Grossman, Re, [1998] 4 CTC 197

Funduk, Registrar in Bankruptcy:

This is an application by Revenue Canada for an order, according to its notice of motion:

(a) directing that Her Majesty and Bryan Edward Grossman (“the Bankrupt”) proceed to the trial of an issue wherein Her Majesty shall be plaintiff and the Bankrupt shall be defendant, and the question to be tried therein shall be whether the Bankrupt knowingly, or under circumstances amounting to gross negligence made or participated in, assented to or acquiesced in the making of false statements or omissions in the return of income filed by him with Her Majesty for the 1992 taxation year; and

(b) directing that the parties are not required to prepare, serve, or file any additional pleadings or records for the trial of the issue, and that this order shall constitute the pleadings for the trial of the issue.

The application is made in the broader context of the bankrupt’s application for discharge.

The bankrupt assigned himself into bankruptcy April 30, 1997. His proved unsecured debts are $708,711.49, of which $649,219 is owed to Revenue Canada.

Revenue Canada put in a proof of claim and its claim was accepted by the Trustee.

The Trustee, in its s. 170 BIA report, says:

3. That the cause of bankruptcy is a reassessment by Revenue Canada based on income tax returns prepared by a former accountant who subsequently passed away, leaving the bankrupt unable to defend reassessments due to lack of pertinent documentation.

Revenue Canada has objected to the bankrupt’s discharge. Attached to this decision is a synopsis of the liability. A substantial portion is for penalties and interest.

What largely generates the present application is the reassessment made in May 1996 for the taxation year 1992. That reassessment plus penalty and interest on it makes up about 89% of Revenue Canada’s claim.

Revenue Canada’s history of how the liability arose is set out in the March 9, 1998 affidavit of Allison Morgan, an auditor. In her affidavit sworn April 6, 1998 she deposes that in 1992 the bankrupt was a chartered accountant.

The bankrupt has filed two affidavits. He disputes Revenue Canada’s reassessment of how his liability arose. He goes so far as to say that when he was reassessed he did not challenge the reassessment or the imposition of penalties “due to my financial circumstances”.

When the bankrupt was reassessed in 1996 the Minister levied a penalty under s. 163(2) Income Tax Act, which says:

Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of

That penalty is part of Revenue Canada’s claim which was proved, and accepted by the Trustee.

Mr. Penton, for Revenue Canada,submits that the bankrupt is mounting a collateral attack on the reassessment and, in particular, an attack on the Minister’s decision that the bankrupt’s conduct fell within s. 163(2). Mr. Engelking, for the bankrupt, says that the bankrupt is not making a collateral attack on the reassessment.

I do not agree that the bankrupt is not trying to undo the Minister’s finding under s. 163(2). I do not agree with Mr. Engelking. The bankrupt’s evidence is an attempt by him to negate a finding that he was grossly negligent or knowingly participated in, assented to or acquiesced in giving false information to Revenue Canada. The reassessment includes a penalty under s. 163(2) so that penalty is a part of the admitted claim. By saying that he had an innocent mind [i.e., no s. 163(2) situation] the bankrupt is indirectly attacking the finding which triggers the s. 163(2) liability. It is like a defendant in a motor vehicle negligence lawsuit saying that he does not dispute the judgment given against him, but in the next breath saying that he was not negligent.

Revenue Canada’s notice of motion asks that there be a trial of an issue which proposed issue is couched in the very language of s. 163(2). The reason why Revenue Canada wants to get into that is because it is relevant to the bankrupt's discharge. The case law clearly establishes that the conduct of the bankrupt relative to his financial affairs is a relevant fact on an application for discharge. How and why a particular liability was incurred is relevant. A bankrupt cannot just say that the claim is admitted by the Trustee and so it is not necessary to look at the circumstances which created the claim.

There is a well known principle of law that collateral attacks on court decisions are not permissible: R. v. Wilson, [1983] 2 S.C.R. 594 (S.C.C.); R. v. Litchfield, [1993] 4 S.C.R. 333 (S.C.C.); R. v. Sarson, [1996] 2 S.C.R. 223 (S.C.C.); Skagos v. Emery Jamieson (1986), 72 A.R. 231 (Alta. Master) (M); Miskew Estate v. Hughes (1986) 71 A.R. 316 (Alta. C.A.).

Whether that can also apply to administrative orders was recently canvassed in R. v. Consolidated Maybrun Mines Ltd. (1998), 123 C.C.C. (3d) 449 (S.C.C.) (April 30, 1998), and R. v. Al Klippert Ltd. (1998), 123 C.C.C. (3d) 474 (S.C.C.) (April 30, 1998).

In Consolidated Maybrun Mines Ltd. a clean up order was issued under environmental protection legislation requiring the accused to clean up a contaminated business site. The accused disregarded the order. The accused was then charged under the legislation with failure to do the cleanup as required. The issue at trial was whether the court could review the validity of the order. I will skip the trial level and first appeal level and jump to the Court of Appeal’s decision which is summarized by L'Heureux-Dubé J. as follows:

Laskin J.A., writing for the Court of Appeal, dismissed the appeal. In his view, the rule laid down in Litchfield, supra, must apply, with certain restrictions, to an administrative order. He held that the following five factors should be considered in determining whether a collateral attack is permissible: (1) the wording of the statute; (2) the purpose of the legislation; (3) the availability of an appeal; (4) the kind of collateral attack; and (5) the penalty on a conviction for failing to comply with the order.

In the case at bar, the wording of the Act neither permits nor forbids a collateral attack on the validity of the order. An attempt must, therefore, be made to ascertain the legislature’s intention in this respect. In his view, the objective of environmental protection would be undermined if a court were permitted, in a trial on a charge of non-compliance with an order issued by the Director, to rule on the existence of reasonable and probable grounds for making the order. The purpose of the Act is to protect public and societal interests by creating regulatory, rather than criminal, offences. These provisions are intended to encourage compliance with orders for the general welfare of society. Furthermore, the Act balances these interests with the interests of those to whom an order is directed by providing for the possibility of an appeal within 15 days entailing a de novo hearing by the Board.

As to the nature of the collateral attack, Laskin J.A. distinguished between lack of jurisdiction ab initio, which can result in a collateral attack on an order, and an error, even if unreasonable, committed by a director in exercising his or her jurisdiction, which is not open to such an attack. He concluded that in the case at bar the Director did have jurisdiction to make the order. On the final factor, Laskin J.A. noted that the penalty is a fine rather than imprisonment.

Concerning the due diligence defence raised by the appellants, Laskin J.A. concluded that accused persons cannot argue that an order was unreasonable or unfounded so as to avoid performing the obligations imposed on them by the order. That would amount to authorizing a disguised collateral attack.

L'Heureux-Dubé J. adopts four of the five factors identified by Laskin J.A. She says this about the five factors:

Subject to the comments below on the fourth factor, this approach seems to me to be satisfactory, provided, however, that it reflects a general approach aimed at determining the legislature’s intention as to the appropriate forum. From this perspective, the factors set out above are not independent and absolute criteria, but important clues, among others, for determining the legislature’s intention. In doing this, it must, inter alia, be presumed that the legislature did not intend to deprive citizens affected by government actions of an adequate opportunity to raise the validity of the order. The interpretation process must, therefore, determine not whether a person can challenge the validity of an order that affects his or her rights, but whether the law prescribes a specific forum for doing so.

The basis for my reservation concerning the fourth factor is that the Court of Appeal, in answering the question as to the nature of the collateral attack, suggests that a distinction be drawn between invalidity for lack of jurisdiction ab initio and invalidity resulting from loss of jurisdiction, which is not open to a collateral attack. However, it is not clear that this distinction can always be drawn in practice, nor is it clear how it really makes it possible to determine the legislature’s intention as to the appropriate forum.

As regards the problems raised by the dichotomy between lack of jurisdiction and loss of jurisdiction, it must be recognized that the distinction between an order in respect of which an agent of the state lacks jurisdiction from the outset and an order that is so unreasonable as to result in a loss of jurisdiction, is not the easiest one to draw. Since U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048, the judgments of this Court have shown the clearest possible determination to avoid the problems connected with this type of distinction.

However, Laskin J.A.’s approach to the nature of the collateral attack has an even more fundamental flaw. The distinction he proposes implies an approach that focuses exclusively on the jurisdiction of the authority that issued the order and disregards any relationship between the kind of collateral attack and the jurisdiction or raison d’être of the appeal tribunal. The jurisdiction of the authority that issued the order is, of course, relevant to the case, since it is the subject of the attack. However, what this Court must do is determine the forum in which the attack should be made, assuming for discussion purposes that the order does in fact contain a jurisdictional defect. Where the legislature has established an administrative appeal tribunal, it must be asked whether it intended that tribunal to have jurisdiction, to the exclusion of a penal court, to determine the validity of the impugned order. For this purpose, the nature of the collateral attack is, of course, relevant to determine not whether it raises an excess or lack of jurisdiction on the part of the agent or official who issued the administrative order, but rather to determine whether the attack involves considerations that fall within the jurisdiction conferred by statute on the appeal tribunal. Where the appropriate forum must be determined, it is, indeed, the jurisdiction of the appeal tribunal that is at issue rather than that of the Director, even though it is the Director’s jurisdiction that is attacked.

Thus, where an attack on an order requires the consideration of factors that fall within the specific expertise of an administrative appeal tribunal, this is a strong indication that the legislature wanted that tribunal to decide the question rather than a court of penal jurisdiction. Conversely, where an attack on an order is based on considerations which are foreign to an administrative appeal tribunal’s expertise or raison d’être, this suggests, although it is not conclusive in itself, that the legislature did not intend to reserve the exclusive authority to rule on the validity of the order to that tribunal. This analysis must be conducted in light of the specific characteristics of each administrative scheme. An approach, such as the one suggested by the Court of Appeal, aimed at establishing a general rule relating to the nature of the attack does not recognize the importance that must be given to the legislature’s intention.

I would, accordingly reformulate the fourth factor suggested by the Court of Appeal to take into account the nature of the collateral attack in light of the appeal tribunal’s expertise and raison d’être.

(c) Conclusion

In summary, the question whether a penal court may determine the validity of an administrative order on a collateral basis depends on the statute under which the order was made and must be answered in light of the legislature’s intention as to the appropriate forum. In doing this, it must be presumed that the legislature did not intend to deprive a person to whom an order is directed of an opportunity to assert his or her rights. For this purpose, the five factors suggested by the Court of Appeal, as reformulated here, constitute important clues for determining the legislature’s intention as to the appropriate forum for raising the validity of an administrative order.

Consolidated Maybrun Mines Ltd. and Al Klippert Ltd. are penal proceedings. A bankruptcy is not a penal proceeding. However, there is no logic to confining the issue to where there is a penal proceeding based on an administrative order. The prevention of collateral attacks of prior civil decisions in later civil process is already well recognized in law: Skagos.

The label that one attaches to the Minister’s derision is not important. It is a decision which is statutorily based, that is, one that Parliament has given the Minister the jurisdiction to make and that has legal consequences for the taxpayer. If a finding is made adverse to the taxpayer a financial penalty is imposed on the taxpayer. The amount of the penalty is not discretionary. It is based on the statutory formula found in s. 163(2).

Income is a necessity for Canadian governments. They need it to be able to perform the many functions they are called on by society to perform. The methods of raising income may vary. One method, possibly the largest, is a tax on income. The Income Tax Act is based on a self-reporting system. Revenue Canada cannot be expected to actively go forth and seek the necessary information to let it then assess the taxpayer. That would simply not be workable. Parliament imposes an obligation on the taxpayer to actively provide the necessary information and in a timely fashion without Revenue Canada having to actively solicit it from the taxpayer.

It is essential to a proper working of the tax system that taxpayers perform their statutory duties. That includes providing all the necessary information and providing accurate information. It is not to be a game of hide and seek between taxpayer and Revenue Canada.

If a taxpayer can deceive or be grossly negligent in what he gives to Revenue Canada with the only possible consequence being a later reassessment if the lie or gross negligence is later discovered it would be a “no lose situation” for the taxpayer. If what he did is not discovered he pays less tax than what he should have paid. If what he did is later discovered and he has to pay only the tax that he should have paid he is no worse off. He has nothing to lose if he lies or is grossly negligent. He might have something to gain if he lies or is grossly negligent.

Parliament has recognized the possibility that some taxpayers may have an inappropriate “state of mind” (or mens rea) and that the penalty for that is to be a financial penalty. That is s. 163(2).

To bring the matter back into Consolidated Maybrun Mines Ltd., what did Parliament intend?

What recourse does a taxpayer who is penalized under s. 163(2) have?

The taxpayer can serve on the Minister a notice of objection to the as sessment: s. 165(1). The Minister must reconsider the assessment and “vacate, confirm or vary the assessment or reassess”: s. 165(3). If the taxpayer is dissatisfied with the Ministers reconsideration he can appeal the Minister’s decision to the Tax Court of Canada: s. 169(1). The Minister must forward to the Tax Court of Canada all returns, notices of assessment and notices of objection: s. 170(2). The Tax Court of Canada may dispose of an appeal by:

(a) dismissing it; or

(b) allowing it and

(1) vacating the assessment,

(11) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment [s. 171(1)]

On an appeal the Minister has the burden of proof to justify the assessment of the penalty: s. 163(3). It says:

Where, in any appeal under this Act, any penalty assessed by the Minister under this section is in issue, the burden of establishing the facts justifying the assessment of the penalty is on the Minister.

The Tax Court of Canada is that created by the Tax Court of Canada Act. The judges must have a legal background: s. 4.

It is not necessary to discuss whether there can be further appeals. The point is that a taxpayer has a right to object to the assessment, the Minister must reconsider the assessment, the taxpayer can then appeal to a court of law and the Ministe’r has the burden of proof to justify the imposition of the penalty.

This particular scheme fits within the concept discussed in Consolidated Maybrun Mines Limited. Section 163(2) is a finding which creates a civil liability. Bankruptcy is also a civil proceeding. It is illogical to suggest, as Mr. Engelking does, that the bankrupt is not collaterally attacking the as-

sessment when the assessment includes a penalty under s. 163(2) and the bankrupt gives evidence that he had a pure state of mind [that 1s, no case under s. 163(2)] when he filed his 1992 return.

The issue whether the bankrupt did what s. 163(2) refers to is not now subject to evidence or argument by the bankrupt in this bankruptcy. He is bound by that decision by the Minister. That cannot now be litigated. The facts found by the Minister trigger the penalty.

As long as the penalty exists the facts to support it must continue to exist. That is just an exercise in reasoning or logic, as Moir J.A. puts it in R. v. Duhamel (1981), 33 A.R. 271 (Alta. C.A.), para. 15.

It is not an answer for the bankrupt to say that he could not afford to appeal.

It is also not an answer for the bankrupt to say that he was not reassessed until four years later. The passage of time does not insulate a taxpayer from the effect of s. 163(2).

The order sought by Revenue Canada is not necessary so I do not grant it.

The application for discharge can be brought on again in due course. I am not seized with it.

Application dismissed.

Appendix

Name: Bryan Grossman

Account Number: 608 776 704