2006-2996(IT)G
TAX
COURT OF CANADA
BETWEEN:
THE TORONTO-DOMINION BANK
Appellant
-
and -
HER
MAJESTY THE QUEEN
Respondent
AMENDED REPLY
OVERVIEW
In this
appeal, the Appellant artificially or unduly created a loss by entering into an
elaborate series of transactions (the “Scheme”) that ended with the
disposition of a new special class (Class E) of shares of a
corporation. As part of the Scheme, the Appellant subscribed to Class E
shares, which were issued at a low par value and an artifically
high subscription price. Substantial dividends were declared and paid
on shares in the corporation that were already owned by the Appellant, other
than the Class E Shares. These dividends were then immediately returned to
the corporation paying them by the Appellant subscribing
for additional Class E shares, which were ultimately disposed of at an
artifical loss. At the end of the day, the Appellant is seeking to deduct
an alleged loss from the disposition of the Class E shares
without having legitimately supported the cost of those shares. The Scheme
falls within the four corners of subsection 55(1) of the Income Tax Act
(the “Act”), with the result that the deduction of the loss on
the Class E shares is therefore prohibited. In addition, the adjusted
cost base of the Class E shares is in issue, and a proper allocation of the
proceeds of disposition among all classes of shares in the corporation owned by
the Appellant would eliminate or reduce the alleged loss on the Class E shares.
In
reply to the Notice of Appeal with respect to a reassessment for the Appellant’s 1989 taxation year, the Deputy Attorney General
of Canada says:
A. STATEMENT OF FACTS
With respect to the facts stated in Part I
of the Notice of Appeal:
1.
He admits the facts stated in paragraph 1 of the Notice of Appeal.
With respect to the facts stated in Part II
of the Notice of Appeal:
2.
He admits the facts stated in paragraphs 2, 3
and 4 of the Notice of Appeal.
With respect to the facts stated in Part
III of the Notice of Appeal:
3.
He admits the facts stated in paragraphs 1(i)
and 1(ii) of the Notice of Appeal. He has no knowledge of, and puts in issue,
the facts stated in paragraph 1(iii).
4.
He admits the facts stated in paragraphs 2, 3, 4,
6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 33, 34, 40, 41 and 42 of the
Notice of Appeal.
5.
Deleted.
6.
He admits that shares of Oxford were also held by Loford Properties
Limited (“Loford Properties”) and Kent Holdings Ltd. (“Kent”), but he denies
the other facts stated in paragraph 5 of the Notice of Appeal.
7.
Deleted.
8.
Deleted.
9.
He admits the facts stated in paragraph 9
of the Notice of Appeal, but he denies that the offer to purchase was
extended on an arm’s length basis.
10.
Deleted.
11.
Deleted.
12.
He has no knowledge of, and puts in issue, the
facts stated in paragraph 18, and the first sentence of paragraph 19 of
the Notice of Appeal.
13.
He admits the second sentence of paragraph 19
and paragraphs 20, 21 and 22 of the Notice of Appeal, and says that these
actions were all part of the Scheme to artificially inflate the adjusted cost
base of the Class D and Class E shares.
14.
He admits the facts stated in the
first sentence of paragraph 23 and the first and third sentences of
paragraph 24 of the Notice of Appeal, and says that these actions were
all part of the Scheme to artificially inflate the adjusted cost base of the
Class D and Class E shares. He denies the facts stated in the second sentences
of paragraphs 23 and 24 of the Notice of Appeal.
15.
Deleted.
16.
He admits the facts stated in paragraphs
25, 26, 27, 28, 29 and 30 of the Notice of Appeal, and says that
these actions were all part of the Scheme to artificially inflate the adjusted
cost base of the Class D and Class E shares.
17.
Deleted.
18.
Deleted.
19.
He admits the facts stated in paragraphs
31 and 32 of the Notice of Appeal, and says that these actions were all part
of the Scheme to artificially inflate the adjusted cost base of the Class D and
Class E shares.
20.
Deleted.
21.
Deleted.
22.
He admits that the Appellant sold the shares of
Holdings Ltd., but he denies the other facts stated in paragraph 35 of the
Notice of Appeal.
23.
He denies the facts stated in paragraphs 36, 37
and 38 of the Notice of Appeal.
24.
He admits the facts stated in paragraph 39 of
the Notice of Appeal, but says that the Appellant was wrong in doing so because
there was no loss.
25.
Deleted.
26.
Deleted.
27.
Deleted.
28.
In reassessing the Appellant, the Minister of
National Revenue (the “Minister”) relied on the following assumptions of
fact:
a)
The Appellant, by holding 337,000 shares in Oxford before 1980, held a
substantial part of all the issued and outstanding shares of that company;
b)
The other shares of Oxford were held by Kent and Loford Properties;
c)
Donald Love (“Mr. Love”) was the chairman of the
board of directors and the president of Oxford;
d)
Mr. Love held all the issued and outstanding
shares of Kent and he held,
with members of his family, all the issued and outstanding shares of Loford
Properties;
e)
As part of the series of transactions in issue,
91922 was incorporated on May 11, 1979;
f)
On January 15, 1980, the Appellant, Mr. Love,
Kent and Loford Properties entered into an agreement to subscribe and own all
the issued and outstanding shares of 91922 (the “Agreement”);
g)
The Appellant disposed of its shares of Oxford to 91922 by way of a tax-free
rollover in which he paid $8,138,000 and received as consideration shares of
the capital stock of 91922;
h)
The Appellant subscribed, for a total
consideration of $16,900,000 (or $26 per share), for the following shares of
91922, namely 51,200 common shares, 285,000 Class A shares, 313,000 Class B
shares;
i)
Kent disposed of 801,555 common shares of Oxford to 91922 and received as
consideration an equal number of common shares from the capital stock of 91922;
j)
Loford Properties disposed of 173,445 common
shares of Oxford to 91922, and
received as consideration an equal number of common shares from the capital
stock of 91922;
k)
The Class A shares of 91922 carry the same
rights as the common shares of 91922, except that they are non voting and they
can be converted into common shares at the option of the holder, unless they
are held by a Canadian bank;
l)
The Class B shares of 91922 carry the same
rights as the Class A shares of 91922, except that they can be converted at the
option of the holder of Class A shares;
m)
On October 29, 1980, Oxford merged with 91922 to form Oxford;
n)
During the month of July, 1982, it was
agreed that Oxford would create
two new classes of shares, namely Class D and Class E shares;
o)
The subscription price for the Class D and Class
E shares was set at $300 per share, which was substantially over their par
value of $1 per share;
o.1) The
subscription price for the Class E shares, which was used by the Appellant as
the adjusted cost base of those shares, was substantially greater than the fair
market value of those shares;
o.2) The fair market value of the Classs E
shares was $1 per share;
p)
The rights attached to the Class E shares were
essentially identical to those attached to the common shares, the Class A and
Class B shares of Oxford (previously 91922), except that they and the Class
A and Class B shares are non-voting;
q)
Only the Appellant would subscribe for the Class
E shares and only Loford Properties and Kent would subscribe for the Class D shares;
r)
On July 29, 1982, Oxford declared and paid dividends of $22,000,000 (or
$13.538 per share) on the common, Class A, Class B, and Class C shares. The
Appellant's portion of the dividends was $8,800,000 (or 40%) received in
respect of its 51,200 common shares, 285,800 Class A shares and 313,000 Class B
shares. On the same date the Appellant subscribed for 22,667 Class E shares
having a par value of $1 each, at a subscription price of $6,800,100 (or
$300 per share). On July 29, 1982, the Appellant owned a total of 22,667 Class
E shares;
s)
On April 15, 1983, Oxford declared and paid dividends of $27,000,000 (or
$16.615 per share) on the common, Class A, Class B, and Class C shares. No
dividends were paid in respect of the Class E or Class D shares. The
Appellant's portion of the dividends was $10,800,000 (or 40%) received in
respect of its 51,200 common shares, 285,800 Class A shares and 313,000 Class B
shares. On the same date the Appellant subscribed for 30,667 Class E shares
having a par value of $1 each, at a susbscription price of $9,200,100
(or $300 per share). On April 15, 1983, the Appellant owned a total of 53,334
Class E shares;
t)
On December 28,
1983, Oxford declared and paid dividends of
$10,000,000 (or $5.151 per share) on the common, Class A, Class B, Class C,
Class D and Class E shares. The Appellant's portion of the dividends was
$4,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800
Class A shares, 313,000 Class B and 53,334 Class E shares. On the same date
the Appellant subscribed for 12,000 Class E shares having a par value of $1
each, at a subscription price of $3,600,000 (or $300 per share).
On December 28, 1983, the Appellant owned a total of 65,334 Class E shares;
u)
On April 30, 1984, Oxford declared and paid dividends of $12,500,000 (or
$6.989 per share) on the common, Class A, Class B, Class C, Class D and Class E
shares. The Appellant's portion of the dividends was $5,000,000 (or 40%)
received in respect of its 51,200 common shares, 285,800 Class A shares,
313,000 Class B and 65,334 Class E shares. On the same date the Appellant
subscribed for 15,000 Class E shares having a par value of $1 each, at a subscription
price of $4,500,000 (or $300 per share). On April 30, 1984, the Appellant
owned a total of 80,334 Class E shares;
v)
On July 30, 1984, Oxford declared and paid dividends of $10,000,000 (or
$5.477 per share) on the common, Class A, Class B, Class C, Class D and Class E
shares. The Appellant's portion of the dividends was $4,000,000 (or 40%)
received in respect of its 51,200 common shares, 285,800 Class A shares,
313,000 Class B and 80,334 Class E shares. On the same date the Appellant subscribed
for 10,666 Class E shares having a par value of $1 each, at a subscription
price of $3,199,800 (or $300 per share). On July 30, 1984, the Appellant
owned a total of 91,000 Class E shares;
w)
On October 31,
1984, Oxford declared and paid dividends of $10,000,000
(or $5.398 per share) on the common, Class A, Class B, Class C, Class D and
Class E shares. The Appellant's portion of the dividends was $4,000,000 (or
40%) received in respect of its 51,200 common shares, 285,800 Class A shares,
313,000 Class B and 91,000 Class E shares. On the same date the Appellant
subscribed for 10,667 Class E shares having a par value of $1 each, at a subscription
price of $3,200,100 (or $300 per share). On October 31, 1984, the
Appellant owned a total of 101,667 Class E shares;
x)
On May 23, 1985,
Oxford declared (paid on November 29, 1985) dividends of $20,000,000 (or
$10.643 per share) on the common, Class A, Class B, Class C, Class D and Class
E shares. Oxford elected the dividends to be capital
dividends on the common and the Class D shares. The Appellant's portion of the
dividends was $8,000,000 (or 40%) received in respect of its 51,200 common
shares, 285,800 Class A shares, 313,000 Class B and 101,667 Class E shares. On
May 23, 1985 the Appellant subscribed for 1,816 Class E shares having a par
value of $1 each, at a subscription price of $544,800 (or $300 per
share). On May 23, 1985, the Appellant owned a total of 103,483 Class E
shares;
y)
On November 29,
1985, the Appellant subscribed for 24,850 Class E shares having a par value of
$1 each, at a subscription price of $7,455,000 (or $300 per share). On
November 29, 1985, the Appellant owned a total of 128,333 Class E shares;
z)
On December 31,
1985, Oxford declared and paid dividends of
$85,000,000 (or $43.683 per share) on the common, Class A, Class B, Class C,
Class D and Class E shares. Oxford elected the
dividends to be capital dividends on the common and the Class D shares. The
Appellant's portion of the dividends was $33,999,991 (or 40%) received in
respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B
and 128,333 Class E shares. On the same date the Appellant subscribed for
113,333 Class E shares having a par value of $1 each, at a subscription
price of $33,999,991 (or $300 per share). On December 31, 1985, the
Appellant owned a total of 241,666 Class E shares;
aa)
In May 1988,
Oxford, declared and paid dividends of $2,000,000 (or $0.8971965 per share) on
the common, Class A, Class B, Class C, Class D and Class E shares. The
Appellant's portion of the dividends was $800,000 (or 40%) received in respect
of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and
241,666 Class E shares. Oxford elected that all the dividends be paid
as capital dividends;
bb)
Some time between
March 8 and November 1, 1988, the Appellant disposed of all its shares of Oxford to Holdings Ltd. by way of tax free rollover and
received as consideration shares of the capital stock of Holdings Ltd.;
cc)
On December 1,
1988, Loford Properties and the Appellant terminated the Agreement through
which they owned all of the issued and outstanding capital stock of Holdings
Ltd.;
dd)
On December 1,
1988, the Appellant disposed of shares of Holdings Ltd. as follows:
i)
Holdings Ltd.
redeemed the 51,200 common, 285,800 Class A and 313,000 Class B shares owned by
the Appellant at a price of $46.809 per share, for an aggregate purchase price
of $30,425,850. An election was made that $14,522,860 be paid as a capital
dividend;
ii)
Loford Properties
purchased the 241,666 Class E shares of Holdings Ltd. owned by the Appellant at
a price of $46.809 per share, for an aggregate purchase price of $11,312,150;
ee)
On December 1,
1988, the Appellant subscribed for shares in Oxford Properties Canada Limited
as follows:
i)
2,000,000 common
shares for cash consideration of $3,200,000;
ii)
1,792,000 preferred
shares for cash consideration of $36,288,000;
ff)
The series of transactions in issue ended on
December 1, 1988;
gg)
Transactions regarding the Class E shares and the shares received in
consideration for those shares artificially or unduly created a loss, or
increased the amount of loss on their disposition.
29.
The Appellant, Loford Properties, Kent, Oxford,
Oxford Holdings and Mr. Love were acting without separate interest, and at
non arm’s length, with respect to all transactions involving the Class D and
Class E shares referred above, and any shares received as consideration for
their disposition, including their final disposition on December 1,
1988.
29.1 The
assumption in paragraph 28(o.2), to the effect that the fair market value of
the Class E shares was $1 per share, is incorrect.
29.2 The
dividends in the amounts of $85,000,000 and $2,000,000 referred to in
paragraphs 28(z) and 28(aa) were paid out of contributed surplus, and were not
supported by earnings.
29.3 For the
purposes of subsection 55(1) of the Act,
the series of transactions consists of those transactions involving the
acquisition and disposition of the Class E shares, and the payment of dividends
thereon, from July 29, 1982 to December 1, 1988.
B. ISSUES
TO BE DECIDED
30.
Whether the Appellant, as a result of the series
of transactions, has artificially or unduly created or increased the amount of
loss on the disposition of the Class E shares issued by Oxford to the Appellant, and is therefore caught by the limitation of subsection 55(1) of
the Act.
31.
Whether the adjusted cost base of the Class E
shares was $300 per share.
C. STATUTORY PROVISIONS RELIED ON
32.
He relies on sections 38,
39, 40, 68, 83, 89, 112, 251, subsections 55(1) and 69(1), and
paragraph 53(1)(c) of the Act, as amended for the 1989 taxation year.
D.
GROUNDS RELIED ON AND RELIEF SOUGHT
32.1 Mr.
Love and the Appellant, who were not dealing at arm's length, agreed in advance
that substantially all (between 77 percent and 100 percent) of each dividend
paid would be immediately reinvested in the company. These immediate
reinvestments of the dividends could not reasonably be regarded as an increase
in the fair market value of the company, and therefore they do not constitute
additions to the adjusted cost base of the Class D and Class E shares under
paragraph 53(1)(c) of the Act.
32.2 While
constantly maintaining their 60 percent to 40 percent shareholding
ratio, Mr. Love and the Appellant agreed in advance to an artificially
high subscription price for the Class D and Class E shares, which was fixed for
a three and a half year period. They were indifferent as to the
precise subscription price, regardless of what happened to the
fair market value of the shares of the company in the meantime. Their
primary concern was that the subscription price be high, and
that the number of shares issued be low.
32.3 After
having agreed in advance to an artificially high subscription price for the
Class D and Class E shares, Mr. Love and the Appellant agreed to
arbitrarily allocate the total proceeds of disposition pro rata among the
common, Class A, Class B, Class D and Class E shares. The effect of
this arbitrary allocation was that the proceeds of
disposition for the Class D and Class E shares was artificially low,
because of the high subscription price and the low number of Class D and Class
E shares.
32.4 The
reason that the Appellant was able to claim a loss on the disposition of
the Class E shares is that it subtracted an artificially low figure for
the proceeds of disposition from an artificially high figure for the adjusted
cost base. To the extent that the proper figure for the
proceeds of disposition was higher, and the proper figure for the adjusted cost
base was lower, the loss that it was able to claim on the disposition of
the Class E shares would have been lower, or eliminated entirely.
32.5 In
determining whether the loss on the disposition of the Class E shares is
artificial or undue, consideration should be given to the scheme of the Act.
Paragraph 69(1)(a) provides a mechanism to reduce to fair market value a high
non-arm's length acquisition cost, namely the subscription price of the Class D
and Class E shares. Section 68 provides a mechanism to properly
allocate consideration for the disposition of a particular property, namely the
proceeds of disposition for the Class D and Class E shares on the one hand, and
the proceeds of disposition for the common, Class A and Class B shares on
the other hand.
33.
The creation of
the Class E shares (or any shares received as consideration for their
disposition) was part of the Scheme to artificially or unduly
create a loss, or increase the amount of loss, on their disposition with the
result that subsection 55(1) of the Act eliminates the loss.
34.
Deleted.
E. RELIEF
SOUGHT
35.
He requests that the appeal be dismissed with
costs.
Dated at Ottawa, Ontario, this day
of 2008.
|
|
Per:
|
Deputy Attorney General of Canada
Solicitor
for the Respondent
____________________________
Donald G. Gibson
Pascal
Tétrault
Counsel
for the Respondent
Tax Law Services Section
Department
of Justice
234
Wellington Street
Bank of Canada Building, East Tower
Ottawa,
Ontario
K1A 0H8
Telephone: (613) 957-4883/1380
Facsimile: (613) 941-1221/2293
|
TO: The
Registrar
Tax Court of Canada
AND TO: Al Meghji/Pooja Samtani
Osler, Hoskin & Harcourt LLP
Counsel for the Appellant
Citation: 2008TCC284
Date: 20080514
Docket: 2006-2996(IT)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Webb J.
[1]
There are two motions in this
matter. The Respondent's motion is to amend several paragraphs of the Reply.
The Appellant’s motion is to strike certain paragraphs (or parts of paragraphs)
of the Reply or the Amended Reply. The objections of the Appellant to the
original Reply and the proposed Amended Reply relate mainly to the statements
by the Respondent that the Appellant and others involved in the transactions that
are the subject of the appeal were not dealing with each other at arm’s length
and the arguments of the Respondent related thereto. The Appellant has
submitted that the Respondent should be prevented from raising the non-arm’s
length argument as a result of the provisions of subsection 152(9) of the Income
Tax Act (the “Act”) or paragraph 53 of the Tax Court of Canada
Rules (General Procedure) (the “Rules”). The Appellant has also
raised the question of whether paragraph 28 gg) of the Reply has been properly
pleaded as an assumption of fact or whether it is a conclusion of mixed fact
and law.
Background
[2]
The Appellant was a minority
shareholder in Oxford Development Group Ltd. In 1979 a series of transactions
was implemented to take Oxford Development Group Ltd. private which included an
amalgamation in 1980 of Oxford Development Group Ltd. with a numbered
company which continued its operations as “Oxford”. Following the privatization of Oxford, the
Appellant held 40% of the total issued shares of the amalgamated entity and Mr.
G. Donald Love (“Mr. Love”), directly or indirectly (through Loford Properties
Limited and Kent Holdings Ltd.), held the balance of the shares of Oxford.
[3]
Starting in 1982 Oxford paid
dividends to its shareholders. The shareholders, upon receipt of the dividends,
would acquire shares of a different class in Oxford. Loford Properties
Limited and Kent Holdings Ltd. acquired Class D shares and the Appellant
acquired Class E shares. In the table attached to the Notice of Appeal, the
dividends that were paid to the Appellant and the amounts that were used to
acquire Class E shares of Oxford during the period from 1982 to 1988 are listed. The
amounts used to acquire Class E shares (with the exception of the dividend paid
in May of 1988) ranged from 77% to 100% of the amount of the dividend received.
No part of the dividend received in May of 1988 was used to acquire Class E
shares. In 1987 the Appellant exchanged its shares of Oxford for
identical shares in Oxford Holdings Ltd.
[4]
The transactions in question
culminated in a sale of the shares of Oxford Holdings Ltd. by the
Appellant on December 1, 1988. The common, Class A shares and Class B
shares were redeemed and the Class E shares were acquired by Loford Properties
Limited. The Appellant claims that the disposition of the Class E shares
resulted in “a capital loss of $61,187,650, which, when subject to the stop
loss provisions of section 112(3) of the Act was reduced to
$52,243,540”. The Appellant also reported a capital gain of $4,054,346 as a
result of the disposition of the Class A shares of Oxford Holdings Ltd., and
reduced its capital loss balance from $52,243,540 to $48,189,193. The Appellant
filed its tax return on the basis that it had incurred an allowable capital
loss of $32,126,129 (2/3 of $48,189,193).
[5]
The Appellant was reassessed in
1994 and its claim for the allowable capital loss of $32,126,129 was denied,
although the basis for denying this allowable capital loss was not clear to the
Appellant when the reassessment was issued. The Appellant received a letter
dated September 20, 1993 from the Canada Revenue Agency (“CRA”), (any
reference herein to the Canada Revenue Agency or the CRA shall be interpreted
as including the Canada Customs and Revenue Agency and Revenue Canada
Taxation). While this letter set out the proposed adjustment related to the
allowable capital loss that had been claimed, no statutory basis for the denial
of the loss was identified in the letter.
[6]
In a position paper dated March
20, 1997 the CRA stated that “Tax Avoidance recommends that we use the old
245(1) to revise the ACB of the Class E shares to its paid-in capital of
$241,666 of the Class E shares, thereby eliminating any loss on disposition of
the Class E shares to Loford (in fact resulting in a gain)”.
[7]
A waiver was also signed by the
Appellant in 1994 in respect of the “Determination of the loss on disposition
of Oxford Holdings Ltd”. It is the understanding of the Appellant that this
waiver was provided to allow the CRA time to determine the fair market value of
the Class E shares during the period from 1982 to 1988. In 2002 the waiver was
revoked by the Appellant. There was no indication at that time whether the CRA
had completed its appraisal of the fair market value of the Class E shares.
[8]
In the Notice of Appeal filed by
the Appellant in 2006, the Appellant assumed that the reassessment was based on
subsection 245(1) of the Act, as it read prior to its repeal by S.C.
1988, c. 55, s.185 (the “Former Section 245”).
[9]
Counsel for the Respondent
confirmed that the initial reassessment was based on the provisions of the
Former Section 245. When preparing the Reply the Respondent abandoned its
assessing position based on the Former Section 245 and instead stated that it
was reassessing based on the provisions of subsection 55(1) of the Act (which
has also been repealed) and as an alternate argument that subsection 69(1)
of the Act (which has not been repealed) applied on the basis that the
Appellant and the others involved in the transactions were not dealing with
each other at arm’s length. The Appellant does not object to the Respondent
changing the basis for the reassessment from Former Section 245 to subsection
55(1) of the Act but does object to the inclusion of the non-arm’s
length alternate argument as a basis for the reassessment in the Reply and in
relation to the arguments based on the non‑arm’s length allegations in
the Amended Reply.
[10]
At the hearing on the motion
counsel for the Respondent stated that the Respondent was no longer raising an
alternate argument based on subsection 69(1) of the Act and was only
basing the reassessment on subsection 55(1) of the Act. Counsel for the
Respondent submitted that the only reason that subsection 69(1) of the Act is
in the Amended Reply is in relation to the argument to support the reassessment
under subsection 55(1) of the Act.
[11]
The Amended Reply deletes the
alternative issue that was in paragraph 31 of the Reply related to whether
subsection 69(1) of the Act applied and the alternative ground relied on
in paragraph 34 and the only references to subsection 69(1) of the Act are
in paragraphs 32 and new paragraph 32.5. Since the Respondent is no longer
taking the position that subsection 69(1) of the Act applies, and
therefore is no longer relying on this subsection, this subsection should be removed
from the list of Statutory Provisions Relied On in paragraph 32 of the Amended Reply.
[12]
The following are the paragraphs
(or parts thereof) of the original Reply that the Appellant is asking to have
stricken from the Reply:
-
The words “but he denies the other
facts stated in paragraph 5 of the Notice of Appeal” in paragraph 6. (Paragraph
6 of the Reply states as follows: “He admits that shares of Oxford were also
held by Loford Properties Limited (“Loford Properties”) and Kent Holdings
Ltd. (“Kent”), but he denies the other facts stated in paragraph 5 of the
Notice of Appeal.”)
-
All of paragraph 9. (Paragraph 9
of the Reply states that “He denies the facts stated in paragraph 9 of the
Notice of Appeal.”)
-
All of paragraph 29. (Paragraph 29
of the Reply states as follows: “The Appellant, Loford Properties, Kent and Mr.
Love were acting without separate interest, and at non arm's length, with
respect to all transactions involving the Class E shares referred above, and
any shares received as consideration for their disposition, until their final
disposition on December 1, 1988.”)
-
The reference to section 251 and
subsection 69(1) of the Act in paragraph 32. (Paragraph 32 of the Reply
is in Part C of the Reply – Statutory Provisions Relied On and states as follows.
“He relies on sections 38, 39, 40, 83, 89, 112, 251, subsections 55(1) and
69(1), and paragraph 53(1)(c) of the Act, as amended for the 1989
taxation year.”)
-
All of paragraph 31. (Paragraph 31
of the Reply states as follows: “In the alternative, whether the shares were
acquired in non-arm's-length transactions and are deemed by the operation of
subsection 69(1) of the Act to have been acquired at their fair market
value.”)
-
All of paragraph 34. (Paragraph 34
of the Reply states as follows: “In the alternative, he says that the shares
were acquired in excess of their fair market value in non-arm's length
transfers. Subsection 69(1) of the Act deems that the shares were
acquired by the Appellant at their fair market value, with the result that the
loss is reduced to nil.”)
[13]
Because the Amended Reply removes
the contentious issue of whether the reassessment can be based on subsection
69(1) of the Act and in particular deletes paragraph 34 and because the
Appellant’s only objections to the proposed amendments relate to the non-arm’s
length allegations, I will deal with the arguments of the Appellant to strike
in relation to the provisions of the proposed Amended Reply.
[14]
The paragraphs (or parts thereof)
in the proposed Amended Reply to which the Appellant objects are the following:
-
The words “but he denies the other
facts stated in paragraph 5 of the Notice of Appeal” in paragraph 6. (The
Respondent is not proposing to amend paragraph 6 of the Reply in the proposed
Amended Reply.)
-
The words “but he denies that the
offer to purchase was extended on an arm's-length basis” in paragraph 9. (The
Respondent is proposing that paragraph 9 will be amended to read as follows:
“He admits the facts stated in paragraph 9 of the Notice of Appeal, but he
denies that the offer to purchase was extended on an arm’s length basis.”)
-
All of paragraph 29. (The
Respondent is proposing that paragraph 29 of the Reply will be amended to read
as follows: “The Appellant, Loford Properties, Kent, Oxford, Oxford Holdings
and Mr. Love were acting without separate interest, and at non arm's length,
with respect to all transactions involving the Class D and Class E shares
referred above, and any shares received as consideration for their disposition,
including their final disposition on December 1, 1988.”)
-
The reference to section 251 and
subsection 69(1) of the Act in paragraph 32. (The Respondent is
proposing to amend paragraph 32 of the Reply to add section 68 to the list
of sections in this paragraph. The Appellant does not object to the Respondent
adding this section to the list of sections in paragraph 32.)
-
All of paragraphs 32.1 to 32.5
(inclusive). (The Respondent is proposing to replace paragraph 31 with the
following: “Whether the adjusted cost base of the Class E shares was $300 per
share.” The Appellant does not object to this change to paragraph 31. The
Respondent is proposing to delete paragraph 34 of the Reply and to add the
following new paragraphs:
32.1 Mr. Love and the Appellant, who were
not dealing at arm’s length, agreed in advance that substantially all (between
77 percent and 100 percent) of each dividend paid would be immediately
reinvested in the company. These immediate reinvestments of the dividends could
not reasonably be regarded as an increase in the fair market value of the
company, and therefore they do not constitute additions to the adjusted cost
base of the Class D and Class E shares under paragraph 53(1)(c) of the Act.
32.2 While constantly maintaining their 60
percent to 40 percent shareholding ratio, Mr. Love and the Appellant agreed in
advance to an artificially high subscription price for the Class D and Class E
shares, which was fixed for a three and a half year period. They were
indifferent as to the precise subscription price, regardless of what happened
to the fair market value of the shares of the company in the meantime. Their
primary concern was that the subscription price be high, and that the number of
shares issued be low.
32.3 After having agreed in advance to an
artificially high subscription price for the Class D and Class E shares, Mr.
Love and the Appellant agreed to arbitrarily allocate the total proceeds of
disposition pro rata among the common, Class A, Class B, Class D and Class E
Shares. The effect of this arbitrary allocation was that the proceeds of
disposition for the Class D and Class E shares was artificially low, because of
the high subscription price and the low number of Class D and Class E shares.
32.4 The reason that the Appellant was
able to claim a loss on the disposition of the Class E shares is that it
subtracted an artificially low figure for the proceeds of disposition from an
artificially high figure for the adjusted cost base. To the extent that the
proper figure for the proceeds of disposition was higher, and the proper figure
for the adjusted cost base was lower, the loss that it was able to claim on the
disposition of the Class E shares would have been lower, or eliminated
entirely.
32.5 In determining whether the loss on
the disposition of the Class E shares is artificial or undue, consideration
should be given to the scheme of the Act. Paragraph 69(1)(a) provides a
mechanism to reduce to fair market value a high non-arm’s length acquisition
cost, namely the subscription price of the Class D and Class E shares. Section
68 provides a mechanism to properly allocate consideration for the disposition
of a particular property, namely the proceeds of disposition for the Class D
and Class E shares on the one hand, and the proceeds of disposition for the
common, Class A and Class B shares on the other hand.
[15]
While the Respondent is proposing
to amend several other paragraphs of the Reply, the Appellant is only objecting
to the paragraphs (or parts thereof) referred to above.
Fresh Step Rule
[16]
The Respondent has stated that the
Appellant cannot raise an issue with respect to the non-arm’s length
allegations being made by the Respondent as the Respondent had made these
allegations in the original Reply and the Appellant has taken several steps
including the filing of an Answer and discovery examinations. Paragraph 8 of
the Rules provides as follows:
8. A motion to attack a proceeding or a step,
document or direction in a proceeding for irregularity shall not be made,
(a) after the expiry of
a reasonable time after the moving party knows or ought reasonably to have
known of the irregularity, or
(b) if the moving party
has taken any further step in the proceeding after obtaining knowledge of the
irregularity,
except with leave of the Court.
[17]
The Appellant stated that it is objecting
because the Appellant will be prejudiced in its ability to adduce evidence in
relation to the dealings between the Appellant and Mr. Love’s companies. The
transactions in question were all completed almost 20 years ago. Mr. Mercier,
who was the Executive Vice‑President, Corporate Banking Group of the
Appellant during the relevant time period (1982 – 1988) retired from the
Appellant in 1993 and passed away in September 2002. Mr. Love passed away on
October 13, 2003. Counsel for the Appellant stated that they were not aware
that these two individuals had passed away when the Notice of Appeal or the
Answer were filed and only became aware of this following the discovery
examinations.
[18]
In this case the Respondent is
proposing extensive amendments to the original Reply. The original Reply has 36
paragraphs (including the overview paragraph) and paragraph 28 has 33
subparagraphs. Of the 36 paragraphs, amendments are proposed to approximately
28 of these paragraphs (or approximately 78% of the paragraphs). While some
amendments are very minor, others, such as deleting the alternative argument
based on subsection 69(1) of the Act, are substantial. As well the
Respondent is proposing to add 8 new paragraphs.
[19]
Associate Chief Justice Bowman (as
he then was) in Imperial Oil Limited v. The Queen 2003 TCC 46, 2003
D.T.C. 179, [2003] 3 C.T.C. 2125 stated that:
20 The “fresh step”
rule is one that has been part of the rules of practice and procedure in Canada
and the United Kingdom for many years.
[20]
Justice O’Keefe of the Federal
Court in Vogo Inc. v. Acme Window Hardware Ltd., 2004 FC
851 described the purpose of the “fresh step rule” as follows:
60 The purpose of the "fresh step" rule is to
prevent a party from acting inconsistently with its prior conduct in the
proceeding. By pleading in response to a statement of claim, for instance, a defendant
may extinguish their right to complain of fatal deficiencies in the allegations
made against them. The fresh step rule aims to prevent prejudice to a party who
has governed themselves according to the procedural steps taken by the opposing
side, where it would be unfair to permit a reversal in approach.
[21]
Paragraph 8 of the Rules
provides that a motion to attack a document cannot be made in the circumstances
described in subparagraphs (a) or (b) except with leave of the Court.
In this case since the Respondent is proposing to make substantial changes to
the Reply, I do not agree that the Respondent would be prejudiced by the
Appellant’s motion and I choose to exercise the discretion that has been
granted to me and I choose to not deal with the Appellant’s motion based on
paragraph 8 of the Rules.
Non-arm’s Length Allegations – Subsection 152(9) of
the Act
[22]
The Appellant argued that the
provisions of subsection 152(9) of the Act do not allow the Respondent
to include the references to the Appellant not dealing with Mr. Love and his
companies at arm's-length, in the Reply (or the Amended Reply), because the
Appellant will now be prejudiced. Given the lapse of time, from the time that
the original reassessment was issued to today, and the fact that key witnesses
from the Appellant’s perspective, are now deceased (namely Messrs. Love
and Mercier) and other senior officers who were with the bank in the 1980s are
now retired and no longer with the Appellant, the Appellant states that it will
be prejudiced in its ability to adduce evidence in relation to these
allegations.
[23]
Subsection 152(9) of the Act provides
as follows:
152 (9) The Minister may advance an alternative
argument in support of an assessment at any time after the normal reassessment
period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to
adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order
that the evidence be adduced.
[24]
This subsection was added to the
Act following the decision of the Supreme Court of Canada in Continental
Bank of Canada v. The Queen,
98 DTC 6501, 229 N.R. 44, [1998] 4 C.T.C. 77. Justice Sharlow of the
Federal Court of Appeal in The Queen v. Loewen, 2004 FCA
146, 2004 DTC 6321, [2004] 3 C.T.C. 6 provides a detailed summary of
the Continental Bank decision, which is as follows:
14 Such was the state of the law of Crown
pleadings in income tax appeals when the Supreme Court of Canada heard the
Continental Bank of Canada appeal. Continental Bank had a leasing subsidiary
(“Continental Bank Leasing”) which owned certain leasing assets. Those assets
were depreciable property in respect of which capital cost allowance had been
deducted. If Continental Bank Leasing had simply sold the depreciable property,
it would have been taxable on income resulting from recaptured capital cost
allowance. To avoid that result, Continental Bank Leasing transferred the
depreciable property in a tax deferred statutory rollover to a partnership of
which it was a member. Continental Bank Leasing then transferred its
partnership interest to Continental Bank in another tax deferred statutory
rollover. The third party acquired the partnership interest from Continental
Bank, resulting in a taxable capital gain to Continental Bank.
15 The Minister assessed Continental Bank
Leasing on the basis that there was no partnership, and that Continental Bank
Leasing had disposed of the depreciable property directly to the third party.
As a protective measure, the Minister also assessed Continental Bank on the
alternative basis that it had realized income (not a capital gain) on the
disposition of the partnership interest. It was apparently understood that the
reassessment of Continental Bank would be vacated if the assessment of
Continental Bank Leasing was found to be correct. Both assessments were
appealed, and the cases were heard together in the Tax Court of Canada, the
Federal Court of Appeal, and the Supreme Court of Canada.
16 By the time the case reached the Supreme
Court of Canada, the principal debate was whether the partnership was valid as
a matter of law. A majority of the Supreme Court of Canada found that the
partnership was valid. The result, for Continental Bank Leasing, was that its
appeal from the tax assessment was allowed. That meant that the correctness of
the assessment of Continental Bank had to be considered (the issue being
whether its gain on the disposition of the partnership interest was a capital
gain or income). The Court found that Continental Bank had a capital gain.
17 In the Supreme Court of Canada, the Crown
presented for the first time a new theory of the entire series of transactions,
which was that it was Continental Bank, not Continental Bank Leasing, that
transferred the depreciable property to the third party. Justice McLachlin, as
she then was, writing for the majority, dismissed this argument for reasons
that appear at paragraphs 18 and 19 (recall that the majority had
concluded that the partnership was valid):
[18] [...] The Minister cannot argue that the Bank could not transfer its
partnership interest at this stage. The Minister must accept that this transfer
took place because his assessment of the Bank was based on the assumption that
the Bank disposed of its partnership interest. I agree with Bastarache J. that
the Minister's argument that the Bank sold depreciable leasing assets or was
otherwise liable for recapture of capital cost allowance pursuant to s. 88(1)
of the Income Tax Act, R.S.C. 1952, c. 148, as amended, raised for the
first time in this Court, cannot be entertained. The Minister should not be
allowed to advance a new basis for a reassessment after the limitation period
has expired.
[19] On the basis that the Bank disposed of its interest in the
partnership, the Bank properly reported the proceeds of the disposition of its
partnership interest as a capital gain. I would therefore dismiss this second
appeal with costs. [...]
18 Justice Bastarache wrote for the
minority, which had concluded that the partnership was not valid. He explains
at paragraphs 10 to 13 why he concluded that the Crown could not rely on its
new theory:
[10] The applicable limitation period under the Act for assessing a
taxpayer is four years from the date of issuance of Revenue Canada's Notice of
Reassessment (ss. 152(3.1) and 152(4) of the Act). As a result, the latest that
the Minister could have reassessed the Bank for the recapture of cost allowance
was October 12, 1993. The Crown is not permitted to advance a new basis for
reassessment after the limitation period has expired. The proper approach was
expressed in The Queen v. McLeod, 90 D.T.C. 6281 (F.C.T.D.), at p. 6286.
In that case, the court rejected the Crown's motion for leave to amend its
pleadings to include a new statutory basis for Revenue Canada's assessment. The
court refused leave on the basis that the Crown's attempt to plead a new
section of the Act was, in effect, an attempt to change the basis of the
assessment appealed from, and “tantamount to allowing the Minister to appeal
his own assessment, a notion which has specifically been rejected by the
courts”. Similarly, the Federal Court of Appeal has described such attempts by
the Crown as “a belated attempt to put the appellant's case on a new footing” (British
Columbia Telephone Co. v. Minister of National Revenue (1994), 167 N.R.
112, at p. 116).
[11] It was open to the appellant to assess the respondent on the basis
that it was liable for the recapture of cost allowance when it issued its
Notice of Reassessment on October 12, 1989 or anytime prior to the expiration
of the limitation period for reassessment. The appellant did not choose to do
so and cannot now be permitted to change its assessment eleven years later. The
appellant argued that the liability of the respondent for the assessment
pursuant to s. 13(1) is an alternative reason for its previous assessment, not
a new assessment or reassessment. According to the appellant, because the
liability for recapture under s. 13(1) would arise solely as a consequence of a
finding that Leasing, in the Leasing Appeal, was not the vendor of the assets
in the sale to Central, a reassessment on this basis is merely a legal
conclusion flowing from the proper application of the statute.
[12] To accept this characterization by the appellant would, in effect,
create a situation where the Crown is permitted to raise new arguments simply
because other arguments failed in the courts below. Unlike the Minister in
Minister of National Revenue v. Riendeau (1991), 132 N.R. 157 (F.C.A.), the
Minister in the present case has never sought to amend, correct or reissue the
reassessment of the Bank to include a claim for recapture under s. 88(1)(f) of
the Act. Moreover, the appellant's characterization of the argument as an
alternative one ignores the fact that Leasing and the Bank are two separate
taxpayers. What the Minister is seeking to do is to substitute an assessment of
one taxpayer for the assessment of another taxpayer because the first
assessment did not succeed.
[13] Taxpayers must know the basis upon which they are being assessed so
that they may advance the proper evidence to challenge that assessment. Here,
it is not clear that there is the proper factual basis to support a
reassessment on the basis proposed by the appellant. For example, the value of
the goodwill associated with the Bank's leasing business, which was transferred
to Central in December 1986, could bear on the appellant's new claim for
recapture by the Bank. It is not possible to measure the extent to which the
Bank might otherwise be liable for recapture, or the Bank's income for tax
purposes, without being able to properly allocate the purchase price paid by
Central between goodwill and leasing assets. Because the Bank was not assessed
on the recapture, the evidence relating to the allocation of the purchase price
was not adduced at trial. To allow the appellant to proceed with its new
assessment without the benefit of findings of fact made at trial would require
this Court to become a court of first instance with regard to the new claim.
[14] As I stated above, it was not necessary, because of the disposition
of the Leasing Appeal, to deal with the issues raised in this case. I would
dismiss the appeal with costs.
19 The right of the Crown to present an
alternative argument in support of an assessment is now governed by subsection
152(9) of the Income Tax Act, which applies to appeals disposed of after
June 17, 1999: Income Tax Amendment Act, S.C. 1999, c. 22, s. 63.1(2).
[25]
In this decision Justice Sharlow
also stated that:
21 As I read subsection 152(9), the
expiration of the normal reassessment period does not preclude the Crown from
defending an assessment on any ground, subject only to paragraphs 152(9)(a) and
(b). Paragraphs 152(9)(a) and (b) speak to the prejudice to the taxpayer that
may arise if the Crown is permitted to make new factual allegations many years
after the event.
[26]
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)).
[27]
With respect to whether
subsection 152(9) of the Act applies to a new basis of assessment (as
distinguished from a new argument), Justice Rothstein (as he then was) of the
Federal Court of Appeal made the following comments in The Queen v.
Anchor Pointe Energy Ltd., 2003 FCA 294, 2003 DTC 5512, [2004] 5
C.T.C. 98:
37 Subsection 152(9)
permits the Minister to rely upon an alternative argument in support of an
assessment after the normal reassessment period. There is no suggestion here
that Anchor Pointe is no longer able to adduce relevant evidence with respect
to the Minister's new basis or argument. Therefore, if the Global decision
constitutes a new basis or argument in support of the reassessment, the
Minister may rely upon it even though it was not relied upon prior to expiry of
the normal reassessment period.
38 Anchor Pointe tries to
distinguish between a new basis of assessment and a new argument in support of
an assessment. I do not find that semantical argument productive. The question
is whether the Minister is purporting, through reliance on the Global decision,
to increase the amount of Anchor Pointe's income that was not included in an
assessment or reassessment made within the normal reassessment period.
[28]
In Walsh v. The Queen, 2007
FCA 222, [2007] 4 C.T.C. 73, 2007 DTC 5441, Justice Richard of the
Federal Court of Appeal made the following comments in relation to subsection
152(9) of the Act:
18 The following conditions apply when the
Minister seeks to rely on subsection 152(9) of the Act:
1) the Minister cannot include transactions which did not form
the basis of the taxpayer's reassessment;
2) the right of the Minister to present an alternative argument
in support of an assessment is subject to paragraphs 152(9)(a) and (b), which
speak to the prejudice to the taxpayer; and
3) the Minister cannot use subsection 152(9) to reassess outside
the time limitations in subsection 152(4) of the Act, or to collect tax
exceeding the amount in the assessment under appeal.
[29]
There is no suggestion in this
case that the Respondent is attempting to increase the amount of the income of
the Appellant to an amount that would be greater than the amount included in
the reassessment or to collect tax exceeding the amount that was reassessed.
[30]
The Federal Court of Appeal in Loewen
and Walsh did not specifically deal with how paragraphs (a) and (b) of
subsection 152(9) of the Act should be interpreted. There was no
discussion in either case of the specific meaning of these two paragraphs.
[31]
The Supreme Court of Canada in The
Queen v. Canada Trustco Mortgage Company, 2005 SCC 54, 2005 DTC 5523
(Eng.), [2005] 5 C.T.C. 215, 340 N.R. 1, 259 D.L.R. (4th) 193, [2005]
2 S.C.R. 601, stated that:
10 It has been long established as a matter
of statutory interpretation that “the words of an Act are to be read in their
entire context and in their grammatical and ordinary sense harmoniously with
the scheme of the Act, the object of the Act, and the intention of Parliament”:
see 65302 British Columbia Ltd. v. R., [1999] 3 S.C.R. 804 (S.C.C.), at
para. 50. The interpretation of a statutory provision must be made according to
a textual, contextual and purposive analysis to find a meaning that is
harmonious with the Act as a whole. When the words of a provision are precise
and unequivocal, the ordinary meaning of the words play a dominant role in the
interpretive process. On the other hand, where the words can support more than
one reasonable meaning, the ordinary meaning of the words plays a lesser role.
The relative effects of ordinary meaning, context and purpose on the
interpretive process may vary, but in all cases the court must seek to read the
provisions of an Act as a harmonious whole.
[32]
It seems to me that the words of
paragraphs (a) and (b) of subsection 152(9) of the Act are precise and
unequivocal. It seems clear that the reference to “relevant evidence” is
to relevant evidence that the taxpayer is no longer able to adduce without the
leave of the court, and it is not appropriate in the circumstances for the court
to order that the evidence be adduced. Because paragraph (b) is linked to
paragraph (a) as a result of the use of “and” at the end of paragraph (a), and
because paragraph (b) states that “it is not appropriate in the circumstances
for the court to order that the evidence be adduced” it seems clear to me that
the phrase "without the leave of the court” is intended to modify the type
of evidence that the taxpayer is no longer able to adduce. Therefore only
evidence that the taxpayer is no longer able to adduce without leave of the
court is the type of evidence that is referred to in these paragraphs.
[33]
Notwithstanding what appears to be
very clear language counsel for the Appellant argued that the intent of the
subsection should be examined. In particular, he referred to the Technical
Notes released by the Department of Finance when subsection 152(9) was added to
the Act. The Technical Notes stated as follows:
New subsection 152(9) is intended to ensure that the Minister of National
Revenue may advance alternative arguments in support of an income tax
assessment after the normal reassessment period has expired. This amendment is
proposed in light of remarks by the Supreme Court of Canada in the case of The
Queen v. Continental Bank of Canada, [1997] 4 C.T.C. 77 (S.C.C.), to the
effect that the Crown is not permitted to advance a new basis for assessment
after the limitation period has expired.
The limitations found in paragraphs 152(9)(a) and (b) are intended to
import the Court protection afforded to taxpayers that an alternative argument
cannot be advanced to the prejudice of the right of a taxpayer to introduce
relevant evidence to rebut the argument.
[34]
The courts have expressed
different views on the use of technical notes. In Silicon Graphics Ltd. v. The Queen,
2002 FCA 260, 2002 DTC 7112, [2002] 3 C.T.C. 527, the Federal Court
of Appeal made the following comments on the use of Technical Notes:
50 Of course, Technical Notes
are not binding on the courts, but they are entitled to consideration. See Ast
Estate v. R., [1997] F.C.J. No. 267 (Fed. C.A.), para.
27:
Administrative interpretations such
as technical notes are not binding on the courts, but they are entitled to
weight, and may constitute an important factor in the interpretation of
statutes. Technical Notes are widely accepted by the courts as aids to
statutory interpretation. The interpretive weight of technical notes is particularly
great where, at the time an amendment was before it, the legislature was aware
of a particular administrative interpretation of the amendment, and nonetheless
enacted it.
[35]
Chief Justice Bowman in Krause
v. The Queen, 2004 TCC 594, 2004 DTC 3265, [2004] 5 C.T.C. 2230
stated as follows:
22…I do not think that technical notes to legislation should be taken as
determinative. Parliament is supposed to be able to express its intention
clearly and unambiguously in the statutory language that it uses. It does not
seem appropriate to resolve ambiguities in the statutory language by having
recourse to notes written by unnamed officials in the Department of Finance
explaining what the Department of Finance thought it was achieving, or what it
hoped to achieve. Nonetheless, the practice is fairly well entrenched. In Glaxo
Wellcome Inc. v. R. (1996), 96 D.T.C. 1159 (T.C.C.), affd (1998), 98 D.T.C.
6638 (Fed. C.A.), the following observation was made at page 1162:
One must bear in mind that it is Parliament that passes legislation, and
it is through the words of that legislation that Parliament speaks. An act of
Parliament represents the collective will of Parliament. One cannot be certain
that the same can be said of extrinsic materials. To attempt to determine the
intent of a statutory provision by reference to a speech delivered by a member
of the government, a speech that he or she may well not have written, or by
technical or explanatory notes prepared by officials of the Department of
Finance, or other budgetary materials, strikes me as a potentially dangerous
course of action. Where a court strains to assign to reasonably comprehensible
language an extended meaning that conforms to what it conceives, on the basis
of extrinsic materials, to be what Parliament was seeking to achieve it runs
the risk of crossing the line that separates the judicial from the legislative
function.
. . . . .
The practice today, in my experience, appears to be to refer in argument
to virtually anything that may have some bearing, however remote, on the
question to be decided - speeches in Parliament, technical notes, explanatory
notes, budgetary materials, commission reports, published advance income tax
rulings, texts by authors, whether living or dead, articles and speeches by practitioners
or academics, interpretation bulletins - all are grist for the mill and the
court is left to determine what assistance, if any, can be gleaned from such
materials.
The practice is now too well entrenched to be reversed but it is
important that the reliability and the utility of such materials be put in
their proper perspective and that it be recognized that ultimately the
interpretation must be based upon the court's reading of the legislative
language itself. In that endeavour such extrinsic aids must be handled with
extreme caution. As Sopinka, J. said in Morgantaler at p. 484:
Provided that the court remains mindful of the limited reliability and
weight of Hansard evidence, it should be admitted as relevant to both the
background and the purpose of legislation.
One should be mindful of the wise observation made by the Earl of
Halsbury, L.C. in Hilder v. Dexter, [1902] A.C. 474 (U.K. H.L.), at 477:
My Lords, I have more than once had occasion to say that in construing a
statute I believe the worst person to construe it is the person who is
responsible for its drafting. He is very much disposed to confuse what he
intended to do with the effect of the language which in fact has been employed.
At the time he drafted the statute, at all events, he may have been under the
impression that he had given full effect to what was intended, but he may be
mistaken in construing it afterwards just because what was in his mind was what
was intended, though, perhaps, it was not done.
[36]
In any event the Technical Note
refers to:
the Court protection afforded to taxpayers that an alternative argument
cannot be advanced to the prejudice of the right of a taxpayer to
introduce relevant evidence to rebut the argument.
(emphasis added)
[37]
It refers to the right of the
taxpayer and not the ability the taxpayer to adduce evidence.
[38]
Counsel for the Appellant argued
that the phrase “without the leave of the court” in paragraph (a) should be
read as a condition subsequent to the first part of this paragraph. Counsel for
the Appellant suggested that there is a series of questions that must be asked
and answered in order to determine whether or not paragraphs (a) and (b) of
subsection 152(9) of the Act apply. The first question would be whether
there is any relevant evidence that the taxpayer is no longer able to adduce.
If the answer to this question is no, then there is no need to read any further
and paragraphs (a) and (b) do not apply. If the answer to this question is yes,
the next question is whether or not leave of the court would assist the
taxpayer in solving this evidentiary problem. In situations such as the one in
this case counsel for the Appellant suggested that since the answer to this
question would obviously be no, then there is no need to read any further and
paragraphs (a) and (b) would apply and the Respondent would not be entitled to
raise the alternate argument.
[39]
However in my opinion, this
interpretation alters the plain meaning of the words “there is relevant
evidence that the taxpayer is no longer able to adduce without the leave of the
court” significantly and does not take into account that paragraphs (a) and (b)
are linked by the word “and” which makes it clear that the evidence referred to
in paragraph (a) is evidence that the taxpayer is no longer able to adduce
without the leave of the court, and not evidence that the taxpayer is no longer
able to adduce for any other reason.
[40]
The interpretation proposed by counsel
for the Appellant would also lead to, what I believe would be, unintended
results. For example if in another situation a taxpayer were to intentionally
destroy documents, and the Respondent in that case should attempt to raise a
new argument that the taxpayer alleges can only be rebutted by the documents
that the taxpayer has destroyed, following the analysis of paragraphs (a) and
(b) as proposed by counsel for the Appellant, the Respondent would not be able
to raise the new argument because the answer to the first question of whether
there is any evidence that the taxpayer is no longer able to adduce will be yes
and the answer to the second question of whether leave of the court would
assist in this evidentiary problem would be no. It does not seem reasonable to
me that, in this example, the Respondent should be prevented from raising the
new argument.
[41]
I am unable to agree with the
interpretation of subsection 152(9) of the Act as advanced by counsel
for the Appellant.
[42]
Reverting back to the plain
meaning of the words used in subsection 152(9) of the Act, what
situations would have been contemplated by paragraphs (a) and (b)? The answer
to this question to me is based on the same premise as the one advanced by the
counsel for the Appellant in referring to the Technical Notes. What was the
intent of this subsection or why was this subsection added to the Act?
It is accepted in the Technical Notes and in the decision of the Federal Court
of Appeal in Loewen that subsection 152(9) was added to the Act
as a result of the decision of the Supreme Court of Canada in Continental
Bank. Therefore, it seems logical that this provision was added so that the
Respondent could, following the addition of this subsection to the Act,
raise additional arguments that the Respondent would otherwise be prevented
from raising as a result of the decision of the Supreme Court of Canada in Continental
Bank. In the Continental Bank case, the new argument was raised
at a very late stage of the litigation. The new argument was raised for the
first time at the hearing before the Supreme Court of Canada. Assuming that the
intention of the provision was to allow the Respondent to raise arguments at
any stage of the litigation (whether the appeal is before this Court, the
Federal Court of Appeal, or the Supreme Court of Canada), then the question
will be whether evidence can be introduced at the appeal stages of litigation,
since paragraphs (a) and (b) of subsection 152(9) of the Act refer to
“evidence that the taxpayer is no longer able to adduce without the leave of
the court”.
[43]
In the Federal Courts Act
section 53 provides as follows:
53. (1) The
evidence of any witness may by order of the Federal Court of Appeal or the
Federal Court be taken, subject to any rule or order that may relate to the
matter, on commission, on examination or by affidavit.
[44]
Part 6 of the Federal Courts
Rules deals with appeals to the Federal Court of Appeal. Paragraph 351 of
the Federal Courts Rules, which is in Part 6, provides as follows:
351. In
special circumstances, the Court may grant leave to a party to present evidence
on a question of fact.
[45]
Therefore the Federal Courts Rules
contemplate that with leave of the Federal Court of Appeal evidence may be
presented before the Federal Court of Appeal. Therefore there is a situation
where in an appeal before the Federal Court of Appeal, the taxpayer could be in
the position where the taxpayer is no longer able to adduce evidence without
leave of the court, but could, with such leave, present evidence.
[46]
Subsection 62(3) of the Supreme
Court Act provides that:
62 (3) The Court or a judge may, in the discretion of
the Court or the judge, on special grounds and by special leave, receive
further evidence on any question of fact, such evidence to be taken in the
manner authorized by this Act, either by oral examination, by affidavit or by
deposition, as the Court or the judge may direct.
[47]
Therefore there are situations
where a taxpayer in an appeal before the Federal Court of Appeal or the Supreme
Court of Canada could be in a position where the taxpayer can only adduce
evidence with leave of the court (and where the applicable statute or rules
contemplate that such evidence may be adduced). In finding a meaning for the
words of paragraphs (a) and (b) of subsection 152(9) of the Act, it is
not a question of how often the situation would arise (or has arisen) but
whether it is possible in law for the situation to arise. The plain wording of
paragraphs (a) and (b) of subsection 152(9) of the Act can be given
meaning that can be applied in situations that are contemplated by the Federal Courts Act
and the Federal Courts Rules and the Supreme Court Act.
[48]
As a result, I do not agree with
the interpretation of this provision as proposed by counsel for the Appellant
and the Appellant cannot succeed in its motion based on subsection 152(9) of
the Act as this is not a situation where the Appellant is no longer able
to adduce evidence without leave of the court. The evidentiary problem
of the Appellant is not that the Appellant requires the leave of the court to
adduce evidence but that key witnesses are now deceased. This type of
evidentiary problem is not the type of evidentiary problem contemplated by
paragraphs (a) and (b) of subsection 152(9) of the Act.
Non-arm’s Length Allegations – Paragraph 53 of the Rules
[49]
The Appellant also raised the
issue of whether paragraph 53 of the Rules should apply. This paragraph
provides as follows:
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,
(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.
[50]
The Appellant, by its Motion, is
requesting that the Respondent accept the statements by the Appellant that the
Appellant and Loford Properties Limited and that the Appellant and Kent
Holdings Ltd. were dealing with each other at arm’s length, and to strike from
the Reply (and the Amended Reply) all of the references to the Appellant and
these companies dealing with each other at non-arm’s length.
[51]
In the Notice of Appeal the facts
are described, in part, as follows:
3. (i) the Appellant was a minority
shareholder in Oxford Development Group Ltd. (“Oxford”)…
…
5. The remaining issued and outstanding
shares of Oxford were collectively held by persons at arm’s length to the
Appellant, namely, Loford Properties Limited (“Loford Properties”) and Kent
Holdings Ltd. (“Kent”)
6. Mr. G. Donald Love (“Mr. Love”), then
Chairman and President of Oxford, was the sole beneficial shareholder of Kent.
Mr. Love together with other related parties, was also the sole beneficial
shareholder of Loford Properties
…
9. On December 19, 1979, an offer was
extended by 91922 Canada Ltd. to purchase, on an arm’s length basis, all of the
outstanding shares of Oxford, which offer was accepted by the Oxford
shareholders.
[52]
At the time of the offer it would
appear that the only issued share of 91922 Canada Ltd. was held by Kent
Holdings Ltd., which was wholly owned by Mr. Love. Therefore it seems logical
that if the Appellant was asserting that the Appellant was dealing at arm’s
length with 91922 Canada Ltd. and Kent Holdings Ltd. then the Appellant would
also be asserting that the Appellant was dealing at arm’s length with the
person (Mr. Love) who was the sole beneficial shareholder of Kent Holdings Ltd.
[53]
The Appellant is asking that the
words “but he denies the other facts stated in paragraph 5 of the Notice of
Appeal” be stricken from paragraph 6 in the Amended Reply and that the other
provisions containing allegations of the parties
not dealing at arm’s length be stricken from the Amended Reply, because the
Appellant will be prejudiced because of the lapse of time and because two of
the principal witnesses that could testify with respect to whether the
Appellant was dealing with Mr. Love and his companies at arm’s length are now
deceased.
[54]
The Appellant indicates that both
Mr. Mercier and Mr. Love are crucial to the question of whether the Appellant
was dealing at arm's-length with Mr. Love and his companies. Mr. Mercier passed
away in September 2002, and Mr. Love passed away on October 13, 2003. Both of
these individuals were deceased prior to the Appellant filing its Notice of
Appeal in 2006. Since the Appellant had made the allegation in its Notice of
Appeal that the Appellant was dealing at arm's-length with Mr. Love’s
companies, how was the Appellant planning to prove this allegation?
[55]
Since the Appellant made the
allegation that it was dealing at arm’s length with Mr. Love’s companies, the
Appellant would have the onus of proof with respect to the facts required to
support this allegation. It is illogical to suggest that the Respondent would
have the onus of disproving facts alleged by the Appellant.
[56]
Justice McIntyre on behalf
of the Supreme Court of Canada stated in Ontario (Human Rights Commission) v. Simpsons Sears Ltd., [1985] 2
S.C.R. 536 that:
28 To begin with, experience has shown that in the resolution of
disputes by the employment of the judicial process, the assignment of a burden
of proof to one party or the other is an essential element. The burden need not
in all cases be heavy -- it will vary with particular cases -- and it may not
apply to one party on all issues in the case; it may shift from one to the
other. But as a practical expedient it has been found necessary, in order to
ensure a clear result in any judicial proceeding, to have available as a
"tie-breaker" the concept of the onus of proof. I agree then with the
Board of Inquiry that each case will come down to a question of proof, and
therefore there must be a clearly-recognized and clearly-assigned burden of
proof in these cases as in all civil proceedings. To whom should it be
assigned? Following the well-settled rule in civil cases, the plaintiff bears
the burden. He who alleges must prove.
[57]
In Pollock v.
The Queen, [1994] 1 C.T.C. 3, 94 DTC 6050, Justice Hugessen, on behalf
of the Federal Court of Appeal, made the following comments:
Where, however, the Minister has pleaded no assumptions, or where
some or all of the pleaded assumptions have been successfully rebutted, it
remains open to the Minister, as defendant, to establish the correctness of his
assessment if he can. In undertaking this task, the Minister bears the ordinary
burden of any party to a lawsuit, namely to prove the facts which support his
position unless those facts have already been put in evidence by his opponent.
This is settled law.
[58]
In Loewen, supra,
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.)).
[59]
The reference by Justice Sharlow
to the onus lying with the Crown is with respect to facts alleged by the Crown.
In this case, the arm’s length dealings are alleged by the Appellant. It does
not seem reasonable that the Appellant should be permitted to allege that the
Appellant was dealing at arm’s length with Mr. Love’s companies and the
Respondent must be forced to accept this allegation as true when there has been
no change in the available evidence from the time that the allegation was made
by the Appellant in its Notice of Appeal to the time when the Respondent is
amending its Reply. Since the Appellant has made the allegation that the Appellant
and Mr. Love’s companies were dealing with each other at arm’s length, the
Respondent should not be prevented from requiring the Appellant to prove this.
[60]
It seems difficult to determine
how the Appellant is prejudiced by the Respondent referring to the dealings as
being on a non-arm's-length basis in this case when the Appellant has alleged the
opposite in its pleadings. It seems to me that there are two possibilities in
relation to the dealings between parties to a transaction – either the parties
are dealing with each other at arm's length or they are dealing with each
other at non-arm’s length. The Respondent, in alleging that the Appellant was
dealing at non-arm’s length with Mr. Love and his companies, is simply alleging
the opposite of what the Appellant is alleging, which would be the same as
simply denying the allegation made by the Appellant.
[61]
The Appellant has made the
allegation that the Appellant and Mr. Love’s companies were dealing at arm’s
length presumably because the Appellant believed that this was relevant in
dealing with a reassessment based on Former Section 245. Former Section 245
read as follows:
245 (1) In computing income for the purpose of this Act, no deduction may
be made in respect of a disbursement or expense made or incurred in respect of
a transaction or operation that, if allowed, would unduly or artificially reduce
the income.
[62]
The Respondent is now taking the
position that the reassessment is based on subsection 55(1) of the Act
which, prior to its repeal, read as follows:
55 (1) For the purposes of this subdivision, where the result of one or
more sales, exchanges, declarations of trust, or other transactions of any kind
whatever is that a taxpayer has disposed of property under circumstances such
that he may reasonably be considered to have artificially or unduly
(a) reduced the amount of his gain from the disposition,
(b) created a loss from the disposition, or
(c) increased the amount of his loss from the disposition,
the taxpayer's gain or loss, as the case may be, from the disposition of
the property shall be computed as if such reduction, creation or increase, as
the case may be, had not occurred.
[63]
Since neither Former Section 245
nor subsection 55(1) of the Act included a condition that the taxpayer
was dealing with any person at non-arm’s length, at the time that the Notice of
Appeal was drafted, the issue of whether the Appellant was dealing at arm’s
length (or non-arm’s length) with Mr. Love and his companies would have been a
matter of relevance, not a requirement of Former Section 245 (the provision
addressed by the Appellant in its Notice of Appeal) and now since there is no
longer any argument based on subsection 69(1) of the Act applying, the
issue of whether the Appellant was dealing at arm’s length (or non-arm’s
length) with Mr. Love and his companies is still only a matter of relevance,
although now in relation to subsection 55(1) of the Act and not Former
Section 245.
[64]
Chief Justice Bowman in Jolly
Farmer Products Inc. v. The Queen, 2008 TCC 124 stated that:
10 Mr. Woon argues that the religious practices and beliefs of
the shareholders are a relevant consideration in the context of the assumptions
considered in their entirety. I am not at present persuaded of their relevancy.
How the religious beliefs of the shareholders of the appellant can affect the
determination whether the cost of building or acquiring a piece of property or
of clearing land has an income earning purpose is not readily apparent to me on
the material filed on this motion. However, the relevance may emerge in the
context of the evidence as a whole and I prefer to leave the question of
relevancy to the trial.
[65]
In this particular case the issue
of whether the Appellant was dealing at arm’s length (or non-arm’s length) with
Mr. Love and his companies is a matter of relevance that is best left to the
trial judge. It would seem that this issue is just as relevant for the purposes
of subsection 55(1) of the Act as it would have been for the
purposes of Former Section 245 as both provisions are based on the key
concept of “unduly or artificially” either creating or increasing a loss or
reducing income and neither subsection included any reference to whether
parties were dealing with each other at non-arm’s length (or arm’s length).
[66]
However, there is another reason
why, in my opinion, the Appellant cannot succeed under paragraph 53 of the Rules.
The reference to “prejudice” in paragraph 53 of the Rules must be read
in light of the provisions of subsection 152(9) of the Act. As
noted by the Federal Court of Appeal in Loewen and Walsh,
paragraphs (a) and (b) of subsection 152(9) of the Act “speak to the
prejudice to the taxpayer”. How can a right to raise an alternative argument
that is granted by subsection 152(9) of the Act, which has been passed
by Parliament, be taken away by a paragraph of the Rules, which has not
been passed by Parliament? If the prejudice to the taxpayer is not as described
in paragraphs (a) and (b) of subsection 152(9) of the Act, then the
Respondent should not be prevented from raising the alternative argument
because of paragraph 53 of the Rules. The right that is granted by
subsection 152(9) of the Act cannot be taken away by the Rules.
Paragraph 28 gg) of the Reply
[67]
The other objection of the
Appellant relates to paragraph 28 gg) of the Reply. This paragraph is part of
the assumptions that, according to the Reply (and the Amended Reply), the
Minister relied on in reassessing the Appellant and this paragraph provides as
follows:
Transactions regarding the Class E shares and the shares received in
consideration for those shares artificially or unduly created a loss, or
increased the amount of loss on their disposition.
[68]
The Respondent is not proposing to
amend this paragraph.
[69]
The issue raised by the Appellant
in relation to this assumption is whether this statement can be more correctly
described as a conclusion of mixed fact and law. The Respondent has stated that
the Appellant cannot raise an issue with respect to this paragraph as a result
of paragraph 8 of the Rules referred to above.
[70]
The Reply, which included
paragraph 28 gg), was filed on January 9, 2007. Almost seven months later, the
Appellant prepared an Answer to the Reply, which is dated August 2, 2007. The
Answer was filed with this Court on August 13, 2007, over seven
months after the Reply was filed. As part of the Answer, the Appellant stated
in paragraph 7 of the Answer that:
7. The Appellant denies the allegations of fact in subparagraphs
28 (ff), (gg) and paragraph 29 of the Reply.
[71]
There is no indication in the
Answer that the Appellant was objecting to the statement in paragraph 28 gg) as
being a conclusion of mixed fact and law. If this was the only issue raised by
the Appellant in its Motion, then I would not exercise my discretion in
paragraph 8 of the Rules given the clear statement by the Appellant in
the Answer that dealt specifically with paragraph 28 gg) without raising any
concerns about this paragraph.
[72]
However in light of the extensive
amendments to the Reply proposed by the Respondent and that this is not the
only issue raised by the Appellant in relation to the Reply, I will grant leave
to the Appellant in this case to raise this issue.
[73]
The question of whether this is a
proper assumption is based on the decision of the Federal Court of Appeal in Anchor
Pointe Energy Ltd., supra. The paragraph of the Reply that was in issue in
that case was as follows:
In reassessing, the Minister assumed the following facts:
. . . . .
(z) the seismic data purchased by API, APII, APIII, APIV and APV does not
qualify as a Canadian Exploration Expense (“CEE”) within the meaning of s.
66.1(6)(a) of the Income Tax Act (the “Act”).
[74]
Justice Rothstein (as he then was)
made the following comments on this assumption:
26 However, the assumption in paragraph
10(z) can be more correctly described as a conclusion of mixed fact and law. A
conclusion that seismic data purchased does not qualify as CEE within the
meaning of paragraph 66.1(6)(a) involves the application of the law to the
facts. Paragraph 66.1(6)(a) sets out the test to be met for a CEE deduction.
Whether the purchase of the seismic data in this case meets that test involves
determining whether or not the facts meet the test. The Minister may assume the
factual components of a conclusion of mixed fact and law. However, if he wishes
to do so, he should extricate the factual components that are being assumed so
that the taxpayer is told exactly what factual assumptions it must demolish in
order to succeed. It is unsatisfactory that the assumed facts be buried in the
conclusion of mixed fact and law.
[75]
The assumption in paragraph gg) in
the Reply in this case is a question of mixed fact and law as the only way to
determine whether the transactions artificially or unduly created a loss would
be to apply the law to the facts of this case. Counsel for the Respondent
indicated that with the decision of Anchor Pointe Energy Ltd. in mind,
there was no reference to subsection 55(1) of the Act in paragraph 28
gg) of the Reply. However, even without a specific reference to subsection
55(1) of the Act, it appears obvious that the wording of the assumption matches
the wording of subsection 55(1) of the Act. Why else would this
assumption be relevant? The only way to determine if:
Transactions regarding the Class E shares and the shares received in
consideration for those shares artificially or unduly created a loss, or
increased the amount of loss on their disposition
is to apply the law related to the meaning of
“artificially or unduly” to the facts. The transactions themselves are facts.
Whether the transactions resulted in the Appellant artificially or unduly
created a loss, is a question of mixed fact and law.
[76]
As a result paragraph 28 gg) is
stricken from the Amended Reply.
Conclusion
[77]
Therefore as a result the Reply
filed by the Respondent is amended as set out in the Amended Reply, a copy of
which was submitted as part of the Respondent’s Motion Record, except that
paragraph 28 gg) is stricken from the Amended Reply and the reference to
subsection 69(1) is stricken from paragraph 32 of the Amended Reply.
[78]
Costs of these motions shall be in
the cause.
Signed at Halifax, Nova Scotia, this 14th day of May
2008.
“Wyman W. Webb”
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