Ludmer v. The Queen, 95 DTC 5311, [1996] 3 CTC 74 (FCA)

Chevalier D.J.: — Between 1977 and 1979 David, Cindy and Brian Ludmer (the “Ludmers”) and Ludco Enterprises Ltd. (“Ludco”) bought shares in companies having their headquarters outside Canada. They obtained loans to pay for these shares. In their tax returns made annually up to 1985 inclusive they claimed a deduction for the interest they had to pay on those loans.

Following an audit the Minister accepted the amounts in question for the taxation years prior to 1981 as deductible and credited the appellants accordingly. Subsequently, by two assessments dated January 7, 1986 and April 29, 1987, he did an about-face and disallowed these deductions for the 1981 to 1985 taxation years inclusive.

The appellants appealed these decisions to the Tax Court of Canada, which dismissed their appeal. They then filed an action in the Federal Court Trial Division. The respondent made a preliminary motion to strike certain allegations contained in this proceeding. The judgment allowing that application is now before this Court.

This opinion will deal with the motions made in each of the four cases. The texts involved are contained in paragraphs 8 to 15 inclusive, 17, 19, 20, 25, 26 and 28(b) and (c) of the Ludmers’ statements of claim and in paragraphs 12 to 19 inclusive, 21, 22, 23, 27, 28 and 30(b) and (c) of the Ludco statement of claim.

In the course of this opinion I shall group for analysis and decision the paragraphs or subparagraphs setting out each of the facts alleged which the respondent is seeking to have struck from the record, with the consequence that the proof of their existence will be declared inadmissible.

To begin with, the issue which the Trial Division will have to decide must be explained.

In support of their right to deduct the interest claimed by them the appellants relied on section 20(1)(c) of the Income Tax Act (the “Act”), which reads as follows:

20.(1) Notwithstanding paragraphs 18(l)(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there must be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(c) an amount paid in the year or payable in respect of the year (depending upon the method regularly followed by the taxpayer in computing his income), pursuant to a legal obligation to pay interest on

(i) borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy)...

The appellants argued, first, that the interest they had to pay was paid on investments (share purchases) made for the purpose of earning income from a business and that as such they were entitled to the deduction permitted by the preceding paragraph.

In addition to this central allegation, the appellants wished to present evidence or other facts in support of the conclusions sought by them. In the course of this opinion I will summarize and analyse these facts and determine whether they are admissible in the case as presented.

As to paragraphs 8, 9, 10, 11, 12, 13 and 15 of the Ludmers’ statement of claim and 12, 13, 14, 15, 16, 17 and 19 of Ludco* s statement of claim

The appellants seek to show that:

(a) the Minister’s decision to allow their request to deduct interest for the taxation years prior to 1981 constitutes an admission by him which is binding on him for 1981 to 1985 inclusive;

(b) as a consequence of this initial approach by the Minister, and assuming that it would continue in the years subsequent to 1981, the appellants organized their affairs so as to continue to benefit from the said deduction for the years in question

According to the trial judge, evidence of these facts is not admissible on the ground that they do not disclose a reasonable cause of action. In my opinion he is right.

First, I feel that the argument based on what the appellants regard as an “admission” by the Minister is inadmissible. At most, his allowing the deduction for the years prior to 1981 constitutes an extension of the interpretation he gave at the time to paragraph 20(1)(c) in respect of the appellants’ request. If at that time he was in error in this regard, this means that he misinterpreted legislation. Both academic opinion and decisions by the courts have unanimously concluded that an admission cannot affect a point of law:

- Sécurité Saglac (1992) Inc., Re, [1994] R.J.Q. 95 (S.C.);

- Alain Lavoie Ltée v. Léo Lisi Ltée, [1981] C.A. 292, [1981] R.L. 346 (Que.), at page R.L. 367, opinion of Lajoie J.A.

Secondly, if accepted the appellants’ proposition and the conclusion that they seek to draw therefrom would have the effect of depriving the Minister of the undoubted right conferred on him by subsection 152(4) of the Act to assess, and even to reassess, a taxpayer at any time for each of the taxation years independently of each other, the only limitation on this power being that he must do so within the time limits laid down in that Act. As Cattanach J. pointed out in First Torland Investment Ltd. v. Minister of National Revenue, [1969] C.T.C. 134, 69 D.T.C. 5109 (Ex. Ct.) (affirmed by the Supreme Court of Canada, 70 D.T.C. 6354), at page 155 (D.T.C. 5121):

... as I pointed out in Admiral Investment Ltd. v. Minister of National Revenue, [1967] 2 Ex. C.R. 308, 67 D.T.C. 5114, a concession made in one year in the absence of any statutory provisions to the contrary, does not preclude the Minister from taking a different view in a later year. An assessment is conclusive as between the parties only in relation to the assessment for the year [in] which it was made.

In Gelber v. Minister of National Revenue, [1991] 2 C.T.C. 2319, 91 D.T.C. 1030 (T.C.C.), Judge Rip took the same approach (at page 2323 (D.T.C. 1033)):

The treatment for tax purposes of expenses claimed in earlier years is not before me and I am not bound by how the respondent may have treated similar claims in previous years; after all, the respondent is not the arbiter of what is right or wrong in tax law.

Finally, as to the fact that the Minister’s initial approach regarding the deductibility of interest for the years prior to 1981 created a legitimate expectation in the minds of the appellants that they would be able to rely on the same benefit for the future, I concur in the view of the trial judge that even if the actions the appellants may have taken were in evidence they could not give rise to the remedy sought by the appellants.

In support of their proposition the appellants cited the decision in À. v. Langille, [1977] C.T.C. 144, 77 D.T.C. 5086 (F.C.T.D.), in which the theory of estoppel was considered and applied. It should at once be noted that in the aforesaid case the situation was that before concluding a contract the taxpayer had obtained an assurance from an employee of the Department that if he acted in a certain way in concluding the contract he would be entitled to benefit from a favourable provision in the Act. In particular, the judgment in Langille contained the following passage at page 150 (D.T.C. 5089-90):

... such statement was not an opinion of law but a statement of fact descriptive of the type of contract offered to him. If the statement had been an opinion or interpretation of section 146 of the Act, stoppel (estoppel) would not lie against the Minister (see Stikel v. Minister of National Revenue, [1972] C.T.C. 210, 72 D.T.C. 6178, at page 219 (D.T.C. 6185)

[Emphasis added.]

The aforementioned distinction is especially relevant in deciding the case at bar. Unlike Langille, the situation here is not one in which before doing something, namely obtaining an interest-bearing loan, the appellants sought and obtained from the Department a formal assurance that they would benefit from deductibility of that interest. In the case at bar the appellants prepared their own assessment and at that time claimed a deduction in reliance on what they took to be a favourable legal provision. In accepting their returns for the years prior to 1981 without alteration the Department did not make any promise to them. It therefore cannot be blamed for inducing them to act on the basis of any promise whatever.

In Canada v. Lidder (sub nom Canada (Minister of Employment & Immigration) v. Lidder) [1992] 2 F.C. 621, (sub nom. Lidder v. Minister of Employment and Immigration), 136 N.R. 254, Marceau J.A. wrote (at page 625 (N.R. 259-60)):

The doctrine of estoppel cannot be invoked to preclude the exercise of a statutory duty — here, the duty of the officer to deal with the application as it was presented — or to confer a statutorily defined status on a person who clearly does not fall within the statutory definition. Indeed, common sense would dictate that one cannot fail to apply the law due to the misstatement, the negligence or the simple misrepresentation of a government worker.

It was suggested in the course of the argument that, if the doctrine of estoppel could not apply, maybe the related doctrine of “reasonable or legitimate expectation” could. The suggestion was to no avail because this doctrine suffers from the same limitation that restricts the doctrine of estoppel. A public authority may be bound by its undertakings as to the procedure it will follow, but in no case can it place itself in conflict with its duty and forego [sic] the requirements of the law. As was repeated by Sopinka J. recently in writing the judgment of the Supreme Court in Reference Re Canada Assistance Plan (B.C.), [1991 2 S.C.R. 525, at pages 557-58:

There is no support in Canadian or English cases for the position that the doctrine of legitimate expectations can create substantive rights. It is a part of the rules of procedural fairness which can govern administrative bodies. Where it is applicable, it can create a right to make representations or to be consulted. It does not fetter the decision following the representations or consultation.

[Emphasis added. I

The same conclusion appears in Minister of National Revenue v. Inland Industries Ltd., [1974] S.C.R. 514, [1972] C.T.C. 27, 72 D.T.C. 6013 and in Stickel v. Minister of National Revenue, [1972] C.T.C. 210, 72 D.T.C. 6178, in which Cattanach J. wrote (at page 219 (D.T.C. 6185)):

It therefore follows that if approval and registration given by the Minister to a pension plan does not give rise to estoppel then a fortiori an information bulletin cannot either.

In short, estoppel is subject to the one general rule that it cannot override the law of the land.

In Granger v. Canada (Employment & Immigration Comm.), [1986] 3 F.C. 70, 69 N.R. 212 (C.A.); affirmed [1989] 1 S.C.R. 141, 91 N.R. 63 Lacombe J.A. said the following (at pages 88-9 (N.R. 218):

In accepting the applicant’s argument of estoppel by representation on grounds of equity, the Court would thereby be setting aside the decision of the respondent Commission rather than that of the Umpire, and the Court is not sitting in equity in connection with the remedy currently being sought by the applicant.

If necessary the applicant might, by a more appropriate procedure, argue that by its decision of April 13, 1984 the respondent Commission was seeking to apply the law in a manner which in his case was unfair, inequitable and indeed so wrongful as to constitute an abuse of power.

In conclusion, I consider that paragraphs 8, 9, 10, 11, 12, 13 and 15 (Ludmer) and 12, 13, 14, 15, 16, 17 and 19 (Ludco) should be excluded from the argument and that the appellants should be barred from presenting evidence of the facts referred to therein.

2. As to paragraphs 14 (Ludmer) and 18 (Ludco)

The appellants wished to file various documents (pamphlets and so on) originating with the Minister of National Revenue or his employees. The paragraph involved reads as follows:

Prior to and during the relevant taxation years, the Minister abided by a widely-known and well established policy of allowing the deduction of interest expenses incurred on money borrowed to purchase common shares of corporations even where those shares were precluded from paying dividends.

In his oral argument counsel for the appellants told the Court that in seeking to present such evidence he had two purposes in mind, namely:

(1) to use them as a basis for the argument that by his interpretation bulletins for section 20(1 )(c) and the various communications which had come to the attention of these appellants, or even the public in general, the Minister had bound himself in respect of them and of necessity his actions had to be consistent with that interpretation;

(2) to show that the interpretation given was valid and legally correct.

Considering only the first purpose mentioned, I would be absolutely opposed to allowing the documents and exhibits in question to be filed. When the Minister states what he believes to be the meaning and scope of legislation, he is simply giving an opinion. If it proves to be incorrect (and it is not he but the courts who have the duty of deciding as to this interpretation), he has committed an error which does not bind him either for the present or the future. As Décary J.A. noted in Vaillancourt v. R. (sub nom. Vaillancourt v. The Queen)(sub nom. Vaillancourt v. Canada), [1991] 2 C.T.C. 42, 91 D.T.C. 5352 (Fr) at page 48 (D.T.C. 5356):

It is well settled that Interpretation Bulletins only represent the opinion of the Department of National Revenue, do not bind either the Minister, the taxpayer or the courts...

On the other hand, if the purpose sought by the appellants is eventually to establish that the interpretation in question is correct and accordingly should be allowed, I feel that such evidence should be permitted but only for that purpose. In Vaillancourt, supra, after stating that such evidence is only useful if some doubt exists in the Court’s mind as to the interpretation of legislation, De’cary J.A. added (at page 48 (D.T.C. 5357)):

Having said that, I note that the courts are having increasing recourse to such Bulletins and they appear quite willing to see an ambiguity in the statute — as a reason for using them — when the interpretation given in a Bulletin squarely contradicts the interpretation suggested by the Department in a given case or allows the interpretation put forward by the taxpayer. When a taxpayer engages in business activity in response to an expressed inducement by the Government and the legality of that activity is confirmed in an Interpretation Bulletin, it is only fair to seek the meaning of the legislation in question in that bulletin also.

See also

- Harel v. Quebec (Deputy Minister of Revenue) (sub nom. Harel v. Deputy Minister of Revenue (Que.)), [1978] 1 S.C.R. 851, [1977] C.T.C. 441, 77 D.T.C. 5438, at pages 858-59 (C.T.C. 477-48, D.T.C. 5441-42);

- Bryden v. Canada (Employment & Immigration Commission), [1982] 1 S.C.R. 443, 133 D.L.R. (3d) 1, at page 450 (D.L.R. 5-6);

- Nowegijick v. R. (sub nom. Nowegijick v. The Queen), [1983] 1 S.C.R. 29, [1983] C.T.C. 20, 83 D.T.C. 5041, at page 37 (C.T.C. 24, D.T.C. 5044-45).

I therefore conclude that for this latter purpose, the material evidence indicating the Minister’s interpretation of section 20(1 )(c) of the Act during the years relevant to the case should be permitted and that the wording of the judgment should be varied accordingly.

Before concluding on this point, however, I cannot help noting that in Bronfman Trust v. R. (sub nom. Bronfman Trust v. The Queen), [1987] 1 S.C.R. 32, [1987] 1 C.T.C. 117, 87 D.T.C. 5059, the country’s highest court gave an extremely detailed interpretation of section 20(1 )(c) (see pages 45-6 (C.T.C. 124-25; D.T.C. 5064)). It will be for the Court hearing the appellants’ action to decide whether on the special features of the case before it the Minister’s interpretation runs counter to that of the Supreme Court.

3. As to paragraphs 17, 19 and 25 (Ludmer) and 21, 22 and 27 (Ludco)

These paragraphs contain two parts, namely:

(1) an account of certain facts which is a repetition of those already set forth in the preceding paragraphs;

(2) propositions of law drawn therefrom.

The “facts” section of these paragraphs is superfluous in that it is a duplication. As to the conclusion of law, they are the same as those which I have earlier said I do not consider to be relevant to the case and would accordingly exclude from the discussion.

4. As to paragraphs 20 (Ludmer) and 23 (Ludco)

The appellants sought to present evidence that other taxpayers had benefited from the interest deduction under section 20(1 )(c) of the Act for loans obtained in identical circumstances. They made the argument that the Minister was guilty of discrimination against them.

In my opinion this allegation does not give rise to the conclusions of the action and the evidence is accordingly not admissible. In Hokhold v. R. (sub nom. Hokhold v. Canada), [1993] 2 C.T.C. 99, 93 D.T.C. 5339 (F.C.T.D.), a case which specifically involved a motion to dismiss allegations, Rothstein J. said in this regard (at page 106 (D.T.C. 5344)):

The plaintiff’s concern seems to be that other taxpayers were treated differently than he was by Revenue Canada. Whatever the reasons for Revenue Canada’s action in respect of other taxpayers, they are not relevant to the plaintiff’s situation.

In the same case, after citing Ford Motor Co. of Canada v. Minister of National Revenue (1994), 85 F.T.R. 116, which applied the same rule in a similar case, he added (at page 106 (D.T.C. 5344)):

While it is understandable that the plaintiff considers it unfair that Revenue Canada appears to have treated taxpayers in similar circumstances differently, that cannot be the basis for the plaintiff’s appeal. The plaintiff is either entitled on a reasonable interpretation of the words of subparagraph 110( 1 )(f)(iii) of the Income Tax Act, to the social assistance deduction or he is not. I have found that it is clear that he is not.

There is another reason arising from the rule of procedural fairness which seems to me to favour this conclusion. If by chance the appellants were allowed to call as witnesses taxpayers whom they knew or thought they knew had benefited from preferential treatment by the Minister it can be seen what an unfavourable position the latter would be placed in, as he could in no case present opposing evidence since he is firmly bound by the prohibition imposed on him against directly or indirectly disclosing the secret information he has in this connection. While the right to present contrary arguments is accepted as one of the fundamental principles of our judicial system, I feel that this reason alone would suffice to dismiss the appellants request.

5. As to paragraphs 26 (Ludmer) and 28 (Ludco)

These paragraphs contain three subparagraphs which repeat what was

already said earlier in the action. The preamble reads as follows:

The plaintiff further submits that these reassessments were arbitrary and discriminatory and issued in breach of the Minister’s duty to act fairly and were consequently null and void because:

(a) ...

(b) ...

(c) ...

This position taken by the appellants is an alternative one. In the event that the interpretation and application of section 20(1)(c) to their case does not allow them victory on this point, they put forward the argument based on what they considered to be the Minister’s duty to act in accordance with the rules of natural justice. In their submission, he contravened those rules by misleading them as to the meaning and scope he gave to legislation, by acting in a discriminatory manner and by not himself following a fiscal policy he had stated for taxpayers in general.

I tend to think a priori that we are going back to the beginning here and, to use a popular expression, going in circles.

In their submission the appellants discussed this point at length. Citing an impressive number of English cases, their counsel sought to persuade the Court that it was time for us to adopt in Canada, for the first time, as he noted, this new approach to the application of legislation governing us. In this regard he cited in particular Inland Revenue Commissioners v. Federation of Self-Employed & Small Businesses Ltd., [1981] 2 All E.R. 93, [1982] A.C. 617 (H.L.); Preston v. Inland Revenue Commissioners, [1985] 2 All E.R. 327, [1985] A.C. 835 (H.L.); Matrix Securities Ltd. v. Inland Revenue Commissioners, [1994] 1 All E.R. 769 (H.L.).

It should be noted at the outset that this concept of natural justice and of the duty to act fairly has varying limits. In my opinion, as such it cannot be applied here because the way in which the taxpayer is treated in Canada is quite different from the United Kingdom. This can be seen from the following parallel.

Inland Revenue Commissioners v. Federation of Self-Employed explains the way in which the collection of taxes is administered in the United Kingdom. Per Lord Wilberforce it states (at page 98 (A.C. 632)):

The 1970 Act provides (section I) that “Income Tax ... Shall be under the care and management of the Commissioners.” This Act contains the very wide powers of the Board and of inspectors of taxes to make assessments on persons designated by Parliament as liable to pay income tax...

Per Lord Diplock it reads (at page 101 (A.C. 636)):

All that I need to say here is that the Board are charged by statute with the care, management and collection on behalf of the Crown of income, corporation tax and capital gains tax. In the exercise of these functions the Board have a wide managerial discretion as to the best means of obtaining for the national exchequer from the taxes committed to their charge the highest net return that is practicable having regard to the staff available to them and the cost of collection.

In Matrix, Lord Jauncey said the following (at page 787):

... the Court may properly review a decision of the Revenue to exercise their statutory powers if the decision is so unfair as to amount to an abuse of power

In Preston (at page 337) Lord Templeman wrote concerning the remedies available to British taxpayers:

In most cases in which the commissioners are said to have fallen into error, the remedy of the taxpayer lies in the appeal procedures provided by the tax statutes to the General Commissioners or the Special Commissioners. This appeal structure provides an independent and informed tribunal which meets in private so that the taxpayer is not embarrassed in disclosing his affairs and the commissioners are not inhibited by their duty of confidentiality. The commissioners and the tribunal established to hear appeals from the commissioners have wide knowledge and experience of fiscal law and practice. Appeals from the General Commissioners or the Special Commissioners lie, but only on questions of law, to the High Court by means of a case stated and the High Court can then correct all kinds of errors of law including errors which might otherwise be the subject of judicial review proceedings: see Edwards (Inspector of Taxes) v. Bairstow, [1955] 3 All E.R. 48, [1956] A.C. 14. Judicial review process should not be allowed to supplant the normal statutory appeal procedure.

The situation in Canada is fundamentally different. Neither the Minister of National Revenue or his employees have any discretion whatever in the way in which they must apply the Income Tax Act. They are required to follow it absolutely, just as taxpayers are also required to obey it as it stands. The institution of Commissioners equipped with broad powers and an extensive discretion to deal with particular cases does not exist here. Accordingly, it is not possible to judge their actions by varying and flexible criteria such as those required by the rules of natural justice. In determining whether their decisions are valid the question is not whether they exercised their powers properly or wrongfully, but whether they acted as the law governing them required them to act.

On this point I cannot do better than to repeat what Pratte J.A. said in Granger (at pages 76-77 (N.R. 215)):

To begin with, the rules of natural justice have nothing to do with this issue. The phrase “rules of natural justice” means the fundamental rules of procedure which all who are required to make quasi-judicial, and in many cases administrative, decisions must observe. The applicant’s real complaint against the Umpire is not that he infringed the rules of natural justice, simply that he did not apply equity rather than the law. It is beyond question that the Commission and its representatives have interpretations which they may give of that law do not themselves have the force of law. It is equally certain that any commitment which the Commission or its representatives may give, whether in good or bad faith, to act in a way other than that prescribed by the law would be absolutely void and contrary to public order. The applicant’s argument comes down to this: the Umpire erred because, so as to avoid causing injury to the applicant, he should have refused to apply the law.

Once the applicant’s argument is seen in its true light it is clear that it must be dismissed. A judge is bound by the law. He cannot refuse to apply it, even on grounds of equity.

The second difference between the concepts applicable in the British and Canadian systems lies in the way in which taxpayer complaints against the Treasury are dealt with. Unlike the approach taken by the British legislature, which only authorized someone with a complaint to make about the use made by the Commissioners of their discretion to do so by an appeal on a point of law, a Canadian taxpayer has a procedure which by an action in the Tax Court of Canada allows him the benefit of a full trial in which both the facts and the law will be canvassed.

I therefore conclude that the appellants’ argument is not admissible and that the allegation contained in paragraphs 26 (Ludmer) and 28 (Ludco) should be struck from the record.

6. As to paragraphs 28(b) and (c) (Ludmer) and 30(b) and (c) (Ludco)

In subparagraph (a) of the paragraphs in question the appellants asked that the assessments for the 1981 to 1985 taxation years inclusive be set aside and that the matter be referred back to the Minister for reconsideration. This conclusion still remains before the Trial Division.

Subparagraphs (b) and (c) read as follows:

The Plaintiffs) seek(s) the following relief(s):

(b) a declaration that the reassessments issued by the Minister against the Plaintiff for the 1981 to 1985 taxation years were null and void and consequently of no force or effect because the Minister had no authority to issue them, because they were arbitrary and discriminatory and because they were issued in breach of the Minister’s duty to act fairly;

(c) such other relief as this Honourable Court deems just ...

In view of the reasons given and the conclusions arrived at above, it is clear that these two remedies are also not available.

Conclusion

I therefore propose that the appeal be dismissed with costs (limited, however, to the costs of a single appeal). However, the wording of the subject judgment should be:

(1) amended to read that in paragraphs 28 (Ludmer) and 30 (Ludco) only subparas (b) and (c) are struck out; and

(2) varied to state that the appellants may be permitted to present evidence of any document issued by the Minister which may be relevant solely for the purpose of using the content thereof to determine the meaning and scope given by the Minister of National Revenue at the times material to the case to the provision in section 20(1 )(c) of the Income Tax Act.

Appeal dismissed.