The Queen v. Central Tobacco Mfg. (1980), Ltd., 85 DTC 5300, [1985] 1 CTC 357 (FCTD)

Walsh, J:—Plaintiff moves pursuant to Rule 1718(3) and 603 of the Federal Court Rules for an order striking the defendant’s cross-demand herein and more specifically paragraphs 56 to 80 and conclusions 2, 3 and 4 thereof, or alternatively that the cross-demand be heard separately. The notice of motion also sets out that it will be argued that defendant’s cross-demand seeking a declaratory judgment be brought against the Attorney General of Canada and not Her Majesty The Queen. This latter contention was not argued at the hearing.

To summarize the facts briefly plaintiff and defendant have been disputing for some time the amount of sales and excise tax due by defendant on cigarette tubes and cigarette rolling devices during the periods between October 1, 1980 and September 30, 1984. As determined by two audits of defendant’s books and records plaintiff claims the sum of $914,340.97 in respect of sales and excise taxes and $365,493.32 in penalty. The dispute arises in part in the manner of evaluating the merchandise sold. Defendant in a very lengthy statement of defence and counterclaim denies the claim for the amounts due and in the counterclaim alleges that negotiations took place respecting the amount allegedly due and that in the course of such negotiations the Department of National Revenue acknowledged they could recommend a substantial reduction of the taxes and penalties claimed, but no final agreement was ever reached. They allege that on or about September 5, 1984 representatives of the plaintiff agreed with the accountant of the defendant that the defendant would not be required to make any payments until all outstanding matters had been resolved but that despite this alleged agreement on or about October 25, 1984, without any notice or warning a writ of seizure fieri facias was issued on an ex parte basis as a result of which property of the defendant was seized on November 9, 1984, pursuant to subsection (4) of section 50 of the Excise Tax Act according to defendant. This subsection is one which imposes penalties for default of payment. Defendant in its cross-demand states that such seizure was contrary to section 8 of the Canadian Charter of Rights and Freedoms, not being supported by the requisite judicial or quasi-judicial process as no judicial determination had been made as to the amount, if any, owing by defendant to plaintiff, as well as contrary to the alleged agreement between them not to demand payment until the amount due was determined. It is further pleaded that plaintiff had no reasonable grounds to believe that the indebtedness of defendant would not be paid without such seizure. On December 6, 1984, defendant filed a motion to quash the seizure and prior to the hearing of the motion plaintiff granted a mainlevée of the seizure which plaintiff contends constitutes an admission by plaintiff that the seizure was wrongful. It is contended that the seizure violated the constitutional rights of defendant. A declaration is sought that subsection 50(4) of the Excise Tax Act is contrary to section 8 of the Canadian Charter of Rights and Freedoms as well as to paragraph 1(a) of the Canadian Bill of Rights in that it is a derogation from due process of law and allows the use of a certificate signed by an administrative official to obtain the seizure on a contested debt which is unreasonable, harsh and arbitrary and lacks the requisite judicial or quasi-judicial intervention. Moral damages in the amount of $1,000 are claimed. It is also alleged that plaintiffs claim and the counterclaim relate to the same underlying factual situation and raise similar and closely related questions of fact and law.

I do not find that the cross-demand should be struck altogether, since in addition to the constitutional issue it raises factual matters dealing with the negotiations between the parties relating to settlement and whether in fact there was any agreement that defendant was not required to make any payment until the dispute of the amount due had been resolved. Obviously a judicial determination will have to eventually be made as to the amount involved if the parties cannot agree and this would be dealt with in the principal action. There is no requirement in the Excise Tax Act requiring payment to be made within a certain period of time following an assessment. There is however a provision in subsection (4) of section 52 for the registration of a certificate of default certified by the Deputy Minister in the Federal Court of Canada which shall thereafter have the same force and effect as if the certificate were a judgment of the Court for the recovery of a debt in the amount specified in the certificate. This is similar to the provision in the Income Tax Act. Some jurisprudence was referred to, including the judgment of the Federal Court of Appeal on August 30, 1984, No A-l 153-83 in the case of Kruger which, with a strong dissent by Justice Marceau, found that subsection 231(4) of the Income Tax Act dealing with search and seizure violated section 8 of the Charter and hence was invalid. That case however did not deal with a seizure in execution of judgment resulting from registration of a certificate in this Court while the amount due is still in dispute when the certificate is registered, but only with search warrants in the course of an investigation, and can therefore be distinguished. It may well be that legislation may be required, as has been contemplated, to delay enforced collection of disputed amounts until the amounts in dispute have been settled by judicial determination, but in the present state of the law I would not be prepared to find that execution proceedings following the registration of a certificate in the Court establishing the amount allegedly due with penalty is a violation of the Canadian Charter of Rights and Freedoms nor do I believe that it would be appropriate to make such a far reaching finding on a preliminary motion in this case which merely seeks to strike such an allegation when in any event the matter is moot, the seizure having been released. In the case of Serge Charron and Claude Dufour, Garnishee v The Queen, [1984] CTC 237; 84 DTC 6241, concerning the use by the Minister of section 158 of the Income Tax Act which is a section permitting the Minister to form an opinion that a taxpayer is attempting to avoid payment of taxes as a result of which it is not necessary to wait 30 days for the filing of the notice of assessment to demand payment of them, which is a more normal procedure, I stated at 243 (DTC 6246):

. . . In a sense it can be said that any taxpayer who files an incomplete or false return is attempting to avoid payment of taxes. In a general way it is also perhaps arguable that any taxpayer who has substantial sums of money in his possession but has not paid his taxes is avoiding payment of them. I do not find that either such circumstance however is what subsection 158(2) is intended to cover. It would appear to be directed more to a situation where a taxpayer is found to be making away with his assets, transferring them to others for insufficient consideration, is about to leave the country, or some such circumstance as would justify a seizure before judgment under provincial law.

There is perhaps some factual analogy to the present case.

It may well be that plaintiff acted unfairly in making such a seizure at the time she did, but it would be necessary to go into the facts on the merits in order to make such a determination to find whether the counterclaim for $1,000 as moral damages is justified in law.

The real issue. before the Court on the present motion is whether the counterclaim should be tried separately from the principal action.

In the case of Burnaby Machine & Mill Equipment Ltd. v Berglund Industrial Supply Co Ltd et al, 64 CPR (2d) 206, in which defendants in a copyright infringement action counterclaimed for relief on the grounds that plaintiffs allegations were false and misleading and malicious and sought punitive damages, the plaintiff sought to strike out the paragraphs of the counterclaim. Justice Dubé in refusing to do this stated at 210-11:

In my view, under our Federal Court Rules, a counterclaim ought not to be struck out under any of the provisions of Rule 419 merely because two issues cannot be conveniently tried in one action. If it appeared to me that the subject-matter of the counterclaim ought, for any reason, to be disposed of by a separate action, I would not strike out the counterclaim but order it to be tried separately under the provisions of Rule 1718(3).

Reference was also made to the case of Del Zotto et al v International Chemalloy Corp, 14 OR (2d) 72, in which in an action brought by a debenture holder a counterclaim alleging conspiracy against plaintiff and certain other persons which might prejudice and embarrass the debenture holders on whose behalf the action was brought was struck out. It was held that a counterclaim should not generally be tried with the main action unless it relates to or is connected with the subject matter of the main action and that a counterclaim for damages should not normally be allowed in an action on a simple contract debt or other demand or for specific performance of a contract. In rendering judgment Madame Justice Van Camp stated at 77:

It is now well settled that where the defendant counterclaims against the plaintiff alone, the counterclaim need not be of the same nature as the original action or even analogous thereto. However, where the defendant claims against the plaintiff “and any other persons’’ the relief claimed must relate to or be connected with the subject-matter of the original action. Where the counterclaim is against the plaintiff alone, it may be excluded because it cannot be conveniently tried with the plaintiffs claim. Where, however, the counterclaim is against the plaintiff and others, it may be excluded on the ground that it is “not related to or connected with” the subject of the plaintiffs action and even if it fulfils that requirement it still may not be capable of being conveniently tried together with the main action.

In the present case there is no such complication of the counterclaim being against other parties than the original plaintiff.

It would appear that there is no general rule and that the Court must decide on the facts of the case before it whether it is desirable that the counterclaim be dealt with separately from the main action. Rule 1718 of the rules of this Court gives wide discretion. It reads as follows:

Rule 1718. (1) A counterclaim or cross-demand may be proceeded with notwithstanding that judgment is given for the plaintiff in the action or that the action is stayed, discontinued or dismissed.

(2) Paragraph (1) is without prejudice to the Court’s power to stay, discontinue or dismiss, or take any other action in relation to the counterclaim or cross-demand, in the same manner as if the counterclaim or cross-demand were a separate action.

(3) If it appears that the subject-matter of a counterclaim or cross-demand ought for any reason to be disposed of by a separate action, the Court may order the counterclaim or cross-demand to be struck out, may order it to be tried separately, or may make such order as may be expedient.

In the present case the Crown contends that that principal action concerns itself with the amount due under the provisions of the Excise Tax Act while a counterclaim is devoted to damages for the seizing of defendant’s assets in an attempt to secure payment of the amount assessed and penalty before the amount has been finally determined by agreement or by Court judgment. Defendant for its part contends that the principal action and cross-demand are inextricably joined. Plaintiff seized defendant’s assets before even commencing the present proceedings. Plaintiff [sic] refers to subsection 52( 1.4) of the Excise Tax Act which reads:

All taxes or sums payable under this Act are debts due to Her Majesty and are recoverable as such in the Federal Court or in any other court of competent jurisdiction.

and argues that this indicates that subsection 52(4) providing for registration of a certificate of default which shall have the effect of a judgment is unconstitutional. I do not read subsection 1.4 to have this effect. It is merely an enabling section indicating the court in which action may be taken to recover sums due to Her Majesty and does not deal with the procedure for effecting such recovery. Neither do I accept plaintiff’s [sic] contention that the debt did not exist at the time the certificate was registered. This is a question of fact which shall be determined in the principal action.

If the principal action and cross-demand were tried separately the issue of the alleged representations made by plaintiff about not demanding payment until the amount to be paid was settled would be an issue in the cross-demand in addition to the constitutional issue. The same or a similar issue might arise in the principal action with respect to the alleged statement made by plaintiffs representatives that the amount claimed might well be reduced, and there might be some danger of conflicting judgments. While there may well have been separate so-called agreements, one with respect to the amount of the claim and the other with respect to whether or not anything would be done to attempt to enforce payment while the amount was still under litigation, which agreements are denied by the Crown, it appears to me that it is not desirable to separate the two proceedings, as to do so would require duplication of some of the evidence.

Plaintiffs motion will therefore be dismissed with costs.

Motion dismissed.