Route Canada Real Estate Inc. (In Receivership) v. Her Majesty the Queen (No. 2), [1995] 2 CTC 2430, 96 DTC 1967

Sarchuk J.T.C.C.:—This is a motion by the respondent for:

A. An order pursuant to paragraph 58(1 )(b) of the Tax Court of Canada Rules (General Procedure) (the "Rules") striking out the notice of appeal because it discloses no reasonable grounds for appeal;

B. A judgment dismissing the appeal;

C. An order granting a stay of the order of The Honourable Judge R. Bell signed November 24, 1994 in respect of the appeal pending the decision of this Court on this motion;

D. Such further and other relief as counsel may advise, and this Honourable Court deem just; and

E. An order for the costs of this motion.

The grounds advanced by the respondent are:

I. The notice of appeal does not disclose any reasonable grounds for an appeal from an assessment of tax in the Tax Court of Canada; and

II. The appeal is not in respect of an assessment of tax, interest or penalties within the meaning of section 169 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), rather, the relief sought by the appellant appears to be in the nature of an action for an accounting or a declaration for reallocation of payments in respect of a debt, which relief is not contemplated in section 171 of the Act.

At the commencement of the hearing it became apparent that the second ground advanced related to the motion to strike pursuant to Rule 58(1 )(b) but also related to the jurisdiction of this Court. Counsel for the respondent conceded that the notice of motion failed to specifically refer to Rule 58(3)(a) but noted that the relief sought in paragraph (b), that is judgment dismissing the appeal, is only available in respect of a motion made pursuant to Rule 58(3). [1] Counsel also indicated that her submissions would in fact bring the jurisdiction of this Court over the subject matter of the appeal into play. In order to expedite matters I directed both counsel to proceed on the basis that two motions were before the Court, one made pursuant to Rule 58(1 )(b) and the other pursuant to Rule 58(3)(a). It was understood that in accordance with Rule 58(2) no evidence, other than the notice of appeal, was to be adduced in respect of the first motion.

Motion to strike-Rule 58(1 )(b)

Respondent’s position

The respondent contends that a review of the issues pleaded in the notice of appeal reveals no triable issue before this Court, inter alia, the appellant does not, in its pleading, challenge the ascertainment of liability of the transferor or the determination of the amount of tax chargeable to the transferor. Neither does the appellant contest the fact that there was a transfer of property from the transferor to the transferee at less than fair market value at a time when those parties were not dealing at arm’s length. The respondent also contends that subsection 160(3) is not applicable and that the grounds the appellant pleaded in support are irrelevant. The appeal does not constitute a challenge of an assessment and, therefore, ought to be struck or dismissed for disclosing no reasonable grounds of appeal. (See {Operation Dismantle Inc. et al. v. The Queen et al., [1985] 1 S.C.R. 441, 18 D.L.R. (4th) 481.)

Appellant’s position

The respondent’s motion fails to meet the test which would entitle it to an order under Rule 58(1)(b). Before a notice of appeal will be struck out the outcome of a case must be "plain and obvious" or "beyond doubt". (See Dumont v. Canada (A.G.), 67 D.L.R. (4th) 159 (S.C.C.).) The outcome of this appeal is not plain and obvious or beyond doubt. The appellant is entitled to challenge the assessment on the basis that, as of the date of assessment, the underlying liability of the third party had been extinguished, in whole or in part. The only liability for which the appellant may properly be assessed under section 160 is the difference between amounts assessed the third party under the Act in respect of 1987 and all payments on account of that liability up to the date of assessment of the appellant. The appellant contends that this is a clear cause of action and that it cannot be said that the remedy sought could never be awarded.

Conclusion

This motion is for an order pursuant to paragraph 58(1 )(b) of the Rules striking out the notice of appeal because it discloses no reasonable grounds for appeal. Only the notice of appeal is to be considered on such a motion. The applicable principle was stated by Estey J. in Attorney General of Canada v. Inuit Tapirisat of Canada, [1980] 2 S.C.R. 735, 115 D.L.R. (3d) 1, at S.C.R. page 740:

As I have said, all the facts pleaded in the statement of claim must be deemed to have been proven. On a motion such as this a court should, of course, dismiss the action or strike out any claim made by the plaintiff only in plain and obvious cases and where the court is satisfied that "the case is beyond doubt": Ross v. Scottish Union and National Insurance Co. (1920), 47 O.L.R. 308 (App. Div.).

One of the arguments raised by the respondent was that the transferor’s liability for 1987 taxes was neither pleaded nor raised by the appellant, thus the appellant was not entitled to treat this as an issue. That is taking too narrow a view of the language used by the appellant in its pleading. The amount of the transferee’s tax liability, particularly as to quantum, is squarely placed in issue. Furthermore, an issue is raised with respect to the applicability of subsection 160(3) of the Act in the circumstances of this case and whether on a proper application of this subsection the transferor’s liability in respect of 1987 had been extinguished in whole or in part. Although the Notice of Appeal is somewhat ambiguous as to the relief sought it cannot be said that the allegations in the notice definitely revealed no cause of action. (See The Queen v. Special Risk Holdings Inc., [1989] 1 C.T.C. 128, 89 D.T.C. 5039 (F.C.A.).)

The motion made pursuant to paragraph 58(1 )(b) of the Rules is dismissed.

Motion—Rule 58(3)(a)

This motion is for an order pursuant to paragraph 58(3)(a) of the Rules dismissing the appeal on the ground that the Court has no jurisdiction over the subject matter.

The following evidence is before the Court:

1. The notice of appeal herein;

2. The affidavit of Terence Hale, assistant director of Revenue Collections, sworn and filed November 15, 1994:

3. The examination for discovery of Terence Hale taken on August 25, 1994;

4. Exhibits 1, 2 and 3 at the examination for discovery of Terence Hale, more specifically:

A. letter from Mr. Farrell to Ernst & Young dated February 28, 1990;

B. letter from Mr. Farrell to Deloitte & Touche dated June 27, 1991;

and

C. letter from Mr. Farrell to Ernst & Young dated April 16, 1992.

A brief summary of the facts is warranted. In January 1987 Transport Route Canada Inc. (the "transferor”) transferred real property with a fair market value of approximately $54,000,000 to the appellant for consideration of $22,400,000. At the time of the transfer the transferor and the appellant were related persons within the meaning of the Act and were not dealing at arm’s length. The transferor was liable to pay to the Receiver General not less than $2,880,241.69 in respect of its 1987 taxation year. That liability, which was determined from the transferor’s records, is said to be related to unpaid and unremitted source deductions on account of its employees. The Minister of National Revenue (the Minister) assessed the transferor in November 1987. The transferor became bankrupt in September 1988. Neither the transferor, or its trustee, Deloitte, Haskins & Sells Ltd., ever objected to or appealed from the Minister’s assessment. Subsequently amounts were collected to the credit of the transferor. According to Hale those amounts were allocated to satisfy all but the transferor’s liability for federal tax owing in respect of the 1987 taxation year.

The Minister assessed the appellant for $265,213.96 pursuant to section 160 of the Act, notice of which was dated November 14, 1989. According to Hale this assessment represents solely federal income tax owing by the transferor in respect of its 1987 taxation year. The transferor was also liable on November 14, 1989 for this amount. Subsequent to November 14, 1989 the T4 and T4A summary returns for the transferor’s 1987 and 1988 taxation years were processed. It was determined by the Minister that the transferor had over-remitted during those years and as a result a credit was applied to reduce the federal income tax liability of the transferor for its 1987 year to $90,777.24. This amount remains unpaid. That is the amount sought by the Minister from the appellant to satisfy the assessment in issue.

In addition the following facts are relevant. On February 5, 1990 notice of objection was filed by the appellant on the basis that the Minister failed to provide it with details relating to the tax liability of the transferor or to provide other supporting documentation to support the assessment. By way of letter dated February 28, 1990 the Minister advised the appellant that the outstanding liability of the transferor for tax penalty and interest in respect of 1986 and 1987 was $1,712,039.71 as at the date of the transferor’s bankruptcy, September 1988. By letter dated June 27, 1991 the Minister advised the trustee for the transferor that as at December 31, 1987 the balance owing by the transferor was $2,880,241.69. The bulk of the liability was shown as relating to an assessment of November 1987 of $2,336,827.19 in tax and an additional $505,708.87 in interest and penalties. This letter also indicates that between December 1987 and May 1989 the Minister received the aggregate amount of $3,477,763.90 in respect of the transferor’s liability under the Act. On April 10, 1992 notice of confirmation was issued to the appellant in the amount of $265,213.96. Finally by letter dated April 16, 1992 the Minister advised the appellant that the amount for which the transferor had been assessed in November 1987 was $1,076,174.53.

In 1987, at the time the matters first arose, Hale was the chief of source deductions in the Mississauga District Office. In 1988 he became chief of collections and subsequently assistant director of Revenue Collections for that district. With respect to the transferor’s tax files he was in a supervisory position but the actual collection function was carried out by another officer who reported to him. This officer has been on indefinite sick leave since 1992. With respect to Exhibits 1, 2 and 3, being letters from the officer to Ernst & Young and to Deloitte & Touche, Hale was not able to reconcile the figures provided therein with what he described as "our own figures in the Department". I make specific note of this fact since one of the issues raised in this appeal relates to the calculation of the amount of tax (if any) properly assessable against the appellant.

Respondent’s position

The respondent contends the relief sought by the appellant in its pleading is not within the power of this Court to grant since what it seeks is an accounting and a reallocation of certain proceeds that were collected by the Minister and credited against the outstanding tax debt of the transferor. Such relief is not within the jurisdiction of this Court but is a matter of creditor/debtor law and not a matter which can properly be determined in an appeal from an assessment of federal income tax.

With respect to the argument raised by the appellant regarding the applicability of subsection 160(3) of the Act to "payments by the transferor on account of its interest or tax liability for years after 1987" the respondent’s position is two-fold. First, there were never any payments made by the transferor in respect of its liability for some $2,880,241.00 in or after 1987. The assessment of the transferor in October 1987 resulted in an unpaid source deduction debt. The amounts that were collected by the Minister after the transferor’s bankruptcy in September 1988 and applied against its outstanding liability subsequent to the bankruptcy but prior to the assessment of the appellant, were collections made by the Minister pursuant to requirements to pay, issued in accordance with subsection 224(1.2) of the Act immediately following the transferor’s bankruptcy. The October 1987 assessment of the transferor resulted in an unpaid source deduction debt. In such circumstances the Minister had priority over any secured creditor pursuant to subsection 224(1.2) of the Act. Similarly that section gives the Minister priority as a creditor with respect to any garnishments and section 224.1 gives the Minister priority as a creditor to set off or deduct amounts payable. The amounts thereby collected by the Minister were not payments made by or to or on account of the transferor but were payments made to the Minister as a result of a collection action undertaken in accordance with the collection provisions of the Act.

Relying on Pica v. M.N.R., [1990] 1 C.T.C. 296, 90 D.T.C. 6206 (F.C.T.D.) ("Pica"), the respondent argues that subsection 160(3) of the Act has no application to the amounts collected by the Minister subsequent to the transferor’s bankruptcy. Furthermore, based on the same decision, it is the respondent’s position that a review of the Minister’s allocation is not permissible, and that this Court has no jurisdiction to review or to authorize a review by the appellant of the allocation by the Minister of the amounts he collected as a creditor for the transferor’s bankruptcy and prior to the assessment of the transferee.

Appellant’s position

The assessment in dispute is based on the liability of the transferor, thus the appellant’s notice of appeal was drafted on the basis of information which the Minister made available to the appellant from which it appeared that the transferor owed somewhere between $1 million and $2.8 million (conflicting numbers were provided by the Minister) in the aggregate in respect of unremitted source deductions in respect of 1987 or an earlier year. It also appeared that the Minister had already collected approximately $3,480,000 on account of the transferor’s liability for the unremitted source deductions prior to the making of the assessment against the appellant. For this reason the notice of appeal filed frames the issues generally.

Counsel for the appellant submits that both the arithmetic calculations and the basis for the calculations used by the Minister in arriving at the assessed amount of $264,213.96 are in issue. Since this figure is a net amount the appellant necessarily challenges the computation of the transferor’s liability as at December 31, 1987 and the computation and allocation of amounts received by the Minister on account of this liability up to the date of assessment.

More specifically, the appellant challenges the basis on which Revenue Canada collected certain amounts, as between differing transferor liabilities under the Act, and seeks to determine whether Revenue Canada applied those amounts against the liabilities on the same basis to ascertain whether Revenue Canada is collecting the same debts twice. By way of example counsel referred to a letter from Revenue Canada to Ernst & Young dated February 28, 1990 [2] which discloses a payment by Coopers & Lybrand to Revenue Canada in the amount of $2,195,000. If that payment was collected on the basis that it represented unremitted employee withholdings (and therefore deemed trust moneys), then it is the appellant’s position that it cannot be jointly and severally liable for such amounts as that liability has been paid. The appellant would therefore have no continuing liability under the assessment in question as the Coopers & Lybrand payments greatly exceeded the amount assessed. Counsel argued that this is very different from a request for an accounting or an allocation.

It is also submitted that a transferee may only be assessed for outstanding liability of a transferor; in other words, a transferee may only be assessed for a liability of the transferor which has not been satisfied or extinguished as at the date of the section 160 assessment. If the Minister has already collected amounts owed by the transferor in respect of a particular year, it surely cannot subsequently collect those same amounts or any part thereof from a third party. This is confirmed by the provisions of subsection 160(3) by virtue of which the liability of a transferee is reduced to the extent that payments by the transferor on account of its liability reduce the total liability of the transferor under the Act below the joint and several liability imposed by section 160. Therefore any payments which were made by the transferor to the Minister on account of its liability under the Act in respect of 1987 or an earlier year will reduce the liability for which the appellant may be assessed under section 160.

Conclusion

The appellant was assessed on the basis that it was jointly and severally liable to pay a part of the transferor’s tax liability for taxation year 1987 pursuant to the provisions of section 160 of the Act. It can fairly be said that upon receipt of the notice of assessment an appellant is aware only that the transferor was allegedly liable for tax with respect to that year and that the appellant itself was involved in a non-arm’s-length transaction with the transferor. Beyond that assessments made by the Minister pursuant to this section rely on facts not generally within the knowledge of the appellant and as such are distinguishable from other assessments made under the Act. It follows that the scope of the inquiry which may legitimately be made by an appellant must be broader. As was stated by D.E. Taylor, Member, Tax Review Board, in Thorsteinson v. M.N.R., [1980] C.T.C. 2415, 80 D.T.C. 1369:

It is open to a transferee assessed under subsection 160(2) of the Act to challenge the bona fides of the Minister’s claim that the liability for tax of the transferor actually existed at a particular point in time. The assessed transferee has available all the rights of any taxpayer, including the opportunity, indeed the obligation, to dislodge the basis for the liability, not merely to challenge the mechanics of the assessment of the transferor. While the basis for the "notice of assessment" to a transferee may be the earlier "notice of assessment" to the transferor, the basis of an "assessment" of the transferee must be the actual established and sustainable liability for the tax itself.

I am also in complete agreement with and adopt the following comments of Bowman J. in Sarraf v. M.N.R., [1994] 1 C.T.C. 2519, 94 D.T.C. 1506, at page 2522 (D.T.C. 1508):

Where section 160 of the Income Tax Act is invoked by the Minister the joint and several liability of the transferee is a secondary or derivative one. An assessment under section 160 may be challenged on a number of grounds, including the following:

(b) that the liability of the transferor at the date of transfer was less than that assumed by the Minister. It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so, or is, as is the case here, precluded from doing so: Thorsteinson, supra; Ramey v. Canada, [1993] 2 C.T.C. 2119, 93 D.T.C. 791;

(d) that the liability of the transferor has been reduced or extinguished at any time following the transfer;

[Emphasis added.]

The respondent argued that certain amounts received by the Minister after September 1988 were not made by the transferor and that subsection 160(3) of the Act has no application since these amounts were collected subsequent to the transferor’s bankruptcy. That, according to the respondent, is a collection matter over which this Court has no jurisdiction.

I do not agree with that analysis. Whether the payments were or were not made by the transferor is a question of fact which should properly be determined by this Court. Furthermore, the applicability of subsection 160(3) of the Act to such payments, if made, is a question of law clearly within the jurisdiction of this Court. In my view the appellant should not be precluded from arguing as a matter of interpretation that the phrase "payment by the transferee on account of his liability" as used in subsection 160(3) may apply to amounts which the Minister received on account of the transferor’s liability by way of "garnishment, set-off and settlement proceeds".

The appellant maintains it is not seeking a declaration or accounting from this Court, nor is it seeking an order which requires the Minister to change the allocation. As I understand its position it merely seeks to challenge whether as at November 14, 1989 the transferor had an outstanding liability under the Act of $265,213.96 in respect of 1987 or an earlier year. If the liability of the transferor is no longer outstanding at the time the transferee is assessed, the transferee may have no liability as it is a secondary or derivative liability. In such circumstances the allocation of funds collected and the question whether they may have been imbued with a trust are collateral issues which can properly be determined by this Court in order to carry out its function, within its jurisdiction, to dismiss or allow an appeal or vacate or vary an assessment. In Stewart v. M.N.R., [1990] 1 C.T.C. 2231, 90 D.T.C. 1110, at page 2233 (D.T.C. 1112), the Court’s jurisdiction was challenged on the basis that it could not declare upon the validity of a clause in a separation agreement. In ruling that it did the Court adopted the following submission:

that in dealing with an appeal which flows directly from an assessment, the doctrine of collateral attack would hold that the Tax Court of Canada has the jurisdiction to decide all issues which are necessary and ancillary for reaching its decisions. He stated also that for example, the Tax Court of Canada deals in issues on a daily basis which touch on matters which are of provincial jurisdiction. This is seen through cases such as, for instance, those dealing with partnerships, commercial transactions, sales, leasehold interest and other transactions of the like. The Court has on numerous occasions decided whether there are partnerships which exist, whether a building was sold at fair market value, whether there exists a valid contract of sale and whether there exists a contract of employment. These are all collateral issues which arise out of its jurisdiction to dismiss or allow an appeal, or vacate or vary an assessment.

This Court may not have the jurisdiction to grant a declaratory order directing the Minister to provide a full accounting, but that does not mean that this Court does not have jurisdiction to consider how amounts were collected and allocated by the Minister in respect of a transferor’s liability since this may ultimately relate to the transferee’s liability.

I am satisfied that issues have been raised in the notice of appeal which this Court has jurisdiction to hear. The respondent’s second motion is denied.

I feel constrained to add that the notice of appeal as it presently stands creates difficulties for all concerned. Issues have been pleaded in language which suggests that allocation is an issue and that relief which might amount to a direction to the Minister was being sought. That is but one example of the flawed nature of the notice of appeal. I accept appellantcounsel’s statement that the pleadings did not clearly convey what the appellant intended. Nonetheless it would be inadvisable for the trial to proceed on the basis of the present pleadings. To provide the trier of facts and the party with a clear and precise statement of all matters in issue and the relief sought it would be appropriate for the appellant to move pursuant to the provisions of the Rules for an order amending its notice of appeal.

The motions brought by the respondent are dismissed with costs to the appellant in any event.

Motions dismissed.