Gregory Taylor v. Minister of National Revenue, [1986] 1 CTC 2313, 86 DTC 1232

Rip, T.C.J.:—Mr. Gregory Taylor, the appellant, appeals against a notice of assessment for tax issued by the Minister of National Revenue, the respondent, on January 22, 1982. The notation on the notice of assessment reads as follows:

This assessment is issued pursuant to the provisions of Section 152(4) of the Income Tax Act. As Administrator of the Estate of the late W. P. Studdert, also known as William P. Studdert, also known as Bill Studdert, default occurred under Section 159(3) of the Income Tax Act. Interest will be charged as prescribed under subsection 161(1) of the Income Tax Act on the unpaid tax.

The parties through counsel filed a statement of agreed facts* [1] which is set forth as follows:

The parties agree as follows:

1. William P. Studdert, of Anaconda, Montana, who died on November 25, 1971, was a 50% partner with another United States resident, F. E. Skelton, in the Gang Ranch, located at Ashcroft, British Columbia.

2. Rose McEwan, of Anaconda, Montana, was the Executrix and one of the beneficiaries under the Will of William P. Studdert.

3. On July 6, 1972 the Appellant was appointed as Administrator with Will Annexed of the Estate of William P. Studdert (hereinafter called “the Estate”).

4. Nil income was reported by the Estate with respect to its 1972 and 1973 taxation years and by Notices of Assessment, dated August 8, 1977, nil tax was assessed with respect to those years. Copies of those Assessments are attached as Exhibits “A” and “B” to this Statement.

5. On or about July 26, 1973, the Appellant remitted an amount of $127,855.74 of the Estate’s funds to Rose McEwan, the Executrix of the Estate (hereinafter referred to as “the Executrix”).

6. By Notices, dated August 8, 1977, the Estate was assessed for taxes, late filing penalties and interest for 1974 in the amount of $148,198.41 and for 1975 in the amount of $17,373.12. Copies of those Assessments are attached as Exhibits “C” and “D” to this Statement.

7. On or about May 30, 1978, the Appellant remitted an amount of $49,194.33 of the Estate’s funds to the Executrix. The cheque and a copy of the covering letter sent by the Appellant with the cheque for $49,194.33 are attached as Exhibit “E” to this Statement.

8. The Appellant filed income tax returns as Administrator of the Estate for the 1975 to 1979 taxation years on February 12, 1980, indicating, inter alia, nil taxable income for the Estate for the 1975 taxation year.

9. By Notice dated April 16, 1980, the Respondent reassessed the Estate by de- I leting all taxes, penalties and interest assessed with respect to the 1975 taxation

year. A copy of the Notice of Reassessment is attached as Exhibit “F” to this Statement.

10. By Notice dated February 14, 1980, the Estate was assessed for tax and interest in the amount of $150,549.98 for the 1979 taxation year. A copy of the Notice of Assessment is attached as Exhibit “G” to this Statement.

11. On or about July 18, 1980, all taxes, penalties and interest owing by the Estate with respect to the 1974 taxation year were paid to the Respondent on behalf of the Estate. Copies of the letter to Revenue Canada enclosing the payment, and from Revenue Canada acknowledging the payment are attached as exhibits “H” and “I” to this Statement.

12. By Notice dated January 22, 1982 the Respondent assessed the Appellant , pursuant to Section 159 of the Income Tax Act for tax in the amount of $177,050.00

which was the total amount of the remittances made by the Appellant to the Executrix. A copy of the Assessment is attached as Exhibit “J" to this Statement.

13. As of January 22, 1982, the Estate had no assets in Canada and an amount in excess of $177,050.70 in taxes and interest was assessed to the Estate but remained unpaid. That amount arose mainly from the assessment of the 1979 taxation year plus interest accrued.

14. Tax and interest in the amount of $251,451.80 is currently outstanding by the Estate. This amount arises mainly from the assessment of the 1979 taxation year plus interest accrued.

15. The Appellant did not, prior to distributing such amounts, as set out in paragraphs 5 and 7, to the Executrix, obtain a certificate from the Respondent certifying that taxes, interest and penalties which had been assessed under the Income Tax Act and which are payable out of the funds of the Estate had been paid, or that security for the payment thereof had been accepted by the Respondent.

16. As there were no amounts of taxes, penalties, and interest assessed and unpaid as of July 26, 1973 when the Appellant remitted $127,855.74 of the Estate’s funds to the Executrix, the Appellant was not liable pursuant to subsection 159(3) of the Act with respect to that amount of $127,855.74.

17. The amount in issue should therefore be reduced from $177,050.70 to $49,194.33.

Approved and Consented to:

DATED at the City of Vancouver, in the Province of British Columbia, this 20th day of January, 1986.

(signed)

Jeanne Watchuk

Solicitor for the Appellant

DATED at the City of Vancouver, in the province of British Columbia, this 21st day of January, 1986.

(signed)

Ingeborg E. Lloyd

Solicitor for the Respondent

The Minister’s position is that subsection 159(3) provides that notwithstanding any subsequent events such as payments of tax assessments or the issuance of reassessments reducing the quantum of the original assessment the person described in subsection 159(2) (hereinafter referred to as the “administrator") who distributes property under his control without obtaining the certificate required by subsection 159(2) continues to be personally liable for an amount equal to the unpaid taxes, interest and penalties assessed under the Income Tax Act (“Act") and chargeable or payable out of the property under his control at time of distribution.

The appellant’s argument is simply that if the debt owing by the appellant to the respondent for the Estate’s taxes, interest and penalties is paid, or if the liability is reduced by a reassessment the payment or reassessment extinguishes the appellant's debt.

Subsections 159(1), (2) and (3) of the Act, as they read in 1978, read as follows:

159(1) Every person required by section 150 to file a return of the income of any other person for a taxation year shall, within 30 days from the day of mailing of the notice of assessment, pay all taxes, penalties and interest payable by or in respect of that person to the extent that he has or had, at any time since the taxation year, in his possession or control property belonging to that person or his

estate and shall thereupon be deemed to have made that payment on behalf of the taxpayer.

159(2) Every assignee, liquidator, administrator, executor and other like person, other than a trustee in bankruptcy, before distributing any property under his control, shall obtain a certificate from the Minister certifying that taxes, interest or penalties that have been assessed under this Act and are chargeable against or payable out of the property have been paid or that security for the payment thereof has, in accordance with subsection 220(4), been accepted by the Minister.

159(3) Distribution of property without a certificate required by subsection (2) renders the person required to obtain the certificate personally liable for the unpaid taxes, interest and penalties.

The purpose of subsections 159(2) and (3) is to facilitate collection of taxes, interest and penalties by obliging the administrator of property to obtain a certificate from the Minister that all taxes, interest and penalties have been paid before he distributes the property; an administrator who contravenes subsection 159(2) by a premature distribution incurs personal liability for the unpaid taxes, interest and penalties (vide H. J. Flemming Estate v. M.N.R., [1983] C.T.C. 321 at 323; 83 D.T.C. 5329 at 5331).

Subsections 159(2) and (3) of the Act are essentially penal in nature and must be strictly construed (vide Flemming (supra) at 327-28 D.T.C. 5335). But although these subsections are penal in nature, because they impose a liability for taxes as a result of a default, the subsections do not impose a penalty as such: subsections 159(2) and (3) make the administrator personally liable for unpaid taxes, interest and penalties already imposed when before his default he personally had no such liability. Subsections 159(2) and (3) are not similar, for example, to subsection 227(9) of the Act which imposes a penalty. (See Dubé, J.’s reasons for judgment in Electrocan Systems Ltd. v. The Queen, [1986] 1 C.T.C. 269; 86 D.T.C. 6089; the reasons of this Court are reported in [1984] C.T.C. 2349; 84 D.T.C. 1292.)

The liability imposed by subsection 159(3) is created as a result of the omission on the part of the administrator in obtaining the certificate. However, the liability so created is not an assessment of tax, interest and penalty but the payment of a quantum of tax, interest and penalties that has not been paid at the time of the distribution of the property. No penalty is imposed by subsections 159(2) and (3); the estate of the administrator who distributed the property becomes an additional asset against whom the Minister may enforce payment.

Counsel for the Minister argues that the Court must look only at the time of distribution to determine the quantum of the administrator's liability. The Court, she suggests, is precluded from considering any subsequent events. In other words, if the Estate subsequently pays the unpaid tax, interest and penalty or if Revenue Canada reassesses the Estate an amount of tax which is less than the previous assessment, the administrator’s liability is not affected. I find this difficult to accept. As I have already stated, Parliament enacted subsections 159(2) and (3) to facilitate collection of unpaid taxes, interest and penalties, not to impose any additional taxes, interest and pe- :‘ nalties. Subsection 159(3) does not create a debt that was not in existence

prior to the distribution; the subsection makes the administrator personally liable for unpaid taxes, interest and penalties so long as they remain unpaid. But once paid, the taxes, interest and penalties cease to be a personal liability of the administrator. To interpret subsections 159(2) and (3) otherwise would mean the Minister has the right to enforce payment twice for the same debt; nowhere does the taxing statute even contemplate such a I procedure.

In The Bank of New York v. M.N.R., [1975] C.T.C. 497; 75 D.T.C. 5340, the Federal Court of Appeal was called upon to determine whether the Bank of New York, a former executor of an estate, was personally liable to pay all the duties of the estate because when it was an executor it transferred property of the deceased to an heir without first paying all duties assessed and levied under the Dominion Succession Duty Act, R.S.C. 1952, c. 89 (as amended). At the same time the executors of the estate appealed an assessment against the estate for succession duties; one of the issues in the executors' appeal was the value for duty of shares of two corporations and whether warrants to purchase shares of a corporation owned by the deceased immediately prior to his death and physically located in New York State had a situs in Canada. Mr. Justice Ryan wrote at 502 (D.T.C. 5344) that: “Obviously the amount for which The Bank of New York was personally liable by virtue of section 49 of the Dominion Succession Duty Act, if liable at all, was dependent on the determination of these very issues.” (Emphasis added.) The parties in the appeal of The Bank of New York agreed that the outcome of the executors' appeal in respect of the two issues and the resultant determination of the amount of succession duties payable in Canada would be accepted as determinative of those issues with respect to the personal liability of The Bank of New York. The Court approved this agreement in hearing the appeal. The Minister's position that a subsequent reassessment of tax, interest and penalties does not affect the administrator's personal liability is clearly wrong.

The Federal Court of Appeal dismissed The Bank of New York's appeal. There is nothing in the reasons of the Federal Court, Trial Division ([1973] C.T.C. 636; 73 D.T.C. 5471), or the Federal Court of Appeal to indicate that payment of succession duties had been made and therefore The Bank of New York should be relieved of liability. The issues before the trial judge and the judges under appeal were not in issue in the case at bar.

Similarly any payment by the Estate should reduce the amount of “unpaid" taxes, interest and penalty and the personal' liability of the administrator. In a question from me, counsel for the Minister replied that in cases when the administrator pays the amount of tax, interest and penalty as a result of his liability under subsection 159(3) the practice of the Minister is to credit the account of the Estate with the payment; the assessment of the Estate is considered by the Minister to be paid. This is proper.

Whether the administrator continues to be liable after payment by the Estate of the “unpaid" taxes, interest and penalty depends upon the words of the legislation imposing the liability. In Highway Sawmills Limited v. M.N.R., [1966] C.T.C. 150; 66 D.T.C. 5116, Mr. Justice Cartwright of the Supreme Court of Canada wrote, at 157-58 (D.T.C. 5120):

Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.

I have already stated that the scheme of subsections 159(2) and (3) is to facilitate collection of money due to the respondent, not to assess an additional amount of tax. While it is trite law that there is no equity in taxing statutes, the statute should be administered with a modicum of common sense whenever possible. It is clear that Parliament intended to reduce for unpaid tax, interest and penalty the administrator's liability in proportion to any payment of such taxes, interest and penalty paid by the Estate. The respondent's officials are expected to administer the Act with some sense of proportion and not look to squeeze tax where none exists.

Counsel for the Minister also submitted an alternative argument that in respect of a distribution made in 1978 without receipt of a certificate issued under subsection 159(2), the Minister's right to enforce payment against the administrator lies not in subsection 159(3) but in section 222 of the Act. Because I have decided this appeal on her primary submission there is no need to consider counsel's alternative argument.

The appeal will be allowed with costs and the assessment vacated.

Appeal allowed.