Rosenberg v. Canada (National Revenue)

Rosenberg v. Canada (National Revenue)
Court (s) Database
Federal Court Decisions
Date
2016-12-14
Neutral citation
2016 FC 1376
File numbers
T-1958-14
Decision Content
Date: 20161214
Docket: T-1958-14
Citation: 2016 FC 1376
Ottawa, Ontario, December 14, 2016
PRESENT: The Honourable Mr. Justice Roy
BETWEEN:
MICHAEL ROSENBERG
Applicant
and
MINISTER OF NATIONAL REVENUE
Respondent
JUDGMENT AND REASONS
[1] This is a judicial review application concerning the activities of the Minister of National Revenue with respect to a taxpayer, Mr. Michael Rosenberg. More particularly, Mr. Rosenberg is challenging a demand letter sent by the Minister on January 7, 2013, by which the Minister was seeking extensive information concerning some aspects of the income tax returns of Mr. Rosenberg and other entities for the taxation years 2006 and 2007.
[2] To be more precise, the Applicant contends that a demand for information dated January 7, 2013, should be declared to violate an agreement reached between the Applicant and a representative of the Minister on February 19, 2010. The demand letter addresses the same “straddling transactions” that are the subject of the “agreement” of February 2010.
I. Procedural History
[3] This case has had a somewhat checkered procedural history before ending up before this Court as a judicial review application. Originally, the Applicant sought to have the “agreement” that will be the subject of much discussion in this Court to be homologated by the Superior Court of Quebec. The Applicant asked for a declaration that the said “transaction” of February 2010 prevents the Respondent Minister from seeking information pursuant to section 231.1 of the Income Tax Act, RSC, 1985, c 1 (5th Supp) [ITA]. The said demand for information was to be withdrawn and no other similar demand for information for fiscal years 2006 and 2007 should be made.
[4] The Superior Court of Quebec, in Rosenberg c Agence du revenu du Canada, 2014 QCCS 685, sided with the Canada Revenue Agency which argued that the Superior Court did not have jurisdiction, pursuant to articles 163 and 164 and the Code of Civil Procedure [CCP].
[5] The matter was appealed to the Quebec Court of Appeal (2014 QCCA 1651). The Court concluded that the homologation was not the true purpose of the proceedings in the Superior Court and found:
[18] L’homologation de la transaction n’est, en l’espèce, que le véhicule procédural emprunté par l’appelant pour amener devant la Cour supérieure du Québec un débat visant à contrecarrer l’exercice des pouvoirs de vérification et d’enquête attribués au ministre par la L.i.r. et ultimement celui d’émettre une nouvelle cotisation.
[19] La nature du recours entrepris par l’appelant consistant essentiellement en une demande de contrôle judiciaire des actes de l’intimée, au sens de l'article 18 L.c.f., il relève de la compétence exclusive de la Cour fédérale.
[TRANSLATION]
[18] The homologation of the transaction, in this case, is merely the procedural vehicle used by the Plaintiff to bring before the Superior Court of Quebec a debate aiming to restrict the auditing and investigation powers of the minister under the ITA and ultimately the power to issue a reassessment.
[19] Since the proceeding instituted by the Plaintiff is essentially an application for judicial review of the Respondent's actions, under section 18 of the FCA, it falls under the exclusive jurisdiction of the Federal Court.
[6] Faced with this final ruling in the Province of Quebec, the Applicant turned to the Federal Court but, instead of seeking the judicial review, an action was launched against the Minister of National Revenue. The Minister brought a motion to strike the action initiated by Mr. Rosenberg under Rule 221 of the Federal Courts Rules, SOR/98-106. Before the Federal Court was also another proceeding, in the nature of a summary application under section 231.7 of the ITA, seeking an order directing Mr. Rosenberg to provide documents and information pursuant to the demand for information made in accordance with section 231.1 of the ITA. The summary application is still in abeyance.
[7] Justice Marie-Josée Bédard, then of this Court, ruled that the motion to strike did not meet the requirements that it be plain and obvious that the action cannot succeed (Hunt v Carey Canada Inc, [1990] 2 SCR 959). In my view the matter is well articulated at paragraph 40 of the Court’s decision (2015 FC 549):
[40] The parties have not submitted any decisions in which the courts have decided on the validity of agreements between the Minister and taxpayers that would involve a waiver or restriction on the Minister’s auditing powers, but the question is raised in this case. The dispute involves determining whether the Agreement deals with the Minister’s audit powers and if so, whether it restricts the Minister’s power to proceed with a new audit of the straddling transactions in which Mr. Rosenberg was involved in 2006 and 2007, and whether the Agreement is valid.
[8] Having found that the motion to strike must fail, Justice Bédard went on to conclude that the action for declaratory relief brought by Mr. Rosenberg was not appropriate in the circumstances. In the view of this Court, when acting under the powers conferred by section 231.1 of the ITA, the Minister qualifies under the definition of “federal board, commission or other tribunal”. In the matter at hand, the Applicant relies on an agreement entered into with the Minister in order to object to the exercise of the powers under section 231.1 on the ground that this agreement is binding and valid. Given the kinds of remedies sought in the declaratory action, this Court was of the view that, pursuant to subsection 18(3) of the Federal Courts Act, RSC 1985, c F-7 [FCA], the appropriate proceedings would be an application for judicial review under section 18.1 of the FCA.
[9] I note that the “Avis de demande de contrôle judiciaire suite aux directives de Madame la juge Bédard du 28 avril 2015” ([TRANSLATION] “Notice of Application for Judicial Review as directed by Madam Justice Bédard on April 28, 2015”), produced by Mr. Rosenberg following the ruling of my former colleague, seeks a more limited remedy than what was sought in the action for declaratory relief. In that action, the Plaintiff, Mr. Rosenberg, was seeking a declaration and injunctive relief. In the case at hand, it is only the declaratory relief that is the subject of the judicial review application. The appropriate paragraphs from the application for judicial review read:
(a) DÉCLARER qu’en date du 19 février 2010 une Entente est intervenue entre le Demandeur et la Défenderesse, que les parties sont liées par cette Entente et qu’elles doivent s’y conformer;
(b) DÉCLARER que, par conséquent:
i) la demande de renseignements et documents datée du 7 janvier 2014 (la « Demande de Renseignements et Documents ») contrevient à l’Entente et le Demandeur n’a aucune obligation d’y donner suite; et
ii) la Défenderesse ne peut cotiser à nouveau le Demandeur pour les années d’imposition 2006 et 2007 en ce qui concerne les opérations de stellage (« straddling ») faisant l’objet de l’Entente.
[TRANSLATION]
(a) DECLARE that on February 19, 2010, an Agreement came into effect between the Plaintiff and Defendant, that the parties are bound by this Agreement, and that they must comply with it;
(b) DECLARE that, as a result:
i) the January 7, 2014, request for information and documents (the "Request for Information and Documents") violates the Agreement, and the Plaintiff has no obligation to comply with it; and
ii) the Defendant cannot reassess the Plaintiff for the tax years 2006 and 2007 for the straddling operations subject to the Agreement.
II. The Facts
[10] The facts have been established through the filing of two affidavits. Mr. Rosenberg filed his own affidavit together with a number of documents, as did the auditor Marc-André Désilets. Neither affiant was cross-examined on his affidavit. Mr. Désilets is not the auditor who signed the agreement of February 2010. That auditor has not produced any evidence in this case.
[11] The facts are uncontroverted. The debate between the parties focuses on the agreement of February 2010. Some basic information is nevertheless required to understand the context in which the agreement was reached. The Applicant was the sole common shareholder of two corporations, 4341350 Canada Inc. and 4341376 Canada Inc. 4341350 acted as the nominee for the Applicant, his spouse, and their family trust along with 4341376 in certain “straddling transactions” done in the 2006 and 2007 taxation years. For our purposes, it is not necessary to enter into the complexities of the transactions and their structure. It suffices to know that it involved taking business losses in one year and turning the sale of partnerships into capital gains the year after. In this case, business losses occurred in December 2006 and the capital gains were realized in early 2007. Because the inclusion of business losses (100% of losses) and capital gains (50% of capital gains are taxable) is different, the taxpayer is advantaged.
[12] On October 17, 2008, a Canada Revenue Agency [CRA] auditor advised the taxpayers that the CRA had started an income tax compliance audit for their 2006 and 2007 income tax years.
[13] Between October 28, 2008, and March 2010, the CRA auditor met and exchanged information and documentation with the taxpayers and their representatives relating to the straddling transactions having taken place in 2006 and 2007. A letter dated February 19, 2010, prepared by the CRA auditor, and signed by the taxpayer and by the auditor, became the so-called “agreement” which is at issue in this case. It is the nature of this document, its effects and its validity that are the subject of this judicial review application. It will therefore be necessary to review at some length a document that runs for merely two pages. The agreement is reproduced in its entirety as Appendix “1” to these Judgment and Reasons.
[14] The parties disagree as to the scope of the agreement; if the agreement has the scope argued for by the Applicant, the Minister contends that the agreement is null and void.
III. The Agreement
[15] The first three paragraphs of the February 19, 2010, document set up the context in which an “agreement” is reached. Right up front, the drafter of the document, the CRA, declares that “[w]e have concluded our audit and review …” The document is precise as to what this is concerned with: “The focus of our audit was primarily on the taxpayers undertaking as venturers in a non-resident general partnership identified as “Mazel Partners G.P.” with particular emphasis, on the partnership loss sustained in 2006 as well as the ensuing capital gain reported in 2007 …” The introduction to the “agreement” continues by identifying the counsel who took part in the discussions with the CRA. The document then explains that there appears to be uncertainty concerning the source and nature of the loss and income, in view of a decision of the Supreme Court of Canada in Friedberg v Canada, 47 DTC 5507, [1993] 4 SCR 285 [Friedberg]. No details are supplied.
[16] The fourth paragraph in the “agreement” defines the concession that the CRA makes in the circumstances. Having reviewed the jurisprudence, published policies, commentaries and the existing legislation relative to straddling transactions, “the Canada Revenue Agency, (“the Agency”) is at the present conjecture (emphasis added), satisfied with the reporting positions taken by the taxpayers, and as such the Agency will not proceed with any reassessments for the taxation years mentioned in caption, with the exception of a revision to the capital gain as initially declared by MCRFT in its 2007 taxation year.” [My emphasis.]
[17] In return for agreeing not to proceed with any reassessment for the taxation years, the auditor, speaking on behalf of the CRA, states that “we herein request that the taxpayers refrain, abstain and terminate their practice of engaging in any similar transactions of “straddling” for Canadian Income Tax Act purposes.” Before making such requests, the CRA again refers to the “technical vacuum” resulting from the Friedberg decision. The following two paragraphs of the “agreement” flesh out the request made of the taxpayer to refrain, abstain and terminate the use of “straddling” transactions for Canadian Income Tax Act purposes. Thus, the sixth paragraph is for the purpose of ensuring that the commitment made by the taxpayers is binding on the Applicant’s spouse and their future executors. Furthermore, paragraph 7 seeks to make it even clearer that the taxpayers shall not shelter any income inclusion from other sources of revenues using straddling transactions. The “escape clause” favouring the taxpayers for future years is limited to transactions that would be permitted by a policy statement or other pronouncement on the part of the CRA or a new final court judgment.
[18] That takes the reader to the sanctions that could ensue if the taxpayer did not abide by his side of the bargain. First, the CRA spells out that it has “the right to declare this agreement null and void” if “any evidence come[s] to our attention as to a breach regarding the terms of resolution forthwith mentioned”. Hence, if the taxpayer does not refrain, abstain or terminate straddling transactions for the following taxation years, the agreement could be declared null and void.
[19] The other possible way for the agreement to be superseded is provided for at paragraph 10 of the document. It speaks of a different situation which would enable the CRA to review its position. It provides that “should the fact pattern for which we based our conclusion change at any time in the future, the Agency may, at such time, review its present position accordingly, in light of the facts and circumstances applicable at that time.”
[20] Paragraph 9 of the document stresses that the agreement does not have any precedential value with respect to other taxpayers. Paragraph 11 confirms that the taxpayers “waive all rights of appeal and/or objection related to the reassessment issues concluded herein.”
[21] On January 7, 2013, an auditor, who is not the auditor who stipulated the terms and concluded the agreement in 2010, sent a new demand for information. The subject matter of the letter leaves nothing to the imagination: “Review of your income tax returns for the 2006 and 2007 taxation years.” Indeed, the letter, which runs for more than ten pages, starts off by stating: “The above-noted Income Tax Returns are currently under review. This review is specifically in relation to the “straddle loss” that was allocated by the Mazel Partners G.P. (Mazel) and therefore we are requesting information on other entities that are related to you and/or who participated in the arrangement.” No one disputes that the straddling transactions for which the CRA declares it will not proceed with any reassessments for taxation years 2006 and 2007 in the “agreement” of February 19, 2010, are the transactions in which an interest is shown in January 2013.
[22] Similarly, there is no allegation made that the CRA is invoking “a breach regarding the terms of resolution”, according to the 8th paragraph of the letter of agreement, or a new “fact pattern” in order to review its position according to the 10th paragraph.
IV. Summary of Applicant and Respondent Arguments
[23] The Applicant argues that the agreement concluded between him and the Minister is binding and, once properly interpreted, bars the Minister from re-auditing and re-assessing him for the taxation years 2006 and 2007 unless of course there is a breach on the part of the taxpayer regarding the terms of resolution or a change in the fact pattern occurs. In his view, such an agreement must be valid in order to bring certainty to arrangements entered between the CRA and taxpayers. The caselaw suggesting that the assessment of taxes cannot be made the subject of an arrangement is not applicable in the circumstances of this case.
[24] Evidently, the Minister argues the exact opposite. She essentially argues that, as a pure matter of contractual interpretation, the agreement did not bar the Minister from conducting another audit of the Applicant for those taxation years. Assessment and audit are two different things. The agreement is limited to not conducting a reassessment. Second, if the agreement would have the effect of barring such further audit, it would be void because such an agreement is illegal as being contrary to the ITA and public order.
[25] Both parties rely on the Civil Code of Quebec [CCQ] for the interpretation that they give to the agreement, in particular, they rely on articles 1425 to 1432 of the CCQ, under the general title of “Interpretation of Contracts”.
[26] The parties did not discuss in their memoranda of facts and law what is the standard of review that is applicable in the present circumstances. It is only at the hearing that the Court sought their views on the matter.
V. Standard of Review and Analysis
A. Standard of Review
[27] The parties argued their case without paying much attention to the standard of review that should be applicable in this case. The matter was raised by the Court at the hearing and the parties were invited to take a position.
[28] Both parties agreed that the matter before the Court on judicial review is the exercise of the power granted to the Minister pursuant to section 231.1 of the ITA to issue the demand letter of January 2013 that is sent to the taxpayer in spite of the “agreement” reached in February 2010. In the view of the taxpayer, the demand letter for years 2006 and 2007 can be sent only if any one of the conditions precedent provided for in the “agreement” is met. None is alluded to in the demand letter and none is offered on this record.
[29] The ability of the Court to grant declaratory relief has not been challenged. Indeed, Brown and Evans in their Judicial Review of Administrative Action in Canada (Brown and Evans, Judicial Review of Administrative Action in Canada (Toronto, On: Carswell, 2013) (loose-leaf)), state at paragraph 1:7200:
As a public law remedy, declarations may be used to provide an original determination of the plaintiff’s legal rights, duties, status, or position. Accordingly, declarations have been granted to decide disputed questions of personal status, to determine whether a public body is in breach of contract, to declare the rights of public office holders and employees, to declare whether a person is a member of an association or has a right to pursue a trade, occupation or other activity, to determine a person’s entitlement to statutory compensation or liability to pay a tax, and to declare the extent of the legal powers, immunities or duty of a public authority, especially when disputed by another. As well, of course, a court may declare a decision of a body that does not exercise powers, such as a trade association, to be invalid. [Footnotes omitted]
[30] As for the standard of review, the Minister contended, presumably relying on the presumption created in Alberta (Information and Privacy Commissioner) v Alberta Teachers’ Association, 2011 SCC 61, [2011] 3 SCR 654, that “[w]hen considering a decision of an administrative tribunal interpreting or applying its home statute, it should be presumed that the appropriate standard of review is reasonableness” (para 39). As is well established,
[r]easonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions.
(Dunsmuir v New Brunswick, 2008 SCC 9, [2008] 1 SCR 190 at para 47)
[31] As I understand it, the Minister considers that the challenge to her decision to exercise the power under section 231.1 of the ITA to seek information from a taxpayer must be resolved by the Court through a declaration that the exercise of the power was reasonable in the circumstances of this case. The exercise of power is a function of the interpretation that must be given to the “agreement” between the parties; it would be sufficient for the interpretation of the “agreement” to be reasonable, as opposed to correct, for the Minister to prevail. If there is more than one interpretation that can be given, and that which the Minister gives can be said to be an acceptable and possible outcome on the facts and the law, the Court’s declaration should favour the Minister.
[32] The Applicant takes the view that he has been forced to turn his action into a judicial review application seeking a declaratory relief (para 18(1)(a) and ss 18(3) of the FCA). He seeks a declaration that the Minister cannot rely on section 231.1 of the ITA, as she is foreclosed to do so by the agreement she entered into with this taxpayer. Such declaration does not entail any deference on a standard of review of reasonableness.
[33] Declaratory relief may be obtained against a federal board, commission or other tribunal. The law requires that there be an application for judicial review according to subsection 18(3) of the FCA. That, in turn, leads to the grounds of review listed at subsection 18.1(4). Unfortunately, the parties in this case did not specify which ground for review was invoked. Although the grounds for review are listed, they would not at any rate provide complete clarity as to what standard of review would be applicable to a particular ground. However, that would have allowed to benefit from the guidance offered by the majority in Canada (Citizenship and Immigration) v Khosa, 2009 SCC 12, [2009] 1 SCR 339, concerning subsection 18.1(4).
[34] The Minister in this case did not give reasons for her interpretation of section 231.1 of the ITA and why effect was not given to the agreement of February 2010. It is implied that she does not consider the agreement as a bar to using section 231.1.
[35] Recently, the majority in Edmonton (City) v Edmonton East (Capilano) Shopping Centres Ltd, 2016 SCC 47 [Edmonton], was satisfied to examine the issue in spite of reasons not being provided:
[38] However, when a tribunal’s failure to provide any reasons does not breach procedural fairness, the reviewing court may consider the reasons “which could be offered” in support of the decision (Dunsmuir, at para. 48, quoting D. Dyzenhaus, “The Politics of Defence: Judicial Review and Democracy”, in M. Taggart, ed., The Province of Administrative Law (1997), 279, at p. 286). In appropriate circumstances, this Court has, for example, drawn upon the reasons given by the same tribunal in other decisions (Alberta Teachers’, at para. 56) and the submissions of the tribunal in this Court (McLean, at para. 72).
As Karakatsanis J. said for the majority, “I shall review the Board’s decision in light of the reasons which could be offered in support of it” [Emphasis in original] (para 40).
[36] I would apply the same approach in this case as used in McLean v British Columbia (Securities Commission), 2013 SCC 67, [2013] 3 SCR 895. To paraphrase Moldaver J., for the Court, at paragraph 72, reasons are preferable but nothing is to be gained by sending the matter back to the Minister to explain what she has already explained before the Court. The Minister is the Respondent in a case where it is her decision to send the demand letter and she is the one who, through an auditor, has entered into an agreement.
[37] The Court has not been offered a cogent argument for why reasonableness should not be used. The default position is reasonableness and that was reasserted strongly in Edmonton.
[38] In view of my conclusion that the interpretation given by the Minister to the “agreement” is not rational, there is no need to reach a conclusion on the standard of review in this peculiar case. Even by giving the Minister the benefit of the more generous standard of review, her interpretation does not fall “within the range of acceptable and rational solutions” (Dunsmuir, para 47).
B. Analysis
[39] There are two issues that need to be addressed. First, the agreement reached between the Minister’s representative and the taxpayer must be reviewed for the purpose of determining what its scope is. The parties disagree on this score. If the Respondent is right and that the agreement has a very narrow scope, there might not be a need to decide if the agreement is illegal. On the other hand, if the agreement is as broad as claimed by Mr. Rosenberg, it will then be necessary to consider whether a broad agreement is illegal. I begin with an interpretation of the agreement.
(1) Scope of the Agreement
[40] The agreement reached on March 4, 2010, but drafted by the Minister’s representative on February 19, 2010, was concluded in the Province of Quebec with a taxpayer who resides in Montreal. The said agreement indicates that it was drafted in Montreal by a Minister’s representative operating out of the Montreal offices of the CRA. In the circumstances, there is little doubt that such an agreement is governed by the CCQ. The parties have operated on that basis and it seems to me to be beyond discussion that federal legislation is complimented in the Province of Quebec by the civil law of the province. In his masterful exposé in Canada (Attorney General) v St Hilaire, 2001 FCA 63, [2001] 4 FC 289, Justice Robert Décary, speaking for the whole Court on this, recognized the suppletive nature of the civil law in federal matters governed by federal law. Here, there would be no reason to seek to rely on the common law to determine the nature of the arrangement and the rules that would govern its interpretation.
[41] The Respondent has not suggested that the author of the February 2010 document was not authorized to do so. In fact, the Respondent does not dispute either that an agreement was reached.
[42] The Minister’s position boils down to arguing that his concession in the agreement was to decline to reassess the taxpayer for the years 2006 and 2007 at this point in time. Essentially, the commitment would have been valid on the day on which it was agreed to, without that commitment being valid the day after. With respect, I disagree. This cannot be a reasonable interpretation of this agreement.
[43] The agreement reached by the parties in this case is a contract as defined in the CCQ:
NATURE AND CERTAIN CLASSES OF CONTRACTS
DE LA NATURE DU CONTRAT ET DE CERTAINES DE SES ESPÈCES
1378. A contract is an agreement of wills by which one or several persons obligate themselves to one or several other persons to perform a prestation.
1378. Le contrat est un accord de volonté, par lequel une ou plusieurs personnes s’obligent envers une ou plusieurs autres à exécuter une prestation.
Contracts may be divided into contracts of adhesion and contracts by mutual agreement, synallagmatic and unilateral contracts, onerous and gratuitous contracts, commutative and aleatory contracts, and contracts of instantaneous performance or of successive performance; they may also be consumer contracts.
Il peut être d’adhésion ou de gré à gré, synallagmatique ou unilatéral, à titre onéreux ou gratuit, commutatif ou aléatoire et à exécution instantanée ou successive; il peut aussi être de consommation.
[44] The instrument created between the parties is the common expression of their intention. In the case at bar, there is no extraneous evidence offered by either party. Thus, Mr. Rosenberg did not offer his personalized view of what was intended and the signatory of the contract, on behalf of the Minister, is not part of these proceedings; he did not testify and he has not been disavowed. The letter of demand of 2013 was prepared by a different auditor and he is the one who testified through his affidavit. As already indicated, neither one of the affiants was cross-examined on the affidavit.
[45] We are therefore left with relying on the interpretative tools of contracts provided for in the CCQ. The CCQ encompasses a whole section called “Interpretation of contracts”. Both parties in fact rely to some extent on certain provisions of the CCQ. The Respondent is right to stress the importance of articles 1427 and 1428 of the CCQ. They read:
1427. Each clause of a contract is interpreted in light of the others so that each is given the meaning derived from the contract as a whole.
1427. Les clauses s’interprètent les unes par les autres, en donnant à chacune le sens qui résulte de l’ensemble du contrat.
1428. A clause is given a meaning that gives it some effect rather than one that gives it no effect.
1428. Une clause s’entend dans le sens qui lui confère quelque effet plutôt que dans celui qui n’en produit aucun.
[46] As for the Applicant, he brought to the Court’s attention article 1432 which reads:
1432. In case of doubt, a contract is interpreted in favour of the person who contracted the obligation and against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or the consumer.
1432. Dans le doute, le contrat s’interprète en faveur de celui qui a contracté l’obligation et contre celui qui l’a stipulée. Dans tous les cas, il s’interprète en faveur de l’adhérent ou du consommateur.
Of course, in order to resort to article 1432, there must first be an attempt to interpret the contract as per the rules that are provided for in the CCQ. It is only if the common intention of the parties cannot be discovered through appropriate interpretation that it can be said that a contract will be ambiguous (Richard-Gagné c Poiré, 2006 QCCS 4980; Compagnie d'assurance l'Anglaise américaine c Chayer, [1986] RJQ 962). In my view, it is quite easily possible to discern what was the intention of the parties through an examination of the terms of the contract they entered into on March 4, 2010, on the basis of a document stipulated on behalf of the Minister on February 19, 2010.
[47] I would add article 1425 to these three articles:
1425. The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract.
1425. Dans l’interprétation du contrat, on doit rechercher quelle a été la commune intention des parties plutôt que de s’arrêter au sens littéral des termes utilisés.
[48] The document is not a model of clarity. However, a careful reading of the document brings about an unambiguous understanding of what the parties were mutually agreeing to.
[49] The CRA having established that the audit and review of the taxpayers’ affairs for years 2006 and 2007 had been concluded, it recognized that there was some difficulty stemming from a Supreme Court of Canada decision. At the fourth paragraph of the document, the CRA stipulates that having reviewed jurisprudence, published policies, commentaries as well as the existing legislation relative to the transactions under examination (“straddling” transactions) the CRA declares itself “satisfied with the reporting positions taken by the taxpayers …” On that basis, the CRA commits itself: the CRA states that it “will not proceed with any reassessments for the taxation years mentioned in caption”. The commitment is limited, as it relates only to some transactions straddling taxation years 2006 and 2007. It also follows a complete review which resulted in the expression of satisfaction “with the reporting positions taken by the taxpayers”. This is the obligation that, by contract, the CRA declares itself willing to abide by.
[50] In return, the taxpayer is requested at paragraph 5 to “refrain, abstain and terminate their practice of engaging in any similar transactions of “straddling” for Canadian Income Tax Act purposes.” The Minister is careful to point out again that there is a technical vacuum created by the Supreme Court of Canada decision.
[51] Thus, paragraphs 4 and 5 of the document establish what the parties agreed to do. On the one hand, the taxpayer has the benefit of not being reassessed for years 2006 and 2007; on the other hand, the taxpayer agrees to refrain from conducting his business in such a way as to create straddling transactions for the purpose of the ITA. There is, in my view, a quid pro quo. Each party obligates itself towards the other. They both intend to benefit.
[52] Paragraphs 6 and 7 are for the purpose of spelling out what is the obligation created concerning the taxpayer. First, spouses and/or future executors are bound by the agreement; second, the obligation applies to other forms of income and not only business income. Furthermore, the agreement is said to apply only to Mr. Rosenberg and does not constitute a precedent that would be applicable to other taxpayers. We are not concerned here with the validity of such clauses.
[53] Having established what the parties have agreed to, the agreement concludes with the circumstances under which the agreement would cease to have effect. These are critical paragraphs that shed light on the scope of the obligations of the parties (art 1427 of the CCQ).
[54] The first such paragraph is paragraph 8. It spells out that any evidence that would come to the attention of the CRA “as to a breach regarding the terms of resolution forthwith mentioned, the Agency reserves the right to declare this agreement null and void.” In my view, this paragraph can only mean one thing. Through the use of the words “breach regarding the terms of resolution”, the parties can only refer to the agreement reached concerning the obligation made to the taxpayer to refrain, abstain and terminate their practice of engaging in similar transactions of “straddling”. This is how the matter is resolved between the parties: the taxpayer will not do that again in the future. This particular clause deals specifically with the side of the transaction which can constitute a “breach regarding the terms of resolution”. The only breach that can be the subject of the CRA declaring the agreement null and void has to be the obligation contracted by the taxpayer. That obligation is to refrain, abstain and terminate the practice of engaging in straddling.
[55] The Respondent has argued that there was no real commitment on her part. Paragraph 4 is simply declaring that, at that moment in time (February 19, 2010), the CRA was not reassessing the taxpayer. However, such cannot be the case in view of paragraphs 8 and 10. It is important to note that the parties saw fit to state in paragraph 8 that the agreement is null and void if the taxpayer breaks his commitment. The clause is for the benefit of the Minister in that it is for the Minister to declare the agreement null and void. However, there is no need for such a clause if, as argued by the Minister, she can proceed to reassess whenever she wants.
[56] The same is true with respect to the other clause, at paragraph 10, which would allow for the contract to be “reopened”. In it, the CRA stipulates that it “may … review its position accordingly, in light of the facts and circumstances applicable at that time.” What are those facts and circumstances applicable at that time? The answer to the question is found in the first half of paragraph 10 where the CRA agreed that “should the fact pattern for which we based our conclusion change at any time in the future”. In other words, it is only if there is a new fact pattern that the CRA would be in a position to review its “present position”, present position being found at paragraph 4 as being “satisfied with the reporting positions taken by the taxpayer”.
[57] Again, if the Minister is right and she can proceed to reassess when she wants, there is no need to create a mechanism whereby the Minister will review her position if the fact pattern that gave rise to the expressed satisfaction with the reporting positions of the taxpayer has changed. That could well be a misrepresentation if it can be argued that paragraph 4 was meant as no more than a comfort letter for the time being. More was stated through the combination of paragraphs 4, 5, 8 and 10. Good faith presides. Article 1375 of the CCQ reads:
1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.
1375. La bonne foi doit gouverner la conduite des parties, tant au moment de la naissance de l’obligation qu’à celui de son exécution ou de son extinction.
[58] Once the clauses of the contract are interpreted together, one shedding some light on the other, it emerges an understanding that is neither ambiguous nor vague. In view of the uncertainty created by some caselaw, the parties agree to, on the one hand, not assess the taxpayer for years 2006 and 2007 about its straddling transactions, and on the other hand, the taxpayer agrees not to use that financial structure for tax purposes in the future. If the taxpayer does not abide by his obligation and breaches the terms of resolution arrived at, the CRA may declare the agreement null and void. If the fact pattern on which the CRA based its conclusion that it is satisfied with the reporting position taken by the taxpayer changes, then the CRA could review its present position “in light of the facts and circumstances applicable at that time”.
[59] I repeat. There is no allegation on this file that Mr. Rosenberg, his spouse or “future executors” have entered into straddling transactions for the purpose of the ITA since the agreement. Similarly, there is no allegation whatsoever that the fact pattern has changed.
[60] It follows, in my view, that the parties intended to reach an agreement whereby the taxpayer would be left alone with respect to the straddling transactions of 2006 and 2007 on condition that he does not use that technique for tax purposes for future years. The matter can be reopened if the taxpayer breaks his commitment or the fact pattern changes. Without any one of those two conditions present, the Minister commits to not proceed with any reassessment.
[61] The Respondent argues that if the common intention of the parties to the agreement was that the Minister can review her position should the fact pattern change, she did not agree to refrain from conducting a new review using section 231.1 of the ITA. The Minister contends that in order to see if the fact pattern has changed, she needs the ability to audit those two years concerning the very transactions she expressed satisfaction about after an audit. The Respondent therefore argues that the Minister could not have chosen to waive her ability to ascertain if the fact pattern has in fact changed. In my view, that argument fails both as a matter of interpretation of contracts and because of what the parties have chosen to agree to. The only way such an interpretation can be reasonable is if it accounts for all the clauses in the contract. That interpretation does not do that.
[62] As shown earlier, article 1428 of the CCQ favours giving meaning to a contract rather than interpreting it such that it has no effect. Going outside of the words that were agreed to by the parties, the Minister suggests, in a circular way, that she needs to audit in order to find a new fact pattern. First, the agreement does not define “fact pattern”. But the fact pattern giving rise to the agreement was studied by the CRA for 16 months prior to the agreement. There was only one. A full audit was conducted and concluded according to the agreement. How does a new audit conform with the Minister’s statement that the audit was concluded and only if a different fact pattern emerges will she proceed with any reassessment? That, to my way of thinking, makes the obligation to which the Minister agreed mea