A-53-72
Mark G. Smerchanski (Appellant)
v.
Minister of National Revenue (Respondent)
Court of Appeal, Thurlow J., Mackay and
Bastin D.JJ.—Winnipeg, February 11, 12, 13,
14 and 15; Ottawa, March 11, 12 and 13, 1974.
Income tax—Appellant admitting correctness of re-assess
ments, waiving right of appeal and paying amounts owing—
Bar to appeal from re-assessments—Income Tax Act, R.S.C.
1952, c. 148, ss. 46(1), 126(3), 132(1)(3), 136(4).
An appeal from re-assessments of income tax, made in
1964 for the years 1945-1959 inclusive, was dismissed by
the Trial Judge (Collier J., [1972] F.C. 227) on the ground
that the appellant was bound by the terms of a document
which he executed under seal on July 10, 1964, admitting
the correctness of the re-assessments and his liability for the
amounts assessed and waiving his right of appeal. After
execution of this document, the appellant paid the amounts
owing. The contention of the appellant, repeated before the
Court of Appeal, was that the document so executed was
ineffective to bind the appellant, as it was contrary to the
provisions and policy of the Income Tax Act.
Held, (Bastin D.J. dissenting), there was no principle of
public policy or of public morality or of the policy of the
Act which was offended by the assessments having been
made upon such stipulations by the Minister and consent by
the appellant, which would relieve the appellant of the
consequences of his consent or of his formal waiver of his
right to appeal from the assessments so made.
Per Bastin D.J. (dissenting): The Minister cannot withhold
from a taxpayer the nature and amount of the tax he is
assessing or compel the taxpayer to give a blank cheque to
be filled out at his caprice. The Minister used the threat of
prosecution to compel the taxpayer to relinquish every
safeguard in the Act, which conduct is an abuse of the
Minister's powers. Johnston v. M.N.R. [1948] S.C.R. 486,
followed.
Woon v. M.N.R. [1951] Ex.C.R. 18; M.N.R. v. The
Lakeview Golf Club Limited [1952] Ex.C.R. 522; Mari
time Electric Company Limited v. General Dairies, Lim
ited [1937] A.C. 610; Anctil v. Manufacturers' Life
Insurance Company [1899] A.C. 604; Carling Export
Brewing and Malting Company Limited v. The King
[1931] A.C. 435; Inland Revenue Commissioners v.
Brooks [1915] A.C. 478; Jones v. Victoria Graving
Dock Co. (1877) 2 Q.B.D. 314; Re: West Devon Great
Consuls Mine [1888] 38 Ch. D. 51, considered.
INCOME tax appeal.
COUNSEL:
A. J. Irving for appellant.
W. B. Williston, Q.C., Miss H. Henderson
and G. J. Kroft for respondent.
SOLICITORS:
Aikins, MacAulay & Thorvaldson, Win-
nipeg, for appellant.
Deputy Attorney General of Canada for
respondent.
THURLOW J.—This is an appeal from a judg
ment of the Trial Division [[1972] F.C. 227]
which dismissed the appellant's appeal from re-
assessments- of income tax made on or about
July 8, 1964 for the years 1945 to 1959 inclu
sive. While two other issues were discussed by
the learned Trial Judge in his reasons for judg
ment the precise ground on which he dismissed
the appeal was that the appellant is bound by
the terms of a document which he executed
under seal on July 10, 1964 admitting the cor
rectness of the assessments and his liability for
the amounts assessed and waiving his right of
appeal.
The document reads as follows:
I, Mark Gerald Smerchanski, of the City of Winnipeg, in
Manitoba, Mining Engineer, do hereby acknowledge receipt
of Notices of Re-assessment made under the Income War
Tax Act, being Chapter 97, Revised Statutes of Canada,
1927, The Income Tax Act, being Chapter 52, Statutes of
Canada, 1948 and the Income Tax Act, being Chapter 148,
Revised Statutes of Canada, 1952, in regard to my income
tax for the taxation years 1945 to 1959, both inclusive, in
the following amounts:
1945 $124,453.47
1946 173,413.76
1947 47,303.19
1948 2,292.65
1949 4,562.24
1950 3,751.45
1951 6,046.75
1952 16,125.99
1953 10,304.69
1954 12,567.53
1955 94,231.07
1956 288,994.87
1957 96,739.51
1958 54,858.82
1959 15,964.82
$951,610.81
I do hereby approve of and consent to the individual
amounts involved in each re-assessment, which I understand
are inclusive of taxes, interest and penalties for each of the
said years. I do hereby admit my liability for the amount of
the same and I do hereby waive any right of appeal I now or
may have in regard to any of the said re-assessments.
I do hereby further acknowledge that the said re-assess
ments for the years 1955 to 1958, both inclusive, are in
substitution for the provisional re-assessments made for
those years under dates March 14, 1960, May 1, 1961, April
16, 1962, and June 28, 1963, and I do hereby withdraw the
Notices of Objection dated June 10, 1960, June 8, 1961,
June 5, 1962 and September 23, 1963, I previously filed in
regard to the said provisional re-assessments.
It is understood and agreed that this document is binding
upon my heirs, executors and administrators.
IN WITNESS WHEREOF I have hereunto set my hand and
seal at Winnipeg, in Manitoba, this 10th day of July, 1964.
"Harry Walsh" "M. G. Smerchanski" (Seal)
Witness Mark Gerald Smerchanski
The above acknowledgment, consent and waiver was
voluntarily executed before me by the said Mark Gerald
Smerchanski of his own free will and accord. The said Mark
Gerald Smerchanski has further acknowledged to me that he
understands and is fully aware of the nature and effect of
the said document.
DATED at Winnipeg, in Manitoba, this 10th day of July,
1964.
"Harry Walsh"
A Barrister-at-law entitled to practise in and
for the Province of Manitoba
The learned Trial Judge also had before him
an appeal by Eco Exploration Company Limited
(no personal liability) a company controlled at
all material times by the appellant, Smerchanski,
from re-assessments also made on or about July
8, 1964 for the years 1946, 1947 and 1951 to
1957 inclusive, which appeal was, by consent of
the parties, heard at the same time and on
common evidence with the Smerchanski appeal.
The Eco appeal was also dismissed by the
learned Trial Judge on the basis that the com-
pany was bound by a similar document execu
ted by it under seal and delivered to the
respondent on July 10, 1964 which read as
follows:
Eco Exploration Company Limited does hereby acknowl
edge receipt of Notices of Re-assessment made under the
Income War Tax Act, being Chapter 97, Revised Statutes of
Canada, 1927, The Income Tax Act, being Chapter 52,
Statutes of Canada, 1948 and the Income Tax Act, being
Chapter 148, Revised Statutes of Canada, 1952, in regard to
its income tax for the years 1946, 1947 and 1951 to 1957,
both inclusive, in the following amounts:
1946 $ 14,546.26
1947 1,038.46
1951 7,116.31
1952 244.18
1953 26,717.40
1954 3,124.85
1955 19,652.48
1956 24,274.45
1957 20,463.50
$117,177.89
Eco Exploration Company Limited does hereby approve
of and consent to the individual amounts involved in each
re-assessment, which it understands are inclusive of taxes,
interest and penalties for each of the said years. Eco
Exploration Company Limited does hereby admit its liability
for the amount of the same and it does hereby waive any
right of appeal it now or may have in regard to any of the
said re-assessments.
It is understood and agreed that this document is binding
upon the successors and assigns of Eco Exploration Com
pany Limited.
IN WITNESS WHEREOF ECO EXPLORATION COMPANY LIMITED
has hereunto affixed its Corporate Seal duly attested by the
hands of its proper officers in that behalf this 10th day of
July, 1964.
ECO EXPLORATION COMPANY LIMITED
(no personal liability)
Per:
"P. N. Smerchanski"
President
"Phillip Smerchanski"
Secretary
In the Trial Division it was alleged by the
appellant and Eco that these documents had
been executed for an illegal consideration, that
is to say, the suppression of prosecutions for
income tax evasion, and alternatively that their
execution had been secured by undue influence,
duress and coercion. The issue of illegality of
consideration was, however, abandoned in the
course of argument when counsel for the appel
lant conceded that there was no evidence to
support the allegation, a view with which the
learned Trial Judge agreed. The learned Judge
further found on the evidence that the docu
ments were not executed under undue influ
ence, duress or coercion and his findings there
on were not challenged before us. This left, as a
basis for holding the documents ineffective to
bind the appellant and Eco according to their
tenor, only the submission of counsel, which
was put forward again on this appeal, that they
are contrary to the provisions and policy of the
Income Tax Act.
The events which led up to the execution and
delivery of these documents cover a lengthy
period and as they are described in detail in the
reasons of the learned Trial Judge a brief outline
of them will be sufficient for present purposes.
In the early part of the period a large quantity of
documents was seized from the appellant under
an authorization issued under section 126(3) of
the Act. This occurred in April 1961 and the
documents so seized were made the subject of
intensive examination over the next two years.
Thereafter between August 1963 and March
1964 a number of meetings took place between
the appellant or his legal advisers and senior
officials of the Department in the course of
which it was made plain that the Department
intended to prosecute the appellant by indict
ment on several charges of tax evasion contrary
to section 132(1) of the Act.
At one of these meetings in August 1963 it
was intimated that the Department's claim for
unpaid taxes and interest for the years 1949 to
1959 inclusive was in the vicinity of $633,-
538.37. This amount was disputed. At another
meeting in December 1963 counsel for the
appellant inquired if the Minister would consid
er a settlement at $400,000. In the meantime a
further investigation had been undertaken with
respect to the years 1945 to 1948 and at another
meeting in January 1964 appellant's counsel
was advised that the total claim against Eco for
unpaid taxes and interest was $156,307 and that
against the appellant covering the years 1945 to
1959 inclusive was $686,000 for unpaid taxes
and $344,000 for interest. These amounts as
well were disputed and at some stage the
Department was asked to consider a settlement
at $600,000. However, at no time during this
stage of the events was it ever indicated that the
Department proposed to take any course but to
prosecute. On the contrary it seems to have
been indicated at each of the meetings referred
to that the Department would proceed by
prosecution.
In the third and final phase, between June 25
and July 10, 1964, counsel for the appellant, in
a conversation with counsel who had been
appointed in March 1964 to conduct the pros
ecutions, suggested that the appellant had been
ill advised in the course he had followed of
attempting to justify his position with respect to
transactions which the Department had brought
into question and that even the mere laying of
charges would result in grave and exceptional
damage to the appellant and his family because
of his public position as a member of the legisla
tive assembly and he enquired as to whether the
Department would be prepared to have the
matter settled on the basis of re-assessments of
income tax, interest and penalties and payment
of same by the appellant. Counsel for the
Department referred this enquiry to Ottawa and
was instructed that a settlement would be con
sidered if the proposal for it included appropri
ate terms, which included a commitment by the
appellant and his counsel that the assessments
when made would be accepted, that liability for
the amounts thereof would be admitted, that no
particulars of such amounts would be required,
that the amounts assessed would be paid forth
with and that the right to appeal from such
re-assessments would be waived.
Following communication of these terms to
appellant's counsel, and upon some sufficient
indication or assurance being given that the total
amount to be paid would not exceed $1,200,000
and that counsel for the Department would
review the transactions involved in the Depart
ment's computations for the purpose of assuring
himself that on the information available they
were properly included therein, the following
document was executed by the appellant and his
counsel and by Eco and on July 2, 1964 was
delivered to counsel for the Department.
Mr. C. Gordon Dilts,
Barrister & Solicitor,
503 Electric Railway Chambers,
WINNIPEG, Manitoba.
Dear Mr. Dilts:
Re: Mark Gerald Smerchanski and
Eco Exploration Company Limited
(no personal liability)
We, Mark Gerald Smerchanski and Harry Walsh, hereby
jointly and severally commit ourselves unconditionally to
the payment in cash of the total income tax liability of Mark
Gerald Smerchanski and Eco Exploration Company Limited
(no personal liability) (including interest and penalties) for
the years 1945 to 1959, both inclusive, as determined by the
Department of National Revenue, such payment to be made
upon our being advised by the said Department of the total
amount of such liability. It is agreed and understood that the
total amount of such liability will be accepted and approved
by us without question or reservation and without any
demand whatsoever being made of the Department of Na
tional Revenue for particulars of the total amount involved.
It is further agreed and understood that Mark Gerald Smer-
chanski will personally assume payment of the total liability
as assessed against Eco Exploration Company Limited (no
personal liability).
We, Mark Gerald Smerchanski and Eco Exploration Com
pany Limited (no personal liability) do hereby further
unconditionally waive any and all right of appeal from the
income tax assessments or re-assessments that are now
made or about to be made by the Department of National
Revenue for the said years.
This letter will also serve to confirm that all counsel and
accountants that have been retained for or on behalf of
Mark Gerald Smerchanski and Eco Exploration Company
Limited (no personal liability) have been familiarized with
the contents of this letter, and that they are all in accord
with it and are prepared to the extent applicable to be bound
by it.
It is further agreed and understood that the commitments
contained in this letter are binding upon the heirs, executors
and administrators of Mark Gerald Smerchanski and upon
the successors and assigns of Eco Exploration Company
Limited (no personal liability).
DATED at Winnipeg, in Manitoba, this 2nd day of July,
1964.
"M. G. Smerchanski"
"Harry Walsh"
ECO EXPLORATION COMPANY LIMITED
(NO PERSONAL LIABILITY)
Per: "P. N. Smerchanski"
President
"Philip Smerchanski"
Secretary
On July 8, 1964, following the contemplated
review by Mr. Dilts, which resulted in amounts
totalling $148,984.15 being eliminated from the
computations of income, notices of re-assess
ments of the appellant and of Eco were deliv
ered by hand to appellant's counsel together
with drafts of the documents here in question
for execution and an accompanying letter which
read as follows:
July 8, 1964
Mr. Harry Walsh, Q.C.,
Messrs. Walsh, Micay & Co.,
Barristers & Solicitors,
7th Fl., Childs Bldg.,
Winnipeg, Manitoba.
Re: Mark G. Smerchanski and
Eco Exploration Company Limited
Our File No. C-51 CGD
Dear Sir:
Further to our telephone conversation of today's date, we
enclose Notices of Re-assessment in regard to the income
tax of the above named for the years 1945 to 1959. You will
note that Mr. Smerchanski's liability, inclusive of the
amount charged against Eco Exploration Company Limited,
totals $1,068,788.70. We shall expect to receive a certified
cheque from you by return mail payable to the Receiver-
General of Canada for the sum of $868,788.70, together
with Mr. Smerchanski's written authorization to the Depart
ment of National Revenue in the form of the enclosed letter
in regard to the $200,000.00 payment previously made in
the matter.
We also enclose forms of Acknowledgment, Consent and
Waiver for execution by Mr. Smerchanski and Eco Explora
tion Company Limited. We shall require both copies of the
two documents to be returned to us with the cheque and
letter referred to above.
Yours truly,
THOMPSON, DILTS, JONES, HALL,
DEWAR & RITCHIE
Per: "C. G. Dilts"
CGD/nd
Encl.
Thereafter on July 10, 1964 the documents in
question were executed and delivered and the
assessments were paid. Two days later the
appellant asked counsel for the appellant when
he could expect particulars of the amounts and
was told that under the terms of the settlement
no particulars were to be given. He thereupon
asked when he might expect the return of his
documents. A further conversation took place
the next day between counsel respecting the
delivery of the documents and they were
released from seizure and returned to the appel
lant on July 20, 1964.
The appellant's point was put in two ways. It
was said, first, that the Income Tax Act is a
statute for the public rather than private benefit,
that it confers rights and imposes obligations
which cannot be contracted out of by either the
Crown or the taxpayer, that the Act is not to be
thwarted by the making of a contract between
the State and the subject as this would result in
taxation by contract rather than by the letter of
the law as prescribed by the statute, and that
neither the Crown nor the taxpayer is bound by
such a contract if one is made. In support of his
proposition counsel relied on Woon v. M.N.R.',
M.N.R. v. The Lakeview Golf Club Limited 2 ,
Maritime Electric Company Limited v. General
Dairies, Limited', and Anctil v. Manufacturers'
Life Insurance Company'. He also referred to
Carling Export Brewing and Malting Company
' [1951] Ex.C.R. 18.
2 [1952] Ex.C.R. 522.
3 [1937] A.C. 610.
4 [1899] A.C. 604.
Limited v. The King s where Lord Thankerton
said at page 438:
In their Lordships' opinion it is not to be readily assumed,
in a taxing Act, that Parliament has delegated to a Minister
the power to settle the limits of taxation, and such intention
must be clearly shown by the terms of the statutory
provision.
and to Inland Revenue Commissioners v.
Brooks 6 where Lord Atkinson said at page 488:
It may be very absurd or illogical that the amounts of these
profits and gains should be inquired into for a second time.
But this is a taxing statute and taxes cannot be imposed
upon the subject under it unless in strict accordance with its
provisions.
The other way in which the point was put was
that the power of the Minister to assess income
tax, interest and penalties is limited to that given
him by section 46 of the Income Tax Act', that
he is entitled to exercise that power so far as it
permits him to go but no further, that he is not
thereby empowered to stipulate for an admis
sion of liability or a waiver of the right to
appeal, that such a stipulation if made is ultra
vires and any admission or waiver which results
from such a stipulation is invalid and ineffective
to deprive the taxpayer of the right to appeal
and to contest an assessment, which is given to
him by the statute, and that the documents in
question are therefore ineffective to prevent the
appellant from appealing and contesting the
amounts of the assessments in question.
I do not find in the cases cited by counsel
much assistance in dealing with the point raised.
The question raised in the Woon and Lakeview
Golf Club cases was whether the Minister was
estopped by the earlier conduct of his officers
from applying the taxing provisions of the appli
cable statute and in both cases it was held that
he was not. In the Woon case Cameron J. after
[1931] A.C. 435.
6 [1915] A.C. 478.
7 R.S.C. 1952,c. 148.
reviewing a number of cases concluded at page
27:
On the principles laid down in these cases I have reached
the conclusion that the so-called "ruling" of the Commis
sioner was nothing more than his personal opinion as to the
meaning of the statute, or, at the most, that the department
in assessing the appellant would carry into effect the "rul-
ing" so made. In either event it was made without authority
and was not binding on the Crown. I find, also, that it cannot
be invoked by the appellant as a ground for raising estoppel
in this case, as to do so would be to nullify the requirement
of the statute itself.
In the Lakeview Golf Club case the same
learned Judge expressed a similar view as fol
lows at page 528:
I cannot agree that such an "understanding",—to use the
word of Exhibit A-5--can be of any assistance to the
respondent, and an estoppel cannot override the law of the
land, and the Crown is not bound by the errors or omissions
of its servants.
In the Maritime Electric case the issue was
also one of estoppel and it was held that estop-
pel could not avail to release the appellant from
a statutory obligation to charge for electric ser
vice the amount required by a rate schedule
approved by a regulatory body nor could estop-
pel enable the , respondent to escape its statutory
obligation to pay the scheduled rates.
The Anctil case, on the other hand, as I see it,
merely holds that a private contract made in
contravention of an express statutory require
ment is not enforceable. Estoppel was raised
and argued but could not defeat the plea that the
contract was contrary to the statute.
Moreover, the contexts in which the state
ments of Lord Thankerton and Lord Atkinson
to which I have referred were made in the
Carling Export Brewing and Brooks cases,
respectively, were so different from the present
that the statements appear to me to afford little
guidance in the present situation.
It appears to me that, as a general proposi
tion, it is quite correct to say that the Income
Tax Act is not to be thwarted by the Minister
and the subject entering into a contract the
tenor of which would be to reduce the taxes
properly payable by the subject under the stat
ute. Taxation must indeed be by the letter of the
law and any attempt to contract out of it is
ineffective in law to reduce or avoid the sub
ject's liability. On the other hand there must be
a method of ascertaining and fixing the amount
of such tax liability and in the Income Tax Act
that need is met by provisions which cast upon
the Minister the authority and the duty to assess
the tax payable by the subject. This he must do
on the basis of such relevant information as he
has with respect to the subject's income, wheth
er such information is provided by the subject
in discharge of the obligation which the statute
casts on him to provide information or is
obtained by other means. It is inherent in such a
system that even after all the pertinent informa
tion has been obtained there will often be
doubts as to whether particular amounts are
properly subject to tax and that there will be
disputes, as well, as to whether particular
amounts ought to be included. In all such
instances the Minister can but act on the totality
of such information as he has in determining
whether to include or exclude the doubtful or
disputed amount. Avenues for objection to him
and subsequently for appeal to courts are pro
vided which the taxpayer may follow if he is not
satisfied with the assessment so made. But
nothing in the statute requires the taxpayer to
exercise his right to object or to appeal.
Viewing the assessments here in question
with these features of the system in mind, I do
not think it can properly be said that they repre
sent taxation by contract rather than by the
letter of the law. It was, of course, not contend
ed that they were too low, or that any deal had
been made to set them at less than the full
amount required by the statute. Nor is there
anything in the evidence to indicate that the
amounts assessed were fixed by reference to a
contract as to the amount to be fixed or other
wise than by the method of bringing into the
computation and assessing tax upon every item
which the information available to the Minister
indicated was subject to tax. There was of
course an indication of the outside limit of the
amount but I regard that not as indicating a
contract as to the total amount but as an esti
mate of an amount which the actual figure,
when calculated according to the statute, would
not exceed. In the result the actual amount was
much less. I have, therefore, come to the con
clusion that there was nothing in the events
which I have summarized which can be regard
ed as a thwarting of the statute or of the statu
tory scheme or as a substitution of taxation by
contract for taxation according to the statute.
Turning to the second way in which the appel
lant's submission was put it appears to me,
again, as a general proposition, that it is not
open to the Minister to stipulate as a condition
of making a re-assessment that the taxpayer
admit liability for the amount to be assessed or
that he waive his right of appeal. There is noth
ing in the statute which expressly or impliedly
prohibits the making of such a stipulation by
him but on the other hand nothing in the statute
appears to me to expressly or impliedly author
ize him to exercise his statutory powers in that
way. To that extent I am in agreement with the
appellant's proposition. However, if this is the
correct view it appears to me that the right to
object to such a stipulation is one that accrues
to the taxpayer concerned and if for some
reason of his own, such as the hope of avoiding
a public prosecution, the taxpayer consents to
such a stipulation or waives his right to object
there appears to me to be no principle of public
morality or of public policy which would inter
vene to protect him from the consequences of
his own act in so consenting or waiving. I am
also of the opinion that the right of a taxpayer
under the Act to appeal from an assessment is
not a public right or one conferred for the public
benefit but is a private right of the taxpayer
which he is entitled to forego or to waive if he
sees fit to do so.
Moreover, from the point of view of the Min
ister, who must, when occasion to do so arises,
decide whether to prosecute a taxpayer or to
proceed entirely by way of re-assessment of
tax, interest and penalties, it will normally be a
legitimate and practical course to consider the
cost and risk of failure that may be involved in
proceeding by way of prosecution even though
such procedure may be warranted on the ma
terial before him. In such circumstances an
offer or agreement by a taxpayer, who is
anxious to avoid prosecution, to admit his tax
liability, to pay up and to waive his appeal may
well be an important factor and in some cases
may be the deciding factor in the Minister's
determination that the public interest will be
best served by his proceeding by re-assessment
of tax, interest and penalties rather than by
prosecution and subsequent re-assessment of
taxes and interest.
Applying these considerations to the present
situation it appears to me that if it can be said,
as I think it may, that the Minister stipulated as
a condition of his proceeding in the matter by
way of re-assessment to recover penalties
incurred, as well as taxes and interest, that the
appellant admit his liability, pay the amounts
assessed forthwith and waive his right of
appeal, the appellant did not object thereto but,
on the contrary, as evidenced both by his execu
tion of the commitment of July 2, 1964 and by
his execution of the document of July 10, 1964
and his immediate payment of the amounts
assessed, consented to and approved of the
stipulation. He did this in each instance with his
eyes open and upon the advice of competent
counsel and there is, in my view, no principle of
public policy or public morality or of the policy
of the statute which is offended by the assess
ments having been made upon such stipulation
and consent or which would relieve the appel
lant from the consequences of his consent or of
his formal waiver of his right to appeal from the
assessments so made. I therefore agree with the
conclusion of the learned Trial Judge that the
appellant is bound by the waiver of appeal con
tained in the document executed by him and
delivered on July 10, 1964.
In view of this conclusion it is unnecessary to
consider the question of estoppel raised by
counsel for the Minister or the further issue
raised by counsel for the appellant with respect
to the right of the Minister to re-assess for the
years 1945 to 1951.
The appeal accordingly fails and in my opin
ion it should be dismissed with costs.
* * *
MACKAY D.J.—While I am in agreement with
the reasons and conclusions of my brother
Thurlow, I wish to express my views in respect
of the respondent's alternative submissions that
the appellants are estopped from appealing the
re-assessments of their income taxes for the
years in question and also that they are bound
by their agreement not to appeal.
Hanbury's Modern Equity 9th ed., pp. 664
and 666 defines estoppel as a doctrine which
prevents a person acting inconsistently with a
representation which he has made to the other
party, in reliance on which the other party has
acted to his detriment. It is necessary that there
should be an unambiguous representation of
existing fact upon which the representee is
intended to act and does act to his detriment.
The document of July 10/64 signed by Smer-
chanski acknowledges receipt of the re-assess
ments for each of the years 1945 to 1959 inclu
sive and continues;
I do hereby approve of and consent to the individual
amounts involved in each re-assessment, which I understand
are inclusive of taxes, interest and penalties for each of the
said years. I do hereby admit my liability for the amount of
the same and I do hereby waive any right of appeal I now or
may have in regard to any of the said re-assessments.
These statements together with the contempo
raneous payment of the re-assessments are an
unambiguous representation that the claims
made by the re-assessments were settled.
In the course of the investigation of the appel
lant's liability for additional taxes, officials of
the Department under an Order of the Court
had on February 21, 1961, seized the appel
lant's records. Two days after signing the docu
ment of July 10th, 1964, and paying the amount
of the re-assessments the appellant asked for
the return of his documents and on July 20th,
1964, they were delivered to him.
When the appellant subsequently commenced
the present proceedings the respondent request
ed the return of records of the appellant that
had been returned to him on July 20 and they
were placed under the joint custody of the par
ties. It was then discovered that some of these
documents material to the respondent's case
were missing and others had been materially
altered.
It is clear from the evidence that after the
time in 1963, when the appellant and his solici
tors first contacted the Department officials in
regard to the investigation of the appellant's tax
liability that was being carried on, that the inten
tion of the Department was to prosecute the
appellant under section 132 of the Income Tax
Act and let the Courts decide the matter, and
that the appellant wished to make a settlement
pursuant to section 46 of the Act. These posi
tions were maintained until at the request of the
appellant's solicitor the settlement set out in the
letter of July 2nd and the document of July
10th, 1964 was completed and the assessments
paid.
The procedures available to the Department
under section 46 and section 132 are concurrent
and the Department has a discretion to proceed
under only one or both—this is made clear by
the provision of section 132 subsection (3)
which provides:
(3) Where a person has been convicted under this section
of wilfully, in any manner, evading or attempting to evade
payment of taxes imposed by Part I, he is not liable to pay a
penalty imposed under subsection (1) of section 56 for the
same evasion or attempt unless he was assessed for that
penalty before the information or complaint giving rise to
the conviction was laid or made.
In the present case it is apparent that had the
matter not been settled proceedings might well
have been taken under both sections because
the Department advisers were of the opinion
that in the circumstances of this case a prosecu
tion would be warranted only in respect of part
of the tax claimed, namely $267,000 and that as
to the balance the proceedings would be under
section 46.
The time for launching proceedings under
section 132 expired on August 28, 1964.
It is my view that the appellant in signing the
documents of July 2nd and July 10th, 1964,
intended to and did induce the respondent to act
to its detriment in returning to the appellant on
July 20, 1964 the documents which it would
have used to justify the re-assessments and in
allowing the time for prosecution under section
132 to elapse I therefore agree with the
respondent's submission as to estoppel.
As to the appellant's agreement not to appeal
the re-assessments: where a provision of a stat
ute is enacted for the benefit of a particular
person or class of persons it may be waived.
(Craies on Statute Law, 7th ed., pp. 269-70.
Maxwell on Interpretation of Statutes,12th ed.,
pp. 328-9.)
I agree with the learned Trial Judge that the
provisions of the Income Tax Act giving the
right to a taxpayer to appeal a re-assessment of
his tax return is a private right enacted for the
benefit of the taxpayer and not a public right
and that it may be waived by the taxpayer. It
was held as long ago as 1877 that parties will be
bound by an agreement not to appeal. (Halsbury
3rd ed., vol. 30 p. 460 para. 869. Jones v.
Victoria Graving Dock Co. [1877] 2 Q.B.D. p.
314. Re: West Devon Great Consuls Mine
(1888) 38 Ch. D. 51.)
As far as I have been able to find these authori
ties have never been questioned.
As to the appellant's submission that the Min
ister had no right to impose the conditions con
tained in the documents of July 2nd and July
10th, 1964, I think it is beyond question that the
parties to any dispute may settle the dispute on
any terms upon which they may agree unless
the agreement or terms of the agreement are
prohibited by law or induced by fraud or
misrepresentation.
On the hearing in this Court appellant's coun
sel abandoned his submissions made in the
Court below that the settlement had the effect
of compounding a felony and that the appellant
was induced to sign the documents by reason of
duress or undue influence.
In the present case the submission of counsel
for the appellant was not that the terms that the
parties agreed to are prohibited by law but that
they were not authorized by the provisions of
the Income Tax Act and as a result the agree
ment was not binding on him. Counsel was
unable 'to submit any authority to support this
submission and I wouldreject it.
There is one other matter to which I wish to
make reference. On the hearing of the appeal
some question was raised as to the credibility of
the witness Karn, whose evidence was accepted
by the learned Trial Judge, on the ground that
his evidence related to matters that occurred
during his interviews with the appellant Smer-
chanski in 1948 and therefore his memory as to
events occurring at that time could not be relied
on. It was pointed out by counsel for the
respondent that Karn in giving his evidence had
available to him to refresh his memory a copy
of a letter of explanation written by Smerchan-
ski, in regard to the matters raised by Karn in
1948. In these circumstances I do not think any
criticism in regard to the learned Trial Judge
having accepted his evidence is justified.
For the reasons of Thurlow J., and these
reasons, I would dismiss the appeal with costs.
* * *
BASTIN D.J. (dissenting)—This appeal is con
cerned with two preliminary questions which by
agreement were to be decided by the learned
Trial Judge at the hearing. The first question is
whether the document dated July 10th, 1964 is
binding on the appellant. Since by this docu
ment the appellant agreed to accept without
question 15 re-assessments for the years 1945
to 1959, to pay the total amount of the tax,
interest and penalty claimed and to give up the
right to appeal, a decision adverse to the appel-
lant will dispose of the case. The second ques
tion is whether there is evidence entitling the
Minister to re-open the assessments of the
appellant for the years 1945 to 1951. Counsel
for the appellant admitted that there was evi
dence with respect to the years 1952 to 1959.
The first issue as to whether the document of
July 10th, 1964 is binding on the appellant does
not involve any question of credibility. The
letter of commitment dated July 2nd, 1964, the
letter of Dilts to Walsh enclosing the 15 re
assessments dated July 8th, 1964 and the docu
ment in question dated July 10th, 1964 speak
for themselves and the circumstances under
which they came into existence are not disputed
and have been described by two prominent and
highly respected Winnipeg lawyers.
On July 10th, 1964, the appellant Smerchan-
ski was a member of the Legislative Assembly
of Manitoba and a prominent politician and
public man. Mr. Harry Walsh, his counsel, said
in his testimony,
... in my opinion this would be the end, the mere laying of
the charge, that would be the end of Mark Smerchanski's
political career and public career and would deal a terrible
blow on him and his family ... .
His vulnerable situation would, of course, be
common knowledge. During the years covered
by the income tax investigation, the appellant or
his representatives had been repeatedly
informed that he would be prosecuted and that
the discussion of any other outcome was out of
the question. At the end of March, 1964, the
intention to prosecute was carried a step further
by the appointment of Mr. Dilts as counsel to
conduct the prosecution on behalf of the Minis
ter. His evidence is that after examining the
material in the Winnipeg Income Tax Office he
wrote the Department recommending prosecu
tion by indictment.
On June 24th, 1964, Mr. Harry Walsh, having
in mind the impending prosecution, called on
Mr. Dilts to make a final effort to avoid pros
ecution. Mr. Dilts communicated with Ottawa
and on June 28th, 1964 he informed Mr. Walsh
of the conditions of settlement which are those
embodied in the document of July 10th, 1964.
These conditions were not worked out by Mr.
Walsh and Mr. Dilts but were Mr. Gourlay's
answer to the question: "What must the appel
lants do to escape prosecution?" It was for the
learned Trial Judge to place his interpretation on
the significance of this answer. In my opinion
the inference is inescapable that these condi
tions were intended to be the alternative to
prosecution and were accepted as such by the
appellant. His counsel had informed him that if
he were prosecuted he would go to jail. In the
face of this threat he capitulated, executed the
document and paid over the amount claimed.
Mr. Walsh testified that at the interview of
July 24th, 1964 Mr. Dilts made a remark to the
effect that if he had been a day later or a few
days later it would have been too late. The
impression of urgency created by this remark is
hardly in keeping with the facts. Mr. Dilts
admitted he had not drawn up any of the
charges when he had his discussions with Mr.
Walsh in June, 1964. The deadline of August
28th, 1964 for the commencement of prosecu
tion under section 136(4) of the Income Tax Act
was not definitely confirmed. One of the
Department officials referred in a memo to a
date in January, 1964 as the date from which
the period of a year would run. It is arguable
that until the Minister had received the opinion
of counsel appointed to review the facts and to
advise the Minister whether a prosecution
would be justified, the period of a year would
not commence to run.
The apparent imminence of prosecution
which was being emphasized appears to have
been designed to increase the pressure on Mr.
Smerchanski to force him to capitulate. If a
similar technique had been employed by a bond
company to recover embezzled funds from an
individual it had bonded the Court would not
require the production of a letter signed by the
bond company president promising immunity
from prosecution to conclude that the actions of
the company amounted to duress and an illegal
bargain not to prosecute. However counsel for
the appellant does not rest his appeal on duress
or the stifling of a prosecution but on the
ground that the Minister exceeded the authority
conferred on him by Parliament by extorting the
conditions contained in the documents of July
2nd, 1964 and July 10th, 1964 and that the
taxpayers could not by their consent give to the
Minister a power which he otherwise did not
possess. Regardless of the failure of counsel to
argue the pleas of duress and stifling a prosecu
tion it was proper for the learned Trial Judge
proprio motu to make his own decision with
respect to their effect on the document. Since
the decision is a matter of inference from facts
which are not in dispute this Court is in as good
a position as the learned Trial Judge to arrive at
a sound conclusion. If the facts would justify a
particular inference if the matter concerned an
individual such an inference may be drawn as to
the conduct of the Minister of National
Revenue.
It was agreed at a pre-trial conference that the
respondent would put in his evidence first to be
followed by the appellant. After the respondent
had completed his prima facie case, it was
agreed that the taxpayer would adduce evidence
on the two issues only and that after argument a
preliminary judgment would be given by the
learned Trial Judge on these two issues with
rights of appeal. It follows that only the
respondent's evidence as to the validity of
individual assessments was heard and during the
argument of this appeal respondent's counsel
spent a great deal of time reviewing this evi
dence. While not strictly relevant to the first
question such evidence tended to seriously tar
nish the character of the appellant Smerchanski.
This evidence points to numerous instances of
tax evasion and the appellant destroyed his
credibility and forfeited the respect of the Court
by his implausible explanations and misleading
additions to his diaries but under our system of
law, even a convicted criminal is entitled to the
protection of the law. Mr. Smerchanski's con
duct should not affect our decision on the prin
ciple involved in this appeal.
The learned Trial Judge dealt with the first
question as follows [at page 248]:
In my opinion the taxpayer's right to appeal assessments
is a private right and not a public right in the sense that the
appeal provisions in the Act express a public policy. I am
also of the view that the right can be waived by a taxpayer,
and that it was done in this case.
With respect this appears to me to be too
narrow a view of the matter. The Income Tax
Act is a public Act passed in the public interest
containing the rules to govern the assessment of
income taxes and the penalties which may be
imposed for income tax offences. It is a basic
principle that the tax should be assessed legally
and that the taxpayer should be told the amount
of any additional assessment and the reasons
for it and to safeguard his rights he is given the
right to appeal. As stated by Rand J. in the case
of Johnston v. M.N.R. [1948] S.C.R. 486 at
page 490:
It must, of course, be assumed that the Crown, as is its duty,
has fully disclosed to the taxpayer the precise findings of
fact and rulings of law which have given rise to the
controversy.
It is not remarkable that counsel have been
unable to find any judgment directly in point. In
my opinion this emphasizes the fact that no
court has ever previously had to consider the
validity of such extraordinary conditions as
were imposed on this taxpayer.
The Minister has been given wide powers to
investigate, assess and penalize and a discretion
as to prosecution but he must discharge the
corresponding duty to act in conformity with
the Act. He cannot, for example, withhold from
a taxpayer the nature and amount of the tax he
is assessing or compel the taxpayer to give a
blank cheque to be filled out at his caprice. It is
not overstating the facts to describe in this way
the concessions he obtained from the appellant
by the two documents of July 2nd and July
10th, 1964. I quote from the letter of
commitment:
It is agreed and understood that the total amount of such
liability will be accepted and approved by us without ques
tion or reservation and without any demand whatsoever
being made of the Department of National Revenue for
particulars of the total amount involved.
I quote from the document of July 10th, 1964:
I do hereby approve of and consent to the individual
amounts involved in each assessment, which I understand
are inclusive of taxes, interest and penalties for each of the
said years. I do hereby admit my liability for the amount of
the same and I do hereby waive any right of appeal I now or
may have in regard to any of the said re-assessments.
The re-assessments gave merely one total
including tax, interest and penalty. Mr. Willis-
ton, counsel for the respondent, stated during
argument that at the time of the settlement in
July, 1964, it was a rule of the Income Tax
Department not to prosecute when a re-assess
ment had been made so the notices of re-assess
ment enclosed in Mr. Dilts' letter of July 8th,
1964 were intended not merely to give the
amount of the tax, interest and penalty demand
ed but also to give Mr. Smerchanski an assur
ance of immunity from prosecution prior to his
paying the money. With regard to the under
standing between Mr. Walsh and Mr. Dilts that
the total assessment would not exceed $1,200,-
000.00 this could not bind the Minister and
therefore would not relieve Mr. Smerchanski
from the obligation of his covenant in the letter
of commitment of July 2nd, 1964.
The inference must be drawn from all these
facts that the Minister used the threat of pros
ecution to compel the taxpayer to relinquish
every safeguard inserted in the Act to protect
the subject from unjust exactions and to place
his assets unreservedly at the disposal of the
Minister. This amounted to the imposition of an
illegal and unprecedented punishment which he
has no power to inflict with or without the
consent of the taxpayer.
If the actions of the Income Tax Department
in relation to this taxpayer were legal and
proper then it follows that a similar course of
conduct may be employed to obtain the same
surrender of his rights in the case of any delin
quent taxpayer of sufficient prominence for the
mere threat of prosecution to be an effective
form of compulsion. In my opinion this is not
justified by the Income Tax Act and is an abuse
of the power of the Minister which it is our duty
to prevent.
I hold that the document dated July 10th,
1964 is invalid on the ground that it was
obtained by duress, that it was executed as part
of a bargain to stifle a prosecution and that the
Minister of National Revenue cannot avoid the
duty to assess income taxes according to law, to
reveal to the taxpayer the nature of the tax, to
permit the taxpayer to question the assessment
and to have the assessment reviewed on appeal.
It is well settled law that the doctrine of
estoppel cannot successfully be invoked to sup
port an illegal contract. Since I hold that the
document in question is invalid no question of
estoppel arises. I would allow the appeal on the
first question with costs in the cause.
The second question related to the income tax
return of the appellant for the years 1945 to
1951 and calls for an answer to the question,
"Did the taxpayer make misrepresentations in
filing a return for any of these years?" The
respondent was unable to produce the actual
income tax returns filed with the Department on
the ground that they have been destroyed and
sought to prove the contents of these returns by
producing the copies of income tax returns for
these years found in the possession of the
taxpayer.
The learned Trial Judge dealt with the second
question as follows [at page 254]:
In this case, when the taxpayer's records were seized,
there were among them, copies of what appeared to be the
actual returns filed for 1945 to 1951. Evidence given on
behalf of the Minister was to the effect that Departmental
officials had checked what I shall call the copies (which
contained assessment notices, and sometimes re-assessment
notices, and receipts) and had reconciled all the figures set
out in the copies and the additional material found with the
copies, with account cards kept by the Department. The
account cards were missing at the time of trial, but the
evidence given by the Department officials was they were
satisfied, from their reconciliation, the copies found in the
possession of the taxpayer were in all probability true copies
of the original returns. In examination in chief, the taxpayer
gave evidence in regard to the copies of the returns in
question. His signature appeared on all copies except that
for 1951. He candidly said it was more than likely or
probable that these copies were carbon or true copies of the
returns filed with the Department, but could not swear they
were exact copies. On the evidence of the Departmental
officials who made the reconciliation, and on the admission
made by the taxpayer, I find the Minister has proved, on a
balance of probabilities, the returns for those particular
years. [Underlining mine.]
What has been destroyed is not merely the
income tax return submitted by the taxpayer but
his entire file for the years in question. Such a
file would contain letters, reports on personal
interviews, memos and recommendations on
contentious matters. Counsel for the appellant
produced such a file pertaining to Eco to show
how many documents it had accumulated. If in
the course of an interview with a representative
of the Department in relation to his income tax
return, the taxpayer gave the facts on a transac
tion involving a question as to whether money
received by the taxpayer was taxable income or
a capital gain, there could be no misrepresenta
tion as to this transaction. How can it be proved
in the absence of the complete file that such
information was not given to the Department.
The learned Trial Judge does not appear to have
considered this aspect of the problem but con
tents himself with the finding that "the Minister
has proved, on a balance of probability, the
returns for the particular years."
The respondent called Mr. Karn, an income
tax official, who had had several interviews
with the appellant in 1948 to prove that any
information given him by the taxpayer was lim
ited to the matters referred to in a letter to the
Income Tax Department, a copy of which was
found attached to the taxpayer's copy of his
income tax return. The importance attached to
this evidence by the respondent is indicated by
his quotations from this evidence in paragraphs
12, 13, 14 and 16 in his statement of facts.
In my opinion the interviews referred to in
this letter would have been a routine, common
place matter of no particular significance to a
busy official and the documents attached to the
taxpayer's income tax return are without par
ticular interest or significance. But in spite of
that Mr. Karn testified under oath to an actual
recollection of this transaction after a lapse of
over 21 years. Such a feat of memory is
incredible.
It is elementary that to prove a document
which has been destroyed by secondary evi
dence, proof must be adduced as to how and
when the document was destroyed. The
respondent did not produce evidence as to the
departmental rule which authorized the destruc
tion of these documents or as to when they
were destroyed. Mr. Dilts testified that when he
was examining the departmental files in the
spring of 1964 he was unaware that any docu
ments were missing which suggests that their
destruction occurred after Mr. Dilts had exam
ined them. It seems to me that more information
should have been given before secondary evi
dence became admissible.
When the learned Trial Judge decided the first
question against the taxpayer, the second ques
tion became academic. But if the appeal on the
first question is allowed, the answer to the
second question becomes of importance and in
my opinion deserves more careful study than
appears to have been given to it. In the event of
the appellant succeeding on his appeal with
respect to the first question, I would refer the
second question back to the learned Trial Judge
to be dealt with by him along with the other
issues left to be tried.
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.