T-468-78
Hutterian Brethren Church of Wilson (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Mahoney J.—Edmonton, Novem-
ber 22, 23 and 24; Ottawa, December 8, 1978.
Income tax — Income calculation — Deductions and
exemptions — Plaintiff complementing religious life with
commercial farming — Labour donated to colony by members
in exchange for provision of worldly goods — Whether or not
plaintiffs income should be reduced by fair market value of
labour contributed by membership, an amount equal to its net
profits — Whether or not Minister's assessment contrary to
exemption for charitable organizations — Income Tax Act,
S.C. 1970-71-72, c. 63, ss. 149(1)(f), 152(1),(3),(4).
Plaintiff, a colony of the Darius-Leut Conference of the
Hutterian Brethren Church, appeals income tax assessments
for 1968 to 1975, inclusive. It is argued that the assessments
should be referred back to the Minister for reassessment
because of his failure to reduce plaintiff's income by the fair
market value of the labour which the membership contribut-
ed—an amount said to be equal to the colony's net profit. It is
also alleged that the assessment is contrary to the exemption
from tax concerning a charitable organization's income.
Held, the appeal is dismissed. There is no basis for the
proposition that the fair market value of donated labour should
be deducted from the net profit of a colony. It is not among the
deductions from income allowed to a taxpayer in the calcula
tion of taxable income. The assessments do not impinge on the
individual member's right to freedom of religion. A church, as
a charitable organization, may qualify for the exemption.
While no part of the plaintiff's income was payable to its
members, part of it was applied for their personal benefit: the
member takes an oath of poverty and donates all his worldly
goods and labours to the colony in exchange for the colony's
commitment to provide for his worldly goods. On that ground
alone the argument fails. The plaintiff's religious and commer
cial, particularly agricultural, objects are pursued concurrently.
Its religious activities, as distinct from its commercial activities,
are almost exclusively internal. Even if they stood alone plain
tiff's non-commercial activities would not qualify as charitable
activities in the legal sense of the term, lacking the element of
public benefit.
Hofer v. Hofer 11970] S.C.R. 958, distinguished. Cocks v.
Manners (1871) L.R. XII Eq. 574, referred to.
INCOME tax appeal.
COUNSEL:
J. A. Matheson for plaintiff.
P. G. C. Ketchum and Brian Saunders for
defendant.
SOLICITORS:
J. A. Matheson, Edmonton, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
MAHONEY J.: The plaintiff appeals income tax
assessments for its taxation years ended
December 31 in each of the years 1968 to 1975,
both inclusive. By order made July 4, 1978, this
and seven other actions' against the defendant are
test actions. The judgments in the test actions are
to be final in respect of a further 88 actions. The
plaintiff in each action is a colony of the Darius-
Leut Conference of the Hutterian Brethren
Church. By the same order, all subsequent pro
ceedings in all test actions have been taken in this
action. At trial, all test actions were heard to
gether on common evidence.
All of the plaintiffs in the test actions are corpo
rations except the Hutterian Brethren of Lakeside
Colony. 2 That colony's income has been assessed
on the basis of the income having been received by
a trustee. The others have all been assessed as
corporations. The eight test actions involve four
colonies. In each case, the corporate plaintiff with
the word "Church" included in its name was incor
porated during 1973 or 1974 and assumed the
property and operations of its similarly named
predecessor. It is acknowledged that there may be
' Court No. Plaintiff
T-463-78 Hutterian Brethren of Wilson Colony
T-464-78 Hutterian Brethren of Lakeside Colony
T-465-78 Hutterian Brethren Church of Scotford
T-466-78 Hutterian Brethren Church of Mixburn
T-467-78 Hutterian Brethren Church of Lakeside
T-469-78 Hutterian Brethren of Mixburn
T-470-78 The Hutterian Brethren of Scotford
2 This is the name as it appears on its statement of claim. The
name on its notices of assessment is Lakeside Colony of Hut-
terian Brethren.
some duplication in the assessments of respective
successors and predecessors. The order of July 4,
1978, provided that "the tax liability of two corpo
rations representing each colony is joint and sever
al" and directed withdrawal of all duplicate assess
ments. That provision is expressly contingent on
the dismissal of one or more of the test actions. I
do not have the material upon which to base a
more precise order; however, note that some of the
predecessors, at least, are not corporations. If the
order is not complied with, appropriate proceed
ings to enforce it can be taken.
Aside from that, the arithmetic of the assess
ments was not disputed. The total amount of tax
liability in issue in all 96 actions is not in evidence;
however, in argument, the figure mentioned was
$ 37,000,000.
A brief history of the recent relationship be
tween the Hutterian Brethren and the exchequer is
desirable. Prior to 1951, the Hutterian Brethren,
as a church, operated under the aegis of a North
Dakota corporation. The individual colonies in
Canada were assessed and paid income tax. In
1951, The Hutterian Brethren Church was incor
porated by a special Act of Parliament 3 with "the
objects of ... [engaging] in and ... [carrying] on
the Christian religion, Christian worship and reli
gious education and teaching and to worship God
according to the religious belief of the members of
the Corporation". Nothing in its objects expressly
contemplates that corporation engaging in any
business and, in particular, the business of farm
ing. After that incorporation, the Minister of Na
tional Revenue ceased assessing the individual
colonies to income tax and, further, reassessed to
the extent that such was not statute barred with
resulting refunds. Beginning in 1961, efforts to tax
the colonies resumed.
The Hutterian Brethren Church in Canada is
made up of three groups of colonies: the Darius-
Leut, the Lehrer-Leut and the Schmeid-Leut. The
colonies of the latter two groups, in 1968, entered
3 S.C. 1950-51, c. 77.
into an agreement with the Minister of National
Revenue whereby each colony, for the years 1961
to 1967, inclusive, was assessed income tax on the
notional basis that the colony's income was person
al income of its members in equal shares in
accordance with a detailed formula. Thereafter,
the corporate assessments of colonies in the Lehr-
er-Leut and Schmeid-Leut groups were cancelled,
new assessments on that notional basis issued and
tax paid. Actions in the Exchequer Court relative
to such corporate assessments were dismissed by
consent judgments May 15, 1969. 4 It appears that
colonies of the Lehrer-Leut and Schmeid-Leut
continued between 1968 and 1975, inclusive, to be
assessed and pay tax on that basis.
The Darius-Leut colonies refused to go along
with the fiction that the income of a colony was
that of its members. They were, nevertheless,
assessed on that basis for the years 1961 to 1966,
inclusive. Those assessments were successfully
appealed. 5 While the proceedings respecting those
assessments moved toward their ultimate resolu
tion by the Supreme Court of Canada, the Darius-
Leut colonies filed corporate income tax returns
for the years presently in issue, 1967 to 1975,
inclusive. Those returns were not assessed until
after the decision of the Supreme Court of Canada
rendered February 11, 1976. The assessments in
issue were issued December 23, 1976, in respect of
the Wilson colony; December 29, 1976, in respect
of the Lakeside colony; March 31, 1977, in respect
of the Mixburn colony and April 6, 1977, in
respect of the Scotford colony. By agreement, the
assessments in respect of the Mixburn colony for
1967 and 1968 are to be vacated. Otherwise, but
subject to the possible duplication previously
referred to, the defendant asserts the validity of all
assessments.
° The Rock Lake Hutterian Brethren v. M.N.R. and Hutter-
ville Hutterian Brethren v. M.N.R.
5 72 DTC 1248 (T.R.B.), [1973] F.C. 1382, [1975] F.C. 162,
76 DTC 6059 (S.C.C.).
The plaintiffs argue that some of the assess
ments are statute barred. They argue that all are
entirely invalid by reason of
a. the Exchequer Court decisions in the Rock Lake and Hut-
terville actions;
b. an absence of natural justice in the assessment process;
c. the discriminatory impact of corporation tax on the Plaintiffs
compared to that on the Lehrer-Leut and Schmeid-Leut
colonies;
d. their being charitable organizations;
e. a deprivation of freedom of religion.
They argue that all should be referred back to the
Minister for reassessment by reason of his failure
to reduce their income by the fair market value of
the labour which their membership has contribut
ed to each—an amount, in each year for each
colony, said to be equal to its net profit.
The plaintiffs adduced no evidence whatever in
support of the propositions that, by agreement, the
judgments in the Rock Lake and Hutterville cases
were to apply to "all Hutterian colonies which
were parties to appeals at that time" including the
"predecessor of the present Plaintiff" and that the
present Darius-Leut colonies are in exactly the
same position as the colonies to which the judg
ments applied. The compelling inference to be
drawn from the evidence is that those consent
judgments, both involving Lehrer-Leut colonies,
ensued upon the settlement the Darius-Leut
rejected.
Likewise, the evidence does not support the
alleged absence of natural justice in the assessment
process. In fact, the argument did not suggest to
me just where a requirement of natural justice, as
I understand the term, could possibly arise in the
assessment process, assuming that process to be
initiated by the taxpayer filing a return and con
cluded by the Minister issuing an assessment.
Thereafter procedures for objection and appeal
with the opportunity to be heard exist and, in this
case, were invoked by the plaintiffs. In the scheme
of the Act, the Minister's reconsideration of an
assessment on a notice of objection is a step in the
appeal, not the assessment, process.
The legality of the arrangement with the Lehr-
er-Leut and Schmeid-Leut is not in issue in this
action. The evidence is, and I have no doubt of the
fact, that the amount of income tax payable by a
colony under that arrangement, all else being
equal, was substantially less than had it been
assessed, as the plaintiffs, to corporate tax. While
one must respect the stated reasons of the Darius-
Leut for rejecting the same arrangement, they had
the opportunity to enter into it. They also had the
opportunity to be taxed on that basis without
entering into such an arrangement and, as was
their right, rejected that opportunity by their suc
cessful appeal. The Darius-Leut opted against
being taxed on that basis. Even if the arrangement
with the other groups was illegal, that fact is no
ground for declaring the plaintiffs' assessments
invalid.
The actual cost to each colony of labour, being
the cost of goods and services supplied to and
consumed by members and their families has been
allowed. The cost of outside purchases is deducted
from revenue in arriving at taxable income while
the value of goods and services produced on the
colony is simply ignored for both revenue and
expense purposes. There is no basis for the proposi
tion that the fair market value of donated labour
should be deducted from the net profit of a colony.
It is not among the deductions from income
allowed to a taxpayer in the calculation of taxable
income.
In support of the allegation that the assessment
to tax is contrary to the exemption, by paragraph
149(1)(f) of the Act, of the income of a charitable
organization, the plaintiffs included, in each state
ment of claim, the following passage from the
decision of Ritchie J., in Hofer v. Hofer. 6
6 [1970] S.C.R. 958 at 968-969.
I am satisfied after having read a great deal of the material
submitted by both sides in this case and after having considered
the analysis thereof as contained in the judgments of the
learned trial judge and the Court of Appeal, that the Hutterite
religious faith and doctrine permeates the whole existence of
the members of any Hutterite Colony and in this regard I adopt
the language which the learned trial judge employed in the
course of his reasons for judgment where he said:
To a Hutterian the whole life is the Church. The colony is
a congregation of people in spiritual brotherhood. The tan
gible evidence of this spiritual community is the secondary or
material community around them. They are not farming just
to be farming—it is the type of livelihood that allows the
greatest assurance of independence from the surrounding
world. The minister is the spiritual and temporal head of the
community.
It follows in my view that, notwithstanding the fact that the
Interlake Colony was a prosperous farming community, it
cannot be said to have been a commercial enterprise in the
sense that any of its members was entitled to participate in its
profits. The Colony was merely an arm of the church and the
overriding consideration governing the rights of all the Breth
ren was the fulfilment of their concept of Christianity. To the
Hutterian Brethren the activities of the community were evi
dence of the living church. In this context I find it impossible to
view the Interlake Colony as any form of partnership known to
the law.
Counsel read the passage in argument and would
have reread a good portion of it, as quoted by
Thurlow J.A., as he then was, in Wipf v. The
Queen' had I not stopped him. His adamant posi
tion that I am bound by a finding of fact in
another action is without merit. That said, nothing
in the evidence in this case leads me to a radically
different conclusion.
The Hutterites who testified are not farming
just to be farmers; farming is the commercial
activity that is most compatible in this day and age
to the lifestyle dictated by their religious faith and
doctrine. In earlier times other commercial activi
ties, such as small manufacturing, were compatible
but are no longer found so. I also agree that none
of the plaintiffs can be said to have been a com
mercial enterprise in the sense that any of its
members was entitled to participate in its profits.
That said, each was a commercial farming enter
prise, employing up to date farming equipment
and techniques and purchasing and marketing
with a view to maximum profits. Surplus funds
were likewise invested.
[1975] 2 F.C. 162 at p. 166.
There is no evidence that the assessments in any
way impinge on the plaintiff's right to freedom of
religion. To the extent that the argument was
based on the Darius-Leut's relatively less favour
able tax treatment to that enjoyed by the Lehrer-
Leut and Schmeid-Leut, it has already been dealt
with. It was freely chosen by the Darius-Leut. It is
true that, as a result, the Darius-Leut have less
money than otherwise would be available for
"church" purposes. However, the income of a
church is not per se exempt from income tax. The
income of certain charitable organizations is, of
course, exempt and a church may be such an
organization and qualify for the exemption.
The plaintiffs are not natural persons and there
is no evidence whatever that the assessments in
any way affect the ability of an individual member
to practice his religion as he choses. Two of the
witnesses, Bishop John K. Wurz and Reverend
John K. Hofer, said their sole objection to paying
income tax was a matter of conscience: part of it
(in Reverend Hofer's view 86%) goes to war and
preparation for war. The requirement that a corpo
ration, of which he is a member, pay tax which
may be used for a purpose to which he, in con
science, is opposed can, in no way, be considered as
impinging on an individual's freedom of religion.
Returning to the question of whether the plain
tiffs are charitable organizations and their income,
therefore, exempt, the relevant provision, as it
stood during the period in issue, is paragraph
149(1)(f) of the Act.
149. (1) No tax is payable under this Part upon the taxable
income of a person for a period when that person was
(/) a charitable organization, whether or not incorporated,
all the resources of which were devoted to charitable activi
ties carried on by the organization itself and no part of the
income of which was payable to, or was otherwise available
for the personal benefit of, any proprietor, member or share
holder thereof;
While no part of the plaintiffs' income was pay
able to their members, part of it was certainly
applied for their personal benefit. Indeed, a funda
mental concept of the colony-member relationship,
is that the member take an oath of poverty and
donate all his worldly goods and labours to the
colony in exchange for the colony's commitment to
provide, thereafter, all his worldly needs. On that
ground alone, the argument fails.
While variously expressed, the memorandum of
association of each corporate plaintiff sets forth
both religious and commercial, particularly
agricultural, objects. The evidence is that both are
pursued concurrently. In addition, the evidence
establishes that the plaintiffs religious activities,
as distinct from its commercial activities, are
almost exclusively internal. Their outward looking,
non-commercial, activities do not extend beyond
the minimal demands of neighbourliness. The
plaintiffs' non-commercial activities, even if they
stood alone, would not qualify as charitable activi
ties in the legal sense of the term, lacking the
element of public benefit. 8
As to the allegation that some, at least, of the
assessments are statute barred, the relevant provi
sions of the Act are subsections (1),(3) and (4) of
section 152.
152. (1) The Minister shall, with all due despatch, examine
each return of income and assess the tax for the taxation year
and the interest and penalties, if any, payable.
(3) Liability for the tax under this Part is not affected by an
incorrect or incomplete assessment or by the fact that no
assessment has been made.
(4) The Minister may at any time assess tax, interest or
penalties under this Part or notify in writing any person by
whom a return of income for a taxation year has been filed that
no tax is payable for the taxation year, and may
(a) at any time, if the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to
neglect, carelessness or wilful default or has committed
any fraud in filing the return or in supplying any informa
tion under this Act, or
8 Cocks v. Manners (1871) L.R. XII Eq. 574.
(ii) has filed with the Minister a waiver in prescribed form
within 4 years from the day of mailing of a notice of an
original assessment or of a notification that no tax is
payable for a taxation year, and
(b) within 4 years from the day referred to in paragraph
(a)(ii), in any other case,
reassess or make additional assessments, or assess tax, interest
or penalties under this Part, as the circumstances require.
The plaintiffs' first argument is that many of the
assessments were not made "with all due
despatch" as required by subsection 152(1).
It is agreed that "throughout the years 1967 to
1975 inclusive the Plaintiffs filed Corporation
Income Tax Returns". The copies of the returns
transmitted by the Minister in compliance with
subsection 176(2) are, in many cases, too faint to
read. However, since none of the assessments
invoke a penalty, I infer the returns were filed on
time and that, therefore, a notice of assessment
may have issued as much as eight years after the
return, to which it relates, was filed.
The defendant argues that it was entirely
reasonable for the Minister to delay assessment of
the corporation tax returns pending disposition of
the appeal process on the personal assessments and
that, indeed, it would have been unreasonable for
him to have done otherwise. In the defendant's
submission, the time lag to be considered in the
context of "all due despatch" is the period that
commenced with the decision of the Supreme
Court of Canada, February 11, 1976. I agree. The
returns were, in the circumstances, assessed with
all due despatch and it is unnecessary for me to
consider what the consequences would be if they
had not been, particularly in view of subsection
152(3).
The plaintiffs also invoke the four year limita
tion period in subsection 152(4). It is acknowl
edged that there is no waiver, wilful default or
fraud established. The Hutterian Brethren of
Lakeside Colony filed T-2 corporation returns in
respect of taxation years when it should have filed
T-3 estate, trust or agency returns. That necessari
ly involved a number of misrepresentations.
The assessments in issue are all original assess
ments, not reassessments or additional assess
ments. The words "or assess tax, interest or penal
ties under this Part, as the circumstances require"
were added at the end of subsection 152(4) by the
same amendment that added the words "a notifi
cation that no tax is payable for a taxation year"
to subparagraph 152(4) (a)(ii). 9 Those words
impose the four year limitation period on the issue
of a notice of an original assessment as well as of a
reassessment or an additional assessment. The four
year period is stipulated to run from "the day of
mailing of a notice of an original assessment or of
a notification that no tax is payable". It says
nothing of the day the return was filed.
In the case of an original assessment, as here,
the four year period commences to run with the
mailing of a notification that no tax is payable. No
such notifications were mailed to any of the plain
tiffs. The assessments are not statute barred and it
is, therefore, unnecessary to deal with the mis
representations previously mentioned.
The plaintiffs action fails. So do the other test
actions. A copy of these reasons will be included in
the record of the other test actions.
No representations for a special order as to costs
were made. The plaintiffs action is dismissed with
costs.
9 S.C. 1960, c. 43, s. 15(1).
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.