A-206-97
Her Majesty the Queen (Appellant)
v.
Chevron Canada Resources Limited (Respondent)
Indexed as: Canadav. Chevron Canada Resources Ltd. (C.A.)
Court of Appeal, Desjardins, Décary and Noël JJ.A. "Montréal, September 18; Ottawa, September 28, 1998.
Income tax — Reassessment — Appeal from T.C.C. judgment holding ITA, s. 165(1.1) not preventing taxpayer from pursuing issues in computation of resource profits raised in objections other than those already withdrawn, specifically dealt with in consent judgment — S. 165(1.1) permitting filing of notice of objection only if relating to matter giving rise to assessment not conclusively determined by Court — Consent judgment referring matter back to MNR for reassessment — Subsequently memorandum of understanding between petroleum industry, Revenue Canada setting out manner in which certain expenditures to be deducted in computation of resource profits — Taxpayer reassessed in conformity with consent judgment — Two weeks later filing notices of objection — Appeal allowed — S. 165(1.1) precluding right to file notices of objection — (1) T.C.J. finding matter giving rise to reassessments including computation of resource allowance; additional expenditures claimed by notices of objection reasonably related to that computation — Open to T.C.J. to so characterize matter — Relationship existing in terms of expenditures falling within same narrow computation, and because prior to issuance of consent judgment all expenditures acknowledged by Revenue Canada, industry as governed by Gulf Canada Ltd. v. Canada — (2) Computation of taxpayer's resource allowance conclusively determined by consent judgment — Issues now seeking to raise forming logical, integral part of litigation before T.C.C. prior to consent judgment — Could, should have been raised at same time — Party failing to raise issue forever barred from raising it again.
Practice — Res judicata — Appeal from T.C.C. decision Income Tax Act, s. 165(1.1) not preventing taxpayer from pursuing issues raised in objections — S. 165(1.1) permitting filing of notice of objection to assessment in accordance with Court order only if relating to matter giving rise to assessment not conclusively determined by Court —Appeal from objections settled — Consent order referring matter back to MNR — Taxpayer objecting to reassessments — Res judicata applies not only to matters decided by earlier litigation, but also to related matters which although undecided could, should have been brought forward, disposed of at time — Concern leading to enactment of s. 165(1.1) to prevent further litigation with respect to matters unrelated to prior decision — Issues taxpayer now attempting to raise logical, integral part of litigation before T.C.C. prior to consent judgment being entered — Could, should have been raised at same time — Matter of computation of taxpayer's resource allowance conclusively determined by consent judgment — S. 165(1.1) neither ousting rule of res judicata by necessary implication nor adopting rule only in so far as applying to matters specifically decided by Court — Court not having discretion to overlook rule of res judicata in special circumstances or where interests of justice so require.
This was an appeal from a Tax Court decision holding that Income Tax Act, subsection 165(1.1) did not prevent the taxpayer from pursuing the issues raised in its objections (which had not already been withdrawn or specifically dealt with by the consent judgment) as to the computation of resource profits. Subsection 165(1.1) permits a taxpayer to object to an assessment in accordance with a court order, but only to the extent that the reasons for the objection reasonably relate to a matter that gave rise to the assessment and that was not conclusively determined by the court. The Minister of National Revenue reassessed the taxpayer for the taxation years 1985 and 1986 respectively. The taxpayer objected but the Minister confirmed the reassessments. The taxpayer appealed, but the parties settled before trial. The consent judgment, dated September 20, 1994, referred the matter back to the Minister for reassessment. On December 9, 1994 the petroleum industry and Revenue Canada agreed to a memorandum of understanding which provided the manner in which certain expenditures were to be deducted for the purposes of computing resource profits up to July 23, 1992. The taxpayer was reassessed in conformity with the terms of the consent judgment on February 14, 1995. Two weeks later notices of objection were filed challenging the correctness of the reassessments on the ground that certain expenses should not have been deducted in the calculation of resource profits. The Minister objected on the ground that subsection 165(1.1) prevented the taxpayer from filing these notices of objection. The issues were whether the notices of objection raised issues: (1) unrelated to the reassessments, and (2) which had been conclusively determined by the consent judgment.
Held, the appeal should be allowed. The stated question should be answered as follows: the taxpayer's entitlement to file notices of objection against the reassessments was precluded by subsection 165(1.1).
(1) The rule of res judicata applies not only to matters decided by earlier litigation, but also to related matters which although undecided, could and should have been brought forward and disposed of at that time. Those responsible for administration of the Act were not content to rely solely on the rule of res judicata as a means of circumscribing the right to object to an assessment issued further to a judgment of the Court. The concern which led to the enactment of subsection 165(1.1) was to prevent further litigation with respect to matters unrelated to a prior decision. With respect to the requirement that the reasons for objection reasonably relate to a matter giving rise to the assessment, Parliament did not prescribe any specific type or manner of relationship, but left it to the Court to ascertain on the facts of each case whether the reasons for objection when considered in light of the matter that gave rise to the assessment were sufficiently related to justify a right to pursue the matter further. The Tax Court found as a fact that the matter that gave rise to the reassessments included the computation of resource allowance, and that the additional expenditures claimed by the notices of objection were reasonably related to that computation. It was open to the Tax Court to so characterize the matter since resource allowance is the product of a relatively precise and narrow computation under the Act and since elements of this computation formed the object of the initial reassessments as well as the reassessments which resulted from the consent judgment. There was also a relationship because prior to the issuance of the consent judgment Revenue Canada and the industry had acknowledged that the expenditures in question were governed by Gulf Canada Ltd. v. Canada, a Federal Court of Appeal decision dealing with the deductibility of certain expenses in the calculation of taxable production profits, and presumably were deserving of similar treatment.
(2) The taxpayer's position that the only issues that were "conclusively determined" were those that were specifically decided was untenable if the doctrine of res judicata , in so far as it bars further litigation with respect to undecided, but related matters applies. The issues which the taxpayer was now attempting to raise formed a logical and integral part of the litigation that was before the Tax Court prior to the consent judgment being entered, and these issues could and should have been raised at the same time. The taxpayer was before the proper forum, the computation of its resource allowance clearly in issue and the additional contentions with respect to this computation known to it and capable of being raised, yet, for unknown reasons, they were not brought forth. The rule is that a party who, under these conditions omits to raise an issue is forever barred from raising it again. The matter of the computation of the taxpayer's resource allowance was conclusively determined by the consent judgment.
The taxpayer contended that the requirement in subsection 165(1.1) that the matter not have been "conclusively determined" must be read as adopting the rule of res judicata only in so far as it bars future litigation with respect to matters expressly or specifically decided. Considering that subsection 165(1.1) was itself intended to limit the scope of ongoing litigation, it would be extraordinary if the legislator had, in the course of implementing this provision ousted the application of this fundamental aspect of the res judicata rule. The taxpayer would have had to demonstrate that subsection 165(1.1) was wholly inconsistent with this rule before the Court could have concluded that it was ousted by necessary implication. There was no such inconsistency. Subsection 165(1.1) can co-exist in harmony with the rule of res judicata. For example, an issue may "reasonably be regarded as relating to a matter that gave rise to the assessment" within the meaning of subsection 165(1.1) in ways that have no relevance to the application of the rule of res judicata . Or, subsection 165(1.1) would permit a further objection with respect to issues related to the matter that gave rise to an assessment, but which were not available at the time of the earlier litigation. Subsection 165(1.1) neither ousts by necessary implication the rule of res judicata nor adopts this rule only in so far as it applies to matters specifically decided by the Court.
The Court does not have the discretion to overlook the application of the rule of res judicata in special circumstances, or where the interests of justice so require. Had the Tax Court been troubled by the Minister's behaviour to the point of overlooking the principle of res judicata, it would have acted on wrong principle. The taxpayer had had an uninhibited opportunity to protect its rights with respect to all the concessions which the Minister extended to the industry, but had not availed itself of this right. Its predicament was caused by its own failure to pursue its rights, not by any ministerial action. If the taxpayer was of the view that this omission was the result of special circumstances such that the rule of res judicata should be overlooked, it was incumbent upon it to place some evidence before the Court tending to establish these special circumstances. No attempt was made to explain why the taxpayer did not assert its rights at the appropriate time and there was no basis upon which the Tax Court could have exercised its discretion in favour of the taxpayer.
statutes and regulations judicially considered
Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 20(1)(v.1), 165(1) (as am. by S.C. 1994, c. 7, Sch. II, s. 138; 1996, c. 21, s. 45), (1.1) (as enacted by S.C. 1994, c. 7, Sch. II, s. 138; Sch. VIII, s. 98), 173, 248(1) "assessment".
Income Tax Regulations, C.R.C., c. 945.
cases judicially considered
applied:
Thomas v. Trinidad and Tobago (Attorney General) (1990), 115 N.R. 313 (P.C.).
considered:
Gulf Canada Ltd. v. Canada, [1992] 1 C.T.C. 183; (1992), 92 DTC 6123; 136 N.R. 187 (F.C.A.); leave to appeal to S.C.C. refused, [1992] 2 S.C.R. ix; Doyle v. R., [1981] 2 F.C. 114; [1980] C.T.C. 330; (1980), 80 DTC 6260 (T.D.).
referred to:
Pothitos v. M.N.R. (1960), 60 DTC 636 (T.A.B.); Bilson (J.) v. M.N.R. (1960), 60 DTC 599 (T.A.B.); Payette (P) v The Queen, [1977] CTC 551; (1977), 77 DTC 5368 (F.C.T.D.); Okalta Oils v. Minister of National Revenue, [1955] S.C.R. 824; [1955] 5 D.L.R. 614; [1955] C.T.C. 271; (1955), 55 DTC 1176; Harris v. Minister of National Revenue, [1965] 2 Ex. C.R. 653; [1964] C.T.C. 562; (1964), 64 DTC 5332.
authors cited
Income Tax Act and Regulations, Department of Finance Technical Notes: A Consolidation of Technical Notes and other Income Tax Commentary from the Department of Finance, 6th ed. Toronto: Carswell, consolidated to September 1994.
Sullivan, Ruth. Driedger on the Construction of Statutes, 3rd ed. Toronto: Butterworths, 1994.
APPEAL from a Tax Court decision (Chevron Canada Resources Ltd. v. R., [1997] 2 C.T.C. 2624; (1997), 97 DTC 1173 (T.C.C.)) holding that Income Tax Act, subsection 165(1.1) did not prevent the respondent from pursuing the issues raised in its objections excluding those objections already withdrawn, or specifically dealt with by a consent judgment in the computation of resource profits. Appeal allowed.
appearances:
Wilfrid Lefebvre for appellant.
H. George McKenzie for respondent.
solicitors of record:
Ogilvy Renault, Montréal, for appellant.
Felesky Flynn, Calgary, for respondent.
The following are the reasons for judgment rendered in English by
Noël J.A.: This is an appeal from a decision rendered by Bowman J. on March 4, 1997.1 The decision in question was rendered further to an application brought pursuant to section 173 of the Income Tax Act [R.S.C., 1985 (5th Supp.), c. 1] (the Act). The decision answered partially in the affirmative the following question:
Whether any of the reasons for the Notices of Objection can reasonably be regarded as relating to a matter that gave rise to the reassessments and that was not conclusively determined by this Court so that the Taxpayer's entitlement to file the Notices of Objection to the Reassessments is not precluded by the provisions of subsection 165(1.1) of the Act.
The facts relevant to this appeal need be outlined in some detail.2
On January 27, 1989, and August 9, 1990, the Minister of National Revenue (the Minister) reassessed Chevron Canada Resources Limited (the respondent) for the taxation years 1985 and 1986 respectively.3 The respondent objected to these reassessments and on December 31, 1991, the Minister gave notice of their confirmation.
On March 25, 1992, the respondent brought an appeal before the Tax Court of Canada. The notices of appeal filed with the Court raised the following issues:
(a) are delay lease rentals on undeveloped lands deductible from income or capitalized and added to Canadian Oil And Gas Property Expenses ("COGPE")?
(b) are Scientific Research and Experimental Development Expenses ("SR & ED") and Crown lease rentals on unproductive lands required to be deducted in the computation of resource profits for the purposes of resource allowance?
(c) is interest income properly characterized as active business income or investment income for the purposes of calculating its Manufacturing and Processing ("M&P") profit?
(d) are royalties in respect of liquefied petroleum gases ("LPG's") deductible in calculating income?
The two appeals were consolidated and further to a status hearing held in November 1993, a trial date was set for September 14, 1994.
On December 20, 1993, the respondent amended its notice of appeal to withdraw the issue relating to the deductibility of royalties in respect of LPG's in the computation of income. This withdrawal was the result of the settlement of another action which had been pending in the Federal Court"Trial Division between the same parties.
On September 9, 1994, the appellant and respondent executed minutes of settlement in respect of the Tax Court action.4 The consent to judgment5 executed the same day provided that the respondent's appeal be allowed and that the matter be referred back to the Minister for reconsideration and reassessment on the basis that:
(a) $2,284,161 of the Appellant's income from its short term investments in its 1985 taxation year and $662,861 of the Appellant's income from its short term investments in its 1986 taxation year constitute income from an active business for the purposes of calculating the Appellant's manufacturing and processing deduction pursuant to section 125.1 of the Income Tax Act; and
(b) neither the Appellant's scientific research expenditures nor its crown lease rental payments are to be deducted under paragraph 1204(1)(f) of the Income Tax Regulations, or otherwise, in the calculation of resource profits for the purpose of paragraph 20(1)(v.1) of the Income Tax Act.
The Appellant is not entitled to any further relief.
On September 20, 1994, Couture C.J. gave judgment (the "consent judgment") in the following terms:6
Upon reading the Consent to Judgment filed:
The appeals from the assessments made under the Income Tax Act for the 1985 and 1986 taxation years are allowed, without costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the terms of the attached Consent to Judgment.
Some two years before the parties endorsed the settlement, the Federal Court of Appeal, in Gulf Canada Ltd. v. Canada,7 addressed the issue of what amounts were to be deducted in the calculation of taxable production profits, and concluded that SR & ED costs and pre-production capital cost allowance were not required deductions in the calculation of taxable production profits.8
Soon after this decision was rendered, the petroleum industry, (the Industry) through the offices of the Canadian Association of Petroleum Producers, undertook negotiations with Revenue Canada with a view to resolving the issue of which other expenses were not required to be deducted in calculating resource profits for the purpose of determining a taxpayer's resource allowance based on the reasoning advanced by the Court in the Gulf Canada decision. The types of expenses under discussion included lease rentals on unproductive lands, SR & ED costs, pre-production capital cost allowance, pre-production operating expenses and general and administrative costs.
By September of 1994, although discussions between the industry and Revenue Canada had progressed to the point where it was acknowledged that concessions would be made by Revenue Canada with respect to the particular expenses under discussion, the terms of an agreement relating to the treatment of all these expenses had not been settled.
On December 9, 1994, a memorandum of understanding was agreed to between the industry and Revenue Canada. In a letter dated the same day, Mr. R. M. Beith, Interim Assistant Deputy Minister, Appeals, wrote the industry as follows:9
This letter is further to various meetings and discussions between representatives of the Canadian Association of Petroleum Producers (CAPP) and Revenue Canada regarding the implications of the 1992 Court of Appeal decision in The Queen vs. Gulf Canada Limited for the treatment of, among another things, corporate general and administrative expenses (G&A) in the computation of resource profits and the resource allowance under the regulations of the Income Tax Act.
Revenue Canada agrees in principle to the G&A allocation principles described in your letter of September 16, 1993. The attached schedule describes the basis upon which we propose to finalize the treatment of G&A, scientific research and experimental development expenditures, capital cost allowance prior to the year of commencement of production and pre-production expenses. After verification of claims, reassessments will be issued for those taxpayers who agree with the proposal and who have raised, or who will have the right to raise, the issues in a valid notice of objection or on appeal, or who have filed a valid waiver. Revenue Canada's position is that the resulting revised resource profits figure will also be utilized for any corresponding adjustments required to PGRT returns similarly open for reassessment. A reassessment will not be issued in respect of a taxation year for which rights to object or appeal have expired. The time for issuing reassessments can be kept to a minimum by ensuring that claims contain sufficient detail and that supporting documentation is readily available for verification.
To avoid possible delays in providing refunds due to the required verification and processing, we intend to issue repayments of amounts in dispute under subsection 164(4.1) of the Act in advance of the actual reassessments in respect of these issues. To obtain repayments, taxpayers will be asked to indicate agreement in principle with the proposal and submit, on a year-by-year basis, an estimate of their claims for these issues, where they have not already done so, an estimate of their expected refund for taxes and interest and a statement as to the amount of tax that they have paid in respect of the year. If these figures agree with our estimates, repayments to the extent of 75% of the disputed amount will be issued as soon as possible without verification. Repayments can be issued under subsection 164(4.1), only if these issues are the subject of a valid objection or appeal.
Revenue Canada will not issue a refund or repayment for a particular year in respect of these issues to the extent that it has reason to believe that the adjustments may be required in respect of other issues that would have the effect of reducing any refund or repayment to which the taxpayer will ultimately be entitled.
If the terms of the proposal in the attached schedule are acceptable to CAPP, I would appreciate a letter indicating your agreement in principle as soon as possible. We will then begin the process of dealing with individual taxpayers.
The actual Memorandum of Understanding reads as follows:10
Memorandum of Understanding
Calculation or Resource
Profits"Regulation 1204
Pre-July 23, 1992 Amendments
Agreement in principle has been concluded as to the manner in which certain expenditures are to be deducted for purposes of computing resource profits under Regulation 1204. The agreed upon method of deduction or allocation will be applicable up to the effective date of the amendments to Regulation 1204 which were issued in draft form on July 23, 1992.
Following verification, reassessments based on this memorandum will be made to all years open for reassessment under an objection, appeal or waiver or in respect of changed loss years for which a loss determination has not been issued.
1. Scientific Research and Experimental Developments (SR & ED)
SR & ED expenditures claimed by taxpayers, which have been accepted by the Department as so qualifying, are not to be deducted in the calculation of resource profits.
2. Pre-Production Capital Cost Allowance (CCA)
CCA for years prior to that in which production commences will not reduce resource profits.
3. Pre-Production Expenses
Pre-Production Expenses (i.e. environmental impact studies, marketing surveys, lease rentals in respect of non-producing properties) will not be deducted in calculating resource profits.
4. General & Administrative Expenses (G & A)
The allocation of G & A for purposes of computing resource profits is as set out in the September 16, 1993 letter from the Canada Association of Petroleum Producers, a copy of which is attached.
Reassessments to be issued pursuant to this memorandum will be conditional upon the Department's receipt of an agreement in writing to waive all objection and appeal rights with respect to the adjustments covered by this memorandum of understanding. [Emphasis in original.]
The respondent was reassessed in conformity with the terms of the consent judgment on February 14, 1995. Two weeks later, notices of objection were filed challenging the correctness of the reassessments on the following grounds:
(a) delay release rentals should not have capitalized as COGPE;
(b) royalties on LPG's should be deductible in calculating income;
(c) royalties paid on miscible flood injectants should be deductible in computing income until the product is recovered from the project; and
(d) the calculation or resource profits and in particular the following expenses should not be deducted in the calculation of resource profits:
(i) lease rentals on unproductive lands,
(ii) scientific research and experimental development costs,
(iii) pre-production capital cost allowance,
(iv) pre-production operating expenses, and
(v) general and administrative costs.
The Minister took issue with the respondent's right to file these notices of objection. In the Minister's view, subsection 165(1.1) [as enacted by S.C. 1994, c. 7, Sch. II, s. 138; Sch. VIII, s. 98] of the Act prevented the respondent from filing these objections as they raised issues unrelated to the reassessments and issues which had been conclusively determined by the consent judgment. The respondent took a different view and the parties agreed to have their dispute resolved by way of a reference to the Tax Court based on the question stated at the beginning of these reasons.
On March 4, 1997, Bowman J. answered this question partially in the affirmative by holding that subsection 165(1.1) did not prevent the respondent from pursuing the issues raised in its objections other than the ones pertaining to the deductibility of royalties in respect of LPG's and the treatment of SR and ED costs and Crown lease rental payments in the computation of resource profits.11 The Crown appeals from this decision in so far as it otherwise upholds the respondent's right to pursue its objections.
The relevant statutory provisions read as follows [s. 165(1) (as am. by S.C. 1994, c. 7, Sch. II, s. 138; 1996, c. 21, s. 45)]:
165. (1) A taxpayer who objects to an assessment under this Part may serve on the Minister a notice of objection, in writing, setting out the reasons for the objection and all relevant facts,
(a) where the assessment is in respect of the taxpayer for a taxation year and the taxpayer is an individual (other than a trust) or a testamentary trust, on or before the later of
(i) the day that is one year after the taxpayer's filing-due date for the year, and
(ii) the day that is 90 days after the day of mailing of the notice of assessment; and
(b) in any other case, on or before the day that is 90 days after the day of mailing of the notice of assessment.
(1.1) Notwithstanding subsection (1), where at any time the Minister assesses tax, interest or penalties payable under this Part by, or makes a determination in respect of, a taxpayer
(a) under subsection 67.5(2), subparagraph 152(4)(b)(i) or subsection 152(4.3) or (6) or 164(4.1), 220(3.4) or 245(8) or in accordance with an order of a court vacating, varying or restoring the assessment or referring the assessment back to the Minister for reconsideration and reassessment,
(b) under subsection (3) where the underlying objection relates to an assessment or a determination made under any of the provisions or circumstances referred to in paragraph (a), or
(c) under a provision of an Act of Parliament requiring an assessment to be made that, but for that provision, would not be made because of subsections 152(4) to (5),
the taxpayer may object to the assessment or determination within 90 days after the day of mailing of the notice of assessment or determination, but only to the extent that the reasons for the objection can reasonably be regarded as relating to a matter that gave rise to the assessment or determination and that was not conclusively determined by the court, and this subsection shall not be read or construed as limiting the right of the taxpayer to object to an assessment or a determination issued or made before that time.**
** In reading these provisions, as well as these reasons, it is important to bear in mind that the term "assessment" is defined under subsection 248(1) of the Act as including a "reassessment".
At the onset, the respondent concedes that subsection 165(1.1) effectively prevents it from pursuing its objection with respect to the deductibility of delay rentals in the computation of income on the ground that this matter was conclusively determined by the consent judgment.12 The respondent also concedes that its attempt to deduct royalties on miscible flood injectants in the computation of income raises a novel issue which cannot be reasonably regarded as relating to any of the matters that gave rise to the reassessments.13 Judgment should be given allowing the appeal in so far as these issues are concerned.
This only leaves to be decided the question of whether the respondent is entitled to pursue the remaining changes which it wishes to bring to the computation of its resource allowance.14 According to the appellant, Bowman J. erred in holding that the question relating to the treatment of these expenditures in the computation of resource profits was reasonably related to the matter that gave rise to the reassessments and in failing to hold that all matters relating to this computation had been conclusively determined by the consent judgment.
Before addressing these two grounds of appeal, it is useful to recall how Bowman J. approached the matter before him. He began by stating:
. . . one should endeavour to interpret subsection 165(1.1) in a manner that gives effect to its wording and to the purpose that it seeks to achieve in the overall scheme of the objection and appeal provisions of the Income Tax Act.15
He then observed that when subsection 165(1.1) was added:
It seems apparent that Parliament must have assumed that without the addition of subsection 165(1.1), subsection 165(1) gave to a taxpayer an unlimited right to object to a reassessment whether it was issued following a notice of objection or pursuant to a judgment of a court or pursuant to any of the sections mentioned in the opening words of paragraph 165(1.1)(a).16
Bowman J. then quoted from Doyle v. R. where Mahoney J., after stating that the right to correct an assessment which does not conform with a judgment by means of an objection has always existed, confirmed that the rule of res judicata applies in tax matters despite the seemingly unlimited right of objection provided for under section 165(1) of the Act.17 In the words of Mahoney J. [at page 116]:
The right to appeal a reassessment ensuing upon a judgment is not a right to have the issues, decided by that judgment, re-tried.18
Bowman J. then asked himself:
What, then, does subsection 165(1.1) do? I do not accept that insofar as it deals with assessments following a judgment it does no more than confirm the rule of res judicata. That rule was well established and was in no danger that inroads would be made upon it. Its purpose is obviously broader than that . . . . Second, it appears, from its opening words "notwithstanding subsection (1)" (which gives an unqualified right to object to an assessment (subject only to considerations of res judicata)) to be intended to operate as a restriction on, or derogation from, subsection 165(1). Third, it permits the filing of a notice of objection to an assessment, and it contemplates doing so even though the assessment is issued pursuant to a court order. It must contemplate a broader range of objection than that discussed by Mahoney J. in the first principle stated by him . . . . The right to object to an assessment that does not conform to a judgment of a court has always existed. It needed no amendment to confirm or to confer that right.19
Bowman J. then reasoned that since subsection 165(1.1) is intended as a restriction on the right to object, construing the word "matter" as referring to all the elements relevant to the computation of income would defeat the purpose of the provision.20 On the other hand, he noted that restricting the word "matter" to the very issue that gave rise to the reassessments would only allow for the correction of assessments which do not conform with a judgment, a right which already exists. In any event, he noted that this last interpretation is excluded by the wording of subsection 165(1.1) which is premised on the assessment being "in accordance" with an order of the Court. This analysis compelled Bowman J. to conclude that the proper construction of the word "matter" was to be found somewhere in between these two extremes.21
That is the background against which Bowman J. came to the conclusion that the "matter" which gave rise to the reassessments following the consent judgment was, inter alia , the computation of the respondent's resource allowance and that the issues raised by the objections in respect of this computation were reasonably related to that matter. I can find no fault with this particular conclusion nor with the reasoning which led to it.
Subsection 165(1.1) significantly modifies the right to object as it existed prior to its enactment. As was noted by Bowman J., the extent to which one could object to an assessment issued further to a judgment on grounds not raised or dealt with by the Court had not been the subject of any judicial pronouncement when subsection 165(1.1) was enacted.22 This is so despite the fact that the rule of res judicata has long been known to apply not only to matters decided by earlier litigation but also to related matters which although undecided, could and should have been brought forward and disposed of at the time.23
Be that as it may, it seems clear that those responsible for the administration of the Act were not content to rely solely on the rule of res judicata as a means of circumscribing the right to object to an assessment issued further to a judgment of the Court. Whatever limitation this rule may have imposed on this right, it did not purport to prevent future litigation with respect to matters unrelated to a prior decision and that is precisely where the concern lay. When the enactment of subsection 165(1.1) was first announced in May of 1991, officials of the Department of Finance expressed this concern as follows:
Where the Minister issues a notice of assessment or a determination pursuant to subsection 67.5(2), subparagraph 152(4)(b)(i) or subsection 152(6), 164(4.1), 220(3.4) or 245(8) or in accordance with an order of a Court, pursuant to subsection 165(3) where the underlying objection relates to those provisions or circumstances or pursuant to other statutory provisions authorizing reassessments beyond the normal reassessment period, the taxpayer may, through the application of subsection 165(1), attempt to object with respect to issues other than those raised in the assessment or determination. New subsection 165(1.1) restricts the matters to which the taxpayer may object in such cases to those which gave rise to the assessment or determination.24 [My emphasis.]
Subsection 165(1.1) requires that henceforth, a notice of objection may only be filed if it relates to a matter that gave rise to the assessment which has not been conclusively determined by the Court. With respect to the first requirement,25 the words used suggest that Parliament was mindful of the complexities of the Act and the variety of ways in which issues can interrelate. Parliament did not prescribe any specific type or manner of relationship26 but left it to the Court to ascertain on the facts of each case whether the reasons for objection when considered in the light of the matter that gave rise to the assessment, were sufficiently related to justify a right to pursue the matter further.
On the evidence before him, Bowman J. found as a fact that the matter that gave rise to the reassessments included the computation of resource allowance and that the additional expenditures claimed by the notices of objection were reasonably related to that computation. It was open to Bowman J. to so characterize the matter since resource allowance is the product of a relatively precise and narrow computation under the Act and since elements of this computation formed the object of the initial reassessments as well as the reassessments which resulted from the consent judgment.
In so far as the relationship between this computation and the reasons advanced in the notices of objection is concerned, it is apparent that what is sought by these objections is a modification of this same computation. Furthermore, these modifications are sought by reference to expenditures which by September of 1994, together with the expenditures recognized by the consent judgment giving rise to the reassessments under objection,27 had been specifically acknowledged by Revenue Canada as coming within the class of expenditures governed by the Gulf Canada decision.28 A relationship therefore existed not only in terms of the expenditures in question falling within the same narrow computation, but also because prior to the issuance of the consent judgment all these expenditures had been acknowledged by both Revenue Canada and the industry as being governed by the Gulf Canada decision and as presumably deserving of a similar treatment. It follows that it was open to Bowman J., on the facts before him, to hold that the reasons for the objections were reasonably related to the matter that gave rise to the reassessments. The appellant's first ground of appeal must therefore be dismissed.
The other ground of appeal advanced by the appellant is that Bowman J. erred in failing to find that the rule of res judicata applied in this instance and in failing to hold that as a result of the application of this rule, the Tax Court, by its consent judgment, had "conclusively determined" all the matters which had given rise to the reassessments within the meaning of subsection 165(1.1).
In advancing this argument, the appellant in effect turns the table on the respondent and submits that if the matter that gave rise to the reassessments is the computation of the respondent's resource allowance as was found by Bowman J., it must follow that this is the matter that was disposed of by the consent judgment.
According to the appellant, the respondent chose to settle the issue pertaining to the computation of its resource allowance and neglected to take any steps to preserve its rights with respect to the other expenditures it now claims.29 The result, according to the appellant, is that the computation of the respondent's resource allowance has been finally determined by the consent judgment and the respondent is barred from pursuing it any further.
The respondent on the other hand takes the position that the consent judgment only disposes of the specific issues which it addresses and no more. As the only issue relevant to the computation of resource allowance which is specifically dealt with by the consent judgment is the treatment of lease rentals on unproductive lands and SR and ED costs, the respondent maintains that only the treatment of these expenditures is res judicata. The treatment of the other expenditures which it wishes to raise with respect to that computation therefore remain undecided.
The reasons of Bowman J. on this point are of little assistance. He endorsed the position of the respondent without adding to his earlier comment that if the respondent's failure to protect its rights was no more than a "slip-up", he would be reluctant to hold this against it.30
In my view, the position of the respondent that the only issues that have been "conclusively determined" are those that have been specifically decided is untenable if the doctrine of res judicata , in so far as it bars further litigation with respect to undecided but related matters, applies. The law on this point is summarized by the decision of the Judicial Committee of the Privy Council in Thomas v. Trinidad and Tobago (Attorney General):31
The principles applicable to a plea of res judicata are not in doubt and have been considered in detail in the judgment of the Court of Appeal. It is in the public interest that there should be finality to litigation and that no person should be subjected to action at the instance of the same individual more than once in relation to the same issue. The principle applies not only where the remedy sought and the grounds therefor are the same in the second action as in the first but also where, the subject matter of the two actions being the same, it is sought to raise in the second action matters of fact or law directly related to the subject matter which could have been but were not raised in the first action. The classic statement on the subject is contained in the following passage from the judgment of Wigram, V.C., in Henderson v. Henderson (1843), 3 Hare 100, at page 115:
". . . where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."
The principles enunciated in that dictum have been restated on numerous occasions of which it is sufficient to mention only three. In Hoystead v. Commissioner of Taxation, [1926] A.C. 155, Lord Shaw of Dunfermline, at page 165, in delivering the opinion of the Board said:
"Parties are not permitted to begin fresh litigations because of new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted litigation would have no end, except when legal ingenuity is exhausted."
In Greenhalgh v. Mallard, [1947] 2 All E.R. 255, Somervell, L.J., at page 257 said:
"I think that on the authorities to which I will refer it would be accurate to say that res judicata for this purpose is not confined to the issues which the court is actually asked to decide, but that it covers issues or facts which are so clearly part of the subjectmatter [sic ] of the litigation and so clearly could have been raised that it would be an abuse of process of the court to allow a new proceeding to be started in respect of them."
In Yat Tung Co. v. Dao Heng Bank, [1975] A.C. 581, Lord Kilbrandon, at page 590, in delivering the opinion of the Board referred to the above quoted passage in the judgment of Wigram, V.C., and continued:
"The shutting out of a `subject of litigation'"a power which no court should exercise but after a scrupulous examination of all the circumstances"is limited to cases where reasonable diligence would have caused a matter to be earlier raised; moreover, although negligence, inadvertence or even accident will not suffice to excuse, nevertheless `special circumstances' are reserved in case justice should be found to require the nonapplication of the rule."
Applying this principle, it seems clear that the issues which the respondent now attempts to raise formed a logical and, indeed, an integral part of the litigation that was before the Tax Court prior to the consent judgment being entered and that these issues could and should have been raised at the time. The respondent was before the proper forum, the computation of its resource allowance clearly in issue and the additional contentions with respect to this computation known to it and capable of being raised; yet they were not brought forth for reasons that remain unexplained. The rule is that a party who, under these conditions omits to raise an issue is forever barred from raising it again. To the extent that this rule applies, the matter of the computation of the respondent's resource allowance must be held to have been conclusively determined by the consent judgment.
The respondent contends, however, that the rule of res judicata in so far as it bars litigation with respect to matters not expressly decided is inconsistent with subsection 165(1.1). According to the respondent, the requirement in subsection 165(1.1) that the matter not have been "conclusively determined" must be read as adopting the rule of res judicata only in so far as it bars future litigation with respect to matters expressly or specifically decided.
The argument in support of this contention is that Parliament could not at once have allowed the pursuit of litigation with respect to a previously litigated matter on the condition that the issue sought to be raised be related to the matter which had given rise to the prior litigation while adopting a rule which effectively bars such a pursuit to the extent that this relationship exists. Consistent with this reasoning, the extended rule of res judicata is said to have been ousted by necessary implication upon the enactment of subsection 165(1.1).
However, the legislator is presumed to know the law,32 and must therefore be presumed to have been keenly aware of the public interest which led to the development of the rule of res judicata.33 Considering that subsection 165(1.1) was itself intended to limit the scope of ongoing litigation, it would be extraordinary indeed if the legislator had, in the course of implementing this provision, ousted the application of this fundamental aspect of the rule of res judicata. The respondent would have to demonstrate that subsection 165(1.1) is wholly inconsistent with this rule before I could conclude that it has been ousted by necessary implication.
There is no such inconsistency. For instance, it is apparent that an issue may "reasonably be regarded as relating to a matter that gave rise to the assessment" within the meaning of subsection 165(1.1) in ways that have no relevance to the application of the rule of res judicata .34 It is also apparent that, consistent with both the rule of res judicata and the intent of subsection 165(1.1), this provision would permit a further objection with respect to issues related to the matter that gave rise to an assessment, but which were not available at the time of the earlier litigation. These are but two instances which demonstrate that subsection 165(1.1) can co-exist in harmony with the rule of res judicata.
It therefore cannot be said that subsection 165(1.1) ousts the rule of res judicata by necessary implication or that it adopts this rule only in so far as it applies to matters specifically decided by the Court.
If the rule of res judicata should be wholly applicable, the respondent argues that the Court retains the discretion to overlook the application of this rule in special circumstances or where the interests of justice so require. The respondent maintains that Bowman J., without so stating, exercised this discretion and submits that this exercise of discretion should not be interfered with.
Bowman J. did make the following comment in the course of his reasons:
Before reproducing the memorandum of understanding attached to Mr. Beith's letter there is one point that deserves mention and that leads me to question why this matter is before the court at all. Mr. Beith stated that reassessments would be issued for those taxpayers who agree with the proposal and who have, inter alia, "filed a valid waiver". In fact, Chevron did file a valid waiver for 1985 and 1986. According to Sarchuk J. in Loukras v. Minister of National Revenue . [1990] 2 C.T.C. 2044 (T.C.C.) once a taxpayer has filed a waiver for a taxation year the Minister can assess as often as he sees fit. Thus I fail to see how Chevron falls outside the administrative guidelines outlined by Mr. Beith. My function is, however, not to decide whether the Department of National Revenue is adhering to its own rules, but rather to decide whether Chevron is entitled, as a matter of law, to file new notices of objection for 1985 and 1986.35 [Footnote omitted.]
It seems clear from the last sentence of this passage that Bowman J. did not consider that the behaviour of the Minister was relevant to the determination of the matter before him. But assuming for the moment that Bowman J. was troubled by the behaviour of the Minister to the point that he was willing to decide that the rule of res judicata ought to be overlooked, he would then have acted on wrong principle.
I say this because, if Bowman J. had considered the matter in light of the evidence before him, he would have been compelled to conclude that irrespective of the Minister's treatment of the matter, the respondent had the uninhibited opportunity to protect its rights with respect to all the concessions which the Minister extended to the industry. For reasons that remain unexplained, the respondent did not avail itself of this right. On the record here and below, it is clear that the respondent finds itself in the present predicament not because of any ministerial action or inaction but as a result of its own failure to pursue its rights.
If the respondent was of the view that this omission was the result of special circumstances such that the rule of res judicata should be overlooked, it was incumbent upon it to place some evidence before the Court tending to establish these special circumstances. As the matter was presented before Bowman J., no attempt was made to explain why the respondent did not assert its rights at the appropriate time and hence there was no basis upon which Bowman J. could have exercised his discretion in favour of the respondent.
For these reasons, I would allow the appeal and answer the stated question as follows: the taxpayer's entitlement to file notices of objection against the reassessments is precluded by subsection 165(1.1) of the Act. As costs were not sought, I would refrain from making any order in that regard.
Desjardins J.A.: I concur.
Décary J.A.: I agree.
1 Chevron Canada Resources Ltd. v. R., [1997] 2 C.T.C. 2624 (T.C.C.) (hereinafter Chevron).
2 These facts are gathered from the agreed statement of facts filed before Bowman J., which constitutes the sole evidentiary basis upon which the stated question was answered. Appeal Book, at p. 4.
3 Waivers had been filed by the respondent with respect to the computation of resource allowance on October 3, 1988 and April 16, 1990 respectively. Appeal Book, at pp. 21-22.
4 Appeal Book, at p. 53.
5 Appeal Book, at p. 58.
6 Appeal Book, at p. 60.
7 [1992] 1 C.T.C. 183 (F.C.A.) (leave to appeal denied July 2, 1992, [1992] 2 S.C.R. ix) (hereinafter Gulf Canada).
8 Taxable production profits are a predecessor of resource profits. A taxpayer's resource allowance is equal to 25% of such profits with the result that a taxpayer has an interest in maximizing this account. (See s. 20(1)(v.1) of the Act and Regulations [Income Tax Regulations, C.R.C., c. 945] made thereunder.)
9 Appeal Book, at pp. 61-62.
10 Appeal Book, at p. 63.
11 Bowman J. excluded the first of these issues because it had been formally withdrawn as a result of the settlement of the Federal Court action and the second on the ground that the treatment of these expenditures had been specifically dealt with by the consent judgment.
12 As this matter had been raised in the notice of appeal that led to the consent judgment, and as this judgment provides that "the appellant is not entitled to any further relief", it seems clear to me that this issue has been conclusively determined.
13 In so doing, the respondent recognizes, properly in my view, that the deduction of this expense in the overall computation of income is not connected to any of the matters which gave rise to the reassessments.
14 Namely the inclusion of pre-production capital cost allowance, pre-production operating expenses and general/administrative costs in the computation of resource profits and the resulting increase in resource allowance.
15 Chevron, supra, note 1, at p. 2635.
16 Ibid.
17 [1981] 2 F.C. 114 (T.D.), at pp. 115 and 116.
18 This principle as well as the first one enunciated by Mahoney J. have long been established. See for instance, Pothitos v. M.N.R. (1960), 60 DTC 636 (T.A.B.), at p. 637 as to the first principle, Bilson (J.) v. M.N.R. (1960), 60 DTC 599 (T.A.B.), at p. 601 as to the second and Payette (P) v The Queen, [1977] CTC 551 (F.C.T.D.), at pp. 551-552 as to both.
19 Chevron, supra, Note 1, at p. 2637.
20 This reasoning, which is undoubtedly correct, confirms that s. 165(1.1) was intended to narrow the scope of an assessment and the ensuing right to object as it was believed to exist under prior law. Arguably, under prior law, the "matter" giving rise to an assessment for purposes of ascertaining the right to object was not only the adjustment giving rise to it but was comprised of all the factors relevant to the determination of the amount assessed. See Okalta Oils v. Minister of National Revenue , [1955] S.C.R. 824, at p. 825 and Harris v. Minister of National Revenue, [1965] 2 Ex. C.R. 653, at p. 662. This can no longer be the case with respect to assessments which come within the ambit of s. 165(1.1).
21 Chevron, supra, note 1, at p. 2638.
22 The parties remained unable to cite any authority on this point when the appeal was heard.
23 See para. 36 of these reasons and the authorities cited therein. It is difficult to explain why this extended form of the rule of res judicata has had no known application in tax matters. No legal restriction, statutory or other, stood in the way. I can only surmise that the conditions precedent to the application of this rule may have made the possibility of invoking it difficult to the point that it never gave rise to decisions or at least to reported decisions.
24 Technical notes issued in May of 1991 [Income Tax Act and Regulations, Department of Finance Technical Notes: A Consolidation of Technical Notes and other Income Tax Commentary from the Department of Finance, 6th ed.]. It is common ground that the erosion of the limitation period for the issuance of assessments was at the heart of this amendment.
25 i.e. the requirement "that the reasons for the objection can reasonably be regarded as relating to a matter that gave rise to the assessment".
26 Causal or other.
27 Lease rentals on unproductive lands and SR & ED costs.
28 Para. 15 of the agreed statement of facts indicates that prior to the filing of the consent judgment, negotiations were engaged between Revenue Canada and the industry to determine whether an agreement could be reached on the impact of the Gulf Canada decision on the computation of resource allowance. Para. 16 indicates in turn that "the types of expenses under discussion between the industry and the Crown in the context of the calculation of a taxpayer's resource allowance included lease rentals on unproductive lands, scientific research and experimental development costs, pre-production capital cost allowance, pre-production operating expenses and general and administrative costs". Finally, para. 19 specifies that at the time when the consent judgment was entered, "discussions had advanced to the point where it was acknowledged that concessions would be made by Revenue Canada in respect of the expenses set forth in para. 15." (Presumably a reference to para. 16 rather than para. 15 is meant as no expenses are "set forth" in para. 15.) Agreed statement of fact, Appeal Book, at pp. 9-11.
29 The appellant suggests that various means were available to the respondent to preserve its rights including a request for an adjournment, amending the notice of appeal or seeking a pro tanto judgment.
30 Chevron, supra, note 1, at p. 2637. This cannot dispose of the issue as there is no evidence on the record with respect to what led to the omission and in any event, an innocent omission, if one should assume its existence, is not a bar to the application of the rule of res judicata.
31 (1990), 115 N.R. 313 (P.C.), at pp. 316-317.
32 "The legislature is presumed to know all that is necessary to produce rational and effective legislation. This presumption is very far-reaching . . . . The legislature is presumed to have a mastery of existing law, both common law and statute law, as well as the case law interpreting statutes. It is also presumed to have an understanding of practical affairs." Ruth Sullivan, Driedger on the Construction of Statutes , 3rd ed. (Toronto: Butterworths, 1994), at pp. 156-157.
33 That is, the need to bring litigation to a definite end.
34 An adjustment that is consequential to an assessment such as a claim for an optional deduction in the face of an increased assessment of income would appear to come within that class.
35 Chevron, supra, note 1, at p. 2631.