Maximo I. Rosales v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2852

Sarchuk T.C.C.J.:—This is an appeal by Mr. Rosales from an assessment of tax for his 1986 taxation year. He has elected to have the provisions of section 18 of the Tax Court of Canada Act apply.

In computing income for that taxation year Rosales deducted the amount of $25,000 as business losses incurred as a result of an investment in West Coast Dart Digest Ltd. ("West Coast"). In assessing Rosales the Minister of National Revenue (the"Minister") disallowed the deduction.

The appellant in his notice of appeal takes issue with the assessment on the following basis:

1. The taxpayer did not claim a business loss in respect of Hutee Hydraulic Product as assessed by the Minister and thus the Minister's assessment dated October 26, 1989 is a nullity.

2. In the alternative, the taxpayer states that the Minister did not assess the taxpayer with "all due dispatch” as required by subsection 152(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act").

3. In the further alternative, if the Minister's assessment is not a nullity, which is not admitted but denied, the taxpayer is entitled to a business loss in the amount of $25,000 with respect to his 1986 taxation year as claimed.

At the commencement of the hearing counsel for the respondent advised the Court that a number of other taxpayers had made similar investments in West Coast. In each instance their business losses were disallowed with the result that a number of appeals have been filed, all pursuant to the general procedure provisions of the Tax Court of Canada Act. These appeals are pending and arrangements are being made to proceed with one as a test case.

Counsel for the respondent suggested, and Rosales agreed, that this Court determine the procedural issues raised in grounds 1 and 2 of the notice of appeal. In the event Rosales is successful, that would be the end of the matter. If he were not, the hearing would be adjourned sine die pending disposition of the test case. At that point of time Rosales will have the option of continuing with his appeal or agreeing to be bound by the decision handed down in the test case.

It is reasonable to proceed on that basis, particularly in view of the fact that the substantive issue is complex and that Rosales is unrepresented by counsel. From a procedural point of view it is appropriate to consider this as a motion by the appellant to vacate the assessment on the grounds set out in paragraphs 1 and 2 of his notice of appeal.

The sequence of events is relevant with respect to both grounds raised by Rosales. The documents filed by both parties establish the following:

1. Rosales filed his return of income for the 1986 taxation year, signed but undated, within the time limits prescribed by the Income Tax Act (the Act), thus not later than April 30, 1987 (Exhibit A-1).

2. On August 28, 1987 a letter was forwarded to Rosales from the Audit Programs Directorate, Revenue Canada, acknowledging receipt of his 1986 income tax return and stating:. . . .

We wish to advise you that the business loss in the amount of $25,100.00 from West Coast Dart Digest will be verified prior to 1986 return being processed. Accordingly, your return will be held in abeyance until the completion of our audit at which time the business loss will be allowed or adjusted, if necessary.

Should you wish us to process your 1986 return without the benefit of the deduction tor the above-noted business loss claim please forward your request in writing to . . ..

[Exhibit R-1.]

3. On January 6, 1988: A.A. Manki of the Audit Division wrote to Rosales advising that the department is currently examining the loss claimed. It acknowledges receipt of a completed questionnaire and certain documents forwarded by Rosales with respect to the West Coast investment and, in order to verify the loss claimed, seeks to examine, pursuant to subsection 231.1(1) of the Act all of the books and records of Rosales' "publishing business” (Exhibit R-2).

4. November 29, 1988: P. Wong, Audit Division to Rosales. In this letter Wong sets out the respondent's understanding of the transaction between West Coast Dart Digest and Rosales in some detail. He concludes by saying:

In view of the above, we propose to disallow $25,000 (the expenses related to the West Coast Dart Digest) pursuant to the provisions of paragraph 18(1)(a) and subsection 245(1) of the Income Tax Act. This adjustment will be held in abeyance for thirty (30) days to provide you with the opportunity to furnish evidence that you carried on a business in that year and that you are entitled to the expenses claimed.

[Exhibit R-3.]

5. On January 17, 1989, Rosales responded to Wong's letter and made factual submissions coupled with references to the relevant provisions of the Act regarding his business involvement with West Coast and his entitlement to the business losses claimed (Exhibit R-4).

6. The Minister proceeded to assess and sent Rosales notice thereof dated October 26, 1989. The notice states"The"Business Loss" of $25,000 relating to Hutee Hydraulic Product has been disallowed as a result of an audit. This adjustment relates only to the audit of Hutee Hydraulic Product. Other information in this return may be subject to further review or audit if necessary" (Exhibit A-1).

7. Upon receipt of the notice of assessment Rosales wrote to Revenue Canada on November 20, 1989 stating in part:

For your information, I do disagree with this assessment due to the fact that I do not have anything to do with Hutee Hydraulic Product which you mentioned.

I hereby request your good office to annul this assessment which I think is unfair on my part.

[Exhibit A-2]

8. On May 29,1990 Rosales, apparently in response to a statement of account with respect to taxes owing, wrote to the Inquiry Section, Revenue Canada reiterating that he had nothing to do with Hutee Hydraulic Product and advised that his letter is an objection to the "statement" (Exhibit A-3).

9. On August 22, 1990 Rosales filed an application for an order extending time within which a Notice of Objection with respect to his 1986 income tax assessment may be served. The Minister did not oppose the issuance of such an order and on Decembr 17,1990 it was granted by the Court.

10. On October 5, 1990 Wong responded to the letters written by Rosales on November 20, 1989 and May 29, 1990. These letters had been forwarded to him by the chief of collections. Wong conceded that the notice of assessment referred to Hutee Hydraulic Product. He added "Please be advised that the ‘business loss’ disallowed was in respect of West Coast Dart Digest claimed by you in 1986 rather than in the Hutee Hydraulic Product” and referred to the Department's audit and previous correspondence in which reference was specifically made to West Coast and the proposed assessment.

11. On November 26,1990 Rosales responded. He rejected Wong's explanation as unacceptable contending that “if it is true that you are disallowing my claim then, you have to send me" . . . another notice of assessment which is based on the audit of West Coast Dart Digest and not with fabricated Hutee Hydraulic Product" (Exhibit A-6).

12. On December 13, 1990 Wong responded to Rosales’ most recent letter and indicated that the Department was not prepared to reassess.

13. On February 26,1991 following a review of Rosales’ notice of objection, E.D. Eng of the Appeals Division summarized the facts upon which the Minister relied in making his assessment and advised Rosales that his file would be held in abeyance for 60 calendar days in order to provide Rosales with time to submit any further information. Failing this his objection would "be processed on the basis of the information available”.

14. On April 26, 1991 the Appeals Division (E.D. Eng) received a letter from Rosales providing additional information which Rosales considered relevant with respect to the disallowance of West Coast business losses.

15. On January 17,1992 a notice of confirmation of the assessment was issued by the Minister.

This appeal followed.

Appellant's position

Mr. Rosales’ position with respect to the first ground is that the assessment in issue is a nullity because it refers to a non-existent transaction as the basis for the denial of the business loss claimed.

As to the second ground he argues that his repeated requests for a proper assessment have been ignored by Revenue Canada and that to date he has never received a valid assessment for his 1986 taxation year. The absence of a valid assessment and notice thereof makes it impossible for him to properly file a notice of objection with the result that to this point he has not been able to do so. As he put it "What I am concerned is only the way they sent me the notice of assessment which I want to be changed so I can file the proper objection. And that deprived me of filing the proper objection.” This, as I understood him, constitutes a failure to assess with due dispatch.

Respondent's position

The respondent concedes that the notice of assessment in respect of Mr. Rosales’ 1986 taxation year, dated October 26, 1989, inadvertently contained an erroneous reference to “ Hutee Hydraulic Product" which has no relevance to the assessment of that taxation year.

The respondent's position is that the assessment is legally valid. Furthermore, Mr. Rosales knew at all material times both before and after the filing of his notice of objection for the 1986 taxation year that the loss disallowed by the Minister was the loss claimed by him in respect to West Coast. Thus he suffered no prejudice as a result of the erroneous reference in the notice of assessment. The Minister pleads and relies upon subsection 152(8) of the Income Tax Act.

As to the alleged delay in making the assessment counsel submitted that it was made at the very outside no more than 2'/2 years following the filing of the return. Thus, it was submitted, in the circumstances it cannot be said that the Minister failed to assess with due dispatch as required by the provisions of subsection 152(1) of the Act.

Conclusion

Is the assessment invalidated by the erroneous reference to" Hutee Hydraulic Product" in the notice of assessment? Technical treatment of such problems is provided by section 152 of the Act. The Minister here relies only on subsection 152(8) which reads:

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.

Errors are inevitable. In the cases of Belle-Isle v. M.N.R., [1966] S.C.R. 354, [1964] C.T.C. 40, 66 D.T.C. 6100, and Canada v. Riendeau, [1990] 1 C.T.C. 141, 90 D.T.C. 6076 (T.C.C.), aff'd by [1991] 2 C.T.C. 64, 91 D.T.C. 5416 (F.C.A.), it was recognized that the assessment remained valid although the basis for it may have been wrong. In both, the Minister relied on the wrong section of the Act; indeed in Riendeau the section had been repealed. However, the critical question was found to be not the section relied on, but whether tax was in fact due. In that case Cullen, J. stated at page 146-47 (D.T.C. 6079-80):

The Act and the cases make it clear that liability for tax is not affected by an incorrect or incomplete assessment. Subject to being varied or vacated on an objection or appeal, or voluntarily reassessed by the Minister, an assessment is deemed to be valid and binding notwithstanding any error, defect or omission therein.

Error will be a matter of degree. Sections 152(3), 152(8) and 166 combined clearly indicate that this error by the Minister of National Revenue is far from fatal. The cases only limit these sections where there is substantial and fundamental error; in such cases, the Court will not allow the Minister to hide behind the provisions.

In the case before me, the Minister has not committed an error of sufficient seriousness to put it into the same category as cases like Optical Recording Co. v. M.N.R. (No. 1), [1986] 2 C.T.C. 325, 86 D.T.C. 6465 (F.C.T.D.); rev'd [1990] 2 C.T.C. 524, 90 D.T.C. 6647 (F.C.A.). The defendant has tried to distinguish Belle-Isle, but upon my reading of the case I cannot agree. The Act and the cases (Belle-Isle, supra, M.N.R. v. Minden, [1962] C.T.C. 79, 62 D.T.C. 1044 (Exch. Ct.), show than [sic] an assessment can be valid even if the original reasons assigned were erroneous or because the Minister initially availed himself of one section (subsection 74(5)) instead of another (sections 3 and 9 of the Act).

While one may argue that both Optical Recording, supra, and Leung v. M.N.R., [1991] 2 C.T.C. 2268, 91 D.T.C. 1020 (T.C.C.) [rev'd [1993] 2 C.T.C. 284 (F.C.T.D.)] suggest a trend towards limiting the application of curative provisions such as subsection 152(8), in my view that is not the case. In Optical Recording the Minister issued an assessment but told the taxpayer the taxes were not yet due. Later, without any warning, the Minister acted to collect the payment, virtually freezing the funds of the taxpayer. The assessment was declared to be null. The Court found that the Minister's actions were tainted with". . . error of law, illegal conduct, excess jurisdiction and unfair pouncing without reasonable notice. . ." (at page 339 (D.T.C. 6475)). In Leung the assessment contained the aggregate of amounts assessed under four statutes, one of which was provincial. It also failed to disclose the period of income tax liability and the amounts of such tax liability. Without such information the assessment was held to be incomplete and was vacated. These decisions were based upon findings of substantial and fundamental errors in assessment and are distinguishable on their facts.

In my view the exercise of the authority to vacate an assessment should be limited to exceptional circumstances. For example, in Stephens Estate v. The Queen, [1984] C.T.C. 111, 84 D.T.C. 6114 (F.C.T.D.); aff'd [1987] 1 C.T.C. 88, 87 D.T.C. 5024 (F.C.A.), the taxpayer alleged that the assessments were invalid because the names of the Department and Deputy Minister were incorrect. The Court held that such irregularities did not render the assessments void as there was no confusion or prejudice caused to the taxpayer as a result. The Court held that these were not defects at all, merely irregularities that could be cured. Even if they were defects they did not invalidate the assessment because of subsection 152(8) of the Act.

In Mr. Rosales' case the Minister has not committed an error of sufficient import to warrant vacating the assessment. On the evidence Rosales was involved in but one business transaction, that being with West Coast. Following the filing of his return there was considerable correspondence between Revenue Canada and Rosales, all of which related to his business dealings with West Coast. He provided documentation and responded to a questionnaire with respect thereto. In November 1988 Rosales received a complete summary of Revenue Canada's position and was advised of the proposed assessment which would disallow the expenses relating to West Coast. He responded and did provide additional material which was considered by the Minister. The assessment followed. Notwithstanding the misdescription of the business involved, the notice of assessment as it read was not in error as to the amount of the business loss claimed and should not have been confusing to Rosales in any substantive manner. He properly questioned the description and the subsequent correspondence between him and Revenue Canada provided ample clarification of the nature and substance of the actual assessment. Rosales then proceeded to file a notice of objection to this assessment.

In my view the error in the notice of assessment on the part of the Minister does not constitute a breach of his duty to fully disclose to a taxpayer the precise findings of fact and rulings of law which give rise to the issue. While in Rosales’ case the name of the company in question was misstated in the notice of assessment he was aware of the precise findings of fact which gave rise to the assessment. No prejudice was caused to Rosales in the sense spoken of in Optical Recording or Leung and therefore I decline to vacate the assessment.

Ground II

Rosales cannot succeed on this ground.

I have ruled that there has been an assessment of his 1986 taxation year and that he received notice of it. Thus the sole argument which could be made is that the length of time the Minister took to do so was excessive. The relevant subsection provides, quite simply:

152(1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine

(a) the amount of refund, if any, to which he may be entitled by virtue of sections 129, 131, 132 or 133 for the year, or

(b) the amount of tax, if any, deemed by subsection 119(2), 120(2), 120.1(4), 122.2(1), 127.1(1), 127.2(2), 144(9) or 164(6) to have been paid on account of his tax under this Part for the year.

In lolicoeur v. M.N.R., [1960] C.T.C. 346, 60 D.T.C. 1254 (Ex. Ct.), Fournier, J. stated at page 358 (D.T.C. 1268):

In my opinion the words “with all due dispatch" have the same meaning as "with all due diligence” or "within a reasonable time. . . ." In a legal sense, they are interpreted as giving a discretion and freedom, justified by circumstances and reasons, to the person whose duty is to act. The acts involved are not submitted to a strict and general rule.

There is no doubt that the Minister is bound by time limits when they are imposed by the statute, but, in my view, the words "with all due dispatch” are not to be interpreted as meaning a fixed period of time. The “with all due dispatch” time limit purports a discretion of the Minister to be exercised, for the good administration of the Act, with reason, justice and legal principles.

This case has been interpreted as only imposing a responsibility on the Minister regarding the speed of the assessment. In Rodmon Construction v. The Queen, [1975] C.T.C. 73, 75 D.T.C. 5038 (F.C.T.D.), at page 78 (D.T.C. 5041), the phrase was interpreted as meaning“ promptitude, speed". It has been held that delays of up to two years between the submission of the tax return and the notice of assessment are not unreasonable (We/h v. M.N.R., [1988] 2 C.T.C. 2013, 88 D.T.C. 1379 (T.C.C.); Hutterian Brethren Church of Wilson v. The Queen, [1979] C.T.C. 1, 79 D.T.C. 5052 (F.C.T.D.); aff'd [1980] C.T.C. 1, 79 D.T.C. 5474 (F.C.A.)). Mr. Rosales relied upon J. Stollar Construction Ltd. v. M.N.R., [1989] 1 C.T.C. 2171, 89 D.T.C. 134 (T.C.C.) [1] . The facts were that a corporate taxpayer was not assessed until six years after submitting its return at pages 2174-75 (D.T.C. 137):

A failure to invalidate an assessment not made in compliance with the subsection would render meaningless a clearly expressed statutory command. The duty imposed and power conferred on the Minister by subsection 152(1) is to assess with all due dispatch. The respondent has by his tardiness failed both to perform the duty and to exercise the power. There is no basis for a conclusion that the language used by the legislature is intended to confer a power on the Minister to assess whenever he pleases coupled with a diffident expression of desire that he do so as soon as reasonably possible.

That is not the case here. As previously noted Rosales’ income tax return was filed in a timely fashion. It was then the subject of substantial communication between Revenue Canada and Rosales, both prior to assessment and to the mailing of the notice of assessment on October 26, 1989. I am satisfied that the Minister examined the return with due dispatch, advised Rosales of the audit being performed with respect to West Coast, considered his submissions and then assessed the tax payable for the year. Given the nature of the transaction in issue, the time involved was not at all unreasonable.

In my view Mr. Rosales has failed to make his case that the requirement in subsection 152(1) to assess with all due dispatch has not been met.

The motion is dismissed. By consent the appeal is adjourned sine die. A date for the continuation will be set upon motion by either party.

Motion dismissed; appeal adjourned.