Citation:
2015 TCC 160
Date: 2015-06-24
Docket: 2013-1322(IT)G
BETWEEN:
PAUL
L. SCHNIER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Bocock J.
I. Motion
to Quash
[1]
The Respondent brings this motion to quash the
Appellant’s appeal on the basis that the Appellant, at the time of filing his
Notice of Appeal, was an undischarged bankrupt. The Respondent argues that under
section 71 of the Bankruptcy and Insolvency Act (the “BIA”) the
Appellant ceased to have legal capacity in respect of his pre-bankruptcy property
and had no authority to bring his appeal. Conjunctively, in the Notice of
Motion the Respondent moved to quash on the grounds that under then Rule 58(3)(c),
now 53(3)(c) of the Tax Court of Canada Rules (General Procedure) (the
“Rules”), the Court may dismiss an appeal if the Appellant is without legal
capacity to commence the proceeding.
[2]
This is not the first hearing of this motion. It
was heard before Justice Pizzitelli on May 28, 2014. At that time,
Justice Pizzitelli directed that his resulting order of that date be served
upon the trustee in bankruptcy (the “Trustee”) and the Trustee would have 90
days to bring an application to extend the time for filing a notice of appeal
in the matter. Although implicit, the time for bringing an application was
within the 90-day and one year period afforded under sections 169 and 167,
respectively, of the Income Tax Act, RSC 1985, c. 1 (5th Supp.) (the “ITA”).
The order provided that if the Trustee brought such an application to extend
the time to file an appeal, then the application would be heard immediately
before the date upon which this motion to quash was returnable. If the Trustee
did not bring an application within the 90 days specified in Justice Pizzitelli’s
order, then the Respondent’s motion to quash was to be set down for hearing at
the earliest opportunity. It is on this latter basis that the matter has been presently
returned to this Court for a decision.
II. Positions of the Parties
[3]
The Appellant, Mr. Schnier, became bankrupt
on January 19, 2012, as a result of his proposal under the BIA
being rejected by his largest creditor: the Respondent. Mr. Schnier filed
his notice of appeal with the Tax Court of Canada on April 10, 2013.
Within her reply to the notice of appeal, the Respondent challenged Mr. Schnier’s
legal capacity. The basis of the challenge is that Mr. Schnier had no
legal capacity and any attempt to gain that legal capacity after the fact was
either legally impermissible or factually insufficient. Further, the Trustee,
the sole party having capacity under the BIA to bring the appeal, has
not done so, nor had the Trustee granted consent at the outset to initiate the
appeal.
[4]
Mr. Schnier opposes the motion on two
grounds. First, the tax appeal does not relate to Mr. Schnier’s property
or its subspecies, a chose or a thing in action, but to a debt and liability.
Since a liability is not property, the Trustee is not vested of
Mr. Schnier’s obligations because subsection 71(2) of the BIA
refers only to property; the subsection is inclusive of all things or choses in
action, but not of liabilities. Therefore, according to his counsel, Mr. Schnier
remains free to appeal the underlying assessment related to a liability, but
not property.
[5]
The second ground is that even if consent or
authorization of the Trustee were required because the appeal is a chose or
thing in action, it has been given by the Trustee. Consent occurred through
various assertions, conduct, and/or affirmations, which shall be reviewed below
under the heading “Additional Facts before the Court”. If the Trustee had
opposed the bringing of the appeal, Mr. Schnier would have had an avenue
to gain Superior Court approval to bring his appeal, but where he has implicit
or explicit approval of the Trustee such consent is not required and, at law,
not available under section 37 of the BIA.
III. General Legislative and Regulatory Scheme
Applicable to this Motion
[6]
Section 71 of the BIA provides as
follows:
Vesting of
property in trustee
71. On a
bankruptcy order being made or an assignment being filed with an official
receiver, a bankrupt ceases to have any capacity to dispose of or otherwise
deal with their property, which shall, subject to this Act and to the rights of
secured creditors, immediately pass to and vest in the trustee named in the
bankruptcy order or assignment, and in any case of change of trustee the
property shall pass from trustee to trustee without any assignment or transfer.
[7]
Section 37 of the BIA provides as
follows:
Appeal to
court against trustee
37. Where the
bankrupt or any of the creditors or any other person is aggrieved by any act or
decision of the trustee, he may apply to the court and the court may confirm,
reverse or modify the act or decision complained of and make such order in the
premises as it thinks just.
[8]
Similarly, the definition of property under section 2
the BIA is as follows:
“property” means
any type of property, whether situated in Canada or elsewhere, and includes
money, goods, things in action, land and every description of property, whether
real or personal, legal or equitable, as well as obligations, easements and
every description of estate, interest and profit, present or future, vested or
contingent, in, arising out of or incident to property;
[9]
Rule 53(3)(c) of the Rules provides as
follows:
53. (3) On
application by the respondent, the Court may quash an appeal if
…
(c) the
appellant is without legal capacity to commence or continue the proceeding.
[10]
Rules 4(1) and 7 of the Rules provides as
follows:
Interpretation
4. (1) These
rules shall be liberally construed to secure the just, most expeditious and
least expensive determination of every proceeding on its merits.
Effect of Non-Compliance
7. A failure to
comply with these rules is an irregularity and does not render a proceeding or
a step, document or direction in a proceeding a nullity, and the Court,
(a) may
grant all necessary amendments or other relief, on such terms as are just, to
secure the just determination of the real matters in dispute, or
(b) only
where and as necessary in the interests of justice, may set aside the
proceeding or a step, document or direction in the proceeding in whole or in
part.
IV. Additional Facts before the Court
[11]
As a result of the two-stage filing of materials
in this matter, a brief inventory of the documents and relevant materials before
the Court is required. This is also relevant since the proceeding is a motion;
facts relied upon must be properly before the Court.
[12]
In the first instance, the pleadings are before
the Court and relevant because of their dates: Mr. Schnier’s Notice of
Appeal and Answer dated, respectively, April 10, 2013 and October 30,
2013, and the Reply of the Respondent filed August 28, 2013.
[13]
An affidavit of a law clerk retained at the
offices of Mr. Schnier’s counsel was also filed. That affidavit contains
certain letters from the Trustee and the Canada Revenue Agency (“CRA”):
•
CRA letter dated January 11, 2013, which is
a reply to the Notice of Objection filed by Mr. Schnier, directing
Mr. Schnier to file an appeal with the Tax Court of Canada if he was not
in agreement with the confirmation to his objection. This particular reply was
also copied to the Trustee;
•
Department of Justice letter dated October 25,
2013, prepared after the Notice of Appeal was filed requesting of the Trustee
whether the Trustee had granted permission to file the Notice of Appeal and, if
yes, when and, further, on what basis;
•
Trustee letter to the Department of Justice
dated November 4, 2013, which states:
“…
The Trustee did
not grant Mr. Schnier permission to file the Appeal; however, CRA’s letter
dated January 11, 2013 (the “Confirmation”) was directed to Mr. Schnier
and advised that he should appeal to the Tax Court of Canada within 90 days
from the date of the Confirmation. The Confirmation is part of a lengthy
process which started many years ago prior to the bankruptcy.
With respect, the
Trustee does not believe that the relevant issue at hand is whether the Trustee
granted permission to Mr. Schnier to file the Appeal or not. If
Mr. Schnier did not draft and file the Appeal, the Trustee would have
drafted it and contacted Mr. Schnier for assistance and the Trustee would
have filed it.
…
The Trustee
believes that Mr. Schnier’s filing of the Appeal was the correct thing to
do and has saved his estate from bearing professional fees associated with the
Trustee drafting and filing the Appeal on his behalf.
…”;
•
Trustee letter to the Department of Justice
dated March 21, 2014, which states:
“…
Had Canada
Revenue Agency not expressly requested of and directed Mr. Schnier to
launch the subject appeal to the Tax Court of Canada in its January 11,
2013 letter, a copy of which is also attached hereto, the trustee would have
either launched the appeal or authorized Mr. Schnier to do so.
To be clear, the
trustee authorizes and gives permission to Mr. Schnier to pursue the
appeal, nunc pro tunc.
…”;
[14]
An affidavit was filed by a legal assistant at
the Department of Justice which contained a letter from the Trustee dated
August 14, 2014, which was after the Order of Justice Pizzitelli referred
to above. It contained the following:
“We are writing
with regard to the appeal from Canada Revenue Agency’s (“CRA”) reassessments of
Mr. Schnier’s income tax returns for various taxation years (the “Appeal”),
which Appeal was filed by Mr. Schnier in or about April 2013 while he was
still an undischarged bankrupt.
CRA challenged
Mr. Schnier’s capacity to file the Appeal and the matter was heard in the
Tax Court of Canada (the “Tax Court”) on May 28, 2014. The Tax Court adjourned
the motion and extended a period of 90 days for MNP Ltd., in its capacity as
trustee of the estate of Paul Schnier (the “Trustee”), to bring an application
to extend the time for filing a Notice of Appeal in the subject matter (the “Extension
Application”), if it so desired.
After considering
the matter, the Trustee wishes to advise you that it will not be filing the
Extension Application.
…”
[15]
An affidavit of Mr. Schnier was sworn and
filed in April 2015, indicating that the Minister and the CRA entered into
dealings with Mr. Schnier regarding his income tax assessment for the 2012
taxation year. It is noted that this taxation year is after Mr. Schnier’s
bankruptcy and therefore is immaterial and not germane to the arguments before
this Court.
[16]
The foregoing constitute the affidavits which
were filed in support of and in opposition to the motion. Additionally, there
are two other orders of the Ontario Superior Court of Justice relevant to this
matter. Since they constitute orders of that court and were submitted by
Mr. Schnier, their contents may be and form part of the factual record of
findings and determinations of a judge or master, as the case may be, seized to
hear and decide matters in respect of Mr. Schnier’s bankrupt estate.
[17]
The first document is the Reasons for Decision
of Master Jean dated July 18, 2014 regarding her decision to
discharge Mr. Schnier from bankruptcy. Respondent’s counsel had opposed
the discharge. The relevant excerpts are as follows:
“…
The bankrupt made
a proposal to his creditors on December 6, 2011. He increased his offer to
the creditors over the course of the following creditors meetings. Ultimately, CRA
rejected the proposal resulting in this bankruptcy.
…
The bankruptcy is
for the most part, driven by the bankrupt’s investment in certain tax shelters
that gave rise to certain claimed tax benefits, which were subsequently disallowed
by CRA. For the present purposes, there is no misconduct of the bankrupt so far
as his usual income tax obligations are concerned. He filed and paid all of his
taxes as and when required under the law.
The issue which
renders this case a tax driven bankruptcy relates to CRA’s disallowance of the
tax shelters. In the late 1980s, the bankrupt was reassessed in relation to his
tax shelters going back to 1985 and yearly more or less thereafter. The
bankrupt immediately filed notices of objections for each of the taxation years
that had been reassessed, the first one having been filed in the late 1980s.
The next step in the process, as I understand matters, would have been for CRA
to review the matter. It was not until just prior to the filing of the proposal
that the bankrupt received confirmations as to some, but not all, of the
assessments dating back to 1985. The bankrupt immediately filed an appeal in
relation to these confirmations.
…
I am not by these
reasons attempting to usurp the role of the Tax Court in making the findings in
tax cases over which it has jurisdiction. It is clear from Re Norris, [1989] 2
CTC 185 that the proper forum for determining tax liabilities is the Tax Court.
That avenue has been pursued by the bankrupt, and possibly by the Trustee. The
appeals have not been disposed of. In the circumstances, I am compelled to
proceed with the disposition of the bankrupt’s discharge hearing on the facts
as presently known. At the present, CRA has a contingent liability that cannot
support the applicability of subsection 172.1 of the BIA.
…
In terms of his
CRA debts, the bankrupt filed timely objections and appeals. Inexplicably, CRA
took upwards of 20 years to deliver confirmations. In the meantime, the
bankrupt continued to claim tax shelters, some of which involved investments
that gave rise to multiple years’ tax benefits. The bankrupt did testify that
he attempted to follow up on the objections over the ensuring [sic]
years without success.
…”
[18]
Justice McEwen of the Ontario Superior
Court of Justice on December 8, 2014, by way of short endorsement
dismissed the Attorney General of Canada’s motion to set aside the order of Master Jean
which, in turn, discharged Mr. Schnier from bankruptcy over the objections
of the Respondent.
V. Issues to be Decided
[19]
The Court will now return to the first issue
before it:
A. Does the Tax Court of Canada Appeal Constitute a Thing or Chose in
Action?
[20]
The Respondent brings this motion under
Rule 53(3)(c) to quash the appeal. Therefore, the onus is on the
Respondent to satisfy the Court that Mr. Schnier does not have legal
capacity to commence or continue the proceeding.
[21]
Pursuant to section 71 of the BIA, a
bankrupt has no capacity to dispose of or otherwise deal with her property,
which immediately vests in the Trustee. The definition of “property” in
section 2 of the BIA is very broad and includes “things in action”.
If an appeal before the Tax Court is a thing in action, then it is property and
a bankrupt has no capacity to deal with his appeal without the action or consent
of the Trustee.
[22]
The Federal Court of Appeal held in 2000 in Biron
c. R, 2002 DTC 6958 (Eng.) (“Biron”), that property includes all of
the bankrupt’s rights to action other than those of a personal nature and those
affecting his exempt property. The Federal Court of Appeal summarily accepted
the trial judge’s conclusion that the appellant could not prosecute his tax appeal
without leave from the Trustee because the bankrupt does not have the capacity
to sue.
[23]
Similarly, Justice V. Miller held in Lawrence
v. R, 2012 TCC 331 (“Lawrence”) that “property” is defined extremely
broadly in the BIA. Therefore the appellant, while an undischarged
bankrupt, did not have standing to file a notice of objection because all rights
of action vested in the Trustee. There was no evidence in Lawrence of
approval, consent or acquiescence by the Trustee.
[24]
Following the Biron decision, Justice
Bédard in 4028490 Canada Inc. v. R, 2005 TCC 50 (“4028490 Canada Inc.”),
refused an undischarged bankrupt’s application under section 304 of the Excise
Tax Act for an extension of time to file a notice of objection. Justice
Bédard held that the bankrupt did not have capacity to bring the application. Likewise,
nothing approaching approval of the Trustee was before the court.
[25]
The Federal Court of Appeal’s broadly based,
generic decision in Biron is binding on this Court. Moreover, it has
been utilized by subsequent Tax Court decisions including Lawrence and 4028490
Canada Inc. Therefore, a Tax Court appeal is a thing in action and
therefore property within the meaning of the BIA. Accordingly, the Trustee
must in some way assume, approve or condone the bringing of an appeal before
the Tax Court. Certainly, opposition by the Trustee is fatal and returns any
appellant to a superior court under section 37 of the BIA for an
order of that court allowing the bankrupt to appeal where the Trustee opposes
the bringing of the appeal.
[26]
The Court will now proceed to the second issue
before it:
B. Was Sufficient Approval given by the Trustee for Mr. Schnier’s Tax
Appeal?
[27]
Within written submissions, the Respondent
accepts that where the Trustee grants permission to an appellant to commence an
appeal, an appellant may do so. However, in the absence of explicit permission
or where permission is given after the fact, the Respondent submits that Mr. Schnier
was and is without legal capacity to commence his appeal.
[28]
However, for the Respondent to succeed in quashing
the appeal it must convince the Court to act under Rule 53(3)(c) of the
Rules as informed by Rule 4. A close reading of Rule 53(3)(c) states
(with emphasis added):
53. (3) On
application by the respondent, the Court may quash an appeal if
…
(c) the
appellant is without legal capacity to commence or continue the
proceeding.
[29]
Similarly, to repeat, Rule 4(1) states:
4. (1) These
rules shall be liberally construed to secure the just, most expeditious
and least expensive determination of every proceeding on its merits.
[30]
In the case of Garage A.D. Inc. c. R,
2008 TCC 246 (“Garage”), the respondent brought a motion to quash the
appeal which had been commenced by an undischarged bankrupt corporation.
Justice Lamarre (as she then was) adjourned the motion to allow a 50%
shareholder of the corporate appellant to request authorization from the Trustee,
or failing that, obtain an order in bankruptcy court (presumably under
section 37 of the BIA). The obvious implication is that if the Trustee
were to authorize the 50% shareholder to act as the corporate appellant’s agent,
then the 50% shareholder could continue the appeal.
[31]
There is no suggestion in Garage that the
corporate appellant needed to have legal capacity to commence the
appeal. Instead, obtaining legal capacity (authorization from the Trustee) to continue
the appeal appeared to be sufficient.
[32]
Again, the applicable text and discretionary
authority for this Court is within Rule 53(3)(c). It allows this Court to
dispositively end Mr. Schnier’s appeal based upon a discretionary,
technical remedy sought by the Respondent. The wording of the rule is plain and
clear. In order for the Court to exercise its discretion to quash an appeal
under this rule, Mr. Schnier must be without legal capacity to commence or
continue his appeal. The Respondent ignores the word “continue” and focuses her
analysis on the word “commence”. This is reflected in the Respondent’s written
submissions which reference “commence” to the exclusion of “continue”. But the
rule is in the disjunctive form. Even if Mr. Schnier did not have legal
capacity to commence his appeal, he may have gained legal capacity under the
Rules to continue it as described below.
[33]
By letter to the CRA dated November 4, 2013, the
Trustee stated that he believes that “Mr. Schnier’s filing of his appeal
was the correct thing to do…”. By further letter to the Department of Justice
dated March 21, 2014, the Trustee stated that he “authorizes and gives
permission to Mr. Schnier to pursue the appeal, nunc pro tunc.”
[34]
Factually, in the present case, the Trustee has
stated that had he known of Mr. Schnier’s desire to appeal, the Trustee
would have granted express permission or commenced the appeal. The Trustee
makes this clear in the letter dated November 4, 2013. This is further
supported by the Trustee’s express permission to continue the appeal on
March 21, 2014.
[35]
Moreover, had the Trustee objected to or refused
to commence the appeal, factually there would be little question that
Mr. Schnier would lack legal capacity within Rule 53(3)(c). The
vested owner of the right would have assessed a risk or exposure of the
bankrupt’s estate and refused consent or leave. Then Mr. Schnier could
have pursued an order under section 37 of the BIA. However one may
characterize the amalgam of directives from the Trustee, the bundle is factually
much closer to affirmation or consent than condemnation or refusal. This places
the present appeal and motion on a different factual footing than a situation
where the Trustee remains ignorant of (4028490 Canada Inc.), opposes (Biron)
or is no longer administering the estate (Lawrence).
[36]
In the present case, the bankrupt filed an
appeal because he thought he was required to. Although he did not inform the
Trustee at that time, he did not intentionally hide information nor
misrepresent his actions to the Trustee. Where the Trustee subsequently grants
permission, the Respondent’s motion to quash should not succeed. The onus is on
the Respondent and Rule 53(3)(c) is discretionary. Moreover, Rule 4(1)
requires that the rules be interpreted so as to afford a just, expeditious
determination on an appeal’s merits. A technical defect due to inadvertence and
timing, clarified after the fact, should not prevent an appeal from continuing
towards the goal of it being heard on its merits, where the Trustee approves,
and does not oppose, the continuation of the appeal.
[37]
Further, since Rule 53(3)(c) is
discretionary, it marches with Rule 4(1) a second time. The rule states
that the Court “may” quash an appeal upon motion by the Respondent. It is
arguable that the Court is not required to quash the appeal even where the
Respondent has met the technical requirements of Rule 53(3)(c), but the
Court is satisfied Rule 4 and/or Rule 7 should be invoked: provided a
substantive right is not created: Nicholls v. R, 2012 FCA 243 at
paragraph 6. Clearly the right to appeal exists under the ITA and Tax
Court of Canada Act. It does, however, require the Trustee’s consent to
continue or “pursue”. The discretion to quash should not be used lightly. The
fact that Rule 53(3)(c) is discretionary means that the Court can consider
Rule 4(1) in determining whether to quash an appeal and prevent the matter
from being heard on its merits.
[38]
“Capacity” is defined in the BIA, not the
Rules. Under the BIA Mr. Schnier can be considered not to have
legal capacity for its purposes. The issue before the Court on this motion is
whether Mr. Schnier lacks legal capacity to commence or continue an appeal
within the meaning of Rule 53(3)(c) sufficient to raise the Court’s
discretion to quash his tax appeal. This motion does not concern a
section 37 order to proceed which Mr. Schnier seeks under the BIA.
It concerns the Respondent who seeks to quash the appeal under this Court’s
Rules. Although the fact that an undischarged bankrupt does not have capacity in
the absence of Trustee consent or leave within the meaning of section 71
of the BIA is relevant, it cannot be dispositive. Unlike section 71
of the BIA, Rule 53(3)(c) is subject to Rule 4(1) and speaks
directly to this Court’s own procedure, jurisdiction, and discretion in respect
of tax appeals.
[39]
Should the above interpretation of the
disjunction in Rule 53(3)(c) prove wrong, it remains factually arguable
that Mr. Schnier now has legal capacity under this Court’s Rules to have commenced
the appeal in the first instance. He was an undischarged bankrupt (without “capacity”
according to section 71 of the BIA), had not obtained permission
from the Trustee, nor at the outset asked for permission. However, the Trustee explained
that he would have either filed the appeal or authorized Mr. Schnier to do
so, and further, the Trustee expressly authorized Mr. Schnier to pursue
the appeal. This is strong after-the-fact evidence that the Trustee would have
consented at the outset had he known it to be necessary under the Rules. This
is arguable retroactive implied consent sufficient to give Mr. Schnier
legal capacity to have commenced the appeal under the Rules. Nowhere in the
Rules or this Court’s jurisprudence is an after-the-fact expression of prior
consent seen to be insufficient so to call upon the Court’s discretion to quash
the appeal. The Respondent has not referred to any on-point cases applicable to
this Court that stand for this proposition. The authorities relate to refusal,
ignorance or opposition by the Trustee.
[40]
Purposively, the vesting power in the Trustee
pursuant to section 71 of the BIA is to prevent an undischarged
bankrupt from reducing or harming the assets in the estate. The Trustee is best
suited to preserve the assets and properly administer the estate. However, as
stated by the Trustee himself after his own assessment, no harm can come to the
estate, or anyone concerned, by allowing Mr. Schnier to proceed for two
reasons: (i) aside from possible costs, a further reassessment is not exigible
against the discharged bankrupt; and (ii) the Trustee is not opposed: Leith
v. Minister of National Revenue, 1970 CarswellNat 46.
VI. Summary
[41]
For these reasons, the motion to quash under
Rule 53(3)(c) is denied and the Appellant is free to proceed with the
prosecution of his appeal before this Court on the basis of the Trustee’s
approval. Paragraph 44 of the Reply shall be struck by virtue of these
Reasons and Order.
[42]
The parties are directed to provide the Hearings
Coordinator with a proposed timetable for the remaining steps in the litigation
within 60 days of the date of this Order, failing which this matter shall be
returned to this judge for a status hearing.
[43]
Costs are awarded to the Appellant in accordance
with the tariff subject to either party’s right to make further written
submissions within 30 days of the date of this Order.
Signed at Toronto, Ontario, this 24th
day of June 2015.
“R.S. Bocock”
Email this Content