Federal Court of Appeal Decisions

Date: 20031208

Docket: A-61-03

Citation: 2003 FCA 471

CORAM:        ROTHSTEIN J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

                                                                                 and

                                POTASH CORPORATION OF SASKATCHEWAN INC.

                                                                                                                                                   Respondent

                                           Heard at Ottawa, Ontario on November 19, 2003.

                                 Judgment delivered at Ottawa, Ontario on December 8, 2003.

REASONS FOR JUDGMENT BY:                                                                                    MALONE J.A.

CONCURRED IN BY:                                                                                                   ROTHSTEIN J.A.

                                                                                                                                            SHARLOW J.A.

Date: 20031208

Docket: A-61-03

Citation: 2003 FCA 471

CORAM:        ROTHSTEIN J.A.

SHARLOW J.A.

MALONE J.A.

BETWEEN:

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                       Appellant

                                                                                 and

                                POTASH CORPORATION OF SASKATCHEWAN INC.

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

MALONE J.A.

Issue

[1]                 The appellant appeals the order of a Tax Court Judge (the Judge) dated January 28, 2003 granting leave to the respondent Potash Corporation of Saskatchewan Inc. (PCS) to amend its pleadings. The reasons for this decision are reported as Potash Corp. of Saskatchewan Inc. v. Canada, 2003 D.T.C. 509, [2003] C.T.C. 2640 (T.C.C.). The issue now is whether the Judge erred in his interpretation of subsection 169(2.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.) (the Act).

[2]                 The order under appeal was made on the motion of PCS in respect of its appeal of income tax reassessments for 1993, 1994, 1995 and 1996, now pending in the Tax Court.

Legislative Framework

[3]                 PCS is a "large corporation" within the meaning of subsection 225.1(8) of the Act. There are special rules that must be followed by a large corporation that wishes to object to a reassessment or to appeal a reassessment. These rules (the Large Corporation Rules) are subsections 165(1.11) and 169(2.1), the relevant parts of which read as follows:

[4]                 The Large Corporation Rules were enacted in 1995 to discourage large corporations from engaging in a full reconstruction of their income tax returns for a particular year, after the objection or appeal process had started, based on developing interpretations and the outcome of court decisions in litigation involving other taxpayers. The reasons for these subsections are well-stated by R. M. Beith in his paper entitled "Draft Legislation on Income Tax Objections and Appeals" as outlined in the Report of Proceedings of the Forty-Sixth Tax Conference, 1994 Conference Report (Toronto: Canadian Tax Foundation, 1995), 34:2.

One of the reasons for the legislation is to identify disputed issues much sooner so that a taxation year's ultimate tax liability can be determined in a timely way.

Owing to the complexity of the law and the number of issues, for many years a number of large corporations have had some of their taxation years left open through outstanding notices of objection or appeals, so that they have been able to raise new issues based on emerging interpretations and the outcome of court decisions challenged by other taxpayers.

Recently, a particular problem was identified by the auditor general and the Public Accounts Committee. A case dealing with the calculation of the "resource allowance" which was decided against the department, resulted in claims not only based on the particular facts decided by the court but in respect of a new issue concerning the calculation of the "resource allowance". These claims, both directly and indirectly from the court decision, involved significant amounts of tax and interests.

In summary, it is essential that revenues be more predictable and therefore that potential liabilities be identified and resolved within a more reasonable time.

Simply put, Parliament wants the Minister of National Revenue (the Minister) to be able to assess at the earliest possible date both the nature and quantum of pending tax litigation and its potential fiscal impact.

[5]                 The parties advance opposing theories as to the scope of these two subsections. The appellant says the Large Corporation Rules are a statutory bar which restricts an appeal to the Tax Court solely to the issues and relief clearly raised in the large corporation's notice of objection. The amount of the relief sought can never increase above that claimed in the notice of objection, except to allow the correction of minor arithmetical and technical errors.

[6]                 On the other hand, PCS argues that these subsections are merely procedural rules that cannot fetter a large corporation's right to be taxed in accordance with the substantive rules which expressly govern the calculation of its income under, for example, subsection 2(1), section 3, paragraph 20(1)(vi) and section 65 of the Act. PCS argues that the granting of the amendment is a reasonable exercise of the Judge's discretion.

Relevant facts                                                   

[7]                 The income tax returns of PCS for the years under appeal included claims for the resource allowance and earned depletion, both of which are determined on the basis of a formula that includes resource profits. Resource profits in turn are computed by the formula in Income Tax Regulation 1204, and involve many factual elements.

[8]                 The reassessments under appeal reflected changes to the computation of resource profits resulting from the exclusion of certain items of income. The categories of income excluded from the computation, and the amount of income in each category, were described in a schedule attached to the notices of reassessment and are summarized in the following table, derived from the record.

Category	1993 ($)	1994 ($)	1995 ($)	1996 ($)
Foreign exchange gain				3,004,134.00
Farm income	*122,527.58	*198,137.04	*297,682.00
Rental income	*37,124.16	*30,499.74	*26,597.00
Management fee Saskterra	*1,062.480.00	*1,062,480.00	*708,320.00
Management fee Transport		*186,000.00	*186,000.00
Bredenbury income	(22,118.82)
Miscellaneous income			*192,455.00	*385,523.00
Lanigan legal costs		*912,102.18
Scrap sales Patience Lake		*21,867.55
Interest income				*913,216.00
Interest income on intercompany				*4,691,618.00
Miscellaneous income Patience Lake		*25,651.56
Interest income Lanigan		*814.44
Interest income Head Office		*1,081,168.96	*2,825,581.00
Interest Income PCS Sales		*2,416,459.51	*3,820,790.26
Port Lease		*636,000.00	*636,000.00	*636,000.00
Insurance Settlement Rocanville		*3,654,097.00
New Brunswick - premium re Potocan	*71,491.01
New Brunswick grant income		*10,793.88	*41,370.64	*6,786.00
	1,271,503.93	10,236,071.86	8,734,795.90	9,637,277.00

[9]                 PCS filed notices of objection for 1993, 1994, 1995 and 1996. The asterisks above mark the amounts that were specifically referred to in the notices of objection prepared by PCS. The form of the objection for each year is approximately the same. As an example, for 1995, the relevant portion of the notice of objection reads as follows:

II.          Resource Allowance                                                         Statement of Facts 1.    For the purposes of computing resource profits for the resource allowance under paragraph 20(1)(v.1) and the regulations, the taxpayer included certain miscellaneous items of income. These included the following: Farm income - $297,682.00, Rental Income - $26,597.00, Management Fee from Saskterra - $708,320.00, Management Fee from Transport - $186,000.00, Miscellaneous Income - $192,455.00, Interest Income from Head Office (remaining 90%) - $2,825,581.00, Interest Income from PCS Sales - $3,820,790.26, Port Lease - $636,000, and New Brunswick Grant Income - $41,370.64, for a total of $8,734,795.90. 2.    The reassessment reduced resources profits by the amount of these miscellaneous items of income which resulted in a reduction of the deductions for the resource allowance, and for earned depletion. Reasons for the Objection The miscellaneous income is related to, and interconnected with, the business of producing and marketing potash. As noted in the case of Echo Bay Mines Ltd. (92 DTC 6437), it is income from the business, as opposed to the activity, of production that should be included in resource profits. Therefore, this income should be characterized as resource profits for the purposes of the resource allowance and earned depletion. Relief Sought The relief sought is a reduction in the 1995 net income of the taxpayer of $3,821,473.20 which is the sum of the resource allowance of $2,183,698.97 (25% of the total of the miscellaneous income amounts), and the deduction for earned depletion of $1,637,774.23 (25% of the total of the miscellaneous income amounts minus the resource allowance).

[10]            In total, PCS objected to the deletion from its resource profits of $1,293,622.75 for 1993, $10,236,071.86 for 1994, $8,734,795.90 for 1995 and $6,633.143.00 for 1996.

[11]            The reassessments were confirmed by the Minister with respect to the computation of resource profits. PCS then appealed to the Tax Court. The notices of appeal in the Tax Court substantially repeated the allegations relating to the computation of resource profits that were in the notices of objection, with the same particulars.

[12]            In the course of examinations for discovery, counsel for the Minister requested an undertaking to provide information as to whether and why there were categories of income excluded from the resource profits calculation for some years but included in other years. As a result of that undertaking, PCS discovered or was reminded that the computation of resource profits in its income tax returns as filed excluded the following amounts that it now says were inadvertently not included:

1993	Miscellaneous income	$98,943.00
1994	Miscellaneous income	$240,718.00
1995	Foreign exchange	$3,855,967.00
1996	Farm income	$518,497.00
1996	Rental income	$29,565.00

[13]            However, a closer examination of the record suggests a different explanation for certain of the exclusions. While three of the amounts in question appear to have been accidentally excluded, two items bear the cryptic explanation that they were "excluded as protective measure based on prior year's audit". This suggests that these latter exclusions were strategic and not accidental.

[14]            Approximately three weeks before trial, PCS filed a motion in the Tax Court to amend its notice of appeal to include these items on the basis that they do not raise any issues not already raised in the context of other items, and that the Minister would not be prejudiced. PCS says that this amendment is necessary to avoid a future claim by the Minister that these five new items are subject to a plea of res judicata or issue estoppel (see Canada v. Chevron Canada Resources Ltd. (C.A.), [1999] 1 F.C. 349).

[15]            Unless the notices of appeal are amended as PCS has requested, the Act has no mechanism by which PCS can compel the Minister to take them into account, even if PCS is correct to say that these items ought to have been included in the computation of its resource profits. The Act permits a taxpayer to challenge the correctness of an assessment by filing an objection and an appeal, but outside of the objection and appeal process, the Minister cannot be compelled to reassess (subject to limited exceptions, none of which are relevant here).

[16]            The Judge allowed the motion, thus permitting PCS to amend its notice of appeal in the Tax Court. By his interpretation of paragraph 169(2.1)(a) of the Act, PCS had sufficiently complied with subsection 165(1.11) by specifying in the notices of objection the issue to be decided, namely resource profits reductions, by using the simple heading "Resource Allowance" and stating the amounts in controversy as accurately as could be done at the time. He concluded that the failure by PCS to specify certain categories of the computation of resource profits, which meant that the total amount in controversy was somewhat greater than disclosed in the notice of objection, did not bar PCS from having those additional items considered as part of its determination of the question of whether the resource profits had been correctly computed.

Standard of Review

[17]            PCS argues that the expertise of the Tax Court of Canada in matters of income tax law justifies deference to the Tax Court on such questions, including the interpretation of the Act. This argument is based on the pragmatic and functional approach to the determination of standard of review of administrative decisions, as developed in a line of cases that includes Pushpanathan v. Canada, [1998] 1 S.C.R. 982, Law Society of New Brunswick v. Ryan, 2003 SCC 20 and Dr. Q v. College of Physicians and Surgeons of British Columbia, 2003 SCC 19. I must reject this argument. The Tax Court of Canada is not an administrative tribunal. It is a court of record pursuant to section 3 of the Tax Court of Canada Act, R.S.C. 1985, c. T-2 (a superior court of record since July 2, 2003, the date of the coming into force of section 60 of the Courts Administration Service Act, S.C. 2002, c. 80). The Supreme Court of Canada, in its many discussions on the question of standard of review, has never suggested that the pragmatic and functional approach applies to appeals from trial courts.

[18]            A determination as to whether or not a taxpayer has provided a reasonable description of an issue for the purposes of subsection 165(1.11) is a question of mixed law and fact. As such, it can be reversed by this Court only for palpable and overriding error as long as it is based on a correct interpretation of the law (Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at paragraph 28). A conclusion tainted by a misunderstanding of the proper legal test is not entitled to deference (see Baker Petrolite Corp. v. Canwell Enviro-Industries Ltd., [2002] F.C.J. No. 614 (C.A.), per Rothstein J.A. at paragraph 52).

[19]            In this case the Judge commenced his statutory analysis from the position that the Large Corporation Rules should be interpreted strictly because they "derogate from and restrict the broad ability of taxpayers to ... appeal assessments". That was an incorrect approach. The Supreme Court of Canada has rejected the strict construction of taxation statutes, holding in Stubart Investments Ltd. v. Her Majesty the Queen,[1984] 1 S.C.R. 536 that:

Gradually, the role of the tax statute in the community changed, as we have seen and the application of strict construction to it receded. Courts today apply to this statute the plain meaning rule...

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes (2^nd ed., 1983), at p. 87, E.A. Driedger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.

(See also Bell ExpressVu Limited Partnership v. Rex, [2002] S.C.J. No. 43; 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804). In my view, the Judge's misapprehension of the proper interpretive approach led him to an erroneous conclusion on the question of what constituted a reasonable description of the issue. As a result, applying the correct interpretive approach, this court must determine what constitutes a reasonable description of the issue.

Analysis

[20]            Subsection 165(1) gives every taxpayer the right to require the Minister to reconsider her assessment of tax by serving the Minister with a notice of objection setting out the reasons for the objection and all relevant facts. In turn, subsection 169(1) gives to every taxpayer who has served a notice of objection, the right to appeal the Minister's assessment to the Tax Court. The Act gives no direction as to what a taxpayer must include in the notice of appeal.

[21]            The Large Corporation Rules place further requirements on large corporations that object to an assessment by the Minister. The main issue in this case is the meaning to be given to the words "each issue" in the phrase "reasonably describe each issue to be decided" in paragraph 165 (1.11)(a). In interpreting those words, the Judge wrote:

The issue is the legal matter which the taxpayer contests with the CCRA. It is not required to be described exactly, but if it was, it could be expressed in section numbers of the Income Tax Act, or in words taken from or paraphrased from those sections.

[22]            I do not agree with this statement. While a large corporation is not required to describe the issue "exactly", as the Judge states, it is required to describe the issue "reasonably". What is reasonable will differ in each case and will depend on what degree of specificity is required to allow the Minster to know each issue to be decided.

[23]            In reassessing PCS, the Minister set out the precise items of income which were being disallowed as part of resource profits (see paragraph 8). In filing its notice of objection, PCS objected to the disallowance of these same items of income, describing them in the same fashion as the Minister. That complied with paragraph 165(1.11)(a) because it gave sufficient certainty as to what issues were then under objection.

[24]            Contrary to the Judge's suggestion, it would not have been reasonable to simply say that the computation of "Resource Allowance" or "resource profits" was in issue, without specifying the particular elements of that computation that required a determination by the Minister or the Tax Court, as the case may be. That level of generality would render the Large Corporation Rules meaningless, defeating the purpose of their enactment.

[25]           The Judge's interpretation of paragraph 165(1.11)(a) could stand only if the language of the provision unambiguously required it, which is not the case here.    It follows that the Judge erred in granting leave to amend the notice of appeal to include the five items referred to above, and to make consequential amendments to the quantum of the relief sought.

[26]            I recognize that this is a harsh result for PCS, and a harsh rule for large corporations. A large corporation that discovers an error in an income tax return after it has filed a notice of objection or a notice of appeal may find itself barred from taking proceedings to compel the Minister to correct the error. However, that is the result that Parliament intended.

[27]            The Judge made a number of comments relating to the statutory requirement to specify an "amount" for each issue. If he had determined, as he should have done, that PCS is not entitled to include the five disputed items in the notice of appeal, there would have been no need to discuss quantification at all. Nor is it necessary for me to comment on it. I prefer to leave open the question of whether the obligation to "specify in respect of each issue, the relief sought, expressed as the amount of a change in a balance (within the meaning assigned by subsection 152(4.4)) or a balance of undeducted outlays, expenses or other amounts of the corporation" necessarily binds a large corporation to the stated amount, or a less favourable amount. It is arguable that there may be situations where an amendment to a notice of appeal could be permitted if the amendment goes only to quantum and does not entail the raising of a new issue.

Canadian Bill of Rights

[28]            PCS argues that the Large Corporation Rules violate subsection 2(e) of the Canadian Bill of Rights. I do not agree. That subsection guarantees the right to a fair hearing in accordance with the principles of fundamental justice. PCS has the right to have its tax liability determined under the Act by the Tax Court. Here, the right to appeal these five new issues has been lost because of the manner in which PCS framed its notices of objection. Having itself defined the issues to be decided, PCS effectively abandoned its right to appeal other issues and cannot now assert that its right to a fair hearing has been abridged by these two subsections.

Summary and Conclusion

[29]            The proposed amendments to the notice of appeal seek to include in the computation of resource profits in the four years under appeal five new items of income not described in the notice of objection and, as a consequence, seek to increase the amount of the resource allowance and earned depletion from the amount set out in the notices of objection. To permit PCS to amend its pleading in this way is contrary to the requirements in subsection 169(2.1)

[30]            The appeal should be allowed with costs in this Court and the Tax Court. The order of the Tax Court dated January 28, 2003, as amended by order dated February 13, 2003 should be set aside and the respondent's motion to amend its notice of appeal in the Tax Court dated January 14, 2003 should be dismissed.

                                                                                               "B. Malone"          

J.A.

I agree

"Marshall Rothstein" J.A.

I agree

"K. Sharlow" J.A.

                          FEDERAL COURT OF APPEAL

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                   A-61-03

STYLE OF CAUSE: Her Majesty the Queen v. Potash Corporation of Saskatchewan Inc.

PLACE OF HEARING:                                   Ottawa, Ontario

DATES OF HEARING:                                   November 19, 2003

REASONS FOR JUDGMENT BY:                           MALONE J.A.

CONCURRED IN BY:                                             ROTHSTEIN J.A.

                                                                                        SHARLOW J.A.

DATED:                      December 8, 2003

APPEARANCES:

Ms. Wendy Burnham and

Mr. Ifeanyichukwu Nwachukwu                                     FOR THE APPELLANT

Mr. Guy Du Pont

Mr. Mathieu Bouchard

Mr. Michael Kandev                                            FOR THE RESPONDENT

SOLICITORS OF RECORD:

Mr. Morris Rosenberg                     

Deputy Attorney General of Canada       

Ottawa, Ontario                                                              FOR THE APPELLANT

Davies Ward Phillips & Vineberg

Montreal, Quebec                                                                FOR THE RESPONDENT