Citation:
2016 TCC 1
Date: 20160106
Docket: 2013-4143(IT)G
BETWEEN:
FORD
CREDIT CANADA LIMITED,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre A.C.J.
[1]
The issue in this appeal is whether a purported
consequential assessment issued on December 19, 2011 for the 2005 taxation
year is statute‑barred. This turns on whether the assessment was properly
issued pursuant to subsection 152(4.3) of the Income Tax Act (ITA),
which reads as follows:
(4.3) Consequential assessment. Notwithstanding
subsections (4), (4.1) and (5), if 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 if 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 by the taxpayer, redetermine an amount deemed to
have been paid or to have been an overpayment by the taxpayer or modify the amount
of a refund or other amount payable to the taxpayer, under this Part in respect
of the subsequent taxation year, but only to the extent that the reassessment,
redetermination or modification can reasonably be considered to relate to the
change in the particular balance of the taxpayer for the particular year.
[Emphasis added.]
[2]
The facts underlying this appeal are summarized
in a Partial Agreed Statement of Facts, which is attached at the end of these
Reasons for Judgment.
[3]
In a nutshell, by reassessment dated July 9,
2009, the Minister of National Revenue (Minister) included in the
appellant’s income for the 2004 taxation year various amounts, some of which had
been initially reported in the appellant's income for the 2005 taxation year. The
issue for most of these amounts came down to timing. The amounts in question included
deferred proceeds on securitization transactions and subvention accretion
income, totalling $76,673,532, which the Minister subsequently removed from
income for the 2005 taxation year by reassessment dated June 21, 2010. The
deferred proceeds and subvention accretion income, along with a few other amounts,
were referred to as a "T2S(1) Securitization Adjustment" in the
reassessment for 2005. Though there were other adjustments made in the
reassessment for 2005, they are not material.
[4]
In all, the reassessment for 2004 added to
income amounts totalling $237,608,206 and removed from income amounts totalling
$21,312,655.
[5]
The appellant filed notices of objection for
both years.
[6]
For 2004, the appellant disputed certain
adjustments in the reassessment and requested an additional deduction of
$5,681,266, which it had requested during the audit but the request was not
processed. The total reduction to taxable income sought by the appellant amounted
to $198,405,337.
[7]
For 2005, the appellant did not dispute the T2S(1)
Securitization Adjustment but requested, in the event that its 2004 income was
ultimately changed on appeal so that the amount of non‑capital losses
necessary to reduce 2004 taxable income to $100 was reduced, that its non‑capital
losses be applied in the order they arose to reduce 2004 taxable income to $100
and to reduce 2005 taxable income to $100 (2005 Notice of Objection,
paragraph 17, Exhibit A‑1, Tab 16, page 278).
[8]
The Notices of Objection were handled by Ms. Leslie Patrick,
who acted in both files as the Canada Revenue Agency (CRA) appeals
officer. On December 3, 2010, she wrote to the appellant to advise that
she had been assigned to the case (Exhibit A‑1, Tab 17).
[9]
On June 20, 2011, Ms. Patrick, on
behalf of the CRA Appeals Division, sent a letter to the appellant offering to
settle the objections in respect of the 2004 and 2005 taxation years on the
terms set out in that letter (mainly that the Minister would accept all of the
appellant's adjustments for 2004), conditional on the appellant waiving its
right of objection and appeal in respect of 2004 and withdrawing its notice of
objection in respect of 2005 (Exhibit A‑1, Tab 23).
[10]
The appellant responded by letter dated
June 30, 2011 requesting an explanation of the principles underlying the
CRA Appeals Division position regarding the settlement offer (Exhibit A‑1,
Tab 24).
[11]
An explanation of the CRA's position was
provided to the appellant in a letter dated July 14, 2011 and signed by Ms. Patrick,
the CRA appeals officer (Exhibit A‑1, Tab 25). Ms. Patrick
stated in the last three paragraphs of that letter:
. . .
There are no
securitization issues in dispute for the 2005 taxation year. However, if the
2004 reassessment is vacated by the Appeals Division there will be
corresponding consequential adjustments to 2005, which should also address your
concerns regarding the non‑capital losses.
The basis for the
proposal is our interpretation of the facts presented. Accordingly, our
settlement offer is for the 2004 taxation year only. The Canada Revenue Agency
will continue to review, audit, and if applicable reassess, securitization
transactions and other issues in 2006 and subsequent taxation years.
If you would like to discuss this matter further please do not
hesitate to contact the undersigned.
[12]
By letter dated August 19, 2011, the
appellant requested clarification of certain points in order to be able to respond
effectively to the CRA's proposal and advance settlement discussions (Exhibit A‑1,
Tab 26). The appellant raised, among others, the following question:
". . . does the CRA Appeals division, in the ordinary course of
adjudicating appeals under subsection 165(3) of the Income Tax Act, intend
to accept FCCL's [Ford Credit Canada Limited] objection to the 2004 year and to
vacate the current assessment?" The appellant then terminated the letter
by saying that it required clarification as to the procedural implications the
CRA's offer had for its objections.
[13]
By letter dated August 26, 2011, the CRA
appeals officer responded to the appellant. Ms. Patrick summarized her
understanding of the appellant's questions raised in its letter dated
August 19, 2011. As this letter is crucial in the present appeal, it is
worth reproducing it in its entirety:
|
Ford
Credit Canada Limited
The
Canadian Road
Oakville,
Ontario L6J 5C7
Attention:
Norman Baxter, Tax Director
|
Our file/Notre référence
L.
Patrick 430-2-0
416-952-1068
GB11117120 8200
GB11117120 9146
|
|
August 26,
2011
Dear
Mr. Baxter:
RE: Ford Credit Canada Limited
Business Number – 101842557RC0001
Notices of Objection for December 31, 2004 and
2005 Taxation Years
|
Thank you for your letter dated August 19, 2011.
It is our understanding that you want to know whether or not the Canada Revenue
Agency's (the "CRA") Appeals Division agrees with your position
regarding the "retained interest". In addition, you want to know
whether the basis for our decision is applicable to subsequent taxation years,
and why the Appeals Officer has sent you a settlement offer.
It is our position that the net present value of
retained interest is an add‑back on schedule one (T2SCH1) of the
corporate income tax return. However, because we do not agree with all of
the CRA Audit Division's adjustments, we are vacating the 2004 reassessment in
dispute.
You have referred to subsection 165(3) of the
Income Tax Act (the Act"). This
subsection requires that the Minister, upon receiving a Notice of Objection,
must with all due dispatch reconsider the assessment and either vacate, confirm
or vary the assessment or reassess. In order to achieve our objective, the
Appeals Division occasionally uses "settlement agreements" to resolve
certain cases that are not decided 100% in favour of either the CRA or the
taxpayer. In this case, a settlement offer was determined to be the most
effective way to ensure that all parties are aware that the Appeals Division
does not entirely agree with FCCL's position. Further, that the basis for
our decision applies only to the years under objection.
Specifically, the review completed by the Appeals
Division was for the 2004 and 2005 taxation years. Our review was limited to
the years under objection. We cannot provide any comments regarding subsequent
taxation years.
The use of the waivers, for the purposes of
settlement is to ensure that all parties have a clear understanding that,
although we do not fully support your position, the reassessment will be
vacated. In addition, our decision applies to the
2004 taxation year only.
As a final point, it should be noted that the use of
the phrase "without prejudice" is a standard practice for all of our
settlement offers.
We look forward to discussing the issue further. Please telephone the undersigned to arrange a mutually
satisfactory date to meet at our office in Scarborough, Ontario.
Yours truly,
L. Patrick
Appeals Officer
[Emphasis added.]
[14]
This letter is the crux of the issue in the
present case. The appellant is of the view that the Minister vacated the
July 9, 2009 reassessment (for the 2004 taxation year) and communicated
this decision to the appellant in the above letter of August 26, 2011,
thereby discharging her obligation to dispose of the objection under
subsection 165(3) of the ITA, which reads as follows:
Objections to Assessments
. . .
(3) Duties of
Minister On receipt of a notice of objection under this section, the
Minister shall, with all due dispatch, reconsider the assessment and vacate,
confirm or vary the assessment or reassess, and shall thereupon notify the
taxpayer in writing of the Minister’s action.
[15]
The appellant is of the view that, when the CRA
stated in the letter that, "because we do not agree with all of the CRA
Audit Division's adjustments, we are vacating the 2004 assessment in
dispute", the CRA was making a statement that, on reconsidering the
July 9, 2009 reassessment, it had decided to vacate it, and the appellant
was notified of that decision by that letter. In the appellant's view, the
reference to subsection 165(3) in the following paragraph of the letter
confirms that the decision had been taken by the Minister to vacate the 2004
reassessment, which was in dispute at that time.
[16]
If the appellant proves to be right in that
interpretation, it would follow that the December 19, 2011 reassessment
issued for 2004 was not issued pursuant to subsection 165(3) of the ITA as
the matter would already have been disposed of by the letter dated
August 26, 2011, and therefore that reassessment would have been issued
after the normal reassessment period, which expired on July 13, 2009 for
2004, and consequently would be statute‑barred.
[17]
The appellant further argues that the Minister
did not have the authority to issue a consequential reassessment pursuant to
subsection 152(4.3) of the ITA for the 2005 taxation year as this
provision does not provide for the issuance of a consequential reassessment as
a result of the Minister vacating a reassessment under subsection 165(3).
(The appellant argues that the decision to vacate an assessment is not an
"assessment or a decision on an appeal", which is a precondition found
in the first sentence of subsection 152(4.3) for the exercise of the
Minister's right to issue a consequential reassessment.)
[18]
As a result, the appellant argues, the
December 19, 2011 reassessment for 2005 could not have been issued
pursuant to 152(4.3) and was therefore likewise statute‑barred.
[19]
The respondent, on the other hand, is of the
view that the letter dated August 26, 2011 was only responding to the
appellant's request (in its letter dated August 19, 2011) for clarification
during the course of settlement discussions following a "without
prejudice" proposal by the CRA for settlement of the objections. The
respondent argues that that letter did not constitute notification of a
decision to vacate the July 9, 2009 reassessment.
[20]
Indeed, the respondent states that a meeting was
held between representatives of the appellant and the Minister on
October 18, 2011 (Exhibit A‑2, paragraph 33). This meeting
followed a letter sent by the appellant to Ms. Patrick on
September 9, 2011 in which it requested the meeting. I note that, in that
letter, the appellant requested an extension of time to respond to the CRA's
settlement proposal.
[21]
The respondent stated that, in the end, the
settlement offer was not accepted by the appellant and that, after completing
the report on objection, the CRA decided to reassess the appellant in
accordance with what was proposed in the settlement offer.
[22]
A letter dated November 23, 2011 and signed
by the Team Leader, Appeals Division was sent to the appellant. It was stated therein
that the CRA Appeals Division had completed the review of the notices of objection
for the 2004 and 2005 taxation years and that the Minister was reversing the
2004 reassessment of $192,724,070, plus allowing an additional reduction of
$5,681,266. It was further stated that the various consequential adjustments
would increase income for the 2005 taxation year by $76,673,532 and that non‑capital
losses would be applied to reduce taxable income. The letter ends by saying
that notices of reassessment would follow under separate cover (Exhibit A‑1,
Tab 31).
[23]
The reassessments were issued on
December 19, 2011. According to the respondent, the consequential
reassessment was issued for 2005 pursuant to subsection 152(4.3) further
to the reassessment issued for 2004 on the same date, following the Minister's
decision on the appellant's objections pursuant to subsection 165(3).
Issue
[24]
The question is therefore whether the
August 26, 2011 letter was determinative and disposed of the objection, with
the result that the Minister was functus officio and prevented from
reassessing the appellant after the issuance of that letter. I do not believe
so.
Analysis
[25]
Since I have concluded that the August 26, 2011
letter neither vacated the July 9, 2009 reassessment nor constituted
notification of a decision to vacate under subsection 165(3), it is clear that the
principle of functus officio is inapplicable.
[26]
I have come to this conclusion for two reasons.
[27]
Firstly, I accept Ms. Patrick's testimony
that, when she used the verb "vacate", she was using it in relation only
to the amounts to which the appellant had objected. She did not mean that she
would vacate the July 9, 2009 reassessment, as only part of it was in dispute. At
trial, when asked about the purpose of the August 26, 2011 letter, Ms. Patrick
answered as follows:
This is an extension of the
July letter, and it's just rehashing many of the same points that were stated
earlier, that we are ‑‑ first of all, the taxpayer was
concerned with our reference in our letter to section 165(3). So we simply
indicated that we are ‑‑ the narrative I used is that we are
vacating the 2005 reassessment in dispute. And what that simply stated was
that the amounts that were in dispute would be reversed for 2004. However,
we were not addressing ‑‑ and this is implicit in my
understanding of the word "vacate" for the purposes of this type of
an assessment, was that we were only addressing the amount ‑‑
not the entire amount that was audited or that was reassessed by the audit
division.
[Emphasis added.]
[Transcript,
volume 1, pages 61-62]
[28]
In the above passage, Ms. Patrick probably meant
to refer to the 2004 reassessment rather than the 2005 reassessment.
[29]
Ms. Patrick's explanation of the purpose of the
letter makes sense in context. The appellant did not object to all of the
adjustments made in the July 9, 2009 reassessment and, correspondingly, in
the settlement offer dated June 20, 2011, the Minister did not offer to reverse
all the adjustments in the reassessment (i.e., to vacate the reassessment). The
Minister offered to reverse only the adjustments to which the appellant had
objected.
[30]
Secondly and alternatively, even if I were to
accept that the use of the verb "vacate" in the August 26, 2011
letter was a reference to vacating under subsection 165(3), the letter merely explained
what the Minister was willing to do if the settlement offer was accepted. The offer
was never accepted by the appellant.
[31]
That the letter only offered to "vacate"
the reassessment as part of a settlement is clear from the text of the letter
and the context in which it was sent. In the same letter, Ms. Patrick wrote
that "although we do not fully support your position, the reassessment will
be vacated" [emphasis added]. The future tense means that the
assessment had not yet been vacated.
[32]
As for the context, the August 26, 2011
letter was written as part of an ongoing settlement discussion. In particular,
it was written in response to the appellant's request for clarification as to how
the offer would affect post‑2004 years and as to what the procedural
implications of the offer would be for its objections.
[33]
It is also clear that the appellant never accepted
the offer. In response to the August 26, 2011 letter, the appellant, by letter
dated September 9, 2011, requested an extension of time to provide an
answer to the offer. The parties met afterwards for further discussion, but ultimately
did not settle.
[34]
I therefore conclude that the August 26,
2011 letter signed by Ms. Patrick was not notification of a decision to
vacate nor did the letter itself vacate under subsection 165(3) the
July 9, 2009 reassessment.
[35]
This conclusion is sufficient to dispose of the
appeal. On the basis of this conclusion, I find that the Minister's decision on
the objection was reflected in the December 19, 2011 reassessment for
2004, which opened the door to the consequential reassessment issued on the
same date for 2005.
[36]
As a result, I will not have to determine
whether a consequential reassessment may result from a decision by the Minister
to vacate an assessment for a previous year.
[37]
The appeal is dismissed, with costs.
Signed at Ottawa,
Canada, this 6th day of January 2016.
"Lucie Lamarre"
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