Docket: A-511-14
Citation: 2015 FCA 288
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CORAM:
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GAUTHIER J.A.
WEBB J.A.
NEAR J.A.
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BETWEEN:
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AGRACITY LTD
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Appellant
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and
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HER MAJESTY THE
QUEEN
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Respondent
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REASONS FOR
JUDGMENT
WEBB J.A.
[1]
The main issue in this appeal is whether the
Crown can have inconsistent pleadings in relation to appeals filed in the Tax
Court of Canada by different taxpayers. Justice C. Miller of the Tax Court of
Canada partially allowed the motion of AgraCity Ltd. (AgraCity) to strike parts
of the reply filed by the Crown (Docket 2014-1537 (IT)G). AgraCity is appealing
the decision to not strike the other parts of the reply that AgraCity was
seeking to have struck on the basis that such parts are inconsistent with
another reply that has been filed by the Crown in response to an appeal of
another taxpayer. AgraCity is also appealing the Order that it serve and file a
list of documents in accordance with Rule 82 of the Tax Court of Canada
Rules (General Procedure) (the Rules).
[2]
The Crown is cross-appealing the order to strike
or rewrite parts of its reply. The main issue in the cross-appeal is whether
the references to paragraphs 247(2)(a) and (c) of the Income
Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the Act) should have been
struck.
[3]
For the reasons that follow, I would dismiss the
appeal of AgraCity and allow, in part, the cross-appeal of the Crown.
Background
[4]
This matter is at the pleadings stage before the
Tax Court of Canada. The actual facts of the case are not clear and are in
dispute. It appears that there is no dispute that farmers in Canada wanted to buy a particular herbicide, ClearOut, which was to be imported into Canada. What is not clear is who was selling ClearOut.
[5]
There are three companies that are relevant in
this matter:
- AgraCity, which
is wholly owned by Jason Mann;
- 101072498 Saskatchewan
Ltd. (SaskCo), which is indirectly owned by Jason Mann and his brother,
James Mann; and
- NewAgco-Barbados,
a company incorporated under the laws of Barbados, which is wholly owned
by SaskCo.
[6]
During the taxation years under appeal,
NewAgco-Barbados reported significant profits from the sale of ClearOut and
claimed that it had paid significant amounts to AgraCity as a service fee in
relation to the sale of ClearOut.
[7]
In the reply filed by the Crown in relation to
AgraCity’s appeal to the Tax Court of Canada, the Crown pled that
NewAgco-Barbados did not sell any ClearOut and therefore should not have been
entitled to any profit from the sale of ClearOut. The Crown determined, under
section 247 of the Act, that the fair market value of the services
provided by AgraCity was equal to the amount that had been paid by
NewAgco-Barbados plus the net profit that had been reported by NewAgco-Barbados
from the sale of ClearOut, thus effectively reallocating all of the profit
reported by NewAgco-Barbados from the sale of ClearOut to AgraCity.
[8]
In the reply filed by the Crown in relation to
SaskCo’s appeal to the Tax Court of Canada, the Crown pled that
NewAgco-Barbados bought ClearOut and sold it to AgraCity. As noted by the Tax
Court Judge, the pleadings of the Crown in relation to the appeals of AgraCity
and SaskCo are irreconcilable.
[9]
The only reply that is the subject of this
appeal, is the reply related to AgraCity’s appeal to the Tax Court of Canada.
Decision of the Tax Court
[10]
The Tax Court Judge held that the Crown could
have a reply in relation to an appeal of one taxpayer that is inconsistent with
the reply filed in relation to the appeal of another taxpayer. As a result, he
did not grant AgraCity’s motion to strike all of the parts of the reply that
would be inconsistent with the reply filed by the Crown in relation to the
appeal of SaskCo.
[11]
The Tax Court Judge did, however, strike certain
paragraphs related to transfer pricing. In the reply, the Minister relied on
both paragraphs 247(2)(a) and 247(2)(b) of the Act to adjust the
amount that would be included in the income of AgraCity under paragraph 247(2)(c)
(if only paragraph 247(2)(a) was applicable) or under paragraph 247(2)(d)
(if paragraph 247(2)(b) was applicable). The Tax Court Judge concluded
that since the Minister had assumed that no product was sold by
NewAgco-Barbados, the provisions of paragraphs 247(2)(a) and (c)
of the Act could not be applicable and he struck those paragraphs of the
reply that referred to these paragraphs.
[12]
The Tax Court Judge also struck certain parts
that he identified as conclusions of law and ordered the Crown to file an
amended reply in which paragraph 14(d) would be moved to another location in
the reply and to clarify the facts upon which it was basing its assessment of
the penalty under subsection 163(2) of the Act.
[13]
The Tax Court Judge also ordered the parties to
serve and file a list of documents under Rule 82.
[14]
While the Tax Court Judge also ordered the
parties to submit a timeline for the completion of various steps and that the
appeal of AgraCity would be heard on common evidence with the appeal of SaskCo,
neither party appealed these orders.
[15]
As noted above, AgraCity has appealed and the
Crown has cross-appealed to this court.
Standards of Review
[16]
The standards of review are those standards as
set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (Decor
Grates Inc. v. Imperial Manufacturing Group Inc., 2015 FCA 100, [2015]
F.C.J. No. 503). In Housen v. Nikolaisen, the Supreme Court of Canada
confirmed that the standard of review for appeals from decisions of the lower
courts for questions of law is correctness. Findings of fact (including
inferences of fact) will stand unless it is established that the Tax Court
Judge made a palpable and overriding error. For questions of mixed fact and
law, the standard of correctness will apply to any extricable question of law
and otherwise the standard of palpable and overriding error will apply. An
error is palpable if it is readily apparent and it is overriding if it changes
the result.
Issues
[17]
The issues arising as a result of the appeal and
the cross-appeal are whether the Tax Court Judge erred in:
(a) not striking all of the parts of the reply that are inconsistent
with the position of the Crown in the reply filed in relation to the appeal of
SaskCo;
(b) ordering each party to serve and file a list of documents under Rule
82;
(c) striking the paragraphs from the reply that relate to paragraphs
247(2)(a) and (c) of the Act;
(d) striking or ordering the Crown to move paragraphs of the reply that
the Tax Court Judge determined to be statements of law; and
(e) ordering the Crown to redraft its reply in relation to the assessment
of penalties under subsection 163(2) of the Act.
Inconsistent Positions
[18]
AgraCity argues that the Crown, in its reply,
cannot plead any facts that are inconsistent with the facts as pled by the
Crown in the reply filed in relation to the appeal of SaskCo. I do not agree
with the position of AgraCity.
[19]
AgraCity and SaskCo, although they are related
persons for the purposes of the Act, are two separate persons. The
Minister of National Revenue (the Minister) is to assess (or reassess) each
taxpayer under section 152 of the Act. Because each taxpayer is assessed (or
reassessed) separately, this can result in inconsistent assessments (Peterson
v. The Queen, 2005 FCA 263, [2005] F.C.J. No. 1269, at paragraph 4). If the
Minister has issued inconsistent assessments, this will lead to inconsistent
pleadings, if the taxpayers appeal to the Tax Court of Canada. In this case the
Crown acknowledges that the assessments and hence the pleadings are
inconsistent and that the Crown does not seek to have both assessments upheld.
[20]
Even though the Crown made certain admissions of
fact in the reply filed in relation to the appeal of SaskCo, those admissions
would only relate to that appeal, not to the appeal of AgraCity (Lederman,
Bryant and Fuerst, The Law of Evidence in Canada, 4th ed. (Canada:
LexisNexis Canada Inc., 2014) at para. 19.6). Since these appeals will be heard
on common evidence, how any admission of facts will affect the outcome of the
appeals is a matter best left to the trial judge who will be hearing all of the
evidence and who will determine what facts have been established.
[21]
I would dismiss AgraCity’s appeal in relation to
this issue.
Full Disclosure – Rule 82
[22]
There are two rules related to the disclosure of
documents in a proceeding before the Tax Court of Canada: Rule 81
(Partial Disclosure) and Rule 82 (Full Disclosure). Rule 81
provides that each party is to file and serve a list of documents that might be
used to support any allegation of fact made by that party or to rebut any
allegation of fact made by the opposing party. Therefore, a list of documents
filed under Rule 81 by a particular party may omit a relevant document
that such party does not intend to introduce at the hearing before the Tax
Court of Canada.
[23]
If the parties agree or if the Tax Court of
Canada so orders, each party will be required to provide a list of all relevant
documents as provided in Rule 82. In this case, the Crown brought a
motion for an order for full disclosure under Rule 82 and the motion was
granted.
[24]
AgraCity’s main argument in appealing the order
for full disclosure is that the Crown had inconsistent pleadings in the reply
filed in relation to AgraCity’s appeal and the reply filed in relation to
SaskCo’s appeal. AgraCity also argued that ordering full disclosure was premature.
[25]
As noted above, the Crown can have inconsistent
pleadings in relation to two different taxpayers. It must be remembered that
the transactions in question are transactions completed by AgraCity, SaskCo and
other related companies – they are not transactions completed by the Minister.
The Minister’s knowledge of the transactions can only be gleaned from what is
discovered when the companies are audited. Since the Crown has inconsistent
pleadings this would indicate that what actually transpired between or among
the various companies is far from clear. Disclosing all relevant documents may
well assist in clarifying what actually happened. Therefore, I do not accept
AgraCity’s argument that inconsistent pleadings should be a basis for
overturning the Tax Court Judge’s decision to grant the order for full
disclosure under Rule 82.
[26]
AgraCity also submits that the order should not
have been granted because the pleadings have not closed and because no list of
documents has been provided under Rule 81. AgraCity refers to the
decision of Justice Campbell in Long v. The Queen, 2010 TCC 197, 2010 D.T.C.
1146. Justice Campbell denied an appellant's request for an order under Rule
82. She stated that:
30 The
most compelling argument against full disclosure at this time is the timing of
the Motion. The Appellant brought this Motion at the close of the pleadings but
prior to the commencement of any other steps in the litigation process.
Although there is no limitation on the timing of a Rule 82 application, one of
the considerations to be taken into account is the stage of the proceedings,
particularly when none of the preliminary steps have been initiated. In fact,
some of the very documents which the Appellant requests under Rule 82 may be
produced under the production of a partial list of documents pursuant to Rule
81.
[27]
This decision was affirmed on appeal (2011 FCA
85, [2011] 3 C.T.C. 160).
[28]
As noted by Justice Campbell, “there is no limitation on the timing of a Rule 82
application”. However, she considered the stage of the proceedings to be
a relevant consideration in that case. In this case, the Tax Court Judge also
considered my comments in Imperial Tobacco Canada Ltd. v. The Queen,
2012 TCC 135, [2012] 5 C.T.C. 2005, at paragraph 25, that the interests of
justice is also an important consideration.
[29]
In my view, the Tax Court Judge did not commit
any error in weighing the interests of justice against the timing of the
application. As the Tax Court Judge noted, there is a history of delays in
providing information by AgraCity or persons related to AgraCity and he was “not convinced that a wait and see approach is an expeditious
way of proceeding in this matter”.
[30]
By requiring a full disclosure of all documents
by AgraCity at this stage of the proceedings it may well assist in determining,
before discovery, what transpired between or among the various companies during
the years in question and may shorten the discovery examinations and reduce the
number of undertakings that would have to be provided at discovery.
[31]
As a result, I would dismiss AgraCity’s appeal
in relation to this issue:
Paragraphs 247(2)(a) and (c) of the Act
[32]
Subsection 247(2) of the Act is as
follows:
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247 (2) Where a
taxpayer or a partnership and a non-resident person with whom the taxpayer or
the partnership, or a member of the partnership, does not deal at arm's
length (or a partnership of which the non-resident person is a member) are
participants in a transaction or a series of transactions and
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247(2) Lorsqu’un contribuable ou une société de personnes et une
personne non-résidente avec laquelle le contribuable ou la société de
personnes, ou un associé de cette dernière, a un lien de dépendance, ou une
société de personnes dont la personne non-résidente est un associé, prennent
part à une opération ou à une série d’opérations et que, selon le cas :
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(a)
the terms or conditions made or imposed, in respect of the transaction or
series, between any of the participants in the transaction or series differ
from those that would have been made between persons dealing at arm's length,
or
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a) les modalités conclues ou imposées,
relativement à l’opération ou à la série, entre des participants à
l’opération ou à la série diffèrent de celles qui auraient été conclues entre
personnes sans lien de dépendance,
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(b) the transaction or series
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b) les
faits suivants se vérifient relativement à l’opération ou à la série
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(i)
would not have been entered into between persons dealing at arm's length, and
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(i) elle n’aurait
pas été conclue entre personnes sans lien de dépendance,
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(ii) can reasonably be considered
not to have been entered into primarily for bona fide purposes other than to
obtain a tax benefit,
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(ii) il est raisonnable de considérer qu’elle n’a pas été
principalement conclue pour des objets véritables, si ce n’est l’obtention
d’un avantage fiscal,
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any amounts that, but for this
section and section 245, would be determined for the purposes of this Act in
respect of the taxpayer or the partnership for a taxation year or fiscal
period shall be adjusted (in this section referred to as an “adjustment”) to
the quantum or nature of the amounts that would have been determined if,
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les montants qui, si ce n’était le présent article et l’article
245, seraient déterminés pour l’application de la présente loi quant au
contribuable ou la société de personnes pour une année d’imposition ou un
exercice font l’objet d’un redressement de façon qu’ils correspondent à la
valeur ou à la nature des montants qui auraient été déterminés si :
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(c) where only paragraph (a)
applies, the terms and conditions made or imposed, in respect of the
transaction or series, between the participants in the transaction or series
had been those that would have been made between persons dealing at arm's
length, or
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c) dans
le cas où seul l’alinéa a) s’applique, les modalités conclues ou imposées,
relativement à l’opération ou à la série, entre les participants avaient été
celles qui auraient été conclues entre personnes sans lien de dépendance;
d) dans
le cas où l’alinéa b) s’applique, l’opération ou la série conclue entre les
participants avait été celle qui aurait été conclue entre personnes sans lien
de dépendance, selon des modalités qui auraient été conclues entre de telles
personnes.
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[33]
It is implicit in the reasons of the Tax Court
Judge that he found that, since the Crown assumed that no product had been sold
by NewAgco-Barbados, paragraph 247(2)(a) of the Act could not apply
because no arm’s length person would have entered into an agreement to provide
services to NewAgco-Barbados in relation to the sale of a product that was not
going to be sold by NewAgco-Barbados. As noted above, the Crown’s position in
the reply related to AgraCity’s appeal is that AgraCity is entitled to all of
the profit from the sale of ClearOut.
[34]
However, this case was decided before this Court
released its decision in Cameco Corp. v. The Queen, 2015 FCA 143, [2015]
F.C.J. No. 774. In that case, the Crown was alleging that the non-resident
corporation did not perform any services and therefore the amount that the
resident corporation should have paid for services was nil. In confirming the
Tax Court Judge’s decision to not strike the references to paragraph 247(2)(a)
and (c) in that case, this court stated that:
51 No court has determined where paragraphs
247(2)(a) and (c) end and where 247(2)(b) and (d)
begin and I agree with the Crown that it would be inappropriate to attempt to
resolve this issue on a motion to strike (Hunt at paras. 18, 28 and 43). The
question whether a nil price can give rise to the application of paragraphs
247(2)(a) and (c) -- in addition to paragraphs 247(2)(b)
and (d) -- is best left to be decided by the trial judge in the fullness
of the evidence (Reasons at para. 27).
[35]
In Cameco, the allegation of the Crown
was that all of the services were provided by the company resident in Canada
and therefore no amount should have been paid by that company to the
non-resident corporation. The net effect was that the non-resident corporation,
in the Crown’s view, was not entitled to any profit in relation to the
transactions in issue.
[36]
Although in Cameco the issue was whether
the company resident in Canada should have paid nothing while the issue in this
case is whether the company resident in Canada should have received all of the
amount related to the sale of ClearOut, in both cases the net effect is that
all of the profit would be reallocated to the company resident in Canada. In
both cases the Crown is arguing that paragraphs 247(2)(a) and (c)
of the Act could effectively allocate all of the profit to the company resident
in Canada. Just as in Cameco, it seems to me that at this stage of the
proceedings the paragraphs of the reply related to paragraphs 247(2)(a)
and (c) of the Act should not have been struck and the Tax Court
Judge committed an error in doing so.
[37]
As a result I would allow the appeal of the
Crown in relation to the part of the order striking paragraphs 15(a) and 17 of
the reply.
Statements of Law
[38]
The Tax Court Judge struck paragraph 14(c) and
the first sentence of paragraph (h) from the reply on the basis that this paragraph
and this sentence stated conclusions of law.
[39]
Paragraph 14(c) and the first sentence of
paragraph (h) of the reply are as follows:
14. The Deputy Attorney General of Canada further
states the following additional facts in support of the reassessments under
appeal:
…
c) the
series of transactions would not have been entered into between persons dealing
at arm’s length since no arm’s length party would accept the risks of the said
series of transactions and yet forego the benefits of the series of transactions
given NewAgco-Barbados limited functions, lack of assets and having no
employees;
…
h)
the series of transactions entered into by AgraCity amounts to a sham or
window dressing designed to deceive the Minister into concluding that
NewAgco-Barbados, not AgraCity, was undertaking a business and incurring real
risks. […]
[40]
It seems to me that both of these provisions are
questions of mixed fact and law. Paragraph c) would require the judge to
determine what persons dealing at arm’s length would do in this particular
situation. This would require a determination of the applicable standard to be
used and then the application of that standard to the facts. As well, whether
the facts would lead to the conclusion that the series of transactions is a
sham is also a question of mixed fact and law. These statements should not be
stated to be facts.
[41]
In Anchor Pointe Energy Ltd. v. Canada, 2003 FCA 294, [2004] 5 C.T.C. 98
and Canadian Imperial Bank of Commerce v. The Queen, 2013 FCA 122,
[2013] 4 C.T.C. 218, this Court emphasized the requirement that assumptions of
fact must be restricted to only the facts and are not to include statements of
mixed fact and law. The facts are to be extricated from such statements.
Although paragraph 14 of the reply in this case does not state the facts that
were assumed by the Minister in reassessing, it is still indicating that what
is included in this paragraph are facts. The characterization of statements as
statements of fact or mixed fact and law does not change simply because these
are stated to be additional facts and not stated to be assumed facts. The Crown
should not be excused from misidentifying statements of mixed fact and law as
statements of fact just because it has included these statements as additional
facts.
[42]
In any event, the conclusion that arm’s length
persons would not enter into these transactions is also repeated in paragraphs
15 b) and 18 of the reply, although the basis upon which the Crown is relying
to reach this conclusion is missing from these paragraphs. The conclusion that
the series of transactions amounts to a sham is also repeated in paragraphs 15
c) and 19 of the reply.
[43]
I would dismiss the appeal of the Crown from the
Order striking paragraph 14 c) and the first sentence of paragraph 14 h) from
the reply.
[44]
The Tax Court Judge also ordered that paragraph
14 d) of the reply is to be incorporated into paragraph 15 b). Since this
paragraph will still be in the reply, albeit in a different location, and since
the Crown has not shown how it would be prejudiced by relocating this
paragraph, I would not interfere with this part of the order of the Tax Court
Judge.
Penalties
[45]
The Tax Court Judge, in paragraph 31 of his
reasons, stated that:
[31] I am not prepared to strike these
provisions but am going to allow the Respondent time (two weeks) to straighten
them out and clarify whether the penalty is due to knowingly underreporting or
underreporting under circumstances amounting to gross negligence or, if both,
plead in the alternative. If gross negligence is at issue, then the pleadings
should be clear what the circumstances are, and if indeed that is why the
Respondent made the assumptions in paragraphs 13(b) and (c), though
interestingly those assumptions postdate the alleged false statement.
[46]
In The Queen v. O’Dwyer, 2013 FCA
200, 449 N.R. 285, I stated as follows:
31 In
setting out the basis upon which the penalty was assessed, the Minister should
clearly identify the role that Thomas O'Dwyer is alleged to have played and not
simply reiterate every possible permutation or combination that could satisfy
the statutory conditions to impose the penalty. Any taxpayer who has been
assessed a penalty should know why the penalty was assessed. Simply reiterating
the multiple combinations of possibilities that could result in the imposition
of the penalty does not tell a taxpayer what specific act (that would result in
the imposition of the penalty) he or she is alleged to have committed.
[47]
I agree with the Tax Court Judge that these
comments from O’Dwyer are applicable here and I would dismiss the
Crown’s appeal from this determination by the Tax Court Judge.
Conclusion
[48]
As a result, I would:
(a) dismiss the appeal of AgraCity, with costs, and
(b) allow the cross-appeal of the Crown in part and without costs, and I
would amend the Order of the Tax Court of Canada dated November 14, 2014 by
deleting the reference to paragraph 15(a) and paragraph 17 from paragraph 1 of
this Order. I would allow the Crown thirty days to file and serve an amended
reply.
"Wyman W. Webb"
“I agree.
Johanne Gauthier J.A.”
“I agree.
D.G. Near J.A.”
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