Citation: 2013 TCC 94
BAKORP MANAGEMENT LTD.,
HER MAJESTY THE QUEEN,
REASONS FOR ORDER
C. Miller J.
The Minister has
brought a motion for the dismissal of this case pursuant to Rule 58(3)(a)
or (b) or Rule 53(c) on the basis that the Appellant has failed
to comply with section 169(2.1) of the Income Tax Act (the “Act”).
Rather than following the normal course of going through the facts first, I
will set out what I refer to as the Large Corporation Rules found in sections
165(1.11), 169(2.1) and 152(4.4):
by large corporations. Where a corporation that was a large corporation in
a taxation year (within the meaning assigned by subsection 225.1(8)) objects to
an assessment under this Part for the year, the notice of objection shall
describe each issue to be decided;
in respect of each issue, the relief sought, expressed as the amount of a
change in a balance (within the meaning assigned by subsection 152(4.4)) or a
balance of undeducted outlays, expenses or other amounts of the corporation;
facts and reasons relied on by the corporation in respect of each issue.
on appeals by large corporations. Notwithstanding subsections (1) and (2),
where a corporation that was a large corporation in a taxation year (within the
meaning assigned by subsection 225.1(8)) served a notice of objection to an
assessment under this Part for the year, the corporation may appeal to the Tax
Court of Canada to have the assessment vacated or varied only with respect to
(a) an issue in
respect of which the corporation has complied with subsection 165(1.11) in the
issue described in subsection 165(1.14) where the corporation did not, because
of subsection 165(7), serve a notice of objection to the assessment that gave
rise to the issue
and, in the case of an issue described in paragraph (a),
the corporation may so appeal only with respect to the relief sought in respect
of the issue as specified by the corporation in the notice.
152(4.4) Definition of “balance”. 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.
As is clear a large
corporation must be relatively specific in its Notice of Objection and those
specifics must follow through to the appeal to the Tax Court of Canada.
Both parties referred
me to the Federal Court of Appeal reasons in Potash Corporation of
Saskatchewan Inc. v. The Queen, 2003 FCA 471:
The Large Corporation Rules were enacted in 1995 to discourage large
corporations from engaging in a full reconstruction of their income tax returns
for a particular year, after the objection or appeal process has started, based
on developing interpretations and the outcome of court decisions in litigation
involving other taxpayers. The reasons for these subsections are well-stated by
R.M. Beith in his paper entitled “Draft Legislation on Income Tax Objections
and Appeals” as outlined in the Report of Proceedings of the Forty-Sixth Tax
Conference, 1994 Conference Report (Toronto: Canadian Tax Foundation, 1995),
of the reasons for the legislation is to identify disputed issues much sooner
so that a taxation year’s ultimate tax liability can be determined in a timely
to the complexity of the law and the number of issues, for many years a number
of large corporations have had some of their taxation years left open through
outstanding notices of objection or appeals, so that they have been able to
raise new issues based on emerging interpretations and the outcome of court
decisions challenged by other taxpayers.
a particular problem was identified by the auditor general and the Public
Accounts Committee. A case dealing with the calculation of “resource allowance”
which was decided against the department, resulted in claims not only based on
the particular facts decided by the court but in respect of a new issue
concerning the calculation of the “resource allowance”. These claims, both
directly and indirectly from the court decision, involved significant amounts
of tax and interest.
summary, it is essential that revenues be more predictable and therefore that
potential liabilities be identified and resolved within a more reasonable time.
put, Parliament wants the Minister of National Revenue (the Minister) to be
able to assess at the earliest possible date both the nature and quantum of
pending tax litigation and its potential fiscal impact.
It is clear these rules
could affect a harsh result by precluding a large corporation from appealing
matters that may come to light after the Notice of Objection. But that depends
on how reasonably the issue is described in the Notice of Objection. As the
Federal Court of Appeal went on to say in Potash:
… While a large corporation is not required to describe the issue “exactly”, as
the Judge states, it is required to describe the issue “reasonably”. What is
reasonable will differ in each case and will depend on what degree of specificity
is required to allow the Minister to know each issue to be decided.
In Potash, the
Appellant claimed to have inadvertently left off certain income items in its
calculation of resource profits at the Notice of Objection stage, which it
wished to include at the Notice of Appeal stage. The Federal Court of Appeal
… it would not have been reasonable to simply say that the computation of
“Resource Allowance” or “resource profits” was an issue, without specifying the
particular elements of that computation that required a determination by the
Minister or the Tax Court, as the case may be. That level of generality would
render the Large Corporation Rules meaningless, defeating the purpose of their
Finally, the Court, in obiter
comments on quantification stated:
The Judge made a number of comments relating to the statutory requirement to
specify an “amount” for each issue. If he had determined, as he should have
done, that PCS is not entitled to include the five disputed items in their
notice of appeal, there would have been no need to discuss quantification at
all. Nor is it necessary for me to comment on it. I prefer to leave open the
question of whether the obligation to “specify in respect of each issue, the
relief sought, expressed as the amount of a change in a balance (within the
meaning assigned by subsection 152(4.4)) or a balance of undeducted outlays,
expenses or other amounts of the corporation” necessarily binds a large
corporation to the stated amount, or a less favourable amount. It is arguable
that there may be situations where an amendment to a notice of appeal could be
permitted if the amendment goes only to quantum and does not entail the raising
of a new issue.
I turn now to the facts
of this matter to determine how the large corporation rules, as interpreted by
the Federal Court of Appeal, should apply.
First, there is no
dispute that the Appellant was a large corporation for the purposes of the Act.
In March, 1992, five
class A common shares of a corporation not connected to the Appellant were
redeemed by that corporation for $338,213,849 resulting in a deemed dividend
pursuant to subsection 84(3) of the Act.
On the basis that a
portion of the redemption proceeds did not become payable until its 1995 taxation
year, the Appellant reported a portion of the deemed dividend ($52,912,264) as
taxable income in 1995, resulting in $13,333,059 of Part IV tax.
The Minister reassessed
the Appellant’s 1995 taxation year by notice of reassessment dated January 31,
2000 to reduce the amount of the deemed dividend included as taxable income in
the 1995 taxation year by $25,332,237. The resulting Part IV tax was reduced
The Appellant objected
by Notice of Objection dated May 29, 2000. Under the heading “Issue” the
Appellant described the issue in the following manner:
redemption proceeds added to income as a deemed dividend.
Taxation Year Deemed
March 10, 1995 $ (25,332,237)
March 10, 1994 (8,154,757)
March 10, 1993 154,224,784
The Appellant asserted
that the amount of the redemption proceeds that had become payable in the 1995
taxation year had been properly included by the Appellant in its 1995 income.
Under the heading “Relief
Sought” the Appellant described the relief sought as follows:
way of Notice of Reassessment dated January 31, 2000, the Minister reassessed
Bakorp Management Ltd., formerly Seven-Up Canada Inc., (“the taxpayer”) the
amount summarized below in respect of the above noted issue.
of Part IV Tax $ 6,333,059.00
as per the reassessment $ 8,707,393.06
taxpayer objects to the reassessment of taxes as outlined above, and any
related interest and penalties with respect to the reassessed item for the
taxation period ended March 10, 1995.
In effect, the
Appellant was objecting to the Minister decreasing the deemed dividend in 1995
by $25,332,237. The Appellant insisted it had properly included a deemed
dividend of $52,912,284 in its 1995 taxation year. It did go on to say in the Notice
of Objection that “it was unable to determine how the CCRA determined the
adjustment of taxable income” and that “it disagrees with the position taken by
The Minister issued a
notice of confirmation on March 26, 2012 as follows:
the 1993 taxation year, shares were redeemed for proceeds of $338,213,849.
$187,062,571 of the $338,213,849 you received is deemed by subsection 84(3) of
the Income Tax Act (ITA) to be a dividend. Also, it is a “taxable
dividend” as defined under subsection 89(1) of the ITA. We have accepted that
$28,000,000 of this deemed dividend should be included in your income in the
The Minister denied
the objection, thus reducing the approximate $53,000,000 deemed dividend the
Appellant wanted in its 1995 income, leaving a balance of $28,000,000 to be
The Appellant filed a Notice
of Appeal in December 2012. It read in part as follows:
8. Of the Deemed Dividend, $28,000,000 was not included in the
Appellant’s income until the 1995 Year (the “1995 Receipt”).
13. The issue with respect to the Assessment is whether the 1995 Receipt
is properly taxable in the Appellant’s 1995 Year.
15. The Deemed Dividend, including the 1995 Receipt, was payable to
the Appellant in the 1993 Year and, therefore, should be included in the
Appellant’s taxable income for the 1993 Year.
The Respondent argues
that the Appellant has failed to comply with the Large Corporation Rules because:
The issue in the Notice
of Appeal is not an issue described in the Notice of Objection, and
The relief specified in
the Notice of Appeal is not the relief specified in the Notice of Objection.
The Respondent maintains
that the Notice of Objection concerns the Appellant’s wish to have
approximately an identified $25,000,000 of deemed dividend included in 1995
income, while the Notice of Appeal concerns the Appellant’s wish to now accept
the Minister’s position on the $25,000,000 and decrease the deemed dividend
inclusion in 1995 by the balance of the $28,000,000.
The Appellant argues
that it is abundantly clear from the Notice of Objection that the issue is what
is the amount of the particular redemption proceeds that is to be included in
1995 as a deemed dividend. As the Appellant put it, that is the nature of the
dispute, and that did not change from the objection stage to the appeal stage.
The Appellant simply did not accept the Minister’ s calculation, and argues
that this cannot be described as a full reconstruction, using the Federal Court
of Appeal’s term, of the Appellant’s 1995 tax return. I disagree.
I cannot imagine a
fuller reconstruction than making a 180 degree turn in what is to be included
The Appellant is taking
a too general approach to identifying the issue. It would lead to pleadings
being drafted in terms of what is the correct amount of income, rendering a
specific and reasonable identification of issues, as required by the Large Corporation
Rules, meaningless. The Appellant says the appeal is simply a continuing
examination of the proper tax treatment of clearly identified proceeds of
redemption, and by proceeds the Appellant means the full amount of the
proceeds. Yet, the Notice of Objection does not reference the full amount of
the proceeds as part of the issue, only the $25,000,000, and then in terms of
wanting that amount included. No, it is unreasonable to suggest the issue can
be as broadly construed as the Appellant suggests.
Had I determined that
the Appellant was correct in characterizing the issue on appeal as the same
issue as the Notice of Objection, then it would be necessary to determine if
the relief sought on appeal is the same relief sought in respect of the issue
as specified by the corporation in the Notice of Objection. The Notice of
Objection, to comply with section 165(1.11)(b) must identify the change in the
balance, being the income, taxable income or tax. The objection does this by
indicating a change of approximately $25,000,000 in income and a change of $6.3
million in tax. The Appellant’s position is that the relief sought in the
appeal is the same, being the correct determination of the amount of deemed
dividend to fall into 1995 income, and only the quantum is changed. Again, I
This is not a situation
of discovering an error, an oversight or new fact that impacts on quantum. This
is a complete reversal from wanting $53,000,000 included in income to wanting
nothing included in income; from saying, Minister, you are wrong to decrease by
$25,000,000, to saying Minister, you were right to decrease by $25,000,000 and
furthermore you should have decreased by the full $53,000,000. As the Federal
Court of Appeal in Potash pointed out, there may be situations where
change in quantum may not involve Large Corporation Rules. This however is not
one of those situations.
The Minister was led to
believe that $25,000,000 of deemed dividend was on the table for 1995, not the
full $53,000,000. The relief sought was to increase income, not to decrease
income. That is just not quantum: that goes to what the Large Corporation Rules
were designed to counter.
The Appellant points
out that section 169(2.1) does not include a specific reference to the amount
of a change in the balance, and therefore quantum is left flexible. I do not
accept this interpretation. Section 169(2.1) refers to “relief sought in
respect of the issue as specified in the notice”. Section 165(1.11) requires
the notice specifically identify the numeric change in the balance, as defined.
It follows one cannot ignore the specificity of that change in balance.
I could allow the
motion under more than one of the Rules cited by the Respondent, but I find
Rule 58(3)(b) is most appropriate, in that the Appellant has not
fulfilled a condition precedent to institute a valid appeal and the appeal is
therefore dismissed with costs to the Respondent.
Signed at Ottawa, Canada this 2nd day of April 2013.
“Campbell J. Miller”