Mary E. Walkem v. Minister of National Revenue, [1971] CTC 513, 71 DTC 5288

WALSH, J.:—This matter came on before me for hearing at Toronto on two motions which were heard together, one being a motion by respondent for an order quashing what he refers to as “the purported Notice of Appeal herein’’, and the other being an application on behalf of the appellant for an order allowing the appellant’s appeal pursuant to Section 99(5) of the Income Tax Act, as respondent had not replied to same within sixty days from the notice of appeal.

The facts giving rise to the litigation may be set out as follows. On July 17, 1968, by a notice of assessment bearing number 168531, respondent levied tax in the amount of $14,074.17 under the provisions of Section 53(1) (a) of the Income Tax Act in respect of moneys allegedly transferred to her by her husband, Edward K. Walkem, and by a second assessment dated August 7, 1968, bearing number 168588, further tax in the amount of $19,034.72 was assessed under the same provisions of the <Act. On October 12, 1968 appellant served notices of objection to each of these asssesments and on November 27, 1969 in answer thereto the Minister issued separate notifications under Section 58 of the Act confirming that each of the assessments had been properly assessed in accordance with the provisions of Section 53(2) of the Act. On January 13, 1970 the taxpayer filed notices of appeal before the Tax Appeal Board against the two separate assessments. When the matter came before the Board for hearing on October 21, 1970 counsel for respondent filed two notices of re-assessment, each dated August 28, 1970, the first of which, bearing number 242463, levied tax in the amount of $18,160.84 stating that it cancelled the previous assessment bearing number 168531 dated July 17, 1968 (which it should be noted was for the amount of $14,074.17). The second re-assessment, bearing number 242468, levied tax in the amount of $33,108.89 together with interest of $117.44 and bore the notation that it cancelled previous assessment number 168538 dated August 7, 1968 and included the amount assessed by assessment notice 242463 dated August 28, 1970. Both assessments again indicated that they were made under the provisions of Section 53(1) (a) of the Income Tax Act, and it will be noted that the total of $33,108.89 was the same as the total of the two original assessments of July 17 and August 7, 1968 respectively on which the appeals had been taken. Counsel for the Minister then moved for an order quashing the two notices of appeal before the Board on the ground that the assessments appealed from had been cancelled and superseded by the re-assessment of August 28, 1970 and more specifically re-assessment number 242468 which included the re-assessment number 242463 though both bore the same date. Judgment was rendered by the Tax Appeal Board dated October 21, 1970 (reported [1970] Tax A.B.C. 1183), quashing the two appeals before it on the grounds that they had been cancelled or superseded by the new assessment dated August 28, 1970 and, hence, had become nullities from which no valid appeal lay. By notice of appeal filed March 11, 1971 appellant instituted the present proceedings before this Court to set aside this judgment of the Tax Appeal Board. Appellant has also filed notice of appeal dated March 22, 1971 with the Tax Appeal Board from the two notices of assessment dated August 28, 1970.

Appellant’s attorney raised three arguments on the motion before me:

1. Respondent has only the power to assess under Section 53(2) of the Act and does not have the power to re-assess thereunder that he has under Section 46(4) or Section 58(3) of the Act. He therefore did not have the power to re-assess under Section 53(2) by way of the second assessment as he purported to do for exactly the same transfers although calculated in a different way.

2. In the alternative, he argued that since the Minister elected to proceed under Section 58(3) and confirmed the first assessments, he thereby lost the right to re-assess under Section 46(4) since, having proceeded under a specific section, namely Section 58(3), this overrides his rights under the general section.

3. In the event that the Court finds against the appellant on both of these arguments, then in the alternative he submitted on the facts that the Walkem appeal was sub judice and hat the Minister had lost the right to re-assess.

The sections in question read as follows :

46. (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 or 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

(ii) of paragraph (a), in any other case,

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

53. (1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatsoever,

(a) to his spouse or to a person who has since become his spouse, or

(b) to a person who was under nineteen years of age,

the following rules are applicable:

(i) the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of section 21 or section 22, as the case may be, in respect of income from the property so transferred or from property substituted therefor; and

(ii) the transferee and transferor are jointly and severally liable to pay the lesser of

(A) any amount that the transferor was liable to pay under this Act on the day of the transfer, or (B) a part of any amount that the transferor was so liable to pay equal to the value of the property so transferred;

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

(2) The Minister may at any time assess a transferee in respect of any amount payable by virtue of this section and the provisions of this Division are applicable mutatis mutandis in respect of an assessment made under this section as though it had been made under section 46..

58. (3) Upon receipt of the notice of objection, the Minister shall with all due despatch reconsider the assessment and vacate, confirm or vary the assessment or re-assess and he shall thereupon notify the taxpayer of his. action by registered mail.

(4) A re-assessment made by the Minister pursuant to subsection (3) is not invalid by reason only of not having been made within 4 years from the day of mailing of a notice of an original assessment or of a notification described in subsection (4) of section 46.

It was argued that while the Minister has the power to assess under Section 46(1) and Section 53(2), he has the additional power to re-assess under Section 46(4) and Section 58(3). The reference in Section 53(2), however, to the provisions of ‘‘this Division’’ (i.e. Division F of the Act headed Returns, Assessments, Payment and Appeals’’, which includes Sections 44 to 58 of the Act, and therefore refers to all the sections in issue before me) being applicable “mutatis mutandis in respect of an assessment made under this section” (i.e. the whole of Section 53 headed ‘‘Tax on income from property transferred between husband and wife or to minors’’) as though it had been made under Section 46 clearly refers to all of Section 46 and is not limited to Section 46(1) giving the power to assess but also includes Section 46(4) which gives the power to re-assess, and it therefore appears to me that the Minister has he power to re-assess under Section 53(2) although these words are not specifically used in that section. Support is given to this conclusion by the wording of Section 139(1)(d) of the Act which, in defining assessments, states:

139. (1) In this Act,

(d) “assessment” includes a re-assessment;

Furthermore, under Section 26(3) of the Interpretation Act, R.S.C, 1970, e. 1-23, it. is stated that:

26. (3) Where a power is conferred . . . the power may be exercised . . . from time to time as occasion requires.

Four leading cases dealing with somewhat similar facts were referred to in the argument of counsel and it is necessary to examine the facts in each of them closely in order to reconcile what might otherwise appear to be somewhat conflicting decisions. The cases to which I have reference are the Tax Appeal Board judgment in the case of Irving Brown v. M.N.R. (1964),

30. Tax A.B.C. 197; the judgment of Jackett, P., as he then was, in the case of Coleman C. Abrahams (No. 1) v. M.N.R., [1966] C.T.C. 690, which has been followed in many Tax Appeal Board decisions including its decisions in the present case; the Tax Appeal Board judgment in Vincas Andrulionis v. M.N.R., [1968] Tax A.B.C. 1007; and finally a decision of Jackett, then President, in the case of Elgin Cooper Realties Ltd. v. M.N.R., [1969] C.T.C. 598, as reported by a Practice Note prepared by F. J. Dubrule.

In the Brown case (supra), the first re-assessment which was appealed from added $54,000 to appellant’s taxable income. While the appeal was pending and notice of hearing had been given, the Minister re-assessment again adding an additional $78,000. This second re-assessment was also appealed from and the appellant contended that the re-assessment was invalid and illegal as the Minister could not issue a re-assessment for any given taxation year while the previous assessment was under appeal. In upholding this argument, Mr. Boisvert of the Tax Appeal Board, stated at page 207 :

The Minister held, for his part, that notwithstanding an appeal he may still continue, under Sections 46 and 58 of the Act, to reassess a taxpayer for any taxation year at pleasure.

If such a line of argument were followed, no useful purpose would be served by appeals in income tax cases. If, after an appeal is filed, the Minister can continue to asssess, the right to appeal either to the Appeal Board or to the Exchequer Court becomes an illusion—as the old saying goes, “Bien fol qui s’y fie”.

Again, in concluding, he stated at page 212 :

On the whole I am of the opinion that. when, as a result of an appeal, the judicial authority set up has an assessment referred to

it, the ministerial authority no longer has jurisdiction in the * matter and can no longer act until the court has passed judgment between the parties concerned.

In the Abrahams case (supra), which has become a leading case followed in several subsequent judgments of the Tax Appeal Board and this Court, Jackett, P., as he then was, reached a different conclusion but stated, at page 692 :

. . . The argument is that, the first re-assessment being, on that account, sub judice, the Minister had then no power to re-assess. Reference was made to Irving Brown v. M.N.R., 35 Tax A.B.C. 197, but it was agreed that that was a decision on a different question.

In the Abrahams ease the second re-assessment was made very shortly after the notice of appeal against the first re-assessment had been made and both appeals were tried together, the differ- ence between the two re-assessments being that, by the second re-assessment, the appellant was assessed on the basis that his income was the amount on which the first re-assessment was based plus an additional amount. In upholding the validity of the second re-assessment, even though it was made following an appeal from the first one, the judgment held at page 692:

. . . The fact that an appeal has been initiated should not make any ? difference in the application of the provision.

. It would be different if one assessment for a year were followed by an “additional” assessment for that year. Where, however, the “re-assessment” purports to fix the taxpayer’s total tax for the year, and not merely an amount of tax in addition to that which has already been assessed, the previous assessment must automatically become null.

In the present case, I do not consider that the final re-assessment number 242468 constitutes an additional assessment over and above the two re-assessments numbers 168531 and 168538 which were first appealed from merely because it adds $117.44 interest. to the assessment for $33,108.89 tax which, as already pointed out, represents the total of the two earlier re-assessments.

On the contrary, it seems to purport to fix the taxpayer’ s total u tax for the year and not merely an amount of tax in addition

to that which had already been assessed and, therefore, nullifies the previous re- assessments in accordance with the Abrahams judgment.

The Andrulionis case (supra) dealt with a situation where a re-assessment was made by adding additional amounts as income previously unreported by the taxpayer and by levying a penalty. This was appealed from and the Minister then made a re-assessment, reducing the. amount of tax and penalty imposed. by granting allowances for two dependent children of the taxpayer

which _, he had not claimed in, his original income tax return. This second re-assessment was also appealed from and the Minister sought to have the appeal quashed on procedural grounds. In this case Mr. Davis of the Tax Appeal Board permitted an amendment of the original notice of appeal so as to refer to the later re-assessment made subsequent to the notice of objection and, as the appeal on the first re-assessment was a valid and subsisting one, held that the Board had jurisdiction to hear it. While the facts in this case differ from those in the Abrahams judgment (supra) in that the second re-assessment instead of adding an additional amount merely gave credit to the taxpayer for allowances which he had neglected to claim, while still maintaining the claim for tax on the additional unreported income it thereby fixed the taxpayer’s total tax for the year, in effect annulling the previous re-assessment, the joinder of the two appeals by permitting the amendment of the notice of appeal against the first re-assessment so as to refer to the later re-assessment appears to be a reasonable and practical way of dealing with the procedural problem.

The later finding of J ackett, P., as he then was, in the Elgin Cooper. Realties Ltd. case (supra) is in line with this. Although the question is not dealt with in the reasons for judgment, it is discussed in the Practice Note of Mr. Dubrule who represented the Minister at the trial, which Note was approved by Mr. Stikeman who. represented the taxpayer. In that case there was an appeal before the Court against an assessment of income tax which was followed. by a notice of re-assessment adding an additional sum to the appellant’s income for the year in question, to which the appellant filed a notice of objection which, in turn, was followed by a notice of re-assessment which reduced appellant’s income (to an extent substantially less than the sum added by the first re-assessment). by applying business losses in the preceding and subsequent taxation years. Appellant’s counsel submitted that appellant had followed all the steps. required by the Income Tax Act in connection with its appeal against the original assessment which was properly before the Court for adjudication. The Practice Note goes on to say, at page 999:

. . . When asked for his comments by the court on the submission by Counsel for the Appellant, Counsel for the Respondent agreed with the position taken by Counsel for the Appellant but did mention to the court its decision in the case of Abrahams v.

M.N.R., [1966] C.T.C. 690.

The court proceeded to hear the appeal of the Appellant and on June 20, 1969 gave its Reasons for Judgment allowing the appeal.

In this case, as in the Andrulionis case (supra), the second re-assessment did not add to but actually reduced the appel- lant’s tax liability while leaving before the Court the main issues on which the appeal against the original assessment and notice of objection to the first re-assessment had been based. While it could be argued that the second re-assessment had absorbed the first and that therefore there was no issue before the Court on the original assessment and first re-assessment, counsel for respondent had agreed with the position taken by counsel for the appellant, and the reasonable course was to allow the appeal to proceed.

Appellant’s counsel attempted to make a distinction on the basis of whether the second re-assessment was made shortly before or after the notice of appeal had been filed as in the Abrahams case (supra) and the various cases which followed it, and the situation which existed in the Brown case (supra) and the present case where the Board or Court is seized of the matter, the notice of hearing. having gone out, and in the present case the hearing haying been adjourned and a motion for particulars made and never disposed of, but I do not accept this distinction. If the Minister has the right to make a second re-assessment after an appeal has been taken to the Board or Court against a first re-assessment, then he can do so at any time within the delays allowed by the Act. As a matter of practice, it appears regrettable that the Minister should decide to make a second re-assessment very belatedly and after the notice of hearing of an appeal against the first re-assessment has gone out especially when, as in the present case, the second re-assessment changed nothing save for adding a minimal sum for interest on the amounts claimed in the original re-assessments, which were before the Board on appeal. In a proper ease, if it w ere established that such a last minute notice of re-assessment were made solely for the purpose of delaying the hearing of the appeal, some appropriate action might be taken to prevent this, but this argument was not raised before me and the second re-assessment does not appear to have been made outside of any legal delays provided by the Act under which same could be made, so the Minister was entitled to make it.

On the contrary, I find that the real distinction lies, as implied in the Abrahams case (supra), in deciding whether or not the new re-assessment completely replaces all previous assessments or re-assessments so that there is no longer any issue before the Board or Court on those previous assessments or re-assessments, in which case the Board or Court no longer has any jurisdiction to hear the original appeal, or whether, on the other hand, it is merely an additional assessment for an additional amount, which may perhaps even be based on a different issue, in which case the original assessment or re-assessment has not been replaced and the issue arising out of it can still be litigated leaving to a later date the hearing of an appeal against the second re-assessment unless by agreement they are. joined for hearing. In the present case the final re-assessment, number 242468 replaced and annulled the two previous assessments numbers 168531 and 168538 which were about to be heard by the Tax Appeal Board on the appeals before it, as well as including the amount assessed in re-assessment number 242463 made on the same date, so that if the final re-assessment could be validly made by the Minister, as I have found, then the Tax Appeal Board had no issue validly remaining before it and the judgment quashing the appeals dated July 17 and August 7, 1968 respectively against assessments numbered 168531 and 168538 on the grounds that these assessments had become nullities from which no valid appeal lies must be sustained.

I shall deal briefly with appellant’s counsel’s second argument to the effect that, since the Minister elected to proceed under Section 58(3) of the Act in confirming the first assessment, he lost his right to re-assess under Section 46(4). In support of this argument he referred to a footnote of Jackett, P., as he then was, in his judgment (at page 691) in the Abrahams case (supra) reading as follows :

Reference has also been made to subsection (3) of Section 58 of the Act, which reads as follows:

"(3) Upon receipt of the notice of objection, the Minister shall with all due despatch reconsider the assessment and vacate, confirm or vary. the assessment or re-assess and he shall thereupon notify the taxpayer of his action by registered mail."

If it could be said that, “Upon receipt of the notice of objection", the respondent had “with all due despatch”, re-assessed, it might be that this section would have authorized a re-assessment not authorized by subsection (4) of Section 46. On the facts of this case, however, I do not regard subsection (3) of Section 58 as relevant.

I do not find that this distinction would apply on the facts of the present case either. In the first place there is nothing in the notices of re-assessment to indicate whether they were in fact made under Section 58(3) of the Act or under Section 46(4). Neither do I read into the Act the distinction which counsel for appeallant seeks to make to the effect that the Minister must elect to proceed either under Section 58(3) or under Section 46(4) and if he has, at some stage of the proceedings, availed himself of Section 58(3) he then cannot use Section 46(4). Furthermore, the question would only have practical significance in the event that there was a question of the Minister being beyond the delays for re-assessing under Section 46(4). Certainly, if the second re-assessment had been made by virtue of Section 58(3) it was not made "‘with all due despatch’’, but since there is no question in this case of the Minister being beyond his delays for re-assessing under Section 46(4), and, save for the question of the time within which it must be done, the power to re-assess under the Act is very broad, I do not find that the second re-assessment was not validly made.

As I have already indicated. I believe that it would have been far preferable, especially as no signficant change was made in the amount assessed, for the proceedings before the Tax Appeal Board to have béen amended às was done in the Andrulionis case (supra) to refer to and proceed on the second re-assessment or to have joined the appeals for hearing as was done in the Abrahams case (supra) so that the matter could have been disposed of on the merits. However, it was stated that the parties could not agree on this and therefore the Tax Appeal Board was compelled to confine its judgment to the procedural issue. I find that judgment to be correct, as already stated, and the ‘real issue will now have to be litigated in due course on the merits by virtue of the appeals taken against the second re-assessments number 242463, and in practice number 242468 which includes the former.

In the present proceedings the motion by respondent to quash appellant’ s appeal against the judgment of the Tax Appeal Board is maintained with costs, and it follows that appellant’s motion for an order allowing the appeal is dismissed, only one set of costs being allowed on the two orders which were heard simultaneously.

DOMINION FREEHOLD LIMITED, Appellant,

and!

MINISTER OF NATIONAL REVENUE, Respondent.

Federal Court—Trial Division (Gibson, J.), June 9, 1971, on appeal from assessments of the Minister of National Revenue,

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Section

The Minister, pursuant to Section 138A(2), had directed that the appellant and another corporation be deemed to be "associated cor- porations" for the purpose of Section 39 of the Act and the appellant now sought to establish, pursuant to Section 138A (3) (b) (ii), that "none of the main reasons for the separate existence of the two . . . corporations [was] to reduce the amount of tax that would otherwise be payable”. By a series of transactions in 1963 the appellant became the owner of the real estate and the other corporation, owned by the wives of the appellant’s shareholders, became the operator of the business.. Formerly both the real estate and the business. had been under a single corporate roof. The appellant contended that the main reasons for the altered corporate structure were (1) to protect the assets in the event of a strike and (2) for estate planning purposes.

HELD:

On the evidence as a whole, the main and paramount reason for the separate existence of the two corporations was to reduce the tax that would otherwise be payable. Appeal dismissed.

W. D. Goodman, Q’C. and Franklyn E, Cappell for the Appellant.

D. G. H. Bowman and E. McFadyen for the Respondent.

GIBSON, J. (orally) :—For its taxation years 1964, 1965 and 1966, pursuant to and founded on the direction of the Minister of National Revenue made under the provisions of ‘Section 138A(2) of the Income Tax Act, the appellant was re-assessed for income tax payable under Section 39 of the Income Tax Act, on the basis that the appellant was a corporation deemed to be associated with a corporation by the name of Dominion: Luggage Company Limited.

The sole issue in this appeal is whether or not on the evidence the appellant by virtue of Section 138A(3) (b) (ii) of the Income Tax Act has satisfied the onus of establishing that none of the main reasons for the separate existence in the said taxation years of the two corporations, namely, the appellant and Dominion Luggage Company Limited, was to reduce the amount of tax that otherwise would have been payable under the Income Tax Act.

In 1963, after several transactions and arrangements were eompleted, the appellant owned the land, buildings and equipment, situate in the City of Toronto, in which the corporation Dominion Luggage Company Limited carried on the business of manufacturing luggage. In essence the appellant was the real estate company and the latter company was the manufacturing company.

The manufacturing company was owned by the shareholder brothers Robert J. Slan, Leon J. Slan and Jack Slan. The appellant real estate company was owned by their respective wives.

Originally, and until 1954, the manufacturing business was carried on in partnership by the Slan Brothers and the partnership owned not only the manufacturing business but the land and plant and equipment used in connection therewith.

In 1954 there was incorporated Dominion Luggage Company Limited (predecessor name of the appellant) which took over the partnership business and operated it until 1963.

In 1963 three corporations were incorporated under the names of Robert J. Slan Limited, Leon Slan Limited and Jack Slan Limited and these companies formed a partnership which acquired the manufacturing business of the appellant corporation under its name of Dominion Luggage Company Limited.

Then the shares of Dominion Luggage Company Limited (which at that time, by reason of the last mentioned transaction, only had as its assets the land, buildings and equipment and not the other assets of the manufacturing part of the business) were sold by Messrs. Slan to their wives in equal shares. After that, the name of Dominion Luggage Company Limited was changed to Dominion Freehold Limited which is the present name of the appellant.

The partnership of the three corporations of the brothers Slan carried on the manufacturing business under the name of Dominion Luggage Company until July 31, 1964, when the three partner corporations were amalgamated into a single company under the name of Dominion Luggage Company Limited. That latter company has continued from that time until the present time to carry on the luggage manufacturing business.

So as stated above, the appellant during the said taxation years owned the real estate and the equipment in which the manufacturing business was carried on, and the appellant leased the same, first to the said partnership and later to Dominion Luggage Company Limited, the manufacturing business.

The details of all these transactions and how they were accomplished are set out in the reporting letter of the solicitors to Dominion Luggage Company Limited dated November 27, 1964 (see Tab 11 of Exhibit 3).

Two reasons were put forward in. evidence for the separate existence iof these two corporations in the said taxation years, namely, (1) for the protection of the assets. of the appellant because of the possibility of. a strike in 1963 which might eventually bankrupt the appellant (which as stated, at the time owned both the real estate and equipment and all the assets of the manufacturing business), and (2) for estate planning purposes for the then three shareholders Robert J. Sian, Leon J. Slan and Jack Slan.

The fact that the amount of income tax that otherwise would have been payable under the Income Tax Act would be reduced was also known, but it was the submission in the evidence that even if such a result would not obtain or would not continue to obtain in the future, the two said reasons for the separate existence of the two corporations were still the only main reasons therefor.

In my view the evidence established that during 1963, before the business of Dominion Luggage Company Limited was divided into two, there was no danger that the possible strike would eventually cause it to go bankrupt. The evidence established that the local union, which was the certified bargaining agent for the relevant employees of that company, was weak and that Dominion Luggage Company Limited was very strong financially.

In my view this suggested reason, viz. for the protection of the assets of Dominion Luggage Company Limited was not a main reason for the separate existence of the two subject corporations.

The other main reason given, namely, for estate planning purposes, probably was a valid reason but undoubtedly the lower income tax rate of the appellant on its income was also a factor in addition to the factor of thereby causing any increase in real estate value to accrue to the respective wives and not to the brothers Slan.

The fact that there was a possibility of a strike at the said time was the occasion which prompted the setting up of the business in two corporations, namely, the real estate and equipment in one corporation and the manufacturing business in the other. But in my view, it was not an important reason for doing

SO.

In my view also the estate planning as stated was a reason but that reason was also coupled with the income tax advantage consequent upon such estate plan.

Looking at the whole of all these transactions and all of the evidence, in my view the appellant not only has not established that none of the main reasons for the separate existence of the two said corporations was to reduce the amount of tax that would otherwise be payable under the Income Tax Act, but instead and on the contrary, has established that the main and paramount reason for the separate existence was to reduce the tax that would otherwise be payable.

with costs. The appeal is therefore dismissed with costs.