Date: 20050406
Docket: A-410-04
Citation: 2005 FCA 119
CORAM: LÉTOURNEAU J.A.
NOËL J.A.
NADON J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
STATUS-ONE INVESTMENTS INC.
Respondent
Hearing held at Montréal, Quebec, April 6, 2005.
Judgment delivered at Montréal, Quebec, April 6, 2005.
REASONS FOR JUDGMENT: NOËL J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
NADON J.A.
Date: 20050406
Docket: A-410-04
Citation: 2005 FCA 119
CORAM: LÉTOURNEAU J.A.
NOËL J.A.
NADON J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
STATUS-ONE INVESTMENTS INC.
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1] This is an appeal from an interlocutory decision by Mr. Justice Rip of the Tax Court of Canada, allowing in part the motion by Status-One Investments Inc. (Status-One or the taxpayer) to strike out certain allegations in the amended reply to the notice of appeal filed by Her Majesty the Queen acting on behalf of the Minister of National Revenue (the Crown or the Minister).
[2] The appeal was heard on the morning of April 6, 2005, and adjourned until later that afternoon for a reading of the following reasons.
Facts
[3] The facts are related in detail in the decision of the Trial Judge. At this stage, we will simply go over the sequence of events.
[4] On July 22, 2002, Status-One filed a notice of appeal in the Tax Court of Canada from a notice of assessment issued by the Minister for its 1996, 1998 and 1999 taxation years. The issue in the Tax Court of Canada was the deductibility of Status-One's non-capital losses from its partnership interest in AFS Limited Partnership No. 11 (AFS No. 11).
[5] On September 23, 2002, the Crown in turn filed a reply in the Tax Court of Canada. More than a year later, on November 10, 2003, a few days before the commencement of the examinations for discovery, the Crown sent Status-One a draft amended reply and asked it to consent to the filing of this pleading.
[6] By a letter dated November 14, 2003, counsel for Status-One refused and notified counsel for the Crown that the examinations for discovery should be postponed to after the close of pleadings.
[7] That same day, the Crown filed a motion for leave to file an amended reply. On December 22, 2003, Mr. Justice Dussault of the Tax Court of Canada allowed the Crown's motion while reserving Status-One's right to challenge some of the amendments allowed by way of a motion to strike.
[8] Some time later, under section 53 of the Tax Court of Canada Rules (General Procedure) (TCCR), Status-One filed a motion to strike out eleven allegations in the amended reply:
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53. The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,
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53. La Cour peut radier un acte de procédure ou un autre document ou en supprimer des passages, en tout ou en partie, avec ou sans autorisation de le modifier parce que l'acte ou le document :
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(a) may prejudice or delay the fair hearing of the action,
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a) peut compromettre ou retarder l'instruction équitable de l'appel;
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(b) is scandalous, frivolous or vexatious, or
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b) est scandaleux, frivole ou vexatoire;
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(c) is an abuse of the process of the Court.
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c) constitue un recours abusif à la Cour.
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[9] By an order dated July 27, 2004, Mr. Justice Rip dismissed Status-One's motion, with the exception of subparagraphs 11(uu) and 11(ww) of the Crown's amended reply, which read as follows:
[TRANSLATION]
Other limited partnership arrangements similar to AFS No. 11:
11(uu) During the years 1993 to 1998, Equicap promoted and marketed several limited partnership arrangements by means of offering memoranda;
11(ww) The important aspects of these limited partnership arrangements were identical to AFS No. 11, notably in terms of structure, operating method, agreements signed, parties involved, actions taken, objectives pursued and financial and tax results obtained.
[10] The Minister had to concede before Mr. Justice Rip that Status-One was in no way a party to these "other arrangements". However, the Minister maintained that they involved the same parties as those with which Status-One had contracted and could serve in some way as "similar facts" for multiple purposes (albeit unspecified in the amended reply) as well as help to identify more clearly Status-One's intention when it acquired its own interest.
Judgment under appeal
[11] Mr. Justice Rip first summarized the reasons cited by Status-One in support of its motion to strike in the following words (paragraph 15): "... [these subparagraphs] introduce new allegations of fact, the facts [in question] are entirely unrelated to [Status-One], and the new allegations broaden the scope of the proceedings to encompass other taxpayers."
[12] At the outset of his analysis, Mr. Justice Rip stated that "were it not" for the decision of the Federal Court of Appeal in The Queen v. Global Communications Ltd., 97 DTC 5194 (FCA), he would have decided to dismiss the motion to strike (paragraph 23). In that case, this Court, in a brief decision, had upheld a previous decision of Mr. Justice Beaubier of the Tax Court of Canada striking out an allegation similar to those at issue here. Having made this observation, Mr. Justice Rip did not stop his analysis at Global.
[13] At paragraph 25, Mr. Justice Rip noted the difficulties that these impugned amendments created for the taxpayer:
[25] In argument, counsel for the appellant stated that the allegations in the Notice of Appeal, the Reply to the Notice of Appeal and the answer contain no reference to any investments other than the appellant's investments in AFS No. 11, with the result that more than 80% of the documents contained in the respondent's list of documents cannot be the subject of questions on discovery. Counsel for the appellant estimates that there are more than 6,000 documents in question.
[14] At paragraph 29, he noted that the facts alleged by the Minister in his pleadings, including those involving the actions of third parties, must be precise and accurate so that the taxpayer knows exactly the case it has to meet (Anchor Pointe Energy Ltd. v. The Queen, 2003 DTC 5512 (FCA)).
[15] The substance of Mr. Justice Rip's reasons for striking out the two subparagraphs in question is set out at the very end of his judgment (paragraph 30):
[30] Subparagraphs 11(uu) and (ww) muddy the appeal process. At this stage of the process, Equicap's actions appear to have no direct bearing on the fundamental issues raised by the appeals. Considerable caution should be exercised when third parties are involved. The relevant actions are those of the appellant, which has been assessed and is entitled to know why. In some cases, it is quite possible that relationships or ties between an appellant and third parties will be relevant. Among other things, I have in mind cases involving securities trading. However, I have found nothing in the parties' pleadings to indicate that the facts alleged in subparagraphs 11(uu) and (ww) are relevant. An appellant must always make his own case. The Minister must assess taxpayers based on what the taxpayers have or have not done, and not, generally, on the conduct of a third party.
Analysis and decision
[16] The Crown contends that Mr. Justice Rip applied the wrong principles, erroneously felt bound by this Court's decision in Global, supra, erred in law in holding that any evidence concerning third parties was irrelevant to the case and failed to consider the tests of intention raised by the issues (memorandum of fact and law, paragraph 23). In our opinion, there is no basis for these attacks.
[17] The relevance or irrelevance of allegations concerning the actions of third parties must be assessed in light of the pleadings. This means that Mr. Justice Rip had to consider the pleadings and determine, in light of the issues they raised, whether the proposed subparagraphs were relevant.
[18] That is precisely what Mr. Justice Rip did, so he cannot be said to have blindly followed Global. Although the allegation at issue in Global suffered from the same excess of generality as those at issue here, each case turns on its own facts, and it was on the basis of the pleadings, as drafted, that Mr. Justice Rip found the proposed amendments irrelevant.
[19] In our opinion, the Crown has failed to demonstrate, on the basis of the pleadings, how the allegations in subparagraphs 11(uu) and 11(ww) are relevant. As Mr. Justice Rip indicates, in some cases, it is quite possible that relationships or ties between an appellant and third parties will be relevant to the determination of its tax payable. But it is still necessary for the pleadings to indicate precisely how those ties or relationships could serve that purpose.
[20] It is not enough to state, as the Crown does, that all of the circumstances are relevant. The fact that the person from whom Status-One acquired its interest in the limited partnership had engaged in similar activities with third parties in the past does not, in itself, prove Status-One's intentions at the time the agreements were executed.
[21] In this regard, the Crown alleges in its memorandum (paragraph 59) that an investor would have considered these past transactions and the results obtained before entering into its own agreement. But, as Mr. Justice Rip observed, no allegation of the sort appears in the pleadings. There is only the general statement reflected in the two subparagraphs at issue.
[22] As Mr. Justice Rip states at paragraphs 29 and 30 of his reasons, the Court must exercise considerable caution when the Crown is seeking to include actions of third parties in the pleadings. The factual assumptions on which the Minister based the assessments are presumed to be accurate, and the taxpayer is entitled to know what he has to demonstrate in order to rebut that presumption (Anchor Pointe Energy Ltd., supra).
[23] While this presumption in favour of the Minister is warranted when it concerns the actions of the taxpayer at issue (since the taxpayer has particular knowledge of its own affairs), it becomes complicated and difficult to counter when it comes to the actions of third parties. It was this difficulty that Mr. Justice Rip had in mind when he addressed the following criticism to the Minister, at the conclusion of his analysis (paragraph 30):
The Minister must assess taxpayers based on what the taxpayers have or have not done, and not, generally, on the conduct of a third party. [Emphasis added]
[24] If the Minister wants to base an assessment on the actions of third parties, it is his responsibility to specify the link between these actions and those of the taxpayer in question, so that the taxpayer knows the case it has to meet.
[25] For example, if the Minister thinks these "other arrangements" are similar to the one to which Status-One was a party, and that Status-One considered the financial results of these "other arrangements" before acquiring its own interest, as he seems to be arguing, he is free to allege it. But he runs the risk of a motion to strike if he includes the actions of third parties generally in the pleadings without specifying the relationship he intends to argue between these actions and those of the taxpayer in question.
[26] The decision to allow or not to allow a motion under section 53 of the TCCR fell within the discretion of the Trial Judge. He weighed the interest put forward by the Crown to justify the proposed addition, the fact that the taxpayer was in no way a party to these "other arrangements" and the difficulty they would create by introducing third parties into the debate without precisely and accurately indicating the supposed relationship with Status-One. He found that the two subparagraphs in question would compromise or delay the fair hearing of the appeal.
[27] In our view, that was a judicious exercise of the discretion conferred on him by section 53 of the TCCR. The appeal will be dismissed with costs.
"Marc Noël"
J.A.
Certified true translation
Peter Douglas
FEDERAL COURT OF APPEAL
SOLICITORS OF RECORD
DOCKET: A-410-04
STYLE OF CAUSE: HER MAJESTY THE QUEEN
Appellant
and
STATUS-ONE INVESTMENTS INC.
Respondent
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: April 6, 2005
REASONS FOR JUDGMENT: NOËL J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
NADON J.A.
DATE OF REASONS: April 6, 2005
APPEARANCES:
Daniel Bourgeois/Nicolas Simard FOR THE APPELLANT
André P. Gauthier/Josée Vigeant FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C., Deputy Attorney General of Canada FOR THE APPELLANT
Ottawa, Ontario
Heenan Blaikie LLP FOR THE RESPONDENT
Montréal, Quebec
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