Riddell v. The Queen, 95 DTC 5526, [1995] 2 CTC 362 (FCTD)

Jerome, A.C.J.:—The plaintiff’s claim to file an amended statement of claim pursuant to Rule 420 of the Federal Court Rules came on for hearing before me at Toronto, Ontario, on March 5, 1995. The action appeals the Minister’s reassessment of the plaintiff’s 1985 taxation year. At the conclusion of argument, I took the matter under reserve and indicated that these written reasons would be filed.

By way of summary of the background, I can do no better than to quote the entirety of the original statement of claim:

Statement of Claim (1985 Taxation Year/Filed May 9, 1990)

Notice of appeal is hereby given to the Federal Court of Canada-Trial

Division, from notice of reassessment no. 3422651, dated February 12, 1990, in respect of the 1985 taxation year of the plaintiff.

A. Statement of Facts

1. The plaintiff is a corporation subject to the laws of Ontario and is a corporation resulting from the amalgamation of Urbanetics Ltd. ("Urbanetics") and Retno Limited under the laws of Ontario by articles of amalgamation dated February 1, 1990. Urbanetics was a corporation resulting from the amalgamation of Urbanetics Construction Co., Urbanetics Ltd. and 248958 Ontario Ltd. (the "company"), under the laws of the Province of Ontario by articles of amalgamation dated December 30, 1977.

2. Urbanetics’ 1985 taxation year ended on December 31, 1985. The company’s last taxation year prior to the 1977 amalgamation ended on December 30, 1977.

3. During its 1985 taxation year Urbanetics was primarily a holding corporation.

4. In November, 1977, the company entered into an agreement (the "agreement") to purchase a total of 120 units in two motion pictures (the "film units") from CFI Investments Inc. ("CFI") at a total cost of $1,800,000 based on a price of $15,000 per unit. In November 1977, the company paid $660,000 in cash to CFI pursuant to the agreement and secured the balance of the purchase price by a promissory note (the "note") in the amount of $1,140,000.

5. In its 1977 taxation year, the company claimed capital cost allowance with respect to the film units as permitted by the Income Tax Act, R.S.C. 1952,

c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

6. Urbanetics was subsequently sued by CFI on the note. This action was successfully defended by Urbanetics and in a judgment dated July 15, 1983 (the "judgment"), the Supreme Court of Ontario set aside the agreement. In the reasons for judgment (the "reasons"), the Court found that there had been a breach of fiduciary duty owed to the company by an officer of CFI relating to the formation of the agreement. Urbanetics was relieved from its obligations under the note (which at the date of judgment was $757,939), the agreement was set aside, and CFI was ordered to repay to Urbanetics the original $660,000 cash payment less distributions received from CFI in respect of the film units. The amount of this repayment was not grossed up to account for any income taxes payable in respect of the distributions received.

7. The judgment and the reasons were upheld by the Ontario Court of Appeal in a decision (the "appeal judgment") rendered on April 9, 1985.

8. Urbanetics did not receive any payment from CFI pursuant to the judgment as a result of the bankruptcy of CFI in the fall of 1985.

9. By notice of reassessment no. 2412132, dated June 22, 1988, the Minister of National Revenue (the "Minister") reassessed Urbanetics’ 1985 taxation year on the basis that subsection 80(1) of the Act applied to the settlement of the debt under the note pursuant to the appeal judgment.

10. Urbanetics objected to this reassessment by notice of objection sent to the Minister on August 9, 1988, on the basis that the Minister erred in applying the provisions of subsection 80(1) of the Act to the settlement of the debt.

11. By notice of reassessment no. 3422651, dated February 12, 1990, the Minister reassessed Urbanetics to give effect to its notice of objection. However, at this time it was reassessed again in respect of the note and the film units for its 1985 taxation year. We understand that the Minister’s basis for the second reassessment was that the appeal judgment resulted in a disposition in 1985 of Urbanetics’ interest in the film units resulting in recaptured depreciation.

12. The Ontario Ministry of Revenue reassessed the company for its 1977 taxation year as a result of the judgment. The Ontario reassessment disallowed the capital cost allowance claimed by the company in respect of the film units in 1977 for purposes of the Corporations Tax Act (Ontario).

B. Statement of Reasons

13. The plaintiff submits that the proper interpretation of the judgment and the reasons, which set aside the agreement as a result of a breach of fiduciary duty owed to the company by an officer of CFI relating to the formation of the agreement, is that the original acquisition of the film units under the agreement was rendered a nullity as of November 1977.

14. The plaintiff submits that the legal effect of the setting aside or rescission of a contract depends on whether it results from a defect in the formation of the contract or a defect in the performance of the contract; in the former case, the legal effect is that (subject to the rights of any third party transferee) the contract terminates ab initio as if it never existed.

The plaintiff therefore seeks judgment of this Court that the reassessment dated February 12, 1990, be varied or referred back to the Minister for reconsideration and reassessment so as to disallow any income inclusion or the application of section 80 of the Act in respect of the film units or the note by the Minister in Urbanetics’ income for its 1985 taxation year.

The defendant filed its statement of defence on August 17, 1990.

The plaintiff now seeks to amend its statement of claim by adding the following paragraphs:

12. In February 1991, after the reassessment of its 1985 taxation year, the plaintiff made a written request of the defendant to make adjustments to its 1985 and other taxation years relating to the application of non-capital loss carrybacks and carryforwards to the 1985 taxation year, and the deduction of capital cost allowance and other discretionary reserves. The 1985 taxation year is the subject of this proceeding.

16. In support of its request for adjustments to non-capital losses and discretionary capital cost allowance and reserves in paragraph 17(c) below, the plaintiff relies on subsection 152(4.3) of the Act and Information Circular 84-1, dated July 9, 1984.

17. The plaintiff, therefore, claims as follows:

(c) that adjustments to its 1985 taxation year previously requested by the plaintiff relating to non-capital loss carrybacks and carryforwards and discretionary capital cost allowance and reserves be allowed in any event;

The defendant has refused to consent to these amendments.

In support of its application, the plaintiff argues that the amendment is necessary to determine all the issues between the parties. The plaintiff contends that in order for the defendant to properly compute the deductions for which the plaintiff is entitled in the taxation year on appeal, it is necessary for the Minister to revise these calculations as requested. The effect of these changes, according to the plaintiff, will leave the tax payable for the years other than 1985 unchanged. The cumulative effect of the requested adjustments, however, will be to reduce taxable income and tax payable by the plaintiff for the 1985 taxation year.

The plaintiff claims that the requested adjustments are available because "nil assessments" were issued in respect of the years that were not appealed, resulting in what is referred to as an "open year”. Therefore, notwithstanding the usual limitation period that applies in respect of reassessments under paragraph 152(4)(c) of the Act, the amounts itemized in that return remain open to challenge in subsequent years when the loss is sought to be applied.

The plaintiff relies on the decision of the Tax Court of Canada in Aallcann Wood Suppliers Inc. v. Canada, [1994] 2 C.T.C. 2079, 94 D.T.C. 1475, wherein Bowman J.T.C.C. confirmed at page 2081 (D.T.C. 1476):

In the absence of a binding loss determination under subsection 152(1.1), it is open to a taxpayer to challenge the Minister’s calculation of a loss for a particular year in an appeal for another year where the amount of the taxpayer’s taxable income is affected by the size of the loss that is available for carryforward under section 111. In challenging the assessment for a year in which tax is payable on the basis that the Minister has incorrectly ascertained the amount of a loss for a prior or subsequent year that is available for deduction under section 111 in the computation of the taxpayer’s taxable income for the year under appeal, the taxpayer is requesting the court to do precisely what the appeal procedures of the Income Tax Act contemplate: to determine the correctness of an assessment of tax by reviewing the correctness of one or more of the constituent elements thereof, in this case the size of a loss available from another year. This does not involve the court’s making a determination of loss under subsection 152(1.1) or entertaining an appeal from a nil assessment. It involves merely the determination of the correctness of the assessment for the year before it.

It was, therefore, unnecessary for the appellant to seek a determination of loss under subsection 152(1.1). The matter of the 1988 loss is now before the court on two bases-both as an appeal from the 1988 loss determination and as a component of the taxable income for 1985, 1986, and 1987 and, to the extent that any amount of loss remains available for carryforward, for 1989. While it was unnecessary for the purposes of these appeals that I deal at length with the point, the Crown’s position is so out of line with both the law and with prevailing practice and could potentially have such far-reaching effects on any number of appeals before this court that I considered it desirable that the idea be nipped in the bud.

The plaintiff also referred the Court to Revenue Canada Taxation Information Circular 84-1, titled "Revision of Capital Cost Allowance Claims and Other Permissive Deductions" dated July 9, 1984. The plaintiff argues that the circular, while not binding, is an accurate summary of the law. In particular, the plaintiff attaches much importance to paragraphs 1, 9, 10 and 11 thereof which state as follows:

1. From time to time, the Department receives requests from taxpayers to permit a revision of capital cost allowance claims for previous taxation years. As well, the situation often arises where a revision results from a reassessment by the Department. The following comments outline the types of revisions that generally occur and the circumstances under which requests for a revision will be accepted by the Department. These comments apply equally to other permissive deductions, such as special mortgage reserves calculated under section 33, scientific research expenditures of a capital nature calculated under paragraph 37(1 )(b), or taxable capital gains reserves calculated under subparagraph 40(l)(a)(iii).

9. If a taxpayer requests a revision of capital cost allowance claimed in a year that was assessable to tax, such requests will be acceded to only if the time has not expired for filing a notice of objection in respect of that year (1.e., 90 days from the day of mailing of the notice of assessment or reassessment for that year) unless the comments in 8 above apply. If, however, circumstances are such that the request for revision of capital cost allowance claimed in a year accompanies a request for an offsetting change in some other "permissive" deduction, the result of which is that no change occurs in the assessed tax for that year (or any other year for which the 90 day time-limit has expired), such requests will ordinarily be acceded to.

10. Where a taxpayer requests a revision of capital cost allowance claimed in a taxation year for which a notification that no tax is payable had been issued (e.g., because of a non-capital loss in that year, the application of a non-capital loss of another year, or the fact that income was exempt from tax in that year), such request will be allowed provided there is no change in the tax payable for the year or any other year filed, including one that is statute barred, for which the time has expired for filing a notice of objection. Such request will not be allowed, however, where after February 24, 1977 the Minister has issued a notice of determination pursuant to subsection 152(1.1). A taxpayer who wishes to revise the capital cost allowance in a year for which a notice of determination has been issued should do so within 90 days from the day of mailing the notice of determination for that year.

11. Where a taxpayer wishes to request a revision of prior years’ capital cost allowance claims within the limits described above, a letter should be forwarded to the director of the district taxation office in which the taxpayer files income tax returns. This letter should set out the pertinent information concerning the requested revisions along with amended capital cost allowance schedules and any other schedules which are affected by the revision.

In opposition to the proposed amendments, the defendant argues that the relief sought to be included in the amended statement of claim is ill-founded and should not be permitted in the pleadings because of plaintiff’s failure to demonstrate a triable issue, the delay of the plaintiff in making the proposed amendment, the prejudice to the defendant, and the fact that allowing these amendments would be contrary to the interests of justice.

On the lack of merit of the proposed amendment, the defendant argues that section 152(4.3) as sought to be pleaded by the plaintiff has no application to the proceedings herein. The defendant states that the plaintiff is seeking to challenge the Minister’s exercise of administrative discretion and that the Minister cannot be compelled to accept an amended return or an amended claim in respect of a year not under appeal. The defendant contends that the adjustments sought in paragraph 17(c) of the amended statement of claim relate to discretionary capital cost allowance and paragraph 20(1 )(n) reserves for taxation years other than 1985.

The defendant also argues that even if the relief requested was available, which it emphatically denies, the Court should refuse to grant the plaintiff leave to amend as a result of undue delay. The defendant suggests that the plaintiff waited almost three and a half years after it knew that the additional relief for the 1985 taxation year was required to amend its pleadings. Additionally, the defendant contends that contrary to the position of the plaintiff, at no time was it made known to a representative of the defendant at an earlier stage in the proceedings that this was an issue or that the plaintiff intended or was likely to raise this point at trial.

The general rule with respect to the amendment of pleadings was discussed by the Federal Court of Appeal in Canderel Ltd v. Canada, [1993] 2 C.T.C. 213, 93 D.T.C. 5357 at page 217 (D.T.C. 5360):

while it is impossible to enumerate all the factors that a judge must take into consideration in determining whether it is just, in a given case, to authorize an amendment, the general rule is that an amendment should be allowed at any stage of an action for determining the real questions in controversy between the parties, provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interests of justice.

In Scannar Industries Inc. (Receiver of) v. Canada, [1994] 1 C.T.C. 215 (F.C.T.D.), aff’d [1994] 2 C.T.C. 185, 94 D.T.C. 6505 (F.C.A.), citing from Continental Bank of Canada, v. Canada, [1993] 1 C.T.C. 2306, 93 D.T.C. 298, at C.T.C. page 2310 (T.C.C.), the motions judge considered the following principles relevant to the issue of whether leave was justified at C.T.C. pages 220-21:

The Court states further that:

other factors, should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter and whether the amendments sought will facilitate the court’s consideration of the true substance of the dispute on its merits. No single factor predominates nor is its presence or absence necessarily determinative. All must be assigned their proper weight in the context of the particular case. Ultimately it boils down to a consideration of simple, common sense and the interest that the courts have that justice be done.

I am satisfied that the amendments should be allowed.

The key factor here is that the proposed amendments raise questions of fact, law and practice which deserve to be determined at trial. There is also evidence that the Minister was made aware by the taxpayer of the claims for the requested adjustments as early as February 1991. Indeed, it is alleged that Revenue Canada officials did more than simply acknowledge the request, they indicated that the requested adjustments were acceptable and could be implemented upon conclusion of the 1985 taxation appeal.

An order will go, therefore, granting leave for the proposed amendments which should be made forthwith. The defendant is to have 60 days from the filing of the amended statement of claim to file its amended statement of defence. The question of costs should be reserved to the presiding judge at the trial.

Motion granted.