Continental Bank Leasing Corporation and Continental Bank of Canada v. Her Majesty the Queen, [1993] 1 CTC 2306, 93 DTC 298

Bowman, T.C.C.J.:— In these motions, counsel for Her Majesty the Queen seeks leave to amend the replies that were filed to the appellants' notices of appeal to add a number of paragraphs and to withdraw an admission of one paragraph in one notice of appeal. Counsel for the appellant did not oppose many of the proposed amendments, but he did oppose the withdrawal of the admission in paragraph 1 of the reply of paragraph 29 of the Continental Bank Leasing Corporation ("C.L.") notice of appeal and the addition of paragraphs 23 and 24 of that reply, as well as the addition of paragraphs 40B, 40C, 40D and 40E to the reply to the Continental Bank of Canada ("C.B.") notice of appeal.

The circumstances giving rise to the proposed amendments may be summarized as follows:

By notices of appeal filed on April 9, 1991, C.B. appealed from reassessments for its 1986 and 1987 taxation years and C.L., a subsidiary of C.B., appealed from a reassessment for 1987.

The appeals raise a variety of substantial and complex issues. One major issue that is common to the appeals of both C.B. and C.L. has to do with transactions that are described in both notices of appeal as the "Central Capital Leasing Partnership Interest". A brief summary of the allegations in the notices of appeal, some of which are admitted in the replies and some of which are not, is as follows:

C.B. and I.A.C. Ltd. ("I.A.C.") amalgamated in 1984 and henceforth C.B. carried on, in addition to its banking business, the business of leasing property, using leasing assets which it acquired on its amalgamation with I.A.C. New leasing business was carried on through C.L.

For reasons alleged in the notice of appeal which will no doubt be the subject of evidence at trial, C.B. decided to divest itself of its banking and leasing business and to wind up. It sold its banking business to Lloyds Bank of Canada, but not the leasing business or the shares of C.L. It entered into negotiations with Central Capital Corporation and an agreement was reached whereby Central Capital ("C.C.") would acquire the shares of C.L. on the understanding that C.B.'s leasing assets would be transferred to C.L. before the acquisition.

C.B. transferred its leasing assets to C.L. on November 1, 1986. For reasons that may be relevant at trial but are not relevant in this motion, C.C. declined to proceed with the purchase of C.L.'s shares. Negotiations with C.C. were reopened and a restructured deal was struck. It was alleged in paragraph 23 of the notice of appeal that in accordance with the new agreement of December 23, 1986, C.L. and two subsidiaries of C.C., 693396 Ontario Ltd. ("6933%") and Central Capital Management ("C.C.M.") formed a partnership on December 24, 1986, known as Central Capital Leasing. C.L. then transferred its leasing business to the partnership for a 99 per cent interest in the partnership. Paragraph 28 of each notice of appeal states that an election under subsection 97(2) of the Income Tax Act was filed to effect a disposition by C.L. of the leasing assets at a deemed amount of $68,184,583.

It is alleged that on December 27, 1986, C.L. wound up into C.B. and the partnership interest was transferred to C.B. In addition, it is alleged that C.B. purchased securities from C.C. for $130,000,000. This amount was transferred to the two subsidiaries, 693396 and C.C.M., who paid it to C.B. as the purchase price of the interest in the partnership.

The Minister of National Revenue, on assessing C.L., took the position, inter alia, according to the "assumptions" pleaded in paragraph 16 of the C.L. reply, that C.L. amalgamated on December 24, 1986, with a numbered company and that the purpose of the transactions described was to transfer the leasing assets to subsidiaries of C.C., that the transactions constituted the disposition by C.L. of its leasing assets and that the interposition of the amalgamated company and the partnership was a sham and that the appellant was not a member of the partnership because it did not acquire the partnership interest with the intention of carrying on business in common for profit but with a view to disposing of its assets for proceeds which represented the sale price of its assets.

All of this has led to inconsistent assessments. The Minister assessed C.L. on recapture of about $83,000,000 on the basis that the involvement of the partnership in the transaction was a sham. He assessed C.B. on the basis that the gain realized on the disposition of the partnership interest was a trading gain and not a capital gain. The Minister acknowledges that the two assessments are inconsistent and cannot both stand, but asserts that to protect the public revenues he is entitled to advance inconsistent and indeed mutually exclusive positions. The assessment against C.L. denies the validity of the partnership or the subsection 97(2) rollover whereas the assessment against C.B. is necessarily premised upon their validity.

The Crown filed its replies on June 10, 1991. They had been prepared by a counsel in the Department of Justice, Ms. Marie-Thérèse Boris. Lists of documents were exchanged. Shortly before the examinations for discovery of an officer of the Crown were scheduled to take place, these motions were brought.

The withdrawal of the admission of paragraph 29 of the C.L. notice of appeal and the addition of paragraphs 23 and 24 of the reply.

Paragraph 29 of the C.L. notice of appeal reads as follows:

29. Continental Leasing did not receive, directly or indirectly, any amount or property, nor was it entitled to, for the Leasing assets transferred to the Partnership other than the Partnership Interest referred to in paragraph 23 above. Continental Leasing also did not receive, either directly or indirectly, any amount or property, nor was it entitled to, for the Partnership Interest transferred to Continental Bank on the winding-up of Continental Leasing.

Paragraph 1 of the reply lists 10 paragraphs of the notice of appeal that the respondent admits, including paragraph 29. Ms. Boris, in her affidavit filed on the motion, states that she now does not know why she admitted paragraph 29 but she believed that it was inconsistent with the position that she thought she was advancing on behalf of the respondent. The admission of paragraph 29 of the C.B. notice of appeal is consistent with the respondent's position in that case, but it is inconsistent with the position advanced in paragraphs 16(g), (h),

(i) and (j) of the C.L. reply which asserts a sham transaction.

I am satisfied, on the evidence before me on the motion, that the admission of paragraph 29 in the C.L. reply was inadvertent in the sense that the full implications that the admission would have on the inferences the Court could be invited to draw were not appreciated at the time the reply was filed. Ms. Boris was cross-examined at length on her affidavit and I was referred to no portion of her cross-examination that is inconsistent with that conclusion.

The admission of paragraph 29 of the notice of appeal is also inconsistent with another group of amendments which the Crown wishes to make to the C.L. reply, specifically new paragraphs 19 to 25. I shall not reproduce these paragraphs in full. They are in the material filed. New paragraph 19 states in part that the Attorney General submits that "the purported partnership agreement was legally ineffective to make the appellant a partner and the appellant never was such a partner". Paragraph 19 goes on to allege a legal impediment to the appellant's becoming a partner by reason of section 174 of the Bank Act. Paragraph 20 alleges that the appellant did not in relation to the partnership carry on business in common with a view to profit. Paragraph 21 alleges that the partnership agreement was a sham and the appellant's purported membership in the partnership was a simulacrum. Paragraph 22 says roughly the same thing in relation to the subsection 97(2) election. Paragraph 25 alleges that $130,071,985 was part of the proceeds of disposition of the appellant's leasing assets. No objection is taken by the appellant to the respondent's inclusion of these paragraphs in the amended reply. The only new paragraphs to which the appellant objects are new paragraphs 23 and 24 which read as follows:

23. It is submitted that the substance of the transactions, considered in light of economic and commercial realities and a common sense appreciation of the guiding features, was a disposition by the appellant of the leasing assets to 693396 Ontario Ltd. and 693397 Ontario Ltd. for proceeds of disposition of $147,828,983.

24. It is submitted that Continental Bank of Canada received the $130,071,985 consideration given by Central Capital Corporation and/or its two subsidiaries, purportedly for the partnership interest, but in substance and reality for the transfer of the appellant's leasing assets to the Central Capital Corporation subsidiaries. It is further submitted that in so receiving the said $130,071,985 consideration Continental Bank of Canada was the agent of the appellant, the appellant having been the owner of the leasing assets.

I have concluded that the interests of justice would best be served if the Crown were permitted to withdraw the admission of paragraph 29 of the C.L. notice of appeal and to file an amended reply to the C.L. notice of appeal in the form of the proposed amended reply attached to the notice of motion. Out of deference to the very thorough arguments of counsel, I shall set forth my reasons briefly.

Section 54 and 132 of the Tax Court Rules — General Procedure, read as follows:

54. A pleading may be amended by the party filing it, at any time before the close of pleadings, and thereafter either on filing the consent of all other parties, or with leave of the Court, and the Court in granting leave may impose such terms as are just.

132. A party may withdraw an admission made in response to a request to admit, a deemed admission or an admission in the party's pleading on consent or with leave of the Court.

Subsection 4(1) of those rules provides:

4.(1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.

These provisions give the court a broad discretion to permit the withdrawal of admissions and the amendment of pleadings where it is in the interests of justice to do so. I was referred to a number of cases in the courts of British Columbia, Ontario and the Supreme Court of Canada. It would seem that there has been a relaxation of the rule that an admission may be withdrawn only if it is shown to be wrong. That rule was stated in Canada Permanent Mortgage Corp. v. The City of Toronto, [1951] O.R. 726. The statement of the rule was criticized as being too wide by Cartwright, J. (as he then was) in Papp Estate v. M.N.R., [1964] S.C.R. 66, [1964] C.T.C. 128, 63 D.T.C. 1219, and a party was permitted to withdraw an admission made even though it had not been established that the fact admitted was untrue.

Courts subsequently have essentially applied a more liberal test which permitted amendments or withdrawal of admissions where a triable issue of fact or law is thereby raised and where the amendment or withdrawal would not result in a prejudice to the opposing party that was not compensable in costs. Counsel for the appellant contended that no evidence had been adduced to show that the proposed amendments raised a triable issue. I think that this submission involves an unduly narrow reading of the cases. The triable issue of the nature and substance of the partnership transaction is clearly before the court and the admission of paragraph 29 of the notice of appeal is inconsistent with the other allegations in the reply, some of which were already pleaded and some of which are proposed to be added, without objection. New paragraphs 23 and 24 are simply a more elaborate articulation of the basic position taken by the Minister, the best evidence of which is the making of the assessment itself. In these circumstances there is no need for further evidence.

It was also contended that the party moving for the amendment had an onus of showing no prejudice by the amendment to the party opposing. Counsel for the appellant did not suggest that there was any prejudice and I should have thought that if there were prejudice that was not compensable in costs it would be reasonable to expect the opposing party to adduce evidence to that effect. It is difficult in any event to see what significant prejudice the appellant has suffered apart from the delay in proceeding with the examination for discovery of an officer of the appellant and the loss of the tactical advantage of not having to prove an allegation that had been inadvertently admitted by the respondent. Either the allegation in paragraph 29 is true or it is not true. If it is true it should be readily provable in considerably less time than this motion has taken. If it is not true it should not have been admitted and the Court should not be required to base its decision on an erroneous factual premise. While I do not doubt the authority of the Attorney General of Canada to make admissions of fact in litigation to which the Crown is a party, it must be recognized that there is a public interest in income tax appeals and the Court should be in a position to decide cases on the basis of correct facts and properly defined issues (c.f. The Clarkson Co. v. The Queen, [1979] C.T.C. 96, 79 D.T.C. 5150 (F.C.A.) at page 97 (D.T.C. 5151), footnote 3). It would do no credit to our system of justice in Canada if the courts were restricted in their consideration of the merits of a case by an ill-considered admission that is inconsistent with another position that is being advanced, particularly where it is sought to withdraw such an admission at an early stage in the proceeding. This is equally true whether the party seeking to change its position is the taxpayer or the Crown.

In the cases in the courts of Ontario and of British Columbia to which I was referred a number of tests 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 a 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.

All of these considerations lead me to conclude that the Crown's motion in the C.L. appeal should be granted.

The amendment to the C.B. reply

In the C.B. appeal the Crown seeks to delete paragraph 40 of its reply and substitute new paragraphs 40, 40A, 40B, 40C, 40D, 40E, 40F and 40G. The appellant opposes the addition of paragraphs 40B, 40C, 40D and 40E. It does not oppose any other amendments, including the extensive amendments to paragraph 34 which contains a statement of the so-called "assumptions" upon which the Minister allegedly acted in making the assessments. The amendments in issue have to do with the treatment upon the winding-up of Tri-Prairie Grain Ltd. ("Tri-Prairie") of certain non-capital losses alleged to have been incurred by it. The issues are complex and technical and arise in part out of the somewhat tangled interaction of sections 80, 88 and 111 of the Income Tax Act. They include such questions as the magnitude of the non-capital loss of Tri- Prairie, the time that it was incurred, whether the loss was incurred by Tri- Prairie or by other persons, the effect on the losses under section 80 of an alleged settlement or extinguishment of debts owing to the appellant by Tri- Prairie, the timing of the alleged extinguishment, the timing of the alleged winding-up of Tri-Prairie, the effect of an alleged change of control of TriPrairie, the effect of an alleged change of year end of Tri-Prairie as well as the ownership of Tri-Prairie at the time of its winding-up.

The opposition to the addition of paragraphs 40B, 40C, 40D and 40E is that they contain statements that are inconsistent with certain of the "assumptions" pleaded, particularly with respect to the time that Tri- Prairie began its winding- up, the fiscal period of Tri-Prairie and the date upon which the indebtedness of Tri-Prairie was extinguished.

It is true that there are inconsistencies between the assumptions pleaded and the allegations in the paragraphs that the Minister now wishes to add. Had these paragraphs been included in the original reply those inconsistencies would not have justified striking the paragraphs. The respondent is not bound by the assumptions made on assessing. She is entitled, in support of the assessment, to allege new facts or facts that are inconsistent with those assumed on assessing, provided that she bears the onus of proving those facts. An assumption, in the sense in which the word has come to be used in income tax appeals, is not a binding admission.

At this relatively early stage in this complex case I do not think it is appropriate that I should, in an interlocutory motion, seek to resolve the possible inconsistencies between the alternative positions taken by the Minister. Any attempt to reconcile them or to decide which the Minister is entitled to advance and which he is not would necessitate, in a sense, a determination of the merits of those positions. To do so would be to usurp the function of the judge who hears the case. To refuse to permit the addition of the paragraphs in question would be to restrict the ability of the court at trial to consider all aspects of the matter on its merits. The allegations in paragraphs 40B, 40C, 40D and 40E are integrally connected with the rest of the reply and are necessary to the court's understanding of the overall position advanced by the Crown.

The respondent's application to amend the replies is granted. The respondent is at liberty to file amended replies in the form attached as appendix B to the notices of motion dated June 16, 1992. The appellants are entitled to their costs, if any, thrown away as the result of the postponement of the examination for discovery of an officer of the respondent on a solicitor and client basis. Otherwise the costs of the motions are costs in the cause.

Application allowed.