Citation:
2014 TCC 316
Date: 20141022
Docket: 2011-3726(IT)G
BETWEEN:
Belcourt Properties Inc./Les
propriétés Belcourt Inc.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Lamarre J.
[1]
By judgment dated June 27, 2014, I
allowed on the basis that the profit on the sale of the two properties at issue
was properly declared as a capital gain the appeal filed by the appellant from
the reassessment made under the Income Tax Act (ITA) for its 2005
taxation year. I awarded costs to the appellant and, at its request, I accepted
the filing of written submissions by each party on the amount of costs to which
the appellant is entitled. I have now received both parties’ submissions and I
will address the two issues raised by the parties.
First issue: Class
of proceeding under Schedule II, Tariff A and Tariff B of the Tax Court of
Canada Rules (General Procedure) (Rules).
[2]
The appellant instituted its appeal as a Class C
proceeding under the Rules. The respondent is of the view that it was a Class A
proceeding.
[3]
Section 1 of Tariff A of Schedule II addresses
the classes of proceedings and reads as follows:
Schedule II
Tariff A — Tariff
of Fees
1. Classes of
Proceedings — Subject to section 1.1, for purposes
of this Tariff and Tariff B, there are three classes of proceedings as follows:
(a)
Class A proceedings which include
(i)
appeals in which the aggregate of all amounts in issue is less than $50,000,
and
(ii)
appeals in which a loss has been determined under subsection 152(1.1) of the Income
Tax Act and the amount that is in issue is less than $100,000; and
(b)
Class B proceedings which include
(i)
appeals in which the aggregate of all amounts in issue is $50,000 or more but
less than $150,000,
(ii)
appeals in which a loss has been determined under subsection 152(1.1) of the Income
Tax Act and the amount that is in issue is $100,000 or more but less than
$300,000,
(iii)
a reference under section 173 or 174 of the Income Tax Act, section 310
or 311 of the Excise Tax Act, section 97.58 of the Customs Act,
section 51 or 52 of the Air Travellers Security Charge Act, section 204
or 205 of the Excise Act, 2001 or section 62 or 63 of the Softwood
Lumber Products Export Charge Act, 2006, and
(iv)
any proceeding not otherwise specifically provided for under this section; and
(c)
Class C proceedings which include
(i)
appeals in which the aggregate of all amounts in issue is $150,000, or more,
and
(ii) appeals in which a
loss has been determined under subsection 152(1.1) of the Income Tax Act
and the amount that is in issue is $300,000 or more.
[4]
The appellant is of the view that the aggregate
of all amounts in issue in this appeal is $150,000 or more whereas the
respondent argues that it is less than $50,000.
[5]
The appellant summarized its approach as to the
amounts in issue as follows in paragraphs 6, 7, 8 and 9 of its submissions:
6.
In addition to the amount of tax owed ($46,810)
with respect to the Appellant’s taxation year ended on
December 31, 2005 as a direct result of the Notice of reassessment
dated August 26, 2011 (Appellant’s Book of Documents, Exhibit A-1,
Tab 20), the Appellant was also the subject of a proposed assessment
pursuant to a letter dated September 29, 2011, advising the Appellant
that following the said assessment an amount of $420,952.50 would be assessed
against it pursuant to Part III of the Income Tax Act, as appears from Document
1 attached herewith under Annex B;
7.
The Appellant as such considered that the Notice
of reassessment under appeal entailed an overall disputed tax debt that
exceeded the amount of $150,000 referred to in Schedule II of the Tax Court
of Canada Rules (General Procedures [sic]) being a minimum of
$467,786 in the aggregate (being, the tax liability under Part I in the amount
of $46,810 and under Part III in the amount of $420,952);
8. Moreover the change of treatment of the said gains also resulted in
an adjustment to the Appellant’s refundable dividend tax on hand account,
whereby the gain resulting from the disposition of the two properties under
dispute would no longer qualify as investment income following the treatment by
the CRA of the gain as business income, resulting in a decrease to the
Appellant’s balance in the refundable dividend tax on hand account. This
adjustment alone represents an effective cost to the Appellant of over
$150,000;
9. In light of the adjustments made both to its income tax payable for
the 2005 taxation year end and its capital dividend account and tax liability
under Part III of the Income Tax Act (without even considering the
change to its refundable dividend tax on hand account), the Appellant submits
that the total amounts assessed as a result of the Notice of reassessment under
appeal was substantially over $150,000 in tax and that as such the present
appeal was properly instituted as a Class “C” proceeding.
[6]
The appellant has accordingly prepared its bill
of costs on the basis that its appeal was a Class C proceeding under the
Tariff.
[7]
The respondent is of the view that the amount of
tax owed with respect to the assessment that was the object of the appeal
before this Court was $46,810.
[8]
The respondent states the following in paragraphs
23 to 26 of her submissions:
23. The respondent agrees with the appellant that the amount of tax owed
with respect to the Appellant’s 2005 taxation year, as a result of the notice
of assessment dated August 26, 2011, is $46,810.7 That
assessment is the only one under appeal8 and the amount of tax that
is no longer payable by the taxpayer, further to this Court’s decision, is
$46,810.
24. The appellant’s assertion that an amount of part III tax should form
part of the aggregate of all amounts in issue is simply not supported by the
wording of the Act or the case law.
25. The appellant’s part III tax was never assessed.9
Furthermore, this part III tax debt is hypothetical.10 If a part III
tax had been assessed, it would have been a part III assessment for the 2008
taxation year of the appellant, which was obviously not part of the appeal.
26. It
follows that this amount cannot be part of the aggregate of all amounts in
issue as stated in Schedule II, Tariff A, section 1 of the Rules and section
2.1 of the Act.
__________________
7
Appellant’s submissions
for costs at para. 6.
8
The assessment under
appeal is the one issued pursuant to subsection 165(3) ITA on
August 26, 2011.
9
Appellant’s submissions
for costs, tab B-1[.]
10
For further indication
that this amount is hypothetical, please see paragraph 4 of the letter dated
September 29, 2011, at tab B-1 of the appellant’s submissions on costs. The
appellant and the shareholder could have elected for the dividend to be taxed
in the hand [s] of the shareholder. That hypothetical debt would have been the
debt of a different taxpayer than the appellant and taxed in the 2008 taxation
year.
[9]
The words “the aggregate of all amounts” in
Tariff A have the same meaning as in section 2.1 of the Tax Court of Canada
Act (TCC Act) (see James v. The Queen, 2001 CanLII 26508,
[2001] 4 C.T.C. 2919, par. 8; De Mond v. R., 2000
CarswellNat 1777, [2000] 4 C.T.C. 2203, par. 16).
[10]
Section 2.1 of the TCC Act reads as follows:
2.1
Interpretation — For the purposes of this Act,
"the aggregate of all amounts" means the total of all amounts
assessed or determined by the Minister of National Revenue under the Income
Tax Act, but does not include any amount of interest or any amount of loss
determined by that Minister.
[11]
The key issue here is whether “the aggregate of
all amounts in issue” can include the proposed assessment in the amount of
$420,952 for Part III tax.
[12]
Both parties agree that the reassessment dated
August 26, 2011 that was the object of the appeal represented an
increase in tax of $46,810 pursuant to Part I of the ITA with respect to the
appellant’s 2005 taxation year.
[13]
As a result of that reassessment, the Canada
Revenue Agency (CRA) revised the calculation of the appellant’s capital
dividend account (CDA). By letter dated September 29, 2011,
the CRA advised the appellant that the capital dividend declared and payable on
December 30, 2008 exceeded the CDA by $701,588 and that this excess
amount was subject to Part III tax under the ITA in the amount of $420,952.50
(Annex B, Document 1, Appellant’s Submissions for Costs).
[14]
It is clear, if one disregards the Minister’s
characterization of the profit from the sale of the two properties at issue as
business income (rather than as a capital gain), that the non-taxable portion
of the capital gain was correctly added to the CDA, as a result of which the
full amount of the dividend declared in 2008 was a capital dividend, and thus
no Part III tax was payable as no excess dividend arose.
[15]
To my knowledge, the CRA had not issued a notice
of assessment for Part III tax arising from any excess dividend by the time the
notice of appeal was filed on November 24, 2011, nor did it issue
such a notice of assessment at any subsequent time.
[16]
Now, because the appeal from the 2005 assessment
has been allowed on the basis that the profit from the sale of the two
properties was properly characterized as a capital gain, the proposed
assessment will vanish as the appellant is not liable for Part III tax.
[17]
The question, therefore, is whether, despite the
fact that the appeal was brought against the reassessment issued for the 2005
taxation year, it can be said that “the aggregate of all amounts in issue” also
includes the proposed Part III tax on the basis that it constituted an amount
determined by the CRA that flowed directly from the dividend declared in 2008,
which was determined to be an excess dividend rather than a capital dividend as
a result of the 2005 reassessment. In other words, the proposed Part III tax
depended on whether the profit on the sale of the properties which were at
issue before me for the 2005 taxation year was to be treated as a capital gain
or as business income. As I said before, since the appeal has been allowed,
Part III tax is no longer exigible.
[18]
In its submissions, at paragraphs 13 to 19, the
appellant presented its arguments as follows:
13. It is well established that the liability for taxes arises under
the Income Tax Act without the necessity of an assessment being issued;
14. The fact that the CRA choses [sic] to issue separate
assessments for separate parts of the Income Tax Act does not impact the
fact that a tax liability exists;
15. Similarly, the fact that the CRA choses [sic] to carry
forward certain tax liabilities deriving from reassessment to further taxation
years does not impact the fact that a tax liability has arisen in the course of
the year affected by a disputed reassessment;
16. In fact, said tax liability is deemed to be determined, as a
mere consequence of the reassessment issued by the CRA, even though it neglects
to collect it in the same taxation year;
17. As to the specific question of the tax liability arising under
Part III of the Income Tax Act, we further submit that this tax
liability was clearly understood by the parties as being affected and thus in
dispute in the course of the current appeal;
18. More precisely, it was assumed by both parties that a dismissal
of the current appeal would also dispose of the Part III tax liability;
19. The
Part III tax liability directly results from the change in treatment from
capital gain to business income by the CRA with respect to the proceeds from
the disposition of the two properties under dispute and therefore would not
exist [if] the treatment of the gain had been allowed as a capital gain;
[19]
The flaw in the appellant’s reasoning is that
the CRA does not choose to issue separate assessments. The Part III tax will
only arise if the corporation elects to pay to its shareholder a capital
dividend which is in excess of the amount of the capital dividend account. It
is only when an election is made by the corporation that the Minister may
assess the Part III tax and only then may that assessment be objected to or
appealed (section 185 of the ITA).
[20]
I agree with the appellant that the 2005
reassessment under appeal had a direct impact on the calculation of the CDA,
which in turn would have generated Part III tax in 2008 if, for example, the
appellant had not appealed the 2005 assessment or if the appeal had been
dismissed.
[21]
However, I agree with the respondent that, for
the purpose of establishing the class of proceeding under Tariff A, the
assessment under appeal was the one issued under Part I of the ITA for the 2005
taxation year, and the appeal was filed pursuant to subsection 169(1) of the
ITA.
[22]
The fact that, as a result of the 2005 reassessment,
the Minister revised the calculation of the CDA and determined that an amount
of $420,952 could be assessed under Part III of the ITA (Part III tax) does
not, in my view, have an impact on the amount at issue in the appeal before the
Court. I say so for the following reasons.
[23]
First, the letter referred to by the appellant,
which was sent by the Minister on September 29, 2011 (Annex B,
Document 1, Appellant’s Submissions for Costs), clearly stated that the new
figures were based on information on hand and were subject to revision should
further adjustments be made to the appellant’s income tax returns. I gather
from this statement that those figures were not yet at issue.
[24]
Second, in Dekker v. The Queen, 93 DTC
1481, [1993] T.C.J. No. 694 (QL), 1993 CarswellNat 1153, this Court had to
determine what was “the aggregate of all amounts in issue in an appeal under
the Income Tax Act” for the purposes of establishing whether the
taxpayer was entitled to an oral discovery of the Crown pursuant to subsection
17.3(1) of the TCC Act. Associate Chief Judge Christie made the following
analysis at page 1484 DTC, paragraphs 15 and 16 QL, 20 to 22 CarswellNat:
The subsection
provides:
17.3(1) Where the aggregate of all
amounts in issue in an appeal under the Income Tax Act is $15,000 or
less, or where the amount of the loss that is determined under subsection 152(1.1) of that Act and that is in issue is $30,000
or less, an oral examination for discovery shall not be held unless the parties
consent thereto or unless one of the parties applies therefor and the Court is
of the opinion that the case could not properly be conducted without that
examination for discovery.
The key words for
present purposes are: “amounts in issue in an appeal under the Income Tax
Act”. Appeals under that Act of the kind presently under consideration are
appeals from the Minister's assessment or reassessment of the appellant's
liability to income tax in respect of a particular taxation year. This, to my
mind is clearly the combined effect of subsections 150(1), 152(1), 165(1) and
(3), 169(1) of the Act and it is the amount of tax in dispute in a particular
taxation year that is to be compared to the $15,000 in subsection 17.3(1) to
determine whether an oral examination for discovery is barred unless the
parties consent thereto or the Court is of the opinion that the case could not
properly be conducted without an examination for discovery.
In calculating the figure to be compared to the $15,000 the
ramifications of an assessment or reassessment made in a particular year as it
relates to liability for tax in future years are not to be included. This is the approach adopted by the appellant, which I regard as
erroneous. It must be borne in mind that subsection 17.3(1) does not speak of
total of amounts of tax liability arising out of a reassessment, but rather it
refers to amounts in issue in an appeal. . . .
[My
emphasis.]
[25]
In Maier v. Canada, [1994] T.C.J. No.
1260 (QL), 1994 CarswellNat 3242 (referred to with approval by Webb J. in Pink
Elephant Inc. v. The Queen, 2011 TCC 395, par. 17), the question was
whether “the aggregate of all amounts in issue” reached the threshold amount
for the application of the general procedure to an informal procedure appeal
pursuant to section 18.12 of the TCC Act. Judge Garon came to the conclusion
that “the aggregate of all amounts” in issue in the context of the TCC Act
referred to the total of all amounts in issue in a single assessment made under
the ITA (par. 5). Judge Garon stated the following at paragraph 6:
6 Since a right of appeal under section 169 of the Income
Tax Act is given in respect of each assessment issued under the Income
Tax Act it makes more sense to consider that the matter of the
applicable procedure must be decided in relation to the aggregate of all
amounts in issue in each assessment. I am fortified in this approach by a close
examination of the wording of section 18.11 where reference is made to an
appeal and to an assessment. . . .
[My
emphasis.]
[26]
It is worth reproducing subsections 18.11(1) and
(2) of the TCC Act:
18.11 (1) General
procedure to apply — The Court may order, on
application of the Attorney General of Canada, that sections 17.1 to 17.8 apply
in respect of an appeal referred to in section 18.
(2) When Court must order that general procedure apply — The Court shall grant an application under subsection (1) where
(a)
the outcome of the appeal is likely to affect
(i)
any other appeal of the appellant, or
(ii)
any other assessment or proposed assessment of the appellant, whether or not
that assessment or proposed assessment relates to the same taxation year; and
(b)
the aggregate of all amounts
(i)
in issue in the appeal,
(ii)
likely to be affected in the other appeal referred to in subparagraph (a)(i),
and
(iii)
likely to be affected in the other assessment or proposed assessment referred
to in subparagraph (a)(ii),
exceeds $25,000.
[27]
It is interesting to note that paragraph
18.11(2)(b) differentiates (i) the aggregate of all amounts in issue in
the appeal, (ii) the aggregate of all amounts likely to be affected in another
appeal, and (iii) the aggregate of all amounts likely to be affected in another
assessment or proposed assessment, whether or not that assessment or proposed
assessment relates to the same taxation year. Such a distinction in this
particular section of the Rules is in line with this Court’s interpretation, in
the above cases, with regard to the meaning of “the aggregate of all amounts in
issue” in an appeal and, in my view, can very well be applied here.
[28]
Further, as stated in De Mond, supra,
par. 23 (referred to by the appellant), alluding to the Federal Court of Appeal’s
decision in Canada v. Consumers’ Gas Co., [1987] 2 F.C. 60, [1987] 1
C.T.C. 79, the total amount in issue is not the amounts that were considered or
determined in the process but rather the final product of the process.
[29]
Here, the Part III tax was the object of a
proposed assessment only, and even though it had been the object of a
determination by the Minister, it was not at issue in the appeal before me,
which appeal was filed pursuant to subsection 169 of the ITA against the
assessment issued for the 2005 taxation year. There was no appeal pursuant to
section 185 of the ITA in relation to Part III tax, as Part III tax was never
assessed.
[30]
I therefore conclude that the aggregate of all
amounts in issue before me was $46,810 and that this appeal was a Class A
proceeding.
Second issue: Appellant’s
request for increased costs above the applicable tariff amount in accordance
with subsection 147(1) and paragraphs 147(3)(d)
and (j) of the Rules
[31]
Subsections, 147(1) and 147(3), (3.1), (3.2) and
(3.3) of the Rules read as follows:
COSTS
147. (1) General Principles — The Court
may determine the amount of the costs of all parties involved in any
proceeding, the allocation of those costs and the persons required to pay them.
[…]
(3) In exercising its discretionary
power pursuant to subsection (1) the Court may consider,
(a) the result of
the proceeding,
(b) the amounts
in issue,
(c) the
importance of the issues,
(d) any offer of
settlement made in writing,
(e) the volume of
work,
(f) the
complexity of the issues,
(g) the conduct
of any party that tended to shorten or to lengthen unnecessarily the duration
of the proceeding,
(h) the denial or
the neglect or refusal of any party to admit anything that should have been
admitted,
(i) whether any
stage in the proceedings was,
(i) improper, vexatious,
or unnecessary, or
(ii) taken through
negligence, mistake or excessive caution,
(i.1) whether the
expense required to have an expert witness give evidence was justified given
(i) the nature of the
proceeding, its public significance and any need to clarify the law,
(ii) the number,
complexity or technical nature of the issues in dispute, or
(iii) the amount in
dispute; and
(j) any other
matter relevant to the question of costs.
(3.1) Unless otherwise ordered by the
Court, if an appellant makes an offer of settlement and obtains a judgment as
favourable as or more favourable than the terms of the offer of settlement, the
appellant is entitled to party and party costs to the date of service of the
offer and substantial indemnity costs after that date, as determined by the
Court, plus reasonable disbursements and applicable taxes.
(3.2) Unless otherwise ordered by the
Court, if a respondent makes an offer of settlement and the appellant obtains a
judgment as favourable as or less favourable than the terms of the offer of
settlement or fails to obtain judgment, the respondent is entitled to party and
party costs to the date of service of the offer and substantial indemnity costs
after that date, as determined by the Court, plus reasonable disbursements and
applicable taxes.
(3.3) Subsections (3.1) and (3.2) do not
apply unless the offer of settlement
(a) is in
writing;
(b) is served no earlier than 30 days after the close of pleadings and
at least 90 days before the commencement of the hearing;
(c) is not
withdrawn; and
(d) does not
expire earlier than 30 days before the commencement of the hearing.
[32]
The appellant’s offer to the respondent that the
appeal be allowed without costs was made less than two weeks before the
hearing. This was not accepted by the respondent.
[33]
The appellant relied on this offer to argue that
a departure from the applicable tariff is justified in accordance with subsection
147(3) of the Rules. In the appellant’s view, given the unreliability of the
auditor’s work and conclusions, the respondent should have determined that her
position in the appeal was weak and should have given consideration to the
appellant’s offer of settlement and conceded the case, rather than forcing the
appellant to incur the costs of litigation and going to trial (Appellant’s
Submissions for Costs, par. 43). In the appellant’s view, the issue to be
decided in the appeal “concerned a ‘yes-no’ issue” with regard to which no
element of compromise was possible (Appellant’s Submissions for Costs, par.
46). The appellant said that it could only make a settlement offer wherein the
entire amount under dispute was treated as capital gains rather than as
business income (referring to CIBC World Markets Inc. v. The Queen, 2012
FCA 3).
[34]
In such a case, the appellant contends, a
settlement offer for the full amount of the claim can be a valid settlement
offer for the purpose of determining costs.
[35]
The appellant adds that no new facts or
arguments were presented during the trial stage and that the respondent had all
relevant information needed in order to determine the merit of its case without
obliging it to incur the cost of court procedures (par. 52, Appellant’s
Submissions for Costs).
[36]
With respect, I differ with the appellant. The
case before me was what we call in tax jargon a “trading case”.
[37]
The issue in such cases mainly revolves around
how the judge will interpret the facts surrounding the acquisition, retention
and disposition of the property at issue. The judge has to rule, among other
factors, on the intention of the taxpayer when it acquired the property and
what particular fact or event triggered the sale of the property.
[38]
It is true, as was argued by the appellant, that
the matter of secondary intention was not raised in the assumed facts taken
into account by the auditor. However, this matter was nonetheless pleaded by
the respondent in her reply to the notice of appeal. The appellant, not having
the onus of proof in this regard, certainly benefited from the lesser burden
imposed on it. However, it was not unreasonable for the Crown to try to argue
secondary intention in the hope of convincing the Court of the existence of
such intention.
[39]
The present case can be distinguished from the
cases of Walsh v. The Queen, 2010 TCC 125, 2010 CarswellNat 470, 2010
DTC 1109, or Langille v. The Queen, 2009 TCC 540, 2009 CarswellNat 3309,
2009 DTC 1351, referred to by the appellant in that a trading case is the type
of case where the respondent may need to have the complete facts come out under
oath and be tested in cross-examination. Furthermore, there was not just one
witness called by the appellant and, as mentioned by the respondent, one of the
witnesses called had never been examined by the Crown before.
[40]
I do not agree with the appellant that there was
no possible element of compromise and that the only option was for the
appellant, which really wanted to settle the case before the hearing, to offer
the respondent a settlement whereby she would consent to judgment for the full
amount sought, without costs. There were two properties at issue and the
circumstances surrounding the acquisition and the sale of those properties
differed.
[41]
Finally, as argued by the respondent, the
so-called offer of settlement was not made well before trial, but was presented
very close to the trial. I agree with the respondent that this element (the
timing of the offer) does not call for a departure from the party and party
costs to which the appellant is entitled under the Tariff (subsection 147(3.3)
of the Rules).
[42]
Having reviewed the factors enumerated in
subsection 147(3) of the Rules, I am of the view that the appellant has not
demonstrated that the Crown’s position did not have a reasonable degree of
tenability. I find that there were no unusual circumstances that would justify
my assessing an increased award of costs against the respondent.
Decision
[43]
I therefore conclude that the costs awarded to
the appellant shall be taxed by the taxing officer in accordance with the
Tariff on the basis that the appeal was a Class A proceeding, subject to
supporting documentation being provided.
[44]
In doing so, I direct the taxing officer to
accept, among the fees in the appellant’s bill of costs that are contested by
the respondent, the fee for second counsel during the hearing, in accordance
with paragraph 1(1)(h) of Tariff B, and all supported photocopy fees.
[45]
The appellant shall also be awarded fees for
services after judgment in accordance with paragraph 1(1)(i) of Tariff
B.
[46]
The appellant shall be reimbursed the excess
amount paid in filing its appeal as a Class C proceeding rather than a Class A
proceeding.
Signed at Montreal, Quebec, this 22nd day of October 2014.
“Lucie Lamarre”
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