Kyte v. R., 97 DTC 5022, [1997] 2 CTC 14 (FCA)

Robertson J.A.:

This is an appeal and cross-appeal from a decision of the Trial Division (Rothstein J.) on a special case under Federal Court Rule 475. The question put to the Trial Judge was framed as follows:

Was the Certificate issued by the Minister on November 12, 1987 in the principal amount of $500,000 “for the amount of Hitec’s liability under Part VIII of the Act” as required by paragraph 227.1(2)(a) of the [Income Tax] Act?

The Trial Judge held that the certificate satisfied the preconditions for imposing “vicarious liability” on a director of a corporation even though the certificate was not in the correct amount. [We note that the use of the term vicarious liability may be inappropriate since a director may avoid liability if her or she has exercised due diligence pursuant to subsection 227(10) of the Act.] The taxpayer accepts the Trial Judge’s finding that there was a mistake in the certificate, but appeals his conclusion that that error was excused by operation of section 166 of the Act. Section 166 is a “saving” provision applicable in cases of an imperfect assessment which a taxpayer seeks to have vacated or varied. Conversely, and by cross-appeal, the Minister disputes the Trial Judge’s finding that the certificate was in error, but maintains, in respect of the issue on appeal, that the Trial Judge properly invoked section 166.

The essential facts of this case are not complicated and since the decision under appeal is now reported, [1996] 1 C.T.C. 151, 96 D.T.C. 6050 (F.C.T.D.), it is simply unnecessary to review all the facts and legislative framework already fully set out in the Trial Judge’s reasons. On January 1, 1985, Hitec issued a Scientific Research Promissory Note for $1 million, which amount it designated under the Act. Accordingly, it became liable to pay Part VIII tax of $500,000 by February 28, 1985. On 25 October 1988, the Minister assessed the taxpayer, a director of Hitec, for $298,473.30 which represented Hitec’s unpaid Part VIII tax for the 1985 taxation year ($215,173.50) plus interest. The amount for which the taxpayer was assessed reflected a refund for that year of $284,826.50 of Part VIII tax allowed by the Minister in a notice of assessment issued on 24 February 1988 to Hitec. Pursuant to paragraph 227.1(2)(a) of the Act, a director is not liable for a corporation’s unpaid tax unless certain conditions precedent are satisfied. First, the Minister must register a certificate “for the amount of the corporation’s liability with the Federal Court.”. [This condition precedent was broken down into two requirements: to file a certificate and to state the correct amount.] Second, he must attempt to collect the amount owing from the defaulting corporation. In short, the Minister was obligated to exhaust his remedies against Hitec before proceeding against the taxpayer.

In the instant case, the Minister registered a certificate against Hitec in the principal amount of $500,000 on November 12, 1987, but was unsuccessful in collecting any monies; the writ of fi fa having been returned nulla bona by the Sheriff on March 28, 1988. The certificate, however, did not take into account the tax refund which the Trial Judge held was deemed to have been paid as of February 28, 1986, pursuant to subsection 194(5) of the Act.

In order for the taxpayer to succeed on this appeal he must establish that the monetary amount stated in the certificate was incorrect and that that mistake was not excused by section 166 of the Act. Assuming, without deciding, that the amount specified in the certificate is not the correct amount, we are of the opinion that the Minister is entitled to rely on section 166. Counsel for the taxpayer advances two arguments which, in our view, are not persuasive.

The taxpayer’s first objection to the decision below is that the Minister failed to discharge the onus of proving that section 166 applied. He argues that the onus was on the Minister to prove that his failure to comply with paragraph 227.1(2)(a) arose as a result of “any irregularity, informality, omission or error”. The taxpayer further argues that the Minister did not submit any affidavit or other evidence to support the argument that the failure to specify the correct amount in the certificate came within the ambit of section 166.

It is common ground that section 166 was not pleaded and that both parties and the Trial Judge proceeded on the basis that the certified question (which is by no stretch of the imagination a model of clarity) was to be answered, in part, by reference to the applicability of that provision. The case below also proceeded on the basis of an agreed statement of facts said to be exhaustive for the purposes of the special case. It makes no reference to evidence relevant to the onus issue. In the circumstances, we are of the view that it was open to the Trial Judge to conclude that there was no evidence to suggest that the error committed by the Minister did not fall within the ambit of section 166. That is to say there was no evidence to suggest bad faith, unfairness, or injustice on the part of the Minister, or prejudice to Hitec or the taxpayer. The Minister could not be expected to adduce evidence necessary to discharge an onus of proof issue which is raised and pursued sometime after an agreed statement of facts has been concluded when that agreement prohibits the parties from adducing further evidence.

The second objection to the decision below is with respect to the Trial Judge’s finding that although the requirements to file a certificate and to attempt realization by way of execution are obviously mandatory provisions, the requirement that the certificate “be for the amount of the corporation’s liability” is directory. It is the taxpayer’s position that the certificate must set out the “correct amount” and if it does not then liability cannot attach to a director as that is a mandatory requirement. That being the case, section 166 is inapplicable for it is expressly limited to errors which relate to the observance of directory provisions.

Counsel for the taxpayer submits the wording of paragraph 227.1(2)(a) is clear and unambiguous and therefore the taxpayer is to be relieved of all liability even if the error in the certificate amounts to $1. Furthermore, he submits that even if the interpretation being advanced leads to what may be considered an absurd result that fact is of no consequence as the interpretation being placed on paragraph 227.1(2)(a) derives from its plain and ordinary meaning. In support of his position, the taxpayer relies on the decision of the Supreme Court of Canada in R. v. McIntosh, [1995] 1 S.C.R. 686 at 704, 21 O.R. (3d) 797 a criminal law case in which it was held that where a statutory provision is clear and unambiguous the fact that its application gives rise to absurd results does not warrant a departure from the plain meaning. In effect, the taxpayer argues that even though he has been properly assessed in dollar terms, he is to be relieved of all liability because of an error in a certificate issued to Hitec in circumstances where neither that party nor the taxpayer was prejudiced by the error. We cannot accede to the taxpayer’s argument.

First, we note that paragraph 227.1(2)(a) does not specify that the certificate be for the “correct” amount and, therefore, there is sufficient ambiguity to warrant further consideration of Parliament’s intent, as elusive as that task may be. In any event, the decision in McIntosh is not applicable to the case at hand. Rather, it is the decision in British Columbia (Attorney General) v. Canada (Attorney General), [1994] 2 S.C.R. 41, [1994] 6 W.W.R. 1, at pages 122-24 (discussed in Ginsberg [infra]) which is of relevance. In that case the Supreme Court was dealing with a clear and unambiguous term - the word “shall” - in the context of the now antiquated mandatory/directory dichotomy. Second, and as a corollary to the first, we have to consider the language of section 166 which expressly requires us to determine whether paragraph 227.1(2)(a) is a “directory provision”. Section 166 reads as follows:

166. An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act. [emphasis added]

Thus, we have to consider whether the error here was in respect of a directory provision of the Act, namely the reference to stating the amount of the corporation’s liability in the certificate. To the extent that a determination as to whether a provision in the Act is mandatory or directory involves a balancing test, as set out in Ginsberg v. R., [1996] 3 C.T.C. 63, (sub nom. R. v. Ginsberg) 96 D.T.C. 6372 (F.C.A.), we are of the view that that test has been met. Having regard to the fact that the amount owing in many cases will be fluid (this is particularly true in cases involving a determination of a refund) and in cases such as the one under appeal the error in the certificate will cause no prejudice to a taxpayer, it seems to us that the Trial Judge’s finding, that the requirement to state the amount of the tax liability of the corporation in the certificate is directory rather than mandatory, is correct in law.

The appeal will be dismissed with costs and the cross-appeal will be dismissed without consideration of the merits and without costs.

Appeal dismissed.