Donald R. Bailey v. Minister of National Revenue, [1989] 2 CTC 2177, 89 DTC 416

Rip, T.C.J.:— The appeals of Donald R. Bailey against income tax assessments for the taxation years 1982, 1983 and 1984 were set down for hearing in Edmonton. However, prior to the appeals being heard applications to the Court were made by both the appellant and the respondent.

The application by the appellant was made to the Court for an order that the Minister of National Revenue, the respondent, reassess the appellant on the basis that certain properties consisting of land and an apartment block ("properties") in which he owned a one-half undivided interest were inventory of a business in 1983 and that the appellant be entitled to “write down" [1] the value of the inventory in 1983 and to carry-back or carry-forward the loss from that write down. The application was founded on the fact that on July 10, 1987, the appellant filed a waiver for 1983 in accordance with subsection 152(4) of the Income Tax Act ("Act") so as to permit the respondent to reassess the appellant beyond the three year period specified in subsection 152(4); the three year period would expire on August 31, 1987. The waiver was “in respect of Inventory Write Down". The appellant contends the waiver was executed only for the limited purpose of determining whether the formula he used to calculate the inventory write down was appropriate and since the respondent in his proposed pleadings has abandoned his argument that the formula was inappropriate there is no issue left to be decided by the Court and the appeals should therefore be allowed.

The second application came on before me by way of a notice of motion whereby the respondent applied for leave pursuant to Rule 7 of the Rules of Practice and Procedure in appeals to the Tax Court of Canada ("Rules") to file his reply to a notice of appeal. The application was opposed by the appellant.

Appellant's Application

Facts

When filing his income tax return for 1983 the appellant, a partner in Milner and Steer, a legal firm in Edmonton, Alberta, calculated his purported business income by deducting an amount which he referred to in the tax return as "Inventory Write Down". The appellant had deducted the cost of the properties from their current fair market value, which was lower than cost in 1983, and arrived at a negative amount which he claimed to be a noncapital loss. The respondent originally assessed the appellant on August 31, 1984, allowing the deduction of the amount of the inventory write down.

Officials of the respondent first indicated that they were proposing to reassess the appellant's 1983 taxation year on May 12,1987, three and one half months prior to the expiry of the three year period from the date of the original notice of assessment. At the first meeting between the appellant's representative, Donald J. Block, C.A. ("Block"), a partner of the accounting firm of Coopers & Lybrand and the appellant's tax advisor, and Leslie Zimmerman (“Zimmerman”), one the the respondent's officials, Zimmerman indicated that the Minister was proposing to reassess the appellant on the basis of the decision of this Court in Jellaczycv. M.N.R., [1985] 1 C.T.C. 2158; 85 D.T.C. 184. In that case the Court refused to allow the taxpayer to capitalize mortgage interest and property taxes on vacant land and add them to the cost of the land he considered to be inventory, and then use the increased cost to calculate a purported loss. The Jellaczyc case held that the transaction in issue was an adventure in the nature of trade but the taxpayer was not engaged in a business with respect to the land; the Court also found that on the facts of this case, writing down the inventory using the sales less cost of sales formula was not permissable.

On June 4, 1987, the appellant received a letter from Zimmerman stating that the Minister proposed to reassess him since "the write-downs are not allowable for tax purposes". In her letter Zimmerman stated the Minister's position is supported by Jellaczyc, supra; she added that the "sales less cost of sales" formula for calculating income is not applicable when there has been no sale in the year.

In the same letter, Zimmerman advised that the appellant's 1983 income tax return would be statute-barred on August 31 and requested that he sign a waiver of the three year limit to allow the Department “time to receive and review your representations". The waiver was enclosed for the appellant's signature. It had been completed by an official of the respondent to read that:

The time limit referred to in subsection 152(4) of the Income Tax Act within which the Minister may reassess . . . is hereby waived for the taxation year indicated above, in respect of:

Inventory writedowns.

On July 10, 1987, the appellant signed the waiver. In his affidavit the appellant says he signed the waiver on the basis of Zimmerman's letter and on the basis of Block’s advice concerning his communications with the respondent and Block's explanation that the proposed waiver referred to the term "inventory writedowns" in the tax accounting sense, meaning an accounting treatment of inventory and in particular the view on that issue expressed in Jellaczyc, supra. Block confirms this advice in his affidavit.

The respondent reassessed the appellant’s 1983 taxation year on April 13, 1988 [2] .

Subsequently there were additional meetings, correspondence and telephone conversations between representatives of the respondent and the appellant and Block. All of these communications focused on the Jellaczyc case and its applicability to the appellant's circumstances. The appellant says the notice of objection and the notice of appeal were prepared by him based on the assumption that the respondent was concerned with the applicability of the "sales less cost of sales" formula. The appellant says he made it clear to the respondent that these were his assumptions and the Minister did nothing to disabuse him of his understanding.

It appears the possibility that the appellant's property might be treated as capital property by the respondent was raised on only one occasion prior to February 10, 1989, at a meeting between the appellant, Block and representatives of the respondent which took place on August 30, 1988. I note this meeting took place after the waiver was signed by the appellant and after the appellant was assessed by notices dated April 13, 1988. The appellant insists there was no suggestion by the respondent prior to that date he would raise the issue in the appeal from the assessment that the properties were capital.

In a telephone conversation of February 9 or 10, 1989, Mr. David Besler ("Besler"), counsel for the respondent, informed the appellant that the respondent would be alleging that the property in question was capital property and not inventory. This conversation took place two weeks prior to the scheduled hearing of these appeals. In the respondent's unfiled reply to a notice of appeal, which is the subject of the second application, the appellant says he makes no allegation about the propriety of the appellant's treatment of his inventory but bases his argument on the ground that the properties in question were capital properties. In a letter to the appellant dated February 21,1989, Besler stated:

I advised my client’s position was that the properties in issue were not inventory and although the Jellaczyc case might lend some support to this position, argument would not be restricted to that case. I also indicated this should be the only issue before the court.

Argument

In the appellant's view the respondent's reply and the letter of February 21, 1989 from Besler represented a competely new position taken by the respondent, a position outside the scope of the waiver granted by the appellant on July 10, 1987.

Subparagraph 152(4)(a)(ii) permits the respondent at any time to reassess tax, interest and penalties under Part I of the Act for a taxation year if the taxpayer or person filing the income tax return files with the respondent a waiver in prescribed form within three years from the date of mailing of the notice of original assessment or a notification that no tax is payable for that taxation year.

Paragraph 152(5)(c) provides that:

Notwithstanding subsection (4), there shall not be included in computing the income of a taxpayer, for the purposes of any reassessment, additional assessment or assessment of tax, interest or penalties under this Part that is made after the expiration of 3 years from the day referred to in subparagraph 4(a)(ii), any amount

(c) where any waiver has been filed by the taxpayer with the Minister, in the form and within the time referred to in subsection (4), with respect to a taxation year to which the reassessment, additional assessment or assessment of tax, interest or penalties, as the case may be, relates, that the taxpayer establishes cannot reasonably be regarded as relating to a matter specified in the waiver.

Neither the appellant nor counsel for the respondent was able to refer the Court to any case law on the question in issue. The appellant made extensive oral and written submissions to the Court in support of his application. He argues that the waiver cannot be used to reassess a taxpayer “if he can establish that the reassessment ‘cannot reasonably be regarded as relating to a matter specified in the waiver' ”. The appellant says that to determine the “scope of the waiver" it must be determined firstly if the appellant has established that the reassessment cannot reasonably be regarded as relating to a matter specified in the waiver and secondly, what is "the matter specified in the waiver"? He suggests the first issue is a question of statutory interpretation and the second is a question of construction of the term "inventory write down".

There is no doubt that paragraph 152(5)(c) must be interpreted in accordance with the ordinary principles of statutory construction: vide The Queen v. The Government of Manitoba, [1986] 1 C.T.C. 16 at 21 citing with approval E.A. Driedger in Construction of Statutes, 2nd ed., Toronto — Butterworths, 1983, at page 204. Estey, J. also cited with approval Mr. Driedger in Stubart Investments Limited v. The Queen, [1984] 1 S.C.R. 536; [1984] C.T.C. 294 at 316; 84 D.T.C. 6305 at 6323:

Today there is only one principle or approach, namely, 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 intention of Parliament.

The appellant adds that the phrase "cannot reasonably be regarded as relating to a matter specified in the waiver” in paragraph 152(5)(c) is to be interpreted consistently both with the ordinary meaning of those words in their proper context and with the principle of strict construction of taxing statutes, notwithstanding the principle expressed in Stubart Investments Limited, supra, that taxing statutes are to be construed “in their entire context and in their grammatical and ordinary sense". The appellant also relied on The Queen v. The Government of Manitoba, supra, The Queen v. Taylor, [1984] C.T.C. 436; 84 D.T.C. 6459 and Murphy v. The Queen, [1985] C.T.C. 386; 80 D.T.C. 6314.

A waiver is usually given by a taxpayer to the respondent when there is an unresolved dispute over one or more specific matters and the three year time period within which the respondent may reassess is fast approaching. The execution of a waiver avoids a hasty reassessment by the respondent; it provides the taxpayer with further opportunity to consider adjustments proposed by the respondent and to allow him to make further representations to support his claim.

The respondent cannot reassess after three years from the date of an original assessment unless there has been fraud or misrepresentation or unless the taxpayer has signed a waiver. By signing the waiver, the appellant says he forfeited his legal right not to be reassessed after the expiry of the three years "with respect to the particular issue designated in the waiver”.

The appellant says that on the basis of the representations made to him about the nature of the reassessment, it was reasonable for him to assume that the only matter in issue was his use of the “sales less cost of sales” formula. The appellant states that the purpose of the waiver was to allow him to make representations and he could not reasonably have been expected to make such representations with respect to the issue of whether his property was Capital property or inventory since he did not know that was the issue; thus that issue could not be said to be reasonably related to the matter specified in the waiver.

The appellant insists that the "amount reassessed does not 'reasonably' relate to the matter specified in the waiver". He referred the Court [to] the definition of “reasonably” in Webster's Third International Dictionary:

1. in a reasonable manner (acted quite . . .) 2. to a fairly sufficient extent (a book that is . . . good).

What is "reasonable" is not the subjective view of either the respondent or appellant but the view of an objective observer with a knowledge of all the pertinent facts: Canadian Propane Gas & Oil Limited v. M.N.R., [1972] C.T.C. 566; 73 D.T.C. 5019 per Cattanach, J. at 5028. The appellant's position is that an objective observer knowing that the respondent had proposed to reassess strictly on the basis of Jellaczyc, knowing that a waiver is normally provided only with respect to a specific matter that is in dispute and knowing that the normal meaning of "inventory writedown" is a specific accounting treatment of inventory, would not conclude that the issue of whether a particular piece of property is capital or inventory is "to a fairly sufficient extent" related to the matter of "inventory writedown".

The appellant says his interpretation is reinforced by an examination of the meaning of the word “specified”. Webster's, supra, defines "specify" as follows:

1.a: to mention or name in a specific or explicit manner.

Strouds Judicial Dictionary, 4th ed. L.5, 2597, cites specific uses of the word "specified", for example, “specified period", or “specified person". The appellant says the common factor is that the specified matter be "unambiguously identified” or “determined”, “fixed” or "settled". He adds it is clear that the only matter which is “unambiguously identified” by the term "inventory writedown" as it is used in the waiver is the issue of the treatment of inventory by the taxpayer in his 1983 return.

The appellant argues that the term, inventory write down, is a particular accounting term with respect to treatment of inventory and any reference to those words in the form of waiver is a description only of that accounting term. The question of whether the property in question is capital property or inventory is divorced from the appropriateness of the appellant’s accounting treatment of inventory. It is on this statement that the appellant has constructed his argument that the reassessment cannot reasonably be regarded as relating to a matter specified in the waiver.

On the other hand the respondent submits that a waiver permits him to issue a further reassessment in respect of a matter specified in that waiver. The matter is the inventory write down. He says the waiver can specify or restrict items to be adjusted but specifying items to be adjusted cannot restrict the reasons for that adjustment. The appellant's waiver is worded sufficiently to allow the assessment disallowing the inventory write down.

The respondent also submits the assessment of a tax liability is distinct from the process by which that amount was determined: Pure Spring Company Limited v. M.N.R., [1946] Ex. C.R. 471; [1946] C.T.C. 169; 2 D.T.C. 844. The appellant's understanding of the reasons for an assessment in no way restricts the respondent from supporting that assessment as a correct application of the Act.

The words of paragraph 152(5)(c) which apply to this appeal are:

. . . there shall not be included in computing the income . . . any amount . . .

that the taxpayer establishes cannot reasonably be regarded as relating to a matter specified in the waiver.

In the French language these words are:

. . ne doit pas être inclus dans le calcul du revenu . . . tout montant

qui . . . ne peut raisonnablement être considéré . . . comme se rapportant à une question spécifiée dans la renonciation.

The provision states that no amount is to be included in a taxpayer's income if that amount cannot reasonably be regarded as relating to a matter specified in the waiver. The word "that" in paragraph 152(5)(c) refers to "any amount"; in the French version the words "montant qui” are not separated by other words as they are in the English version. What is not to be included in computing income is an amount that does not reasonably relate to the matter specified in the waiver.

In reassessing the appellant on April 13, 1988, the respondent added to the appellant’s previously assessed income the amount of “reduction of inventory write down". As previously stated the term, inventory write down, had its genesis in the appellant’s 1983 income tax return.

Paragraph 152(5)(c) provides that no amount is to be added to income by the respondent if the appellant establishes the amount cannot be reasonably regarded as relating to the matter specified in the waiver. The matter specified in the waiver is "Inventory Write Down".

The appellant has referred the Court to one definition of the word “reasonably”. The Shorter Oxford English Dictionary on Historical Principles refers to “reasonably” as an adverb meaning “in a reasonable manner; sufficiently; fairly". This dictionary defines "reasonable" as:

2. Having sound judgment; sensible; sane. Also, not asking for too much. .. . . b. Requiring the use of reason . . . 3. Agreeable to reason; not irrational, absurd or ridiculous; . . . .

Le Petit Robert defines "raisonnablement" as "conformément aux lois de la raison, à la logique ou un bon sens."

In assessing the appellant on April 13, 1988, the respondent disallowed a deduction claimed by the appellant in his income tax return for 1983. In calculating the amount of the deduction the appellant, in his income tax return, referred to the calculation as "Inventory Write Down". These words may describe an accounting term, but they also describe the calculation performed by the appellant in his income tax return to determine an amount deducted in computing income. The dispute between the appellant and the respondent is whether the amount so determined may or may not be deducted by the appellant in computing his income. During negotiations between the appellant and officials of the respondent, the latter said the appellant could not deduct the amount claimed because of the Jellaczyc decision. The respondent now sees fit to deny the deduction for other reasons and his counsel has prepared pleadings accordingly.

The amount originally in question, before and after the waiver was signed, and the amount disallowed by the reassessment was the same amount. The amount was calculated and referred to in the income tax return as "Inventory Write Down”. The subject matter to which the amount referred both before and after and signing of the waiver and on reassessment was the same: inventory write down. A sensible and not absurd view of the dispute is that the amount disallowed as a deduction in computing income can be reasonably regarded as relating to the "Inventory Write Down" described in the appellant’s 1983 income tax return.

The appellant has not established the amount disallowed as a deduction cannot reasonably be regarded as relating to the inventory write down. The appellant's application is therefore dismissed.

Respondent's Application

The relevant Rules are as follows:

6.(1) The Minister of National Revenue shall, within sixty days from the day on which the Board has transmitted to him a Notice of Appeal pursuant to the provisions of section 170 of the Income Tax Act, as enacted by S.C. 1970-71-72, c. 63, file with the Registrar of the Board a Reply to the Notice of Appeal.

7. If no Reply to a Notice of Appeal has been filed within sixty days from the date on which the Registrar of the Board has transmitted the Notice of Appeal to the Minister of National Revenue, the appellant may make an application to the Registrar to have the appeal entered on the list of appeals to be called for hearing at the next sitting of the Board in the appellant's district and, upon the making of such application, no Reply shall thereafter be filed without leave of the Board.

8. Where no Reply to a Notice of Appeal has been filed, the Board may dispose of the appeal on the basis that the allegations of fact contained in the Notice of Appeal are true.

Facts

The appellant filed his notice of appeal to the Court on November 8, 1988. In filing his notice of appeal the appellant informed the Court that he wished to have the appeal heard at the earliest possible date. The Court transmitted the notice of appeal to the respondent on November 14,1988. By letter dated November 17, 1988, the appellant applied to have the appeal set down for hearing during the week of February 20, 1989.

Besler was assigned carriage of the appeal for the respondent on December 14, 1988, and on that date received the appropriate files of the respondent.

On December 16, 1988, the appeals were set down for hearing for February 23, 1988. Both the appellant and Besler were advised of the trial date by telephone and agreed to that date. On December 19, 1988, the notice of hearing was sent to the parties.

In the meantime Besler, according to his affidavit, prepared a reply to a notice of appeal and a draft was forwarded to the respondent on February 9, 1989. On the same day Besler spoke with the appellant outlining the respondent's position. Further discussions between Besler and the appellant took place on February 13 and 16, 1989. During these discussions Besler says he informed the appellant the reply to a notice of appeal ("Reply") was being prepared and says he kept the appellant informed both as to the stage of preparation of the reply and the respondent's position in response to the appeal. At no time, affirms Besler, did the appellant express concern the reply had not been filed within 60 days of the filing of the notice of appeal nor did he indicate he was considering making an application under Rule 7 of the Rules.

Besler signed the respondent's reply on February 16, 1989, and is of the view it was mailed to the appellant no later than February 17, 1989; he also personally served the reply to the appellant's address of record.

By letter dated February 16, the appellant informed Besler that he expected the respondent to make an application for leave to file his reply. On February 17 the appellant informed the Court that he opposes the filing of the reply.

The appellant referred the Court to the reasons of Sarchuk, T.C.J. in Kosowan v. M.N.R., [1989] 1 C.T.C. 2044; 89 D.T.C. 58 where the respondent's application to file a reply to a notice of appeal was denied as the Court could find no valid reason for the delay on the respondent's part.

In the matter at bar it is important to note:

(a) the notice of appeal was transmitted to the respondent on November 14, 1988;

(b) 60 days following November 14, 1988, is January 12, 1989;

(c) the appellant applied on November 17, 1988 to the Registrar to have the appeal entered at the next sitting of the Court in his district; this was some 56 days prior to the expiry of the 60 days referred to in subsection 6(1) of the Rules.

Interpretation

Section 6, 7 and 8 of the Rules constitute a code of procedure for the respondent to file a reply and a remedy if he does not file on time. Section 6 requires the respondent to file a reply to a notice of appeal within 60 days of the date the Court transmits to him the notice of appeal.

Section 7 of the Rules provides that no reply shall be filed without leave of the Court once an application is made by the appellant to have the appeal entered on the list for hearing. However, an application may be made if no reply to a notice of appeal has been filed within 60 days from the date the Court transmitted the notice of appeal to the respondent. The appellant's application of November 17, 1988, to have the appeals called for trial during the week of February 20, 1989, was not an application contemplated by Rule 7 since the 60 day period had not expired.

Section 8 provides for the event that no reply is filed.

There is no rule requiring leave of the Court by the respondent when he files a reply late and the appellant has not made an application pursuant to section 7 of the Rules.

When counsel for the respondent agreed on December 16, 1988, to have the appeals heard on February 23, 1989, he obviously had not reviewed his client's files in any detail or permitted] himself time to formulate any defense to the appeal. He was not in any position to agree to a trial date. However, he did so and the appellant at the time had no reason to believe the respondent's position at trial would be any different from what he previously stated. Two weeks prior to trial is not the appropriate time to inform an opponent of one's position, especially if it is completely different from what the opponent was previously led to believe. However, there is nothing this Court can do: the appellant "jumped the gun" in applying for a trial date — he may have had good reason to do so. Unfortunately for the appellant, on the facts of the application there is no provision in the rules preventing the Minister from filing his reply, even at a late date.

The respondent's application to file his reply will therefore have to be allowed.

The Registrar of the Court will be instructed to have this appeal entered on the list of appeals to be called for hearing at the next available sitting of the Court in Edmonton, Alberta.

Application of appellant dismissed. Application of respondent allowed.