and treatment thereof as reported by the plaintiff, the Department had before it all of the information and knowledge that it had when the Minister issued the reassessment some seven years later, namely on November 3, 1987. Revenue Canada knew of the reassessments for 1976, 1977 and 1978. It knew of the plaintiff's notices of objection thereto and it knew how the plaintiff had treated its reserves when filing its 1979 tax return.

The 1979 return as filed continued to treat the proceeds of the sale as a capital gain since the plaintiff was disputing the Minister's position that the proceeds should be treated as income. The onus is on the defendant to establish that, in so doing, the taxpayer made a misrepresentation that is attributable to neglect, wilful default, carelessness or fraud in order for the defendant to escape the four-year limitation imposed by paragraph 152(4)(b) (M.N.R. v. Taylor, [1961] Ex. C.R. 318; [1961] C.T.C. 211; 61 D.T.C. 1139).

Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 (1056 Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1; 89 D.T.C. 5287). In Levy (/.) v. M.N.R., [1989] 2 C.T.C. 151; 89 D.T.C. 5385 at page 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following statement by Muldoon, J. in the above case:

Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist.

[Emphasis added]

It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. In another decision by Mr. Justice Muldoon, namely Iris M. Reilly, Executrix and Trustee of the Estate of Cleo E. Reilly v. The Queen, [1984] C.T.C. 21; 84 D.T.C. 6001, in which he dealt again with the subject, we find the following statement at page 38 (D.T.C. 6015):

In order to make any determination of making "any misrepresentation that is attributable to neglect, carelessness or wilful default . . . in filing the return or in supplying any information under the Act” it is necessary to have direct evidence of the state of mind and intention of "the taxpayer or person filing the return" or other evidence upon which reasonable inferences can be drawn in regard to the taxpayer's or otherperson's state of mind and intention.

And at pages 40-41 (D.T.C. 6016):

The issue is not whether Mr. Tetz, in forming his opinion at the material time was wrong, but whether his not reporting the disposition was attributable to neglect, carelessness or wilful default.

Finally, at page 42 (D.T.C. 6018):

So, when it is now said that the standard of care is that of a wise and prudent person, it must be understood that wisdom is not infallibility and prudence is not perfection.

In the instant case, because Mr. Tetz, upon the careful and attentive reading of the Guide, which he testified and demonstrated that he performed, concluded that Reilly's disposition of land was not reportable, then in not reporting it he made no default, and accordingly no wilful default, because he intended no such thing. It was argued on behalf of the defendant that if and when the Minister's ambiguously worded Guide induces error on the part of a taxpayer or professional adviser, it is of no consequence in this kind of litigation because the defendant is not bound by that official Guide in any event. That argument surely misses the point of this enquiry. Here the issue is whether the error, if any, be attributable to neglect and carelessness. Mr. Tetz' demonstrated diligence and care in perusing the Guide were clearly the very antithesis of neglect and carelessness, even if his firmly held conclusions, upon which he acted in filing Reilly’s return were wrong. Therefore, the Minister is barred from making a reassessment back beyond the four-year limit.

The accountant for the defendant maintained that since the plaintiff's agent knew that the proceeds of the 1976 sale of real estate had for the years 1976 to 1978 been reassessed by the department against income he should so have reported it in the 1979 return. The agent, however, knowing that the question was the subject matter of a continuing dispute and feeling that his view of the nature of the gain was a correct one, continued to report it as such in 1979 as he had in the three previous years. I accept his evidence that he did so in good faith and with the honest belief that his view was the correct one. He and two other expert accountants knowledgeable in the field of corporate accounting for income tax, testified that this was a normally accepted practice and the one that they constantly used and that it was generally recognized as entirely proper for taxpayers to proceed in that manner. The sole witness for the Crown admitted that this method was possibly as common as any other but he maintained however that though commonly used, the method was improper. According to him, the plaintiff had two options. In the first place, it could have reported the proceeds as income and the resulting reserves as income reserves and then waited for the initial assessment by the Department confirming that view and then, subsequently, issue anotice of objection to the effect that the proceeds and the resulting reserves should be considered as capital. In other words, it was suggested that in order to ensure that the department was, on the filing of the 1979 return, alerted to the fact that there was an ongoing dispute as to how the proceeds of the 1976 sale should be reported, the taxpayer would be expected to report income according to the way the department would apparently be viewing the matter at that time and, when the Department agreed and assessed accordingly, the taxpayer should then object to the assessment and claim on a completely different basis than originally reported by it.

It is difficult for me to conceive of a more illogical and improper way of proceeding. The system of declaring revenue and assessing tax provided for in our Act is a self assessing one. Where the taxpayer reports that an item of revenue is to be treated in a certain manner, after having carefully considered the matter, is not negligent in doing so and does not in any way intend to deceive the Department, the law under a self assessing system cannot be taken as imposing on that taxpayer the duty of reporting receipts in a manner which the Department views as the correct one and which the reporting taxpayer bona fide believes to be incorrect. Furthermore, it is not the duty of the reporting taxpayer to alert the Department to a situation as to which any reasonable person would believe the latter is fully aware. There was at the time a fundamental and serious ongoing and unresolved dispute between the parties on that very issue. There was no reason whatsoever for the plaintiff to believe that the Department would somehow overlook it.

The second possible method which according to that witness and counsel for the defendant would be acceptable would be for the plaintiff to submit the 1979 report as it did but to accompany the report with a waiver of the provisions of paragraph 152(4)(b) in order to afford the defendant an indefinite time to reassess. I honestly feel that the suggestion that the filing of a waiver would relieve against an obligation to file in one manner as opposed to another, is hardly worthy of comment. If, as suggested by the defendant, the plaintiff was acting improperly in filing as it did, I fail to see how the filing of a waiver allowing the Department more than four years to reassess would somehow add validity to the report. At the time of reporting the plaintiff had no reason whatsoever to believe that the defendant would allow four years to go by before reassessing.

It is quite clear from the evidence that the failure to reassess in time was not due to any misrepresentation on the part of the plaintiff but simply to a total failure on the part of the defendant to consider the information which it had before it. The witness for the defendant admitted that the Department by mistake or for some unknown reason failed to follow its normal procedure when there is continuity of reserves, until after the four-year period had expired. This was not a question of having to dig into old files but, on the contrary, the whole issue was being vigorously contested. There was a note made on the file of the Department when the 1976, 1977 and 1978 years were reassessed that the matter should be followed in later years. This in fact was done for 1980 but was not done for 1979. I fully accept the evidence of the experts called on behalf of the plaintiff to the effect that it was proper practice for the plaintiff to file as it did. The defendant has failed to discharge the onus that, in the filing of the 1979 return, there was any misrepresentation attributable to neglect, carelessness or wilful default or fraud on the part of the plaintiff or its agent.

The second issue before the Court refers to the reassessment for the taxation year 1980. In reassessing the plaintiff for that year the Minister added to the plaintiff's income under paragraph 12(1)(e) an amount described in the assessment as "1979 special reserve for sale of land $699,751”. This section reads as follows:

Section 12: Amounts to be included as income from business or property.

(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(e) Reserves in respect of certain goods and services, etc. — any amount

(ii) deducted under paragraph 20(1)(n),

in computing the taxpayer's income from a business for the immediately preceding year;

The relevant parts of paragraph 20(1)(n) read as follows:

20.(1) Notwithstanding paragraphs 18(1)(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(n) reserve for amount not due until later year. — where an amount has been included in computing the taxpayer's income from the business for the year or for a previous year in respect of property sold in the course of the business and that amount or a part thereof is not due,

(ii) where the property sold is land, until a day that is after the end of the taxation year,

a reasonable amount as a reserve in respect of such part of the amount so included in computing the income as may reasonably be regarded as a portion of the profit from the sale;

In filing its return for 1979 the plaintiff had in fact added to income an amount of $175,538 described as a 1979 reserve for uncollected proceeds and had deducted the sum of $127,496. The plaintiff's uncollected proceeds in its 1979 return were of course calculated on the basis that they were chargeable to capital account and not to income. The reserves were therefore calculated by the plaintiff's agent pursuant to subparagraph 40(1)(a)(iii):

Section 40: General rules.

(1) Except as otherwise expressly provided in this Part

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) subject to subsection (1.1), such amount as he may claim

(A) in the case of an individual (other than a trust) in prescribed form

filed with his return of income under this Part for the year, and

(B) in any other case, in his return of income under this Part for the year, as a deduction, not exceeding the lesser of

(C) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

The calculations were indicated as follows:

Receivable at December 31, 1979 Section 40(1)(a)(iii)

from arm's length portion x taxable capital gain = Reserve total sale proceeds

414,000 X 1,231,844 (.50) = 127,496

2,000,000

The plaintiff therefore maintains that since it did not, in computing its 1979 income, deduct any amount under paragraph 20(1)(n), paragraph 12(1)(e) could not become operative for 1980.

The plaintiff's counsel in his argument relied on a 1977 case before the Tax Review Board: A.E. Greer v. M.N.R., [1977] C.T.C. 2522; 77 D.T.C. 368. One of the issues in that case was whether the Minister had erred in adding to the appellant's 1972 income the sum of $6,711.93 on account of a reserve which the Minister had determined to allow the appellant in 1968. At page 2525 (D.T.C. 370) of the report, the presiding member held:

However, I have concluded that once the Minister had determined to allow to the appellant the reserve under paragraph 85B(1)(d), apparently without the appellant's request that he do so, the onus for maintaining that reserve in a "recallable" posture shifted to the Minister and, unless some particular action by the appellant altered that responsibility, it would there remain. The opportunity existed for the Minister to show the reserve, "in" and “out”, in the assessments or reassessments for 1969, 1970 and 1971, but not having done so, it is my view that the appellant's position is sound—the reserve to be included in the appellant’s taxable income for the year 1972 should have appeared as a deduction and/or credit to him in the year 1971.

There is no doubt that there is an onus on the taxpayer who seeks to demolish the basic fact on which an assessment rests (Roderick Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; [1948] 4 D.L.R. 321). The plaintiff has discharged that onus. The basic fact on which the assessment for the 1980 taxation year had to rest was that there was a special reserve on the income account of $699,751 declared by the plaintiff at the end of the 1979 taxation year. This fact simply did not exist. No such reserve was ever declared.

It is also worthy of note that the 1979 reassessment was made two years after the 1980 reassessment. This was undoubtedly an attempt to justify ex post facto the 1980 reassessment by having the required reserve included in the 1979 year. In other words, it was an attempt to establish ex post facto the fact that it did not exist at the time the assessment for 1980 was issued.

The right to assess anything as taxable revenue is a strictly legal concept the authority for which must be found within the four corners of the Act. The Act must also be strictly interpreted in favour of the taxpayer and against the taxing authority. It is patently obvious and indeed an uncontested fact that the plaintiff did not deduct any amount as an income reserve under paragraph 20(1)(n) for the taxation year 1979. The attempt to reassess for that year has failed and no 1979 deductions pursuant to paragraph 20(1)(n) can even be presumed. The reassessment for 1980 is defective in that it purports to include that 1979 income reserve.

The mere fact that a taxpayer may ultimately benefit from a failure of the taxing authority to properly reassess obviously does not constitute authority for reassessment which is not found in the legislation itself. There is no rule of equity or of common law which may somehow assist the taxing authority to obtain revenue which it has lost solely and entirely through its own negligence or failure to exercise the powers granted to it by the Act.

In conclusion I find that the reassessment of the plaintiff for the 1979 taxation year which was issued on October 12, 1988, will be vacated as it was issued beyond the time prescribed by paragraph 152(4)(c) of the Act and that the assessment for taxation year 1980 will be referred back to the Minister for reassessment on the basis that the reserve of $699,751 for 1979 allegedly included in the year 1980 under paragraph 12(1)(e) will be excluded from any calculation of the plaintiff's income for the year 1980.

The plaintiff will be entitled to all its reasonable costs in both actions.

Appeal allowed.