Citation: 2011TCC568
Date: 20111221
Docket: 2010-1413(IT)G
2010-1414(IT)G
2010-1640(IT)G
2010-2864(IT)G
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Rossiter A.C.J.
Introduction:
[1] The Appellant entered
into a number of transactions with Enron some of which involved the sale of
assets by Enron to special purpose entities. Enron filed for Chapter 11 Bankruptcy
Protection. Litigation known as the Newby Litigation and MegaClaim Litigation were
commenced against the Appellant and others alleging in part that the Appellant improperly
participated in transactions with Enron involving the sales of assets to
special purpose entities, knowing they were improperly accounted for on Enron's
financial statements.
[2] The Newby and MegaClaim
Litigations were each settled by the Appellant paying a total of approximately U.S.
$2.65 billion plus interest and legal expenses. The Appellant treated these
payments as expenses. The Minister of National Revenue denied the deductions.
The Appellant appealed and the Respondent filed a reply some 80 plus pages
in length; the Appellant now brings a motion to strike the reply pursuant to
Rule 53 of the Tax Court of Canada Rules (General Procedure).
Factual
Background:
[3] The appeals are essentially all the same in the sense
that they raise the issue of whether or not settlement amounts, interest and
legal expenses paid in what are known as the Newby and MegaClaim Litigation were
properly deductible by the Appellant in computing its income for the 2005 or
2006 taxation year.
[4] The Respondent asserts that certain entities affiliated
with the Appellant, participated pre-October, 2001 in a number of financing
transactions for Enron to create the false appearance of asset sales and equity
contributions which facilitated Enron’s overstatement of its profits and
concealment of the true extent of its borrowings. It is alleged that Enron
defrauded the investment public, creditors and others by its intentional
violation of certain financial accounting standards and that these foreign
affiliates of the Appellant acted in concert with Enron in order to achieve
Enron’s fraudulent purpose of falsifying its reported financial results.
[5] Enron Corporation and certain of its affiliates
voluntarily filed for Chapter 11 Bankruptcy Protection under the U.S.
Bankruptcy Code. Numerous investigations related to Enron’s activities in the
years leading up to and including Enron’s bankruptcy undertaking were commenced,
with these investigations exploring, among other things, transactions involving
Enron and the accounting treatment accorded to these transactions. As a result,
litigation arose in this context including claims against the Appellant
relating to its dealings with Enron.
[6] During the taxation year ending October 31, 2005, the
Appellant settled:
(a) Enron class action
litigation known as the “Newby Litigation” for U.S. $2.4 billion (the “Newby
Settlement Amount”); and
(b) Enron bankruptcy litigation
known as the “MegaClaim Litigation” for U.S. $250 million (the “MegaClaim
Settlement Amount”).
These settlements enabled the CIBC to avoid the possibility
of joint and several liability with numerous other defendants in the litigation
as well as the adverse effects of the ongoing litigation.
[7] In its taxation returns for 2005 and 2006 CIBC sought
to deduct from its income tax certain settlement amounts, interest and legal
expenses. The issue in the appeals is whether such amounts were properly
deductible in computing CIBC’s income for the 2005 and 2006 taxation years, as
the case may be. As noted the Appellant moved to strike all or portions of the
Respondent’s Replies.
Appellant's Position on Motion to Strike:
[8] The Appellant has three arguments with respect to its
motion:
(a) The “egregious or repulsive” concept does not exist
as some sort of freestanding test for deductibility pursuant to section 9 or
paragraph 18(1)(a) of the Income Tax Act and therefore, if the
income earning purpose is established or it is admitted as alleged, there is no
public policy override by the Minister of National Revenue to prevent the
deductibility pursuant to section 9 and paragraph 18(1)(a) of the Income
Tax Act.
(b) If the answer to (a) is that there is some "egregious
or repulsive" concept that is freestanding in terms of deductibility
pursuant to section 9 or paragraph 18(1)(a) of the Income Tax Act,
then the “egregious or repulsive” concept does not apply to settlement payments
in litigation between private parties where there has never been an
adjudication on the facts or consequences.
(c) Further, in the alternative, if the position of the
Appellant is in error in paragraph (a) and (b), the assumptions as pleaded are
not assumptions of fact or are not assumptions of fact within the taxpayer’s
knowledge and therefore should be struck or treated as ordinary allegations.
[9] The Appellant also takes the position that because of
the manner in which the Replies were structured, it is impossible to strike out
parts as to do so would result in incoherent pleadings and therefore the
Replies must be struck out in their entirety with leave to file Amended Replies
and with directions that new Replies should not refer to the “egregious and repulsive”
conduct or anything of that nature.
Respondent's Position on Motion to Strike:
[10] The Respondent asserts that the "egregious or
repulsive" concept is a legal test and not an evidentiary test and that in
dealing with the following questions, the answer to those questions are not so
plain and obvious that it is beyond doubt that the Respondent has no hope of
success:
(a) Is it fully settled in jurisprudence that the “egregious
and repulsive” test forms part of the prohibition on deductibility under
paragraph 18(1)(a) of the Income Tax Act?
(b) Is it fully settled in
jurisprudence that the “egregious and repulsive” test would trump paragraph 18(1)(a) of the Income
Tax Act in the required circumstances?
(c) Is it fully settled in jurisprudence that the “egregious
and repulsive” test does not apply to settlement payments?
(d) Is it fully settled in jurisprudence that the “egregious
and repulsive” tests are restrictions to the extent that the Tax Court of
Canada can examine a settlement transaction and make findings as to what the
transactions were for in terms of the purpose of deciding an income tax appeal?
Analysis:
(i) Egregious or Repulsive Concept:
[11] Is it plain and obvious that it is beyond doubt that
the Respondent has no hope of success on its “egregious and repulsive” test
argument?
(a) Rule 53:
[12] The motion brings into play Rule 53 of the Tax Court
of Canada Rules (General Procedure) which states as follows:
53. The
Court may strike out or expunge all or part of a pleading or other document,
with or without leave to amend, on the ground that the pleading or other
document,
(a) may prejudice or delay the fair hearing of the action,
(b) is scandalous, frivolous or vexatious, or
(c) is an abuse of the process of the Court.
(b) Applicable
Test:
[13] Both the Appellant
and the Respondent refer to Hunt v. Carey Canada Inc., [1990] 2 S.C.R.
959. Justice Wilson stated in part, at page 980, as follows:
… assuming that the facts as stated in
the statement of claim can be proved, is it “plain and obvious” that the
plaintiff’s statement of claim discloses no reasonable case of action? As in England, if there is a chance that the plaintiff might
succeed, then the plaintiff should not be “driven from the judgment seat”.
Neither the length and complexity of the issues, the novelty of the cause of
action, nor the potential for the defendant to present a strong defence should
prevent the plaintiff from proceeding with his or her case. Only if the action
is certain to fail because it contains a radical defect ranking with the others
listed in Rule 19(24) of the British Columbia Rules of Court should the
relevant portions of a plaintiff’s statement of claim be struck out under Rule
19(24)(a).
[14] Bowman C.J. in Sentinel
Hill Productions (1999) Corporation v. Her Majesty the Queen, 2007 TCC 742 in
dealing with Rule 53 of the Tax Court of Canada Rules (General Procedure)
stated in part as follows:
[4] I shall begin by outlining what I
believe are the principles to be applied on a motion to strike under Rule 53.
There are many cases in which the matter has been considered both in this court
and the Federal Court of Appeal. It is not necessary to quote from them all as
the principles are well established.
(a) The facts as
alleged in the impugned pleading must be taken as true subject to the limitations
stated in Operation Dismantle Inc. v. Canada, [1985] 1 S.C.R.
441 at 455. It is not open to a party attacking a pleading under Rule 53 to
challenge assertions of fact.
(b) To strike out a
pleading or part of a pleading under Rule 53 it must be plain and obvious
that the position has no hope of succeeding. The test is a stringent one and
the power to strike out a pleading must be exercised with great care.
(c) A motions judge
should avoid usurping the function of the trial judge in making determinations
of fact or relevancy. Such matters should be left to the judge who hears the
evidence.
(d) Rule 53 and not
Rule 58, is the appropriate rule on a motion to strike.
[15] Chief Justice Bowman
then went on to quote from Hunt v. Carey, supra, as noted above, and then
stated as follows:
[11] … However much jurisprudence may
surround the words “scandalous, frivolous or vexatious, or abuse of the process
of the Court”, they are nonetheless strong, emotionally charged and derogatory
expressions denoting pleading that is patently and flagrantly without merit.
Their application should be reserved for the plainest and most egregiously
senseless assertions. …
[16] The Supreme Court of
Canada considered the applicable test and its application as recently as February 24,
2011 in R. v. Imperial Tobacco Limited, 2011 SCC 42. In that case, Chief
Justice McLachlin stated, in part:
17
The
parties agree on the test applicable on a motion to strike for not disclosing a
reasonable cause of action under r. 19(24)(a) of the B.C.
Supreme Court Rules. This Court has reiterated the test on many
occasions. A claim will only be struck if it is plain and obvious, assuming the
facts pleaded to be true, that the pleading discloses no reasonable cause of
action: … Another way of putting the test is that the claim has no reasonable
prospect of success. Where a reasonable prospect of success exists, the matter
should be allowed to proceed to trial: …
[17] The Supreme Court of
Canada then commented on the purpose of the test and its application and the
fact that it promotes efficiency in the conduct of litigation and correct
results as follows:
22 A motion to strike for failure to disclose a reasonable
cause of action proceeds on the basis that the facts pleaded are true, unless
they are manifestly incapable of being proven: Operation
Dismantle Inc. v. The Queen, [1985] 1 S.C.R. 441, at p. 455. No evidence is admissible on such a motion: … It
is incumbent on the claimant to clearly plead the facts upon which it relies in
making its claim. A claimant is not entitled to rely on the possibility that
new facts may turn up as the case progresses. The claimant may not be in a
position to prove the facts pleaded at the time of the motion. It may only hope
to be able to prove them. But plead them it must. The facts pleaded are the
firm basis upon which the possibility of success of the claim must be
evaluated. If they are not pleaded, the exercise cannot be properly conducted.
…
25 … The judge on a motion to strike asks if the claim has
any reasonable prospect of success. In the world of abstract speculation, there
is a mathematical chance that any number of things might happen. That is not
what the test on a motion to strike seeks to determine. Rather, it operates on
the assumption that the claim will proceed through the court system in the
usual way -- in an adversarial system where judges are under a duty to apply
the law as set out in (and as it may develop from) statutes and precedent. The
question is whether, considered in the context of the law
and the litigation process, the claim has no reasonable chance of
succeeding.
[18] The Supreme Court of
Canada in Imperial Tobacco Canada simply confirmed the test in Hunt
v. Carey and given it a little bit more definition.
[19] As noted, neither
the length nor complexity of the issues, the novelty of the cause of action or
the potential for a party to present a strong case should prevent the party
from proceeding with his or her case. Only if the position taken in the Reply
is certain to fail because it contains a radical defect should the relevant
portions of the Respondent’s Reply be struck. Rule 53 speaks of the
ability to strike pleadings that prejudice or delay of a fair hearing of an
action; are scandalous, frivolous or vexatious; or are an abuse of process of
the Court. Striking pleadings under Rule 53(b) “should be reserved for the
plainest, and most egregious, senseless assertions”, as stated by Chief Justice
Bowman in Sentinel Hill at paragraph [11].
[20] Having heard all the
arguments and read the authorities presented, it has been shown that it is not
plain and obvious that the Respondent’s Reply has no reasonable chance of
success in terms of the “egregious and repulsive” concept, or put another way,
there is a chance that the Respondent might succeed on the “egregious and
repulsive” concept.
[21] The Appellant argues
that the “egregious and repulsive” concept does not apply to section 18 of the Income
Tax Act and is one of evidence only. The Appellant states that the “egregious
and repulsive” concept comes out of what is commonly known as the BC Eggs
case, 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804. In
that case, Iacobucci J. noted that the appeal concerned the language of
paragraph 18(1)(a) of the Income Tax Act. In discussing whether
or not a fine or penalty could be deducted, Iacobucci J., at paragraph [69],
stated as follows:
[69] Finally, at para. 17, my colleague states that
penal fines are not, in the legal sense, incurred for the purpose of gaining
income. It is true that s. 18(1)(a) expressly authorizes the
deduction of expenses incurred for the purpose of gaining or producing income
from that business. But it is equally true that if the taxpayer cannot
establish that the fine was in fact incurred for the purpose of gaining or
producing income, then the fine or penalty cannot be deducted and the analysis
stops here. It is conceivable that a breach could be so egregious or
repulsive that the fine subsequently imposed could not be justified as being
incurred for the purpose of producing income. However, such a situation
would likely be rare and requires no further consideration in the context of
this case, especially given that Parliament itself may choose to delineate such
fines and penalties, as it has with fines imposed by the Income Tax Act.
To repeat, Parliament may well be motivated to respond promptly and
comprehensively to prohibit clearly and directly the deduction of all such
fines and penalties, if Parliament so chooses.
[Emphasis added.]
[22] It is to be noted
that Iacobucci J. was dealing only with fines or penalties, not damages or
settlement sums.
[23] The Appellant also
referred to McNeill v. Canada, [2000] 4 F.C. 132. The issue before
the Federal Court of Appeal was the deduction of a court ordered award of
damages for breach of contract. The Federal Court of Appeal pointed out that if
a fine or penalty for breach of contract is deductible because nothing in
paragraph 18(1)(a) of the Income Tax Act precluded it, a Court
order for damages for breach of contract should also be deductible. The Federal
Court of Appeal then stated in part as follows:
[15] It may be that in respect of a
civic damage award that the wrongful action may be so egregious or repulsive
that the damages could not be justified as being incurred for the purpose of
gaining or producing income and in such rare cases deductibility would properly
be disallowed. Although in the case at bar, the learned Tax Court Judge
referred to the appellant’s actions as reprehensible, he also found they were
for the purpose of keeping his clients and his business. We are satisfied that
they were incurred for the purpose of producing income.
[16] Accordingly, we conclude that
the finding of the Supreme Court of Canada in 65302 British Columbia Ltd. is
determinative of the present appeal. In coming to this conclusion, we
acknowledge that there may be policy reasons against allowing the deductibility
of damages as an expense when they arise from “reprehensible” conduct of a
taxpayer. Be that as it may, 65302 British Columbia Ltd. instructs
that such policy questions are to be left to Parliament. If it so wishes,
Parliament may legislate against the deductibility of damage awards in those
circumstances.
[Emphasis added.]
[24] The Appellant argues
that the egregious and repulsive concept goes only to evidence that the conduct
was for the purpose of gaining or producing income and therefore it is not a
separate policy override issue, but one of evidence only.
[25] These statements from
BC Eggs and McNeill might be somewhat confusing in terms of
exactly what the Supreme Court of Canada or Federal Court of Appeal intended
with respect to the “egregious and repulsive” concept. Taking the one sentence
from Iacobucci J.’s decision at paragraph [69] in the B.C. Eggs case,
… It is conceivable that a breach could
be so egregious or repulsive that the fine subsequently imposed could not be
justified as being incurred for the purpose of producing income. …
could lead one to believe that
there is some “egregious or repulsive” conduct which is an override to section
18 of the Income Tax Act in terms of deductibility. On the other hand,
Iacobucci J. points out that such situations are rare and require no further
consideration or comments on that case, “especially given that Parliament
itself may choose to delineate such fines and penalties, as it has with fines
imposed by the Income Tax Act”. Iacobucci J. appears to invite
Parliament to be more specific on this particular point while the Federal Court
of Appeal seems to think that Iacobucci J. was instructing that such policy
questions are to be left with Parliament – I would not go that far in the
assessment of Iacobucci J.’s comments – I do not take them as an instruction
but rather a nudge to clarify the situation.
[26] Chief Justice Rip in Bains
v. R., 2003 TCC 211 appears to have considered that the “egregious and
repulsive” breach in that case could be such that the actions of the Appellant
would not be justified as being incurred for the purpose of producing income.
At paragraph [29] Chief Justice Rip stated in part:
I have found that the damages paid by Mr.
Bains were not incurred to gain or produce income. However, even if I erred in
so concluding, the actions of Mr. Bains in usurping money out of Mr. Bhandar is
the egregious or repulsive breach that Iacobucci J. states could not be
justified as being incurred for the purpose of producing income.
[27] Also, Webb J. in Douthwright
v. R., 2007 TCC 560 stated at paragraph [27] as follows:
In this case, the amounts payable by the
Appellant to BMO Nesbitt Burns are not repulsive or egregious as they simply
were incurred as a consequence of the Appellant choosing to work for a
different firm. The Agreement does not prohibit the Appellant from working for
a competing firm, it simply sets out the consequences if he should choose to do
so.
It would appear that Justice Webb
was of the view, after referring to McNeill, supra, that there
was such a concept which could trump deductibility.
[28] From Justice Woods, in Ferguson-Neudorf
Glass Inc.v. R., 2008 TCC 684, it appears the “egregious and repulsive”
concept was also recognized but not applied.
[29] The Appellant states
that CRA takes the position that public policy over-rides the Income Tax Act,
but the Appellant counters that such policy considerations are solely an issue
for Parliament, and that the “egregious and repulsive” concept is nothing more
than an evidentiary issue on income earning purpose. To support this
proposition, they refer to:
(a) the
2000 CTF paper, Judicial Administrative Development, on giving an explanation
with respect to the CRA having tax policy concerns that arose out of the
decision of the Supreme Court of Canada in 65302 British Columbia Ltd. v. Canada;
(b) correspondence
of the Director of Business and Partnerships Division, Income Tax Rulings
Directorate, on April 6, 2001, on the deductibility of fines and penalties;
(c) the round table on Federal
Taxation at the APFF 2001 Conference;
(d) IT104R3 on August 9,
2002; and
(e) IT-467R2 on November 13,
2002 in terms of damages.
[30] These references plus
the authorities referred to above lead me to believe, however, that it is not
plain and obvious that the Respondent’s Reply has no reasonable chance of
success in terms of the “egregious and repulsive” concept. Also, I am equally
of the view that the application of the “egregious and repulsive” concept to
settlement payments is equally unclear. If the concept applies to fines,
penalties or damages why wouldn’t it apply to settlement payments? It follows
that if the concept of “egregious and repulsive” is in issue then so too is its
application to settlement payments.
(ii) The Reply:
[31] A most significant
aspect of the motion is in terms of the Reply itself and its content, separate and
apart from the parties disagreement on the application or interpretation of the
“egregious or repulsive” concept.
(a) Position of the Parties:
[32] The Appellant wants
the entire Reply to be struck, because to strike out only parts would result in
incoherent pleadings and they wish to have the Respondent have leave to amend
the Replies with direction that the new Replies should not refer to “egregious
or repulsive” conduct or anything of that nature.
[33] The Appellant takes
this position based upon what they see as three separate problems:
(a) The
litigation cannot commence with the Minister of National Revenue making an
assumption of fact that the Appellant engaged in misconduct and breached the
laws of the United States and now it is up to the Appellant to show on the balance of probabilities
to prove otherwise. This is not an assumption of fact but rather an assumption
and conclusion of law which is not permitted in pleadings.
(b) Assumptions
by the Minister of National Revenue that when the assessment was raised the
Minister of National Revenue assumed as a fact that all of the allegations made
by complainants in the legal actions in the United States are true, and the
burden is upon the Appellant to prove otherwise.
(c) Finally,
the assumptions of fact that relate to third parties should not be allowed as
these are not about the Appellant’s business and the facts are not within the
knowledge of the Appellant but are within the knowledge of the third party.
[34] The
position of the Respondent is basically that:
(a) Where
a scheme that involves a third party is alleged to prevent the deductibility of
an expense, the Minister of National Revenue is entitled to rely upon all
aspects of the scheme. Further, it is the Court’s responsibility to make
determinations which are questions of fact, i.e., whether or not there was a
settlement and the reason and basis behind the settlement.
(b) As
well, the Court has jurisdiction to decide certain issues which are integral to
the appeal itself and this is particularly true when there is fraud alleged.
(b) Applicable
Law and Concepts:
Reference should again be made to
Rule 53 of the Tax Court of Canada Rules (General Procedure) referred to
in paragraph [12] hereof.
[35] In Transocean
Offshore Limited v. The Queen, 2005 FCA 104, Justice Sharlow, speaking
on the issue of assumptions, stated:
[34] The Judge in Redash also said this about the
factual assumptions that were not within the knowledge of the appellant (at
paragraph 31):
[...] Perceptions of fact based upon
facts which lie within the peculiar knowledge of the Respondent
[the Crown] which are paraded as assumptions in the Reply to the Notice of
Appeal, which are beyond the knowledge of the Appellant [Redash] and
which are not easily or practicably deniable by the Appellant without
extraordinary effort and expenditure, should not be deemed to be facts
simply because they are not specifically negated by the Appellant's evidence.
Assumptions of fact in such circumstances cannot displace the need of the Respondent
to produce evidence to substantiate or support that which may be relevant to
counter or affect the Appellant's factual presentation.
[35] This statement recognizes the general principle that,
in a tax appeal, the Crown's factual assumptions are taken as true unless they
are rebutted (see Pollock, cited above). It also recognizes that this
general principle, like all general principles, may have exceptions. The
justification for the general principle is that the taxpayer knows or has the
means of knowing all of the facts relevant to an income tax assessment. A trier
of fact is entitled to draw an inference adverse to a party who has or may
reasonably be presumed to have some evidence that is relevant to disputed
facts, but fails to adduce that evidence. However, there may be situations
where fairness would require that no onus be placed on a taxpayer to rebut a
specific factual assumption made by the Crown. One example might be a fact
that is solely within the knowledge of the Crown. However, I do not see this as
such a case.
[36] The only factual controversy in this case is this:
why was the US $40 million payment made? Section 2 of the Deed of Settlement
states that the US $40 million payment was made pursuant to the Deed of
Settlement "in consideration for the voluntary termination of the Bareboat
Charter" (clause 2).
[Emphasis added]
[36] The Federal Court of
Appeal brings the concept of “fairness” to assumptions as pleaded by the
Respondent in tax appeals as there may be situations which require that no onus
be placed on the taxpayer to rebut a specific factual assumption made by the
Crown.
[37] Justice Bowie in Zelinski
v. The Queen, 2002 DTC 1204, at paragraph [5], affirmed 2002 FCA 330, reviewed
the fundamental rule of pleading, as follows:
[5] The
applicable principle is stated in Holmsted and Watson:
This is the rule of pleading: all
of the other pleading rules are essentially corollaries or qualifications to
this basic rule that the pleader must state the material facts relied upon for his
or her claim or defence. The rule involves four separate elements: (1) every
pleading must state facts, not mere conclusions of law; (2) it must state
material facts and not include facts which are immaterial; (3) it must state
facts and not the evidence by which they are to be proved; (4) it must state
facts concisely in a summary form.
[38] The purpose of
pleadings is to assist in clearly and concisely defining the issues before the
Court, to set the table for the trial judge so to speak, but that is a far cry
from pleadings that attempt to poison the mind of the trial judge with respect
to the issues at hand. I am loathe to interfere in the pleadings of parties;
experienced counsel know their case much better than the judge; they know what
the real issues are and they know what they must prove. However, while pleading
assumptions can and do have significant effect with respect to how the case is
tried, I strongly believe that there must be a sense of fairness in the
pleadings and as noted by the Appellant in their argument, I believe the issue in
pleadings must be one of balance.
[39] Justice Jorré in Kopstein
and Sirett v. The Queen, 2010 TCC 448, commented on assumptions that may be
erroneously left in pleadings and what onus if any may be left on an Appellant:
[67] In assessing whether it is appropriate to
strike a paragraph of a pleading one must bear in mind the practical effect of
the paragraph.
[68] In this context one must bear in mind that
an invalid or irrelevant assumption does not
cast an onus upon an appellant just because it was pleaded. For example, if on
discovery it turns out that an assumption was never made then there is no onus
on the appellant to disprove it; if the respondent wishes to rely on that
particular fact, the respondent will have to prove it. Similarly, if what is
pleaded as an assumption of fact is simply a conclusion of law and no
underlying facts for that conclusion of law have been assumed elsewhere then
there is no obligation on an appellant to disprove that.
[40] In Strother v.
Canada, 2011 TCC 251, Chief Justice Rip reviewed the types of statements
that should be found within a reply, and those that should be excluded,
stating:
[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?
Chief
Justice Rip emphasized that statements of facts must only include facts and not
conclusions of law and mixed fact and law, but recognized the challenges that
counsel may face in distinguishing between these categories, as follows:
[21] It
does not require complex statutory analysis to arrive at the conclusion that a
"fact" means a fact in the legal context. The majority of the Supreme
Court of Canada took a technical interpretation approach to the word
"sale" in the Income Tax Act with Major J. stating:10
To apply a "plain meaning" interpretation of the concept of a
sale in the case at bar would assume that the Act operates in a vacuum,
oblivious to the legal characterization of the broader commercial relationships
it affects. It is not a commercial code in addition to a taxation statute.
Previous jurisprudence of this Court has assumed that reference must be given
to the broader commercial law to give meaning to words that, outside of the Act,
are well-defined. ...
[22] In
terms of "facts", this word is in the rules of civil procedure and so
should be interpreted in the legal context with the relevant distinctions
between questions of law, questions of fact and questions of mixed fact and
law. The word "facts" excludes conclusions of law and mixed fact and
law.
[23] The
appellants claim that the disputed bracketed portions of the Replies are
actually conclusions of law or mixed fact and law. However, the respondent
states that these are simply factual assertions.
[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:11
... 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.
The Chief Justice also
asserted that pleadings are of a summary nature, and should avoid repetition
and redundancy, stating:
[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 Corporation20,
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:21
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, he added the
following general comments regarding pleadings in general:22
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. ...
[41] Having referred to Justice Sharlow’s decision in Transocean,
Justice Bowie in Zelinski, Justice Jorré in Kopstein and Sirett, and
Chief Justice Rip in Strother, and in considering Rule 53, the following
can be succinctly stated:
1. There may be
situations where fairness would require that no onus be placed on the taxpayer
to rebut a specific factual assumption made by the Respondent.
2. The pleadings
themselves must not be prejudicial or delay the hearing of the action, be
scandalous, frivolous or vexatious, or amount to an abuse of the process of the
Court.
3. The pleadings
must contain material facts that clearly and concisely define the issues before
the Court. Rarely should facts which are relevant be pleaded if they are not
material facts. One must be careful that one is not pleading evidence and
further one must be careful not to be repetitive and redundant.
[42] The task in reviewing an 83 plus page Reply is
significant, to say the least; especially given the various grounds that one
must look to in determining whether or not part of the Reply should be struck.
The following are some of the grounds upon which portions of the pleadings
could be struck:
1. Material
facts: Facts are not material if they are directed at a matter not in issue.
This means that when one refers to materiality, in talking about the
relationship between the fact and the matter at issue, one asks, what is the
party trying to prove? If the item to be proven is not a matter in issue, then
it is immaterial. See Strothers above at paragraph 16, and David M.
Paciocco and Leo Stuesser, the Law of Evidence, at page 27.
2. Relevance: Simply
because something is relevant does not make it a material fact, and it can be
that many facts are relevant but are not material facts. Questions of relevancy
should generally be left to the trial judge, in the context of all evidence at
trial, unless the pleadings are clearly irrelevant and doomed to fail, see Sandia
Mountain Holdings Inc. v. The Queen, 2005 TCC 136 at paragraph [17]; Sentinel
Hill Productions, above, at paragraph [4].
3. Evidence:
Facts relating to the way the party will prove allegations are basically
evidence and should not be included in pleadings. See Zelinski above.
For example, a pleading can say that notice was provided but it does not have
to go into the particulars as to the form and manner of the notice.
4. Allegations
of fraud and dishonesty: Because allegations of fraud and dishonesty are so
serious, many more particulars are required, see Weyerhaeuser Co. v. The
Queen, 2007 TCC 65 at paragraph [21].
5. Conclusions
of law: Assumptions of fact cannot include conclusions of law and mixed fact
and law. Questions of law concern the correct legal test, and questions of fact
address what has happened. Questions of mixed fact and law apply the legal test
to the facts. See Strother, above, at paragraph [21]-[24].
6. Prejudice or
Delay of Fair Hearing (Rule 53(a)): Rule 53(a) describes the possibility of a
matter being prejudged or prejudiced due to the delay of a fair hearing.
Prejudicial facts or evidence may result in triers of fact giving more weight
to evidence or facts than it deserves. Further, a lack of precision in describing
the relationship of third parties can be prejudicial. See Status-One
Investments Inc. v. The Queen, 2004 TCC 473, appeal dismissed 2005 FCA 119.
7. Scandalous,
frivolous or vexatious (Rule 53(b)): Scandalous refers to pleadings which are
offensive and do not relate to issues and are abusive or prejudicial. Also,
pleadings might be struck because they were inserted for colour, or because
they are just plain inflammatory. Frivolous claims usually have little weight
or importance and lack a rational argument, where vexatious claims are usually
malicious and have no cause. Striking pleadings for being scandalous, frivolous
or vexatious should only be done in the most obvious cases.
8. Abuse of
process (Rule 53(c): As asserted in Toronto (City) v. C.U.P.E. Local 79,
2003 SCC 63, this is a flexible doctrine and refers to a misuse of procedure that
prejudices a party and/or brings the administration of justice into disrepute.
Litigation may be found as an attempt to re-litigate even if issue estoppel is
not present. A court must consider fairness and balance the right to be heard
with the concerns about finality, efficiency and the authoritative weight of
judicial decisions. See also Morel v. The Queen, 2007 TCC 109, 2008 FCA
53. Abuse of process includes an attempt to use the Court processes in an unfair
manner, i.e. consideration should be given in particular with tax litigation,
when one is considering the implication of assumptions.
[There has been no judicial consideration of the MegaClaim
and Newby litigation on their merits and as such this is not an attempt to
relitigate.]
[43] It is in light of the foregoing principles that a review
of each paragraph of the Respondent’s Reply has been made.
[44] I am in agreement with the Appellant in part where the
Appellant wants the entire Reply to be struck out - it is difficult to strike
out parts of the Reply without the remaining parts resulting in incoherent
pleadings. The Respondent themselves have acknowledged that there are portions
of the Reply to be struck, and took steps to make certain admissions with
respect to what ought to be removed. These were described as the “gray
screened” paragraphs in the Reply filed with the Court and prepared by the
Respondent for argument on April 2, 2011.
[45] In the appeal in 2001-1414(IT)G, after giving a four
paragraph overview, the Appellant does a three page Statement of Fact at
paragraphs 9 to 24. The Respondent in their Reply does an eighty-three page
Reply with two appendices of eleven pages for a total of a ninety-four page
Reply. The Respondent pleaded no less than seventy pages of assumptions. I
mention the volume of the Reply because it gives one an indication of the
breadth and detail that the Respondent has pleaded and relied on.
[46] I have reviewed each word, and each sentence of the
Respondent's Reply and have listed in the attached Schedule the particular text
which should be struck out, and the summary reasons why the text should be
struck. The strikes to the Respondent’s Reply in appeal 2010-1414(IT)G should
be applied mutatis mutandis to the three other replies. The
quantum of the text to be struck is considerable and it will be necessary for
the Respondent to prepare draft Amended Replies given the schedule attached, to
bring more coherency to the Replies after applying my decision on the motion to
strike.
[47] I further order the Respondent provide to the Appellant
and the Court, within 60 days of the date of this Order, draft Amended Replies
to bring more coherency to the Replies given the text to be struck, and to
provide same to the Court. The Court will review the draft Amended Replies to
determine if it complies with the provisions of this Order and issue a further
Order, if and when required, with respect to formally filing the Amended Replies.
Costs:
[48] Given the partial success of both parties with respect
to their arguments before the Court on this motion, there will be no order as
to costs.
Signed at Ottawa, Canada,
this 21st day of December, 2011.
“E.P. Rossiter”
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