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Citation: 2008TCC129
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Date: 20080418
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Docket: 2007-763(GST)G
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BETWEEN:
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1072174 ONTARIO LTD.,
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Appellant,
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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
Bowman,
C.J.
[1] This is a motion for an order striking
out certain paragraphs of the Reply to the Notice of Appeal. The first group of
impugned paragraphs are the following:
B. ISSUE TO BE DECIDED
25. He accepts the Appellant’s
statement of the issues except that the assessment does include export sales.
. . . . .
D. GROUNDS RELIED ON AND RELIEF
SOUGHT
28. He submits that the Appellant
could not prove that it had delivered vehicles to status Indians on a reserve
and that Minister correctly reassessed the Appellant for the GST that it should
have charged, collected and remitted pursuant to sections 165, 221 and 225 of
the Act.
29. He submits that the Appellant was
not relieved from collecting and remitting GST on the supply of vehicles by
reason of s. 87 of the Indian Act as neither it nor its agent,
Courtesy Auto Haulage, delivered the vehicles to the Six Nations reserve.
30. He submits that claimed vehicle
deliveries to a status Indian on a reserve were a sham.
31. He submits that the Appellant
could not prove that it had exported vehicles or sold vehicles directly to a
person who had exported the vehicle. The claimed export sales were not supplies
that were zero-rated under Part V, Schedule VI of the Excise Tax and
the Appellant was required to collect and remit GST on them.
32. He submits that the Appellant did
not export a vehicle (VIN 3VW) or sell the vehicle directly to a person who
exported that vehicle. The supply of the vehicle was not zero-rated under Part
V, Schedule VI of the Excise Tax Act and the Appellant was required to
collect and remit GST on it.
33. He submits that the Minister made
adjustments in order to establish the correct amounts of GST and ITC’s for each
of the reporting periods and no posting errors were made.
34. Penalties and interest were
properly assessed under s. 280 of the Act. The Appellant has failed to
collect and remit amounts owing as required and was not duly diligent in
ensuring that the claims that it made were proper.
35. He submits that the Appellant’s
liability to pay GST is not affected by the error made in the statement of net
tax in the notice of reassessment.
. . . . .
37. He requests that the appeal be dismissed with
costs.
[2] The grounds for the
motion are:
(a) The Applicant has been reassessed for
non-collection of GST on the sale of vehicles which the Applicant says were
relieved from tax because they were sold and delivered to Indians on a reserve
or exported. Since the Respondent pleads in paragraph 24 of the Reply that the
223 said vehicles (see paragraph 26 of the Reply and Schedule B thereto) were
never purchased by the Applicant, the Applicant cannot be subject to
reassessment for non-collection of GST on their sale – i.e. if there was no
purchase, there can be no sale or liability to collect GST.
The paragraphs sought to be struck disclose no issue
or grounds for opposing the Appeal with respect to the vehicles, because the
Respondent pleads they were never purchased. The Applicant makes this motion
under section 53 or, in the alternative, under s. 58(1)(a) of the Tax
Court of Canada Rules (General Procedure) (the “Rules”), as this Honourable Court considers
appropriate.
[3] The
second group of paragraphs of the Reply which the appellant seeks to have
struck out are:
26. In the alternative, the issue is
whether the Appellant should be denied claimed input tax credits in the
calculation of its net tax for the reporting periods at issue on its purchase
and sale of 223 vehicles where the transactions were a sham.
. . . . .
36. In the alternative, he submits
that in its calculation of net tax for the period 1997‑09‑01 to
1998‑12‑31 the Appellant improperly claimed ITC’s on vehicle
purchases which must be disallowed because:
a) the transactions were
shams;
b) the vehicles were
either owned by others or already out of the country no property was available
for the Appellant to acquire during a reporting period to include in the
calculation of its input tax credits pursuant to subsection 169(1) of the
Act;
c) the vehicles were
either owned by others or already out of the country any evidence the Appellant
provided with respect to the purchase of those vehicles would be insufficient
to enable input tax credits to be determined as required by
subsection 169(4) of the Act;
d) the inclusion of
consideration for vehicles owned by others or already out of the country at the
time of the alleged purchase by the Appellant in the calculation of input tax
credits would be unreasonable in the circumstances within the meaning of
subsection 170(2) of the Act.
[4] The grounds for the
motion to strike these paragraphs are as follows:
(a) The Applicant has been reassessed for
non-collection of GST on the sale and export of the said 223 vehicles.
Paragraphs 26 and 36 of the Reply raise for the first time the issue (and
corresponding grounds and relief) that the Applicant should be denied input tax
credits for GST actually paid by the Applicant on its acquisition of the
vehicles because the purchases were allegedly fictitious or a sham. If allowed
to stand, these paragraphs purport to assess on a completely different basis,
involving different issues, transactions and parties than the reassessment
which the Applicant appealed. Such an assertion is barred by s. 298(6.1)
of the Excise Tax Act. The Applicant makes this motion under
section 53 or, in the alternative, under s. 58(1)(a) of the Rules, as
this Honourable Court considers appropriate.
[5] Finally,
the appellant asks that, if the paragraphs are struck out, there be a further
order striking out the rest of the Reply without leave to amend, and allowing
the appeal and vacating the assessment.
[6] The
Notice of Appeal asserts that the appellant sold automobiles to Indians on a
reserve. Paragraph 6 of the Notice of Appeal reads as follows:
6. The
automobiles in issue in this appeal (with the exception of one exported vehicle
— see below) were sold to various individual Indians, including one Indian who
was also a licensed automobile dealer. The automobiles were delivered to
purchasers on the Six Nations Reserve near Brantford Ontario (the “Reserve”).
This allegation is denied by the
respondent.
[7] I
shall try to reduce this somewhat complicated motion to manageable proportions.
Essentially it is based on what the appellant asserts are internally
inconsistent, mutually contradictory and self-eradicating statements in the
Reply to the Notice of Appeal. It is true, the pleading in the Reply contains inconsistencies.
It is however less clear that such inconsistencies entitle the appellant to
have large portions of the Reply struck out and, ultimately, to obtain judgment
allowing the appeal.
[8] The
appellant alleges in its motion that it claimed that it sold 223 vehicles of
which 178 were claimed to have been sold to status Indians and 45 were claimed
to have been exported. The appellant in its Notice of Appeal and its motion has
taken the position that vehicles were sold and the respondent in its Reply
seems to admit that sales were made. Obviously, the assessment of GST is premised
on the assumption that vehicles were sold. The assessor appears not to have
questioned that sales were made but he or she was, apparently, not satisfied
that the vehicles were sold to Indians or that they were delivered to a reserve
or that they were exported.
[9] Up
to this point the issue seems relatively clear. The appellant says it sold 178
vehicles to Indians and delivered them to a reserve and that it exported
another 45 vehicles. Therefore it claims that the sales are exempt from GST or,
in the case of exported vehicles, zero-rated. Counsel for the appellant draws a
distinction between exported vehicles, which are zero-rated, and vehicles that
have always been located abroad and are sold to non-residents. These, he says,
are simply not taxable because they are not caught by the taxing provisions of
the Excise Tax Act. This distinction is not raised in the Notice of
Appeal and is not particularly germane to this motion. Initially, the Crown
appears to have accepted that vehicles were sold because it imposed GST, but it
refused the exemption on the basis that it was not satisfied with the evidence
provided that the vehicles were sold to Indians and delivered to a reserve or
that some vehicles had been exported. This raises a clear factual justiciable
issue.
[10] From this point onwards things get a little murkier. I do not think it
is necessary for the purposes of this motion that I deal with the actual
numbers in detail. It is obvious from the Notice of Appeal and Reply that
assessment was a complex one involving many transactions and a multiplicity of
calculations. Many of the assumptions on which the August 24, 2001
assessment was based were carried forward to the reassessment of
November 14, 2006. The basic assumptions on which the
August 24, 2001 assessment was based were contained in paragraphs
21(e) and 21(i) of the Reply. They were:
“the Appellant had
no supporting documents for its claimed export sales: …”
and
“none of the 178 alleged
sales to status Indians … could be shown as having been received by a status
Indian purchaser on a reserve;”
[11] Paragraph 21 of the Reply then goes on to set out in some detail
a number of evidentiary problems that the Minister of National Revenue had,
such as faulty documentation, insufficient information, purported sales to
Indians where the vehicle had allegedly been exported or were located outside
of Canada and a number of other alleged irregularities.
[12] The reassessment of November 24, 2006 repeats the same assumptions
and goes on to allege some further assumptions such as the assumption that 97
of the vehicles in question that were alleged to be sold to status Indians were
either outside Canada or owned by other persons. It is alleged
that some of the alleged transactions were shams.
[13] I set out below the grounds relied upon by the respondent.
D.
GROUNDS RELIED ON AND RELIEF SOUGHT
28.
He
submits that the Appellant could not prove that it had delivered vehicles to
status Indians on a reserve and that Minister correctly reassessed the
Appellant for the GST that it should have charged, collected and remitted
pursuant to sections 165, 221 and 225 of the Act.
29. He submits that
the Appellant was not relieved from collecting and remitting GST on the supply
of vehicles by reason of s. 87 of the Indian Act as neither it nor
its agent, Courtesy Auto Haulage, delivered the vehicles to the Six Nations
reserve.
30. He submits that
claimed vehicle deliveries to a status Indian on a reserve were a sham.
31. He submits that
the Appellant could not prove that it had exported vehicles or sold vehicles
directly to a person who had exported the vehicle. The claimed export sales
were not supplies that were zero‑rated under Part V, Schedule VI of the Excise
Tax and the Appellant was required to collect and remit GST on them.
32. He submits that
the Appellant did not export a vehicle (VIN 3VW) or sell the vehicle
directly to a person who exported that vehicle. The supply of the vehicle was
not zero-rated under Part V, Schedule VI of the Excise Tax Act and the
Appellant was required to collect and remit GST on it.
33. He submits that
the Minister made adjustments in order to establish the correct amounts of GST
and ITC’s for each of the reporting periods and no posting errors were made.
34. Penalties and
interest were properly assessed under s. 280 of the Act. The Appellant has
failed to collect and remit amounts owing as required and was not duly diligent
in ensuring that the claims that it made were proper.
35. He submits that
the Appellant’s liability to pay GST is not affected by the error made in the
statement of net tax in the notice of reassessment.
36. In the
alternative, he submits that in its calculation of net tax for the period 1997‑09-01
to 1998-12-31 the Appellant improperly claimed ITC’s on vehicle purchases which
must be disallowed because:
a) the
transactions were shams;
b)
the
vehicles were either owned by others or already out of the country no property
was available for the Appellant to acquire during a reporting period to include
in the calculation of its input tax credits pursuant to subsection 169(1)
of the Act;
c)
the
vehicles were either owned by others or already out of the country any evidence
the Appellant provided with respect to the purchase of those vehicles would be
insufficient to enable input tax credits to be determined as required by
subsection 169(4) of the Act;
d)
the
inclusion of consideration for vehicles owned by others or already out of the
country at the time of the alleged purchase by the Appellant in the calculation
of input tax credits would be unreasonable in the circumstances within the
meaning of subsection 170(2) of the Act.
37. He requests that the
appeal be dismissed with costs.
[14] What it boils down to is that the Crown appears to be saying to the
appellant “Yes, we accepted your allegation that you sold the vehicles. If we
had not we would not have assessed you GST. What we do not accept is that the
sales were exempt because we are not satisfied you sold the vehicles to Indians
on a reserve or that they were zero-rated because you exported them. And, by
the way, in respect of the vehicles on which we taxed you, we gave you ITCs.
Now, on reflection, we are not so sure you really owned some of the vehicles
and so, in the alternative, we think you should not get the ITCs we gave you.”
To this, the appellant replies “Well, if you do not think we owned the vehicles
it follows that we could not have sold them so what makes you think you can tax
us on these non‑existent transactions?” To this, the Crown’s rejoinder is
“Well, you said you sold them and you are stuck with that assertion unless you
can disprove it. Our argument that perhaps you should not have been given the ITCs
was just an alternative and it arises from the seemingly inconsistent and
confusing documentation you have put forward. You cannot blame us for a
situation that is largely of your own making.”
[15] In this imaginary dialogue between the parties I have tried to set out
what is the essence of the problem. What it attempts to do is to illustrate in
a simple and graphic way the complexity of the issues raised in this
litigation.
[16] I agree with Mr. Wyslobicky that there are inconsistencies in the
Crown’s pleading of assumptions. In one paragraph the respondent says
essentially that GST was assessed because sales were made and ITCs were
allowed, but that no exemption was allowed because section 87 of the Indian
Act was not complied with. In another paragraph the Crown pleads that some
of the transactions were shams or that some of the vehicles were outside of Canada when they were purportedly sold to Indians on
reserves. These are inconsistencies. It is theoretically possible, I suppose,
that the assessor or assessors can make inconsistent assumptions. This may well
relieve the appellant of the traditional onus. The Crown can assert facts that
are inconsistent with assumptions if it is prepared to accept the onus.
[17] Moreover, Mr. Wyslobicky contends that the Minister cannot,
outside the time limit for reassessing, argue that the appellant should not
have been allowed the ITCs in the first place. This may be true but it is not
something that can be readily dealt with on motion to strike under Rule 53
or Rule 58. It should be dealt with at trial.
[18] There have been many cases in this court and the Federal Court of
Appeal about what the respondent can plead in support of an assessment and what
she cannot. They are not all readily reconcilable. I do not think that any
useful purpose would be served by yet another lengthy analysis of the
jurisprudence on practice and procedure in this court. Some of the cases were
decided by me, and they have had mixed success in the Federal Court of Appeal.
Virtually all of the cases are contained in the appellant’s or the respondent’s
books of authorities. I rely on those authorities that support the view that a
court should be reluctant to strike out pleadings except in the clearest and
most obvious of cases.
[19] If I follow the rule, as I must, that I can look only at the pleadings
and not go beyond them I see confusion on both sides. The Crown alleges facts
and assumptions that are inconsistent both with the claims asserted by the
appellant and with the assertion of liability for GST and the allowance of
ITCs. I do not think it is possible for me at this stage to excise from the
confused mishmash of contradictory assertions on both sides just what ought to
be deleted and should remain. One thing is certain: it would not be appropriate
for me to strike out so much from the Reply that an allowance of the appeal and
a vacating of the assessment could automatically follow. I agree that the Reply
contains inconsistencies but then the Crown’s position itself seems to build on
the appellant’s alleged inconsistencies. The appellant’s attempt to make
capital of the Crown’s perceived inconsistencies creates a procedural anomaly
that can, in my view, best be sorted out by a trial judge who hears all of the
evidence. The assessments give rise to a clear justiciable issue: the assertion
of sales to Indians on reserves or exports, a resulting claim to be relieved of
tax on those transactions and a denial by the Minister of that claim. These are
issues that can fairly be put before a trial judge for determination. I do not
see how the taxpayer can be relieved of the obligation of proving its case or
can have the assessment vacated just because the Minister has come up with some
new ideas in the Reply that may be inconsistent with the basis on which the
assessment was made. Whether the inconsistency changes where the onus of proof
lies or whether the assertion that some transactions were shams amounts to an
attempt to raise a new assessment is not something that can be dealt with in a
motion to strike. It requires a trial. I do not think that a motion to strike
is the way to resolve these problems.
[20] Let us be clear on one thing. Income tax litigation takes place in the
real world against a background of hard practical reality. It is not an
exercise in which the game becomes an end in itself. For cases to be decided on
the basis of an artificial regime created by pleadings and divorced from
reality removes the enquiry from one relating to objective fact to a realm of artificiality
in which the essential commerciality on which taxation is based becomes
irrelevant.
[21] The pleadings of both parties cry out for a demand for particulars and
for a searching and detailed examination for discovery. By the time they go to
trial, if ever, the parties should have a reasonable idea of what was sold, to
whom and where. I am mindful of the wise counsel found in Odgers on High
Court Pleading and Practice, Twenty-Third Edition, at pages 183-4:
But what is a pleader to do
when he is confronted by some flagrantly bad bit of pleading in flat violation
of the rules? Even then, the best thing he can do, as a rule, is to leave it
alone. But there are exceptions. As Bowen L.J. said in Knowles v. Roberts,
“It seems to me that the rule that the court is not to dictate to parties how
they should frame their case, is one that ought always to be preserved sacred.
But that rule is, of course, subject to this modification and limitation, that
the parties must not offend against the rules of pleading which have been laid
down by the law; and if a party introduces a pleading which is unnecessary, and
it tends to prejudice, embarrass and delay the trial of the action, it then
becomes a pleading which is beyond his right.” His opponent’s remedy in such a
case is to apply to the master at chambers for an order that the whole or any
part of a pleading be struck out or amended under Order 18, r. 19(1),
or for an order for particulars under rule 12(3).
But be careful how you
advise any such application. You may materially increase the costs of the
action, and yet reap no compensating advantage for your client, even though you
succeed. You should also be careful which of these alternatives you adopt. If
your opponent has omitted a material allegation, the proper course is to apply
under Order 18, r. 19(1); if, however, he has pleaded a material
allegation with insufficient particularity, the appropriate remedy is to apply
for particulars.
In a personal injury
action, if the Plaintiff fails to serve a medical report and a schedule of
special damages with the Statement of Claim the Defendant may apply to stay the
action until those documents have been provided.
(1) Striking out or
Amending your Opponent’s Pleading
Your attack may be directed at the
whole of your opponent’s pleading or upon certain objectionable portions of it;
the objective may be to expose the entire action or the defence to it as a
sham, or one which cannot possibly succeed in law, and to obtain judgment
accordingly; or it may be to force your opponent to amend the whole or some
part of an embarrassing pleading under pain of having it struck out if he does
not.
[22] One or other or both of the parties may wish to consider amending
their pleadings to clarify precisely what is in issue. In particular I find, from reading the
Reply, that the Crown’s position is confusing. Again, the comments of Odgers
at page 150 are helpful:
Perhaps the best test is this: after you have
drafted your pleading, banish your instructions from your mind for a moment,
and imagine yourself a stranger coming fresh to the matter. Would your draft,
read by itself, convey to his mind a clear conception of your client’s case? If
not, you must make your draft more definite: and this object will often be best
attained by omitting half of it. Length does not conduce to perspicuity. Half a
dozen neat, short sentences, each clear in itself, will tell your story best.
[23] The motion is dismissed. The matter of costs is left to the
determination of the trial judge.
Signed at Ottawa, Canada, this 18th
day of April 2008.
Bowman, C.J.
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