Tax Court of Canada Judgments

Docket: 2003-1171(IT)G

BETWEEN:

GEORGE CLIFFORD PEARCE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on November 18, 2004 at Nanaimo, British Columbia

Before: The Honourable Justice G. Sheridan
Appearances:
For the Appellant:	The Appellant himself
Counsel for the Respondent:	Peter M. Kremer, Q.C.

JUDGMENT

          The appeal from the Notice of Reassessment dated April 12, 2002 made under the Income Tax Act is quashed, without costs, in accordance with the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 17th day of January, 2005.

"G. Sheridan"

Sheridan, J.

Citation: 2005TCC38

Date: 20050117

Docket: 2003-1171(IT)G

BETWEEN:

GEORGE CLIFFORD PEARCE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Sheridan, J.

[1]      The Appellant, George Clifford Pearce, has filed a Notice of Appeal in respect of the refusal of the Minister of National Revenue to reconsider a 1996 business loss claimed by Mr. Pearce and in relation to which, he filed a Notice of Objection to a Notice of Reassessment issued by the Minister on April 12, 2002. The Minister rejected the Notice of Objection pursuant to subsection 165(1.2) of the Income Tax Act on the basis that Mr. Pearce had signed a Waiver of Objection Rights in respect of the 1996 business loss. The Minister's position is that pursuant to subsection 169(2.2) of the Act, Mr. Pearce may not appeal to this Court in respect of that issue. Mr. Pearce admits that he signed the Waiver but is challenging its validity on the ground that his signature was obtained under duress as a result of a threat of imprisonment made by a Canada Revenue Agency official, Mr. Brad Anderson. His Notice of Appeal contains no information regarding the merits of his claim for the 1996 business loss; at the hearing, the only issue before the Court was the validity of the Waiver.

[2]      Subsection 169(2.2) reads as follows:

169(2.2) Waived issues. Notwithstanding subsections (1) and (2), for greater certainty a taxpayer may not appeal to the Tax Court of Canada to have an assessment under this Part vacated or varied in respect of an issue for which the right of objection or appeal has been waived in writing by the taxpayer.

Facts

[3]      Mr. Pearce, now retired, is a former land developer who, between 1994 and 1997, was also engaged in the purchase and resale of motor vessels including one known as the Crown Jewel. In August 1997, his business activities came under review regarding certain customs matters not relevant to this appeal. That, in turn, led to a series of investigations and audits by CRA, the only one relevant to this appeal being Brad Anderson's inquiries into the disposition of the Crown Jewel in 1996. After numerous discussions with Mr. Pearce, in July 1999 Brad Anderson and his colleague, Ken Anderson (not related) met with Mr. Pearce and his lawyer, Mr. Scott, and administered to Mr. Pearce a criminal caution regarding possible tax evasion charges arising from his failure to report income for the taxation years 1994 to 1997. Mr. Pearce admitted at the hearing that he had not reported income during these years. After the criminal caution, Mr. Scott advised Mr. Pearce to say nothing more and the meeting concluded. In the days that followed, however, settlement discussions began and a second meeting occurred in late August 1999 at which were present Mr. Scott, Mr. Pearce and his accountant Mr. Crofton, as well as the Messrs. Anderson from CRA. Brad Anderson proposed for Mr. Pearce's consideration, certain terms of settlement.

[4]      Mr. Scott testified that although Mr. Pearce had been a client of his firm for several years, he personally had little involvement with the Pearce file prior to July 1999 and that he had no particular expertise in tax law. Mr. Crofton, on the other hand, was Mr. Pearce's long-time tax advisor and had many years experience as a Chartered Accountant. Accordingly, at the August 1999 meeting, Mr. Crofton made notes of the CRA proposal and following the departure of the Andersons, he reviewed its "pros and cons" with Mr. Pearce and Mr. Scott. He then left them to consider whether, from a legal perspective, Mr. Pearce would accept the offer. On September 21, 1999, a final meeting occurred between Mr. Pearce and Mr. Scott and the two Andersons from CRA. Mr. Pearce and Mr. Brad Anderson, as the agent for CRA, signed the Waiver duly witnessed by Mr. Scott and Mr. Ken Anderson.

[5]      Regarding the 1996 taxation year, the Waiver contains a clause which reads:

1996 Taxation Year

A Business or Capital Loss on the disposition of the Motor Vessel, Crown Jewel will not be allowed, [the Crown Jewel loss].

Unreported mortgage interest of $15,671.00 will be reassessed in 1996 as George Pearce failed to report this income.

At the end of the Waiver of Objection Rights appears the following paragraph:

George Pearce acknowledges:

1)          that the provisions of subsection 165(1.2) of the Income Tax Act are understood as they pertain to this document;

2)          that additional interest may result from the Department's reassessment of the issues itemized above;

3)          that the impact of this document will be binding on the Taxpayer's heirs, executors, trustees, successors, administrators and any other person who might be liable for the tax and interest which will ensue from the reassessment of the issues itemized above;

4)          that this document is being freely and voluntarily signed; and

5)          that either professional advice was obtained concerning the waiving of objection rights pursuant to this document or an awareness of the right to have done so.

[6]      Mr. Crofton was aware that Mr. Pearce "wasn't happy" when he signed the Waiver. In spite of that and notwithstanding Mr. Crofton's evidence that between 1999 and 2002 they discussed the Crown Jewel loss "several times", at no time did Mr. Pearce instruct him to file an objection to the June 2000 Notice of Reassessment which gave effect to the terms of settlement in the Waiver. Had he done so, Mr. Crofton testified, he would have reminded Mr. Pearce that he waived his right to object to any reassessment regarding the Crown Jewel loss when he signed the Waiver.

[7]      It then happened that on April 12, 2002, the Minister issued a new reassessment pertaining to certain aspects of the 1996 taxation year not included in the Waiver. Even though, as Mr. Pearce stated in paragraph 3 of his Notice of Appeal, it was "... contrary to the terms of the [Waiver], the Appellant claimed a business loss [for the Crown Jewel transaction] of $139,703 for 1996 ..." in that Notice of Objection. No mention was made in the Notice of Objection of challenging the Waiver as having been signed under threat of imprisonment. That allegation appears for the first time in the Notice of Appeal. In any event, the Minister rejected Mr. Pearce's Notice of Objection on the basis that he had signed a Waiver in respect of the Crown Jewel loss and pursuant to subsection 165(1.2)[1], no objection could be made in respect of that issue.

Analysis

[8]      Mr. Pearce's allegation that Brad Anderson obtained his signature under threat is a serious one and one which Mr. Anderson firmly denies. He testified that while he had administered a criminal caution to Mr. Pearce at the July 1999 meeting in relation to the possibility of prosecution for tax evasion for having failed to report income, at no time in any of his dealings with Mr. Pearce did he threaten him with imprisonment to get his signature on the Waiver. In addition to describing such behaviour as "contrary to his normal practice", Brad Anderson's evidence was that once serious settlement discussions were underway, CRA abandoned its consideration of criminal prosecution and he had informed Mr. Pearce's lawyer of that fact. Brad Anderson was a credible witness who was unshaken in his position on cross-examination by Mr. Pearce. His evidence was corroborated by his colleague Ken Anderson.

[9]      The evidence presented by Mr. Pearce's witnesses, on the other hand, did not support his allegation. Mr. Crofton was not present at the September meeting when Mr. Pearce signed the Waiver. He testified, however, that he had reviewed the terms of the Waiver with both Mr. Pearce and his lawyer and put them into a format that could be used by the less-experienced Mr. Scott in preparing the settlement document ultimately signed on September 21, 1999. Further, although he was made aware that Mr. Pearce had signed the Waiver, at no time was he told anything about a threat having been made. On the contrary, he was given the task of reviewing the June 2000 reassessment issued by the Minister to ensure that it was in accordance with the terms of settlement in the Waiver. This leads to the conclusion that Mr. Pearce was not only accepting of the terms contained in the Waiver but acting in anticipation of their implementation.

[10]     Mr. Scott, Mr. Pearce's lawyer had no clear recollection of the events of the September 1999 meeting. He had recorded almost nothing regarding the details of the meeting in his file - certainly, nothing to support Mr. Pearce's allegation. Had Brad Anderson uttered threats of imprisonment to Mr. Pearce in Mr. Scott's presence, one might reasonably expect his lawyer to have, at the very least, made a small notation on the file or retained some memory of such an extraordinary event, and protected his client from waiving his rights under duress. Yet Mr. Scott, whose professional competence and integrity was in no way impugned at the hearing, did none of these things. The inference to be drawn is that no such threat was made.

[11]     Finally, there is Mr. Pearce's own testimony. Mr. Pearce stated himself to be a business man of long experience involved in at least one major land development project, a 69-unit town house in Nanaimo. Around the same time, he was buying and selling expensive yachts in the international market. He had access to legal and accounting advice in his business affairs. He had, over the years, numerous dealings and experience with a range of government agencies and departments, including CRA. At the hearing, he presented himself as one unlikely to shrink from asserting his rights or expressing his views. All this leads me to conclude that had his signature been obtained by threat, Mr. Pearce would not have been one to sit quietly by for several months before taking action. In his direct evidence, Mr. Pearce had only vague memories of the events between July and September 1999. He was in no way precise about the content of the threat or where and when it had occurred. When cross-examined about inconsistencies in his evidence, he equivocated, refused to answer or merely resorted to bluster.

[12]     The evidence shows that he was not a happy man the day he signed the Waiver. His unhappiness, however, was not the result of having been threatened. By his own admission, many of his problems sprang from his own failure to keep adequate records and to report income as required by the Act. Only after numerous discussions with CRA officials - especially Brad Anderson - and advice from his lawyer and accountant did light begin to flicker at the end of the tunnel he had dug for himself. The settlement proposed by CRA was reviewed and reformatted by Mr. Pearce's own professional advisors. After further discussions with them in the presence of his lawyer, on September 21, 1999, he signed the settlement agreement. Part of that settlement was the Waiver of his right to object to the reassessment giving effect to the terms. By signing the Waiver, he availed himself of the terms of settlement that were to his benefit and accepted its obligations. The Minister, for his part, lived up to his part of the bargain by reassessing the 1996 taxation year in accordance with the terms of the settlement. When he was reassessed in 2002, Mr. Pearce tried to use that avenue to reopen the 1996 Crown Jewel loss. Of course, subsection 169(2.2) precludes him from doing any such thing. The validity of this limiting provision was considered and accepted by the Supreme Court of Canada in 1977 in the Smerchanski[2] decision:

Since it is not contested that a taxpayer may validly waive his rights of appeal against a tax assessment and that no question of public policy is involved to preclude such a waiver, the only issue of importance in this appeal is whether the tax authorities, seriously contemplating prosecution, and by indictment as in the present case, are entitled to exact a waiver of rights of appeal as a binding term of settling a clear tax liability when overtures for settlement are made by the taxpayer and, in consequence, to abandon their intention to prosecute.

As in the present case, the Appellant in Smerchanski impugned the validity of the Waiver on the basis that he had signed it under threat of criminal prosecution. Even though the Appellant Smerchanski was able to show that criminal proceedings would have been taken against him had he not settled, on the particular facts of that case, the Supreme Court of Canada held that that was not sufficient to invalidate the waiver of his right to object. Mr. Pearce's position is far less compelling than Smerchanski's in that he has not even been able to satisfy this Court that any threat was ever made.

[13]     As suggested (perhaps generously) by counsel for the Respondent, time may have distorted, in Mr. Pearce's memory, the criminal caution administered in respect of possible tax evasion charges at the July 1999 meeting into a threat of imprisonment to compel his signature on the Waiver in September 1999. In any event, neither his testimony, nor the evidence of Mr. Pearce's own witnesses leads to the conclusion that he was threatened by Brad Anderson. I accept Brad Anderson's evidence that at no time did he threaten Mr. Pearce for the purpose of obtaining his signature on the Waiver. I find that the Waiver of Objection Rights was freely signed by Mr. Pearce and that it is valid.

[14]     In the Respondent's Reply to the Notice of Appeal, the "relief sought" is that the appeal be dismissed. Given, however, that the combined effect of subsections 165(1.2) and 169(2.2) is to deprive Mr. Pearce of any right to appeal to this Court in respect of the 2002 Notice of Reassessment, the Notice of Appeal is quashed, without costs.

Signed at Ottawa, Canada, this 17th day of January, 2005.

"G. Sheridan"

Sheridan, J.

CITATION:

2005TCC38

COURT FILE NO.:

2003-1171(IT)G

STYLE OF CAUSE:

George Clifford Pearce v. H.M.Q.

PLACE OF HEARING:

Nanaimo, British Columbia

DATE OF HEARING:

November 18, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice G. Sheridan

DATE OF JUDGMENT:

January 17, 2005

APPEARANCES:

For the Appellant:

The Appellant himself

Counsel for the Respondent:

Peter M. Kremer, Q.C.

COUNSEL OF RECORD:

For the Appellant:

Name:

Firm:

For the Respondent:

John Sims Deputy Attorney General of Canada Ottawa, Canada

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