First Fund Genesis Corp. v. The Queen, 90 DTC 6337, [1990] 2 CTC 24 (FCTD)

Joyal, J.: —There is pending before this Court an appeal by the plaintiff from an assessment issued by the defendant with respect to the plaintiff's 1985 taxation year.

The assessment is in relation to a Part VIII tax and is on the basis that the plaintiff's scientific research and experimental development credit did not include an amount of some $3.75 million. This was the amount designated pursuant to subsection 194(4) of the Income Tax Act by a company called Dell Chemical Ltd. (Dell) in respect of a $7.5 million debenture issued by Dell to the plaintiff during the 1985 taxation year.

The defendant Crown, by its assessment, determined that the designation by Dell did not comply with subparagraph 194(4.2)(b)(ii) of the Act as its debt obligation, perfected after October 10, 1984, had not been incurred pursuant to “arrangements, evidenced in writing, . . . [which] were substantially advanced before October 10, 1984”, as that expression is found in the statute.

On March 23, 1990, the plaintiff filed a motion in Court returnable on the day set for trial of the action. The motion, made pursuant to Rule 494(2), asked the Court for a direction that the defendant Crown be required to adduce evidence or otherwise put its case before the Court prior to presentation of the plaintiff's case. The grounds advanced by the plaintiff are that the onus of proof in the action should lie on the defendant.

The Plaintiffs Case:

The position of the plaintiff rests on the special circumstances surrounding the 1985 assessment which effectively bars the plaintiff from knowing what case it has to meet.

One need only go through the labyrinth of section 127 and section 194 of the statute to appreciate the special circumstances advanced by the plaintiff. Under the Scientific & Research Tax Credit (SRTC) scheme, the issuer of the security, Dell, designated an amount of $7.5 million which was purchased by the plaintiff. Later on, the Crown refused to recognize the designation. That refusal would not appear to have troubled Dell too much. By some quirk or other, it did not suffer any tax liability from it.

Subsequent to the SRTC transaction, some conflict appears to have developed between the plaintiff and Dell. As a result, the plaintiff suggests that it cannot easily call upon Dell and its witnesses in support of its appeal. The plaintiff's position would be extremely difficult and it would have to presume that the witnesses, having already agreed with the Crown's position, would not be of any help to the plaintiff.

Other hurdles face the plaintiff, says counsel. From the very beginning of the litigation, demand for particulars as to the facts on which the Crown was basing its assessment was resisted by the Crown. Subsection 241(1) of the Income Tax Act precluded tax officers from disclosing any evidence relating to the Dell assessment and any breach of it made them liable to fine and imprisonment under subsection 241(9). This placed the plaintiff in the unenviable position of not knowing on what facts or documents, obtained from Dell, the Crown had reached the conclusion that Dell’s designation did not comply with the grandfather provision of subparagraph 194(4.2)(b)(ii).

In the plaintiff's view there is more to it than that. Its counsel reminds the Court that the assessment it faces is not the usual kind of assessment imposing on a taxpayer the burden of proving the assessment wrong. That particular and well-recognized onus has its place in tax appeals, he says, by reason of the voluntary nature of tax returns when usually, all the facts of the case are within the exclusive knowledge and control of the taxpayer. The assessment facing the plaintiff, however, is no ordinary assessment. It is one grounded on the thorough investigation of another taxpayer where the evidence obtained is by reason of third party disclosure on which the Crown has made its case but on which the plaintiff cannot be expected to rely. The plaintiff, in fact, being the victim of a statutory ricochet, cannot be expected to carry the burden of proving the assessment wrong if all it has to go on is the evidence obtained from another taxpayer whose interests have become inimical to the plaintiff.

Counsel for the plaintiff also points out the grave risk it would be taking were the plaintiff to call the Dell people as its own witnesses. The plaintiff would be extremely limited in the scope of its examination and, pursuant to section 9 of the Canada Evidence Act, R.S.C. 1985, c. C-5, would have great difficulty in having these witnesses declared hostile.

To conclude, states plaintiff's counsel, the situation facing the plaintiff is such as to justify the intervention of the Court so as to impose a reverse onus on the Crown. The Crown, in any event, enjoys such a gamut of prerogatives and statutory powers that imposing this burden upon it should not be prejudicial to its case. It was the Crown which based its assessment on its investigation of the Dell affairs. It should now be called upon to prove it. After all, the extremely onerous tax liability facing the plaintiff is not the result of its own misfeasance or malfeasance but is based on the fact that it relied on Dell’s own designation of the SRTC in getting into a security deal with it in the first place.

The Case for the Crown:

Counsel for the Crown takes a more dispassionate view. He admits that in the earlier stages of the case, the Crown was in a bind as to providing the plaintiff with the factual base for its assessment. That explained, he said, the lengthy delay experienced between the plaintiff's action instituted in April 1988 and the Crown's defence filed in September 1989. The Crown could not really disclose its case in the face of the statutory prohibition in section 241 of the Act. It was only when the Crown was able to obtain Dell’s consent that it was able to disclose its case. The Crown has since provided the plaintiff with all the Dell documents in its possession. It is, says Crown counsel, on the basis of that documentation that the Crown establishes the grounds for its assessment and it is the only evidence on which it relies. In effect, this constitutes full disclosure and of a nature to indicate clearly and succinctly to the plaintiff the case it has to meet.

In the event, concludes Crown counsel, the original problem has now been cured and there remain no more grounds to accede to the plaintiff's request.

The Law:

It is trite law and indeed it is conceded by the parties, that any tax assessment is valid and binding on its face, subject to the taxpayer's right to challenge it on grounds of fact and law. The result is to impose on the taxpayer the burden of proving that the assessment is wrong.

There is, however, a concurrent burden on the Crown to play fair. As stated by Rand, J. in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182 at page 203 (D.T.C. 1183):

It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy.

Even when the Crown is an appellant before this Court after having its assessment vacated by a Tax Review Board or a Tax Appeal Board or a Tax Court of Canada, the burden on the taxpayer does not shift. President Thorson of the Exchequer Court in M.N.R. v. Simpson's Ltd., [1953] C.T.C. 203; 53 D.T.C. 1127, put it succinctly at page 207 (D.T.C. 1129):

On the contrary, the true position is that on an appeal to this Court from a decision of the Income Tax Appeal Board, whether the taxpayer or the Minister is the appellant, the assessment under consideration carries with it a presumption of its validity until the taxpayer establishes that it is incorrect either in fact or in law. Thus, the onus of proving that it is incorrect is on the taxpayer, notwithstanding the fact that the Income Tax Appeal Board may have allowed an appeal from it. It follows, under the circumstances, that while the Minister, being the appellant, may be called upon to begin he may rest on the assessment so far as the facts are concerned without adducing any evidence. The onus of proving the assessment to be erroneous in fact is on the taxpayer.

In most cases, the duty imposed on the Crown to disclose is based on certain assumptions of fact. This is simply for the reason that in most cases, the facts are within the exclusive preserve of the taxpayer and the Crown should not be expected to do more. Nevertheless, the Crown in a sense is bound by these assumptions and these assumptions are of a nature to indicate clearly to the taxpayer what is the case he or she has to meet. The taxpayer's burden is thereafter, to use the words of Rand, J. in Johnston v. M.N.R., supra,* [1] "to demolish” the exact assumptions made by the Minister at the time of the assessment and no more.

Numerous have been the comments by the courts on the application of the onus rule to meet the exigencies of particular cases. Counsel for the plaintiff is correct in stating that care should always be taken in its application. Counsel quotes an article by Charles MacNab in the Canadian Tax Journal, Vol XXVI, No. 4, 1978, p. 393, where, after the author has referred to the general doctrine with respect to the burden of proof in civil matters, he remarks with reference to income tax cases at page 411:

There will be need for care in each case, however, to ensure that the considerations of policy and fairness which underlie all the rules are fully appreciated before a determination of the onus of proof is made.

The Findings:

Since the plaintiff's apprehensions first arose, a number of things have happened. Firstly, the Crown finally obtained the consent of Dell for the release of all relevant information and documents arising out of the Crown's investigation of Dell’s own affairs. Secondly, these disclosures enabled the Crown to file its statement of defence and to set out in detail the basis on which it proceeded to make the assessment. Paragraphs 6(a) to 6(h), in my respectful view, discloses not only the Crown's case but effectively close the door to additional matter.

Moreover, the Crown has provided the plaintiff with all the documents on which the Crown has relied in making its assessment and, as Crown counsel warranted, these documents include all the documents which are in the Crown's possession. It was on March 22, 1989, that Crown counsel provided copies of its material to the plaintiff and a reading of this material attached to Crown counsel's affidavit of September 8, 1989, indicates, in sufficiently clear terms, the basis of the Crown's case and concurrently, the kind of case the plaintiff has to meet.

To say more about it at this stage would be pure conjecture. While it might be admitted that any evidence from Dell ostensibly favourable to the plaintiff might be difficult to obtain, the issue facing the plaintiff is not so much more onerous than any issue facing any taxpayer who wishes to appeal from an assessment. I do not know at this stage what evidence is to be adduced by the plaintiff nor what arguments might be advanced as to the proper interpretation to be given to subparagraph 194(4.2)(b)(ii) or as to whether or not the Crown on the evidence it has disclosed, was right or wrong in assessing as it did. That is a matter for trial. As mentioned at the hearing, one cannot easily write a scenario on what will take place in the course of a trial. We all know that initial burdens of proof may shift from time to time or that the Court will intervene in that respect to serve the ends of justice or provide to any party a fair hearing.

Such is the situation before me. Although the circumstances of the case, as well as the statutory provision under Part VIII of the statute create an unusual situation, I view the Crown's position as fully disclosed and at this stage, at least, giving the plaintiff full opportunity to answer.

The fundamental grievance of the plaintiff's complaint was artfully and eloquently described by its counsel. One cannot view without some concern a taxpayer facing a $3.75 million assessment arising from the purported non- compliance of a statutory provision by a third person who suffers no grief. This is compounded by the fact the dire consequences of the non-compliance fall upon the plaintiff's shoulders who presumably entered into its deal with Dell on the advice or opinion of qualified people. It is in this respect that plaintiff's counsel stressed that the issue was simply one of imposing on the Crown the onus to prove one thing: whether the security issued by Dell complied or not with the statutory requirements.

With respect, I must find that the Crown has, for the reasons I have already stated, provided the plaintiff with sufficient grounds to enable the plaintiff to make its case and that there are no circumstances of such an exceptional nature as to justify at this stage a departure from well-established and well- recognized rules applicable to income tax appeals. As to the actual conduct of the forthcoming trial, many issues which might arise and which might hinder the proper disposition of the case or expose the plaintiff to prejudice, are properly left to the trial judge.

The plaintiff's application is dismissed. Costs shall be in the cause.

Application dismissed.