Docket: A-428-13
Citation:
2015 FCA 40
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CORAM:
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NOËL C.J.
DAWSON
J.A.
TRUDEL J.A.
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BETWEEN:
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DAVID GRAMIAK
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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
NOËL C.J.
[1]
This is an appeal from a decision (neutral
citation 2013 TCC 383) rendered by Associate Chief Justice Rossiter (as he then
was) of the Tax Court of Canada (the Tax Court judge) wherein he dismissed the
motion brought by David Gramiak (the appellant) to strike portions of the Reply
to the Notice of Appeal filed by Her Majesty the Queen (the respondent) and
granted the respondent leave to amend her Reply.
[2]
At issue is whether the Tax Court judge
committed various legal and factual errors in dismissing the appellant’s Motion
to Strike and allowing the respondent’s Motion to Amend. For the reasons which
follow, I have come to the view that no such errors were committed and that the
appeal should accordingly be dismissed.
[3]
The provisions of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (the Act) and the Tax Court of
Canada Rules (General Procedure), SOR/90-688a (the Rules) which are
relevant to the analysis are reproduced in the Annex to these reasons.
BACKGROUND
[4]
The reassessments which form the subject matter
of the underlying proceedings were issued with respect to the appellant’s 2002
and 2003 taxation years. At issue throughout the audit which led to their
issuance was whether debentures issued by PI Ventures Inc. (the debentures)
were qualified investments for purposes of the appellant’s self-directed
registered retirement savings plan (RRSP) and whether they were acquired for an
amount in excess of their fair market value.
[5]
During the course of the audit, by letter dated
January 12, 2006, waivers were sought by the Canada Revenue Agency (CRA). The
text as proposed by the CRA waived the normal reassessment period with respect
to (Appeal Book, Vol. I at pp. 130 and 132):
Income inclusion relating to the acquisition
of non-qualified investment for a registered plan and/or income inclusion
relating to the acquisition of investment for a registered plan for an amount
in excess of fair market value with respect to PI Ventures Inc. in the amount
of $130,500 [amount for 2002 taxation year, for 2003, the amount was $8,500]
plus related penalties.
[6]
The authorized representative of the appellant
asked and obtained that the waivers be modified so as to read (ibidem):
Income inclusion of $130,500 [for the 2002
taxation year, $8,500 for the 2003 taxation year] relating to the acquisition
of non-qualified investments (PI Ventures Corporation convertible debentures)
for a RRSP subject to s. 146(9) and/or s. 146(10).
Waivers bearing this language were signed by
the appellant on or about March 14, 2006.
[7]
The waivers were subsequently revoked by the
appellant on October 4, 2006, with effect six months thereafter thereby
provoking the issuance of reassessments.
[8]
These were issued on January 4, 2007. The effect
of the reassessments was to add the above amounts to the appellant’s income for
the 2002 and 2003 taxation years pursuant to subsections 146(9), 146(10) and
paragraph 56(1)(h) of the Act on the basis that the debentures were
non-qualified investments (subsection 146(10)) and were acquired by the
appellant’s self-directed RRSP for an amount in excess of their value
(subsection 146(9)). Penalties were levied pursuant to subsection 163(2) on the
amounts assessed on the basis that the appellant had knowingly made a false
statement in filing his tax returns for those years.
[9]
The normal reassessment period (3 years from the
date of the initial assessment) ended on June 5, 2006 with respect to the
appellant’s 2002 taxation year and May 13, 2007 with respect to his 2003
taxation year so that the latter was reassessed within this period and the
former was not.
[10]
Up to January 12, 2012, when he filed his Notice
of Appeal, the appellant maintained that the debentures had been acquired by
his RRSP (Appeal Book, Vol. 1 at pp. 140, 141 and 200). In his Notice of
Appeal, the appellant took the position, for the first time, that the
debentures were not acquired and that as a result no amount could be included
in his income pursuant to subsections 146(9) and 146(10) of the Act.
[11]
In her initial Reply to the Notice of Appeal
filed on March 6, 2012, the respondent raised the alternative argument that if
the debentures were not acquired by the appellant, he nevertheless was in constructive
receipt of a taxable benefit in the same amounts as those reassessed, pursuant
to subsection 146(8).
[12]
On February 28, 2013, the appellant brought a
motion to strike the paragraphs setting out this alternative argument and
related additions.
[13]
Before the motion could be heard, the respondent
brought a motion of her own seeking to amend her Reply so as to add the
following two paragraphs:
19A. During the years 2004 to 2007, the
Appellant received the following funds from foreign source as shown on the
statements issued by Syndicated Gold Depository and provided by the Appellant
to the CRA:
2004: US$ 5,950.00
2005: US$ 32,351.86
2006: US$ 40,000.00
2007: US$ 40,000.00
TOTAL: US$ 118,301.86 (CND$135,297.60)
19B. These
amounts represent a return of capital from the Appellant’s RRSP investment in
PI ventures Inc. as stated by the Appellant in a declaration dated June 20,
2008.
[14]
On the same occasion, the respondent proposed to
complement the contested plea as follows:
28. Alternatively, if this Court concludes
that the Appellants’ RRSP did not acquire the debenture units and/or did not
acquire any property during the 2002 and 2003 taxation years, the Respondent
submits that by directing Olympia Trust to transfer funds from his RRSP
account into Singh Walters Bindal Trust Account, the Appellant constructively
received the total amount of the funds transferred.
29. As a consequence, the amounts of
$130,500 and $8,500 received by the Appellant as constituted a
benefit out of or under a RRSP and as such this amount should be properly
included in his income for the 2002 and 2003 taxation years pursuant to
subsection 146(8) and paragraph 56(1)(h) of the Act.
[15]
The Motion to Strike and the Motion to Amend
were heard together. During the hearing, the appellant took the position that
the Minister of National Revenue (the Minister) could not rely on subsection
152(9) to advance the alternative argument as it rests on a transaction that is
different from the one on which the reassessments are premised. He further
argued that insofar as the 2002 taxation year is concerned, the alternative
argument falls outside the scope of the waiver and therefore outside of the
exception to the normal reassessment period created by subparagraph 152(4.01)(a)(ii).
[16]
By decision rendered on December 10, 2013, the
Tax Court judge dismissed the appellant’s Motion to Strike and granted the
respondent’s Motion to Amend her Reply. This is the decision now under appeal.
DECISION UNDER APPEAL
[17]
The Tax Court judge first addressed the Motion
to Strike. He referred to section 53 of the Rules and then enunciated the
“plain and obvious” test for striking out pleadings (Operation Dismantle
Inc. v. Canada, [1985] 1 S.C.R. 441 at p. 455; R. v. Imperial Tobacco
Canada Ltd., 2011 SCC 42). Although he stated that this test, by reason of
its wording, must be ascertained without the need for lengthy deliberation – a
proposition that has become a source of contention in the present appeal
(appellant’s memorandum at paras. 34 and 35) – he went on to write more than thirty
paragraphs before concluding at paragraph 38 that the appellant had failed to
demonstrate that this test had been met.
[18]
In the course of his analysis, the Tax Court
judge considered two questions. First, do the impugned paragraphs of the Reply
raise an argument that is permitted by subsection 152(9) of the Act? Second,
does the allegation made in those paragraphs, more particularly the reference
to subsection 146(8), reasonably relate to the matters specified in the waivers
as contemplated by subparagraph 152(4.01)(a)(ii) of the Act?
[19]
After considering the relevant case law, the Tax
Court judge answered both of these questions in the affirmative. As to the
first, the Tax Court judge found that the transactions underpinning the
alternative argument were not substantially different from those underlying the
reassessments at issue (reasons at paras. 43 to 47).
[20]
He went on to find that although the text of the
waiver was restrictive, this wording was not a bar to the alternative argument
raised by the respondent (reasons at paras. 53 to 67). In the course of his
reasons, he found that (reasons at para. 66):
… [i]t would be absurd to disallow the
Respondent’s alternative argument when one considers that the Appellant drafted
the waiver attempting to limit the scope of the reassessment, then advanced a
new argument in the Notice of Appeal that contradicts the information provided
to the CRA during the audit, and now claims the Respondent cannot respond to
their new position since it is outside the scope of the carefully crafted
waiver.
[21]
Having refused to strike the impugned
paragraphs, the Tax Court judge went on to allow the respondent’s proposed
amendment to her Reply. The Tax Court judge noted that an amendment will be
allowed if it assists in determining the real question in controversy between
the parties (reasons at para. 75). The two paragraphs sought to be added
achieve this result as they trace the funds which form the subject matter of
the reassessments from the appellant’s self-directed RRSP back to him (reasons
at para. 76).
[22]
Moreover, the CRA was not made aware of these
facts until 2008, well after the reassessments were issued (reasons at para.
78). Finally, no prejudice results as the appellant was aware from the
beginning that the CRA was investigating what they believed was an RRSP
stripping scheme (reasons at para. 77).
ALLEGED ERRORS
[23]
The appellant first contends, citing Canadian
Imperial Bank of Commerce v. The Queen, 2011 TCC 568 at paragraphs 7 to 81
[CIBC], that the Tax Court judge made an error in principle when he held
that the “plain and obvious” test was to be ascertained quickly without
deliberation. According to the appellant, “[t]he ‘plain
and obvious’ test does not mean that a careful analysis of the issues is not
required on a motion brought under section 53 of the Rules” (appellant’s
memorandum at para. 35).
[24]
The appellant further argues that the language
of the waiver as crafted by his authorized representative is air-tight and
cannot be reasonably linked to the transaction underlying the alternative
argument. In particular, the specificity of the words “PI Ventures Corporation
Debentures” to describe the investment and the phrase “subject to subsection
146(9) and/or subsection 146(10)” are such that the waiver cannot be reasonably
construed as extending to anything other than the imposition of tax under these
two provisions as a result of the debenture transaction.
[25]
The appellant adds that the impugned paragraphs
are not saved by subsection 152(9) of the Act since the alternative argument
rests on a legal and factual basis that is different from that which underlies
the reassessments.
[26]
Furthermore, it is well established that an
alternative argument pursuant to this provision cannot be permitted if it
allows the Minister to reassess outside the normal reassessment period.
According to the appellant, this is the effect of the alternative argument
which the respondent seeks to raise.
[27]
Finally, the appellant submits that if the
respondent’s alternative argument is struck, it would necessarily follow that
paragraphs 19A and 19B cannot be added to the respondent’s Reply as the facts
which they state would have no bearing on the outcome of the appeal.
ANALYSIS AND
DECISION
Standard of Review
[28]
The decision of a Tax Court judge disposing of a
Motion to Strike or a Motion to Amend pleadings is discretionary in nature.
This Court will therefore defer to such decision in the absence of an error of
law, or a misapprehension of the facts (CIBC at para. 5).
[29]
Whether the Tax Court judge properly directed
himself in applying subsections 152(9) and 152(4.01) gives rise to a question
of mixed fact and law to be reviewed for palpable and overriding error absent
an extricable question of law (Housen v. Nikolaisen, 2002 SCC 33).
The test on a motion to strike
[30]
The appellant first asserts that although the
Tax Court judge cited the leading cases in setting out the test for striking
pleadings, he erred in law in holding that the “plain and obvious” test is
inconsistent with the need to conduct a careful analysis of the issues before a
conclusion can be reached.
[31]
As noted earlier, although paragraph 31 of the
Tax Court judge’s reasons, if read in isolation, does suggest that he
misunderstood the applicable test, the lengthy reasons that he gave demonstrate
unequivocally that his conclusion is based on a full analysis of the issues. It
is therefore apparent that although an error could be apprehended, none was in
fact committed.
Is the alternative argument
authorized by subsection 152(9)?
[32]
At issue is whether assessing a tax on the
amounts in issue as “benefits” pursuant to subsection 146(8) rather than by
reason of acquiring a non-qualified investment and/or property below fair
market value pursuant to subsection 146(9) and (10) amounts to an alternative
argument that is prohibited by subsection 152(9). This provision allows the
Minister to support an assessment on the basis of an alternative argument
subject to certain terms and conditions aimed at ensuring that a taxpayer is
not prejudiced by a late argument from an evidentiary viewpoint.
[33]
A further restriction is that an alternative
argument cannot be advanced when it would result in a reassessment being made
outside the normal reassessment period set out in subsection 152(4) (Walsh
v. Canada, 2007 FCA 222 at para. 18). This restriction which is central to
the present appeal acknowledges the fact that allowing the Minister to raise an
argument based on a legal and factual basis that is different from the one
underlying the assessment after the normal reassessment period has expired
would in effect do away with the limitation period.
[34]
The appellant does not challenge the Tax Court
judge’s understanding of the legal principles applicable in ascertaining the
scope of subsection 152(9) (reasons at paras. 39 to 42). Rather, he takes issue
with the application of those principles to the facts of this case.
Specifically, the appellant maintains that the Tax Court judge drew an
unreasonable conclusion or made a palpable and overriding error in holding that
the alternative argument rests on transactions which formed the basis of the
reassessments (appellant’s memorandum at paras. 50 to 62 relying on Pedwell
v. Canada (C.A.), [2000] 4 F.C.R. 616 and St. Arnaud v. Canada, 2013 FCA 88).
[35]
The question turns on whether the alternative
argument is within or outside the legal and factual basis underlying the
reassessments. As to the legal basis for the reassessments, the appellant
insists on the fact that the Minister relied on subsections 146(9) and 146(10)
which are limited to property transactions below fair market value and the
acquisition of non-qualified investments (appellant’s memorandum at para. 39).
However, this ignores the fact that paragraph 56(1)(h) was also invoked
by the Minister in support of the reassessments (Reply to the Notice of Appeal,
Appeal Book, Vol. 1, p. 56 at para. 21; Amended Reply to the Notice of Appeal,
Appeal Book, Vol. 1, p. 36 at para. 21). Paragraph 56(1)(h) is a
provision of general application which requires that all amounts which come
within the ambit of section 146, without distinction, be included in income.
[36]
While counsel for the appellant questioned
whether paragraphs 56(1)(h) can be used as a charging provision, he
provided no authority for the proposition that it could not. At this stage, I
am not convinced that reliance on paragraph 56(1)(h) as a legal basis
for the alternative argument can be excluded.
[37]
As to the factual basis, the Tax Court judge
found that the facts underlying the reassessments were that funds used to
purchase the debentures having nil or nominal value were diverted to a law
firm’s trust account in the course of RRSP stripping transactions (reasons at
para. 43). According to the Tax Court judge, whether the funds were diverted to
the law firm’s trust account directly as the appellant now contends or by way
of purchasing assets which had no value is not materially different (reasons at
para. 44). The bottom line is that the appellant engaged in RRSP stripping
transactions and that is the factual basis relied upon by the Minister in
issuing the reassessments (reasons at para. 46).
[38]
This admittedly broad view of the factual basis
for the reassessments finds support in the language of the letter from the
auditor addressed to the appellant outlining the proposed reassessments
(reasons at para. 59) which amongst other things refers to RRSP value stripping
as well as the notion of sham (Appeal Book, Vol. 1, at p. 82). I note that a
sham allegation is particularly supportive of the broad view adopted by the Tax
Court judge as it suggests that the true transaction is different from what the
appellant made it appear to be.
[39]
Counsel for the appellant pointed out during the
hearing that the Notice of Confirmation subsequently issued indicates that the
sham argument was not cited by the auditor in the audit report as an assessing
position (Appeal Book, Vol. 1 at pp. 109 and 110). That is so. However, if
anything this calls for further clarification. In my view, the determination of
the factual basis for the reassessment is best left to be determined at trial based
on the fullness of the evidence, including the testimony of the auditor.
The waiver
[40]
The issue insofar as the waiver is concerned is
whether the alternative argument “can reasonably be
regarded as relating to, … [the] matter specified in [the] waiver …”
(subparagraph 152(4.01)(a)(ii)). The fact that the waiver only provides
for income inclusions relating to debentures subject to subsections 146(9)
and/or subsection 146(10) is on the face of it very restrictive. The Tax Court
judge appeared to recognize so much but he nevertheless held that a
“non-textual objective interpretation” of the waiver (reasons at para. 60)
allowed for a broader application (reasons at paras. 53 to 67).
[41]
I need not dwell on this issue because I agree
with the Tax Court judge’s further opinion that allowing the appellant to
escape taxation on the basis of a waiver, crafted so as to include the
transaction which he maintained had taken place but exclude the transaction
which he later revealed after the limitation period had expired, would give
rise to an absurd result (reasons at para. 66).
[42]
Counsel for the appellant contends that the
absurdity identified by the Tax Court judge is based on an erroneous assessment
of the circumstances (appellant’s memorandum at para. 92). Specifically,
counsel asserts that the appellant made no representations whatsoever to the
Minister prior to the drafting and filing of the waiver (ibidem).
[43]
That is so. However, the record reveals that the
CRA was induced to maintain its initial assessing position at a time when the
Minister was still in a position to reassess, i.e. before the limitation
period had expired.
[44]
In the written representations dated May 14,
2006, submitted to the CRA by the appellant’s authorized representative, the
following factual assertions are made (Appeal Book, Vol. 1 at pp. 139 and 141):
“… Our client exercised reasonable care with
respect to the debentures investment”
“It is our contention that the RRSP investment
in PI Ventures Corporation at the time our client purchased the debentures was
a qualified investment …”
“…, the documentation at the time the
debentures were purchased, indicate the investment was a qualified RRSP
investment.”
[45]
The appellant later asserted in the Notices of
Objection that were filed on March 21, 2007, when the limitation period for the
2003 taxation year had yet to expire, that the “…
debenture units …” were acquired and that “the
acquisitions were conducted via a self-directed RRSP transfer …”. I note
that a person who files an objection is required by subsection 165(1) to set
out “all relevant facts”.
[46]
Against this background, the appellant concedes
that the avowed purpose of the modification brought to the wording of the
waiver initially proposed by the CRA was to “consciously
and deliberately … [restrict] … the Waiver to … reassessments … in reliance on
subsections 146(9) and (10) of the Act and no other provisions …”
(Notice of Motion to Strike, Appeal Book, Vol. 1 at p. 27).
[47]
To the extent that the appellant actively
induced the Minister to remain on the wrong path and waited until the
reassessment period had passed to reveal the true transaction after having
ensured that the waiver had been made air-tight, he may well be precluded from
resiling from his initial position and/or relying on the waiver. In this respect,
the appellant’s state of mind when these representations were made is obviously
crucial. Yet, the extensive affidavits sworn by the appellant and his
authorized representative in support of the Motion to Strike are both silent as
to when they became aware that the debentures were not acquired (Appeal Book,
Vol. 1 at pp. 74 to 77 and 113 to 118). In my view, only the trial judge after
having considered the evidence on point will be in position to pronounce on the
behaviour of the appellant and its impact on the position which he takes on
appeal.
The motion to amend
[48]
Paragraphs 19A and 19B of the Amended Reply
complement the alternative argument by tracing the use of the invested funds
back to the appellant. Having come to the conclusion that the decision of the
Tax Court judge refusing to strike this argument should be upheld, it follows
that his decision allowing the amendment would also have to stand.
DISPOSITION
[49]
I would dismiss the appeal with costs.
“Marc Noël”
“I agree
Eleanor R. Dawson J.A.”
“I agree
Johanne Trudel J.A.”
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