Citation: 2015 TCC 27
Date: 20150203
Docket: 2014-1875(IT)G
BETWEEN:
LANCAN
INVESTMENTS INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Pizzitelli J.
[1]
The Appellant has appealed a reassessment that
effectively increased its obligations to withhold and remit required Part XIII
of the Income Tax Act (the “Act”) withholding taxes from 5% to
15% in connection with its repurchase of shares from a foreign entity assumed
to reside in the Netherlands. The Respondent takes the position that the
foreign entity was a trust instead of a corporation and hence under the
applicable Treaty is subject to the higher withholding taxes. In the
alternative, the Respondent has pleaded that the foreign entity is a resident
of Liechtenstein that is subject to a 25% withholding tax the Appellant would
be responsible for remitting to the tax authorities and so the appeal should be
dismissed as such obligation is in effect greater than the reassessed amount,
notwithstanding that the Respondent is not seeking the extra amount. It is the
alternative pleading that is in issue in this motion.
[2]
The Appellant brings a motion to strike
paragraph 9 of the Respondent’s Reply dated September 30, 2014( the “Residency
Allegation”) which reads as follows:
9. Alternatively, he says that at all material times Palfinvest Reg.
Trust was a resident of the Principality of Liechtenstein by reason of its
management and control being in that jurisdiction, rather than a resident of
the Netherlands.
[3]
The Appellant brings the above motion to strike
pursuant to Rules 53(1)(a) and (c) of the Tax Court of Canada Rules
(General Procedure) (the “Rules”) which read as follows:
53. (1) The
Court may, on its own initiative or on application by a party, 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 appeal;
…
(c) is an
abuse of the process of the Court; or
…
[4]
In the alternative, the Appellant requires an order
for particulars pursuant to Rule 52 in response to the Appellant’s Demand for
Particulars dated October 27, 2014, namely an order that:
the respondent fully particularize all facts
upon which she presently relies and which she intends to prove in order to
establish that the non-resident resided in Liechtenstein at any time relevant
to supporting the reassessment appealed from;
[5]
Pursuant to the above Demand for Particulars in
relation to the Residency Allegation, the Appellant posed three questions which
were answered by the Respondent, all as follows:
Q1. Which are the “material times” to which the
respondent refers?
The “material times” referred to in paragraph 9
of the Respondent’s Reply are all times that are relevant to the redemption of
the Appellant’s shares held by Palfinvest Reg. Trust.
Q2. Who exercised management and control of
Palfinvest Reg. Trust (“Palfinvest”) during the material times?
The person or persons who exercised management
and control of Palfinvest Reg. Trust during the material times is a matter of
evidence to be adduced at trial, in respect of which no particulars can be
demanded for the purposes of pleading.
Q3. How was management and control of
Palfinvest exercised during the material times?
The manner in which the management and control
of Palfinvest Reg. Trust was exercised during the material times is a matter of
evidence to be adduced at trial, in respect of which no particulars can be
demanded for the purpose of pleading.
[6]
The Appellant also seeks costs of $9,000.00 in
any event of the cause and such other relief as is just and equitable in the
circumstances.
[7]
I will consider the Motion to Strike and then
deal with the Demand for Particulars and costs.
Motion to Strike
[8]
The issues of the Motion to Strike and the
Demand for Particulars are connected in this matter; being two sides of the
same coin. The Appellant argues that the Respondent has not provided any
material facts to support such Residency Allegation and that its failure to
provide particulars, both in its pleading as well as to the Demand for
Particulars suggests the Respondent has no factual foundations for the
Residency Allegation and is attempting to ground an improper “fishing
expedition” at discovery, thus is an abuse of process and forces the Appellant
to exert huge effort and expense to investigate all possible scenarios of which
it has no knowledge hence is also prejudicial to it and may lead to
unreasonable delays and accordingly should be struck. The Respondent argues
that there are no grounds for striking the pleading since if it is taken to be
true that Palfinvest resided in Liechtenstein then the Respondent would be
successful at trial and argues the Appellant has knowledge of the facts itself.
[9]
The parties are in agreement as to the general
principles of law applicable to the issues in this matter. It is trite law from
the Supreme Court of Canada decision of Hunt v Carey Canada Inc. [1990] 2
SCR 959, relied upon in Satin Finish Hardwood Flooring (Ontario) Limited v
The Queen, 96 DTC 1402, at 1404 that:
The test used by the courts in motions to
strike out a notice of appeal is whether it is “plain and obvious” that the
action cannot succeed even if the facts alleged in the notice of appeal are
true.
[10]
It is clear, as aforesaid, that in the most
general sense of the Residency Allegation, if Palfinvest was a resident of Liechtenstein, the Minister would succeed. I appreciate that the Appellant has relied on
cases such as Kinglon Investments Inc. v The Queen, 2014 DTC 1128 and O’Dwyer
v The Queen, 2012 TCC 261, 2012 DTC 1215, where this Court has struck
pleadings for failure to plead sufficient facts; however I note that in both cases
the presiding judge expressed concern that even giving the facts their widest
credibility they would not be enough to establish the elements necessary to
justify the assessments and thus had no reasonable chance of success, notably in
the context of a Rule 58(1)(b) for O’Dwyer and Rule 53(1)(d)
for Kinglon, none of which Rules are in issue here. In the case at hand,
the mere statement that the management and control of the party in question is
in Liechtenstein would, in its widest sense, disclose reasonable grounds for
opposing the appeal, if found to be true.
[11]
I also appreciate Appellant’s counsels reference
to the decision of former Chief Justice Rip in Cameco Corp. v The Queen,
2010 TCC 636, where several paragraphs were struck on the basis they included
only bald assertions that failed to specify the underlying factual components
of the impugned allegations, but in that case, the chief allegations pertaining
to transfer pricing were only struck after Chief Justice Rip gave the
Respondent leave to amend the pleadings challenged and the Respondent was found
not to have done so and thus created an abuse of process. I take judicial
notice of the Federal Court of Appeal decision in Yacyshyn v Tthe Queen, [1999]
FCJ No. 196, 99 DTC 5133, which I relied upon in Cameco v The Queen,
2014 TCC 367, a decision of mine that counsel for the Appellant referenced in
argument, where Letournou JA stated at paragraph 18 that:
… the dismissal of an appeal is a drastic and
somewhat ultimate remedy reserved for the egregious case or when no other
alternative and less drastic remedy would be adequate.
[12]
In the case at hand, I am not satisfied the
Appellant has met the high standard of demonstrating the Residency Allegation
would have no prospect of success, nor can I find failure to strike it would
lead to any prejudice to the Appellant at this early stage in the proceedings that
could not be compensated for by costs and that could not be remedied by less
drastic means. The matter is at an early stage of litigation and I have no
evidence before me that failure to strike the provision would result in any
substantial delays. Frankly, as referenced in Cameco above, the approach
to grant leave to amend if particulars are in order would be the preferred
relief in an application of first instance like in this matter and in fact an
order for particulars is the alternative relief requested by the Appellant,
which I address next.
Demand For
Particulars
[13]
The Appellant argues that the Respondent has
pleaded no material facts in support of the Residency Allegation, which it
claims is a mixed question of law and fact, while the Respondent counters that
the said allegation is an expression of fact on its own and a clearly defined
issue of “residency” and that the Appellant is really asking for the evidence
in support of such allegation which is inappropriate. The Respondent also takes
the position that the Appellant has knowledge of the facts and thus further
particulars are not needed.
[14]
Firstly, let me deal with the Respondent’s
position that the Appellant has knowledge of the fact the management and control
of Palfinvest is in Liechtenstein. The Respondent relies on the decision of Obonsawin
v Canada [2001] OJ No. 369, for the proposition that particulars will not
be ordered where the party demanding them has knowledge. This is well
established law discussed also in Mastronardi v The Queen, 2010 TCC 57,
2010 DTC 1066, at page 5 with reference to Zelinski v The Queen, 2002
DTC 1204, paragraph 4.
[15]
I cannot find any evidence in the pleadings or Affidavit
of P.L. the representative of the Appellant, filed in support of the
Appellant’s motion that the Appellant acknowledged or had any knowledge of the
residence of Palfinvest being other than in the Netherlands. The Respondent
itself summarized the provisions in the Affidavit and nowhere is there any
indication or mention of the residence being in Liechtenstein. The Respondent
has not filed an affidavit in this matter nor sought leave to cross-examine the
deponent and so no other evidence is before me regarding the knowledge of the
Appellant.
[16]
The Respondent’s argues in paragraph 46 of his
submissions that:
46. Unless there in an indication to the
contrary, one would ordinarily assume that an entity created by law resides in
the jurisdiction in which it is created. On that assumption, Palfinvest’s
residence would be in the Principality of Liechtenstein, because it was created
there….
[17]
The Respondent assumes in his argument that the
Appellant should assume that Palfinvest’s residence is where it was created. Frankly,
this is hardly evidence of the Appellant’s knowledge and frankly is
contradictory to the assumption of the Respondent in its main argument that the
residence is in the Netherlands. I agree with Appellant’s counsel’s argument
that the Respondent appears to be attempting to characterize his submissions as
if they were evidence. They are not.
[18]
I do not find that the Appellant can be taken to
have knowledge of Palfinvest’s residence being anywhere other than in the Netherlands so his knowledge cannot be a bar to particulars regarding the Residency Allegation.
[19]
Secondly, I wish to deal with the Respondent’s
submission that the Appellant is really asking for evidence in support of the
allegation.
[20]
There is no dispute between the parties that the
Appellant is not entitled to the Respondent’s evidence at the pleadings stage.
In Embee Electronic Agencies Ltd. v Agence Sherwood Agencies Inc. et al.
[1979] FCJ No. 1131, Marceau J. stated at paragraph 3:
… A defendant should not be allowed to use a
request for particulars as a means to pry into the brief of his opponent with a
view to finding out about the scope of the evidence that might be produced
against him at trial, nor should he be allowed to use such request as a means
to go on a sort of fishing expedition in order to discover some grounds of
defence still unknown to him. At that early stage, a defendant is entitled to
be furnished all particulars which will enable him to better understand the
position of the plaintiff, see the basis of the case made against him and
appreciate the facts on which it is founded so that he may reply intelligently
to the statement of claim and state properly the grounds of defence on which he
himself relies, but he is not entitled to go any further and require more than
that.
[21]
While I fully agree with the Rule against
evidence at pleadings above, I do not agree that the Appellant is asking for
any evidence. The Residency Allegation is not accompanied by any material facts
at all relating to the management and control of Palfinvest being in Liechtenstein. I agree with the Appellant that the issue of where the management and
control of a party lies is a question of mixed fact and law. As stated by Iacobucci
and Major JJ in Housen v Nikolaisen [2002] 2 S.C.R. 235 at paragraph 26,
in distinguishing questions of mixed fact and law from factual findings,
“Questions of mixed fact and law involve applying a legal standard to a set of
facts.” In paragraph 33, it was stated thus: “A question “about whether the
facts satisfy the legal tests” is one of mixed law and fact.” The Supreme
Court identified the issue of whether certain individuals are the directing
minds of a corporation as an example of a mixed question of fact and law.
[22]
Clearly, the issue of who the directing minds of
Palfinvest are may be an element of the legal test of who exercises management
and control. In fact, there may be several tests to determine whether it is
exercised by de jure or de facto control or by related groups to
use a few examples. The Appellant must have particulars from the Respondent to
understand which of the possible options are relied upon by the Respondent and
be able to deal with them, otherwise the statement is ambiguous.
[23]
The general principle of the purpose of
pleadings was well stated by Bowie J in Zelinski v The Queen, 2002 DTC
1204, affirmed by the Federal Court of Appeal (2002 DTC 7395) and relied upon
by numerous decisions of this Court including Mastronardi, who at
paragraph 4 said:
[4] The purpose of pleadings is to define the
issues in dispute between the parties for the purposes of production, discovery
and trial. What is required of a party pleading is to set forth a concise
statement of the material facts upon which she relies. Material facts are those
facts which, if established at trial, will tend to show that the party pleading
is entitled to the relief sought. …
[24]
In Mastronardi above, Campbell J. also
relied on the Federal Court of Appeal decision in Gulf Canada Ltd. v The
Mary Mackin, [1984] 1 FC 884, which was actually relied on by the Respondent,
which stated that “…the purpose of particulars is to require a party to
clarify the issues he has tried to raise by his pleading, so that the opposite
party may be able to prepare for trial, by examination for discovery or
otherwise”, in effect “to know what case he has to meet at the trial, and so to
save unnecessary expense, and avoid allowing parties to be taken by surprise.”
[25]
It is clear that the pleadings inform the next
steps in the litigation process such as discovery and the preparation of evidence
for trial. Accordingly, I cannot agree with the Respondent’s counsel that the
Appellant should not be given particulars on the Residency Allegation now but
proceed to discovery and ask for particulars afterwards if needed. Such a
position is contrary to the express purpose of pleadings.
[26]
In the Mary Mackin decision above, relied
upon by the Respondent, the Federal Court of Appeal found that the negligence
allegation there in issue “linguistically encompasses unspecified omissions and
is capable of a range of meanings” and gives a few examples. The Respondent
itself acknowledged in paragraph 37 of its submissions that, in addressing the
aforesaid allegation: “…This range of unspecified meaning was found to be too
wide and imprecise to properly define the issues to be tried.”, then goes on to
suggest the Residency Allegation here is “clear and unambiguous” in paragraph
38 of its submissions. With all due respect to the Respondent, the Residency
Allegation is far too wide and imprecise here as well to properly define the
“residency” issue. As I stated above, addressing the residency issue here
encompasses an examination of multiple scenarios such as de jure or de
facto control to name a few and the multiple elements that pervade their
analyses.
[27]
I should also like to comment on the
Respondent’s suggestion that the Appellant’s concerns about the Respondent
setting herself up for a “fishing expedition” due to her failure to plead
material facts was not well founded. The Respondent argued that since its
pleading was clear and ambiguous, then it in fact “had a licence to fish”. In
light of the above, it is clear to me that the parameters of the “fishing
licence” are and must be set within the issues properly pleaded with their
material facts. In other words, with sufficient particulars that clearly and
precisely define the issues. It is for this reason that “They tie the hands of
the party, and he cannot without leave go into any matters not included”, as
stated by Campbell J. in Mastronardi above at paragraph 10. I strongly
agree with the Appellant’s position on this matter as the Residency Allegation
is too wide and imprecise, capable of different meanings and of encompassing
different factual elements necessary to meet possibly different legal tests. To
let it stand without particulars would be to declare “open season” rather than
set parameters of a licence.
[28]
In my opinion the Appellant’s Demand for
Particulars was not premature as the Respondent has contended and the Appellant
is entitled to know the particulars of what the Respondent means when she
states the management and control of Palfinvest resides in Liechtenstein.
[29]
The Questions posed by the Appellant and listed
at the beginning of these reasons are proper questions. The Appellant is
entitled to know both who the Respondent alleges exercised management and
control and precisely how or in what manner such person or group of persons
exercised such management and control, be it de jure or de facto
control or otherwise. The Respondent’s answers to Questions 2 and 3, that
particulars will not be provided because the Appellant is not entitled to
evidence is not a satisfactory answer. The Respondent is directed to provide
the particulars requested by the Appellant in said Questions 2 and 3 within 60
days unless within that time she amends her Reply to strike the Residency
Allegation.
[30]
With respect to Question 1, I find the
Respondent has answered such question by effectively stating that the “material
times” were the times relevant to the repurchase of shares, the latter of
course which gives rise to a deemed dividend under the Act that triggers
the Appellant’s withholding obligation in issue. It is clear to me that the
relevant time triggering the deemed dividend is the time of repurchase of
shares.
[31]
With respect to costs on this matter, the
Appellant seeks the sum of $9,000.00 in any event of the cause although in
argument suggested its costs on this motion to date totalled approximately
$20,000.00. The Respondent did not take issue with that specific amount requested
in argument. While I totally agree with the Appellant’s argument that this
motion would not have been necessary had the Respondent properly provided the
particulars requested, the Appellant also sought and argued for the extreme
relief of striking the Respondent’s alternative pleading in issue without success.
While the Appellant had in the end mixed success, I take note of the fact that
the Appellant made it clear at the beginning of this motion that he would not
proceed if the Minister agreed to provide the requested particulars which the
Respondent refused to do, in my opinion, without any reasonable justification,
thus making this motion necessary. The Appellant was clear that all it really
wanted were the requested particulars. The law on particulars is quite
established and clear and the Respondent’s arguments to the contrary were, to
speak frankly, very unconvincing. Accordingly, I am ordering that the
Respondent pay the Appellant costs in the fixed amount of $8,000.00 in any
event of the cause.
Signed at Ottawa, Canada, this 3rd day of February 2015.
“F.J. Pizzitelli”
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