Dicosmo, 2017 FCA 60: a statute-barred argument must be pleaded, and credibility findings stand on appeal

2017 FCA 60 · Federal Court of Appeal

Author: Sas Tullo

This is a short bench judgment of the Federal Court of Appeal in an individual’s income tax appeal. Mr. Dicosmo had lost in the Tax Court on claims for employment expenses and an allowable business investment loss, largely because the judge did not believe his witnesses and he had no documents. On appeal he argued that the judge should have found the reassessments statute-barred even though his notice of appeal never said so. The Crown won on every point. The case matters to anyone appealing a reassessment because it confirms two practical rules: the Tax Court’s view of the evidence is almost impossible to overturn, and a limitation defence that is not pleaded does not exist.

Facts

The Minister reassessed the appellant for the 2003, 2004, and 2005 taxation years. In the Tax Court he challenged the disallowance of additional employment expenses, an allowable business investment loss, and a representation fee claimed for 2005 (para 1). The Tax Court judge dismissed the appeal, finding that his evidence fell far short of establishing a prima facie case that the reassessments were wrong, because the testimony of his witnesses was unreliable and there was no supporting documentation; she also found that the appellant may well have fabricated evidence with an intention to mislead the Court (para 2). On the employment expense issue she described his testimony as “completely unsatisfactory”; on the investment loss she found the testimony unconvincing, noted the absence of any document supporting the alleged loan to the business, and concluded that no investment had in fact been made; on the representation fee she found insufficient evidence linking the expenditure to a permitted deduction (para 3). The appellant also argued before the Tax Court that the reassessments were statute-barred, but the judge declined to consider the point because it had not been raised in the notice of appeal (para 4). At the hearing of the appeal he abandoned the business investment loss and representation fee issues (para 1).

Issues

The Court of Appeal addressed two questions: whether the Tax Court judge erred in finding that the appellant had not made out a prima facie case against the Minister’s assumptions, and whether she erred in refusing to decide whether the reassessments were statute-barred when the issue had not been pleaded (paras 5-6).

Holding

The appeal was dismissed with costs (para 10). The judge applied the correct legal standard and her findings on credibility and on the absence of documents disclosed no reviewable error (para 5). On the limitation point, the Minister bears no onus to prove that a reassessment was issued within the normal reassessment period unless the taxpayer alleges that it was not, and a statute-barred argument must be specifically pleaded (paras 7 and 9).

The court’s reasoning

The Court began with the appellate standard in Housen v. Nikolaisen, 2002 SCC 33 at para 8: questions of fact and of mixed fact and law are reviewed for palpable and overriding error, while questions of law, including extricable questions of law, are reviewed for correctness (para 5). The Tax Court judge had required the appellant to establish a prima facie case that the Minister’s assumptions were incorrect, which the Court accepted as the correct legal standard. Her application of that standard to the facts disclosed no reviewable error: she had heard and observed the witnesses, her conclusions on their veracity and reliability “had a solid foundation in the record”, and the inferences she drew from the absence of documentation, in circumstances where documentation would reasonably be expected, were open to her (para 5).

The limitation argument was treated as a question of law reviewable for correctness, but the Court found no error (para 7). Relying on Last v. R, 2014 FCA 129 at para 54, it held that, absent an allegation that the reassessments were statute-barred, the Minister has no obligation or onus to prove that they were made within the normal reassessment period (para 7). The reasons do not cite the Income Tax Act by section number; the normal reassessment period is the concept defined in subsection 152(3.1), and the Minister’s authority to reassess outside it is governed by subsection 152(4). The text of those subsections on the Justice Laws site is current to 2024 and reflects amendments made since 2017, which do not affect the point decided here.

Counsel for the appellant relied on Yunus v The Queen, 2015 TCC 272, for the proposition that a statute-barred issue can be inferred from, and put in issue by, the Minister’s reply (para 8). The Court rejected the argument in one paragraph: its own jurisprudence requires that the statute-barred issue “must be specifically pleaded”, the rationale being fairness and ensuring that all relevant evidence is before the Court (para 9).

Practical implications

The decision is brief, but it settles a point that arises often with self-represented or late-advised taxpayers. Whether a reassessment was issued after the normal reassessment period is a potentially complete answer to an assessment, since the Minister must then bring the reassessment within one of the exceptions in subsection 152(4). The Court of Appeal confirms that this answer is available only if the taxpayer puts it on the table in the pleadings. A reply that happens to recite the dates of the assessments does not do the taxpayer’s work for him, and a Tax Court decision suggesting otherwise does not bind the Court of Appeal. In my view, the practical lesson is that every notice of appeal should be checked against the assessment dates before it is filed, and amended under the Tax Court rules if a limitation argument emerges later; raising it for the first time at trial, or on appeal, will not succeed.

The first part of the judgment is a routine application of Housen, but it is a useful illustration of how heavily the outcome of a tax appeal depends on the trial. The appellant’s claims failed not on the law of employment expenses or business investment losses but on the judge’s assessment of the witnesses and the absence of records. Once a trial judge has found testimony unreliable and has drawn adverse inferences from missing documents that ought to exist, the Court of Appeal will not revisit those findings. The reasons also record the judge’s finding that evidence may have been fabricated, which the Court of Appeal left undisturbed. Whether an appeal was taken is not verified here.

For taxpayers and advisers the message is a familiar one, now reinforced at the appellate level: keep the documents, make sure the witnesses can be believed, and plead every defence, including a limitation defence, at the outset. The case is also a reminder that the burden in a tax appeal starts with the taxpayer, and that the Minister’s assumptions stand until they are displaced by evidence a judge finds credible.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Dicosmo v. Canada, 2017 FCA 60. Judgment delivered from the bench at Toronto on March 28, 2017. Panel: Near, Rennie, and Gleason JJ.A.; reasons of the Court delivered by Rennie J.A. Appeal from a judgment of the Tax Court of Canada dated December 11, 2015, docket 2011-3407(IT)G (no neutral citation is given in the reasons). Reasons on the Federal Court of Appeal’s site. Also on CanLII.