Preston Family Trust II v. The Queen

Preston Family Trust II v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-11-15
Neutral citation
2021 TCC 79
File numbers
2020-641(IT)G, 2020-642(IT)G, 2020‑643(IT)G
Judges and Taxing Officers
David E. Spiro
Subjects
Income Tax Act
Notes
Decision Content
Docket: 2020-641(IT)G
BETWEEN:
THE PRESTON FAMILY TRUST II,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent,
Applicant’s Motion considered by Written Representations with the Motions in John Preston - 2020-642(IT)G and Monika Preston ‑ 2020‑643(IT)G
Before: The Honourable Justice David E. Spiro
Participants:
Counsel for the Applicant:
Yves St-Cyr and Jacob Yau
Counsel for the Respondent:
Rishma Bhimji
AMENDED ORDER
UPON Motion of the Applicant for an Order striking out subparagraphs 10(h), 10(k), 10(1), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(bb), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), 10(nn), 10(oo), 10(pp), 10(qq), 10(rr), 10(ss), and 10(tt) of the Reply to the Notice of Appeal pursuant to subsection 53(1) of the Tax Court of Canada Rules (General Procedure);
UPON READING the materials filed on behalf of the Applicant in support of this motion and the materials filed on behalf of the Respondent;
THIS COURT ORDERS that the relief sought is granted in part on the following terms:
the Respondent shall file and serve an Amended Reply in accordance with this Amended Order within 30 days;
subparagraphs 10(h), 10(k), 10(l), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(bb), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), 10(nn), and 10(qq) are struck from the assumptions paragraph of the Reply with leave to amend to include them in the Amended Reply as reasons upon which the Respondent intends to rely;
subparagraphs 10(oo) and 10(pp) are struck from the assumptions paragraph of the Reply with leave to amend to read:
Mr. and Ms. Preston did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the appellant;
Mr. and Ms. Preston did not collect and remit Part XIII withholding tax on the Capital Dividends received from the appellant;
subparagraph 10(rr) is struck from the assumptions paragraph of the Reply with leave to amend to read:
the appellant did not deduct or withhold Part XIII tax in respect of the Taxable Dividends or Capital Dividends.
subparagraphs 10(ss) and 10(tt) are struck from the assumptions paragraph of the Reply without leave to amend;
schedule “A” to this Amended Order sets out the remaining and amended assumptions of fact to be pleaded by the Respondent in the Amended Reply;
the Applicant may file and serve an Amended Answer within 30 days of the date on which the Amended Reply is served; and
costs shall be in the cause.
This Amended Order is issued in substitution of the Order dated November 10, 2021.
Signed at Toronto, Ontario, this 15th day of November 2021.
“David E. Spiro”
Spiro J.
SCHEDULE “A” TO THE ORDER
2020-641(IT)G
In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
The appellant and its beneficiaries
a) the appellant was an inter-vivos trust;
b) the appellant was an irrevocable trust;
c) the appellant was settled in Ontario;
d) the appellant was governed by the laws of Ontario;
e) the appellant was settled by Margaret Shorey on September 30, 1993;
f) the appellant was settled in accordance with a Deed of Settlement dated September 30, 1993 (“Trust Deed”);
g) Ms. Shorey settled the trust by contributing 100 common shares in J.W.S.P. Holdings Inc. (“Holdco”);
h) Mr. Preston, Ms. Preston and Mr. Preston’s two children have been non-resident persons of Canada since October 1, 1993;
i) at all material times, Mr. Preston and Robert Green were the directors of Holdco;
j) at all material times, the appellant’s trustees were Mr. Green and Gilbert J. Weiss (“Trustees”);
k) the Trustees could pay and apply any part of the net annual income of the capital of the trust to the Beneficiaries;
The appellant’s capital distribution
l) as of September 25, 2014, the appellant held 100 common shares in Holdco and 95% interest in North American Development LP (the “Partnership”);
m) on September 25, 2014, the Trustees resolved to distribute an equal share of the appellant’s assets to Mr. Preston and Ms. Preston after the resolution of the trust (the “Trustees’ Resolution”);
n) following the Trustees’ Resolution, Mr. and Ms. Preston assigned their capital interests in the appellant – 100 common shares of Holdco and 95% partnership interest in the Partnership (“Distributed Property”) – to ULC;
o) Mr. and Ms. Preston assigned their capital interests in the Distributed Property pursuant to subsection 85(1) of the Income Tax Act (“Act”) in exchange for 100 common shares each in ULC (“Assignment”);
p) Mr. and Ms. Preston were the only shareholders of ULC;
q) on September 25, 2014, the appellant transferred 100 common shares of Holdco and 95% partnership interest in the Partnership to ULC;
r) pursuant to the Trustees’ Resolution, a transfer to ULC would be for the benefit of Mr. and Ms. Preston, to the exclusion of any other beneficiary of the appellant;
Dividends paid to Mr. and Ms. Preston
s) as part of a 2014 corporate reorganization, Holdco’s shareholder signed a series of special resolutions whereby the stated capital of Holdco’s common shares was increased by $23,900,000;
t) Holdco filed an election to treat a portion of the deemed dividends, $18,500,000, arising from the increase in the stated capital as capital dividends pursuant to subsection 83(2) of the Act (“Capital Dividends”);
u) the balance of the increase in the stated capital, $6,400,000, was deemed to be taxable dividends paid to the appellant pursuant to subsection 84(1) of the Act (“Taxable Dividends”);
v) the appellant reported dividend income of $6,400,000 in its 2014 T3 tax return;
w) the appellant designated the income from the Taxable Dividends to ULC;
Part XIII withholding on dividends paid to Mr. and Ms. Preston
x) Mr. and Ms. Preston did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the appellant;
y) Mr. and Ms. Preston did not collect and remit Part XIII withholding tax on the Capital Dividends received from the appellant; and
z) the appellant did not deduct or withhold Part XIII tax in respect of the Taxable Dividends or Capital Dividends.
Docket: 2020-642(IT)G
BETWEEN:
JOHN PRESTON,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent,
Applicant’s Motion considered by Written Representations with the Motions in The Preston Family Trust II - 2020-641(IT)G and Monika Preston - 2020-643(IT)G
Before: The Honourable Justice David E. Spiro
Participants:
Counsel for the Applicant:
Yves St-Cyr and Jacob Yau
Counsel for the Respondent:
Rishma Bhimji
AMENDED ORDER
UPON Motion of the Applicant for an Order striking out subparagraphs 10(h), 10(k), 10(1), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(gg), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), 10(nn), 10(oo), and 10(pp) of the Reply to the Notice of Appeal pursuant to subsection 53(1) of the Tax Court of Canada Rules (General Procedure);
UPON READING the materials filed on behalf of the Applicant in support of this motion and the materials filed on behalf of the Respondent;
THIS COURT ORDERS that the relief sought is granted in part on the following terms:
1. the Respondent shall file and serve an Amended Reply in accordance with this Amended Order within 30 days;
subparagraphs 10(h), 10(k), 10(l), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(gg), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), and 10(pp) are struck from the assumptions paragraph of the Reply with leave to amend to include them in the Amended Reply as reasons upon which the Respondent intends to rely;
subparagraphs 10(nn) and 10(oo) are struck from the assumptions paragraph of the Reply with leave to amend to read:
the appellant and Ms. Preston did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the appellant;
the appellant and Ms. Preston did not collect and remit Part XIII withholding tax on the Capital Dividends received from the appellant;
schedule “A” to this Amended Order sets out the remaining and amended assumptions of fact to be pleaded by the Respondent in the Amended Reply;
the Applicant may file and serve an Amended Answer within 30 days of the date on which the Amended Reply is served; and
costs shall be in the cause.
This Amended Order is issued in substitution of the Order dated November 10, 2021.
Signed at Toronto, Ontario, this 15th day of November 2021.
“David E. Spiro”
Spiro J.
SCHEDULE “A” TO THE ORDER
2020-642(IT)G
In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
The appellant as beneficiary
a) The Trust was an inter-vivos trust;
b) the Trust was an irrevocable trust;
c) the Trust was settled in Ontario;
d) the Trust was governed by the laws of Ontario;
e) the Trust was settled by Margaret Shorey on September 30, 1993;
f) the Trust was settled in accordance with a Deed of Settlement dated September 30, 1993 (“Trust Deed”);
g) Ms. Shorey settled the Trust by contributing 100 common shares in J.W.S.P. Holdings Inc. (“Holdco”);
h) the appellant, Ms. Preston and the appellant’s two children have been non-resident persons of Canada since October 1, 1993;
i) at all material times, the appellant and Robert Green were the directors of Holdco;
j) at all material times, the Trust’s trustees were Mr. Green and Gilbert J. Weiss (“Trustees”);
k) the Trustees could pay and apply any part of the net annual income of the capital of the Trust to the Beneficiaries;
The Trust’s capital distribution
l) as of September 25, 2014, the Trust held 100 common shares in Holdco and 95% interest in North American Development LP (the “Partnership”);
m) on September 25, 2014, the Trustees resolved to distribute an equal share of the Trust’s assets to the appellant and Ms. Preston after the resolution of the Trust (the “Trustees’ Resolution”);
n) following the Trustees’ Resolution, the appellant and Ms. Preston assigned their capital interests in the Trust – 100 common shares of Holdco and 95% partnership interest in the Partnership (“Distributed Property”) – to ULC;
o) the appellant and Ms. Preston assigned their capital interests in the Distributed Property pursuant to subsection 85(1) of the Act in exchange for 100 common shares each in ULC (“Assignment”);
p) the appellant and Ms. Preston were the only shareholders of ULC;
q) on September 25, 2014, the Trust transferred 100 common shares of Holdco and 95% partnership interest in the Partnership to ULC;
r) pursuant to the Trustees’ Resolution, a transfer to ULC would be for the benefit of the appellant and Ms. Preston, to the exclusion of any other beneficiary of the Trust;
Dividends paid to the appellant
s) as part of a 2014 corporate reorganization, Holdco’s shareholder signed a series of special resolutions whereby the stated capital of Holdco’s common shares was increased by $23,900,000;
t) Holdco filed an election to treat a portion of the deemed dividends, $18,500,000, arising from the increase in the stated capital as capital dividends pursuant to subsection 83(2) of the Act (“Capital Dividends”);
u) the balance of the increase in the stated capital, $6,400,000, was deemed to be taxable dividends paid to the Trust pursuant to subsection 84(1) of the Act (“Taxable Dividends”);
v) the Trust reported dividend income of $6,400,000 in its 2014 T3 tax return;
w) the Trust designated the income from the Taxable Dividends to ULC;
Part XIII withholding on dividends paid to the appellant and Ms. Preston
x) the appellant and Ms. Preston did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the Trust; and
y) the appellant and Ms. Preston did not collect and remit Part XIII withholding tax on the Capital Dividends received from the Trust.
Docket: 2020-643(IT)G
BETWEEN:
MONIKA PRESTON,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent,
Applicant’s Motion considered by Written Representations with the Motions in The Preston Family Trust II - 2020-641(IT)G and John Preston - 2020-642(IT)G
Before: The Honourable Justice David E. Spiro
Participants:
Counsel for the Applicant:
Yves St-Cyr and Jacob Yau
Counsel for the Respondent:
Rishma Bhimji
AMENDED ORDER
UPON Motion of the Applicant for an Order striking out subparagraphs 10(h), 10(k), 10(1), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(gg), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), 10(nn), 10(oo), and 10(pp) of the Reply to the Notice of Appeal pursuant to subsection 53(1) of the Tax Court of Canada Rules (General Procedure);
UPON READING the materials filed on behalf of the Respondent in support of this motion and the materials filed on behalf of the Applicant;
THIS COURT ORDERS that the relief sought is granted in part on the following terms:
the Respondent shall file and serve an Amended Reply in accordance with this Amended Order within 30 days;
subparagraphs 10(h), 10(k), 10(l), 10(o), 10(w), 10(x), 10(y), 10(z), 10(aa), 10(gg), 10(hh), 10(ii), 10(jj), 10(kk), 10(ll), 10(mm), and 10(pp) are struck from the assumptions paragraph of the Reply with leave to amend to include them in the Amended Reply as reasons upon which the Respondent intends to rely;
subparagraphs 10(nn) and 10(oo) are struck from the assumptions paragraph of the Reply with leave to amend to read:
Mr. Preston and the appellant did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the appellant;
Mr. Preston and the appellant did not collect and remit Part XIII withholding tax on the Capital Dividends received from the appellant;
schedule “A” to this Amended Order sets out the remaining and amended assumptions of fact to be pleaded by the Respondent in the Amended Reply;
the Applicant may file and serve an Amended Answer within 30 days of the date on which the Amended Reply is served; and
costs shall be in the cause.
This Amended Order is issued in substitution of the Order dated November 10, 2021.
Signed at Toronto, Ontario, this 15th day of November 2021.
“David E. Spiro”
Spiro J.
SCHEDULE “A” TO THE ORDER
2020-643(IT)G
In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
The appellant as beneficiary
a) The Trust was an inter-vivos trust;
b) the Trust was an irrevocable trust;
c) the Trust was settled in Ontario;
d) the Trust was governed by the laws of Ontario;
e) the Trust was settled by Margaret Shorey on September 30, 1993;
f) the Trust was settled in accordance with a Deed of Settlement dated September 30, 1993 (“Trust Deed”);
g) Ms. Shorey settled the Trust by contributing 100 common shares in J.W.S.P. Holdings Inc. (“Holdco”);
h) Mr. Preston, the appellant, and Mr. Preston’s two children have been non-resident persons of Canada since October 1, 1993;
i) at all material times, Mr. Preston and Robert Green were the directors of Holdco;
j) at all material times, the Trust’s trustees were Mr. Green and Gilbert J. Weiss (“Trustees”);
k) the Trustees could pay and apply any part of the net annual income of the capital of the Trust to the Beneficiaries;
The Trust’s capital distribution
l) as of September 25, 2014, the Trust held 100 common shares in Holdco and 95% interest in North American Development LP (the “Partnership”);
m) on September 25, 2014, the Trustees resolved to distribute an equal share of the Trust’s assets to Mr. Preston and the appellant after the resolution of the Trust (the “Trustees’ Resolution”);
n) following the Trustees’ Resolution, Mr. Preston and the appellant assigned their capital interests in the Trust – 100 common shares of Holdco and 95% partnership interest in the Partnership (“Distributed Property”) – to ULC;
o) Mr. Preston and the appellant assigned their capital interests in the Distributed Property pursuant to subsection 85(1) of the Act in exchange for 100 common shares each in ULC (“Assignment”);
p) Mr. Preston and the appellant were the only shareholders of ULC;
q) on September 25, 2014, the Trust transferred 100 common shares of Holdco and 95% partnership interest in the Partnership to ULC;
r) pursuant to the Trustees’ Resolution, a transfer to ULC would be for the benefit of Mr. Preston and the appellant to the exclusion of any other beneficiary of the Trust;
Dividends paid to the appellant
s) as part of a 2014 corporate reorganization, Holdco’s shareholder signed a series of special resolutions whereby the stated capital of Holdco’s common shares was increased by $23,900,000;
t) Holdco filed an election to treat a portion of the deemed dividends, $18,500,000, arising from the increase in the stated capital as capital dividends pursuant to subsection 83(2) of the Act (“Capital Dividends”);
u) the balance of the increase in the stated capital, $6,400,000, was deemed to be taxable dividends paid to the Trust pursuant to subsection 84(1) of the Act (“Taxable Dividends”);
v) the Trust reported dividend income of $6,400,000 in its 2014 T3 tax return;
w) the Trust designated the income from the Taxable Dividends to ULC;
Part XIII withholding on dividends paid to the appellant and Ms. Preston
x) Mr. Preston and the appellant did not collect and remit Part XIII withholding tax on the Taxable Dividends received from the Trust; and
y) Mr. Preston and the appellant did not collect and remit Part XIII withholding tax on the Capital Dividends received from the Trust.
Citation: 2021 TCC 79
Date: 20211110
Docket: 2020-641(IT)G
BETWEEN:
THE PRESTON FAMILY TRUST II,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2020-642(IT)G
AND BETWEEN:
JOHN PRESTON,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2020-643(IT)G
AND BETWEEN:
MONIKA PRESTON,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDERS
Spiro J.
I. Overview
[1] In assessing tax, interest, or penalty under the Income Tax Act (the “Act”), [1] the Minister of National Revenue (the “Minister”) may make findings or assumptions of fact. [2] The Minister may also arrive at conclusions of law or conclusions of mixed fact and law. However, only the former may be pleaded as “assumptions of fact” in the Respondent’s Reply to a Notice of Appeal.
[2] By motion in writing, each of the Applicants ask the Court to strike out certain assumptions pleaded in the Respondent’s Replies to their Notices of Appeal [3] on the basis that they are not “findings or assumptions of fact made by the Minister when making the assessment” within the meaning of paragraph 49(1)(d) of the Tax Court of Canada Rules (General Procedure) (the “Rules”). [4]
[3] I have concluded that the Applicants are entitled to succeed on their motions but not in the way they had hoped. For the most part, their motions have simply resulted in a restructuring of the Replies. Costs will, therefore, be in the cause.
II. The issue in these appeals
[4] The issue in these appeals is whether a particular tax plan works under the Act — a plan designed to avoid the tax consequences of the deemed disposition at fair market value of the capital property of a trust every 21 years under subsection 104(4) of the Act. All parties agree that the only beneficiaries of the trust, at least until the plan was implemented, were non‑residents.
[5] A number of strategies designed to avoid the tax consequences of the 21‑year deemed disposition rule have been discussed in the tax literature. A tax‑deferred roll out of trust assets under subsection 107(2) of the Act to Canadian resident beneficiaries is one strategy, but it does not work under the Act in respect of non‑resident beneficiaries. In 2014, two practitioners offered an overview of the planning options where non-resident beneficiaries are involved:
There are a few planning options available to address the implications of a non‑resident beneficiary. One planning option is to distribute trust property to a Canadian resident corporation, of which the nonresident individual beneficiary is directly or indirectly a shareholder. Subsection 107(2) of the Act is only available if the trust property is “distributed by the trust to a taxpayer who was a beneficiary under the trust”. Accordingly, for this option to be available to the trustees, the class of beneficiaries to which capital can be distributed must include corporations that are owned or controlled by one or more of the individual beneficiaries that are also within the class of capital beneficiaries (often respectively referred to as “Corporate Beneficiaries” and “Individual Beneficiaries”).
A benefit of distributing trust assets to a Corporate Beneficiary is that control over the assets can continue to be retained while deferring the income tax on the accrued gains on the trust property until the Corporate Beneficiary sells the property or the shareholders dispose of their shares, on a deemed or real basis. For this reason, the use of a Corporate Beneficiary may have appeal even when dealing with a distribution to an Individual Beneficiary who is a Canadian resident.
If the terms of the trust do not expressly include the concept of Corporate Beneficiaries within the class of capital beneficiaries, an issue arises as to whether subsection 107(2) will be satisfied. The trustees will need to consider whether the language of the dispositive provisions allow for a distribution to a corporation that is owned or controlled by an Individual Beneficiary. An option, suggested by Tim Youdan, is to consider whether the trust contains general language within the capital distribution provisions, such as a power to distribute “to or for the benefit of” an Individual Beneficiary. To reach a conclusion that a corporation is itself a beneficiary on the basis that the distribution is “for the benefit” of the individual beneficiary, the trustees would need to rely upon the extended meaning of “beneficially interested” provided in subsection 248(25), which applies to the definition of “beneficiary” in subsection 108(1). [5]
[6] The Appellants in these appeals are a trust resident in Canada (the “Preston Family Trust”) and two non-resident beneficiaries of that trust, John and Monika Preston. [6] Just before the 21st anniversary of the Preston Family Trust, John and Monika Preston became sole shareholders of an Alberta ULC (“ULC”) to which they assigned their capital interests in the Preston Family Trust and to which the Preston Family Trust transferred all of its capital property, consisting of shares of a holding company and a partnership interest.
[7] The Minister’s theory of assessment is that the ULC never became a beneficiary of the Preston Family Trust and that John and Monika Preston continued to be beneficiaries of that trust even after the assignment of their capital interests in that trust to the ULC. Under the Minister’s theory, the property of the Preston Family Trust was effectively distributed to John and Monika Preston and not to the ULC.
[8] The Minister assessed about $12 million in tax to the Preston Family Trust under Part I and Part XII.2 of the Act on the theory that it had realized gains from the disposition, deemed to have been made at fair market value, of its capital property to non‑resident beneficiaries in 2014.
[9] The Minister also assessed each of John and Monika Preston under Part XIII of the Act in respect of certain dividends (capital dividends and taxable dividends) deemed to have been paid by the holding company in 2014. Each of their Part XIII assessments amounted to about $2 million in tax.
III. The position of the Applicants on the motions
[10] The Applicants’ motions are based on subsection 53(1) of the Rules which provides:
53(1) The Court may, on its own initiative or on application by a party, 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 appeal;
(b) is scandalous, frivolous or vexatious;
(c) is an abuse of the process of the Court; or
(d) discloses no reasonable grounds for appeal or opposing the appeal.
[11] The Applicants say that the impugned subparagraphs reflect conclusions of law or conclusions of mixed fact and law and not “assumptions of fact made by the Minister when making the assessment” as required by paragraph 49(1)(d) of the Rules. They should, therefore, be struck out presumably on the basis of paragraph 53(1)(a) of the Rules.
IV. The position of the Respondent on the motions
[12] The Respondent contends that the impugned subparagraphs (with the exceptions described in Part H. below) reflect “assumptions of fact made by the Minister when making the assessment” within the meaning of paragraph 49(1)(d) of the Rules and are properly situated within the “assumptions” paragraph of each Reply.
V. Assumptions of fact
[13] Subsection 49(1) of the Rules sets out what “every reply shall state”:
(a) the facts [pleaded in the Notice of Appeal] that are admitted,
(b) the facts [pleaded in the Notice of Appeal] that are denied,
(c) the facts [pleaded in the Notice of Appeal] of which the respondent has no knowledge and puts in issue,
(d) the findings or assumptions of fact made by the Minister when making the assessment,
(e) any other material fact,
(f) the issues to be decided,
(g) the statutory provisions relied on,
(h) the reasons the respondent intends to rely on, and
(i) the relief sought. [7]
[14] As the architecture of subsection 49(1) of the Rules makes clear, a Reply has two parts. First, paragraphs 49(1)(a) to 49(1)(e) of the Rules require the Respondent to set out the facts. This part of the Reply includes the facts the Respondent admits, the facts the Respondent denies, and the facts of which the Respondent has no knowledge and puts in issue. It includes assumptions of fact made by the Minister in assessing and any other material facts the Respondent pleads in support of the assessment. After the Respondent has set out all of the facts, the Respondent states the issues to be decided (paragraph 49(1)(f) of the Rules).
[15] Second, paragraphs 49(1)(g) and 49(1)(h) of the Rules require the Respondent to relate the facts to the law. This part of the Reply sets out the statutory provisions and the reasons upon which the Respondent intends to rely. In this part of the Reply, the Respondent has an opportunity to describe how the law applies to the facts pleaded in the first part of the Reply. The Respondent concludes the Reply by stating the relief sought (paragraph 49(1)(i) of the Rules).
[16] It would make little sense for a Reply to include (a) a recitation of facts and law under the “assumptions” called for by paragraph 49(1)(d) of the Rules and (b) a recitation of facts and law under the “reasons” called for by paragraph 49(1)(h) of the Rules. As Chief Justice Rip put it in Strother v The Queen: [8]
[19] The form of the Reply set out in Rule 49(1) contemplates the avoidance of commingling facts with law. Facts are required to be plead first through paragraphs 49(1)(a)(b)(c) and (e). Rule 49(1)(d) restricts the respondent to pleading findings of fact or assumptions of fact made by the Minister in assessing; there are material facts only. Rules 49(1)(f) to (i) inclusive give the respondent the right to plead matters described in these Rules. This is similar to the rules of practice in common law provinces, including Ontario and British Columbia as well as the Federal Court which allow the pleading of law if the factual underpinnings have been pled.
[20] The respondent argues that Rule 49 merely sets out what must be included and does not establish a specific structure. In other words, so long as the requirements of Rule 49 are met, it is possible to intersperse conclusions of law with the facts throughout. To accept the respondent’s argument would lead to incoherent, repetitious pleadings as difficult and frustrating as the ones faced with under this motion.
[17] Taxpayers have the onus of disproving, on a balance of probabilities, assumptions of fact — and only assumptions of fact — made by the Minister in assessing. That is why paragraph 49(1)(d) of the Rules requires the Respondent to state in the first part of the Reply “the findings or assumptions of fact made by the Minister when making the assessment”. In its 2003 decision in Anchor Pointe Energy Ltd. v R, [9] the Federal Court of Appeal explained:
[23] The pleading of assumptions gives the Crown the powerful tool of shifting the onus to the taxpayer to demolish the Minister's assumptions. The facts pleaded as assumptions must be precise and accurate so that the taxpayer knows exactly the case it has to meet. [10]
[18] However, taxpayers have no onus to go further and disprove the Minister’s conclusions of law or the legal elements of the Minister’s conclusions of mixed fact and law. As President Thorson of the Exchequer Court stated in Goldman v MNR: [11]
. . .. When the taxpayer challenges the correctness in fact of the assessment the onus of proof that the assessment is erroneous in fact lies on him. But when the validity of the assessment is attacked in point of law it is not, strictly speaking, correct to say that the onus of establishing its invalidity lies on the appellant. In such a case there is really no onus on either party, for once the facts have been established, the responsibility for determining the validity of the assessment as a matter of law is solely that of the court. It must decide the question according to the applicable law regardless of the submissions of the parties. [12]
[19] In Anchor Pointe, the Federal Court of Appeal made it clear that conclusions of law may not be pleaded by the Crown in the guise of assumptions of fact:
[25] I agree that legal statements or conclusions have no place in the recitation of the Minister's factual assumptions. The implication is that the taxpayer has the onus of demolishing the legal statement or conclusion and, of course, that is not correct. The legal test to be applied is not subject to proof by the parties as if it was a fact. The parties are to make their arguments as to the legal test, but it is the Court that has the ultimate obligation of ruling on questions of law. [13]
[20] For the same reason, the Respondent may not plead a conclusion of mixed fact and law as an assumption of fact. It is helpful to review the general concept of a “question of mixed fact and law” as described by Justice Iacobucci of the Supreme Court of Canada:
… Briefly stated, questions of law are questions about what the correct legal test is; questions of fact are questions about what actually took place between the parties; and questions of mixed law and fact are questions about whether the facts satisfy the legal tests. A simple example will illustrate these concepts. In the law of tort, the question what "negligence" means is a question of law. The question whether the defendant did this or that is a question of fact. And, once it has been decided that the applicable standard is one of negligence, the question whether the defendant satisfied the appropriate standard of care is a question of mixed law and fact. I recognize, however, that the distinction between law on the one hand and mixed law and fact on the other is difficult. On occasion, what appears to be mixed law and fact turns out to be law, or vice versa. [14]
[21] The Federal Court of Appeal in Anchor Pointe explained the meaning of a “conclusion of mixed fact and law” using the following example:
[8] In reassessing, the Minister assumed the following facts:
...
(z) the seismic data purchased by API, APII, APIII, APIV and APV does not qualify as a Canadian Exploration Expense ("CEE") within the meaning of s. 66.1(6)(a) of the Income Tax Act (the "Act").
...
[26] . . . the assumption in paragraph 10(z) can be more correctly described as a conclusion of mixed fact and law. A conclusion that seismic data purchased does not qualify as CEE within the meaning of paragraph 66.1(6)(a) involves the application of the law to the facts. Paragraph 66.1(6)(a) sets out the test to be met for a CEE deduction. Whether the purchase of the seismic data in this case meets that test involves determining whether or not the facts meet the test. The Minister may assume the factual components of a conclusion of mixed fact and law. However, if he wishes to do so, he should extricate the factual components that are being assumed so that the taxpayer is told exactly what factual assumptions it must demolish in order to succeed. It is unsatisfactory that the assumed facts be buried in the conclusion of mixed fact and law. [15]
[22] In 2013, the same principle was applied by a different panel of the Federal Court of Appeal in Canadian Imperial Bank of Commerce v Canada: [16]
[92] It is now well established that the statement of factual assumptions must contain no statements of law (Anchor Pointe (2003) at paragraph 25), and where the assessment under appeal is based on a conclusion of mixed fact and law, the factual components must be extricated and stated as factual assumptions (Anchor Pointe (2003) at paragraph 26). The Crown did not observe those principles in many parts of its statement of assumptions, and the judge made no error in requiring the assumptions to be revised accordingly. [17]
[23] Finally, it is not for the Court to extricate the facts buried in a conclusion of mixed fact and law — it is incumbent on the Respondent to do so in the Reply. [18]
VI. The impugned subparagraphs
[24] I will list each impugned subparagraph as pleaded in the Reply to the Preston Family Trust’s Notice of Appeal. My reasoning in respect of the Reply to the Preston Family Trust’s Notice of Appeal applies equally to the other two Replies.
A. John and Monika Preston continued as beneficiaries of the Preston Family Trust even after they assigned their capital interests in the Preston Family Trust to the ULC and the ULC never became a beneficiary of the Preston Family Trust
10. In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
…
(h) at all material times, the appellant’s beneficiaries were Mr. Preston, Mr. Preston’s spouse (Ms. Preston), and Mr. Preston’s issue (collectively, “Beneficiaries”). [19]
…
(w) after the Assignment, Mr. and Ms. Preston remained the income and capital beneficiaries of the appellant. [20]
…
(aa) ULC was not a beneficiary of the appellant. [21]
…
(hh) ULC was not a beneficiary of the appellant. [22]
[25] The Minister’s theory of assessment, and the Respondent’s theory of the case, is that John and Monika Preston continued as beneficiaries of the Preston Family Trust even after having assigned their capital interests in that trust to the ULC. On the same theory, the ULC never became a beneficiary of the Preston Family Trust. Each aspect of this theory reflects a conclusion of mixed fact and law. Indeed, the Respondent says that the “submission” that the ULC was not a beneficiary is “both a factual assumption and a legal argument”. [23]
[26] Pleading conclusions of mixed fact and law as “assumptions of fact made by the Minister when making the assessment” is tantamount to the Respondent telling the Appellants: “The onus is on you to disprove the Minister’s theory of the case including its factual and legal elements.” As we have already seen, this constitutes improper pleading — the taxpayer has no onus to disprove any of the legal elements of the Minister’s theory of the case.
[27] These subparagraphs will be struck from the assumptions paragraph but may be included in the Amended Reply as reasons upon which the Respondent intends to rely under paragraph 49(1)(h) of the Rules.
B. Who could or could not have been beneficiaries of the Preston Family Trust
10. In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
…
(k) the appellant’s beneficiaries could only be natural persons. [24]
(l) the appellant’s beneficiaries could not be corporations. [25]
[28] This is another way of saying that the law restricts potential beneficiaries of the Preston Family Trust to a certain group. This is a conclusion of mixed fact and law. Limiting the application of this legal conclusion to the Preston Family Trust (“the appellant’s beneficiaries”) does not make it an assumption of fact.
[29] These subparagraphs will be struck from the assumptions paragraph but may be included in the Amended Reply as reasons upon which the Respondent intends to rely.
C. The extent of trustee discretion
10. In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
…
(o) the Trustees did not have discretion to vary the terms of the Preston Trust Deed or to add new beneficiaries of the appellant. [26]
[30] Whether the trustees of the Preston Family Trust had the discretion to vary the terms of that trust or to add new beneficiaries to that trust is a conclusion of mixed fact and law.
[31] This subparagraph will be struck from the assumptions paragraph but may be included in the Amended Reply as a reason upon which the Respondent intends to rely.
D. Use of the phrase “received . . . for the benefit of”
10. In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
…
(x) ULC received the Distributed Property for the benefit of Mr. and Ms. Preston. [27]
…
(ii) ULC received the Taxable Dividends for the benefit of Mr. and Ms. Preston. [28]
…
(ll) ULC received the Capital Dividends for the benefit of Mr. and Ms. Preston. [29]
[32] In Canadian tax law, the “beneficial owner” of income is subject to tax on that income. For example, if a creditor instructs a debtor to direct payments of interest to a third party, that does not make those interest payments any less the income of the creditor for purposes of the Act. [30]
[33] These subparagraphs reflect the Minister’s conclusion that John and Monika Preston, and not the ULC, were the “beneficial owners” of the property distributed by the Preston Family Trust. That is a conclusion of mixed fact and law. In this context, it is worth noting that the Respondent had argued in Canada v Prévost Car Inc. [31] that this Court made a legal error by giving the treaty term “beneficial owner” the meaning it has in common law while ignoring its meaning in civil law and international law. [32]
[34] These subparagraphs will be struck from the assumptions paragraph of the Reply but may be included in the Amended Reply as reasons upon which the Respondent intends to rely.
E. Use of certain “deeming” provisions of the Act
10. In so reassessing the appellant, the Minister made, inter alia, the following assumptions of fact:
…
(y) the appellant was deemed to have distributed the Distributed Property to Mr. and Ms. Preston at its fair market value (“FMV”). [33]
(z) Mr. and Ms. Preston were deemed to have received the Distributed Property from the appellant at its FMV. [34]
…
(jj) the appellant was deemed to have distributed the Taxable Dividends to Mr. and Ms. Preston. [35]
(kk) Mr. and Ms. Preston were deemed to have received the Taxable Dividends from the appellant. [36]
…
(mm) the appellant was deemed to have distributed the Capital Dividends to Mr. and Ms. Preston. [37]
(nn) Mr. and Ms. Preston were deemed to have received the Capital Dividends from the appellant. [38]
[35] As noted by Ruth Sullivan in Sullivan on the Construction of Statutes, 6th ed (Markham: LexisNexis, 2014) a deeming provision creates a “legal fiction”:
§4.106 Use of “deem” (or “consider” or “is”) to create legal fictions.
The most important use of “deems” is to create a legal fiction: a given fact ‘x’ is declared to be ‘y’ or is to be dealt with as if it were ‘y’ for some or all purposes. A person is deemed to be single even though they may be married; a notice is deemed to have arrived on a certain day regardless of when it actually arrived; a provision is deemed to have c