Skinner v. The Queen

Skinner v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-07-03
Neutral citation
2009 TCC 269
File numbers
2006-2969(IT)G, 2007-1950(IT)G
Judges and Taxing Officers
Georgette Anne Sheridan
Subjects
Income Tax Act
Decision Content
Dockets: 2006-2969(IT)G
2007-1950(IT)G
BETWEEN:
SARA DORIS SKINNER, IN HER CAPACITY AS EXECUTRIX
OF THE ESTATE OF RONALD SKINNER, DECEASED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Respondent’s Motions heard jointly on an Agreed Statement of Facts
with the Motions of
Sara Doris Skinner, (2006-2972(IT)G and 2007-1949(IT)G)
on September 4, 2008 at Saskatoon, Saskatchewan
Before: The Honourable Justice G. A. Sheridan
Appearances:
Counsel for the Appellant:
Kurt G. Wintermute
Counsel for the Respondent:
Karen Janke
____________________________________________________________________
ORDER
Upon the Respondent having brought a motion under sections 58 and 65 of the Tax Court of Canada Rules (General Procedure) for the following orders:
1. An Order dismissing the appeals with respect to the 2001 taxation year (#2006‑2972(IT)G and #2006-2969(IT)G) pursuant to paragraph 58(3)(a) of the General Procedure Rules; and
2. An Order determining the following questions of law in relation to the appeals for the 2002 taxation year (#2007-1949(IT)G and #2007‑1950(IT)G), pursuant to paragraph 58(1)(a) of the General Procedure Rules:
a. In order to obtain a deduction for an amount under paragraph 20(l)(j) of the Income Tax Act in computing income for a taxation year, must there be an inclusion in income of an amount by virtue of subsection 15(2) of the Income Tax Act in the final determination of tax liability by the Minister of National Revenue in a preceding taxation year? and
b. If the answer to this is yes, whether the appeals with respect to the 2002 taxation year should be dismissed?
And upon having heard the submissions of counsel and having read the materials filed;
IT IS HEREBY ORDERED THAT:
1. the appeals with respect to the 2001 taxation year (2006-2972(IT)G and 2006-2969(IT)G) are dismissed; and
2. in respect of the appeals for the 2002 taxation year (2007-1949(IT)G and 2007‑1950(IT)G):
(a) the question as to whether, to obtain a deduction for an amount under paragraph 20(l)(j) of the Income Tax Act in computing income for a taxation year, there must have been an inclusion in income of an amount by virtue of subsection 15(2) of the Income Tax Act in the final determination of tax liability by the Minister of National Revenue in a preceding taxation year, is answered in the affirmative; and
(b) given that determination, the appeals for the 2002 taxation year, 2007-1949(IT)G and 2007‑1950(IT)G, are dismissed.
Signed at Ottawa, Canada, this 3rd day of July, 2009.
“G. A. Sheridan”
Sheridan J.
Dockets: 2006-2972(IT)G
2007-1949(IT)G
BETWEEN:
SARA DORIS SKINNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Respondent’s Motions heard jointly on an Agreed Statement of Facts
with the Motions of
Sara Doris Skinner, in her capacity as Executrix
of the Estate of Ronald Skinner, Deceased,
(2006-2969(IT)G and 2007-1950(IT)G)
on September 4, 2008 at Saskatoon, Saskatchewan
Before: The Honourable Justice G. A. Sheridan
Appearances:
Counsel for the Appellant:
Kurt G. Wintermute
Counsel for the Respondent:
Karen Janke
____________________________________________________________________
ORDER
Upon the Respondent having brought a motion under sections 58 and 65 of the Tax Court of Canada Rules (General Procedure) for the following orders:
1. An Order dismissing the appeals with respect to the 2001 taxation year (#2006‑2972(IT)G and #2006-2969(IT)G) pursuant to paragraph 58(3)(a) of the General Procedure Rules; and
2. An Order determining the following questions of law in relation to the appeals for the 2002 taxation year (#2007-1949(IT)G and #2007‑1950(IT)G), pursuant to paragraph 58(1)(a) of the General Procedure Rules:
a. In order to obtain a deduction for an amount under paragraph 20(l)(j) of the Income Tax Act in computing income for a taxation year, must there be an inclusion in income of an amount by virtue of subsection 15(2) of the Income Tax Act in the final determination of tax liability by the Minister of National Revenue in a preceding taxation year? and
b. If the answer to this is yes, whether the appeals with respect to the 2002 taxation year should be dismissed?
And upon having heard the submissions of counsel and having read the materials filed;
IT IS HEREBY ORDERED THAT:
1. the appeals with respect to the 2001 taxation year (2006-2972(IT)G and 2006-2969(IT)G) are dismissed; and
2. in respect of the appeals for the 2002 taxation year (2007-1949(IT)G and 2007‑1950(IT)G):
(a) the question as to whether, to obtain a deduction for an amount under paragraph 20(l)(j) of the Income Tax Act in computing income for a taxation year, there must have been an inclusion in income of an amount by virtue of subsection 15(2) of the Income Tax Act in the final determination of tax liability by the Minister of National Revenue in a preceding taxation year, is answered in the affirmative; and
(b) given that determination, the appeals for the 2002 taxation year, 2007-1949(IT)G and 2007‑1950(IT)G, are dismissed.
Signed at Ottawa, Canada, this 3rd day of July, 2009.
“G. A. Sheridan”
Sheridan J.
Citation: 2009TCC269
Date:20090703
Dockets: 2006-2969(IT)G
2007-1950(IT)G
BETWEEN:
SARA DORIS SKINNER, IN HER CAPACITY AS EXECUTRIX
OF THE ESTATE OF RONALD SKINNER, DECEASED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
2006-2972(IT)G
2007-1949(IT)G
SARA DORIS SKINNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Sheridan, J.
Introduction
[1] The Respondent’s motion arises out of the Appellants’ appeals of the reassessments by the Minister of National Revenue of their 2001 and 2002 taxation years. Briefly summarized, in the 2001 appeals, the Appellants are challenging the Minister’s decision to exclude from their income shareholder loans of $1.1 million reported by the Appellants pursuant to subsection 15(2) of the Income Tax Act and the disallowance of foreign tax credits in respect of that income. In 2002, they are appealing the Minister’s disallowance of a deduction claimed by the Appellants for the repayment of a shareholder loan under paragraph 20(1)(j) of the Act.
[2] Just prior to the hearing of the appeals, the Respondent brought a motion for:
1. An Order dismissing the appeals with respect to the 2001 taxation year (#2006‑2972(IT)G and #2006-2969(IT)G) pursuant to paragraph 58(3)(a) of the General Procedure Rules; and
2. An Order determining the following questions of law in relation to the appeals for the 2002 taxation year (#2007-1949(IT)G and #2007‑1950(IT)G), pursuant to paragraph 58(1)(a) of the General Procedure Rules:
a. In order to obtain a deduction for an amount under paragraph 20(l)(j) of the Income Tax Act in computing income for a taxation year, must there be an inclusion in income of an amount by virtue of subsection 15(2) of the Income Tax Act in the final determination of tax liability by the Minister of National Revenue in a preceding taxation year? and
b. If the answer to this is yes, whether the appeals with respect to the 2002 taxation year should be dismissed?
[3] The hearing of the motion proceeded on an Agreed Statement of Facts, including the documents referred to therein and attached as exhibits, and the pleadings and proceedings in the appeals.
[4] The text of the Agreed Statement of Facts is reproduced below:
1. In 1987, the appellants purchased a condominium (the “Condo”) at #1401 – 4000 Wailea Alanui, Kihei, Hawaii for $846,058.00 USD;
2. On January 17, 2001, the appellants disposed of the Condo for $4,200,000 USD and each paid United States and Hawaiian State Tax of $321,947 USD ($498,502 CDN) on the capital gain;
3. On filing their original T1 individual income tax returns for 2001, the appellants did not report any foreign non-business income, other than the net capital gain realized from the sale of the Condo;
4. On or about December 6, 2001 the appellants and their daughter, Kimberley Dawn South, organized and registered Rondor Investments (USA), LLC (“Rondor”) in the State of California, with the appellants and their daughter as the members of the limited liability company;
5. Rondor’s year end was the last Friday in December of each calendar year, its first fiscal year ended December 28, 2001 and its second fiscal year ended December 27, 2002;
6. On or about November 29, 2001 the appellants each borrowed $1,100,000 CDN from the Yorkton Credit Union in Yorkton, Saskatchewan;
7. On December 18, 2001 the appellants each made a contribution of capital to Rondor in the amount of $1,089,000 CDN and loaned $11,000 CDN to their daughter, who made a capital contribution to Rondor in the amount of $22,000 CDN;
8. On December 19, 2001 each of the appellants borrowed the amount of $1,100,000 from Rondor, and gave Rondor promissory notes;
9. On December 27, 2002 the loans to the appellants remained outstanding;
10. On December 30, 2002 Rondor issued promissory notes to each of the appellants in the amount of $1,089,000 CDN as the return of their capital contributions;
11. On December 31, 2002 Rondor accepted the promissory notes from each of the appellants, together with a cash payment of $11,000 CDN, as payment in full of the loans;
Filing and Assessment History:
2001 Taxation Year – Ronald Skinner
12. On or about April 26, 2002, Ronald Skinner filed his 2001 individual income tax return in Canada and file a Form T2091 designating the Condo as his principal residence, disclosing a capital gain of $2,342,901 CDN and claiming a principal residence exemption in the amount of $2,342,901 CDN. (A copy of Ronald Skinner’s 2002 income tax return is attached as Exhibit A);
13. This 2001 individual income tax return was assessed as filed on June 10, 2002. (A copy of the Notice of Assessment is attached as Exhibit B);
14. On or about March 4, 2003, the Estate of Ronald Skinner (the “Estate”) filed a request with the Canada Revenue Agency (“CRA”), on behalf of Ronald Skinner, to amend his 2001 individual income tax return to include an amount of $1,100,000 pursuant to subsection 15(2) of the Income Tax Act (the “Act”) for an outstanding shareholder loan. The Estate requested that this income be included as foreign non-business income and claimed foreign tax credits in the amounts of $310,554.75 (Federal) and $172,875.58 (Provincial). (A copy of the amended 2001 income tax return is attached as Exhibit C);
15. Ronald Skinner’s amended return was initially assessed as filed and the tax liability assessed as $13,205.23. (Attached at Exhibits D and E are copies of Notices of Reassessment dated April 29, 2003 and May 15, 2003. In the Notice of Reassessment dated April 29, 2003 there was an error in the assessment of Saskatchewan provincial tax that was corrected in the May 15, 2003 Notice of Reassessment.);
16. By Notice of Reassessment dated June 9, 2005 the CRA reversed the inclusion of the amount of $1,100,000 in income, denied the claim for foreign tax credits and reduced the net federal tax payable to $4,167.14. (Attached as Exhibit F is a copy of the Notice of Reassessment and Form T7W-C);
17. This Notice of Reassessment was confirmed by Notification of Confirmation by the Minister dated June 23, 2006 on the basis that the transactions resulting in the subsection 15(2) income and the foreign tax credits in 2001 were a sham or, alternatively, avoidance transactions. (A copy of the Notification of Confirmation is attached as Exhibit G);
2001 Taxation Year – Sara Doris Skinner
18. On or about April 26, 2002, Sara Doris Skinner filed her 2001 individual income tax return in Canada and filed a Form T2091 designating the Condo as her principal residence, disclosing a capital gain of $2,342,901 CDN and claiming a principal residence exemption in the amount of $2,342,901 CDN. (A copy of Sara Doris Skinner’s 2002 income tax return is attached as Exhibit H);
19. This 2001 individual income tax return was assessed as filed on June 6, 2002.
20. On or about March 4, 2003, Sara Doris Skinner filed a request with the CRA to amend her 2001 individual income tax return to include an amount of $1,100,000 pursuant to subsection 15(2) of the Act for an outstanding shareholder loan. Sara Doris Skinner requested that this income be included as foreign non-business income and claimed foreign tax credits in the amounts of $310,499.00 (Federal) and $172,856.00 (Provincial). (A copy of the amended 2001 income tax return is attached as Exhibit I);
21. Sara Doris Skinner’s amended return was initially assessed as filed and the tax owing assessed as $8,091.33. (A copy of the Notice of Reassessment dated March 27, 2003 is attached as Exhibit J);
22. By Notice of Reassessment dated June 3, 2005 the CRA reversed the inclusion of the amount of $1,100,000 in income, denied the claim for foreign tax credits and reduced the net federal tax payable to $2,359.73. (Attached as Exhibit K is a copy of the Notice of Reassessment and Form T7W-C);
23. This Notice of Reassessment was confirmed by Notification of Confirmation by the Minister dated June 23, 2006 on the basis that the transactions resulting in the subsection 15(2) income and foreign tax credits in 2001 were a sham or, alternatively, avoidance transactions. (A copy of the Notification of Confirmation is attached as Exhibit L);
2002 Taxation Year – Ronald Skinner
24. In filing the 2002 individual income tax return on behalf of Ronald Skinner, the Estate claimed a $1,100,000 deduction pursuant to paragraph 20(1)(j) of the Act relating to a repayment of a shareholder loan and claimed a non-capital loss of $1,063,111.11, of which the Estate requested $228,982.00 be carried back to his 1999 taxation year and $288,621.00 be carried back to his 2000 taxation year, leaving a non‑capital loss balance of $545,508.11 available for carryforward. (A copy of the 2002 individual income tax return is attached as Exhibit M);
25. On September 29, 2003 the CRA issued a Notice of Assessment disallowing $1,089,000 of the deduction on the basis that the giving of a promissory note did not constitute repayment. The assessment resulted in no tax liability. (A copy of the Notice of Assessment is attached as Exhibit N);
26. Upon the request of the Estate, the CRA issued a Notice of Determination of Loss dated September 29, 2006 determining the amount of non-capital loss for 2002 to be nil. (A copy of the Notice of Determination is attached as Exhibit O);
27. This Notice of Determination was confirmed by Notification of Confirmation dated January 23, 2007 on the basis that the transactions resulting in the foreign tax credit and subsection 15(2) income in 2001 and the paragraph 20(1)(j) deduction in 2002 were a sham; alternatively, the shareholder loans that resulted in the subsection 15(2) income inclusions are Canadian source income; or, as a further alternative, these transactions were avoidance transactions. (A copy of the Notification of Confirmation is attached as Exhibit P);
2002 Taxation Year – Sara Doris Skinner
28. In filing her 2002 individual income tax return, Sara Doris Skinner claimed a $1,100,000 deduction pursuant to paragraph 20(l)(j) of the Act relating to a repayment of a shareholder loan and claimed a non-capital loss of $1,074,322.44, of which she requested $99,337.00 be carried back to her 1999 taxation year and $117,134.00 be carried back to her 2000 taxation year, leaving a non-capital loss balance of $857,851.44 available for carryforward. (A copy of the 2002 individual income tax return is attached as Exhibit Q);
29. On September 5, 2003 the CRA issued a Notice of Reassessment allowing the deduction as filed. (A copy of the Notice of Reassessment is attached as Exhibit R);
30. On September 29, 2003 the CRA issued a Notice of Reassessment disallowing $1,089,000 of the deduction on the basis that the giving of a promissory note did not constitute repayment. The reassessment resulted in no tax liability. (A copy of the Notice of Reassessment is attached as Exhibit S);
31. At the request of Sara Doris Skinner, the CRA issued a Notice of Determination of Loss dated September 29, 2006 determining the amount of non-capital loss for 2002 to be nil. (A copy of the Notice of Determination is attached as Exhibit T);
32. This Notice of Determination was confirmed by Notification of Confirmation dated January 23, 2007 on the basis that the transaction resulting in the foreign tax credit and subsection 15(2) income in 2001 and the paragraph 20(l)(j) deduction in 2002 were a sham; alternatively, the shareholder loans that resulted in the subsection 15(2) income inclusions are Canadian source income; or, as a further alternative, these transactions were avoidance transactions. (A copy of the Notification of Confirmation is attached as Exhibit U);
The Appeals to the Tax Court of Canada
33. The Estate’s appeals to Tax Court are from the Notice of Reassessment dated June 9, 2005 (subsequently confirmed by Notification of Confirmation dated June 23, 2006) for the 2001 taxation year and from the Notice of Determination of Loss dated September 29, 2006 (subsequently confirmed by Notification of Confirmation dated January 23, 2007) for the 2002 taxation year.
34. Sara Doris Skinner’s appeals to Tax Court are from the Notice of Reassessment dated June 3, 2005 (subsequently confirmed by Notification of Confirmation dated June 23, 2006) for the 2001 taxation year and from the Notice of Determination dated September 29, 2006 (subsequently confirmed by Notification of Confirmation dated January 23, 2007) for the 2002 taxation year.
35. For the 2001 taxation year, the appellants are each seeking to have the Notices of Reassessment vacated.
36. For the 2002 taxation year, the appellants are seeking deductions pursuant to paragraph 20(l)(j) of the Act. These deductions result in non-capital losses, which the appellants are seeking to apply to other taxation years. There is nothing else at issue in the appeals of the 2002 taxation years.
[5] For ease of reference, in these Reasons for Order, the individual assessments from which the Appellants are appealing, that is to say, the Notices of Reassessment for 2001[1] and Notices of Determination/Redetermination of Loss for 2002[2], are referred to collectively as the “2001 Reassessment” and the “2002 Determination of Loss”, respectively. The individual amounts reported by the Appellants as shareholder loans are referred to herein as “the shareholder loan”.
The 2001 Reassessment
[6] In respect of the appeals of the 2001 Reassessment, the Respondent is seeking an order to dismiss the appeals under paragraph 58(3)(a) of the General Procedure Rules on the basis that the Tax Court of Canada does not have jurisdiction to make any order that would result in an increase in the tax assessed. It is an agreed fact that the relief sought by the Appellants is to have the 2001 Reassessment vacated thereby restoring the Minister’s prior assessment in which the shareholder loan was included in their 2001 income. There is no question that this would result in an increase in their tax liability for that year.
[7] Counsel for the Respondent submitted that the jurisprudence is clear and binding on this Court that it is without authority to order an increase in the tax assessed as that would be “tantamount to allowing the Minister to appeal his own reassessment”[3], a power the Crown does not enjoy under the legislation. In support of this contention, the Respondent relied, in particular, on Harris v. Canada, (Minister of National Revenue – M.N.R.)[4], a decision of the Exchequer Court of Canada as well as four more recent decisions of the Federal Court of Appeal, Abed Estate v. Canada[5]; Pedwell v. Canada[6]; Petro-Canada v. Canada[7] and Bruner v. Canada[8].
[8] The Respondent also took the position that, in any case, there is no ground to vacate the 2001 Reassessment: it was issued within the normal reassessment period and as such, is a valid assessment that has nullified and replaced the prior assessment which had included the shareholder loan in income[9]. From this it follows that the prior assessment no longer continues to “subsist”[10] and cannot be revived by an order vacating the 2001 Reassessment. Finally, the Respondent argued that the right of appeal is from the result of the calculation made by the Minister, not from the calculations themselves.[11]
[9] The Appellants submitted that, notwithstanding the remedy sought is an increase in their tax liability, this Court does have jurisdiction to hear their appeals. This position is based on the following arguments:
(a) the principle relied upon by the Respondent that the Court does not have jurisdiction on an appeal to increase an assessment is not applicable to the facts and circumstances of the within Appeals;
(b) to the extent that the jurisprudence has established a general principle that the Court does not have jurisdiction on an appeal to increase an assessment, such general principle is not well-founded based on the governing legislation that provides the Court with its jurisdiction; and
(c) it is the Appellants’ position that the original principle that the Minister cannot appeal his own assessment has been misapplied and misinterpreted in the jurisprudence and has been extended well beyond its intended meaning and purpose.[12]
[10] In support, counsel for the Appellants made a thorough review of the case law immediately prior and subsequent to the Harris decision. Given its central role in the evolution of the jurisprudence it is useful to review the details of the Harris case.
[11] In 1960, Dr. Harris claimed a capital cost allowance deduction of $30,425.80 for a building he was leasing. On reassessment, the Minister disallowed the capital cost allowance deduction in its entirety but allowed a deduction of $775.02 for rent expenses (which Harris had never claimed).[13] Harris appealed the disallowance of the capital cost allowance; the Tax Appeal Board upheld the Minister’s reassessment.
[12] Harris appealed to the Exchequer Court. The Crown’s alternative argument before Thurlow, J. was that if section 18 of the Act was applicable to Harris’ situation, he ought to have been allowed a capital cost allowance deduction of $525, but nothing at all for rental expenses. If its contention were to be upheld, the Crown submitted that the proper remedy would be to allow the appeal and refer the matter back to the Minister for reassessment on that basis[14]. However, because the Crown had not raised the question of rental expenses in its Reply, it first sought leave to amend its pleadings accordingly. The Court rejected the Crown’s request on the following basis:
17 I do not think … this is the correct way to deal with the matter. On a taxpayer's appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing the $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court. The application for leave to amend is therefore refused. [Emphasis added.][15]
[13] The Court ultimately determined that Harris was entitled to a capital cost allowance deduction of $525 but went on to dismiss the appeal on the following basis:
… as it is thus not shown that the deduction to which [Harris] is entitled under s. 18 exceeds the $775.02 which the Minister, in my opinion, wrongly allowed as rent, the amount of tax assessed against the appellant is not in excess of his liability therefore and it follows that he has no cause to complain that his appeal fails.[16]
[14] As mentioned above, counsel for the Appellants reviewed the cases which have expressly or by implication relied on Harris, including some appellate court decisions. Before considering his arguments in that regard, however, it is useful to review the more recent Federal Court of Appeal decisions considered by counsel for the Appellants and relied on by the Respondent, the earliest of which is Abed Estate v. Canada[17]. The relevant portion of that judgment is the Court’s conclusion that:
[m]oreover, the Court could not, in my view, render a judgment which could, for certain years under consideration, result in a higher assessment than the assessment under attack. The Trial Division, therefore, should not have reserved to Mr. Abed the right to agree to the application of the reserve provisions of section 85B.[18]
[15] A similar conclusion regarding the limitations on the Court’s powers under subsection 171(1) was reached by the Federal Court of Appeal in Pedwell v. Canada. In that case, the taxpayer challenged the inclusion in his personal income of some $180,000 which, according to the Minister’s basis of assessment, he had appropriated from the sale proceeds of certain land owned by his corporation. At trial, the Tax Court judge found that no such appropriation had been made and allowed the appeal; however, the Court then went on to refer the assessment back to the Minister for reconsideration and reassessment on the basis of his finding of fact that the sale proceeds from certain other properties owned by the corporation had been appropriated by the taxpayer.
[16] The taxpayer appealed to the Federal Court of Appeal to have the decision of the Tax Court quashed on the ground that the transactions involving the other properties had not formed the basis of the assessment under appeal and could not, therefore, underpin the Court’s disposition. Rothstein, J.A. (as he then was) agreed and allowed the appeal on the following basis:
Here, on his own motion, the Tax Court Judge, in his decision and after the completion of the evidence and argument directed to the Minister’s basis of assessment, changed the basis of that assessment without the appellant having the opportunity to address the change. This is clear because the Tax Court judgment allowed the appellant’s appeal i.e., found that there was no appropriation of property which was the basis of the Minister’s assessment, but then referred the matter back to the Minister to reassess on the basis that the [other properties not under appeal] were appropriated. What has taken place is tantamount to allowing the Minister to appeal his own reassessment.[19] [Emphasis added.]
[17] This theme continues in Petro-Canada v. Canada where the issue under appeal was the Minister’s disallowance of a portion of certain seismic data expenses claimed by the taxpayer. The taxpayer had claimed a deduction based on a fair market value of the seismic data of approximately $46 million; upon reassessment, the Minister reduced that amount to some $8.9 million. At trial, the Tax Court judge found as a fact that the fair market value of the seismic data was only $4.7 million, about half the amount actually allowed by the Minister. However, on the basis of Harris, the Minister “could not and did not”[20] argue that the seismic data deduction allowed by the Minister in the assessment under appeal ought to be reduced to accord with the Court’s findings.
[18] However, there was also before the Court the matter of a consent judgment pursuant to which the Minister had agreed to allow the taxpayer an additional deduction of $700,000 in respect of scientific research and experimental development expenses.
[19] In his disposition of the case, the Tax Court judge dismissed the appeal in respect of the seismic data issue but also refused to give effect to the consent judgment in respect of the scientific research and experimental development expenses because the taxpayer had already been allowed a deduction for seismic data expenses that “… exceeded its entitlement by much more than $700,000, and the ultimate issue before [the Court] was the correctness of the assessment under appeal, …”[21].
[20] The taxpayer appealed. The Federal Court of Appeal accepted the trial judge’s finding that the fair market value was less than the amount allowed on assessment and citing Harris, affirmed his dismissal of that aspect of the appeal. However, the Court overturned his refusal to give effect to the consent judgment on the following basis:
… Refusing Petro-Canada’s rightful claim to the deduction for scientific research and experimental development had the same effect as an order allowing the claim but reducing Petro-Canada’s seismic expense deduction by the same amount. It is as though the Judge had allowed, in part, the Crown’s appeal of the seismic data deduction. The Judge was doing indirectly what he could not have done directly. In my view, the Judge erred in failing to give effect to the consent judgment.[22] [Emphasis added.]
[21] The last of the appellate decisions cited above, Bruner v. Canada, was an appeal by the Crown of the Tax Court’s dismissal of its motion seeking the dismissal of the taxpayer’s appeal as being from a nil assessment. The narrow issue before the Federal Court of Appeal was whether the principle that there can be no appeal from a “nil assessment” under the Income Tax Act is equally applicable to an appeal under the Excise Tax Act. The somewhat unusual facts of this case are summarized in the reasons of the Tax Court judge:
[3] Mr. Bruner incorporated the company on July 4, 1994. From the outset, he has been the sole shareholder, officer and director. Its directing mind is his. The company and Mr. Bruner both became registrants under the provisions of Part IX of the Act on July 7, 1994. The first reporting period for each of them ended on July 31, 1994. On July 5, 1994, Mr. Bruner registered the trade name "More Black Ink" under the Ontario Business Names Act. It cost him $60.00 to do so. On July 29, 1994, he sold that trade name to the company, and in payment for it the company gave him a non-interest bearing promissory note with a face value of $l trillion dollars ($1,000,000,000,000), having a maturity date 499 years in the future, that is on July 29, 2493. Mr. Bruner alleges that this was a commercial transaction carried out in furtherance of a business to be conducted by the company, the details of which I need not go into for purposes of these motions. At the same time, the company gave a second promissory note to Mr. Bruner (the GST note) purportedly to satisfy its obligation under section 165 of the Act to pay goods and service tax (GST), and to satisfy Mr. Bruner's obligation to collect it. This was also a non-interest bearing note, but payable to the bearer on demand, in the amount of $70 billion dollars ($70,000,000,000), which of course is 7% of $1 trillion. Under the terms of this note, the company was entitled to offset against its obligation to pay the face amount to the bearer any amounts owed to the company by the bearer. On or about July 31, Mr. Bruner filed a GST return for the company for the reporting period ending July 31, 1994. On August 30, he filed a GST return for himself, for the same period. Along with the return, he tendered the GST note, purportedly to satisfy his liability to remit GST that he had collected on the sale transaction. Ignoring for present purposes the effect of one or two other small transactions carried out by the company, the purported effect of these returns was the following. The Appellant reported sales of $1 trillion, and liability to remit GST collected, at the rate of 7%, in the amount of $70 billion. He claimed to have satisfied that liability by the tender of the GST note. The company claimed an input tax credit of $70 billion, and a net tax refund of that amount.
…
[4] Both notices of appeal [Both Bruner and his company appealed their respective assessments] go on to plead in some detail evidence as to dealings between Mr. Bruner and Revenue Canada over a period of some years during which Mr. Bruner, on behalf of the company, asserted the right to be paid interest in respect of the net tax refund of $70 billion, pursuant to subsection 229(3) of the Act. The quantum of this interest sought on behalf of the numbered company is not specified in either notice of appeal. Counsel for the Respondent stated in argument that the amount of interest at issue is approximately $300 million. My own rough calculation verifies that it is indeed in that order of magnitude. This is the pot of gold that Mr. Bruner hopes to retrieve at the end of his personal rainbow.[23]
[22] The Tax Court judge had premised his refusal to grant the Crown’s motion, in part, on the different tax consequences flowing from a “nil” balance in a GST assessment and a “nil” assessment under the Income Tax Act. In overturning his decision the Federal Court of Appeal held that:
… The provisions of the Income Tax Act relating to assessments and appeals are mirrored in the Excise Tax Act and we see no reason why the principles relating to appeals from nil assessments under the Income Tax Act should not apply to appeals under the Excise Tax Act providing that the principles extend to input tax credits and refunds as well as to liability for tax. …[24] [Emphasis added.]
[23] The Court then went on to make the following statement, the underlined portions of which are relied on by the Respondent in the present matter to support the Crown’s argument that the 2001 appeals ought to be dismissed:
… Consequently, a taxpayer is not entitled to challenge an assessment where the success of the appeal would either make no difference to the taxpayer's liability for tax or entitlement to input tax credits or refunds, or would increase the taxpayer’s liability for tax. When the [taxpayer] took the position that there was no amount in dispute, the Tax Court judge should have applied the nil assessment jurisprudence and quashed the Notice of Appeal.[25] [Emphasis added.]
[24] Counsel for the Appellants took the position that the appellate and lower court decisions relied upon by the Respondent are distinguishable from the Appellants’ case; specifically, in respect of Bruner, counsel argued that unlike the taxpayer in that case, the Appellants are not appealing from a nil assessment nor were their appeals brought under the Excise Tax Act.
[25] Counsel also argued that there is nothing in the appeal provisions of the Income Tax Act to limit expressly a taxpayer’s right of appeal to a reduction of tax. The restriction on the Minister’s powers can be traced to the legislation itself, i.e. the right to appeal is conferred exclusively on the taxpayer; the Minister’s recourse against his own assessment lies in his right, subject to certain limitations, to reassess “at any time”[26]. Following his review of the case law, counsel contended that although the jurisprudence is clear that the Court’s role is to determine whether the Minister’s assessment of tax is “correct in law and in fact”[27], the shorthand description in Harris (“basically whether the assessment is too high”[28]) has been improperly applied to prevent a taxpayer from seeking an increase in the tax assessed. This result has been achieved, he argued, without consideration of the language used in subsection 169(1) or subsection 171(1) and without regard to whether it was the Minister seeking the increase, the taxpayer or both, by mutual agreement[29]. Having read the cases cited with some care, I must agree with counsel that the evolution of the Harris principle seems to have occurred without direct analysis of the underlying legislative provisions and on the assumption that the prohibition against the Minister’s seeking an increase of his assessment is equally applicable to the taxpayer. This is perhaps understandable in view of the dearth of taxpayers petitioning the Court for a tax increase. However, as can be seen from the present circumstances and given the complexities of the Act in its application and operation, it is not inconceivable that a taxpayer might wish to challenge the correctness of an assessment on the basis that the tax assessed was too low.
[26] While I am sympathetic to counsel’s argument, I am bound by the jurisprudence to reject it. The lack of any express limitation of a taxpayer’s right of appeal to a reduction in tax under the equivalent provisions in the Excise Tax Act was noted by the Tax Court judge in Bruner[30]; while not specifically attracting any negative comment from the appellate Court, nor did that analysis prevent his decision from being reversed. In my view, the combined effect of the appellate Court’s conclusions in Bruner that “[t]he provisions of the Income Tax Act relating to assessments and appeals are mirrored in the Excise Tax Act …”[31] and that a taxpayer is “… not entitled to challenge an assessment where the success of the appeal … would increase the taxpayer’s liability for tax”[32] precludes this Court from finding in the Appellants’ favour on this point.
[27] Counsel for the Appellants also sought to distinguish the present case on the basis that, in none of the binding authorities cited by the Respondent was it the taxpayer who was seeking an increase in the tax assessed. He also urged the Court to consider that, although the Appellants are seeking an order that would result in a higher assessment for 2001, their ultimate goal in appealing the 2001 and 2002 taxation years is a reduction in their tax liability. In support of this contention, he underscored the fact that in reassessing the 2001 and 2002 taxation years, the Minister himself treated them as a “package deal”[33]: the bases of the 2001 Reassessment and the 2002 Determination of Loss are identical; the same transactions spanning 2001 and 2002 were considered in respect of each taxation year; and the corresponding legislative provisions relied on by the Minister are premised on the occurrence of certain events over a course of years.
[28] Firstly, notwithstanding the interconnectedness of the 2001 Reassessment and 2002 Determination of Loss, the fact remains that a taxpayer’s right of appeal under subsection 169(1) arises from the assessment for each individual taxation year. As for the Appellants’ other contention, the Tax Court has considered and rejected the argument that a taxpayer (as opposed to the Minister) can seek an increase in the tax assessed. In Cohen v. M.N.R.[34], a General Procedure case, the taxpayer challenged the Minister’s disallowance of his inclusion in income of interest in the year under appeal as part of a larger strategy to force the Minister to reassess prior years to reduce certain interest amounts already included in income in those years. Although Rip, J. (as he then was) allowed the appeal on another basis, he had this to say in respect of the remedy initially sought by the taxpayer:
… The Court can consider an appeal for an assessment of tax only when relief sought is in the form of a reduced amount of tax for the year under appeal: Vide: No. 526 v. M.N.R., 20 Tax A.B.C. 114; 58 D.T.C. 497, Neil L. Boyko et al. v. M.N.R., [1984] C.T.C. 2233 at page 2237; 84 D.T.C. 1233 at 1237; and Steven Cooper v. M.N.R., [1987] 1 C.T.C. 2287 at 2301; 87 D.T.C. 194 at page 205. The Court has no authority to increase tax in a taxation year properly before it even if such a decision may result in reduced taxes for other years.[35]
[29] Finally, counsel for the Appellants submitted that the nature of the remedy sough