Tax Liability and Contradictory Assessments 

McAdams v The Queen, 2014 FCA 99

This was an appeal from the TCC dismissing the taxpayer’s motion to strike the Crown’s reply to the taxpayer’s notice of appeal.

The taxpayer argued that the CRA accepted a spousal trust’s return of income, where the trust included in income a deemed dividend on the share of sales and paid tax on that income, and therefore could not now argue that the shares ought to be included in the taxpayer’s and not the trust’s income.  Since only one party – the trust or the individual – would have to include the amount in income, and given that the assessment of the trust’s liability is (pursuant to subsection 152(8)) valid and binding unless varied and vacated, the taxpayer cannot be assessed on the basis of the same amount.  The Crown argued that the trust was a sham.

The FCA agreed with the TCC that it was not plain and obvious that the reassessment of the taxpayer is an impermissible collateral attack on the Minister’s assessment of the trust.  The FCA held that the CRA may issue inconstant assessments pending the resolution of the dispute: Antle v. Canada, 2010 FCA 280, Hawkes v. Canada, 97 DTC 5060.

The FCA held:

[6]               In theory, the deemed dividend is taxable in the hands of only one taxpayer, which must be either the trust or Mr. McAdams. However, it does not follow that the initial assessment of the trust for its 2001 taxation year necessarily reflects the correct result. Nor is it plain and obvious that the Minister, having initially assessed the trust on the basis of the trust’s 2001 tax return, is precluded from assessing what she now believes to be the correct tax in the hands of Mr. McAdams (M.N.R. v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250), or from defending that assessment on the basis stated in the reply.

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