T-1446-83
A. W. C. Parsons, Hugh J. Flemming Jr. for
themselves and as Executors of the Estate of
Hugh John Flemming Sr. (Applicants)
v.
Minister of National Revenue (Respondent)
Trial Division, Cattanach J.—Ottawa, June 28
and August 12, 1983.
Income tax — Penalties — Application for order quashing
assessments and injunction restraining further action thereon
— Applicant directors assessed under s. 159 in amount equal
to dividend declared without s. 159(2) certificate after nil
assessment of company — Subsequent reassessments of com
pany indicating taxes owing — Applicants alleging want of
legal authority for assessments — Assessment being calcula
tion of tax payable, fixing both quantum and liability —
Assessment administrative — S. 159(2) and (3) penal so must
be strictly construed — Interpretation Bulletin having no legal
effect and misreading provision — Certificate required and
liability therefore attaching only if taxes previously assessed
— Definite article "the" in s. 159(3) implying specific unpaid
taxes, hence obligation to pay, hence assessment — No
assessed taxes when dividend declared so no certificate
required — Doubtful that declaration of dividend is "distribu-
tion of property" — Whether director controls any property —
Board conceivably controlling all corporate assets but subject
to shareholders' control — Assessed taxes not "chargeable
against or payable out of corporate assets as per s. 159(2)
"Director" term of art included in other provisions but not s.
159(2) — "And other like person" unusual draftsmanship —
Director not ejusdem generis — Director not required to file
return by s. 150 so not referred to in s. 159(1) — Application
granted — Income Tax Act, S.C. 1970-71-72, c. 63, ss. 150,
152(1) (rep. and sub. S.C. 1978, c. 5, s. 5), 159(1),(2),(3),
173(1), 222, 248(1) — Federal Court Act, R.S.C. 1970 (2nd
Supp.), c. 10, ss. 18, 28 — Federal Court Rules, C.R.C., c. 663,
RR. 319, 603.
Judicial review — Prerogative writs — Certiorari — Income
tax — Application for order quashing assessments and injunc
tion restraining further action thereon — Applicant directors
assessed under Income Tax Act ("Act") s. 159 in amount equal
to dividend declared without s. 159(2) certificate after nil
assessment of company — Subsequent reassessments of com
pany indicating taxes owing — Applicants alleging want of
legal authority for assessments — Assessment reviewable
under Federal Court Act s. 18 since administrative — Minister
being s. 18 "board" when purporting to exercise powers under
Act — Methods provided by Act for challenging assessment
not activating private provision being s. 29 of Federal Court
Act — Applicability of s. 29 dependant upon nature of appeal
— S. 18 jurisdiction including several appealable matters —
Taxpayer's objection and Minister's reconsideration under Act
s. 165 part of assessment process not true appeal — Appeals
to Tax Review Board and Federal Court addressing substance
of assessment (quantum and liability) not existence of author
ity to assess — Whether to refuse application because alterna
tive remedy available or more appropriate — Option of refer
ence to Court under Act s. 173(1) rejected by Minister —
Failure to exhaust appeal option traditionally prompting
refusal to grant discretionary remedy — Courts reluctant to
insist upon appeal when error of law results in improper
assumption of authority — Facts herein not disputable so trial
unnecessary — Objection and appeal not yielding more ade
quate remedy, costing extra, and being unnecessarily circui
tous way of resolving issue — Time particularly important to
applicant in profession since large debt to Crown especially
detrimental — Application granted — Income Tax Act, S.C.
1970-71-72, c. 63, ss. 159(1),(2),(3), 165(/),(3)(b), 169, 172(2),
173(1) — Federal Court Act, R.S.C. 1970 (2nd Supp.), c. 10,
ss. 18, 28, 29 — Federal Court Rules, C.R.C., c. 663, RR. 319,
603.
In June 1979, the Minister assessed at nil the taxes owed by
North Carleton Land Company Limited ("the Company") in
respect of the year 1978. In October 1979, the Company's
board of directors met, and declared a dividend in the amount
of approximately $454,000. The meeting was attended by the
applicants Parsons and Flemming Jr., and by Flemming Sr.,
but not by the Company's two other directors. In May 1981,
the Minister issued reassessments of the Company's taxes for
both 1978 and 1979, showing that a total of about $718,000
was owed by the Company in respect of the two years. The
Company served a notice of objection. The Minister disallowed
the objection and confirmed the reassessments. In September
1982, the Company appealed both reassessments to the Tax
Review Board.
In February 1983, the Minister issued a notice of assessment
to each of Parsons, Flemming Jr. and the estate of Flemming
Sr. Each assessment was in the amount of the aforementioned
dividend. The theory behind these assessments was that, by
declaring a dividend without first obtaining a ministerial cer
tificate under subsection 159(2) of the Income Tax Act—i.e., a
certificate attesting to the payment of the Company's taxes—
the three directors had incurred personal liability for those
taxes by virtue of subsection 159(3). (The amount of the
assessments was consistent with the departmental position
stated in Bulletin IT-368: namely, that personal liability under
subsection 159(3) was limited to the value of the property
distributed.)
The applicants took the view that these latter three assess
ments were made without legal authorization, and so void.
They proposed that the resolution of the dispute thus estab
lished be expedited, by referring a question to the Federal
Court under subsection 173(1); however, this suggestion was
rejected by the Minister. The applicants then applied for an
order quashing the three assessments, and for an injunction
restraining the Minister from taking further action upon them.
Held, the application is granted.
The act of assessing is the act of calculating the tax payable
by the taxpayer. It fixes both the quantum of tax payable, and
the taxpayer's liability therefor. It is an administrative act, and
as such, it is outside the ambit of section 28 of the Federal
Court Act, and is reviewable under section 18 instead. Further
more, in exercising or purporting to exercise powers conferred
by the Income Tax Act, the Minister constitutes a federal
"board" within the meaning of section 18. Also, the particular
kinds of relief sought by the applicants herein—certiorari and
an injunction—are ones which the Trial Division is empowered
by section 18 to grant.
Nonetheless, in light of the procedures for questioning an
assessment afforded by the Income Tax Act, the Minister
maintains that the present application is barred by section 29 of
the Federal Court Act. Section 29 consists in a privative
provision, which proscribes judicial review of a board's decision
to the extent that the particular decision is subject to appeal
under the express terms of a federal statute. Now, in any given
case, the applicability of the section is dependant upon the
nature of the appeal provided by the particular Act involved.
Moreover, there are many instances in which the Court's
section 18 jurisdiction extends to matters that are subject to
appeal. Thus, the question to be decided is whether the methods
of challenging an assessment available under the Income Tax
Act are so constituted as to call the section 29 proscription into
play against an application of the kind presently before the
Court.
One of those methods is the section 165 procedure, according
to which the taxpayer serves a notice of objection and the
Minister is required thereupon to reconsider the assessment.
This procedure, though, is not an appeal at all. It is simply part
and parcel of the assessment process itself. Elsewhere, the Act
does make provision for true appeals: to the Tax Review Board,
under section 169; and to the Federal Court, under subsection
172(2). However, the appeals thus permitted are addressed
only to the substance of an assessment—that is, to the issues of
quantum and liability. Those are issues very different from that
of the existence of legal authority for making the assessment;
and since it is the latter issue which the applicants wish to raise,
their application is not blocked by the presence of the Income
Tax Act's appeal provisions or by any activation of section 29
resulting therefrom.
Should the Court nonetheless reject the application without
considering its merits, either on the ground that another
remedy is available, or because an available alternative is more
appropriate? In the first instance, the applicants herein did
have open to them two routes other than the one for which they
have opted. One of these, however, was to agree with the
Minister to submit a question of law to the Court—a course
which the applicants did indeed attempt to pursue, but which
was foreclosed by the Minister's refusal to participate. The
applicants had the further option of lodging a notice of objec
tion and, if necessary, following that step with an appeal to the
Board or the Federal Court (or both in turn); and it is true that
an applicant's failure to exhaust an alternative remedy of
appeal, where available, is traditionally a reason for the Court's
declining to grant discretionary remedies. However, the ques
tion which these applicants want resolved is whether the Minis
ter committed an error of law and accordingly engaged in a
wrongful assumption of authority; and when an error of law has
resulted in an improper assumption of authority, the courts
have shown a marked reluctance to compel resort to statutory
appeal procedures, treating as irrelevant an applicant's failure
to resort to that option. In the case at bar, none of the facts
underlying the three assessments is susceptible of dispute, so
there is no need for a full trial, which is what an appeal to the
Federal Court would entail. Furthermore, proceeding by way of
objection and appeal would not secure for the applicants a
remedy more adequate than the relief currently sought. To
adopt that alternative procedure would be to take an unneces
sarily circuitous route to the resolution of the key issue, which
would arise only incidentally. In contrast, the present procedure
goes directly to the heart of the matter. It is also less costly and
more expeditious than the alternative. Time is of particular
significance to the one applicant who is a professional: in an
occupation of a professional nature, it is especially detrimental
to be indebted to the Crown in an amount as substantial as that
stated in these assessments. With regard to this circumstance,
the Court may properly take account of the fact that justice
delayed is justice denied. Thus, on several grounds, the Court
should proceed to consider whether section 159 did give the
Minister authority to make the impugned assessments.
Subsections 159(2) and (3) are essentially penal in nature.
They must therefore be construed strictly, and the person
whom the Minister seeks to penalize must be brought within
their precise terms. It is stated in the Department's Bulletin
that under subsection 159(3), an individual may be held liable
for taxes "whether or not assessed prior to the distribution of
property". An Interpretation Bulletin, though, has no legal
effect whatsoever. Moreover, the Department's reading does
violence to the clear language of subsection 159(2): the
individual incurs liability (under subsection (3)) only if he has
failed to obtain a certificate where required, and according to
subsection (2), a certificate is required only in respect of taxes
"that have been assessed". Subsection (3) itself implicitly
affirms that the existence of such taxes is a precondition of
liability, inasmuch as it speaks of liability "for the unpaid
taxes" (emphasis added). Here, the definite article implies the
existence of specific unpaid taxes, but these cannot exist unless
an obligation to pay has arisen, and for such an obligation to
arise there must be an assessment. In the instant case, it follows
from the assessment of June 1979 that there were no assessed
taxes at the time when the dividend was declared; consequently,
no obligation to obtain a certificate flowed from the existence
of such taxes.
There are further obstacles to the invocation of section 159
against these applicants. For one thing, subsection 159(2) is
concerned only with the situation wherein one of the persons
named in the subsection is "distributing any property under his
control". It is doubtful that the declaration of a dividend
constitutes a "distribution of property", but that point aside,
one may ask what property a director has under his control. It
might be argued—though again it is doubtful—that all of a
company's assets are controlled by the directors as a board, yet
even the board's power is subject to the ultimate control which
resides with the shareholders.
Secondly, subsection (2) refers to taxes which not only have
been assessed but also "are chargeable against or payable out
of' the property distributed. In the absence of collection pro
ceedings and a charge resulting therefrom, assessed taxes would
not seem to be chargeable against or payable out of the assets
of a company.
Another difficulty is that, while the Minister sought to fix
the applicants (and the Flemming estate) with liability on the
basis of their status as company directors, directors are not a
category of persons to which subsection 159(2) applies. "Direc-
tor" is a term of art, and although it was included elsewhere in
the Income Tax Act, it is absent from the opening words of this
provision. Therefore, if a director were to be brought within the
embrace of subsection 159(2), this would have to be done by
means of the general words "and other like person", interpreted
according to the doctrine of ejusdem generis. The use of the
word "and" (rather than "or"), and of the singular word
"person", constitutes unusual draftsmanship; and it is conceiv
able that the general words are intended to be linked with, and
referrable to, the word "executor" alone. In any event, though,
the duties and rights of a director are much different from
those of each of the persons specifically named. A director is
not "like" any of those persons and is thus beyond the grasp
even of the general words of subsection (2). Furthermore, he is
not one of the persons alluded to in subsection (1), since he is
not required by section 150 to file a return.
For these reasons as well, the applicants were under no
obligation to obtain a certificate pursuant to subsection 159(2).
The three assessments, premised as they were upon such an
obligation, were illegal.
CASES JUDICIALLY CONSIDERED
FOLLOWED:
Pure Spring Company Limited v. Minister of National
Revenue, [1946] Ex.C.R. 471; [1946] C.T.C. 169; Mar-
tineau v. Matsqui Institution Disciplinary Board, [1980]
1 S.C.R. 602.
REFERRED TO:
Harelkin v. The University of Regina, [1979] 2 S.C.R.
561.
COUNSEL:
E. J. Mockler, Q.C. and B.A. Crane, Q.C. for
applicants.
D. G. Gibson for respondent.
SOLICITORS:
Mockler, Allen & Dixon, Fredericton, for
applicants.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
CATTANAcx J.: By notice of motion pursuant to
Rule 603 [Federal Court Rules, C.R.C., c. 663]
the applicants move for an order that:
(a) three assessments made by the Deputy Minister of
National Revenue and dated February 8, 1983 against each
of the applicants herein in the like amount of $454,425.27
made under subsection 159(3) of the Income Tax Act
[R.S.C. 1952, c. 148 (as am. by S.C. 1970-71-72, c. 63)]
consequent upon a purported failure by them to comply with
subsection 159(2) of that Act "being the amount of unpaid
tax is payable by or in respect of North Carleton Land
Company Limited (hereafter referred to as "North Carle-
ton") for the taxation years 1978 and 1979" should be
removed into this Court and quashed.
(The statement common to the notices of assessment that
$454,425.27 is the amount of unpaid tax payable by North
Carleton is wrong. The taxes ultimately assessed against
North Carleton were $681,321.67 for its 1978 taxation year
and $36,758.72 for its 1979 taxation year, a total for the two
years of $718,080.39 not $454,425.27 or $1,363,275.81.)
(b) an injunction restraining the Minister, his agents, ser
vants and employees from taking any further action pursuant
to the said assessments or otherwise attempting to enforce or
realize the same.
North Carleton is a company incorporated pur
suant to the law of New Brunswick of which the
applicants, A. W. C. Parsons and Hugh J. Flem-
ming Jr., as was the late Hugh John Flemming Sr.
who died on October 16, 1982, were the directors.
On June 14, 1979, the 1978 tax return of North
Carleton was assessed by the Minister as "NIL".
Some four months later the board of directors
consisting of A. W. C. Parsons, Hugh John Flem-
ming Sr., Hugh John Flemming Jr., William L.
Hoyt, Q.C. (now Mr. Justice Hoyt) and F. G.
Flemming convened in meeting on October 16,
1979 and declared a dividend in respect of the
common shares in the capital stock of North
Carleton of $908.85 per share for a total of
$454,425.27, the entire amount being paid to
Flemming Industries Limited, the sole shareholder
except for directors' qualifying shares held in trust.
Mr. Justice Hoyt and F. G. Flemming were not
present. Hoyt J. waived notice and consented to
the transaction of such business as came before the
meeting.
Subsequent to the filing of North Carleton's
return for the 1979 taxation year, on May 27,
1981, by notice of that date, the Minister reas
sessed the taxpayer in the amount of $681,321.67,
inclusive of interest in the amount of $138,489.19,
for its 1978 taxation year which had been previ
ously assessed on June 14, 1979 with no tax being
payable, and on the same date also reassessed
North Carleton for its 1979 taxation to an amount
of $36,758.72—a total for the two years of
$718,080.39.
On August 20, 1981, North Carleton filed a
notice of objection.
On July 6, 1982, the Minister disallowed the
objection and confirmed the assessments.
On September 27, 1982, a notice of appeal to
the Tax Review Board was filed by North Carle-
ton with respect to the assessments for its 1978
and 1979 taxation years dated May 27, 1981.
On October 16, 1982, Hugh John Flemming Sr.
died. By his last will and testament he appointed
Hugh John Flemming Jr., A. W. C. Parsons, the
Honourable Mr. Justice William L. Hoyt and the
Royal Trust Corporation of Canada to be his
executors and trustees.
On January 27, 1983, the Royal Trust
renounced its right and title to participate in the
administration of the estate as executor and
trustee.
As at February 1, 1983, the matter had been
before the Department of National Revenue for
two years.
On February 8, 1983, the Minister issued
notices of assessment pursuant to subsection
159(3) of the Income Tax Act against A. W. C.
Parsons and Hugh John Flemming Jr. in their
personal capacities as directors of North Carleton,
each in the amount of $454,425.27, being the
amount of the dividend declared on October 16,
1979 by the board of directors of North Carleton
of which they were members participating in the
declaration, and against the estate of the late
Hugh John Flemming Sr. in the same amount.
These are the assessments presently sought to be
removed into this Court and quashed.
Like assessments were not issued against Mr.
Justice Hoyt and F. G. Flemming, perhaps
because the Minister considered it expedient not to
do so as they were not present at the meeting of
the board at which the dividend was declared.
The basic contention advanced by counsel on
behalf of the applicants is that the assessments
called into question are not authorized by law and
as such are illegal and void.
There seems little likelihood that the facts upon
which the assessments are based are susceptible of
dispute between the parties or variation on trial.
In the light of these circumstances the sugges
tion was made by counsel for the applicants to
expedite the matter by resort to section 173 of the
Income Tax Act, subsection (1) of which reads:
173. (1) Where the Minister and a taxpayer agree in writing
that a question of law, fact, or mixed law and fact arising under
this Act should be determined by the Federal Court, that
question shall be determined by the Court pursuant to subsec
tion 17(3) of the Federal Court Act.
The Minister spurned that suggestion as it is his
right to do, but which refusal inspired the appli
cants to seek the expeditious remedy of certiorari
by the present motion.
The matter turns upon the proper interpretation
of section 159 of the Income Tax Act—particular-
ly subsections (2) and (3) thereof.
The purpose of the section is clear. Persons who
are obliged by section 150 to file a return of
income on behalf of another person or persons
acting within the fiduciary capacity contemplated
by subsection 159(2) may be held personally liable
for unpaid taxes, interest and penalties if that
person has not first obtained a clearance certificate
from the Minister before the distribution of any
property under his control.
Whether a director is such a person is a question
of the interpretation of the statute. A determina
tion based upon an erroneous interpretation of a
statute is an error of law patent on the face of the
record and as such is subject to relief by way of
certiorari almost ex debito justitiae (an unfortu
nate expression for the reasons outlined by Beetz
J. in Harelkin v. The University of Regina,
[1979] 2 S.C.R. 561, at pages 575-576).
The contention by counsel for the respondent is
that a privative provision exists in section 29 of the
Federal Court Act [R.S.C. 1970 (2nd Supp.), c.
10], which reads:
29. Notwithstanding sections 18 and 28, where provision is
expressly made by an Act of the Parliament of Canada for an
appeal as such to the Court, to the Supreme Court, to the
Governor in Council or to the Treasury Board from a decision
or order of a federal board, commission or other tribunal made
by or in the course of proceedings before that board, commis
sion or tribunal, that decision or order is not, to the extent that
it may be so appealed, subject to review or to be restrained,
prohibited, removed, set aside or otherwise dealt with, except to
the extent and in the manner provided for in that Act.
The moot question is whether section 29 of the
Federal Court Act is applicable to the appeals
from an assessment provided for in the Income
Tax Act.
The applicability of section 29 in a particular
circumstance is dependent on the nature of the
appeal provided by the statute in question.
In many instances the jurisdiction of the Court
under section 18 of the Federal Court Act extends
to matters which are subject to appeal and as well
to those which are not.
By section 18 of the Federal Court Act the Trial
Division has exclusive original jurisdiction to issue
an injunction and a writ of certiorari, which is the
relief sought by the applicants herein, against any
federal board, commission or other tribunal. The
Minister, in exercising or purporting to exercise
powers conferred by the Income Tax Act, is such a
board.
The act of assessing has been held by Thorson P.
(confirmed by the Privy Council) in Pure Spring
Company Limited v. Minister of National Reve
nue, [1946] Ex.C.R. 471; [1946] C.T.C. 169, to be
an administrative act and not one of a judicial
nature. It is the assessment which fixes the quan
tum of the tax and liability therefor by a taxpayer.
It is the act of calculation of the tax.
Since the act is administrative it is not within
section 28 of the Federal Court Act but it is within
section 18. That has been resolved in Martineau v.
Matsqui Institution Disciplinary Board, [1980] 1
S.C.R. 602.
Section 18 differs from section 28 in that the
grant of the equitable and prerogative relief there
in provided is from its very nature inherently
discretionary.
The fact that an appeal may be provided is but
one circumstance to be considered in the exercise
of that discretion and is not of itself conclusive.
Section 165 of the Income Tax Act provides
that a taxpayer who objects to an assessment (as
all taxpayers do) may file a notice of objection
setting forth the reasons therefor and all relevant
facts.
Upon receipt of a notice of objection it is the
duty of the Minister with all due dispatch to
reconsider the amount.
This has been referred to by counsel for the
respondent as an "in-house" appeal.
In my opinion it is not an appeal. It continues to
be part and parcel of the assessment process.
If vacated that would no doubt satisfy a taxpay
er and end the matter.
However, if the assessment is confirmed or
varied somewhat, provision is made in section 169
for an appeal by the taxpayer to the Tax Review
Board, or to the Federal Court of Canada pursu
ant to subsection 172(2).
But the filing of a notice of objection to the
assessment is a condition precedent to an appeal
either to the Tax Review Board or the Federal
Court and it remains a condition precedent even if
the taxpayer wishes to circumvent reconsideration
by the Minister and appeal directly to the Board or
the Court in accordance with paragraph 165(3)(b)
of the Act.
The assessment by the Minister, which fixes the
quantum and tax liability, is that which is the
subject of the appeal.
The quantum is not the basis of the attack by
the applicants in this instance.
The basis of the attack upon the assessments is
that the Minister did not have the power by law in
the circumstances to make the assessments and
accordingly they are void as well as illegally made.
An error in law which goes to jurisdiction is
alleged in which event certiorari is the appropriate
remedy and, in my view, that remedy is available
despite the appeal process provided against quan
tum and liability therefor which is the purpose of
the assessment process. That is an appeal provided
from a matter far different from the lack of au
thority in law to make the assessment.
For that reason section 29 of the Federal Court
Act, in my view, does not constitute a bar to the
certiorari and injunctive proceedings taken by the
applicants.
Having concluded that this Court is vested with
jurisdiction the question arises as to whether the
Court ought to exercise that jurisdiction or decline
to do so.
The prerogative and equitable relief sought by
the applicants is discretionary and being discre
tionary the discretion must be exercised upon
sound judicial principles.
A ground traditionally relied upon to warrant
the refusal to grant discretionary remedies is the
applicants' failure to exhaust an alternate remedy
of appeal if provided.
However where there has been a wrongful
assumption of authority, as a result of an error of
law, as is alleged to be the case here, the courts
have exhibited a marked reluctance to compel
resort to statutory appeal procedures. In such cir
cumstances the fact that the applicant has not
taken advantage of a statutory right of appeal is
not normally regarded as relevant in the consider
ation of the exercise of judicial discretion.
An error in jurisdiction or an error of law in the
record almost invariably and automatically results
in the grant of certiorari.
The power of the Minister to make assessments
must be based upon the legal authority to do so
and can be set aside by reason of the wrongful
interpretation and application of the provision of
the statute upon which the Minister relies.
As I have concluded and as I view the matter,
the applicants have three avenues of recourse
available to them.
The first avenue would be to lodge notices of
objection, pursue that step in the assessment pro
cess to its end, and in the event that this end
resulted in confirmation of the assessments, to
appeal to the Tax Review Board and possibly
thence to the Federal Court or directly to the
Federal Court. The appeal to the Federal Court is
a trial de novo with all the rights applicable in and
procedures incident to the trial of an action.
I do not overlook that the continuation of the
assessment process within the Department of Na
tional Revenue can be circumvented and the notice
of objection serve as an appeal directly to the Tax
Review Board or to the Federal Court, with the
notice of objection serving as the originating
pleading.
The second recourse, which was initiated by the
applicants, is for the taxpayer and the Minister to
agree that a question of law should be determined
by the Federal Court. For reasons best known to
the Minister he did not agree to the initiative of
the taxpayers which was accordingly aborted.
The third remaining avenue of recourse avail
able to the taxpayers was that presently invoked by
them—that is, by notice of motion pursuant to
Rules 603 and 319 for relief by way of certiorari
and injunction against the Minister provided for
by section 18 of the Federal Court Act.
The question which is posed for answer is which
of the two methods available is more appropriate
to resolve the issue to be decided, which is whether
it was within the power of the Minister to assess
the applicants as he purported to do pursuant to
subsections 159(2) and (3) of the Income Tax Act
or, put another way: Was the Minister wrong in
law in assessing the applicants as he did?
To ascertain which is the more appropriate,
regard must be had to all the circumstances of the
case, paramount amongst which is the relief
sought by the remedy invoked and the adequacy of
the alternate remedy.
Certiorari is the prerogative writ adopted to
quash a decision based upon an error of law which
is apparent from the record. The question there
fore resolves itself into one of law. None of the
facts antecedent to the assessment are susceptible
of dispute. Those facts have been set forth at the
outset. A full-dress trial is not necessary to estab
lish those salient facts.
I am convinced that the statutory appeal pro
vided in the Income Tax Act, predicated as it is by
a condition precedent involving time and expense
to the applicants, does not afford the applicants a
more adequate remedy than the present remedy
elected by them.
There can be no question that it is more conven
ient in terms of cost and expedition.
Time is of particular significance to one of the
applicants who is engaged in a professional
occupation.
Upon assessment by the Minister, liability for
the quantum thereof is immediate upon the mail
ing of notice thereof and payment is likewise
immediate regardless of an objection lodged or an
appeal outstanding. The amount of the assessment
is a debt due the Crown and is recoverable as such
with interest running thereon. There is no equity in
a taxing statute nor in the administration thereof.
Thus to be a debtor to the Crown in such a
substantial amount is detrimental to this particular
applicant in his professional capacity. This is a
consideration to which no weight can be attached
other than the principle expressed in the maxim
that justice delayed is justice denied.
The remedy presently adopted by the applicants
is available to them subject only to this remedy
being barred by the provision of a more adequate
remedy.
The more adequate remedy advanced by the
Minister is the filing of a notice of objection. It is
not my function to decide the efficacy thereof,
which was the subject of comment by counsel for
the rival parties. As I have said before, it is not an
appeal but merely a prolongation of the process of
assessment by the Minister, but it is, without
exception, a condition precedent to an appeal.
In the event of confirmation in this objection
process there remains an appeal to either the Tax
Review Board and/or to the Federal Court.
That objection and ultimate appeal is to and
from the assessment, the,validity of which would
arise only incidentally.
Rather than adopt this circuitous route, the
applicants elected the more direct route of going
directly to the heart of the matter which is, as
repeatedly stated before, whether the Minister
erred in law in assessing the applicants as he did.
I am not satisfied that the alternate route pro
pounded by the Minister is the more appropriate.
On the other hand it appears more appropriate
that the circuity consequent upon prosecuting an
appeal in the manner prescribed in the Income
Tax Act is not necessary or convenient, expedi
tious and beneficial to the applicants' clear ulti
mate end, that is to demonstrate an error in law on
the part of the Minister, and is available by the
more direct course to which the applicants have
had resort.
For the cumulative effect of these circum
stances, I entertain the application for prerogative
and injunctive relief.
This then brings me to the consideration of the
crux of the matter, which is the straightforward
question of law in the circumstances outlined,
which is: Did the Minister err in law in assessing
the applicants?
By virtue of subsection 152(1) of the Income
Tax Act [rep. and sub. S.C. 1978, c. 5, s. 5], it is
the duty of the Minister to forthwith examine a
taxpayer's income tax return for a taxation year
and assess the tax for the year, the interest and
penalties, if any, payable and determine the
amount of refund or tax. That tax becomes a debt
due the Crown immediately payable by virtue of
section 222. The nature of debts due the Crown
and their collection is a matter of royal prerogative
which stems, not from the Income Tax Act, but
from the common law. Where the sovereign's and
the subject's title concur the sovereign's shall pre
vail. Here the respondent's title is disputed.
Within the all-encompassing net cast by the
Income Tax Act since The Income War Tax Act,
1917 [S.C. 1917, c. 28; subsequently c. 97 of
R.S.C. 1927] were provisions like those now
included in subsections 159(1), (2) and (3), which
are reproduced:
159. (1) Every person required by section 150 to file a return
of the income of any other person for a taxation year shall,
within 30 days from the day of mailing of the notice of
assessment, pay all taxes, penalties and interest payable by or
in respect of that person to the extent that he has or had, at any
time since the taxation year, in his possession or control prop
erty belonging to that person or his estate and shall thereupon
be deemed to have made that payment on behalf of the
taxpayer.
(2) Every assignee, liquidator, administrator, executor and
other like person, other than a trustee in bankruptcy, before
distributing any property under his control, shall obtain a
certificate from the Minister certifying that taxes, interest or
penalties that have been assessed under this Act and are
chargeable against or payable out of the property have been
paid or that security for the payment thereof has, in accordance
with subsection 220(4), been accepted by the Minister.
(3) Distribution of property without a certificate required by
subsection (2) renders the person required to obtain the certifi
cate personally liable for the unpaid taxes, interest and
penalties.
Subsections 159(2) and (3), under which the
Minister has assessed the applicants herein, are
essentially penal in nature.
If the persons who are in control of assets which
do not belong to them distribute those assets with
out first paying any taxes owing by the beneficial
owner or first ascertaining that no taxes are pay
able and obtaining a certificate by the Minister to
that effect in accordance with subsection 159(2)
renders the person who distributes any property
under his control personally liable for the unpaid
taxes.
Being essentially penal in nature, the section
must be strictly construed and the person sought to
be penalized must be brought precisely within the
terms of the subsections.
It will be recalled that North Carleton filed its
income tax return for its 1978 taxation year.
On June 14, 1979, the Minister by his notice of
assessment affirmed that no tax was payable by
North Carleton.
On October 16, 1979, four months later, the
board of directors declared a dividend payable to
the common shareholders of North Carleton.
The board did so after the receipt of an assess
ment by the Minister dated June 14, 1979 that no
taxes were assessed and accordingly no taxes were
payable.
Long later, on May 27, 1981, upon the filing of
the tax return by North Carleton for its 1979
taxation year, the Minister assessed North Carle-
ton for its 1979 taxation year in an amount of
$36,758.72 and at the same time reassessed North
Carleton for its 1978 taxation year in an amount
of $681,321.67.
Naturally these assessments to income tax have
been appealed by North Carleton.
But because the board of directors of North
Carleton, after having received a nil assessment,
declared a dividend of $454,425.27 to the common
shareholders, three members of that board, the
applicants herein, were each personally assessed
for taxes in that amount under subsection 159(3)
because they had not obtained certificates that no
taxes were payable under subsection 159(2).
By Interpretation Bulletin IT-368 dated March
28, 1977 and entitled "Corporate Distributions—
Clearance Certificates", a wide application is
given to subsections 159(2) and (3) by the
Minister.
Paragraphs 1, 2 and 3 of that Bulletin are those
relevant in this matter.
Paragraph 1 reads:
1. By virtue of subsection 159(2) every assignee, liquidator,
administrator, and other like person (except a trustee in bank
ruptcy) must request and obtain a clearance certificate before
distributing any property under his control if he wishes to avoid
being personally liable for the unpaid taxes, interest, and
penalties of a corporation pursuant to subsection 159(3). A
clearance certificate is issued on form TX21.
This paragraph reproduces the substance of sub
section 159(2).
Paragraph 2 reads:
2. The term "and other like person" includes any person acting
in the capacity of liquidator, whether or not a formal appoint
ment was made. In a voluntary dissolution, there may be no
formally appointed liquidator and responsibility may have been
assumed by an auditor, director, or other person. Whether or
not a person falls within the scope of subsection 159(2) will be
determined in accordance with the facts of the particular case.
The Minister's interpretation is not relevant in
the circumstances of this matter. North Carleton
has not been placed in liquidation nor has it gone
into voluntary liquidation. It is a subsisting corpo
ration. Accordingly no director has assumed any
responsibility in connection with a voluntary liqui
dation to infect him with the capacity of a liquida
tor, nor have any acts been done by the directors
which are susceptible of that interpretation.
What the board of directors has done was to
declare a dividend. It is an established principle of
common law, implemented in the applicable corpo
rate legislation in Canada and the provinces, that a
declaration of a dividend which would impair the
capital of the company is void.
Here the dividend was declared at a duly con
stituted meeting of the board of directors on Octo-
ber 16, 1979.
The maxim Omnia praesumuntur legitime facta
donec probetur in contrarium is applicable.
The presumption that the dividend had been
properly declared has not been contradicted as was
the privilege of the respondent to do if circum
stances so warranted but which the respondent did
not choose to exercise.
Paragraph 3 of the Bulletin reads:
3. According to subsection 159(3), where no clearance certifi
cate is obtained, a person described in subsection 159(2) could
be held liable to [sic] all taxes, interest, and penalties, whether
or not assessed prior to the distribution of property. However,
the liability of the person under subsection 159(3) is limited to
the value of the property he distributed.
It states that according to subsection 159(3),
where no clearance certificate is obtained, a person
described in subsection 159(2) could be held liable
to all taxes, interest and penalties, whether or not
assessed prior to the distribution of property.
The crucial words in this paraphrase of subsec
tion 159(3) are, "all taxes, interest, and penalties,
whether or not assessed prior to the distribution of
property."
The language of subsection 159(3) is to the
effect that distribution of property without the
Minister's certificate renders the person required
to obtain the certificate "personally liable for the
unpaid taxes, interest and penalties." [Emphasis
added.] The definite article "the" precedes the
words "unpaid taxes". How there can be specific
taxes unpaid without an obligation to pay first
arising—which is, under the Income Tax Act, by
assessment by the Minister—cannot in logic
follow.
An Interpretation Bulletin is precisely what it is
stated to be. It is nothing more than some depart
mental officer's interpretation of subsections
159(2) and (3) of the Act and has no legal effect
whatsoever, other than it is directed to employees
of the Department responsible for assessing tax
payers who will follow it without question. The
limit of their discretion is to do what they are told.
That interpretation does violence to the clear
language of subsection 159(2).
Subsection 159(3) imposes liability if distribu
tion of property is made "without a certificate
required by subsection (2)".
Thus to render a person liable for all the unpaid
taxes, interest and penalties, that person must have
failed to obtain a certificate contemplated by sub
section 159(2).
A person within the categories mentioned in
subsection (2), before distributing any property
under his control, shall obtain a certificate from
the Minister that taxes, interest and penalties
"that have been assessed under this Act" have
been paid or secured.
That language on its face creates a liability only
when distribution of property has been made after
an assessment has been made. The language is
clear and is susceptible of no other meaning. Cer
tainly taxes do not become payable before
assessment.
In this instance an assessment of North Carle-
ton was made on June 14, 1979. As at that date no
"taxes, interest or penalties" had been assessed
under the Income Tax Act, from which it follows
that there was no necessity to obtain the Minister's
certificate and no impediment to the distribution
of property by way of declaration of dividends by
the board of directors of North Carleton if the
creation of a right is susceptible of meaning a
distribution of property within the definition of the
word "property" in subsection 248(1), which is
dubious.
Further, subsection 159(2) provides that the
"taxes, interest or penalties" that have been
assessed must be "chargeable against or payable
out of the property". The "property" must be that
"under the control" of the person who distributes
it.
Naturally the question arises as to what "prop-
erty" a director has under his control.
The directors of a company form a board to
which the duty is delegated by the shareholders of
managing the general affairs of the company.
They have the power of management and the
conduct of the business of the company. Put at its
very broadest it is conceivable that all assets of the
company are under the control of the board of
directors, but subject to the control of the board by
the shareholders. Ultimate control reposes in the
shareholders.
Accepting the dubious assumption that it is all
assets of the company that are under the control of
the directors as a board, how then are taxes which
have been assessed chargeable against or payable
out of the assets of the company? The Income Tax
Act does not impose a lien on property for the
payment of taxes unless one of the collection
procedures was taken with a resultant charge.
Further, the question arises as to whether a
"director", as each of the applicants is, falls within
the initial language of subsection 159(2) reading,
"Every assignee, liquidator, administrator, execu
tor and other like person, other than a trustee in
bankruptcy", who are obligated to obtain a certifi
cate of the Minister before distributing property
under their control.
A trustee in bankruptcy is excepted, being else
where covered.
The word "director" is a term of art and accord
ingly has a technical meaning in respect of corpo
rations. Use is made of the word "director" in
other provisions of the Income Tax Act but the
word is not included in the initial words of subsec
tion 159(2).
Prima facie if it is not included it is excluded
unless included in the words "and other like per
son" on the doctrine of ejusdem generis.
General words following specific words are ordi
narily construed as limited to things ejusdem gen-
eris with those before enumerated.
The general words in subsection 159(2) are
"and other like person". The use of the word
"and" and the word "person" in the singular is
unusual draftsmanship. The more frequent use
would be the word "or" and the word "persons" in
the plural. It is conceivable that the word "and"
should join only the word "executor" as well as the
word "person" being in the singular.
However a "director" is not "like" any of the
preceding persons, let alone an "executor"
exclusively.
The specific words which are to govern the
general words "and other like person" are
"assignee, liquidator, administrator, executor", all
of which are terms of art having a specific mean
ing in their legal context and are so used in
subsection 159(2).
An assignee is a person to whom an assignment
is made and assignment means that property is
transferred to another. The assignee is the recipi
ent of that property.
A liquidator is a person appointed to carry out
the winding-up of a company whose duty is to get
in and realize the property of the company, to pay
its debts and to distribute the surplus (if any)
among the shareholders.
An executor is the person to whom the execution
of a will is entrusted by a testator. Strictly speak
ing an executor is bound to satisfy all claims on
the estate before distributing it among the legatees
and other beneficiaries.
An administrator is the person to whom the
property of a person dying intestate is committed
for administration and whose duties with respect
thereto correspond with those of an executor.
Basically the directors of a company are those
persons acting collectively to whom the duty of
managing the general affairs of the company is
delegated by the shareholders. Their duty is to
conduct the business of the company for the great
est benefit of the shareholders.
Directors have been described as "agents",
"trustees", and "managing partners", but each
such description has been judicially negated.
They have been held not to be exactly agents,
not exactly trustees, not exactly managing part
ners. They are not the masters of the shareholders;
neither are they servants of the shareholders. Their
relationship is one requiring an exercise of fidelity
having in view the purposes for which they are
appointed and the statutory provisions under
which their appointment is made.
The position of a director is very different from
that of an agent or an ordinary trustee. The prop
erty of the company may not be legally vested in
the directors.
Likewise the duties, rights and obligations of a
director and the position of a director generally is
also far different from those of an assignee, a
liquidator, an administrator or an executor—so
different in fact as to be unlike those of such
persons, from which it follows that a director is not
"another like person" to those specific persons
preceding these general words as used in subsec
tion 159(2).
A director is not a person obligated to file an
income tax return under section 150 of the Income
Tax Act, to which reference is made in subsection
159(1).
The obligation of the applicants here to obtain a
certificate of the Minister certifying that taxes
that have been assessed have been paid is governed
by subsection 159(2).
For the reasons expressed, in the circumstances
which have also been described no such obligation
was incumbent upon the applicants.
Accordingly, the assessments made by the Min
ister on February 8, 1983 against the applicants
herein are quashed and the Minister, his agents,
servants and employees are restrained from taking
any further action or steps pursuant to the said
assessments or to otherwise attempt to enforce or
realize upon the said assessments.
The applicants shall be entitled to their 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.