Roselawn Investments Limited v. Minister of National Revenue, [1980] CTC 2316, 80 DTC 1271

M J Bonner:—In these appeals the appellant challenges the validity of reassessments of income tax for the 1970 and 1971 taxation years on the basis that they were made beyond the four year period named in section 53 of the Income Tax Act.* [1]

The reassessments were made by the respondent on August 31, 1976. At the hearing of the appeals the evidence entered by the appellant consisted of rough copies of each return and notices of assessment for the 1970 and 1971 taxation years respectively dated October 31,1971, and July 4, 1972. In addition copies of the returns as filed were forwarded to the Board pursuant to subsection 170(2) of the Act.

The respondent did not adduce any evidence at the hearing and thus did not try to rebut the presumption which arises by virtue of subsection 244(14) of the Act that the day of mailing of the prior assessments was the date which they bore. No suggestion was made that any waiver had been filed under section 152 of the Act, nor that there was any objection to a prior assessment outstanding at the time the reassessments under appeal were made.

The appellant’s position was that because it was proved that the reassessments in issue were each made more than four years after the date of mailing of the original assessments for the years, the burden shifted to the respondent to establish that the appellant or person filing the return had made a misrepresentation or committed fraud as set forth in subparagraph 152(4)(a)(i). The appellant relied on the decision of the Exchequer Court in MNR v Maurice Taylor, [1961] CTC 211: 62 DTC 1139.

The respondent’s position was that “the taxpayer has to establish that he is not guilty of any misrepresentation as per subsection 152(5) of the Income Tax Act— 152(5)(b)”. No authority was cited in support of this position. Further, the respondent’s counsel asserted that certain allegations in the notice of appeal came “very close to conceding that there was some misrepresentation”.

The reassessments in issue did not adjust income. The explanation form attached to them stated only that “You are being reassessed as an associated corporation.”.

The portion of the notice of appeal referred to by the respondent’s counsel was as follows:

The Minister has assessed this company as being associated with McKay Excavating Limited within the provisions of subsection 4 of section 39 and paragraph (a) of subsection (4) of section 46 of the Income Tax Act.

Subsection 4 of section 39 is applicable, however it is the contention of the officers of this company that paragraph (a) of subsection (4) of section 46 does not apply.

The principals and officers of the company relied on their accountants to file proper income tax returns and were not aware that any misrepresentations had been made. These principals and officers do not even understand the requirements of the Income Tax Act regarding associated companies.

It should be pointed out that a review of these files indicates that no officer of the company reviewed the 1970 and 1971 tax returns of Roselawn.

I do not think that subsection 152(5) has anything to do with the right to make the reassessments in issue in these appeals. That subsection, by its plain words, operates only to restrict the power of the Minister to include amounts in the computation of income. In making the reassessments in issue the Minister did not purport to adjust income. He did nothing more than recompute tax.

Next, I note that the quoted portion of the notice of appeal does not, on a fair reading, contain a clear admission that misrepresentations were made In any event, in paragraph 1 of the reply to the notice of appeal the respondent stated that he did not admit any of the allegations of fact contained in the notice of appeal. Thus, there is a basis in the evidence or otherwise on which any conclusion can be reached as to who were the shareholders of the appellant and McKay Excavating Limited during the relevant periods.

The position of the appellant is, in my view, correct. The Taylor case on which the appellant relied is authority for the proposition that the burden of establishing misrepresentation or fraud lies on the Minister in any appeal from an assessment made beyond the normal period, that is to say the period (now four years) within which the Minister may reassess at will. Although section 152 is not the same as either section 55 of the Income War Tax Act or subsection 42(4) of the 1948 Act, the differences are not material to the question where the onus lies. Common to both statutory provisions considered in the Taylor case and to the present section 152 is a restriction on the power of the Minister to reassess after the normal period to cases where the taxpayer (or person filing the return) has made a misrepresentation or committed fraud. It is that restriction which results in the imposition of the onus on the Minister.

The misrepresentation alleged by the Minister in this case arose, it was said, from the failure of the appellant in its returns to disclose that it was associated with McKay Excavating Limited. As noted previously, the Minister adduced no evidence to establish the identity, in fact, of the shareholders of the appellant and McKay. In the absence of such evidence it is impossible to determine whether the two companies were in fact associated, and thus the Minister has failed to discharge the onus.

The appeals are therefore allowed and the assessments are vacated.

Appeal allowed.