Kwee v. The Queen, 93 DTC 904, [1993] 2 CTC 2165 (TCC)

Sobier, T.C.C.J.:—The appellant appeals from an assessment by the Minister of National Revenue (the" Minister”) for her 1985 taxation year with respect to matters set out in full below.

The matter was brought before the Court for a determination of law under section 58 of the Tax Court of Canada Rules (General Procedure) as formulated in paragraph 14 of a statement of agreed facts filed.

Facts

1. The appellant is an individual resident in Canada.

2. By notice of assessment dated June 20, 1986, for the appellant's 1985 taxation year (the "1985 notice of annual assessment"), the Minister of National Revenue (the "Minister") assessed the tax for the appellant's 1985 taxation year pursuant to subsection 152(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). A copy of the 1985 notice of annual assessment is annexed hereto as exhibit 1. [1]

3. By notice of assessment No. 6417250 dated October 29, 1986 (the “first 1984 notice of subsection 116(5) assessment"), the Minister assessed the appellant in respect of her alleged liability to tax under subsection 116(5) of the Act in the amount of $9,300 relating to her alleged acquisition of an interest in taxable Canadian property from a non-resident. In making this assessment, the Minister assumed that the acquisition occurred in the appellant's 1984 taxation year. A copy of the first 1984 notice of subsection 116(5) assessment is annexed hereto as exhibit 2.

4. By notice of appeal received by this Honourable Court on November 4, 1988 (Court File No. 88-2010(IT)), the appellant instituted an appeal against the assessment made by the first 1984 notice of subsection 116(5) assessment (the “first appeal”). A copy of the notice of appeal filed in the first appeal is annexed hereto as exhibit 3. Prior to filing the first appeal, the appellant served upon the Minister a notice of objection in a timely manner pursuant to subsection 165(1) of the Act.

5. By letter dated April 20, 1989 counsel for the Minister, J.B. Dans, informed counsel for the appellant that it had come to his attention that the relevant transfer of property occurred in 1985 and not 1984 as specified in the first notice of subsection 116(5) assessment. He stated that he expected the Minister to issue a new assessment specifying the correct taxation year involved and nullifying the assessment made by the first 1984 notice of subsection 116(5) assessment. He also stated that no reply would be filed in respect of the first appeal. A copy of that letter is annexed hereto as exhibit 4.

6. By notice of reassessment No. 668466 dated February 9, 1990 (the "second 1984 notice of subsection 116(5) assessment"), the Minister refunded tax to the appellant in the amount of $9,300. A copy of the second 1984 notice of subsection 116(5) assessment is annexed hereto as exhibit 5.

7. By notice of assessment No. 7180634 dated February 9, 1990 (the "1985 notice of subsection 116(5) assessment"), the Minister reassessed tax to the appellant in respect of her alleged liability under subsection 116(5) of the Act in the amount of $9,300 relating to her alleged acquisition of an interest in taxable Canadian property from a non-resident. In making the assessment, the Minister assumed that the acquisition occurred in the appellant’s 1985 taxation year. A copy of the 1985 notice of subsection 116(5) assessment is annexed hereto as exhibit 6.

8. By letter dated July 10, 1990, counsel for the Minister, J.B. Dans, informed counsel for the appellant of the issuance of the second 1984 notice of subsection 116(5) assessment and suggested that the first appeal had, thereby, become moot. By that letter counsel for the Minister requested that the appellant withdraw the first appeal in light of the issuance of the second 1984 notice of subsection 116(5) assessment. A copy of that letter is annexed hereto as exhibit 7.

9. By notice of withdrawal dated July 12, 1990, addressed to this Honourable Court, the appellant withdrew the first appeal. A copy of the notice of withdrawal is annexed hereto as exhibit 8.

10. By judgment dated July 20, 1990, this Honourable Court dismissed the first appeal. A copy of the judgment dismissing the first appeal is annexed hereto as exhibit 9.

11. By notice of appeal filed in this Honourable Court on February 13,1992 (Court File No. 92-412(IT)), the appellant instituted an appeal against the assessment made by the 1985 notice of subsection 116(5) assessment (the "second appeal”). A copy of the notice of appeal in the second appeal is annexed hereto as exhibit 10. Prior to filing the second appeal, the appellant served a notice of objection upon the Minister in a timely manner pursuant to subsection 165(1) of the Act.

12. The assessment made by the 1985 notice of subsection 116(5) assessment was not made within 3 years from the day of mailing of the 1985 notice of annual assessment.

Issue

In paragraph 14 of the statement of agreed facts, the issues are stated to be as follows:

14. The question of law for this Honourable Court is whether:

(1) the assessment made by the 1985 notice of subsection 116(5) assessment was required to be made within three years from the date of mailing of the 1985 notice of annual assessment (as the appellant contends), or

(2) the assessment made by the 1985 notice of subsection 116(5) assessment was not required to be made within three years from the date of mailing of the 1985 notice of annual assessment (as the respondent contends).

Appellant's position

The appellant submits that pursuant to paragraph 152(4)(c) of the Income Tax Act (the"Act"), the Minister had three years from June 20, 1986, ("the 1985 notice of original assessment") to issue any additional assessments regarding the appellant's 1985 taxation year. Accordingly, the Minister is statute barred from issuing the additional assessment, dated February 9, 1990, in respect of the appellant’s 1985 taxation year because more than three years have elapsed since the date of mailing the 1985 notice of original assessment.

Respondent's position

The respondent submits that by notice of assessment No. 7180634 dated February 9, 1990, the Minister assessed tax under subsection 227(10.1) of Part XV of the Act which the appellant was liable to pay under subsection 116(5) of the Act in respect of a transaction which occurred in her 1985 taxation year (the "1985 notice of subsection 116(5) assessment") [2] . Thus, the respondent submits that the assessment made by the 1985 notice of subsection 116(5) assessment is not statute barred as it is an original assessment of tax under subsection 227(10.1) of Part XV of the Act and not a reassessment or an additional assessment. [3]

Statutory references: subsections 152(4) and 227(10.1) of the Act

Subsection 152(1) directs the Minister to examine, with due dispatch, a taxpayer's return of income for a taxation year and to assess the tax, interest and penalties, if any, for the year. Subsection 152(2) provides that, after examining a return, the Minister must send a notice of assessment to the person by whom the return was filed.

Subsection 152(4) provides that the Minister may at any time assess tax under Part I and may, within certain limitations, reassess or make additional assessments or assess tax under Part I, as the circumstances require.

As a general rule, paragraph 152(4)(c) provides that once an original assessment has been made, any further assessment, reassessment or additional assessment may only be made within three years from the date of mailing of the notice of original assessment. [4]

Subsection 227(10.1) of the Act provides that the Minister may assess any person for any amount that has not been withheld or deducted as a nonresident tax for, inter alia, any penalty or liability for failure to withhold tax or remit tax withheld. The Minister may further assess, reassess or make additional assessments within the time limits set forth in section 152 of the Act. [5]

Pursuant to paragraph 227(10.1)(a), [6] the Minister may assess any person for any amount payable by that person under subsection 227(9) of the Act. [7] Subsection 227(9) of the Act imposes a penalty upon a person for failure to remit or pay any amount of tax that he is, by section 116 of the Act, required to

notification that no tax is payable for a taxation year,

(b) within 6 years from the day referred to in subparagraph (a)(ii), if

(i) an assessment or reassessment of the tax of the taxpayer was required pursuant to subsection (6) or would have been required if the taxpayer had claimed an amount by filing the prescribed form referred to in that subsection on or before the day referred to therein, or

(ii) there is reason, as a consequence of the assessment or reassessment of another taxpayer's tax pursuant to this paragraph of subsection (6), to assess or reassess the taxpayer's tax for any relevant taxation year, and

(c) within 3 years from the day referred to in subparagraph (a)(ii), in any other case,

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require, except that a reassessment, an additional assessment or assessment may be made under paragraph (b) after three years from the day referred to in subparagraph (a)(ii) only to the extent that it may reasonably be regarded as relating to the assessment or reassessment referred to in that paragraph.

pay. Subsection 116(5) [8] of the Act sets out the purchaser's liability resulting from the disposition by a non-resident of taxable Canadian property other than depreciable property or "excluded property" (defined in subsection 116(6) of the Act).

Subsection 227(10.1) further provides that, upon the Minister sending a notice of assessment to the person involved, Divisions I and J of the Act are applicable. While this imports limitation period of subsection 152(4), it should be noted that the subsection clearly provides that the limitation for any reassessment, additional assessment or further assessment, as prescribed under subsection 152(4) only commences to run, in respect of matters referred to in subsection 227(10.1), with the mailing of an original notice of assessment under Part XV or Part XIII of the Act (as the case may be).

This assessment under Part XV (subsection 227(10.1) of the Act) is an original assessment which is in addition to the original assessment of a taxpayer pursuant to subsection 152(1) of the Act in respect of a taxation year. In essence, this original assessment under subsection 227(10.1) of the Act is an example of what may loosely be referred to as an "event assessment”, such that, even though a person (the purchaser) has been assessed for a taxation year pursuant to subsection 152(1) of the Act, where this event occurs (failure by a purchaser to remit or pay tax as required by subsection 116(5) of the Act), the Minister may assess that person (the purchaser) under subsection 227(10.1) in respect of his liability resulting from that event. It is noteworthy, that subsection 227(10.1) sets no time limits within which the Minister must make this original assessment. However, once the original notice of assessment in respect of tax liability under subsection 227(10.1) is made, the Minister is precluded from reassessing the taxpayer's liability under subsection 227(10.1) beyond the time limits imposed by subsection 152(4) of the Act.

Application of subsection 227(10.1) to the case at bar

In the case at bar, the Minister never sent an original notice of assessment in respect of matters referred to in subsection 227(10.1) (that is, for a penalty for failure to remit or pay an amount of tax as required by section 116). The assessment dated October 29,1986 [9] was in respect of tax owing by the appellant pursuant to subsection 116(5) of the Act. Thus it was a reassessment of Part I tax and is subject to the limitation period of subsection 152(4). In this assessment, dated October 29, 1986, the Minister assumed that the alleged transaction giving rise to the appellant's tax liability under subsection 116(5) occurred in the appellant's 1984 taxation year. In fact, the alleged transaction occurred in 1985, which the Minister later realized.

In the February 9, 1990 assessment the Minister referred to 1985 as the correct taxation year in which the alleged transaction occurred giving rise to the appellant’s liability for tax under subsection 116(5).

The respondent relied on Cable Mines & Oils Ltd. v. M.N.R. (1961), 28 Tax A.B.C. 42, 61 D.T.C. 641, in support of his contention that the notice of assessment, dated February 9, 1990, was not statute barred, as it was an original assessment of tax under Part XV of the Act.

The appellant in that case, had filed its corporate income tax return for its fiscal period ending on December 31, 1954, on May 2, 1955. Attached to the return was a balance sheet where, under the heading of" Liabilities”, reference was made to mortgage bonds issued to National Gypsum Company. However, there was no reference in the appellant’s corporate income tax return to indicate that National Gypsum Company was a non-resident of Canada. The Minister, in a notice of assessment dated June 10, 1960, assessed the appellant pursuant to subsection 123(10) of the Act, for interest and penalties due to the Crown in respect of amounts of tax which should have been withheld by the appellant when remitting the interest paid, or credited in 1954, to National Gypsum Company. The appellant appealed against the assessment on the ground that it had not been made within a period of four years from the date of an assessment notice issued by the Minister on May 17, 1955, in respect of the appellant's 1954 taxation year. The respondent, on the other hand, submitted that the notice of assessment dated June 10, 1960, was an original assessment issued under Part II of the Act in respect of withholding tax and accordingly, was issued within the limitation period permitted by subsection 46(4) of the Act (now subsection 152(4) of the Act).

Former subsection 123(10) of the Act reads as follows:

123. (10) The Minister may assess any person for any amount that has been deducted or withheld under this Act or a regulation or that is payable under this section and, upon his sending a notice of assessment to that person, Division F of Part I is applicable mutatis mutandis.

Subsection 123(8) of the Act (now subsection 227(8)) imposed a penalty upon any person who failed to deduct or withhold any amount as required by the Act. Lastly, pursuant to paragraph 106(1)(b) of the Act (now paragraph 212(1)(b)), interest payable to a non-resident was subject to withholding tax when it became payable.

Similarly, in the case at bar, subsection 227(10.1) of the Act provides that the Minister may assess any person for any amount that is “ payable under this section”. Subsection 227(9) of the Act imposes a penalty on a person who has failed to remit tax as required by section 116 of the Act. Thus, as stated previously, subsection 227(10.1) of the Act does not allow the respondent to assess tax under section 116 of the Act. The tax required by subsection 116(5) of the Act is assessed under section 152 of the Act. Under subsection 227(10.1) the Minister may only assess the penalty.

In Cable Mines & Oils Ltd., supra, Mr. Fisher, Q.C., of the Tax Appeal Board, decided that the June 1960 assessment was a valid assessment because it was a separate and distinct assessment under the withholding tax provisions of the Act.

In particular, Mr. Fisher, Q.C., stated the following at page 49 (D.T.C. 645):

In my opinion, therefore, an assessment issued under the provisions of section 123(10) is an original assessment in respect of withholding tax and is a quite different assessment from any original assessment issued under section 46 in respect of a taxpayer's own income. The enactment in section 123(10) to the effect that the provisions of Division F of Part I are applicable mutatis mutandis is merely a means of obviating the necessity of repeating at length the applicable provisions of the said Division F. In other words, it means that once an original assessment notice in respect of withholding tax has been issued under section 123(10), the four-year limitation will apply should any further assessment in respect of withholding tax be issued to a taxpayer in respect of amounts which should have been deducted and remitted to the Receiver General of Canada by the said taxpayer, during the "selfsame year".

[Emphasis in original.]

Similarly, in the case at bar, an assessment issued under the provisions of subsection 227(10.1) is an original assessment in respect of a penalty owing pursuant to subsection 227(9) and is a separate and distinct assessment from an assessment issued under section 152 in respect of the tax on the appellant's own income. Had the respondent issued the February 9, 1990 assessment under the provisions of subsection 227(10.1) of the Act in respect of the penalty owing by the appellant for failure to remit the tax required by section 116, the respondent would have been able to rely on the decision in Cable Mines & Oils Ltd., supra, in support of his position that the February 9, 1990 assessment was valid as an original assessment. However, it is clearly evident that by the February 9, 1990 assessment the respondent assessed the appellant for the 1985 taxation year for the tax owing by her, pursuant to subsection 116(5) of the Act. That tax, assessed under Part I, includes subsection 152(4). As stated previously, since the February 9, 1990 assessment for tax owing by the appellant pursuant to subsection 116(5) was not made within a period of three years from the date of the original assessment for tax owing by the appellant for her 1985 taxation year (June 20, 1986), it is statute barred and therefore, invalid. [10]

Accordingly, the question posed in paragraph 14(1) of the statement of agreed facts is answered in the affirmative and therefore the appeal is allowed with costs.

Appeal allowed.