Lux Operating Limited Partnership v. The Queen

Lux Operating Limited Partnership v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-07-11
Neutral citation
2018 TCC 141
File numbers
2012-3093(IT)G, 2012-3094(IT)G
Judges and Taxing Officers
David E. Graham
Subjects
Income Tax Act
Decision Content
Dockets: 2012-3093(IT)G
2012-3094(IT)G
BETWEEN:
2078970 ONTARIO INC., in its capacity as designated partner of LUX OPERATING LIMITED PARTNERSHIP,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
2078702 ONTARIO INC., in its capacity as designated partner of LUX INVESTOR LIMITED PARTNERSHIP,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard on January 16, 2018 at Vancouver, British Columbia
Before: The Honourable Justice David E. Graham
Appearances:
Counsel for the Applicants:
David R. Davies
Shawn W. Tryon
Counsel for the Respondent:
Michael Taylor
Raj Grewal
ORDER
THIS COURT ORDERS THAT:
1. The question put to the Court pursuant to section 58 of the Tax Court of Canada Rules (General Procedure) is answered in the negative.
2. Costs are awarded to the Applicants for both stages of the application. Although there were two applications, the Applicants shall share one set of costs. The parties shall have 30 days from the date hereof to reach an agreement on costs, failing which the Applicants shall have a further 30 days to file written submissions on costs and the Respondents shall have yet a further 30 days to file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the foregoing time limits, one set of costs shall be awarded to the Applicants as set out in the Tariff.
Signed at Ottawa, Canada, this 11th day of July 2018.
“David E. Graham”
Graham J.
Citation: 2018 TCC 141
Date: 20180711
Dockets: 2012-3093(IT)G
2012-3094(IT)G
BETWEEN:
2078970 ONTARIO INC., in its capacity as designated partner of LUX OPERATING LIMITED PARTNERSHIP,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
2078702 ONTARIO INC., in its capacity as designated partner of LUX INVESTOR LIMITED PARTNERSHIP,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Graham J.
[1] The Lux Operating Limited Partnership and the Lux Investor Limited Partnership both filed information returns reporting business losses in their 2006, 2007 and 2008 fiscal periods. [1] The Minister of National Revenue concluded that neither partnership was a valid partnership. The Minister reached this conclusion based on her conclusion that the partnerships’ members did not carry on business in common with a view to profit. Based on that conclusion, the Minister issued Notices of Determination to the partnerships indicating that they had nil losses in the relevant fiscal periods.
[2] The Applicants argue that the Minister cannot issue a valid Notice of Determination if the Minister has concluded that the partnership in question does not exist. The Respondent disagrees.
[3] The validity of an assessment is different than its correctness. An assessment is invalid if it does not comply with the procedural provisions of the Act. [2] The provisions of the Act dealing with assessments apply equally to determinations. [3] Therefore, a determination is invalid if it does not comply with the procedural provisions of the Act.
[4] The Applicants have asked the court to make the following determination under section 58 of the Tax Court of Canada Rules (General Procedure) (“Rule 58”):
Where the Minister has at all times concluded that no partnership existed, can the Minister issue a valid Notice of Determination in respect of that purported partnership under subsection 152(1.4) of the Income Tax Act?
[5] Technically speaking, Notices of Determination are issued under subsection 152(1.5) after the Minister has made a determination under subsection 152(1.4). Nothing turns on this. The question still remains whether the Minister can make a valid determination in the circumstances.
A. Overview of the Legislation
[6] Before turning to the specific question to be determined, it is worthwhile to review the normal process under the Act for dealing with partnership income and losses.
[7] Partnerships are, with rare exceptions, not persons and not liable to tax under the Act. [4] However, partnerships are required to file information returns in a prescribed form reporting their income or loss as if they were a person (Income Tax Regulations, section 229). The partners of the partnership then report their share of the partnership income or loss in their own tax returns (subsection 96(1)).
[8] The Minister has three years from the day that is the later of the day that the partnership return is due to be filed and the day that it is actually filed to dispute the income or loss reported in the information return (subsection 152(1.4)). If the Minister disagrees with the income or loss reported in the information return, the Minister has two options.
[9] The traditional, less efficient option is for the Minister to reassess each partner individually to adjust the partner’s share of the partnership’s income or loss. I will refer to this option as the “Traditional Process”. Under the Traditional Process, if the partners disagree with the Minister’s view of the partnership’s income, they may individually object to and appeal from their reassessments. The Traditional Process was the only option available to the Minister prior to the introduction of subsection 152(1.4) and related provisions in 1998.
[10] The second, more streamlined option is for the Minister to determine the correct income or loss of the partnership (subsection 152(1.4)). I will refer to this option as the “Streamlined Process”. The Streamlined Process has the advantage of resolving any dispute about the partnership’s income or loss at the partnership level. If the Minister makes a determination under subsection 152(1.4), she then sends a Notice of Determination to the partnership and to each partner who was a member of the partnership during the relevant fiscal period (subsection 152(1.5)). The determination is binding on the Minister and each partner unless it is objected to or the Minister issues a subsequent redetermination (paragraph 152(1.7)(a)). The next steps in the Streamlined Process depend on whether the partnership wishes to dispute the determination or not. If the partnership decides not to dispute the determination, the Minister may then reassess the individual partners to give effect to the determination. Reassessment is an important step in the process because it is the partners, not the partnership, that pay tax. If the partnership decides to dispute the determination, the dispute proceeds through the usual process. The objection and appeal provisions normally applicable to assessments apply to determinations (subsection 152(1.2)). However, one partner, known as the designated partner, disputes the determination on behalf of all of the partners (subsection 165(1.15)). That partner is generally the partner who was designated for that purpose in the information return filed by the partnership. If the dispute is resolved in a way that results in a change in the partnership’s income or loss, the Minister may reassess the individual partners to give effect to the outcome. Again, reassessment is an important step in the process because it is the partners, not the partnership, that pay tax.
[11] It is important to emphasize that the Traditional Process and the Streamlined Process both lead to the same result. The only difference is that, under the Streamlined Process, the objection or appeal is carried out collectively through the designated partner whereas under the Traditional Process it is carried out individually by each partner. Thus, while the Streamlined Process is generally more efficient for all parties, both processes allow the Minister to assess the correct tax and both processes ensure that partners have objection and appeal rights.
B. Application to the Partnerships in Issue
[12] In the Applicants’ case, the Lux Operating Limited Partnership and the Lux Investor Limited Partnership (together, the “Lux Partnerships”) filed information returns reporting business losses. The Minister issued Notices of Determination. The Applicants, being the designated partners for the Lux Partnerships, objected to the determinations. When the Minister confirmed those determinations, the Applicants appealed to this Court.
[13] What sets the Applicants’ case apart from the normal use of subsection 152(1.4) is the Minister’s reason for making the determinations. The Minister did not simply determine that the Lux Partnerships had no losses. The Minister determined that the Lux Partnerships had no losses because the Minister concluded that the purported partners of the Lux Partnerships (the “Lux Partners”) were not carrying on business in common with a view to profit and thus there were no partnerships.
C. Parties’ Positions
[14] The parties have different interpretations of how the process is supposed to work when the Minister concludes that a partnership did not exist.
[15] Both parties accept that, if the Minister concludes that a partnership did not exist, the Minister may use the Traditional Process to reassess the purported partners.
[16] The Applicants take the position that the Traditional Process is the only option available to the Minister. They argue that, once a conclusion has been reached that a partnership did not exist, the Streamlined Process is no longer available to the Minister. They submit that any Notice of Determination issued based on that conclusion is invalid. The Applicants say that the Minister can only determine a partnership’s income to be nil if the Minister concludes that the partnership existed and that its revenue less its expenses equaled zero.
[17] The Respondent goes further. The Respondent says that the Minister can also determine a partnership’s income to be nil if the Minister concludes that the partnership did not exist. The Respondent argues that the Minister’s reason for making the determination does not form part of the determination. The Respondent takes the position that, when the Minister concludes that a partnership did not exist, the Minister still has the option of using the Streamlined Process. The Respondent argues that the Minister may, as she did in the Applicants’ cases, simply issue a Notice of Determination stating that the income of the partnership was nil. In the alternative, the Respondent argues that the Minister may issue a Notice of Determination determining the non-existence of the partnership.
D. Conclusion
[18] I find that the Applicants’ interpretation is correct. If the Minister concludes that a partnership did not exist, the Minister cannot issue a Notice of Determination to the partnership. Her only choice is to reassess the purported partners individually under the Traditional Process. Any Notice of Determination issued to a partnership in these circumstances is invalid.
[19] The following textual, contextual and purposive analysis sets out the reasons for my conclusion.
E. Belief vs. Conclusion
[20] Before turning to the textual, contextual and purposive analysis, I need to first address a question of terminology. Throughout the Respondent’s submissions, counsel for the Respondent referred to the Minister’s “belief” that the Lux Partnerships did not exist. Neither the word “belief” nor any version thereof is used in section 152. The only portion of section 152 that explicitly addresses the existence of a partnership is subsection 152(1.8). Subsection 152(1.8) describes what happens when the Minister or a court “concludes” that a partnership does not exist.
[21] The Respondent’s use of the word “belief” to describe what Parliament has clearly labelled a conclusion unnecessarily clouds the issue before me. More importantly, the question that I have been asked to answer is whether the Minister can issue a valid Notice of Determination if the Minister has at all times concluded that no partnership existed. In the circumstances, examining whether believing is something less than concluding is a pointless exercise. The question before me presupposes that the Minister has reached a conclusion. For this reason, I will avoid referring to the Minister’s beliefs in the rest of these Reasons for Order.
F. Textual Analysis
[22] A textual analysis of subsection 152(1.4) reveals ambiguity in the meaning of the subsection.
[23] The full text of subsection 152(1.4) and of all of the other provisions referred to in these Reasons for Order is reproduced in Appendix “A”. The relevant portion of subsection 152(1.4) states:
The Minister may . . . determine any income or loss of [a] partnership for [a] fiscal period and any deduction or other amount, or any other matter, in respect of the partnership for the fiscal period that is relevant in determining the income, taxable income or taxable income earned in Canada of . . . any member of the partnership for any taxation year under this Part.
[24] The word “partnership” appears throughout subsection 152(1.4). Both parties say that the ordinary meaning of the word supports their position.
[25] The Applicants argue that the use of the word “partnership” throughout subsection 152(1.4) clearly indicates that the provision only applies to partnerships. Thus, the Applicants submit that the subsection cannot be applied where the Minister has concluded that there was no partnership. The Applicants say that it would have been easy for Parliament to insert the phrase “or purported partnership” into subsection 152(1.4) if that had been its intention. They argue that the absence of that phrase indicates that the subsection only applies to actual partnerships.
[26] The Respondent emphasizes that partnerships do not cease to be partnerships simply because the Minister reaches a conclusion. The partners presumably continue to hold a different view. The Respondent refers to the Federal Court of Appeal’s observation in Sentinel Hill Productions IV Corp. v. The Queen that the filing of a partnership information return “in effect constitutes a representation that the entity is in fact and law a partnership”. [5] The Respondent says that whether a partnership existed or not is a question that will ultimately be determined by the courts, not the Minister. The Respondent submits that, until that happens, a partnership that claimed to have been a partnership should be treated as such for the purposes of the Act.
[27] The Respondent submits that there is nothing in the text of subsection 152(1.4) that prevents the Minister from making a determination that a partnership’s income was nil if the Minister has concluded that the partnership did not exist. The Respondent argues that the Minister’s reason for making the determination (i.e. her conclusion that the partners were not carrying on business in common with a view to profit) does not form part of the determination.
[28] The Applicants submit that it is too simplistic to say that the Minister simply determines that a partnership’s income is nil and that her reason for doing so is irrelevant.
[29] I see merit in both parties’ interpretations. The Respondent’s assertion that a partnership did not cease to be a partnership just because the Minister concluded it was not a partnership is sound. If I were dealing with an assessment, the Respondent’s interpretation would be correct. The Minister’s conclusions could not be used to invalidate an assessment. However, a determination is not an assessment. A determination is an expression of the Minister’s position. It is not a statement of fact, not an expression of the partnership’s position and not a prediction of the conclusion that a court may one day reach. Therefore, when making a determination, the Minister’s view is not only relevant, but actually the only thing of relevance.
[30] If the Minister concludes that a partnership did not exist, she has done something different than determining that the partnership’s income was nil. There is a significant difference between having $0 of income and being incapable of having income. Something that does not exist cannot have attributes. The fact that purported partners or the courts may disagree with the Minister’s conclusion that a partnership did not exist does not change the fact that Minister did not determine that the partnership had no income, but rather concluded that it did not exist.
[31] The Respondent counters this argument with an alternative textual interpretation. The Respondent submits that the phrase “or any other matter, in respect of the partnership” in subsection 152(1.4) is broad enough to encompass the question of the partnership’s existence. Thus, the Respondent submits, the Minister may simply determine that a partnership did not exist. [6]
[32] The Applicants counter that the “other matter” referred to in subsection 152(1.4) still has to be “in respect of the partnership”. Thus, the Applicants say that if the Minister has concluded there is no partnership, there is still nothing that the other matter can be in respect of.
[33] I see merit in the Respondent’s alternative position. The words “in respect of” are very broad. [7] I can see how they could capture the existence of a partnership. At the same time, the Applicants’ interpretation is not inconsistent with the text.
[34] Overall, I find that there is ambiguity in the text of subsection 152(1.4). I prefer the Applicants’ textual interpretation on the primary argument and the Respondent’s textual interpretation on the alternative argument but there is certainly room for both interpretations within the ordinary grammatical meaning of the subsection.
G. Contextual Analysis
[35] The contextual analysis of the provisions related to subsection 152(1.4) strongly supports the Applicants’ interpretation. I will deal with some minor contextual provisions before turning to the heart of the matter, namely subsections 152(1.7) and (1.8).
(i) Subsections 152(1), (1.01), (1.1) and (1.11)
[36] Subsection 152(1.4) is not the only provision in section 152 involving determinations. Subsections 152(1.01), (1.1) and (1.11) and paragraphs 152(1)(a) and (b) all deal with other situations where the Minister makes determinations. These provisions highlight that determinations may be either mandatory or permissive. Determinations that the Minister makes as a result of a request by a taxpayer are mandatory. [8] The Minister has no choice but to make a determination and, in fact, is required to do so “with all due dispatch”. By contrast, determinations that the Minister makes independently are permissive. [9] It is entirely up to the Minister whether she makes the determination or not.
[37] Subsection 152(1.4) falls into the permissive category. The fact that subsection 152(1.4) is permissive is important because it means that the Minister is not required to determine a partnership’s income just because the partnership filed an information return. This fact is consistent with both parties’ interpretations. However, from the Applicants’ point of view, it certainly takes away much of the force of the Federal Court of Appeal’s observations in Sentinel Hill. While the filing of a partnership information return certainly “constitutes a representation that the entity is in fact and law a partnership”, [10] that representation does not impose any obligation on the Minister to do anything. If the Minister disagrees with the representation (i.e. if the Minister concludes the partnership did not exist), the Minister does not have to issue a determination.
(ii) Subsections 152(1), (4) and (7)
[38] Subsection 152(1) requires the Minister to assess a taxpayer after a return is filed. Subsection 152(7) allows the Minister to assess a taxpayer in the absence of a return. Subsection 152(4) allows the Minister to assess or reassess a taxpayer beyond the normal reassessment period in certain circumstances.
[39] The Minister can assess a person under these subsections even if the Minister has concluded that the person does not exist. Antle v. The Queen [11] is an example of this technique. Antle involved a transfer of shares from an individual to a trust and then to a third party. The Minister was of the view that the trust was not validly constituted and thus that the resulting capital gains belonged to the individual. However, to protect her position, the Minister assessed both the individual (on the basis that the trust was not validly constituted) and the trust (on the alternative basis that the trust was validly constituted). The Minister knew that only one of those assessments would stand but, by issuing both, ensured that her interests were protected. In the end, the courts concluded that the trust did not exist. As a result, the reassessment of the trust was vacated and the reassessment of the individual was upheld.
[40] It is tempting to say that if the Minister can reassess a person whom the Minister has concluded does not exist (albeit having made that conclusion in the course of assessing another taxpayer), then the Minister should be able to make a subsection 152(1.4) determination of the income of a partnership that the Minister has concluded does not exist. However, I am not persuaded by this logic. There is a significant difference between subsection 152(1), (4) or (7) assessments and a subsection 152(1.4) determination. The purpose of an assessment is to assess tax, penalties and interest. A subsection 152(1.4) determination does not assess tax, penalties or interest. It simply allows for the income or loss of a partnership to be determined in a streamlined manner.
[41] When issuing assessments, the Minister faces risks that are not present when making determinations. In Antle, if the Minister had not assessed both the trust and the individual, she would have run the risk of having assessed the wrong person. If the Minister only assessed the trust and the court had found that the trust had not been validly constituted, the Minister would have been left with nothing. Similarly, if the Minister had only assessed the individual and the court had found that the trust had been validly constituted, the Minister would have been left with nothing. [12]
[42] The same risks are not present with subsection 152(1.4) determinations. Under subsection 152(1.4), the Minister is not choosing between assessing alternative persons. The Minister only ever assesses the partners. If they are partners, then the Minister assesses them and includes the partnership income or losses in their incomes. If they are not partners, the Minister still assesses them, this time to remove the income or losses from their incomes. All that subsection 152(1.4) does is streamline the assessment process.
[43] In summary, the Streamlined Process is not an assessment process. It is something very different. As a result, I do not find contextual comparisons to the subsection 152(1), (4) and (7) assessment processes useful. I am being asked how the Streamlined Process works. It is better to focus the contextual analysis on the provisions that relate to that process.
(iii) Subsections 152(1.2) and (1.9)
[44] While subsections 152(1.2) and (1.9) are part of the Streamlined Process, they do not shed any contextual light. Subsection 152(1.2) simply states that the standard objection and appeal provisions apply to determinations. Subsection 152(1.9) allows for a waiver of the normal determination period.
(iv) Subsections 152(1.5) and (1.6)
[45] The Applicants submit that subsections 152(1.5) and (1.6) support their interpretation. I disagree. I find that these subsections could support either party’s interpretation.
[46] Subsection 152(1.5) states that if the Minister makes a determination under subsection 152(1.4), the Minister shall send a Notice of Determination to the partnership and the partners. The Applicants argue that it would be absurd if the Minister were required to mail a Notice of Determination to a partnership that the Minister had concluded did not exist. I disagree. If Parliament intended the Minister to be able to issue a Notice of Determination concerning the existence of a partnership, then Parliament must have intended the notice to be mailed to someone. If Parliament envisioned that the Minister could not issue a Notice of Determination concerning the existence of a partnership, then the fact that Parliament required other Notices of Determination to be mailed to the partnership does not tell me anything about what Parliament intended to happen when no Notice of Determination could be issued.
[47] Subsection 152(1.6) states that a determination is not rendered invalid simply because one or more of the partners did not receive the Notice of Determination. I am unsure what value subsection 152(1.6) adds to the Streamlined Process since subsection 244(20) already deems anything sent to a partnership to have been provided to each partner. In any event, subsection 152(1.6) does not shed any contextual light on the issue before me. It is consistent with both parties’ positions.
(v) Subsections 152(1.7) and (1.8)
[48] Subsections 152(1.7) and (1.8) are the key to the contextual analysis. They strongly support the Applicants’ interpretation. I will briefly describe the subsections before analyzing them.
[49] Subsection 152(1.7) is the heart of the Streamlined Process. It sets out what happens after the Minister makes a determination. The following are the relevant portions of subsection 152(1.7):
Where the Minister makes a determination under subsection (1.4) or a redetermination in respect of a partnership,
(a) subject to the rights of objection and appeal of the member of the partnership referred to in subsection 165(1.15) in respect of the determination or redetermination, the determination or redetermination is binding on the Minister and each member of the partnership for the purposes of calculating the income, taxable income or taxable income earned in Canada of . . . the members for any taxation year under this Part; and
(b) notwithstanding subsections (4), (4.01), (4.1) and (5), the Minister may, before the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the determination or redetermination, assess the tax, interest, penalties or other amounts payable . . . in respect of any member of the partnership and any other taxpayer for any taxation year as may be necessary to give effect to the determination or redetermination or a decision of the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada.
[Emphasis added.]
[50] In a normal situation where there is no dispute as to the existence of the partnership, subsection 152(1.7) has two effects. The first effect is to provide that, once all objection and appeal rights have expired, the resulting determination or redetermination is binding on both the Minister and the partners (paragraph 152(1.7)(a)). This binding effect is what makes the Streamlined Process streamlined. By making the final determination or redetermination binding, the Minister does not end up relitigating the same issue over and over for each partner.
[51] The second effect of subsection 152(1.7) is to give the Minister additional time to reassess the partners. A dispute under the Streamlined Process may take time and, during that time, the partners’ normal reassessment periods may expire. There is no point in making the result of the Streamlined Process binding on the partners if the Minister cannot reassess them. Therefore, paragraph 152(1.7)(b) gives the Minister a year following the end of the relevant objection or appeal period to reassess the partners without having to prove that the partners made a misrepresentation attributable to carelessness, neglect or wilful default.
[52] The following are the relevant portions of subsection 152(1.8):
Where, as a result of representations made to the Minister that a person was a member of a partnership in respect of a fiscal period, a determination is made under subsection (1.4) for the period and the Minister, the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada concludes at a subsequent time that the partnership did not exist for the period or that, throughout the period, the person was not a member of the partnership, the Minister may, notwithstanding subsections (4), (4.1) and (5), within one year after that subsequent time, assess the tax, interest, penalties or other amounts payable . . . by any taxpayer for any taxation year, but only to the extent that the assessment . . . can reasonably be regarded
(a) as relating to any matter that was relevant in the making of the determination made under subsection (1.4);
(b) as resulting from the conclusion that the partnership did not exist for the period; or
(c) as resulting from the conclusion that the person was, throughout the period, not a member of the partnership.
[Emphasis added.]
[53] At first glance, subsection 152(1.8) appears to set out what happens if the Minister or a court concludes that a partnership did not exist. [13] That is not, however, what it does. Subsection 152(1.8) does not specify what is to happen when the Minister or a court reaches that conclusion. It simply extends the normal reassessment period to give the Minister time to reassess the purported partners following such a conclusion. Subsection 152(1.8) is neither part of the Streamlined Process nor part of the Traditional Process. At the same time, subsection 152(1.8) is not a third process. It is simply a way, in certain circumstances, to assist the Minister in moving from the Streamlined Process to the Traditional Process. If the normal reassessment periods for the purported partners have not yet expired, then the Minister does not need subsection 152(1.8) to move from the Streamlined Process to the Traditional Process. The Minister may simply reassess the purported partners under subsection 152(1). Subsection 152(1.8) only comes into play where the Streamlined Process has been started but is no longer applicable and the purported partners’ normal reassessment periods have expired. It gives the Minister a year to switch from the Streamlined Process to the Traditional Process without having to worry about the purported partners’ normal reassessment periods.
[54] There are three key preconditions that must be met for subsection 152(1.8) to apply. First, the Minister or a court must have concluded that a partnership did not exist. Second, a Notice of Determination must have previously been issued in respect of the partnership. Third, the conclusion must have been reached after the determination was issued. This third precondition is found in the phrase “concludes at a subsequent time”.
[55] Subsections 152(1.7) and (1.8) strongly support the Applicants’ interpretation. The Applicants’ interpretation results in a system in which subsections 152(1.7) and (1.8) work harmoniously together. By contrast, the Respondent’s interpretation requires me to accept that Parliament chose to:
(a) create redundancy in paragraphs 152(1.8)(a) and (b);
(b) unnecessarily introduce the word “concludes” into subsection 152(1.8) when it really meant to use the words “redetermines” and “decides”;
(c) prevent subsection 152(1.8) from applying in circumstances where it logically would apply;
(d) create limitation periods under subsection 152(1.8) that ignored rights of appeal; and
(e) create redundant, yet contradictory, limitation periods under paragraph 152(1.7)(b) and subsection 152(1.8).
[56] I will discuss each of these problems separately.
Why would Parliament make paragraphs 152(1.8)(a) and (b) redundant?
[57] The first problem with the Respondent’s interpretation is that it makes paragraphs 152(1.8)(a) and (b) redundant. In the Respondent’s alternative textual argument, the Respondent argues that the phrase “any other matter in respect of the partnership” includes the question of whether the partnership exists. Paragraph 152(1.8)(a) allows the Minister to reassess tax that can reasonably be regarded “as relating to any matter that was relevant in the making of the determination”. Under the Respondent’s interpretation, the phrase “any matter” in paragraph 152(1.8)(a) would include the existence of the partnership. Yet paragraph 152(1.8)(b) already specifically allows the Minister to reassess tax that can reasonably be regarded “as resulting from the conclusion that the partnership did not exist”. Why would Parliament have included paragraph 152(1.8)(b) if it added nothing new? If the Minister’s interpretation were correct, I would have expected paragraph 152(1.8)(a) to be placed at the end of the list of reasons to reassess and would have expected it to refer to “any other matter” in recognition of the fact that the existence of the partnership was already covered in paragraph 152(1.8)(b). The fact that subsection 152(1.8) is not drafted in this manner undermines the Respondent’s interpretation.
Why would Parliament unnecessarily use the word “concludes”?
[58] The second problem with the Respondent’s interpretation is that it requires me to accept that Parliament unnecessarily used the word “concludes” in subsection 152(1.8). Subsection 152(1.8) only applies if “the Minister, the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada concludes” that a partnership did not exist.
[59] The use of the word “concludes” is unusual. Nowhere else do the Act or the Income Tax Regulations refer to the Minister or the courts concluding anything. Subsection 152(1.7) refers to the Minister making a determination or redetermination and refers to courts making decisions. Why not use that same language in subsection 152(1.8)?
[60] Unfortunately, the Technical Notes that accompanied the introduction of subsection 152(1.8) do not provide any guidance. The Technical Notes state: [14]
New subsection 152(1.8) will come into play where the Minister of National Revenue makes a determination at the partnership level but it is subsequently demonstrated that there is no partnership or that a taxpayer in respect of which an assessment or determination was made on the basis that the taxpayer was a member of the partnership is not, in fact, a member of the partnership.
[Emphasis added.]
[61] The use of the word “demonstrated” is unhelpful. “Demonstrated” neither means “concludes”, nor “redetermines” nor “decides”. The French version of the Technical Notes uses the term “constate”. This term is equally unhelpful.
[62] The Applicants say that Parliament chose to use the word “concludes” because concluding is something different than redetermining or deciding and Parliament wanted to be clear that something different was happening. I agree.
[63] Subsection 152(1.8) does not apply unless the Minister has already made a determination under subsection 152(1.4). Furthermore, subsection 152(1.8) requires that the conclusion made by the Minister or the courts must be made “at a subsequent time”. That indicates that the conclusion must be something separate from the initial determination. It also indicates that the Minister must have changed her mind. In other words, when she made the initial determination she must have accepted that the partnership existed and she must now have reached a different conclusion.
[64] If the Minister had determined a partnership’s income to be one amount, and now thought that she should have determined the income to be some other amount, the normal process would be for the Minister to issue a Notice of Redetermination reflecting that new income. If, as the Respondent argues, the Minister can make a redetermination if she has subsequently concluded that no partnership exists, then why does subsection 152(1.8) say the Minister “concludes” that a partnership did not exist rather than “makes a redetermination” that the partnership did not exist? The Respondent cannot provide a satisfactory answer to this question.
[65] Subsection 171(1) sets out the Tax Court’s power to dispose of an appeal. The powers of the Federal Court of Appeal and the Supreme Court of Canada are the same. These courts have the power to either dismiss or allow an appeal from an assessment. As set out above, subsection 152(1.2) makes the provisions of the Act relating to appeals from assessments apply equally to appeals from subsection 152(1.4) determinations. Therefore, the courts also have the power to either dismiss or allow an appeal from a determination. If a court allows an appeal, the court may either vacate the determination or refer the determination back to the Minister for redetermination on a different basis. In subsection 152(1.7), Parliament used the word “decision” when referring to judgments of a court. Parliament also uses the words “decision” or “decisions” when referring to judgments of a court in subsections 118.1(11), 164(4.1), 171(4), 174(4.1), 223(7), 223.1(1), 225.1(3), 225.1(5), 231.7(5), 232(5), 232(14) and paragraph 191.2(1)(b). So why did Parliament choose to use the word “concludes” in subsection 152(1.8) instead of the more applicable word “decides”? The use of the word “concludes” suggests that, when dealing with the existence of a partnership, the courts are to do something that they would not otherwise do ─ something outside of the courts’ normal decision making process. If Notices of Determination or Redetermination cannot be issued when no partnership exists, then the courts cannot order the Minister to make a redetermination on the basis that no partnership exists. The courts have to be able to conclude that no partnership exists without ordering the Minister to make a redetermination. In these circumstances, it is understandable that Parliament would choose to use “concludes” rather than “decides”.
[66] An example helps to illustrate this problem. Say a partnership filed an information return reporting a $100,000 loss. The Minister reviewed the return and made a determination that the partnership had a $95,000 loss. The partnership did not object. Subsequently, the Minister made a redetermination that the partnership had $1,000 in income. The Minister’s alternative position was that the partnership did not exist. The partnership objected to the redetermination and then appealed to court. Now say that the court accepted the Minister’s alternative argument and concluded that the partnership did not exist. If the Applicants are correct and the Minister cannot issue a Notice of Redetermination on the basis that partnership does not exist, then what is the court to order? The court cannot allow the appeal and order the Minister to issue a Notice of Redetermination. The court cannot allow the appeal and vacate the redetermination because the result would be that the original determination holding that the partnership existed and had a $95,000 loss would stand. If the court simply dismisses the appeal, the result would be that the redetermination stands and the partnership exists and has $1,000 of income. The Applicants argue that the use of the word “concludes” in subsection 152(1.8) implies that something different is supposed to happen. The Applicants say that the court is supposed to issue a judgment dismissing the appeal based on its conclusion that the partnership does not exist. But if that is the case, what happens to the redetermination? If it has not been vacated or replaced with another redetermination, is it not still binding on the partners under paragraph 152(1.7)(a)? The answer is “no”. That is the beauty of the Applicants’ interpretation. As set out above, paragraph 152(1.7)(a) binds “each member of the partnership”. If a court has concluded that there is no partnership, then there is no one for paragraph 152(1.7)(a) to bind. All prior det