Mark G Smerchanski v. Minister of National Revenue, [1974] CTC 241, 74 DTC 6197

Thurlow, J:—This is an appeal from a judgment of the Trial Division which dismissed the appellant’s appeal from reassessments of income tax made on or about July 8, 1964 for the years 1945 to 1959 inclusive. While two other issues were discussed by the learned trial judge in his reasons for judgment the precise ground on which he dismissed the appeal was that the appellant is bound by. the terms of a document which he executed under seal on July 10, 1964 admitting the correctness of the assessments and his liability for the amounts assessed and waiving his right of appeal.

The document reads as follows:

I, Mark Gerald Smerchanski, of the City of Winnipeg, in Manitoba, Mining Engineer, do hereby acknowledge receipt of Notices of Re-assessment made under the Income War Tax Act, being Chapter 97, Revised Statutes of Canada, 1927, The Income Tax Act, being Chapter 52, Statutes of Canada, 1948 and the Income Tax Act, being Chapter 148, Revised Statutes of Canada, 1952, in regard to my income tax for the taxation years 1945 to 1959, both inclusive, in the following amounts:

1945	$124,453.47
1946	173,413.76
1947	47,303.19
1948	2,292.65
1949	4,562.24
1950	3,751.45
1951	6,046.75
1952	16,125.99

1953	10,304.69
1954	12,567.53
1955	94,231.07
1956	288,994.87
1957	96,739.51
1958	54,858.82
1959	15,964.82
	$951,610.81

I do hereby approve of and consent to the individual amounts involved in each re-assessment, which I understand are inclusive of taxes, interest and penalties for each of the said years. I do hereby admit my liability for the amount of the same and I do hereby waive any right of appeal I now or may have in regard to any of the said re-assessments.

I do hereby further acknowledge that the said re-assessments for the years 1955 to 1958, both inclusive, are in substitution for the provisional reassessments made for those years under dates March 14, 1960, May 1, 1961, April 16, 1962, and June 28, 1963, and I do hereby withdraw the Notices of Objection dated June 10, 1960, June 8, 1961, June 5, 1962 and September 23, 1963, I previously filed In regard to the said provisional re-assessments.

It Is understood and agreed that this document is binding upon my heirs, executors and administrators.

IN WITNESS WHEREOF I have hereunto set my hand and seal at Winnipeg, in Manitoba, this 10th day of July, 1964.

“Harry Walsh’’	“M.G. Smerchanski”	(Seal)
Witness	Mark Gerald Smerchanski

The above acknowledgement, consent and waiver was voluntarily executed before me by the said Mark Gerald Smerchanski of his own free will and accord. The said Mark Gerald Smerchanski has further acknowledged to me that he understands and Is fully aware of the nature and effect of the said document.

DATED at Winnipeg, in Manitoba, this 10th day of July, 1964.

“Harry Walsh”

A Barrister-at-law entitled to practise

in and for the Province of Manitoba.

The learned trial judge also had before him an appeal by Eco Exploration Company Limited (no personal liability), a company controlled at all material times by the appellant, Smerchanski, from reassessments also made on or about July 8, 1964 for the years 1946, 1947 and 1951 to 1957 inclusive, which appeal was, by consent of the parties, heard at the same time and on common evidence with the Smerchanski appeal. The Eco appeal was also dismissed by the learned trial judge on the basis that the company was bound by a similar document executed by it under seal and delivered to the respondent on July 10, 1964 which read as follows:

Eco Exploration Company Limited does hereby acknowledge receipt of Notices of Re-assessment made under the Income War Tax Act, being Chapter 97, Revised Statutes of Canada, 1927, The Income Tax Act, being Chapter 52, Statutes of Canada, 1948 and the Income Tax Act, being Chapter 148, Revised Statutes of Canada, 1952, in regard to its income tax for the years 1946, 1947 and 1951 to 1957, both inclusive, in the following amounts:

1946	$14,546.26
1947	1,038.46
1951	7,116.31
1952	244.18
1953	26,717.40
1954	3,124.85
1955	19,652.48
1956	24,274.45
1957	20,463.50
	$117,177.89

Eco Exploration Company Limited does hereby approve of and consent to the individual amounts involved in each re-assessment, which it understands are inclusive of taxes, interest and penalties for each of the said years. Eco Exploration Company Limited does hereby admit its liability for the amount of the same and it does hereby waive any right of appeal it now or may have in regard to any of the said re-assessments.

It is understood and agreed that this document is binding upon the successors and assigns of Eco Exploration Company Limited.

IN WITNESS WHEREOF ECO EXPLORATION COMPANY LIMITED has hereunto affixed its Corporate Seal duly attested by the hands of its proper officers in that behalf this 10th day of July, 1964.

ECO EXPLORATION COMPANY LIMITED

(no personal liability)

Per:

“P N Smerchanski”

President

“Phillip Smerchanski”

Secretary.

In the Trial Division it was alleged by the appellant and Eco that these documents had been executed for an illegal consideration, that is to say, the suppression of prosecutions for income tax evasion, and alternatively that their execution had been secured by undue influence, duress and coercion. The issue of illegality of consideration was, however, abandoned in the course of argument when counsel for the appellant conceded that there was no evidence to support the allegation, a view with which the learned trial judge agreed. The learned judge further found on the evidence that the documents were not executed under undue influence, duress or coercion and his findings thereon were not challenged before us. This left, as a basis for holding the documents ineffective to bind the appellant and Eco according to their tenor, only the submission of counsel, which was put forward again on this appeal, that they are contrary to the provisions and policy of the Income Tax Act.

The events which led up to the execution and delivery of these documents cover a lengthy period and as they are described in detail in the reasons of the learned trial judge a brief outline of them will be sufficient for present purposes. In the early part of the period a large quantity of documents was seized from the appellant under an authorization issued under subsection 126(3) of the Act. This occurred in April 1961 and the documents so seized were made the subject of intensive examination over the next two years.

Thereafter between August 1963 and March 1964 a number of meetings took place between the appellant or his legal advisers and senior officials of the Department in the course of which it was made plain that the Department intended to prosecute the appellant by indictment on several charges of tax evasion contrary to subsection 132(1) of the Act.

At one of these meetings in August 1963 it was intimated that the Department’s claim for unpaid taxes and interest for the years 1949 to 1959 inclusive was in the vicinity of $633,538.37. This amount was disputed. At another meeting in December 1963 counsel for the appellant inquired if the Minister would consider a settlement at $400,000. In the meantime a further investigation had been undertaken with respect to the years 1945 to 1948 and at another meeting in January 1964 appellant’s counsel was advised that the total claim against Eco for unpaid taxes and interest was $156,307 and that against the appellant covering the years 1945 to 1959 inclusive was $686,000 for unpaid taxes and $344,000 for interest. These amounts as well were disputed and at some stage the Department was asked to consider a settlement at $600,000. However, at no time during this stage of the events was it ever indicated that the Department proposed to take any course but to prosecute. On the contrary it seems to have been indicated at each of the meetings referred to that the Department would proceed by prosecution.

In the third and final phase, between June 25 and July 10, 1964, counsel for the appellant, in a conversation with counsel who had been appointed in March 1964 to conduct the prosecutions, suggested that the appellant had been ill advised in the course he had followed of attempting to justify his position with respect to transactions which the Department had brought into question and that even the mere laying of charges would result in grave and exceptional damage to the appellant and his family because of his public position as a member of the Legislative Assembly and he inquired as to whether the Department would be prepared to have the matter settled on the basis of reassessments of income tax, interest and penalties and payment of same by the appellant. Counsel for the Department referred this inquiry to Ottawa and was instructed that a settlement would be considered if the proposal for it included appropriate terms, which included a commitment by the appellant and his counsel that the assessments when made would be accepted, that liability for the amounts thereof would be admitted, that no particulars of such amounts would be required, that the amounts assessed would be paid forthwith and that the right to appeal from such reassessments would be waived.

Following communication of these terms to appellant’s counsel, and upon some sufficient indication or assurance being given that the total amount to be paid would not exceed $1,200,000 and that counsel for the Department would review the transactions involved in the Department’s computations for the purpose of assuring himself that on the information available they were properly included therein, the following document was executed by the appellant and his counsel and by Eco and on July 2, 1964 was delivered to counsel for the Department:

Mr C Gordon Dilts,

Barrister & Solicitor,

503 Electric Railway Chambers,

WINNIPEG, Manitoba

Dear Mr Dilts:

Re: Mark Gerald Smerchanski and

Eco Exploration Company Limited

(no personal liability)

We, Mark Gerald Smerchanski and Harry Walsh, hereby jointly and severally commit ourselves unconditionally to the payment in cash of the total income tax liability of Mark Gerald Smerchanski and Eco Exploration Company Limited (no personal liability) (including interest and penalties) for the years 1945 to 1959, both inclusive, as determined by the Department of National Revenue, such payment to be made upon our being advised by the said Department of the total amount of such liability. It is agreed and understood that the total amount of such liability will be accepted and approved by us without question or reservation and without any demand whatsoever being made of the Department of National Revenue for particulars of the total amount involved. It is further agreed and understood that Mark Gerald Smerchanski will personally assume payment of the total liability as assessed against Eco Exploration Company Limited (no personal liability).

We Mark Gerald Smerchanski and Eco Exploration Company Limited (no personal liability) do hereby further unconditionally waive any and all right of appeal from the income tax assessments or re-assessments that are now made or about to be made by the Department of National Revenue for the said years.

This letter will also serve to confirm that all counsel and accountants that have been retained for or on behalf of Mark Gerald Smerchanski and Eco Exploration Company Limited (no personal liability) have been familiarized with the contents of this letter, and that they are all in accord with it and are prepared to the extent applicable to be bound by it.

It is furher agreed and understood that the commitments contained in this letter are binding upon the heirs, executors and administrators of Mark Gerald Smerchanski and upon the successors and assigns of Eco Exploration Company Limited (no personal liability).

DATED at Winnipeg, in Manitoba, this 2nd day of July, 1964.

“M G Smerchanski”

“Harry Walsh”

ECO EXPLORATION COMPANY LIMITED

(NO PERSONAL LIABILITY)

Per:

“P N Smerchanski”

President

“Phillip Smerchanski”

Secretary

On July 8, 1964, following the contemplated review by Mr Dilts, which resulted in amounts totalling $148,984.15 being eliminated from the computations of Ificome, notices of reassessments of the appellant and of Eco were delivered by hand to appellant’s counsel together with drafts of the documents here in question for execution and an accompanying letter which read as follows:

July 8, 1964

Mr Harry Walsh, QC,

Messrs Walsh, Micay & Co,

Barristers & Solicitors,

7th Fl, Childs Bldg,

Winnipeg, Manitoba

Re: Mark G Smerchanski and

Eco Exploration Company Limited

Our File No C-51 CGD

Dear Sir:

Further to our telephone conversation of today’s date, we enclose Notices of Re-assessment in regard to the income tax of the above named for the years 1945 to 1959. You will note that Mr Smerchanski’s liability, inclusive of the amount charged against Eco Exploration Company Limited, totals $1,068,788.70. We shall expect to receive a certified cheque from you by return mail payable to the Receiver-General of Canada for the sum of $868,788.70, together with Mr Smerchanski’s written authorization to the Department of National Revenue in the form of the enclosed letter in regard to the $200,000.00 payment previously made in the matter.

We also enclose forms of Acknowledgment, Consent and Waiver for execution by Mr Smerchanski and Eco Exploration Company Limited. We shall require both copies of the two documents to be returned to us with the cheque and letter referred to above.

Yours truly,

THOMPSON, DILTS, JONES, HALL, DEWAR & RITCHIE

Per: “C G Dilts”

CGD*nd

Encl.

Thereafter on July 10, 1964 the documents in question were executed and delivered and the assessments were paid. Two days later the appellant asked counsel for the appellant when he could expect particulars of the amounts and was told that under the terms of the settlement no particulars were to be given. He thereupon asked when he might expect the return of his documents. A further conversation took place the next day between counsel respecting the delivery of the documents and they were released from seizure and returned to the appellant on July 20,1964.

The appellant’s point was put in two ways. It was said, first, that the Income Tax Act is a statute for the public rather than private benefit, that it confers rights and imposes obligations which cannot be contracted out of by either the Crown or the taxpayer, that the Act is not to be thwarted by the making of a contract between the state and the subject as this would result in taxation by contract rather than by the letter of the law as prescribed by the statute, and that neither the Crown nor the taxpayer is bound by such a contract if one is made. In support of his proposition counsel relied on Woon v MNR, [1950] Ex CR 18; [1950] CTC 263; 4 DTC 871; MNR v The Lakeview Golf Club Limited, [1952] Ex CR 522; [1952] CTC 278; 52 DTC 1164; Maritime Electric Company Limited v General Dairies Limited, [1937] AC 610, and Ancti! v Manufacturers Life Insurance Company, [1899] AC 604. He also re- ferred to Carling Export Brewing and Malting Company Limited v The King, [1931] AC 435, where Lord Thankerton said at page 438:

In their Lordships opinion it is not to be readily assumed, in a taxing Act, that Parliament has delegated to a Minister the power to settle the limits of taxation, and such intention must be clearly shown by the terms of the statutory provisions.

and to Inland Revenue Commissioners v Brooks, [1915] AC 478, where Lord Atkinson said at page 488:

lt may be very absurd or illogical that the amounts of these profits and gains should be inquired into for a second time, but this is a taxing statute and taxes cannot be imposed upon the subject under it unless in strict accordance with its provisions.

The other way in which the point was put was that the power of the Minister to assess income tax, interest and penalties is limited to that given him by section 46 of the Income Tax Act, RSC 1952, c 148, that he is entitled to exercise that power so far as it permits him to go but no further, that he is not thereby empowered to stipulate for an admission of liability or a waiver of the right to appeal, that such a stipulation if made is ultra vires and any admission or waiver which results from such a stipulation is invalid and ineffective to deprive the taxpayer of the right to appeal and to contest an assessment, which is given to him by the statute, and that the documents in question are therefore ineffective to prevent the appellant from appealing and contesting the amounts of the assessments in question.

I do not find in the cases cited by counsel much assistance in dealing with the point raised. The question raised in the Woon and Lakeview Golf Club cases was whether the Minister was estopped by the earlier conduct of his officers from applying the taxing provisions of the applicable statute and in both cases it was held that he was not. In the Woon case Cameron, J. after reviewing a number of cases concluded at page 27 [273]:

On the principles laid down in these cases I have reached the conclusion that the so-called “ruling” of the Commissioner was nothing more than his personal opinion as to the meaning of the statute, or, at the most, that the department in assessing the appellant would carry into effect the “ruling” so made. In either event it was made without authority and was not binding on the Crown. I find, also, that it cannot be invoked by the appellant as a ground for raising estoppel in this case, as to do so would be to nullify the requirement of the statute itself.

In the Lakeview Golf Club case the same learned judge expressed a similar view as follows at page 528 [284, 1167]:

I cannot agree that such an “understanding”,—to use the word of Exhibit A-5—, can be of any assistance to the respondent, and an. estoppel cannot override the law of. the land, and the Crown is not bound by the errors or omissions of its servants.

In the Maritime Electric case the issue was also one of estoppel and it was held that estoppel could not avail to release the appellant from a statutory obligation to charge for electric service the amount required by a rate schedule approved by a regulatory body nor could estoppel enable the respondent to escape its statutory obligation to pay the scheduled rates.

The Anctil case, on the other hand, as I see it, merely holds that a private contract made in contravention of an express statutory requirement is not enforceable. Estoppel was raised and argued but could not defeat the plea that the contract was contrary to the statute.

Moreover, the contexts in which the statements of Lord Thankerton and Lord Atkinson to which I have referred were made in the Carling Export Brewing and Brooks cases, respectively, were so different from the present that the statements appear to me to afford little guidance in the present situation.

It appears to me that, as a general proposition, it is quite correct to Say that the Income Tax Act is not to be thwarted by the Minister and the subject entering into a contract the tenor of which would be to reduce the taxes properly payable by the subject under the statute. Taxation must indeed be by the letter of the law and any attempt to contract out of it is ineffective in law to reduce or avoid the subject’s liability. On the other hand there must be a method of ascertaining and fixing the amount of such tax liability and in the Income Tax Act that need is met by provisions which cast upon the Minister the authority and the duty to assess the tax payable by the subject. This he must do on the basis of such relevant information as he has with respect to the subject’s income, whether such information is provided by the subject in discharge of the obligation or is obtained by other means. It is inherent in such a system that even after all the pertinent information has been obtained there will often be doubts as to whether particular amounts are properly subject to tax and that there will be disputes, as well, as to whether particular amounts ought to be included. In all such instances the Minister can but act on the totality of such information as he has in determining whether to include or exclude the doubtful or disputed amount. Avenues for objection to him and subsequently for appeal to courts are provided which the taxpayer may follow if he is not satisfied with the assessment so made. But nothing in the statute requires the taxpayer to exercise his right to object or to appeal.

Viewing the assessments here in question with these features of the system in mind, I do not think it can properly be said that they represent taxation by contract rather than by the letter of the law. It was, of course, not contended that they were too low, or that any deal had been made to set them at less than the full amount required by the statute. Nor is there anything in the evidence to indicate that the amounts assessed were fixed by reference to a contract as to the amount to be fixed or otherwise than by the method of bringing into the computation and assessing tax upon every item which the information available to the Minister indicated was subject to tax. There was of course an indication of the outside limit of the amount but I regard that not as indicating a contract as to the total amount but as an estimate of an amount which the actual figure, when calculated according to the statute, would not exceed. In the result the actual amount was much less. I have, therefore, come to the conclusion that there was nothing in the events which I have summarized which can be regarded as a thwarting of the statute or of the statutory scheme or as a substitution of taxation by contract for taxation according to the statute.

Turning to the second way in which the appellant’s submission was put it appears to me, again, as a general proposition, that it is not open to the Minister to stipulate as a condition of making a reassessment that the taxpayer admit liability for the amount to be assessed or that he waive his right of appeal. There is nothing in the statute which expressly or impliedly prohibits the making of such a stipulation by him but on the other hand nothing in the statute appears to me to expressly or impliedly authorize him to exercise his statutory powers in that way. To that extent I am in agreement with the appellant’s proposition. However, if this is the correct view it appears to me that the right to object to such a stipulation is one that accrues to the taxpayer concerned and if for some reason of his own, such as the hope of avoiding a public prosecution, the taxpayer consents to such a stipulation or waives his right to object there appears to me to be no principle of public morality or of public policy which would intervene to protect him from the consequences of his own act in so consenting or waiving. I am also of the opinion that the right of a taxpayer under the Act to appeal from an assessment is not a public right or one conferred for the public benefit but is a private right of the taxpayer which he is entitled to forego or to waive if he sees fit to do so.

Moreover, from the point of view of the Minister, who must, when occasion to do so arises, decide whether to prosecute a taxpayer or to proceed entirely by way of reassessment of tax, interest and penalties, it will normally be a legitimate and practical course to consider the cost and risk of failure that may be involved in proceeding by way of prosecution even though such procedure may be warranted on the material before him. In such circumstances an offer or agreement by a taxpayer, who is anxious to avoid prosecution, to admit his tax liability, to pay up and to waive his appeal may well be an important factor and in some cases may be the deciding factor in the Minister’s determination that the public interest will be best served by his proceeding by reassessment of tax, interest and penalties rather than by prosecution and subsequent reassessment of taxes and interest.

Applying these considerations to the present situation it appears to me that if it can be said, as I think it may, that the Minister stipulated as a condition of his proceeding in the matter by way of reassessment to recover penalties incurred, as well as taxes and interest, that the appellant admit his liability, pay the amounts assessed forthwith and waive his right of appeal, the appellant did not object thereto but, on the contrary, as evidenced both by his execution of the commitment of July 2, 1964 and by his execution of the document of July 10, 1964 and his immediate payment of the amounts assessed, consented to and approved of the stipulation. He did this in each instance with his eyes open and upon the advice of competent counsel and there is, in my view, no principle of public policy or public morality or of the policy of the statute which is offended by the assessments having been made upon such stipulation and consent or which would relieve the appellant from the consequences of his consent or of his formal waiver of his right to appeal from the assessments so made. I therefore agree with the conclusion of the learned trial judge that the appellant is bound by the waiver of appeal contained in the document executed by him and delivered on July 10, 1964.

in view of this conclusion it is unnecessary to consider the question of estoppel raised by counsel for the Minister or the further issue raised by counsel for the appellant with respect to the right of the Minister to reassess for the years 1945 to 1951.

The appeal accordingly fails and in my opinion it should be dismissed with costs.

Mackay, DJ:—While I am in agreement with the reasons and conclusions of my brother Thurlow, I wish to express my views in respect of the respondent’s alternative submissions that the appellants are estopped from appealing the reassessments of their income taxes for the years in question and also that they are bound by their agreement not to appeal.

Hanbury's Modern Equity, 9th ed, pp 664 and 666, defines estoppel as a doctrine which prevents a person acting inconsistently with a representation which he has made to the other party, in reliance on which the other party has acted to his detriment. It is necessary that there should be an unambiguous representation of existing fact upon which the representee is intended to act and does act to his detriment.

The document of July 10, 1964 signed by Smerchanski acknowledges receipt of the reassessments for each of the years 1945 to 1959 inclusive and continues:

I do hereby approve of and consent to the individual amounts involved in each re-assessment, which I understand are inclusive of taxes, interest and penalties for each of the said years. I do hereby admit my liability for the amount of the same and I do hereby waive any right of appeal I now or may have in regard to any of the said re-assessments.

These statements together with the contemporaneous payment of the reassessments are an unambiguous representation that the claims made by the reassessments were settled.

In the course of the investigation of the appellant’s liability for additional taxes, officials of the Department under an order of the court had on February 21, 1961 seized the appellant’s records. Two days after signing the document of July 10, 1964 and paying the amount of the reassessments the appellant asked for the return of his documents and on July 20, 1964 they were delivered to him.

When the appellant subsequently commenced the present proceedings the respondent requested the return: of records of the appellant that had been returned to him on July 20 and they were placed under the joint custody of the parties. It was then discovered that some of these documents material to the respondent’s case were missing and others had been materially altered.

It is clear from the evidence that after the time in 1963, when the appellant and his solicitors first contacted the Department officials in regard to the investigation of the appellant’s tax liability that was being carried on, the intention of the Department was to prosecute the appellant under section 132 of the Income Tax Act and let the courts decide the matter, and that the appellant wished to make a settlement pursuant to section 46 of the Act. These positions were maintained until at the request of the appellant’s solicitor the settlement set out in the letter of July 2 and the document of July 10, 1964 was completed and the assessments paid.

The procedures available to the Department under sections 46 and 132 are concurrent and the Department has a discretion to proceed under only one or both—this is made clear by the provision of section 132, subsection (3), which provides:

132. (3) Penalty upon Conviction.—Where .a person has been convicted under this section of wilfully, in any manner, evading or attempting to evade payment of taxes imposed by Part I, he is not liable to pay a penalty imposed under subsection (1) of section 56 for the same evasion or attempt unless he was assessed for that penalty before the information or complaint giving rise to the conviction was laid or made.

In the present case it is apparent that had the matter not been settled proceedings might well have been taken under both sections because the Department advisers were of the opinion that in the circumstances of this case a prosecution would be warranted only in respect of part of the tax claimed, namely $267,000 and that as to the balance the proceedings would be under section 46.

The time for launching proceedings under section 132 expired on August 28, 1964.

It is my view that the appellant in signing the documents of July 2 and July 10, 1964 intended to and did induce the respondent to act to its detriment in returning to the appellant on July 20, 1964 the documents which it would have used to justify the reassessments and in allowing the time for prosecution under section 132 to elapse. I therefore agree with the respondent’s submission as to estoppel.

As to the appellant’s agreement not to appeal the reassessments, where a provision of a statute is enacted for the benefit of a particular person or class of persons it may be waived: Craies on Statute Law, 7th ed, pp 269-70; Maxwell on Interpretation of Statutes, 12th ed, pp 328-9.

I agree with the learned trial judge that the provisions of the Income Tax Act giving the right to a taxpayer to appeal a reassessment of his tax return is a private right enacted for the benefit of the taxpayer and not a public right and that it may be waived by the taxpayer. It was held as long ago as 1877 that parties will be bound by an agreement not to appeal: Halsbury, 3rd ed, Vol 30, p 460, para 869; Jones v Victoria Graving Dock Co (1877), 2 QBD 314; Re West Devon Great Consuls Mine (1888), 38 Ch D 51. As far as I have been able to find these authorities have never been questioned.

As to the appellant’s submission that the Minister had no right to impose the conditions contained in the documents of July 2 and July 10, 1964, I think it is beyond question that the parties to any dispute may settle the dispute on any terms upon which they may agree unless the agreement or terms of the agreement are prohibited by law or induced by fraud or misrepresentation.

On the hearing in this Court appellant’s counsel abandoned his submissions made in the Court below that the settlement had the effect of compounding a felony and that the appellant was induced to sign the documents by reason of duress or undue influence.

In the present case the submission of counsel for the appellant was not that the terms that the parties agreed to are prohibited by law but that they were not authorized by the provisions of the Income Tax Act and as a result the agreement was not binding on him. Counsel was unable to submit any authority to support this submission and I would reject it.

There is one other matter to which I wish to make reference. On the hearing of the appeal some question was raised as to the credibility of the witness Karn, whose evidence was accepted by the learned trial judge, on the ground that his evidence related to matters that occurred during his interviews with the appellant Smerchanski in 1948 and therefore his memory as to events occurring at that time could not be relied on. It was pointed out by counsel for the respondent that Karn in giving his evidence had available to him to refresh his memory a copy of a letter of explanation written by Smerchanski in regard to the matters raised by Karn in 1948. In these circumstances I do not think any criticism in regard to the learned trial judge having accepted his evidence is justified.

For the reasons of Thurlow, J and these reasons I would dismiss the appeal with costs.

Bastin, DJ:—This appeal is concerned with two preliminary questions which by agreement were to be decided by the learned trial judge at the hearing. The first question is whether the document dated July 10, 1964 is binding on the appellant. Since by this document the appellant agreed to accept without question 15 reassessments for the years 1945 to 1959, to pay the total amount of the tax, interest and penalty claimed and to give up the right to appeal, a decision adverse to the appellant will dispose of the case. The second question is whether there is evidence entitling the Minister to reopen the assessments of the appellant for the years 1945 to 1951. Counsel for the appellant admitted that there was evidence with respect to the years 1952 to 1959.

The first issue as to whether the document of July 10, 1964 is binding on the appellant does not involve any question of credibility. The letter of commitment dated July 2, 1964, the letter of Diits to Walsh enclosing the 15 reassessments dated July 8, 1964 and the document in question dated July 10, 1964 speak for themselves and the circumstances under which they came into existence are not disputed and have been described by two prominent and highly respected Winnipeg lawyers.

On July 10, 1964 the appellant Smerchanski was a member of the Legislative Assembly of Manitoba and a prominent politician and public man. Mr Harry Walsh, his counsel, said in his testimony,

... in my opinion this would be the end, the mere laying of the charge, that would be the end of Mark Smerchanski’s political career and public career and would deal a terrible blow on him and his family . ..

His vulnerable situation would, of course, be common knowledge. During the years covered by the income tax investigation, the appellant or his representatives had been repeatedly informed that he would be prosecuted and that the discussion of any other outcome was out of the question. At the end of March 1964 the intention to prosecute was carried a step further by the appointment of Mr Dilts as counsel to conduct the prosecution on behalf of the Minister. His evidence is that after examining the material in the Winnipeg income tax office he wrote the Department recommending prosecution by indictment.

On June 24, 1964 Mr Harry Walsh, having in mind the impending prosecution, called on Mr Dilts to make a final effort to avoid prosecution. Mr Dilts communicated with Ottawa and on June 28, 1964 he informed Mr Walsh of the conditions of settlement which are those embodied in the document of July 20, 1964. These conditions were not worked out by Mr Walsh and Mr Dilts but were Mr Gourlay’s answer to the question: “What must the appellants do to escape prosecution?” It was for the learned trial judge to place his interpretation on the significance of this answer. In my opinion the inference is inescapable that these conditions were intended to be the alternative to prosecution and were accepted as such by the appellant. His counsel had informed him that if he were prosecuted he would go to jail. In the face of this threat he capitulated, executed the document and paid over the amount claimed.

Mr Walsh testified that at the interview of July 24, 1964 Mr Dilts made a remark to the effect that if he had been a day later or a few days later it would have been too late. The impression of urgency created by this remark is hardly in keeping with the facts. Mr Dilts admitted he had not drawn up any of the charges when he had his discussions with Mr Walsh in June 1964. The deadline of August 28, 1964 for the commencement of prosecution under subsection 136(4) of the Income Tax Act was not definitely confirmed. One of the Department officials referred in a memo to a date in January 1964 as the date from which the period of a year would run. It is arguable that, until the Minister had received the opinion of counsel appointed to review the facts and to advise the Minister whether a prosecution would be justified, the period of a year would not commence to run.

The apparent imminence of prosecution which was being emphasized appears to have been designed to increase the pressure on Mr Smerchanski to force him to capitulate. If a similar technique had been employed by a bond company to recover embezzled funds from an individual it had bonded the Court would not require the production of a letter signed by the bond company president promising immunity from prosecution to conclude that the actions of the company amounted to duress and an illegal bargain not to prosecute. However counsel for the appellant does not rest his appeal on duress or the stifling of a prosecution but on the ground that the Minister exceeded the authority conferred on him by Parliament by extorting the conditions contained in the documents of July 2, 1964 and July 10, 1964 and that the taxpayers could not by their consent give to the Minister a power he otherwise did not possess. Regardless of the failure of counsel to argue the pleas of duress and stifling a prosecution it was proper for the learned trial judge proprio motu to make his own decision with respect to their effect on the document. Since the decision is a matter of inference from facts which are not in dispute this Court is in as good a position as the learned trial judge to arrive at a sound conclusion. If the facts would justify a particular inference if the matter concerned an individual such an inference may be drawn as to the conduct of the Minister of National Revenue.

It was agreed at a pre-trial conference that the respondent would put in his evidence first to be followed by the appellant. After the respondent had completed his prima facie case, it was agreed that the taxpayer would adduce evidence on the two issues only and that after argument a preliminary judgment would be given by the learned trial judge on these two issues with rights of appeal. It follows that only the respondent’s evidence as to the validity of individual assessments was heard and during the argument of this appeal respondent’s counsel spent a great deal of time reviewing this evidence. While not strictly relevant to the first question such evidence tended to seriously tarnish the character of the appellant Smerchanski. This evidence points to numerous instances of tax evasion and the appellant destroyed his credibility and forfeited the respect of the Court by his implausible explanations and misleading additions to his diaries but under our system of law, even a convicted criminal is entitled to the protection of the law. Mr Smerchanski’s conduct should not affect our decision on the principle involved in this appeal.

The learned trial judge dealt with the first question as follows:

In my opinion the taxpayer’s right to appeal assessments is a private right and not a public right in the sense that the appeal provisions in the Act express a public policy. I am also of the view that the right can be waived by a taxpayer, and that it was done in this case.

With respect this appears to me to be too narrow a view of the matter. The Income Tax Act is a public Act passed in the public interest containing the rules to govern the assessment of income taxes and the penalties which may be imposed for income tax offences. It is a basic principle that the tax should be assessed legally and that the taxpayer should be told the amount of any additional assessment and the reason for it and to safeguard his rights he is given the right to appeal. As stated by Rand, J in the case of R W S Johnston v MNR, [1948] SCR 486 at 490; [1948] CTC 195 at 203; 3 DTC 1182:

It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy.

It is not remarkable that counsel have been unable to find any judgment directly in point. In my opinion this emphasizes the fact that no court has ever previously had to consider the validity of such extraordinary conditions as were imposed on this taxpayer.

The Minister has been given wide powers to investigate, assess and penalize and a discretion as to prosecution but he must discharge the corresponding duty to act in conformity with the Act. He cannot, for example, withhold from a taxpayer the nature and amount of the tax he is assessing or compel the taxpayer to give a blank cheque to be filled out at his caprice. It is not overstating the facts to describe in this way the concessions he obtained from the appellants by the two documents of July 2 and July 10, 1964. I quote from the letter of commitment:

It is agreed and understood that the total amount of such liability will be accepted and approved by us without question or reservation and without any demand whatsoever being made of the Department of National Revenue for particulars of the total amount involved.

I quote from the document of July 10, 1964:

I do hereby approve of and consent to the individual amounts involved in each assessment, which I understand are inclusive of taxes, interest and penalties for each of the said years. I do hereby admit my liability for the amount of the same and I do hereby waive any right of appeal I now or may have in regard to any of the said re-assessments.

The reassessments gave merely one total including tax, interest and penalty. Mr Williston, counsel for the respondent, stated during argument that at the time of the settlement in July 1964 it was a rule of the Income Tax Department not to prosecute when a reassessment had been made so the notices of reassessment enclosed in Mr Dilts’ letter of July 8, 1964 were intended not merely to give the amount of the tax, interest and penalty demanded but also to give Mr Smerchanski an assurance of immunity from prosecution prior to his paying the money. With regard to the understanding between Mr Walsh and Mr Dilts that the total assessment would not exceed $1,200,000 this could not bind the Minister and therefore would not relieve Mr Smerchanski from the obligation of his covenant in the letter of commitment of July 2, 1964.

The inference must be drawn from all these facts that the Minister used the threat of prosecution to compel the taxpayer to relinquish every safeguard inserted in the Act to protect from unjust exactions and to place his assets unreservedly at the disposal of the Minister. This amounted to the imposition of an illegal and unprecedented punishment which he has no power to inflict with or without the consent of the taxpayer.

If the actions of the Income Tax Department in relation to this taxpayer were legal and proper then it follows that a similar course of conduct may be employed to obtain the same surrender of his rights in the case of any delinquent taxpayer of sufficient prominence for the mere threat of prosecution to be an effective form of compulsion. In my opinion this is not justified by the Income Tax Act and is an abuse of the power of the Minister which it is our duty to prevent.

I hold that the document dated July 10, 1964 is invalid on the ground that it was obtained by duress, that it was executed as part of a bargain to stifle a prosecution and that the Minister of National Revenue cannot avoid the duty to assess income taxes according to law, to reveal to the taxpayer the nature of the tax, to permit the taxpayer to question the assessment and to have the assessment reviewed on appeal.

It is well settled law that the doctrine of estoppel cannot successfully be invoked to support an illegal contract. Since I hold that the document in question is invalid no question of estoppel arises. I would allow the appeal on the first question with costs in the cause.

The second question related to the income tax return of the appellant for the years 1945 to 1951 and calls for an answer to the question, “Did the taxpayer make misrepresentations in filing a return for any of these years?” The respondent was unable to produce the actual income tax returns filed with the Department on the ground that they have been destroyed and sought to prove the contents of these returns by producing the copies of income tax returns found in the possession of the taxpayer.

The learned trial judge dealt with the second question as follows:

In this case, when the taxpayer’s records were seized, there were among them, copies of what appeared to be the actual returns filed for 1945 to 1951. Evidence given on behalf of the Minister was to the effect that Departmental officials had checked what I shall call the copies (which contained assessment notices, and sometimes reassessment notices, and receipts) and had reconciled all the figures set out in the copies and the additional material found with the copies, with account cards kept by the Department. The account cards were missing at the time of trial, but the evidence given by the Departmental officials was they were satisfied, from their reconciliation, the copies found In the possession of the taxpayer were In all probability true copies of the original returns. In examination in chief, the taxpayer gave evidence in regard to the copies of the returns in question. His Signature appeared on all copies except that for 1951. He candidly said it was more than likely or probable that these copies were carbon or true copies of the returns filed with the Department, but could not swear they were exact copies. On the evidence of the Departmental officials who made the reconciliation, and on the admission made by the taxpayer, I find the Minister has proved, on a balance of probabilities, the returns for those particular years.* [1]

What has been destroyed is not merely the income tax return submitted by the taxpayer but his entire file for the years in question. Such a file would contain letters, reports on personal interviews, memos and recommendations on contentious matters. Counsel for the appellant produced such a file pertaining to Eco to show how many documents it had accumulated. If in the course of an interview with a representative of the Department in relation to his income tax return, the taxpayer gave the facts on a transaction involving a question as to whether money received by the taxpayer was taxable income or a capital gain, there could be no misrepresentation as to this transaction. How can it be proved in the absence of the complete file that such information was not given to the Department? The learned trial judge does not appear to have considered this aspect of the problem but contents himself with the finding that “the Minister has proved, on a balance of probability, the returns for the particular years”.

The respondent called Mr Karn, an income tax official, who had had several interviews with the appellant in 1948 to prove that any information given him by the taxpayer was limited to the matters referred to in a letter to the Income Tax Department, a copy of which was found attached to the taxpayer’s copy of his income tax return. The importance attached to this evidence by the respondent is indicated by his quotations from this evidence in paragraphs 12, 13, 14 and 16 in his statement of facts.

In my opinion the interviews referred to in this letter would have been a routine, commonplace matter of no particular significance to a busy official and the documents attached to the taxpayer’s income tax return are without particular interest or significance. But in spite of that Mr Karn testified under oath to an actual recollection of this transaction after a lapse of over 21 years. Such a feat of memory is incredible.

It is elementary that to prove a document which has been destroyed by secondary evidence, proof must be adduced as to how and when the document was destroyed. The respondent did not produce evidence as to the departmental rule which authorized the destruction of these documents or as to when they were destroyed. Mr Dilts testified that when he was examining the departmental files in the spring of 1964 he was unaware that any documents were missing which suggests that their destruction occurred after Mr Dilts examined them. It seems to me that more information should have been given before secondary evidence became admissible.

When the learned trial judge decided the first question against the taxpayer, the second question became academic. But if the appeal on the first question is allowed, the answer to the second question be- comes of importance and in my opinion deserves more careful study than appears to have been given to it. In the event of the appellant succeeding on his appeal with respect to the first question. I would refer the second question back to the learned trial judge to be dealt with by him along with the other issues left to be tried.