Tax Court of Canada Judgments

Date: 19971107

Dockets: APP-506-96-IT; APP-507-96-IT

BETWEEN:

GOR-CAN CANADA INC., ALPHA-LEATHER CANADA INC.,

Applicants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

RIP J.T.C.C.

[1] Alpha-Leather Canada Inc. (“Alpha”) and Gor-Can Canada Inc. (“Gor-Can”) have each applied to this Court pursuant to section 167 of the Income Tax Act (“Act”) for orders extending time within which appeals may be instituted. The applications were heard together on common evidence.

[2] The Minister of National Revenue (“Minister”) assessed each applicant on the following dates:

Years Assessed	Gor-Can	Alpha
1991	September 13, 1991	September 13, 1991
1992	September 28, 1992	September 28, 1992
1993	November 8, 1993	October 28, 1993
1994	August 22, 1994

[3] The Minister reassessed the applicants’ 1991, 1992 and 1993 taxation years and, in the case of Gor-Can, the 1994 taxation year as well, on August 28, 1995. In reassessing, the Minister disallowed a number of deductions claimed by the applicants in their tax returns. One of the claims in dispute was whether certain expenditures, referred to as the “Saar expenditures”, were incurred by the applicants and, if so, whether these expenditures were deductible by the applicants in computing their incomes for the particular years.

[4] Both Alpha and Gor-Can objected to the assessments. They authorized their accountant, a member of an auditing firm, to negotiate settlement of the reassessments with Revenue Canada.[1]

[5] Eventually a settlement was reached and the accountant forwarded the settlement documents, prepared by Revenue Canada, for execution by Mr. John Gorenko, president of the applicants. Under the terms of the settlement, certain claims were allowed but other claims were not. The “Saar expenditures” were not allowed. The “Saar expenditures” are not specifically mentioned in the settlement documents. The settlements were in the following terms:

PROPOSED SETTLEMENT

REVENUE CANADA - APPEALS DIVISION (Montreal)

Date: May 23 1996

Re: Notice of Objection for 1991, 1992, 1993 and 1994, concerning: Gor-Can Canada Inc.

Revenue Canada proposes to settle the present files as follows:

Gor-Can Canada Inc.

1991 1992 1993 1994

Expenses allowed

1) Selling salaries 8,500 10,500 15,673 42,244

2) Repairs and maintenance 52,244

3) Bad debts 364,330

All other items of the assessments remain unchanged.

for the Chief of Appeals

Montreal District Office

ACCEPTANCE:

The undersigned, Mr. John Gorenko and Mrs. Nicole Gorenko, on behalf of Gor-Can Canada Inc. understand and agree to the above proposed settlement with Revenue Canada and agree to waive any rights of Objection and of Appeal, in accordance with subsections 165(1.2) and 169(2.2) of the Income Tax Act, with respect to the assessments that will be issued in connection therewith, including any rights the companies may have under the “fairness package”.

______________ __________________

DATE SIGNATURE

PROPOSED SETTLEMENT

REVENUE CANADA - APPEALS DIVISION (Montreal)

Date: July 2, 1996

Re: Notice of Objection for 1990, 1991, 1993 and 1994, concerning: Alpha Leather Canada Ltd.

Revenue Canada proposes to settle the present files as follows:

Alpha Leather Canada Ltd.

1991 1992 1993

A) Expenses allowed

1) Selling salaries 8,500 10,500 7,041

2) Unrealized foreign

exchange loss 122,404

B) Reduction of losses cancelled 417,448

* As discussed, the Notice of Objections for 1990 and 1994 are considered invalid.

for the Chief of Appeals

Montreal District Office

ACCEPTANCE:

The undersigned, Mr. John Gorenko, on behalf of Alpha Leather Canada Ltd. understands and agrees to the above proposed settlement with Revenue Canada and agrees to waive any rights of Objection and of Appeal, in accordance with subsections 165(1.2) and 169(2.2) of the Income Tax Act, with respect to the assessments that will be issued in connection therewith, including any rights the companies may have under the “fairness package”.

______________ __________________

DATE SIGNATURE

[6] I note the Gor-Can settlement specifies items not allowed under the settlement remain unchanged. There is no such statement in the Alpha settlement.

[7] Mr. Gorenko signed the Gor-Can settlement on May 29, 1996 and the Alpha document on July 2, 1996.

[8] The Minister reassessed Gor-Can on June 29, 1996 and Alpha on August 12, 1996. These reassessments were based on the terms of the settlements executed by Mr. Gorenko and were nil assessments.

[9] Mr. Gorenko testified on behalf of the applicants. He stated that at the time he agreed to settle the reassessments he was under emotional stress because of business reversals and bank pressure. He acknowledged, however, that when he signed the settlements, he realized “the signing was final” and that he could not appeal any assessment based on the settlements.

[10] Then, during the second week of October 1996, the Special Investigations unit of Revenue Canada attended at business premises of the applicants and the residence of Mr. Gorenko. Under authority of warrants issued by the Cour de Québec, Criminal Division, on October 7, 1996, the Special Investigation unit seized certain business records. Apparently, on or about October 7, 1996, one André Faribault in his capacity as an officer of Revenue Canada, swore that he had reasonable grounds to believe and did believe certain alleged offences had been committed under the Act by, amongst others, Gor-Can and Alpha. These alleged offences essentially related to the “Saar expenditures”.

[11] Mr. Gorenko stated that until the warrants were executed, neither he nor the applicants had any knowledge that Revenue Canada was going to revisit the “Saar expenditures”. As far as he was concerned, once he signed the settlements of the assessments, all matters between the applicants and Revenue Canada with respect to the “Saar expenditures” had been concluded and were final. Mr. Gorenko then engaged counsel to act on behalf of the applicants. In the course of preparing the defence on behalf of the applicants, counsel advised that Revenue Canada’s disallowance of the “Saar expenditures” ought to be challenged. The applicants stated that Revenue Canada kept their ongoing investigation hidden from them. Had the investigation not been kept secret, the applicants would have objected to the reassessments issued on July 29 and August 12, 1996 by way of an appeal to this Court within the time provided for by subsection 169(1) of the Act.

[12] Mr. Gorenko stated that from the time he got in touch with his accountant and his lawyer “it took about 30 days to put together the facts” and he realized that Revenue Canada was investigating whether criminal action should be taken against the applicants with respect to the “Saar expenditures”. In Mr. Gorenko’s view once the seizures took place the settlements were no longer valid and that the reassessments issued pursuant to the settlements ought to be appealed. He did not want the concessions the applicants made in arriving at the settlements to be used against them in a criminal proceeding. The applicants never intended to admit the “Saar expenditures” were fictitious or were not deductible. He stated he “wants to start from zero” because Revenue Canada is questioning the expenses from a criminal point of view. If no seizure had taken place he would be content with the reassessments. By seizing the business records, Revenue Canada reneged on the settlement.

[13] In cross-examination Mr. Gorenko stated that “bulk of the unallowed Saar expenses should have been allowed ... [my] priorities [were] focused elsewhere ... and [I] wanted to put out a fire ... [It] was the worst point of my business career ...” he added, “now that I see the light ... I shouldn’t have settled ...”. Mr. Gorenko declared that “since he was under stress when he signed the settlement agreements he and the applicants should not be bound by them”. He stated that his accountant never told him that Revenue Canada was investigating the “Saar expenditures” at the time he signed the settlements.[2] The accountant did not testify.

[14] In 1996, the applicants also took action before the Superior Court, District of Montréal, asking (among other things) that the warrants be set aside. On July 17, 1997 a judgment was issued by the Honourable Madam Justice Côté denying the applicants’ Petition.[3] One of the allegations made by the petitioners was that Revenue Canada’s action was an abuse of power. They were never informed that the Special Investigation unit of Revenue Canada would interfere with the settlements. Counsel for the applicants had argued in Superior Court that it is inequitable for Revenue Canada to lure a taxpayer into a final settlement, and at the same time cause the applicants to renounce any rights to appeal, when the question of the “Saar expenditures” was still under study by Special Investigations. On review of the evidence Côté, J. held that the applicants did not establish that there was a manifest case of abuse by Revenue Canada. She found that Revenue Canada never urged Mr. Gorenko or the applicants to renounce their rights. Moreover no false representation was made by Revenue Canada to the applicants nor its representative that the settlement of the reassessments would exclude any penal action. Côté, J. held that the settlement of the assessments did not prevent Revenue Canada from taking any penal action against the applicants.

[15] The judgment of Côté, J. has been appealed to the Quebec Court of Appeal. The appeal is not expected to be heard within the next year.

[16] Applicants’ counsel wants me to extend the time for appealing for two reasons:

a) The settlement was based on false representations on the part of Revenue Canada and that Revenue Canada did not inform the applicants of possible criminal proceedings, and

b) the applicants wish to repudiate the settlements because they do not want a court to consider the settlements as an admission that the “Saar expenditures” were improper, frivolous or fraudulent.

[17] I need not comment on the reasons the applicants wish to extend the time within which to appeal. The Superior Court of Montréal, the court of competent jurisdiction, has refused to cancel the warrants. I note the applicants have not asked the Superior Court to repudiate the settlement agreements and they remain bona fide and valid agreements. The applicants therefore would have no basis to appeal the assessments based on these settlements.

[18] Finally, and most important, is the fact that all the assessments the applicants wish to appeal from are nil assessments. No appeal lies from a nil assessment: see, for example, Okalta Oils Ltd. v. M.N.R., 55 DTC 1176 (S.C.C.); The Queen v. Bowater Mersey Paper Company Limited, 87 DTC 5382 (F.C.A.), 86 DTC 6293 (F.C.T.D.); Lornex Mining Corporation Ltd. v. M.N.R., 88 DTC 6399 (F.C.T.D.) and Consoltex Inc. v. The Queen, 92 DTC 1567 (T.C.C.). On the basis of these decisions alone, the applicants’ applications ought to be dismissed and are dismissed with costs to the respondent.

"Gerald J. Rip"

J.T.C.C.

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