1455257 Ontario Inc. v. The Queen

1455257 Ontario Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-08-07
Neutral citation
2020 TCC 64
File numbers
2012-4138(IT)G
Judges and Taxing Officers
Gabrielle St-Hilaire
Subjects
Income Tax Act
Decision Content
Docket: 2012-4138(IT)G
BETWEEN:
1455257 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 21 and October 22, 2019, at Toronto, Ontario.
Before: The Honourable Justice Gabrielle St-Hilaire
Appearances:
Counsel for the Appellant:
Domenic Marciano
Eric Torelli
Counsel for the Respondent:
Craig Maw
AMENDED JUDGMENT
The appeal from an assessment bearing number 1191785, dated October 18, 2010, made under the Income Tax Act, is dismissed with costs to the Respondent, in accordance with the attached Reasons for Judgment.
This Amended Judgment is issued in substitution of the Judgment dated July 22, 2020 for the purpose of correcting the spelling of counsel for the Appellant’s name.
Signed at Ottawa, Canada, this 7th day of August 2020.
“Gabrielle St-Hilaire”
St-Hilaire J.
Citation: 2020 TCC 64
Date: 20200807
Docket: 2012-4138(IT)G
BETWEEN:
1455257 ONTARIO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
St-Hilaire J.
I. Introduction
[1] This is an appeal from an assessment made under section 160 of the Income Tax Act, (Act). [1] Section 160 is a collections provision that authorizes the Minister of National Revenue (Minister) to recover a tax debt from a person who has received a transfer of property from a non-arm’s length debtor for inadequate consideration.
[2] The parties agree that the Appellant, 1455257 Ontario Inc. (257), received a transfer of $998,460 from 1473661 Ontario Limited (661) in 2003. This transfer was made for no consideration at all. Mr. Enrico Lisi was the sole shareholder, sole director and sole officer of both 257 and 661 such that the two corporations were not dealing at arms-length. 257 was a management company; it managed the affairs of 661 as well as that of other corporations. 661 was involved in the construction business. Mr. Lisi had signing authority on the bank accounts of both 257 and 661.
[3] The Minister assessed the Appellant pursuant to section 160 of the Act for an amount of $702,374.01, that being the lesser of the amount transferred and 661’s tax liability as of October 18, 2010, the date of the assessment (the subject assessment). The subject assessment was made on the basis that 661 transferred funds to the Appellant on January 3, 2003 when 661 had a tax liability in respect of its 2000 taxation year.
II. Issues
[4] The core issue before the Court in this appeal is whether the amount assessed against the Appellant under section 160 of the Act is correct. In the circumstances of this appeal, this raises two sub-issues: (i) whether 661 had a tax liability in respect of its 2003 taxation year or any preceding taxation year when it transferred property to the Appellant; and (ii) whether the Minister’s calculation of interest accrued on 661’s tax liability is correct. In answering the question regarding 661’s tax liability, the Court must determine whether non‑capital losses available to 661 with respect to its 2002 taxation year ought to have been carried back to its 2000 taxation year.
III. Background Information
[5] The Appellant, 257, was incorporated in 2000 under the Ontario Business Corporations Act, [2] and was dissolved in 2007. During the course of these proceedings, the Respondent took the position that a dissolved corporation lacks the capacity to pursue an appeal of its assessment in the Tax Court of Canada and brought a motion to adjourn the appeal to allow the Appellant to revive its corporate status. In granting the motion in 1455257 Ontario Inc. v The Queen, [3] the Tax Court concluded that upon dissolution, the Appellant ceased to exist and unless and until revived, it lacked the capacity to pursue its appeal. The Tax Court adjourned the appeal to allow the Appellant time to take the necessary steps to revive its corporate status. The Appellant appealed this order. In 1455257 Ontario Inc. v The Queen, [4] the Federal Court of Appeal confirmed that the Appellant, as a dissolved corporation, lacked the capacity to pursue an appeal of its assessment in the Tax Court of Canada. The Appellant then took the necessary steps to revive its corporate status.
IV. The Law Regarding Section 160 of the Act and Application of the Criteria
[6] In Livingston v R, [5] the Federal Court of Appeal set out the criteria that must be met for the application of section 160 of the Act. These criteria are based on the wording of subsection 160(1) and can be expressed simply as follows:
1) There must have been a transfer of property;
2) The transfer must be made between persons not dealing at arm’s length;
3) The fair market value of the property transferred must have exceeded the fair market value of the consideration given by the transferee; and
4) The transfer was made by a person who had a liability under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.
[7] The parties agree that the first three criteria are met. The transfer of funds in the amount of $998,460 from 661 to the Appellant on January 3, 2003 was a transfer of property for no consideration between two corporations who were not dealing at arm’s length.
[8] The fourth criterion is in issue. This criterion requires that the transfer be made by a person (661 in this case) who had a tax liability in or in respect of the taxation year in which the property was transferred (2003 in this case) or any preceding taxation year. The Appellant’s position is that 661 did not have a tax liability in respect of its 2000 taxation year in the amount that led to the subject assessment. The Appellant submits that non-capital losses incurred in 661’s 2001 and 2002 taxation years were carried back or ought to have been thereby reducing 661’s taxable income for its 2000 taxation year.
[9] The Minister reassessed 661’s taxation year ending on October 31, 2000 on the following dates:
• August 13, 2001 (initial assessment);
• April 24, 2002 (application of loss carry-back from 2001);
• October 23, 2003 (application of loss carry-back from 2002);
• January 14, 2005 (adjustments and overall decrease to loss carry‑back from 2001 as a result of the Grosvenor settlement); and
• November 20, 2008 (application of the loss carry-back from 2003).
I will refer to the 2008 assessment, the latest assessment, as the “underlying assessment”.
[10] In its notice of appeal, the Appellant raised the issue of its right to challenge the correctness of the underlying assessment. It is my view that the Appellant is entitled to challenge the correctness of the underlying assessment made against 661 on any grounds that would have been available to 661 had it appealed its assessment directly. In Gaucher v R, the Federal Court of Appeal wrote as follows:
It is a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties. […] When the Minister issues a derivative assessment under subsection 160(1), a special statutory provision is invoked entitling the Minister to seek payment from a second person for the tax assessed against the primary taxpayer. That second person must have a full right of defence to challenge the assessment made against her, including an attack on the primary assessment on which the second person’s assessment is based. [6]
[11] The Appellant is not bound by the underlying assessment even if it is final for 661 and no longer open to objection and appeal by 661. [7] I note that the Respondent did not address this issue in its reply to notice of appeal and did not challenge the Appellant’s position at the hearing.
V. Burden of Proof
[12] Although not specifically raised in the pleadings, at the hearing, both parties briefly addressed the issue of who bears the burden of proving that the underlying assessment is correct. In assessing the Appellant, the Minister proceeded on the assumption that 661 had a corporate tax liability pertaining to its 2000 taxation year of not less than $702,374.01 including penalties and interest as of October 18, 2010. The Appellant submits that the Minister bears the burden of proof regarding the correctness of the underlying assessment and appears to take the position that this principle applies to all cases in which liability is assessed pursuant to section 160 of the Act. I am of the view that the Appellant has the burden of proving that the underlying assessment is incorrect.
[13] The ordinary rule with respect to the onus of proof in tax appeals was set out by the Supreme Court of Canada in Johnston v MNR, [8] and reiterated in Hickman Motors Ltd. v R, wherein Justice L’Heureux-Dubé wrote as follows:
The Minister, in making assessments, proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098 (Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment (Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C. 5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact assumptions made by the Minister but no more: First Fund Genesis Corp. v. The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340. [9]
[14] This general rule which puts the burden of proof on the taxpayer “is not to be lightly, capriciously or casually shifted” although there may be instances where it is appropriate to shift the burden to the Minister.
[15] In Voitures Orly Inc./Orly Automobiles Inc. v R, the Federal Court of Appeal expressed its view on the burden of proof as follows:
To sum up, we see no merit in the submissions of the appellant that it no longer had the burden of disproving the assumptions made by the Minister. We want to firmly and strongly reassert the principle that the burden of proof put on the taxpayer is not to be lightly, capriciously or casually shifted. There is a very simple and pragmatic reason going back to over 80 years ago as to why the burden is on the taxpayer: see Anderson Logging Co. v. British Columbia, (1925) S.C.R. 45, Pollock v. Canada (Minister of National Revenue) (1993), 161 N.R. 232 (F.C.A.), Vacation Villas of Collingwood Inc. v. Canada (1996) 133 D.L.R. (4th) 374 (F.C.A.), Anchor Pointe Energy Ltd. v. Canada, 2003 FCA 294. It is the taxpayer’s business. He knows how and why it is run in a particular fashion rather than in some other ways. He knows and possesses information that the Minister does not. He has information within his reach and under his control. The taxation system is a self-reporting system. Any shifting of the taxpayer’s burden to provide and to report information that he knows or controls can compromise the integrity, enforceability and, therefore, the credibility of the system. That being said, we recognize that there are instances where the shifting of the burden may be warranted. This is simply not one of those cases. [emphasis added] [10]
[16] In Anchor Pointe Energy Ltd. v R, the Federal Court of Appeal restated the principle succinctly as follows: “It is trite law that, barring exceptions, the initial onus of proof with respect to assumptions of fact made by the Minister in assessing a taxpayer’s tax liability and quantum rests with the taxpayer.” [11]
[17] Several decisions of this Court [12] have recognized both the general rule regarding the burden of proof as well as the exception that provides that there are circumstances in which fairness will require that the burden be shifted to the Minister to show that the assessment is correct.
[18] One often cited example of an exception to the general rule is where the facts are peculiarly or exclusively within the Minister’s knowledge. This case is not one of those cases. In this appeal, the facts are squarely within the knowledge of the Appellant through Mr. Lisi who is the sole shareholder, director and officer of both the Appellant and 661 and as such, the information is within his reach and under his control and counsel for the Appellant did not argue otherwise. For example, Mr. Lisi testified that Mr. Derrick Wright, a partner at BDO Dunwoody LLP, was his accountant until around 2009 and that he spoke with him about the Grosvenor losses several times over a number of years. In addition, Mr. Lisi testified that he had several conversations with Canada Revenue Agency (CRA) employees from the collections department regarding 661’s balance owing.
VI. Loss carry-back
[19] The Appellant’s subject assessment is based on 661’s tax liability for its 2000 taxation year and includes interest accrued up to October 18, 2010. 661’s carry‑back of losses to its 2000 taxation year is at the center of the main issue in this appeal. Appendix B provides an overview of 661’s carry back of losses as well as the source of the unused losses that are central to this dispute.
[20] 661’s income for its 2000 taxation year was $8,469,700, net of $14,239 of losses claimed from previous years.
[21] 661 incurred non-capital losses as a partner in the Grosvenor Services 2000 Limited Partnership (Grosvenor LP) for 2001 and subsequent years [13] and requested carryback of its share of the losses (Grosvenor losses) for taxation years including 2001, 2002 and 2003 to its 2000 taxation year.
[22] In its 2001 taxation year, 661 had Grosvenor losses of $6,566,808 and carried back these losses to its 2000 taxation year. As a result of this loss carry‑back, 661’s taxable income for the 2000 taxation year was reduced to $1,902,892. The Minister assessed this loss carry‑back by Notice of Assessment dated April 24, 2002.
[23] In its 2002 taxation year, 661 had Grosvenor losses of $2,147,666 and carried back part of these losses in the amount of $1,902,892 to reduce its 2000 taxable income to nil. The Minister assessed this loss carry‑back by Notice of Assessment dated October 23, 2003. At this point, 661 had a remaining loss balance of $244,797 for 2002. [14]
[24] Following an audit of Grosvenor LP and as a result of a subsequent settlement which was binding on all partners, 661’s Grosvenor losses for the 2001 taxation year were reduced to $4,033,959.71 (a decrease of $2,532,848.29) and its losses for the 2002 taxation year were increased to $2,412,306 (an increase of $264,640). [15] The Minister reassessed 661’s 2000 taxation year on January 14, 2005 and decreased the loss carry-back from 2001 to reflect the losses as determined by the settlement. Hence, 661’s taxable income for its 2000 taxation year increased.
[25] The parties agree that the changes that resulted from the Grosvenor settlement left 661 with a closing balance of losses in the amount of $509,437.17 [16] (the unused losses) for its 2002 taxation year and further, that the 2002 loss balance was never applied to 661’s 2000 taxation year. [17]
[26] 661 requested that losses in the amount of $1,827,051 incurred in its 2003 taxation year be carried back to its 2000 taxation year. [18] The Minister assessed this loss carry‑back by Notice of Reassessment dated November 20, 2008 thereby further decreasing 661’s taxable income for the 2000 taxation year.
[27] On December 8, 2010, the Appellant made an access to information and privacy (ATIP) request and received the ATIP disclosures on or around October 12, 2011. [19] During examinations for discovery, as read-in at trial, the Appellant acknowledged that it was only in 2011, through the ATIP request, that it discovered that it had non-capital losses from 2002 that had not been applied to its 2000 taxation year. [20]
[28] I note that the 2002 unused losses of $509,437.17 are at the root of the dispute between the parties. In a nutshell, the Appellant takes the position that a prescribed form requesting the carry back of the 2002 unused losses to 661’s 2000 taxation year was not required and further that it would have been impossible for 661 to comply with that formal requirement. The Respondent takes the position that the Minister may, but could not be required to reassess 661’s 2000 taxation year to apply the 2002 unused losses and further, that 661 did not request, in prescribed form or otherwise, that the unused losses be carried back to its 2000 taxation year.
[29] Paragraph 111(1)(a) of the Act provides that, in computing taxable income, a taxpayer may carry non-capital losses back three years. There is no dispute that 661 could request that its non-capital losses incurred in taxation years ending in 2001 and 2002 be carried back to 2000 when it filed its returns for those years. In fact, the 2001 losses and part of the 2002 losses were applied to reduce its 2000 taxable income by reassessments of 661’s 2000 taxation year in April 2002 and October 2003 respectively. Further, 661 requested a loss carry back of its 2003 losses to its 2000 taxation year and these losses were applied to reduce its taxable income. The issue that remains is whether the balance of losses for 2002 which were never applied to 2000 should have been applied to reduce 661’s taxable income and if so, when.
[30] Paragraph 111(1)(a) of the Act authorizes a taxpayer to deduct non-capital losses, subject to the restrictions found in subparagraphs 111(1)(a)(i) and (b)(i). Neither party has submitted that these restrictions are an impediment to the deduction of 661’s 2002 unused losses.
[31] In my view, paragraph 111(1)(a) of the Act is a permissive deduction in light of the preamble of subsection 111(1) which reads “there may be deducted such portion as the taxpayer may claim” [emphasis added]. There is nothing in the provision to suggest that 661 had to deduct its 2002 unused losses in its 2000 taxation year nor that the Minister could force it to do so. Support can be found for this view in the Federal Court of Appeal decision in CCLI (1994) Inc. v R, wherein the Court wrote as follows:
A more important problem with this interpretation is that it fails to respect the choice that Parliament has given to taxpayers in the first line of subsection 111(1). As I read subsection 111(1), only the taxpayer has the right to choose how to allocate the non-capital loss of a particular year between the 3 prior years and the 7 subsequent years, subject only to the restrictions in subparagraphs 111(3)(a)(i) and 111(3)(b)(i). Although in a given situation a taxpayer may be content to allow the Minister to choose how its losses may be applied, nothing in section 111, except subparagraphs 111(3)(a)(i) and 111(3)(b)(i), gives the Minister any legal basis for imposing on a taxpayer a particular allocation. [emphasis added] [21]
[32] I find that it was 661’s right to choose how to allocate its 2002 losses and more importantly, that the Minister had no legal basis to impose on 661 an obligation to apply its 2002 unused losses to the 2000 taxation year.
[33] Hence, the question now becomes whether 661 requested that its 2002 unused losses be applied to its 2000 taxation year and more specifically, what it had to do to make such a request.
[34] The mechanism by which a taxpayer may request a loss carry-back and the corresponding obligation on the Minister to reassess is provided by subsection 152(6) of the Act which reads in part as follows:
152 (6) Reassessment where certain deductions claimed [carrybacks] Where a taxpayer has filed for a particular taxation year the return of income required by section 150 and an amount is subsequently claimed by the taxpayer or on the taxpayer's behalf for the year as
(c) a deduction […] under section 111 in respect of a loss for a subsequent taxation year,
by filing with the Minister, on or before the day on or before which the taxpayer is, or would be if a tax under this Part were payable by the taxpayer for that subsequent taxation year, required by section 150 to file a return of income for that subsequent taxation year, a prescribed form amending the return, the Minister shall reassess the taxpayer's tax for any relevant taxation year (other than a taxation year preceding the particular taxation year) in order to take into account the deduction claimed. [emphasis added]
[35] Reduced to its bare essentials, subsection 152(6) of the Act provides that when a taxpayer has filed a return for a particular taxation year as required by section 150 and an amount is subsequently claimed by the taxpayer by filing a prescribed form amending the return, the Minister shall reassess. Thus, assuming the conditions under section 150 are met, the Minister is required to reassess when the taxpayer has requested a loss carry-back by filing a prescribed form. Of course, this must be done within the period provided for in the Act. In effect, subsection 152(6) in combination with subparagraph 152(4)(b)(i) of the Act extends the normal reassessment period by a further three years. [22]
[36] Subsection 152(6) of the Act also provides the period within which the taxpayer may file the prescribed form. Again, reducing the relevant portion of the provision to its bare essentials, subsection 152(6) provides that the taxpayer may request a loss carry-back by filing a prescribed form on or before the day the taxpayer is required by section 150 to file a return of income for that taxation year. In applying this part of the provision to the facts of this case, 661 could request that its 2002 losses be carried back to its 2000 taxation year on or before its filing due date of July 31, 2002 for its taxation year ending in 2002. [23] As mentioned earlier, 661 did request a loss carry-back of $1,902,982 from its 2002 taxation year to its 2000 taxation year and was reassessed accordingly on October 23, 2003. [24] 661 now wishes to carry back the unused losses from its 2002 taxation year to reduce the 2000 taxable income that resulted from the revised Grosvenor losses.
[37] By letter dated April 2, 2004, the Minister advised 661 that a settlement, binding on all partners, had been reached on March 31, 2004 in the Grosvenor LP matter and that the Minister had made a determination of losses for the period from 2000 to 2007. Both the letter and the attached Notice of Determination set out the changes to the Grosvenor losses in the aggregate but not for each partner although it did refer to the units held by 661 according to the Minister’s records.
[38] The Appellant submits that it was therefore impossible to comply with a requirement to file a prescribed form to request a loss carry-back on or before July 31, 2002 because the increase in 661’s taxable income for 2000 and the determination of the Grosvenor losses it now wanted to carry back to 2000 were partly the result of the 2004 settlement. The changes that resulted from the Grosvenor settlement were reflected in the January 14, 2005 reassessment of 661’s 2000 taxation year.
[39] The Respondent’s position is stated as follows in paragraph 27 of the Agreed Statement of Facts (Partial):
The Respondent takes the positon that 661 could only carry back the Subject Unapplied Loss if (and only if) it had filed a “prescribed form” following the Grosvenor LP Loss Determination Settlement in or around April 2, 2004, requesting the loss carry back of the Subject Unapplied Loss (of $509,437 in 2002) to 661’s 2000 taxation year, in accordance with section 152(6) of the ITA. The Respondent takes the position that the required “prescribed form” (for purposes of section 152(6) of the ITA) was/is (for 1998 and later taxation years) a T2Sch4. [emphasis added]
The Respondent submits that not only is there no prescribed form in this case but also further submits that 661 did not make any written request for the carry-back of the unapplied losses from its 2002 taxation year to its 2000 taxation year at any time during the extended assessment period. During his submissions, Counsel for the Respondent was asked to address the issue regarding the impossibility of filing a prescribed form “in accordance with section 152(6)” because the provision required that the prescribed form be filed by July 31, 2002 while the need to carry back the unused losses arose out of the 2004 Grosvenor settlement. If I understand the Respondent’s argument, once the timeframe within which the Minister can reassess pursuant to subparagraph 152(4)(b)(i) of the Act, that is three years beyond the normal reassessment period, has expired, the year is statute‑barred and the Minister does not have to reassess to apply the unused losses. Counsel for the Respondent suggested that there might be a right to apply to the Federal Court for a review of the Minister’s administrative decision to refuse to reassess.
[40] At trial, Counsel for the Appellant acknowledged that they could not provide the Court with a prescribed form to show 661’s compliance with subsection 152(6) of the Act, nor could they provide the Court with any document evidencing 661’s request for the carry back of the 2002 unused losses. [25] Rather, the Appellant submits that subsection 152(6) is a permissive provision and that compliance with the requirements of the provision is not mandatory on 661, although the Appellant argues it is mandatory on the Minister. The Appellant submitted, “this Court can find on the basis of oral testimony that the increased loss request would have been made to, but not processed by, the CRA.” [26] The Appellant further argued that irrespective of whether 661 made the request, this Court can interpret 661’s original loss carry-back request of approximately 1.9 million from 2002 to 2000 as an “implied request to carry back all losses available from 2002 to the extent needed to eliminate and/or reduce to the maximum extent possible 661’s 2000 income.” [27]
[41] 661 filed a prescribed form to carry-back part of its 2002 losses when it filed its 2002 return. However, it is clearly established that 661 did not file the prescribed form as required by subsection 152(6) of the Act to request a carry‑back of the 2002 unused losses after the 2004 Grosvenor settlement. It is also clearly established that 661 did not make a written request for carry‑back in any form whatsoever.
[42] The Appellant submitted that subsection 152(6) of the Act does not contemplate the filing of an amended prescribed form and further, that the wording in subsection 152(6) precludes compliance with the provision as the Grosvenor settlement was concluded in 2004 when it was too late to comply with the timing of the requirement discussed earlier. Counsel for the Appellant argued that since 661 filed a prescribed form in 2002 in compliance with subsection 152(6), what is contemplated in the circumstances is an amendment to the original request for loss carry‑back. He argued that the Minister needs to consider the intention of the taxpayer and queried “so if we're piggybacking off the original prescribed form, the question then becomes: in light of what happened with Grosvenor, what was the taxpayer's intention?” [28]
[43] Counsel for the Appellant appears to submit that the Minister has authority to reassess 661 beyond the limitation period independently of subsection 152(6) of the Act. Counsel for the Appellant referred to a number of provisions in the Act that, in his view, illustrate a mandatory requirement on the Minister to reassess but an optional requirement on the part of the taxpayer to comply with subsection 152(6) in particular because of the use of the word “if” in the provisions.
[44] I will provide two examples of the provisions referred to by Counsel for the Appellant. He referred to subparagraph 152(4)(b)(i) of the Act which provides that the Minister may reassess after the end of the normal reassessment period only if the assessment is made before the day that is three years after the end of the normal reassessment period and is required under subsection (6)… or would be so required if the taxpayer had claimed an amount by filing the prescribed form. Counsel for the Appellant also referred to subparagraph 161(7)(b)(iii) which speaks to the effect of the carry back of losses on the calculation of interest and uses the wording “if” a prescribed form was filed under subsection 152(6). Counsel again submitted that the reference to “if” suggests that it is an optional requirement, not a mandatory requirement. [29]
[45] I am not persuaded by Counsel for the Appellant’s argument to the effect that the filing of a prescribed form is optional. In my view, what is made optional by the use of the word “if” in reference to the filing of a prescribed form under subsection 152(6) is the taxpayer’s option or right to choose how to allocate the losses of a particular year between prior and subsequent years. However, once the taxpayer has made the choice to carry back the losses, subsection 152(6) of the Act requires that they file a prescribed form.
Waivers and implied requests
[46] At this point, it is useful to recall that in 2003, 661 requested that part of its 2002 losses be carried back to 2000 to reduce its income to nil. Counsel for the Appellant submitted that it would be reasonable to interpret this request for carry back of the 2002 losses in an amount sufficient to reduce its income to nil as providing an “implied request” to apply the 2002 unused losses to reduce the increase in income that resulted from the 2004 Grosvenor settlement. In support of this position, Counsel for the Appellant argued that interpretive principles applicable to waivers [30] should apply to the requirement for a prescribed form under subsection 152(6).
[47] Counsel for the Appellant referred to several cases where the Tax Court of Canada, the Federal Court and the Federal Court of Appeal held that waivers were valid despite their defects. The courts have held that waivers were valid despite the following defects: the use of an incorrect form such as a letter, [31] the lack of clarity of the terms of a waiver, [32] the omission of the taxpayer’s name, [33] or the omission of a corporate seal. [34] Counsel for the Appellant submits that these cases support the view that although 661 did not file the prescribed form to request that the 2002 unused losses be carried back, this should not prevent this Court from finding that there was an implied request for loss carry back and that is sufficient.
[48] In reviewing the cases the Appellant relied on, it is clear that they share a common feature, that of involving a signed waiver or a letter, an actual document, that the Court could interpret by referring to relevant evidence to determine the validity of the waiver. For example, in Solberg, the Federal Court, Trial Division, spoke of technical defects, which did not impair the substance of the waiver and found that “the appropriate approach to the interpretation of the waiver is to seek to ascertain the intention of the parties as expressed in that document together with any relevant circumstances for which evidence is available (emphasis added).” [35] In Mitchell, the Federal Court of Appeal wrote that the intention was abundantly clear and the letter provided all the information required by a waiver in prescribed form. [36]
[49] I am not persuaded by the Appellant’s argument that the principles applied in the waiver cases ought to be applied in this case to support the position that 661’s original loss carry back request is sufficient to serve as a request for carry back of the unused losses.
[50] Earlier in these reasons, I expressed my view that paragraph 111(1)(a) of the Act is a permissive deduction; only the taxpayer has the right to choose how to allocate their losses and the Minister has no basis to impose a particular allocation on the taxpayer subject to the restriction referred to earlier. It follows that the taxpayer must make the request for loss carry back. Subsection 152(6) of the Act requires that this be done by filing a prescribed form within a prescribed timeframe. The Appellant concedes that 661 did not file a prescribed form. Nor did 661 file any document specifically requesting a loss carry back that this Court could review in light of other evidence to ascertain the intention of the parties as expressed in that document.
[51] However, what is unusual in the circumstances of this case is that even if 661 had filed a prescribed form, it could not have complied with the requirement to do so within the required timeframe. In light of this and in light of the evidence at trial regarding the CRA’s audit manual, I am prepared to consider whether, although not on a prescribed form, there was sufficient information on which the Minister could rely to apply the 2002 unused losses to the 2000 taxation year following the changes that resulted from the Grosvenor settlement.
[52] Although an auditor’s view of how the Act should be interpreted is generally irrelevant, in this case, it is useful to consider testimony on how the CRA was applying subsection 152(6) based on an internal policy. Mr. Jonathan Smith, the auditor on the Grosvenor LP file, testified that he was familiar with an audit policy on loss carry-back. When asked about the policy, Mr. Smith testified as follows: [37]
Q. Okay. But have you read any internal CRA instructions, whether from an audit manual or otherwise, with respect to the processing of loss carryback requests?
A. No.
Q. And have you read any document that reflects the substance of the highlighted portion below, which reads:
“Where an internally generated adjustment results in an increase to income and a loss of another year has been applied to that year, the taxpayer registrant will be given the opportunity to amend the loss application.” (As read)
Have you ever read any documents at the CRA that's in line with that instruction?
A. Have I read something, or am I aware of such a...
Q. Let's start with reading.
A. Have I read it? No.
Q. Are you aware of it?
A. Yes.
Q. You're aware of this requirement?
A. I'm aware that we always give the taxpayer the opportunity to request losses in writing, yes.
Q. You're aware that the CRA gives the opportunity to the taxpayer to amend a loss application?
A. Yes.
Q. Yes? And what does that mean? What is your understanding of that policy?
A. It's a matter of them just requesting in writing, and then we amend the loss.
Q. So is it a separate loss request? Is it amended to the original --
A. If they made an original loss and then they want to amend it, they're going to send in a separate request for an amended loss.
Q. Okay. So you're aware of that policy at the CRA?
A. I'm aware generally that people have to request loss amendments or original loss applications in writing, yes.
Q. Okay. And when it says giving the taxpayer the opportunity to amend it, does that require any sort of communication between the CRA and the -- from the CRA to the taxpayer?
A. Yes, I'm not necessarily going to get into a situation where we're going to interpret those terms, but...
Q. So generally, it's your understanding that you don't need to reach out to the taxpayer?
A. I'll be reaching out to the taxpayer by -- to issue a T7W-C which will show our amended loss. Then the taxpayer would know to actually say, “Okay, I think I want to change the loss at some point in the future.”
[53] To summarize, Mr. Smith acknowledged that the CRA has a policy of giving the taxpayer an opportunity to amend their loss application when an internally generated adjustment results in an increase in income and a loss from another year has been applied to that year. The circumstances of this case appear to be directly contemplated by that policy, since an adjustment to 661’s losses made following the 2004 Grosvenor settlement resulted in an increase in income for its 2000 taxation year, which had been previously reduced to nil by losses carried back from 2002. Hence, it appears that the CRA reassessed taxpayers who amended their loss applications even when that was not in strict compliance with subsection 152(6) of the Act. Mr. Smith testified that the CRA would reach out to the taxpayer through a T7W-C, a form showing the amended loss and then would expect the taxpayer to communicate with the CRA to advise of whether and how they want to amend their loss application.
[54] On April 2, 2004, Mr. Smith wrote to Mr. Lisi and 661 to inform them of the Grosvenor settlement. In his letter, Mr. Smith expressed the loss determination as an aggregate and as an amount per unit. Mr. Smith wrote that CRA records indicated that 661 had 116.4400 units in Grosvenor LP and included the telephone number at which he could be reached. Mr. Smith testified that he was involved in the Grosvenor LP audit and would have generated T7W‑Cs for individual partners but was not involved in the reassessment of the partners’ losses. Any documents specific to a taxpayer such as a T7W‑C would have been put in that taxpayer’s return file. Mr. Smith testified that the documents associated with the Grosvenor audit including copies of the T7W‑Cs were eventually culled as the matter was settled.
[55] The documents sent to the Appellant as part of the ATIP disclosure included a T7W‑C addressed to 661 showing that the losses for its 2001 taxation year had been reduced by $2,532,848.29, from $6,566,808.00 to $4,033,959.71. The ATIP disclosure also included a “Revised Non‑Capital Loss Schedule” prepared by Mr. Smith. Mr. Smith testified that he would typically attach a Revised Loss Schedule to the T7W-C and that these documents would be sent to Sudbury where the reassessments were prepared and issued.
[56] The Revised Loss Schedule disclosed through the ATIP request had a column showing 661's 2001 and 2002 losses carried back to its 2000 taxation year. The second column entitled “CRA” showed the revised losses of $4,033,959.71 as well as their carry back to 2000. The document also showed that the losses for 2002 were revised to $2,412,306.17. This amount was the amount typed in for “loss applied to 2000” and then scratched out by hand and replaced with $1,902,892. Mr. Smith testified this was his handwriting and explained that he would have put the $2,412,306 amount thinking that there was a possibility that the taxpayer would request that loss to be carried back. He testified that the CRA would give the taxpayer the opportunity to use the losses available but that it was ultimately up to the taxpayer to decide whether they wanted to use the losses or not. Mr. Smith asserted that it was not his role to reach out to individual partners and added: “It's up to them to really say, you know, once they become aware of what they actually can claim to make that request because I'm not in a position to assume that's the best thing for their loss or that's the loss application they prefer to make. I can't make that determination.” [38]
[57] Mr. Smith testified that he did not send the Revised Loss Schedule containing his handwritten scratch outs to 661. Although he could not confirm it because the file was culled, Mr. Smith testified that he believed that the following Revised Loss Schedule was sent to 661 with the T7W‑C for the 2000 taxation year:
1473661 Ontario Limited
Revised Non-Capital Loss Schedule
Taxpayer
CRA
April 22/2001 Opening Balance
$0.00
$0.00
2001 Loss
$6,566,808.00
$4,033,959.71
Loss applied to Oct. 31/2000
($6,566,808.00)
($4,033,959.71)
April 22/2001 Closing Balance
$0.00
$0.00
Jan. 31/2002 Opening Balance
$0.00
$0.00
2002 Loss
$2,147,666.00
$2,412,306.17
Transferred on Amalgamation
$23.00
$23.00
Loss applied to 2000
($1,902,892.00)
($1,902,892.00)
Jan 13/2002 Closing Balance
$244,797.00
$509,437.17
The T7W‑C indicated that the revised taxable income was $2,532,849.29 but did not indicate 661’s loss balance subsequent to the Grosvenor settlement and corresponding adjustments to 661’s 2000 taxation year. However, the loss balance of $509,437.17 was indicated on the November 20, 2008 notice of reasse