Leonard Reeves Inc. v. R., [1996] 1 CTC 2602, 96 DTC 1903

Christie A.C.J.T.C.: — This is a motion brought by the appellant (“the Applicant”) for approval by the Court of a form of special case prepared by its counsel.

The relevant background to this application is that on July 25, 1990, a hearing presided over by Sarchuk T.C.J. was held at Toronto pertaining to an appeal under the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the “Act”) in which the Applicant was the appellant and the Respondent was the Minister of National Revenue, (“the Minister”). The Notice of Appeal is dated February 20, 1989 and that appeal will be referred to in these reasons as “the 1989 appeal”. It related to the sale of real estate in Texas. The profit on the disposition had been reported in the appellant’s return of income for 1984 as a capital gain. In reassessing, the Minister treated the gain as business income. The Notice of Reassessment reads:

Revised Taxable Income

The appellant then served a Notice of Objection on the Minister and the 1989 appeal followed. The Minister also included in the appellant’s income for 1985 a portion of the reserve referred to in the Notice of Reassessment and an appeal against this is included in the 1989 appeal.

The reasons for judgment and the judgment pertaining to these appeals are both dated February 4, 1991. The reasons are reported in Leonard Reeves Inc. v. R. (sub nom. Leonard Reeves v. Minister of National Revenue, [1991] 1 C.T.C. 2298, 91 D.T.C. 425 (T.C.C.). With reference to the Minister having deducted a reserve of $742,405 in reassessing the learned judge said at page 2299 (D.T.C. 429):

The appellant in this case, in its 1984 taxation year, treated the gain on the disposition of the Magic Valley Trailer Park, as a capital gain and claimed a reserve under section 40 of the Act with respect thereto. The Minister reassessed, treating the gain as being on income account, and deducted reserves under paragraph 20(1 )(n) of the Act with respect to taxation year 1984. As well the Minister consequentially added part of these reserves into the appellant’s income in 1985.

He went on at page 2301 (D.T.C. 431):

The reserve provided for under paragraph 20(1 )(n) of the Act is undoubtedly permissive. However, it is not correct to conclude that it is also exclusive. By this I mean that there is nothing to suggest that the Minister is precluded from allowing a reserve in appropriate circumstances. In a number of cases the Minister has taken the initiative in allowing a reserve for a taxpayer on reassessment. This has occurred in situations where previously unreported income was assessed as taxable or a previously reported capital gain was later assessed as business income. However, where the Minister takes the initiative of calculating and deducting a reserve from the taxpayer’s income the taxpayer can object and in my view the Minister cannot force the taxpayer into taking the reserve. Only where the taxpayer acquiesces should he be regarded as having adopted the reserve.

The operative part of the judgment of February 4, 1991 reads:

JUDGMENT

It is ordered and adjudged that the appeals from assessments of income tax for the 1984 and 1985 taxation years and from the determination of a loss for the 1983 taxation year be allowed, with costs, and the matters referred back to the Respondent for reconsideration and reassessment on the following basis:

1. That the interest imputed to the appellant pursuant to the provisions of subsection 17(1) of the Act in the following amounts:

Ranchero Village

$3,583.96 (1983)

$3,851.66 (1984)

$6,184.44 (1985)

Georgetown Mobile Manor Inc.

$4,274.55 (1983)

$3,902.84 (1984)

$4,088.69 (1985)

be deleted from the computation of the appellant’s income in those taxation years;

2. That the gain realized upon the sale of the property referred to as Magic

Valley be regarded as income from a business and not as a capital gain;

3. That the foreign tax credit to which the appellant is entitled be calculated on the basis that the appropriate method of conversion is to use the weighted average exchange rate for the relevant fiscal period, that being the 12-month period ending December 31, 1983;

4. That with respect to taxation year 1984 the reserve deducted by the Respondent under paragraph 20(1 )(n) of the Income Tax Act be deleted. As a further consequence with respect to the appellant’s taxation year 1985, that portion of the reserve added to the appellant’s income is deleted.

What is germane for the purpose of this motion in subsection 164(4.1) of the Act provides that where the Tax Court of Canada has, on the disposition of an appeal in respect of taxes, interest or a penalty payable under this Act by a taxpayer resident in Canada referred an assessment back to the Minister for reconsideration and reassessment, the Minister shall with all due dispatch reconsider the assessment and make a reassessment in accordance with the decision of the Court, unless otherwise directed in writing by the taxpayer.

The Minister was not otherwise directed in writing and on July 12, 1991, this Notice of Reassessment and accompanying T7W-C issued:

By notice dated October 1, 1991, the appellant objected to the reassessment. [1] Under the heading “Statement of Facts and Reasons” in the form of objection prepared by Revenue Canada reference is made to an attached document. It reads:

Leonard Reeves Incorporated

Notice of Objection

Statement of Facts

On February 4, 1991, the Tax Court of Canada issued a judgment on the appeal of the taxpayer from reassessments issued by the Minister of National Revenue for the years 1983, 1984 and 1985 years. The part of the judgment relevant to this Notice of Objection reads as follows:

It is ordered and adjudged that the appeals from the assessment of income tax for the 1984 and 1985 taxation years and from the determination of a loss for the 1983 taxation year be allowed, with costs, and the matters referred back to the Respondent for reconsideration and reassessment on the following basis:

4, That with respect to taxation year 1984 the reserve deducted by the Respondent under paragraph 20(1 )(n) of the Income Tax Act be deleted. As a further consequence with respect to the appellant’s taxation year 1985, that the portion of the reserve added to the appellant’s income is deleted.

On July 12, 1991, further reassessments were issued by the Minister of National Revenue with respect to the years in question. The reassessment for the 1984 taxation year, in addition to other adjustments, added the amount of $742,405 to the taxpayers income, which addition was described on Form T7W- C in the following words:

Adjustment to Active Business Income

Reserve per 20(1 )(n) Previous: $742,405.00 Revised: 0

As a result, the taxpayer’s income for the 1984 taxation year was increased by this amount, and the tax for that year was correspondingly increased. The Form T7W-C carries the following notation

This reassessment is issued pursuant to subsection 164(4.1) of the Income Tax Act.

Statement of Reasons for the Objection

The judgment of the Tax Court of Canada provided that “the reserve deducted by the Respondent under paragraph 20(1 )(n) of the Income Tax Act be deleted’’. It did not provide that the income for the 1984 year be increased and that increase be subject to tax. The purpose of the section of the judgment deleting the reserve was to provide that there would no amount to be added to its 1985 income with respect to the reserve. That this was the intention is spelled out clearly in the immediately following sentence wherein it is stated “As a further consequence with respect to the appellant’s taxation year 1985, that portion of the reserve added to the appellant's income is deleted.” (emphasis

added). The direct reference to the effect on the appellant’s income in the second sentence, contrasted with the lack of such a reference in the first sentence makes it clear that it was intended that the effect on income, and therefore, tax, be confined to its effect on the 1985 year. The taxpayer contends that since it was not the intention of the judgment to increase the income of the taxpayer for the 1984 year, that the reassessment of July 12, 1991, insofar as it relates to the reserve under paragraph 20(1 )(n), for the 1984 taxation year was not issued pursuant to subsection 164(4.1), since this subsection requires the Minister to reassess “in accordance with the decision of the Court”.

The purpose of the rules governing appeals to the Tax Court of Canada is to provide relief to the taxpayer from assessments or reassessments made by the Minister of National Revenue which are not justified by the facts of the situation or by the law. The Tax Court of Canada may refuse the taxpayer’s application for relief by dismissing his appeal, or may allow the appeal of the taxpayer by one of the following methods:

(i) vacating the assessment,

(ii) varying the assessment,

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

Each of the actions listed above represent relief to the taxpayer of the assessment in connection with which the appeal was taken. None of the actions listed in the statute, all of which are methods of allowing the appeal, in whole or in part, can serve as authority for increasing the tax of the appellant above the amount of the assessment which is the subject of the appeal. Consequently, it is submitted, it cannot have been the intention of the Tax Court of Canada that allowing the taxpayer’s argument with respect to the reserve would be to increase the tax imposed on it. Again, the taxpayer contends that, since this could not have been the intention of the Tax Court of Canada, the reassessment of July 12, 1991, insofar as it relates to the inclusion in income of the paragraph 20(1 )(n) reserve, was not issued pursuant to subsection 164(4.1).

The taxpayer further contends that, since the reassessment July 12, 1991 was not issued pursuant to subsection 164(4.1), it is subject to the rules relating to normal reassessments. These rules, which are contained in subsection 152(4), provide that in the absence of fraud or misrepresentation, the Minister may assess the taxpayer only within the “normal” reassessment period in respect of the year. That normal reassessment period is defined in subsection 152(3.1) to be 3 years after the date of mailing of the original assessment for the year. This reassessment falls outside that time period, and therefore, is beyond the power of the Minister.

Statement of Relief Sought

The taxpayer requests that the addition to income of $742,405, contained in the reassessment of July 12, 1991, be deleted from its income for that year, and that the tax imposed by that reassessment be accordingly reduced.

The Notification of Confirmation by the Minister is dated February 14, 1992. It reads:

Notification of Confirmation by the Minister

Your Notice of Objection to the income tax assessment for the 1984 taxation year has been carefully reviewed under paragraph 165(3)(a) of the Income Tax Act.

The Minister of National Revenue has considered the reasons set out in your objection and all the relevant facts. It is hereby confirmed that the assessment has been made in accordance with the provisions of the Income Tax Act on the basis that:

As a result of Court Judgment under subsection 164(4.1) of the Act, the amount of $742,405 was included in computing your income in accordance with the provision of Section 3 and Subsection 9(1) of the Act.

The appeal to which the Notice of Motion at hand relates is dated May 1, 1992, and was filed on May 5, 1992.

On June 30, 1995, counsel for the appellant and the Respondent in that appeal appeared before Bonner T.C.J. at a pre-hearing conference. Subsection 126(1) of the Tax Court of Canada Rules (General Procedure) (“the Rules”) provides:

Pre-Hearing Conference

Where Available

126(1) Where an appeal has been set down for hearing, the Court may, on its own initiative, or at the request of a party, direct counsel for the parties, either with or without the parties, and any party not represented by counsel, to appear before a judge for a pre-hearing conference to consider,

(a) the possibility of settlement of any or all of the issues in the appeal,

(b) appropriate means to simplify the issues and to shorten the hearing, (c) the possibility of obtaining admissions of fact or documents,

(d) the advisability of amending the pleadings or defining the questions in dispute, and

(e) any other relevant matter.

(2) A judge who conducts a pre-hearing conference shall not preside at the hearing.

(3) Subsection (2) does not prevent a judge before whom an appeal has been called for hearing from holding a conference, either before or during the hearing, to consider any matter that may assist in the disposition of the appeal, without the judge being disqualified from presiding at the hearing.

(4) Where a party fails to appear at a pre-hearing conference at the time and place set for it, the Court may allow the appeal, dismiss the appeal or make such other order as is just.

As a result of the conference a direction was issued by Judge Bonner that reads:

HIS HONOUR: The parties are directed to state a special case under section 59 of the Rules as follows: was the assessment of July 12, 1991, for the appellant’s 1984 taxation year, made in accordance with the judgment of this Court dated February 4, 1991, and with subsection 164(4.1) of the Income Tax Act, with the consequence that it is not open to the appellant to raise on the appeal from that assessment (a) the question whether it is entitled to a reserve under paragraph 20(1 )(n) of the Income Tax Act, and (b) the question whether it is entitled to a reserve under paragraph 20(1 )(1) of the Income Tax Act in the computation of income for that year.

The parties shall make arrangements with the Registry for the hearing of the special case at a date to be fixed by the Registry, but that date will be sometime in the week of July 17th. It is the responsibility of the parties to prepare the form of special case under section 60 of the Rules and to do so with all due dispatch. The motion to amend the pleadings may be dealt with by the judge at the hearing of the special case.

Section 59 and 60 of the Rules provide:

Special Case

59(1) Where the parties to an appeal concur in stating a question of law in the form of a special case for the opinion of the Court, any party may apply to the Court to have the special case determined.

(2) Where the Court is satisfied that the determination of the question may dispose of all or part of the appeal, substantially shorten the hearing or result in a substantial saving of costs, the judge may hear and determine the special case.

Form of Special Case

60. A special case shall,

(a) set out concisely the material facts, as agreed to by the parties, that are necessary to enable the Court to determine the question stated,

(b) refer to and include a copy of any documents that are necessary to determine the question, and

(c) set out the relief sought, as agreed on by the parties, on the determination of the question of law.

Both counsel confirmed to the Court that this direction was probably issued because what occurred at the pre-hearing conference would have led the learned judge to expect that agreement would be reached. That did not occur and it is now obvious that there is no prospect of that happening.

Counsel for the Applicant and the Respondent have both prepared a draft special case. As mentioned at the outset of these reasons counsel for the applicant seeks the approval of the Court to the special case stated by him. In my opinion, an implied condition precedent to the application of sections 59 and 60 of the Rules is agreement between or among the parties to an appeal concerning the content of a proposed special case. I believe that is apparent from the language of the sections and I direct special attention to these words in subsection 59(1) and paragraphs 60(a) and (c): “parties to an appeal concur”; “as agreed to by the parties”; “as agreed on by the parties”.

Sections 7 and 9 of the Rules provide:

Effect of Non-compliance

7. A failure to comply with these rules in an irregularity and does not render a proceeding or a step, document or direction in a proceeding a nullity, and the Court,

(a) may grant all necessary amendments or other relief, on such terms as are

just, to secure the just determination of the real matters in dispute, or

(b) only where and as necessary in the interests of justice, may set aside the proceeding or a step, document or direction in the proceeding in whole or in part.

Court may Dispense with Compliance

9. The Court may, only where and as necessary in the interests of justice, dispense with compliance with any rule at any time.

Counsel for the Applicant contends that section 9 empowers the Court to dispense with the requirement that the litigants agree to the form of a special case. He further submitted that section 7 permitted the Court to “tailor the relief’. That is meant to say that section 7 enables the Court to dictate the content of a special case in the absence of the agreement by the litigants. In my view, sections 7, 9, 59 and 60 of the Rules when read together and in their general context cannot properly be so construed.

The application is dismissed. The costs of this motion shall be on the basis of party and party and shall be costs in the cause.

Application dismissed.