The Queen v. Pennington, 87 DTC 5107, [1987] 1 CTC 235 (FCA)

The Chief Justice (Stone, J. concurring):—This is an application to review and set aside a decision of the Tax Court of Canada granting the respondent an extension of time to file a notice of objection to a reassessment of his 1981 income tax.

The extension was granted on an application therefor made under section 167 of the Income Tax Act. Subsection 1 of that section authorizes the Court to grant such an extension “if in its opinion the circumstances of the case are such that it will be just and equitable to do so". Subsection (5), however, provides that no order shall be made unless the application is made within one year after the expiration of the time limited for objecting to the assessment and further that no order shall be made unless the Tax Court is satisfied inter alia that:

(ii) the application was brought as soon as circumstances permitted it to be brought.

The only issue raised on the present application is whether it was open to the Tax Court to hold that this requirement of the Act had been met.

The notice of reassessment was sent to the respondent on August 20, 1984. He mailed a notice of objection on November 21, 1984, three days after the 90-day limitation period prescribed by subsection 165(1) of the Income Tax Act had elapsed. By a letter dated January 21, 1985, the Department informed the respondent that his notice of objection was not submitted within the prescribed time and could not be accepted as valid under the Act. The letter went on to tell the respondent that he could apply to the Tax Court for an extension of time to file his notice of objection and inter alia that:

Application must be made as soon as possible and not later than one year from the 90-day time limit for the mailing of a Notice of Objection.

The respondent's application was dated October 21, 1985 and was filed on November 13, 1985, some 359 days after the end of the 90-day period. In the meantime the respondent had taken the matter up with the accountant who had prepared his income tax return and had instructed him to attempt to negotiate a settlement of the matter in issue. It does not appear that he instructed the accountant to apply for an extension of time to file a notice of objection. When the respondent ultimately concluded that the accountant would be unable to achieve a satisfactory settlement he himself filed the application.

In granting the application the learned Tax Court judge said:

First, it is quite reasonable to accept the explanation of Mr. Pennington, that he did not gain the impression from reading the January 21, 1985 letter (supra) that there was any particular requirement for undue haste in filing the application, but rather, while it would be advisable to do so early, the critical factor was to respect the "one year” time limit — which he did. I am quite satisfied that at any time before October 31, 1985 the circumstances "permitted” Mr. Pennington to file the application — but only to the degree that his pursuit of a settlement through his accountant’s efforts did not prohibit him from doing so. As I follow his explanation, the set of circumstances which developed on or about October 31, 1985, which instigated his filing the application, was that he decided then his pursuit of such a settlement was not going to be successful within the year he considered to be available to him. I am sure that it might have been more prudent for him to have filed the application anyway, but that is not the basis upon which the application should be viewed now. In essence the Minister by contesting this application is saying that almost immediately upon receipt of the letter dated January 21, 1985 (supra) Mr. Pennington should have filed the application, in order to comply with subparagraph 167(5)(c)(ii) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. Mr. Pennington, on the other hand, asserts that it was not until the efforts of his accountant had been exhausted, and he was at risk of losing his formal right to object, that he recognized any requirement to file the application. I would be more content with this matter, if Mr. Pennington had provided some evidence of the efforts of his accountant in this regard, and indeed I question in what way the accountant could have been successful in such efforts, since the matter was not formally before any appropriate party in Revenue Canada for resolution. However in the instance of this appeal, I am inclined to give Mr. Pennington the benefit of the doubt.

It appears from this that the learned judge was satisfied that, save with respect to the two matters he mentioned, the circumstances permitted the respondent to file the application at any time before October 31, 1985 that is to say, as I read it, that nothing in the circumstances disclosed prevented the respondent from doing so from the time he received the department's letter of January 21, 1985 to October 31, 1985, the date on his letter of application.

In my opinion neither the interpretation which the respondent put on the department's letter nor his referral of the matter to his accountant nor the combination of the two is capable of being regarded as a circumstance that could justify the respondent in failing to file his application for an extension of time promptly after his receipt of the department's rejection of his notice of objection. What the statute appears to me to require is that the taxpayer make his application as early as, under the particular circumstances, he could reasonably be expected to get an application ready and present it.

Here the department's letter advised the respondent quite plainly that his application should be made “as soon as possible” and if any ambiguity or doubt arose from the subsequent reference in it to a “year", it could not reasonably be resolved in favour of taking the whole year without so much as an inquiry as to what the law required. Moreover, passing the subject matter to an accountant to seek a settlement was not a circumstance relating to his right to file an application or with respect to the filing of his application. Nor was it a circumstance of the situation in which he found himself when his notice of objection was rejected. It was simply an alternative course that he chose to adopt instead of filing his application.

In my opinion the decision is erroneous in law and should be set aside.

Heald, J. (dissenting):—This is a section 28 application to review and set aside a decision of the Tax Court of Canada which allowed the respondent's application for an order extending the time for filing a notice of objection in respect of an income tax reassessment for the respondent's 1981 taxation year. The only viva voce evidence in the Tax Court was given by the re- spondent. He testified that the accountant who prepared his 1981 tax return was, in reality, his wife's accountant who looked after numerous companies which she had in her building business. He went on to state that this accountant came up with “a clever tax idea’ which consisted of showing a remuneration to him of $10,000 that was held as a reserve in his wife's company. It was included in his tax return without his realizing it, or accepting that he was going to have to pay taxes on $10,000 that he had never received. He went on to observe that he was "quite annoyed" when he finally found out what had happened. Based on this addition to his 1981 income, the respondent's 1981 return was reassessed by notice of reassessment dated August 20, 1984. The respondent said that when he finally realized why he was being assessed so much more than was proper, he contacted the accountant who ". . . spoke to people at the department seeking to resolve the matter". Apparently the accountant was unsuccessful in settling the problem. The respondent added “. .. I then asked him to prepare a suitable notice of objection. He then prepared it and when it got to me, for some reason or other, in any event, I dated it November 13, 1984, but for some reason I didn't mail it on that day. I notice in sending a letter to the department I mentioned reasons of health, but I must confess Your Honour, I just have no recollection of why it did not get mailed until November 21, from November 13. But, I certainly had formed the intention within the 90-day period of appealing. It was something I thought was very wrong." It is clear that the notice of objection was not served on the Minister within the 90 days prescribed by subsection 165(1) of the Income Tax Act. On January 21, 1985, Revenue Canada advised the respondent by letter that his notice of objection was not submitted within the prescribed 90-day time limit. The letter further advised the respondent of his right to apply to the Tax Court of Canada for an extension of time within which to file his notice of objection and went on to state that such an application ". . . must be made as soon as possible and not later than one year from the 90-day time limit for the mailing of a Notice of Objection". Under date of October 31, 1985, the respondent made such an application for extension of time. In that application, he gave the following explanation. “It was not possible to file the Notice within the prescribed time, owing to delays in resolution with accountant of returns, ongoing discussions with Tax Department, reasons of health and other reasons.”

It is not in issue that the application for extension was within the one- year period, being made some 359 days after the expiration of the 90-day time limit.

On cross-examination, the respondent was asked to explain why, after receiving the letter from Revenue Canada dated January 21, 1985, no further action was taken until October 31, 1985 when the application for extension was made. His response was to the effect that he was ". . . sort of putting it back . . .” on his accountant who was having discussions relative to the reassessment with Revenue Canada. When it was apparent that the accountant was not going to be able to resolve the matter to the respondent's satisfaction, the respondent then applied for an extension of time. He said further that he saw the accountant on a number of occasions during this period relative to this matter as well as to his wife's corporate business. At the conclusion of the respondent's testimony, the learned Tax Court judge asked him the following question (Case-Appendix 1): ". . . but then what initiated your efforts, Mr. Pennington, to send the application for an extension of time? We have no indication of what the accountant did and we have no indication of when he arrived at the conclusion that it could

not be resolved. What happened that made you say: I had better send in this application?” The respondent's answer reads: "I'm really speculating, Your Honour, but I think I must have realized that there was a one year time limit and it was triggered by that and his failure up to that point to resolve the matter.”

The relevant legislation in this appeal is section 167 of the Income Tax Act and, in particular, subsections (1) and (5) thereof. Those subsections read as follows:

167. (1) Application to Tax Court for time extension — Where no objection to an assessment under section 165 or appeal to the Tax Court of Canada under section 169 has been made or instituted within the time limited by section 165 or 169, as the case may be, for doing so, an application may be made to the Tax Court of Canada for an order extending the time within which a notice of objection may be served or an appeal instituted and the Court may, if in its opinion the circumstances of the case are such that it would be just and equitable to do so, make an order extending the time for objecting or appealing and may impose such terms as it deems just.

(5) When order to be made — No order shall be made under subsection (1) or (4)

(a) unless the application to extend the time for objecting or appealing is made within one year after the expiration of the time otherwise limited by this Act for objecting to or appealing from the assessment in respect of which the application is made;

(b) if the Tax Court of Canada or Federal Court has previously made an order

extending the time for objecting to or appealing from the assessment; and

(c) unless the Tax Court of Canada or Federal Court is satisfied that,

(i) but for the circumstances mentioned in subsection (1) or (4), as the case may be, an objection or appeal would have been made or taken within the time otherwise limited by this Act for so doing,

(ii) the application was brought as soon as circumstances permitted it to be brought, and

(iii) there are reasonable grounds for objecting to or appealing from the assessment.

In the Tax Court, counsel for the Deputy Attorney General restricted his submissions to one ground, namely, that the respondent's application for extension was not brought as soon as circumstances permitted it to be brought. In other words, he was relying upon the constraints imposed by subparagraph 167(5)(c)(ii), supra. The Learned Tax Court judge, in granting the respondent's application said at [1986] 1 C.T.C. 2499:

First, it is quite reasonable to accept the explanation of Mr. Pennington, that he did not gain the impression from reading the January 21, 1985 letter (supra) that there was any particular requirement for undue haste in filing the application, but rather, while it would be advisable to do so early, the critical factor was to respect the ‘'one year” time limit — which he did. I am quite satisfied that at any time before October 31, 1985 the circumstances "permitted” Mr. Pennington to file the application — but only to the degree that his pursuit of a settlement through his accountant’s efforts did not prohibit him from doing so. As I follow his explanation, the set of circumstances which developed on or about October 31, 1985, which instigated his filing the application, was that he decided then his pursuit of such a settlement was not going to be successful within the year he considered to be available to him. I am sure that it might have been more prudent for him to have filed the application anyway, but that is not the basis upon which the application should be viewed now. In essence the Minister by contesting this application is saying that almost immediately upon receipt of the letter dated January 21, 1985 (supra) Mr. Pennington should have filed the application, in order to comply with subparagraph 167(5)(c)(ii) of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. Mr. Pennington, on the other hand, asserts that it was not until the efforts of his accountant had been exhausted, and he was at risk of losing his formal right to object, that he recognized any requirement to file the application. I would be more content with this matter, if Mr. Pennington had provided some evidence of the efforts of his accountant in this regard, and indeed I question in what way the accountant could have been successful in such efforts, since the matter was not formally before any appropriate party in Revenue Canada for resolution. However in the instance of this appeal, I am inclined to give Mr. Pennington the benefit of the doubt.

At the hearing of the appeal before us, one of the arguments advanced by counsel for the applicant was to the effect that the findings of fact made by the learned Tax Court judge were not supported by the evidence. Specifically, it was submitted that the finding that the efforts of the respondent's accountant prohibited him from filing his application at an earlier date was in error, and was made in the total absence of evidence to that effect. It was said that there was no evidence of any efforts by the respondent's accountant. It was also said that the learned Tax Court judge placed undue reliance on the letter from Revenue Canada to the respondent dated January 21, 1985 (supra) without having due regard to the requirement of subparagraph 167(5)(c)(ii), supra, that the application be brought “‘as soon as circumstances permitted it to be brought". A further ground advanced was that, the learned Tax Court improperly relied upon the decision of this Court in Tic Toc Tours v. M.N.R., [1982] C.T.C. 264; 82 D.T.C. 6231.

The predecessor section to section 167 was section 61A. Under section 61A, the applications for extension were restricted to situations where, because of the death, incapacitating sickness or bankruptcy of the taxpayer, the notice of objection had not been filed within the 90-day time period. Subsection 167(1) removed those restrictions. Accordingly, and as might be expected, the applications under section 167 became far more numerous than was the case under section 61A. As a result, the Tax Review Board and its successor, the Tax Court of Canada have developed a considerable body of jurisprudence on the proper tests to be applied when dealing with such applications.

In my opinion, the proper approach to be adopted in applications under section 167 was well stated by Tax Review Board member M. J. Bonner (now Bonner, T.C.J.) in the case of Wright v. M.N.R., [1983] C.T.C. 2493; 83 D.T.C. 447: "Subparagraph 167 5(c)(ii), . .., must be read in light of the 90-day rule which is one of general application and of the fact that section 167 operates by way of exception to that general rule. Strict compliance with the requirements of section 167 is needed. Subparagraph 5(c)(ii) imposes a requirement for prompt remedial action as soon as the need for such action becomes evident and such action can reasonably be taken" (Emphasis added.). A similar approach was adopted by Chairman Flanagan in Savary Beach Lands Ltd., et al. v. M.N.R., [1972] C.T.C. 2608; 72 D.T.C. 1497 and Marvin Shore v. M.N.R., [1974] C.T.C. 2193; 74 D.T.C. 1132 where he said that applications under section 167 should not be granted as a matter of course but only under unusual circumstances. Chief Judge Christie of the Tax Court of Canada (as he then was) adopted a similar approach in the case of Kidd v. M.N.R., [1983] C.T.C. 2747 at 2748; 83 D.T.C. 639 at 640-41 where he held that section 167 applications for extension of time require "special circumstances” before being granted. Accordingly, I conclude from the myriad of cases before the Tax Review Board and the Tax Court of Canada that a consistent approach has been followed to the effect that a successful applicant under section 167 must demonstrate unusual or special circumstances and must satisfy the presiding judge that the application was made as soon as it became evident that such was necessary and could reasonably be taken. While these decisions are not binding upon this Court, I find them persuasive and I am prepared to accord them considerable judicial deference because of the experience acquired by the members of the Board and the Court since the provisions of section 167 were added to the Act. From this perspective I approach the conclusion of the learned Tax Court judge in this case.

In my opinion, his findings are tantamount to a conclusion that there were unusual or special circumstances in this case and that in such circumstances, the respondent's conduct was reasonable. What are those unusual or special circumstances?

I would enumerate them as follows:

(a) The reassessment sought to be challenged is highly questionable since the respondent did not receive the $10,000 sought to be added to his 1981 income.

(b) The accountant who added the said $10,000 to the respondent's income without his authorization was given the task of negotiating with the Income Tax department with a view to having the reassessment vacated. When it became apparent that the accountant's efforts were not going to succeed the respondent then applied for the extension.

(c) The respondent had formed the clear intention within the initial 90- day period of filing a notice of objection and had in fact, dated the notice prior to the expiration of that period.

(d) Revenue Canada has interpreted the constraints contained in subparagraph 167(5)(c)(ii) to mean that the application must be made “.. . as soon as possible and not later than one year. .

In my view, the above-noted circumstances are both unusual and special and when viewed in this light, I think the learned Tax Court judge was justified in concluding from these facts that the respondent had brought his application “as soon as circumstances permitted it to be brought”. I say this because, so long as the respondent's accountant was negotiating with Revenue Canada, there was a possibility that the reassessment would be reversed. On this basis, there wouldn't be much point in filing the notice of objection. The learned Tax Court judge found this conduct to be reasonable. There was a basis on the evidence for this conclusion. Accordingly an appellate court should refrain from interfering with the exercise of discretion by a trial judge when that exercise is sustainable on the record before him. This record includes documentary evidence as well as oral testimony because circumstance (d), supra, is to be found in the last paragraph of the letter from Revenue Canada to the respondent dated January 21, 1985.

In recent years, it has been considered proper for courts to have regard to the Tax Interpretation Bulletins issued by Revenue Canada with respect to the interpretation to be given to various sections of the Income Tax Act. While not conclusive, it is at least some evidence of the correct interpretation. The letter of January 21, 1985 to the respondent indicates that Revenue Canada has interpreted the phrase “as soon as circumstances permitted" to mean “as soon as possible and not later than one year . . .”. In my view, the replacement of section 61A with section 167 is a clear indication of the intention of Parliament to substantially extend the circumstances under which the time for filing a notice of objection may be increased to one year. It is a purposive amendment. While not opening the door completely, Parliament did, nevertheless confer upon the Board (and the Tax Court) a wide discretion. In the exercise of that discretion, the Tax Court is entitled, in my view, to give a somewhat liberal interpretation to the restrictions imposed by subsection 167(5). In the case at bar, I do not think the learned Tax Court judge exceeded the permissible limits of the discretion conferred upon him by section 167. I think, however, that he employed some unfortunate and inaccurate phraseology in giving his reasons for exercising his discretion in favour of the respondent. It was not accurate to conclude that the respondent was prohibited from filing his extension application. When those reasons are read in toto and in context, it becomes clear that what he really meant to convey was the reasonableness of the respondent waiting to file the application .. until the efforts of his accountant had been exhausted, and he was at risk of losing his formal right to object, .. .”. Accordingly, I would not set aside his decision merely on this basis when it is apparent to me, from the totality of his reasons, that there exists a sound and proper basis for the discretion which he exercised in favour of the respondent.

In so far as the reliance by the trial judge on the Tic Toc Tours case is concerned, I agree with counsel for the applicant that the case has no relevance to the issues in this application. However, since in my view and for the reasons expressed, supra, the trial judge did have a proper basis for the exercise of his discretion, his decision is sustainable in light of the circumstances enumerated, supra, without reference to irrelevant jurisprudence.

For these reasons I would dismiss the section 28 application.

Application granted.