The Queen v. Regina Shoppers Mall Ltd., 91 DTC 5101, [1991] 1 CTC 297 (FCA)

MacGuigan, J.A.:—These two appeals relate to income tax assessments issued by the appellant to the respondent for the 1979 and 1980 taxation years respectively. Both matters were tried together before Addy, J., who rendered judgments on June 26, 1990, vacating both assessments.

The notice of reassessment for the 1979 year, which was dated October 12, 1988, was simply vacated as issued beyond the time prescribed by paragraph 152(4)(c) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The notice of reassessment for the 1980 year, dated May 26, 1986, was vacated and the matter referred back to the Minister of National Revenue "the Minister") for reassessment on the basis that the sum of $699,751 not be added to the respondent's income pursuant to paragraph 12(1)(e) of the Act, since no deduction was taken for its 1979 taxation year pursuant to paragraph 20(1)(n).

The 1979 Year

The respondent Saskatchewan corporation disposed of a piece of real estate in 1976 and treated the profits of the sale of $1,231,884 as a capital gain in its corporate returns for the three years 1976 to 1978, and also treated the reserve for each year in accordance with subparagraph 40(1)(a)(iii) of the Act, which provides for reserves on capital gains.

In 1980 the Minister advised the respondent of his intention to assess it for those three years on the basis that the gain was in fact on income account, and inquired whether, in computing into income for those years, the respondent wished to claim a reserve against income pursuant to paragraph 20(1)(n). The respondent advised that it did, if it were to be so reassessed. Reassessment notices were accordingly issued, and the respondent filed notices of objection on the ground that the gain was a capital one and not attributable to income.

At the time the respondent filed its return for its 1979 year, viz., October 14, 1980, the respondent had received these reassessments for 1976 through 1978 but nonetheless filed its 1979 return on the basis that the 1976 sale was a capital gain and that its reserve should therefore be calculated according to subparagraph 40(1)(a)(iii). On December 29, 1980, the Minister's original assessment accepted the respondent's claim as made. It was only some seven years later, by a notice of reassessment dated November 7, 1987, that the Minister brought his assessment into line with his earlier assessments for 1976, 1977 and 1978, by adding to the respondent's income the income reserve it would have been entitled to if the 1976 sale were on income account. [1] The respondent objected that the reassessment was outside the prescribed limitation period. It also claimed alternatively, in its notice of objection, that, should the reassessment not be statute-barred, it was entitled to deduct an income reserve of $699,751 according to paragraph 20(1)(n) of the Act. This alternative claim was admitted by a final reassessment dated October 12, 1988. It was this reassessment that was vacated by the trial judge.

The provision of the Act that is most directly in point is subsection 152(4)(a)(i), which reads as follows:

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 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.

The trial judge correctly identified the issue as follows at page 185 (D.T.C. 6428):

The determination of the issue of whether the reassessment for 1979 is in fact statute-barred as being over four years after the date of the original assessment, depends entirely on whether the plaintiff, in filing its T-2 return for that year, made any misrepresentation attributable to either neglect, carelessness, wilful default or fraud.

He continued at page 186 (D.T.C. 6428-29):

When the Minister issued his original assessment in December 1980 confirming the income and treatment thereof as reported by the plaintiff, the Department had before it all of the information and knowledge that it had when the Minister issued the reassessment some seven years later, namely on November 3, 1987. Revenue Canada knew of the reassessments for 1976, 1977 and 1978. It knew of the plaintiff's notices of objection thereto and it knew how the plaintiff had treated its reserves when filing its 1979 tax return.

The 1979 return as filed continued to treat the proceeds of the sale as a capital gain since the plaintiff was disputing the Minister's position that the proceeds should be treated as income. The onus is on the defendant to establish that, in so doing, the taxpayer made a misrepresentation that is attributable to neglect, wilful default, carelessness or fraud in order for the defendant to escape the four-year limitation imposed by paragraph 152(4)(b) (M.N.R. v. Taylor, [1961] Ex. C.R. 318; [1961] C.T.C. 211; 61 D.T.C. 1139).

Where a taxpayer thoughtfully, deliberately and carefully assesses the situation and files on what he believes bona fide to be the proper method there can be no misrepresentation as contemplated by section 152 (1056 Enterprises Ltd. v. Canada, [1989] 2 C.T.C. 1; 89 D.T.C. 5287). In Levy (J.) v. M.N.R., [1989] C.T.C. 151; 89 D.T.C. 5385 at 176 (D.T.C. 5403), Teitelbaum, J. quotes with approval the following statement by Muldoon, J. in the above case:

Subsection 152(4) protects such conduct, and perhaps only such conduct, where the taxpayer thoughtfully, deliberately and carefully assesses the situation as being one in which the law does not exact the reporting of that which the taxpayer bona fide believes does not exist.

[Emphasis added.]

It has also been established that the care exercised must be that of a wise and prudent person and that the report must be made in a manner that the taxpayer truly believes to be correct. . . .

Finally the trial judge demolished the two options the appellant recognized for the respondent in filing its 1979 return at pages 187-88 (D.T.C. 6429-30):

According to him, the plaintiff had two options. In the first place, it could have reported the proceeds as income and the resulting reserves as income reserves and then waited for the initial assessment by the Department confirming that view and then, subsequently, issue a notice of objection to the effect that the proceeds and the resulting reserves should be considered as capital. In other words, it was suggested that in order to ensure that the Department was, on the filing of the 1979 return, alerted to the fact that there was an ongoing dispute as to how the proceeds of the 1976 sale should be reported, the taxpayer would be expected to report income according to the way the department would apparently be viewing the matter at the time and, when the Department agreed and assessed accordingly, the taxpayer should then object to the assessment and claim on a completely different basis than originally reported by it.

It is difficult for me to conceive of a more illogical and improper way of proceeding. The system of declaring revenue and assessing tax provided for in our Act is a self assessing one. Where the taxpayer reports that an item of revenue is to be treated in a certain manner, after having carefully considered the matter, is not negligent in doing so and does not in any way intend to deceive the Department, the law under a self assessing system cannot be taken as imposing on that taxpayer the duty of reporting receipts in a manner which the Department views as the correct one and which the reporting taxpayer bona fide believes to be incorrect. Furthermore, it is not the duty of the reporting taxpayer to alert the Department to a situation as to which any reasonable person would believe the latter is fully aware. There was at the time a fundamental and serious ongoing and unresolved dispute between the parties on that very issue. There was no reason whatsoever for the plaintiff to believe that the Department would somehow overlook it.

The second possible method which according to that witness and counsel for the defendant would be acceptable would be for the plaintiff to submit the 1979 report as it did but to accompany the report with a waiver of the provisions of paragraph 152(4)(b) in order to afford the defendant an indefinite time to reassess. I honestly feel that the suggestion that the filing of a waiver would relieve against an obligation to file in one manner as opposed to another, is hardly worthy of comment. If, as suggested by the defendant, the plaintiff was acting improperly in filing as it did, I fail to see how the filing of a waiver allowing the Department more than four years to reassess would somehow add validity to the report. At the time of reporting the plaintiff had no reason whatsoever to believe that the defendant would allow four years to go by before reassessing.

It is quite clear from the evidence that the failure to reassess in time was not due to any misrepresentation on the part of the plaintiff but simply to a total failure on the part of the defendant to consider the information which it had before it. The witness for the defendant admitted that the Department by mistake or for some unknown reason failed to follow its normal procedure when there is continuity of reserves, until after the four-year period had expired. This was not a question of having to dig into old files but, on the contrary, the whole issue was being vigorously contested. There was a note made on the file of the Department when the 1976, 1977 and 1978 years were reassessed that the matter should be followed in later years. This in fact was done for 1980 but was not done for 1979. I fully accept the evidence of the experts called on behalf of the plaintiff to the effect that it was proper practice for the plaintiff to file as it did. The defendant has failed to discharge the onus that, in the filing of the 1979 return, there was any misrepresentation attributable to neglect, carelessness or wilful default or fraud on the part of the plaintiff or its agent.

These vigorous and admirable reasons for judgment by Addy, J. serve to respond as well to the issues on appeal as to those at trial, and I want merely to supplement them with some additional considerations pertinent to the oral argument on appeal.

The appellant laid a good deal of stress in oral argument on subsection 152(8) of the Act, which reads as follows:

(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this act relating thereto.

The appellant argued that the words “an assessment shall . . . be deemed to be valid and binding” should be taken as creating an obligation on the part of the respondent to treat the Minister's assessments for the years 1976-78, which it is common ground were known to it before filing its 1979 tax return, as valid and binding for its 1979 return. In other words, the argument is that the respondent was compelled in its 1979 return to accept the Minister's view of the 1976 sale, and that, in persisting with its own view that the profit from that sale was a Capital gain, acted contrary to the Act. The appellant gave a supporting interpretation to subparagraph 12(1)(e)(ii) of the Act, which reads as follows:

12.(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable . . .

(e) any amount. . .

(ii) deducted under paragraph 20(1)(n),

in computing the taxpayer's income from a business for the immediately preceding year;

In the appellant's contention the respondent was required to include in its income for 1979 the income deduction the Minister assessed it as having made under paragraph 20(1)(n) for 1978 rather than the nil deduction under that provision which was the respondent's preferred option (along with which went a deduction on capital account according to subparagraph 40(1)(a)(iii)).

The only case the appellant was able to cite under subsection 152(8) was Stephens Estate v. The Queen, [1984] C.T.C. 111; 84 D.T.C. 6114 (F.C.T.D.), where the validity of notices of reassessment was attacked on the grounds of erroneous headings and as bearing the name of the previous Deputy Minister. Reed, J. held that the notices were valid, and concluded at 114 (D.T.C. 6116): "At most the usage of the appellation Revenue Canada, Taxation and the usage of printed forms carrying the name of the previous rather than the incumbent Deputy Minister would be irregularities cured by subsection 152(8) of the Act and not defects such as to render the documents void."

To my mind this comment expresses the purpose of the first clause of subsection 152(8). There is no comma between “ valid and binding” and "notwithstanding any error, defect or omission therein,” which leads me to the conclusion that the "notwithstanding" phrase restricts the meaning of the preceding words to the case of (and despite) any error, defect or omission. In other words, the first clause of 152(8) is a curative provision allowing for validity despite errors, defects or omissions.

I am strengthened in my view by the second clause of the subsection, or in any proceeding under this Act relating thereto." If the first clause had the general sweep attributed to it by the appellant, there would be no need for the second clause, since the first clause would have created validity for all purposes. The first clause must needs have a limited meaning. It is hardly necessary to add that the respondent's tax returns cannot be considered "proceedings under this Act."

Nor do I apply subparagraph 12(1)(e)(ii) to the facts herein as does the appellant. As I read that provision, it is the deduction in the taxpayer's return for the previous year that must be entered into income the following year—or at most a deduction in a ministerial assessment that is not disputed by the taxpayer. I cannot read into the general words of the subparagraph the requirement that the taxpayer abandon his still-unlitigated objection to an assessment.

The appellant relied upon the Minister's obligation in assessing tax returns as analyzed by Thorson, P. in Provincial Paper Ltd. v. M.N.R., [1954] C.T.C. 367; 54 D.T.C. 1199. In that case the Minister initially assessed the appellant after merely checking its returns for mathematical accuracy, accepting the appellant's figures of income, tax paid and refund due. The Minister reassessed some two years later, assessing interest on unpaid tax for the full period. Faced with the elimination of a moratorium provision of the legislation which would have limited the interest on the unpaid tax to a lesser period, the appellant contended that the first notice of assessment was not such in reality since there had been no actual assessment before its issuance.

In dismissing the appeal, Thorson, P. wrote at 371 and 373 (D.T.C. 1900-1901) :

The contention that he had not examined the return may be dealt with briefly. It is clear, of course, that the examination referred to need not be made by the Minister personally. It is sufficient if it is made by his appropriate officers in the course of their duty. In the present case it seems clear to me that the officers referred to in the statement of facts did examine the appellant’s return. The assessors could not have checked the computations in it without making some examination of it. Nor could the amount of payments made have been verified without such examination. It is not for the Court or any one else to prescribe what the intensity of the examination in any given case should be. That is exclusively a matter for the Minister, acting through his appropriate officers, to decide. In my judgment, while the examination may not have been an exhaustive one, as to which I do not express any opinion, it was, nevertheless, an examination within the meaning of Section 42(1) [now 152(1)]. . .

There is no standard in the Act or elsewhere, either express or implied, fixing the essential requirements of an assessment. It is, therefore, idle to attempt to define what the Minister must do to make a proper assessment. It is exclusively for him to decide how he should, in any given case, ascertain and fix the liability of the taxpayer. The extent of the investigation that he should make, if any, is for him to decide. Of necessity it will not be the same in all cases.

The Provincial Paper delineates the bounds of the Minister's responsibility, but has nothing to say about the duty of the taxpayer. Counsel for the appellant affirmed in argument that, in the absence of a duty on the Minister, Parliament must be presumed to impose a duty on the taxpayer to fill the gap. In my view, there is no warrant for such a position.

Thorson, P. rejected the argument that the Minister must do more than merely accept the taxpayer's return as correct in order to make an assessment. Nothing more is required by law for an assessment. But surely Parliament may be thought to have hoped that the Minister would apply his independent judgment to returns before him. In any event, Provincial Paper establishes no standards for the taxpayer. Such standards are in fact established by subparagraph 152(4)(a)(ii), the very provision which the trial judge applied to the facts of the case at bar. The taxpayer does not have to make up for any inadequacies of the ministerial assessment process, but has merely to file a return according to the provisions of the Act. In the words of Mahoney, J. (as he then was) in The Queen v. Wilchar Construction Ltd., [1979] C.T.C. 117; 79 D.T.C. 5086 at 120 (D.T.C. 5088): “A person liable to tax is required to prepare and file a tax return in which he calculates his income and the tax payable in respect of it. He is obliged to make those calculations in accordance with the requirements of the Act and, by the assessment process, the Minister is supposed to ensure that he does." Where the Act is unclear, or the characterization of the facts doubtful, the trial judge correctly stated that "the care exercised must be that of a wise and prudent person and . . . the report must be made in a manner that the taxpayer truly believes to be correct."

The 1980 Year

In reassessing the respondent for the 1980 taxation year, the Minister added to its income under paragraph 12(1)(e) the amount of $699,751 described in the assessment as"1979 special reserve for sale of land.”

In fact in its return for 1979 the respondent had added to income an amount of $175,538 described as a 1979 reserve for uncollected proceeds and had deducted the sum of $127,496, calculated on the basis that it was chargeable to capital account and not to income. The respondent's position was therefore that since it did not deduct any amount in 1979 under paragraph 20(1)(n), paragraph 12(1)(e) could not become operative for 1980.

The learned trial judge succinctly disposed of this issue as follows at pages 189-90 (D.T.C. 6431):

The plaintiff's [respondent's] counsel in his argument relied on a 1977 case before the Tax Review Board: A.E. Greer v. M.N.R., [1977] C.T.C. 2522; 77 D.T.C. 368. One of the issues in that case was whether the Minister had erred in adding to the appellant's 1972 income the sum of $6,711.93 on account of a reserve which the Minister had determined to allow the appellant in 1968. At page 2525 (D.T.C. 370) of the report, the presiding member held:

However, I have concluded that once the Minister had determined to allow to the appellant the reserve under paragraph 85B(1)(d), apparently without the appellant's request that he do so, the onus for maintaining that reserve in a “recallable” posture shifted to the Minister and, unless some particular action by the appellant altered that responsibility, it would there remain. The opportunity existed for the Minister to show the reserve, "in" and “out,” in the assessments or reassessments for 1969, 1970 and 1971, but not having done so, it is my view that the appellant's position is sound—the reserve to be included in the appellant's taxable income for the year 1972 should have appeared as a deduction and/or credit to him in the year 1971.

There is no doubt that there is an onus on the taxpayer who seeks to demolish the basic fact on which an assessment rests (Roderick Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; [1948] 4 D.L.R. 321]. The plaintiff has discharged that onus. The basic fact on which the assessment for the 1980 taxation year had to rest was that there was a special reserve on the income account of $699,751 declared by the plaintiff at the end of the 1979 taxation year. This fact simply did not exist. No such reserve was ever declared.

It is also worthy of note that the 1979 reassessment was made two years after the 1980 reassessment. This was undoubtedly an attempt to justify ex post facto the 1980 reassessment by having the required reserve included in the 1979 year. In other words, it was an attempt to establish ex post facto the fact that it did not exist at the time the assessment for 1980 was issued.

The right to assess anything as taxable revenue is a strictly legal concept the authority for which must be found within the four corners of the Act. The Act must also be strictly interpreted in favour of the taxpayer and against the taxing authority. It is patently obvious and indeed an uncontested fact that the plaintiff did not deduct any amount as an income reserve under subparagraph 20(1)(n) for the taxation year 1979. The attempt to reassess for that year has failed and no 1979 deductions pursuant to subparagraph 20(1)(n) can even be presumed. The reassessment for 1980 is defective in that it purports to include that 1979 income reserve.

The mere fact that a taxpayer may ultimately benefit from a failure of the taxing authority to properly reassess obviously does not constitute authority for reassessment which is not found in the legislation itself. There is no rule of equity or of common law which may somehow assist the taxing authority to obtain revenue which it has lost solely and entirely through its own negligence or failure to exercise the powers granted to it by the Act.

While it is no longer correct, in the light of Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294; 84 D.T.C. 6305 to speak of a strict interpretation rule for the construction of taxing statutes, [2] nevertheless, as the trial judge observed, the respondent has discharged the onus resting on it and there is neither statute nor judicial decision nor fact to assist the appellant.

* * *

In the result, the appeals must be dismissed with costs. There is in my view no warrant for anything beyond the usual party-party costs.

Crown's appeals dismissed.