Citation:
2015 TCC 48
Date: 20150226
Docket: 2013-4832(GST)G
2013-4833(GST)G
2013-4834(GST)G
2013-4835(GST)G
2013-4836(GST)G
BETWEEN:
BEMCO
CONFECTIONERY AND SALES LTD.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Paris J.
Background
[1]
The Appellant filed an identical Notice of Motion
in each of these appeals seeking to have various parts of each of the
Respondent’s Replies to the Appellant’s Notices of Appeal struck out pursuant
to paragraphs 53(a) and (c) of the Tax Court of Canada Rules
(General Procedure). In response to the Motions, the Respondent filed a
Fresh as Amended Reply to the Notice of Appeal in appeal 2013-4833(IT)G.
[2]
The Appellant then amended its Notice of Motion
in respect of appeal 2013-4833(IT)G to take into account the modifications made
by the Respondent in the Fresh as Amended Reply in appeal 2013-4833(IT)G.
[3]
At the hearing, the parties referred only to the
Fresh as Amended Reply and to the portions thereof that the Appellant asks the
Court to strike. I assume that the intention of the parties is to obtain a ruling
on the Fresh as Amended Reply in appeal 2013-4833(IT)G in order to determine
how the Replies in the remaining four appeals should be amended. Given this
state of affairs, it appears to me that the most expeditious way of proceeding
would be to decide the Motion in respect of appeal 2013-4833(IT)G on its
merits, and to dismiss the Motions on the remaining appeals, while granting the
Respondent leave to file Amended Replies in the four remaining appeals and
granting the Appellant leave to file Answers to those Amended Replies.
Background
[4]
The Appellant has carried on business as a
wholesaler of tobacco products in Ontario since 1988.
[5]
The appeal is one of five, brought from five
separate notices of assessment issued under the Excise Tax Act, R.S.C.
1985, c.E-15 (“ETA”). The total amount in
dispute is approximately $30,000,000. The assessment of one of the periods was
made beyond the normal assessment period and all of the assessments included
gross negligence penalties under section 285 of the ETA.
[6]
This issue in the appeals is whether certain of
the Appellant’s sales of tobacco products during the relevant periods were made
to Status Indians on a reserve and thereby exempt from GST by virtue of section
87 of the Indian Act, R.S.C. 1985, c.I-5.
[7]
The Minister assessed the Appellant under the
ETA on the basis that those sales were, in fact, made to persons or
entities who were not eligible for the Indian Act exemption. The
assessments were premised, at least in part, on the existence of a sham. The
Minister believed that the Appellant misrepresented the identity of the true
purchasers of its products and delivered the products to those purchasers at
locations that were not on a reserve.
Applicable Legislation
[8]
Paragraphs (a) and (c) of the Rules
reads as follows:
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;
. . .
(c) is an
abuse of the process of the Court;
. . .
Test
[9]
The test for striking portions of pleadings
under Rule 53 is whether it is plain and obvious that the impugned
portion of the pleading has no chance of success.
[10]
With respect to striking pleadings, the Supreme
Court in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, stated at paragraph
17 of that decision that:
. . .This Court has reiterated the test on many
occasions. A claim will only be struck if it is plain and obvious, assuming
the facts pleaded to be true, that the pleading discloses no reasonable cause
for action:… Another way of putting the test is that the claim has no
reasonable prospect of success. Where a reasonable prospect of success exists,
the matter should be allowed to proceed to trial. . .
[11]
In this Court, in Canadian Imperial Bank of
Commerce v. R., 2011 TCC 568, Rossiter A.C.J. (as he then was) held at paragraph
19 that:
. . .Only if the position taken in the Reply is
certain to fail because it contains a radical defect should the relevant
portions of the Respondent’s Reply be struck. . . .
Appellant’s Position on the Motion
[12]
The Appellant is seeking an Order striking three
groups of paragraphs, in whole or in part. All of those paragraphs set out
assumptions relied upon by the Minister in reassessing the Appellant.
Group 1 Paragraphs
[13]
The first group is made up of paragraphs 14(a),
(b), (k), (l), (m), (n), (o), (p), (q) and (z). The Appellant maintains that
these paragraphs involve either irrelevant facts or highly prejudicial
assumptions of “similar facts”.
[14]
Those paragraphs read as follows:
a) the appellant has a wholesaler’s
permit for the province of Ontario;
b) the
appellant has not a vendor’s permit to sell tobacco products to consumers in Ontario
. .
.
k) the
manufacturers who sold their tobacco products to the appellant authorized and
permitted the resale of their tobacco products by the appellant only on the
basis that the GST/HST is collected from the purchaser on every subsequent
resale to wholesale accounts and retail locations (with the exception of sales
of allocation cigarettes under the Ontario First Nations Cigarette Allocation
System) and that such GST/HST is reported and remitted as required under the Act;
l) the
appellant is not an authorized tobacco wholesale under the Ontario First
Nations Cigarette Allocation System;
m) none
of the tobacco products sold by the appellant during the period were allocation
cigarettes (allocation cigarettes bear a peach-colored tear tape or stamp);
n) according
to the scheme, the status Indians that the appellant claims to have sold the
tobacco products to were intended to be wholesalers of tobacco products;
o) the
appellant made no inquiries as to whether any of the status Indians that the
appellant claims to have sold the tobacco products to were licenced by the
province as tobacco wholesalers;
p) prior
to June 26, 2012, none of the status Indians that the appellant claims to have
sold the tobacco products to had a vendor’s permit to sell tobacco products to
consumers in Ontario;
q) the
appellant knew that it was not authorized to sell its tobacco products to
unlicenced individuals;
. .
.
z) the
appellant knew that the Ontario regulated special scheme for unmarked
cigarettes provides a sufficient quantity of non-taxable tobacco products to
status Indians for their own consumption;
. .
.
[15]
The Appellant’s primary position is that the
Group 1 Paragraphs are improperly pleaded in the assumptions because they refer
(explicitly or implicitly) to alleged non-compliance by the Appellant with the Ontario Tobacco Tax Act, R.S.O. 1990, c. T.10 (“TTA”)
and the Regulations made under that Act.
[16]
The Appellant says that these facts are
irrelevant because the TTA has no connection to the issue on appeal,
which is whether GST/HST should have been collected and remitted. This breaches
the rule in Johnston v. Minister of National Revenue, [1948] S.C.R.
486 which holds that the onus is only on the taxpayer to “demolish
the basic fact on which the taxation rested”.
[17]
The irrelevance is further demonstrated by the Respondent’s
failure to draw any link in the Reply between the alleged TTA
non-compliance and the grounds for relief.
[18]
Given that the Court ought to strike a pleading
where it is plain and obvious that it is irrelevant, the Appellant says that
the Group 1 Paragraphs should be struck.
[19]
Should the irrelevance argument fail, the Appellant
submits that the Group 1 Paragraphs should be removed from the assumptions
because they represent evidence of bad character or discreditable conduct,
namely, that the Appellant breached the TTA. This leads to the
implication that the Appellant also breached the ETA, which is the issue
at the heart of the appeal. The Appellant argues pleadings of this type violate
the rule on similar fact evidence set out by the Supreme Court in R. v. Handy,
[2002] 2 S.C.R. 908: evidence of bad character is presumptively inadmissible
when character is not an issue in the proceedings. In order to rebut the
presumption of inadmissibility, the party seeking to have the evidence admitted
must convince the trial judge that its probative value to a particular issue
outweighs its potential prejudice.
[20]
The Appellant further argues that the rule in Johnston does not apply to similar fact evidence; in such cases, the onus is on
the Respondent to demonstrate that the evidence can be admitted. In essence,
the Appellant is arguing that similar fact evidence cannot merely be pleaded as
an assumption. Instead, it is prima facie inadmissible and the onus is
on the Respondent in this case to convince the trial judge of its
admissibility.
[21]
As to whether the Group 1 Paragraphs truly
allege discreditable conduct, the Appellant argues that the Respondent has
merely disguised the allegation. Rather than saying the Appellant breached the TTA,
the Reply simply says that the Appellant did not make any inquiries and relies
on the Appellant’s “knowledge” instead. This amounts to the Respondent
disguising the allegation of non-compliance with the TTA.
Analysis
Relevance
[22]
In this case I find that the Appellant has not
shown that it is plain and obvious that the facts set out in the Group 1 Paragraphs
are irrelevant. I accept the Respondent’s submission that the
assumptions in which reference is made to the TTA relate to the scheme
alleged by the Minister to have been carried out and that the structure used by
the Appellant and the Status Indians was a sham. I am not prepared to say that
references to the regulatory regime governing the sale of tobacco or tobacco
products in Ontario when setting out the background to the alleged scheme or
sham are clearly irrelevant where the alleged scheme or sham is a central
element to the assessments.
[23]
With respect to the Appellant’s argument that
the Reply failed to draw a link between the Group 1 Paragraphs and the grounds
for relief, the Appellant has offered no authority for the proposition that the
Respondent must state which assumptions specifically support the sham position.
I do not believe that the Respondent is required to do so. The Respondent merely
needs to state the facts that were relied upon in assessing and then may ask
the trial judge to use these facts to draw conclusions in favour of the
position being advanced.
[24]
Finally, the Appellant’s concerns relating to
onus have no bearing on the question of whether the impugned paragraphs are
relevant or not, nor is it a matter that ought to be decided on a preliminary
motion. The following comments of Bowman A.C.J. (as he then was) in Mungovan
v. The Queen 2001 D.T.C. 691, at paragraph 10, are germane:
Assumptions are not quite like pleadings in an
ordinary lawsuit. They are more in the nature of particulars of the facts on
which the Minister acted in assessing. It is essential that they be complete
and truthful. The conventional wisdom is they cast an onus upon an appellant
and as Mr. Mungovan observes with some considerable justification they may
force him to endeavour to disprove facts that are not within his knowledge.
Superficially this may be true, but this is a matter that can be explored on discovery.
The trial judge is in a far better position than a judge hearing a preliminary
motion to consider what effect should be given to these assumptions. The trial
judge may consider them irrelevant. He or she might also decide to cast upon
the respondent the onus of proving them.
Similar Fact Evidence
[25]
In my view, the Group 1 Paragraphs, taken together,
do not allege that the Appellant breached the TTA and therefore there is
no pleading of discreditable conduct unrelated to its obligations under the ETA.
In particular, paragraphs (o) and (p) state that the Status Indians to whom the
Appellant was purportedly selling tobacco were not licensed under the TTA
to sell to consumers and that the Appellant made no inquires whether those
individuals were licensed by the province as tobacco wholesalers. To the extent
any breaches of the TTA are alleged to have occurred, the Group 1 Paragraphs
suggest that they were committed by parties other than the Appellant.
[26]
Even if it were alleged that the Appellant
breached the TTA, I see no basis for the suggestion that the Respondent
is relying on such a breach to demonstrate a propensity by the Appellant for
breaching the ETA. In any event, no such argument is found in the Reply.
[27]
The Reply sets out the position of the Respondent
that the commercial structures in place between the Appellant and the Indian
purchasers were a sham or conduit designed to give the appearance that the Indian
Act exemption applied. This therefore precludes any suggestion of
propensity-based reasoning.
Group 2 Paragraphs
[28]
The Group 2 Paragraphs consist of paragraphs (o),
(p), (q), (u), (y) and (bb), which the Appellant objects to on the grounds that
they contain conclusions of law or mixed fact and law. The portions of those
paragraphs that the Appellant seeks to have struck are as follows:
Paragraph Extricable
Wording________________________________
14(o) “were licenced by the province as tobacco wholesalers”
14(p) “had a vendor’s permit to sell tobacco products”
14(q) “was not authorized to sell its tobacco products to unlicensed
individuals”
14(u) “the appellant initially mislead the CRA auditor about”
14(y) “that the purpose of the scheme was to give the false
appearance”
14(bb) “manipulation or abuse of the purpose of the Indian Act
tax exemption”
[29]
The Appellant relies on Canada v. Anchor
Pointe Energy Ltd, 2003 FCA 294, for the proposition that legal statements
or conclusions have no place in assumptions.
Paragraphs (o), (p) and (q)
[30]
The Appellant says that these paragraphs (which
were also covered by the Appellant’s first argument, above) include statements
relating to whether the Status Indians were licensed or had proper permits. The
Appellant argues that based on the TTA, compliance does not necessarily
require a licence since there are deeming provisions that deem a retailer to be
holding a permit if the retailer meets certain criteria. The Appellant
therefore says it is a legal conclusion for the Minister to assume that a
licence was required. The impugned assumptions should therefore be struck.
[31]
The Appellant adds that even if paragraph (o)
was left intact, it would still contain a question of mixed fact and law
because it deals with knowledge, which contains an implicit legal question.
Analysis
[32]
I am not convinced that these paragraphs, apart
from paragraph (q), contain legal conclusions. Paragraph (o) states that the Appellant
made no enquiries whether the Status Indian purchasers were licensed as
wholesalers and (p) deals with whether the Status Indians held a permit to sell
to consumers. Holding a licence and a failure to enquire whether such a licence
was held are questions of fact, not legal conclusions. The presumption that the
facts in these paragraphs are true would not extend to a presumption that the
licences referred to were required under the TTA.
[33]
On the other hand, paragraph (q) contains the
statement that the Appellant was not authorized to sell to unlicensed
individuals, which involves both fact and law, and is therefore not
permissible. While paragraph (q) contains the element of the Appellant’s
knowledge, the question of whether the Appellant was authorized under the TTA
requires the application of the relevant statutory provisions to the facts of
the Appellant’s case. The Respondent’s counsel asked that all of paragraph (q)
be struck if the Court agreed with the Appellant’s position. Therefore, all of paragraph
(q) will be struck.
Paragraphs (u), (y) and (bb)
[34]
These paragraphs state that the Appellant misled
the auditor and that the commercial scheme in place was designed to wrongfully
take advantage of the Indian Act exemption.
[35]
The Appellant argues that the use in paragraph
(u) of the word “mislead” is no different than the
case law on misrepresentations of fact. This case law says that the Minister
cannot plead an assumption that there was a misrepresentation. In the same
vein, the Appellant argues, “mislead” should not
be allowed to remain as an assumption either.
[36]
The Appellant maintains that the use in
paragraph (y) of the phrase “false appearance” is
merely the Respondent finding another way to plead “sham”
in the assumptions. The Appellant referred to Stubart Investments Ltd. v.
The Queen, [1984] 1 S.C.R. 536 which defines “sham”,
to show that a court cannot find a sham without first finding a false
appearance. The Respondent has therefore indirectly snuck in a legal conclusion
– one of “sham” – when it could not do so
directly.
[37]
Counsel maintained that paragraph (bb) is the
clearest example of a legal conclusion because it uses the words “manipulation or abuse” but did not elaborate further on
this point.
Analysis
[38]
Regarding paragraph (u), the alleged act of
misleading the auditor is a question of fact and does not require the
application of a legal test. What a person does or knows is a fact.
[39]
However, paragraph (bb) goes further than
paragraph (u) and includes a statement concerning “manipulation
or abuse of the purpose of the Indian Tax exemption”. I agree with the Appellant
that, since the purpose of a statutory provision is a matter of legal
interpretation, this wording is not properly pleaded as a fact. The
Respondent’s counsel asked that all of paragraph (bb) be struck if the Court
agreed with the Appellant’s position. Therefore, all of paragraph (bb) will be
struck.
[40]
In paragraph (y) the use of the words “the purpose of the scheme was to give the false appearance”
is not equivalent to pleading that the arrangement was a “sham”
which Rip C.J. (as he then was) struck from the Minister’s assumptions in the
case of Strother v. The Queen, 2011 TCC 251. In that case, Rip C.J. (as
he then was) said:
[31] The allegations of sham, circular
transactions and facades are also in issue. The test for the sham doctrine was
set forth in Snook v. London West Riding Investments, Ltd.: 15
. . . [Sham] means acts done or
documents executed by the parties to the “sham”
which are intended by them, to give to third parties or the Court, the
appearance of creating between the parties, legal rights and obligations
different from the actual legal rights and obligations (if any), which the
parties intend to create. … for acts or documents to be a “sham”, with whatever legal consequences follow from
this, all the parties thereto must have a common intention that the acts or
documents are not to create the legal rights and obligations which they give
the appearance of creating. …
[Emphasis
added.]
[32]
In this case, the facts are the actual rights and responsibilities as well as
what the parties did or did not do. However, applying the facts to determine
whether there was a common intention to mislead is a conclusion of mixed fact
and law as it involves the applications of the facts to the legal test of sham.
Again, the respondent is required to extricate the facts and mentions of sham,
or façade should be deleted. With respect to this argument, some of the
bracketed portions are struck while some are not as they are factual
underpinnings and not conclusions.
[41]
While I agree that the existence of a sham is
determined by the application of a legal test to the facts of a taxpayer’s
situation, I respectfully disagree that the existence of an intention to
mislead is a legal conclusion. Both intention and purpose relate to a person’s
state of mind, which are factual matters. In Edgington v Fitzmaurice
(1885) L.R. 29 Ch. D. 459 (CA) Bowen L.J. said that “…the
state of a man's mind is as much a fact as the state of his digestion. It is
true that it is very difficult to prove what the state of a man's mind at a
particular time is, but if it can be ascertained it is as much a fact as
anything else. A misrepresentation as to the state of a man's mind is,
therefore, a misstatement of fact” (see also: Irrigation
Industries Ltd. v. The Minister of National Revenue, [1962] S.C.R. 346 at page
362).
[42]
The question of whether the “appearance that the Appellant’s sale of tobacco products were
relieved from GST/HST” was false, though, would require an analysis of
the relevant portions of the Indian Act and ETA and therefore
involve a determination of law. The word “false” should
be struck from paragraph (y).
Group 3 Paragraphs
[43]
The third group contains paragraphs (s), (t) and
(w). The wording that the Appellant objects to is as follows:
Paragraph Extricable
Wording________________________________
14(s) “retailers not located on a reserve (the “Customers”)”
14(t) “the location of each Customer”
14(w) “the Customer’s” and “to consumers”
[44]
The Appellant takes issue with the third group
of paragraphs because in its view they have not been pleaded with sufficient
specificity or completeness and are based on information that is only within
the Minister’s knowledge and which has not been shared with the Appellant.
[45]
The Appellant says that assumptions must be
pleaded with specificity, completeness, accuracy and honesty (Canada v.
Anchor Pointe Energy Ltd., 2007 FCA 188 at para 29) and cannot be based on
information that is only within the Minister’s knowledge and is not shared with
the Appellant. Fairness would require that the Appellant should not hold the
onus to demolish such an assumption.
[46]
The Appellant argues that in these paragraphs,
the assumptions involve unnamed parties and unnamed locations, being the
off-reserve retailers who were the alleged true customers. The Respondent has
not shared the identity or locations of these off-reserve retailers, and the Appellant
is therefore faced with a significant challenge in attempting to demolish the
assumption. Without specific and complete information on which off-reserve
retailers the Minister assumes were the true customers, the Appellant does not
know the case it has to meet.
Analysis
[47]
With respect to the Appellant’s argument
concerning specificity, I would note that paragraphs (s), (t) and (u) when read
together appear to indicate that the identity and location of the Appellant’s
customers is determinable by means of an alphanumeric code appearing on the
purchase orders for the sales in issue, and that the code was used by the Appellant.
This was confirmed by the Respondent’s counsel at the hearing. To this extent,
the paragraphs involve matters which would be within the knowledge of the Appellant.
Therefore, while the customers are not named in those paragraphs, the identity
of those customers and their location on or off-reserve would be known to the Appellant.
For this reason, I am not prepared to find that the wording that the Appellant
complains of should be struck from the Reply. I find there is sufficient
precision in paragraphs (s), (t) and (w) to permit the Appellant to know the
case it has to meet.
[48]
Even if I had been satisfied that the wording
referred to by the Appellant in paragraphs (s), (t) and (w) concerned matters
outside the knowledge of the Appellant, striking that wording would not be the
appropriate remedy. In such situations, it the Minister may bear the onus of
proving the impugned facts, despite pleading them as assumptions relied upon by
the Minister. See: Transocean Offshore Ltd. v. Canada, 2005 FCA 104 at
para 35. This, again, would be a matter that should be left to the
determination of the trial judge who would have the benefit of hearing all of the
evidence.
[49]
In the case of pleadings that lack specificity,
this Court has also held that the appropriate course of action would be a
demand for particulars rather than a motion to strike: Kulla v. The Queen,
2005 TCC 136 at para 15; Kopstein v. Canada, 2010 TCC 448 at para 64 and
65. I agree with Jorré J in Kopstein that
In such a case where the complaint is a failure
to include something in the pleading, it is also necessary in applying Rule 53
to consider whether the trial process is better served:
(a) by a motion to strike and, if
it is successful, in all likelihood, a motion to amend the reply which may well
be successful
or
(b) by a demand for particulars
followed by a motion for particulars, if necessary.
Depending on the
circumstances, sometimes the more appropriate course of action may be to demand
particulars in which case a motion to strike may be dismissed.
Conclusion
[50]
The motion is allowed in part in 2013-4833(GST)G,
and paragraphs 14(q) and (bb) and the word “false” in paragraph (y) will be struck
from the Fresh as Amended Reply. In light of this conclusion the Respondent is
granted leave to file a Second Fresh as Amended Reply in appeal 2013-4833(GST)G
within 30 days of this Order. The Appellant may file an Answer 30 days after
the filing of the Second Fresh as Amended Reply. The motion in the four other
appeals is dismissed. The Respondent is granted leave to file Amended Replies within
30 days of this Order in those appeals and the Appellant may file Answers 30
days after the filing of the Amended Replies.
Costs
[51]
In light of its very limited success on its
motion, the Appellant’s request for solicitor-client costs is denied and no
costs are awarded.
Signed at Ottawa, Canada, this 26th day of February 2015.
“B.Paris”
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