Citation: 2007TCC703
Date: 20071120
Docket: 2001-3839(IT)G
2003-446(IT)G
2003-1073(IT)G
BETWEEN:
CHARLES B. LOEWEN,
ANDREW PRINGLE and
MICHAEL DE PENCIER,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bowie
J.
Background
[1] There are
motions before me in each of these three appeals, brought by the respondent
seeking leave to amend the Replies to the Notices of Appeal. The pleadings in
the three appeals are identical in all material aspects, as are the amendments
that the respondent wishes to make to the Replies. That is because these three
appeals are representative of a group of appeals pending before the Court on
behalf of 17 taxpayers, each of whom was a purchaser of an undivided interest
in certain computer software that changed hands under an agreement for purchase
and sale that was executed on December 31, 1993. In his Reasons in relation to
an earlier motion, Bowman C.J. recited the background to these appeals in some
detail, and I think it would be useful to reproduce that here.
3 The
appellant is a businessman with a degree in economics from the University of British Columbia as well as from Harvard
Business School. Throughout his career he has been active at a
senior level in financial, corporate, management and investment matters. The
allegations that are germane to this motion are contained in the appellant's
affidavit filed in support of the motion as well as the notice of appeal. They
are:
- In
1993 the appellant acquired a 6.25% interest in computer software known as
Arachnae Information Retrieval System Software II ("AIRS II"). He was
one of 17 co-owners. He alleges in his affidavit that he paid $500,000 for his
interest.
- Computer
software is a class 12 asset and capital cost allowance ("CCA") may
be deducted under Schedule II to the Income Tax Regulations at 100%,
subject to the rule that in the year of acquisition a taxpayer may deduct only
one half of the amount of CCA otherwise deductible.
- The
appellant therefore deducted CCA of $250,000 in 1994. The claim in 1994 put the
appellant in a loss position in that year and he therefore carried forward a
loss of $32,822 to 1995.
4 The Minister
reassessed the appellant for each of the three years 1993, 1994 and 1995 as
follows:
(a) For
1993 he disallowed the entire claim for CCA on the basis that the software was
not available for use until 1994.
(b) For
1994 he assessed on the basis that the fair market value of 100% of the
software was $1,600,000 and not $8,000,000, the basis upon which the appellant
filed. Therefore the appellant's deduction for CCA on the software was reduced
to $50,000, as follows:
$1,600,000 X
$500,000 X ½ = $50,000
$8,000,000
(c) For
1995 the appellant did not claim CCA on the software evidently on the
assumption that it had all been used up in 1993 and 1994. The Minister did not
allow the non-capital loss carry-forward on the theory that the appellant had
none. Moreover the Minister - inadvertently I assume - did not allow the
appellant even the CCA of $50,000 which on the Minister's theory he would have
been entitled to. That however is not germane to this motion.
5 The
assessments for 1993, 1994 and 1995 were all dated February 27, 2001.
6 The
appellant signed a waiver of the "normal reassessment period" as
defined in section 152 of the Income Tax Act in respect of the 1993
taxation year on April 4, 1997 and in respect of the 1994 taxation year on
April 28, 1998.
7 The
waivers for the taxation years were revoked by notices of revocation of waiver
signed by the appellant on October 12, 2000. The effect of revoking the waivers
was that the normal reassessment period ended in respect of 1993 and 1994 six
months after the revocation was filed, i.e. on April 21, 2001.
8 No
waiver was filed with respect to 1995.
9 The
original assessment for 1995 was made on May 9, 1996. Therefore the normal
reassessment period for 1995 expired on May 10, 1999.
10 On
March 2, 2000 an auditor for the Canada Customs and Revenue Agency, Ms. Jang,
wrote to the appellant with respect to the AIRS II Co-ownership proposing
adjustments in respect to his investment. Only two issues were identified:
(a) Valuation.
After
a lengthy discussion of the valuation of the software she stated
Since the
original valuation of $8.0 million is considered unreasonable it has been
determined that at the date of valuation, i.e., December 31, 1993 the fair
market value of the Software acquired by the Co-ownership was $1.6 million
supported by our valuation. Therefore the capital cost used for the purpose of
capital cost allowance ("CCA") is limited to $1.6 million. The excess
of $6.4 million is proposed to be disallowed.
(b) Availability
for use.
She
stated that the software was not available for use until 1994 and therefore CCA
should not be claimed on it in 1993.
11 On
March 20 and March 30, 2000 the appellant wrote to Ms. Jang making
representations on the matter of valuation and suggesting that she issue a
reassessment based on the $1.6 million valuation. He seems to have assumed that
as soon as he received a notice of reassessment he could appeal to the court.
He also observed that she would have to reassess the other 16 investors.
12 On
May 12, 2000 Ms. A. Christina Tari, counsel for the appellant, made a lengthy
submission to Ms. Jang on the available for use issue.
13 On
January 19, 2001 Ms. Jang wrote again to the appellant with respect to the
years 1993, 1994 and 1995. She reiterated her position that the $1.6 million
valuation by Cole Valuation Partners was proper and her position on the
available for use issue. She commented in detail on Ms. Tari's representations.
She concluded with the observation:
We believe that
we have gathered enough evidence to support our conclusion. As stated in our
proposal letter, we accepted that the Software was available for use in 1994.
Therefore CCA should only be claimed in 1994 and the subsequent years. Enclosed
please find a Revised Capital Allowance Schedule and a Revised Non-Capital Loss
Schedule.
14 The
schedules reduced the CCA claim for 1993 to zero and for 1994 to $50,000
(($500,000 X $1,600,000/$8,000,000) X 50%) and the non-capital loss
carry-forward to 1995 to nil.
15 The
reassessments for 1993, 1994 and 1995 followed on February 27, 2001. The
notices of reassessment each bore on their face the notation:
We have made an
adjustment according to our letter of January 19, 2001.
16 On
April 30, 2001 Ms. Jang sent to Ms. Tari an audit report (T20-R1). The report
describes the software and deals in detail with two and only two issues:
valuation and available for use.
17 A
very substantial part of the report was the CCRA's response to the 50 page
representations by the co-owners with respect to the Cole Valuation report.
18 There
was no discussion in the report of the question whether the co‑owners or
the appellant were dealing at arm's length with the vendor of the software,
although on page 8 of the report, under "Explanation of All Changes"
the following appears.
1. CCA
Disallowed*
Income Tax
Act: Sec. 67, Subsection 9(2),
Paragraph 69(1)(a), Paragraph 251(1)(b), Subsection 13(26),
Subsection 13(27), Paragraph 20(1)(a)
*
Please note
that as the result of this audit, a balance of ???? of Capital Cost Allowance
is being carried forward to future year. The T/P did not request in writing to
claim the remaining balance.
See explanation
on the following pages.
19 Paragraph
69(1)(a) of the Income Tax Act deals with the tax consequences of
transfers between persons not dealing at arm's length. Paragraph 251(1)(b)
provides that it is a question of fact whether unrelated persons are dealing at
arm's length, and subsections 13(26) and 13(27) have to do with the available
for use restriction on CCA claims.
20 In
addition to the audit report Ms. Jang sent Ms. Tari on May 9, 2001 a document
called a Position Paper dated November 21, 2000. This report dealt with a
number of issues in addition to the two discussed in the audit report. In it
she states:
C. PROBLEM
OR ISSUE
The issues to
be decided are:
1. did
the Co-Owners acquire the software for the purpose of carrying on a business
with a reasonable expectation of profit or were the expenses incurred for the
purpose of earning income from a business or property (paragraphs 18(1)(a) and
18(1)(h)), and was the software acquired for the purpose of gaining or
producing income (paragraph 1102(1)(c));
2. whether
the amounts allegedly paid or payable to the vendor of Software are reasonable
under the circumstances or was the value of the Software inflated (section 67);
3. was
the Software available for use on December 31, 1993 (subsection 13(26));
4. are
the Notes real or contingent liabilities (paragraph 18(1)(e));
5. was
the Software purchased by the Co-Ownership a new product developed by Arachnae?
...
F. RECOMMENDATIONS
AND CONCLUSION
Our
position here is mainly relied on the Valuation Report from Cole and Partners.
It has been determined that the value of the Software should be in the $1.6
million range. We accept this amount as the fair market value for the AIRS II
Software. We agree with the Cole's FMV for the following reasons:
1. The
Software was not ready at the valuation date. There were a lot of uncertainties
involved, i.e., would the Software function as described or expected, when will
the Software be available for use, how strong the competitors be, etc.
2. Although
the sum of $5,102,315 had been invested on the original AIRS and AIRS II and
additional funds of $2.4 million was expected to be invested in the AIRS II
Software by the Co-Owners, it does not mean that the new AIRS II Software
should worth $8 million.
3. As
stated previously, the historical results from AIRS was very poor. The AIRS
Software was only able to generate $1,249,377 gross revenue for the entire 10
years. Yet the total development costs came to $2,284,315 which was almost
twice as much as the gross revenue. It is questionable that their projections
were achievable and attainable.
4. For
the entire period in question, Arachnae was not able to demonstrate one successful
contract.
5. The
success of Excite, Inc. does not suggest that the similar outcome could have
been happened to AIRS II.
6. The
entry of Excite may or may not be the main reason for the failure of the
Software.
Please note
that we do not consider "no reasonable expectation of profit" for the
business. During the meeting of February 8, 2000, we re-considered what Mr.
Phil McDonnell had suggested which were as follows:
￭ Was it run as a company?
￭ Was there proper management?
￭ Was there sales force to marketing the
product?
￭ Was the product out there in the
market?
￭ Was there a roadblock?
The answers to
the above are "yes". In addition, all of the available correspondence
indicates that reasonable efforts were put into the operation. They were doing
everything a genuine business would do. As far as the profit is concerned, we
cannot refuse a business due to lack of profit alone.
CONCLUSION:
It
is recommended that total CCA deductions is limited to $1.6 million for all the
Co-Owners as stated in our first position above. As stated in
"Availability For Use" above, it has been determined that the
Software was not available for use on December 31, 1993. Therefore no CCA is
being allowed for 1993. It appears that the Software was available for use in
1994. Thus deduction for CCA is recommended in the taxation year of 1994 and
onward.
21 On
the question whether the notes were contingent she said:
Promissory
Notes details:
For each unit
cost of $500,000 the promissory note is for $350,000 together with interest on
such amount, at a rate equal to five percent (5%) per annum calculated annually
not in advance.
Maker - the
various purchasers/co-owners/investors
Payee - AIRS II
Inc.
Payment date -
is December 31, 2003 for those notes made in 1993 and December 31, 2004 for
those made in 1994
Prior to the
Payment date, payments of principal and interest on this promissory note shall
only be made out of the Maker's share of Adjusted Revenues.
If the Maker's
share of Adjusted Revenues is insufficient to pay the interest payable on any
anniversary date, such interest shall accrue.
This promissory
note may be repaid at any time or times without notice or bonus.
The maker shall
have the right upon notice of the Payee at any time prior to the Payment date
to extend the payment date for up to an additional 10 years.
This promissory
note shall be unsecured.
The Payee
agrees that this promissory note cannot be assigned to or endorsed in favor of,
a third party without the consent of the maker, which consent may be
unreasonably withheld.
We have tried
to verify the authenticity of the Promissory notes. To date, the Notes have not
been paid off. Per representation of June 10, 1999, from Mr. Frank Penny, the
terms of the Notes remain the same. The current status of the Acquisition Notes
is that they are still outstanding and will be dealt with between AIRS II Inc.
and the Co-Owners according to their terms. The carrying charges with respect
to the Acquisition Notes are accrued on the books of AIRS II Inc. and will be
paid according to the terms of the loan.
The unusual
long due date in relation to the economic life of the Software and the lack of
proper security do not seem to agree with normal business practice. However
there is no evidence to support that the debt was not intended to be repaid.
22 It is
clear from the position paper that Ms. Jang considered the question of
contingency and decided that the notes were not contingent. She considered the
question whether the software was acquired for the purpose of gaining or
producing income from a business or property and decided that it was.
23 She
said in her affidavit:
15. At
the time of the audit I believed that the facts that I had gathered and assumed
raised several legal issues, which are detailed in the Position Paper. However,
I chose to proceed with the reassessment on the basis of two legal conclusions:
(a) the
fair market value of the Software did not exceed 1.6 million dollars as at December
31, 1993, and
(b) the
Software was not available for use in the Appellant's 1993 taxation year.
16. Upon
my review of the Reply to the Notice of Appeal, I can state that additional
legal conclusions may be drawn from the facts that I assumed and gathered
during the course of my audit. These legal conclusions are:
(a) the
Appellant did not acquire an interest in the Software for the purpose of
gaining or producing income;
(b) the
Appellant, the co-owners of the Software, AIRS II Inc. and Arachnae were not
dealing with each other at arm's length;
(c) the
deduction of the CCA claimed by the Appellant in his 1993 and 1994 taxation
years was unreasonable;
(d) the
$350,000 set out in the So-Called Promissory Note provided by the Appellant to
AIRS II Inc. was a contingent liability.
17. I am
advised that these conclusions were made based on the facts and information
that I gathered and assumed during the audit. I believe this advice to be true.
24 The
statement in paragraph 15 that she decided to proceed with the reassessment on
the basis of two legal conclusions, fair market value and available for use, is
correct.
[2] Mr. Loewen’s
Notice of Appeal was filed in October 2001, and the Reply in January 2002. In
the other two appeals, the Notices of Appeal were filed in early 2003 and the
Replies in May 2004. The respondent now seeks to amend the Reply in each appeal
to add the following five paragraphs and one sub-paragraph, and to add section
237.1 to paragraph 26, which sets out the statutory provisions upon which the
respondent relies.
25. No application was made pursuant to
subsection 237.1(2) of the Act for a tax shelter identification number
in relation to the Software and no identification number was issued by the
Minister under section 237.1(2) of the Act.
26. The Appellant did not file the prescribed
form, including the identification number for the tax shelter, under section
237.1(6) of the Act.
27. Prior to the acquisition of the Software,
statements or representations were made or proposed to be made by AIRS II Inc.,
or on its behalf, to prospective purchasers of the Software.
28. The statements or representations state
that each prospective purchaser, who purchased a unit in the amount of $500,000
in 1993, would make a cash investment of $75,000 in each 1993 and 1994 taxation
year, and would be able to write-off $250,000 in 1993 and $250,000 in 1994
against all income.
29. The issues are whether:
a) The Software is a tax shelter within the
meaning of section 237.1 of the Act;
31. He submits that the software was a tax
shelter as defined in section 237.1 of the Act. He further submits that
no application for a tax shelter identification number was made and as a
result, no tax shelter identification number was issued by the Minister.
Consequently no amount may be deducted or claimed by the Appellant in respect
of the software by virtue of subsection 237.1(6) of the Act.
The numbering above refers to the Loewen
appeal. The proposed amendments to the other two Replies are identical but the
paragraph numbers are different. The
motions are opposed by counsel for the appellants on several grounds that she
summarized under the following headings in an outline of her argument:
(i)
No prima facie right to
amend pleadings
(ii)
No reasonable cause of action
(iii)
Prejudice
(iv) Not an “alternative argument”
(v) Fairness/Common Sense/Interests of
Justice
(vi) Abuse of Process/Policy Concerns
I shall deal with (i), (ii) and (iv) under those
headings, with (iii) and (v) together under the heading discretionary
considerations, and finally (vi).
no
prima facie right to amend
pleadings
[3] Ms. Tari
contrasts Rule 54,
under which these motions are brought, with Ontario Rule 26.01:
54. A
pleading may be amended by the party filing it, at any time before the close of
pleadings, and thereafter either on filing the consent of all other parties, or
with leave of the Court, and the Court in granting leave may impose such terms
as are just.
26.01 On motion at any stage of an action the court shall grant
leave to amend a pleading on such terms as are just, unless prejudice would
result that could not be compensated for by costs or an adjournment.
Rule 54 must be applied
having in mind the provisions of Rule 4:
4(1) These rules shall be liberally
construed to secure the just, most expeditious and least expensive
determination of every proceeding on its merits.
There
is considerable jurisprudence surrounding Rule 54, but the accepted statement
of principle is that of the present Chief Justice of this Court made in Continental
Bank Leasing v. The Queen,
where he said at page 302:
In the cases in the courts of Ontario and of British Columbia to which
I was referred a number of tests have been developed -- whether an admission
was inadvertent, whether there is a triable issue raised by an amendment or the
withdrawal of an admission and whether the other party would suffer a prejudice
not compensable in costs. Although I find that these tests have been met I
prefer to put the matter on a broader basis: whether it is more consonant with
the interests of justice that the withdrawal or amendment be permitted or that
it be denied. The tests mentioned in cases in other courts are of course
helpful but other factors should also be emphasized, including the timeliness
of the motion to amend or withdraw, the extent to which the proposed amendments
would delay the expeditious trial of the matter, the extent to which a position
taken originally by one party has led another party to follow a course of
action in the litigation which it would be difficult or impossible to alter and
whether the amendments sought will facilitate the court's consideration of the
true substance of the dispute on its merits. No single factor predominates nor
is its presence or absence necessarily determinative. All must be assigned
their proper weight in the context of the particular case. Ultimately it boils
down to a consideration of simple fairness, common sense and the interest that
the courts have that justice be done.
That
passage was cited with approval by the Federal Court of Appeal in Canderel
v. Canada,
and more recently in Merck & Co. v. Apotex Inc. Proposed amendments,
therefore, must be considered in the light of the factors enumerated in Continental
Bank Leasing, and considering as well the question whether they raise a
reasonable cause of action, or in the present context, whether they raise a
viable defence to the appeals. It would make no sense to permit an amendment to
a pleading that, if pleaded in the first instance, would have been susceptible
of being struck out as immaterial.
no reasonable cause of
action
[4] The principle
that an amendment to a pleading will not be permitted if it raises no cause of
action, or, in the context of a Reply to a Notice of Appeal in this Court, it
would afford no defence of the assessment from which the appeal has been
brought is self-evident. As I have said above, it would make no sense to permit
an amendment to a pleading that, had it been included initially, would have
been susceptible of striking out.
[5] Section 237.1
was added to the Income Tax Act (the “Act”) in 1989. It defines
the term “tax shelter”, and it requires that the promoter of a tax shelter
register it with the Minister, and thereby obtain a tax shelter identification
number. Subsection 237.1(6) provides as follows:
237.1(6) In computing the amount of income, taxable income,
taxable income earned in Canada, tax or other amount payable by, or refundable
to a taxpayer under this Act for a taxation year, or any other amount
that is relevant for the purposes of computing that amount, no amount may be claimed
or deducted by the taxpayer in respect of an interest in a tax shelter unless
the taxpayer provides the Minister with the identification number for the
shelter.
It
is this subsection that the respondent now wishes by these amendments to invoke
against the appellants. For the Crown to succeed in any such argument would
require that the evidence establish that the AIRS II software met the
definition of “tax shelter” as it stood at the relevant time in 1993 and 1994.
As the decision of this Court in Baxter v. The Queen, and the decision of the
Federal Court of Appeal reversing that decision show, the application of that
definition is no simple matter. Key to that determination is a document
referred to in the argument before me simply as Appendix I, and, of course, the
definition of “tax shelter” as it appeared in the Act in 1993 and 1994.
That definition then read:
237.1(1) In this section,
"tax shelter" means any property in respect of
which it may reasonably be considered having regard to statements or representations
made or proposed to be made in connection with the property that, if a person
were to acquire an interest in the property, at the end of any particular
taxation year ending within 4 years after the day on which the interest is acquired,
(a)
the total of all amounts each of which is
(i) a
loss represented to be deductible in computing income in respect of the
interest in the property and expected to be incurred by or allocated to the person
for the particular year or any preceding taxation year, or
(ii) any
other amount represented to be deductible in computing income or taxable income
in respect of the interest in the property, and expected to be incurred by or
allocated to the person for the particular year or any preceding taxation year,
other than any amount included in computing a loss described in subparagraph I,
would exceed
(b) the
amount, if any, by which
(i) the
cost to the person of the interest in the property at the end of the particular
year,
would
exceed
(ii)
the total of all
amounts each of which is the amount of any prescribed benefit that is expected
to be received or enjoyed, directly or indirectly, in respect of the interest
in the property, by the person or another person with whom the person does not
deal at arm's length.
Ms.
Tari argues that on the face of Appendix I the software does not fall within
the definition as it appeared in 1993 and 1994. The requirement of the
definition was expressed this way by Rip J. in Maege v. The Queen:
30 In
terms of the financial aspects of an investment and whether or not it is a tax
shelter, the provisions defining "tax shelter" can be reduced to a
simple equation: there may be a tax shelter if A > (B - C) where A is the
aggregate of deductions against income (including losses), B is the amount of
the investment or cost, and C is the amount of prescribed benefits received (in
this case, tax credits.)
The
cost of one unit of the software (B in the equation above) is shown by Appendix
I to consist of one payment of $75,000, three payments of $25,000 each, and a
promissory note for $350,000, a total of $500,000, and the CCA deductible (A in
the equation) in each of 1993 and 1994 is shown to be $250,000, a total of
$500,000. The latter is only equal to but not greater than the former, and so
the property, it is argued, could not be a tax shelter.
[6] The Respondent’s
position is that there must be deducted from the cost side of the equation (B)
the amount of the $350,000 note (C), because it is a prescribed benefit within
the description of that expression found in Income Tax Regulation
231(6). The relevant operative words in the Regulation as it read at the
relevant time were:
231(6) For the purposes of paragraph (b) of the definition
“tax shelter” in subsection 237.1(1) of the Act, “prescribed benefit” in
relation to a tax shelter means any amount … and includes such an amount
(a) that is, either immediately or in the future, owed
to any other person by the purchaser … to the extent that
(i)
liability to pay that amount is contingent,
…
It
is alleged in subparagraph 22(h) of the Reply in Loewen (19 and 20 in Pringle
and De Pencier) that the liability under the note is contingent. The proposed
amendment, therefore, would raise a triable issue.
not an “alternative
argument”
[7] The normal
reassessment period prescribed by subsection 152(4) of the Act for all
the years under appeal by each of these appellants has long since expired.
Consequently, the appellants argue that to permit the proposed amendment would
offend the rule in Continental Bank of Canada v. Canada. The
respondent relies on subsection 152(9):
152(9) The
Minister may advance an alternative argument in support of an assessment at any
time after the normal reassessment period unless, on an appeal under this Act
(a) there
is relevant evidence that the taxpayer is no longer able to adduce without the
leave of the court; and
(b) it
is not appropriate in the circumstances for the court to order that the evidence
be adduced.
The
appellants’ objection under this head of argument is that what the respondent
proposes is not simply to raise a new argument in support of the assessments
now under appeal, but rather to raise a different assessment based upon new and
different transactions or events. Counsel relied on the decision of this Court
in Papiers Cascades Cabano Inc. v. The Queen, and that of the
Federal Court of Appeal in Pedwell v. Canada. In my view, Papiers
Cascades has no application to the present case. It dealt with the
application of the New St. James principle to the carry forward of
unused investment tax credits, where the Minister, in assessing the 1966
taxation year, reduced the amount carried forward from an earlier statute‑barred
year as the result of a revision of the amount of the credit to which the
taxpayer was entitled for that earlier year. The trial Judge, in obiter,
accepted an alternative argument for the appellant that to permit the Minister
to recalculate the entitlement for a statute-barred year was, in effect, to
permit him to appeal from his own assessment. In the Federal Court of Appeal,
the Minister’s appeal was allowed and the New St. James principle was
affirmed. The Court did not find it necessary to consider subsection 152(9).
[8] In Pedwell,
the Minister initially assessed the taxpayer to tax on two transactions, one an
appropriation of property from a corporation, and the other a sale of property.
Following objection, the Minister reassessed to allow the objection relating to
the sale transaction, and confirmed the assessment arising out of the
appropriation. An appeal was taken from this assessment, and the trial judge,
while allowing the appeal in respect of the appropriation of property, referred
the assessment back to the Minister with a direction to reassess on the basis
that the proceeds of the sale transaction and of another transaction were
income of the appellant. This decision was set aside by the Court of Appeal,
reasoning that the appellant had not been assessed on that basis, and that the
Court could not ex proprio motu substitute an entirely different
assessment for the Minister’s assessment that was under appeal. The ratio
of the Court of Appeal decision is found in the following excerpt from the
judgment:
21 The Minister advances two arguments. The
first is that the issue in a tax appeal is whether the tax is too high. The
implication of this argument is that anything can be argued in the Tax Court
and the Tax Court Judge is limited only to the amount of the assessment. In
other words, as long as a finding does not exceed the amount of the tax
assessed by the Minister, the Tax Court Judge is free to find liability against
the taxpayer on any basis, whether included in the notice of reassessment or
not, provided the taxpayer has notice and an opportunity to respond.
22 I think Continental Bank is
dispositive on this point. The Crown and therefore the Court are bound by the
assessment appealed from, unless it has been amended, or adequate notice given
of an intention to rely on a different basis for it, within the limitation
period and certainly before judgment is rendered by the Tax Court. This was not
the case here.
23 The second of the Crown's arguments is
that what transpired is all part of one scheme; that the acquisition of the 84
acres, the sale to Eulers and the deposit received from Landpark cannot be
separated for tax purposes. However, what transpired were three separate
transactions involving different parties:
(1) the acquisition of the
84 acres;
(2) the sale of one lot to
Eulers; and
(3) the deposit received
from Landpark for 16 lots.
This is seen in the Minister's notice of
reassessment. In the October 1, 1994 reassessment, the appropriation of the 84
acres is listed, followed by the alleged unreported profit on the Euler sale.
On the April 4, 1996 notice of reassessment, the Euler transaction is
eliminated. The necessary implication is that the appellant need have no
further worry that the Euler proceeds constituted an appropriation to him and
that he may concentrate on the acquisition of the 84 acres. This was confirmed
before the Tax Court Judge in the excerpt from the transcript quoted above.
Finally, nowhere on the reassessments is there any mention of the Landpark
deposit of $22,500.
24
I do not say that the Minister might not base an assessment on a scheme
consisting of more than one transaction. However, taxation is transaction-based
(or perhaps deemed transaction-based) and if more than one transaction is to
form the basis of assessment, the assessment must reflect that fact. Where the
basis of the Minister's assessment is one transaction, the Court cannot, ex
post facto, broaden the scope of the assessment to include other
transactions.
Pedwell
is distinguishable from the present cases on several grounds. First, the
prohibition arising out of Pedwell is against shifting to an entirely
different transactional basis of assessment from that appealed from; second, in
Pedwell the taxpayer never had notice of the proposed basis of the
assessment directed by the judgment of the Court; third, subsection 152(9)
applies only to appeals disposed of after June 17, 1999; the decision of this
Court in Pedwell was rendered on October 29, 1988, and in the words
of Rothstein J.A. the subsection “… is not relevant here in any event …”.
[9] For purposes of
considering the application of subsection 152(9), the decisions that are
relevant, and binding on me, are Canada v. Anchor Pointe Energy Ltd., Canada v. Loewen, and Walsh v. Canada. Anchor Pointe is
in all respects parallel to the present cases. There the Minister’s
reassessment of the taxpayer was based upon the opinion that certain seismic
data, the cost of which was claimed as a Canadian Exploration Expense, had a
fair market value that was less than the amount claimed. The taxpayer objected.
After the normal reassessment period had expired, the Minister, relying on the
then recent judgment of the Federal Court of Appeal in Global Communications
Ltd. v. The Queen,
confirmed the reassessment. In doing so, he relied upon both the valuation
issue that gave rise to the reassessment, and on the added reason that the
seismic data had been acquired for the purpose of resale and not for the
purpose of exploration as the Act required. The question raised on a
motion attacking the Reply to the Notice of Appeal was whether subsection
152(9) permitted the Minister to rely on this new alternative argument. In
concluding that it did, Rothstein J.A., for a unanimous Court, said this at
paragraphs 37 to 41:
37 Subsection 152(9) permits the Minister to rely upon an
alternative argument in support of an assessment after the normal reassessment
period. There is no suggestion here that Anchor Pointe is no longer able to
adduce relevant evidence with respect to the Minister's new basis or argument.
Therefore, if the Global decision constitutes a new basis or argument in
support of the reassessment, the Minister may rely upon it even though it was
not relied upon prior to expiry of the normal reassessment period.
38 Anchor Pointe tries to distinguish between a new basis of
assessment and a new argument in support of an assessment. I do not find that
semantical argument productive. The question is whether the Minister is
purporting, through reliance on the Global decision, to increase the
amount of Anchor Pointe's income that was not included in an assessment or
reassessment made within the normal reassessment period.
39 In my opinion, he was not. This case is unlike cases such as
Pedwell v. The Queen, 2000 D.T.C. 6050 (F.C.A.), where the Minister
sought to take into account different transactions than the ones that formed
the basis of the reassessments that were made within the normal reassessment
period. I do not say that taking into account other transactions is the only
thing the Minister cannot do after expiry of the normal reassessment period.
Anything that increases tax payable from what would have been the case prior to
expiry of the normal reassessment period would be objectionable.
40 Here, the Minister does not seek to rely on Global to
increase Anchor Pointe's taxes payable over what was included in the Minister's
reassessment prior to expiry of the normal reassessment period. The
reassessment increased taxes payable by reducing CEE deductions by the
difference between the amount claimed and the amount based on the Minister's
estimation of the fair market value of the seismic data. On confirming the
reassessment, the Minister does not seek to increase that amount. He is not
introducing a new transaction. He is only relying on an additional argument,
that there is no CEE deduction allowed where the acquisition of the seismic
data is for resale or licensing.
41 In these circumstances, I agree with Rip J.'s conclusion
that there is nothing objectionable about the Crown's Reply containing an
additional argument based on the Global decision.
[10] Ms. Tari argues
that the addition in this case of the allegations that the AIRS II
software was a tax shelter and that the appellants did not comply with the
requirement to file the prescribed form containing the prescribed information
required by subsection 237.1(6) of the Act would amount to adding new
transactions to the basis for the reassessments. I do not agree. These
allegations are precisely analogous to the added requirement in Anchor
Pointe that the seismic data be purchased for the purpose of exploration.
As in Anchor Pointe, the Minister does not seek to increase the amount
of the assessment, even though the new ground, if raised in time, would have
led to a higher reassessment of tax. To paraphrase the final three sentences of
paragraph 40 of Rothstein J.A.’s reasons in making this amendment to the
pleading, the Respondent does not seek to increase the amount of tax. He is not
introducing a new transaction. He is only relying on an additional argument
that there is no deduction for CCA in respect of the asset where it is an
unregistered tax shelter and the taxpayer has not filed the prescribed form
with the Minister.
[11] The proposed
amendment is also analogous to the addition in the Replies filed some years ago
in these cases of the argument in support of the reassessments that the
appellants did not acquire the software for the purpose of gaining or producing
income. In allowing an appeal from the Order of this Court striking that
allegation out of the Reply, Sharlow J.A. said this for a unanimous Court:
46 In Mr. Loewen's case, the Crown wishes to
argue that Mr. Loewen did not acquire his interest in the software for the
purpose of gaining or producing income. If that argument is valid, Mr. Loewen
should not have been permitted to deduct any capital cost allowance. Because
the statutory limitation period has passed, the Minister cannot now reassess to
increase Mr. Loewen's tax liability by reducing his capital cost allowance deduction.
However, the Crown is not seeking to reduce the capital cost allowance
deduction to nil, but only to defend the Minister's reassessment, which reduced
the deduction to reflect what the Minister alleges is the fair market value of
Mr. Loewen's interest in the software. That is essentially what the Crown was
permitted to do in Anchor Pointe.
47 ]It is argued for Mr. Loewen that Anchor
Pointe is not relevant to the issues in this case because in Anchor
Pointe the Crown's new argument emerged at the conclusion of the objection
stage, while in this case the Crown presented its new argument for the first
time at the pleading stage. I see no relevant distinction. The issue in both
cases is whether the Crown is permitted to defend an assessment on the basis of
an argument that is asserted for the first time after the expiry of the time
limit for reassessments.
48 In my view, Anchor Pointe is
dispositive of the issues raised in this part of the Crown's appeal. Therefore,
it is not necessary for me to deal with the other arguments presented for Mr.
Loewen on this issue. I conclude that the Judge erred in striking these
provisions from the reply, and that the Crown's appeal should be allowed on
this point.
[12] In Walsh v. Canada, after referring to Anchor
Pointe, Richard C.J. summarized the matter succinctly in paragraph 18 of
his unanimous reasons:
18 The following conditions apply when the Minister seeks to
rely on subsection 152(9) of the Act:
1) the Minister cannot include transactions which did not form
the basis of the taxpayer’s reassessment;
2) the right of the Minister to present an alternative
argument in support of an assessment is subject to paragraphs 152(9)(a) and
(b), which speak to the prejudice to the taxpayer; and
3) the Minister cannot use subsection 152(9) to reassess
outside the time limitations in subsection 152(4) of the Act, or to
collect tax exceeding the amount in the assessment under appeal.
In
the present cases, the Respondent does not seek to reassess, she does not seek
to collect more tax than that which was assessed within the normal reassessment
period, and she does not seek to rely on transactions other than those put into
issue by the original reassessments. She does seek to rely on an additional
argument, that subsection 237.1(6) precludes the deductions that have been
disallowed by the reassessments under appeal, and that additional argument
requires that she allege an additional fact – that the prescribed form
containing the prescribed information was not filed by the appellants.
Subsection 152(9) permits that. The proviso contained in paragraphs (a) and (b)
has no application here; only in an appellate court is leave required to adduce
evidence. Whether the addition of this new factual issue at this stage is
unfair to the appellants is a different issue, and I shall turn to that now.
discretionary
considerations
[13] Ms. Tari advances
a number of discretionary grounds in opposing leave to amend. She says that 14
years have passed since the transactions that gave rise to the assessments took
place. Arachnae Management Limited, the vendor to AIRS II, has gone out of
business and its principal has moved to the United
States. There is no longer a source at
which to search for additional documents of Arachnae. It would be difficult or
impossible to establish now whether it ever made any representations, or
registered the software under section 237.1 of the Act. The original
search for documents, she says, was focused on documents relating to the issues
of value and availability for use originally relied on by the assessor. Since
then, other issues have been added, and to add yet another issue at this stage
would prejudice the appellants in that they have no means available to them to
rebut the allegation that the software was an unregistered tax shelter. The
appellants also assert that to permit a further amendment now would inevitably
cause undue delay in bringing these cases to trial, to the detriment not only
of these three appellants, but also 14 others whose appeals are awaiting the
outcome of these. The Loewen appeal was begun some six years ago, and the
others almost five years ago. The appellants concluded their discovery of the
respondent in May 2005. They wish to proceed to trial without further delay,
and say that they are ready to do so. Many of the appellants are of advanced
age, and I am told that two have died since these proceedings began.
[14] In opposing the amendments, counsel relies as
well on Rule 4.
4(1) These rules shall be liberally construed to secure the just,
most expeditious and least expensive determination of every proceeding on its
merits.
The
proposed amendments, she argues, would add expense and delay, as well as new
issues not previously addressed in preparation for trial, and thereby would
deny the appellants the just and most expeditious determination of their
appeals that they are entitled to.
[15] The Respondent’s explanation of the lateness
of the application to make the proposed amendments is found in the affidavit of
Laura Alescio filed in support of the motions. A critical document relating to
the AIRS II investment is entitled “An Opportunity to Participate in the
Information Age Through the Investment in a Search and Retrieval Engine by way
of a Joint Venture Investment” (the Opportunity document). It is dated December
9, 1993, and it consists of a cover page, followed by pages numbered 2 to 6,
followed by Appendices I to VI. The Appendices contain 17 pages in total. It is
Appendix I that counsel for the respondent argues is indicative that the
software falls into the definition of “tax shelter” in section 237.1. The
affidavit establishes that this Appendix I was never seen by the assessor, and
that the assessor did not consider the possibility that she was dealing with an
investment that was a tax shelter. This evidence was not refuted by the
appellants, and I conclude that the Minister’s assessor was prevented from
considering the very issue that the respondent now seeks to raise because she
was provided with only seven pages of a 17-page document, one of the missing
pages – Appendix I – being the critical one that spells out the cost to
purchase a unit and the anticipated CCA deduction over the two-year period
following acquisition.
[16] Ms. Alescio’s affidavit establishes also that
the appellants’ counsel first produced a copy of the document containing
Appendix I (but not the other Appendices) to the respondent’s counsel no
earlier than February 2005. The complete document, it appears, was not produced
until April 2006 in response to an undertaking given by Mr. Pringle on his
examination for discovery. The pleadings in these cases were closed by the
middle of April 2004, following the decision of the Federal Court of Appeal
that dismissed the appellant’s attack on the original Reply in the Loewen
appeal.
[17] The Respondent’s explanation of the delay in
bringing this motion is that “… the Attorney General did not turn its [sic]
mind to whether the investment in AIRS II is a tax shelter…” until the decision of the
Federal Court of Appeal in Baxter
was released on April 30, 2007. By May 9, 2007, counsel for the respondent
had advised counsel for the appellant of her intention to bring the motion. The
delay between then and October 24 is attributable to the unavailability of the
appellants’ counsel.
[18] I do not wish to be taken as condoning the two
year period that it took for the Attorney General to appreciate the
significance of Appendix I, and then react to it. It was the same Attorney
General, after all, who had been litigating the Baxter case in this
Court and in the Federal Court of Appeal since 2002. This motion should have
been brought much sooner following the production of Appendix I. That said, it
is obvious that if the assessor had not been furnished with an incomplete copy
of the Opportunity document, then she would have been able to canvas the tax
shelter issue before the reassessments were issued. Whether that is the fault
of the appellants or of Arachnae is not necessarily clear on the evidence
before me, but the period of delay for which the respondent is answerable began
no sooner than February 2005, and it ended in May 2007.
documentary
evidence
[19] The affidavit filed on behalf of the
appellants in opposition to the motion is concerned largely with the fact that
Arachnae is no longer in business and its principal, Mr. McCutcheon, has moved
to the United States. All of this had happened by about the year 2000. It
appears that the Appellants’ counsel has possession of such documents of
Arachnae as there were to be found after these events. Certainly there is no
evidence before me that suggests that any documents relevant to the tax shelter
issue have disappeared or been destroyed since February 2005. It is
significant, too, that the respondent will have the burden of proving the
material facts that she wishes now to allege for the first time. There is no
reason, therefore, to conclude that the delay between February 2005 and May
2007 has caused any prejudice to the appellants in terms of their ability to
secure documents. Nor have the appellants pursued a course of conduct in advancing
their appeals that they would be required to alter if the amendments were
permitted.
delay of the trial
[20] The appellants assert that they wish to
proceed to trial as soon as possible, and that it would be unfair to permit the
amendment as that would occasion more delay. I do not wish to attribute the
considerable delay that has taken place up to now to either party in greater
degree than the other. The fact is that these cases are not at this moment
ready for trial. The discovery of the appellants is not complete. As recently
as October 15, 2007, counsel for the appellants acknowledged the right of the
respondent to further discovery of the appellants Pringle and De Pencier, and
proposed that the examinations take place in January or February 2008.
[21] The Chief Justice ordered a year ago that the
appellants produce the source code for the AIRS II software. That Order has not
yet been complied with. The reason given for that is that the tapes in
possession of the appellants are said to be corrupted. I was told during the
hearing that, at a pre-hearing conference in June, the Order for production of
it had been modified by the pre-hearing Judge, but in fact the Court docket
shows that no such Order has been made. A suggestion that the parties’ experts
meet to consider the feasibility of extracting information from the tapes
apparently was made, but has not yet been acted upon.
[22] Appellants’ counsel advised me during the
hearing of the motions that another copy of the source code has been held by a
national accounting firm under an escrow agreement since the closing date in
December 1993. That firm, it seems, has not been able to produce it in response
to her inquiries. At present, there is no application before the Court to amend
the Chief Justice’s Order, or for directions, to resolve this issue. These
appeals cannot be ready for hearing until the matter of production of the
source code is resolved in one way or another.
[23] During the hearing of the motions, I asked
counsel how long she would require to examine the respondent’s representative
on the new issue if I were to permit the amendment. She was unwilling to hazard
an estimate. Considering that the issue whether the notes are contingent is
already raised in the Replies filed, the new factual issues that the amendments
would raise are whether representations were made, whether the promoter
registered AIRS II as a tax shelter, and whether the appellants filed the
prescribed form with the prescribed information. I see no reason why discovery
on these issues could not be conducted in a day or two.
[24] Ms. Tari suggests that the addition of the tax
shelter issue would require delay of the trial until the Supreme Court decides
an application for leave to appeal in the Baxter case that was filed in
June 2007, and if leave is granted, then until that appeal is heard and
decided. Case law is always in a state of flux; the trial courts are not
required to refrain from hearing cases because they involve legal issues that
may be affected by the outcome of appeals that are proceeding elsewhere.
interests of justice
[25] The issue that the respondent now seeks to
raise in these cases is a significant one. The matter at issue in the appeals
is the right of the appellants to deductions for CCA. The respondent wishes to
allege that a component of that, under the Act as it stood at the
relevant times, is the requirement to comply with subsection 237.1(6). To
permit the amendments would enable the Court to consider the true substance of
the appellants’ claims for CCA to be decided on their merits, taking all
relevant provisions of the Act into account. It was in quite similar
circumstances that Bowman A.C.J., as he then was, after referring to his earlier
decision in Continental Bank Leasing, permitted amendments to be made to
the Notices of Appeal after the trial had begun in Scavuzzo and Scavuzzo v.
The Queen.
The trial was adjourned to permit new pleadings to be filed by both
parties, and further production and discovery to take place, so that all
possible grounds of appeal could be fully considered at the trial. He said at
page 170:
I can see no
prejudice to the Crown that is not compensable in costs. The possibility that
the appellants might succeed on the new point is not the kind of prejudice the
case law contemplates in cases of this kind.
[26] In summary, the delay in bringing these motions
for some two years after Appendix I to the Proposal document was produced
certainly militates against permitting the amendments, but that alone is not
fatal to the motions: see Bradley Holdings Ltd v. The Queen. The appellants will not be
prejudiced in dealing with the new issue by that two year delay. The appeals
certainly have taken far too long to reach the stage that they are at, but that
delay is apparently no more attributable to the respondent than to the
appellants. The respondent has apparently been fully examined for discovery, but
the examinations of two of the appellants have not been completed and there are
also issues remaining concerning production of the source code. To permit the
amendments would be to permit all relevant provisions bearing on the
appellants’ right to the claimed deductions to be considered at trial. In my
view, to permit the amendments to be made will not cause prejudice to the
appellants that cannot be compensated in costs.
abuse
of process
[27] Ms. Tari advanced the argument that these
motions are an abuse of process, and that they should be dismissed on that
basis alone. She characterized the motions as having been brought as part of a
deliberate strategy of delay on the part of counsel for the respondent, the
purpose of which, she said, is to make this litigation so expensive for the
appellants that they will be reluctantly driven to accept a compromise
settlement. I have examined the material before me carefully for evidence to
support that submission and have found none. That kind of accusation, made
without foundation, is inexcusable. There has been a decline in civility in
litigation in recent years that has attracted the attention of The Advocates’
Society, The Canadian Bar Association and others. It has been addressed by the
Advocates’ Society in its Principles of Civility, published on the
Society’s website.
It condemns unfounded allegations against opposing counsel of this kind. For
the most part, the conduct of counsel appearing in this Court has always been
in the best traditions of the bar. I would like to think that that will
continue to be so, and that what occurred here is an isolated incident that
will not be repeated.
conclusion
[28] For the foregoing reasons, the motions are
allowed. The respondent shall have leave to file an amended Reply in each of
these appeals in the form annexed to the Notices of Motion. The Amended Replies
shall be served and filed within seven days from the date of the Order. A case
management conference will be scheduled to deal with expediting any further
production and discovery that may be required.
costs
[29] Ms.
Tari’s submission is that the motions should be dismissed, and that the appellants
should have their costs of the motions on a solicitor and client basis, and
that if the motions are allowed then the appellants should have the costs of
the motions and any costs occasioned by the amendments on a solicitor and
client basis. She relies on the decision of Bonner J. in Bradley Holdings
Ltd.
He said at paragraphs 19-20:
19 Mr.
Silver points out that this case was launched more than three years ago. What
is in question is the amendment to an already amended Reply. The form of the
Amended Amended Reply attached to the Notice of Motion is not the same as the
Amended Amended Reply which the Respondent sought to file only a few weeks ago.
In the course of the hearing of this motion, the Respondent found it necessary
to seek further amendments or further changes to paragraph 7 of the Amended
Amended Reply to make it comprehensible. Following the hearing of last Friday
of the motion to amend, he sought a further clarification in the form of a
corrected paragraph 27. All of this happened following discoveries and at a
time when the case was apparently ready for trial and the hearing date had been
fixed.
20 No
doubt the principle underlying costs on a party-and-party scale is that the
costs should not form an undue burden on the loser. I recognize too that a
party acting reasonably may be obliged to amend its pleadings if investigation
during preparation of the case or if answers on discovery paint the case in a
fresh light. Such amendments are, I think, normal and usual. Here however,
nothing of the sort is suggested in the affidavit filed in support of the
motion. It would seem, so far as I can tell, that the amendment is required
simply because the Respondent failed to properly analyze his case in a timely
fashion. All of that should have been done long before this application for
amendment was made. In my view, the circumstances here meet the scandalous and
outrageous conduct threshold for the award of costs on a solicitor and client
scale. Costs of this motion and costs thrown away will be awarded on that
scale.
Were it not for the submission to which I have referred
at paragraph 27 above, I would be inclined to award costs of the motions and
costs of any additional production and discovery required as a result of the
amendments, to the appellants, but on a party and party basis. Unlike Bradley
Holdings, this is not a case of the respondent failing to analyze the case
properly in a timely way. The opportunity to analyze the case properly only
arose with the production of Appendix I in 2005. The assessor had no such
opportunity, and while I do not condone the delay between 2005 and 2007 in
bringing the motions, the fact remains that much of the added cost of the
litigation to all parties from the amendments is the result of the failure to
produce Appendix I along with the rest of the document. Under these
circumstances, I consider that the parties should each bear their own costs of
the motions. Any costs attributable to the delay in bringing the motions since
the production of Appendix I shall be to the appellants, in the cause, on a
party and party basis.
Signed at Ottawa, Canada, this 20th day of November, 2007.
“E.A. Bowie”
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