Tax Court of Canada Judgments

Date: 20000911

Docket: 1999-1708-IT-G

BETWEEN:

GERALD PATRICK SINNOTT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1] This appeal is from an assessment for the appellant's 1997 taxation year. The facts are straightforward and not in dispute, but the case raises a number of interesting and slightly troublesome questions of law.

[2] The appellant, a barrister and solicitor, was petitioned into bankruptcy on March 25, 1994 and by order made on 14 November 1994 was declared to be a bankrupt. He remains to this date an undischarged bankrupt.

[3] The trustee in bankruptcy of the appellant was Ernst & Young Inc. and the person in that company in charge of the appellant's bankruptcy was Mr. Kenneth Glover. On July 20, 1995 a registrar of the Supreme Court of British Columbia ordered that the trustee be changed to Ken Glover & Associates Inc., of which Kenneth Glover was the principal.

[4] On April 29, 1998 Mr. Sinnott filed an income tax return for 1997 in which he showed his address to be 1125 Ash Street, Campbell River, British Columbia V9W 1G8.

[5] On September 4, 1998 the Minister of National Revenue issued a notice of assessment which he sent as follows:

Gerald P Sinnott

c/o Kenneth Raymond Gosford Glover

109 645 Fort Street

Victoria B.C. V8W 1G2

[6] On 10 September 1998 Ken Glover & Associates Inc. sent a copy of the notice of assessment to the appellant by fax at his business address as well as a covering letter. The letter read as follows:

For your records, we enclose a copy of your 1997 Revenue Canada Taxation Notice of Assessment dated September 4, 1998, which was directed to the Trustee as you are an undischarged bankrupt. Please provide the Trustee with a copy of your 1997 income tax return that you filed with Revenue Canada Taxation.

We look forward to your prompt reply to this request and to our outstanding letter of August 25, 1998.

[7] On November 25, 1998 Mr. Sinnott filed a notice of objection. The notice of objection read as follows:

1. In April of 1998 I filed my income tax return for my 1997 income giving as my address that of my residence at 1125 Ash Street, Campbell River, British Columbia.

2. That following the assessment of my tax return notice of that assessment was wrongfully sent to me care of Kenneth Raymond Gosford G.L. at 109-645 Fort Street, Victoria, B.C. V8W 1G2.

3. That at the present time I am an undischarged bankrupt, but I have not provided my Trustee in Bankruptcy with a consent form T1013 or an authorization and Direction letter in accordance with appendix 1 of Policy Statement 1 dealing with income tax returns issued the 21st of January 1993.

4. That I believe the Notice of assessment in order to be valid should have been sent to me in accordance with section 152(2) of the Income Tax Act, and I further believe the sending of my tax assessment as was done here to a third party without my consent may be a breach of section 241 of the Income Tax Act.

[8] The Minister's response of December 3, 1998 was as follows:

This is in response to your objection dated November 25, 1998. We have reviewed your correspondence and are unable to accept it as a valid Notice of Objection for 1997.

Under subsection 165(1) of the Income Tax Act, a taxpayer has the right to object to the assessment of tax, interest or penalties for a particular year. There is no right under this subsection for an individual to object to the fact that a Notice of Reassessment was issued to an address other than the individual's address.

However, we have forwarded your correspondence to the T1 Client Services Section of the Surrey Taxation Centre for their review. You will be advised of their results when their review has been completed.

[9] The issues are:

(a) Did the Minister of National Revenue fulfil his statutory obligation to send the notice of assessment "to the person by whom the return was filed" by sending it to the trustee in bankruptcy?

(b) If the Minister did send the notice of assessment to the wrong person has the assessment been validly made?

(c) Does the appellant, Mr. Sinnott, an undischarged bankrupt, have any standing to appear before this court on an appeal from an assessment or should it be the trustee in bankruptcy?

(d) Is it within the jurisdiction of the court to entertain an appeal from a purported assessment where the central issue is whether the assessment was valid because it was sent to the wrong person?

[10] In the course of argument I asked Mr. Sinnott what he was seeking to achieve. I am still somewhat unclear on the practical effect of my agreeing with all or any of the points Mr. Sinnott is making. Assuming I accept that the assessment to be valid it had to be sent to Mr. Sinnott personally and not the trustee, it would follow that no assessment has been made and therefore the Minister is not limited by the three-year normal assessment rule. The Minister could simply send the notice to Mr. Sinnott personally. Even if the three-year normal reassessment period under section 152 started to run on September 4, 1998, the Minister would still be within time to issue a new assessment. Mr. Sinnott stated that he has no objection to the amount of tax assessed.

[11] I shall endeavour, however, to answer the questions as raised by the parties.

[12] Subsection 128(2) contains a fairly extensive and detailed code relating to the bankruptcy of an individual. The provisions that are relevant to this appeal are the following:

Where an individual has become a bankrupt, the following rules are applicable:

(a) the trustee in bankruptcy shall be deemed to be the agent of the bankrupt for all purposes of this Act;

(b) the estate of the bankrupt shall be deemed not to be a trust or an estate for the purposes of this Act;

(c) the income and the taxable income of the individual for any taxation year during which the individual was a bankrupt and for any subsequent year shall be calculated as if

(i) the property of the bankrupt did not pass to and vest in the trustee in bankruptcy on the receiving order being made or the assignment filed but remained vested in the bankrupt, and

(ii) any dealing in the estate of the bankrupt or any act performed in the carrying on of the business of the bankrupt estate by the trustee was done as agent on behalf of the bankrupt and any income of the trustee from such dealing or carrying on is income of the bankrupt and not of the trustee;

...

(e) where the individual was a bankrupt as any time in a calendar year the trustee shall, within 90 days from the end of the year, file a return with the Minister, prescribed form, on behalf of the individual of the individual's income for any taxation year occurring in the calendar year computed as if

(i) the only income of the individual for that taxation year was the income for the year, if any, arising from dealings in the estate of the bankrupt or acts performed in the carrying on of the business of the bankrupt by the trustee,

(ii) in computing taxable income, the individual was not entitled to any deduction permitted by Division C for that taxation year except any deduction permitted by section 111, and

(iii) in computing the tax payable under this Part by the individual, the individual was not entitled to deduct any amount under any of sections 118 to 118.3, 118.5, 118.6, 118.8 and 118.9,

and the trustee is liable to pay any tax payable under this Part by the individual in respect of that taxable income for that taxation year;

(f) notwithstanding paragraph (e), the individual shall file a separate return of the individual's income for any taxation year during which the individual was a bankrupt, computed as if

(i) the income required to be reported in respect of the year by the trustee under paragraph (e) was not the income of the individual,

(ii) in computing income, the individual was not entitled to deduct any loss sustained by the trustee in the year in dealing with the estate of the bankrupt or in carrying on the business of the bankrupt,

(iii) in computing taxable income, the individual was not entitled to any deduction under section 111 with respect of any losses for a previous taxation year,

and the individual is liable to pay any tax payable under this Part by the individual in respect of that taxable income for the taxation year.

[13] Under paragraph 128(2)(f) the bankrupt individual is the person who must file a separate return for income not included in the return prepared by the trustee. Under subsection 152(2) the Minister must send the notice of assessment relating to that return "to the person by whom the return was filed". I agree that the sending of a notice is an essential part of the assessment process (Scott v. M.N.R., 60 DTC 1273). In my view that obligation is satisfied by sending the notice to the trustee, who is the bankrupt individual's agent "for all purposes of this Act". The Minister could satisfy his obligation equally well by sending it directly to the bankrupt individual.

[14] The statement in the letter from the appeals section of December 3, 1998 that there is no right under subsection 165(1) to object to the fact that a notice of reassessment was issued to an address other than the individual's address is wrong.

[15] The invalidity of a purported assessment — whether it be because it is statute-barred or because it is invalid for some other reason, such as not being sent to the right address or the right person, is quite properly raised in a notice of objection. The appeals section has no right to reject a notice of objection on such grounds.

[16] The situation is analogous to that discussed by Duff C.J. in Provincial Secretary of Prince Edward Island v. Egan, [1941] S.C.R. 396 at 399:

I think the contention of the appellant is well founded that section (1) of chap. 5 of the P.E.I. Statutes of 1940 gives prima facie an appeal to the Supreme Court (P.E.I.) from any decree, judgment, order, or conviction by a Judge of a County Court who is acting in a judicial capacity, though persona designata and not as the County Court, under the authority of a Provincial statute. This is not intended to be an exhaustive description, but in such circumstances I think an appeal lies.

The fact that the County Judge has acted without jurisdiction does not, in my opinion, affect this right of appeal. Once the conclusion is reached that the section intends to give an appeal to the Supreme Court, even where the County Court Judge is exercising a special jurisdiction and not as the County Court, I can see no reason for limiting the scope of the appeal in such a way as to exclude questions of jurisdiction. As the Attorney-General observed in the course of his argument, lawyers are more familiar with the practice of dealing with question of jurisdiction raised by proceedings by way of certiorari and prohibition. a tribunal exercising a limited statutory jurisdiction has no authority to give a binding decision upon its own jurisdiction and where it wrongfully assumes jurisdiction it follows, as a general rule, that, since what he has done is null, there is nothing to appeal from. But here we have a statute and this is only pertinent on the point of the meaning and effect of the statute.

It has always seemed to me that the proceeding by way of appeal would be the most convenient way of questioning the judgment of any judicial tribunal whose judgment is alleged to be wrong, whether in point of wrongful assumption of jurisdiction, or otherwise. There is no appeal, of course, except by statute and, I repeat, the question arising upon this point is entirely a question of the scope and effect of this statute.

[17] This passage was quoted and followed by Jackett P. (as he then was) in M.N.R. v. Gunnar Mining Ltd., 70 DTC 6135 at 6137 (Exchequer Court).

[18] The conclusion that the notice of assessment was properly sent to the trustee is sufficient to dispose of the appeal since no other objection to the assessment is made. Nonetheless, I shall deal briefly with the argument that an undischarged bankrupt has no right either to object to an assessment or appeal from it.

[19] I start from the observation that under the Income Tax Act the bankrupt individual is

(a) the person who must file the separate return as a bankrupt;

(b) the person who is assessed with respect to that return; and

(c) the person who must pay the tax.

[20] Does it follow that such an individual has the right to file an objection and to appeal to this court?

[21] There are some differences between the scheme of the Income Tax Act and the Bankruptcy and Insolvency Act, and they are not necessarily reconcilable. The first is that the trustee is deemed to be an agent of the bankrupt for the purposes of the Income Tax Act. No such agency specifically arises under the Bankruptcy and Insolvency Act.[1] Second, the estate of the bankrupt is deemed not to be an estate or trust for the purposes of the Income Tax Act, although it is an estate or trust for the purposes of the Bankruptcy and Insolvency Act as it read in 1997. Third, the salary, wages or other remuneration of the bankrupt individual that arises after the bankruptcy does not vest in the trustee. Moreover, income tax refunds with respect to thereto belong to the bankrupt and not the trustee.[2]

[22] The question was explored at some length by Iacobucci J. in Marzetti v. Marzetti, [1994] 2 S.C.R. 765. I may summarize his conclusions as follows:

1. Section 67 of the Bankruptcy and Insolvency Act, by itself, would dictate that the refund of tax on earnings arising after a declaration of bankruptcy should vest in the trustee.

2. Section 68 of the Bankruptcy and Insolvency Act is a substantive provision that is a complete code. The trustee may ask a court to direct that salary, wages or remuneration or a portion thereof of a bankrupt be paid to the trustee. Absent such a direction the post bankruptcy salary, wages or remuneration belong to the bankrupt.

3. A refund of tax in respect of such salary, wages or remuneration belongs to the bankrupt unless the trustee makes an application to a court to have it sent to the trustee or unless the bankrupt authorizes the Minister to send it to the trustee.

[23] It follows, therefore, that since a refund belongs to the bankrupt, a right to object to or appeal from an assessment with a view to obtaining such a refund is not property divisible among the bankrupt's creditors. Therefore the bankrupt may pursue such an objection or appeal in his or her own name.

[24] The case of Biron v. Minister of National Revenue, [1998] 3 C.T.C. 2012, dealt with an attempt by a person, whose bankruptcy occurred in 1994, to proceed in his own name with appeals relating to the 1979 to 1983 taxation years. The right to proceed with those appeals were rights that arose prior to the bankruptcy and vested in the trustee on the date of bankruptcy. The same observation is true of Belham v. Strider, etc., 57 C.B.R. 171. There, the Federal Court—Trial Division held that the bankrupt had no status to sue in his own name for wages earned prior to his bankruptcy.

[25] I do not think that either of these cases has any application. We are dealing with the narrow situation of a bankrupt who, as is required under the Income Tax Act, files a return of his income while a bankrupt and is assessed. The refund to which he might become entitled does not automatically belong to the trustee. It would seem to follow inevitably that the Income Tax Act gives the bankrupt the right to pursue an objection and appeal to enforce a property right that belongs to him or her and not to the trustee.

[26] The fact that for the purposes of the Income Tax Act the trustee is the agent of the bankrupt does not deprive the bankrupt of such rights of objection and appeal as he or she may have under the Income Tax Act (see, for example, Leith v. M.N.R., 70 DTC 1144).

[27] Subsection 71(2) of the Bankruptcy and Insolvency Act reads as follows:

On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.

[28] I do not read that provision as depriving the bankrupt of the right to object to or appeal from an assessment of tax on salary, wages or other remuneration that arises after the bankruptcy without the intervention of the trustee.

[29] I have concluded that the assessment is validly made when sent to the trustee, but that the appellant has the right to object to it and to appeal from it. Since no objection to the assessment is made other than the fact it was sent to the trustee the appeal is dismissed with costs.

Signed at Ottawa, Canada, this 11th day of September 2000.

"D.G.H. Bowman"

A.C.J.

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