Loewen v. The Queen

Loewen v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2003-03-14
Neutral citation
2003 TCC 101
File numbers
2001-3839(IT)G
Judges and Taxing Officers
Donald G.H. Bowman
Subjects
Income Tax Act
Decision Content
Docket: 2001-3839(IT)G
BETWEEN:
CHARLES B. LOEWEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on February 10, 2003 at Toronto, Ontario
Before: The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances:
Counsel for the Appellant:
A. Christina Tari
Marcela S. Aroca
Counsel for the Respondent:
Elizabeth D. Chasson
Jenna Clark
____________________________________________________________________
ORDER
Upon motion by the appellant for an order striking out the entire reply to the notice of appeal, allowing the appeals and vacating the assessments for the appellant's 1993, 1994 and 1995 taxation years or in the alternative striking out certain portions of the reply
And upon hearing what was alleged by the parties
It is ordered that the motion be allowed and the provisions referred to in the attached reasons for order be struck out.
.../2
It is further ordered that costs be awarded to the appellant in a lump sum amount of $2,000.
Signed at Toronto, Canada, this 14th day of March 2003.
"D.G.H. Bowman"
A.C.J.
Citation: 2003TCC101
Date: 20030314
Docket: 2001-3839(IT)G
BETWEEN:
CHARLES B. LOEWEN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bowman, A.C.J.
[1] The appellant seeks an order striking out the entire reply to the notice of appeal, allowing the appeals and vacating the assessments appealed from for the appellant's 1993, 1994 and 1995 taxation years. Alternatively he asks that the reply be struck out without leave to amend. The grounds for these two requests are that the reply is scandalous, frivolous or vexatious or is an abuse of the process of the court within the meaning of section 53 of the Tax Court of Canada Rules (General Procedure). In the further alternative the appellant seeks an order striking out or expunging a large number of paragraphs, subparagraphs, phrases or references in the reply on the basis that they seek to advance new and different assessments from those under appeal.
[2] A brief overview of the litigation is necessary to an understanding of the issues on this motion.
[3] The appellant is a businessman with a degree in economics from the University of British Columbia as well as from Harvard Business School. Throughout his career he has been active at a senior level in financial, corporate, management and investment matters. The allegations that are germane to this motion are contained in the appellant's affidavit filed in support of the motion as well as the notice of appeal. They are:
- In 1993 the appellant acquired a 6.25% interest in computer software known as Arachnae Information Retrieval System Software II ("AIRS II"). He was one of 17 co-owners. He alleges in his affidavit that he paid $500,000 for his interest.
- Computer software is a class 12 asset and capital cost allowance ("CCA") may be deducted under Schedule II to the Income Tax Regulations at 100%, subject to the rule that in the year of acquisition a taxpayer may deduct only one half of the amount of CCA otherwise deductible.
- The appellant therefore deducted CCA of $250,000 in 1994. The claim in 1994 put the appellant in a loss position in that year and he therefore carried forward a loss of $32,822 to 1995.
[4] The Minister reassessed the appellant for each of the three years 1993, 1994 and 1995 as follows:
(a) For 1993 he disallowed the entire claim for CCA on the basis that the software was not available for use until 1994.
(b) For 1994 he assessed on the basis that the fair market value of 100% of the software was $1,600,000 and not $8,000,000, the basis upon which the appellant filed. Therefore the appellant's deduction for CCA on the software was reduced to $50,000, as follows:
$1,600,000 X $500,000 X ½ = $50,000
$8,000,000
(c) For 1995 the appellant did not claim CCA on the software evidently on the assumption that it had all been used up in 1993 and 1994. The Minister did not allow the non-capital loss carry-forward on the theory that the appellant had none. Moreover the Minister - inadvertently I assume - did not allow the appellant even the CCA of $50,000 which on the Minister's theory he would have been entitled to. That however is not germane to this motion.
[5] The assessments for 1993, 1994 and 1995 were all dated February 27, 2001.
[6] The appellant signed a waiver of the "normal reassessment period" as defined in section 152 of the Income Tax Act in respect of the 1993 taxation year on April 4, 1997 and in respect of the 1994 taxation year on April 28, 1998.
[7] The waivers for the taxation years were revoked by notices of revocation of waiver signed by the appellant on October 12, 2000. The effect of revoking the waivers was that the normal reassessment period ended in respect of 1993 and 1994 six months after the revocation was filed, i.e. on April 21, 2001.
[8] No waiver was filed with respect to 1995.
[9] The original assessment for 1995 was made on May 9, 1996. Therefore the normal reassessment period for 1995 expired on May 10, 1999.
[10] On March 2, 2000 an auditor for the Canada Customs and Revenue Agency, Ms. Jang, wrote to the appellant with respect to the AIRS II Co-ownership proposing adjustments in respect to his investment. Only two issues were identified:
(a) Valuation.
After a lengthy discussion of the valuation of the software she stated
Since the original valuation of $8.0 million is considered unreasonable it has been determined that at the date of valuation, i.e., December 31, 1993 the fair market value of the Software acquired by the Co-ownership was $1.6 million supported by our valuation. Therefore the capital cost used for the purpose of capital cost allowance ("CCA") is limited to $1.6 million. The excess of $6.4 million is proposed to be disallowed.
(b) Availability for use.
She stated that the software was not available for use until 1994 and therefore CCA should not be claimed on it in 1993.
[11] On March 20 and March 30, 2000 the appellant wrote to Ms. Jang making representations on the matter of valuation and suggesting that she issue a reassessment based on the $1.6 million valuation. He seems to have assumed that as soon as he received a notice of reassessment he could appeal to the court. He also observed that she would have to reassess the other 16 investors.
[12] On May 12, 2000 Ms. A. Christina Tari, counsel for the appellant, made a lengthy submission to Ms. Jang on the available for use issue.
[13] On January 19, 2001 Ms. Jang wrote again to the appellant with respect to the years 1993, 1994 and 1995. She reiterated her position that the $1.6 million valuation by Cole Valuation Partners was proper and her position on the available for use issue. She commented in detail on Ms. Tari's representations. She concluded with the observation:
We believe that we have gathered enough evidence to support our conclusion. As stated in our proposal letter, we accepted that the Software was available for use in 1994. Therefore CCA should only be claimed in 1994 and the subsequent years. Enclosed please find a Revised Capital Allowance Schedule and a Revised Non-Capital Loss Schedule.
[14] The schedules reduced the CCA claim for 1993 to zero and for 1994 to $50,000 (($500,000 X $1,600,000/$8,000,000) X 50%) and the non-capital loss carry-forward to 1995 to nil.
[15] The reassessments for 1993, 1994 and 1995 followed on February 27, 2001. The notices of reassessment each bore on their face the notation:
We have made an adjustment according to our letter of January 19, 2001.
[16] On April 30, 2001 Ms. Jang sent to Ms. Tari an audit report (T20-R1). The report describes the software and deals in detail with two and only two issues: valuation and available for use.
[17] A very substantial part of the report was the CCRA's response to the 50 page representations by the co-owners with respect to the Cole Valuation report.
[18] There was no discussion in the report of the question whether the co-owners or the appellant were dealing at arm's length with the vendor of the software, although on page 8 of the report, under "Explanation of All Changes" the following appears.
1. CCA Disallowed*
Income Tax Act: Sec. 67, Subsection 9(2), Paragraph 69(1)(a), Paragraph 251(1)(b), Subsection 13(26), Subsection 13(27), Paragraph 20(1)(a)
*
Please note that as the result of this audit, a balance of ???? of Capital Cost Allowance is being carried forward to future year. The T/P did not request in writing to claim the remaining balance.
See explanation on the following pages.
[19] Paragraph 69(1)(a) of the Income Tax Act deals with the tax consequences of transfers between persons not dealing at arm's length. Paragraph 251(1)(b) provides that it is a question of fact whether unrelated persons are dealing at arm's length, and subsections 13(26) and 13(27) have to do with the available for use restriction on CCA claims.
[20] In addition to the audit report Ms. Jang sent Ms. Tari on May 9, 2001 a document called a Position Paper dated November 21, 2000. This report dealt with a number of issues in addition to the two discussed in the audit report. In it she states:
C. PROBLEM OR ISSUE
The issues to be decided are:
1. did the Co-Owners acquire the software for the purpose of carrying on a business with a reasonable expectation of profit or were the expenses incurred for the purpose of earning income from a business or property (paragraphs 18(1)(a) and 18(1)(h)), and was the software acquired for the purpose of gaining or producing income (paragraph 1102(1)(c));
2. whether the amounts allegedly paid or payable to the vendor of the Software are reasonable under the circumstances or was the value of the Software inflated (section 67);
3. was the Software available for use on December 31, 1993 (subsection 13(26));
4. are the Notes real or contingent liabilities (paragraph 18(1)(e));
5. was the Software purchased by the Co-Ownership a new product developed by Arachnae?
...
F. RECOMMENDATIONS AND CONCLUSION
Our position here is mainly relied on the Valuation Report from Cole and Partners. It has been determined that the value of the Software should be in the $1.6 million range. We accept this amount as the fair market value for the AIRS II Software. We agree with the Cole's FMV for the following reasons:
1. The Software was not ready at the valuation date. There were a lot of uncertainties involved, i.e., would the Software function as described or expected, when will the Software be available for use, how strong the competitors be, etc.
2. Although the sum of $5,102,315 had been invested on the original AIRS and AIRS II and additional funds of $2.4 million was expected to be invested in the AIRS II Software by the Co-Owners, it does not mean that the new AIRS II Software should worth $8 million.
3. As stated previously, the historical results from AIRS was very poor. The AIRS Software was only able to generate $1,249,377 gross revenue for the entire 10 years. Yet the total development costs came to $2,284,315 which was almost twice as much as the gross revenue. It is questionable that their projections were achievable and attainable.
4. For the entire period in question, Arachnae was not able to demonstrate one successful contract.
5. The success of Excite, Inc. does not suggest that the similar outcome could have been happened to AIRS II.
6. The entry of Excite may or may not be the main reason for the failure of the Software.
Please note that we do not consider "no reasonable expectation of profit" for the business. During the meeting of February 8, 2000, we re-considered what Mr. Phil McDonnell had suggested which were as follows:
￭ Was it run as a company?
￭ Was there proper management?
￭ Was there sales force to marketing the product?
￭ Was the product out there in the market?
￭ Was there a roadblock?
The answers to the above are "yes". In addition, all of the available correspondence indicates that reasonable efforts were put into the operation. They were doing everything a genuine business would do. As far as the profit is concerned, we cannot refuse a business due to lack of profit alone.
CONCLUSION:
It is recommended that total CCA deductions is limited to $1.6 million for all the Co-Owners as stated in our first position above. As stated in "Availability For Use" above, it has been determined that the Software was not available for use on December 31, 1993. Therefore no CCA is being allowed for 1993. It appears that the Software was available for use in 1994. Thus deduction for CCA is recommended in the taxation year of 1994 and onward.
[21] On the question whether the notes were contingent she said:
Promissory Notes details:
For each unit cost of $500,000 the promissory note is for $350,000 together with interest on such amount, at a rate equal to five percent (5%) per annum calculated annually not in advance.
Maker - the various purchasers/co-owners/investors
Payee - AIRS II Inc.
Payment date - is December 31, 2003 for those notes made in 1993 and December 31, 2004 for those made in 1994
Prior to the Payment date, payments of principal and interest on this promissory note shall only be made out of the Maker's share of Adjusted Revenues.
If the Maker's share of Adjusted Revenues is insufficient to pay the interest payable on any anniversary date, such interest shall accrue.
This promissory note may be repaid at any time or times without notice or bonus.
The maker shall have the right upon notice of the Payee at any time prior to the Payment date to extend the payment date for up to an additional 10 years.
This promissory note shall be unsecured.
The Payee agrees that this promissory note cannot be assigned to or endorsed in favor of, a third party without the consent of the maker, which consent may be unreasonably withheld.
We have tried to verify the authenticity of the Promissory notes. To date, the Notes have not been paid off. Per representation of June 10, 1999, from Mr. Frank Penny, the terms of the Notes remain the same. The current status of the Acquisition Notes is that they are still outstanding and will be dealt with between AIRS II Inc. and the Co-Owners according to their terms. The carrying charges with respect to the Acquisition Notes are accrued on the books of AIRS II Inc. and will be paid according to the terms of the loan.
The unusual long due date in relation to the economic life of the Software and the lack of proper security do not seem to agree with normal business practice. However there is no evidence to support that the debt was not intended to be repaid.
[22] It is clear from the position paper that Ms. Jang considered the question of contingency and decided that the notes were not contingent. She considered the question whether the software was acquired for the purpose of gaining or producing income from a business or property and decided that it was.
[23] She said in her affidavit:
15. At the time of the audit I believed that the facts that I had gathered and assumed raised several legal issues, which are detailed in the Position Paper. However, I chose to proceed with the reassessment on the basis of two legal conclusions:
(a) the fair market value of the Software did not exceed 1.6 million dollars as at December 31, 1993, and
(b) the Software was not available for use in the Appellant's 1993 taxation year.
16. Upon my review of the Reply to the Notice of Appeal, I can state that additional legal conclusions may be drawn from the facts that I assumed and gathered during the course of my audit. These legal conclusions are:
(a) the Appellant did not acquire an interest in the Software for the purpose of gaining or producing income;
(b) the Appellant, the co-owners of the Software, AIRS II Inc. and Arachnae were not dealing with each other at arm's length;
(c) the deduction of the CCA claimed by the Appellant in his 1993 and 1994 taxation years was unreasonable;
(d) the $350,000 set out in the So-Called Promissory Note provided by the Appellant to AIRS II Inc. was a contingent liability.
17. I am advised that these conclusions were made based on the facts and information that I gathered and assumed during the audit. I believe this advice to be true.
[24] The statement in paragraph 15 that she decided to proceed with the reassessment on the basis of two legal conclusions, fair market value and available for use, is correct.
[25] Paragraph 16 is not really a proper statement in an affidavit. It is legal argument and a legal conclusion. Moreover it is inconsistent with the statements in the two reports. Specifically, she set out no facts that she assumed or found to support the allegation that the co-owners, AIRS II Inc. and Arachnae were not dealing at arm's length. She clearly did not assume that they were not dealing at arm's length. Indeed if she had assumed that they were not at arm's length she would unquestionably have said so and based her assessment on section 69 of the Act. Rather, in her letter of March 2, 2000 she refers to the $8,000,000 as "unreasonable". In the list of issues in her position paper, set out above, she deals in point 2 only with reasonableness in the context of value.
[26] The reports in my view support the conclusion that she assumed
(a) the co-owners were dealing at arm's length;
(b) the software was acquired for the purpose of gaining or producing income from a business or property;
(c) the promissory notes were not contingent. I might observe on this last point that whether a promissory note is contingent or not is a question of law, not a fact to be assumed. Her conclusion is contained in the sentence
However there is no evidence to support that the debt was not intended to be repaid.
[27] This is not a strong assumption, if it can be described as an assumption at all.
[28] Therefore, it was open to the respondent to plead that the Minister assumed
(a) that the value of the software did not exceed $1.6 million on December 31, 1993 and
(b) the software was not available for use in the appellant's 1993 taxation year.
[29] Before I come to the request to strike out specific paragraphs, subparagraphs, phrases and references in the reply I shall deal with the request to strike out the entire reply and allow the appeals and vacate the assessments or strike out the reply without leave to amend. The grounds are that the reply is scandalous, vexatious or frivolous or is an abuse of the process of the court.
[30] It may be that some of the statements in the reply offend some of the rules of pleading. I shall discuss this question below. However to strike out a reply entirely or allow an appeal on the ground that some of the rules have been broken strikes me as unduly draconian. The words "frivolous, scandalous, vexatious or an abuse of process" have acquired a meaning in procedural law but whether taken in their legal sense or their popular sense they connote a high degree of impropriety or a virtual certainty that the position taken in the pleading is without merit. This is sometimes referred to as the "plain and obvious" rule enunciated in Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959 at page 980. See also Davitt v. The Queen, 2001 DTC 702. It is by no means plain and obvious that the Crown's position is so lacking in merit that it cannot proceed.
[31] The motion to strike out portions of the reply is rather more complex. It is based upon the combined effect of the decision of Bastarache J. in Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358, and subsection 152(9) which was enacted after the Continental Bank judgment. The observations of Bastarache J. upon which the appellant relies in this motion were adopted by McLachlin J. (as she then was) writing for the majority. In light of the importance of Bastarache J.'s statement I set it out in full, followed by McLachlin J.'s endorsement of his statement. Bastarache J. said at pages 364-368:
Issues
7 Because I have found in the Leasing Appeal that the reassessment of Leasing should be maintained because Leasing did not roll its assets into a valid partnership pursuant to s. 97(2) of the Act, the assessment on the Bank's disposition of the "partnership interest" does not arise. The appellant, however, set out an alternative argument for the first time in this appeal that should be addressed. The appellant argued that if the Court held in the Leasing Appeal that it was the Bank and not Leasing that acted as the vendor when the assets were sold to Central Capital Corporation ("Central"), the reassessment of the Bank in this appeal should be restored on the basis that having acquired the leasing assets as properties distributed to it under s. 88(1) of the Act, the Bank is taxable on the recapture of capital cost allowance under s. 13(1) of the Act in the amount of $83,052,657. The issue that arises out of this argument is whether the Crown is permitted to substitute its original reassessment of the Bank for an assessment on a different basis that amounts to the same amount of income.
Analysis
8 Given the finding in the Leasing Appeal that it was Leasing and not the Bank that sold the assets to Central, it is not necessary to determine whether the Bank would be liable for the recapture of capital cost allowance on the basis that it acquired the leasing assets as properties distributed to it under s. 88(1) of the Act. However, even if it was found that the Bank was the vendor of those assets and liable for the recapture, the appellant could not succeed in upholding its reassessment of the Bank in this appeal.
9 The only basis given in the Notice of Reassessment that Revenue Canada issued to the Bank for the 1987 taxation year was that the amount in question was alleged to constitute a "trading gain on sale of Central Capital Leasing's partnership interest". Revenue Canada did not reassess the Bank on any other basis including that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Act, as the appellant now alleges for the first time in this Court.
10 The applicable limitation period under the Act for assessing a taxpayer is four years from the date of issuance of Revenue Canada's Notice of Reassessment (ss. 152(3.1) and 152(4) of the Act). As a result, the latest that the Minister could have reassessed the Bank for the recapture of cost allowance was October 12, 1993. The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired. The proper approach was expressed in The Queen v. McLeod, 90 D.T.C. 6281 (F.C.T.D.), at p. 6286. In that case, the court rejected the Crown's motion for leave to amend its pleadings to include a new statutory basis for Revenue Canada's assessment. The court refused leave on the basis that the Crown's attempt to plead a new section of the Act was, in effect, an attempt to change the basis of the assessment appealed from, and "tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts". Similarly, the Federal Court of Appeal has described such attempts by the Crown as "a belated attempt to put the appellant's case on a new footing" (British Columbia Telephone Co. v. Minister of National Revenue (1994), 167 N.R. 112, at p. 116).
11 It was open to the appellant to assess the respondent on the basis that it was liable for the recapture of cost allowance when it issued its Notice of Reassessment on October 12, 1989 or anytime prior to the expiration of the limitation period for reassessment. The appellant did not choose to do so and cannot now be permitted to change its assessment eleven years later. The appellant argued that the liability of the respondent for the assessment pursuant to s. 13(1) is an alternative reason for its previous assessment, not a new assessment or reassessment. According to the appellant, because the liability for recapture under s. 13(1) would arise solely as a consequence of a finding that Leasing, in the Leasing Appeal, was not the vendor of the assets in the sale to Central, a reassessment on this basis is merely a legal conclusion flowing from the proper application of the statute.
12 To accept this characterization by the appellant would, in effect, create a situation where the Crown is permitted to raise new arguments simply because other arguments failed in the courts below. Unlike the Minister in Minister of National Revenue v. Riendeau (1991), 132 N.R. 157 (F.C.A.), the Minister in the present case has never sought to amend, correct or reissue the reassessment of the Bank to include a claim for recapture under s. 88(1)(f) of the Act. Moreover, the appellant's characterization of the argument as an alternative one ignores the fact that Leasing and the Bank are two separate taxpayers. What the Minister is seeking to do is to substitute an assessment of one taxpayer for the assessment of another taxpayer because the first assessment did not succeed.
13 Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge that assessment. Here, it is not clear that there is the proper factual basis to support a reassessment on the basis proposed by the appellant. For example, the value of the goodwill associated with the Bank's leasing business, which was transferred to Central in December 1986, could bear on the appellant's new claim for recapture by the Bank. It is not possible to measure the extent to which the Bank might otherwise be liable for recapture, or the Bank's income for tax purposes, without being able to properly allocate the purchase price paid by Central between goodwill and leasing assets. Because the Bank was not assessed on the recapture, the evidence relating to the allocation of the purchase price was not adduced at trial. To allow the appellant to proceed with its new assessment without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.
[32] McLachlin J. agreed with Bastarache J. on this point, as follows, at pages 369-370:
18 The next event occurred on December 29, 1986 when the Bank transferred its interest in the partnership to 693396 and 693397. The Minister cannot argue that the Bank could not transfer its partnership interest at this stage. The Minister must accept that this transfer took place because his assessment of the Bank was based on the assumption that the Bank disposed of its partnership interest. I agree with Bastarache J. that the Minister's argument that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, raised for the first time in this Court, cannot be entertained. The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.
[33] Following the Continental Bank judgment the Income Tax Act was amended to add subsection 152(9) which (including the marginal note) reads
(9) Alternative basis for assessment - The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.
[34] Before I consider to what extent subsection 152(9) modifies or overrules Continental Bank the provision itself should be looked at. I do not as a rule quote the marginal notes of a provision because section 14 of the Interpretation Act states
Marginal notes and references to former enactments that appear after the end of a section or other division in an enactment form no part of the enactment, but are inserted for convenience of reference only.
[35] Despite the clear wording of section 14 of the Interpretation Act, the Supreme Court of Canada in R. v. Wigglesworth, [1987] 2 S.C.R. 541 at pages 556-557, held that courts may consider the marginal notes when interpreting a legislative provision. In Wigglesworth, Wilson J., in interpreting section 11 of the Charter, referred to the case of Law Society of Upper Canada v. Skapinker, [1984] 1 S.C.R. 357, where Estey J. stated at page 377:
... a court should not, by the adoption of a technical rule of construction, shut itself off from whatever small assistance might be gathered from an examination of the heading as part of the entire constitutional document.
[36] In determining the weight to place on marginal notes when interpreting a legislative provision, Wilson J. stated at page 558:
It must be acknowledged, however, that marginal notes, unlike statutory headings, are not an integral part of the Charter.... The case for their utilization as aids to statutory interpretation is accordingly weaker. I believe, however, that the distinction can be adequately recognized by the degree of weight attached to them.
[37] From an aid to interpretation in Charter cases marginal notes have moved, according to the Federal Court of Appeal, to be appropriate references in interpreting income tax legislation.
[38] In Brill et al. v. The Queen, 96 DTC 6572, the Federal Court of Appeal adopted the reasoning of Wilson J. in Wigglesworth and have used the marginal notes in interpreting provisions of the Act. In Brill et al. Linden J.A. referred to the marginal notes to provide guidance of the scope of section 79 of the Act, as it then read, stating at page 6575:
Notwithstanding what I view as the clear meaning of the above language, there is, if needed, further support for this interpretation in the marginal notes. Although the Interpretation Act states that marginal notes "form no part of an enactment", it is permissible to consider them as part of the context of the legislation as a whole.
[39] After quoting Wilson J. from Wigglesworth on the use of marginal notes, Linden J.A. concluded at page 6575:
Marginal notes, therefore, can be used to aid the Court. In this case, the marginal note is "Mortgage foreclosures and conditional sale repossessions", indicating to me that it is meant to apply to situations where there is no determined sale price. If it were intended to cover all acquisitions by lenders, whether by sale or not, as contended for by the Crown, the marginal notes would have so described the subsection.
[40] I think marginal notes should be used with caution. In the Supreme Court of Canada cases they were used in interpreting the Charter. Both Estey J. and Wilson J. accorded to them a very limited role. In the Federal Court of Appeal Linden J.A. used the marginal notes not to assist him in interpreting the statute but as confirmation of his view of the plain meaning of the statute. I do not think that section 14 of the Interpretation Act can be totally ignored.
[41] Here we have a marginal note that speaks of an alternative basis for assessment and the statute itself that refers to an alternative argument. Subsection 298(6.1) of the Excise Tax Act is identical in all material respects to subsection 152(9) of the Income Tax Act. With its marginal note it reads:
(6.1) Alternative argument in support of assessment - The Minister may advance an alternative argument in support of an assessment of a person at any time after the period otherwise limited by subsection (1) or (2) for making the assessment unless, on an appeal under this Part,
(a) there is relevant evidence that the person is no longer able to adduce without leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.
[42] The French version of the marginal note to subsection 152(9) of the Income Tax Act speaks of "nouvel argument à l'appui d'une cotisation".
[43] I rather doubt that draft legislation that has never been enacted, along with a press release explaining it, can afford much assistance, if any, in interpreting a legislation that is substantially different but for what it is worth I reproduce here a news release of the Department of Finance dated December 23, 1998 which reads in part:
Also released with today's proposals is a draft amendment to the Income Tax Act to clarify that Revenue Canada may, in the course of an income tax appeal, rely on alternative grounds to support its assessment. This amendment is proposed in light of remarks by the Supreme Court of Canada in the recent case of The Queen v. The Continental Bank of Canada. More detailed information can be found in the attached draft legislation and accompanying explanatory note.
ALTERNATIVE GROUNDS SUPPORTING AN ASSESSMENT
1.(1) Section 152 of the Income Tax Act is amended by adding the following subsection:
(9) Subject to subsection 152(5), an assessment shall not be vacated, varied, or referred back to the Minister for reconsideration and reassessment by reason only of the identification by the Minister of an alternative basis of liability for the assessment.
(2) Subsection (1) applies to appeals disposed of after Royal Assent.
Explanatory note:
New subsection 152(9) is intended to ensure that Revenue Canada may, on an appeal of an income tax assessment, identify the basis or further bases on which Revenue Canada is relying in support of its assessment. This amendment is proposed in light of remarks by the Supreme Court of Canada in the case of The Queen v. Continental Bank of Canada to the effect that the Crown is not permitted to advance a new basis for assessment after the limitation period has expired.
Subsection 152(9) is subject to subsection 152(5) which prevents the Minister from including amounts in a taxpayer's income which were not included prior to the expiration of the taxpayer's normal reassessment period. It is also intended that subsection 152(9) be subject to the court protection afforded to taxpayers that an alternative argument cannot be advanced to the prejudice of the right of a taxpayer to introduce relevant evidence to rebut the argument.
[44] The draft subsection 152(9) never became law. Subsection 152(9) in its present form came into effect on June 17, 1999. The technical note, dated March 1999, accompanying it read:
New subsection 152(9) is intended to ensure that the Minister of National Revenue may advance alternative arguments in support of an income tax assessment after the normal reassessment period has expired. This amendment is proposed in light of remarks by the Supreme Court of Canada in the case of The Queen v. Continental Bank of Canada..., to the effect that the Crown is not permitted to advance a new basis for assessment after the limitation period has expired.
The limitations found in paragraphs 152(9)(a) and (b) are intended to import the Court protection afforded to taxpayers that an alternative argument cannot be advanced to the prejudice of the right of a taxpayer to introduce relevant evidence to rebut the argument.
Subsection 152(9) is subject to other limitations in the Act, including subsection 152(5) which prevents the Minister from including amounts in a taxpayer's income which were not included prior to the expiration of the taxpayer's normal reassessment period.
This subsection applies to appeals disposed of after Royal Assent.
[45] Assuming all of this extraneous material can be looked at it supports the conclusion that would have been reached without it, that is to say that "an alternative argument" in support of an assessment is not the same as "alternative basis for an assessment". Although at one point the Department of Finance may have wanted the legislation to permit alternative bases for assessments the legislation in its final form was considerably watered down.
[46] It will be obvious from the passage from the judgment of Bastarache J. that the alternative proposition that the Crown sought to advance for the first time in the Supreme Court of Canada was not just a new argument in support of the assessment of a trading gain on the sale of the partnership interest. It was a brand new basis of assessment that the Crown tried on at the eleventh hour.
[47] What happened was that Continental Bank's ("CB") subsidiary Continental Bank Leasing ("CBL") in order to avoid recapture of CCA on the sale of its leasing assets rolled those assets into a newly formed partnership, elected a price equal to their UCC, wound up into CB who then sold the partnership interest to Central Capital ("CC") and treated the gain as a capital gain. The basic assessment was against CBL and was premised on the view that the series of steps was in substance a sale by CBL of its leasing assets to CC giving rise to recapture. The assessment against CB as an adventure in the nature of trade was inconsistent with the assessment against CBL and was purely protective in case the assessment against CBL failed.
[48] Then, in the Supreme Court of Canada the Crown came up with an even more improbable basis for assessing CB, that it was really CB that was selling CBL's leasing assets. If it could not succeed in its substance over form argument in defending its assessment against CBL it is difficult to see how it could possibly have succeeded with its new theory.
[49] What Bastarache J. articulated was what appellate courts have been saying for years, that an appellant cannot raise new arguments on appeal that were not raised at trial particularly where had the point been raised at trial the evidence might have been different. This proposition was stated by Duff J. (as he then was) in SS. Tordenskjold v. SS. Euphemia, 41 S.C.R. 154 (1908) at page 164 where he quoted the same proposition stated by Lord Herschell in the Tasmania, 15 App. Cas. 223 at page 225.
[50] It is no wonder the Supreme Court of Canada refused to entertain the new theory. Quite apart from the fact the position has no merit the evidentiary basis needed to establish that CB was from the outset the vendor of CBL's assets on which CBL had claimed and been allowed CCA so that CB became liable on the recaputure on the assets was virtually insuperable and would have required that very different evidence be adduced at trial.
[51] It is perfectly clear that even if subsection 152(9) of the Act had been in force when the new basis was advanced and even if the Crown could have successfully argued that the new basis was an "alternative argument" the Crown still could not have succeeded in advancing the new basis in the Supreme Court. What is new in Bastarache J.'s judgment is the proposition that the Crown cannot raise a new basis for upholding the assessment after the normal reassessment period had elapsed. In fact it is questionable whether the Crown could have succeeded in raising the point in the Supreme Court of Canada even if the normal reassessment period had not elapsed.
[52] In what way then did subsection 152(9) modify the judgment of Bastarache J. or for that matter the law that has existed since the SS. Euphemia case? Bastarache J.'s comments were not confined to appellate courts. They appear to apply to all courts, including the Tax Court of Canada. Subsection 152(9) permits the raising of new arguments in support of an assessment. An argument is something that is advanced in support of a basis of assessing. A basis in the fundamental principle underlying an assessment.
[53] In Schultz v. The Queen, [1996] 2 C.T.C. 127, which was decided before the Supreme Court of Canada decision in Continental Bank, Stone J., after referring to a number of cases stated:
24 I do not understand that the law as developed in these cases prevented the Minister from pleading the alternative defence before the Tax Court of Canada. It is true that in pleading he is subject to certain constraints. For example, he cannot plead an alternative assumption when to do so would fundamentally alter the basis on which his assessment was based as to render it an entirely new assessment. In my view, in the present cases the Minister has not so changed the basis of the assessments. What he did was merely to assert a different legal result flowing from the self-same set of facts by alleging that those facts show the existence of a joint venture or partnership if they do not show an agency relationship. Even if it could be said that the Minister has alleged new "facts" by adopting the alternative posture, the law as developed allowed him to do so but imposed upon him the onus of proving those facts: Pillsbury, supra, at page 302-03 (D.T.C. 5188); Continental Bank Leasing Corp. v. R., [1990] 1 C.T.C. 2306, 93 D.T.C. 298 (T.C.C.), at page 2310 (D.T.C. 302).
[54] These observations must of course be read in light of the subsequent comments by Bastarache J. in Continental Bank but they are useful in that they draw a distinction between, on the one hand, so fundamental an alteration in the basis of the assessment that, if accepted, would lead to a result that is tantamount to an entirely new assessment and, on the other hand, an assertion of a different legal result flowing from the same set of facts by alleging that those facts lead to an alternative legal relationship.
[55] In paragraph 10 of his judgment quoted above Bastarache J. refers with approval to the Federal Court Trial Division's judgment in The Queen v. McLeod, 90 DTC 6281, and the Federal Court of Appeal's judgment in British Columbia Telephone Company Co. v. Minister of National Revenue, (1994) 167 N.R. 112.
[56] These are examples of the type of change in position by the Crown that Bastarache J. considered unacceptable. The question of course remains whether the result would have been the same if subsection 152(9) had been in force. I do not think that subsection 152(9), speaking as it does of an alternative argument, goes so far as to permit the Crown to in effect "appeal its own assessment" or put its case "on a new footing".
[57] Since subsection 152(9) was enacted there have been several cases that considered the provision. In Anchor Pointe Energy Limited v. The Queen, 2002 DTC 2071 (since appealed to the Federal Court of Appeal), Rip J. stated that it is an abuse of the process of the court for the Crown to plead as assumptions facts that were not assumed. I agree (see Holm v. Canada, [2002] T.C.J. No. 641). However since the case has been appealed to the Federal Court of Appeal I make no further comment on it.
[58] In General Motors Acceptance Corporation of Canada, Limited v. The Queen, 99 DTC 975, Rip J. refused to strike out portions of the reply which the appellant attacked on the grounds that they raised a new basis of assessment. He did not rely on subsection 152(9) but he did refer to the judgment of Létourneau J.A. in The Queen v. Hollinger Inc., 99 DTC 5500. In Hollinger Létourneau J.A. said at pages 5504-5505 (footnotes omitted):
[16] The position now taken by the appellant that the loss shares were not capital property is obviously a revocation of its prior unsuccessful assumption. From the evidence before us and before the Tax Court judge, it is impossible, however, to determine whether the limitation period for reassessing had expired when this new basis was first raised by the Minister. We know that a Notice of Reassessment was issued on February 4, 1993, but the record does not reveal when the original assessment of the respondent was made from which to calculate the four-year limitation period.
[17] On the other hand, the Minister did raise for the first time on September 12, 1994, in his Reply to the respondent's Notice of Appeal, that Coseka did not hold the loss shares as capital property on December 12, 1986 and that the transfer of these shares to the second subsidiary company (353380 Alberta Ltd.) on that date was not a transfer of capital property. Instead, he submitted that the loss shares had become trading assets utilized by Coseka in a business operation or venture of profit-making by which it intended to sell for gain its tax loss. Thus, the issue was as early as September 1994 before the Tax Court and it is still impossible to establish whether by then the limitation period for reassessment had expired. Because the limitation date is not in evidence, I am of the view that the Continental Bankprinciple relied upon by the respondent, namely that the Crown is not permitted to advance a new basis for reassessment after the limitation period has expired, cannot be applied in this instance.
[18] However, counsel for the respondent contended that the Continental Bank decision of the Supreme Court stands for more. In his view, it also determined the procedure to be followed when a new basis for reassessment is being advanced. Under the existing law at the time, if the Minister was entitled to change the basis of the reassessment within the limitation period, counsel claimed, he could only do that formally by either issuing a new reassessment or amending the existing reassessment. Consequently, the mere pleading of such new basis in the Reply is not sufficient to validly raise the issue and prevent the limitation period from expiring. He relied to sustain his claim upon the following passage from Bastarache, J.:
The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired.
[19] With respect, I do not read this statement of Bastarache, J. as imposing a formal procedure or a procedural restriction of the kind suggested by the respondent.
[20] First, the quoted passage refers to the Crown, not the Minister. Had Bastarache, J. mentioned the Minister, it could have been a possible indication that he had in mind the procedure of reassessment itself. Second, it speaks of "advancing a new basis for reassessment", thereby referring to the Crown's actual practice of advancing a new argument in its pleadings in support of the assessment. Indeed, immediately after his statement, Bastarache, J. refers with approval to the case of The Queen v. McLeod in which the Crown was refused leave to amend its pleadings to advance a new basis for reassessment because the limitation period had expired. While Collier, J. in McLeod refused the amendment on account of the expiry of the limitation period, he never questioned the Crown's right to make new assumptions at trial or advance a new argument in support of the assessment.
[21] It is obvious at pages 367-368 of his reasons that what Bastarache, J. is concerned with is the possible unfairness to the taxpayer when notification of the new basis, whatever form it may take, is either inadequate or given too late and, as a result, the taxpayer is not afforded a proper opportunity to respond:
p. 367 Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge the assessment.
p. 368 To allow the appellant to proceed without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.
[22] I am comforted in this view by the recent legislative amendment in Bill C-72 brought to section 152 of the Act to overrule the decision of the Supreme Court in Continental Bank on this point. Subsection 152(9) assented to on June 17, 1999 allows for an alternative argument in support of an assessment to be advanced at any time after the normal reassessment period, subject to a discretion given to the Court to refuse it if prejudice could result to the taxpayer from the late change. The subsection reads:
s. 63.1(2) Section 152 of the Act is amended by adding the following after subsection (8):
(9) The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.
[23] The amendment has no application in the present proceedings because it was not in force when the matter was argued before the Tax Court. But it is indicative of the philosophy that ought to prevail in these matters. It would introduce an unnecessary measure of formalism, unwarranted by the decision of the Supreme Court and the subsequent amendment to section 152, if we were to require that proper notification to the taxpayer of an alternative argument in support of an assessment can only be achieved by the ministerial issuance of a new reassessment. This is not to say that the Minister may change the amount of an assessment in pleadings, but only that arguments in support of an assessment can be made in pleadings, even if not included in a notice of reassessment. Changing the amount of an assessment in pleadings is tantamount to the Minister appealing his own assessment, an avenue which has been clearly rejected by the Courts.
[24] In conclusion, I think the preliminary objection of the respondent grounded on the Continental Bank case has no merit in this instance and, accordingly, the appellant was entitled to argue, as it did before the Tax Court, the new basis advanced in its Reply. The respondent was fully and timely informed of it and had ample time to prepare as the hearing of the appeal took place more than three and a half years later. All the relevant evidence was before the Tax Court judge. Not only was there no objection made by the respondent at the time, but submissions were made to the judge by both parties with respect to the new basis for reassessment. The Tax Court judge dealt with the issue on its merits and the appellant's ground of appeal relating to that aspect of