CORAM: STONE J.A.
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HER MAJESTY THE QUEEN
Heard at Toronto, Ontario, November 7, 2000
JUDGMENT OF THE COURT delivered at Ottawa, Ontario, December 21, 2000
REASONS FOR JUDGMENT BY THE COURT
CORAM: STONE J.A.
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HER MAJESTY THE QUEEN
REASONS FOR JUDGMENT
BY THE COURT:
This is an appeal of income tax reassessments for 1974, 1975, 1976 and 1977 made on March 8, 1979 on the basis that certain amounts paid in those years were taxable in the hands of Mr. James by virtue of the application of subsection 56(2) of the Income Tax Act as then in force (S.C. 1970-71-72, c. 63). The Crown, in addition to including those amounts in the income of Mr. James, imposed penalties under subsection 163(2) of the Income Tax Act.
Mr. James filed notices of objection on or about May 30, 1979. For the next four years, there was a criminal investigation relating to the transactions that were the subject of the reassessments. Nothing was done with respect to the notices of objection during that period. Charges were laid against Mr. James in May of 1983. A trial was commenced in November of 1984. The charges were dismissed. The Crown appealed unsuccessfully to the District Court of Ontario, but its appeal to the Ontario Court of Appeal was allowed in July of 1986. Mr. James obtained leave to appeal to the Supreme Court of Canada but his appeal was dismissed in May of 1988.
A new trial was commenced in December of 1988 but the proceedings were stayed by the judge. The Crown appealed but the appeal was abandoned in February or March of 1989. A few months later, in November of 1989, the Crown considered the notices of objection and confirmed the reassessments. By that time, more than ten years had elapsed from the date on which the notices of objection were filed.
Once the confirmations were issued, Mr. James appealed to the Tax Court. The Tax Court Judge allowed the appeal in part. In a decision dated December 29, 1992, reported at 93 D.T.C. 161,  1 C.T.C. 2126,  T.C.J. No. 778 (QL), the Tax Court Judge held that Mr. James was taxable on certain amounts paid by K.C.R. Investments Ltd. but not a dividend paid by Pedigree Holdings Ltd. to the nephew of Elsa Kirsten, the common law spouse of Mr. James. He also held that the Crown had failed to discharge its burden of justifying the imposition of the penalties.
Mr. James appealed that decision to the Trial Division, which heard the matter as a trial de novo under the tax appeal regime in effect prior to 1992. The Crown cross-appealed on the basis that the dividend should have been taxable to Mr. James, and that the penalties were justified. The trial judge dismissed Mr. James' appeal and allowed the Crown's cross appeal with respect to the penalties, but dismissed the Crown's cross appeal with respect to the dividend: 96 D.T.C. 6509,  F.C.J. No. 1146 (QL).
The trial judge also dismissed a motion on behalf of Mr. James to vacate the reassessments on the basis that the Minister had not acted with all due dispatch in considering the notices of objection: 96 D.T.C. 6416,  3 C.T.C. 125,  F.C.J. No. 899 (QL), and ruled that certain banking documents were admissible: (1996), 115 F.T.R. 277,  F.C.J. No. 1053 (QL).
All of the decisions of the trial judge are now under appeal by Mr. James. The Crown has not cross-appealed the matter of the tax treatment of the dividend, which is no longer in issue.
Motion to vacate reassessments for failure to reassess with all due dispatch
As stated above, the Minister did not confirm the reassessments that are the subject of this appeal until over ten years had elapsed from the date on which Mr. James filed notices of objection. At trial, a motion was made on behalf of Mr. James that the reassessments should be vacated because the Minister failed to meet the obligation imposed by paragraph 165(3)(a) of the Income Tax Act (as in force prior to 1991). The trial judge dismissed that motion.
For the taxation years in issue, paragraph 165(3)(a) read as follows:
165(3) Upon receipt of a notice of objection under this section, the Minister shall,
(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess; [...]
and he shall thereupon notify the taxpayer of his action by registered mail.
165(3) Dès réception de l'avis d'opposition, formulé en vertu du présent article, le ministre_:
a) avec diligence, examine de nouveau la cotisation et annule, ratifie ou modifie cette dernière ou établit une nouvelle cotisation;
et en avise le contribuable par lettre recommandée.
This provision is substantially the same as subsection 165(3) of the current version of the Income Tax Act.
The Crown argues that vacating reassessments is not an appropriate remedy for undue delay in dealing with an objection, but in any event there was no undue delay, because the objections were held in abeyance pending the conclusion of the criminal proceedings.
The Income Tax Act does not stipulate any consequence for a failure on the part of the Minister to deal with a notice of objection with all due dispatch. On that question, the leading authority in this Court is Bolton v. The Queen, (1996), 200 N.R. 303, 96 D.T.C. 6413,  3 C.T.C. 3 (F.C.A.). In that case Mr. Justice Hugessen, speaking for the Court, said this (at page 304, N.R.):
| Parliament clearly did not intend that the Minister's failure to reconsider an assessment with all due dispatch should have the effect of vacating such assessment. If the Minister does not act, the taxpayer's recourse is to appeal pursuant to section 169. |
The reference to section 169 is a reference to paragraph 169(1)(b) of the Income Tax Act as now in force. Prior to July 18, 1983, its predecessor, paragraph 169(b), was in force and read as follows:
169 Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Review Board to have the assessment vacated or varied after [...]
(b) 180 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that he has vacated or confirmed the assessment or reassessed;
169 Lorsqu'un contribuable a signifié un avis d'opposition à une cotisation, prévu à l'article 165, il peut interjeter appel auprès de la Commission de révision de l'impôt pour faire annuler ou modifier la cotisation_:
b) après l'expiration des 180 jours qui suivent la signification de l'avis d'opposition sans que le ministre ait notifié au contribuable le fait qu'il a annulé ou ratifié la cotisation ou procédé à une nouvelle cotisation;
By S.C. 1980-81-82-83, c. 158, section 58, paragraph 169(b) was amended to replace "Tax Review Board" with "Tax Court of Canada" effective July 18, 1983. By S.C. 1984, c. 45, subsection 70(1), the 180 day period was reduced to 90 days for notices of objection filed after December 20, 1984, but otherwise paragraph 169(b) survives as paragraph 169(1)(b) of the current version of the Income Tax Act.
If Bolton stands, then regardless of the reason for the ten year delay in dealing with the objections, Mr. James cannot obtain the remedy he seeks.
It is argued for Mr. James that Bolton should not stand because it contradicts Schultz v. The Queen,  F.C. 423, 95 D.T.C. 5657,  2 C.T.C. 127,  F.C.J. No. 1471(QL) (F.C.A.), Minister of National Revenue v. Appleby,  1 Ex. C.R. 244, 64 D.T.C. 5199,  C.T.C. 323 (E.C.) and J. Stollar Construction Ltd. v. Minister of National Revenue, 89 D.T.C. 134,  1 C.T.C. 2171 (T.C.C.).
In each of those cases it was suggested that the remedy for the Minister's failure to deal with a notice of objection with all due dispatch would be to vacate the reassessment. Bolton was decided after those cases, and deals squarely with the issue of remedy. We see nothing in any of those cases that provides a reason for departing from the principle in Bolton.
J. Stollar Construction is the only case in which reassessments were vacated. That is a decision of the Tax Court, and it must be taken as overruled by this Court in Bolton.
The comments in Schultz and Appleby on remedy were obiter dicta. It was found in both cases that the Minister had not failed to act with due dispatch, and so the question of the appropriate remedy did not arise. We note as well that the Court in Schultz recognized that a taxpayer who has filed a notice of objection may resort to paragraph 169(1)(b) of the Income Tax Act and appeal directly to the Tax Court.
It was argued on behalf of Mr. James that the Bolton interpretation of paragraph 165(3)(b) imposes a statutory duty on the Minister but gives no effective weapon to taxpayers by which they can compel the Minister to comply. It is true that under Bolton, a taxpayer cannot claim the right to have a reassessment vacated because it is under objection for an unduly long period of time. However, it does not follow that the taxpayer has no effective remedy. The taxpayer may appeal to the Tax Court under paragraph 169(1)(b), or commence proceedings in the Federal Court to compel the Minister to consider the objection and deal with it. There is jurisprudence relating to such applications in the context of other income tax provisions imposing an obligation on the Minister to act with all due dispatch: Burnet v. Canada, 98 D.T.C. 6205,  3 C.T.C. 60,  F.C.J. No. 364 (QL) (F.C.A.); Merlis Investments Ltd. v. Canada,  F.C.J. No. 1746 (QL)(F.C.T.D.).
We conclude that there is no basis for departing from the decision of this Court in Bolton, and that the Trial Judge was correct to dismiss the motion to set aside or vary the notices of reassessments.
At trial, the Crown tendered copies of a large number of bank documents and originally asked that they be admitted under section 29 of the Canada Evidence Act, R.S.C. 1985, c. C-5 as amended. The parts of section 29 that are relevant to this case read as follows:
29 (1) Subject to this section, a copy of any entry in any book or record kept in any financial institution shall in all legal proceedings be admitted in evidence as proof, in the absence of evidence to the contrary, of the entry and of the matters, transactions and accounts therein recorded.
(2) A copy of an entry in the book or record described in subsection (1) shall not be admitted in evidence under this section unless it is first proved that the book or record was, at the time of the making of the entry, one of the ordinary books or records of the financial institution, that the entry was made in the usual and ordinary course of business, that the book or record is in the custody or control of the financial institution and that the copy is a true copy of it, and such proof may be given by any person employed by the financial institution who has knowledge of the book or record or the manager or accountant of the financial institution, and may be given orally or by affidavit sworn before any commissioner or other person authorized to take affidavits.
(4) Where evidence is offered by affidavit pursuant to this section, it is not necessary to prove the signature or official character of the person making the affidavit if the official character of that person is set out in the body of the affidavit.
(5) A financial institution or officer of a financial institution is not in any legal proceedings to which the financial institution is not a party compellable to produce any book or record, the contents of which can be proved under this section, or to appear as a witness to prove the matters, transactions and accounts therein recorded unless by order of the court made for special cause.
(6) On the application of any party to a legal proceeding, the court may order that that party be at liberty to inspect and take copies of any entries in the books or records of a financial institution for the purposes of the legal proceeding, and the person whose account is to be inspected shall be notified of the application at least two clear days before the hearing thereof, and if it is shown to the satisfaction of the court that he cannot be notified personally, the notice may be given by addressing it to the financial institution.
29. (1) Sous réserve des autres dispositions du présent article, une copie de toute inscription dans un livre ou registre tenu dans une institution financière fait foi dans toutes procédures judiciaires, jusqu'à preuve contraire, de cette inscription, ainsi que des affaires, opérations et comptes y inscrits.
(2) Une copie d'une inscription dans ce livre ou registre n'est pas admise en preuve sous le régime du présent article à moins qu'il n'ait préalablement été établi que le livre ou registre était, lors de l'inscription, l'un des livres ou registres ordinaires de l'institution financière, que l'inscription a été effectuée dans le cours ordinaire des affaires, que le livre ou registre est sous la garde ou la surveillance de l'institution financière, et que cette copie en est une copie conforme. Cette preuve peut être fournie par le gérant ou par le comptable de l'institution financière ou par tout employé de l'institution qui connaît le contenu du livre ou du registre et peut être donnée de vive voix ou par affidavit devant un commissaire ou une autre personne autorisée à recevoir les affidavits.
(4) Lorsque la preuve est produite sous forme d'affidavit en conformité avec le présent article, il n'est pas nécessaire de prouver la signature ou la qualité officielle de la personne souscrivant l'affidavit, si la qualité officielle de cette personne est énoncée dans le corps de l'affidavit.
(5) Dans les procédures judiciaires auxquelles l'institution financière n'est pas partie, l'institution financière ou un officier de l'institution financière ne peut être contraint à produire un livre ou registre dont le contenu peut être prouvé sous le régime du présent article, ni à comparaître comme témoin afin de prouver les affaires, opérations et comptes y inscrits, sauf par ordonnance du tribunal rendue pour un motif spécial.
(6) À la demande d'une partie à une procédure judiciaire, le tribunal peut ordonner que cette partie soit libre d'examiner les inscriptions dans les livres ou registres d'une institution financière pour les fins de cette procédure, et d'en prendre copie. La personne dont le compte doit être examiné doit recevoir avis de la demande deux jours francs au moins avant l'audition de la demande et, s'il est démontré au tribunal que l'avis ne peut être donné à la personne elle-même, cet avis peut être donné à l'adresse de l'institution financière.
The copies were accompanied by affidavits sworn in 1984, 12 years before the trial, that had been prepared with a view to having the documents tendered under section 29 of the Canada Evidence Act at the trial of the criminal charges referred to above. There were 19 affidavits in all, relating to various banks and various accounts. The affidavits are listed as number 1 to 7 (Exhibit 25, Banking Documents, Volume I), numbers 8 to 11 (Exhibit 26, Banking Documents, Volume II), 12 (Exhibit 27, Banking Documents, Volume III), and 13 to19 (Exhibit 28, Banking Documents, Volume IV). Affidavit number 4 was withdrawn because it was only a draft, included in error (Transcript, Volume 5, July 2, 1996, page 7 - 9). The trial judge admitted the remaining documents.
Counsel for Mr. James argues on several grounds that the trial judge erred in admitting those documents. For the reasons below, we have concluded that the documents were admissible.
We note at the outset that there is no evidence that any of the documents admitted by the trial judge are unreliable or that they do not correctly reflect the transactions to which they refer. There was no suggestion that these documents were not disclosed to Mr. James in a timely fashion under the ordinary rules for the discovery of documents so that Mr. James would be aware of their contents. Counsel for Mr. James says that he was prejudiced by the admission of these documents because they were put to him in cross-examination and he was compelled to make what may have been damaging admissions that would not have been made if the documents had been ruled inadmissible.
With respect to affidavits number 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 17, and 18 (Transcript, Volume 5, July 2, 1996, page 9), the copies of the documents attached to the affidavits were not identified by an exhibit stamp or a signature of the commissioner who took the oaths. It was therefore impossible to conclude that the appended documents were in fact copies of the documents to which the affidavit purported to refer. Counsel for Mr. James argued that those appended documents should not have been admitted under section 29 of the Canada Evidence Act.
His argument on this point was somewhat misleading, in the sense that those appended documents were not admitted under section 29 of the Canada Evidence Act. Although they were initially admitted with no one noticing the error, they were withdrawn from the record at the request of counsel for the Crown when he told the trial judge that there were deficiencies in the affidavits. Counsel for the Crown then put each of those documents to Mr. James, who was a witness at trial. He identified them and testified as to their contents. We see no basis for concluding that the documents so identified by Mr. James were not admissible.
Counsel for Mr. James raised two additional arguments relating to the bank documents. Those arguments relate only to the documents adduced under the affidavits that did not suffer the deficiencies referred to above (affidavits number 1, 2, 3, 15, 16 and 19 (Transcript, Volume 5, July 2, 1996, page 9), found in the Appeal Book at Volume 7, page 1067, 1086 and 1089 and Volume 11, page 1983, 1987 and 2116).
The first argument is that the documents should not have been admitted because the affidavits were not sworn at the time of the trial in 1996, but in 1984. Nothing in section 29 of the Canada Evidence Act imposes any requirement as to when the affidavit must be sworn. Normally, it will be sworn before the trial at which the documents are to be used. There may be situations where the lapse of time between the swearing of the affidavit and the trial causes concern as to the reliability of the documents to which the affidavit refers, but it is always open to the trial judge to put little or no weight on such documents. While the lapse of time in this case was unusually long, we do not accept that the lapse of time by itself renders the affidavits inadmissible.
The second argument made by counsel for Mr. James is that subsection 29(2) should be interpreted as though the words "the book or record is in the custody or control of the financial institution" refer to the time of trial and not the time when the affidavit is sworn. It was said in argument that at the time of trial, the documents in question were no longer in the respective banks' custody and control. That is not based on any evidence in the record, but rather on an admission made by counsel for the Crown at trial when the admissibility of the bank documents was being considered.
For present purposes, we are prepared to assume that the original documents, copies of which were appended to the affidavits, did not exist at the time of trial. However, we are unable to accept the argument that the copies of those documents are inadmissible merely because the originals do not exist. Counsel referred to no jurisprudence on this point. The only authority that supports the argument is a statement at page 128 of Documentary Evidence in Canada by J. Douglas Ewart (Agincourt: Carswell, 1984), for which no jurisprudence is cited. In our view, that statement is not correct, and neither is the argument.
Section 29 permits copies of banking documents to be proved without requiring the viva voce evidence of a bank officer (except where special circumstances require the application of subsection 29(5)), and without requiring the original documents to be adduced. This exception to the ordinary rules of evidence is, as the trial judge said, justified by necessity and a circumstantial guarantee of trustworthiness.
As we read subsection 29(2), the requirement that the documents be in the bank's custody and control speaks to the time when the affidavit is made, not the date of trial. Indeed, no deponent can say in an affidavit, before the trial commences, that the documents will be in the custody and control of the bank when the trial commences. Such a statement is a prediction or an assertion as to future intention, not a statement of fact. If Parliament had intended copies of bank documents to be admissible only as long as the originals were in the custody and control of the bank, it would have imposed an obligation on financial institutions to retain the originals of any documents referred to in a section 29 affidavit. There is no such requirement.
Counsel for Mr. James argues that his interpretation of subsection 29(2) is supported by subsection 29(6). We do not agree. Subsection 29(6) facilitates access to bank documents for the purposes of a legal proceeding, subject to a court order. It cannot be read as a guarantee that any particular documents are in existence when the order is sought.
Interpretation of subsection 56(2)
The reassessments under appeal are based on the application of subsection 56(2) of the Income Tax Act, which at the relevant time read as follows:
A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.
Tout paiement ou transfert de biens fait, suivant les instructions ou avec l'accord d'un contribuable, à toute autre personne au profit du contribuable ou à titre d'avantage que le contribuable désirait voir accorder à l'autre personne doit être inclus dans le calcul du revenu du contribuable dans la mesure où il le serait si ce paiement ou transfert avait été fait au contribuable.
It has long been established that there are four conditions for the application of subsection 56(2). The four conditions were stated in Murphy v. The Queen, 80 D.T.C. 6314,  C.T.C. 386 (F.C.T.D.) and Fraser Companies, Ltd. v. The Queen, 81 D.T.C. 5051,  C.T.C. 61 (F.C.T.D.) and were adopted by the Supreme Court of Canada in Neuman v. M.N.R.,  1 S.C.R. 770, 98 D.T.C. 6297,  3 C.T.C. 177 (at paragraph 32 of the decision of Mr. Justice Iacobucci):
| (1) the payment must be to a person other than the reassessed taxpayer; |
| (2) the allocation must be at the direction or with the concurrence of the reassessed taxpayer; |
| (3) the payment must be for the benefit of the reassessed taxpayer or for the benefit of another person whom the reassessed taxpayer wished to benefit; and |
| (4) the payment would have been included in the reassessed taxpayer's income if it had been received by him or her. |
To understand the debate about the application of subsection 56(2) in this case, it is necessary to understand the two competing theories relating to the payments in question.
During the years under appeal, Mr. James was a self-employed lawyer and a partner in a law firm called James & Suits. One of the clients of the law firm was K.C.R. Investments Ltd., a corporation that carried on a mortgage business.
Mr. James was also an officer and director of Pedigree Holdings Ltd. which had two issued common shares, one of which was registered in the name of Mr. James but until 1977 was allegedly held in trust for a minor, the nephew of Elsa Kirsten (the common law spouse of Mr. James). The other share was registered in the name of a third party during the years under appeal.
The Crown alleged that during the years in question, Mr. James did work for K.C.R. Investments Ltd. outside his law partnership, for which he and not the law firm was entitled to be paid, and that at his direction K.C.R. Investments paid some of those amounts to Elsa Kirsten and Pedigree Holdings Ltd. The Crown also alleged that Ms. Kirsten did not perform any services that would have led to the conclusion that any of those sums were earned by her, rather than Mr. James.
If the Crown's version of the facts is correct, the four requirements of subsection 56(2) are met. The payments were made to persons other than Mr. James. The allocation of the money to those persons was made at the direction or with the concurrence of Mr. James. The payments were for the benefit of Ms. Kirsten (because she gave no consideration for the payments). And the payment would have been included in the income of Mr. James if it had been received by him.
On the other hand, Mr. James sought to establish that in fact the money paid to Ms. Kirsten and Pedigree Holdings Ltd. was remuneration she earned by doing certain work for K.C.R. Investments Ltd., and thus was her income and not his. Among the evidence relied on in support of this version of the facts was that the amounts in question were in fact reported in the income tax returns of Ms. Kirsten and taxed in her hands. If the version of the facts propounded by Mr. James is correct, subsection 56(2) would have no application.
The trial judge accepted the Crown's version of the facts. If those factual conclusions stand, there would seem to be no bar to the conclusion that subsection 56(2) was properly applied. However, counsel for Mr. James points to what he says is a fifth condition for the application of subsection 56(2). He says that the fifth condition is evidence that the actual recipient of the amounts in question (in this case Ms. Kirsten) would not be subject to tax on those amounts.
The argument for the existence of a fifth condition is derived from obiter dicta in Winter v. Canada,  1 F.C. 585, 90 D.T.C. 6681,  1 C.T.C. 113 (C.R.). In that case Mr. Winter, a shareholder and officer of a corporation, caused the corporation to sell property to his son-in-law at an undervalue. Mr. Winter was assessed under subsection 56(2) on the basis that he had caused a corporate appropriation to be directed to his son-in-law, and that the amount of the appropriation would be taxable in the hands of Mr. Winter under subsection 15(1) if he had received it. The son-in-law was also a shareholder of the corporation, and as he had received the alleged appropriation, it was argued that he should have been taxed on the resulting shareholder benefit under subsection 15(1), leaving no scope for the application of subsection 56(2) in a manner that would cause the same amount to be taxed in the hands of Mr. Winter.
Mr. Justice Marceau, speaking for this Court in Winter, agreed with the logic of this argument, but found it had no application to the facts of the case because the son-in-law received the corporate appropriation in his capacity as son-in-law, not in his capacity as shareholder. From that it followed that there was no shareholder benefit that was taxable under subsection 15(1) in the hands of the son-in-law. In the course of his analysis on this point, Mr. Justice Marceau said this (emphasis added) (at page 594, F.C.):
| ...I agree that the validity of an assessment under subsection 56(2) of the Act when the taxpayer had himself no entitlement to the payment made or the property transferred is subject to an implied condition, namely that the payee or transferee not be subject to tax on the benefit he received. The problem for the appellants, however, is that, in my judgment, this qualification does not come into play in this case. |
This reference to an "implied condition" simply recognizes that subsection 56(2) cannot apply to an amount that is properly taxable as income in the hands of the person who actually received it, because in that case the fourth condition cannot be met. Put another way, it is implicit in the fourth condition that the payment in question must be an amount that only the taxpayer, in this case Mr. James, is entitled to receive as income (see paragraph 53 of the decision of Mr. Justice Iacobucci in Neuman, cited above). When the comments of Mr. Justice Marceau are understood in this light, it is clear that there is no fifth condition to the application of subsection 56(2).
Given the two competing theories of this case, the payments made by K.C.R. Investments Ltd. to Ms. Kirsten could not be remuneration for Ms. Kirsten's services and at the same time be remuneration for the services of Mr. James. The two theories are mutually exclusive. If the payments were remuneration payable to Ms. Kirsten for her services, subsection 56(2) would not require the payments to be taxed in the hands of Mr. James. However, if Ms. Kirsten did not provide services that would justify an entitlement to the payments in question, but Mr. James did, the inescapable conclusion is that subsection 56(2) must be applied to cause the payments to be taxable in the hands of Mr. James.
It appears to have been argued at trial that if Mr. James was taxable on these amounts, he should be entitled to an offsetting deduction because the theory would then be that he was entitled to receive the amounts as legal fees but Ms. Kirsten was also entitled to receive like amounts for the work that she performed. The trial judge gave no effect to that argument because the pleadings filed on behalf of Mr. James did not refer to any claim for expenses. This argument was not made on appeal.
We have not overlooked the allegation made by Mr. James that the amounts in question were reported in Ms. Kirsten's tax returns. The trial judge found as a fact that Ms. Kirsten did not earn the amounts in question and they were not her income. Ms. Kirsten was not obliged as a matter of law to pay tax on any amount that was not income in her hands. The manner in which her returns were filed does not detract from the conclusion that subsection 56(2) must be applied if the amounts in question were income of Mr. James alone.
Reasonable apprehension of bias
Finally, it is argued for Mr. James that the result of the trial must be quashed because the trial judge's interventions in the questioning of witnesses gave rise to a reasonable apprehension of bias.
The applicable principles are not in dispute. They are well established in such cases as Yuill v. Yuill,  1 All E.R. 183 (C.A.), Jones v. National Coal Board,  2 All E.R. 155 (C.A.), Majcenic v. Natale,  1 O.R. 189 (C.A.); R. v. Brouillard,  1 S.C.R. 39, Rajaratnam v. Canada (Minister of Employment and Immigration), (1991), 135 N.R. 300,  F.C.J. No. 1271 (F.C.A.)(QL); Sorger v. Bank of Nova Scotia (1998), 39 O.R. (3d) 1, 160 D.L.R. (4th) 66 (C.A.).
The general rule is that a judge may ask a witness questions of clarification and amplification, but should not intervene in the questioning of a witness to such an extent as to give the impression of taking on the role of counsel. A judge who does so necessarily will be seen as having adopted a position in opposition to one of the parties. That diminishes the appearance of impartiality that is critical to the goal of ensuring that justice is not only done, but is seen to be done. It may also interfere with the effective presentation of the case by counsel.
An allegation of undue intervention in the questioning of a witness must be assessed in the context of the proceedings as a whole. The objective of such a review is not to determine whether the interventions were well motivated or well intentioned. Rather, the objective is to determine whether the intervention would cause a reasonable and well informed observer to apprehend that the mind of the trial judge was closed to a fair and impartial consideration of the case:  1 S.C.R. 369">Committee for Justice and Liberty v. National Energy Board,  1 S.C.R. 369. Where it is determined that there are interventions having that effect, the only possible remedy is to remit the matter for retrial.
The trial of this matter took place over 11 days in June, July and August, 1996. Considerable time was taken up with motions, submissions on various points that arose in the course of the trial, and closing argument. Evidence was heard on June 26, 27, and 28, July 2 and 3, and August 22 and 23, 1996. Closing argument was heard on August 30 and 31, 1996, and the trial judge rendered his decision orally at the conclusion of argument.
Counsel for Mr. James cited 27 instances in which the trial judge intervened to put questions to the witnesses. We have carefully reviewed the transcript, giving due regard to the exigencies of the trial process and the degree of latitude that must be allowed to trial judges in the fulfilment of their obligations. We have borne in mind the inherent limitations of transcripts, which record only words and leave out important nuances that may be derived from the manner in which the words are spoken. We note also that the evidence elicited by counsel was in many respects confusing and apparently inconsistent with the documentary evidence.
We have concluded that many of the interventions of the trial judge, when reviewed in the context in which they occurred, were questions posed to clarify evidence and were thus incapable of sustaining any objection on behalf of Mr. James.
However, with all due respect to the trial judge, we are compelled to agree with counsel for Mr. James that there were numerous instances where the questioning of the witnesses by the trial judge appeared to take on the character of cross-examination. We do not propose to describe those instances in detail. It is enough to say that the trial judge challenged witnesses to explain apparent inconsistencies, debated with witnesses as to the meaning of documents or prior statements, and led the questioning of the witnesses along avenues that had not been introduced by counsel. On those occasions he acted in a manner that could reasonably lead an objective observer to conclude that he had taken on the role of counsel for the Crown (Transcript, Volume V, pages 133-39, 143-46, 169-70, 172-73 and Volume VI, pages 84-94).
Counsel for the Crown pointed out that a number of the interventions to which objection was taken related to the issue of the dividend paid by Pedigree Holdings Ltd., which ultimately was decided in favour of Mr. James.
That is true, but it is also true that some of the interventions that overstepped the boundaries of proper judicial intervention related to the legal character of the payments made to Ms. Kirsten, which was the principal issue in the appeal. In any event, the question is not whether the trial judge was actually predisposed or biassed against Mr. James. No such suggestion has been or could be made in this case. The question is whether his conduct of the trial was such as to give rise to a reasonable apprehension of bias in the mind of an informed and objective observer.
We are forced to conclude that Mr. James is entitled to a remedy, and the only possible remedy is to allow this appeal and remit the matter for a new trial.
Findings of fact by the trial judge
Counsel for Mr. James made several arguments with respect to the findings of fact by the trial judge. Because we have concluded that this matter must be remitted for a new trial, we think it best not to comment on any of these arguments.
We would allow the appeal with costs and set aside the judgment of the Trial Division, and remit the matter for a new trial.
Juilius A. Isaac
Karen R. Sharlow