Citation:
2014 TCC 367
Date: 20141212
Docket: 2009-2430(IT)G
BETWEEN:
CAMECO
CORPORATION,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Pizzitelli J.
[1]
The Appellant has brought a motion for:
1. An Order
striking paragraphs 31(a), 36, 37 and 38 (the “Paragraph 247(2)(a) Statements”)
of the Amended Reply filed by the Respondent on February 15, 2011 and directing
that the Respondent is precluded from disputing that the terms and conditions
of all of the transactions between the Appellant and any of its affiliates,
which are in issue in this appeal, are terms and conditions which would have
been made between persons dealing at arm’s length;
2. An Order
directing the Respondent to provide answers (and to also answer any proper
questions arising from those answers) to questions 1118-1123 of the examination
for discovery of Mr. G.H. conducted on February 5, 2014 (concerning the Crown’s
Sham Theory);
3. Costs of this motion, payable in any event of
the cause; and
4. Such further
and other relief as counsel may advise and this Honourable Court deems just.
[2]
I intend to deal first with the motion to strike
the Paragraph 247(2)(a) Statements and then with the request to preclude the
Respondent from disputing the terms and conditions above-referenced. I will
deal with the request for answers to questions concerning the Crown’s Sham
Theory above-referenced last.
I. Striking
Paragraphs of Amended Reply and Order Sought
[3]
The Paragraph 247(2)(a) Statements in the Respondent’s
Amended Reply the Appellant seeks to strike read as follows:
C. ISSUES TO BE DECIDED
31. The
issues to be determined in respect of transactions or series of transactions or
arrangements described in paragraphs 14 and 17 are:
a) whether the
provisions of paragraphs 247(2)(a) and (c) apply to the said transactions; …
D. STATUTORY PROVISIONS, GROUNDS RELIED ON, AND RELIEF SOUGHT
36. He
respectfully submits that the terms or conditions made or imposed in respect of
the sale and purchase of uranium between Canco and Swissco and the services to
be provided by Canco to Swissco in respect of the Mining Agreements differed
from those that would have been made between persons dealing at arm’s length
within the meaning of paragraph 247(2)(a) of the Income Tax Act. Canco
performed all the functions and undertook all the risks and Swissco undertook
no functions and assumed no risks. Arm’s length parties, in such circumstances,
would give Swissco negligible or nil consideration and provide Canco with all
the income, commensurate with each parties’ functions and risks in the
transactions. The Minister properly reassessed as such by adding all of
Swissco’s profits into Canco’s income pursuant to paragraph 247(2)(c) of the Income
Tax Act.
37. He
further submits that with respect to Tenex, Urenco and other transactions with
third parties whereby Swissco executed contract(s) and /or amendment(s) or had
them assigned to it by Luxco, Canaco guaranteed the performance and payment by
Swissco for a guarantee fee, created a Service Agreement whereby Canco
performed all substantive functions and all necessary functions, and undertook
all the risks. The terms or conditions between Canco and Swissco in respect of
those transactions differ from those that would have been made between persons
dealing at arm’s length within the meaning of paragraph 247(2)(a) of the Income
Tax Act. At arm’s length, the terms and conditions would:
a) reflect
compensation to Swissco only in respect of the functions and risks it undertook,
which were limiting to executing contracts and maintaining Swissco as a legal
entity; and
b) the party
undertaking all the remaining functions and assuming all the risks would earn
all the profits, either through the Guarantee Agreements and the Service Agreement
or other arrangements.
38. Pursuant
to paragraph 247(2)(c), the Minister properly reassessed in accordance with the
terms and conditions that would exist between arm’s length parties, namely all
the profit would be earned by Canco and Swissco would not earn any profit.
[4]
The Appellant takes the position that such
provisions should be struck because the Respondent not once, but twice, failed
to comply with Chief Justice Rip’s previous Orders to provide certain
fundamental information to the Appellant in respect of the allegation that
those terms and conditions differ from those that would have been agreed to
between person’s dealing at arm’s length and thus pursuant to Rule 53 of the Tax
Court of Canada Rules (General Procedure), such statements are scandalous,
frivolous or vexatious or is an abuse of process as the Appellant contends in
this case.
[5]
Rule 53 reads as follows:
53. (1) The Court may, on its own initiative or on application
by a party, strike out or expunge all or part of a pleading or other document
with or without leave to amend, on the ground that the pleading or other
document
(a) may
prejudice or delay the fair hearing of the appeal;
(b) is
scandalous, frivolous or vexatious;
(c) is an abuse
of the process of the Court; or
(d) discloses no
reasonable grounds for appeal or opposing the appeal.
(2) No evidence is admissible on an
application under paragraph (1)(d).
(3) On application by the respondent, the
Court may quash an appeal if
(a) the Court
has no jurisdiction over the subject matter of the appeal;
(b) a condition
precedent to instituting an appeal has not been met; or
(c) the
appellant is without legal capacity to commence or continue the proceeding.
[6]
By way of background, the Appellant brought a
motion to strike certain paragraphs of the Respondent’s original Reply on May
17, 2010, which, inter alia included the following paragraphs found in
the assumptions portion of the Reply, namely subparagraphs 14(bbb) and (fff)
which read as follows:
(bbb) the transfer prices for uranium on the sales
by Canco to Swissco and the purchases by Canco from Swissco were not consistent
with an arm’s length price;
(fff) the terms and conditions made or imposed
in respect of the sale and purchase of uranium between Canco and Swissco differ
from those that would have been made between persons dealing at arm’s length.
[7]
Chief Justice Rip struck both of these
provisions in his Order of December 30, 2010 with leave to amend for the reasons
stated in paragraphs 48 and 49 of his Amended Reasons for Order dated
January 12, 2011 which read:
[48] Subject Paragraph 14(bbb) is another
key allegation in this appeal alleging that the transfer prices on the sales
and purchases in issue were not consistent with an arm’s length price. The
Appellant is entitled to know what prices are consistent with an arm’s length
prices to the extent that such prices cannot be determined by reference to the
amount of tax assessed. This paragraph will be struck with leave to amend.
[49] Subject Paragraphs 14(fff), (ggg) and
(jjj) will be struck with leave to amend. The contents of these paragraphs are
mixed fact and conclusions of law, in particular a paraphrase of paragraph
247(2)(a) of the Act.
[8]
With leave to amend, the Respondent filed the
Amended Reply where such provisions were contained in identical form save that
they were referenced as subparagraphs 14(eee) and (lll). Consequently, the
Appellant brought another motion to strike these two subparagraphs on the basis
the Respondent did not comply with Chief Justice Rip’s First Order to strike
the identical subparagraphs pursuant to Rule 53. Chief Justice Rip ordered the
provisions struck in his Order of July 20, 2011 (the “Second Order”) for
failure to comply with the First Order on the basis same offended Section 53 of
the Rules. Notwithstanding that Chief Justice Rip incorrectly identified those
subparagraphs as 14(bbb) and (fff) instead of (eee) and (lll) there is no
dispute what provisions he was referring to. In paragraph 20 of his Reasons, Chief
Justice Rip reiterated his rationale for striking it in first instance:
[20] Subparagrpah 14(bbb) was ordered
struck from the reply because the appellant was entitled to know how the prices
for uranium transferred between Canco and Swissco differed from those that
would have been agreed upon by arm’s length parties. …once the Minister assumed
that the transfer prices for uranium contracts differed from those that would
have been made between persons dealing at arm’s length, the appellant was
entitled to know exactly how they differed. In principle, this may apply to
subparagraph 14(fff) of the reply as well.
[9]
In paragraphs 22 to 23 Chief Justice Rip went on
to state that in effect merely changing the numbers of the subparagraphs does
not constitute an amendment and thus if no amendment was made the provisions
were ordered struck. In paragraph 23 Chief Justice Rip stated:
[23] When a court orders a provision of a
pleading to be struck the provision in question must be struck. If leave to
amend is granted, the struck provisions may be replaced by amendment. In
principle, leave to amend does not anticipate the struck provisions will remain
in the pleadings even if, on amendment, further provisions are inserted to
clarify or address the concerns of the Court in the first place. …
[10]
The Appellant argues that in effect the
information directed to be included by Chief Justice Rip in those two
subparagraphs; namely that the Appellant was entitled to know how the prices
for uranium transferred between Canco and Swissco differed from those that
would have been agreed upon by arm’s length parties and once assumed the
difference, the appellant was entitled to know exactly how they differed must
also be contained in the Paragraph 247(2)(a) Statements or provided on
discovery and failure to do so should constitute non-compliance with his Orders
and thus an abuse of process under Rule 53(1)(c).
[11]
Frankly, I cannot agree with the Appellant. As
the Respondent had pointed out, the Paragraph 247(2)(a) Statements now sought
to be struck by the Appellant were contained in the Amended Reply at the time
of the second motion and neither specifically argued nor commented on by Chief
Justice Rip. If Chief Justice Rip had intended to have his dicta apply to the Paragraph
247(2)(a) Statements he would have indicated so. His Second Order, addressing the
Amended Reply was dated July 20, 2011, over 3 years ago, and now the
Appellant, after pleadings were closed and discovery commenced and completed,
save for any need to further answer questions in issue, raises the issue in
respect of the Paragraph 247(2)(a) Statements that he did not raise during the
earlier motions.
[12]
Chief Justice Rip was not asked to nor did he
consider or make any order in regards to the Paragraph 247(2)(a) Statements in
question and hence there is no violation of any such order and hence no abuse
of process claimed by the Appellant. Moreover, even if I were to accept the Appellant’s
interpretation of Chief Justice Rip’s directives as applying to the Paragraph
247(2)(a) Statements, it is clear that the Respondent has indicated that the
arm’s length price for Swissco’s services were nil or nominal and so would have
satisfied the directives in any event. The Respondent in such amended Paragraph
247(2)(a) Statements clearly indicated the price is 0. In paragraph 36 the
Respondent states that “Arm’s length parties, in such circumstances, would give
Swissco negligible or nil consideration …” and in paragraph 37 stated:
[37] … The terms or conditions between
Canco and Swissco in respect of those transactions differ from those that would
have been made between persons dealing at arm’s length within the meaning of
paragraph 247(2)(a) of the Income Tax Act. At arm’s length, the
terms and conditions would:
a) reflect compensation to Swissco only
in respect of the functions and risks it undertook, which were limited to
executing contracts and maintaining Swissco as a legal entity; and
b) the party undertaking all the
remaining functions and assuming all the risks would earn all the profits, either
through the Guarantee Agreements and the Service Agreements or other
arrangements.
[13]
In paragraph 38 of the Paragraph 247(2)(a) Statements
the Respondent states “… namely all the profit would be earned by Canco and
Swissco would not earn any profit.”
[14]
These Paragraph 247(2)(a) Statements do not paraphrase
paragraph 247(2)(a) as did the subparagraphs struck by Chief Justice Rip above.
They contain sufficient detail and information in my view for the Appellant to
know exactly the price it feels Swissco is due in an arm’s length situation,
nil and thus allow the Appellant to know and deal with it properly at trial.
This is hardly the case of rambling pleadings that would justify a conclusion
that the Amended Reply is scandalous, frivolous or vexatious as in the O’Neil
v Minister of National Revenue, [1994] FCJ No. 1940, 95 DTC 5060, relied
upon by the Appellant.
[15]
Moreover, these statements fall under the
headings “C. ISSUES TO BE DECIDED” or “D. STATUTORY PROVISIONS, GROUNDS RELIED
ON, AND RELIEF SOUGHT”. They are not assumptions under paragraph 14 like the
provisions considered by Chief Justice Rip, the onus of which falls on the Appellant
to demolish, so I am not convinced there is any prejudice to the Appellant in
this regards. Moreover, on a review of the assumptions in the Amended Reply not
challenged by the Appellant, it is clear to me that if true, many of the
assumptions may be capable of supporting the Respondent’s position, something
which the trial judge must determine after weighing all the evidence.
[16]
It is trite law stated by Chief Justice Rip in
the First Order when quoting former Chief Justice Bowman in Sentinel Hill
Productions (1999) Corporation et al. v Her Majesty the Queen, 2007
TCC 742, 2008 DTC 2544, at page 2545, paragraph 4 that:
…
(b) To strike out a pleading or part of a pleading under Rule
53 it must be plain and obvious that the position has no hope of succeeding.
The test is a stringent one and the power to strike out a pleading must be
exercised with great care.
(c) A
motions judge should avoid usurping the function of the trial judge in making
determinations of fact or relevancy. Such matters should be left to the judge
who hears the evidence.
…
[17]
In my view, the Appellant has not demonstrated
the Respondent’s position has no hope of succeeding and it seems clear to me
that if a trial judge accepts on the evidence that the Appellant has not demolished
the Ministers assumptions, like paragraph 14(x), that assumes all substantive
functions relating to Swissco’s alleged business were performed by Canco or
paragraphs 14(y) and (rr) which assumes Swissco assumed no risk while Canco
did, or (hhh) which assumes Swissco provides no functions of value to Canco and
assumes no risk, or (mmm) which assumes Swissco would not earn any profit at
arm’s length for failure to perform any functions of value to generally name
and summarize a few, then such assumptions can support the Paragraph 247(2)(a) Statements
that Swissco is in effect entitled to no or nil consideration in the transfer
pricing regime.
[18]
It should also be noted that Chief Justice Rip made
it clear in paragraph 22 of his Second Order that “… discussions regarding
transfer pricing methodologies are not before me at this stage…”. Clearly Chief
Justice Rip was not basing his decision to strike the two specific paragraphs
on the merits of the Respondent’s profit split methodology and the process it
argued in support of its position during those motions.
[19]
It follows then that I disagree with the
Appellant’s argument that the decisions of Chief Justice Rip would have had to
be appealed for the Respondent to maintain the Paragraph 247(2)(a) Statements
in its Amended Reply.
[20]
The Appellant’s motion to strike the Paragraph
247(2)(a) Statements is denied.
II. Order
Precluding Paragraph 247(2)(a) and (c) Issues
[21]
The Appellant also seeks an Order directing that
the Respondent be precluded from disputing that the terms and conditions of all
of the transactions between the Appellant and any of its affiliates, which are
in issue in this appeal, are terms and conditions which would have been made
between persons dealing at arm’s length; effectively precluding the Respondent
from pursuing paragraph 247(2)(a) transfer pricing arguments and the
adjustments contemplated by paragraph 247(2)(c). These provisions are set out
below:
247. (2) Where a
taxpayer or a partnership and a non-resident person with whom the taxpayer or
the partnership, or a member of the partnership, does not deal at arm’s length
(or a partnership of which the non-resident person is a member) are
participants in a transaction or a series of transactions and
(a) the terms or
conditions made or imposed, in respect of the transaction or series, between
any of the participants in the transaction or series differ from those that
would have been made between persons dealing at arm’s length, or
…
(c) where only
paragraph 247(2)(a) applies, the terms and
conditions made or imposed, in respect of the transaction or series, between
the participants in the transaction or series had been those that would have
been made between persons dealing at arm’s length, or
…
[22]
The Appellant argues that the Respondent has
failed to properly answer questions on discovery of its auditor, one Mr. G. H.,
dealing with the above paragraphs, in effect failing for a third time to meet
the directives of Chief Justice Rip referred to above pertaining to the
striking of the subparagraphs in his First and Second Order, thus rendering the
Crown’s pleadings of the Paragraph 247(2)(a) Statements sought to be struck as
scandalous, frivolous and vexatious or an abuse of the process of this Court
within the meaning paragraphs 53(1)(a), (b) and (c) of the
Rules above-referred to, or in the alternative, find that such responses
constitute a failure to answer questions; and thus seeks that the appeal under
paragraphs 247(2)(a) and (c) of the Income Tax Act be dismissed under
Rule 110(f) which will be discussed in more detail. Furthermore argued by
the Appellant, the responses to the questions demonstrate there is no basis
upon which the Crown could successfully advance an argument under those provisions
and indeed the answers represent an abandonment of the argument that paragraphs
247(2)(a) and (b) apply in this case.
[23]
I have already ruled that I am not prepared to strike
the Paragraph 247(2)(a) Statements above on the basis of the applicable law pertaining
to striking pleadings under any of the provisions of Rule 53. I must also
disagree with the Appellant that the directive of Chief Justice Rip which he
refers to applied to any questions asked on discovery. Clearly, the Orders of Chief
Justice Rip were well in advance of discovery and pertained only to the content
of the pleadings questioned, so I frankly again fail to see how the Respondent
was in any way in violation of any Order in this regard so as to constitute any
abuse of process.
[24]
Moreover, as I mentioned earlier, I have already
determined, based on the pleadings in the Amended Reply, the Appellant has not
demonstrated that the Respondent has no chance of succeeding. The Appellant
however now asks in effect that I find the Respondent also has no chance of
succeeding based on his answers on discovery. I am not prepared to do so for a
few reasons.
[25]
Firstly, the questions posed to the Respondent’s
auditor, Mr. G.H., in particular Question 1117 (although similar questions
ensued in Questions 1032 and 1033-1041) and answer ultimately given in writing
by follow-up undertakings are as follows:
Q. Mr. H, in connection with the
Minister’s arguments under 247(2)(a) and (c), I’d like you to tell me for each
transaction involving the purchase and sale of uranium between Cameco Europe SA
and Comeco Corporation or Cameco Europe, Ltd and Comeco Corporation taking
place between 1999 and 2003, I’d like you to tell me which terms and conditions
differ from those which would have been made between persons dealing at arm’s
length, and what you say the terms and conditions of each of these transactions
would have been had they been entered into between persons dealing at arm’s
length.
[26]
The answer for all the related questions above
was as follows:
The Crown’s primary position is in this appeal
is that the structure is a sham. In the alternative, our position is that at
arm’s length, CEL, [also earlier described as Swissco] would not have been a
party to these transactions as CEL did not perform any functions nor did it assume
any risks. An arm’s length party would not have entered into these series of
transactions with CEL in these economic circumstances. An arm’s length party
would not have paid anything to CEL as CEL did not contribute anything of value
to the series of transactions. At arm’s length, CCO [the Appellant] would be a
party to all transactions where CEL (or CSA) were signatories and CEL’s compensation,
if any, would be commensurate with the minimal functions it performed.
[27]
In addition to the clear arguments of sham
enunciated by such answer, the Respondent also clearly addressed the issue of
price in all the transactions by clearly advising that “an arm’s length party
would not have paid anything” based on its contribution. The Question is
answered and the answer, like in the Paragraph 247(2)(a) Statements the Appellant
sought to have struck, is nil. The answer not only addresses sham but clearly
addresses the price term of the transactions challenged as being the different term
and sets out what an arm’s length party would pay. In the circumstances the
Respondent appears to have directly addressed the issues contemplated by
paragraphs 247(2)(a) and (c) and appears consistent with the pleadings sought
to be struck. Even if I had found Chief Justice Rip’s directive had applied, I
would find it was satisfied by such answer. It will be up to the trial judge to
ultimately decide whether those sections apply on the evidence but the
responses to the questions demonstrate a possible basis upon which the Crown
could successfully advance an argument under those provisions. It follows that
in my opinion the Respondent has in no way abandoned any argument on these
transfer pricing provisions.
[28]
Secondly, I am in agreement with the Respondent
that there are no grounds to strike the Amended Reply on the basis of the
Respondent’s answers at discovery in question pursuant to Rule 110(b)
which allows a Court to strike an appeal for failure to answer any proper
question.
[29]
As the Respondent has argued, the decision of
the Federal Court of Appeal in MacIver v Her Majesty the Queen, 2009 FCA
89, 2009 DTC 5078, at paragraph 8, clearly stated that the use of dismissal
powers under section 110(b) of the Rules “… should only be exercised
where the violations of the Rules are multiple, egrarious and intentional”. The
Respondent also relies on the Federal Court of Appeal decision in Yacyshyn v
Her Majesty the Queen, [1999] FCJ No. 196, 99 DTC 5133 where Létourneau JA
stated at paragraph 18 that “… the dismissal of an appeal is a drastic and
somewhat ultimate remedy reserved for the egregious case or when no other
alternative and less drastic remedy would be adequate.”
[30]
In this matter I have found no violation of any
Rule or Order here as earlier stated and find the questions were answered on
discovery. Moreover, the Appellant seeks this severe remedy without having even
asked any follow-up questions or requested further details, without having
brought any motion to determine whether his question was proper or properly
answered or refused as he alleges or otherwise under the Rules, yet seeks this
drastic remedy. The Appellant has made no attempt to pursue less drastic steps
under the Rules.
[31]
Accordingly, I am denying the Appellant’s motion
for an Order directing that the Respondent be precluded from disputing that the
terms and conditions of all of the transactions between the Appellant and any
of its affiliates, which are in issue in this appeal, are terms and conditions
which would have been made between persons dealing at arm’s length. The
Respondent shall not be precluded from advancing any such position or
arguments.
III. Order
to Answer Questions on Sham Theory
[32]
As earlier stated the Appellant seeks an Order
directing the Respondent to provide answers (and to also answer any proper
questions arising from those answers) to Questions 1118-1123 of the examination
for discovery of Mr. G.H. conducted on February 5,2014 concerning the Crown’s
Sham Theory.
[33]
The questions and the written answers given to
those questions, after the Respondent initially took them under advisement at
the discovery, are as follows:
26. On the examination for discovery of
Crown’s nominee, counsel for Cameco put the following questions:
1118 Q. I would like you,
then, to identify for me each instance where the actual legal relationships
between [Cameco] and [CSA] in respect of any contract or transaction which you
consider relevant, differ from the legal relationships reflected in the
agreements between [Cameco] and [CSA].
…
1119 Q. And I will have
the same question and I assume get the same response with respect to - - well,
let me just put it on the record to it’s there. I’d ask you to identify each
instance where the actual legal relationships between [Cameco] and [CEL] in
respect of any contract or transaction which it considered relevant, differs
from the legal relationships reflected in agreements between [Cameco] and
[CEL].
…
1120 Q. I would like the
same information with respect to any agreements between any other pair of
Cameco entities or any number of Cameco entities.
In other words, I’ve covered off [Cameco] and
[CSA] relationships, [Cameco] and [CEL] relationships. If there are
relationships or contracts which you say are relevant between any other
grouping of Cameco entities, which you say do not reflect the actual legal relationships
between them, again I’d like to know.
…
1121 Q. And the same
request with respect to the relationship between any Cameco entity and any
third party.
…
1122 Q. And I think this
will flow from the answers to the undertakings and I would be entitled to ask
it, but to the extent your response is that in any of these relationships, the
actual legal relationships differed from those represented by the written
agreements. I’d like to know the basis upon which you say that. That is to say
the basis upon which you say the parties, in fact, were not and did not intend
to be governed by the written agreements between them.
MS. CHASSON: Do
I understand you correctly that is – that that question is a similar question
that you’ve asked previously in other areas, looking for evidence in the nature
of documents or otherwise?
BY MR. STEINER:
1123 Q. It would involve,
in the first instance, an explanation, and in the second instance, information
and documents.
Crown counsel took all of these questions under
advisement. (The reference by Cameco’s counsel to “undertakings” in question
1122 was in error.)
27. The following answers were provided
in the Crown’s Responses:
1118: All of them
because they are all shams. CCO treated CEL’s business as its own.
1119: All of them
because they are all shams. CCO treated CEL’s business as its own.
1120: Any contract
where CEL or CSA is the named party does not reflect the legal relationship.
1121-1123: Refusal.
Too broad. The respondent does not have knowledge all of CCO’s contracts with
third parties.
[34]
Although the Appellant failed to rely on any
specific rule in support of its contention that the answers given were
non-answers or for the relief sought, the Respondent assumed in argument
without objection of the Appellant that the Appellant was relying on Rule 95
requiring a person examined for discovery to answer any proper questions to the
best of his knowledge, information and belief and Rule 107 which allows a
person to object to a question and allows in effect the questioner to bring a
motion to the Court for a ruling on the propriety of a question that is
objected to, as well as Rule 110, which allows a Court to order a person to re-attend
to answer a question essentially found not to be improper.
[35]
It should be noted that the Appellant made no
effort to request further particulars or ask any follow up questions at all or
bring this motion until almost 10 months after the discovery in question, however
I will deal with it now.
[36]
The rationale for the Appellant’s objection to the
answers of the Respondent in question is based on its position that the
Appellant cannot know the case which it will be required to meet at trial with
respect to the Sham issue. Moreover argues the Appellant, if the Respondent
believes there is a case to be made on “sham”, it must be able to answer the
questions and articulate how it says the actual legal relationships differed
from those reflected in the various agreements and transactions and prove all
the elements of a Sham which it alleges are articulated in various cases including
recently in McLarty v Her Majesty the Queen, 2014 TCC 30, 2014 DTC 1162,
at paragraph 73, as follows:
The classic definition of a “sham” in Snook
v. London and West Riding Investments, Ltd., [1967] 1 All ER 518, has been
repeatedly endorsed by Canadian courts. The required elements for a sham are (1)
an intention of the parties to the transactions (2) to give a false appearance (3)
that legal rights and obligations have been created that are different from the
actual legal rights and obligations of the parties.
[37]
Firstly, I must say that if the Appellant wished
to ask questions pertaining to facts relevant to what he perceives are the
elements of the legal test for the existence of a sham he should have asked
them. It is not for the witness being examined to presume to answer a question
of law. In this context the Appellant’s questions are far too vague or broad.
[38]
Secondly, as the Respondent has argued, the Appellant
itself presumes the elements of sham enunciated by the Tax Court are complete.
With respect to the Appellant, such arguments must be answered only by a trial
judge. It can be said here that the manner in which the elements of sham stated
by the Appellant appear somewhat incomplete. In Stubart Investments Ltd. v Her
Majesty the Queen, [1984] 1 S.C.R. 536, the Supreme Court of Canada discussed
what constituted a “sham transaction” at pages 545 and 546, which provision was
also quoted in McLarty above immediately before the earlier elements
provision:
… A sham transaction. This expression comes to
us from decisions in the United Kingdom, and it has been generally taken to
mean (but not without ambiguity) a transaction conducted with an element of
deceit so as to create an illusion calculated to lead the tax collector away
from the taxpayer or the true nature of the transaction; or, simple deception
whereby the taxpayer creates a facade of reality quite different from the
disguised reality. …
[39]
Its seems quite clear to me that the answers
given to Questions 1118 -1120 clearly suggest all the transactions between the
Appellant and it affiliates are shams because the Appellant treated the
business of the affiliates as its own, hence it can be argued falls within the
Supreme Court of Canada’s dictum that such transactions create an illusion
leading the tax collector away from the taxpayer. That of course will be up to
the trial judge to determine. Likewise the answer to Question 1121 that
contracts to which the affiliates are parties do not reflect the legal
relationship seems to be consistent with the Supreme Court of Canada’s dictum
that the tax collector is lead away from the true nature of the transaction.
[40]
Moreover, these answers must be put in context
with the answer earlier discussed given in relation to Question 1117 where the
Respondent answered that the “Crown’s primary position is in this appeal that
the structure is a sham” and in the alternative goes on to discuss that CEL
would not have been a party to these transactions as it did not perform any
functions nor assume any risks and the Appellant would be a party to all the
transactions. The fact the alternative arguments may support a transfer pricing
argument do not preclude them from also supporting a “sham” argument and the
trial judge must decide that issue based on the evidence before him. It seems
clear to me that the Appellant knows exactly the case it has to meet with a
sham theory.
[41]
Notwithstanding the above, I must also agree
with the Respondent’s position that the questions, particularly when Question
1122 further requires the deponent to provide the basis of why the Respondent
says all the various parties intention not to be bound by the written
agreements, are compound questions and are unfair to the person being examined.
As Bowie J. stated in Reddy v Her Majesty the Queen, 2011 TCC 161, 2011
DTC 1129, at paragraphs 6 and 7:
[6] In the present case, it is the form of the
question that is objectionable.… it is counsel’s job, not the deponent’s, to go
through the document to ascertain whether the assumptions are to be found
recorded there. The examination is not a memory test for the deponent to pass
or fail depending on how well she has memorized the 37 assumptions that are
pleaded.
[7] Compound questions are not permitted,
because they are unfair to the person being examined….
[42]
With the questions at hand the deponent was essentially
being asked to recall all the contracts between the Appellant and CEL and other
members of the group as well as between any member of the group and third
parties and then identify differences in the legal relationships. These are not
only compound questions, especially difficult having regard to the evidence
that the various documents in question were complex and different from one another,
but also require, as the Respondent has argued, that the deponent would have to
segregate all the potential documents in issue, including some with third
parties it may not even have knowledge of in Question 1121, and then identify
those documents which related to a particular issue, something found improper
in Kossow v Her Majesty the Queen, 2008 TCC 422, 2008 DTC 4408, at
paragraph 60. The Appellant is aware of which documents the entities entered
into and their terms and has the ability to both identify and pose specific
questions related thereto.
[43]
In summary, I do not find that the questions
were not answered and find that the questions were in fact not proper questions
and hence will not order the deponent to re-attend to answer those questions as
posed.
Conclusion
[44]
The Appellant has not satisfied me that it is
entitled to an Order with respect to any of the relief requested in the motion.
Frankly, I am of the view the Appellant had no reasonable grounds to justify
seeking the relief sought and frankly failed to take proper steps under the
Rules to first seek less dramatic relief than that sought as referred to early
in these reasons. The Court should not tolerate unnecessary motions that serve
only to delay the process at substantial cost to all parties, particularly when
the party bringing the said motion is the one alleging abuse of process. The
Appellant’s motion is dismissed in its entirety and the Respondent shall be
entitled to costs on a solicitor and its own client basis with respect hereto,
payable in any event of the cause.
Signed at Nanaimo, British Columbia, this
12th day of December 2014.
“F.J. Pizzitelli”
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