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Citation: 2003TCC101
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Date: 20030314
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Docket: 2001-3839(IT)G
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BETWEEN:
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CHARLES B. LOEWEN,
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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, A.C.J.
[1] The appellant seeks an order
striking out the entire reply to the notice of appeal, allowing
the appeals and vacating the assessments appealed from for the
appellant's 1993, 1994 and 1995 taxation years. Alternatively
he asks that the reply be struck out without leave to amend. The
grounds for these two requests are that the reply is scandalous,
frivolous or vexatious or is an abuse of the process of the court
within the meaning of section 53 of the Tax Court of
Canada Rules (General Procedure). In the further alternative
the appellant seeks an order striking out or expunging a large
number of paragraphs, subparagraphs, phrases or references in the
reply on the basis that they seek to advance new and different
assessments from those under appeal.
[2] A brief overview of the litigation
is necessary to an understanding of the issues on this
motion.
[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 the 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.
[25] Paragraph 16 is not really a
proper statement in an affidavit. It is legal argument and a
legal conclusion. Moreover it is inconsistent with the statements
in the two reports. Specifically, she set out no facts that she
assumed or found to support the allegation that the co-owners,
AIRS II Inc. and Arachnae were not dealing at arm's
length. She clearly did not assume that they were not dealing at
arm's length. Indeed if she had assumed that they were not at
arm's length she would unquestionably have said so and based
her assessment on section 69 of the Act. Rather, in
her letter of March 2, 2000 she refers to the $8,000,000 as
"unreasonable". In the list of issues in her position
paper, set out above, she deals in point 2 only with
reasonableness in the context of value.
[26] The reports in my view support the
conclusion that she assumed
(a) the co-owners were dealing
at arm's length;
(b) the software was acquired for the
purpose of gaining or producing income from a business or
property;
(c) the promissory notes were not
contingent. I might observe on this last point that whether a
promissory note is contingent or not is a question of law, not a
fact to be assumed. Her conclusion is contained in the
sentence
However there is no evidence to support that the debt was not
intended to be repaid.
[27] This is not a strong assumption, if it
can be described as an assumption at all.
[28] Therefore, it was open to the
respondent to plead that the Minister assumed
(a) that the value of the
software did not exceed $1.6 million on December 31, 1993
and
(b) the software was not available for
use in the appellant's 1993 taxation year.
[29] Before I come to the request to strike
out specific paragraphs, subparagraphs, phrases and references in
the reply I shall deal with the request to strike out the entire
reply and allow the appeals and vacate the assessments or strike
out the reply without leave to amend. The grounds are that the
reply is scandalous, vexatious or frivolous or is an abuse of the
process of the court.
[30] It may be that some of the statements
in the reply offend some of the rules of pleading. I shall
discuss this question below. However to strike out a reply
entirely or allow an appeal on the ground that some of the rules
have been broken strikes me as unduly draconian. The words
"frivolous, scandalous, vexatious or an abuse of
process" have acquired a meaning in procedural law but
whether taken in their legal sense or their popular sense they
connote a high degree of impropriety or a virtual certainty that
the position taken in the pleading is without merit. This is
sometimes referred to as the "plain and obvious" rule
enunciated in Hunt v. Carey Canada Inc., [1990]
2 S.C.R. 959 at page 980. See also Davitt v.
The Queen, 2001 DTC 702. It is by no means plain
and obvious that the Crown's position is so lacking in merit
that it cannot proceed.
[31] The motion to strike out portions of
the reply is rather more complex. It is based upon the combined
effect of the decision of Bastarache J. in Continental
Bank of Canada v. Canada, [1998] 2 S.C.R. 358, and
subsection 152(9) which was enacted after the Continental
Bank judgment. The observations of Bastarache J. upon
which the appellant relies in this motion were adopted by
McLachlin J. (as she then was) writing for the majority. In
light of the importance of Bastarache J.'s statement I
set it out in full, followed by McLachlin J.'s
endorsement of his statement. Bastarache J. said at
pages 364-368:
Issues
7 Because I have found in the
Leasing Appeal that the reassessment of Leasing should be
maintained because Leasing did not roll its assets into a valid
partnership pursuant to s. 97(2) of the Act, the assessment on
the Bank's disposition of the "partnership
interest" does not arise. The appellant, however, set out an
alternative argument for the first time in this appeal that
should be addressed. The appellant argued that if the Court held
in the Leasing Appeal that it was the Bank and not Leasing
that acted as the vendor when the assets were sold to Central
Capital Corporation ("Central"), the reassessment of
the Bank in this appeal should be restored on the basis that
having acquired the leasing assets as properties distributed to
it under s. 88(1) of the Act, the Bank is taxable on the
recapture of capital cost allowance under s. 13(1) of the Act in
the amount of $83,052,657. The issue that arises out of this
argument is whether the Crown is permitted to substitute its
original reassessment of the Bank for an assessment on a
different basis that amounts to the same amount of income.
Analysis
8 Given the finding in the
Leasing Appeal that it was Leasing and not the Bank that
sold the assets to Central, it is not necessary to determine
whether the Bank would be liable for the recapture of capital
cost allowance on the basis that it acquired the leasing assets
as properties distributed to it under s. 88(1) of the Act.
However, even if it was found that the Bank was the vendor of
those assets and liable for the recapture, the appellant could
not succeed in upholding its reassessment of the Bank in this
appeal.
9 The only basis given in the
Notice of Reassessment that Revenue Canada issued to the Bank for
the 1987 taxation year was that the amount in question was
alleged to constitute a "trading gain on sale of Central
Capital Leasing's partnership interest". Revenue Canada
did not reassess the Bank on any other basis including that the
Bank sold depreciable leasing assets or was otherwise liable for
recapture of capital cost allowance pursuant to s. 88(1) of the
Act, as the appellant now alleges for the first time in this
Court.
10 The applicable limitation
period under the Act for assessing a taxpayer is four years from
the date of issuance of Revenue Canada's Notice of
Reassessment (ss. 152(3.1) and 152(4) of the Act). As a result,
the latest that the Minister could have reassessed the Bank for
the recapture of cost allowance was October 12, 1993. The Crown
is not permitted to advance a new basis for reassessment after
the limitation period has expired. The proper approach was
expressed in The Queen v. McLeod, 90 D.T.C. 6281
(F.C.T.D.), at p. 6286. In that case, the court rejected the
Crown's motion for leave to amend its pleadings to include a
new statutory basis for Revenue Canada's assessment. The
court refused leave on the basis that the Crown's attempt to
plead a new section of the Act was, in effect, an attempt to
change the basis of the assessment appealed from, and
"tantamount to allowing the Minister to appeal his own
assessment, a notion which has specifically been rejected by the
courts". Similarly, the Federal Court of Appeal has
described such attempts by the Crown as "a belated attempt
to put the appellant's case on a new footing"
(British Columbia Telephone Co. v. Minister of National
Revenue (1994), 167 N.R. 112, at p. 116).
11 It was open to the appellant
to assess the respondent on the basis that it was liable for the
recapture of cost allowance when it issued its Notice of
Reassessment on October 12, 1989 or anytime prior to the
expiration of the limitation period for reassessment. The
appellant did not choose to do so and cannot now be permitted to
change its assessment eleven years later. The appellant argued
that the liability of the respondent for the assessment pursuant
to s. 13(1) is an alternative reason for its previous assessment,
not a new assessment or reassessment. According to the appellant,
because the liability for recapture under s. 13(1) would arise
solely as a consequence of a finding that Leasing, in the
Leasing Appeal, was not the vendor of the assets in the
sale to Central, a reassessment on this basis is merely a legal
conclusion flowing from the proper application of the
statute.
12 To accept this
characterization by the appellant would, in effect, create a
situation where the Crown is permitted to raise new arguments
simply because other arguments failed in the courts below. Unlike
the Minister in Minister of National Revenue v. Riendeau
(1991), 132 N.R. 157 (F.C.A.), the Minister in the present case
has never sought to amend, correct or reissue the reassessment of
the Bank to include a claim for recapture under s.
88(1)(f) of the Act. Moreover, the appellant's
characterization of the argument as an alternative one ignores
the fact that Leasing and the Bank are two separate taxpayers.
What the Minister is seeking to do is to substitute an assessment
of one taxpayer for the assessment of another taxpayer because
the first assessment did not succeed.
13 Taxpayers must know the basis
upon which they are being assessed so that they may advance the
proper evidence to challenge that assessment. Here, it is not
clear that there is the proper factual basis to support a
reassessment on the basis proposed by the appellant. For example,
the value of the goodwill associated with the Bank's leasing
business, which was transferred to Central in December 1986,
could bear on the appellant's new claim for recapture by the
Bank. It is not possible to measure the extent to which the Bank
might otherwise be liable for recapture, or the Bank's income
for tax purposes, without being able to properly allocate the
purchase price paid by Central between goodwill and leasing
assets. Because the Bank was not assessed on the recapture, the
evidence relating to the allocation of the purchase price was not
adduced at trial. To allow the appellant to proceed with its new
assessment without the benefit of findings of fact made at trial
would require this Court to become a court of first instance with
regard to the new claim.
[32] McLachlin J. agreed with
Bastarache J. on this point, as follows, at
pages 369-370:
18 The next event occurred on
December 29, 1986 when the Bank transferred its interest in the
partnership to 693396 and 693397. The Minister cannot argue that
the Bank could not transfer its partnership interest at this
stage. The Minister must accept that this transfer took place
because his assessment of the Bank was based on the assumption
that the Bank disposed of its partnership interest. I agree with
Bastarache J. that the Minister's argument that the Bank sold
depreciable leasing assets or was otherwise liable for recapture
of capital cost allowance pursuant to s. 88(1) of the Income
Tax Act, R.S.C. 1952, c. 148, as amended, raised for the
first time in this Court, cannot be entertained. The Minister
should not be allowed to advance a new basis for a reassessment
after the limitation period has expired.
[33] Following the Continental Bank
judgment the Income Tax Act was amended to add
subsection 152(9) which (including the marginal note)
reads
(9) Alternative
basis for assessment - 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.
[34] Before I consider to what extent
subsection 152(9) modifies or overrules Continental
Bank the provision itself should be looked at. I do not as a
rule quote the marginal notes of a provision because
section 14 of the Interpretation Act states
Marginal notes and references to former enactments that appear
after the end of a section or other division in an enactment form
no part of the enactment, but are inserted for convenience of
reference only.
[35] Despite the clear wording of
section 14 of the Interpretation Act, the Supreme
Court of Canada in R. v. Wigglesworth, [1987]
2 S.C.R. 541 at pages 556-557, held that courts
may consider the marginal notes when interpreting a legislative
provision. In Wigglesworth, Wilson J., in
interpreting section 11 of the Charter, referred to
the case of Law Society of Upper Canada v. Skapinker,
[1984] 1 S.C.R. 357, where Estey J. stated at
page 377:
... a court should not, by the adoption of a technical
rule of construction, shut itself off from whatever small
assistance might be gathered from an examination of the heading
as part of the entire constitutional document.
[36] In determining the weight to place on
marginal notes when interpreting a legislative provision,
Wilson J. stated at page 558:
It must be acknowledged, however, that marginal notes, unlike
statutory headings, are not an integral part of the
Charter.... The case for their utilization as aids to
statutory interpretation is accordingly weaker. I believe,
however, that the distinction can be adequately recognized by the
degree of weight attached to them.
[37] From an aid to interpretation in
Charter cases marginal notes have moved, according to the
Federal Court of Appeal, to be appropriate references in
interpreting income tax legislation.
[38] In Brill et al. v. The Queen,
96 DTC 6572, the Federal Court of Appeal adopted the
reasoning of Wilson J. in Wigglesworth and have used
the marginal notes in interpreting provisions of the Act.
In Brill et al. Linden J.A. referred to the marginal
notes to provide guidance of the scope of section 79 of the
Act, as it then read, stating at page 6575:
Notwithstanding what I view as the clear meaning of the above
language, there is, if needed, further support for this
interpretation in the marginal notes. Although the
Interpretation Act states that marginal notes "form
no part of an enactment", it is permissible to consider them
as part of the context of the legislation as a whole.
[39] After quoting Wilson J. from
Wigglesworth on the use of marginal notes,
Linden J.A. concluded at page 6575:
Marginal notes, therefore, can be used to aid the Court. In
this case, the marginal note is "Mortgage foreclosures and
conditional sale repossessions", indicating to me that it is
meant to apply to situations where there is no determined sale
price. If it were intended to cover all acquisitions by lenders,
whether by sale or not, as contended for by the Crown, the
marginal notes would have so described the subsection.
[40] I think marginal notes should be used
with caution. In the Supreme Court of Canada cases they were used
in interpreting the Charter. Both Estey J. and
Wilson J. accorded to them a very limited role. In the
Federal Court of Appeal Linden J.A. used the marginal notes
not to assist him in interpreting the statute but as confirmation
of his view of the plain meaning of the statute. I do not think
that section 14 of the Interpretation Act can be
totally ignored.
[41] Here we have a marginal note that
speaks of an alternative basis for assessment and the statute
itself that refers to an alternative argument.
Subsection 298(6.1) of the Excise Tax Act is
identical in all material respects to subsection 152(9) of
the Income Tax Act. With its marginal note it reads:
(6.1) Alternative argument in support
of assessment - The Minister may advance an alternative
argument in support of an assessment of a person at any time
after the period otherwise limited by subsection (1) or (2) for
making the assessment unless, on an appeal under this Part,
(a) there is
relevant evidence that the person is no longer able to adduce
without leave of the court; and
(b) it is not
appropriate in the circumstances for the court to order that the
evidence be adduced.
[42] The French version of the marginal note
to subsection 152(9) of the Income Tax Act speaks of
"nouvel argument à l'appui d'une
cotisation".
[43] I rather doubt that draft legislation
that has never been enacted, along with a press release
explaining it, can afford much assistance, if any, in
interpreting a legislation that is substantially different but
for what it is worth I reproduce here a news release of the
Department of Finance dated December 23, 1998 which reads in
part:
Also released with today's proposals is a draft amendment
to the Income Tax Act to clarify that Revenue Canada may,
in the course of an income tax appeal, rely on alternative
grounds to support its assessment. This amendment is proposed in
light of remarks by the Supreme Court of Canada in the recent
case of The Queen v. The Continental Bank of Canada. More
detailed information can be found in the attached draft
legislation and accompanying explanatory note.
ALTERNATIVE GROUNDS SUPPORTING AN
ASSESSMENT
1.(1) Section 152 of the
Income Tax Act is amended by adding the following
subsection:
(9) Subject to
subsection 152(5), an assessment shall not be vacated, varied, or
referred back to the Minister for reconsideration and
reassessment by reason only of the identification by the Minister
of an alternative basis of liability for the assessment.
(2)
Subsection (1) applies to appeals disposed of after Royal
Assent.
Explanatory note:
New subsection 152(9) is intended to ensure that Revenue
Canada may, on an appeal of an income tax assessment, identify
the basis or further bases on which Revenue Canada is relying in
support of its assessment. This amendment is proposed in light of
remarks by the Supreme Court of Canada in the case of The
Queen v. Continental Bank of Canada to the effect that the
Crown is not permitted to advance a new basis for assessment
after the limitation period has expired.
Subsection 152(9) is subject to subsection 152(5) which
prevents the Minister from including amounts in a taxpayer's
income which were not included prior to the expiration of the
taxpayer's normal reassessment period. It is also intended
that subsection 152(9) be subject to the court protection
afforded to taxpayers that an alternative argument cannot be
advanced to the prejudice of the right of a taxpayer to introduce
relevant evidence to rebut the argument.
[44] The draft subsection 152(9) never
became law. Subsection 152(9) in its present form came into
effect on June 17, 1999. The technical note, dated March
1999, accompanying it read:
New subsection 152(9) is intended to ensure that the Minister
of National Revenue may advance alternative arguments in support
of an income tax assessment after the normal reassessment period
has expired. This amendment is proposed in light of remarks by
the Supreme Court of Canada in the case of The Queen v.
Continental Bank of Canada..., to the effect that the
Crown is not permitted to advance a new basis for assessment
after the limitation period has expired.
The limitations found in paragraphs 152(9)(a) and (b) are
intended to import the Court protection afforded to taxpayers
that an alternative argument cannot be advanced to the prejudice
of the right of a taxpayer to introduce relevant evidence to
rebut the argument.
Subsection 152(9) is subject to other limitations in the Act,
including subsection 152(5) which prevents the Minister from
including amounts in a taxpayer's income which were not
included prior to the expiration of the taxpayer's normal
reassessment period.
This subsection applies to appeals disposed of after Royal
Assent.
[45] Assuming all of this extraneous
material can be looked at it supports the conclusion that would
have been reached without it, that is to say that "an
alternative argument" in support of an assessment is not the
same as "alternative basis for an assessment". Although
at one point the Department of Finance may have wanted the
legislation to permit alternative bases for assessments the
legislation in its final form was considerably watered down.
[46] It will be obvious from the passage
from the judgment of Bastarache J. that the alternative
proposition that the Crown sought to advance for the first time
in the Supreme Court of Canada was not just a new argument in
support of the assessment of a trading gain on the sale of the
partnership interest. It was a brand new basis of assessment that
the Crown tried on at the eleventh hour.
[47] What happened was that Continental
Bank's ("CB") subsidiary Continental Bank Leasing
("CBL") in order to avoid recapture of CCA on the sale
of its leasing assets rolled those assets into a newly formed
partnership, elected a price equal to their UCC, wound up into CB
who then sold the partnership interest to Central Capital
("CC") and treated the gain as a capital gain. The
basic assessment was against CBL and was premised on the view
that the series of steps was in substance a sale by CBL of its
leasing assets to CC giving rise to recapture. The assessment
against CB as an adventure in the nature of trade was
inconsistent with the assessment against CBL and was purely
protective in case the assessment against CBL failed.
[48] Then, in the Supreme Court of Canada
the Crown came up with an even more improbable basis for
assessing CB, that it was really CB that was selling CBL's
leasing assets. If it could not succeed in its substance over
form argument in defending its assessment against CBL it is
difficult to see how it could possibly have succeeded with its
new theory.
[49] What Bastarache J. articulated was
what appellate courts have been saying for years, that an
appellant cannot raise new arguments on appeal that were not
raised at trial particularly where had the point been raised at
trial the evidence might have been different. This proposition
was stated by Duff J. (as he then was) in SS.
Tordenskjold v. SS. Euphemia, 41 S.C.R. 154 (1908)
at page 164 where he quoted the same proposition stated by
Lord Herschell in the Tasmania, 15 App.
Cas. 223 at page 225.
[50] It is no wonder the Supreme Court of
Canada refused to entertain the new theory. Quite apart from the
fact the position has no merit the evidentiary basis needed to
establish that CB was from the outset the vendor of CBL's
assets on which CBL had claimed and been allowed CCA so that CB
became liable on the recaputure on the assets was virtually
insuperable and would have required that very different evidence
be adduced at trial.
[51] It is perfectly clear that even if
subsection 152(9) of the Act had been in force when
the new basis was advanced and even if the Crown could have
successfully argued that the new basis was an "alternative
argument" the Crown still could not have succeeded in
advancing the new basis in the Supreme Court. What is new in
Bastarache J.'s judgment is the proposition that the
Crown cannot raise a new basis for upholding the assessment after
the normal reassessment period had elapsed. In fact it is
questionable whether the Crown could have succeeded in raising
the point in the Supreme Court of Canada even if the normal
reassessment period had not elapsed.
[52] In what way then did
subsection 152(9) modify the judgment of Bastarache J.
or for that matter the law that has existed since the SS.
Euphemia case? Bastarache J.'s comments were not
confined to appellate courts. They appear to apply to all courts,
including the Tax Court of Canada. Subsection 152(9) permits
the raising of new arguments in support of an assessment.
An argument is something that is advanced in support of a
basis of assessing. A basis in the fundamental principle
underlying an assessment.
[53] In Schultz v. The Queen, [1996]
2 C.T.C. 127, which was decided before the Supreme
Court of Canada decision in Continental Bank,
Stone J., after referring to a number of cases stated:
24 I do not
understand that the law as developed in these cases prevented the
Minister from pleading the alternative defence before the Tax
Court of Canada. It is true that in pleading he is subject to
certain constraints. For example, he cannot plead an alternative
assumption when to do so would fundamentally alter the basis on
which his assessment was based as to render it an entirely new
assessment. In my view, in the present cases the Minister has not
so changed the basis of the assessments. What he did was merely
to assert a different legal result flowing from the self-same set
of facts by alleging that those facts show the existence of a
joint venture or partnership if they do not show an agency
relationship. Even if it could be said that the Minister has
alleged new "facts" by adopting the alternative
posture, the law as developed allowed him to do so but imposed
upon him the onus of proving those facts: Pillsbury,
supra, at page 302-03 (D.T.C. 5188); Continental Bank
Leasing Corp. v. R., [1990] 1 C.T.C. 2306, 93 D.T.C. 298
(T.C.C.), at page 2310 (D.T.C. 302).
[54] These observations must of course be
read in light of the subsequent comments by Bastarache J. in
Continental Bank but they are useful in that they draw a
distinction between, on the one hand, so fundamental an
alteration in the basis of the assessment that, if accepted,
would lead to a result that is tantamount to an entirely new
assessment and, on the other hand, an assertion of a different
legal result flowing from the same set of facts by alleging that
those facts lead to an alternative legal relationship.
[55] In paragraph 10 of his judgment
quoted above Bastarache J. refers with approval to the
Federal Court Trial Division's judgment in The Queen v.
McLeod, 90 DTC 6281, and the Federal Court of
Appeal's judgment in British Columbia Telephone Company
Co. v. Minister of National Revenue, (1994)
167 N.R. 112.
[56] These are examples of the type of
change in position by the Crown that Bastarache J.
considered unacceptable. The question of course remains whether
the result would have been the same if subsection 152(9) had
been in force. I do not think that subsection 152(9),
speaking as it does of an alternative argument, goes so far as to
permit the Crown to in effect "appeal its own
assessment" or put its case "on a new
footing".
[57] Since subsection 152(9) was
enacted there have been several cases that considered the
provision. In Anchor Pointe Energy Limited v. The Queen,
2002 DTC 2071 (since appealed to the Federal Court of
Appeal), Rip J. stated that it is an abuse of the process of
the court for the Crown to plead as assumptions facts that were
not assumed. I agree (see Holm v. Canada, [2002]
T.C.J. No. 641). However since the case has been
appealed to the Federal Court of Appeal I make no further comment
on it.
[58] In General Motors Acceptance
Corporation of Canada, Limited v. The Queen,
99 DTC 975, Rip J. refused to strike out portions
of the reply which the appellant attacked on the grounds that
they raised a new basis of assessment. He did not rely on
subsection 152(9) but he did refer to the judgment of
Létourneau J.A. in The Queen v. Hollinger
Inc., 99 DTC 5500. In Hollinger
Létourneau J.A. said at pages 5504-5505
(footnotes omitted):
[16] The position now taken by
the appellant that the loss shares were not capital property is
obviously a revocation of its prior unsuccessful assumption. From
the evidence before us and before the Tax Court judge, it is
impossible, however, to determine whether the limitation period
for reassessing had expired when this new basis was first raised
by the Minister. We know that a Notice of Reassessment was issued
on February 4, 1993, but the record does not reveal when the
original assessment of the respondent was made from which to
calculate the four-year limitation period.
[17] On the other hand, the
Minister did raise for the first time on September 12, 1994, in
his Reply to the respondent's Notice of Appeal, that Coseka
did not hold the loss shares as capital property on December 12,
1986 and that the transfer of these shares to the second
subsidiary company (353380 Alberta Ltd.) on that date was not a
transfer of capital property. Instead, he submitted that the loss
shares had become trading assets utilized by Coseka in a business
operation or venture of profit-making by which it intended to
sell for gain its tax loss. Thus, the issue was as early as
September 1994 before the Tax Court and it is still impossible to
establish whether by then the limitation period for reassessment
had expired. Because the limitation date is not in evidence, I am
of the view that the Continental Bankprinciple relied upon
by the respondent, namely that the Crown is not permitted to
advance a new basis for reassessment after the limitation period
has expired, cannot be applied in this instance.
[18] However, counsel for the
respondent contended that the Continental Bank decision of
the Supreme Court stands for more. In his view, it also
determined the procedure to be followed when a new basis for
reassessment is being advanced. Under the existing law at the
time, if the Minister was entitled to change the basis of the
reassessment within the limitation period, counsel claimed, he
could only do that formally by either issuing a new reassessment
or amending the existing reassessment. Consequently, the mere
pleading of such new basis in the Reply is not sufficient to
validly raise the issue and prevent the limitation period from
expiring. He relied to sustain his claim upon the following
passage from Bastarache, J.:
The Crown is not permitted to advance a new basis for
reassessment after the limitation period has expired.
[19] With respect, I do not read
this statement of Bastarache, J. as imposing a formal procedure
or a procedural restriction of the kind suggested by the
respondent.
[20] First, the quoted passage
refers to the Crown, not the Minister. Had Bastarache, J.
mentioned the Minister, it could have been a possible indication
that he had in mind the procedure of reassessment itself. Second,
it speaks of "advancing a new basis for reassessment",
thereby referring to the Crown's actual practice of advancing
a new argument in its pleadings in support of the assessment.
Indeed, immediately after his statement, Bastarache, J. refers
with approval to the case of The Queen v. McLeod in which
the Crown was refused leave to amend its pleadings to advance a
new basis for reassessment because the limitation period had
expired. While Collier, J. in McLeod refused the amendment
on account of the expiry of the limitation period, he never
questioned the Crown's right to make new assumptions at trial
or advance a new argument in support of the assessment.
[21] It is obvious at pages
367-368 of his reasons that what Bastarache, J. is concerned with
is the possible unfairness to the taxpayer when notification of
the new basis, whatever form it may take, is either inadequate or
given too late and, as a result, the taxpayer is not afforded a
proper opportunity to respond:
p. 367 Taxpayers must know the basis upon which they
are being assessed so that they may advance the proper evidence
to challenge the assessment.
p. 368 To allow the appellant to proceed without the
benefit of findings of fact made at trial would require this
Court to become a court of first instance with regard to the new
claim.
[22] I am comforted in this view
by the recent legislative amendment in Bill C-72 brought to
section 152 of the Act to overrule the decision of the Supreme
Court in Continental Bank on this point. Subsection 152(9)
assented to on June 17, 1999 allows for an alternative argument
in support of an assessment to be advanced at any time after the
normal reassessment period, subject to a discretion given to the
Court to refuse it if prejudice could result to the taxpayer from
the late change. The subsection reads:
s. 63.1(2) Section 152 of the Act is amended by
adding the following after subsection (8):
(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.
[23] The amendment has no
application in the present proceedings because it was not in
force when the matter was argued before the Tax Court. But it is
indicative of the philosophy that ought to prevail in these
matters. It would introduce an unnecessary measure of formalism,
unwarranted by the decision of the Supreme Court and the
subsequent amendment to section 152, if we were to require that
proper notification to the taxpayer of an alternative argument in
support of an assessment can only be achieved by the ministerial
issuance of a new reassessment. This is not to say that the
Minister may change the amount of an assessment in pleadings, but
only that arguments in support of an assessment can be made in
pleadings, even if not included in a notice of reassessment.
Changing the amount of an assessment in pleadings is tantamount
to the Minister appealing his own assessment, an avenue which has
been clearly rejected by the Courts.
[24] In conclusion, I think the
preliminary objection of the respondent grounded on the
Continental Bank case has no merit in this instance and,
accordingly, the appellant was entitled to argue, as it did
before the Tax Court, the new basis advanced in its Reply. The
respondent was fully and timely informed of it and had ample time
to prepare as the hearing of the appeal took place more than
three and a half years later. All the relevant evidence was
before the Tax Court judge. Not only was there no objection made
by the respondent at the time, but submissions were made to the
judge by both parties with respect to the new basis for
reassessment. The Tax Court judge dealt with the issue on its
merits and the appellant's ground of appeal relating to that
aspect of the Tax Court judge's decision is properly before
us. I shall deal with it after consideration of the second
preliminary objection.
[59] In Smith Kline Beecham Animal Health
Inc. v. The Queen, 2000 DTC 1526 aff'd
2000 DTC 6141 (F.C.A.), Bonner J. said at
page 1530:
[14] In my view Continental
Bank was never authority for the proposition that the
Minister is, when defending an appeal from an assessment after
the expiry of the subsection 152(4) period, confined within a
conceptual prison called "basis of assessment"
comprising only the facts and statutory provisions relied upon by
the assessor. In my view Continental Bank is an
application of the long-standing rule governing litigation in
appellate courts which rule prevents litigants from raising
points on appeal which were not pleaded and argued in the trial
court. Appellate courts cannot be expected to deal with a new
issue on appeal resting on an evidentiary record which is
deficient by reason of the failure to plead and direct evidence
to that issue. Here the Respondent seeks leave to amend well
before the commencement of the trial. The situation is in no way
analogous to Continental Bank.
[15] Furthermore, nothing said
in Continental Bank suggests that subsection 152(4) has a
bearing on the amendment which the Respondent seeks. Subsection
152(4) restricts the right of the Minister to "... reassess
or make additional assessments, or assess tax, interest or
penalties ... ". The amendment now in question would not
effect a reassessment of tax. Rather it is an attempt to defend
the existing assessment of tax by asserting that, on the facts
already pleaded, liability is imposed by a provision of the Act
other than that relied on by the assessor.
[16] It is long-settled law that
the validity of an assessment depends on the application of the
statute to the facts and not on the assessor's analysis. It
is, I believe, unlikely that it was the intention of the Court in
Continental Bank (supra) to overrule decisions such as
Minden (supra) and Riendeau (supra)without
referring to them. Accordingly, I am of the opinion that nothing
said in Continental Bank can apply to prevent the Minister
from relying on section 245 in the present case.
[60] Finally, in Rogic et al. v. The
Queen, 2001 DTC 855, Bell J. held that it was
not open to the Crown to argue that the company, not the
appellant, owned the property. Bell J. held that this
argument, advanced after the expiry of the normal reassessment
period, constituted a fundamental change in the basis of the
assessment. He distinguished that the Federal Court of
Appeal's decisions in the Hollinger and Smith
Kline cases as follows.
[39] Adopting the submission of
Appellants' counsel in that regard, as supplemented below, I
conclude that the Respondent's alternative position, advanced
after the statute-barred period for reassessment expired, is not
available to the Respondent.
[40] While respecting the views
of Bonner, J. of this Court in Smith Klineand the Federal
Court of Appeal in Hollinger, there are different
circumstances in this appeal. In Hollinger, the matter
under dispute was that the reassessment was based on the
assumption that loss shares acquired by Hollinger were
capital property. As the Court said at page 5504:
The position now taken by the appellant that the loss shares
were not capital property is obviously a revocation of its prior
unsuccessful assumption. From the evidence before us and before
the Tax Court judge, it is impossible, however, to determine
whether the limitation period for reassessing had expired when
this new basis was first raised by the Minister....
Because the limitation date is not in evidence, I am of the
view that the Continental Bank principle relied upon by
the respondent, namely that the Crown is not permitted to advance
a new basis for reassessment after the limitation period has
expired, cannot be applied in this instance.
Apart from not knowing the reassessment limitation date,
whether the loss shares were or were not capital property is a
matter of legal determination - not an assumption of fact basic
to the issue of a reassessment.
[41] In SmithKline the
Respondent sought to amend its pleadings to add additional
statutory provisions to support the assessment. Counsel pointed
out that the Respondent did not seek to appeal the existing
assessment by asserting a claim for more tax than already
assessed. The judgment, at page 1529 says:
Rather, the objective is to ensure that it is open to the
Respondent to defend the existing assessments by relying on
statutory provisions which, when applied to material facts
already pleaded will support the assessments of Part XIII
tax, either in whole or in
part.
(emphasis added)
[42] The instant case differs in
that there is a fundamental change in the fact assumption forming
the foundation of Respondent's alternative submission, namely
that "if the Appellant did not beneficially own the Property"
such Appellant failed to include in income
... a benefit in respect of the personal use of the Property
... and such benefit must be included in the Appellant's
income pursuant to subsection 15(1) of the Act.
This clearly implies ownership of the Property by the Company.
Ownership is substantially a matter of fact. The assumption of
fact upon which the assessment was based was that the Appellants
owned the beneficial interest in the Property equally. The
assessment, based upon that assumption, was that the Appellants
should be taxable on the gain on the sale of the Property, such
gain totalling $184,982. Not only is there a fundamental factual
assumption difference (which was not the case in either
Hollinger or Smith Kline) but there is no
exposition of the amount of the benefit referred to in the
alternative submission arising from the presumed personal use of
the Property. The term "personal use of the property" connotes
possession of same for living purposes. Assuming the
Respondent's allegations in its Reply are factually correct,
the Property having been purchased on April 1, 1993 and sold in
October, 1994, there would, given a reasonable period of several
months for house construction, be a benefit equal to the fair
market rental of the Property for a period slightly in excess of
one year. The amount of such benefit would be minimal relative to
the sum of $184,982 and would have no relation to it.
[43] In Marina (supra) at
page 5052, McKay, J. quoted Stone, J.A. at page 5662 of
Schultz v. The Queen (1995), 95 DTC 5651:
I do not understand the law as developed in these cases
prevented the Minister from pleading the alternative defence
before the Tax Court of Canada. It is true that in pleading he is
subject to certain constraints. For example, he cannot plead an
alternative assumption when to do so would fundamentally alter
the basis on which his assessment was based as to render it an
entirely new assessment.
At page 5653, the learned Justice said:
The alternative ground for an assessment pursuant to s. 160,
is a matter to be pursued, if at all, by formal action by the
Minister by means of a reassessment under the Act. It is not a
matter for endorsement by the Court at this stage.
[44] The alternative submission
to the effect that the Company, not the Appellants, owned the
Property is a fundamental change in the basis of the assessment
and is not available to the Respondent.
[61] What then does it all boil down to? Any
attempt to find perfect consistency among all of these cases -
and there are others that have not been cited - would be utopian.
Some of the broad principles that have emerged since
Continental Bank are:
1. The decision in
Continental Bank stands for the proposition that the Crown
cannot advance, after the limitation period has expired, a
fundamentally different basis of assessment that amounts in
essence to a different assessment. This is a fortiori true
at the appellate level but it also applies to trial courts.
2. Subsection 152(9)
of the Act does not overrule Continental Bank. It
does not sanction the substitution of a wholly different basis of
assessment. It permits the Crown to put forward new arguments in
support of the existing basis of assessment.
3. Subsection 152(9)
is particularly relevant at the trial level because it
contemplates the possibility of an appellant adducing evidence.
At an appellate level new evidence is rarely, if ever, adduced
and the rule stated in the SS. Euphemia has been quite
adequate to prevent new arguments being raised in the appeal
courts.
[62] Subsection 152(9) is a most
peculiarly drafted section. The conventional wisdom is that it
was intended to modify or restrict in some way the effect of what
the Supreme Court of Canada said in Continental Bank. It
is open to question whether it achieves that result. I set out
both the English and French versions with their marginal
notes.
|
(9) Alternative
basis for assessment. 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
|
(9) Nouvel argument
à l'appui d'une cotisation. Le ministre
peut avancer un nouvel argument à l'appui
d'une cotisation après l'expiration de la
période normale de nouvelle cotisation, sauf si, sur
appel interjeté en vertu de la présente
loi:
|
|
(a) there is
relevant evidence that the taxpayer is no longer able to
adduce without the leave of the court; and
|
a)
d'une part, il existe des éléments de
preuve que le contribuable n'est plus en mesure de
produire sans l'autorisation du tribunal;
|
|
(b) it is
not appropriate in the circumstances of the court to order
that the evidence be adduced.
|
b)
d'autre part, il ne convient pas que le tribunal
ordonne la production des éléments de preuve
dans les circonstances.
|
[63] The court does not as a rule order a
party to adduce evidence. The idea that the Crown can advance a
new argument that was not advanced on assessing to support an
assessment has always been around. The section contemplates that
the taxpayer may wish to call new evidence if the Crown, in
argument, raises a new point. It says nothing about the Crown
calling evidence and therefore the Crown's right to do so is
impliedly excluded. Yet if it is the Crown that is raising the
new point I should have thought it would have been the Crown that
would want to reopen the case to advance new evidence, a request
that in the vast majority of cases would be denied.
[64] It comes to this.
Subsection 152(9) really does not do much to modify what
Bastarache J. said.
[65] Ms. Tari argues that the two
salient elements in Continental Bankare fairness and
finality. Fairness requires that the Attorney General give notice
of the basis of his assessment and finality requires that he not
come up with a new basis of assessment after the limitation
period expires. I accept her argument on this point and I do not
think that subsection 152(9) alters that position.
[66] The basis for striking out specific
provisions of the reply is that "these pleadings seek to
advance new and different assessments from the assessments that
are under appeal". The first group of provisions are full
paragraphs 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 27, 28,
30, 32, 33, 34, and 35. They are set out below.
[67] Paragraph 14 of the reply
reads
14. He denies the facts
alleged in paragraph 23 of the Notice of Appeal. He says that any
letter sent by the Minister to the Appellant speaks for itself.
He also states that the basis of the reassessment of the
Appellant is set out below.
Paragraph 23 of the notice of appeal simply describes
what the letter of January 19, 2001 said, i.e. that the
Minister relied on two bases. The statement in paragraph 23
is accurate and the denial is absurd. However, the respondent is
free to deny the obvious. This is not a basis for striking out
the paragraph. The remedy is to serve a notice to admit and if
the denial is unreasonable to ask for costs.
[68] Paragraph 16 of the reply
reads
16. In all the
circumstances, the Appellant, the Co-owners, Arachnae and AIRS II
Inc. did not deal with one another at arm's length.
This paragraph is not an assumption. It is under the heading
"Further facts". It seems obvious that the Minister
never assumed that the parties did not deal with each other at
arm's length. Indeed, on the contrary, the Minister seems to
have assumed that they dealt at arm's length.
[69] Can the Crown plead a fact that is
diametrically opposed to what the Minister assumed on assessing?
I think it can but it takes on the onus of proving it and it must
go further and specifically repudiate the Minister's
assumption. See The Queen v. Bowens,
96 DTC 6128, discussed in Holm v. Canada
(supra). It is important to emphasize here the necessity of
the Minister's pleading honestly all assumptions made
on assessing, including those that assist the taxpayer. This was
accentuated in the recent decision of the Federal Court of Appeal
in Grant v. Canada, 2003FCA77, paragraphs 17 and
18.To allege that the parties were not at arm's length
is not, in my view, tantamount to raising a new assessment or a
new basis for the assessment. It is simply an additional argument
supporting the reduction of the cost to $1,600,000. The reason
for the reduction on assessing seems arguably to have been
section 67. Section 69 is another reason if the Crown
can plead and prove facts to support the application of the
section. It does seem a little surprising that nowhere in the
auditor's report are any facts found, assumed or mentioned
that would support the view that the parties are not at arm's
length. Given the thoroughness of Ms. Jang's review one
might wonder if any such facts exist. This will be however a
matter for the trial judge. I might observe further that the mere
bald assertion that the parties are not at arm's length is an
insufficient basis for advancing the argument. This is, however,
not a reason to strike it out. See Satin Finish Hardwood
Flooring (Ontario) Limited v. The Queen,
96 DTC 1402. However a trial judge may well refuse to
permit the argument to be advanced on the ground that no facts
supporting the conclusion have been pleaded.
[70] Paragraphs 17 to 21 of the reply
read
17. At the time the
Appellant entered into his Software Purchase Agreement, he knew,
or ought to have known,
a) that he and
his fellow Co-owners had not provided sufficient financial
resources for the development and marketing of the Software;
b) that the
financial projections on which the aggregate, alleged purchase
price of $8 million was based were unreasonable; and
c) that the
aggregate, alleged purchase price of $8 million for the Software
was grossly inflated.
18. The Appellant and the
other Co-owners were not required to contribute funds to the
development and marketing of the Software, other than the initial
cash payments totalling $150,000 per unit.
19. In acquiring an
interest in the Software, the Appellant sought to create tax
savings by generating deductions to reduce his income.
20. The Appellant did not
acquire an interest in the Software for the purpose of gaining or
producing income.
21. The Software did not
constitute a source of income for the Appellant.
Paragraphs 17 to 21 are facts that are pleaded in support
of the broad proposition that there was no business, that there
was no reasonable expectation of profit, that the whole scheme
was tax motivated, and that the software was not acquired for the
purpose of gaining or producing income.
[71] That some of these allegations are
completely inconsistent with the findings and assumptions of the
assessor Ms. Jang is obvious. That, in itself is not a
reason for striking them out if they are merely additional
reasons advanced in support of the existing assessments. The
assessments are premised on the view that the software was
acquired for the purpose of gaining or producing income but that
the price paid was too high and therefore CCA was to be based on
a lower price.
[72] The argument that the software was not
acquired for the purpose of gaining or producing income, if
accepted, would mean that it was not depreciable property
(paragraph 1102(1)(c) of the Regulations). The
result would be that the appellant would be entitled to no CCA.
This is not an additional argument in support of the assessments.
It has as its intent the destruction of the assessments as made
and the substitution of wholly new assessments in which the
appellant would be allowed no CCA. The Continental Bank
case would not sanction it and it is not saved by
subsection 152(9).
[73] Paragraph 17 is barely salvageable
in that it deals with the question of the reasonableness of the
price. Paragraph 18 seems wholly irrelevant but it will be
for the trial judge to decide what weight to give to that fact,
if it is established. Paragraph 19 is, in light of the
decisions of the Supreme Court of Canada in Brian J. Stewart
v. The Queen, 2002 DTC 6969, and The Queen v.
Walls et al., 2002 DTC 6960, quite irrelevant but I
will let it stand. Perhaps the Crown will wish to invite the
Supreme Court of Canada to reconsider the view that a tax
motivation is irrelevant.
[74] Paragraphs 20 and 21 are struck.
They seek to set up an entirely new basis of assessment in
substitution for the existing basis. They are not alternative
arguments.
[75] Paragraphs 22, 23 and 24 read
22. He further states
that:
a) the
Appellant's So-Called Promissory Note was subject to the
terms of his Distribution Agreement and his Software
Agreement;
b) under his
So-Called Promissory Note to AIRS II Inc., the Appellant had the
right to set off any amounts due to him by AIRS II Inc. and by
AIRS II Inc.'s subsidiaries and affiliates against amounts
due under the So-Called Promissory Note;
c) under the
Distribution Agreement, Arachnae, AIRS II Inc. and the Appellant
agreed that Arachnae's right to distribute and to sell copies
of the Software could not be transferred;
d) in
Distribution Agreement, AIRS II Inc. and Arachnae made
representations to the Appellant as material inducements to enter
into the Distribution Agreement;
e) among those
representations, AIRS II Inc. and Arachnae represented to the
Appellant that certain projections, prepared by Arachnae, were
accurate and complete and were based on facts known to AIRS II
Inc. and Arachnae and the assumptions used in preparing these
projections were fair and reasonable in all material respects and
could be relied upon by the Appellant;
f)
according to the Distribution Agreement, the Appellant could
terminate the Distribution Agreement in the event that, over
seven years, he did not receive a minimum amount of payments in
respect of the Software, based on the projections noted in the
immediately preceding subparagraph;
g) the
Appellant could set off against any amounts owing under his
So-Called Promissory Note to AIRS II Inc. any claims the
Appellant had against Arachnae as a result of the failure to meet
the projections noted in the immediately preceding two
subparagraphs;
h) the
Appellant's liability to pay $350,000 with interest on that
amount, under his So-Called Promissory Note to AIRS II Inc., is
contingent;
i) the
amount of $350,000, therefore, does not form part of the capital
cost to the Appellant of his interest in the Software; and
j)
accordingly, the Appellant could not deduct CCA in relation to
the amount of $350,000.
23. At the time the
Appellant provided the So-Called Promissory Note to AIRS II Inc.
the Appellant's Co-Called Promissory Note had a fair market
value that was substantially less than its face value.
24. The deduction of the
CCA claimed by the Appellant in his 1993 and 1994 taxation years
was unreasonable in the circumstances.
[76] Paragraphs 22, 23 and 24 are
simply additional arguments in support of restricting the capital
cost of the software to the appellant to $150,000. As such they
support the assessments and can stand, subject to one point. What
I find highly objectionable is the use of the word
"So-Called". This is
ambiguous,
equivocal and mealy-mouthed. It is a weasel word.[1] Either the Crown admits
that there was a promissory note signed by the appellant or it
does not. It could deny that the note was signed or it could say
that the note was unenforceable, illegal or a sham. However the
appellant and the court are entitled to know what the Crown's
position is. In law the word "duplicitous" is sometimes
used to mean "double pleading". It is simply a more
elegant polysyllabic way of saying "weasel word". Here
we have the Crown half admitting and half denying a material
fact. This is unacceptable.
[77] Since Ms. Tari asked that the
paragraphs be struck entirely she did not deal with the
impropriety of the expression "So-Called". I am doing
so of my own motion. Although I have been unable to find any case
law to this effect I believe that in obvious cases the court is
entitled to strike out improper or objectionable pleadings of its
own motion. The court as well as the parties has an interest in
having pleadings that clearly and unambiguously set out the
respective positions of the parties and the facts upon which they
rely so that the issues to be joined can be defined with
precision.
[78] The only question remaining is whether
I should strike the entire paragraph that contains the offending
words, or merely the weasel words themselves. To strike out the
offending word leaves the sentence intact but possibly alters the
meaning in that it turns what is a meaningless ambiguity into a
clear admission. This would be the effect in any event even if I
did not strike out the words "So-Called".
[79] In Odgers' Principles of
Pleading and Practice, Twenty Second Edition, the following
appears at page 133:
It is in the power of the party either to admit or to deny
each allegation in his opponent's plea, as he thinks fit. If
he decides to deny it, he must do so clearly and explicitly. Any
equivocal or ambiguous phrase will be construed into an admission
of it. There is no third or intermediary stage. If the judge does
not find in the pleading a specific denial or a definite refusal
to admit, there is an end of the matter; the fact stands
admitted.
[80] If I had let these obviously defective
pleadings stand the ambiguity in them would be construed as an
admission.
[81] To strike out the entire sentence
because it is vitiated by reason of the weasel words it contains
would not be inappropriate but it would force the Crown to seek
an amendment. It is possible, however, that the Crown is prepared
to live with the pleadings purged of the weasel words. Removal of
the offending words leaves it that option.
[82] I have decided to strike out only the
offending words. The words "So-Called" are struck from
subparagraphs 22a), 22b), 22g), 22h) and paragraph 23.
If the Crown does not like what remains it can move to amend by
replacing the paragraphs with something that conforms more to the
rules of proper pleading.
[83] Paragraphs 27 and 28 of the reply
read
27. He respectfully
submits that the Appellant acquired his interest in the Software
for the purpose of generating tax savings and not for the purpose
of gaining or producing income from a business or property. The
Software did not constitute a source of income to the Appellant
within the meaning of sections 3 and 4.
28. He submits that the
Appellant is not entitled to deduct any amount of CCA in respect
of his interest in the Software. The Appellant did not acquire
his interest in the Software for the purpose of gaining or
producing income, as required by paragraph 1102(1)(c) of the
Regulations.
[84] These paragraphs are struck for the
same reason that I struck paragraphs 20 and 21. They are a
belated attempt to raise what is in essence a new assessment.
They are not simply advanced as alternative arguments in support
of the existing assessments.
[85] Paragraphs 30, 32, 33, 34 and 35
of the reply read:
30. Furthermore, any
deduction of CCA by the Appellant in respect of the Software in
computing his income for the 1994 taxation year is limited to 50
per cent of the capital cost of the Appellant's interest in
the Software, under subsection 1100(2) of the
Regulations.
32. He submits that, in
all the circumstances, the Appellant, the Co-owners, AIRS II Inc.
and Arachnae did not deal with one another at arm's length.
Therefore, pursuant to paragraph 69(1)(a) of the Act, the
capital cost of the Software is deemed to be the fair market
value. The capital cost to the Appellant of his interest in the
Software is deemed to be the fair market value of that
interest.
33. In any event,
deductions of CCA based on a capital cost for the Software in
excess of $1.6 million are unreasonable in the circumstances,
within the meaning of section 67 of the Act. The Minister
properly denied such unreasonable deductions to the
Appellant.
34. The deduction of CCA
in each of the Appellant's 1993 and 1994 taxation years in
respect of the Appellant's interest in the Software was
unreasonable in the circumstances, within the meaning of section
67 of the Act.
35. He submits that the
amount of $350,000 set out in the Appellant's So-Called
Promissory Note to AIRS II Inc. is a contingent liability. The
amount of $350,000 does not form part of the capital cost of the
Appellant's interest in the Software.
[86] I see nothing wrong with these
paragraphs except for paragraph 35. The use of
"So-Called" is duplicitous and it vitiates the entire
paragraph. It offends fundamental rules of pleading and therefore
the words in paragraph 35 must be struck. As in the case of
subparagraphs 22a), 22b), 22g), 22h) and paragraph 23
where I have struck out the weasel words "So-Called" I
am striking the words out of this paragraph. Weasel words destroy
the entire sentence in which they are used. The Crown may wish to
move to amend. There is no reason why the Crown cannot confront
an issue forthrightly, honestly and robustly instead of
pussyfooting around it and trying to avoid saying what it really
means so as to keep its options open.
[87] The numerous subparagraphs in
paragraph 15 of the reply that the appellant wants deleted
are all the assumptions on which the Crown alleges the Minister
based his assessments.
[88] They are as follows.
15. In so reassessing the
Appellant, the Minister made, inter alia, the following
assumptions:
...
b) the expense
of developing AIRS exceeded the gross revenues generated from the
sale of AIRS;
...
g) AIRS II
Inc. provided Arachnae with a document called a promissory note,
dated December 30, 1993, in the amount of $8 million;
h) the
document called a promissory note purportedly bore interest at
the rate of 5% per annum, calculated annually not in advance;
i) this
document called a promissory note was unsecured;
j) the
document called a promissory note had a maturity date of December
31, 2003; unless, at the option of AIRS II Inc., the maturity
date was extended by up to ten years;
k) AIRS II
Inc. was Arachnae's wholly-owned subsidiary;
...
m) Arachnae was also
a party to these Software Purchase Agreements;
...
r) the
Co-owners were to pay approximately 30% of the aggregate, alleged
purchase price of the Software, or $2.4 million, in cash;
s) the
Co-owners provided documents called promissory notes (the
"So-Called Promissory Notes" or, in the singular, the
"So-Called Promissory Note") to AIRS II Inc. for about
70% of the alleged purchase price, or $5.6 million;
t) a
Co-owner who acquired one unit of the Software by agreement dated
December 31, 1993 would have agreed:
i) to an
alleged purchase price of $500,000;
ii) to pay
$75,000 in cash in 1993;
iii) to pay
$75,000 in cash in 1994; and
iv) to provide a
So-Called Promissory Note to AIRS II Inc. in the amount of
$350,000;
u) the terms
of the So-Called Promissory Notes provided by the Co-owners were
excessive in relation to the economic life, if any, of the
Software;
v) the
purported interest rate on the So-Called Promissory Notes was 5%
per annum, calculated annually not in advance;
w) principal and
interest on the So-Called Promissory Notes were payable only out
of the proceeds from the sales of the Software;
x) the
So-Called Promissory Notes were unsecured;
y) the
So-Called Promissory Notes had maturity dates of December 31,
2003;
z) however,
if, on or before December 31, 2003, the So-Called Promissory
Notes had not been satisfied from the proceeds of the sales of
the Software, the Co-owners could extend the maturity date up to
December 31, 2013;
aa) the So-Called
Promissory Notes could not be assigned to a third party or
endorsed in favour of a third party without the consent of the
Co-owners which consent could be unreasonably withheld;
bb) the Co-owners had not
satisfied the So-Called Promissory Notes;
cc) under the Software
Purchase Agreements into which the Co-owners entered, Arachnae
would be responsible for marketing and distributing the
Software;
dd) under the Software
Purchase Agreements, Arachnae had sole discretion with respect to
modifications and enhancements, if any, to the Software;
ee) each of the Co-owners
entered into a distribution agreement with Arachnae and AIRS II
Inc. (the "Distribution Agreements" or, in the
singular, "Distribution Agreement");
ff) under the
Distribution Agreements, each of the Co-owners would provide
Arachnae with the Software, including associated documentation,
object code and source code;
gg) under the Distribution
Agreements, Arachnae obtained the exclusive right to distribute
and to sell copies of the Software on a world-wide basis;
...
ii) the
Appellant paid AIRS II Inc. $75,000 in cash in 1993 and, in three
equal instalments, $75,000 in cash in 1994;
jj) the
Appellant provided a So-Called Promissory Note, dated December
31, 1993, to AIRS II Inc. in the amount of $350,000, containing
the terms described above under the header, "Co-owners'
So-Called Promissory Notes";
kk) the Appellant entered
into a Distribution Agreement, dated December 31, 1993, with AIRS
II Inc. and Arachnae, containing the terms described above under
the header, "Distribution Agreements";
...
oo) these deductions were
unreasonable in the circumstances as they were based on a capital
cost to the Appellant of the Software that was in excess of $1.6
million;
...
uu) the Co-owners did not
provide the financial resources necessary for the development and
marketing of the Software;
vv) so sales of the
Software were made; and
ww) marketing and development, if any,
of the Software ceased in September 1996;
[89] It is rare to strike out paragraphs
pleading assumptions at so early a stage in a case unless it is
clear beyond any doubt that the assumptions pleaded could not
possibly have been made at the time of assessing (as, for
example, in Anchor Pointe, supra).
[90] The appellant's argument for
striking these paragraphs out is contained in paragraph 52
of Ms. Tari's written argument:
52. The "facts"
pleaded by the Attorney General in subparagraphs 15(b), (g), (h),
(i), (j), (k), (m), (r), (s), (t), (u), (v), (w), (x), (y), (z),
(aa), (bb), (cc), (dd), (ee), (ff), (gg), (ii), (jj), (kk), (oo),
part of (qq), (uu), (vv) and (ww) are not facts that were
presented to the appellant as assumptions made by the Minister in
support of the assessments. These pleadings are attempts by the
Attorney General to contend that the Minister relied on the bases
of no reasonable expectation of profit, non-arm's length
dealings, contingent liability of the notes, and unreasonableness
of the CCA deduction claimed by the appellant in raising the
assessments under appeal.
[91] I agree with Ms. Tari that these
are new arguments. However a distinction must be made between
(a) facts assumed that support
the two hypotheses upon which the assessment was based, i.e. that
the software was not available for use in 1993 and the fair
market value was $1,600,000 and that $8,000,000 is unreasonable
(a word used in Ms. Jang's letter of March 2,
2000);
(b) facts assumed that support an
alternative hypothesis for assessing (non-arm's length,
contingent liability).
[92] Let us say for example that facts a),
b), c), d) and e) support the hypotheses upon which the
assessment was based (hypotheses A and B) and facts p), q), r),
s) and t) support alternative hypotheses (X and Y) I can see
nothing wrong with pleading as assumptions facts p), q), r), s)
and t) even though they are irrelevant to hypotheses A and B.
What would be unacceptable would be to plead as assumptions
hypotheses X and Y. It would also be highly improper either to
plead assumptions that were not made on assessing or to refrain
from pleading assumptions that were in fact made (Grant v.
Canada, supra; The Queen v. Bowens, supra).
[93] I find the use of "So-Called"
in paragraph 15 in describing the promissory note completely
unacceptable. Since the assumptions pleaded are important in
defining the appellant's onus the appellant is entitled to
know just what assumptions he has to demolish. How can one
demolish something that is as amorphous and equivocal as an
assertion that something is a "So-Called promissory
note"? If the Crown wishes to allege that the promissory
note is a sham, or unenforceable or illegal it should put the
appellant on notice that it is raising this as an issue and
allege facts that support the assertion. I used the expression
"weasel word" above. The use of weasel words is
offensive and unacceptable in any pleading. It is doubly so in
pleading assumptions.
[94] For the same reasons as I gave for
striking "So-Called" out of subparagraphs 22a),
22b), 22g), 22h) and paragraph 23 I am striking the words
"So-Called" out of subparagraphs 15s), t), u), v),
w), x), y), z), aa), bb), jj) because the use of the expression
"So-Called" renders them unacceptably equivocal and
ambiguous. I am striking out of subparagraphs 15g), h), i)
and j) the words "called a" and also striking out the
word "purportedly" of subparagraph 15h). The Crown
should state its assumptions unambiguously without the use of
weasel words.
[95] The respondent may of course move to
amend its reply to specify whether it challenges the existence,
legality or effect of the promissory note and to allege facts in
support of the point.
[96] Subparagraph 15qq) of the reply
reads
qq) as at December 31,
1993, the Software was not capable of performing its task at such
a rate, and of such quality, that a profit could be reasonably
expected to ensue;
[97] This assumption is relevant to the
"not available for use" issue and can stand.
[98] Subparagraphs 25 a), b), c), d),
e) and f) of the reply read
25. The issues are
whether:
a) the
Appellant acquired an interest in the Software for the purpose of
gaining or producing income;
b) in the
Appellant's 1993 taxation year, the Software could be
considered available for use, within the meaning of subsections
13(26) and (27) of the Income Tax Act, R.S.C. 1985
(5th Supp.), c. 1, as amended (the
"Act");
c) as at
December 31, 1993, the fair market value of the Software was
greater than $1.6 million;
d) the
Appellant, the Co-owners, AIRS II Inc. and Arachnae were dealing
with one another at arm's length;
e) the
deduction of the CCA claimed by the Appellant in his 1993 and
1994 taxation years was unreasonable in the circumstances;
and
f) the
$350,000 set out in the So-Called Promissory Note provided by the
Appellant to AIRS II Inc., is a contingent liability.
[99] The appellant submits that only
subparagraphs b) and c) can stand.
[100] I think d), e) and f) can stand. The arm's
length issue is properly advanced in support of restricting the
CCA on the software to a cost of $1,600,000 even though
section 69 was not relied on in assessing. The Crown of
course has the onus on this issue. The same can be said of
subparagraph e). Reasonableness is an issue that was
considered on assessing. It was mentioned in Ms. Jang's
letter.
[101] Subparagraph f) is a legal question and can
be raised to support the assessments as made.
[102] All three of the issues raised in d), e) and f)
are based on arguments that support the assessments as made, that
is to say the deduction of CCA on a more restricted basis than
the appellant claimed. These arguments could be raised even
without subsection 152(9).
[103] The same cannot be said about
subparagraph 25a). For the reasons given above this is not
based on an argument that supports the assessments. It destroys
the assessments and seeks to substitute entirely different
assessments that would deny the appellant any CCA. This is
inconsistent with what was said in Continental Bank and is
not saved by subsection 152(9).
[104] Paragraph 26 of the reply reads
26. He relies, inter
alia, on sections 3, 4, 9, 13, 67 and subsections 69(1),
152(9), 248(1) and 251(1) and paragraphs 20(1)(a), 20(1)(c),
111(1)(a) and (e) of the Act and paragraphs 1100(1)(xii),
1102(1)(c), subsection 1100(2) and Schedule II, class 12 of the
Income Tax Regulations, C.R.C. 1978, c. 945 (the
"Regulations").
[105] The statutory references in paragraph 26 can
stand, except for the reference to
paragraph 1102(1)(c) of the Regulations. This
reference is irrelevant since I have held that the Crown cannot
at this stage raise an entirely new basis of assessment that
results in effect in substituting a new assessment. Therefore it
should be struck.
[106] Subparagraphs 15f), q) and hh) of the reply
read
f) the
alleged purchase price under this agreement was $8 million;
q) the
aggregate, alleged purchase price of the Software to the
Co-owners was $8 million;
hh) under a Software
Purchase Agreement, dated December 31, 1993, the Appellant
acquired 1 unit of the Software for an alleged purchase price of
$500,000;
[107] The use of the weasel word "alleged" in
each of these subparagraphs is as unacceptable as the use of the
expression "So-Called". Is the Crown not capable of
stating openly what its position is? The appellant should not be
left wondering whether it has to prove the purchase price or not.
The term "alleged" implies at least skepticism, if not
downright disbelief.[2] It is not neutral. It has no place in pleadings and in
particular in the pleading of assumptions which are supposed to
be a full, open and honest disclosure of what was assumed on
assessing. In being able to plead assumptions and thereby cast an
onus on an appellant the Crown has a significant advantage but it
has serious concomitant obligations. It does not fulfill those
obligations by indulging in this puerile sort of gamesmanship.
The word "alleged" is struck in the above
subparagraphs. The Crown can seek leave to amend if it does not
like what it is left with after the weasel word
"alleged" is removed.
[108] Subparagraphs 13a), b), d) and e) and 15nn)
of the reply read
13. In respect of
paragraphs 20, 21 and 22 of the Notice of Appeal,
a) he admits
that, in computing income for his 1993 taxation year, the
Appellant purported to add $500,000 to the underpreciated capital
cost of his class 12 assets and purported to deduct capital cost
allowance ("CCA") in respect of his interest in the
Software in the amount of $250,000;
b) he admits
that, in computing income for his 1994 taxation year, the
Appellant purported to deduct CCA in respect of his interest in
the Software in the amount of $250,000;
...
d) he denies
that the Appellant carried forward to his 1995 taxation
year a purported non-capital loss of $32,822;
e) he says
that the Appellant carried forward a purported non-capital loss
of $32,802;
...
15. In so reassessing the
Appellant, the Minister made, inter alia, the following
assumptions:
...
nn) in computing income
for his 1993 and 1994 taxation years, the Appellant purported to
deduct CCA in respect of his interest in the Software;
[109] The use of the word "purported" is
plainly absurd. Obviously the appellant made the deductions that
were disallowed. That is why he was reassessed. Is the Crown now
saying that he did not do so? The question is whether he was
right or wrong in doing so. This is one more example of ambiguous
pleading. The weasel word "purported" is inappropriate
in these subparagraphs and should be struck.
[110] Finally the appellant wants me to strike out the
denials in paragraph 2 of the reply of the allegations in
paragraphs 6, 7 and 8 of the notice of appeal as well as the
denials in paragraphs 6 and 8 of the reply with respect to
paragraphs 3 and 9 of the notice of appeal.
Paragraphs 3, 6, 7, 8 and 9 of the notice of appeal read
3. Charles B.
Loewen is an individual who purchased an undivided 6.25%
co-ownership interest in computer software known as Arachnae
Information Retrieval System Software (the "software or
"AIRS II") in his 1993 taxation year for the purposes
of earning income therefrom.
6. At all
material times the appellant dealt at arm's length with the
vendor of the software.
7. At all
material times the appellant dealt at arm's length with the
developer of the software, Arachnae.
8. At the time
of purchase of his co-ownership interest in the software on
December 31, 1993, the appellant reviewed and relied on the
opinion of an independent expert, a Chartered Business Valuator,
who determined the fair market value of the software to be
$8,000,000.
9. The CCRA
has assessed Arachnae, the developer of the software, to tax on
income account on the basis that the value of the software as at
December 30, 1993 was $8,000,000.
[111] Paragraphs 2, 6 and 8 of the reply read
2. He denies
the facts alleged in paragraphs 6, 7, 8, 11, 12, 14, 18 and 19 of
the Notice of Appeal.
6. With
respect to the facts alleged in paragraph 3 of the Notice of
Appeal, he states that the Appellant acquired an undivided 6.25%
co-ownership interest in software called "AIRS II" (the
"Software") in his 1993 taxation year. He denies the
other facts alleged in that paragraph.
8. He denies
the facts alleged in paragraph 9 of the Notice of appeal. He says
that those allegations are irrelevant to the appeal at bar.
[112] The appellant has made certain allegations of fact
in the notice of appeal. The Crown is under no obligation to
admit them and I cannot force it to do so. It can deny anything
it wishes to deny. A number of alternative courses of action are
open to the appellant. It can refrain from proving the facts it
has alleged and take the position that the Crown has the onus of
disproving them or that they were irrelevant anyway (a somewhat
risky procedure) or it can serve the respondent's counsel
with a notice to admit. If the opposing party is unreasonable in
its refusal to admit it may be penalized in costs.
[113] I would close these lengthy reasons by observing
that the singular form of pleading in income tax cases that has
developed over half a century involving as it does the unique
concept of "assumptions" and a shifting onus of proof
can lead to a procedural quagmire that is both time-consuming and
in many cases ultimately unedifying. The system is however too
well established to be dislodged. I am not being critical of
counsel. The system and the vast amount of jurisprudence that has
been developed in this area lead to precisely this type of
motion. Nonetheless, one must recognize the danger of allowing
the procedural tail to wag the substantive dog. After all, an
appeal is from an assessment not from and assessor's
thought-processes. I would repeat what was said in The
Cadillac Fairview Corporation Limited v. The Queen,
97 DTC 405, at page 407 (footnote 2):
The appellant pleaded that the payments were made pursuant to
the guarantees and this allegation was denied. Counsel for the
appellant argued that since the Minister had not pleaded that he
"assumed" that the payments were not made pursuant to
the guarantees the Minister had the onus of establishing that the
payments were not made pursuant to the guarantees. The question
is, if not a pure question of law, at least a mixed one of law
and fact. In any event the basic assumption made on assessing was
that the appellant was not entitled to the capital loss claimed
and it was for the appellant to establish the several legal
components entitling it to the deduction claimed. An inordinate
amount of time is wasted in income tax appeals on questions of
onus of proof and on chasing the will-o'-the-wisp of what the
Minister may or may not have "assumed". I do not
believe that M.N.R. v. Pillsbury Holdings Ltd. [1964] DTC
5184 has completely turned the ordinary rules of practice and
pleading on their head. The usual rule - and I see no
reason why it should not apply in income tax appeals
- is set out in Odgers' Principles of Pleading and
Practice, 22nd edition at p. 532:
The "burden of proof" is the duty which lies on a
party to establish his case. It will lie on A, whenever A must
either call some evidence or have judgment given against him. As
a rule (but not invariably) it lies upon the party who has in his
pleading maintained the affirmative of the issue; for a
negative is in general incapable of proof. Ei incumbit
probatio qui dicit, non qui negat. The affirmative is
generally, but not necessarily, maintained by the party who first
raises the issue. Thus, the onus lies, as a rule, on the
plaintiff to establish every fact which he has asserted in the
statement of claim, and on the defendant to prove all facts which
he has pleaded by way of confession and avoidance, such as fraud,
performance, release, rescission, etc.
[114] The motion is allowed and the provisions referred
to in these reasons are struck out. If the Crown wishes to amend
and if the parties cannot agree on the amendments a motion will
have to be brought by the Crown.
[115] Counsel for the appellant asked for costs on a
solicitor and client basis. I do not think this is appropriate.
Success was mixed. A lump sum amount of $2,000 should adequately
reflect the complexity and difficulty of the matter and the
degree of success achieved by the appellant.
Signed at Toronto, Canada, this 14th day of March 2003.
A.C.J.
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