Modlivco Inc. v. Her Majesty the Queen, [1996] 3 CTC 2484, 96 DTC 1516

Lamarre Proulx J.T.C.C.: — This is an appeal from a reassessment made by the Minister of National Revenue (the “Minister”) after reasons for judgment were read at the close of a common hearing of the appeals of four taxpayers, among them, the appeal of a Mr. Donald W. McTavish and that one of Modlivco Inc., the Appellant in the present instance.

During the common hearing of the aforementioned appeals from four taxpayers, the parties had decided to agree on the disputed issues with the exception of one, that is, an amount of $60 000.00 allegedly paid by Modlivco to Mr. McTavish. This amount of $60,000 was shown as a salary expense of Modlivco in its financial statement and had been included by the Minister in Mr. McTavish’s income for the year 1982. This matter was left to the appreciation of the presiding judge in respect of the appeal of Mr. McTavish. No mention was made of the resulting effect on the appeal of Modlivco.

In his reasons for judgment as well as in his formal judgment the presiding judge allowed the appeal of Mr. McTavish respecting the amount of $60,000. The judge stated that this amount should not have been included in Mr. McTavish’s income for the year 1982. The judge remained silent as to the disallowance of this amount from the expenses claimed by Modlivco, although this amount was shown in its statement of expenses.

The reasons for judgment were read on April 19, 1991, the day following the end of the hearing which had gone on for two days. The formal judgment was issued in writing on May 19, 1991. On April 29, 1991, the Minister assessed the Appellant in accordance with the oral judgment. On April 30, 1991, he issued an additional assessment disallowing the salary expense.

In his Amended Notice of Appeal, the Appellant gave as its reasons of appeal:

27. The Appellant states that the Minister is bound by agreements reached with the taxpayer and approved by this Court.

28. The Appellant was in any event entitled to deduct the sum of $60,000 from its income in the 1982 taxation year.

29. Finally, the Appellant states that if the assessment dated April 30, 1991 is an additional assessment and not a reassessment, it was not issued with the obligatory diligence.

Evidence was adduced at the time of hearing on the deductibility of the expense of $60,000 by the Appellant. At the end of the hearing, the reasons for judgment of the presiding judge were entered as Exhibit A-13.

In reading the reasons for judgment that were tendered as Exhibit A-13, it became more and more evident to me that the amount of $60,000 had been an issue considered by the presiding judge when rendering his judgment, and did not appear as an issue only incidentally considered. The matter then became, in my view, not a matter as to whether the Minister was bound by his consent, but whether there was res judicata in respect of this amount.

Therefore, I consider the question at issue in the present appeal whether the Minister was prevented by the rule of the res judicata to make the reassessment in question, although he was still within the time limit prescribed by subsection 152(4) of the Income Tax Act (the “Act”) to reassess the Appellant.

The amount of $60,000 was mentioned several times in the reasons for judgment of the presiding judge in a manner that should be characterized as fundamental rather than incidental. (Angle v. Minister of National Revenue, [1975] 2 S.C.R. 248, 74 D.T.C. 6278, 2 N.R. 397)

I quote from the reasons for judgment, at page 17, what the presiding judge said concerning the agreement reached between the parties:

Après la première journée d’audition, la Cour a réalisé qu’elle devait accorder aux appelants une partie assez substantielle des dépenses contestées et elle en a fait part aux procureurs des parties.

Les parties se sont rencontrées et après une demi-heure de discussion, ils se sont entendus de la façon suivante:

The presiding judge goes on to determine the issue of each appeal and concludes by saying:

Le seul point en litige est de déterminer si le montant de soixante mille dollars (60 000 $) est imposable en 1981.

There was no mention by the Respondent to the presiding judge of the possible effect of his decision in the McTavish appeal on the appeal of Modlivco.

Let us continue with the reasons for judgment. There is a first mention of the amount of $60,000 at page 13 where subparagraph 3 d) of the Reply to the Notice of Appeal in the matter of Mr. McTavish is reproduced:

3 d) the second amount totalled $60,000.00 (deducted as a salary expense by Modlivco during its 1982 taxation year);

There are several other mentions of this amount at pages 19, 20, 21 and 22, where the following is said:

(page 19)

Monsieur McTavish a témoigné qu’il n’avait jamais reçu de soixante mille piastres (60 000 $) de la compagnie; pendant le six (6) années antérieures à mil neuf cent quatre-vignt-un (1981), il a vécu à même son capital de quelques cent cinquante mille dollars (150 000 $) qu’il avait investis dans la compagnie.

En contre-interrogatoire, le procureur de l’intimé a eu recours aux états financiers de la compagnie pour démontrer:

1 ) que le montant de soixante mille dollars avait été déduit comme dépenses des revenus de la compagnie;

2) que le même montant figurait comme prêt payable à l’appelant;

(page 20)}

3) qu’en mille neuf cent quatre-vingt-un (1981), l’appelant avait retiré son cent cinquante mille dollars (150 000 $) de la compagnie indiquant une balance zéro;

4) que le montant de soixante mille dollars (60 000 $) avait été crédité l’appelant indiquant un prêt de soixante mille dollars (60 000 $) par l’appelant à sa compagnie;

5) le montant est encore dans les livres de la compagnie aujourd’hui et la compagnie est encore active.

Le procureur de l’appelant a plaidé que l’appelant n’avait jamais reçu un salaire de soixante mille dollars (60 000 $) en quatre-vingt-un (81) ou en quatre-vingt-deux (82) et que la compagnie n’avait jamais fait de tels déboursés.

Vu que le ministre a refusé les déclarations de dix mille dollars (10 000 $) de salaire par anne pour les six (6) annes, il aurait dû annuler le tout.

(page 21)

Il soutient que c’est une erreur qui a été commise par les fonctionnaires du département. Ils ont présumé un salaire en quatre-vingt-un (81) alors que l’appelant était sur une comptabilité de caisse et qu’il n’avait jamais touché à cet argent.

Il réfère la Cour au témoignage de monsieur Fryer l’effet que le salaire n’a jamais été reçu ni versé. D’après lui, l’inscription est fausse et le soixante mille dollars (60 000 $) n’existe pas; “une somme qui n’est pas reçue ne doit pas être imposée” surtout pour un contribuable qui utilise la comptabilité de caisse.

Le procureur de l’intimé a soutenu que la compagnie avait déclaré un salaire et que l’appelant était en droit de prêter cet argent à la compagnie; même si l’appelant n’a pas été payé en chèque, l’entrée est suffisante pour démontrer que l’argent a été reçu.

La preuve a démontré que la compagnie n’avait pas d’argent pour payer soixante mille dollars (60 000 $) à l’appelant et que les entrées dans les états financiers de la compagnie avaient été faites que pour régler une situation confuse.

Les fonctionnaires du département ont commis une erreur; au lieu d’annuler la déduction du salaire de soixante mille dollars (60 000 $) non payé, ils ont imposé le contribuable pour un salaire non reçu; ils savaient que le salaire n’avait pas été payé et ils auraient dû annuler le tout.

(page 22)

Pour décider de cette question, la Cour préfère se fier à la substance de la transaction plutôt qu’à la forme.

Pour toutes ces raisons, la Cour décide ce qui suit:

1) l’appel de la compagnie Modlivco Inc. pour son anne d'imposition mil neuf cent soixante-dix-sept (1977) est rejeté;

2) l’appel de la compagnie Mobile Homes Ltd. pour la partie intitulée

“Allocation du cot en capital au montant de 26 650,48 $” est rejeté;

3) l'appel de la compagnie Modlivco Inc. est accordé en partie pour ajouter des dépenses additionnelles de sept mille quatre cent soixante-quinze dollars (7 475 $) et annulé la pénalité impose en vertu de l'article 163(2) de la Loi;

4) l’appel de la compagnie Le Marquis Mobile Home Ltd. est accordé en partie pour ajouter des dépenses additionnelles de quatre mille quatre cent soixante-cinq dollars (4 465 $) et annulé la pénalité imposée en vertu de l’article 163(2) de la Loi;

5) l’appel de monsieur Quantz est accordé en partie pour diminuer l’avantage personnel de l’appelant d’un montant de sept mille huit cent vingt et un dollars (7 821 $) et annulé la pénalité imposée en vertu de l’article 163(2) de la Loi pour l’année d’imposition quatre-vingt-un (81) et diminué aussi l’avantage personnel de l’appelant d’un montant de sept mille quatre cent soixante-quinze dollars (7 475 $) et annulé la pénalité imposée en vertu de l’article 163(2) de la Loi pour l’année d’imposition mil neuf cent quatre-vingt-deux (1982);

6) l'appel de monsieur McTavish est accordé en partie pour diminuer U avantage personnel de six cent quatre-vingt-dix neuf dollars (699 $) et annulé la pénalité de l’article 163 de la Loi; cette pénalité est aussi annulée pour le salaire de onze mille dollars (11 000 $) qui reste imposable pour l'année d'imposition mil neuf cent quatre-vingt-un ( 1981);

7) Pour ce qui est du soixante mille dollars (60 000 $), l'appel est accordé.

When the reasons for judgment were read counsel for the parties were present. They, with the judge, discussed the allocation of costs concerning the appeal of Mr. McTavish. There was no mention of the effect of the disallowance of the amount of $60,000 from Mr. McTavish’s income on the Appellant’s statement of expenses.

Counsel for the Appellant referred the Court to the decision of this Court in Cie Price Ltée v. R., 95 D.T.C. 236(f), 95 D.T.C. 428(e). This decision was to the effect that the right to appeal a reassessment ensuing upon a judgment is not a right to have the issues decided by that judgment retried but to ensure that the assessment is in accordance with the judgment.

Counsel for the Respondent pointed out that there were two reassessments. The first one was in accordance with the judgment. The second one disallowed the amount of $60 000 as an expense in the calculation of the income but that assessment was within the reassessment period provided for by subsection 152(4) of the Act.

My view on this matter is that this reassessment would be lawful as it has been made within the prescribed time limit, unless it has been made on an issue that has already been litigated and decided by the Court.

Counsel for the Respondent also submitted that the Respondent cannot by consent agree to do something that is not in accordance with the Act and cannot be bound by an apparent consent. It is also true, but the question is whether the matter has been litigated or not.

On this aspect, after having carefully read the aforementioned reasons for judgment, I find that the amount of $60,000 was an amount that had been considered in a fundamental manner by the judge and had been decided upon. [1] The avenues opened to the Respondent, the latter having failed to bring the matter to the attention of the judge at the appropriate time, were possibly a motion to amend the judgment or surely an appeal. [2]

I wish to refer to the same cases on the matter of res judicata that I referred to in my order dated August 1995, that I rendered in the same appeal. I will refer first to the decision of the Judicial Committee of the Privy Council (London, England) in the matter of Thomas v. Trinidad and Tobago (Attorney General) 115 N.R. 313, where Lord Jauncey of Tullichettle stated at pages 316 and 317:

[7] The principles applicable to a plea of res judicata are not in doubt and have been considered in detail in the judgment of the Court of Appeal. It is in the public interest that there should be finality to litigation and that no person should be subjected to action at the instance of the same individual more than once in relation to the same issue. The principle applies not only where the remedy sought and the grounds therefor are the same in the second action as in the first but also where, the subject matter of the two actions being the same, it is sought to raise in the second action matters of fact or law directly related to the subject matter which could have been but were not raised in the first action. The classic statement on the subject is contained in the following passage from the judgment of Wigram, V.C., in Henderson v. Henderson (1843), 3 Hare 100, at page 115:

. where a given matter becomes the subject of litigation, in and of adjudication by, a court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.

In Greenhalgh v. Mallard [1947] 2 All E.R. 255, Somervell, L.J., at page 257 said:

I think that on the authorities to which I will refer it would be accurate to say that res judicata for this purpose is not confined to the issues which the court is actually asked to decide, but that it covers issues or facts which are so Clearly part of the subject matter of the litigation and so clearly could have been raised that it would be an abuse of process of the court to allow a new proceeding to be started in respect of them.

In the second place, I wish to refer to the decision of the Supreme Court of Canada in Dorion v. Roberge (sub nom. Roberge v. Bolduc), [1991] 1 S.C.R. 374, (sub nom. Dorion v. Roberge) 124 N.R. 1, 78 D.L.R. (4th) 666 and to the following passage of Madam Justice L’Heureux-Dub’s reasons at page 402:

(To the same effect, see Aubry and Rau, Droit civil français (6th ed. 1958), t. 12, No. 769, page 319; Laurent, Principes de droit civil (5th ed. 1893), t. 20, at No. 1, page 5.)

The rationale for this irrebuttable legal presumption of validity of judgments is anchored in public social policy to ensure the security and stability of relations is society. The converse would be anarchy, with the possibility of endless trials and contradictory judgments.

(Dans le même sens, voir Aubry et Rau, Droit civil français (6e éd. 1958), t. 12, no 769, page 319; Laurent, Principes de droit civil (5e éd. 1893), t. 20, au no 1, page 5.)

La raison d’être de cette présomption légale irréfragable de validité des jugements est ancrée dans une politique sociale d’intérêt public visant à assurer la sécurité et la stabilité des rapports sociaux. L’inverse signifierait l’anarchie, avec la perspective de procès sans fin et de jugements contradictoires.

It is in the interest of justice that there is finality in litigation so that the taxpayers are not brought in endless trials for the same issues. In my view, the subject matter of this appeal is the same as the one dealt with by the other judge and “it is sought to raise in the second action matters of fact and law directly related to the subject matter which could have been, but were not raised, in the first action”. The deductibility or non deductibility of the expense of $60,000 was not brought forward because of inadvertence but it properly belonged to the subject of the first litigation.

I therefore conclude that the assessment is not valid as it concerns an issue that has already been decided upon by this Court and the Minister is prevented by the rule of res judicata from assessing twice on the same matter.

Appeal allowed.