Jérémie Dauphinais v. Her Majesty the Queen, [1994] 1 CTC 2288

Garon, J.T.C.C.:—This is an appeal from a reassessment of the Minister of National Revenue issued on April 17, 1990 for the 1982 taxation year.

In that assessment, the Minister of National Revenue disallowed the deduction of a non-capital loss in the amount of $28,581 incurred by the appellant during the 1978 taxation year pursuant, according to the Minister, to subsection 111(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

At the hearing of this appeal, the parties filed a document entitled 'Admission on the facts”. This document read as follows:

For the purposes of the hearing in the instant case, the parties acknowledge the existence of the following facts:

1. In March 1983, Jérémie Dauphinais filed an amended income tax return for the 1978 taxation year in which he reported a deferrable non-capital loss of $53,637;

2. Jérémie Dauphinais’ intention was to defer this loss as follows:

1977	$28,581
1980	$19,762
1981	$ 5,294

3. In 1977, Jérémie Dauphinais had an income of $28,581;

4. The sum of $28,581 could not be applied against Jérémie Dauphinais’ income for the 1977 taxation year because of the prescription provided at section 152 of the Income Tax Act;

5. Having regard to the fact that Jérémie Dauphinais had a positive income for the 1983 taxation year under the terms of a reassessment issued by the Minister of National Revenue, the loss of $28,581 was deferred to this 1983 taxation year;

6. In April 1990, as a result of an appeal filed by the appellant in respect of the 1983 taxation year, an agreement was entered into creating a loss for the 1983 taxation year and thus nullifying the deferral of $28,581 of the loss incurred by the appellant in the 1978 taxation year;

7. Jérémie Dauphinais requested that the non-capital loss of $28,581 incurred in 1978 be deferred to 1982;

8. The Minister of National Revenue refused to allow the deferral on the ground that this loss of $28,581 was deductible prior to the 1978 taxation year, that is in 1977, in accordance with the provisions of paragraph 111(3)(a) of the Income Tax Act as it then existed;

9. The point at issue consists in determining whether the balance of the losses incurred by Jérémie Dauphinais for the 1978 taxation year, that is $28,581, may be deferred to the 1982 taxation year or rather whether the loss of $28,581 was deductible in a year prior to 1978, that is 1977, thus rendering its deduction in a subsequent year impossible;

Montreal, March 23, 1993

Me Serge Fournier

WOODS BROUILETTE DES MARAIS Counsel for the appellant

Montreal, March 23, 1993

Me Pierre Cossette

Counsel for the respondent

[Translation.]

Following the reopening of the hearing ordered by the Court under section 138 of the Tax Court of Canada Rules (General Procedure), the "nil assess- ment" for year 1978 dated November 4, 1985 made in response to the amended return filed in March 1983 and the T7W-C form which accompanied it were filed with the Court by the appellant with the respondent's consent.

Appellant’s claims

The appellant argued that, in taxation terms, the loss incurred by the appellant in 1978 was not created by the appellant’s amended return filed in 1983, but rather by the assessment of the Minister of National Revenue which was made in 1983. Consequently, the loss was not previously deductible in 1977 because the Minister of National Revenue no longer had the power to issue a reassessment, the four-year time limit provided for that purpose having expired. Counsel for the appellant drew a distinction between the facts of the instant case and those concerned in the decision of the Tax Appeal Board in Alexis Nihon Co. v. M.N.R., [1969] C.T.C. 39, 69 D.T.C. 53 and in the judgment of the Judge Taylor of this Court in John Campbell v. M.N.R., [1985] 1 C.T.C. 2070, 85 D.T.C. 65.

According to the appellant, the critical moment was at the time of the assessment because it was at that point that the legal consequences arising from a loss incurred by a taxpayer, in particular the right to defer a loss, came into being. At the time of the assessment issued on November 4, 1985, in response to the amended return, the loss could no longer be deducted in 1977 because of the prescription.

The appellant further argued that the term "deductible" in paragraph 111 (3)(a) of the Act must be interpreted as meaning actually or physically deductible at the time the Minister of National Revenue, according to the appellant, created the loss through the effect of his assessment.

Respondent's claims

The respondent, for her part, claimed that the loss here concerned, incurred in 1978, was deductible in 1977 and could not be carried forward to 1982 under subsection 111 (3) of the Act. Counsel for the respondent argued that it was not the Minister of National Revenue who created the loss, but rather its realization. It was added for the respondent that, since the loss had been incurred in 1978, the appellant could have claimed the deduction of that loss for the 1977 taxation year by filing an amended return for the 1977 taxation year. According to counsel for the respondent, the sole condition for a loss to be deductible in another year is that there be income in that other year against which it may be deducted.

Analysis

The central point in support of the appellant’s argument concerns the effect under the Act of an assessment of the Minister of National Revenue in the case where a loss is incurred by a taxpayer in a given taxation year.

The evidence here shows that the Minister of National Revenue made a “nil assessment" on November 4, 1985 in response to the amended return filed by the appellant in March 1983. This assessment was accompanied by a statement showing a loss of $53,657. This was not strictly speaking an assessment, but rather a written notice or notification that no tax was payable for the taxation year in question, to use the terminology employed in subsection 152(4) of the Act. In that notice or notification, the Minister of National Revenue did not strictly speaking "assess" or "determine" the amount of a loss. He merely determined that no tax was payable. For example, it is well established that this notice or notification that no tax is payable is not subject to objection or appeal. A determination of the loss in a formal sense is made only at the taxpayer's request, as provided at subsection 152(1.1) of the Act, ana the taxpayer in turn can request it only if the Minister sets the loss in question at an amount that is different from that reported by the taxpayer.

When counsel for the appellant argued that the assessment created the loss, he probably meant that, in the instant case, at the time of the notification dated November 4, 1985, the Minister of National Revenue had implicitly acknowledged the fact of the existence of a loss in the amount of $53,637 estimated by the appellant in his amended return filed in 1983 for the 1978 taxation year. As appears from the document that accompanied the notification, the Minister's allowing the amount of the loss as calculated by the appellant was not tantamount to a determination of the loss within the meaning of subsections 152(1.2) and 152(1.3) of the Act. A determination of loss under the subsections in question resembles an assessment in many respects. As explicitly stated at subsection 152(1.3) of the Act, a determination “is. . . binding on both the Minister and the taxpayer for the purposes of calculating the taxable income of the taxpayer in any other year" and is subject to objection or appeal.

Even if, contrary to what I believe, I take it for granted that a notification from the Minister that no tax is payable, in a situation in which it is clear that the Minister allows the amount of the loss estimated by the taxpayer, has the effects of an assessment, it appears to me incorrect to claim that such notification or "assessment" creates the loss. The case law shows that an assessment is merely an established procedural or administrative means for determining tax payable. The judgments in Parsons v. M.N.R., [1983] C.T.C. 321, 83 D.T.C. 5329 (F.C.T.D.); rev'd on appeal on other grounds in [1984] C.T.C. 352, 84 D.T.C. 6345 (F.C.A.), and Dominion of Canada General Insurance Co. v. The Queen, [1984] C.T.C. 190, 84 D.T.C. 6197, aff'd [1986] 1 C.T.C. 423, 86 D.T.C. 6154 (F.C.A.), clearly support this finding.

Furthermore, the decision of Judge Noël in The Queen v. Simard-Beaudry Inc., [1971] F.C. 396, 71 D.T.C. 5511, at page 403 (D.T.C. 5515) goes further in one sense in that it establishes that the assessment does merely state the obligation to pay income tax because the tax liability itself is created by the Act. The following passage from Judge Noël's judgment is particularly apposite:

It seems to me that. . .the general scheme of the Income Tax Act indicates that the taxpayer’s debt is created by his taxable income, not by an assessment or reassessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point. Here the reassessments issued on August 14, 1969, for income earned in previous years seem to me to be at most a confirmation or acknowledgment of the amounts owing for these earlier years. Indeed, in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.

This principle was reiterated by the Federal Court of Appeal in Riendeau v. M.N.R., [1991] 2 C.T.C. 64, 91 D.T.C. 5416, at page 65 (D.T.C. 5417). On behalf of that Court, Stone, J.A. wrote as follows:

As the cases and statutory provisions which were cited by Cullen, J. well show, liability for tax is created by the Income Tax Act. . .not by a notice of assessment. A taxpayer’s liability to pay tax is just the same whether a notice of assessment is mistaken or is never sent at all.

It is indisputable, based on the preceding, that the assessment does not create the tax liability or debt. Likewise, it seems clear to me that the notification that no tax is payable does not create the loss. The loss incurred by the taxpayer existed as of the end of the 1978 taxation year. It was definitely not attributable to a determination of the Minister, but rather reflects the results of the appellant’s financial operations for the 1978 taxation year as a whole. Furthermore, section 111 of the Act, which establishes a certain number of rules pertaining to the deferral of losses to other taxation years, is drafted in terms of losses “incurred” during a given period.

I must therefore now consider whether the loss incurred by the appellant in 1978 was, in the factual context of this appeal, deductible prior to year 1982, as the respondent argues, or not deductible prior to 1982 in accordance with the appellant’s claims. Since it was admitted by the parties to the instant case that the loss which concerns us was a non-capital loss, the provisions of paragraph 111 (1 )(a) and subsection 111 (3) of the Act must be considered in order to resolve this matter. These provisions read as follows:

111 (1 ) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted from the income for the year such of the following amounts as are applicable:

(a) non-capital losses for the five taxation years immediately preceding and the taxation year immediately following the taxation year, but no amount is deductible in respect of non-capital losses from the income of any year except to the extent of the taxpayer's income for the year minus any amount deductible under subsection 138(6) and all deductions permitted by the provisions of this Division other than this paragraph, paragraph (b) or section 109;

(3)(a) an amount in respect of a non-capital loss, net capital loss or restricted farm loss, as the case may be, for a taxation year is only deductible to the extent that it exceeds the aggregate of

(i) amounts previously deductible in respect of that loss under this section,

and

(ii) amounts previously subtracted in respect of that loss under paragraph 186(1)(c) or (d) in determining amounts on which tax under Part IV has become payable; and. . . .

If the loss was not created in 1983 for the purposes of the Income Tax Act, but at the time of its realization at the close of the 1978 taxation year, it follows that this loss was deductible prior to 1982. Indeed, this loss could have been deducted in the 1977 taxation year if the appellant had, within the time limit provided under section 152(6), filed the amended return in which he claimed the deduction for the non-capital loss here in question. Having regard to the nature of the proposals put forward by counsel for the appellant which the latter would acknowledge — if the premise were taken for granted that the loss was created in 1978 — 1 would even be inclined to believe that this loss was deductible in 1977.

It is also indisputable that the fact that the amended income tax return for the 1978 taxation year was not filed until March 1983 had no bearing on the moment when the loss became deductible. It is not the taxpayer who decides in which taxation year the loss became deductible, but rather the Act itself. Nor was it suggested by counsel for the appellant that the appellant could make any choice whatever in this regard. Subsection 152(6) of the Income Tax Act set out a time limit for the filing of the amended return, which time limit was not met, and subsection 111 (3) established the order to be followed in the deferral of losses.

A number of judicial decisions have affirmed that subsection 11 1 (3), in its version applicable to the taxation years prior to 1983, and paragraph 27(1 )(e), as it read prior to the coming into effect of Chapter 53 of the Statutes of Canada, 1970-71-72 [in certain respects the equivalent of subsection 111(3)], prescribed the order in which certain classes of losses could be carried back to the preceding year and forward to subsequent years. This subsection 111(3) was amended by subsection 54(2) of Chapter 1 of the Statutes of Canada, 1984, applicable with respect to the computation of taxable income for the 1983 and subsequent taxation years. Among the amendments made to subsection 111(3) by this statute of 1984, it should be noted that the term "deductible" appearing at subparagraph 111 (3)(a)(i) was replaced by the term "deducted".

I refer first to Falaise Steamship Co. (No. 2) v. M.N.R. (1963), 33 Tax A.B.C. 6, 63 D.T.C. 659, at page 12 (D.T.C. 661). In that case, the appellant was, in 1953, a foreign corporation not taxable in Canada. In 1953, the appellant realized a profit of $354,014, and it incurred a loss of $216,891 in 1954. The company deducted the loss of 1954 from its profit of 1956, the year in which it was subject to Canadian taxes. However, the Minister deducted the 1954 loss from the 1953 non-taxable profit. The Tax Appeal Board found in favor of the Minister. It concluded that the 1954 loss had to be applied first against income earned in 1953, secondly against income from 1955, thirdly against income from 1956 and so on. According to it, paragraph 27(1)(e) must apply:

In my view, the provisions of the law as contained in paragraph 27(1)(e) are mandatory as to the respective years against which any loss is to be applied, namely: first, against the income, if any, of the fiscal period immediately prior to the year of the loss, and then, respectively, against the income, if any, of the first, second, third, fourth and fifth fiscal periods immediately succeeding the year of loss.

This judgment was followed by Me Boisvert of the Tax Appeal Board in Alexis Nihon, supra. In that case, the appellant had incurred losses of about $67,000 in 1953. In 1952, the company in question had carried over a sum of $17,000 in respect of part of the loss of $67,000, which carryover the Minister allowed. In 1955, the Minister reassessed the appellant and increased the appellant’s taxable income for 1952 by a sum of about $49,000. When the corporation claimed a deduction from income for 1959 in respect of the balance of the loss incurred in 1953, the Minister refused, alleging that the appellant had lost the right to deduct it under subparagraph 27(1 )(e)(ii) of the Act because, according to the Board, the loss incurred in 1953 was deductible in 1952. Since it had not deducted these losses in 1952, the appellant was deprived of the right that it could have had under the subparagraph cited above. The appellant was first supposed to deduct its losses incurred during 1953 from its income for 1952. As it had not done this, in 1957, 1958 and 1959, it was no longer permitted to exercise the right granted it under paragraph 27(1)(e) of the Act. If Parliament had wanted matters to be otherwise, it would not have enacted subparagraph 27(1 )(e)(ii).

Judge Taylor of this Court adopted the same approach in Campbell, supra. He showed that the appellant’s failure to deduct the loss from the income from previous years was tantamount to foregoing his right to deduct it from his income for subsequent years. Judge Taylor made the following comments, at page 2072 (D.T.C. 66):

The critical word is "deductible", it is not "deducted". This taxpayer has indeed forgone his right to deductibility of that portion of the losses which ne was entitled to deduct in previous years.

[Emphasis in original.]

Judge Tremblay also considered this question in Hanusch v. M.N.R., [1985] 1 C.T.C. 2022, 85 D.T.C. 34 (T.C.C.) at page 2025 (D.T.C. 36). In that case, it had to be determined whether the appellant had the right to deduct the loss from 1978 in 1979, 1980 and 1981. Judge Tremblay concluded that subsection 111(3) had to apply, in the following terms:

The word "may" is used by the legislator because sometimes it is not possible to apply the loss to the previous year especially when there is no income in that previous year. But when there is an income, the taxpayer and the assessor are obliged to apply the loss against the said year pursuant to subsection 111(3) of the Act.

I therefore come to the conclusion that the loss in issue was deductible in 1977 in that it could have been applied against the income for the 1977 taxation year if the appellant had, at the appropriate time, taken the necessary steps to do so. Since this loss was not deducted in 1977, it could not be deducted in 1982 because the time limit within which the Minister could have made a reassessment had expired.

It follows that the balance of the losses in the amount of $28,581 incurred by the appellant in the 1978 taxation year cannot be deducted for the purpose of computing taxable income for the 1982 taxation year.

For these reasons, the appeal is dismissed with costs.

Appeal dismissed.