Rothstein
J.:
—
Introduction
This
is
an
appeal
from
a
decision
of
the
Tax
Court
of
Canada
(Sarchuk
J.T.C.C.)
dated
December
3,
1990
dismissing
the
plaintiffs
appeal.
The
matter
comes
before
me
by
way
of
a
special
case
pursuant
to
Rule
475
of
the
Federal
Court
Rules.
The
question
framed
1s:
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,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
“Act”)?
The
ultimate
issue
is
whether
the
plaintiff,
a
director
of
a
corporation,
may
be
assessed
for
Part
VIII
income
tax
which
the
corporation
failed
to
pay.
The
answer
to
this
question
depends
on
whether
the
Minister
complied
with
the
mandatory
conditions
precedent
to
assessing
a
director
as
laid
out
in
the
Income
Tax
Act
and
in
particular
whether
the
certificate
referred
to
in
the
question
as
framed
was
in
compliance
with
the
Act.
These
issues
were
not
addressed
in
the
Tax
Court
as
they
were
not
raised
by
either
of
the
parties.
Before
turning
to
the
facts
of
this
case,
I
think
it
is
desirable
to
outline
the
relevant
legislative
framework
so
as
to
provide
some
context
within
which
the
facts
may
be
better
appreciated.
LEGISLATIVE
FRAMEWORK
(a)
Part
VIII
Tax
and
Refunds
Part
VIII
of
the
Act
is
entitled
“Refundable
Tax
on
Corporations
in
Respect
of
Scientific
Research
and
Experimental
Development
Tax
Credit”.
The
Scientific
Research
and
Experimental
Development
Tax
Credit
was
developed
to
assist
firms
in
obtaining
external
financing
for
research
and
development
purposes.
It
provided
a
mechanism
permitting
corporations
making
scientific
research
and
development
expenditures
but
which
were
not
in
a
position
to
otherwise
utilize
those
expenditures
as
deductions
for
income
tax
purposes,
to
renounce
those
expenditures
in
favour
of
investors
who
purchased
securities
or
loaned
funds
to
the
corporation.
As
will
become
readily
apparent,
the
relevant
legislation
is
complex.
As
this
case
does
not
involve
the
tax
liability
of
investors
in
the
corporation
or
the
relationship
between
investors
and
the
corporation,
the
legislative
outline
will
be
restricted
to
the
taxation
provisions
applicable
to
the
corporation
and
its
directors
only.
A
corporation
may,
for
the
purposes
of
raising
funds
for
scientific
research,
issue
shares
or
debt
obligations.
In
the
case
of
a
debt
obligation,
the
corporation
may,
by
filing
a
prescribed
form,
designate
an
amount
up
to
the
consideration
for
which
the
debt
obligation
was
issued.
Subsection
194(4)
provides:
194(4)
Every
taxable
Canadian
corporation
may,
by
filing
a
prescribed
form
with
the
Minister
at
any
time
on
or
before
the
last
day
of
the
month
immediately
following
a
month
in
which
it
issued
a
share
or
debt
obligation
or
granted
a
right
under
a
scientific
research
and
experimental
development
financing
contract
(other
than
a
share
or
debt
obligation
issued
or
a
right
granted
before
October,
1983,
or
a
share
in
respect
of
which
the
corporation
has,
on
or
before
that
day,
designated
an
amount
under
subsection
192(4))
designate,
for
the
purposes
of
this
Part
and
Part
I,
an
amount
in
respect
of
that
share,
debt
obligation
or
right
not
exceeding
the
amount
by
which
(a)
the
amount
of
the
consideration
for
which
it
was
issued
or
granted,
as
the
case
may
be,
exceeds
(b)
in
the
case
of
a
share,
the
amount
of
any
assistance
(other
than
an
amount
included
in
computing
the
scientific
research
and
experimental
development
tax
credit
of
a
taxpayer
in
respect
of
that
share)
provided,
or
to
be
provided
by
a
government,
municipality
or
any
other
public
authority
in
respect
of,
or
for
the
acquisition
of,
that
share.
The
corporation
is
then
required
to
pay
tax,
for
the
taxation
year,
in
the
amount
of
fifty
percent
(50
per
cent)
of
the
total
amounts
it
designated.
Subsection
194(1)
provides:
194(1)
Every
corporation
shall
pay
a
tax
under
this
Part
for
a
taxation
year
equal
to
50
per
cent
of
the
total
of
all
amounts
each
of
which
is
an
amount
designated
under
subsection
(4)
in
respect
of
a
share
or
debt
obligation
issued
by
it
in
the
year
or
a
right
granted
by
it
in
the
year.
The
tax
payable
under
subsection
194(1)
must
be
paid
on
or
before
the
last
day
of
the
month
following
the
issuance
of
the
debt
obligation.
Subsection
195(2)
provides:
195(2)
Where,
in
a
particular
month
in
a
taxation
year,
a
corporation
issues
a
share
or
debt
obligation,
or
grants
a
right,
in
respect
of
which
it
designates
an
amount
under
section
194,
the
corporation
shall,
on
or
before
the
last
day
of
the
month
following
the
particular
month,
pay
to
the
Receiver
General
on
account
of
its
tax
payable
under
this
Part
for
the
year
an
amount
equal
to
50
per
cent
of
the
total
of
all
amounts
so
designated.
As
an
offset
to
the
tax
payable
under
subsection
194(1),
a
corporation
may
claim
a
refund
of
up
to
fifty
percent
(50
per
cent)
of
the
total
qualifying
scientific
research
expenditures
for
the
year
up
to
the
amount
of
tax
payable
under
subsection
194(1).
Subsection
194(2)
provides:
194(2)
In
this
Part,
the
“Part
VIII
refund”
of
a
corporation
for
a
taxation
year
means
an
amount
equal
to
the
lesser
of
(a)
the
total
of
(i)
the
amount,
if
any,
by
which
the
scientific
research
and
experimental
development
tax
credit
of
the
corporation
for
the
year
exceeds
the
amount,
if
any,
deducted
by
it
under
subsection
127.3(1)
from
its
tax
otherwise
payable
under
Part
I
for
the
year,
and
(ii)
such
amount
as
the
corporation
may
claim,
not
exceeding
50
per
cent
of
the
amount,
if
any,
by
which
(A)
the
total
of
all
expenditures
made
by
it
after
April
19,
1983
and
in
the
year
of
the
immediately
preceding
taxation
year
each
of
which
is
an
expenditure
(other
than
an
expenditure
prescribed
for
the
purposes
of
the
definition
“qualified
expenditure”
in
subsection
127(9))
claimed
under
paragraph
37(1
)(a)
or
(b)
to
the
extent
that
the
expenditure
is
specified
by
the
corporation
in
its
return
of
income
under
Part
I
for
the
year
exceeds
the
total
of
(B)
the
total
of
all
expenditures
each
of
which
is
an
expenditure
made
by
it
in
the
immediately
preceding
taxation
year,
to
the
extent
that
the
expenditure
was
included
in
determining
the
total
under
clause
(A)
and
resulted
in
(I)
a
refund
to
it
under
this
Part
for
the
immediately
preceding
taxation
year,
(ID)
a
deduction
by
it
under
subsection
37(1)
for
the
immediately
preceding
taxation
year,
or
(III)
a
deduction
by
it
under
subsection
127(5)
for
any
taxation
year,
and
(C)
twice
the
portion
of
the
total
of
amounts
each
of
which
is
an
amount
deducted
by
it
in
computing
its
income
for
the
year
or
the
immediately
preceding
taxation
year
under
section
37.1
that
can
reasonably
be
considered
to
relate
to
expenditures
that
were
included
in
determining
the
total
under
clause
(A);
and
(b)
the
refundable
Part
VIII
tax
on
hand
of
the
corporation
at
the
end
of
the
year.
When
the
corporation
has
a
refund
for
the
taxation
year,
the
refund
is
deemed
to
be
paid
on
account
of
the
corporation’s
Part
VIII
tax
on
the
last
day
of
the
second
month
following
the
end
of
the
corporation’s
taxation
year.
Subsection
194(5)
provides:
194(5)
For
the
purposes
of
this
Act,
the
Part
VIII
refund
of
a
corporation
for
a
taxation
year
shall
be
deemed
to
be
an
amount
paid
on
account
of
its
tax
under
this
Part
for
the
year
on
the
last
day
of
the
second
month
following
the
end
of
the
year.
A
corporation
liable
to
pay
Part
VIII
tax
must
file
a
return
under
Part
VIII
on
or
before
the
date
it
is
required
to
file
its
income
tax
return
under
Part
I
of
the
Act.
Subsection
195(1)
provides:
195(1)
Every
corporation
that
is
liable
to
pay
tax
under
this
Part
for
a
taxation
year
shall,
on
or
before
the
day
on
or
before
which
it
is
required
to
file
its
return
of
income
under
Part
I
for
the
year,
file
with
the
Minister
a
return
for
the
year
under
this
Part
in
prescribed
form.
If
a
corporation
fails
to
pay
tax
or
any
instalment
of
tax
when
it
is
required
to
do
so,
interest
is
payable
on
the
amount
it
failed
to
pay
computed
from
the
required
payment
date
to
the
date
of
payment.
Subsection
195(3)
provides:
195(3)
Where
a
corporation
is
liable
to
pay
tax
under
this
Part
and
has
failed
to
pay
all
or
any
part
or
instalment
thereof
on
or
before
the
day
on
or
before
which
the
tax
or
instalment,
as
the
case
may
be,
was
required
to
be
paid,
it
shall
pay
to
the
Receiver
General
interest
at
the
prescribed
rate
on
the
amount
that
it
failed
to
pay
computed
from
the
day
on
or
before
which
the
amount
was
required
to
be
paid
to
the
day
of
payment.
However,
subsection
195(4)
limits
the
corporation’s
liability
to
pay
interest
by
making
the
corporation’s
refund,
for
interest
purposes,
retroactive
to
the
end
of
the
month
following
the
month
in
which
it
has
issued
a
debt
or
share
obligation.
This
is
the
same
date
upon
which
it
is
liable
to
pay
tax
pursuant
to
subsection
195(2).
As
a
result,
the
interest
payable
by
the
corporation
is
calculated
monthly
only
on
the
net
amount
of
tax
payable
over
and
above
the
amount
of
the
refund.
Subsection
195(4)
provides:
195(4)
For
the
purposes
of
computing
interest
payable
by
a
corporation
under
subsection
(3)
for
any
month
or
months
in
the
period
commencing
on
the
first
day
of
a
taxation
year
and
ending
two
months
after
the
last
day
of
the
year
in
which
period
the
corporation
has
designated
an
amount
under
section
194
in
respect
of
a
share
or
debt
obligation
issued,
or
right
granted,
by
it
in
a
particular
month
in
the
year,
the
corporation
shall
be
deemed
to
have
been
liable
to
pay,
on
or
before
the
last
day
of
the
month
immediately
following
the
particular
month,
a
part
or
an
instalment
of
tax
for
the
year
equal
to
that
proportion
of
the
amount,
if
any,
by
which
its
tax
payable
under
this
Part
for
the
year
exceeds
its
Part
VIII
refund
for
the
year
that
(a)
the
total
of
all
amounts
so
designated
by
it
under
section
194
in
respect
of
shares
or
debt
obligations
issued,
or
rights
granted,
by
it
in
the
particular
month
is
Of
(b)
the
total
of
all
amounts
so
designated
by
it
under
section
194
in
respect
of
shares
or
debt
obligations
issued,
or
rights
granted,
by
it
in
the
year.
(b)
General
Assessment
Provisions
Applicable
to
Part
VIII
Tax
Under
subsection
195(8)
the
general
assessment
provisions
of
the
Act
are
made
applicable
to
Part
VIII.
Subsection
195(8)
provides:
195(8)
Sections
151,
152,
158
and
159,
subsection
161(11),
sections
162
to
167
(except
subsections
164(1.1)
to
(1.3))
and
Division
J
of
Part
I
are
applicable
to
this
Part
with
such
modifications
as
the
circumstances
require
and,
for
greater
certainty,
the
Minister
may
assess,
before
the
end
of
a
taxation
year,
an
amount
payable
under
this
Part
for
the
year.
(c)
Collection
Procedures
Commencing
at
section
222
of
the
Act
are
provisions
relating
to
collection.
Under
section
222
all
taxes
and
interest
payable
are
debts
due
to
Her
Majesty
and
are
recoverable
as
provided
by
the
Act.
Section
222
provides:
222.
All
taxes,
interest,
penalties,
costs
and
other
amounts
payable
under
this
Act
are
debts
due
to
Her
Majesty
and
recoverable
as
such
in
the
Federal
Court
of
Canada
or
any
other
court
of
competent
jurisdiction
or
in
any
other
manner
provided
by
this
Act.
Under
subsection
223(1)
“an
amount
payable”
means
an
amount
payable
under
the
Act.
Paragraph
223(1
)(a)
provides:
223(1)
For
the
purposes
of
subsection
(2),
“an
amount
payable”
by
a
person
means
any
or
all
of
(a)
an
amount
payable
under
this
Act
by
the
person;
Under
subsection
223(2)
the
Minister
may
certify
an
amount
payable
by
a
taxpayer.
Subsection
223(2)
provides:
223(2)
An
amount
payable
by
a
person
(in
this
section
referred
to
as
a
“debtor”)
that
has
not
been
paid
or
any
part
of
an
amount
payable
by
the
debtor
that
has
not
been
paid
may
be
certified
by
the
Minister
as
an
amount
payable
by
the
debtor.
Subsection
223(3)
provides
that
a
certificate
under
subsection
223(2)
may
be
registered
in
the
Federal
Court.
Once
registered,
the
certificate
has
the
same
effect
as
a
judgment
of
the
Federal
Court.
Collection
proceedings
may
be
taken
against
the
debtor
for
the
amount
certified
plus
interest.
Subsection
223(3)
provides:
223(3)
On
production
to
the
Federal
Court,
a
certificate
made
under
subsection
(2)
in
respect
of
a
debtor
shall
be
registered
in
the
Court
and
when
so
registered
has
the
same
effect,
and
all
proceedings
may
be
taken
thereon,
as
if
the
certificate
were
a
judgment
obtained
in
the
Court
against
the
debtor
for
a
debt
in
the
amount
certified
plus
interest
thereon
to
the
day
of
payment
as
provided
by
the
statute
or
statutes
referred
to
in
subsection
(1)
under
which
the
amount
is
payable
and,
for
the
purpose
of
any
such
proceedings,
the
certificate
shall
be
deemed
to
be
a
judgment
of
the
Court
against
the
debtor
for
a
debt
due
to
Her
Majesty,
enforceable
in
the
amount
certified
plus
interest
thereon
to
the
day
of
payment
as
provided
by
that
statute
or
statutes.
Under
subsection
225.1(1)
of
the
Act,
generally
the
Minister
may
not
certify
an
amount
under
section
223
until
90
days
after
the
mailing
of
a
notice
of
assessment.
This
provision
precludes
collection
action
being
taken
while
a
taxpayer
is
entitled
to
dispute
his
or
her
liability
for
the
tax.
However,
this
restriction
on
the
Minister
does
not
apply
with
respect
to
tax
payable
under
Part
VIII.
Paragraph
225.1(6)(a)
provides:
225.1
(6)
Subsections
(1)
to
(4)
do
not
apply
with
respect
to
(a)
an
amount
payable
under
Part
VIII;
(d)
Vicarious
Liability
of
Directors
Included
in
the
collection
procedures
of
the
Act
is
section
227.1
which
renders
directors
of
a
corporation
vicariously
liable
for
taxes
the
corporation
has
failed
to
pay.
Subsection
227.1(1)
provides
in
part:
227.1
(1)
Where
a
corporation
has
failed
to...pay
an
amount
of
tax
for
a
taxation
year
as
required
under
Part...VIII,
the
directors
of
the
corporation
at
the
time
the
corporation
was
required
to...pay
the
amount
are
jointly
and
severally
liable,
together
with
the
corporation,
to
pay
that
amount
and
any
interest
or
penalties
relating
thereto.
Subsection
227.1(2)
provides
that
a
director
is
not
vicariously
liable
for
income
tax
imposed
on
a
corporation
unless
the
Minister
has
registered
a
certificate
“for
the
amount
of
the
corporation’s
liability”
under
subsection
223(3)
and
execution
“for
such
amount”
has
been
returned
unsatisfied
in
whole
or
in
part.
Subsection
227.1(2)
provides
in
part:
227.1(2)
A
director
is
not
liable
under
subsection
(1),
unless
(a)
a
certificate
for
the
amount
of
the
corporation’s
liability
referred
to
in
that
subsection
has
been
registered
in
the
Federal
Court
under
section
223
and
execution
for
that
amount
has
been
returned
unsatisfied
in
whole
or
in
part;
Facts
The
plaintiff
Robert
E.
Kyte
was
a
director
of
Hitec
Control
Corporation
(“Hitec”).
On
January
1,
1985
Hitec
issued
a
Scientific
Research
Promissory
Note
in
the
principal
amount
of
$1,000,000
to
By-
Way
Stores
Limited.
On
or
about
January
31,
1985
Hitec
designated
$1,000,000
under
subsection
194(4)
of
the
Act
by
filing
the
appropriate
form
with
the
Minister
of
National
Revenue
(“the
Minister”).
By
virtue
of
subsection
195(2)
of
the
Act,
Hitec
was
required,
by
February
28,
1985,
to
pay
on
account
of
its
tax
payable
under
Part
VIII
of
the
Act,
fifty
percent
of
the
designated
amount,
that
is
$500,000.
Hitec
did
not
pay
this
amount.
Under
subsection
194(2)
Hitec
was
entitled
to
a
refund,
on
account
of
its
$500,000
income
tax
liability,
of
up
to
fifty
percent
of
its
qualifying
scientific
research
expenditures
for
1985.
Although
its
1985
return
was
due
on
or
before
June
30,
1986
Hitec
did
not
file
its
1985
return
until
December
30,
1986.
In
the
return
it
filed
on
December
30,
1986,
Hitec
claimed
scientific
research
expenditures
of
$1,481,512.
Assuming
the
other
requirements
of
subsection
194(2)
were
met,
and
the
Minister
accepted
Hitec’s
return
as
filed,
the
result
would
have
been
a
refund
wiping
out
Hitec’s
tax
payable
of
$500,000
under
Part
VIII.
On
November
12,
1987,
by
virtue
of
subsection
223(2)
of
the
Act,
and
presumably
without
regard
for
Hitec’s
1985
income
tax
return
filed
on
December
30,
1986,
the
Minister
registered
a
certificate
against
Hitec
for
$500,000
in
the
Federal
Court
of
Canada
in
respect
of
Hitec’s
Part
VIII
tax
liability
plus
interest.
On
November
27,
1987
the
Minister
caused
a
writ
of
fieri
facias
to
be
issued
against
Hitec
for
$500,000
plus
interest.
On
February
24,
1988
the
Minister
issued
a
notice
of
assessment
to
Hitec
in
respect
of
its
Part
VIII
tax
for
1985.
Although
the
notice
of
assessment
did
not
accept
Hitec’s
refund
claim
with
respect
to
scientific
expenditures
as
set
forth
in
its
return,
a
refund
of
Part
VIII
tax
of
$284,826.50
was
still
allowed,
leaving
a
balance
of
tax
owing
of
$215,173.50
plus
interest.
On
March
28,
1988
the
Sheriff
of
British
Columbia
returned
the
writ
of
fieri
facias
issued
on
November
27,
1987
advising
“we
are
unable
to
locate
any
assets”.
On
October
25,
1988,
pursuant
to
subsection
227.1(1)
of
the
Act
the
Minister
issued
a
notice
of
assessment
to
Robert
Kyte
assessing
him
for
$298,473.30
which
constituted
Hitec’s
unpaid
tax
of
$215,173.50
plus
interest.
It
is
this
amount
which
is
under
dispute
in
this
Court.
Analysis
The
question:
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?
must
be
considered
in
two
parts.
The
first
is
whether,
when
the
certificate
was
issued,
it
was
for
the
amount
of
Hitec’s
liability
under
Part
VIII
of
the
Income
Tax
Act.
The
second
is
whether,
if
it
was
not
for
the
amount
of
Hitec’s
liability,
a
correct
certificate
was
required
under
paragraph
227.1(2)(a)
of
the
Act
in
order
for
a
director
to
be
vicariously
liable
for
the
corporation’s
unpaid
tax
liability.
(1)
Was
the
certificate
for
the
correct
amount
of
Hitec’s
liability
As
to
whether
the
certificate
was
issued
for
the
correct
amount
of
Hitec’s
liability
under
Part
VIII
of
the
Income
Tax
Act,
it
is
first
necessary
to
determine
how
and
when
Hitec’s
liability
arises.
The
case
law
is
clear
that
liability
for
income
tax
is
created
by
the
Act
and
not
by
a
notice
of
assessment.
In
R.
v.
Riendeau
(sub
nom.
Riendeau
v.
Minister
of
National
Revenue),
[1991]
2
C.T.C.
64,
91
D.T.C.
5416
(F.C.A.),
Stone
J.A.
states
at
page
65
(D.T.C.
5417):
As
the
cases
and
statutory
provisions
which
were
cited
by
Cullen,
J.
well
show,
liability
for
tax
is
created
by
the
Income
Tax
Act...not
by
a
notice
of
assessment.
A
taxpayer’s
liability
to
pay
tax
is
just
the
same
whether
a
notice
of
assessment
is
mistaken
or
is
never
sent
at
all.
By
the
same
reasoning,
a
refund
of
tax,
i.e.
a
negative
liability,
is
created
by
the
Act
as
well.
Further,
it
logically
follows
that
the
date
when
the
liability
or
refund
arises
is
also
determined
by
the
Act.
This
is
made
amply
clear
in
the
Part
VIII
provisions
which
specify
when
amounts
of
tax
are
to
be
paid
thereunder,
when
a
refund
is
deemed
paid
on
account
of
unpaid
tax,
and
the
dates
from
which
interest
runs
for
non-payment
of
taxes
owed.
Liability
for
fifty
percent
of
designated
amounts
arises
on
the
last
day
of
the
month
following
the
month
in
which
a
corporation
issued
a
debt
obligation.
Any
refund
to
which
the
corporation
is
entitled
is
deemed
paid
on
account
of
tax
owing
on
the
last
day
of
the
second
month
following
the
corporation’s
year
end.
What
then
is
the
effect
of
a
notice
of
assessment
issued
by
the
Minister?
An
assessment
is
the
Minister’s
opinion
as
to
the
liability
of
the
taxpayer
for
income
tax
under
the
Act.
The
assessment
is
subject
to
challenge
by
reason
of
the
objection
and
appeal
provisions
of
the
Income
Tax
Act
that
are
available
to
the
taxpayer.
However,
whether
the
determination
of
tax
payable
is
the
taxpayer’s
in
his
or
her
return,
the
Minister’s
in
his
notice
of
assessment,
or
the
court’s
on
any
decision
rendered
on
an
appeal,
those
determinations
are
calculations
of
the
tax
liability
of
the
taxpayer
created
by
the
Act.
Further,
they
are
determinations
that
will
have
a
retroactive
effect
if
relevant
provisions
of
the
Act
stipulate
when
the
tax
liability
arose.
Thus,
in
the
case
at
bar,
Hitec’s
initial
liability
for
tax
under
Part
VIII
was
created
by
reason
of
subsection
194(1)
of
the
Act
which
provided
that
Hitec
had
to
pay
fifty
percent
of
the
amount
of
the
debt
obligation
it
issued
or
$500,000.
By
virtue
of
subsection
195(2),
the
sum
of
$500,000
had
to
be
paid
on
or
before
February
28,
1985.
In
its
tax
return
for
1985,
Hitec
claimed
a
refund
for
the
entire
$500,000.
The
Minister
did
not
accept
Hitec’s
claim
and
by
his
February
24,
1988
notice
of
assessment,
allowed
Hitec
a
refund
of
$284,826.50
leaving
a
balance
of
tax
owing
of
$215,173.50.
In
allowing
this
refund
and
assessing
for
the
balance
of
tax
owing,
the
Minister
must
be
taken
to
be
applying
the
relevant
provisions
of
the
Income
Tax
Act.
The
relevant
provisions
would
include
subsection
194(5),
which
would
make
the
refund
paid
on
account
of
tax
as
of
February
28,
1986.
As
a
result,
as
of
February
28,
1986,
Hitec’s
liability
for
income
tax
was
$215,173.50
and
not
$500,000
as
stated
in
the
certificate
of
the
Minister
filed
in
the
Federal
Court
of
Canada
on
November
12,
1987.
Apparently,
Hitec
objected
to
the
Minister’s
calculation
of
its
refund
and
the
balance
of
tax
that
it
owed
but
the
Minister
confirmed
his
assessment.
No
further
appeal
proceedings
were
taken
by
Hitec.
Had
Hitec
appealed,
it
might
have
settled
with
the
Minister
for
a
different
refund
or
the
Court
might
have
determined
that
it
was
entitled
to
a
different
refund
and
that
a
different
amount
of
tax
was
owing.
However,
whenever
the
process
ends,
with
the
Minister
or
by
settlement
or
by
a
court
judgment,
the
determination
of
the
refund
and
balance
of
tax
payable
will
be
one
that
is
made
in
accordance
with
the
Income
Tax
Act
as
to
the
amount
of
the
refund,
balance
of
tax
payable
and
the
date
when
the
refund
was
effected
and
balance
of
tax
established.
I
therefore
reject
the
argument
of
the
Minister
that
a
refund
only
arises
and
is
deemed
paid
on
account
of
unpaid
taxes
when
the
Minister
makes
a
determination
of
that
refund.
No
matter
when
the
Minister
makes
that
determination,
the
refund
is
deemed
paid
on
account
of
unpaid
taxes
when
the
Income
Tax
Act
so
provides.
In
this
case,
that
would
be
February
28,
1986.
I
also
do
not
accept
the
Minister’s
argument
that
subsection
194(5)
of
the
Act
is
to
be
interpreted
as
rendering
the
refund
deemed
paid
on
account
of
tax
as
of
February
28,
1986
for
the
purposes
of
interest
only.
Such
an
interpretation
requires
a
reading
down
of
the
literal
words
of
subsection
194(5).
However,
as
affirmed
by
the
Supreme
Court
of
Canada
in
Friesen
v.
R.
(sub
nom.
Friesen
v.
Canada),
[1995]
3
S.C.R.
103,
[1995]
2
C.T.C.
369,
95
D.T.C.
5551,
the
words
of
the
Income
Tax
Act
are
to
be
given
their
plain
meaning.
It
would
have
been
a
simple
matter
for
Parliament
to
have
limited
the
provision
by
use
of
words
such
as
“for
the
purposes
of
the
calculation
of
interest...”
instead
of
using
the
words
“for
the
purposes
of
this
Act...”.
Parliament
did
not
do
so.
For
the
Court
to
adopt
the
Minister’s
interpretation
would
be
tantamount
to
the
Court
purporting
to
legislate.
The
Minister’s
alternative
argument,
that
the
relevant
amount
for
inclusion
in
a
certificate
is,
forever,
the
liability
of
the
corporation
on
the
day
it
failed
to
pay
the.
amount
it
was
initially
required
to
pay,
cannot
be
accepted.
The
words
of
subsection
227.1
themselves
do
not
support
the
Minister’s
argument.
Certainly,
the
words
“at
the
time”
contained
in
the
subsection
refer
to
the
time
when
the
corporation
was
required
and
failed
to
make
the
payment,
but
the
purpose
of
this
section
is
not
to
establish
for
all
time
the
amount
a
corporation
is
liable
to
pay.
Its
purpose
is
to
ensure
that
it
is
the
directors
in
office
at
the
time
the
liability
arose
who
are
rendered
vicariously
liable.
I
cannot
read
the
subsection
to
say
those
directors
would
remain
liable
for
the
amount
the
corporation
initially
failed
to
pay
even
if
the
corporation
subsequently
paid
some
amount
on
account
or
a
refund
was
deemed
paid
on
account
of
unpaid
taxes.
Hitec’s
liability
for
income
tax
as
of
February
28,
1986,
was
$215,173.50.
When
the
Minister
registered
a
certificate
for
$500,000
in
the
Federal
Court
on
November
12,
1987,
the
certificate
was
not
for
the
amount
of
Hitec’s
liability
under
Part
VIII
of
the
Income
Tax
Act.
(2)
Was
a
correct
certificate
a
requirement
for
director
liability
I
now
turn
to
the
question
of
whether
a
director
is
liable
under
section
227.1
for
income
taxes
owing
and
unpaid
by
a
corporation
if
the
certificate
registered
by
the
Minister
in
the
Federal
Court
was
not
for
the
correct
amount
of
the
corporation’s
liability.
This
question
involves
a
consideration
of
section
166
of
the
Income
Tax
Act:
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.
Section
166
requires
a
determination
as
to
whether
an
error
is
in
the
observance
of
a
directory
or
mandatory
provision
of
the
Act.
If
a
mandatory
provision
is
involved,
the
error
would
not
be
excused
by
section
166.
However,
if
the
error
is
with
respect
to
a
directory
provision
of
the
Act
the
Minister
may
avail
himself
of
the
benefit
of
section
166.
As
to
what
constitutes
a
directory
as
opposed
to
a
mandatory
provision
of
legislation,
I
am
guided
by
the
comments
of
Lord
Penzance
in
Howard
v.
Bodington
(1877),
2
P.D.
203
at
page
211,
as
quoted
by
Joyal
J.
in
Cal
Investments
v.
R.
(sub
nom.
Cal
Investments
v.
Canada),
[1990]
2
C.T.C.
418,
90
D.T.C.
6556,
at
page
427,
(D.T.C.
6563}:
I
believe
that
as
far
as
any
rule
is
concerned
you
cannot
safely
go
further
than
that
in
each
case
you
must
look
to
the
subject
matter;
consider
the
importance
of
the
provision
that
has
been
disregarded
and
the
relation
of
that
provision
to
the
general
object
intended
to
be
secured
by
the
Act;
upon
a
review
of
the
case
in
that
aspect
decide
that
the
matter
is
what
is
called
imperative
or
only
directory.
[Emphasis
added.]
The
same
approach
is
stated
in
Halsbury’s
Laws
of
England,
(4th
Ed.),
Vol.
44,
paragraph
933:
No
universal
rule
can
be
laid
down
for
determining
whether
provisions
are
mandatory
or
directory;
in
each
case
the
intention
of
the
legislature
must
be
ascertained
by
looking
at
the
whole
scope
of
the
statute
and,
in
particular,
at
the
importance
of
the
provision
in
question
in
relation
to
the
general
object
to
be
secured.
[Emphasis
added.]
The
general
object
intended
to
be
secured
by
sections
223
and
227
is
the
collection
of
income
tax.
The
specific
object
of
paragraph
227.1(2)(a)
is
to
ensure
that
before
a
director
is
made
vicariously
liable
for
the
unpaid
income
taxes
of
a
corporation,
the
Minister
take
steps
to
try
to
recover
from
the
corporation.
The
legislation
is
clear
that
the
taking
of
such
steps
is
a
condition
precedent
to
the
vicarious
liability
of
directors
and
therefore,
such
steps
are
mandatory.
Indeed,
the
failure
to
take
such
steps
could
result
in
a
director,
not
directly
liable
for
the
corporation’s
income
tax,
being
called
upon
to
pay
that
tax
before
recourse
against
the
corporation
has
been
exhausted.
That
would
be
inconsistent
with
the
object
of
the
provision.
However,
while
the
steps
to
exhaust
recourse
against
the
corporation
are
mandatory,
whether
the
certificate
is
for
the
correct
amount
owing
is
not
of
the
same
importance.
As
long
as
the
certificate
is
registered
and
execution
is
attempted,
the
basic
object
of
the
provision
is
respected.
The
fact
that
the
amount
on
the
certificate
is
incorrect
does
not
derogate
from
adherence
to
the
object
of
the
legislation.
This
view,
I
think,
accords
with
practicality.
As
I
have
indicated,
an
assessment
may
have
retroactive
effect.
Thus
a
taxpayer
corporation,
after
a
certificate
has
issued,
could,
by
filing
an
amended
return
which
was
assessed
as
filed
by
the
Minister,
change
the
amount
of
its
income
tax
liability.
That
changed
liability
would
have
retroactive
effect.
The
certificate
issued
prior
to
the
amended
return
having
been
filed
and
assessed
would
be
in
error.
The
taxpayer
corporation
itself
could
therefore
be
the
cause
of
an
incorrect
certificate.
If
a
correct
certificate
was
a
mandatory
requirement
of
the
Act,
vicarious
director
liability
could
be
avoided
solely
by
actions
of
the
corporation.
This
would
not
be
a
reasonable
result.
In
the
same
context,
an
error
of
a
few
dollars
or
cents
could,
if
the
requirement
that
the
certificate
be
correct
was
mandatory,
render
a
director
free
from
vicarious
liability.
That
would
not
be
consistent
with
practicality
nor
the
general
object
of
the
sections,
which
is
to
collect
tax,
or
the
specific
purpose
of
paragraph
227.1(2)(a),
which
is
only
to
require
an
attempt
at
recovery
against
the
corporation
before
seeking
recovery
from
a
director.
Again,
the
result
would
not
be
reasonable.
The
plaintiff
relies
on
Local
Improvement
District
(No.
26
A
5)
v.
Walters,
[1908]
1
Alta.
L.R.
188
(C.A.),
in
which
Beck
J.,
at
page
196,
accepts
a
general
principle
laid
down
in
A.
&
E.
Ency.
of
Law,
2nd
ed.,
vol.
26;
tit.
“Statutes,”
pages
689-90:
Provision
in
regard
to
the
assessment
and
collection
of
taxes,
and
the
measures
preliminary
thereto
which
are
intended
for
the
protection
of
the
taxpayer,
to
ensure
an
equality
of
taxation,
and
to
prevent
a
sacrifice
of
his
property,
are
mandatory;
while,
on
the
other
hand,
those
intended
simply
for
the
guidance
of
the
officers
and
to
promote
the
efficiency
of
their
work
are
directory.
Assuming
that
this
is
a
correct
current
statement
of
the
law
in
respect
of
the
Income
Tax
Act
(which
I
do
not
necessarily
accept),
the
description
of
mandatory
provisions
would
clearly
apply
to
the
requirements
to
register
the
certificate
and
issue
execution.
These
are
provisions
intended
for
the
protection
of
the
director.
But
the
reference
in
subsection
227.1(2)
to
the
amount
of
the
certificate
is
a
direction
to
the
Minister’s
officials
as
to
how
to
complete
the
certificate.
The
taxpayer
is
not
unprotected
and
his
or
her
property
is
not
sacrificed
by
reason
of
an
incorrect
certificate.
For
these
reasons,
the
requirement
that
a
certificate
be
for
the
amount
of
the
corporation’s
liability
is
a
directory
provision
only.
While
I
think
this
disposes
of
the
matter,
in
view
of
the
approach
of
other
courts
as
to
the
types
of
errors
excused
by
section
166
(and
subsections
152(3)
and
152(8)),
I
should
add
the
following
comments.
Gaitens
v.
R.
(sub
nom.
Gaitens
v.
Canada),
[1993]
1
C.T.C.
2168,
93
D.T.C.
54
was
a
case
similar
to
the
one
at
bar
in
which
Kempo
J.T.C.C.
found
that
a
certificate
that
failed
to
take
account
of
a
refund
deemed
paid
on
account
of
tax
under
subsection
194(5)
of
the
Act
was
not
correct.
She
rejected
the
Minister’s
argument
based
on
sections
152(3)
and
166
stating
at
page
2176
(D.T.C.
59):
The
erroneous
amount
in
the
Certificate
in
the
case
at
bar
is
fundamental.
It
goes
beyond
mere
error
or
irregularity
contemplated
within
166
or
152(3).
[Emphasis
added.]
The
“fundamental”
test
seems
to
have
originated
with
cases
such
as
R.
v.
Riendeau,
[1990]
1
C.T.C.
141,
90
D.T.C.
6076
(upheld
on
appeal,
supra)
in
which
Cullen
J.
stated
at
pages
146-47
(D.T.C.
6079):
Error
will
be
a
matter
of
degree.
Subsections
152(3),
152(8)
and
section
166
combined
clearly
indicate
that
this
error
by
the
Minister
of
National
Revenue
is
far
from
fatal.
The
cases
only
limit
these
sections
where
there
is
substantial
and
fundamental
error;
in
such
cases,
the
court
will
not
allow
the
Minister
to
hide
behind
the
provisions.
In
Stephens
Estate
v.
R.
(sub
nom.
Stephens
Estate
v.
The
Queen),
[1984]
C.T.C.
Ill,
84
D.T.C.
6114
(F.C.T.D.)
affirmed
[1987]
1
C.T.C.
88,
87
D.T.C.
5024,
Reed
J.
refused
to
invalidate
an
assessment
where
there
was
no
evidence
of
the
taxpayer
being
misled
or
prejudiced
by
errors
of
the
Minister.
I
deduce
from
these
cases
that
the
Court,
in
considering
subsections
152(3),
152(8)
and
section
166,
must
have
in
mind
whether
there
was
some
bad
faith,
unfairness,
or
injustice
on
the
part
of
the
Minister
or
prejudice
to
the
taxpayer.
If
so,
there
is
more
than
just
a
simple
error
by
the
Minister
which
would
otherwise,
by
reason
of
the
plain
meaning
rule
in
Friesen
v.
Canada,
supra,
be
excused
by
the
saving
provisions
of
the
Act.
This
is
not
a
case
in
which
there
is
evidence
of
any
prejudice
or
injustice
to
Hitec
or
to
Mr.
Kyte
arising
from
the
error.
The
Minister
simply
failed
to
take
account
of
the
refund
which
was
deemed
paid
on
account
of
tax
as
of
February
28,
1986.
While
the
Minister
had
Hitec’s
return,
and
might
have
assessed
it
before
registering
the
certificate
on
November
12,
1987,
there
is
no
evidence
of
anything
sinister
because
the
Minister
did
not
do
so.
In
fact,
Hitec
itself
filed
its
income
tax
return
for
1985
approximately
six
months
late.
It
may
well
have
been
Hitec’s
late
filing
that
delayed
the
Minister’s
assessment.
The
retroactive
provisions
of
the
Act
in
respect
of
refunds
indicate
that
errors
in
certificates
may
be
inevitable.
The
Minister
may
consider
it
necessary
to
register
a
certificate
before
a
corporation’s
return
is
filed,
or
at
least
before
he
has
had
an
opportunity
to
properly
consider
a
claimed
refund.
Or
a
taxpayer
corporation
may
itself
file
an
amended
return
after
a
certificate
is
issued
which,
if
assessed
by
the
Minister
as
filed,
would
retroactively
change
the
corporation’s
liability
and
render
the
certificate
incorrect.
There
are
undoubtedly
other
circumstances
that
could
give
rise
to
incorrect
certificates.
In
enacting
section
166,
Parliament
must
have
had
regard
for
such
circumstances.
I
am
satisfied
that
what
occurred
here
was
an
error
contemplated
by
section
166.
I
am
mindful
that
in
Gaitens,
supra,
a
case
similar
to
the
one
at
bar,
Kempo
J.T.C.C.
was
not
prepared
to
permit
the
Minister
to
avail
himself
of
the
benefit
of
section
166.
I
am
not
aware
of
all
the
facts
of
that
case,
but
I
must
say,
with
respect,
that
if
the
relevant
facts
were
the
same
as
in
the
case
at
bar,
I
would
have
come
to
a
different
conclusion
on
this
point
than
did
Kempo
J.T.C.C.
Counsel
for
the
plaintiff
says
that
section
166
does
not
apply
to
errors
in
certificates
because
section
166
is
not
expressly
incorporated
by
reference
into
section
223
of
the
Act.
However,
as
plaintiffs
counsel
also
points
out,
section
166
is
incorporated
by
reference
into
subsection
227(10)
which
provides:
227(10)
The
Minister
may
assess
(a)
any
person
for
any
amount
payable
by
that
person
under
subsection
(8),
or
224(4)
or
(4.1)
or
section
227.1
or
235,
and
(b)
any
person
resident
in
Canada
for
any
amount
payable
by
that
person
under
Part
XIII,
and,
where
he
sends
a
notice
of
assessment
to
that
person,
Divisions
I
and
J
of
Part
I
are
applicable
with
such
modifications
as
the
circumstances
require.
Section
166
is
contained
in
Division
I
of
Part
I
of
the
Act.
It
is
the
assessment
under
section
227.1
that
makes
that
provision
operative
and
renders
the
plaintiff
vicariously
liable
for
Hitec’s
income
tax
liability.
The
registration
of
a
certificate
under
section
223
is
a
condition
precedent
to
liability
of
a
director
under
section
227.1.
Accordingly,
the
Minister
must
observe
section
223.
However,
if
a
portion
of
section
223
is
directory
in
nature,
an
error
by
the
Minister
in
respect
of
the
directory
provision
will
be
excused
under
section
166.
I
think
there
is
sufficient
linkage
between
section
223
and
section
227.1
for
the
purpose
of
the
Minister
availing
himself
of
the
assistance
of
section
166
when
a
certificate
which
is
a
condition
precedent
to
a
director’s
liability
under
paragraph
227.1(2)(a)
is
in
error.
Therefore,
while
the
certificate
was
in
error,
the
plaintiffs
assessment
should
not
be
vacated
or
varied
and
his
liability
excused
by
reason
of
such
error.
CONCLUSION
The
question
as
framed
under
section
475
of
the
Federal
Court
Rules
is
answered
in
two
parts:
1.
The
certificate
issued
on
November
12,
1987,
in
the
principal
amount
of
$500,000
was
not
for
the
amount
of
Hitec’s
liability
under
Part
VIII
of
the
Income
Tax
Act.
2.
It
was
not
a
mandatory
requirement
of
paragraph
227.1(2)(a)
of
the
Act
that
a
certificate
be
for
the
amount
of
Hitec’s
liability
under
Part
VIII
of
the
Act.
For
this
reason,
the
plaintiffs
assessment
should
not
be
vacated
or
varied
by
reason
of
the
error
in
the
certificate
registered
on
November
12,
1987.
Order
accordingly.
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