Citation:
2015TCC195
Date: 20150805
Docket: 2013-1860(IT)G
BETWEEN:
COAST
CAPITAL SAVINGS CREDIT UNION,
Applicant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
V.A. Miller J.
[1]
The Applicant has brought a motion for an Order
seeking leave to file an Amended Notice of Appeal (the “Proposed Pleadings”)
pursuant to Rule 54 of the Tax Court of Canada Rules (General Procedure)
(the “Rules”).
[2]
The circumstances which gave rise to this appeal
are as follows. The Applicant was the trustee of certain trusts which were
self-directed registered retirement savings plans (“RRSPs”) and registered
retirement income funds (“RRIFs”). The trustee acquired shares of certain
Canadian corporations from a non-resident person which shares, according to the
Minister of National Revenue (the “Minister”), were taxable Canadian property
of the non-resident person. The Minister assessed the Applicant on the basis
that as trustee of the trusts, it was the “purchaser” within the meaning of
subsection 116(5) of the Income Tax Act (the “Act”) and the
Applicant was liable to pay 25% of the cost of the shares as tax under Part I
of the Act. The Applicant was assessed pursuant to subsection 227(10.1)
of the Act and a penalty was applied under subsection 227(9).
[3]
In its Notice of Appeal, the Applicant took the
position that it was not the “purchaser” of the shares. The Applicant now seeks
to file the Proposed Pleadings to plead that it was the victim of an RRSP strip
and as such, it was the victim of a sham. It only learned the facts underlying
the RRSP strip from the Reply to Notice of Appeal and during the discovery
process of its appeal. The Applicant asserts in its Proposed Pleadings that if
it is found to be the “purchaser” of the shares, then it should be reassessed
on the basis that the transactions involving the sale of the shares were a sham
or, alternatively, that the cost of the shares for the purposes of section 116
of the Act was equal to the fair market value of the shares.
[4]
The Respondent does not oppose the additional
facts pled in the Proposed Pleadings on the condition that she is entitled to
further discovery with respect to those facts. The Respondent also requests the
right to file an amended reply in accordance with section 57 of the Rules.
However, the Respondent opposes the amendments contained in the Overview, the
Grounds section and the Relief Sought section of the Proposed Pleadings.
Specifically, it is the Respondent’s position that paragraphs 4A, 23(b), 23(f),
28A, 30A, 33A and 37A should be struck from the Proposed Pleadings. The
additional facts and the amendments in the Overview, the Grounds section and the
Relief Sought section are listed below in my decision.
[5]
The Applicant does not agree that there should
be further discoveries.
Law
A. Amendment to Pleadings
[6]
Section 54 of the Rules allows amendments
to pleadings with consent of the opposing party, or without consent but with
leave of the Court. The general rule is that an amendment should be allowed at
any stage of an action for the purpose of determining the real questions in
controversy between the parties, provided that the allowance would not result
in an injustice to the other party not capable of being compensated by an award
of cost: Canderel v R, [1994] 1 FC 3 at paragraph 10.
[7]
In circumstances such as here, where an
amendment to pleadings involves the addition of facts, new grounds and new
relief on the basis of those additional facts, the Court must assume that the
amendments as set out in the Proposed Pleadings are true. The amendments will
only be struck if the Court determines that it is “plain and obvious” they
disclose “no reasonable cause of action”: Hunt v T & N plc,
[1990] 2 S.C.R. 959 at paragraphs 30 and 34.
[8]
On a motion to amend pleadings, it is open to
the motions judge to evaluate the fundamentals of the proposed amendment to
ensure that the amendment conforms to the minimum requirements of pleadings
under the Rules. A proposed amendment to a pleading which, on its face, does
not raise a cause of action, should not be allowed. See Canada v Fluevog,
2011 FCA 338.
[9]
In making the decision whether to allow the
amendments contained in the Overview, the Grounds section and the Relief Sought
section of the Proposed Pleadings, I cannot review any evidence which has been
submitted to prove the alleged facts. In Romanuk v The Queen, 2013 FCA
133, Webb, J.A. stated it this way at paragraph 5:
…Since the facts
as pled are to be taken as proven, there is no need for the judge, in deciding
whether to allow the amendment, to review any evidence that may be submitted to
try to prove the alleged facts. If any such evidence is submitted at such
hearing for this purpose, it should not be reviewed by the judge in deciding
whether to allow the amendments.
B. Section
116
[10]
Section 116 of the Act provides a
mechanism to facilitate the collection of Part I tax from non-residents who
dispose of taxable Canadian property (“TCP”). Subsections 116(1), (2) and (3)
provide that the non-resident vendor must give notice to the Minister prior to
the disposition of TCP or within ten days after the disposition and pay an
amount on account of the tax or furnish security in respect of the disposition.
Where the non-resident has complied, the Minister will issue a certificate to
the non-resident and the purchaser. However, if the non-resident has not
complied, the purchaser becomes vicariously liable for the tax. Subsection
116(5) provides that the purchaser of TCP may be liable for tax owed by the
non-resident vendor. It is a collection tool and it allows the Minister to
collect the non-resident vendor’s tax from the purchaser of TCP. Subsection
116(5) reads:
Liability
of purchaser
116(5) Where in a
taxation year a purchaser has acquired from a non-resident person any taxable
Canadian property (other than depreciable property or excluded property) of the
non-resident person, the purchaser, unless
(a)
after reasonable inquiry the purchaser had no reason to believe that the
non-resident person was not resident in Canada,
(a.1)
subsection (5.01) applies to the acquisition, or
(b)
a certificate under subsection 116(4) has been issued to the purchaser by the
Minister in respect of the property,
is liable to pay,
and shall remit to the Receiver General within 30 days after the end of the
month in which the purchaser acquired the property, as tax under this Part for
the year on behalf of the non-resident person, 25% of the amount, if any, by
which
(c)
the cost to the purchaser of the property so acquired
exceeds
(d)
the certificate limit fixed by the certificate, if any, issued under subsection
116(2) in respect of the disposition of the property by the non-resident person
to the purchaser,
and is entitled
to deduct or withhold from any amount paid or credited by the purchaser to the
non-resident person or otherwise recover from the non-resident person any
amount paid by the purchaser as such a tax.
[11]
According to subsection 116(5), the purchaser
may be fully discharged from liability in the following situations:
a)
If after making reasonable inquiry, the
purchaser had no reason to believe the vendor was not resident in Canada; or
b) If the Minister has issued a certificate under subsection 116(4) to
the purchaser with respect to the disposition.
I note that
paragraph 116(5)(a.1) applies to acquisitions after 2009 with respect to
treaty-protected property. As such, this paragraph does not apply to the
circumstances of this appeal.
Applicant’s Position
[12]
In its Proposed Pleadings, the Applicant argued
that if it is found to be the “purchaser”, then it should be reassessed on the
basis that the transactions were a sham. Counsel for the Applicant argued that
the transactions which gave rise to its appeal must be viewed in context. Those
transactions involved a purchase price for shares which included fees paid to
the Promoters of the scheme and funds deposited into an offshore account for
the unfettered use and benefit of the Annuitants of the RRSPs and RRIFs. Viewed
in this context, the transactions were shams designed to deceive the Applicant.
A finding that the transactions were a “sham” will permit the Court to
re-characterize the transactions and allow the appeal on the basis that the
Applicant should be reassessed in accordance with the transactions.
[13]
Counsel for the Applicant argued that there is
no positive statement that only the tax authority may have the benefit of the
“sham doctrine”. It is not “plain and obvious” that its sham argument will not
succeed and it should not be struck.
[14]
The Applicant argued, in the further
alternative, that the cost amount of the shares acquired by the trusts was only
equal to the fair market value of the shares at the time of the respective
transactions. Therefore, its tax liability should be based on this fair market
value.
Respondent’s Position
[15]
It was the Respondent’s position that assuming
the facts as plead are true, the doctrine of sham has no application to this
appeal. In pleading sham, the Applicant is attempting to turn the focus of its
appeal from section 116 of the Act to another transaction which the
Respondent described as “back-end of the transaction”.
Counsel for the Respondent described the “back-end of
the transaction” as those facts which are assumed to be true for the
purposes of this motion. (I will list those facts later in my decision.) He
argued that the back-end of the transaction is irrelevant to the question of
whether subsection 116(5) is engaged.
[16]
Counsel further argued that in accordance with
the “sham doctrine”, in a tax case, there must be an intention to deceive the
Minister. As a result, only the Minister can plead “sham” in a tax case.
[17]
With respect to the Applicant’s alternative
argument that that the cost of the shares for the purposes of section 116 of
the Act was equal to the fair market value of the shares, the Respondent
argued that the word “cost” in paragraph 116(5)(c) means the price that
the Appellant gave up in order to get the shares.
The Proposed Pleadings
[18]
The facts which the Respondent doesn’t oppose in
the Proposed Pleading and which are assumed to be true for the purposes of this
application are the following:
C. The
Scheme
20A. Certain
persons, whose identities are not all known to Coast Capital, but including
Cameron Claridge, Roy Gallant, Sommerville, the Solicitor, Bruce Frommert, Evan
Seys and Peter Khean (the “Promoters”), created a scheme designed to
purportedly allow for the tax free withdrawal of RRSP or RRIF funds (the “Scheme”).
20B. The
Promoters entered into arrangements with the Annuitants to implement the
Scheme. The Promoters and the Annuitants deliberately deceived Coast Capital.
Coast Capital was not aware of the Scheme. Coast Capital was not a Promoter of
the Scheme.
20C. Unbeknownst
to Coast Capital, the Scheme involved the purchase of shares of a corporation
resident in Canada by a trust governed by an RRSP or RRIF for an amount in
excess of the fair market value of the shares by the Annuitants.
20D. As part
of the Scheme, the Annuitant:
i) opened up a self-directed RRSP or RRIF with Coast
Capital;
ii) if not already in cash, converted part or all of the
Annuitant’s pre-existing RRSP or RRIF to cash;
iii) transferred cash into the newly opened self-directed
RRSP or RRIF with Coast Capital; and
iv) directed Coast Capital as trustee of the RRSP or RRIF to
acquire the Shares for an amount in excess of fair market value;
20E. Unbeknownst
to Coast Capital, the Promoters kept a portion of the purchase price of the
Shares as fees and transferred the balance of the funds offshore to an
international corporation, bank account or other facility to which the
Annuitants had access and control, but not direct ownership.
20F. Unbeknownst
to Coast Capital, the funds could then be withdrawn by the Annuitants from the
international corporation or bank account by Internet banking, the use of an
offshore debit or credit card, or some other hard to trace method.
20G. The
following types of documents were provided to Coast Capital by the Annuitants,
the Solicitor and/or Mr. Khean to cause Coast Capital to acquire shares of a
corporation for an amount in excess of fair market value:
i) A letter of direction (“Letter of Direction”)
from the Annuitant to Coast Capital directing Coast Capital to transfer funds
to the Solicitor in trust for the purchase of shares; and
ii) A letter from the Solicitor and/or Mr. Khean advising
that the shares were a qualified investment and suggesting that the shares had
a fair market value equal to the purchase price (“Certification Letter”).
20H. The
Annuitants and the Promoters knew that the Letter of Direction did not
represent the true nature of the Scheme. The true nature of the Scheme was not
to purchase the Shares for the stated purchase price, but to purchase the
Shares for an amount in excess of the fair market value of the Shares, withdraw
the difference between the stated purchase price and the fair market value of
the Shares from the Annuitants’ RRSPs or RRIFs, and transfer those funds
offshore for the use of the Annuitants.
20I. The
Annuitants and the Promoters provided the Letters of Direction and
Certification Letters to Coast Capital to cause Coast Capital to provide funds
to Mr. Stewart in furtherance of the Scheme.
[19]
The paragraphs in the Proposed Pleadings which
the Respondent seeks to strike are the following:
I. OVERVIEW
4A. The
Appellant further says that the Appellant’s clients, the annuitants under the
RRSP’s (the “Annuitants”), and the vendors of the shares and their
agents, deliberately misrepresented the true nature of the transactions relied
on by the Minister in the documents supplied to Coast Capital and that the
transactions were a sham.
V. ISSUES
TO BE DECIDED
23. (b) whether
the transactions relied on by the Minister were a sham.
(f) whether
the cost of the Shares to Coast Capital for the purposes of subsection 116(5)
was not the same amount as was assessed by the Minister.
VII. REASONS
COAST CAPITAL RELIES UPON
28A. Second,
the transactions were a sham.
30A. Fifth, if
this Honourable Court finds that Coast Capital is personally liable as the
purchaser under subsection 116(5) of the Act, which is not admitted and is
specifically denied, Coast Capital did not acquire the shares at a cost amount
equal to the amount assessed.
B. The
Transactions were a Sham
33A. The
documents provided to Coast Capital and the other acts of the Annuitants and
the Promoters were intended by the Annuitants and the Promoters to give the
appearance to Coast Capital of creating the legal rights and obligations of a
share transfer transaction at the stated purchase price, but the true intention
of the transaction was to transfer the difference between the fair market value
of the Shares and the stated purchase price from the Annuitants’ RRSP or RRIF
offshore for the benefit and use of the Annuitants. The Annuitants and the
Promoters deliberately set out to misrepresent the actual state of affairs to
Coast Capital and to intentionally deceive Coast Capital.
E. Coast
Capital Did Not Acquire the Shares at a Cost Amount Equal to the Amount
Assessed
37A. If this
Honourable Court finds that Coast Capital is personally liable as the purchaser
under subsection 116(5) of the Act, which is not admitted and is specifically
denied, it is respectfully submitted that Coast Capital’s cost amount of the
Shares is not as assessed by the Minister and the amount assessed under
subsection 116(5) of the Act is incorrect. The cost amount of the Shares to
Coast Capital is equal to the fair market value of the Shares at the time of
the respective transaction.
The Sham Argument
[20]
In summary, the Applicant argued that it was the
victim of a sham and its appeal should be allowed on this basis. It stated that
the Annuitants and Promoters misrepresented the transactions. The Applicant was
induced to release funds from the RRSP and RRIF accounts so that the Annuitants
could receive control of the funds. The Applicant requested that this Court
allow its appeal and vary the assessments or refer the assessments back to the
Minister for reconsideration and reassessment on the basis that the transactions
should be characterized correctly. That is, the Applicant’s liability under
section 116 should be based on the fair market value of the shares.
[21]
In Faraggi v R, 2008 FCA 398, Noel J.A.,
as he then was, considered the concept of “sham” in Canadian law. He made the
following observations:
57 However,
courts have always felt authorized to intervene when confronted with what can
properly be labelled as a sham. The classic definition of “sham” is that
formulated by Lord Diplock in Snook , supra , and reiterated by the
Supreme Court on a number of occasions since. In Stubart Investments Ltd. v.
R., [1984] 1 S.C.R. 536 (S.C.C.) , Estey J. said the following (page 545):
... This
expression comes to us from decisions in the United Kingdom, and it has been
generally taken to mean (but not without ambiguity) a transaction conducted
with an element of deceit so as to create an illusion calculated to lead the
tax collector away from the taxpayer or the true nature of the transaction; or,
simple deception whereby the taxpayer creates a facade of reality quite
different from the disguised reality.
This passage is
also quoted with approval in Continental Bank of Canada v. R., [1998] 2
S.C.R. 298 (S.C.C.) , at paragraph 20.
58 In Cameron
, supra , the Supreme Court adopted the following passage from Snook ,
supra , to define “sham” in Canadian law (page 1068):
... [I]t means
acts done or documents executed by the parties to the “sham” which are intended
by them to give to third parties or to the court the appearance of creating
between the parties legal rights and obligations different from the actual
legal rights and obligations (if any) which the parties intend to create.
The same excerpt
was quoted by Estey J. in Stubart , supra , at page 572.
59 It follows
from the above definitions that the existence of a sham under Canadian law
requires an element of deceit which generally manifests itself by a
misrepresentation by the parties of the actual transaction taking place between
them. When confronted with this situation, courts will consider the real
transaction and disregard the one that was represented as being the real one.
[22]
I have concluded from these comments on the
concept of “sham” and particularly the Supreme Court’s statements at page 545
of Stubart, that in a tax case, a court will make a finding of “sham”,
only when it is the Minister who is deceived.
[23]
In Mc Ewen Brothers Ltd v R, [1999] 3 CTC
373 (FCA), Robertson J.A. quoted from the Stubart decision and stated
that “to qualify as a sham, the taxpayer must say one
thing to the Minister, and do another in an attempt to avoid its tax obligation”.
He also stated:
27 In the present
case, it appears that the taxpayer misled both Manitoba Hydro and the federal
Department of Public Works by failing to disclose that the respective bids were
being submitted on behalf of partnerships. But, in my view, those distortions
of the facts do not support a finding of sham. The fact remains that the
undisclosed partnerships may qualify as partnerships. The fact that a contract
may have been obtained in circumstances where, had the true circumstances been
known, it could have been set aside does not render the underlying agreement to
form a partnership invalid. For tax purposes, this type of deception is
irrelevant. For example, simply because a taxpayer is a successful
con-artist does not mean that a sham has been perpetrated on the Minister of
National Revenue. [In an earlier case, I referred to a situation in which a
taxpayer was intending to mislead a third party as an “inverse sham”. 6 ] In
any event, a partnership could have been formed after the bids were submitted
for the purpose of raising needed capital. The only relevant evidence of a
sham is that which demonstrates that the taxpayer purposefully or effectively
misled the Minister. The typical situation occurs where the taxpayer's
documentary evidence says one thing, and the taxpayer does another. (Emphasis
added).
[24]
To my mind, in a tax case, if it is the Minister
who must be deceived, it is only the Minister who can plead “sham” and rely on
the “sham” argument to have the courts disregard a transaction. My opinion is
supported by the decision of the Federal Court of Appeal in Bonavia v The
Queen, 2010 FCA 129.
[25]
In that case, the taxpayer had made a loan
application to NBI and had given NBI a power of attorney to permit it to
recover its loan plus interest through NBI’s receipt of monthly payments which
were due to the taxpayer from his Registered Retirement Income Fund (RRIF) with
the Royal Bank. NBI used the power of attorney and documents created by it to
transfer in excess of $118,000 from the taxpayer’s RRIF from the Royal Bank to
another entity called CCCC. The Minister added this amount to the taxpayer’s
income on the basis that it was a benefit to him out of a RRIF in accordance with
subsection 146.3(1) and 56(2) of the Act. The Tax Court judge upheld the
assessment. At the Federal Court of Appeal, the taxpayer argued that the
documents created by NBI constituted a sham because they contained a
fundamental misrepresentation by the principals of NBI about the nature of the
transactions and the Minister could not rely on these documents for concluding
that the taxpayer’s RRIF was transferred from the Royal Bank. Writing for the
court, Evans J.A. disagreed with the taxpayer’s argument. He stated:
7 We disagree. In
our view, this was nothing other man (than) a fraudulent misrepresentation, of
which Mr Bonavia, among others, was the victim. Since Mr Bonavia was not a
party to the misrepresentation it was not a “sham” within the meaning attributed
to that term by the Supreme Court of Canada in Stubart Investments Ltd. v. R.,
[1984] 1 S.C.R. 536 (S.C.C.) , at 545 and 572, which precluded the Minister
from relying upon the documents as effecting a transfer of the funds from RBC
to CCCC.
[26]
I have also inferred from the Bonavia
decision that the taxpayer, whose appeal is before the court, must have been a
party to the “sham”.
[27]
Moreover, in my analysis, the facts as pled by
the Applicant in its Proposed Pleadings do not support a finding that the Applicant
was the victim of a “sham”. Rather, it appears to me that, as in Bonavia,
the Applicant was the victim of fraudulent misrepresentation. In the Proposed Pleadings,
the Applicant plead that the Annuitants and the Promoters deliberately set out
to misrepresent the transactions to the Applicant. This pleading does not
demonstrate that there was a “sham”. There are no facts plead which would
demonstrate that the legal rights and obligations created between the
Annuitants and the Promoters were other than they intended. It is clear that
both the Annuitants and the Promoters intended the purchase price for the
shares be the stated purchase price. They set up a plan to withdraw the funds
from the Annuitants’ RRSPs so that the Promoters received their fees and the
Annuitants received a withdrawal of funds from their RRSPs. They misled the
Applicant with respect to the value of the shares purchased by the RRSPs but
this is not a “sham” It is fraud.
[28]
Based on my conclusions, it is “plain and
obvious” that the Applicant’s “sham argument” does not disclose a cause of
action. Paragraphs 4A, 23(b), 28A and 33A shall be struck from the Proposed
Pleadings.
The Cost Argument
[29]
The RRSPs acquired shares at a price in excess
of their fair market value. The Applicant argued, in the alternative, that the
cost amount of the shares for the purposes of section 116 of the Act was
equal to their fair market value.
[30]
Paragraph 116(5)(c) of the Act
reads, in part:
116(5)….the purchaser…
…
is liable to pay, and shall remit to the
Receiver General within 30 days after the end of the month in which the
purchaser acquired the property, as tax under this Part for the year on behalf
of the non-resident person, 25% of the amount, if any, by which
(c) the cost to the
purchaser of the property so acquired
[31]
It is clear that the tax under paragraph 116(5)(c)
is assessed on “the cost to the purchaser”. There is no mention in paragraph
116(5)(c) of the fair market value of the property purchased. The words
used in the sentence and the sentence itself are not ambiguous. The
plain-meaning of the word “cost” in this section means the price that the
taxpayer gave up in order to get the property: The Queen v Stirling,
[1985] 1 FC 342 (FCA).
[32]
It is my opinion that the Applicant’s
alternative argument also does not disclose a cause of action. Paragraphs
23(f), 30A and 37A shall be struck from the Proposed Pleadings.
[33]
The Proposed Pleadings may be filed with the
additional facts which were not opposed by the Respondent. The Applicant’s
motion, as it relates to the amendments which were opposed, is dismissed with
costs to the Respondent.
[34]
The Respondent is entitled to have discovery on
the additional allegations of fact pled in the Proposed Pleadings and the
Respondent can file an amended Reply in response to the additional allegations
of fact in the Proposed Pleadings.
[35]
I have been informed that the Respondent has
brought a motion in which she requests leave to examine for discovery a
non-party and that the motion is scheduled to be heard on September 25, 2015.
As a result, I will not make any Order with respect to the litigation timetable
in this appeal.
Signed at Halifax,
Nova Scotia, this 5th day of August 2015.
“V.A. Miller”
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