Hillcore Financial Corporation v. The King

Hillcore Financial Corporation v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-05-18
Neutral citation
2023 TCC 71
File numbers
2022-103(IT)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Income Tax Act
Decision Content
Docket: 2022-103(IT)G
BETWEEN:
HILLCORE FINANCIAL CORPORATION,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Motion heard on November 25, 2022 at Montréal, Québec
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
Guy Du Pont
Marie-France Dompierre
Luca Teolis
Counsel for the Respondent:
Charles Camirand
Yara Barrak
Emilie Raby-Roussel
Christopher Kitchen
ORDER
UPON reviewing the Notice of Motion dated August 14, 2022, filed by the Appellant pursuant to sections 49 and 53 of the Tax Court of Canada Rules (General Procedure) (the “Rules”), and other documentary material (the “Motion”), seeking an order:
Striking out the Respondent’s Reply to the Notice of Appeal, filed on June 30, 2022 (the “Reply”), without leave to amend and allowing the appeal with costs;
In the alternative, striking out the Reply without leave to amend and ordering that the allegations of facts contained in the Appellant’s Notice of Appeal are presumed to be true for the purposes of the appeal, pursuant to subsection 44(2) of the Rules;
In the further alternative, striking out the Reply and directing the Respondent to file a fresh Reply within 30 days of the date of the order granting the Motion and extending by a further 30 days the time within which the Appellant may file an Answer, if it deems advisable;
Awarding the Appellant the costs of this Motion in any event of the cause, on such a scale as may be deemed appropriate; and
Granting any such further and other relief as may be deemed just.
AND UPON reviewing the affidavit of Stéfany Lemieux sworn November 22, 2022 filed by the Respondent;
AND UPON reviewing the written submissions of the parties and hearing the submissions of the parties;
THIS COURT ORDERS THAT:
In accordance with the attached Reasons for Order, the Motion is granted as follows:
i)the Reply is struck in its entirety;
ii)On or before June 20, 2023, the Respondent shall file and serve a fresh reply to the Notice of Appeal;
iii)On or before July 24, 2023, the Appellant may file an Answer, if it deems advisable, and in such event, the Appellant shall serve the Answer on or before that date; and
iv)Costs for this Motion shall be awarded to the Appellant, in any event of the cause. The parties shall have 20 days from the date of this Order to reach an agreement on costs for this Motion and to so advise the Court, failing which the Appellant shall have a further 20 days to serve and file written submissions on costs and the Respondent shall have a further 20 days to serve and file a written response. Any such submissions shall not exceed ten (10) pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the applicable time limits, costs for this Motion shall be awarded to the Appellant in accordance with the Tariff.
Signed at Ottawa, Canada, this 18th day of May 2023.
“Dominique Lafleur”
Lafleur J.
Citation: 2023 TCC 71
Date: 20230518
Docket: 2022-103(IT)G
BETWEEN:
HILLCORE FINANCIAL CORPORATION,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR ORDER
Lafleur J.
I. THE MOTION
[1] A Notice of Motion dated August 14, 2022, was filed by the Appellant pursuant to sections 49 and 53 of the Tax Court of Canada Rules (General Procedure) (the “Rules”), and other documentary material (the “Motion”), seeking an order:
Striking out the Respondent’s Reply to the Notice of Appeal, filed on June 30, 2022 (the “Reply”), without leave to amend and allowing the appeal with costs;
In the alternative, striking out the Reply without leave to amend and ordering that the allegations of facts contained in the Appellant’s Notice of Appeal are presumed to be true for the purposes of the appeal, pursuant to subsection 44(2) of the Rules;
In the further alternative, striking out the Reply and directing the Respondent to file a fresh Reply within 30 days of the date of the order granting the Motion and extending by a further 30 days the time within which the Appellant may file an Answer, if it deems advisable;
Awarding the Appellant the costs of this Motion in any event of the cause, on such a scale as may be deemed appropriate; and
Granting any such further and other relief as may be deemed just.
[2] The Respondent filed the affidavit of Stéfany Lemieux sworn November 22, 2022.
[3] At the hearing, the Respondent made some concessions, which will be discussed below.
II. CONCLUSION
[4] In accordance with the following reasons, the Motion is granted as follows:
The Reply is struck in its entirety;
On or before June 20, 2023, the Respondent shall file and serve a Fresh Reply to the Notice of Appeal;
On or before July 24, 2023, the Appellant may file an Answer, if it deems advisable, and in such event, the Appellant shall serve the Answer on or before that date; and
Costs for this Motion shall be awarded to the Appellant, in any event of the cause. The parties shall have 20 days from the date of this Order to reach an agreement on costs for this Motion and to so advise the Court, failing which the Appellant shall have a further 20 days to serve and file written submissions on costs and the Respondent shall have a further 20 days to serve and file a written response. Any such submissions shall not exceed ten (10) pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the applicable time limits, costs for this Motion shall be awarded to the Appellant in accordance with the Tariff.
III. CONTEXT
[5] The Appellant appeals from reassessments made by the Minister of National Revenue (the “Minister”) under the Income Tax Act (R.S.C., 1985, c.-1 (5th Supp.), (the “Act”)) with respect to its taxation years which ended on December 31, 2012, December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016, and December 31, 2017.
[6] By notices dated June 20, 2020, the Minister reassessed the Appellant to add unreported income totalling $17,232,046 for the taxation year ended December 31, 2012, $15,131,666 for the taxation year ended December 31, 2013, $27,778,318 for the taxation year ended December 31, 2014, and $28,997,389 for the taxation year ended December 31, 2015, and assessed penalties under subsection 163(2) of the Act for these years. The Minister also disallowed additions to the Appellant’s cumulative eligible capital account and deductions claimed by the Appellant with respect to capital cost allowance and interest expenses. The Minister, consequently, reduced non-capital loss balance and denied the Appellant’s requests for loss carry forward. Further, another issue raised by the reassessments is whether the Minister was allowed to reassess the Appellant outside the normal reassessment period for the taxation years ended December 31, 2012, December 31, 2013, December 31, 2014 and December 31, 2015.
[7] The Reply contains an overview of the matter and reads as follows (pp.1-2):
In its 2012, 2013, 2014 and 2015 taxation years the appellant sold and implemented a tax plan that enabled its customers to sell assets without paying tax on the proceeds of disposition received from the sales. The tax plan involved a series of transactions, ending with the allocation of purported losses from a sham partnership to offset the gains received from the asset sale. The appellant received a fee from its customers for the services it provided, which the appellant did not report as income. Instead of reporting the fees as income, the appellant purported to borrow money from certain corporations that it used to sell its customers’ assets when implementing the tax plans. The amount of the purported loan was equal to the appellant’s fee for selling and implementing the tax plan. In connection with the purported loan, the appellant issued purported promissory notes in favour of the lender. These promissory notes were shams that were created to mislead the Minister of National Revenue into believing that the appellant had received loan proceeds when in reality, the amounts were the appellant’s unreported income earned from selling and implementing the tax plans.
Additionally, in the 2012 taxation year, the appellant purchased assets from 4092325 Investment Ltd. Specifically, the appellant purchased 4092325 Investment Ltd.’s unbilled revenues as work-in-progress for significantly less than fair market value, and did not include those revenues in computing its income for the 2012 taxation year. The appellant also purchased 4092325 Investment Ltd.’s other business assets. The appellant purported to pay for these assets by issuing two purported promissory notes. These notes were shams created to fabricate tax attributes, specifically, inflated capital cost allowance and cumulative eligible capital expenditures. The appellant deducted interest purportedly payable on the sham notes.
As a result of its grossly under-reported income and the deductions for interest, inflated capital cost allowance and eligible capital expenditures, the appellant claimed substantial non-capital losses in the 2012, 2013, 2014 and 2015 taxation years, to which it was not entitled. At all material times, the appellant’s non-capital loss balance was nil, and accordingly the appellant was not entitled to the loss carry-forwards it claimed in the 2016 and 2017 taxation years.
[8] According to the Appellant, the promissory notes it issued created a valid creditor-debtor relationship. It then follows that the principal amount of these promissory notes should not be included in the computation of the income of the Appellant. Further, the Appellant is entitled to claim non-capital loss carry forward, interest expenses deduction, capital cost allowance and addition to its cumulative eligible capital account. Finally, penalties assessed under subsection 163(2) of the Act should be vacated.
[9] This appeal is at an early stage. There has not yet been any exchange of lists of documents or discovery examinations.
IV. POSITIONS OF THE PARTIES
[10] According to the Appellant, the Reply has the following defects: law disguised as assumptions of facts, improper inclusion of evidence, immaterial facts, disclosure of confidential information and is vague, repetitive, ambiguous and misleading. The numerous deficiencies undermine the parties’ ability to proceed to a hearing of the appeal in a timely and orderly fashion. The Reply is also scandalous, frivolous and vexatious and constitutes an abuse of the Court’s process prohibited by section 53 of the Rules. According to the Appellant, due to the numerous defects of the Reply, the only appropriate remedy and sanction for the judicial time and Appellant’s resources that are lost over this remarkably defective pleading is for this Court to strike the Reply in its entirety, without leave to amend, and to allow the Appeal.
[11] According to the Respondent, while the Reply is partially defective, the defects are not as numerous as contended by the Appellant. The Reply can be cured by amendments, and thus, the Reply should not be struck.
V. ANALYSIS
5.1 Applicable principles
A. Rules of pleadings
[12] The purpose of pleadings is “to define the issues in dispute between the parties for the purposes of production, discovery and trial” (see Zelinski v. R (2002) DTC 1204, [2002] 1 CTC 2422, at para 4 (aff’d 2002 FCA 330) [Zelinski]; see also Beima v. The Queen, 2016 FCA 205, at para 17 and Husky Oil Operations Limited v. The Queen, 2019 TCC 136 [Husky Oil], at para 11).
[13] Pleadings should contain a concise statement of the material facts a party relies on.
[14] As explained by this Court in Zelinski (paras 4 – 5):
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.
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.
[Emphasis added.]
[15] Pleadings should be concise. Repetition should be avoided, as pleadings should only contain material facts relied upon for a claim or defense, which provide an overview of the case (Strother v. The Queen, 2011 TCC 251 [Strother], at paras 39-40).
[16] It is also important that pleadings be balanced and that there must be a sense of fairness in the pleadings (Canadian Imperial Bank of Commerce v. The Queen, 2011 TCC 568 [CIBC, TCC], at para 38).
[17] Subsection 49(1) of the Rules provides the requirements as to what a reply should state and reads as follows:
49(1) Subject to subsection (1.1), every reply shall state
(a) the facts that are admitted,
(b) the facts that are denied,
(c) the facts 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.
49 (1) Sous réserve du paragraphe (1.1), la réponse indique :
a) les faits admis;
b) les faits niés;
c) les faits que l’intimée ne connaît pas et qu’elle n’admet pas;
d) les conclusions ou les hypothèses de fait sur lesquelles le ministre s’est fondé en établissant sa cotisation;
e) tout autre fait pertinent;
f) les points en litige;
g) les dispositions législatives invoquées;
h) les moyens sur lesquels l’intimée entend se fonder;
i) les conclusions recherchées.
[18] The facts referred to in paragraphs 49(1)(a), (b) and (c) of the Rules are the facts set out in a particular notice of appeal (see Husky Oil, at para 8). When the respondent admits or denies a fact (paragraphs 49(1)(a) and (b) of the Rules), it should not add comments or other conclusion of law (Strother, at para 16 and Xu v. R, 2006 TCC 695 [Xu], at para 5).
[19] More recently, the Court reviewed these principles (see Husky Oil, at paras 20-21):
-the respondent must admit only those facts alleged by the appellant;
-the admission must stand alone without the respondent’s own allegations relating to the subject;
-it is inappropriate in a reply to purport to admit certain facts when those fact were not alleged in the notice of appeal; and
-it is not permissible in the reply, when purporting to admit the particular fact, to interpret an imprecise word by substituting some other word for it.
[20] Once the respondent has denied or admitted a fact, or has stated that it had no knowledge of a fact, there are only two more statements of facts to be pleaded by the respondent: the assumptions of fact made by the Minister when making the assessment (para 49(1)(d) of the Rules) and any other material facts (para 49(1)(e) of the Rules).
[21] As stated by this Court in Strother:
[15]… All these statements of fact are to be statements of material fact, not immaterial facts, not statements or principles of law and not statements mixing fact with law. Subparagraphs f), g) and h) of Rule 49 accord the respondent opportunity to describe the issues, state the statutory provisions in play and submit the reasons she is relying on in this appeal.
B. Striking of a pleading
[22] The Rules specifically provide at Section 53 for the striking out of pleadings. The Court may strike out or expunge all or part of a pleading on the ground that the pleading may prejudice or delay the fair hearing of the appeal, is scandalous, frivolous or vexatious, is an abuse of the process of the Court or discloses no reasonable grounds for appeal. Section 53 of the Rules sets out a high standard for striking out pleadings or part of pleadings. It reads as follows:
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.
53 (1) La Cour peut, de son propre chef ou à la demande d’une partie, radier un acte de procédure ou tout autre document ou en supprimer des passages, en tout ou en partie, avec ou sans autorisation de le modifier parce que l’acte ou le document:
(a) peut compromettre ou retarder l’instruction équitable de l’appel;
(b) est scandaleux, frivole ou vexatoire;
(c) constitue un recours abusif à la Cour;
(d) ne révèle aucun moyen raisonnable d’appel ou de contestation de l’appel.
[23] In Sentinel Hill Productions (1999) Corporation v. The Queen, 2007 TCC 742, [Sentinel Hill], the Court propounded the well-established principles to be applied in a motion to strike under section 53 of the Rules:
[4] … There are many cases in which the matter has been considered both in this court and the Federal Court of Appeal. It is not necessary to quote from them all as the principles are well established.
(a) The facts as alleged in the impugned pleading must be taken as true subject to the limitations stated in Operation Dismantle Inc. v. Canada, [1985] 1 S.C.R. 441 at 455. It is not open to a party attacking a pleading under Rule 53 to challenge assertions of fact.
(b) To strike out a pleading or part of a pleading under Rule 53 it must be plain and obvious that the position has no hope of succeeding. The test is a stringent one and the power to strike out a pleading must be exercised with great care.
(c) A motions judge should avoid usurping the function of the trial judge in making determinations of fact or relevancy. Such matters should be left to the judge who hears the evidence.
[24] The test to be applied for the striking out of pleadings or parts of pleadings is whether it is plain and obvious that it discloses no reasonable claim (Main Rehabilitation Co. v. Canada, 2004 FCA 403, at para 3).
[25] In the context of a motion to strike a reply in an income tax appeal, the motion will be granted only if it is plain and obvious, assuming the facts as pleaded in the reply are true, that the reply fails to state a reasonable basis for concluding that the reassessment under appeal is correct (Canadian Imperial Bank of Commerce v. R, 2013 FCA 122 [CIBC, FCA], at para 7).
[26] More recently, the Federal Court of Appeal in Ereiser v. Canada, 2013 FCA 20, reviewed those principles:
[17] There is no dispute as to the test for striking pleadings. It was recently restated by Chief Justice McLachlin, writing for the Supreme Court of Canada in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45 at paragraph 17:
... A claim will only be struck if it is plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action: Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, at para. 15; Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959, at p. 980. Another way of putting the test is that the claim has no reasonable prospect of success. Where a reasonable prospect of success exists, the matter should be allowed to proceed to trial: see, generally, Syl Apps Secure Treatment Centre v. B.D., 2007 SCC 38, [2007] 3 S.C.R. 83; Odhavji Estate; Hunt; Attorney General of Canada v. Inuit Tapirisat of Canada, [1980] 2 S.C.R. 735.
…
[27] A pleading may prejudice or delay the fair hearing of the appeal, if it is plain and obvious that the alleged pleading is irrelevant to the issues to be resolved.
[28] It has also been held that pleadings which state irrelevant and improper facts or are so deficient in material facts that they do not raise a ground of appeal can be struck on the ground that they would prejudice the fair hearing of the appeal (Gauthier v. R, 2006 TCC 290). As stated in Heron v. The Queen, 2017 TCC 71 (aff’d in 2017 FCA 229):
[12] When a party states that the allegation is not relevant, the “irrelevancy must be quite clear and, so to speak, apparent at the first glance. It is not enough that on considerable argument it may appear that they do not afford a defence.”
[29] A pleading will be considered frivolous or vexatious when “it was so deficient that the defendant could not know how to answer the claim. As well, the Court would be unable to regulate or manage the proceeding” (Simon v. Canada, 2011 FCA 6 [Simon], at para 9). It should be reserved for the plainest and most egregiously senseless assertions (Sentinel Hill, at para 11).
[30] Pleadings may also be struck if “…they were inserted for colour, or simply as they are inflammatory” (Mudge v. R, 2020 TCC 77 [Mudge], at para 20). Furthermore, a pleading will be considered frivolous if, assuming the facts to be true, it is plain and obvious that it cannot succeed (Canada v. Roitman, 2006 FCA 266, at para 15).
[31] A pleading may be considered an abuse of the Court’s process when it is unfair to a party or would bring the administration of justice into disrepute (Toronto City v. CUPE Local 79, 2003 SCC 63, at paras 35-45). As stated by this Court in Marine Atlantic Inc. v. R, 2016 TCC 46:
[47] In order for a party’s conduct to amount to an abuse of process, the party must have deliberately failed to cooperate or comply with the rules or court orders causing delay and prejudice. In Yacyshyn v. Canada, [1999] 1 CTC 139 (FCA), the Federal Court of Appeal affirmed this Court’s order to strike pleadings is based on the taxpayer’s conduct, which in that case had caused “delay and prejudice” amounting to an abuse of process.
[32] However, as stated by this Court in Promex Group Inc. v. R, [1998] 3 C.T.C. 2128, 98 DTC 1588, it is not an abuse of the Court’s process to fully disclose the basis of an assessment, regardless of the source of the information on which it is based, but it could well be an abuse of the process for the Minister to withhold facts central to the making of the assessment, or to conjure up assumptions that were not in fact made (at para 32).
C. Remedy
[33] Improper pleadings constitute an irregularity within the meaning of Section 7 of the Rules (reproduced in Appendix A to these Reasons) and do not render a proceeding a nullity.
[34] Where the deficiencies in a pleading are extensive, lack specificity or are vague, the proper remedy is to set the pleadings aside with leave to file a new pleading that meets the requirements set out in the Rules. As stated by this Court, it is “not about striking out poor pleadings but rather about pleadings that will materially harm the litigation process” (see 935475 Ontario Ltd v. R, 2009 TCC 196, at para 34).
[35] The Court may grant all necessary amendment or relief to secure the just determination of the real matters in dispute. To strike a pleading without leave to amend, the defect must be incurable by amendment (see Simon, at para 8). Furthermore, the Federal Court determined that for a claim to be struck without leave to amend, there must not be a “scintilla” of a legitimate cause for action (Riabko v. R, [1999] FCJ No 1289, 173 FTR 239 [Riabko], at para 8).
[36] When an appellant makes a motion to strike a reply, it has the burden of showing that “it would be impossible for the Respondent to amend to support the reassessment” (see Mont-Bruno C. C. Inc. v. R, 2018 TCC 105, at para 29).
[37] This burden is a heavy one. As stated by this Court in Zelinski, “[a]mendments to pleadings should generally be permitted, so long as that can be done without causing prejudice to the opposing party that cannot be compensated by an award of costs or other terms, 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” (at para 4).
[38] Upon examining the motion, I will now apply these principles.
5.2 Overreaching denials and admissions
A. Positions of the parties
[39] According to the Appellant, the Respondent uses “overreaching denials” and “overreaching admissions” in the Reply numerous times, namely at paragraphs 4, 6, 8, 9, 10, 11 and 12 and subparagraph 7.3.
[40] Paragraphs containing the alleged overreaching denials or admissions are in the part of the Reply that shall state the facts that are admitted (para 49(1)(a) of the Rules), the facts that are denied (para 49(1)(b) of the Rules) and the facts of which the Respondent has not knowledge of and puts them at issue (para 49(1)(c) of the Rules).
[41] At the hearing, the Respondent made some concessions as described in Appendix A to the Respondent’s written representations dated November 24, 2022 (Appendix A is attached to these reasons as Appendix B).
B. Analysis
[42] As stated by this Court in Xu “[a] defendant in civil litigation is permitted to admit only those facts alleged by a plaintiff. The admission should be a “stand alone” event, not clouded by the defendant’s own allegations in the subject area of the admission” (at para 5).
[43] Using overreaching admissions or denials is poor and improper pleadings (Strother, at para 16), and as such, the Court should strike these parts of the Reply and allow the Respondent to amend the Reply.
Paragraphs 4, 6, and 11 and subparagraph 7.3 of the Reply
[44] The Respondent concedes overreaching denials and admissions at paragraphs 4, 6 and 11 and subparagraph 7.3 of the Reply. Amendments to paragraphs 4, 6 and 11 and subparagraph 7.3 of the Reply as proposed by the Respondent shall be made to the Reply.
Paragraph 4 of the Reply [45] The Respondent concedes that paragraph 4 of the Reply constitutes an overreaching denial and proposes to amend it by deleting the second sentence containing the overreaching denial, deleting the reference to paragraph 24 of the Notice of Appeal and adding the following at the end of the first sentence: “but denies that the loans exists”.
[46] Furthermore, the Respondent proposes to add subparagraph 8.1 in the Reply to deal with paragraph 24 of the Notice of Appeal, which will then read as follows:
With respect to paragraph 24 of the Notice of Appeal, the Attorney General of Canada admits only that documents titled promissory notes were created to evidence some purported loans, but denies that the loans existed. The Attorney General of Canada has no knowledge of whether a promissory note was created for every purported loan to the Appellant and puts it in issue.
Paragraph 6 of the Reply [47] The Respondent concedes that paragraph 6 of the Reply constitutes an overreaching denial and proposes to amend paragraph 6 by deleting the second sentence containing the overreaching denial and adding the following at the end of the first sentence: “but denies that $19,768,000 was the agreed purchase price for the acquisition” and by changing the words “purported agreed” by the word “stated”.
Subparagraph 7.3 of the Reply
[48] The Respondent concedes that subparagraph 7.3 of the Reply constitutes an overreaching denial and proposes to amend subparagraph 7.3 to read as follows: “denies that the appellant paid the purchase price”.
Paragraph 11 of the Reply [49] At the hearing, the Respondent conceded that paragraph 11 of the Reply constitutes an overreaching admission, because paragraph 27 of the Notice of Appeal does not allege the Appellant claimed interest of $971,999. The Respondent proposes to remove paragraph 11 of the Reply and amend paragraph 2 of the Reply to include a denial of the facts alleged in paragraph 27 of the Reply.
Paragraphs 9 and 10 of the Reply
[50] With respect to paragraphs 9 and 10 of the Reply, for the reasons below, I find that proposed amendments by the Respondent are not sufficient to answer the defects raised by the Appellant.
Paragraph 9 of the Reply [51] According to the Appellant, paragraph 9 of the Reply contains an overreaching denial, which reads as follows: “…the respondent denies that the appellant incurred any of the expenses related to the additions listed”, which assertions were not alleged in paragraph 25 of the Notice of Appeal. I agree with the Appellant and that part of paragraph 9 has to be deleted.
[52] The Respondent concedes that paragraph 9 of the Reply constitutes an overreaching denial because paragraph 25 of the Notice of Appeal does not allege that the Appellant incurred the expenses. The Respondent conceded that an amendment should be made to paragraph 9 by deleting that part of paragraph 9 as referred to by the Appellant and adding the following: “…the Attorney General of Canada’s position is that the appellant did not incur any of the expenses related to the additions listed”.
[53] However, the addition proposed to be made by the Respondent at the end of paragraph 9 should not be allowed. Again, as stated in Strother and Xu, it is not proper to add comments of this sort in that part of the Reply. More specifically, in Xu (at para 5), this Court stated:
A defendant in civil litigation is permitted to admit only those facts alleged by a plaintiff. The admission should be a “stand alone” event, not clouded by the defendant’s own allegations in the subject area of the admission.
[54] Hence, the proposed addition at the end of paragraph 9 is not allowed.
Paragraph 10 of the Reply [55] According to the Appellant, paragraph 10 of the Reply contains an overreaching denial, which reads as follows: “…but, for clarity, he denies that the appellant incurred those expenses”, which assertions were not alleged in paragraph 26 of the Notice of Appeal. I agree with the Appellant and that part of paragraph 10 has to be deleted.
[56] The Respondent concedes that paragraph 10 of the Reply constitutes an overreaching denial because paragraph 26 of the Notice of Appeal does not allege that the Appellant incurred the expenses. The Respondent conceded that an amendment should be made to paragraph 10 by deleting that part of paragraph 10 as referred to by the Appellant and adding the following: “…but, for clarity, the Attorney General of Canada’s position is that the appellant did not incur those expenses”.
[57] However, the proposed addition at the end of paragraph 10 is not allowed. As indicated above, it is not proper to add comments of this sort in that part of the Reply.
Paragraphs 8 and 12 of the Reply
[58] At the hearing, the Respondent did not concede on whether paragraphs 8 or 12 contained any overreaching denials or admissions.
Paragraph 8 of the Reply [59] The Appellant is of the view that paragraph 8 of the Reply contains an overreaching admission, because the Respondent added the following after admitting the facts stated in paragraph 21 of the Notice of Appeal: “…but for clarity adds that the promissory notes did not create a valid debtor-creditor relationships”. Paragraph 21 of the Notice of Appeal reads as follows: “As part of the Acquisition, the 409 Notes were assumed by the Appellant (the “Assumption”).”
[60] I find that this is improper pleading (see Strother and Xu), and accordingly, that part of paragraph 8 of the Reply should be struck.
Paragraph 12 of the Reply [61] According to the Appellant, part of paragraph 12 of the Reply constitutes an overreaching denial as it was not alleged by the Appellant. That part of paragraph 12 reads as follows: “but for clarity, denies that there were non-capital losses available for carry forward.” I agree with the Appellant.
[62] I find that that is an unnecessary comment by the Respondent which should be avoided in that part of the Reply. The corresponding paragraph of the Notice of Appeal just stated that the Appellant carried forward and deducted non-capital losses. For these reasons, that part of paragraph 12 of the Reply should be struck.
5.3 Assumptions of mixed fact and law and conclusions of law
[63] Assumptions of fact made by the Minister when making the assessment can be found at paragraph 27 of the Reply. Paragraph 27 of the Reply contains 126 subparagraphs, and some subparagraphs contain their own subparagraphs. Furthermore, Schedules A to F of the Reply are part of the assumptions of fact made by the Minister when making the assessment, being referenced within paragraph 27 of the Reply.
A. Positions of the parties
[64] According to the Appellant, numerous assumptions of mixed fact and law and conclusions of law contained in the part of the Reply stating the assumptions of fact the Minister relied upon to make the assessment should be struck since only assumptions of fact should be included within that part of the Reply.
[65] At the hearing, the Respondent conceded, to some extent, that various assumptions should be amended to comply with these rules.
B. Analysis
[66] The findings or assumptions of fact made by the Minister when making the assessment are to be stated in every reply by virtue of paragraph 49(1)(d) of the Rules.
[67] In Canada v. Anchor Pointe Energy Ltd., 2003 FCA 294, the Federal Court of Appeal concluded that in pleading findings or assumptions of fact, the Minister could not plead conclusions of law. Further, the Minister should only assume the factual components of a conclusion of mixed fact and law as she must extricate the factual components of a conclusion of mixed fact and law:
[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.
[26] . . . 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.
[Emphasis added.]
[68] More recently, the Federal Court of Appeal confirmed these principles in CIBC, FCA, at para 92.
[69] In Canada (Director of Investigation and Research) v. Southam Inc., [1997] 1 SCR 748 at para 35, 144 DLR (4th)1, the Supreme Court of Canada distinguished between questions of law, questions of fact, and questions of mixed fact and law as follows:
. . . 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. . . .
[Emphasis added.]
[70] In other words, “[q]uestions of mixed fact and law involve applying a legal standard to a set of facts” (Housen v. Nikolaisen, 2002 SCC 33, at para 26).
Dealing at arm’s length
[71] At the hearing, the Respondent conceded that subparagraphs 27.65 and 27.114 contain assumptions of mixed fact and law as to whether the parties are dealing at arm’s length and proposes that subparagraph 27.114 be deleted in its entirety, and subparagraph 27.65 be amended to extract the factual elements to read as follows:
27.65 “Negus, directly or indirectly, controls the Abacus Group.
27.65.1 “The TargetCos were controlled by Negus or the Abacus Group at the time the loans in respect of the Abacus Promissory Notes were purported to have been made”.
[72] I find that subparagraphs 27.65 and 27.114 contain assumptions of mixed fact and law and should be struck from that part of the Reply. The Reply should be amended as proposed by the Respondent.
Sham
[73] According to the Appellant, the assumptions of fact made by the Minister when making the assessment contain 104 references to the effect that documents or contracts were “sham”, which is a conclusion of law. As stated by this Court in Chad v. R, 2021 TCC 45 [Chad]:
…the factual underpinnings (such as intention to mislead) may be pleaded as facts assumed by the Minister but the mention or use of the term sham or the drawing of a legal conclusion that there was a sham should be pleaded elsewhere in the particular reply” (at para 42).
[74] Conclusions of law should not be part of the assumptions of facts made by the Minister when making the assessment. For example, Schedules B-1 to B-42, which are part of the assumptions of fact made by the Minister, each contain numerous references to the word “sham”.
[75] At the hearing, the Respondent conceded that a finding a sham is a conclusion of law and should not be part of the assumptions of fact, and proposed to amend all assumptions, including the schedules, to strike the word “sham”.
[76] I find that the word “sham” should not be part of the assumptions of fact made by the Minister when making the assessment as it is a conclusion of law. Hence, the word “sham” has to be struck from the assumptions of fact found at paragraph 27 of the Reply, including the Schedules.
Valid creditor/debtor or debtor/lender relationship
[77] According to the Appellant, subparagraphs 27.53 and 27.94 of the Reply, which deny a “valid creditor-debtor” relationship, have to be modified as that is an improper conclusion of law or mixed fact and law. The Appellant also refers to paragraph 4, subparagraph 7.3 and paragraph 8 using the same terminology.
[78] Firstly, paragraph 4, subparagraph 7.3 and paragraph 8 are not part of the assumptions of fact made by the Minister when making the assessment. Hence, the ground raised by the Appellant to strike part of these paragraphs because they contain improper conclusions of law or mixed fact and law cannot stand.
[79] As for subparagraph 27.53 of the Reply, it reads as follows: “Neither party had any intention to create a valid debtor-creditor relationship”. I find that whether someone has a specific intention is a question of fact; accordingly, I find that subparagraph 27.53 is an assumption of fact and should not be struck from that part of the Reply.
[80] However, subparagraph 27.94 of the Reply, which reads as follows: “the parties to the APEL Promissory Note #1 and APEL Promissory Note #2 did not have a debtor/lender relationship” is a conclusion of law, and thus should be struck from that part of the Reply.
Transfer of property
[81] According to the Appellant, subparagraph 27.50 is a conclusion of law. It reads as follows: “There was no transfer of property from any of the TargetCos to 409 Ltd. or the appellant in connection with the Abacus Promissory Note”.
[82] I agree with the Appellant that subparagraph 27.50 is a conclusion of law, and this subparagraph should be struck from that part of the Reply.
Fair market value
[83] Subparagraphs 5.3, 27.103 and 28.23 refer to the fair market value of the work-in-progress sold by 4092325 Investments Ltd. to the Appellant. According to the Appellant, these paragraphs represent improper conclusions of law.
[84] I find that assertions as to value are a finding of fact and, thus, these subparagraphs are prop