Canus Fisheries Ltd. v. Canada (Customs and Revenue Agency)

Canus Fisheries Ltd. v. Canada (Customs and Revenue Agency) Court Supreme Court Date 2005-10-18 Citation 2005 NSSC 283 Docket SH 166174 Judge/Registrar/Adjudicator Hood, Suzanne M. (Honourable Justice) Document Type Decision Relations Library Sheet - Canus Fisheries Ltd. v. Canada (Customs and Revenue Agency) - 2005 NSSC 283 - 2005-10-18 - Library Sheet Decision Content IN THE SUPREME COURT OF NOVA SCOTIA Citation: Canus Fisheries Ltd. v. Canada (Customs and Revenue Agency), 2005 NSSC 283 Date: 051018 Docket: S.H. 166174 Registry: Halifax Between: Canus Fisheries Limited, a body corporate Plaintiff v. Canada Customs and Revenue Agency and Michael Flinn Defendants DECISION Judge: The Honourable Justice Suzanne M. Hood Heard: April 4,5,6,8,11,12,15, 2005, in Halifax, Nova Scotia Counsel: Christopher C. Robinson, Q.C. and Cheryl L.M. Hodder for the plaintiff John J. Ashley and Caitlin A. Ward for the defendants By the Court: [1] Canus Fisheries Limited was audited by Michael Flinn, an auditor with Canada Customs and Revenue Agency (now Canada Revenue Agency). As a result of the audit, Canus was reassessed for substantial additional income taxes. The reassessment was subsequently vacated. Canus claims that it suffered losses because the audit done by Michael Flinn, for which CCRA is vicariously liable, was done negligently and/or there was public misfeasance by Michael Flinn. ISSUES 1. Was there public misfeasance? 2. Negligence (a) Is there a duty of care? (b) If there is a duty of care, is there reason to negate it? (c) If there is a duty of care, what is the standard of care and has it been breached? 3. Causation and Damages 4. Costs FACTS [2] Canus is a fish processor in Clark’s Harbour, Nova Scotia and its parent company is Maritime Fish Products Limited, a New York company. Canus sells to Maritime fully-finished, processed and packaged product. Canus also sells fresh fish to others. Roald Hertzwig, a resident of New York, is the president of both companies. [3] Maritime sells to wholesalers in the New York market and purchases product from Canus, f.o.b. Canus’ Plant; that is, Maritime pays all transportation and related costs. Maritime also purchases fish from other fish producers which purchases are paid for in Canadian dollars by Canus from Maritime’s funds held by Canus. Sans Souci is also a fish dealer in Nova Scotia which sells to wholesalers in the New York market. [4] Canus had a loan from the Bank of Nova Scotia which was called in 1993 and subsequently paid down. Its operating financing came from Maritime. Maritime dealt with the Chemical Bank and later with State Street Bank. The Income Tax Act [5] The Income Tax Act, s. 69(3) (now repealed) dealt with transfer pricing. Prior to its repeal, it provided: 69(3) Where a non-resident person has neither paid nor agreed to pay to a taxpayer with whom the person was not dealing at arm’s length as price, rental, royalty or other payment for or for the use or reproduction of any property ..., an amount equal to or greater than that would have been a reasonable amount in the circumstances if the non-resident person and the taxpayer had been dealing at arm’s length, that reasonable amount shall, for the purpose of computing the taxpayer’s income under this Part, be deemed to have been received or receivable by the taxpayer therefor. In its previous version, amended in 1994, it provided as follows: (3) Where a non-resident person has neither paid nor agreed to pay to a taxpayer with whom the taxpayer was not dealing at arm’s length as price, rental, royalty or other payment for or for the use or reproduction of any property, or as consideration for the carriage of goods or passengers or for other services, the amount that would have been reasonable in the circumstances if the non-resident person and the taxpayer had been dealing at arm’s length, that amount shall, for the purpose of computing the taxpayer’s income under this Part, be deemed to have been received or receivable by the taxpayer therefor. For tax purposes, a non-resident, in transactions with a Canadian taxpayer with whom it is not dealing at arms-length, may not pay less for goods and services than a reasonable arms-length price. [6] CCRA’s Information Curricular 87-2 (Exhibit 13) also deals with transfer pricing and provides in part: 7. ... Normally the most persuasive evidence of fair market value or reasonable arm’s length price is from the market to which the transfer is being made, as opposed to the home market of the supplier (especially in the case of the transfer of goods). 14. The primary method in the view of the Department, other tax administrations and the OECD, is to base a transfer price on a ‘comparable, uncontrolled price,’ i.e., a price established in the same market and circumstances by parties who are dealing at arm’s length. [7] The following provisions of the Income Tax Act deal with the duty of the Minister, taxpayer’s books and records, assessment and reassessment and the authority to inspect. 220. (1) The Minister shall administer and enforce this Act ... 230. (1) Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at the person’s place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined. 231.1. (1) An authorized person may, at all reasonable times, for any purpose related to the administration or enforcement of this Act, (a) inspect, audit or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act, and (b) examine property in an inventory of a taxpayer and any property or process of, or matter relating to, the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer or in ascertaining the information that is or should be in the books or records of the taxpayer or any amount payable by the taxpayer under this Act, and for those purposes the authorized person may (c) subject to subsection 231.1(2), enter into any premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any books or records are or should be kept, and (d) require the owner or manager of the property or business and any other person on the premises or place or give the authorized person all reasonable assistance and to answer all proper questions relating to the administration or enforcement of this Act and, for that purpose, require the owner or manager to attend at the premises or place with the authorized person. 152. (4) The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year ... (8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto. [8] Part 1, Division 1 of the Act deals with “Objections to Assessments” in s. 165. It provides: 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, ... [9] Section 169 deals with appeals as follows: 169.(1) Where a taxpayer has served notice of objection to an assessment under section 165, the taxpayer may appeal to the Tax Court of Canada to have the assessment vacated or varied after either (a) the Minister has confirmed the assessment or reassessed, or (b) 90 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that the Minister has vacated or confirmed the assessment or reassessed, but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed. [10] The Act provides for a system of self-assessment. According to Don Mitchener, FCA (Exhibit 18, p. 5): ... Taxpayers are required to file annual tax returns reporting, pursuant to the provisions of the Income Tax Act, their determination of their income subject to tax and to pay their income tax in accordance with the provisions of the Act. Taxpayers are expected to know and comply with the provisions of the Income Tax Act applicable to their situation. [11] He also referred to the reverse onus on the taxpayer as follows (p. 6): It is important to note that regardless of the reason for or cause of such changes, the changes are statutorily deemed to be correct. Specifically, subsection 152(8) of the Income Tax Act provides that ‘An assessment [which includes a reassessment] shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a [further] reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission in the assessment or in any proceeding under this Act relating thereto.’ This provision reverses the onus of proof from Revenue Canada and places it on the taxpayer. Consequently, once an assessment or reassessment is issued by Revenue Canada altering a taxpayer’s submission of his/her/its taxable income and income taxes payable, the onus is on the taxpayer to prove that Revenue Canada is incorrect in making the changes. [12] Caselaw supports these opinions. In Johnston v. Canada (Minister of National Revenue - M.N.R.), [1984] S.C.R. 486, Rand, J. said (at p. 3 of the Quicklaw version): Since the taxpayer in this case must establish something, it seems to me that that something is the existence of facts or law showing an error in relation to the taxation imposed on him. [13] In Pollock v. Canada (Minister of National Revenue - M.N.R.), [1993] F.C.J. No. 1055 (Fed C.A.), Hugessen, J. said in paras. 18 and 19: 18 The special position of the assumptions made by the Minister in taxation litigation is another matter altogether. It is founded on the very nature of a self-reporting and self-assessing system in which the authorities are obliged to rely, as a rule, on the disclosures made to them by the taxpayer himself as to facts and matters which are peculiarly within his own knowledge. When assessing, the Minister may have to assume certain matters to be different from or additions to what the taxpayer has disclosed. While the Minister’s assumptions, if any, are generally made in the pleadings, that is not always the case and we have seen, in this very record, an example of the taxpayer taking pains to demolish assumptions which the Minister had not pleaded. Where pleaded, however, assumptions have the effect of reversing the burden of proof and of casting on the taxpayer the onus of disproving that which the Minister has assumed. ... 19 The burden cast on the taxpayer by assumptions made in the pleadings is by no means an unfair one: the taxpayer, as plaintiff, is contesting an assessment made in relation to his own affairs and he is the person in the best position to produce relevant evidence to show what the facts really were. The Audit [14] Transfer pricing was an issue at CCRA in the early to mid 1990's, according to David Turner, CA, of CCRA’s Head Office Appeals Division in Ottawa. The Canus income tax returns for 1991 and 1992 were selected for audit. Michael Flinn was assigned the audit in approximately April of 1995. He reviewed the income tax returns and visited Canus’ plant on three occasions. He interviewed the General Manager, Kevin Goodwin, the office manager, Margo Swim, and the external auditor, Gordon Hiltz. He asked for information from Canus and Maritime. His audit notes (Vol. 6, Tab 81) refer to Maritime’s arms-length purchases, the Sans Souci audit file and a number of conversations he had with Kevin Goodwin and others (Tab 111). He subsequently sent a proposal letter to Canus in October 1995 (Exhibit 1, v. 4, Tab 73, p. 1086,). Further correspondence followed between him and Canus from Roald Hertzwig (Tabs 103,105 and 106). His audit report (Tab 118) was dated February 1, 1995 and signed by E.W. Casely on February 7, 1996. [15] The audit report led to a notice of reassessment for being issued on April 19, 1995 for 1991 and 1992. The total claimed to be owing was $1,031,345.36. Canus retained Ed Harris and as a result of later correspondence between CCRA and Harris, additional information was provided to CCRA. [16] Clarence Whynot and Kevin McGuigan of the Appeals Division in the Halifax Tax Service Offices sent a letter to the Appeals Division at CCRA Headquarters in Ottawa on May 5, 1998 (Tab 168). In it, they say there should be a reduction in the amount of the reassessment. Subsequently, Barry Hassar from Headquarters prepared a memorandum dated July 14, 1998 recommending the reassessment be vacated. (Tab 169, pp. 2448-49). On July 31, Canus was told of the recommendation. The reassessment was vacated in October 1998. After the Audit [17] Canus was a guarantor of Maritime’s loan from State Street Bank. Canus’ Financial Statements for the year ended March 31, 1996 referred to the reassessments and contingent liabilities arising therefrom (Exhibit 1, v. 10, Tab 188, p. 3141). [18] On May 8, 1997, State Street Bank sent a letter to Maritime (Tab 137). In the letter, the bank asked Maritime to refinance and offered to continue reduced financing of US $1.5 million, down from US $1.75 million, and only until August 31, 1997. [19] As a result of the withdrawal of the State Street Bank financing, Roald Hertzwig said that Canus curtailed its business because it did not have the financing to continue to buy as before. The Trial [20] Canus commenced action against the Canada Customs and Revenue Agency on September 15, 2000. Canus retained Revenue Management Limited whose President, W. Grant Thompson, FCA, prepared two reports and two updates. Objection was made by CCRA to the late introduction of the updated reports but at trial I allowed the updates to be admitted into evidence. [21] CCRA retained two experts, D.G. Mitchener, FCA , LLP and Brian Dunstan, CA CFE CBV, both of Deloitte & Touche LLP. [22] Roald Hertzwig and Michael Flinn both testified as did David Turner from the Ottawa Appeals Division of CCRA. Both Thompson and Dunstan agreed that, if there was a loss, the loss period would be three years. ISSUES 1. Public Misfeasance [23] The essence of Canus’ claim is that Michael Flinn had information to do a proper job but wilfully and deliberately ignored that information and used other information upon which to base a reassessment, which information had previously been discredited. Canus says he acted inconsistently with the duties of his office, that he deliberately disregarded his duties and therefore his actions became unlawful. The claim is that this constitutes public misfeasance. [24] Canus says the official duty of Michael Flinn was to determine if the transfer pricing between Canus and Maritime was reasonable. Canus says that Michael Flinn failed to carry out that official duty and that he was on a quest of his own which made his actions illegal, constituting public misfeasance. CCRA says that the overall duty of the Minister of National Revenue under the Income Tax Act is to administer and enforce the Act and that the duty of its employees is the same. The powers of the minister and his or her employees include conducting audits and issuing reassessments. [25] Michael Flinn examined Canus’ records and reviewed the Sans Souci audit file and used the Sans Souci sales as comparables. Canus says that Flinn ignored, or disregarded after considering, the sales to Maritime from other Nova Scotia producers and used the Sans Souci sales which were not comparable. Canus also says that Michael Flinn did nothing to further investigate or respond to Roald Hertzwig’s correspondence which pointed out his error. In his letter of November 1, 1995 (Tab 105), Roald Hertzwig tells Michael Flinn that he had skipped a distribution level. [26] Michael Flinn testified that he found the other sales to Maritime not to be comparable because they were small quantities, there was only a small product range and, according to him, they did not sell into the New York market. He said a proper comparable would be Canus selling directly to the New York market, not other producers selling to Maritime. Michael Finn’s superior, E.W. Casely, questioned Michael Flinn’s comparables (Tab 106). He inquired whether Sans Souci’s sales to third parties were at the same level. However, he ultimately signed Michael Flinn’s audit report (Tab 118). [27] Michael Flinn said he was trying to determine the functions being performed. He said the sales to the New York market by Sans Souci were comparable because Sans Souci was selling directly to New York wholesalers. He had comparable prices in New York (Sans Souci’s prices) and Maritime’s prices in New York and was trying to determine why there was a difference. According to his superiors, he came up with the wrong result or a result which would not have stood up on appeal. The Hassar memorandum, (Tab 169, p. 2448) refers to “a distributor selling to a wholesaler [Sans Souci] versus a producer selling to a distributor” [Canus to Maritime]. Sans Souci had distribution costs and Canus did not because Maritime was paying those costs. [28] Canus says Michael Flinn used the CUP method (comparable uncontrolled price method) but, to use that method, the transactions must be similar in all characteristics and they were not because of the distribution costs incurred by Sans Souci which were not incurred by Canus. Canus says this could have been deduced from Canus’ records which would have shown there were no distribution costs. [29] In my view, the most that can be said is that Michael Flinn wrongly determined the transfer pricing and/or wrongly conducted the audit. However, CCRA’s expert witness, Don Mitchener, FCA, was not satisfied about the relationship between Canus and Maritime and was not satisfied that Michael Flinn was in fact wrong. Similarly, although he recommended the reassessment be vacated, Hassar said (at Tab 169, p. 2449): In conclusion, we do not believe audit has provided us with enough evidence to support this reassessment in court. While a transfer pricing adjustment may be warranted, we have no documentation or working papers on which to rely. With sufficient evidence, though, a transfer pricing adjustment may be warranted for subsequent years. On the other hand, as mentioned above, Casely had questions about the comparable. The Law [30] The leading case on public misfeasance in Canada is Odhavji Estate v. Woodhouse, [2003] 3 S.C.R. 263. I was also referred to Alberta (Minister of Infrastructure) v. Nilsson, [2002] A.J. No. 1474 (Alta. C.A.); Powder Mountain Resorts Ltd. v. British Columbia (2001), B.C.C.A. 619; Longley v. M.N.R. (1999), 176 D.L.R. (4th) 455 (B.C.S.C.); affirmed in part (2000), 184 D.L.R. (4th) 590 (B.C.C.A.); leave to appeal to Supreme Court of Canada denied [2000] S.C.C.A. No. 256 (S.C.C.); and Chhabra v. R, [1989] 26 F.T.R. 288 (F.C.T.D.). [31] In Odhavji, supra, Iacobucci, J., in paras. 22 and 23, set out the essential ingredients of the tort of public misfeasance as follows: 22 What, then, are the essential ingredients of the tort, at least insofar as it is necessary to determine the issues that arise on the pleadings in this case? In Three Rivers, the House of Lords held that the tort of misfeasance in a public office can arise in one of two ways, what I shall call Category A and Category B. Category A involves conduct that is specifically intended to injure a person or class or persons. Category B involves a public officer who acts with knowledge both that she or he has no power to do the act complained of and that the act is likely to injure the plaintiff. This understanding of the tort has been endorsed by a number of Canadian courts: see, for example, Powder Mountain Resorts Ltd., supra; Alberta (Minister of Public Works, Supply & Services) (C.A.), supra, and Granite Power Corp. v. Ontario, [2002] O.J. No. 2188 (Ont. S.C.J.). It is important, however, to recall that the two categories merely represent two different ways in which a public officer can commit the tort; in each instance, the plaintiff must prove each of the tort’s constituent elements. It is thus necessary to consider the elements that are common to each form of the tort. 23 In my view, there are two such elements. First, the public officer must have engaged in deliberate and unlawful conduct in his or her capacity as a public officer. Second, the public officer must have been aware both that his or her conduct was unlawful and that it was likely to harm the plaintiff. What distinguishes one form of misfeasance in a public office from the other is the manner in which the plaintiff proves each ingredient of the tort. In Category B, the plaintiff must prove the two ingredients of the tort independently of one another. In Category A, the fact that the public officer has acted for the express purpose of harming the plaintiff is sufficient to satisfy each ingredient of the tort, owing to the fact that a public officer does not have the authority to exercise his or her powers for an improper purpose, such as deliberately harming a member of the public. In each instance, the tort involves deliberate disregard of the official duty coupled with knowledge that the misconduct is likely to injure the plaintiff. [32] In Powder Mountain, Newbury, J.A. at para, 2 prefaced his reasons with the following: 2 But for reasons that are perhaps obvious, the tort must be used cautiously. Otherwise, the courts risk straying into the arena of political decision-making, bypassing the normal restraints associated with judicial review, and becoming the arbiters of the personal thought processes of public officials. One recent commentator (Phillip Allott, ‘EC Directives and Misfeasance in Public Office’, [2000] 59 Camb. L.J. 4) has written that the court should not, by means of the tort, take on the role of ‘ombudsman, a parliamentary committee, or an organ of public opinion in reviewing even egregious acts of maladministration, official incompetence, or bad judgement.’ (at 6.) To avoid dangers of this kind, a balance must be sought between curbing unlawful behaviour on the part of governmental officials on the one hand, and on the other, protecting officials who are charged with making decisions for the public good, from unmeritorious claims by persons adversely affected by such decisions. This appeal provides us with another opportunity to consider the tort and the striking of that balance. [33] In the end result, the Court of Appeal upheld the decision of the trial judge that there was no public misfeasance. Newbury, J.A. said in para. 71: 71 In summary, I do not believe it is open to this court to interfere with the trial judge’s findings of fact, based as they are on a careful consideration of the credibility of the witnesses, and the voluminous testimony and hundreds of documents that were adduced during the course of this long trial. As regards the applicable law, I am of the opinion that the facts found by the trial judge do not begin to support a finding of targeted malice - i.e. that any of the officials was motivated by a desire to injure PMR or benefit CRI, as opposed to a wish to serve the best interests of the Province. Nor does the evidence show that any of these individuals performed an unlawful or ultra vires act or that they did so wilfully disregarding a risk that their conduct was unlawful. [34] The question in this case is whether Michael Flinn deliberately disregarded his official duty in the knowledge that his misconduct would be likely to injure Canus. Iacobucci, J. continued in para. 24 of Odhavji as follows: Insofar as the nature of the misconduct is concerned, the essential question to be determined is not whether the officer has unlawfully exercised a power actually possessed, but whether the alleged misconduct is deliberate and unlawful. As Lord Hobhouse wrote in Three Rivers, supra, at p. 1269: The relevant act (or omission, in the sense described) must be unlawful. This may arise from a straightforward breach of the relevant statutory provisions or from acting in excess of the powers granted or for an improper purpose. [35] I have outlined above Michael Flinn’s actions in conducting the audit which led to the reassessment of Canus. His superiors concluded the reassessment would not withstand an appeal because the evidence was insufficient. [36] Barry Hassar said in his memorandum (Tab 169, p. 2448) that “We have a lot of concerns with Audit’s adjustment.” He continued: “We believe that their methodology is flawed, and not defensible in court.” He went on to be specific about the problems with the methodology, as follows: o We have a lot of concerns with Audit’s adjustment. The comparables that they used were obtained while doing an audit of one of Maritime’s main competitors. In our view, these are not the type of comparables we should be using to establish a CUP as they relate to a distributor selling to a wholesaler versus a producer selling to a distributor. We believe that their methodology is flawed, and not defensible in court. o Audit should have looked at what price Canus was selling to other companies in the U.S. (besides Maritime). This was not done. Therefore, we have no evidence to establish a CUP to support our position. o Also, we agree with the taxpayer that Audit is looking at different levels in the distribution chain. Canus is a fish producer that sells to Maritime (an importer/exporter/distributor) that sells to wholesalers. Audit used comparables of one of Maritime’s competitors (not even one of Canus’ competitors) and said that the price that they sold to other wholesalers for should be the price that Canus is selling to Maritime. This does not make any sense to us. o The OECD Transfer Pricing Guidelines state that to be a valid CUP, the level of the market must be the same. That is not the case with the prices used by Audit. o The taxpayer has a strong argument that Maritime paid Canus at least as much as it paid other suppliers. The OECD guidelines state that it is the market into which the product is being sold that must be considered to establish a CUP. Looking at prices Maritime paid to other suppliers is the same as looking at what prices other suppliers were selling into the U.S. market for. The taxpayer’s evidence is going to be very persuasive in getting a judge to agree that Maritime was paying Canus a reasonable price. [37] Hassar refers to “no evidence to establish a CUP”; “looking at different levels in the distribution chain”; “This does not make any sense ...”; “The taxpayer has a strong argument ...”; “the taxpayer’s evidence is going to be very persuasive ...”. It is clear that Hassar believed Michael Flinn’s methodology was wrong. [38] Hassar said there was no evidence to support a CUP since Michael Flinn did not look at what price Canus was selling to other U.S. companies. However, the evidence is that Canus sold to no other U.S. customers. Therefore, Michael Flinn looked at Sans Souci which did. [39] Hassar also said that Michael Flinn looked at sales of Sans Souci which was Maritime’s competitior, not that of Canus. However, Michael Flinn’s notes of his conversation with Kevin Goodwin, Canus’ General Manager, disclose that Goodwin told him Sans Souci was its (Canus’) competitior. His notes of an interview with Goodwin and Swim in April 1995 say that he was told Maritime is “basically a wholesaler” (Exhibit 1, v. 4, Tab 73, p. 1076). [40] Furthermore, Don Mitchener, FCA, was not quite so convinced that Michael Flinn was wrong. In his report (Exhibit 17) and in Exhibit 18, he explained his conclusion. He says on p. 10 of Exhibit 17: It appears clear that both Canus and Sans Souci were producers and packagers of fish. The documents also indicate that Sans Souci sold to wholesalers in the New England/New York Market place. Mr. Hertzwig has stated that Sans Souci and Maritime had the same customers i.e. wholesalers. Logically then, where is Maritime in the trade level? Is it at the same level as Canus and Sans Souci or at the same level as its customers and those of Sans Souci? And is Sans Souci a competitor of Maritime or Canus? These were issues that do not appear to have been resolved with unanimity in this case. In fact, from our review of the documents provided, we have been left with the impression that the distinction between Canus and Maritime has been lost. [41] Exhibit 18, prepared by Don Mitchener, illustrates the “Conventional Trade Level Distribution Patterns” and the “Functionality” of Canus/Maritime and Sans Souci. [42] Mitchener’s conclusion (on p. 2 of his report) is that: ... the audit ... was conducted substantially and materially pursuant to the policies and procedures of Revenue Canada as they applied to the facts and circumstances existing at the time the audit was carried out. [43] Even if Michael Flinn was wrong, being wrong is not sufficient to commit the tort of public misfeasance. Michael Flinn did not act unlawfully, but used wrong methodology in coming to his conclusion according to his superiors. Using the words of Lord Hobhouse in Three Rivers, supra, I find that Michael Flinn did not “breach relevant statutory provisions” or “act in excess of powers granted”. Nor, in my view, did he act for an improper purpose. From his evidence and from the correspondence, I can see no evidence of ill will. I find as a fact that there was no intent by Michael Flinn to harm Canus by his actions. [44] In contrast to my findings about the actions of Michael Flinn are the findings in Longley and Chhabra. In Longley, Quijano, J. said in paras 75 and 92: 75. It is clear from this memo that Mr. Davidson was aware of no legal basis for the position Revenue Canada was taking with Mr. Longley. ... 92. I have no hesitation in finding that throughout most of the period from 1985 to the introduction of Bill C-139 in 1988, the advice given to Mr. Longley by Revenue Canada as to the legality of the CCC was known to the representatives of Revenue Canada to be untrue: It was intentionally misleading. [45] Quijano, J. found Revenue Canada to have committed the tort of public misfeasance. Revenue Canada abandoned its appeal of her decision. [46] In Chhabra, the court used phrases such as: “It was malicious of officials” to use “tainted material against him” (para. 27) and in para. 43: 43 But, despite the fact that Field audit agreed with the taxpayer, and their feeling that assessment would be wiped out, and in January 1981, that ‘TP does not owe these dollars’, Collection in October 1980 demanded payment of $48,372.59. What could this be other than malice? and in para. 46: 46. The notes made by Bennett/Keddy are replete with evidence of malice ... [47] In both the above cases, the courts made findings that there was malice and/or illegality which was documented in evidence referred to in the decisions. [48] The Alberta Court of Appeal said in Alberta v. Nilsson, supra, at para. 86: Because it is a key function of government to devise and execute policies involving the application of state power or the gathering or distribution of resources, it is inevitable that the acts or omissions of government agents will have adverse effects on some individuals. Therefore, the test for the tort of abuse of public office is not exclusively defined by the fact that government agents have caused damage to an individual. Loss or damage to individuals may occur as a result of lawful and non-tortious activity. [49] Information Circular 87-2 (Exhibit 13) required Michael Flinn to look at the New York Market to determine if the transfer pricing was reasonable. Since there was no company between Sans Souci and its wholesalers, it appeared to him there was a possibility that Canus’ income was being shifted out of Canada at the behest of the parent company, Maritime. The result was that there was a possibility that income was being taxed at a lower rate in the United States. This, in my view, is the reason why Michael Flinn wanted financial information from Maritime. (As it turns out, when Ed Harris finally did provide it some time later (and not to Michael Flinn when he requested it), it became apparent that Maritime is an “S” corporation in the United States which means its income is taxed at the personal rate of Roald Hertzwig.) Conclusion [50] Although CCRA’s expert, Don Mitchener, FCA, questioned whether this was the case, Michael Flinn’s superiors concluded his methodology was wrong and vacated the reassessment. Without more, merely being wrong does not equate to public misfeasance. In my view, if it did, it would mean that Michael Flinn and all CCRA employees must always correctly interpret the Income Tax Act. In other words, they must be right all the time and, if not, there could be a successful lawsuit every time an assessment or reassessment was overturned on appeal. As the court said in Nilsson: “Loss may occur as a result of lawful and non-tortious activity.” [51] I have concluded that there was no intent to harm Canus nor any unlawful acts on the part of Michael Flinn. As Iacobucci, J. said in Odhavji, supra, at para. 26: ... As each passage makes clear, misfeasance in a public office is not directed at a public officer who inadvertently or negligently fails adequately to discharge the obligations of his or her office: see Three Rivers, at p. 1272, per Lord Millett. [52] Canus also alleges public misfeasance on the part of other CCRA employees in the Halifax Tax Services Office. Canus says that the Notice of Reassessment was based upon “irrelevant and inaccurate information” and that correct information was provided which ultimately resulted in the reassessment being vacated. It says that, in spite of this, CCRA “persisted in this unauthorized position for a period in excess of two years”. Canus then says: Indeed, the fact that an offer to reduce the reassessment by 50% was made after becoming aware of the flaws in the audit arguably provides evidence of outright malice on the part of Revenue Canada servants. [53] In my view, the answer to this allegation is the same as the answer to the allegations against Michael Flinn. Being wrong is not enough. The file materials from Halifax Tax Services Office disclose no intent to harm Canus or to act illegally. An example of this is the Memo to File from Clarence Whynot dated October 15, 1997, approximately 18 months after the Notices of Reassessment were issued (Exhibit 1, v. 3, Tab 54, pp. 614-15). It deals specifically with the settlement. I find as a fact that there is no evidence of illegality or malice in that and related material. [54] It must also be recognized that it was only in August 1997 that Maritime’s Financial Statements as of March 31, 1991 and March 31, 1992 were provided. At the same time, “complete lists of purchases by Maritime Fish Products Inc. from non-related suppliers in calendar 1991 and 1992" (the reassessment years) and “Price lists of Maritime Fish Products Inc. for the period April 3, 1990 to March 20, 1992" (Exhibit 1, v. 8, Tab 143, p. 2354) were provided. [55] Thereafter, Clarence Whynot on August 15, 1997, sought additional information (Exhibit 1, v. 8, Tab 143, p. 2357): o Financial statements for Maritime Fish Products, Inc. (‘MFP’), prepared on a non-consolidated basis for its 1991 and 1992 fiscal years. o Verification of various U.S. income taxes paid by MFP for 1991 and 1992. o For fiscal 1991 and 1992, a schedule detailing MFP’s purchases by product (including products not sold by Canus), stated in Canadian dollars. This should show the total purchases from Canus for the year for each product, and the total purchases from non-related suppliers for each product. [56] As late as May 5, 1998, when the referral was made to Headquarters - Appeals Branch (Exhibit 1, v. 8, Tab 168), Clarence Whynot, while acknowledging weaknesses in the reassessment, went on to comment that “Maritime appears to be receiving a disproportionate share of the total profits ...” (p. 2445) [57] I therefore conclude there is no evidence of public misfeasance by any other CCRA employees. 2. Negligence [58] In its pre-trial brief, Canus alleges that the negligence claim falls within an established category of recovery as set out by Major, J. in Cooper v. Hobart, [2001] 3 S.C.R. 537. Canus says its negligence claim is one for “harm ... to the Plaintiff’s property, namely its business interests.” [59] In my view, this is an incorrect characterization of the claim. In para. 36 of Cooper v. Hobart, Major, J. referred to an act which “causes physical harm to the plaintiff or the plaintiff’s property” (my emphasis). This is not a claim for physical injury. [60] Alternatively, Canus says in its brief, the claim is “harm of an economic nature such as would fall into the relational economic loss category.” In my view, this too is incorrect. Again quoting from Major, J. at para. 36 of Cooper: Relational economic loss (related to a contract’s performance) may give rise to a tort duty of care ... This claim is not one arising from a contractual relationship. [61] In order for there to exist a prima facie duty of care, the alleged negligence must fall into an established category or an analogous one. No authorities were cited to me where an employee of CCRA was found to owe a duty of care. The question then becomes whether this is analogous to an existing category. In my view, it is not. [62] In Cooper, at para. 36, Major, J. referred to other situations where a duty of care has been found: ... a municipality has been held to owe a duty to prospective purchasers of real estate to inspect housing developments without negligence: Anns, supra; Kamloops (City), supra. Similarly, governmental authorities who have undertaken a policy of road maintenance have been held to owe a duty of care to execute the maintenance in a non-negligent manner: Just v. British Columbia, [1989] 2 S.C.R. 1228 (S.C.C.), Swinamer v. Nova Scotia (Attorney-General), [1994] 1 S.C.R. 445 (S.C.C.) etc. [63] In its brief, Canus also refers to “a tort duty owed by auditors and accountants to such parties as reasonably rely on accuracy of their work product”, citing the decisions in Hedley Byrne v. Heller & Partners, [1964] A.C. 465 (H.L.); Haig v. Bamford, [1977] 1 S.C.R. 466 and Kripps v. Touche Ross, [1997] 6 W.W.R. 421 (B.C.C.A.). [64] I cannot conclude that the actions of a CCRA employee conducting an income tax audit are analogous to a municipal housing inspection; nor to road maintenance work done pursuant to a policy for such work; nor to the work of an auditor/accountant retained by and paid a fee by a company to do its audit and prepare its financial statements. [65] CCRA employees act pursuant to powers conferred upon the Minister of National Revenue by the Income Tax Act. A CCRA employee is not retained by a taxpayer to audit its books and give an opinion. [66] Where the alleged negligence does not fall within an existing or analogous category of negligence, there is no prima facie duty of care. To determine if a new duty of care should be created, the test in Anns v. Merton London Borough Council, [1978] A.C. 728 must be applied. Lord Wilberforce said at pp. 751-52: ... the position has now been reached that in order to establish that a duty of care arises in a particular situation, it is not necessary to bring the facts of that situation within those of previous situations in which a duty of care has been held to exist. Rather the question has to be approached in two stages. First one has to ask whether, as between the alleged wrongdoer and the person who has suffered damage there is a sufficient relationship of proximity or neighbourhood such that, in the reasonable contemplation of the former, carelessness on his part may be likely to cause damage to the latter, in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed or the damages to which a breach of it may give rise. ... (a) Duty of Care (i) Foreseeability [67] The first issue is reasonable foreseeability of the harm claimed. The claim is one for economic loss. Paragraph 14 of the statement of claim provides as follows: 14. Prior to the reassessments being vacated, various financial institutes with whom Canus had been dealing took steps adverse to Canus and its business interests based on the reassessments issued by Revenue Canada. [68] The financing was Maritime’s financing not that of Canus, but Canus was a guarantor. The harm complained of is that, because of the negligent audit a reassessment was made, resulting in a large tax liability which contingent liability was reported in Canus’ financial statements. These, in turn, were provided to Maritime’s bank because Canus was a guarantor of Maritime’s loan. The Bank withdrew its financing and Canus was unable to get replacement financing. As a result, it is alleged that Canus suffered losses. [69] In my view, it is reasonably foreseeable that a reassessment would have an effect upon Canus’ ability to retain or obtain financing. ii) Proximity [70] Foreseeability alone is not sufficient to create a duty of care. In Cooper v. Hobart, supra, Major, J. said in para. 22, after referring to McAlister (Donoghue) v. Stevenson, [1932] A.C. 562 (U.K.H.L.): ... foreseeability alone was not enough; there must be a close and direct relationship of proximity or neighbourhood. I must therefore look at the relationship between Michael Flinn and the plaintiff to determine if there is sufficient proximity to create a duty of care. [71] There does not need to be a formal or contractual relationship and it is clear that no such relationship existed here as would be the case where a chartered accountant performs an audit on retainer. Michael Finn was an employee of CCRA and his obligation was to his employer which sent him to do the “audit”. His audit report is directed to CCRA. It was not done at the request of Canus and, in fact, the relationship between Canus and Michael Flinn/CCRA was an adversarial one typified, in my view, by the refusal of Canus to arrange to provide to Michael Flinn financial information of Maritime, the other party to the transfer pricing at issue. The adversarial nature of the relationship is also apparent from Roald Hertzwig’s correspondence to Michael Flinn. [72] In his correspondence (contained in Exhibit 1, v. 4, Tab 73), Mr. Hertzwig makes comments such as: Unfortunately, you are not knowledgeable regarding sales of saltfish into the U.S. market, and it shows. (p. 1129, letter of Jan. 4, 1996) You have not done your homework properly. (p. 1136, letter of Jan. 12, 1996) There would appear to be collusion on behalf of yourself and Sans Souci to create a problem for Sans Souci’s major competitor, Maritime Fish Products and its subsidiary, Canus Fisheries (p. 1137, letter of Jan. 12, 1996) All your schedules show is that you can add, multiply and divide. (p. 1138, letter of Jan. 12, 1996) You have based your total case on selected material supplied to you by Maritime Fish Products’ arch competitor, Sans Souci Sea Foods. (p. 1142, letter of January 25, 1996) [73] The relationship arises from statute: The Income Tax Act. The interests of a taxpayer and CCRA are inherently opposing interests. The interest of a taxpayer is to pay as little in taxes as is legally possible and the interest of CCRA is to ensure all taxes legally owing are remitted. [74] The statutory scheme under the Income Tax Act provides that the Minister of National Revenue is responsible for enforcing the Act, one method of which is by audit. There are no directions in the Act about how the Minister and his employees should carry out the duties under the Act. [75] In Western Minerals Ltd. v. Minister of National Revenue, [1962] S.C.R. 592, Martland, J. referred in para. 11 to Provincial Paper, Limited v. Minister of National Revenue, [1955] Ex. C.R. 33, [1954] C.T.C. 367 and to Western Leaseholds Limited v. Minister of National Revenue, [1958] Ex. C.R. 277, [1958] C.T.C. 257. He said in paras. 12 and 13: 12 The conclusions reached in the first of those two cases and applied in the second are accurately stated in the headnote as follows: ‘Held: That it is not for the Court or anyone else to prescribed (sic) what the intensity of the examination of a taxpayer’s return in any given case should be. That is exclusively a matter for the Minister, acting through his appropriate officers, to decide. 2. That there is no standard in the Act or elsewhere, either express or implied, fixing the essential requirements of an assessment. it is exclusively for the Minister to decide how he should, in any given case, ascertain and fix the liability of a taxpayer. The extent of the investigation he should make, if any, is for him to decide. 3. That the Minister may properly decide to accept a taxpayer’s income tax return as a correct statement of his taxable income and merely check the computations of tax in it and without any further examination or investigation fix his tax liability accordingly. If he does so it cannot be said that he has not made an assessment.’ 13 I am in agreement with these propositions. [76] There is provision in the Income Tax Act for a taxpayer to file a Notice of Objection which is what Canus did in this case. It is clear that, from the outset, Canus did not accept the Notice of Reassessment as valid. The Act provides in s. 152(8), quoted above, that an assessment is valid even if in error. [77] In certain instances, governments have been held to be liable for the actions of its employees. The starting point for this liability is the decision in Anns. In Canada, the Anns principles have been approved by the Supreme Court of Canada in a number of cases including Nielson v. Kamloops, [1984] 2 S.C.R. 2 and Just v. British Columbia, [1989] 2 S.C.R. 1228. Anns and Kamloops dealt with housing inspections and Just dealt with road maintenance. [78] Canus relies on Keeping v. Canada 2003 CarswellNfld. 113 (C.A.) which cites Just. In Keeping, Roberts, J.A. said in para. 38: 38. The test to determine whether a duty of care is owed by a government agency was detailed in Just by Cory, J. writing for the majority, at p. 1235: In cases such as this where allegations of negligence are brought against a government agency, it is appropriate to consider and apply the test laid down by Lord Wilberforce in Anns ... Cory, J. then quoted the passage from Anns to which I have referred above. [79] In Keeping, the court concluded that a duty of care was owed, upholding the decision of the trial judge. Roberts, J.A., at para. 40, quoted from the decision of the trial judge as follows: 40 [62] Because of the close and direct relationship between Slaney and the Plaintiffs there was proximity or neighbourhood and harm to the Plaintiffs was foreseeable; in these circumstances Slaney owed the Plaintiffs a duty to take care. ... [80] CCRA relies on Jones v. Department of Employment, [1998] 1 All E.R. 725 (C.A.). In Jones, the claim of the plaintiff, Jones, for unemployment benefits was disallowed by an adjudication officer and upheld. An appeal tribunal subsequently allowed the appeal and gave the benefits. The action alleged negligence by the adjudication officer in not allowing the claim. The defendant applied to strike out the pleadings which was refused at the County Court and appealed. The court concluded that the adjudication officer was acting administratively and there was no duty of care. Glidewell, J. said at p. 736: The question thus is whether, taking all these circumstances into account, it is just and reasonable that the adjudication officer should be under a duty of care at common law to the claimant to benefit. Having regard to the non-judicial nature of the adjudication officer’s responsibilities, and in particular to the fact that the statutory framework provides a right of appeal which, if a point of law arises, can eventually bring the matter to this court, it is my view that the adjudication officer is not under any common law duty of care. In other words, I agree with counsel for the department that his decision is not susceptible of challenge at common law unless it be shown that he is guilty of misfeasance. Indeed, in my view, it is a general principle that, if a government department or officer, charged with the making of decisions whether certain payments should be made, is subject to a statutory right of appeal against his decisions, he owes no duty of care in private law. Misfeasance apart, he is only susceptible in public law to judicial review or to the right of appeal provided by the statute under which he makes his decision. [81] Of course, neither Keeping nor Jones has a factual situation similar to this. In Keeping, regulations under the Fisheries Act provided for the issuance of crab licences and a requirement that a boat have a minimum displacement. The boat owner who wanted to fish crab was required to obtain a crab licence and had to meet certain conditions for its issuance. A fisheries officer carried out the required inspection of the boat and made measurements of its size. He did so incorrectly and the license was denied. [82] As quoted above, the trial judge concluded (upheld on appeal) there was sufficient proximity to create a duty of care. The trial judge concluded there was a “close and direct relationship” between the fisheries officer and the boat owner. [83] In Jones, unemployment benefits were denied by an adjudication officer whose decision was upheld by the Department of Employment. On appeal to a social security tribunal, the claim was allowed. Jones then commenced action against the department alleging negligence in disallowing the claim. The Court of Appeal referred to Anns, Donoghue (or McAlister) v. Stevenson, [1932] A.C. 562 and to Hedley Byrne. [84] One of the arguments raised by counsel for the Department is set out at p. 734 of the decision, followed by the plaintiff’s response: However, the second and broader proposition of counsel for the department was argued before us and I think it right to express my view on this also. His argument on this ground goes somewhat as follows. Unlike, for example, the Factories Acts, the Social Security Act 1975 gives no statutory right enforceable by action. It is not here suggested that the adjudication officer was guilty of a breach of statutory duty. The claim is framed in common law negligence. But the right to unemployment benefit derives from statute. It would be strange if a mistake which, temporarily, deprived a claimant of benefit to which he was entitled did not amount to a breach of statutory duty, but was a breach of a common law duty of care. He gives as examples an inspector of taxes who makes an assessment to income tax, a customs officer who levies a demand for value added tax or a planning officer of a local authority who advises his authority on an application for planning permission. The decision of each of these officers may be challenged by the statutory process of appeal but none of them, submits counsel for the department, owes to the applicant a duty of care at common law the breach of which can give rise to an action. Put another way, the argument of counsel for the department is that the duty of the adjudication officer lies in the field of public law, and is enforceable only by the statutory appeal procedure or by the public law remedy of judicial review. There is no remedy available to the applicant in private law as opposed to public law. Counsel for the plaintiff submits that the relationship between the adjudication officer and the claimant to unemployment benefits is sufficiently close or proximate to give rise to a duty of care, within the meaning of the dicta in recent decisions which have extended the boundaries of laws of negligence. The question we therefore have to decide is whether such a duty of care can exist. I have quoted above Glidewell, J.’s conclusion on the issue. [85] This situation is more like Jones than Keeping. Keeping dealt with a statute similar to those in the housing inspection cases like Anns and Kamloops. The government set up a scheme of regulation of an industry which required inspections to be done. If done negligently, liability follows. [86] In Jones, the statute provided for non-judicial responsibilities of the employee and a statutory framework which included a right of appeal. Glidewell, J.’s conclusion that a right of appeal from decisions of an employee or government department precludes the existence of a common law duty of care is, in my view, applicable here. Michael Flinn’s responsibilities were non-judicial. The Income Tax Act is a self-assessing system which places the onus on the taxpayer, the one with the information, to prove an assessment is wrong. The Act has a process for filing Notices of Objection and provides for appeals. [87] I conclude that any duty owed by Michael Flinn was to the Minister of National Revenue whose duty is owed in turn to Parliament and to all taxpayers generally. Therefore, there is no duty of care owed to an individual taxpayer under the Income Tax Act. [88] If Canus’ claim is characterized as one for negligent misrepresentation then proximity is also a key factor. The leading case on proximity, in cases of negligent misrepresentation, is Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165; [1997] S.C.J. No. 51. There the claim was, as here, one of economic loss. In Hercules, Ernst & Young and one of its partners/auditors were hired by two companies to perform annual audits and provide audit reports for the shareholders of the companies. The shareholders sued Ernst & Young and the auditor saying the reports were negligently prepared and in reliance on those reports they suffered financial losses. [89] One of the issues before the Supreme Court of Canada was whether Ernst & Young and the audit partner owed a duty of care for the investment losses of the shareholders and their losses in the value of their shareholdings in the companies. The decision of the court in Hercules was delivered by La Forest, J. In paragraph 22 he referred to the first branch of the Kamloops test as follows: 22. The first branch of the Anns/Kamloops test demands an inquiry into whether there is a sufficiently close relationship between the plaintiff and the defendant that in the reasonable contemplation of the latter, carelessness on its part may cause damage to the former. The existence of such a relationship - which has come to be known as a relationship of “neighbourhood” or “proximity” - distinguishes those circumstances in which the defendant owes a prima facie duty of care to the plaintiff from those where no such duty exists. In the context of a negligent misrepresentation action, then, deciding whether or not a prima facie duty of care exists necessitates an investigation into whether the defendant-representor and the plaintiff-representee can be said to be in a relationship of proximity or neighbourhood. [90] He went on in paragraphs 23 and 24 to discuss proximity in the context of negligent misrepresentation actions as follows: 23. What constitutes a “relationship of proximity” in the context of negligent misrepresentation actions? In approaching this question, I would begin by reiterating the position I took in Norsk, supra, at pp. 1114-15, that the term “proximity” itself is nothing more than a label expressing a result, judgment or conclusion; it does not, in and of itself, provide a principled basis on which to make a legal determination. ... it is necessary to set out the basis upon which one may properly reach the conclusion that proximity inheres between a representor and a representee. 24. This can be done most clearly as follows. The label “proximity” as it was used by Lord Wilberforce in Anns, supra, was clearly intended to connote that the circumstances of the relationship inhering between the plaintiff and the defendant are of such a nature that the defendant may be said to be under an obligation to be mindful of the plaintiff’s legitimate interests in conducting his or her affairs. Indeed, this idea lies at the very heart of the concept of a “duty of care”, as articulated most memorably by Lord Atkin in Donoghue v. Stevenson, [1932] A.C. 562 at pp. 580-81. In cases of negligent misrepresentation, the relationship between the plaintiff and the defendant arises through reliance by the plaintiff on the defendant’s words. Thus, if “proximity” is meant to distinguish the cases where the defendant has a responsibility to take reasonable care of the plaintiff from those where he or she has no such responsibility, then in negligent misrepresentation cases, it must pertain to some aspect of the relationship of reliance. To my mind, proximity can be seen to inhere between a defendant-representor and a plaintiff-representee when two criteria relating to reliance may be said to exist on the facts: (a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation; and (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable. To use the term employed by my colleague, Iacobucci J., in Cognos, supra, at p. 110, the plaintiff and the defendant can be said to be in a “special relationship” whenever those two factors inhere. [91] La Forest, J. went on in paragraph 31 to look at policy considerations about “liability in an indeterminate amount for an indeterminate time to an indeterminate class”, quoting the words of Cardozo, C.J. in Ultramares Corp. v. Touche, 174 N.E. 441( N.Y.C.A 1931) at p. 444. He then concluded in para. 35: 35. In my view, therefore, it makes more sense to circumscribe the ambit of the duty of care than to assume that difficulties in proving negligence and reliance will award sufficient protection to auditors, since this approach avoids both ‘indeterminate liability’ and ‘indeterminate litigation’. [92] He continued in para. 37: 37. In other words, in cases where the defendant knows the identity of the plaintiff (or a class of plaintiffs) and where the defendant’s statements are used for the specific purpose or transaction for which they were made, policy consideration surrounding indeterminate liability will not be of any concern since the scope of liability can readily be circumscribed. [93] In paras. 38 to 40, La Forest, J. discussed Glanzer v. Shepard, 135 N.E. 275 (N.Y.C.A 1922), Hedley Byrne and Haig v. Bamford. In para. 38, he referred to Glanzer and said: “In reaching his decision, Cardozo, J. explicitly noted that the weight certificate was used for the very “end and aim of the transaction” and not for any collateral or unintended purpose. [94] In para 39, La Forest, J. says: “The same idea serves to explain the rationale underlying the seminal judgement of the House of Lords in Hedley Byrne, ... .” “...The plaintiff relied on the credit reference for the specific purpose for which it was prepared.” He continued in para. 40: 40. This court’s decision in Haig, supra, can be seen to rest on precisely the same basis. ... In my view, his conclusion was eminently sound given that the defendants were informed by Mr. Scholler of the class of persons who would rely on the report and the report was used by the plaintiff for the specific purpose for which it was prepared. Dickson J. himself expressed this idea as follows, at p. 482: The case before us is closer to Glanzer than to Ultramares. The very end and aim of the financial statements prepared by the accountants in the present case was to secure additional financing for the company from [a Saskatchewan government agency] and an equity investor; the statements were required primarily for these third parties and only incidentally for use by the company. [95] La Forest, J. then said, in para. 41: 41. The foregoing analysis should render the following points clear. A prima facie duty of care will arise on the part of a defendant in a negligent misrepresentation action when it can be said (a) that the defendant ought reasonably to have foreseen that the plaintiff would rely on his representation and (b) that reliance by the plaintiff, in the circumstances, would be reasonable. Even though, in the context of auditors’ liability cases, such a duty will often (even if not always) be found to exist, the problem of indeterminate liability will frequently result in the duty being negated by the kinds of policy considerations already discussed. Where, however, indeterminate liability can be shown not to be a concern on the facts of a particular case, a duty of care will be found to exist. [96] In this case, the specific purpose of the “report” prepared by Michael Flinn was to carry out the objectives of the Income Tax Act and the duties of the Minister of National Revenue. Michael Flinn’s job was to determine for his employer if there should be a reassessment of Canus. In my view, the purpose of his report is unlike the purpose of an audit report done by a chartered accountant for a company expressing the auditor’s opinion, prepared at the company’s request and used to govern its operations. The reassessment arising from Michael Flinn’s “report” was referred to by Gordon Hiltz, CA, in preparing Canus’ Financial Statements for the year ending March 31, 1996. It is obvious that Michael Flinn did not prepare his report for that purpose. [97] In Hercules, the court concluded there was a prima facie duty. The Manitoba Corporations Act required an audit and therefore some form of reliance by the shareholders upon that audit was foreseeable. The reliance was determined to be reasonable in that case. [98] In para. 43 of Hercules, La Forest J. referred to five general indicia of reasonable reliance: ... Professor Feldthusen (at pp. 62-63) sets out five general indicia of reasonable reliance; namely: 1) The defendant had a direct or indirect financial interest in the transaction in respect of which the representation was made. (2) The defendant was a professional or someone who possessed special skill, judgment, or knowledge. (3) The advice or information was provided in the course of the defendant’s business. (4) The information or advice was given deliberately, and not on a social occasion. (5) The information or advice was given in response to a specific enquiry or request. While these indicia should not be understood to be a strict “test” of reasonableness, they do help to distinguish those situations where reliance on a statement is reasonable from those where it is not. ... [99] Applying those general indicia to this case, I conclude as follows: 1. Michael Flinn had no direct or indirect financial interest in the transaction. His employer was CCRA. Canus did not retain his services. 2. Michael Flinn was a professional; although not a CA, he was a CGA and possessed special skill, judgment or knowledge. 3. The report Michael Flinn prepared was provided in the course of his employment with CCRA. It was directed to his employer and resulted in the reassessments. It was not professional advice to Canus. The information contained in the report was for the purpose of his employer, CCRA, to determine if a reassessment of Canus should occur. According to Don Mitchener, the work of CCRA employees like Michael Flinn is to “verify” not “audit”. 4. The report was prepared deliberately and not on a social occasion, however, it was prepared for CCRA. 5. The report was not in response to a specific inquiry or request from Canus. In fact, as noted previously, their interests are opposing. Michael Flinn was acting pursuant to the powers given to the Minister of National Revenue. He conducted the audit when directed to do so by his superiors and pursuant to powers granted under the Income Tax Act. [100] I use these indicia to assist me in determining whether there is sufficient proximity between the plaintiff and the defendants. To paraphrase Glidewell L.J. in Jones, Michael Flinn’s responsibilities were non-judicial and pursuant to a statutory framework which provided a right of appeal. I conclude that Michael Flinn was not in such a relationship of proximity to Canus as to owe a common law duty of care to Canus. [101] I therefore conclude that, since there is no duty of care, there is no liability in negligence. b) Negation of Duty of Care [102] If I am wrong in concluding that no duty of care was owed, in my view, there are reasons to negate the duty in this case. [103] The purpose of the Income Tax Act is to raise revenue for the government. The Minister of National Revenue under the Act has a duty to administer and enforce the Act for the benefit of Parliament and the general public. A duty of care in circumstances such as this would affect the ability of the Minister of National Revenue to raise revenue. [104] Furthermore, the Act provides a complete remedy by way of notices of objection and appeals. As well, s. 152(8) of the Act provides that assessments are deemed to be valid and binding. [105] If the acts of an employee are bad enough, the tort of public misfeasance would apply. As Caulfield, J. said in Jones v. Department of Employment at p. 739: .. I conclude that it cannot be right in law that the isolated adjudication officer should have so many hundreds, possibly thousands, of neighbours to whom the common law says he owes a duty of care when Parliament has provided a whole scheme of legislation to protect the so called neighbours against a mistake by the adjudication officer. [106] For the above reasons, I conclude that any duty of care which might be found in these circumstances is negated. c) Standard of Care/Breach [107] If I am wrong that no duty of care exists or, if there is a duty, that it should be negatived, I go on to consider what the standard of care is and whether it has been breached. [108] The standard of care is normally expressed as the performance of one’s occupation in a reasonably competent manner, that is, to act as a reasonably competent person would do in similar circumstances. In this case, the question is: What would a reasonably competent tax auditor do in these circumstances? [109] W. Grant Thompson, FCA, and Don Mitchener, FCA, both considered this issue. [110] In his report (p. 15, Exhibit 3), Grant Thompson concludes that Michael Flinn’s methodology “is not valid” and also that it “does not comply with Generally Accepted Auditing Standards” nor “CCRA International Transfer Pricing Regulations”. [111] I have dealt with methodology under the heading of “Public Misfeasance”. Grant Thompson’s analysis of it flowed from his review of the standards he extracted from both the CICA Handbook on G.A.A.S. and CCRA’s Information Circular 87-2R. Although 87-2 not 87-2R was in force at the time of Michael Flinn’s work, Grant Thompson compared the two and explained that the standards he used were equally applicable to both. He also said that there was no difference in the theory of each. Grant Thompson summarized the professional standards from the CICA Handbook at p. 3 of his report (Exhibit 3) as follows: Summary of Professional Standards A1 An auditor should obtain sufficient evidence through inspection, observation, enquiry, confirmation, computation and analysis, to support his or her report. A2 The measure of obtaining sufficient audit evidence is determined by the quality of the evidence. The quality is confirmed by evidence obtained from different sources and analyzing refuting or inconsistent evidence. A3 Reliance on secondary audits (Sans Souci) should be based on communications with the secondary auditor to determine the manner in which the audit was conducted and to be advised of any applicable problems that might have arisen. [112] He also referred to IC-87-2R and summarized its standards at pp.4-5 as follows: Summary of International Transfer Pricing Standards P1 CCRA utilizes the arm’s length principle in examining non-arm’s length transactions, which compares prices and margins of arm’s length and non-arm’s length parties engaged in similar transactions. P2 The CUP method of examining non-arm’s length transactions requires both function and product comparability. P3 The reliability of any method is affected by the availability of data and the degree of accuracy of any adjustments required. P4 To achieve valid comparability of controlled and non-controlled transactions, there must be no differences which would materially affect the price in the open market. [113] He then enumerated the ways in which, in his opinion, Michael failed to adhere to the standards he said were applicable. [114] Don Mitchener in his report (Exhibit 17) responded to Grant Thompson’s conclusions about G.A.A.S. and the methodology used by Michael Flinn. I accept his testimony and the conclusion in his report that CCRA auditors do not need to adhere to the Canadian Institute of Chartered Accountants’ Generally Accepted Auditing Standards in conducting their “audits”. The work done by CCRA auditors is not akin to the “opinion” audit conducted by chartered accountants. As quoted previously, Don Mitchener said the role of CCRA auditors is to “verify” not “audit”. [115] On cross-examination, Don Mitchener agreed that A-1 to A-3 of the Thompson report were reasonable standards to which someone like Michael Flinn should adhere. But he then referred to the first sentence on p. 6 of his report (Exhibit 17) where he states: There was no documentation to support whether, in accordance with specific non-arm’s length provisions of the Income Tax Act, the amount or value for which the products were sold to Maritime represented the fair market value of the products. According to Don Mitchener, Canus failed to comply with the requirements of the Income Tax Act with respect to documentation. In his report he explained the reverse onus on the taxpayer in a self-assessment system to which I have referred above. [116] Although I conclude that the CICA Handbook provisions concerning G.A.A.S. per se do not apply to those undertaking “audits” for their employer, CCRA, I accept, as Don Mitchener did, that these are reasonable standards for such persons, if understood in the context of CCRA “audits”. That means they must be read in the context of a self-assessment system where it is the taxpayers who have the required information and who have the onus of satisfying CCRA that they have properly followed the provisions of the Income Tax Act. In this case, Michael Flinn had to proceed using the information he had, that is, without the financial records of Maritime which he requested. As Don Mitchener points out in his report on p. 9: The taxpayer’s reaction to these proposals was to state Mr. Flinn was wrong, that Mr. Flinn had skipped a distribution level, and that Mr. Flinn had not provided any support for his proposition, instead of providing appropriate documentary information to support the fact that the taxpayer was right. [117] Because of the reverse onus on the taxpayer, it was up to Canus to show Michael Flinn was wrong. Because of the scheme of the Income Tax Act, a tax auditor does not have the option of not producing a report if he does not have all the information he believes necessary. An opinion auditor has the ability, and the professional obligation, not to report if he believes the company he is auditing has not provided everything he needs to provide an opinion. The tax auditor, on the other hand, uses the best information he has available. [118] Michael Flinn explained, in his testimony, and his notes from his audit confirm, that he contacted other fish dealers but concluded: It was determined that these dealers do not export to the U.S. because: 1. they are not integrated operations involving fish catching and trucking & storage. 2. they do not have sufficient product mixes or lines to interest U.S. wholesalers. 3. Maritime pays them approx. the same prices as Cannus (sic). (quoting from Exhibit 1, v. 4, Tab 75, p. 1169) [119] That conclusion may well have been wrong but meeting the standard of care does not require that one be correct. The question rather is, was it so wrong as to breach the standard of care? [120] Michael Flinn considered the information about the other suppliers and explained his reasons for rejecting it. I cannot conclude that, in doing so, he fell below the required standard of care. [121] Michael Flinn referred to the Sans Souci audit and has been criticized by Grant Thompson for his use of it. In my view, it was acceptable for Michael Flinn to refer to the Sans Souci audit in the way he did. It was a CCRA “audit” conducted by a colleague of Michael Flinn. For this reason, it differs from the type of “secondary audit” to which Grant Thompson refers. The audits to which the CICA refers are opinion audits performed for a fee by a chartered accountant. Furthermore, Michael Flinn had access to the entire Sans Souci file. [122] With respect to P1 to P4, Michael Flinn did use the CUP method and considered “comparability” (P1 and P2). He used available data and made adjustments (P3). He considered there is to be no material differences in the comparables (P4). [123] Michael Flinn considered all available information but he preferred some over others. He was criticized for some of the adjustments he made. However, not all errors, if they were errors, equate with negligence or falling below the required standard of care. For example, the extrapolations which were criticized affected the final reassessment amount but not whether a reassessment was called for. [124] Roald Hertzwig, in his correspondence, criticized Michael Flinn for his lack of knowledge about the saltfish industry. In my view, it would require a standard of perfection for a tax auditor to be intimately familiar with every business or industry which he might be called upon to audit. An auditor does not need to specialize in an industry or business like the saltfish industry to conduct a tax audit. That is one of the reasons why the onus is on the taxpayer to provide information. [125] Michael Flinn’s work was not perfect. But that is not the standard. Nor does it have to be correct. [126] Don Mitchener says on pp. 4-5 of his report: The fact that income tax audits must be in accordance with statutory requirements, and are therefore susceptible to challenges in a court of law, is not insignificant. Auditors and their supervisors are aware that the ultimate determination of the validity of their audit findings and reassessments is a court of law and may, in fact, be the Supreme Court of Canada. As a result, they are continually cognizant in the course of their audit and processing of their reassessments, that the positions they take and the matters they assess must stand the ‘test of law’. Traditional audits, conducted in accordance with GAAS, do not posses this specific and ever-present attribute. The ‘legal’ environment within which an income tax audit must be conducted is a compelling distinguishing factor of an income tax audit vis-a-vis a traditional audit and functionally dispenses with the ‘carte blanche’ applicability of Generally Accepted Auditing Standards to the conduct of an income tax audit. [127] Case law supports this position. In Symes v. R., [1993] 4 S.C.R. 665, Iacobucci, J. referred to Generally Accepted Accounting Principles (G.A.A.P) in para. 43 as follows: ... As the trial judge rightly noted, the determination of profit under subsection 9(1) is a question of law: Neonex International Ltd. v. The Queen, [1978] C.T.C. 485, 78 D.T.C. 6339 (F.C.A.). Perhaps for this reason, and as Neonex itself impliedly suggests, courts have been reluctant to posit a subsection 9(1) test based upon ‘generally accepted accounting principles’ (G.A.A.P.): see also ‘Business Income and Taxable Income’ (1953 Conference Report: Canadian tax Foundation) cited in B.J. Arnold and T.W. Edgar, eds., Materials on Canadian Income Tax (9th ed. 1990), at page 336. Any reference to G.A.A.P. connotes a degree of control by professional accountants which is inconsistent with a legal test for ‘profit’ under subsection 9(1). Further, whereas an accountant questioning the propriety of a deduction may be motivated by a desire to present an appropriately conservative picture of current profitability, the Income Tax Act is motivated by a different purpose: the raising of public revenues. For these reasons, it is more appropriate in considering the subsection 9(1) business test to speak of ‘well accepted princples of business (or accounting) practice’ or ‘well accepted principles of commercial trading’. [128] In Canderel Ltd. v. R., [1998] 1 S.C.R. 147, Iacobucci, J. quoted the above passage from Symes. He then went on in para. 33 to say: What must be remembered, however, is that these are non-legal tools and as such are external to the legal determination of profit, whereas the provisions of the Act and other established rules of law form its very foundation. In my view, the same applies to G.A.A.S. [129] As has already been discussed under the “Public Misfeasance” heading, Don Mitchener was not convinced that Michael Flinn did not use proper methodology. He said in his report on p. 12: Mr. Flinn was told that Maritime was a wholesaler but no support was provided for this. In the documents arising after the reassessments a substantial amount of time was given to, and weight put upon, Maritime’s position in the distribution cycle. (In our view, we are still not certain that anyone has yet sorted this out.) And it appears to be the after the fact submitted contentions about trade levels which undermined Mr. Flinn’s comparable pricing analysis. [130] On page 2 of his report, Don Mitchener says: Based on our analysis, comments, observations and conclusions outlined and developed within this report, we consider that, from the perspective and objective of ensuring compliance with the Income Tax Act of Canada, the audit of Canus Fisheries Limited (‘Canus’) carried out by Mr. Michael Flinn of Revenue Canada was conducted substantially and materially pursuant to the policies and procedures of Revenue Canada as they applied to the facts and circumstances existing at the time that audit was carried out. [131] He elaborated on this at p. 11: % Mr. Flinn, at the time, possessed the appropriate experience and training to conduct the audit; % The audit of Canus, in light of its scope, was appropriately planned; % The audit of Canus was appropriately supervised and (sic) that Mr. Flinn kept his superiors informed of his progress and they in turn guided and counselled him in the process; % Based on the information available to Mr. Flinn and the information provided to Mr. Flinn at the time, the documentation generated during the audit process supported his findings although we note that Mr. Flinn, in his examination for discovery acknowledges deficiencies in his documentation discipline; and % Mr. Flinn would have been remiss in the performance of his duties had he not, in light of the information he had at the time, recommended and supported the issuance of the Notices of Reassessment and shifted the responsibility for proving the incorrectness of the reassessments to the taxpayer. I accept his opinion in this regard. [132] There were flaws in Michael Flinn’s work but I am not satisfied that it falls below the standard required of a CCRA auditor. He conducted the audit in a reasonably competent manner. 3. Damages and Causation [133] If I am wrong on all of the above, I now consider the issues of causation and damages. [134] Both W. Grant Thompson, FCA, acting for Canus and Brian D. Dunstan, CA, CFE, CBV for CCRA agree that the loss period, if one is found, is a period of three years (1997 to 1999 inclusive). The report of Grant Thompson is Exhibit 6 and his commentary on Mr. Dunstan’s report is Exhibit 7. The Dunstan report is Exhibit 15. Grant Thompson concluded the total loss to be $876,414.00 and, in alternative scenarios, Brian Dunstan concluded the loss to be either $270,000.00 or $320,000.00. [135] Grant Thompson said that all of the losses attributable to the three year period were as a result of the reassessment. However, I conclude that other factors affected Canus’ business during that period. Fish stocks were declining and there had been a previous downturn in the industry which is reflected in Canus’ 1994 financial statements (Exhibit 1, v. 10, Tab 188, p. 3115). The treatment of depreciation was changed at that time and, in doing so, reference was made to a downturn in the industry. The Notes to the Consolidated Financial Statements for the year ended March 31, 1994 say: The rates of depreciation have been reduced by 50% from past accounting periods. Due to a down turn in the industry the company felt that the depreciation charges were excessive. [136] In his correspondence with Michael Flinn of January 12, 1996 (Exhibit 1, v. 4, Tab 73, pp. 1136-37), Roald Hertzwig himself refers to financing problems and problems in the industry. On page 2 of his letter he says: However, you must be aware that the ‘Eastern Canada groundfish industry’ is having difficulties ... In 1992, The Bank of Nova Scotia, refused to renew our operating loan and Chemical Bank refused to renew Maritime’s operating loan due to Maritime’s heavy commitment to Canus. [137] State Street Bank, which was then Maritime’s Bank in New York, advised Maritime on May 8, 1997 that it would no longer provide financing. State Street Bank reduced its financing from US $1,750,000.00 to $1,500,000.00 for a three month period ending August 31, 1997 and advised it would not provide financing after that date. [138] As at March 31, 1997, Canus had financing from Maritime of $3,000,000.00. By March 31, 1998, Canus’ loan from Maritime was 2.3 million. Prior to that, in 1993, the Bank of Nova Scotia, from whom Canus had financing, requested repayment of all its loans. By March 31, 1996, the Bank of Nova Scotia loan had been reduced to $458,000.00 and, by March 31, 1997, the loan was down to $178,877.00. [139] Furthermore, Canus had previously been unable to get Business Development Corporation (“BDC”) financing and did not do so until July 1999. The letter from Kevin Goodwin of Canus to BDC dated May 6, 1997 (Exhibit 1, v. 8, Tab 136) refers to previous correspondence. In that letter, Goodwin sought BDC financing of $2.5 million. In the reply from BDC dated June 19, 1997 (Exhibit 1, v. 8, Tab 140), three areas of concerned are mentioned, the reassessment being only one factor in BDC’s decision not to offer financing to Canus. I therefore conclude that difficulties with financing pre-dated the reassessment. It is also worthy of note that Canus had greater reliance on Maritime for its financing because its external financing was declining but Canus was not making interest payments on its debt to Maritime. This is referred to in the Dunstan report and substantiated in Canus’ financial statements. [140] In addition, Canus sustained a loss of three-quarters of a million dollars in 1995 from a venture in NiCCRAuga. Michael Flinn testified that Kevin Goodwin, Canus’ general manager, told him that it almost put Canus out of business. Brian Dunstan refers to decisions such as this as indicative of poor management. [141] Furthermore, Brian Dunstan in his report concludes that Canus had a working capital deficiency. I accept his evidence in this regard. [142] In addition to the downturn in the industry, Roald Hertzwig said the business was “mercurial”. For this reason, I cannot conclude that average sales over the period 1992 to 1996 would necessarily be the best means to estimate income for the years 1997, 1998 and 1999. The increased sales in 1995 from pollock sales to the West Indies are, in my view, indicative of the mercurial nature of the industry. Although Roald Hertzwig testified that Canus lost the opportunity to have similar sales in 1997 through 1999 because of a lack of financing, I cannot conclude there is any evidence that such sales would have been repeated during those years. [143] It is also apparent from Canus’ financial statements that it suffered exchange losses, losses from its trucking operations, boat operations and the Port Mouton operations in years before 1997. [144] For all of these reasons, I am not satisfied that all of the losses sustained by Canus in the period 1997 through 1999 are attributable to the reassessment. I therefore cannot accept the loss figure of $876,414.00 set out in the Thompson report. [145] However, I am not satisfied that the Dunstan report accurately reflects the losses incurred during the three year period. I accept the underlying premise from the Thompson report that break-even accounting should be used to calculate the losses. Furthermore, although I am not satisfied that $500,000.00 in pollock sales could have been achieved in any of the years 1997 through 1999, I do not consider it appropriate that Brian Dunstan, in his report, completely disregarded those sales. In my view, some consideration should have been given to these sales. For that reason, I do not accept his report in its entirety either. [146] Accordingly, had I been satisfied that there was a loss, I would have sought further submissions from both parties on the quantification of the loss based upon the conclusions I have set out above. OTHER [147] I am not satisfied, if there is a loss attributable to CCRA, that general damages are payable. [148] In Uni-Jet Industrial Pipe Ltd. v. Canada (Attorney General) (2001), 198 D.L.R. (4th) 577 (Man. C.A.), the court considered damage awards for public misfeasance, where negligence was not proven. Kroft, J.A. in para. 66 distinguished general damage awards in cases of intentional torts and cases of negligence. He said: [66] As a principle, it can be safely stated the general damages awarded for intentional torts resulting in this kind of injury are damages ‘at large’. Unlike the damages caused by negligence precise measurement or limits should not be expected. The concept of damages at large was well articulated by Goodridge C.J.N. in Farrell v. Canadian Broadcasting Corp. (1987), 43 D.L.R. (4th) 667 (Nfld. C.A.), when he said (at p. 669): Damages other than for material loss are termed ‘damages at large’. These have been variously defined but appear generally to mean general damages consisting of non-economic loss and exemplary damages in appropriate cases. [149] With respect to the corporate plaintiff, Kroft, J. continued in para. 83: [83] There is no reason, however, to assume in this case that Uni-Jet, the corporate plaintiff, should be restricted to the purely token award designated by the trial judge. It is true that the company was not exposed to the embarrassment or humiliation that only a human being can experience. Nonetheless, Uni-Jet has a corporate reputation that was conspicuously called into question and possibly tarnished. While there is no evidence of actual lost income or corporate profit, there was certainly a risk that goodwill would be lost. [150] I have dealt above with the damage figures the experts put forward. In my view, a general damage award would be applicable only if public misfeasance were proven. I have concluded it was not. Even if proven, the circumstances of this case are vastly different from the conduct proven to be an abuse of public office in Uni-Jet. Even in those circumstances, the general damage award to the corporate plaintiff was only $15,000.00. In this case, if I am wrong concluding there was no public misfeasance, I conclude there is no basis, like that in Uni-Jet, for a general damage award. There was no public disclosure of the reassessment and an Income Tax reassessment does not have the same stigma attached to it as allegations of fraud like in Uni-Jet. [151] I also conclude that there is no basis for aggravated or punitive damages under the circumstances. Aggravated damages are also compensatory damages. Since I have concluded no general damage award should be made, I similarly conclude there is no basis for an award of aggravated damages. [152] A claim is also made for punitive damages arising from public misfeasance. In my view, there is no behaviour to censure, even if I am wrong in concluding there was no public misfeasance. Nor is there a need for punishment and deterrence. Such awards are rare and there are no circumstances here which make it an exceptional case. COSTS [153] CCRA is to have its costs paid by Canus. If the parties cannot agree, I will accept written submissions. Hood, J.