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Citation: 2010 TCC 57
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Date: 20100201
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Dockets: 2009-1669(IT)G
2009-1670(IT)G
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BETWEEN:
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ROBERT MASTRONARDI,
LYNDA MASTRONARDI,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR ORDER
Campbell J.
[1] By
way of background to the present Motion, the Appellants have been reassessed in
respect to their tax liability for the 2004 taxation year. In dispute are various
tax consequences flowing from transactions in which the Appellants engaged to
facilitate a settlement agreement. In accordance with this agreement, Robert
Mastronardi was to sell his shares in 404564 Ontario Limited to his siblings.
The settlement provided that the sale would be completed in a tax effective
basis and, consequently the Appellants, who are spouses, completed the
following two steps:
1.
Pursuant to a “Share
Transfer” Agreement dated October 21, 2004, the Appellant, Robert Mastronardi,
purported to sell 27 common shares in 404564 Ontario Limited to the Appellant,
Lynda Mastronardi, for which she executed a demand promissory note. Robert
Mastronardi elected not to have subsection 73(1) of the Income Tax Act (the “Act”) apply to this share transfer. These shares were
therefore exempt from attribution in accordance with subsection 74.5(1).
Lynda Mastronardi in turn sold these shares to the children of Robert’s
brother as per the settlement agreement and then relied on section 110.6
of the Act to claim a capital gains deduction (the “sale shares”); and
2.
Pursuant to a second “Share Transfer” Agreement
dated October 22, 2004, Robert Mastronardi purported to convey 27 common shares
in 404564 Ontario Limited to the Appellant, Lynda Mastronardi, by way of a
gift. Unlike the first transaction, Robert Mastronardi did not elect out
of subsection 73(1) of the attribution rules so that these shares were subject
to attribution. Lynda Mastronardi also sold these shares to the children
of Robert’s siblings in accordance with the settlement agreement (the “gift
shares”). Subsequently, the capital gain was attributed to
Robert Mastronardi.
[2] Lynda
Mastronardi averaged the adjusted cost base of both the sale shares and the
gift shares and reported a capital gain from the sale of the total
54 common shares. Lynda Mastronardi is attempting to rely on
subsection 74.1(1) to attribute the gain on the gift shares back to
Robert Mastronardi and on section 110.6 to deduct the capital gain herself
on the sale shares.
[3] The
Minister of National Revenue (the “Minister”) claims that the transfer of the
beneficial ownership respecting the sale shares and the gift shares from Robert
to Lynda never occurred and that it was Robert Mastronardi who realized the
capital gain on the share sales. Alternatively, the Minister is alleging that,
even if beneficial ownership transferred to Lynda, section 245 applies (the
GAAR provision) to render the transfers tax avoidance transactions.
[4] A
Notice of Appeal dated May 7, 2009 for both Appellants was purported to be
filed with the Court on May 11, 2009. This document was unsigned and was
stamped as a draft copy on numerous pages throughout. Replies to the Notice of
Appeal were purported to be filed in respect to the appeals of Robert Mastronardi
and of Lynda Mastronardi on August 4, 2009. Before hearing the Motion, I
canvassed with counsel my concerns respecting the validity of the Notice of
Appeal together with the Replies being filed pursuant to an unsigned draft of a
Notice of Appeal. Both counsel agreed that a properly signed Notice of Appeal
in its present form would be filed forthwith and that any amendments to either
the Notice of Appeal or the Replies would be addressed by the appropriate
means. The Motion proceeded on this understanding.
[5] The
Appellant served a Demand for Particulars dated September 2, 2009. The
Respondent delivered separate Responses to this Demand for each of the Appellants.
Because the Appellants considered these Responses to be generally limited and
incomplete, this Motion has been brought for:
1.
An order allowing the
Respondent to file its amended Robert Mastronardi Reply provided that the
Minister clarify that the facts, added at paragraphs 9(p) and 9.1 and 9.2,
either were, or were not, facts assumed by the Minister at the time of
assessment;
2.
An order striking the
term “purports” in paragraph 9(f) of the Lynda Mastronardi Reply; and
3.
An order directing
the Respondent to provide sufficient particulars in accordance with the Demand
for Particulars with respect to paragraphs 9(g) and 13 of the Lynda Mastronardi
Reply and paragraphs 9(t)(u)(v), 15, 16(a) to (e), 16(f) and 18 of the
Robert Mastronardi Reply.
[6] Although
the Appellants withdrew the first request to allow the Respondent to file a
proposed Amended Reply to the Notice of Appeal in the Robert Mastronardi
appeal, I do not believe there is any authority in any event at common law or
otherwise that would allow one party to move to amend the pleadings of an
opposing party.
[7] Section
52 of the Tax Court of Canada Rules states:
52. Where a party demands
particulars of an allegation in the pleading of an opposite party, and the
opposite party fails to supply them within thirty days, the Court may order
particulars to be delivered within a specified time.
[8] Court
proceedings consist of different stages with each stage having its own unique
purpose and function. Factual submissions at any stage are intended to serve
the purpose and function of that particular stage. In the present appeals,
examinations for discovery have not been held and, consequently, the parties
are at the preliminary stage of the pleadings, which in fact may still be
amended. The function of the pleadings is to define the issues – that is, to
define precisely and correctly what is being disputed. To do this, the parties
must identify the material facts relied upon to support the issues because it
will be these material facts which, if established at trial, will support that
party’s entitlement to that which it is seeking. The material facts must not
be:
1.
conclusions of law; or
2.
evidence that proves that the
facts being relied on do in fact support the claim being made.
When
the parties are satisfied that the issues are sufficiently clear, they proceed
to the next stage, the examinations for discovery, where cross-examination of
the facts relevant to the issues can occur. In having well defined issues, the
pleadings should be focused as should the resulting examinations.
[9] It is often
difficult to identify that grey area between “material facts” and “evidence”.
There is an abundance of caselaw dealing with the function of particulars in
relation to the purpose of the pleadings.
[10] At
paragraph 30 of Obonsawin (c.o.b. Native Leasing Services) v. Canada,
[2001] O.J. No. 369, [2001] G.S.T.C. 26, Epstein J. of the Ontario Superior
Court of Justice stated:
… In Copland v. Commodore Business
Machines Ltd. (1985), 52 O.R. (2d) 586, Master Sandler referred to
particulars as "additional bits of information, or data, or detail, that
flesh out the material facts, but they are not so detailed as to amount to
"evidence". These additional bits of information, known as
"particulars", can be obtained by a party under new Rule 25.10, if
the party swears an affidavit showing that the particulars are necessary to
enable him to plead to the attacked pleading, and that the
"particulars" are not within the knowledge of the party asking for
them."
In discussing how courts determine whether
particulars are necessary to “flesh out” the material facts, Webb J. in Kozar
v. The Queen, 2008 D.T.C. 3390, at paragraph 5, explained that such a
determination will depend on:
… whether the Respondent has
set out the relevant facts with sufficient clarity so that the Appellant can
determine the issue in dispute and the facts on which the Respondent will be
relying …
[11] At paragraphs 4 and
5 of the decision in Zelinski v. The Queen, 2002 D.T.C. 1204,
affirmed by the Federal Court of Appeal (2002 D.T.C. 7395), Bowie J.
stated that:
[4] The purpose of pleadings is to
define the issues in dispute between the parties for the purposes of
production, discovery and trial. What is required of a party pleading is to set
forth a concise statement of the material facts upon which she relies. Material
facts are those facts which, if established at the trial, will tend to show
that the party pleading is entitled to the relief sought. Amendments to
pleadings should generally be permitted, so long as that can be done without
causing prejudice to the opposing party that cannot be compensated by an award
of costs or other terms, as the purpose of the Rules is to ensure, so far as
possible, a fair trial of the real issues in dispute between the parties.
[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.
Applying these principles, I
approach both motions on the basis that the test to be applied is whether the
paragraphs in dispute, and those that the Appellant proposes to add, are proper
pleadings of material facts. The Appellant's motion seeks to add two issues to
those now pleaded. She should be permitted to do so, unless it is plain and
obvious that they are so ill-founded in law that they could not succeed at
trial, even if the facts upon which they depend were established to be true.
[12] The Federal Court of
Appeal considered the function of particulars in Gulf Canada Ltd. v.
The Mary Mackin, [1984] 1 F.C. 884, and stated:
The principles governing an
application of this kind were well stated by Sheppard J.A. in the case of Anglo-Canadian
Timber Products Ltd. v. British Columbia Electric Company Limited, [(1960),
31 W.W.R. 604 (B.C.C.A.).] where he stated at pages 605 and 606:
Hence it
appears that an examination for discovery follows upon the issues having been
previously defined by the pleadings and the purpose of such discovery is to
prove or disprove the issues so defined, by a cross-examination on the facts
relevant to such issues.
On the other
hand the purpose of particulars is to require a party to clarify the issues he
has tried to raise by his pleading, so that the opposite party may be able to
prepare for trial, by examination for discovery and otherwise. The purpose of
particulars was stated in Thorp v. Holdsworth (1876)3 Ch 637, 45 LJ
Ch 406, by Jesse, M.R. at p. 639, as follows:
"The
whole object of pleadings is to bring the parties to an issue, and the meaning
of the rules of Order XIX, was to prevent the issue being enlarged, which would
prevent either party from knowing when the cause came on for trial, what the
real point to be discussed and decided was. In fact, the whole meaning of the
system is to narrow the parties to definite issues, and thereby to diminish
expense and delay, especially as regards the amount of testimony required on
either side at the hearing."
That purpose
of particulars was stated in Spedding v. Fitzpatrick (1888) 38 Ch 410,
58 LJ Ch 139, by Cotton, L.J. at p. 413, as follows:
"The
object of particulars is to enable the party asking for them to know what case
he has to meet at the trial, and so to save unnecessary expense, and avoid
allowing parties to be taken by surprise."
Also the
particulars operate as a pleading to the extent that "They tie the hands
of the party, and he cannot without leave go into any matters not
included" (Annual Practice, 1960, p. 460) and they may be amended only by
leave of the court (Annual Practice, 1960, p. 461).
When
pleadings are so vaguely drawn that the opposing party cannot tell what are the
facts in issue or, in the words of Cotton, L.J. in Spedding v.
Fitzpatrick, supra, "what case he has to meet," then in
such circumstances the particulars serve to define the issue so that the
opposite party may know what are the facts in issue. In such instances the
party demanding particulars is in effect asking what is the issue which the
draftsman intended to raise and it is quite apparent that for such a purpose an
examination for discovery is no substitute in that it presupposes the issues
have been properly defined.
This case
was cited with approval in a later decision of the British Columbia Court of
Appeal in the case of Cansulex Limited v. Perry et al. [Judgment dated
March 18, 1982, British Columbia Court of Appeal, file C785837, not reported.]
In that case, Lambert J.A. referred to the Anglo-Canadian Timber
decision as being one of the decisions which "... delineate the difference
between what is properly the subject matter of a Demand for Particulars and
what is more properly the subject-matter of a Demand for Discovery of material
that should be obtained on an Examination for Discovery". (See, page 8 of
the reasons of Lambert J.A.) Mr. Justice Lambert added:
At the heart
of the distinction between the two lies the question whether the material
demanded is intended to, and does, delineate the issues between the parties, or
whether it requests material relating to the way in which the issues will be
proved.
He then went
on at pages 10 and 11 of his reasons to enumerate with approval the function of
particulars as set out in the White Book dealing with the English Practice. The
Supreme Court Practice, 1982, Vol. 1, page 318 details this function as
follows:
(1) to inform the other side of the nature of the case they have
to meet as distinguished from the mode in which that case is to be proved ....
(2) to prevent the other side from being taken by surprise at the trial
(3) to enable the other side to know what evidence they ought to
be prepared with and to prepare for trial ....
(4) to limit the generality of the pleadings ....
(5) to limit and decide the issues to be tried, and as to which
discovery is required ....
(6) to tie the hands of the party so that he cannot without leave
go into any matters not included ....
Because Rule
408(1) [Federal Court Rules, C.R.C., c. 663] requiring "... a precise
statement of the material facts on which the party pleading relies" and
Rule 415 permitting applications for further and better particulars of
allegations in a pleading are substantially similar to the corresponding
sections in the English Rules, I think the above quoted six functions of
particulars should apply equally to an application such as the present one
under our Rules.
[13] The Ontario Court of Appeal in Physicians’
Services Inc. v. Cass, [1971] O.J. No. 1561, [1971] 2 O.R. 626, at
paragraph 2, stated that the following two principles should guide a court in
ordering particulars:
… Accordingly, we would apply the principles laid down in such cases as Fairbairn v.
Sage, 56 O.L.R. 462, [1925] 2 D.L.R. 536, in which it was held that
particulars for pleading will only be ordered if (1) they are not within the
knowledge of the party demanding them, and (2) they are necessary to enable the
other party to plead. …
[14] The avoidance of “fishing
expeditions”, where demands may be made for improper purposes, is some of the
basis for the rationale of restricting the production of particulars at this
stage only where necessary to define the issues. As explained by Marceau J. in Embee
Electronic Agencies Ltd. v. Agence Sherwood Agencies Inc., 43 C.P.R. (2d)
285, at paragraph 3:
… A defendant should not be
allowed to use a request for particulars as a means to pry into the brief of
his opponent with a view to finding out about the scope of the evidence that
might be produced against him at trial, nor should he be allowed to use such a
request as a means to go on a sort of fishing expedition in order to discover
some grounds of defence still unknown to him. At that early stage, a defendant
is entitled to be furnished all particulars which will enable him to better
understand the position of the plaintiff, see the basis of the case made
against him and appreciate the facts on which it is founded so that he may
reply intelligently to the statement of claim and state properly the grounds of
defence on which he himself relies, but he is not entitled to go any further
and require more than that.
[15] In Satin Finish
Hardwood Flooring (Ontario) Limited v. The Queen, 96 D.T.C. 1402, Bowman J. at
page 1405 states that:
The purpose of pleadings is to
define the issues to be decided by the court, not to provide a detailed outline
of the evidence that the parties intend to adduce …
He went on, at page 1405, to state
that particulars must be permitted only “… for the purpose of enabling the opposite
party to formulate an intelligent response”.
[16] According to Bowman
J.’s decision in Satin Finish, allowing an order for particulars
presupposes that three conditions have been satisfied:
1.
the
party demanding the particulars must serve the opposing party a demand for
particulars, as required by section 52 of the Rules;
2.
an
affidavit should be issued demonstrating that particulars are required in order
to plead; and
3.
the
purpose of the particulars must be to enable the party making the demand to
formulate an intelligent response.
(A) Did the Appellants serve
a Demand for Particulars?
[17] Although a demand for
particulars was served, the Respondent alleges that some of the questions put
before me by the Appellant during the hearing of the Motion were not the same
questions contained in the Demand. Appellant counsel suggested that the
additional demands related to the material facts which were originally demanded
and that they did not expand the grounds for particulars. These additional
questions relate, firstly, to a demand to particularize “legislative facts” in
respect to the application of subsection 245(2), the GAAR provision and,
secondly, to a demand to particularize the stage at which assumptions were
made. I will address these additional questions in connection with the
particular demand under which they were formulated and submitted during the
hearing of the Motion.
(B) Did
the Appellants issue an affidavit demonstrating that particulars are required
in order to plead?
[18] The Appellants
failed to file an affidavit. Appellant counsel referred me to caselaw in which
some courts have applied an approach to the general requirement of affidavits, which
resulted in the waiver of the affidavit. In Steiner v. Lindzon et
al., 14 O.R. (2d) 122, Lerner J. stated at paragraph 24 that “… an affidavit should be delivered with the
notice of motion …”. In Saan Stores Ltd. v. Reebok Canada Inc., 63 A.C.W.S. (3d) 244, which Appellant counsel referred me to,
Master Bolton stated at paragraph 17 that the:
… requirement for particulars
is something that arises from a study of the pleadings. It is not enhanced in
any way by a litigant swearing an affidavit parroting what should be a
submission of counsel, i.e. that the material facts necessary to plead to the
statement of claim are not present. …
However, I believe this statement must be
viewed with caution in light of Lerner J.’s further comments at paragraph
24 in Steiner that:
… an affidavit is not necessary when the
allegations are so general that particulars are manifestly necessary, or so
bald as to be recognized as a pleading of which particulars should be given
without a supporting affidavit: Welch v. Jackson et al., [1948]
O.W.N. 708; Patterson v. Proprietary Mines Ltd. et al., [1945] O.W.N.
237; Madden v. Madden [1947] O.W.N. 746 [affirmed [1947] O.R. 866].
(Emphasis added)
A proper approach to Lerner J.’s comments
were provided by Perell J. in Mirshahi v. Suleman, [2008] O.J. No. 4954, where he stated:
… A motion for particulars
ordinarily will not be granted unless the moving party deposes that the
particulars are not within his or her knowledge and that they are needed to
plead; however, a supporting affidavit is not required if the allegations are
so general and bald that it is clear that particulars of them are necessary: Steiner v. Lindzon (1976), 14 O.R. (2d) 122 (H.C.J.); Wood Gundy Inc. v. Financial Trustco Capital Ltd. [1988]
O.J. No. 275 (Ont. Master); Curry v. Advocate General
Insurance Co. of Canada, [1986] O.J. No. 2564 (Master).
A number of other cases have also followed
the principles expressed by Lerner J. Bowman J. in Satin Finish cited
the lack of an affidavit as one of the reasons to justify dismissing the motion
for particulars. Generally, therefore, an affidavit will be required unless it
is clearly unnecessary to the demand for particulars because the opposing
party’s pleadings are such that a court can conclude that it would be
impossible to know the exact material facts to be relied upon in support of the
claim. Such pleadings will necessitate particulars on their own without a
supporting affidavit.
[19] With respect to the
present Motion, it is apparent on a review of both Replies that none of the
Minister’s allegations contained in its pleadings fall within the exception to
the general requirement of an affidavit. That is, the Minister’s allegations
and assumptions are not so general that particulars are manifestly necessary or
so bald as to be recognized as a pleading for which particulars should be given
without the necessity of a supporting affidavit. I must therefore conclude that
the Appellants have not satisfied this requirement.
(C) Are the
particulars necessary to formulate an intelligent response?
1.
The
Demand for Particulars in Respect to the Lynda Mastronardi Appeal:
[20] The Appellant
demanded particulars in respect to paragraphs 9(f), 9(g), 9(m), which were
stated as assumptions in the Reply, and paragraph 13, which was contained under
the heading “Grounds Relied on and Relief Sought”.
[21] Paragraph 9(f) in
the Reply states:
f) The
Appellant executed a promissory note, dated October 21, 2004, in which she
purports to promise to pay $1,030,500 to her spouse, with interest at 5% per
annum, payable on demand.
The Demand respecting 9(f) states:
(1) please state
the material facts related to the use of the word “purports”. Did the Minister
assume that Lynda Mastronardi did not in fact “promise to pay”? if so, is it
the Minister’s position that the Appellant’s representation was fraudulent? if
so, please provide the material facts that support that assumption; if not, is
it the Minister’s assumption that the note was a sham?
(2) did the
Minister assume that the promissory note was not paid?
The Respondent’s Response states:
1. In
answer to the Appellant’s Demand for Particulars concerning paragraph 9(f)
of the Reply, the Respondent states that the material facts relied upon by the
Minister of National Revenue (the “Minister”) are as stated in paragraphs 9(m)
to (p) of the Reply. The Minister did not assume that the Appellant did not in
fact “promise to pay”. The Minister did not assume that the promissory note was
not paid.
[22] Paragraph 9(g) in
the Reply states:
g) The
Appellant and her spouse executed a further document entitled “Share Transfer”,
dated October 22, 2004, pursuant to which Robert Mastronardi conveyed to his
spouse, by deed of gift, 27 common shares in the capital stock of 404564 (the
“Gift Shares”).
The Demand respecting
9(g) states:
(1) please
state the material facts, if any, on which the Minister based the assumption
that the “Share Transfer” was not legally effective.
The Respondent’s Response states:
2. In
answer to the Appellant’s Demand for Particulars concerning paragraph 9(g)
of the Reply, the Respondent states that the Minister did not assume that the
share transfer was not legally effective.
[23] Paragraph 9(m) in
the Reply states:
m) The
Appellant’s purchase of the Sale Shares was satisfied by way of a promissory
note for the full amount of the proceeds.
The Demand respecting 9(m) states:
(1) please state
the material facts, if any, on which the Minister based the assumption that the
Appellant did not satisfy the purchase price of the shares by way of promissory
note.
The Respondent’s Response states:
3. In
answer to the Appellant’s Demand for Particulars concerning paragraph 9(m)
of the Reply, the Respondent states that the question arises from an erroneous
reading of paragraph 9(m) of the Reply. The Minister did not assume that the
Appellant did not satisfy the purchase price of the shares by way of promissory
note.
[24] The Respondent has
clearly and precisely answered the Demands respecting 9(f), 9(g) and 9(m) and,
in addition, in respect to 9(f), identified specifically those material facts [assumptions
9(m) to (p)] upon which it will rely to support the assumption at 9(f). The
responses in 9(g) and 9(m) specifically address the Appellant’s Demands.
Anything beyond these responses and the parties enter the realm of evidence.
The Respondent has made its position clear and there is nothing further that
would assist in delineating the issues. I also believe that the actual question
posed in the Motion respecting paragraph 9(g) is in fact a new question. The
Appellant requested that the Respondent be directed to provide sufficient
particulars with respect to 9(g) of the Lynda Mastronardi appeal and stated:
9(g) The Minister
assumes at paragraph 9(t-x) of the Robert Mastronardi Reply that there was no
disposition of the shares; it is unclear how a share sale transaction can be
legally effective without resulting in the disposition of the shares;
The content of this query is very
different from the question that was asked in the original Demand and therefore
could not be permitted in any event.
[25] Paragraph 13 in the
Reply states:
13. The
Appellant entered into the transactions with her spouse on October 21 and
22, 2004, with the sole intention of selling the shares at a profit.
Consequently, the Appellant dealt with the shares as an adventure in the nature
of trade, such that the gain from the sale is to be included on income account.
The Demand respecting paragraph 13
states:
(1) please state
the material facts, if any, that support the contention that there was a
“transaction” regarding the Gift Shares; further what material facts relate to
the Appellant’s intention regarding the Gift Shares or is this simply a bald
assumption?
(2) please state
the material facts, if any, that support the contention that the Appellant
dealt with the Gift Shares as an adventure in the nature of trade;
(3) please state
the material facts, if any, that support the contention that the Appellant
dealt with the Sale Shares as an adventure in the nature of trade;
(4) in light of
the Appellant’s pleading that these shares are long term family assets what
material facts support the contention that the transactions involving these
shares constitute an “adventure”?
The Respondent’s Response
respecting paragraph 13 states:
4. In answer to the
Appellant’s Demand for Particulars concerning paragraph 13 of the Reply,
the Respondent states as follows.
(1) The material
facts that relate to the Appellant’s intention regarding the Gift Shares are as
stated in paragraphs 9(a) to (q) of the Reply. The question pertaining to the
use of the word “transaction” is not a proper question for a Demand for Particulars
in that it is ambiguous and appears to elicit legal argument from the
Respondent.
(2) The material
facts that support the contention that the Appellant dealt with the Gift Shares
as an adventure in the nature of trade are as stated in paragraphs 9(a) to (q)
of the Reply.
(3) The material
facts that support the contention that the Appellant dealt with the Sale Shares
as an adventure in the nature of trade are as stated in paragraphs 9(a) to (q)
of the Reply.
(4) This
question is not a proper question for a Demand for Particulars in that it is
ambiguous and appears to elicit legal argument or evidence from the Respondent.
[26] Again, the
Respondent has referred the Appellant to the specific assumptions of material
fact within the Reply upon which reliance will be placed to support the
Minister’s contention respecting both the Sale Shares and the Gift Shares.
Those are the specific assumptions to which the Appellant has been directed.
The Appellant has the onus and the Respondent, unless the Replies are
successfully amended, is left to rely on the specific content of those
assumptions. To direct the Respondent to provide further particulars at this
stage would amount to giving the Appellant a license to fish in a pond in off-season.
The principles enunciated in the caselaw simply will not permit it. The balance
of the information requested in paragraph 13, in my view, elicits legal
argument respecting the meaning of an “adventure in the nature of trade” and
“transactions”. Whether the Minister has pleaded sufficient material facts to
support the suggested meanings of these terms will depend on the eventual
outcome of a trial.
2.
The
Demand for Particulars in Respect to the Robert Mastronardi Appeal:
[27] The Appellant’s
Motion demanded particulars in respect to paragraphs 9(t)(u)(v), 15, 16(a)-(e),
16(e), 16(f) and 18.
[28] Paragraphs 9(t), (u)
and (v) are assumptions within the Reply and state:
No disposition of shares
to Lynda Mastronardi
t) Lynda
Mastronardi
i) had
little savings and did not have the financial resources necessary to purchase
the Sale Shares or to repay the promissory note;
ii) did
not make alternative financing arrangements to be in a position to repay the
promissory note;
iii) never
intended to repay the promissory note;
iv) intended
to sell the Sale Shares and the Gift Shares on October 31, 2004, as provided by
the Minutes of Settlement;
v) was
not entitled to make decisions regarding the Sale Shares and the Gift Shares,
including their disposition;
vi) was
not able to enjoy the usual benefits nor was she exposed to the usual risks of
ownership regarding the Sale Shares and the Gift Shares.
u) There
was never a transfer of the beneficial ownership regarding the Sale Shares and
the Gift Shares from the Appellant to Lynda Mastronardi.
v) The
Appellant did not dispose of the Sale Shares to Lynda Mastronardi on October
21, 2004.
[29] The Appellant’s
Motion contained the following request respecting 9(t)(u)(v):
9(t)(u)(v) The
Minister is of the position that “there never was a transfer of beneficial
ownership”. The Minister has not particularized which incidents of beneficial
ownership did not transfer. This pleading is unclear in light of the Minister’s
pleading in Lynda’s reply that the transfer was “legally effective”;
[30] The Respondent’s
Response to the initial Demand clearly stated that the Minister would be
relying on the material facts contained in assumptions 9(d), (f), (g), (i),
(j), (m) and (t) of the Reply in order to come to the conclusions at (u) and
(v). To go beyond this and order the Respondent to particularize which
incidents of beneficial ownership the Minister believes did not transfer is
again a quest for legal argument and not for material facts as they relate to
the pleadings stage.
[31] With respect to the
Appellant’s allegation of inconsistent pleadings in the two appeals, in light
of the Minister’s Reply in the appeal of Lynda Mastronardi, that the transfer
was legally effective, the Respondent acknowledged that the Minister assessed
two different taxpayers which resulted in mutually inconsistent assessments.
These are basically alternative assessments, if you will, which the Respondent
must deal with during the hearing of these appeals. In the end, only one appeal
in all likelihood will be successfully maintained. The Respondent referred me
to several cases in support of this position, including the case of The Queen
v. W.H. Violette Limited, 88 D.T.C. 6025. In that case, the
Federal Court, Trial Division, explained the circumstances in which
inconsistent pleadings could be permitted. Whether such circumstances exist in
the present appeals is a matter best left to the trial judge. It is not for a
motions judge to determine if the Minister was correct in making inconsistent
and seemingly contradictory assessments. If any inherent unfairness to this
method can be demonstrated, it can be dealt with in terms of costs at the
termination of the hearing.
[32] Paragraphs 15, 16
and 18 of the Reply are contained under the heading “Grounds Relied On and
Relief Sought” and deal with the application of section 245, the GAAR
provision. Those paragraphs state:
15. The
tax benefit was the avoidance of the tax liability on the capital gain from the
disposition of the Sale Shares and the Gift Shares that would otherwise have resulted,
had the Appellant sold the shares directly to the purchasers.
16. This
tax benefit resulted, directly or indirectly, from a series of transactions
that included the following transactions:
a) The
transfer of the Sale Shares to Lynda Mastronardi on October 21, 2004, for
proceeds of disposition reflecting their fair market value;
b) The
Appellant’s election for the roll-over provision in subsection 73(1) of the Act
not to apply to the sale of the Sale Shares;
c) The
transfer of the Gift Shares to Lynda Mastronardi on October 22, 2004, by way of
gift;
d) The
Appellant’s decision not to elect for the roll-over provision in subsection
73(1) of the Act not to apply to the sale of the Gift Shares;
e) The
disposition of the Sale Shares and the Gift Shares by Lynda Mastronardi to Paul
Mastronardi and Marne Safrance on October 31, 2004;
f) The
claiming of the capital gains deduction by Lynda Mastronardi in respect of
the disposition of the Sale Shares, pursuant to section 110.6 of the Act.
…
18. The
avoidance transactions resulted directly or indirectly in a misuse of
subsections 47(1), 73(1), 74.1(2), 74.5(1) and 110.6(2.1), and an abuse having
regard to the provisions of the Act read as a whole, all within the
meaning of subsection 245(4) of the Act.
[33] The Motion contained
the following Demands in respect to these paragraphs:
(15) The Minister
has not particularized its pleading “avoidance of capital gain”, this pleading
lacks particularity in light of the facts that: the capital gain on the Gift
shares was attributed to Robert; and, the capital gain on the Sale shares was
declared by Lynda;
(16)a.-e. The Minister
sets out a series of five transactions at paragraphs 9(x) and (y), and
16a.-e. Four of these transactions are said to result in a benefit indirectly;
and the fifth (16e.) is said to result in the benefit directly. The Minister
does not particularize the material facts related to:
- the subsections relied
on in each transaction;
- the benefit associated
with subsection;
- whether the benefit
may only apply to transactions with a certain economic, commercial, family or
other non-tax purpose;
- the object spirit and
purposes of the subsections relied on; and
- how the object spirit
and purposes of the subsections was abused.
(16)e. The Minister
assumes the existence of a transaction to which the taxpayer Robert was not a
party. The Minister assumes that the tax benefit arises directly to Robert from
this transaction. The Minister has not particularized how a tax benefit accrues
to Robert from a transaction to which he was not a party.
(16)f. An additional
(sixth) transaction is set out at paragraph 16f. The Minister does not assume
that this transaction was part of the series of transactions on which it
relies. The Minister has not particularized the relevance of this transaction
to this proceeding.
(18) Paragraphs
9(a) to (o), 9(t) and 9(y) to (aa) set out the adjudicative facts of this
proceeding, the Minister has not particularized the legislative facts relevant
to the interpretation of the legislation; nor, has the Minister particularized
how the impugned transactions are wholly dissimilar to the transactions
intended to be allowed by the subsections.
[34] First, in paragraph
15 of the Reply, the Respondent has clearly identified what it believes to be
the tax benefit – the avoidance of tax on a capital gain that would have been
realized if there had been a direct sale of shares to Robert’s siblings. As
suggested in the Response to the original Demand, the Appellant’s demand implies
a misreading of this paragraph of the Reply, as the Response clearly states that
the Minister did not assume that the capital gains reported by the Appellants
had been avoided or not realized. Paragraph 15 has clearly described the
benefit and at other paragraphs contained in the Reply the transactions are set
forth from which the tax benefit supposedly flows. This accords with the
response provided by the Respondent to the original Demand.
[35] Paragraph 16 of the
Reply sets forth the same series of transactions from which the Respondent
alleges the tax benefit flowed to the Appellants. However, as correctly noted
by the Appellant, the Respondent lists a sixth transaction at paragraph 16
which is not one of the transactions specified in the assumption 9(z). It
is added as an additional step in the series but because of the placement of
paragraph 16 in the Reply, the Minister is not entitled to rely on it as an
assumption as it will be able to with the five steps that are outlined at
assumption 9(z).
[36] At the pleadings
stage, I do not believe that the Appellant is entitled to any other material
facts except those that the Respondent has supplied. Some of the questions
respecting paragraph 16 are an attempt to elicit legal argument and, if I
directed that they be answered, I would in essence be requiring the Respondent
to divulge its legal argument in respect to its understanding of the relevant
legal provisions and how it intends to argue the purpose, object and spirit of
these provisions as well as their potential misuse and abuse under section 245
of the Act. In fact, the Appellant in his submissions on this Motion
stated that he was indeed looking for the identification of the extrinsic aids
which demonstrate the object, spirit and purpose of the relevant provisions.
Aside from all this, the Respondent has clearly identified specific provisions
at paragraph 18 of the Reply, other than section 245, that resulted in misuse
and abuse within the Act as a whole. There is nothing beyond what the
Reply and the subsequent Response contain that is necessary, at the pleadings
stage, to enable the Appellant to identify the issues and the material facts in
support of those issues that are being relied upon.
[37] The Appellants also
argued that interpreting legislative intent requires a consideration of
legislative facts and therefore the Appellant is entitled to the particulars of
these legislative facts. The Appellant submits that it is seeking the material
facts relating to the legislative scheme, including its purpose and background,
which is at the heart of the GAAR provision. These particulars, according to
the Appellant, will assist in flushing out the facts that the Minister relies
on in alleging there was abuse in the circumstances and it will also assist the
Appellants in knowing the case to be met. I take from this that the Appellants are
saying that the Respondent has an obligation, beyond stating that a particular
series of transactions are abusive, to identify material legislative facts underlying
the allegation of GAAR. Counsel referred me to the decision in Public School
Boards’ Assn. of Alberta v. Alberta (Attorney General), 2000 SCC 2, [2000] 1 S.C.R.
44. That decision refers to the case of Danson v. Ontario (Attorney General), [1990] 2 S.C.R. 1086.
Sopinka J., at page 1099, stated:
It is necessary to draw a
distinction at the outset between two categories of facts in constitutional
litigation: "adjudicative facts" and "legislative facts".
These terms derive from Davis,
Administrative Law Treatise (1958), vol. 2, para. 15.03, p. 353. (See also
Morgan, "Proof of Facts in Charter Litigation", in Sharpe, ed.,
Charter Litigation (1987).) Adjudicative facts are those that concern the
immediate parties: in Davis's
words, "who did what, where, when, how and with what motive or intent
...." Such facts are specific, and must be proved by admissible evidence.
Legislative facts are those that establish the purpose and background of
legislation, including its social, economic and cultural context. Such facts are
of a more general nature, and are subject to less stringent admissibility
requirements: see e.g., Re Anti-Inflation Act, [1976] 2 S.C.R. 373, per Laskin
C.J., at p. 391; Re Residential Tenancies Act, 1979, [1981] 1 S.C.R. 714, per
Dickson J. (as he then was), at p. 723; and Reference re Upper Churchill Water
Rights Reversion Act, [1984] 1 S.C.R. 297, per McIntyre J., at p. 318.
[38] I assume the
Appellant is looking for the legislative facts, establishing the purpose and
background of the legislation, in the form of explanatory notes, textbooks,
legislative historical material and other such items that would pertain to the
Minister’s perception of the alleged avoidance transactions and how they
resulted in a misuse of the provisions which the Respondent enumerated. I can
dispose of this quickly by stating that this demand as presented in the Motion
was not included in the original Demand and is therefore a new question which
cannot now be permitted. However, beyond this reason for denying the
Appellant’s request, I believe that the legislative facts which the Appellant
seeks to obtain in these circumstances can be adduced in evidence and to order
the Respondent to disclose the legislative facts at the pleadings stage would
in essence amount to ordering the Respondent to disclose its interpretation of
the law and its legal argument. This is never the intention of a Demand for
Particulars at the stage of pleadings.
3.
The
Motion Request for Clarification of the Facts contained at paragraphs 9(p),
9.1 and 9.2 of the Robert Mastronardi appeal:
[39] This request refers
to a proposed Amended Reply by the Respondent which is not before me in light
of the agreement which counsel reached respecting the state of pleadings, such
as they were, at the time I heard this Motion. A proposed change to 9(p) would
occur and 9.1 and 9.2 would be added if this Amended Reply does in fact
get filed. As I understand the Appellant’s request, he is alleging that the
Respondent failed to particularize the point in time that assumptions were
made, that is, the assessment stage, the reassessment stage or the confirmation
stage. Since the proposed Amended Reply is simply that – proposed - it was not
a part of the proper pleadings that were before me in this Motion and,
consequently, it is unnecessary that I address it.
4.
The
Motion Request for an Order to Strike the term “purports” in paragraph 9(f) of
the Lynda Mastronardi appeal:
[40] The Appellant
requests that the term “purports” be struck from 9(f) because in using this
term, according to its definition, it presumes the Minister viewed the
promissory note as presenting a false appearance. Its inclusion in 9(f) is
therefore prejudicial to the Appellant. The Appellant seeks particulars which
may have been relied upon if, in fact, the Minister’s assumption is that this
note purports to be a sham. This is an issue for the trial judge. This
assumption, if it does exist, must be dealt with at trial after hearing all of
the evidence. The request to strike “purports” from 9(f) is therefore denied.
The Respondent has, in my view, sufficiently identified the material facts at
paragraphs 9(m) to (p) of the Reply upon which it intends to rely. In
addition, the Respondent went on to clarify in its Response to the Demand that
“The Minister did not assume that the Appellant did not in fact ‘promise to
pay’” and “The Minister did not assume that the promissory note was not paid.”
These are sufficiently adequate responses to the original Demand.
Conclusion:
[41] It should be
relatively clear from a Demand for Particulars that the facts, for which the
Particulars are sought, should have been in the pleadings in the first place.
Much of what the Appellant seeks to elicit by way of this Demand goes beyond
that which the caselaw principles suggest a court should order at the pleadings
stage. It attempts to seek evidence and legal argument of the opposing party on
how the issues will be proved and, finally, seeks to obtain some facts through
a Demand for Particulars that can and should be accomplished by way of examinations
for discovery. The Replies are sufficiently detailed that the Appellants cannot
claim that they are unable to formulate and provide an intelligent response. Denying
the Appellants particulars at this stage of the proceedings in no way implies that
they may not be entitled to seek some of these particulars at the next stage
during discoveries.
[42] For these reasons,
the Appellants’ Motion is dismissed with costs in any event of the cause. Since
the Appellants have been unsuccessful in this Motion, I make no comment on the
effect that the lack of an affidavit may have had if the Appellants had been partially
or fully successful on the Motion.
Signed at Ottawa, Canada, this 1st
day of February 2010.
Campbell J.
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