Kopstein v. The Queen

Kopstein v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-08-27
Neutral citation
2010 TCC 448
File numbers
2008-2468(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2008-2468(IT)G
BETWEEN:
ROBERT ALAN KOPSTEIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard together with the motion of William Sirett (2008‑2590(IT)G) on March 20, 2009, at Vancouver, British Columbia.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the appellant:
Robert Alan Kopstein
Jasmine Sidhu
Counsel for the respondent:
David I. Besler
____________________________________________________________________
ORDER
Upon motion made by the appellant;
And upon hearing the submissions of the parties;
In accordance with the attached reasons for order, the motion is allowed in part and it is ordered that:
(a) subparagraphs 18(c) and 18(g) of the amended reply be struck;
(b) the time to file an answer will be extended to 45 days after this order;
(c) the respondent shall file and serve on the appellant a list of documents pursuant to Rule 82 on condition that the appellant also file and serve a list of documents on the respondent pursuant to Rule 82. The lists are to be filed and served on the opposing party no later than 75 days after the last day on which the appellant may file an answer.
In all other respects the motion is denied.
Costs will be in the cause.
Signed at Ottawa, Ontario, this 27th day of August 2010.
“Gaston Jorré”
Jorré J.
Docket: 2008-2590(IT)G
BETWEEN:
WILLIAM SIRETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard together with the motion of Robert Alan Kopstein (2008‑2468(IT)G) on March 20, 2009, at Vancouver, British Columbia.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the appellant:
Robert Alan Kopstein
Jasmine Sidhu
Counsel for the respondent:
David I. Besler
____________________________________________________________________
ORDER
Upon motion made by the appellant;
And upon hearing the submissions of the parties;
In accordance with the attached reasons for order, the motion is allowed in part and it is ordered that:
(a) subparagraphs 18(c) and 18(g) of the amended reply be struck;
(b) the time to file an answer will be extended to 45 days after this order;
(c) the respondent shall file and serve on the appellant a list of documents pursuant to Rule 82 on condition that the appellant also file and serve a list of documents on the respondent pursuant to Rule 82. The lists are to be filed and served on the opposing party no later than 75 days after the last day on which the appellant may file an answer.
In all other respects the motion is denied.
Costs will be in the cause.
Signed at Ottawa, Ontario, this 27th day of August 2010.
“Gaston Jorré”
Jorré J.
Citation: 2010 TCC 448
Date: 20100827
Dockets: 2008-2468(IT)G
2008-2590(IT)G
BETWEEN:
ROBERT ALAN KOPSTEIN,
WILLIAM SIRETT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Jorré J.
Introduction
The motions
[1] The parties are in agreement that the issues in the motion in the Sirett appeal are in substance the same as in the Kopstein case and that the only difference relates to paragraph numbering. Accordingly these reasons will simply deal with the Kopstein appeal. I will make brief reference at the end of these reasons to the Sirett appeal.
[2] The appellant has brought a motion seeking the following:
(a) that certain portions of the amended reply to the notice of appeal be struck;
(b) that the time to file an answer to the amended reply be extended;
(c) that:
(i) the respondent be ordered to produce the assessor for examination with respect to the assumptions of fact set out in the amended reply and
(ii) that the respondent be ordered to produce the documents relating to the assumptions of fact made prior to the filing of the answer; and
(d) that the respondent produce a full list of documents pursuant to section 82 of the Rules.[1]
Nature of the appeal
[3] It will be useful to very briefly and generally set out the nature of the dispute as alleged in the pleadings.
[4] The appellant acquired certain non-exclusive limited use licenses relating to software for trading in securities and entered into other agreements with companies in the Trafalgar Group of Companies. The companies in the Trafalgar Group are incorporated in various countries; it is alleged that they do not deal with each other at arm’s length.
[5] In computing his income the appellant claimed capital cost allowance in respect of the licenses acquired as well as certain amounts in respect of fees paid pursuant to the agreements for maintenance, modifications and enhancements of the software.
[6] In reassessing the appellant, the Minister of National Revenue (Minister) disallowed these deductions.
[7] The appellant and the respondent respectively set out the issues as follows:
Appellant
(a) whether the Appellant’s investment in the Licenses was a “tax shelter” as defined in subsection 237.1(1) of the Act;
(b) whether the Appellant’s investment in the Licenses was a “tax shelter investment” as defined in subsection 1100(20.2) of the Regulations;
(c) whether the Appellant acquired the Licenses for the purpose of gaining or producing income from a business or property;
(d) whether the 1999 Note and the 2000 Note are a “limited recourse amount” as defined in subsection 143.2(1);
(e) whether section 67 applies;
(f) whether the Appellant’s obligation under the 1999 Note and the 2000 Note was a “contingent liability”;
(g) whether the Appellant’s income tax returns for the 2000 and 2001 taxation years were filed in a timely manner in accordance with subparagraph 150(1)(d)(ii) of the Act; and
(h) whether the Appellant acted with due diligence in respect of the filing of his returns for the 2000 and 2001 taxation years.
Respondent
i) Whether the Minister has correctly assessed the Appellant’s liability for penalties and interest;
ii) Whether the Appellant’s investments in the Trafalgar computer software program was an investment in an unregistered tax shelter;
iii) Whether the 1999 Promissory Note or the 2000 Promissory Note are contingent liabilities, limited recourse amounts, or cause at risk adjustments;
iv) Whether the Trafalgar I/T Program was a “computer software tax shelter property” as defined in the Income Tax Regulations;
v) Whether the Appellant acquired his interests in the Trafalgar computer software programs for the purpose of gaining or producing income from a business; and
vi) Whether the amounts claimed as Appellant’s investment in the Trafalgar computer software programs were unreasonable in the circumstances.
Applicable Rules
[8] Rule 49(1) requires that every reply state, among other things:
49(1) . . .
(d) the findings or assumptions of fact made by the Minister when making the assessment,
(e) any other material fact,
. . .
[9] Rule 51(1) states:
51(1) The effect of a document or the purport of a conversation, if material, shall be pleaded as briefly as possible, but the precise words of the document or conversation need not be pleaded unless those words are themselves material.
[10] Rule 53 states:
53 The Court may 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 action,
(b) is scandalous, frivolous or vexatious, or
(c) is an abuse of the process of the Court.
General nature of the appellant’s challenge to certain paragraphs of the amended reply
[11] The appellant seeks to strike certain portions of the amended reply to the notice of appeal on the grounds that:[2]
(a) they allege evidence rather than material facts;[3]
(b) they are conclusions of law;
(c) they are mixed conclusions of fact and law;
(d) they are allegations of fact about third parties solely within the Minister's knowledge; or
(e) in the case of subparagraphs 19(b) and (c) of the amended reply, they are inconsistent with certain of the assumptions in paragraph 18.
[12] The appellant referred me to Zelinski v. The Queen, 2002 DTC 1204 (TCC). Two passages are of interest:
4 The purpose of pleadings is to define the issues in dispute between the parties for the purposes of production, discovery and trial. What is required of a party pleading is to set forth a concise statement of the material facts upon which she relies. Material facts are those facts which, if established at the trial, will tend to show that the party pleading is entitled to the relief sought. Amendments to pleadings should generally be permitted . . . as the purpose of the Rules is to ensure, so far as possible, a fair trial of the real issues in dispute between the parties.
5 The applicable principle is stated in Holmsted and Watson:
This is the rule of pleading: all of the other pleading rules are essentially corollaries or qualifications to this basic rule that the pleader must state the material facts relied upon for his or her claim or defence. The rule involves four separate elements: (1) every pleading must state facts, not mere conclusions of law; (2) it must state material facts and not include facts which are immaterial; (3) it must state facts and not the evidence by which they are to be proved; (4) it must state facts concisely in a summary form.
[Footnotes omitted.]
[13] The appellant also put great weight on Foss v. The Queen, 2007 TCC 201, a case where the respondent pleaded a great many detailed assumptions. The appellant particularly stressed paragraphs 9, 10 and 11:[4]
9 The only obvious rationale for this approach to the drawing of pleadings is that the Minister (or more correctly her counsel) then takes the position at trial that every fact that is pleaded to have been assumed when assessing, whether material or simply evidentiary, and every conclusion of mixed fact and law included in the pleading as an assumption, becomes a fact established for purposes of the trial, unless the taxpayer is able to disprove it. This, in my view, is a gross distortion of what was decided by the Supreme Court in Anderson Logging and Johnston. The taxpayer is the party who has initiated the challenge to the status quo, which is the validity of the assessment, and so it is for him to “… demolish the basic fact on which the taxation rested.” To do this the taxpayer needs, and so is entitled to have pleaded, “… full [disclosure] of the precise findings of fact and conclusions of law which have given rise to the controversy [assessment].” When Rand J. used the expression “precise findings of fact” he surely did not mean the whole gamut of evidence that led the assessor to his factual conclusions, but simply the material facts of the case, which is to say those facts that, if true, justify the Minister in making the assessment on her understanding of the law. The rationale for this is often said to be that it is the taxpayer who best knows his own affairs. This derives from the following passage from the judgment of Duff J., as he then was, in Anderson Logging at page 50:
First, as to the contention on the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.
(Emphasis added)
The concluding words that I have italicized are often overlooked. There are cases, of course, where all the facts are (or should be) within the taxpayer’s particular knowledge. An example is the case where it is simply the revenues and the expenses of a business that are in dispute. Anderson Logging itself was such a case — the issue being whether a sale of timber limits was effected by the taxpayer in the course of its business, or was the realization of an investment. So too was Johnston, where the only factual issue between the parties was whether the taxpayer supported his wife in the taxation year. It was simply as to those material facts that the judgments in those two cases placed the onus of proof on the taxpayers.
10 The iniquity inherent in the practice of pleading vast swaths of evidence as assumptions of fact that underlie the assessment under appeal is that it purports to establish as true all the evidence pleaded that the taxpayer cannot disprove. It is this that Duff J. cautioned against in the concluding part of the passage from his judgment in Anderson Logging that I have quoted above. The present case is an outstanding example of one where the assumptions pleaded relate, to a very large extent, to matters which may very well be quite outside the appellant’s knowledge. . . .
11 The purpose of pleadings is to define the issues between the parties for the purposes of discovery, both documentary and testamentary, and trial. That requires no more than a statement of the “precise findings of fact” that underpin the assessment. It is potentially prejudicial to the appellant to plead more — certainly to plead more by way of assumptions of fact. The appellant is, of course, entitled to particulars of the evidence that the Crown intends to lead at trial, but these are properly obtained on discovery, not disguised as material facts as to which the Crown at trial may claim a presumption of truth. . . .
[Footnotes omitted.][5]
I will discuss the rules for pleadings below including those with respect to material facts.
Pleadings
General considerations
[14] It will be useful to consider further some of the rules that apply to pleadings.
[15] The following are some of the rules:
(a) A party should not plead evidence as opposed to facts.
(b) A party should not plead irrelevant facts.
(c) In a tax case the respondent should plead “the precise findings of fact and rulings of law which have given rise to the controversy” (often referred to as the Minister’s assumptions or as the basis of the assessment). [6]
(d) A party cannot simply plead a mixed conclusion of fact and law but must also plead the underlying facts.[7]
Material facts and facts particularly within the Minister's knowledge will be discussed further below.
[16] It is worth remembering that there are invariably exceptions to most of these rules and it is very important to keep in mind the specific circumstances of each case in applying these rules.[8]
[17] I would also note that I do not understand Foss as suggesting that one should not examine each part of the pleading that a party seeks to have struck in terms of the specific rules of pleading.
[18] Some cases may by their nature involve many and complicated facts and issues; in such cases, it is not surprising if the pleadings are longer.
Not always easy to categorize statements in pleadings
[19] It is useful to first consider some of the different kinds of allegations or statements that may be contained in a pleading:[9]
(a) evidence of facts,
(b) irrelevant facts,
(c) relevant but immaterial facts or, stated differently, relevant facts which are not material facts (facts which may lead to an inference of a material fact),[10]
(d) material facts,
(e) mixed conclusions of fact and law,
(f) conclusions of law and,
(g) in tax cases, there will usually be the Minister’s “assumptions” or, stated differently, basis of the assessment.
While an irrelevant fact would certainly not be a material fact, for clarity in the discussion below, I wish to emphasize that when I am referring to immaterial facts I am only referring to relevant facts that are not material facts.
[20] In some circumstances, the distinction between categories may be relatively straightforward; often, it will be quite difficult. This is well recognized:
Algoma Central Corporation v. The Queen, 2009 TCC 314:
23 . . . In many instances it may be a very fine line that separates that which is fact from that which is evidence. . . .
Niagara Helicopters Limited v. The Queen, 2003 TCC 4:
8 Whether an allegation is irrelevant is something that the trial judge is in a position to determine in the context of all of the evidence at trial. 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.
Odgers on Civil Court Actions, 24th edition by Simon Goulding (London, Sweet and Maxwell, 1996), pages 155 and 156:
7.12 It is obvious, then, that the question whether a particular fact is or is not material depends mainly on the special circumstances of the particular case. It is a question which it is not always easy to answer, and yet it is a very important one: the result of the case often depends on the ruling of the judge at the trial that it is or is not necessary that a particular fact should be proved. Sometimes it is material to allege and prove that the defendant was aware of certain facts; at other times it is sufficient to aver that he did some act, without inquiring into the state of his mind. In some cases the defendant’s intention is material, in a few cases his motives. . . . No general rule can be laid down.
The following quotation relates to Rule 25.06(1) of the Rules of Civil Procedure of Ontario:
25.06(1) Every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.
In Jourdain v. Ontario, 2008 CanLII 35684 (ON S.C.), Shaw J. says:
37 As noted by Master McLeod in City of Toronto v. MFP Financial Services Ltd. (2005), 17 C.P.C. (6th) 338 (Ont. S.C.J.) at para. 15, the distinction between material facts, particulars, and evidence is not a “bright line”. He points out that there will be situations where the minimum level of fact disclosure may require a pleading of material facts that might also be regarded as evidence. In this regard, Rule 25.06(8) requires that where intent is alleged, the pleading must contain full particulars of the allegations. The full particulars must set out precisely what the wrongful act is and the when, what, by whom and to whom of the relevant circumstances. See Balanyk v. University of Toronto, [1999] O.J. No. 2162 (S.C.J.) at para. 28.
[Emphasis added.]
[21] The appellant argued that the determination of whether a fact was a material fact should be distinguished from the situation where a motions judge must determine whether a particular fact is a relevant fact and that the case law in respect of a motions judge determining relevance should not be applied to a determination of materiality. However, in practice, I do not see that it is any easier to determine whether or not a relevant fact is a material fact than to determine whether or not a particular fact is a relevant fact.
[22] In general, the trial judge will be better placed than the motions judge to determine the category of an allegation, whether it is fact or evidence, whether it is relevant or irrelevant or whether it is material or immaterial.[11]
[23] Accordingly, a motions judge should be very cautious about categorizing an allegation and deciding to strike part of a pleading as a result. Unless it is clear-cut, it is generally appropriate to leave questions as to the category of an allegation and, as discussed below, the consequences that may arise to the trial judge.
Material facts
[24] A material fact may be established:
(a) by evidence directly or
(b) by inferences made from other facts (sometimes referred to as secondary facts), relevant but immaterial facts, which are in turn established by evidence.
[25] Depending on the circumstances of a particular case, it may be that a given material fact could be established by evidence directly or by evidence of the other relevant but immaterial facts. For example, supposing in a tort action relating to a hunting accident a material fact alleged is that A shot B in circumstances where A and B did not see each other. It may be that the fact will be established by evidence; this would be the case if, for example, Y will testify that he (i) was standing where he could see both A and B, (ii) saw A aim his rifle, (iii) heard a gunshot and (iv) saw B fall.
[26] On the other hand, it may be that no one saw the accident directly and that the plaintiff will establish, among others facts, the fact that (i) A and B were in the same general area at the same time and that (ii) the bullet removed from B’s shoulder was fired by A’s rifle. In this case, the plaintiff will be asking the trier of fact to infer that A shot B not directly from the evidence of a witness, but from other relevant immaterial facts; these other immaterial facts might be established by various means including witnesses as to the location of A and B and evidence such as, for example, in the case of the origin of the bullet, an expert ballistics report.
[27] Odgers discusses the question: what is a material fact? Some of the historical context of the development of the rules regarding the pleading of material facts is also explained:
What facts are material?
7.10 “The word ‘material’ means necessary for the purpose of formulating a complete cause of action, and if any one ‘material’ fact is omitted, the statement of claim is bad” (per Scott L.J. in Bruce v. Odhams Press Ltd). The same principle applies to defences.
7.11 Facts which are not necessary to establish either a cause of action or the defence to it are not, speaking generally, “material” within the meaning of Order 18, r. 7, and should, therefore, be omitted from the pleading unless it is clear that evidence will have to be given of them at the trial. All statements which need not be proved should be omitted.
7.12 It is obvious, then, that the question whether a particular fact is or is not material depends mainly on the special circumstances of the particular case. It is a question which it is not always easy to answer, and yet it is a very important one: the result of the case often depends on the ruling of the judge at the trial that it is or is not necessary that a particular fact should be proved. Sometimes it is material to allege and prove that the defendant was aware of a certain fact; at other times it is sufficient to aver that he did some act, without inquiring into the state of his mind. In some cases the defendant’s intention is material: in a few cases his motives. The pleader must apply his knowledge of the law, and his common sense, to the facts stated in his instructions, and decide for himself which he must plead and which he may safely omit. Precedents may afford him some assistance; but in the end he must rely on his own judgment. No general rule can be laid down.
7.13 In early days, when the courts were very strict, they punished either party who pleaded immaterial facts: for if his opponent pleaded to immaterial facts, and issue was joined thereon, they compelled the party who had alleged such facts to prove them literally, although they were immaterial; otherwise he failed in his action. He had himself raised the issue, so he must prove it or take the consequences.
7.14 Subsequently, however, the courts adopted a far better method of preventing the parties from raising immaterial issues. They declared that “immaterial allegations were not traversable,” e.g. neither party was allowed to plead to any immaterial matter in his opponent’s pleading, but must treat it as surplusage and leave it alone. Thus no issue could be raised on it; and the party pleading it was no longer bound to prove it at the trial.
7.15 And now the courts never compel either party to prove at the trial more than the substance of his pleading, even though his opponent may have expressly traversed some immaterial averment contained in it lest by the operation of Order 18, r. 13(1), it should be taken to be admitted.
7.16 If there is doubt whether a particular fact is or is not material, the safer course is for it to be pleaded. If you think you can prove it. For if it is omitted, and it is held to be material, no evidence can be given of that fact at the trial, unless the judge will give leave to amend, and such leave may be upon terms as to payment of costs.
. . .
7.44 The fact in issue between the parties is the factum probandum, the fact to be proved, and therefore the fact to be alleged. It is unnecessary to tell the other side how it is proposed to prove that fact; such matters are merely evidence, facta probantia, facts by means of which one proves the fact in issue. Such facts will be relevant at the trial, but they are not material facts for pleading purposes.
7.45 This was always a clear rule of the common law. “Evidence shall never be pleaded, because it tends to prove matter in fact, and therefore the matter in fact shall be pleaded.”
7.46 In the Court of Chancery, however, this rule was never observed: the pleadings there were lengthy narratives which sometimes became intolerably prolix. They stated the evidence on which the party proposed to rely in full detail, with copious extracts from the material documents. They were more like lengthy affidavits than modern pleadings.
7.47 This was partly due to the nature of the matters with which equity courts had to deal; for even now an equitable defence or reply is pleaded in the Queen’s Bench Division somewhat more in detail than is usual in the case of ordinary legal defences or replies. Moreover, it is not always easy to decide what are the facts to be proved, and what is only evidence of those facts. The question is often one of degree. “There are many cases in which facts and evidence are so mixed up as to be almost indistinguishable.” Usually though the line is reasonably clear between the fact in issue and the evidence by which that fact would be proved, and the courts have been content to affirm the principle without trying to elaborate the distinction further.
[Footnotes omitted.]
[28] It is clear from the historical context set out in paragraph 7.47 of Odgers that the rule as applied in England was not an absolute one.
[29] It is also clear from the historical context set out in paragraphs 7.13 to 7.15 of Odgers that pleading immaterial facts once had significant effects that are no longer applicable. Consequently, although unduly and unnecessarily long pleadings should not be encouraged, there is less reason than was once the case to be concerned with a party pleading relevant facts that are not material facts.[12]
[30] Indeed, Rule 47(2), which applies to all pleadings, says:
47 . . .
(2) Where it is convenient to do so, particulars may be set out in a separate document attached as a schedule to the pleading.[13]
Given that it is clear that particulars go beyond the material facts,[14] this means that the Rules contemplate parties pleading facts other than material facts.
Is it improper to include relevant facts that are not material facts in the assumptions?
[31] There remains the question: is it improper to plead relevant but immaterial facts as assumptions? With respect to this there are a number of matters to consider.
[32] First, there is the well-established duty on the Minister to fully disclose to the taxpayer the precise findings of fact which have given rise to the controversy and as Bowman A.C.J. (as he then was) said in Mungovan v. The Queen, 2001 DTC 691 (TCC), at paragraph 10:
10 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. . . .
Although it was dealing with a different point, whether the onus should be shifted, in that context the Federal Court of Appeal in Kossow v. Canada, 2009 FCA 83, appears to approve this quotation.[15]
[33] The “assumptions” or basis of the assessment play a special role in tax appeals. The ultimate issue in a tax appeal is whether the Minister has correctly assessed the amount of tax, interest and penalties, if any. One of the functions of pleading the basis of the assessment is to inform the taxpayer of the case he has to meet. One of the effects of pleading assumptions is to narrow what is at issue and what the taxpayer has to prove.[16]
[34] Thus, for example, if an individual runs a business as a proprietorship and the basis of the assessment relates solely to a claimed deduction for medical expenses, it will be unnecessary for the appellant taxpayer to make any proof regarding all the other elements which went into the ultimate calculation of his liability for tax. The appellant will not have to deal with his business revenues or expenses or with any other matter that entered into the computation of his tax.
[35] Second, although Rule 49(1)(d), unlike Rule 49(1)(e), does not contain the word “material”, in Globtek Inc. v. The Queen,[17] Bowie J., who was quite conscious of the absence of the word “material”, stated that:
4 . . . [i]t is material facts, and only material facts, that sub-rules 49(d) and (e) mandate.
[36] I note, however, that, as mentioned above, Rule 47(2) envisages parties pleading particulars that may well include relevant but not material facts. I also note that the French text of Rule 49(1)(e) refers to “fait pertinent” which is closer in meaning to “relevant fact” than to “material fact”.[18]
[37] Third, as previously discussed there are circumstances where it is very difficult to determine what the material facts are as opposed to the relevant but immaterial facts.
[38] Let us take as an example a case where one of the issues is whether someone was a resident of Canada. Although this is primarily a question of fact, it is accepted that it is a mixed question of fact and law. Accordingly, one cannot simply assume that X is a resident of Canada. The Minister may have concluded and assumed that X was a resident because he owned a house in Canada, his spouse and children remained in Canada and lived in the house owned by X, he was employed by a company headquartered in Canada who had employed him in Canada for 10 years prior to his being asked to take the overseas position, he returned to Canada every summer for his vacation and every Christmas as well as maintaining his golf club membership and two bank accounts in Canada, etc.[19]
[39] All the Minister’s reasons in the preceding example are facts that potentially lead to the conclusion of fact and law. None of these individual facts look like material facts by themselves. For example, the fact that X was a member of a golf club is clearly not by itself a material fact.
[40] There is no fixed set of the above facts that are the essential elements, the material facts, relevant to the issue and yet, presumably, some subset of these facts is essential.
[41] In this example, are some of the alleged facts not essential to the legal conclusion, and therefore relevant, but not material? Perhaps, but there is no way of determining in advance which are or are not material. In such a case, if any of the alleged facts enumerated happen to be relevant but immaterial, I cannot see how such a determination, assuming it is possible to make such a determination, could be made by anyone other than the trial judge.[20]
[42] Fourth, as previously noted in a case where there is a mixed conclusion of fact and law, such as in the residence example above, the underlying facts, some of which may be relevant but not material facts, must be pleaded.[21]
[43] Perhaps the discussion above is the wrong way of analyzing the example regarding residence; it may be that the better way of looking at the example is the following: all possible indicia that might lead to the conclusion that a person was a resident of Canada are material facts; the immaterial facts are only those other relevant facts that are not in themselves indicia of residence but which could lead to an inference of one or more of the indicia of residence. If this is the right way of looking at the situation then the material facts as to residence remain, potentially, quite extensive and, again, the borderline between a material and a relevant but immaterial fact may remain a grey one indeed.
[44] Fifth, it is not apparent to me that it is necessarily in the taxpayer’s interest that the Minister be precluded from including in the section outlining the basis of the assessment assumptions regarding relevant but immaterial facts. On the contrary, in many circumstances it will be to the appellant’s advantage.[22]
[45] There may be more than one possible set of secondary facts which can lead to the same inference of a material fact. In such a case, if the Minister includes in the assumptions the secondary facts assumed, the practical effect will be to limit the case the taxpayer has to make and to simplify the litigation process.
[46] For example, suppose the Minister has made an assessment using an alternative estimation technique such as the net worth method. When using this technique, the Minister will determine a person’s assets and liabilities at year end and then compare the resulting net worth with the person’s net worth the following year. To estimate income the Minister will then make a number of adjustments including taking account of income reported, gifts, capital gains and many other matters.
[47] In such an assessment there could be quite an extensive debate as to exactly which facts are material facts and which facts are secondary facts. However, it is clear that each asset or each liability as determined at year end is a secondary fact since they are added or subtracted to come up with an inference of fact, the individual’s net worth at year end. For the sake of discussion, I will assume that an individual’s net worth at year end is material fact.[23]
[48] It is well accepted in this Court that when the net worth method is used, the Minister’s reply should include the full net worth statements including the assets and liabilities at year end and all the adjustments made in estimating an individual’s income. This necessarily includes immaterial facts.
[49] To do otherwise would complicate enormously the task of an appellant since he would have to build up from the beginning any challenge to the Minister’s calculation of his net worth at the end of every year. Under the existing practice, the requirement of including all the assets and all the liabilities (secondary, relevant but immaterial, facts) simplifies enormously the appellant’s task as well as the entire proceeding since the appellant can focus his case simply on correcting errors in the assets and liabilities rather than having to establish each and every asset and liability.[24]
[50] Given these considerations, particularly the duty to disclose assumptions, the comments of Bowman A.C.J. (as he then was) in Mungovan and the fact that there are clearly cases where parties are expected to plead relevant but immaterial facts, while pleadings should not be unduly and unnecessarily long, in my view there is no general prohibition against pleading assumptions consisting of relevant facts that are not material facts.[25]
[51] Although it is not always explicitly expressed in argument, the question of onus probably lies at the heart of most debates regarding the pleading of the Minister’s assumptions or basis for the assessment. There may be cases where it is unfair to place on an appellant the onus of disputing certain assumptions. The key question in such circumstances is not whether such facts can be pleaded as assumptions based or whether they are material facts or relevant facts that are not material facts. The key question is whether the circumstances are such that the onus should not be on a taxpayer.
[52] That question will arise in the following section.
Allegations of fact solely within the Minister’s knowledge
[53] The appellant argues that certain paragraphs or subparagraphs should be struck because they are allegations of fact about third parties solely within the Minister’s knowledge.
[54] I would first observe that, generally speaking, the Minister does not have direct knowledge of the actions of an appellant or of other parties. What information he has is usually gathered during an audit by speaking to various persons and obtaining and examining various documents. Only occasionally does the Minister have direct knowledge of his own of a relevant fact; for example, he would have knowledge of his officers filing a certificate pursuant to the provisions of paragraph 227.1(2)(a) of the Income Tax Act (ITA) for the purposes of a director’s liability assessment.
[55] Normally in a situation involving third party dealings all the circumstances will have to be considered before any decision is made regarding shifting the onus of proof.
[56] In Kossow v. The Queen, 2008 TCC 422, V.A. Miller J. faced a very similar question. Among the motions before V.A. Miller J. was a motion for an order directing that the respondent bear the burden of proof with respect to certain paragraphs or subparagraphs of the reply. In that case the reply was 37 pages in length and there were some 138 pleaded assumptions,[26] many of which related to third parties. The appellant sought an order to shift the burden of proof with respect to allegations relating to third parties and their dealings with each other. V.A. Miller J. stated:
45 The decision of whether the onus of proof should be shifted to the Minister for certain of the assumptions of fact is a decision that should be made by the trial judge. The following portions from Mungovan v. The Queen [2001 DTC 691] are relevant to this motion:
10 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. The conventional wisdom is they cast an onus upon an appellant and as Mr. Mungovan observes with some considerable justification they may force him to endeavour to disprove facts that are not within his knowledge. Superficially this may be true, but this is a matter that can be explored on discovery. The trial judge is in a far better position than a judge hearing a preliminary motion to consider what effect should be given to these assumptions. The trial judge may consider them irrelevant. He or she might also decide to cast upon the respondent the onus of proving them. The rule in M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184, is a rule of general application but it is not engraved in stone.
12 It is entirely possible, as Mr. Mungovan points out, that some of the impugned assumptions are i