Citation: 2013 TCC 101
Date: 20130409
Docket: 2011-3781(IT)G
BETWEEN:
ACI PROPERTIES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bocock J.
I. Introduction
[1]
This application is
brought by the Minister under section 174 of the Income Tax Act (the “Act”)
for the reference of a common question to the Court. The Appellant contests the
application while the third party, who would be otherwise joined in the
reference, AFT Properties Inc. (“AFT”), consents.
II. Facts and Nature of Question before the
Court
i) The Proposed Question
[2]
In 2003, AFT paid to
the Appellant the sum of $1.95 million dollars. A subsisting agreement,
terminated in 2003 gave rise to the payment (“the Agreement”). AFT deducted the
payment from income as an expense. The Appellant recorded the payment as a
capital gain. In 2006-2007 AFT was the subject of a full Canada Revenue Agency
(“CRA”) audit and the Appellant was subject to a partial one (the “Audits”). As
a result, the Minister concluded that the payment constituted management fees or
other remuneration for services rendered. It reassessed the Appellant for its
2004 taxation year in December 2008 in a manner consistent with the as filed
characterization of the payment by AFT. The characterization of the payment forms
the basis of the Respondent’s application for the reference of a common
question to the Court.
[3]
The proposed question
before the Court is:
What
is the proper characterization of the $1.95 million payment from AFT to ACI in
April 2003? Was the payment in respect of management fees or other remuneration
for services provided by ACI to AFT or was the payment for an interest that ACI
had in a joint venture with AFT which was capital property that ACI disposed of
to AFT? This is the sole issue to be determined in ACI’s appeal.
ii) Background to 2008 Reassessments
[4]
Evidence of the timing,
sequence, and various conclusions arising as a result of the Audits was placed
before the Court. In short, the lead auditor for CRA assigned to the matter during
the 2006-2007 Audits (the “Audit Period”), concluded with some certainty in his
memorandum of August 2007 (“Memorandum”) that the Agreement(s) and business
relationship constituted a joint venture, that the parties were ad idem
on the valuation of the joint venture interest and that, apart from the use of
the term “joint venture”, the transaction in 2003 constituted the purchase by
AFT of the Appellant’s investment unit or interest in the venture at a fixed
price. During the Audit Period, but before the final determination by the Minster,
written waivers were obtained from both AFT and the Appellant in order to
prevent the then potential reassessments from becoming statute barred.
Notwithstanding the Memorandum to the Rulings Directorate of the CRA, the Rulings
Directorate clearly preferred the characterization of the payment as income.
Accordingly, the Minister reassessed the Appellant by denying the gain on
account of capital, recharacterizing the payment as income and de facto confirming
the AFT categorization of the payment as management fees.
[5]
During
cross-examination on the Respondent’s affidavit filed in the motion, the lead
auditor referenced a discussion during the Audit Period regarding the
possibility of bringing what was roughly described as a section 174 application,
although that specific section reference was not used in such internal
discussions. Such a request for an application has not occurred until now.
There was no evidence before the Court of any subsequent assessment or proposed
assessments or proposals of either taxpayer other than the reassessment of the
Appellant in 2008 and the de facto confirmation of AFT’s return as filed
arising from the review during the Audit Period. Moreover, counsel for the
Respondent agreed with the Court that the original assessment (or at least the confirmation
of same) of AFT constitutes the Respondent’s evidence of one “assessment” and
the reassessment of the Appellant in 2008 constitutes the other relevant
reassessment otherwise fulfilling the requirement of a “transaction … common to
assessments or proposed assessments in respect of two or more taxpayers.” within
the meaning of subsection 174(1). Relevant excepts from subsection 174(1) and
subsection 174(3) are as follows:
174(1)
Where the Minister is of the opinion that a question of law, […] fact or mixed
law and fact arising out of one and the same transaction […] is common to
assessments or proposed assessments in respect of two or more taxpayers, the
Minister may apply to the Tax Court of Canada for a determination of the question.
[…]
(3) Where the Tax Court of Canada is satisfied that a determination
of the question set out in an application under this section will affect
assessments or proposed assessments in respect of two or more taxpayers who
have been served with a copy of the application and who are named in an order
of the Tax Court of Canada pursuant to this subsection, it may
[…]
(b)
if one or more of the taxpayers so named has or have appealed, make such order
joining a party or parties to that or those appeals as it considers appropriate
and proceed to determine the question.
III.
Respondent’s
Submissions
[6]
The Respondent has
stated that the case at bar constitutes the very instance where section 174 should
be invoked by arguing: the reassessment of the Appellant and the assessment of
AFT in 2008 constituted communication by the taxing authority; input was
obtained from both assessees prior to the assessments; waivers were executed in
relation to the audit; and, the Respondent’s present application proposes how
exactly AFT would be assessed.
[7]
Respondent’s counsel
argued that the case of Zubin Pheroze Daruwala et al. v. Her Majesty The
Queen, 2012 TCC 116, [2012] T.C.J. No. 227 which cited with approval of Thierry
Brenneur v. Her Majesty The Queen, 2010 TCC 610, [2010] T.C.J. No. 489 establishes
the three questions which the Court must pose in assessing whether a question
to be determined under section 174 meets the appropriate criteria. These
questions taken from paragraph 11 of Daruwala are as follows:
1. Has the Applicant provided the Court with evidence of independent
communication by the taxing authority to the proposed assessee or some other
reasonable indication that it may reassess the proposed assessee?;
2. What evidence has been submitted of an actual or proposed
investigation, review or survey of the proposed assessee’s affairs, history or
file in the context or in pursuance of a proposed reassessment?; or
3. What submissions have been made regarding the expected
efficiencies to be gained from joining a proposed and actual assessment into a
single question for the Court to determine prior to the otherwise pending
hearing of the single appeal?
[8]
As stated above the
Respondent’s submissions (and Minister’s opinion) are that the three questions
have been satisfied and, accordingly, the question for determination should be put
to, and determined by, the Court. Neither perceived procedural difficulties nor
the absence of a “proposal letter” or recent proposed reassessment should
prevent such a determination given the plain wording and intent of the section.
IV. Appellant’s Submissions
[9]
In argument, the
Appellant stated that the application under subsection 174(1) should fail on
three grounds.
i)
No Proposal to
Reassess AFT
[10]
The Appellant submitted
that the Audits, the waivers and the confirmation of AFT’s assessment have not
led to a reassessment or potential reassessment since the Minister has clearly
preferred the position taken by AFT from the outset. The Minister’s actions in
assessing AFT’s return as filed, ignoring the position taken by the conclusive
findings of the CRA lead auditor and obtaining waivers prior to completing the Audits
do not constitute sufficient factual basis of a reassessment within the meaning
of subsection 174(1). Therefore the “statutory precondition” of an assessment
or proposed assessment of more than one taxpayer connected to the question
implicit in subsection 174(1) has not been met.
ii) Consistent Acceptance of AFT’s Factual
and Legal Position
[11]
In drawing the Court’s
attention to Daruwala, Appellant’s counsel indicated that the unilateral
acceptance by the Minister of AFT’s characterization of the payment as income
from the very outset (further confirmed in time after the Audits, obtainment of
waivers and contemplation of a section 174 application) is a more obvious
unilateral acceptance of one taxpayer’s factual and legal position when
compared with those factual situations found in Daruwala and Brenneur,
with which this Court twice took exception.
iii) Abuse of Process by the Minister
[12]
The Appellant also
submitted that the use of section 174 by the Minister in this instance
constitutes an abuse of process since it obviates the Minister’s present
obligation in the pending appeal to answer evidence adduced by the Appellant
which will possibly demolish or render irrelevant the Minister’s assumptions in
the Minister’s Reply. In the present case, given the Memorandum, adduced by way
of affidavit and transcript on cross-examination, the Minister is attempting to
tactically remove the obligation to defend her assumptions and recharacterize
what to date has been an unilateral endorsement of AFT’s longstanding factual
and assessed position to that of a presently conflicting characterization of a
single payment by two taxpayers. The removal of the implication of assumptions recasts
this hotly contested appeal into one where fairness and the obligations of the
Minister to defend her assumptions are lately cleansed in the name of
efficiency. In short, allowing the Minister to presently resile from the
inceptive assumptions contained in the pleadings is unfair. This amounts to the
use of process in an unfair manner in a tax appeal where the assumptions
constitute an integral component in the fairness of the system.
V. Decision of the Court
[13]
Both counsel cited the
decisions of Daruwala and Brenneur. Similarly, both counsel submitted
that Daruwala was supportive of their respective, but contrary positions
on the facts as presented. Further analysis of the Daruwala questions is
therefore required. With reference to the three questions in Daruwala,
the undoubted purpose behind the Court posing the questions was to
determine, in the context of the determination of a question, whether the objects
of the assessment, enforcement and litigation processes are served and are applied
and administered in a fair, efficient and balanced manner as among more than
one taxpayer and Crown alike.
[14]
With respect to the
first question, namely, the independent communication by the taxing authority
to the proposed assessee, the Court must consider the overall actions of the
Minister in relation to the (proposed) taxpayers and her obligations as a
Minister to the objects of the system as a whole as it did in Daruwala and
in Brenneur and referenced above. The Court did so in the cited cases in
order to determine whether the Minister’s opinion embodies some bona fide
element of ambivalence or uncertainty as to the fact and/or law which is to be
determined in the question to be put to the Court. In turn, this allows the
Minister to be further certain of her position and effect the final assessments
in a consistent, fair and efficient manner, an object identified in the
preceding paragraph.
[15]
With respect to the
second question, where the Minister, after having conducted the review as she
did in the case of Daruwala and in Brenneur, finds that the position
taken by one taxpayer for whatever reasons is clearly preferable to that of
another without an indication of factual and/or legal ambivalence or uncertainty,
the Court is naturally reluctant to allow the Minister to utilize a section 174
application to belatedly thereafter buttress an otherwise longstanding,
definitive and/or readily formulated conclusion as to fact and/or law and
related assessment.
[16]
Consistently, Daruwala
and Brenneur direct that the obligation is on the Minister to
firstly conduct the investigation, review or audit (“review”) and from that review
determine whether she is prepared, on the basis of that review, to make a
decision at that time (or in relative chronological proximity to it) as to
whether a section 174 application is appropriate to bring to the Court. Such a
decision is to be linked, however loosely, causally and temporally, to some uncertainty
or ambivalence which the Minister harbours. This is the connective tissue or
linkage referred to in both cases when the Court says “what evidence has
been submitted … of an actual or proposed investigation … in the
context or in pursuance of a proposed reassessment”.
[17]
In the case at bar, after
obtaining written waivers, alerting both parties to the process and conducting
the review, the Minister during or shortly after the Audit Period (now six
years ago):
1)
unilaterally preferred
the representations of AFT and the facts which supported the confirmation of
AFT’s assessment and the reassessment of the Appellant;
2)
approached a
consideration of a section 174 application in one form or another and decided
not to proceed; and
3)
some years later proceeded
to file a Reply containing factual assumptions which are consistent with her assessing
position taken from the very outset which confirmed, (without ambivalence,
indecision or uncertainty as to fact and/or law) the preferred as filed return
of AFT over the characterization of the payment by the Appellant.
[18]
Given this followed
process, the Minister six years after having made a conclusive assessment without
evidence of possible doubt, indecision or ambivalence which might result in a
reversal of the Crown’s assessing position now raises the prospect of a section
174 determination. To reiterate, the purpose and object of a section 174
application, as outlined by Justice Boyle in the final paragraph of Brenneur,
are “to advance objectives which enhance Canadians’ confidence in the integrity
of the tax administration and collection system as well as in the Court.”
[19]
The Minister’s clear
conduct, until very recently, of unequivocally preferring longstanding factual,
legal and assessing positions in this matter do not match an opinion, now
asserted by the Minister, that assessments of one or more taxpayers were (or
are) affected by the results of that review and consequential conclusions of
the Minister. In short, the now dated and spent review has no connection to
“the context or in pursuance of a proposed reassessment” as detailed in Daruwala
and Brenneur.
[20]
For the reasons stated,
the application is denied. Costs shall be awarded to the Appellant.
Signed at Ottawa, Canada, this 9th day of April 2013.
“R.S. Bocock”
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