Cie Price Ltée v. R., [1998] 1 CTC 3055, 97 DTC 800

Lamarre Proulx T.C.J.:

This is a motion by the respondent under section 54 of the Tax Court of Canada Rules (General Procedure) (the “Rules”) asking the Court for leave to amend the Reply to the Notice of Appeal in each of the appeals, which were joined for hearing purposes. The points at issue in the instant appeals include the tax treatment of spare parts purchased by the appellant for the purposes of the operation of its business.

Section 54 of the Rules reads as follows:

A pleading may be amended by the party filing it, at any time before the close of pleadings, and thereafter either on filing the consent of all other parties, or with leave of the Court, and the Court in granting leave may impose such terms as are just.

For the 1979 to 1983 taxation years, the appellant’s spare parts were considered as inventory under subsection 10(5) of the Income Tax Act (the “Act”) and the appellant was assessed on that basis.

For the 1984 to 1987 taxation years, the Minister of National Revenue (the “Minister”) first assessed the appellant with respect to the spare parts as inventory, then, relying on the decision by the Federal Court, Trial Division, in Stearns Catalytic Ltd. v. R., (1990), 90 D.T.C. 6286 (Fed. T.D.), subsequently assessed the appellant on the basis that the spare parts were capital property and, for capital cost allowance purposes, class 8 property under Schedule II of the Income Tax Regulations (“Regulations”).

Thus for the 1984 to 1987 taxation years, the issue for the appellant concerned only the determination of the class of depreciable property to which the spare parts belonged. The appellant contended for its part that the spare parts were class 29 property, which granted the appellant a higher capital cost allowance rate and enabled it to claim the investment tax credit if the property also met the requirements of subsection 127(9) of the Act.

The amendment of the replies for which leave is being sought states once again that the spare parts constituted inventory [1] for the years 1984 to 1987. In Donohue Normick Inc. c. R. (1995), 95 D.T.C. 5667 (Fed. C.A.), the Federal Court of Appeal provided certain useful tests for determining whether spare parts are inventory or capital property and it is in this perspective that counsel for the respondent wishes to amend the Reply to the Notice of Appeal.

In order to obtain leave to amend the replies, counsel for the respondent also relied on the judgment of the Federal Court of Appeal in Canderel Ltd. v. R. (1993), 93 D.T.C. 5357 (Fed. C.A.), in which, after reviewing the case law, Décary J.A. wrote at page 5360:

...the general rule is that an amendment should be allowed at any stage of an action for the purpose of determining the real questions in controversy between the parties, provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interests of justice.

Counsel for the appellant objected to the proposed amendment, submitting that to permit such an amendment would be to permit a reassessment and that only the Minister may assess. He explained that it was not the legal costs that were important with respect to this amendment, but rather the costs that a change in the grounds accepted by the Minister in making his assessment could cause for the appellant.

In this aspect of the argument, counsel for the appellant relied on the now classic solution in tax case law that the right of appeal from an assessment is essentially in respect of the amount assessed, not of the grounds on which the Minister relied in order to achieve the result, and, on this point, he cited Pratte J.A. in Bowater Mersey Paper Co. v. R. (1987), 87 D.T.C. 5382 (Fed. C.A.), at page 5383:

First, it is simply untrue that the rule in Abrahams does not apply in cases where, in spite of the reassessment, the taxpayer retains an interest in the solution of an issue relating to a prior assessment. This presupposes that a taxpayer may appeal from alleged errors made by the Minister in calculating the tax owed by him. There is no such right of appeal. The right of appeal that exists is from the result of the calculation made by the Minister, not from those calculations.

He also cited Hugessen J.A. in Consumers Gas Co. v. R. (1986), 87 D.T.C. 5008 (Fed. C.A.), at page 5012:

In the light of these conclusions, it is perhaps unnecessary that I express any final opinion on a procedural argument raised by respondent. Briefly stated that argument is that the Minister cannot now be heard to urge that the receipts in question should be brought into income since that is not the treatment he accorded to them in his original notice of assessment. Instead the Minister’s position originally was that the receipts should be used to decrease the undepreciated capital cost base. Since the Minister cannot appeal from his own assessment, it is the respondent’s submission that the Minister could not change his position before the Trial Division so as to urge that amounts which he had heretofore treated as capital receipts should now be brought into income.

I cannot agree with this submission. What is put in issue on appeal to the courts under the Income Tax Act is the Minister’s assessment. While the word “assessment” can bear two constructions, as being either the process by which tax is assessed or the product of that assessment, it seems to me clear, from a reading of sections 152 to 177 of the Income Tax Act, that the word is there employed in the second sense only. This conclusion flows in particular from subsection 165(1) and from the well established principle that a taxpayer can neither object to nor appeal from a nil assessment.

The position of the Minister, who, in making his most recent assessment for the 1984 to 1987 taxation years, allowed the spare parts as capital property, favoured the appellant. The appellant is understandably disappointed by the potential change in the future method of assessing. In law, however, in order to arrive at the result of the assessment, the respondent may plead other grounds than those used in making the assessment, the only constraint being that the amount of the assessment may not be increased, as ruled in Harris v. Minister of National Revenue (1964), 64 D.T.C. 5332 (Can. Ex. Ct.) and restated in well-settled case law on this point.

Relying on the cases cited above, I see no reason to deny leave to amend the replies to the notices of appeal and the replies are therefore amended as requested by the respondent.

Costs will follow the outcome of the instant appeals.

Motion granted.