Date: 20010703
Docket: 2001-568-IT-G
BETWEEN:
DAVID J.T. MUNGOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Order
BOWMAN, A.C.J.
[1]
The appellant moves to strike out subparagraphs 8(c), (d),
(e) and (o) of the Amended Reply to the Notice of Appeal.
[2]
Paragraph 8 of the amended reply comprises approximately
nine pages and about 65 subparagraphs. Its apparent function
is to set out in great detail the so-called
"assumptions" upon which the Minister acted in
assessing.
[3]
The issue in the appeal is whether the amounts of $106,993 and
$38,916 are deductible under subsection 66.1(3) of the
Income Tax Act as Canadian Exploration Expenses
("CEE"). There are other very small amounts in issue
but essentially the question is as I have stated it. It involves
the purchase, or alleged purchase, of seismic data. A number of
subsidiary points are pleaded by the respondent and a large
number are pleaded as alternative arguments.
[4]
Some of these arguments are
(a)
the amounts claimed are not CEE;
(b)
the promissory note given was a contingent amount;
(c)
the amounts claimed in excess of the cash paid was not
reasonable;
(d)
the amounts paid were not laid out for the purpose of gaining or
producing income and were capital in nature.
[5]
The assumptions, so called, endeavour to paint a picture of a tax
motivated scheme in which inflated prices were paid for seismic
data.
[6]
The paragraphs to which the appellant objects are 8(c), (d), (e)
and (o). They read as follows.
(c)
Shapiro arranged many similar pre-ordained series of transactions
in which he would obtain seismic at market price through an
intermediary; cause the intermediary to transfer the seismic to a
middle person (a member of the Shapiro group) at a price inflated
by the use of limited recourse promissory notes; and they cause
the middle person to transfer it to the Appellant at the same
inflated price, for roughly 15% cash and a limited recourse
promissory note for the remainder;
(d)
The primary purpose of these pre-ordained transactions was the
selling of tax deductions which generated management fees for one
or more of the Shapiro group;
(e)
One of these purchases involved a sale of seismic from TDHL to
Global Communications Limited ("Global") in 1991 (the
"Global sale");
...
(o)
Kondrat approached Geosignal in the summer of 1992 to purchase
its seismic, but because Geosignal wanted $2 million for its
data, negotiations broke off.
[7]
They form part of about 65 pleaded assumptions containing
facts, law, evidence and argument. Mr. Mungovan's
position is set out in his notice of motion as follows.
(a)
Subparagraphs (c), (d), (e) and (o) of paragraph 8 of the Reply
are scandalous, frivolous and vexatious and will undoubtedly
prejudice and delay the fair hearing of the action. The
subparagraphs refer to prior irrelevant transactions which
allegedly occurred prior to the matters concerning this action.
These prior irrelevant transactions are unconnected to this
respondent and no connection is alleged. Furthermore, the
respondent by these subparagraphs raises irrelevant and
prejudicial issues concerning the intention of a person to those
earlier transactions to which the appellant has no connection
whatsoever nor is any connection alleged.
(b)
The appellant is being smeared with guilt by alleged association
with earlier irrelevant transactions to which he has no actual
connection or actual association. As a result, the respondent is
also abusing the process of this Court.
(c)
That there may have been an aborted attempt by Kondrat to
purchase seismic at a date before the transaction involved in
this case as alleged in subparagraph (o) of paragraph 8 of the
Reply but this is also irrelevant and frivolous. It is inserted
to colour the legitimacy of the subject transaction in a
scandalous and vexatious manner.
[8]
He submitted a written argument as well. It reads
1.
This appellant states that subparagraphs (c), (d), (e) and (o) of
paragraph 8 of the Reply allege in substance that the vendor of
the seismic data in which the appellant is an investor was
provided by the vendor as part of fraudulent schemes to evade tax
that had been performed by the vendor on a number of occasions
before the appellant was solicited to invest. Although the
appellant is not alleged to have been involved in those alleged
earlier schemes, his case is being unfairly and prejudicially
tainted by them. Such pleading is nothing but an improper and
scandalous attempt to colour the legitimacy of the transaction
that is the subject matter of this appeal by alleging matters
wholly unrelated and immaterial to the transaction at issue under
the guise that they were "assumptions of fact" made by
the Minister.
2.
In fact, they may or may not have been something that motivated
the Minister but they certainly are not facts that are relevant
and material to this case.
3.
The allegations in subparagraphs (c), (d) and (e) of paragraph 8
of the Reply that Mr. Shapiro arranged on other occasions for the
sale of seismic data to investors in what the respondent
characterizes as being tantamount to a fraud on investors and
that this appellant was defrauded in the same way is not only
scandalous but also frivolous, and vexatious.
4.
If such allegations are permitted to continue to be a part of
this case, then the appellant will be put to the expense of
having to investigate and determine the accuracy of such
allegations when he has had no involvement in them nor is any
such involvement alleged.
5.
Accordingly, it would be grossly unfair to this appellant and
will delay the hearing of the action to leave these allegations
in the Reply.
6.
The allegation in subparagraph (o) of paragraph 8 of the Reply
that there may have been an aborted attempt to acquire seismic
prior to this transaction is also improper as it is no less than
an attempt to present frivolous and irrelevant information in the
Reply that has no legitimate purpose. The allegation is vexatious
and will prejudice the appellant and delay a fair trial because
it will require the investigation by the appellant and eventually
the Court into an area wholly unrelated to the facts in issue in
this case.
[9] I
am not prepared to strike out these paragraphs of the
assumptions. The reasons are as follows.
[10]
Assumptions are not quite like pleadings in an ordinary lawsuit.
They are more in the nature of particulars of the facts on which
the Minister acted in assessing. It is essential that they be
complete and truthful. The conventional wisdom is they cast an
onus upon an appellant and as Mr. Mungovan observes with some
considerable justification they may force him to endeavour to
disprove facts that are not within his knowledge. Superficially
this may be true, but this is a matter that can be explored on
discovery. The trial judge is in a far better position than a
judge hearing a preliminary motion to consider what effect should
be given to these assumptions. The trial judge may consider them
irrelevant. He or she might also decide to cast upon the
respondent the onus of proving them. The rule in M.N.R. v.
Pillsbury Holdings Ltd., 64 DTC 5184, is a rule of
general application but it is not engraved in stone. For example
in Hickman Motors Limited v. The Queen,
97 DTC 5363, L'Heureux-Dubé J. said at
page 5377:
In the present case, without any evidence, both the Trial
Division and the Court of Appeal purported to transform the
Minister's unsubstantiated and unproven assumptions into
"factual findings", thus making errors of law on the
onus of proof. My colleague Iacobucci, J. defers to these
so-called "concurrent findings" of the courts below,
but, while I fully agree in general with the principle of
deference, in this case two wrongs cannot make a right. Even with
"concurrent findings", unchallenged and uncontradicted
evidence positively rebuts the Minister's assumptions:
MacIsaac, supra. As Rip, T.C.J., stated in Gelber v.
M.N.R., 91 DTC 1030, at p. 1033, "[the Minister] is not
the arbiter of what is right or wrong in tax law". As
Brulé, T.C.J., stated in Kamin, supra, at p.
64:
...
the Minister should be able to rebut such [prima facie]
evidence and bring forth some foundation for his assumptions.
...
The Minister does not have a carte blanche in terms of
setting out any assumption which suits his convenience. On
being challenged by evidence in chief he must be expected to
present something more concrete than a simple assumption.
[Emphasis added.]
In my view, the above statement is apposite in the present case:
the respondent, on being challenged by evidence in chief, failed
to present anything more concrete than simple assumptions and
failed to bring forth any foundation. The respondent chose not to
rebut any of the appellant's evidence. Accordingly, the
respondent failed to discharge her onus of proof.
I note that, in upholding the Minister's unproven
assumptions, my colleague Iacobucci, J. may be seen as
reversing the above-stated line of caselaw, without explicitly
providing the rationale for doing so. With respect for the
contrary opinion, in my view, changes in the jurisprudence
regarding the onus of proof in tax law should be left for another
day. Furthermore, on the facts of the case at bar, sanctioning
the respondent's total lack of evidence could seem
unreasonable and perhaps even unjust, given that the appellant
complied with a well-established line of jurisprudence as regards
its onus of proof.
[11] I think
that we are seeing an evolution in the rôle of assumptions
in income tax appeals. The day may be near when there will be a
modification in the rigid rule that whatever the Crown may choose
to say the Minister assumed has to be demolished by the taxpayer.
It is well settled, for example, that the respondent cannot by
dressing evidence up in the guise of assumptions expect the court
to accept such evidence as proved. However a motion to strike out
certain assumptions is not the place to reconsider the rule.
[12] It is
entirely possible, as Mr. Mungovan points out, that some of
the impugned assumptions are irrelevant. This is a matter for the
trial judge to determine after the evidence has been presented.
It is not a matter that can or should be determined on a
preliminary motion to strike. It may well be that the paragraphs
contain allegations that lie exclusively within the
respondent's knowledge. It is a matter for the trial judge to
determine whether the onus should be cast upon the respondent to
establish them. The rule that the onus is upon a taxpayer who
challenges an assessment is based on the passage in the Supreme
Court of Canada by Duff J. in Anderson Logging Co. v. The
King, 52 DTC 1209 (S.C.C.) aff'd
52 DTC 1215 (J.C.P.C.), at p. 1211:
On behalf of the appellant company it is contended, first, that
the onus was upon the Crown to shew that the profit was earned in
an operation which was a part of the business carried on in fact
by the company; and, secondly, that from what is described as the
isolated case of the purchase and sale of these timber limits no
inference as to the course of the company's business can
properly be drawn.
First, as to the contention on the point of onus. If, on an
appeal to the judge of the Court of Revision, it appears that, on
the true facts, the application of the pertinent enactment is
doubtful, it would, on principle, seem that the Crown must fail.
That seems to be necessarily involved in the principle according
to which statutes imposing a burden upon the subject have, by
inveterate practice, been interpreted and administered. But, as
concerns the inquiry into the facts, the appellant is in the same
position as any other appellant. He must shew that the impeached
assessment is an assessment which ought not to have been made;
that is to say, he must establish facts upon which it can be
affirmatively asserted that the assessment was not authorized by
the taxing statute, or which bring the matter into such a state
of doubt that, on the principles alluded to, the liability of the
appellant must be negatived. The true facts may be established,
of course, by direct evidence or by probable inference. The
appellant may adduce facts constituting a prima facie case
which remains unanswered; but in considering whether this has
been done it is important not to forget, if it be so, that the
facts are, in a special degree if not exclusively, within the
appellant's cognizance; although this last is a consideration
which, for obvious reasons, must not be pressed too far.
[13] One
should not press the conventional rule about the appellant having
the onus so far that one loses sight of its original purpose and
of all considerations of procedural fairness. In The Cadillac
Fairview Corporation Limited v. The Queen,
97 DTC 405, aff'd 99 DTC 5121 (F.C.A.),
at p. 407 the following observation was made.
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.
[14] The trial
judge may well decide that the Crown has some onus that goes
beyond the mere recitation of a bald assumption. The weight to be
put on these paragraphs is a matter for the trial judge, as is
the onus of proof. This is not, however, a reason for striking
the paragraphs before trial.
[15] The
respondent has an obligation to disclose all of the facts upon
which the assessment was based. Conceivably some of the facts
assumed are wrong or irrelevant. They should still be disclosed.
I would not wish to discourage the full disclosure of facts. The
mere fact that the lawyer drafting the reply may have thought an
assumption was wrong, irrelevant or embarrassing to the
Crown's case is no reason for failing to disclose it. Indeed,
in Bowens v. The Queen, 94 DTC 1853, aff'd
96 DTC 6128, the effect of failing to plead assumptions
that were central to an assessment was discussed. The Federal
Court of Appeal at p. 6129 suggested that the Crown's
Reply might have been struck out for failing to plead a fact that
was at the basis of the assessment.
[16] I do not
think that the pleaded assumptions to which the appellant takes
exception are scandalous, frivolous or vexatious. They may be
irrelevant or wrong but, unless the evidence at trial discloses
otherwise, they remain nonetheless to be treated as the
assumptions on which the Minister acted.
[17] The
motion is dismissed.
[18] Costs
will be costs in the cause.
Signed at Toronto, Ontario, this 3rd day of July 2001
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
2001-568(IT)G
STYLE OF
CAUSE:
Between David J.T. Mungovan and
Her Majesty The Queen
PLACE OF
HEARING:
Conference call
DATE OF
HEARING:
June 15, 2001
REASONS FOR ORDER
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
ORDER:
July 3, 2001
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Wendy Burnham
Deborah Horowitz
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-568(IT)G
BETWEEN:
DAVID J.T. MUNGOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard by way of conference call on
June 15, 2001, by
The Honourable D.G.H. Bowman, Associate Chief
Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Wendy
Burnham
Deborah Horowitz
ORDER
Upon
motion by the appellant for an order striking out
subparagraphs 8(c), (d), (e) and (o) of the Amended Reply to
the Notice of Appeal
And
upon hearing what was alleged by the parties
It is
ordered that the motion be dismissed.
Costs
will be costs in the cause.
Signed at Toronto, Canada, this 3rd day of July 2001.
A.C.J.
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