Guenter Wollitzer v. Her Majesty the Queen, [1995] 1 CTC 2996

Kempo J.T.C.C.:—The appellant appeals from a notice of reassessment bearing number 7049 dated January 16, 1991. The basis for the reassessment concerned his liability as a director of Fortune West Enterprises Inc. (the "company") for their failure to remit source deductions, interest and penalties as therein described, see Exhibit A-1.

At the trial counsel advised that the appellant would not be claiming exculpation from liability under the due diligence provision of subsection 227.1(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

c. 63) (the "Act") nor under the two-year limitation provision of subsection 227.1(4).

The appellant’s case focused on two particular factual assumptions made by the Minister’s assessor. These are stated in paragraphs 10(m) and (n) of the respondent’s reply to notice of appeal thusly:

(m) on October 25, 1990, the Minister delivered a proof of claim to the trustee in the amount $22,515.19, claiming priority under section 136 of the Bankruptcy Act and the proof of claim was accepted by the trustee;

(n) by notices of assessment dated November 17, 1987, March 16, 1988, August 26, 1988, August 29, 1988, September 26, 1988, August 18, 1989 and August 23, 1989, the Minister had assessed Fortune for unremitted source deductions, interest and penalties for the 1987 and 1988 taxation years;

Counsel for the respondent said she was made aware that the appellant would be challenging these factual assumptions and that the trial would be concerned with only these issues.

With respect to the proof of claim matter, paragraph 10(m) of the reply purports to provide the factual underpinnings required to satisfy paragraph 227.1(2)(c) of the Act which provides that

227.1(2) A director is not liable under subsection (1), unless

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy Act and a claim for the amount of the corporation’s liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.

With respect to the assessment notices qua the company particularized in paragraph 10(n) of the reply, the appellant’s position was that no such notices exist or existed.

The evidence for the appellant’s case came in via a reading-in of portions of the examination for discovery of one Mr. Minhas, a collections officer with Revenue Canada, who was put forth as the respondent’s representative with respect to the proceedings.

Mr. Minhas acknowledged he never actually saw copies of the seven notices of assessment referred to in paragraph 10(n) of the reply and that his knowledge of them was derived solely from that pleading. He said he had searched Revenue Canada’s files and was unable to locate any originals or copies of these notices nor was he able to find any records or evidence therein which would indicate that any such notices had been either sent to or received by anyone. Mr. Minhas also acknowledged that inquiries had been launched at the Surrey Taxation Centre respecting the production of copies of these notices, that he was aware appellant’s counsel had been inquiring about them for some time, and that currently no one has been able to locate either the originals or copies of the company’s notices of assessment.

As to paragraph 10(m) of the reply dealing with the proof of claim, it was executed by one Shawn Mapoles and marked as item no. 6 during the examination. Mr. Minhas conceded he was unable to locate anything on file confirming the trustee’s receipt of this claim. The only item he was able to discover relating to its purported delivery to the trustee was on a sheet of paper ostensibly authored by Mr. Mapoles. This name appears under the date of October 25, 1990 and there follows a written inscription of the words "F/C to trustee to hand deliver POC". This was translated by Mr. Minhas to mean field call to trustee to hand deliver proof of claim. Mr. Minhas conceded these notes did not represent actual delivery to, or receipt by, the trustee. He agreed Mr. Mapoles’ notes confirm that as of that same date a credit arising in respect of the company’s previous year’s liability was then under active consideration. Pursuant to an undertaking made, respondent’s counsel advised that during a payroll audit the amount of $1,681.31 was found to be an overpayment of tax, that this credit was realized and applied to the previous amounts owing by the company on November 29, 1990, and that the appellant’s liability was decreased by this amount upon reassessment dated January 16, 1991 which is the subject of this appeal.

The proof of claim document was in the form of a certification. It attached an accounting statement particularizing the claim of $22,515.19 being advanced. By clause 3 thereof Mr. Mapoles certified it was this amount, after deducting any counterclaims to which the debtor was entitled, for which the company was justly and truly indebted to Revenue Canada (Taxation). Mr. Minhas agreed this document excluded any mention relating to last year’s credit then being actively considered and that it was actually provided only one month later. Ms. Barbara Harvey, a designated appeals officer for Revenue Canada (Taxation) attended in furtherance of a subpoena issued by appellant’s counsel. Counsel for both parties agreed that Ms. Harvey would be appropriately considered an employee of an adverse party and that she was subject to cross-examination by appellant’s counsel pursuant to Rule 146(3) of the Tax Court of Canada Rules (General Procedure).

Ms. Harvey confirmed she had charge of this file with respect to taking it to trial, that she prepared the transmittal letter with its enclosures to the Court pursuant to subsection 176(1) of the Act, that she was made aware in October 1994 by respondent’s counsel that the appellant’s counsel was still inquiring about obtaining copies of the company’s notices of assessment, and that the six documents provided by respondent’s counsel to the appellant’s counsel, each entitled "notice of assessment" and directed to the company bearing the notation "certified true copy" followed by illegible initials, were all in fact reconstructed from computer data printouts. She agreed with appellant’s counsel that source documents were important, however she added that reconstructions derived from computer printouts were not unusual and that this represented a normal practice. To her a copy of a notice of assessment, and a copy of a reconstructed notice of assessment, were the same thing.

No further evidence was called.

Submissions

Respondent’s counsel submitted that:

-Particulars of the amounts of the appellant’s liability, which originated in the company’s books and records, were provided to him and are currently unchanged; that

—It is reasonable to infer the company was properly assessed by notices issued on the dates noted in the assumptions of fact pleaded in paragraph 10(n) of the reply in that this information was extrapolated from data tapes. There was no evidence adduced by the company that it failed to receive any of the assessment notices and detailed particulars of the amounts were provided on a timely basis; and that

-It is reasonable to infer the proof of claim was delivered to the trustee as per Mr. Mapoles’ notes and if the appellant entertained any doubts he could have subpoenaed Mr. Mapoles and/or the trustee.

Appellant’s counsel submitted that:

—The appellant’s liability being derivative in nature, the initial onus is on the respondent to adduce evidence upon which a prima facie case is made out against the appellant; that

—The facts assumed in paragraphs 10(m) and (n) of the reply have been shown to be false or unfounded; and that

-As the respondent failed to discharge its burden of proof, the appellant has no case to answer and is not liable.

Analysis

Generally

The focus of the appellant’s liability as assessed was under paragraph 227.1(2)(c) of the Act. In this regard, some of the comments of Joyal J. in The Queen v. Leung, [1993] 2 C.T.C. 287, 93 D.T.C. 5467 (F.C.T.D), at page 304 (D.T.C. 5481) are particularly apt:

subsection 227.1(2) imposes certain conditions under which vicarious liability may attach. The Crown must comply with these conditions and in my view, it is incumbent on the Crown to prove compliance. These are all matters within the Crown’s knowledge and the accepted doctrine is that it should bear the burden of proving them.

Secondly, I suggest that the Crown would have the burden of proving that the conditions imposed under subsection 227.1(2) of the Act have been met. In actual terms, the burden on the Crown would necessarily depend on the nature of the case before the Court. I would therefore hesitate to provide more obiter on that subject, except to mention that it might be open to a Court to allow a section 227.1 assessment appeal on the grounds that on one or more of these statutory conditions, the Crown has not discharged its burden of proof. As an example, I note in the considered reasons for judgment in the Tax Court when the issue first came up for determination, Rip J.T.C.C. agreed with an obiter by Bonner J.T.C.C. in the Crossley case, supra, that when a notice of assessment refers to another document, that other document should be attached to the notice and that it is the Crown’s duty to transmit this material to the Court. Rip J.T.C.C. noted, however, that:

In the appeal at bar...no notice of assessment against Eastern (the corporation) was adduced in evidence or transmitted to this Court.

[Emphasis in original.]

Such a failure might well be considered as fatal to the Crown’s case and the taxpayer’s appeal allowed. Such would be a matter of evidence which a trier of facts would be called upon to determine, depending on the circumstances in any particular case.

I should simply conclude that in the presence of an incomplete or erroneous or defective notice of assessment, a taxpayer in the case before me is neither prejudiced nor estopped from challenging it.

[Emphasis added. ]

The company’s assessment notices

There is no statutory authority supportive of Ms. Harvey’s view that a copy of a notice of assessment and a copy of a reconstructed notice of assessment are the same thing. The latter does not legitimize the former. While the conclusion of Joyal J., as expressed on page 305 (D.T.C. 5481) in Leung, supra was that

...in the absence of any statutory condition as to the form or content of a notice of assessment, and in the light of subsection 152(3) and subsection 152(8) of the statute, the notice of assessment issued to the defendant is valid.

[Emphasis added.]

it is important to remember that he was dealing particularly with the form of the original notice actually sent to the taxpayer, Leung, and not to one purportedly sent to the corporation of which he was a director. Subsections 152(3) and 152(8) of the Act provide:

152(3) Liability for the tax under this Part is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.

152(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto.

However the law remains as established in Pure Spring Co. v. M.N.R., [1946] C.T.C. 169, 2 D.T.C. 844 (Ex. Ct.) where at page 198 (D.T.C. 857) Thorson J. said:

The assessment is different from the notice of assessment; the one is an operation, the other is a piece of paper.

In Scott v. M.N.R., [1960] C.T.C. 402, 60 D.T.C. 1273 (Ex. Ct.) Thurlow J. noted at page 409 (D.T.C. 1277) the provisions of subsections 46(3) and 46(7) of the Act as they then read (which currently read as subsections 152(3) and 152(8) respectively) and stated at page 413 (D.T.C. 1279) that "an assessment and a notice of assessment are not the same thing" upon quoting from Pure Spring Co. At page 416 (D.T.C. 1280) he concluded:

I think it is unlikely that Parliament while providing no form for recording an assessment, nevertheless intended that a mere calculation of tax by an assessor should have binding effect either on the Crown or the taxpayer notwithstanding any error, defect or omission therein or in any proceeding relating thereto before the notice required by subsection 46(2) has been given.

I am accordingly of the opinion that the giving of notice of assessment is part of the fixation operation referred to as an assessment in the statute and that an assessment is not made until the Minister has completed his statutory duties as an assessor by giving the prescribed notice....

[Emphasis added.]

Accordingly, this is a matter of substance, not of form; the Minister must advise a taxpayer that the assessment operation has been done.

The truth of the assumptions of fact pleaded in paragraph 10(n) of the respondent’s reply has been challenged by the appellant which he is entitled to do.

In launching this challenge, and given that the initial evidentiary onus rests on the Minister who has the knowledge, see Leung, supra, at page 305 (D.T.C. 5481), and given that that onus has not been discharged, the appellant has no obligation to rebut the assumptions made and I therefore decline to draw any adverse inferences against him for not calling any corporate evidence relating to their purported assessment notices. As it turns out only reconstructed forms of notices, derived as to their particulars from data printouts, were provided to the appellant or his counsel, and only very recently in 1995. Even then they were represented (innocently by respondent’s counsel) as "certified true copies" on forms purporting to portray the original assessment notices. The only indication thereon that could, and in fact did, put the appellant’s counsel on notice appeared in very small print on the top right hand corner to the effect it was form PD 67-A revised 10-92 (i.e., October 1992) while at the same time reflecting assessment notice dates occurring in the much earlier years, 1987, 1988 and 1989. No record exists on the Minister’s files indicating or confirming assessment notices were sent to the company.

On the basis of the evidence before me I am led to conclude no notices of assessment were sent to the company and therefore the facts assumed in paragraph 10(n) have been shown to be incorrect.

However this does not in itself result in the resolution of the matter in the appellant’s favour as I note that validity of the company’s assessment notices has not been made a specific statutory precondition to his personal liability. The appellant’s vicarious liability arises out of subsection 227.1(1) of the Act which reads:

227.1(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) 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 liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

The evidence was that accounting statements were provided to the appellant or his agent or counsel in the format attached as a schedule to the respondent’s reply. No evidence was introduced that the non production of the company’s assessment notices had caused the appellant to be confused, misled or prejudiced as to any matters touching upon his liabilities under subsection 227.1(1). Accordingly no prejudice respecting the appellant’s derivative liability was raised. Given these factors, I decline to invoke the obiter of Joyal J. in Leung, supra at page 305 (D.T.C. 5481) respecting possible consequences which could arise from the respondent’s failure to produce the company’s assessment notices.

The 227.1 (2)(c) proof of claim

The evidence in this appeal does bear materially however on whether the appellant has successfully challenged the Minister’s paragraph 10(m) factual assumptions which underlie the statutory preconditions of paragraph 227.1(2)(c) of the Act.

On this subject, as here also, the facts are essentially within the Minister’s knowledge, the initial burden lies on him to show compliance on the balance of probabilities.

The only individual having personal knowledge was a Shawn Mapoles. He was the one who executed the proof of claim and he was the one who made the very ambiguous cursory note which Mr. Minhas found in the file which simply read "F/C to trustee to hand deliver POC”. The ambiguity therein is substantive; a trip to deliver does not translate to actual delivery. Respondent’s counsel offered no explanation respecting Mr. Mapoles’ absence from the hearing except to say he could have been called by the appellant. As he was obviously a material witness, I draw the adverse inference against the respondent that his evidence would have been damaging to the respondent’s case in this respect.

Proof of the claim under bankruptcy legislation is "by delivery to the trustee a proof of claim in the prescribed form". Evidence of the proof of delivery, coming as it did through Mr. Minhas, was hearsay and therefore was no proof at all. The appellant was not obliged to subpoena Mr. Mapoles, or even the trustee for that matter, as he was not faced with a case made by the respondent which he was obliged to meet.

That misrepresentations concerning the true nature of the company’s assessment notices were made, and that only conjectural explanations were advanced as to why a pending credit was not disclosed on the proof of claim, all serve to provide reasonable grounds supportive of an inference that delivery of the proof of claim was likely mishandled as well.

Be that as it may, the evidence here falls far short of establishing the respondent’s claim was proved in compliance with the statutory precondition of paragraph 227.1(2)(c) of the Act on October 25, 1990 or at any time.

Conclusion

In conclusion then the appeal succeeds and the reassessment is vacated.

Costs

Counsel for the appellant spoke to costs, and submitted they ought to be as between solicitor-and-client not only because of the mishandling of this whole case by the Minister’s officials but also because it would be an appropriate avenue or means to deliver a strong message to Revenue officials that documentary misrepresentations would not be countenanced nor condoned.

Upon noting that no position was advanced by the appellant that he had been confused, misled or prejudiced by these actions (the appellant did not appear during the trial, nor did he testify), and upon noting that liability in this case neither focused nor turned upon the existence of the company’s assessment notices, the Court declined to award additional costs reflective of a punitive basis.

Costs are awarded to the appellant on a party-to-party basis.

Appeal allowed.