Federal Court of Appeal Decisions

Date: 20021015

Docket: A-747-01

Neutral citation: 2002 FCA 386

CORAM:        DÉCARY J.A.

LINDEN J.A.

LÉTOURNEAU J.A.

BETWEEN:

                                                             S.T.B. HOLDINGS LTD.

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                   Heard at Vancouver, British Columbia, on October 3, 2002

                                  Judgment delivered at Ottawa, Ontario, on October 15, 2002

REASONS FOR JUDGMENT BY:                                                                          LÉTOURNEAU J.A.

CONCURRED IN BY:                                                                                                         DÉCARY J.A.

                                                                                                                                               LINDEN J.A.

Date: 20021015

Docket: A-747-01

Neutral citation: 2002 FCA 386

CORAM:        DÉCARY J.A.

LINDEN J.A.

LÉTOURNEAU J.A.

BETWEEN:

                                                             S.T.B. HOLDINGS LTD.

                                                                                                                                                       Appellant

                                                                                 and

                                                        HER MAJESTY THE QUEEN

                                                                                                                                                   Respondent

                                                        REASONS FOR JUDGMENT

LÉTOURNEAU J.A.

[1]                 This appeal comes to us from a decision of Miller J. of the Tax Court of Canada where the debate between the parties was adjourned while a preliminary determination of a matter of law was convened pursuant to Rule 58(1)(a) of the Tax Court of Canada Rules (General Procedure). The decision is reported as S.T.B. Holdings Ltd. v. Canada, [2001] T.C.J. No. 854. Two questions were submitted for adjudication:

(a)        Does subsection 245(7) of the Income Tax Act (Act) require that a reference to section 245 and/or the General Anti-Avoidance Rule (GAAR) be made on the face of a notice of assessment or reassessment in order for section 245 to be relied on by the Minister? and

(b)        Does subsection 245(7) of the Act preclude the use of section 245 as an alternative assessing position?

At issue are two different interpretations of subsection 245(7) entailing two very different results. The appellant's interpretation would mean that there are special requirements in the reassessment procedure when GAAR is involved that are not required when any other provision of the Act is involved in a reassessment. My use of the term reassessment in these reasons includes assessments and additional assessments. The respondent's construction of the subsection would merely entail that third parties affected by an initial application of GAAR are precluded from self-assessing on the basis of GAAR.

[2]                 Both questions relating to the application of GAAR have far-reaching implications in this instance as well as in future cases. In the present litigation, it would mean that the Minister of National Revenue (Minister) cannot rely upon GAAR to deny the appellant a deduction in the amount of $12,308,649.00. It could in future cases change the procedure and conditions of exercise of GAAR which is meant to be used as a last resort when there is an abuse of the Act or a misuse of a provision. I hasten to add that the issue before us falls to be decided on the proper interpretation of subsection 245(7) of the Act, not its consequences, however inimical, which are best left to Parliament to remedy.

The Facts

[3]                 The Rule 58 Motion proceeded on the following agreed statement of facts:

S.T.B. Holdings Ltd. (STB) is a company incorporated under the laws of the Province of British Columbia with a registered and records office at 1500 - 1040 West Georgia Street, Vancouver, British Columbia.

During STB's 1989 taxation year, STB acquired all the outstanding shares in the capital of Newport Industries Ltd. (Newport) and Newport was subsequently wound-up prior to STB's 1989 taxation year end. Prior to the acquisition of Newport by STB, Newport and STB were not related corporations.

In computing its income for its 1990 and 1991 taxation years STB applied non-capital losses of $9,832,810 and $1,164,124 from previous taxation years that originated from prior taxation years of Newport. In its 1990 taxation year STB claimed an inventory write down of $1,224,937 and a loss on disposal of the inventory of $86,778 for its 1991 taxation year. The inventory was real estate that had been owned by Newport (the Newport Lands). STB became the owner of the real estate by reason of the wind-up of Newport. The Newport Lands were located in an area of Calgary known as Victoria Square and comprised a significant portion of two city blocks. STB sold the Newport Lands in 1991 and claimed the $86,778 loss described above.

On or about July 7, 1994, a waiver in the form requested by the respondent was provided by STB for its 1990 taxation year. On or about November 2, 1994, STB filed a waiver in the form requested by the respondent for its 1991 taxation year. On May 13, 1996, Notices of Reassessment were issued to STB for its 1990 and 1991 taxation years regarding the Newport losses. On August 2, 1996, a Notice of Objection was filed in connection with the May 13, 1996, reassessments of STB's 1990 and 1991 taxation years.

On November 12, 1996, Notices of Revocation of the waivers were filed in connection with STB's 1990 and 1991 taxation years. On April 14, 2000, the May 13, 1996 Notices of Reassessment for STB's 1990 and 1991 taxation years were confirmed by way of a Notice of Confirmation which, inter alia, confirms the basis upon which the Minister reassessed. On July 12, 1000, STB filed a Notice of Appeal with respect to the April 14, 2000 Notice of Confirmation. On October 31, 2000, the respondent filed a Reply to STB's July 12, 2000 Notice of Appeal.

No other Notices of Assessment or Notices of Reassessment are relevant to the questions of law posed under the Rule 58 Motion. No additional assessments or determinations have been made by the Minister with respect to the STB's 1990 or 1991 taxation years.

The contentions of the litigants

[4]                 I should summarize the contentions made by the parties before the Tax Court Judge and us. I need to reproduce the relevant portions of section 245 for a better understanding of the debate as well as the decision of the learned judge:

                                                                                                                                               (my emphasis)

[5]                 As it appears, the first question to be decided is narrower in scope than the second. It is agreed in the present instance that no mention of GAAR appears on the notice of reassessment sent to the appellant on May 13, 1996. The respondent invoked GAAR for the first time in the waivers signed by the appellant on July 7, 1994, for the second time in the notice of confirmation of the notice of reassessment after receiving the appellant's objection to the reassessment and, for the third time, in the Reply to the Notice of Appeal. As a matter of fact, the 1994 waivers referred to a reassessment under Part I and Part XVI of the Act, the latter being the Part which contains GAAR.

[6]                 The appellant avers that subsection 245(7) imposes two requirements on the Minister when assessing a taxpayer on the basis of GAAR: the reassessment notice must state on its face that GAAR is being used and GAAR must be the primary assessing position. Counsel for the appellant seeks support for his position in the wording of the provision. Four groups of words are in his view determinative: "Notwithstanding any other provision of this Act", "through a notice... of reassessment", "following the application" and "involving the application of ".

[7]                 When teleological, purposive or contextual interpretation is made of these words, counsel argues, it leads to a series of conclusions:

a)         the tax consequences pursuant to the application of section 245 must be determined through the issuance of a notice of reassessment indicating the application of GAAR;

b)         subsection 245(7) covers not only third parties affected by GAAR, but also targeted taxpayers;

c)         in enacting that subsection, Parliament intended to override the usual rules in the Act regarding self-assessment and alternative arguments;

d)         disclosure of the fact that GAAR is invoked needs to be made to third parties so that, if affected, they can exercise their rights;

e)         fairness to third parties and the targeted taxpayer requires that disclosure be made on the notice of reassessment sent to the targeted taxpayer.

In the appellant's view, the learned judge did not consider, or erred in considering, these words in subsection 245(7). I should mention that the expression "targeted taxpayer" in the present context refers to the taxpayer to whom the initial application of GAAR is made.

[8]                 The respondent submits that neither the wording, the context nor the purpose of subsection 245(7) support the position of the appellant. Moreover, the contention of the appellant runs contrary to the Act and the legal principles applicable to notices of reassessment, requirements of reasons therein and alternative bases for assessing taxpayers. In short, the judge committed no error when he rejected all the appellant's contentions, except as regards the scope of application of subsection 245(7). Counsel for the respondent submits that, on this issue, the judge erred when he ruled that the subsection applies both to the targeted taxpayer and third parties.

The decision of the Tax Court judge

[9]                 The learned Tax Court judge answered both questions in the negative and ordered costs of the application to be in the cause.

[10]            Speaking of the Act and the provision in issue, the Tax Court judge wrote:

What the drafter believes is clear becomes murky: what is black becomes gray, and, remarkably at times even white. There is no dearth of opportunity for the Courts to provide clarity in the interpretation of the Act, given the CCH version of the Act and Regulations now runs to close to 3000 pages. Complexity is the name of the game - clarification is our job. I would have no difficulty in citing numerous examples where the legislation leaves the taxpayer, counsel, the Department of Justice and Courts baffled by convoluted structures, triple negatives and cross-references upon cross-references. My impression of the section before me is that it is not such a hieroglyphic mish-mash: it is however imprecise, subject to different views and confusing in its very simplicity. The interpretation suggested by the Applicant is an enthusiastic and well-argued attempt to stretch the words further than I believe they can reasonably bend. I am not prepared to accept such a degree of malleability.

[11]            He defined GAAR as an assessing tool given to the Minister, not a planning tool for the taxpayer. He admitted to some ambiguity in subsection 245(7) and, therefore, conducted a detailed statutory interpretation of the provision by inquiring into the ordinary meaning or grammatical meaning of the subsection, its context and the legislative purpose sought to be attained by its enactment.

[12]            With respect to the ordinary meaning of the provision, the judge found that the words "following the application of this section" means "following an assessment involving GAAR". He rejected the appellant's submission that these words should be read as if they wrote "in the application". To put it another way, subsection 245(7) covers a situation in which there has been an initial application of GAAR and, consequently, the words must refer to a subsequent application of GAAR. The words "involving the application of this section" found at the end of subsection 245(7) were simply descriptive of the fact that a subsequent notice of reassessment, arising from a subsection 245(6) request, by the Minister must involve GAAR. He rejected the appellant's construction of these words as requiring the Minister to make a specific reference to GAAR in the notice of reassessment, including that sent to the targeted taxpayer.

[13]            Looking at the context in which subsection 245(7) finds itself, the Tax Court judge ruled that the placement of that subsection between subsections 245(6) and 245(8) indicates that these three subsections work together. Subsection 245(6) permits a taxpayer who is affected by a GAAR assessment in respect of a targeted taxpayer to request a subsequent GAAR application to his or her tax return. Subsection 245(8) requires the Minister to respond to that request with due dispatch while subsection 245(7) ensures that the taxpayer does not self-assess as is usually the case under the Act.

[14]            Finally, the judge found indications of Parliament's purpose or intent in the technical note to subsection 245(7) as well as in the explanatory notes to Bill C-139 which enacted the GAAR provisions. Essentially, he found these references to be supportive of the view that subsection 245(7) is a direction to the taxpayer and not to the Minister; it precludes taxpayers, including both the originally GAAR-assessed taxpayer and an affected third party taxpayer, from self-assessing in relying upon the original GAAR assessment of the same transaction. The legislative purpose of subsections 245(6), (7) and (8) is geared towards adjustments for third parties. If Parliament had intended that subsection 245(7) would so significantly restrict the Minister's invoking of subsection 245(2) as contended by the appellant, it would have specifically made a reference to subsection 245(2) in subsection 245(7), as does subsection 245(6), rather than simply referring to the words "involving the application of this section". While the general scheme of the Act involves a two-step process, i.e., self-assessment followed by a government assessment, subsection 245(7) departs from that scheme and limits the process to one step. Pursuant to a taxpayer's request under subsection 245(6), a notice of reassessment is to be made and that notice must involve GAAR.

Analysis of the decision

[15]            The Tax Court judge made a thorough analysis of the parties' submissions. My summary of his decision, although longer than usual, does not give full credit to his thoughtful examination of the issues. I am in general agreement with his interpretation of subsection 245(7), except as regards his application to the targeted taxpayer. I shall come back later to this finding. I will now address some of the grounds of appeal.

The judge's omission to consider the words "notwithstanding any other provisions of this Act"

[16]            I do not think, as contended by the appellant, that the learned Tax Court judge omitted to consider the introductory words of subsection 245(7) "Notwithstanding any other provision of this Act". It is true that he made no specific reference to these words. However, his whole interpretation of subsection 245(7) indicates that he considered the "notwithstanding" language and interpreted it to apply to the more narrow aspect of "subsequent" assessments undertaken by the Minister pursuant to subsections 245(6) and 245(8). This is also evident from his refusal of the appellant's contention that this language applied to any and all applications of GAAR, including the initial GAAR assessment of the targeted taxpayer. I am satisfied that the judge recognized that the "notwithstanding" language had meaning and gave it its proper meaning.

Erroneous interpretation of the phrase "following the application of this section"

[17]            The Tax Court judge interpreted the word "following" to mean "after" and rejected the appellant's contention that "following the application" meant "in the application". I see no error in such interpretation which, in addition to being reasonable, is supported by the French text of the provision "par suite de l'application". "Par suite de l'application" means "en conséquence de", "à cause de" l'application: see Le Nouveau Petit Robert, Dictionnaire de la langue française, 1993, page 2425. A plain construction of these words in French, especially in the context of subsections 245(6) and 245(8) between which subsection 245(7) is inserted, indicates a prior happening triggering a subsequent event, in this case a prior GAAR application to a taxpayer resulting in a subsequent determination of the tax consequences for another.

Omission to consider the importance of the words "notice of" and give meaning to them

[18]            The appellant contends that the Tax Court judge failed to give a meaning of their own to the words "notice of" and unnecessarily linked them to the phrase "involving the application of this section", thereby misconstruing these components of the provision.

[19]            As for the "notwithstanding" language, I believed the judge did not ignore these words in subsection 245(7), but rather gave them an interpretation that limits any notice requirement to those subsequent assessments that are based on subsections 245(6) and 245(8). It was not unreasonable to rely upon the closing words of the subsection to determine the meaning to be given to the word "notice".

The meaning of "any person" in subsection 245(7)

[20]            The judge interpreted "any person" in subsection 245(7) as including not only the third party affected by the application of GAAR to a transaction in which it was implicated, but also the taxpayer originally assessed under GAAR. His interpretation meant that both the third party and the originally GAAR-assessed taxpayer are precluded from self-assessing in reliance upon the original GAAR assessment of the same transaction.

[21]            I believe his extension of the words "any person" to the targeted taxpayer is not of great significance for the purpose of self-assessment. Indeed, as the judge himself noted at paragraph 25 of his decision, "it is difficult to imagine a taxpayer arranging a transaction for a particular intended effect and then filing on the basis that GAAR is applicable to result in consequences different from what was intended". In other words, it is not very likely that a taxpayer who intends to obtain a tax benefit would self-assess to deny himself that benefit on the admitted ground that he abused the Act or misused one of its provisions. I doubt that, by using the words "any person" in subsection 245(7), Parliament intended to cover this unlikely, not to say unrealistic, situation.

[22]            The placement of subsection 245(7), "sandwiched" between subsections 245(6) and 245(8) which relate to a third party favourably affected by the application of GAAR to a targeted taxpayer, indicates to me that these words have the same meaning as the one they were given to in subsection 245(6). In subsection 245(6), "any person" is followed in brackets by the phrase "other than a person referred to in paragraph (a) or (b)". It is not disputed that this formula in subsection 245(6) refers to third parties. It is a known principle of interpretation that "unless the contrary is clearly indicated by the context, a word should be given the same interpretation or meaning whenever it appears in an act": see P.A. Côté, The Interpretation of Legislation in Canada, (3^rd ed.), Scarborough, Thomson Canada Ltd., 2000, page 332; R. Sullivan, Driedger on the Construction of Statutes, (3^rd ed.), Toronto, Butterworths Canada Ltd., 1994, page 163. This is even truer when the words are found in the same provision. Professor Côté writes, at page 333, citing R. v. Zeolkowski, [1989] 1 S.C.R. 1378:

Another relevant factor is the physical proximity of the words. The closer they are, the greater the likelihood that they have the same meaning.

Interestingly enough, the situation in the Zeolkowski case was similar to ours: an identical phrase (all relevant evidence) was used in two adjacent subsections within the same section of the Criminal Code: see at page 1387. They were given the same meaning by the Supreme Court. Here, the words "any person" are used in two adjacent subsections, 245(6) and 245(7), within the same provision of the Act. They have the same meaning.

[23]            I am comforted in my conclusion by the fact that in subsection 245(5), Parliament, when referring to the determination of tax consequences for a targeted taxpayer, employed a different wording and used the words "a person". That subsection precedes the three subsections (245(6), (7) and (8)) dealing with third parties. As the Tax Court judge pointed out, the Explanatory Notes to Proposed Legislation (Bill C-139), Special Release, De Boo, June 30, 1988, at pages 329-330, leave no doubt that the three subsections establish a relief mechanism for third parties affected by the application of GAAR to a taxpayer:

In determining, under new subsection 245(2) of the Act, the reasonable tax consequences to any person in order to deny the tax benefit of an avoidance transaction, adjustments of a relieving nature may be made. New subsection 245(6) introduces a mechanism that allows a person to request such adjustments.

Under new subsection 245(6), where proposed subsection 245(2) applies with respect to a transaction and, consequently, a taxpayer has been assessed or reassessed or a determination has been made under proposed subsection 152(1.11) with respect to that person, another person is entitled to request that the Minister apply subsection 245(2) in his case in order to make adjustments of a relieving nature with respect to the same transaction.

[...]

Subsection 245(6) does not apply to a taxpayer who has already been assessed or in respect of whom a determination pursuant to subsection 152(1.11) has been made by the Minister of National Revenue under section 245, because this taxpayer is in a position to request the appropriate adjustments through the objection and appeal mechanisms provided by other provisions of the Act.

New subsection 245(7) of the Act provides that a person may not rely on subsection 245(2) in order to determine his income, taxable income, or taxable income earned in Canada of, tax or other amount payable by, or amount refundable to, any person under the Act as well as any other amount under the Act which is relevant for the purposes of the computation of the foregoing, except through a request for adjustment under subsection 245(6). This prevents a person from using the provisions of subsection 245(2) in order to adjust his income, or any of the above-mentioned amounts, without requesting that adjustment following the procedure set out in subsection 245(6).

                                                                                                                                               (my emphasis)

The reference to the procedure set out in subsection 245(6) for a person mentioned in subsection 245(7) certainly tends to confirm that subsection 245(7) was intended to apply only to third parties seeking a tax relief.

The potential prejudice resulting from an interpretation of subsection 245(7) limiting its scope of application to third parties

[24]            The appellant stresses the fact that limiting the scope of application of subsection 245(7) to third parties has the effect of depriving third parties of their recourse when GAAR is invoked as an alternative basis for reassessment, especially when this is done for the first time in the Reply to the Notice of appeal. Subsection 245(6) gives a third party 180 days after the mailing of a notice of reassessment to the targeted taxpayer to request from the Minister adjustments to its tax return. As there is no such notice in that scenario, the third party will not be aware of the application of GAAR and will lose its remedy.

[25]            The Tax Court judge acknowledged an imperfection in the operation of the third party relief provisions in subsections 245(6), (7) and (8). He discarded the appellant's solution which consisted of requiring that GAAR be invoked as a primary tool of assessment and that mention be made of the use of GAAR on the notice of reassessment. As he rightly pointed out, the problem remains where the third party is simply not advised of the notice even if it refers to GAAR: see his decision, paragraph 43. He concluded that the imperfection in the machinations of the third party relief provisions was not sufficient to override the established process for assessments: ibid., paragraph 47.

[26]            I agree with this conclusion of the judge. The position advocated by the appellant would fundamentally change the nature of GAAR. The rules regarding general anti-avoidance were designed to apply as provisions of "last resort after the application of the other provisions of the Act, including specific anti-avoidance measures": see Explanatory Notes to Proposed Tax Legislation, supra, at page 324; Technical Notes, Income Tax Act and Regulations, Department of Finance, 4^th ed., 1992, Carswell, page 1238. The appellant would make of the rules a primary assessment tool. However, in practice, it is often only after an objection to the notice of reassessment has been filed that the Minister is in a position to fully assess the taxpayer's transaction and determine whether abuse or misuse of the Act are involved. An application of GAAR must be determined by the facts applicable to a particular case and the full knowledge of all the relevant facts may come at a later stage in the process.

[27]            In sum, I have no doubt that it would be unreasonable to conclude that Parliament, through a "sandwiched" subsection in a set of three subsections providing third party relief, intended to so fundamentally alter the nature of GAAR and the procedure applicable to reassessments when abuse of the Act or misuse of a provision are alleged. The remedy to the problem raised by the appellant lies not in the courts changing the nature of GAAR and compromising its application to a targeted taxpayer, but in Parliament extending the statutory duties of the Minister contained in subsection 245(8), so as to ensure that third parties likely to be favourably affected by the application of GAAR to another taxpayer are so informed.

[28]            For these reasons, I would dismiss the appeal with costs.

                                                                                                                                       "Gilles Létourneau"                 

                                                                                                                                                                  J.A.

"I agree

Robert Décary J.A."

"I agree

A.M. Linden J.A."

                                                    FEDERAL COURT OF APPEAL

                              NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                             A-747-01

STYLE OF CAUSE:                           S.T.B. Holdings Ltd. v. Her Majesty the Queen

PLACE OF HEARING:                     Vancouver, B.C.

DATE OF HEARING:                       October 3, 2002

REASONS FOR                                 

JUDGMENT:                                      LÉTOURNEAU J.A.

CONCURRED IN BY:                      DÉCARY J.A.

LINDEN J.A.

DATED:                                                October 15, 2002

APPEARANCES:

Mr. Gordon Funt & Ms. Laurie Mathison                                    FOR THE APPELLANT

Mr. Robert Carvalho                                                                      FOR THE RESPONDENT

SOLICITORS OF RECORD:

Fraser Milner Casgrain LLP                                                           FOR THE APPELLANT

Barristers and Solicitors

15^th Floor, 1040 West Georgia Street

Vancouver, B.C. V6E 4H8

Department of Justice                                                                     FOR THE RESPONDENT

900-840 Howe Street

Vancouver, B.C. V6Z 2S9