Date:
20130708
Docket:
A-342-12
Citation: 2013 FCA 180
CORAM: SHARLOW
J.A.
DAWSON J.A.
STRATAS
J.A.
BETWEEN:
CLEARWATER
SEAFOODS HOLDINGS TRUST
Appellant
and
HER
MAJESTY THE QUEEN
Respondent
REASONS
FOR JUDGMENT
SHARLOW J.A.
[1]
In
2011, the appellant Clearwater Seafoods Holdings Trust (the “Taxpayer Trust”)
appealed an income tax assessment to the Tax Court of Canada. The trust was
terminated in 2012 upon the disposition of all of its property. In order to
obtain directions as to the continuation of the income tax appeal, a motion was
made pursuant to Rule 29 of the Tax Court of Canada Rules (General
Procedure), SOR/90‑688. The motion was dismissed on June 1, 2012. The
order dismissing the motion has been appealed to this Court. For the reasons
that follow, I would allow the appeal.
[2]
Prior
to the hearing of the appeal, the Court directed the parties to consider
certain issues not dealt with in their written submissions, and to consider
whether it would be appropriate to adjourn the appeal to permit an alternative
motion to be submitted to the Tax Court. An adjournment motion was filed on
behalf of the Taxpayer Trust, and it was opposed by the Crown. The Court heard
submissions on the motion and the appeal, and reserved its decision on both.
[3]
For
the purposes of this appeal and the Rule 29 motion, the facts are undisputed
and may be summarized as follows. In 2012, as part of a series of transactions
intended to achieve a permitted tax result, all of the property of the Taxpayer
Trust was transferred to another trust named Clearwater Seafoods Income Fund
(the “Fund”), which was then the holder of all units in the Taxpayer Trust. The
same property was immediately transferred to a corporation named Clearwater
Seafoods Incorporated (the “Corporation”), which was then the holder of all
units in the Fund.
[4]
It
is common ground that the Taxpayer Trust ceased to exist when it ceased to own
any property. However, the transactions described above did not automatically
put an end to the Taxpayer Trust’s income tax appeal. To facilitate the
continuation of that appeal despite the termination of the Taxpayer Trust,
counsel for the Taxpayer Trust filed a motion in the Tax Court seeking
directions under Rule 29, which reads as follows:
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29. (1) Where at
any stage of a proceeding the interest or liability of a person who is a
party to a proceeding in the Court is transferred or transmitted to another
person by assignment, bankruptcy, death or other means, no other proceedings
shall be instituted until the Registrar is notified of the transfer or
transmission and the particulars of it.
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29. (1) Lorsque
l’intérêt ou la responsabilité d’une partie à l’instance est transféré ou
transmis à une autre personne en raison d’une cession, d’une faillite, d’un
décès ou de toute autre cause, à tout moment de l’instance, nulle autre
procédure ne peut être engagée avant que le greffier ne soit avisé du
transfert ou de la transmission, ainsi que des modalités qui s’y rapportent.
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(2) On
receipt of the notice and particulars referred to in subsection (1) the
Registrar shall consult with the parties regarding the circumstances under
which the proceeding shall continue and he shall report on these
consultations to the Chief Justice.
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(2) Sur
réception de l’avis dont il est fait mention au paragraphe (1), le greffier
consulte les parties concernant les circonstances dans lesquelles l’instance
doit être continuée et fait rapport de ces consultations au juge en chef.
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(3) The Chief Justice or a
judge designated by him to deal with the matter may direct the continuation
of the proceeding or give such other direction as is just.
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(3) Le
juge en chef ou un juge désigné par lui pour traiter de l’affaire peut donner
une directive de continuer l’instance ou toute autre directive qui lui semble
appropriée.
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[5]
The
motion sought a direction permitting the Corporation to be named as the
appellant in place of the Taxpayer Trust. It was submitted that for three
reasons, the Corporation is the appropriate person to conduct the litigation:
(1)
The
Corporation is the party to which all of the property of the Taxpayer Trust was
transferred in the series of transactions described above, so that in practical
terms, the Corporation is the successor in title and interest to the trust
property.
(2)
As
the transferee of the trust property, the Corporation is at risk of being
assessed under subsection 160(1) of the Income Tax Act for the tax
liability of the Taxpayer Trust, if the appeal of its income tax assessment is
not successful. In that regard, counsel for the Taxpayer Trust admitted in this
Court that except for the existence of the tax liability of the Taxpayer Trust
that is the subject of the appeal in the Tax Court, all of the conditions in
subsection 160(1) are met.
(3)
The
series of transactions that included the transfer of all of the trust property
was undertaken to take advantage of the “specified investment flow-through
trust conversion rules” in the Income Tax Act (section 88.1 of the Income
Tax Act and related provisions). Those rules were intended to permit the
conversion, on a tax deferred basis, of certain income trusts to taxable
Canadian corporations. To comply with those rules, it was essential to complete
the series of transactions before January 1, 2013.
[6]
As
a result of the direction of this Court before the hearing, counsel for the
Taxpayer Trust also admitted, properly in my view, that the trustees of the
Taxpayer Trust are at risk of being assessed under subsection 159(3) of the Income
Tax Act for the liability of the Taxpayer Trust.
[7]
The
Crown opposed the Rule 29 motion, mainly on the basis that the appeal cannot be
continued because the taxpayer has ceased to exist. The Crown’s position is
that the merits of the Taxpayer Trust’s income tax appeal should not be
determined in the tax appeal now pending in the Tax Court. Rather, that appeal
should be dismissed for want of an appellant. Then, if Minister issues one or
more assessments under subsection 160(1) or 159(3), those assessments may be
appealed. It is now well established that in an appeal of such derivative
assessments, the correctness and validity of the underlying tax assessment can
be raised: Gaucher v. Canada (2000), 264 N.R. 369, 2000 D.T.C. 6678,
[2001] 1 C.T.C. 125 (FCA).
[8]
The
judge concluded that the circumstances of this case are not within the scope of
Rule 29(1). On that basis, he considered Rule 29 to be inapplicable and dismissed
the motion. In my view, the judge’s decision is based on misinterpretation of
Rule 29(1). He construed it too narrowly, disregarding its language and
purpose.
[9]
It
is important to consider the purpose of Rule 29(1). In the course of any court
proceeding, the circumstances of a litigant may change in such a way that the
proceeding cannot continue without special accommodation in matters of
procedure. Such a change in circumstances may be the result of the bankruptcy
of the litigant, the incapacity of the litigant due to illness or injury, the
death of a litigant who is an individual, or the dissolution of a litigant that
is a corporation if the dissolution cannot be reversed with retrospective
effect. An analogous situation for a litigant that is a trust (or, more
properly, the trustee or trustees of a trust) is the termination of the trust.
Such a termination is the legal consequence of the disposition by the trust of
all of its property. The purpose of Rule 29 is to deal with such situations, to
the extent they are within the scope of Rule 29(1).
[10]
Rule
29(1) is quoted above and is repeated here with only the words that appear to
me to be relevant to this case, inserting names as appropriate:
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29. (1) Where at
any stage of a proceeding the … liability of [Clearwater Seafoods Holdings
Trust] is … transmitted to another person by assignment, bankruptcy, death or
other means …
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29. (1) Lorsque
l’intérêt … [de Clearwater Seafoods Holdings Trust] est … transmis à une
autre personne en raison d’une cession, d’une faillite, d’un décès ou de
toute autre cause …
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[11]
It
is clear from the undisputed facts that the disposition of all of the property
of the Taxpayer Trust had significant legal consequences. One consequence is
that the Taxpayer Trust ceased to exist. Another consequence is that certain
persons became liable for some or all the federal income tax liability of the
Taxpayer Trust. One of those persons is the Corporation, by virtue of
subsection 160(1) of the Income Tax Act. The others are the persons who
were the trustees of the Taxpayer Trust when the property was transferred, by
virtue of subsection 159(3) of the Income Tax Act.
[12]
The
liability of a person under subsection 160(1) or 159(3) is joint and several
with the transferor of the property. In this case the transferor – the Taxpayer
Trust – ceased to exist as a result of the transfer. In practical terms, only
the Corporation and the trustees may be required to pay the federal income tax
liability of the Taxpayer Trust if the income tax appeal is not successful. In
effect, the transfer of the trust property caused the Corporation and the
trustees to become liable for that tax liability. While it is true that the
Corporation and the trustees will be required to pay that liability only if the
Minister chooses to assess and collect, the liability nevertheless exists.
[13]
In
my view, there has been in this case a transmission of the liability of the
Taxpayer Trust to another person by “other means” – which I take to include the
termination of the existence of the taxpayer. The disposition of property of the
Taxpayer Trust resulted automatically in the termination of the Taxpayer Trust
and the transmission of its federal income tax liability to one or more other
persons. That is a sufficient basis for concluding that the circumstances are
within the language and intended purpose Rule 29(1).
[14]
Once
a notification is made under Rule 29 and it is determined that the
circumstances are within the scope of Rule 29(1), the Chief Justice or a judge
designated by him must make the directions required by Rule 29(3). The content
of such directions is a matter of judicial discretion, and may well vary from
case to case. Therefore, I consider it appropriate to return this matter to the
Tax Court so that the motion filed on behalf of the Taxpayer Trust may be
reconsidered with a view to directing the continuation of the proceedings.
[15]
For
these reasons I would dismiss the motion to adjourn, without costs. I would allow
the appeal with costs, set aside the order of the Tax Court of Canada dated
June 1, 2012, and refer this matter back to the judge, or any other judge
designated by the Chief Justice of the Tax Court of Canada, for reconsideration
in accordance with the following directions:
(1)
The
appeal in the Tax Court is to be allowed to continue if there is a person or
group of persons who may appropriately be named as the appellant in the place
of the Taxpayer Trust.
(2)
In
determining whether there is a person or group of persons who may appropriately
be named as the appellant in the place of the Taxpayer Trust, the judge is to consider
all relevant factors including, without limitation, the following:
a)
whether
the person or group has the legal and financial capacity to retain and instruct
counsel in this appeal, and has undertaken to do so;
b)
whether
the person or group has ability to ensure the completion of pre-trial
discoveries in accordance with the relevant rules of the Tax Court, and has
undertaken to do so;
c)
whether
the person or group has the financial resources to pay the costs of the appeal
in the Tax Court in the event the appeal is unsuccessful, and has undertaken to
do so.
(3)
In
the reconsideration, both parties should be permitted to present fresh evidence
relating to the factors listed above, as well as any other factors that they
consider relevant to the application of Rule 29.
(4)
Any
award of costs of the motion and the reconsideration are to be determined in
the discretion of the judge who reconsiders the motion.
“K. Sharlow”
“I
agree
Eleanor R. Dawson J.A.”
“I agree
David Stratas J.A.”
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