The Queen v. McLeod, 90 DTC 6281, [1990] 1 CTC 433 (FCTD)

Collier, J.: —This is a motion, for an order giving the plaintiff leave to file an amended statement of claim. There is an identical motion in another action T-1788-84 between the same parties. These reasons will apply, as well, in that action.

In his 1977 and 1978 taxation years, the defendant sought to deduct all his farming losses under subsection 28(1) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. The Minister of National Revenue disallowed the deductions on the grounds the defendant was precluded from reporting the losses under subsection 28(l), because he was not engaged in the business of farming. The defendant was advised of this decision by two notices of reassessment dated June 6, 1980.

The defendant filed a notice of objection claiming he had been a farmer since 1943. The Minister confirmed his reassessment by a notice of confirmation, repeating the position taken by Revenue Canada that the defendant was not engaged in the business of farming.

The defendant appealed to the Tax Review Board. Following the hearing before the Board, both parties submitted written arguments. Both submissions dealt with two questions: (1) Was the defendant engaged in the business of farming and, (2) For the purposes of section 31 of the Income Tax Act, was farming the chief or combined source of the defendant's income.

The Tax Review Board found the defendant to be engaged in the business of farming and having a reasonable expectation of profit since 1977. Goetz, T.C.J. considered the classes of farmers set out by the Supreme Court of Canada in Moldowan v. The Queen, [1978] 1 S.C.R. 480; [1977] C.T.C. 310; 77 D.T.C. 5213. He concluded the defendant was "a taxpayer, for whom farming could reasonably be expected to provide the bulk of income or the centre of work routine”. Accordingly, the defendant was entitled to deduct his full farming losses.

The Crown commenced appeal proceedings in this Court. The statement of claim set out the assumptions on which Revenue Canada's reassessment was based. Paragraphs 6(d) and (e) of the statement of claim provided as follows:

6. In reassessing the Defendant in the manner set forth in paragraph 5 herein the Minister of National Revenue relied upon the following assumptions of fact, inter alia :

(d) At no time in 1977 was the Defendant engaged in the business of farming.

(e) The Defendant's major source of income in 1977 was employment income

in the amount of $96,468.70 and dividend income in the amount of $48,000.

The same assumptions were relied upon by the Minister of National Revenue in respect of the 1978 taxation year.

The statement of claim alleged the defendant was not engaged in the business of farming and, in the alternative, if he were, his chief or combined source of income was not farming; his deductible losses should be restricted under section 31 of the Income Tax Act. That section provides that, where farm losses are incurred by a taxpayer whose chief source of income is neither farming, nor a combination of farming and some other source, he may deduct only part of his farming losses.

The defendant filed a statement of defence. He alleged he was engaged in farming; that farming was his chief or combined source of income. In addition to the statement of defence, the defendant filed a counterclaim, seeking a declaration that subsection 31(2) of the Income Tax Act contravenes the Canadian Charter of Rights and Freedoms, 1982. Subsection 31(2) provides as follows:

31.(2) For the purpose of this section, the Minister may determine that a taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income.

In its reply to the counterclaim, the Crown stated that subsection 31(2) of the Act was not relied upon in the reassessment under appeal. Paragraph 8 of the defence to counterclaim provides as follows:

8. In answer to paragraph 10 of the counterclaim he submits that section 31(2) is within the power of the Parliament of Canada and he adds that this section was not used in the reassessment of the plaintiff by Counterclaim during the taxation years at issue herein.

The plaintiff then sought to file an amended statement of claim with the defendant's consent. The amended statement of claim contains the following changes:

1. In the list of assumptions on which the reassessment was based, the assumption that the taxpayer was not engaged in the business of farming has been deleted. A new assumption, that the defendant's chief source of income was neither farming, nor a combination of farming and other income, has been added.

2. The submission that the defendant was not engaged in farming has been deleted. The only remaining submission is that his allowable farm loss is restricted under section 31.

The defendant refused to consent to the amendments. The Crown now brings this motion, pursuant to Rule 420, for leave to amend its pleadings.

The defendant argues the plaintiff should not be granted leave to amend its statement of claim because the amendments in question raise an issue that was not part of the original reassessment. The original reassessment and notice of confirmation put into issue only one question: was the defendant engaged in the business of farming and therefore entitled to deduct his full farming losses under section 28 of the Income Tax Act. The hearing before the Tax Court of Canada proceeded on that issue alone. In its statement of claim, the plaintiff refers to that original issue and also attempts to raise new issues under section 31 of the Act. However, by the requested amendments, the defendant maintains the plaintiff is now abandoning the original issue and is attempting to turn the case into an issue under section 31 of the Act: whether the defendant is entitled to claim restricted farm losses.

The defendant points out that, during the hearing before me, counsel for the plaintiff admitted the defendant is engaged in the business of farming. By seeking to amend its statement of claim, the plaintiff is, in the defendant's opinion, attempting to do what cannot otherwise be done; that is, reconsider its 1980 reassessment, abandon it, and reassess the defendant's 1977 and 1978 income tax returns outside of the four year time limit prescribed by the Income Tax Act. In addition, the amendments would allow the plaintiff to reassess the defendant on completely different grounds.

Finally, the defendant submits the original reassessment defines the issue to be tried and appealed. The issue was whether the defendant was engaged in the business of farming and therefore entitled to deduct his full farming losses under section 28 of the Act. The decision of the Tax Review Board was made on the basis of that issue alone. Section 31 of the Act was never in issue. Although an appeal from a decision of the Board is a trial de novo, the defendant maintains that it is only the facts, not the issues, which are to be determined de novo.

The plaintiff submits that Rule 420 allows for amendments to pleadings where such amendments are necessary for determining the real question in controversy between the parties, and where such amendments can be made without prejudice to the other side.

The plaintiff agrees the amended statement of claim differs from the original statement of claim in that the proposed amended pleadings rely exclusively on section 31 of the Income Tax Act. However, in the plaintiff's opinion, the amendment assists rather than prejudices the defendant. The position taken by the plaintiff in its original statement of claim disallowed the defendant from claiming the full extent of his farming losses. The position now taken by the plaintiff, in its amended statement of claim, that the defendant's chief source of income for the taxation years in question, is neither farming nor a combination of farming and some other source of income, entitles the defendant to claim restricted farm losses under section 31.

The proposed amendments, in the plaintiff's view, constitute a concession. They assist rather than prejudice the defendant with respect to examination for discovery and preparation for trial in that they facilitate litigation on the real question in controversy and reduce the proof and argument required at trial; furthermore, the defendant is neither unfamiliar with, nor would he be taken by surprise, by the issues raised in the amended statement of claim.

The plaintiff submits the Minister of National Revenue can assess a taxpayer on the basis of a particular provision of the Income Tax Act and is free to seek to uphold the assessment on the basis of another provision of the Act, so long as the amount of income tax in issue remains the same, or is less than the amount originally assessed.

Finally, the plaintiff contends an assessment is nothing more than a determination by the Minister of National Revenue as to the amount of income tax payable by a taxpayer, based upon a consideration of the circumstances relevant to the assessment. The only question for determination in any action involving an assessment of income tax is whether the assessment is too high.

The issue before this Court is whether the Minister of National Revenue should be permitted, at this stage of the proceedings, to take a different position than the one taken at the time of the original reassessment. It is clear the reassessments were made only on the basis the defendant was not engaged in farming. The defence to the counterclaim specifically states subsection 31(2) of the Income Tax Act was not relied on in the reassessment. The attempt by the plaintiff to now plead only section 31, rather than section 28, is an attempt to change the basis of the assessment appealed from.

The rules with respect to amending pleadings in the Federal Court provide an amendment will be allowed, where necessary, for the purpose of determining the real question in controversy between the parties. In Northwest Airporter Bus Service v. The Queen (1978), 13 N.R. 49; Kayser-Roth Canada (1969) Ltd. v. Fascination Lingerie Inc., [1971] F.C. 84; 3 C.P.R. (2d) 27 and Sorbara v. M.N.R., [1964] Ex. C.R. 191, [1964] C.T.C. 536; 64 D.T.C. 5325, this general rule was qualified by the courts to the effect an amendment will be allowed only where it can be made without injustice to the other side. In general, amendments will be allowed only on such terms as are just, protecting the opposite party with respect to discovery and trial preparation and where any prejudice may be compensated by an order as to costs.

The plaintiffs argument in this case is that no such prejudice would result from allowing the amendments: the defendant will hardly be surprised by the issue raised in the amendment, since he specifically addressed that issue in his written argument before the Tax Review Board; in fact, he characterized it as one of the two questions arising on the appeal to the Board.

I agree the defendant may not be surprised by the issue raised in the amendment. But, in my opinion, allowing these amendments will cause an injustice to the defendant. The amendments to the statement of claim make new assumptions and raise new issues. They represent, in my view, a totally new reassessment from the one originally made. The plaintiff is statute barred from making another assessment because the four year limitation period, for doing so, prescribed by paragraph 152(4)(b) of the Income Tax Act, has expired. The plaintiff is attempting to circumvent the limitation period by asking this Court to permit the amendments. The injustice, which would result, were I to grant the plaintiff its order, is obvious.

Further, within the parameters of tax law, it would be an error to allow these amendments. Section 169 of the Income Tax Act governs appeals:

169. Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Review Board to have the assessment vacated or varied. . . .

In Hofer v. M.N.R., [1972] C.T.C. 2289; 72 D.T.C. 1240, the Tax Review Board held these words implied that, without an assessment of income tax, there is no basis at all for an appeal. It is the assessment that forms the basis of the appeal. Gibson, J. on “An Overview of Income Tax Litigation”, a paper presented to the Canadian Tax Foundation, November 30, 1983, points out that, whereas an assessment constitutes the findings of an amount of tax payable, the appeal from that assessment arises out of one or more disputes between the taxpayer and the Minister as to the facts and law entering into the determination of that amount. It is for that reason the courts have held the Minister must, as a general rule, set out the assumptions on which the assessment was based. In Brewster v. The Queen, [1976] C.T.C. 107; 76 D.T.C. 6046 (F.C.T.D.), certain assumptions, which the Minister of National Revenue acted upon in making the reassessment, were pleaded in the action before the Court. In addition, certain assumptions were pleaded, in the alternative. Gibson, J. stated at page 111 (D.T.C. 6049):

Pleading assumptions in the alternate is novel in view of the state of the law. In law the onus is on the taxpayer to destroy some or all of the assumptions. But it is open to the defendant to plead other facts not relied in making the assessments or reassessments, but in that event, the onus is on the Minister of National Revenue to prove such other facts.

(It seems therefore that it is fundamentally wrong in law to plead assumptions in the alternative. In like manner, it is fundamentally wrong in law for any assessors of the Minister of National Revenue to assess or reassess and not tell precisely the basis for such assessment or reassessment, but instead as certain assessors often do, namely, assess or reassess in the alternative, or merely record the basis as contrary to the Income Tax Act, on the premise that thereby they are “keeping their options open”, and that they are entitled in law to do so.)

Once the assessment has been issued, and the Minister’s assumptions have been delineated in the pleadings, a question arises as to who has the burden of either proving or disproving those assumptions. The rule is the taxpayer must disprove the assumptions made at the time of the assessment. The Minister may add assumptions at trial, but he then bears the burden of proving them. In M.N.R. v. Pillsbury Holdings Ltd., [1965] 1 Ex. C.R. 676; [1964] C.T.C. 294; 64 D.T.C. 5184, Cattanach, J. made the following comment at page 302 (Ex. C.R. 685-686; D.T.C. 5188):

The Minister, by his Notice of Appeal, set forth the assumptions on which the assessments appealed from were based.

The respondent could have met the Minister’s pleading that, in assessing the respondent, he assumed the facts set out in paragraph 6 of the Notice of Appeal by:

(a) challenging the Minister's allegation that he did assume those facts,

(b) assuming the onus of showing that one or more of the assumptions was wrong, or

(c) contending that, even if the assumptions were justified, they do not of themselves support the assessment.

(The Minister could, of course, as an alternative to relying on the facts he found or assumed in assessing the respondent, have alleged by his Notice of Appeal further or other facts that would support or help in supporting the assessment. If he had alleged such further or other facts, the onus would presumably have been on him to establish them. . . .)

In Pillsbury, the Court also held the taxpayer may shift the burden of proof by challenging whether the assumptions listed were really made at the time of the assessment.

The Courts have allowed Revenue Canada a substantial amount of procedural leeway in attempting to establish the validity of its assessment. In del Valle v. M.N.R., [1986] 1 C.T.C. 2288; 86 D.T.C. 1235, (T.C.C.), it was held the Minister may bring in new facts or even neglect to state his assumptions and his penalty is only an increased burden of proof.

However, the Minister is not entitled to challenge the basis of his own assessment. In The Queen v. Scheller, [1976] 1 F.C. 480; [1975] C.T.C. 601; 75 D.T.C. 5406, the Minister allowed only a minimal deduction for the support of the taxpayer's daughter. The Tax Review Board allowed considerably more. On appeal from the Board's decision, the Crown attempted to plead the taxpayer should be allowed nothing in respect of his daughter. The Minister was successful, but the Court held he could not appeal from his own assessment. Therefore, the original deduction was allowed to stand. The Court concluded the Minister was bound by his own assessment. As authority for that proposition, Cattanach, J. relied upon the decision of Thurlow, J. in Harris v. M.N.R., [1964] C.T.C. 562; 64 D.T.C. 5332; [1966] S.C.R. 489; [1966] C.T.C. 226; 66 D.T.C. 5189.

As a result of these cases, the Minister is not restricted on appeal to pleading the assumptions made on assessment, but he is bound by the assessment itself. He cannot, on appeal, attempt to make a case the taxpayer owes more tax than he was originally assessed. The question before me is whether the Minister should be allowed to claim less tax is owing, but on a totally different basis. To allow that, would, in my opinion, be tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts.

I am not prepared to allow the amendments. The proposed amended statement of claim restricts the plaintiff's pleadings to a different issue than the one which formed the basis of the assessment. Despite the fact the defendant is not taken by surprise by this issue, the plaintiff is bound by its assessment and should not be permitted to change it at this late stage.

The plaintiff's application is dismissed. The defendant shall have his costs of this motion, in any event of the cause.

There will be no costs to either party in action 1-1788-84.

Application dismissed.