Date:
19971210
Docket:
T-47-91
BETWEEN:
KATHLEEN
S. MAPLESDEN
Plaintiff
-
and -
HER MAJESTY THE
QUEEN AS
REPRESENTED BY
THE MINISTER
OF NATIONAL
REVENUE
Defendant
----------------------------------------------------------
Docket:
T-1134-90
BETWEEN:
ALBION
TRANSPORTATION RESEARCH CORPORATION,
285614
ALBERTA LTD., and HENRY JOHN ALBERT
MAPLESDEN
also known as JOHN HENRY ALBERT MAPLESDEN
and
KATHLEEN SYLVIA MAPLESDEN
Plaintiffs
-
and -
HER
MAJESTY THE QUEEN
Defendant
REASONS
FOR JUDGMENT
REED
J.:
[1]
The actions in T-47-91 and T-1134-90
were scheduled to be heard, one after the other, starting on December 1, 1997.
At the commencement of the hearing of T-47-91, it was decided that an order
should issue that the two actions be heard together on common evidence.
[2]
The T-47-91 action is an appeal of a Tax
Court decision that found the plaintiff liable for income tax because of a
shareholder's loan she had received. There had been no arrangements made for bona
fide repayment within a reasonable time and the loan had not been repaid
within one year of the creditor's year end. (Refer subsection 15(2) of the Income
Tax Act). The T-1134-90 action is a claim in negligence against the
defendant alleging that it was Revenue Canada's own actions that made it
impossible for the plaintiff to repay the loan. Damages are sought in the
amount of the tax liability. Both actions arise out of the same fact situation.
Most of the facts are not in dispute.
Facts
[3]
The plaintiff's husband, Mr. Maplesden,
became involved, in 1984, in several businesses that took advantage of the
Scientific Research Tax Credits provisions of the Income Tax Act. A
number of inter-related corporations were involved. The two corporations
relevant for present purposes are 285614 Alberta Ltd. ("'614") and
Albion Transportation Research Corporation ("Albion"). Mr. Maplesden
owned 51% of the shares of the '614 company and Mrs. Maplesden owned 49%. '614
was a holding company and owned all the shares of Albion. Mr. and Mrs.
Maplesden did not deal at arm's length with either '614 or Albion.
[4]
On October 30, 1984, Albion approved, by
corporate resolution, a loan of $750,000.00 to Mrs. Maplesden. This was to be
repayable on demand and to be secured by a promissory note. On November 3,
1984, Albion provided Mrs. Maplesden with $710,025.00. Mrs. Maplesden signed a
non-interest bearing demand promissory note in favour of Albion for
$750,000.00.
[5]
The money was used to purchase a house
and approximately 160 acres of land ("the Priddis property"). The
purchase price of that property was $750,000. The amount of the purchase price
over the $710,025.00 that was loaned by Albion to Mrs. Maplesden was provided
by Mr. Maplesden. That amount was advanced to him, by way of a loan from Albion
Microelectronics Research Corporation Ltd. That company was, or subsequently
became, like Albion, a tax debtor.
[6]
The Priddis property was acquired by
Mrs. Maplesden and was registered in her name. It has been her residence ever
since. She has not been employed outside the home at any material time and her
only significant asset is the Priddis property. She exercised no independent
judgment in either obtaining the loan or purchasing the property. She relied
entirely on her husband's decisions in this regard.
[7]
On November 16, 1984, Revenue Canada issued a Notice of Assessment against Albion respecting taxes due under subsection 195(2) of
the Income Tax Act. There was no Notice of Objection to this assessment
filed.
[8]
In July of 1985, Mr. and Mrs. Maplesden
and those who were advising them considered transferring the title to the
Priddis property from Mrs. Maplesden to the '614 company. This transfer was not
proceeded with because the Albion operating companies were, at the time, under
surveillance by Revenue Canada with respect to a possible tax fraud (Exhibit
28, page 5).
[9]
On August 27, 1985, a certificate was
registered in the Federal Court, pursuant to section 223 of the Income Tax
Act, certifying that the principal amount of $15 million dollars in taxes
together with interest in the amount of $1,368,835.62 was owed by Albion. On the same day a writ of fieri facias was issued with respect to that
certificate. Revenue Canada realized net proceeds of $3,391,659.01 from this
process and applied them against the taxes owed by Albion.
[10]
On September 23, 1985, Albion assigned
the debt owed to it by Mrs. Maplesden to the '614 company. The '614 company
agreed to pay Albion, on demand, an amount corresponding to the amount of that
debt. Two days later, an unrelated corporation, 328095 Alberta Ltd., agreed to
purchase all of the shares of the '614 company and to assume the indebtedness
of the '614 company to Albion. However, that purchase was
not completed.
The '614 company, thus, continued to own all the shares of Albion.
[11]
On September 30, 1985, Revenue Canada issued an Income Tax Assessment in the amount of $750,000.00 for the 1984 taxation
year against Mrs. Maplesden. This assessment was pursuant to subsection 160(2)
of the Income Tax Act. On the same day, a certificate was registered in
the Federal Court pursuant to section 223 of the Act. On October 2, 1985, a
writ of fieri facias was registered against Mrs. Maplesden's title to
the Priddis property.
[12]
The September 30, 1985 Notice of
Assessment stated:
This Assessment is issued pursuant to the provisions
of Subsection 160(2) of the Income Tax Act and is in respect of a transfer
on November 3, 1984 from Albion Transportation Research Corporation to
Kathleen S. Maplesden of the property located at Site 10, R.R.No.
1, Priddis, Alberta. Legal Description: SW 1/4 Section 20, Township 22, Range
3W of the 5th Meridian containing 64.7 Hectares
(underlining added)
[13]
A clerical error had been made. It had
been intended that the notice read "in respect of a transfer on November
3, 1984 from Albion ... of funds to purchase the property ...". The
assumption underlying this intended assessment was that the promissory note
that had been signed by Mrs. Maplesden had no value.
[14]
In any event, the Notice of Assessment
that was issued was clearly erroneous on its face because the Priddis property
had not been transferred from Albion to Mrs. Maplesden. The property had been
acquired from an arm's length vendor.
[15]
The relevant provisions of section 160
provide:
(1) Where a person has ...
transferred property, either directly or indirectly,
... by any means whatsoever, to
….
a person with whom he was not dealing at arm's
length,
….
the transferee and transferor are jointly and
severally liable to pay under this Act an amount equal to the lesser of
(i) the amount, if any, by which the fair market
value of the property at the time it was transferred exceeds the fair market
value at that time of the consideration given for the property, and
….
(2) The Minister may at
any time assess a transferee in respect of any
amount payable by virtue of this section and the
provisions of this Division are applicable mutatis mutandis in respect of an
assessment made under
this section as though it had been made under
section 152.
[16]
On October 16, 1985, a Notice of
Objection with respect to the subsection 160(2) assessment was filed. It was
pointed out that the Priddis property had not been transferred from Albion to Mrs. Maplesden, and that the loan was permitted under subsection 15(1) of the Income
Tax Act.
[17]
On October 18, 1985, a Notice of
Reassessment for the 1984 taxation year was sent to Mrs. Maplesden. It was
issued on the basis that a benefit, governed by subsections 15(1) and 15(2) of
the Income Tax Act, had been received. The taxes owing
were assessed at
$371,954.18. A Notice of Objection was filed with respect to this assessment.
It was stated that no amount had been paid by the '614 company to Mrs.
Maplesden and that the loan was expressly permitted to the taxpayer under
subparagraph 15(2)(a)(ii) of the Income Tax Act. Subparagraph
15(2)(a)(ii) allows for loans to assist in the purchase of a dwelling providing
certain conditions are met. One of the two conditions, relevant for present
purposes, is that when bona fide arrangements are made at the time the
loan is given, for repayment within a reasonable time the loan will not be
treated as income in the taxpayer's hands. The other is that if the loan is
repaid within one year of the creditor's year end it will not be taken into the
taxpayer's income.
[18]
Many discussions were held between
Revenue Canada officials and Mr. Maplesden's representatives with respect to
the tax situation of the various Albion companies. Insofar as Mrs. Maplesden's
situation is concerned, as has been noted, a Notice of Objection was filed on
October 16, 1985. Also, a letter, dated March 14, 1986, was sent to Revenue Canada enclosing copies of the relevant documents and pointing out that the Priddis property had
never been owned by Albion, but had been purchased by Mrs. Maplesden from an
arm's length vendor.
[19]
On June 9, 1988, Revenue Canada issued a Notice of Reassessment against Mrs. Maplesden for income tax for the 1984
taxation year. It was issued in the amount of $342,101.53, and was based on the
receipt by her of a shareholder's benefit. On the same day the assessment
pursuant to subsection 160(2) was reduced to zero. On June 10, 1988, the writ
that had been registered against the Priddis property pursuant to the 160(2)
assessment was removed and a new writ in the amount of $342,101.53 was
registered.
[20]
As already mentioned, subsection 15(2)
sets out the conditions under which a shareholder's benefit will not be
included in a person's income:
Where a person ... is connected with a shareholder
of a particular corporation ... and ... has in a taxation year received a loan
from or has become indebted to the particular corporation, ... the amount of
the loan or indebtedness shall be included in computing the income for the year
of the person ... unless
. . .
.
... bona fide arrangements were
made, at the time the loan was made or the indebtedness arose, for
repayment thereof within a reasonable time; or
(b) the loan or indebtedness was repaid within
one year from the end of
the taxation year of the lender or creditor in which
it was made or incurred and it is established, by subsequent events or
otherwise, that the repayment was not made as part of a series of loans or
other transactions and repayments.
(underlining
added)
[21]
The plaintiff appealed the tax
assessment to the Tax Court. That appeal was dismissed on December 11, 1990. In
that appeal it was argued that the demand promissory note was "a bona
fide arrangement made for repayment of the loan within a reasonable period
of time". Alternately, it was argued that the debt had been repaid within
the time prescribed by paragraph 15(2)(b) because the debt to Albion had been
repaid on the assignment of the loan to the '614 company. These arguments were
rejected. The first because, while a promissory note may be a bona fide
arrangement for repayment of a loan, it does not meet the requirement of
providing for repayment "within a reasonable period of time". A
demand note can endure indefinitely. The second argument was rejected because
the appropriate question to ask, when considering paragraph 15(2)(b), is not
whether the original lender is still owed money, but whether the taxpayer is
still indebted on the loan she has incurred.
Vacating
a Tax Assessment on Equitable Grounds?
[22]
The argument before me was somewhat
different than that made to the Tax Court. It was argued that Revenue Canada
itself had made it impossible for the plaintiff to repay the loan and therefore
had caused her tax liability. Accordingly, as a matter of equity, it is argued,
Revenue Canada should not be able to collect the taxes and the tax assessment
should be vacated.
[23]
When the writ against the Priddis
property was first registered, in October 1985, the time period allowed for
repayment, under paragraph 15(2)(b), had not expired. The fiscal year end for
both Albion and the '614 company was August 31. The money had been borrowed in
November of 1984. Thus Mrs. Maplesden had until August 30, 1986 before the loan
would be considered, under paragraph 15(2)(b), to be income in her hands.
[24]
Counsel for the plaintiff argues that,
if the writ pursuant to the erroneous subsection 160(2) assessment not been in
place, Mrs. Maplesden could have sold the Priddis property to repay the debt
owed, or she could have conveyed the property to the '614 company and thereby
extinguished the debt. Thus, it is argued that it was Revenue Canada's own
actions in registering and maintaining a writ against the property, in support
of an erroneous assessment, long after the erroneousness of that assessments
had been called to its attention, that caused the plaintiff's income tax
liability to arise. In such circumstance, it is argued the tax assessment
should be vacated.
[25]
I have been referred to no authority to
support the proposition that this Court has authority to grant the relief
sought. The Court's authority is to determine the correctness of the Minister's
decisions by reference to the applicable law, primarily the Income Tax Act,
as applied to the facts of the taxpayer's case. If the relevant facts fall
within the provisions of the Act, then, those provisions govern.
[26]
Counsel refers to only two authorities:
section 3 of the Federal Court Act and the decision in Teledyne Industries
Inc. et al. v. Lido Industrial Products Ltd. (1982), 31 C.P.C. 285
(F.C.T.D.).
[27]
Section 3 of the Federal Court Act
provides:
The court of law, equity and admiralty in and for Canada now existing under the name of the Federal Court of Canada is hereby continued ...
That section
continues the Court as a court of equity and authorizes the application of
equitable principles. That jurisdiction has its roots in the pre-1873 Judicature
Act days when the courts in England were not unified. "Equity" in
section 3 does not mean what is just and fair. It refers to those principles of
law that were administered before 1873 by the Courts of Equity (mainly the
Court of Chancery).1 Tax laws were never part of that regime. Tax
laws were within the jurisdiction of the Courts of Exchequer. The Federal Court
has equitable jurisdiction in many areas. See Sgayias et al., Federal Court
Practice, 1997 at 53. But this does not include authority to grant the kind
of remedy the plaintiff (appellant) seeks. An explanation of equitable
principles and when they apply can be found in Spry, Equitable Remedies (3rd
ed., 1984).
[28]
In the Teledyne decision the
Court referred to its equitable jurisdiction to assess the date from which
interest should run on a judgment. This "equitable jurisdiction arose
because the statutory grant of authority given to the Court was expressed to be
"unless the Court orders otherwise". There is no such discretionary
grant of authority conferred on the Court in the case of income tax appeals.
The plaintiff's appeal of the Tax Court decision must fail.
Negligence
Action
[29]
I turn next to the claim that Revenue
Canada acted negligently in maintaining the writ against the Priddis property,
long after it should have known that that writ was not well founded, and
thereby caused the plaintiff damage. There is no doubt that Revenue Canada
issued an erroneous tax assessment (the subsection 160(2) assessment). An error
1
See
Hood Phillips, The First Book of English Law (6th Ed), 1970, at p. 11.
does not itself,
however, necessarily constitute negligence.2 There is no evidence
that the defendant's officials acted negligently when they issued the writ in
the first instance, in pursuit of taxes owed by Albion.
[30]
There was a clerical error in the
assessment. The filing of a Notice of Objection does not mean that the
taxpayer's position is necessarily accepted at that date. The letter of the
following March, sending copies of the appropriate documents to Revenue Canada, indicates that Revenue Canada was still investigating the situation. There is no
evidence that the investigation was completed before May 1988 and no negligence
between March 1986 and September 1986 has been demonstrated.
[31]
Even if I were to assume negligence in
this case, I still could not find that the actions of Revenue Canada caused the non-conveyance of the property. There is no reliable evidence that the taxpayer
seriously considered conveying the property to '614 or selling it to a third
party during the time in question. The proposed transfer of the property in
July 1985 had not been proceeded with because of concern that the property
might become subject to seizure as a result of Revenue Canada's tax investigations. In order to be persuaded that the writ caused the
non-transference of the property during the relevant 1985 - 1986 period, I
would expect to see, at least, some communication with Revenue Canada asking it
to lift the writ to allow conveyance to '614 or to allow a
2 See Hodgins v. Nepean (Township) Hydro-Electric Commission, [1976] 2 S.C.R. 501.
sale to a third
party. Given that there were ongoing investigations with respect to the tax
situation of the Albion companies, I am not prepared to find that the existence
of the writ was the cause of the debt not being repaid. If there had been a
request to Revenue Canada that it expedite the reassessment process with
respect to the Priddis property, to allow Mrs. Maplesden to dispose of that
property to avoid a tax liability, the result might be different. I note that
at least as late as January 1986, the legal advise the Maplesdens were getting
was that the property not be transferred.3
[32]
There is an additional reason why the
plaintiff cannot succeed in her negligence action. Mrs. Maplesden brought an
action against the solicitors Burnet, Duckworth and Palmer for arranging for
her to take a shareholder's loan without advising her of the risk of tax
implications. On February 26, 1993, Mrs. Maplesden recovered damages in
negligence from that law firm, in the amount of $356,156.20. The Alberta Court
of Queen's Bench assessed this amount as the damages sustained by Mrs.
Maplesden as a result of the solicitor's negligence. This was calculated to
provide compensation for the taxes owed up to the date when that tax liability
was confirmed by the Tax Court on December 11, 1990.
[33]
Counsel for the plaintiff argues, with
respect to the Queen's Bench decision, that the damages that were awarded
should only be considered to have compensated the plaintiff for the tax
liability owed to the extent that she actually received such funds. The
3
Exhibit 28, p. 5
award was
calculated by deducting, from the amount otherwise to be awarded, an amount
attributable to the benefit Mrs. Maplesden received as a result of living in
the house during the relevant time. Legal fees were also deducted. I do not
find this argument persuasive. The plaintiff has already recovered damages from
her solicitors for the tax liability that arose. She cannot recover a second
time.
[34]
I have not been persuaded that the
existence of the writ caused the damage that is alleged and, in any event, the
plaintiff has recovered damages from her solicitor for the amount owed as
taxes.
Conclusion
[35]
For the reasons set out above both
actions will be dismissed.
“B.
Reed”
Judge
OTTAWA, ONTARIO
December
10, 1997
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