Fagan v. The Queen

Fagan v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-12-14
Neutral citation
2011 TCC 523
File numbers
2007-4851(IT)G
Judges and Taxing Officers
François M. Angers
Subjects
Income Tax Act
Decision Content
Dockets: 2007-4851(IT)G,
2006-3734(IT)G
BETWEEN:
H. GLENN FAGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on May 18 and 19, 2011, at Calgary, Alberta.
Before: The Honourable Justice François Angers
Appearances:
Counsel for the Appellant:
Jehad Haymour
Dan Misutka
Counsel for the Respondent:
Gregory Perlinski
Marta Burns
____________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act in respect of the 1992 taxation year is allowed in part and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment and the Minutes of Settlement signed by the parties. The Respondent is entitled to 75% of her costs.
Signed at Ottawa, Canada, this 14th day of December 2011.
« François Angers »
Angers J.
Citation: 2011 TCC 523
Date: 20111214
Dockets: 2007-4851(IT)G,
2006-3734(IT)G
BETWEEN:
H. GLENN FAGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1] Appeal number 2006-3734(IT)G of the appellant was the subject of an application under section 173 of the Income Tax Act (the "Act"), which application was held in abeyance pending the hearing of the second appeal numbered 2007‑4851(IT)G. By consent of the parties, both appeals have now been joined and will be referred to as one appeal.
[2] H. Glenn Fagan (the “appellant”) is appealing a reassessment for his 1992 taxation year dated October 29, 1999. In reassessing the appellant, the Minister of National Revenue (the “Minister”) disallowed Canadian exploration expenses (CEE), Canadian development expenses (CDE) and Canadian oil and gas property expenses (COGPE) that had been renounced by 991274 Ontario Ltd. (991) pursuant to the terms of a flow-through share subscription agreement concluded between the appellant and 991. The Minister also disallowed $33,909 of the $50,500 addition to the appellant's cumulative CEE account in respect of his investment in seismic data acquired for exploration purposes for use by the Compton Resource Corporation 1992/1993 Oil and Gas Investment Fund (Compton).
[3] At trial, counsel for the respondent informed the Court that the Minister has now allowed the appellant to claim, in respect of his 1992 taxation year, the addition to his cumulative CEE in the amount of $33,909 pertaining to his investment in Compton.
[4] Counsel for both parties also informed the Court that Minutes of Settlement had been signed between them regarding some of the issues raised by their respective pleadings, with the caveat that the Minutes of Settlement were to become applicable only to the extent that the respondent was successful on the remaining unresolved issues argued before this Court.
[5] The first issue has to do with whether the Minister, in this instance, has reassessed the appellant for his 1992 taxation year by virtue of a waiver given under the Act.
[6] If the Minister is not precluded from reassessing, the second issue raised is whether he could reassess the appellant with respect to the related resource expenses without reassessing 991, the flow-through corporation.
[7] Additionally, the respondent submitted, in the alternative, that the appellant made a misrepresentation or committed fraud as envisioned by subparagraph 152(4)(a)(i) of the Act by filing a waiver with an intent to deceive the auditor, and that, as a result the Minister is, pursuant to subsection 152(4) of the Act, not precluded from reassessing for the appellant's 1992 taxation year. In closing arguments, neither party argued this alternative submission before the Court, assuming, I presume, that the evidence would not support such a finding by this Court. I assume, therefore, that this argument is abandoned.
Facts
[8] The appellant has been a chartered accountant since 1977 and was a partner at Coopers Lybrand from 1975 to late 1998. One of his partners at Coopers Lybrand, Mr. Brian Foley, informed the appellant and a number of the firm’s partners in its Toronto office of the opportunity to invest in an oil and gas joint venture (the “Sierra Joint Venture”) with an Alberta company called Sierra Trinity Inc. (Sierra).
[9] Mr. Foley was knowledgeable and experienced in this area, having himself invested in similar ventures as had some of his partners in the firm’s Calgary office. Mr. Foley fully explained to the appellant how such an investment worked. The appellant and his other partners were concerned and nervous about possible risks and liability in excess of an insured amount associated with such a venture. It was therefore decided that a flow–through company would be created for the purpose of adding extra protection against such risks. The Ontario company, 991, was incorporated by Mr. Foley on June 12, 1992 for that very purpose. The appellant understood that 991 was to be responsible for paying the resource expenses for the 991 shareholders and that 991 was a flow-through company.
[10] The appellant and six of his partners, including Mr. Foley, subscribed for shares in 991. The appellant subscribed for 105,000 shares at an issue price of $1 per share. On July 22, 1992, the Board of Directors of 991 passed a resolution to enter into a flow-through share agreement with the shareholders. By this agreement 991 undertook to incur within 24 months CEE, CDE and COGPE and to renounce them to the shareholders in accordance with the Act. The flow-through share agreement was entered into on September 1, 1992.
[11] On September 2, 1992, 991 entered into a joint venture agreement with Sierra. The agreement indicated that Sierra’s joint venture program was for the purpose of “the ownership and operation, and acquisition of petroleum and natural gas interests and the exploration, development and production activities associated with such interests.” 991 was therein referred to as the participant and Sierra as the operator. The agreement stated that the joint venture program was to be conducted by the operator and that the participant was to advance the funds required for the program. 991 was issued quarterly reports and statements indicating its share of the costs of the activities undertaken by Sierra.
[12] On September 23, 1992, 991 filed with the Canada Revenue Agency (CRA) the company’s Flow-Through Share Information form (T100) in which it indicated that between September 1, 1992 and August 31, 1994, it anticipated receiving $970,000 in CEE, $80,000 in CDE and $105,000 in COGPE and renouncing the same amounts.
[13] On March 31, 1993, 991 filed its Summary of Renunciation of CEE, CDE and COGPE and Allocation of Assistance form (T101) in which it indicated that between September 1, 1992 and December 31, 1992, it incurred and was renouncing $885,782 in CEE, $25,032 in CDE and $70,705 in COGPE. A T101 Supplementary slip was issued to the appellant and it showed that, effective December 31, 1992, 991 was renouncing to him $80,526 in CEE, $2,276 in CDE and $6,428 in COGPE for his 1992 taxation year.
[14] In his 1992 income tax returns, the appellant deducted $92,175.60 in exploration and development expenses from his income. In his 1992 Resource Expense Pools schedule he indicated more specifically, that in 1992 he was deducting $90,850 in CEE, $682.80 in CDE and $642.80 in COGPE. It was also indicated in the schedule that the appellant had made two additions to his CEE pool in 1992, the first being in the amount of $50,500 (Compton) and the second, added by way of the T101 being in the amount of $80,526 (991).
[15] At some point in time, the Minister decided to audit Sierra. In his report, the auditor determined that, despite his investigation, Sierra failed to prove that its seismic data were being used in a way that would qualify it as giving rise to CEE.
[16] During the audit, the auditor, Mr. Robert Dunbar, assembled a list of all of Sierra’s joint venture participants, including 991 and also shareholders of 991. His report also indicates that the Minister was not going to reassess Sierra, but instead reassessments were issued to the individual investors disallowing their investment in the Sierra Joint Venture. Mr. Dunbar stated that he reviewed 991’s permanent documents and likely its 1992 and 1993 income tax returns and chose not to audit or reassess 991. Also, he stated that he was aware that the Sierra Joint Venture’s CEE deducted by the shareholders of 991 had been renounced by 991 and not by Sierra. Mr. Dunbar also stated that he never advised 991 that the renounced expenses were being disallowed.
[17] In a letter to the appellant dated April 4, 1996, Mr. Dunbar proposed disallowing the addition of $80,527 to the appellant’s 1992 CEE on the basis that he was unable to determine any business purpose for the seismic data the appellant acquired through the joint venture with Sierra. Mr. Dunbar requested additional information before issuing a proposed reassessment, and due to the proximity of the date at which the appellant’s 1992 taxation year would become statute-barred and in order to provide the appellant more time to make representations, he included a waiver with respect to the normal reassessment period.
[18] The original wording of the waiver provided by the CRA defined the waiver for the appellant’s 1992 taxation year as being:
. . . in respect of: calculation of income, net income, taxable income and taxes payable with respect to expenditures for seismic data.
[19] A similar letter was sent by the CRA, through Mr. Dunbar, to the other six investors of 991, including Mr. Foley. On April 17, 1996, Mr. Foley wrote to all the investors of 991 suggesting that it would be in their best interest to agree to the CRA’s request that they provide a waiver, but he proposed an amended waiver that would specifically limit Revenue Canada to the Sierra Joint Venture and not include other joint ventures. The amended waiver states that it is:
. . . in respect of:
Calculation of income, net income, taxable income and taxes payable with respect to expenditures for seismic data, pertaining to the taxpayer’s participation in the 1992 Sierra Trinity Inc. Joint Venture.
[20] In his letter, Mr. Foley has also advised the investors that a lawyer had been retained on their behalf to advise them on how and in what format these waivers should be filed. Mr. Foley added that the amended waiver’s limiting of the reassessment to the Sierra Joint Venture probably would prevent the Minister from reassessing the investors of 991 as the renouncement in their case came from 991 and not Sierra. He did acknowledge, though, that this discrepancy was a technical one and that the real substance was the deductions that the investors had taken and that were being challenged.
[21] As for the appellant, his understanding was that the waiver was formulated in such a way as to ensure that it did not relate to his investment in Compton. He also stated that the object of the waiver was to buy all of the investors time to make additional representations to the Minister about the Sierra Joint Venture expenses, and it was assumed or hoped that, since there was concern with the wording of the waiver in that it pertained to the Sierra Joint Venture and not 991, it would not be right to reassess them and that it would not be necessary to do so. In cross-examination, despite the apparent problem with the wording of the waiver, the appellant indicated that he was aware that the difficulty the Minister had with his 1992 tax return was with respect to the exploration deductions obtained from 991 by way of the Sierra Joint Venture and the $80,527 CEE addition.
[22] Upon receipt by the CRA, through Mr. Dunbar, of the amended waiver, Mr. Dunbar thought the waiver to be acceptable even though he was aware that the expenses related to a renunciation of resource expenses to the appellant by 991 and not Sierra. He reviewed it with his supervisor to ensure that the amendment did not create any problems with respect to the scope of the waiver and was told not to worry about it.
[23] On April 26, 1996, the appellant wrote to the CRA to inform them that he had retained a lawyer to represent him with respect to income tax matters relating to the 1992 Sierra Joint Venture. He testified that he viewed this authorization as enabling this lawyer to represent him with regard to the Sierra Joint Venture, but not necessarily with respect to the 991 renunciation, because there was a disconnect between the investment in the Sierra Joint Venture and the renouncement figure.
[24] In a letter dated May 9, 1996, the lawyer retained by the appellant and the other investors in 991 wrote to the three auditors involved in the file, enclosing the amended waiver and referring in this letter to the CRA’s concern regarding the investors in the Sierra Joint Venture.
[25] On February 4, 1999, the Minister wrote a letter to the appellant and repeated the proposal to disallow the appellant’s 1992 CEE, CDE and COGPE deductions with respect to Sierra Trinity Inc. The adjustments were later confirmed, and on April 12, 1999 the appellant signed a Letter of Authorization appointing Mr. Haymour to represent him with respect to all income tax matters relating to his participation in the Sierra Joint Venture. The unamended waiver was revoked on April 15, 1999. The revocation was received by the CRA on August 17, 1999, and a Notice of Reassessment was issued on October 29, 1999. The appellant was not surprised by the reassessment.
[26] Counsel for the appellant argues that the waiver did not authorize the Minister to reassess with respect to the appellant’s 1992 renounced expenses because the waiver specifically limits the reassessment to the appellant’s participation in the 1992 Sierra Joint Venture and the appellant did not participate in the 1992 Sierra Joint Venture. It is further submitted that the Minister may well have understood that the appellant had deducted amounts renounced to him by 991, but, the Minister nevertheless proposed to reassess the appellant in respect of seismic data that the Minister suggested the appellant had acquired. Both the appellant and the Minister believed that the real issue that the CRA had to address was the renunciation by 991. It is further submitted that by filing the amended waiver the appellant cannot be taken to have agreed to an invalid reassessment.
[27] Counsel for the appellant relied on a number of decisions by various courts that establish that a technical defect in a waiver will not invalidate it, while a substantive one will. It is submitted that the uncertainty contained in the appellant’s waiver is not a technical but rather a substantive defect, which invalidates it. Counsel also referred to cases that establish that where the taxpayer and the Minister have a common understanding of the subject matter of the reassessment, even if the waiver is worded imperfectly, it will be valid. The appellant’s position is that there was no such common understanding between him and the Minister. Counsel further argues that the Minister’s approval of the amended wording in the waiver, without ascertaining the appellant’s intention, supports his position that there was no common understanding between them.
[28] The appellant also submits that seismic data is classified under CEE and not under CDE or COGPE. The waiver refers to reassessment only with respect to expenditures for seismic data, and in this case the Minister also reassessed the appellant’s CDE and COGPE, which suggests that the Minister was making it up as he went along.
[29] Counsel for the respondent has also relied on a number of cases, some of which were the same as those submitted by counsel for the appellant. On the basis of these cases, it is submitted that the appropriate approach is to ascertain the intention of the parties as expressed in the waiver together with any relevant circumstances for which evidence is available; technical defects do not invalidate a waiver where circumstances show that both parties knew what was in issue; given the nature of a waiver, a matter specified in a waiver must involve a substantial issue between the parties, and in determining what is reasonably related to a matter specified in a waiver, the view of an objective observer with knowledge of all the pertinent facts rather than the subjective view of either party is considered reasonable; a waiver provides the benefit of time to both parties; and finally, the purpose of a waiver is to allow the continued analysis of the matter at issue; the description of the matter cannot be expected to be perfect at the stage of drafting the waiver and the reassessment must relate to the transaction or matter which is the source of the disagreement between the parties and concerning which the taxpayer agreed to sign a waiver.
[30] In reviewing the facts of this case in light of the above approach, counsel for the Minister submitted that an appellant who pleads the nullity of a waiver must be able to demonstrate some prejudice, which the facts of this case do not do. Counsel further submits that the word “participation” found in the waiver is broad in scope and refers to the various documents submitted at trial in which the shareholders of 991 are referred to as “participants” in the 1992 Sierra Joint Venture. Counsel finally submits that when the waiver was amended, that waiver then applied to the entire T101 at issue, which covered all of the CEE, CDE and COGPE deductions.
[31] Subsection 152(4) of the Act provides that the Minister may not reassess a taxpayer’s income tax after the taxpayer’s normal reassessment period unless certain conditions are met, one of which is the filing of a waiver in prescribed form on the taxpayer’s behalf:
152(4) Assessment and reassessment [limitation period] -- The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
. . .
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year.
[Emphasis added.]
[32] Subsection 152(4.01) further provides that, where a waiver is filed, the Minister may reassess the taxpayer’s income tax only to the extent that the reassessment can reasonably be regarded as relating to a matter specified in the waiver:
152(4.01) Assessment to which paragraph 152(4)(a), (b) or (c) applies -- Notwithstanding subsections (4) and (5), an assessment, reassessment or additional assessment to which paragraph (4)(a), (b) or (c) applies in respect of a taxpayer for a taxation year may be made after the taxpayer's normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to,
(a) where paragraph (4)(a) applies to the assessment, reassessment or additional assessment,
. . .
(ii) a matter specified in a waiver filed with the Minister in respect of the year . . .
[Emphasis added.]
[33] I have reviewed the jurisprudence that has analyzed and applied the waiver provisions and particularly the principles that have been established for determining whether a reassessment can be reasonably regarded as relating to the matter specified in the waiver.
[34] The principle that the intentions of both parties as to the basis of the waiver must be ascertained by analyzing the contents of the waiver as well as the relevant circumstances was established in the Federal Court, Trial Division’s 1992 decision in Solberg (S.J.) v. Canada, [1992] 2 C.T.C. 208. In that case, the Court found that the reference to Part III was inserted in the waiver by mistake and was only a technical defect that did not invalidate the reassessment of Part I tax. Justice Reed stated the following at pages 2, 3 and 14:
11 After considering the arguments presented to me I have concluded that the reference to Part III in the waiver was inserted by mistake. I reach this conclusion on the following grounds: there is no evidence that the dispute between the taxpayer and the Department involved a Part III election; Part III only applies to a corporate taxpayer and this could not in any event be applicable to the plaintiff’s personal tax liability . . .
12 Further explanation is required with respect to the first reason set out above. As noted, there is no evidence from either party concerning the circumstances surrounding the waiver. A lack of evidence is often a telling consideration in assessing the factual conclusion which should be drawn. While it is understandable that the defendant’s files may lack notes and other indicia of the events of 1980-84, it is highly unlikely that if a Part III election had been in issue, there would be no documentary evidence of that fact. No evidence of any such election was produced either by the plaintiff or by the defendant. This is a telling consideration. Even more telling is the fact that a Part III tax liability only applies to a corporate taxpayer, which this plaintiff is not.
13 Having concluded that the reference in the waiver to Part III was an error, I must then consider whether the waiver is invalid for the purposes of reassessing the taxpayer for Pat I tax. I am not prepared to so conclude. In my view, the error is a technical defect which does not impair the substance of the waiver. 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. This is consistent with the approach taken in interpreting taxing statutes themselves, see, for example, Stubart Investments Ltd. v. the Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305 at pages 315-16 C.T.C. (D.T.C. 6323).
14 In my view, it is clear for the reasons set out above that what the Minister was seeking to have extra time to consider and what the taxpayer intended to agree to when he signed the waiver, was the reassessment of the adjusted cost base of the shares for the purpose of determining the tax payable by the plaintiff as a result of the capital gain arising out of the disposition of those shares. This conclusion is supported by the fact that when the Minister did send a notice of reassessment to the taxpayer on that basis the notice of objection which the taxpayer sent back made no reference to Part III tax as being the real issue between them. That notice replied to the reassessment on its merits.
15 The defect created by inserting “III” in the waiver form instead of “I” is comparable to the defect dealt with by Mr. Justice Joyal in CAL Investments Ltd. v. Canada, supra. In that case the corporation had not affixed its corporate seal despite the express provision in the waiver form requiring it to do so. Mr. Justice Joyal held that the taxpayer could not use that defect to invalidate the waiver and that the waiver was not a nullity because of that defect. He pointed out that the requirement that a corporate seal be used was directory only, not mandatory and that it was for the benefit of the Minister. The Minister could therefore rely on the waiver if he chose to do so even if no seal had been affixed.
16 In this case the admonition that the appropriate Part of the Income Tax Act be identified in the waiver form is equally directory and not mandatory. Indeed. I note that the text of subparagraph 154(4)(a)(ii) specifically states that a waiver once signed allows for the assessment of tax “under this Part”, that is under Part I. I agree with counsel’s argument that, unlike the defect in the CAL Investments case the instruction that the relevant Part of the Income Tax Act be identified in the waiver is not merely for the Minister’s benefit. It is for the benefit of both the Minister and the taxpayer. Nevertheless I cannot conclude that a mistake in this identification results in the waiver being a nullity when it appears from the text of the waiver as a whole and from the surrounding circumstances to the limited extent that evidence of such exists in this case, that both parties knew what was in issue. No prejudice arose to the plaintiff as a result of the mistake.
[Emphasis added.]
[35] Solberg was followed in a number of decisions at the trial and appeal levels. See Holmes v. The Queen, 2005 TCC 403. That decision also referred to the importance of extrinsic evidence in the analysis of a section 152 waiver and it was stated that the absence of evidence may influence the Court’s finding just as strongly as its presence. (see para. 12 of the decision). Extrinsic evidence was used by the courts to help determine the validity of a waiver in Guerette v. R., [1996] 1 C.T.C. 2780; Mitchell v. The Queen, 2002 FCA 407; Mah v. The Queen, 2003 TCC 720, and Brown v. The Queen, 2006 TCC 381. Justice Mogan stated in Brown that a waiver is not a contract whose interpretation must exclude extrinsic evidence and that, on the contrary, relevant surrounding circumstances play an important role in its interpretation. Here is what he said at paragraphs 15 and 26 of his decision:
15 There would be some merit in the Appellant’s argument if it could be said that he was surprised by the adjustments made to his 1996 income in the reassessment under appeal. Having regard to all of the related and concurrent documents, however, I am satisfied that the Appellant could not reasonably have been surprised by the adjustments to his 1996 income made in the reassessment under appeal. Indeed, the amounts set out in the CRA form T7W-C (“explanation of changes”) which Exhibit R-1, Tab 7 are the same amounts which appear on page 5 of the letter dated March 13, 2000 (Exhibit R-1, Tab 5) which CRA sent to the Appellant with a copy to Mr. MacIvor. That letter preceded the signing of the waiver.
. . .
26 In my opinion, a waiver is not a contract between a taxpayer and Revenue Canada, excluding extrinsic evidence as to its interpretation. Quite the contrary. Relevant surrounding circumstances are important to determine whether a subsequent reassessment falls within the stated terms of a waiver.
[Emphasis added.]
[36] In Mah, referred to above, the taxpayer had exchanged shares for other shares and later redeemed some of the shares acquired in that exchange. Justice Rip (as he then was) held that where the waiver specified that it was with respect to the taxpayer’s “share exchange,” the Minister could not reassess the taxpayer on the basis of her redemption of those same shares. Justice Rip stated that the phrase “in respect of” used in the waiver limits the scope of the waiver to the matter specified and the items that necessarily flow from, or are normally connected with, the matter specified, and that a share exchange and a share redemption are not so connected. I reproduce below paragraphs 12, 13, 14 and 16 of his decision:
12 In Stone Container I disagreed with the taxpayer and held that the phrase “in respect of” limited the application related to the matter specified and the calculation for any items that necessarily flow from, or are normally connected to, the matter specified. Taxable income is connected to the federal abatement by virtue of the mechanical application of section 124 and a recalculation of the abatement is connected with, and necessary [sic] flows from, a recalculation of taxable income. This is not the situation in the appeal at bar.
13 In Stone Container I was concerned with the phrase “in respect of” in the waiver form. In the case at bar, I am also concerned of the language of subparagraph 152(4.01)(a)(ii) and whether that provision authorizes the reassessment in issue on the basis that “it can reasonably be regarded as relating to a matter specified in the waiver”. The phrase “in respect of” in the standard form of waiver limits the application of the waiver to the matter specified and, by virtue of subparagraph 152(4.01)(a)(ii), any other matters that can reasonably be regarded as relating to the matter specified. In other words, the phrase “in respect of” in the waiver is simply an expression of the reasonable relationship required by subparagraph 152(4.01)(a)(ii). It is quite clear that the Minister cannot base a reassessment on a substantive issue that is not specified in a waiver or cannot be regarded as relating to the substantive issue that is specified in the waiver.
14 In Pedwell v. Her Majesty the Queen, [2000 DTC 6405 (F.C.A.), para. 24.], Rothstein, J. explained that
. . . taxation is transaction-based (or perhaps deemed transaction-based) and if more than one transaction is to form the base of assessment, the assessment must reflect that fact. Where the basis of the Minister’s assessment is one transaction, the Court cannot, expost [sic] facto, broaden the scope of the assessment to include other transactions.
. . .
16 In the case at bar, unlike the facts in Stone Container, subsection 84(3) is not in any way related to subsection 86(2) by virtue of a mechanical application of the provisions of the Act. There is no relationship between these two provisions whatsoever, except that in the present case, Ms. Mah happened to trigger them both in the same year. A capital gain triggers an inclusion of income pursuant to subsection 86(2) of the Act and a deemed dividend triggers an inclusion of income under subsection 84(3) of the Act, these are two totally separate and discrete substantive issues.
[Emphasis added.]
[37] The jurisprudence also suggests that where a complication, such as a wording technicality, exists in a waiver, an objective or common-sense approach may help to determine whether the matter specified in the waiver can be reasonably found to relate to the matter that was assessed (see D.R. Bailey v. M.N.R., [1989] 2 C.T.C. 2177). In Chafetz v. The Queen, 2005 TCC 803, Mr. Justice Miller of this Court found that a common-sense interpretation of the waivers led to the finding that CEE could reasonably be found to relate to its predecessor CEDE (Canadian Exploration and Development Expenses) in the relevant time period. At paragraph 19 he wrote:
19 If I am not prepared to accept either party’s stated intention of the meaning of the matter specified, it is for me to determine objectively what those words mean. Given the very nature of a waiver, a “matter specified” in a waiver must involve a substantial issue between the parties. As indicated in the oft-cited case of Solberg v. Canada, where both parties know what is at issue, a technical error will not invalidate the waiver. It is also clear (see Mah v. Canada) that the Minister cannot base a reassessment on a substantial issue that is not specified in the waiver. These cases lead me to conclude that, in determining the matter specified, I should seek the substantive issue. This interpretation of “matter” accords with Black’s Law of [sic] Dictionary interpretation being “a subject under consideration”.
[38] The Federal Court of Appeal affirmed Justice Miller’s decision, stating that the test was an objective one and that it had been applied correctly (2007 FCA 45, paragraph 7).
On the basis that the appellants and Mr. Holmes had different intentions concerning the scope of the waiver, Justice Miller considered how the reference in the waiver to “Canadian Exploration and Development Expense” should be interpreted objectively. This was the correct legal test. The application of the law to the facts of this case is a question of mixed fact and law; absent a more general extricable question of law, the Judge’s decision is reviewable only for palpable or overriding error: Housen v. Nickolaisen, [2002] 2 S.C.R. 235, 2002 SCC 33.
[Emphasis added.]
[39] It has also been held that a defect in the wording of a waiver will not necessarily invalidate it. (See Cal Investments Ltd. v. R., [1990] 2 C.T.C. 418, Solberg (supra), Placements T.S. Inc. v. R., [1994] 1 C.T.C. 2464, Gestion B. Dufresne Ltée v. R., [1998] 4 C.T.C. 2551, affirmed by the Federal Court of Appeal at 99 DTC 5614.) In Mitchell v. The Queen, 2002 FCA 407, Justice Sexton provided a useful overview of the jurisprudence analyzing waivers that contained some kind of defect, in either form or content. At paragraphs 34 to 37 he wrote:
34 It is further conceded by Revenue Canada that in the past their practice has been to accept as valid waivers, prescribed forms which have been altered, and documents which are not in the prescribed form. Further, it is clear that Revenue Canada has taken the position that there can be a valid waiver even though the waiver may contain vital information which is erroneous. In this connection I refer to the following cases.
35 Firstly, in Gestion B. Dufresne Ltée v. the Queen (1998), 98 D.T.C. 2078, a case involving the treatment of a deemed dividend as a capital gain, Dufresne Ltée filed a waiver with respect to the normal reassessment period but misstated the year. It referred to the 1990 taxation year instead of 1991, the relevant year in question. As a result, Dufresne Ltée contended that the waiver was not valid. The court held that the plaintiff did not adduce any evidence to support the allegation that the waiver did not intend to apply to the 1991 taxation year, as it was signed in 1994 and could not have applied to the 1990 year because the limitation period had already expired. Thus, the court characterized this error as a careless mistake. Therefore, despite the fact that this waiver contained incorrect information, the Minister was willing to argue that it was valid. In our case, all of the correct and necessary information was included in the letters, yet still the Minister refused to accept the letters as valid waivers.
36 Secondly, Placements T.S. Inc. v. The Queen, [1994] 1 C.T.C. 2464, 94 D.T.C. 1302 involved the attribution rules under s. 56(4) of the Income Tax Act as they applied to the purchase of property. The appellant signed a waiver in which there was a discrepancy between the contents of the waiver and the issue under appeal. The waiver related to the land and the assessment under appeal related to the building. [This statement appears to be erroneous. In Placements, the waiver stated that it applied to the capital gain on the disposal of the right to purchase.] Thus, there was a substantive error in the waiver. The court held, however, that the taxpayer was not surprised by the assessment and that the reassessment reasonably related to the matter for which the waiver was issued.
37 Thirdly, in Solberg (S.J.) v. Canada, [1992] 2 C.T.C. 208, 92 D.T.C. 6448, the taxpayer signed a waiver of the four-year time limit for reassessment for the taxation year 1979 pursuant to subparagraph 152(4)(a)(ii) of the Income Tax Act, but later objected to reassessment because the waiver only covered tax under Part III of the act, while the reassessment concerned Part I. The Federal Court, Trial Division held in Solberg that the reference to Part III in the waiver was inserted by mistake, but was a technical defect only and did not impair the substance of the waiver. 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. The court concluded that the waiver was not a nullity as a result of the mistake because it appeared from surrounding circumstances and from the text of the waiver as a whole that both parties knew what was in issue. This approach taken by the court in Solberg should be applied to our fact situation.”
[Emphasis added.]
[40] The cases referred to above also confirm that a reassessment can reasonably be regarded as relating to the terms of the waiver if the evidence shows that the taxpayer was not surprised by the basis of the reassessment or if the basis of the reassessment was known to both parties. In other words, the Courts have found that, in such circumstances, affirming the validity of the waiver will not result in prejudice to either party.
[41] In Solberg (supra) it was held that the appropriate approach is to ascertain the intention of the parties with respect to the subject matter of the reassessment by analyzing the content of the waiver together with any relevant circumstances. The ambiguity which is raised by the appellant stems from the fact that he was not a participant in the 1992 Sierra Joint Venture because he was not a direct investor as he invested via 991. The Minister’s position is that the appellant was an indirect participant.
[42] The Minister’s first letter (April 4, 1996) regarding the proposed reassessment of the appellant describes the matter giving rise to the proposed reassessment as "seismic data acquired by yourself . . . through a joint venture operated by Sierra Trinity Inc.” and goes on to say: “We are proposing to deny your Canadian exploration expense addition . . . of $80,527." Although the Minister has failed to describe with precision the exact mechanism of the appellant’s investment in the Sierra Joint Venture, it appears to me to be sufficiently clear that the subject matter of the reassessment was the seismic data expense and its amount.
[43] The subject matter of the proposed reassessment was likely clear to the appellant when Brian Foley wrote a memorandum to him and the other investors on April 17, 1996 saying that he believed that each of them had received a letter from Revenue Canada indicating that Revenue Canada required information concerning "this investment". There is no certainty as to whether Mr. Foley was referring to the Sierra Joint Venture or the 991 investment, but the context of the letter, which was a follow-up with the shareholders regarding the Minister’s request for information about the seismic expenses, suggests that he was referring to the Sierra Joint Venture even if the investment was indirect. In my opinion, the reference to "this investment" was clear to the appellant even though he was not a direct investor in the Sierra Joint Venture.
[44] In the same memorandum, Mr. Foley indicated that he was enclosing an amended waiver that specifically limited Revenue Canada to the Sierra Joint venture and included no other joint ventures. The appellant testified that he believed that the added wording was to distinguish between the reassessments concerning his two investments, the other one being Compton. The memorandum also explained that the wording of the waiver was merely technical and that the real substance was the deductions the investors had taken. That letter demonstrates that the substance of the matter that gave rise to the reassessment was understood by the investors, including the appellant, or was at least clarified for them.
[45] When the appellant, on April 26, 1996, wrote a letter of authorization stating that he had retained counsel to represent him, he said it was "with respect to income tax matters relating to the 1992 Sierra Trinity Joint Venture". The language used appears to indicate that the appellant understood that his income tax matter was connected with the Sierra Joint Venture, and the authorization was valid as his counsel was authorized to act on his behalf in dealing with the CRA with respect to that matter.
[46] In his cr