Quemet Corp. v. The Queen, 79 DTC 5330, [1979] CTC 414 (FCTD)

Walsh, J:—Defendant applies by motion under section 174 of the Income Tax Act to join Magog Metal Co Inc to the appeal filed herein by plaintiff and for an order pursuant to subsection 174(3) to determine the common question set forth in the application which question will affect assessments in respect of Quemet Corp and Magog Metal Co Inc for their 1972,1973,1974,1975 and 1976 taxation years. This section of the Act reads as follows:

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 in respect of two or more taxpayers, he may apply to the Tax Review Board or the Federal Court—Trial Division for a determination of the question.

IDEM

(2) An application under subsection (1) shall set forth

(a) the question in respect of which the Minister requests a determination,

(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 he 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 person who, in the opinion of the Tax Review Board or the Federal Court—Trial Division, as the case may be, are likely to be affected by the determination of the question.

WHERE BOARD OR COURT MAY DETERMINE QUESTION

(3) Where the Tax Review Board or the Federal Court—Trial Division is satisfied that a determination of the question set forth in an application under this section will affect 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 Board of the Court, as the case may be, pursuant to this subsection, it may

(a) if none of the taxpayers so named has appealed from 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.

(4) Where a question set forth in an application under this section is determined by the Tax Review Board of the Federal Court—Trial Division, the determination thereof is, subject to an appeal therefrom in accordance with the Federal Court Act, final and conclusive for the purposes of any assessments of tax payable by the taxpayers named by it pursuant to subsection (3).

TIME DURING CONSIDERATION OF QUESTION NOT COUNTED

(5) The time between the day on which an aplication under this section is served on a taxpayer pursuant to subsection (2), and

(a) in the case of a taxpayer named in an order of the Tax Review Board or the Federal Court—Trial Division, as the case may be, pursuant to subsection (3), the day on which the question is finally determined pursuant to paragraph (3)(a) or on which an order is made under paragraph (3)(b), or

(b) in the case of any other taxpayer, the day on which he is served with notice that he has not been named in an order of the Board or the Court, as the case may be, pursuant to subsection (3),

shall not be counted in the computation of

(c) the 4-year period referred to in subsection 152(4),

(d) the time for service of a notice of objection to an assessment under section 165, or

(e) the time within which an appeal may be instituted under section 169 or subsection 172(2),

for the purpose of making an assessment of the tax payable by the taxpayer, serving a notice of objection thereto or instituting an appeal therefrom, as the case may be.

Magog Metal Co Inc appeared through its counsel and did not oppose the application provided it would not be liable for costs and would be given a full opportunity to participate in the pleadings and discoveries. The latter request is reasonable and normal and with respect to costs there will be no costs in this motion against it since it is not contesting. Subsequent costs will be at the discretion of the judge trying the question which defendant seeks to have determined or a trial judge in the event that the decision of the question is left for trial. Plaintiff Quemet Corp however through its counsel contested the present application, contending that the situation is not an appropriate one for the use of section 174, that there are no legal grounds for joining Magog Metal Co Inc, that a normal trial of the present proceedings without that company being joined would decide the issue, that in any event the determination of question would not resolve the issues common to both parties, and finally that a hearing on the facts in the event that Magog Metal Co Inc is joined would be prejudicial to plaintiff Quemet Corp.

The facts are set out at length in defendant’s motion and for the purpose of the present decision must be deemed to be true, the decision being based on the situation which would be created if this were the case. The application states that the Minister of National Revenue on September 7,1977 reassessed plaintiff by disallowing an amount of $17,471.83 in computing its income for its 1972 taxation year. After notice of objection, and confirmation of the disallowance by reassessemnt dated August 15, 1978, plaintiff appealed directly to this court in the present proceedings. Plaintiff was also reassessed on July 27,1978, the sum of $27,509.56 being disallowed as a deduction in computing its income for its 1973 taxation year. This also was duly objected to and the reassessment has not been confirmed, vacated or varied. No further assessments have yet been issued against plaintiff for its taxation years 1974 and 1975 to disallow similar claims.

With respect to Magog Metal Co Inc notices of reassessment were issued against it on September 22, 1978 disallowing a deduction of $57,120.62 for its 1974 taxation year, $62,763.63 for its 1975 taxation year, and $10,281.83 for its 1976 taxation year. Notices of objection were duly made and the reassessments have not been confirmed, vacated or varied.

The Minister alleges that during the taxation years 1972 to 1976 both corporations were in the business of buying and selling non ferrous metal, which Quemet purchased from different suppliers, one being Magog. Quemet’s taxation year ends on December 31 while Magog’s ends on April

30. In computing its income for its taxation years 1972 to 1975 Quemet deducted the following amounts as alleged purchases from Magog:

these purchases being substantiated by invoices made by Quemet in the name of Magog. Magog added to its declared income the amount of these sales allegedly made, but claimed expenses corresponding to the amounts added to the income less commissions which were kept by Magog resulting from the sales, and to substantiate these expenses Magog allegedly prepared invoices made out in the name of different individuals. Invoices were allegedly made out in fictitious names, some being names of employees of Quemet and the president of Magog has allegedly admitted this to a representative of the Minister of National Revenue, providing him with a list of such invoices and substantiated this by an affidavit produced on March 17,1977 which stated that the moneys remitted in payment of the alleged purchases to Magog by Quemet were in fact returned to Quemet less $0.01/per pound kept as a commission. Magog contended that none of the amounts represented sales made by it to Quemet the money being handed back to officers or employees of Quemet. The accommodation invoices issued by Magog for purchases which it allegedly never made were as follows:

It will be noted that the amounts for the 1974,1975 and 1976 years are those which have been deducted by the Minister in reassessing Magog Metal Co Inc for those years. Magog’s notice of objection is based on the fact that these amounts should not be considered as income since in fact the moneys were remitted to Quemet with the exception of the commission earned in the transaction. Quemet for its part contends that the purchases allegedly made by it from Magog were true and actual purchases which it should be allowed to claim as expenses in computing its income for the 1972 and 1973 taxation years the only years which have so far been assessed.

Defendant in reassessing Quemet relies on paragraph 18(1)(a) of the Act which disallows as a deduction an outlay or expense save to the extent that it was made or incurred by a taxpayer for the purpose of gaining or producing income for the business or property. Attention is also directed to subsection 152(7) of the Act which reads as follows:

152.(7) The Minister is not bound by a return or information supplied by or on behalf of a taxpayer and, in making an assessment, may, notwithstanding a return or information so supplied or if no return has been filed, assess the tax payable under this Part.

and to subsection 163(2) which provides for a penalty of 25% against a person who knowingly or under circumstances amounting to gross negligence makes, participates in, or assents to the making of a statement or omission in a return. The Minister seeks the determination of a question as to whether the purchases made by Quemet from Magog were true and factual purchases, the expense of which would be deductible, or whether the purchases were not in fact true and factual purchases and therefore not deductible, but the proceeds thereof would consequently not be included in Magog’s income with the exception of the commissions.

Quemet’s 1972 reassessment is the only reassessment before the Court in the present proceedings as it has not yet appealed to the Court its reassessment for its 1973 taxation year. The Minister indicates however that it is his intention to issue new assessments against Quemet for its 1974 and 1975 taxation years, and also to disallow the amounts claimed as expenses for those years and to confirm the reassessment for the 1973 taxation year. Pending the outcome of Quemet’s appeal to this Court the Minister intends to reassess Magog for its 1972 and 1973 taxation years which have not yet been reassessed and to confirm the reassessments issued with respect to the 1974, 1975 and 1976 taxation years. It is contended that the determination of the question set forth in the present application will affect all these assessments. An order is therefore sought to join Magog Metal Co Inc to the appeal of Quemet Corp herein, to determine the question in a manner which is considered appropriate for all the years in issue, that Quemet Corp and Magog Metal Co Inc be bound by the decision of the Court in the present appeal filed by Quemet Corp and by the decision of the Court on the determination of the common question for all the years in issue with costs. If the facts as set out are correct it would appear that there was a conspiracy between the two corporations, most probably of a criminal nature, although counsel for defendant advises me that no charges have yet been laid, to defraud the Minister of National Revenue of amounts legally due as income tax. It is apparent however that the Minister cannot duplicate the claim for taxation on the sums in question, nor does he seek to do so. If in fact Quemet never purchased from Magog the amounts for which fictitious invoices were allegedly made out it cannot of course claim the amount of these purchases as an expense item in its return, but conversely these amounts could not be considered as receipts by Magog in the calculation of its income. Magog in its returns has indicated receipt of these sums but to avoid tax liability has created another series of fictitious invoices for purchases of metal never made by it in order to set off these amounts as expense items against the payments allegedly received from Quemet. If the facts as set out are correct it would not be taxable on income never received but neither would it be able to deduct expenses never incurred. It is evident that the proof to be eventually made would be relevant to the assessments of both companies and that the proof may well be shortened if by determination of a question it is first decided which company should be assessed for the fiscal consequences of the alleged fraud. If Magog Metal Co Inc had instituted proceedings in this Court contesting the reassessments made for its 1974,1975 and 1976 taxation years the two actions would properly be joined for hearing. Defendant contends that by the use of section 174 a multiplicity of actions will be avoided and that it can be guided with respect to its reassessments for the years not yet reassessed by the decision of the Court, and pursuant to subsection 174(5) (supra) the time for making reassessments is suspended pending the final determination of the question.

Plaintiff objects to the use of section 174 in that only its 1972 taxation year is in issue in this action and with respect to Magog Metal Co Inc only its 1974, 1975 and 1976 taxation years have been reassessed so that the same years are not being dealt with. This contention cannot be sustained since subsection 174(1) refers to 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’’ and it is apparent that the alleged false invoicing practices were carried on for a period of five years from 1972 to 1976 inclusive. Furthermore, paragraph 174(2)(c) requires the application to set out the facts and reasons on which the Minister relies and on which he bases “or intends to base’’ assessments and the declaration of intent is contained in the motion. It is evident that the assessments need not have already been made for each of the given years for each corporation provided it is the intention to make these assessments.

Plaintiff further contends that there are two distinct issues, one being the allegedly false invoicing of sales by Magog Metal Co Inc to Quemet Corp which alone should be dealt with in these proceedings, and that Magog Metal Co Inc in its tax returns has admitted receiving these sums, but that in considering the reassessments of Magog Metal Co Inc the question is whether its alleged purchases of metal from other parties, whether fictitious, or employees of Quemet’s, were actually made and hence deducti- ble as an expense or not, and that proof with respect to this cannot be properly introduced in the present action. This is a serious argument but it appears to me that whether or not on the facts it can be established that plaintiff Quemet Corp was in any way privy to or involved in the purchases by Magog Metal Co Inc which allegedly were fictitious, the latter corporation is certainly involved in both transactions and the Minister has justifiable reason for inquiring into both transactions, whether in the present proceedings or in some proceedings to be instituted by or against Magog Metal Co Inc. The two transactions are of necessity connected and it appears to me practical to permit evidence respecting both in the present proceedings by the use of section 174 of the Income Tax Act. While Quemet may or may not have any interest in the alleged fictitious purchases made by Magog Metal Co Inc in the present proceedings as they stand, the joinder of the latter corporation to the proceedings will then open the door to this proof and appropriate questions can be put which will deal with both transactions.

Quemet’s counsel further contended that procedural difficulties have occurred in cases in which section 174 was invoked before the Tax Review Board to add another taxpayer to an appeal by a taxpayer already taken before the Board, and that some procedural difficulties may be encountered in the order of proof, burden of proof, and calling of certain witnesses whose interests may be adverse to those of the party calling them and so forth. I cannot accept this argument that because the section breaks new ground and may be somewhat difficult in its application it should not be used if the better administration of the Act and the convenience of the court by avoiding multiplicity of actions indicates the desirability of invoking It. That its application may be inconvenient to one of the taxpayers, whether the taxpayer already before the court, or the other taxpayer is not a principal consideration which should be taken into account, provided both taxpayers and the Minister all have a full and complete opportunity to participate in the pleadings, by pleadings of their own, to answer each other’s pleadings, and participate in the examinations for discovery so that their respective contentions can be fully and completely presented, before the Court is called upon to decide the question. I have examined the jurisprudence to which I was referred in the two decisions of the Tax Review Board namely that of the MNR v Les Meubles de Maskinongé Inc, [1978] CTC 2285; 78 DTC 1235 and MNRvEmile Crevier and Gasex Limitée and York Lamb- ton Corporation Limitée, 79 DTC 450 as wellas the only decision which appears to have dealt with the matter in this Court namely that of Crown Trust Company in its capacity as Trustee of the Suburban Realty Trust v Her Majesty The Queen, [1977] CTC 320; 77 DTC 5173. In the latter case, in allowing costs on a solicitor and client basis to both taxpayers Addy, J strongly criticized the practice of the Minister in making contradictory assessments. The facts in that case were much clearer than in the present case, the issue being the division of the selling price of a property between land and buildings for capital cost allowance purposes. The vendor claimed a higher evaluation for the land than the purchaser who was added in accordance with section 174. The assessors while still maintaining a lower value in the proceedings before the court had made an assessment of the added party by giving the higher value to the land for which plaintiff was contending in its action. While I fully agree with my learned colleague that inconsistent and contradictory assessments of different taxpayers arising out of the same transaction are highly undesirable there are circumstances in which the Minister has little choice. There are many such cases, for example that of MNR v RP Ouellette and J E Brett, [1971] CTC 121; 71 DTC 5094 and the converse case of A Blauerv MNR, [1971] CTC 154; 71 DTC 5113, confirmed in the Supreme Court [1975] CTC 111, 112; 75 DTC 5075, 5076. In the present case the Minister in contending that plaintiff Quemet Corp never made the purchases which it claims to have made from Magog Metal Co Inc was forced to go further with respect to the assesment of the latter company and contend that if in fact it did receive as revenue the proceeds of bona fide sales to Quemet Corp, it did not itself make bona fide purchases from third persons to set off as expenses against the proceeds of these sales. Failure to do so might have left both taxpayers free from assessments on profits resulting from an alleged conspiracy by the creation of the fictitious invoices.

If the Minister had chosen he could have proceeded to confirm the notices of reassessments issued to Magog Metal Co Inc and reassessed the years not yet reassessed for both companies. This would then have led to a mulitiplicity of litigation. I therefore conclude this is an appropriate situation in which to apply section 174 of the Act.

By the application of paragraph 174(3)(b) an order will therefore be made joining Magog Metal Co Inc to the appeal brought by Quemet Corp to the Court in the present proceedings. The questions which will be set forth for determination are:

1. Whether for the fiscal years 1972 to 1976 respective Quemet Corp’s alleged payments to Magog Metal Co Inc for used metal were bona fide payments or resulted in whole or in part from the creation of fictitious invoices and hence were never received by Magog Metal Co Inc or if received retained by them as proceeds of bona fide sales.

2. In the event that it be found that these receipts by Magog Metal Co Inc resulted from bona fide sales to Quemet Corp whether Magog Metal Co Inc then created by fictitious invoices disbursements which were not bona fide made by it, to set off against such income receipts in whole or In part.

ORDER

1. Magog Metal Co Inc is joined to the appeal brought herein by Plaintiff Quemet Corp as an added party pursuant to paragraph 174(3)(b) of the Income Tax Act.

2. The heading of the proceedings is amended so as to read:

QUEMET CORP,

Plaintiff,

—and —

HER MAJESTY THE QUEEN,

Defendant,

—and—

MAGOG METAL CO INC,

Added Party.

3. Two questions are set forth for determination:

(a) Whether for the fiscal year 1972 to 1976 respective Quemet Corp’s alleged payments to Magog Metal Co Inc for used metal were bona fide payments or resulted in whole or in part from the creation of fictitious invoices and hence were never received by Magog Metal Co Inc or if received retained by them as proceeds of bona fide sales.

(b) In the event that it be found that these receipts by Magog Metal Co Inc resulted from bona fide sales to Quemet Corp whether Magog Metal Co Inc then created by fictitious invoices disbursements which were not bona fide made by it, to set off against such income receipts in whole or in part.

4. Quemet Corp, Magog Metal Co Inc and defendant will be bound by the decision of the trial division of this court on the determination of the common questions for all years in issue, subject to any appeal therefrom.

5. The defendant shall within 15 days file and serve upon the added party copies of all pleadings and proceedings in this action (save for the application under section 174 which has already been served), and of this Order, and the added party shall serve a defence to the material in defendant’s said application on plaintiff and defendant within 15 days after service of this order, and defendant and plaintiff shall be at liberty to file and serve an answer or reply and joinder of issue to the defence of the added party within 15 days after service thereof.

6. The plaintiff, defendant, and added party may have production and discovery each from the other in the same manner as between a plaintiff and defendant.

7. The order of trial of the action shall be as the trial judge may direct.

8. The added party shall be at liberty to file and serve a defence to plaintiff’s declaration or statement of claim within 15 days after service upon the added party of copies of the pleadings and proceedings in this action and plaintiff shall be at liberty to deliver an answer or reply and joinder of issue to the defence filed by the added party within 15 days after service thereof.

9. Notice shall be given to all parties of all examinations for discovery between any of them, and all parties may be present at such examinations and take part therein.

10. The costs of this application are in favour of defendant against plaintiff. All other costs shall be in the cause as determined by the trial judge.