2014 FCA 45
CORAM: PELLETIER J.A.
HER MAJESTY THE QUEEN
ACI PROPERTIES LTD.
PELLETIER J. A.
In April 2003, AFT Properties Inc. (AFT) paid $1.95 million to ACI
Properties Ltd. (ACI) pursuant to a series of contracts between the two companies.
For purposes of tax filings, AFT deducted this payment in computing its
business income while ACI recorded the payment as a capital gain on the
disposition of an interest in a joint venture.
In 2006-2007 the Minister audited both ACI and AFT. One of the issues in
these audits was the proper characterization of the 2003 payment. While the
auditor assigned to this task agreed with ACI’s characterization of the payment
as the proceeds of disposition of capital property, the Rulings Directorate of
the Canada Revenue Agency, which exercises internal oversight, was of the view that
the payment was income in ACI’s hands and not a capital gain. In 2008, the
Minister reassessed ACI accordingly. AFT’s assessment was not disturbed.
ACI’s appeal from the 2008 reassessment is currently before the Tax
Court of Canada. The sole issue in that appeal is the proper characterization
of the $1.95 million payment. In the course of that appeal, the Minister
brought an application for the determination of a common question pursuant to
section 174 of the Income Tax Act, R.S.C. 1985 c. 1 (5th
Supp.) (the Act). AFT consents to be joined in the reference should the
Minister’s application succeed. The proposed question is as follows:
What is the proper
characterization of the $1.95 million payment from AFT to ACI in April 2003?
Was the payment in respect of management fees or other remuneration for
services provided by ACI to AFT or was the payment for an interest that ACI had
in a joint venture with AFT which was capital property that ACI disposed of to
AFT? This is the sole issue to be determined in ACI’s appeal.
In a decision cited as 2013 TCC 101 (the Decision), Justice Bocock of
the Tax Court dismissed the application on the basis that the Minister’s prior
assessment of ACI, without any evidence of doubt or ambivalence on her part,
precludes her from seeking a determination of a common question under section
174 of the Act. The Minister now appeals to this Court.
Section 174 of the Act, as it read as the material time, provided as
174 (1) Where the Minister is of the opinion that a
question of law, fact or mixed law and fact arising out of one and the same
transaction or occurrence or series of transactions or occurrences is common
to assessments or proposed assessments in respect of two or more taxpayers,
the Minister may apply to the Tax Court of Canada for a determination of the
(2) An application under subsection 174(1) shall set out
(a) the question in respect of which the Minister requests
(b) the names of the taxpayers that the Minister seeks to
have bound by the determination of the question, and
(c) the facts and reasons on which the Minister relies and
on which the Minister based or intends to base assessments of tax payable by
each of the taxpayers named in the application,
and a copy of the application shall be served by the
Minister on each of the taxpayers named in the application and on any other
persons who, in the opinion of the Tax Court of Canada, are likely to be
affected by the determination of the question.
(3) Where the Tax Court of Canada is satisfied that a
determination of the question set out in an application under this section
will affect assessments or proposed assessments in respect of two or more
taxpayers who have been served with a copy of the application and who are
named in an order of the Tax Court of Canada pursuant to this subsection, it
(a) if none of the taxpayers so named has appealed from
such an assessment, proceed to determine the question in such manner as it
considers appropriate; or
(b) if one or more of the taxpayers so named has or have
appealed, make such order joining a party or parties to that or those appeals
as it considers appropriate and proceed to determine the question.
(4) Subject to subsection 174(4. 1), where a question set
out in an application under this section is determined by the Tax Court of
Canada, the determination thereof is final and conclusive for the purposes of
any assessments of tax payable by the taxpayers named by it pursuant to
(1) Lorsque le ministre est d'avis qu'une même opération ou un même
événement ou qu'une même série d'opérations ou d'événements a donné naissance
à une question de droit, de fait ou de droit et de fait qui se rapporte à des
cotisations, réelles ou projetées, relatives à plusieurs contribuables, il
peut demander à la Cour canadienne de l'impôt de se prononcer sur la question.
Une demande présentée en vertu du paragraphe (1) doit faire état :
de la question au sujet de laquelle le ministre demande une décision;
des noms des contribuables que le ministre désire voir liés par la décision
relative à cette question;
des faits et motifs sur lesquels le ministre s'appuie et sur lesquels il
s'est fondé ou a l'intention de se fonder pour établir la cotisation
concernant l'impôt payable par chacun des contribuables nommés dans la
outre, un exemplaire de la demande doit être signifié par le ministre à
chacun des contribuables qui y sont nommés et à toutes autres personnes qui,
de l'avis de la Cour canadienne de l'impôt, sont susceptibles d'être touchées
par la décision rendue sur cette question.
Lorsque la Cour canadienne de l'impôt est convaincue que la décision rendue
concernant la question exposée dans une demande présentée en vertu du présent
article influera sur des cotisations ou des cotisations éventuelles
intéressant plusieurs contribuables à qui une copie de la demande a été
signifiée et qui sont nommés dans une ordonnance de la Cour canadienne de
l'impôt conformément au présent paragraphe, elle peut:
si aucun des contribuables ainsi nommés n'en a appelé d'une de ces
cotisations, entreprendre de statuer sur la question de la façon qu'elle juge
si un ou plusieurs des contribuables ainsi nommés se sont pourvus en appel,
rendre une ordonnance groupant dans cet ou ces appels les parties appelantes
comme elle le juge à propos et entreprendre de statuer sur la question.
(4) Sous réserve du paragraphe (4. 1), lorsque la Cour
canadienne de l'impôt statue sur une question exposée dans une demande dont
elle a été saisie en vertu du présent article, la décision rendue est finale
et sans appel pour l'établissement de toute cotisation concernant l'impôt
payable par les contribuables nommés dans la décision, en vertu du paragraphe
In Canada v. Miller, 2005 FCA 394,  F.C.J. No. 1953 (Q.L.) (Miller),
this Court pointed out that a Tax Court Judge faced with an application under
section 174 has to address three questions. First, the judge must be satisfied
that section 174 is applicable. While the use of the word “satisfied” suggests
the exercise of some discretion, the judge’s task is to identify the proper test
for the application of the section and then to apply that test to the facts of
the case before him.
is an appeal from the decision of a trial judge, the standard of review
analysis set out in Housen v. Nikolaisen, 2002 SCC 33,  2 S.C.R. 235
(Housen) applies. The application of a legal test to a set of facts is a
question of mixed fact and law that is reviewable on the standard of palpable
and overriding error unless an extricable question of law can be identified
and, if so, the correctness standard applies to the determination of that
question: see Housen at paragraphs 26 and 36. The determination of the
test to be applied is an extricable question of law: see Housen at
The second question to be addressed by a Tax Court Judge in a section
174 application is whether, notwithstanding that the conditions for the
application of section 174 are present, the application should nevertheless be
refused. This flows from the use of the word “may” in subsection 174(3). This
is a true discretionary decision and can only be set aside if the Tax Court
Judge has acted on a wrong principle, in the sense of an error of law, or has
exercised his discretion wrongfully in that he has considered irrelevant
factors or failed to consider relevant factors: Elders Grain Co. v. M/V
Ralph Misener (The), 2005 FCA 139,  F.C.J. No. 612 (Q.L.) at
The last question to be dealt with by the Tax Court Judge is the procedure
to be followed in the determination of the common question. Subsection 174(3)
distinguishes between cases where one or more appeals from an assessment are
pending and those cases where no appeals are pending. In Miller, this
Court said that this was clearly a matter of discretion related to procedure
and costs. Once again, the standard of review would be that applicable to discretionary
Does section 174 apply to the
facts of this case?
The first question then is whether section 174 is applicable. The Tax
Court Judge's analysis is based on the premise that there must be some doubt or
ambivalence on the Minister’s part as to the correct answer to the proposed
question sufficient to justify a proposed assessment before section 174 can
apply: see Decision at paragraphs 14-16. The Tax Court Judge found support for
this premise in an earlier case, Brenneur v. Canada, 2010 TCC 610,
 T.C.J. No. 489 (Q.L.) (Brenneur) in which the Tax Court took the
position that section 174 did not apply if there was no proposed reassessment. In
that case, the Court found that a contingent intention to reassess a second
taxpayer in the event that the position taken by the Minister with respect to a
first taxpayer did not prevail was not a "proposed reassessment" for
the purposes of section 174: see Brenneur, at paragraphs 34-35.
The Tax Court adopted this interpretation in Daruwala v. Canada,
2012 TCC 116,  T.C.J. No. 227 (Q.L.) (Daruwala), a case in which
section 311 of the Excise Tax Act, R.S.C. 1985 c. E-15, a provision that
mirrors section 174, was in issue. Expanding on the reasoning in Brenneur,
the Court in Daruwala set out three questions, the answers to which were
indicative of whether the conditions for the application of section 174 were
present. Those questions were:
the applicant provided the Court with evidence of independent communication by
the taxing authority to the proposed assessee or some other reasonable
indication that it may reassess the proposed assessee?
evidence has been submitted of an actual or proposed investigation, review or
survey of the proposed assessee's affairs, history or file in the context or in
pursuance of a proposed asssessment?
What submissions have been made regarding the expected efficiencies to
be gained from joining a proposed and actual assessment into a single question
for the Court to determine prior to the otherwise pending hearing of the single
Daruwala at paragraph 11
The Tax Court Judge then applied these questions to the facts of this
case. In doing so, he applied the wrong test and erred in law. The conditions
for the application of section 174 are set out in subsection 174(3) of the
statute: there must be “a question set out in an application
under this section [that] is common to assessments or proposed assessments in
respect of two or more taxpayers who have been served with a copy of the
The Tax Court Judge hearing the application must decide whether the
question set out in the notice is one that is common to assessments or proposed
assessments in respect of two or more taxpayers. This requires an inquiry into
the legal or factual nexus between the taxpayers who are to be parties to the
determination. This inquiry need not have arisen as a result of any doubt in
the Minister’s mind as to the position to be taken in assessing one or the
other of the taxpayers in respect of whom the question arises. While section
174 may apply where there is a pending assessment, a pending assessment is not
a condition precedent to its application.
history of section 174 supports this interpretation. The words “proposed
assessments” were added to section 174 in 1978. The Technical Notes to the Way
and Means motion that introduced the amendment explained that it was intended “to
make clear that the questions may concern assessments or proposed
assessments”: see Joint Book of Authorities at tab 17 (my emphasis).
Finally, a consideration of the purpose of the section leads to the same
conclusion. Where a question is common to two or more taxpayers, equity between
taxpayers, as well as the protection of the revenue, requires that they be
assessed on a consistent basis. It is open to the Minister to reassess a second
taxpayer (subject to issues of timing arising from the normal reassessment
period) if an appeal by a first taxpayer results in a characterization of a
common transaction that is inconsistent with the basis on which the second
taxpayer has been assessed. This is clear from the words of subsection 152(4)
which allow the Minister to “make an assessment, reassessment
or additional assessment of tax for a taxation year” at any time within the
normal reassessment period.
Where the Minister proceeds with a reassessment of a second taxpayer
following a successful appeal by a first taxpayer, the findings of fact and law
as between the Minister and the first taxpayer are not binding on the second
taxpayer. The contentious question must be decided afresh in proceedings
between the Minister and the second taxpayer. This gives rise to multiple
proceedings, and opens the door to inconsistent decisions and inconsistent
assessments between parties to a single transaction. Section 174 is designed to
reduce those risks by establishing a procedure whereby all interested parties
are participants in a single proceeding where the common question is decided.
In Brenneur, the Tax Court held that references under section 174
were to be encouraged in appropriate circumstances because “they encourage the
efficient use of the Court’s resources, avoid the risk of inconsistent Court
decisions and of separate proceedings, ensure that the Court hears relevant
evidence, and ensure the collection of taxes that are properly due”: see Brenneur,
at paragraph 36. In my view, this accurately reflects the objectives that Parliament
sought to achieve when it enacted section 174.
I am therefore of the view that the Tax Court Judge erred in applying
the wrong test to determine if section 174 applied to the facts of this case.
Since all parties are agreed that the appeal presently before the Tax Court is
a single issue appeal, and since AFT is the other party to the contracts giving
rise to the dispute, it is clear that the proposed question is common to both
ACI’s and AFT’s assessments for the taxation year in question. As a result, I
find that the conditions for the application of section 174 are met.
Should an order be made under
section 174 of the Act?
While the Tax Court judge concluded his analysis after finding that a
condition for the application of section 174 was not satisfied, some of the
considerations he raised in disposing of that question were perhaps relevant to
the second question he was to address, namely, should he exercise his
discretion to order that there be a determination of a common question?
The Tax Court Judge identified several factors that could be seen to
militate against the exercise of his discretion in favour of granting the
Minister’s application. Among these was the fact that the Minister assessed AFT
on the basis that the payment to ACI was deductible as a current expense. At no
time, in the many years leading up to the Minister’s application, did the
Minister express any uncertainty or “bone fide element of ambivalence or
uncertainty” as to the correctness of its assessing position with respect to
AFT. This raises the question as to why the Minister has chosen to seek a
determination of a common question at this time.
Counsel for ACI speculates that the Minister’s section 174 application
is simply an attempt to insure against an adverse result in the ACI appeal. He
further speculates that the need for such insurance arises from the Minister’s
realization that ACI is in a position to “demolish” the assumptions pleaded in
the Reply to Notice of Appeal.
It should first be noted that subsection 174(1) of the Act sets out the
factors with respect to which the Minister must be satisfied prior to making an
application for determination of a common question. If the Minister is
satisfied that those conditions are met, the Act allows him to make the
application, subject only to considerations of bad faith and abuse of process that
are absent here.
It should also be noted, once more, that, apart from considerations
related to the normal reassessment period, nothing prevents the Minister from
reassessing a second taxpayer on the basis of a successful appeal by a first
party. As a result, there is nothing untoward about the Minister using section
174 to streamline that process.
The line of reasoning suggested by ACI’s counsel leads to the question
of whether the Court should decline to make the order sought because its effect
would be to deprive ACI of a tactical advantage in the litigation. Counsel
believes that he will be able to demolish the Minister’s assumptions and
thereby shift the burden of proof to the Minister (see Hickman Motors Ltd v.
Canada,  2 S.C.R. 336 at paragraph 94), a burden that he believes the
Minister will be unable to discharge.
The fact that steps taken by the Minister in a proceeding deprive the
appellant of a tactical advantage is not, in and of itself, an abuse of process,
as alleged by counsel for ACI. The public interest in income tax appeals requires
that the Court be able to able to decide those appeals on the basis of the
correct facts and in the most expeditious, least expensive way: see Continental
Bank Leasing Corporation et al. v. The Queen,  T.C.J. No. 18 (Q.L.), 93
D.T.C. In any event, the loss of a tactical advantage decried by counsel for ACI
may, for the reasons set out below, be more apparent than real. That said, where
a party invokes procedural measures in circumstances which do amount to abuse
of process, the Tax Court, as master of its own procedure, may act so as to
protect the integrity of its process. This is not such a case.
As a result, I am of the view that ACI has not identified any issue that
would justify the Tax Court judge in refusing to grant the order sought by the
What procedure should be
followed in the determination of the common question?
That leaves the last question to be considered by the Tax Court Judge,
the procedure to be followed in the determination of the common question. Subsection
174(3) provides that where an appeal is pending, the other party or parties to
the transaction may be added as respondents to that appeal. This is a
discretionary matter. Given that Rule 21 of Tax Court of Canada Rules (General
Procedure), SOR/90-688 provides that an application under section 174 of
the Act shall be initiated by an originating document using Form 21(1)(c), it
is presumably open to the Tax Court Judge to have the common question
determined in free standing proceedings subject to the directions of the Court
as to the manner of proceeding. For that reason, the statement of the “facts
and reasons on which the Minister relies and on which the Minister based or
intends to base assessments of tax payable” may be significant to the Tax Court
Judge’s determination of the procedure to be followed.
As the parties had not directed their attention to this question, we
asked for further submissions on the question of the content of the notice
required to be given under subsection 174(2) of the Act.
It is apparent from the submissions made by counsel for ACI that he
contemplates that the determination of the common question will occur in the
course of a proceeding, distinct from the pending appeal, in which the
Minister’s assumptions will no longer be “in play”. While paragraph 174(3)(a)
appears to contemplate such a proceeding, this case falls under paragraph 174(3)(b)
which provides that the third party may be joined to a pending appeal. Given
that the Minister has asked that AFT be added as a party to ACI’s appeal, it
would seem to me that the logic of the section would favour having ACI’s appeal
proceed in the normal course, the only unresolved question being AFT’s role in the
conduct of the appeal. The stated question can be answered in the judgment
which disposes of ACI’s appeal, an answer that will be binding on AFT pursuant
to subsection 174(4) in any subsequent proceedings.
Since ACI has not shown why the Minister’s motion should not be granted,
AFT should be added as a party to ACI’s appeal, subject to such directions as
the Court may make as to the conduct of the appeal in light of AFT’s joinder.
In those circumstances, the contents of the notice given by Minister appear to
me to be adequate.
Different considerations may apply where the Minister seeks to have the
common question determined pursuant to paragraph 174(3)(a). Since that question
does not arise on these facts, I leave it to be answered when it does.
As a result, I would allow the appeal with costs, allow the Minister’s
motion for the determination of a common question on the terms requested by the
Minister and return the matter to the Tax Court Judge for directions as to the
conduct of ACI’s appeal in light of AFT’s joinder as a party.
D. Denis Pelletier"
Eleanor R. Dawson J.A.”
David Stratas J.A.”