[OFFICIAL ENGLISH TRANSLATION]
Date: 20011011
Docket: 98-2925(IT)G, 98-2930(IT)G
98-3120(IT)G, 98-3452(IT)G
98-3517(IT)G, 98-3521(IT)G
98-3540(IT)G, 98-3573(IT)G
BETWEEN:
RICHARD BLANCHETTE,
ANDRÉ CASTAGNER,
DENIS McNAMARA,
MICHEL ROYAL,
TIRUVENKAT DEVANATHAN,
GORDON FOREST,
CHRISTIAN LAVOIE,
VENKATACHALA MURTHY,
Applicants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
GARON, C.J.T.C.C.
[1] This is a motion brought on behalf
of the applicants with a view to obtaining, inter alia,
the striking out of certain allegations from the Replies to the
Notices of Appeal in the above eight cases. The object of the
Notice of Motion filed in those cases is stated as follows:
[TRANSLATION]
THIS IS A MOTION FOR the striking out of certain
allegations or of certain enumerations of documents contained in
the respondent's pleadings, in particular in her Replies to the
Notices of Appeal and in her amended lists of documents.
[2] At the hearing of this motion, the
applicants dropped their claim for the remedy sought in the part
of the Notice of Motion respecting certain documents referred to
in the respondent's "amended lists of documents". The
applicants decided at that time to seek only the striking out of
certain allegations appearing in the Replies to the Notices of
Appeal.
[3] On the very day of the hearing of
this motion, in a letter to the Court dated July 24, 2001, a
copy of which was sent to the respondent, the applicants in the
eight cases in question specified the paragraphs or portions of
paragraphs of the Replies to the Notices of Appeal which they
were seeking to have struck out. The applicants expressed
themselves as follows:
[TRANSLATION]
Accordingly, the Applicants-Appellants request that the
following paragraphs of the respondent's Replies to the Notices
of Appeal be struck out:
Michel
Royal
The statement in paragraphs 1 and 2
Denis
McNamara
that there was no partnership
Christian
Lavoie
and that no actual business was
Venkatachala
Murthy
operated by the purported
Tiruvenkat
Devanathan
partnership;
Gordon Forest
paragraphs 30 to 42;
the first two questions of paragraph 43; and
paragraphs 45, 46 and 48.
Richard
Blanchette
The statement in paragraphs 1 and 2
André
Castagner
that there was no partnership and that no actual business was
operated by the purported partnership;
paragraphs 31 to 45;
the first two questions of paragraph 46; and
paragraphs 48, 49 and 51.
[4] The paragraphs or portions of
paragraphs of the Replies to the Notices of Appeal concerned by
the motion to strike out in the cases of the applicants Michel
Royal, Denis McNamara, Christian Lavoie, Venkatachala Murthy,
Tiruvenkat Devanathan and Gordon Forest are reproduced below:
[TRANSLATION]
1. He denies
the facts alleged in paragraph 1 of the Notice of Appeal and
adds that there was no partnership during the period at
issue.
2. He denies
the facts alleged in paragraph 2 of the Notice of Appeal and
adds that no actual business was operated by the purported
partnership.
. . .
30. At the time of the
sale of the interests in the partnership, the purchase plan
offered by the purported partnership involved having the Quebec
investors pay a cash sum representing 50 percent of their
interest and the Ontarioinvestors pay a cash sum representing
46 percent of their interest. The difference was
"financed" by the Diasware corporation.
31. The appellant had no
obligation toward anyone with respect to the amount presented as
having been "financed".
32. The appellant knew
that, according to the scheme presented at the solicitation, his
interest would be redeemed in the short term for the amount
presented as having been "financed".
33.
Payment in each case was made by discharge of debt representing
the amount "financed" by Diasware. The amount in
question exceeded the fair market value of the interest at the
time of disposition.
34. The use of the
redemption-financing scheme described above represented, for the
promoters and the members of the purported partnership, an
essential characteristic of the "tax shelter" in
respect of which they were reciprocally sellers and buyers.
35. The appellant was
entitled to receive an amount which was granted to him to
eliminate or reduce the effect of any loss attributable to the
fact that he had an interest in the partnership.
36. The appellant
benefited from a mechanism that provided for the disposition of
his interest in the purported partnership and that may reasonably
be considered as having as one of its main objects to attempt to
exclude him from the application of subsection 96(2.4) of
the Income Tax Act.
37. The only reason the
appellant became a member of the purported partnership was to
obtain a reduction of his income tax payable under the Income
Tax Act.
38. The Partnership, Dias,
Data Age, Zuniq Data, Inar, Diasware, Glenrock and Zuniq
("the Zuniq group corporations") were not dealing at
arm's length with each other or with Vohoang.
39. Zuniq, Dias, Data Age,
Zuniq Data and Inar all have the same postal address.
40. The purported
partnership had no reason for being except to serve as a vehicle
for generating income tax refunds and as a financing tool for the
Zuniq group corporations.
41. The appellant had no
intention of entering into a contract of partnership; the
appellant and the co-contractors had no intention of
working together to make the purported business produce
profits.
42.
As there was no reasonable expectation in the circumstances that
the activities of the purported partnership would produce a
profit, the partnership was not, in that respect, carrying on a
business.
B. ISSUES
43. The issues are as
follows:
-
Did a partnership actually exist, and, if so, did it operate a
business?
-
Was the appellant, where applicable, a partner who was a limited
partner of the purported partnership within the meaning of
subsection 96(2.4) of the Income Tax Act at a time in
the year relevant to this appeal?
-
Was the appellant, where applicable, a partner who, in a regular,
continuous and significant manner throughout the year concerned
in which the purported partnership represents itself as having
ordinarily operated its business, did not take an active part in
the activities of the business of the purported partnership and
did not carry on a business similar to that which the purported
partnership represents itself as having carried on during the
year concerned?
. . .
45. He submits that,
having regard to all of the circumstances, there is no actual
partnership carrying on a business and that, as a consequence,
the resulting expenses and loss, if any, are not deductible.
46. He submits that the
appellant is, where applicable, a limited partner within the
meaning of subsection 96(2.4) of the Income Tax Act
and that the appellant is accordingly a specified member within
the meaning of paragraph (a) of the definition of
that expression in subsection 248(1) of the said
Act.
. . .
48.
Furthermore, the Deputy Attorney General respectfully submits
that the whole of the facts set out above authorize this Court to
conclude that:
1 °
the "tax shelter" here in question is a sham, giving
entitlement to none of the deductions claimed;
2 °
the appellant was not a member of a partnership on
December 31, 1989.
[5] In the cases of the applicants
Richard Blanchette and André Castagner, the
paragraphs or parts of paragraphs sought to be struck out are
similar mutatis mutandis to those listed above found in
the other six cases herein, with the exception of
paragraph 34 in the cases of applicants
Richard Blanchette and André Castagner, which
has no equivalent in the other six cases. I therefore think it
useful to reproduce the paragraphs or portions of paragraphs
concerned by the motion to strike out in the cases of the
applicants Richard Blanchette and
André Castagner.
[6] One of the counsel for the
applicants also stated at the hearing that the applicants' motion
was based on section 58, not section 53, of the Tax
Court of Canada Rules (General Procedure).
Applicants' Arguments
[7] It was argued on behalf of the
applicants that the striking out of the aforementioned paragraphs
was necessary, since the basis of the assessments in issue would
otherwise be completely altered. One of the counsel for the
applicants spoke as follows:[1]
[TRANSLATION]
YVES ST-CYR:
That's what
it was. The basis on which the amount was established in the
notice of assessment was that a deduction was allowed. And what
we are being told today is that that was not at all the case. We
are being told: there is no longer any deduction and we can refer
you to no other sections; we're not relying on any other section
of the Act to tell you that a deduction is possible or not
possible. In that case, the basis is being changed; it is as
though an entirely new assessment was being made. It is the
equivalent of what we have today.
In this regard, counsel referred to a passage from the
decision by Stone J.A. in Schultz et al. v. The
Queen, 95 DTC 5657, cited in the decision by
Judge Rip of this Court in General Motors Acceptance
Corporation of Canada, Limited v. The Queen,
99 DTC 975. That passage reads in part as follows:
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
. . . .
[8] For the applicants, it was
emphasized that, in the paragraphs of the Replies to the Notices
of Appeal that the applicants were seeking to have struck out,
the respondent wanted to make a fundamental change to the basis
of the assessments. According to counsel, those paragraphs do not
support the assessments at issue and he made the following
comments on that point:[2]
[TRANSLATION]
It should not be forgotten, Your Honour, and this will, it
completes what I told you a moment ago, and that is that we are
here to accept changes whose purpose is to support the
assessment. But any change that would have the effect of making a
reassessment, obviously that would not be for the purpose of
supporting the assessment. And when reference was made to
inclusion-inclusion and deduction-deduction, what was meant was
that an amount was determined, for example, in the case of the
deductions, as a result of the application of the provisions
relating to deductions, and the same applies to the inclusions.
So the concept is the same; the only thing is that the Department
says: "We did not proceed on the basis of the right section
of the act with respect to-when we included that amount in income
or when we deducted that amount from income. And in support of
the deduction that we allowed the taxpayer, in support of the
inclusion that we allowed the taxpayer, that we allowed, that we
imposed on the taxpayer, we just used the wrong section. So it
should have been included under such and such section or it
should have been deducted under such and such section." But
here it is impossible to draw a parallel; the fundamental
substance of the notice of assessment is being changed. And it
cannot be said that it is a "basis for supporting the
assessment". I do not see how it can be claimed before the
Court that it supports the assessment.
[9] In his reply to the respondent's
argument, one of the counsel for the applicants, after referring
to the decisions by the Federal Court-Trial Division (90 DTC
6076) and Federal Court of Appeal in Riendeau v.
The Queen (91 DTC 5416), further explained his
thoughts on the subject of what may constitute a fundamental
change to the basis of an assessment, as follows:[3]
[TRANSLATION]
And that was basically what we said at the start of the reply,
when the amount of tax doesn't change. And that doesn't
necessarily mean that the Department's arguments are valid, but
if the Department's arguments are valid and the amount of the
assessment does not change, the amendment may be granted or the
new argument may be accepted.
However, even if the Department does not want the
amount to change, because of course it cannot want the amount to
change because it knows that, in any event, it is going to be
considered as an appeal from an assessment, so in that case, if
it is truly fundamental and we find ourselves with what amount to
new notices of assessment that are completely different, it
doesn't mean that their amendments, or contrary
allegations in a reply to the notice of appeal, may be allowed by
the Court.
Respondent's Arguments
[10] The respondent referred in particular
to the decision in The Queen v. The Consumer's
Gas Company Ltd., 87 DTC 5008, in which the Minister was
permitted to adopt before the Federal Court-Trial Division
a position which differed from that taken at the time of the
assessment.
[11] The respondent emphasized that, in an
appeal from an assessment, the Court must determine whether the
amount of tax at issue is too high. He relied for this on the
decision by Thurlow J. of the Exchequer Court of Canada in
Harris v. M.N.R., 64 DTC 5332, and in
particular on certain passages at page 5337.
[12] The respondent cited the decision by
Judge Dussault in Sauvé et al. v. The
Queen, 2000 DTC 2003, and referred to the following
passage from that decision at page 2006:
. . . As noted above, in Gilles Sauvé's case, the
Minister allowed a capital gains deduction equal to the amount
added to his income. This way of looking at the interest received
on the capital invested (minus the legal fees paid) as a capital
gain is clearly wrong, and counsel for the respondent, relying on
the new subsection 152 (9) of the Act, argued that the amount was
actually received as interest and must be included in the
appellants' income on that basis and not as a taxable capital
gain, although he acknowledged that the amount of the assessment
cannot be increased in any way.
[13] The respondent also contended that the
Minister of National Revenue may not only put forward alternative
arguments, but also present new facts. On that point, counsel for
the respondent cited the decision in Smith Kline Beechman
Animal Health Inc. v. R., [2000] 1 C.T.C.
2552, which the Federal Court of Appeal simply confirmed without
giving any reasons.
[14] The respondent further argued that the
existence of a partnership is a question of law and that the
Minister was not bound by an admission. The decision of the
Supreme Court of Canada in Backman v. Canada,
2001 S.C.R. 10, and this Court's decision in
L.I.U.N.A. Local 527 Members' Training Trust
Fund v. The Queen, 92 DTC 2365, were cited
in support of that proposition.
[15] Counsel for the respondent clearly
stated that the Minister of National Revenue was not asking that
the amount of tax assessed be increased. The respondent merely
wanted to establish that the amount of tax appearing on each of
the assessments under appeal was not too high.
Analysis
[16] In the assessments concerned in these
appeals, the Minister of National Revenue assumed that the
partnerships in question existed and that their partners were
sleeping partners.
[17] In each of the Replies to the Notices
of Appeal, the respondent now disputes the existence of each of
the partnerships concerned and furthermore claims, should it turn
out that those partnerships actually existed, that they were
limited partnerships.
[18] It therefore falls to be determined
whether the respondent may present arguments and evidence to
establish that the groupings in question did not constitute
actual partnerships and that, if they did actually constitute
partnerships, the applicants were limited partners.
[19] It is well-settled case law that the
Minister of National Revenue may not appeal from his own
assessments. It is also well recognized that, in the case of an
appeal from an assessment, the Court must, in the final analysis,
decide the question whether the amount of tax assessed by the
Minister of National Revenue is too high. Even before
subsection 152(9) was added by Chapter 22 of the
Statutes of Canada 1999, the case law had established that the
Minister may, in support of his assessment, rely on reasons other
than those he considered at the time of the assessment. See on
this subject the decision by the Federal Court of Appeal in
The Queen v. Consumer's Gas Company Ltd.,
supra, at page 5012. However, the decision of the
Supreme Court of Canada in Continental Bank of Canada v.
Canada, [1998] 2 S.C.R. 358, cast some doubt on the
matter, which led Parliament in 1999 to enact
subsection 152(9) of the Income Tax Act.
[20] In my view, the Minister of National
Revenue is entitled in the instant case to argue that the
partnerships in question are non-existent and that, if they do
exist, they are limited partnerships. This evidence, if accepted
by the judge, would establish that the assessed amount is not too
high. The respondent is not asking that the Minister of National
Revenue be authorized to amend the assessments or, if I may put
it in more technical terms, is not asking that the appeals be
dismissed and that the assessments be referred back to the
Minister of National Revenue for reconsideration and
reassessment. Indeed, subsection 171(1) of the Act
does not permit an assessment to be referred back to the Minister
if the appeal is dismissed; the respondent is asking only that
the appeals from the assessments at issue be dismissed.
[21] If I accepted the proposition put
forward by the applicants, it would follow that the respondent
could advance an alternative argument under subsection 152(9) of
the Act-and present any evidence supporting it-only if the
effect of that argument would be to justify the specific amount
of the assessment under appeal. If it led to the determination of
an amount of tax greater than that assessed, if only by a few
dollars, that argument would be inadmissible. To accept such a
proposition, it seems to me, would be to introduce an arbitrary
and artificial element into the assessment appeals system.
Furthermore, subsection 152(9) of the Act is general
in scope; it does not make the presentation of an alternative
argument in support of an assessment conditional on that
argument's resulting in a determination corresponding exactly
to the amount of the assessment under appeal.
[22] That is the approach
Judge Dussault of this Court adopted in Sauvé et
al, supra, a case in which a portion of the
interest received by the taxpayer had been considered as a
capital gain when the assessment was made. The Minister of
National Revenue had thus included only 75 percent of the
amount of that interest in the taxpayer's income. Following the
taxpayer's appeal from the assessment, the Minister of National
Revenue argued in support of that assessment-which argument was
accepted by the Court-that all the interest should have been
included in income, not just 75 percent thereof, but the
Minister did not ask that the income tax assessment be increased
accordingly.
[23] Referring to this question of interest,
Judge Dussault writes as follows in Sauvé et
al., supra, at page 2006:
On this question, which is something of a
preliminary one, I believe that the respondent can indeed rely on
the provisions of the new subsection 152 (9) to advance a new
argument in support of the assessment, which means-as has been
held many times-in support of the very amount of tax assessed.
Reference may be made in this regard to the decision I rendered
in Consoltex Inc. v. The Queen, 92 DTC 1567, at page 1569,
where I referred to what was stated by Hugessen, J.A. of the
Federal Court of Appeal in The Queen v. The Consumer's Gas
Company Ltd., 87 DTC 5008, at page 5012.
Further on, Judge Dussault concludes as follows on the same
question, at page 2006:
The net amounts received by the appellants on
that basis [that is, as interest] in 1993 should normally
have simply been included as interest and not as business income,
and, of course, much less as a taxable capital gain. Since the
assessments made cannot be varied by adding extra amounts to make
up for the fact that only 75 percent of the net amount received
as interest on the reimbursed capital invested was included in
income, I can only conclude that the amount that was included in
income and that represented interest must in fact remain as
income. [The words in bold characters within brackets have been
added by me.]
[24] Judge Lamarre Proulx of this Court
had previously adopted the same attitude in La Compagnie Price
Limitée v.The Queen, T.C.C.
No. 92-1993(IT)G, October 23, 1996 (97 DTC
800, French only). Her comments at page 3 (DTC:
page 802) should be noted:
The position of the Minister, who, in making his
most recent assessment for the 1984 to 1987 taxation years,
allowed the spare parts as capital property, favoured the
appellant. The appellant is understandably disappointed by the
potential change in the future method of assessing. In law,
however, in order to arrive at the result of the assessment, the
respondent may plead other grounds than those used in
making the assessment, the only constraint being that the amount
of the assessment may not be increased, as ruled in Harris v.
M.N.R., 64 DTC 5332 and restated in well-settled case law on
this point.
[25] The applicants' assertion that the
Minister of National Revenue may not advance in support of an
assessment an alternate argument that would constitute a
fundamental change to the basis of an assessment runs contrary,
in my view, to the decisions of Judges Lamarre Proulx
and Dussault in Compagnie Price, supra, and
Sauvé, supra. For example, in
Sauvé, the alternate argument-advanced by the
Minister and accepted by this Court-was that all the interest the
taxpayer had received should be included in his income, whereas,
in the assessment at issue in that case, the interest in question
was considered as constituting a capital gain and only
75 percent of that interest amount was included in the
taxpayer's income. In addition to establishing with respect to
capital gains a special rate of inclusion in income
(75 percent at the relevant time) as compared to income
from, for example, any office, employment, business or property
of a taxpayer, the Act-particularly in Subdivision c
of Division B of Part I-provides for quite special
treatment for capital gains as compared to income from the
sources just cited. In Sauvé, the alternate
argument, which the Court recognized as valid, represented, in my
view, a radical change with regard to the basis of the assessment
that was the subject of the appeal. One of the counsel for the
applicants did not appear to accept this conclusion which I draw
from Sauvé.
[26] I would add that there was suggested to
me on behalf of the applicants no formula or logical dividing
line that would make it possible to determine whether an
alternate argument was fundamental or not for the purposes of
subsection 152(9) of the Act. Although I do not have
to decide the question, I nevertheless do not believe that the
Minister of National Revenue could advance, in a Reply to a
Notice of Appeal concerning a given assessment, an argument that
would be utterly unrelated to the element of the assessment that
is the subject of a dispute between the parties.
[27] For these reasons, the motion is
dismissed. The respondent is entitled to costs, regardless of the
outcome of the appeals.
Signed at Ottawa, Canada, this 11th day of October 2001.
C.J.T.C.C.
Translation certified true
on this 24th day of February 2003.
Erich Klein, Revisor
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