Citation: 2012 TCC 261
Date: 20120720
Docket: 2011-3234(IT)G
BETWEEN:
THOMAS O’DWYER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bocock J.
I. Motion
Relief Sought
[1]
This motion, brought by
the Appellant, requests the Court:
a)
to strike the Reply to
the Notice of Appeal (the “Reply”) under s.58(1)(b) of the Tax Court of
Canada Rules (General Procedure)(“Rules”) on the basis that there exists
no reasonable grounds for opposing the appeal; or,
b)
in the alternative to
strike out certain portions of the Reply as an abuse of process in accordance
with paragraph 53(c) of the Rules, namely:
i.
paragraph 11(r) which
in its entirety reads:
SRLP
made statements or representations that would cause an investor to believe that
the loss that would be deductible in respect of their[sic] partnership interest
would exceed the cost to the investor of the partnership interest less the
value of the investor’s promissory note;
ii.
paragraph 18 which in
its entirety reads:
The
Appellant is liable for a penalty because he acted as a principal or agent to
sell, issue or accept consideration in respect of the SRLP tax shelter before
the Minister issued a tax shelter identification number, pursuant to subsection
237.1.(7.4) of the Act.;
iii.
in paragraph 3, the
words “but he has no knowledge and puts in issue whether the Appellant held any
interest or units in an indirect manner.”;
iv.
in each of paragraphs
4, 5, 12 and 18 of the Reply, the words “principal or”;
v.
in paragraph 6, the
words “or principal.” and/or;
vi. in the final alternative, to order the
Respondent to answer item #4 of the Appellant’s Demand for Particulars, namely:
11 r) SRLP made statements or representations
that would cause an investor to believe that the loss that would be deductible
in respect of their partnership interest would exceed the cost to the investor
of the partnership interest less the value of the investor’s promissory note;
Demand 4
In
respect of paragraph 11(r) of the Reply, provide full particulars of each
statement or representation that the Minister assumed was made, including but
not limited to the following:
(a) the complete statement or representation itself;
(b) who made the statement or representation;
(c) who the statement or representation was made to;
(d) the date on which the stamen [sic] or representation was
made;
(e) whether the statement or representation was written or verbal; and
(f) if the statement is written, the document in which that statement is
found and the precise words of the document which constitute the alleged
statement or representation.
The
Respondent’s response to Demand #4 of the Demand for Particulars was as
follows:
The
Respondent states that the information demanded by the Appellant in respect of
subparagraph 11(r) of the Reply is not the proper subject of a demand for
particulars. Subparagraph 11(r) sets out a material assumption of fact made by
the Minister. The Appellant is demanding evidence in respect of that fact. The
information sought is not necessary in order for the Appellant to determine the
issues in dispute.
II. Striking the Reply as an Abuse
of Process
A.
Statutory References
and Definition of Tax Shelter
[2]
As to striking the Reply
in toto, the Court shall consider this request firstly since its outcome
will determine the need to address any of the subsequent relief sought.
[3]
In order to assist in
the analysis of the relevant statement of facts made by the Respondent which
are to be assumed as proven Appendix “A” includes excerpts of the relevant
Statement of Fact made by the Respondent in determining that a tax shelter
existed and assessing the penalty. Similarly the Court upon motion may also
accept those factual statements of the Appellant which have been admitted by
the Respondent in the Reply. These relevant admitted facts are reproduced in
Appendix “B” to these Reasons for Order.
[4]
As to the precise
procedural basis for the motion, paragraph 58(1)(b) of the Rules provides:
58(1)
A party may apply to the Court,
[…]
(b)
to strike out a pleading because it discloses no reasonable grounds for ….
opposing the appeal,
[…]
[5]
As to the definition of
“tax shelter”, both parties directed the Court to subsection 237.1(1) of the Income
Tax Act (“Act”) which, (with appropriate omissions and emphasis),
provides the following critical definition:
237.1(1)
“tax shelter” means
[…]
(b)
… a property (including any right to income) other than a flow-through
share or a prescribed property, in respect of which it can reasonably be
considered, having regard to statements or representations made or proposed
to be made in connection with … the property, that, if a person were
to … acquire an interest in the property, at the end of a particular
taxation year that ends within four years after the day on which … the interest
is acquired,
(i)
the total of all amounts each of which is,
(A)
an amount, or a loss in the case of a partnership interest, represented to be
deductible in computing the person’s income for the particular year or any
preceding taxation year in respect of … the interest in the property
(including, if the property is a right to income, an amount or loss in respect
of that right that is stated or represented to be so deductible), or
(B)
any other amount stated or represented to be deemed under this Act to be paid
on account of the person’s tax payable, or to be deductible in computing the
person’s income, taxable income or tax payable under this Act, for the
particular year or any preceding taxation year in respect of … the interest
in the property, other than an amount so stated or represented that is
included in computing a loss described in clause (A),
would
equal or exceed
(ii)
the amount, if any, by which
(A)
the cost to the person of … the interest in the property at the end of
the particular year, determined without reference to section 143.2,
would
exceed
(B)
the total of all amounts each of which is the amount of any prescribed benefit
that is expected to be received or enjoyed, directly or indirectly, in respect
of … the interest in the property, by the person or another person with
whom the person does not deal at arm’s length.
[6]
Were a tax shelter to
exist, the constituent legal elements of the penalty imposed are to be established
by the Minister’s argument (as identified by the Respondent) that the Appellant,
as agent or principal sold, issued or accepted consideration in respect of the
tax shelter before the issuance of an identification number and is therefore statutorily
liable for a penalty in respect thereof under subsection 237.1(7.4) of the Act
as follows (again with appropriate omissions and emphasis):
237.1(7.4) Every
person who …. whether as a principal or as an agent, sells, issues or
accepts consideration in respect of a tax shelter before the
Minister has issued an identification number for the tax shelter is liable to a
penalty equal to the greater of
(a)
$500, and
(b)
25% of the total of all amounts each of which is the consideration received or
receivable from a person in respect of the tax shelter before the correct
information is filed with the Minister or the identification number is issued,
as the case may be.
[7]
The Appellant submits
that Baxter v. The Queen 2007 FCA 172 establishes that a “tax shelter” exists
where:
(i)
property is offered for
sale to prospective purchasers (the “Property Element”);
(ii)
statements or
representations have been made or proposed in connection with the property
describing the loss in excess of the cost (the “Statement Element”); and
(iii)
in respect of the
Statement Element, it may be reasonably considered that the loss will exceed
the cost within four years all in accordance with the formula contained in subsection
237.1(1) (the “Calculation Element”);
Once each individual
tax shelter element is established, a tax shelter penalty (“Penalty”) may be
imposed provided the assessed party “as a principal or as an agent sells,
issues or accepts consideration in respect of a tax shelter before the Minister
has issued an identification number”(the “Role Element”).
B. Submissions
of Parties
[8]
The Appellant has
offered four distinct grounds under paragraph 58(1)(b) of the Rules as
the legal bases upon which the entire Reply of the Respondent should be struck.
The Respondent’s submissions in reply follow in sequence.
(1) Tax Shelter Definition Must Include “Property”
[9]
The Appellant has submitted
that, pursuant to subsection 237.1(1) of the Act, the assumptions of the
Minister when assessing a tax shelter penalty under subsection 237.1(7.4) of
the Act must be in connection with a tax shelter. The Appellant asserts
that the relevant definition of tax shelter must reference and identify “property”
as clearly enumerated in subsection 237.1(1) of the Act. The Appellant
relies upon the authority of Baxter, supra and infra, as
authority for the proposition that the statements and representations necessary
for the application of the Penalty must also be in respect of “property”.
[10]
In a technical and textual
legal argument, the Appellant has argued, by reference to certain authorities (notably
the Partnerships Act of British Columbia and the case of Madsen cit. infra)
that Solid Resources No. 1 Limited Partnership (“SRLP”), as a limited
partnership, cannot be property at law. It may well be that the limited
partnership units or interests subscribed in SRLP (the “LP Units”) by the
limited partners constitute the “property”, but the Appellant argues that the
Reply and submissions by the Respondent made before the Court identify only SRLP
as the “tax shelter” or “property”. Legally, whatever the “property” comprising
the tax shelter might be, the Appellant contends it cannot at law be SRLP, a
limited partnership.
[11]
The Appellant concedes
that the general test for striking an appeal or a reply as a whole, under R
v. Imperial Tobacco Canada Ltd., [2011] 3 S.C.R. 45, allocates a
very high onus upon the party seeking to strike the pleading. Facts alleged
must be assumed to be proved, and once so assumed, such a motion to strike will
not succeed unless the facts are manifestly incapable of being or once proven
do not amount to the legal requirements for the assessment. In addition, one cannot
hope for new facts to be adduced at trial or, in the present case, any new assumptions
to be made in future. Simply put, the Appellant states that if certain and
necessary assumptions and facts are absent from the Reply and, correspondingly,
the facts which are present fail factually or legally to establish the Property
Element of the Legal Elements for the assessment of the Penalty, then the Reply
must be struck.
[12]
In response, the
Respondent directed the Court to the general assertion in its submissions that
the Legal Elements of subsection 237.1(7.4) had been properly pleaded. The
Respondent has consistently contended that SRLP is the tax shelter. No further specific
representations were made by the Respondent in reply (either in the written
submissions or orally before the Court) on whether the partnership itself (SRLP),
identified and defined by the Respondent as the “property” of the tax shelter,
could constitute property at law.
(2) No Identification of Statements or
Representations re: Property or Calculation of Losses
[13]
As an alternative
ground to striking the entire Reply, the Appellant has argued that even if the
Respondent had pleaded facts which establish the Property Element, the Reply has
not disclosed material facts related to the Statement Element. The Appellant
states that the only factual reference in the Reply to statements or
representations in respect of the “property” or “tax shelter” are disparate and
irrelevant facts attributed circumstantially to the Appellant merely and
indirectly as implicit agent or principal and are limited to one statement
contained in the offering memorandum(“OM”).
[14]
If there must be
statements concerning “property” as defined in the Act in order to
establish a tax shelter, and no clear statements by the Appellant concerning
“property” exist in the pleadings, then the Penalty lacks the Statement Element
and the Reply, on a prima facie basis even when all facts are assumed to
be proved, cannot defeat the appeal since the Reply lacks a Legal Element necessary
for the imposition of the Penalty.
[15]
As regards the
Calculation Element, the Appellant states that nothing in the Reply nor
specifically anything in paragraph 11(r) describe an amount that a prospective
purchaser would be able to deduct in computing income. No comparative language
of the deductible amount in relation to the cost less prescribed benefits over
the four year duration otherwise defined in subsection 237.1(1) is present in
the Reply as an alleged fact.
[16]
In response, the Respondent
has stated that “it is clear from the terms of the OM that the purpose of the [OM] was to create a tax shelter”. In its Reply, and relevant to the Statement Element, the
Respondent assumes by allegation that the Appellant prepared the OM, submitted
all documentation to the relevant security regulations for approval, had
signing authority for the SRLP, and otherwise exhibited management and control
over SRLP through its general partner in the process. Moreover, counsel for the
Respondent suggested the facts pleaded in its Reply as a whole, lead to the
conclusion that SRLP made statements and representations (by virtue of the
Appellant as principal and agent) concerning the tax shelter which actions, taken
as a whole, would cause a person to reasonably believe that SRLP was a tax
shelter.
(3) The Appellant did not have a “Role” within the Tax Shelter
[17]
The Appellant states
that paragraph 18 of the Respondent’s Reply is a bald conclusion of law which
does not factually express or even infer that the Appellant acted as a principal
or agent to “sell, issue or accept consideration” in respect of the SRLP tax
shelter and thereby fails to establish a factual basis for the Role Element. In
short, no identifiable assumption or assertion of fact appears in the Reply
which directly describes, categorizes, differentiates or identifies the actions
of the Appellant as a principal or agent who has sold, issued or accepted
consideration in respect of a tax shelter necessary to establish the Legal
Elements of the Penalty.
[18]
The Appellant submits
that there is no clear and explicit statement as to the facts assumed to assess
the Penalty. The Appellant referenced paragraph 9 of Johnston v. M.N.R.,
[1948] S.C.R. 486 which assigns to the Crown the duty to fully disclose “the precise
findings of fact and rulings of law which have given rise to the controversy”. Similarly,
the Appellant states that pursuant to the principles outlined in Continental
Bank of Canada v. The Queen, [1998] 2 S.C.R. 358 and Anchor
Pointe Energy Ltd. v. The Queen, [2004] 5 C.T.C. 98 (F.C.A.), the
Respondent has failed to disclose the material facts necessary and correlative
to establish the Legal Elements of the Penalty. It is argued that the Appellant
cannot know the basis of the factual assumptions with sufficient definition to
allow the Appellant to meet the case against him. Additionally, compliance with
the direction of Sharlow J.A., at paragraph 4 of Canada v. Loewen 2004
FCA 146 has not been achieved since the Reply fails to “state the Crown’s
position with respect to each factual allegation and argument in the notice of appeal,
and … [to] state the facts and arguments upon which the Crown relies to defend
the correctness of the assessment”.
[19]
The Respondent states
that only in the “most plain and obvious cases”, where the case is beyond doubt,
should the Reply be struck. The Respondent argued assuredly that the material
facts necessary to support the legal position that “Appellant acted as a
principal or agent in selling, issuing or accepting consideration in respect of
that SRLP tax shelter … and are” found in paragraphs 11 (bb) through (mm). On
the basis of these facts, the Respondent asserts that the Appellant acted as
principal or agent for SRLP. The Respondent contends that it is not required to
specify to which of “sold, issued or accepted consideration” these facts
pertain.
(4) Striking of Critical Paragraphs
[20]
On a final point in
support of striking the entire Reply, the Appellant has requested that certain critical
paragraphs be struck on the basis that they are in the nature of argument, are
superfluous and/or do not appropriately disclose, or relate to, allegations
which have as their underpinning pleaded facts or assumptions needed to establish
prima facie the
Legal Elements of the Penalty. Specifically, the request is to strike
paragraphs 11(r) and 18 within the Reply.
[21]
The Appellant argues that
paragraph 11(r) is simply a conclusion of law, and is absent of any material
facts relating to the Legal Elements of the Penalty. Secondly, paragraph 18 is
simply a statement or conclusion that the Appellant has otherwise committed the
Legal Elements of the Penalty but does not plead any facts tending to establish,
as factual allegations or assumptions, the Legal Elements of the Penalty.
[22]
Since these paragraphs
are not properly pleaded in accordance with paragraph 53(c) of the Rules,
the Appellant argues this constitutes an opportunity on the part of the
Respondent to discover new facts necessary to build new assumptions at
discovery. The Appellant argues this is an abuse of process and these two
paragraphs should be struck. In turn, once struck, the Reply discloses no
reasonable basis for opposing the appeal since those paragraphs contain the
only reference to statements and representations, the Appellant’s role and
capacity in the tax shelter and the financial metrics sufficient to establish
the tax shelter threshold -- the Legal Elements of the Penalty.
[23]
The Respondent argues
that Paragraph 11(r) represents a concise statement that certain statements
were made. This pleading of material fact is to be proven at trial, needs to be
considered in conjunction with the other facts pleaded and must be weighed by
the trial judge charged with the task of assessing all the factual assumptions
at the hearing.
[24]
The Respondent states
that paragraph 18 is simply an argument which identifies the components of
subsection 237.1(7.4) which must be present for the Appellant to be liable for
the Penalty – the Role Component.
C. Analysis
of Submissions
(1) Tax Shelter must be “Property”
[25]
The Appellant’s
assertion that subsection a “237.1(1) penalty” may not be imposed where the
Respondent has failed to legally identify a “property” is not the question of preference
and style in pleadings which it may otherwise appear to be at first glance. Only
indirect submissions were made before the Court by the Respondent to refute
this legal argument. It justifies serious consideration by the Court. It is
also noted that the Respondent did not, although it was drawn to counsel’s
attention, request leave to amend the pleadings in order to otherwise refer to
the LP Units, per se, as the “property” rather than SRLP. The Respondent
also challenged the use of affidavit evidence introduced by the Appellant at
the motion relating to the Notice of Confirmation dated September 6, 2011. This
objection need not be addressed since the Respondent in its Reply admitted
paragraph 26 of the Notice of Appeal which contained the relevant
identification by the Canada Revenue Agency of SRLP and not the LP Units as the
“tax shelter”. No other evidence from the affidavit was considered.
[26]
In terms of the substantive
underlying law relevant to SRLP’s legal character, it should be noted that in
the province of British Columbia, unlike certain other common law provinces in
Canada, limited partnerships are in law described, defined and otherwise
created statutorily within the Partnerships Act of British Columbia
R.S.B.C.1996, c.348 (the “Partnerships Act”). In certain other
provinces, there is a separate statute governing limited partnerships per se.
[27]
Much has been said and
written, sometimes inconsistently, about limited partnerships. Limited partnerships
do not exist at common law. They are created entirely by statute. This is to be
differentiated greatly from the concept of partnership and general partnerships
generally which exist at common law, and which relevant body of law has over
the years been codified under various legislation within the provinces. By
direct reference to the Partnerships Act (under which SRLP was created),
section 49 at the outset of Part III of the Partnerships Act provides:
49 The provisions of this Act must in the case of limited
partnerships be read subject to this Part.
[28]
The intent of this
particular clause is to ensure that the Partnerships Act, which
otherwise applies to limited partnerships must be read in the context of
partnership law as a whole, but nonetheless expressly subject to this specific part
of the Partnerships Act. British Columbia’s Partnerships Act
provides that a limited partnership will exist, as if and as though, it is a
general partnership, but specifically subject to the statutory differences and exceptions
provided for in Part III. Nothing within Part III of the Partnerships
Act alters the relevant common law definition of a partnership properly
characterized as a relationship or arrangement subsisting between persons
carrying on business in common with a view to profit. Therefore, the legal
character of SRLP, which is a British Columbia limited partnership, is such an
arrangement or relationship since it is not otherwise modified by the Partnerships
Act.
[29]
As to the issue of
partnership constituting property for the purposes of the Act, in the
case of Madsen v. The Queen, [2001] 1 C.T.C. 244 (F.C.A.) the Federal
Court of Appeal, at paragraph 16, characterized the nature of the partnership
for the purposes of the Act as follows (with emphasis added):
[16] A
partnership’s lack of separate legal personality is what distinguishes it from
an individual or corporation. The Act maintains this lack of legal personality,
and does not generally treat partnerships as taxpayers. Instead, it is the
individual partners who pay tax on the basis of their particular share of
the income or losses of the partnership. In order for this ‘flow through’
of tax consequences to take place, subsection 96(1) of the Act requires that
the income or losses of the partnership be computed as if the partnership were
a ‘separate person’ and each “partnership activity … were carried on by the
partnership as a separate person …” As a part of this conceptual separation,
expenditures to acquire depreciable property are capitalized at the partnership
level, and capital cost allowance is only deductible at that stage. Section
1102(1a) protects the integrity of calculating capital cost allowance at the
partnership level by ensuring that depreciable assets owned by a partner in his
or her personal capacity are not intermingled with assets of the same class
owned by the partnership. In my view, the foregoing ‘regime’ implies nothing
more than a notional construct for calculating a taxpayer’s tax liability. It
is a purely administrative convenience necessary to sustain the Act’s view of
the partnership as a conduit or vehicle for taxpayers.
This constitutes
the relevant and topical authority to this Court on the legal character of
partnerships within the context of the Act.
(2) No Identification of Statements re: Property or Calculation of
Losses
[30]
Regarding the necessary
pre-conditions to establish a tax shelter, the case of Baxter is
particularly instructive. Specifically, paragraphs 8 through 11, provide informative
and direct authority to this Court of the need for each of the Property,
Statement and Calculation Elements. Those paragraphs are as follows (with
emphasis added):
[8] The
property contemplated by the definition of tax shelter is each and every
property that is offered for sale to prospective purchasers. However, not
every property that is proposed to be sold will constitute a tax shelter.
[9] The
definition requires that statements or representations must be made, at
some time, in connection with the property that is offered for sale. If no
statements or representations have ever been made in connection with a
property, then that property cannot constitute a tax shelter. Because the
property that is contemplated by the definition of tax shelter is a property
that is assumed to have been acquired by the prospective purchaser and the
statements or representations are required to have been made in connection with
that property, it follows that the statements or representations must have been
made prior to any actual sale of the property that is offered for sale.
Further, while the definition does not specify to whom or by whom the
statements or representations must be made, in my view they must be made to
the prospective purchasers of the property by or on behalf of the person who
proposes to sell the property.
[10] The
subject matter of the statements or representations is essentially a
description of an amount that the prospective purchaser would be able to
deduct, in computing income in respect of the property, as a consequence of
an assumed acquisition of the property, that is to say, if the prospective
purchaser had actually acquired the property, whether the amount constitutes
the acquisition cost of the property, a cost incurred in order to obtain the
property (e.g. a drilling cost incurred to acquire an interest in an oil and
gas property in a farm-out transaction) or an amount allocated to the holder of
the property (e.g. a loss allocated to partner holding a partnership interest).
[11] The
definition of tax shelter does not specify the form that the statements or
representations must take or the manner in which they must be made. It is
clear that there must be a communication to prospective purchasers
which would inform them that a deductible amount would become available to
each of them as a consequence of an acquisition by any of them of the
property that is offered for sale. Nothing in the definition indicates that
the requisite communication must be made in writing.
[31]
The
Court notes that the assumed statements and representations, both as to
association and quantum, are limited to paragraph 11(m) of the Reply and
specifically the reference in the OM to “the majority of the partnerships
expenses occurring in 2006”. In turn, this statement was made by SRLP for whom
the Appellant it alleged to have acted as agent or principal, again with no
distinction between the two capacities.
(3) The Appellant did not have a “Role” within the Tax Shelter
[32]
Subsection 49(1) of the
Rules provide that a Reply must identify: the admitted, denied and
unknown facts; the findings or assumptions of fact made by the Minister when
making the assessment; any other material fact; issues to be decided; statutory
authority relied on; the reasons the Respondent intends to rely on; and, the
relief sought.
[33]
Johnston,
Continental Bank of Canada, Anchor Pointe Energy Ltd. and Loewen, supra, provide
ample direction to the Crown that Reply pleadings must provide the Appellant
with a clear and unequivocal map to the sequence, detail, depth and chronology
of the facts assumed by the Crown. Johnston mandates precision of
fact and rules of pleadings, Continental requires disclosure of the
basis of assessment, Anchor Pointe directs Ministerial elucidation and
explanation of the facts and assumptions and Loewen reflects the
requirement that assumptions must have clarity, accuracy, and consistency.
[34]
In short, the static
and stoic state of the facts, conclusions and assumptions in the Reply must
reflect the precise, fulsome, evolved and clear basis of the assessment and comprise
the factually established case theory to be disproved, discredited or
demolished by the Appellant, who is required to challenge same or lose the
appeal. All such Reply facts are assumed to be correct until the Appellant
mounts such a challenge and defeats the assumptions. On a motion to strike, if
the facts, after being assigned their highest credibility, lack sufficient
precision, clarity, fulsomeness and sequence to establish the elemental basis
of an assessment (in this case a penalty with a clearly alleged Role Element),
then liability for the Penalty cannot, on a plain and obvious basis, succeed.
(4) Striking of Critical Paragraphs 11(r) and 18
[35]
Paragraphs 11(r) and 18
of the Reply constitute the allegations that SRLP made statements and representation
causing an investor to believe a partnership interest would exceed the cost --
the Statement Element, and that the Appellant acted as agent or principal in
selling, issuing or receiving consideration for the SRLP tax shelter – the Role
Element.
[36]
To the extent these
summaries are reasoning or argument, they have no probative value. To the
extent they relate to other alleged facts in the Reply it can be argued they
are superfluous. To the extent they are intended to be a general allegation,
without further detail, precision or clarity, they do not establish the Legal
Elements of the Penalty. Pure Spring Co v. M.N.R., [1996] C.T.C. 169
(Ex. Ct.) stands for the proposition that an assessment is “the summation of
all the factors representing tax liability, ascertained in a variety of ways,
and the fixation of the total after all of the necessary computations have been
made.”
[37]
As to the
interpretation and classification of statements contained in pleadings, in Strother
v. The Queen 2011 TCC 251, CJ Rip stated at paragraphs 15, 16, 24 and 39.
[15] Once
the respondent has admitted and denied facts and stated she has no knowledge of
certain facts alleged in the Notice of Appeal and puts these facts in issue,
there are only two more statement of facts for the respondent to plead: the
finding or assumptions of fact made by the Minister when making the assessment,
and any other material fact. All these statements of fact are to be
statements of material fact, not immaterial facts, not statements or principles
of law and not statements mixing fact with law. Subparagraphs f), g)
and h) of Rule 49 accord the respondent opportunity to describe the
issues, state the statutory provisions in play and submit the reasons she is
relying on in this appeal.
[16] It
is poor and improper pleading when a litigant admits or denies a fact in a
pleading but couples the admission or denial with a conclusion of law or some
extraneous comments that add nothing to the process. The assumptions of fact
should be facts the Minister relied on in assessing and the facts so relied on
should be material facts. Otherwise, why were these facts relied on if they
were not material? In Foss v. The Queen my colleague Bowie J.
explained that:
The
purpose of pleadings is to define the issues between the parties for the
purposes of discovery, both documentary and testamentary, and trial. That
requires no more than a statement of the “precise findings of fact” that
underpin the assessment. It is potentially prejudicial to the appellant to
plead more - certainly to plead more by way of assumptions of fact. The
appellant is, of course, entitled to particulars of the evidence that the Crown
intends to lead at trial, but these are properly obtained on discovery, not
disguised as material facts as to which the Crown at trial may claim a
presumption of truth. …
[24] It
is frequently difficult to draw the line between a question of fact and a
question of law. It is more difficult when the third category, mixed question
of fact and law, is considered. Iacobucci J. of the Supreme Court of Canada
recognized this problem and stated the following:
…Briefly
stated, questions of law are questions about what the correct legal test is;
questions of fact are questions about what actually took place between the
parties; and questions of mixed law and fact are questions about whether the
facts satisfy the legal tests. A simple example will illustrate these concepts.
In the law of tort, the question what “negligence” means is a
question of law. The question whether the defendant did this or that is a
question of fact. And, once it has been decided that the applicable standard is
one of negligence, the question whether the defendant satisfied the appropriate
standard of care is a question of mixed law and fact. I recognize, however,
that the distinction between law on the one hand and mixed law and fact on the
other is difficult. On occasion, what appears to be mixed law and fact turns
out to be law, or vice versa.
[39] The
appellants’ alternative argument to strike is based on the repetition and
redundancy of the Replies. When reading through redundant and repetitive
portions of the Replies it is only a matter of pages before one has the feeling
that one of the parties is trying to beat the other into submission, never mind
the judge who is only just entering the fray. The appellants rely on Mudrick
v Mississauga Oakville Veterinary Emergency Professional Corporation, in
which Master Haberman of the Ontario Superior Court of Justice struck out the
plaintiff’s overview and summary for this very reason. In reaching this conclusion
Master Haberman stated:
The
pleading contains a summary, which essentially repeats the overview. This will
be unnecessary when the claim is pleaded properly. Including the summary and
the overview means the same things are repeated three times in the pleading.
They should only be discussed once, in the body of the claim, where they fall
chronologically.
In
concluding, she added the following general comments regarding pleadings
in general:
Repetition should be avoided. Superfluous detail should be
eliminated. Editorialized comments should be removed. … This is not “the last
chance” to tell the whole story – it is only an overview of what the case will
be about. …
[38]
Therefore, should
either of paragraph 11(r) or 18 relate inconsequentially to other alleged
facts, are argument or law or are too general, they shall be struck, unless
they are clearly identified as argument in which case they are not to be
assumed for the purposes of this motion.
III. Decision
[39]
In a different kind of
proceeding, the failure to identify the “property” with legal exactitude would
not necessarily militate the outcome of the matter in favour of striking the
Reply. However, the Legal Elements of the Penalty in respect of tax shelters
require the Minister and the Canada Revenue Agency to have thoroughly and
accurately understood the nature of “the property” related to the factual allegations
against a person so assessed. With respect to the Property Element, the SRLP cannot
be a tax shelter, within the definition of the Act, since it is not
property, but rather as the Federal Court of Appeal has said in Madsen “partnerships
are a conduit or vehicle for taxpayers.” Nothing can possibly remedy the
fundamental allegations in the Reply that SRLP is tax shelter or property which,
even when assumed true, will not definitionally establish the Property
Element required for the assessment of the Penalty. This reference to SRLP as
the tax shelter is not passing or inadvertent reference. The Respondent has stated
many times in the Reply and in the written submissions in reply to this motion
that SRLP (a partnership) is the tax shelter. Since a tax shelter must be
“property” under subsection 237.1(1) of the Act, it is not legally possible
for SRLP to be a tax shelter. The LP Units may well be property and a tax
shelter, but this allegation was not assumed, pleaded or argued by the
Respondent. This is evident from paragraph 1 of its motion submissions,
paragraphs 14 of the Reply and the admitted Notice of Confirmation of September
6, 2011.
[40]
The Court has assumed
that the Minister, through the Canada Revenue Agency, when assessing a Penalty,
will have thoroughly, accurately and fulsomely analysed the legal structure and
character of the “tax shelter” and what constitutes the legal “property”. This Property
Element of the Penalty is fundamental and the Court assumes the Minister and
Canada Revenue Agency have conducted the appropriate review of the assessment
through audit and has nonetheless identified SRLP as the property constituting
the tax shelter as borne out by the consistency of approach. By making this logical
inference, this Court of law is left with a legally impossible conclusion of
law, witnessed repeatedly in the Respondent’s pleading, namely that, SRLP, a
legal limited partnership, is property for the purposes of subsection 237.1(1)
of the Act. This error in law fails to establish a critical Legal
Element of the transgression giving rise to the Penalty.
[41]
In addition, apart from
the forgoing legal determination, the Court also finds that the present Reply
pleadings in respect of the Statement Element and Calculation Element of the Penalty
are lacking in a level of factual specificity and disclosure which would
otherwise allow the Appellant to meet the case that has been alleged against
him as to statements and representations made relating to the actual loss
accruing to the tax shelter property and the quantum of the loss in excess of
the cost. There is a dearth of factual assertions and assumptions beyond the
single “expense statement” in the OM which provide a nexus of SRLP statements
regarding the duration, character and quantum of losses of the “tax shelter”.
Once these limited factual allegations are transferred to the context of the Appellant,
vaguely referenced by incorporating the statutory language of “agent or
principal” without specific factual assertions concerning same, the factual association
becomes even more remote.
[42]
Generally, the factual
assertions in the Reply concerning the Role Element, beyond the single
paragraph in the OM, lack even a general description as to dates, addressees,
meetings and time frames of such statements. Paragraphs 11(r) and 18 do not disclose
sufficient summary material facts to establish a Role Element which the
Appellant can reasonably recognize in order to muster a case in his attempt to
demolish the facts establishing the Legal Elements of the Penalty.
[43]
In summary the
critical, general facts, if they exist, have simply not been pleaded. The Respondent’s
unwillingness to respond to the Request for Particulars, other than by denying
the need for same on the basis that the request for particulars relates to
evidence, is premature (i.e. brought before discoveries) and/or should
ultimately be tested at discoveries, suggests a possibility that the necessary facts
and assumptions which can be fairly placed in the Reply regarding the Statement
Element, the Calculation Element and/or the Role Element do not exist to
establish the Legal Elements of the Penalty.
[44]
Accordingly, although
the Court agrees that the Reply and Notice of Confirmation do not identify
property which can, by legal logic and analysis identified in the authorities, amount
to a tax shelter (as assumed and defined within the pleadings by the Respondent),
the Court also finds that the Reply does not contain a reasonable and
sufficient description of facts concerning: (i) the statements or
representations made in connection with the property of the tax shelter; (ii) statements
of the quantum of the losses in excess of the cost; nor, (iii) the Appellant’s
alleged actions as an agent or principal -- all of which are not only legally required
to afford the Appellant an opportunity to identify the case to be met by him,
but also to factually establish the Legal Elements of the Penalty.
[45]
Therefore, on the basis
of the foregoing, and after affording the Respondent the most favourable weight
to all of the facts as alleged by the Minister in the Reply, the presence of
several insurmountable hurdles makes it plain and obvious that the Respondent has
failed to plead sufficient facts and assumptions which would otherwise comprise
the Legal Elements necessary to establish the Penalty. To reiterate, these
impediments are:
a)
SRLP will never legally
be “property” within the definition of a tax shelter, but nonetheless SRLP has been
consistently characterized as the “property” constituting the tax shelter from
the very inception of the confirmation of the assessment (as included in the
pleadings), through the pleadings and within the Respondent’s own submissions
at the motion;
b)
the Reply does not
contain specific, precise or clear factual allegations and/or assumptions
needed to establish statements and representations made by the Appellant in
respect of the property offered for sale;
c)
the Reply does not
contain direct or inferred facts or allegations concerning the sufficiency of
the calculations and quantum of the losses in excess of the cost within the threshold
formulae described in subsection 237.1(1) of the Act; and
d)
the Reply fails to
factually assert facts relating to the capacity or acts of the Appellant in the
sale, issuance or acceptance of consideration in respect of the alleged tax
shelter.
[46]
Therefore, for the
reasons stated above, the motion to strike the Reply under paragraph 58(1)(b)
of the Rules, for failing to disclose reasonable grounds to oppose the
appeal, is granted. Therefore the remaining relief sought regarding the
striking of certain paragraphs in the Reply and compelling the Respondent to
answer the Demand for Particulars need not be addressed. Costs are awarded to
the Appellant.
Signed and
issued at Ottawa, Canada this 20th day of July 2012.
“R.S. Bocock”
Appendix “A”
Material and Relevant Statement of Fact within the
Reply
1.
He admits the allegations of fact stated in
paragraphs 1, 2, 3, 4, 5, 6, 7, 10, 13, 14, 15, 16, 17, 23, 24, 25, and 26 of
the Notice of Appeal.
2.
He denies the allegations of fact stated in
paragraph 11, 12, 18, 19, and 20 of the Notice of Appeal.
3.
With respect to paragraph 8 of the Notice of
Appeal, he admits that the Appellant did not directly hold any interests or
units in SRLP at the time but he has no knowledge and puts in issue whether the
appellant held any interest or units in an indirect manner.
4.
With respect to paragraph 9 of the Notice of
Appeal, he admits the allegations of fact but, for clarification, states that
the offers were made by the Appellant acting as principal or agent for SRLP.
5.
With respect to paragraph 21 of the Notice of
Appeal, he admits only that all of the interests or units of SRLP were sold or
issued by SRLP with the Appellant acting as principal or agent for SRLP in
respect of the sales and issuances.
6.
With respect to paragraph 22 of the Notice of
Appeal he admits that all consideration paid in respect of the interests in or
units of SRLP was paid to SLRP but, for clarification, he states that the
Appellant accepted the payment of the consideration on behalf of SRLP as its
agent or principal.
[…]
8.
By Notice dated May 27, 2009, the Minister of
National Revenue (“Minister”) assessed a penalty totalling $2,352,500 pursuant
to subsection 237.1(7.4) of the Income Tax Act (the “Act”). The
penalty was assessed on the basis that the Appellant, acting as a principal or
as an agent, sold, issued or accepted consideration in respect of the Solid
Resource #1 Limited Partnership tax shelter before the Minister had issued an
identification number for the tax shelter.
[…]
11.
In determining that the Appellant was liable to
a penalty pursuant to subsection 237.1(7.4) of the Act, the Minister
relied on the following facts:
The Tax
Shelter
a)
Solid Resources #1 Limited Partnership (SRLP)
was structured as a limited partnership;
b)
SRLP’s first taxation year was from December 15,
2006 to December 31, 2006 (“2006 taxation year”);
c)
SRLP has never had a tax shelter identification
number;
[…]
SRLP’s partners
[…]
g)
In 2006, SRLP’s limited partners paid the Total
Cost of the Partnership and acquired the partnership units by paying 25% by
cash, money order, bank draft or certified cheque payable to SRLP ($2,352,500)
and 75% by promissory note ($7,057,500)(the “Promissory Notes”);
h)
When SRLP’s limited partners purchased their
limited partnership units, they filled out forms and submitted amounts equal to
25% of the subscription cost of the partnership units to Ken Legasse Inc.;
[…]
m)
The Offering Memorandum states that the majority
of the partnership’s expenses would occur in 2006;
n)
SRLP had no revenue in 2006;
o)
SRLP incurred expenses of $8,798,935 in its 2006
taxation year resulting in a loss of the same amount (the “2006 SRLP Loss”);
p)
SRLP allocated the 2006 SRLP loss to SRLP’s
limited partners;
q)
For the 2007 fiscal period, SRLP reported a loss
of $201,132, which was allocated to SRLP’s limited partners;
r)
SRLP made statements or representations that
would cause an investor to believe that the loss that would be deductible in
respect of their partnership interest would exceed the cost to the investor of
the partnership interest less the value of the investor’s promissory note;
[…]
The
Appellant’s role in SRLP
bb)
The Appellant is the “Director Tax Services” for
Ken Legasse Inc.;
cc)
Ken Legasse Inc. is a firm of Chartered
Accountants;
dd)
The Appellant prepared the Offering Memorandum;
ee)
The Appellant submitted all the required
documents relating to SRLP with the Security Exchange Commission;
ff)
The Appellant has signing authority over SRLP’s
bank account;
gg)
25% of the subscription cost of each SRLP
partnership were deposited to SRLP’s bank account;
hh)
The Appellant issued cheques for the payment of
SRLP’s expenses;
ii)
The Appellant is the authorized signing officer
of SRLP;
kk)
The Appellant was the sole director of the
General Partner until December 11, 2007;
ll)
The General Partner is responsible for the
management and control of SRLP; and
mm)
The General Partner describes itself as a
promoter of SRLP.
[…]
14.
SRLP is a tax shelter pursuant to section 237.1
of the Act because it can reasonably be considered, having regard to
statements or representations made in connection with SRLP, that, if an
investor were to acquire an interest in SRLP, at the end of the particular
taxation year that ends within four years after the day on which the
partnership interest was acquired, the total of the loss represented to be
deductible in respect of the partnership interest would exceed the cost to the
investor of the partnership interest less the value of the investor’s
promissory note.
18.
The Appellant is liable for a penalty because he
acted as a principal or agent to sell, issue or accept consideration in respect
of the SRLP tax shelter before the Minister issued a tax shelter identification
number, pursuant to subsection 237.1(7.4) of the Act.
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