Citation:
2017 TCC 71
Date:
20170503
Docket: 2016-2542(IT)G
BETWEEN:
SCOTT
HERON,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
D’Auray J.
I. OVERVIEW
[1]
The appellant filed a motion on October 14,
2016, requesting this Court to strike certain paragraphs of the Reply to Notice
of Appeal (“Reply”), filed by the respondent, that relate to his criminal
conduct in respect of a business that he carried on and in which income was
earned.
[2]
The appellant is arguing that his criminal
conduct is irrelevant in determining his liability for tax or in determining whether
gross negligence penalties under subsection 163(2) of the Income Tax Act
(“Act”) should have been levied by the Minister of National Revenue (the
“Minister”).
[3]
The position of the appellant is that some of the
allegations set out in the Reply are vexatious, may prejudice or delay the fair
hearing of the appeal, or disclose no reasonable grounds for opposing the
appeal.
[4]
The appellant is asking the Court to strike the
underlined paragraphs of the Reply, namely:
[16] In determining the Appellant’s tax
liability for the 2010 and 2011 taxation years, the Minister made the following
assumptions of fact:
(a) the facts stated and admitted above;
(b) the Appellant was a police officer with the Niagara Regional Police
Service;
(c) the Appellant was in the business of reselling cheese and other food
products (the “products”) to restaurants in southern Ontario (the “business”);
(d) the Appellant was charged with conspiracy to commit an indictable
offence – smuggled goods and breach of trust;
(e) the Appellant was also charged with four counts under the Customs
Act;
(f) the charges identified in subparagraphs 16d) and 16e) related to the
smuggling of the products into Canada;
[…]
[17] The Minister now relies on the
following additional facts:
(a) the Appellant was tried and convicted on three charges under
the Customs Act and one breach of trust charge in relation to the
smuggling of the products; and
(b) the Appellant was sentenced to four months in jail.
[18] In determining that the Appellant
was liable to a penalty pursuant to subsection 163(2) of the Income Tax Act
(the “Act”), the Minister relied on the following facts:
(a) the
assumptions stated in paragraph 16;
[…]
(g) given the illegal source of the income, the Appellant
knowingly did not report the income from the business;
(h) given the Appellant’s employment, it would not have been in
his best interest to admit his illegal activity;
(i) had he reported the income from the resale of
the products there could have been duties imposed by the Canada Border Services
Agency which would have undermined the profitability of the business;
II. FACTS
[5]
During the 2010 and 2011 taxation years, the
appellant carried on a business of purchasing and importing cheese and other
products from the United States and reselling them to restaurants in Canada
(the “business”).
[6]
The appellant did not report any income from his
business activities for his 2010 and 2011 taxations years.
[7]
On April 8, 2013, a Notice of Reassessment was
issued whereby the Minister included in the appellant’s income the amounts of $23,916
for his 2010 taxation year and $84,216 for his 2011 taxation year as unreported
income from a business. The Minister also levied penalties pursuant to subsection
163(2) of the Act.
[8]
The appellant admits that he operated a business
in his 2010 and 2011 taxation years. However, he contests the quantum of the
amounts included in his income and the penalties levied pursuant to subsection
163(2) of the Act.
III. ANALYSIS
[9]
The relevant provision in this motion is section
53 of the Tax Court of Canada Rules (General Procedure) (the “Rules”),
in particular subsection 53(1), of the Rules, which states:
53. Striking out a Pleading or other
Document – (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;
(b) is scandalous,
frivolous or vexatious;
(c) is an abuse of
the process of the Court; or
(d) discloses no
reasonable grounds for appeal or opposing the appeal.
(2) No
evidence is admissible on an application under paragraph (1)(d).
[…]
[10]
In Gramiak v HMQ, the Chief Justice of this
Court, Justice Rossiter, set out the test for motions to strike, referring to
the decision of Chief Justice Bowman (as he then was), in Sentinel Hill
Productions. Chief Justice Rossiter stated as follows:
[30] The plain and obvious
test has been longstanding and widely accepted in Canadian jurisprudence as the
test for motions to strike. In Sentinel Hill Productions (1999) Corp.
v. R., 2007 TCC 742, Bowman, C.J., provided a useful overview of the
principles that govern the application of Rule 53:
[4] I shall begin by
outlining what I believe are the principles to be applied on a motion to strike
under Rule 53. There are many cases in which the matter has been
considered both in this court and the Federal Court of Appeal. It is not
necessary to quote from them all as the principles are well
established.
(a) The facts as
alleged in the impugned pleading must be taken as true subject to the
limitations stated in Operation Dismantle Inc. v. Canada, [1985] 1 S.C.R. 441
at 455. It is not open to a party attacking a pleading under Rule 53 to
challenge assertions of fact.
(b) To strike out
a pleading or part of a pleading under Rule 53 it must be plain and
obvious that the position has no hope of succeeding. The test is a stringent
one and the power to strike out a pleading must be exercised with great care.
(c) A motions
judge should avoid usurping the function of the trial judge in making
determinations of fact or relevancy. Such matters should be left to the judge
who hears the evidence.
(d) Rule 53
and not Rule 58, is the appropriate rule on a motion to strike.
[31] Chief
Justice McLachlin wrote for the Supreme Court in Knight v. Imperial Tobacco
Canada Ltd., 2011 SCC 42 (S.C.C.):
This Court has reiterated the test on
many occasions. A claim will only be struck if it is plain and obvious,
assuming the facts pleaded to be true, that the pleading discloses no
reasonable cause for action:… Another way of putting the test is that the claim
has no reasonable prospect of success. Where a reasonable prospect of
success exists, the matter should be allowed to proceed to trial.
Further:
…The judge on a motion to strike asks
if the claim has any reasonable prospect of success. In the world of
abstract speculation, there is a mathematical chance that any number of things
might happen. That is not what the test on a motion to strike seeks to
determine. Rather, it operates on the assumption that the claim will
proceed through the court system in the usual way – in an adversarial system
where judges are under a duty to apply the law as set out in (and as it may
develop from) statutes and precedent. The question is whether, considered
in the context of the law and the litigation process, the claim has no reasonable
chance of succeeding.
[Emphasis in the original.]
[11]
In addition, in a motion to strike, the burden
rests with the party attacking the pleading or portions thereof to show that it
is clear and obvious that the pleading is scandalous, frivolous or vexatious,
or that it is otherwise an abuse of the process of the Court.
[12]
When a party states that the allegation is not
relevant, the “irrelevancy must be quite clear and, so to speak, apparent at
the first glance. It is not enough that on considerable argument it may appear
that they do not afford a defence.”
[13]
On the question of relevancy, in Niagara
Helicopters,
Chief Justice Bowman opined that whether an allegation is relevant is usually
best decided by the judge who will preside the trial. He stated as follows:
[8] […] It is inappropriate on a preliminary
motion for a motions judge, who has heard no evidence, to decide that an
allegation is irrelevant thereby depriving a party of the opportunity of
putting the matter before the judge who presides the trial and letting him or
her put such weight on it as may be appropriate.
[14]
From these decisions, it is quite clear that the
test to strike an allegation in a pleading is a stringent one.
[15]
The appellant is asking the Court to strike the
following assumptions of fact at paragraph 16 of the Reply:
[16] In determining the Appellant’s
tax liability for the 2010 and 2011 taxation years, the Minister made the
following assumptions of fact:
d) the Appellant
was charged with conspiracy to commit an indictable offence smuggled goods and
breach of trust;
e) the Appellant
was also charged with four counts under the Customs Act;
f) the charges
identified in subparagraphs 16d) and 16e) related to the smuggling of the
products into Canada;
[16]
The appellant argues that since he is only
contesting the quantum of the amounts to be included in his income as business,
the facts taken into account by the Minister dealing with his criminal conduct
are irrelevant and should be struck.
[17]
The appellant also argues that he does not
object to the respondent making allegations relating to the conduct of the
business as opposed to the legal consequences of the business. In the appellant’s
view, the assumptions of fact dealing with his criminal conduct are vexatious
and may prejudice or delay the fair hearing of the appeal or they disclose no
reasonable ground for opposing the appeal. He also argues that prior
convictions may be relevant for cases dealing with estoppel, but the issue of
estoppel was not raised by the respondent in this appeal.
[18]
I do not agree with the appellant. In tax
appeals, the role of the assumptions of fact in a Reply is to inform the
taxpayer of the factual basis upon which he or she has been assessed by the
Minister. Justice Bowman in Holm v Canada, stated that the assumptions “are
supposed to be a full and honest disclosure of the facts upon which the
Minister relied in making the assessment.”
Justice Bowman also stated in Mungovan v The Queen, in tax cases:
Assumptions are not quite like pleadings in
an ordinary lawsuit. They are more in the nature of particulars of the facts on
which the Minister acted in assessing. It is essential that they be complete
and truthful.
[Emphasis added.]
[19]
In my view, the assumptions of fact made by the
Minister in subparagraphs 16(d), (e) and (f) are a complete and truthful
disclosure of the facts on which the Minister has relied in assessing the
appellant. In addition, the Minister did not know at the time she assessed that
the appellant would only put into question the quantum of the amounts. In any
event, these assumptions of fact at paragraph 16 of the Reply are not only
relevant for the income inclusion, but also for the penalty levied under
subsection 163(2) of the Act. This is clear from subparagraph 18(a) of
the Reply, where it is stated that the facts at paragraph 16 of the Reply were
taken into account by the Minister in assessing the penalty under subsection
163(2) of the Act.
[20]
Subsection 163(2) of the Act states that
the Minister may levy penalties when a taxpayer in filing his income tax
return, knowingly, or under circumstances amounting to gross negligence, made
or participated in, assented to or acquiesced in the making of, a false
statement or omission in his tax return. The burden of proving that the
Minister correctly assessed penalties under subsection 163(2) of the Act,
rests with the respondent.
[21]
The appellant quoted the decision of Simard v R. In Simard, the respondent pleaded as additional facts the criminality
of the taxpayer in her Reply to Notice of Appeal:
[2] Paragraph
76 of the reply read as follows:
76. The Deputy Attorney General
relies on the following additional facts:
a) in
April 2014, as a result of an investigation of the XXX Tax Shelter by the Royal
Canadian Mounted Police ("RCMP"), principals and representatives of
XXX and ABC ( … ) were charged with the following offences in
relation to their activities in connection with the XXX Tax Shelter:
• fraud over $5,000.00 contrary to paragraph 380(1)(a) of the
Ciminal Code [sic];
• conspiracy to commit fraud over $5,000.00 contrary to
paragraph 465(1)(c) of the Criminal Code;
• laundering proceeds of crime contrary to subsection 462.31(1) of
the Ciminal Code [sic]; and
• commission
of an offence for the benefit for a criminal organization contrary to
section 467.12 of the Criminal Code.
[3] The
charges listed in Bullets 2 and 3 were not in fact laid against the
individuals and representatives of XXX.
[22]
Justice Rip (as he then was) stated in Simard
that the additional facts pleaded by the respondent at paragraph 76 of her
Reply to Notice of Appeal were scandalous and an abuse of the process of the
Court under Rules 53(1)(b) and (c), and would potentially prejudice or
delay the fair hearing of the trial under Rule 53(1)(a). However, he indicated
in his reasons that if a person were found guilty of the alleged charges, at
that point, the respondent may consider amending her Reply to include these
additional facts. Specifically, he stated:
To allege in a pleading that a person is
charged with a criminal offence, but the charge has not been proven serves no
legitimate purpose. If, prior to the hearing of this appeal, the individuals
are found guilty of the charges, then the respondent may consider amending her
reply accordingly.
[Emphasis added.]
[23]
By making such statement, Justice Rip was
therefore of the view that such facts could be relevant where a taxpayer is
convicted, which is the situation in this motion. It is also interesting to
note that Justice Rip was dealing with additional facts and not facts taken
into account by the Minister at the time of the assessment.
[24]
In MacIver v The Queen, Justice Hershfield (as he
then was) stated that the criminality of the taxpayer is relevant for purposes
of the penalty under subsection 163(2) of the Act. He stated the
following at paragraph 3 of his reasons:
[…] On this basis that part of the Appellant's
first motion that seeks to strike paragraphs relating to his criminal
prosecution must fail unless the Respondent is successful in these proceedings
on its motion to apply issue estoppel so as to make the impugned provisions in
the Reply redundant. Similarly, paragraphs referring to wilful default, fraud
and making false statements cannot be impugned as frivolous or vexatious or as
tending to embarrass or delay since they are material assertions in respect of
penalties assessed under the reassessments as well as being material in respect
of the Respondent's issue estoppel motion and, potentially, time limitations.
Accordingly, the Appellant's motion to strike from the Reply cannot be granted.
[Footnotes removed.]
[25]
I am therefore of the view that the assumptions of
fact in subparagraphs 16(d), (e) and (f) of the Reply should not be struck. They
do not prejudice or delay the fair hearing of the appeal, they are not
scandalous, frivolous or vexatious, and are not an abuse of the process of this
Court. On the contrary, these assumptions of facts have a reasonable prospect
of success in defending the inclusion of the amounts in the appellant’s income
and the penalties levied by the Minister under subsection 163(2) of the Act.
[26]
The appellant is also requesting that the
additional facts pleaded by the Respondent in her Reply at paragraph 17 be
struck:
[17] The Minister now relies on the
following additional facts:
(a) the
Appellant was tried and convicted on three charges under the Customs Act
and one breach of trust charge in relation to the smuggling of the products;
and
(b) the
Appellant was sentenced to four months in jail.
[27]
I am of the view that subparagraph 17(a) of the
Reply is relevant for the purposes of the penalty levied pursuant to 163(2) of
the Act for the same reasons that I mentioned in my reasons when I was
dealing with paragraph 16 of the Reply.
[28]
However, I am of the view that subparagraph
17(b) should be struck since this allegation has no reasonable prospect of
successfully defending the validity of the assessment with respect to the
penalty.
[29]
The appellant is also requesting that I strike
the following facts relied upon by the Minister in assessing the penalty under subsection
163(2) of the Act.
[18] In determining that the Appellant was
liable to a penalty pursuant to subsection 163(2) of the Income Tax Act
(the “Act”), the Minister relied on the following facts:
(g) given the
illegal source of the income, the Appellant knowingly did not report the income
from the business;
(h) given the Appellant’s
employment, it would not have been in his best interest to admit his illegal
activity;
(i) had he
reported the income from the resale of the products there could have been
duties imposed by the Canada Border Services Agency which would have undermined
the profitability of the business;
[30]
The appellant is arguing that these allegations
of facts are irrelevant for the test under subsection 163(2) of the Act,
namely that he knowingly made a false statement in filing his income tax
return. Rather, the appellant is of the view that these allegations speculate
about the appellant’s motives for not reporting profits from the business and
such motives are irrelevant.
[31]
I do not agree with the appellant with respect
to subparagraph 18(g) of the Reply – the allegation of fact is relevant for the
purposes of subsection 163(2) of the Act. It cannot be said that it is
plain and obvious that the allegation discloses no reasonable cause of action.
[32]
However, I am of the view that subparagraphs
18(h) and (i) of the Reply should be struck. Subparagraphs 18(h) and 18(i) are
not facts, they are hypothetical and argumentative. In addition, they are not
relevant for the purposes of the penalty pursuant to subsection 163(2) of the Act.
IV. CONCLUSION
[33]
The motion made by the appellant to strike
certain paragraphs of the Respondent’s Reply is allowed.
[34]
Subparagraphs 17(b), 18(h) and (i) of the Reply
are struck.
[35]
The appellant is not entitled to any further
relief.
[36]
Without costs.
Signed at Montreal, Quebec, this 3rd
day of May 2017.
“Johanne D’Auray”
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