Harris v. Canada

Harris v. Canada
Court (s) Database
Federal Court Decisions
Date
2001-12-19
Neutral citation
2001 FCT 1408
File numbers
T-2407-96
Notes
Reported Decision
Decision Content
Federal Court Reports Harris v. Canada (T.D.) [2002] 2 F.C. 484
Date: 20011219
Docket: T-2407-96
Neutral Citation: 2001 FCT 1408
BETWEEN:
GEORGE WILLIAM HARRIS,
on his own behalf, and on behalf of a class of Plaintiffs
comprised of all individuals and others required to file returns
pursuant to section 150 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1,
as amended, excepting those filers as described in paragraph 2 of this Claim,
Plaintiff
-and-
HER MAJESTY THE QUEEN and
THE MINISTER OF NATIONAL REVENUE,
Defendants
REASONS FOR JUDGMENT
DAWSON J.
[1] In May of 1996, the Auditor General of Canada reported serious concerns about the administration of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1[1] ( the "Act") involving the movement out of Canada of at least two billion dollars of assets held in family trusts following the issuance in 1991 of an advance income tax ruling by what was then Revenue Canada.
[2] The advance ruling had dealt with the income tax consequences for a trust that would cease to be resident in Canada and would become resident in the United States. The concerns raised by the Auditor General were that the transactions ruled upon may have circumvented the intent of the tax law, the ruling may have forfeited a future claim to significant tax revenue, there was a lack of documentation and analysis of key decisions made by Revenue Canada, and because the advance ruling was not made public on a timely basis other taxpayers may have been denied a similar benefit.
THE NATURE AND HISTORY OF THIS ACTION
[3] Relying on those concerns, in October of 1996, Mr. Harris commenced this action. It is brought on his own behalf and on behalf of all taxpayers required to file income tax returns except those taxpayers who, between January 1, 1985 and October 1, 1996, carried out transactions or were assessed on the basis that, as a matter of law, "taxable Canadian property" under the Act can be held or disposed of by a resident of Canada.
[4] In this action, Mr. Harris raises two distinct causes of action. Mr. Harris first alleges that by virtue of the 1991 advance tax ruling the Crown "bestowed an undue preference and special benefit" upon the affected taxpayers and that Mr. Harris has a "reasonable apprehension of bad faith administration and an ulterior motive on the part of the Crown in the circumstances of this case". Second, Mr. Harris asserts that in receiving and responding to the 1991 advance ruling request the Minister of National Revenue ( the "Minister") "was acting in a fiduciary capacity, or was acting in a capacity akin to a fiduciary" towards the class of taxpayers Mr. Harris represents and that the Minister breached that duty.
[5] The substantive relief sought by Mr. Harris is a declaration that the Minister is obliged to utilize all available powers and measures under the Act to collect any tax properly due and owing as a result of the transactions referenced in the advance ruling.
[6] The defendants moved to strike the statement of claim on the grounds that it disclosed no cause of action and that Mr. Harris lacked public interest standing to bring the claim. While the motion to strike was initially allowed by the Associate Senior Prothonotary, the motion was dismissed by Muldoon J. on appeal to the trial division. An appeal to the Court of Appeal from that decision was unsuccessful, and the Supreme Court refused leave to appeal from that decision.
[7] A defence was then filed to the claim and following discovery of the defendants the matter proceeded to trial.
THE NATURE OF THE EVIDENCE AT TRIAL AND EVIDENTIARY ISSUES
[8] The evidence adduced at trial consisted of an agreed statement of facts, the testimony of 14 witnesses, the filing of a number of documents as exhibits, and the reading in of excerpts from the examination for discovery of the defendants' representative. Of the 14 witnesses, three were associated with the office of the Auditor General and 11 were past or present representatives of Revenue Canada or the Department of Finance.
[9] The plaintiff called as witnesses three individuals associated with the office of the Auditor General, a former representative of the Department of Finance, and four persons currently or formerly associated with Revenue Canada. By agreement, the plaintiff was permitted to cross-examine present and former representatives of Revenue Canada without the necessity of a finding that they were adverse to the plaintiff.
[10] The bulk of the documents received as exhibits were contained in two volumes of a joint document brief filed by consent which specified whether the documents were filed as prima facie proof of their contents or were filed simply as authentic copies. The first volume of the joint brief consisted of the documents contained in Revenue Canada's file with respect to the 1991 advance ruling. A significant portion of those documents consisted of file notes or memoranda prepared by Mr. J. Chan, the rulings officer responsible for the initial analysis of the advance ruling request. Those notes were not admitted by the defendants to be prima facie proof of their contents.
(i) The admissibility of the notes of the rulings officer as proof of their contents
[11] Mr. Chan testified at trial. With respect to his notes he testified that they were taken down on a departmental form, in his own handwriting, at or about the same time as the events recorded, and that it was expected of him to keep these types of notes so that they would form part of Revenue Canada's file. Mr. Chan also testified that he attempted to the best of his ability to make them accurate and complete throughout. Notwithstanding, Mr. Chan's notes of meetings were not necessarily exhaustive. Nor were Mr. Chan's notes of meetings circulated to other meeting participants for comment.
[12] On that evidentiary basis the plaintiff moved to have Mr. Chan's notes received in evidence to establish the truth of their contents pursuant to section 30 of the Canada Evidence Act, R.S.C. 1985, c. C-5. This section provides in material part:
30. (1) Where oral evidence in respect of a matter would be admissible in a legal proceeding, a record made in the usual and ordinary course of business that contains information in respect of that matter is admissible in evidence under this section in the legal proceeding on production of the record.
[...]
(6) For the purpose of determining whether any provision of this section applies, or for the purpose of determining the probative value, if any, to be given to information contained in any record admitted in evidence under this section, the court may, on production of any record, examine the record, admit any evidence in respect thereof given orally or by affidavit including evidence as to the circumstances in which the information contained in the record was written, recorded, stored or reproduced, and draw any reasonable inference from the form or content of the record.
30. (1) Lorsqu'une preuve orale concernant une chose serait admissible dans une procédure judiciaire, une pièce établie dans le cours ordinaire des affaires et qui contient des renseignements sur cette chose est, en vertu du présent article, admissible en preuve dans la procédure judiciaire sur production de la pièce.
[...]
(6) Aux fins de déterminer si l'une des dispositions du présent article s'applique, ou aux fins de déterminer la valeur probante, le cas échéant, qui doit être accordée aux renseignements contenus dans une pièce admise en preuve en vertu du présent article, le tribunal peut, sur production d'une pièce, examiner celle-ci, admettre toute preuve à son sujet fournie de vive voix ou par affidavit, y compris la preuve des circonstances dans lesquelles les renseignements contenus dans la pièce ont été écrits, consignés, conservés ou reproduits et tirer toute conclusion raisonnable de la forme ou du contenu de la pièce.
[13] The defendants opposed receipt of the documents to establish the truth of their contents on the grounds that the notes were not records made in the ordinary course of business, and that because the notes were not exhaustive and were not circulated among meeting participants there were reliability concerns.
[14] Subsection 30(12) of the Canada Evidence Act defines "business" to include any activity or operation carried on or performed by any department of any government. On the basis of Mr. Chan's evidence, I was satisfied and ruled that his notes were records made in the usual and ordinary course of business and were admissible pursuant to section 30 of the Canada Evidence Act. On the evidence before me, I concluded that concerns as to the completeness of any individual note or memorandum more properly go to the weight to be given to the information contained in the note, as contemplated by subsection 30(6) of the Canada Evidence Act.
(ii) The expertise of the Auditor General's office
[15] A second evidentiary issue was whether the representatives of the office of the Auditor General could testify as experts on the operation of government departments in general, and Revenue Canada in particular, and so could opine on the proper running of Revenue Canada.
[16] Denis Desautels, the former Auditor General of Canada, Shahid Minto, the Assistant Auditor General of Canada, and Barry Elkin, Senior Principal of the office of the Auditor General of Canada, all testified. Their respective qualifications and involvement with the matters at issue in this action are as follows.
[17] Mr. Desautels is a chartered accountant and a fellow of the Order of Chartered Accountants of Québec and the Institute of Chartered Accountants of Ontario. He is a member and past chair of the Public Sector Accounting and Auditing Committee of the Canadian Institute of Chartered Accountants. He served as Auditor General of Canada from April 1, 1991 to March 31, 2001.
[18] The functions and powers of the Auditor General are set forth in the Auditor General Act, R.S.C. 1985, c. A-17. The Auditor General is required pursuant to section 7 of that Act to report annually to the House of Commons and he may make special reports to the House. Each report is required to call attention to anything which the Auditor General considers to be of significance and of a nature that should be brought to the attention of the House of Commons. Paragraph 7(2)(b) of the Auditor General Act requires him to include in a report any cases in which he has observed that "essential records have not been maintained or the rules and procedures applied have been insufficient [...] to secure an effective check on the assessment, collection and proper allocation of the revenue [...]".
[19] Mr. Desautels testified that during his tenure as Auditor General:
· Between 20 and 40 audits of Revenue Canada were conducted.
· As a result of that involvement his department gained a very good understanding of how Revenue Canada operates.
· In 1993 and 1996, his office audited the activities of the advance ruling directorate.
· In 1996, his office looked at specific rulings as opposed to an overall review of all of the procedures of the advance ruling directorate.
· His office evaluates and makes judgments on the quality of the systems that are in place in various departments for carrying out certain activities.
· As Auditor General he neither could, nor would, provide a report to anyone other than to Parliament.
· With respect to the May 1996 report, he personally was responsible to ensure that his office had the technical competence to pursue the issue, that it sought assistance where necessary and that his department exceeded its own quality standards, ensuring there was proper independent challenge of what the office did and that there was complete evidence to support the conclusions reached. At the conclusion of his office's investigation, Mr. Desautels also had to ensure that he understood and agreed with the conclusions contained in the report to Parliament.
· Mr. Desautels was satisfied that the procedural issues commented on in the report to Parliament were within his expertise and the expertise of his office.
[20] Mr. Shahid Minto is a certified fraud examiner and chartered accountant who holds a master's degree in political science and a bachelor of laws degree. Mr. Minto was promoted to Assistant Auditor General in 1989. At that time he set up a tax practice at the office of the Auditor General and prepared strategic and operational plans to examine the operations of Revenue Canada and the tax policy branch. Mr. Minto has been responsible for between 15 and 20 audits of Revenue Canada and testified that he had significant experience in understanding the operations of Revenue Canada and its decision-making process. He had overall responsibility for the review in 1993 of the advance ruling process and is generally responsible for ensuring the quality assurance of all audits conducted by the office of the Auditor General.
[21] Mr. Barry Elkin is a chartered accountant who has been with the Auditor General's office since 1982. From 1982 to 1987, he was the principal responsible for the audit of the Department of National Revenue, Taxation, and since 1989 he has been the principal responsible for income tax, special tax studies, tax expenditure and tax policy issues. Mr. Elkin testified that he led the audit team on approximately 17 audits dealing with tax issues and agreed that through those audits he acquired a great deal of experience in terms of the operations and procedures in Revenue Canada, including the advance tax ruling process.
[22] The defendants opposed the admission of expert testimony from these witnesses on the grounds that the plaintiff had failed to comply with Rule 279(b) of the Federal Court Rules, 1998 and that the testimony was inadmissible hearsay. No complaint was made concerning the expertise of the witnesses.
[23] After hearing argument on the first day of trial, I reserved the issue of the admissibility of the opinions and conclusions of these witnesses on the proper operation of the advance ruling directorate of Revenue Canada, but allowed them to testify as to their opinions subject to that reservation.
[24] With respect to the defendants' objection under Rule 279, in material part that rule is as follows:
279. Unless the Court orders otherwise, no evidence in chief of an expert witness is admissible at the trial of an action in respect of any issue unless
[...]
(b) an affidavit, or a statement in writing signed by the expert witness and accompanied by a solicitor's certificate, that sets out in full the proposed evidence, has been served on all other parties at least 60 days before the commencement of the trial.
279. Sauf ordonnance contraire de la Cour, le témoignage d'un témoin expert recueilli à l'interrogatoire principal n'est admissible en preuve, à l'instruction d'une action, à l'égard d'une question en litige que si les conditions suivantes sont réunies :
[...]
b) un affidavit ou une déclaration signée par le témoin expert et certifiée par un avocat, qui reproduit entièrement le témoignage, a été signifié aux autres parties au moins 60 jours avant le début de l'instruction.
[25] As can be seen, the rule contemplates that in some circumstances leave may be given to adduce evidence from an expert where all of the requirements of the rule have not been complied with. Departure from the rule will, however, be exceptional. Sub-part (b) of the rule is designed to avoid trial by ambush and it will not be departed from unless the Court is fully satisfied that the opposing party will not be prejudiced.
[26] In the present case, the opinions of these witnesses were substantially contained in the May 1996 report of the Auditor General, which has been available to the parties since that date. Additionally, the parties had the benefit of the transcript of the Auditor General's evidence before standing committees of Parliament. One week prior to trial, the parties received access to the complete file of the Auditor General's office.
[27] In these circumstances, I am satisfied that the disclosure required by Rule 279 was substantially provided through the 1996 report of the Auditor General and his testimony to Parliament so that the defendants were not taken by surprise by any part of the testimony of Messrs. Desautels, Minto and Elkin. Considering this, and Mr. Desautels' evidence that it would not have been possible for the plaintiff to have provided any affidavit or signed statement from the witnesses, I conclude that this is one of the rare instances where leave should be given for the admission of the opinion evidence without compliance with Rule 279.
[28] As for the balance of the defendants' objections, admission of opinion evidence is governed by application of the principles enunciated by the Supreme Court of Canada in R. v. Mohan, [1994] 2 S.C.R. 9. To be admissible the evidence must be relevant to an issue in the case, the evidence must be necessary to assist the trier of fact, the evidence must not violate an exclusionary rule, and the witness testifying must be a properly qualified expert.
[29] As noted above, no challenge was made to the qualifications of the witnesses and I am satisfied that they are properly qualified to be able to opine on the proper operation of the advance ruling directorate of Revenue Canada.
[30] Similarly, the defendants did not argue that the evidence was irrelevant or unnecessary. To the extent that the plaintiff alleges, and the defendants deny, that on December 23, 1991, meetings of senior Revenue Canada officials and meetings with the Department of Finance representatives were not minuted contrary to established policy and practice, and the plaintiff asserts a breach of duty by failing to publish the advance ruling (together "the process issues") I am satisfied that the evidence is relevant. I am also satisfied that the evidence is necessary in the sense that it provides information outside the experience or knowledge of the Court.
[31] The real thrust of the defendants' objection was that the Auditor General's office did not conduct its review for the purpose of providing opinions on whether there was a breach of fiduciary duty or maladministration. In addition to reporting on the process issues, the Auditor General also commented on legal issues, particularly whether the substance of the advance ruling forfeited a legitimate claim to hundreds of millions of dollars of tax revenue. To that latter extent the views of the Auditor General and his officials were informed by documents and statements made by third parties and the opinions of outside legal and accounting experts. Testimony touching on legal issues was therefore said to be based on hearsay that was neither necessary nor reliable.
[32] In considering those submissions it is important to keep in mind the narrow area in which the witnesses were proffered as experts: the operation of government departments and Revenue Canada in particular. They were not presented as experts on domestic tax law, nor could such evidence have been admissible in any event.
[33] Having observed the cross-examination of the witnesses on their ability to opine on the quality of the December 23, 1991 documentation and upon Revenue Canada's practices of publishing opinions and advance rulings, I am satisfied that their conclusions were properly founded upon their own review of the records of Revenue Canada. The evidentiary basis for their conclusions on the process issues was subsequently supported by the testimony of Revenue Canada officials and the 1991 advance ruling file of Revenue Canada. In the result, I conclude that the opinion evidence of Messrs. Desautels, Minto and Elkin on the process issues is properly admissible. Where I rely upon that evidence to reach my conclusions it will be specifically referred to in these reasons.
[34] In so ruling I am mindful that the testimony of the witnesses was not confined to the process issues. Beyond opinion evidence, there was properly admissible testimony of primary facts concerning the investigation and what was found in the files of the Department of Finance and Revenue Canada with respect to the 1991 advance ruling. However, the report of the Auditor General (received in evidence, but not as to the proof of the truth of its content) also raised doubt as to the soundness of the advance ruling. The witnesses testified as to the steps they performed to reach that view. To the extent that that view was formed on the basis of interviews with some, but not all, of the people involved in the advance ruling and on the basis of consultation with outside expert advisers not before the Court, it could not properly be tested by cross-examination. Hence, in my view, it carried no probative value on any issues to be determined in this action touching upon the soundness of the ruling.
[35] Any conclusion as to matters of domestic tax law are based solely upon the relevant provisions of the Act and the arguments addressed to the Court by counsel after the conclusion of the evidence.
(iii) The Reports of the Standing Committees on Finance and Public Accounts, and the Ways and Means Motion tabled in Parliament by the Minister of Finance on October 2, 1996.
[36] Prior to the commencement of the trial, the defendants sought an order that the above captioned documents be admitted into evidence to establish that a political process was in place to deal with the report of the Auditor General and that such process was followed. The defendants did not propose that the documents be admitted for the truth of their content nor as prima facie evidence of the facts, inferences and opinions found therein.
[37] The plaintiff opposed admission of these documents on the ground that the evidence went to facts admitted in the pleadings and hence was unnecessary, irrelevant and inadmissible.
[38] After reviewing the written submissions of the parties, I ordered that for reasons to be delivered after the conclusion of the trial the documents could be received as exhibits at trial. As the defendants subsequently chose not to tender those documents, I do not propose to deal with that issue.
THE FACTS
[39] The nub of the plaintiff's concerns arise out of the events and decisions taken on December 23, 1991, with respect to the request for an advance ruling. Before dealing with the events of that day in light of the plaintiff's two causes of action, I believe it is necessary to establish in detail the events which led up to December 23, 1991, so that the events of that day are seen in their proper context. The preceding events are in large part undisputed and are substantially contained or confirmed in contemporary documents. In view of the length of time which has passed since the events at issue, I consider the contemporary documents to be generally the most reliable evidence.
[40] Before moving to the specific facts an explanation is required as to how the taxpayer and related entities are described in these reasons. Throughout, the defendants have been scrupulous in keeping confidential both the identity of the taxpayer and taxpayer information as mandated by section 241 of the Act. Therefore, in this proceeding, the taxpayer is referred to either as the "taxpayer" or "C". The taxpayer's representatives are referred to as "Mr. Lawyer", "Mr. Accountant" and "Mr. Adviser". The relevant trusts are described as the "Family Trust" and the "Protective Trust". Other relevant individuals are referred to as "A" and "B". Two relevant corporations are referred to as "Public Co." and "Private Co.".
[41] I now turn to a brief review of the advance ruling service.
[42] An advance ruling is a written statement given by Revenue Canada to a taxpayer stating how Revenue Canada will interpret income tax law in its application to a specified transaction or transactions which the taxpayer is contemplating. The plaintiff alleges in his claim and the evidence supports the contention that rulings generally are sought as a result of ambiguity in the legislation or the complexity of a particular transaction. There is no legislative basis for the advance ruling process; it is an administrative service that at the relevant time operated pursuant to guidelines articulated in Information Circular 70-6R2. Salient features were:
i) An advance ruling might be either favourable or unfavourable to the taxpayer's desired interpretation. Where an unfavourable advance ruling was to be issued, the taxpayer was given the opportunity to withdraw the request for an advance ruling.
ii) An advance ruling was regarded as binding upon Revenue Canada.
iii) The purpose of the advance ruling service was to promote voluntary compliance, uniformity and self-assessment by providing certainty with respect to the tax implications of proposed transactions.
iv) Advance rulings would be given only in respect of proposed transactions, and were not issued in respect of transactions that were already completed or on a series of transactions that were significantly advanced.
v) Any material omission or misrepresentation in the statement of relevant facts or proposed transactions provided by the taxpayer resulted in the advance ruling being considered invalid by Revenue Canada.
vi) Requests for advanced rulings might be refused in a number of circumstances, including where the transaction was to be completed at some indefinite future time, and where all the pertinent facts could not be established at the time the request for the advance ruling was made.
vii) The advance Rulings Directorate also provided written opinions on the interpretation of specific provisions of the law. However, when a requested interpretation related to a contemplated transaction, it was suggested by Revenue Canada that taxpayers should request an advance ruling rather than an opinion.
[43] As for how requests for an advance ruling were dealt with, the process is described in a Revenue Canada publication "The Rulings Directorate Service" and was explained more fully in evidence by Mr. R. Read. Mr. Read served as a Director in Corporate Rulings from 1980 to 1984, Director of Specialty Rulings from 1986 to 1988 and Director General of Rulings from 1989 to 1993. He was not cross-examined on his explanation of how the Rulings Directorate operated at the relevant time.
[44] On receipt, a request for an advance ruling was passed to a rulings officer, usually an accountant or a lawyer, who would review the request to ensure completeness, research the issue or issues posed, and prepare a draft response. The draft response would be reviewed by the ruling officer's section chief. When approved by the section chief the proposed ruling would generally go to one of four directors in the Rulings Directorate for signature. The director could revise the proposed response. If the director felt it was an unusual case and felt other directors should be made aware of it, or if the director wanted input from some of the other directors, or if the director was concerned that the ruling might be contentious and "go up the line", then the matter would be put before the Ruling Review Committee. That committee met weekly and was composed of the four directors and the Director General of Rulings. In the event that it was believed that a taxpayer would seek recourse from a higher authority, briefing notes would be prepared for either the Deputy Minister or the Minister. Either event, according to Mr. Read, "elevated the decision level" to that level. Another witness confirmed that if a matter was referred to the Deputy Minister, he became responsible to make the decision. Matters were not then remitted to the Ruling Review Committee.
[45] Mr. Read also testified that as a result of a review of Revenue Canada conducted in 1985, the Minister had undertaken that Revenue Canada would avoid refusing to rule as much as possible. After that ministerial commitment, Mr. Read could not recall a case where Revenue Canada refused to rule.
[46] Turning now to the facts of this case, on March 8, 1991, a request for an advance ruling was made by Mr. Lawyer. Subsequently, upon being advised that Revenue Canada would not be able to grant an affirmative ruling on an important aspect of the then proposed transactions, the request was withdrawn and replaced with the request dated November 7, 1991.
[47] The facts giving rise to the November 7, 1991 ruling request were described as follows in the request.
[48] The late A had established the Family Trust (sometimes "FT") for the benefit of B and the children of B, one of whom was the taxpayer, C. The taxpayer's interest in the FT was subsequently contributed to the Protective Trust (sometimes "PT") in or about 1987. C was the sole beneficiary of the PT. At the time the ruling was requested, FT, PT and C were resident in Canada, but C had decided to take up permanent residence in the United States.
[49] At the time of the ruling request the principal assets of the FT consisted of the beneficial ownership of a number of shares of Public Co., a taxable Canadian corporation, and a public corporation, as each term was defined in the Act. The FT had acquired the relevant Public Co. shares as a result of an exchange of its ownership of shares in Private Co. for newly issued common shares of Public Co. The ruling request stated as a fact that the shares of Private Co. were taxable Canadian property of the FT as defined in subparagraph 115(1)(b)(iii) of the Act, and that the FT and Public Co. had jointly elected that the provisions of subsection 85(1) would apply to the exchange so that by virtue of paragraph 85(1)(i) of the Act, the Public Co. shares received by the FT on the share exchange were taxable Canadian property of the FT.
[50] The proposed transactions were described in the following terms. After C took up residence in the United States, the trustees of the PT would resign to be replaced by trustees resident in the United States. The place of administration of the PT would be moved so that the PT would cease to be resident in Canada and would become resident in the United States. Subsequently, but prior to January 1, 1992, the FT would distribute to the PT beneficial ownership of a number of the exchanged Public Co. shares.
[51] Two rulings were requested in respect of those proposed transactions. First, a ruling that the FT would be deemed to dispose of the Public Co. shares distributed to the PT at their adjusted cost base to it, and the PT would be deemed to acquire those shares at the same amount. Second, a ruling that the PT would not be deemed by subsection 48(1) of the Act to dispose of its interest in the FT when it ceased to be resident in Canada.
[52] By November 8, 1991, the ruling request had been referred to Mr. Chan who determined that the ruling would turn upon whether a Canadian resident could hold "taxable Canadian property" as that term is defined in the Act. On November 14, 1991, Mr. Chan met with Mr. J. Bentley to discuss this issue. Mr. Bentley was a lawyer with the Department of Justice who had, with the exception of two periods totalling two and a half years, provided legal services to Revenue Canada since 1975. Mr. Bentley advised Mr. Chan that it was his initial view that a Canadian resident could not own taxable Canadian property.
[53] Mr. Chan also spoke on November 14 by telephone with Mr. S. Thompson, who was then a senior tax policy officer with the Department of Finance. Mr. Thompson advised Mr. Chan that from a tax policy view the argument that a resident could have taxable Canadian property "might not be without merit".
[54] On November 18, 1991, Mr. Chan spoke to Mr. Lawyer about a number of matters related to the ruling request. Mr. Chan raised his concern as to whether a Canadian resident could own taxable Canadian property and therefore whether the Public Co. shares could be taxable Canadian property. Mr. Lawyer advised that in his view subsection 97(2) of the Act illustrated that a Canadian resident might hold taxable Canadian property. This was the first occasion on which Mr. Chan considered that subsection 97(2) might be relevant to the ruling request.
[55] The next day Mr. Chan spoke again to Mr. Bentley about the taxable Canadian property issue. Mr. Chan advised Mr. Bentley of Mr. Lawyer's argument based on paragraph 97(2)(c) of the Act. Mr. Bentley responded that he had not previously considered the impact of that provision, but that having looked at it he had to agree with Mr. Lawyer.
[56] On November 21, 1991, Mr. Chan spoke again to Mr. Lawyer who at that point agreed with Mr. Chan that the proposed disposition of the shares by the PT would escape taxation in Canada because of the application of Article XIII(5)(a) of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, September 26, 1980, Can. T.S. 1984 No. 15 (the "Treaty"). That provision allowed Canada to tax a former resident residing in the United States on a capital gain if the former resident had been resident in Canada for 10 years during any period of 20 consecutive years preceding the disposition. While C had been so resident in Canada, the PT had not been resident in Canada for 10 years because it had only been created in 1987.
[57] On December 3, 1991, a representative of Revenue Canada wrote to Mr. R. A. Short, then the General Director of the Tax Policy and Legislation Branch of the Department of Finance. The letter informed Mr. Short of the matters disclosed in the advance ruling request and expressed the concern that the taxation in Canada of capital gains on taxable Canadian property could be avoided by using a trust and obtaining tax treaty protection. The letter concluded by noting that the Rulings Directorate intended to refuse to grant a favourable ruling and, if necessary, to bring the matter before the appropriate committee to recommend that the general anti-avoidance rule ("GAAR") found in subsection 245(2) of the Act be applied to the transaction. In a prior draft of this letter, Mr. Chan had noted that except for the GAAR concerns, there was no strong technical argument for denying the requested rulings. Steps were never taken by the Rulings Directorate to refer the matter for application of the anti-avoidance rule.
[58] Following the letter to Mr. Short, a meeting took place between representatives of the Department of Finance and Revenue Canada on December 6, 1991. Mr. Thompson, his supervisor Ms. C. Muirhead, and another individual attended on behalf of the Finance Department. Ms. Muirhead at the time was the section chief for legislation relating to trusts. Revenue Canada was represented at the meeting by Mr. Chan, Ms. C. Gouin-Toussaint (a director in the advance Rulings Directorate) and three other individuals. At the December 6 meeting, the advance ruling request was discussed, including the taxable Canadian property issue. Mr. Thompson noted that in his view the argument that a Canadian resident could not own taxable Canadian property was "too weak" and could not be supported by Finance. The meeting ended with Finance not making any recommendations on what should or could be done to stop the transactions involved in the ruling request.
[59] On December 10, 1991, a memorandum prepared by Mr. Chan and signed by Ms. Gouin-Toussaint was submitted to the Rulings Review Committee. The memorandum set out the facts disclosed in the advance ruling request, the proposed transactions, and the rulings requested. The memorandum went on to provide an analysis. The analysis noted that there was no apparent problem with granting the second requested ruling to the effect that the PT would not be deemed to dispose of its interest in the FT when it ceased to be resident in Canada. However, the analysis noted that there was a problem with respect to the first requested ruling.
[60] With respect to that first requested ruling, the analysis set out the arguments for and against the proposition that a Canadian resident could hold taxable Canadian property. The analysis noted that in January of 1985 Revenue Canada had given an advance ruling in respect of a trust related to FT on the basis that a Canadian resident could hold taxable Canadian property, but that in May of 1985 an opinion was issued by Revenue Canada which expressed the opinion that only non-residents could hold taxable Canadian property. The analysis also noted that if a favourable ruling was provided Canada would lose its base for taxing the accrued capital gains on the Public Co. shares because of the application of the Treaty and the fact that PT had not been resident in Canada for 10 years.
[61] The memorandum to the Rulings Review Committee also set out the concerns of Mr. Chan and Ms. Gouin-Toussaint with respect to the potential application of GAAR. Given the later significance of the GAAR concerns, it is helpful to quote those concerns as set out in the memorandum to the Rulings Review Committee:
Since the Act permits the tax free rollovers of TCP [taxable Canadian property] to non-residents and C will be relocating to the U.S., subsection 245(2) (GAAR) would not apply to the proposed transactions. However, if C returns to Canada within the next 10 years with the Public Co. Shares at their increased ACB [adjusted cost base], we would have to consider whether the intention was to obtain the increase in ACB of the shares and whether GAAR is applicable.
During telephone conversations, the taxpayer's representative said that it is not yet certain that C would not return to Canada. He said that it is possible that C may return to Canada in six months. [underlining added]
[62] The memorandum of December 10, 1991 concluded as follows:
The technical argument that the Public Co. Shares are not TCP is not a strong onebecause of the wording of paragraph 97(2)(c) and could likely be lost in court. However, in view of the significant amount of income tax that will be lost and the possibility that GAAR may be applicable if C returns to Canada shortly after the increase in the ACB of the shares has been achieved, we are requesting your support in refusing to rule on the proposed transactions. [underlining added].
[63] This request was considered by the Rulings Review Committee at its meeting of December 12, 1991. No conclusion was reached by the Rulings Review Committee on the taxable Canadian property issue. Instead, the Committee took the position that Revenue Canada was not in a position to provide an advance ruling for two reasons. First, it was noted that the few transactions disclosed raised the strong possibility of there being further transactions, some of which might be subject to GAAR. The taxpayer's representative was noted to have acknowledged that there could be more transactions, although he was not aware of any. Second, it was noted that the taxpayers were asking for a ruling that the Public Co. shares received as a result of the exchange are taxable Canadian property. As that transaction had already taken place the Rulings Review Committee concluded that it could not be ruled upon. Those reasons were grounded in the Information Circular 70-6R2.
[64] Later on December 12, after the meeting of the Ruling Review Committee, Mr. Chan and Ms. Gouin-Toussaint met with Mr. Bentley to again review the taxable Canadian property argument. Mr. Chan explained his concern with respect to the argument premised on subsection 97(2) of the Act. Mr. Bentley advised that while Mr. Chan had an arguable position, if asked as to the better view of the law Mr. Bentley would have to say that in view of paragraph 97(2)(c) the better view of the law is that a resident of Canada can have taxable Canadian property.
[65] Still later that afternoon Mr. Chan spoke to Mr. Lawyer. Mr. Chan explained Revenue Canada's concern that any gains by the trust would be tax free in Canada under Article XIII(5)(a) solely because the trust was not resident in Canada for 10 years in circumstances where the intent was always that Canada should be permitted to tax accrued gains on taxable Canadian property by a U.S. resident. Mr. Chan told Mr. Lawyer that the Rulings Review Committee had decided that Revenue Canada would refuse to rule on the request. Mr. Chan advised that Revenue Canada had legal advice to the effect that there was an arguable position that a Canadian resident could not hold taxable Canadian property. Mr. Chan made the point to Mr. Lawyer that Revenue Canada was also being asked to rule in a situation where it could not determine all of the contemplated transactions and there was a concern that either C or the trust could return to Canada with a stepped up adjusted cost base in the near future. Mr. Lawyer asked Mr. Chan where he could go from there and Mr. Chan replied that he could not think of anything that would help Mr. Lawyer. It was left between them that Mr. Lawyer would speak to Ms. Gouin-Toussaint.
[66] On December 13, 1991, Mr. Read wrote to legal services requesting a formal opinion on whether a resident of Canada can have taxable Canadian property. The letter noted Revenue Canada's understanding that although the position that a resident could not have taxable Canadian property is arguable, the better view might very well be to the contrary.
[67] That same day Mr. Lawyer provided a new request for an advance ruling. This differed from the November 7 request in that it was now proposed that shortly after C took up residence in the United States, the trustees of the PT would distribute to C the entire interest PT held in the FT. Shortly thereafter, but prior to January 1, 1992, FT would distribute to C directly beneficial ownership of the shares in Public Co. The rulings requested were, first, that PT would be deemed to dispose of its interest in the FT at its adjusted cost base and C would be deemed to acquire such interest at the same amount, and second, that FT would be deemed to dispose of the Public Co. shares at their adjusted cost base and C would be deemed to acquire such shares at the same amount.
[68] In the latter part of the afternoon on December 13, Ms. Gouin-Toussaint spoke to Mr. Lawyer advising him of a proposal to resolve the situation. She advised that Revenue Canada would be willing to rule as sought in the December 13 request if the Public Co. shares were distributed to C before C leaves Canada. Revenue Canada would specifically rule that there was no deemed disposition on C's departure. Ms. Gouin-Toussaint advised that because of the uncertainty as to whether the shares were taxable Canadian property, C would have to provide a waiver so that if C later reversed C's position so as to assert that the shares were not taxable Canadian property then the deemed disposition provision found in subsection 48(1) of the Act would apply.
[69] Implicit in Revenue Canada's advice that it would so rule was acceptance of the position that the shares were taxable Canadian property. This is because pursuant to section 48 of the Act when a taxpayer ceases to be resident in Canada the taxpayer is deemed to have disposed of property other than taxable Canadian property. Also implicit in Ms. Gouin-Toussaint's advice was acceptance that the fact that the exchange by which the Public Co. shares were received had already taken place was not a bar to a ruling.
[70] On December 16, 1991, a meeting took place between Ms. Gouin-Toussaint, Mr. Chan and Mr. R. Thompson on behalf of Revenue Canada, and Mr. Lawyer, Mr. Accountant and Mr. Advisor on behalf of the taxpayer. Mr. Lawyer explained that he was withdrawing the December 13, 1991 request for a ruling because it had been determined that on a direct distribution to C, as had been proposed, there would have to be public disclosure that C is entitled to the worth of the shares. This was said to raise concerns with respect to C's personal security.
[71] At the December 16 meeting, the representatives of Revenue Canada reiterated why they were of the view that Revenue Canada could not rule on the November 7 proposed transactions. Revenue Canada's concerns centered on the uncertainty as to whether a Canadian resident could hold taxable Canadian property, the possibility of GAAR being triggered by future transactions, and the concern at the unintended result that the capital gains by the trust would be tax free. No concern was expressed about the "completed transaction" issue previously referenced by the Rulings Review Committee. Mr. Lawyer then proposed that in addition to the proposed transactions FT would provide a waiver for the taxation year of the distribution so that the FT could be reassessed under subsection 107(5) of the Act if it was later determined that the shares are not taxable Canadian property. It was also proposed that the taxpayers would add to the facts contained in the ruling request that PT would not dispose of the shares for 5 years. Five years was apparently selected because Mr. Lawyer was of the view that 10 years would be too long a restriction. The latter offer was to assuage the GAAR concerns_ based upon potential future transactions.
[72] Later on December 16, Mr. Chan and Ms. Gouin-Toussaint met with Mr. Read to discuss the latest proposal. Mr. Chan was instructed to prepare a briefing note for the Assistant Deputy Minister, Mr. D. Lefebvre, to give to the Deputy Minister, Mr. P. Gravelle.
[73] Mr. Chan did prepare a number of drafts of a briefing note, each submitted to Ms. Gouin-Toussaint. The final version he prepared was dated December 18, 1991. The draft briefing note set out the underlying facts and the transactions proposed in the November 7 ruling request and discussed the relevant issues. The first issue identified in the briefing note was whether the shares of Public Co. were taxable Canadian property. The note stated that the law was not clear and that the Departments of Finance and Justice agree that it is not certain that the Public Co. shares are taxable Canadian property. This omitted reference to the advice received as to the strength of the argument that a resident could own taxable Canadian property. The second issue identified was whether avoidance provisions applied to the PT. It was noted that any gain on the sale of the Public Co. shares would be exempt from tax in Canada under the Treaty because the PT would not have been resident in Canada for 10 years. It was also said to be clear that if the PT had not been created and the FT distributed the Public Co. shares to C that Canada could tax any gain on the sale of the Public Co. shares within 10 years of C becoming a U.S. resident because C had been a resident of Canada for 10 of the 20 years preceding the sale of the shares. Because the purpose of the establishment or maintenance of the PT could only be determined from the circumstances of the formation and continued existence of the trust it was said that the avoidance issue could not be established on a ruling basis.
[74] The briefing note advised that Mr. Lawyer and Mr. Accountant had been informed that Revenue Canada was unable to rule on the original transactions because the transactions which the taxpayer claims gave rise to the taxable Canadian property status were completed transactions. It was also noted that the taxpayer was willing to have the FT provide a waiver for the taxation year in which the Public Co. shares are transferred to the PT and, in addition, undertake that the PT would not dispose of the shares within the next 10 years. The conclusion of the briefing note was that the latest request contained most of the problems inherent in the original ruling request; therefore the taxpayer's representative had been advised that Revenue Canada was unable to rule.
[75] The oral evidence, which I accept, was to the effect that this draft briefing note, while discussed at subsequent meetings, was never formally sent from the Assistant Deputy Minister to the Deputy Minister.
[76] On December 18, 1991, Ms. Gouin-Toussaint spoke to Mr. Advisor and told him that they could not accept the then latest proposal. Mr. Advisor then advised Ms. Gouin-Toussaint that the taxpayer would also be prepared to opt out of treaty protection by not claiming a deduction under paragraphs 115(1)(d) and 110(1)(f) of the Act for the next 10 years.
[77] Later on December 18, 1991, Ms. Gouin-Toussaint and Mr. Chan met with Mr. Bentley. At that time Mr. Bentley advised that the taxpayer's agreement to opt out of treaty protection would not, in his view, be enforceable. Mr. Bentley referred to the decision of Cohen v. The Queen, 80 DTC 6250 (F.C.A.).
[78] After meeting with Mr. Bentley, Ms. Gouin-Toussaint and Mr. Chan met with Mr. Read. Mr. Read advised that he would call the Assistant Deputy Minister to inform him of what was happening and then a decision on the ruling would be made. Ms. Gouin-Toussaint instructed Mr. Chan to call Mr. Advisor to inform him that no decision had yet been reached and that his proposal was still being considered.
[79] On December 19, 1991, Mr. Lawyer made a written submission to Mr. Read on the issue of whether or not an undertaking not to invoke a treaty benefit would be valid. Mr. Lawyer relied on the decision of the Supreme Court in Smerchanski v. Minister of National Revenue, [1977] 2 S.C.R. 23.
[80] On December 19, 1991, Mr. Bentley provided an unsigned draft legal opinion to the Rulings Directorate in response to the request of December 13, 1991. The opinion noted that the Act was ambiguous with respect to whether a Canadian resident could own taxable Canadian property. Mr. Bentley concluded in the opinion that:
However, given the general scheme of the Act, I share your view that an argument is available that only a non-resident