Inwest Investments Ltd. v. The Queen, 2015 BCSC 1375

In order to avoid B.C. provincial income tax on a capital gain of $336.2 million which was realized on a sale in 2002 of a control block of a TSX-listed company (Future Shop), before closing the holders transferred their Future Shop shares to a newly-incorporated Yukon company (”Wesbild”) with non-resident directors. Its 2002 return indicated “OC” [outside Canada] as its jurisdiction. CRA commenced to audit the transaction more than four years after the initial assessment of the 2002 year and reassessed Wesbild in December 2011 for the difference on the taxable capital gain between the 13.5% B.C. tax rate and the 10% federal tax abatement credit.

Wesbild brought a summary-trial application respecting whether the Minister was statute-barred from issuing the reassessment. After noting (at para. 85) that “fairness is achieved for the Minister if the taxpayer is required to file its return in a manner that sufficiently identifies its filing position so that the Minister can assess that position, noting (at para. 101) that the French version of s. 152(4)(a)(i) refers to “soit a fait une présentation erronée des faits”, which translated as “has made a misrepresentation of facts,” and referring inter alia to Ver, Fitzpatrick J. stated (at para. 126):

[A] statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable; …the fairness objective of the legislation is achieved if that reasonable filing position is evident from the tax return… .

Here, the CRA position was that “business” as used in Reg. 400(2) was “’ very broad and wide enough to capture corporations that generate income from sources that include income from… property or capital gains’” (para. 136), whereas Wesbild argued that “the Marconi test applies and that it had no ‘business’” and, therefore, no permanent establishment in B.C. (para. 138).

In finding that Wesbild had not made a misrepresentation, Fitzpatrick J. concluded (at para. 143):

[The 2002 Return] indicated a filing position that was clearly more than arguable based on the… jurisprudence on the issue. There is no suggestion that Wesbild failed to disclose to the CRA all that it was required to disclose. The CRA was, of course, more than able to understand that filing position and take whatever steps it wished to challenge that position. … Simply, the filing position in the 2002 Return was certainly a representation, but it was not a misrepresentation of any kind. … Accordingly… s. 152(4)(a)(i) is not available… to allow the CRA to reassess outside of the normal reassessment period.

In any event, the Crown had not established neglect or carelessness. The in-house tax lawyer (Mr. Zien), in addition to considering the plan carefully himself, had “obtained outside legal advice on the issue to supplement his own views as to the viability of the Tax Plan” from Robert Kopstein at Blakes (para. 169). Furthermore (para. 181):

Wesbild’s filing position conformed to the Marconi test… . There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.

Fitzpatrick J. found that CRA had failed to establish neglect or carelessness in the filing position of the taxpayer ("Wesbild") given that such position had been carefully considered by its in-house tax lawyer – and, furthermore, he had consulted outside counsel (Robert Kopstein). Fitzpatrick J. found that it was unnecessary to put Kopstein’s opinion in evidence. He noted that Kopstein had refused to disclose the substance of his advice, and CRA had refused its proposal to have a Justice lawyer review his opinion and advise CRA that it met the due diligence defence. Fitzpatrick J. then stated (at paras. 174, 176-177):

I [disagree]… that Wesbild cannot exonerate itself by merely showing there is a potential legal argument that would support the filing position and that it must show what legal arguments were actually considered before the return was filed. …

The CRA invites the court to infer that there was no consideration of the legal issues by reason of the fact that Mr. Kopstein’s opinion was not put into evidence. …

…What that advice entailed is not before the Court. However, I was not referred to any authority… that, in considering this issue, Wesbild is compelled to waive its right to assert privilege … . To do so would render the protection afforded by such privilege to be illusory… .

The high rate of B.C. corporate income tax was avoided through rolling shares into a Yukon corporation (“Wesbild”), which purported not to have a B.C. permanent establishment, before a sale of the shares closed (giving rise to a $336M capital gain). Wesbild’s position was that, applying Marconi, it was not carrying on business, so that under Reg. 400(2) it did not have a fixed place of “business” (and, thus, no permanent establishment) in B.C. CRA reassessed (but not until after the normal reassessment period) on the basis that, in the context of Reg. 400 et seq., “business” included having property or taxable capital gains as the only sources of income.

After finding that the filing position of Wesbild was reasonable and, therefore, not a “misrepresentation,” Fitzpatrick J stated (at para. 181):

Wesbild’s filing position conformed to the Marconi test… . There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.

The filing position of the taxpayer (Wesbild), that it did not have a permanent establishment in B.C., was based on an application of the Marconi test of what was a business, so that under Reg. 400(2) it did not have a fixed place of “business” in B.C. CRA reassessed (but not until after the normal reassessment period) on the basis that, in the context of Reg. 400 et seq., “business” included having property or taxable capital gains as the only sources of income.

After finding that the filing position of Wesbild was reasonable and, therefore, not a “misrepresentation,” Fitzpatrick J stated (at para. 181):

Wesbild’s filing position conformed to the Marconi test… . There is no indication that the CRA’s currently-advanced dictionary definition of “business” had any support at all in 2001/2002 or even at this time.

Fitzpatrick J., after noting (at para. 101) that the French version of s. 152(4)(a)(i) rendered “misrepresentation” as “misrepresentation of facts” and (at para. 102) that in Canada v. Mossop, [1993] 1 S.C.R. 554 at 618 “the court reiterated… that the French and English versions of legislation are equally authoritative and, where there is a discrepancy, the meaning that furthers the purpose of the legislation is to prevail,” found (at para. 126) that “a statement of a filing position that, even if that position may be incorrect, involves a determination of law or mixed fact and law will not be a misrepresentation if that filing position is reasonable."