Gibson v. Canada, 2004 FC 809

Date: 20040604

Docket: T-958-03

Citation: 2004 FC 809

Ottawa, Ontario, this 4^th day of June, 2004

Present:           The Honourable Mr. Justice Mosley                                   

BETWEEN:

                                                          D. KENNETH GIBSON

                                                                                                                                            Applicant

                                                                           and

HER MAJESTY THE QUEEN

                                                                                                                                        Respondent

                                            REASONS FOR ORDER AND ORDER

[1]                Mr. Gibson, an Ottawa lawyer, brings this application for judicial review in respect of any action or prospective action to be taken by the Canada Customs and Revenue Agency ("CCRA") to collect any tax, including interest and penalties, alleged to be owing by the applicant for the 1990 and 1991 taxation years. Mr. Gibson seeks a declaration that the CCRA is prohibited due to the expiry of certain limitation periods from taking collection action against him for tax debts allegedly owing for the 1990 and 1991 taxation years. The applicant also seeks his costs in this application.

BACKGROUND

[2]                The applicant filed his income tax returns for the 1990 and 1991 taxation years late. Mr. Gibson attests, in his affidavit filed in this proceeding, that he filed his 1990 return on or about June 15, 1992 because he believed that there would be no tax liability as he had sustained significant business losses. The applicant attests that in September 1992 he filed his tax return for the 1991 taxation year, believing again that there would be no tax liability because he had sustained business losses.

[3]                CCRA sent a notice of assessment setting out the tax payable for the 1990 taxation year dated December 18, 1992. The applicant owed $80,104. 68, inclusive of interest and penalties. With regards to the 1991 taxation year, CCRA sent a notice of assessment to the applicant, dated December 29, 1992, stating that he owed $9,412. 43 (the balance due was stated as a combination for both the 1990 and 1991 taxation years of $ 89,709. 92).

[4]                On March 2, 1999, the applicant requested that his losses from subsequent tax years be carried back and applied to the 1990 and 1991 taxation years. By notice of reassessment dated September 28, 2000, CCRA granted the applicant's request, resulting in a reduction of his taxable income for 1990.

[5]                Second notices of reassessment were issued to the applicant for both the 1990 and

1991 taxation years on August 26, 2002. This indicated that the applicant owed at that time $137,552. 40 in outstanding tax, penalties and interest for the 1990 taxation year, and $9,491. 91 in outstanding tax, penalties and interest for the 1991 taxation year.

[6]                CCRA took no action to collect the debts owing by the applicant between December 1992, when it first issued the notices of assessment, and November 1999, when it first responded to the applicant's query of March 2, 1999. The applicant to date has not paid any part of the outstanding amounts.

ISSUE

[7]                1. Is the CCRA statute barred, pursuant to either section 32 of the Crown Liability Proceedings Act, R.S.C. 1985, c. C-50 ("CLPA") or section 45 of the former Limitations Act, R.S.O. 1990, c. L-15 ("LA")^[1], from taking tax collection action against the applicant?

ANALYSIS

[8]                The applicant argues that the CCRA is statute barred from collecting the claimed tax debts owing from him for the 1990 and 1991 taxation years, pursuant to section 32 of the CLPA and subsections 45(1)(f) and (h) of the LA. The applicant submits that since 1992 the CCRA has made no effort to collect the claimed tax debts and he has paid no part of them. The applicant refers to the Supreme Court of Canada decision of Markevich v. Canada, [2003] 1 S.C.R. 94 and submits that it supports his position.

[9]                The respondent, on the other hand, submits that the ratio in Markevich, supra, supports its position. Pursuant to section 32 of the CLPA, the respondent argues that CCRA was required to take proceedings prior to March 19 and 30, 1999, respectively for the 1990 and 1991 tax debts. However, the respondent argues that the limitation period set out in section 32 of the CLPA has been renewed pursuant to the applicant's request dated March 2, 1999, for the loss carry-backs. Such request, according to the respondent, forms an express acknowledgment of the applicant's indebtedness, and pursuant to the reasoning in Markevich, supra, the limitation period was then renewed for another six years from March 2, 1999. This would permit the CCRA to take collection action against the applicant for the 1990 and 1991 tax debts up to March 2005.

[10]            Pursuant to the reasoning of the majority in Markevich, supra, the alleged federal tax debt of the applicant arises pursuant to federal legislation, that is the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) ("ITA"), and creates rights and duties between the federal Crown and residents of Canada or those who have earned income within Canada. According to the majority in Markevich, supra, the cause of action for such federal tax debt arises "otherwise than in a province", for the purposes of s. 32 of the CLPA, and the six-year limitation period provided in that section applies, rather than the provincial limitation legislation, for tax debts accrued pursuant to the federal legislation. Section 32 of the CLPA provides as follows:

[11]            Determining when the cause of action arose in relation to the federal tax debt is governed by s. 225.1(1) of the ITA. The notice of assessment for the applicant's 1990 taxation year was dated December 18, 1992, and the notice of assessment for the 1991 taxation year was dated December 29, 1992. Pursuant to s. 225.1(1) of the ITA, the CCRA was restricted from taking collection action until 90 days after the mailing of these notices of assessment:

Therefore, when s. 225.1(1) of the ITA is read in combination with the six-year limitation period set out in s. 32 of the CLPA, the CCRA was required to take collection action against the applicant by March 18 and 29 1999, for the respective 1990 and 1991 tax debts.

[12]            The respondent urges that the applicant taxpayer's request of March 2, 1999, that losses from subsequent tax years be carried back and applied to his 1990 and 1991 tax return, is to be viewed as an "acknowledgment" of his indebtedness and as described in Markevich, supra, and the limitation period is renewed for another six years from the date of such acknowledgement. For the reasons that follow, I do not agree that the applicant's letter of March 2, 1999 amounts to an acknowledgement of his indebtedness, as such correspondence is distinguished from the decisions set out in Markevich, supra, which have set out examples of circumstances when the section 32 limitation period may be renewed. At pages 108-109 of Markevich, supra, Justice Major for the majority of the Court stated as follows:

A purposive analysis of the ITA confirms that the collection provisions do not by implication exclude the operation of s. 32. The application of limitation periods to the collection of tax debts does not offend the principles of horizontal and vertical equity that, as Iacobucci J. noted in Symes v. Canada, [1993] 4 S.C.R. 695, at p. 738, should in part govern the ITA. The appellant submits that applying laws of prescription to tax collection would unfairly alleviate the tax burden of individuals who experience fluctuations in income at the expense of those who enjoy a steady stream of income. This apparent problem can be averted, however, by the Minister's reasonably diligent exercise of debt collection. If a taxpayer does not have the ability to satisfy a tax debt prior to the expiration of the limitation period, the Minister can choose from a variety of means to extend the limitation period. In Ross v. Canada, [2002] 2 C.T.C. 222, 2002 FCT 401, the Federal Court, Trial Division, held that the registration of a certificate with the Federal Court in accordance with s. 223(3) of the ITA gives rise to a renewal of the limitation period. See also MacKinnon v. Canada, [2002] 4 C.T.C. 48, 2002 FCT 824, where the court found that the taxpayer's acknowledgement of indebtedness by way of a hypothecation agreement with the

Minister, and his partial payment of the tax debt, each served to renew the limitation period. There is no need to exhaustively set out the ways in which the Minister can extend the limitation period, other than to note that there are numerous avenues open to the Minister by which renewals may be effected. There is no credible basis to support the submission that the laws of prescription will undermine the equitable collection of taxes when minimum diligence would have the opposite effect.

[Emphasis added]

[13]            The Court in Markevich, supra, set out two decisions as examples of situations in which a s. 32 limitation period could be renewed or extended in the context of tax collection by the CCRA.    The Court also emphasized that these were not the only ways in which the Minister of National Revenue (the "Minister") could extend the limitation period, and that there are "numerous avenues" open to the Minister by which a renewal could be affected with a minimum amount of diligence. I set out below how these two decisions are factually distinct from the present case.

[14]            In MacKinnon v. Canada, [2002] F.C.J. No. 1101 (T.D.)(QL), aff'd [2003] F.C.J. No. 480 (C.A.) (QL) the taxpayer formally signed a written hypothecation agreement in accordance with British Columbia's Limitation Act, R.S.B.C. 1996, c. 266, s. 5(2)(a)(i). The taxpayer in that case also made various payments on his debt to the Minister. Each of these factors served as an acknowledgement of the debt and extended the limitation period. Such actions were an express and unequivocal recognition of the debt owing. In such a situation, extending the limitation period did not work against the purpose of such provision, namely to bring certainty as to

whether old obligations would or would not be addressed, avoidance of stale evidence and the encouragement of due diligence on the part of the suing party.

[15]            In Ross v. Canada, [2002] F.C,J. No. 517 (T.D.)(QL), aff'd [2002] F.C.J. No. 1396 (C.A.)(QL), Justice Dawson found that the Minister's action of registering a certificate with the Federal Court, pursuant to s. 223 of the ITA, whereby CCRA obtained a writ of seizure and sale, demonstrated that it had taken a step to collect the debt. Therefore, since the Minister had begun its collection proceeding against the taxpayer within the prescribed time limit set out in s. 32 of the CLPA, it was not necessary that the collection procedures be completed within the limitation period.

[16]            In the present case, it is apparent that although the CCRA was engaged in a continuing review of the taxpayer's difficulties over a considerable number of taxation years, it took no collection action from the time of issuance of the notices of assessment, dated December 18 and 29, 1992, respectively for the 1990 and 1991 taxation years, up until its November, 1999 response to the applicant's letter of March 2, 1999. The six-year limitation period was to have expired March 18 and 29, 1999, for the 1990 and 1991 tax debts.   

[17]            The nature and effect of this March 1999 request is the contentious and important issue in this application. In my opinion, the request cannot be read as an express acknowledgment of the tax debt claimed to be owing. Nothing in the brief cover letter from the applicant indicates acknowledgment of the debt, nor is there such acknowledgment in the forms signed by the applicant requesting the loss carry-back. Furthermore, I am of the view that this letter, even if it is to be viewed as an implied acknowledgment of indebtedness, cannot have the effect of extending the limitation period provided in s. 32 of the CLPA. In order to benefit from the extension of such prescription, the CCRA must demonstrate, with some positive step on its part, that it is following through with collection action within the limitation period. Only in this manner is the due diligence rationale with respect to limitation periods respected. Absent express acknowledgment by the taxpayer, or some sort of concrete step initiated by the CCRA in the collection process, the limitation period will not be renewed.

[18]            Permitting the CCRA to benefit from an extended limitation period, when it took no action to preserve its rights to collect the debt owing, does not further the underlying objectives of limitations provisions, that is, bringing certainty to individuals so that they can know whether old obligations will be addressed, the avoidance of proceedings based on stale evidence and the encouragement of due diligence on the part of the suing party. The attempt by the CCRA to rely on an inquiry initiated by the applicant, just two weeks prior to the expiry of the six-year limitation period, as a ground for extending the limitation period is not a valid manner of demonstrating that the debt has been formally recognized by the taxpayer or pursued diligently for collection by the CCRA. In my view, this case is not one where the Minister pursued one of the "numerous avenues" available to it under the ITA to demonstrate "minimum diligence" in taking action on the collection of the tax debts owed by the applicant (Markevich, supra, at 109).

[19]            Moving to the applicability of Ontario's limitation legislation to the applicant's provincial tax debt, I note that the respondent did not address this issue in his written argument. At the hearing, counsel for the respondent observed that this court lacked jurisdiction to prevent the province from seeking to collect on its debt and suggested that the time-limit for the Ontario prescription period began to run with the notice of the most recent reassessment, that dated August 26, 2002.

[20]            The majority of the Supreme Court in Markevich, supra, at 118-120, held that the federal Crown's right to collect provincial taxes must be delegated by the province and collection of such is subject to provincial limitation period legislation. In this case, pursuant to section 49 of Ontario's Income Tax Act, R.S.O. 1990, c. I-2 ("Ontario's ITA") and clause 1 of the Memorandum of Agreement between the Province of Ontario and the Government of Canada in relation to tax matters, Canada has been authorized by the Ontario provincial government to collect tax debts as an agent of the province. Parts III and IV of Ontario's ITA stipulate how provincial taxes are to be collected when a collection agreement is in place.

[21]            In my opinion, having regard to Markevich, supra, and Ontario's former LA and the Limitations Act, 2002 which came into force on January 1, 2004, the federal Minister is now precluded from collecting the provincial tax debt allegedly owed by the applicant for the taxation years 1990 and 1991. Subsection 45(1)(h) of the former LA provided:

[22]            The applicant also refers to subsection 45(1)(f) of the former LA, which refers to "an acton for money levied on execution". In my view, such subsection is not applicable in this case, as there has never been any legally sanctioned levy on any of the applicant's property.

[23]            Paragraph 16(1)(i) of the Limitations Act, 2002 provides that there is no limitation period for :

(i) a proceeding to recover money owing to the Crown in respect of,

(i) fines, taxes and penalties, or

(ii) interest that may be added to a tax or penalty under an Act;              

[24]            Section 24 sets out the transitional provisions for implementation of the Limitations Act, 2002. For the purposes of this judicial review subsections 24 (1)- (3) are relevant and provide:

[25]            In the present case, the former limitation period expired prior to the effective date of the new legislation, namely January 1, 2004. Subsection 24(3) of the Limitations Act, 2002 is therefore applicable to the applicant's situation. Under subsection 45(1)(h) of the former LA, the CCRA had to commence collection action within two years after the cause of action arose. Pursuant to section 27 of Ontario's ITA, section 225.1 of the federal ITA is applicable to the provincial collection scheme. Therefore, the cause of action for the collection of provincial tax debts arose at the same time as that of the federal tax debt; 90 days after the mailing of the notice of assessment.

[26]            The action for the provincial tax debt had to be commenced within two years of March 18, 1993, and March 29, 1993 for the 1990 and 1991 tax debts respectively. These dates are 90 days beyond the date of the notices of assessment for each tax year in question. Such time expired even prior to the applicant's letter of March 2, 1999 requesting the carry-back of losses, therefore the issue of extension of the limitation period does not arise with respect to the provincial tax debt, and the respondent is statute barred from collecting the provincial tax debt.

                                              ORDER

THIS COURT ORDERS that it is declared that the Canada Customs and Revenue Agency is statute barred from initiating or carrying through any action for the collection against the applicant of any federal and provincial tax debt allegedly owing by the applicant for the 1990 and 1991 taxation years. Costs to the applicant.

   "Richard G. Mosley"

   F.C.J.

                                     FEDERAL COURT

                              SOLICITORS OF RECORD

DOCKET:                  T-958-03

STYLE OF CAUSE: D. KENNETH GIBSON v.

HER MAJESTY THE QUEEN

PLACE OF HEARING:                                 Ottawa, Ontario

DATE OF HEARING:                                   April 28, 2004

REASONS FOR ORDER

ORDER BY:             The Honourable Mr. Justice Mosley

DATED:                     June 4, 2004

APPEARANCES:

William G. D. McCarthy                                                FOR THE APPLICANT

Richard Gobeil                                                  FOR THE RESPONDENT

SOLICITORS OF RECORD:

WILLIAM G.D. McCARTHY                                      FOR THE APPLICANT

Barrister and Solicitor

Ottawa, Ontario                                               

MORRIS ROSENBERG                                            FOR THE RESPONDENT

Deputy Attorney General of Canada

Ottawa, Ontario