The Queen (Plaintiff)
v.
Gerald Dain (Defendant)
Trial Division, Kerr J.—Ottawa, November 20
and 23, 1973.
Income tax—Practice—Application by Minister to deter
mine amounts of partnership profits allocable to each part-
ner—Joinder of parties—Income Tax Act, s. I74(3)(b).
A partnership of three persons was dissolved at the end of
its fiscal year on June 30, 1969. The profits of the partner
ship for its 1969 fiscal year were $92,070.63. By a settle
ment agreement D released his interest in the partnership
assets for $15,000 plus $350 costs. Each of the partners was
assessed to income tax for a â interest in these profits. D
appealed his assessment and the Tax Review Board allowed
the appeal. The Minister appealed and applied under section
174(3)(b) to the Federal Court—Trial Division for a determi
nation of the issue and an order joining the other partners as
parties.
Held, the application is dismissed. There is nothing in
section 174 authorizing the Federal Court to join parties on
an appeal from the Tax Review Board by the Minister. The
appeal must be taken by the taxpayer.
APPLICATION.
COUNSEL:
R. Pyne for plaintiff.
H. Pearl for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Cogan, Radnoff and Pearl, Ottawa, for
defendant.
KERR J.—This is in respect of an application
pursuant to section 174(3)(b) of the Income Tax
Act. I am informed that it is the first application
under that section of the Act, and that there is
no jurisprudence relating particularly to the
section.
The relevant portion of section 174 reads as
follows:
174. (1) Where the Minister is of the opinion that a
question of law, fact or mixed law and fact arising out of
one and the same transaction or occurrence or series of
transactions or occurrences is common to assessments in
respect of two or more taxpayers, he may apply to the Tax
Review Board or the Federal Court—Trial Division for a
determination of the question.
(2) An application under subsection (1) shall set forth
(a) the question in respect of which the Minister requests
a determination,
(b) the names of the taxpayers that the Minister seeks to
have bound by the determination of the question, and
(c) the facts and reasons on which the Minister relies and
on which he based or intends to base assessments of tax
payable by each of the taxpayers named in the
application,
and a copy of the application shall be served by the Minister
on each of the taxpayers named in the application and on
any other persons who, in the opinion of the Tax Review
Board or the Federal Court—Trial Division, as the case may
be, are likely to be affected by the determination of the
question.
(3) Where the Tax Review Board or the Federal Court—
Trial Division is satisfied that a determination of the ques
tion set forth in an application under this section will affect
assessments in respect of two or more taxpayers who have
been served with a copy of the application and who are
named in an order of the Board or the Court, as the case
may be, pursuant to this subsection, it may
(a) if none of the taxpayers so named has appealed from
such an assessment, proceed to determine the question in
such manner as it considers appropriate, or
(b) if one or more of the taxpayers so named has or have
appealed, make such order joining a party or parties to
that or those appeals as it considers appropriate.
(4) Where a question set forth in an application under this
section is determined by the Tax Review Board or the
Federal Court—Trial Division, the determination thereof is,
subject to any appeal therefrom in accordance with the
Federal Court Act, final and conclusive for the purposes of
any assessments of tax payable by the taxpayers named by
it pursuant to subsection (3).
The application, which was by Notice of
Motion, supported by an affidavit of Ronald J.
Thrasher, asks:
(a) for an order pursuant to section 174(3)(b)
of the Income Tax Act joining Arthuro Brez
and Alcide Fortuna to the action aforesaid for
the purpose of determining the question, in
what amounts the partnership profits of A.B.
& Lafortune Contractors for its 1969 taxation
year are allocable for income tax purposes
among the three partners that comprised the
partnership; namely Gerald Dain, Arthuro
Brez and Alcide Fortuna;
(b) for a determination of the question set
forth in paragraph (a) hereof;
(c) for an order that the said Gerald Dain,
Arthuro Brez and Alcide Fortuna shall be
bound by the determination; and
(d) for an order for directions as to the
manner in which evidence will be adduced in
the determination of the question.
The Notice of Motion states that the facts
upon which the Minister based his assessments
for the 1969 taxation year of each of the per
sons mentioned in paragraph (c) are as follows:
1. On or about the 1st day of January 1967, the said Gerald
Dain, Arthuro Brez and Alcide Fortuna entered into a
partnership which carried on the business of general con
tractors under the firm name and style of A.B. & Lafortune
Contractors.
2. Each of the partners had a interest therein.
3. The partnership has a fiscal year end of June 30th.
4. The profits of the said partnership for its 1969 fiscal year
were $92,070.63.
5. Prior to June 30, 1969 the said Gerald Dain notified his
partners that as of June 30, 1969 he would be terminating
his interest in the partnership.
6. Pursuant to litigation commenced in the Supreme Court
of Ontario by the said Gerald Dain a form of settlement was
drawn up and executed by the said Gerald Dain, which
settlement reads as follows:
DATED at Ottawa this 21st day of July, 1969.
I, GERALD DAIN, upon the dissolution of the partnership
known as A.B. and Lafortune Contractors and carried on
by Alcide Fortuna, Arthuro Brez, and Gerald Dain,
hereby acknowledge receipt of the sum of $15,000.00
plus the sum of $350.00 for costs and I accept the sum of
$15,000.00 as complete and final withdrawal of my one-
third interest in the partnership assets of A.B. and Lafor-
tune Contractors including, without limiting the generality
of the foregoing, cash on hand, accounts receivable, all
other assets, both fixed and current, and good will.
I hereby release any interest that I may have in the
assets, the name and the operation of A.B. and Lafortune
Contractors and I release all claims that I may have on or
against the assets of Arthuro Brez and Alcide Fortuna and
A.B. and Lafortune Contractors, as of July 1st, 1969.
I hereby undertake to sell any shares or interest that I
may have in A.B. and Lafortune Contractors Limited, a
private company not yet fully incorporated, to any person
or persons as directed by Arthuro Brez and Alcide For-
tuna for the total sum of $1.00.
I further undertake to provide the aforementioned
Arthuro Brez and Alcide Fortuna with my resignation
from the Board of Directors of the aforementioned com
pany upon request.
I hereby authorize and direct my solicitors to file a
Notice of Discontinuance of an action commenced at my
request on the 14th day of July, 1969, in the Supreme
Court of Ontario at Ottawa as Action No. 525/69.
Having been advised by my solicitor, I hereby agree to
accept the sum of $15,000.00 in the following manner:
(a) $2,000.00 having been already accepted.
(b) $12,000.00 by way of cheque from Chiarelli & Guzzo,
Barristers and Solicitors, solicitors for Arthuro Brez and
Alcide Fortuna.
(c) $1,000.00 by way of promissory note payable on
August 31st, 1969.
(d) I direct that the sum of $350.00 be paid to my
solicitors, Gowling, MacTavish, Osborne & Henderson,
for costs.
I hereby declare that I have made no contracts nor
agreements of any kind on behalf of A.B. and Lafortune
Contractors with any customers of the aforementioned
A.B. and Lafortune Contractors to perform any additional
services or provide additional materials under existing
contracts other than what has been brought to the atten
tion of Arthuro Brez and Alcide Fortuna.
Signed Signed
Witness Gerald Dain
7. Subsequent to the execution of the release the financial
statements were prepared and each of the said partners was
credited therein with a one-third interest of the profits in the
amount of $30,690.21 each.
8. The said partners were assessed for income tax by
assessments reflecting the said allocation of profits.
9. The said Dain objected to and ultimately appealed the
said assessment to the Tax Review Board.
10. The Tax Review Board by judgment dated the 27th day
of February 1973, and mailed on the 28th day of February
1973 allowed the appeal of the said Gerald Dain from the
said assessment and referred it back to the Minister of
National Revenue on the basis that the sum of $12,682.42
should not be taxed in his hands because this amount was
not and will never be received by him.
The Notice of Motion also states that the
reasons on which the Minister relies to support
the assessments are as follows:
11. Each of the said partners, having had one-third interest
in the partnership, was entitled to receive a like proportion
of the profits for the partnership's 1969 tax year.
12. Each partner's share of the 1969 profits came to
$30,690.21 and was payable to the partners in their 1969 tax
year.
13. By virtue of section 6(1)(c) of the Income Tax Act each
taxpayer was required to add the amount of $30,690.21 into
his income for the 1969 taxation year.
14. The form of settlement executed by the said Gerald
Dain as set out in paragraph 6 above operated solely as a
release of his interest in the capital of the partnership and
did not operate to disentitle him to his share of proceeds of
the partnership profits in the partnership's 1969 fiscal year.
At the hearing of the application counsel on
behalf of the plaintiff argued in support of the
motion, and it was opposed by counsel for the
defendant Dain and by counsel for Arthuro
Brez. There apparently was an oversight in
giving Alcide Fortuna notice of this hearing,
which had been adjourned from an earlier date,
and he did not appear and was not represented.
Here the situation is that one of the taxpay
ers, Dain, appealed to the Tax Review Board
from his assessment, and consequently section
174(3)(b) applies.
Counsel for the plaintiff argued, inter alia,
that the onus of proving an assessment errone
ous remains on the taxpayer throughout on
appeal to the Tax Review Board and to the
Federal Court, and in this instance the appeal to
the Federal Court in respect of Dain's assess
ment should be treated as an appeal by the
taxpayer within the context of section 174; that
one of the purposes of the section is to obviate
litigation and avoid separate appeals or hearings
where there are common questions, such as
dove-tailing assessments; that, on an appeal by
a taxpayer to the Tax Review Board, the Minis
ter may await the result of that appeal without
precluding his right, in an appeal by him to the
Federal Court from an adverse decision of the
Board, to apply for a determination under sec
tion 174 and to have other taxpayers added to
such latter action; and that, if the section is not
so construed, anomalous consequences would
follow.
Counsel for Brez and counsel for Dain argued
that section 174 is a code, that the appeal
referred to in section 174(3)(b) is an appeal by a
taxpayer, not an action or appeal by the Minis
ter, and that the time for the Minister to apply
for a determination in this instance was when
there was an appeal by the taxpayer before the
Tax Review Board.
Section 174 is designed to have a determina
tion of such questions as are referred to in
subsection (1), and it contemplates two situa
tions, namely, (a) where none of the taxpayers
has appealed from an assessment, and (b) where
one or more of the taxpayers has or have
appealed. In the first situation, the Tax Review
Board or the Federal Court, whichever has the
application for a determination, may proceed to
determine it in such manner as it considers
appropriate. In the other situation, where one
(or more than one) of the taxpayers has
appealed from his assessment, the section
affords an opportunity to`the Minister to apply
under section 174 to the tribunal that has the
taxpayer's appeal, and it can deal with the
appeal and with the question under section 174
and can join other parties to the appeal. How
ever, I do not find in section 174, either in
express words or by reasonable and necessary
implication, any authority in the Federal Court
to join a party or parties to an action or appeal
by the Minister from a decision of the Tax
Review Board, which the present action is, for
although this action is in consequence of the
decision on the taxpayer's appeal to the Tax
Review Board and as defendant in this action he
still has the onus of showing the assessment to
be erroneous, and the action is a trial de novo, it
nevertheless is not an appeal by the taxpayer
but by the Minister.
If a taxpayer appeals in the first instance to
the Tax Review Board and follows it with a
further appeal to this Court from the Board's
decision, it may possibly be that the Minister
has a right to apply to this Court for a determi
nation under section 174 even although he did
not apply to the Tax Review Board when it had
the taxpayer's initial appeal, and in that situa
tion the Court may have authority to join other
parties to the taxpayer's latter appeal, but that is
not the situation here.
In addition to asking for an order joining Brez
and Fortuna to the action for the purpose of
determining the question as to allocation of the
partnership profits among the partners, the
application asks for a determination of the ques
tion and for an order that the three partners be
bound by the determination. It appears to me
that joining Brez and Fortuna to the action
would be a prerequisite to the making of a
determination binding on them, and if the Court
has no authority to join them to the action there
would be no point in making an order for the
determination of the question.
The application will therefore be dismissed,
with 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.