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Citation: 2004TCC130
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Date: 20040309
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Docket: 2000-3781(IT)G
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BETWEEN:
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BULK TRANSFER SYSTEMS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Teskey, J.
[1] The Appellant appeals from
assessment of income tax in respect of its 1991 taxation year,
notice of which was dated February 24, 1997.
Issue
[2] The sole issue is whether the
assessment was validly issued and conforms to
subsection 152(4.3) of the Income Tax Act
(the "Act").
Facts
[3] On consent, the parties filed as
Exhibit A-1 a Statement of Agreed Facts containing
11 pertinent paragraphs, which read as follows:
1. The
Appellant is a corporation incorporated under the laws of the
Province of Ontario with its head office at R.R. #1, Kleinburg,
Ontario, L0J 1C0. The Appellant was originally incorporated
under the name Muscillo Transport Limited, which name was changed
to Bulk Transfer Systems Inc. by articles of amendment issued on
April 9, 1998.
2. The
Appellant is a Canadian Controlled Private Corporation as defined
by the Income Tax Act, R.S.C. 1985, c. I (5th Supp.), as
amended (the "Act").
3. On August
1, 1990, the Appellant was reassessed in respect of its 1987
taxation year. The Minister of National Revenue assessed a
disposition of a business property as giving rise to a taxable
capital gain. On October 25, 1990, the Appellant filed a
Notice of Objection in respect of this reassessment (the
"1987 Objection").
4. On December
1, 1991, the Appellant was issued its Notice of Assessment in
respect of its 1991 taxation year (the
"Assessment").
5. The
Appellant filed a Notice of Objection to the Assessment (the
"1991 Objection #1") within the requisite ninety (90)
day period after December 2, 1991.
6. The
Appellant's taxation year is March 31. In the 1991
taxation year, the Appellant paid its shareholders a taxable
dividend and in its 1991 tax return applied to have access to its
refundable dividend tax account which was increased by the
taxable capital gain that was reassessed as noted in paragraph 3
hereof. As a result, the Appellant was credited with the
amount of $65,000 of refundable dividend tax on its initial
Assessment of the 1991 taxation year issued on December 2,
1991. This amount was offset against income tax of
$21,008.00
7. On November
15, 1994, further reassessments were issued in respect of each of
the Appellant's 1987 and 1991 taxation years (the
"November 15, 1994 Reassessments"). The Appellant
objected to and then appealed the November 15, 1994 Reassessments
to the Tax Court of Canada, in Court File No. 95-2852(IT)G.
8. On March 1,
1996, the Tax Court of Canada issued a Judgment in Court File No.
95-2852(IT)G, pursuant to a Consent to Judgment filed by the
parties. The Consent to Judgment filed by the Appellant and
the Respondent is dated February 2, 1996. One of the
decisions of the Tax Court of Canada in this matter was a
determination that the capital gain realized by the Appellant in
its 1987 taxation year from the disposition of a former business
property was nil pursuant to subsection 44(1) of the Act in that
the Appellant had acquired a replacement property for its
business.
9. As a result
of the above Consent to Judgment, on May 1, 1996, the
Appellant's 1987 return was reassessed accordingly to remove
the taxable capital gain from the Appellant's taxable
income.
10. On February 24, 1997,
a Notice of Reassessment was issued in respect of the
Appellant's 1991 taxation year (the "February 24, 1997
Reassessment"). This reassessment makes reference to a
refundable dividend tax on hand of $8,420.68.
The Appellant filed a Notice of Objection to the
February 24, 1997 Reassessment on or about May 12, 1997 (the
"1991 Objection #2).
11. On June 23, 2000, the
Minister issued a Notice of Confirmation on the following
terms:
"Your Notice of Objection to the income tax assessment
for the 1991 taxation year has been carefully reviewed under
subsection 165(3) of the Income Tax Act.
The Minister of National Revenue has considered the reasons
set out in your objection and all the relevant facts. It is
hereby confirmed that the assessment has been made in accordance
with the provisions of the Income Tax Act on the basis that:
Your return for the 1991 taxation year has been assessed
according to subsection 152(4.3)."
[4] The Appellant called one witness,
a Joseph Pillo ("Pillo"), a chartered accountant
for 25 years and who has been the outside auditor of the
Appellant for a number of years.
[5] When Pillo received the Notice of
Reassessment, he immediately wrote a letter on the same date,
namely February 26, 1997, to Revenue Canada Taxation,
attention Corporate Accounts Department, which reads as
follows:
...
Attached you will find a copy of a notice of reassessment
dated February 24, 1997. The reassessment is for the
company's 1991 taxation year.
As far as I can see, the company's taxable income as
originally filed has not been altered. The amount of revised tax
is the same as on the original notice of assessment. The company
was reassessed in 1994 and (sic)
In fact the only change appears to be a change to the balances
due. Recently we received a credit on the company's 1987 tax
account that cleared up all outstanding balances. A copy of that
statement is attached.
Before we prepare and file a notice of objection, I wonder if
someone there would be kind enough to provide us with a detailed
explanation of the balance owing and/or what was actually
reassessed as we cannot tell from the information provided if
the reassessment is correct or not.
(Underline added.)
[6] Since Pillo did not receive a
response to the above letter, he filed an objection to the
assessment on May 12, 1997, approximately 37 months
later. The objection was denied and the assessment confirmed on
June 23, 2000.
[7] Pillo prepared and assembled a
three-column summary. The first column, entitled: "As
originally filed and assessed December 2, 1991"; the
next column entitled: "Reassessment issued November 15,
1994; and the last column entitled: "Reassessment issued
February 24, 1997, which summary is reproduced herein as
Schedule "A" to these reasons.
[8] At the hearing, Pillo still could
not determine if the calculation in the reassessment was
accurate.
[9] The initials "RDTOH" on
Schedule "A" stand for "Refundable Dividend
Tax On Hand".
[10] It was Pillo's opinion that the
effect of the assessment was a reassessment of the RDTOH and a
clawing back of the refund.
[11] The Respondent served on the
Appellant's counsel a request to admit three separate
documents, which the Appellant did not respond to, and therefore
the three documents were made Exhibit R-1.
[12] The request to admit describes the
three documents as follows:
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Date
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Description
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1.
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Explanation of use of source documents in preparation of
schedule calculating Refundable Dividend Tax on Hand
prepared by Leona Cote, Canada Customs and Revenue Agency,
with attached Exhibits
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2.
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T2S7 prepared by Canada Customs and Revenue Agency -
"Income Analysis (1985 and subsequent taxation
years)" calculating the Refundable Dividend Tax on
Hand and Dividend Refund with respect to the Appellant for
the fiscal period end March 31, 1987
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3.
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Schedule "A" to Reply to the Amended Notice of
Appeal, prepared by Canada Customs and Revenue Agency,
calculating the Appellant's Refundable dividend Tax on
Hand
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[13] Document # 1 is 71 pages
long.
[14] Document # 2 is 10 pages
long.
[15] Document #3 is
Schedule "A" to the Amended Reply to the Notice of
Appeal, containing four pages of figures, which are the first
four pages of document #1 above.
[16] The Appellant, in its Notice of Appeal,
pleaded in paragraph 11, that:
11. The Minister has by
virtue of the Reassessment, which was based on the Consent to
Judgment, assumed that the balance in the Appellant's RDTOH
account for the 1991 taxation year was $8,420.68. The Minister is
attempting to recover from the Appellant a portion of the refund
of RDTOH, being the difference between $65,000 (as originally
allowed to the Appellant in its 1991 tax year) and $8,420.68,
which is the Minister's current calculation of the balance in
the RDTOH account for the Appellant's 1991 taxation year.
[17] The facts contained in the above
paragraph were denied by the Respondent in paragraph 3 of
its Amended Reply.
[18] Paragraph 4 of the Amended Reply,
reads as follows:
In assessing the Appellant, the Minister relied upon, inter
alia, the following facts:
a) Pursuant to
subsection 152(4.3) of the Income Tax Act, R.S.c. 1985,
c. 1 (5th Supp.), as amended (the "Act"),
the Appellant was reassessed, notice of which was dated
February 24, 1997;
b) On May 1,
1996, the Appellant was reassessed for its 1987 taxation year to
reduce its capital gain pursuant to section 44 of the
Act; as a result, the Appellant's dividend refund for
1991 was reduced;
c) As at the
end of its 1991 taxation year, the Appellant's Refundable
Dividend Tax on Hand was not greater than $8,420.68, as shown on
Schedule "A" attached hereto.
[19] There is no issue as regards to the
facts in subparagraph 4(a) and 4(b) above.
Appellant's Submissions
[20] The Appellant submits that
subparagraph 4(c) of the Reply to the Amended Notice of
Appeal is a reference to a calculation and thus, the Reply does
not state the facts upon which the Appellant is being reassessed
and the tax, interest and penalty thereon, if any, and thus did
not disclose the factual basis of the reassessment.
[21] The Appellant submits that the claw
back of a refund of tax is not permitted under
subsection 152(4.3) of the Act, which reads:
(4.3) Consequential assessment
Notwithstanding subsections (4), (4.1) and (5), where the
result of an assessment or a decision on an appeal is to change a
particular balance of a taxpayer for a particular taxation year,
the Minister may, or where the taxpayer so requests in writing,
shall, before the later of the expiration of the normal
reassessment period in respect of a subsequent taxation year and
the end of the day that is one year after the day on which all
rights of objection and appeal expire or are determined in
respect of the particular year, reassess the tax, interest or
penalties payable, or redetermine an amount deemed to have been
paid or to have been an overpayment, under this Part by the
taxpayer in respect of the subsequent taxation year, but only to
the extent that the reassessment or redetermination can
reasonably be considered to relate to the change in the
particular balance of the taxpayer for the particular year.
[22] The Appellant submits that the Minister
has erred in applying subsection 152(4.3) to the facts
herein because this subsection only empowers the Minister to
assess and thereby increase or decrease the amount of "tax,
interest or penalties" payable by a taxpayer or to
"redetermine an amount deemed to have been paid or to have
been an overpayment". Thus, there is no authority to
reassess to recover a "refund" previously assessed.
[23] The Appellant further submits that the
plain meaning of subsection 152(4.3) does not entitle the
Minister to reassess a taxpayer for any purpose other than the
limited purposes stipulated therein and that if Parliament had
intended to permit the Minister to reduce and/or eliminate and
recover a refund of tax, Parliament would have enacted clear
statutory language which permitted the Minister to do so.
Respondent's Submissions
[24] The Respondent acknowledges that for
the purposes of this appeal, I do not have to give any attention
to subparagraphs 4 (a) and (b).
[25] The Respondent's counsel appears to
be under the misapprehension that the Appellant admitted
subparagraph 4 (c) as factual. The Appellant's
counsel said: "This is a reference to a calculation."
His oral argument followed his written argument and at no time
did he admit that the calculation was correct.
[26] The Respondent submits that
Schedule "A" to the Reply to the Amended Notice of
Appeal and the documents in Exhibit D-1 show how the
figure $8,420.68 in subparagraph 4 (c) was arrived
at.
[27] Counsel for the Respondent did not take
the Court through the schedule, or the documents in
Exhibit R-1.
[28] The Respondent submits that: (i) the
Minister reassessed the Appellant for 1987 to include a taxable
capital gain in its income and that had the result of bumping up
the Appellant's RDTOH; (ii) the Appellant successfully
appealed the reassessment and the taxable capital gain was
removed and that had the effect of reducing the balance of the
Appellant's RDTOH; (iii) the Minister issued a consequent
assessment pursuant to subsection 152(4.3) of the Act
for 1991 as a result of the RDTOH reduction in 1987.
Appellant's Reply to the Respondent's
Position
[29] The Appellant submitted that: (i)
"In the normal course, if you were assessing a taxpayer for
the first time, yes RDTOH comes into the calculation, but this is
not what we are dealing with herein."; (ii) the Respondent
says that subsection 152(4.3) is perfectly clear. If it were
so perfectly clear, why did it take the Appeals Officer three
years to come to a conclusion that where you get a lack of
clarity and ambiguity, the win does not go to the Respondent.
Analysis
[30] The Respondent did not call any
witnesses and therefore, no one explained what the 81 pages
of figures represented or how the calculations were made or what
the 81 pages in documents # 1, # 2 and
# 3 of Exhibit R-1 demonstrate. (It was submitted
that they demonstrate a calculation.)
[31] Pillo stated that the dividend tax on
hand at the end of its 1991 taxation year was greater than
$8,420.68, as assumed by the Minister in paragraph 4(c) of
the Reply, and in fact, was $46,780.00, the factual basis of the
assessment has been defeated.
[32] Subsection 152(4.3) is an
exception to subsection 152(4), which provides that, with
some specified exceptions, the Minister may only reassess a
taxpayer within the taxpayer's normal reassessment
period.
[33] Subsection 152(4.3) was enacted to
enable the Minister to reassess outside the normal limitation
periods in consequence of an assessment or an appeal that changed
the balance of a taxpayer in a particular year, "but only to
the extent that the reassessment ... can reasonably be considered
to relate to the change in the particular balance of the taxpayer
for the particular year".
[34] For the purposes of this appeal,
subparagraph 152(4.3) should be paraphrased to read:
Where the result of a decision on an appeal is to change a
particular balance of a taxpayer for a particular taxation year,
the Minister may reassess the tax, interest or penalties payable,
or redetermine an amount deemed to have been paid or to have been
an overpayment, under this Part, by the taxpayer in respect of
the subsequent taxation year, but only to the extent that the
assessment can reasonably be considered to relate to the change
in the particular balance of the taxpayer for the particular
year.
[35] Subsection 152(4.4) defines the
word "balance" as used in subsection 152(4.3) and
says: "a balance of a taxpayer for a taxation year is the
income, taxable income, taxable income earned in Canada or any
loss of the taxpayer for the year, or the tax or other amount
payable by, any amount refundable to, or any amount deemed to
have been paid or to have been an overpayment by, the taxpayer
for the year".
[36] The Federal Court of Appeal, in
Sherway Centre Limited v. The Queen, 2003 DTC
5082, was dealing with subsection 152(4.3). The Court
accepted the Minister's position that
subsection 152(4.3) must be narrowly construed and that in
the context of this appeal, its assessment must be directly
related to the 1987 assessment.
[37] I do not believe the Minister disclosed
in the Reply to the Amended Notice of Appeal the factual basis
for the assessment under appeal. Therefore, the pleading was
defective.
[38] There is no dispute between the parties
that, in interpreting the Act, "the words of an act
are to be read in their entire context and in their grammatical
and ordinary sense harmoniously with the scheme of the act, the
object of the act, and the intentions of Parliament".
[39] I am satisfied that
subsection 152(4.3) does not entitle the Minister to
reassess a taxpayer for any purpose other than the limited
purposes stipulated therein.
[40] I accept that reference to
"balance" in subsection 152(4.3), as defined in
subsection 152(4.4) is limited to the 1987 taxation year,
for which there has been a judicial determination and the balance
is not a reference to what the Minister is empowered to reassess
in respect of the 1991 taxation year.
[41] I am satisfied that upon reading
subsection 152(4.3) in its entire context, and in its
grammatical and ordinary sense harmoniously with the scheme of
the Act, the object of the Act, and the intention
of Parliament, it is clear that if Parliament intended to give
the Minister the power under subsection 152(4.3) of the
Act to reduce the amount of a refund or to newly assess
tax, interest or penalties as a result of a change in a balance
in a prior years, it would have included clear statutory language
to that effect in the body of subsection 152(4.3)
itself.
[42] For the above reasons, the appeal is
allowed, with costs, and the assessment is referred back to the
Minister of National Revenue for reconsideration and reassessment
in accordance with these reasons.
Signed at Toronto, Ontario, this 9th day of March, 2004.
Teskey, J.
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