Citation:
2014 TCC 131
Date: May 5, 2014
Docket: 2013-770(IT)G
BETWEEN:
KINGLON
INVESTMENTS INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Graham J.
[1]
Kinglon Investments Inc. is an Ontario
corporation formed by the amalgamation of a company of the same name and a
company named Jackes Holdings Inc. Richard Sommers is the controlling shareholder of Kinglon. In
computing its income for its taxation years ending August 31, 2006, October 31,
2006, August 31, 2007, August 31, 2008, August 31, 2009 and August 31, 2010,
Kinglon claimed over $12 million in capital cost allowance (“CCA”) relating to
a licence that it purchased from a company named Cardiopharma Inc. to market a
heart drug named CardiaPill. The
Minister of National Revenue denied the entire CCA claim on a number of
grounds. One of those grounds was that the Minister believed that the licence
was an unregistered tax shelter. Kinglon has brought a motion under Rule 53(1)(d)
of the Tax Court of Canada Rules (General Procedure) to strike various
portions of the Reply relating to the issue of whether the license was a tax
shelter.
Test for Striking a Pleading
[2]
The test for striking a pleading is set out by
the Supreme Court of Canada in The Queen v. Imperial Tobacco Canada,
2011 SCC 42 at paragraph 17:
… 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 causes of action: Odhavji Estate
v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, at para. 15; Hunt v.
Carey Canada Inc., [1990] 2 S.C.R. 959, at p. 980. 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: see, generally, Syl Apps Secure Treatment Centre v. B.D.,
2007 SCC 38, [2007] 2 S.C.R. 83; Odhavji Estate; Hunt; Attorney
General of Canada v. Inuit Tapirisat of Canada, [1980] 2 S.C.R. 735.
Parties’ Positions
[3]
Kinglon submits that even if the facts pled in
the Reply were assumed to be true, it would still be plain and obvious that no
tax shelter could exist and thus that the portions of the Reply dealing with
the tax shelter argument should be struck. The Respondent takes the opposite
position. Alternatively, the Respondent seeks leave to amend the Reply. Kinglon
opposes the Respondent being granted such leave.
Tax Shelter
[4]
The definition of “tax shelter” is set out in
subsection 237.1(1) of the Income Tax Act. The relevant portions read as
follows:
“tax shelter” means
…
(b) … a property
(including any right to income) … in respect of which it can reasonably be considered,
having regard to statements or representations made or proposed to be made
in connection with … the property, that, if a person were to … acquire an
interest in the property, at the end of a particular taxation year that ends
within four years after the day on which … the interest is acquired,
(i)
the total of all amounts each of which is
(A)
an amount … represented to be deductible in computing the person's income for
the particular year or any preceding taxation year in respect of … the interest
in the property …
…
would equal or exceed
(ii) …
(A)
the cost to the person of … the interest in the property at the end of the
particular year, …
[emphasis added]
[5]
There are a number of elements to this
definition. Kinglon accepts that the Respondent has pled sufficient facts that,
if those facts were presumed to be true, could support a finding that all but
one of the elements of the definition would have been met. The element which
Kinglon submits could not be supported arises from the phrase “having regard to
statements or representations made or proposed to be made in connection with …
the property”. The parties both submit that the meaning of that phrase was
clarified by the Federal Court of Appeal in The Queen v. Baxter, 2007
FCA 172[3]. However, the parties disagree on the manner in which the Court
clarified the test.
[6]
Counsel for the Appellant referred me to paragraph
9 of Baxter:
The definition
requires that statements or representations must be made, at some time, in
connection with the property that is offered for sale. If no statements or
representations have ever been made in connection with a property, then that
property cannot constitute a tax shelter. Because the property that is
contemplated by the definition of tax shelter is a property that is assumed to
have been acquired by the prospective purchaser and the statements or
representations are required to have been made in connection with that
property, it follows that the statements or representations must have been made
prior to any actual sale of the property that is offered for sale. Further, while
the definition does not specify to whom or by whom the statements or
representations must be made, in my view they must be made to the prospective
purchasers of the property by or on behalf of the person who proposes to sell
the property.
[emphasis added]
[7]
Kinglon submits that the foregoing passage makes
it clear that to be a tax shelter, not only must statements or representations
be made, they must be made by or on behalf of the vendor of the property.
Kinglon argues that it is plain and obvious that the facts in the Reply could
not support a finding that statements or representations had been made by or on
behalf of Cardiopharma.
[8]
Counsel for the Respondent referred me to
paragraph 44 of Baxter:
While neither of the
parties to this appeal, nor the TCC in its decision, focused much attention on
the identity of the party who must have made the statements or representations,
in my view, it would be reasonable to conclude that it must be each person who
constitutes a promoter, as defined in subsection 237.1(1) (a “promoter”).
[9]
The Respondent submits that paragraph 44 of Baxter
imports the definition of “promoter” into the definition of “tax shelter”.
Thus, so long as the statements or representations are made by someone who fits
the definition of “promoter”, the Respondent submits that a tax shelter exists.
[10]
Subsection 237.1(1) defines “promoter” as
follows:
“promoter” in
respect of a tax shelter means a person who in the course of a business
(a)
sells or issues, or promotes the sale, issuance or acquisition of, the tax
shelter,
(b)
acts as an agent or adviser in respect of the sale or issuance, or the
promotion of the sale, issuance or acquisition, of the tax shelter, or
(c)
accepts, whether as a principal or agent, consideration in respect of the tax
shelter,
and more than one
person may be a tax shelter promoter in respect of the same tax shelter;
[11]
The Respondent argues that the facts in the
Reply could support a finding that statements or representations had been made
by a “promoter”.
Issues
[12]
In my view, Kinglon is attempting to roll what
should be two separate issues into one issue. Kinglon takes a view of the law which
differs from that taken by the Respondent and then applies the facts in the
Reply to its own view of the law in order to reach its conclusion that the
Respondent’s position on the tax shelter issue does not have a reasonable prospect
of success.
[13]
The Court’s role in a motion to strike is not,
as Kinglon would have me accept, to decide which parties’ view of the law is
correct. Rather, it is to determine whether the view of the law put forward by
the party against whom the motion is brought has a reasonable prospect of
success on the assumption that the facts as pled are true. As stated in Imperial
Tobacco at paragraph 21:
… Therefore, on a
motion to strike, it is not determinative that the law has not yet recognized
the particular claim. The court must rather ask whether, assuming the facts
pleaded are true, there is a reasonable prospect that the claim will succeed.
The approach must be generous and err on the side of permitting a novel but
arguable claim to proceed to trial.
[14]
However, in Kinglon’s case, the Court’s job is
complicated somewhat by the fact that the Respondent may not have pled sufficient
facts to support even her own view of the law. The only practical way to frame
the issues is therefore as follows:
(a)
Does the Respondent have a reasonable prospect
of success in convincing the Court that her view of the law on the tax shelter
issue is correct?
(b)
If so, if the facts in the Reply were assumed to
be correct, does the Respondent have a reasonable prospect of success on the
tax shelter issue?
(c)
If not, should the Respondent be entitled to
amend the Reply?
Does the Respondent’s View of the Law Have a Reasonable Prospect of
Success?
[15]
As set out above, the Respondent relies on
paragraph 44 of Baxter for her position that the person who must make a statement
or representation is the “promoter” of the tax shelter. In my view, it is not
plain and obvious that the Respondent cannot succeed on in advancing this view
of the law. There is, at a minimum, the appearance of a conflict between
paragraphs 9 and 44 of Baxter. Paragraph 9 suggests that the statement
or representation must be made by or on behalf of the vendor whereas paragraph
44 opens up a potentially broader class of people who could have made the
statement or representation. One
could conclude from the opening words of paragraph 44 that the issue may not
have been fully argued before the Court. The possible ambiguity is arguably
amplified by paragraph 41 which states:
The opening portion
of the definition of tax shelter contains a requirement that statements or
representations be made in connection with the property. However, the
definition does not specify the identity of either the person who must make the
statements or representations or the person to whom they must be made. It is
not clear whether this apparent imprecision in drafting was deliberate.
What is clear is that a property cannot constitute a tax shelter unless
statements or representations of the type contemplated by the definition of tax
shelter have been made, at some point in time, in connection with the property.
[emphasis added]
[16]
The parties agree that, in Kinglon’s case, the statements
or representations in question were made by an accountant and / or a lawyer. It
appears that one or both of those individuals was acting on behalf of Kinglon
at the time. It is possible that one or both of these individuals may have been
acting for Cardiopharma either exclusively or in addition to acting for
Kinglon.
[17]
Based on the foregoing, I am not prepared at
this point in the proceedings to foreclose the possibility that a judge of this
Court, upon hearing all of the evidence, could reasonably conclude that:
(a)
a tax shelter can exist regardless of who makes
the statements or representations so long as they are made to the taxpayer;
(b)
a tax shelter can exist in a circumstance where
an individual who acts for both the taxpayer and the vendor makes statements or
representations to the taxpayer; or
(c)
a tax shelter can exist in a circumstance where
an individual, acting solely on behalf of the taxpayer, designs a transaction
which will have the desired effect, then arranges for a vendor to participate
in the transaction and finally makes statements or representations to the
taxpayer.
[18]
To be clear, I am not endorsing any of the above
interpretations. I am merely stating that they are interpretations that a judge
of this Court could reach and thus that it is not plain and obvious that the
Respondent’s view of the law cannot succeed.
Do the Facts as Pled
Result in a Reasonable Prospect of Success?
[19]
Having concluded that the Respondent’s view of
the law has a reasonable prospect of success, I must then consider whether, if
the facts in the Reply are presumed to be true, the Respondent’s argument still
has a reasonable prospect of success. The relevant facts are found in the
following subparagraphs of paragraph 13 of the Reply:
(t)
Cardiopharma engaged BeachHead Capital Partners
Inc.’s [sic] (BeachHead) to assist it in raising funds.
(u)
BeachHead was a company based in Northport, New
York, that describes itself as a North American advisory firm specializing in
structured financings and transactions for science and technology.
(v)
BeachHead was a sales agent for Cardiopharma.
(w)
BeachHead approached Jay Granatstein, an
accountant, for assistance in raising funds for Cardiopharma.
(x)
Granatstein was Jackes’ accountant and Sommers’
accountant.
(y)
Granatstein approached David Rotfleisch, a lawyer
for Sommers, about the opportunities presented to him by BeachHead.
(z)
Granastein [sic] and Rotfleisch, alone or
with others, structured and organized a transaction that would result in the
acquisition by Jackes of a license in respect of the CardiaPill drug from
Cardiopharma in such a manner as to generate income tax deductions for Jackes
and a tax loss in its taxation year ended August 31, 2006.
(bbb) Rotfleisch and/or Granastein [sic] made statements
or representations to Sommers, the director and sole shareholder of Jackes, as
a prospective purchaser that:
1.
purchasing the License would result in Jackes
being entitled to deduct losses or other amounts, the aggregate of which would,
within four years of the date of the acquisition of the License, equal or
exceed the cost of the interest acquired by Jackes in the License;
2.
the License was a class 44 asset;
3.
Jackes would be able to deduct CCA in respect of
Jackes’ cost of acquiring the License (“License CCA”); and
4.
Jackes would be able to deduct the License CCA,
which is equal to 25% per year, subject to the half-year rule, on a declining
balance basis.
(ccc) Granastein’s [sic] representations to Sommers and
Rotfleisch included preparing pro forma tax returns for Jackes with respect to
its purchase of the License.
(ddd) Rotfleisch and/or Granatstein made the above statements or
representations to Sommers in the course of their business and, in so doing,
were promoting and advising Jackes to acquire the License under the [Exclusive
License Agreement (“ELA”)] for the associated CCA.
(eee) Rotfleisch and Granatstein were paid or otherwise received consideration
in respect of Jackes’ acquisition of the License under the ELA.
(fff) No application was made to the Minister for a tax shelter
identification number for the License.
(ggg) The Minister has not issued a tax shelter identification
number for the License.
(hhh) Neither Jackes nor Kinglon filed with the Minister a
prescribed form containing prescribed information, including the tax shelter
identification number for the License.
[20]
The foregoing assumptions of fact dance around the
question of on whose behalf the statements or representations were made. Nowhere
does the Reply clearly state either that the statements or representations were
made on behalf of Kinglon or that they were made on behalf of Cardiopharma. It
suggests that there was a connection extending from Cardiopharma to BeachHead
to Mr. Granatstein and Mr. Rotfleisch but it does not actually state that Mr.
Granatstein and / or Mr. Rotfleisch made statements or representations on
behalf of Cardiopharma. It indicates that Mr. Granatstein was Kinglon’s and
Sommers’ accountant and that Mr. Rotfleisch was Sommers’ lawyer and states that
they structured and organized the transaction but does not actually state that
they did so on behalf of Kinglon or that they made the statements or
representations that they made on behalf of Kinglon.
[21]
The Respondent appears to have drafted the Reply
with the intention of fitting into the definition of “promoter” should that
prove necessary without actually committing to any specific aspect of the
definition. For example, the Respondent has pled that Mr. Granatstein and / or
Mr. Rotfleisch made the statements or representations in the course of a business
but has not specified what that business was. Similarly, the Respondent has pled that Mr. Granatstein and Mr.
Rotfleisch received or were otherwise paid consideration but has not specified
from whom it came.
[22]
The foregoing lack of specificity was not
accidental. Counsel for the Respondent admits that the Respondent was
“intentionally non-committal” in drafting the Reply. At the hearing of the
motion, counsel was still unwilling to commit to whether the Respondent’s
position was that the statements or representations were made on behalf of
Cardiopharma or Kinglon. Counsel for Kinglon suggested that the Respondent was
attempting to wait in the weeds until examinations for discovery in order to
see what evidence might emerge to support its various theories of the case. I
agree that this is what the Respondent appears to be doing.
[23]
Paragraph 22 of Imperial Tobacco states:
… It is incumbent on
the claimant to clearly plead the facts upon which it relies in making its
claim. A claimant is not entitled to rely on the possibility that new facts may
turn up as the case progresses. The claimant may not be in a position to prove
the facts pleaded at the time of the motion. It may only hope to be able to
prove them. But plead them it must. The facts pleaded are the firm basis upon
which the possibility of success of the claim must be evaluated. If they are
not pleaded, the exercise cannot be properly conducted.
[24]
I understand that the relationship among Mr.
Granatstein, Mr. Rotfleisch, Cardiopharma and Kinglon is something exclusively
within the knowledge of Kinglon and that it may therefore be difficult for the
Minister to state that relationship with any certainty but that is why the
Minister has the power to make assumptions of fact when assessing taxpayers.
[25]
Since the Respondent has not pled the specific
facts necessary to show on whose behalf the statements or representations were
made, I am left with no choice but to strike the portions of the Reply dealing
with the tax shelter argument. Even if I assume that the facts pled are true,
there is insufficient evidence to prove that the license was a tax shelter even
on the Respondent’s broader interpretation of the law.
Leave to Amend the Reply
[26]
The Respondent has requested that, if Kinglon’s
motion is granted, the Respondent be given 30 days to serve and file an Amended
Reply. At this early stage in the proceeding it is difficult to imagine how
permitting such an amendment would prejudice Kinglon in a way that could not be
compensated by costs on this motion. Kinglon submits that it will not be
prejudiced if the Respondent amends the Reply so long as the Respondent does
not add new assumptions of fact to the Reply. For the reasons described in more
detail below, I do not believe that the addition of new assumptions of fact
would prejudice Kinglon. Therefore, I will grant the Respondent leave to serve
and file an Amended Reply.
Comments on Potential Amendments
[27]
I would like to address some potential issues
that may arise in amending the Reply. In doing so I hope to reduce the
likelihood of additional procedural disputes in this matter. My comments are
not binding on the Respondent.
(a)
Assumptions of Fact: An Amended Reply will need to clearly identify the facts
necessary to support the Respondent’s view of the law. To the extent that the
Respondent wishes to plead alternative bases in support of the assessment, she
will also need to clearly identify the facts necessary to support those
alternatives. In pleading the facts, the Respondent will have to decide whether
it is appropriate to plead them as assumptions of fact or as additional facts. Kinglon
is concerned that the Respondent may end up pleading assumptions of fact that
were not actually made by the Minister. I do not share this concern. An
appellant may overcome the Minister’s assumptions of fact by either demolishing
them or proving that the Minister did not, in fact, make them (Loewen v. The
Queen, 2004 FCA 146). By intentionally being non-committal in the Reply, the
Respondent has placed herself in a position where Kinglon may find it easier
than would normally be the case to convince a judge that the Minister did not,
in fact, make a given assumption of fact that appears for the first time in the
Amended Reply. The Respondent knows the exact nature of the assumptions made by
the Minister and will presumably draft the Amended Reply accordingly while
bearing the foregoing increased risk in mind.
(b)
“Promoter”: The
definition of “promoter” is complex and involves a number of different possible
permutations. To the extent that the Respondent wishes to rely on one or more
aspects of the definition of “promoter”, I anticipate that the Respondent will
bear in mind the Federal Court of Appeal’s comments in O’Dwyer at
paragraphs 26, 27 and 31:
[26]
… The penalty under subsection 237.1(7.4) of the Act is imposed if a
person “whether as a principal or as an agent, sells, issues or accepts
consideration in respect of a tax shelter” before the identification number is
issued. In the reply (paragraph 18), the provisions of subsection 237.1(7.4) of
the Act are reiterated without identifying what specific role Thomas O'Dwyer is
alleged to have played:
18. The
Appellant is liable for a penalty because he acted as principal or agent to
sell, issue or accept consideration in respect of the SRLP tax shelter before
the Minister issued a tax shelter identification number, pursuant to subsection
237.1(7.4) of the Act.
[27]
Every possible combination enumerated in subsection 237.1(7.4) of the Act is
included. There is no clear indication of why the penalty was imposed. ...
…
[31]
In setting out the basis upon which the penalty was assessed, the Minister
should clearly identify the role that Thomas O’Dwyer is alleged to have
played and not simply reiterate every possible permutation or combination that
could satisfy the statutory conditions to impose the penalty. Any taxpayer who
has been assessed a penalty should know why the penalty was assessed. Simply
reiterating the multiple combinations of possibilities that could result in the
imposition of the penalty does not tell a taxpayer what specific act (that
would result in the imposition of the penalty) he or she is alleged to have
committed.
(c)
Reasons: Paragraph
17 of the Reply as it is currently drafted simply refers to the license being a
“tax shelter”. The definition of “tax shelter” is very broad and complex. I
anticipate that the Amended Reply will, at a minimum, identify the manner and,
to the extent it is relevant, any alternative manner in which the Respondent
believes the license falls within that definition.
Conclusion
[28]
Based on all of the foregoing, Kinglon’s motion
is granted. The following portions of the Reply are struck:
(a)
the phrase “the license based on the
representations of its accountant and lawyer who negotiated the terms of the
license agreement:” in paragraph 1;
(b)
the phrase “was an unregistered tax shelter;” in
paragraph 2;
(c)
subparagraphs 13(t) to (z) and (bbb) to (hhh);
(d)
subparagraph 15(i);
(e)
the section reference “237.1” in paragraph 16;
(f)
paragraph 17; and
(g)
the headings “The Income to be Sheltered From
Tax”, “Background to the Tax Shelter”, “Jackes Acquires the Tax Shelter”, “The
License was a tax shelter” and “Tax Shelter”.
[29]
The Respondent shall have 30 days from the date
hereof to serve and file an Amended Reply.
Costs
[30]
In awarding costs, I am mindful not only of the
fact that Kinglon has been successful on this motion but, more importantly,
that the Respondent made a conscious choice to draft the Reply in a vague
manner and to refuse to commit herself to a particular position on the facts. The
Minister is given a powerful advantage in tax litigation through the ability to
plead assumptions of fact. With that advantage comes the responsibility “… that
the facts pleaded as assumptions be complete, precise, accurate and honestly
and truthfully stated so that the taxpayer knows exactly the case and the burden
that he or she has to meet”. That
responsibility was clearly not met by the Respondent in this case. In the
circumstances, I do not think that an award of costs in accordance with the
Tariff is appropriate. Accordingly, I award costs to Kinglon in the amount of $3,000.
Signed at Ottawa, Canada, this 5th day of May 2014.
“David E. Graham”
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