West Hill Redevelopment Co. Ltd. v. The Queen, 87 DTC 5210, [1987] 1CTC 310 (FCTD)

J.A. Preston (Prothonotary):—This is an application by the defendant to strike out paragraph 6 of the statement of claim pursuant to Rule 419 on the grounds that it is immaterial or redundant, scandalous, frivolous or vexatious and that it may prejudice, embarrass, or delay the fair trial of the action.

The plaintiff carries on a variety of businesses, but principally its business is real estate development. When, in the late 1970s, interest rates rose to such high levels, it became customary in the real estate business to try to reduce the rate of mortgage interest payable by purchases of condominiums so that they would be able to meet the monthly payments.

In 1977 the plaintiff adopted a business plan of taking back low-interest mortgages on the sale of various condominium and other housing units and holding them itself.

The defendant now moves to strike out paragraph 6 of the claim which reads as follows:

6. The Plaintiff states that other builders of condominiums or other residential housing units constructed for sale who provided purchasers with low interest mortgages as sales inducements either “paid down” mortgages by prepaying interest to the banks or other financial institutions or, took low interest mortgages back but immediately resold them at a discount. In such cases, the amount paid as prepaid interest, or the discount on the resale of the mortgages is deductible in computing income under the Income Tax Act, R.S.C. 152, c. 148, as amended (the “Act”), which deduction is not challenged by Revenue Canada.

It is the defendant's submission that in taking back and holding the mortgages itself the plaintiff is doing something other than the procedure outlined in paragraph 6, which practice is not challenged by Revenue Canada. The facts outlined in paragraph 6 are, in counsel’s submission, irrelevant to the facts stipulated in the other paragraphs of the plaintiff’s claim and would prejudice the trial of the action by involving the parties in a dispute that is wholly apart from the issues.

However the plaintiff, in its counsel's submission, in taking back mortgages at lower than the commercial rates of interest for mortgages at banks or other lending institutions, did so as a sales incentive knowing that it was effectively providing the purchaser with a reduction on the real price paid for the condominium unit. The plaintiff then treated the difference between the value of such mortgage and the principal amount thereof as an amount that was not properly includable in its profit or income. He also states that the burden of the defendant is to satisfy the Court beyond a reasonable doubt that paragraph 6 is not relevant. In his view all taxpayers should be treated equally.

Counsel for the defendant referred to the reasons of the Tax Court of Canada in this matter reported at [1986] 2 C.T.C. 2235; 86 D.T.C. 1685 where Bonner, T.C.J. in outlining the issues stated:

The first of the remaining issues is whether the appellant is entitled in computing its income for the 1977, 1978 and 1979 taxation years from the business of erecting and selling condominium apartment units to “discount” low interest rate mortgages which it took back from purchasers on the sale of the units.

This, on a reading of the statement of claim is the only issue before me today.

Mr. Malette then referred to Rothschild v. Custodian of Enemy Property, [1945] Ex. C.R. 44 where President Thorson at page 50 stated:

A restricted meaning has been given to the term “embarrassing” as applied to pleadings. In City of London v. Horner (2) Pickford, L.J., at page 514 said:

I take “embarrassing” to mean that the allegations are so irrelevant that to allow them to stand would involve useless expense, and would also prejudice the trial of the action by involving the parties in a dispute that is wholly apart from the issues. In order that allegations should be struck out from a defence on that ground it seems to me that their irrelevancy must be quite clear and, so to speak, apparent at the first glance. It is not enough that on considerable argument it may appear that they do not afford a defence.

Also in the Supreme Court of Ontario in Union Gas Ltd. v. Steel Co. of Canada Ltd. et al. (1976), 1 C.P.C. 325, Weatherston, J. stated at 327:

As a general rule, any fact which it is open to a party to prove at the trial is a material fact, and so may be pleaded: Redmond v. Stacey (1917), 13 O.W.N. 79, affirmed 13 O.W.N. 179, leave to appeal granted 13 O.W.N. 206.

As to proof of similar facts at trial, the general rule is thus stated in Sopinka and Lederman: The Law in Civil Cases, at p. 19:

6. Similar Acts

Evidence of similar acts is considered collateral, and therefore irrelevant, unless some special nexus between the fact in issue and the evidence tendered is shown, which creates a relationship beyond mere similarity. General similarity is not sufficient.

The last case cited by counsel for the defendant was The Queen v. Bronfman Trust, [1987] 1 C.T.C. 117; 87 D.T.C. 5059. In the reasons of Chief Justice Dickson in allowing this appeal to the Supreme Court of Canada, His Lordship stated:

Before concluding, I wish to address one final argument raised by counsel for the trust. It was submitted — and the Crown generously conceded — that the trust would have obtained an interest deduction if it had sold assets to make the capital allocation and borrowed to replace them. Accordingly it is argued, the trust ought not to be precluded from an interest deduction merely because it achieved the same effect without the formalities of a sale, and repurchase of assets. It would be a sufficient answer to this submission to point to the principle that the courts must deal with what the taxpayer actually did, and not what he might have done: Matheson v. The Queen, [1974] C.T.C. 186 at 189; 74 D.T.C. 6176 at 6179 (F.C.T.D.), per Mahoney, J.

Mr. Sharpe in his submissions referred to Baird v. The Queen, [1981] 2 F.C. 726 where at 727 Marceau, J. stated:

It is well established — in fact so well established that it hardly needs be repeated — that an order striking out a statement of claim under Rule 419 of the General Rules of this Court can only be made where the statement of claim under attack is clearly futile and does not reveal any arguable cause of action.

I agree with this statement of the law. However, on this motion only one paragraph of the statement of claim is discussed, the balance of the claim would still remain undisturbed. Mr. Sharpe also discussed two cases dealing with interpretation bulletins, these set out the Department's position on certain facts and for that particular purpose may be used as an aid to interpretation.

Finally, Mr. Sharpe also referred to the Bronfman Trust case, supra, where, in the reasons of the Chief Justice, in discussing subparagraph 20(1 )(c)(i) of the Income Tax Act, stated at 126 (D.T.C. 5065)

In order for the trust to succeed, subparagraph 20(1)(c)(i) would have to be interpreted so that a deduction would be permitted for borrowings by any taxpayer who owned income-producing assets. Such a taxpayer could, on this view, apply the proceeds of a loan to purchase a life insurance policy, to take a vacation, to buy speculative properties, or to engage in any other non-incomeearning or ineligible activity. Nevertheless, the interest would be deductible. A less wealthy taxpayer, with no income-earning assets, would not be able to deduct interest payments on loans used in the identical fashion.

His Lordship however goes on to say that

Such an interpretation would be unfair as between taxpayers and would make a mockery of the statutory requirement that, for interest payments to be deductible, borrowed money must be used for circumscribed income-earning purposes.

I am of the opinion that this comment, with which I fully agree, does not assist counsel for the plaintiff on this motion. The Trust was taxed on the basis of what it did.

Having given this matter considerable thought I am of the opinion on the jurisprudence submitted by the applicant that this motion must succeed in order not to delay the fair trial of this action. The paragraph in issue does not in any way describe the practice carried out by the plaintiff in attempting to discount the mortgages it held for income tax purposes. The Court must deal with what the taxpayer actually did.

The application is therefore allowed and paragraph 6 of the statement of claim is struck out with costs to the defendant in the cause. The defendant shall file Her statement of defence within 20 days of the date of this order.

Application allowed.