Citation: 2008TCC680
Date: 20081221
Dockets: 2004-4073(IT)G
BETWEEN:
PATRICK JOSEPH EMILE BURKE,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR ORDER
Webb J.
[1]
This is an application by the
Appellant to set aside the Order of this Court dated August 15, 2008
dismissing the Appellant's appeal. This Order was granted following the failure
of the Appellant to appear at the hearing of his appeal scheduled for
August 5, 2008.
[2]
The Tax Court of Canada Rules (General Procedure) apply in this case and paragraph 140 of these Rules provides as follows:
140. (1) If at a hearing, either party fails to appear, the Court
may allow the appeal, dismiss the appeal or give such other direction as is
just.
(2) The Court may set aside or vary, on such terms as
are just, a judgment or order obtained against a party who failed to attend a
hearing, a status hearing or a pre-hearing conference on the application of the
party if the application is made within thirty days after the pronouncement of
the judgment or order.
[3]
The Appellant wrote
to the Court on September 8, 2008 to request that his appeal be reinstated.
However, no affidavit accompanied the Appellant’s letter.
[4]
In Farrow v.
The Queen, [2003] T.C.J. No. 713, [2004] 2 C.T.C. 2223, 2004 DTC 2055, then
Associate Chief Justice Bowman described the principles that would be applied
in setting aside a default judgment:
17 The
principles upon which the court will set aside a default judgment are discussed
further in Hamel, (supra). At pages 117-118 Culliton, C.J.S. said:
The principles upon which a court in its
discretion will act to set aside a judgment legally entered were set forth by
Lamont, J.A. in Klein v. Schile, [1921] 2 W.W.R. 78, 14 Sask. L.R.
220, when he said at p. 79:
The circumstances under which a
Court will exercise its discretion to set aside a judgment regularly signed are
pretty well settled. The
application should be made as soon as possible after the judgment comes to the
knowledge of the defendant, but mere delay will not bar the application, unless
an irreparable injury will be done to the plaintiff or the delay has been
wilful. Tomlinson v. Kiddo (1914) 7 WWR 93, 29 WLR 325, 7 Sask LR
132; Mills v. Harris & Craske (1915) 8 WWR 428, 8 Sask LR
114. The application should be supported by an affidavit setting out the
circumstances under which the default arose and disclosing a defence on the
merits. Chitty's Forms, 13[th] ed., p. 83.
It is not sufficient to merely state
that the defendant has a good defence upon the merits. The affidavits must show
the nature of the defence and set forth facts which will enable the Court or
Judge to decide whether or not there was matter which would afford a defence to
the action. Stewart v. McMahon (1908) 7 WLR 643, 1 Sask LR
209.
If the application is not made
immediately after the defendant has become aware that judgment has been signed
against him, the affidavits should also explain the delay in making the
application; and, if that delay be of long standing, the defence on the merits
must be clearly established. Sandhoff v. Metzer (1906) 4 WLR 18
(N.W.T.).
(emphasis added)
[5]
Then Associate
Chief Justice Bowman also made the following comments:
15…..I agree that the court must be
satisfied that a litigant who seeks to have a default judgment set aside has an
arguable case, but the threshold is a relatively low one. I do not think a
litigant needs to testify or call evidence to show that there is a prima facie
case. Moreover, it does not add much to the strength of the applicant's case
for him or his solicitor to make the self-serving statement “I believe that I
have a good case”.
[6]
In Amethyst
Greenhouses Ltd. v. The Queen 2006 TCC 575, 2006 DTC 13 (Eng.), [2007] 1 C.T.C. 2323, Justice Sheridan summarized
this as follows:
6 The
hurdle the Appellant faces in this motion is to show that its appeals disclose
an arguable case on the merits and that the circumstances in which its failure
to appear arose justify the setting aside of the default judgment.
[7]
The Appellant,
in his affidavit, needed to address the following two issues:
(a)
the reasons why
he failed to appear at his hearing; and
(b)
that he has an
arguable case.
[8]
The Appellant
in his affidavit indicated that he has had several health issues for many years
and that this was compounded approximately two months before the hearing date
by the discovery of an 18 cm soft tissue mass in his chest. The stress of not
knowing whether this mass was malignant or benign caused the Appellant to lose
his focus on personal matters including the date of his hearing. I accept that
his affidavit satisfactorily dealt with the first issue noted above with
respect to the reasons for his failure to appear.
[9]
The next issue
is whether the Appellant has an arguable case. The facts, as assumed by the
Respondent in the Amended Reply, are that:
a) The
Appellant owned a locked in RRSP that could not be cashed in before the age of
65.
b) The
Appellant opened a self directed RRSP account, being Plan 22110723‑15
with “Investor Line” as the designated Trustee;
c) The
Appellant transferred his locked in RRSP to the Investor Line account (the
“trust”);
d) On
January 27, 1999 the Appellant signed a direction to Investor Line to buy 80,000
Class A shares in First-One Investments Corp. (“First One”);
e) deleted
f) the
only activity of First One is to receive funds to buy shares in Total Success
Systems (“TSS”) or to loan money to the owners of RRSPs who invest in First
One;
g) On
February 25, 1999 the Appellant received a loan from Total Success Systems
(“TSS”) for $56,000;
h) On
March 4, 1999 First One issued a cheque for the sum of $45,280 to the
Appellant;
i) The
fair market value of the 80,000 Class A shares as of January 29, 1999, the date
of acquisition, was $80,000.
[10]
The issue as
identified by the Appellant in his Notice of Appeal, was as follows:
c) The tax
was based on a loan that the (sic) respondent received from First-One
Investments and is basing the appeal on the fact it was a loan. In addition,
the amount of moneys received by the (sic) respondent was less than
$20,000.
d) The issue
is whether this is a qualified investment or whether a loan should be taxable.
[11]
The issue as
identified in the Amended Reply is:
14….whether the investment made by
Investor Line, on behalf of the Appellant’s RRSP, in First One is a
non-qualified investment according to paragraph 146(10)(a) of the Act.
[12]
An alternative
issue was identified in paragraph 15 of the Amended Reply:
Alternatively, the issue is whether the
trust was used or permitted to be used, the property of the trust as security
for a loan pursuant to 146(10)(b) of the Act.
[13]
Subsection
146(10) of the Income Tax Act provides as follows:
(10) Where at any time in a taxation
year a trust governed by a registered retirement savings plan
(a) acquires a non-qualified investment,
or
(b) uses or permits to be used any
property of the trust as security for a loan,
the fair market value of
(c) the non-qualified investment at the
time it was acquired by the trust, or
(d) the property used as security at the
time it commenced to be so used,
as the case may be, shall be included in
computing the income for the year of the taxpayer who is the annuitant under
the plan at that time.
[14]
A non-qualified
investment is defined as an investment that is not a qualified investment as
defined in subsection 146(1) of the Income Tax Act. There is a detailed
list of investments that would be qualified investments in section 4900 of
the Income Tax Regulations.
[15]
The Appellant
needed to show that he had an arguable case in relation to the issue of whether
the Class A shares of First One Investments Corp. (“First One”) were a
qualified investment for an RRSP. Whether the Appellant has an arguable case
will depend, in this case, on whether the Appellant or the Respondent would
have the onus of proof.
[16]
The first two
paragraphs of the Appellant’s affidavit following the heading “Merits of
proceeding with this case” are as follows:
12. I wish to
state my case in this Honourable Court because there are relevant facts that
need to be brought forward.
13. The facts
in my situation are analogous to existing decisions from this Honourable Court.
My position has been, and will be, that the money advanced to me in the initial
agreement was a loan, and therefore not taxable.
[17]
The issue is
not, however, whether the Appellant received a loan but whether the Class A
shares of First One were a qualified investment. In the remaining paragraphs of
his affidavit, the Appellant deals with the repayment of the loan he received,
his dealings with the Canada Revenue Agency and other matters not related to
the issue of whether the shares of First One were a qualified investment. The
Appellant does not address this issue in his affidavit.
[18]
At the
conclusion of the conference call related to the Appellant’s motion, I allowed
the Appellant an additional two weeks to submit a supplementary affidavit to
address this issue. The Appellant did not submit a supplementary affidavit but
did submit a letter. Without realizing it the Appellant did raise an
interesting issue. The issue is whether the Appellant or the Respondent would
have had the onus of proving that the shares of First One were a qualified
investment (or conversely were not a qualified investment).
[19]
Counsel for the
Respondent has assumed that the Appellant would have the onus of proving that
these shares were a qualified investment. In the recent decision of the Federal
Court of Appeal in Anchor Pointe Energy Ltd. 2007 FCA 188 Létourneau J.A. stated that:
[35] It is trite law that,
barring exceptions, the initial onus of proof with respect to assumptions of
fact made by the Minister in assessing a taxpayer’s liability and quantum rests
with the taxpayer. ...
[36] I agree with Bowman A.C.J.T.C.,
as he then was, that there may be instances where the pleaded assumptions of
facts are exclusively or peculiarly within the Minister’s knowledge and that
the rule as to the onus of proof may work so unfairly as to require a
corrective measure: see Holm et al. v. The Queen, supra, at
paragraph 20.
[20]
In this
particular case there is no suggestion that the Appellant had any involvement
with First One other than as an investor through his RRSP. Is this a situation
where “the rule as to the onus of proof may work so unfairly as to require a corrective
measure”? How could the Appellant be expected to bring forth the evidence that
would be required to establish that the shares of First One were a qualified
investment for an RRSP?
[21]
There is no
indication that First One is a public company. Therefore if the shares were to
qualify as a qualified investment presumably the shares would have had to
satisfy the provisions of either subsection 4900(6) or subsection 4900(12) of
the Income Tax Regulations. The investment only has to satisfy the
requirements of one of these subsections, not both. Since an eligible
corporation for the purposes of subsection 4900(6) of the Income Tax
Regulations will not include “a corporation the principal business of which
is the lending of money” (subsection 5100(1) of the Income Tax
Regulations), the provisions of subsection 4900(12) of the Income Tax
Regulations will be examined. Subsection 4900(12) of the Income Tax
Regulations provides as follows:
(12) For the purposes of paragraph (d)
of the definition “qualified investment” in subsection 146(1) of the Act,
paragraph (e) of the definition “qualified investment” in subsection 146.1(1)
of the Act and paragraph (c) of the definition “qualified investment” in
subsection 146.3(1) of the Act, a property is prescribed as a qualified
investment for a trust governed by a registered retirement savings plan, a
registered education savings plan or a registered retirement income fund at any
time if, at the time the property was acquired by the trust,
(a) the property was a share of the
capital stock of a corporation (other than a cooperative corporation) that
would, at that time or at the end of the last taxation year of the corporation
ending before that time, be a small business corporation if the expression
“Canadian-controlled private corporation” in the definition “small business
corporation” in subsection 248(1) of the Act were read as “Canadian corporation
(other than a corporation controlled at that time, directly or indirectly in any
manner whatever, by one or more non-resident persons)”,
(b) the property was a share of the
capital stock of a venture capital corporation described in any of sections
6700, 6700.1 or 6700.2, or
(c) the property was a qualifying share
in respect of a specified cooperative corporation and the plan or fund
and, immediately after the time the
property was acquired by the trust, each person who is an annuitant, a
beneficiary or a subscriber under the plan or fund at that time was not a
connected shareholder of the corporation.
[22]
To satisfy the
conditions as set out in subsection 4900(12) of the Income Tax Regulations,
the corporation (First One) must satisfy certain tests and the shareholder must
satisfy certain tests (i.e. the Appellant must not be a connected shareholder).
In particular, First One would have to be a small business corporation either
at the time the shares were acquired or at the end of the last taxation year of
First One ending before that time. Subsection 4900(12) of the Income Tax Regulations
refers to a “small business corporation” and not an “eligible corporation”. The
definition of “small business corporation”, as modified by Subsection 4900(12) of
the Income Tax Regulations is as follows:
“small business corporation”, at any
particular time, means, subject to subsection 110.6(15), a particular
corporation that is a [Canadian corporation (other than a corporation
controlled at that time, directly or indirectly in any manner whatever, by one
or more non-resident persons)] all or substantially all of the fair market
value of the assets of which at that time is attributable to assets that are
(a) used principally in an active
business carried on primarily in Canada by the particular corporation or by a corporation
related to it,
(b) shares of the capital stock or
indebtedness of one or more small business corporations that are at that time
connected with the particular corporation (within the meaning of subsection
186(4) on the assumption that the small business corporation is at that time a
“payer corporation” within the meaning of that subsection), or
(c) assets described in paragraphs (a)
and (b),
including, for the purpose of paragraph
39(1)(c), a corporation that was at any time in the 12 months preceding that
time a small business corporation, and, for the purpose of this definition, the
fair market value of a net income stabilization account shall be deemed to be
nil;
[23]
Active business
is defined in subsection 248(1) of the Income Tax Act as follows:
“active
business”, in relation to any business carried on by a taxpayer resident in Canada,
means any business carried on by the taxpayer other than a specified investment
business or a personal services business;
[24]
A specified
investment business is defined in subsection 125(7) of the Income Tax Act
as follows:
“specified investment business” carried
on by a corporation in a taxation year means a business (other than a business
carried on by a credit union or a business of leasing property other than real
property) the principal purpose of which is to derive income (including
interest, dividends, rents and royalties) from property but, except where the
corporation was a prescribed labour-sponsored venture capital corporation at
any time in the year, does not include a business carried on by the corporation
in the year where
(a) the corporation employs in the
business throughout the year more than 5 full-time employees, or
(b) any other corporation associated
with the corporation provides, in the course of carrying on an active business,
managerial, administrative, financial, maintenance or other similar services to
the corporation in the year and the corporation could reasonably be expected to
require more than 5 full-time employees if those services had not been
provided;
[25]
There are very
few facts related to First One that are disclosed in either the Notice of
Appeal or the Amended Reply. The only fact as stated in the Amended Reply that
relates to the activity of First One is that “the only activity of First One
is to receive funds to buy shares in Total Success Systems (“TSS”) or to loan
money to the owners of RRSPs who invest in First One”. There is no indication
whether this activity or the activity of TSS was a business or whether First
One or TSS had more than five full time employees. There is also no indication
whether TSS was related to or connected with First One. It should be noted that
the definition of active business in subsection 248(1) of the Income Tax Act
does not include a reference to an adventure or concern in the nature of trade,
which is to be contrasted with the definition of “active business carried on by
a corporation” in subsection 125(7) of the Income Tax Act which does
include an adventure or concern in the nature of trade. It is the definition of
“active business” in subsection 248(1) of the Income Tax Act and not the
definition of “active business carried on by a corporation” in subsection
125(7) of the Income Tax Act that would be relevant in this case.
[26]
The facts as
assumed by the Respondent in the Amended Reply are not sufficient to make any
determination of whether the activities of First One were a business or whether
First One had more than five full time employees. If a corporation employs more
than five full time employees in a business of lending money to earn interest
income, then that business will be an active business not a specified
investment business. The issues of who would have the onus of establishing that
First One was carrying on a business (or not carrying on a business) and
whether, if it was carrying on a business, that business was an active business
(or a specified investment business) are issues that should be resolved at a
hearing.
[27]
As well no
facts were assumed in the Amended Reply in relation to the ownership of shares
of First One or in relation to who had control of First One. The issue of who
would have the onus of proof with respect to the facts required to determine
whether First One was “controlled at that time, directly or indirectly in any
manner whatever, by one or more non-resident persons” is a matter that should
be resolved at a hearing. It is not clear whether this is even an issue in this
case. As well it is also not clear whether there is any issue in relation to
the question of whether the Appellant was a connected shareholder of First One.
There are very few facts that are assumed in relation to First One.
[28]
In Loewen,
[2004] F.C.J. No. 638, 2004 FCA 146, Justice Sharlow, on behalf of the Federal
Court of Appeal, made the following comments:
11 The constraints on the Minister that apply to the
pleading of assumptions do not preclude the Crown from asserting, elsewhere in
the reply, factual allegations and legal arguments that are not consistent with
the basis of the assessment. If the Crown alleges a fact that is not
among the facts assumed by the Minister, the onus of proof lies with the Crown.
This is well explained in Schultz v. R. (1995), [1996] 1 F.C. 423, [1996] 2
C.T.C. 127, 95 D.T.C. 5657 (Fed. C.A.) (leave to appeal refused, [1996]
S.C.C.A. No. 4 (S.C.C.)).
(emphasis
added)
[29]
Leave to appeal the decision of
the Federal Court of Appeal in Loewen to the Supreme Court of Canada was
refused (338 N.R. 195 (note)). If the Crown has the onus of proof with respect
to facts asserted “elsewhere in the Reply”, then the Crown would have the onus
of proof with respect to facts that are not asserted at all in the Reply.
[30]
The position of
the Respondent is that the Appellant’s case is governed by the decision of the
Federal Court of Appeal in Nunn v. The Queen, 2006 FCA 403,
[2007] 2 C.T.C. 222, 2007 DTC 5111. The Federal Court of Appeal in that case noted
that once shares that were not a qualified investment were acquired in an RRSP
account, the provisions of subsection 146(10) of the Income Tax Act were
applicable. The shares that were acquired in the Nunn case were shares
of Jovalguy Inc. In that case Jovalguy Inc. subsequently acquired shares in La Financière Inc. These are
not the same companies that are involved in this matter. A finding that the
shares of Jovalguy Inc. are not a qualified investment for an RRSP does not necessarily
mean that the shares of First One (a different corporation) are not a qualified
investment for an RRSP.
[31]
The Federal
Court of Appeal in the Nunn case raised the issue of the fair market
value of the shares. In this case, the Appellant, in his Notice of Appeal, states
that:
e) …and the
market value of my investment of $80,000 was included in my income according to
subsection 146(10).
[32]
The Appellant
appears to be conceding that the fair market value of his investment was
$80,000 and he did not raise the valuation of the investment as an issue in his
notice of appeal.
[33]
However, it is
important to remember that the issue in this Motion is simply whether the
Appellant should be permitted to have a hearing. It is not to decide whether
the Appellant will succeed but only whether the Appellant has an arguable case
and whether it is in the interests of justice that he be permitted to have his
appeal heard. In my opinion, it is in the interests of justice that the
Appellant be allowed to have his appeal heard in relation to the issue of
whether the shares of First One were a qualified investment for an RRSP. At a
hearing the issue of who has the onus of proof in this case can be determined
and the evidence presented can be examined to determine whether the assessment based
on paragraph 146(10)(a) of the Income Tax Act is correct. The assumption
of facts as set out in the Amended Reply are inadequate to make any
determination of whether First One is a small business corporation, who has
control of First One or whether the Appellant was a connected shareholder.
Whether the Appellant or the Respondent should have the onus of proof in this
case is a matter best resolved at a hearing.
[34]
The alternative
issue raised in the Amended Reply is whether “the trust … used or permitted to
be used, the property of the trust as security for a loan pursuant to
146(10)(b) of the Act”. This paragraph of the Income Tax Act
provides as follows:
(10) Where at any time in a taxation
year a trust governed by a registered retirement savings plan
…
(b) uses or permits to be used any
property of the trust as security for a loan,
the fair market value of
…
(d) the property used as security at the
time it commenced to be so used,
as the case may be, shall be included in
computing the income for the year of the taxpayer who is the annuitant under
the plan at that time.
[35]
In the Amended
Reply it is stated that in paragraphs 12 g) and h) that:
g) On
February 25, 1999 the Appellant received a loan from Total Success Systems
(“TSS”) for $56,000;
h) On
March 4, 1999 First One issued a cheque for the sum of $45,280 to the
Appellant;
[36]
It is not at
clear how these two paragraphs should be read. Is the Respondent assuming that
the Appellant received both amounts - $56,000 + $45,280? Paragraph g) refers to
the Appellant receiving $56,000 as a loan from TSS and paragraph
h) refers to First One issuing a cheque to the Appellant for $45,280.
Since the amount invested was only $80,000, it does not seem logical that the
Appellant would have received in excess of $100,000. In the Notice of Appeal,
the Appellant indicated that he received less than $20,000. Clearly the correct
facts would have to be determined and this could only be determined at a
hearing. The issue, in relation to an assessment based on paragraph 146(10)(b)
of the Income Tax Act, would be the fair market value of the property
used as security. What property was used as security for the actual loan
received by the Appellant? What was the fair market value of this property at
the time that the loan was made? There are no assumptions in the Amended Reply with
respect to the property that was used as security for the loan. There is a
reference in paragraph 13 of the Amended Reply to the Minister relying “on the
fact that the Appellant used the trust as collateral for the loan from TSS”.
However this was not one of the facts that was assumed and the issue would be
what property of the trust was used as security (and the fair
market value of that property), not whether the Appellant used the trust as
collateral.
[37]
It should also
be noted that the only assumption related to fair market value of any property
was the fair market value of the Class A shares of First One as of January 29,
1999. No assumptions were made with respect to the fair market value as of
either February 25, 1999 or March 4, 1999.
[38]
It also seems
to me that in the interests of justice the Appellant should have his appeal
heard in relation to the alternate issue. Given the limited assumptions made by
the Respondent, the issue of who has the onus of proof with respect to the
facts related to the alternate issue should also be determined at a hearing and
whether the evidence as presented at the hearing supports the particular
finding of fact advocated by the person who has the onus of proving such facts
should be determined at a hearing.
[39]
The Appellant’s
Motion, to set aside the Order dismissing his appeal, is allowed. The costs of
this Motion shall be in the cause.
Signed at Halifax, Nova Scotia, this 21st
day of December 2008.
“Wyman W. Webb”
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