REASONS FOR
JUDGMENT AND JUDGMENT
I. Introduction
[1]
The Minister of National Revenue (the Minister) brought
a summary application before the Federal Court for a compliance order pursuant
to subsection 231.7(1) of the Income Tax Act (the Act) which reads as
follows:
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231.7 (1) On summary
application by the Minister, a judge may, notwithstanding subsection 238(2),
order a person to provide any access, assistance, information or document
sought by the Minister under section 231.1 or 231.2 if the judge is satisfied
that
(a) the person was
required under section 231.1 or 231.2 to provide the access, assistance,
information or document and did not do so; and
(b) in the case of information
or a document, the information or document is not protected from disclosure
by solicitor-client privilege (within the meaning of subsection 232(1)).
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231.7 (1)
Sur demande sommaire du ministre, un juge peut, malgré le paragraphe 238(2),
ordonner à une personne de fournir l’accès, l’aide, les renseignements ou les
documents que le ministre cherche à obtenir en vertu des articles 231.1 ou
231.2 s’il est convaincu de ce qui suit :
a) la personne n’a pas fourni l’accès, l’aide, les renseignements
ou les documents bien qu’elle en soit tenue par les articles 231.1 ou 231.2;
b) s’agissant de renseignements ou de documents, le privilège des
communications entre client et avocat, au sens du paragraphe 232(1), ne peut
être invoqué à leur égard.
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[2]
The Minister, relies on his powers under subsection
231.2(1) in the application for the order, which reads:
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(1) Notwithstanding any other
provision of this Act, the Minister may, subject to subsection (2), for any
purpose related to the administration or enforcement of this Act (including
the collection of any amount payable under this Act by any person), of a
comprehensive tax information exchange agreement between Canada and another
country or jurisdiction that is in force and has effect or, for greater certainty,
of a tax treaty with another country, by notice served personally or by
registered or certified mail, require that any person provide, within such
reasonable time as stipulated in the notice,
(a) any information or
additional information, including a return of income or a supplementary
return; or
(b) any document.
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(1) Malgré
les autres dispositions de la présente loi, le ministre peut, sous réserve du
paragraphe (2) et pour l’application ou l’exécution de la présente loi (y
compris la perception d’un montant payable par une personne en vertu de la
présente loi), d’un accord général d’échange de renseignements fiscaux entre
le Canada et un autre pays ou territoire qui est en vigueur et s’applique ou
d’un traité fiscal conclu avec un autre pays, par avis signifié à personne ou
envoyé par courrier recommandé ou certifié, exiger d’une personne, dans le
délai raisonnable que précise l’avis :
a) qu’elle fournisse
tout renseignement ou tout renseignement supplémentaire, y compris une
déclaration de revenu ou une déclaration supplémentaire;
b) qu’elle produise des
documents.
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[3]
In this case, the Minister is seeking
information from Mr. Giovanni Zen (Mr. Zen). Specifically, the Minister seeks detailed
Net Worth Statements for the purpose of collecting outstanding interest and
penalties on an assessment against Mr. Zen in his capacity as a Director of
Pacific Refineries Inc. (the Corporation).
[4]
Mr. Zen has not complied with the notices of
requirement for information (RFIs) sent to him by the Minister in order to
obtain Net Worth Statements pursuant to subsection 231.2(1) of the Act. As a
result, the Minister filed his application for an order for compliance wherein
Mr. Zen is the named respondent.
[5]
Mr. Zen is the applicant in a second related
application. Mr. Zen has applied for judicial review of the RFIs. He seeks a
writ of certiorari to quash the RFIs on the basis that the Minister does not
have the authority to collect “unassessed interest” on the assessment of
Mr. Zen issued in 1986 for the Corporation’s failure to remit source deductions.
[6]
Pursuant to the order of Madam Justice Mactavish
dated July 18, 2008, and by reason of the similar circumstances and issues
raised, the Minister’s application and Mr. Zen’s application were heard
together.
II. Facts
[7]
Mr. Zen was a director of the Corporation at all relevant times. The
Corporation was indebted to her Majesty the Queen for unpaid source deductions.
Mr. Zen was assessed in relation to the Corporation’s debt on or about December
8, 1986 for $103,463.32 (the Assessment). The Assessment included the
outstanding debt, interest and penalties.
[8]
Mr. Zen appealed the Assessment to the Tax Court in 1987. The appeal
was discontinued by Mr. Zen.
[9]
On August 23, 2005, the Minister served Mr. Zen with five (5) RFIs
pursuant to subsection 231.2(1)(a) of the Act (2005 RFIs) seeking his Net
Worth Statements as at August 15, 2005, December 31, 2004, December 31, 2003,
December 31, 2002 and December 31, 2001, complete with supporting schedules,
showing full details of all his assets and liabilities.
[10]
The Minister contends that as of February 10, 2006, Mr. Zen was indebted
to Her Majesty the Queen for $615,587.20. This amount included the original
Assessment as well as penalties and interest thereon.
[11]
In August 2006, Mr. Zen brought an application for judicial review in
this Court of the Minister’s decision to deny Mr. Zen a “Fairness Package”
relieving him of his obligation to pay the interest accruing from his debt.
[12]
On or about February 21, 2007, Mr. Zen paid $103,463.32, being the
amount assessed against him in 1986. On May 15, 2008, Mr. Zen received
acknowledgment of his payment and notice that his outstanding balance was now
reduced to $629,849.47. The Minister takes the position that the amount which
remains outstanding is the accrued interest on the 1986 assessment.
[13]
On March 12, 2008, Mr. Zen’s application for judicial review of the
Minister’s decision to deny his request for fairness relief under the Act was
dismissed.
[14]
On June 2, 2008, the Minister served Mr. Zen’s legal representatives
with two RFIs pursuant to subsection 231.2(1) of the Act (2008 RFIs) seeking his
Net Worth Statements as at December 31, 2006 and December 31, 2007 complete
with supporting schedules, showing full details of all of his assets and
liabilities.
[15]
It is Mr. Zen’s position that the sole purpose for these RFIs is to
collect the outstanding interest allegedly owing and since, in Mr. Zen’s argument,
the Minister has no authority to collect such interest, the RFIs ought to be
quashed.
III. Issues
[16]
Mr. Zen’s application will turn on the following issue:
Does the Minister have
the authority under the Act to collect interest on the Assessment?
Later in these reasons I will
address the extent to which the determination of the above issue will affect the
outcome of the Minister’s application.
IV. Analysis
[17]
The amount of the Assessment is not at issue here. The Assessment was
challenged before the Tax Court of Canada. That appeal was discontinued and the
debt conceded. What is being challenged before this Court is the authority of
the Minister to charge interest on the Assessment. Such authority must be found
in the Act. The answer rests in the words of the statute to which I now turn.
[18]
Subsection 227.1(1) of the Act reads as follows:
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Liability of directors for
failure to deduct
227.1 (1) Where a corporation
has failed to deduct or withhold an amount as required by subsection 135(3)
or 135.1(7) or section 153 or 215, has failed to remit such an amount or has
failed to pay an amount of tax for a taxation year as required under Part VII
or VIII, the directors of the corporation at the time the corporation was
required to deduct, withhold, remit or pay the amount are jointly and
severally, or solidarily, liable, together with the corporation, to pay that
amount and any interest or penalties relating to it.
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Responsabilité
des administrateurs pour défaut d’effectuer les retenues
227.1 (1)
Lorsqu’une société a omis de déduire ou de retenir une somme, tel que prévu
aux paragraphes 135(3) ou 135.1(7) ou aux articles 153 ou 215, ou a omis de
verser cette somme ou a omis de payer un montant d’impôt en vertu de la
partie VII ou VIII pour une année d’imposition, les administrateurs de la
société, au moment où celle-ci était tenue de déduire, de retenir, de verser
ou de payer la somme, sont solidairement responsables, avec la société, du
paiement de cette somme, y compris les intérêts et les pénalités s’y
rapportant.
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[19]
Section 227.1 is the provision of the Act that renders directors liable
where a corporation fails to remit source deductions. Mr. Zen, as a director,
is therefore “jointly and severally, or solidarily, liable with the
corporation” to pay the amount “and any interest or penalties relating to it”.
[20]
The language of section 227.1 expressly provides that directors be
liable for any applicable interest or penalties relating to the amount owing by
the Corporation for failure to deduct and remit. It follows, in the plain words
of the section, that interest would continue to accrue on the amount until it
is paid. The Minister’s authority to assess for amounts payable under section
227.1 is found in subsection 227(10) of the Act which provides as follows:
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Assessment
227(10) The Minister may at any
time assess any amount payable under
(a) subsection 227(8),
227(8.1), 227(8.2), 227(8.3) or 227(8.4) or 224(4) or 224(4.1) or section
227.1 or 235 by a person,
(b) subsection
237.1(7.4) by a person or partnership,
(c) subsection 227(10.2)
by a person as a consequence of a failure of a non-resident person to deduct
or withhold any amount, or
(d) Part XIII by a
person resident in Canada,
and, where the Minister sends a
notice of assessment to that person or partnership,
Divisions I and J of Part I
apply with any modifications that the circumstances require.
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Cotisation
227(10) Le
ministre peut, en tout temps, établir une cotisation pour les montants
suivants :
a) un montant payable par une personne en vertu des paragraphes
(8), (8.1), (8.2), (8.3) ou (8.4) ou 224(4) ou (4.1) ou des articles 227.1 ou
235;
b) un montant payable par une personne ou une société de personnes
en vertu du paragraphe 237.1(7.4);
c) un montant payable par une personne en vertu du paragraphe
(10.2) pour défaut par une personne non-résidente d’effectuer une déduction
ou une retenue;
d) un montant payable en vertu de la partie XIII par une personne
qui réside au Canada.
Les sections
I et J de la partie I s’appliquent, avec les modifications nécessaires, à
tout avis de cotisation que le ministre envoie à la personne ou à la société
de personnes.
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[21]
Subsection 227(10) does not expressly provide that directors are liable
for interest on the amount assessed, rather it provides that Divisions I and J
of Part I of the Act apply with “any modifications that the circumstances
require”. Division I of Part I, deals with “Returns, Assessments, Payments, and
Appeals”, and includes the section on interest (section 161). Subsection 161(1)
provides for the payment of interest, at the prescribed rate, on “taxes
payable”. In Mr. Zen’s argument, interest cannot accrue on the amount assessed because
it is not a tax but rather a third party debt. He contends that the Minister
cannot rely on the application of Divisions I and J of Part I to collect
interest because this would entail reading in a substantive change to the Act
and rewriting the interest provisions.
[22]
Mr. Zen argues that to claim interest there must be a charging provision
in the Act. He maintains that subsection 161(1) provides authority to claim
interest on tax payable but not on his debt because it is not a tax. He cites Ho-A-Shoo
v. Canada (Attorney General) 2000 D.T.C. 6293, at paragraph
21 in support of his argument. Mr. Zen also relies on Algoa Trust v. MNR
98 DTC 1614 for the proposition that absent an express provision, interest
cannot be charged on an assessed amount. Both cases dealt with the liability of
a transferee under section 160 of the Act. That provision essentially provides
for joint and several liability limited by a formula in the section, to
non-arms length transferees of property and for their assessment.
[23]
In Algoa Trust, the Tax Court held that there is no provision of
the Act regarding interest that may be applicable to an assessment issued
pursuant to s. 160 of the Act. The Tax Court found that the Act provided for
interest on the tax debt of the transferor and not on the third party liability
created by section 160. It held that there was only one tax debt and concluded
that interest did not accrue on the assessment of a transferee of property
under section 160 of the Act. The Tax Court focused on the singularity of the tax
debt, the internal limitation of liability on the transferee provided for in section
160 and on the fact that the Act does not specifically provide for interest to
be charged on such an assessment.
[24]
In Ho-A-Shoo the Ontario Superior Court relying on Algoa Trust
found that interest could not accrue on an assessment made pursuant to
subsection 160(2). The Court held that applying interest in such circumstances
would have resulted in a substantive change to the provisions of the Act since
section 161 provides this authority only with respect to “taxes payable”. The
amount owed by a transferee under section 160 is fixed by a liability limit and
is not a tax but is rather a debt.
[25]
In my view both Algoa Trust and Ho-A-Shoo can be
distinguished from the case at bar. The liability of a transferee under section
160 of the Act is limited by the specific liability limit formula in paragraph
160(1)(e) and as a consequence incorporating the interest provision in
Divisions I and J would result in a substantive change, as found by the Courts
in those cases. In contrast, section 227.1 contains no express provision
limiting liability of directors, it specifically addresses interest and does
not rely solely on the application of subsection 227(10) for interest to apply.
[26]
The substantive authority, therefore, for the accrual of interest on the
liability of a director assessed pursuant to subsection 227(10) is found
in section 227.1 of the Act; it need not be read in. Parliament intended that
directors be liable, on an ongoing basis, for interest and penalties on amounts
outstanding under that provision. Modification of the language of the
Act to ensure this result is expressly provided for in subsection 227(10) and
doing so does not bring about a substantive change to the Act. In my view the
combined effect of section 227.1 and subsection 227(10) is to provide for
interest to accrue on the Assessment of a director. It follows that Mr. Zen
is liable for the accrued interest on the Assessment.
[27]
The Tax Court of Canada applied similar reasoning in Robert D. Green
v. The Minster of National Revenue 90 DTC 1898 and in Canadian Imperial
Bank of Commerce (CIBC) v. Canada (Minister of National Revenue),
[1992] T.C.J. No. 662.
[28]
To decide otherwise would result in directors not being liable for
interest and penalties on amounts owing under section 227.1 after the date of
an assessment which, in my view, would be contrary to the clear language of the
provision. It would also result in the Minister having to issue a new
assessment in order to collect what is clearly a continuing liability of
directors for accrued interest under the Act. This would be inconsistent with
the clear language of the Act and the intention of Parliament.
V. Conclusion
[29]
For the above reasons I am satisfied that interest may properly accrue
on an assessment under section 227.1. In the result, Mr. Zen’s application will
be dismissed.
[30]
Given my above determination, it was open to the Minister to issue the
impugned RFIs for the purpose of collecting the outstanding amounts owing by
Mr. Zen. I am satisfied that Mr. Zen was required to provide the requested
information pursuant to subsection 231.2(1) of the Act and did not do so. I am
also satisfied that the information requested is not protected from disclosure
by solicitor-client privilege within the meaning of subsection 232(1).
Consequently, the Minister’s application will be allowed. The Order sought
under section 231.7 of the Act will issue. To that end, the Minister is to
submit a draft order for the Court’s consideration.
VI. Costs
[31]
The determinative issue in these applications, the accrual of interest
on a director’s liability under section 227.1, is before the Court for the
first time. Given the complexity of the Income Tax Act, the issue raised
is not frivolous. This initial judicial pronouncement on the issue will be
welcomed as guidance in further cases. Further, having regard to Rule 400(3)(h)
of the Federal Courts Rules, SOR/2004-283, s. 2, there is, in my view, a
public interest in having this issue litigated. For these reasons and in the
exercise of my discretion, no costs will be awarded on the applications.
JUDGMENT
THIS COURT ORDERS
AND ADJUDGES that:
1. Mr. Zen’s application is
dismissed without costs.
2. The Minister’s
application is allowed without costs.
3. The Order sought by the
Minister under section 231.7 of the Act will issue.
4. The Minister will submit a draft order for the Court’s
consideration within ten (10) days of the date of this order.
“Edmond
P. Blanchard”
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