FORD CREDIT CANADA LIMITED, Appellant, v. HER MAJESTY THE QUEEN,, 2016 TCC 1

Docket: 2013-4143(IT)G BETWEEN: FORD CREDIT CANADA LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeal heard on October 19 and 20, 2015, at Toronto, Ontario. Before: The Honourable Associate Chief Justice Lucie Lamarre Appearances : Counsel for the Appellant: Daniel Sandler Allison Blackler Counsel for the Respondent: Donna Dorosh Patricia Lee JUDGMENT The appeal from the reassessment made under the Income Tax Act for the 2005 taxation year is dismissed, with costs. Signed at Ottawa, Canada, this 6th day of January 2016. "Lucie Lamarre" Lamarre A.C.J.

Citation: 2016 TCC 1 Date: 20160106 Docket: 2013-4143(IT)G BETWEEN: FORD CREDIT CANADA LIMITED, Appellant, and HER MAJESTY THE QUEEN, Respondent.

REASONS FOR JUDGMENT Lamarre A.C.J. [ 1 ] The issue in this appeal is whether a purported consequential assessment issued on December 19, 2011 for the 2005 taxation year is statute-barred. This turns on whether the assessment was properly issued pursuant to subsection 152(4.3) of the Income Tax Act ( ITA ), which reads as follows:

(4.3) Consequential assessment.

Notwithstanding subsections (4), (4.1) and (5), if the result of an assessment or a decision on an appeal is to change a particular balance of a taxpayer for a particular taxation year , the Minister may, or if the taxpayer so requests in writing, shall, before the later of the expiration of the normal reassessment period in respect of a subsequent taxation year and the end of the day that is one year after the day on which all rights of objection and appeal expire or are determined in respect of the particular year, reassess the tax, interest or penalties payable by the taxpayer, redetermine an amount deemed to have been paid or to have been an overpayment by the taxpayer or modify the amount of a refund or other amount payable to the taxpayer, under this

Part in respect of the subsequent taxation year, but only to the extent that the reassessment, redetermination or modification can reasonably be considered to relate to the change in the particular balance of the taxpayer for the particular year. [Emphasis added.] [ 2 ] The facts underlying this appeal are summarized in a Partial Agreed Statement of Facts, which is attached at the end of these Reasons for Judgment. [ 3 ] In a nutshell, by reassessment dated July 9, 2009, the Minister of National Revenue ( Minister ) included in the appellant’s income for the 2004 taxation year various amounts, some of which had been initially reported in the appellant's income for the 2005 taxation year.

The issue for most of these amounts came down to timing. The amounts in question included deferred proceeds on securitization transactions and subvention accretion income, totalling $76,673,532, which the Minister subsequently removed from income for the 2005 taxation year by reassessment dated June 21, 2010. The deferred proceeds and subvention accretion income, along with a few other amounts, were referred to as a "T2S(1) Securitization Adjustment" in the reassessment for 2005.

Though there were other adjustments made in the reassessment for 2005, they are not material. [ 4 ] In all, the reassessment for 2004 added to income amounts totalling $237,608,206 and removed from income amounts totalling $21,312,655. [ 5 ] The appellant filed notices of objection for both years. [ 6 ] For 2004, the appellant disputed certain adjustments in the reassessment and requested an additional deduction of $5,681,266, which it had requested during the audit but the request was not processed.

The total reduction to taxable income sought by the appellant amounted to $198,405,337. [ 7 ] For 2005, the appellant did not dispute the T2S(1) Securitization Adjustment but requested, in the event that its 2004 income was ultimately changed on appeal so that the amount of non-capital losses necessary to reduce 2004 taxable income to $100 was reduced, that its non-capital losses be applied in the order they arose to reduce 2004 taxable income to $100 and to reduce 2005 taxable income to $100 (2005 Notice of Objection, paragraph 17, Exhibit A-1, Tab 16, page 278). [ 8 ] The Notices of Objection were handled by Ms.

Leslie Patrick, who acted in both files as the Canada Revenue Agency ( CRA ) appeals officer. On December 3, 2010, she wrote to the appellant to advise that she had been assigned to the case (Exhibit A-1, Tab 17). [ 9 ] On June 20, 2011, Ms.

Patrick, on behalf of the CRA Appeals Division, sent a letter to the appellant offering to settle the objections in respect of the 2004 and 2005 taxation years on the terms set out in that letter (mainly that the Minister would accept all of the appellant's adjustments for 2004), conditional on the appellant waiving its right of objection and appeal in respect of 2004 and withdrawing its notice of objection in respect of 2005 (Exhibit A-1, Tab 23). [ 10 ] The appellant responded by letter dated June 30, 2011 requesting an explanation of the principles underlying the CRA Appeals Division position regarding the settlement offer (Exhibit A-1, Tab 24). [ 11 ] An explanation of the CRA's position was provided to the appellant in a letter dated July 14, 2011 and signed by Ms.

Patrick, the CRA appeals officer (Exhibit A-1, Tab 25). Ms. Patrick stated in the last three paragraphs of that letter: . . . There are no securitization issues in dispute for the 2005 taxation year. However, if the 2004 reassessment is vacated by the Appeals Division there will be corresponding consequential adjustments to 2005, which should also address your concerns regarding the non-capital losses. The basis for the proposal is our

interpretation of the facts presented. Accordingly, our settlement offer is for the 2004 taxation year only. The Canada Revenue Agency will continue to review, audit, and if applicable reassess, securitization transactions and other issues in 2006 and subsequent taxation years. If you would like to discuss this matter further please do not hesitate to contact the undersigned. [ 12 ] By letter dated August 19, 2011, the appellant requested clarification of certain points in order to be able to respond effectively

to the CRA's proposal and advance settlement discussions (Exhibit A-1, Tab 26).

The appellant raised, among others, the following question: ". . . does the CRA Appeals division, in the ordinary course of adjudicating appeals under subsection 165(3) of the Income Tax Act, intend to accept FCCL's [Ford Credit Canada Limited] objection to the 2004 year and to vacate the current assessment?" The appellant then terminated the letter by saying that it required clarification as to the procedural implications the CRA's offer had for its objections. [ 13 ] By letter dated August 26, 2011, the CRA appeals officer responded to the appellant. Ms.

Patrick summarized her understanding of the appellant's questions raised in its letter dated August 19, 2011. As this letter is crucial in the present appeal, it is worth reproducing it in its entirety: Ford Credit Canada Limited The Canadian Road Oakville, Ontario L6J 5C7 Attention: Norman Baxter, Tax Director Our file/Notre référence L. Patrick 430-2-0 416-952-1068 GB11117120 8200 GB11117120 9146 August 26, 2011 Dear Mr. Baxter: RE: Ford Credit Canada Limited Business Number – 101842557RC0001 Notices of Objection for December 31, 2004 and 2005 Taxation Years Thank you for your letter dated August 19, 2011.

It is our understanding that you want to know whether or not the Canada Revenue Agency's (the "CRA") Appeals Division agrees with your position regarding the "retained interest". In addition, you want to know whether the basis for our decision is applicable to subsequent taxation years, and why the Appeals Officer has sent you a settlement offer. It is our position that the net present value of retained interest is an add-back on

schedule one (T2SCH1) of the corporate income tax return. However, because we do not agree with all of the CRA Audit Division's adjustments, we are vacating the 2004 reassessment in dispute . You have referred to subsection 165(3) of the Income Tax Act (the Act") . This subsection requires that the Minister, upon receiving a Notice of Objection, must with all due dispatch reconsider the assessment and either vacate, confirm or vary the assessment or reassess.

In order to achieve our objective, the Appeals Division occasionally uses "settlement agreements" to resolve certain cases that are not decided 100% in favour of either the CRA or the taxpayer. In this case, a settlement offer was determined to be the most effective way to ensure that all parties are aware that the Appeals Division does not entirely agree with FCCL's position . Further, that the basis for our decision applies only to the years under objection. Specifically, the review completed by the Appeals Division was for the 2004 and 2005 taxation years. Our review was limited to the years under objection.

We cannot provide any comments regarding subsequent taxation years. The use of the waivers, for the purposes of settlement is to ensure that all parties have a clear understanding that, although we do not fully support your position, the reassessment will be vacated . In addition, our decision applies to the 2004 taxation year only. As a final point, it should be noted that the use of the phrase "without prejudice" is a standard practice for all of our settlement offers.

We look forward to discussing the issue further . Please telephone the undersigned to arrange a mutually satisfactory date to meet at our office in Scarborough, Ontario. Yours truly, L. Patrick Appeals Officer [Emphasis added.] [ 14 ] This letter is the crux of the issue in the present case. The appellant is of the view that the Minister vacated the July 9, 2009 reassessment (for the 2004 taxation year) and communicated this decision to the appellant in the above letter of August 26, 2011, thereby discharging her obligation to dispose of the objection under subsection 165(3) of the ITA, which reads as follows: Objections to Assessments . . .

(3) Duties of Minister On receipt of a notice of objection under this section, the Minister shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess, and shall thereupon notify the taxpayer in writing of the Minister’s action. [ 15 ] The appellant is of the view that, when the CRA stated in the letter that, "because we do not agree with all of the CRA Audit Division's adjustments, we are vacating the 2004 assessment in dispute", the CRA was making a statement that, on reconsidering the July 9, 2009 reassessment, it had decided to vacate it, and the appellant was notified of that decision by that letter.

In the appellant's view, the reference to subsection 165(3) in the following paragraph of the letter confirms that the decision had been taken by the Minister to vacate the 2004 reassessment, which was in dispute at that time. [ 16 ] If the appellant proves to be right in that

interpretation, it would follow that the December 19, 2011 reassessment issued for 2004 was not issued pursuant to subsection 165(3) of the ITA as the matter would already have been disposed of by the letter dated August 26, 2011, and therefore that reassessment would have been issued after the normal reassessment period, which expired on July 13, 2009 for 2004, and consequently would be statute-barred. [ 17 ] The appellant further argues that the Minister did not have the authority to issue a consequential reassessment pursuant to subsection 152(4.3) of the ITA for the 2005 taxation year as this provision does not provide for the issuance of a consequential reassessment as a result of the Minister vacating a reassessment under subsection 165(3). (The appellant argues that the decision to vacate an assessment is not an "assessment or a decision on an appeal", which is a precondition found in the first sentence of subsection 152(4.3) for the exercise of the Minister's right to issue a consequential reassessment.) [ 18 ] As a result, the appellant argues, the December 19, 2011 reassessment for 2005 could not have been issued pursuant to 152(4.3) and was therefore likewise statute-barred. [ 19 ] The respondent, on the other hand, is of the view that the letter dated August 26, 2011 was only responding to the appellant's request (in its letter dated August 19, 2011) for clarification during the course of settlement discussions following a "without prejudice" proposal by the CRA for settlement of the objections.

The respondent argues that that letter did not constitute notification of a decision to vacate the July 9, 2009 reassessment. [ 20 ] Indeed, the respondent states that a meeting was held between representatives of the appellant and the Minister on October 18, 2011 (Exhibit A-2, paragraph 33). This meeting followed a letter sent by the appellant to Ms. Patrick on September 9, 2011 in which it requested the meeting.

I note that, in that letter, the appellant requested an extension of time to respond to the CRA's settlement proposal. [ 21 ] The respondent stated that, in the end, the settlement offer was not accepted by the appellant and that, after completing the report on objection, the CRA decided to reassess the appellant in accordance with what was proposed in the settlement offer. [ 22 ] A letter dated November 23, 2011 and signed by the Team Leader, Appeals Division was sent to the appellant.

It was stated therein that the CRA Appeals Division had completed the review of the notices of objection for the 2004 and 2005 taxation years and that the Minister was reversing the 2004 reassessment of $192,724,070, plus allowing an additional reduction of $5,681,266. It was further stated that the various consequential adjustments would increase income for the 2005 taxation year by $76,673,532 and that non-capital losses would be applied to reduce taxable income.

The letter ends by saying that notices of reassessment would follow under separate cover (Exhibit A-1, Tab 31). [ 23 ] The reassessments were issued on December 19, 2011. According to the respondent, the consequential reassessment was issued for 2005 pursuant to subsection 152(4.3) further to the reassessment issued for 2004 on the same date, following the Minister's decision on the appellant's objections pursuant to subsection 165(3). Issue [ 24 ] The question is therefore whether the August 26, 2011 letter was determinative and disposed of the objection, with the result

that the Minister was functus officio and prevented from reassessing the appellant after the issuance of that letter. I do not believe so. Analysis [ 25 ] Since I have concluded that the August 26, 2011 letter neither vacated the July 9, 2009 reassessment nor constituted notification of a decision to vacate under subsection 165(3), it is clear that the principle of functus officio is inapplicable. [ 26 ] I have come to this conclusion for two reasons. [ 27 ] Firstly, I accept Ms.

Patrick's testimony that, when she used the verb "vacate", she was using it in relation only to the amounts to which the appellant had objected. She did not mean that she would vacate the July 9, 2009 reassessment, as only part of it was in dispute. At trial, when asked about the purpose of the August 26, 2011 letter, Ms. Patrick answered as follows: This is an extension of the July letter, and it's just rehashing many of the same points that were stated earlier, that we are -- first of all, the taxpayer was concerned with our reference in our letter to section 165(3).

So we simply indicated that we are -- the narrative I used is that we are vacating the 2005 reassessment in dispute. And what that simply stated was that the amounts that were in dispute would be reversed for 2004. However, we were not addressing -- and this is implicit in my understanding of the word "vacate" for the purposes of this type of an assessment, was that we were only addressing the amount -- not the entire amount that was audited or that was reassessed by the audit division. [Emphasis added.] [Transcript, volume 1, pages 61-62] [ 28 ] In the above passage, Ms.

Patrick probably meant to refer to the 2004 reassessment rather than the 2005 reassessment. [ 29 ] Ms. Patrick's explanation of the purpose of the letter makes sense in context. The appellant did not object to all of the adjustments made in the July 9, 2009 reassessment and, correspondingly, in the settlement offer dated June 20, 2011, the Minister did not offer to reverse all the adjustments in the reassessment (i.e., to vacate the reassessment).

The Minister offered to reverse only the adjustments to which the appellant had objected. [ 30 ] Secondly and alternatively, even if I were to accept that the use of the verb "vacate" in the August 26, 2011 letter was a reference to vacating under subsection 165(3), the letter merely explained what the Minister was willing to do if the settlement offer was accepted. The offer was never accepted by the appellant. [ 31 ] That the letter only offered to "vacate" the reassessment as part of a settlement is clear from the text of the letter and the context in which it was sent. In the same letter, Ms.

Patrick wrote that "although we do not fully support your position, the reassessment will be vacated" [emphasis added]. The future tense means that the assessment had not yet been vacated. [ 32 ] As for the context, the August 26, 2011 letter was written as part of an ongoing settlement discussion. In particular, it was written in response to the appellant's request for clarification as to how the offer would affect post-2004 years and as to what the procedural implications of the offer would be for its objections. [ 33 ] It is also clear that the appellant never accepted the offer.

In response to the August 26, 2011 letter, the appellant, by letter dated September 9, 2011, requested an extension of time to provide an answer to the offer. The parties met afterwards for further discussion, but ultimately did not settle. [ 34 ] I therefore conclude that the August 26, 2011 letter signed by Ms. Patrick was not notification of a decision to vacate nor did the letter itself vacate under subsection 165(3) the July 9, 2009 reassessment. [ 35 ] This conclusion is sufficient to dispose of the appeal.

On the basis of this conclusion, I find that the Minister's decision on the objection was reflected in the December 19, 2011 reassessment for 2004, which opened the door to the consequential reassessment issued on the same date for 2005. [ 36 ] As a result, I will not have to determine whether a consequential reassessment may result from a decision by the Minister to vacate an assessment for a previous year. [ 37 ] The appeal is dismissed, with costs. Signed at Ottawa, Canada, this 6th day of January 2016. "Lucie Lamarre" Lamarre A.C.J.

CITATION: 2016 TCC 1 COURT FILE NO.: 2013-4143(IT)G STYLE OF CAUSE: FORD CREDIT CANADA LIMITED v. HER MAJESTY THE QUEEN PLACE OF HEARING: Toronto, Ontario DATES OF HEARING: October 19 and 20, 2015 REASONS FOR JUDGMENT BY: The Hon. Associate Chief Justice Lucie Lamarre DATE OF JUDGMENT: January 6, 2016 APPEARANCES: Counsel for the Appellant: Daniel Sandler Allison Blackler Counsel for the Respondent: Donna Dorosh Patricia Lee COUNSEL OF RECORD:

For the Appellant: Name: Daniel Sandler Firm: Couzin Taylor Toronto, Ontario For the Respondent: William F. Pentney Deputy Attorney General of Canada Ottawa, Canada