McKay v. R. – TCC: Ss. 152(9) precludes the Crown from raising a new allegation outside limitation period concerning company now in receivership

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McKay v. The Queen (February 10, 2015 – 2015 TCC 33, Lyons J.).

Précis: CRA had assessed Ms. McKay pursuant to subsection 160(1) of the Income Tax Act (the “ITA”) in respect of the transfer of a car to her by Henry Wetelainen in 2008. Ms. McKay appealed the assessment to the Tax Court. Subsequently the Crown moved to amend its Reply to include an allegation that a corporation, Bending Lake Iron Group (“BLIG”), had transferred funds to Mr. Wetelainen giving rise to an indirect benefit to Ms. McKay pursuant to subsection 56(2) of the ITA. The Tax Court refused to permit the amendment on the since this was a new basis for the assessment which was outside the normal reassessment period and did not meet the requirements of subsection 152(9) of the ITA since BLIG was in receivership which “would likely prejudice the appellant from an evidentiary perspective”.

Decision: This was a decision on a motion to amend the Crown’s Reply. The underlying appeal dealt with a subsection 160(1) assessment against Ms. McKay relating to a car transferred to her by Henry Wetelainen:

[2] The appeal concerns the assessment by the Minister of National Revenue of the appellant’s tax liability in 2008 pursuant to subsection 160(1) of the Act, in the amount of $68,543.72 for the transfer of a Cadillac Escalade (the “Cadillac”) from Henry Wetelainen (“Mr. Wetelainen”) to the appellant on the basis that she became jointly and severally liable for Mr. Wetelainen’s pre-existing tax liability.

The proposed amendment alleged an indirect benefit to Ms. McKay arising from a cheque paid to Mr. Wetelainen by a corporation, BLIG, which had subsequently gone into receivership:

[4] At the hearing, the appellant opposed only the amendments to subparagraph 8 c) and paragraphs 9 and 18 of the proposed Amended Reply which read as follows:

8. c) In the further alternative, whether the amount of $68,543.72 was properly added to the appellant’s income for the 2008 taxation year pursuant to subsection 56(2) of the Act.

9. He relies on subsections, 56(2) and 152(9) and sections 3, 160, 248, and 251 of the Act.

18. In the further alternative, the Minister properly included the amount of $68,543.72 in the appellant’s income for the 2008 taxation year. The appellant either directed that or concurred with the transfer of $75,000 by BLIG to Mr. Wetelainen by way of the Cheque. In addition, the transfer by BLIG of $75,000 to Mr. Wetelainen either benefited the appellant or was done because the appellant desired to confer a benefit on Mr. Wetelainen. As such, the appellant is liable pursuant to subsections 56(2) and 152(9) of the Act for an amount of $68,543.72.

By pleading subsection 152(9) of the ITA the Crown tacitly acknowledged that this was a new basis for assessment raised outside of the normal reassessment period.

The Court first outlined the circumstances under which subsection 152(9) would permit such a new basis:

[9] In Walsh v R, 2007 FCA 222, [2007] 4 CTC 73 (FCA), the Federal Court of Appeal set out the following conditions when the Minister seeks to rely on subsection 152(9):

1) the Minster cannot include transactions which did not form the basis of the taxpayer’s reassessment;

2) the right of the Minister to present an alternative argument in support of an assessment is subject to paragraphs 152(9)(a) and (b), which speak to the prejudice to the taxpayer; and

3) the Minister cannot use subsection 152(9) to reassess outside the time limitations in subsection 152(4) of the Act, or to collect tax exceeding the amount in the assessment under appeal.

[10] In this motion, only the first two conditions are relevant.

The Court concluded that the second condition had not been met:

[14] I now turn to the second condition and the second ground that the appellant opposes the motion. Appellant counsel asserts that the appellant would suffer prejudice should the respondent’s motion be granted because effective September 11, 2014 BLIG was placed into receivership by virtue of the Notice of Receivership Order issued by the Superior Court of Justice. Therefore, it will prove to be difficult to obtain information from the receiver rather than BLIG. An affidavit was adduced at the hearing confirming that BLIG was placed into receivership.

[16] The Notice of Appeal was filed with the Court on August 29, 2012 and served on the respondent on October 12, 2012. The Reply was filed with the Court on December 10, 2012. At the time of and subject to the respondent’s motion seeking leave to amend the Reply, the matter was ready to proceed to the hearing as all the litigation steps had been completed.

[17] According to the respondent’s motion record, a formal request for consent to amend the Reply was sent to appellant counsel by letter dated September 26, 2014, and filed as Exhibit “B” to the Affidavit filed in support of the respondent’s motion. I note that the receivership pre-dates the request for consent.

[18] I accept that BLIG’s receivership will present challenges in the appellant’s ability to access relevant documentary evidence and information associated with the issuance of the Cheque nor is it appropriate to order evidence to be adduced. Further, dealing with the receiver could potentially prove to be difficult in seeking to obtain evidence relating to BLIG. I agree that in these circumstances there would be prejudice to the appellant.

[Footnote omitted]

Accordingly the Court dismissed the motion to amend the Reply in connection with the disputed paragraphs:

[21] For the above reasons, the motion relating to the amendments in subparagraph 8 c) and paragraphs 9 and 18 of the proposed Amended Reply, is dismissed. Costs of this motion shall be in the cause.