Morrison v. The Queen

Morrison v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-11-23
Neutral citation
2018 TCC 220
File numbers
2008-2759(IT)G, 2008-2779(IT)G, 2014-3231(IT)G, 2015-858(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Notes
A correction was made on November 26, 2018.
Decision Content
Citation: 2018 TCC 220
Date: 20181123
Dockets: 2008-2759(IT)G
2008-2779(IT)G
2014-3231(IT)G
BETWEEN:
V. ROSS MORRISON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2015-858(IT)G
AND BETWEEN:
DIETER EISBRENNER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Owen J.
I. Introduction
[1] These are appeals by Mr. V. Ross Morrison and Mr. Dieter Eisbrenner (the “Appellants”) of reassessments fixing the income tax consequences of their participation in pharmaceutical donation programs (the “Programs”) that existed from 2003 through 2008. Mr. Morrison participated in the Canadian Gift Initiatives donation program (the “CGI Program”) in 2003 and in the Canadian Humanitarian Trust donation program (the “CHT Program”) in 2004 and 2005 and Mr. Eisbrenner participated in the CHT Program in 2005. The appeals were heard on common evidence.
[2] Mr. Morrison is a lawyer and represented himself with the assistance of an associate. Mr. Eisbrenner was represented by counsel appointed shortly before the hearing.
[3] The week before the commencement of the hearing of these appeals, scheduled for four weeks, Mr. Rosen discontinued his appeal. Mr. Rosen was the owner of World Health Initiatives Inc. (“WHI”), the creator and promoter of the CHT Program. Following the receipt of affidavit evidence of difficulties encountered in serving Mr. Rosen in person with a subpoena, I issued an Order in favour of the Respondent allowing for substituted service of the subpoena.
[4] At the commencement of the hearing of the appeals, Mr. Miller, a former employee of Canadian Donations Limited (“CDL”), the marketer of the CGI Program and the CHT Program, discontinued his appeal.
[5] The Appellants called the following witnesses:
Mr. Morrison.
Mr. Eisbrenner.
Mr. Eric Richard Miller, an employee of CDL in 2004, 2005 and 2006.
Mr. Kevin O’Brien, the executive director of Canadian Physicians for Aid and Relief (“CPAR”) during the taxation years in issue in these appeals.
Mr. Robert Edison Barnett, the chairman of the board of Escarpment Biosphere Foundation (“EBF”) during the taxation years in issue in these appeals.
Ms. Shirley Gremyachev, the founder and a director of Universal Aide Society.
Mr. Max Zive, a pharmacist and the president of Zipharm International Inc., a consultant in respect of the CGI Program and the CHT Program.
Mr. Philip J. Rosenberg, a pharmacist and a consultant in respect of the CHT Program.
[6] The Respondent called the following witnesses:
Mr. Ronald Eugene Monahan, a large file auditor with the Canada Revenue Agency (the “CRA”) and the lead auditor of the individuals who participated in the CHT Program in 2004, 2005 and 2006.
Mr. Richard Alan Wilson, a tax avoidance auditor with the CRA and the lead auditor of the individuals who participated in the CGI Program after the initial lead auditor retired in September 2006.
Mr. Claude Senecal, an exchange of information officer with the Canadian Competent Authority (the “CCA”).
[7] The Respondent also called Professor Ernst Rudolf Berndt, Ph.D., who was qualified as an expert on measuring values for generic pharmaceuticals.
A. The Assumptions of Fact of the Minister of National Revenue
[8] In reassessing the Appellants in respect of their participation in the CHT Program, the Minister of National Revenue (the “Minister”) made assumptions of fact that were not addressed by the evidence adduced by the Appellants. The Minister’s assumptions of fact as set out in the Minister’s pleadings are reproduced in full in Appendix A to these Reasons.
II. The Evidence
A. The CGI Program
[9] Mr. Morrison participated in the CGI Program in 2003. Mr. Eisbrenner did not participate in the CGI Program.
[10] The promoter of the CGI Program was Canadian Gift Initiatives Inc. (“CGI”). CGI retained CDL to market the CGI Program.
[11] Mr. Morrison entered into a purchase agreement with CGI made as of the 30th day of September 2003 (the “CGI Agreement”) whereby he agreed to purchase “certain goods . . . set out in Schedule A hereto.” from CGI for a net purchase price of $9,500. [1]
[12] Mr. Morrison testified that someone other than himself filled in most of the handwritten information in the CGI Agreement [2] and that the pharmaceuticals were not identified in the purchase agreement when he signed the agreement. [3] Mr. Morrison understood that the pharmaceuticals would be a combination of the medicines listed in the CGI Program promotional materials. [4]
[13] In section 4 of the CGI Agreement, an “X” in a box indicates that Mr. Morrison intends to donate the pharmaceuticals to a registered charity and that he appoints CGI to facilitate the donation. The registered charity is not named in the CGI Agreement. [5]
[14] Mr. Morrison paid the $9,500 purchase price by a cheque dated October 7, 2003 made out to a law firm. The cheque was cashed on October 30, 2003. [6]
[15] Mr. Morrison executed a deed titled “DEED OF GIFT TO A CHARITY” dated November 7, 2003 in favour of EBF (the “CGI Deed”). [7] The name of the charity and the date were written by someone other than Mr. Morrison. [8]
[16] Mr. Morrison did not know if the CGI Deed was attached to the CGI Agreement. [9] Mr. Morrison also did not know whether he signed the CGI Agreement and the CGI Deed on the same date, but he conceded that it was possible even though the documents had two different dates (i.e., September 30 and November 7). [10]
[17] EBF issued Mr. Morrison a tax receipt dated November 11, 2003 in the amount of $56,502.80. [11] Attached to the receipt was an invoice dated November 5, 2003 and an undated document titled “Donation Value Schedule” identifying certain pharmaceuticals and stating the value attributed to those pharmaceuticals. Mr. Morrison did not know the precise pharmaceuticals he had purchased or the value of those pharmaceuticals until he received the tax receipt. [12]
[18] In his 2003 tax return, [13] Mr. Morrison claimed the amount stated in the tax receipt as a gift to EBF and reported a capital gain of $47,002.80 (i.e., $56,502.80 - $9,500) from the disposition of the pharmaceuticals identified on the attachments to the tax receipt.
[19] Mr. Wilson testified that the CRA did not challenge Mr. Morrison’s position that he purchased pharmaceuticals from CGI and that he transferred those pharmaceuticals to EBF. [14] However, the CRA did challenge the value of the pharmaceuticals based on an appraisal obtained from a valuator employed by the CRA. [15] The CRA reassessed Mr. Morrison to deny all but $1,759.35 of the gift to EBF claimed by Mr. Morrison in his 2003 tax return. Mr. Morrison did not lead expert evidence regarding the value of the pharmaceuticals. Instead, Mr. Morrison relied on the valuations obtained by the CGI Program, which used values from the Ontario drug benefit formulary. [16]
[20] Mr. Morrison testified that he was aware of the possible tax benefit associated with participating in the CGI Program, but that the tax saving was not his primary reason for participating in the program. [17] Mr. Morrison described his motivation as follows:
What motivated me was the opportunity to participate in a program which involved essential medicines, pharmaceuticals, if you will, being distributed to persons in need in third-world countries. [18]
B. The CHT Program
[21] The CHT Program replaced the CGT Program after 2003 because of proposed amendments to the Income Tax Act (the “ITA”) released in early December 2003 that addressed so-called “buy low gift high” arrangements. [19]
[22] Mr. Monahan testified that based on the tax returns filed with the CRA and the CRA’s audit of the CHT Program, there were approximately 6,500 participants in the CHT Program in 2004, 10,000 in 2005 and 10,500 in 2006. [20] The amount of cash and in-kind gifts claimed by participants in the CHT Program during those three years was approximately $222 million and $600 million, respectively. [21]
[23] Mr. Miller testified that Stephen Rosen structured the CHT Program and that over time he became the figurehead of the program. [22] Starting in 2004, Mr. Miller organized public and private events to market the CHT Program to individuals. [23] Stephen Rosen spoke at almost all these events. [24] From 2004 to 2006, CDL had agreements with at least 200 authorized representatives (agents), who solicited participants for the CHT Program. [25]
[24] The promotional materials for the CHT Program, which included at least one professionally produced video presentation, suggest that pharmaceuticals were distributed to great effect in Vietnam, Ecuador, Malawi and Sub-Saharan Africa among other places. [26]
[25] The Respondent’s counsel indicated during the hearing that the Respondent does not dispute that pharmaceuticals existed and were distributed outside Canada. The Respondent disputes that the various [27] Canadian Humanitarian Trusts (“CHT”) acquired pharmaceuticals that were distributed to the Appellants. [28]
[26] Mr. Morrison and Mr. Eisbrenner participated in the CHT Program in 2004 and 2005. These appeals do not address Mr. Eisbrenner’s participation in 2004. A portion of the amount of the gifts claimed by Mr. Eisbrenner in his 2005 income tax return was carried over to his 2006 taxation year. [29]
[27] According to the promotional materials for the CHT Program, the CHT Program involved the following elements: [30]
Client makes a cash donation to a registered charitable foundation (Foundation A)
Client applies to WHI to be considered as a potential Class A beneficiary of CHT
CHT transfers title to World Health Organization (“WHO”) Essential Medicine Units to the successful applicant (Client)
Client chooses to donate WHO Essential Medicine Units (“WHOEM Units”) to a registered charitable foundation (Foundation B)
Foundation A issues a tax receipt for the cash donation; Foundation B issues a tax receipt for the net value [31] of the WHOEM Units
WHOEM Units are distributed to those in need in developing countries
[28] The promotional materials do not explain how the pharmaceuticals make their way to CHT for distribution to Class A beneficiaries. Mr. Miller identified Crunin Investments (“Crunin”) as the settlor of CHT [32] but none of the witnesses were able to address how Crunin acquired pharmaceuticals purportedly settled on CHT.
[29] Certain Canadian registered charities participated in the CHT Program in one of three possible roles. [33] The first role was as a cash charity (i.e., a Foundation A). These charities received cash donations from participants and issued tax receipts to participants. Mr. Miller testified that Alberta Distribution Relief Agency (“ADRA”), Living Waters Ministry Trust and Phoenix Community Works Foundation (“PCWF”) were cash charities during 2004 through 2006. [34]
[30] The second role was as an in-kind charity (i.e., a Foundation B). These charities received in-kind donations from participants in the form of certificates issued by CHT and issued tax receipts to participants. Mr. Miller testified that Choson Kallah Foundation (“CKF”), Meoroth Charitable Foundation (“MCF”), Resources for Life Foundation and New Hope Ministries Institute were in-kind charities during the years 2004 through 2006. [35] The Minister assumed as a fact that Adventist Society International was also a cash charity. [36]
[31] The third role was as a distributing charity. These charities received cash donated to the cash charities and the certificates donated to the in-kind charities. Mr. Miller testified that CPAR and EBF were distributing charities during 2004 through 2006. [37] The distributing charities did not issue tax receipts.
[32] The distributing charities and WHI entered into agreements regarding the cash and in-kind receipts of those charities. The agreements provided that the distributing charity would deposit all monies received in a segregated trust account held by a law firm and that the charity would execute an irrevocable letter of direction instructing the law firm to pay the monies received as follows:
1% to the general account of the distributing charity;
1.57% of the total unencumbered value of the pharmaceuticals the distributing charity receives to a named in-kind charity;
1% (plus applicable GST) to WHI as fees for its services;
32.68% (plus applicable GST) to WHI for solicitation of funds and pharmaceuticals; and
the balance to the trust account of WHI to cover all costs associated with the distribution of pharmaceuticals. [38]
[33] The Minister assumed as a fact that the charities involved in the CHT Program collectively retained no more than 3.3% of the cash received by the cash charities in 2004 and no more than 3% of the cash received by the cash charities in 2005 and 2006. [39] Counsel for the Respondent asked Mr. Miller if the cash charities retained 1% of the cash they received from participants but Mr. Miller testified that he had no knowledge of the arrangements with the cash charities. [40]
[34] The documentation effecting an individual’s participation in the CHT Program consisted of the following (collectively, the “CHT Documents”):
A Class A beneficiary application made to WHI (an “application”)
A certificate issued by CHT (a “certificate”) stating that the person named on the certificate had been named a Class A beneficiary of CHT and was the owner of a specified number of WHOEM Units subject to a lien described in a page attached to the certificate that also included language for up to three transfers of title. The certificate states that a description of the WHOEM Units is set out in a schedule to the certificate
A deed of gift appointing WHI as agent to take all steps required to effect the gift of the WHOEM Units to a donee
[35] Mr. Morrison and Mr. Eisbrenner each testified that there was no connection between the cash donation identified in the promotional materials as “Stage 1” and the balance of the steps identified in the promotional materials as “Stage 2”, and that there was no obligation to make a cash donation to be considered as a potential Class A beneficiary of CHT. [41]
[36] Mr. Morrison testified that he made a cash donation in 2004 and in 2005 and Mr. Eisbrenner testified that he made two cash donations in 2005. These cash donations were paid by cheque. [42]
[37] The Appellants’ cheques indicate that these cash donations were paid in trust to a law firm on behalf of the recipient cash charity. The law firms named as payee on the Appellants’ cheques are the same as the law firms that agreed to maintain trust accounts for CPAR and EBF. [43] Mr. Miller testified that he was aware that these two law firms acted in this capacity for the cash charities. [44]
[38] The Appellants each submitted applications to WHI to be appointed Class A Beneficiaries of CHT and to receive WHOEM Units with a minimum stipulated value. [45] The applications submitted by the Appellants did not state the stipulated value of the WHOEM Units, which was filled in by someone other than the Appellants. [46] The Appellants did not know how the stipulated value was determined. [47] The Appellants testified that they were not guaranteed to be appointed a Class A beneficiary of CHT and Mr. Miller testified that the authorized representatives were instructed not to provide such guarantees to participants. [48]
[39] CHT issued certificates to each of the Appellants stating that they were accepted as Class A beneficiaries of CHT and were entitled to receive a stipulated number of WHOEM Units subject to a lien. [49] The page attached to the certificates describes the lien on the WHOEM Units and states that title to the WHOEM Units is being transferred first to the in-kind charity named on the page and then from that charity to one of the distributing charities. The certificates in evidence have a “discharged” stamp on the page with the name KP Innovispharm Ltd. (“KP Innovispharm”).
[40] The Appellants had no knowledge of why there was a lien on the WHOEM Units. [50] Mr. Barnett testified that EBF received the certificates representing the WHOEM Units without the discharge stamp. [51] Mr. O’Brien and Mr. Barnett testified to their understanding that the certificates with the two transfer of title sections completed represented the distributing charities’ ownership of pharmaceuticals. [52] Mr. O’Brien testified that during 2004 through 2006 CPAR received “boxes and boxes of certificates”. [53]
[41] The Appellants each executed deeds of gift. [54] The name of the donee was filled in by someone other than the Appellants after the deeds of gift were submitted to WHI. [55] Mr. Eisbrenner explained that at the time the deeds of gift were submitted to WHI, he would not have known who he wanted to donate to or whether he was a Class A beneficiary. [56]
[42] A relative of Mr. Eisbrenner completed his second application and second deed of gift for 2005 and issued the cheque in payment of Mr. Eisbrenner’s second cash donation. Mr. Eisbrenner testified that he proceeded in this fashion because he was not able to complete the application in time. [57]
[43] The Appellants received tax receipts for each of the cash and in-kind donations and claimed the amounts stated on the receipts as gifts in their tax returns for the relevant taxation years. [58] The amounts of the cash gifts reported by the Appellants in their tax returns for 2004 and 2005 were as follows:
Name of Appellant
2004
2005 [59]
Morrison
$15,350
$15,075
Eisbrenner
N/A
$39,966
[44] The amounts of the in-kind donations reported by the Appellants in their tax returns for 2004 and 2005 were as follows: [60]
Name of Appellant
2004
2005
Morrison
$41,108.82
$ 37,815.15
Eisbrenner
N/A
$124,459.25
[45] The receipts for the in-kind donations included a schedule that listed pharmaceuticals by name and the value attributed to those pharmaceuticals. [61] Mr. Miller testified that Matthew Rosen prepared the tax receipts issued by the cash and in-kind charities but to his knowledge he did not sign those tax receipts. [62]
[46] Mr. Morrison was not aware of the specific pharmaceuticals purportedly distributed to him by CHT until he received a tax receipt from the in-kind charity. [63] Mr. Eisbrenner did not agree with counsel for the Respondent that the receipts were the first indication of the precise pharmaceuticals purportedly distributed to him by CHT, but he could not recall when he obtained that information. [64]
[47] The value attributed to the in-kind donations was based on one of three methodologies. These methodologies were described as follows in general terms in a letter from Philip J. Rosenberg to Stephen Rosen dated July 15, 2004:
Following the determination of the safety and efficacy of the pharmaceuticals each product is best valued by making use of the Ontario Drug Benefit Formulary/Comparative Drug Index, as prescribed under the Ontario Drug Benefit Act (Ontario Formulary Value) or the price ascribed to the pharmaceutical by the two major Canadian pharmaceutical wholesalers (McKesson Canada, and Kohl & Frisch Limited), utilizing whichever price is more. Where no such prices are available, the valuation is then derived from the ‘Red Book AWP’, less 25%. (The Patented Medicine Pricing Review Board (PMPRB), an independent quasi-judicial body created by Parliament in 1987, under the Patent Act, to protect consumer interests and to contribute to Canadian health by ensuring that prices charged by manufacturers of patented medicines are not excessive, utilizes the Red Book as one of its two references. PMPRB also references the US government Federal Supply Scheduling Pricing which is not relevant or applicable in this case). [65]
[48] Mr. Rosenberg prepared product-specific per molecule (per dose) appraisals for CHT based on lists of pharmaceuticals provided by Matthew Rosen, who was Mr. Rosenberg’s contact in the CHT Program. [66] Mr. Rosenberg chose to rely on the Ontario Drug Benefit Formulary/Comparative Drug Index as the default reference to value the pharmaceuticals because the donor was a Canadian resident and the donee was a Canadian charity. [67]
[49] In cross-examination, Mr. Rosenberg acknowledged that he was not a certified valuator and that he had no experience valuating pharmaceuticals for use in markets outside Canada. [68] Mr. Rosenberg agreed that he did not receive any documentation to demonstrate that the pharmaceuticals identified by Matthew Rosen were approved for import and sale in Canada and that he knew the pharmaceuticals were not approved for import and sale in Canada. [69] Mr. Rosenberg did not ask for or review the invoices for the purchases of the pharmaceuticals and agreed that he had no interest in the actual purchase price of the pharmaceuticals. [70]
[50] Mr. Morrison testified that although he believed pharmaceuticals were distributed in third-world countries and was motivated to participate by that belief, he did not independently confirm that belief, he had no knowledge of whether the pharmaceuticals in fact existed and he had no knowledge of whether the charities took possession of the pharmaceuticals. [71]
[51] Mr. Eisbrenner testified that he relied on the certificates as proof that the pharmaceuticals were transferred to the charity named on the page attached to the certificate and that he had no information outside that stated in the CHT Program materials. [72]
[52] Mr. Zive testified that he inspected pharmaceuticals identified with the CHT Program at a warehouse in Holland and that he visited three of the manufacturers supplying the pharmaceuticals to determine if they were following good manufacturing practices but not to inspect pharmaceuticals identified with the CHT Program. [73] Mr. Zive and Mr. O’Brien testified that they conducted a monitoring trip to Vietnam [74] and Mr. Miller testified that he visited Ecuador in 2006. [75]
[53] The Appellants had no knowledge regarding the workings of the CHT Program beyond what was stated in the promotional materials for the program, the CHT Documents and the tax receipts. None of the witnesses, including Mr. O’Brien and Mr. Barnett, [76] had any first-hand knowledge of who purchased the pharmaceuticals from the manufacturers or who (if anyone) transferred pharmaceuticals to CHT for distribution to Class A beneficiaries.
[54] Counsel for Mr. Eisbrenner attempted to track down several individuals associated with the CHT Program but with no success. Stephen Rosen was served with a subpoena by the Respondent, but he did not attend the hearing and I was not asked to issue a bench warrant for his arrest.
[55] Mr. Monahan testified that he was able to identify pharmaceuticals associated with the CHT Program based on materials provided by counsel for WHI cross-referenced against other information obtained through the course of the CRA audit of the CHT Program. [77] Mr. Monahan used this information to identify manufacturers and issue requests to those manufacturers for copies of invoices for the pharmaceuticals identified with the CHT Program. [78] In response, Mr. Monahan received copies of invoices from the manufacturers (the “Invoices”). [79] Mr. Monahan testified that based on the Invoices the only purchasers of the pharmaceuticals that the CRA identified with the CHT Program were MedPharm, Amstelfarma (the owner of the warehouse in Holland) and PK Bonapharm. [80] In the course of the audit, the CRA did not find any evidence that the pharmaceuticals identified with the CHT Program by WHI were purchased by Crunin or KP Innovispharm. [81] Mr. Monahan stated:
We took issue with a document called a sale and supply agreement between KPI and Crunin that purports to show that they did take possession. But what we found, after reviewing all the manufacturers, is that there had never been any indication, any document, any shipping document, any invoice, any money transfer, that indicated that KP Innovispharm had owned those drugs at any time.
. . .
But the information we received from the manufacturers showed that KP Innovispharm never acquired pharmaceuticals. There’s no evidence they ever owned the pharmaceuticals. The purchases made to the manufacturers, as we concluded from reviewing the invoices and the shipping documents, was that KP Innovispharm never owned those drugs, and therefore never had the ability to transfer the title of those drugs to Crunin. [82]
[56] WHI identified KP Innovispharm as the holder of a lien on the pharmaceuticals. After the CRA obtained details of the transfers of funds from the lawyers’ trust accounts, Mr. Monahan asked the CCA to request Bank of Cyprus statements for KP Innovispharm from the Cyprus Competent Authority (the “Cyprus CA”). Mr. Senecal testified that the CCA made the request and received bank statements from the Cyprus CA (the “Bank Statements”). [83]
[57] Mr. Monahan testified that, according to the audit, approximately $116 million was deposited into the Cyprus bank account of KP Innovispharm in 2004 through 2006 from the trust accounts held by Mr. Sommer and Mr. Hancock. This number corresponded to the amount of the lien on the pharmaceuticals identified by WHI. However, the CRA’s examination of the Bank Statements indicated that none of this money was paid by KP Innovispharm to the manufacturers of pharmaceuticals, that $70 million was transferred to a company called Hever International, which the CRA believed (based on the Bank Statements) was beneficially owned by Leonard Bellam, and that $22 million was transferred to PK Bonapharm, which was one of the companies purchasing pharmaceuticals and which again was believed by the CRA (based on the Bank Statements) to be beneficially owned by Leonard Bellam. [84]
[58] Counsel for Mr. Eisbrenner objected to the admission of the Invoices and the Bank Statements on the grounds that the content of these documents was hearsay. After receiving written submissions, I ruled that the Invoices and the Bank Statements were admissible into evidence as proof of the truth of their contents under the principled exception to the hearsay rule. [85]
C. The Expert Evidence
[59] Professor Berndt prepared an expert report [86] and testified as an expert valuator for the Respondent.
[60] Professor Berndt opines that the methodology for valuating pharmaceuticals adopted by the CHT Program substantially overstates the value of the pharmaceuticals:
. . . I understand that Appellants’ gift receipt amounts are based on these methodologies. In my judgment, the methodologies put forward by Messrs. Rosenberg and Marigold would lead to substantial overestimates of the fair market value for the Products. Specifically, both methodologies recommend that fair market value be estimated with a Canadian list price that, like AWP and WAC in the United States, is typically substantially greater than actual acquisition costs for generic prescription drugs in Canada.
Mr. Rosenberg and Mr. Marigold recommend that fair market value for a generic drug be estimated as the listed price for that generic drug in either the Ontario provincial formulary or the catalogues of major Canadian pharmaceutical wholesalers. Mr. Rosenberg claims further that the wholesaler catalogue prices are in most cases identical to the Ontario formulary prices. Mr. Rosenberg asserts that the wholesaler catalogue prices represent the “actual amount paid by pharmacies for the pharmaceuticals,” and Mr. Marigold asserts similarly that they represent “what the pharmacies themselves pay for the pharmaceuticals.” Messrs. Rosenberg and Marigold are incorrect.
. . .
Rebates for generic drugs in Canada have been estimated to be at least 40 percent on average and as much as 80 percent. Hence Canadian pharmacies actually pay up to 80 percent less than wholesaler catalogue prices for generic pharmaceuticals. The wholesaler catalogue prices that Messrs. Rosenberg and Marigold recommend thus have no connection with the transactions prices actually charged and received by manufacturers for generic drugs in Canada. Therefore, in my judgment, the methodologies and recommendations of Mr. Rosenberg and Mr. Marigold provide inappropriate measures of fair market value for generic prescription drugs and substantially overstate actual transactions prices.
I do not consider list prices such as AWP, WAC, provincial formulary prices, or wholesaler catalogue prices in my estimation of fair market value because they tend to overstate transactions prices for generic prescription drugs actually charged and received by manufacturers and are thus inappropriate for that purpose. [87]
[61] Professor Berndt goes on to conclude:
Based on my research, experience, and understanding of generic prescription drug markets, as summarized above, it is my judgment that prices charged by generic manufacturers to distributors, wholesalers, and retail outlets such as pharmacies and hospitals represent an appropriate measure of fair market value for generic prescription drugs. In this section, I describe two sources of data on manufacturer prices and the methods I use to calculate average manufacturer prices for the Products from each data source. [88]
[62] The first source of data is the invoices obtained by Mr. Monahan from manufacturers. Professor Berndt acknowledged that this data was incomplete and did not address all the pharmaceuticals identified with the CHT Program. Based on his analysis of this data, Professor Berndt prepared Exhibit 5 to his expert report.
[63] The second source of data is the MIDAS database published by QuintilesIMS (formerly, IMS). With respect to the latter, Professor Berndt states in his report:
. . . The MIDAS data are widely used by researchers to examine prices of prescription drugs across different international markets. The MIDAS data and sales and quantity data produced by IMS more generally (such as the National Prescription Audit and the National Sales Perspective) are regarded as the “gold standard” for such types of data. . . . [89]
[64] Based on the MIDAS data, Professor Berndt prepared Exhibit 4 to his expert report. He described this data as setting the ceiling to the value of the pharmaceuticals.
III. Analysis
A. The Burden of Proof regarding the Assumptions of Fact
[65] Counsel for Mr. Eisbrenner submits that since the only facts of which Mr. Eisbrenner has knowledge are those in subparagraphs 18(yy) to (ccc), (qq), and (eee) to (iii) of the Eisbrenner Reply, as a matter of procedural fairness Mr. Eisbrenner should not be required to demolish the remaining assumptions about which he has no knowledge. Rather the Minister should bear the burden of proof with respect to the majority of her factual assumptions.
[66] Mr. Morrison did not raise the burden of proof argument in his submissions. However, it is apparent from Mr. Morrison’s testimony that his knowledge of the facts assumed by the Minister in the Morrison Replies is also quite limited. [90]
[67] In cross-examination, counsel for the Respondent asked Mr. Morrison if his position was that he had no access to the assumed facts about which he had no knowledge and Mr. Morrison responded that he did not know what information he may have had access to, but he could not say unqualifiedly that he had no access to any of the information. [91]
(1) The Law regarding the Assumptions of Fact and the Burden of Proof
[68] The burden of proof in tax cases and the relationship of that burden to the assumptions of fact made by the Minister has been the subject of much commentary in the tax jurisprudence. In House v. The Queen, 2011 FCA 234 (“House”), the Federal Court of Appeal stated:
In determining the issue before us, it is important to keep in mind the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. R., [1997] 2 S.C.R. 336 (S.C.C.) (Hickman), where Madam Justice L’Heureux-Dubé enunciated, at paragraphs 92 to 95 of her Reasons, the principles which govern the burden of proof in taxation cases:
1. The burden of proof in taxation cases is that of the balance of probabilities.
2. With regard to the assumptions on which the Minister relies for his assessment, the taxpayer has the initial onus to “demolish” the assumptions.
3. The taxpayer will have met his initial onus when he or she makes a prima facie case.
4. Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by proving, on a balance of probabilities, his assumptions (in this case, that Hunt River held at the end of taxation year 2002 a long-term investment of $305,000, which it transferred to the appellant in 2003).
5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed. [92]
[Emphasis added.]
[69] In Sarmadi v. The Queen, 2017 FCA 131 (“Sarmadi”), Justice Webb reviewed the law on burden of proof and concluded:
61 In my view, a taxpayer should have the burden to prove, on a balance of probabilities, any facts that are alleged by that taxpayer in their notice of appeal and that are denied by the Crown. In most cases this should end the discussion of the onus of proof since the assumptions of fact made by the Minister in reassessing the taxpayer would generally be inconsistent with the facts pled by the taxpayer with respect to the material facts on which the reassessment was issued.
62 If there are facts that were assumed by the Minister in reassessing a taxpayer and that are not inconsistent with the facts as pled by that taxpayer, it would also seem logical to require the taxpayer to prove, on a balance of probabilities, that these facts assumed by the Minister (and which are in dispute and are not exclusively or peculiarly within the Minister’s knowledge) are not correct. Requiring a taxpayer to disprove the facts assumed by the Minister in reassessing that taxpayer simply puts the onus on the person who knows (or ought to know) the facts. It also puts the onus on the person who indirectly asserted certain facts in filing their tax return that would be inconsistent with the facts assumed by the Minister in reassessing such taxpayer.
63 Once all of the evidence is presented, the Tax Court judge should then (and only then) determine whether the taxpayer has satisfied this burden. If the taxpayer has, on the balance of probabilities, disproven the particular facts assumed by the Minister, based on all of the evidence, there is no burden to shift to the Minister to disprove what the Tax Court judge has determined that the taxpayer has proven. Either the taxpayer has disproven the assumed facts or he, she or it has not.
[70] Justice Stratas, writing for the majority, declined to provide a definitive opinion on the burden of proof issue but did provide the following helpful comments:
69 I have read Justice Webb’s reasons on the issue of the burden of proof in tax appeals. I commend him on his exploration of this issue.
70 The issue has been considered before in this Court. My colleague’s reasons somewhat revisit this issue and articulate it somewhat differently. I find much of what my colleague says to be thoughtful, illuminating and attractive.
71 However, at this time and in these circumstances, I decline to express a definitive opinion on the correctness of his views on this fundamental point. The insights of commentators may be helpful. Judges in the Tax Court may also have useful insights. As well, in a future appeal in this Court where the issue matters, other counsel may also be able to assist.
[71] While I am bound by the decision of the Federal Court of Appeal in House and will base my decision on the principles stated in that decision and others on point, in light of the comments in Sarmadi, I will first provide my analysis of the issue of burden of proof in tax cases as suggested by Justice Stratas. I believe this approach is consistent with the instruction of the Supreme Court of Canada in The Queen v. Craig, 2012 SCC 43, where Rothstein J. stated:
But regardless of the explanation, what the court in this case ought to have done was to have written reasons as to why Moldowan was problematic, in the way that the reasons in Gunn did, rather than purporting to overrule it. [93]
(2) Analysis of the Law regarding the Burden of Proof in Tax Cases
[72] I will start by observing that there are only two burdens recognized by Canadian law: the burden of proof (which I will refer to as the “persuasive burden”) and the evidential burden. In The Queen v. Fontaine, 2004 SCC 27 (“Fontaine”), a unanimous nine judge panel of the Court summarily describes these two burdens at paragraphs 10 to 12:
We are concerned with the evidential burden on a defence of mental disorder automatism and not with the “persuasive” burden [i.e., the burden of proof] on that defence.
An “evidential burden” is not a burden of proof. It determines whether an issue should be left to the trier of fact, while the “persuasive burden” determines how the issue should be decided.
These are fundamentally different questions. The first is a matter of law; the second, a question of fact. . . . [Emphasis added by Court]
[73] A party with an evidential burden has the responsibility to ensure there is sufficient evidence of the existence or non-existence of a particular fact or issue to pass the threshold test for that particular fact or issue but is not required to actually prove anything. [94] Whether an evidential burden is met is a question of law determined by the trial judge. [95] Common examples of when an evidential burden must be met are by the plaintiff on a motion by the defendant for non-suit, by the Crown in a motion by the accused for a directed verdict and by the accused in order to place certain positive defences before the trier of fact.
[74] A party with a persuasive burden must prove the facts material to the issue(s) in question to the civil or criminal standard of proof. The civil standard of proof is always on a balance of probabilities: H. (F.) v. McDougall, 2008 SCC 53 (“McDougall”) and Merck Frosst Canada Ltd. v. Canada (Health), 2012 SCC 3 (“Merck Frosst”) at paragraph 94.
[75] As stated by Justice Webb in Sarmadi, [96] whether a persuasive burden is met is determined by the trier of fact at the conclusion of the case (i.e., after the evidence of both parties has been placed into the record). In Robins v. National Trust Co., [1927] A.C. 515 (“Robins”), the Privy Council describes the role of the persuasive burden as follows:
But onus as a determining factor of the whole case can only arise if the tribunal finds the evidence pro and con so evenly balanced that it can come to no sure conclusion. Then the onus will determine the matter. But if the tribunal, after hearing and weighing the evidence, comes to a determinate conclusion, the onus has nothing to do with it, and need not be further considered. [97]
[76] The substantive law determines which, if any, of the two burdens is assigned to a party. Typically, the party with the persuasive burden for a fact or issue also has the evidential burden for that fact or issue. In civil actions, the plaintiff typically bears the persuasive burden because the plaintiff is seeking to change the status quo. [98]
[77] Importantly, once a persuasive burden or evidential burden is assigned to a party that burden does not “shift” to the other party. The authors of SLB state this point as follows:
The authorities and the jurisprudence often refer to the shifting of the evidential burden or the persuasive (legal) burden of proof. Except for the operation of presumptions of law or rebuttable statutory provisions, these burdens do not shift. [99]
[78] A presumption or statutory rule may provide that the discharge of a burden