October 07, 2011

Her Majesty the Queen (Appellant) v. Wesbrook Management Ltd. (Respondent)

96 DTC 6590
Federal Court of Appeal
November 5, 1996

(Court File No. A-790-95.)

Responsible representative assessment — Corporate taxpayer liquidating corporation controlled by it and distributing such corporation’s assets without obtaining Ministerial certificate — Such controlled corporation having losses accepted by Minister on assessment and reassessment — Whether Minister later entitled to assess taxpayer under responsible representative provisions of subsection 159(2) of the Act for tax otherwise payable by controlled corporation had Minister disallowed its losses — Income Tax Act, R.S.C. 1985, Chapter 1 (5th Supp.), ss. 152(3), 152(8), 159(2) and 159(3).

In September 1988, the corporate taxpayer acquired the shares of a numbered corporation, 466. On December 28, 1988, 466 was liquidated, and its assets were distributed without the taxpayer having obtained a certificate under subsection 159(2) of the Act certifying that all of 466’s taxes had been paid. On March 9, 1989, the Minister assessed 466 for its taxation year ending May 7, 1988, permitting it to deduct its share of a certain partnership loss (“the Grand Bell loss”). On July 4, 1989, the Minister reassessed 466 for its taxation year ending May 7, 1988, allowing the deduction of a loss carryback from its terminal taxation year (ending December 28, 1988), but making no other changes. At no time subsequent to July 4, 1989 did the Minister ever reassess 466 so as to disallow the deduction of the Grand Bell loss. On February 18, 1992, the Minister assessed the corporate taxpayer under the “responsible representative” provisions of subsection 159(2) of the Act, claiming tax and interest that would have been payable by 466 for its May 7, 1988 taxation year, had the deduction of the Grand Bell loss been disallowed. The taxpayer appealed to the Tax Court of Canada, and, in the course of that appeal applied for the determination of a question of law. That question was whether the Minister is entitled to assess one person under subsection 159(3) of the Act in respect of an alleged tax liability of another person which has never been, and can never be, assessed or reassessed. The question was answered “no”, the taxpayer’s appeal was allowed, and the Minister’s assessment under subsections 159(2), and (3) was vacated. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed. The Minister’s difficulty was that 466 had been both assessed and reassessed in respect of its 1988 taxation year and, there being no question of fraud or misrepresentation, no further reassessment could be issued to it after March 9, 1992. In addition, while an assessment is by no means a condition of liability to pay tax, an assessment, once issued, and unless and until varied by competent authority, has the effect of fixing the liability for tax. That was the case with the reassessment issued on July 4, 1989 against 466, which fixed the latter’s tax liability for its 1988 taxation year at nil. As a result, the Minister’s assessment under section 159 of the Act in respect of 466’s liability could only be made if the Minister were in a position to vary that liability by issuing a further reassessment, and if he in fact did so. That did not happen. Hence the Tax Court judge was right to answer the question in issue in the negative, and to allow the taxpayer’s appeal.