T-2097-78
The Queen (Plaintiff)
v.
B. & J. Music Ltd. (formerly Buegeleisen and
Jacobson Limited) (Defendant)
Trial Division, Grant D.J.—Toronto, April 22 and
30, 1980.
Income tax — Income calculation — Deductions — Small
business cumulative deduction account — Appeal from a
decision of the Tax Review Board, directing the Minister to
delete the cumulative deduction account calculation from the
taxpayer's 1974 assessment — Defendant did not become a
Canadian-controlled private corporation until 1974, and thus
did not qualify for a small business deduction and had not
computed its cumulative deduction account — The Minister
confirmed the amount of tax payable in the 1974 assessment,
but included a computation of the defendant's cumulative
deduction account — The Tax Review Board allowed the
defendant's appeal — Whether the Board had jurisdiction to
entertain the appeal — Appeal allowed — Income Tax Act,
R.S.C. 1952, c. 148, as amended.
Appeal from a decision of the Tax Review Board in respect
of the defendant's 1974 taxation year, directing the Minister to
either delete the cumulative deduction account calculation from
the notice of assessment or if on consideration he considered
some calculation was required as from June 24, 1974, to make
such calculation and amend the assessment accordingly. On
June 24, 1974 the defendant Company qualified for the first
time as a Canadian-controlled private corporation. It had not
previously qualified for the small business deduction and it had
not computed its cumulative deduction account. The 1974
assessment did not change the tax payable but it included a
calculation in respect of the cumulative deduction account. The
defendant appealed the assessment to the Tax Review Board,
submitting that the cumulative deduction account calculation
should be deleted. The Board allowed the appeal. The issue is
whether the Tax Review Board had the jurisdiction to entertain
the appeal or render the decision that it did.
Held, the appeal is allowed. The Board had no jurisdiction to
render the decision it did, because the amount of the tax
payable for the year 1974 by the Company was not in issue
before the Board. There is no requirement in the Act that a
taxpayer's cumulative deduction account be calculated in the
returns except in the case of a Canadian-controlled private
corporation which in that year is seeking to avail itself of the
benefits of section 125(1). The defendant was not seeking and
was not entitled to any such relief in its 1974 year of taxation
because it had not qualified as a Canadian-controlled private
corporation throughout that year. Such calculation by the
Minister did not affect in any way the amount of tax payable
by the Company in that year. If in some future year when the
defendant had become a Canadian-controlled private corpora
tion, the amount of the Company's cumulative deduction
account should become a factor in assessing the amount of
income tax payable by it, it would be open to the Company at
that time to have such question decided and the Minister's
calculation of the Company's 1974 income tax would not in any
way be a bar thereto or binding either upon the Company or
the Minister. This Court has jurisdiction in this appeal to
reverse the Board even though the latter had no power, jurisdic
tion or authority to make the order in question.
Vineland Quarries and Crushed Stone Ltd. v. Minister of
National Revenue 70 DTC 6043, applied. R. v. Gary Bowl
Ltd. [1974] 2 F.C. 146, applied. Minister of National
Revenue v. Gunnar Mining Ltd. [1970] Ex.C.R. 328,
applied. Gardner v. Minister of National Revenue 65 DTC
591, distinguished. Hullmann v. Minister of National
Revenue 73 DTC 94, distinguished. Gardner v. Minister of
National Revenue 67 DTC 246, referred to.
INCOME tax appeal.
COUNSEL:
W. Lefebvre and C. G. Pearson for plaintiff.
S. D. Paton for defendant.
SOLICITORS:
Deputy Attorney General of Canada for
plaintiff.
Rosenberg, Smith, Paton, Hyman & Matlow,
Toronto, for defendant.
The following are the reasons for judgment
rendered in English by
GRANT D.J.: (1) This is an appeal by the
Deputy Attorney General of Canada on behalf of
Her Majesty the Queen from the decision of the
Tax Review Board in respect of the defendant's
1974 taxation.year dated January 19, 1978, where
by that Board allowed the defendant's appeal and
directed the Minister to either delete the cumula
tive deduction account calculation from the notice
of assessment issued for that year or if on consider
ation he considered some calculation was required
as from June 24, 1974, to make such calculation
and amend the assessment accordingly.
(2) The parties agreed upon a statement of facts
which has been signed by the solicitors for both
parties, and filed that it may be treated as evi-
dence of all the facts therein set forth. As the same
covered all relevant matters no evidence was heard
viva voce. Such statement read as follows:
STATEMENT OF FACTS
1. The Defendant is a company incorporated under the laws of
the Province of Ontario.
2. Prior to June 24, 1974 the Defendant was controlled by
non-residents of Canada.
3. On June 24th, 1974, there occurred a transfer of all of the
shares of the Defendant so that on that date it qualified as a
Canadian-controlled private corporation as defined by s. 125(6)
(a) of the Income Tax Act R.S.C. 1952, c. 148 as amended by
s. 1 of c. 63, S.C. 1970-71-72 (the "Income Tax Act").
4. The Defendant was not a Canadian-controlled private corpo
ration throughout its 1972, 1973 and 1974 taxation years and
therefore did not qualify for the small business deduction in its
1972, 1973 and 1974 taxation years within the meaning of s.
125(1) of the Income Tax Act.
5. The Defendant was assessed for its 1974 taxation year by
Notice dated August 27, 1975 and numbered 0469724 (the
"Assessment").
6. The Assessment did not change the total Federal tax payable
in the amount of $71,066.12 originally reported by the
Defendant.
7. The form attached to the Notice of Assessment and
described as the T7W disclosed that the Minister of National
Revenue ("the Minister") had made a calculation in respect of
the Defendant's cumulative deduction account.
8. The Defendant objected to the Assessment, which Assess
ment was confirmed by Notification of the Minister.
9. The Defendant appealed the Assessment, to the Tax Review
Board.
10. The Defendant's Notice of Appeal to the Tax Review Board
submitted:
that the cumulative deduction account calculation be deleted
from the Notice of Assessment issued for the 1974 taxation
year, which calculates the cumulative deduction account for
each of the taxation years 1972, 1973 and 1974.
11. The Tax Review Board allowed the Defendant's appeal
thereto and in its decision directed the Minister to either delete
the cumulative deduction account calculation from the Notice
of Assessment issued for the 1974 taxation year entirely, or if
on reconsideration he considered that some calculation was
required under the Income Tax Act as from June 24, 1974, to
make such calculation and amend the assessment accordingly.
12. The Defendant's taxable incomes for its 1972, 1973 and
1974 taxation years respectively were $148,864.07, $255,675.84
and $175,252.58.
13. The Defendant paid no dividends in its 1972, 1973 and
1974 taxation years.
14. The Defendant in filing its income tax returns for its 1972,
1973 and 1974 taxation years did not calculate its cumulative
deduction account as defined in s. 125(6)(b) of the Income Tax
Act.
15. The Minister in computing the balance in the Defendant's
cumulative deduction account as of the 31st of December 1974,
included therein in accordance with his interpretation of s.
125(6)(b) of the Income Tax Act, the sums of $148,864.07,
$255,675.84 and $175,252.58.
16. Attached hereto as Exhibit "A" is a true copy of the
Defendant's 1974 Corporation Income Tax Return with rele
vant documents.
17. Attached hereto as Exhibit "B" is a true copy of the Notice
of Assessment dated August 27th, 1975, in respect of the
Defendant's 1974 taxation year with the attached T7W form.
The plaintiffs first ground of appeal was that
the Tax Review Board had no jurisdiction to enter
tain this appeal or render the direction that it did.
The following sections of the Income Tax Act,
R.S.C. 1952, c. 148 as amended by section 1 of
S.C. 1970-71-72, c. 63, are relevant to this
submission:
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.
(2) After examination of a return, the Minister shall send a
notice of assessment to the person by whom the return was
filed.
165. (1) A taxpayer who objects to an assessment under this
Part may, within 90 days from the day of mailing of the notice
of assessment, serve on the Minister a notice of objection in
duplicate in prescribed form setting out the reasons for the
objection and all relevant facts.
(2) A notice of objection under this section shall be served by
being sent by registered mail addressed to the Deputy Minister
of National Revenue for Taxation at Ottawa.
(3) Upon receipt of a notice of objection under this section,
the Minister shall,
(a) with all due dispatch reconsider the assessment and
vacate, confirm or vary the assessment or reassess, or
and he shall thereupon notify the taxpayer of his action by
registered mail.
169. Where a taxpayer has served notice of objection to an
assessment under section 165, he may appeal to the Tax Review
Board to have the assessment vacated or varied after either
(a) the Minister has confirmed the assessment or reassessed,
or
but no appeal under this section may be instituted after the
expiration of 90 days from the day notice has been mailed to
the taxpayer under section 165 that the Minister has confirmed
the assessment or reassessed.
171. (1) The Board may dispose of an appeal by
(a) dismissing it, or
(b) allowing it and
(i) vacating the assessment,
(ii) varying the assessment, or
(iii) referring the assessment back to the Minister for
reconsideration and reassessment.
172. (I) The Minister or the taxpayer may, within 120 days
from the day on which the Registrar of the Tax Review Board
mails the decision on an appeal under section 169 to the
Minister and the taxpayer, appeal to the Federal Court of
Canada.
The return filed by such taxpayer for the year
1974 indicated total federal tax payable by it for
such year as $71,000.12. The Minister in his notice
of assessment did not change the amount of such
tax as calculated by the taxpayer but rather con
firmed it. The taxpayer's complaint herein will be
better understood after studying the sections of the
Act which provides some relief from income tax to
Canadian-controlled private corporations.
125. (1) There may be deducted from the tax otherwise
payable under this Part for a taxation year by a corporation
that was, throughout the year, a Canadian-controlled private
corporation, an amount equal to 25% of the least of
(a) the amount, if any, by which
(i) the aggregate of all amounts each of which is the
income of the corporation for the year from an active
business carried on in Canada,
exceeds
(ii) the aggregate of all amounts each of which is a loss of
the corporation for the year from an active business car
ried on in Canada,
(e) the corporation's business limit for the year, and
(d) the amount, if any, by which the corporation's total
business limit for the year exceeds its cumulative deduction
account at the end of the immediately preceding taxation
year,
except that in applying this section for a taxation year after the
1972 taxation year, the reference in this subsection to "25%"
shall be read as a reference to "24%" for the 1973 taxation
year, "23%" for the 1974 taxation year, "22%" for the 1975
taxation year, and "21%" for the 1976 and subsequent taxation
years.
(2) For the purposes of this section,
(a) a corporation's "business limit" for a taxation year is
$100,000, and
(b) its "total business limit" for a taxation year is $500,000,
unless the corporation is associated in the year with one or
more other Canadian-controlled private corporations in which
case, except as otherwise provided in this section, its business
limit for the year is nil and its total business limit for the year is
nil.
(6) In this section,
(a) "Canadian-controlled private corporation" means a pri
vate corporation that is a Canadian corporation other than a
corporation controlled, directly or indirectly in any manner
whatever, by one or more non-resident persons, by one or
more public corporations or by any combination thereof; and
(b) "cumulative deduction account" of a corporation at the
end of any taxation year means the amount, if any, by which
the aggregate of
(i) the corporation's taxable incomes for taxation years
commencing after 1971 and ending not later than the end
of the particular year, and
(ii) 4/3 of the amounts deductible under section 112 or
subsection 113(1) from the corporation's incomes for those
years
exceeds the aggregate of
(iii) 4/3 of the taxable dividends paid by the corporation
in those years, and
(iv) 4 times the amount, if any, by which the corporation's
refundable dividend tax on hand (within the meaning
assigned by subsection 129(3)) at the end of the particular
year exceeds its dividend refund (within the meaning
assigned by subsection 129(1)) for the particular year.
The defendant herein complains that the Minis
ter had added in the portion in the income tax
form provided for calculation of the cumulative
deduction account of the taxpayer, when it is
applicable, the figure of $404,539.91 as the
amount thereof which was the total of the Com-
pany's taxable income for the two previous years,
1972 and 1973. The defendant at such part of the
form had carried out the sum of $175,252.82. The
Minister had also at the bottom of such form
inserted the sum of $579,792.47 which was a total
of such taxable income for such three years and
indicated such sum to be the amount of the tax
payer's cumulative deduction account at the end of
the 1974 tax year.
In a further memorandum attached to the notice
of assessment the Minister had given particulars of
such amount as follows:
The amount of $579,792.47 in the cumulative deduction
account represents the following:
TAXABLE INCOME
1972 $148,864.07
1973 $255,675.84
1974 $175,252.58
$579,792.49
These amounts are the Corporation's taxable
income for the taxation years commencing after
1971. If these figures had been binding on the
taxpayer in subsequent years it would have less
ened or probably extinguished the deduction to
which that Company might have been entitled
under section 125(1)(d) in subsequent years after
it had become a Canadian-controlled private cor
poration. The Company's "corporate business
limit" under the above section 125(2) was
$100,000 and its "total business limit" was $500,-
000. When the latter figure is reached in the
cumulative deduction account then a company
which is entitled to the benefits of the small busi
ness deduction has no further rights to such tax
deduction.
There is no requirement in the Act that a tax
payer's "cumulative deduction account" be cal
culated in the returns except in the case of a
Canadian-controlled private corporation which in
that year is seeking to avail itself of the benefits of
section 125(1). The defendant was not seeking and
was not entitled to any such relief in its 1974 year
of taxation because it had not qualified as a
Canadian-controlled private corporation through
out that year. Such calculation by the Minister did
not affect in any way the amount of tax payable by
the Company in that year. If in some future year
when the defendant had become a Canadian-con
trolled private corporation, the amount of the
Company's cumulative deduction account should
become a factor in assessing the amount of income
tax payable by it, it would be open to the Com
pany at that time to have such question decided
and the Minister's calculation of the Company's
1974 income tax would not in any way be a bar
thereto or binding either upon the Company or the
Minister.
In the present case the Minister has made no
change in the amount of tax calculated by the
taxpayer but has rather confirmed it. In Vineland
Quarries and Crushed Stone Limited v. M.N.R.
70 DTC 6043, Cattanach J. at page 6045 stated:
As I understand the basis of an appeal from an assessment by
the Minister, it is an appeal against the amount of the
assessment.
In Harris v. M.N.R., (1965) 2 Ex. C.R. 653 [64 DTC 5332],
my brother Thurlow said at page 662:
... On a taxpayer's appeal to the Court the matter for
determination is basically whether the assessment is too high.
This may depend on what deductions are allowable in com
puting income and what are not but as I see it the determina
tion of these questions is involved only for the purpose of
reaching a conclusion on the basic question. ...
In The Queen v. Gary Bowl Limited [1974] 2
F.C. 146, Thurlow J. (as he then was) stated at
page 149:
In the present case as it was admitted that the respondent's
appeal to the Tax Review Board was from nil assessments for
the years 1967, 1968 and 1969 the question arises whether in
view of the decision of the Supreme Court of Canada in Okalta
Oils Ltd. v. M.N.R. ([1955] S.C.R. 824) there is any serious or
fairly arguable question of law remaining to be argued as to the
respondent's right to appeal therefrom. In my opinion there is
not.
This Court has jurisdiction in this appeal to
reverse the Board even though the latter had no
power, jurisdiction or authority to make the order
in question. M.N.R. v. Gunnar Mining Ltd. [1970]
Ex.C.R. 328 where Jackett P. stated at page 332:
In my view, this right of appeal extends to a case where the
attack is based on a lack of jurisdiction in the Tax Appeal
Board to deliver the judgment attacked (See Provincial Secre
tary of Prince Edward Island v. Egan [1941] S.C.R. 396, per
Duff C.J.C. at page 399) and, that being so, it follows that it
extends to a case where, as I conceive it to be here, the attack is
really based on a contention that, while the matter falls within
the Board's jurisdiction, that court had no power or authority to
deliver the judgment under attack.
The defendant relied upon the cases of Gardner
v. M.N.R. 65 DTC 591 where it was said at pp.
591-592:
The material on which counsel for the Minister based his
motion consisted of an affidavit made by one of the solicitors
employed in the Department of National Revenue who had
knowledge of all the documents which are or have been in the
custody or possession of the Minister relating to the matters in
question in this appeal. After pointing out that the appellant
was finally re-assessed for the amount of tax declared by him in
his returns covering the respective taxation years 1959 and
1961, he stated that the appellant was not claiming in his
Notice of Appeal—"that the amount of tax payable assessed by
the respondent herein be increased or be varied". In other
words, as already mentioned, the Minister's position was that,
since there was no dispute as to the amount of tax actually
payable in the years under appeal, the Board had no jurisdic
tion to entertain the appeal. Admittedly, the Minister had
introduced matters into his computation of the appellant's tax
in each of the taxation years 1959 and 1961 which, while they
did not change the amount of tax payable, were obviously
included with the hope of enabling the Minister to comply in
due course with the provisions of section 85B of the Act dealing
with special reserves.
and Hullmann v. M.N.R. 73 DTC 94 where it was
said at p. 95:
However, if in spite of a nil assessment the taxpayer's rights
pursuant to the Income Tax Act have not been exhausted in
respect of the taxation year to which the nil assessment per
tains, and the provisions of the Act confer rights to the taxpay
er notwithstanding the nil assessment such as, for example, the
right of a taxpayer to carry business losses back to a previous
year or to dispute a reserve which the Minister had set up in
order to arrive at the nil assessment although the taxpayer had
not claimed the reserve, I am of the opinion that the taxpayer
cannot be precluded from appealing the nil assessment in order
to establish and exercise an existing right conferred on him by
the Act because it might be of great importance to him at that
time to find out how large the loss is which he may apply to the
previous or future years or how great a reserve he has to
account for in future years.
as authority for the proposition that an appeal can
be properly taken by a taxpayer where the assess
ment of the Minister is nil or is one showing no tax
payable. Both these cases are decisions of the Tax
Review Board and in each of them the assessment
made by the Minister affected some existing legal
rights of the taxpayer which were relevant for the
returns for the year in question.
In the present case no legal right of the taxpayer
is affected by the Minister's calculation or his
statement as to the status of the taxpayer's
cumulative deduction account sent with his confir
mation of the Company's tax liability as shown in
its return for that year.
The Gardner decision above referred to was a
judgment on an interim motion and is at variance
with the judgment at Trial which is reported at 67
DTC 246; at page 248 the Assistant Chairman of
the Board's giving judgment stated:
There is much to be said for this point of view, but it suffices to
hold, as is now done, that, despite the somewhat unusual
procedure followed in the assessing done during the period
involved, the true tax position of the appellant was not altered
or affected thereby and there is no relief indicated that this
Board can properly be expected to grant.
I would therefore hold that the Board had no
jurisdiction to render the decision it did, because
the amount of the tax payable for the year 1974 by
the Company was not in issue before the Board.
The appeal should therefore be allowed and the
appeal from the assessment of the Minister dis
missed but without 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.