Drewlo Holdings Inc. v. R., [1996] 2 CTC 2215, 97 DTC 466

Garon J.T.C.C.: - These Reasons deal with the Respondent’s motion (the “main motion”) and the Appellant’s cross-motion in two income tax appeals. Both motions were heard at the same time.

The Respondent’s motion is for leave from the Court to file an Amended Reply to the Notice of Appeal pursuant to rule 54 of the Tax Court of Canada Rules (General Procedure) in each of these two income tax appeals. By the same motion, the Respondent also sought an amendment to a Court Order dated February 16, 1995 “with respect to the time limits imposed for the examinations for discovery and undertakings respectively” in these two appeals.

A few days after the service of the Respondent’s Notices of Motion, the Appellant filed and served a Notice of Motion with respect to both appeals for an Order to abridge the time to serve and file its Notice of Motion, to permit it to file a Supplementary List of Documents, to extend the time to complete examinations for discovery of both the Appellant and the Respondent, to extend the time to deliver answers to the undertakings given at these discoveries and to set a new trial date for the hearing of these appeals.

A brief review of the events leading to these motions appears to be in order.

The Notices of Appeal were filed on July 23, 1993 and January 24, 1994, respectively in these two appeals. The Replies to the Notices of Appeal were filed on October 26, 1993 and April 6, 1994, respectively.

On February 16, 1995, Judge Sarchuk of this Court following a status hearing held on January 23, 1995, directed, inter alia, the parties to complete the examinations for discovery not later than December 31, 1995 and to fulfil their undertakings arising out of the discoveries not later than February 28, 1996. In addition, by the same Order, the appeals were set down for hearing at Toronto, commencing on June 3, 1996.

In September or October 1995, Mr. Luther P. Chambers, Q.C. took over as senior counsel the conduct of this litigation on behalf of the Respondent; he had no hand in the Respondent’s original pleadings. Following the institution of these two appeals, in July 1993 and January 1994, as noted above, and, prior to the appointment of Mr. Chambers, the Respondent had already changed counsel twice.

On November 3, 1995, Mr. Chambers wrote to counsel for the Appellant and asked for consent to amend the Replies to Notices of Appeal in both appeals. The body of Mr. Chambers’s letter of November 3, 1995, received on November 6, 1995, reads as follows:

In the course of preparing for the examinations for discovery it has unfortunately materialized that the Replies to the Notices of Appeal are clearly wrong in material respects and that they do not raise additional defenses open to the Respondent. We therefore deem it imperative to amend them.

The errors in the Replies are based in part on a misappreciation of the law and in part on a failure to plead the facts, as found on assessment, and the failure to raise the additional defenses is based on a misappreciation of the law.

The existing Replies do not lend themselves to amendment by crossing out words and adding others; rather, they require to be rewritten in their entirety.

I accordingly enclose two copies of two Consents, with the proposed Amended Replies attached as Appendices “A”. I request that you execute all copies and return one for each appeal if you are prepared to consent thereto. I request that you do so in order to save the time and expense of a motion for an amending order.

It is to be noted that at the time counsel for the Respondent requested counsel for the Appellant to consent to the Respondent amending the Replies to the Notices of Appeal in these two appeals, Lists of Documents had been filed pursuant to section 82 of the Tax Court of Canada Rules (General Procedure) and the examinations for discovery were scheduled to commence on November 27, 1995 and to last four days.

After a brief exchange of correspondence between counsel for both parties respecting the request made by Mr. Chambers on November 3, 1995, the Appellant, through its counsel, provided a detailed response, which ran to 19 pages, with respect to each allegation made in the proposed Amended Reply to the Notice of Appeal in the Appeal 94-90(IT)G. The Appellant objected to some of the paragraphs in the proposed Amended Reply to the Notice of Appeal. Hence, the present Motion made by the Respondent preceded by the serving and filing in each appeal of a separate Notice of Motion, couched in identical terms, dated November 24, 1995.

As mentioned at the commencement of these Reasons, the Respondent’s Notices of Motion of November 24, 1995, were followed by the Appellant’s Notice of Motion filed on November 30, 1995, relative to both appeals.

Before considering the matter of the amendments sought by the Respondent in the proposed Amended Replies to Notices of Appeal it is useful to review the facts which appeared not to be in dispute in these appeals from the original pleadings.

One of the Appellant’s predecessor corporations, Drewlo Holdings Inc. (“Drewlo”), was incorporated on October 31, 1963 and carried on a real estate development business in Canada. On December 11, 1985, Drewlo purchased all the issued shares of Kingsrow Development Ltd. (“Kingsrow”). On the same date, 643288 Ontario Limited, a wholly owned subsidiary of Drewlo, acquired the total residual liability of Kingsrow, in the amount of $12,903,692.38. On December 13, 1985, Kingsrow was continued as an Ontario corporation and renamed 647410 Ontario Limited (the “numbered company”). On the same day, Drewlo amalgamated with the numbered company pursuant to the provisions of the Ontario Business Corporations Act, 1982 under the name “Drewlo Holdings Inc.”, the present Appellant.

In its returns of income for its 1986 and 1987 taxation years, the Appellant deducted non-capital losses incurred by Kingsrow prior to the change of control and the amalgamation. These losses claimed by the Appellant amounted to $7,206,452 for its 1986 taxation year and $6,047,740 for its 1987 taxation year. The Minister of National Revenue disallowed the deduction of the Appellant’s entire loss in respect of its 1986 taxation year and with respect to the Appellant’s 1987 taxation year, allowed the deduction of non-capital losses to the extent of $2,990,500 and disallowed the balance of non-capital losses totalling $3,057,240.

In light of the above facts and some others referred to in the original Replies to the Notices of Appeal, the Respondent framed the questions in issue in these Replies to the Notices of Appeal for each of the 1986 and 1987 taxation years, thusly:

(a) whether 643288 acquired the residual debt liability of Kingsrow/647410 as agent of the Appellant; and

(b) whether the provisions of section 80 of the Act apply to reduce the amount of the non-capital losses of Kingsrow/647410 available for deduction by the Appellant.

Having regard to the stage of the proceedings in these two appeals referred to earlier, the very general factual background previously described and the questions in issue as set out by the Respondent in her original Replies to the Notices of Appeal, it is now appropriate to consider the amendments sought by the Respondent in her proposed Amended Replies to the Notices of Appeal. The Appellant consented to many amendments. I will only be referring to those opposed by it.

The Appellant, in its Factum, filed on the hearing of these motions, considers that its objections to certain portions of the Amended Replies to Notices of Appeal fall into the following three broad categories:

1. Those portions of the Amended Replies that constitute direct or implicit withdrawals of judicial admissions contained in the existing Replies.

2. Those portions of the Amended Replies that constitute new or amended Ministerial assumptions.

3. Those portions of the Amended Replies where it is alleged that the pleading is improper, as where it is alleged that the Respondent is pleading argument or conjecture rather than facts or law.

In the course of analysing the nature of the amendments sought in the proposed Amended Replies to Notices of Appeal, I must be guided by the principles laid down by the Federal Court of Appeal in the case of Canderel Ltd. v. R. (sub nom. Canderel Ltd. v. Canada), [1993] 2 C.T.C. 213 (sub nom. R. v. Canderel Ltd.), 93 D.T.C. 5357. This was a case where the Crown, on the fifth day of the trial, moved for the fourth time to amend its Amended Reply to the Notice of Appeal. The amendment raised an entirely new issue and necessitated the possible recall of expert testimony. The following observations of Justice Décary, at page 217 (D.T.C. 5360), speaking for a unanimous Court, are of particular interest:

With respect to amendments, it may be stated, as a result of the decisions of this Court in Northwest Airporter Bus Service Ltd. v. The Queen and the Minister of Transport, The Queen v. Special Risks Holdings Inc., Meyer v. Canada, Glisic v. Canada and Francoeur v. Canada and of the decision of the House of Lords in Ketteman v. Hansel Properties Ltd. which was referred to in Francoeur, that while it is impossible to enumerate all the factors that a judge must take into consideration in determining whether it is just, in a given case, to authorize an amendment, the general rule is that an amendment should be allowed at any stage of an action for the purpose of determining the real questions in controversy between the parties, provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interests of justice.

As regards injustice to the other party, I cannot but adopt, as Mahoney, J.A. has done in Meyer, the following statement by Lord Esher, M.R. in Steward v. North Metropolitan Tramways Co. (1886), 16 Q.B.D. 556 at page 558:

There is no injustice if the other side can be compensated by costs; but, if the amendment will put them into such a position that they must be injured it ought not to be made.

and the statement immediately following:

And the same principle was expressed, I think perhaps somewhat more clearly, by Bowen L.J., who says that an amendment is to be allowed “whenever you can put the parties in the same position for the purposes of justice that they were in at the time when the slip was made.”

To apply that rule to the present case; if the amendment is allowed now, will the plaintiff be in the same position as if the defendants had pleaded correctly in the first instance?

[Footnotes omitted.]

Justice Décary in the same judgment went on to add at page 218 (D.T.C. 5361):

As regards interests of justice, it may be said that the courts and the parties have a legitimate expectation in the litigation coming to an end and delays and consequent strain and anxiety imposed on all concerned by a late amendment raising a new issue may well be seen as frustrating the course of justice. The principles were in our view best summarized by Lord Griffiths, speaking for the majority, in Ketteman v. Hansel Properties Ltd.:

This was not a case in which an application had been made to amend during the final speeches and the court was not considering the special nature of a limitation defence. Furthermore, whatever may have been the rule of conduct a hundred years ago, today it is not the practice invariably to allow a defence which is wholly different from that pleaded to be raised by amendment at the end of the trial even on terms that an adjournment is granted and that the defendant pays all the costs thrown away. There is a clear difference between allowing amendments to clarify the issues in dispute and those that permit a distinct defence to be raised for the first time.

Whether an amendment should be granted is a matter for the discretion of the trial judge and he should be guided in the exercise of the discretion by his assessment of where justice lies. Many and diverse factors will bear on the exercise of this discretion. I do not think it possible to enumerate them all or wise to attempt to do so. But justice cannot always be measured in terms of money and in my view a judge is entitled to weight in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants rather than business corporations, the anxieties occasioned by facing new issues, the raising of false hopes, and the legitimate expectation that the trial will determine the issues one way or the other. Furthermore, to allow an amendment before trial begins is quite different from allowing it at the end of the trial to give an apparently unsuccessful defendant an opportunity to renew the fight on an entirely different defence.

Another factor that a judge must weigh in the balance is the pressure on the courts caused by the great increase in litigation and the consequent necessity that, in the interests of the whole community, legal business should be conducted efficiently. We can no longer afford to show the same indulgence towards the negligent conduct of litigation as was perhaps possible in a more leisured age. There will be cases in which justice will be better served by allowing the consequences of the negligence of the lawyers to fall on their own heads rather than by allowing an amendment at a very late stage of the proceedings.

[Emphasis added; footnotes omitted.]

Since, as mentioned by the Appellant in its Factum, the Respondent seeks to withdraw certain admissions made in the existing Replies to the Notices of Appeal, the law on the withdrawal of admissions should also be canvassed.

Under section 132 of the Tax Court of Canada Rules (General Procedure), an admission in a pleading may be withdrawn with the leave of the Court or the consent of the parties. The jurisprudence distinguishes between admissions of law on the one hand and admissions of fact or of mixed fact and law on the other hand. According to Sopinka and Lederman, in the Law of Evidence in Civil Cases} [1] an admission of law may be withdrawn at any time. Such an admission could not, in any case, bind the court. The test for allowing the withdrawal of admissions of fact is more stringent. Sopinka and Lederman write that such admissions may be withdrawn only if they were made by mistake or without authority. [2]

In Continental Bank Leasing Corp. v. R. (sub nom. Continental Bank Leasing Corp. v. Canada) [1993] 1 C.T.C. 2306, (sub nom. Continental Bank Leasing Corp. v. The Queen) 93 D.T.C. 298 in a motion before this Court, the Crown sought to withdraw an admission it had made in one of its Replies with respect to a paragraph in one of the corporate taxpayers’ Notices of Appeal and to add a number of new paragraphs to both of its Replies. Bowman J. permitted the amendments. At page 2310 (D.T.C. 302), he sets out a broad test for the withdrawal of admissions:

In the cases in the courts of Ontario and of British Columbia to which I was referred[to] a number of tests [that] have been developed -whether an admission was inadvertent, whether there is a triable issue raised by an amendment or the withdrawal of an admission and whether the other party would suffer prejudice not compensable in costs. Although I find that these tests have been met, I prefer to put the matter on a broader basis: whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied. The tests mentioned in cases in other courts are of course helpful but other factors should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter and whether the amendments sought will facilitate the court’s consideration of the true substance of the dispute on its merits. No single factor predominates nor is its presence or absence necessarily determinative. All must be assigned their proper weight in the context of the particular case. Ultimately it boils down to a consideration of simple fairness, common sense and the interest that the courts have that justice be done.

[Emphasis added.]

Bearing in mind the case law in the area of amendments to, and the withdrawal of admissions from, pleadings, a detailed examination of the amendments sought in the proposed Replies to Notices of Appeal is re- quired.

From the Appellant’s letter of November 24, 1995 (attached to the Affidavit of Mr. Peter R. Lockyer of the Appellant’s firm of solicitors) filed on the hearing of these motions in support of its position, it appears that the Appellant opposes the following portions of the Amended Reply to the Notice of Appeal in Appeal 94-90(IT)G:

Paragraph 2(b), as far as the words “and rentals” are concerned

Paragraph 5

Paragraph 6

Paragraphs 7(c), (d)(ii), (f)(i), (f)(iii), (f)(v), (g), (i), (j), (k)(iv), (k)(vii), (n)

The second paragraph 8(c), beginning with the words “it was not in the interests....”

Paragraph 10

Paragraph 11(b)

Paragraph 16

I will adopt for the consideration of the amendments contested by the Appellant, the grouping used by the latter in its Factum.

The Respondent in paragraphs 2(b) and 7(c) of the proposed Amended Replies to Notices of Appeal seeks to withdraw, according to the Appellant, an admission as to the nature of the business carried on by the Appellant. Paragraphs 2(b) and 7(c) read as follows:

2. He denies paragraph 3 of the Notice of Appeal and says:

(b) that in its 1986 and 1987 taxation years the Appellant carried on the business of real estate development and rentals in Canada.

7. In assessing the Appellant with respect to its 1987 taxation year the Minister of National Revenue assumed:

(c) that prior to December, 1985, Drewlo carried on a profitable business of real estate development and rentals in Ontario.

The wording of the paragraphs 2(b) and 7(c) of the proposed Amended Reply to Notice of Appeal is to be contrasted with the position in paragraph 1 of the existing Reply to Notice of Appeal which admits paragraph 3 of the Notice of Appeal which reads thus:

The Appellant was incorporated on October 31, 1963 and carries on the business of a builder and developer in Canada.

These allegations in paragraphs 2(b) and 7(c) of the proposed Amended Reply to the Notice of Appeal deal with the nature of the Appellant’s business or one of its predecessors.

The proposed allegations are more in the nature of an addition than in the withdrawal of an admission. I do not see how any harm could be caused to the Appellant in permitting these allegations referred to above in the proposed Amended Reply to the Notice of Appeal. It would be easy for the Appellant to refute these allegations made in the proposed Reply to Notice of Appeal since they have to do with the basic nature of the Appellant’s business or that of its predecessor corporation.

Moreover, there should be no element of surprise in these allegations. After all, the Appellant should be familiar with the type of business that was carried on by it and one of its predecessor corporations in the relevant years. Furthermore, the Appellant itself in its income tax return for its 1986 taxation year described its major business activity as “Development/rentals”. Also, counsel for the Respondent in the course of his cross-examination of Mr. Lockyer, a solicitor of the firm of solicitors for the Appellant, referred to the Appellant’s financial statements where there are listed large amounts of rental properties. I see no merit in the Appellant’s objections to the allegations in paragraphs 2(b) and 7(c) of the proposed Amended Reply to Notice of Appeal.

The second withdrawal of admission that is made in the proposed Amended Reply to the Notice of Appeal is found in paragraphs 5, 7(d), 10, 11(b) and 16 of this pleading, which paragraphs read thus:

5. He admits that following the said amalgamation the Appellant became registered as an extraterritorial corporation under the laws of the Province of Alberta, but he otherwise denies paragraph 6 of the Notice of Appeal.

7. In assessing the Appellant ... the Minister of National Revenue assumed:

(d) that prior to December 1985, Kingsrow was a company which carried on an unprofitable real estate business in Alberta, so that by December 9, 1985:

(i) its accumulated noncapital losses were, as follows:

1982: $ 990,708

1983: 3,031,329

1984: 6,809,632

1985: 2,422,523

$ 13,254,192

(ii) its total assets amounted to $5,167,731.41, of which $4,760,550.51 consisted of land under development, and its total liabilities amounted to $15,449,336.61, of which $12,903,692.28 (Kingsrow’s “residual liability”) was owed to The Royal Bank of Canada, and to Kingsrow’s shareholders, i.e. Kenaco Commercial Services Ltd. (“Kenaco”) and McDevco Holdings Ltd. (“McDevco”) (“the residual creditors”) in the following amounts:

The Royal Bank of Canada: $ 7,063,452.88

Kenaco: 4,420,075.62

McDevco: 1,420,163.88

$12,903,692.38

10. In the further alternative, he says that the assessment appealed from is correct on the following facts:

(a) the only assets remaining in Kingsrow as a result of the said transactions on or about December 11, 1985, that was integral to a real estate development business were the “Varsity Estates” properties,

(b) the said “Varsity Estates” properties were not retained for the purpose of gaining or producing income from a business, but were rather retained solely for the purpose of reducing or discharging Kingsrow’s remaining indebtedness associated with those properties,

(c) some of the said “Varsity Estates” properties were disposed of between the end of December, 1985 and September, 1986, and the net proceeds of their sale were turned over to the creditors whose debts were secured by these properties,

(d) the remaining “Varsity Estates” properties were quit-claimed to the creditors whose debts were secured by these properties, and

(e) Kingsrow’s business, if any, which was after the amalgamation carried on by the Appellant was not carried on for profit or with a reasonable expectation of profit, but rather in the expectation of losses,

...so that Kingsrow’s real estate development business had come to an end as a result of the said transactions on or about December 11, 1985, or was in any event not carried on for profit or with a reasonable expectation of profit, with the result that the business relating to Kingsrow which was thereafter carried on by the Appellant was not the business in which the said noncapital losses, had been sustained and was in any event not carried on for profit or with a reasonable expectation of profit, within the meaning of subparagraph 111 (5)(a)(i) of the Income Tax Act.

11. The issues to be decided in this appeal are:

(b) whether the business that was carried on by Drewlo and subsequently, by the Appellant after the acquisition of Kingsrow was the business in which Kingsrow’s said noncapital losses were sustained, and whether it was carried on for profit or with a reasonable expectation of profit, within the meaning of subparagraph 111 (5)(a)(i) of the Income Tax Act.

16. In the further alternative, he submits that the business which Drewlo and subsequently, the Appellant, carried on with respect to Kingsrow was not the business in which Kingsrow’s noncapital losses had been sustained, and it was in any event not carried on for profit or with a reasonable expectation of profit, within the meaning of subparagraph 111 (5)(a)(i) of the Income Tax Act, with the result that the said noncapital losses were not deductible by the Appellant, so that the amount of tax assessed was less than would have been exigible if the Appellant had been assessed on the basis of disallowing those losses in their entirety.

Paragraph 5 of the proposed Amended Reply to Notice of Appeal denies paragraph 6 of the Notice of Appeal except for the allegation “following the said amalgamation the Appellant became registered as an extraterritorial corporation under the laws of the Province of Alberta”.

Paragraph 6 of the Notice of Appeal is as follows:

The Appellant, following the amalgamation, became registered as an extraprovincial corporation under the laws of the Province of Alberta and carried on the same business that had been carried on by Kingsrow prior to the share acquisition and subsequent continuance and amalgamation. The amalgamated corporation carried on the same business as Kingsrow throughout the fiscal period ended October 31, 1986 for profit or with a reasonable expectation of profit.

Paragraph 2(h) of the existing Reply to the Notice of Appeal refers, inter alia, to paragraph 6 of the Notice of Appeal. Paragraph 2(h) is couched in the following terms:

2. With respect to the allegations of fact contained in paragraphs 4, 5, 6 and 7 and 8 of the Notice of Appeal he admits that:

(h) the amalgamated corporation carried on the same business, that is, real estate development, that had been carried on by Kingsrow prior to the share acquisition, debt purchase and subsequent continuance and amalgamation, and carried on such business throughout the fiscal period ended October 31, 1986 for profit or with a reasonable expectation of profit.

Paragraph 2(h) of the existing Reply to Notice of Appeal is made into an assumption by virtue of paragraph 5(a) of this pleading.

As it appears from the above, the portion of paragraph 5 of the proposed Amended Reply to the Notice of Appeal relating to the denial of paragraph 6 of the Notice of Appeal (wherein it is stated that after the amalgamation, the Appellant had carried on the same business that had been carried on by Kingsrow prior to the share acquisition and subsequent continuance and amalgamation) and the substance of the allegation of paragraph 7(d) of the proposed Amended Reply to the Notice of Appeal to the extent that it relates to the unprofitable business of Kingsrow, are incorporated into paragraphs 10, 11(b) and 16 of the proposed Amended Reply to Notice of Appeal. These allegations in the proposed Amended Reply to the Notice of Appeal introduce two new factual elements which differ from those found in the existing Reply to the Notice of Appeal:

1. Kingsrow carried on an unprofitable real estate business or its business was not carried on for profit or with a reasonable expectation for profit.

2. Separate businesses were carried on by Kingsrow and the Appellant at the relevant times.

Mr. Thomas Bruce Reed, an officer of Revenue Canada, who took part in the making of the reassessments in issue, explained (in the course of the cross-examination on his Affidavits accompanying the Notices of Motion) why these allegations had not been made in the original Replies to Notices of Appeal. He said that, after the reassessments, he had obtained no new information allowing the Respondent to make these new factual allegations. He mentioned, however, certain additional documents which the Appellant had produced for discovery purposes and which were not in his possession at the time the reassessments were made. More specifically, during this cross-examination, Mr. Reed testified that Revenue Canada had in its possession considerable documentation prior to the reassessments in issue in the present litigation that would reveal that a loss was predicted for the Varsity Estates development comprising 32 lots. According to Mr. Reed, Revenue Canada appears to have communicated to the Appellant’s representatives its views about the unprofitableness of the Varsity Estates project. However, the latter Department also informed the same representatives of the Appellant at the same time that the stop-loss rules of subsection 111(5) of the Income Tax Act could not be used to disallow the deduction of non-capital losses for the Appellant’s 1986 and 1987 taxation years. In summary, Mr. Reed simply stated that the new allegations had not been made in the original Replies to Notices of Appeal because Revenue Canada had misappreciated the known facts; he also referred to Revenue Canada’s wrong interpretation of the requirements of subsection 111(5) of the Income Tax Act. In the result, a new view of the facts had been arrived at in light of a different interpretation of subsection 111(5) of the Income Tax Act. Whether there is enough evidence to support this newly developed appreciation of known facts is a matter for the trial judge to determine in due course. I cannot see that the Appellant would suffer a prejudice if these allegations of fact were permitted to be pleaded apart, of course, from the ensuing delay and associated costs involved in reexamining the evidence.

I shall now turn to paragraphs 6, 7(f), (h) and (j) of the proposed Amended Reply to Notice of Appeal. Paragraph 6 of this proposed pleading would deny paragraph 7 of the Notice of Appeal. It would permit the Respondent to withdraw admissions contained in paragraphs 2(c) and (g) of the existing Reply to Notice of Appeal and to replace them with paragraphs 7(f), (h) and (j) of the proposed Amended Reply to Notice of Appeal. Paragraphs 2(c) and (g) of the existing Reply to the Notice of Appeal are as follows:

2. With respect to the allegations of fact contained in paragraphs 4, 5, 6 and 7

and 8 of the Notice of Appeal he admits that:

(c) on December 11, 1985, by entering into the following agreements, 643288 acquired the total residual liability of Kingsrow amounting to $12,903,692.38 for the total purchase price of $2,640,000.00:

(i) an Agreement of Purchase of Residual Indebtedness and Guarantee of Indemnities with the Royal Bank of Canada (“Royal Bank”) which provided, inter alia, that :

(A) Kingsrow’s residual liability relating to the Royal Bank in the amount of $7,063,452.88 was purchased by 643288 for $1,372,800.00;

(B) part of the payment of the purchase price for the Royal residual liability was based on the utilization of Kingsrow’s non-capital losses by Drewlo; and

(C) the Agreement was dependent on the completion of the Share Purchase Agreement between McDevco, Kenaco and Drewlo referred to in subparagraph 2(b) hereof;

(ii) an Agreement of Purchase of Residual Indebtedness with McDevco and Kenaco which provided, inter alia, that:

(A) Kingsrow’s residual liability relating to McDevco in the amount of $1,420,163.88 was purchased by 643288 for $528,000.00;

(B) Kingsrow’s residual liability relating to Kenaco in the amount of $4,420,075.62 was purchased by 643288 for $739,200.00;

(C) part of the payment of the purchase prices for the McDevco and Kenaco residual liabilities was based on the utilization of Kingsrow’s non-capital losses by Drewlo; and

(D) the Agreement was dependent on the completion of the Share Purchase Agreement between McDevco and Kenaco and Drewlo referred to in paragraph 2(b) hereof.

(g) as a result of the amalgamation, the residual debt liability owing by Kingsrow/647410 to 643288 then became owing by the Appellant to 643288, its wholly owned subsidiary; and

Paragraphs 7(f), (h) and (j) of the proposed Amended Reply to the Notice of Appeal read thus:

7. In assessing the Appellant with respect to its 1987 taxation year the Minister of National Revenue assumed:

(f) that in order to implement the said acquisition of Kingsrow’s noncapital losses Drewlo and the “residual creditors” entered into a series of agreements on or about December 11, 1985, the principal features of which were, as follows:

(i) all of Kingsrow’s assets, except the “Varsity Estates properties”, were disposed of, and Kingsrow was released from all its liabilities, except for the said “residual liability” and the debts associated with the Varsity Estates properties,

(ii) Drewlo acquired all the issued and outstanding shares of Kingsrow, being all common shares, for $100; $75.00 payable to Kenaco and $25.00 payable to McDevco,

(iii) Drewlo agreed to pay a total of $2,640,000 to the said “residual creditors”, and the latter agreed to divide that sum among them in return for their relinquishment of the amounts owing to them by Kingsrow on account of the “residual liability” in the following amounts:

The Royal Bank of Canada, 52%
of $12,254,192	$ 1,372,800
Kenaco, 28% of $12,254,192	739,200
McDevco, 20% of $12,254,192	528,000
	$ 2,640,000

(iv) the said amounts totalling $2,640,000 were to be paid in instalments whose payment in part depended on Drewlo’s, and subsequently, the Appellant’s ability to utilize Kingsrow’s said noncapital losses, and

(v) the said “residual creditors” relinquished the amounts owing to them by executing assignments thereof to 643288,

(h) portions of the said part of the said $2,640,000 that was payable at future times were secured by promissory notes issued by 643288 and Drewlo’s guarantees,

(j) that Drewlo interposed 643288 between itself and the “residual creditors” in order to attempt to prevent the extinguishment of the “residual liability” upon the amalgamation of Drewlo and Kingsrow and thereby preserve the latter’s noncapital losses for the use of the Appellant.

Counsel for the Appellant points out that the two sets of allegations in the existing Reply to Notice of Appeal and the proposed Amended Reply to Notice of Appeal (in the paragraphs to which I have just made reference) are inconsistent in three material particulars mentioned in the Appellant’s Factum. I agree with him that the allegations in paragraphs 7 (f), (h) and (j) of the proposed Amended Reply to the Notice of Appeal are substantially different from their counterparts in the existing Reply to the Notice of Appeal. From the deposition of Mr. Reed, it appears doubtful that sufficient evidence underpins the allegations set out in paragraphs 7(f), (h) and (j) of the proposed Amended Reply to Notice of Appeal. However, it is not up to the Motions judge to determine if these new allegations can be reasonably supported by the agreements referred to particularly the introductory portion of paragraph 7(f), which agreements are not before the Court at this stage. In the result, if the construction placed by the Respondent on these agreements in these new allegations is erroneous, the trial judge will determine this and the Appellant will not suffer any prejudice apart from resulting costs and delay. If, on the other hand, these allegations are, in part or in whole, found to be correct, I see no reason, as a matter of principle, to deprive the Respondent of the right to amend her pleadings.

I now come to paragraph 7(i) of the proposed Amended Reply to Notice of Appeal which reads as follows:

(i) that $132,000 of the said $2,772,000 was paid to the Mercantile Bank of Canada as a commission for Drewlo’s purchase of Kingsrow’s said noncapital losses.

As mentioned by counsel for the Appellant, this allegation has no counterpart in the existing Reply to Notice of Appeal. There is no reference to the commission arrangement in Mr. Reed’s Affidavits filed in support of the Respondent’s motion. On the other hand, counsel for the Respondent stated in his letter of November 30, 1995, that this allegation is one of the real assumptions made on assessment. On cross-examination on his Affidavits, Mr. Reed confirmed that he had at the time of the reassessments in issue a document showing payment of a commission in the amount of $132,000 to the Mercantile Bank of Canada. The correctness of this allegation could be established at the trial and I see no objection to permitting the addition of this allegation in the proposed Amended Reply to Notice of Appeal.

I shall now refer to paragraph 7(k)(iv) of the proposed Amended Reply to the Notice of Appeal which is formulated thus:

(k) that 643288 acted merely as Drewlo’s nominee or agent for the purpose of obtaining the said assignments of the “residual liability”, in that:

(iv) the interest to be paid on the “residual liability” was, at the Appellant’s behest, waived by 643288 in each year following 1985.

As can be seen, this allegation deals with a waiver of interest “at the Appellant’s behest”. From Mr. Reed’s deposition, it appears that this allegation is in the nature of an inference that he drew from certain documentation and facts. This is an evidentiary matter that should be left to the trial judge. I can see no objection to the Respondent making this allegation in the proposed Amended Reply to the Notice of Appeal.

I turn to paragraphs 7(d)(ii) and 7(f)(i) of the proposed Amended Reply to Notice of Appeal. These paragraphs are expressed in this way:

7.

(d) that prior to December 1985, Kingsrow was a company which carried on an unprofitable real estate business in Alberta, so that by December 9, 1985:

(ii) its total assets amounted to $5,167,731.41, of which $4,760,550.51 consisted of land under development, and its total liabilities amounted to $15,449,336.61, of which $12,903,692.28 (Kingsrow’s “residual liability”) was owed to The Royal Bank of Canada, and to Kingsrow’s shareholders, i.e. Kenaco Commercial Services Ltd. (“Kenaco”) and McDevco Holdings Ltd. (“McDevco”) (“the residual creditors”) in the following amounts:

The Royal Bank of Canada$ 7,063,452.88

Kenaco 4,420,075.62

McDevco 1,420,163.88

$12,903,692.38

(f) that in order to implement the said acquisition of Kingsrow’s noncapital losses Drewlo and the “residual creditors” entered into a series of agreements on or about December 11, 1985, the principal features of which were, as follows:

(i) all of Kingsrow’s assets, except the “Varsity Estates properties”, were disposed of, and Kingsrow was released from all its liabilities, except for the said “residual liability” and the debts associated with the Varsity Estates properties.

With respect to paragraph 7(d)(ii) of the proposed Amended Reply to Notice of Appeal, counsel for the Appellant made the following comments in paragraph 38 of the Appellant’s Factum:

38. The Appellant is prepared to consent to the amendment of para. 7(d)(ii) if the Respondent clarifies the allegations by stating that the “book value of its total assets” and the “book value of its total liabilities” were the amounts set out in the proposed amendment. Otherwise the Appellant cannot consent because the values stated are book values, not commercial values, and it knows, as a matter of fact, that Kingsrow had undisclosed liabilities exceeding those disclosed on its December 1985 balance sheet.

In paragraph 39 of the Appellant’s Factum, the following remarks are made with respect to paragraph 7(f)(i) of the proposed Amended Reply to Notice of Appeal:

39. The Appellant is prepared to consent to the amendment of para. 7(f)(i) if the Respondent clarifies that Kingsrow was released from all of its “ascertained liabilities”. The reason for this qualification is the same as that set out above with respect to para. 7(d)(ii).

Counsel for the Respondent indicated, on the hearing of these motions, that the Respondent had no knowledge that the assets and liabilities referred to in paragraphs 7(d)(ii) and 7(f)(i) of the proposed Reply to Notice of Appeal were stated at book value. Again, this is an evidentiary matter that should be determined by the trial judge. I see no objection to permitting the Respondent to make the allegations set out in paragraphs 7(d)(ii) and 7(f)(i).

I now come to paragraph 7(g) of the proposed Amended Reply to Notice of Appeal:

(g) that in order to make the said payments, totalling $2,640,000, to the “residual creditors” Drewlo injected $2,772,000 into 643288 as proceeds from the purchase by Drewlo of 2,772,000 shares of that company.

Counsel for the Appellant made the simple comment in its Factum that “the Appellant consents to this paragraph apart from the unnecessarily pejorative verb “injected” which could be replaced by the verb Omade””. This is a pure question of semantics, perhaps a trivial matter, in the circumstances. This amendment should be allowed.

It remains for me to deal with the allegation found in paragraph 7(n) and the second paragraph 8(c) of the proposed Amended Reply to Notice of Appeal. Paragraph 7(n) of this proposed pleading is worded thus:

(n) it was not in the interests of the principal of 643288 and Drewlo, and consequently, the Appellant, i.e. Mr. Eugen Drewlo, to have 643288 receive any portion of the principal amount of the “residual liability”, and not in the interests of Drewlo and, subsequently, the Appellant, to pay any portion of that liability, because 643288’s receipts would have created a substantial income tax liability in that company, and Drewlo’s and subsequently, the Appellant’s, payments would have seriously depleted the Appellant’s working capital,

with the result that the “residual liability” was in fact and law owned by Drewlo, and not 643288, with the consequences:}

1. that the “residual liability” was in law extinguished upon the subsequent amalgamation of Drewlo and Kingsrow,

2. that the “residual liability” was therefore settled or extinguished immediately prior to the amalgamation as provided by subsection 80(2) of the Income Tax Act, and

3. that the “residual liability” was therefore deemed to have been settled or extinguished for an amount equal to the cost of the “residual liability”, i.e. $2,640,000) that Kingsrow’s said noncapital losses of $13,254,192 were pursuant to subsection 80(1) of the Income Tax Act reduced by the difference between the said cost of $2,640,000 and the “residual liability” of $12,903,692.

I agree with counsel for the Appellant that this allegation is neither a statement of law nor of fact; it appears to be a mixture of both law and fact. In effect, the first part of paragraph 7(n) of the proposed Amended Reply to Notice of Appeal seems to be an inference from certain facts drawn by the Respondent when it is stated that “it was not in the interests of... to have 643288 receive any portion of the principal amount of the “residual liability”, and not in the interests of ... to pay any portion of that liability...” while the second part of paragraph 7(n) beginning with the words “with the result that the “residual liability” was in fact and law” deals with certain legal consequences flowing from the inferences set out in the first part of the same paragraph 7(n). I noted the Appellant’s consent to the postamble portion of paragraph 7(n).

In considering the question whether paragraph 7(n) and the second paragraph 8(c) of the proposed Amended Reply to Notice of Appeal is a proper pleading, I had in mind the provisions of subsection 49(1) of the Tax Court of Canada Rules (General Procedure) which provides that every reply shall state “the reasons the respondent intends to rely on”. I take it that subsection 49(1) of these Rules refers to the main reasons that should be invoked by the Respondent in an income tax appeal in support of an assessment. On balance, I am inclined to the view that this allegation is not a proper pleading in the circumstances. This allegation is properly left to argument.

The comments made above respecting the amendments sought by the Respondent refer to the proposed Amended Reply to Notice of Appeal in the Appeal 94-90(IT)G because the letter of November 24, 1995 setting out the Appellant’s position with respect to these amendments proposed by the Respondent makes reference to the proposed Amended Reply to Notice of Appeal in Appeal 94-90(IT)G. However, counsel for the Appellant at page 18 of the Appellant’s letter of November 24, 1995 to Mr. Chambers states that the Appellant adopts in challenging the proposed Amended Reply to Notice of Appeal in Appeal 93-1526(IT)G, the positions set out in this letter with respect to Appeal 94-90(IT)G subject to the caveat that he had not made a word-for-word comparison of the proposed Amended Reply to Notice of Appeal in Appeal 93-1526(IT)G with that in Appeal 94-90(IT)G. Likewise, my observations about each amendment in the proposed Amended Reply to Notice of Appeal in Appeal 94-90(IT)G apply to the proposed Amended Reply to Notice of Appeal in Appeal 93-1526(IT)G since both proposed Amended Replies to Notices of Appeal are virtually identical. [3]

Before leaving the matter of amendments sought in the proposed Amended Replies to Notices of Appeal, I would like to comment briefly on the matter of assumptions made by the Minister of National Revenue.

The Appellant has argued that the new assumptions were not the assumptions made by the Minister of National Revenue upon assessing. Whether these assumptions were contemporaneous with the assessment, though, should not be decided in disposing of the motions at hand. This is an issue that is best left for the trial judge. In these motions, very little evidence was, in fact, presented; only Affidavits and the cross-examination of Mr. Reed on his Affidavits dated November 3, 1985 were before the Court. The Respondent has replied that most, if not all, of the assumptions in the amendments were made by the Minister at the time of assessing. This evidence does not provide a sufficient factual basis for deciding the issue. Moreover, the decision of Judge Bonner of this Court in Morris v. The Queen, (sub nom. Mooris v. Canada) [1993] 1 C.T.C. 2680, (sub nom. Morris v. The Queen) 93 D.T.C. 316 supports this conclusion. In the latter case, the Appellant moved to strike out a paragraph of the Reply to Notice of Appeal. He argued that the Minister of National Revenue had not made the assumption set out in that paragraph at the time he had assessed the Appellant. Judge Bonner rejected this argument at page 318:

I cannot find on the material before me that the Respondent has no ground for asserting that he made the assumption now under attack at the time of the assessment.

I am of the opinion that the question whether the 6(k) assumption was made on assessment and the question whether that assumption is factually correct are relevant and ought to be addressed should it become necessary to do so by the trial judge. They cannot, in my view, be dealt with adequately on an interlocutory motion.

Respecting the subject matter of ministerial assumptions, I should also add that, contrary to what counsel for the Appellant in the latter’s Factum suggested, there is no legal requirement that a ministerial assumption be conveyed to the taxpayer during the assessment process although I should think that, as a matter of policy, the imparting of this information to the taxpayer by the officials of the Minister of National Revenue should be done. Normally, these ministerial assumptions should be pleaded as such in the Reply to Notice of Appeal. Even at that point, the failure to plead assumptions is not fatal to the Government’s case but it results in the Government losing the tactical advantage of the reversal of onus of proof.

I shall now consider the matter of costs thrown away as a result of my decision to allow most of the amendments sought in the proposed Amended Replies to Notices of Appeal.

The Appellant submitted that it incurred costs of not less than $155,913.59 prior to the receipt of Mr. Chambers’ letter of November 3, 1995 and that as much as 80-90% of those costs would be thrown away, if the proposed amendments were allowed in their entirety. I this respect, the Appellant relied on the Affidavit of Mr. Peter R. Lockyer sworn November 29, 1995. In this Affidavit, Mr. Lockyer described himself in this way:

1. I have been a partner of the law firm of Harrison, Elwood since 1974 and have practised law for 26 years. I have been a legal representative of the Appellant since 1985 and am cognizant of the matters relating to the two Appeals in the Tax Court of Canada, namely Action 93-1526(IT)G in respect of the 1986 taxation year and Action 94-90(IT)G in respect of the 1987 taxation year (collectively “the Appeals”).

Paragraphs 7, 8, 9, 10 and 11 of the Affidavit of Mr. Lockyer constitute evidence of the costs expended by the Appellant so far in opposing the reassessments in issue and costs thrown away as a result of the amendments:

7.1 am advised by my staff and legal counsel for the Appellant and do verily believe that the Appellant has expended considerable cost in dealing with the Appeals since April 26, 1993; the date of the Notification of Confirmation in respect of the Income Tax Assessment for the 1986 taxation year. From April 26, 1993 until November 6, 1995; the date of receipt of the letter from Mr. Chambers (dated November 3, 1995) that notified the Appellant as to the existence of the Proposed Amended Replies, the Appellant has expended at least $155,913.59 in respect of the Appeals. The total sum has been incurred as follows:

1. Stikeman, Elliott	$32,113.29
(May 31, 1993 until September 14, 1994)
2. Genest Murray DesBrisay Lamek	$85,337 89
(September 13, 1994 until November 6, 1995)
3. Harrison, Elwood	$38,462.41
4. Deloitte & Touche	unavailable at this time

8. I am familiar with the details of both the evidentiary and legal research completed by legal counsel and accountants on behalf of the Appellant to date since April 26, 1993. I also recognize the additional evidentiary and legal research, documentary review and preparation that will become necessary if the Respondent is permitted to amend his Replies to the Notices of Appeal.

9. The new allegations, assumptions and defences raised by the Proposed Amended Replies will necessitate an additional review of much of the same material that has already been examined. The material will have to be reexamined with a view towards determining the relevance of such material in relation to issues that were previously ignored either because of admissions by the Respondent (which are now sought to be withdrawn) or because certain assumptions and issues were not previously raised as allegations, assumptions and/or defences by the Minister of National Revenue.

10. The degree of duplication that will result in re-examining the material will vary depending upon which portions of the Proposed Amended Replies the Court permits the Minister of National Revenue to file. While it is difficult to estimate the degree of duplication in advance, I have been informed by legal counsel for the Appellant and do verily believe that the best estimate at this time of the amount of duplication that would result as a result of various new assumptions and issues raised by the Proposed Amended Reply is as follows:

Issue	Percentage of Duplication
2(b), 7(a), 7(c)	40%

5, 10, 11(b), 16: 40%

6, 7(f)(iii)(v),7(g), 70): 5 - 10%

7(i), 7(k)(vii): 5%

9: 40%

11. If the Proposed Amended Replies were admitted in their entirety, the Appellant’s review of material would result in 80-90% duplication of work previously done by legal and accounting representatives of the Appellant.

In his written submissions at paragraphs 37 and 38 on the subject matter of costs, the Respondent said this:

37. Thus costs incurred by the opposite party before being served with the applicant’s pleading that is sought to be amended cannot fall within the category of costs thrown away; nor can any costs incurred from the time of the amendment onward, while the costs of the application for the amendment should follow the event of the case.

See: Cominco Limited v. Westinghouse Canada Limited, supra, at page 25.

See: Continental Bank Leasing Corp., supra, at page 303.

38. In the Respondent’s submission, any order as to costs to be awarded to the Appellant as costs thrown away should therefore be limited to any costs that the Appellant wasted, i.e. for work that has become useless as a result of the sought amendments.

There is no doubt that the proposed Amended Replies to Notices of Appeal are substantially different from the existing Replies to Notices of Appeal. The proposed Amended Replies to Notices of Appeal raise among other things, three additional defenses, as the Respondent has admitted in paragraph 41 of her submissions. In addition, the Respondent seeks to withdraw a number of admissions.

On balance, I am of the opinion that the amount of costs thrown away is substantial having regard to the amendments that I have allowed. The Appellant is entitled to costs in respect of the work that has become useless as a result of the amendments that I have permitted the Respondent to make. These costs should be fixed by the trial judge. At the conclusion of the trial, it should be easier to determine the amount of costs thrown away.

Also, the making of substantial amendments by the Respondent to her pleadings at a rather late stage in the proceedings should be discouraged. In this respect, I refer to the decision of the Ontario Court of Appeal in the case Kings Gate Developments Inc. v. Drake (sub nom. Kings Gate Developments Inc. v. Colangelo) [1994] 17 O.R. (3d) 841. The Appellant is entitled to these costs in any event of the cause on a solicitor and client basis.

Finally, I have to determine the question of costs of the present motions.

In my view, in considering the matter of costs relative to the Respondent’s main motion, it is proper to take into account, among other things, the following facts:

1. On November 6, 1995, about three weeks prior to the scheduled examinations for discovery of both parties, and after the Lists of Documents had been produced pursuant to section 82 of the Tax Court of Canada Rules (General Procedure), the Respondent served on the Appellant, proposed Amended Replies to the Notices of Appeal which substantially alter the position of the Respondent in this litigation.

2. The Appellant consented to many of the amendments sought.

3. The generally successful result from the Respondent’s standpoint on the main motion.

4. Some lack of assistance on the Respondent’s part in facilitating the comparison between the existing Replies to Notices of Appeal and the proposed Amended Replies to Notices of Appeal.

In view of the above, costs should be in the cause.

To sum up the Respondent is permitted to make all the amendments sought in the proposed Amended Replies to Notices of Appeal with the exception of paragraph 7(n) and the second paragraph 8(c). The amendments allowed by these Reasons should be made forthwith.

The Respondent is liable to indemnify the Appellant on a solicitor and client scale in respect of all costs thrown away by the Appellant as a result of the amendments that I have allowed the Respondent to make, such costs to be determined by the trial judge.

In addition, I am making an Order abridging the time to serve and file the Appellant’s Notice of Motion filed on November 30, 1995.

The matter of time limits for a) the filing a supplementary list of documents, if required, b) additional examinations for discovery of the representatives of both the Appellant and the Respondent, and c) the delivery of answers to the undertakings arising out of these examinations for discovery, will be decided following a conference call to be held, if at all possible, during the week of March 25, 1996. It is understood that the precise date of such conference call will be determined following consultation by the Registry with counsel for both parties. A new date for the hearing of these appeals will also be set during this conference call.

Motions granted in part.