Date: 20011220
Docket: 2000-3248-IT-G
BETWEEN:
S.T.B. HOLDINGS LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Order
Miller J.T.C.C.
[1]
This is an application for a determination of a matter of law
pursuant to Rule 58(1)(a) of the Tax Court of Canada
Rules (General Procedure) based on an Agreed Statement of
Facts. The Applicant poses the questions of law as follows:
(a)
Does subsection 245(7) of the Income Tax Act
("Act") require that a reference to section 245
and/or the "General Anti-Avoidance Rule"
("GAAR") be made on the face of a notice of assessment
or reassessment in order for section 245 to be relied on by the
Minister? and
(b)
Does subsection 245(7) of the Act preclude the use of
section 245 as an alternative assessing position.
[2]
While the issues are framed in the guise of two questions this is
a matter of the interpretation of subsection 245(7). No other
Act, with the exception perhaps of the Criminal Code of
Canada, is subjected to such intense scrutiny by diligent
lawyers, searching for that legislative flaw or twist which may
secure a procedural victory for the client. What the drafter
believes is clear becomes murky: what is black becomes gray, and,
remarkably at times even white. There is no dearth of opportunity
for the Courts to provide clarity in the interpretation of the
Act, given the CCH version of the Act and
Regulations now runs to close to 3000 pages. Complexity is the
name of the game - clarification is our job. I would have
no difficulty in citing numerous examples where the legislation
leaves the taxpayer, counsel, the Department of Justice and
Courts baffled by convoluted structures, triple negatives and
cross-references upon cross-references. My impression of
the section before me is that it is not such a hieroglyphic
mish-mash: it is however imprecise, subject to different views
and confusing in its very simplicity. The interpretation
suggested by the Applicant is an enthusiastic and well-argued
attempt to stretch the words further than I believe they can
reasonably bend. I am not prepared to accept such a degree of
malleability.
[3]
The only portions of the Agreed Statement of Facts relevant to
this application are as follows:
...
1.8
On or about July 7, 1994, a Waiver in the form requested by the
Respondent was provided by STB for its 1990 taxation year (Tab
1).
1.9
On or about November 2, 1994, STB filed a Waiver in the form
requested by the Respondents for its 1991 taxation year (Tab
2).
1.10 On May
13, 1996, Notices of Reassessment were issued to STB for its 1990
and 1991 taxation years (Tab 3) regarding the Newport losses.
1.11 On August
2, 1996, a Notice of Objection was filed in connection with the
May 13, 1996, reassessment of STB'S 1990 and 1991 taxation
years (Tab 4).
1.12 On
November 12, 1996, Notices of Revocation of the Waivers were
filed in connection with STB's 1990 and 1991 taxation years
(Tab 5).
1.13 On April
14, 2000, the May 13, 1996 Notices of Reassessment for STB's
1990 and 1991 taxation years were confirmed by way of a Notice of
Confirmation which, inter alia, confirms the basis
upon which the Minister reassessed (Tab 6).
...
1.16 No other
Notices of Assessment or Notices of Reassessment are relevant to
the questions of law posed under the Rule 58 Motion. No
additional assessments or determinations have been made by the
Minister with respect to the STB's 1990 or 1991 taxation
years.
[4] I
have not included the Tabs, but the key points to note in that
regard are that the Waivers (Tab 1 and Tab 2) refer to Part XVI
(GAAR), the Notices of Reassessment (Tab 3) make no reference to
GAAR and the Notice of Confirmation (Tab 6) does refer to the
application of GAAR.
[5]
Both questions of law posed in this Rule 58 application are
answered by an interpretation of subsection 245(7) of the
Act. It reads as follows:
Notwithstanding any other provision of this Act, the tax
consequences to any person, following the application of this
section, shall only be determined through a notice of assessment,
reassessment, additional assessment or determination pursuant to
subsection 152(1.11) involving the application of this
section.
[6]
This section cannot be viewed in isolation but must be put in
context, so I repeat subsection 245(7) now wedged appropriately
between subsections 245(6) and (8):
(6)
Where with respect to a transaction
(a)
a notice of assessment, reassessment or additional assessment
involving the application of subsection (2) with respect to
the transaction has been sent to a person, or
(b)
a notice of determination pursuant to subsection 152(1.11)
has been sent to a person with respect to the transaction,
any person (other than a person referred to in
paragraph (a) or (b)) shall be entitled,
within 180 days after the day of mailing of the notice, to
request in writing that the Minister make an assessment,
reassessment or additional assessment applying
subsection (2) or make a determination applying subsection
152(1.11) with respect to that transaction.
(7)
Notwithstanding any other provision of this Act, the tax
consequences to any person, following the application of this
section, shall only be determined through a notice of assessment,
reassessment, additional assessment or determination pursuant to
subsection 152(1.11) involving the application of this
section.
(8)
Upon receipt of a request by a person under subsection (6),
the Minister shall, with all due dispatch, consider the request
and, notwithstanding subsection 152(4), assess, reassess or make
an additional assessment or determination pursuant to subsection
152(1.11) with respect to that person, except that an assessment,
reassessment, additional assessment or determination may be made
under this subsection only to the extent that it may reasonably
be regarded as relating to the transaction referred to in
subsection (6).
Applicant's Argument
[7]
The Applicant's suggested interpretation of
subsection 245(7) is that, firstly, it requires that
any assessment involving the application of the
GAAR must clearly indicate on the face of the notice of
assessment that GAAR is being applied; secondly, that this
subsection precludes the use of section 245 as an
alternative assessing position.
[8]
The Applicant prefaced his interpretation of
subsection 245(7) with the comment that the GAAR provisions
are extraordinary provisions to invoke policy to override words
Parliament has used. The taxpayer must be in a position in a
self-assessing system to know with some considerable confidence
when such provisions are being relied upon and how they are being
relied upon. The carefully framed GAAR provisions impose
therefore a heavy duty on the Minister to make it absolutely
clear at the assessment stage that GAAR is involved. The
Applicant contended that subsection 245(7) is a two step process;
firstly, GAAR must be applied and secondly, the tax consequences
must be determined through a "notice of reassessment
involving the application of section 245".
Subsection 245(7) provides that the notice involving the
application of GAAR can only be issued "following the
application" of GAAR. Upon questioning on this point, the
Applicant's counsel suggested that the
"application" of GAAR is the Minister's
contemplation of invoking GAAR prior to the assessment. I believe
this is where the Applicant's argument breaks down, but I
will return to that point in my analysis.
[9]
The Applicant pointed specifically to the concluding words of
subsection 245(7), "involving the application of this
section" and maintained that such words would be superfluous
if the GAAR assessment did not need to refer to section 245 on
its face. The Applicant acknowledged that subsection 245(7)
certainly comes into play following a subsection 245(6) request
from a third party, asking the Minister to make consequential
adjustments, however the Applicant did not limit subsection
245(7) to such an application. He relied on Associate Chief Judge
Bowman's words in John N. Gregory v. Her Majesty
The Queen, [2000] T.C.J. No. 158 as supporting a general
application of subsection 245(7). Bowman, A.C.J. indicated at
paragraph 3:
... It is agreed between the parties that GAAR was
applied at the assessment level and the tax consequences were
determined through a notice of reassessment. I specifically
raised this point with counsel because it is clear, in light of
subsection 245(7), that unless GAAR is applied through an
assessment it cannot be used in an appeal to this court to
justify an assessment that was made without its application.
[10] The
Applicant relied on the third party process of subsections
245(6), (7) and (8) to support the argument that the mention of
the application of GAAR is required on the face of the notice of
assessment or reassessment. How else, argued the Applicant, does
a third party even know that GAAR might ultimately have some
impact on his or her tax position, justifying a
subsection 245(6) request from the third party. Is the
counsel or the Applicant under some fiduciary obligation to
notify the third party of a notice of assessment? How is that
obligation met if the notice does not state GAAR is involved?
Counsel may have a client who would benefit from making a
subsection 245(6) request, yet counsel may be unaware of the
necessity to advise the client.
[11] With
respect to his position that subsection 245(7) precludes the
Minister relying on GAAR as an alternative assessing basis, the
Applicant argued as follows: GAAR only applies when a taxpayer
has complied with the letter of the applicable provisions of the
Act; in effect there can then only be that one basis of
assessment. The Minister must chose between an assessment based
on non-compliance with specific provisions of the
Act or based on compliance with the Act but afoul
of GAAR. The Applicant contended that GAAR is too difficult a
provision to be dealt with in the alternative. He also indicated
that if GAAR could be raised in the alternative, this would have
the effect of making subsection 245(6) inoperative, as time, in
many cases, may have run out before a third party is even aware
GAAR has been raised. Finally, the Applicant maintained that
relying on GAAR in this particular situation, in an alternative
assessing position, produces a different numerical result, which
is impermissible.
Respondent's Position
[12] Regarding
the general application of subsection 245(7) to all taxpayers as
opposed to a more limited application the Respondent argued that
this subsection was limited to a third party application. The
reasons were as follows:
The Respondent submitted that neither the wording, the context
nor the purpose of subsection 245(7) supports the interpretation
proposed by the Applicant. Further, the interpretation of
subsection 245(7) by the Applicant, the Respondent maintained is
contrary to other provisions of the Act and goes against
established law with respect to notice requirements, and the
ability of the Minister to use alternative basis for assessing a
taxpayer. The Respondent directed me to the context of subsection
245(7). Subsections 245(6), (7) and (8) are a recognition by the
drafters that an assessment under GAAR may affect third parties.
The determination involved in reassessing a taxpayer may have a
favourable or adverse impact on those third parties. The enacting
of provisions to provide relief to third parties was recognized
in the 1987 Tax Reform supplementary information accompanying the
release of draft section 245:
Generally, the rule as proposed in the white Paper provided
that an avoidance transaction, as defined, would be ignored for
tax purposes and that the tax situation of a taxpayer would then
be determined as is reasonable in the circumstances. The
definition of an avoidance transaction introduced as statutory
concepts the business purpose test and a step transaction
doctrine. Special provisions were included to allow third
parties affected by an avoidance transaction to request
adjustments of relieving nature.
[13]
Subsection 245(6) provides third party taxpayers with a means to
request that the Minister assess them with respect to the
transaction that gave rise to the GAAR assessment against the
original taxpayer, whose tax benefits were denied by the
application of the GAAR. Subsection 245(8) then imposes on the
Minister a requirement that he consider the request under
subsection 245(6) and assess or reassess the third party.
Subsection 245(7) is found sandwiched between these two
provisions, both of which deal with third party adjustments. Its
juxtaposition in between subsection (6) and (8) imply that it too
is concerned with third party adjustments.
[14] The
presence of the phrase "following the application of this
section" in subsection 245(7) is consistent with it being
meant to deal with third party adjustments, since it implies
section 245 has already been applied (to the taxpayer who was
denied a tax benefit under subsection 245(2)).
[15] A
technical note to subsection 245(7) confirms that it is meant to
address the situation of third party adjustments. It reads as
follows:
New subsection 245(7) of the Act provides that a person
may not rely on subsection 245(2) in order to determine his
income, taxable income, or taxable income earned in Canada of,
tax or other amount payable by, or amount refundable to, any
person under the Act as well as any other amount under the
Act which is relevant for the purposes of the computation
of the foregoing, except through a request for adjustment under
subsection 245(6). This prevents a person from using the
provisions of subsection 245(2) in order to adjust his
income, or any of the above-mentioned amounts without
requesting that adjustment following the procedures set out in
subsection 245(6).
[16] With
respect to the issue of the requirement of a statement on the
face of the notice of assessment invoking GAAR, the Respondent
rejected such a position as neither the wording, context, nor
purpose of subsection 245(7) has anything to do with such a
requirement. It would require clear language to impose such a
requirement.
[17] The
Respondent argued that the mere failure to mention a provision of
the Act in a notice of assessment does not invalidate an
otherwise valid notice of assessment, as an assessment is made
under the Act as a whole. Also, he contended that there is
no requirement that the Minister must give the particulars of any
assessment or reassessment. Further, any defect in notification
to the taxpayer can be cured at the notice of confirmation stage
(see Raymond Kirby and the Estate of Daniel Lee v. Minister of
National Revenue, 91 2 C.T.C. 2639.)
[18] The
Respondent concluded his argument with respect to the first
question by referring to the case of Michelin Tires (Canada)
Ltd. v. Minister of National Revenue, [1995] G.S.T.C.
17. Section 274 of the Excise Tax Act is a
General Anti-Avoidance Rule identical to that in section 245
of the Act. This case determined that the equivalent
provision, being subsection 274(7) of the Excise Tax
Act, does not impose any notice requirement different from
that imposed on the Minister to inform a taxpayer of the reasons
for the reassessment utilizing any other section of the Excise
Tax Act.
[19] Finally,
the Respondent rejected any notion that subsection 245(7)
restricts the use of section 245 to a primary assessing position.
The Respondent relied on the case of Louis Riendeau v. Her
Majesty The Queen, 91 D.T.C. 5416 for the proposition that
the question in a tax appeal is the amount of tax, not the
correctness of reasons given for the assessment, and liability is
not affected by an incorrect or incomplete assessment.
[20] The
charging section of GAAR (subsection 245(2)) contains no wording
limiting the application to a primary assessing position, and by
its very nature GAAR is to only apply once it has been determined
the transactions otherwise comply to the other provisions of the
Act. The Respondent indicates that this Court has
acknowledged that GAAR can be used in the alternative citing
A.C.J. Bowman's comments in the Gregory case in
support:
It is not necessary for the purposes of the present motion
that I set out the facts pleaded by the parties leading up to the
claim of loss. It is sufficient to say that the Minister of
National Revenue denied the loss. In the reply to the amended
notice of appeal a number of alternative assumptions are pleaded
in justification of the Minister's denial of the loss. After
all of the other alternative bases for denying the losses were
pleaded, the Minister pleaded that in the alternative he assumed
that the transaction was an avoidance transaction within the
meaning of section 245 of the
Income Tax Act, the so-called General
Anti-Avoidance Rule ("GAAR"). It is agreed between
the parties that GAAR was applied at the assessment level and the
tax consequences were determined through a notice of
reassessment. ...
[21] Further
it was pointed out that in all but two of the decided cases
dealing with GAAR, GAAR was used as an alternative assessing
position.
[22] Although
not applicable to the year under appeal, the Respondent referred
to subsection 152(9) introduced in June 1999 permitting
alternative arguments at any time after the normal reassessment
period.
[23] Finally,
the Respondent alleged there is no difference in the amount
disallowed in this appeal under the alternative assessing
positions.
Analysis
[24] I will
deal first with the interpretation to be put upon
subsection 245(7) generally before specifically answering
the two questions at issue. GAAR is an assessing tool in the
Minister's box of tools: it is not a planning tool for the
taxpayer. Unlike the rest of the Act, which a taxpayer
relies upon in a self-assessed taxation system, GAAR is
simply not available to be relied upon or initiated by a taxpayer
except in the circumstances outlined in subsections 245(6),
(7) and (8). This is not because of the wording of
subsection 245(7): it is because of the very nature of the
policy of GAAR. These are anti-avoidance provisions: they are not
entitled "Tax Planning Measures". They are indeed, as
the Applicant suggested, exceptional measures; but they are
measures given to the Minister to invoke, not broad hurdles for
the Minister to overcome.
[25] It is
difficult to imagine a taxpayer arranging a transaction for a
particular intended effect and then filing on the basis that GAAR
is applicable to result in consequences different from what was
intended. The only situation where that could possibly arise is
where the Minister has assessed a transaction involving GAAR and
now a taxpayer wishes to take advantage of that application of
GAAR as it applies to his own situation. This is where I believe
subsection 245(7) comes into play. Subsection 245(7)
states such a taxpayer cannot so self-assess; and, further
restricting the taxpayer, subsections 245(6), (7), and (8)
together limit possible relief to only those taxpayers who were
impacted by the prior GAAR application as it pertained to the
very same transaction in which they were involved.
[26] I read
subsection 245(7) as a directive to the taxpayer rather than a
procedural requirement for the Minister. The only way a taxpayer
can initiate the application of GAAR following a prior
application of GAAR is through a subsection 245(6) request.
Subsection 245(7) stipulates that tax consequences to such a
taxpayer shall only be determined through a notice of assessment
(i.e. by the institution of the Minister) involving GAAR. Only a
taxpayer involved in the same transaction as already
GAAR-assessed can, within a limited time period, request an
adjustment. The Minister must respond with all due dispatch to
such a request with an assessment.
[27]
Interpreted as just outlined, subsections 245(6), (7) and (8) are
relatively clear. Clear language should govern. Only when one
attempts to dissect these provisions do the words transform into
a disconnected puzzle. When provisions are clear and unambiguous
it is suggested by some that it is unnecessary to delve into the
more exhaustive application of principles of legal interpretation
necessary to resolve ambiguity. So why descend into that
analysis? Because, notwithstanding my initial position that the
sections are indeed clear and are to be interpreted to apply as
just outlined, learned counsel for the Applicant most ably argued
for a broader interpretation of these sections. In so doing he
has relied on statements from this Court, specifically in the
Gregory[1]
case and on statements in the Michelin Tires (Canada) Ltd.
case, that might provide some support. I am satisfied that a
different interpretation has some merit and there exists some
ambiguity. It is therefore necessary to conduct a more detailed
analysis following the principles of statutory interpretation as
summarized in the most recent case of Ludco Enterprises Ltd,
Brian Ludmer, David Ludmer and Cindy Ludmer v. Her Majesty
The Queen, 2001 S.C.C. 62 as follows:
36
The modern rule of statutory interpretation was put succinctly by
E.A. Driedger in Construction of Statutes (2nd ed., 1983),
at p. 87:
Today there is only one principle or approach, namely, the
words of an Act are to be read in their entire context and
in their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act, and the
intention of Parliament... .
37
This passage from Driedger "best encapsulates" the
preferred approach to statutory interpretation: Rizzo
& Rizzo Shoes (Re), [1998]
1 S.C.R. 27, at paras. 21 and 23. This is the case
for the interpretation of any statute, and it is noteworthy that
Driedger's famous passage has been cited with approval by our
Court on numerous occasions both in the non-tax and in the tax
context: ...
38
Furthermore, when interpreting the Income Tax Act courts
must be mindful of their role as distinct from that of
Parliament. In the absence of clear statutory language, judicial
innovation is undesirable: Royal Bank of Canada v.
Sparrow Electric Corp., [1997]
1 S.C.R. 411, at para. 112. Rather, the promulgation
of new rules of tax law must be left to Parliament:
Canderel Ltd. v. Canada, [1998]
1 S.C.R. 147, at para. 41. As McLachlin J. (now C.J.)
recently explained in Shell Canada Ltd. v.
Canada, [1999]
3 S.C.R. 622, at para. 43:
The Act is a complex statute through which Parliament
seeks to balance a myriad of principles. This Court has
consistently held that courts must therefore be cautious before
finding within the clear provisions of the Act an
unexpressed legislative intention... . Finding unexpressed
legislative intentions under the guise of purposive
interpretation runs the risk of upsetting the balance Parliament
has attempted to strike in the Act. [Citations
omitted.]
[28] It
appears that finding provisions are clear is perhaps not
sufficient to meet the standard of statutory interpretation. For
this reason, and for the reasons already given, I shall consider
the modern approach to statutory interpretation which requires a
review of the grammatical and ordinary meaning, the context and
the legislative purpose of the provisions.
[29] First, to
further flush out the ordinary meaning of subsection 245(7)
it is necessary to describe the different interpretations put
upon the phrases "following the application of this
section" and "involving the application of this
section". Does the ordinary meaning of "following the
application of this section" suggest the GAAR provisions
have already been applied? What is meant by "applied"?
The Applicant argues that "application" means just the
process of contemplation by the Minister and discussion with the
taxpayer prior to assessment. I fail to see how such musing and
communications constitute application. The Minister may consider
GAAR, may talk to the taxpayer about GAAR and then may determine
not to apply GAAR. This cannot in the ordinary sense be
considered the application of the section. The section, as
indicated previously, is an assessing tool for the Minister; it
follows that an application of the section is only complete upon
assessment. That being the case, "following the
application" on an ordinary construction means following an
assessment involving GAAR. Tax consequences to any person,
following the application of this section, must then necessarily
refer to tax consequences other than those in the original
application of GAAR; it must refer to a subsequent application.
It precludes a taxpayer from self-assessing by applying
GAAR.
[30] The
concluding words of subsection 245(7), "involving the
application of this section" are presumably added to provide
some clarity, but I have difficulty in fully appreciating the
essence of the clarification. A subsequent notice of assessment
by the Minister must "involve" GAAR. It seems trite to
say any GAAR assessment must involve GAAR. Yet without these
concluding words, is the Minister free to issue a subsequent
notice of assessment pursuant to a subsection 245(6) request
against a taxpayer without involving GAAR? By attempting to make
these words directory in this manner they become somewhat
nonsensical. I therefore look to those words not in any way as
directory to the Minister, but simply as descriptive.
[31] If you
strip subsection 245(7) of some peripheral wording it simply
reads: "The tax consequences to any person, following the
application of this section, shall only be determined through a
notice of assessment involving the application of this
section." This is not a lengthy statement, yet it becomes a
Gordian Knot on dissection for the purposes of determining
its ordinary meaning. I conclude it is an extraordinary provision
lacking ordinary meaning, unless you cut the Gordian Knot
and view the last phrase as descriptive only of the notice of
assessment arising from a subsection 245(6) request. Then
some order is restored to the ordinary meaning. On this basis I
conclude subsection 245(7) is only to be interpreted as
denying taxpayers the right to self-assess relying on a
previous application of GAAR.
[32] The
Applicant's interpretation is that subsection 245(7) is
not just to preclude a taxpayer from self-assessing based
on a prior application of GAAR, but is also intended to apply to
every GAAR assessment, requiring the Minister to
"involve" GAAR in the notice of assessment by specific
written reference thereto. If I accepted such an interpretation I
would be construing the words "following the
application" to mean "in the application"; in
other words, as part of the application. The words just do not
say that.
[33] The
conundrum presented by the drafting is whether the section is
meant to apply to every application of GAAR in the sense of being
a procedural requirement of the Minister, or is meant to be a
direction to taxpayers that they cannot self-assess relying on a
prior application of GAAR (subject only to the third party relief
available through subsection 245(6)). The difficulty in the
Applicant's approach to stretch the ordinary meaning of the
words to impose a procedural requirement on the Minister to refer
to GAAR expressly in the Notice, is to move this section away
from a direction to the taxpayer to a direction to the Minister.
This ignores the entire context of the GAAR being an assessing
tool for the Minister. I will now turn to the question of
context.
[34] As night
follows day, subsection (7) falls between
subsection (6) and subsection (8). While I can fall
into the trap, and do, of referring dramatically to
subsection (7) being wedged or sandwiched between
subsections (6) and (8), the placement is significant. The
GAAR provisions are exceptional in the context of a
self-assessed tax system, as they put the taxpayer on
notice that notwithstanding your best laid plans, technically
compliant with all other provisions of the Act, you may be
subjected to additional tax by the imposition of these rules. And
while you can twist and turn and squeeze into compliance with
other provisions, you cannot use the GAAR to self-assess.
The only exception where a taxpayer initiated use of GAAR is
acceptable is explicitly set forth in subsection 245(6): if
GAAR has been applied to a transaction in which you were
involved, and as a consequence you wish to be assessed or
reassessed, you must make a request pursuant to
subsection 245(6). The Minister must respond to that request
with all due dispatch pursuant to subsection 245(8). You
cannot simply self-assess relying on a prior application of
GAAR (subsection 245(7)). These three subsections work
together. Without subsection 245(7), while it might still be
open to make a request, it would not preclude the taxpayer from
simply self-assessing. This is indeed, as the heading of
subsection 245(7) suggests, an exception to a fundamental of
the Canadian tax system, that of self-assessment.
[35] Finally,
to complete the statutory interpretation analysis of
subsection 245(7) I look at the legislative purpose. While I
recognize that technical notes are for information purposes only,
I do refer to the technical note to subsection 245(7) which
confirms a third party application only. This technical note is
referred to earlier in paragraph 15 of these Reasons. There
is no suggestion that the section is a direction to the Minister:
it is directed to the taxpayer. I find that the words do extend
the coverage of subsection 245(7) beyond just a third party
involved in the same transaction as the one GAAR-assessed,
to preclude even the originally GAAR-assessed taxpayer from
self-assessing in reliance upon the original GAAR
assessment of the same transaction.
[36] In
introducing these extraordinary measures the explanatory notes to
Bill C-139 also were of some help and they are referred to
in paragraph 12 hereof.
[37] It is
interesting to note that subsection 245(6) refers
specifically to a notice of assessment "involving the
application of subsection (2)": subsection 245(7)
refers to a notice of assessment "involving the application
of this section". Surely, had the legislation intended to
restrict the Minister's invoking of subsection 245(2) in
such a significant procedural manner as the Applicant contends,
they would have specifically addressed the application of
subsection 245(2). The fact they did not do so in
subsection 245(7) suggests no intention that this particular
subsection is a general limitation of subsection 245(2).
Subsection 245(7) does not say that. It can only be read to
apply as a direction to taxpayers that they cannot
self-assess relying on a prior application of GAAR. The
general scheme of the Act is a two-step process; a
self-assessment followed by a government assessment.
Subsection 245(7) departs from that scheme and limits the
process to just the latter step. Any notice of assessment arising
from a subsection 245(6) request must "involve"
GAAR.
[38] Having
found that subsection 245(7)'s application is limited as
directory to the taxpayer, how does that assist in answering the
first question? Must the Minister indicate on the face of any
assessment involving GAAR that GAAR is being applied? No, there
is no procedural requirement contained in subsection 245(7)
to that extent. If the assessment arises as a result of a
subsection 245(6) request, I cannot conceive of why the
Minister would not state in the notice its reliance on GAAR, as
that was the very essence of the request for the assessment.
While I find there is no requirement to do so, the Minister
should be able to prove that GAAR was involved at the time of the
notice. I stress this is only in relation to a notice issued as a
result of a subsection 245(6) request.
[39] The
Applicant's argument was based on the wording of
subsection 245(7) and specifically the phrase
"involving the application of this section". Given my
interpretation of subsection 245(7) as a direction to
taxpayers, the Applicant's argument in this regard is limited
to an assessment arising from a subsection 245(6) request. I
do not find "involve" to mean expressly "stated in
writing", as the Applicant suggested. "Involve" in
the Canadian Oxford Dictionary is defined as
"imply" or "entail", neither of which
connotes any form of written requirement. "Involve"
does not suggest any form of communication from one to
another.
[40] The
Applicant also relied upon subsections 245(6), (7) and (8)
in addressing how the Minister must make an initial
subsection 245(2) assessment. Subsection 245(6) allows
180 days from the day of mailing an assessment for a third party
to request his own assessment in connection with a transaction to
which the Minister has applied GAAR. How does the third party
know a notice has been mailed, and further how does a third party
know the notice is one "involving the application of
subsection 245(2)": the notice was not mailed to the
third party. Presuming the third party is so intimately involved
in the transaction to which the notice relates, that he becomes
aware of the notice, how does he know that GAAR is
"involved" if the notice is silent. The Applicant also
expressed concerns that counsel for a taxpayer may run the risk
of breaking a fiduciary obligation to a third party client, if
the third party is not notified. These concerns do highlight the
imperfections in the section. From a practical perspective, a
third party involved in the very transaction to which the
Minister has applied GAAR is most likely to be aware that the
transaction is under attack, albeit through the assessment of
another taxpayer involved in the transaction. In many cases it
would be probable the third party and assessed taxpayer were not
dealing at arms length. However, this does not deny the
possibility of an unrelated third party being out of the loop
regarding the GAAR-assessed transaction.
[41] Is a
requirement for explicit wording on the face of the assessment
implied because of these concerns? I think not. If the notice of
assessment is silent, there exists two possible scenarios: GAAR
is not involved or it is involved. If it is not involved then
none of the concerns mentioned surface. If it is involved then
either the assessed taxpayer knows it is involved or does not
know it is involved. If the taxpayer knows it is involved he, or
perhaps his counsel, has a decision to make as to whether to
notify a third party. This would be the same position for the
taxpayer had the notice indicated explicitly that GAAR was being
applied.
[42] What if
the taxpayer does not know GAAR is involved, which I would think
would be an exceptional, though not impossible, situation. There
follow then two situations where this might arise. First, if the
Minister is applying GAAR though simply has not informed the
taxpayer and second, if the Minister, at the notice of assessment
stage, has not yet determined to apply GAAR. This second scenario
is more likely. However, in such a case it cannot be argued that
the assessment must state on its face that GAAR is being applied,
as it is unknown at that point in time that GAAR is in fact being
applied. This raises the problem of the taxpayer not being able
to avail himself of subsection 245(6), which I will address
shortly. Ultimately, the only argument to support a position that
subsections 245(6), (7) and (8) imply a requirement of a
written statement in the notice is that it would avoid the
situation where the Minister is applying GAAR and just has not
told the Applicant. While I believe such a case would be rare,
that is in fact a suggestion put forth by the Applicant in the
case before me. I am satisfied GAAR had been an issue between the
Applicant and the department prior to the assessment (see for
example the waivers which refer to part XVI). The Applicant
suggested that by not mentioning GAAR in the assessment, the
Applicant was led to believe that GAAR was off the table. I am
not convinced the Applicant was blind to the application of GAAR.
The Applicant was certainly disabused of the notion GAAR was not
applying by the express wording of the Notification of
Confirmation, which made it clear to the Applicant that GAAR was
indeed being applied.
[43] This does
raise a legitimate concern of how, in the limited scenario just
described, a third party is able to avail himself of the recourse
provided in subsection 245(6). If the Applicant was not
aware that the assessment involved GAAR until long after the 180
day period referred to in subsection 245(6) had expired, is
a third party out of luck? While there is provision for an
extension of the 180 day period by an additional year, the
problem might still remain and indeed the third party may
inadvertently forfeit his opportunity for relief. The
Applicant's answer is that one can only avoid this dilemma if
the notice states explicitly that GAAR is being applied. But this
does not overcome the dilemma in the situation where the third
party is simply not advised of the notice even if it does refer
to GAAR.
[44] Even if
one considers the failure to involve GAAR at the notice of
assessment stage an omission, this does not invalidate the
assessment. I refer to subsection 152(8) which reads:
152(8) 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 omission therein or in any
proceeding under this Act relating thereto.
Also, as Judge Dussault indicated in Mujoca Inc. v. Her
Majesty The Queen, 98 D.T.C. 1130 at paragraph
15:
I do not think that the mere failure to mention a provision of
the Act in a notice of assessment makes an otherwise valid
assessment invalid, especially where the notice clearly states
the nature of the tax liability and there is no possibility of
confusion. ...
Similarly, A.C.J. Bowman pointed out in RMM Canadian
Enterprises Inc. v. Her Majesty The Queen, 97 D.T.C. 302
that reference to particular provisions in an assessment is more
a matter of convenience, but
... this does no more than indicate the statutory
provision under which the assumed liability arises. The
assessment itself is made under the Act as a whole.
Finally, in Louis Riendeau v. Her Majesty The Queen, 91
D.T.C. 5416 Justice Stone stated:
As the cases and statutory provisions which were cited by
Cullen J. well show, liability for tax is created by the
Income Tax Act, R.S.C. 1952, c. 148, not by a notice of
assessment. A taxpayer's liability to pay tax is just the
same whether a notice of assessment is mistaken or is never sent
at all. ...
In quoting Belle-Isle v. Minister of National Revenue,
63 DTC 347 Justice Stone stated:
Where the above texts are concerned, it matters little under
what section of the Act an assessment is made. What does
matter is whether tax is due.
[45] There is
no prohibition generally against the Minister submitting
statutory provisions in support of an assessment, which were not
listed in the notice of assessment or reassessment.[2] There are three caveats
that go along with this proposition:
1.
The Minister cannot substantively change the assessment, but only
supply additional statutory basis to support the assessment; the
amount of the taxpayer's liability cannot change.
2.
The taxpayer must be informed of this additional submission in a
timely manner, not the eve of a trial and certainly not at the
Appellate Court.
3.
The Crown has the onus of convincing the Court that the
provisions of the Act newly relied upon support the
assessment.
[46] Unless I
find the GAAR provisions themselves by implication, or by an
interpretation of subsection 245(7), require reference in the
notice of assessment to GAAR, I am satisfied that the rest of the
Act and case law supports the right of the Minister to
raise GAAR subsequent to the notice of assessment, subject to the
caveats just mentioned.
[47] I am not
prepared to find that an imperfection in the machinations of the
third party relief provisions in subsections 245(6), (7) and
(8) is sufficient reason to override the established process for
assessments. It is essential in reaching this conclusion that the
Minister is in no way being given any authority to rely on GAAR
subsequent to the notice of assessment for purposes of altering
the tax liability. The Applicant suggested that in fact was the
case here, in that the tax liability was different pursuant to
the application of GAAR. I had insufficient evidence to rule on
that, and indeed it is unnecessary for me to do so in answering
the two questions of law in this application. That will be a
matter for the trial judge.
[48] Finally,
I refer to the case of Michelin Tires (Canada) Ltd. a
decision of the Canadian International Trade Tribunal, affirmed
by the Federal Court, and in particular the following
passage:
Counsel for the appellant argued that the situation with
respect to the GAAR is different and that, under subsec. 274(7)
of the Act, there is a legislated obligation on the
Minister to inform the taxpayer at the time of the assessment or
reassessment (or under subsec. 68.2(2) of the Act at the
time of the determination or re-determination) that he is
applying the GAAR. The Tribunal is not persuaded that subsec.
274(7) of the Act creates an obligation on the Minister
that is any different from his normal obligation to inform the
taxpayer of the reason why an application for refund is being
rejected. Subsec. 274(7) of the Act simply indicates that,
if the GAAR is to be applied, it must be done by means of a
notice of assessment, reassessment, determination or
re-determination. In the Tribunal's view, this obligation is
no different from the obligation to determine tax liability
through such means under other sections of the Act.
...[3]
[49] Counsel
for the Applicant asked me to discount the significance of this
case as the notice of determination (equivalent to a notice of
assessment) was issued prior to the legislation being amended
making section 274 applicable to the subject matter of that
particular assessment. The Minister would not have known to have
referred to GAAR. While I have reached the same conclusion as the
Michelin Tires (Canada) Ltd. case, I have done so by a
different route. The Michelin case appears to suggest a
general application of subsection 274(7) to every
assessment, a position with which I disagree for the reasons
given. I do not rely on this case in support of my finding that
the answer to the first question is no.
[50] With
respect to question two, how does my interpretation of
subsection 245(7) impact on the answer to this issue?
Interpreting subsection 245(7) as I have, I find this
subsection has no relevance whatever to the second question.
There is no choice for the Minister to make - there is
simply no either or decision. I agree with the Respondent that by
its very nature GAAR is an alternative assessing tool. Again I
refer to Justice Stone's words as quoted earlier in the
Riendeau case.
[51] I
recognize that subsection 245(6) can become inoperative in
limited situations where GAAR is used in the alternative. For
example, where the Minister does not raise GAAR until after the
notice of assessment. It is for Parliament to recognize this
consequence and amend if deemed necessary. It is not for me to
construe the legislation contrary to its plain meaning, context
and purpose to rectify Parliament's legislative oversight, if
indeed this is even to be considered an oversight.
[52] The
Applicant argued that relying on GAAR in the alternative produces
a different numeric result. As stated previously, this does not
lead to the conclusion that the Act demands GAAR be
precluded from an alternative assessing position. It does though
require the trial judge to determine if the alternative assessing
position taken by the Respondent does in fact lead to the same
tax liability.
[53] In
summary, I do not agree with the Applicant's broad
interpretation of subsection 245(7) stretching the application to
a procedural requirement in every GAAR assessment. I find it is a
direction to taxpayers that they cannot rely on a previous
application of the GAAR provisions in self-assessing with
respect to the same transaction. Following this interpretation, I
find nothing in subsection 245(7) that requires reference to
section 245 be made on the face of a notice of assessment or
reassessment nor that precludes an alternative assessing
position. I answer no to each of the questions posed in the
application. Costs of this application shall be in the cause.
Signed at Ottawa, Canada this 20th day of December,
2001.
"Campbell J. Miller"
J.T.C.C
.COURT FILE
NO.:
2000-3248(IT)G
STYLE OF
CAUSE:
S.T.B. Holdings Ltd. v. The Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
November 23, 2001
REASONS FOR ORDER
BY:
The Honourable Judge Campbell J. Miller
DATE OF
REASONS:
December 20, 2001
APPEARANCES:
Counsel for the
Applicant:
Gordon S. Funt
Counsel for the
Respondent:
Robert Carvalho
COUNSEL OF RECORD:
For the
Applicant:
Name:
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3248(IT)G
BETWEEN:
S.T.B. HOLDINGS LTD.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
Application heard on November 23, 2001 at
Vancouver, British Columbia
by the Honourable Judge Campbell J. Miller
Appearances
Counsel for the
Applicant:
Gordon S. Funt
Counsel for the
Respondent:
Robert Carvalho
ORDER
Upon application by the Applicant to the Court for a
determination of a matter of law pursuant to Rule 58(1)(a)
of the Tax Court of Canada Rules (General Procedure),
for the reasons contained in the attached Reasons for Order:
(a) Subsection 245(7) of the
Income Tax Act ("Act") does not require that a
reference to section 245 and/or the "General
Anti-Avoidance Rule" ("GAAR") be made on the
face of a notice of assessment or reassessment in order for
section 245 to be relied on by the Minister; and
(b) Subsection 245(7) of the
Act does not preclude the use of section 245 as an
alternative assessing position.
Signed at Ottawa, Canada this 20th day of December,
2001.
J.T.C.C.
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