Skirt Togs Industries LTD v. Minister of National Revenue, [1982] CTC 2156, 82 DTC 1155

Guy Tremblay:—This application was heard in Montreal, Quebec, on September 25, 1981. It was taken under advisement on November 24, 1981, when the last written argument was received by the Board.

1. The Point at Issue

The issue is whether the applicant company is correct in requesting an order extending the time within which notices of objection may be served. The applicant company contends it did not receive the notices of reassessment concerning the taxation years 1969 to 1975 inclusive issued on August 6, 1980, before March 30, 1981, and therefore it was already too Ite to file notice of objection.

2. The Burden of Proof

The burden of proving the facts of the request are on the applicant’s shoulders, the applicant has to give a reasonable explanation for not filing the notices of objection on time and, in addition, must prove that the application was brought as soon as circumstances permitted it to be brought. In addition, the applicant must prove that there are reasonable grounds for objecting to the assessments (paragraph 167(5)(c) of the Act).

3. The Facts

3.01 The applicant, whose head office is in Montreal, is a corporation carrying on the business of the manufacture of apparel at various locations in the Province of Quebec.

3.02 In a letter dated May 8, 1979 (Exhibit A-10) Mr Bruno Pateras, QC, counsel for the applicant at that time, was informed by the respondent that:

(a) the taxable income of his client, for the years 1969 to 1976, was underestimated by $1,079,005 because of purchases disallowed by the respondent;

(b) a penalty of 25% would be charged;

(c) the main shareholder, Mr Norman Wexelman, would have to reimburse the company for the amount of $1,117,005 (fictitious invoices), otherwise, new assessments would be issued.

Statements were attached to the letter giving details of the purchases disallowed and the fictitious invoices.

3.03 This letter followed an important investigation made in 1976 by the Minister of National Revenue of about 250 companies in Montreal, all involved in the textile industry. The applicant and its affiliated companies, Pacemaker Inc and Livible Knits Inc, were among the companies investigated.

3.04 Following the letter (Exhibit A-10) of May 1979, there were negotiations between the parties from August 1979 until December 1979. At the last meeting before Christmas Mr Wexelman reimbursed $1,117,005 to the company, but “without prejudice”. The parties were supposed to have other meetings to discuss the contentions of the respondent concerning purchases disallowed as expenses and fictitious invoices. However, no date was fixed for the meetings.

They had meetings after that, but they concerned Pacemaker Inc. On May 26, 1980, the solicitor for the Minister of National Revenue signed a consent to judgment with respect to Pacemaker Inc so that Appeal 78-659 before the Board could be allowed “on the basis that an amount of $9,269.42 is an allowable expense as purchases” (Exhibit A-3).

3.05 At the beginning of 1980, the applicant’s accountant put a note in the financial statements of 1979 saying that the Minister of National Revenue had contended that there were improper expenses, but the notices of reassessment had not yet been issued.

In February 1981, the applicant was about to get a government guaranteed loan. However, the applicant did not yet know about the reassessments. Moreover, as the financial statements for the year 1980 were to be prepared, the accountant wanted to know whether the reassessments had been issued. On February 19, 1981, Mr M Klein, counsel for the applicant, met with Mr Serge Mercilie, a director of the Income Tax Department, to obtain information about the reassessment.

At first glance, from the documents in hand, Mr Mercilie could not see whether the reassessments had been issued. It was lunch time when Mr Klein left the taxation office. Mr Mercille, after research in the special investigation office during the afternoon, learned that the reassessments for the taxation years 1969 to 1976 had been issued on August 6, 1980. The same day, he gave Mr Klein the information by telephone. Mr Mercille testified that the special investigation case had been completed in March 1980, even though the reassessments were issued five months later (SN p 8).

3.06 The next day, on February 20, 1981, Mr Klein wrote a letter (Exhibit A-6) to Mr Mercille asking for copies of the reassessments. The same day, he informed the applicant’s authorities about the said notices of reassessment.

On March 30, 1981, the reassessments involved in the present case were received by Mr Klein.

3.07 The applicant filed: a Consent to Judgment in the case of Pacemaker Inc, affiliated company of the applicant (Exhibit A-3); the notice of reassessment concerning Norman Wexelman and Lionel Zimmerman, both directors of the applicant (Exhibit A-4); and 15 photocopies of letters and notices of payment to Messrs Wexelman and Zimmerman (Exhibit A-5). Counsel for the respondent objected saying they were not relevant to the present case.

However, the applicant wanted to prove the course of conduct ordinarily followed by the respondent:

(a) in a case of the same nature as the present case (Exhibit A-3), and

(b) in the collection of the accounts receivable (notices of payment were sent less than 50 days after the notices of reassessment were issued) (Exhibits A-4 and A-5).

Although the Board permitted the filing of the said exhibits and examination about them, it reserved its decision regarding the objection raised.

Because of the nature of the present application, and because the Board must consider justice and equity in giving its final decision (subsection 167(1) of the Income Tax Act), and because the taxpayers to which the said exhibits refer are related to the applicant, the board rejects the objection and accepts the evidence and shall study the weight of this evidence in the final analysis below.

3.08 On April 15, 1981, Mr Klein wrote a letter (Exhibit A-7) to Mr R Roy, Chief of Special Investigations. As the writer detailed seven points which substantially were proven before the Board, it is useful to quote this letter:

Dear Mr Roy:

We acknowledge receipt of your registered letter, dated the 30th day of March 1981, together with enclosures thereto.

We are somewhat mystified by receipt of the assessments in question. Allow us to state chronologically the events, and the reason for our surprise at the receipt of assessments, bearing date the 6th day of August 1980, at this time.

1. The writer, and members of your Department, held several meetings during the period September 1979 through December 1979, when the Department insisted that the monies represented by the purported false invoices be returned to the Company.

The writer met with both yourself, and Mr Demers, on several occasions in December 1979, and finally a lengthy letter was sent to the Department outlining the steps to be taken to reimburse.

At that time, the writer suggested a meeting to attempt once more to try to resolve the matter on the merits. It was suggested, by your Department, that this could await the New Year.

2. We, at no time, received any further advise from the Department, either the Assessing Branch, or Special Investigations Branch.

3. The assessments you forwarded to us bear date the 6th day of August 1980. The delay in the assessments themselves (bearing in mind that your department had determined their estimate of the amount in August 1979) is in itself noteworthy. One questions why it took the Department eight (8) months to issue assessments (subsequent to December 1979) when the taxpayers had “reimbursed” (without prejudice) on the 7th day of December 1979.

4. In the same time frame, personal assessments issued against Messrs Wexelman and Zimmerman (the principals of Skirt Togs in the years in question), in part relating to a voluntary disclosure previously made for Livible Knits, and a further matter relating to Pacemaker.

It is interesting to note that Messrs Wexelman and Zimmerman have each received no less than six (6) demands for payment, with respect to these personal assessments. It is also to be noted that these assessments were ill-founded on the merits, and the Minister has agreed that a substantial portion of the Notices of Objection filed in connection therewith were well-founded.

The point, however, is that although the Skirt Togs assessments purportedly bear date of August 6, 1980, no demand for payment has ever been made against Skirt Togs Industries Ltd.

One is thus left with the strange situation that the Collection Department appears more concerned about collecting $12,000 (the amount of the personal assessments — six (6) demands for payment), than $335,000 (the amount of the total of the Skirt Togs assessments — No demand for payment over a period of eight (8) months).

5. As we had not heard from Special Investigations, and as a result of the personal assessments directed against Messrs Wexelman and Zimmerman, which could only be described as vicious and vindictive, the writer took up this matter with Mr Serge Mercille during a meeting with him on other matters.

Mr Mercille appeared to have a computer print-out of the various assessments issued in the “Ventex” matter, but could find no evidence of assessments directed against Skirt Togs. Mr Mercille promised to call me back with news, as it was now the lunch period and personnel at Special Investigations were not available to advise of the status of the matter.

6. Mr Mercille called me that afternoon, advising that in fact, according to the Department’s records, assessments had issued on the 6th day of August 1980. We communicated this information immediately to our client. After an exhaustive search, our client could find no record of these assessments. We might add that each assessment, and collection letter, received by Messrs. Wexelman and Zimmerman

on the personal assessments by our client, were immediately forwarded to the writer.

With this in mind, on the 20th day of February 1981, we wrote to Mr Mercille, requesting copies of the assessments in question.

7. Your letter of March 30, 1981, resulted from our letter of February 20, 1981. Inasmuch as our letter was hand delivered to Mr Mercille, it is incredible that the Department would have required forty (40) days to answer a simple request for copies of assessments which purportedly had been issued on August 6, 1980 (and assessments with respect to which there had never been any request for payment by the Collection Department).

It is furthermore incredible that most of the letters sent by the Department, in the Skirt Togs files, were sent registered mail. We would ask whether, in fact, the purported assessments of August 6th were, in fact, sent by registered mail?

As a result of the foregoing, our clients are finally (on the 31st day of March 1981) in possession of assessments dated the 6th day of August 1980, totalling in excess of $330,000, which in their view, are unfounded in fact and in law. These assessments were never received by our client and from the lack of activity by your Collection Department, one must question whether they, in fact, ever left the hands of the Department.

We have always understood that once Special Investigation issues an assessment, the matter is out or their hands and forms part of the Departmental records in general. One also questions why a registered letter came to the writer from the Chief of Special Investigations.

We reiterate that these assessments were not received by our client, and their forwarding to the writer on March 30, 1981, was the first occasion that they have been brought to the attention of our client.

Under the circumstances, we would ask whether, in fact, the original assessments were sent registered mail. If this is not the case, we would respectfully suggest that these assessments be deemed to have been sent to the Taxpayer on March 30, 1981, the first occasion that they were, in fact, received by the Taxpayer, or its representatives.

3.09 Mr Klein explained that by writing to Mr Roy, Chief of Special Investigations, and by asking him to question the date of the assessments, he sought to eliminate the necessity of the present application. According to his experience indeed, sometimes the Department has admitted the fact that the taxpayer has not received the assessments in due time. The Department has then considered the effective date the actual date of reception of the said assessments.

3.10 Concerning the reassessments issued in August, 1980, Mr Wexelman testified that Mr Klein called and asked him:

If there was any assessment ever received by me. I said:

No, but let me check, maybe my office got something, We checked through the office and we never received any assessments whatsoever. I got back to him and I told him that no, we had never received any assessments. At that time he told me that assessments were issued in August of 1980. I said: Well, we never got them and we never got any letters subsequent to that; which I went to check on at that time.

Q. You say you checked your office. Did you make a thorough check?

A. Oh yes, we checked all the receivables, payables department, in different areas.

Q. And nothing turned up?

A. No. (SN pp 21, 22)

3.11 Mr Klein received Mr Roy’s answer (Exhibit A-8) on April 28, 1981. The letter explained that the Department must consider the notices of reassessment as mailed on August 6, 1980. Mr Roy suggested making an application for an extension of time.

3.12 One of the reasons invoked by the applicant (para 5 of his application) for objecting to the reassessments is:

5. That all of the Assessments are statute barred and the assessments by the Minister of those years, without appropriate indication of why the Minister is entitled to reopen those years, is a radical nullity, and renders such assessments null and void, ipso facto.

Before being able to make such an affirmation, Mr Klein had to have the dates of the original assessments. The applicant did not have them. They were in the hands of the applicant’s former accountant.

However, because of differences between the former accountant and Mr Wexelman, president of the applicant, the accountant refused to give the said original assessments to Mr Klein. It was at the end of April. Moreover, Mr Wexelman was in Antigua for business reasons and returned on May 7 or

8. A draft of the application was ready, but it needed the dates of the original assessments.

Paragraph 5 of the said draft application, which was filed as Exhibit A-9, reads as follows:

said years are statute barred and the assessments by the Minister of those years, without appropriate indication of why the Minister is entitled to reopen those years, is a radical nullity, and renders such assessments null and void, ipso facto.

It was finally possible for the new chartered accountant to get the said original assessments in the middle of May 1981. The application was completed and signed on May 15, 1981. Mr Norman Wexelman was sworn and signed the affidavit the same day.

3.13 Concerning the “fictitious invoices”, Mr Klein testified that in 1979 he met the respondent’s special investigators. He had on hand affidavits from the people who had supplied these invoices to the effect that they were valid. It is partly on this basis that Mr Klein tried to settle the case, but the employees of the respondent said: “No, no, these are false invoices, we don’t have to tell you, we’ll see you in Court”. (SN p 47)

Mr Klein however said that the $1,079,000 became $638,000 in August 1980.

3.14 Pursuant to the reassessments (Exhibit A-1), the additional income and penalties for the years involved are as follows:

Mr Jacques Sauvé, collection agent for the respondent, explained the administrative reasons why the applicant had not received notices of payment before May 1981 even though the notices of reassessment had been issued on August 6, 1980. The collection division indeed only received the computer printout of the said reassessments on April 14, 1981. The only explanation for this delay was that it was due to errors made in the keypunch system by the employees working in Shawinigan (Exhibit A-11, SN pp 80 to 90).

3.15 Mr Robert Roy, Chief of the Special Investigations Section, explained the delay of 38 days between the date of Mr Klein’s letter of February 20, 1981 (Exhibit A-6) and his own letter dated March 30, 1981 (Exhibit A-2). Mr Klein’s letter, addressed to “Mr Marcil”, was kept by the latter for many days. It was then sent to an employee of the Special Investigations Section, a Mr Anctil, and later to a Mr Demers. It took time to obtain the files of the applicant from the file section. Finally the answer was drafted and Mr Roy signed it on March 30, 1981.

4. Law — Cases at Law — Analysis

4.01 Law

Subsections 167(1), (2), (3) and (5), and 244(14) of the Income Tax Act are the main provisions involved in the present case. They read as follows:

167. (1) Where no objection to an assessment under section 165 or appeal to the Tax Review Board under section 169 has been made or instituted within the time limited by section 165 or 169, as the case may be, for doing so, an application may be made to the Tax Review Board for an order extending the time within which a notice of objection may be served or an appeal instituted and the Board may, if in its opinion the circumstances of the case are such that it would be just and equitable to do so, make an order extending the time for objecting or appealing and may impose such terms as it deems just.

(2) The application referred to in subsection (1) shall set forth the reasons why it was not possible to serve the notice of objection or institute the appeal to the Board within the time otherwise limited by this Act for so doing.

(3) An application under subsection (1) shall be made by filing with the Registrar of the Tax Review Board or by sending by registered mail addressed to him at Ottawa 3 copies of the application accompanied by 3 copies of a notice of objection or notice of appeal, as the case may be.

(5) No order shall be made under subsection (1) or (4)

(a) unless the application to extend the time for objecting or appealing is made within one year after the expiration of the time otherwise limited by this Act for objecting to or appealing from the assessment in respect of which the application is made;

(b) if the Board or Court has previously made an order extending the time for objecting to or appealing from the assessment; and

(c) unless the Board or Court is satisfied that,

(i) but for the circumstances menioned in subsection (1) or (4), as the case may be, an objection or appeal would have been made or taken within the time otherwise limited by this Act for so doing,

(ii) the application was brought as soon as circumstances permitted it to be brought, and

(iii) there are reasonable grounds for objecting to or appealing from the assessment.

244. (14) For the purpose of this Act, the day of mailing of any notice of assessment or notification described in subsection 152(4) shall, in the absence of any evidence to the contrary, be deemed to be the day appearing from such notice or notification to be the date thereof unless called in question by the Minister or by some person acting for him or Her Majesty.

4.02 Cases at Law

The parties referred to the following cases:

1. Provisions St-Félix Limitée v MNR, [1980] CTC 2875; 80 DTC 1734;

2. Murray Bowen v La ville de Montréal, [1979] 1 SCR 511;

3. Antonio Arnone v MNR, [1979] CTC 2006; 79 DTC 22;

4. James Wayne Elliott v MNR, [1978] CTC 2919; 78 DTC 1643.

4.03 Analysis

4.03.1 The evidence shows that the notices of reassessment were issued on August 6, 1980. By virtue of subsection 244(14) of the Act quoted above, this date is deemed to be the date of mailing of the said notices.

Despite the evidence that it took time for the employees of the respondent to answer the letter from the applicant’s counsel and to send photocopies of the notices of reassessment (para 3.15), and despite the evidence that the notices of payment were sent late to the applicant by the employees of the respondent (para 3.14), the Board cannot conclude that the notices of reassessment were not issued on August 6, 1980. It is true that the respondent has not given direct evidence of the mailing date, but the deeming subsection, 244(14), still applies.

4.03.2 The main objection of the respondent is that the application does not meet subparagraph 167(5)(c)(ii) of the Act, ie the Board must be satisfied that “the application was brought as soon as circumstances permitted it to be brought”.

4.03.3 The evidence is to the effect that the authorities of the applicant had no knowledge of the existence of the said notices of reassessment dated August 6, 1980, until February 20, 1981. On that day a serious search and a thorough check was made (para 3.06) by the applicant to find the original of the said notices, but nothing was found (para 3.10). They did not have the said notices on hand, therefore it was not possible for them to make any decision as to whether to accept them or to oppose them.

4.03.4 On receipt of the notices of reassessment Mr Klein, after studying them, decided to write to the Chief of Special Investigations trying to eliminate the necessity of the application (para 3.09). Was this the right step? Would the application before this Board be more legal? Mr Klein based his decision on his experience (para 3.09) to try to settle a problem of this nature. It is a fact that most of the problems of taxpayers are settled between the taxpayers’ representatives and the employees of the respondent. However, at that level, it would have been better to make the application immediately. After that, it would always have been possible to have further discussion.

However, Mr Klein, for very serious reasons, needed the first assessments to complete the application and it took more than 15 days for him to succeed in obtaining them (para 3.12).

Probably, if Mr Klein had started to write the application at the beginning of April, it would have been completed during the third week of April, and possibly before the departure of Mr Wexelman for Antigua.

4.03.5 Even if Mr Klein’s action in writing to Mr Roy was really an error, can the Board reproach the applicant? Two judgments (Arnone and Elliott) referred to by the respondent would be a basis for an answer in the affirmative. However, the decision of the Supreme Court in the Bowen case must be followed:

. . . in accordance with the principle that a party may not be deprived of his rights on account of an error of counsel where it is possible to rectify the consequences of such error without injustice to the opposing party . . .

Moreover, I am inclined to think that this principle was in fact the “substratum” of section 167 of the Act. Many taxpayers, indeed, before the enactment of the new Act had lost their rights because of errors made by an agent or lawyer.

4.03.6 There is another requirement that the applicant had to meet. It is given in subparagraph 167(5)(c)(iii): “there are reasonable grounds for objecting . . . from the assessment”.

It seems at first glance that the applicant has reasonable grounds to object. According to the applicant:

(a) the assessments are statute barred (para 3.12);

(b) if they are not, the person who supplied the “fictitious invoices”, which are the basis of the said reassessments, has declared an affidavit that the said invoices are valid (para 3.13);

(c) in a case of the same nature (Pacemaker Inc, affiliated company of the applicant) the problem was settled between the parties (para 3.04).

4.03.7 It is the Board’s opinion that “the circumstances of the case are such that it would be just and equitable” to make an order extending the time for objecting.

5. Conclusion

The application is allowed in accordance with the above Reasons for Decision.

Application allowed.