The reasons are also now available online in St. Michael Trust Corp. v. The Queen, 2010 FCA 309, aff’g Garron Family Trust v. The Queen, 2009 TCC 450, in which the Federal Court of Appeal also dismissed the taxpayer’s appeal.

The CRA and the Department of Justice are having a good fall when it comes to attacking arrangements involving offshore trusts.

In Browning, the taxpayer became indebted to her husband’s corporation in the late 80s under a mortgage. The corporation became indebted to the CRA, and so the CRA issued garnishment orders to the taxpayer under section 224 of the Income Tax Act (Canada), which she failed to pay at various times. Ms. Browning stopped making payments under the mortgage to the husband’s corporation in 1994. The CRA continued to issue garnishment orders into 2000, past the time in the BC Limitation Act when the corporation could enforce the debt.

Ms. Browning failed to pay the garnishments issued in 2000, and so the CRA assessed her under subsection 227(10). She appealed and argued that, at the time the 2000 garnishments were issued, she was no longer indebted to the corporation and so the garnishments were invalid. The Crown tried to argue that section 222, which was enacted in response to Markevich and provides for generous limitation periods for the collection of debts under the Act, applied so that the assessment against Ms. Browning was valid.

The Tax Court was having none of it. The Court held that the Limitation Act applied so that Ms. Browning was not indebted to her husband’s corporation beginning in 2000. The CRA could not pretend that the debt still existed and, therefore, form the basis of a garnishment under section 224. Section 222 could not extend the time to collect a debt to the Crown that was based on an assessment that was invalid.

[35] In these circumstances, there is no need to consider the Respondent’s arguments in respect of section 222. The Minister cannot use that provision to bootstrap his way over the criteria in section 224 upon which his power to assess under subsection 227(10) depends.

[36] Notwithstanding the amendments to section 222 consequent to Markevich, that case still stands for the proposition that the Minister has a duty to act with some dispatch in collecting tax debts. Here, the Minister’s practice of issuing requirements to pay to Ms. Browning in dribs and drabs over a 15-year period in respect of Berkeley’s 1989-90 tax debt falls somewhat short of the ideal expressed by Major, J. in paragraph 20 of the Supreme Court of Canada decision:

… If the Minister makes no effort to collect a tax debt for an extended period, at a certain point a taxpayer may reasonably come to expect that he or she will not be called to account for the liability, and may conduct his or her affairs in reliance on that expectation. As well, a limitation period encourages the Minister to act diligently in pursuing the collection of tax debts. In light of the significant effect that collection of tax debts has upon the financial security of Canadian citizens, it is contrary to the public interest for the department to sleep on its rights in enforcing collection.

The Court summarized the problem faced by Ms. Danso-Coffey as follows:

[1] On May15, 2006, the appellant, hereinafter referred to as the Minister, assessed the respondent, Ms. Danso-Coffey, $64,020 for unremitted retail sales tax on the basis that she was a director of Danso Enterprises Ltd. Danso Enterprises was a company owned and incorporated by her brother that had failed to remit the tax and which had made an assignment in bankruptcy.

[2] The assessment was made pursuant to s. 43 of the Retail Sales Tax Act, R.S.O. 1990, c. R-31 (RSTA). Section 43 provides that when a bankrupt corporation has failed to remit tax, the directors of the corporation are jointly and severally liable with the corporation to pay the tax.[1] The section empowers the Minister to assess any person “for any amount payable by the person under this section” and states that the sections of the RSTA respecting assessments, objections and appeals apply with such modifications as required. Subsection 43(3) recognizes a “due diligence” defence, in that liability is not imposed “if the director exercised the degree of care, diligence and skill to prevent the failure [to remit tax] that a reasonably prudent person would have exercised in comparable circumstances.”

[3] Ms. Danso-Coffey was never a director of the corporation and had no involvement with the company. Regrettably, through no fault of her own, she did not contest liability within the framework of the RSTA. She did, however, seek and obtain a declaration under s. 97 of the Courts of Justice Act, R.S.O. 1990 c. C-43, and rule 14.05(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, that:

[Ms. Danso-Coffey] was never a director of Danso Enterprises Ltd. and [that she] is accordingly not liable for the section 43 Retail Sales Tax Act director’s liability assessment dated May 15, 2008.

Danso-Coffey’s brother added her as a director of the bankrupt corporation without her knowledge or consent. Moreover, she had no involvement in the corporation’s affairs, and so the Superior Court and the Court of Appeal accepted that, legally, she was never a director of the corporation.

Unfortunately, Ms. Danso-Coffey’s advisers did not follow the procedures set out in the RSTA for disputing her liability under section 43. They missed the relevant limitation periods, including the time within which they could have applied for an extension of time within which to file an objection, and so Danso-Coffey lost her ability to contest the assessment issued against her.

What was the result where, it became clear, the basis of the Minister’s assessment was wrong? The Superior Court purported to solve the problem by issuing a declaration to the effect that, because the basis of the assessment was erroneous, Ms. Danso-Coffey could not be liable under it.

The Court of Appeal overturned the Superior Court’s decision. Madame Justice Weiler accepted that the Superior Court had the jurisdiction to issue its declaration and, in effect, nullify the assessment, but she found that the Superior Court should not have done so.

[33] Superior Courts must be cautious in exercising their jurisdiction in order to preserve the efficacy of the system of tax assessments. They should respect the structure set up by the legislature and not develop a new form of incidental litigation. See by analogy: Canada v. Addison [2007 SCC 33]:

[8] We need not engage in a lengthy theoretical discussion on whether s. 18.5 can be used to review the exercise of ministerial discretion. It is not disputed that the Minister belongs to the class of persons and entities that fall within the Federal Court’s jurisdiction under s. 18.5. Judicial review is available, provided the matter is not otherwise appealable. It is also available to control abuses of power, including abusive delay. Fact-specific remedies may be crafted to address the wrongs or problems raised by a particular case.

[11] Reviewing courts should be very cautious in authorizing judicial review in such circumstances. The integrity and efficacy of the system of tax assessments and appeals should be preserved. Parliament has set up a complex structure to deal with a multitude of tax-related claims and this structure relies on an independent and specialized court, the Tax Court of Canada. Judicial review should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court. Judicial review should remain a remedy of last resort in this context.

[34] Whether or not the RSTA is a complete code in the strict sense of that term, the application here was a direct challenge to the validity of an assessment and the provisions of the RSTA govern such challenges.

[35] Where the legislature has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that the legislature intended that taxpayers would rely on such provisions to achieve the result they prescribe. Even absent words clear enough to oust the court’s jurisdiction, I would infer that the legislature intended disputes concerning the validity of an assessment of tax to be resolved within the RSTA. Thus the application judge erred in declaring that Ms. Danso-Coffey was not liable for retail sales tax.

What then? Can the Minister collect tax even where the basis for the assessment creating the liability is bogus?

[38] Because Ms. Danso-Coffey was never a director of the company, a precondition for the imposition of liability under s. 43(3) was not met. Nonetheless the original assessment remains valid because of s. 18 (8). Section 18(8) provides:

An assessment, subject to being varied or vacated on an objection or appeal and subject to a reassessment, shall be deemed to be valid and binding despite any error, defect or omission therein or in any proceeding under this Act relating thereto.

[39] As the original assessment under the RSTA was valid and cannot be set aside, I would allow the Minister’s appeal.

Mr. Justice Juriansz was more categorical:

[59] I would also observe that even if the application judge could have properly exercised jurisdiction to grant Ms. Danso-Coffey a declaration determining her tax liability under the RSTA, he should have declared she was liable for the tax assessed. Rule 14.05(3) did not give the application judge the authority to make a declaration that was contrary to the law plainly set out in s. 18(8). The assessment was deemed valid by s. 18(8) of the RSTA.

Interestingly enough, after arriving at her conclusion, Madame Justice Weiler went on to consider several other remedies that might be available to the respondent in the circumstances. The unsympathetic Mr. Justice Juriansz responded as follows:

[61] Finally, I do not acquiesce in the discussion Weiler J.A. undertakes after concluding the appeal must be allowed. I do not see it as my role to seek to assist one of the parties before it by, in effect, offering legal advice. The recourse that Ms. Danso-Coffey may yet have and the statutory provisions upon which she might apply are not issues pertinent to this appeal. I would also refrain from commenting on the equities of the case. Time limits and limitation periods serve a valuable function in the legal process by promoting finality. The fact that time limits and limitation periods are to the detriment of parties who miss them does not affect the equities, in my view.

I admit that I do not find the Court of Appeal decision surprising. It has reiterated a constant refrain of the federal tax courts: woe to you if you fail to dispute an assessment using the procedure provided in the relevant legislation: you will be liable for the tax assessed regardless of the equities.

I’ve had occasion to explain this to clients on a number of occasions. Usually they come to see me years after being assessed because they are being chased by Collections. They wish to argue that they shouldn’t have to pay because they weren’t liable for the tax. I have to explain to them something they don’t want to hear, which is that the Minister can make up a tax liability out of nothing, as it appears to have done for poor Ms. Danso-Coffey, and if you did not follow the correct procedures for disputing the assessment, you are out of luck.

The lawyer kept a trust account with Canada Trust, but he also owed money to the fisc for unpaid taxes. The lawyer began paying amounts by cheques (the “Cheques”) payable to him that were drawn on the trust account and that were deposited into another Canada Trust account that the lawyer held jointly with another individual.

The Crown conceded that Canada Trust was not liable in respect of the amounts held in the trust account or the joint account. Instead, the Crown argued that the Cheques indebted the bank to the lawyer alone and that Canada Trust should have diverted that money to the CRA.

The Tax Court agreed, on the basis that a bank is a debtor of a depositor because the “bank [is] responsible to repay the funds on deposit when asked for it” (¶23) and that the Cheques represented an amount payable to the lawyer when they were presented (¶30). The judge appears to have concluded that it didn’t matter that the payments might have been intended for use for the benefit of the lawyer’s clients. The judge wrote:

[31] I believe that counsel for the Appellant is correct when he said that writing a cheque is not by itself a withdrawal, but just the creation of an instrument. Nevertheless, a cheque is an instrument by which a drawer directs a drawee to pay on the instrument. As soon as the cheque is presented to the bank, it is different. We should not only look at Mr. McLeod as the payee of the cheque, but also as the drawer of the cheque. As the holder of the account, Mr. McLeod was in a position to enforce the payment because of the debtor-creditor relationship that existed; via the cheque he was demanding for the repayment of a portion of a previous deposit. I again emphasize that there was no evidence produced that Mr. McLeod was not the person who presented the cheques to the bank.

But didn’t the trust funds belong to the lawyer’s clients? Justice Little responded as follows:

[37] The Law Society of British Columbia has produced Law Society Rules that govern the practice of law in British Columbia. Rule 3-56(1.3) of the Law Society Rules provides for the withdrawal by cheque of funds from a lawyer’s trust account. Rules 3-56(3) provide expressively that withdrawal of trust funds for the payment of fees must be made by cheque payable to the lawyer’s general account. A lawyer who does not follow those rules is responsible to the Law Society for his failure to follow the rules. Nevertheless, the Appellant is not concerned by those rules. Mr. McLeod could have closed the account and taken all the funds out or transferred them to another account and the Appellant would have had nothing to say. Before releasing money from the account, the Appellant did not have to call the clients to see if there was a problem. There was no limit to the access of the account, and the Appellant was not required to police or monitor the use of the trust account, as provided by the Bank Act, at subsection 437(3).

Appeal dismissed.

Parliament quickly decided to overrule the Supreme Court, and the result was an amendment to section 222 of the Income Tax Act. As a result of the amendment, the CRA can collect a tax debt for 10 years after it is assessed. That 10-year period stops running in certain circumstances. For example, if an individual is assessed for tax and then leaves Canada while still owing the amount, the period while the individual is a non-resident does not count for the purposes of measuring the 10-year period.

In addition, the Act provides that the CRA can collect any debt that was owing on March 4, 2004, or that would have been owing but for a limitation period, for a period of 10 years from that date. That is, the CRA has until March 4, 2014, to collect any tax debts owing before March 4, 2004.

Can Parliament overrule the Supreme Court in this way and, in effect, change the law with retroactive (or retrospective) effect? You bet! In Collins v. C.C.R.A., 2005 FC 1431, the CRA began seizing Mr. Collins’ pension to pay a tax debt that he owed. Mr. Collins thought he was protected by Markevich. He was wrong. Mr. Justice Noel of the Federal Court wrote:

In the Applicant’s view, “the new legislation can in no way revive an alleged fiscal debt that was already extinguished one year earlier by the aforementioned ruling of the Supreme Court of Canada [Markevich v. Canada, supra], for if that were the case, it would have for effect the retroactive annulment of the actual ruling by the Supreme Court of Canada, which makes absolutely no sense”. With deference for the Applicant, the Parliament has discretion to overrule Supreme Court judgments. The principle of parliamentary supremacy is a foundation of Canadian constitutional law: the judiciary must abide by the statutes adopted by Parliament.

See also Rose v. The Queen, 2005 FC 1731.

At least Ottawa thought that some limitation period should apply to the CRA’s attempts to collect tax debts. It appears that Ontario provides no such protection to taxpayers. The Queen v. Gibson, 2005 FCA 180, addressed whether the new or old Ontario Limitations Act applied to the collection of Ontario tax debts. The Court held that neither statute imposed any kind of limitation period on the Ontario government. In particular, while section 3 of the Limitations Act, 2002 states that it binds the Crown, clause 16(1)(i) of the Act provides that there is no limitation period with respect to a proceeding to recover money owing to the Crown. As the Court in Gibson noted “If there was uncertainty before—and I have found none—with respect to the imprescriptibility of tax collection proceedings in Ontario, there can be none now.”