Farm Business Consultants Inc. v. Her Majesty the Queen, [1993] 2 CTC 2937, 93 DTC 1190

Beaubier, T.C.CJ.:—This matter was heard at Toronto, Ontario on September 14, 1993.

The appellant has moved for an order that the respondent's representative answer question 57 put to him at an examination for discovery. Question 57 is as follows:

57. Q. Would you turn to paragraph 11 of the notice of appeal, please? The allegation is made, in paragraph 11, that: “In their respective returns of income filed for the taxation years in which the payments were received, the payees, or any one or more of them, included the amount of the payments in computing their respective incomes and did not treat them as an eligible capital amount, within the meaning assigned by subsection 14(1) of the Act, or as any other amount on account of capital, and the Minister assessed the tax of the payees, or any one or more of them, so as to recognize the payments as income in their hands.” Would you confirm to me that that allegation is so?

The following exchange occurred in the examination immediately after question 57:

MR. GILL: Mr. Nathanson, our position is set out in paragraph 9 of the reply.

MR. NATHANSON:

58. Q. Do you adopt your Counsel's answer?

A. Yes.

59. Q. What is the position in paragraph 9 of the reply?

A. The position is, it’s not relevant.

Paragraph 9 of the Queen's reply reads, respecting the Deputy Attorney General of Canada:

9. He states that paragraph 11 of the notice of appeal is irrelevant.

For the purposes of this motion, it is noted that the trial judge may find that the facts described in paragraph 11 are relevant since the assessment in question is based in part on sections 68 and 14 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). The jurisprudence respecting section 68 raises the “ mirror image” concept.

The appellant's answer states:

6. In answer to the statement made in paragraph 9 of the reply that paragraph 11 of the notice of appeal is irrelevant, the appellant states that, as the facts alleged in paragraph 11 of the notice of appeal remain part of the pleadings, they are of necessity relevant. It is therefore not open to the respondent under the rules of pleadings of this Honourable Court to make such a statement. The respondent is obliged under the said rules either to admit or to deny the facts alleged in paragraph 11 of the notice of appeal or, if the respondent has no knowledge of the facts so alleged and puts them in issue, so to state. The appellant further states that the respondent does in fact have, or must be presumed to have, knowledge as to whether, in their respective returns of income filed for the taxation years in which the payments were received, the payees, or any one or more of them, included the amount of the payments in computing their respective incomes and did not treat them as an "eligible capital amount" (within the meaning assigned by subsection 14(1) of the Act) or as any other amount on account of capital, and also whether the minister assessed the tax of the payees, or any one or more of them, so as to recognize the payments as income in their hands.

The respondent did not plead a general denial in the reply.

Section 49 of the Rules of General Procedure of this Court states:

Rules of Pleadings — Applicable to reply

49.(1) Every reply shall state,

(a) the facts that are admitted,

(b) the facts that are denied,

(c) the facts of which the respondent has no knowledge and puts in issue,

(d) the findings or assumptions of fact made by the Minister when making the assessment,

(e) any other material fact,

(f) the issues to be decided,

(g) the statutory provisions relied on,

(h) the reasons the respondent intends to rely on, and

(i) the relief sought.

(2) All allegations of fact contained in a notice of appeal that are not denied in the reply shall be deemed to be admitted unless it is pleaded that the respondent has no knowledge of the fact.

The respondents argument is that since section 241 of the Income Tax Act forbids the respondent to reveal the information alleged in paragraph 11 of the notice of appeal, the respondent cannot admit those facts and cannot be deemed to have admitted those facts. But the respondent could admit those facts even if it is against the law. In such event, the officer admitting or the respondent would suffer the consequences.

The respondent did not admit or deny paragraph 11 of the notice of appeal which contained statements of fact, nor did the respondent plead that he had no knowledge of those facts. Therefore, those facts pleaded by the appellant in paragraph 11 are deemed to be admitted by the respondent. It remains the right of the respondent to call evidence to prove that those facts deemed admitted are not true.

In these circumstances question 57 of the examination for discovery is not necessary.

The appellant's counsel anticipated this possibility before bringing this motion. As a result, the following exchange of correspondence which occurred between counsel was attached to an affidavit filed by counsel for the appellant in support of the motion:

Farm Business Consultants v. H.M.Q.

Court File No.: 92-2597(IT)

Your File No.: TO. 201692

As you know, in paragraph 11 of the notice of appeal the following allegation is made:

In their respective returns of income filed for the taxation years in which the payments were received, the payees, or any one or more of them, included the amount of the payments in computing their respective incomes and did not treat them as an “eligible capital amount” (within the meaning assigned by subsection 14(1) of the Act) or as any other amount on account of capital, and the minister assessed the tax of the payees, or any one or more of them, so as to recognize the payments as income in their hands.

As you also are aware, the reply fails to state whether the facts alleged in paragraph 11 of the notice of appeal are admitted, are denied or are facts of which the respondent has no knowledge and puts in issue, as required by subsection 49(1) of the Tax Court of Canada Rules (General Procedure). Therefore, it would appear that, by virtue of subsection 49(2) of the said Rules, the allegations of fact contained in paragraph 11 of the notice of appeal are deemed to have been admitted. If you agree with this conclusion, would you please so advise. Your so advising will obviate the need to bring a motion to the Court for an order pursuant to paragraph 110(a) of the said Rules directing Mr. Okonski to reattend and answer question 57 put to him at his examination for discovery, a copy of which is enclosed for your convenient reference.

However, if you do not agree that the allegations contained in paragraph 11 of the notice of appeal are deemed to be admitted, then it would appear to be necessary to bring the aforementioned motion or to receive confirmation from the Court that subsection 49(2) of the said Rules has the effect of deeming the allegations of fact contained in paragraph 11 of the notice of appeal to be admitted b the respondent.

We would ask you kindly to respond promptly so that we may know whether the need to bring a motion to the Court may be obviated.

Thank you for your anticipated co-operation herein.

Yours very truly,

David C. Nathanson

Department of Justice

Canada

Toronto Regional Office

First Canadian Place

Box 36

Toronto, Ontario

M5X 1K6

September 1, 1993

VIA FAX & TDX #43

	This is Exhibit C referred to in the
Messrs. McDonald & Hayden	affidavit of Susan Goodeve sworn before
Barristers and Solicitors	me, this 7th day of September 1993
One Queen Street East
Suite 1500
	"Marshall Steven Kay"
Toronto, Ontario
MSC 2Y3	A Commissioner, Etc.
M5C2Y3
	"Marshall Steven Kay”
Attention: Mr. David C. Nathanson
	a Commissioner, etc.,
Dear Sir:	Province of Ontario,
Dear Sir:
	while a student-at-law.
RE: Farm Business Consultants v. H.M.Q.
Court File No.: 92-2597(IT)	Expires August 6, 1996
Court File No.: 92-2597(IT)
Our File No.: TO. 201692

This is in response to your letter dated July 26, 1993 relating to paragraph 11 of the notice of appeal.

As you know, section 241 of the Income Tax Act prohibits us from disclosing the affairs of another taxpayer. It is our position that subsection 49(1) of the Tax Court of Canada Rules (General Procedure) does not override this provision. Accordingly, the allegations of fact contained in paragraph Tl of the notice of appeal are not deemed to have been admitted pursuant to subsection 49(2) of the Rules. In any event, paragraph 11 of the notice of appeal is irrelevant.

With respect to your two other letters, also dated July 26, 1993, we are presently awaiting instructions and information from Revenue Canada in respect thereof.

Yours very truly,

Caroline Coderre

Counsel, Tax Litigation

In argument, the respondents counsel moved to strike paragraph 11 of the notice of appeal. However, pursuant to the“ mirror image" concept of jurisprudence determined by the courts in respect to section 68, the appellant is entitled to make allegations of fact and lead evidence respecting the dealing between the vendor and the purchaser and how the other party to the transaction was dealt with by the Crown. This concept was best described by Heald, J. of the Federal Court of Appeal in Golden v. The Queen, [1983] C.T.C. 112, 83 D.T.C. 5138 at page 116 (D.T.C. 5142) when he said:

It is my opinion that the correct approach to a section 68 determination would be, as suggested by the above authorities, to consider the matter from the viewpoint of both the vendor and the purchaser and to consider all of the relevant circumstances surrounding the transaction. Where, as in this case, as found by the trial judge, the transaction is at arm's length and is not a mere sham or subterfuge, the apportionment made by the parties in the applicable agreement is certainly an important circumstance and one which is entitled to considerable weight.

This decision of the Federal Court of Appeal was approved by the Supreme Court of Canada in The Queen v. Golden, [1986] 1 S.C.R. 209, [1986] 1 C.T.C. 274, 86 D.T.C. 6138. For this reason the respondent's motion to strike paragraph 11 of the notice of appeal is dismissed and the appellant is granted costs respecting respondent's motion.

Therefore, paragraph 11 of the notice of appeal is deemed to be admitted and question 57 is unnecessary with the result that the appellant's motion is dismissed. Despite the counsels’ correspondence, the motion was necessary. As a result the appellant is granted its costs for the appellant's motion.

Motion dismissed.