Grant Wilson v. Her Majesty the Queen, [1996] 3 CTC 203, 96 DTC 6452

Simpson J.: — Grant Wilson (the “Taxpayer”) appeals a reassessment of his 1978 Income Tax Return on the basis that the Minister of National Revenue (“Revenue Canada”) failed to reassess with due dispatch following a notice of objection as required by subsection 165(3) of the Income Tax Act, S.C. 1970-71-72, c. 63 (the “Act”). Pursuant to subsection 175(3) of the Act, as it was then, this appeal is deemed to be an action in this Court.

Background

There was a dispute about the full deductibility of the taxpayer’s farm losses in 1976 and 1977. Revenue Canada took the position that the losses claimed were restricted by the operation of section 31 of the Act. This meant that, although the full amount of the Taxpayer’s farm losses could be used to reduce his farm income, only $5000 of the farm losses could be deducted from his non-farm income. The taxpayer appealed this assessment to the Federal Court (the “Appeal”).

By the time the taxpayer filed his income tax return for 1978, he was aware that Revenue Canada had restricted the farm losses claimed in 1976 and 1977. Accordingly, in computing his income for his 1978 tax return, he properly calculated a restricted farm loss carry-forward and deducted that amount from his farm income in 1978. The taxpayer’s 1978 income tax return showed net Federal Tax Payable of $137,603.00 and Ontario Tax Payable of $60,765.00. As well, it showed a profit from the taxpayer’s farm of $44,420 and a restricted farm loss carry forward of $44,420. This meant that the Taxpayer’s net income from farming was nil.

In its Notice of Assessment form dated July 17, 1979 (the “Assessment Form”) which related to the taxpayer’s 1978 income tax return, Revenue Canada accepted the federal and provincial tax figures of $137,602.75 and $60,765.25 which the Taxpayer had declared on his 1978 return. However, under the heading “Statement of Account”, the Assessment Form showed both a current year balance of $91,254.37 and a previous balance of $64,410.00. This produced a total unpaid balance of $156,664.37.

The taxpayer filed a Notice of Objection for his 1978 taxation year (the “First Objection”). The First Objection was dated October 9, 1979 and it read:

The taxpayer has been assessed by the Minister of National Revenue in respect of the Returns of Income filed by the taxpayer for taxation years 1976 and 1977, both of which assessments are objected to and appealed from. The Notice of Assessment dated July 17th, 1979, in respect of taxation year 1978, indicates that the Federal and Provincial taxes assessed are as declared by the Taxpayer, but alleges an outstanding unpaid balance of taxes in the amount of $156,664.37, which amount is disputed and contested, both as to quantum and as to basis of assessments.

On cross-examination, the taxpayer admitted that the substance of the First Objection to the figure of $156,664.37 had nothing to do with his 1978 tax year. Rather, the First Objection related to matters in earlier years which were already the subject of objections and appeals.

After the First Objection, no action was taken by Revenue Canada. It did not ask the taxpayer for a waiver for 1978 and it did not correspond with him about the handling of his First Objection. On the other hand, the taxpayer never complained that he had received no response to his First Objection and he did not file an appeal pursuant to subsection 172(2) of the Act. [1] As well, there was no evidence that the taxpayer was prejudiced by Revenue Canada’s inaction.

The Minister of National Revenue is under a duty to respond to a notice of objection “with all due dispatch”. In this regard, subsection 165(3) of the Act, as it was then, provided that:

On receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess

and he shall thereupon notify the taxpayer in writing of his action by registered mail.

Prior to any action being taken by Revenue Canada in response to the First Objection, the taxpayer’s Appeal concerning his 1976 and 1977 farm losses was heard by Associate Chief Justice Jerome and his decision was released on August 31, 1988 (the “Appeal Decision”). Jerome A.C.J. held that Revenue Canada had erred in its treatment of the farm losses. He ordered a reassessment on the basis that the taxpayer was entitled to deduct all his farm losses from all of his income in 1976 and 1977. This meant that the farm losses were not restricted and, significantly, that there were no restricted farm losses to carry forward and apply to the farm profit in the taxpayer’s 1978 income tax return.

More than nine years after the First Objection, and five months after the Appeal Decision, Revenue Canada responded to the First Objection with a Notice of Reassessment dated February 1, 1989 (the “Reassessment”). The Reassessment deleted the restricted farm loss carry forward of $44,420.00 because the Appeal Decision had allowed full farm losses in 1976 and 1977. This deletion had the effect of leaving the taxpayer with taxable farm income of $44,420.00 and meant that the taxpayer owed additional tax for 1978.

The paper trail ended with a second Notice of Objection dated April 20, 1989 (the “Second Objection”) in which the Taxpayer objected to the Reassessment primarily on the basis that it was invalid for being out of time. There was no issue before me about the accuracy of the $44,420.00 figure.

Finally, by way of background, Counsel for Revenue Canada submitted that his client’s Statement of Defence indicated that Revenue Canada thought it sensible to wait for the Appeal Decision before dealing with the First Objection (the “Explanation”). The Explanation is entirely reasonable and would have been acceptable, but for the fact that it has no evidentiary basis. During the trial, I asked counsel for Revenue Canada whether there would be evidence to support the Explanation. He replied that he could call a witness, but chose instead to rely on his Statement of Defence as the sole evidence of the Explanation.

If the taxpayer is successful in this appeal, his 1978 income tax return will stand as filed and as originally assessed. If that occurs, the practical result will be that the taxpayer will benefit twice from the same losses. He will have deducted them fully in 1976 and 1977 as a result of the Appeal Decision and he will have benefited a second time to the extent that a restricted farm loss carry forward of $44,420.00 is taken as a deduction in his 1978 income tax return.

The Issues

In my view, the threshold question is whether the First Objection is a nullity. Neither counsel addressed this issue directly at trial, but each did so at my request in subsequent written submissions. If the First Objection is a nullity, then the subsidiary question relates to the status of the Reassessment; in particular, is it out of time for being outside the four year limitation period which then applied under previous paragraph 152(4)(b) of the Act?

If the First Objection is not a nullity, it will be necessary to consider whether the pleadings are acceptable evidence of the Explanation. If a justification for the delay is not established, then the question of a remedy must be considered. One question will be whether an appeal is available in this case given Revenue Canada’s acceptance of the taxpayer’s 1978 taxes. If there is no right of appeal, the issue will be whether the Reassessment can be vacated in spite of subsection 152(3) of the Act. If an appeal is available, I will have to determine whether it is the taxpayer’s sole remedy.

Discussion

Assessment is not defined in the Act except to say that it includes a reassessment. The first question, therefore, is whether an assessment is the same as a notice of assessment. There is no doubt that, in common parlance, the two terms are used interchangeably. However, the notice of assessment form incorporates both Revenue Canada’s response to a taxpayer’s declared federal and provincial tax and a Statement of Account; the latter reflects the total due and may well include unpaid amounts from prior taxation years, the former is, in my view, the actual assessment.

The distinction between an assessment and a notice of assessment is not new. The point was dealt with in the context of whether an error in a notice of assessment form affected the assessment itself. The Court found that it did not because the two were different. Stephens v. R. (sub nom. Stephens v. Minister of National Revenue), (sub nom. Stephens Estate v. The Queen) [1984] C.T.C. 111, 84 D.T.C. 6114 (F.C.T.D.), affirmed [1987] 1 C.T.C. 88, 87 D.T.C. 5024 (F.C.A.).

The next question is whether the Notice of Objection for 1978, which takes no issue with the taxes declared and accepted by Revenue Canada in 1978, is a nullity such that it can be said to have never existed. The answer to this question must depend on whether the Notice of Objection is intended to be a response only to the assessment for 1978 or whether it properly responds to any items which appear on the notice of assessment form.

Section 165 of the Act, as it was in force in 1978, spoke of a taxpayer’s objection to an “assessment”. It also spoke of the notice of assessment separately from the assessment. I have, therefore, concluded that the right to object relates only to the assessment for a given year. It does not relate to every item on a notice of assessment form and, notably, does not relate to the balance due from prior years. In my view, an objection is only possible with respect to those figures which comprise the assessment.

I am reinforced in this view by two matters. The first is the fact that the Act places time limitaitons on objections. Subsection 165(1) provides that objections must be filed within 90 days of the mailing of the notice of assessment. If an objection, such as the First Objeciton in this case, could deal with prior years, then the limitations on objections could be defeated. The second matter is the case law which indicates that there is no appeal from a nil assessment. [2] In my view, it is logical that, if a taxpayer cannot appeal a nil assessment, he or she cannot object to such an assessment.

As noted above, the taxpayer has a nil assessment for 1978. His First Objection takes issue only with figures in the Statement of Account section on the Assessment Form. Further, he acknowledges that he has outstanding objections and appeals in respect of the earlier years covered by the Statement of Account.

In these circumstances, I have concluded that the taxpayer’s First Objection is a nullity. As such, it can be treated as if it does not exist. If that is the case, no right of appeal exists under section 169 of the Act because an appeal is only possible if a notice of objection has been filed. Further, if the First Objection is a nullity, the Act in 1978 provided that any reassessment by Revenue Canada should have been filed within four years of the original Assessment. The Reassessment in this case was, therefore, out of time and it is of no force and effect. [4] It, therefore, follows that no reassessments for 1978 were possible as of four years after the mailing of the assessment. Accordingly, the Taxpayer’s income tax return for 1978 stands as originally assessed.

Although this conclusion means that the Taxpayer will benefit twice from the same deductions, this state of affairs is the result of Revenue Canada’s failure to have the Taxpayer sign a waiver or, in the alternative, to reassess his 1978 income tax return in a timely manner.

Given this conclusion, it is not necessary to decide the issues which flow from a finding that the Notice of Objection is not a nullity. I will, however, indicate, by way of obiter dicta that, had I been required to consider whether the Explanation was adequately proved by statements in the Statement of Defence, I would have rejected the Explanation for lack of proof. It follows that I would not have relied on the decision of Bonner T.C.J. in Greco v. Minister of National Revenue, [1991] 2 C.T.C. 2384, 91 D.T.C. 1090 (T.C.C.) in which he accepted a pleading as evidence to explain an apparent lack of due dispatch.

The appeal will be allowed with costs on a party and party basis.

Appeal allowed.