[OFFICIAL ENGLISH TRANSLATION]
98-2925(IT)G, 98-2930(IT)G
98-3120(IT)G, 98-3452(IT)G
98-3517(IT)G, 98-3521(IT)G
98-3540(IT)G, 98-3573(IT)G
BETWEEN:
RICHARD BLANCHETTE,
ANDRÉ CASTAGNER,
DENIS McNAMARA,
MICHEL ROYAL,
TIRUVENKAT DEVANATHAN,
GORDON FOREST,
CHRISTIAN LAVOIE,
VENKATACHALA MURTHY,
Applicants,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard on July 24, 2001, at Montréal, Quebec, before
the Honourable Chief Judge Alban Garon
Appearances
Counsel for the Applicants: Yves St-Cyr
James Bonhomme
Counsel for the Respondent: Pierre Cossette
ORDER
Upon a motion brought on behalf of the applicants with a view to obtaining, inter alia, the striking out of certain allegations from the Replies to the Notices of Appeal in the above eight cases;
And upon hearing the representations by counsel for the parties;
The motion is dismissed. The respondent is entitled to costs, regardless of the outcome of the appeals.
Signed at Ottawa, Canada, this 11th day of October 2001.
|
"Alban Garon" |
C.J.T.C.C.
Translation certified true
on this 24th day of February 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011011
Docket: 98-2925(IT)G, 98-2930(IT)G
98-3120(IT)G, 98-3452(IT)G
98-3517(IT)G, 98-3521(IT)G
98-3540(IT)G, 98-3573(IT)G
BETWEEN:
RICHARD BLANCHETTE,
ANDRÉ CASTAGNER,
DENIS McNAMARA,
MICHEL ROYAL,
TIRUVENKAT DEVANATHAN,
GORDON FOREST,
CHRISTIAN LAVOIE,
VENKATACHALA MURTHY,
Applicants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
GARON, C.J.T.C.C.
[1] This is a motion brought on behalf of the applicants with a view to obtaining, inter alia, the striking out of certain allegations from the Replies to the Notices of Appeal in the above eight cases. The object of the Notice of Motion filed in those cases is stated as follows:
[TRANSLATION]
THIS IS A MOTION FOR the striking out of certain allegations or of certain enumerations of documents contained in the respondent's pleadings, in particular in her Replies to the Notices of Appeal and in her amended lists of documents.
[2] At the hearing of this motion, the applicants dropped their claim for the remedy sought in the part of the Notice of Motion respecting certain documents referred to in the respondent's "amended lists of documents". The applicants decided at that time to seek only the striking out of certain allegations appearing in the Replies to the Notices of Appeal.
[3] On the very day of the hearing of this motion, in a letter to the Court dated July 24, 2001, a copy of which was sent to the respondent, the applicants in the eight cases in question specified the paragraphs or portions of paragraphs of the Replies to the Notices of Appeal which they were seeking to have struck out. The applicants expressed themselves as follows:
[TRANSLATION]
Accordingly, the Applicants-Appellants request that the following paragraphs of the respondent's Replies to the Notices of Appeal be struck out:
Michel Royal The statement in paragraphs 1 and 2
Denis McNamara that there was no partnership
Christian Lavoie and that no actual business was
Venkatachala Murthy operated by the purported
Tiruvenkat Devanathan partnership;
Gordon Forest
paragraphs 30 to 42;
the first two questions of paragraph 43; and paragraphs 45, 46 and 48.
Richard Blanchette The statement in paragraphs 1 and 2
André Castagner that there was no partnership and that no actual business was operated by the purported partnership;
paragraphs 31 to 45;
the first two questions of paragraph 46; and paragraphs 48, 49 and 51.
[4] The paragraphs or portions of paragraphs of the Replies to the Notices of Appeal concerned by the motion to strike out in the cases of the applicants Michel Royal, Denis McNamara, Christian Lavoie, Venkatachala Murthy, Tiruvenkat Devanathan and Gordon Forest are reproduced below:
[TRANSLATION]
1. He denies the facts alleged in paragraph 1 of the Notice of Appeal and adds that there was no partnership during the period at issue.
2. He denies the facts alleged in paragraph 2 of the Notice of Appeal and adds that no actual business was operated by the purported partnership.
. . .
30. At the time of the sale of the interests in the partnership, the purchase plan offered by the purported partnership involved having the Quebec investors pay a cash sum representing 50 percent of their interest and the Ontarioinvestors pay a cash sum representing 46 percent of their interest. The difference was "financed" by the Diasware corporation.
31. The appellant had no obligation toward anyone with respect to the amount presented as having been "financed".
32. The appellant knew that, according to the scheme presented at the solicitation, his interest would be redeemed in the short term for the amount presented as having been "financed".
33. Payment in each case was made by discharge of debt representing the amount "financed" by Diasware. The amount in question exceeded the fair market value of the interest at the time of disposition.
34. The use of the redemption-financing scheme described above represented, for the promoters and the members of the purported partnership, an essential characteristic of the "tax shelter" in respect of which they were reciprocally sellers and buyers.
35. The appellant was entitled to receive an amount which was granted to him to eliminate or reduce the effect of any loss attributable to the fact that he had an interest in the partnership.
36. The appellant benefited from a mechanism that provided for the disposition of his interest in the purported partnership and that may reasonably be considered as having as one of its main objects to attempt to exclude him from the application of subsection 96(2.4) of the Income Tax Act.
37. The only reason the appellant became a member of the purported partnership was to obtain a reduction of his income tax payable under the Income Tax Act.
38. The Partnership, Dias, Data Age, Zuniq Data, Inar, Diasware, Glenrock and Zuniq ("the Zuniq group corporations") were not dealing at arm's length with each other or with Vohoang.
39. Zuniq, Dias, Data Age, Zuniq Data and Inar all have the same postal address.
40. The purported partnership had no reason for being except to serve as a vehicle for generating income tax refunds and as a financing tool for the Zuniq group corporations.
41. The appellant had no intention of entering into a contract of partnership; the appellant and the co-contractors had no intention of working together to make the purported business produce profits.
42. As there was no reasonable expectation in the circumstances that the activities of the purported partnership would produce a profit, the partnership was not, in that respect, carrying on a business.
B. ISSUES
43. The issues are as follows:
- Did a partnership actually exist, and, if so, did it operate a business?
- Was the appellant, where applicable, a partner who was a limited partner of the purported partnership within the meaning of subsection 96(2.4) of the Income Tax Act at a time in the year relevant to this appeal?
- Was the appellant, where applicable, a partner who, in a regular, continuous and significant manner throughout the year concerned in which the purported partnership represents itself as having ordinarily operated its business, did not take an active part in the activities of the business of the purported partnership and did not carry on a business similar to that which the purported partnership represents itself as having carried on during the year concerned?
. . .
45. He submits that, having regard to all of the circumstances, there is no actual partnership carrying on a business and that, as a consequence, the resulting expenses and loss, if any, are not deductible.
46. He submits that the appellant is, where applicable, a limited partner within the meaning of subsection 96(2.4) of the Income Tax Act and that the appellant is accordingly a specified member within the meaning of paragraph (a) of the definition of that expression in subsection 248(1) of the said Act.
. . .
48. Furthermore, the Deputy Attorney General respectfully submits that the whole of the facts set out above authorize this Court to conclude that:
1 ° the "tax shelter" here in question is a sham, giving entitlement to none of the deductions claimed;
2 ° the appellant was not a member of a partnership on December 31, 1989.
[5] In the cases of the applicants Richard Blanchette and André Castagner, the paragraphs or parts of paragraphs sought to be struck out are similar mutatis mutandis to those listed above found in the other six cases herein, with the exception of paragraph 34 in the cases of applicants Richard Blanchette and André Castagner, which has no equivalent in the other six cases. I therefore think it useful to reproduce the paragraphs or portions of paragraphs concerned by the motion to strike out in the cases of the applicants Richard Blanchette and André Castagner.
[6] One of the counsel for the applicants also stated at the hearing that the applicants' motion was based on section 58, not section 53, of the Tax Court of Canada Rules (General Procedure).
Applicants' Arguments
[7] It was argued on behalf of the applicants that the striking out of the aforementioned paragraphs was necessary, since the basis of the assessments in issue would otherwise be completely altered. One of the counsel for the applicants spoke as follows:[1]
[TRANSLATION]
YVES ST-CYR: That's what it was. The basis on which the amount was established in the notice of assessment was that a deduction was allowed. And what we are being told today is that that was not at all the case. We are being told: there is no longer any deduction and we can refer you to no other sections; we're not relying on any other section of the Act to tell you that a deduction is possible or not possible. In that case, the basis is being changed; it is as though an entirely new assessment was being made. It is the equivalent of what we have today.
In this regard, counsel referred to a passage from the decision by Stone J.A. in Schultz et al. v. The Queen, 95 DTC 5657, cited in the decision by Judge Rip of this Court in General Motors Acceptance Corporation of Canada, Limited v. The Queen, 99 DTC 975. That passage reads in part as follows:
I do not understand that the law as developed in these cases prevented the Minister from pleading the alternative defence before the Tax Court of Canada. It is true that in pleading he is subject to certain constraints. For example, he cannot plead an alternative assumption when to do so would fundamentally alter the basis on which his assessment was based as to render it an entirely new assessment. In my view, in the present cases the Minister has not so changed the basis of the assessments. What he did was merely to assert a different legal result flowing from the self-same set of facts by alleging that those facts show the existence of a joint venture or partnership if they do not show an agency relationship. Even if it could be said that the Minister has alleged new "facts" by adopting the alternative posture, the law as developed allowed him to do so but imposed upon him the onus of proving those facts . . . .
[8] For the applicants, it was emphasized that, in the paragraphs of the Replies to the Notices of Appeal that the applicants were seeking to have struck out, the respondent wanted to make a fundamental change to the basis of the assessments. According to counsel, those paragraphs do not support the assessments at issue and he made the following comments on that point:[2]
[TRANSLATION]
It should not be forgotten, Your Honour, and this will, it completes what I told you a moment ago, and that is that we are here to accept changes whose purpose is to support the assessment. But any change that would have the effect of making a reassessment, obviously that would not be for the purpose of supporting the assessment. And when reference was made to inclusion-inclusion and deduction-deduction, what was meant was that an amount was determined, for example, in the case of the deductions, as a result of the application of the provisions relating to deductions, and the same applies to the inclusions. So the concept is the same; the only thing is that the Department says: "We did not proceed on the basis of the right section of the act with respect to-when we included that amount in income or when we deducted that amount from income. And in support of the deduction that we allowed the taxpayer, in support of the inclusion that we allowed the taxpayer, that we allowed, that we imposed on the taxpayer, we just used the wrong section. So it should have been included under such and such section or it should have been deducted under such and such section." But here it is impossible to draw a parallel; the fundamental substance of the notice of assessment is being changed. And it cannot be said that it is a "basis for supporting the assessment". I do not see how it can be claimed before the Court that it supports the assessment.
[9] In his reply to the respondent's argument, one of the counsel for the applicants, after referring to the decisions by the Federal Court-Trial Division (90 DTC 6076) and Federal Court of Appeal in Riendeau v. The Queen (91 DTC 5416), further explained his thoughts on the subject of what may constitute a fundamental change to the basis of an assessment, as follows:[3]
[TRANSLATION]
And that was basically what we said at the start of the reply, when the amount of tax doesn't change. And that doesn't necessarily mean that the Department's arguments are valid, but if the Department's arguments are valid and the amount of the assessment does not change, the amendment may be granted or the new argument may be accepted.
However, even if the Department does not want the amount to change, because of course it cannot want the amount to change because it knows that, in any event, it is going to be considered as an appeal from an assessment, so in that case, if it is truly fundamental and we find ourselves with what amount to new notices of assessment that are completely different, it doesn't mean that their amendments, or contrary allegations in a reply to the notice of appeal, may be allowed by the Court.
Respondent's Arguments
[10] The respondent referred in particular to the decision in The Queen v. The Consumer's Gas Company Ltd., 87 DTC 5008, in which the Minister was permitted to adopt before the Federal Court-Trial Division a position which differed from that taken at the time of the assessment.
[11] The respondent emphasized that, in an appeal from an assessment, the Court must determine whether the amount of tax at issue is too high. He relied for this on the decision by Thurlow J. of the Exchequer Court of Canada in Harris v. M.N.R., 64 DTC 5332, and in particular on certain passages at page 5337.
[12] The respondent cited the decision by Judge Dussault in Sauvé et al. v. The Queen, 2000 DTC 2003, and referred to the following passage from that decision at page 2006:
. . . As noted above, in Gilles Sauvé's case, the Minister allowed a capital gains deduction equal to the amount added to his income. This way of looking at the interest received on the capital invested (minus the legal fees paid) as a capital gain is clearly wrong, and counsel for the respondent, relying on the new subsection 152 (9) of the Act, argued that the amount was actually received as interest and must be included in the appellants' income on that basis and not as a taxable capital gain, although he acknowledged that the amount of the assessment cannot be increased in any way.
[13] The respondent also contended that the Minister of National Revenue may not only put forward alternative arguments, but also present new facts. On that point, counsel for the respondent cited the decision in Smith Kline Beechman Animal Health Inc. v. R., [2000] 1 C.T.C. 2552, which the Federal Court of Appeal simply confirmed without giving any reasons.
[14] The respondent further argued that the existence of a partnership is a question of law and that the Minister was not bound by an admission. The decision of the Supreme Court of Canada in Backman v. Canada, 2001 S.C.R. 10, and this Court's decision in L.I.U.N.A. Local 527 Members' Training Trust Fund v. The Queen, 92 DTC 2365, were cited in support of that proposition.
[15] Counsel for the respondent clearly stated that the Minister of National Revenue was not asking that the amount of tax assessed be increased. The respondent merely wanted to establish that the amount of tax appearing on each of the assessments under appeal was not too high.
Analysis
[16] In the assessments concerned in these appeals, the Minister of National Revenue assumed that the partnerships in question existed and that their partners were sleeping partners.
[17] In each of the Replies to the Notices of Appeal, the respondent now disputes the existence of each of the partnerships concerned and furthermore claims, should it turn out that those partnerships actually existed, that they were limited partnerships.
[18] It therefore falls to be determined whether the respondent may present arguments and evidence to establish that the groupings in question did not constitute actual partnerships and that, if they did actually constitute partnerships, the applicants were limited partners.
[19] It is well-settled case law that the Minister of National Revenue may not appeal from his own assessments. It is also well recognized that, in the case of an appeal from an assessment, the Court must, in the final analysis, decide the question whether the amount of tax assessed by the Minister of National Revenue is too high. Even before subsection 152(9) was added by Chapter 22 of the Statutes of Canada 1999, the case law had established that the Minister may, in support of his assessment, rely on reasons other than those he considered at the time of the assessment. See on this subject the decision by the Federal Court of Appeal in The Queen v. Consumer's Gas Company Ltd., supra, at page 5012. However, the decision of the Supreme Court of Canada in Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358, cast some doubt on the matter, which led Parliament in 1999 to enact subsection 152(9) of the Income Tax Act.
[20] In my view, the Minister of National Revenue is entitled in the instant case to argue that the partnerships in question are non-existent and that, if they do exist, they are limited partnerships. This evidence, if accepted by the judge, would establish that the assessed amount is not too high. The respondent is not asking that the Minister of National Revenue be authorized to amend the assessments or, if I may put it in more technical terms, is not asking that the appeals be dismissed and that the assessments be referred back to the Minister of National Revenue for reconsideration and reassessment. Indeed, subsection 171(1) of the Act does not permit an assessment to be referred back to the Minister if the appeal is dismissed; the respondent is asking only that the appeals from the assessments at issue be dismissed.
[21] If I accepted the proposition put forward by the applicants, it would follow that the respondent could advance an alternative argument under subsection 152(9) of the Act-and present any evidence supporting it-only if the effect of that argument would be to justify the specific amount of the assessment under appeal. If it led to the determination of an amount of tax greater than that assessed, if only by a few dollars, that argument would be inadmissible. To accept such a proposition, it seems to me, would be to introduce an arbitrary and artificial element into the assessment appeals system. Furthermore, subsection 152(9) of the Act is general in scope; it does not make the presentation of an alternative argument in support of an assessment conditional on that argument's resulting in a determination corresponding exactly to the amount of the assessment under appeal.
[22] That is the approach Judge Dussault of this Court adopted in Sauvé et al, supra, a case in which a portion of the interest received by the taxpayer had been considered as a capital gain when the assessment was made. The Minister of National Revenue had thus included only 75 percent of the amount of that interest in the taxpayer's income. Following the taxpayer's appeal from the assessment, the Minister of National Revenue argued in support of that assessment-which argument was accepted by the Court-that all the interest should have been included in income, not just 75 percent thereof, but the Minister did not ask that the income tax assessment be increased accordingly.
[23] Referring to this question of interest, Judge Dussault writes as follows in Sauvé et al., supra, at page 2006:
On this question, which is something of a preliminary one, I believe that the respondent can indeed rely on the provisions of the new subsection 152 (9) to advance a new argument in support of the assessment, which means-as has been held many times-in support of the very amount of tax assessed. Reference may be made in this regard to the decision I rendered in Consoltex Inc. v. The Queen, 92 DTC 1567, at page 1569, where I referred to what was stated by Hugessen, J.A. of the Federal Court of Appeal in The Queen v. The Consumer's Gas Company Ltd., 87 DTC 5008, at page 5012.
Further on, Judge Dussault concludes as follows on the same question, at page 2006:
The net amounts received by the appellants on that basis [that is, as interest] in 1993 should normally have simply been included as interest and not as business income, and, of course, much less as a taxable capital gain. Since the assessments made cannot be varied by adding extra amounts to make up for the fact that only 75 percent of the net amount received as interest on the reimbursed capital invested was included in income, I can only conclude that the amount that was included in income and that represented interest must in fact remain as income. [The words in bold characters within brackets have been added by me.]
[24] Judge Lamarre Proulx of this Court had previously adopted the same attitude in La Compagnie Price Limitée v.The Queen, T.C.C. No. 92-1993(IT)G, October 23, 1996 (97 DTC 800, French only). Her comments at page 3 (DTC: page 802) should be noted:
The position of the Minister, who, in making his most recent assessment for the 1984 to 1987 taxation years, allowed the spare parts as capital property, favoured the appellant. The appellant is understandably disappointed by the potential change in the future method of assessing. In law, however, in order to arrive at the result of the assessment, the respondent may plead other grounds than those used in making the assessment, the only constraint being that the amount of the assessment may not be increased, as ruled in Harris v. M.N.R., 64 DTC 5332 and restated in well-settled case law on this point.
[25] The applicants' assertion that the Minister of National Revenue may not advance in support of an assessment an alternate argument that would constitute a fundamental change to the basis of an assessment runs contrary, in my view, to the decisions of Judges Lamarre Proulx and Dussault in Compagnie Price, supra, and Sauvé, supra. For example, in Sauvé, the alternate argument-advanced by the Minister and accepted by this Court-was that all the interest the taxpayer had received should be included in his income, whereas, in the assessment at issue in that case, the interest in question was considered as constituting a capital gain and only 75 percent of that interest amount was included in the taxpayer's income. In addition to establishing with respect to capital gains a special rate of inclusion in income (75 percent at the relevant time) as compared to income from, for example, any office, employment, business or property of a taxpayer, the Act-particularly in Subdivision c of Division B of Part I-provides for quite special treatment for capital gains as compared to income from the sources just cited. In Sauvé, the alternate argument, which the Court recognized as valid, represented, in my view, a radical change with regard to the basis of the assessment that was the subject of the appeal. One of the counsel for the applicants did not appear to accept this conclusion which I draw from Sauvé.
[26] I would add that there was suggested to me on behalf of the applicants no formula or logical dividing line that would make it possible to determine whether an alternate argument was fundamental or not for the purposes of subsection 152(9) of the Act. Although I do not have to decide the question, I nevertheless do not believe that the Minister of National Revenue could advance, in a Reply to a Notice of Appeal concerning a given assessment, an argument that would be utterly unrelated to the element of the assessment that is the subject of a dispute between the parties.
[27] For these reasons, the motion is dismissed. The respondent is entitled to costs, regardless of the outcome of the appeals.
Signed at Ottawa, Canada, this 11th day of October 2001.
|
"Alban Garon" |
C.J.T.C.C.
Translation certified true
on this 24th day of February 2003.
Erich Klein, Revisor