William S. Hawkes, Appellant v. Her Majesty the Queen Respondent, [1997] 2 CTC 133, 97 DTC 5060

Strayer J A. (Robertson, McDonald JJ.A., concurring):

These two appeals were heard together, involving interlocutory motions in the two proceedings which were also heard together by the Tax Court of Canada. The learned Tax Court judge allowed the respondent’s motion to strike out paragraphs 9, 10 and 11 in the notice of appeal in each appeal before that Court, and dismissed the appellant’s motion in each appeal to require the respondent to make better discovery of documents in relation to “the tax treatment of Dr. Clifford Revell of Edmonton, Alberta”, in respect of expenses said to have been incurred by him in the same enterprise in which the appellants here claim to be entitled to deductions for expenses incurred to gain or produce income.

According to the allegations in the Notice of Appeal filed in the Tax Court (whose truth we have to assume for the purposes of the motion to strike) the appellants Hawkes and Graham entered into an agreement with Otstenla Estates (1984) Ltd. by which they undertook to provide funds for Otstenla to prosecute a lawsuit against the Boeing Company. If the lawsuit were to succeed the appellants would share in the proceeds in excess of the funds they had advanced. It was further alleged that Dr. Clifford Revell entered into a “substantially similar” agreement with Otstenla. While Dr. Revell was allowed by the Edmonton office of the respondent to deduct such amounts from income as being expended to gain or produce income, the Victoria office refused such a deduction to the appellants.

The paragraphs in the notice of appeal which the respondent successfully applied to strike are as follows:

9. The Appellant and Richard Graham were not the only people expending funds to enable Otstenla to prosecute its lawsuit against the Boeing Company. Dr. Clifford Revell of Edmonton, Alberta entered into an agreement that was substantially similar to the agreement entered into between the Appellant, Richard Graham and Otstenla. The Minister of National Revenue permitted Dr. Revell to deduct the amounts he expended for funding the lawsuit in circumstances identical to that of the Appellant. In doing so, the Minister of National Revenue made the assumption that such amounts were expended to gain or produce income.

10. By letter dated April 22, 1993, representatives of the Minister of National Revenue informed representatives of the Appellant that the Minister of National Revenue accepted the fact that amounts were expended by the Appellant to gain or produce income and, as such, no re-assessment would be issued with respect to the amounts expended as pleaded in paragraph 6, herein.

11. In the circumstances as pleaded herein, the Appellant states that the Respondent is estopped from assuming that amounts expended by the Appellant as pleaded herein were not expended to gain or produce income in determining whether to re-assess the Appellant for his 1990 and 1991 taxation years.

In reply to paragraph 9, the respondent admitted that Dr. Revell had been allowed the deduction, but stated that this was done in error. With respect to paragraph 10 the respondent admitted such a letter had been written but when the “assessing process was as yet incomplete”. He denied the allegation of estoppel in paragraph 11 which was based on the allegations in paragraphs 9 and 10.

With respect to the appeals from the order of the learned motions judge to strike these paragraphs, I believe such appeals must be dismissed. There are essentially two issues here. Firstly, should the respondent be able to move to strike these paragraphs over a year after having pleaded in response to them in the reply to the notice of appeal? Secondly, if so can it be said that, in the words of paragraph 58(l)(b) of the General Procedure Rules of the Tax Court of Canada invoked by the respondent, these paragraphs of the notice of appeal

disclose[s] no reasonable grounds for appeal...?

On the first issue, no jurisprudence of the Tax Court was cited to us. The jurisprudence concerning analogous provisions in the rules of the Federal Court of Canada clearly indicates that where the motion to strike asserts that such a pleading discloses no cause of action or grounds for appeal in law, such motion can be made at any time. [1] Where, however, the party making such motion has already pleaded to the allegations complained of, the motions judge has a discretion as to whether to entertain the application to strike in light of this delay. In the present case the Tax Court judge clearly recognized these principles and exercised his discretion in entertaining such a motion a year after the respondent had so pleaded. I can see no error in principle in the exercise of this discretion and therefore we should not interfere with it.

The second issue concerns the Tax Court judge’s decision to strike out the three paragraphs in the notice of appeal which based a plea of estoppel on the fact that the Minister had acted inconsistently: firstly, in allowing Dr. Revell to deduct expenses incurred in the same venture while refusing such deductions to the appellants; and secondly, by giving notice in the letter to the appellants dated April 22, 1993 that such deductions would be allowed and then by disallowing such deductions in notices of reassessment dated July 19, 1993 with respect to the appellants’ 1990 and 1991 taxation years.

I would first observe that this Court in no way condones inconsistent assessments or conflicting information being provided to taxpayers as is virtually admitted to have happened here. Such conduct must surely be avoided if at all possible if taxpayers are to perceive the system as fair, equitable, and reasonable in application, a system with which they are expected to cooperate voluntarily.

It is quite another matter, however, to say that the Minister must always be bound by his own mistakes. I do not understand that to be the established law.

This Court had occasion recently to review the law in respect of inconsistent assessments concerning the same taxpayer and as between different taxpayers. In Ludco Enterprises Ltd. v. R. [2] this Court considered earlier jurisprudence and confirmed the basic principle that it is the duty of the Min- ister to assess, and if necessary reassess, taxpayers’ returns so as to apply correctly the law to the facts. If the taxpayer disagrees with any particular assessment he or she has the right to appeal to the Tax Court of Canada where the law and the facts can be fully reviewed and a further appeal may be brought to this Court. Thus the fact that the Minister has assessed one return of a taxpayer in a different way from another return, or has assessed two taxpayers involved in similar activities differently, is not proof that any particular assessment is incorrect. That is a matter for determination on appeal.

Therefore the allegation in paragraph 9, not disputed by the Minister, that Dr. Revell was assessed differently by a different taxation office, does not at law raise any ground for attacking the assessment. It discloses no issue relevant to determining the correctness of the reassessments made in respect of the appellants.

Paragraph 10 asserts the undisputed fact that the Victoria office of Revenue Canada advised these appellants on April 22, 1993 that the respondent would allow the deductions in question, apparently on the basis that the Edmonton office had allowed such deductions in respect of Dr. Revell. This was obviously inconsistent with the reassessments actually issued on July 19, 1993. Again the authorities are clear that it is only the final assessment which can be attacked and that interim opinions, or even previous assessments, cannot be relied upon to establish the invalidity of the last assessment or reassessment provided the latter is made within the time allowed by the statute. [3] Among other reasons, the proposition that the Minister is bound by earlier assessments (to say nothing of earlier statements of opinion by letter) would make meaningless the times allowed for reassessment by subsection 152(4) of the Income Tax Act. Therefore paragraph 10 does not in law allege any fact which could logically affect the validity of the reassessment here.

Paragraph 11 which alleges estoppel based, apparently, on the actions of the Minister alleged in paragraphs 9 and 10, similarly discloses no reasonable ground for appeal. It is trite law that estoppel cannot apply so as to prevent the Minister from performing the duties imposed on him by the Income Tax Act, namely the proper assessment of returns in accordance with the law. The same limitation applies to the doctrine of legitimate ex- pectations. More specifically in this case, the appellants have alleged no adequate facts to bring themselves within the doctrine of estoppel, either the traditional doctrine based on representation of facts through conduct, or the more modern doctrine of promissory estoppel. With respect to either doctrine it must be demonstrated that the representee has acted to his detriment in reliance on the representations. No such allegation is made in this case and for this reason alone the pleading with respect to estoppel as framed could not succeed.

I am therefore of the view that these paragraphs should be struck out as disclosing no reasonable grounds of appeal.

Counsel for the appellants laid considerable stress on a decision of the Tax Court of Canada in Labelle v. R.^ [4] In that case the Tax Court judge held that because the Minister had treated a certain prize in accountancy as a prize “recognized by the general public” within the meaning of section 7700 of the Income Tax Regulations, in respect of one taxpayer, he must assess another taxpayer on the same basis. The learned Tax Court judge stated:

The Minister must make assessments pursuant to the Act, and for this reason the manner in which another taxpayer is assessed is normally not relevant. However, when an assessment requires that the Minister exercise an element of subjective appreciation, it seems to me that this cannot be the rule.” [5]

While I am somewhat puzzled by the reference to “an element of subjective appreciation” this decision must, at best, be confined to its particular circumstances. In that case the dispute was not over the characterization of one taxpayer’s activities as compared to another, but rather the characterization of a prize whose essential nature was unrelated to any particular taxpayer. With respect, I find it unnecessary to comment further on the decision other than to say that I do not find it in any way authoritative in respect of the issues before us. The other decision strongly relied on was that of the Trial Division of this Court in Riddell v. Minister of National Revenue^ [6] In that case the reassessment by the Minister was attacked, inter alia, with respect to his refusal to permit Mr. Riddell to deduct certain interest payments from his personal income tax where those payments had been made by his com- pany. According to the evidence the Revenue Canada auditor in charge of his file was advised by his superior as follows:

In these types of situations, it has been our Policy (as approved by the previous Chief of Audit Review) to allow the shareholder the deductions as if he had paid them himself. [7]

Yet the reassessment was not made on this basis. The learned Trial Judge held that the Minister was obliged to apply the policy as so stated “in a fair and even handed manner”. If other taxpayers in the same situation were being permitted to make this type of deduction that advantage must be extended to Mr. Riddell as well. As the learned judge said:

It is not open to the Minister to exercise his discretionary power to implement policy in an arbitrary and capricious fashion. [8]

The learned judge went on to rely on a decision I rendered in the Trial Division, Aurchem Exploration Ltd. v. Canada? [9] where I had quashed a discretionary decision of the mining recorder of the Whitehorse mining district, Yukon. With respect, I am not prepared to apply the Riddell decision in the present case. The Riddell decision seems to have turned on inconsistency in the departure from the “policy” of the Minister in the exercise of his “discretion”. Whatever the merits of that characterization may have been in Riddell, as I have indicated here the function being performed by the Minister in reassessing the appellants was a function of applying the law and the facts to make an assessment, an assessment which was open to full appeal as to its correctness in law and fact. No issue of policy or discretion was involved. Further, with respect, I am unable to perceive in Riddell the application of the criteria which I specifically applied in granting certiorari in the Aurchem case. In the latter case there was a discretionary power of the recorder to waive compliance with certain technical requirements in staking and filing a mining claim. I found that there had been foreseeable reliance by the community of prospectors on a continuing and favourable exercise of that discretion which was of fundamental importance to the manner in which they staked claims before filing them. Further I found a serious prejudice to the applicant prospector who, in reliance on the past practice of the recorder, staked his claims in a fashion similar to countless others, and then filed accordingly. There was a time limit for filing and no opportunity to challenge the views of the recorder before his refusal of fil- ing, as a result of which refusal the right to the claim might well be lost. I further made it clear that it was open to the recorder to change his policy, subject to him alerting the prospecting community to his intention to do so. In the report of Riddell, however, it is not clear to me that there was any element of representation or detrimental reliance as a result of such representation. Certainly none existed in the present case and Aurchem, the authority upon which Riddell seems to have been based, has no application here.

Paragraphs 9, 10 and 11 should therefore be struck out. Counsel for the appellants conceded that if these paragraphs were struck there would be no basis for his motions for better discovery as they related to materials relevant to the allegations in paragraphs 9, 10 and 11.

The appeals from the decisions of the Tax Court in respect of both the motions to strike and the motions for better discovery should therefore be dismissed.

The learned Tax Court judge ordered that

The Respondent will have its costs, which will be costs in the cause.

I found this statement somewhat enigmatic and asked counsel for clarification. Counsel for the appellants suggested what appears to me the correct interpretation, namely that the respondent will have its costs on these motions if it is successful in the cause. Neither party has taken issue with the judge’s exercise of discretion in this respect. I believe the order should be clarified consistently with what appears to have been his intention and to apply the same disposition to the costs of these appeals.

Appeal dismissed.