T-1392-86
Optical Recording Corporation (Applicant)
v.
The Queen and Minister of National Revenue
(Respondents)
INDEXED AS: OPTICAL RECORDING CORP. V. CANADA
Trial Division, Muldoon J.-Ottawa, August 15
and September 4, 1986.
Income tax - Scientific research tax credit - Legislation
requiring companies issuing securities to designate amount not
exceeding consideration for issue and to pay 50% on account
of taxes within following month - Illegal departmental
policy permitting payment deferral if liability extinguishable
by refunds before year end - Notice of assessment improper
as no amount "assessed" - Minister inducing applicant into
belief tax payment unnecessary - Suddenly issuing garnish
ing orders freezing corporation's operating accounts - Certio-
rari granted quashing certificate and Minister prohibited from
pursuing collection proceedings until lawful and fair
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 152(8), 153(1) (as
am. by S.C. 1980-81-82-83, c. 48, s. 86; c. 109, s. 19; c. 140, s.
104; 1985, c. 45, s. 85), (1.1) (as am. by S.C. 1980-81-82-83, c.
48, s. 86), 194 (re-enacted by S.C. 1984, c. 1, s. 95; c. 45, s. 82;
1985, c. 45, s. 105), 195(2) (re-enacted by S.C. 1984, c. 1, s.
95), 223 (as am. by S.C. 1985, c. 45, s. 114), 224 (as am. by
S.C. 1980-81-82-83, c. 48, s. 103; c. 140, s. 121), 225.2 (as
added by S.C. 1985, c. 45, s. 116) - Canadian Bill of Rights,
R.S.C. 1970, Appendix III - Financial Administration Act,
R.S.C. 1970, c. F-10, s. 17.
Estoppel - Income tax - Scientific research tax credits
Minister excusing, contrary to Act, required payments on
account of tax in certain circumstances - Illegal policy
scheme - Taxpayer prejudiced by relying on Minister's writ
ten offer and not filing notice of objection - Out of time for
statutory appeal - Taxpayer in effect told did not have to
obey law until told to pay by officials - Minister garnishing
without advising taxpayer position changed - Minister
estopped from benefiting from garnishments.
Federal Court jurisdiction - Trial Division - Income tax
- Certiorari to quash notice of assessment, request to pay and
certificate - Applicant's operating accounts seized to satisfy
tax liability following securities issue under scientific research
tax credit provisions - Departmental policy permitting pay
ment deferral contrary to statutory requirement - Minister of
National Revenue v. Parsons holding Income Tax Act provid
ing procedure for appeal from assessments thus barring Court
from reviewing, restraining or setting aside - Case at bar
raising issues beyond scope of appeal provisions dealt with in
Parsons — Issues raising questions of administrative illegal
ity, unfair treatment, estoppel engaging superintending juris
diction of superior court — Federal Court Act, R.S.C. 1970
(2nd Supp.), c. 10, ss. 18, 28, 29 — Federal Court Rules,
C.R.C., c. 663.
The applicant, a Canadian corporation, issued securities to
raise capital for research and development under the income
tax provisions relating to the Scientific Research Tax Credit.
Pursuant to subsection 194(4) of the Act, a company issuing
such securities must, no later than the end of the month
following the month of issue, designate any amount up to the
amount of issue. The initial purchaser of the securities is
thereby entitled to deduct a tax credit of 50% of the designated
amount. The applicant filed the prescribed form designating
$21,500,000 thus becoming liable to pay, on account of tax, the
sum of $10,750,000. Pursuant to subsection 195(2) this amount
must be paid to the Receiver General before the last day of the
month following the month of designation. However, according
to departmental policy, the Minister does not insist upon pay
ment if a corporation can demonstrate that its tax liability will
be eliminated by refunds generated before the end of the year
in which securities were issued. Although a form filed without
payment cannot be considered as validly filed, the Minister
does not request that the amount be paid if the corporation can
show that its tax liability can be satisfied.
The Minister issued a notice of assessment stating, in accord
ance with its policy, that collection proceedings would be
withheld with respect to the applicant's tax liability if it could
satisfy Revenue Canada that it would eliminate its liability by
year end. The applicant always maintained that it would suc
ceed in eliminating its liability. Despite this, the Minister issued
requirements to pay and a certificate pursuant to section 223
respecting taxes allegedly owing by the applicant. Garnishing
orders were served upon two of the applicant's creditors freez
ing the corporation's operating accounts.
The applicant is seeking writs of certiorari to quash the
Minister's notice of assessment, the requirements to pay and
the certificate issued pursuant to section 223. A writ of prohibi
tion is also sought to restrain the respondents from continuing
collection proceedings.
Held, the application should be allowed.
At the outset, the question of the Court's jurisdiction to
adjudicate on the applicant's motion pursuant to section 18
must be decided. Although this question was answered nega
tively by the Court of Appeal in Minister of National Revenue
v. Parsons subsequent apparently conflicting decisions of the
Trial Division have left some doubt as to Court's jurisdiction in
such matters. It was decided in Parsons that the Income Tax
Act expressly provides for an appeal to the Federal Court from
assessments made by the Minister and that those assessments
may not be reviewed, restrained or set aside by this Court in the
exercise of its jurisdiction under sections 18 and 28. However,
the issues to be decided in the case at bar are broader than
matters related to notices of assessment and go beyond the
scope of the appeal provision of the Act relied on in the Parsons
case to invoke section 29 and refuse jurisdiction to the Court.
The issues here raise questions of fundamental administrative
illegality, unfair treatment and estoppel which engage the
superintending jurisdiction of a superior court thus warranting
the intervention of the Federal Court.
Parliament, in enacting subsection 195(2) established a man
datory delay within which to pay the Receiver General in
respect of tax owing under the provisions of the scientific
research tax credit. The Minister's policy is to permit corpora
tions to file the necessary forms without payment if they are
capable of demonstrating that their tax liability will be extin
guished within the year of issue. The Minister provides extra-
legally for voluntary arrangements by which he does not insist
on payments mandated by subsection 195(2). Where it is
determined that the company will generate a tax refund suffi
cient to offset its tax liability no further action is required. The
Minister's policy to disregard the obligation to pay 50% within
the stated time is beyond the contemplation of the Income Tax
Act. The Minister has no lawful authority to thwart the
application of subsection 195(2). This extra-legal policy is
illegal. The plea of necessity advanced by the respondents is
unconvincing. Successive Ministers have frequently obtained
amendments to this Act. Parliamentary authority for this
scheme—if the policy was essential—should have been sought.
It is important to keep in mind that at the time of filing there
is not necessarily any tax assessed or due. On the contrary, no
taxes are due but only a payment on account of tax. To
"assess", in terms of the Act, means "to calculate, to compute
and to fix and determine" the amount of tax to be paid.
Parliament performed that assessment by establishing the tax
at 50% of the amount designated. The so-called notice of
assessment sent to the applicant represents a double nullity in
that the Minister was not demanding payment and, at that
particular time, there was no tax due to assess. The Minister's
behaviour is an usurpation of legislative power. The objective of
facilitating the working of the tax credit provision without
jeopardizing the security of tax revenues is irrelevant. The
Minister induced the applicant into believing that no payment
was necessary. The respondent counselled the applicant not to
pay by advising it that collection proceedings would be with
held. The Minister still declined to exact payment when the
ninety-day period in which the applicant could have lodged a
notice of objection to the so-called assessment expired. The
Minister bears greater responsibility for this flouting of the law
than the applicant. The applicant was still operating under this
illegal scheme when, without warning, there was a change of
attitude which saw the applicant's operating accounts frozen by
garnishing orders. The respondents, by illegal abuse of author
ity and false inducements are clearly estopped from benefitting
from their sudden garnishments. The Minister cannot put a
taxpayer to prejudicial disadvantage by invoking an illegal
administrative scheme that unlawfully induced the taxpayer
into a vulnerable position. The respondents' illegal conduct and
excess of jurisdiction can only lead to the quashing of the
impugned decisions and acts.
CASES JUDIDICALLY CONSIDERED
DISTINGUISHED:
Minister of National Revenue v. Parsons, [1984] 2 F.C.
331; 84 DTC 6345 (C.A.) reversing [1984] 1 F.C. 804;
(1983), 83 DTC 5329 (T.D.); WTC Western Technolo
gies Corporation v. M.N.R. (1985), 86 DTC 6027
(F.C.T.D.); Becht hold Resources Ltd. v. Canada
(M.N.R.), [1986] 3 F.C. 116; 86 DTC 6065 (T.D.); The
Queen v. Gary Bowl Ltd., [1974] 2 F.C. 146; 74 DTC
6401 (C.A.); Danielson v. Canada (Deputy Attorney
General), [1987] 1 F.C. 335; 86 DTC 6340 (T.D.).
COUNSEL:
G. A. Smith for applicant.
J. S. Gill, H. W. Winkler and D. Winters for
respondents.
SOLICITORS:
McCarthy & McCarthy, Toronto, for appli
cant.
Deputy Attorney General of Canada for
respondents.
The following are the reasons for order ren
dered in English by
MULDOON J.: It will be noticed by anyone who
sees the documents on the Court's file of these
proceedings, that one of the references preceding
the title of action (style of cause), as formulated
by the applicant's solicitors, announces: "AND IN
THE MATTER OF the Constitution Act, 1982, and
sections 7, 8, 24 and 52 thereof". That reference
presages a prayer for, "(6) A declaration that
sections 223 and 224 of the Income Tax Act are of
no force and effect". At the beginning of the
hearing of this litigation, on August 15, 1986, the
applicant's counsel informed the Court that the
applicant abandons herein its claim for relief to
declare sections 223 [as am. by S.C. 1985, c. 45, s.
114] and 224 [as am. by S.C. 1980-81-82-83, c.
48, s. 103; c. 140, s. 121 ] of the Income Tax Act to
be of no force and effect. So be it.
(Parenthetically, it may be observed that the
legislators who enacted Schedule I of the Federal
Court Act [R.S.C. 1970 (2nd Supp.), c. 10], and
the judges who composed Appendix I to the Rules
[Federal Court Rules, C.R.C., c. 663], made no
provision for such references. Further, if Her
Majesty the Queen be an appropriate party herein,
which is doubtful, the expression "in Right of
Canada" is in the same state of inutility as the
immediately above-mentioned references and
should share their fate. They will be eliminated
from the formal order which will dispose of this
motion, and this may be taken to be an order to
eliminate all of those extraneous references from
further proceedings, if any, in these proceedings.)
The remaining prayers for relief expressed by
the applicant are as follows:
(1) A Writ of certiorari or an order for relief in the nature
thereof to quash the determination by the respondent, the
Minister of National Revenue, to assess tax as owing by the
applicant and the issue of a document headed "Notice of
Assessment" dated June 3, 1985 in respect of those taxes
allegedly owing by the applicant;
(2) A Writ of certiorari or an order for relief in the nature
thereof to quash the decision by the respondent to issue a
"Requirement to Pay" dated March 18, 1986 pursuant to
section 224 of the Income Tax Act delivered by hand to the
Royal Bank of Canada, 20 King Street West, Toronto, Ontario
respecting taxes allegedly owing by the applicant;
(3) A Writ of certiorari or an order for relief in the nature
thereof to quash the decision by the respondent to issue a
"Requirement to Pay" dated March 18, 1986 pursuant to
section 224 of the Income Tax Act delivered by hand to the
Canada Permanent Trust, 66 Temperance Street, Toronto,
Ontario respecting taxes allegedly owing by the applicant;
(4) A Writ of certiorari or an order for relief in the nature
thereof to quash the decision by the respondent to issue a
Certificate pursuant to section 223 of the Income Tax Act
respecting taxes allegedly owing by the applicant;
(5) A writ of prohibition or relief in the nature thereof prohibit
ing or restraining the respondents and anyone under their
direction and control from continuing with collection proceed
ings against the applicant until it is lawful to do so;
(6) [abandoned]
(7) Such other orders as may to this Honourable Court seem
just.
The applicant asserts the following grounds in
support of its prayers for relief:
a) That the respondent acted without or in exce", of his
jurisdiction in issuing a Notice of Assessment;
b) The document headed Notice of Assessment issued by the
respondent contains an error on its face in that the tax allegedly
assessed is shown as owing pursuant to subsection 195(2) of the
Income Tax Act, which section does not create an obligation to
pay tax;
c) The Certificate issued pursuant to section 223 of the Income
Tax Act contains an error on its face as to the amount of tax, if
any, that is owing by the applicant;
d) That the collection proceedings taken by the respondent
amount to unreasonable seizure of the assets of the applicant
contrary to sections 7, 8 and 52 of the Charter of Rights and
Freedoms; and
e) [abandoned]
f) Sections 223 and 224 of the Income Tax Act are procedural-
ly unfair and infringe on the applicant's right to a fair hearing
or infringe on the applicant's right to security of property
contrary to the Canadian Bill of Rights.
Ground f), in invoking the Canadian Bill of Rights
[R.S.C. 1970, Appendix III], is broader than the
relief claimed and, insofar as it implies a plea for a
declaration of invalidity or lack of force and effect,
it also is regarded as having been abandoned.
On behalf of the applicant there was filed the
affidavit of John Adamson, its president. Annexed
to his affidavit are voluminous and numerous
exhibits which invite more detailed examination
and commentary than can be accorded here in
view of the pressing nature of these proceedings
upon which the parties desire the Court's pro
nouncement without delay. Mr. Adamson was
cross-examined on his affidavit, of which para
graph 19 is struck out of it. No affidavit was
tendered on behalf of the respondent Minister.
The applicant has served and tendered a rather
succinct statement of fact and law included in the
motion recorded herein. The respondents have ten
dered such a statement, as well as two books of
authorities. For convenience in the circumstances,
those statements of fact are now reproduced
herein, with such commentaries, abridgements and
findings as the Court deems necessary and desir-
able. Both express the parties' references to other
material. The applicant is frequently called O.R.C.
1. The applicant is a Canadian corporation carrying on the
business of scientific research and development with its head
corporate office located in the City of Toronto, in the Munici
pality of Metropolitan Toronto.
2. The company was incorporated as Information Tunnel
Research Inc., on August 17, 1984. It has subsequently
changed its name to Optical Recording Corporation.
3. The fiscal year end for the corporation is February 28.
(The above assertions are admitted by the
respondents.)
4. In April of 1985, O.R.C. designated amounts totalling
$21,500,000 pursuant to subsection 194(4) of the Income Tax
Act, as the respondents admit. The applicant says that those
amounts were the consideration received by O.R.C. on the issue
of shares, debt obligations and certain rights to finance scientif
ic research and development. [For purposes of these proceed
ings, this can be taken to be true, without prejudice to any
rights of the respondents in other proceedings.]
5. In June of 1985, the Minister of National Revenue served a
"Notice of Assessment" dated June 3, 1985 purporting to levy
an assessment under subsection 195(2) of the Act in the
amount of $10,750,000.
Reference: Affidavit of Gary John Adamson, paragraph 8.
6. The Notice of Assessment provided on its face:
Corporations that have issued scientific research or share-
purchase tax credit securities are technically liable to pay the
related Part VIII tax by the end of the month following the
transaction. However, under the terms of this special credit
program, the tax liabilities may be reduced or extinguished
through the use of qualifying expenditures or tax credits.
Since these Part VIII tax liabilities may be reduced, Revenue
Canada, Taxation is prepared to modify or withhold its usual
collection action with respect to these assessments where the
corporation is able to satisfy Revenue Canada that its liabili
ty will be eliminated by the end of the year, or provide
acceptable security. [Emphasis added.]
Reference: Affidavit of Gary John Adamson, paragraph 9
and Exhibit "D".
(Statements of fact 5 and 6, above, are admitted
by the respondents.)
7. In reliance on this statement, the corporation did not file a
Notice of Objection to the Notice of Assessment, as it had
already eliminated its liability regarding this tax.
Reference: Affidavit of Gary John Adamson, paragraphe 9.
Cross-examination of Gary John Adamson, pages 30, 31, 32,
questions 121 through 133.
The respondents do not admit paragraph 7 and state that
when the applicant's president, Mr. Adamson, received the
Notice of Assessment he did not at first immediately read it,
but instead put it aside. Mr. Adamson did not understand that
there was such a procedure as a Notice of Objection until after
the time limit for objecting had passed.
Reference: Cross-examination of John Adamson, pages 2-3,
questions 1-15; and pages 30-32, questions 121-133.
Both the applicant and the respondents are cor
rect. The Court finds that the receipt of the two-
page document caused Mr. Adamson, upon read
ing it, to review and to reaffirm his belief that the
applicant, O.R.C., had already eliminated its lia
bility for Part VIII tax, and therefore in light of
the emphasized passage, that the respondent Min
ister and his officials were not exacting payment of
the $10,750,000 recorded on the other page. It is
true that Mr. Adamson did not immediately read
that document, did not then understand that there
was such a procedure as a notice of objection and
was unable to say on cross-examination which
particular phrases or linguistic constructs in the
cited paragraph conveyed to him, as it did, that its
meaning was to remove any requirement to pay
the sum recorded on the other page. In the view
which the Court takes of the evidence those truths
indicated by the respondents are of wan weight or
significance when compared with the salient fact
that the Minister's message conveyed to Mr.
Adamson the eminently reasonable meaning that
the Minister and his officials were not requiring
the payment of the cited sum, but were in fact
merely acknowledging the applicant's filing.
8. In late 1985 and early 1986, John Adamson met with [three
named officials, included among whom was one from Revenue
Canada Collections], to discuss the subject of collateral secu
rity by O.R.C. as against the potential tax liability.
Reference: Affidavit of Gary John Adamson, paragraph 10.
(The respondents admit the above assertion of
facts.)
9. The scientific equipment purchased and to be credited
against the tax liability has been assessed by one Professor
Chamberlain. [Respondents correctly add the following
remarks.] Professor Chamberlain was retained by Revenue
Canada for the purpose only of ascertaining whether the
research carried out by the applicant was scientific in nature.
Any statement made by Professor Chamberlain was only con
cerned with that issue. The only opinion sought by the appli-
cant from Revenue Canada was with respect to whether the
financing arrangements for the purchase of certain equipment
satisfied the transitional provisions of the Income Tax Act. No
other opinion was sought from and no other opinion has been
given by Revenue Canada with respect to any other issue.
— Paragraph 11 of affidavit of John Adamson and
— Cross-examination of John Adamson,
pages 11-16, questions 50-65;
pages 19-20, questions 73-76;
pages 21-23, questions 82-87; and
pages 53-56, questions 205-209.
10. On March 18, 1986, two of the creditors of O.R.C. (the
Royal Bank of Canada and Canada Permanent Trust) were
served with requirements to pay by the Minister of National
Revenue. This has had the effect of freezing the funds held by
them for O.R.C.
Reference: Affidavit of Gary John Adamson, paragraphs 12
and 13.
(This is admitted by the respondents.)
11. Optical Recording has requested an extension of time to file
a Notice of Objection to the Notice of Assessment of June 3,
1985. The Minister has refused to consent to such an extension
of time.
Reference: Affidavit of Gary John Adamson, paragraphs 14
and 15.
The respondents admit the above facts, but add that pursuant
to subsection 167(5) of the Income Tax Act unless the Court is
satisfied that the requirements of paragraph 167(5)(c) of the
Income Tax Act are satisfied no extension shall be granted,
notwithstanding the respondents' position.
12. Optical Recording has filed a tax return for its fiscal year
ending February 28, 1986 which shows no Part VIII tax owing
as the Part VIII liability has been eliminated through expendi
tures on research and development.
Reference: Affidavit of Gary John Adamson, Exhibit "P".
The respondents admit that the applicant has filed such a
return, but they deny that the Part VIII tax liability has been
eliminated through expenditures on research and development.
13. The Minister of National Revenue has indicated that it
[sic] will continue its collection proceedings in this matter.
14. On July 3, 1986, six days before a scheduled hearing in the
Supreme Court of Ontario brought by Canada Trust to inter-
plead the sum of $543,858 of monies due and owing to Digital
Recording Corporation, the Minister consented to these funds
being paid to Digital Recording Corporation.
(The respondents admit the facts expressed in
paragraphs 13 and 14 above.)
The above-mentioned sum was held in escrow by
the trust company for the purpose of paying the
remaining expenditures for scientific research
equipment, according to an escrow agreement, by
which total expenditures Mr. Adamson believed
the applicant had, or would have, eliminated its
Part VIII tax liability before or by the dawning of
the day of reckoning.
In addition to the above-recited facts about
which there is little relevant dispute here, the
respondents would add certain others, thus:
A. The applicant chose to avail itself of the scientific research
tax credit provisions of the Income Tax Act voluntarily and
under no compulsion.
Cross-examination of John Adamson,
page 27, questions 106-107.
B. The applicant in filing designations under subsection 194(4)
of the Income Tax Act, could have designated any amount up
to $21,500,000.
Cross-examination of John Adamson,
page 27, questions 108-109.
C. The applicant designated in total $21,500,000 pursuant to
subsection 194(4) of the Income Tax Act and declared that the
Part VIII tax payable, which was 50% of the total amount
designated, was $10,750,000. The designations filed were pre
pared on the instructions of Mr. Adamson and were signed by
him.
Cross-examination of John Adamson,
pages 25-27, questions 92-105.
(The above three statements of fact are correct.)
D. At the time the applicant filed the designations under
subsection 194(4) of the Income Tax Act, it knew that its Part
VIII tax payable would be 50% of the total amount designated.
Cross-examination of John Adamson,
page 27, question 110.
The above statement is correctly cited, but it
would be most accurately stated "could be as
much as 50% of the total amount". At the end of
the tax year tax might have been entirely eliminat
ed or might be less than 50%, but no more than
50%.
E. The assessment issued to the applicant, in respect of the
designations filed, was in an amount equal to 50% of the total
amount of the designations filed, which was $10,750,000.
Cross-examination of John Adamson,
page 28, question 112.
The above statement E is also correctly cited but
begs the question of whether or not that which is
called an assessment is simply a nullity.
F. At the time the applicant received the Notice of Assessment
it had not and at no time since receiving the Notice of
Assessment has the applicant received any confirmation from
Revenue Canada that they were satisfied that the Company's
Part VIII tax liability would be satisfied.
Cross-examination of John Adamson,
page 33, question 134;
pages 11-16, questions 50-65;
pages 19-20, questions 73-76;
pages 21-23, questions 82-87; and
pages 53-56, questions 205-209.
G. The assessment issued to the applicant has not been altered
by virtue of any objection or appeal filed by the applicant.
Cross-examination of John Adamson,
page 28, questions 113-114.
H. The applicant has at no time offered to provide security to
Revenue Canada for its Part VIII tax liability and has refused
all requests for security made by Revenue Canada.
Cross-examination of John Adamson,
pages 43-44, questions 169-171; and
pages 50-51, questions 187-191.
I. The Requirements To Pay issued in respect of the applicant's
Part VIII tax liability do not refer to any Notice of Assessment.
Cross-examination of John Adamson,
pages 41-43, questions 162-168.
J. The applicant's Part VIII income tax return was filed in
early April, 1986.
Cross-examination of John Adamson,
pages 38-41, questions 153-161.
K. Revenue Canada is currently auditing the applicant's Part
VIII return.
Cross-examination of John Adamson,
page 53, question 200.
L. Paragraph 10 of the affidavit of John Gary Adamson, sworn
June 18, 1986, should be amended to read, inter alia:
On both occasions I advised [the department's collections
official] and do verily believe that there was no need for
collateral security as O.R.C. had satisfied the potential tax
liability through its equipment purchase made with Digital
and that O.R.C. is a well established business in Toronto.
Cross-examination of John Adamson,
page 36, questions 145-146.
(Statements F to L are correct.)
The respondents also allege, as a fact, that
which is properly a conclusion of law:
M. At all material times the applicant, by virtue of subsection
195(2) of the Income Tax Act, was liable to make a payment
under the Income Tax Act.
In terms of the relief sought here, that statement is
a double-edged sword of the kind traditionally
associated with the allegorical symbol of justice.
Subsection 195(2) of the Act [as re-enacted by
S.C. 1984, c. 1, s. 95] will be considered, in
conjunction with other pertinent matters, after
consideration of the question of this Court's juris
diction to adjudicate on the applicant's motion for
relief pursuant to section 18 of the Federal Court
Act. The question is raised and discussed by both
sides.
At first blush that question might seem to be
already concluded. The Appeal Division in its
unanimous decision in Minister of National Reve
nue v. Parsons, [1984] 2 F.C. 331; 84 DTC 6345,
(reversing the Trial Division judgment [ 1984] 1
F.C. 804; (1983), 83 DTC 5329) held [at pages
332-333 F.C.; 6346 DTC]:
We are all of opinion that the appeal must succeed on the
narrow ground that the only way in which the assessments
made against the respondents could be challenged was that
provided for in sections 169 and following of the Income Tax
Act. This, in our view, clearly results from section 29 of the
Federal Court Act.
The learned Judge of first instance held that, in this case,
section 29 did not deprive the Trial Division of the jurisdiction
to grant the application made by the respondents under section
18 of the Federal Court Act because, in his view, the appeal
provided for in the Income Tax Act was restricted to questions
of "quantum and liability" while the respondents' application
raised the more fundamental question of the Minister's legal
authority to make the assessments. We cannot agree with that
distinction. The right of appeal given by the Income Tax Act is
not subject to any such limitations.
In our view, the Income Tax Act expressly provides for an
appeal as such to the Federal Court from assessments made by
the Minister; it follows, according to section 29 of the Federal
Court Act, that those assessments may not be reviewed,
restrained or set aside by the Court in the exercise of its
jurisdiction under sections 18 and 28 of the Federal Court Act.
Since the release of the Parsons judgment, there
have been apparently conflicting decisions of the
Trial Division in WTC Western Technologies Cor
poration v. M.N.R. (1985), 86 DTC 6027
(F.C.T.D.), and in Bechthold Resources Ltd. v.
Canada (M.N.R.), [1986] 3 F.C. 116; 86 DTC
6065 (T.D.).
The case at bar raises issues about the para
graph attached to the purported notice of assess
ment (Exhibit "D", above recited) and the
respondent Minister's policy of collections (Exhibit
"A" to Mr. Adamson's affidavit), which are quite
beyond the scope of the appeal provisions of the
Income Tax Act upon which the Appeal Division
relied in order to invoke section 29 of the Federal
Court Act in derogation of the Trial Division's
jurisdiction in the Parsons case.
The issues to be determined here are much
broader than, and different from, matters of exten
sion of time to appeal, the validity of a notice of
assessment and appeal therefrom. The issues here
raise questions of fundamental administrative ille
gality, unfair treatment and estoppel which engage
the superintending jurisdiction of a superior court,
such that even if this Court's disposition of them
be ultimately adjudged to be wrong, the Court's
decision to entertain them should be seen to be
correct. The case at bar is therefore quite distinct
from the Parsons case. It will be seen, as well, to
be distinguishable from the WTC Western and
Bechthold Resources decisions. For these reasons,
which are more fully developed hereinafter, the
Court accepts and exercises jurisdiction in, upon
and over the subject of this motion.
A brief general explanation of the Scientific
Research Tax Credit (SRTC) program, in more
narrative prose than the Act provides, can be
gleaned from the first two pages of the Depart
ment's internal paper on administrative policy and
procedures, a copy of which is annexed as Exhibit
"A" to Mr. Adamson's affidavit, thus:
Incentives for research and development (R & D) have been
provided in the Income Tax Act since 1944. However, in the
past these tax incentives were only of value to companies that
were in a taxable position. The SRTC mechanism was intro
duced to allow research companies to provide tax incentives to
investors to assist the research companies in attracting external
financing for their R & D programs. SRTC's may be issued
after September 1983 and in respect of qualified R & D
expenditures incurred after April 19, 1983.
The SRTC provisions enable a corporation to issue capital
stock, debt obligations or certain rights (SRTC securities) after
September 30, 1983 to raise capital to fund its R & D
activities. Pursuant to subsection 194(4) of the Act, a company
issuing SRTC securities can designate, by filing prescribed
form T2113 no later than the end of the month following the
month of issue, any amount up to the issue price of the SRTC
security (net of any government assistance received by the
investor in respect of the security). The first purchaser of the
SRTC securities will thereby become entitled to deduct a tax
credit equating to 50% of the amount designated by the issuer
in respect of the SRTC securities.
(pages 00006 and 00007 of the motion record)
In making its designation, the applicant effected
a timely filing of the prescribed form T2113,
which is exhibited as schedule "A" to the respon
dents' points of argument. Having designated
$21,500,000, the applicant became liable to pay,
on account of its tax payable pursuant to Part VIII
of the Act, the sum of $10,750,000. Such liability
is provided in subsection 195(2) of the Act.
The eye of the storm for the present litigation
resides in subsection 195(2) of the Income Tax
Act. It runs as follows:
195... .
(2) Where, in a particular month in a taxation year, a
corporation issues a share or debt obligation, or grants a right,
in respect of which it designates an amount under section 194,
the corporation shall, on or before the last day of the month
following the particular month, pay to the Receiver General on
account of its tax payable under this Part for the year an
amount equal to 50% of the aggregate of all amounts so
designated. [Emphasis added.]
This solemn enactment of Parliament is mandato
ry, absolute and precise.
The ultimate tax, on account of which subsec
tion 195(2) exacts the above mentioned 50%, will
not be assessed in excess of that amount. "How-
ever, to the extent that a corporation's Part VIII
tax liability is extinguished by Part VIII refunds
generated before the end of the year in which [it]
issued SRTC securities, no Part VIII tax or inter
est thereon will be payable" according to the said
policy paper, exhibit "A" at its pages 2 and 3.
(pages 00008 and 00009 of the motion record)
In oral argument, counsel for the respondents
indicated that the way the SRTC system works, if
the Minister started insisting on payment pursuant
to subsection 195(2) the working of the scheme
would be affected. He noted that the respondent
Minister tries to facilitate the working of the
scheme, but not to jeopardize the security of tax
revenues; and he asserted that if the Minister is
strict, the legislative provisions will not work. So,
the Minister provides, extra-legally, for voluntary
arrangements, of which there is no parliamentary
approval.
No doubt successive ministers can be credited
with good intentions by taxpaying corporations
engaged in scientific research, which must appreci
ate the indulgence of the "extra-legal" voluntary
arrangements. But, in law, those intentions are
quite beside the point.
On page 8 of the respondents' points of argu
ment there is this passage:
Form T2113 [already mentioned] indicates that payment of
Part VIII tax and penalty is to accompany the filing.
It does indicate that, but at the filing, no tax is
necessarily assessed or due. Subsection 195(2)
exacts payment merely "on account of its tax
payable under this Part". The passage continues:
Strictly speaking a form, without the payment of Part VIII tax
accompanying it, cannot be said to be validly filed. But the
Minister does not take that strict an approach, he accepts such
forms as validly filed. Nor does he insist on payments mandat
ed by subsection 195(2) if the corporation could show that the
liability for Part VIII tax would be satisfied.
In terms only of the Minister's indulgent approach
to the law, the applicant has always maintained
that it would lawfully succeed in eliminating its
Part VIII tax liability, and it exhibits a copy of its
return for its taxation year ending February 28,
1986 (at page 00110 of the motion record) to
verify its contentions. The Minister has not yet
assessed the Part VIII tax in this regard.
The respondents' policy is revealed in exhibit
"A" which is too voluminous to be recited here. It
is stated to be "for departmental use only" as the
respondents' counsel confirmed. Two samples will
suffice to demonstrate how that policy departs
from the precise and absolute command which
Parliament enacted in subsection 195(2). At
pages 5 and 6 (pages 00011 & 00012 of the
motion record):
As the purpose of this project is to determine the corporation's
ability to satisfy its Part VIII tax obligation, the following
questions should be answered in the course of the interview(s)
and a copy of the results placed in the T2 file with the
permanent correspondence:
1. How does the taxpayer intend to satisfy its Part VIII tax
liability?
At page 7 of exhibit "A" (page 00013 of the
motion record):
Where it is evident that the company has generated or will
generate a Part VIII tax refund sufficient to offset its Part VIII
tax liability, no further action is required. In addition, no
further action is required for companies that appear to be
sound taxpayers based upon an evaluation of their corporate
history, size, financial status and the nature of their operations
or for companies that can establish that they have the techno
logical capability to carry out a bona fide research project (i.e.
qualified personnel, proper facilities, etc.) and the financial
capability to spend sufficient funds on qualified R & D to
eliminate its Part VIII tax liability (i.e. the taxpayer has access
to sufficient internal or external financing to incur sufficient R
& D expenses).
Counsel for the respondents were offered a
recess during the hearing, for the purpose of con
sulting among themselves, or with anyone else, in
order to reflect upon their position in regard to the
Minister's lawful authority, if any, to effect his
indulgent policy scheme evinced in exhibits "A"
and "D". They declined the recess but conferred
together at the counsel table and then indicated
that they could cite no such authority.
Since, as the respondents' counsel conceded, the
Minister's invitation to disregard the legislative
command to pay 50% within the stated time is
"extra-legal", it is obviously wholly beyond the
contemplation of the Income Tax Act, and is
obviously not engaged by the objection and other
appeal provisions therein enacted by Parliament.
As well, the Minister receives no lawful or any
authority to thwart subsection 195(2) by means of
the provisions of subsections 153(1) [as am. by
S.C. 1980-81-82-83, c. 48, s. 86; c. 109, s. 19; c.
140, s. 104; 1985, c. 45, s. 85] or (1.1) of that Act
[as am. by S.C. 1980-81-82-83, c. 48, s. 86], nor
yet by any means provided in section 17 of the
Financial Administration Act, R.S.C. 1970, c.
F-10.
One is left with the conclusion that the Minis
ter's "extra-legal" policy is quite illegal. It runs
directly against subsection 195(2) of the Income
Tax Act. That Act, moreover, makes no proce
dural provision for contesting by litigation such an
illegal irregularity.
The respondents' counsel's secondary plea of
necessity rings hollow because successive Ministers
have always been members of the successive gov
ernments of the day, which always can, and fre
quently did and do lay before Parliament numer
ous amendments to this Act. If there were such
necessity for this policy of counselling and permit
ting disobedience of the law, why not seek approv
al and ratification by Parliament? Parliament is
the only constitutional arbiter to decide whether or
not such indulgence be necessary and Parliament
alone can and could enact it into law or decline to
do so.
After the completion of all oral argument, coun
sel on both sides were invited to submit, in writing,
any further thoughts on any of the issues debated
in the court room. Under cover of a letter dated
August 21, 1986, the respondents' counsel submit
ted "Further Submissions by the Respondents",
signed by the three counsel, with a copy to the
applicant's counsel.
The judgments in The Queen v. Gary Bowl Ltd.,
[1974] 2 F.C. 146; 74 DTC 6401 (C.A.), and in
Danielson v. Canada (Deputy Attorney General),
[1987] 1 F.C. 335; 86 DTC 6340 (T.D.), are cited
for the respondents.
In the Gary Bowl decision, it was contended that
a judgment of the Tax Review Board allowing an
appeal from "nil assessments" was a nullity and
that no appeal could be taken from a nullity to this
Court. The present Chief Justice of the Federal
Court was then a member of the appellate panel
and, for the Court he wrote (at pages 150-151
F.C.; 6403 DTC) to the effect that, whereas the
Board ought to have realized immediately that
there was no relief which it could properly accord
and that the appeal ought to have been dismissed,
nevertheless that circumstance did not deprive the
Board of jurisdiction to deal with what purported
to be an appeal pursuant to the Act. There the fact
of a properly lawful assessment—a "nil" assess
ment to be sure—was not questioned and, of
course, there was no suggestion that the Minister
had created any illegal anomaly in order to induce
breach of the law, an anomaly which is not even
contemplated by procedures provided in the
Income Tax Act. The Gary Bowl decision, unex-
ceptionally correct in and for the noted circum
stances, does not engage or bear upon the circum
stances here.
The Danielson case relates to delay in collection
whereby "an amount assessed in respect of a tax
payer" was reasonably considered to be jeopard
ized, pursuant to section 225.2 of the Act [as
added by S.C. 1985, c. 45, s. 116]. Having
declined to submit any evidence herein, the
respondents fail to demonstrate that circumstance
here. Nor is there any evidence here of the notice
to the taxpayer prescribed by that section. On the
contrary, the applicant here complains that, while
it was still engaged in attempting to demonstrate
to the respondent Minister its elimination of Part
VIII tax liability, the Minister effected the freez
ing of its operating accounts without notice or
other warning.
The respondents' counsel, in their latest submis
sion, return to the Bechthold decision and empha
size subsection 152(8) which deems an assessment
to be valid, subject to certain conditions. It will be
noted that in the latter case (F.C., at page 126;
DTC, at page 6070) it is said "subsections (4) [as
am. by S.C. 1984, c. 1, s. 84; c. 45, s. 59] and (7)
of section 152 allow the Minister to assess at any
time". To "assess" in terms of the Act must mean
all or either of "to calculate, to compute and to fix
and to determine". The verb "assess" does not
operate at large. It is not expressed in an intransi
tive usage. It is transitive. The Minister must
assess something. He assesses tax(es), penalty and
interest. What then could he assess pursuant to
subsection 195(2)? Not taxes, for they were not
yet due. What was due was a payment "on account
of ... tax". How could the Minister calculate,
compute, fix or determine any sum of tax in regard
to subsection 195(2)? All the calculating, comput-
ing, fixing and determining had already been done,
by Parliament, in exacting 50% of the amounts
designated to be paid by the end of the following
month. There was nothing for the Minister to
assess. Parliament performed the assessment as
such and demanded payment forcefully and pre
cisely. What Parliament did was quite adequate,
and did not call for the Minister's interference.
The respondents' counsel offer the Minister's
objective and intentions as a basis for usurping
legislative power, and in so doing they merely
emphasize the illegality of such usurpation. Here
is part 5 of their further submissions:
The timing for the collection of Part VIII tax is fixed by
statute. A payment on account of tax is required to be made by
subsection 195(2) within 2 months (at the latest) of the date as
of which a designation under s. 194 is made. In practice the
Minister may extend the time for the payment. The extension
depends upon various circumstances but the underlying objec
tive is to secure the taxes due. To either rigidly adhere to the
mandatory requirement of s. 195(2) or to extend the time for
payment as a matter of course could seriously impair the
working of the Part VIII scheme.
It is submitted that in the circumstances the Minister is the
appropriate person to decide whether the circumstances war
rant an extension of time for collection or not. The effect of
subsection 195(2) is that the debt due to Her Majesty (s.222) is
crystallized as of the end of the month following the month in
which the amount was designated. The Minister's action in
dealing with the Applicant in collecting the debt is analagous
[sic] to that of other creditors in similar circumstances. Any
concession made with respect to discharging the debt does not
affect the validity of the debt itself. It would not be appropriate
either to legislate or to direct judicially the process of such
negotiations for there is no question involved of the relative
rights of the parties. All concessions made by the Minister were
for the benefit of the Applicant. The concessions were made
gratuitously. It is submitted that the practice of the Minister in
collection matters of taking into account the particular circum
stances of a taxpayer and the preservation of the public purse is
to be encouraged rather than inhibited in order to achieve the
purpose of the Part VIII scheme. [Emphasis added.]
As noted above, Parliament provided adequately
and lawfully for the preservation of the public
purse, and it did not provide for the Minister's
usurpation of its legislative power.
As the applicant's counsel argues, this situation
is not, in the words of subsection 152(8), merely a
matter of "any error, defect or omission" in an
assessment "or in any proceeding under this Act
relating thereto". He rightly argues, in his
response to the respondents' further submissions,
that the Minister, in effect, stepped, and induced
the applicant to follow him, outside the proceed
ings under the Act. As such, he argues, that
subsection cannot be applied to validate a purport
ed notice of assessment issued without jurisdiction,
as this is not contemplated by the subsection.
The applicant's counsel is willing to concede
that although the Minister may indeed exercise
some discretion as to whether the circumstances of
a particular case warrant an extension of time for
collection, (without mentioning the régime of sub
section 195(2) specifically in this regard) he never
theless asserts that upon the Minister making a
representation to a taxpayer, that representation
should be binding. Here, he asserts again that the
applicant is, indeed, prejudiced for, having relied
on the Minister's written offer (exhibit "D" to Mr.
Adamson's affidavit, previously recited) in writing,
it did not file a notice of objection. Since, as the
applicant contends, it had already eliminated its
liability in respect of the tax referred to in the
form of notice of assessment it was led to believe
that there was no need for a notice of objection,
and now the applicant is too late to put forward its
notice of objection in the course of a regular
appeal under the Income Tax Act.
There is a strong fibre in the fabric of our law
which is to the effect that neither the Sovereign,
nor the Sovereign's minister nor yet any exactor
regis is above the law. So strong is that fibre that
our people have come rightly to expect that a
minister of the Crown will not counsel them to
break the law.
It is reasonable to hold that John Adamson, the
applicant's president, harboured that same expec
tation, as his affidavit and cross-examination
demonstrate. The apparent authority of the
Deputy Minister who "signed" the note attached
to the assessment notice (exhibit "D") would dupe
many a reasonable taxpayer into accepting the
legitimacy of the assertions therein, and the more
so (in light of human nature), because no payment
was demanded. By that note the Minister was, in
effect, telling the applicant: "Despite the law
enacted by Parliament in subsection 195(2), you
do not have to obey Parliament's absolute and
precise command to pay on account of tax until I
or my officials tell you to pay." The Minister
sought to put himself above the law in purporting
to absolve the applicant from its lawful duty, and
in publishing a notice to that illegal effect.
So it was that after the time in April, 1985,
when the applicant, O.R.C. designated the
$21,500,000 pursuant to section 194 [as re-enacted
by S.C. 1984, c. 1, s. 95; c. 45, s. 82; 1985, c. 45, s.
105], the Minister and his officials failed to take
that strict approach, which was their duty, to exact
the 50% which Parliament commanded to be paid.
That was certainly the time to do it.
So it also was that in early June, 1985, when
that curious "assessment" (not of tax, but maybe
of the sum already levied under subsection 195(2)
of the Act) was directed to the applicant, the
respondent counselled the applicant conditionally
not to pay because the Department "is prepared to
modify or withhold its usual collection action". Of
course, with such apparently official encourage-
ment—albeit not read immediately by Mr. Adam-
son—the applicant did not pay and the respondent
did not enforce the law which commanded pay
ment. The Minister bears greater responsibility—
blame—for this flouting of the law than does the
applicant.
Printed forms are part of the essential mystique
of governments in the twentieth century, but one
must not be dazzled by printed forms even when
they are officially prescribed. The printed form
itself, carries no legal force. One wonders why the
Minister, or his Deputy or their officials, in con
veying whatever message they intended to convey
on June 3, 1985, chose to make a Notice of
Assessment form the vehicle. There was no Part
VIII tax due to assess at that time. Nor was the
Minister then demanding payment as his words
and deeds amply demonstrate. Since that form of
Notice of Assessment signified neither demand nor
assessment it amounts to a double nullity. Indeed
it is not really clear just what message was intend
ed, or could be taken, from exhibit "D", except
that the applicant was not then required to pay
any money until the Minister, the deputy or the
officials told him to pay.
About September 3, 1985, the ninety-day period
in which the applicant could have lodged a notice
of objection expired. That is, it expired, if there
were a real notice of assessment calling for a
notice of objection, and not just a double sham.
Still the respondent Minister and his officials
declined to exact from the applicant that payment
which Parliament commanded be made on account
of tax. They continued to foster that clear breach
of the law.
Much correspondence flowed between the appli
cant and the Minister's officials in late 1985 and
early 1986 as is demonstrated by exhibits "E" to
"J". By the end of December, 1985, the Minister
had designated Professor Chamberlain to perform
an evaluation of the scientific and research aspects
of the applicant's activities. Matters rolled along
with the parties still wedded in the Minister's
illegal policy scheme, with the applicant being
intent on showing Prof. Chamberlain its marvel
lous optical research laboratory, when on March
18, 1985, the Minister struck with two garnishing
instruments (exhibits "K" and "L"), thereby
freezing the applicant's operating accounts.
The respondents' counsel concedes that there is
nothing before the Court to show that the appli
cant was given any warning or notice of a change
of official attitude from that of the previous sever
al months. The applicant was never informed that
the Minister had changed his mind about not
collecting the money. To pounce upon the appli
cant after first having induced its president, by
illegal abuse of ostensible authority, into the
reasonable belief that the applicant did not (if not
would not) have to pay is quintessentially unfair to
the applicant. It is unfair even in the context of an
illegal scheme, which indulgently purported to
absolve the applicant of obedience to the law's
absolute and precise command.
One wonders why the respondent Minister,
when he decided that he ought at last to take
sudden action, did not register the certificate of
indebtedness in this Court pursuant to subsection
223(2). It would have operated as a judgment of
this Court. From that, the applicant would not
have been foreclosed from complaining by means
of appeal, and could at least have sought a stay of
enforcement pending appeal. It appears that sub
section 223(2) has not been invoked yet by the
Minister in the matter.
The respondents, by illegal abuse of authority
and false inducements, are clearly estopped from
taking any benefit from their sudden garnishments
of the applicant's accounts. They are justly
estopped even in public law and even although the
benefit taken is not for personal gain but for the
public purse. The principle of estoppel here is
closely akin to that other long and hardy fibre in
the web of our law, ex turpi causa non oritur
actio. The Minister cannot be permitted to put a
taxpayer to prejudicial disadvantage by invocation
of illegal administrative means of the Minister's
own invention, which unlawfully induced the tax
payer into a highly vulnerable position. The cir
cumstances here do not support the decision to
issue the garnishments nor the instruments
themselves.
The actions of the Minister and his officials are
so infected with error of law, illegal conduct,
excess of jurisdiction and unfair pouncing without
reasonable or any notice, that those impugned
decisions and acts which affect the applicant
adversely ought all, in justice, to be quashed.
Included will be the purported Notice of Assess
ment, that curious double nullity. If this determi
nation by the Court be seen, on further adjudica
tion to run counter to the Parsons decision, it will
also be seen to be severable and distinct from the
other dispositions herein.
Certiorari is granted to quash, as well, the
respondent Minister's decisions to issue the two
statutory requirements to pay, the garnishing
orders, and to quash the instruments themselves,
which are removed into this Court for that
purpose.
It is far too late now for the applicant to make
timely compliance with subsection 195(2) of the
Income Tax Act from which it was counselled and
induced by the Minister. The reasonable course
now would be to perform a real assessment of tax,
including Part VIII tax, if any, upon the appli
cant's now filed income tax return, in order to
determine whether or not the applicant actually
did eliminate its liability for those Part VIII taxes.
Accordingly, certiorari is also granted to quash
the respondents' decision to issue a certificate pur
suant to section 223 of the Act, and to quash the
certificate itself, which is now removed into this
Court for that purpose. The applicant is therefore
also entitled to relief in the nature of prohibition to
prohibit the respondent Minister and everyone
under his direction and control from continuing
with collection proceedings until it is lawful and
fair to do so. One criterion of timing for the lawful
and fair resumption of collection proceedings is
suggested above.
The applicant is entitled to its taxable party-
and-party costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.