Citation:
2017 TCC 126
Date: 20170630
Docket: 2015-5560(IT)G
BETWEEN:
COUGAR
HELICOPTERS INC.,
Applicant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Lyons J.
I. Introduction
[1]
Cougar Helicopters Inc. (“Cougar”) brought a motion under Rule 58
of the Tax Court of Canada Rules (General Procedure) (the “Rules”)
for a question of mixed law and fact (the “Question”) to be determined before
the hearing of its appeal.[1]
The Question stated is:
Whether the Reassessment is void ab initio because it was issued beyond the normal
reassessment period and was not accompanied by any allegation that the
Appellant made any misrepresentation or committed any fraud in filing its tax
returns or in supplying in any other information under the Act for the
Taxation Year. [2]
[2]
The Reassessment is the Notice of Reassessment dated July 29,
2015 (“Reassessment”), the Act is the Income Tax Act (the “Act”)
and the Taxation Year ended on December 31, 2011 (“2011”).
[3]
Cougar contends that if the Question is allowed to be determined,
it will result in the disposition of its appeal or substantially shorten the
hearing and result in substantial cost savings. The respondent disagrees and
says a determination of the Question in the circumstances would be
inappropriate, largely because of the contested material facts and credibility
issues and would be prejudicial to the respondent.
II. Background
[4]
Cougar, located in Newfoundland, is Canada’s largest helicopter
service provider to the offshore energy sector.
One of Cougar’s main business activities involves flying workers to and from offshore
locations such as oil rigs situated off of Newfoundland, Labrador and Nova
Scotia. Another main activity involves search and rescue operations for the
same sector in Newfoundland and Labrador. Cougar also performed work in
Greenland and purportedly in British Columbia and the Gulf of Mexico.
[5]
Cougar is a member of the VIH Aviation Group of Companies
(“VIH Group”). Until 2012, Cougar was a wholly owned subsidiary of VIHAG
Aviation Group Ltd. (“VIHAG”) located in British Columbia.
In 2011, Cougar had leased eight helicopters from VIHAG; six of which operated
in Newfoundland and Labrador and two of which operated in Nova Scotia.
[6]
The Minister of National Revenue issued the Notice of Assessment,
dated July 6, 2012, to Cougar for 2011. It was assessed nil tax under the Act
and assessed for Nova Scotia tax on large corporations.
[7]
Affidavits in support of Cougar’s motion set out the
correspondence and the communications between Cougar and the Canada Revenue
Agency (“CRA”) as follows.
[8]
Around November 26, 2013, the Minister commenced an audit of
Cougar for 2011. That was followed by the field audit commencing on March 3,
2014. By letter dated March 3, 2015, the Minister sent an initial proposal
letter to Cougar containing proposed adjustments.
[9]
The final proposal letter, dated April 27, 2015, was sent by the
auditor to Cougar containing proposed adjustments plus the Minister’s intention
to reassess 2011.[5]
[10]
On July 29, 2015, the Minister issued the Reassessment for 2011 after
the expiry of the normal reassessment period and disallowed the amount of
$12,788,270 (the “Amount”), pursuant to paragraph 18(1)(a) of the Act,
claimed by Cougar as a business expense.
[11]
In August 2015, a Cougar representative
made requests to the CRA auditor for all materials supporting the Reassessment.
Cougar obtained the T20 Audit Report, the T2020 and “coding sheets and copy of
diary regarding our conversations about the participation expense”.
Cougar alleges the auditor informed it that all of his audit working papers
were in the initial and final proposal letters and the coding sheets and diary
and that he had no working papers relating to the participation fee except for
those already provided in the initial and final proposal letters.
[12]
On September 24, 2015, Cougar filed an objection with the CRA to
the Reassessment for 2011.
[13]
During a telephone conversation on October 5, 2015, a CRA
collections officer informed a Cougar representative that the auditor had
created a subsection 152(4) “assessment after the normal (re)assessment period
recommendation report” relating to the Reassessment for 2011 which alleges
misrepresentation or fraud by Cougar (the “Report”). The Report had not been
provided to Cougar by or until October 5, 2015.
[14]
The parties’ pleadings, Amended Notice of Appeal, the Reply to
the Amended Notice of Appeal (“Reply”) and Answer (collectively, the
“pleadings”), reveal the following issues. Cougar identifies the issues, each
of which is melded with its respective position, in its Amended Notice of
Appeal as follows:
The appellant’s positions with respect to
the issues are as follows:
1. The Reassessment is void ab initio because it was
issued beyond the normal reassessment period and was not accompanied by an
allegation that the appellant made any misrepresentation or committed any fraud
in filing its tax returns or in supplying any other information under the Act
for the Taxation Year;
2. In the alternative, the Reassessment is statute-barred
because it was issued beyond the normal reassessment period and the appellant
did not make any misrepresentation attributable to neglect, carelessness or
wilful default or commit any fraud in filing its tax returns or in supplying
any other information under the Act for the Taxation Year;
3. In
the further alternative, paragraph 18(1)(a) does not apply to disallow the
deduction of the Participation Fee.
[15]
Cougar characterizes the Amount interchangeably as compensation
for helicopter lease expenses or “Participation Fee” and claims it accrued the
Amount in 2011 under an agreement it had with VIHAG. Cougar’s Answer “denies
that it paid, accrued or claimed any hourly flight time amounts to VIHAG”, “denies
that there was a “profit sharing charge” as alleged by the Respondent” and
states “While the amount of the Participation Fee was not directly tied to the
amount of the Appellant’s revenue, the accrual of the Participation Fee was
directly connected to the generation of revenue.”
[16]
The respondent identifies the issues in her Reply as follows:
The issues are whether the appellant:
a)
made or incurred any claimed expenses, in excess
of the amounts allowed by the Minister, for the purpose of gaining or producing
income from a business or property;
b)
claimed an outlay or expense, in excess of the
amounts allowed by the Minister, that was reasonable in the circumstances; and
c)
made a misrepresentation attributable to
neglect, carelessness or wilful default in its 2011 income tax return that
entitled to Minister to reassess beyond the normal reassessment period.
[17]
The respondent asserts that the Minister
was justified in reopening 2011 beyond the normal reassessment period because
Cougar made a misrepresentation and it was attributable to neglect, careless or
willful default. Intertwined with that issue is the characterization of the
Amount by Cougar in claiming it as a business expense on its tax return even
though it was devoid of any income producing purpose and was unconnected to
Cougar’s revenue from its charter service. She alleges the Amount is part of a
tax planning arrangement to reduce Cougar’s income to zero by profit sharing
with VIHAG, its parent. The Amount was determined by how large it needed to be
to accomplish zero net income because it wanted to ensure it paid no provincial
income tax, on its income in Newfoundland and Nova Scotia, and shift the income
to British Columbia where a lower tax rate would apply on that income in
VIHAG’s hands.
[18]
Upon issuing the Reassessment pursuant to subparagraph 152(4)(a)(i)
of the Act, there is no requirement, she says, that it be accompanied by
an allegation of misrepresentation nor is the Minister required to give notice
of such allegation prior to the issuance of the Reassessment.
[19]
No examinations for discovery have been held.
[20]
Cougar filed its “Notice of Motion (Rule 58)”.
[21]
Rule 58[12]
reads:
Question of Law, Fact or Mixed Law and Fact
58(1) On application by a party, the Court may
grant an order that a question of law, fact or mixed law and fact raised in a
pleading or a question as to the admissibility of any evidence be determined
before the hearing.
(2) On the application, the Court may grant an
order if it appears that the determination of the question before the hearing
may dispose of all or part of the proceeding or result in a substantially
shorter hearing or a substantial saving of costs.
(3)An order that is granted under subsection (1) shall
(a) state the question to be determined before the hearing;
(b) give directions relating to the determination of the question,
including directions as to the evidence to be given — orally or otherwise — and
as to the service and filing of documents;
(c) fix time limits for the service and filing of a factum consisting of a
concise statement of facts and law;
(d) fix the time and place for the hearing of the question; and
(e) give any other direction that
the Court considers appropriate.
[22]
In Paletta v Canada, 2016 TCC 171, 2016 DTC 1145 [Paletta],
Justice Owen undertook a fresh consideration of the current Rule 58,
effective February 7, 2014, because of the changes in text and
structure from the former Rule 58 noting “current Rule 58 represents a
consolidation of sections 58, 59, 60, 61 and 62 of the Rules under a
single rule, which in some respects is similar to, but in other respects quite
different from, the version of Rule 58 that it replaced”.
Rule 58 process
and requirements
[23]
Rule 58 sets out a two-stage process. At stage one, a motion’s
judge may set down a question for determination if the following requirements,
in subsections 58(1) and (2) of the Rules, are met:
1. The question proposed must be a question of law, fact or
mixed law and fact or be a question as to the admissibility of any evidence;
2. The question must be raised in a
pleading; and
3. It appears that the determination of the question before the
hearing may dispose of all or part of the proceeding, result in a substantially
shorter hearing, or result in a substantial saving of costs.
[24]
The onus is on the applicant to establish that those requirements
are met at stage one.[15]
[25]
A decision to grant an order to allow for a
determination of a question is discretionary as is clear from the repetitive,
permissive and broad discretionary language in subsection 58(2) of the Rules.
[26]
If the requirements are met, an order setting out terms may
be granted to proceed to the stage two determination hearing where the Question
is decided on its merits.
[27]
The Question will require the courts consideration
of subparagraph 152(4)(a)(i) of the Act which permits a late reassessment
if a taxpayer makes a “misrepresentation that is attributable to neglect,
carelessness or willful default” in filing a return or supply of information
under the Act.
The Minister has the authority to reassess (or assess or make an
additional assessment) after the expiry of the normal reassessment period of
the taxation year in such circumstances. In re-opening a taxation year on that
basis, the onus is on the Minister to show misrepresentation occurred
and it was attributable to neglect, carelessness or willful default.
Cougar’s application
[28]
I now turn to Cougar’s
application which is at stage one.
Subsection 58(1)
[29]
As framed, the Question asks whether and to what
extent the Minister has an obligation to make an allegation of
misrepresentation or fraud when issuing an out-of-time reassessment, a question
of law, and whether the Minister made any allegation of misrepresentation or
fraud at the time of (or prior) to the time of issuing the Reassessment, a
question of fact.
Clearly, the Question meets one of the alternative
requirements in subsection 58(1) of the Rules that it is a question of
mixed law and fact and that it is raised in Cougar’s Amended Notice of Appeal.
Subsection 58(2)
[30]
Cougar claims that the requirements in
subsection 58(2) are “overwhelmingly met” because if the Question is answered
in the affirmative the Reassessment is void ab initio, (invalid), and will
dispose of the entire appeal rendering a trial unnecessary. Alternatively, if
the Reassessment is determined to be valid, issue 1 in its pleading will be
resolved leaving the remaining issues identified in the pleadings to be dealt
with at trial.
[31]
The Question, Cougar submits, is a discrete “silo” issue that
goes to the validity - versus the correctness - of the Reassessment for 2011. The validity versus correctness distinction is expressed as follows:
The facts that gave rise to the Reassessment and the basis for
reopening the statute-barred year will be of key relevance to the issue of
whether the Appellant made a misrepresentation attributable to neglect,
carelessness or wilful default. However, they are not relevant to the question
of the whether the Minister made any allegation of misrepresentation or
fraud within the meaning of subsection 152(4) at or prior to the time of issuing
the reassessment.
[32]
Cougar contends whether the Minister made
any allegation of misrepresentation or fraud at the time of or prior to issuing
the Reassessment (validity) engages facts and law that differ from and are irrelevant
to the remaining issues in the appeal (correctness). The former is legally and
factually determinable by considering subparagraph 152(4)(a)(i)
of the Act, the jurisprudence, and the actions of the
Minister and her representatives. Cougar estimates that the issues raised in
the motion should take only a day to argue and the balance of the trial may
take more than a week resulting not only in a substantially shorter hearing but
substantial costs savings.
[33]
The respondent counters that the basis for
reopening 2011 and raising the Reassessment is inextricably linked with
Cougar’s characterization of the Amount in the context of Cougar’s filing
position necessitating a consideration of all the circumstances and should not
be bifurcated. Further, there are material foundational contested facts,
some of which will invoke credibility findings and it would be inappropriate
and prejudicial to the respondent to allow the Question to proceed to a
determination.
[34]
If allowed to proceed, says the respondent, it would
not result in substantial savings of time at the hearing of the appeal or costs
if the Question proceeded to stage two and was unsuccessful as there would be a
duplication of evidence relating to issue involving the Amount. Thus, the same
evidence about Cougar’s pursuit of profit-sharing arrangement under the guise
of inter-corporate lease payments would be relevant to whether those were for
the purpose of earning income. An affirmative answer to the Question
would have far-reaching jurisprudential implications impacting future taxpayers.
[35]
Several similarities exist, in my view, in the present motion and
the motion brought in Paletta (albeit a different question). Both
involve a statute‑barred issue and a vigorous debate between the parties
over the circumstances surrounding income tax filing positions. In denying the
Rule 58 motion and having referred to the Federal Court of Appeal in Nesbitt v The Queen as to whether a misrepresentation has occurred, Justice
Owen states:
30 In light of this
statement, it is apparent that, for the Court to find a misrepresentation, the
Respondent must establish that there were one or more incorrect statements in
the Appellant’s returns for the Taxation Year. As the correctness of the
returns is the crux of the reassessment issue … it seems to me that it would be
difficult to address this question without a full hearing that addresses all of
the issues raised in the pleadings.
[36]
Justice Owen found that the question was not a
discrete issue and “cannot be resolved without an appreciation of all of the
circumstances surrounding the filing positions taken by the Appellant in his
returns for the Taxation Year. Those circumstances have not been agreed upon by
the parties and, in fact, are at the heart of the highly contested reassessment
issue.”[21]
[37]
The comments in Paletta are equally applicable in the
present motion I disagree with Cougar that the Question involves a silo issue
which can be separated from the other issues in the appeal. The pleadings in
Cougar’s situation disclose a factually complex appeal flowing from commercial
transactions with the pivotal concern being Cougar’s characterization of the
Amount (payment to its parent, VIHAG, that was claimed as a business expense)
plus the debate between the parties as to the circumstances surrounding
Cougar’s 2011 income tax filing position.
[38]
The facts surrounding the reopening of 2011 and raising the
Reassessment under subparagraph 152(4)(a)(i) of the Act, involving
allegations of misrepresentation as it relates to the Amount and Cougar’s
filing position, are germane to the correctness of the return which is the crux
of the Reassessment issue. Tied to that, is the Question involving the alleged Ministerial
obligation to communicate the allegations of misrepresentation (by notice) to Cougar
when reopening 2011. These are intertwined issues and cannot be dealt with in
isolation given the highly contested material and multiple facts surrounding
the characterization issue involving the Amount that led to the income tax
filing that are connected to the communications between Cougar and the CRA also
involving material disputed facts foundational to the Question.
[39]
One example of the latter is whether Cougar was
unaware of the Minister’s position regarding the Reassessment before it was
issued. A motions judge would be asked to assess
whether Cougar had notice that the Minister intended to allege
misrepresentation or fraud or whether in the circumstances there was an implied
allegation of misrepresentation or fraud made to Cougar.[23] Cougar’s claim that there is one disputed fact that
relates solely to the communication between Cougar and the Minister appears to
be an oversimplification of the issues in a complex appeal.
[40]
Cougar argues that the principles identified in by the Supreme
Court of Canada in Hryniak v Mauldin are apposite in assessing the
candidacy of a question for a Rule 58 determination.[25]
The general principles derived from that decision are that summary judgment
rules are to be interpreted broadly favoring proportionality and expediency; a
summary judgment is to be granted where the record enables a motions judge to
reach a fair and just determination on the merits.[26] The Court further instructs that the summary judgment process
is only appropriate where a motions judge can make necessary findings of fact
and apply the law.
[41]
The Federal Court of Appeal in Southwind v Canada, 2015 FCA 57, cautioned
that “care must be taken not to import the pronouncements in Hryniak
uncritically, thereby improperly amending” the substantive content of other
rules before the courts.
[42]
Cougar asks that if the Question proceeds to stage two, that the
evidence be tendered by affidavit and that it be restricted to the affidavit
Cougar adduced. Admittedly, subsection 58(3) of the Rules
enables a motion’s judge to address evidentiary
matters, and may give directions, relating to the stage-two determination hearing.
However, a Rule 58 process should not be used as a substitute for a full
hearing merely because evidentiary issues can be addressed in an order. Nor would a determination be appropriate where the motions
judge would need to hear a volume of evidence comparable to what a trial judge
would hear.
[43]
Cougar’s approach seeks to circumscribe
the manner in which the respondent may introduce evidence. In
my view, that would not be conducive with the principle enunciated in Hryniak
for a fair and just determination on the merits especially when the respondent
has the onus relating to subparagraph 152(4)(a)(i) of the Act.
[44]
As noted by Chief Justice Rossiter in Suncor,
“although Rule 58 contemplates questions of fact and of mixed law and fact, the
determination of such questions is very much like a a trial, except that an
actual trial has the benefits of a fair hearing with evidentiary protections”.[29] In my opinion, it would be challenging in such a
complex appeal with contested material facts and credibility issues that are pivotal
to the Question without hearing the matter in a trial setting to gain a full
appreciation of all the circumstances to address the issues raised in the
pleadings as to the filing position and the communications between
Cougar and the CRA to properly address the Question, that center
on allegations of misrepresentation pursuant to subparagraph 152(4)(a)(i)
of the Act.
[45]
I am unconvinced in the context of the Question and what the motions
judge will be required to assess in Cougar’s circumstance involving the
application of subparagraph 152(4)(a)(i), that the requirements in
subsection 58(2) of the Rules may be met and would result in a
substantial savings of time or costs.
[46]
Even if the requirements in subsections 58(1) and
(2) of the Rules are met, the motion’s judge is not compelled to order a
determination and can consider other factors, with all the circumstances
of the case, to decide whether the proposed question is appropriate for a Rule
58 determination.[30]
Vagueness
[47]
Suncor affirms that
vague questions are not appropriate for determination under Rule 58.[31]
[48]
Cougar submits that the Question is not
vague and provides flexibility to the motion’s judge to determine the specific
requirements that form part of the Minister’s obligation to allege
misrepresentation or fraud either prior to or at the time of issuing the
Reassessment.
[49]
One difficulty with the Question, is the meaning to be ascribed
to the phrase “was not accompanied by any allegation” which poses several
questions and lacks clarity. This is illustrated by several examples provided
by the respondent in her written submissions as to queries that
might flow from the use of that phrase. Additionally,
the Question may entreat further queries into whether a taxpayer must
subjectively understand the Minister’s position at the time they are
reassessed.
[50]
Cougar responds that if the motion’s judge finds
that the answers to the respondent`s queries are necessary, it is within the
purview of the motion’s judge to determine the answers to those questions but
suggests such queries are unlikely to arise.[33] Yet, it
admits that the motion’s judge must decide whether and to what extent the
Minister has an obligation to make an allegation of misrepresentation or fraud
when issuing an out-of-time reassessment.[34] The
injection of “to what extent” makes clear that Cougar’s expectation of a
determination to make reference to what constitutes sufficient notice of the
Minister’s allegations of misrepresentation.
[51]
In arguing for the Question’s appropriateness for a
Rule 58 determination, Cougar’s choice of language highlights the ambiguity
inherent in the Question. Initially, Cougar asks the motion’s judge to decide,
in essence:
Whether a notice of Reassessment must be accompanied by any
allegation of misrepresentation or fraud?[35]
[52]
Cougar then indicates that the motion’s judge will
be required to determine the contemporaneous nature of such allegations as to:
Whether the notice of reassessment … is void without some accompanying or
prior allegation of misrepresentation or fraud?[36]
[53]
Then, Cougar states that the motion’s judge must
draw the necessary conclusions from the relevant case law to decide what
constitutes constructive notice:
What is the legal requirement of notice?[37]
[54]
I agree with the respondent
that “notice” is a broad term and comes in many forms. Phrasing the Question
such that “notice” of allegations of fraud would be required becomes unclear.
[55]
Further, the Question would
require the motions judge to dissect the phrases “accompanied by any
allegation” or “accompanying allegation”. Neither are anchored in subparagraph
152(4)(a)(i). The provision does not explicitly stipulate that the
taxpayer must be warned of the Minister’s position nor set out a procedure to
be used by the Minister to allege misrepresentation or fraud when issuing an
out-of-time reassessment. If the Question is not properly framed, a
determination may lack corresponding legal consequences such that the
usefulness of the Question’s determination would be compromised if the answer
is not linked to the relevant provisions as in Barejo.[38]
[56]
Notably, an affirmative answer to the Question
would add a requirement to the Act without Parliament’s input obliging the
Minister to notify a taxpayer at the time of or prior to issuing the
Reassessment of the allegations of misrepresentation or fraud in order
to validly reassess a taxpayer beyond the normal assessment period.
[57]
Based on the foregoing, I find the Question to be
vague in nature and suffers from ambiguity. It is not appropriate in my opinion
for a Rule 58 determination.
Merit of the Question
[58]
Another argument advanced by Cougar was that the
Court should exercise its’ discretion to allow the determination because the Question has merit and is not precluded from success by existing
jurisprudence.
[59]
In Paletta, the
Court affirmed that the prospect of success factor remains relevant at stage-one
of a Rule 58 analysis as one of several factors in the analysis in the exercise
of the Court’s discretion.
[60]
In Sentinel Hill, the Federal Court of Appeal upheld Justice
Woods’ (as she then was) dismissal of a Rule 58 motion. The Court found that
the question was predicated on an unproven assumption and inappropriate for a
determination because the proposed question’s ability to dispose of all or part
of the proceedings, shorten the hearing, or save costs, would be undermined if it
was so lacking in merit that it accomplished none of these.[39] Cougar’s Question is based on
an unproven assumption that the notice of intention to rely on subparagraph
152(4)(a)(i) of the Act was not given. Consequently, the Question
is inappropriate for a determination.
[61]
Cougar says for out-of-time reassessments to be
valid, these must be accompanied by the Minister’s allegation of fraud or
misrepresentation. It relies on
the legal principle enunciated by the Federal Court of Appeal in Canadian
Marconi[40]
and followed in Blackburn Radio. That is, it is
unnecessary to object to an out-of-time reassessment, unless the Minister has
alleged fraud or misrepresentation.[41]
In Blackburn Radio, Woods J. (as she then was)
states that “Canadian Marconi is strong authority that an out-of-time
reassessment is void absent an allegation of fraud or misrepresentation. Cougar
construes that to suggest for such Reassessment to be valid, it must be
accompanied by the Minister’s allegations of fraud or misrepresentation at the time
of issuance or prior to so as to put the taxpayer on notice.
[62]
The Court in Canadian Marconi found that the
Minister had no power to reassess Canadian Marconi’s tax returns for the 1977
to 1981 taxation years:
Absent a waiver as
provided by subparagraph 152(4)(a)(ii), an allegation of misrepresentation or
fraud is implicit in an out-of-time reassessment.
Where the Minister alleges, expressly or implicitly, misrepresentation
or fraud, there is nothing offensive in putting a taxpayer on notice that he
must object to an out-of-time reassessment. It is, with respect, quite
otherwise absent an allegation of fraud or misrepresentation. An obvious policy
consideration nourishes the distinction in treatment.[42]
[63]
Even if Cougar’s circumstances show that it did not
receive notice, Canadian Marconi appears to suggest that when the
Minister issues a statute‑barred reassessment, she implicitly alleges misrepresentation
or fraud.
[64]
In assessing merit as a
factor, I find that the Question has no reasonable chance of success because
the Question is based on an unproven assumption, it is flawed and misrepresentation
appears to be implicit upon the issuance of a reassessment.
[65]
Based on the foregoing, I conclude that the Question would not dispose of the proceeding, substantially shorten the
hearing or result in a substantial cost savings. The Question is not
appropriate for a determination hearing under the more abbreviated Rule
58 process. Rather, the circumstances warrant a full trial with
the opportunity to tender and test evidence thereby affording evidentiary
protections to obtain a fair and just decision. The motion is dismissed.
[66]
Costs are awarded to the respondent in any event of the cause.
Signed at Toronto, Ontario, this 30th day of June 2017.
“K. Lyons”
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