Ottawa, Ontario, June 12, 2006
PRESENT: The Honourable Madam Justice Mactavish
BETWEEN:
and
REASONS FOR JUDGMENT AND JUDGMENT
[1] In proceedings before the Tax Court of Canada, LJP Sales Agency Inc. was successful in establishing that it was not associated with a company known as Jo-Van Distributors Inc. As a result, LJP was entitled to claim a small business tax deduction in its 1995, 1996 and 1997 taxation years.
[2] LJP had also been denied a small business tax deduction for its 1998 and 1999 taxation years on the basis that it was associated with Jo-Van. After receiving the decision of the Tax Court, LJP brought an application in this Court seeking an order of mandamus compelling the Minister of National Revenue to reassess its 1998 and 1999 taxation years in accordance with the findings of the Tax Court. The Minister then moved before a Prothonotary to have LJP's Notice of Application struck out. The Prothonotary found LJP's application to be so clearly improper as to be bereft of any possibility of success, and struck it out. This is an appeal from that ruling.
[3] For the reasons that follow, I am satisfied that the Prothonotary's decision was correct, and that the appeal should be dismissed.
Background
[4] LJP filed tax returns in 1995, 1996, and 1997 in which it claimed a small business tax deduction. This deduction was disallowed on the basis that LJP was associated with Jo-Van Distributors Inc., and thus did not qualify as a 'small business'.
[5] The majority shareholder in Jo-Van is the wife of the owner of LJP. The owner of LJP is also a minority shareholder in Jo-Van.
[6] Notices of assessment disallowing the small business deduction for LJP's 1995, 1996, and 1997 taxation years were issued by the Minister on April 3, 2000. LJP filed timely notices of objection with respect to these assessments, and ultimately took the matter to the Tax Court. In a decision dated December 1, 2003, Justice Miller of the Tax Court found that LJP and Jo-Van Distributors were not associated companies, and that, as a result, LJP could be eligible for the small business tax deduction.
[7] Notices of reassessment for the 1995, 1996, and 1997 taxation years were issued by the Minister on January 13, 2004, in which LJP was given the benefit of the small business deduction.
[8] LJP had also filed returns for the 1998 and 1999 taxation years, in which it again claimed the small business tax deduction. In 2001, the Minister assessed LJP on the basis that it was associated with Jo-Van, again denying LJP the benefit of the small business deduction. LJP did not file notices of objection or waivers for these taxation years. Having failed to do so, LJP's right to appeal the 1998 and 1999 assessments to the Tax Court was extinguished.
[9] By letter dated April 12, 2004, LJP requested the reassessment of the 1998 and 1999 taxation years, based upon the findings of the Tax Court. The Minister refused to do so on the basis that no notices of objection had been filed in regards to the original assessments.
[10] Tax returns filed by LJP for the taxation years since 2000 have been assessed on the basis that it was not associated with Jo-Van, and LJP has been allowed to claim the small business tax deduction for these years.
LJP's Application for Mandamus
[11] After the Minister refused to reassess LJP for the 1998 and 1999 taxation years, LJP filed its application for judicial review in this Court, seeking an order of mandamus requiring that the Minister carry out the reassessments. LJP relies upon the provisions of subsection 152(4.3) of the Income Tax Act in support of its application.
[12] Subsection 152(4.3) provides that:
| 152 (4.3) Notwithstanding subsections 152(4), 152(4.1) and 152(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. |
152 (4.3) Malgré les paragraphes (4), (4.1) et (5), lorsqu'une cotisation ou une décision d'appel a pour effet de modifier un solde donné applicable B un contribuable pour une année d'imposition donnée, le ministre peut ou, si le contribuable en fait la demande par écrit, doit, avant le dernier en date du jour d'expiration de la période normale de nouvelle cotisation pour une année d'imposition subséquente et de la fin du jour qui tombe un an aprPs l'extinction ou la détermination de tous les droits d'opposition ou d'appel relatifs B l'année donnée, établir une nouvelle cotisation B l'égard de l'impôt, des intérLts ou des pénalités payables, ou déterminer de nouveau un montant réputé avoir été payé, ou payé en trop, en vertu de la présente partie par le contribuable pour l'année subséquente, mais seulement dans la mesure oj il est raisonnable de considérer que la nouvelle cotisation ou la détermination se rapporte B la modification du solde donné applicable au contribuable pour l'année donnée.
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[13] Also relevant to LJP's application is subsection 152(4.4) of the Income Tax Act, which defines what is meant by the term "balance" as it is used in subsection 152(4.3):
| (4.4) For the purpose of subsection 152(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.
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(4.4) Pour l'application du paragraphe (4.3), le solde applicable B un contribuable pour une année d'imposition correspond au revenu, au revenu imposable, au revenu imposable gagné au Canada ou B une perte du contribuable pour l'année, B l'impôt ou autre montant payable par lui pour l'année, B un montant qui lui est remboursable pour l'année ou B un montant réputé avoir été payé, ou payé en trop, par lui pour l'année. |
[14] LJP relies upon its success in the Tax Court of Canada with respect to the non-association findings for the 1995, 1996 and 1997 taxation years, submitting that its 1998 and 1999 tax years should have been reassessed on the same basis.
[15] In its Notice of Application, LJP asserted that the Minister incorrectly refused to exercise his jurisdiction, erred in law and otherwise acted in a manner contrary to law by refusing to conduct a reassessment in accordance with LJP's written request.
[16] The Minister then brought a motion pursuant to Rule 221 of the Federal Courts Rules seeking an order striking out LJP's Notice of Application. Prior to the matter being heard by the Prothonotary, LJP sought to strike the Affidavit of Ken Berini, filed by the Minister in support of the motion. LJP also challenged the Minister's reliance on Rule 221 in these circumstances.
[17] Justice Snider dismissed LJP's motion to strike the Berini affidavit, holding that, whether Rule 221 was the operative rule for the Minister's motion or not, it was open to the Court to receive affidavit evidence with respect to arguments based on the jurisdiction of the Court to entertain an application for judicial review.
The Order of the Prothonotary
[18] The Minister's motion to strike LJP's application for mandamus was subsequently granted by the Prothonotary. In granting the motion, the Prothonotary found that the plain language of subsection 152(4.3) of the Income Tax Act, together with the reference to "the balance of a taxpayer for a taxation year" indicated that the subsection refers to a change to the numerical calculation of an amount of money, as opposed to a change to the legal principles upon which the taxpayer's income is determined.
[19] In coming to this conclusion, the Prothonotary relied extensively on the decision of the Federal Court of Appeal in Sherway Centre Ltd. v. Canada, [2003] F.C.J. No. 67, 2003 F.C.A. 26.
[20] As a result, the Prothonotary found that LJP had not brought itself within the provisions of subsection 152(4.3) of the Income Tax Act, and was therefore not entitled to a reassessment.
[21] In assessing whether LJP's Notice of Application should be struck, the Prothonotary applied the test articulated by the Federal Court of Appeal in David Bull Laboratories (Canada) Inc. v. Pharmacia Inc., [1994] F.C.J. No. 1629 (C.A.), asking herself whether the application was "so clearly improper as to be bereft of any possibility of success".
[22] In concluding that the question should be answered in the affirmative, the Prothonotary found that while the facts in this case were somewhat different than those in Sherway, these factual distinctions did not result in LJP coming within the exception created by subsection 152(4.3). That is, the Prothonotary found that the Tax Court's finding of non-association did not have a consequential effect on a "balance", as that word was defined in the legislation.
[23] As a result, the Prothonotary struck LJP's Notice of Application, and the application was dismissed.
Standard of Review
[24] The parties are in agreement that the standard of review to be applied to the Prothonotary's decision is that of correctness. Given that the Prothonotary's decision finally disposed of LJP's application for judicial review, I agree that the decision should be reviewed on a de novo basis: see Merck & Co. Inc. v. Apotex, [2003] F.C.J. No. 1925, 2003 FCA 488 at ¶ 18-19.
Analysis
[25] As was noted by the Prothonotary, an application for judicial review will not be struck out prior to a hearing on the merits of the application, unless the application is so clearly improper as to be bereft of any possibility of success: David Bull, above.
[26] The reason why the test is so strict is that it is ordinarily more efficient for the Court to deal with a preliminary argument at the hearing of the application for judicial review itself, rather than as a preliminary motion: Addison & Leyen Ltd. et al., v. Canada, [2006] F.C.J. No. 489, 2006 FCA 107, at ¶ 5.
[27] By analogy to the process followed in relation to the striking out of a statement of claim, on a motion to strike a Notice of Application, the facts asserted by the applicant in the application must be presumed to be true: Addison & Leyen Ltd. et al., above, at ¶ 6.
[28] Thus the question for the Court is whether, based upon the facts alleged in LJP's Notice of Application, the application is so clearly improper as to be bereft of any possibility of success.
[29] The Minister says that quite apart from the reasons given by the Prothonotary for striking out the Notice of Application and dismissing the case, the Federal Court had no jurisdiction to entertain LJP's application in the first place.
[30] Although the application for judicial review is framed in terms of reviewing a decision, the Minister submits that, in essence, what LJP is actually seeking is an order for the reassessment of the 1998 and 1999 taxation years. Citing the decisions in Optical Recording Laboratories v. Canada, [1991] 1 F.C. 309, Scott Slipp Nissan Ltd. v. Canada (Attorney General), [2004] F.C.J. No. 1327, 2004 FC 1096, the Minister argues that the power to order a reassessment under the Income Tax Act is one that is exclusively reserved to the Tax Court of Canada.
[31] Further, the Minister contends that by virtue of section 18.5 of the Federal Courts Act, the Federal Court is without jurisdiction to deal with LJP's application, as the Income Tax Act provides the appropriate procedure for dealing with this matter.
[32] Section 18.5 of the Federal Courts Act provides:
| 18.5 Despite sections 18 and 18.1, if an Act of Parliament expressly provides for an appeal to [...] the Tax Court of Canada [...] from a decision or an order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except in accordance with that Act.
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18.5 Par dérogation aux articles 18 et 18.1, lorsqu'une loi fédérale prévoit expressément qu'il peut Ltre interjeté appel, devant la Cour fédérale, la Cour d'appel fédérale, la Cour suprLme du Canada, la Cour d'appel de la cour martiale, la Cour canadienne de l'impôt, le gouverneur en conseil ou le Conseil du Trésor, d'une décision ou d'une ordonnance d'un office fédéral, rendue B tout stade des procédures, cette décision ou cette ordonnance ne peut, dans la mesure oj elle est susceptible d'un tel appel, faire l'objet de contrôle, de restriction, de prohibition, d'évocation, d'annulation ni d'aucune autre intervention, sauf en conformité avec cette loi. |
[33] Having given the Minister's argument careful consideration, I am satisfied that this Court does in fact have jurisdiction to entertain LJP's application.
[34] The purpose behind section 18.5 is to prevent a multiplicity of proceedings. As a consequence, judicial review is precluded where there already exists a statutory right of appeal to the Tax Court, or another such body.
[35] It is true that an application for judicial review of the decision of the Minister to assess or confirm a person's tax liability is beyond the jurisdiction of this Court, because the assessment of that liability may be appealed to the Tax Court: Addison & Leyen Ltd. et al., above, at ¶ 48.
[36] However, it must be recalled that what LJP is seeking in this case is not to appeal an income tax assessment to this Court, but rather an order of mandamus, requiring that the Minister exercise his statutory duty. In this regard, LJP asserts that the Minister incorrectly refused to exercise his jurisdiction, erred in law or otherwise acted in a manner contrary to law. Such relief is not available to LJP in the Tax Court.
[37] I am therefore satisfied that, to the extent that LJP's application seeks an order compelling the Minister to perform a statutory duty, the application is one that is properly brought in this Court. Whether or not such a duty in fact exists in the circumstances of this case is another question altogether. This was the question addressed by the Prothonotary in her decision, and I turn next to consider whether her conclusion in this regard was correct.
[38] Given that the Prothonotary's decision was based on the decision of the Federal Court of Appeal in the Sherway matter, it is important to start by considering what it is that Sherway says.
[39] Sherway had succeeded in establishing its entitlement to deductions for interest on mortgage loan payments before the Tax Court for the 1987 and 1988 tax years. Although the time for filing an objection had expired, Sherway objected to assessments made in relation to the 1989, 1990 and 1991 tax years, claiming that its income should be recalculated in accordance with the Tax Court's decision.
[40] The Tax Court held that the exception in subsection 152(4.3) of the Income Tax Act only applied where a different numerical amount was found to be applicable, and not where a different method of calculating income had been imposed.
[41] The Federal Court of Appeal dismissed Sherway's appeal, finding that the Minister did not have the jurisdiction to reassess Sherway's taxes based upon the outcome of its successful appeal to the Tax Court and the attendant change in the method to be used in calculating its income.
[42] In coming to this conclusion, the Court held that the exception to the limitation period for filing a notice of objection created by subsection 152(4.3) of the Income Tax Act only applied where there had been a change to a fixed amount of money, and not where what had changed was a method of calculation.
[43] As a consequence, given that Sherway had not objected to the 1989, 1990 and 1991 assessments in a timely fashion, the Minister could not entertain the request for reassessment.
[44] In this case, based upon the facts as pleaded by LJP in its Notice of Application, the Prothonotary concluded that the Tax Court's finding that LJP and Jo-Van were not associated companies in previous years did not have a consequential effect on a "balance", as that term is defined in the Income Tax Act, for the years in question. Rather, the Prothonotary found that what LJP was seeking was to have legal principles relating to its status as determined by the Tax Court in relation to certain taxation years applied to other taxation years, in a manner that the Federal Court of Appeal had already determined is not appropriate.
[45] I am of the view that the decision of the Prothonotary was correct. Subsection 152(4.3) of the Income Tax Act creates a limited exception to the provisions limiting the time within which the Minister may reassess any particular taxation year. While the provision does state that the Minister shall reassess, upon receipt of a written request from a taxpayer, it is clear that the duty to reassess is only engaged when the result of a decision on an appeal is to change a "particular balance" of a taxpayer for a previous year, and then only to the extent that the reassessment can reasonably be considered to relate to the change in the particular balance for the succeeding year or years. An example of this would be where there has been a change to the calculation of a reserve or the carry-forward of a capital gain or loss.
[46] I also do not accept LJP's contention that it was premature for the Prothonotary to have struck the Notice of Application at such an early stage. While acknowledging that the issue before the Prothonotary was a pure question of law, LJP nevertheless says that a "fully developed factual matrix" was necessary in order to be able to properly answer the question. I do not agree.
[47] Not only was the Prothonotary's decision based entirely on the facts as pleaded by LJP itself in its Notice of Application, presuming those facts to be true, LJP has not pointed to any additional evidence that could have changed the outcome of this case.
[48] The question of law identified by LJP was "whether the interpretation of 'balance' in the Sherway decision is too restrictive". LJP may not agree with the Federal Court of Appeal's interpretation of the applicable legislation, but the fact is that Sherway is a decision of the Federal Court of Appeal, and reflects the current state of the law on this point.
[49] LJP's submission that it should be allowed to argue that, based upon the principles of res judicata or issue estoppel, the decision of the Tax Court in relation to the 1995, 1996 and 1997 taxation years should be applied to the 1998 and 1999 tax years is similarly bereft of any chance of success. The Federal Court of Appeal was categorical in Sherway that res judicata does not arise in relation to the assessment of different taxation years. It would necessarily follow that the "same issue" requirement for the creation of an issue estoppel could not be satisfied.
[50] Finally, LJP says that it should be allowed to pursue its application for judicial review in this Court, as there is no other way for it to obtain a reassessment of the 1998 and 1999 tax years based upon the decision of the Tax Court, and with that, a further right of appeal to the Tax Court in relation to these taxation years.
[51] The difficulty I see with this argument is the same one identified by the Federal Court of Appeal in Sherway. That is, a mechanism exists in the Income Tax Act that would have allowed LJP to go to the Tax Court to pursue the relief it is now seeking indirectly in this Court, had LJP acted prudently and preserved its rights in relation to the 1998 and 1999 tax years by filing timely Notices of Objection. Having failed to do so, and by allowing the limitation period for objecting to the reassessments to expire, LJP is, to a large extent, the author of its own misfortune.
[52] As the Federal Court of Appeal further observed in Sherway (at ¶ 44), it is the nature of limitation periods that their application will sometimes result in taxpayers having to pay more or less tax than they would otherwise have been required to pay.
Conclusion
[53] For these reasons, the appeal is dismissed. The parties agree that costs should be on the ordinary scale and should follow the event, and I so order.
JUDGMENT
This Court orders and adjudges that the appeal is dismissed, with costs.
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-473-04
STYLE OF CAUSE: LJP SALES AGENCY INC. v.
MINISTER OF NATIONAL REVENUE
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: March 29, 2006
REASONS FOR JUDGMENT
AND JUDGMEMT BY: Mactavish J.
APPEARANCES BY:
Mr. Thomas McRae FOR THE APPLICANT
Ms. Marie-Thérèse Boris
Ms. Lorraine Edinbolo FOR THE RESPONDENT
SOLICITORS OF RECORD:
Shibley Righton LLP
Barristers and Solicitors
Toronto, Ontario FOR THE APPLICANT
John H. Sims, Q.C.
Deputy Attorney General of Canada FOR THE RESPONDENT