Her Majesty the Queen v. Cyril Joffe, [1974] CTC 268, 74 DTC 6219

Kerr, J:—The action in which the present application is made is an appeal by Her Majesty from a judgment of the Tax Review Board allowing an appeal by the defendant from assessments for income tax for his 1965, 1966, 1967 and 1968 taxation years. In the appeal to this Court the Crown asks that the judgment of the Tax Review Board be set aside and the assessments be restored. The assessments are in issue.

What is before the Court at this time is an application by the defendant* [1] for:

(a) an order pursuant to Rule 419(1)(a) striking out the statement of claim herein on the ground that the statement of claim discloses no reasonable cause of action; or

(b) determination pursuant to Rule 474 of the question of law whether the gains in issue, assuming for purposes of this application only that they were income, were income in the defendant’s 1965, 1966, 1967 and 1968 taxation years,! [2] the years for which they were reassessed as such by the Minister of National Revenue; or, in the alternative,

(c) directions pursuant to Rule 474 as to the case upon which the question referred to in (b) above shall be argued.

I will refer to portions of the statement of claim and statement of defence to indicate allegations and issues in the pleadings.

Paragraph 2 of the statement of claim states, and the defence admits, that the Minister of National Revenue by reassessments all dated March 31, 1970, one each for the taxation years 1965, 1966, 1967 and 1968, added to the income of the defendant the amounts of $5,515.63, $2,061.50, $2,905.12 and $2,015.63, respectively.:! [3]

Paragraphs 3, 5, 6 and 7 of the statement of claim, as follows, are also admitted in the defence:

3. The t some associates on or about the 10th day of October 1961 caused a corporation known as Jemp Investments Ltd (hereinafter called Jemp) to be incorporated, their shareholding interest therein being:

Morris Kowall (hereinafter called Kowall)	25	per cent
Paul Ferner (hereinafter called Ferner)	25	per cent
Ed Sardachuck (hereinafter called Sardachuck)	25	per cent
Cyril Joffe (hereinafter called C-Joffe)	121/2 per cent
Yale Joffe (hereinafter called Y-Joffe)	121/2 per cent

- By declaration of trust bearing date the 20th day of October 1961 the sald Kowall, Jemp and Y-Joffe declared that any Interest they had acquired by the letter of intent referred to in paragraph 4 hereof, was held in trust for the individuals referred to in paragraph 3 hereof in the proportion therein indicated.

6. Petex Building Ltd (hereinafter called Petex) is a corporation incorporated on or about the 12th day of December 1961, its shareholders being as follows:

	Issued	Shareholders
Class A—Voting, non-participating	100	Sam Hashman
Class B—Voting, non-participating	50	Morris Kowall
Class B—Voting, non-participating	50	J B O’Connor
Class C—Non-voting, participating	50	Jemp Investments
		Ltd
Class C—Non-voting, participating	50	Trust Corp of
		Bahamas Ltd
Class C—Non-voting, participating	100	Sam Hashman
		Management Ltd

7. By declaration of trust dated the 18th day of December 1961 Kowall and Jemp stated that the shares they owned in Petex were held by them as trustees for the individuals mentioned in paragraph 3 hereof in the proportion therein indicated.

Paragraph 4 of the statement of claim is as follows:

4. By letter of intent dated the 20th day of October 1961 Texaco Exploration Company and Texaco Canada Limited agreed to lease from Kowall, Jemp and Y-Joffe an office building which the latter three persons were to cause to be built in the City of Calgary, Province of Alberta.

The defence admits paragraph 4, but denies that the contents have been properly or adequately summarized by the plaintiff, and says that the letter of intent constituted a commitment to lease by the Texaco Companies.

Paragraph 8 of the statement of claim is as follows:

8. Jemp assigned to Petex in the 1962 calendar year all its interest in the letter of intent referred to in paragraph 4 hereof in consideration of Petex paying to Jemp a commission of $100,000 for its efforts in negotiating and obtaining the letter of intent from Texaco Exploration Company and Texaco Canada Limited which commission was to be paid out of the cash profits of Petex.

The defence denies the allegations in paragraph 8 and says, inter alia, that during the 1961 or 1962 calendar year Jemp, on behalf of the defendant and other persons named, transferred to Petex its interest in the letter of intent and other assets for a consideration of $100,000 cash payable over a period of several years out of earnings by Petex plus 25% of the issued shares of Petex, and that the defendant’s interest in the letter of intent and other assets constituted his contribution towards the capitalization of Petex.

Paragraph 11 of the statement of claim alleges that Petex paid the $100,000 commission to Jemp in various amounts in the years 1966, 1967, 1968 and 1969; and paragraph 12 reads as follows:

12. In each of the calendar years 1965, 1966, 1967 and 1968 the Defendant received respectively the amounts of $5, 515. 63, $2,061.50, $2,905.12 and $2,015.63 on account of a commission paid by Petex.

The defence admits that payments were made to Jemp and the defendant as alleged in paragraphs 11 and 12, but denies that they represented payments or receipts on account of a commission, and says that the moneys so paid represented payments on account of the purchase price of the assets transferred to Petex by Jemp.

Paragraphs 13 and 14 of the statement of claim read as follows:

13. On assessing the Defendant for tax on the said amounts the Minister of National Revenue assumed that:

(a) Jemp (and thereby the Defendant and his associates in their respective proportions) received a commission for their services in acquiring the letter of intent and assigning it to Petex; and

(b) the Defendant and his associates acquired the letter of intent to lease for the purpose of turning it to account.

14. The Deputy Attorney General submits that the sum received by the Defendant in his 1965, 1966, 1967 and 1968 taxation years through Jemp from Petex was income from a business within the meaning of sections 3, 4 and 139(1 )(e) of the Income Tax Act.

Those paragraphs, 13 and 14, are replied to in paragraphs 7, 8 and 9 of the defence as follows:

7. The Defendant denies the allegations set forth in paragraph 13(b) of the Statement of Claim. The Defendant says and the fact is that he and his associates acquired the letter of intent and the lease commitment that it represented in furtherance of their intention to develop and invest in an office building. The office building contemplated by the letter of intent was in fact developed and the Defendant retained his interest therein for a number of years. The Defendant was not and never has been engaged in the business of acquiring and disposing of leases or commitments to lease at a profit.

8. In further answer to paragraph 13 of the Statement of Claim, the Defendant says:

(a) the assumptions therein set out are assumptions of law, not assumptions of fact;

(b) the said assumptions are not the same as the assumptions made by the Plaintiff in the Plaintiff's Reply to Notice of Appeal filed in the proceedings before the Tax Review Board and the Plaintiff ought not to be allowed to rely on different assumptions in this Honourable Court, and

(c) the said assumptions are inconsistent and are mutually exclusive whereby the Defendant is prejudiced and embarrassed in his Defence,

and said paragraph 13 ought to be struck out accordingly on the grounds set forth in Rule 419(1)(b), (c), (d), (e) and (f) of the Federal Court Rules.

9. In further answer to the whole of the Statement of Claim, the Defendant says that the gains sought to be taxed by the Plaintiff are not income but represent capital gains or accretions. In the alternative, the Defendant says that if the said gains do constitute income in his hands, then the same do not constitute income in the Defendant’s 1965, 1966, 1967 and 1968 taxation years as is alleged in the Plaintiff’s reassessment dated 31st March, 1971.

In the present motion the defendant argues that the relief claimed by the Crown is not available under the applicable Income Tax Act provisions, that even if the gains in issue were income they were taxable only in the year in which they were earned (which the defendant says was 1962), and that they were not income taxable in the defendant’s 1965, 1966, 1967 and 1968 taxation years (which were the years in which the defendant received the gains and the years for which they were assessed).* [4]

The Crown contends that the statement of claim discloses a reasonable cause of action, that all the pertinent facts have not been agreed, that the hearing of the appeal will be a trial de novo of the issues of fact and law that are involved, that paragraph 8 of the statement of claim reveals a conditional or contingent right to receive a commission to be paid out of cash profits of Petex, that the gains in issue were taxable income in the year in which they were received and assessed, that the Crown requires to have resort to examination for discovery for further evidence, and that it will be more convenient to deal with all the issues at the trial.

As to the motion to strike out the statement of claim on the ground that it discloses no reasonable cause of action. it seems to me that the statement of claim does disclose a reasonable cause of action, that the Crown, assuming all the facts alleged in the statement of claim to be true, has an arguable case, and that it is not one that is obviously unsustainable. The application to strike, under Rule 419(1)(a) will be refused.

As to the remainder of the application, ie, for a determination pursuant to Rule 474 of the question whether the gains in issue were income in the defendant’s 1965, 1966, 1967 and 1968 taxation years,! or, in the alternative, for directions as to a case upon which that question shall be argued. There is, it seems to me, not an agreement upon all the material facts, and also a possibility that the examination for discovery contemplated on behalf of the Crown may disclose the existence of facts that may have a bearing upon the action and require a trial on contested issues. I am not satisfied that the Court, on what is before it, should determine the question set forth in paragraph

(b) of the notice of motion, or that the giving of directions for the question to be set down on a case to be argued before trial will materially facilitate the determination of the action or probably save time and expense. I think it is more appropriate that the question be left to be dealt with at trial.

Therefore the application will be dismissed with costs, to be taxed. As the argument applied to the like applications of both defendants, Ferner and Joffe, the Crown’s costs in each of the applications will be taxed at one-half of the amounts in Tariff B.