Docket: A-57-18
Citation: 2019 FCA 45
| CORAM:
|
RENNIE J.A.
WOODS J.A.
LASKIN J.A.
|
| BETWEEN:
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| FRANK MAMMONE
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| Appellant
|
| and
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| HER MAJESTY THE QUEEN
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| Respondent
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REASONS FOR JUDGMENT
WOODS J.A.
[1]
This is an appeal from a judgment of the Tax Court of Canada (per Justice Graham) which dismissed an appeal regarding a reassessment issued to Frank Mammone under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) for the 2009 taxation year (2018 TCC 24).
[2]
The appeal mainly concerns the limitation period for reassessing in subsection 152(4) of the Act. Specifically, the question is whether the Minister impermissibly relied on a new factual basis for the reassessment after the normal reassessment period had expired.
I.
Background
[3]
The relevant factual background is set out in detail in the Tax Court decision. A brief summary will suffice for purposes of the appeal.
[4]
Mr. Mammone was employed in Toronto as a mechanic from 1981 to 2009 and was a member of the Ontario municipal employees pension plan (OMERS).
[5]
In his year of retirement, Mr. Mammone established a new pension plan in which he was the sole member. The plan was registered under the Act effective January 1, 2009.
[6]
On June 23, 2009, the commuted value of Mr. Mammone’s OMERS pension was transferred to the new plan. A total of $640,080.91 was transferred.
[7]
On November 14, 2013, the Minister sent a notice of an intention to revoke the registration of the new pension plan retroactively as of January 1, 2009 on the basis that the plan did not satisfy registration requirements.
[8]
Twenty-eight days later, on December 12, 2013, the Minister provided notice of revocation, which purported to revoke the registration of the new pension plan effective January 1, 2009.
[9]
On the same day, the Minister issued a notice of reassessment for the 2009 taxation year, which included the amount transferred to the new plan in Mr. Mammone’s income. The notice was sent on the last day before the expiry of the time period that the Minister was able to assess this amount (the “normal reassessment period”
as defined in the subsection 152(3.1) of the Act).
[10]
Mr. Mammone pursued rights of appeal, including an appeal to the Tax Court which was instituted in July 2016.
[11]
In 2017, three and one-half years after the revocation notice was sent, the Minister concluded that the notice was ineffective because it was sent two days earlier than was permitted by the Act. Upon realizing the defect, the Minister sent a second revocation notice on June 26, 2017. The new notice stated that it superseded the earlier one and was being issued to correct a timing error. It also stated to be effective on a retroactive basis to January 1, 2009.
[12]
The Minister reflected the change in position in an amended reply filed in the Tax Court on September 22, 2017. It stated that the Minister was relying on the second revocation notice for purposes of the reassessment issued on December 12, 2013.
[13]
A useful summary of key dates for purposes of this appeal is provided in the Crown’s memorandum as follows:
Date
|
Event
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January 1, 2009
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The Plan is registered under the Act
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June 23, 2009
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Transfer of $640,080.91 from OMERS Plan to the Plan
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November 14, 2013
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Mailing of notice of intent to revoke the Plan
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December 12, 2013
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Initial notice of revocation of the Plan, effective January 1, 2009
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December 12, 2013
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Notice of reassessment
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December 12, 2013
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Last day of the normal reassessment period
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June 2017
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Second notice of revocation of the Plan, effective January 1, 2009
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II.
Tax Court decision
[14]
The Tax Court considered two issues.
[15]
First, the Tax Court considered whether the reassessment should be vacated on the ground that the factual basis for the reassessment relied on by the Minister did not exist at the time it was issued. The Tax Court determined that the basis did exist: “[t]he facts necessary to support the reassessment did exist when the reassessment was issued because subsection 147.1(12) caused them to exist retroactively”
(Tax Court reasons at para. 14).
[16]
The second issue was similar to the first, namely, whether the Minister’s reliance on the second revocation notice was impermissible as a new basis of reassessment raised after the limitation period had expired. The Court rejected this argument for the same reason: “there has been no change to the factual basis of the reassessment”
(Tax Court reasons at para. 27). Further, “[t]he basis for reassessment is and always has been that the commuted value of the OMERS pension plan was transferred to a non-registered pension plan”
(Tax Court reasons at para. 22).
III.
Analysis
A.
Introduction
[17]
The central issue to be decided in this appeal is whether the Tax Court erred in its conclusion that the factual basis of the reassessment had not changed and always was that the commuted value of Mr. Mammone’s OMERS pension was transferred to a non-registered plan.
[18]
Mr. Mammone submits that the factual basis for the reassessment did change. He points out that it changed in 2017 when the Minister no longer relied on the ineffective revocation notice issued in 2013 and instead relied on a new revocation notice issued in 2017.
[19]
The Crown submits that the Tax Court made no reviewable error and that the retroactive effect of the revocation meant that the factual basis of the reassessment did not change.
B.
Applicable legislative scheme
[20]
The relevant provisions of the Act are reproduced in an appendix.
[21]
As a general rule, a taxpayer is required to include in income an amount received “on account or in lieu of payment of, or in satisfaction of … a superannuation or pension benefit”
(subparagraph 56(1)(a)(i) of the Act). This includes indirect payments, such as payments that the taxpayer directs to someone else for the taxpayer’s benefit (subsection 56(2) of the Act).
[22]
However, there is no income inclusion with respect to amounts transferred between registered pension plans that are defined benefit plans (subsections 147.3(3) and (9) of the Act).
[23]
The term “registered pension plan”
is defined in the Act. It includes a pension plan that has been registered by the Minister and whose registration has not been revoked (subsection 248(1) of the Act).
[24]
The revocation of a pension plan’s registration by the Minister involves a two-step process under the Act. First, the Minister gives notice to the plan administrator of a proposal to revoke the registration. The notice is to include a proposed effective date of the revocation, which may be on a retroactive basis (subsection 147.1(11) of the Act). In the second step, the Minister provides notice to the plan administrator of the actual revocation. The notice of revocation must be provided after a period of 30 days of the mailing of the notice of intent to revoke. It must also specify the effective date of revocation (subsections 147.1(12) and (13) of the Act). Once the revocation notice is issued, the registration of the pension plan is revoked as of the date specified, unless this Court orders otherwise (subsection 147.1(13) of the Act).
[25]
This Court has recognized that such revocations can be retroactive, including for purposes of determining the tax consequences to members of the transferee pension plan (Hodge v. Canada (National Revenue), 2009 FCA 210, 2009 D.T.C. 5124 at paras. 23-25).
[26]
Although a notice of revocation may be issued on a retroactive basis, the limitation periods for reassessing also need to be considered. In this case, the reassessment was issued before the limitation period expired. However, this is not the end of the matter as courts have developed jurisprudence aimed at preventing the Minister from avoiding a limitation period by raising a new basis of assessment after the limitation period has expired.
[27]
Chief Justice Noël of this Court described this principle in Gramiak v. Canada, 2015 FCA 40, 2015 D.T.C. 5042, as follows:
[33] A further restriction is that an alternative argument cannot be advanced when it would result in a reassessment being made outside the normal reassessment period set out in subsection 152(4) (Walsh v. Canada, 2007 FCA 222 at para. 18). This restriction which is central to the present appeal acknowledges the fact that allowing the Minister to raise an argument based on a legal and factual basis that is different from the one underlying the assessment after the normal reassessment period has expired would in effect do away with the limitation period.
[28]
It is also necessary to take into account subsection 152(9) of the Act. This provision permits the Minister to raise a new argument after the relevant limitation period has expired, within certain specified limitations. The principle as set out in Gramiak takes this provision into account.
[29]
It is also worth mentioning that a legislative amendment to subsection 152(9) appears to expand the scope of the new arguments that the Minister may make after the expiry of the limitation period. The amendment is not in force for purposes of this appeal and the appendix includes the version of subsection 152(9) which is applicable.
C.
Application to facts
[30]
The question is whether the Minister’s change in position, which was first set out in 2017, “is within or outside the legal and factual basis underlying the reassessments”
(Gramiak at para. 35). Accordingly, it is necessary to consider both the legal and factual basis for the reassessment.
[31]
The legal basis underlying the reassessment issued to Mr. Mammone on December 12, 2013 was that the amount transferred to the new pension plan is required to be included in Mr. Mammone’s income because the new pension plan was never registered. I agree with the Tax Court that the legal basis did not change over time due to the retroactive nature of the revocation.
[32]
However, the factual basis underlying the reassessment did change. When it was issued on December 12, 2013, the reassessment was based on the revocation notice sent on December 12, 2013. This basis was abandoned in 2017 because the notice was of no effect and the Minister then relied on a new notice of revocation.
[33]
This change in position is reflected in the amended reply filed by the Minister in 2017. Paragraph 16 of the amended reply acknowledges that the Minister’s factual assumptions do not support the reassessment and are no longer being relied on (appeal book at p. 25).
[34]
It is clear from the legislative scheme described above, and subsection 147.1(13) in particular, that a revocation notice is a necessary step which must be taken to revoke a pension plan’s registration. Without the notice, the new pension plan would be a “registered pension plan”
that qualifies for a tax-free transfer of funds between plans. Therefore, the revocation notice was a factual element that was necessary in order to support the legal basis of the income inclusion, namely that the amount transferred from the OMERS pension plan should be included in Mr. Mammone’s income because it was transferred to an unregistered plan.
[35]
In this case, the applicable revocation notice was sent in 2017, which is long after the limitation period had expired. Clearly, this was not a factual basis on which the reassessment was based when it was issued, or when the limitation period expired.
[36]
The Tax Court failed to take this into account. According to the Tax Court, the factual basis of the reassessment was always that the pension plan was revoked as of January 1, 2009. This is a conclusion based on subsection 147.1(13) of the Act. However, the conclusion itself relies on a new factual basis. This is an error of mixed fact and law which attracts the palpable and overriding error standard of review (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at para. 37). The error made meets that standard.
[37]
In my view, this is a clear case in which the Minister’s position impermissibly avoids the limitation period for the 2009 taxation year. The Minister’s reliance on the 2017 revocation notice was a new factual basis underlying the reassessment raised long after the limitation period had expired. Moreover, this was more than a “new basis”
to support the reassessment. It was also a new fact that did not materialize until after the limitation period had expired, when the Minister issued the second notice.
[38]
The importance that limitation periods play in providing finality to disputes has been well established. In Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60, [2015] 3 S.C.R. 801, Justice Côté of the Supreme Court of Canada stated:
[57] This Court has generally recognized that limitation periods have three purposes known as the certainty, evidentiary and diligence rationales: Novak v. Bond, [1999] 1 S.C.R. 808, at paras. 64-67, per McLachlin J.; M. (K.) v. M. (H.), [1992] 3 S.C.R. 6, at pp. 29-31, per La Forest J. Limitation periods serve “(1) to promote accuracy and certainty in the adjudication of claims; (2) to provide fairness to persons who might be required to defend against claims based on stale evidence; and (3) to prompt persons who might wish to commence claims to be diligent in pursuing them in a timely fashion”: P. M. Perell and J. W. Morden, The Law of Civil Procedure in Ontario (2nd ed. 2014), at p. 123.
[58] Clearly, it is desirable that litigation be accurate and certain, given that the passage of time dims memories and erodes evidence, and also that the risk of error grows as an adjudicator is further removed from the cause of action. Furthermore, after a certain time, possible defendants may be unaware of the need to preserve potentially enlightening or even exonerating pieces of evidence. Finally, it is appropriate to expect plaintiffs to assert their claims diligently and to be cognizant of their circumstances and of the extent of their control over them. Modern limitations legislation is therefore based on a recognition that limitation periods, in order to be effective, need to be final. This is the other side of the coin, the practical consequence of limitation periods that can make the application of a limitations statute seem harsh: Novak, at para. 8, per Iacobucci and Major JJ., dissenting.
[39]
In my view, Mr. Mammone was entitled to rely on the expiry of the normal reassessment period to finalize his tax payable for the 2009 taxation year. In issuing the second revocation notice, and relying on it for purposes of the reassessment, the Minister was in effect seeking to do away with the limitation period.
[40]
I would accordingly allow the appeal, with costs, and order that the reassessment for the 2009 taxation year be referred back to the Minister for reconsideration and reassessment to delete the income inclusion relating to the transfer of funds between pension plans.
“Judith M. Woods”
“I agree
Donald J. Rennie J.A.”
“I agree
J.B. Laskin J.A.”
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