McPherson v. R., [1997] 3 C.T.C. 2586, 97 D.T.C. 1497

Rip T.C.J.:

1 The appellants, Glenda McPherson, Allan Stremler, Warwick Jones and Donald Harrower have made motions for an order that their appeals be heard together or one immediately after the other during the week of September 8, 1997 through September 12, 1997 and for an order setting dates for the delivery of pleadings, the holding of examinations for discovery, and the fulfilment of undertakings in respect of each of the appeals. The respondent, on the other hand, has made a motion with respect to each of Stremler, Jones and Harrower appeals for particulars pursuant to section 52 of the Rules of the Tax Court of Canada (General Procedure) (“Rules”) concerning the fair market value of the properties raised in each of the Notices of Appeal and for an extension of time for filing the Replies to the Notices of Appeal.

2 The respondent's motions were heard first since, if they are allowed, the appellants' appeals would not be able to be heard during the week of September 8, 1997 and I would have to dismiss their motions.

3 The solicitors for Ms. McPherson filed a Notice of Appeal from reassessments of Ms. McPherson's 1990, 1991 and 1992 taxation years on or about August 11, 1995. Ms. McPherson's solicitors represent approximately 90 other taxpayers whose circumstances are similar to those of Ms. McPherson and would be assessed on a similar basis. The appeals of Ms. McPherson and those of the other appellants had been selected by agreement with officials of the Revenue Canada as representative of these taxpayers. The list of documents in respect of the McPherson appeals was filed pursuant to section 81 of the Rules and discoveries in the McPherson appeals were heard during the week of June 23, 1997.

4 At a status hearing of the McPherson appeals heard by telephone conference call by McArthur T.C.C.J. on January 29, 1997 the parties agreed to, and Judge McArthur issued, an order that the McPherson appeals be set down for hearing commencing on Monday, September 8, 1997 for five days until September 12, 1997. Judge McArthur anticipated that within the “next few months” counsel would advise the Court of the other appeals to be heard that would follow in the same. According to the transcript of the status hearing counsel agreed that after the selection of the representative appellants, examinations for discovery in respect of all the appeals would be held by June 30, 1997 and any undertakings given at discovery would be completed by July 31, 1997.

5 Following discussions and correspondence between them, solicitors for the appellants and the respondent agreed, on March 12, 1997, as to those taxpayers who would file appeals that, together with the McPherson appeals, would be representative of all the other taxpayers represented by appellants' solicitors. These appeals would be heard together with the McPherson appeals during the week of September 8, 1997. Discoveries for all four appeals were agreed to be set down for June 23, 1997.

6 On or about May 14, 1997 the Stremler, Jones and Harrower Notices of Appeal were filed.

7 The main issue in all four appeals appears to be whether the appellants are entitled to deduct losses from condominium real property in computing income for the taxation years under appeal. The Minister appears to have disallowed the appellants' claim for losses on the basis that the real property in question did not constitute inventory to the appellants as the appellants were not in the business of buying and selling real property and they did not incur any loss in the years under appeal as losses from a business: subsection 9(2) of the Income Tax Act (“Act”). In the Stremler, Jones and Harrower appeals, the appellants state that the properties were acquired for the purpose of earning a profit for the resale of the properties and, in the interim, earn income from the rental of the properties; therefore, the appellants are entitled to deduct as losses from a business within the meaning of subsection 9(2) of the Act. The appellants Stremler, Jones and Harrower also pleaded in the alternative that:

if the Appellant was required to add the losses incurred in the years under appeal to the cost of the Properties, the Appellant is entitled to value the Properties at the lower of their cost to the Appellant and their fair market value in accordance with subsection 10(1) of the Income Tax Act and to deduct the resulting business losses in the years under appeal. (Emphasis added)

8 Counsel agrees that the various condominium properties are inventory and that the appellants should be permitted to deduct, in computing their income for a year, the decrease in the value of the properties.

9 The alternative submission in the Notices of Appeal of Stremler, Jones and Harrower is not present in McPherson's Notice of Appeal. By letter dated June 6, 1997 Mr. Richard Gobeil, a counsel for the respondent, wrote to Mr. Clifford Rand and Ms. Susan Thomson, counsel for the appellants, requesting particulars of the fair market value of the condominium properties referred to in the Notices of Appeal of Stremler, Harrower and Jones.

10 By letters dated June 10, 1997 and June 12, 1997 respectively from Clifford Rand to Richard Gobeil, Mr. Rand advised Mr. Gobeil that the particulars requested in respect of the fair market value of the properties were not available.Appellants' counsel did provide certain particulars requested in respect of another matter.

11 Counsel for the appellants forwarded documents for a consent motion to hear the four appeals together or one after the other on June 13, 1997 for delivery to Mr. Gobeil on June 16, 1997. Ms. Thomson in her affidavit, stated that she believed, “on the basis of prior discussions and the status hearing, that we had an agreement to proceed with the McPherson appeal and the three other appeals to be heard together...”. In a telephone conversation between Mr. Gobeil, Mr. Rand and Ms. Thomson on June 16, 1997 Mr. Gobeil informed appellants' counsel that he would not consent to the motion. Subsequently, by letter dated June 17, 1997, Mr. Gobeil wrote to Mr. Rand and Ms. Thomson acknowledging their prior agreement concerning the joining of these appeals and the schedule for discoveries, and expressing the view that due to appellants' inability to respond to the request for particulars he had no alternative but to cancel discoveries in respect of the Stremler, Jones and Harrower appeals and that he could not sign the consent to motion.

12 The Crown's ground for the motion for particulars is that the appellants raised in their Notices of Appeal the alternative argument that they are entitled to a business loss resulting from the difference between their fair market value of the relevant properties and their cost. The respective Notices of Appeal of Stremler, Jones and Harrower do not quantify the fair market value of these properties in any year. According to an affidavit of Audie Schwartz in support of the respondent's motion, the respondent is either incapable of determining whether there exists an issue concerning losses claimed resulting from the difference between the fair market value of the properties and their costs. There are no allegations in the respective Notices of Appeal quantifying the fair market value of the properties for each taxation year under appeal and in the absence of such allegations, Mr. Schwartz says, the respondent is incapable of properly addressing the issue in the Replies.

13 Mr. Gobeil, who acted for the Crown in these motions, stated that if the fair market value of the properties has increased or if the values have remained stable, then the appellants have incurred no loss. He stated he is not seeking evidence at this point but what he wants to know the fair market value so that he can respond to the alternate agreement, in particular whether there was a loss or not.

14 Mr. Gobeil also was concerned with the fact in paragraph 13 of the Stremler's Notice of Appeal (and paragraph 11 of the Jones appeal), the appellants alleged that:

during the years under appeal, the losses associated with the Properties exceeded the increase, if any, in the value of the Properties.

15 Counsel for the appellants submitted that the Crown does not require any particulars since the losses themselves are clearly stated and quantified. If the properties are indeed inventory, he submitted, then the taxpayers would be entitled to deduction equal to the losses in a particular year.

16 Counsel for the appellants explained that “even if [the appellants] were required to add [their annual] losses [from the condominium units] to the cost of the units in inventory accounting, then, to the extent that the fair market value of the property did not go up by the amount of the losses in that particular year, [one] would only add the losses to the extent of the increase in fair market value.” Thus, he concluded, the alternative argument is not based strictly on Friesen, supra. He argued that for accounting purposes one may only add to the cost of the property the losses to the extent there has been an increase in value. Thus, if the properties did not decrease in value, or they increased in value only to a certain extent, the appellants would be entitled to a portion of the losses. This has nothing to do with defining the issues, counsel declared, “it's simply a question of what the quantum of the losses are in the particular cases”. That question will be determined by the evidence at trial.

17 In counsel for the appellants' view, the losses have been defined as a specific amount but the evidence at trial may show that, based on how the properties fluctuated in value, the appellants are entitled to only a portion of the losses.

18 Counsel also was concerned that since there were approximately 90 other appellants, of which only the representative appeals are before the Court, precise values may not be of assistance in the overall goal of proceeding with the four appeals. Counsel was willing to provide the respondent with a range within which the properties would be valued, that is, the values of each property for a year would be in a range between the property's actual cost and the aggregate of its actual cost and the loss from the property for the year. Respondent's counsel rejected this offer.

19 Counsel for the appellants insisted the issues are defined and only at trial need the respondent know the actual fair market value of the properties. In the meantime the respondent will know the range of the value and that is enough until trial.

20 The respondent is entitled to know the quantum of the fair market value of the condominium properties at the end of each year. In her Reply to the Notices of Appeal, the respondent must state the facts which are admitted, denied and of which she has no knowledge and puts in issue: Rule 49. She must also state the issues to be decided and one of the issues is raised as the appellants' alternative submission. In the case at bar, if the respondent knows the fair market values alleged by the appellants, she may agree with the appellants and say so in the Replies to the Notices of Appeal. This may reduce the need for litigation or, at least, reduce the time required for trial. The fair market values of the condominiums are not facts the Minister appears to have addressed his mind to when assessing: Satin Finish Hardwood Flooring (Ontario) Ltd. v. R., [1995] 2 C.T.C. 2440 (T.C.C.). The values were not required to make the assessments.

21 Any agreement by the parties to add other appeals to the hearing date of the McPherson appeals I believe, was premised on the understanding the issues would be similar in all appeals. The alternative agreement in the Stremler, Jones and Harrower appeals affects the agreement.

22 An order shall issue that the respondent shall be entitled to the particulars demanded and the appellants Stremler, Jones and Harrower shall provide to respondent particulars of the fair market values of the properties by August 20, 1997. The respondent shall have 30 days from receipt of particulars to file relies to the Notices of Appeal.

23 Because the appellants' motion has been allowed, it is doubtful discoveries on the Stremler, Jones and Harrower appeals can be held in sufficient time for these appeals to be heard together with that of McPherson. Therefore the appellants' motion is dismissed. However, if particulars are provided quickly, and the Replies filed without delay and discoveries are held on short notice, all before September 1997, the appellants may again come before the Court to make a motion that all four appeals be heard together, or one after the other. That would have been, of course, the most efficient way to prosecute the appeals.

24 The respondent shall be entitled to her costs of the motions.