Marc Bougie and Nicole Bougie v. Her Majesty the Queen, [1990] 2 CTC 239, [1990] 2 CTC 365

Denault, J. [Translation]: —Under cover of an action for a declaratory judgment, the application at bar is in fact a challenge to the order absolute imposing a charge on land (Rule 2400) and ultimately to a certificate registered pursuant to section 223 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63).

The point to be decided is whether in the circumstances a clearance certificate was issued in error, and if so, whether the heirs who accepted the estate subject to inventory are liable for payment of the tax when the Minister of National Revenue could not obtain payment from the executor of the will.

The case at bar was heard concurrently with an action for a declaratory judgment (T-681-88) brought by Marc Bougie, Nicole Bougie's brother. For these purposes they will hereafter be jointly referred to as the plaintiffs.

Facts

The plaintiffs’ father, Jean Bougie, died in Florida in 1979. He was already divorced from their mother, and in his will he left half his property to his new wife, Christiane Vinette, and the other half in equal shares to his three children Nicole, Carole and Marc Bougie. The latter accepted their father's estate subject to inventory. The principal heir, Christiane Vinette, who lives in the U.S., was appointed executrix of the Bougie estate and instructed solicitors in Montreal to carry out this mandate.

In 1983 the Department of National Revenue ("the Department"), as a consequence of an internal audit of the affairs of the late Jean Bougie, found that his tax return for the 1978 taxation year had never been filed. A department auditor, Michel Coutu, then contacted Gilles Blondin, who was acting for the executrix, and he undertook to file the tax return for 1978 by at the latest August 18, 1983. The evidence showed that the sum of $25,000 had in fact been set aside to cover payment of the tax. In August 1983, without proof of the existence of a clearance certificate, counsel for the executrix sent Mr. Valiquette, then acting for the Bougie children, the sum of $60,000 for distribution. A cheque for $17,696.71 was in fact sent to each of the three children on August 24, 1983.

On December 28, 1983 the Department concluded the audit of the estate's affairs and, as the 1978 taxation return had not been filed, a notice of assessment for the 1978 taxation year was accordingly issued in the amount of $45,846.32, resulting from a taxable capital gain amounting to $98,114. It should be noted that no notice of objection or appeal was ever filed against the assessment under the Income Tax Act. Eventually, counsel for the executrix handling the case ceased to do so and was replaced by André Jacques Gauthier. The evidence showed that Mr. Gauthier made requests to the Department for information on the amount of the notice of assessment for 1978. He took steps to file a tax return for 1979. A nil amount of tax was established for this taxation year (D-24) , and shortly thereafter counsel for the executrix asked that a clearance certificate be issued for the Bougie estate. According to the testimony of Richard Harriman, enquiries officer, however, it appears that on November 27, 1985 he informed counsel for the executrix that the late Jean Bougie's tax return for the 1978 taxation year had still not been filed. On December 2, 1985, the same investigator said he also warned counsel for the Bougie children that the latter would henceforth be held responsible for their share of the tax debt of the deceased.

On December 30, 1985 a clearance certificate was issued by the Department. Counsel for the parties quickly acted to release money still held in trust, and each of the children thus received the sum of $3,681.17. In his letter to counsel for the plaintiffs, counsel for the executrix wrote (D-11):

It should be noted that the clearance certificate, a copy of which is enclosed, is absolute as written, and as such will cover all subsequent dispositions of the assets of the Bougie estate and the last disposition which we have still to make as aforesaid. We accordingly consider that we are entitled to proceed forthwith to the final disposition of the Bougie estate, without any need for either side to inquire into the validity of the issuance by Revenue Canada, Taxation of the said clearance certificate and run the risk of giving the latter's officers the mistaken impression that it was not valid, especially in view of the fact that we have already made a disposition of the estate's assets.

[Emphasis added.]

The tax recovery personnel soon found that this certificate was issued by mistake and investigator Harriman informed counsel for the plaintiff of this on January 13, 1986, before the final issuing of the cheques for $3,681.17 to each of the children, which took place on January 21, 1986.

Recovery proceedings were begun against each of the plaintiffs, by means of seizure or by an agreement for payment. Naturally, these payments were not made willingly. The plaintiffs, losing patience as a consequence of repeated demands for payment or administrative seizures, finally decided to dispute the claims for reimbursement.

All these facts are clearly apparent from the documentary evidence and testimony presented to the Court.

The record further indicates that on December 17, 1986 the Department filed a certificate pursuant to section 223 of the Income Tax Act against Nicole Bougie. An attempt was subsequently made to obtain a certificate imposing a charge on land, and for this purpose an order to appear was served on Nicole Bougie. Counsel for the plaintiff challenged this application, relying on the clearance certificate issued in December 1985. In an order elated March 27, 1987 the prothonotary referred to the Court the application for an order absolute imposing a charge on land. In view of the complexity of the matter and the need to call witnesses, counsel for the parties agreed to proceed by a declaratory action, and this was done by each of the plaintiffs in March 1988. The cases were joined by order of the Court.

Conclusions Sought

In their pleadings plaintiffs respectively sought the following conclusions:

(1) declare that all payments made to the Minister of National Revenue by each of them were made subject to their right to challenge the validity of the claim;

(2) declare to be a good and valid release clearance certificate No. 253,751D;

(3) declare void ab initio and absolutely null the certificate filed and registered pursuant to section 223 of the Income Tax Act, and order that it be struck out for all legal purposes;

(4) simply dismiss the application of Her Majesty the Queen for an order absolute imposing a charge on land;

(5) direct the Minister of National Revenue to return to them any money paid by them, in capital and interest;

(6) reserve all their other rights and remedies.

It is worth noting that conclusions (3) and (4) have no bearing on the case of Marc Bougie, as only his sister Nicole was the subject of a judgment and an application to impose a charge on land.

The chief argument put forward by the plaintiffs is that as the clearance certificate issued on December 30, 1985 was a valid release, the claims for payment and administrative seizures subsequently made against them by the Department are improper and illegal. Nicole Bougie further argued that the certificate which the Department caused to be registered against her on December 17, 1986, pursuant to section 223 of the Income Tax Act, is void together with the application to impose a charge on land.

For its part, the Department maintained that this clearance certificate was clearly issued by mistake, that the parties concerned were fully aware of the existence of the notice of assessment for 1978, and that in any case the plaintiffs were responsible for the tax debt.

As I indicated in discussing the facts, I consider that the evidence amply demonstrated that the clearance certificate was issued by mistake. First, the Department's employees were called to explain the circumstances surrounding the issuance of the clearance certificate, and in particular the document purporting to recommend this clearance. Second, the evidence showed that in December 1985 a substantial amount of tax remained unpaid under the notice of assessment for 1978 and the recovery section was in touch with counsel for both the executrix and the plaintiffs to recover the amounts owed by the estate. As indicated above, even counsel for the executrix seem to have been surprised and to have informed counsel for the plaintiffs accordingly, as appears from the extract from the letter cited above.

A clearance certificate cannot be proof of payment, as counsel for the plaintiffs argued: at most, it can be an out-of-court admission of payment. In Corbin v. Jutras, [1986] R.D.J. 66, the Quebec Court of Appeal held that an out- of-court admission could only be revoked by proof of an error of fact on the part of its maker. The Court is satisfied that such evidence was presented.

The second argument put forward by the plaintiffs is that, if the clearance certificate is found to be invalid, the plaintiffs should not be held liable for the debt in consequence, since under subsections 159(2) and (3) of the Income Tax Act, the executrix could not proceed to the distribution of this money before obtaining the clearance certificate, and failing that, she should be made personally liable for unpaid taxes, interest and penalties; as the plaintiffs only accepted the estate subject to inventory and have only the status of heirs, they argued, they are not liable for the tax debt.

In my opinion this argument cannot be allowed. The relevant sections of the Income Tax Act read as follows:

159(2) Certificate before distribution. — Every person (other than a trustee in bankruptcy) who is an assignee, liquidator, receiver, receiver-manager, administrator, executor or any other like person (in this section referred to as the "responsible representative") administering, winding-up, controlling or otherwise dealing with a property, business or estate of another person, before distributing to one or more persons any property over which he has control in his capacity as the responsible representative, shall obtain a certificate from the Minister certifying that all amounts

(a) for which any taxpayer is liable under this Act in respect of the taxation year

in which the distribution is made, or any preceding taxation year, and

(b) for the payment of which the responsible representative is or can reasonably be expected to become liable in his capacity as the responsible representative

have been paid or that security for the payment thereof has been accepted by the Minister.

(3) Personal liability—Where a responsible representative distributes to one or more persons property over which he has control in his capacity as the responsible representative without obtaining a certificate under subsection (2) in respect of the amounts referred to in that subsection, the responsible representative is personally liable for the payment of those amounts to the extent of the value of the property distributed and the Minister may assess the responsible representative therefor in the same manner and with the same effect as an assessment made under section 152.

Reading these subsections suggests that the responsibility for obtaining a certificate rests on the person liquidating the estate, whether an heir or not. The mere fact of being an heir does not in itself entail any responsibility for obtaining the certificate. Nothing in subsections 159(2) and (3) imposes on the heir a responsibility greater than that which he incurs under the Civil Code for the deceased's debts. Conversely, an executrix who is not an heir and who receives nothing from the estate may still become liable for the total tax debt if he distributes the money without obtaining the certificate. In short, the clearance certificate concerns only the executor: it does not increase the heir's liability or reduce it in any way whatsoever.

In Boger v. M.N.R., [1989] 1 C.T.C. 2110; 89 D.T.C. 15 at 2117-18 (D.T.C. 21), Judge Rip of the Tax Court of Canada said the following:

The certificate contemplated by subsection 159(2), referred to as a clearance certificate, may be issued to a person who is an assignee, liquidator, receiver, receiver-manager, administrator, executor or any like person (referred to as the “responsible representative") administering, winding up, controlling or otherwise dealing with a property, business or estate of another person prior to its distribution. The certificate is not issued to the estate, for example. The issuance of the clearance certificate to a responsible representative does not free the estate, business or property of its obligation under the Act; if a clearance certificate is not obtained by the responsible representative and he distributes property to one or more persons under his control as responsible representative, he becomes personally liable for the payments of amounts of tax to the extent of the value of the property distributed (vide subsection 159(3)).

The clearance certificate is addressed to the responsible representative and any statement by the Minister contained in the certificate is made to the responsible representative with respect to his liability in his personal capacity under the Act. The issue of a clearance certificate does not preclude the Minister from going against a beneficiary to whom property of the estate, for example, was distributed, or if property remains in the hands of the responsible representative, against the responsible representative in such capacity. The obtention of a clearance certificate by a legal representative does not free the Estate from its liability under the Act.

[Emphasis added.]

Failure to observe subsection 159(2) thus results in a "punishment" being imposed on the executor, but does not thereby release the heirs of their liability for the debts of the deceased. The purpose of the clearance certificate is only to release the executrix, as such, not the heirs. In this connection, the "revocation of clearance certificate” (D-16) signed on February 17, 1988 in no way benefits the plaintiffs at bar, who cannot rely on it. The plaintiffs are accordingly subject to the tax obligations arising out of their father's estate.

One brief comment before concluding: it is possible that the plaintiffs could bring an action for damages or for an accounting against the executrix to require reimbursement of her share of this tax debt, but that is a completely different action, of a purely civil nature and subject to the rules of prescription, which is not within the jurisdiction of this Court.

For these reasons, the action for a declaratory judgment, which is in fact a challenge to an order absolute imposing a charge on land, is dismissed without costs.

Action dismissed.