Yuck v. R., [1996] 2 CTC 2715, 97 DTC 558

Sobier J.T.C.C.: — In this appeal, the parties have agreed that the appeals be allowed, the assessments vacated, and the matter is referred back to the Minister of National Revenue (the “Minister”) for reconsideration and reassessment on the basis that the Appellant has not made any misrepresentation attributable to neglect, carelessness, or wilful default, nor has he committed any fraud in filing his 1987 tax return and that consequently, the reassessments of the Appellant’s 1987 taxes, dated July 15, 1992 and May 5, 1993 are invalid as having been made beyond the normal three-year reassessment period provided for in subsections 152(3.1) and 152(4) of the Income Tax Act (the “Act”).

The Respondent wishes that, in addition to the above provisions, the judgment to be issued by this Court contain the following: “and in any event the agreement between the Appellant and Mr. Sawchuck was in the nature of a stock loan arrangement in respect to the ARC shares.”

The parties have agreed based upon arguments given today and notwithstanding that there is no evidence on the point, that the Court determine whether or not that the latter provision be included or excluded from the judgment of this Court.

What is appealed under the Act to the Tax Court of Canada are assess ments made by the Minister, and the relief which this Court may grant is set out in subsection 171(1) of the Act and that is to (a) dismiss the appeal or (b) allow it and, (i) vacate the assessment, (ii) vary the assessment or (iii) refer the assessment back to the Minister for reconsideration and reassessment.

The parties have acknowledged that the assessments are statute- barred and that this alone is sufficient to dispose of the appeal by vacating it on that basis, i.e., of having been made beyond the normal three-year period as provided in subsection 152(3.1) and 152(4) of the Act.

The inclusion of the sought after language relating to whether the transaction in issue was a loan or disposition would not be appropriate since it has not been based upon any finding of fact.

Accordingly, judgment is to go as follows:

On consent the appeal is allowed and reassessments are vacated, and the matter is referred back to the Minister for reconsideration and reassessment on the basis that the Appellant has not made any misrepresentation attributable to neglect, carelessness, or wilful default, nor has he committed any fraud in filing his 1987 tax return and that consequently, the reassessments of the Appellant’s 1987 taxes, dated July 15, 1992 and May 5, 1993 are invalid as having been made beyond the normal three year reassessment period provided for in subsections 152(3.1) and 152(4) of the Act.

The Appellant asks for costs on a solicitor and client basis. Subsection 147(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”) allows the Court to award costs. Subsection 147(3) of the Rules states as follows:

(3) In exercising its discretionary power pursuant to subsection (1) the Court may consider,

(a) the result of the proceeding,

(b) the amounts in issue,

(c) the importance of the issues,

(d) any offer of settlement made in writing,

(e) the volume of work,

(f) the complexity of the issues,

(g) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding,

(h) the denial or the neglect or refusal of any party to admit anything that should have been admitted,

(i) whether any stage in the proceedings was,

(i) improper, vexatious, or unnecessary, or

(ii) taken through negligence, mistake or excessive caution, (j) any other matter relevant to the question of costs.

The authority for awarding costs on a solicitor and client basis may be found in subparagraph 147(5)(c) of the Rules, which reads as follows:

(5) Notwithstanding any other provision in these rules, the Court has the discretionary power,

(c) to award all or part of the costs on a solicitor and client basis.

This appeal arose by reason of an assessment by the Minister of the Appellant’s 1987 taxation year. In that year, the Appellant claims to have lent 200,000 shares (the “Shares”) in the capital of Alberta Resources Capital Corporation to one Sawchuk.

The Shares had an original capital cost to the Appellant of $10,000. At the time of the alleged loan, it was said that the fair market value of the Shares was $400,000.

The Minister asserts that the transaction was not a loan but a disposition of the Shares by the Appellant to Mr. Sawchuk, which resulted in a substantial gain to the Appellant.

In 1988, Mr. Sawchuk returned 162,000 of the Shares to the Appellant. At that time, the Shares were trading at approximately $3.88 per share. On December 31, 1988, the Shares were trading at $.90 per share and on December 31, 1989, at $.17 per share. The Shares ceased trading by December 31, 1990.

In addition, the Minister assessed the Appellant penalties under subsection 163(2) of the Act and also interest.

There were a series of reassessments, whereby the Minister allowed losses in, prior and in subsequent years, but maintains that the penalties were properly assessed. However, by a reassessment dated May 5, 1993, the penalties assessed under subsection 163(2) were reversed and penalties under subsection 152(4) were assessed. The relevant provisions of subsection 163(2) of the Act read as follows:

(2) False statements or omissions. Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater...

and there follows a formula.

The relevant provisions of subsection 152(4) read as follows:

(4) Assessment and reassessment. Subject to subsection (5), the Minister may at any time assess tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act.

Therefore, in reversing the assessment under subsection 163(2) of the Act, the Minister acknowledges that what was done, was not done knowingly or under circumstances amounting to gross negligence.

In reassessing under subsection 152(4), the Minister need not establish the higher degree of culpability on the part of the taxpayer, but does put himself subject to the provisions of subsection 152(3.1) of the Act, which requires an assessment under subsection 152(4) to be made within three years after the making of the original assessment.

The Appellant claims that prior to the reassessment of May 1993, and in any event at the time of the filing of the Notice of Appeal dated April 27, 1994, the Respondent was made aware of the claim that the reassessments were statute-barred. The Reply to the Notice of Appeal put that in issue when the Respondent claimed that the failure to report the sale of the Shares was a misrepresentation attributable to neglect, carelessness or a wilful default, within the meaning of subparagraph 152(4)(a)(i) of the Act, such that the three year period in paragraph 152(4)(c) of the Act applied.

Throughout the proceedings, commencing at the objection stage, the Appellant maintained that there was no disposition of the Shares to Mr. Sawchuk, but that they were loaned to him. Throughout the proceedings, up to a few days before the hearing of the appeal was to commence, the Respondent maintained that it was a disposition, not a loan, and therefore, the gain was not reported and that this was a misrepresentation. On July 18, 1995, the then counsel for the Appellant met with the then counsel for the Respondent. Counsel for the Appellant urged counsel for the Respondent to review the case, particularly as it pertained to the statute-barred aspect. The issue of the onus being on the Respondent in showing that there was a misrepresentation on the part of the Appellant, attributable to neglect, carelessness or wilful default was also raised. Counsel’s reply was that Revenue Canada was “sticking to its position”.

As a result of a status hearing, the parties had exchanged documents, completed discoveries and undertakings, so that all the information was available or could have been made available no later than January 1996.

At his examination for discovery, the Appellant still maintained that there was a loan and not a disposition of the Shares.

A further discussion with then counsel for the Respondent took place with the then counsel for the Appellant. When misrepresentation was again raised, it was pointed out that the Respondent could not prove misrepresen- tation based on the facts available to her.

At the hearing of the appeal, on March 12, 1996, Respondent’s counsel completely reversed her position and admitted there was no misrepresentation, as required under subsection 152(4) of the Act, and that the assessment under appeal was invalid as not having been made in time.

In assessing under subsection 152(4), the Minister must have alleged misrepresentation and was required to prove it.

The awarding of costs on a solicitor and client basis is not one to be made lightly. Solicitor and client costs should only be awarded in extraordinary circumstances.

In Di Renzo v. R. (sub nom. Di Renzo v. Canada), [1994] 1 C.T.C. 2486, 94 D.T.C. 1782 (T.C.C.), Associate Chief Judge Christie of this Court stated at page 2494 (D.T.C. 1790):

In Rummel v. Minister of National Revenue, 90 D.T.C. 1868 (T.C.C.), Sarchuk, J.T.C.C. said at page 1869:

Costs as between solicitor and client are exceptional and generally to be awarded only on the ground of misconduct connected with the litigation (Amway Corp. v. The Queen, [1986] 2 C.T.C. 339). An award of costs on a solicitor and client basis is ordered only in rare and exceptional cases to mark the Court’s disapproval of the parties’ conduct in the litigation (Isaacs v. MHG International Ltd., 45 O.R. (2d) 693).

In The Queen v. Lee, 91 D.T.C. 5596 (F.C.A.), the original hearing was before this Court. The trial judge awarded the appellant costs on a solicitor and client basis. Counsel for the Minister of National Revenue made application under the Tax Court of Canada Rules of Practice and Procedure for the Award of Costs (Income Tax) to have the matter reviewed. On March 15, 1991, Brulé, J.T.C.C., delivered reasons approving the costs awarded. There was a further review by the Federal Court of Appeal under section 28 of the Federal Court Act. It set aside Judge Brulé’s decision and referred the matter back to the Tax Court of Canada for taxation of costs on a party and party basis. Heald, J.A. speaking for the Court said at page 5598:

In my opinion, Judge Brulé was in error when he relied on the intrinsic merits of the taxpayer’s appeal. Such a basis was disapproved of in the Reading & Bates case ((1986) 2 F.T.R. 241 at 264). The decision of this Court in Amway Corporation v. Her Majesty the Queen ([1986] 2 C.T.C. 339 at page 340) is also relevant. In that case, Mr. Justice Mahoney stated:

Costs as between solicitor and client are exceptional and generally to be awarded only on the ground of misconduct connected with the litigation.

Associate Chief Judge Christie also stated on page 2494 (D.T.C. 1791):

In the Toronto-Dominion Bank v. Canada Trustee Mortgage Co. (1992), 50

F.T.R. 317, Mr. Justice Strayer said at page 318:

In any event I see no basis for awarding costs on a solicitor-client basis. Such costs should only be awarded where the misconduct of the opposite party in the preparation and presentation of the case has caused unnecessary expense to the party applying for such costs, or where the proceeding was so futile, vexatious, or frivolous, that the other party has knowingly or recklessly put the applicant for such costs to completely unnecessary expense in response. Neither of those conditions apply here.

The Appellant’s claim throughout that the assessment was statute- barred was based on the position consistently taken by him, that there was no need to report any gain on the disposition, since there was no disposition, only a loan. The Respondent’s claim throughout that there was a disposition and since the amount of gain resulting was so large, the Appellant surely must have made a misrepresentation in failing to report it. This is not an indefensible position. However, were the actions of the former counsel for the Respondent such as to warrant the imposition of solicitor and client costs? At the meeting of July 18, 1995, the then counsel for the Respondent was urged to examine the issue. Her response was that Revenue Canada was “sticking to its position”. This urging was also made by new counsel for the Appellant to new counsel for the Respondent.

As a result, the Respondent did a complete turn-about and admitted that there was no misrepresentation. However, I am unable to say that the Respondent’s conduct was such as to mark the Court’s disapproval of its conduct. I cannot characterize the conduct of the Respondent as vexatious or frivolous or reprehensible, scandalous or outrageous. Young v. Young, [1993] 4 S.C.R. 3 at page 134. There may have been a degree of intransigence in the Respondent’s position but I do not believe that it should warrant the imposition of solicitor and client costs.

Costs are awarded to the Appellant on a party and party basis to be taxed.

Costs awarded to taxpayer on party and party basis.