Citation: 2007TCC742
Date: 20071219
Docket: 2006-3455(IT)G
BETWEEN:
SENTINEL HILL PRODUCTIONS (1999) CORPORATION,
in its capacity as designated member of
SENTINEL HILL 1999 MASTER LIMITED PARTNERSHIP,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2007-329(IT)G
BETWEEN:
ROBERT STROTHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bowman, C.J.
[1] In these motions
the respondent seeks an order under Rule 53 of the Tax Court of
Canada Rules (General Procedure) to strike out 22 full paragraphs and a
part of one other paragraph of the further amended notices of appeal of Sentinel
Hill Productions (1999) Corporation (“Sentinel Hill”) and 18 paragraphs of
the further amended notice of appeal of Robert Strother.
[2] Rule 53 reads
as follows:
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Striking out a Pleading or other Document
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Radiation d’un acte de procédure ou d’un autre
document
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53. 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,
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53. La Cour peut radier un acte de procédure ou un autre document ou
en supprimer des passages, en tout ou en partie, avec ou sans autorisation de
le modifier parce que l’acte ou le document :
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(a) may prejudice
or delay the fair hearing of the action,
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a) peut compromettre ou retarder l’instruction
équitable de l’appel;
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(b) is
scandalous, frivolous or vexatious, or
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b) est scandaleux, frivole ou vexatoire;
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(c) is an abuse
of the process of the Court.
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c) constitue un recours abusif à la Cour.
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[3] Essentially the impugned paragraphs contain assertions
that the appellants entered into certain transactions involving Canadian-based
production services in respect of full‑length motion picture films and
television productions and that in doing so they relied upon a number of
advance income tax rulings issued by the Canada Revenue Agency (“CRA”) in
respect of the investment in limited partnerships. For the purposes of the
motions I shall assume that the limited partnerships were tax shelters as
defined in section 237.1 of the Income Tax Act.
[4] I shall begin by outlining what I believe are the
principles to be applied on a motion to strike under Rule 53. There are
many cases in which the matter has been considered both in this court and the Federal
Court of Appeal. It is not necessary to quote from them all as the principles
are well established.
(a) The
facts as alleged in the impugned pleading must be taken as true subject to the
limitations stated in Operation Dismantle Inc. v. Canada, [1985] 1 S.C.R. 441 at
455. It is not open to
a party attacking a pleading under Rule 53 to challenge assertions of
fact.
(b) To strike
out a pleading or part of a pleading under Rule 53 it must be plain and
obvious that the position has no hope of succeeding. The test is a stringent
one and the power to strike out a pleading must be exercised with great care.
(c) A
motions judge should avoid usurping the function of the trial judge in making
determinations of fact or relevancy. Such matters should be left to the judge
who hears the evidence.
(d) Rule 53
and not Rule 58, is the appropriate rule on a motion to strike.
[5] We have here a number of paragraphs that allege that
advance rulings were obtained and that the transactions in issue conformed to
the advance rulings. Counsel for the respondent seeks, in these motions, to
dispute those allegations of fact. Among the paragraphs in the Sentinel Hill’s
further amended notice of appeal that the respondent seeks to strike are the
following:
4.A. SHEC
also owns all the shares of Sentinel Hill Productions Corporation and Sentinel
Hill Productions II Corporation. Sentinel Hill Productions Corporation is the
sole general partner of the Sentinel Hill 1998 Master Limited Partnership.
Sentinel Hill Productions II Corporation is the sole general partner of the
Sentinel Hill 1998-2 Master Limited Partnership.
. . .
. .
36. On October 6, 1998
(the “October 1998 Ruling”) and December 18, 1998 (the “December 1998
Ruling”) the Rulings Division of the CRA issued binding advance income tax
rulings to SHEC in respect of transactions that were the same, in all
material respects, as those concluded by SHEC with respect to
the Appellant and the Partnership.
36.A. The October 6, 1998 Ruling
was in respect of transactions undertaken by SHEC, its subsidiary Sentinel Hill
Productions Corporation, and the Sentinel Hill 1998 Master Limited Partnership,
among others.
36.B. The
December 18, 1998 Ruling was in respect of transactions undertaken by
SHEC, its subsidiary Sentinel Hill Productions II Corporation, and the Sentinel
Hill 1998-2 Master Limited Partnership, among others.
36.C. The rulings issued to SHEC
were in respect of, among the other things, the existence of a partnership, the
computation of at-risk amounts, and the non‑applicability of the
matchable expenditure rules.
36.D. The CRA Rulings Division’s
widely-known and accepted practice in issuing rulings to promoters of multiple
partnerships was to issue a single ruling which was valid in respect of all
transactions implemented by that promoter that were the same, in all material
respects, as those outlined in the ruling.
36.E. SHEC paid a fee to the
CRA in respect of each ruling.
37. In December 1999, counsel
for SHEC, the Appellant, the Partnership and the PLPs began discussions
and corresponded with representatives of the Rulings Division of CRA to refresh
the October 1998 Ruling and the December 1998 Ruling. Those discussions
culminated in the Rulings Division of CRA issuing another binding advance
income tax ruling on February 21, 2000.
38. SHEC, the Appellant,
the Partnership, the PLPs, and the Limited Partners relied on the
October 1998 Ruling, the December 1998 Ruling and the preliminary
discussions and correspondence for the February 2000 Ruling in investing
in the partnerships and in undertaking the Productions.
39. The Minister intended
that, and knew or ought to have known that, SHEC, the Appellant, the
Partnership, the PLPs, and the Limited Partners would rely on the October 1998
Ruling, the December 1998 Ruling and the preliminary discussions and
correspondence for the February 2000 Ruling in investing in the
partnerships and in undertaking the Productions.
39.A. The Minister based his
assumptions in reassessing on a comparison of the facts set forth in the
rulings with the facts as he found them in the transactions here in issue.
. . . . .
50.A. The 1999 PLP
Determinations and the 1999 Determinations were issued notwithstanding that the
transactions accorded with the advance income tax rulings, practice, correspondence
and discussions described in paragraphs 36 to 39A hereof, on which the
Appellant and the Limited Partners relied.
. . . . .
58.A. The 2000 PLP
Determinations and the 2000 Determination were issued notwithstanding that the
transaction accorded with the advance income tax rulings, practice,
correspondence and discussions described in paragraphs 36 to 39A hereof,
on which the Appellant and the Limited Partners relied.
59. The issues to be decided in
this appeal in respect of the 1999 Determination are:
(a) whether the Minister is
estopped from raising all or any part of the 1999 Determination due to the
Minister’s practice of issuing binding advance income tax rulings to the
Sentinel Hill group and others, in particular by the issuance of the October
1998 Ruling, the December 1998 Ruling and the February 2000 Ruling;
(a.1) whether the
October 6, 1998 Ruling, the December 18, 1998 Ruling, the CRA’s
practice in issuing such rulings and the related correspondence and discussions
constitute an agreement binding on the Minister to assess the Partnership and
the Limited Partners in accordance therewith and, if so, whether the Minister
in fact assessed in accordance with the agreement thereby established;
. . . . .
60. The issues to be decided in
this appeal in respect of the 2000 Determination are:
(a) whether the Minister is
estopped from raising all or any part of the 2000 Determination due to the
Minister’s practice of issuing binding advance income tax rulings to the
Sentinel Hill group and others, in particular by the issuance of the October
1998 Ruling, the December 1998 Ruling and the February 2000 Ruling, and in
light of the recommended revisions to the structure made by the CRA Rulings
Division in 1998;
(a.1) whether the
October 6, 1998 Ruling, the December 18, 1998 Ruling, the CRA’s
practice in issuing such rulings and the related correspondence and discussions
constitute an agreement binding on the Minister to assess the Partnership and
the Limited Partners in accordance therewith and, if so, whether the Minister
in fact assessed in accordance with the agreement thereby established;
. . . . .
60.A. Whether solicitor and
client or other special costs should be awarded to the Appellant because of the
issuance of the Determinations and Confirmations thereof and the prosecution of
this appeal by the Respondent notwithstanding the advance income tax rulings,
discussions and correspondence described in paragraphs 36 to 39.A hereof
and relied on by the Appellant and the Limited Partners.
. . . . .
62. The Appellant, its related
entities and the limited partners of the Partnership relied on the advance
income tax rulings issued by the Rulings Division of the CRA, and the Minister
knew of that reliance. Accordingly, the Minister is estopped from issuing the
1999 Determination and the 2000 Determination in contravention of the rulings.
62.A. The rulings, practice,
correspondence and discussions described in paragraphs 36 to 39.A hereof
constituted an agreement binding on the Minister to assess in accordance
therewith, which the Minister has breached in issuing the 1999 Determination
and the 2000 Determination. The 1999 Determination and 2000 Determination, to
the extent they are inconsistent with that agreement, should be vacated.
. . . . .
72. The Appellant says that
in issuing the Determination in issue and prosecuting this appeal
notwithstanding the advance income tax rulings, correspondence and discussions
referred to in paragraphs 36 to 39A hereof, the Respondent has acted in an
improper and vexatious manner for which solicitor and client or other special
costs should be awarded to the Appellant.
[6] The paragraphs which the respondent seeks to strike
from the Strother notice of appeal are similar. Most of the paragraphs attacked
by the respondent contain allegations of fact which must be taken as true for
the purposes of this motion. If the respondent wishes to challenge the facts
alleged, a section 53 motion is not the place in which to do so. It is at
trial where a judge hearing the evidence can determine the correctness,
relevancy and weight to be assigned to the evidence adduced in support of the
allegations.
[7] The respondent seeks to strike out the paragraphs on
the basis that they contain references to the doctrine of estoppel. It is clear
that estoppel cannot prevail against the law. Mr. Mitchell, counsel for
the appellants, agrees with this and so do I.
[8] Mr. Mitchell quotes from a decision I rendered a
number of years ago in Goldstein v. The Queen, 96 DTC 1029 at 1033:
There is much
authority relating to the question of estoppel in tax matters and no useful
purpose would be served by yet another review of the cases. I shall endeavour
however to set out the principles as I understand them, at least to the extent
that they are relevant. Estoppels come in various forms — estoppel in pais,
estoppel by record and estoppel by deed. In some cases reference is made to a
concept of “equitable estoppel”, a phrase which may or may not be accurate. It
is sufficient to say that the only type of estoppel with which we are concerned
here is estoppel in pais. In Canadian Superior Oil Ltd. v. Paddon-Hughes
Development Co. Ltd. [1970] S.C.R. 932 at 939-940 Martland, J. set
out the factors giving rise to an estoppel as follows:
The essential factors giving rise to an estoppel are I
think:
(1) A representation or conduct
amounting to a representation intended to induce a course of conduct on the
part of the person to whom the representation is made.
(2) An act or omission resulting from
the representation, whether actual or by conduct, by the person to whom the
representation is made.
(3) Detriment to such person as a
consequence of the act or omission.
Estoppel is no longer merely a rule of
evidence. It is a rule of substantive law. Lord Denning calls it “a principle
of justice and of equity.”
It is sometimes said that estoppel does
not lie against the Crown. The statement is not accurate and seems to stem from
a misapplication of the term estoppel. The principle of estoppel binds the
Crown, as do other principles of law. Estoppel in pais, as it applies to the
Crown, involves representations of fact made by officials of the Crown and
relied and acted on by the subject to his or her detriment. The doctrine has no
application where a particular interpretation of a statute has been
communicated to a subject by an official of the government, relied upon by that
subject to his or her detriment and then withdrawn or changed by the
government. In such a case a taxpayer sometimes seeks to invoke the doctrine of
estoppel. It is inappropriate to do so not because such representations give
rise to an estoppel that does not bind the Crown, but rather, because no
estoppel can arise where such representations are not in accordance with the
law. Although estoppel is now a principle of substantive law it had its origins
in the law of evidence and as such relates to representations of fact. It has
no role to play where questions of interpretation of the law are involved,
because estoppels cannot override the law.
Lastly, in a footnote near the end of
the judgment (at p. 1034):
I leave aside
entirely the question of advance rulings which form so important and necessary
a part of the administration of the Income Tax Act. These rulings are
treated by the Department of National Revenue as binding. So far as I am aware
no advance ruling that has been given to a taxpayer and acted upon has ever
been repudiated as against the taxpayer to whom it was given. The system would
fall apart if he ever did so.
[9] Whether the factual components giving rise to
an estoppel exist is a matter for the trial judge.
[10] So far as the words scandalous,
frivolous or vexatious are concerned, the most frequently quoted (and
authoritative) passages are the following:
An excellent statement of the test for
striking out a claim under such provisions is that set out by Wilson J. in Hunt
v. Carey Canada Inc., [1990] 2 S.C.R. 959 (S.C.C.), at p. 980:
... assuming that the facts as
stated in the statement of claim can be proved, is it "plain and
obvious" that the plaintiff's statement of claim discloses no reasonable
cause of action? As in England, if
there is a chance that the plaintiff might succeed, then the plaintiff should
not be "driven from the judgment seat". Neither the length and complexity
of the issues, the novelty of the cause of action, nor the potential for the
defendant to present a strong defence should prevent the plaintiff from
proceeding with his or her case. Only if the action is certain to fail because
it contains a radical defect . . . should the relevant portions of a
plaintiff's statement of claim be struck out . . . .
The test is a
stringent one. The facts are to be taken as pleaded. When so taken, the
question that must then be determined is whether there it is "plain and
obvious" that the action must fail. It is only if the statement of claim
is certain to fail because it contains a "radical defect" that the
plaintiff should be driven from the judgment seat.... [emphasis added]
Odhavji Estate v. Woodhouse, [2003] 2 S.C.R. 263, 2003 SCC 69.
[11] I do not see how, in light of
the jurisprudence on Rule 53, it can be said that it is plain and obvious
that the arguments and facts advanced in the further amended notices of appeal
fall within any of the provisions of Rule 53. Whether I agree that the factual
components of estoppel exist or whether the advance rulings constitute
agreements is not germane to the disposition of these motions. The appellants
should be entitled to advance such arguments at trial on the basis of all the
evidence. However much jurisprudence may surround the words “scandalous,
frivolous or vexatious, or abuse of the process of the Court”, they are
nonetheless strong, emotionally charged and derogatory expressions denoting
pleading that is patently and flagrantly without merit. Their application
should be reserved for the plainest and most egregiously senseless assertions –
as for example in William Shawn Davitt v. The Queen, 2001 DTC
702. Where senior and experienced counsel advances a proposition of fact or law
in a pleading that merits serious consideration by a trial judge, it is at
least presumptuous and at most insulting and offensive to force counsel to face
the argument that the position is so lacking in merit that it does not even deserve
to be considered by a trial judge. It is a deplorable tactic for the Crown, as soon
as it sees a legal argument that it does not like, to move to strike. As I said
in Sackman v. The Queen, 2007 TCC 455, it is this sort of skirmishing that
is putting tax litigation out of the reach of ordinary people. I do not wish to
see this court turned into a forum for procedural manoeuvring. I repeat what
was said in Satin Finish Hardwood Flooring (Ontario) Limited v. The Queen, 96
DTC 1402 at 1405:
There was no justification for bringing this motion.
It serves no purpose within the context of this litigation. The time that has
been spent on this exercise in procedural oneupmanship would have been better
spent, following the filing and serving of a reply, in conducting an examination
for discovery in which the evidentiary basis of the appellant's challenge to
the assessment could readily have been ascertained. The rules of this court,
which are designed to facilitate, not impede, the expeditious determination of
fiscal disputes, should not be used to carry out unproductive procedural
manoeuvring.
[12] The respondent’s position is
ambivalent. I asked counsel if he was saying that advance rulings were not
binding or that the appellants had not conformed to them. His answer was “Both”.
If the argument is that they do not apply to the appellants or that their terms
had not been complied with, this is a factual matter that contradicts the
allegations in the notices of appeal. It cannot be raised on these motions. It
must be decided on evidence at trial. If the respondent is now seeking to
establish that advance rulings can be repudiated by the Minister after decades
of reliance by taxpayers upon them, this proposition, which would startle most
practitioners, should be tested in a full trial and not a preliminary motion.
This preliminary motion is certainly not the time or place to discuss the
complex issues arising out of the Minister’s remarkable position. The rulings
process, which was created by Revenue Canada and has been enormously beneficial
to taxpayers in creating certainty in predicting the tax consequences of commercial
transactions, constitutes a fundamental cornerstone of Canadian tax
administration. The idea that a motions judge could, on the basis of a one hour
argument without evidence, demolish one of the essential underpinnings of our
system is, quite frankly, appalling.
[13] The magnitude of this question
transcends the boundaries of a preliminary motion and is indeed of a greater
importance in the field of taxation than any I have seen in many years.
[14] The motions are dismissed with costs
payable by the Crown to the appellants in any event of the cause.
[15] The appellants have 30 days
from the date of this order in which to file replies.
Signed at Ottawa, Canada, this 19th day of December 2007.
“D.G.H. Bowman”
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