Date: 20011109
Docket: 1999-5087-IT-G
BETWEEN:
SHERWAY CENTRE LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowie J.
[1] These appeals are brought from assessments under the Income Tax Act (the Act) dated February 10, 1999, in respect of the Appellant's 1989, 1990 and 1991 taxation years. They are concerned with the results that flow from the Appellant's earlier, and successful, appeals to this Court in which Bonner J. held that the Appellant was entitled, in computing its income for each of the years 1987 and 1988, to deduct what is called participating interest. That decision[1] was affirmed by the Federal Court of Appeal.[2] What is now at issue is the consequences which flow, as a result of that decision, for the three subsequent taxation years.
[2] For convenience, I have set out in an appendix the various sections of the Act which are relevant to these appeals.
[3] The facts are not in dispute. The Appellant, in computing its income for each of the years 1984 to 1991, deducted its participating interest expense. By Notices of Reassessment dated November 30, 1992, the Minister reassessed the Appellant for 1987 and 1988 to disallow that expense in each year. At the same time, the Minister stated that the Appellant's non-capital loss balance at December 31, 1988 was $5,989,762. This amount was computed on the assumption that the participating interest was not deductible for the years 1984, 1985 and 1986.
[4] Following the successful appeals for 1987 and 1988 the Minister reassessed those years to give effect to the judgment. This was done on June 9, 1998, and at the same time the Minister gave to the Appellant a revised computation of its non-capital loss balance as at December 31, 1988. This was computed to be $7,634,761, consisting of the previously computed balance of $5,989,762 and the additional amounts of participating interest for 1987 and 1988, which were $872,749 and $772,250 respectively. He did not at this time increase the computation of the non-capital loss balance by the participating interest amounts for 1984, 1985 and 1986, which total $2,077,030, although he did do so at a later date.
[5] I turn now to the years under appeal. On June 20, 1994, the Minister reassessed the Appellant for each of these three years to disallow the claimed participating interest. The amounts of income assessed were:
1989 $3,504,917
1990 $5,527,083
1991 $3,040,823
The Appellant did not serve Notices of Objection in respect of any of these assessments.
[6] Following the Appellant's successful appeals of the 1987 and 1988 assessments, the Minister, in addition to reassessing those years to implement the Court's decision, on February 10, 1999, issued consequential reassessments for the taxation years 1989, 1990 and 1991 under subsection 152(4.3) of the Act. In doing so, he applied the non-capital loss balance previously computed to be $7,634,761 in the following way:
|
1989 |
1990 |
1991 |
|
|
Income |
$3,504,917 |
$5,527,083 |
$3,040,823 |
|
Loss carry forward |
$3,504,817 |
$4,027,083 |
102,861 |
|
Income subject to tax |
$100 |
$1,500,000 |
$2,937,962 |
This allocation of the losses was done in accordance with a request made by the Appellant on November 10, 1998. The Appellant filed Notices of Objection to these reassessments on May 10, 1999. On December 21, 1999, having received neither notice of confirmation nor further reassessments, the Appellant brought these appeals.
[7] Shortly after the present appeals were begun, the Appellant requested non-capital loss determinations for each of 1984 and 1985 under subsection 152(1.1), allowing the deduction of participating interest. It had previously filed a waiver in respect of 1986, and so it requested the Minister to reassess that year to allow the deduction. In June 2001 the Minister made the requested loss determinations for 1984 and 1985, and reassessed the 1986 taxation year, in each case allowing the participating interest deduction, as follows:
1984 $ 613,231
1985 $ 678,241
1986 $ 785,558
$2,077,030
As a result, the non-capital loss balance as of December 31, 1988 was increased to $9,711,791 ($7,634,761 + 2,077,030).
[8] The Appellant takes the position that it is now entitled to have the benefit of deductions for participating interest incurred in 1989, 1990 and 1991. These amounts are $898,219, $1,195,617 and $2,391,234 respectively. Counsel for the Respondent does not dispute that the Appellant would be entitled to reassessments allowing these deductions, if only it had objected to the reassessments for those years that were issued on June 20, 1994, or alternatively, filed waivers in respect of them. Since the Appellant did neither of these things, however, the years are not open for reassessment, except pursuant to subsection 152(4.3) and that, she says, was done correctly on February 10, 1999.
[9] The issue, then, is whether, having failed to object to the reassessments for 1989, 1990 and 1991 which were issued in 1994, and absent waivers for those years, the Appellant may now, by the present appeals from the assessments made in 1999 under subsection 152(4.3), have the benefit of deducting the participating interest in those three years.
[10] In its Amended Notice of Appeal, the Appellant advances arguments based on subsection 152(4.3) and paragraph 111(1)(a) of the Act, and on what counsel in argument referred to as the New St. James[3] principle. At the hearing of the appeal, Mr. Mitchell said that he would not rely on subsection 152(4.3), but only on the New St. James principle.
[11] That principle, as I understand it, is simply this. If, the Minister in assessing a taxpayer, has misstated the non-capital loss for a particular taxation year, which is statute-barred, and so has also misstated the balance of non-capital losses available to be applied to other years, then that error may be remedied in the reassessment or the appeal of a later year, provided that either the later year is open for reassessment, or there is a valid appeal with respect to it before the Court. The Minister or the Court, as the case may be, should, in dealing with that later year, re-compute the non-capital loss balance available to be carried forward, and in doing so should correct the error in respect of the earlier year.
[12] On June 18, 2001, the Appellant wrote to the Minister to request that the loss carry-forward balance of $9,711,791 be applied to reduce the taxable income for 1989 and 1990 to nil. Based on that, Mr. Mitchell contends in paragraphs 21 and 22 of his Memorandum of Fact and Law filed at the hearing:
21. Here the Appellant invokes the New St. James principle. If the deduction of prior years' losses are relevant in determining the taxable income for a particular year (1991), it is appropriate to determine those losses in accordance with the provision of the Act, which is not necessarily in accordance with the manner in which the prior years were filed. Put another way, while prior years that are statute barred cannot be reassessed, balances arising from those years can be recomputed in determining taxable income for years that are subject to reassessment.
"The Minister is obliged to assess in accordance with the law. If he assesses a prior year incorrectly and that year becomes statute barred, this will prevent his reassessing tax for that year, but it does not prevent his correcting the error in a year that is not statute barred even though it involves adjusting carry forward balances from previous years, whether they be loss carry forwards or balances of investment tax credits."
Coastal Construction & Excavating v. R. [1996]
3 CTC 2845 at p. 2856
22. In this case, to determine the amount of the non-capital loss that can be carried forward from 1989 and 1990 to 1991, it is necessary to determine the amount of the prior years' losses that is to be utilized in those years to reduce taxable income to nil. This in turn requires determining the taxable income for those years which determination must be made in accordance with the provisions of the Act. This means that in determining taxable income for 1989 and 1990, the income must be reduced by the participating interest. (emphasis in the original)
[13] In other words, in reassessing the 1990 year under subsection 152(4.3) the Minister must allow the 1989 participating interest as a deduction, and in reassessing the 1991 year he must allow the 1990 participating interest. Mr. Mitchell conceded that even on this theory the 1991 participating interest would have to await a subsequent open year to be credited.
[14] The Appellant had positive income in each of the years under appeal, prior to the application of the prior years' losses. That income had been assessed, without objection, under section 165 on June 20, 1994. By subsection 152(8), those assessments are deemed to be valid and binding, subject only to "being varied or vacated on an objection or appeal ... and subject to a reassessment". Losses carried forward to those years cannot create non-capital losses in those years because the definition of a taxpayer's non-capital loss for a taxation year, which is found in subsection 111(8) of the Act, does not include losses carried forward and applied by virtue of paragraph 111(1)(a). There is, therefore, no computation to be made of a non-capital loss for any of the years under appeal. They were originally, and they remain, years in which the Appellant had positive income, the assessments of which were made in 1994, and those assessments became final and binding when the Appellant did not file notices of objection.
[15] The only reassessment available is under subsection 152(4.3). Those reassessments are, by the terms of that subsection, limited to that which "can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year".[4] That is, it is limited to reflecting a change in the income, taxable income, loss, or the tax payable by the Appellant for 1987 or 1988 arising out of the reassessments of those years to implement Judge Bonner's judgment.[5] As Mr. Mitchell recognized when he abandoned reliance on subsection 152(4.3), a change in a balance of the Appellant for 1987 or 1988 cannot reasonably be said to be related to a change in the income of the Appellant for 1989, 1990 or 1991. The Minister, in making the reassessments now under appeal, did all that subsection 152(4.3) either requires or permits.
[16] The New St. James principle has no application here. The years 1989, 1990 and 1991 are not loss years, so there is no question of correcting an error by the Minister in computing their non-capital losses. Nor is there any need for that principle in a case of this kind. The Appellant had income in the years under appeal. It was assessed, and it let its rights of objection and appeal expire. The New St. James principle did not emerge to revive rights that had been permitted to expire. Prior to the enactment of subsection 152(1.1), a taxpayer with a non-capital loss in a taxation year had no direct mean by which to challenge the Minister's computation of that loss.[6] Any challenge had to await a subsequent year, and take the form of a challenge to the non-capital loss balance available to be applied against the income of other years.[7] The same is not true of years such as this taxpayer's 1989, 1990 and 1991 taxation years, where there were assessments available to be appealed.
[17] Mr. Mitchell did not contend at the hearing of this appeal that the February 10, 1999 assessments were not made as the subsection directs. The result of the decision of Bonner J. in the 1987 and 1988 appeals was to increase the non-capital loss balance to $7,634,761. The result of the reassessments of the 1984, 1985 and 1986 years, which were open for reassessment by reason of the objections for 1984 and 1985 and the waiver for 1986, was to further increase the non-capital loss balance to $9,711,791. Subsection 152(4.3) does not, however, allow the Minister to reassess the 1989, 1990 and 1991 taxation years to change the taxable income for those years as earlier assessed by allowing the additional deduction. A loss carried forward from a prior year does not come within the definition of the non-capital loss of a taxpayer for a taxation year.[8] Nor does it otherwise come within the definition of a "balance" in subsection 152(4.4). To do what the Appellant now asks would go beyond what could "reasonably be considered to relate to the change in the particular balance", as defined in subsection 152(4.4), for any of the earlier years 1984 to 1988.
[18] The appeals must be dismissed. This may seem an unfortunate result given the decision of this Court, affirmed on appeal, on the substantive issue. However, it flows directly from the Appellant's failure to exercise its rights, and is no more unfortunate than the result in any other case where a taxpayer has failed to exercise the right to an appeal which, if taken, would have been successful.
Signed at Ottawa, Canada, this 9th day of November, 2001.
"E.A. Bowie"
J.T.C.C.
COURT FILE NO.: 1999-5087(IT)G
STYLE OF CAUSE: Sherway Centre Limited and
Her Majesty the Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: September 12, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge E.A. Bowie
DATE OF JUDGMENT: November 9, 2001
APPEARANCES:
Counsel for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel for the Respondent: Judith Sheppard
COUNSEL OF RECORD:
For the Appellant:
Name: Warren J.A. Mitchell, Q.C.
Firm: Thorsteinssons
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
APPENDIX "A"
111(1) For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such portion as the taxpayer may claim of the taxpayer's
(a) non-capital losses for the 7 taxation years immediately preceding and the 3 taxation years immediately following the year;
...
118(8) "non-capital loss" of a taxpayer for a taxation year means the amount determined by the formula
(A + B) - (C + D + D.1 + D.2)
where
A is the amount determined by the formula
E - F
where
E is the total of all amounts each of which is the taxpayer's loss for the year from an office, employment, business or property, the taxpayer's allowable business investment loss for the year, an amount deducted under paragraph (1)(b) or section 110.6 in computing the taxpayer's taxable income for the year or an amount that may be deducted under paragraphs 110(1)(d), (d.1), (d.2), (d.3), (f), (j) or (k), section 112 or subsections 113(1) and 138(6) in computing the taxpayer's taxable income for the year,
F is the amount determined under paragraph 3(c) in respect of the taxpayer for the year,
B is the amount, if any, determined in respect of the taxpayer for the year under section 110.5,
C is any amount specified by the taxpayer in the taxpayer's election for the year under subsection 110.4(2),
D is the amount that would be the taxpayer's farm loss for the year if the amount determined for B in the definition "farm loss" in this subsection were zero,
D.1 is the total of all amounts deducted under subsection (10) in respect of the taxpayer for the year, and
D.2 is the total of all amounts by which the non-capital loss of the taxpayer for the year is required to be reduced because of section 80;
...
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
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer's tax payable under this Part for the year.
(1.1) Where the Minister ascertains the amount of a taxpayer's non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year and the taxpayer has not reported that amount as such a loss in the taxpayer's return of income for that year, the Minister shall, at the request of the taxpayer, determine, with all due dispatch, the amount of the loss and shall send a notice of determination to the person by whom the return was filed.
(1.2) Paragraphs 56(1)(l) and 60(o), this Division and Division J, as they relate to an assessment or a reassessment and to assessing or reassessing tax, apply, with such modifications as the circumstances require, to a determination or redetermination of an amount under this Division or an amount deemed under section 122.61 or 126.1 to be an overpayment on account of a taxpayer's liability under this Part, except that
(a) subsections (1) and (2) do not apply to determinations made under subsections (1.1) and (1.11);
(b) an original determination of a taxpayer's non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year may be made by the Minister only at the request of the taxpayer; and
(c) subsection 164(4.1) does not apply to a determination made under subsection (1.4).
(4.3) Notwithstanding subsections (4), (4.1) and (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.
(emphasis added)
(4.4) For the purpose of subsection (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.
...
152(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.
1999-5087(IT)G
BETWEEN:
SHERWAY CENTRE LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on September 12, 2001, at Toronto, Ontario, by
the Honourable Judge E.A. Bowie
Appearances
Counsel for the Appellant: Warren J.A. Mitchell, Q.C.
Counsel for the Respondent: Judith Sheppard
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1989, 1990 and 1991 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 9th day of November, 2001.
|
"E.A. Bowie" |
J.T.C.C.
[1] [1996] 3 C.T.C. 2687.
[2] [1998] 2 C.T.C. 343.
[3] New St. James Ltd. v. M.N.R., [1966] C.T.C. 305.
[4] Subsection 152(4.3).
[5] Subsection 152(4.4).
[6] Okalta Oils Limited v. M.N.R., 55 DTC 1176.
[7] This practical problem ceased to exist with the enactment of subsections 152(1.1) and (1.2) by S.C. 1976-77, c.4, subsection 61(1).
[8] Definition in subsection 111(8).