Tax Forum
Triumph Over Evil
Sometimes the Supreme Court needs to teach the tax department that it is not above the law.
FROM: SEP-OCT 2003 ISSUE | BY DON GOODISON
A recent case brought back memories of my early days in tax work. I was something of a crusader, bound and determined to expose the tax department for what it really was — evil. I had heard stories of how it had seized a child's bank account because the parents owed tax, or taken a taxpayer's wheelchair as payment for taxes that weren't even owed. By far the saddest case I heard about was that of a tax collector who ripped a teddy bear from a child's hands and saying, "When mommy and daddy pay their taxes, you can have this back." What kind of evil person would do such a thing?
I knew these stories were true because people who knew people who knew the victims told them to me. My opinion was reinforced one day when I engaged in unpleasantries with a tax auditor who was just as zealous as I was. The "conversation" ended with his telling me that the law didn't apply to the tax department. You can imagine the combination of horror and delight I felt in hearing him say that.
That may have been the thinking behind the Canada Custom and Revenue Agency's (CCRA) decision to go to the Supreme Court of Canada to appeal a Federal Court of Appeal judgment. In Her Majesty the Queen (appellant) v. Joe Markevich (respondent) [2003 SCC 9], the taxpayer was suddenly hit with a 12-year-old tax debt that he thought had been written off.
Forgiven Debt?
In 1986, Markevich was assessed $267,432 taxes on income he had earned from stock promotions in the early 1980s. He did not appeal the assessment. He sold his house, using the proceeds to pay some of the taxes owing. Subsequently, Revenue Canada determined that there was no realistic prospect of collecting the remaining $234,136 and wrote it off.
Now, the tax department writing off a debt is a little different than what you might think. The debt is removed from the active collection list, but it is neither forgiven, nor forgotten. This oddity is covered by subsection 25(3) of the Financial Administration Act,which states, "The writing off of any debt, obligation or claim pursuant to this section does not affect any right of Her Majesty to collect or recover the debt, obligation or claim."
The CCRA made no effort to collect the debt from 1987 to 1998. Markevich filed returns from 1992 to 1994 and, though occasionally late, paid his taxes. The balance showing after these payments was always nil. He experienced some financial problems from 1995 to 1997, and the CCRA was forced to send requirements to pay to his creditors. Still, the amount shown as owing pertained only to those years. However, in January 1998, Markevich received a notice stating that he owed $770,583 in taxes — the $234,136 and $536,447 in accrued interest. The CCRA issued this statement because of a change in policy requiring previously written off debts to be included in the statements of account sent to taxpayers.
Markevich applied to the Federal Court, Trial Division [T-250-9], to have the Crown prohibited from collecting his tax debts for 1990 and prior years. He sought the protection of section 32 of the Crown Liability and Proceedings Act (CLPA), and subsection 3(5) of the British ColumbiaLimitation Act.Both of these sections prevent collection on debts that are more than six years old and where no attempt has been made to collect them during that period. Section 32 of the CLPA states the following:
Except as otherwise provided in this Act or in any other Act of Parliament, the laws relating to prescription and the limitation of actions in force in a province between subject and subject apply to any proceedings by or against the Crown in respect of any cause of action arising in that province, and proceedings by or against the Crown in respect of a cause of action arising otherwise than in a province shall be taken within six years after the cause of action arose... (Emphasis added).
Subsection 3(5) of the British Columbia Limitation Act states:
Any other action not specifically provided for in this Act or any other Act may not be brought after the expiration of 6 years after the date on which the right to do so arose... (Emphasis added).
Subsections 9(1) and 9(3) of the British Columbia Limitation Act also state that the debt is extinguished at the expiration of the limitation period.
The Federal Court, Trial Division, dismissed the application on the basis that the Income Tax Act was a complete code in itself, and, as such, the emphasized words in the above quotes applied. The Income Tax Act and the British ColumbiaIncome Tax Act were not subject to the limitations imposed by the two other acts.
Markevich appealed to the Federal Court of Appeal [A-174-99], which found that the Income Tax Act was not a complete code and that section 32 of the CLPA does impose a limitation on the collection of taxes under the Income Tax Act. Similarly, the British Columbia Limitations Act applied to the provincial portion of the taxes owing. Markevich's appeal was allowed.
The Crown then applied to the Supreme Court of Canada, which unanimously dismissed the appeal. The only disagreement between the judges was which act applied to limit the collection period to six years. Seven judges agreed with the Appeal Court, that the federal portion of the taxes owing was limited by section 32 of the CLPA and the British Columbia Limitations Act limited the provincial taxes. Three judges held that the British Columbia Limitations Act restricted the entire amount since Markevich resided in British Columbia and the debt was incurred there.
No Limitations
The authority for the Minister to collect tax debts through either court action or statutory collection procedures is granted in section 222 of the Income Tax Act, which states the following:
All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to Her Majesty and recoverable as such in the Federal Court or any other court of competent jurisdiction or in any other manner provided by this Act.
The question in this case was whether these collection powers were subject to the limitation period set out in section 32 of the CLPA. Two criteria have to be met in order for section 32 to apply:
- The Income Tax Act must not otherwise provide for limitation periods with respect to the collection of tax debts.
- The statutory collection procedures must qualify under section 32 as "proceedings... in respect of a cause of action."
The Supreme Court of Canada found that both criteria were met.
The Court followed the same line of thinking with respect to the provincial portion of the tax debt. The British ColumbiaIncome Tax Act did not provide for a limitation period for collections and therefore, the B.C. Limitations Actapplied to the "statutory collection proceedings undertaken by the Crown acting as collection agent for the Province of British Columbia." In addition, the Court held that the Income Tax Act is not a complete code, operating in a vacuum. The Court quoted from P. W. Hogg, J. E. Magee and T. Cook,Principles of Canadian Income Tax Law (3rd ed. 1999), saying the " Income Tax Act relies implicitly on the general law."
While this decision is encouraging, the Court gave the Crown a hint as to how to fix this problem in the future. In its pleadings, the Crown suggested that the Court should interpret section 222 as if it permits the collection of tax debts "at any time." The Court rejected this on the basis that it is "a basic principle of statutory interpretation that the Court should not accept an interpretation that requires the insertion of extra wording where there is another acceptable interpretation that does not require any additional wording." This suggests that the legislation could be changed to insert that wording, giving the tax department an unlimited amount of time to collect tax debts. In light of other comments made by the Court, however, the Crown is more likely to change the legislation to provide its own limitation period. This would seem reasonable, since, as the Court pointed out, "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."
To give anyone unlimited power is not in the country's best interests, and I would be surprised if Parliament allowed that to happen. As well, this decision could have far-reaching implications, since it may well be applicable to other government agencies, both federal and provincial, that attempt to collect money after the limitation period set out in the Crown Liability and Proceedings Act and corresponding provincial legislation.
Professional Passion
I can only imagine what Markevich must have felt when he opened the envelope from the CCRA and saw that he owed $770,583 in back taxes. Personally, I would have had to breathe into a paper bag for a few hours. Markevich was very concerned that having this amount included on any requirements to pay issued to his creditors would have a very negative impact on his ability to conduct business. I would venture to guess that it could result in his not being able to conduct business at all.
As I said earlier, the case brought back memories of the time when I was ruled by passion rather than reason, when admiring clients and colleagues would congratulate me on not being afraid to take on the enemy. It was also a time when I lost a lot more cases than I won, but I made a lot of noise doing so. It took a few years to realize that, while huffing and puffing may impress some, the professional approach was by far more successful. Nevertheless, it is gratifying to see that the Courts do not consider the CCRA to be above the law.
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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail goodison@axionet.com.