Elizabeth Phillips v. Her Majesty the Queen, [1993] 2 CTC 2110, 93 DTC 573

Rip, T.C.C.J.:—Elizabeth Phillips [1] , the appellant, appeals from purported assessments of tax made by the Minister of National Revenue (" Minister") pursuant to subsection 160(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "federal Act").

The trial proceeded by way of an agreed statement of facts which reads as follows:

1. Margaret Levietta Phillips (the “ transferor”) is the mother of the appellant.

2. The transferor filed her 1980, 1981, 1982 and 1983 personal tax returns reporting income received from a life interest in her deceased husband's estate. The deceased husband's estate consists primarily of gross Royalty Trust certificates (Oil and Gas Royalties).

3. In 1984 and subsequent to the initial assessments of the transferor's 1980, 1981, 1982 and 1983 tax returns, the transferor applied for the Alberta royalty tax rebate and the Alberta royalty tax credit in respect of her 1980, 1981, 1982 and 1983 taxation years.

4. By notices of reassessment dated November 8, 1984, the tax returns of the transferor for her 1980, 1981, 1982 and 1983 taxation years were reassessed by the Minister of National Revenue ("Minister") to allow her claims for the Alberta royalty tax rebate and the Alberta royalty tax credit. A refund cheque in the amount of $68,209.99 was issued on November 14, 1984 in the name of the transferor and the cheque was deposited to a bank account in her name. The said notices of reassessment referred to are attached. . . 2 [2]

5. On or about September 14, 1985, the appellant received an unsolicited gift (the "property") from the transferor in the amount of $8,000. At the time of the transfer, the fair market value of the property was $8,000.

6. By notices of reassessment dated June 20, 1986, the Minister reassessed the transferor in 1986 in respect of her 1981, 1982, and 1983 taxation years disallowing her claims for the Alberta royalty tax rebate and the Alberta royalty tax credit. . . .

7. By notice of assessment dated July 26, 1990, the Minister assessed the appellant in the amount of $8,000 pursuant to section 160 of the (Federal) Act in respect of the aforesaid transfer of property to the appellant. The said notice of assessment referred to is attached. . . . [3]

8. The appellant served a notice of objection, dated October 2, 1990, on the Minister in respect of the assessment in the prescribed form and within the prescribed time limits . . .

9. By notice of confirmation dated February 7, 1991, the Minister confirmed the assessment. . . .

10. By notice of appeal dated May 3, 1991, the appellant instituted an appeal of the assessment to the Tax Court of Canada pursuant to section 169 of the (Federal) Act. . . .

11. By notice of reassessment dated November 23, 1992, the respondent has attempted to reassess the appellant by attaching an exhibit to the reassessment which purports to be “in addition to and forms part of the attached notice of assessment dated July 26, 1990 bearing number 3185” [sic], and sets out the transferor's and transferee's liability under the provincial Act. The said notice of reassessment referred to is attached . . . . [4]

12. Commencing in the summer of 1986, continuing throughout 1987, and culminating with a meeting with Revenue Canada in the spring of 1988, the lawyer and accountants for the transferor discussed the tax matters of the transferor with Revenue Canada and advised Revenue Canada that, in contemplation of an operation, the transferor had transferred the property to the appellant and to her other children and grandchildren in September of 1985 and thereafter to June of 1986. Revenue Canada continued with collection discussions with the transferor's accountant and the appellant thereafter.

The issue in this appeal is whether the appellant is liable to pay an amount of $8,000 pursuant to section 160 of the federal Act in respect of the transferor's tax liability determined by the Alberta Income Tax Act, R.S.A. 1980, c. A-31 ("Alberta Act"), which, at section 11, provided for the royalty tax rebates and credits.

On September 14, 1985, the relevant portions of section 160 of the federal Act read as follows:

160(1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(c) a person with whom he was not dealing at arm's length,

the following rules apply:

(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year equal to the amount by which the tax for the year is. greater than it would have been if it were not for the operation of section 74, 75 or 75.1, as the case may be, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor; and

(e) 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

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in respect of the taxation year in which the property was transferred or of any preceding taxation year,

(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.

At the time of the transfer of funds in 1985 the section 24 of the Alberta Act read as follows:

Subsection 70(2) . . . and sections 159 and 160 of the federal Act apply, with all necessary modifications, in respect of the payment of tax under this Act for a taxation year by a taxpayer subject to tax under this Act to whom those provisions apply in respect of tax payable under the federal Act for the same taxation year.

Section 24 was repealed in 1990 (S.A. 1990 c. 7, section 8). In its place was added section 19:

(1) Subsections 70(2) and 104(2), paragraph 104(23) (e) and sections 155, 156, 158, 159, 160, 160.1, 160.2, 160.3 and 161 except subsection (4) of the federal Act apply for the purposes of this Act. . . .

The appellant's position is clear; it is with the Minister’s position that I had difficulty. The appellant states quite simply and clearly that the transferor had been assessed under the provision of the Alberta Act and thus was liable for tax under that statute. Nevertheless the Minister assessed the appellant pursuant to a provision of the federal Act, section 160, on the basis the transferor of the property was liable to pay an amount under the federal Act.

The facts surrounding the trial in this matter were confusing. Things did not get any clearer as the trial continued. In the notice of assessment sent to the appellant on July 26, 1990 she was informed the assessment was issued pursuant to the provisions of subsection 160(2) of the federal Act with respect to a transfer of funds from Margaret Levietta Phillips to her on June 14, 1986. In her notice of appeal the appellant acknowledged receiving the funds "on or about June 14,1986".

According to the agreed statement of facts, which is the only evidence before me, the transfer of property took place “on or about September 14, 1985". [5]

By notice dated February 7, 1991, the Minister confirmed the assessment was made in accordance with section 160 of the federal Act as a result of the transfer of property taking place on or about June 12, 1986.

The notice of reassessment, dated November 23, 1992, continues to purport to assess the appellant under the provisions of section 160 of the federal Act with respect to a transfer of property which took place on June 14, 1986. Attached to this notice of reassessment is Exhibit "A", entitled “ Particulars of Assessment". Exhibit "A" refers to transferor's liability of $8,000 "as of July 26, 1990”, and refers to the appellant's liability of $8,000 by virtue of section 19 of the Alberta Act. In 1985, section 19 of the Alberta Act provided for payment of tax by farmers and fishermen and is not relevant to any assessment before me. Exhibit "A" informs the appellant that:

[t]his attachment is in addition to and forms part of the attached notice of assessment dated July 26, 1990 bearing #3196.

Counsel for the Minister explained the Minister's initial position as pleaded:

The position of the Department . . . with respect to the pleadings is that the amount that arises by virtue of the Alberta royalty tax credit or the Alberta royalty tax rebates is an amount payable under the Income Tax Act (of Canada) by virtue of the incorporation in the Alberta Income Tax Act.

However, counsel conceded that he was "not sure” that this is a correct position in law. He stated the "fact may well be that an amount is owing under the provisions of the provincial Act, and then get [sic] into the interplay between the two Acts to that extent, the assumption that (money) is owing under the federal Act would be incorrect".

Counsel then submitted “the issue is whether or not the provincial legislation incorporating section 160 . . . charges the section to make it applicable not only to amounts payable under the federal statute, but also to amounts payable under the provincial statute . . .". In other words, as I understand counsel's submission, section 160 of the federal Act is modified by a provincial legislature to grant the Minister the power to assess a transferee of property under section 160 in respect of the transferor's liability for provincial tax.

The Minister’s counsel summarized his argument as follows:

My submission would still remain, sir, that the appropriate means of applying section 160 is to first define a liability under subsection (1). And whether that liability comes out of the provincial statute or the federal statute, by virtue of section 24, it’s imported into 160(1), and you end up with a liability under 160(1), whether by virtue of provincial statute or not. And the assessment of that under subsection 160(2) is an assessment of liability under the section, not federal and not provincial, just under the section.

By that interpretation, I would submit the Minister has proceeded absolutely correctly in this case because the liability in the hands of the transferee is for neither federal nor provincial amounts; it’s for the lesser of a tax payable and a gift, whichever is lesser. And that is the liability we're talking about.

My submission to you is that 160(2), the assessment power does not hang on where the liability arises; it hangs on whether there's a liability under subsection (1). And in applying subsection (1) by virtue of section 24, you have that liability. But the assessment is still out of 160(2).

In his written submissions, [6] Mr. McNary stated that section 24 of the Alberta Act applies the power to assess created by subsection 160(2) but is not itself an assessment section. He added "the power to assess relied upon is subsection 160(2), not section 24”. This, he concluded, is distinct from the situation where the legislation "incorporates by reference”, and it is submitted that the usual cases arising therefrom do not apply.

Mr. McNary also informed the Court in his written submissions that at time of the transfer of funds, Margaret Levietta Phillips was indebted in the amount of $4,189 under the federal Act with respect to a 1981 reassessment for federal tax. This fact was not raised in the pleadings nor was it included in the agreed statement of facts. Mr. McNary acknowledged that at trial the submission was that the liability was entirely provincial. I cannot allow this disclosure to be part of the evidence. (The respondent has not made any application to reopen the evidence.)

Appellant's counsel made several submissions. Among them were the following:

(a) Section 24 of the Alberta Act incorporates into the provincial statute section 160 of the federal Act. The conditions and rules as well as the power of the Minister to assess a transfer of property under section 160 of the federal statute apply to the payment of tax under the Alberta Act under certain conditions. Such assessment is an assessment under the Alberta Act, as authorized by section 24 of that Act.

Section 24 was not intended to apply section 160, in a modified form, to attribute to transferees a new liability for tax. Section 24 applies only in the situation most common where the taxpayer's liability under the federal Act is increased as a result of an assessment under section 160, to the proportion and extent of his or her provincial liability is increased. Pursuant to section 24, section 160 applies with all necessary modifications, in respect of the payment of tax under the Alberta Act for a taxation year by a taxpayer subject to tax under the Alberta Act to whom section 160 of the federal Act applies in respect of federal tax payable for the same taxation year. On facts similar to those present in this appeal, an assessment of tax under subsection 160(2) is not an assessment for a particular taxation year.

(b) The transferor of the property is liable to the province of Alberta pursuant to the Alberta Act. The debt cannot be said to be a liability under the federal Act. Accordingly no tax can be assessed against the appellant pursuant to subsection 160(2) of the federal Act itself: the assessment, if it is a proper assessment, was made pursuant to the Alberta Act and this Court has no jurisdiction to determine tax liability under provincial statute: Wallace v. M.N.R., [1991] 2 C.T.C. 2341, 91 D.T.C. 1135, Larocque v. M.N.R., [1991] 2 C.T.C. 2151, 91 D.T.C. 899, McConnachie v. M.N.R., [1991] 2 C.T.C. 2072, 91 D.T.C. 873. The procedure to appeal an assessment issued pursuant to the Alberta Act is set down in that statute, not the federal Act, and this Court is not the forum to hear such appeal.

(c) Since the liability of the transferee arose upon the reassessment of Margaret Levietta Phillips it is section 24 of the Alberta Act, as it read in 1985, that applies. However even if section 19, which came into force in 1990 applies, the interpretation still fits. Section 160 does not render a transferee liable for a transferor's tax liability under the Alberta Act. Clearly, more specific and clearer wording is required to create a liability than that in the wordings of sections 19 and 24. Sections 19 and 24 are best interpreted as “computation of taxable income” paragraphs which apply only in assisting in the calculation of the Alberta income tax owing on the formula referred to in the combined application of paragraphs 160(1)(d) and (e) to create the total amount owing. Paragraph 160(1 )(e) only applies when there is income attribution referred to in paragraph

(d) or other federal tax owing. It does not create a new tax liability of a transferee for provincial taxes.

(d) The assessment of the appellant is void for failure to provide the essential information to the taxpayer: Leung v. M.N.R., [1991] 2 C.T.C. 2268, 91 D.T.C. 1020.

I agree in substance with the appellant's submissions. [7] I have great difficulty in conceiving how a provincial legislature may amend a federal statute; this is what the Minister declares has taKen place. Somehow, he appears to say, the peculiar wording of section 24 of the Alberta Act transforms a provincial liability into a liability that may be assessed under the federal Act as if it was a liability under the federal Act.

Section 24 of the Alberta Act provides that section 160 of the federal Act applies, with all necessary modifications, in respect of the payment of tax under the Alberta Act for a taxation year by a taxpayer subject to tax under the Alberta Act to whom section 160 of the Act applies in respect of tax payable under the federal Act for the same taxation year. Thus, in short, section 24 will apply with respect to payment of tax by a taxpayer to the Alberta fisc if section 160 applies in respect of tax payable by that taxpayer to the federal fisc as a result of a particular event. The power to assess under subsection 160(2) is not necessarily with respect to a taxation year. At the same time the application of section 160 to the Alberta Act requires some fact common to both sections 160 and 24, and that, in my view, is a common event giving rise to the tax liabilities. Thus a necessary modification to the application of section 160 to section 24 is that references to a “taxation year" and "same taxation year" are to be dropped.

It is useful to compare the language used by the provincial legislators in drafting subsection 47(1) of the Alberta Act, R.S.A. 1980 c. A-31, which also purports to incorporate a provision of the federal Act into the Alberta Act:

47(1) Section 232 of the federal Act applies, with all necessary modifications, for the purposes of this Act where, in the same or similar circumstances, that section is or would be applicable for the purposes of the federal Act.

If the legislature had intended for section 160 of the federal Act to apply on a provincial level whether or not a federal tax liability existed section 24 of the Alberta Act would have been drafted in the same manner as subsection 47(1) of the Alberta Act. The significant contrast in the language used in the two provisions leads to the conclusion that the strict criterion of pre-existing federal tax liability was intended to govern the incorporation of section 160 of the federal Act into the Alberta Act.

Section 160 cannot be incorporated into the Alberta Act in the present case as the transferor had no federal tax liability. Her liability was specifically determined under the provincial statute.

Crown's counsel submits that section 24 of the Alberta Act operates to modify section 160 which in turn empowers the federal government to assess transferees in respect of a transferor's provincial tax liability. In counsel's view, as I see it, section 24 of the Alberta Act operates to effect the following change in the wording of section 160 of the federal Act:

160(1) Where a person has, on or after the 1st day of May, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(c) a person with whom he is not dealing at arm's length,

the following rules apply:

(e) the transferee and transferor are jointly and severally liable to pay under the Income Tax 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

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under the Alberta Income Tax Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year. . . .

[Emphasis added.]

In the view of the respondent's counsel, the words "under this Act", in subparagraph 160(1)(e)(ii) of the federal Act should be interpreted to mean under the Alberta Income Tax Act" when read in conjunction with section 24 of the Alberta Act. At the same time, he says that the same terms in paragraph 160(1)(e) should continue to mean "under the Income Tax Act’. The words, “this Act”, will thus have a different meaning in different places to suit this interpretation. This argument is not tenable and is contrary to the plain meaning of section 24.

It is apparent from plain readings of section 24 of the Alberta Act and section 160 of the federal Act that the federal government does not have the power to assess transferees in respect of a transferor's provincial tax liability. This power is reserved for the provincial government where the criteria set out in section 24 of the Alberta Act are met by the particular circumstances surrounding the transfer.

I wish to comment on the purported notices of assessment and reassessment. These notices, informing the appellant of assessments on July 26, 1990 and November 23, 1992, not only lack information with respect to the relevant assessment but, taken together, are confusing. The notice in 1990 refers to subsection 160(2) of the federal Act. One would therefore assume the assessment was made under the federal statute. The notice advises the transfer of property took place on June 14, 1986; this is a different date than that referred to in the agreed statement of facts. The notice of 1992 also refers to subsection 160(2) of the federal Act and June 14, 1986 as the date of the transfer of property. However the latter notice refers to an attachment of particulars of the assessment. The attachment of particulars refers to section 19 of the Alberta Act, which had no relevance in 1985 to any transfer of property, and also informs the appellant that the attachment forms part of the "attached notice of assessment dated July 26, 1990 . . .” although it was actually attached to the notice of reassessment dated November 23, 1992. This is just plain sloppiness on the part of the Minister.

I cannot reasonably satisfy myself that the notice of assessment of July 26, 1990 was not an assessment issued by virtue of subsection 160(2) of the federal Act. There is no reference on the notice to the Alberta Act. I am not prepared to accept the attachment to a purported notice of reassessment issued one and a half years later to be part of a notice to a previous assessment, even if the attachment states it is.

In her reply to the notice of appeal, the respondent alleged that in assessing, the Minister assumed, amongst other things, that:

. . . the aggregate of all amounts that the transferor was liable to pay under the federal Act in or in respect of the taxation years in which the property was transferred or any preceding taxation year was $104.643.07.

The respondent, in her reply, does not refer to the Alberta Act or any liability of the transferor with respect to that Act. The reader of the reply alone would conclude the transferor of the property was liable only under the federal Act. However the opening statements of counsel, the agreed statement of facts and the closing submissions of counsel at trial were directed solely to the transferor's liability under the Alberta Act and that was the issue that was joined at trial. The facts agreed to by the parties in the agreed statement of facts demolish any basic fact assumed by the Minister in assessing to the extent that the fact assumed is contrary to that agreed by the parties. The agreed statement of facts lack any reference to a liability of Margaret Levietta Phillips under the federal Act in 1985. The only evidence before me was that the transferor was liable only under the Alberta Act.

I would therefore dismiss the appeal from the assessment, notice of which is dated July 26, 1990.

At time of trial the appellant had not amended her appeal from the assessment, notice of which is dated July 26, 1990, by joining thereto an appeal of the purported reassessment, notice of which is dated November 23, 1992. I instructed the deputy registrar to write counsel inquiring if such an amendment was forthcoming and advise I would be predisposed to grant the amendment, with consent of counsel for the respondent. By letter dated April 6, 1993, counsel for the appellant, Mr. Ludwig, applied for such amendment advising that respondent's counsel, Mr. McNary, consented to the application. Mr. Ludwig informed the Court that:

Mr. McNary had raised this issue with our office shortly after the November, 1992 reassessment notices were issued. He indicated his consent at that time to an application on our behalf to join the reassessment notice in accordance with the Act.

At that time, our view was that we could not amend our appeal by joining the notice because to do so would be to "mix jurisdictions": i.e., that the original assessment was under the Income Tax Act, and by attempting to amend the notice by including a provincial liability, it was our view that Revenue Canada was "trying to do the impossible”, as far as jurisdiction is concerned.

It is apparent, however, that in order for that very issue to best be determined, the appropriate course would be to amend the appeal by joining the reassessment notice. . . .

I appreciate counsel's concern in not immediately amending his client's notice of appeal. I agree that I ought to consider the reassessment so that it will not be left in abeyance to the extent it may be considered a reassessment under the federal Act. Accordingly I granted leave to amend the appellant's pleadings.

I must therefore decide if, as a result of the amendment, the reassessment of November 23,1992 was made pursuant to the federal Act or the Alberta Act. If it was made pursuant to the federal Act, then the earlier assessment, notice of which is dated July 26, 1990, is no longer before me, having been superseded and I am to consider the reassessment. If the reassessment was made by the Minister as agent of Alberta pursuant to the Alberta Act, then, of course, I have no jurisdiction; the procedure in opposing the reassessment is set out in the Alberta Act and any appeal would lie in the Alberta Court of Queen's Bench.

As I mentioned earlier, the comments on the notices of assessment and reassessment, and Exhibit "A" to the latter notice, are confusing. The notice of reassessment refers to Exhibit "A" attached to it but Exhibit "A" refers only to the notice of assessment of July 26, 1990.

It appears to me that the Minister attempted to correct his failure to provide the necessary information to the appellant when assessing her in 1990 by sending to her in 1992 the notice of reassessment and particulars of assessment", that is, Exhibit "A" to the notice. I have held that the assessment of 1990 was issued pursuant to the federal Act, notwithstanding the particulars of assessment sent to the appellant in 1992.

To the extent that the reassessment of 1992 may be considered to have been issued pursuant to the federal Act, the appellant's appeal would succeed for the same reasons as her appeal against the earlier assessment.

The Minister, under authority of the so-called Collection Agreement between the governments of Canada and Alberta, [8] assesses tax under the Alberta Act as agent of the Alberta government and sends notice of assessment for the year or otherwise for such taxes to residents of Alberta for both federal and provincial taxes. When conditions set out in subsection 160(1) of the federal Act are present with respect to a taxpayer's liability under the Alberta Act, the Minister may apply section 24 of the Alberta Act, as it read in 1985, and assess the transferee of property received in 1985 from the transferor who was liable under the Alberta Act at the time of the transfer. Section 160 of the federal Act applies to the Alberta Act by virtue of section 24. Any such assessment is an assessment for provincial tax. The taxpayer so assessed must be notified the assessment was made pursuant to the Alberta Act.

In assessing the appellant in 1992, the Minister realized an assessment must be made pursuant to the provincial taxing statute. He failed to so assess in 1990 and attempted to rectify the situation in 1992, by issuing a" reassessment". I am satisfied the" reassessment" was not issued in accordance with the federal Act. The attachment of Exhibit "A" to the notice — notwithstanding the confusion whether the particulars apply to the notice to which the Exhibit is attached or to the notice sent to the appellant in 1990 — indicates the assessment has been issued pursuant to the Alberta Act. Perhaps the Minister, in reassessing the way he did, wished to inform the appellant in 1992, that the assessment of 1990 was actually issued pursuant to the Alberta Act: this may be the reason Exhibit "A" reads in the manner it does. In any event the probability is that the reassessment, notice of which was dated November 23, 1992, was issued by the Minister as agent pursuant to the Alberta Act. If this is the case — and in the circumstances I believe it is — the appellant's appeal from the reassessment will have to be quashed.

Since the reassessment was not an assessment under the federal Act the original assessment has not been superseded. Therefore since I have found the assessment of 1990 to be issued pursuant to the federal Act and the reassessment of 1992 to be issued pursuant to the Alberta Act,

(a) the appeal from the assessment, notice of which is dated July 26, 1990, will be allowed and the assessment vacated; and

(b) the appeal from the reassessment, notice of which is dated November 23, 1992, will be quashed.

The appellant shall be entitled to costs on a party-and-party basis.

Appeal allowed.