Harris v. Canada, 2001 FCT 1408

Date: 20011219

Docket: T-2407-96

Neutral Citation: 2001 FCT 1408

BETWEEN:

GEORGE WILLIAM HARRIS,

on his own behalf, and on behalf of a class of Plaintiffs

comprised of all individuals and others required to file returns

pursuant to section 150 of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1,

as amended, excepting those filers as described in paragraph 2 of this Claim,

Plaintiff

-and-

HER MAJESTY THE QUEEN and

THE MINISTER OF NATIONAL REVENUE,

Defendants

REASONS FOR JUDGMENT

DAWSON J.

[1]                 In May of 1996, the Auditor General of Canada reported serious concerns about the administration of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1^[1] ( the "Act") involving the movement out of Canada of at least two billion dollars of assets held in family trusts following the issuance in 1991 of an advance income tax ruling by what was then Revenue Canada.

[2]                 The advance ruling had dealt with the income tax consequences for a trust that would cease to be resident in Canada and would become resident in the United States. The concerns raised by the Auditor General were that the transactions ruled upon may have circumvented the intent of the tax law, the ruling may have forfeited a future claim to significant tax revenue, there was a lack of documentation and analysis of key decisions made by Revenue Canada, and because the advance ruling was not made public on a timely basis other taxpayers may have been denied a similar benefit.

THE NATURE AND HISTORY OF THIS ACTION

[3]                 Relying on those concerns, in October of 1996, Mr. Harris commenced this action. It is brought on his own behalf and on behalf of all taxpayers required to file income tax returns except those taxpayers who, between January 1, 1985 and October 1, 1996, carried out transactions or were assessed on the basis that, as a matter of law, "taxable Canadian property" under the Act can be held or disposed of by a resident of Canada.

[4]                 In this action, Mr. Harris raises two distinct causes of action. Mr. Harris first alleges that by virtue of the 1991 advance tax ruling the Crown "bestowed an undue preference and special benefit" upon the affected taxpayers and that Mr. Harris has a "reasonable apprehension of bad faith administration and an ulterior motive on the part of the Crown in the circumstances of this case". Second, Mr. Harris asserts that in receiving and responding to the 1991 advance ruling request the Minister of National Revenue ( the "Minister") "was acting in a fiduciary capacity, or was acting in a capacity akin to a fiduciary" towards the class of taxpayers Mr. Harris represents and that the Minister breached that duty.

[5]                 The substantive relief sought by Mr. Harris is a declaration that the Minister is obliged to utilize all available powers and measures under the Act to collect any tax properly due and owing as a result of the transactions referenced in the advance ruling.

[6]                 The defendants moved to strike the statement of claim on the grounds that it disclosed no cause of action and that Mr. Harris lacked public interest standing to bring the claim. While the motion to strike was initially allowed by the Associate Senior Prothonotary, the motion was dismissed by Muldoon J. on appeal to the trial division. An appeal to the Court of Appeal from that decision was unsuccessful, and the Supreme Court refused leave to appeal from that decision.

[7]                 A defence was then filed to the claim and following discovery of the defendants the matter proceeded to trial.

THE NATURE OF THE EVIDENCE AT TRIAL AND EVIDENTIARY ISSUES

[8]                 The evidence adduced at trial consisted of an agreed statement of facts, the testimony of 14 witnesses, the filing of a number of documents as exhibits, and the reading in of excerpts from the examination for discovery of the defendants' representative. Of the 14 witnesses, three were associated with the office of the Auditor General and 11 were past or present representatives of Revenue Canada or the Department of Finance.

[9]                 The plaintiff called as witnesses three individuals associated with the office of the Auditor General, a former representative of the Department of Finance, and four persons currently or formerly associated with Revenue Canada. By agreement, the plaintiff was permitted to cross-examine present and former representatives of Revenue Canada without the necessity of a finding that they were adverse to the plaintiff.

[10]            The bulk of the documents received as exhibits were contained in two volumes of a joint document brief filed by consent which specified whether the documents were filed as prima facie proof of their contents or were filed simply as authentic copies. The first volume of the joint brief consisted of the documents contained in Revenue Canada's file with respect to the 1991 advance ruling. A significant portion of those documents consisted of file notes or memoranda prepared by Mr. J. Chan, the rulings officer responsible for the initial analysis of the advance ruling request. Those notes were not admitted by the defendants to be prima facie proof of their contents.

(i) The admissibility of the notes of the rulings officer as proof of their contents

[11]            Mr. Chan testified at trial. With respect to his notes he testified that they were taken down on a departmental form, in his own handwriting, at or about the same time as the events recorded, and that it was expected of him to keep these types of notes so that they would form part of Revenue Canada's file. Mr. Chan also testified that he attempted to the best of his ability to make them accurate and complete throughout. Notwithstanding, Mr. Chan's notes of meetings were not necessarily exhaustive. Nor were Mr. Chan's notes of meetings circulated to other meeting participants for comment.

[12]            On that evidentiary basis the plaintiff moved to have Mr. Chan's notes received in evidence to establish the truth of their contents pursuant to section 30 of the Canada Evidence Act, R.S.C. 1985, c. C-5. This section provides in material part:

[13]            The defendants opposed receipt of the documents to establish the truth of their contents on the grounds that the notes were not records made in the ordinary course of business, and that because the notes were not exhaustive and were not circulated among meeting participants there were reliability concerns.

[14]            Subsection 30(12) of the Canada Evidence Act defines "business" to include any activity or operation carried on or performed by any department of any government. On the basis of Mr. Chan's evidence, I was satisfied and ruled that his notes were records made in the usual and ordinary course of business and were admissible pursuant to section 30 of the Canada Evidence Act. On the evidence before me, I concluded that concerns as to the completeness of any individual note or memorandum more properly go to the weight to be given to the information contained in the note, as contemplated by subsection 30(6) of the Canada Evidence Act.

(ii) The expertise of the Auditor General's office

[15]            A second evidentiary issue was whether the representatives of the office of the Auditor General could testify as experts on the operation of government departments in general, and Revenue Canada in particular, and so could opine on the proper running of Revenue Canada.

[16]            Denis Desautels, the former Auditor General of Canada, Shahid Minto, the Assistant Auditor General of Canada, and Barry Elkin, Senior Principal of the office of the Auditor General of Canada, all testified. Their respective qualifications and involvement with the matters at issue in this action are as follows.

[17]            Mr. Desautels is a chartered accountant and a fellow of the Order of Chartered Accountants of Québec and the Institute of Chartered Accountants of Ontario. He is a member and past chair of the Public Sector Accounting and Auditing Committee of the Canadian Institute of Chartered Accountants. He served as Auditor General of Canada from April 1, 1991 to March 31, 2001.

[18]            The functions and powers of the Auditor General are set forth in the Auditor General Act, R.S.C. 1985, c. A-17. The Auditor General is required pursuant to section 7 of that Act to report annually to the House of Commons and he may make special reports to the House. Each report is required to call attention to anything which the Auditor General considers to be of significance and of a nature that should be brought to the attention of the House of Commons. Paragraph 7(2)(b) of the Auditor General Act requires him to include in a report any cases in which he has observed that "essential records have not been maintained or the rules and procedures applied have been insufficient [...] to secure an effective check on the assessment, collection and proper allocation of the revenue [...]".

[19]            Mr. Desautels testified that during his tenure as Auditor General:

·            Between 20 and 40 audits of Revenue Canada were conducted.

·            As a result of that involvement his department gained a very good understanding of how Revenue Canada operates.

·            In 1993 and 1996, his office audited the activities of the advance ruling directorate.

·            In 1996, his office looked at specific rulings as opposed to an overall review of all of the procedures of the advance ruling directorate.

·            His office evaluates and makes judgments on the quality of the systems that are in place in various departments for carrying out certain activities.

·            As Auditor General he neither could, nor would, provide a report to anyone other than to Parliament.

·            With respect to the May 1996 report, he personally was responsible to ensure that his office had the technical competence to pursue the issue, that it sought assistance where necessary and that his department exceeded its own quality standards, ensuring there was proper independent challenge of what the office did and that there was complete evidence to support the conclusions reached. At the conclusion of his office's investigation, Mr. Desautels also had to ensure that he understood and agreed with the conclusions contained in the report to Parliament.

·            Mr. Desautels was satisfied that the procedural issues commented on in the report to Parliament were within his expertise and the expertise of his office.

[20]            Mr. Shahid Minto is a certified fraud examiner and chartered accountant who holds a master's degree in political science and a bachelor of laws degree. Mr. Minto was promoted to Assistant Auditor General in 1989. At that time he set up a tax practice at the office of the Auditor General and prepared strategic and operational plans to examine the operations of Revenue Canada and the tax policy branch. Mr. Minto has been responsible for between 15 and 20 audits of Revenue Canada and testified that he had significant experience in understanding the operations of Revenue Canada and its decision-making process. He had overall responsibility for the review in 1993 of the advance ruling process and is generally responsible for ensuring the quality assurance of all audits conducted by the office of the Auditor General.

[21]            Mr. Barry Elkin is a chartered accountant who has been with the Auditor General's office since 1982. From 1982 to 1987, he was the principal responsible for the audit of the Department of National Revenue, Taxation, and since 1989 he has been the principal responsible for income tax, special tax studies, tax expenditure and tax policy issues. Mr. Elkin testified that he led the audit team on approximately 17 audits dealing with tax issues and agreed that through those audits he acquired a great deal of experience in terms of the operations and procedures in Revenue Canada, including the advance tax ruling process.

[22]            The defendants opposed the admission of expert testimony from these witnesses on the grounds that the plaintiff had failed to comply with Rule 279(b) of the Federal Court Rules, 1998 and that the testimony was inadmissible hearsay. No complaint was made concerning the expertise of the witnesses.

[23]            After hearing argument on the first day of trial, I reserved the issue of the admissibility of the opinions and conclusions of these witnesses on the proper operation of the advance ruling directorate of Revenue Canada, but allowed them to testify as to their opinions subject to that reservation.

[24]            With respect to the defendants' objection under Rule 279, in material part that rule is as follows:

[25]            As can be seen, the rule contemplates that in some circumstances leave may be given to adduce evidence from an expert where all of the requirements of the rule have not been complied with. Departure from the rule will, however, be exceptional. Sub-part (b) of the rule is designed to avoid trial by ambush and it will not be departed from unless the Court is fully satisfied that the opposing party will not be prejudiced.

[26]            In the present case, the opinions of these witnesses were substantially contained in the May 1996 report of the Auditor General, which has been available to the parties since that date. Additionally, the parties had the benefit of the transcript of the Auditor General's evidence before standing committees of Parliament. One week prior to trial, the parties received access to the complete file of the Auditor General's office.

[27]            In these circumstances, I am satisfied that the disclosure required by Rule 279 was substantially provided through the 1996 report of the Auditor General and his testimony to Parliament so that the defendants were not taken by surprise by any part of the testimony of Messrs. Desautels, Minto and Elkin. Considering this, and Mr. Desautels' evidence that it would not have been possible for the plaintiff to have provided any affidavit or signed statement from the witnesses, I conclude that this is one of the rare instances where leave should be given for the admission of the opinion evidence without compliance with Rule 279.

[28]            As for the balance of the defendants' objections, admission of opinion evidence is governed by application of the principles enunciated by the Supreme Court of Canada in R. v. Mohan, [1994] 2 S.C.R. 9. To be admissible the evidence must be relevant to an issue in the case, the evidence must be necessary to assist the trier of fact, the evidence must not violate an exclusionary rule, and the witness testifying must be a properly qualified expert.

[29]            As noted above, no challenge was made to the qualifications of the witnesses and I am satisfied that they are properly qualified to be able to opine on the proper operation of the advance ruling directorate of Revenue Canada.

[30]            Similarly, the defendants did not argue that the evidence was irrelevant or unnecessary. To the extent that the plaintiff alleges, and the defendants deny, that on December 23, 1991, meetings of senior Revenue Canada officials and meetings with the Department of Finance representatives were not minuted contrary to established policy and practice, and the plaintiff asserts a breach of duty by failing to publish the advance ruling (together "the process issues") I am satisfied that the evidence is relevant. I am also satisfied that the evidence is necessary in the sense that it provides information outside the experience or knowledge of the Court.

[31]            The real thrust of the defendants' objection was that the Auditor General's office did not conduct its review for the purpose of providing opinions on whether there was a breach of fiduciary duty or maladministration. In addition to reporting on the process issues, the Auditor General also commented on legal issues, particularly whether the substance of the advance ruling forfeited a legitimate claim to hundreds of millions of dollars of tax revenue. To that latter extent the views of the Auditor General and his officials were informed by documents and statements made by third parties and the opinions of outside legal and accounting experts. Testimony touching on legal issues was therefore said to be based on hearsay that was neither necessary nor reliable.

[32]            In considering those submissions it is important to keep in mind the narrow area in which the witnesses were proffered as experts: the operation of government departments and Revenue Canada in particular. They were not presented as experts on domestic tax law, nor could such evidence have been admissible in any event.

[33]            Having observed the cross-examination of the witnesses on their ability to opine on the quality of the December 23, 1991 documentation and upon Revenue Canada's practices of publishing opinions and advance rulings, I am satisfied that their conclusions were properly founded upon their own review of the records of Revenue Canada. The evidentiary basis for their conclusions on the process issues was subsequently supported by the testimony of Revenue Canada officials and the 1991 advance ruling file of Revenue Canada. In the result, I conclude that the opinion evidence of Messrs. Desautels, Minto and Elkin on the process issues is properly admissible. Where I rely upon that evidence to reach my conclusions it will be specifically referred to in these reasons.

[34]            In so ruling I am mindful that the testimony of the witnesses was not confined to the process issues. Beyond opinion evidence, there was properly admissible testimony of primary facts concerning the investigation and what was found in the files of the Department of Finance and Revenue Canada with respect to the 1991 advance ruling. However, the report of the Auditor General (received in evidence, but not as to the proof of the truth of its content) also raised doubt as to the soundness of the advance ruling. The witnesses testified as to the steps they performed to reach that view. To the extent that that view was formed on the basis of interviews with some, but not all, of the people involved in the advance ruling and on the basis of consultation with outside expert advisers not before the Court, it could not properly be tested by cross-examination. Hence, in my view, it carried no probative value on any issues to be determined in this action touching upon the soundness of the ruling.

[35]            Any conclusion as to matters of domestic tax law are based solely upon the relevant provisions of the Act and the arguments addressed to the Court by counsel after the conclusion of the evidence.

(iii) The Reports of the Standing Committees on Finance and Public Accounts, and the Ways and Means Motion tabled in Parliament by the Minister of Finance on October 2, 1996.

[36]            Prior to the commencement of the trial, the defendants sought an order that the above captioned documents be admitted into evidence to establish that a political process was in place to deal with the report of the Auditor General and that such process was followed. The defendants did not propose that the documents be admitted for the truth of their content nor as prima facie evidence of the facts, inferences and opinions found therein.

[37]            The plaintiff opposed admission of these documents on the ground that the evidence went to facts admitted in the pleadings and hence was unnecessary, irrelevant and inadmissible.

[38]            After reviewing the written submissions of the parties, I ordered that for reasons to be delivered after the conclusion of the trial the documents could be received as exhibits at trial. As the defendants subsequently chose not to tender those documents, I do not propose to deal with that issue.

THE FACTS

[39]            The nub of the plaintiff's concerns arise out of the events and decisions taken on December 23, 1991, with respect to the request for an advance ruling. Before dealing with the events of that day in light of the plaintiff's two causes of action, I believe it is necessary to establish in detail the events which led up to December 23, 1991, so that the events of that day are seen in their proper context. The preceding events are in large part undisputed and are substantially contained or confirmed in contemporary documents. In view of the length of time which has passed since the events at issue, I consider the contemporary documents to be generally the most reliable evidence.

[40]            Before moving to the specific facts an explanation is required as to how the taxpayer and related entities are described in these reasons. Throughout, the defendants have been scrupulous in keeping confidential both the identity of the taxpayer and taxpayer information as mandated by section 241 of the Act. Therefore, in this proceeding, the taxpayer is referred to either as the "taxpayer" or "C". The taxpayer's representatives are referred to as "Mr. Lawyer", "Mr. Accountant" and "Mr. Adviser". The relevant trusts are described as the "Family Trust" and the "Protective Trust". Other relevant individuals are referred to as "A" and "B". Two relevant corporations are referred to as "Public Co." and "Private Co.".

[41]            I now turn to a brief review of the advance ruling service.

[42]            An advance ruling is a written statement given by Revenue Canada to a taxpayer stating how Revenue Canada will interpret income tax law in its application to a specified transaction or transactions which the taxpayer is contemplating. The plaintiff alleges in his claim and the evidence supports the contention that rulings generally are sought as a result of ambiguity in the legislation or the complexity of a particular transaction. There is no legislative basis for the advance ruling process; it is an administrative service that at the relevant time operated pursuant to guidelines articulated in Information Circular 70-6R2. Salient features were:

i)           An advance ruling might be either favourable or unfavourable to the taxpayer's desired interpretation. Where an unfavourable advance ruling was to be issued, the taxpayer was given the opportunity to withdraw the request for an advance ruling.

ii)          An advance ruling was regarded as binding upon Revenue Canada.

iii)          The purpose of the advance ruling service was to promote voluntary compliance, uniformity and self-assessment by providing certainty with respect to the tax implications of proposed transactions.

iv)         Advance rulings would be given only in respect of proposed transactions, and were not issued in respect of transactions that were already completed or on a series of transactions that were significantly advanced.

v)          Any material omission or misrepresentation in the statement of relevant facts or proposed transactions provided by the taxpayer resulted in the advance ruling being considered invalid by Revenue Canada.

vi)         Requests for advanced rulings might be refused in a number of circumstances, including where the transaction was to be completed at some indefinite future time, and where all the pertinent facts could not be established at the time the request for the advance ruling was made.

vii)         The advance Rulings Directorate also provided written opinions on the interpretation of specific provisions of the law. However, when a requested interpretation related to a contemplated transaction, it was suggested by Revenue Canada that taxpayers should request an advance ruling rather than an opinion.

[43]            As for how requests for an advance ruling were dealt with, the process is described in a Revenue Canada publication "The Rulings Directorate Service" and was explained more fully in evidence by Mr. R. Read. Mr. Read served as a Director in Corporate Rulings from 1980 to 1984, Director of Specialty Rulings from 1986 to 1988 and Director General of Rulings from 1989 to 1993. He was not cross-examined on his explanation of how the Rulings Directorate operated at the relevant time.

[44]            On receipt, a request for an advance ruling was passed to a rulings officer, usually an accountant or a lawyer, who would review the request to ensure completeness, research the issue or issues posed, and prepare a draft response. The draft response would be reviewed by the ruling officer's section chief. When approved by the section chief the proposed ruling would generally go to one of four directors in the Rulings Directorate for signature. The director could revise the proposed response. If the director felt it was an unusual case and felt other directors should be made aware of it, or if the director wanted input from some of the other directors, or if the director was concerned that the ruling might be contentious and "go up the line", then the matter would be put before the Ruling Review Committee. That committee met weekly and was composed of the four directors and the Director General of Rulings. In the event that it was believed that a taxpayer would seek recourse from a higher authority, briefing notes would be prepared for either the Deputy Minister or the Minister. Either event, according to Mr. Read, "elevated the decision level" to that level. Another witness confirmed that if a matter was referred to the Deputy Minister, he became responsible to make the decision. Matters were not then remitted to the Ruling Review Committee.

[45]            Mr. Read also testified that as a result of a review of Revenue Canada conducted in 1985, the Minister had undertaken that Revenue Canada would avoid refusing to rule as much as possible. After that ministerial commitment, Mr. Read could not recall a case where Revenue Canada refused to rule.

[46]            Turning now to the facts of this case, on March 8, 1991, a request for an advance ruling was made by Mr. Lawyer. Subsequently, upon being advised that Revenue Canada would not be able to grant an affirmative ruling on an important aspect of the then proposed transactions, the request was withdrawn and replaced with the request dated November 7, 1991.

[47]            The facts giving rise to the November 7, 1991 ruling request were described as follows in the request.

[48]            The late A had established the Family Trust (sometimes "FT") for the benefit of B and the children of B, one of whom was the taxpayer, C. The taxpayer's interest in the FT was subsequently contributed to the Protective Trust (sometimes "PT") in or about 1987. C was the sole beneficiary of the PT. At the time the ruling was requested, FT, PT and C were resident in Canada, but C had decided to take up permanent residence in the United States.

[49]            At the time of the ruling request the principal assets of the FT consisted of the beneficial ownership of a number of shares of Public Co., a taxable Canadian corporation, and a public corporation, as each term was defined in the Act. The FT had acquired the relevant Public Co. shares as a result of an exchange of its ownership of shares in Private Co. for newly issued common shares of Public Co. The ruling request stated as a fact that the shares of Private Co. were taxable Canadian property of the FT as defined in subparagraph 115(1)(b)(iii) of the Act, and that the FT and Public Co. had jointly elected that the provisions of subsection 85(1) would apply to the exchange so that by virtue of paragraph 85(1)(i) of the Act, the Public Co. shares received by the FT on the share exchange were taxable Canadian property of the FT.

[50]            The proposed transactions were described in the following terms. After C took up residence in the United States, the trustees of the PT would resign to be replaced by trustees resident in the United States. The place of administration of the PT would be moved so that the PT would cease to be resident in Canada and would become resident in the United States. Subsequently, but prior to January 1, 1992, the FT would distribute to the PT beneficial ownership of a number of the exchanged Public Co. shares.

[51]            Two rulings were requested in respect of those proposed transactions. First, a ruling that the FT would be deemed to dispose of the Public Co. shares distributed to the PT at their adjusted cost base to it, and the PT would be deemed to acquire those shares at the same amount. Second, a ruling that the PT would not be deemed by subsection 48(1) of the Act to dispose of its interest in the FT when it ceased to be resident in Canada.

[52]            By November 8, 1991, the ruling request had been referred to Mr. Chan who determined that the ruling would turn upon whether a Canadian resident could hold "taxable Canadian property" as that term is defined in the Act. On November 14, 1991, Mr. Chan met with Mr. J. Bentley to discuss this issue. Mr. Bentley was a lawyer with the Department of Justice who had, with the exception of two periods totalling two and a half years, provided legal services to Revenue Canada since 1975. Mr. Bentley advised Mr. Chan that it was his initial view that a Canadian resident could not own taxable Canadian property.

[53]            Mr. Chan also spoke on November 14 by telephone with Mr. S. Thompson, who was then a senior tax policy officer with the Department of Finance. Mr. Thompson advised Mr. Chan that from a tax policy view the argument that a resident could have taxable Canadian property "might not be without merit".

[54]            On November 18, 1991, Mr. Chan spoke to Mr. Lawyer about a number of matters related to the ruling request. Mr. Chan raised his concern as to whether a Canadian resident could own taxable Canadian property and therefore whether the Public Co. shares could be taxable Canadian property. Mr. Lawyer advised that in his view subsection 97(2) of the Act illustrated that a Canadian resident might hold taxable Canadian property. This was the first occasion on which Mr. Chan considered that subsection 97(2) might be relevant to the ruling request.

[55]            The next day Mr. Chan spoke again to Mr. Bentley about the taxable Canadian property issue. Mr. Chan advised Mr. Bentley of Mr. Lawyer's argument based on paragraph 97(2)(c) of the Act. Mr. Bentley responded that he had not previously considered the impact of that provision, but that having looked at it he had to agree with Mr. Lawyer.

[56]            On November 21, 1991, Mr. Chan spoke again to Mr. Lawyer who at that point agreed with Mr. Chan that the proposed disposition of the shares by the PT would escape taxation in Canada because of the application of Article XIII(5)(a) of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, September 26, 1980, Can. T.S. 1984 No. 15 (the "Treaty"). That provision allowed Canada to tax a former resident residing in the United States on a capital gain if the former resident had been resident in Canada for 10 years during any period of 20 consecutive years preceding the disposition. While C had been so resident in Canada, the PT had not been resident in Canada for 10 years because it had only been created in 1987.

[57]            On December 3, 1991, a representative of Revenue Canada wrote to Mr. R. A. Short, then the General Director of the Tax Policy and Legislation Branch of the Department of Finance. The letter informed Mr. Short of the matters disclosed in the advance ruling request and expressed the concern that the taxation in Canada of capital gains on taxable Canadian property could be avoided by using a trust and obtaining tax treaty protection. The letter concluded by noting that the Rulings Directorate intended to refuse to grant a favourable ruling and, if necessary, to bring the matter before the appropriate committee to recommend that the general anti-avoidance rule ("GAAR") found in subsection 245(2) of the Act be applied to the transaction. In a prior draft of this letter, Mr. Chan had noted that except for the GAAR concerns, there was no strong technical argument for denying the requested rulings. Steps were never taken by the Rulings Directorate to refer the matter for application of the anti-avoidance rule.

[58]            Following the letter to Mr. Short, a meeting took place between representatives of the Department of Finance and Revenue Canada on December 6, 1991. Mr. Thompson, his supervisor Ms. C. Muirhead, and another individual attended on behalf of the Finance Department. Ms. Muirhead at the time was the section chief for legislation relating to trusts. Revenue Canada was represented at the meeting by Mr. Chan, Ms. C. Gouin-Toussaint (a director in the advance Rulings Directorate) and three other individuals. At the December 6 meeting, the advance ruling request was discussed, including the taxable Canadian property issue. Mr. Thompson noted that in his view the argument that a Canadian resident could not own taxable Canadian property was "too weak" and could not be supported by Finance. The meeting ended with Finance not making any recommendations on what should or could be done to stop the transactions involved in the ruling request.

[59]            On December 10, 1991, a memorandum prepared by Mr. Chan and signed by Ms. Gouin-Toussaint was submitted to the Rulings Review Committee. The memorandum set out the facts disclosed in the advance ruling request, the proposed transactions, and the rulings requested. The memorandum went on to provide an analysis. The analysis noted that there was no apparent problem with granting the second requested ruling to the effect that the PT would not be deemed to dispose of its interest in the FT when it ceased to be resident in Canada. However, the analysis noted that there was a problem with respect to the first requested ruling.

[60]            With respect to that first requested ruling, the analysis set out the arguments for and against the proposition that a Canadian resident could hold taxable Canadian property. The analysis noted that in January of 1985 Revenue Canada had given an advance ruling in respect of a trust related to FT on the basis that a Canadian resident could hold taxable Canadian property, but that in May of 1985 an opinion was issued by Revenue Canada which expressed the opinion that only non-residents could hold taxable Canadian property. The analysis also noted that if a favourable ruling was provided Canada would lose its base for taxing the accrued capital gains on the Public Co. shares because of the application of the Treaty and the fact that PT had not been resident in Canada for 10 years.

[61]            The memorandum to the Rulings Review Committee also set out the concerns of Mr. Chan and Ms. Gouin-Toussaint with respect to the potential application of GAAR. Given the later significance of the GAAR concerns, it is helpful to quote those concerns as set out in the memorandum to the Rulings Review Committee:

Since the Act permits the tax free rollovers of TCP [taxable Canadian property] to non-residents and C will be relocating to the U.S., subsection 245(2) (GAAR) would not apply to the proposed transactions. However, if C returns to Canada within the next 10 years with the Public Co. Shares at their increased ACB [adjusted cost base], we would have to consider whether the intention was to obtain the increase in ACB of the shares and whether GAAR is applicable.

During telephone conversations, the taxpayer's representative said that it is not yet certain that C would not return to Canada. He said that it is possible that C may return to Canada in six months. [underlining added]

[62]            The memorandum of December 10, 1991 concluded as follows:

The technical argument that the Public Co. Shares are not TCP is not a strong onebecause of the wording of paragraph 97(2)(c) and could likely be lost in court. However, in view of the significant amount of income tax that will be lost and the possibility that GAAR may be applicable if C returns to Canada shortly after the increase in the ACB of the shares has been achieved, we are requesting your support in refusing to rule on the proposed transactions. [underlining added].

[63]            This request was considered by the Rulings Review Committee at its meeting of December 12, 1991. No conclusion was reached by the Rulings Review Committee on the taxable Canadian property issue. Instead, the Committee took the position that Revenue Canada was not in a position to provide an advance ruling for two reasons. First, it was noted that the few transactions disclosed raised the strong possibility of there being further transactions, some of which might be subject to GAAR. The taxpayer's representative was noted to have acknowledged that there could be more transactions, although he was not aware of any. Second, it was noted that the taxpayers were asking for a ruling that the Public Co. shares received as a result of the exchange are taxable Canadian property. As that transaction had already taken place the Rulings Review Committee concluded that it could not be ruled upon. Those reasons were grounded in the Information Circular 70-6R2.

[64]            Later on December 12, after the meeting of the Ruling Review Committee, Mr. Chan and Ms. Gouin-Toussaint met with Mr. Bentley to again review the taxable Canadian property argument. Mr. Chan explained his concern with respect to the argument premised on subsection 97(2) of the Act. Mr. Bentley advised that while Mr. Chan had an arguable position, if asked as to the better view of the law Mr. Bentley would have to say that in view of paragraph 97(2)(c) the better view of the law is that a resident of Canada can have taxable Canadian property.

[65]            Still later that afternoon Mr. Chan spoke to Mr. Lawyer. Mr. Chan explained Revenue Canada's concern that any gains by the trust would be tax free in Canada under Article XIII(5)(a) solely because the trust was not resident in Canada for 10 years in circumstances where the intent was always that Canada should be permitted to tax accrued gains on taxable Canadian property by a U.S. resident. Mr. Chan told Mr. Lawyer that the Rulings Review Committee had decided that Revenue Canada would refuse to rule on the request. Mr. Chan advised that Revenue Canada had legal advice to the effect that there was an arguable position that a Canadian resident could not hold taxable Canadian property. Mr. Chan made the point to Mr. Lawyer that Revenue Canada was also being asked to rule in a situation where it could not determine all of the contemplated transactions and there was a concern that either C or the trust could return to Canada with a stepped up adjusted cost base in the near future. Mr. Lawyer asked Mr. Chan where he could go from there and Mr. Chan replied that he could not think of anything that would help Mr. Lawyer. It was left between them that Mr. Lawyer would speak to Ms. Gouin-Toussaint.

[66]            On December 13, 1991, Mr. Read wrote to legal services requesting a formal opinion on whether a resident of Canada can have taxable Canadian property. The letter noted Revenue Canada's understanding that although the position that a resident could not have taxable Canadian property is arguable, the better view might very well be to the contrary.

[67]            That same day Mr. Lawyer provided a new request for an advance ruling. This differed from the November 7 request in that it was now proposed that shortly after C took up residence in the United States, the trustees of the PT would distribute to C the entire interest PT held in the FT. Shortly thereafter, but prior to January 1, 1992, FT would distribute to C directly beneficial ownership of the shares in Public Co. The rulings requested were, first, that PT would be deemed to dispose of its interest in the FT at its adjusted cost base and C would be deemed to acquire such interest at the same amount, and second, that FT would be deemed to dispose of the Public Co. shares at their adjusted cost base and C would be deemed to acquire such shares at the same amount.

[68]            In the latter part of the afternoon on December 13, Ms. Gouin-Toussaint spoke to Mr. Lawyer advising him of a proposal to resolve the situation. She advised that Revenue Canada would be willing to rule as sought in the December 13 request if the Public Co. shares were distributed to C before C leaves Canada. Revenue Canada would specifically rule that there was no deemed disposition on C's departure. Ms. Gouin-Toussaint advised that because of the uncertainty as to whether the shares were taxable Canadian property, C would have to provide a waiver so that if C later reversed C's position so as to assert that the shares were not taxable Canadian property then the deemed disposition provision found in subsection 48(1) of the Act would apply.

[69]            Implicit in Revenue Canada's advice that it would so rule was acceptance of the position that the shares were taxable Canadian property. This is because pursuant to section 48 of the Act when a taxpayer ceases to be resident in Canada the taxpayer is deemed to have disposed of property other than taxable Canadian property. Also implicit in Ms. Gouin-Toussaint's advice was acceptance that the fact that the exchange by which the Public Co. shares were received had already taken place was not a bar to a ruling.

[70]            On December 16, 1991, a meeting took place between Ms. Gouin-Toussaint, Mr. Chan and Mr. R. Thompson on behalf of Revenue Canada, and Mr. Lawyer, Mr. Accountant and Mr. Advisor on behalf of the taxpayer. Mr. Lawyer explained that he was withdrawing the December 13, 1991 request for a ruling because it had been determined that on a direct distribution to C, as had been proposed, there would have to be public disclosure that C is entitled to the worth of the shares. This was said to raise concerns with respect to C's personal security.

[71]            At the December 16 meeting, the representatives of Revenue Canada reiterated why they were of the view that Revenue Canada could not rule on the November 7 proposed transactions. Revenue Canada's concerns centered on the uncertainty as to whether a Canadian resident could hold taxable Canadian property, the possibility of GAAR being triggered by future transactions, and the concern at the unintended result that the capital gains by the trust would be tax free. No concern was expressed about the "completed transaction" issue previously referenced by the Rulings Review Committee. Mr. Lawyer then proposed that in addition to the proposed transactions FT would provide a waiver for the taxation year of the distribution so that the FT could be reassessed under subsection 107(5) of the Act if it was later determined that the shares are not taxable Canadian property. It was also proposed that the taxpayers would add to the facts contained in the ruling request that PT would not dispose of the shares for 5 years. Five years was apparently selected because Mr. Lawyer was of the view that 10 years would be too long a restriction. The latter offer was to assuage the GAAR concerns_ based upon potential future transactions.

[72]            Later on December 16, Mr. Chan and Ms. Gouin-Toussaint met with Mr. Read to discuss the latest proposal. Mr. Chan was instructed to prepare a briefing note for the Assistant Deputy Minister, Mr. D. Lefebvre, to give to the Deputy Minister, Mr. P. Gravelle.

[73]            Mr. Chan did prepare a number of drafts of a briefing note, each submitted to Ms. Gouin-Toussaint. The final version he prepared was dated December 18, 1991. The draft briefing note set out the underlying facts and the transactions proposed in the November 7 ruling request and discussed the relevant issues. The first issue identified in the briefing note was whether the shares of Public Co. were taxable Canadian property. The note stated that the law was not clear and that the Departments of Finance and Justice agree that it is not certain that the Public Co. shares are taxable Canadian property. This omitted reference to the advice received as to the strength of the argument that a resident could own taxable Canadian property. The second issue identified was whether avoidance provisions applied to the PT. It was noted that any gain on the sale of the Public Co. shares would be exempt from tax in Canada under the Treaty because the PT would not have been resident in Canada for 10 years. It was also said to be clear that if the PT had not been created and the FT distributed the Public Co. shares to C that Canada could tax any gain on the sale of the Public Co. shares within 10 years of C becoming a U.S. resident because C had been a resident of Canada for 10 of the 20 years preceding the sale of the shares. Because the purpose of the establishment or maintenance of the PT could only be determined from the circumstances of the formation and continued existence of the trust it was said that the avoidance issue could not be established on a ruling basis.

[74]            The briefing note advised that Mr. Lawyer and Mr. Accountant had been informed that Revenue Canada was unable to rule on the original transactions because the transactions which the taxpayer claims gave rise to the taxable Canadian property status were completed transactions. It was also noted that the taxpayer was willing to have the FT provide a waiver for the taxation year in which the Public Co. shares are transferred to the PT and, in addition, undertake that the PT would not dispose of the shares within the next 10 years. The conclusion of the briefing note was that the latest request contained most of the problems inherent in the original ruling request; therefore the taxpayer's representative had been advised that Revenue Canada was unable to rule.

[75]            The oral evidence, which I accept, was to the effect that this draft briefing note, while discussed at subsequent meetings, was never formally sent from the Assistant Deputy Minister to the Deputy Minister.

[76]            On December 18, 1991, Ms. Gouin-Toussaint spoke to Mr. Advisor and told him that they could not accept the then latest proposal. Mr. Advisor then advised Ms. Gouin-Toussaint that the taxpayer would also be prepared to opt out of treaty protection by not claiming a deduction under paragraphs 115(1)(d) and 110(1)(f) of the Act for the next 10 years.

[77]            Later on December 18, 1991, Ms. Gouin-Toussaint and Mr. Chan met with Mr. Bentley. At that time Mr. Bentley advised that the taxpayer's agreement to opt out of treaty protection would not, in his view, be enforceable. Mr. Bentley referred to the decision of Cohen v. The Queen, 80 DTC 6250 (F.C.A.).

[78]            After meeting with Mr. Bentley, Ms. Gouin-Toussaint and Mr. Chan met with Mr. Read. Mr. Read advised that he would call the Assistant Deputy Minister to inform him of what was happening and then a decision on the ruling would be made. Ms. Gouin-Toussaint instructed Mr. Chan to call Mr. Advisor to inform him that no decision had yet been reached and that his proposal was still being considered.

[79]            On December 19, 1991, Mr. Lawyer made a written submission to Mr. Read on the issue of whether or not an undertaking not to invoke a treaty benefit would be valid. Mr. Lawyer relied on the decision of the Supreme Court in [1977] 2 S.C.R. 23">Smerchanski v. Minister of National Revenue, [1977] 2 S.C.R. 23.

[80]            On December 19, 1991, Mr. Bentley provided an unsigned draft legal opinion to the Rulings Directorate in response to the request of December 13, 1991. The opinion noted that the Act was ambiguous with respect to whether a Canadian resident could own taxable Canadian property. Mr. Bentley concluded in the opinion that:

However, given the general scheme of the Act, I share your view that an argument is available that only a non-resident can dispose of "taxable Canadian property" for purposes of the deeming provisions of paragraph 85(1)(i) of the Act.

Mr. Bentley testified, and I accept, that he sent the opinion to Mr. Read in draft following discussions with Mr. Read where it was agreed that the opinion would be given in draft form. Mr. Bentley also testified, and I accept, that the draft opinion provided the "strongest view" he could to show there was a basis not to rule favourably. Put more succinctly, Mr. Bentley was prepared to support Mr. Read to the extent that he would maintain that Mr. Read's position was arguable. Prior to December 19, Mr. Bentley had told Revenue Canada orally that his better view was that a resident of Canada could own taxable Canadian property.

[81]            By December 20, 1991, Mr. Chan had also prepared the initial draft of a briefing note to be sent by the Deputy Minister to the Minister, Otto Jelinek. This memo set out the background facts, the applicable law, the department's concerns, and a conclusion. The view was stated that the Public Co. shares are not taxable Canadian property. It was stated that "[w]e have tax policy support and some legal support for this view". The concern was noted in the draft briefing memo that by taking the view that the Public Co. shares constitute taxable Canadian property and using the Protective Trust, the taxpayer would be in a position not only to postpone the Canadian tax but also to eliminate it completely, or to return to Canada with a cost for the shares equal to their fair market value. The draft note contained the conclusion that the taxpayer's representative had been advised that Revenue Canada would be unable to provide an advance income tax ruling. I am satisfied that while this may have been the conclusion anticipated by the authors of the memo, the taxpayer's representative had not yet so been advised.

[82]            I also accept that by this point in time the department had been advised of the taxpayer's intent to go over the head of the Rulings Directorate. In this connection, Mr. Read testified that if it "was fairly obvious when it went to the review committee that unless something clarified the issues, that we would probably be on the refusal to rule clause, in which case the taxpayer was almost certain to go up the line over my head". By December 18, Mr. Advisor had requested a meeting with Mr. Read. At that meeting Mr. Advisor told Mr. Read that he was going over Mr. Read's head and Mr. Advisor asked Mr. Read to review the matter one last time. Mr. Read agreed to review the matter again. The draft briefing note to the Minister was prepared in anticipation that the Minister might be contacted on the taxpayer's behalf, although as events developed I find that it was never sent but remained unsigned, in draft form. I am satisfied on the evidence that as events developed the taxpayer in fact never went over Mr. Read to higher authorities.

[83]            At 4:00 p.m. on December 20, a meeting took place in the office of the Assistant Deputy Minister with respect to the outstanding request for an advance ruling. In attendance were Mr. Lefebvre, Mr. Read, Ms. Gouin-Toussaint, Mr. Bentley, Mr. Chan, and Mr. R. Beith. Mr. Beith was at the time the Deputy Minister's principal technical advisor. Mr. Beith was a former Director General of the Rulings Directorate and was described by Mr. Read to be probably the most experienced technical person in the department at the time. Mr. Lefebvre described Mr. Beith to be the very top tax professional in the department.

[84]            Mr. Lefebvre testified, and I accept, that prior to this meeting he had apprised the Deputy Minister of the ruling request and had verbally informed the Deputy Minister that the Rulings Directorate was working on the ruling and of the steps that needed to be taken "to make sure that the right people would be looking at it to bring it to its due conclusion". Mr. Lefebvre was not cross-examined on that evidence.

[85]            The December 20 meeting lasted for some two hours. At the meeting the participants had before them copies of the December 18 version of the draft memo to the Deputy Minister and the first draft of the draft memo to the Minister. Mr. Beith, Mr. Read and Ms. Gouin-Toussaint saw at least one of the purposes of the meeting to be to brief Mr. Beith.

[86]            Mr. Lefebvre's recollection of the meeting was that there was a full discussion of the issues, a number of items were identified that required further analysis and investigation, and Mr. Chan, Mr. Read and Ms. Gouin-Toussaint were to pursue those elements and to meet on the following Sunday to discuss them. Those individuals were then to meet with Mr. Beith on Monday morning. While Mr. Bentley has little or no recall of the meeting, Mr. Lefebvre's recollection of what transpired at the meeting is consistent with that of Mr. Read, Mr. Beith, Mr. Chan and Ms. Gouin-Toussaint.

[87]            Mr. Lefebvre stated that he had no preconceived notion as to the decision which would be reached on Monday morning. Mr. Beith said, and I accept, that while he left the meeting with no position (as he was just being briefed) the mood of the other parties who had been involved in the file for some period of time was negative to giving a favourable ruling. This is consistent with Mr. Read's testimony that at the December 20 meeting there was no change in the tentative position which was not to give a favourable ruling. It is also consistent with the draft briefing notes which were discussed or at least available at the meeting.

[88]            This evidence as to what transpired at the December 20 meeting is also consistent with the notes prepared by Mr. Beith at the meeting. With respect to these notes, I have considered that Mr. Beith was unwilling or unable to provide those notes to the Auditor General's office at the time of the Auditor General's review. Notwithstanding, no direct suggestion was made to Mr. Beith that the notes were anything other than what Mr. Beith described them to be, namely his notes made at the December 20 meeting, and on the following weekend and on December 23, 1991. I accept that to be so.

[89]            Mr. Chan, Mr. Read and perhaps Ms. Gouin-Toussaint did meet on Sunday, December 22 to revise the draft briefing note to the Minister. In its final draft form the thrust of the draft memo to the Minister remained unchanged. An attachment entitled "Avenues Explored" flatly stated that the proposition that the Public Co. shares are taxable Canadian property was wrong in law, although no new legal advice had been obtained from that described above.

[90]            The evidence set out above in some detail establishes the following.

[91]            There was real uncertainty as to whether, as a matter of law, Canadian residents could hold taxable Canadian property. In the past, Revenue Canada had opined that they could not, and ruled that they could. Faced with this uncertainty Revenue Canada sought advice from the Departments of Justice and Finance.

[92]            Oral advice had been provided from Justice that the better view was that a resident could hold taxable Canadian property. Oral advice had been provided from Finance, through Mr. Thompson, to the same effect, although there is some suggestion of advice from Finance to the contrary because the first draft of the briefing note to the Minister refers to tax policy support for the view that the Public Co. shares were not taxable Canadian property. However, there was no clear evidence before me as to exactly when such advice had been provided, or by whom, or what precisely the advice was. It is likely, I find, that this is a reference to a conversation Ms. Gouin-Toussaint had in early December with Ms. Muirhead where she believed the issue was problematic. There was no evidence of any other input from Finance.

[93]            The staff of the Rulings Directorate who had dealt with the ruling request were all against issuing the requested ruling.

[94]            The Rulings Directorate was, however, prepared to rule favourably if the Public Co. shares were distributed to C prior to C's departure from Canada. Given that such ruling would be predicated upon the conclusions that the shares of Public Co. were taxable Canadian property and that there was no completed transaction bar to so ruling, I find that the impediments to ruling as requested in November were concerns at protecting the tax base of Canada and GAAR concerns. Of these, the evidence persuades me that the real concern was the loss of substantial tax revenue by operation of the Treaty. As Ms. Gouin-Toussaint testified, Revenue Canada's problem was "solved" with the direct distribution to C because C had been a life long resident of Canada and Canada would not lose the right to tax for 10 years.

[95]            I now turn to the events of December 23, 1991 which led to the granting of the requested advance ruling. The uncontradicted evidence is as follows.

[96]            At 8:00 a.m. Mr. Beith met with Mr. Read and Ms. Gouin-Toussaint. The purpose was to prepare for a meeting at 9:00 a.m. with the Deputy Minister.

[97]            At 9:00 a.m. they, possibly with Mr. Bentley who has no recall, met with Mr. Gravelle. That meeting concluded on the basis that further advice would be sought from Mr. Short, the then General Director of the Tax Policy Branch.

[98]            A meeting was then convened on the morning of December 23, 1991, at about 10:00 a.m. with Mr. Short. In attendance were Mr. Bentley, Mr. Beith and Ms. Gouin-Toussaint from Revenue Canada, and Mr. Short, Mr. Thompson, Ms. Muirhead and perhaps C. Savage from Finance.

[99]            Subsequent to that meeting, Mr. Beith and Mr. Bentley returned to meet with Mr. Gravelle in his office at about 11:00 a.m. At that meeting the decision was made to rule as requested by the taxpayer.

[100]        Thereafter, at about 2 p.m., Messrs. Beith, Read and Chan together with Ms. Gouin-Toussaint on behalf of Revenue Canada met with Mr. Advisor and Mr. Accountant. Mr. Beith advised that subject to some conditions Revenue Canada would accept that the Public Co. shares were taxable Canadian property. The conditions were that:

i)           the Family Trust would provide a waiver for the 1991 taxation year;

ii)          an undertaking would be provided that the Protective Trust would not claim treaty protection for 10 years; and

iii)          the Protective Trust would undertake not to take any action which would result in the realization of the accrued capital gains on the Public Co. shares for a period of 5 years.

Those terms were acceptable to the taxpayer and subsequently the ruling issued on that basis.

[101]        The undertaking not to realize any gain had previously been considered in the briefing memo to the Deputy Minister to be insufficient, and the undertaking not to claim treaty protection had previously been considered by Mr. Bentley to have been unenforceable.

[102]        Prior to the meeting with Mr. Advisor and Mr. Accountant, Ms. Gouin-Toussaint had been told by one or both of Mr. Read and Mr. Beith that with respect to the undertaking not to claim treaty protection it had been decided that the family would not renege on that agreement.

[103]        No notes or minutes were kept with respect of any of the meetings which took place during the morning of December 23, 1991. While Mr. Chan prepared a memorandum listing these four meetings and the attendees, Mr. Chan was not present at any of the meetings. Hence, where Mr. Chan's memorandum is contradicted by the evidence of meeting participants as to who attended various meetings I have preferred the evidence of the meeting participants to the memorandum of Mr. Chan.

[104]        As for what transpired at those four undocumented meetings, I have considered carefully the submissions made on Mr. Harris' behalf with respect to the frailty of 10 year old memories and the potential for collective memory, recollection bias, or the giving of evidence which is simply conjecture as to what likely happened.

[105]        As I move from the undisputed facts I therefore place greatest reliance upon the notes prepared by Mr. Beith over the weekend of December 21 because they are contemporary documents and I conclude they therefore contain the most reliable information.

[106]        Of greatest significance, in my view, are Mr. Beith's weekend notes to the following effect:

(1)            We should be able to make up our mind on whether

or not TCP              -85(1)(i) 97(2)                         -some suggest

-248(1) -                                     it is TCP

-                 What is Finance policy view of these provisions?

(2)            This is not an avoidance transaction - so forget 245 and Article XXIX(6)

[...]

(6)            Bottom Line: Have to make a determination on TCP

-                 Consult Finance

-                 Consult Justice

Meet with Reps.

[...]

If we say      -           TCP then they must agree for all time

     -           waiver for 1991 - only used if they take position not TCP

     -           undertaking not to sell for 10 years gives treaty protection

[...]

-                 The concept of taxable Canadian property arose in 1972, the Government should be able to advise whether or not the property is taxable Canadian property.

[...]

Solution

-                 Decide whether or not TPC

-                 Seems to be; based on 85(1)(i); 97(2) and 248(1)

-                 Consult Finance and Justice

-                 Take waiver for 1991 from Trust, if they later dispose and argue not TCP can assess Trust.

-                 Undertaking not to sell gives them treaty protection - consistent with Treaty.

[...]

It seems ridiculous we can't give an answer?

[107]        From this, I find that Mr. Beith was convinced that it was both proper and appropriate for Revenue Canada to determine whether or not a Canadian resident could hold taxable Canadian property, and that he concluded that further consultations were necessary with both Finance and Justice. Further, on the basis of his analysis of the Act Mr. Beith inclined to the view that a Canadian resident could own taxable Canadian property and that the Public Co. shares seemed to be taxable Canadian property.

[108]        I therefore accept Mr. Beith's testimony that as a result of his weekend analysis he was not prepared to recommend to Mr. Gravelle on December 23 that the department rule as requested because Mr. Beith had not seen any legal advice and he was not aware of the Finance view.

[109]        Mr. Beith could not recall if at the 8:00 a.m. meeting there was any discussion of his view that further advice was needed, although he stated he believed that he expressed his view to Mr. Read and Ms. Gouin-Toussaint. It may well be that there was no discussion of this view because Ms. Gouin-Toussaint testified that after the meeting with Mr. Beith she expected to meet Mr. Gravelle to inform him that she and Mr. Read were of the view that the Public Co. shares were not taxable Canadian property. The plaintiff read into evidence a question and answer from Mr. Beith's discovery that at the conclusion of the 8:00 a.m. meeting no decision had been made as to what the department was going to do.

[110]        As for what transpired at the 9:00 a.m. meeting, Ms. Gouin-Toussaint testified that Mr. Gravelle was probably given a copy of the draft briefing note to the Minister and that he was taken through the draft briefing note so that he understood the issues and Revenue Canada's position on the ruling. Ms. Gouin-Toussaint testified that she specifically recalled giving Mr. Gravelle a transaction diagram that had been contained in an earlier draft briefing note. Mr. Beith confirmed that copies of the latest draft briefing note to the Minister were handed around at the meeting to help focus the discussion and that Mr. Read and Ms. Gouin-Toussaint discussed the factual background, the proposed transactions and the ruling implications. Mr. Read testified that there was a long discussion, the issues were reviewed, and Mr. Gravelle asked a lot of questions.

[111]        To the extent Mr. Gravelle testified that he did not review the briefing note at the meeting, that he was not aware that Mr. Read, Ms. Gouin-Toussaint and Mr. Chan had worked the day before on the draft briefing note to the Minister which was to advise the Minister why Revenue Canada was refusing to rule, that it was not appropriate for Mr. Gravelle to get into the technical issues at that time and that the meeting was simply to update him on the status of the file and to decide the next course of action, I prefer the evidence of Mr. Beith, Mr. Read and Ms. Gouin-Toussaint. Their evidence is in my view consistent with the effort made over the weekend before Christmas to finalize the draft briefing note, the content of the briefing note and the position of the Rulings Directorate to that point in time. As such I find the evidence of Mr. Beith, Mr. Read and Ms. Gouin-Toussaint to be consistent with the documents and to also be more probable.

[112]        Having so concluded, I do accept that at the 9:00 a.m. meeting there was discussion about the need for further advice.

[113]        Mr. Beith testified that Mr. Gravelle probably asked him for his view and that it was in Mr. Beith's mind that "we had to see Finance" because while there had been some discussion with Finance it had not been at the senior level. I find it only reasonable to accept that the Deputy Minister would have asked his principal technical advisor for his view, and Mr. Beith's notes made on the weekend are express that Mr. Beith saw the need to consult with Finance. It was Mr. Beith's recollection that he suggested that they consult with Mr. Short and that Mr. Gravelle directed them to do this immediately.

[114]        Mr. Gravelle testified that he asked the question as to whether Revenue Canada had up to date opinions from Justice and Finance because he had been informed by Mr. Lefebvre on December 20 that there was an outstanding issue on the policy intent of the legislation which required input from Finance, and that Mr. Bentley's legal advice had not been finalized.

[115]        Mr. Gravelle's evidence is consistent with Mr. Lefebvre's advice that on December 20 he had advised Mr. Gravelle of the ruling and the steps needed to be taken. Given that Mr. Lefebvre was leaving the next day for a long planned vacation it would be reasonable to expect him to brief the Deputy Minister on pending matters.

[116]        In the result, notwithstanding the strong view against ruling expressed in the draft briefing note, I find that there was discussion, whether raised by Mr. Gravelle or by Mr. Beith, of the need for further input from Finance and agreement resulting from that discussion that Mr. Short would be asked for his view. I further accept the evidence of Mr. Read and Ms. Gouin-Toussaint that they considered this further consultation to be appropriate. In Mr. Read's words "I was quite relieved when [Mr. Gravelle] finally said the obvious, that we need to get something firm in writing from Finance". In Ms. Gouin-Toussaint's words:

R.             Je n'ai pas considéré que la demande de monsieur Gravelle était superflue. Comme je l'ai dit, on n'avait pas eu de réponse écrite de la part de monsieur Short.

Donc, une rencontre avec monsieur Short était appropriée, aussi, avant de prendre une position définitive sur un dossier aussi important.

[117]        As for what transpired at that meeting with Mr. Short, whether Mr. Short did most of the talking or Mr. Thompson did so in Mr. Short's presence, I have no doubt that the view was expressed that as a matter of tax policy both residents and non-residents could own taxable Canadian property. Ms. Gouin-Toussaint, Mr. Beith and Mr. Bentley were clear that this was the position of Finance as articulated by Mr. Short. That Mr. Short held this view was evidenced both by his presence at a meeting where the view was articulated and by his letter to that effect sent later that day to Mr. Read. As well, Mr. Short testified that there was always some concern when drafting amendments to the Act that taxable Canadian property might relate only to non-residents, but that he did not share the view, but maintained the definition did not depend upon the owner's residence. I take from that testimony that this was a long held view by Mr. Short.

[118]        Thereafter, Mr. Beith and Mr. Bentley returned to Mr. Gravelle's office where Mr. Beith advised Mr. Gravelle of Mr. Short's advice and Mr. Bentley confirmed his long held view that the better interpretation of the Act was that a Canadian resident could hold taxable Canadian property. I find that at that meeting Mr. Gravelle asked for Mr. Beith's advice, because both Mr. Gravelle and Mr. Beith testified_ that he did, and again this only makes sense following the events of the day. I also accept their further testimony that Mr. Beith advised that a favourable ruling should issue and Mr. Beith's testimony that Mr. Gravelle decided that Revenue Canada would rule favourably.

[119]        I now turn to consider each cause of action asserted by Mr. Harris.

BESTOWAL OF UNDUE PREFERENCE AND SPECIAL BENEFIT

[120]        As characterized by the Court of Appeal on the appeal from the order of Muldoon J. on the motion to strike in Harris v. Canada, [2000] 4 F.C. 37 at paragraph 40 (C.A.), Mr. Harris alleges that the Minister of National Revenue acted illegally or improperly or for ulterior motives, namely favouritism and preferential treatment by way of a covert deal. The defendants object that this language is not found in the statement of claim and that the words used in the claim, "a reasonable apprehension of bad faith administration and an ulterior motive on the part of the Crown", are insufficient to amount to an allegation of bad faith.

[121]        With respect, that argument ignores the express allegation found in paragraph 33 of the statement of claim that the Minister bestowed an undue preference and special benefit. That is, in my view, a properly pleaded allegation.

[122]        As to the evidence adduced in support of that allegation, the plaintiff conceded in oral and written argument that he "does not allege that there were any dishonest dealings". Rather, Mr. Harris submits that the evidence as a whole leads to an inference that preferential treatment was given to this particular taxpayer because of the taxpayer's status and power and because of who the taxpayer was.

[123]        There is no direct evidence to support that allegation.

[124]        Mr. Desautels testified that during his review of this matter his office saw no evidence of unacceptable behaviour, undue influence, or any dishonest dealings. Mr. Desautels also testified that he had no reason to doubt the integrity of the officials at Revenue Canada. Mr. Minto confirmed that the staff of the Auditor General had seen no evidence from the documents or their interviews of bad faith or political interference.

[125]        The report of the Auditor General raised no issue of undue preference or special benefit as a result of who the taxpayer was.

[126]        In the absence of direct evidence Mr. Harris submits that the inference of preferential treatment and special benefit should be drawn from the following:

i)           By December 20, 1991, the Rulings Directorate had taken the firm position that the Public Co. shares were not taxable Canadian property and that the contrary view was wrong in law. At the 8:00 a.m. meeting of senior directorate staff on December 23, 1991 nothing changed.

ii)          The draft briefing note to the Minister was provided to Mr. Gravelle at the 9:00 a.m. meeting for the purpose of informing him of the department's decision, not to request a decision from him. All that was required was for Mr. Gravelle to sign the briefing note.

iii)          Mr. Gravelle was no expert on tax matters, yet he decided not to accept the conclusions in the briefing note and to instead seek further input from Finance. It was said that there was no reason for Mr. Gravelle not to accept the view expressed in the draft briefing note unless Mr. Gravelle had a pre-disposition to rule favourably.

iv)         Mr. Gravelle's testimony as to what transpired at the 9:00 a.m. meeting was not credible and was directly contradicted by his own officials.

v)          At the final 11:00 a.m. meeting Mr. Gravelle asked Mr. Bentley if the legal opinion would support ruling favourably for the taxpayer. Mr. Gravelle never asked if there was a basis on which the department could refuse to rule. By failing to ask that question it was said that the inference must be that Mr. Gravelle was searching for support to rule favourably for the taxpayer.

vi)         Mr. Gravelle never read the entire file.

vii)         No notes or minutes were taken at the four meetings held on the morning of December 23.

viii)        The taking of the waiver and undertaking indicate that preferential treatment was given to the taxpayer's family.

ix)         Despite the existence of reasons to refuse to rule or to rule negatively, the Deputy Minister bent over backwards to favourably rule. This was said to be due to the power and the status of the taxpayer.

[127]        Considering each submission in turn, submissions (i), (ii) and (iii) above are contrary to the facts as I have found them, specifically my findings that:

(a)         On the weekend before December 23, 1991, Mr. Beith determined that Revenue Canada should be able to decide whether a resident of Canada could hold taxable Canadian property.

(b)         At the same time Mr. Beith concluded that further consultations were necessary with Finance and Justice.

(c)         Whether initially raised by Mr. Beith or Mr. Gravelle, the issue of the need for further input from Mr. Short was raised at the 9:00 a.m. meeting and there was a consensus that Mr. Short's view should be obtained.

[128]        Those findings were made after careful consideration of all of the evidence. To conclude as Mr. Harris argues that "nothing changed" over the weekend or at the 8:00 a.m. meeting on December 23, that the briefing of Mr. Gravelle at 9:00 a.m. was for information purposes only, and that there was no reason for Mr. Gravelle to seek further input, would require me to ignore the notes made by Mr. Beith over the weekend in circumstances where I am satisfied that those contemporary documents provide the most reliable indication of what was happening. While the notes alone are not proof of the truth of their contents, to the extent they are consistent with Mr. Beith's sworn testimony I have been satisfied that Mr. Beith's testimony is reliable.

[129]        To reach the conclusions Mr. Harris asserts, I would also have to ignore the evidence of:

i)           Mr. Lefebvre: that he had briefed the Deputy Minister on the steps that needed to be taken to complete the ruling. It follows from that evidence that the Minister would be expected to inquire as to the status of those matters.

ii)          Mr. Read: that the decision had been elevated to a level above Mr. Read and the Rulings Directorate, specifically to the assistant Deputy Minister level. Given that Mr. Lefebvre left before the decision was made it reasonably follows that the decision would be made by the Deputy Minister who would be expected to make some inquiries before making the decision.

iii)          Mr. Read, Mr. Gravelle and Ms. Gouin-Toussaint: as to how the decision to consult with Mr. Short was reached.

[130]        Further, there was no suggestion that Mr. Gravelle knew what Mr. Short's advice would be. Thus, by itself, requesting Mr. Short's advice does not support the conclusion that Mr. Gravelle had a predisposition to rule favourably.

[131]        As for the submission based upon Mr. Gravelle's credibility, while I prefer the testimony of others as to the degree to which the issues were canvassed before Mr. Gravelle, I do not believe that a general finding of incredibility is warranted. In any event, any question concerning Mr. Gravelle's testimony is insufficient by itself to establish the converse of his testimony.

[132]        The fact that Mr. Gravelle asked Mr. Bentley if his legal opinion would support a favourable ruling is, in my view, wholly inadequate to support the inference that Mr. Gravelle was searching for support to rule favourably. Given the evidence which I accept that Mr. Gravelle had just been advised that the view of Finance would support a positive ruling I take no significance from putting the same question to Mr. Bentley.

[133]        Similarly, in the face of the detailed briefing which I have found that Mr. Gravelle received, I draw no negative inference from the fact that Mr. Gravelle did not personally read the entire file. The then extant issues relating to the consequence to the tax base, GAAR, and whether the shares were taxable Canadian property were fully addressed in the draft briefing note and I have accepted the evidence of Ms. Gouin-Toussaint, Mr. Read, and Mr. Beith on the extent of the briefing. It is inconsistent with this evidence and not reasonable to conclude that the Deputy Minister should be left with the entire file for a period of self-study.

[134]        The absence of written notes or minutes makes it demonstrably more difficult for Revenue Canada to justify its actions and provide assurance that its representatives acted appropriately. I accept the evidence of the representatives of the Auditor General's office that this failure to minute was contrary to established Revenue Canada policy and procedures. The absence of proper documentation therefore provides a ready basis for speculation and conjecture, and is a matter of concern. Indeed, given the large amounts involved, it is astonishing that senior officials at Revenue Canada failed to keep minutes of certain meetings where crucial decisions were being made. It is axiomatic that poor practice of this sort has the potential of compromising public accountability.

[135]        However, the question for the Court is whether the absence of minutes or notes leads to the conclusion of bad faith or preferential treatment? To so lead, that conclusion must be more plausible or likely than other available conclusions.

[136]        Another available conclusion is sloppy practice and haste.

[137]        The evidence establishes that the rulings file as maintained by Revenue Canada contains the name of the taxpayer, the correspondence from Justice and Finance which contains the opinions which formed the basis for the ruling, and the terms and conditions of the ruling. The Auditor General was able to base much of his criticism upon that information, and the contents of the rulings file and to that extent the basis for the ruling could not be said to be covert.

[138]        In that circumstance, it is difficult to find a nefarious or ulterior motive for the absence of minutes. The essential process followed and the extent of the analysis is reflected in the file.

[139]        Given that, and the fact that the absence of documents is consistent with haste and bad practice, I am not prepared to infer bad faith and preferential treatment on the basis of the absence of minutes.

[140]        While I am not prepared to infer bad faith from the absence of documents, such shoddy practice is not in any way to be condoned. The absence of contemporary minutes does a disservice both to the Canadian public which has a right to expect a consistent level of documentation and to the employees of Revenue Canada called upon to justify their decision much after the fact.

[141]        With respect to the waiver and undertaking, I accept that the waiver, which permitted a re-assessment of the Family Trust for a period of ten years, was taken or accepted because there was a degree of uncertainty as to whether the Public Co. shares were taxable Canadian property and because there was resultant concern that the taxpayer might later use that uncertainty to try to argue that the shares were not taxable Canadian property so as to gain an advantage. This was the uncontradicted evidence of Mr. Chan and Ms. Gouin-Toussaint, and is consistent with Mr. Chan's notes of a telephone conversation with Mr. Lawyer on December 13, 1991.

[142]        Given that uncertainty, I find that it was Ms. Gouin-Toussaint who proposed a waiver to protect Revenue Canada and the tax base against the scenario where C might later reverse C's position. Extending the period during which Revenue Canada could re-assess insured that there would be symmetry. That is, the shares would be taxable Canadian property, or not, both on departure and return. The practical effect of the waiver was to make it almost certain that C would never resile from the position that the shares were taxable Canadian property. The waiver was a condition inserted by Revenue Canada contrary to the taxpayer's interest to protect the tax base against a subsequent hypothetical event. I find no preferential treatment in the taking of the waiver.

[143]        As for the undertaking to waive treaty protection for ten years, Mr. Bentley had advised that this undertaking was likely unenforceable. Thus, after the decision was made to rule favourably, Mr. Chan raised the concern to Ms. Gouin-Toussaint that this undertaking was being accepted in view of the enforceability concern. Mr. Chan recorded her response in his notes to be "it was decided that the Family would not renege on the agreement and it will be bad for them in future dealings with the government of Canada if they do". Ms. Gouin-Toussaint said that she had been so advised by one or both of Mr. Beith or Mr. Read.

[144]        Mr. Beith testified that he was sure that this issue came up in discussion with Mr. Gravelle and that Mr. Beith advised Mr. Gravelle that "we had no reason to question their bad faith, as a matter of fact they were offering it as an indication of good faith. I had no reason to question their integrity and that they would honour it". Mr. Read recalled advising Ms. Gouin-Toussaint that "given my knowledge of the taxpayer, I thought it very unlikely that they would renege; they had a position in society".

[145]        On Mr. Harris' behalf it was forcefully urged that this evidence established bad faith because the ruling was conditional on the undertaking, and the undertaking was taken because of the taxpayer's position in society. The qualitative finding about the taxpayer's status was said to evidence an improper and illegal preference.

[146]        It is important to understand the nature of the undertaking. The Protective Trust undertook not to claim a deduction under subparagraph 110(1)(f)(i) and paragraph 115(1)(d) of the Act for the next ten years. Those provisions allow a non-resident taxpayer to reduce his or her taxable income earned in Canada by an amount equal to Treaty protected income. Because the Protective Trust had not been resident in Canada it could claim not to be caught by the terms of the Treaty. The effect of the undertaking was therefore to give Canada a commitment that any tax on the disposition of capital property would be in accord with the terms of the Treaty. The Protective Trust would not claim it was totally exempted from paying tax.

[147]        Together, the taking of the waiver and undertaking were unrelated to the legal issue of whether the Public Co. shares were taxable Canadian property. Rather, they were assurances offered to deal with the Rulings Directorate's concern that there could be future hypothetical steps taken that would amount to an avoidance strategy as opposed to a bona fide change of residence. They, together with the commitment not to dispose of the shares for five years, substantially ensured that there was no practical likelihood that subsequent avoidance transactions would take place.

[148]        Understood in that light, I find no improper side deal or preferential treatment.

[149]        Mr. Read's reference to a "position in society" was inappropriate and ill considered. A position in society is not by itself a reliable test for probity.

[150]        However, what Mr. Chan's note and the preponderance of the evidence indicate is a valid inquiry into whether the waiver and undertaking offered by the taxpayer were sufficient to alleviate the GAAR concerns. In that regard, I find it significant that at the time the GAAR committee was chaired by Mr. Beith and over the weekend of December 21, 1991, Mr. Beith had written in his notes "[t]his is not an avoidance transaction". Mr. Read also considered a GAAR eventuality to be "unlikely". These conclusions do not appear to in any way rely upon the status of the family.

[151]        The final point asserted on Mr. Harris' behalf is premised on his contention that there were reasons to refuse to rule or to rule negatively.

[152]        However, the initial tax policy advice from Mr. Thompson on November 14, 1991, supported the conclusion that a Canadian resident could own taxable Canadian property. By December 6, 1991, Mr. Thompson had advised that the argument that a Canadian resident could not own taxable Canadian property was "too weak".

[153]        As of November 19, 1991, Mr. Bentley's legal advice was that he agreed with Mr. Lawyer's argument on the taxable Canadian property issue. By December 2, 1991, Mr. Chan had written in a draft letter to Mr. Short that except for the GAAR concerns there was no strong technical argument for denying the requested rulings. By December 10 and the preparation of the memo to the Ruling Review Committee the basis for refusing to rule was the significant amount of tax that would be lost by application of the tax treaty, and a possibility that GAAR might become applicable depending upon future events.

[154]        The waiver, undertaking and commitment not to dispose of the property for five years dispelled to a considerable extent the GAAR concerns. It was properly open to Revenue Canada to consider that it was not looking at an avoidance transaction. In my view, Revenue Canada could not properly decline to provide an advance ruling on the sole ground that the result was favourable to the taxpayer and Revenue Canada was unhappy with the result that would arise from application of the Treaty.

[155]        Mr. Read confirmed that by December 23, 1991, the Rulings Directorate no longer had a concern that the ruling was on a completed transaction. I find that to have been a reasonable conclusion. The ruling sought and ultimately given was not on a completed transaction. Rather, it accepted the result of a completed transaction as a fact and then relied on the consequence of that fact in respect of a contemplated transaction.

[156]        Therefore, there were not such strong reasons for refusing to rule, or for ruling against the taxpayer, that an inference may properly be drawn that the Deputy Minister "bent over backwards" to rule for the taxpayer.

[157]        I am satisfied for these reasons that the evidence does not support the inference that preferential treatment was given to this particular taxpayer.

[158]        The plaintiff did not pursue in argument before me the allegation that an undue preference was bestowed because other taxpayers were unaware of the favourable interpretation provided in the ruling at issue. In any event, other taxpayers could have sought similar rulings and in Information Circular 70-6R2 taxpayers were encouraged to do so. There was no clear evidence as to when the 1985 opinion that a resident could not hold taxable Canadian property was published. It was agreed as a fact that the 1985 opinion was not published in the loose-leaf service "Access to Canadian Income Tax".

[159]        In addition to analysing the evidence as it relates to Mr. Harris' specific argument before me, I have also considered whether the whole of the evidence supports the contentions that the taxpayer was the recipient of preferential treatment and that the defendants acted in bad faith.

[160]        Allegations of bad faith against senior government officials are a serious matter which require careful scrutiny of the cogency of the evidence. Here, the evidence in its totality failed to establish preferential treatment or bad faith. Indeed, there was some evidence to the contrary. As previously recited, on March 8, 1991, a prior request had been made by Mr. Lawyer for an advance ruling. Revenue Canada advised it would not grant the requested ruling. As a result, the taxpayer withdrew the request and submitted the request at issue. This is some evidence that the Rulings Directorate was not afraid or unwilling to issue unfavourable rulings in respect of this particular taxpayer.

THE BREACH OF A FIDUCIARY DUTY, OR A DUTY AKIN TO A FIDUCIARY DUTY

[161]        I now turn to the assertion that in receiving and responding to the ruling request the Minister and his officials were acting in a fiduciary capacity, or were acting in a capacity akin to a fiduciary, and that they breached that duty. A fiduciary or fiduciary-like duty is said by the plaintiff to be owed to both the taxpayers represented in this proceeding and to the taxpayers who requested the ruling.

[162]        On Mr. Harris' behalf it is argued that fiduciary or fiduciary-like obligations can apply to public officials and that the categories of fiduciary relationship are not closed. Mr. Harris notes that in cases such as Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, the Supreme Court of Canada has established a "rough and ready guide" to determining whether the imposition of a fiduciary obligation on a relationship is appropriate. Relationships in which a fiduciary obligation have been imposed generally possess three general characteristics:

i)           the fiduciary has scope for the exercise of some discretion or power;

ii)          the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's legal or practical interest; and

iii)          the beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.

[163]        Mr. Harris then argues:

The circumstances of the rulings process suggest that all the elements of a fiduciary relationship exist between the Minister and Canadian taxpayers. First, the Minister has a discretion whether or not to issue an advance tax ruling in a given case. There are no statutory criteria guiding the Minister's discretion. The Information Circular published by Revenue Canada sets out certain guidelines for issuing rulings. However, ultimately, there is no legal requirement to issue an advance tax ruling. The Minister has the discretion whether to issue a favourable ruling, unfavourable ruling or not to issue a ruling at all. In particular, if a specific provision of the Income Tax Act is ambiguous, as was the case with the 1991 ruling, and if Revenue Canada cannot clearly resolve the ambiguity, it may decline to issue a ruling and deal with the matter upon assessment.

The exercise of that discretion will affect the practical interests of all income tax filers as a class, particularly when the matter involves a significant transaction which may have a large impact on the tax base. If under-collection or under-assessment of taxes occurs as a result of an advance tax ruling which erroneously interprets the law or permits an avoidance scheme to proceed, this will inevitably increase the load of tax on the shoulders of the rest of tax filers, as Lord Scarman noted in the Inland Revenue Commissioners case. This shortfall in public revenue must be corrected either through higher or newer taxes or through expenditure reductions. Either way, the very real and practical interests of Canadian citizens in general will be adversely affected.

Due to the nature of the advance tax ruling process, Canadian taxpayers are peculiarly vulnerable to the Minister's exercise of discretion. As noted, the process is secret and confidential, there is no right to appeal and taxpayers must place their trust in government officials to collect and assess tax in a fair and proper manner.

[...]

Unless the Minister is bound by a fiduciary duty, there is simply no legal or practical way of redressing the wrongful exercise of that discretion. Even though rulings decisions affect the practical interests of not only the individual requesting the advance tax ruling, but potentially all taxpayers, without a heightened duty of care, ruling made by Revenue Canada could almost never be subject to challenge. It is not acceptable for the government to assert that so long as officials do not act in bad faith, it does not matter whether appropriate care was taken in making advance tax rulings. Unless Canadian taxpayers know that the Minister is bound by a very high standard of care, whether fiduciary in nature or akin to fiduciary, public confidence in the tax system will be undermined. It would be open to Revenue Canada to act with impunity. It would mean that unless there was proof of bad faith, officials could be grossly negligent and yet still not be held accountable. Such a result would erode the legitimacy of the taxation system in Canada. In today's climate, Canadians are entitled not to accept the common refrain "just trust us".

[164]        In response to the argument that the constitutional protection from alleged mismanagement or maladministration is through the supervision of the Auditor General and ministerial accountability to the House of Commons and, ultimately, the government's accountability to the electorate, Mr Harris contends that such accountability is a "myth" where a decision is popular with "the party in power".

[165]        I begin my analysis by noting with respect to the "rough and ready guide" that in Lac Minerals, supra, Sopinka J., writing for the majority of the Court on the issue of fiduciary duty, wrote that:

It is possible for a fiduciary relationship to be found although not all of these characteristics are present, nor will the presence of these ingredients invariably identify the existence of a fiduciary relationship.

[166]        Justice Sopinka cautioned that:

The consequences attendant on a finding of a fiduciary relationship and its breach have resulted in judicial reluctance to do so except where the application of this "blunt tool of equity" is really necessary.

[...]

In my opinion, equity's blunt tool must be reserved for situations that are truly in need of the special protection that equity affords.

[167]        In [1984] 2 S.C.R. 335">Guerin v. Canada, [1984] 2 S.C.R. 335 Dickson J., as he then was, writing for the majority drew attention to the distinction, for fiduciary duty purposes, between private and public law duties, at page 385:

It should be noted that fiduciary duties generally arise only with regard to obligations originating in a private law context. Public law duties, the performance of which requires the exercise of discretion, do not typically give rise to a fiduciary relationship. As the "political trust" cases indicate, the Crown is not normally viewed as a fiduciary in the exercise of its legislative or administrative function. [underlining added]

[168]        Justice Dickson went on to determine that the Crown assumed a fiduciary obligation when dealing with Indian land upon surrender. This flowed from the independent legal interest which Indians hold in their land which was an interest not created by either the legislative or executive branches of government. Thus, Justice Dickson concluded that the Crown's obligation with respect to that interest was "not a public law duty" but rather "in the nature of a private law duty". In this "sui generis relationship" it was not improper to regard the Crown as a fiduciary.

[169]        Prior to the decision of the Supreme Court of Canada in [1984] 2 S.C.R. 335">Guerin, in Swain v. Law Society, [1982] 2 All E.R. 827, the House of Lords had also cautioned of the need to distinguish between duties which arise at public and at private law when considering fiduciary obligations.

[170]        The facts before the House of Lords in Swain were that the Law Society was empowered by statute to make rules concerning indemnity against loss arising from claims made against solicitors for professional negligence, and to take out and maintain insurance with authorized insurers. The Law Society had established a group program whereby it arranged indemnity insurance through a particular firm of insurance brokers and then required solicitors to participate in the program. The brokers agreed to share with the Law Society the substantial commission the brokers received from the insurer. A declaration was sought by a solicitor that the Law Society was not entitled to retain the commission it received from the brokers in respect of premiums paid by individual solicitors, but was instead accountable to those solicitors for that commission.

[171]        The House of Lords held that the Law Society was not accountable as a fiduciary to its members for the commission earned in performance of its statutory authority. Lord Brightman wrote, at pages 837-838:

In exercising its power [...] the Law Society is performing a public duty, a duty which is designed to benefit, not only solicitor-principals and their staff, but also solicitors' clients.

[...]

So, as I have said, in exercising the power conferred on it, the Law Society was performing a public duty, and not a private duty to premium-paying solicitors. This approach, which in my opinion is fundamental, has important consequences, because the nature of a public duty and the remedies of those who seek to challenge the manner in which it is performed differ markedly from the nature of a private duty and the remedies of those who say that the private duty has been breached. If a public duty is breached, there are the remedies of judicial review, declaration, injunction and recovery of money if wrongly demanded and paid. There is no remedy in breach of trust or equitable account. The latter remedies are available, and available only, where a private trust has been created: see the decision of your Lordships' House in Skinners' Co v Irish Society (1845) 12 Cl & Fin 425, 8 ER 1474. The duty imposed on the possessor of a statutory power for public purposes is not accurately described as fiduciary because there is no beneficiary in the equitable sense. [underlining added]

[172]        In 1988, Swain was applied by the Ontario Court of Appeal in Windsor Roman Catholic Separate School Board v. Windsor (City) (1988), 64 O.R. (2d) 241 (C.A.), leave to appeal to the Supreme Court of Canada refused. There, the Court was required to consider the claim of the school board to interest on taxes collected on its behalf by the city, but not yet paid to the school board. After quoting with approval from Swain, the Court wrote at pages 247-248:

Early in this century, this court decided in Norfolk v. Roberts (1913), 28 O.L.R. 593, 13 D.L.R. 463 (App. Div.); affirmed 50 S.C.R. 283, 23 D.L.R. 547, that a municipal corporation or its council is not a trustee for its ratepayers. Meredith C.J.O. said at pp. 602-3 O.L.R., pp. 465-6 D.L.R.:

The trend of modern judicial decisions is to depart from the practice of former times of applying to bodies of a public representative character, intrusted by Parliament with delegated authority, the rules which were applied in the case of trading corporations, and to recognise the right of such bodies, while acting bona fide and within the limit of the powers conferred upon them by the Legislature, to transact their business without interference by the Courts: Slatery v. Naylor, 13 App. Cas. 446; Kruse v. Johnson, [1898] 2 Q.B. 91; Thomas v. Sutters, [1900] 1 Ch. 10.

It is, in my judgment, erroneous to treat either the corporation or its council as trustees for the ratepayers. They are, no doubt, in the sense in which the Sovereign is spoken of as a trustee for the people, trustees for the inhabitants of the municipality; but they are, in my opinion, in no other sense trustees, but a branch of the civil government of the Province; and, within the limits of the powers committed to them by the Legislature, at all events in the absence of fraud, should be free from interference by the Courts.

The same principle applies to the relationship between the City and the Board in this case. The City is not a mere instrument of the Board for the purposes of collection and disbursement of taxes. At all times, it has important public functions to perform. It is not only responsible for the collection of taxes for the Board but it must also make good any deficiencies in tax collections out of its own funds. In the exercise of its function, the City is responsible not only to the Board but to the citizens at large. Its relationship to the Board is not that of a fiduciary governed by the principles of equity. Rather, its relationship is that of a public authority governed by proper construction of the relevant statutes. It follows that no fiduciary duty can be superimposed on the City's statutory duty prescribed in s. 215(2). [underlining added]

[173]        This Court has considered the extent to which fiduciary obligations may flow from public law duties.

[174]        In Fairford First Nation v. Canada, [1999] 2 F.C. 48 (T.D.) Rothstein J., as he then was, considered an action for breach of fiduciary duty following construction of a dam on an Indian reserve. One issue was whether the Crown had breached its fiduciary duty to the Band in the planning, approval and financing of the dam. It was argued on the Band's behalf that the defendant had a duty under subsection 18(1) of the Indian Act, R.S.C. 1985, c. I-5 not to act in any way that would impair the Band's use and enjoyment of the reserve.

[175]        Justice Rothstein concluded that the actions taken by the Indian Affairs Branch arose under legislation and were public law duties. He found no indication that the duties were in the nature of private law duties as would be the case where Indian land is surrendered. Justice Rothstein found no suggestion that the Crown was exercising a discretion or power for or on behalf of Indians. Thus, he concluded that the course of conduct by the Crown in its dealings with and for Indians under the legislation could not be relied upon as a basis for the creation of a fiduciary duty on the Crown. He found no evidence of any statute, contract or unilateral undertaking leading to a ceding of the Band's power over any matter to the Crown. Thus, the Crown was not a fiduciary with respect to its involvement in the study, approval or financing of the dam.

[176]        Justice Rothstein went on to note, at page 89, that to find a fiduciary duty with respect to the defendant's involvement with the dam would:

[...] place the government in a conflict between its responsibility to act in the public interest and its fiduciary duty of loyalty to the Indian band to the exclusion of other interests. In the absence of legislative or constitutional provisions to the contrary, the law of fiduciary duties, in the Aboriginal context, cannot be interpreted to place the Crown in the untenable position of having to forego its public law duties when such duties conflict with Indian interests.

[177]        In Chippewas of Nawash First Nation v. Canada (Minister of Indian and Northern Affairs) (1999), 251 N.R. 220, the Federal Court of Appeal considered whether in the context of disclosure of information under the Access to Information Act, R.S.C. 1985, c. A-1, the government had a fiduciary duty not to disclose information because some of it related to Indian land. The Court concluded at paragraph 6 that:

The government is acting pursuant to a public law duty. Fiduciary obligations do not arise in these circumstances.

[178]        From these cases I take the following principles:

1.          The Crown may in some circumstances owe a fiduciary duty, or a duty akin to a fiduciary duty.

2.          In any particular case, the surrounding circumstances must be closely examined in order to determine whether the duty imposed on, or undertaken by, the Crown is in the nature of a private law duty. For example, is the Crown exercising a discretion on behalf of the beneficiary of the alleged fiduciary duty? Thus in [1984] 2 S.C.R. 335">Guerin, the mere fact that Indian Bands had an interest in lands did not by itself give rise to a fiduciary relationship with the Crown. The existence of that relationship depended upon the further fact that the Indian interest in land was inalienable except upon surrender to the Crown, with the Crown there acting on the Band's behalf. The source of that obligation was not a creation of either the legislative or executive branches of government and so was not a public law duty. The equitable obligation entailed in the surrender requirement was the source of the fiduciary obligation owed to Indians. It was therefore in the nature of a private law duty.

3.          Where the Crown owes duties to a number of interests it is more likely that the Crown is not in a fiduciary relationship, but rather is exercising a public authority governed by the proper construction of the relevant statute.

4.          A fiduciary relationship is unlikely to exist where that would place the Crown in a conflict between its responsibility to act in the public interest and the fiduciary's duty of loyalty to its beneficiary.

[179]        I now turn to apply these principles to the facts before me.

[180]        At the relevant time the source of the Minister's obligation was subsection 220(1) of the Act which then required that:

[181]        It was conceded in oral argument on Mr. Harris' behalf that in providing advance rulings the Minister performs a public law duty.

[182]        The plaintiff did not point to any provisions of the Act which are said to give rise to a fiduciary duty and I have been unable to find any indicia in either the Act or in Information Circular 70-6R2 that in providing advance rulings the Minister is performing a duty in the nature of a private law duty. Indeed, in Rothmans of Pall Mall Canada Ltd. v. Canada (Minister of National Revenue-M.N.R.), [1976] 2 F.C. 500 (F.C.A.) in considering section 202 of the Excise Act, R.S.C. 1970, c. E-12, which provided that there should be imposed, levied and collected excise duties, it was suggested by the Federal Court of Appeal that the duty of the Minister and his officials in that circumstance was one owing to the Crown and not to taxpayers who were competitors of the respondent taxpayer.

[183]        Further, while the scope for the exercise of discretion is one of the indicia of a fiduciary relationship, and was essential for the imposition of a fiduciary duty in [1984] 2 S.C.R. 335">Guerin, supra, the Federal Court of Appeal has held that neither the Minister of National Revenue nor his employees have any discretion in the way in which they must apply the Income Tax Act. They are required to follow it absolutely. See: Ludmer et al. v. The Queen, 95 DTC 5311 (F.C.A.).

[184]        In the present case the limited discretion which the plaintiff relies upon is the discretion in the Minister's representatives to decline to issue an advance ruling or to issue a negative ruling. However, I have been unable to find any suggestion in the Act or Information Circular that in deciding whether to issue an advance ruling the Minister's representatives are performing a duty in the nature of a private law duty. I can find no source for such duty independent of the Act, and no equitable obligation of the sort found in [1984] 2 S.C.R. 335">Guerin, supra, to be necessary to attract liability. Rather, I conclude the duty owed is a public duty to be exercised in accord with all of the provisions of the Act, in good faith, for no improper purpose, and without regard to irrelevant considerations.

[185]        With respect to the submission that this limited exercise of discretion none the less affects the practical interests of all income tax filers because a shortfall in revenue must be corrected through higher or new taxes or expenditure reductions, no evidence was adduced as to any tax increases or expenditure reductions alleged to have resulted from the tax ruling here at issue.

[186]        I have considered as well the interests to which the Minister's representatives may be said to owe a duty to when determining whether to issue an advance ruling.

[187]        One view, suggested by Rothmans of Pall Mall, supra, is that the duty is owed to the Crown. Another, as suggested by the plaintiff, is that the duty is owed to both the taxpayer requesting the ruling and to taxpayers at large. The plaintiff's suggestion in my view militates against the imposition of a fiduciary duty because where duties are owed to a number of interests it is less likely that the Crown owes fiduciary obligations.

[188]        As to the argument that absent the existence of a fiduciary or fiduciary-like duty there is no legal or practical way of redressing the wrongful exercise of discretion so that taxpayers are particularly vulnerable, in my view the answer at law is that public law duties are governed by public law principles. As noted by Lord Diplock in Swain, supra, at page 830:

The council [of the Law Society], in exercising its powers under the Act to make rules and regulations and the Law Society in discharging functions vested in it by the Act or by such rules or regulations, is acting in a public capacity and what it does in that capacity is governed by public law; and, although the legal consequences of doing it may result in creating rights enforceable in private law, those rights are not necessarily the same as those that would flow in private law from doing a similar act otherwise than in the exercise of statutory powers. [underlining added]

[189]        Moreover, I respectfully adopt the reasoning of Simpson J. in Squamish Indian Band v. Canada, [2000] F.C.J. No. 1568 (T.D.) (Q.L.) at paragraph 521:

It cannot be the case that each time legislation gives the Crown discretion to act, a Private Law Fiduciary Duty or even a sui generis fiduciary duty applies. This must be so because, in matters of public law, there will generally not be a reasonable expectation that the Crown is acting for the sole benefit of the party affected by the legislation. For this reason, it is my conclusion that, in matters of public law, discretion and vulnerability can exist without triggering a fiduciary standard. There would have to be special circumstances, other than those created by the legislation, to justify the imposition of a fiduciary duty on the Crown.

[190]        That is not to say that there is no remedy for the wrongful exercise of the Minister's discretion. The Auditor General is required to report to Parliament where procedures have not secured an effective check on the assessment and collection of Revenue. The Auditor General did so here and Parliament has amended the Act with respect to the treatment of departing residents and taxable Canadian property.

[191]      While it was submitted that accountability becomes a "myth" where a decision finds favour with "the party in power", I can not improve on the language used by Chief Justice Dickson writing for the unanimous Court in Canada (Auditor General) v. Canada (Minister of Energy, Mines and Resources), [1989] 2 S.C.R. 49. The Court there considered whether the Auditor General had a judicially-enforceable right of access to certain records. In concluding that there was no such right, Chief Justice Dickson wrote at paragraphs 68 and 69:

In this case, it is reasonable to interpret s. 7(1)(b) as the Auditor General's only remedy for claimed denials of s. 13(1) entitlements not only because the text is conducive to such an interpretation but also because, in the circumstances, a political remedy of this nature is an adequate alternative remedy. The Auditor General is acting on Parliament's behalf carrying out a quintessentially Parliamentary function, namely, oversight of executive spending pursuant to Parliamentary appropriations. Where the exercise of this auditing function involves the Auditor General in a dispute with the Crown, this is in essence a dispute between the legislative and executive branches of the federal government. Section 7(1)(b) would seem to be the means by which Parliament itself retains control over the position it wishes to take in such a dispute.

It is of no avail to point to the fusion of powers which characterizes the Westminster system of government. That the executive through its control of a House of Commons majority may in practice dictate the position the House of Commons takes on the scope of Parliament's auditing function is not, with all respect to the contrary position taken by Jerome A.C.J., constitutionally cognizable by the judiciary. The grundnorm with which the courts must work in this context is that of the sovereignty of Parliament. The ministers of the Crown hold office with the grace of the House of Commons and any position taken by the majority must be taken to reflect the sovereign will of Parliament. Where Parliament has indicated in the Auditor General Act that it wishes its own servant to report to it on denials of access to information needed to carry out his functions on Parliament's behalf, it would not be appropriate for this Court [page 104] to consider granting remedies for such denials, if they, in fact, exist. [underlining added]

[192]        Finally, the essence of a fiduciary obligation is the duty of loyalty owed to the beneficiary. That duty requires the fiduciary to act in the best interest of the beneficiary, to the exclusion of the fiduciary's own interest and the interest of third parties. In the present case it is conceded on Mr. Harris' behalf that if a fiduciary obligation is owed to the plaintiff, a fiduciary obligation is similarly owed to the taxpayer. I am unable to conclude that it is Parliament's intent that in providing advance rulings the Minister must forego his public law duties and instead be placed in the untenable position of trying to reconcile potentially conflicting duties of loyalty owed to both a particular taxpayer requesting an advance ruling and the larger group of taxpayers who, implicit in the plaintiff's submission, would often be best served by a refusal to rule or by a negative ruling.

[193]        In the result, for these reasons, I conclude that in receiving and responding to the ruling request the Minister and his officials did not owe a fiduciary duty, or a duty akin to a fiduciary duty, to the plaintiff and those he represents.

[194]        It is important to repeat that it does not follow that no obligation is owed by the Minister and his officials. As a matter of public law they are required to act in good faith when carrying their duties and to act within a proper construction of the Act.

[195]        This is an important and significant limit on the exercise of discretion. The limit was forcefully articulated by the Supreme Court of Canada in [1959] S.C.R. 121">Roncarelli v. Duplessis, [1959] S.C.R. 121 at page 140:

In public regulation of this sort there is no such thing as absolute and untrammelled "discretion", that is that action can be taken on any ground or for any reason that can be suggested to the mind of the administrator; no legislative Act can, without express language, be taken to contemplate an unlimited arbitrary power exercisable for any purpose, however capricious or irrelevant, regardless of the nature or purpose of the statute. [...] "Discretion" necessarily implies good faith in discharging public duty; there is always a perspective within which a statute is intended to operate; and any clear departure from its lines or objects is just as objectionable as fraud or corruption. Could an applicant be refused a permit because he had been born in another province, or because of the colour of his hair? the legislature cannot be so distorted.

And at page 143:

"Good faith" in this context, [...], means carrying out the statute according to its intent and for its purpose; it means good faith in acting with a rational appreciation of that intent and purpose and not with an improper intent and for an alien purpose; it does not mean for the purposes of punishing a person for exercising an unchallengeable right; it does not mean arbitrarily and illegally attempting to divest a citizen of an incident of his civil status.

[196]        All taxpayers are entitled to a fair, just and impartial application of the Act, including the right to every benefit allowed under the Act. The Minister and his officials function within those strictures.

THE TAXABLE CANADIAN PROPERTY ISSUE

[197]        On Mr. Harris' behalf it is submitted that it is essential for the Court to determine whether Revenue Canada correctly interpreted the concept of taxable Canadian property. It is argued that if Revenue Canada's interpretation was incorrect, it would support an inference that the standard of care was not met and an inference that Revenue Canada accepted the waiver and undertaking as a conditional side agreement required in order to give a favourable ruling. It is also argued that a determination of the correctness of the ruling is essential to the public's confidence in the integrity of the tax system.

[198]        I have found, as a matter of fact, that there was no bad faith or preferential treatment and concluded, as a matter of law, that the defendants did not owe fiduciary or fiduciary-like duties. It is therefore unnecessary for me to rule as to whether, in my view, the ruling was correct. Nor do I consider it appropriate to make such a ruling in circumstances where the affected taxpayer is not a party to the proceeding.

[199]        However, in determining that there was no bad faith or preferential treatment, I have concluded that it was open to Revenue Canada to accept that the Public Co. shares were taxable Canadian property. That is, in the circumstances, Revenue Canada's conclusion that the shares were taxable Canadian property would not support an inference of bad faith or improper preference on the part of Revenue Canada.

[200]        I note that all of the parties agree that the wording of the Act made this issue complex and ambiguous.

[201]        In my view, it was not unreasonable for Revenue Canada to conclude based on an analysis of the Act that taxable Canadian property referred to a class of property and was not dependent upon whether the property is owned by a resident or non-resident. I come to this view on the basis of the defendants' submissions that:

i)           Subsection 85(1) of the Act is a provision of general application to residents and non-residents. It provides that where a shareholder transfers property to a corporation, the consideration received for the transferred property is treated as replacement property with a continuity of tax attributes. This reflects the policy that because a transfer of property in exchange for the shares of the company which receives and then owns property is a non-event for economic purposes, it is a non-event for tax purposes.

ii)          Paragraph 85(1)(i) is a specific application of the general rollover rule which deems the shares received in exchange for taxable Canadian property to be taxable Canadian property. Because subsection 85(1) applies equally to residents and non-residents, so does paragraph 85(1)(i).

iii)          Subsection 97(2) is a parallel rollover provision designed to accomplish the same tax policy objective as subsection 85(1), except that subsection 97(2) applies to the contribution of property to a partnership. Paragraph 97(2)(c) shows that a Canadian resident can hold taxable Canadian property. That paragraph at the material time provided:

Notwithstanding any other provision of this Act, other than subsection 85(5.1), where at any time after November 12, 1981 a taxpayer has disposed of any capital property, a Canadian resource property, a foreign resource property, an eligible capital property or an inventory to a partnership that immediately after that time was a Canadian partnership of which the taxpayer was a member, if the taxpayer and all the other members of the partnership have jointly so elected in prescribed form and within the time referred to in subsection 96(4), the following rules apply:

[...]

(c) where the property so disposed of by the taxpayer to the partnership is taxable Canadian property of the taxpayer, the interest in the partnership received by him as consideration therefor shall be deemed to be taxable Canadian property of the taxpayer. [underlining added]

[202]        This rollover is expressly limited to the case where property is disposed of to what was immediately thereafter a "Canadian partnership". Subsection 102(a) of the Act defines a "Canadian partnership" to mean:

(a) [...] a partnership all of the members of which were, at any time in respect of which the expression is relevant, resident in Canada, [...]

[203]        The Canadian residence of the partnership's partners is therefore a necessary requirement for the application of the rollover rule. It follows that paragraph 97(2)(c) of the Act contemplates that a resident Canadian taxpayer could hold taxable Canadian property.

[204]        Revenue Canada's interpretation carries with it the benefit that it affords to paragraph 97(2)(c) an interpretation consistent with the plain meaning of its language, and interprets both paragraphs 85(1)(i) and 97(2)(c) in accordance with the canon of construction that each component of a statute must be considered in light of the whole. It avoids the argument of the plaintiff that paragraph (c) was inserted in subsection 97(2) out of an over abundance of caution, or in error.

[205]        Revenue Canada's interpretation is consistent with its prior ruling of 1985. While inconsistent with the 1985 opinion, the author of that opinion confirmed that he would not have had occasion to consider paragraph 97(2)(c) when preparing his opinion.

[206]        Having so interpreted taxable Canadian property, a review of Parliamentary history in my view confirms that the interpretation is reasonable, and arguably correct. The defendants argued that:

In the course of the [1971] tax reform initiative, the original and sole focus in the case of TCP [taxable Canadian property] was the relevance of this concept to non-resident taxpayers. The new Canadian capital gains tax was extended to non-residents in respect of gains from the disposition of property having a Canadian nexus. Consequently, the "definition" of TCP was statutorily located in subsection 115(1). That provision is essentially an abridgement of sections 3 - 114 of the Act to matters of relevance to full-year non-residents only.

Therefore, the types of TCP were listed in section 115 of the Act because that is where the TCP concept was initially relevant. However, the TCP concept became relevant to residents when the departure tax rules were elaborated at a late stage in the tax reform process. Consequently, a method was needed to export the TCP concept from section 115 to section 48. As a pure drafting matter, it was decided that the best way to accomplish this was to employ the conditional or, "for-greater-certainty" language in section 48, rather than reproduce, in that section, the long list of TCP in section 115. Therefore, this approach was dictated by an abundance of caution and drafting economy.

[207]        This argument is supported by the Summary of 1971 Tax Reform Legislation published under the authority of the then Minister of Finance, the Honourable E.J. Benson. The legislation established the general rule that one half of capital gains would be included income and taxed at normal personal or corporate rates. At page 34 of the Summary under the heading "Leaving and Entering Canada", the general principle was set out that:

The legislation offers the taxpayer a choice. He may pay tax on his accrued gain at departure with an exemption for the first $5,000 of gains. Alternatively, the taxpayer may elect to defer any capital gain at that time and agree to file a return as a resident of Canada in any year in which he sells assets. Reasonable security would have to be given at the time of departure to cover the tax on the accrued gain. In filing a Canadian tax return when assets are sold he would pay tax on his world income and receive credit for any foreign taxes paid.

When a taxpayer moves to Canada he will be treated as if he at that time purchases his assets at their fair market value. This will ensure that Canada imposes tax only on gains enjoyed while he is in Canada.

These rules for entering and leaving Canada do not apply to Canadian assets on which a non-resident would normally be taxed, as outlined below. [underlining added]

Immediately below under the heading "Non-Residents", the Summary went on to state:

The general rule to bring one-half of capital gains into income and to allow a deduction of one-half of capital losses will apply to non-residents on the sale of

-                 real property interests situated in Canada;

-                 assets used in carrying on business in Canada;

-                 interests in certain partnerships and trusts;

-                 shares in Canadian private corporations;

-                 shares in Canadian public corporations; where the non-resident owned a 25 per cent or greater interest.

[208]        This listing of property essentially captures the property found in paragraph 115(1)(b) of the Act described as taxable Canadian property.

[209]        Thus, I find in the Minister of Finance's Summary support for the interpretation that a resident would not be taxed on departure in respect of taxable Canadian property owned by the resident.

[210]        I am satisfied that I may refer to the Summary for this purpose. See: Construction Paquette v. Enterprises Végo, [1997] 2 S.C.R. 299 at paragraph 20; and Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27 at paragraph 35.

THE JUSTICIABILITY OF THE PLAINTIFF'S CLAIM

[211]        The defendants vigorously pressed the argument that the plaintiff has no public interest status to bring the cause of action for breach of fiduciary duty, and that in the absence of a statutory right of appeal, the accuracy or correctness of the Minister's determination is outside the Court's jurisdiction. In response, the plaintiff argued that these issues were already decided against the defendants by the Court of Appeal on the motion to strike the statement of claim. The defendants replied that the sole issue before the Court of Appeal was whether it was plain and obvious that the statement of claim disclosed no cause of action.

[212]        In view of the conclusions I have reached on the merits of the plaintiff's two causes of action it is not necessary for me to consider the defendants' argument as to justiciability. I have considered it preferable, in view of the public interest nature of the case, to deal with the claim on its merits.

COSTS

[213]        As I have found the plaintiff failed to establish either bad faith or the bestowal of an undue preference, or the existence of a fiduciary or fiduciary-like duty, the plaintiff's action will be dismissed.

[214]        The defendants do not seek their costs, notwithstanding the general principle that costs follow the event.

[215]        The plaintiff maintains that due to the public interest nature of this case he should receive his costs, in any event of the cause, on a solicitor-client basis. In the alternative, the plaintiff seeks his costs on a party and party basis. In so submitting, Mr. Harris argues that traditional concepts upon which the rules of costs are based should be modified to acknowledge and award public interest litigants for their contribution to the law.

[216]        The defendants oppose any award of costs to the plaintiff, contending that the Court should not encourage "busy bodies" who make widely publicized allegations of bath faith but are unable to support those allegations with evidence. The defendants state that before Parliament the Auditor General testified that his officials had not questioned the integrity of the officials at Revenue Canada and his officials had no reason to suspect any bad faith. The defendants claim that in consequence the plaintiff was only able to allege a reasonable apprehension of bad faith, which throughout the litigation was never particularized or proven. The defendants say that this litigation has brought to light no information not already made public by the Auditor General. Finally, the defendants stress that Mr. Harris' action was publicly funded through donations solicited on his web site.

[217]        In weighing these conflicting submissions it is important to remember that costs, while discretionary, are to be awarded on a principled basis.

[218]        Rule 400 of the Federal Court Rules, 1998, sets out the scope of the Court's discretion and a number of factors which may be considered by the Court in its exercise of discretion.

[219]        In the present case, I have concluded that the most significant factor is that found in Rule 400(3)(h) which provides that the Court may consider the public interest in having the proceeding litigated. While the issues raised in this action were brought to public attention by the Auditor General, his report was not prepared by officials acting judicially or quasi-judicially. Only a few of the individuals at Revenue Canada and the Department of Finance with direct involvement were interviewed by the Auditor General's office, and standards of proof of evidence applicable to the conduct of a civil trial were not applied. The investigation itself was not public. The report of the Auditor General raised serious issues which brought into question the proper administration of the Act.

[220]        For these reasons, I can not agree that Mr. Harris may fairly be characterized as a mere busy body. This individual's effort in bringing forward this litigation has permitted further light to be cast on events that had become a concern for Canadians across this country. Though ultimately unsuccessful in this instance, public institutions and the confidence which they carry can only be strengthened by close scrutiny of government actors by responsible citizens.

[221]        The question of costs is of considerable significance when rationally deciding whether to bring an action. Where a plaintiff lacks a personal, proprietary or pecuniary interest in an action the plaintiff is effectively deterred from bringing the action, notwithstanding he or she may have, as a matter of law, public interest standing.

[222]        In its Report on Standing (Toronto: Minister of the Attorney General, 1989) the Ontario Law Reform Commission proposed criteria to determine the circumstances where costs should not be awarded against a person who commences public interest litigation. Those criteria were:

a)          The proceeding involves issues the importance of which extends beyond the immediate interests of the parties involved.

b)          The person has no personal, proprietary or pecuniary interest in the outcome of the proceeding, or, if he or she has an interest, it clearly does not justify the proceeding economically.

c)          The issues have not been previously determined by a court in a proceeding against the same defendant.

d)          The defendant has a clearly superior capacity to bear the costs of the proceeding.

e)          The plaintiff has not engaged in vexatious, frivolous or abusive conduct.

[223]        In my view, those criteria also provide a principled foundation for considering a claim to costs in the context of public interest litigation. As I conclude that the facts of the present case fall within those criteria, I find, in the exercise of my discretion, that Mr. Harris is entitled to some award of costs. This recognizes that absent an award of costs public interest status may be of theoretical but not practical effect.

[224]        Mr. Harris should not however receive costs on a solicitor and client basis. Such awards are exceptional and are generally awarded only where there has been reprehensible conduct on the part of one of the parties. There has been no such conduct and no circumstances in my view otherwise warrant an award of costs in this basis. The appropriate scale of costs is in accordance with column III of the Table to Tariff B of the Federal Court Rules, 1998.

[225]        Given my conclusion that any award of costs should be on a party and party basis, another important principle is that such costs are to be a partial indemnity, not a windfall, or a bonus. This is reflected in the Court's Tariff B which represents a compromise between compensating the payee while not unduly burdening the payor. I am therefore concerned at the absence of information before the Court as to the funds already given to Mr. Harris, likely by other Canadian taxpayers, to finance this action.

[226]        Therefore if Mr. Harris continues to seek costs, and they can not be agreed between the parties, as a condition for such award and pursuant to my discretion as set out in Rule 400(1), I find it appropriate that Mr. Harris provide a full accounting to the Court and the defendants in satisfactory form as to the amount of the funds received by him and expended or owing in respect of the costs of this litigation. This accounting is for the purpose of ensuring that any award of costs paid by the Canadian government goes toward indemnity, not profit. Once that is available I will receive further submissions from counsel on the amount of costs appropriate in the circumstances to be awarded on a lump sum basis in lieu of an assessment in accordance with column III of Tariff B. Costs are therefore reserved on this basis, and counsel may apply for directions as to the timing and manner of submissions and any related matters.

CONCLUSION

[227]        For the reasons set out above, the action is dismissed and costs are reserved for further submissions.

[228]        I repeat my thanks to all counsel for the high quality of their advocacy which was of great assistance to the Court. On both sides, their conduct before the Court exemplified the exercise of the advocate's duty to fearlessly raise every issue, advance every argument and ask every question while all the while treating the witnesses, opposing counsel and the Court with fairness, courtesy and respect.

"Eleanor R. Dawson"

                                                                                                                                                  Judge                        

Ottawa, Ontario

December 19, 2001

Date: 20011219

Docket: T-2407-96

Ottawa, Ontario, Wednesday the 19^th day of December 2001

PRESENT:      The Honourable Madam Justice Dawson

BETWEEN:

GEORGE WILLIAM HARRIS,

on his own behalf, and on behalf of a class of Plaintiffs

comprised of all individuals and others required to file returns

pursuant to section 150 of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1,

as amended, excepting those filers as described in paragraph 2 of this Claim,

Plaintiff

-and-

HER MAJESTY THE QUEEN and

THE MINISTER OF NATIONAL REVENUE,

Defendants

                                                                 JUDGMENT

IT IS HEREBY ORDERED AND ADJUDGED THAT:

1.          The action is dismissed.

2.          Costs are reserved for further submissions in accordance with the Court's reasons of this date.

"Eleanor R. Dawson"

                                                                                                                                                  Judge