AMENDED REASONS FOR ORDER
Rossiter C.J.
I.
EXECUTIVE SUMMARY
[1]
Both the Appellant and the
Respondent bring Rule 58 motions. The Appellant seeks a determination of one
question before hearing, while the Respondent seeks a determination of four
questions before hearing, with the Appellant’s question and the Respondent’s
third questions being very similar. Rule 58 motions have two stages. First,
decide whether to determine the question(s) before hearing. Second, hear
argument and decide the question(s). The issue of the motion is solely to
decide if there are questions to determine before the hearing.
[2]
The Court has discretion to decide
whether to determine the question(s) before hearing. Two requirements must be met.
First, the question(s) must be properly raised as issues in the pleadings. In
terms of the Appellant’s questions and the Respondent’s questions, the third
question is properly raised in the pleadings; the rest of the Respondent’s
questions are not properly raised in the pleadings.
[3]
Second, the questions must dispose
of all or part of the proceeding, substantially shorten the hearing of the
appeal, or result in a substantial savings of costs. The Respondent’s first and
second questions fail this requirement because they only potentially shorten
the hearing of the appeal. The third and fourth questions meet this requirement
as they dispose of part of the proceeding. The fourth question would fail this
requirement unless it is determined under the third question that the
“property” in Regulation 1100(14)(a) of the Income Tax
Regulations is only 50% of Petro-Canada’s undivided interest in the PCC.
[4]
The Appellant’s question and the
Respondent’s third question are very similar.
II.
BACKGROUND
The Appeal
[5]
Suncor Energy Inc. (the “Appellant”)
is the successor by amalgamation to Petro-Canada. In 1981, Petro-Canada
Explorations Inc., a predecessor to Petro-Canada, purchased a 50% undivided
beneficial interest in land principally to make office space available for its
own use and occupation. Petro-Canada entered into a co-tenancy agreement with
ARCI to develop an office tower complex that ultimately became the Petro-Canada
Centre (“PCC”).
[6]
PCC’s total rentable area was
about 1,730,000 square feet. PCC’s total rentable office space was about
1,707,000 square feet. The difference was retail space.
[7]
The Respondent pleads that Petro
Canada had an undivided interest in the entire property of the PCC so the
rental property consists of the entire building. The total space occupied by
Petro Canada in 1998 was approximately 750,000 square feet, which represents
43% of the building. Therefore, the building was a “rental
property” because it was used principally by Petro Canada for
the purpose of gaining or producing gross revenue that is rent.
[8]
The Appellant argues that the
Income Tax regulation 1100(14) focuses on what use was made of the property
owned by the taxpayer, not on the entire property. Petro-Canada, as a
tenant in common, owned a 50% interest in the PCC, separate and distinct from
ARCI’s interest. 50% of PCC’s total rentable area is about 865,000 square feet,
so Petro Canada used about 87% for the purpose of gaining or producing business
income. Therefore, Petro Canada’s 50% interest was not a rental property
because it was used principally by Petro Canada for the purpose of gaining or
producing business income.
The Rule 58
Motion
[9]
The Appellant seeks determination
of the following question:
Applying
s. 1100(14) of the Income Tax Regulations to a set of four
circumstances in quantitatively determining whether Petro-Canada’s use of its
50% interest in Petro-Canada Centre (“PCC”)
was principally (i.e. more than 50%) for income or rent, should Petro-Canada’s
business use be calculated based on 50% or 100% of the total rentable area of
the PCC?
[10]
The Respondent seeks determination
of the following questions:
(1)
Is the PCC a building owned by the
Appellant, whether owned jointly with another person or otherwise (within the
meaning of regulation 1100(14)(a)) of the Income Tax Regulations?
(2)
Did Petro-Canada use the property
entirely for rent because Petro-Canada leased all of the property?
(3)
Is the “property”
referred to in the “rental property” definition the entire
PCC or only Petro-Canada’s undivided 50% interest in PCC?
(4)
If the “property” is only
Petro-Canada’s undivided 50% interest in PCC, in determining Petro-Canada’s use
of that property,
i.
should its business use of the PCC
be divided in half?
ii.
and, is total possible “use”
of the property restricted to the total rentable space or does it include all
quantifiable uses of the property?
III.
LAW AND ANALYSIS
A.
Should the Court Determine the Preliminary
Questions Before the Hearing?
[11]
An application under Rule 58 is a
two-step process. First, the court must decide whether the question is
appropriately dealt with under Rule 58. Second, if so, the court will hear
argument and decide the question. Gregory v. R.,
2000 D.T.C. 2027 at 2029. Warawa v. R., 2002 D.T.C. 1264 at para 6.
[12]
The Court may grant an order to
determine a question before the hearing if two conditions are met:
(1) Rule 58(1) requires the question to be one of law,
fact, or mixed law and fact raised in a pleading. [emphasis added]
(2) Rule 58(2) only allows the Court to grant the order if
it appears that the determination of the question before the hearing may:
i.
Dispose of all or part of the
proceeding,
ii.
Result in a substantially shorter
hearing, or
iii.
Result in a substantial saving of
costs.
[13]
In McIntyre v. R., 2014 TCC
11 Justice Campbell held at paragraph [23] that three technical requirements
must be met under the first stage of a Rule 58 motion:
(1) there are questions of law, fact or mixed law and
fact;
(2) they are raised by the pleadings; and
(3) the questions may dispose of all or part of the
proceeding, may substantially shorten the hearing of the appeal, or may result
in a substantial savings of costs.
[14]
In Sentinel Hill Productions IV
Corp. v. R., 2013 TCC 267, Justice Woods held at paragraph [3] that the “main
focus’ of the first stage is to determine whether the second
and third requirements, above, are met. This suggests that Justice Woods did
not see the first requirement that the questions be of law, fact, or mixed law
and fact as important, perhaps because every question must be either a question
of law, fact, or mixed law and fact. These are all the possibilities of what
form a question could take.
[15]
Based on McIntyre and Sentinel
Hill, there are essentially only two requirements:
(1) the questions are raised by the pleadings; and
(2) the questions may dispose of all or part of the
proceeding, may substantially shorten the hearing of the appeal, or may result
in a substantial savings of costs.
[16]
Also, it should be noted that Campbell,
in McIntyre, supra at paragraph [25] found that beyond the technical
requirements, “the Court has the discretion to consider other factors,
together with all the circumstances of the case”.
B.
Are the Preliminary Questions of Law, Fact, or Mixed Law and Fact Raised
in a Pleading?
[17]
In Sentinel Hill, at
paragraphs [27] to [31], Justice Woods held that a proposed question must be
properly raised as an issue in the pleadings; it is insufficient for the
question to be merely referred to in the pleading. It is not an appropriate use
of s. 58(1)(a) to raise a new issue.
[18]
The Appellant’s
question, whether the denominator is 50% or 100% of the total rentable area,
was raised at paragraph 65(a) of the Notice of Appeal. The s. 58(1) condition
is therefore met.
[19]
Under the Respondent’s first
question, the definition of “rental property” in regulation 1100(14)(a), is not directly raised in
the pleadings. The Respondent points to paragraph 23(a) of the Amended Reply,
which only states that “the rental property consists of the entire
building”. These few words alone do not constitute
properly raising an issue. The Respondent also points to several paragraphs in
the Notice of Appeal (65(a)(i), 71, and 74). Subparagraph 65(a)(i) states the
Respondent’s third question, not his first question. Paragraphs 71 and 74 are
relevant to the Respondent’s third question.
[20]
The second question,
whether the property was entirely for rent because it was leased, may have been
referred to in the Amended Reply but was not properly raised as an issue. The
Respondent points to paragraphs 20(k) and 23(b). Paragraph 20(k) simply states
that ARCI was in the business of acquiring and developing real estate; it does
not raise the Respondent’s second question as an issue. Paragraph 23(b) pleads
that “as a Co-Tenant, Petro-Canada leased the
entire PCC principally for the purpose of gaining or producing income that is
rent”. This simply restates the issue on appeal
(whether the PCC was leased principally for rent), it does not specifically
raise the Respondent’s second question, that Petro-Canada leased all of the
property.
[21]
The third question,
whether the property is the PCC or merely the 50% interest in the PCC, is
raised in paragraph 65(a) of the Notice of Appeal. The s. 58(1) condition is
therefore met.
[22]
The Respondent’s
question 4(i), whether the business use ought to be divided in half, is not
raised in the pleadings. The Respondent points to paragraph 24 of the Amended
Reply which just states that “more than half of Petro-Canada’s use of [the 50%
undivided interest]… was to gain or produce gross revenue that is rent”, which
is essentially the issue on appeal, not question 4(i). The Respondent also
points to several paragraphs of the Notice of Appeal which at best have a
remote nexus with question 4(i).
[23]
The Respondent’s
question 4(ii), whether “use” includes
non-rentable space, was not properly raised in the pleadings. The Respondent
does not even attempt to argue that it was raised in the Amended Reply.
Instead, the Respondent points to several paragraphs of the Notice of Appeal
which at best have a remote nexus with question 4(ii).
[24]
Of the Respondent’s
questions only the third question is properly raised in the pleadings; the
other questions are not.
C.
Does it Appear that the Determination of the
Preliminary Questions Before the Hearing May: Dispose of All or Part of the
Proceeding, Result in a Substantially Shorter Hearing, Or Result in a Substantial
Saving of Costs?
Jurisprudence
[25]
As noted in McIntyre,
supra, in 2004, Rule 58(1) was amended to include questions of fact and
questions of mixed law and fact to the pre-existing questions of law already
permitted. The existence of factual disputes is no longer an absolute bar to
granting an application but will remain relevant to a court considering whether
a determination will substantially shorten the hearing or save costs.
[26]
Despite the 2004
amendment, as noted in McIntyre, supra, at paragraph [27], a Rule 58
determination should never be a substitute for a hearing and there should never
be a dispute as to a material fact underpinning the question of law. Similarly,
in HSBC Bank Canada v. R., 2011 TCC 37, Justice C. Miller held that case
law has established that on a determination there should be no dispute as to
the facts underpinning the questions of law to be answered. Although Rule 58
contemplates questions of fact and of mixed law and fact, the determination of
such questions is very much like a trial, except that an actual trial has the
benefits of a fair hearing with evidentiary protections.
[27]
In Devon Canada
Corp. v. R., 2013 TCC 4, Justice Hogan confirmed that the test is not
whether there are facts in dispute but whether there are facts that are in dispute
that are material to a determination of the proposed question.
[28]
In Sentinel Hill,
2014 FCA 161, the Federal Court of Appeal upheld Justice Woods’ dismissal of a
Rule 58 motion where the proposed question had no reasonable chance of success
and therefore would not dispose of the proceeding, shorten the hearing, or save
costs.
[29]
In McIntyre, supra,
permitting the question to go to the second stage had the potential of
shortening the hearing and saving costs, but only if the question was
determined in a particular way. Justice Campbell held that this was
insufficient to satisfy the third requirement. Similarly, in Kwok v. R.,
2008 TCC 238, Justice V. Miller found a question that would only shorten the
hearing if answered a particular way to fail this requirement.
[30]
The Respondent states
that the preliminary questions may dispose of all or part of the appeal, or
result in a substantially shorter hearing or a substantial savings of costs.
The Respondent also states that the preliminary questions are not premised on
any disputed fact.
[31]
The first question is
vague and not effectively explained in the Respondent’s submissions. If it asks
whether “property” means the taxpayer’s interest in the property or the
building itself, then it is redundant as it is essentially answered by the
Appellant’s question (or the Respondent’s third question). Further, it would
not shorten the hearing and thus fails the requirement in section 58(2).
[32]
The second question, if
answered in the affirmative, may effectively dispose of the appeal in favour of
the Respondent. However, if answered negatively, the hearing would not be
shortened. McIntyre and Kwok both suggest that this type of
question fails the requirement.
[33]
The third question may
dispose of all or part of the appeal because it appears to be the main question
at issue on the appeal. If the “property” is the
entire PCC, the Respondent’s case will be made significantly easier because the
Minister’s assumptions then lead to the inference that only 43% of the property
was occupied by Petro-Canada for a use other than rent. If instead the “property” is merely
Petro-Canada’s 50% undivided interest, then the Appellant’s case will be made
significantly easier.
[34]
The fourth question
depends on the resolution of the third question. Thus, it would not likely
result in a shorter hearing unless the third question is determined in a
particular way. If the “property” is the
entire PCC, then the fourth question is unnecessary to answer at all.
[35]
If instead, under the
third question, the “property” is only
Petro-Canada’s 50% undivided interest, then there is a possibility that the
fourth question will be helpful to resolving the remaining issues on appeal.
Even so, question 4(i) is essentially redundant on question 3, because it is
basically an indirect way of achieving the exact same result as if question 3
had been answered differently. Therefore, question 4(i) will not be helpful to
resolving the remaining issues on appeal.
[36]
Question 4(ii) will not
make a difference in the appeal and is therefore unhelpful. The total rentable
office space is approximately 1,707,000 square feet and the total rentable
space is approximately 1,730,000 square feet. In either event, Petro Canada’s
business use amount of approximately 749,000 square feet is less than half of the
total space and more than half of Petro Canada’s 50% interest in the total
space. Therefore, the third question is determinative; question 4(ii) cannot
resolve live issues on the appeal nor save time or costs.
[36] The Appellant’s question involves
the same analysis as the Respondent’s third question discussed in paragraph
[32] above and as such, the condition set out in section 58(2) has been met.
D.
What Combination of Motions Should Be Granted?
1)
Test
[37]
Considering the test
under Rule 58 motions, it should be noted that Rule 58(2) allows the Court to
determine questions before the hearing if doing so would dispose of all or part
of the hearing, result in a substantially shorter hearing, or result in a
substantial saving of costs. These are the goals of a Rule 58 motion.
Therefore, in exercising discretion to grant a Rule 58 motion, I must consider
which combination will best meet the objectives found in Rule 58(2).
2)
Options
[38]
There are essentially
three options – the Appellant’s question, the Respondent’s third question, or
some other similar question.
3)
The Respondent’s Concerns with the Appellant’s
Question
[39]
The Respondent has
several concerns with the Appellant’s question.
[40]
First, the Respondent
submits that, by not seeking an interpretation of the words “use” and “property” within the meaning of regulation 1100(14), the
Appellant’s question incorrectly assumes that “property” means the taxpayer’s interest in the property, not
the property itself.I
do not believe this is correct. The Appellant’s question offers two possibilities
for the denominator; while 50% of the total rentable area is essentially the
taxpayer’s interest in the property, the other option of 100% of the total
rentable area is the property itself. Therefore, the Appellant’s question does
not assume away the issue.
[41]
Second, even assuming
that the proper focus is the use made of Petro Canada’s 50% interest, the
numerator must be similarly modified. The Appellant’s question does not look at
the use made of the 50% interest but rather of the space leased under the Head
Lease, representing approximately 80% of the space in the PCC. Therefore, if
the denominator is restricted to 50% of the PCC, then the numerator should also
be restricted to 50%.
[42]
Shouldn’t the
Respondent be instead suggesting that the numerator be restricted to 50%
divided by 80% (or 62.5%) of the Appellant’s proposed use because the Appellant
had already restricted its use from 100% down to 80%? Of course, this approach
would decide the entire case in favour of the Appellant, because 62.5% of the
approximately 749,000 square feet of business use is approximately 468,000
square feet, which means that 54% was used for the purpose of gaining or
producing income.
[43]
Further, this is almost
completely redundant. The Respondent’s third question and the Appellant’s
question deal with whether the denominator should be the entire PCC or merely
50% of the PCC; the Respondent’s question 4(i) asks whether the numerator
should be Petro-Canada’s entire business use or merely 50% of it. Therefore,
the Respondent’s question 4(i) achieves, in the alternative, exactly the same
result as if his third question had been answered in favour of the Respondent.
[44]
Third, the Respondent
argues that the Appellant’s question also incorrectly presupposes that “use” should be compared with rentable space
instead of the entire building. This argument is completely irrelevant because
the only issue that will decide the quantitative test is whether the
denominator is 50% or 100%, regardless of whether it is rentable space or the entire
building. Whether the Respondent is correct may be relevant at trial to aid the
Court in properly framing the legal test to be applied, but it will not affect
how the appeal is resolved and is inappropriate on a Rule 58 motion.
4)
Conclusion
[45]
It is my view that the
Respondent’s third question is much simpler but less contextualized than the
Appellant’s question. It asks whether the “property” is the PCC or Petro Canada’s 50% interest in the PCC.
This is the same as the Appellant’s question, which asks whether the
denominator ought to be 50% or 100% of the total rentable area.
[46]
I would prefer the
Respondent’s third question because of its simplicity and lack of dependence on
assumptions. I believe that the proper question to be put before the Court is the
Respondent’s third question.
5)
Costs
[47]
I believe that there
was no need for the Respondent to dispute this motion and certainly no need for
the Respondent to bring his own Rule 58 motion. The Respondent’s third question
and the Appellant’s question were essentially the same. The Respondent sought
the determination of several questions that were quite obviously inappropriate
on a Rule 58 motion. Questions 1, 4(i), and 4(ii) were not raised in the
pleadings and were also either redundant or immaterial. Also raising these
questions did not appear to have the Court focus on the real issue on the appeal.
Question 2 was not completely meritorious but could simply have been dealt with
at trial instead of on a Rule 58 motion. I believe the Appellant should have
costs of the motion. Considering how the matter proceeded, the result, and the
obvious effort put in by the parties on the motions, even though the matter was
reasonably straightforward, I believe costs in the amount of $5,000 are
appropriate. I order $5,000 in costs in favour of the Appellant, payable within
sixty days of the date of this Order by the Respondent to the Appellant.
[48]
These Amended
Reasons for Order are issued in substitution of the Order dated August 24,
2015.
Signed at Ottawa, Canada, this 16th
day of November, 2015.
“E.P. Rossiter”
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