Carma Developers Ltd. v. R., [1996] 1 CTC 2985, 96 DTC 1803

Christie J.T.C.C.: - This is an application by Carma Developers Ltd. (the “applicant”) under paragraph 58(1 )(a) of the Tax Court of Canada Rules (General Procedure) (the “Rules”). It, together with paragraph 58(2)(a) and section 62 provide: [1]

58(1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or

and the Court may grant judgment accordingly.

(2) No evidence is admissible on an application,

(a) under paragraph ( 1 )(a), except with leave of the Court or on consent of the parties, or

62. On a hearing of the question of law under sections 58 and 59, each party shall serve on every other party to the hearing a factum consisting of a concise statement, without argument, of the facts and law relied on by the party, and file it, with proof of service, in the Registry not later than seven days before the hearing.

The notice of motion is dated November 27, 1995. It states:

THE MOTION IS FOR:

1. A determination pursuant to Rule 58(1 )(a) on the following question of law raised by the pleadings.

The Appellant’s indebtedness to various creditors was acquired from those creditors by the Appellant’s parent corporation pursuant to a plan of arrangement under the Companies’ Creditors Arrangement Act. After the acquisition of those debts by the Appellant’s parent, the Appellant remained legally obligated to pay the full amount of the assigned debts. The question of law to be determined is whether in these circumstances the Appellant’s debts have been settled or extinguished within the meaning of subsection 80(1) of the Income Tax Act as it read in 1986.

and, if the answer to this question is no, an order allowing this appeal with costs; and in any other case, an order that this appeal proceed to trial; and

2. leave pursuant to Rule 58(2)(a) for the parties to adduce as evidence before the Court at the hearing of the Motion

(a) portions of the transcripts of the examination for discovery of Frans T. Heynen dated September 20, 1995, and related exhibits, and

(b) portions of the transcripts of the examination for discovery of Alan Norris [2] dated November 21, 22 and 23, 1995, and related exhibits establishing that there are no facts in dispute.

THE GROUNDS FOR THE MOTION ARE that:

(a) these questions can be determined on the pleadings as clarified by the examinations for discovery, without other evidence; and

(b) these questions, if determined in the Appellant’s favour, would dispose of these proceedings without trial.

Paragraphs 1 to 11 inclusive of the applicant’s factum read:

Facts

1. The Appellant is a taxable Canadian corporation carrying on a business of acquiring, developing and selling real property situated in Canada.

Notice of Appeal, paragraph 4 Admitted Reply, paragraph 1 Assumption, Reply, paragraphs 10(a) and 10(b)(ii)

2. At all material times the Appellant was a wholly-owned subsidiary of Consolidated Carma Corporation, formerly Carma Ltd. (“CL”), a Canadian corporation whose shares are listed on The Toronto Stock Exchange.

Notice of Appeal, paragraphs 5 and 6 Admitted, Reply, paragraphs 1 and 5 Assumption, Reply, paragraphs 10(a) and 10(b)(i)

3. As of the beginning of 1985, the Appellant was heavily indebted to its creditors and CL had guaranteed a substantial portion of those debts. As a result of a downturn in the Alberta real estate market in 1982, the Appellant experienced difficulty in servicing its debts. By September 1985, the Appellant’s debt obligations exceeded its ability to pay them.

Notice of Appeal, paragraph 9 Admitted, Reply, paragraph 6 Assumption, Reply, paragraphs 10(a), 10(b)(v), 10(c), 10(d) and 10(e)

4. Prior to September 1985, the Carma Group had commenced negotiations with its creditors to restructure its debt obligations. While these negotiations were in progress one creditor of the Appellant took steps to realize on its security and was in the process of obtaining judgment. Such judgment would have resulted in similar action on the part of the Appellant’s other creditors and in the creditors’ inability to collect most of the debts owed to them.

Assumption, Reply, paragraphs 10(g), 10(h) and 10(i)

5. In order to protect itself from the impending judgment the Appellant filed with the Alberta Court of Queen’s Bench a petition under the Companies’ Creditors Arrangement Act.

Notice of Appeal, paragraph 11 Admitted, Reply, paragraph 7 Assumption, Reply, paragraph 10(a)

6. The Appellant agreed upon a plan of arrangement with its various classes of creditors which plan was approved by an order of the Alberta Court of Queen’s Bench on January 31, 1986 (the ‘CDL Plan’). The order stated that the CDL Plan would be binding on the Appellant and the creditors of the Appellant of each class who were parties to it: the operating lenders, the project lenders and the debenture holders.

Notice of Appeal, paragraph 13 Admitted, Reply, paragraph 8 Assumption, Reply, paragraphs 10(a) and 10(p) Exhibit A-l - Order of Mr. Justice Wachowich, Court of Queen’s Bench, Alberta with the CDL Plan attached (Appendix 2 to this Factum)

7. The principal objective of the CDL Plan was to enable the Appellant to carry on its business, and the implementation of the CDL Plan achieved that objective.

Notice of Appeal, paragraph 16 Admitted, Reply, paragraph 2 Assumption, Reply, paragraph 10(a)

8. The CDL Plan provided that certain debts owed by the Appellant to its creditors of each class would be assigned to CL in exchange for common shares to be issued by CL, and that any debts assigned to CL pursuant to the CDL Plan would not be extinguished. The CDL Plan stipulated the number of CL shares to be issued for debts assigned by the creditors of each class.

CDL Plan, sections 3.18, 4.5(c), 5.3, 6.10, 7.5 (Appendix 2 to this Factum)

9. To implement the CDL Plan, each of the Appellant’s creditors entered into agreements in similar terms assigning to CL the debts owed by the Appellant for the number of CL shares stipulated by the CDL Plan. After the assignment the Appellant continued to have a legal obligation to repay the assigned debts.

Portions of the examination for discovery of Frans T. Heynen (Appendix 1 to this Factum) Exhibit A-2 - Project lender assignment agreement (Appendix 3 to this Factum) Exhibit A-3 - Supplemental Trust Indenture (Appendix 4 to this Factum) Exhibit A-4 - Debenture holder assignment agreement (Appendix 5 to this Factum) Exhibit A-5 - Operating lender assignment agreement (Appendix 6 to this Factum)

10. The debts acquired by CL pursuant to the CDL Plan and the number of CL shares issued by CL in exchange were as follows:

Creditor / Group Debt / Acquired Number of CL Shares

1986

Project lenders / $ 69,452,762 / 19,842,720

Debenture holders /$ 85,490,429 / 50,288,530

Operating lenders / $ 16,621,452 / 5,936,232

Subtotal / $171,564,643 / 76,067,482

1987

Project lenders / $4,861,013 / 1,388,861

Operating lenders / $2,927,632 / 1,045,583

Subtotal / $7,788,645 / 2,434,444

Total / $179,353,288 / 78,501,926

The trading price of the CL shares on The Toronto Stock Exchange at the time that CL acquired the debts of the Appellant did not exceed 20 cents per share. Accordingly, the face amount of the debts acquired by CL exceeded the trading price of the CL shares issued for them.

11. The Minister reassessed the Appellant to apply subsection 80(1) of the Income Tax Act (the “Act”) to the difference between the amount of the assigned debts and the trading price of the shares issued by CL as consideration for the assignments.

Notice of Appeal, paragraph 22 Reply, paragraph 11

It will be seen that with respect to these facts the applicant is relying on the notice of appeal and reply thereto except regarding paragraph 6 in part and paragraphs 8 and 9. With respect to paragraph 6 reference is made to an order issued by Mr. Justice Wachowich of the Alberta Court of Queen’s Bench. That order is an exhibit to the examination for discovery of Mr. Frans Heynen who was examined by counsel for the applicant. Attached to the order is copy of the CDL Plan. With reference to paragraph 8 reliance is placed on specified sections of the CDL Plan and regarding paragraph 9 reliance is placed on portions of the examination for discovery of Heynen, three agreements and a supplemental trust indenture. These four documents are exhibits in the examination for discovery.

I think that the combined effect of section 75 and paragraph 100(1 )(b) of the Rules [3] is that the examination for discovery of Heynen and related exhibits may be used in evidence on this application by counsel for the applicant if that evidence is otherwise admissible. But it can only be used with leave of the Court or on consent of the parties: paragraph 58(2)(a) of the Rules.

The fact that in the absence of consent no evidence is admissible on an application under paragraph 58(1 )(a) without leave of the Court indicates to me that applications under that paragraph are predicated on the premise that there is no substantial disagreement between the parties concerning the facts pertinent to the question of law to be determined. If there is disagreement about some relatively incidental fact the Court may grant leave to adduce evidence to resolve it. That to my mind is the basic scheme of the Rules referred to. Further, I think what I have said about agreement about the facts implies, in turn, that there is no fundamental disagreement about whether the question posed for determination will dis- pose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs.

Paragraph 58(2)(a) refers to the determination of a question of law raised by a pleading. The material facts relied on by Carma Developers Ltd. in its notice of appeal are set out in paragraphs 3 to 24 inclusive of that document. In the reply to the notice of appeal unqualified admissions pertain to only 8 paragraphs of the notice of appeal and a portion of another. What is said in three paragraphs and a significant portion of another is denied. With respect to four paragraphs it is said that the Attorney General of Canada has no knowledge of the allegations therein and they are not admitted. There are only partial admissions in respect of the remaining paragraphs in the notice of appeal.

The Rules require that in an appeal under the Income Tax Act the appellant shall specify the issues to be decided. These issues must also be stated in the reply to the notice of appeal. Heading D of the notice of appeal reads:

D. Issues to be decided

25. Did the acquisition of the CDL Debt by CL pursuant to the CDL Plan constitute a settlement of the CDL Debt for the purposes of section 80 of the Act? In particular, for the purposes of section 80 of the Act, can a settlement of a debt be held to have occurred when there is no termination of a debtor’s obligation to pay the debt and the debtor remains liable for the full amount of principal and interest owing under the debt?

26. If the acquisition of the CDL Debt by CL does constitute a settlement of the CDL Debt (which is not admitted but expressly denied), when was the CDL Debt settled, what is the Settlement Amount, and how should the Settlement Amount be applied to reduce non-capital losses, net capital losses, the capital cost of depreciable assets and the adjusted cost base of non-depreciable capital property of CDL in accordance with section 80 of the Act?

Heading B of the reply to the notice of appeal reads:

B. The issue to be decided

12. He submits that there are three issues to be decided in this appeal:

(a) whether the Appellant’s debts in the aggregate amount of $213,145,288 were settled or extinguished, within the meaning of subsection 80(1) of the Income Tax Act,

(b) when such settlement of extinguishment occurred, and

(c) whether it was the share exchange value of the CL shares, as aforesaid, or their fair market value that formed part of the payment for which the Appellant’s debts were settled or extinguished within the meaning of subsection 80( 1 ) of the Income Tax Act.

Counsel for the respondent refused to consent to the admission of the evidence described in paragraph 6, 8, 9 of the applicant’s factum and rejected the notion that this litigation could properly be disposed of under paragraph 58(1 )(a) of the Rules having regard to across-the-board differences between the applicant and the respondent. He referred to differences about the facts and even the issues.

In Moriarity v. Slater (1989), 67 O.R. (2d) 758, 42 B.L.R. 52, Mr. Justice White said at page 764:

I am of the view that, as in an application under rule 21.01 (l)(b) (of the Ontario Rules of Civil Procedure),* [4] that is an application to strike out a pleading on the ground that it discloses no reasonable cause of action, so in an application under rule 21.01 (l)(a) that is an application for the determination before trial of a question of law raised by a pleading, that caution and prudence should govern the exercise of the court’s discretion.

In summary, I am of the opinion that paragraph 58(l)(a) of the Rules is not intended as an easily accessible alternative to a trial for the disposition of complex and contentious disputes about the rights and liabilities of litigants. It is to be invoked when it is clear that the determination of all or part of a dispute by trial would be essentially redundant. That is not applicable to the appeal at hand. As I said at the hearing I think it would be an error to attempt to dispose of it under paragraph 58(1 )(a).

The application is dismissed.

Application dismissed.