Bonnie Ellen Danielson v. Minister of National Revenue, [1986] 2 CTC 341

McNair, J.:—This is an originating motion of the applicant Bonnie E. Danielson, under section 18 of the Federal Court Act for the following relief:

(1) A declaration that under Section 227.1 of the Income Tax Act the Minister of National Revenue cannot assess liability under Section 227.1 of the Income Tax Act against a director of a company without first litigating the issue of whether that director “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances” pursuant to Section 227.1(3) of the Income Tax Act;

(2) A Writ of Certiorari or an Order for relief in the nature thereof to quash the determination by the Respondent, the Minister of National Revenue, to assess tax as owing by the Applicant and the issue of a document headed “Notice of Assessment” dated May 13, 1986 in respect of those taxes allegedly owing by the Applicant.

The motion proceeded on the basis of an order for certiorari to quash the Minister’s assessment of some $10.8 million against Mrs. Danielson as a director of FPI Development Corporation (FPI) under section 227.1 of the Income Tax Act on the ground that the assessment was illegal and invalid. The claim for declaratory relief was not alluded to and I do not propose to deal with it. This is just as well because it is now authoritatively settled that a proceeding for a declaration must be brought by way of action and cannot be sought in an originating motion application under section 18 of the Federal Court Act.

The assessment against the applicant was made on May 13, 1986. Mrs. Danielson became a director of FPI on October 23, 1984 and resigned as a director on April 17, 1986. On May 13, 1986 the Minister had assessed a like amount of $10.8 million against the applicant’s husband Charles E. Danielson. The latter had been active in the promotion of a scientific and research tax credit scheme for FPI. It is unnecessary to recount the details of the SRTC scheme. The upshot was that the Minister assessed the corporation on March 1, 1985 to the tune of $10.2 million for tax allegedly payable under Part VIII of the Income Tax Act. Part VIII incorporates, inter alia, with such modifications as the circumstances require, section 152 dealing with the assessment process. The Part VIII provisions relating to SRTC tax obligation are contained in sections 194 and 195.

The statutory provisions particularly relevant to the case are subsection 227(10) and certain subsections and paragraphs of section 227.1, which state:

227 (10) Assessment.—The Minister may assess

(a) any person for any amount payable by that person under subsection (8) or 224(4) or (4.1) or section 227.1 or 235, and

(b) any person resident in Canada for any amount payable by that person under Part XIII,

and, where he sends a notice of assessment to that person, Divisions I and J of Part I are applicable with such modifications as the circumstances require.

227.1 (1) Liability of directors.—Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

(2) Limitations.—A director is not liable under subsection (1), unless

(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court of Canada under subsection 223(2) and execution for such amount has been returned unsatisfied in whole or in part;

(3) Idem.—A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

(4) Idem.—No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

(5) Amount recoverable.—Where execution referred to in paragraph (2)(a) has issued, the amount recoverable from a director is the amount remaining unsatisfied after execution.

On August 8, 1986 the applicant filed a notice of objection to the Minister's assessment, pursuant to section 165 of the Act. The Minister is now obliged to reconsider the assessment and vacate, confirm or vary it or reassess. The filing of the notice of objection has the effect of staying the Minister's hand in taking any of the actions or proceedings for the collection of unpaid taxes prescribed in section 225.1 until 90 days after the date of mailing of a notice to the taxpayer that the Minister has confirmed or varied the assessment, subject to a direction to pay under section 225.2.

The assessment against the taxpayer corporation was presumably made under subsection 195(2) of the Act and this provides for a payment of a tax equal to 50 per cent of the aggregate of all amounts designated under section 194 with respect to the issuance of share or debt obligations under a SRTC scheme. Presumably, the Minister could also rely on the assessment at large provisions contained in subsection 152(7) of the Act. The assessment against the applicant, Mrs. Danielson, would seem to have been under sections 227(10) and 227.1, buttressed by subsection 152(7).

Counsel for the applicant challenges the validity of the assessment on four grounds. Firstly, it is argued that it is a condition precedent to the operation of section 227.1 that the corporation, FPI, had failed to pay the Part VIII tax for the taxation year. The obligation to pay is said to be dependent on the validity of the assessment. The FPI assessment in this case was invalid because the Minister's jurisdiction to assess derives from his examination of the taxpayer’s return of income under subsection 152(1). The corporation was not obliged to file its tax return until June 28, 1986. Therefore the assessment against FPI is illegal.

A second precondition for the validity of an assessment against a director under section 227.1 is that execution on a certificate of judgment against the corporation has been returned unsatisfied in whole or in part. The argument here is that an official of the Department of National Revenue is said to have admitted to the applicant’s husband that there were assets of FPI that might have been exigible for execution in Ontario. The admission, if there was one, was by no means clear and unequivocal.

The third precondition for the operation of section 227.1 is that a director is not liable for his corporation's failure to pay “where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances". It is the submission of counsel for the applicant that the exculpatory issue of due diligence must be determined in an action against the delinquent di- rector and that such liability cannot be determined by assessment. Thus, the director will have his day in court.

Finally, it is submitted that if there is such an extraordinary power to fasten prima facie liability on a director by assessment then the Minister is under a duty of fairness to conduct the necessary investigations on the issue of due diligence and afford the director an opportunity to be heard before making the assessment. It is no answer to say that the applicant has a right of appeal against the assessment.

Counsel for the Crown strenuously contends that the applicant’s appropriate remedy is that of appeal where all the conditions going to the validity of the assessment, including the operation of section 227.1 and the due diligence exemption, can be properly determined in the appropriate forum. What is at issue is the applicant’s assessment and not the FPI assessment and the former can be better challenged in an appeal. Moreover, it is submitted that the issue of “due diligence” is not something that the Minister has to determine in advance of making his assessment. The onus of establishing that the director exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure of payment by the corporation is that of the director concerned. It is not a matter within the immediate knowledge of the Minister. If it transpired on appeal that the taxpayer did meet the requisite standard of due diligence then the Minister’s assessment would undoubtedly fail.

The real issue in the case, as it seems to me, is whether the applicant can bring an application at all under section 18 of the Federal Court Act for an order for certiorari to quash the assessment on the ground of its illegality.

In my view, this is the whole point of the case and one on which there is divergent judicial opinion at the trial level: W.T.C. Western Technologies Corporation v. M.N.R., [1986] 1 C.T.C. 110; 86 D.T.C. 6027 (F.C.T.D.); Bechthold Resources Limited v. M.N.R., [1986] 1 C.T.C. 195; 86 D.T.C. 6065 (F.C.T.D.); Bechthold Resources Limited v. M.N.R. (No. 2), [1986] 1 C.T.C. 2406; 86 D.T.C. 1297 (T.C.C.); Hart et al v. M.N.R., [1986] 2 C.T.C. 63; 86 D.T.C. 6337; R.J. Gibbs v. M.N.R., [1984] C.T.C. 434; 84 D.T.C. 6418 (F.C.T.D.); and Parsons et al. v. M.N.R., [1983] C.T.C. 321; 83 D.T.C. 5329 (F.C.T.D.).

I do not propose to exhaustively analyze these cases. It will suffice to touch briefly on the results. Western Technologies held that an originating motion for certiorari to quash an illegal assessment was an appropriate remedy in the circumstances of the case and that the taxpayer was not bound to pursue his remedy by way of appeal. Bechthold Resources Limited went the other way. The learned judge there held that the assessment complained of could only be attacked by way of regular appeal under the provisions of the Income Tax Act based on the law stated by the Court of Appeal in the Parsons case, to which I will subsequently refer. In Bechthold Resources (No. 2) The Tax Court of Canada dismissed the taxpayer’s application for an extension of time to appeal under the Income Tax Act on the ground that the Western Technologies decision was correct in law and that there could be no appeal from an assessment that was a nullity. The Hart case dismissed an originating motion under section 18 of the Federal Court Act to quash an assessment on the ground that the prerogative remedy did not avail because of section 29 of the Federal Court Act and the decision as to its applicability by the Court of Appeal in the Parsons case. In the Gibbs case the Court followed the Parsons decision and dismissed a section 18 application for an order to quash the taxpayer’s assessment.

Section 29 of the Federal Court Act, R.S.C. 1970, c. 10 (2nd Supp.) states:

Notwithstanding sections 18 and 28, where provision is expressly made by an Act of the Parliament of Canada for an appeal as such to the Court, to the Supreme Court, to the Governor in Council or to the Treasury Board from a decision or order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except to the extent and in the manner provided for in that Act.

The section provides in effect that no proceedings shall be brought in the Federal Court to review or attack a decision or order of any federal tribunal where an appeal therefrom has been expressly provided therefor.

In Parsons et al. v. M.N.R., supra, the issue before the court at the trial level involved the Minister's assessment against two directors of a corporation in their personal capacities for the amount of a dividend declared payable to the sole corporate shareholder of the corporation, without having first obtained the certificate required under subsection 159(2) of the Income Tax Act. The court held that the directors were not personally liable for the assessment because there was no obligation incumbent on them under the circumstances to obtain the certificate under subsection 159(2). The real crux of the case was whether section 29 of the Federal Court Act precluded the court from exercising its discretion under section 18 of the Federal Court Act to issue certiorari and an injunction to quash the impugned assessment and restrain its enforcement, where the Income Tax Act expressly provided for an appeal from such assessment. The Minister took the position that the remedies of certiorari and injunction were barred and that the only effective remedy was by way of statutory appeal. The court ruled otherwise. The reasons for decision are stated by Cattanach, J., at 325 (D.T.C. 5322):

The assessment by the Minister, which fixes the quantum and tax liability, is that which is the subject of the appeal.

The quantum is not the basis of the attack by the applicants in this instance.

The basis of the attack upon the assessments is that the Minister did not have the power by law in the circumstances to make the assessments and accordingly they are void as well as illegally made.

An error in law which goes to jurisdiction is alleged in which event certiorari is the appropriate remedy and, in my view, that remedy is available despite the appeal process provided against quantum and liability therefor which is the purpose of the assessment process. That is an appeal provided from a matter far different from the lack of authority in law to make the assessment.

For that reason section 29 of the Federal Court Act, in my view, does not constitute a bar to the certiorari and injunctive proceedings taken by the applicants.

The decision was appealed to the Federal Court of Appeal in The Queen v. Parsons et al, [1984] C.T.C. 352; 84 D.T.C. 6345. The court there held that section 29 of the Federal Court Act precluded a challenge of the Minister’s assessment except by way of appeal therefrom as expressly provided by the Income Tax Act. Pratte, J., gave judgment for the court, stating the following reasons for decision at 352-53 (D.T.C. 6346):

We are all of the opinion that the appeal must succeed on the narrow ground that the only way in which the assessments made against the respondents could be challenged was that provided for in sections 169 and following of the Income Tax Act. This, in our view, clearly results from section 29 of the Federal Court Act.

The learned judge of first instance held that, in this case, section 29 did not deprive the Trial Division of the jurisdiction to grant the application made by the respondents under section 18 of the Federal Court Act because, in his view, the appeal provided for in the Income Tax Act was restricted to questions of “quantum and liability” while the respondent's application raised the more fundamental question of the Minister's legal authority to make the assessments. We cannot agree with that distinction. The right of appeal given by the Income Tax Act is not subject to any such limitations.

In our view, the Income Tax Act expressly provides for an appeal as such to the Federal Court from assessments made by the Minister; it follows, according to section 29 of the Federal Court Act, that those assessments may not be reviewed, restrained or set aside by the Court in the exercise of its jurisdiction under sections 18 and 28 of the Federal Court Act.

In my judgment, the case at bar is on all fours with the Parsons case and there is nothing whatever to distinguish. The contention advanced by the applicant is the selfsame contention that failed before the Federal Court of Appeal. In the result, the contention must fail here as well.

For the foregoing reasons, the applicant’s motion is dismissed with costs.

Motion dismissed.