Is a Nil Assessment an Assessment? When Can the Crown Rely on subsection 152(4.3) as a consequential reassessment? Does an out-of-time Reassessment Extend the Time for the Crown? What Changes a “Balance”?

Blackburn Radio Inc v The Queen, 2012 TCC 255

There were several issues in this case, all revolving round the propriety of the MNR issuing a consequential assessment pursuant to subsection 152(4.3).

FACTS

The MNR issued the consequential reassessment on the basis of it arising from a reassessment for the 1999 tax year.  The consequential reassessment was issued within one year of the 1999 reassessment.

By notice of assessment in 2000, the MNR reassessed the taxpayer’s 1999 tax year to make that year a Nil year. Four other reassessments for the 1999 year were made, the first two resulting in a Nil assessment.  The third reassessment in 2004 denied a deduction for long-term incentive bonuses of over $7 million, and fixed part I tax liability at over $2 million.

The taxpayer filed an objection and then appealed to the TCC. Miller J allowed the appeal and vacated the third reassessment (2009 TCC 155) on the basis that the reassessment was statute barred. The Crown did not appeal that decision, and the time for doing do expired in 2009. The fourth reassessment took into account Miller J’s reasons and allowed the deduction. No notice of objection was filed.

The 2000 tax year was assessed in 2001, but was reassessed three times thereafter.  The second reassessment was a consequential reassessment when the bonus deduction in 1999 was denied.  This reassessment reduced the capital gain arising from the sale of shares, and fixed the tax payable for the 2000 tax year at Nil.  The Third re-assessment was in 2010, as a result of once again allowing the deduction in 1999, and added back the capital gain.

The 2005 tax year was re-assessed as a result of allowing the deduction in 1999, and adding back the capital gain in 2000, resulting in surtax credits of $73,000 being deleted.

ANALYSIS

Justice Woods recognizing that subsection 152(4.3) of the ITA permits the MNR to make consequential reassessments outside the normal reassessment period in circumstances where the tax payable for one taxation year would be affected by a change made for an earlier taxation year.  Subsection 152(4.3) reads:

152 (4.3)  Consequential assessment – Notwithstanding subsections (4), (4.1) and (5), where the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year, the Minister may, or where the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and 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 particular year, reassess the tax, interest or penalties payable, or redetermine an amount deemed to have been paid or to have been an overpayment, under this Part by the taxpayer in respect of the subsequent taxation year, but only to the extent that the reassessment or redetermination can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year.

The Court noted that if the third 2000 and the first 2005 reassessments comply with subsection 152(4.3), then they are not statute barred pursuant to subsection 152(4).

The taxpayer argued that since the fourth 1999 re-assessment in invalid, and cannot give the MNR additional time to make consequential reassessments. The taxpayer argued that the fourth reassessment was statute barred and void, while the MNR argued that the fourth reassessment was not statute barred and if it was barred, its valid as no objection was filed.  In response, the taxpayer argues that even if the fourth reassessment is valid, it cannot be used as a basis for a subsection 152(4.3) consequential assessment as that assessment did not change a balance as required by the provision.

The Court began by asking whether a Nil Assessment is in fact an assessment.  Both parties took the position that a nil assessment is a valid assessment for purposes of the ITA.  However, the parties positions was found to be contrary to the decision in The Queen v Interior Savings Credit Union, 2007 FCA 151, where the FCA stated that the reason a nil assessment cannot be appealed is that an appeal must be directed at an assessment, and an assessment which assesses no tax is not an assessment (citing Okalta Oils Limited v. MNR, 55 DTC 1176 (SCC) at p. 1178: “Under these provisions, there is no assessment if there was not tax claimed”).   Therefore, since the fourth reassessment was a nil assessment, and as such is not an assessment, it cannot form the basis of an assessment for purposes of subsection 152(4.3).  However, the court proceeded on the basis that the nil assessment was an assessment.

The Taxpayer argued that the fourth re-assessment was invalid, as it was issued in response to the TCC vacating the third assessment. The TCC did not send the matter back to the MNR for reassessment.  The taxpayer relied on The Queen v Canadian Marconi Company, [1992] 1 FC 655.

The Crown argued that, given subsection 171(1) of the ITA, the MNR has the inherent authority to issue the fourth reassessment, because it was necessary to give effect to the TCC decision vacating the third reassessment.  The Crown relied on Pure Spring Company Limited v MNR, [1946] Ex. C.R. 471, 2 DTC 844, to argue that a decision of the TCC cannot fix tax liability, but required the assessing action of the Minister.  Woods J did not agree with the argument and stated that Pure Springs is relevant only when the statute has conferred a discretionary power on the Minister.

The Court concluded that based on the plain words of subsection 171(1), if the TCC varies or vacates an assessment, there is no contemplation of a further reassessment by the Minister.  A further reassessment is also not required to issue a refund as a result of the TCC decision since a refund is required by operation of subsection 164(4.1), which reads:

(4.1)  Duty of Minister – Where the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada has, on the disposition of an appeal in respect of taxes, interest or a penalty payable under this Act by a taxpayer resident in Canada,

(a) referred an assessment back to the Minister for reconsideration and reassessment, or

(b) varied or vacated an assessment,

the Minister shall with all due dispatch, whether or not an appeal from the decision of the Court has been or may be instituted,

(c) where the assessment has been referred back to the Minister, reconsider the assessment and make a reassessment in accordance with the decision of the Court, unless otherwise directed in writing by the taxpayer, and

(d) refund any overpayment resulting from the variation, vacation or reassessment,

and the Minister may repay any tax, interest or penalties or surrender any security accepted therefor by the Minister to that taxpayer or any other taxpayer who has filed another objection or instituted another appeal if, having regard to the reasons given on the disposition of the appeal, the Minister is satisfied that it would be just and equitable to do so, but for greater certainty, the Minister may, in accordance with the provisions of this Act, the Tax Court of Canada Act, the Federal Courts Act or the Supreme Court Act as they relate to appeals from decisions of the Tax Court of Canada or the Federal Court of Appeal, appeal from the decision of the Court notwithstanding any variation or vacation of any assessment by the Court or any reassessment made by the Minister under paragraph (c).

(Emphasis added.)

The Court also held that the words in subsection 165(1.1) and 169(2) do not imply that a reassessment is required after the TCC vacates or varies an assessment. This was because those sections make sense without the implication that the Crown is seeking, because reassessments are sometimes permitted after a decision has been vacated (for example pursuant to subsection 152(4.3)).

Since the fourth reassessment was invalid, the 2010 reassessment is statute barred by subsection 152(4).

The Crown also argued the fourth reassessment is deemed valid and binding by operation of subsection 152(8), which reads:

152 (8)  Assessment deemed valid and binding – An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto

 The Court referred to the decision in Lornport Investments Ltd. v The Queen, [1992] 2 FC 293, 92 DTC 6231, in refuting the argument that a statute barred reassessment is valid until set aside by court order. In Lornport, Stone JA stated that:

[…] It seems to me that [s. 152(8)] is not addressed to a situation where an assessment is issued out of time but rather to a situation where an assessment is issued in time but contains an “error, defect or omission” or that such is contained in any proceeding under the Act relating to it.

The Crown finally argued that since no objection was filed against the fourth reassessment, it is valid.  Woods J referred to the FCA decision in Canadian Marconi in stating that it is not necessary for a taxpayer to object to a statute barred reassessment, unless the MNR was expressly or impliedly alleging fraud or misrepresentation.     An out-of-time is void.

The Court also addressed the Taxpayer’s final argument that the fourth reassessment for 1999 did not change a “balance”. Subsection 152(4.4) defined “balance”, and reads:

152 (4.4)  Definition of “balance” – For the purpose of subsection (4.3), a “balance” of a taxpayer for a taxation year is the income, taxable income, taxable income earned in Canada or any loss of the taxpayer for the year, or the tax or other amount payable by, any amount refundable to, or any amount deemed to have been paid or to have been an overpayment by, the taxpayer for the year.

The Court agreed that a balance was changed by virtue of the judgment and not the reassessment.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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