Chutka v. R., [1997] 2 CTC 2838, 97 DTC 377

Bell T.CJ .:

The Appellant [1] filed a Notice of Motion under section 58 of the Tax Court of Canada Rules (General Procedure) (“Rule” or “Rules”) for the determination, before hearing, of a question of law raised by the pleadings. They disclose that:

(a) the Appellant was a member of a limited partnership called Inter- Teck Oil Limited Partnership (“Partnership”);

(b) in 1982 a corporation called International Resource Recovery Inc. (“Inc.”) transferred equipment to the Partnership for the sum of $6,850,000;

(c) the partnership included the equipment in Class 29 of Schedule II of the Income Tax Regulations and claimed maximum capital cost allowance resulting in the allocation of non-capital loss to the Appellant on the basis that Inc. and the Partnership were not dealing at arm’s length and that the fair market value of the equipment was $422,000 instead of $6,850,000.

The questions of law in respect of which the Appellant applied to this Court for determination are:

1. does subparagraph 69(l)(a) of the Income Tax Act S.C. 1970-71-72, c. 63, as amended for the 1982, 1983 and 1984 taxation years (the “Act’) apply where the purchaser is a partnership?

2. if the answer to question 1 is yes, does the “arm’s length” concept as described in ss. 251(l)(a) and (b) apply to the notional “separate person” described in section 96 of the Act?

3. does ss. 245(1) of the Act, as it read in the taxation years in question, have any application to prohibit a taxpayer from claiming a deduction for capital cost allowance? and,

4. if the answer to question 3 is yes, would the deduction of capital cost allowance by the Appellants’ based on the facts set out in the Minister’s Replies, artificially or unduly reduce the Appellants’ incomes within the meaning of ss. 245(1) of the Act?

The grounds of the motion were stated to be:

1. the Minister of National Revenue’s assessments rely upon subsection 69(l)(a) of the Act, which, by its terms, applies to “taxpayers” that acquire anything, not to partnerships (which are not taxpayers under the Act) that acquire anything,

2. the notional “separate person” used in computing the income of a partner pursuant to section 96 of the Act, cannot take on any of the attributes or characteristics of the partners, therefore, the concept of “arm’s length” does not apply to the computation of income pursuant to that section, and,

3. Subsection 245(1) of the Act [as it read in the taxation years in question] does not apply to the present case because capital cost allowance is not a “disbursement or expense”, and,

4. the deductions claimed by the Appellants’ for capital cost allowance in the circumstances set out in the pleadings would not artificially or unduly reduce the Appellants’ incomes in the years in question.

Rule 58 provides, in part, that:

(1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, ...

and the Court may grant judgment accordingly.

(2) No evidence is admissible on an application,

(a) under paragraph (1)(«), except with leave of the Court or on consent of the parties, or...

Rule 62 provides that:

On a hearing of the question of law under sections 58 and 59, each party shall serve on every other party to the hearing a factum consisting of a concise statement, without argument, of the facts and law relied on by the party, and file it, with proof of service, in the Registry not later than seven days before the hearing.

Appellant’s counsel filed a factum. No factum was filed by the Respondent.

At the hearing of the motion, Appellant’s counsel stated that he was not able to obtain an Agreed Statement of Facts and that, accordingly, he would be relying totally on the Minister’s assumption of facts. He stated that he would not subsequently challenge the validity of assumptions of fact upon which he relied for this determination. Counsel, in support of his position respecting facts contained in the Reply to the Notice of Appeal, referred to Minister of National Revenue v. Pillsbury Holdings Ltd., (1964), 64 D.T.C. 5184 (Can. Ex. Ct.), at 518 where Cattanach, J. said:

The relevance of this pleading appears from the decision of the Supreme Court of Canada in Johnston v. Minister of National Revenue, [1948] S.C.R. 186 [3 DTC 1182] per Rand J., delivering the judgment of the majority, at p. 489:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant.

For the purposes of the first question posed by the Appellant’s Notice of Motion, counsel accepted the Minister’s assumption that by a conditional sales contract dated November 10, 1982 the corporation agreed to sell the equipment to the Partnership for $6,850,000. He then submitted that section 69(1)(a) could not apply because the Appellant had not acquired the equipment from the corporation but, rather, the Partnership had acquired that equipment. Section 69(1)(«) reads as follows:

(1) Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm’s length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value; ...

The Appellant’s first question requires an analysis of whether a partnership owns what are referred to as “partnership assets” or whether the partners thereof own those assets. Appellant’s counsel, in submitting that it was the Partnership, not a partner, who had acquired the equipment, seemed to assume that because a partnership was not a taxpayer under the Income Tax Act (the “Act”) the first question could be readily resolved in the Appellant’s favour. In my view, the answer to that question is not that simple. It seems to me that the partnership agreement, the relevant Partnership Act, other relevant facts and appropriate jurisprudence must be examined and considered in order to make an informed determination of the first question.

Respondent’s counsel objected strenuously to the Appellant’s application on the basis that facts in addition to assumptions of fact accepted by Appellant’s counsel, should be presented to the Court.

The words of Christie, A.C.J.T.C. in Carma Developers Ltd. v. R., (1995), 96 D.T.C. 1803 (T.C.C.), at 180are of assistance. He said:

The fact that in the absence of consent no evidence is admissible on an application under paragraph 58(1)(«) without leave of the Court indicates to me that applications under that paragraph are predicated on the premise that there is no substantial disagreement between the parties concerning the facts pertinent to the question of law to be determined. If there is disagreement about some relatively incidental fact, the Court may grant leave to adduce evidence to resolve it. That to my mind is the basic scheme of the Rules referred to. Further, I think what I have said about agreement about the facts implies, in turn, that there is no fundamental disagreement about whether the question posed for determination will dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of cost.

(underlining added)

He said at page 1806:

In summary, I am of the opinion that paragraph 58(1)(a) of the Rules is not intended as an easily accessible alternative to a trial for the disposition of complex and contentious disputes about the rights and liabilities of litigants. It is to be invoked when it is clear that the determination of all or part of a dispute by trial would be essentially redundant. That is not applicable to the appeal at hand. As I said at the hearing I think it would be an error to attempt to dispose of it under paragraph 58(1 )(a).

These latter words seem clearly to have been written in the context of his earlier words that “there is no substantial disagreement between the parties concerning the facts”.

Ideally a question of law, clearly stated, would be presented by both parties on agreed facts with the prospect of its determination attaining the objectives stated in Rule 58. The Court should be cautious about hearing questions where there is no agreement or only partial agreement on facts, and particularly so when an applicant seeks leave of this Court to adduce evidence, that being an exception to the express rule that no evidence is admissible on an application. An applicant’s perception of how clear and how concluding a question of law is and how simple the adduction of evidence may be is naturally coloured by the goal sought.

I have decided that the Appellant’s first question, as indicated above, cannot be properly determined without the presentation of evidence and reference to appropriate materials and authorities. This can happen at the hearing of this appeal. Accordingly, the application is dismissed. Obviously it is unnecessary to consider the other three questions.

Respondent’s counsel submitted that the procedure under Rules 58 and 62 is a two step procedure. Her point was that where parties do not agree on an application to the Court for a determination, the Court must decide whether a hearing of an application should take place and then fix a date for the “hearing of the question of law”. Then, under Rule 62, each party should file a factum consisting of a concise statement, without argument, of the facts and law relied upon by the party. Although it is not necessary for me to consider this submission and to make a finding as to the correct procedure it seems well founded.

Motion dismissed.