John E. Wiebe v. Minister of National Revenue, [1988] 1 CTC 2308, 88 DTC 1234

Goetz, T.C.J.: —[Orally]: This is a notice of motion by the respondent to amend his reply to notice of appeal.

As agreed at the outset of the hearing, the decision on the above-mentioned motion will apply to the motion filed in the appeal of Jacob Wiebe (83-361(1T)).

The taxpayer was reassessed the amounts of $1,402.00, $9,643.63 and $7,598.31 for his 1977, 1978 and 1979 taxation years respectively. The taxpayer objected and the reassessments were confirmed on June 8, 1983. The base of the assessments were purportedly in accordance with the provisions of paragraph 15(1)(b) of the Income Tax Act (the Act), namely, the appropriation of funds or property of the corporation to or for the benefit of a shareholder.

The taxpayer instituted an appeal with this Court and the Minister in his reply pleaded and relied upon the fact that the appellant had received a benefit as a shareholder from Mardak Investments Ltd. ("Mardak"). In actual fact, the appellant is alleged not to be a shareholder for the relevant taxation years, and counsel for the appellant so advised counsel for the Minister to this effect on or about September 7, 1987.

The hearing date was set for September 15, 1987, and the matter came before Kempo, T.C.J. on that date when counsel for the Minister by way of notice of motion made application to amend the reply to notice of appeal as follows in paragraph 5 of the amended reply to notice of appeal:

5. In the further alternative he states that:

(a) the Appellant held, during the years in question, an office or employment with Mardak Investments Ltd.;

(b) the payment by Mardak Investments Ltd. of the said premiums constituted the value of benefits received or enjoyed by the Appellant in the years in operation, in respect of the course of, or by virtue of his office or employment with Mardak Investments Ltd.

The application was adjourned to this sitting of the Court. An affidavit filed in support of the motion deposed that the appellant’s accountant dealing with Revenue Canada supplied certain documents namely, "Shareholder's loan working paper files’, identifying the appellant as a shareholder of Mardak in the operative taxation years. The issue of shareholdership was, not as such, raised in the notice of appeal.

The situation is simply this: the reassessments imposed a tax of $1,402.00, $9,643.63 and $7,598.31 for the taxpayer's 1977, 1978 and 1979 taxation years on the basis that the appellant was a shareholder of Mardak and as such received a benefit from Mardak, paying certain insurance premiums on an insurance policy, he, the appellant, had taken out on the life of his brother, Jacob Wiebe.

The Minister now seeks to impose the same tax liability on the appellant, not only on the basis of section 15 of the Income Tax Act, but, alternatively, on the basis of section 6 of the Act as an employee of Mardak. The basis and reasons for imposing the tax have changed, but not the amount of the tax reassessed.

Counsel for the Minister cited the following cases for consideration by the Court:

1. Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182 (S.C.C.)

2. Midwest Oil Production Ltd. v. The Queen, [1982] C.T.C. 107; 82 D.T.C. 6092 (F.C.T.D.)

3. Ottawa Valley Power Company v. M.N.R., [1969] C.T.C. 242; 69 D.T.C. 5166 (Ex. Ct.)

4. Crane Ltd. v. M.N.R., [1960] C.T.C. 371; 60 D.T.C. 1248 (Ex. Ct.)

5. Metcalfe v. Metcalfe Farms Ltd. (1982), 17 Man. R. (2d) 333 (Q.B.)

6. M.N.R. v. Beatrice Minden, [1962] C.T.C. 79; 62 D.T.C. 1044;

7. The Queen v. The Consumers' Gas Company Ltd., [1987] 1 C.T.C. 79; 87 D.T.C. 5008 (F.C.A.)

8. Zakoor v. M.N.R., [1971] Tax ABC 1118; 71 D.T.C. 745 (T.A.B.)

9. Harris v. M.N.R., [1964] C.T.C. 562; 64 D.T.C. 5332 (Ex. Ct.)

10. Vineland Quarries and Crushed Stone Limited v. M.N.R., [1970] C.T.C. 12 at 15-16; 70 D.T.C. 6043 at 6045-6046 (Ex. Ct.)

11. Pellizzari v. M.N.R., [1987] 1 C.T.C. 2106; 87 D.T.C. 56 (T.C.C.)

12. Shiewitz v. M.N.R., [1979] C.T.C. 2291; 79 D.T.C. 340 (T.R.B.)

13. The Queen v. W.H. Violette Limited, [1988] 1 C.T.C. 12; 88 D.T.C. 6025 (F.C.T.D.)

14. M.N.R. v. Pillsbury Holdings Limited, [1964] C.T.C. 294; 64 D.T.C. 5184

15. Neogleous et al. v. Toffolon (No. 2) (1977), 4 C.P.C. 192 (Ont. H.C.)

Counsel for the appellant cited the following cases:

1. CCH Canadian Tax Reports, Volume 5, pp. 22,361-22,364

2. Johnston v. M.N.R., [1948] C.T.C. 195; 3 D.T.C. 1182 (S.C.C.)

3. Ocean View Development Limited v. M.N.R., 15 Tax ABC 204; 56 D.T.C. 286 (T.A.B.)

4. Brown v. M.N.R., 35 Tax ABC 197; 64 D.T.C. 316 (T.A.B.)

5. Chambers v. M.N.R., 36 Tax ABC 242; 64 D.T.C. 623 (T.A.B.)

6. The Queen v. The Consumers' Gas Company Ltd. (No.1), [1984] C.T.C. 83; 84 D.T.C. 6058 (F.C.A.)

7. The Consumers' Gas Company Ltd. v. The Queen (No. 2), [1986] 1 C.T.C. 380; 86 D.T.C. 380 (F.C.T.D.)

The most relevant of these cases I find is the case of The Queen v. The Consumers' Gas Company Ltd., [1984] C.T.C. 83; 84 D.T.C. 6058. To expedite this ruling I will read a portion of the headnote [D.T.C. 6058]:

. . . The taxpayer calculated the undepreciated capital cost of its relocated pipelines without taking into account the customer reimbursements. The Minister took the position that the reimbursed costs could not be added to the undepreciated capital cost and accordingly disallowed a portion of the capital cost allowance claimed by the taxpayer. The taxpayer's appeal to the Federal Court-Trial Division (82 D.T.C. 6300) was allowed and the Crown appealed to the Federal Court of Appeal. The Crown's position now was that the gross expenditures could be included in the undepreciated capital cost but that the reimbursements were to be treated as income in the year of receipt.

The Crown's appeal was dismissed.

The Court found that no reasonable reader of the pleadings delivered by the Crown in the Trial Division would anticipate that if the Court were to find in favour of the taxpayer on the undepreciated capital cost issue that the Crown's position would be that the reimbursements were on income account although the expenditure would be for capital account. Accordingly, the trial judge should not have permitted that argument to be advanced nor to have made a finding on the accounting treatment to be accorded the receipt of the reimbursements for tax purposes; . . . The Court found, therefore, that the issue raised by the Crown as to the character of the reimbursements was not properly raised and ought not to be considered.

Mrs. Gorlich, counsel for the appellant, referred the Court to certain passages of this judgment. First, at page 88 (D.T.C. 6063), which I will read:

. . . Having so pleaded, it seems to me that if the Minister intended to put in issue the question of how the receipt of the reimbursements should be treated for tax purposes, (assuming that the respondent was found to be correct in relying on the Canadian Pacific case), she should have done so in clear and unmistakable terms to enable the respondent to know the case it had to meet and to adduce such evidence as it deemed necessary to meet that contention. As earlier stated, I am of the opinion that the appellant failed to do so.

Quite aside from any rules of court in respect of pleadings and the necessity for pleading particular defences, it is trite to say that one of the purposes of a statement of defence is to raise all grounds of defence which, if not raised, would be likely to take the opposite party by surprise.

Further, at page 90 (D.T.C. 6064), Mrs. Gorlich referred me, among other things, in particular to these words of Urie, J. in Kingsdale Securities Co. Ltd. v. M.N.R., [1975] C.T.C. 10 at 18; 74 D.T.C. 6674 at 6680-81:

In my view, the appellant having proceeded to trial on the basis of the validity of certain documents, ought not to be permitted to invite either the trial judge or this court to consider the case on an entirely different basis.

Mrs. Gorlick further argued that the Minister in asking for the amendment is seeking to have new assessments by the Crown and the Minister cannot appeal against his own assessments and, in any event, the new assessments would be statute-barred.

The Vineland Quarries case (supra) referred to me by counsel for the Crown is to me the most helpful in making my decision. The headnote of that case fairly well sets out the issues before the Court. I read from it:

. . . In the present case, the Minister sought to amend his reply to the notice of appeal to put in issue the deductions under regulation 1100(1)(g), on the basis that if the court should hold that the appellant was entitled to regulation 1100(1)(n) deductions because its business was not principally mining, then the appellant was not entitled to regulation 11(1)(g) (sic) deductions for operating an 'industrial mineral mine’. . . . and that to allow the Minister's motion was to permit the Minister to appeal from his own assessment.

Now, the Minister’s motion was allowed in this case, and

. . . the point was arguable and the Minister was entitled to a decision of the trial judge.

That was the alternative plea.

It was true that the Minister could not appeal from his own assessment; however, the precedents showed that the basic issue in a taxpayer's appeal is the amount of the assessment, not the correctness of reasons assigned by the Minister for making it.

At page 15 (D.T.C. 6045) of that decision, Cattanach, J. said:

It was also the position taken by Counsel for the appellant that the Minister cannot appeal from his own assessment with which position I am in complete agreement. He said that when the Minister seeks to amend his Reply to the Notice of Appeal to raise an alternative plea, he is, in effect, launching a cross-appeal to his own assessment. I am not in agreement with this latter submission.

As I understand the basis of an appeal from an assessment by the Minister, it is an appeal against the amount of the assessment.

Here the Minister does not seek to increase the amount of the assessment. He seeks to maintain the assessment at the amount he assessed. However by his amendment to his Reply he seeks to ensure that, if the Court should find that the basis of his assessment was wrong, he might then, pursuant to reference back, assess a considerably lesser amount on what he forsees the Court might say is the correct basis of assessment.

Cattanach, J. refers to the case of M.N.R. v. Beatrice Minden, [1962] C.T.C. 79; 62 D.T.C. 1044, a decision of Thorson, P. (the former President of the Exchequer Court) who says at page 89 (D.T.C. 1050):

. . . In considering an appeal from an income tax assessment the Court is concerned with the validity of the assessment, not the correctness of the reasons assigned by the Minister for making it. An assessment may be valid although the reason assigned by the Minister for making it may be erroneous. This has been abundantly established.

He makes a specific reference:

In effect the Minister says that for a reason he thinks to be correct he assessed the appellant to income tax at "X" dollars. The appellant says that the reason assigned by the Minister was incorrect. The Minister then says if the Court should hold the basis for his assessment of "X" dollars is erroneous, then for what the Court might find to be the correct reason, he would assess the appellant at "X" minus "Y" dollars.

The assessments remain the same in this case, but the reasons and premise upon which the assessments are based have changed, hence the request for the amendment. The appellant has not been unduly prejudiced, and has due notice of what faces him at trial. Having regard to how the request for the amendment came about, namely, the gratuitous warning to the Minister given by Mrs. Gorlich, counsel for the appellant, I would award her costs of the day for the appearance before Kempo, T.C.J. on September 15, 1987, and for her appearance before me and these costs will be costs in the cause.

The motion is allowed and, as agreed at the outset of the hearing, this decision will apply also to the motion in the appeal of Jacob Wiebe (83-361(IT)).

Motion allowed.