The Toronto Dominion Bank v. The Queen

The Toronto Dominion Bank v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2008-05-14
Neutral citation
2008 TCC 284
File numbers
2006-2996(IT)G
Judges and Taxing Officers
Wyman W. Webb
Subjects
Income Tax Act
Decision Content
Docket: 2006-2996(IT)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motions heard on April 18, 2008 at Toronto, Ontario
Before: The Honourable Justice Wyman W. Webb
Appearances:
Counsel for the Appellant:
Ian MacGregor and Pooja Samtani
Counsel for the Respondent:
Donald G. Gibson and Pascal Tetrault
____________________________________________________________________
ORDER
Upon Motion by the Respondent to amend several paragraphs of the Reply;
And upon Motion by the Appellant to strike certain paragraphs (or parts of paragraphs) of the Reply or the Amended Reply;
It is ordered that the Reply filed by the Respondent is amended as set out in the Amended Reply, a copy of which was submitted as part of the Respondent’s Motion Record, except that paragraph 28 gg) is stricken from the Amended Reply and the reference to subsection 69(1) is stricken from paragraph 32 of the Amended Reply, and therefore the Amended Reply is as attached hereto as Schedule “A”.
Costs of these motions shall be in the cause.
Signed at Halifax, Nova Scotia, this 14th day of May 2008.
“Wyman W. Webb”
Webb J.
Schedule “A”
2006-2996(IT)G
TAX COURT OF CANADA
BETWEEN:
THE TORONTO-DOMINION BANK
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
AMENDED REPLY
OVERVIEW
In this appeal, the Appellant artificially or unduly created a loss by entering into an elaborate series of transactions (the “Scheme”) that ended with the disposition of a new special class (Class E) of shares of a corporation. As part of the Scheme, the Appellant subscribed to Class E shares, which were issued at a low par value and an artifically high subscription price. Substantial dividends were declared and paid on shares in the corporation that were already owned by the Appellant, other than the Class E Shares. These dividends were then immediately returned to the corporation paying them by the Appellant subscribing for additional Class E shares, which were ultimately disposed of at an artifical loss. At the end of the day, the Appellant is seeking to deduct an alleged loss from the disposition of the Class E shares without having legitimately supported the cost of those shares. The Scheme falls within the four corners of subsection 55(1) of the Income Tax Act (the “Act”), with the result that the deduction of the loss on the Class E shares is therefore prohibited. In addition, the adjusted cost base of the Class E shares is in issue, and a proper allocation of the proceeds of disposition among all classes of shares in the corporation owned by the Appellant would eliminate or reduce the alleged loss on the Class E shares.
In reply to the Notice of Appeal with respect to a reassessment for the Appellant’s 1989 taxation year, the Deputy Attorney General of Canada says:
A. STATEMENT OF FACTS
With respect to the facts stated in Part I of the Notice of Appeal:
1. He admits the facts stated in paragraph 1 of the Notice of Appeal.
With respect to the facts stated in Part II of the Notice of Appeal:
2. He admits the facts stated in paragraphs 2, 3 and 4 of the Notice of Appeal.
With respect to the facts stated in Part III of the Notice of Appeal:
3. He admits the facts stated in paragraphs 1(i) and 1(ii) of the Notice of Appeal. He has no knowledge of, and puts in issue, the facts stated in paragraph 1(iii).
4. He admits the facts stated in paragraphs 2, 3, 4, 6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 33, 34, 40, 41 and 42 of the Notice of Appeal.
5. Deleted.
6. He admits that shares of Oxford were also held by Loford Properties Limited (“Loford Properties”) and Kent Holdings Ltd. (“Kent”), but he denies the other facts stated in paragraph 5 of the Notice of Appeal.
7. Deleted.
8. Deleted.
9. He admits the facts stated in paragraph 9 of the Notice of Appeal, but he denies that the offer to purchase was extended on an arm’s length basis.
10. Deleted.
11. Deleted.
12. He has no knowledge of, and puts in issue, the facts stated in paragraph 18, and the first sentence of paragraph 19 of the Notice of Appeal.
13. He admits the second sentence of paragraph 19 and paragraphs 20, 21 and 22 of the Notice of Appeal, and says that these actions were all part of the Scheme to artificially inflate the adjusted cost base of the Class D and Class E shares.
14. He admits the facts stated in the first sentence of paragraph 23 and the first and third sentences of paragraph 24 of the Notice of Appeal, and says that these actions were all part of the Scheme to artificially inflate the adjusted cost base of the Class D and Class E shares. He denies the facts stated in the second sentences of paragraphs 23 and 24 of the Notice of Appeal.
15. Deleted.
16. He admits the facts stated in paragraphs 25, 26, 27, 28, 29 and 30 of the Notice of Appeal, and says that these actions were all part of the Scheme to artificially inflate the adjusted cost base of the Class D and Class E shares.
17. Deleted.
18. Deleted.
19. He admits the facts stated in paragraphs 31 and 32 of the Notice of Appeal, and says that these actions were all part of the Scheme to artificially inflate the adjusted cost base of the Class D and Class E shares.
20. Deleted.
21. Deleted.
22. He admits that the Appellant sold the shares of Holdings Ltd., but he denies the other facts stated in paragraph 35 of the Notice of Appeal.
23. He denies the facts stated in paragraphs 36, 37 and 38 of the Notice of Appeal.
24. He admits the facts stated in paragraph 39 of the Notice of Appeal, but says that the Appellant was wrong in doing so because there was no loss.
25. Deleted.
26. Deleted.
27. Deleted.
28. In reassessing the Appellant, the Minister of National Revenue (the “Minister”) relied on the following assumptions of fact:
a) The Appellant, by holding 337,000 shares in Oxford before 1980, held a substantial part of all the issued and outstanding shares of that company;
b) The other shares of Oxford were held by Kent and Loford Properties;
c) Donald Love (“Mr. Love”) was the chairman of the board of directors and the president of Oxford;
d) Mr. Love held all the issued and outstanding shares of Kent and he held, with members of his family, all the issued and outstanding shares of Loford Properties;
e) As part of the series of transactions in issue, 91922 was incorporated on May 11, 1979;
f) On January 15, 1980, the Appellant, Mr. Love, Kent and Loford Properties entered into an agreement to subscribe and own all the issued and outstanding shares of 91922 (the “Agreement”);
g) The Appellant disposed of its shares of Oxford to 91922 by way of a tax-free rollover in which he paid $8,138,000 and received as consideration shares of the capital stock of 91922;
h) The Appellant subscribed, for a total consideration of $16,900,000 (or $26 per share), for the following shares of 91922, namely 51,200 common shares, 285,000 Class A shares, 313,000 Class B shares;
i) Kent disposed of 801,555 common shares of Oxford to 91922 and received as consideration an equal number of common shares from the capital stock of 91922;
j) Loford Properties disposed of 173,445 common shares of Oxford to 91922, and received as consideration an equal number of common shares from the capital stock of 91922;
k) The Class A shares of 91922 carry the same rights as the common shares of 91922, except that they are non voting and they can be converted into common shares at the option of the holder, unless they are held by a Canadian bank;
l) The Class B shares of 91922 carry the same rights as the Class A shares of 91922, except that they can be converted at the option of the holder of Class A shares;
m) On October 29, 1980, Oxford merged with 91922 to form Oxford;
n) During the month of July, 1982, it was agreed that Oxford would create two new classes of shares, namely Class D and Class E shares;
o) The subscription price for the Class D and Class E shares was set at $300 per share, which was substantially over their par value of $1 per share;
o.1) The subscription price for the Class E shares, which was used by the Appellant as the adjusted cost base of those shares, was substantially greater than the fair market value of those shares;
o.2) The fair market value of the Classs E shares was $1 per share;
p) The rights attached to the Class E shares were essentially identical to those attached to the common shares, the Class A and Class B shares of Oxford (previously 91922), except that they and the Class A and Class B shares are non-voting;
q) Only the Appellant would subscribe for the Class E shares and only Loford Properties and Kent would subscribe for the Class D shares;
r) On July 29, 1982, Oxford declared and paid dividends of $22,000,000 (or $13.538 per share) on the common, Class A, Class B, and Class C shares. The Appellant's portion of the dividends was $8,800,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares and 313,000 Class B shares. On the same date the Appellant subscribed for 22,667 Class E shares having a par value of $1 each, at a subscription price of $6,800,100 (or $300 per share). On July 29, 1982, the Appellant owned a total of 22,667 Class E shares;
s) On April 15, 1983, Oxford declared and paid dividends of $27,000,000 (or $16.615 per share) on the common, Class A, Class B, and Class C shares. No dividends were paid in respect of the Class E or Class D shares. The Appellant's portion of the dividends was $10,800,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares and 313,000 Class B shares. On the same date the Appellant subscribed for 30,667 Class E shares having a par value of $1 each, at a susbscription price of $9,200,100 (or $300 per share). On April 15, 1983, the Appellant owned a total of 53,334 Class E shares;
t) On December 28, 1983, Oxford declared and paid dividends of $10,000,000 (or $5.151 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. The Appellant's portion of the dividends was $4,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 53,334 Class E shares. On the same date the Appellant subscribed for 12,000 Class E shares having a par value of $1 each, at a subscription price of $3,600,000 (or $300 per share). On December 28, 1983, the Appellant owned a total of 65,334 Class E shares;
u) On April 30, 1984, Oxford declared and paid dividends of $12,500,000 (or $6.989 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. The Appellant's portion of the dividends was $5,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 65,334 Class E shares. On the same date the Appellant subscribed for 15,000 Class E shares having a par value of $1 each, at a subscription price of $4,500,000 (or $300 per share). On April 30, 1984, the Appellant owned a total of 80,334 Class E shares;
v) On July 30, 1984, Oxford declared and paid dividends of $10,000,000 (or $5.477 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. The Appellant's portion of the dividends was $4,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 80,334 Class E shares. On the same date the Appellant subscribed for 10,666 Class E shares having a par value of $1 each, at a subscription price of $3,199,800 (or $300 per share). On July 30, 1984, the Appellant owned a total of 91,000 Class E shares;
w) On October 31, 1984, Oxford declared and paid dividends of $10,000,000 (or $5.398 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. The Appellant's portion of the dividends was $4,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 91,000 Class E shares. On the same date the Appellant subscribed for 10,667 Class E shares having a par value of $1 each, at a subscription price of $3,200,100 (or $300 per share). On October 31, 1984, the Appellant owned a total of 101,667 Class E shares;
x) On May 23, 1985, Oxford declared (paid on November 29, 1985) dividends of $20,000,000 (or $10.643 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. Oxford elected the dividends to be capital dividends on the common and the Class D shares. The Appellant's portion of the dividends was $8,000,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 101,667 Class E shares. On May 23, 1985 the Appellant subscribed for 1,816 Class E shares having a par value of $1 each, at a subscription price of $544,800 (or $300 per share). On May 23, 1985, the Appellant owned a total of 103,483 Class E shares;
y) On November 29, 1985, the Appellant subscribed for 24,850 Class E shares having a par value of $1 each, at a subscription price of $7,455,000 (or $300 per share). On November 29, 1985, the Appellant owned a total of 128,333 Class E shares;
z) On December 31, 1985, Oxford declared and paid dividends of $85,000,000 (or $43.683 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. Oxford elected the dividends to be capital dividends on the common and the Class D shares. The Appellant's portion of the dividends was $33,999,991 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 128,333 Class E shares. On the same date the Appellant subscribed for 113,333 Class E shares having a par value of $1 each, at a subscription price of $33,999,991 (or $300 per share). On December 31, 1985, the Appellant owned a total of 241,666 Class E shares;
aa) In May 1988, Oxford, declared and paid dividends of $2,000,000 (or $0.8971965 per share) on the common, Class A, Class B, Class C, Class D and Class E shares. The Appellant's portion of the dividends was $800,000 (or 40%) received in respect of its 51,200 common shares, 285,800 Class A shares, 313,000 Class B and 241,666 Class E shares. Oxford elected that all the dividends be paid as capital dividends;
bb) Some time between March 8 and November 1, 1988, the Appellant disposed of all its shares of Oxford to Holdings Ltd. by way of tax free rollover and received as consideration shares of the capital stock of Holdings Ltd.;
cc) On December 1, 1988, Loford Properties and the Appellant terminated the Agreement through which they owned all of the issued and outstanding capital stock of Holdings Ltd.;
dd) On December 1, 1988, the Appellant disposed of shares of Holdings Ltd. as follows:
i) Holdings Ltd. redeemed the 51,200 common, 285,800 Class A and 313,000 Class B shares owned by the Appellant at a price of $46.809 per share, for an aggregate purchase price of $30,425,850. An election was made that $14,522,860 be paid as a capital dividend;
ii) Loford Properties purchased the 241,666 Class E shares of Holdings Ltd. owned by the Appellant at a price of $46.809 per share, for an aggregate purchase price of $11,312,150;
ee) On December 1, 1988, the Appellant subscribed for shares in Oxford Properties Canada Limited as follows:
i) 2,000,000 common shares for cash consideration of $3,200,000;
ii) 1,792,000 preferred shares for cash consideration of $36,288,000;
ff) The series of transactions in issue ended on December 1, 1988;
gg) Transactions regarding the Class E shares and the shares received in consideration for those shares artificially or unduly created a loss, or increased the amount of loss on their disposition.
29. The Appellant, Loford Properties, Kent, Oxford, Oxford Holdings and Mr. Love were acting without separate interest, and at non arm’s length, with respect to all transactions involving the Class D and Class E shares referred above, and any shares received as consideration for their disposition, including their final disposition on December 1, 1988.
29.1 The assumption in paragraph 28(o.2), to the effect that the fair market value of the Class E shares was $1 per share, is incorrect.
29.2 The dividends in the amounts of $85,000,000 and $2,000,000 referred to in paragraphs 28(z) and 28(aa) were paid out of contributed surplus, and were not supported by earnings.
29.3 For the purposes of subsection 55(1) of the Act, the series of transactions consists of those transactions involving the acquisition and disposition of the Class E shares, and the payment of dividends thereon, from July 29, 1982 to December 1, 1988.
B. ISSUES TO BE DECIDED
30. Whether the Appellant, as a result of the series of transactions, has artificially or unduly created or increased the amount of loss on the disposition of the Class E shares issued by Oxford to the Appellant, and is therefore caught by the limitation of subsection 55(1) of the Act.
31. Whether the adjusted cost base of the Class E shares was $300 per share.
C. STATUTORY PROVISIONS RELIED ON
32. He relies on sections 38, 39, 40, 68, 83, 89, 112, 251, subsections 55(1) and 69(1), and paragraph 53(1)(c) of the Act, as amended for the 1989 taxation year.
D. GROUNDS RELIED ON AND RELIEF SOUGHT
32.1 Mr. Love and the Appellant, who were not dealing at arm's length, agreed in advance that substantially all (between 77 percent and 100 percent) of each dividend paid would be immediately reinvested in the company. These immediate reinvestments of the dividends could not reasonably be regarded as an increase in the fair market value of the company, and therefore they do not constitute additions to the adjusted cost base of the Class D and Class E shares under paragraph 53(1)(c) of the Act.
32.2 While constantly maintaining their 60 percent to 40 percent shareholding ratio, Mr. Love and the Appellant agreed in advance to an artificially high subscription price for the Class D and Class E shares, which was fixed for a three and a half year period. They were indifferent as to the precise subscription price, regardless of what happened to the fair market value of the shares of the company in the meantime. Their primary concern was that the subscription price be high, and that the number of shares issued be low.
32.3 After having agreed in advance to an artificially high subscription price for the Class D and Class E shares, Mr. Love and the Appellant agreed to arbitrarily allocate the total proceeds of disposition pro rata among the common, Class A, Class B, Class D and Class E shares. The effect of this arbitrary allocation was that the proceeds of disposition for the Class D and Class E shares was artificially low, because of the high subscription price and the low number of Class D and Class E shares.
32.4 The reason that the Appellant was able to claim a loss on the disposition of the Class E shares is that it subtracted an artificially low figure for the proceeds of disposition from an artificially high figure for the adjusted cost base. To the extent that the proper figure for the proceeds of disposition was higher, and the proper figure for the adjusted cost base was lower, the loss that it was able to claim on the disposition of the Class E shares would have been lower, or eliminated entirely.
32.5 In determining whether the loss on the disposition of the Class E shares is artificial or undue, consideration should be given to the scheme of the Act. Paragraph 69(1)(a) provides a mechanism to reduce to fair market value a high non-arm's length acquisition cost, namely the subscription price of the Class D and Class E shares. Section 68 provides a mechanism to properly allocate consideration for the disposition of a particular property, namely the proceeds of disposition for the Class D and Class E shares on the one hand, and the proceeds of disposition for the common, Class A and Class B shares on the other hand.
33. The creation of the Class E shares (or any shares received as consideration for their disposition) was part of the Scheme to artificially or unduly create a loss, or increase the amount of loss, on their disposition with the result that subsection 55(1) of the Act eliminates the loss.
34. Deleted.
E. RELIEF SOUGHT
35. He requests that the appeal be dismissed with costs.
Dated at Ottawa, Ontario, this day of 2008.
Per:
Deputy Attorney General of Canada
Solicitor for the Respondent
____________________________
Donald G. Gibson
Pascal Tétrault
Counsel for the Respondent
Tax Law Services Section
Department of Justice
234 Wellington Street
Bank of Canada Building, East Tower
Ottawa, Ontario
K1A 0H8
Telephone: (613) 957-4883/1380
Facsimile: (613) 941-1221/2293
TO: The Registrar
Tax Court of Canada
AND TO: Al Meghji/Pooja Samtani
Osler, Hoskin & Harcourt LLP
Counsel for the Appellant
Citation: 2008TCC284
Date: 20080514
Docket: 2006-2996(IT)G
BETWEEN:
THE TORONTO-DOMINION BANK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Webb J.
[1] There are two motions in this matter. The Respondent's motion is to amend several paragraphs of the Reply. The Appellant’s motion is to strike certain paragraphs (or parts of paragraphs) of the Reply or the Amended Reply. The objections of the Appellant to the original Reply and the proposed Amended Reply relate mainly to the statements by the Respondent that the Appellant and others involved in the transactions that are the subject of the appeal were not dealing with each other at arm’s length and the arguments of the Respondent related thereto. The Appellant has submitted that the Respondent should be prevented from raising the non-arm’s length argument as a result of the provisions of subsection 152(9) of the Income Tax Act (the “Act”) or paragraph 53 of the Tax Court of Canada Rules (General Procedure) (the “Rules”). The Appellant has also raised the question of whether paragraph 28 gg) of the Reply has been properly pleaded as an assumption of fact or whether it is a conclusion of mixed fact and law.
Background
[2] The Appellant was a minority shareholder in Oxford Development Group Ltd. In 1979 a series of transactions was implemented to take Oxford Development Group Ltd. private which included an amalgamation in 1980 of Oxford Development Group Ltd. with a numbered company which continued its operations as “Oxford”. Following the privatization of Oxford, the Appellant held 40% of the total issued shares of the amalgamated entity and Mr. G. Donald Love (“Mr. Love”), directly or indirectly (through Loford Properties Limited and Kent Holdings Ltd.), held the balance of the shares of Oxford.
[3] Starting in 1982 Oxford paid dividends to its shareholders. The shareholders, upon receipt of the dividends, would acquire shares of a different class in Oxford. Loford Properties Limited and Kent Holdings Ltd. acquired Class D shares and the Appellant acquired Class E shares. In the table attached to the Notice of Appeal, the dividends that were paid to the Appellant and the amounts that were used to acquire Class E shares of Oxford during the period from 1982 to 1988 are listed. The amounts used to acquire Class E shares (with the exception of the dividend paid in May of 1988) ranged from 77% to 100% of the amount of the dividend received. No part of the dividend received in May of 1988 was used to acquire Class E shares. In 1987 the Appellant exchanged its shares of Oxford for identical shares in Oxford Holdings Ltd.
[4] The transactions in question culminated in a sale of the shares of Oxford Holdings Ltd. by the Appellant on December 1, 1988. The common, Class A shares and Class B shares were redeemed and the Class E shares were acquired by Loford Properties Limited. The Appellant claims that the disposition of the Class E shares resulted in “a capital loss of $61,187,650, which, when subject to the stop loss provisions of section 112(3) of the Act was reduced to $52,243,540”. The Appellant also reported a capital gain of $4,054,346 as a result of the disposition of the Class A shares of Oxford Holdings Ltd., and reduced its capital loss balance from $52,243,540 to $48,189,193. The Appellant filed its tax return on the basis that it had incurred an allowable capital loss of $32,126,129 (2/3 of $48,189,193).
[5] The Appellant was reassessed in 1994 and its claim for the allowable capital loss of $32,126,129 was denied, although the basis for denying this allowable capital loss was not clear to the Appellant when the reassessment was issued. The Appellant received a letter dated September 20, 1993 from the Canada Revenue Agency (“CRA”), (any reference herein to the Canada Revenue Agency or the CRA shall be interpreted as including the Canada Customs and Revenue Agency and Revenue Canada Taxation). While this letter set out the proposed adjustment related to the allowable capital loss that had been claimed, no statutory basis for the denial of the loss was identified in the letter.
[6] In a position paper dated March 20, 1997 the CRA stated that “Tax Avoidance recommends that we use the old 245(1) to revise the ACB of the Class E shares to its paid-in capital of $241,666 of the Class E shares, thereby eliminating any loss on disposition of the Class E shares to Loford (in fact resulting in a gain)”.
[7] A waiver was also signed by the Appellant in 1994 in respect of the “Determination of the loss on disposition of Oxford Holdings Ltd”. It is the understanding of the Appellant that this waiver was provided to allow the CRA time to determine the fair market value of the Class E shares during the period from 1982 to 1988. In 2002 the waiver was revoked by the Appellant. There was no indication at that time whether the CRA had completed its appraisal of the fair market value of the Class E shares.
[8] In the Notice of Appeal filed by the Appellant in 2006, the Appellant assumed that the reassessment was based on subsection 245(1) of the Act, as it read prior to its repeal by S.C. 1988, c. 55, s.185 (the “Former Section 245”).
[9] Counsel for the Respondent confirmed that the initial reassessment was based on the provisions of the Former Section 245. When preparing the Reply the Respondent abandoned its assessing position based on the Former Section 245 and instead stated that it was reassessing based on the provisions of subsection 55(1) of the Act (which has also been repealed) and as an alternate argument that subsection 69(1) of the Act (which has not been repealed) applied on the basis that the Appellant and the others involved in the transactions were not dealing with each other at arm’s length. The Appellant does not object to the Respondent changing the basis for the reassessment from Former Section 245 to subsection 55(1) of the Act but does object to the inclusion of the non-arm’s length alternate argument as a basis for the reassessment in the Reply and in relation to the arguments based on the non‑arm’s length allegations in the Amended Reply.
[10] At the hearing on the motion counsel for the Respondent stated that the Respondent was no longer raising an alternate argument based on subsection 69(1) of the Act and was only basing the reassessment on subsection 55(1) of the Act. Counsel for the Respondent submitted that the only reason that subsection 69(1) of the Act is in the Amended Reply is in relation to the argument to support the reassessment under subsection 55(1) of the Act.
[11] The Amended Reply deletes the alternative issue that was in paragraph 31 of the Reply related to whether subsection 69(1) of the Act applied and the alternative ground relied on in paragraph 34 and the only references to subsection 69(1) of the Act are in paragraphs 32 and new paragraph 32.5. Since the Respondent is no longer taking the position that subsection 69(1) of the Act applies, and therefore is no longer relying on this subsection, this subsection should be removed from the list of Statutory Provisions Relied On in paragraph 32 of the Amended Reply.
[12] The following are the paragraphs (or parts thereof) of the original Reply that the Appellant is asking to have stricken from the Reply:
- The words “but he denies the other facts stated in paragraph 5 of the Notice of Appeal” in paragraph 6. (Paragraph 6 of the Reply states as follows: “He admits that shares of Oxford were also held by Loford Properties Limited (“Loford Properties”) and Kent Holdings Ltd. (“Kent”), but he denies the other facts stated in paragraph 5 of the Notice of Appeal.”)
- All of paragraph 9. (Paragraph 9 of the Reply states that “He denies the facts stated in paragraph 9 of the Notice of Appeal.”)
- All of paragraph 29. (Paragraph 29 of the Reply states as follows: “The Appellant, Loford Properties, Kent and Mr. Love were acting without separate interest, and at non arm's length, with respect to all transactions involving the Class E shares referred above, and any shares received as consideration for their disposition, until their final disposition on December 1, 1988.”)
- The reference to section 251 and subsection 69(1) of the Act in paragraph 32. (Paragraph 32 of the Reply is in Part C of the Reply – Statutory Provisions Relied On and states as follows. “He relies on sections 38, 39, 40, 83, 89, 112, 251, subsections 55(1) and 69(1), and paragraph 53(1)(c) of the Act, as amended for the 1989 taxation year.”)
- All of paragraph 31. (Paragraph 31 of the Reply states as follows: “In the alternative, whether the shares were acquired in non-arm's-length transactions and are deemed by the operation of subsection 69(1) of the Act to have been acquired at their fair market value.”)
- All of paragraph 34. (Paragraph 34 of the Reply states as follows: “In the alternative, he says that the shares were acquired in excess of their fair market value in non-arm's length transfers. Subsection 69(1) of the Act deems that the shares were acquired by the Appellant at their fair market value, with the result that the loss is reduced to nil.”)
[13] Because the Amended Reply removes the contentious issue of whether the reassessment can be based on subsection 69(1) of the Act and in particular deletes paragraph 34 and because the Appellant’s only objections to the proposed amendments relate to the non-arm’s length allegations, I will deal with the arguments of the Appellant to strike in relation to the provisions of the proposed Amended Reply.
[14] The paragraphs (or parts thereof) in the proposed Amended Reply to which the Appellant objects are the following:
- The words “but he denies the other facts stated in paragraph 5 of the Notice of Appeal” in paragraph 6. (The Respondent is not proposing to amend paragraph 6 of the Reply in the proposed Amended Reply.)
- The words “but he denies that the offer to purchase was extended on an arm's-length basis” in paragraph 9. (The Respondent is proposing that paragraph 9 will be amended to read as follows: “He admits the facts stated in paragraph 9 of the Notice of Appeal, but he denies that the offer to purchase was extended on an arm’s length basis.”)
- All of paragraph 29. (The Respondent is proposing that paragraph 29 of the Reply will be amended to read as follows: “The Appellant, Loford Properties, Kent, Oxford, Oxford Holdings and Mr. Love were acting without separate interest, and at non arm's length, with respect to all transactions involving the Class D and Class E shares referred above, and any shares received as consideration for their disposition, including their final disposition on December 1, 1988.”)
- The reference to section 251 and subsection 69(1) of the Act in paragraph 32. (The Respondent is proposing to amend paragraph 32 of the Reply to add section 68 to the list of sections in this paragraph. The Appellant does not object to the Respondent adding this section to the list of sections in paragraph 32.)
- All of paragraphs 32.1 to 32.5 (inclusive). (The Respondent is proposing to replace paragraph 31 with the following: “Whether the adjusted cost base of the Class E shares was $300 per share.” The Appellant does not object to this change to paragraph 31. The Respondent is proposing to delete paragraph 34 of the Reply and to add the following new paragraphs:
32.1 Mr. Love and the Appellant, who were not dealing at arm’s length, agreed in advance that substantially all (between 77 percent and 100 percent) of each dividend paid would be immediately reinvested in the company. These immediate reinvestments of the dividends could not reasonably be regarded as an increase in the fair market value of the company, and therefore they do not constitute additions to the adjusted cost base of the Class D and Class E shares under paragraph 53(1)(c) of the Act.
32.2 While constantly maintaining their 60 percent to 40 percent shareholding ratio, Mr. Love and the Appellant agreed in advance to an artificially high subscription price for the Class D and Class E shares, which was fixed for a three and a half year period. They were indifferent as to the precise subscription price, regardless of what happened to the fair market value of the shares of the company in the meantime. Their primary concern was that the subscription price be high, and that the number of shares issued be low.
32.3 After having agreed in advance to an artificially high subscription price for the Class D and Class E shares, Mr. Love and the Appellant agreed to arbitrarily allocate the total proceeds of disposition pro rata among the common, Class A, Class B, Class D and Class E Shares. The effect of this arbitrary allocation was that the proceeds of disposition for the Class D and Class E shares was artificially low, because of the high subscription price and the low number of Class D and Class E shares.
32.4 The reason that the Appellant was able to claim a loss on the disposition of the Class E shares is that it subtracted an artificially low figure for the proceeds of disposition from an artificially high figure for the adjusted cost base. To the extent that the proper figure for the proceeds of disposition was higher, and the proper figure for the adjusted cost base was lower, the loss that it was able to claim on the disposition of the Class E shares would have been lower, or eliminated entirely.
32.5 In determining whether the loss on the disposition of the Class E shares is artificial or undue, consideration should be given to the scheme of the Act. Paragraph 69(1)(a) provides a mechanism to reduce to fair market value a high non-arm’s length acquisition cost, namely the subscription price of the Class D and Class E shares. Section 68 provides a mechanism to properly allocate consideration for the disposition of a particular property, namely the proceeds of disposition for the Class D and Class E shares on the one hand, and the proceeds of disposition for the common, Class A and Class B shares on the other hand.
[15] While the Respondent is proposing to amend several other paragraphs of the Reply, the Appellant is only objecting to the paragraphs (or parts thereof) referred to above.
Fresh Step Rule
[16] The Respondent has stated that the Appellant cannot raise an issue with respect to the non-arm’s length allegations being made by the Respondent as the Respondent had made these allegations in the original Reply and the Appellant has taken several steps including the filing of an Answer and discovery examinations. Paragraph 8 of the Rules provides as follows:
8. A motion to attack a proceeding or a step, document or direction in a proceeding for irregularity shall not be made,
(a) after the expiry of a reasonable time after the moving party knows or ought reasonably to have known of the irregularity, or
(b) if the moving party has taken any further step in the proceeding after obtaining knowledge of the irregularity,
except with leave of the Court.
[17] The Appellant stated that it is objecting because the Appellant will be prejudiced in its ability to adduce evidence in relation to the dealings between the Appellant and Mr. Love’s companies. The transactions in question were all completed almost 20 years ago. Mr. Mercier, who was the Executive Vice‑President, Corporate Banking Group of the Appellant during the relevant time period (1982 – 1988) retired from the Appellant in 1993 and passed away in September 2002. Mr. Love passed away on October 13, 2003. Counsel for the Appellant stated that they were not aware that these two individuals had passed away when the Notice of Appeal or the Answer were filed and only became aware of this following the discovery examinations.
[18] In this case the Respondent is proposing extensive amendments to the original Reply. The original Reply has 36 paragraphs (including the overview paragraph) and paragraph 28 has 33 subparagraphs. Of the 36 paragraphs, amendments are proposed to approximately 28 of these paragraphs (or approximately 78% of the paragraphs). While some amendments are very minor, others, such as deleting the alternative argument based on subsection 69(1) of the Act, are substantial. As well the Respondent is proposing to add 8 new paragraphs.
[19] Associate Chief Justice Bowman (as he then was) in Imperial Oil Limited v. The Queen 2003 TCC 46, 2003 D.T.C. 179, [2003] 3 C.T.C. 2125 stated that:
20 The “fresh step” rule is one that has been part of the rules of practice and procedure in Canada and the United Kingdom for many years.
[20] Justice O’Keefe of the Federal Court in Vogo Inc. v. Acme Window Hardware Ltd., 2004 FC 851 described the purpose of the “fresh step rule” as follows:
60 The purpose of the "fresh step" rule is to prevent a party from acting inconsistently with its prior conduct in the proceeding. By pleading in response to a statement of claim, for instance, a defendant may extinguish their right to complain of fatal deficiencies in the allegations made against them. The fresh step rule aims to prevent prejudice to a party who has governed themselves according to the procedural steps taken by the opposing side, where it would be unfair to permit a reversal in approach.
[21] Paragraph 8 of the Rules provides that a motion to attack a document cannot be made in the circumstances described in subparagraphs (a) or (b) except with leave of the Court. In this case since the Respondent is proposing to make substantial changes to the Reply, I do not agree that the Respondent would be prejudiced by the Appellant’s motion and I choose to exercise the discretion that has been granted to me and I choose to not deal with the Appellant’s motion based on paragraph 8 of the Rules.
Non-arm’s Length Allegations – Subsection 152(9) of the Act
[22] The Appellant argued that the provisions of subsection 152(9) of the Act do not allow the Respondent to include the references to the Appellant not dealing with Mr. Love and his companies at arm's-length, in the Reply (or the Amended Reply), because the Appellant will now be prejudiced. Given the lapse of time, from the time that the original reassessment was issued to today, and the fact that key witnesses from the Appellant’s perspective, are now deceased (namely Messrs. Love and Mercier) and other senior officers who were with the bank in the 1980s are now retired and no longer with the Appellant, the Appellant states that it will be prejudiced in its ability to adduce evidence in relation to these allegations.
[23] Subsection 152(9) of the Act provides as follows:
152 (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.
[24] This subsection was added to the Act following the decision of the Supreme Court of Canada in Continental