Date: 20101019
Docket: A-493-09
Citation: 2010 FCA 272
CORAM: EVANS
J.A.
DAWSON J.A.
STRATAS
J.A.
BETWEEN:
MICHAEL
EDWARDS
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
[1]
This is an
appeal from an interlocutory order of a Judge of the Tax Court of Canada. In
reasons reported as 2009 TCC 606, 2010 DTC 1006, the Judge dismissed a motion
to strike all or part of two subparagraphs of the amended reply to the notice
of appeal. The two subparagraphs are contained in the recitation of the
assumptions relied upon by the Minister of National Revenue (Minister) when
reassessing the appellant. The motion to strike was brought on the ground that
the subparagraphs contained facts not assumed by the Minister. The two
subparagraphs at issue are:
13. h) The
Royalty Agreement had a nominal fair market value;
13. cc) The
following parties were willing participants, acting in concert to facilitate
execution of the Scheme:
i)
Trafalgar
Trading;
ii)
ParkLane;
iii)
Plaza
Capital;
iv)
Plaza
Capital Finance Corporation (“Plaza Capital Finance”);
v)
Specialty
Insurance;
vi)
the
Designated Associations; and
vii)
the
Participant.
[2]
The
appellant argues that the Judge erred in law by ruling that, for the purposes
of Rule 49(1)(d) of the Tax Court of Canada Rules (General
Procedure), SOR/90-688 assumptions can include implicit findings or
conclusions that the Minister might logically have drawn when coming to the
reassessment. In oral argument, counsel for the appellant initially argued
that the analysis must be textual, meaning that the precise assumption must be
recorded in the records that led to the issuance of the notice of reassessment
(the audit record). However, counsel for the appellant later agreed that, as a
matter of law, some assumptions may be inferred from the content of the audit
record where they are blindingly obvious. In my view, assumptions may be inferred
from the audit record in appropriate circumstances. In every case it will be a
question of fact whether there is a sufficient basis in the audit record to
support the inference that a particular fact was indeed an assumption relied
upon by the Minister in the assessment or reassessment process.
[3]
It follows
that the Judge did not err in law in considering that assumptions can be
inferred from the audit record. It further follows that where the Judge was
prepared to infer the existence of an assumption, such a conclusion is one of
fact, or mixed fact and law, that is reviewable on the standard of palpable and
overriding error. See: Housen v. Nikolaisen, [2002] 2 S.C.R. 235.
[4]
Turning to
the impugned subparagraphs, with respect to subparagraph 13(h) the Judge found
as a fact that this assumption was made and relied upon at the time of the
assessment. This finding was based upon the content of a letter sent to the
appellant on the completion of the audit and upon the auditor's testimony on
discovery. The finding is also consistent with the content of the GARR
Referral and the Audit Report. No palpable or overriding error has been shown
with respect to the Judge's finding of fact that the assumption was made and
relied upon at the time of the reassessment.
[5]
With
respect to subparagraph 13(cc), the Judge acknowledged that the legal
significance of the phrase “acting in concert” may well not have been
considered by the auditor. However, the Judge considered that the issue of
whether the facts would support the use of the phrase “acting in concert” was
an issue best left to the trial judge.
[6]
It is
settled law that facts pleaded as assumptions must be complete, precise and
accurate. See, for example, The Queen v. Anchor Pointe Energy Ltd, 2007
DTC 5379 (F.C.A.) at paragraph 29.
[7]
The
transcript of the auditor’s examination was in evidence before the Judge. On
discovery the auditor gave the following evidence:
Q.
You say there that the participants, little one through little seven
were acting in concert. What do you mean by “acting in concert”?
A.
By acting in concert I mean they were acting together.
Q.
What does that mean?
A.
That means that they were part of a series of transactions or events as
described in Section 248(10). And I am not reading their mind, I am not saying
or suggesting that -- or it’s not our position that they were acting non-arm’s
length.
[…]
Q.
But I just wanted to be clear, you’re not saying that Edwards was
acting in concert with, specifically, the Wrestling Association.
A.
Let’s remove the word “acting in concert” because that ---
Q.
Well, that’s what you’re alleging.
A.
Okay. Acting together. Acting together might be a better -- use a
synonym for acting in concert.
[…]
Q.
Coming back to acting in concert, I appreciate what you’ve said about
acting in concert. Where in the audit material including the 30-day letter
is there any reference to acting in concert?
A.
Where -- there is reference to series of transactions so we don’t
have the exact term “acting in concert,” but we have the concept that was a
series and that leads to saying that there was more than one transaction or you
have more than one transaction. He may have wanted more than one party.
So
it’s -- there’s a series -- reference to series in parts of that concept.
[…]
Q.
And we will find no reference in addition to the audit report in the
position paper or the GAAR referral or the GAAR referral letter, or the
proposal letter to the taxpayer of any non-arm’s length relationship between
the donor and any of the participants in the program or any reference to the
donor or any of the participants acting in concert.
A.
Yes, but we have mentioned a series of transactions or events.
Q.
You agree the answer to my question is yes?
A.
Yes.
[Emphasis
added.]
[8]
The phrase
“acting in concert” is part of the legal test for determining whether parties
have acted at non-arm’s length. On discovery the auditor denied that he was
alleging non-arm’s length transactions. Whether the parties acted at arm’s length
may be material in this proceeding. In oral argument counsel for the
respondent conceded that in light of the auditor’s answers on discovery the
language used in subparagraph 13(cc) of the Minister’s amended reply to the notice
of appeal was not as precise as it could have been. In view of the auditor’s
evidence, subparagraph 13(cc) is not complete, precise and accurate as
required. It follows that the assumption should have been struck.
[9]
Counsel
for the appellant acknowledged during his reply argument that the auditor did
assume during the course of the audit that the participants were acting
together in a series of transactions. In light of that advice, it is
appropriate to give leave to the respondent to amend subparagraph 13(cc) of its
reply in a manner consistent with the evidence given by the auditor on
discovery.
[10]
For these
reasons, I would allow the appeal in part. Pronouncing the order that should
have been given by the Judge, I would strike subparagraph 13(cc) of the
Minister’s amended reply with leave to amend in accordance with these reasons.
In view of the divided success I would award no costs.
“Eleanor R. Dawson”
“I
agree.
John
M. Evans”
“I
agree.
David
Stratas”
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