Date: 20001027
Docket: T-1814-99
Between :
MERLIS INVESTMENTS LTD.
Applicant
- and -
THE MINISTER OF NATIONAL REVENUE
Respondent
REASONS FOR ORDER
PINARD, J. :
[1] The applicant seeks judicial review of the Minister of National Revenue's (the Minister) delay in assessing the applicant with respect to the 1998 fiscal year. More specifically, the applicant seeks to obtain an order of mandamus pursuant to sections 18 and 18.1 of the Federal Court Act, R.S.C. 1985, c. F-7, requiring the respondent to: assess the applicant pursuant to section 152 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), (the Act), apply the appropriate international tax convention provisions, and release the sum of $5,350,603 held for the applicant's account.
Facts
[2] The applicant was incorporated in Barbados on September 18, 1997 and its sole shareholder is the Kaufman Family Trust (KFT). The KFT's beneficiaries are Bruce Kaufman's daughters and a charitable organization.
[3] 3412032 Canada Inc. (3412032) was incorporated in Canada on September 22, 1997. The applicant is the sole shareholder of its common shares (the shares). 3412032's principal asset was an indirectly held controlling interest in Kaufel Group Limited (Kaufel), a Canadian public corporation. This asset was acquired on September 29, 1997, when Mr. Kaufman, a resident of Canada, transferred his 100% interest in Gold Metal Holding Inc. (GMH), which held a controlling interest in Kaufel, to 3412032 in exchange for Class F preferred voting shares of 3412032. On October 5, 1997, Mr. Kaufman emigrated to Barbados.
[4] Approximately one year later, Mr. Kaufman and the applicant agreed to sell their shares in 3412032 to Thomas & Betts Canada Inc. (Thomas & Betts) in the context of a takeover bid for Kaufel that Thomas & Betts filed soon thereafter. The actual disposition of the shares took place in November 1998. The applicant received $16,051,708 for its shares.
[5] On October 5, 1998, in connection with the sale of the shares, the applicant filed a request with Canada Customs and Revenue Agency (CCRA) to obtain a certificate under section 116 of the Act. The applicant requested that a certificate be issued without any payment of tax on its part, on the grounds that under subsection 14(4) of the Canada-Barbados Income Tax Convention (the treaty), any capital gain resulting from its disposition of the shares is taxable exclusively in Barbados.
[6] Beginning in October 1998, the International Audit Section of the CCRA began requesting additional information and documents from the applicant for the purpose of determining the application of the General Anti-Avoidance Rule (GAAR). The applicant seems to have been told that a preliminary position on this issue would be reached by mid-December 1998.
[7] The applicant states that on December 16, 1998, it agreed to have a bank letter of guaranty issued to the CCRA in the amount of $5,350,603, one third of the amount of the sale price of the shares. Apparently, a draft letter was forwarded by the applicant to the CCRA on December 17, 1998, at the latter's request.
[8] On December 22 or 23, 1998, the CCRA devised its own draft letter of guaranty which required the applicant to secure any potential tax obligations of Mr. Kaufman and of the Ernst & Young Trust Corporation (BVI) Ltd. (later replaced by the KFT). Their concerns were that was the GAAR to be applied to either Mr. Kaufman or the Kaufman Family Trust, the security provided by Merlis would not protect the interests of the Minister. The applicant refused to have such a letter of credit issued.
[9] On December 24, 1998, the CIBC Mellon Trust Company, acting on behalf of Thomas & Betts, remitted $5,350,603 held in escrow to the Receiver General in accordance with the Act and an agreement with the applicant. This agreement stated that such an amount would be remitted unless a section 116 certificate was received by the applicant and furnished to Thomas & Betts on or before December 24, 1998.
[10] On February 18, 1999, this case was formally referred to the GAAR Committee in Ottawa. According to the respondent, the Minister cannot issue a notice of assessment until the audit on the possible application of GAAR is completed.
[11] On March 1, 1999, the applicant filed its income tax return for the 1998 fiscal year. It declared a capital gain of $16,051,708 resulting from the sale of the shares and claimed an exemption under the Act in accordance with the treaty.
Issues
[12] This case raises the following issues:
| (i) Did the respondent act illegally in requiring security from the applicant for the potential debts of third parties? |
| (ii) Did the respondent consider the applicant's income tax return with diligence, as required by section 152 of the Act? |
| (iii) Is the respondent required to reimburse the applicant $5,350,603? |
[13] For the purpose of this application, the statutory provisions which are particularly relevant are appended hereto as "Appendix A".
Analysis
[14] The applicant first argues that section 116 of the Act does not permit the respondent to require security from the non-resident for the potential debts of third parties. The applicant claims that it furnished an acceptable guaranty and that the respondent then changed its mind and demanded a guaranty with respect to the potential debts of third parties.
[15] As the applicant is not asking this court to issue mandamus forcing the Minister to issue a certificate pursuant to section 116 of the Act, a decision on this point would be an exercise in futility. In any event, pursuant to subsection 18.1(2) of the Federal Court Act, an application for judicial review in respect of a decision of a federal board is subject to a time limitation of thirty (30) days from the date the decision is communicated to the applicant. In the present case, the limitation has expired as the refusal to issue a certificate was communicated to the applicant during the course of a meeting on December 23, 1998.
[16] The applicant further argues that the respondent was obligated, pursuant to section 152 of the Act, to consider its tax return diligently, to determine the tax owing, and to send a notice of assessment. The applicant cites case-law to the effect that the concept of diligence means "a discretion of the Minister to be exercised, for the good administration of the Act, with reason, justice and legal principles" (Jolicoeur v. M.N.R., 60 DTC 1254 at 1261) and "promptitude, speed" (Rodmon Construction Inc. v. The Queen, 75 DTC 5038 at 5041).
[17] The Federal Court of Appeal in Ginsberg v. Canada, [1996] 3 F.C. 334, was required to consider the nature of the duty conferred to the Minister by subsection 152(1) of the Act which provides that the Minister "shall, with all due dispatch" consider the applicant's income tax return. It stated as follows at page 340:
| . . . The words "with all due dispatch" in subsection 152(1) are the equivalent of such words as "with all due diligence" or "within a reasonable time" [citation omitted]. They give some discretion to the person, whose duty it is to act, such discretion to be exercised according to the circumstances of each case. . . . |
[18] I consequently agree with the respondent that this provision, read in its entirety, confers some discretion on the Minister with respect to the timing of the assessment. This is particularly so in the case where the Minister's delay in issuing the notice of assessment is reasonably justified. Such justification was considered by the Tax Court of Canada in Ginsberg, [1994] 2 C.T.C. 2063 at 2073, where it concludes:
| I believe that if there is a delay that prima facie indicates a failure to examine and assess a return with all due dispatch as required under subsection 152(1) of the Act there is an onus on the respondent to establish by evidence pertaining to the manner in which that return was dealt with that the delay was not unreasonable. . . . |
| In the case at hand the lapse of time between the receipt of the returns and the assessments was one and one-half years. It strikes me that on the face of it this is a failure to meet the requirements of subsection 152(1) that returns of income shall be examined and assessed with all due dispatch. If there were evidence of some special circumstance relating to the appellant's returns which established that a delay of 18 months was reasonable then the requirements of the law would have been met. . . . |
[19] This conclusion having been ratified by the Federal Court of Appeal (Ginsberg, supra, at page 339), it follows that an order of mandamus shall only be granted if the respondent fails to establish that the delay in issuing an assessment was not unreasonable (see Apotex Inc. v. Canada, [1994] 1 F.C. 742, affirmed [1994] 3 S.C.R. 1100). I believe the respondent has discharged this obligation in the present case.
[20] In Hutterian Brethen Church v. The Queen, 70 DTC 5052, affirmed 79 DTC 5474 (F.C.A.), Mahoney, J. was called upon to decide whether the Minister, who had issued assessments up to eight years after the income tax returns had been filed, had acted with "all due dispatch". The Court held that the Minister had assessed with all due dispatch as the delay in assessing the Corporation was attributable to the fact that the Minister was waiting for the completion of appeals from related personal assessments. The relevant period of time was decided to have commenced after the final decision concerning the personal assessments.
[21] Similarly, in this case, the Minister contends that pursuant to section 152 of the Act, the applicant's tax return was being examined because of the possible application of the GAAR, which required a detailed analysis and the gathering of expert opinions. The respondent further alleges that it could not begin examining the tax return until the end of June 1999, when it received all the pertinent documents. In my opinion, these constitute "special circumstances" which justify the Minister's delay in issuing an assessment.
[22] On various occasions, the Minister advised the applicant of the causes for this delay. In effect, in its letter dated November 3, 1998, the CCRA advised the applicant that it required further information in order to proceed with its assessment. This advisement was again repeated in letters dated January 19, 1999 and May 21, 1999. Further, in a letter dated February 23, 1999, the CCRA specifically justified its delay as follows:
| 1) As explained in our recent discussions, in our opinion, the issue of furnishing "security acceptable to the Minister" per S.116 of the Income Tax Act ("Act") is inextricably intertwined with the substantive tax liability exigible (sic) from a non-resident in respect of the Taxable Canadian Property being disposed of. |
| As you (sic) also aware, the issue of said substantive tax liability is the subject of a detailed preliminary GAAR referral addressed to our colleagues at Headquarters - Ottawa. |
[23] In a letter dated September 25, 1999, the Department of Justice confirmed that it had been approached by the CCRA on September 24, 1999 for a legal opinion concerning this matter and stated as follows:
| I indicated that I expected to be able to provide my opinion within three weeks; however, I could not confirm that Revenue Canada would be able to resolve the matter within three weeks, for at least two reasons. The first is that my opinion would be subject to review by other counsel on behalf of the Department of Justice and, while I could speak for my own schedule, I could not speak for others. The second reason is that, to the extent the issue involves a consideration of the General Anti-Avoidance Rule, Revenue Canada has its own internal review mechanism which might require some time. I said that I would advise you where matters stood at the end of the three-week period (i.e. by October 15, 1999). |
[24] Finally, as it appears from the additional affidavit from Claudio Riti, Team Co-ordinator, Tax Avoidance Section, CCRA, filed on consent on the day of the hearing before myself, the latter received the legal opinions expected at the beginning of May 2000 and the matter was referred back to the GAAR Committee in Ottawa for review. By the end of May 2000, Mr. Riti indicates that he was verbally informed that the GAAR Committee in Ottawa had reviewed the case along with the legal opinions and agreed to proceed with proposals of reassessment letters. Mr. Riti further states that, on or about June 26, 2000, he received the written reply from Ottawa with instructions to proceed with the drafting of the proposal letters to the three taxpayers audited, including the applicant. Mr. Riti concludes by stating that a draft proposal letter for the applicant has been prepared, which is subject to final internal review, proposing the application of the GAAR (section 245 of the Act), to disallow the exemption claimed by the applicant under paragraphs 110(1)(f) and (i) of the Act. At the hearing before me, counsel for the respondent indicated many times that the latter is now prepared to formally assess the applicant pursuant to section 152 of the Act, which I consider should be done within thirty (30) days from the date of filing of the present Reasons.
[25] Given the circumstances, I do not think that the delay in issuing the notice of assessment up to this point has been unreasonable and I agree with the respondent that a writ of mandamus is not available to the applicant in this case.
[26] Finally, the applicant argues that pursuant to section 158 of the Act, even if it owes a sum to the respondent, it does not have to remit this sum to the respondent until after a notice of assessment is issued.
[27] The applicant further argues that section 225.1 of the Act requires the respondent to wait ninety (90) days after the issue of a notice of assessment before taking measures to recover a sum owed.
[28] In my opinion, neither section 158 nor paragraph 225.1(1) of the Act have any bearing in the present case as both deal with the payment of sums actually owed by a taxpayer (see King v. Canada (Minister of National Revenue), [1991] T.C.J. No. 108), while section 116 deals fundamentally with the furnishing of security in the event of tax liability. Notwithstanding, section 116 specifically applies to non-resident vendors who dispose of certain types of taxable Canadian property and consequently has precedence over these more general provisions.
[29] In the present case, the amount of $5,350,603 was paid by the purchaser pursuant to paragraph 116(5). In the context of the other provisions of section 116, it is clear that any excess payment must be refunded to the applicant subsequent to the assessment of its income tax return for the 1998 fiscal year. As a result, pursuant to section 116, it is apparent that the Minister, not yet having completed his assessment of the applicant's income tax return, is not required to reimburse the applicant the sum of $5,350,603.
[30] For all the above reasons, the application for judicial review is dismissed. Albeit not the result of undue delay, considering the lengthy period of time required for the purpose of assessing the applicant, whose impatience is understandable, there will be no adjudication as to costs.
JUDGE
OTTAWA, ONTARIO
October 27, 2000
Date: 20001027
Docket: T-1814-99
APPENDIX A
Federal Court Act, R.S.C. 1985, c. F-7
| 18. (1) Subject to section 28, the Trial Division has exclusive original jurisdiction
[. . .] (3) The remedies provided for in subsections (1) and (2) may be obtained only on an application for judicial review made under section 18.1. 18.1 (2) An application for judicial review in respect of a decision or order of a federal board, commission or other tribunal shall be made within thirty days after the time the decision or order was first communicated by the federal board, commission or other tribunal to the office of the Deputy Attorney General of Canada or to the party directly affected thereby, or within such further time as a judge of the Trial Division may, either before or after the expiration of those thirty days, fix or allow. |
18. (1) Sous réserve de l'article 28, la Section de première instance a compétence exclusive, en première instance, pour :
[. . .] (3) Les recours prévus aux paragraphes (1) ou (2) sont exercés par présentation d'une demande de contrôle judiciaire. 18.1 (2) Les demandes de contrôle judiciaire sont à présenter dans les trente jours qui suivent la première communication, par l'office fédéral, de sa décision ou de son ordonnance au bureau du sous-procureur général du Canada ou à la partie concernée, ou dans le délai supplémentaire qu'un juge de la Section de première instance peut, avant ou après l'expiration de ces trente jours, fixer ou accorder. |
Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (as amended)
| 116. (1) Where a non-resident person proposes to dispose of any property that would, if the non-resident person disposed of it, be taxable Canadian property of that person (other than property described in subsection (5.2) and excluded property) the non-resident person may, at any time before the disposition, send to the Minister a notice setting out
(2) Where a non-resident person who has sent to the Minister a notice under subsection (1) in respect of a proposed disposition of any property has
the Minister shall forthwith issue to the non-resident person and the proposed purchaser a certificate in prescribed form in respect of the proposed disposition, fixing therein an amount (in this section referred to as the "certificate limit") equal to the estimated amount set out in the notice in accordance with paragraph (1)(c). (3) Every non-resident person who in a taxation year disposes of any taxable Canadian property of that person (other than property described in subsection (5.2) and excluded property) shall, not later than 10 days after the disposition, send to the Minister, by registered mail, a notice setting out
unless the non-resident person has, at any time before the disposition, sent to the Minister a notice under subsection (1) in respect of any proposed disposition of that property and
(4) Where a non-resident person who has sent to the Minister a notice under subsection (3) in respect of a disposition of any property has
the Minister shall forthwith issue to the non-resident person and the purchaser a certificate in prescribed form in respect of the disposition. (5) Where in a taxation year a purchaser has acquired from a non-resident person any taxable Canadian property (other than depreciable property or excluded property) of the non-resident person, the purchaser, unless
is liable to pay, and shall remit to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property, as tax under this Part for the year on behalf of the non-resident person, 33 1/3% of the amount, if any, by which
exceeds
and is entitled to deduct or withhold from any amount paid or credited by the purchaser to the non-resident person or otherwise recover from the non-resident person any amount paid by the purchaser as such a tax. [. . .] (5.2) Where a non-resident person has, in respect of a disposition or proposed disposition to a taxpayer in a taxation year of property (other than excluded property) that is a life insurance policy in Canada, a Canadian resource property, a property (other than capital property) that is real property situated in Canada, a timber resource property, depreciable property that is or would, if the non-resident person disposed of it, be a taxable Canadian property of the non-resident person or any interest in, or option in respect of, a property to which this subsection applies (whether or not the property exists),
the Minister shall forthwith issue to the non-resident person and to the taxpayer a certificate in prescribed form in respect of the disposition or proposed disposition fixing therein an amount equal to the proceeds of disposition, proposed proceeds of disposition or such other amount as is reasonable in the circumstances. 152. (1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
158. Where the Minister mails a notice of assessment of any amount payable by a taxpayer, that part of the amount assessed then remaining unpaid is payable forthwith by the taxpayer to the Receiver General. 225. (1) Where a taxpayer is liable for the payment of an amount assessed under this Act, other than an amount assessed under subsection 152(4.2), 169(3) or 220(3.1), the Minister shall not, for the purpose of collecting the amount,
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| 116. (1) La personne non-résidente qui se propose de disposer d'un bien qui, si elle en disposait, serait un de ses biens canadiens imposables, sauf un bien visé au paragraphe (5.2) et un bien exclu, peut envoyer au ministre au préalable un avis contenant les renseignements suivants :
(2) Lorsqu'une personne non-résidente qui, en vertu du paragraphe (1), a envoyé un avis au ministre concernant la disposition éventuelle d'un bien quelconque, a :
le ministre délivre sans délai à la personne non-résidente ainsi qu'à l'acheteur éventuel un certificat selon le formulaire prescrit, en ce qui concerne la disposition éventuelle, y fixant un montant (appelé la « limite prévue par le certificat » au présent article) égal au montant estimatif mentionné dans l'avis conformément à l'alinéa (1)c). (3) La personne non-résidente qui dispose de son bien canadien imposable, sauf un bien visé au paragraphe (5.2) et un bien exclu, au cours d'une année d'imposition est tenue d'envoyer au ministre, dans les dix jours suivant la disposition, sous pli recommandé, un avis contenant les renseignements suivants :
sauf si la personne non-résidente a envoyé au ministre, à un moment donné avant la disposition, et conformément au paragraphe (1), un avis concernant toute disposition éventuelle de ce bien, et si, à la fois :
(4) Lorsqu'une personne non-résidente qui, en vertu du paragraphe (3), a envoyé au ministre un avis concernant la disposition d'un bien, a :
le ministre délivre sans délai à la personne non-résidente ainsi qu'à l'acheteur un certificat selon le formulaire prescrit concernant la disposition. (5) L'acheteur qui, au cours d'une année d'imposition, acquiert auprès d'une personne non-résidente un bien canadien imposable (sauf un bien amortissable ou un bien exclu) d'une telle personne est redevable, pour le compte de cette personne, d'un impôt en vertu de la présente partie pour l'année, sauf si, selon le cas :
Cet impôt - à remettre au receveur général dans les 30 jours suivant la fin du mois au cours duquel l'acheteur a acquis le bien - est égal à 33 1/3% de l'excédent éventuel du coût visé à l'alinéa c) sur la limite visée à l'alinéa d) :
L'acheteur a le droit de déduire d'un montant qu'il a versé à la personne non-résidente, ou porté à son crédit, ou de retenir sur un tel montant, ou de recouvrer autrement d'une telle personne, tout montant qu'il a payé au titre de cet impôt. [. . .] (5.2) Lorsqu'une personne non-résidente a effectué, ou se propose d'effectuer, une disposition en faveur d'un contribuable au cours d'une année d'imposition d'un bien (sauf un bien exclu) qui est une police d'assurance-vie au Canada, un avoir minier canadien, un bien immeuble (sauf une immobilisation) situé au Canada, un avoir forestier, un bien amortissable qui, si elle en disposait, serait un bien canadien imposable lui appartenant ou un droit ou une option afférent à un bien auquel s'applique le présent paragraphe, que ce bien existe ou non, le ministre délivre sans délai à la personne non-résidente et au contribuable un certificat selon le formulaire prescrit à l'égard de la disposition effectuée ou proposée sur lequel est indiqué un montant égal au produit de disposition réel ou proposé, ou un autre montant raisonnable dans les circonstances, si la personne non-résidente a, selon le cas :
152. (1) Le ministre, avec diligence, examine la déclaration de revenu d'un contribuable pour une année d'imposition, fixe l'impôt pour l'année, ainsi que les intérêts et les pénalités éventuels payables et détermine :
158. Lorsque le ministre poste un avis de cotisation pour un montant payable par un contribuable, celui-ci doit immédiatement verser au receveur général la partie alors impayée de ce montant. 225.1 (1) Dans le cas où un contribuable est redevable du montant d'une cotisation établie en vertu de la présente loi, exception faite des paragraphes 152(4.2), 169(3) et 220(3.1), le ministre, pour recouvrer le montant impayé, ne peut, avant le lendemain du 90e jour suivant la date de mise à la poste de l'avis de cotisation :
|