|
Citation: 2005TCC76
|
|
Date: 20050121
|
|
Docket: 2001-2641(IT)G
|
|
BETWEEN:
|
|
CHARLES JAMES HEVEY,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
BowieJ.
[1] This appeal concerns the right of
the Minister of National Revenue to reassess a taxpayer after the
normal reassessment period of three years has expired on the
authority of subsection 152(4.3) of the Income Tax Act
(the Act). That subsection reads:
|
152(4.3)
Notwithstanding subsections (4), (4.1) and (5), where
the result of an assessment or a decision on an appeal is
to change a particular balance of a taxpayer for a
particular taxation year, the Minister may, or where the
taxpayer so requests in writing, shall, before the later of
the expiration of the normal reassessment period in respect
of a subsequent taxation year and the end of the day that
is one year after the day on which all rights of objection
and appeal expire or are determined in respect of the
particular year, reassess the tax, interest or penalties
payable, or redetermine an amount deemed to have been paid
or to have been an overpayment, under this Part by the
taxpayer in respect of the subsequent taxation year, but
only to the extent that the reassessment or redetermination
can reasonably be considered to relate to the change in the
particular balance of the taxpayer for the particular
year.
|
152(4.3)
Malgré les paragraphes (4), (4.1) et (5),
lorsqu'une cotisation ou une décision
d'appel a pour effet de modifier un solde donné
applicable à un contribuable pour une année
d'imposition donnée, le ministre peut ou, si le
contribuable en fait la demande par écrit, doit,
avant le dernier en date du jour d'expiration de la
période normale de nouvelle cotisation pour une
année d'imposition subséquente et de la
fin du jour qui tombe un an après l'extinction
ou la détermination de tous les droits
d'opposition ou d'appel relatifs à
l'année donnée, établir une
nouvelle cotisation à l'égard de
l'impôt, des intérêts ou des
pénalités payables, ou déterminer de
nouveau un montant réputé avoir
été payé, ou payé en trop, en
vertu de la présente partie par le contribuable pour
l'année subséquente, mais seulement
dans la mesure où il est raisonnable de
considérer que la nouvelle cotisation ou la
détermination se rapporte à la modification
du solde donné applicable au contribuable pour
l'année donnée.
|
Specifically, the result in this appeal will be governed by
the meaning to be given to the concluding words to which I have
added emphasis. This subsection must be read in conjunction with
subsection 152(4.4):
|
152(4.4)
For the purpose of subsection (4.3), a "balance" of a
taxpayer for a taxation year is the income, taxable income,
taxable income earned in Canada or any loss of the taxpayer
for the year, or the tax or other amount payable by, any
amount refundable to, or any amount deemed to have been
paid or to have been an overpayment by, the taxpayer for
the year.
|
152(4.4)
Pour l'application du paragraphe (4.3), le solde
applicable à un contribuable pour une année
d'imposition correspond au revenu, au revenu imposable,
au revenu imposable gagné au Canada ou à une
perte du contribuable pour l'année, à
l'impôt ou autre montant payable par lui pour
l'année, à un montant qui lui est
remboursable pour l'année ou à un montant
réputé avoir été payé,
ou payé en trop, par lui pour
l'année.
|
[2] The Appellant is a director of
numerous corporations. From time to time he has borrowed from one
or more of them, and from time to time he has made repayment of
loans to them. The repayments have not always been made within
the year following the end of his taxation year in which the loan
was made. As a result, he has at various times been liable to
take those loans into income under subsection 15(2) of the
Act, and he has at various times been entitled to
deductions from income under paragraph 20(1)(j) as a
result of repayments of them that he has made. For the years 1991
to 1995, he reported the following inclusions in income under
subsection 15(2) and claimed the following deductions under
paragraph 20(1)(j):
|
|
Included under subsection 15(2)
|
Deducted under paragraph
20(1)(j)
|
|
1991
|
$243,333.00 *
|
$0.00
|
|
1992
|
587,790.00
|
0.00
|
|
1993
|
250,158.00
|
0.00
|
|
1994
|
633,368.00
|
1,082,281.00
|
|
1995
|
149,245.00
|
662,684.00
|
|
|
$1,863,894.00
|
$1,744,965.00
|
* This
is the amount pleaded by the Appellant. The Reply to the Notice
of Appeal alleges it was $243,538.00. It is immaterial which is
correct.
[3] Thereafter, the Minister
reassessed the Appellant for the 1991, 1992, 1993 and 1994
taxation years. In doing so, he reduced and redistributed the
amounts that the Appellant had declared as income under
subsection 15(2) for his taxation years 1991, 1992 and 1993 and
1994, and he disallowed all the amounts that the Appellant had
claimed as deductions under paragraph 20(1)(j) for those
years. The assessment and the reassessment for 1994 did not
include any amount in income under subsection 15(2), and it did
not allow any deduction under paragraph 20(1)(j).
[4] At the end of June 1996, then, the
Appellant had been reassessed for the taxation years 1991, 1992,
1993 and 1994. The result of those reassessments, insofar as
shareholder loan inclusions and deductions are concerned, are
summarized in the following table. The 1995 taxation year had
been assessed according to the Appellant's return as filed.
It had not been reassessed, nor had the assessment been objected
to. There were, however, outstanding objections for 1993 and
1994.
|
|
Included under subsection 15(2)
|
Deducted under paragraph
20(1)(j)
|
|
1991
|
$289,372.36
|
$0.00
|
|
1992
|
385,885.22
|
0.00
|
|
1993
|
280,125.78
|
0.00
|
|
1994
|
0.00
|
0.00
|
|
1995
|
149,045.00
|
662,684.00
|
|
Total
|
$1,104,428.36
|
$662,684.00
|
The evidence of both witnesses and Exhibit A-1, Tab 42
establish that this table accurately reflects the assessments in
respect of the shareholder loans at that time.
[5] The Appellant's solicitor and
the Minister's appeals officer then negotiated towards a
resolution of the outstanding objections for 1993 and 1994. There
were other issues in addition to the shareholder loan issues, and
it was a lengthy negotiation, but by the end of February 1999
they believed that they had reached a settlement: one that would
be implemented by reassessment of the Appellant for the 1993,
1994 and 1995 taxation years.
[6] I digress at this point to say
that the disagreement between the Appellant and the Respondent as
to the amounts to be included in the Appellant's income under
subsection 15(2) of the Act did not arise out of any
culpable conduct of the Appellant. The source of their
differences lies in the fact that while Mr. Hevey as an
individual reports his income on a calendar year basis, the
corporation with which he transacted the loans has a March 31st
year-end. The company's accountant, who was also Mr.
Hevey's accountant, issued T4 slips and prepared the
Appellant's returns in respect of the shareholder loan
transactions based on the corporation's fiscal period rather
than the calendar year. The Minister's auditor correctly
computed the inclusions and deductions on a calendar year
basis.
[7] As I have said, the negotiation of
the objections for 1993 and 1994 culminated in what the parties
at the time thought was an agreement. Under that agreement, which
was executed on February 26, 1999, the outstanding shareholder
loan issue was to be resolved in this way:
|
1994
|
Allow a subsection 20(1)(j) deduction in the
amount of $755,319.00, based on the repayments made to your
shareholder loan accounts.
Add an interest benefit [the particulars are not
relevant here].
|
|
1995
|
Allow a subsection 20(1)(j) deduction in the
amount of $200,064 based on repayments made to your
shareholder loan account.
Add an interest benefit [the particulars are not
relevant here].
|
[8] On the basis of this signed
agreement, the Appellant waived the right to appeal the
reassessments that would be issued to implement it. When the
Minister issued these reassessments on May 28, 1999, the
Appellant and his solicitor were surprised to find that the
reassessment for 1995 was based on an inclusion under subsection
15(2) of $149,045 (as the Appellant had declared), but a total
deduction under paragraph 20(1)(j) of $200,064,
rather than the deduction of $662,684 (as filed and previously
assessed) plus $200,064 (the "settlement" amount for
1995) equals $862,748 that they had expected.
[9] The Appellant objected to this
reassessment for 1995 and this appeal results. At the opening of
the trial, counsel advised that they now agree that there never
was agreement as to the terms of the settlement for 1995 - each
party had a different understanding of the agreement that they
signed, and so there was no agreement. Counsel for the Appellant
made it clear in his opening statement that the Appellant
advanced only one ground of appeal - that the reassessment for
1995 was statute-barred. He led no evidence as to the amounts
repaid on the shareholder loan in 1995.
[10] For his part, counsel for the
Respondent made it clear that he defended the reassessment only
on the basis that it was consequential to the reassessment the
same day of the 1994 year. He did not rely on the settlement
agreement, and he did not allege any misrepresentation.
[11] Mr. William Scott is the appeals
officer who negotiated the settlement with the Appellant's
solicitor, and who then issued the reassessments of May 28, 1999
for the 1993, 1994 and 1995 taxation years. He testified that the
reassessment for 1995 was driven by the reassessment for 1994 in
this way. As appears from the table in paragraph 5 above, the
amounts that were included in the Appellant's income under
subsection 15(2) of the Act for the years 1992, 1993 and
1994 totalled $955,383, and he believed that there had not been
any inclusions in income under that subsection before 1992. As an
amount can only be deductible under paragraph 20(1)(j) if
it has previously been included in income by virtue of subsection
15(2), the permissible deductions under 20(1)(j) up to and
including 1995 could not amount in aggregate to more than
$955,383. Once it had been agreed between the parties that there
would be no deduction under 20(1)(j) for 1993, and that
the deduction for 1994 would be $755,319, the maximum permissible
deduction for 1995 was necessarily fixed at $955,383 - $755,319 =
$200,064. As the initial assessment of the Appellant for 1995 had
allowed him the full claimed deduction of $662,684 under
paragraph 20(1)(j), it was necessary to reassess that year
to reduce it to $200,064.
[12] Counsel for the Appellant argued that
as subsection 152(4.3) is headed "Consequential
assessment", its use must be strictly limited to those
situations where there is a change in a balance that is carried
forward from one year to the next and that must appear on the
taxpayer's income tax return. Examples would be a change in a
reserve or in the balance of undepreciated capital cost of a
class of property. He supports this argument by reference to the
Technical Notes issued by the Department of Finance in 1994 when
this subsection was added to the Act, citing the following
passages:
May 1994 TN: Subsection 152(4.3) allows the Minister of
National Revenue to reassess beyond the normal reassessment
period for a taxation year where it is necessary to do so as a
result of an adjustment to an amount deducted or included in
computing a "balance" of the taxpayer for another year.
The "balance" of a taxpayer for a taxation year is
defined in subsection 152(4.4).
...
The reassessment may be made only where the adjustment of the
amount deducted or included in the other year's balance was
made in an assessment for that year or as a result of a decision
on an appeal from an assessment for that year. ... Such a
reassessment may be made only where the Act requires the
inclusion, or allows the deduction, in computing a taxpayer's
balance for the year of an amount relating to the deduction or
inclusion that was adjusted for the other year.
...
This provision might be applied, for example, where a decision
on appeal has changed the amount of a reserve claimed in a
taxation year, and a subsequent taxation year for which an amount
relating to the reserve is required to be included, or is allowed
to be deducted, in computing income has become barred from
reassessment.
[13] Counsel also referred me to the
decision of the Federal Court of Appeal in Sherway Centre
Limited v. Canada,[1] and to the decision of this Court in Bulk Transfer
Systems Inc. v. The Queen,[2] but I do not find that either of
those is helpful in the present case as they do not construe the
subsection in question.
[14] In my view the application of
subsection 152(4.3) presents no great difficulty in the context
of this case. It requires that I consider the following:
i)
has there been an assessment or a decision on an appeal?
ii)
if so, did it result in a change to a particular balance within
the meaning of that word as it is defined in subsection
152(4.4)?
iii)
if so, can the reassessment reasonably be considered to relate to
that change in the particular balance for the earlier year?
In my view the answer to each of these questions is clearly
yes. There was an assessment in relation to the 1994 taxation
year, specifically the reassessment of May 28, 1999 that
implemented the settlement, and from which no appeal
has been taken. It resulted in a change to several balances
as defined by subsection 152(4.4) - the taxpayer's
income, his taxable income, and his tax payable for the 1994
taxation year. The changes in these balances were brought about
in part by an increase in the amount of repayment of shareholder
loans that he was permitted to deduct in 1994. It is beyond
doubt, on the evidence of Mr. Scott, that this increase could
only be brought about by transferring some amount of loan
repayment that had been allowed as a 20(1)(j) deduction on
assessing 1995 to 1994, thus requiring a consequential
reassessment of 1995 to make an equivalent reduction of the
deduction for loan repayment in that year. The reassessment of
1995, therefore, was not just related to but entirely the result
of the changes made to the Appellant's balances of income,
taxable income and tax payable for the 1994 year. The Minister
was therefore entitled to make the reassessment that he did for
1995, notwithstanding subsections 152(4), (4.1) and (5).
[15] The appeal is dismissed, with
costs.
Signed at Ottawa, Canada, this 21st day of January, 2005.
Bowie J.
Email this Content