Docket: A-257-14
Citation:
2015 FCA 134
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CORAM:
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GAUTHIER J.A.
WEBB J.A.
RENNIE J.A.
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BETWEEN:
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KINGLON
INVESTMENTS INC.
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Appellant
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And
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HER MAJESTY THE
QUEEN
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Respondent
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REASONS
FOR JUDGMENT
WEBB J.A.
[1]
Graham J. of the Tax Court of Canada allowed the
motion of Kinglon Investments Inc. (Kinglon) and struck certain parts of the
Reply filed by the Crown (2014 TCC 131). The Tax Court Judge also granted the Crown
leave to file an amended Reply. Kinglon has appealed from this order insofar as
it granted the Crown leave to file an amended Reply and the Crown has cross-appealed
from this order insofar as it struck the parts in question from the Reply and
awarded costs.
Background
[2]
Kinglon was reassessed for several taxation years
to deny all of the amounts that it had claimed as capital cost allowance in
relation to a licence that it had purchased to market a certain heart drug.
While the Minister of National Revenue relied on a number of grounds for the
reassessments, the ground that is in issue in this appeal is the claim by the
Minister that the licence is an unregistered tax shelter.
[3]
There are a number of conditions that must be
satisfied in order for the licence to be a tax shelter for the purposes of the Income
Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (Act). In particular, certain
statements or representations must be made with respect to the amount that
would be deductible if the licence is acquired. In this case, the Tax Court
Judge struck the parts of the Reply related to the claim that the licence was
an unregistered tax shelter because, although the Crown identified the
particular individuals who were assumed to have made the required statements or
representations, the Crown did not specify on whose behalf those individuals
were acting when such statements or representations were being made.
[4]
For the reasons that follow, I would allow the
cross-appeal and dismiss the appeal.
Standard
of Review
[5]
The decision of the Tax Court Judge to strike
part of the Reply is a discretionary interlocutory decision. In Imperial
Manufacturing Group Inc. v. Decor Grates Inc., 2015 FCA
100 (paragraphs 18 to 29), Stratas J.A. concluded that the standard of review
as set out in Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 2002 SCC
33, applies to appeals from such decisions. Therefore, the standard of review
is correctness for questions of law. Findings of fact (including inferences of
fact) will stand unless it is established that the Tax Court Judge made a
palpable and overriding error. For questions of mixed fact and law, the
standard of correctness will apply to any extricable question of law and
otherwise the standard of palpable and overriding error will apply. An error is
palpable if it is readily apparent and it is overriding if it would change the
result.
Test
for Striking Pleadings
[6]
In R. v. Imperial Tobacco Canada Ltd.,
2011 SCC 42, [2011] 3 S.C.R. 45, the Supreme Court of Canada confirmed that a “claim will only be struck
if it is plain and obvious, assuming the facts pleaded to be true, that the
pleading discloses no reasonable cause of action”, which could also be stated as “the
claim has no reasonable prospect of success”
(paragraph 17).
Analysis
[7]
Since the Crown has cross-appealed on the basis
that the Tax Court Judge should not have struck any part of the Reply, I will
first address this issue. If the Crown is successful in the cross-appeal, then
there will not be any need to address Kinglon’s appeal.
[8]
The question in this
cross-appeal is whether, assuming the facts as alleged in the Reply are true, the
Tax Court Judge erred in assessing whether the Crown has a reasonable prospect
of success in relation to its claim that the licence is a tax shelter.
[9]
A tax shelter is defined in section 237.1 of the
Act and is either a gifting arrangement or a property (in respect of
which certain conditions are satisfied). In this case, there is no suggestion
that there was any gifting arrangement. Therefore, the only relevant parts of
the definition of tax shelter in this case are those parts that relate to a
property. The relevant parts of this definition of tax shelter are as follows:
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“tax shelter”
means
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« abri
fiscal »
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…
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[…]
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(b) […] a
property (including any right to income) […] in respect of which it can
reasonably be considered, having regard to statements or representations made
or proposed to be made in connection with the […] the property, that, if a
person were to […] acquire an interest in the property, at the end of a
particular taxation year that ends within four years after the day on which
the […] interest is acquired,
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b) […] bien (y
compris le droit à un revenue), […] pour lequel il est raisonnable de
considérer, compte tenu de déclarations ou d’annonces faites ou envisagées
relativement […] au bien, que, si une personne devait conclure […] acquérir
une part dans le bien, le montant visé au sous-alinéa serait, à la fin d’une
année d’imposition qui se termine dans les quatre ans suivant le jour […] la part,
acquise égal ou supérieur au montant visé au sous-alinéa (ii)
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(i) the total of
all amounts each of which is
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(i) le total des
montants représentant chacun
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(A) an amount, or
a loss in the case of a partnership interest, represented to be deductible in
computing the person's income for the particular year …, or
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(A) un montant
ou, dans le cas d’une participation dans une société de personnes, une perte
qui est annoncé comme étant déductible dans le calcul du revenue de la
personne pour l’année […] ou,
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…
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[…]
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would equal or
exceed
(ii) the amount,
if any, by which
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(ii) l’excédent
éventuel du montant visé à la division (A) sur le total visé à la division
(B)
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(A) the cost to
the person of […] the interest in the property at the end of the particular
year, determined without reference to section 143.2, would exceed
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(A) le coût, pour
la personne, […] de la part dans le bien à la fin de l’année, déterminé
compte non tenu de l’article 143.2,
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(B) the total of
all amounts each of which is the amount of any prescribed benefit that is
expected to be received or enjoyed, directly or indirectly, in respect of the
[…] interest in the property, by the person or another person with whom the
person does not deal at arm's length.
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(B) la valeur
totale des avantages […] avec laquelle elle a un lien de dépendance pourrait
recevoir, directement ou indirectement, au titre du bien acquis aux termes de
l’arrangement ou au titre de la part dans le bien.
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[10]
In order to consider whether the Crown’s claim
has a reasonable prospect of success, it is necessary to understand the
argument that the Crown is making in relation to the definition of tax shelter.
In order to be a tax shelter, certain statements or representations must be
made. The definition of a tax shelter does not, however, specify either the
person who must make the statements or representations, or the person to whom
such statements or representations must be made.
[11]
In Baxter v. The Queen, 2007 FCA 172, [2007]
F.C.J. No. 605, the issue that this Court had to decide in relation to the
communication of the statements or representations was whether the statements
or representations had to be made to the particular taxpayer (paragraph 40 of
the reasons). Although Ryer J.A. in paragraph 44 noted that “neither of the parties to this appeal, nor the TCC in its
decision, focused much attention on the identity of the party who must have
made the statements or representations”, he offered the following
comments in relation to this issue:
9. The definition requires that
statements or representations must be made, at some time, in connection with
the property that is offered for sale. If no statements or representations have
ever been made in connection with a property, then that property cannot
constitute a tax shelter. Because the property that is contemplated by the
definition of tax shelter is a property that is assumed to have been acquired
by the prospective purchaser and the statements or representations are required
to have been made in connection with that property, it follows that the
statements or representations must have been made prior to any actual sale of
the property that is offered for sale. Further, while the definition does not
specify to whom or by whom the statements or representations must be made, in
my view they must be made to the prospective purchasers of the property by
or on behalf of the person who proposes to sell the property.
…
44. While neither of the parties to
this appeal, nor the TCC in its decision, focused much attention on the
identity of the party who must have made the statements or representations, in
my view, it would be reasonable to conclude that it must be each person who
constitutes a promoter, as defined in subsection 237.1(1) (a
"promoter").
(emphasis added)
[12]
Although the Tax Court Judge, in paragraph 15 of
his reasons, stated that “[t]here is, at a minimum, the
appearance of a conflict between paragraphs 9 and 44 of Baxter”, it
seems to me, without deciding the issue, that it is possible that the
statements in these paragraphs could be reconciled on the basis that Ryer J.A.
was concluding that the required statements or representations had to be made
by a promoter who was acting on behalf of the person who is proposing to sell
the property.
[13]
In Part C of the Reply (Statutory Provisions,
Grounds Relied on and Relief Sought) filed in this case, the Crown, in
paragraph 17, simply states that the licence was a tax shelter but does not
explain the reasoning to support this conclusion. In the memorandum filed in
this appeal and during oral argument, the Crown clarified its position, which
is that it would be sufficient for the requirements of the definition of tax
shelter if the required statements or representations were made by Jay
Granatstein, an accountant, and David Rotfleisch, a lawyer, as promoters
without the need to specify on whose behalf such statements or representations
were made. The Crown is relying on the comments in paragraph 44 of Baxter
that it would be sufficient if the person making the statements or
representations is a promoter. Implicit in this position is that the comments
in paragraph 9 of Baxter are obiter, otherwise the comments in
paragraph 9 would be binding on the Tax Court. However, if the comments in
paragraph 9 are obiter, then the comments in paragraph 44 would also be obiter.
[14]
The argument of the Crown is based on paragraphs
(a) and (c) of the definition of promoter and that it is not necessary that
either Mr. Granatstein or Mr. Rotfleisch were acting on behalf of any other
person.
[15]
The definition of promoter is set out in section
237.1 of the Act:
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“promoter” in
respect of a tax shelter means a person who in the course of a business
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promoteur »
Personne qui, quant à un abri fiscal et dans le cours des activités d’une
entreprise :
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(a) sells or
issues, or promotes the sale, issuance or acquisition of, the tax shelter,
(b) acts as an
agent or adviser in respect of the sale or issuance, or the promotion of the
sale, issuance or acquisition, of the tax shelter, or
(c) accepts,
whether as a principal or agent, consideration in respect of the tax shelter,
and more than one person may be a tax shelter promoter in respect of the same
tax shelter;
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a) émet ou
vend l’abri fiscal ou fait la promotion de son émission, de sa vente ou de
son acquisition;
b) agit, à
titre de mandataire ou de conseiller, en ce qui concerne l’émission ou la
vente de l’abri fiscal ou la promotion de son émission, de sa vente ou de son
acquisition;
c) accepte,
à titre de principal ou de mandataire, une contrepartie relativement à l’abri
fiscal. Au même abri fiscal peuvent correspondre plus d’un promoteur d’abris
fiscaux.
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[16]
While initially the Crown was arguing that the
two individuals could also be promoters under paragraph (b), the Crown is now
only arguing that either paragraph (a) or (c) would be applicable (paragraph 45
of the Crown’s Memorandum) and that the provisions of paragraphs (a) and (c) do
not indicate that the person must be acting for someone else.
[17]
In his reasons for judgment, the Tax Court Judge
noted that:
16 The
parties agree that, in Kinglon's case, the statements or representations in
question were made by an accountant and / or a lawyer. It appears that one or
both of those individuals was acting on behalf of Kinglon at the time. It is
possible that one or both of these individuals may have been acting for
Cardiopharma either exclusively or in addition to acting for Kinglon.
17 Based
on the foregoing, I am not prepared at this point in the proceedings to
foreclose the possibility that a judge of this Court, upon hearing all of the
evidence, could reasonably conclude that:
(a) a tax shelter can exist regardless of who makes the statements or
representations so long as they are made to the taxpayer;
(b) a tax
shelter can exist in a circumstance where an individual who acts for both the
taxpayer and the vendor makes statements or representations to the taxpayer; or
(c) a tax
shelter can exist in a circumstance where an individual, acting solely on
behalf of the taxpayer, designs a transaction which will have the desired
effect, then arranges for a vendor to participate in the transaction and finally
makes statements or representations to the taxpayer.
[18]
The Tax Court Judge in paragraph 17(a) noted
that a possible interpretation of the Act is that “a tax shelter can exist regardless of who makes the statements
or representations so long as they are made to the taxpayer”. This
statement appears to reflect the position of the Crown that the individuals who
make the required statements or representations would not have to be the vendor
or someone acting on behalf of the vendor in order for the licence to be a tax
shelter. In light of this statement and based on the Crown’s position, it would
not follow that the Crown would have to identify the person on whose behalf Mr.
Granatstein and Mr. Rotfleisch were making the statements or representations.
Although Kinglon argued that paragraph 17(a) is to be interpreted based on the
comments of the Tax Court Judge in paragraph 16, in my view, paragraph 17(a) is
clear and should not be modified by the Tax Court Judge’s comments in paragraph
16.
[19]
Since the Tax Court Judge acknowledged that one
possible interpretation of the relevant provisions of the Act is that a
tax shelter could be found to “exist regardless of who
makes the statements or representations so long as they are made to the
taxpayer”, it was a palpable and overriding error on his part to then
find that the Reply was deficient because the Crown did not specify on whose
behalf the two individuals were making the statements or representations.
[20]
The issue before this court in Baxter was
not related to whether the person making these statements or representations
had to be acting on behalf of any other person. Therefore, the comments in
paragraphs 9 and 44 of Baxter would be obiter. While another
Court may adopt these comments, the issue in relation to striking pleadings is
not whether a person will be successful but whether it is plain and obvious
that such person will not be successful. Since these comments are obiter
and since there is no specific requirement in the definitions of tax shelter or
promoter that the person making the required statements or representations must
be the person who is attempting to sell the property or must be making such
statements or representations on behalf of such person, it is not plain and
obvious that the Crown will not be successful.
[21]
Since no facts would have to be pled in support
of this argument of the Crown, the parts of the Reply related to the allegation
that the licence was a tax shelter should not have been struck.
[22]
Kinglon has, since it brought its motion before
the Tax Court, continuously maintained its position that the legal argument of
the Crown is not clear. As noted above, the Crown’s position is not apparent in
Part C of the Reply as the Crown simply states that the licence was a tax
shelter but does not explain the reasoning to support this conclusion. Before
us, the Crown undertook to amend the Reply to clarify its legal argument in
relation to why, in the Crown’s view, the licence is a tax shelter. I would
grant leave for the Crown to file an amended Reply to explain such reasoning.
[23]
The Tax Court Judge, in paragraph 21 of his
reasons, also identified certain other alleged deficiencies in the details
provided in the pleadings of the Crown. It seems to me that to the extent that Kinglon
may require any further particulars with respect to the any of the pleadings Kinglon
could file and serve a demand for particulars as provided in Rule 52 of the Tax
Court of Canada Rules (General Procedure), SOR/90-688.
[24]
As a result I would allow the cross-appeal and I
would dismiss Kinglon’s motion to strike the parts of the Reply related to the
issue of whether the licence is a tax shelter. As noted above, since I would
allow the cross-appeal and not strike the parts of the Reply in issue, there is
no need to address Kinglon’s appeal.
Proposed
Disposition
[25]
Therefore, I would:
(a)
dismiss Kinglon’s appeal;
(b)
allow the Crown’s cross-appeal;
(c)
set aside the Order issued by the Tax Court and
dismiss Kinglon’s motion to strike the parts of the Reply related to the issue
of whether the licence is a tax shelter;
(d)
grant the Crown leave to file and serve, within
30 days of the date of the order of this Court, an amended Reply to clarify the
reasoning of why, in the Crown’s view, the licence was a tax shelter;
(e)
not award either party costs in the Tax Court;
and
(f)
award the Crown costs only in relation to the
cross-appeal to this Court.
“Wyman W. Webb”
“I agree
Johanne
Gauthier J.A.”
“I agree
Donald
J. rennie J.A.”
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