Section 222

The taxpayer made a designation on January 17, 1985 under former s. 194(4) of $30 million in respect of scientific research tax credits, which resulted in a Part VIII tax liability of $15 million, for which the taxpayer was assessed under Part VIII on March 26, 1985. In addressing an argument that the assessment was a nullity so that a requirement to pay issued to the taxpayer also was a nullity, Addy, J. stated (at p. 6069):

Liability to pay tax or to pay any amount on account of tax does not depend on any Notice of Assessment. It has long been firmly established that liability is created by statute and exists regardless of whether there has been an assessment by the Minister. ...

The principle was upheld...in...Lambert...76 DTC 6373 (F.C.A.)... .

It was held that under the Act, a debt of the taxpayer to the Crown comes into existence the moment that taxable income is earned, notwithstanding that assessment is not made by the Minister until considerably later. The taxpayer corporation accordingly was insolvent for purposes of section 40 of the Business Corporations Act (Saskatchewan) by virtue of paying dividends equal to all its remaining net assets, including proceeds of disposition of land which it had reported as a capital transaction, notwithstanding that the taxpayer was not reassessed on the basis that the disposition had been on capital account until after the payment of the dividends.

The taxpayer agreed in Montreal on December 15, 1964 to acquire assets of another company for consideration which included the assumption of all corporate income taxes which had been incurred prior to January 1, 1965. The Minister subsequently reassessed the vendor for corporate income taxes on August 14, 1969 and then called upon the taxpayer to discharge this debt. In rejecting the taxpayer’s position that it was not liable for such taxes as they had not yet been assessed at the time of its assumption under the purchase agreement , Noël J stated (at p. 5515):

As to his second argument, namely that the debt arising from re-assessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or re-assessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned, and even if the assessment is made one or more years after the taxable income is earned, the debt is supposed to originate at that point.

The taxpayer claimed losses and other deductions in her 1988 income tax return respecting two sets of transactions (the “Trinity Denton” and “Sierra Trinity” transactions). The taxpayer’s 1993 objection respecting losses from the Trinity Denton transactions was settled in a 1994 settlement agreement. However, except as described below, CRA did not take any action to collect the taxes acknowledged by that settlement to be owing. On January 4, 2011, the taxpayer filed a Notice of Appeal respecting losses from the Sierra Trinity transactions – but due to an error, also disputed the disallowance of the Trinity Denton losses (because new counsel were unaware of the 1994 settlement). This error was identified in the Minister’s Reply. On December 19, 2014, the Minister reassessed (under the “Third Reassessment”) to essentially allow the Sierra Trinity losses, but applied a portion of the resulting refund as repayment (by way of set off) of the taxes owing by the taxpayer under the 1994 settlement.

The taxpayer sought recovery of this collection by way of set-off on the basis that it was contrary to the 10-year collection limitation period (“CLP”) in s. 222(4), and brought this application for judicial review when the Minister’s representative rejected this position, consistent with the CRA published position that the filing of a notice of objection or an appeal to the Tax Court is an acknowledgment of the related tax debt.

In finding that the taxpayer’s appeal to the Tax Court did not constitute an “acknowledgement” of her 1988 tax liability so as to restart the running of the CLP under ss. 222(5) and (6)(b), Strickland J stated (at paras. 66-67, 76):

It would … be absurd if the limitation period could be both restarted by the filing of an appeal to the Tax Court pursuant to s 222(5)(a) and (6)(b) and, at the same time, also be extended pursuant to s 222(8). This could have the result of two different limitation periods running with respect to the same matter. …

[T]he Minister’s general conclusionary statement that filing an appeal with the Tax Court is an acknowledgement of debt, thereby restarting the limitation period, is not justified, intelligible or transparent and is unreasonable … .

… [T]he plain meaning of “acknowledgment” requires an admission or confirmation by the person making the acknowledgment of the thing alleged, be it an admission of liability for damages, blame, responsibility or liability for a tax debt.

In any event , the Appeal did not admit or confirm that the 1988 debt was validly owed and instead “dispute[d] the validity of the amounts assessed” (para. 96).

The application for judicial review was allowed and the matter remitted back to the Minister for redetermination taking into account the above reasons.

The taxpayer claimed losses and other deductions in her 1988 income tax return respecting two sets of transactions (the “Trinity Denton” and “Sierra Trinity” transactions). The taxpayer’s 1993 objection respecting losses from the Trinity Denton transactions was settled in a 1994 settlement agreement. However, except as described below, CRA did not take any action to collect the taxes acknowledged by that settlement to be owing. On January 4, 2011, the taxpayer filed a Notice of Appeal respecting losses from the Sierra Trinity transactions – but due to an error, also disputed the disallowance of the Trinity Denton losses (because new counsel were unaware of the 1994 settlement). This error was identified in the Minister’s Reply. On December 19, 2014, the Minister reassessed (under the “Third Reassessment”) to essentially allow the Sierra Trinity losses, but applied a portion of the resulting refund as repayment (by way of set off) of the taxes owing by the taxpayer under the 1994 settlement.

The taxpayer sought recovery of this collection by way of set-off on the basis that it was contrary to the 10-year collection limitation period (“CLP”) in s. 222(4), and brought this application for judicial review when the Minister’s representative rejected this position, consistent with the CRA published position that the filing of a notice of objection or an appeal to the Tax Court is an acknowledgment of the related tax debt.

After finding that the taxpayer’s appeal to the Tax Court did not constitute an “acknowledgement” of her 1988 tax liability so as to restart the running of the CLP under ss. 222(5) and (6)(b), Strickland J went on to reject the Minister’s position that the CLP was restarted and simultaneously extended pursuant to ss. 222(8) and 225.1(2) when the Appeal was filed. Stickland J stated (at para. 108) that in the Appeal, the Trinity Denton losses:

were not properly raised and therefore were not in controversy when the Appeal was filed. They were improperly included in the Appeal as recognized by the Minister at that time. In the Reply, the Minister correctly took the position that the Trinity Denton matters were not validly subject to appeal pursuant to the terms of the Settlement Agreement.

Finally, Strickland J noted (at para 119):

… [T]he Third Reassessment, undertaken on December 19, 2014, fell outside the March 4, 2014 limitation period expiry and could not extend, restart or revive the exhausted limitation period. Accordingly, the Decision unreasonably found that the Third Reassessment restarted the limitation period.