Gregory v. The Queen, docket 1999-488-IT-G

Date: 19990317

Docket: 1999-488-IT-G

BETWEEN:

JOHN N. GREGORY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Order

Bowman, A.C.J.

[1] These reasons deal with a motion for directions brought by the respondent in response to a motion brought by the appellant to have the constitutionality of section 245 of the Income Tax Act decided under Rule 58 of the Tax Court of Canada Rules (General Procedure). Counsel for the respondent contends that Rule 58 is inappropriate for the determination of such a question.

[2] The Minister of National Revenue assessed the appellant for his 1993, 1994, 1995 and 1996 taxation years. The assessments arise out of a transaction or transactions which resulted in a claim by the appellant of a substantial non-capital loss from the appellant's participation in a partnership.

[3] It is not necessary for the purposes of the present motion that I set out the facts pleaded by the parties leading up to the claim of loss. It is sufficient to say that the Minister of National Revenue denied the loss. In the reply to the amended notice of appeal a number of alternative assumptions are pleaded in justification of the Minister's denial of the loss. After all of the other alternative bases for denying the losses were pleaded, the Minister pleaded that in the alternative he assumed that the transaction was an avoidance transaction within the meaning of section 245 of the Income Tax Act, the so-called General Anti-Avoidance Rule ("GAAR"). It is agreed between the parties that GAAR was applied at the assessment level and the tax consequences were determined through a notice of reassessment. I specifically raised this point with counsel because it is clear, in light of subsection 245(7), that unless GAAR is applied through an assessment it cannot be used in an appeal to this court to justify an assessment that was made without its application.

[4] The only point here is that it is admitted that the assessments in question arose from the application of GAAR, even though the Minister is advancing a number of other arguments or "assumptions" that are independent of GAAR in support of his assessing action.

[5] The appellant put forward a number of facts and arguments in support of its claim to deduct the losses. In addition, paragraph 38 of the Amended Notice of Appeal reads as follows:

Section 245 of the Income Tax Act violates s. 7 of the Charter and the rule of law is not saved by section 1 of the Charter and thus is of no force and effect pursuant to the Constitution Act, 1982, s. 52.

[6] The question of the constitutionality of section 245 is therefore squarely raised.

[7] On February 22, 2000, counsel for the appellant filed a notice of motion which read as follows:

TAKE NOTICE THAT the Applicant will make a motion to the Court on April 13, 2000 at 10:00 a.m., or as soon after that time as the motion may be heard, at 200 Kent Street, 2^nd floor, Ottawa, Ontario.

THE MOTION IS FOR a determination, pursuant to Rule 58(1) of the Tax Court Rules, of the following question of law:

"Are the provisions of section 245 of the Income Tax Act, R.S.C. 1985, c.1, as amended, impermissibly vague and of no force and effect as being contrary to the substantive requirements of the rule of law, and of no force and effect pursuant to s. 52 of the Constitution Act, 1982 for violation of section 7 of the Canadian Charter of Rights and Freedoms?"

The Applicant has served a Notice of Constitutional Question, which is filed herein, on the Attorney General of Canada and the Attorney General of each Province as required by subsection 57(2) of the Federal Court Act, R.S.C. 1985, c.F-7, as amended.

THE GROUNDS FOR THE MOTION ARE that the question of the validity of s. 245 is a pure question of law that can be determined without evidence, and if determined in the Appellant's favour, will either:

(a) invalidate the reassessments under appeal and dispose of these proceedings without a trial; or

(b) eliminate one central issue before the Court and thereby obviate the need for, or substantially shorten, the hearing of the appeal herein.

[8] The matter was set down for hearing at Ottawa on April 13, 2000.

[9] On February 23, 2000 counsel for the respondent brought a motion, as follows:

THE MOTION IS FOR:

(a) directions pursuant to Rule 4(2) of the General Procedure Rules that the Appellant's motion for determination, pursuant to Rule 58(1)(a) of the General Procedure Rules, that section 245 of the Income Tax Act is unconstitutionally vague, to be heard by the Court at 200 Kent Street, 2nd floor, Ottawa, on April 13, 2000, is to be heard and disposed of in two stages, that is to say, first to determine whether the question to be determined on the Appellant's motion is an appropriate one to be determined pursuant to Rule 58(1)(a), and then, if the Court determines that it is, to determine the question whether section 245 of the Income Tax Act is unconstitutionally vague, the first stage to be heard and disposed of at such time and place as the Court may fix, but in any event prior to April 13, 2000, or alternatively,

(b) for leave to permit the Respondent to adduce evidence regarding the legislative facts pertaining to section 245 of the Income Tax Act at the hearing of the Appellant's motion on April 13, 2000.

THE GROUNDS FOR THE MOTION ARE

(a) that a determination of the constitutional question which the Appellant seeks to have determined would involve the adduction of extensive time-consuming and costly evidence of adjudicative and legislative facts, which may be unnecessary if the Court decided that the question whether the subject matter of the Appellant's motion is appropriate to be decided on a Rule 58(1)(a) motion was heard and decided before hearing and deciding the constitutional question raised by the Appellant's motion, and, alternatively,

(b) the constitutional issue raised by the Appellant's motion requires for its determination the adduction of extensive evidence of legislative facts concerning the purpose of the enactment of section 245 of the Income Tax Act and of its effect.

[10] These reasons deal with the second motion which was argued at Vancouver on March 6, 2000.

[11] Rule 58 reads as follows:

58. (1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or

(b) to strike out a pleading because it discloses no reasonable grounds for appeal or for opposing the appeal,

and the Court may grant judgment accordingly.

(2) No evidence is admissible on an application,

(a) under paragraph (1)(a), except with leave of the Court or on consent of the parties, or

(b) under paragraph (1)(b).

(3) The respondent may apply to the Court to have an appeal dismissed on the ground that,

(a) the Court has no jurisdiction over the subject matter of an appeal,

(b) a condition precedent to instituting a valid appeal has not been met, or

(c) the appellant is without legal capacity to commence or continue the proceeding,

and the Court may grant judgment accordingly.

[12] I agree with counsel for the respondent that an application for determination of a question under Rule 58 involves a two step process — first to decide whether the question put is one that should appropriately be dealt with under Rule 58 and then, if it is, to hear argument and decide the question. This seems self-evident.

[13] Counsel for the respondent contends that the constitutional question should not be dealt with as a preliminary question under Rule 58. Rather, he argues that all of the evidence should be presented, which could take upwards of two weeks, all of the other non-GAAR arguments relating to the correctness of the assessments made and then if and only if it is decided that the assessments cannot be sustained without GAAR should the constitutional question be argued.

[14] He contends further that the use of Rule 58 for the determination of a constitutional question requires evidence and Rule 58 does not permit evidence to be adduced without leave of the court or with the consent of all parties.

[15] It is quite true that in many cases constitutional challenges to legislation may require evidence of the effect that particular impugned provisions may have on persons or classes of persons. This is not, however invariably the case.

[16] It is necessary to distinguish between adjudicative and legislative facts. In Danson v. Ontario (Attorney General), [1990] 2 S.C.R. 1086, Sopinka J. said at 1099-1101:

It is necessary to draw a distinction at the outset between two categories of facts in constitutional litigation: "adjudicative facts" and "legislative facts". These terms derive from Davis, Administrative Law Treatise (1958), vol. 2, para. 15.03, p. 353. (See also Morgan, "Proof of Facts in Charter Litigation", in Sharpe, ed., Charter Litigation (1987).) Adjudicative facts are those that concern the immediate parties: in Davis' words, "who did what, where, when, how, and with what motive or intent...." Such facts are specific, and must be proved by admissible evidence. Legislative facts are those that establish the purpose and background of legislation, including its social, economic and cultural context. Such facts are of a more general nature, and are subject to less stringent admissibility requirements: see e.g., Re Anti-Inflation Act, [1976] 2 S.C.R. 373, per Laskin C.J., at p. 391; Re Residential Tenancies Act, 1979, [1981] 1 S.C.R. 714, per Dickson J. (as he then was), at p. 723; and Reference re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R. 297, per McIntyre J. at p. 318.

In the present case, the appellant contends that he ought to be entitled to proceed with his application under Rule 14.05(3)(h) in the complete absence of adjudicative facts, and, moreover, that it is sufficient that he present in argument (but not prove by affidavit or otherwise) legislative "facts", in the form of textbooks and academic material about the prevailing understanding of the concept of the independence of the bar, and material concerning the legislative history of the impugned rules. In the view I take of this matter, the appellant is not entitled to proceed with the application as presently constituted.

In the time between the granting of leave to appeal in this matter and the hearing of the appeal, this Court heard and decided MacKay v. Manitoba, [1989] 2 S.C.R. 357, a case concerning an action for a declaration that certain provisions of The Elections Finances Act, S.M. 1982-83-84, c. 45, violated the guarantee of freedom of expression contained in s. 2(b) of the Charter. Cory J., speaking for a unanimous Court, stated, at pp. 361-62:

Charterdecisions should not and must not be made in a factual vacuum. To attempt to do so would trivialize the Charter and inevitably result in ill-considered opinions. The presentation of facts is not, as stated by the respondent, a mere technicality; rather, it is essential to a proper consideration of Charter issues.... Charter decisions cannot be based upon the unsupported hypotheses of enthusiastic counsel.

Later, Cory J. stated, at p. 366:

A factual foundation is of fundamental importance on this appeal. It is not the purpose of the legislation which is said to infringe the Charter but its effects. If the deleterious effects are not established there can be no Charter violation and no case has been made out. Thus the absence of a factual base is not just a technicality that could be overlooked, but rather it is a flaw that is fatal to the appellants' position.

This is not to say that such facts must be established in all Charter challenges. Each case must be considered on its own facts (or lack thereof). As Beetz J. pointed out in Manitoba (Attorney General) v. Metropolitan Stores Ltd., [1987] 1 S.C.R. 110, at p. 133:

There may be rare cases where the question of constitutionality will present itself as a simple question of law alone which can be finally settled by a motion judge. A theoretical example which comes to mind is one where Parliament or a legislature would purport to pass a law imposing the beliefs of a state religion. Such a law would violate s. 2(a) of the Canadian Charter of Rights and Freedoms, could not possibly be saved under s. 1 of the Charter, and might perhaps be struck down right away; see Attorney General of Quebec v. Quebec Association of Protestant School Boards, [1984] 2 S.C.R. 66, at p. 88. It is trite to say that these cases are exceptional. [Emphasis added.]

The unconstitutional purpose of Beetz J.'s hypothetical law is found on the face of the legislation, and requires no extraneous evidence to flesh it out. It is obvious that this is not one of those exceptional cases. In general, any Charter challenge based upon allegations of the unconstitutional effects of impugned legislation must be accompanied by admissible evidence of the alleged effects. In the absence of such evidence, the courts are left to proceed in a vacuum, which, in constitutional cases as in nature, has always been abhorred. As Morgan put it, op. cit., at p. 162: "... the process of constitutional litigation remains firmly grounded in the discipline of the common law methodology."

The present case is, for these purposes, indistinguishable from MacKay, and I would respectfully adopt and apply Cory J.'s comments to these circumstances. The appellant here seeks to attack the impugned rules on the basis of their alleged effects upon the legal profession in Ontario. It would be, in my view, difficult if not impossible for a motions judge to assess the merits of the appellant's application under Rule 14.05(3)(h) without evidence of those effects, by way of adjudicative facts (i.e., actual instances of the use or threatened use of the impugned rules) and legislative facts (i.e., the purpose, history and perceptions among the profession of the impugned rules).

[17] Counsel for the appellant stated that he does not intend to adduce any adjudicative facts of the type that were considered necessary in Danson or MacKay. His contention is that section 245 is unconstitutional on its face and no further evidence is necessary. He is not alleging any unconstitutional effects on the appellant or on any class of persons that would require the adducing of evidence. His position is that the legislation is impermissibly vague and is therefore contrary to the substantive requirements of the rule of law and in violation of section 7 of the Charter. For this counsel for the appellant contends that no evidence is required. That is the manner in which he chooses to frame the appellant's challenge to the legislation and it is not the court's place (or the Crown's) to tell the appellant how to present his case. Nor, in my view, should procedural roadblocks be put in the way of a citizen's attempt to invoke the supreme law of this country.

[18] In my opinion the question raised here of the constitutionality of section 245 of the Income Tax Act is one that is entirely appropriate for determination under Rule 58. I say this for several reasons.

[19] Although there are many facts in dispute in the litigation generally, both in respect of the GAAR issue and the non-GAAR issues, there is no fact in dispute that is relevant to the challenge to the constitutionality of section 245 as it is framed by the appellant. The question therefore differs significantly from that in Carma Developers Ltd. v. The Queen, 96 DTC 1803, where many of the facts necessary for the adjudication of the question which the appellant wanted decided under Rule 58 were in dispute.

[20] The constitutionality of section 245 is a separate and discrete issue of law that can be determined without reference to any of the other facts that are in issue in this appeal. If it is decided that section 245 is unconstitutional many of the facts that the parties would advance for or against its application in this case would become irrelevant. If it is decided that it is constitutional the trial can proceed based on the premise of the validity of section 245, without having the constitutional uncertainty hanging over the proceedings.

[21] This is precisely the sort of question that should be dealt with under Rule 58. It would be a waste of time to proceed with a lengthy trial of which at least a portion was devoted to proving or disproving facts that are relevant only to the application of a section that may turn out to be of no force and effect.

[22] I agree that if the trial proceeds without a preliminary determination of the constitutional question it may happen that it will not be necessary to decide that question, because the other grounds advanced in support of the assessment are accepted, or, if they are not, it is decided that GAAR does not apply in any event.

[23] The fact that the judge who hears the case may find it unnecessary to deal with the constitutional question is not a reason for refusing to decide the question now. The question is one that a Canadian taxpayer against whom section 245 has been applied wants answered and it is one that should be answered. If we were to refuse to deal with the question of the constitutionality of section 245 it might be years before the question is raised again. It would be an unfortunate state of affairs if the issue were avoided and the Minister of National Revenue went on applying a section that was ultimately held to be of no force and effect.

[24] I do not propose to deal with many of the cases to which counsel referred, both during the argument of the motion and in correspondence afterwards, such as Canadian Bar Assn. British Columbia Branch v. British Columbia, [1993] B.C.J. 407, Johnson v. BC (Securities Commission, [1999] B.C.J. 552, Ontario v. Canadian Pacific Ltd., [1995] 2 S.C.R. 1031, and R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, to mention only a few. Such cases and many others will unquestionably be referred to upon the hearing of argument on the question. All I am deciding here is the appropriateness of dealing with the question under Rule 58. I do not propose to prejudge the issue on its merits. It would be rather ironic if I acceded to the respondent's argument that it was not appropriate to deal with the constitutional question under Rule 58, and yet went on to dispose of the merits of the question on the basis of the cases cited on a motion for directions.

[25] So far as legislative facts are concerned, these can always be adduced in evidence and I am quite prepared to accede to the request of counsel for the respondent that he be entitled to adduce such evidence of legislative facts as he sees fit. The same applies to the appellant.

[26] Mr. Chambers also asked that he be entitled to examine the appellant for discovery. He does not need leave to do this. The rules permit him to serve an appointment for discovery on the appellant.

[27] The question has been set down for hearing on April 13, 2000. Mr. Chambers contends that he needs more time to assemble the voluminous legislative facts that he wants to adduce. Counsel for the respondent points out that this material has already been assembled for a similar case in British Columbia. I will not, however, presume to second-guess the judgment of a senior and experienced counsel such as Mr. Chambers. If he feels he needs more time he can have it. The parties should communicate with the registry to find a date in June that is suitable.

Signed at Ottawa, Canada, this 17th day of March 2000.

"D.G.H. Bowman"

A.C.J.