REASONS
FOR ORDER
C. Miller J.
[1]
Aitchison Professional Corporation, the
Appellant (“Applicant”), seeks a Determination
before hearing pursuant to Rule 58 of the Tax Court of Canada (General
Procedure) Rules (the “Rules”). Such an
application is a two-stage process. First, a judge determines if the questions
for Determination are appropriate to be determined. Second is the Determination
itself. This is the first stage of the procedure.
[2]
Rule 58 reads as follows:
58(1) On application by a party, the Court may grant an order
that a question of law, fact or mixed law and fact raised in a pleading or a
question as to the admissibility of any evidence be determined before the
hearing.
(2) On the application, the Court may grant an order if it
appears that the determination of the question before the hearing may dispose
of all or part of the proceeding or result in a substantially shorter hearing
or a substantial saving of costs.
(3) An
order that is granted under subsection (1) shall
(a) state
the question to be determined before the hearing;
(b) give directions relating to the determination of the
question, including directions as to the evidence to be given — orally or
otherwise — and as to the service and filing of documents;
(c) fix time limits for the service and filing of a factum consisting
of a concise statement of facts and law;
(d) fix
the time and place for the hearing of the question; and
(e) give
any other direction that the Court considers appropriate.
[3]
The questions, which the Applicant submits are
questions of law, for determination are:
a)
whether between 2007 and 2010, James Aitchison
transferred to the Applicant a right to invoice for his legal services; and
b) if so, whether such a right constitutes “property”,
within the meaning of subsection 248(1) of the Income Tax Act (collectively,
the “Questions”).
[4]
By Notice of Assessment dated January 26, 2012
(the “Assessment”), the Minister of National
Revenue (the “Minister”) assessed tax against
the Applicant in the amount of $2,097,770 pursuant to subsection 160(1) of the Income
Tax Act (the “Act”).
[5]
In making the Assessment, the Minister assumed
that James Aitchison had made a transfer to the Applicant of “property”, within the meaning of subsection 248(1)
of the Act, in an amount exceeding $2,000,000. The “property” that the Minister assumes James Aitchison
transferred to the Applicant is “the right to invoice
for legal services” between January 1, 2007 and September 30, 2010.
[6]
The Applicant suggests the following key facts
underlying the Questions are not in dispute:
a)
The Applicant is a professional corporation
incorporated under the laws of Ontario in 2003 and was established for the
purpose of practising law in Ontario;
b)
The Applicant’s directors and shareholders
consist of James Aitchison and his daughters, Kelly and Laurie Aitchison, all
three of whom are barristers and solicitors licensed to practice law in
Ontario;
c)
Between 2007 and 2010, Kelly, Laurie and James
Aitchison performed legal services for the Applicant, and the Applicant
invoiced and collected fees relating to those legal services, but paid no
dividends and either no or nominal wages and salary to James Aitchison;
d)
A portion of the fees collected by the Applicant
throughout this period was attributable exclusively to legal services performed
by James Aitchison (the “JA Fees”), which the
Minister has assumed exceeded $3 million;
e)
The amount of $2,097,770 is the lesser of (a)
the amount that the Minister alleges the Applicant to have received from James
Aitchison and (b) the amount owed by James Aitchison on account of tax, interest,
CPP contributions and penalties;
f)
In making the Assessment, the Minister assumed, inter
alia, that
(i)
the clients in respect of whom James Aitchison
performed legal services were clients of the Applicant;
(ii)
nevertheless, it was James Aitchison, and not the
Applicant, who had the “right to invoice” these
clients;
(iii)
James Aitchison transferred the “right to invoice” for his legal services between
January 1, 2007 and September 30, 2010 to the Applicant;
(iv)
James Aitchison’s “right
to invoice” was “property”, within the
meaning of subsection 248(1) of the Act; and
(v)
the fair market value of that “property” was equal to the amount of the JA Fees
collected by the Applicant between 2007 and 2010.
[7]
The Respondent, in her submissions, refers to
Mr. Aitchison’s arrangement “of not being paid”
as unusual, and links it to the fact that since 1992 Mr. Aitchison has paid no
federal income tax, and as of 2007 was over $2,000,000 in debt to the Minister.
This, notwithstanding that, according to the Applicant’s financial records, Mr.
Aitchison generated revenues of $911,391, $750,249, $847,108 and $701,926 in
2007 to 2010 respectively.
[8]
Both Parties acknowledged the Questions were
raised in the pleadings. Therefore, in accordance with Rule 58, the Court must
consider whether the Determination may dispose of all or part of the proceeding
or result in a substantially shorter hearing or a substantial saving of costs.
[9]
The Applicant suggests there are two elements to
the first question identified in paragraph 3(a): is there an innate right to invoice
of any lawyer who renders services through a professional corporation; if so,
can such a right be transferred? Both elements are questions of law according
to the Applicant. The Applicant also represents that the second question,
whether the right to invoice is property for purposes of subsection 248(1) of
the Act, is also a question of law.
[10]
If either question is answered in the negative,
the Applicant maintains that would dispose of the Appeal. If they are both
answered positively, the Applicant’s position is that only the issue of the value
of property would be left to be adjudicated, which could likely lead to a
settlement rather than trial. The Applicant pointed out that the valuation
issue could prove lengthy as it would require expert evidence. If there was no Rule
58 determination, the Applicant is concerned about having to incur the time and
expense to address the valuation issue at the time of the trial.
[11]
The Applicant suggested that a Determination
could proceed by affidavit evidence as it need only cover the key facts
identified above.
[12]
The Respondent’s position was that only if the
Questions were answered negatively would the trial be shortened. I disagree
with this assessment and prefer the Applicant’s view that either response could
shorten the trial. The difficulty I have, however, is whether the Determination
itself would be any shorter than a trial. Certainly, if it proceeded by
affidavit evidence, that would be the case, but is limiting the Determination’s
process to affidavit evidence the appropriate process? I do not believe so.
[13]
It is in this regard that the Respondent urged
me to consider the following relevant factors:
a)
What type of questions is the Applicant asking
to have determined;
b) What kind of evidence will need to be considered if a Rule 58
motion is allowed and are factual issues in dispute;
c)
What is the proposed procedure; and
d) Will a Rule 58 motion result in prejudice to either Party.
[14]
With respect to the type of questions, the
Respondent submits they are questions of mixed fact and law and not just
questions of law.
[15]
I agree with the Respondent. The question of
whether there is a transfer is only determinable by a full examination of the
factual circumstances surrounding the Applicant’s arrangement with Mr.
Aitchison. Just by way of example, it strikes me how invoicing was handled
would be significant. Also, what were the intentions of the Applicant and Mr.
Aitchison? More than the key facts identified by the Applicant need to be
flushed out. This is best handled through the normal course of examination and
cross-examination. This alone is sufficient for me to rule against a Determination
solely based on affidavit evidence. Having reached that conclusion, then it
strikes me that a Determination based on viva voce evidence involves
the same time and expense as a trial. The exception, as noted by the Applicant,
is that the Determination would not address the valuation issue. But, that is
readily handled by simply bifurcating the trial.
[16]
I find further support for the view that a full
hearing is required to address the Questions in comments of the Federal Court
of Appeal in the case of Manrell v Canada, where the Court
addresses the concept of property:
24. Professor Ziff, in Principles of Property Law, 3rd ed.
(Scarborough: Carswell, 2000), says this about property at page 2:
Property is sometimes referred to as
a bundle of rights. This simple metaphor provides one helpful way to explore
the core concept. It reveals that property is not a thing, but a right, or
better, a collection of rights (over things) enforceable against others.
Explained another way, the term property signifies a set of relationships among
people that concern claims to tangible and intangible items. [Underlining
added.]
25. It is implicit in this notion of "property" that
"property" must have or entail some exclusive right to make a claim
against someone else. A general right to do something that anyone can do, or a
right that belongs to everyone, is not the "property" of anyone. In this
case, the only thing that Mr. Manrell had before he signed the non-competition
agreement that he did not have afterward was the right he shares with everyone
to carry on a business. Whatever it was that Mr. Manrell gave up when he signed
that agreement, it was not "property" within the ordinary meaning of
that word.
[17]
Establishing the set of relationships, as
Professor Ziff puts it, can only be fully and fairly determined with the benefit
of examination and cross‑examination of the key players. I do not agree
with the Applicant that a limited number of key facts would be sufficient for a
court to properly resolve this issue between the Parties.
[18]
I concur with the Respondent that the Questions
raise “numerous factual underpinnings”, many of
which the Respondent suggests are in dispute, such as:
(a) whether Mr. Aitchison or the appellant was retained by his/its
clients;
(b) whether Mr. Aitchison held an exclusive right to invoice for his
legal services, which he could assign or transfer;
(c) whether the Law Society of Upper Canada’s licensing regulations
provide any limitations on invoicing for legal services;
(d) whether the appellant’s income statements are true and accurate; and
(e) whether the appellant’s invoices are true and accurate.
[19]
While I do not believe I am prone to quoting my
own reasons, I did set out my views on Rule 58 Determinations in HSBC Bank
Canada v R.
I repeat them.
10. Mr.
Kroft also urges me to consider this provision in light of what he describes is
an objective of the Tax Court of Canada Rules to find ways to resolve issues
without the need for trial. He points out our new rules on pre-hearing and
settlement conferences as examples of this thrust. While I agree with the
sentiment, I remain of the view that a Determination is not a substitute for
trial. This is a view expressed in the case of Carma Developers Ltd. v.
H.M.Q..[1] The Appellant claims this request is not made as an alternative to
trial, yet does acknowledge that both sides may need to call evidence at the
Determination.
11. Case
law has also established that on a Determination there should be no dispute as
to the facts underpinning the questions of law to be answered. The Appellant
placed considerable emphasis on the changes in 2004 to Rule 58 which extended
Determinations on questions of law to Determinations of fact or mixed fact and
law as well, suggesting the Rule now specifically contemplates that a
Determination of questions of law may first require a Determination of facts.
That sounds very much to me like a trial.
…
13. …The
Appellant invites the Respondent to call evidence at the Determination.
Notwithstanding the new wording of Rule 58, I do not agree that calling such
evidence at a Determination of the 12 questions of law before me is in order.
The CDIC issue as framed in the Reply is a question of fact: was there the
necessary purpose to incur the fee to produce income. Interestingly, the
Appellant has framed its question for Determination as a question of law – is
the fee to the parents deductible vis-à-vis the deposit liabilities insured by
CDIC. The answer to the legal question can only be determined by answering the
factual question, and that notwithstanding the new wording of Rule 58, is a
finding so fundamental to the overall appeal that only a full-blown trial with
all the benefits of trial rules and procedures is the appropriate place for
such an adjudication.
14. …This
goes to the very heart of what a trial judge, with all the evidentiary rules
and procedures at his or her disposal, is to hear. No, I find the Appellant’s
request for the resolution of the CDIC issue is an attempt to bifurcate the
trial, with the result a Motion’s Judge may be forced to reach conclusions on
facts which should, and must, go to trial for a fair hearing, and to reach
those conclusions without the benefit of the evidentiary protections afforded
to both sides at a trial. I simply have not been convinced that the parties can
reach into this complicated mass of documents and surrounding circumstances and
pluck out only those facts that are necessary to answer the CDIC issue. It simply
cannot work.
[20]
I agree with the Respondent that the issue
raised by this assessment is a novel one and, as such, a full hearing would
best serve the interests of justice in possibly establishing a precedent. I
disagree with the Applicant’s view that it is unnecessary to look beyond the
complete legislative regime (Business Corporations Act and the Law
Society Act) to ascertain the relationship. The Court needs to know all the
circumstances.
[21]
It remains to be determined whether unnecessary
time and expense would result from requiring evidence, expert or otherwise, to
deal with the valuation issue coincidentally with the rest of the trial. The
Applicant argues that this could involve considerable time and expense,
necessitating expert evidence, given the complexity. Frankly, I do not see the
valuation issue being that complex. The Respondent values the “right to invoice” equal to the amount of the invoices
themselves, taking no account even of tax owing on such amounts. I would have
thought that the Parties, without excessive energy, might address this between
them without requiring expert help.
[22]
I agree with the Respondent’s view that their
approach to the Applicant’s and Mr. Aitchison’s tax position is novel and
complex. This is not, I respectfully suggest, due to any great complexity with
respect to the value, but is with respect to the concept of property itself,
what are rights and what is transferable.
[23]
I am prepared to bifurcate the trial and allow
the Parties to proceed to trial without addressing the valuation issue. It will
be left to the trial judge to set timelines for hearing the valuation issue, if
that ultimately proves necessary. If both Parties decide that they do not
require the bifurcation then they are to advise the Court at least 30 days
prior to the date set for trial. Costs of this Motion to the Respondent.
Signed at Ottawa, Canada,
this 1st day of December 2016.
“Campbell J. Miller”
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