2016 FCA 181
SAVINGS CREDIT UNION
HER MAJESTY THE
In this appeal, the appellant, Coast Capital
Savings Credit Union, seeks to set aside a portion of the August 5, 2015 Order
of Justice Valerie Miller of the Tax Court of Canada, reported at 2015 TCC 195.
In the Order, the Tax Court Judge granted Coast Capital leave to file an
Amended Notice of Appeal after certain paragraphs in the proposed Amended
Notice were struck. Coast Capital submits that the Tax Court Judge erred in
ordering that the impugned paragraphs in the proposed Amended Notice of Appeal
should be struck as it was not plain and obvious that they disclosed no
reasonable cause of action.
For the reasons that follow, I disagree and would
dismiss this appeal, with costs.
Coast Capital is a credit union in British
Columbia. In 2001 and 2002, it was the trustee of a number of trusts that were
either self-directed registered retirement savings plans [RRSPs] or registered
retirement income funds [RRIFs]. The Minister of National Revenue asserts that
Coast Capital, as trustee of the trusts, used funds in them to purchase taxable
Canadian property in the form of shares in Canadian-controlled corporations and
that it purchased these shares from a non-resident. The Minister further
asserts that Coast Capital did not take any steps to verify the residency of
the vendor and therefore assessed Coast Capital for a liability in both 2001
and 2002 under subsection 116(5) of the Income Tax Act, R.S.C. 1985, c.
1 (5th Supp.) [the ITA]. That provision states in relevant part:
Disposition by non-resident person of certain property
Disposition par une personne non-résidente
Liability of purchaser
Assujettissement de l’acheteur
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
L’acheteur qui, au cours d’une année d’imposition, acquiert auprès d’une
personne non-résidente un bien canadien imposable (sauf un bien amortissable
ou un bien exclu) d’une telle personne est redevable, pour le compte de cette
personne, d’un impôt en vertu de la présente partie pour l’année, sauf si,
selon le cas :
(a) after reasonable inquiry the purchaser had no reason to
believe that the non-resident person was not resident in Canada,
après enquête sérieuse, l’acheteur n’avait aucune raison de croire que la
personne ne résidait pas au Canada;
(a.1) subsection (5.01) applies to the acquisition, or
paragraphe (5.01) s’applique à l’acquisition;
(b) a certificate under subsection 116(4) has been issued
to the purchaser by the Minister in respect of the property,
ministre a délivré à l’acheteur, en application du paragraphe (4), un
certificat concernant le bien.
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
Cet impôt — à remettre au receveur général dans les 30 jours
suivant la fin du mois au cours duquel l’acheteur a acquis le bien — est égal
à 25 % de l’excédent éventuel du coût visé à l’alinéa c) sur la limite
visée à l’alinéa d):
(c) the cost to the purchaser of the property so acquired
coût pour l’acheteur du bien ainsi acquis;
(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,
limite prévue par le certificat délivré en application du paragraphe (2)
concernant la disposition du bien par la personne non-résidente en faveur de
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.
L’acheteur a le droit de déduire d’un montant qu’il a versé à la
personne non-résidente, ou porté à son crédit, ou de retenir sur un tel
montant, ou de recouvrer autrement d’une telle personne, tout montant qu’il a
payé au titre de cet impôt.
In its Notice of Appeal, Coast Capital took the
position that it was not the purchaser of the shares, an argument that is now
foreclosed due to the recent decision of this Court in Olympia Trust Company
v. Canada, 2015 FCA 279, 479 N.R. 317. It also asserted that it did not
acquire taxable Canadian property from a non-resident and, in the alternative,
that even if it did do so, it did not appreciate that it was dealing with a
non-resident when it purchased the shares and, thus, is not liable for the
In her Reply, the respondent indicated that the
Minister made the following assumptions of fact in issuing the Notices of
Certain persons created a scheme to make
tax-free withdrawals from RRSPs or RRIFs;
The scheme involved the purchase of shares of
corporations resident in Canada by a trust governed by an RRSP or a RRIF for an
amount in excess of the fair market value of the shares;
The scheme also involved the transfer of funds
from pre-existing RRSPs or RRIFs to newly created ones. The annuitants then
directed the trustee to use funds in the newly created RRSP or RRIF to purchase
shares in Canadian companies, at a price in excess of their fair market value;
The promoter kept some of the funds as a fee and
transferred the balance of the funds that exceeded the fair market value of the
shares to offshore accounts that the annuitants did not own but had access to.
The result of the scheme was that the annuitants
stripped funds out of their RRSPs or RRIFs without paying the requisite tax.
Coast Capital is not alleged to have been in any
way involved in the scheme and states that it had no knowledge of the
fraudulent nature of the transactions that were being undertaken. On the
contrary, it asserts that it was misled as to the true nature of the
transactions and as to the value of the shares by the promoters of the scheme
or by the solicitor who was assisting them. It claims that it learned about the
scheme through the discovery process in this litigation and sought to amend its
Notice of Appeal following discovery to plead additional facts and new reasons
for varying the Notices of Assessment that related to the scheme.
Specifically, it sought to plead that the scheme
was a sham, which it asserted would permit the Tax Court to re-characterize the
transaction and allow the appeal on the basis that Coast Capital should be
reassessed in accordance with what actually occurred. It also sought to amend
its Notice of Appeal to raise the assertion that the cost of the shares, for
the purposes of subsection 116(5) of the ITA, was their fair market
value as opposed to their purchase price. These pleas were set out in
paragraphs 4A, 23(b), 23(f), 28A, 30A, 33A and 37A of Coast Capital’s proposed
Amended Notice of Appeal.
The Tax Court Judge’s Reasons
In her Reasons for Order, the Tax Court Judge
held that the proposed amendments set out in paragraphs 4A, 23(b), 23(f), 28A,
30A, 33A and 37A of Coast Capital’s proposed Amended Notice of Appeal were not
permissible as they disclosed no reasonable cause of action.
In so ruling, she first noted, in accordance
with Rule 54 of the Tax Court of Canada Rules (General Procedure),
S.O.R./90-688a, that amendments to pleadings should be allowed at any stage of
an action for the purpose of determining the real questions in controversy
between the parties provided that so doing would not result in an injustice to
the other party not capable of being compensated by an award of costs (citing Canderel
Ltd. v. Canada,  1 F.C. 3 at 9-10, 157 N.R. 380 (C.A.)). The Tax
Court Judge also acknowledged that she should assume that the facts in the
proposed pleadings were true and that amendments should only be struck if it is
plain and obvious that they disclose no reasonable cause of action (citing Hunt
v. Carey Canada Inc.,  2 S.C.R. 959 at 977, 979-980, 117 N.R. 321).
The Tax Court Judge determined that it was plain
and obvious that Coast Capital’s sham argument did not disclose a cause of
action for three reasons.
First, she held that a sham could only be found
in the tax context when the Minister is deceived as to the true nature of the
transaction (citing 2529-1915 Québec Inc. v. Canada, 2008 FCA 398, 387
N.R. 1; Stubart Investments Ltd. v. The Queen,  1 S.C.R. 536, 53
N.R. 241 [Stubart]; McEwen Brothers Ltd. v. R.,  4 F.C.
225, 243 N.R. 149 (C.A.); Bonavia v. Canada, 2010 FCA 129,  6
C.T.C. 99 [Bonavia]). Here, Coast Capital, and not the Minister, was
deceived, and therefore the plea of sham was not possible.
Secondly, the Tax Court Judge held that the
taxpayer whose appeal is before the Court must have been a party to the sham
(citing Bonavia). As Coast Capital was a stranger to the sham, it could
not invoke the plea.
Finally, the Tax Court Judge held that the facts
pled did not support a finding that Coast Capital was the victim of a sham in
any way relevant to its tax appeal as there were no facts pled to demonstrate
that the legal rights and obligations created were other than intended. Rather,
it appeared that Coast Capital was the victim of fraudulent misrepresentation.
However, this did not alter the fact that Coast Capital had used funds from the
RRSPs and RRIFs to purchase the shares in question.
Regarding the second amendment that Coast
Capital sought to make to its Notice of Appeal, the Tax Court Judge held that
it was plain and obvious that the appellant’s cost argument raised no cause of
action because the plain meaning of “cost to the
purchaser” in subsection 116(5) of the ITA means the amount that
the taxpayer gave up to get the property (citing The Queen v. Stirling,
 1 F.C. 342,  1 C.T.C. 275 (C.A.) [Stirling]).
The Proposed Pleadings Related to the Sham
Turning, first, to the refusal of the proposed
amendments that sought to plead that the transaction was a sham and to invoke
this as a reason for setting the assessments aside, Coast Capital argues that
it was not plain and obvious that the proposed pleading of a sham disclosed no
cause of action for three reasons.
First, it says it is not plain and obvious that
only the Minister can rely on the sham doctrine. It says that this Court’s
jurisprudence rests on the Supreme Court of Canada’s seminal decision in Stubart,
and, in that case, the Court did not definitively state that a plea of sham is
only open to the Minister in a tax case. The appellant refers in particular to
the passage on page 572 of the majority reasons where Justice Estey cited from Snook
v. London & West Riding Investments Ltd.,  1 All E.R.
518, which defines a sham as occurring when acts are undertaken:
… 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
obligation (if any) which the parties intend to create.
Coast Capital says that the foregoing passage
does not specifically require that the party being deceived be the taxing
authority, but rather leaves open the possibility that someone else might be
deceived in a sham transaction in a tax case. Coast Capital concedes that the
Minister is usually the victim of the sham; however, it says that the fact that
its claim is novel or unusual does not make it plain and obvious that it will
not succeed. It notes that the Tax Court applied the sham doctrine for the
benefit of a taxpayer in Nunn v. The Queen, 2005 TCC 806,  2
C.T.C. 2045. While Coast Capital acknowledges that the Nunn decision was
reversed on appeal (2006 FCA 403, 367 N.R. 108 [Nunn FCA]), it says that
this Court did not do so on the basis that only the Minister can rely on the
sham doctrine. Coast Capital further says that it must be taxed on the basis of
what actually happened (citing in particular St. Arnaud v. Canada, 2013
FCA 88, 444 N.R. 176), and, in this case, it was the victim of a sham. It thus
submits that it was not plain and obvious that a plea of sham is only open to
the Minister and the first reason offered by the Tax Court Judge cannot stand.
Second, Coast Capital submits that the Tax Court
Judge erred because it is not plain and obvious that the sham doctrine can only
be applied in tax appeals when the appellant is a party to the sham. It says
that this part of the Tax Court Judge’s holding must have been based on her
assumption that only the Minister can rely on the sham doctrine. However, it is
obvious that the Minister is not a party to the sham when she relies upon the
sham doctrine, and it would be absurd if a party that had perpetrated a sham
could rely on that deceit in appealing a tax assessment.
Third, Coast Capital alleges that the Tax Court
Judge erred in finding that it had failed to plead sufficient facts to support
a finding of sham. Coast Capital says that it has pled sufficient facts to
establish that the parties to the sham did something to deceive others and
presented a transaction as reality which was different from the actual
transaction that they were undertaking: the annuitants could withdraw the funds
which formed the purchase price; the true nature of the scheme was not to
purchase shares for the purported purchase price but to transfer an amount to
offshore accounts for the annuitants’ use; and, the promoters and annuitants
provided documentation to Coast Capital which falsely misrepresented the true
nature of the scheme.
I have considerable doubt that the decision in Stubart
can be read in the way Coast Capital submits or that the prior decisions of
this Court to the effect that only the Minister can plead the sham doctrine in
a tax case can be ignored in the way Coast Capital suggests.
However, it is not necessary in this case to
decide whether it is plain and obvious that a plea of sham may only be made by
the Minister in a tax case or whether a taxpayer must necessarily be party to
the sham for the doctrine to be invoked, because the third reason offered by
the Tax Court Judge for refusing to allow the proposed amendments related to
sham is unassailable.
Coast Capital has misapprehended the nature of
the Tax Court Judge’s third reason for refusing the plea of sham. Contrary to
what Coast Capital suggests, she ruled that the plea of sham was irrelevant to
the issues before the Tax Court and not that the plea was insufficiently
particularized. In so ruling, the Tax Court Judge was correct.
The nature of transaction at issue and the basis
for the assessment in this proceeding must be kept in mind. Coast Capital, as
trustee of the RRSPs and RRIFs in issue, is alleged to have used funds from the
RRSPs and RRIFs to purchase shares in Canadian-controlled corporations from a
non-resident person. Subsection 116(5) of the ITA provides that a
purchaser of taxable Canadian property from a non-resident is liable to pay, as
tax on behalf of the non-resident person, 25% of the cost of the taxable
Canadian property acquired. As a result, the Minister assessed Coast Capital,
as the purchaser of taxable Canadian property, for 25% of the cost of the
shares. It is therefore being assessed for its purchase of the shares from a
non-resident and not for its mistaken belief as to how much they were worth or
for what happened, unbeknownst to it, after the shares were purchased. Thus,
Coast Capital’s deception as to the value of the shares or as to the ultimate
destination of the funds paid out of the RRSPs and RRIFs is irrelevant to the
issues that were before the Tax Court.
It follows that the sham doctrine has no
application to the share purchase transaction at issue in this appeal. As the
Tax Court Judge noted, Coast Capital and the promoters intended that Coast
Capital acquire the shares for the agreed-upon purchase price. They also
intended that Coast Capital release the funds from the RRSPs or RRIFs and
receive the shares. Thus, the parties intended exactly what occurred.
Coast Capital argues that the dishonesty or
misrepresentations in the overarching scheme means that the share purchase
transaction was a sham and should be set aside for the “real
transaction”. However, there is no alternate “reality”
for the Tax Court to apply. There is no underlying “real”
transaction so that the share purchase transaction could be set aside and the
Minister could tax on that “real” transaction.
Coast Capital complains about the routing of funds to offshore accounts.
However, it is not being taxed on the withdrawal from the RRSPs or RRIFs but
rather is simply being taxed as the purchaser of taxable Canadian property. It
is irrelevant what the promoters did with the funds.
The jurisprudence recognizes that taxpayers are
not relieved of their tax obligations if they have been victims of mistake or
fraud (Nunn FCA at para. 22, citing Vankerk v. Canada, 2006 FCA
96 at para. 3, 348 N.R. 258). Thus, the fact that Coast Capital might have been
deceived as to the ultimate nature of the transactions in this case is
irrelevant to its tax liability under subsection 116(5) of the ITA. The
Tax Court Judge therefore did not commit a reviewable error in refusing to
allow the proposed amendments set out in paragraphs 4A, 23(b), 28A, and 33A of
the proposed Amended Notice of Appeal.
The Proposed Pleadings Related to Cost
Turning to the refusal to allow the amendment
that sought to plead that the cost of the shares, within the meaning of
subsection 116(5) of the ITA, was their fair market value as opposed to
the amounts paid out of the RRSPs and RRIFs, Coast Capital says that the Tax
Court Judge misapprehended the effect of its proposed pleading. It says that it
seeks to argue that not all of the amount transferred was given to purchase the
shares but that some portion was given for the purpose of conveying benefits to
the annuitants and the promoters. It claims that the Tax Court Judge therefore
erred in ruling that it is plain and obvious that the judge hearing the case on
the merits could not be persuaded to find that the cost amount of the shares
was in reality substantially less than the amount that was paid out of the
RRSPs and RRIFs (citing R. v. Kendall, 2015 ABQB 177 at para. 524, 2015
D.T.C. 5046 [Kendall]). In Kendall, promoters of a scheme similar
to that which is alleged to have taken place in this case were convicted of
fraud, conspiracy and theft. In his reasons, the trial judge found that the
accused diverted the funds they received from contributors’ RRSPs and that only
a portion of them were actually paid to purchase shares in a
Canadian-controlled private corporation.
Coast Capital also notes that the Tax Court
Judge allowed it to add section 68 of the ITA to the listing in the
Notice of Appeal of the statutory provisions it relied upon, which it says is
the underpinning for its alternate cost argument. That provision states in
Allocation of amounts in consideration for property, services or
68 If an amount received or receivable
from a person can reasonably be regarded as being in part the consideration
for the disposition of a particular property of a taxpayer, for the provision
of particular services by a taxpayer or for a restrictive covenant as defined
by subsection 56.4(1) granted by a taxpayer,
le cas où il est raisonnable de considérer que le montant reçu ou à recevoir
d’une personne représente en partie la contrepartie de la disposition d’un
bien d’un contribuable, la contrepartie de la prestation de services par un
contribuable ou la contrepartie d’une clause restrictive, au sens du
paragraphe 56.4(1), accordée par un contribuable, les règles ci-après
(a) the part of the amount that can reasonably be regarded
as being the consideration for the disposition shall be deemed to be proceeds
of disposition of the particular property irrespective of the form or legal
effect of the contract or agreement, and the person to whom the property was
disposed of shall be deemed to have acquired it for an amount equal to that
partie du montant qu’il est raisonnable de considérer comme la contrepartie
de cette disposition est réputée être le produit de disposition du bien,
quels que soient la forme et les effets juridiques du contrat ou de la
convention, et la personne qui a acquis le bien à la suite de cette
disposition est réputée l’acquérir pour un montant égal à cette partie;
Coast Capital submits that the Tax Court Judge’s
allowance of the addition of section 68 of the ITA to the provisions to
be relied upon is inconsistent with her refusal to allow the pleading invoking
the cost argument, set out in paragraphs 23(f), 30A and 37A of its proposed
Amended Notice of Appeal.
While I agree that it might not have been
necessary to allow Coast Capital to add section 68 of the ITA to the
list of statutory provisions that it relied on, it does not follow that the Tax
Court Judge erred in failing to allow the amendments to raise the cost
argument. The Tax Court Judge was correct that there is no ambiguity as to the
meaning of “cost” in subsection 116(5) of the ITA.
This term has been defined as meaning the amount paid by the purchaser for the
capital property. In Stirling, Justice Pratte noted that the term “cost” means “the price that
the taxpayer gave up in order to get the asset” and held that it did not
include other charges incurred in respect of the asset. While Stirling
was decided in the context of interpreting the term “cost”
in the context of the ITA provisions on capital gains, it applies
equally to the definition of “cost” in
subsection 116(5) of the ITA. The cost of the shares to Coast Capital is
what it paid for them and, for purposes of discerning their cost to Coast
Capital, it matters not what their actual value might have been nor how the
promoters might have diverted the funds paid by Coast Capital for the shares
after the funds were paid out of the RRSPs or RRIFs.
It therefore follows that the Tax Court Judge
did not err in holding that it was plain and obvious that the pleading set out
in paragraphs 23(f), 30A and 37A of Coast Capital’s proposed Amended Notice of
Appeal disclosed no reasonable cause of action.
For the foregoing reasons, I would dismiss this
appeal, with costs.
"Mary J.L. Gleason"
M. Nadon J.A.”