Bradley Holdings Limited v. The Queen, 2004 TCC 221

Citation: 2004TCC221

Date:20040430

Docket: 2000-1992(IT)G

BETWEEN:

BRADLEY HOLDINGS LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Delivered orally from the bench at Toronto, Ontario, January 21, 2004

Bonner, J.

[1]      This is an application for leave to amend the amended Reply to the Notice of Appeal in an income tax appeal and for consequential relief.

[2]      The amended Reply was filed on June 13, 2003. The application is governed by section 54 of the Rules which reads:

A pleading may be amended by the party filing it at any time before the close of pleadings and thereafter 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.

[3]      The appeal is from an assessment imposing tax in respect of a taxable capital gain realized by the Appellant upon the disposition in October 1997 of shares of Ascent Holdings Inc. I think that is the name of the company. It is found in some of the material and I assume that is right.

[4]      Those shares are taxable Canadian property. The Appellant is a wholly owned subsidiary of Mid-Ocean Investments Limited, a corporation which was formed in Bermuda. Its shares appear to be owned by persons resident in Bermuda only, and management and control seem to be exercised there too.

[5]      The Appellant was incorporated in June of 1994 in Malta as an offshore, non-trading company. In June of 1996, it was converted under Maltese law to an onshore limited liability company. Following the October 1997 disposition of the Ascent shares, the Appellant filed a Canadian tax return reporting the gain from the disposition. The Appellant took the position that the gain was exempt from Canadian tax pursuant to article 13(5) of the Canada Malta Tax Treaty. It reads:

Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, and 4 shall be taxable only in the contracting state of which the alienator is a resident.

[6]      The Respondent does not contend that the Appellant was a resident of Canada. The Respondent does contend that the change in the status of the Appellant to onshore limited liability company under Maltese law materially reduced or eliminated the liability to tax under Maltese law in respect of the transaction in question.

[7]      The Respondent seeks to amend paragraph 7 of the amended Reply to read -- and I refer there to the form of paragraph 7 found in Exhibit A attached to Mr. William's letter of January 19th - the Respondent seeks to amend the Amended Reply, a) by pleading as an issue to be decided a new paragraph 21(h) as follows:

In the further alternative, the Appellant should be disallowed Treaty benefits on the basis of a general anti-abuse rule inherent in treaties. and

          b) by pleading as a ground relied on, a new paragraph 34 as follows:

It is submitted that the Appellant has abused the Treaty on the basis that:

a) the Appellant has attempted to create an illusion that it was no longer excluded from Treaty benefits under Article 28(4).

b) it improperly took advantage of the Treaty benefits by establishing itself in Malta while its sole purpose was to channel income economically accruing to residents of Bermuda; and

c) it attempted to take advantage of the Treaty not to obtain relief from double taxation but to obtain double non-taxation that is no taxation in either one of the contracting states.

[8]      Counsel for the Appellant opposed the amendment to paragraph 7 as originally proposed by the Respondent in the Notice of Motion on the basis that it was vague and incomprehensible, and he certainly had a point. I could not understand it. Counsel for the Respondent then submitted by the letter of January 19th the version set out above as a substitute.

[9]      Counsel for the Appellant opposed the addition of paragraphs 21(h) and 34 on the basis that they raised a new basis of assessment after the expiry of the normal reassessment period as defined in subsection 152(3.1) of the Income Tax Act. In this regard, counsel relied on the decision of the Supreme Court of Canada in Her Majesty the Queen v. Continental Bank of Canada, 1998 DTC 6501.

[10]     Counsel for the Appellant submitted further that the Appellant is entitled to be indemnified in respect of costs occasioned by this very tardy application to amend. He pointed out that there had already been a Notice of Appeal, Reply and Answer filed, and as well an amended Reply. There followed examinations for discovery and the preparation of briefs for use at the pre-hearing conference which, prior to this motion, had been scheduled to take place today. An amended answer and further examinations for discovery are possible consequences of the amendment. Amendments to the pre-hearing conference briefs are a certainty. Granting leave to amend will necessitate postponing the pre-hearing conference and the hearing of the appeal.

[11]     The general principles relating to amendments to pleadings are very well settled. In The Queen v. Canderel Limited, 93 DTC 5357, Décary J.A. said at page 5360.

...while it is impossible to enumerate all the factors that a judge must take into consideration in determining whether it is just, in a given case, to authorize an amendment, the general rule is that an amendment should be allowed at any stage of an action for the purpose of determining the real questions in controversy between the parties, provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interest of justice.

As regards injustice to the other party, I cannot but adopt, as Mahoney J.A. has done in Meyer [(1985), 62 N.R. 70 (C.A.)] the following statement by Lord Esher in Steward v. North Metropolitan Tramways Co. (1886), 16 Q.B.D. 556 at 558.

...There is no injustice if the other side can be compensated by costs: but, if the amendment will put them into such a position that they must be injured it ought not to be made.

[12]     I would refer as well to Visx Inc. v. Nidek Co. et al. (1998), 234 N.R. 94.

[13]     In principle, then, it seems clear that the Respondent ought to be permitted, despite its protracted thrashing about in search of justification for the assessment, to make the amendment sought. The amendment will enable it to place before the Court its argument that there is inherent in the Treaty a general anti-abuse rule which prohibits reliance on the Treaty in the circumstances of this case.

[14]     In my view, the Respondent does not seek to raise a new basis of assessment after the expiry of the normal reassessment period contrary to what is said in Continental Bank, supra. It is true the period has expired here, but all the Respondent seeks to do in making the amendments to which the Appellant objects is to advance a new argument in support of the position to which the Respondent has adhered all along, namely, that the Appellant is not entitled to shelter under the Canada Malta Treaty. That is precisely what the Respondent is entitled to do under subsection 152(9) of the Income Tax Act.

[15]     There is no suggestion here that the Appellant is unable to adduce any evidence which may be required to deal with the amendments.

[16]     With regard to Continental Bank, there is nothing which can usefully be added to what I said at paragraphs 13 to 17 of my reasons in Smith Kline Beecham Animal Health Inc. v. Her Majesty the Queen, 2000 DTC 1526.

[17]     The Respondent may, therefore, file and serve an Amended Amended Reply as requested. And for greater clarity, I note that paragraph 7 is to be in the form set forth above. I note too, in light of what was said a moment ago, that Exhibit B to Mr. William's letter of January 19th, 2004, the corrected paragraph 27 is to be the form in the Amended Amended Reply of that paragraph.

[18]     Turning to costs, the general principles are set out in section 147 of the Rules of this Court. Paragraphs 3(g) and (i) are of particular importance here. As a general rule, costs are awarded to a successful party on a party-and-party basis. The party-and-party scale is not meant to indemnify the successful party. Here the Appellant seeks an award of costs amounting to an indemnity in respect of those costs thrown away as a consequence of the amendment.

[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.

[21]     Now, I have a draft of an order here. There are two ways we can go about this. I do not want any more delays. You recall we discussed on Friday a schedule, and I would like to see it adhered to. I think that is owed to the Appellant. This case was started close enough to four years ago. In May, it will be four years ago. So I am going to read this thing, and I would like to hear comments. I know it is perhaps unfortunate that I do not have a written draft to put in front of you. The other thing we could do is direct you to prepare an order under section 169 of the Rules, get the approval of the Appellant, and deal with it that way. What I want to do is get the show on the road.

DRAFT ORDER READ BY JUSTICE BONNER:

"Upon application by the Respondent for:

A)an Order granting leave to amend the amended Reply to the Notice of Appeal;

B) an Order extending the time for the completion of the examinations for discovery;

C) an Order abridging time pursuant to Rule 12 of the General Procedure Rules of the Tax Court of Canada for the filing of this motion and;

D) for such further Order as to the Court shall seem meet;

And upon reading the affidavits of David Poore and John Tepelenas and the Respondent having amended the desired wording of paragraphs 7 and 27 of the proposed amended Amended Reply, it is ordered that:

1) the Respondent shall be at liberty to file and serve on or before January 26th, 2004, an amended Amended Reply to the Notice of Appeal in the form attached to the Notice of Motion save for paragraphs 7 and 27 which shall be amended to read as set out in the letter from Mr. Williams of January 19th.

2) the Appellant shall have all reasonable and proper costs of this motion, on a solicitor client basis, in any event of the cause such costs to include

a) costs if any of preparing an answer;

b) costs if any, of further examinations for discovery and production of documents;

c) costs of revising the Appellant's pre-hearing conference brief.

3) The Appellant shall be at liberty to file and serve an answer to the amended Amended Reply on or before February 5th of this year.

4) Further examination for discovery if any are to be completed on or before February 11th, 2004.

5) Statements if any of the proposed evidence in chief of expert witnesses as required by section 145 of the Rules shall be filed and served on or before February 17th, 2004.

6) Pre-hearing conference briefs shall be filed and served on or before February 19th, 2004.

And the same day as the deadline for pre-hearing conference briefs. Pre-hearing conference briefs shall be filed and served on or before February 17th, 2004. And if this needs any reworking, I will hear what everybody has to say about it.

7) A pre-hearing conference under section 126 of the Rules shall be held at 200 King Street West, Toronto, Suite 902 on February 24th, 2004, commencing at 9:30 a.m.

8) This appeal is set down for hearing at the Tax Court of Canada, 200 King Street West, Suite 902, Toronto, Ontario, on Wednesday March 24, 2004, for an estimated duration of three days.

Signed at Toronto, Ontario, this 30th day of April 2004.

"Michael J. Bonner"

Bonner, J.