Cole v. R., [1999] 3 CTC 2300, 99 DTC 1098

Beaubier T.C.J. .

This Motion by the Respondent dated December 11, 1998 to strike out certain portions of the Appellant’s Amended Notice of Appeal was heard at St. John’s, Newfoundland on May 12, 1999.

The Motion is pursuant to Section 53 of the Tax Court of Canada Rules (General Procedure), which reads:

The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,

a) may prejudice or delay the fair hearing of the action,

b) is scandalous, frivolous or vexatious, or

c) is an abuse of the process of the Court.

The Amended Notice of Appeal, with the portions proposed to be struck in italics, reads:

Amended Notice of Appeal

Amended pursuant to Rule 54, to include a reference to the Canadian Bill of Rights and a settlement reached relating to other taxation years.

a. Home address: 25 Elmwood Crescent, Pasadena, NF AOL I KO

b. Identification of the Assessments under appeal: March 4, 1998 under the Income Tax Act for the taxation years 1987 and 1988.

c. Material Facts: the appellant is a former Revenue Canada auditor, and is now residing in Pasadena, NF. In April 1984, he gave a speech to the Corner Brook Rotary Club on how to respond if audited by Revenue Canada. Mr. Ron Moore, the director of Revenue Canada, St. John’s office, who by reading a newspaper account of the speech, filed a written complaint regarding his speech with the Institute of Chartered Accountants. In January 1986, Mr. Neal Moores, a tax auditor with the St. John’s Office and a former coworker of the appellant, screened the appellant’s partner for an income tax audit, subsequently the audit was expanded to include the return of the Appellant. Mr. Neal Moores and Mr. Ron Moore were frequent companions, taking hunting and fishing trips together.

While the appellant was not fully aware of all the details from the beginning, he suspected that the files were not objectively screened. He objected to the assessments on the basis of the Charter of Rights being violated, and also on the merits of the assessment, and he wrote the Minister of National revenue complaining he was being audited for reasons unrelated to the Income Tax Act. The minister refused to intervene. After the audit was completed, the appellant filed notices of objection and subsequently a statement of claim on the Federal Court.

Bonnell Cole Janes, Chartered Accountants, was a partnership in which the Appellant held a ten per cent interest and to which the Appellant was not connected. Bonnell Cole Computer Services. Limited is an Incorporated body of which the Appellant held a thirty-three per cent interest. Bonnell Cole Janes, Chartered Accountants was not a shareholder of Bonnell Cole Computer Services Limited. On December 31, 1987, Bonnell Cole Janes, Chartered Accountants had an account payable to Bonnell Cole Computer Services Limited in the amount of $130,412.72. The Account was subject to normal credit terms.

The amount was repaid in full by March 31, 1988. The Minister determined the existence of this account payable constituted a benefit conferred upon a shareholder. The minister increased the income of the partnership in the amount of $130,412.72. He further included in the Appellant’s 1988 income thirty-three per cent of the account ($43,470.09). Similar issues arose when the Appellant was assessed for the tax year 1983 and the outstanding litigation was settled with the Respondent by letter dated August 9, 1995 from the Respondent’s solicitor (among other correspondence) that Revenue Canada would settle the Notices of Objection for 1984, 1986, 1987 and 1988 by makin ain adjustment: “and that this will settle in full the Notices of Objection for these years”.

d. The issues to be decided: Whether it is a violation of The Canadian Bill of Rights and the Charter o f Rights and Freedoms for a department of government to interfere with a citizen for making remarks the department believes to be unflattering.

Whether the existence of a trade account payable constitutes a benefit.

Whether a partnership is a person

Whether a benefit can be imputed to a partnership that is not a shareholder of a corporation nor connected to a shareholder of a corporation.

Whether a benefit arose to Bonnell Cole Janes, Chartered Accountants in its capacity as shareholder.

Whether the trade accounts payable arose in the ordinary course of business and bona fide arrangements were made, at the time the indebtedness arose, for repayment within a reasonable time.

Whether it is reasonable to allocate a benefit conferred upon a partnership to its members on a per capita or upon percentage of ownership basis.

Whether the Respondent has contracted a full settlement with the Appellant and whether the Respondent is estopped in continuing to maintain assessments that it agreed were settled in full.

e. Statutory provision relied upon: Constitution Act, 1982 (79) Part I Canadian Charter of Rights and Freedoms subsection 2(b), section 8, Canadian Income Tax Act R.S.C. 1985 c. 1, Subsection 15(2), 15(2.1), 248(1), and the Ca- nadian Bill of Rights.

f. Reasons the appellant intends to rely on: The Appellant’s tax returns were ordered for audit in retaliation for a speech given in public, broadcast on radio and reported in the newspapers. This action on the part of the Minister is contrary to both subsection 2(a) (Freedom of expression) and section 8 (freedom from unreasonable search) of the Canadian Charter of Rights and Freedoms. Further section 1(b) of the Canadian Bill of Rights ensures people are equally treated in the application of legislation. The law requires files be selected for audit on the basis of objective criteria and for objective reasons, impartially and without favour.

For subsection 15(2) to be operative a benefit must be conferred upon a shareholder. The Appellant enjoyed no benefit from the existence of a trade account between Bonnell Cole Janes, Chartered Accountants and Bonnell Cole Computer Services Limited.

Subsection 15(2) identifies four persons and four partnerships to which the subsection applies As a perquisite the person or partnership must first become indebted to a corporation. These persons and partnerships are:

	A person who is a shareholder of the corporation.
1.	A person connected to a shareholder of the corporation
2.	A person who is the member of a partnership, that is a shareholder of
	the corporation.
3,	A person who is the beneficiary of a trust, that is a shareholder of the
	corporation.
4.	A partnership that is a shareholder of the corporation.
5.	A partnership that is connected to a shareholder of the corporation.
6.	A partnership that is the member of a partnership, that is a shareholder
	of the corporation.
7.	A partnership that is the beneficiary of a trust, that is a shareholder of
	the corporation.
1.	The Appellant is a person who is a shareholder, but he is not indebted to
	the corporation.
2.	The appellant is not connected to any other shareholder of the
	corporation.

3. The appellant is a member of a partnership, but the partnership is not a shareholder of the corporation.

4. The Appellant is not the beneficiary of a trust, that is a shareholder of the corporation.

5. Bonnell Cole Janes, Chartered Accountants is a partnership who is indebted, but is not a shareholder of the corporation.

6. Bonnell Cole Janes, Chartered Accountants is not connected to a shareholder of the corporation.

7. Bonnell Cole Janes, Chartered Accountants is not a member of a partnership that is a shareholder of the corporation.

8. Bonnell Cole Janes, Chartered Accountants is not a beneficiary of a trust, that is a shareholder of the corporation.

Benefits contemplated by subsection 15(2) must be enjoyed in the recipient’s capacity as a shareholder. If Bonnell Coles Janes, Chartered Accounts did enjoy some sort of advantage through its indebtedness to the corporation it arose by way of common ownership of firms engaged in complementary businesses, and not through share ownership.

Subsection 15(2) exempts certain transactions with its shareholders. Debts that arise in the ordinary course of business are exempt provided bona fide arrangements for repayments are made at the time the loan was incurred. The arrangements for repayments made at the time the debt was incurred was normal credit terms, net 30 days maximum 365 days. The debt was extinguished by March 31, 1988 with in the period of time prescribed by paragraph 15(2)b.

The Appellant’s contributed capital to Bonnell Cole Janes, Chartered Accountants constituted 8.8% of the capital of the partnership so the maximum benefit attributable to him is 8.8%.

g. Relief sought: I. The Minister be ordered to withdraw his notices of reassessment for the years 1987 and 1988.

2. The Appeal be allowed with the Respondent to pay the Appellant’s cost.

h. Date of notice: Notice of Objection dated May 22, 1991, and confirmed by Appeals Divisions dated March 4, 1998.

Amended at St. John’s, Newfoundland, this Day of November, 1998.

The Respondent’s Motion is on two grounds:

1. The Appellant’s pleadings of alleged infringements of his subsection 2(b) and section 8 rights under the Canadian Charter of Rights and Freedoms as well as alleged infringements of his subsection 1(b) rights under the Canadian Bill of Rights may prejudice or delay the fair hearing of the action.

2. The Appellant’s pleadings of alleged infringements of his subsection 2(b) and section 8 rights under the Canadian Charter of Rights and Freedoms as well as alleged infringements of his subsection 1(b) rights under the Canadian Bill of Rights are frivolous and vexatious as the pleadings disclose no basis whatsoever for the alleged infringements.

Respondent’s counsel quoted /rwin Toy Ltd. c. Québec (Procureur général) (1989), 58 D.L.R. (4th) 577 (S.C.C.), at 608 and 609 in support of the motion. In essence, he argued that there is nothing in the Notice of Appeal to indicate that the purpose or effect of the impugned governmental activity was to control the Appellant’s attempts to convey meaning through that activity.

This can be taken to mean that what was done is now past and the remedy is to claim damages.

The Appellant opposes the motion on the basis that the strikeout should not occur unless the case alleged is unarguable. If it may or may not succeed, the pleading should stand. That is the accepted law on the subject.

In support of the pleading itself, Appellant’s counsel referred to the judgment of Lamarre Proulx, T.C.C.J. in Huet c. Ministre du Revenu national, (1990), 90 D.T.C. 1792 (T.C.C.), at 1798 where she stated:

While it is now doubtful that section 15 of the Charter may apply to an act of the government, it would seem from Lavell, supra, that paragraph 1(b) of the Bill may be relied upon to ensure that people are treated equally in the application of legislation. In the enforcement or policing of legislation it has always been accepted that investigations relating to such enforcement may be conducted on a sample basis, on the basis of informations laid or according to any other objective test relating to the enforcement of the legislation and does not have to be done on a universal basis. It does not seem possible or logical to proceed in any other way. The fact that an investigation is conducted on the above bases is essential to ensure full compliance with the law and not an arbitrary or discriminatory exercise of administrative power. This is not unequal treatment of individuals in that all persons are subject to the possibility of investigation and that these investigations are conducted on the basis of objective criteria and for objective reasons, impartially and without favour.

In essence the Appellant’s counsel argues that if he is right in the pleadings the assessment will be struck as it has been in criminal proceedings and, he suggests, in tax proceedings in the United States.

A review of United States’ tax proceedings indicates that in Raheja v. Commissioner of Internal Revenue, [725 F.2d 64 (U.S. 7th Cir. 1984)] 84-1 U.S.T.C. ^[9145 the taxpayers did not contest the correctness of the adjustments to their taxes, but rather argued that the notice of deficiency should be declared null and void because the taxpayers were selected for the audit, in violation of their Fifth Amendment right of due process. They submitted that they should have been selected by a computer for the audit rather than due to their association with a partnership. Cudahy, Circuit Judge, rejected this argument and stated at p. 83, 153:

As a general rule, the Tax Court will not look behind the notice of deficiency to examine the evidence used or the propriety of the Commissioner’s motives or of his administrative policy or procedure in making his determinations....

An exception to the rule against “looking behind” the notice of deficiency is made when an infringement of the taxpayer’s constitutional rights is alleged and the integrity of the judicial process is at stake. In cases of alleged Fourth Amendment violations, the Tax Court has carefully scrutinized the notice of deficiency and imposed sanctions to discourage reliance on evidence which is not merely inadmissible under the usual rules of evidence (the deficiency determination often rests upon hearsay or other inadmissible evidence), but is constitutionally inadmissible. Proesel at 605; Suarez at 813. Similarly, while the conscious exercise of some selectivity in criminal prosecution is not in and of itself a constitutional violation, see Oyler v. Boles, 368 U.S. 448, 456 (1962), it is possible that selectivity may rise to the level of an equal protection violation. Fundamental to an equal protection defense to prosecution is “proof that the decision to prosecute was based on impermissible considerations such as race, religion, or the desire to penalize the exercise of constitutional rights.” United States v. Pes- kin, 527 F. 2d 71, 86 (7th Cir. 975), cert. denied, 429 U.S. 818 (1976)...

Numerous taxpayers have raised the Fourth Amendment or equal protection arguments in an attempt to quash notices of deficiency — and have been notably unsuccessful. In Suarez, all the evidence on which the notice of deficiency was based was obtained in an illegal search of taxpayer’s premises. As a remedy, the Tax Court merely removed the presumption of correctness attached to the notice of deficiency, and shifted the burden of producing and going forward (not the burden of proof) to the Commissioner who had to present independent untainted evidence to sustain the asserted deficiency. In Greenberg's Express (alleged selection for audit on the basis of taxpayers’ ties to organized crime) and Foxman v. Renison [80-2 USTC 49512], 625 F. 2d 429 (2d Cir.), cert. denied, 449 U.S. 993 (1980) (allegation of selection on the basis of the IRS agent’s dislike of dentists who deal with Medicaid patients), even the minor burden-shifting remedy was denied. In no case was the notice of deficiency quashed.

The Court consequently, held that the taxpayers had not established grounds for quashing the notice of deficiency.

In Greenberg’s Express Inc. v. Commissioner of Internal Revenue, 62 T.C. 324 (U.S. T.C. 1984), at 328, the taxpayer alleged that their tax returns had been selected for examination because of their supposed family and business connections with persons purportedly involved in organized crime. The taxpayers brought an application requesting an order declaring the notices of deficiency null and void. The Court recognized that situations may arise in which the taxpayer should be accorded some relief due to an audit selection that was clearly based on an unjustifiable criterion. However, it found that such situations would be rare and that this was not one of them. Hence, the relief sought by the taxpayer was denied.

It is evident that the Tax Court in the United States may consider the constitutional rights of taxpayers during the audit selection process. The line of cases indicates that the Court will look at the reasons underlying the notice of deficiency (equivalent to a notice of assessment) when an infringement of the taxpayer’s constitutional rights is alleged and the integrity of the judicial system is put into question. However, the Court is reluctant to find a notice of deficiency null and void without a clear and serious violation of the taxpayer’s constitutional rights. To date, such relief has not been granted.

In the Court’s view the Amended Notice of Appeal is arguable. Matters under both the Charter and the Bill of Rights are in a state of flux and there does not appear to have been a similar appeal of an assessment for these reasons under the Income Tax Act. If arbitrary conduct is established in evidence, then, whether arbitrary conduct of Revenue Canada officials will vitiate an assessment, warrants judicial review. The Appellant appears to base his appeal on freedom of speech and a right of citizens to be free from the arbitrary acts of government officials. It is a case that is arguable.

Other matters were raised at the hearing of the motion and as a result the following are ordered:

1. The Respondent’s motion to strike is dismissed.

2. The Amended Notice of Appeal dated November, 1998 is accepted as filed, by consent of the Respondent.

3. The Respondent is allowed 75 days from the date of this Order in which to file a Reply to the Amended Notice of Appeal.

4. Costs of this Motion are in the cause.

Application was dismissed.