Mckernan v. The Queen, docket 2002-975(IT)APP

Date: 20021008

Docket: 2002-975-IT-APP,

2002-976-IT-APP

BETWEEN:

NORA M. McKERNAN and

STEPHEN M. McKERNAN,

Applicants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for order

Mogan J.

[1]            Nora M. McKernan and Stephen M. McKernan are wife and husband. Their applications to this Court for Orders extending the time to serve Notices of Objection for the taxation years 1986 to 2000 were heard together on common evidence. For convenience, I shall refer to Nora as "the Wife" and to Stephen as "the Husband". The circumstances surrounding these applications are out of the ordinary.

[2]            The Husband is a theatrical producer. In the period from 1987/1988 to 1993, he worked in the USA. During much of that period, the Wife was with him in the USA. In late 1993, they came back to Canada on a permanent basis. The Husband and Wife have eight children born in the years from 1978 to 1991 (including twins born in 1988). Upon their return to Canada on a permanent basis, they concluded that they had always resided in Canada but had not filed income tax returns since 1986. The Husband therefore went to his accountant, Bernard Faibish, and instructed him to prepare and file income tax returns for the taxation years 1986 to 1995 inclusive. In the early fall of 1996, Mr. Faibish filed T1 income tax returns for the Husband for the taxation years 1986 through 1995 inclusive.

[3]            According to the unchallenged evidence of Mr. Faibish, the Husband's income tax returns for the 10-year period 1986 to 1995 show that he claimed a tax refund or reported a tax liability (amounts in brackets) in the amounts disclosed in the table below inclusive of the child tax credit or benefit due each year:

	Refund (liability)	Child tax benefit
1986	$2,383.55	-
1987	(6.93)	-
1988	(51.17)	-
1989	(40.97)	-
1990	(39.66)	-
1991	(14.84)	-
1992	(130.31)	-
1993	(5,007.45)	$8,795.04
1994	(4,630.50)	7,981.50
1995	(4,335.47)	7,074.00

[4]            For the following years (1996 to 2000 inclusive) the Husband filed income tax returns showing a tax liability (amounts in brackets) inclusive of the child tax benefit due to him in the amounts disclosed in the table below:

	Refund (liability)	Child tax benefit
1996	($6,338.67)	$5,224.00
1997	(5,792.37)	5,812.04
1998	(8,408.37)	4,462.25
1999	(6,455.39)	5,038.56
2000	(4,860.48)	4,292.76

[5]            According to the Affidavit of Warren O'Dwyer, an officer in the Toronto district office of Canada Customs and Revenue Agency ("CCRA"), sworn on July 8, 2002, the following facts are established with respect to Notices of Assessment and Notices of Determination issued to the Husband:

(a)            the Minister of National Revenue assessed income tax against the Husband for the taxation years 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994 by Notices of Assessment dated October 7, 1997; and the Minister assessed income tax for the 1995 taxation year by Notice of Assessment dated January 13, 1997;

(b)            the Husband did not serve Notices of Objection to the above assessments within the limitation periods described in subsection 165(1) of the Income Tax Act (the "Act");

(c)            the Husband did not serve on the Minister or on CCRA an application for an extension of time to serve Notices of Objection to the assessments within the limitation period described in subsection 166.1(7) of the Act;

(d)            on various dates from February 1997 to July 1998 the Minister determined amounts of tax deemed by subsection 122.5(3) of the Act to be paid for the 1989, 1990, 1991, 1993, 1994 and 1995 taxation years, and the Minister issued to the Husband the respective Notices of Determination;

(e)            the Husband did not serve Notices of Objection to the above determinations within the statutory limitation period following the day of mailing of the Notices of Determination; and

(f)             the Husband did not serve on the Minister or on CCRA an application for an extension of time to serve Notices of Objection to the determinations within the statutory limitation period prescribed in the Act.

[6]            The statements in the Affidavit of Warren O'Dwyer indicate that the Husband simply did not respond to the various Notices of Assessment and Notices of Determination made by the Minister for the years 1986 to 1995 inclusive. The oral evidence and the documents of Bernard Faibish (the Husband's accountant) indicate that the Husband, through Mr. Faibish, was actively corresponding with CCRA concerning the various Notices of Assessment and Determination.

[7]            Having regard to subparagraph 5(a) above and subsection 165(1) of the Act, the period within which the Husband was permitted to serve Notices of Objection for the taxation years 1986 to 1994 inclusive was October 8, 1997 to January 5, 1998. That is the well-known 90-day period. For the 1995 taxation year, the permitted period to object ended on April 30, 1997 being one year after the filing-due date for 1995. It appears from the evidence that the Husband did not, within those permitted time periods, actually file a formal Notice of Objection for any one of the taxation years 1986 to 1995 inclusive. Considering the extraordinary circumstances of this application, however, I raise the question as to whether some of the correspondence between the Husband's agent (Mr. Faibish) and CCRA could or should be construed as the Husband's de facto objection to certain assessments.

[8]            By letter dated March 26, 1997, CCRA (under its prior name "Revenue Canada") wrote to the Husband (Exhibit A-1) with respect to his claims for child tax credit and asked for "an award letter issued by Human Resources Development Canada confirming the number of children eligible" for the taxation years 1986 to 1992. By letter dated April 7, 1997 (Exhibit A-2), Mr. Faibish responded to the Revenue Canada letter stating that Human Resources Development Canada ("HRDC") would need 60 to 120 days to send the award letter. Mr. Faibish wrote a further letter on July 16, 1997 (Exhibit A-3) stating that Health and Welfare Canada (in place of HRDC) might take up to four months to issue the award letter.

[9]            On October 7, 1997, Revenue Canada issued to the Husband nine Notices of Assessment for the taxation years 1986 to 1994 inclusive (Exhibit A-6) assessing federal tax and provincial tax as follows:

	Federal Tax	Provincial Tax
1986	$1,572	$774
1987	1,415	686
1988	2,326	1,151
1989	2,102	1,051
1990	2,774	-0-
1991	3,205	-0-
1992	2,980	-0-
1993	3,722	-0-
1994	3,299	-0-
Totals	$23,395	$3,662

These Notices of Assessment are important documents because (i) they started the 90-day limitation period for serving Notices of Objection expiring on January 5, 1998; and (ii) the Notices for 1986, 1987, 1988, 1989, 1990, 1991 and 1992 stated explicitly that the claim for the child tax credit was disallowed.

[10]          On September 12, 1997, Revenue Canada wrote to the Husband (Exhibit A-4) about his tax arrears of $11,765 for 1995 and 1996 and threatened legal action. On January 20, 1998, Mr. Faibish wrote to Revenue Canada - Fairness Package Committee (Exhibit A-5) stating in part:

Please be advised that the above taxpayer filed 1986 through 1995 T1 Income Tax Returns during 1997 and that Assessments have been received which indicate an amount due to the Department in excess of $70,000.

The Department in March 1997 requested an award letter concerning the Child Tax Credits and subsequent Child Tax Benefits that were available to the taxpayer for those taxation years.

The writer submitted the request to Health and Welfare Canada during the month of April, 1997 for an award letter for the taxation years 1986 through 1995 and we have not received an answer to our request to current date. The writer was told that because the Child Tax Credits had changed to Child Benefits that a Department within Health and Welfare Canada "hidden in the depths of Ottawa" were the only ones able to issue such an award letter.

In the interim, the Collection Department and specifically a Ms. A. Kernohan - telephone (416) 954-4560 has commenced the collection process but I must admit that she has been most lenient because Health and Welfare Canada has been remiss in sending the award letter to the taxpayer.

It is obvious that without the award letter the taxpayer may not obtain credit for the benefits due to him and as a result the collection process continues.

The taxpayer therefore requests that the Fairness Package Committee help to resolve the request for and obtaining of the award letter requested way back in April of 1997. In addition, the taxpayer requests that any interest and penalty that accrues because of the "missing" award letter be forgiven because the circumstance was beyond the control of the taxpayer.

The reference to $70,000 in the above passage probably includes taxes of about $12,000 for 1995 and 1996 plus interest plus late-filing penalties plus any amounts owing by the Wife. If Notices of Objection were not served in the 90-day period from October 7, 1997 to January 5, 1998, it appears from the above passage that Mr. Faibish was relying on the "award letter" from Health and Welfare Canada and on the Fairness Package Committee to provide some equitable relief. On February 3, 1998, Mr. Faibish wrote a letter to Revenue Canada (Exhibit A-7) asking that any child tax credit or benefit be paid to the Wife.

[11]          On June 4, 1998, Revenue Canada wrote to the Wife (Exhibit A-8) with respect to the child tax credit for 1986, 1989, 1990, 1991 and 1992 stating in part:

We are unable to adjust your returns because we need more information.

The information on hand with the Department indicates that you have five children however, it was noted in subsequent years that you have claimed eight children. If our information is incorrect, please send us copies of all the children's birth certificates so that we might update our records, and process your claim.

Our records also indicate that you have not filed a return for 1986 in order to allow your claim for this year you must file a return.

Once we received the information we need, we will review your file for a possible adjustment.

We trust this clarifies the Department's position in this regard.

It is apparent from the above letter that Revenue Canada was prepared, in June 1998, to adjust the Wife's tax payable upon receipt of certain information.

[12]          On June 25, 1999, Mr. Faibish wrote a long letter to Revenue Canada (Exhibit A-9) concerning both the Husband and the Wife, enclosing certain documents and providing certain information. On January 26, 2000, Mr. Faibish wrote a further letter to CCRA (Exhibit A-10) providing more information and enclosing copies of 12 letters which had passed between him and Revenue Canada in the period from March 1997 to June 1999. Subsequent correspondence summarized below shows that Revenue Canada/CCRA never did receive all of the information or documents which they requested.

Exhibit A-11                           Letter February 17, 2000 from CCRA to Mr. Faibish requiring specific information.

Exhibit A-12                           Letter September 12, 2000 from CCRA to Mr. Faibish suggesting that CCRA will close their file subject to receipt of certain information.

Exhibit A-13                           Letter June 5, 2001 from CCRA to the Husband stating that a certificate for his arrears has been registered in the Federal Court, and that a Writ of Seizure and Sale has been issued against him, and that his arrears were $132,406.

Exhibit A-14                           Letter June 12, 2001 from Mr. Faibish to CCRA concerning charitable receipts for the years 1996 to 1999.

Exhibit A-15                           Letters October 25, 2001 from Mr. Faibish to CCRA (Collections) and to CCRA (Fairness Package Committee) asking for relief.

Exhibit A-16                           Letters November 5, 2001 from Mr. Faibish to CCRA (Appeals Division) and to CCRA (Fairness Package Committee) asking for relief.

Exhibit A-17                           Letters December 17, 2001 from CCRA to the Husband and to Mr. Faibish stating that the Husband's Notices of Objection for the taxation years 1986 to 1995 (apparently filed in October or November 2001) could not be accepted because they were not filed "within the required timeframe".

Exhibit A-18                           Letter March 5, 2002 from CCRA to Mr. Faibish commenting on the Husband's Notices of Objection for the taxation years 1996 to 2000.

Exhibit A-19                           Letter March 5, 2002 from CCRA to Mr. Faibish commenting on the Wife's Notice of Objection for the 2000 taxation year, and stating that her file will be reviewed if the information requested in the CCRA letter of September 12, 2000 (Exhibit A-12 above) is received.

[13]          The limitation periods within which a notice of objection may be served are set out in section 165 of the Income Tax Act. If a notice of objection is not served within the permitted time period, a taxpayer may apply to the Minister under section 166.1 for an extension of time to serve the notice of objection. If the Minister has refused a taxpayer's application under section 166.1, the taxpayer may apply to this Court under section 166.2 for an extension of time to serve the notice of objection. The relevant portions of sections 166.1 and 166.2 are set out below.

166.1(1)                   Where no notice of objection to an assessment has been served under section 165, nor any request under subsection 245(6) made, within the time limited by those provisions for doing so, the taxpayer may apply to the Minister to extend the time for serving the notice of objection or making the request.

166.1(7) No application shall be granted under this section unless

(a)            the application is made within one year after the expiration of the time otherwise limited by this Act for serving a notice of objection or making a request, as the case may be; and

(b)            the taxpayer demonstrates that

(i)             within the time otherwise limited by this Act for serving such a notice or making such a request, as the case may be, the taxpayer

(A)           was unable to act or to instruct another to act in the taxpayer's name, or

(B)            had a bona fide intention to object to the assessment or make the request,

(ii)            given the reasons set out in the application and the circumstances of the case, it would be just and equitable to grant the application, and

(iii)           the application was made as soon as circumstances permitted.

166.2(1)                   A taxpayer who has made an application under subsection 166.1 may apply to the Tax Court of Canada to have the application granted after either

(a)            the Minister has refused the application, or

(b)            90 days have elapsed after service of the application under subsection 166.1(1) and the Minister has not notified the taxpayer of the Minister's decision,

but no application under this section may be made after the expiration of 90 days after the day on which notification of the decision was mailed to the taxpayer.

166.2(5) No application shall be granted under this section unless

(a)            the application was made under subsection 166.1(1) within one year after the expiration of the time otherwise limited by this Act for serving a notice of objection or making a request, as the case may be; and

(b)            the taxpayer demonstrates that

(i)             within the time otherwise limited by this Act for serving such a notice or making such a request, as the case may be, the taxpayer

(A)           was unable to act or to instruct another to act in the taxpayer's name, or

(B)            had a bona fide intention to object to the assessment or make the request,

(ii)            given the reasons set out in the application and the circumstances of the case, it would be just and equitable to grant the application, and

(iii)           the application was made under subsection 166.1(1) as soon as circumstances permitted.

[14]          It is clear from subsection 166.2(1) and paragraph 166.2(5)(a) that a taxpayer may not apply to this Court to extend the time for serving a notice of objection unless the taxpayer has first made an application to the Minister under section 166.1 for an extension of time. In other words, an application to the Minister under section 166.1 is a condition precedent to an application to this Court under section 166.2. In these applications, there is no evidence that either the Husband or the Wife made an application to the Minister under section 166.1 to extend the time for serving one or more notices of objection. In ordinary circumstances, that would end the matter and I would dismiss both applications. The circumstances are not ordinary, however, and I have explored the correspondence to see if there were a letter or other document which could be construed as a notice of objection.

[15]          The Husband's Notices of Assessment for the years 1986 to 1994 are part of Exhibit A-6. Those assessments show that the Husband's taxable income in any one year did not exceed $30,000 and, with his large family, the child tax credit or benefit would be a significant financial advantage. On most of the Notices of Assessment, there is a statement that he is not entitled to a child tax credit or benefit. The Wife's Notices of Assessment for the years 1987 to 1995 are also part of Exhibit A-6. Her assessments show that her taxable income was only $6,000 in seven of those nine years and nil in another year. Also, there is no indication that she received either the child tax credit or benefit.

[16]          The correspondence summarized in paragraphs 8, 10, 11 and 12 above demonstrates that Revenue Canada was willing to grant the child tax credit or benefit to the Wife if certain information and documents (including an "award letter" from Health and Welfare Canada) were submitted. That correspondence also demonstrates that the Husband and Wife, through Mr. Faibish, provided all of the information in their possession but the delivery of the "award letter" was beyond their power or control. The Husband and Wife were relying on the spirit of the correspondence from March 1997 (Exhibit A-1) to December 2001 to conclude that the child tax credit or benefit for each year would eventually be granted; but the letter from CCRA on December 17, 2002 (Exhibit A-17) was the first indication that CCRA was standing firm on the assessments made in 1997, and that it was too late to object to those assessments.

[17]          The argument put forward on behalf of the Husband and Wife is in the nature of "detrimental reliance", a concept which is sometimes argued in the law of contract. In effect, the Husband and Wife claim that they relied on the lengthy correspondence with Revenue Canada (or CCRA) to their detriment. An argument based on detrimental reliance cannot assist the Husband and Wife when they are, within the four corners of the Income Tax Act, attempting to object to or appeal from various assessments. The provisions of the statute dominate this proceeding.

[18]          As stated in paragraph 14 above, an application to the Minister under section 166.1 to extend time to object is a condition precedent to an application to this Court under section 166.2. Because there is no evidence that the Husband or Wife made an application to the Minister under section 166.1, I cannot grant their applications under section 166.2. In the evidence before me, I have tried to find a letter from the Husband or Wife or Mr. Faibish (their agent) which I could construe as a notice of objection served within the time periods described in subsection 165(1) of the Act. I find no such letter.

[19]          The Husband was assessed for the years 1986 to 1994 on October 7, 1997. The 90-day period to object ran from October 8, 1997 to January 5, 1998. There is no letter at all in that 90-day period. The Husband was assessed for 1995 on January 13, 1997. The period to object for 1995 ended on April 30, 1997 being one year after the filing due date for 1995. The correspondence between January 13 and April 30, 1997 comprises only the two letters described above as Exhibits A-1 and A-2. I cannot construe the letter of April 7, 1997 from Mr. Faibish (Exhibit A-2) as a notice of objection for 1995 when that taxation year is not even mentioned in the letter.

[20]          In Exhibit A-17, CCRA confirmed that the Husband's objections for the 1996, 1997, 1998, 1999 and 2000 taxation years were "filed on time". I will therefore dismiss the Husband's application as it relates to the taxation years 1986 to 1995 inclusive; and not rule on his subsequent taxation years. I do note, however, that CCRA responded to the Husband's objections for the subsequent taxation years (1996, 1997, 1998, 1999 and 2000) by letter dated March 5, 2002 (Exhibit A-18). If the Husband has any reason to dispute a Notice of Assessment for any one of the five subsequent taxation years, it is not too late to protect his position by acting under sections 165 and 166.1 if he wants to object; or by acting under sections 167 and 169 if he wants to appeal.

[21]          Above all, if the Husband and Wife wish to protect their rights as taxpayers under the Income Tax Act, they should use the provisions of the Act to object or appeal as the case may be. Corresponding with a "Fairness Package Committee" (whatever that committee may be) could possibly be effective in obtaining equitable relief but it is not effective at all in protecting a taxpayer's right to object or appeal.

[22]          The Wife's Notices of Assessment for the taxation years 1987 to 1995 inclusive are part of Exhibit A-6. Five of those assessments are "nil" in every respect. The other four assessments impose only modest penalties, each one less that $60. The Notices of Assessment are all dated August 25, 1997. The 90-day period to object ran from August 26 to November 23, 1997. There was no letter written in that 90-day period which I can construe as a Notice of Objection. The Wife's application with respect to the taxation years 1987 to 1995 is dismissed.

[23]          In Exhibit A-19, a letter dated March 5, 2002, CCRA responded to the Wife's notice of objection for the taxation year 2000 but stated that CCRA would "confirm" the assessment at a later date. If the Wife intends to dispute any amount in her assessment for 2000, she should take steps to appeal under section 169 and under section 167 if necessary.

[24]          While the Husband and Wife were sojourning in the USA in the late 1980s and early 1990s, they did not file their income tax returns in Canada on a timely basis. Apart from that fact, virtually all of the equities in this matter appear to be running in favour of the Husband and Wife. I regret that I am not able to grant the application of the Husband or the Wife. If my perception of this matter is well-founded, I strongly recommend to the Minister of National Revenue that the Minister exercise the discretion available under subsection 220(3.1) of the Act to waive or cancel all of the interest or penalty otherwise payable by the Husband or the Wife with respect to the years 1986 to 1995 inclusive. Also, I strongly recommend that CCRA do what it can to grant the child tax credit or benefit to the Wife for any and all years in respect of which the credit or benefit was not granted to the Husband or the Wife.

[25]          One last comment concerning the discretion granted to the Minister in subsection 220(3.1). This Court does not have any jurisdiction over the Minister concerning that discretion. The Minister will not likely exercise his or her discretion under subsection 220(3.1) unless specifically requested to do so by the taxpayer who would benefit from such request.

Signed at Ottawa, Canada, this 8th day of October, 2002.

"M.A. Mogan"

J.T.C.C.

COURT FILE NOS.:                                              2002-975(IT)APP and 2002-976(IT)APP

STYLE OF CAUSE:                                                               Nora M. McKernan and Stephen M. McKernan and Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           August 26 and 29, 2002

REASONS FOR ORDER BY:                               The Honourable Judge M.A. Mogan

DATE OF ORDER:                                                October 8, 2002

APPEARANCES:

Agent for the Applicants:                   Bernard Faibish

Counsel for the Respondent:              Suzanne M. Bruce and

                                                                                Bernard Assan (Student-at-law)

COUNSEL OF RECORD:

For the Applicants:              

Name:                                N/A

Firm:                  N/A

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

APPLICATION UNDER SECTION 166.2 OF THE

INCOME TAX ACT (OBJECTION)

2002-975(IT)APP

BETWEEN:

NORA M. McKERNAN,

Applicant,

and

HER MAJESTY THE QUEEN,

Respondent.

Application heard on common evidence with the application of Stephen M. McKernan (2002-976(IT)APP), on August 26 and 29, 2002,

at Toronto, Ontario, by

the Honourable Judge M.A. Mogan

Appearances

Agent for the Applicant:                                     Bernard Faibish

Counsel for the Respondent:                              Suzanne M. Bruce and

Bernard Assan (Student-at-law)

ORDER

Upon application for an Order extending the time within which Notices of Objection may be served with respect to assessments made under the Income Tax Act for the 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999 and 2000 taxation years;

                And upon hearing the agent for the applicant and counsel for the Respondent;

It is ordered:

(i)             that the application with respect to the taxation years 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 is dismissed;

(ii)            that the application with respect to the taxation years 1986, 1996, 1997, 1998 and 1999 is null and void because there is no evidence of an assessment of tax for any one of those years; and

(iii)           that the application with respect to the taxation year 2000 is redundant because there is evidence that a valid Notice of Objection for the year 2000 was served.

Signed at Ottawa, Canada, this 8th day of October, 2002.

"M.A. Mogan"

J.T.C.C.

APPLICATION UNDER SECTION 166.2 OF THE

INCOME TAX ACT (OBJECTION)

2002-976(IT)APP

BETWEEN:

STEPHEN M. McKERNAN,

Applicant,

and

HER MAJESTY THE QUEEN,

Respondent.

Application heard on common evidence with the application of Nora M. McKernan (2002-975(IT)APP), on August 26 and 29, 2002, at Toronto, Ontario, by

the Honourable Judge M.A. Mogan

Appearances

Agent for the Applicant:                                     Bernard Faibish

Counsel for the Respondent:                              Suzanne M. Bruce and

Bernard Assan (Student-at-law)

ORDER

Upon application for an Order extending the time within which Notices of Objection may be served with respect to assessments made under the Income Tax Act for the 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999 and 2000 taxation years;

                And upon hearing the agent for the applicant and counsel for the Respondent;

It is ordered:

(i)             that the application with respect to the taxation years 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 is dismissed; and

(ii)            that the application with respect to the taxation years 1996, 1997, 1998, 1999 and 2000 is redundant because there is evidence that valid Notices of Objection were served for those five years.

Signed at Ottawa, Canada, this 8th day of October, 2002.

"M.A. Mogan"

J.T.C.C.