Loewen v. The Queen

Loewen v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2007-11-20
Neutral citation
2007 TCC 703
File numbers
2001-3839(IT)G
Judges and Taxing Officers
Eric A. Bowie
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 common evidence with the motions in Andrew Pringle, 2003-446(IT)G and Michael De Pencier, 2003-1073(IT)G,
on October 24, 2007, at Toronto, Ontario,
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:
A. Christina Tari
Counsel for the Respondent:
Annie Paré and Elizabeth Chasson
____________________________________________________________________
ORDER
Upon motion by the respondent for an Order granting leave to amend the Reply to the Notice of Appeal, and in particular, by the inclusion of the following paragraphs:
25. No application was made pursuant to subsection 237.1(2) of the Act for a tax shelter identification number in relation to the Software and no identification number was issued by the Minister under section 237.1(2) of the Act.
26. The Appellant did not file the prescribed form, including the identification number for the tax shelter, under section 237.1(6) of the Act.
27. Prior to the acquisition of the Software, statements or representations were made or proposed to be made by AIRS II Inc., or on its behalf, to prospective purchasers of the Software.
28. The statements or representations state that each prospective purchaser, who purchased a unit in the amount of $500,000 in 1993, would make a cash investment of $75,000 in each 1993 and 1994 taxation year, and would be able to write-off $250,000 in 1993 and $250,000 in 1994 against all income.
29. The issues are whether:
a) The Software is a tax shelter within the meaning of section 237.1 of the Act;
31. He submits that the software was a tax shelter as defined in section 237.1 of the Act. He further submits that no application for a tax shelter identification number was made and as a result, no tax shelter identification number was issued by the Minister. Consequently no amount may be deducted or claimed by the Appellant in respect of the software by virtue of subsection 237.1(6) of the Act.
And upon reading the material filed, and hearing counsel for the parties;
It is ordered that the motion is allowed and the Respondent shall have leave to file and serve an amended Reply to the Notice of Appeal in the form annexed to the Notice of Motion within seven days from the date of this Order.
And it is further ordered that the parties shall bear their own costs of the motion, and costs attributable to the delay in bringing this motion since the production of Appendix I shall be to the appellant, in the cause, on a party and party basis.
Signed at Ottawa, Canada, this 20th day of November, 2007.
“E.A. Bowie”
Bowie J.
Docket: 2003-446(IT)G
BETWEEN:
ANDREW PRINGLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on common evidence with the motions in
Charles B. Loewen, 2001-3839(IT)G
and Michael De Pencier, 2003-1073(IT)G,
on October 24, 2007, at Toronto, Ontario,
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:
A. Christina Tari
Counsel for the Respondent:
Annie Paré and Elizabeth Chasson
____________________________________________________________________
ORDER
Upon motion by the respondent for an Order granting leave to amend the Reply to the Notice of Appeal, and in particular, by the inclusion of the following paragraphs:
21. No application was made pursuant to subsection 237.1(2) of the Act for a tax shelter identification number in relation to the Software and no identification number was issued by the Minister under section 237.1(2) of the Act.
22. The Appellant did not file the prescribed form, including the identification number for the tax shelter, under section 237.1(6) of the Act.
23. Prior to the acquisition of the Software, statements or representations were made or proposed to be made by AIRS II Inc., or on its behalf, to prospective purchasers of the Software.
24. The statements or representations state that each prospective purchaser, who purchased a unit in the amount of $500,000 in 1993, would make a cash investment of $75,000 in each 1993 and 1994 taxation year, and would be able to write-off $250,000 in 1993 and $250,000 in 1994 against all income.
25. The issues are whether:
a) The Software is a tax shelter within the meaning of section 237.1 of the Act;
27. He submits that the software was a tax shelter as defined in section 237.1 of the Act. He further submits that no application for a tax shelter identification number was made and as a result, no tax shelter identification number was issued by the Minister. Consequently no amount may be deducted or claimed by the Appellant in respect of the software by virtue of subsection 237.1(6) of the Act.
And upon reading the material filed, and hearing counsel for the parties;
It is ordered that the motion is allowed, without costs, and the Respondent shall have leave to file and serve an amended Reply to the Notice of Appeal in the form annexed to the Notice of Motion within seven days from the date of this Order.
And it is further ordered that the parties shall bear their own costs of the motion, and costs attributable to the delay in bringing this motion since the production of Appendix I shall be to the appellant, in the cause, on a party and party basis.
Signed at Ottawa, Canada, this 20th day of November, 2007.
“E.A. Bowie”
Bowie J.
Docket: 2003-1073(IT)G
BETWEEN:
MICHAEL DE PENCIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on common evidence with the motions in
Charles B. Loewen, 2001-3839(IT)G and Andrew Pringle, 2003-446(IT)G on October 24, 2007, at Toronto, Ontario,
By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:
A. Christina Tari
Counsel for the Respondent:
Annie Paré and Elizabeth Chasson
____________________________________________________________________
ORDER
Upon motion by the respondent for an Order granting leave to amend the Reply to the Notice of Appeal, and in particular, by the inclusion of the following paragraphs:
22. No application was made pursuant to subsection 237.1(2) of the Act for a tax shelter identification number in relation to the Software and no identification number was issued by the Minister under section 237.1(2) of the Act.
23. The Appellant did not file the prescribed form, including the identification number for the tax shelter, under section 237.1(6) of the Act.
24. Prior to the acquisition of the Software, statements or representations were made or proposed to be made by AIRS II Inc., or on its behalf, to prospective purchasers of the Software.
25. The statements or representations state that each prospective purchaser, who purchased a unit in the amount of $500,000 in 1993, would make a cash investment of $75,000 in each 1993 and 1994 taxation year, and would be able to write-off $250,000 in 1993 and $250,000 in 1994 against all income.
26. The issues are whether:
a) The Software is a tax shelter within the meaning of section 237.1 of the Act;
28. He submits that the software was a tax shelter as defined in section 237.1 of the Act. He further submits that no application for a tax shelter identification number was made and as a result, no tax shelter identification number was issued by the Minister. Consequently no amount may be deducted or claimed by the Appellant in respect of the software by virtue of subsection 237.1(6) of the Act.
And upon reading the material filed, and hearing counsel for the parties;
It is ordered that the motion is allowed, without costs, and the Respondent shall have leave to file and serve an amended Reply to the Notice of Appeal in the form annexed to the Notice of Motion within seven days from the date of this Order.
And it is further ordered that the parties shall bear their own costs of the motion, and costs attributable to the delay in bringing this motion since the production of Appendix I shall be to the appellant, in the cause, on a party and party basis.
Signed at Ottawa, Canada, this 20th day of November, 2007.
“E.A. Bowie”
Bowie J.
Citation: 2007TCC703
Date: 20071120
Docket: 2001-3839(IT)G
2003-446(IT)G
2003-1073(IT)G
BETWEEN:
CHARLES B. LOEWEN,
ANDREW PRINGLE and
MICHAEL DE PENCIER,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bowie J.
Background
[1] There are motions before me in each of these three appeals, brought by the respondent seeking leave to amend the Replies to the Notices of Appeal. The pleadings in the three appeals are identical in all material aspects, as are the amendments that the respondent wishes to make to the Replies. That is because these three appeals are representative of a group of appeals pending before the Court on behalf of 17 taxpayers, each of whom was a purchaser of an undivided interest in certain computer software that changed hands under an agreement for purchase and sale that was executed on December 31, 1993. In his Reasons in relation to an earlier motion, Bowman C.J. recited the background to these appeals in some detail, and I think it would be useful to reproduce that here.
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 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.
[2] Mr. Loewen’s Notice of Appeal was filed in October 2001, and the Reply in January 2002. In the other two appeals, the Notices of Appeal were filed in early 2003 and the Replies in May 2004. The respondent now seeks to amend the Reply in each appeal to add the following five paragraphs and one sub-paragraph, and to add section 237.1 to paragraph 26, which sets out the statutory provisions upon which the respondent relies.
25. No application was made pursuant to subsection 237.1(2) of the Act for a tax shelter identification number in relation to the Software and no identification number was issued by the Minister under section 237.1(2) of the Act.
26. The Appellant did not file the prescribed form, including the identification number for the tax shelter, under section 237.1(6) of the Act.
27. Prior to the acquisition of the Software, statements or representations were made or proposed to be made by AIRS II Inc., or on its behalf, to prospective purchasers of the Software.
28. The statements or representations state that each prospective purchaser, who purchased a unit in the amount of $500,000 in 1993, would make a cash investment of $75,000 in each 1993 and 1994 taxation year, and would be able to write-off $250,000 in 1993 and $250,000 in 1994 against all income.
29. The issues are whether:
a) The Software is a tax shelter within the meaning of section 237.1 of the Act;
31. He submits that the software was a tax shelter as defined in section 237.1 of the Act. He further submits that no application for a tax shelter identification number was made and as a result, no tax shelter identification number was issued by the Minister. Consequently no amount may be deducted or claimed by the Appellant in respect of the software by virtue of subsection 237.1(6) of the Act.
The numbering above refers to the Loewen appeal. The proposed amendments to the other two Replies are identical but the paragraph numbers are different. The motions are opposed by counsel for the appellants on several grounds that she summarized under the following headings in an outline of her argument:
(i) No prima facie right to amend pleadings
(ii) No reasonable cause of action
(iii) Prejudice
(iv) Not an “alternative argument”
(v) Fairness/Common Sense/Interests of Justice
(vi) Abuse of Process/Policy Concerns
I shall deal with (i), (ii) and (iv) under those headings, with (iii) and (v) together under the heading discretionary considerations, and finally (vi).
no prima facie right to amend pleadings
[3] Ms. Tari contrasts Rule 54,[1] under which these motions are brought, with Ontario Rule 26.01:[2]
54. A pleading may be amended by the party filing it, at any time before the close of pleadings, and thereafter either on filing the consent of all other parties, or with leave of the Court, and the Court in granting leave may impose such terms as are just.
26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.
Rule 54 must be applied having in mind the provisions of Rule 4:
4(1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.
There is considerable jurisprudence surrounding Rule 54, but the accepted statement of principle is that of the present Chief Justice of this Court made in Continental Bank Leasing v. The Queen,[3] where he said at page 302:
In the cases in the courts of Ontario and of British Columbia to which I was referred a number of tests have been developed -- whether an admission was inadvertent, whether there is a triable issue raised by an amendment or the withdrawal of an admission and whether the other party would suffer a prejudice not compensable in costs. Although I find that these tests have been met I prefer to put the matter on a broader basis: whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied. The tests mentioned in cases in other courts are of course helpful but other factors should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter and whether the amendments sought will facilitate the court's consideration of the true substance of the dispute on its merits. No single factor predominates nor is its presence or absence necessarily determinative. All must be assigned their proper weight in the context of the particular case. Ultimately it boils down to a consideration of simple fairness, common sense and the interest that the courts have that justice be done.
That passage was cited with approval by the Federal Court of Appeal in Canderel v. Canada,[4] and more recently in Merck & Co. v. Apotex Inc.[5] Proposed amendments, therefore, must be considered in the light of the factors enumerated in Continental Bank Leasing, and considering as well the question whether they raise a reasonable cause of action, or in the present context, whether they raise a viable defence to the appeals. It would make no sense to permit an amendment to a pleading that, if pleaded in the first instance, would have been susceptible of being struck out as immaterial.
no reasonable cause of action
[4] The principle that an amendment to a pleading will not be permitted if it raises no cause of action, or, in the context of a Reply to a Notice of Appeal in this Court, it would afford no defence of the assessment from which the appeal has been brought is self-evident. As I have said above, it would make no sense to permit an amendment to a pleading that, had it been included initially, would have been susceptible of striking out.
[5] Section 237.1 was added to the Income Tax Act (the “Act”) in 1989. It defines the term “tax shelter”, and it requires that the promoter of a tax shelter register it with the Minister, and thereby obtain a tax shelter identification number. Subsection 237.1(6) provides as follows:
237.1(6) In computing the amount of income, taxable income, taxable income earned in Canada, tax or other amount payable by, or refundable to a taxpayer under this Act for a taxation year, or any other amount that is relevant for the purposes of computing that amount, no amount may be claimed or deducted by the taxpayer in respect of an interest in a tax shelter unless the taxpayer provides the Minister with the identification number for the shelter.
It is this subsection that the respondent now wishes by these amendments to invoke against the appellants. For the Crown to succeed in any such argument would require that the evidence establish that the AIRS II software met the definition of “tax shelter” as it stood at the relevant time in 1993 and 1994. As the decision of this Court in Baxter v. The Queen,[6] and the decision of the Federal Court of Appeal reversing that decision show, the application of that definition is no simple matter. Key to that determination is a document referred to in the argument before me simply as Appendix I, and, of course, the definition of “tax shelter” as it appeared in the Act in 1993 and 1994. That definition then read:
237.1(1) In this section,
"tax shelter" means any property in respect of which it may reasonably be considered having regard to statements or representations made or proposed to be made in connection with the property that, if a person were to acquire an interest in the property, at the end of any particular taxation year ending within 4 years after the day on which the interest is acquired,
(a) the total of all amounts each of which is
(i) a loss represented to be deductible in computing income in respect of the interest in the property and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, or
(ii) any other amount represented to be deductible in computing income or taxable income in respect of the interest in the property, and expected to be incurred by or allocated to the person for the particular year or any preceding taxation year, other than any amount included in computing a loss described in subparagraph I,
would exceed
(b) the amount, if any, by which
(i) the cost to the person of the interest in the property at the end of the particular year,
would exceed
(ii) the total of all amounts each of which is the amount of any prescribed benefit that is expected to be received or enjoyed, directly or indirectly, in respect of the interest in the property, by the person or another person with whom the person does not deal at arm's length.[7]
Ms. Tari argues that on the face of Appendix I the software does not fall within the definition as it appeared in 1993 and 1994. The requirement of the definition was expressed this way by Rip J. in Maege v. The Queen:[8]
30 In terms of the financial aspects of an investment and whether or not it is a tax shelter, the provisions defining "tax shelter" can be reduced to a simple equation: there may be a tax shelter if A > (B - C) where A is the aggregate of deductions against income (including losses), B is the amount of the investment or cost, and C is the amount of prescribed benefits received (in this case, tax credits.)
The cost of one unit of the software (B in the equation above) is shown by Appendix I to consist of one payment of $75,000, three payments of $25,000 each, and a promissory note for $350,000, a total of $500,000, and the CCA deductible (A in the equation) in each of 1993 and 1994 is shown to be $250,000, a total of $500,000. The latter is only equal to but not greater than the former, and so the property, it is argued, could not be a tax shelter.
[6] The Respondent’s position is that there must be deducted from the cost side of the equation (B) the amount of the $350,000 note (C), because it is a prescribed benefit within the description of that expression found in Income Tax Regulation 231(6). The relevant operative words in the Regulation as it read at the relevant time were:
231(6) For the purposes of paragraph (b) of the definition “tax shelter” in subsection 237.1(1) of the Act, “prescribed benefit” in relation to a tax shelter means any amount … and includes such an amount
(a) that is, either immediately or in the future, owed to any other person by the purchaser … to the extent that
(i) liability to pay that amount is contingent,
…
It is alleged in subparagraph 22(h) of the Reply in Loewen (19 and 20 in Pringle and De Pencier) that the liability under the note is contingent. The proposed amendment, therefore, would raise a triable issue.
not an “alternative argument”
[7] The normal reassessment period prescribed by subsection 152(4) of the Act for all the years under appeal by each of these appellants has long since expired. Consequently, the appellants argue that to permit the proposed amendment would offend the rule in Continental Bank of Canada v. Canada.[9] The respondent relies on subsection 152(9):
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.
The appellants’ objection under this head of argument is that what the respondent proposes is not simply to raise a new argument in support of the assessments now under appeal, but rather to raise a different assessment based upon new and different transactions or events. Counsel relied on the decision of this Court in Papiers Cascades Cabano Inc. v. The Queen,[10] and that of the Federal Court of Appeal in Pedwell v. Canada.[11] In my view, Papiers Cascades has no application to the present case. It dealt with the application of the New St. James principle[12] to the carry forward of unused investment tax credits, where the Minister, in assessing the 1966 taxation year, reduced the amount carried forward from an earlier statute‑barred year as the result of a revision of the amount of the credit to which the taxpayer was entitled for that earlier year. The trial Judge, in obiter, accepted an alternative argument for the appellant that to permit the Minister to recalculate the entitlement for a statute-barred year was, in effect, to permit him to appeal from his own assessment. In the Federal Court of Appeal, the Minister’s appeal was allowed and the New St. James principle was affirmed. The Court did not find it necessary to consider subsection 152(9).
[8] In Pedwell, the Minister initially assessed the taxpayer to tax on two transactions, one an appropriation of property from a corporation, and the other a sale of property. Following objection, the Minister reassessed to allow the objection relating to the sale transaction, and confirmed the assessment arising out of the appropriation. An appeal was taken from this assessment, and the trial judge, while allowing the appeal in respect of the appropriation of property, referred the assessment back to the Minister with a direction to reassess on the basis that the proceeds of the sale transaction and of another transaction were income of the appellant. This decision was set aside by the Court of Appeal, reasoning that the appellant had not been assessed on that basis, and that the Court could not ex proprio motu substitute an entirely different assessment for the Minister’s assessment that was under appeal. The ratio of the Court of Appeal decision is found in the following excerpt from the judgment:[13]
21 The Minister advances two arguments. The first is that the issue in a tax appeal is whether the tax is too high. The implication of this argument is that anything can be argued in the Tax Court and the Tax Court Judge is limited only to the amount of the assessment. In other words, as long as a finding does not exceed the amount of the tax assessed by the Minister, the Tax Court Judge is free to find liability against the taxpayer on any basis, whether included in the notice of reassessment or not, provided the taxpayer has notice and an opportunity to respond.
22 I think Continental Bank is dispositive on this point. The Crown and therefore the Court are bound by the assessment appealed from, unless it has been amended, or adequate notice given of an intention to rely on a different basis for it, within the limitation period and certainly before judgment is rendered by the Tax Court. This was not the case here.
23 The second of the Crown's arguments is that what transpired is all part of one scheme; that the acquisition of the 84 acres, the sale to Eulers and the deposit received from Landpark cannot be separated for tax purposes. However, what transpired were three separate transactions involving different parties:
(1) the acquisition of the 84 acres;
(2) the sale of one lot to Eulers; and
(3) the deposit received from Landpark for 16 lots.
This is seen in the Minister's notice of reassessment. In the October 1, 1994 reassessment, the appropriation of the 84 acres is listed, followed by the alleged unreported profit on the Euler sale. On the April 4, 1996 notice of reassessment, the Euler transaction is eliminated. The necessary implication is that the appellant need have no further worry that the Euler proceeds constituted an appropriation to him and that he may concentrate on the acquisition of the 84 acres. This was confirmed before the Tax Court Judge in the excerpt from the transcript quoted above. Finally, nowhere on the reassessments is there any mention of the Landpark deposit of $22,500.
24 I do not say that the Minister might not base an assessment on a scheme consisting of more than one transaction. However, taxation is transaction-based (or perhaps deemed transaction-based) and if more than one transaction is to form the basis of assessment, the assessment must reflect that fact. Where the basis of the Minister's