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2005-1474(IT)G
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BETWEEN:
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GLOBTEK INC.,
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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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____________________________________________________________________
Motion heard on September 13, 2005, at Toronto, Ontario,
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By: The Honourable Justice E.A. Bowie
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Appearances:
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Counsel for the Appellant:
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Richard G. Fitzsimmons
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Counsel for the Respondent:
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André L. LeBlanc
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____________________________________________________________________
ORDER
Upon motion by the Appellant for an order striking from the Respondent's Reply to the Notice of Appeal the following subparagraphs and portions of paragraphs and subparagraphs:
(i) that part of paragraph 5 which begins "he admits" and ends "approval of FICS";
(ii) subparagraphs 10(a), (b), (c), (d), (e), (f), (j), (k), and (l) in their entirety;
(iii) that part of subparagraph 10(m) which states "which was due no later than January 31, 2000; and
(iv) subparagraphs 11(a), (b), (c) and (d).
and for costs of this motion on a substantial indemnity scale.
And upon reading the pleadings in this appeal;
And upon hearing counsel for the parties;
It is ordered that the Appellant's motion is allowed as follows:
1. subparagraphs 10(a), (b), (c), (d), (e) and (f) and 11 (a) and (d) of the Reply are struck out;
2. the Respondent will have 15 days from the date of this Order within which she may deliver a Further Amended Reply, consistent with these Reasons for Judgment;
3. the Appellant will have 45 days from the date of this Order within which to deliver an Answer; and
4. the Appellant is entitled to costs of the motion in any event, and forthwith.
Signed at Ottawa, Canada, this 8th of November, 2005.
Bowie J.
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Citation: 2005TCC727
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Date: 20051108
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Docket: 2005-1474(IT)G
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BETWEEN:
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GLOBTEK INC.,
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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
BowieJ.
[1] The Appellant moves to strike out substantial parts of the Reply to the Notice of Appeal herein. Since the notice of motion was served, the Respondent's counsel has delivered an Amended Reply to the Notice of Appeal, which he was able to do as of right since the time for delivery of an Answer by the Appellant had not yet expired. This amended pleading answers some of the Appellant's objections to the original Reply, but not all of them. Although the notice of motion was not then amended, the motion was argued before me on the basis that the Appellant's attack was on the Amended Reply, and I shall deal with it on that basis.
[2] The Appellant's attack on the pleading is focused primarily on paragraph 10, which sets out the assumptions that are said to underlie the reassessments of the Appellant for income tax for the taxation years 1998 and 1999, from which these appeals are brought. For convenience I reproduce here that entire paragraph, italicizing those parts that the Appellant submits should be struck out.[1]
10. In so reassessing the Appellant for its 1998 and 1999 taxation years and in confirming the reassessments, he Minister relied on the following assumptions:
a) In September 2002, a Specific Request for Information was made by the Belgium authorities to the Canadian government under the Exchange of Information Program governed by the Canada-Belgium Income Tax Convention with respect to a series of billings by the Appellant to FICS Group, a Belgium company ("FICS");
b) The Specific Request for Information raised the following three points of concerns by the Belgian authorities:
i) Is GLOBTECK INC. legally incorporated in Canada?
ii) Were the incomes from Fics Group in 1997, 1998 and 1999 reported in Canada?
iii) Were the Belgian bank accounts [Bankque Beuxelles-Lambert account #310-09149226-11 and Generale de Banque account #239-0037256-28] mentioned in GLOBTEC INC. accounting?
c) The Canadian authorities responded to the above questions as follows:
i) Yes, GLOBTEC INC. was legally incorporated in the Jurisdiction of Ontario, Canada.
ii) No, the incomes earned from Fics Group in 1997, 1998 and 1999 were not reported in Canada.
iii) No, the two Belgian bank accounts were not mentioned in GLOTEC INC. accounting as these two accounts were not found in General Ledger Listing provided by Mr. Kotarba.
d) As a result of this specific request, the Canada Revenue Agency ("CRA") conducted an audit of the Appellant for its 1998 and 1999 taxation years;
e) During a meeting with the CRA on August 29, 2002, Mr. Lawrence W. Kotarba, president and sole shareholder of the Appellant, stated that the Appellant had only one contract in 1997 with CMC, a United States company operating in Germany, and no contract in 1998 and that the Appellant was inactive with no income in 1998;
f) During the same meeting, Mr. Kotarba stated that the Appellant only had two Bank of Montreal accounts, namely Account #1253-971 and #4638-913 for Canadian and US dollar transactions respectively;
g) The Appellant reported as income $53,918 earned under a US/German contract for its 1998 taxation year and no income for its 1999 taxation year;
h) In 1997 and in 1998, the Appellant entered into subcontractor contracts (the "contracts") with FICS whereby the Appellant was to provide IT services to FICS;
i) The Appellant invoiced FICS during its 1998 and 1999 taxation years for a total amount of $85,301 and $221,106 respectively;
j) The Appellant failed to declare the income of $85,301 and $221,106 earned under the contracts during its 1998 and 1999 taxation years respectively.
k) REMOVED
l) REMOVED
m) The Appellant's income tax return for the 1999 taxation year was due no later than January 31, 2000 but was not filed until June 17, 2002.
11. In confirming the reassessments for the Appellant's 1998 and 1999 taxation years, the Minister also relied on the following additional assumptions:
a) Mr. Kotarba was not an employee of FICS;
b) Mr. Kotarba did not report any income earned pursuant to any contract with FICS in any country during the 1998 and 1999 taxation years;
c) The Appellant did not account for any salaries being paid to Mr. Kotarba pursuant to any contract with FICS during the 1998 and 1999 taxation years and therefore no expenses were made or incurred by the Appellant with respect to the same;
d) If any of the Appellant's income was directed to Mr. Kotarba, it represents a benefit conferred on a shareholder.
[3] The rules of pleading that apply to the Reply in an income tax appeal are found in Rule 49(1):
49(1) Subject to subsection (1.1), every reply shall state
(a) the facts that are admitted,
(b) the facts that are denied,
(c) the facts of which the respondent has no knowledge and puts in issue,
(d) the findings or assumptions of fact made by the Minister when making the assessment,
(e) any other material fact,
(f) the issues to be decided,
(g) the statutory provisions relied on,
(h) the reasons the respondent intends to rely on, and
(i) the relief sought.
[4] As I said in Zelinski v. The Queen:[2]
[4] The purpose of pleadings is to define the issues in dispute between the parties for the purposes of production, discovery and trial. What is required of a party pleading is to set forth a concise statement of the material facts upon which she relies. Material facts are those facts which, if established at the trial, will tend to show that the party pleading is entitled to the relief sought. ...
[5] The applicable principle is stated in Holmsted and Watson:[3]
This is the rule of pleading: all of the other pleading rules are essentially corollaries or qualifications to this basic rule that the pleader must state the material facts relied upon for his or her claim or defence. The rule involves four separate elements: (1) every pleading must state facts, not mere conclusions of law; (2) it must state material facts and not include facts which are immaterial; (3) it must state facts and not the evidence by which they are to be proved; (4) it must state facts concisely in a summary form.
It is in light of this cardinal rule that Rule 49 must be read. Sub-rule (d) requires the Respondent to plead "the findings or assumptions of fact made by the Minister when making the assessment", but it does not thereby give a license to the Respondent to plead whatever thoughts were in the head of the Minister's assessor, whether material to the correctness of the assessments or not. The function of this Court in hearing an appeal from an assessment of income tax[4] is to conduct a trial, and then determine on the basis of the evidence and the law whether the assessment appealed from is correct. It is not a proceeding in the nature of judicial review of administrative decision-making. It is of no advantage to the taxpayer to show that the assessor acted on irrelevant information. It is material facts, and only material facts, that sub-rules 49(d) and (e) mandate.
[5] Scott L.J. explained the meaning of the word material in the context of pleadings in Bruce v. Odhams Press Ltd.[5]
The cardinal provision in r. 4 is that the statement of claim must state the material facts. The word "material" means necessary for the purpose of formulating a complete cause of action;
That remains an authoritative statement today. In the context of a Reply in this Court, a fact is material if, once established, it would tend to show that the assessment under appeal is a correct one.
[6] The manner in which the taxpayer came to the attention of the Minister, the specific questions posed by the Belgian authorities, the specific answers to those inquiries that were given by the Canadian authorities, and any other facts that led to the decision to audit the taxpayer, are not material to the correctness of the assessment to which that audit gave rise.
[7] I appreciate that in the context of an assessment of a taxpayer to disallow certain charitable tax credits on the basis that he was a participant in a scheme involving widespread abuse, the Chief Justice has recently taken a very liberal view of the proper scope of the Reply.[6] My reading of that case is that the material that the Chief Justice declined to strike out of the Reply comprised particulars of the scheme in which the Minister alleged the Appellant had been a participant. The present case is in no way similar, however. The only issue in this case is simply whether certain payments for work done were revenues of the Appellant, or of its principal shareholder. It is a narrow issue, and there is no reason it should not remain so.
[8] I have recently deplored the proliferation of motions in cases proceeding before this Court under the informal procedure.[7] Nor do I favour unnecessary motions being brought in general procedure cases. Nevertheless, the scope of discovery, including discovery of documents, and of the evidence at trial, is tested against the pleadings, not as they should be framed, but as they are in fact framed. The inclusion in pleadings of allegations that are not material to the outcome of the litigation, including those matters known to the Minister at the time he assessed that can have no bearing upon the correctness of his decision to assess as he did, simply complicates matters that should be simple, and exacerbates the complexity of those that are not. That in turn prolongs both discovery and trial, as well as the preparation for both. It is a notorious fact that the financial burden of litigation upon individuals and small businesses has become crippling in recent years, and anything that promotes focus upon the real issues and excludes the immaterial is, I believe, salutary.
[9] Applying these principles to the Reply, subparagraphs 10(a), (b), (c) and (d) will be struck out as they are immaterial to the validity of the assessments that are under appeal.
[10] Subparagraphs 10(e) and (f) plead that when he reassessed the Appellant in July 2004, the Minister relied on the fact that at a meeting Mr. Kotarba had stated certain facts. This, of course, is incorrect. The facts that the Minister relied on were not the making of the statements by Mr. Kotarba, which is evidence, but rather the facts that he stated. While the materiality of these is not obvious to me, neither is it obvious that they are immaterial. While this may seem a minor matter hardly worth correcting, this Court has commented far too many times to catalogue here on the careless and inaccurate pleading by the Deputy Attorney General of assumptions said by him to have been relied on by the Minister in assessing. The Federal Court of Appeal has also addressed the issue in strong language recently: see Anchor Pointe Energy Ltd. v. The Queen,[8] per Rothstein J.A. at paragraphs 20-28. These subparagraphs will be struck out, but with leave to the Respondent to further amend the Reply within 15 days to plead the facts that the Minister actually relied on that these subparagraphs address, and to delete the evidence.
[11] The other parts of paragraph 10 that were attacked by the Notice of Motion have been cured in the Respondent's Amended Reply.
[12] Mr. Fitzsimmons takes exception to subparagraph 11(a) on the ground that it involves a conclusion of mixed fact and law. In Anchor Pointe, Rothstein J.A. said this at paragraph 26:
... The Minister may assume the factual components of a conclusion of mixed fact and law. However, if he wishes to do so, he should extricate the factual components that are being assumed so that the taxpayer is told exactly what factual assumptions it must demolish in order to succeed. It is unsatisfactory that the assumed facts be buried in the conclusion of mixed fact and law.
If the Respondent wishes to plead facts assumed at the time of confirming the assessment, in addition to those assumed at the time of assessing, it is presumably with a view to arguing that these facts too are presumptively accurate. To so plead, the Respondent must "extricate the factual components". Subparagraph 11(a) will be struck out. Although it involves an element of law, the plea is not one that would normally be found to be objectionable, but for the additional weight that the Respondent may argue that it has as an assumption made on confirmation. The Respondent will have leave to amend the Reply to plead it as an additional "fact", but not one assumed.
[13] Subparagraph 11(d) simply pleads a conclusion of law, and consequently it will be struck out as well.
[14] The Appellant's motion is allowed. Subparagraphs 10(a), (b), (c), (d), (e) and (f) and 11 (a) and (d) of the Reply are struck out. The Respondent will have 15 days from the date of this Order within which she may deliver a Further Amended Reply, consistent with these Reasons for Judgment. The Appellant will have 45 days from the date of this Order within which to deliver an Answer.
[15] The Appellant will have costs of the motion forthwith in any event of the cause.
Signed at Ottawa, Canada, this 8th day of November, 2005.
Bowie J.
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