Citation: 2010 TCC 582
Date: 20101109
Docket: 2010-1331(IT)APP
BETWEEN:
SUGANTHI NATARAJAN,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Hogan J.
Introduction
[1]
On January 27,
2010, Suganthi Natarajan, (the “Applicant”) filed an application to extend the
time to file notices of objection against reassessments of her 2004 to 2006
taxation years (the “2004 to 2006 reassessments”).
[2]
At
the hearing of the application, the Applicant’s counsel agreed that the
application was not properly framed. The Applicant asked this Court to vary the
Consent to Judgment disposing of the Applicant’s appeal of the 2004 to 2006
reassessments. Counsel for the Respondent was taken by surprise by this change
of direction and to avoid prejudice to both parties, I have allowed counsel to
submit their respective positions in writing to me after hearing evidence on
the matter. I am now ready to dispose of this matter.
Factual Background
[3]
In
the relevant years, the Applicant lived in Canada in the Windsor area but was employed
in Detroit as a computer
programmer. She was eligible to participate in a Deferred Income Plan (“DIP”) established
by her US employer, where part of
her wages could be deferred until the termination of her employment. She
contributed amounts to the DIP in 2003, 2005 and 2006 (the “DIP
contributions”).
[4]
As a
Canadian, working in the US, she was subject to US taxation on her salary and wages.
However, she was not subject to immediate US taxation on the DIP contributions
because these amount were not viewed as having been received or constructively received
under US tax principles. The DIP
contributions would be subject to US taxation upon receipt; generally speaking, that would be
the time of termination of the Applicant’s employment.
[5]
The
Applicant did not report the funds that she had used to make the DIP
contributions as income in her Canadian tax return on the basis that the funds
were not received by her. If the Minister’s reassessments were to stand, there
would be a potential for double taxation as the Applicant would be unable to
benefit from a foreign tax credit for the US tax payable upon receipt of the
DIP contributions upon termination of employment. This result can occur if the
taxing event does not occur at the same time in both jurisdictions.
[6]
The
net result of the Applicant’s tax filing position in both jurisdictions is that
the Applicant constitutes savings on a pre-tax basis much in the same way that a
contribution to a registered retirement savings plan benefits from tax deferral.
[7]
The
Minister of National Revenue (the “Minister”) reassessed the Applicant’s 2003
DIP contributions (the “2003 reassessment”) on the basis that the amount was
received by the Applicant. The Applicant filed a notice of objection against
the 2003 reassessment.
[8]
On
March 6, 2008, the reassessment for the 2003 taxation year was confirmed by way
of a letter sent to the Applicant.
[9]
On March
31, 2008, the Canada Revenue Agency (the “CRA”) sent a letter explaining that
the Applicant’s 2004–2006 returns would be reassessed. The reassessments were
issued on March 31, 2008 and they included the DIP contributions made to the
DIP as taxable income in the years of contribution.
[10]
On
June 12, 2008, the Applicant filed an informal notice of appeal before the Tax
Court of Canada for the years 2003 to 2006.
[11]
On
November 3, 2009, at the commencement of the hearing of the Applicant’s 2003 to
2006 appeals, counsel for the Respondent pointed out to the Applicant’s
counsel that the Applicant had omitted to file notices of objection with
respect to the 2004–2006 reassessments and, as a result, those appeals had not
been properly initiated before the Court. As more than 1 year and ninety days
had passed since the date of the 2004–2006 reassessments, the delay during
which the Applicants could apply for an extension of the delay to file notices
of objection against those reassessments had expired. After consulting with his
client, counsel for the Applicant agreed that only the appeal for the 2003
reassessment could proceed. The 2003 appeal was heard and the Court reserved
judgment at the end of the hearing.
[12]
On
December 4, 2009, prior to the Court rendering judgment on the 2003 appeal, the
parties filed a Consent to Judgment (the “Consent”). In the Consent, the
parties agreed that the 2003 appeal would be allowed and the Minister would
issue a reassessment on the basis that the DIP Contributions of $83,229 made in
that year were not received. The Consent also provided that the 2004–2006
appeals would be dismissed on the grounds that the Applicant had failed to file
notices of objection in respect of those years. On December 19, 2009, I rendered
a judgment giving effect to the Consent.
[13]
On January
21, 2010, the Applicant filed an application to extend the time to file notices
of appeal against the 2004 to 2006 reassessments. At the hearing of the
application, the Applicant’s counsel agreed that the application had not been properly
framed. Indeed, the purpose of the application was to obtain a judgment from
this Court varying the Consent as it pertains to the 2004 to 2006 reassessments.
Counsel for the Applicant argues that the Consent was entered into by error and
that I should vary it on the basis of the doctrine of common mistake.
[14]
The
Applicant testified as the only witness at the hearing. She claims that she
gave her counsel documents on December 29, 2009 that he needed to prepare an
application under the fairness program. I understand that the purpose of the
fairness application was to convince the Minister to make a reassessment as to the
2004‑2006 taxation years of the Applicant on the same basis as her
2003 taxation year following the Consent to Judgment.
[15]
Among
the documents received by counsel from his client to prepare the fairness
application was a statement of account dated September 17, 2008 (the “2008
statement”) received from the CRA. This statement shows the amount owed by the
Applicant as of that date. There is an interesting annotation on the statement.
The statement shows the amount owed by the Applicant as being nil. However, it
is specified that the nil balance does not include taxes owing in respect of
which the Applicant had filed objections. The exact words are as follows:
Balance indicated does not include the
unpaid amount of $84,241.80 for the taxation years which you filed notices of
objection.
[16]
The
$84,241.80 balance of tax owing is the aggregate of two amounts. Approximately
$30,037 pertains to the 2004 to 2006 reassessments. The balance pertains to the
2003 reassessment.
[17]
The
Applicant explained that she did communicate verbally with the CRA following
receipt of the 2004-2006 reassessments to tell them that she intended to contest
these reassessments in the same way that she had contested the 2003 reassessment.
It appears reasonable to infer that the 2008 statement was issued as a result
of that phone call.
[18]
The
Applicant introduced into evidence a series of email exchanged between herself
and counsel. From the exchange, it appears that counsel was spending most of
his energies on joining the 2004 to 2006 reassessments with the appeal he was
preparing for the 2003 reassessment. He appears to have left the Applicant with
the responsibility of dealing with the 2004 to 2006 reassessments at the
administrative stage without reminding her of the necessity of filing formal
notices of objection against the 2004 to 2006 reassessments as a precondition
for filing an appeal before this Court from those reassessments. The Applicant
appears to have been unaware of the fact that she was required to file notices
of objection.
Position of the Parties
Applicant
[19]
The
Applicant submits that the judgment based on the Consent should be varied on
the basis that consent was entered into in error. The common mistake stems from
the failure of both parties to appreciate that the CRA had been verbally informed
by the Applicant that she intended to contest the 2004 to 2006 reassessments
and that the CRA treated this communication as an objection. In support of this
allegation, the Applicant alleges that the 2008 statement is evidence that the
CRA intended to treat the verbal communication as a valid notice of objection.
[20]
According
to counsel’s view, section 165 is permissive. This provision does not mandate a
taxpayer to file notices of objection in writing only. Furthermore, the
Minister is “served” with the notice if he is aware of the taxpayer’s intention
to contest a reassessment.
[21]
Counsel
makes it clear that he is not at all seeking to have the full Judgment or Consent
for that matter set aside; rather, counsel is only asking this Court to set
aside the part of the Consent which dismisses the Applicant’s 2004 to 2006
appeals; the Consent and Judgment with respect to the variation of the 2003 reassessment
are to be left untouched. Then, the Court would eventually have to decide on
the 2004 to 2006 reassessments on the basis of the evidence heard at the
initial trial unless the parties entered into a new Consent for those
reassessments.
[22]
The
Applicant submits that the Court has the power to vary its judgment and that
the doctrine of res judicata cited by the Minister’s counsel does not
bar the relief sought by the Applicant.
Respondent
[23]
The
Respondent submits that there was no common mistake made by the parties because
there is no evidence that the Applicant filed a formal notice of objection in
writing that was served on the Chief of Appeals, as required by section 165 of
the Income Tax Act (the “ITA”). According to the Respondent,
subsection 165(1) is permissive in the sense only that a taxpayer “may” file an
objection. If the taxpayer fails to do so the taxpayer may be deprived of his right
to file an appeal before this Court unless the failure is cured.
[24]
The
Respondent adds that consideration of this issue is also barred by res judicata.
According to the Respondent, this doctrine bars further action on all undecided
but related issues that could have been raised in the matter. In the case at
hand, it is submitted that the Applicant’s counsel was unaware of evidence that
might have served to argue that, somehow, a notice of objection had been filed.
It was incumbent upon counsel to verify these points prior to agreeing to the Consent.
Finally, the Respondent argues that the Applicant should not be granted the
relief that she seeks. Were I to find that a notice of objection was indeed filed
and that I have the powers to correct the Consent and the Judgment, to give
effect to it, the whole judgment should be set aside. The reason for this is
fairness. The Respondent may have agreed to enter into the Consent because of
the dismissal of the 2004-2006 appeals. This would bring the parties back to
square one, namely, they could either enter into a new Consent or ask me to
render judgment on the basis of the evidence heard at the trial.
Issues
[25]
In
view of the above, the issues can be summarized as follows:
1. Was there a valid notice
of objection filed, and, in the affirmative, did the parties enter into the Consent
on the basis of a common mistake?
2. Does res judicata
act as a bar to varying the judgment?
3. In the negative, what is
the appropriate relief in this case?
Analysis
[26]
In
my opinion there is little support for the Applicant’s contention that a notice
of objection was made as required by the ITA. In her application for an
extension of time, it is admitted that no formal objection in writing was
served on the Minister. The Applicant’s counsel signed a Consent to that effect
on her behalf.
[27]
The
Applicant now asks the Court to change the Consent on the grounds that the CRA
was aware of the Applicant’s intention to litigate the 2004‑2006 taxation
years. According to the Applicant, the 2008 statement of account shows that the
tax liability reassessed by the 2003-2006 taxation years, is pending because
the matter is in dispute. The Applicant’s argument is that an objection may be
made verbally. There is no prescribed manner in which it needs to be made, or
for that matter, served on the CRA. The Applicant rests her case on an
interpretation of the word “may” in subsection 165(1) of the ITA. The provision
reads as follows:
(1) Objection to assessment. A
taxpayer who objects to an assessment under this Part may serve on the Minister
a notice of objection, in writing, setting out the reasons for the objection
and all relevant facts,
[28]
In
my view, in spite of the word “may”, that section does require that the notice
be in writing and served in the matter set out in subsection 165(2) of the ITA.
The latter provision provides that a taxpayer must serve the notice of
objection by addressing it to the Chief of Appeals in a District Office or a Taxation Center of the CRA, and
delivering it by hand or mail. In my view, this confirms the requirement that
the notice of objection must be made in writing. Subsection 165(6) provides
that a notice of objection may be accepted by the Minister if it is served in a
manner other than as prescribed in 165(2). In other words, the notice of
objection is not delivered or mailed to the person identified in that
provision. There is no mention that the Minister may waive the requirement that
the notice of objection be in a form other than in writing. In this light, the
word “may” in subsection 165(1) does not modify or otherwise make the requirements
of that subsection permissive. An Applicant may choose not to file a notice of
objection and try to persuade the Minister to change the reassessment.
[29]
However,
if the taxpayer chooses that route and fails to persuade the Minister to vary
the reassessment, he or she cannot file an appeal before this Court because
subsection 169(1) of the ITA makes it clear that the taxpayer must have
served a notice of objection under section 165 in order to file an appeal before
this Court.
[30]
Courts
have approved different ways of filing a notice of objection, but in those
exceptional cases, the notice in issue was something in writing that was given
to the Minister’s representative. For example, in Schneidmiller v. The Queen, the taxpayer challenging an
assessment called the CRA that sent him a ‘T1 Adjustment Request’, which he
filed but was later lost by the CRA. Over a year later, he filed notices of
objection, but the CRA advised the taxpayer it was too late. Beaubier J.
found that, in those circumstances, the adjustment request was sufficient to be
treated as a notice of objection and allowed the appeal.
[31]
However,
where the taxpayer has not served any
written notice that can be considered an objection, there is no support in the
case law for finding a valid notice of objection was given.
[32]
In 870 Holdings Ltd. v. Canada, the
Applicant had sent a letter to the CRA requesting more time to provide
information. The Federal Court of Appeal said that it was impossible to treat the
letter as a notice of objection. To constitute such a notice, a letter must
object in some way to a particular assessment, and set out some relevant facts
in support of the taxpayer’s contentions. The Court dismissed the appeal, and
stated:
The statutory
requirements for the filing of a valid of Notice of Objection are minimal, but
must nevertheless be complied with.
[33]
The Applicant has cited Jones
v. Canada (Minister of National Revenue). In that case, the applicant claimed to have sent a
notice of objection on his 1988 tax assessment to the Minister in 1990. The
response was that the Minister had received no notice of objection on that taxation
year until 2001. The Applicant then appealed before the Tax Court requesting
that the Minister exercise his discretion under subsection 165(6) to accept a
notice of objection despite the fact that it did not comply with service
requirements under subsection 165(2).
[34]
Snider J. took a different view: rather,
the issue was whether or not the Applicant had satisfied the requirements under
subsection 165(1). The Court held that those requirements were mandatory.
With regards to notice, Snider J. stated:
In my view,
the party who seeks to rely on a provision and who is in a position to adduce
facts in support of such reliance ought to bear the burden of proving that such
reliance is warranted.
[35]
To
summarize, a notice of objection must be
in writing, it must include an actual objection to an assessment with some
supporting facts, and it must be served on the Minister. The Court has been
willing to accept different types of documents as notice, as long as they had
been properly served on the Minister. When a taxpayer alleges that a notice has
been sent to the Minister, he has the burden of proof. I have not found any
case where the taxpayer was allowed to proceed to an appeal without having filed
some kind of notice of objection in writing.
[36]
The
Applicant has failed to persuade me that she complied with the requirements of
section 165 by filing a notice of objection in writing served in the manner
prescribed in subsection 165(2). Therefore, I am of the view that the parties
were not acting on a common mistake in arguing to the dismissal of the 2004 to
2006 appeals in the Consent. In addition, I concur with the Respondent
that res judicata or cause of action estoppel would bar me
from varying the Consent and my Judgment. Cause of action estoppel applies
if, the following four conditions are met:
1. There must be a final
decision of the court of competent jurisdiction in the prior action;
2. The parties to the
subsequent litigation must have been parties to or in privy with the parties to
the prior action;
3. The cause of action in
the prior action must not be separate and distinct; and
4. The basis of the cause
of action and the subsequent action was argued or could have been argued in the
prior action if the parties had exercised reasonable diligence.
[37]
The
second requirement is satisfied since the parties are identical in this matter.
The third requirement is also satisfied, because the issue of an appeal on the
2004-2006 reassessments was part of the original action. As to the fourth
requirement, the Applicant is now pleading that there are facts, unknown to her
at the time of trial, that indicate that a notice of objection had been made.
However, even assuming arguendo the truth of that submission, I am not
persuaded that the Applicant and her counsel took reasonable steps to verify
the evidence available to them so as to be able to argue that notices of
objection had been filed.
[38]
That
being said, it appears that the Applicant has a good fairness case to present
to the Minister since the 2004-2006 reassessments deal exactly with the same
issue as the 2003 reassessment. There is no reason, apparent to me, why the DIP
Contributions should be treated differently as to each of those years.
[39]
For
all of these reasons, the application is dismissed.
Signed at Ottawa, Canada, this 9th day of November 2010.
"Robert J. Hogan"
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