Date:
20120718
Docket: A-363-11
Citation: 2012 FCA 208
CORAM: DAWSON J.A.
GAUTHIER J.A.
STRATAS
J.A.
BETWEEN:
SRI HOMES INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
DAWSON J.A.
[1]
This
is an appeal from a decision of the Tax Court of Canada (2011 TCC 386, 2011 DTC
1283). At issue before the Tax Court was whether the appellant taxpayer was
entitled to deduct certain losses in the amount of $411,830.00. In brief
reasons, the Tax Court dismissed the appellant’s appeal.
[2]
On
this appeal the issue to be determined is whether the Judge erred in law by
failing to provide adequate reasons for his decision.
Factual
Background
[3]
At
all material times, all the shares of the appellant were owned by Norterra Inc.
(Norterra). Norterra negotiated an arms’ length agreement with R & M
Frontier Holdings Corporation (Frontier) in which Frontier agreed to purchase
all the shares of the appellant. Prior to the closing of the share purchase
transaction, Frontier advised it would only buy the shares if certain assets
owned by the appellant were removed and the purchase price reduced. Norterra
and Frontier agreed on which assets would be removed and on the reduced
purchase price of the shares.
[4]
To
effect this agreement, the appellant sold the unwanted assets to a related
company. Included in the unwanted assets were shares in two companies, Valley
Vista Seniors Park Inc. (Valley Vista) and Lakeside Pines Development Inc.
(Lakeside), and shareholder loans made by the appellant to Valley Vista and to Lakeside. The proceeds of disposition on the sale of the unwanted assets were
$4,430,366.00, of which $1,332,796.00 was allocated to the two shareholder
loans. This was $411,830.00 below the face value of the shareholder loans. The
deductibility of this amount is the issue in dispute in this proceeding. It is
agreed between the parties that the allocation of the proceeds of disposition
for the assets other than the shareholder loans was reasonable and equal to
their fair market value.
[5]
The
parties presented competing theories at trial. The appellant taxpayer submitted
that the proceeds of disposition allocated to each shareholder loan was equal
to the fair market value of the loan at the time it was sold to the related
company and that the resulting loss was not on account of capital. The
respondent Crown argued that the appellant had “expensed the negative retained
earnings” of its investment in Valley Vista and Lakeside (that is, its portion
of those companies’ cumulative equity losses in the amount of $411,830.00). The
respondent also submitted that the shareholder loans were fully collectible at
the time of their disposition and so their fair market value was the face value
of each loan. Finally, the respondent submitted that any loss was on account of
capital.
[6]
The
trial took place over three days. Three witnesses were called by the appellant
and the Canada Revenue Agency auditor testified on behalf of the Crown.
The Decision of
the Tax Court
[7]
The
reasons for judgment were divided into three sections: a statement of the
facts, a statement of the issues, and a portion entitled “Analysis and Decision.”
[8]
In
the statement of the facts, the Court set out certain uncontested facts
(reasons, paragraphs 1 to 13) and certain assertions made by the Minister
(reasons, paragraphs 14 to 32). Those assertions paraphrased some of the
assumptions pleaded in the Crown’s reply to the amended notice of appeal.
[9]
In
the second part of the reasons, at paragraph 33, the Court framed the issues
before the Court to be:
33. The issues are
whether, for its taxation year ending April 30, 2001, SRI:
a) is entitled to
expense the negative retained earnings of its investment in Valley Vista and
Lakeside Pines (i.e., its portion of those companies’ cumulative equity losses)
in the amount of $411,830; and
b) had an
additional non-capital loss of $411,830 available for carry back to its
taxation year ending December 31, 2000.
[10]
This
statement of the issues was a verbatim quotation of the issues as framed by the
Crown in its reply to the amended notice of appeal.
[11]
In
the final segment of the reasons, under the heading “Analysis and Decision”,
the Court began by quoting from the opening statements of counsel for the
appellant (reasons, paragraph 34) and counsel for the Crown (reasons,
paragraphs 35 and 36) where counsel framed their competing theories of the
case. The Court then quoted briefly from the closing argument of counsel for
the appellant (reasons, paragraph 37) and more extensively from the closing
argument of counsel for the Crown (paragraphs 38 to 40). Included in this
excerpt was counsel for the respondent’s recitation of six different reasons
why the amount at issue was not deductible.
[12]
Finally,
the Court concluded as follows:
41. I agree with the
reasoning outlined by [counsel for the respondent] in his argument.
42. The appeals are
dismissed, with costs.
The Obligation to
Give Reasons
[13]
In
R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869, the Supreme Court of
Canada confirmed that a trial judge has no general duty to provide reasons for
a decision “when the finding is otherwise supportable on the evidence or where
the basis of the finding is apparent from the circumstances” (paragraph 4,
citing R. v. Barrett, [1995] 1 S.C.R. 752 at page 753).
[14]
In
R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3, the Supreme Court of
Canada reiterated that a court of appeal “considering the sufficiency of
reasons should read them as a whole, in the context of the evidence, the
arguments and the trial, with an appreciation of the purposes or functions for
which they are delivered” (paragraph 16). At paragraph 17 the Supreme Court
wrote:
These purposes are fulfilled if
the reasons, read in context, show why the judge decided as he or she did. The
object is not to show how the judge arrived at his or her conclusion, in
a “watch me think” fashion. It is rather to show why the judge made that
decision. The decision of the Ontario Court of Appeal in Morrissey
predates the decision of this Court establishing a duty to give reasons in Sheppard.
But the description in Morrissey of the object of a trial judge’s
reasons is apt. Doherty J.A. in Morrissey, at p. 525, puts it this way: “In
giving reasons for judgment, the trial judge is attempting to tell the parties what
he or she has decided and why he or she made that decision” (emphasis
added). What is required is a logical connection between the “what” -- the
verdict -- and the “why” -- the basis for the verdict. The foundations of the
judge’s decision must be discernable, when looked at in the context of the
evidence, the submissions of counsel and the history of how the trial unfolded.
[emphasis in original]
[15]
The
functional approach described in Sheppard and R.E.M. requires “reasons
sufficient to perform the functions reasons serve -- to inform the parties of
the basis of the verdict, to provide public accountability and to permit
meaningful appeal. The functional approach does not require more than will
accomplish these objectives.” (R.E.M. at paragraph 25.)
[16]
While
Sheppard and R.E.M. arose in the context of criminal
prosecutions, these principles apply as well to civil cases. See, for example, Merck
Frosst Canada Ltd. v. Canada (Health), 2012 SCC 3, 426 N.R. 200 at
paragraph 233; Brokenhead First Nation v. Canada (Attorney General),
2011 FCA 148, 419 N.R. 289.
[17]
Moreover,
in Baker v. Canada (Minister of Citizenship and Immigration), [1999] 2
S.C.R. 817 at paragraph 43, the Supreme Court stated “it is now appropriate to
recognize that, in certain circumstances, the duty of procedural fairness will
require the provision of a written explanation for a decision.”
Application of
these Principles to this Appeal
[18]
We
are to apply a functional analysis to the reasons of the Tax Court. Under this
approach, much will turn on the state of the record before the trial court.
Reasons similar to those now before this Court may be adequate, depending on
the nature and the number of issues before the trial court, the nature of the
evidentiary record and the substance and nature of the submissions made to the
trial court.
[19]
In
the present case, for the reasons which follow, I have concluded that on the
state of the record before the Tax Court, the Judge erred in law by failing to
give adequate reasons for his decision.
[20]
First,
as noted above, the parties provided competing theories to the Tax Court. For
the taxpayer, the issue was whether the portion of the proceeds of disposition
that were allocated to the two shareholder loans represented their fair market
value, and if so, whether the resulting loss was on account of income. However,
the Judge gave no explanation as to why he chose to frame the issues as defined
by the Crown in its pleading. I am unable to discern from the record why the
Judge was not obliged to deal with the case as framed by the appellant and
supported by the evidence adduced by the appellant.
[21]
Second,
as noted above, the Crown advanced six reasons why the appellant’s appeal
should be dismissed. Some reasons were internally inconsistent. For example,
the first reason was that the appellant had written-off as an expense its
portion of the equity losses of Valley Vista and Lakeside. The auditor
testified that such loss was an equity loss that ought to have been allocated
to the shares (transcript, volume 2, pages 285 and 286). Other grounds advanced
by the Crown were that the appellant could not take a doubtful account on the
non-capital shareholder loan receivables because it no longer owned the loan
receivables and the appellants could not take a bad debt expense because the
debt was not bad.
[22]
It
is impossible to meaningfully review the Judge’s reasons when this Court is
unable to discern how the Judge characterized the transaction. Did the Judge
consider the alleged loss to be a capital loss that should have been allocated
to share value or was it, in his view, an improperly claimed doubtful account
or bad debt?
[23]
Third,
and related to the second point, the Judge failed to reference any of the viva
voce evidence adduced through the four witnesses. This was an error when
the taxpayer adduced evidence that supported its theory of the case and that
evidence was sufficient to require some apparent adjudication. For example, the
appellant’s corporate secretary, a chartered accountant by profession,
testified that the appellant did not write-off negative retained earnings.
Rather, “the actual accounting records on this equity method [of valuation]
best represent our market value” of the shareholder loans. During oral argument
of the appeal, counsel for the Crown submitted that the Judge did not believe
this evidence. If the Judge made credibility findings or gave no weight to
certain evidence, meaningful appellate review in this case requires the Court
to know what evidence was rejected by the Judge.
[24]
Fourth,
during oral argument before the Tax Court, counsel for the appellant confirmed
the appellant was not arguing that the amount in issue was a doubtful account.
Yet the Judge dealt with this argument in his reasons, adopting the Crown’s
submission on the point. This does not demonstrate that the Judge understood
and grappled with the real issues before him.
[25]
Similarly,
the appellant argued that the loss was not on account of capital for two
reasons. First, the appellant argued that it was in the business of lending
money and that the loans were made in the ordinary course of that business.
Second, the appellant argued that the loans were made for income-producing
purposes related to its own business. Specifically, the appellant argued that
its primary business was the manufacture of manufactured homes. The loans at
issue financed the development of manufactured home parks where only homes
manufactured by the appellant could be situated. The Judge adopted the Crown’s
submission on the first ground but did not deal with the evidence and
submissions advanced with respect to the second ground. I am unable to discern
from the record any reason why the Judge did not deal with the second argument.
Given that he felt obliged to deal with the issue of whether any loss was on
account of income or capital, in light of the evidence and submissions before
the Court some explanation was required as to why the second argument failed.
[26]
To
conclude, in light of the issues, evidence and submissions before the Judge, he
was, in my respectful view, required to explain why he embraced the Crown’s
position so completely.
Conclusion
[27]
For
these reasons, I would allow the appeal with costs both here and in the Tax
Court, and remit the matter to the Tax Court of Canada for redetermination by a
different judge in accordance with these reasons.
“Eleanor
R. Dawson”
“I
agree.
Johanne
Gauthier J.A.”
“I
agree.
David
Stratas J.A.”
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