Schmidt v. The Queen, 92 DTC 6415, [1992] 2 CTC 113 (FCTD)

Giles, A.S.P.:—The action which gave rise to the motions before me was commenced by a statement of claim in which Mr. and Mrs. Schmidt were joint plaintiffs. The Crown, citing L&M Wood Products Ltd., et al. v. M.N.R., [1972] C.T.C. 556, 72 D.T.C. 6483 and Gallos v. The Queen, [1989] 1 C.T.C. 169, 89 D.T.C. 5170, seeks to strike the claim on the grounds that taxpayers with a common case cannot join as plaintiffs in view of paragraph 175(3)(a) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

It is alleged that Mr. and Mrs. Schmidt were officers of a company which deducted moneys from employees in respect of income tax and unemployment insurance premiums. These trust moneys were not held separately as required by the legislation (e.g. subsection 227(5) of the Income Tax Act) but were placed in a company account with Toronto-Dominion Bank and in due course, it is alleged, were appropriated by that bank.

Mr. and Mrs. Schmidt, being directors of the company were, pursuant to section 227.1, jointly and severally liable with the company to pay the amount withheld.

In due course an assessment was issued to each of them. A notice of objection was filed by each of them. The Minister confirmed the assessments and this action was launched by Mr. and Mrs. Schmidt as plaintiffs.

In L & M Wood Products Mr. Justice Heald, sitting in the Trial Division, having quoted Rules 1714 and 1715, wrote at 559 and 560 (D.T.C. 6485):

Were it not for the specific prohibition contained in Section 175(3) of the Income Tax Act, it may well be that the plaintiffs here could bring themselves within the provisions of said Rules so as to permit several taxpayers to appeal their income tax assessments in one proceeding. However, reading Section 175(3) with Rules 1714 and 1715 and taking said section in the context of the income tax statute as a whole, I have the view that each taxpayer must “institute” his appeal separate and apart from any other taxpayer. The scheme of the statute applies to separate taxation years and to separate taxpayers. Each assessment in each year is, it seems to me, a separate cause of action. The object of the appeal procedures set out in the Act is to obtain an adjudication of the issues which have arisen between a particular taxpayer and the Minister of National Revenue as to his liabilities under the statute for a particular taxation year.

I am therefore of the opinion that the three separate taxpayers in this case should have commenced separate appeals against the income tax assessments complained of. Once this was done and the Minister had pleaded thereto, and the pleadings were closed, I believe that Section 175(3)(a) would permit the appeals to be joined for the purposes of trial, if, as submitted by plaintiffs’ counsel, the three appeals depend on common facts and on the same legal issues.

I have therefore concluded that the present Statement of Claim cannot be allowed to stand and must be struck out. I reach this conclusion with some reluctance because the plaintiffs have very definitely indicated their intention to appeal the Minister's assessments to this Court within the time limit prescribed by the Act and they should be given every opportunity to do so. However, their right to appeal is statutory and is contingent upon compliance with the conditions set out in that part of the statute conferring on them the right to appeal.

In the present case, there is of course no taxation year involved but because Part 1 of the Act is made applicable I do not see that the result of L & M Wood Products can be avoided.

Plaintiffs’ new counsel, while citing no authority for his submission, argued that the law at the time the action was brought was not the same as the law when L & M Wood Products and Gallos were decided.

The statement of claim here filed in July, 1986, dealt with an assessment in May of 1985. The claim in L & M Wood Products was filed in August, 1972 and was governed by the Income Tax Act 1972, the same Act with these sections substantially unamended as applied when the alleged liabilities of Mr. and Mrs. Schmidt arose. Gallos was decided in 1988 and dealt with an appeal from decisions of the Tax Court in 1986.

In October, 1991, in Optical Recording Corp. v. Canada, [1990] 2 C.T.C. 524, 90 D.T.C. 6647, [the] Federal Court of Appeal indicated that the only way an assessment could be challenged was by the procedure set out in the Income Tax Act. In that case the assessment had been made in June of 1985. No objection was served. I can find no change in the law which would assist the plaintiffs.

The plaintiff in turn has filed a motion to split this action. As I indicated in Gallos the filing of the statement of claim showing more than one plaintiff was a nullity. The action can therefore not be split at this time.

I have sought to distinguish L & M Wood Products because in that case, by which I am bound, it was still possible to seek an extension of time to file a new appeal. The time in this case has long passed. I have been unable to find any ground for distinguishing L & M or Optical Recording and being bound by them, must, with reluctance strike the plaintiffs' claim and dismiss the plaintiffs' motion to split the causes of action and in the result must dismiss the plaintiffs’ action.

Order:

The plaintiffs' motion to split the causes of action is dismissed. The statement of claim is struck out and the plaintiffs’ action dismissed.

Defendant's motion granted; plaintiff's motion dismissed.