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Citation: 2004TCC473
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Date: 20040727
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Docket: 2002-2867(IT)G
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BETWEEN:
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STATUS-ONE INVESTMENTS 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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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR ORDER
Rip J.
[1] The appellant, Status-One
Investments Inc., brought a motion in the Court for an order
under Rule 53 of the Tax Court of Canada Rules (General
Procedure) (hereinafter "Rule 53") striking out the
facts set out in the respondent's amended reply.
[2] In his assessments with respect to
the appellant's 1996, 1998 and 1999 taxation years, the
Minister of National Revenue disallowed the deduction of certain
losses allocated to the appellant by an alleged limited
partnership (called "ASF No. 11") to which
another alleged limited partnership
(called "ARCP") had allocated losses as well. The
reasons for the disallowance included the following: the
appellant had participated in a tax shelter; there were no
partnerships; and, in any event, the allocated losses were not
deductible. According to the respondent, an entity known as
Equicap promoted and marketed investments to ASF No.1. The
Minister also disallowed the deduction for borrowing costs that
the appellant allegedly incurred to invest in ASF
No. 11.
[3] The appellant filed its notice of
appeal on July 22, 2002, and the respondent replied to
it on September 23, 2002. The answer was filed on
October 23, 2002. By order of Judge Dussault dated
December 22, 2003, the respondent was granted leave to
file an amended reply no later than
January 31, 2004, and the appellant was granted
leave to bring a motion to strike certain allegations of fact
contained in the respondent's amended reply should it wish to
bring such a motion.
[4] The respondent's notice of
motion asks for leave to file an amended reply and for an
extension of time. In it, the respondent stated that the purposes
of the amendments that would be made to the reply included the
following:
(i)
to ensure that its contents were in keeping with the recent
decision in Anchor Pointe;[1]
(ii)
to specify certain facts; and
(iii)
to improve the clarity, syntax and grammar of the reply.
[5] The Respondent filed its amended
reply on January 30, 2004, and the appellant argued its
motion before me on February 16, 2004.
[6] The instant motion by the
appellant asks that:
(i)
subparagraph 11(j), as written, be struck out because the
respondent is making an amendment and adding and introducing new
allegations of fact;
(ii)
subparagraphs 11(j.1), (j.2) and (j.3) be struck out because the
respondent is adding and introducing new allegations of fact;
(iii)
subparagraphs 11(aa.1) and (gg.1) be stuck out because the
respondent is adding and introducing new allegations of fact;
(iv)
subparagraph 11(tt), as written, be struck out because the
respondent is making an amendment and is adding and introducing
new allegations of fact;
(v)
subparagraphs 11(uu) and (ww) be struck out because the
respondent is adding and introducing new allegations of fact,
these new allegations are entirely unrelated to the appellant and
the new allegations broaden the scope of the proceedings to
encompass other taxpayers; and
(vi)
paragraphs 11.1 and 11.2 be struck because the respondent is
adding and introducing new allegations of fact.
[7] The portions of the Amended Reply
that the appellant seeks to have struck out are reproduced in
Schedule I to these Reasons for Order.
[8] Pleadings fulfil several
functions. Among other things, when drafted well, they enable the
judge to determine clearly the matter submitted to him for
decision, they enable the defendant (or respondent) to know what
the plaintiff (or appellant) is alleging against him, and they
enable the claimant to know what defences will be raised in
answer to his claim.[2] In addition, pleadings often give their drafters a
better understanding of their case. After an exchange of
pleadings, the parties should know exactly which points are in
issue and what proof each of them will have to make.
[9] By amending a pleading, a party
can, among other things, delete an admission made inadvertently
without having to prove that the fact admitted was not true,[3] or raise
additional issues,[4] provided the amendment is timely and causes the
opposing party no injustice.[5] There is no injustice if the other party can be
compensated in costs.[6] The fact that amendments may make a case more
difficult for a party to win is entirely immaterial on a motion
to amend.[7]
[10] Rule 53 provides:
53.
The Court may strike out or expunge all or part of a pleading or
other document, with or without leave to amend, on the ground
that the pleading or other document:
(a) may
prejudice or delay the fair hearing of the appeal;
(b) is
scandalous, frivolous or vexatious; or
(c) is
an abuse of the process of the Court.
[11] Since the taxpayer's motion was
brought under Rule 53, it is important to summarize the
principles that have emerged from the cases in which a party
seeks to strike out pleadings in whole or in part. In Morris
v. Canada,[8]
Bonner J. summarized the principles as follows:
1. Generally speaking,
allegations of fact in a statement of claim should be taken as
being true or capable of being proven. The reference for
that is Unterreiner v. Wilson
(1982) 40 O.R. 2nd 197, which was later
affirmed by the Court of Appeal.
2. There is a heavy burden on
the attacking party to show that it is clear and obvious that the
pleading is scandalous, frivolous or vexatious, or that it is
otherwise an abuse of the process of the Court. The authority for
that proposition is Erasmus v. The Queen, 91 D.T.C.
5415.
3. "Embarrassing"
means that the allegations are so irrelevant that to allow them
to stand would involve useless expense and would also prejudice
the trial of the action by involving the parties in a dispute
that is wholly apart from the issues. "In order that the
allegations should be struck out from a defense on that ground,
it seems to me that their irrelevancy must be quite clear and, so
to speak, apparent at the first glance. It is not enough that on
considerable argument it may appear that they do not afford a
defense." That is a quotation from City of London v.
Horner (1914) 111 LT 512 a decision of Pickford, L.J.
[12] Similarly, in Enterac Property Corp.
v. Canada,[9]
the Court hesitated to strike out a pleading in whole or in part,
having found that the requesting party had not made it clear and
obvious that the impugned paragraphs were not relevant.
[13] It should also be noted that the
decision whether or not to allow a motion under Rule 53
falls within the discretion of the Court.[10] This discretion results from the
word "may" which Parliament has used at the beginning
of the provision.
[14] Lastly, this Court has stated on
several occasions that the question of whether a pleading should
be struck out in whole or in part is one for the trial judge to
determine, and is not matter to be determined in an interlocutory
motion: see Mungovan v. Canada.[11] The portions of the amended
reply that the appellant seeks to strike out are part of the
assumptions of fact on which the Minister of National Revenue
relied in assessing the appellant. As the Associate Chief Judge
stated in Mungovan, "Assumptions are not quite like
pleadings in an ordinary lawsuit. They are more in the
nature of particulars of the facts on which the Minister acted in
assessing. It is essential that they be complete and
truthful." The trial judge is in a far better position
than a judge hearing a preliminary motion to consider which
assumptions of fact, if any, should be stuck out. It is up to the
trial judge to decide what is relevant and what is not.
[15] I have divided into two categories the
portions of the amended reply that the appellant seeks to have
struck out. One category contains all those portions except
subparagraphs 11(uu) and 11(ww). The appellant submits that these
portions may be amendments or that they add or introduce new
allegations of fact. Subparagraphs 11(uu) and 11(ww) make up
the second category. In the appellant's submission, they add
or introduce new allegations of fact, the facts alleged therein
are entirely unrelated to the appellant, and the new allegations
broaden the scope of the proceedings to encompass other
taxpayers.
[16] I will begin with the first category of
paragraphs and subparagraphs. The appellant submits that the
respondent is raising one or more additional issues in them.
However, appeals such as this one, which are commenced under
subsection 169(1), do not pertain to particular issues.
In TransCanada Pipelines, supra, Rothstein
J.A.[12] did not
rule out the possibility that a notice of appeal can be amended
in a manner that raises additional questions, provided the
amendment is timely and complies with the rules of the Court.
[17] If a party may amend its pleadings to
raise an additional issue involving a single assessment, the
party may also do so in order to change facts set out in the
original pleadings and add new facts and new allegations,
provided they are relevant to the appeal. Consequently, there is
no reason to strike out any portion of the amended reply simply
because that portion deals with an issue that was not raised in
the Reply itself. However, such amendments must be timely, and
must, as a general rule, be done before the examinations for
discovery.
[18] It should be emphasized that, while all
the pleadings have been filed in the instant case, no
examinations for discovery have been held so far. Thus, the
appellant is not yet in a situation where it can no longer
examine an officer of the Crown for discovery to determine
exactly which facts the Minister assumed in making the
assessments under appeal and which evidence the appellant will
have to rebut.
[19] My colleague Dussault J. allowed the respondent
to amend her pleadings because she wanted, among other things, to
specify ("préciser") certain facts. He
determined that the appellant would be compensated for the costs
occasioned by the amendment of the respondent's pleadings. In
the case of a reply to the notice of appeal, the word
"specify" includes the addition of facts. The
Petit Robert (2002) defines the word
"préciser" as follows:
[TRANSLATION]
1.
To express, present in a precise or more precise fashion.
. . .
2.
To make clearer or more certain . . .
3.
. . . to make clarifications
. . . avoid vagueness or allusion.
The word "précision" is defined as
follows:
A detail or precise fact, a precise explanation that ensures
that information is reliable.
Lastly, the Petit Robert (2002) gives the following
meanings for the word "explication":
[TRANSLATION]
1.
Substantiation intended to make something
understood. . . .
2.
Something that accounts for a fact or event.
3.
Clarification (regarding a person's intentions or
conduct).
These definitions show that "préciser"
does not simply mean "reformulate". In sum, it appears
that it is possible to add facts in order to specify certain
other facts.
[20] I do not believe that I should touch
subparagraphs 11(j), (j.1), (j.2), (j.3), (aa.1), (gg.1) or
(tt), or paragraphs 11.1 and 11.2, of the amended reply. I do not
find any of the statements therein obviously irrelevant to the
issues involved in the appeals.[13] I am not satisfied that these paragraphs and
subparagraphs fail to specify certain facts. The trial judge will
be in a much better position than me to assess their relevance
and determine whether they meet at least one of the stated
objectives of the motion for leave to amend the reply, namely to
determine whether they truly specify certain facts.
[21] In the instant case, Mr. Fournier,
counsel for the respondent, submitted that subparagraphs 11(uu)
and (ww) are relevant in that they serve to determine whether the
taxpayer intended to earn a profit from the operation of ASF No.
11.
[22] The appellant claims that the facts set
out in subparagraphs 11(uu) and (ww) may deal with taxpayers
other than the appellant. It should be recalled that
subparagraphs 11(uu) and (ww) are worded as follows:
[TRANSLATION]
11(uu) During the years 1993 to 1998, Equicap promoted
an marketed several limited partnership arrangements by means of
offering memoranda;
11(ww)The important aspects of these limited partnership
arrangements were identical to AFS No. 11, notably in
terms of structure, operating method, agreements signed, parties
involved, actions taken, objectives pursued and financial and tax
results obtained.
[23] Were it not for the decision of the
Federal Court of Appeal in
The Queen v. Global Communications
Ltd.,[14] I
would dismiss the appellant's motion in respect of
subparagraphs 11(uu) and 11(ww) as well. In the instant
appeals, to determine whether a partnership existed, regard must
be paid, inter alia, to the true intention of the parties
as appearing from the whole facts of the case.[15]
[24] In Global, the Federal Court of
Appeal affirmed a decision of this Court dismissing the
Crown's application for leave to amend its reply by adding an
allegation that a person through whose activities the taxpayer
had bought certain seismic data, which data then formed the basis
of a deduction for Canadian Exploration Expenses, had engaged in
similar activities with other taxpayers. The Federal Court
of Appeal agreed with the Tax Court of Canada judge that the
allegation was not relevant, and that adding the allegation would
have broadened the litigation unnecessarily. Neither court seems
to have been unduly influenced by the fact that the application
had been made two months before the date set down for the trial.
The situation in the instant case is analogous to that in
Global, supra: the Crown wishes to add to its reply
allegations that a person, through whose activities the appellant
acquired a share in a partnership, had engaged in similar
activities with other taxpayers.
[25] In argument, counsel for the appellant
stated that the allegations in the Notice of Appeal, the Reply to
the Notice of Appeal and the answer contain no reference to any
investments other than the appellant's investments in AFS
No. 11, with the result that more than 80% of the documents
contained in the respondent's list of documents cannot be the
subject of questions on discovery. Counsel for the appellant
estimates that there are more than 6,000 documents in
question.
[26] The appellant believes that the facts
set out in subparagraphs 11(uu) and (ww) merely seek to extend
the debate to documents involving investments made by taxpayers
other than the appellant ― investments in which the
appellant did not participate at all.
[27] The appellant's counsel, Mr.
Gauthier, said that the exception in subsection 241(4) of
the Income Tax Act ("the Act") regarding the
disclosure of documents to third parties applies only where such
disclosure is necessary to determine the amount of tax payable.
It is clear, upon reading subparagraphs 11(uu) and (ww) of the
amended reply, that the allegations made therein and the
documents potentially related thereto are not necessary. Indeed,
in subparagraph 11(ww), the respondent clearly states that other
limited partnerships's documents are identical to those of
AFS No. 11. If so, their production is not just unnecessary
but entirely superfluous as well. Reproducing a document four or
five times adds nothing to the debate and merely encumbers the
Court file.[16]
[28] I do not agree with counsel for the
respondent that subparagraphs 11(uu) and (ww) are relevant in
that they serve to determine whether the taxpayer intended to
make a profit from the operation of ASF No. 11. At this
stage, there is no need to include subparagraphs 11(uu) and
11(ww) in the amended reply. Their inclusion would, as it did in
Global, supra, unduly prolong the discovery and the trial
without any assurance that the inquiry would deal with questions
relevant to the assessments in issue.
[29] The Minister purportedly assumed the
facts set out in subparagraphs 11(uu) and (ww) in assessing the
appellant. In Anchor Pointe, supra, Rothstein J.A.
explained:
The pleading of assumptions gives the Crown the powerful tool
of shifting the onus to the taxpayer to demolish the
Minister's assumptions. The facts pleaded as assumptions must
be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[30] Subparagraphs 11(uu) and (ww) muddy the
appeal process. At this stage of the process, Equicap's
actions appear to have no direct bearing on the fundamental
issues raised by the appeals. Considerable caution should be
exercised when third parties are involved. The relevant actions
are those of the appellant, which has been assessed and is
entitled to know why. In some cases, it is quite possible that
relationships or ties between an appellant and third parties will
be relevant. Among other things, I have in mind cases
involving securities trading. However, I have found nothing in
the parties' pleadings to indicate that the facts alleged in
subparagraphs 11(uu) and (ww) are relevant. An appellant must
always make his own case. The Minister must assess
taxpayers based on what the taxpayers have or have not done, and
not, generally, on the conduct of a third party.
[31] Consequently, only subparagraphs 11(uu)
and (ww) will be struck from the amended reply. Costs will be in
the cause.
[32] Signed in Ottawa, Canada, this 27th day
of July 2004.
Rip J.
Translation certified true
on this 24th day of March 2005
Jacques Deschênes, Translator
SCHEDULE I
11.
The Minister relied on the following assumptions or findings of
fact in making the reassessments in issue:
[TRANSLATION]
"Tax shelter investment" and
"limited-recourse amount"
(j)
having regard inter alia to the statements made in the
offering memorandum concerning the units of AFS No. 11
("Offering Memorandum") and to a financial analysis
prepared by Alliance Equicap Inc. ("Equicap"), the
Minister determined that it was reasonable to consider that the
purchase of a unit of AFS No. 11 in 1996 would give rise, at
the end of a taxation year ending within the four coming years,
to deductible losses, for the purchaser, that would be equal to
or greater than the cost of the unit at the end of the year less
the total value of the benefits described in subparagraph
11(p.1);
(j.1) the Minister determined that it would
be reasonable to consider that the acquisition of a unit of
Alliance No. 11 in 1996 would give rise, at the end of
a taxation year ending within the four coming years, to
deductible losses, for the purchaser, that would be equal to or
greater than the cost of the unit at the end of the year less the
total value of the benefits described in
subparagraph 11(p.1);
(j.2) the loans made by Berkshire to the
Participants were debts for which the recourse was limited,
having regard to the agreements between Alliance No. 11,
Warner Bros, Berkshire, the Bank and Equicap, among others;
(j.3) the total amount of loans by Berkshire
to Participants was $25,403,920;
...
Reimbursement of loan resulting from Studio Loan Agreement
and reimbursement of promissory notes
(aa.1) a series of predetermined
transactions took place on December 3, 1996, and
January 30 1998, so that Alliance No. 11 could
reimburse part of the loan resulting from the Studio Loan
Agreement, Warner Bros. could pay the Defined Gross
Payments, and a mechanism could be set up to distribute revenues
to the Participants and enable them to pay interest and reimburse
the loan to Berkshire upon maturity;
(gg.1) under Interest Support Agreement
No. 1, signed on January 30, 1998, Equicap acted
on the commitment it made in the Offering Memorandum with regard
to AFS No. 11, and promised, for the benefit of the
Participants, to provide the funds needed to pay the interest
that they owed until maturity, i.e. January 30, 2006;
...
Alliance No. 11 as a tax shelter
(tt)
having regard inter alia to the statements made in the
Offering Memorandum concerning AFS No. 11, and to the
financial analysis prepared by Equicap, the Minister determined
that it was reasonable to consider that the purchase of a unit of
AFS No. 11 in 1996 would give rise, at the end of a taxation year
ending within the four coming years, to deductible losses equal
to or greater than the cost of the unit at the end of the year
less the total value of the benefits described in subparagraph
11(p.1);
Other limited partnership arrangements similar to
AFS No. 11.
(uu) During the years 1993 to
1998, Equicap promoted and marketed several limited partnership
arrangements by means of offering memoranda;
. . .
(ww)
The important aspects of these limited partnership arrangements
were identical to AFS No. 11, notably in terms of structure,
operating method, agreements signed, parties involved, actions
taken, objectives pursued and financial and tax results
obtained;
11.1 Agreements were
signed to enable Alliance Film Holdings No. 11 Inc., a
subsidiary of Alliance Communications Corporation, to assume the
debt that Alliance No. 11 owed to Warner Bros.,
under the Studio Loan Agreement, in exchange for Alliance
No. 11 Class "B" units. At the time that this
purchase option was exercised by Alliance Film
Holdings No. 11 Inc., the Alliance Class
"B" units had no market value.
11.2 All the
agreements related to the use of the Bank's credit facility
grant AFS No. 11 and the Participants the right to
receive amounts enabling the Participants to reimburse their loan
to Berkshire and the interest thereon. These benefits were
granted to eliminate or reduce the effect of a loss that the
Participants and AFS No. 11 might have incurred as
partners in their respective partnerships.
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