Citation: 2010TCC229
Date: 20100504
Dockets: 2009-3250(IT)G
2009-3257(GST)I
BETWEEN:
EVERTON BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Sheridan, J.
[1] On March 10,
2010, the Respondent brought motions in respect of two related appeals,
2009-3250(IT)G and 2009-3257(GST)I. The motions were heard together.
Background
[2] The issues under
appeal in 2009-3250(IT)G (the “Income Tax Act Appeal”) are the
correctness of a net worth assessment and the imposition of penalties by the
Minister of National Revenue under the Income Tax Act.
[3] In respect of
the Income Tax Act Appeal, the Respondent is seeking an Order:
1.
striking out paragraphs 9, 10 (except for “In issuing the Reassessments,
the Minister proceeded on a rough ‘net worth’ basis”), 11, 12, 13, 20, 23 and
26 of the Notice of Appeal, pursuant to ss. 53(a) and (b) of the Tax
Court of Canada Rules (General Procedure) (the “Rules”);
2.
an order extending the time to file the Reply, pursuant to s. 44(b)
of the Rules;
3.
such further and other relief as this Court may deem just; and
4.
the Respondent’s costs of this motion in any event.
[4] The other
appeal, 2009-3257(GST)I (the “GST Appeal”), was brought under the Excise Tax
Act in respect of the Minister’s reassessment of the Appellant’s
entitlement to a GST Credit. The Respondent is seeking an Order:
1.
striking out the Notice of Appeal pursuant to s. 58(1)(b) of the Tax
Court of Canada Rules (General Procedure) (the “Rules”);
2.
in the alternative, an order extending the time to file the
Reply, pursuant to s. 44(b) of the Rules;
3.
such further and other relief as this Court may deem just; and
4.
the Respondent’s costs of this motion in any event.
[5] By
way of background, after having determined under the net worth assessment that
the Appellant’s income was greater than reported, the Minister made a
derivative reassessment to recover GSTC amounts which had been paid to the
Appellant based on his pre‑reassessment income. It was with the intention
of challenging that reassessment that the Appellant commenced this appeal under
the Excise Tax Act.
Motion
to Dismiss the GST Appeal
[6] Turning first to
the Respondent’s motion in respect of the GST Appeal, the grounds are as
follows:
1.
The Minister correctly assessed tax payable by the appellant under the Income
Tax Act for the periods from July 2007 to June 2008, and from July 2008 to
June 2009.
2.
There is no assessment of good and services tax under the Excise Tax
Act.
[7] The
Respondent’s position is essentially that the Notice of Appeal ought to be
struck out in its entirety and the appeal dismissed because the Appellant has
appealed under the wrong legislation. A taxpayer’s entitlement to a GSTC arises
not under the Excise Tax Act but rather under section 122.5
of the Income Tax Act and accordingly, an appeal of an assessment made
in respect of a GSTC must be made under section 169 of the Income Tax Act.
[8] At the hearing
of the Respondent’s motion, counsel for the Appellant conceded that the appeal
had been commenced under the wrong legislation and did not contest the remedy
sought by the Respondent. What puzzles me is that counsel for the Respondent
had brought this fundamental flaw to the attention of counsel for the Appellant
long before the date the motion was returnable. Rather than withdrawing the GST
Appeal and making an application for an extension of time to appeal the GSTC
assessment under the existing Income Tax Act in order to amend that Notice
of Appeal, the Appellant put the Respondent to the trouble of proceeding with
this motion.
[9] In these
circumstances, I am satisfied that the Respondent’s motion to dismiss the GST
Appeal ought to be granted and that the Respondent is entitled to costs.
Motion
to Strike Certain Paragraphs from Notice of Appeal 2009-3250(IT)G
[10] Turning,
then, to the motion in respect of the Income Tax Act appeal, the
Respondent is seeking an Order striking out paragraphs 9, 10 (in part), 11, 12,
13, 20, 23 and 26 of the Notice of Appeal. The gist of the very thorough
argument presented by counsel for the Respondent is that the allegations
contained in the above paragraphs pertain either to matters outside the
jurisdiction of the Court (paragraph 10 only) or to the misconduct of Canada
Revenue Agency officials during the assessment process. Accordingly, they ought
to be struck out under section 53 of the Tax Court of Canada Rules (General
Procedure) for being an abuse of process or irrelevant to the issues under
appeal, respectively.
[11] The
Notice of Appeal identifies two issues to be decided:
16. The main issue to be determined for each of the tax years
represented by the Reassessments is the correct determination of taxable income
of the Appellant for those years.
17. In addition, it will be necessary to determine whether the
Minister is entitled to impose penalties in respect of any of the years represented
by the Reassessments.
[12] At paragraph 18 of the Notice of Appeal are listed the statutory provisions upon which the Appellant
relies: sections 3, 9, 12, 18, 150, 152 and 162 of the Income Tax Act.
[13] The
impugned paragraphs are set out below:
9. The Reassessments in question were issued without the
benefit of normal audit procedures and were based upon suspected and alleged
illegal activities which were allegedly conducted or undertaken by the
Appellant.
10.
[The underlined portion is excluded from the Respondent’s motion: In
issuing the Reassessments, the Minister proceeded on a rough “net worth” basis.]
Furthermore, the Minister commenced the process of obtaining a Jeopardy Order
purportedly pursuant to section 225.2 of the Income Tax Act, R.S.C.
1985, c.1 (5th Supplement), as amended (hereinafter the “Act”)
BEFORE the Reassessments were issued.
11.
In issuing the Reassessments, the Canada Revenue Agency (“CRA”) Special
Enforcement Program Auditors concluded, without meaningful investigation, audit
or inquiry, that the Appellant was engaged in illegal activities which were the
subject of pending charges “current before the courts”. The Minister’s
representatives did not conduct any companion investigation, the purpose of
which would verify or otherwise ascertain with certainty the accuracy of the
allegations reflected in information which was the investigative product of
persons who were not associated in any way with CRA.
12.
In the course of purportedly conducting an audit of the Appellant’s
activities, and with full knowledge of the pending criminal charges, the CRA
investigators questioned, without providing a Warning as required by law, the
Appellant about matters which they knew or ought to have known were connected
with the alleged criminal activities.
13.
Furthermore, CRA auditors openly misled the Appellant about the nature
of their inquiry repeatedly (referring to it as a “civil matter”) when they
knew or ought to have known that the questions they asked of him related
directly or indirectly to the alleged criminal activities.
[…]
20. Furthermore, it is the Appellant’s position that the
Minister openly and knowingly abused his audit privileges as set forth in the Act
by misrepresenting the nature of the audit purportedly conducted by him to the
Appellant.
[…]
23. In the alternative, the Appellant states that the Minister’s
conduct of the audit of the Appellant and the Minister’s misrepresentations to
the Appellant have so wholly contaminated the audit process that the
Reassessments should be vacated.
[…]
26. The Appellant further states that the imposition of
penalties in the present circumstances represents an arbitrary, capricious and
abusive exercise of the Minister’s powers of assessment and, as such, is
unlawful and contrary to the Act, considered as a whole.
[14] The grounds for the
Respondent’s motion are:
1.
The allegations of fact and law contained in paragraphs 9, 10 (except
for “In issuing the Reassessments, the Minister proceeded on a rough ‘net
worth’ basis”), 11, 12, 13, 20, 23 and 26 of the Notice of Appeal are
irrelevant and immaterial to whether the Minister of National Revenue correctly
assessed the appellant’s tax payable for the 2004 to 2007 taxation years in
accordance with the Income Tax Act (the “Act”).
2.
The allegations of fact and law contained in paragraphs 9, 10 (except
for “In issuing the Reassessments, the Minister proceeded on a rough ‘net
worth’ basis”), 11, 12, 13, 20, 23 and 26 of the Notice of Appeal are
irrelevant and immaterial to the Minister’s assessment of gross negligence
penalties on the basis that the appellant knowingly, or under circumstances
amounting to gross negligence in carrying out a duty or obligation imposed
under the Act, made or participated in, assented to or acquiesced in the
making of false statements or omissions in the income tax returns filed for the
taxation years in question.
3.
This Court does not have the jurisdiction to grant the relief sought by
the appellant in paragraph 27 on the basis of the allegations of fact and law
contained in paragraphs 9, 10 (except for “In issuing the Reassessments, the
Minister proceeded on a rough ‘net worth’ basis”), 11, 12, 13, 20, 23 and 26 of
the Notice of Appeal.
[15] Counsel
for the Respondent referred to the test for the striking of pleadings
established by the Supreme Court of Canada in Hunt v. Carey Canada Inc.:
assuming the facts alleged therein can be proved, a pleading ought not to be
struck out unless it is “plain and obvious” that it contains a radical defect
that is certain to fail. Pleadings are meant to “define the issues in dispute
between the parties for the purposes of production, discovery and trial”;
to the extent they do not conform to that purpose, they ought to be struck out.
The Crown was forced to bring this motion, counsel contended, because of the
risk of responding to and thereby pleading over the Notice of Appeal in its
present form.
[16] Counsel
for the Appellant advised the Court that he had inherited the Notice of Appeal
and while acknowledging that more precision could have been employed in its drafting,
argued that the Notice of Appeal satisfactorily communicated the matters in
dispute. Referring repeatedly to the impugned paragraphs as simply part of the
“prose” of the Notice of Appeal, counsel for the Appellant urged the Court to
take a liberal approach to their analysis. He conceded that while the Notice of
Appeal made no reference to the Canadian Charter of Rights and Freedoms
(an omission dismissed as, possibly, a matter for amendment at a later date),
but contended that the Appellant’s intention to challenge the admissibility of
evidence relied on by the Minister in making his reassessment could be inferred
from the impugned paragraphs. He summarized his analysis of the impugned paragraphs 9‑20
of the Notice of Appeal as follows:
… So let's just wrap this up together up to paragraph 22. So all these
paragraphs that came before talk about lack of evidence. The process employed
was arbitrary. He was questioned without being notified that this is a criminal
vis‑a‑vis civil matter.
Those assertions, those pleadings, are not inconsistent with the case
law that my friend talked about. We're not talking about, you know, bad faith
of the officers. We're talking about evidence. We're talking about what they
used to do the reassessment.
We're not talking about how they behaved and how ‑‑ we're
talking about not just their behaviour, I mean, but we are talking about the
evidence they obtained through that conduct.
…
… But the misrepresentations, Your Honour, again, we have to read the
pleadings with a liberal sense of what they mean, is that the process
complained about is acquiring evidence that led to the reassessment through a
questionable process of criminal vis‑a‑vis civil.
It goes to section 8. It goes to the reasonableness of the search, of
how the information was acquired. So they ‑‑ the question at the
end of the day for a trial judge is, you know, Mr. Appellant, have you proven,
do you have evidence to prove this pleading that your rights have been violated
by the misrepresentations of the Minister?
Analysis
[17] Before
considering the merits of the Respondent’s motion, it is important to
understand the context in which it has been brought. The appeal in question is
from a net worth assessment, the essence of which was neatly summarized by
Desjardins, J.A. in Hsu v. Canada:
29. Net
worth assessments are a method of last resort, commonly utilized in cases where
the taxpayer refuses to file a tax return, has filed a return which is grossly
inaccurate or refuses to furnish documentation which would enable Revenue Canada
to verify the return (V. Krishna, The Fundamentals of Canadian Income Tax
Law, 5th ed. (Toronto: Carswell, 1995) at 1089). The net worth method is
premised on the assumption that an appreciation of a taxpayer's wealth over a
period of time can be imputed as income for that period unless the taxpayer
demonstrates otherwise. Its purpose is to relieve the Minister of his ordinary
burden of proving a taxable source of income. The Minister is only required to
show that the taxpayer's net worth has increased between two points in time. In
other words, a net worth assessment is not concerned with identifying the
source or nature of the taxpayer's appreciation in wealth. Once an increase is
demonstrated, the onus lay entirely with the taxpayer to separate his or her
taxable income from gains resulting from non-taxable sources (Gentile v. The
Queen, [1988] 1 C.T.C. 253 at 256 (F.C.T.D.)).
30. By
its very nature, a net worth assessment is an arbitrary and imprecise approximation
of a taxpayer's income. Any perceived unfairness relating to this type of
assessment is resolved by recognizing that the taxpayer is in the best position
to know his or her own taxable income. Where the factual basis of the
Minister's estimation is inaccurate, it should be a simple matter for the
taxpayer to correct the Minister's error to the satisfaction of the Court.
[18] And
this will be the Appellant’s task in the present case. It is not clear to me,
either from the Notice of Appeal or the submissions of counsel for the
Appellant, exactly how the allegations made in the impugned paragraphs will
assist in that effort. If, indeed, the Appellant intends to challenge the
admissibility of evidence obtained by the Minister in violation of his rights
under the Charter, then he must, at the very least, include a reference
to it (and, preferably, to the specific Charter provisions relied upon)
in the Notice of Appeal. This has not been done. Nor has the Appellant made it
clear under what legislation the activities obliquely referred to in paragraphs
9, 11, 12 and 13 as “criminal” or “illegal” took on that quality. Was it, for
example, under a criminal offence provision of the Income Tax Act such
as section 239, or under some other statute? On this latter point, for example,
it is not unheard for net worth assessments to flow from a Criminal Code
investigation into illegal activities such as drugs or gambling. Apart from the
bare assertion in the submissions of counsel for the Appellant that “what we
have in this case is a parallel criminal investigation”,
it is not obvious from the pleadings under what legislation such an
investigation might have arisen. Nor is it stated whether the Appellant was
suspected, charged or convicted of criminal activity; nor what connection there
is between the allegations regarding the conduct of the Minister’s officials during
that “investigation” and the resulting net worth assessment.
[19] If
it is truly the Appellant’s position that, in making his reassessment, the
Minister relied on evidence obtained during a criminal investigation in
circumstances that amounted to a breach of the Appellant’s Charter rights,
he needs to say so. The admissibility of such evidence will depend on whether
it was the product of the Minister’s civil audit function or his criminal
investigative function; assuming admissibility has been properly raised in
the pleadings, that determination will be for the trial judge; it will depend
on a careful analysis of such factors as the nature of the Minister’s inquiry,
the timing thereof and its ultimate purpose.
The Notice of Appeal ought to provide the legal and factual framework to
facilitate that consideration.
[20] As
presently drafted, paragraphs 9, 11, 12, 13 and 20 do not achieve this goal.
Counsel for the Appellant questioned whether the Respondent’s motion was a good
use of the Court’s time:
… given the
fact that it’s so early in the stage, and the fact that the pleadings
themselves speak about evidentiary gathering. Evidentiary gathering cannot be
irrelevant to a reassessment, at all. … Net worth assessments everyday are
adjudicated in this court and all we do is talk about the evidence. That’s all
we do. We talk about the evidence, about the net worth, to demolish the
Minister’s assumption. That’s what we talk about. And what you see in these
pleadings is the Minister’s behaviour about gathering evidence.
[21] While
I agree with counsel for the Appellant that putting the Respondent to the
trouble of bringing this motion was not a good use of the Court’s time, my
motives are different from his own. I am puzzled by counsel’s reluctance to clarify,
at an “early” stage, the issues in dispute and the facts upon which each party
will rely. Had the Appellant turned his mind to such matters at an even earlier
time (in the case of former Appellant’s counsel, for example, when drafting the
Notice of Appeal; or with current counsel, when in January, 2010, he received
the Respondent’s motion materials), this motion might well have been
unnecessary.
[22] Instead,
the Notice of Appeal remained in its imprecise state. Given the vagueness of
the impugned paragraphs and the absence of a statutory basis for the facts
alleged, they can easily be read as allegations of ministerial misconduct
during the legitimate performance of the audit function duties. The
jurisprudence is clear that such misfeasance is irrelevant to the determination
of the correctness of the assessment; see Main Rehabilitation Co. v. Canada.
[23] As
presently drafted, paragraphs 20 and 26 clearly run afoul of this
principle. The remaining paragraphs are, at best, ambiguous. In paragraph 9,
the Appellant speaks of the net worth assessment having been issued “without
the benefit of normal audit procedures”; paragraph 11 alleges that officials did
not “verify or otherwise ascertain with certainty the accuracy of the
allegations reflected in information which was the investigative product of
persons who were not associated in anyway with CRA.” Paragraphs 12, 13 and 23
come slightly closer to the mark, leaving the impression that the Minister
might, at some point, have been engaged in a criminal investigative function of
some kind.
[24] As
for paragraph 10 (except the opening sentence), this Court is without
jurisdiction to look into whether the Appellant’s allegation that the Minister
improperly obtained a Jeopardy Order under s. 225.2 of the Income Tax Act.
[25] If
this were an Informal Procedure appeal with a self-represented appellant, the
impugned paragraphs might be up to the task. But this is a General Procedure
appeal in which the Appellant is represented by counsel. Higher standards
apply. As with the GST Appeal, I am unable to understand why counsel for the
Appellant did not avail himself of the opportunity presented by the
Respondent’s motion to bring the Notice of Appeal into sharper focus rather
than choosing to defend a blurry picture of the Appellant’s case. That such
steps were not taken leaves me with the uneasy feeling that the impugned
paragraphs are, in fact, the sort of general rant against the assessment
process that has no place in proper pleadings.
[26] On
balance, I am persuaded that the motion should be granted, with costs to the
Respondent; paragraphs 9, 10 (except for the first sentence), 11, 12, 13, 20,
23 and 26 shall be struck from the Notice of Appeal.
[27] That
said, it seems to me justice is better served if the Appellant is given leave
to amend his Notice of Appeal. First of all, there is the matter of the GST
Appeal which ought properly to have been brought under the Income Tax Act. Considering,
among the other relevant factors, its interrelatedness to the net worth
assessment, the clear intention of the Appellant to challenge the GSTC
assessment and the merits of the appeal as shown in the Notice of Appeal for
the GST Appeal, I am prepared, in the interest of making the best use of
judicial resources, to treat the submissions of counsel for the Appellant as an
application to extend the time for filing of the appeal wrongly commenced under
the Excise Tax Act and to grant that application together with leave to
amend the Income Tax Act Appeal accordingly.
[28] As
for the matter of admissibility, if it is indeed the intention of the Appellant
to challenge the evidence relied upon by the Minister in making the net worth
assessment or in imposing penalties, he might also turn his mind to the
additions and revisions to the Notice of Appeal required to achieve that end.
In the hope of expediting the hearing of what, even allowing for admissibility
issues, ought to be a relatively straight-forward appeal, the Appellant shall
have until May 28, 2010 to amend his Notice of Appeal for the Income
Tax Act Appeal in respect of the GSTC matter and the admissibility of evidence;
and to serve on the Respondent and file the Amended Notice of Appeal.
[29] The
Respondent shall have 60 days from the date of service of the Amended Notice of
Appeal or, in the event that the Appellant does not serve and file an Amended
Notice of Appeal within the time permitted, from May 28, 2010 to file the Reply
to the Notice of Appeal.
[30] The Respondent is entitled to costs in both
motions.
Signed at Ottawa, Canada, this 4th day of May, 2010.
“G. A. Sheridan”
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