William C Russell v. Minister of National Revenue, [1977] CTC 2473, 77 DTC 334

The Assistant Chairman:—Mr Russell appealed to this Board from a reassessment for tax for the 1973 taxation year. After his notice of appeal and the respondent’s reply had been filed, and following a notice of hearing, Mr Russell, who lives in the City of Clarkston in the State of Washington in the United States of America, wrote to the Board advising that he would be unable to attend the hearing for which the appeal had been called and asked that it be heard by way of written submissions. In due course, after Mr Russell and the Department of Justice, on behalf of the Minister of National Revenue, agreed on a statement of facts relating to the appeal, each party submitted a written argument in support of the position he had taken. The appellant did not file with the Board a reply to the respondent’s written argument in chief.

The agreed statement of facts reads as follows:

The Appellant, William C Russell, and the Respondent, by his solicitor, hereby agree on the following facts:

1. Prior to and during 1972 the Appellant lived and worked in the United States, and his earnings were confined to the United States.

2. During the year 1972 the Appellant did not sojourn in Canada, nor was he employed in Canada, nor did he carry on business in Canada.

3. On or about January 25, 1973 the Appellant entered Canada, returning to the United States on or about November 5, 1973 where he remains to date.

4. In filing his income tax return for 1973 the Appellant did not make any application with respect to ‘ General Averaging’’.

5. By Notice of Assessment dated April 1, 1974, the Minister made several adjustments in respect of the Appellant’s 1973 taxation year including, inter alia, the application of the “General Averaging’’ provision.

6. By Notice dated May 22, 1974, the Appellant was further reassessed, the Minister making several adjustments in respect of the 1973 taxation year of the Appellant, which adjustments were unrelated to the application of the “General Averaging’’ provision.

7. By Notice dated April 14, 1975, the Minister again re-assessed the Appellant in respect of his 1973 taxation year to deny to the Appellant any General Averaging Saving.

The written argument of the appellant was a one-page document dated April 3, 1977 (which is reproduced hereinafter) to which was attached a copy of his letter of March 14, 1976, being his appeal to this Board, together with six other attachments to which he specifically refers in his document of April 3, 1977. His letter to this Board of March 14, 1976, as well as items 2, 4 and 5 referred to in his written argument are also set forth. Documents 1, 3 and 6 are respectively his notice of assessment dated April 1, 1974, his notice of reassessment dated May 22, 1974 and his notice of reassessment dated April 14, 1975. The appellant’s documents to which I have specifically referred are as follows:

Written Argument

April 3, 1977

Dear Sir:

My letter dated March 14, 1976, to your office states the reasons for appealing National Revenue’s Ruling on my Notice of Objection. Enclosed is another copy of that letter. The reasons for my appeal are predicated upon the fact that laws and legal matters, including taxation, have a sound and reasonable basis. National Revenue has exercised unfair and unreasonable treatment in

(A) Revoking use of a tax provision granted without a request and

(B) Subjecting my tax return to three audits within a period of one year.

I am enclosing the following additional information to document the statements I have made:

(1) Notice of Assessment dated April 1, 1974

(2) Letter from B.C. Revenue Canada dated April 29, 1974

(3) Notice of Re-Assessment dated May 22, 1974

(4) Letter to B.C. Revenue Canada dated June 17, 1974

(5) Letter from B.C. Revenue Canada dated August 9, 1974

(6) Notice of Re-Assessment dated April 14, 1975

If additional information is required, please call me at my office telephone (509) 843-1091. Thank you.

Notice of Appeal

March 14, 1976

On February 27, 1976, I received a Notification By The Minister from the British Columbia Appeals Branch of National Revenue overruling my Notice of Objection. I am herewith appealing that ruling by the Regional Director of Appeals.

The basis for my Appeal is as follows:

(1) The instruction booklet for individual tax returns does not have any details or specific information on the application of “General Averaging’’ provisions to individual returns. Consequently, my return dated February 11, 1974, did not make any reference to “General Averaging’’. On April 5, 1974, I received a Notice of Assessment dated April 1, 1974, which notified me that the ‘General Averaging” provision was being applied to my return. The latest re-assessment April 14, 1975, disallows the General Averaging and charged interest on the amount due. My objection is based on a point of being “unreasonable”. Once a correction has been made and left for over a year, it is not reasonable to go back and revoke the correction. An implied acceptance of the correction was made at that time by the Director of Taxation when he made the correction and by myself accepting payment for the correction.

A simplified example will perhaps help make my point. Suppose you send an invoice in the amount of $1,000 with detailed calculations to a Mr Smith. Mr Smith receives the invoice and finds that the computations were incomplete. He corrects the calculations, making the invoice amount $1,800, which he pays to you. You Accept the payment to complete the transaction. Then, a year later, Mr Smith in reviewing the calculations finds that the corrections he had made were faulty. Next he mails you an invoice in the amount of $800, plus interest and states that the correction is withdrawn. Mr Smith, I believe, would be illogical, unreasonable and have a legally unsound basis regarding his effort.

(2) The Notice of Assessment dated April 1, 1974, also included various other adjustments to my return which resulted in increased taxes of approximately $280.00. These adjustments were not explained or detailed in any way, but definitely inferred that an audit or complete review of my return had been made. I accepted the adjustments without back-up at that time. In June 1974, I received another Notice of Re-Assessment dated May 22, 1974, which resulted from a review and audit of my deductions. Additional information was requested from the District Taxation Office in my letter dated June 17, 1975 (sic). In August, 1974, I received sufficient answers such that on September 4, 1975, (sic) I paid the unpaid balance. Then in April, 1975, I received a third Notice of Re-Assessment. My second objection is that after 2 audits, I believe that a condition of finality is implied and, therefore, closes and settles all issues.

Please notify me if additional information is required.

-2

April 29, 1974

Your 1973 Income Tax Return is presently under review regarding your claim for Medical expenses and Charitable Donations.

It is proposed to reassess your return to reduce your total Medical expenses from $867.57 to $713.30 as lodging, meals and non-prescription drugs are not considered to be medical expenses.

Further to the above regarding your Charitable Donations totalling $281.00, this amount will be reduced $214.00 as the additional $67.00 claimed was not supported by the proper receipts.

A Reassessment Notice will be forwarded to you in due course.

June 17, 1974

A notice of re-assessment in the amount of $55.20 was recently sent to me. In order to evaluate the correctness, and object if necessary, please answer the following questions:

1. Why are meals and lodging, when associated with a trip for medical purposes, not allowed as deductions? If you have written particulars or instructions, please send me a copy.

2. Must a charitable donation always be supported by a written receipt? With previous years’ records, I can show that my family attends church every week and donates an average of $5.00 per week. When away from Mica Creek (Revelstoke, Kamloops, or on vacations), church is attended and donations are made, but a receipt is not possible. A detailed summary (date, amount, and location) can be provided to substantiate the total claimed amount.

3. May I receive a copy of my return as currently revised by your department? A revision was apparently made when the Notice of Assessment was being prepared. Now a second revision is being made for the Notice of Re-Assessment. I would like to check to make certain that none of the changes are being duplicated by your department. Thank you.

-5

August 9, 1974

Your claim for meals and lodging is not considered a deductible expense according to Paragraph 110(1)(c) of the Income Tax Act, which sets out allowable medical expenses.

Your claim for charitable donations were only allowed up to the amount supported by accredited receipts. All claims for charitable donations must be supported by proper receipts from the chartiable organization.

As we are unable to provide you with a duplicate of your return, a breakdown of the calculations to arrive at your refund are as follows:—

Net income	$15,154.00
Total personal exemptions	$2,567.00
Medical expenses	$713.30
Less: 3% of net income	454.64

Allowable portion of medical expenses		$258.66
Add: Charitable donations		214.00
Total allowable amounts		$472.66	472.66
Total			$3,039.66	3,039.66
Taxable income				$12,114.34
Federal taxes	$2,087.20
Provincial tax	$ 670.10
Total tax	$2,757.30
TD per T4	$5,701.47
Amount assessed	$2,757.30
Previous assessment	2,702.10
Debit of	$ 55.20

Please find enclosed a photocopy of Paragraph 110(1)(c) medical ex- penses, we hope this will clarify the situation for you.

The Minister s submission, without attachments, is as follows:

In reply to the written submission dated April 3, 1977, of Mr William C Russell, the Appellant, the following submissions are respectfully made on behalf of the Respondent:

1. The re-assessment in issue in this appeal has denied to the Appellant the application of the ‘general averaging’’ formula provided for by Section 118 of the Income Tax Act S.C. 1970-71-72 c. 63 and amendments.

Section 118 provides, in part, as follows:

“Sec. 118. General averaging

(1) Notwithstanding section 117, where, in the case of an individual who was resident in Canada throughout the taxation year immediately preceding a particular taxation year (which particular taxation year is hereafter in this section referred to as the ‘year of averaging’), any excess remains when . . .

Sec. 118(2)

(2) Non-resident individuals. Notwithstanding section 117, where, in the case of an individual who

(a) at no time during a taxation year (in this section referred to as the ‘year of averaging’) and the immediately preceding taxation year was residing in Canada, and

(b) in each of those years, performed the duties of one or more offices or employments in Canada or carried on one or more businesses in Canada.

any excess remains after . . .”

2. It is agreed (see: Agreed Statement of Facts, paragraph 1, 2 and 3) and submitted that the Appellant was not resident in Canada throughout 1972, that he was not, therefore, resident in Canada throughout the taxation year immediately preceding the year in respect of which general averaging is sought (1973) as required by Section 118(1).

3. It is agreed (see: Agreed Statement of Facts, paragraph 2) and submitted that the Appellant was not employed in Canada, nor did he carry on business in Canada in 1972, and that he did not perform the duties of one or more offices or employments, nor did he carry on one or more businesses in Canada in both the year of averaging (1973) and immediately preceding year as required by Section 118(2).

4. It is agreed (see: Agreed Statement of Facts, paragraph 5, 6 and 7) that at the time of the Appellant’s original assessment the “general averaging provisions’’ were automatically but mistakenly applied by computer and that the re-assessment in issue in this appeal corrected that error.

It is also respectfully submitted that the Minister is not bound by the mistakes of his servants. The Board’s attention is respectfully directed to two decisions, copies of which are attached:

1. Western Vinegars Ltd v MNR (1938), 1 DTC 390 [[1935-37] CTC 325]

2. Salter v MNR (1952), 6 DTC 148 [6 Tax ABC 193; 52 DTC 148]

5. The attention of the Chairman is respectfully directed to a comment of the applicable section taken from Stikeman’s Canada Tax Service (a copy of which is attached) and in particular to those comments under the paragraph entitled “Immigrants” and those under the paragraph entitled “Nonresidents Employed in or Carrying on Business in Canada’’.

6. In summary, it is respectfully submitted that the Minister has properly denied to the Appellant in respect of his 1973 taxation year the application of the “general averaging provisions” because the criteria prerequisite to the application of Sections 118(1) and (2) have not been met.

ALL OF WHICH IS RESPECTFULLY SUBMITTED.

What is the issue in this appeal? It would appear, based on Mr Russell’s written argument (April 3, 1977), that the Minister of National Revenue exercised unfair and unreasonable treatment against the appellant in:

(a) revoking the use of a tax provision which had been granted to the appellant by the Minister on his own initiative and not at the request of the appellant, and

(b) subjecting the appellant’s tax return to three audits within the period of one year.

The respondent takes the position that he is not bound by the errors of his servants (a computer) and that the appellant is not entitled to the averaging provisions of the Income Tax Act. All references to the Income Tax Act will be to that Act as in the RSC 1952, c 148 as amended by SC 1970-71-72, c 63.

It thus resolves itself to the question as to whether the assessment of tax payable by the appellant for the 1973 taxation year has been properly determined as represented by the reassessment dated April 14, 1975.

The appellant complained that his tax return had been subjected to three audits in a period of one year. I assume that, while an audit or examination of his return presumably precedes an assessment or reassessment of his return, the appellant is really stating that the Minister has assessed or reassessed his 1973 tax on three different occasions in a one-year period and this is unfair and unreasonable treatment. As to the facts in this respect, it is clear that, with respect to the 1973 taxation year, the appellant was assessed once and reassessed twice in a period of just over twelve months. Regardless of why the Minister of National Revenue reassessed (that is, regardless of whether he increased or decreased the tax assessed the appellant for the 1973 taxation year), did the respondent have the authority to make those reassessments? The answer to this question is clearly found in section 152 of the said Act. Subsection 152(4) reads as follows:

152. (4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

The subsection starts by stating “The Minister may at any time assess tax, interest or penalties under this Part . . .”. Were the subsection to stop at this point, one could agree that there was no limitation, in so far as a time limit was concerned, on the right of the Minister to assess a taxpayer. However, paragraph 152(4)(b) limits the right of the Minister to reassess to a period of four years from the day of mailing of a notice of an original assessment; that is, the Minister may reassess a taxpayer at any time within a period expiring four years from the day of mailing of a notice of original assessment. Since in this appeal it is clear the second assessment is within the period of four years from the day of mailing of the original assessment, the Minister had the right to make that reassessment. There are no restrictions on what he can do by his reassessment. He is not restricted to only decreasing the amount of tax assessed a taxpayer, nor (and I am sure no one would suggest it) is he restricted to only increasing the tax of a taxpayer. The Minister, in the words of subsection 152(2), . shall . . . assess the tax . . . payable’’. To me that clearly means the tax as computed by the Minister in accordance with the provisions of the Income Tax Act and any other relevant statute. This would appear to be the duty imposed on the Minister by the Income Tax Act and it is incumbent upon him to perform that duty if he may reassess within the limits imposed by the Act. Not only should he, but he must, correct assessing errors by reassessment if he knows of them. Assuming (without deciding) that that which he did in this case was correcting errors, then the reassessments were not “unfair and unreasonable treatment” by the Minister.

While the appellant has not clearly contended that he is entitled to the averaging provisions in section 118, the notice of appeal shall be read as though he submitted that his factual situation is within the ambit of section 118 and, consequently, he is entitled to the benefit of the averaging provisions. From the agreed statement of facts we have the following relevant facts:

1. Prior to and during 1972 the Appellant lived and worked in the United States, and his earnings were confined to the United States.

2. During the year 1972 the Appellant did not sojourn in Canada, nor was he employed in Canada, nor did he carry on business in Canada.

3. On or about January 25, 1973 the Appellant entered Canada, returning to the United States on or about November 5, 1973 where he remains to date.

The introductory words of subsection 118(1) indicate the individuals who may use those averaging provisions. Those words read as follows:

118. (1) Notwithstanding section 117, where, in the case of an individual who was resident in Canada throughout the taxation year immediately preceding a particular taxation year (which particular taxation year is hereafter in this section referred to as the “year of averaging’’), . . .

The individual had to be resident in Canada throughout the taxation year immediately preceding a particular taxation year (which particular taxation year is hereafter in this section referred to as the “year of averaging’’). Where was the appellant in the year of averaging (1973)? He was resident in Canada. Where was he “throughout the taxation year immediately preceding” (1972)? Based on the agreed statement of facts, he clearly was not resident in Canada and consequently he was not within the ambit of subsection 118(1).

However, it could be he is entitled to the averaging provisions because of subsection 118(2). The introductory words of that subsection read as follows:

118. (2) Notwithstanding section 117, where, in the case of an individual who

(a) at no time during a taxation year (in this section referred to as the “year of averaging’’) and the immediately preceding taxation year was resident in Canada, and

(b) in each of those years, performed the duties of one or more offices or employments in Canada or carried on one or more businesses in Canada,

On the facts as admitted in paragraphs 1, 2 and 3 of the agreed statement of facts with respect to paragraph 118(2)(a), the appellant was not resident in Canada in 1972, but he was for some time in 1973 so resident. Likewise, from those facts in each of those years he did not perform the duties of one or more offices or employments in Canada nor did he carry on one or more businesses in Canada. Such being the case, he is not within the ambit of either subsection

(1) or (2) of section 118 and, consequently, he is not in 1973 entitled to the averaging provisions as provided in the Income Tax Act.

The result is the respondent had the right, power and duty to make the reassessments he made and he was correct in not permitting the appellant to have the advantage of the averaging provisions which he (the Minister) had incorrectly originally granted to the appellant.

The appeal of the appellant is dismissed.

Appeal dismissed.