Citation: 2013TCC383
Date: 20131210
Docket: 2012-315(IT)G
BETWEEN:
DAVID GRAMIAK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on April 9, 2013, in Vancouver, British Columbia,
By: The Honourable Eugene P. Rossiter,
Associate Chief Justice
Appearances:
|
Counsel for the Appellant:
|
Alistair
Campbell and
Michelle Moriarty
|
|
|
|
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Counsel for the Respondent:
|
Janie Payette and
Julie David
|
____________________________________________________________________
ORDER AND REASONS FOR ORDER
A.
Background:
[1] The Appellant’s appeal is part of a group
known as the Concentra-Olympia group of appeals which all relate to certain
purported Registered Retirement Savings Plan “RRSP stripping” transactions. Mr.
Gramiak is the lead Appellant for the purposes of the matter at issue in this
motion.
[2] Both parties agree that prior to the
transactions in question the Appellant opened a self-directed RRSP account that
had the Olympia Trust Company (“Olympia”) as its trustee. The Respondent
alleges that the Appellant transferred funds into this RRSP account from a
similar type of account with another financial institution.
[3] In 2002 and 2003 respectively, $130,500 and
$8,500 were removed from the Appellant’s RRPS account with Olympia. The Respondent’s
position is that the Appellant instructed Olympia to use the foregoing amounts
to acquire certain debenture units in PI Ventures Inc. (“PI Ventures”) in 2002
and 2003. The Appellant previously conveyed to the Canada Revenue Agency (“CRA”)
that he believed at all material times that the RRSP funds were used to acquire
debenture units in PI Ventures. The Notice of Appeal filed now indicates that
the Appellant’s position is that the debentures were never acquired.
[4] It is now unclear
if the RRSP funds were ever actually
used to acquire the debenture units in PI Ventures, or were instead transferred
into a trust account maintained by a Calgary law firm. Once in the law firm’s
trust account, the Respondent argues that the amounts were used to invest in
certain off-shore corporations, and that the reported yield from these
investments were credited to the Appellant’s debit card accounts.
[5] There was no agreement between the parties
as to whether or not the debenture units in PI Ventures were “qualified
investments” for the purpose of the Income Tax Act (“Act”), or if they would
have been a “qualified investment” if they had been acquired.
[6] In January of 2002, the Appellant received
a Proposal Letter from the CRA wherein the CRA proposed to reassess the Appellant
for the 2002 and 2003 taxation years.
[7] Further into the audit process, the Minister of National
Revenue (“the Minister”) obtained waivers from the Appellant with respect to the
normal assessment period for the Appellant’s 2002 and 2003 taxation years. Both
of the waivers were drafted by the Appellant, and were dated March 14, 2006.
[8] The waiver with respect to the 2002
taxation year provided, in part, as follows:
The
normal reassessment period referred to in subsection 152(4) of the Income
Tax Act … is hereby waived for the taxation year indicated above in respect
of:
Income
inclusion of $130,500 relating to the acquisition of non-qualified investments
(PI Ventures Corporation Convertible Debentures) for an RRSP subject to s.
146(9) and/or s. 146(10).
[9] The waiver in respect to the Appellant’s
2003 taxation year is identical to the waiver to the 2002 taxation year except
for the value of the income inclusion referred to therein.
[10] The Appellant submits
that subsection 146(9) and
146(10) were identified in the waiver based on the Proposal Letter and the Appellant’s
understanding of the issues and provisions that were relevant for the
reassessment.
[11] On January 4, 2007, after the normal
reassessment period in respect of the Appellant’s 2002 taxation year had
expired, but before the normal reassessment period in respect to the Appellant’s
2003 taxation year had expired, the Minister reassessed the Appellant to include
the amounts of the RRSP funds in the Appellant’s income. These reassessments applied
subsections 146(9) and 146(10) of the Act, which generally apply to a taxpayer
when funds or value are diverted out of a taxpayer’s RRSP in a certain way.
[12] The Appellant argued for the first time in
the Notice of Appeal that they did not in fact acquire the debenture units in
question. As such, the Respondent included an alternative argument in which they
submitted that if the acquisition of the debenture units did not in fact take
place then the Appellant received a benefit from his RRSP such that subsection
146(8) applies.
[13] The Appellant objected to this
reassessment, and it was confirmed by the Minister on October 14, 2011.
[14] The Appellant’s waivers were subsequently
revoked.
B. Motion to strike:
[15] The Appellant brought a motion for the
following:
1.
Pursuant to section 53
of the Tax Court of Canada Rules (General Procedure) (“Rules”), an Order
striking out paragraphs 20 (c) and (d), striking references to “245”, “56(2)”
and “146(8)”, and striking paragraph 21 and paragraphs 26 through 30 inclusively
of the Reply, without leave to amend;
2.
In the alternative, for
an Order pursuant to section 53 of the Rules striking out the paragraphs
referred to aforesaid, with leave to amend those paragraphs so as to limit
their application to the Appellant’s 2003 taxation year only;
3.
Pursuant to section 53
of the Rules, striking paragraphs 19(d) without leave to amend;
4.
Pursuant to section 53
of the Rules, an Order striking out the phrase “RRSP stripping
mechanisms” in paragraph 18(bb) of the Reply, with leave to amend paragraph
18(bb) so as to refer to a phrase that is not prejudicial to the Appellant;
5.
The costs of the motion
payable forthwith.
[16] The Respondent also brought a motion for
the following:
1.
Pursuant to section 54
of the Rules, an Order Amending the Reply to include paragraphs 19A and
19B as set out in the Amended Reply.
[17] Prior to the hearing of this motion, the parties have agreed
that paragraphs 19(d), 20(d), and references in the Reply to section 245 and subsection
56(2) of the Act in paragraphs 21, 26, 27 and 30 are to be removed from
the Reply.
[18] The parties further agreed that paragraph
18(cc) would be amended to read as follows:
The
promoters of the scheme had previously been involved in other transactions
that the Minister has identified as RRSP stripping transactions.
[19] As a result of the foregoing agreements,
the remaining portions of the motions to be addressed are:
A. Should the following parts of the Reply
be struck without leave to amend:
1. Paragraph 20(c);
2. The reference to section 148(8) in
paragraph 21;
3. Paragraph 28; and
4. Paragraph 29.
These paragraphs read as follows:
20.c: Whether the Appellant constructively received the total amount
of the RRSP funds transferred out of his RRSP account.
…
28: Alternatively, if this Court concludes that the Appellant’s RRSP
did not acquire the debenture units and/or did not acquire any property during
the 2002 and 2003 taxation years, the Respondent submits that by directing
Olympia Trust to transfer funds from his RRSP account into Singh Walters Bindal
Trust Account, the Appellant constructively received the total amount of the
funds transferred.
29. As a consequence, the amounts of $130,500 and $8,500 received by
the Appellant constituted a benefit out of or under a RRSP and as such this
amount should be included in his income for the 2002 and 2003 taxation years
pursuant to subsection 146(8) and paragraph 56(1)(h) of the Act.
B. Should the Respondent be granted leave to
amend the Reply as to include the additional facts in paragraphs 19A and 19B?
These paragraphs read as follows:
19A: During the years 2004 to 2007, the Appellant received the
following funds from foreign source as shown on the statements issued by
Syndicated Gold Depository and provided by the Appellant to the CRA:
2004: US $ 5,950.00
2005: US $ 32,351.86
2006: US $ 40,000.00
2007: US $ 40,000.00
Total: US $ 118,301.86 (CND $135,297.60)
19B: These amounts represent a return of capital from the Appellant’s
RRSP investment in PI ventures Inc. as stated by the Appellant tin a
declaration dated June 20, 2008.
C. Issues:
A. Appellant’s motion: Is the Respondent precluded by subparagraph
152(4.1)(a)(ii) and subsections 152(5) and (9) of the Act from
advancing the alternative argument of the Appellant receiving a benefit out of/under
his RRSP in each of the 2002 and 2003 taxation years pursuant to subsection
146(8) of the Act?
B. Respondent’s motion: Should the Reply be amended to
include paragraphs 19A and 19B? In other words, will the proposed amendments
aid in the determination of the real question in controversy between the
parties at trial without causing injustice or prejudice to the Appellant that
cannot be compensated by costs?
D. Position of the parties:
[20] (i) Appellant: The Appellant asserts
that the Respondent is precluded from advancing the alternative argument in
respect of the Appellant’s 2002 taxation year for several reasons.
[21] First, the alternative argument does not
meet the conditions of subsection 152(9) of the Act. The Appellant
argues that the Respondent is relying on transactions in the alternative
argument that were not transactions that formed the basis of the reassessment.
The Appellant alleges that the “new transactions” introduced by the alternative
argument are the transfer of funds out of the RRSP account, and the constructive
receipt of the funds. The Appellant submits that the acquisition of the debentures
by the RRSP is not only fundamental to the Minister’s position in subsections
146(9) and (10), it is the sole transaction relied upon by the Minister in
issuing the reassessment. As such, they argue that to allow the Respondent to
rely on a transaction that presupposes that debentures were never acquired
would force the Minister to abandon the very assumption upon which the
reassessment relies, and therefore should not be allowed.
[22] Second, the Appellant argues that subparagraph
152(4.01)(a)(ii) and subsection 152(5) of the Act disallow the
alternative argument because it is outside the scope of the waiver. Their
position relies on the assertion that the alternative argument does not
“reasonably relate” to the matters specified in the waiver. In fact, the Appellant
submits that their representative consciously and deliberately drafted the
waiver in narrow terms so as to limit its application to only reassessments
issued pursuant to subsections 146(9) and (10) of the Act.
[23] The Appellant lastly advances that the
alternative argument would prejudice the fair hearing of the appeal within the
meaning of subsection 53(a) of the Rules, and would constitute an abuse
of process within the meaning of subsection 53(c) of the Rules.
[24] With regard to the Respondent’s motion, the
Appellant opposes the amendment to permit the inclusion of paragraphs 19A and
19A of the Amended Reply.
[25] (ii) Respondent: The Respondent first submits
that the alternative argument is permissible under subsection 152(9) since the facts
and transactions upon which the alternative argument relies are the same ones that
formed the reassessment. They argue that the alternative argument does not
rely on any new transactions, rather the RRSP investment in the PI ventures and
the tax consequences from that transaction form the basis of both the
reassessment and the alternative argument.
[26] The Respondent further submits that the
wording of the waiver is sufficiently broad to prompt a conclusion that the
alternative argument “reasonably relates” to the matters outlined in the
waiver, such that it should not be struck.
[27] With regard to the new facts included in
paragraphs 19A and 19B of their Amended Reply, the Respondent submits that
these facts serve only to complete the Reply, they are relevant to all of the
provisions upon which the Minister is reassessing the Appellant, and they are material
to the determination of the trial judge.
E. Analysis:
Appellant’s
Motion:
Plain and Obvious Test
[28] The Appellant relies on section 53 of the Rules
to strike certain portions of the Respondent’s Reply. Section 53 provides as
follows:
53.
The Court may 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
action,
(b)
is scandalous, frivolous or vexation, or
(c)
is an abuse of the process of the Court.
[29] At the outset I will
note that trial courts have frequently dealt with the validity of arguments
that the Minister was purportedly precluded from advancing by virtue of
subparagraph 152(4.01)(a)(ii) (see Fagan v. The Queen, 2011 TCC
523; Chafetz v. The Queen, 2005 TCC 803, affirmed at 2007 FCA 45; Holmes
v. The Queen, 2005 TCC 403; Mah v. The Queen, 2003 TCC 720).
[30] The plain and obvious
test has been longstanding and widely accepted in Canadian jurisprudence as the
test for motions to strike. In
Sentinel Hill Productions (1999) Corporation, Robert Strother v. the Queen,
2007 TCC 742, Bowman, C.J., provided a useful overview of the principles that
govern the application of Rule 53:
[4] I shall begin by outlining what I believe are the principles
to be applied on a motion to strike under Rule 53. There are many cases in
which the matter has been considered both in this court and the Federal Court
of Appeal. It is not necessary to quote from them all as the principles are
well established.
(a) The facts as alleged in the impugned
pleading must be taken as true subject to the limitations stated in Operation
Dismantle Inc. v. Canada, [1985] 1 S.C.R. 441 at 455. It is
not open to a party attacking a pleading under Rule 53 to challenge
assertions of fact.
(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. [Emphasis added]
(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. [Emphasis
added]
(d) Rule 53
and not Rule 58, is the appropriate rule on a motion to strike.
[31] Chief Justice McLachlin wrote for the
Supreme Court in Knight v. Imperial Tobacco Canada Ltd., 2011 SCC 42:
“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.”
Further:
“…The judge on a motion to strike asks if the claim
has any reasonable prospect of success. In the world of abstract speculation,
there is a mathematical chance that any number of things might happen. That is
not what the test on a motion to strike seeks to determine. Rather, it
operates on the assumption that the claim will proceed through the court system
in the usual way – in an adversarial system where judges are under a duty to
apply the law as set out in (and as it may develop from) statutes and
precedent. The question is whether, considered in the context of the law
and the litigation process, the claim has no reasonable chance of
succeeding.”
[32] More recently, this
Court applied the plain and obvious test in Canadian Imperial Bank of
Commerce v. R., 2011 TCC 568 (“CIBC”).
“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.”
[33] I will comment that
there is jurisprudence that has applied the plain and obvious test in elaborate
judgments in which the Court engages in deep and lengthy analysis, and
ultimately concludes to strike the pleading in question. I have difficulty
reconciling an elaborate and in-depth analysis with the very nature of the
“plain and obvious” test. As the name of the test suggests, a pleading is only
to be struck if it is obvious that it should be. In my view, an “obvious
decision” in both life and law is a conclusion that can be attained without
hesitation, and that does not require lengthy deliberation. In my respectful
view, if it takes 20 pages to explain why something is obvious, it simply is not
obvious.
[34] This being said, the
plain and obvious test has yet to be applied to circumstances exactly as they
are in this case. There do not appear to be any decisions in which the Court
struck pleadings because they contained an argument that the Minister was
precluded from advancing by virtue of subparagraph 152(4.01)(a)(ii) of
the Act. None of the decisions cited by the Appellant in the Notice of
Motion directly pertain to a motion to strike under Rule 53. Honeywell v.
The Queen, 2007 FCA 22 and Walsh v. The Queen, 2007
FCA 222 pertain to motions to amend pleadings. The same can be said for
the authorities submitted by both the Appellant and Respondent in support of
their written submissions. While their authorities may analyse subparagraph
152(4.01)(a)(ii) of the Act in the context of amending pleadings
or other, the analysis has not yet been done within the context of the plain
and obvious test required by section 53 of the Rules.
[35] There is a
significant difference between the standards to which are held motions to amend
and motion to strike pleadings. Canderel Ltd v. R. [1993] 2 CTC 213, [1994]
1 FC 3 establishes that
amendments to pleadings are to be allowed so long as they relate to the issue
in the appeal and do not prejudice the parties or cause injustice. In
contrast, the plain and obvious test applied to striking motions is
significantly higher, more stringent, and the courts have ruled that striking pleadings
is to be done in only the most exceptional cases.
[36] This therefore limits
the applicability of the suggested precedents to the motion at bar. While the
analysis of the proposed authorities is relevant as they pertain to
subparagraph 154(4.01)(a)(ii) of the Act, the outcome of these
cases are not determinative on the outcome of the instant motion.
[37] Ultimately, in
determining whether to grant the motion to strike portions of the Respondent’s
pleadings, the question is whether it is plain and obvious that the Respondent
is not entitled to plead the alternative argument.
[38] In order to determine
this, I will first approach the two issues raised by the parties and go through
the analysis as effectuated in the precedents submitted to this Court. The two
main issues to be determined are whether the alternative argument relies on
questions that did not form the basis of the reassessment, and second whether
the alternative argument reasonably relates to the waiver. This analysis will
then be framed and considered within the context of the plain and obvious test
to determine the outcome of the Appellant’s motion.
Does the alternative argument rely on transactions that did not form the
basis of the reassessment?
[39] Subsection 152(9) of
the Act reads as follows:
Alternative basis for assessment – The Minister may advance an alternative
argument in support of an assessment at any time after the normal reassessment
period, unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to
adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that
the evidence be adduced.
[40] It is established in Canadian jurisprudence
that the Minister is entitled to rely on subsection 152(9) to advance an
alternative argument in certain situations.
[41] The Federal Court of
Appeal in Walsh v. The Queen, 2007 FCA 222, sets out three relevant
limitations.
1) the Minister cannot
include transactions which did not form the basis of the taxpayer’s
reassessment;
2) the right of the
Minister to present an alternative argument in support of an assessment is
subject to paragraphs 152(9)(a) and (b), which speak to the
prejudice to the taxpayer; and
3) the Minister cannot
use subsection 152(9) to reassess outside the time limitations in subsection
152(4) of the Act, or to collect tax exceeding the amount of the assessment
under appeal.
[42] Anchor Pointe Energy
Ltd. v. The Queen, 2003 FCA 294, and The Queen v. Loewen, 2004 FCA 146 further
explain that a Respondent is not precluded from relying on subsection 152(9) to
advance an alternative argument except in circumstances where the factual
transactions underpinning the alternative argument are different than the ones
underpinning the reassessment.
[43] In this case I find
that the
transactions underpinning the alternative argument do not appear to be
substantially different from those underpinning the reassessments at issue. Indeed,
the Minister assumed in issuing the relevant reassessments, among other things,
that:
•
The
debentures for the purchase by the Appellant’s RRSP trust had a value at the
time of acquisition of nil to nominal; and
•
The
funds which had purportedly been used to purchase the debentures were
ultimately diverted to a law firm’s trust account.
[44] In my view a series
of transactions through which the Appellant might have directly diverted
funds from his RRSP to the law firm’s trust account is not materially different
from the transactions assumed by the Minister. Rather it seems that the only
difference between the facts underpinning the alternative argument and the
facts underpinning the reassessments relates to the question of whether the Appellant’s
RRSPs were a legally acquired asset of nominal or nil value.
[45] Further assumptions
made by the Minister in reassessing the Appellant are:
•
PI
Ventures was a shell company.
•
The
annuitant directed Olympia Trust to transfer the funds held in his RRSP account
to the Singh Walters Bindal Trust Account no. 5204448 to obtain access to the
said funds.
•
The
RRSP funds that ended up in Singh Walters Bindal Trust Account were never used
for PI Ventures Inc.’s own purpose but were transferred to various companies in
or outside of Canada.
[46] It seems clear that the
transactions underlying the reassessment and the alternative argument are the
alleged transactions undertaken by the Appellant to circumvent tax on his RRSP
funds. Naturally, all of the sections of the Act in question, subsection
146(8), (9) and (10), are all provisions aimed in part at preventing taxpayers
from diverting funds out of their RRSPs on a tax-free basis. It is the
transactions relating to the “RRSP stripping”, and more particularly the
diversion of funds from the RRSP account to the law firm’s trust account, that
underpin both the reassessment and the alternative argument.
[47] As such, I am of the
view that the alternative argument does not “include transactions which did not
form the basis of the taxpayer’s assessment” as described in Walsh, and
as purported by the Appellant.
[48] Also, none of the
concerns referred to in paragraphs 152(9)(a) and (b) of the Act
appear to be present in these circumstances.
Does subsection 146(8) reasonably
relate to the matters specified in the waivers?
[49] Section 152 of the Act
provides the rules relating to the Minister’s issuance of assessments and
reassessments. Subections 152(4), (4.01) and (5) provide:
152(4) Assessment and
reassessment. The Minister may at any time make an assessment, reassessment or additional
assessment of tax for a taxation year, interest or penalties, if any, payable
under this Part by a taxpayer or notify in writing any person by whom a return
of income for a taxation year has been filed that no tax is payable for the
year, except that an assessment, reassessment or additional assessment may be
made after the taxpayer’s normal reassessment period in respect of the year
only if
(a) the taxpayer or person
filing the return
(i) has made any
misrepresentation that is attributable to neglect, carelessness or wilful
default or has committed any fraud in filing the return or in supplying any
information under this Act, or
(ii) has filed
with the Minister a waiver in prescribed form within the normal reassessment
period for the taxpayer in respect of the year; or
(b) the
assessment, reassessment or additional assessment is made before the day that
is 3 years after the end of the normal reassessment period for the taxpayer in
respect of the year and
(i) is required under subsection (6) or (6.1), or
would be so required if the taxpayer had claimed an amount by filing the
prescribed form referred to in the subsection on or before the day referred to
in the subsection,
(ii) is made as a consequence of the assessment or
reassessment pursuant to this paragraph or subsection 152(6) of tax payable by
another taxpayer,
(iii) is made as a consequence of a transaction
involving the taxpayer and a non-resident person with whom the taxpayer was not
dealing at arm’s length,
(iii.1) is made, if the taxpayer is non-resident and
carries on a business in Canada, as a consequence of
(A) an
allocation by the taxpayer of revenues or expenses as amounts in respect of the
Canadian business (other than revenues and expenses that relate solely to the
Canadian business, that are recorded in the books of account of the Canadian
business, and the documentation in support of which is kept in Canada), or
(B) a
notional transaction between the taxpayer and its Canadian business, where the
transaction is recognized for the purposes of the computation of an amount
under this Act or an applicable tax treaty.
(iv) is made as a consequence of a payment or
reimbursement of any income or profits tax to or by the government of a country
other than Canada or a government of a state, province or other political
subdivision of any such country,
(v) is made as a consequence of a reduction under
subsection 66(12.73) of an amount purported to be renounced under section 66,
(vi) is made in order to give effect to the
application of subsection 118.1(15) or 118.1(16).
(4.01) Assessment to which
para. 152(4)(a) or (b) applies — Notwithstanding
subsections (4) and (5), an assessment, reassessment or additional assessment
to which paragraph (4)(a) or (b) applies in respect of a taxpayer
for a taxation year may be made after the taxpayer’s normal reassessment period
in respect of the year to the extent that, but only to the extent that, it
can reasonably be regarded as relating to,
(a) where paragraph
(4)(a) applies to the assessment, reassessment or additional
assessment,
…
(ii) a matter
specified in a waiver filed with the Minister in respect of the year; and
(5) There
shall not be included in computing the income of a taxpayer for a taxation
year, for the purpose of an assessment, reassessment or additional assessment
made under this Part after the taxpayer’s normal reassessment period in respect
of the year, any amount that was not included in computing the taxpayer’s
income for the purpose of an assessment, reassessment or additional assessment
made under this Part before the end of the period.year; and
…
(emphasis added)
[50] Subparagraph 152(4.01)(a)(ii) provides that
the Minister can issue a reassessment after the normal reassessment period, to
the extent, but only to the extent, that it can reasonably be regarded as
relating to “a matter specified in a waiver filed with the Minister in respect
of the year”. By virtue of Honeywell, we know that this rule applies
to alternative bases for reassessments advanced during the appeal process. This
Court must therefore determine if the alternative argument which cites subsection
246(8) of the Act, reasonably relates to the matters specified in the
waiver.
[51] Case law has established that for the
purposes of subparagraph 152(4.01)(a)(ii), a waiver should be
interpreted objectively when there is a technical defect or when the intentions
of the parties differ, Chafetz v. The Queen, 2007 FCA 45, and this
interpretation must be performed within the context of the surrounding
circumstances of the appeal, Brown v. The Queen, 2006 TCC 381.
[52] Similarly, when interpreting a waiver, the
text is not necessarily determinative. This issue was discussed by Justice Reed
in Stanley J. Solberg v. M.N.R., 92 D.T.C. 6448 (F.C.T.D.) whose
reasoning was followed in Fagan v. The Queen, 2011 TCC 523. In Fagan,
Justice Angers emphasized that extrinsic evidence is often relevant when
interpreting a waiver. See paragraphs [34] and [35].
Scope of the Waiver:
[53] The waiver signed by
the parties for the 2002 taxation year reads as follows:
Income inclusion of $130,500 relating to acquisition
of non-qualified investment (PI Ventures Corporation convertible debentures)
for a RRSP subject to s. 146(9) and/or 146(10).
[54] I interpret the
waiver as being sufficiently broad as to find that the alternative argument can
reasonably be regarded as relating to matters specified in the waiver.
[55] I come to this conclusion in first noting
that the
alternative argument must only reasonably relate to the matter of the waiver –
it does not need to be expressly included in the waiver. I interpret the “matter”
specified in the waiver to be the income inclusion and treatment of $130,500
for the 2002 taxation year. In my view it would be too narrow of an interpretation to find that
the “matter” of the waiver is an income inclusion resulting exclusively from the
acquisition of the debentures in PI Ventures. The matter of the waiver is not limited
to specified provisions that explain why the matter might be included as
income. The matter of the waiver is not confined within the parameters of subsections
146(9) and (10); the matter of the waiver is the treatment of the specified
income. As such, I find that the alternative argument reasonably relates to
the matter set out in the waiver.
[56] As already mentioned,
in cases where there is a defect in the waiver, or there is disagreement as to
the extent and meaning of a waiver, the analysis turns to whether the meaning
of the waiver is wider than the text alone. As we know from Solberg and
Fagan, extrinsic evidence must be analysed when interpreting a disputed
waiver. As was highlighted by J. Mogan in Brown,
“Relevant surrounding circumstances are important to
determine whether a subsequent reassessment falls within the stated terms of a
waiver.”
[57] The Appellant appears
to be arguing that the waiver limits the Respondent’s ability to reassess
beyond subsections 246(9) and (10). The Respondent is clearly arguing that
they do not share the Appellant’s intention as to the scope of the waiver. In
such cases of discrepant intentions, an objective interpretation of the waiver
and the extrinsic surrounding evidence is the appropriate analysis (Chafetz).
[58] In turning to the
extrinsic evidence before the Court in this motion, one cannot escape the fact
that the Proposal Letter clearly conveyed to the Appellant that the Minister was
investigating an arrangement through which the Appellant received the value of
his RRSP funds without paying the appropriate tax. It is worth again
highlighting that subsection 246(8), just like subsections 246(9) and (10),
works to prevent, in part, taxpayers from diverting funds out of their RRSPs on
a tax-free basis.
[59] I have extracted
certain passages from the Proposal Letter sent to the Appellant in January of
2006 which outline the Minister’s concerns regarding the 2002 and 2003 taxation
years. Based on the following excerpts, as well as my interpretation of the Proposal
Letter as a whole, the Appellant knew, or ought to have known, that the issue
in this case is RRSP stripping, not simply the acquisition of debentures.
•
“Certain
individuals associated with this sale of debentures are known to have
previously promoted or facilitated arrangements aimed at extracting cash from
RRSPs on a tax free basis.”
•
“The
true purpose of the transactions was to remove the cash within your RRSP
without creating a liability for income tax.”
•
“It
is our opinion that the arrangement was intended to, and resulted in, the
stripping of value of the RRSP.”
[60] These passages show
that the issue in the reassessment was not restricted to the acquisition of
debentures and that the Appellant was aware of this fact. The waiver is as
wide as the matter that it addresses, and these communications indicate that
the matter the parties were dealing with was beyond the simple application of subsections
146(9) and (10). As such, I find that a non-textual, objective interpretation
of the waiver, keeping in mind the circumstances and extrinsic evidence, also indicates
that subsection 246(8) of the Act “reasonably relates” to the matters
set out in the waiver.
[61] I am also compelled
to find that the alternative argument reasonably relates to the matter of the
waiver since subsections 146(8), (9) and (10) are all closely connected. These
provisions read:
(8) There
shall be included in computing a taxpayer’s income for a taxation year the
total of all amounts received by the taxpayer in the year as benefits out of or
under registered retirement savings plans, other than excluded withdrawals (as
defined in subsection 146.01(1) or 146.02(1)) of the taxpayer and amounts that
are included under paragraph (12)(b)
in computing the taxpayer’s income.
…
(9) Where in a taxation
year a trust governed by a registered retirement savings plan
(a) disposes
of property for a consideration less than the fair market value of the property
at the time of the disposition, or for no consideration, or
(b) acquires
property for a consideration greater than the fair market value of the property
at the time of the acquisition,
the difference between the fair
market value and the consideration, if any, shall be included in computing the
income for the taxation year of the annuitant under the plan.
…
(10) If
at any time in a taxation year a trust governed by a registered retirement
savings plan uses or permits to be used any property of the trust as security
for a loan, the fair market value of the property at the time it commenced to
be so used shall be included in computing the income for the year of the
taxpayer who is the annuitant under the plan at that time.
[62] Subsection 146(1)
defines “benefit” for the purpose of subsection 146(2) to generally include
“any amount received out of or under a retirement savings plan” other than
certain enumerated amounts.
[63] Subsections 146(8),
(9) and (10) each apply to very similar circumstances. Subsection 146(8) can
apply to require an income inclusion where a taxpayer receives an amount
directly paid out of his RRSP. Similarly, subsection 146(1) can apply where a
taxpayer seeks to avoid the application of subsection 146(8) by, for example,
having his RRSP purchase property which he personally holds for an inflated
amount. Subsection 146(9) can apply where a taxpayer seeks to avoid the
application of subsection 146(8) by having his RRSP pledged as property
security for a loan to a taxpayer in order to effectively remove the value from
the RRSP assets. The commonalities and links between these provisions are
strong.
[64] Moreover, amounts
required to be included by virtue of subsections 146(8), (9) and (10) are all
brought into income under paragraph 56(1)(h) of the Act.
[65] This case is unlike
that of Honeywell, where the Minister reassessed the Appellant on an
entirely new basis after receiving new information at the examination for
discovery stage; Honeywell’s reassessment dealt with new facts, new
issues, and new transactions that could not reasonably relate to the matters
set out in the waiver. Similarly, the case at bar can also be distinguished
from the case in Mah, where Chief Justice Rip found that the only
relationship between the two provisions was that they were triggered in the
same year. In stark contrast, the instant case deals with the same
transactions, the same issues, and there is a direct connection between the
provisions pleaded.
[66] I will address here
the fact that the Appellant had maintained throughout the audit process that he
had acquired the debenture units in question, however the Appellant changed his
position in the Notice of Appeal, and now claims to have never acquired the
units. It would be absurd to disallow the Respondent’s alternative argument
when one considers that the Appellant drafted the waiver attempting to limit
the scope of the reassessment, then advanced a new argument in the Notice of
Appeal that contradicts the information provided to the CRA during the audit,
and now claims the Respondent cannot respond to their new position since it is
outside the scope of the carefully crafted waiver.
[67] Given the
relationship between subsections 146(8), (9) and (10) and given the common
factual matrix underlining both the alternative argument and the reassessment, I
believe that the alternative argument can reasonably be regarded as relating to
the matter specified in the waiver. As a result, it is my view that the Respondent
should be entitled to raise the alternative argument in their Reply.
Plain and obvious analysis:
[68] My foregoing
conclusions, first that the alternative argument does not rely on new
transactions that did not form the basis of the reassessment, and second that
the alternative argument reasonably relates to the matter in the waiver,
demonstrate that the Appellant’s arguments fail and the alternative argument
should proceed to the trial judge. Notably, the Appellant’s arguments failed
on the basic analysis of these questions which were developed in the context of
amending pleadings, rather than striking them. It goes without saying that if
the amending standard is not met, the striking standard is certainly not met. To
have been successful in this Motion, the Appellant would have had to not only
demonstrate how the foregoing analysis supports their argument, but also how
coming to this conclusion is “plain and obvious.” In my view, it is inconceivable
that the pleadings should be struck, not alone plain and obvious.
Prejudice:
[69] I fail to see how allowing the alternative
argument to remain in the Respondent’s pleadings could prejudice or delay the
fair hearing of the appeal within the meaning of subsection 53(a) of the Rules,
or result in the abuse of the process of the Court within the meaning of subsection
53(c) of the Rules.
[70] I reference J. Angers, who wrote in Fagan
:
“The cases referred to above also confirm that a
reassessment can reasonably be regarded as relating to the terms of the waiver
if the evidence shows that the taxpayer was not surprised by the basis of
the reassessment or if the basis of the reassessment was known to both the
parties. In other words, the Courts have found that, in such circumstances,
affirming the validity of the waiver will not result in prejudice to either
party.” [Emphasis Added]
[71] In this case, the Appellant could not have
been reasonably surprised by the alternative argument advanced in the Reply
since it was included in the Respondent’s pleadings in simple response to the Appellant’s
new position in the Notice of Appeal.
[72] The Appellant’s motion
is therefore dismissed.
Respondent’s Motion:
[73] The Respondent is seeking
to amend the Reply to include two additional facts, namely the facts included
in paragraphs 19A and 19B of the Amended Reply. The Appellant opposes the
proposed amendments.
[74] Paragraph 19A sets
out the exact amounts allegedly received by the Appellant in years 2004 through
to 2007 from the Syndicated Gold Depository, totalling at $135,297.60 CAN.
Paragraph 19B claims that these funds were a return from the Appellant’s RRSP
investment in PI ventures, as stated by the Appellant in a declaration dated
June 20, 2008.
[75] It is important to
first note that the Respondent’s motion is a motion to amend under Rule 52 of
the Tax Court of Canada Rules (General Procedure), rather than a motion
to strike under Rule 53. I have already established that the distinction
between these two tests is significant. The law for amending pleadings was set
out by the Federal Court of Appeal in Canderel. Justice Decary wrote:
“… the general rule is that an amendment should be
allowed at any stage of an action for the purpose of determining the real
questions in controversy between the parties. Provided, notably, that the
allowance would not result in an injustice to the other party not capable of
being compensated by an award of costs and that it would serve the interests of
justice.”
[76] It is clear to me
that the facts set out in the new paragraphs relate to the heart of the appeal
at bar. The paragraphs include facts relating to the tracing of funds from the
Appellant’s self-directed RRSP, which is clearly material and relevant to the issue
of this appeal which is whether or not there was stripping of the Appellant’s
RRSP, resulting in the acquisition of the funds on a tax-free basis.
[77] I cannot imagine how
the Appellant would be prejudiced in any way by the addition of these facts
given that it was made clear to the Appellant since the very beginning of the
audit that the CRA was investigating what they believed to be an RRSP stripping
scheme. The Appellant has been anticipating this very argument from the Minister,
and nothing with regard to the Respondent’s position has changed with the
addition of the new paragraphs. They are material facts that simply complete
the Respondent’s pleadings.
[78] Further, the CRA was
not made aware of the facts set out in paragraphs 19A and 19B during the audit
stage, and did not have these facts when the reassessments were issued in 2007.
It is reasonable that they now seek to include these facts in their pleadings.
[79] In my view the
Minister has acted correctly in bringing this motion early in the proceedings. I
believe that any delay that may result from granting this motion will be
minimal, and I have a hard time imagining how any resulting delay would be of
the magnitude to cause an injustice worthy of refusing the amendment. As such,
I find that the interest of justice is best served by allowing the Respondent’s
motion.
[80] The Respondent’s
motion is therefore granted, and the Amended Reply will now include paragraphs
19A and 19B.
[81] The Respondent is awarded costs on the dismissed
Appellant’s motion and on the Respondent’s successful motion.
Signed at Ottawa, Canada, this 10th day of December,
2013.
“E.P. Rossiter”
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