Burnet v. Minister of National Revenue, 98 DTC 6205, [1999] 3 CTC 60 (FCA)

Létourneau J.A. (Strayer J.A. concurring):

This is an appeal from a decision of a judge of the Trial Division dismissing a motion for an order of mandamus to compel the Respondent to issue to the Appellant a Notice of Determination of a loss in the amount of $260,460 pursuant to s. 152(1.1) of the Income Tax Act (“Act”) which reads:

152(1.1) Determination of losses. Where the Minister ascertains the amount of a taxpayer’s non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year and the taxpayer has not reported that amount as such a loss in the taxpayer’s return of income for that year, the Minister shall at the request of the taxpayer, determine, with all due dispatch, the amount of the loss and shall send a notice of determination to the person by whom the return was filed.

In 1987, the Appellant and her husband sold a property in West Vancouver, British Columbia, which they owned in joint tenancy. In selling the property, husband and wife incurred a total loss of $520,920. The Appellant did not claim any portion of the loss in filing her 1987 tax return, but her husband claimed the entire loss as a business loss in his 1987 tax return.

On October 7, 1992, the Respondent reassessed the Appellant’s husband for his 1987 taxation year and disallowed the entire loss on the basis that it was a personal-use loss. Two weeks later, the Appellant’s husband filed an Amended Notice of Appeal within the Tax Court of Canada in which he appealed the October 7 reassessment and claimed only half the loss ($260,460) as a business loss because he was a joint owner of the property.

On October 5, 1992, the Appellant requested from the Respondent a determination of her non-capital loss in respect of her 1987 taxation year pursuant to subsection 152(1.1) of the Act and that the loss, in the amount of $260,460, be carried back pursuant to subsections 152(6) and (4.2) of the Act and the Income Tax Refunds Remission Order of 1992 which was a remission process granted to a taxpayer by Order in Council PC 1992-166, dated January 23, 1992. The Audit Division of the Department of National Revenue, by letter dated January 22, 1993, replied that the matter of her loss carry-back would be held in abeyance pending the resolution of her husband’s appeal to the Tax Court relating to his 1987 taxation year. The letter also informed the Appellant that a copy of it with the relevant Tax Returns was sent to the Appeals Division “so that they can handle your request as soon as a decision is reached on the 1987 Appeal by the Tax Court of Canada”.

Pursuant to this letter from the Audit Division of Revenue Canada, counsel for the Appellant had numerous telephone discussions with the Senior Appeals Officer at the Appeals Division and on July 7 and 19, 1994 wrote to him to confirm the points they had been discussing by telephone. The July 7 letter sought confirmation on two issues. First, that the Appellant is entitled to half the loss ($260,460) for her 1987 taxation year if the Tax Court found the loss to be on account of income and, consequently, that a determination under subsection 152(1.1) to that effect would be issued at the Appellant’s request. The second issue related to the Appellant’s application for the loss carry-back and counsel for the Appellant acknowledged that such application was made pursuant to subsection 152(4.2) and that its determination was at the Minister’s discretion.

On July 28, 1994, the Senior Appeals Officer, in a reply to the Appellant’s letter confirmed that, in the advent of a decision favourable to her husband by the Tax Court, the loss would be taken into consideration in determining the Appellant’s non-capital loss for the 1987 taxation year and a Notice of Determination of such loss would be issued accordingly. The second paragraph of the letter dealt with the request for a carry-back of the loss, but is not relevant for the determination of this appeal as the Appellant eventually requested that the loss be carried forward.

A few days later, 1.e., on August 5, 1994, the Senior Appeals Officer wrote again to counsel for the Appellant on the matter, but this time the second paragraph of the previous letter relating to a carry-back of the loss was modified to inform the Appellant that the 1987 taxation year was statute-barred from reassessment and that the Minister would have to exercise his discretion pursuant to subsection 152(4.2) of the Act under what was then referred to as the Fairness Package. I reproduce the whole letter as it is an important element in the determination of the Appellant’s rights in the present appeal:

[Letter not reproduced].

By judgment dated May 26, 1995, the Tax Court allowed the Appellant’s husband’s appeal with respect to his loss on the disposition of property in 1987. Then the Appellant requested that her 1987 taxation year be reassessed to allow a loss on disposition of property pursuant to subsection 152(1.1) of the Act in accordance with the Tax Court decision. She requested at this time that the loss be carried forward pursuant to subsection 152(4.3) instead of back as originally claimed.

On February 22, 1996, a member of the Appeals Division, expressing her view and that of the Chief of Designated Appeals Division, informed counsel for the Appellant that it was their belief that subsection 152(4.3) of the Act had no application because the Appellant had no adjustment made to her 1987 taxation year in an assessment for that year or as a result of a decision on an appeal from an assessment for that year. The Appellant was told, however, that her request for reassessment would be considered under the provisions of subsection 152(4.2) of the Act. On April 25, 1996, the Chief of Appeals informed the Appellant that it was not appropriate in the circumstances to reassess her tax returns to allow the requested loss.

There is no need to say that the letter of the Chief of Appeals prompted numerous exchanges between the parties in this whole saga. On May 13, 1996, counsel for the Appellant renewed his request under subsection 152(4.3) or alternatively under subsection 152(1.1). The Chief of Designated Appeals reiterated his position with respect to subsection 152(4.3). As for subsection 152(1.1), his position was simply that the Appellant had reported no losses in her return of income for the 1987 taxation year. As the Minister had already ascertained the Appellant’s loss to be nil as reported, a loss determination could not be requested.

By an amended Originating Notice of Motion filed December 5, 1996, the Appellant sought a mandamus which, as previously mentioned, was denied. Hence the appeal which is concerned solely with the Minister’s duty under subsection 152(1.1) to determine the taxpayer’s loss and not his power or duty to reassess or not the taxpayer.

Whether the Minister had ascertained the amount of the taxpayer’s non-capital loss within the meaning of subsection 152(1.1)

Counsel for the Appellant submitted that the learned motions judge erred in dismissing the Order for mandamus when she concluded that all the conditions of subsection 152(1.1) of the Act had not been met as of October 27, 1995 when the Appellant applied for a Notice of Determination of loss for her 1987 taxation year.

He argued that paragraph 1 of the August 5, 1994 letter is an ascertainment of the Appellant’s 1987 loss at an amount other than the nil amount reported by the taxpayer. He takes issue with the first finding of the learned motions judge that the amount was not ascertained because the precise amount of loss was not determined.

I think counsel for the Appellant is right in his submission and that the motions judge misinterpreted the meaning and significance of paragraph I of the letter sent by the Designated Appeals Officer.

The only issue before the Tax Court of Canada was the nature of the loss incurred by the Appellant and her husband, i.e., whether it was or not a loss on account of income. The Appellant was entitled to half of the loss as a joint owner of the property and her share of the loss, 1.e., $260,460, was known at the time of her request for a determination of her non-capital loss within subsection 152(1.1) of the Act. The Respondent did not dispute the amount of the loss. This appears clearly from the Amended Notice of Ap- peal filed by the Appellant’s husband before the Tax Court [1] and the following excerpts of the decision of the Tax Court Judge at pp. 2 and 5:

p.2

A substantial loss was sustained on the sale and the appellant seeks to deduct that loss in the computation of his income... The respondent denies the deduction of the loss on the ground that the new house was the personal residence of the appellant and his wife and was personal use of property that did not form part of a business undertaking.

p. 5

In his 1987 return of income, the appellant claimed a business loss of $520,920, the difference between the expenses claimed of $505,920 and the selling price. These figures are not disputed by the respondent.

The learned Trial Division motions judge also concluded that the amount of loss was not ascertained because the allowance of the loss was subject to contingency. She wrote at p. 6 of her decision:

The conjunction “if’ in the letter makes it clear that the allowance of the loss was subject to contingency.

From there, she concluded that the Minister had not ascertained the amount of the Appellant’s loss and the August 5, 1994 letter did not change that. In my view, this was a mistake.

In the present instance, the amount of the loss could only be $260,460 or nil depending on whether it was a deductible loss or not. A combined reading of the January 22, 1993 letter from the Audit Division and the August 5, 1994 letter from the Appeals Division clearly indicates that the Appellant’s request for a determination of her loss was put in abeyance and that the ascertainment of the amount by the Respondent would be made only after the Tax Court would have rendered its decision on the appeal by the Appellant’s husband. The two letters reveal a definite undertaking by the Respondent, if the loss was found to be a business loss, to take it into consideration in determining the Appellant’s capital loss for the 1987 taxation year and, therefore, issue a Notice of Determination accordingly.

At the time the Tax Court issued its decision, the amount of the Appellant’s loss became certain and the result of the August 5, 1994 letter was an ascertainment of the Appellant’s loss under subsection 152(1.1) in the amount of $260,460.

Furthermore, even in assuming that the amount was conditional on a favourable ruling by the Tax Court as to its deductibility and, therefore, that the amount was uncertain, the fact is that that condition had been met by the time the Appellant requested a determination of her loss by the Minister. The decision of the Tax Court was rendered on May 26, 1995 and confirmed that her loss in the amount of $260,460 was a deductible loss on account of income. On October 27, 1995, that is to say five weeks after the Respondent filed a Notice of Discontinuance of her appeal against the decision of the Tax Court, the Appellant requested from the Respondent a Notice of Determination for her non-capital loss which, according to the Tax Court decision, was in the amount of $260,460.

Either at that point in time or on May 26, 1995 when the decision of the Tax Court was rendered, the conditions of subsection 152( 1.1 ) had been satisfied and the Minister was under a legal duty to proceed to the second step envisaged by that subsection, 1.e., a determination of the Appellant’s loss and the issuance of a Notice of Determination accordingly.

Finally, counsel for the Respondent argued that the August 5, 1994 letter is of no effect because his signatory was the Designated Appeals Officer on the appeal by the Appellant’s husband and was not assigned to the question of the Appellant’s loss.

The answer to this contention is simple. It is the Audit Division of Revenue Canada which, on January 22, 1993, informed counsel for the Appellant that the Appellant’s request would henceforth be handled by the Appeals Division. The letter reads:

[Letter not reproduced].

Counsel for the Appellant was led and entitled to believe that the Audit Division had given the Appeals Division general authority to conduct business on their behalf with respect to the Appellant’s request. He was right to assume that he could deal with the Appeals Division with respect to his client’s request until he would receive notice that the Appeals Division’s authority had been revoked or circumstances would arise which in all reason should put him upon inquiry. No such circumstances ever arose. On the contrary, there were numerous and regular exchanges on the matter, both orally and in writing, between counsel for the Appellant and persons in authority at the Appeals Division.

Furthermore, at no time during all these exchanges or thereafter were the letters issued by the Appeals Division to the Appellant, including the crucial August 5, 1994 letter, disavowed. Indeed, it is the Appeals Division which took the decision to deny the Appellant’s request and which, by letters of February 22, 1996, April 17, 1996, April 25, 1996, May 6, 1996, September 10, 1996 and September 23, 1996, informed counsel for the Appellant of that decision and invited him to make additional submissions as the process was unfolding.

I am, to put it mildly, surprised that the Respondent would now try to renege on the contents of the August 5, 1994 letter sent to the Appellant by the Appeals Division. Such Division was given authority to deal with the Appellant’s request and the subsequent behavior of that Division was strong inducement to the Appellant that it possessed at least ostensible or apparent authority to deal with the issue. It should come as no surprise that counsel for the Appellant responded predictably to the reasonable expectation created thereby and accepted the terms presented in the August 5, 1994 correspondence.

In conclusion, the August 5, 1994 letter of the Appeals Division to counsel for the Appellant was, in my view, an ascertainment of the Appellant’s loss for the 1987 taxation year within the meaning of subsection 152(1.1) of the Act. The conditions of that subsection having been met, the Minister was under a duty, when so requested by the taxpayer, to determine, with all due dispatch, the amount of the loss and send a Notice of Determination to the Appellant.

For these reasons, the appeal should be allowed with costs and, since the amount of the loss is not in dispute, the Respondent should be directed to issue a Notice of Determination of loss to the Appellant for her 1987 taxation year in the amount of $260,460 as a non-capital loss.

Marceau J.A. (dissenting):

I have had the advantage of reading in draft the reasons for judgment prepared by my brother Létoumeau. I must, with respect, express my disagreement. My understanding of the meaning of the provision of the Income Tax Act involved, subsection 152(1.1), and of the role assigned to it in the administration of the Act, does not allow me to accept the approach and reasoning of my colleague. I will endeavour to set out my reasons as briefly as I can.

There is no need to go through another complete recital of the facts. They have been well stated in my brother’s reasons. In order to give some factual context to my reasoning, I will nevertheless focus on some of those facts that seem especially pertinent to my analysis.

The appellant filed her income tax return for the 1987 taxation year on May 17, 1988, without claiming any loss on property. The income tax she owed was assessed as she had calculated and notice thereof was sent to her on August 15, 1988. Naturally, she did not object to the assessment.

More than four years later, in October 1992, the appellant, through her lawyer, sought an acknowledgement from the Department that she had sustained a business loss in 1987. It will be remembered that the loss referred to was half of the loss sustained by her and her husband on the disposition, in 1987, of a property they had acquired in common. The husband had claimed the entire loss as a non-capital loss in his tax return for the year 1987 filed in 1989, but in the proceedings instituted by him before the Tax Court to appeal the disallowance ruled by the Minister, he had had to concede that he was only a co-owner with his wife. Thus, the appellant now wanted to be recognized as being entitled to her half of the loss.

On August 5, 1994, the Department Appeals Officer responsible for the husband’s appeal before the Tax Court responded to the appellant’s lawyer’s letter seeking a confirmation in writing of the treatment that would be accorded to his client with respect to the loss. The officer’s response, being at the center of the controversy, ought to be reproduced here again verbatim:

August 5, 1994

Joel A. Nitikman

Fraser & Beatty

Barristers and Solicitors

1040 West Georgia Street, 15th Floor

Vancouver, British Columbia

V6E 4H38

Dear Mr. Nitikman:

Re: Allison Burnet

Social Insuranc e Number [xxx xxx xxx]

In response to your letter, dated August 3, 1994, with respect to the above- named taxpayer, the writer hereby further confirms that:

• If the final outcome of Peter Burnet’s appeal from the assessment for the 1987 taxation year results in a loss, on account of income, on the disposition of the property (the “Property”) which was jointly owned by that person and the taxpayer, the taxpayer’s share, whether it be one- half or otherwise as the case may be, of such loss would be taken into consideration in determining the taxpayer’s non-capital loss for the 1987 taxation year and a Notice of Determination of such non-capital loss would be issued accordingly.

• However, even though the taxpayer may have a non-capital loss for the 1987 taxation year as referred to in the immediately preceding paragraph, the taxpayer’s 1987 taxation year is statute-barred from reassessment, and the taxpayer’s share of any income loss on the disposition of the Property cannot be taken into consideration in computing her income, taxable income and tax payable for that year unless the Minister of National Revenue exercises his discretion to do so pursuant to the provisions of subsection 152(4.2) of the Income Tax Act. No such discretion has been exercised by the Minister of National Revenue or any of his delegated officials.

Yours truly,

“Stephen Tsoi”

Stephen Tsoi

Designated Appeals Officer

Appeals Division

As we have seen, the Tax Court of Canada, by judgment dated May 26, 1995, allowed the husband’s appeal. Shortly thereafter, the appellant came forward with the August 5, 1994 letter and requested a Notice of Determination of Loss for her 1987 taxation year equal to half the loss incurred on the sale of the property. Her contentions were: that the undertaking given in the letter was binding on the Minister as it emanated from a superior officer whose power to act was not open to question by the taxpayer; that it contained an “ascertainment” of the amount of the loss she had sustained with her husband on disposition of their common property in 1987, since, when written, the only problem that had to be settled was with respect to the nature of the loss, not its quantum, a problem now disposed of; that, consequently, she was entitled to request, pursuant to subsection 152(1.1) of the Act, and the Minister was duty bound to issue, a determination of that loss, so that she may take advantage of it, if possible.

In the order now under appeal, as explained by Létourneau J.A., the learned motions judge in the Trial Division refused to issue an order in the nature of mandamus compelling the Minister to comply with the obligation imposed on him by subsection 152(1.1) of the Act. The learned judge was of the view that the condition necessary to give rise to the duty to make a determination had not occurred. The letter of August 5, 1994 did not “ascertain” the loss, since there was a condition therein that raised an uncertainty. In his draft reasons, my colleague disagrees, taking the view that, on a proper analysis of the terms of the letter and the context in which it had been written, there was no such uncertainty: the amount was not disputed. As to the Crown’s contention that the agent was not authorized and simply made a mistake, these were insufficient reasons to deny the effect of the position taken in the name of the Minister.

Now is the the time for me to explain why, as I understand the role and the meaning of subsection 152(1.1) of the Act, I cannot accept the approach and reasoning of my colleague. Very simply put, I have come to the view that the facts of the case do not even allow the coming into play of this subsection 152(1.1) of the Act which, for convenience, I will reproduce once again:

152. (1.1) Where the Minister ascertains the amount of a taxpayer’s non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss for a taxation year and the taxpayer has not reported that amount as such a loss in the taxpayer’s return of income for that year, the Minister shall, at the request of the taxpayer, determine, with all due dispatch, the amount of the loss and shall send a notice of determination to the person by whom the return was filed.

(my emphasis)

As I see it, there is one basic question that must be answered to determine the meaning and role of this provision. This question is when and how the “ascertainment” which will trigger the duty to determine may take place.

The answer to the question brings into play many features of the scheme of the Act. Considering the very definition of a non-capital loss (subsection 111(8) of the Act), its deductibility from revenues of all sources in the year it was sustained (paragraph 111(1)(a) of the Act), the possibility of carrying it over to other years if in excess of revenues for that year and the order in which such a deferral is to be made (paragraph 111(3)(a) of the Act), it seems clear that a non-capital loss must be calculated and claimed by the taxpayer in his or her tax return for the year in which it was sustained (section 150 of the Act). If the tax return for that year has been filed and an assessment or notice that no tax was payable was issued without being objected to, then an amendment of the tax return for that year would have to be authorized and the Minister would have to reassess. Considering, on the other hand, that a taxpayer has no right to amend his or her tax return for a past year except to give effect to very special and exclusive claims (subsection 152(6) of the Act) and that after three years the Minister is not even authorized by the Act to agree to reassess (subsection 152(4) of the Act; [2] ), it seems equally clear that the failure of a taxpayer to claim a non-capital loss in his or her tax return for the year in which it occurred may be remedied only with the Minister’s consent and during a very limited period of time.

If one keeps all those features in mind, one can only conclude that the so-called “ascertainment” referred to in subsection 152(1.1) of the Act, an “ascertainment,” I repeat, of a non-capital loss different from what was reported by the taxpayer in his or her tax return in the year involved, can be made by the Minister, not at any time and in any way, but necessarily when, after having “examined” the tax return of the taxpayer, he fulfils his duty under subsection 152(1) of the Act and issues a notice of reassessment or a notice that no tax is payable. This, it should be noted, is in strict conformity with the reason that led to the adoption of this subsection 152(1) in 1977. The purpose of the provision, it was explained, was to give a taxpayer who does not owe any tax and therefore has no right of appeal (the situation in all cases of possible deferral of non-capital losses) an immediate recourse (instead of one put off to the year when the remaining portion of the loss will not cover all revenues and a tax will consequently be payable) against the refusal of the Minister to accept the loss as claimed, the “notice of determination” following the request being made appealable within a certain period of time like an assessment. [3] Thus, while the taxpayer’s “request” under subsection 152(1.1) and the ensuing “determination” by the Minister are not subject to any specific limitation period and may be made in any manner, the “ascertainment” required to bring the provision into play is to be found necessarily in the notice of assessment or of “no tax but changes in some reported figures” sent by the Minister pursuant to subsection 152(1) of the Act, once his examination of the taxpayer’s original or amended tax return is completed.

It will now be seen why I am of the view that subsection 152(1.1) of the Act cannot be involved in the circumstances of the instant case. The letter of August 5, 1994 can have no effect. The appeals officer used words found in subsection 152(1.1) but to absolutely no avail. In 1994, there was no way a non-capital loss sustained in 1987 could be “ascertained” within the meaning of the provision; it could not even be claimed since the Minister could not allow an amendment to the tax return as he had no power to proceed to a reassessment. Not only are the two paragraphs of the letter contradictory, but neither one nor the other is capable of being acted upon within the scheme of the Act. In 1994, the appellant’s loss was a non-issue that could not be revived in keeping with the principle of finality in tax assessments and liability. [4]

It is my opinion, therefore, that the learned motions judge was finally correct in refusing to issue the order sought pursuant to subsection 152(1.1) of the Act. The appeal ought to be dismissed with costs.

Appeal allowed.