Tax Court of Canada Judgments

Docket: 2001-3839(IT)G

BETWEEN:

CHARLES B. LOEWEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Motion heard on February 10, 2003 at Toronto, Ontario

Before: The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances:
Counsel for the Appellant:	A. Christina Tari Marcela S. Aroca
Counsel for the Respondent:	Elizabeth D. Chasson Jenna Clark

____________________________________________________________________

ORDER

          Upon motion by the appellant for an order striking out the entire reply to the notice of appeal, allowing the appeals and vacating the assessments for the appellant's 1993, 1994 and 1995 taxation years or in the alternative striking out certain portions of the reply

          And upon hearing what was alleged by the parties

          It is ordered that the motion be allowed and the provisions referred to in the attached reasons for order be struck out.

.../2

          It is further ordered that costs be awarded to the appellant in a lump sum amount of $2,000.

Signed at Toronto, Canada, this 14th day of March 2003.

"D.G.H. Bowman"

A.C.J.

Citation: 2003TCC101

Date: 20030314

Docket: 2001-3839(IT)G

BETWEEN:

CHARLES B. LOEWEN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR ORDER

Bowman, A.C.J.

[1]      The appellant seeks an order striking out the entire reply to the notice of appeal, allowing the appeals and vacating the assessments appealed from for the appellant's 1993, 1994 and 1995 taxation years. Alternatively he asks that the reply be struck out without leave to amend. The grounds for these two requests are that the reply is scandalous, frivolous or vexatious or is an abuse of the process of the court within the meaning of section 53 of the Tax Court of Canada Rules (General Procedure). In the further alternative the appellant seeks an order striking out or expunging a large number of paragraphs, subparagraphs, phrases or references in the reply on the basis that they seek to advance new and different assessments from those under appeal.

[2]      A brief overview of the litigation is necessary to an understanding of the issues on this motion.

[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 the 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.

[25]     Paragraph 16 is not really a proper statement in an affidavit. It is legal argument and a legal conclusion. Moreover it is inconsistent with the statements in the two reports. Specifically, she set out no facts that she assumed or found to support the allegation that the co-owners, AIRS II Inc. and Arachnae were not dealing at arm's length. She clearly did not assume that they were not dealing at arm's length. Indeed if she had assumed that they were not at arm's length she would unquestionably have said so and based her assessment on section 69 of the Act. Rather, in her letter of March 2, 2000 she refers to the $8,000,000 as "unreasonable". In the list of issues in her position paper, set out above, she deals in point 2 only with reasonableness in the context of value.

[26]     The reports in my view support the conclusion that she assumed

(a)       the co-owners were dealing at arm's length;

(b)      the software was acquired for the purpose of gaining or producing income from a business or property;

(c)      the promissory notes were not contingent. I might observe on this last point that whether a promissory note is contingent or not is a question of law, not a fact to be assumed. Her conclusion is contained in the sentence

However there is no evidence to support that the debt was not intended to be repaid.

[27]     This is not a strong assumption, if it can be described as an assumption at all.

[28]     Therefore, it was open to the respondent to plead that the Minister assumed

(a)       that the value of the software did not exceed $1.6 million on December 31, 1993 and

(b)      the software was not available for use in the appellant's 1993 taxation year.

[29]     Before I come to the request to strike out specific paragraphs, subparagraphs, phrases and references in the reply I shall deal with the request to strike out the entire reply and allow the appeals and vacate the assessments or strike out the reply without leave to amend. The grounds are that the reply is scandalous, vexatious or frivolous or is an abuse of the process of the court.

[30]     It may be that some of the statements in the reply offend some of the rules of pleading. I shall discuss this question below. However to strike out a reply entirely or allow an appeal on the ground that some of the rules have been broken strikes me as unduly draconian. The words "frivolous, scandalous, vexatious or an abuse of process" have acquired a meaning in procedural law but whether taken in their legal sense or their popular sense they connote a high degree of impropriety or a virtual certainty that the position taken in the pleading is without merit. This is sometimes referred to as the "plain and obvious" rule enunciated in Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959 at page 980. See also Davitt v. The Queen, 2001 DTC 702. It is by no means plain and obvious that the Crown's position is so lacking in merit that it cannot proceed.

[31]     The motion to strike out portions of the reply is rather more complex. It is based upon the combined effect of the decision of Bastarache J. in Continental Bank of Canada v. Canada, [1998] 2 S.C.R. 358, and subsection 152(9) which was enacted after the Continental Bank judgment. The observations of Bastarache J. upon which the appellant relies in this motion were adopted by McLachlin J. (as she then was) writing for the majority. In light of the importance of Bastarache J.'s statement I set it out in full, followed by McLachlin J.'s endorsement of his statement. Bastarache J. said at pages 364-368:

Issues

7       Because I have found in the Leasing Appeal that the reassessment of Leasing should be maintained because Leasing did not roll its assets into a valid partnership pursuant to s. 97(2) of the Act, the assessment on the Bank's disposition of the "partnership interest" does not arise. The appellant, however, set out an alternative argument for the first time in this appeal that should be addressed. The appellant argued that if the Court held in the Leasing Appeal that it was the Bank and not Leasing that acted as the vendor when the assets were sold to Central Capital Corporation ("Central"), the reassessment of the Bank in this appeal should be restored on the basis that having acquired the leasing assets as properties distributed to it under s. 88(1) of the Act, the Bank is taxable on the recapture of capital cost allowance under s. 13(1) of the Act in the amount of $83,052,657. The issue that arises out of this argument is whether the Crown is permitted to substitute its original reassessment of the Bank for an assessment on a different basis that amounts to the same amount of income.

Analysis

8       Given the finding in the Leasing Appeal that it was Leasing and not the Bank that sold the assets to Central, it is not necessary to determine whether the Bank would be liable for the recapture of capital cost allowance on the basis that it acquired the leasing assets as properties distributed to it under s. 88(1) of the Act. However, even if it was found that the Bank was the vendor of those assets and liable for the recapture, the appellant could not succeed in upholding its reassessment of the Bank in this appeal.

9       The only basis given in the Notice of Reassessment that Revenue Canada issued to the Bank for the 1987 taxation year was that the amount in question was alleged to constitute a "trading gain on sale of Central Capital Leasing's partnership interest". Revenue Canada did not reassess the Bank on any other basis including that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Act, as the appellant now alleges for the first time in this Court.

10       The applicable limitation period under the Act for assessing a taxpayer is four years from the date of issuance of Revenue Canada's Notice of Reassessment (ss. 152(3.1) and 152(4) of the Act). As a result, the latest that the Minister could have reassessed the Bank for the recapture of cost allowance was October 12, 1993. The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired. The proper approach was expressed in The Queen v. McLeod, 90 D.T.C. 6281 (F.C.T.D.), at p. 6286. In that case, the court rejected the Crown's motion for leave to amend its pleadings to include a new statutory basis for Revenue Canada's assessment. The court refused leave on the basis that the Crown's attempt to plead a new section of the Act was, in effect, an attempt to change the basis of the assessment appealed from, and "tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts". Similarly, the Federal Court of Appeal has described such attempts by the Crown as "a belated attempt to put the appellant's case on a new footing" (British Columbia Telephone Co. v. Minister of National Revenue (1994), 167 N.R. 112, at p. 116).

11       It was open to the appellant to assess the respondent on the basis that it was liable for the recapture of cost allowance when it issued its Notice of Reassessment on October 12, 1989 or anytime prior to the expiration of the limitation period for reassessment. The appellant did not choose to do so and cannot now be permitted to change its assessment eleven years later. The appellant argued that the liability of the respondent for the assessment pursuant to s. 13(1) is an alternative reason for its previous assessment, not a new assessment or reassessment. According to the appellant, because the liability for recapture under s. 13(1) would arise solely as a consequence of a finding that Leasing, in the Leasing Appeal, was not the vendor of the assets in the sale to Central, a reassessment on this basis is merely a legal conclusion flowing from the proper application of the statute.

12       To accept this characterization by the appellant would, in effect, create a situation where the Crown is permitted to raise new arguments simply because other arguments failed in the courts below. Unlike the Minister in Minister of National Revenue v. Riendeau (1991), 132 N.R. 157 (F.C.A.), the Minister in the present case has never sought to amend, correct or reissue the reassessment of the Bank to include a claim for recapture under s. 88(1)(f) of the Act. Moreover, the appellant's characterization of the argument as an alternative one ignores the fact that Leasing and the Bank are two separate taxpayers. What the Minister is seeking to do is to substitute an assessment of one taxpayer for the assessment of another taxpayer because the first assessment did not succeed.

13       Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge that assessment. Here, it is not clear that there is the proper factual basis to support a reassessment on the basis proposed by the appellant. For example, the value of the goodwill associated with the Bank's leasing business, which was transferred to Central in December 1986, could bear on the appellant's new claim for recapture by the Bank. It is not possible to measure the extent to which the Bank might otherwise be liable for recapture, or the Bank's income for tax purposes, without being able to properly allocate the purchase price paid by Central between goodwill and leasing assets. Because the Bank was not assessed on the recapture, the evidence relating to the allocation of the purchase price was not adduced at trial. To allow the appellant to proceed with its new assessment without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.

[32]     McLachlin J. agreed with Bastarache J. on this point, as follows, at pages 369-370:

18       The next event occurred on December 29, 1986 when the Bank transferred its interest in the partnership to 693396 and 693397. The Minister cannot argue that the Bank could not transfer its partnership interest at this stage. The Minister must accept that this transfer took place because his assessment of the Bank was based on the assumption that the Bank disposed of its partnership interest. I agree with Bastarache J. that the Minister's argument that the Bank sold depreciable leasing assets or was otherwise liable for recapture of capital cost allowance pursuant to s. 88(1) of the Income Tax Act, R.S.C. 1952, c. 148, as amended, raised for the first time in this Court, cannot be entertained. The Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.

[33]     Following the Continental Bank judgment the Income Tax Act was amended to add subsection 152(9) which (including the marginal note) reads

            (9)         Alternative basis for assessment - 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.

[34]     Before I consider to what extent subsection 152(9) modifies or overrules Continental Bank the provision itself should be looked at. I do not as a rule quote the marginal notes of a provision because section 14 of the Interpretation Act states

Marginal notes and references to former enactments that appear after the end of a section or other division in an enactment form no part of the enactment, but are inserted for convenience of reference only.

[35]     Despite the clear wording of section 14 of the Interpretation Act, the Supreme Court of Canada in R. v. Wigglesworth, [1987] 2 S.C.R. 541 at pages 556-557, held that courts may consider the marginal notes when interpreting a legislative provision. In Wigglesworth, Wilson J., in interpreting section 11 of the Charter, referred to the case of Law Society of Upper Canada v. Skapinker, [1984] 1 S.C.R. 357, where Estey J. stated at page 377:

... a court should not, by the adoption of a technical rule of construction, shut itself off from whatever small assistance might be gathered from an examination of the heading as part of the entire constitutional document.

[36]     In determining the weight to place on marginal notes when interpreting a legislative provision, Wilson J. stated at page 558:

It must be acknowledged, however, that marginal notes, unlike statutory headings, are not an integral part of the Charter.... The case for their utilization as aids to statutory interpretation is accordingly weaker. I believe, however, that the distinction can be adequately recognized by the degree of weight attached to them.

[37]     From an aid to interpretation in Charter cases marginal notes have moved, according to the Federal Court of Appeal, to be appropriate references in interpreting income tax legislation.

[38]     In Brill et al. v. The Queen, 96 DTC 6572, the Federal Court of Appeal adopted the reasoning of Wilson J. in Wigglesworth and have used the marginal notes in interpreting provisions of the Act. In Brill et al. Linden J.A. referred to the marginal notes to provide guidance of the scope of section 79 of the Act, as it then read, stating at page 6575:

Notwithstanding what I view as the clear meaning of the above language, there is, if needed, further support for this interpretation in the marginal notes. Although the Interpretation Act states that marginal notes "form no part of an enactment", it is permissible to consider them as part of the context of the legislation as a whole.

[39]     After quoting Wilson J. from Wigglesworth on the use of marginal notes, Linden J.A. concluded at page 6575:

Marginal notes, therefore, can be used to aid the Court. In this case, the marginal note is "Mortgage foreclosures and conditional sale repossessions", indicating to me that it is meant to apply to situations where there is no determined sale price. If it were intended to cover all acquisitions by lenders, whether by sale or not, as contended for by the Crown, the marginal notes would have so described the subsection.

[40]     I think marginal notes should be used with caution. In the Supreme Court of Canada cases they were used in interpreting the Charter. Both Estey J. and Wilson J. accorded to them a very limited role. In the Federal Court of Appeal Linden J.A. used the marginal notes not to assist him in interpreting the statute but as confirmation of his view of the plain meaning of the statute. I do not think that section 14 of the Interpretation Act can be totally ignored.

[41]     Here we have a marginal note that speaks of an alternative basis for assessment and the statute itself that refers to an alternative argument. Subsection 298(6.1) of the Excise Tax Act is identical in all material respects to subsection 152(9) of the Income Tax Act. With its marginal note it reads:

            (6.1)      Alternative argument in support of assessment - The Minister may advance an alternative argument in support of an assessment of a person at any time after the period otherwise limited by subsection (1) or (2) for making the assessment unless, on an appeal under this Part,

(a)         there is relevant evidence that the person is no longer able to adduce without leave of the court; and

(b)         it is not appropriate in the circumstances for the court to order that the evidence be adduced.

[42]     The French version of the marginal note to subsection 152(9) of the Income Tax Act speaks of "nouvel argument à l'appui d'une cotisation".

[43]     I rather doubt that draft legislation that has never been enacted, along with a press release explaining it, can afford much assistance, if any, in interpreting a legislation that is substantially different but for what it is worth I reproduce here a news release of the Department of Finance dated December 23, 1998 which reads in part:

Also released with today's proposals is a draft amendment to the Income Tax Act to clarify that Revenue Canada may, in the course of an income tax appeal, rely on alternative grounds to support its assessment. This amendment is proposed in light of remarks by the Supreme Court of Canada in the recent case of The Queen v. The Continental Bank of Canada. More detailed information can be found in the attached draft legislation and accompanying explanatory note.

ALTERNATIVE GROUNDS SUPPORTING AN ASSESSMENT

1.(1)      Section 152 of the Income Tax Act is amended by adding the following subsection:

(9)         Subject to subsection 152(5), an assessment shall not be vacated, varied, or referred back to the Minister for reconsideration and reassessment by reason only of the identification by the Minister of an alternative basis of liability for the assessment.

(2)         Subsection (1) applies to appeals disposed of after Royal Assent.

Explanatory note:

New subsection 152(9) is intended to ensure that Revenue Canada may, on an appeal of an income tax assessment, identify the basis or further bases on which Revenue Canada is relying in support of its assessment. This amendment is proposed in light of remarks by the Supreme Court of Canada in the case of The Queen v. Continental Bank of Canada to the effect that the Crown is not permitted to advance a new basis for assessment after the limitation period has expired.

Subsection 152(9) is subject to subsection 152(5) which prevents the Minister from including amounts in a taxpayer's income which were not included prior to the expiration of the taxpayer's normal reassessment period. It is also intended that subsection 152(9) be subject to the court protection afforded to taxpayers that an alternative argument cannot be advanced to the prejudice of the right of a taxpayer to introduce relevant evidence to rebut the argument.

[44]     The draft subsection 152(9) never became law. Subsection 152(9) in its present form came into effect on June 17, 1999. The technical note, dated March 1999, accompanying it read:

New subsection 152(9) is intended to ensure that the Minister of National Revenue may advance alternative arguments in support of an income tax assessment after the normal reassessment period has expired. This amendment is proposed in light of remarks by the Supreme Court of Canada in the case of The Queen v. Continental Bank of Canada..., to the effect that the Crown is not permitted to advance a new basis for assessment after the limitation period has expired.

The limitations found in paragraphs 152(9)(a) and (b) are intended to import the Court protection afforded to taxpayers that an alternative argument cannot be advanced to the prejudice of the right of a taxpayer to introduce relevant evidence to rebut the argument.

Subsection 152(9) is subject to other limitations in the Act, including subsection 152(5) which prevents the Minister from including amounts in a taxpayer's income which were not included prior to the expiration of the taxpayer's normal reassessment period.

This subsection applies to appeals disposed of after Royal Assent.

[45]     Assuming all of this extraneous material can be looked at it supports the conclusion that would have been reached without it, that is to say that "an alternative argument" in support of an assessment is not the same as "alternative basis for an assessment". Although at one point the Department of Finance may have wanted the legislation to permit alternative bases for assessments the legislation in its final form was considerably watered down.

[46]     It will be obvious from the passage from the judgment of Bastarache J. that the alternative proposition that the Crown sought to advance for the first time in the Supreme Court of Canada was not just a new argument in support of the assessment of a trading gain on the sale of the partnership interest. It was a brand new basis of assessment that the Crown tried on at the eleventh hour.

[47]     What happened was that Continental Bank's ("CB") subsidiary Continental Bank Leasing ("CBL") in order to avoid recapture of CCA on the sale of its leasing assets rolled those assets into a newly formed partnership, elected a price equal to their UCC, wound up into CB who then sold the partnership interest to Central Capital ("CC") and treated the gain as a capital gain. The basic assessment was against CBL and was premised on the view that the series of steps was in substance a sale by CBL of its leasing assets to CC giving rise to recapture. The assessment against CB as an adventure in the nature of trade was inconsistent with the assessment against CBL and was purely protective in case the assessment against CBL failed.

[48]     Then, in the Supreme Court of Canada the Crown came up with an even more improbable basis for assessing CB, that it was really CB that was selling CBL's leasing assets. If it could not succeed in its substance over form argument in defending its assessment against CBL it is difficult to see how it could possibly have succeeded with its new theory.

[49]     What Bastarache J. articulated was what appellate courts have been saying for years, that an appellant cannot raise new arguments on appeal that were not raised at trial particularly where had the point been raised at trial the evidence might have been different. This proposition was stated by Duff J. (as he then was) in SS. Tordenskjold v. SS. Euphemia, 41 S.C.R. 154 (1908) at page 164 where he quoted the same proposition stated by Lord Herschell in the Tasmania, 15 App. Cas. 223 at page 225.

[50]     It is no wonder the Supreme Court of Canada refused to entertain the new theory. Quite apart from the fact the position has no merit the evidentiary basis needed to establish that CB was from the outset the vendor of CBL's assets on which CBL had claimed and been allowed CCA so that CB became liable on the recaputure on the assets was virtually insuperable and would have required that very different evidence be adduced at trial.

[51]     It is perfectly clear that even if subsection 152(9) of the Act had been in force when the new basis was advanced and even if the Crown could have successfully argued that the new basis was an "alternative argument" the Crown still could not have succeeded in advancing the new basis in the Supreme Court. What is new in Bastarache J.'s judgment is the proposition that the Crown cannot raise a new basis for upholding the assessment after the normal reassessment period had elapsed. In fact it is questionable whether the Crown could have succeeded in raising the point in the Supreme Court of Canada even if the normal reassessment period had not elapsed.

[52]     In what way then did subsection 152(9) modify the judgment of Bastarache J. or for that matter the law that has existed since the SS. Euphemia case? Bastarache J.'s comments were not confined to appellate courts. They appear to apply to all courts, including the Tax Court of Canada. Subsection 152(9) permits the raising of new arguments in support of an assessment. An argument is something that is advanced in support of a basis of assessing. A basis in the fundamental principle underlying an assessment.

[53]     In Schultz v. The Queen, [1996] 2 C.T.C. 127, which was decided before the Supreme Court of Canada decision in Continental Bank, Stone J., after referring to a number of cases stated:

24         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: Pillsbury, supra, at page 302-03 (D.T.C. 5188); Continental Bank Leasing Corp. v. R., [1990] 1 C.T.C. 2306, 93 D.T.C. 298 (T.C.C.), at page 2310 (D.T.C. 302).

[54]     These observations must of course be read in light of the subsequent comments by Bastarache J. in Continental Bank but they are useful in that they draw a distinction between, on the one hand, so fundamental an alteration in the basis of the assessment that, if accepted, would lead to a result that is tantamount to an entirely new assessment and, on the other hand, an assertion of a different legal result flowing from the same set of facts by alleging that those facts lead to an alternative legal relationship.

[55]     In paragraph 10 of his judgment quoted above Bastarache J. refers with approval to the Federal Court Trial Division's judgment in The Queen v. McLeod, 90 DTC 6281, and the Federal Court of Appeal's judgment in British Columbia Telephone Company Co. v. Minister of National Revenue, (1994) 167 N.R. 112.

[56]     These are examples of the type of change in position by the Crown that Bastarache J. considered unacceptable. The question of course remains whether the result would have been the same if subsection 152(9) had been in force. I do not think that subsection 152(9), speaking as it does of an alternative argument, goes so far as to permit the Crown to in effect "appeal its own assessment" or put its case "on a new footing".

[57]     Since subsection 152(9) was enacted there have been several cases that considered the provision. In Anchor Pointe Energy Limited v. The Queen, 2002 DTC 2071 (since appealed to the Federal Court of Appeal), Rip J. stated that it is an abuse of the process of the court for the Crown to plead as assumptions facts that were not assumed. I agree (see Holm v. Canada, [2002] T.C.J. No. 641). However since the case has been appealed to the Federal Court of Appeal I make no further comment on it.

[58]     In General Motors Acceptance Corporation of Canada, Limited v. The Queen, 99 DTC 975, Rip J. refused to strike out portions of the reply which the appellant attacked on the grounds that they raised a new basis of assessment. He did not rely on subsection 152(9) but he did refer to the judgment of Létourneau J.A. in The Queen v. Hollinger Inc., 99 DTC 5500. In Hollinger Létourneau J.A. said at pages 5504-5505 (footnotes omitted):

[16]       The position now taken by the appellant that the loss shares were not capital property is obviously a revocation of its prior unsuccessful assumption. From the evidence before us and before the Tax Court judge, it is impossible, however, to determine whether the limitation period for reassessing had expired when this new basis was first raised by the Minister. We know that a Notice of Reassessment was issued on February 4, 1993, but the record does not reveal when the original assessment of the respondent was made from which to calculate the four-year limitation period.

[17]       On the other hand, the Minister did raise for the first time on September 12, 1994, in his Reply to the respondent's Notice of Appeal, that Coseka did not hold the loss shares as capital property on December 12, 1986 and that the transfer of these shares to the second subsidiary company (353380 Alberta Ltd.) on that date was not a transfer of capital property. Instead, he submitted that the loss shares had become trading assets utilized by Coseka in a business operation or venture of profit-making by which it intended to sell for gain its tax loss. Thus, the issue was as early as September 1994 before the Tax Court and it is still impossible to establish whether by then the limitation period for reassessment had expired. Because the limitation date is not in evidence, I am of the view that the Continental Bankprinciple relied upon by the respondent, namely that the Crown is not permitted to advance a new basis for reassessment after the limitation period has expired, cannot be applied in this instance.

[18]       However, counsel for the respondent contended that the Continental Bank decision of the Supreme Court stands for more. In his view, it also determined the procedure to be followed when a new basis for reassessment is being advanced. Under the existing law at the time, if the Minister was entitled to change the basis of the reassessment within the limitation period, counsel claimed, he could only do that formally by either issuing a new reassessment or amending the existing reassessment. Consequently, the mere pleading of such new basis in the Reply is not sufficient to validly raise the issue and prevent the limitation period from expiring. He relied to sustain his claim upon the following passage from Bastarache, J.:

The Crown is not permitted to advance a new basis for reassessment after the limitation period has expired.

[19]       With respect, I do not read this statement of Bastarache, J. as imposing a formal procedure or a procedural restriction of the kind suggested by the respondent.

[20]       First, the quoted passage refers to the Crown, not the Minister. Had Bastarache, J. mentioned the Minister, it could have been a possible indication that he had in mind the procedure of reassessment itself. Second, it speaks of "advancing a new basis for reassessment", thereby referring to the Crown's actual practice of advancing a new argument in its pleadings in support of the assessment. Indeed, immediately after his statement, Bastarache, J. refers with approval to the case of The Queen v. McLeod in which the Crown was refused leave to amend its pleadings to advance a new basis for reassessment because the limitation period had expired. While Collier, J. in McLeod refused the amendment on account of the expiry of the limitation period, he never questioned the Crown's right to make new assumptions at trial or advance a new argument in support of the assessment.

[21]       It is obvious at pages 367-368 of his reasons that what Bastarache, J. is concerned with is the possible unfairness to the taxpayer when notification of the new basis, whatever form it may take, is either inadequate or given too late and, as a result, the taxpayer is not afforded a proper opportunity to respond:

p. 367 Taxpayers must know the basis upon which they are being assessed so that they may advance the proper evidence to challenge the assessment.

p. 368 To allow the appellant to proceed without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim.

[22]       I am comforted in this view by the recent legislative amendment in Bill C-72 brought to section 152 of the Act to overrule the decision of the Supreme Court in Continental Bank on this point. Subsection 152(9) assented to on June 17, 1999 allows for an alternative argument in support of an assessment to be advanced at any time after the normal reassessment period, subject to a discretion given to the Court to refuse it if prejudice could result to the taxpayer from the late change. The subsection reads:

s. 63.1(2) Section 152 of the Act is amended by adding the following after subsection (8):

(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.

[23]       The amendment has no application in the present proceedings because it was not in force when the matter was argued before the Tax Court. But it is indicative of the philosophy that ought to prevail in these matters. It would introduce an unnecessary measure of formalism, unwarranted by the decision of the Supreme Court and the subsequent amendment to section 152, if we were to require that proper notification to the taxpayer of an alternative argument in support of an assessment can only be achieved by the ministerial issuance of a new reassessment. This is not to say that the Minister may change the amount of an assessment in pleadings, but only that arguments in support of an assessment can be made in pleadings, even if not included in a notice of reassessment. Changing the amount of an assessment in pleadings is tantamount to the Minister appealing his own assessment, an avenue which has been clearly rejected by the Courts.

[24]       In conclusion, I think the preliminary objection of the respondent grounded on the Continental Bank case has no merit in this instance and, accordingly, the appellant was entitled to argue, as it did before the Tax Court, the new basis advanced in its Reply. The respondent was fully and timely informed of it and had ample time to prepare as the hearing of the appeal took place more than three and a half years later. All the relevant evidence was before the Tax Court judge. Not only was there no objection made by the respondent at the time, but submissions were made to the judge by both parties with respect to the new basis for reassessment. The Tax Court judge dealt with the issue on its merits and the appellant's ground of appeal relating to that aspect of the Tax Court judge's decision is properly before us. I shall deal with it after consideration of the second preliminary objection.

[59]     In Smith Kline Beecham Animal Health Inc. v. The Queen, 2000 DTC 1526 aff'd 2000 DTC 6141 (F.C.A.), Bonner J. said at page 1530:

[14]       In my view Continental Bank was never authority for the proposition that the Minister is, when defending an appeal from an assessment after the expiry of the subsection 152(4) period, confined within a conceptual prison called "basis of assessment" comprising only the facts and statutory provisions relied upon by the assessor. In my view Continental Bank is an application of the long-standing rule governing litigation in appellate courts which rule prevents litigants from raising points on appeal which were not pleaded and argued in the trial court. Appellate courts cannot be expected to deal with a new issue on appeal resting on an evidentiary record which is deficient by reason of the failure to plead and direct evidence to that issue. Here the Respondent seeks leave to amend well before the commencement of the trial. The situation is in no way analogous to Continental Bank.

[15]       Furthermore, nothing said in Continental Bank suggests that subsection 152(4) has a bearing on the amendment which the Respondent seeks. Subsection 152(4) restricts the right of the Minister to "... reassess or make additional assessments, or assess tax, interest or penalties ... ". The amendment now in question would not effect a reassessment of tax. Rather it is an attempt to defend the existing assessment of tax by asserting that, on the facts already pleaded, liability is imposed by a provision of the Act other than that relied on by the assessor.

[16]       It is long-settled law that the validity of an assessment depends on the application of the statute to the facts and not on the assessor's analysis. It is, I believe, unlikely that it was the intention of the Court in Continental Bank (supra) to overrule decisions such as Minden (supra) and Riendeau (supra)without referring to them. Accordingly, I am of the opinion that nothing said in Continental Bank can apply to prevent the Minister from relying on section 245 in the present case.

[60]     Finally, in Rogic et al. v. The Queen, 2001 DTC 855, Bell J. held that it was not open to the Crown to argue that the company, not the appellant, owned the property. Bell J. held that this argument, advanced after the expiry of the normal reassessment period, constituted a fundamental change in the basis of the assessment. He distinguished that the Federal Court of Appeal's decisions in the Hollinger and Smith Kline cases as follows.

[39]       Adopting the submission of Appellants' counsel in that regard, as supplemented below, I conclude that the Respondent's alternative position, advanced after the statute-barred period for reassessment expired, is not available to the Respondent.

[40]       While respecting the views of Bonner, J. of this Court in Smith Klineand the Federal Court of Appeal in Hollinger, there are different circumstances in this appeal. In Hollinger, the matter under dispute was that the reassessment was based on the assumption that loss shares acquired by Hollinger were capital property. As the Court said at page 5504:

The position now taken by the appellant that the loss shares were not capital property is obviously a revocation of its prior unsuccessful assumption. From the evidence before us and before the Tax Court judge, it is impossible, however, to determine whether the limitation period for reassessing had expired when this new basis was first raised by the Minister....

Because the limitation date is not in evidence, I am of the view that the Continental Bank principle relied upon by the respondent, namely that the Crown is not permitted to advance a new basis for reassessment after the limitation period has expired, cannot be applied in this instance.

Apart from not knowing the reassessment limitation date, whether the loss shares were or were not capital property is a matter of legal determination - not an assumption of fact basic to the issue of a reassessment.

[41]       In SmithKline the Respondent sought to amend its pleadings to add additional statutory provisions to support the assessment. Counsel pointed out that the Respondent did not seek to appeal the existing assessment by asserting a claim for more tax than already assessed. The judgment, at page 1529 says:

Rather, the objective is to ensure that it is open to the Respondent to defend the existing assessments by relying on statutory provisions which, when applied to material facts already pleaded will support the assessments of Part XIII tax, either in whole or in part.                     (emphasis added)

[42]       The instant case differs in that there is a fundamental change in the fact assumption forming the foundation of Respondent's alternative submission, namely that "if the Appellant did not beneficially own the Property" such Appellant failed to include in income

... a benefit in respect of the personal use of the Property ... and such benefit must be included in the Appellant's income pursuant to subsection 15(1) of the Act.

This clearly implies ownership of the Property by the Company. Ownership is substantially a matter of fact. The assumption of fact upon which the assessment was based was that the Appellants owned the beneficial interest in the Property equally. The assessment, based upon that assumption, was that the Appellants should be taxable on the gain on the sale of the Property, such gain totalling $184,982. Not only is there a fundamental factual assumption difference (which was not the case in either Hollinger or Smith Kline) but there is no exposition of the amount of the benefit referred to in the alternative submission arising from the presumed personal use of the Property. The term "personal use of the property" connotes possession of same for living purposes. Assuming the Respondent's allegations in its Reply are factually correct, the Property having been purchased on April 1, 1993 and sold in October, 1994, there would, given a reasonable period of several months for house construction, be a benefit equal to the fair market rental of the Property for a period slightly in excess of one year. The amount of such benefit would be minimal relative to the sum of $184,982 and would have no relation to it.

[43]       In Marina (supra) at page 5052, McKay, J. quoted Stone, J.A. at page 5662 of Schultz v. The Queen (1995), 95 DTC 5651:

I do not understand 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.

At page 5653, the learned Justice said:

The alternative ground for an assessment pursuant to s. 160, is a matter to be pursued, if at all, by formal action by the Minister by means of a reassessment under the Act. It is not a matter for endorsement by the Court at this stage.

[44]       The alternative submission to the effect that the Company, not the Appellants, owned the Property is a fundamental change in the basis of the assessment and is not available to the Respondent.

[61]     What then does it all boil down to? Any attempt to find perfect consistency among all of these cases - and there are others that have not been cited - would be utopian. Some of the broad principles that have emerged since Continental Bank are:

1.        The decision in Continental Bank stands for the proposition that the Crown cannot advance, after the limitation period has expired, a fundamentally different basis of assessment that amounts in essence to a different assessment. This is a fortiori true at the appellate level but it also applies to trial courts.

2.        Subsection 152(9) of the Act does not overrule Continental Bank. It does not sanction the substitution of a wholly different basis of assessment. It permits the Crown to put forward new arguments in support of the existing basis of assessment.

3.        Subsection 152(9) is particularly relevant at the trial level because it contemplates the possibility of an appellant adducing evidence. At an appellate level new evidence is rarely, if ever, adduced and the rule stated in the SS. Euphemia has been quite adequate to prevent new arguments being raised in the appeal courts.

[62]     Subsection 152(9) is a most peculiarly drafted section. The conventional wisdom is that it was intended to modify or restrict in some way the effect of what the Supreme Court of Canada said in Continental Bank. It is open to question whether it achieves that result. I set out both the English and French versions with their marginal notes.

(9) Alternative basis for assessment. 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	(9) Nouvel argument à l'appui d'une cotisation. Le ministre peut avancer un nouvel argument à l'appui d'une cotisation après l'expiration de la période normale de nouvelle cotisation, sauf si, sur appel interjeté en vertu de la présente loi:
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and	a)     d'une part, il existe des éléments de preuve que le contribuable n'est plus en mesure de produire sans l'autorisation du tribunal;
(b) it is not appropriate in the circumstances of the court to order that the evidence be adduced.	b)     d'autre part, il ne convient pas que le tribunal ordonne la production des éléments de preuve dans les circonstances.

[63]     The court does not as a rule order a party to adduce evidence. The idea that the Crown can advance a new argument that was not advanced on assessing to support an assessment has always been around. The section contemplates that the taxpayer may wish to call new evidence if the Crown, in argument, raises a new point. It says nothing about the Crown calling evidence and therefore the Crown's right to do so is impliedly excluded. Yet if it is the Crown that is raising the new point I should have thought it would have been the Crown that would want to reopen the case to advance new evidence, a request that in the vast majority of cases would be denied.

[64]     It comes to this. Subsection 152(9) really does not do much to modify what Bastarache J. said.

[65]     Ms. Tari argues that the two salient elements in Continental Bankare fairness and finality. Fairness requires that the Attorney General give notice of the basis of his assessment and finality requires that he not come up with a new basis of assessment after the limitation period expires. I accept her argument on this point and I do not think that subsection 152(9) alters that position.

[66]     The basis for striking out specific provisions of the reply is that "these pleadings seek to advance new and different assessments from the assessments that are under appeal". The first group of provisions are full paragraphs 14, 16, 17, 18, 19, 20, 21, 22, 23, 24, 27, 28, 30, 32, 33, 34, and 35. They are set out below.

[67]     Paragraph 14 of the reply reads

14.        He denies the facts alleged in paragraph 23 of the Notice of Appeal. He says that any letter sent by the Minister to the Appellant speaks for itself. He also states that the basis of the reassessment of the Appellant is set out below.

Paragraph 23 of the notice of appeal simply describes what the letter of January 19, 2001 said, i.e. that the Minister relied on two bases. The statement in paragraph 23 is accurate and the denial is absurd. However, the respondent is free to deny the obvious. This is not a basis for striking out the paragraph. The remedy is to serve a notice to admit and if the denial is unreasonable to ask for costs.

[68]     Paragraph 16 of the reply reads

16.        In all the circumstances, the Appellant, the Co-owners, Arachnae and AIRS II Inc. did not deal with one another at arm's length.

This paragraph is not an assumption. It is under the heading "Further facts". It seems obvious that the Minister never assumed that the parties did not deal with each other at arm's length. Indeed, on the contrary, the Minister seems to have assumed that they dealt at arm's length.

[69]     Can the Crown plead a fact that is diametrically opposed to what the Minister assumed on assessing? I think it can but it takes on the onus of proving it and it must go further and specifically repudiate the Minister's assumption. See The Queen v. Bowens, 96 DTC 6128, discussed in Holm v. Canada (supra). It is important to emphasize here the necessity of the Minister's pleading honestly all assumptions made on assessing, including those that assist the taxpayer. This was accentuated in the recent decision of the Federal Court of Appeal in Grant v. Canada, 2003FCA77, paragraphs 17 and 18.To allege that the parties were not at arm's length is not, in my view, tantamount to raising a new assessment or a new basis for the assessment. It is simply an additional argument supporting the reduction of the cost to $1,600,000. The reason for the reduction on assessing seems arguably to have been section 67. Section 69 is another reason if the Crown can plead and prove facts to support the application of the section. It does seem a little surprising that nowhere in the auditor's report are any facts found, assumed or mentioned that would support the view that the parties are not at arm's length. Given the thoroughness of Ms. Jang's review one might wonder if any such facts exist. This will be however a matter for the trial judge. I might observe further that the mere bald assertion that the parties are not at arm's length is an insufficient basis for advancing the argument. This is, however, not a reason to strike it out. See Satin Finish Hardwood Flooring (Ontario) Limited v. The Queen, 96 DTC 1402. However a trial judge may well refuse to permit the argument to be advanced on the ground that no facts supporting the conclusion have been pleaded.

[70]     Paragraphs 17 to 21 of the reply read

17.        At the time the Appellant entered into his Software Purchase Agreement, he knew, or ought to have known,

a)          that he and his fellow Co-owners had not provided sufficient financial resources for the development and marketing of the Software;

b)          that the financial projections on which the aggregate, alleged purchase price of $8 million was based were unreasonable; and

c)          that the aggregate, alleged purchase price of $8 million for the Software was grossly inflated.

18.        The Appellant and the other Co-owners were not required to contribute funds to the development and marketing of the Software, other than the initial cash payments totalling $150,000 per unit.

19.        In acquiring an interest in the Software, the Appellant sought to create tax savings by generating deductions to reduce his income.

20.        The Appellant did not acquire an interest in the Software for the purpose of gaining or producing income.

21.        The Software did not constitute a source of income for the Appellant.

Paragraphs 17 to 21 are facts that are pleaded in support of the broad proposition that there was no business, that there was no reasonable expectation of profit, that the whole scheme was tax motivated, and that the software was not acquired for the purpose of gaining or producing income.

[71]     That some of these allegations are completely inconsistent with the findings and assumptions of the assessor Ms. Jang is obvious. That, in itself is not a reason for striking them out if they are merely additional reasons advanced in support of the existing assessments. The assessments are premised on the view that the software was acquired for the purpose of gaining or producing income but that the price paid was too high and therefore CCA was to be based on a lower price.

[72]     The argument that the software was not acquired for the purpose of gaining or producing income, if accepted, would mean that it was not depreciable property (paragraph 1102(1)(c) of the Regulations). The result would be that the appellant would be entitled to no CCA. This is not an additional argument in support of the assessments. It has as its intent the destruction of the assessments as made and the substitution of wholly new assessments in which the appellant would be allowed no CCA. The Continental Bank case would not sanction it and it is not saved by subsection 152(9).

[73]     Paragraph 17 is barely salvageable in that it deals with the question of the reasonableness of the price. Paragraph 18 seems wholly irrelevant but it will be for the trial judge to decide what weight to give to that fact, if it is established. Paragraph 19 is, in light of the decisions of the Supreme Court of Canada in Brian J. Stewart v. The Queen, 2002 DTC 6969, and The Queen v. Walls et al., 2002 DTC 6960, quite irrelevant but I will let it stand. Perhaps the Crown will wish to invite the Supreme Court of Canada to reconsider the view that a tax motivation is irrelevant.

[74]     Paragraphs 20 and 21 are struck. They seek to set up an entirely new basis of assessment in substitution for the existing basis. They are not alternative arguments.

[75]     Paragraphs 22, 23 and 24 read

22.        He further states that:

a)          the Appellant's So-Called Promissory Note was subject to the terms of his Distribution Agreement and his Software Agreement;

b)          under his So-Called Promissory Note to AIRS II Inc., the Appellant had the right to set off any amounts due to him by AIRS II Inc. and by AIRS II Inc.'s subsidiaries and affiliates against amounts due under the So-Called Promissory Note;

c)          under the Distribution Agreement, Arachnae, AIRS II Inc. and the Appellant agreed that Arachnae's right to distribute and to sell copies of the Software could not be transferred;

d)          in Distribution Agreement, AIRS II Inc. and Arachnae made representations to the Appellant as material inducements to enter into the Distribution Agreement;

e)          among those representations, AIRS II Inc. and Arachnae represented to the Appellant that certain projections, prepared by Arachnae, were accurate and complete and were based on facts known to AIRS II Inc. and Arachnae and the assumptions used in preparing these projections were fair and reasonable in all material respects and could be relied upon by the Appellant;

f)           according to the Distribution Agreement, the Appellant could terminate the Distribution Agreement in the event that, over seven years, he did not receive a minimum amount of payments in respect of the Software, based on the projections noted in the immediately preceding subparagraph;

g)          the Appellant could set off against any amounts owing under his So-Called Promissory Note to AIRS II Inc. any claims the Appellant had against Arachnae as a result of the failure to meet the projections noted in the immediately preceding two subparagraphs;

h)          the Appellant's liability to pay $350,000 with interest on that amount, under his So-Called Promissory Note to AIRS II Inc., is contingent;

i)           the amount of $350,000, therefore, does not form part of the capital cost to the Appellant of his interest in the Software; and

j)           accordingly, the Appellant could not deduct CCA in relation to the amount of $350,000.

23.        At the time the Appellant provided the So-Called Promissory Note to AIRS II Inc. the Appellant's Co-Called Promissory Note had a fair market value that was substantially less than its face value.

24.        The deduction of the CCA claimed by the Appellant in his 1993 and 1994 taxation years was unreasonable in the circumstances.

[76]     Paragraphs 22, 23 and 24 are simply additional arguments in support of restricting the capital cost of the software to the appellant to $150,000. As such they support the assessments and can stand, subject to one point. What I find highly objectionable is the use of the word "So-Called". This is ambiguous,         

equivocal and mealy-mouthed. It is a weasel word.[1] Either the Crown admits that there was a promissory note signed by the appellant or it does not. It could deny that the note was signed or it could say that the note was unenforceable, illegal or a sham. However the appellant and the court are entitled to know what the Crown's position is. In law the word "duplicitous" is sometimes used to mean "double pleading". It is simply a more elegant polysyllabic way of saying "weasel word". Here we have the Crown half admitting and half denying a material fact. This is unacceptable.

[77]     Since Ms. Tari asked that the paragraphs be struck entirely she did not deal with the impropriety of the expression "So-Called". I am doing so of my own motion. Although I have been unable to find any case law to this effect I believe that in obvious cases the court is entitled to strike out improper or objectionable pleadings of its own motion. The court as well as the parties has an interest in having pleadings that clearly and unambiguously set out the respective positions of the parties and the facts upon which they rely so that the issues to be joined can be defined with precision.

[78]     The only question remaining is whether I should strike the entire paragraph that contains the offending words, or merely the weasel words themselves. To strike out the offending word leaves the sentence intact but possibly alters the meaning in that it turns what is a meaningless ambiguity into a clear admission. This would be the effect in any event even if I did not strike out the words "So-Called".

[79]     In Odgers' Principles of Pleading and Practice, Twenty Second Edition, the following appears at page 133:

It is in the power of the party either to admit or to deny each allegation in his opponent's plea, as he thinks fit. If he decides to deny it, he must do so clearly and explicitly. Any equivocal or ambiguous phrase will be construed into an admission of it. There is no third or intermediary stage. If the judge does not find in the pleading a specific denial or a definite refusal to admit, there is an end of the matter; the fact stands admitted.

[80]     If I had let these obviously defective pleadings stand the ambiguity in them would be construed as an admission.

[81]     To strike out the entire sentence because it is vitiated by reason of the weasel words it contains would not be inappropriate but it would force the Crown to seek an amendment. It is possible, however, that the Crown is prepared to live with the pleadings purged of the weasel words. Removal of the offending words leaves it that option.

[82]     I have decided to strike out only the offending words. The words "So-Called" are struck from subparagraphs 22a), 22b), 22g), 22h) and paragraph 23. If the Crown does not like what remains it can move to amend by replacing the paragraphs with something that conforms more to the rules of proper pleading.

[83]     Paragraphs 27 and 28 of the reply read

27.        He respectfully submits that the Appellant acquired his interest in the Software for the purpose of generating tax savings and not for the purpose of gaining or producing income from a business or property. The Software did not constitute a source of income to the Appellant within the meaning of sections 3 and 4.

28.        He submits that the Appellant is not entitled to deduct any amount of CCA in respect of his interest in the Software. The Appellant did not acquire his interest in the Software for the purpose of gaining or producing income, as required by paragraph 1102(1)(c) of the Regulations.

[84]     These paragraphs are struck for the same reason that I struck paragraphs 20 and 21. They are a belated attempt to raise what is in essence a new assessment. They are not simply advanced as alternative arguments in support of the existing assessments.

[85]     Paragraphs 30, 32, 33, 34 and 35 of the reply read:

30.        Furthermore, any deduction of CCA by the Appellant in respect of the Software in computing his income for the 1994 taxation year is limited to 50 per cent of the capital cost of the Appellant's interest in the Software, under subsection 1100(2) of the Regulations.

32.        He submits that, in all the circumstances, the Appellant, the Co-owners, AIRS II Inc. and Arachnae did not deal with one another at arm's length. Therefore, pursuant to paragraph 69(1)(a) of the Act, the capital cost of the Software is deemed to be the fair market value. The capital cost to the Appellant of his interest in the Software is deemed to be the fair market value of that interest.

33.        In any event, deductions of CCA based on a capital cost for the Software in excess of $1.6 million are unreasonable in the circumstances, within the meaning of section 67 of the Act. The Minister properly denied such unreasonable deductions to the Appellant.

34.        The deduction of CCA in each of the Appellant's 1993 and 1994 taxation years in respect of the Appellant's interest in the Software was unreasonable in the circumstances, within the meaning of section 67 of the Act.

35.        He submits that the amount of $350,000 set out in the Appellant's So-Called Promissory Note to AIRS II Inc. is a contingent liability. The amount of $350,000 does not form part of the capital cost of the Appellant's interest in the Software.

[86]     I see nothing wrong with these paragraphs except for paragraph 35. The use of "So-Called" is duplicitous and it vitiates the entire paragraph. It offends fundamental rules of pleading and therefore the words in paragraph 35 must be struck. As in the case of subparagraphs 22a), 22b), 22g), 22h) and paragraph 23 where I have struck out the weasel words "So-Called" I am striking the words out of this paragraph. Weasel words destroy the entire sentence in which they are used. The Crown may wish to move to amend. There is no reason why the Crown cannot confront an issue forthrightly, honestly and robustly instead of pussyfooting around it and trying to avoid saying what it really means so as to keep its options open.

[87]     The numerous subparagraphs in paragraph 15 of the reply that the appellant wants deleted are all the assumptions on which the Crown alleges the Minister based his assessments.

[88]     They are as follows.

15.        In so reassessing the Appellant, the Minister made, inter alia, the following assumptions:

...

b)          the expense of developing AIRS exceeded the gross revenues generated from the sale of AIRS;

...

g)          AIRS II Inc. provided Arachnae with a document called a promissory note, dated December 30, 1993, in the amount of $8 million;

h)          the document called a promissory note purportedly bore interest at the rate of 5% per annum, calculated annually not in advance;

i)           this document called a promissory note was unsecured;

j)           the document called a promissory note had a maturity date of December 31, 2003; unless, at the option of AIRS II Inc., the maturity date was extended by up to ten years;

k)          AIRS II Inc. was Arachnae's wholly-owned subsidiary;

...

m)         Arachnae was also a party to these Software Purchase Agreements;

...

r)           the Co-owners were to pay approximately 30% of the aggregate, alleged purchase price of the Software, or $2.4 million, in cash;

s)          the Co-owners provided documents called promissory notes (the "So-Called Promissory Notes" or, in the singular, the "So-Called Promissory Note") to AIRS II Inc. for about 70% of the alleged purchase price, or $5.6 million;

t)           a Co-owner who acquired one unit of the Software by agreement dated December 31, 1993 would have agreed:

i)           to an alleged purchase price of $500,000;

ii)          to pay $75,000 in cash in 1993;

iii)          to pay $75,000 in cash in 1994; and

iv)         to provide a So-Called Promissory Note to AIRS II Inc. in the amount of $350,000;

u)          the terms of the So-Called Promissory Notes provided by the Co-owners were excessive in relation to the economic life, if any, of the Software;

v)          the purported interest rate on the So-Called Promissory Notes was 5% per annum, calculated annually not in advance;

w)         principal and interest on the So-Called Promissory Notes were payable only out of the proceeds from the sales of the Software;

x)          the So-Called Promissory Notes were unsecured;

y)          the So-Called Promissory Notes had maturity dates of December 31, 2003;

z)          however, if, on or before December 31, 2003, the So-Called Promissory Notes had not been satisfied from the proceeds of the sales of the Software, the Co-owners could extend the maturity date up to December 31, 2013;

aa)        the So-Called Promissory Notes could not be assigned to a third party or endorsed in favour of a third party without the consent of the Co-owners which consent could be unreasonably withheld;

bb)        the Co-owners had not satisfied the So-Called Promissory Notes;

cc)        under the Software Purchase Agreements into which the Co-owners entered, Arachnae would be responsible for marketing and distributing the Software;

dd)        under the Software Purchase Agreements, Arachnae had sole discretion with respect to modifications and enhancements, if any, to the Software;

ee)        each of the Co-owners entered into a distribution agreement with Arachnae and AIRS II Inc. (the "Distribution Agreements" or, in the singular, "Distribution Agreement");

ff)          under the Distribution Agreements, each of the Co-owners would provide Arachnae with the Software, including associated documentation, object code and source code;

gg)        under the Distribution Agreements, Arachnae obtained the exclusive right to distribute and to sell copies of the Software on a world-wide basis;

...

ii)          the Appellant paid AIRS II Inc. $75,000 in cash in 1993 and, in three equal instalments, $75,000 in cash in 1994;

jj)          the Appellant provided a So-Called Promissory Note, dated December 31, 1993, to AIRS II Inc. in the amount of $350,000, containing the terms described above under the header, "Co-owners' So-Called Promissory Notes";

kk)        the Appellant entered into a Distribution Agreement, dated December 31, 1993, with AIRS II Inc. and Arachnae, containing the terms described above under the header, "Distribution Agreements";

...

oo)        these deductions were unreasonable in the circumstances as they were based on a capital cost to the Appellant of the Software that was in excess of $1.6 million;

...

uu)        the Co-owners did not provide the financial resources necessary for the development and marketing of the Software;

vv)        so sales of the Software were made; and

ww)      marketing and development, if any, of the Software ceased in September 1996;

[89]     It is rare to strike out paragraphs pleading assumptions at so early a stage in a case unless it is clear beyond any doubt that the assumptions pleaded could not possibly have been made at the time of assessing (as, for example, in Anchor Pointe, supra).

[90]     The appellant's argument for striking these paragraphs out is contained in paragraph 52 of Ms. Tari's written argument:

52.        The "facts" pleaded by the Attorney General in subparagraphs 15(b), (g), (h), (i), (j), (k), (m), (r), (s), (t), (u), (v), (w), (x), (y), (z), (aa), (bb), (cc), (dd), (ee), (ff), (gg), (ii), (jj), (kk), (oo), part of (qq), (uu), (vv) and (ww) are not facts that were presented to the appellant as assumptions made by the Minister in support of the assessments. These pleadings are attempts by the Attorney General to contend that the Minister relied on the bases of no reasonable expectation of profit, non-arm's length dealings, contingent liability of the notes, and unreasonableness of the CCA deduction claimed by the appellant in raising the assessments under appeal.

[91]     I agree with Ms. Tari that these are new arguments. However a distinction must be made between

(a)       facts assumed that support the two hypotheses upon which the assessment was based, i.e. that the software was not available for use in 1993 and the fair market value was $1,600,000 and that $8,000,000 is unreasonable (a word used in Ms. Jang's letter of March 2, 2000);

(b)      facts assumed that support an alternative hypothesis for assessing (non-arm's length, contingent liability).

[92]     Let us say for example that facts a), b), c), d) and e) support the hypotheses upon which the assessment was based (hypotheses A and B) and facts p), q), r), s) and t) support alternative hypotheses (X and Y) I can see nothing wrong with pleading as assumptions facts p), q), r), s) and t) even though they are irrelevant to hypotheses A and B. What would be unacceptable would be to plead as assumptions hypotheses X and Y. It would also be highly improper either to plead assumptions that were not made on assessing or to refrain from pleading assumptions that were in fact made (Grant v. Canada, supra; The Queen v. Bowens, supra).

[93]     I find the use of "So-Called" in paragraph 15 in describing the promissory note completely unacceptable. Since the assumptions pleaded are important in defining the appellant's onus the appellant is entitled to know just what assumptions he has to demolish. How can one demolish something that is as amorphous and equivocal as an assertion that something is a "So-Called promissory note"? If the Crown wishes to allege that the promissory note is a sham, or unenforceable or illegal it should put the appellant on notice that it is raising this as an issue and allege facts that support the assertion. I used the expression "weasel word" above. The use of weasel words is offensive and unacceptable in any pleading. It is doubly so in pleading assumptions.

[94]     For the same reasons as I gave for striking "So-Called" out of subparagraphs 22a), 22b), 22g), 22h) and paragraph 23 I am striking the words "So-Called" out of subparagraphs 15s), t), u), v), w), x), y), z), aa), bb), jj) because the use of the expression "So-Called" renders them unacceptably equivocal and ambiguous. I am striking out of subparagraphs 15g), h), i) and j) the words "called a" and also striking out the word "purportedly" of subparagraph 15h). The Crown should state its assumptions unambiguously without the use of weasel words.

[95]     The respondent may of course move to amend its reply to specify whether it challenges the existence, legality or effect of the promissory note and to allege facts in support of the point.

[96]     Subparagraph 15qq) of the reply reads

qq)        as at December 31, 1993, the Software was not capable of performing its task at such a rate, and of such quality, that a profit could be reasonably expected to ensue;

[97]     This assumption is relevant to the "not available for use" issue and can stand.

[98]     Subparagraphs 25 a), b), c), d), e) and f) of the reply read

25.        The issues are whether:

a)          the Appellant acquired an interest in the Software for the purpose of gaining or producing income;

b)          in the Appellant's 1993 taxation year, the Software could be considered available for use, within the meaning of subsections 13(26) and (27) of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c. 1, as amended (the "Act");

c)          as at December 31, 1993, the fair market value of the Software was greater than $1.6 million;

d)          the Appellant, the Co-owners, AIRS II Inc. and Arachnae were dealing with one another at arm's length;

e)          the deduction of the CCA claimed by the Appellant in his 1993 and 1994 taxation years was unreasonable in the circumstances; and

f)           the $350,000 set out in the So-Called Promissory Note provided by the Appellant to AIRS II Inc., is a contingent liability.

[99]     The appellant submits that only subparagraphs b) and c) can stand.

[100] I think d), e) and f) can stand. The arm's length issue is properly advanced in support of restricting the CCA on the software to a cost of $1,600,000 even though section 69 was not relied on in assessing. The Crown of course has the onus on this issue. The same can be said of subparagraph e). Reasonableness is an issue that was considered on assessing. It was mentioned in Ms. Jang's letter.

[101] Subparagraph f) is a legal question and can be raised to support the assessments as made.

[102] All three of the issues raised in d), e) and f) are based on arguments that support the assessments as made, that is to say the deduction of CCA on a more restricted basis than the appellant claimed. These arguments could be raised even without subsection 152(9).

[103] The same cannot be said about subparagraph 25a). For the reasons given above this is not based on an argument that supports the assessments. It destroys the assessments and seeks to substitute entirely different assessments that would deny the appellant any CCA. This is inconsistent with what was said in Continental Bank and is not saved by subsection 152(9).

[104] Paragraph 26 of the reply reads

26.        He relies, inter alia, on sections 3, 4, 9, 13, 67 and subsections 69(1), 152(9), 248(1) and 251(1) and paragraphs 20(1)(a), 20(1)(c), 111(1)(a) and (e) of the Act and paragraphs 1100(1)(xii), 1102(1)(c), subsection 1100(2) and Schedule II, class 12 of the Income Tax Regulations, C.R.C. 1978, c. 945 (the "Regulations").

[105] The statutory references in paragraph 26 can stand, except for the reference to paragraph 1102(1)(c) of the Regulations. This reference is irrelevant since I have held that the Crown cannot at this stage raise an entirely new basis of assessment that results in effect in substituting a new assessment. Therefore it should be struck.

[106] Subparagraphs 15f), q) and hh) of the reply read

f)           the alleged purchase price under this agreement was $8 million;

q)          the aggregate, alleged purchase price of the Software to the Co-owners was $8 million;

hh)        under a Software Purchase Agreement, dated December 31, 1993, the Appellant acquired 1 unit of the Software for an alleged purchase price of $500,000;

[107] The use of the weasel word "alleged" in each of these subparagraphs is as unacceptable as the use of the expression "So-Called". Is the Crown not capable of stating openly what its position is? The appellant should not be left wondering whether it has to prove the purchase price or not. The term "alleged" implies at least skepticism, if not downright disbelief.[2] It is not neutral. It has no place in pleadings and in particular in the pleading of assumptions which are supposed to be a full, open and honest disclosure of what was assumed on assessing. In being able to plead assumptions and thereby cast an onus on an appellant the Crown has a significant advantage but it has serious concomitant obligations. It does not fulfill those obligations by indulging in this puerile sort of gamesmanship. The word "alleged" is struck in the above subparagraphs. The Crown can seek leave to amend if it does not like what it is left with after the weasel word "alleged" is removed.

[108] Subparagraphs 13a), b), d) and e) and 15nn) of the reply read

13.        In respect of paragraphs 20, 21 and 22 of the Notice of Appeal,

a)          he admits that, in computing income for his 1993 taxation year, the Appellant purported to add $500,000 to the underpreciated capital cost of his class 12 assets and purported to deduct capital cost allowance ("CCA") in respect of his interest in the Software in the amount of $250,000;

b)          he admits that, in computing income for his 1994 taxation year, the Appellant purported to deduct CCA in respect of his interest in the Software in the amount of $250,000;

...

d)          he denies that the Appellant carried forward to his 1995 taxation year a purported non-capital loss of $32,822;

e)          he says that the Appellant carried forward a purported non-capital loss of $32,802;

...

15.        In so reassessing the Appellant, the Minister made, inter alia, the following assumptions:

...

nn)        in computing income for his 1993 and 1994 taxation years, the Appellant purported to deduct CCA in respect of his interest in the Software;

[109] The use of the word "purported" is plainly absurd. Obviously the appellant made the deductions that were disallowed. That is why he was reassessed. Is the Crown now saying that he did not do so? The question is whether he was right or wrong in doing so. This is one more example of ambiguous pleading. The weasel word "purported" is inappropriate in these subparagraphs and should be struck.

[110] Finally the appellant wants me to strike out the denials in paragraph 2 of the reply of the allegations in paragraphs 6, 7 and 8 of the notice of appeal as well as the denials in paragraphs 6 and 8 of the reply with respect to paragraphs 3 and 9 of the notice of appeal. Paragraphs 3, 6, 7, 8 and 9 of the notice of appeal read

3.          Charles B. Loewen is an individual who purchased an undivided 6.25% co-ownership interest in computer software known as Arachnae Information Retrieval System Software (the "software or "AIRS II") in his 1993 taxation year for the purposes of earning income therefrom.

6.          At all material times the appellant dealt at arm's length with the vendor of the software.

7.          At all material times the appellant dealt at arm's length with the developer of the software, Arachnae.

8.          At the time of purchase of his co-ownership interest in the software on December 31, 1993, the appellant reviewed and relied on the opinion of an independent expert, a Chartered Business Valuator, who determined the fair market value of the software to be $8,000,000.

9.          The CCRA has assessed Arachnae, the developer of the software, to tax on income account on the basis that the value of the software as at December 30, 1993 was $8,000,000.

[111] Paragraphs 2, 6 and 8 of the reply read

2.          He denies the facts alleged in paragraphs 6, 7, 8, 11, 12, 14, 18 and 19 of the Notice of Appeal.

6.          With respect to the facts alleged in paragraph 3 of the Notice of Appeal, he states that the Appellant acquired an undivided 6.25% co-ownership interest in software called "AIRS II" (the "Software") in his 1993 taxation year. He denies the other facts alleged in that paragraph.

8.          He denies the facts alleged in paragraph 9 of the Notice of appeal. He says that those allegations are irrelevant to the appeal at bar.

[112] The appellant has made certain allegations of fact in the notice of appeal. The Crown is under no obligation to admit them and I cannot force it to do so. It can deny anything it wishes to deny. A number of alternative courses of action are open to the appellant. It can refrain from proving the facts it has alleged and take the position that the Crown has the onus of disproving them or that they were irrelevant anyway (a somewhat risky procedure) or it can serve the respondent's counsel with a notice to admit. If the opposing party is unreasonable in its refusal to admit it may be penalized in costs.

[113] I would close these lengthy reasons by observing that the singular form of pleading in income tax cases that has developed over half a century involving as it does the unique concept of "assumptions" and a shifting onus of proof can lead to a procedural quagmire that is both time-consuming and in many cases ultimately unedifying. The system is however too well established to be dislodged. I am not being critical of counsel. The system and the vast amount of jurisprudence that has been developed in this area lead to precisely this type of motion. Nonetheless, one must recognize the danger of allowing the procedural tail to wag the substantive dog. After all, an appeal is from an assessment not from and assessor's thought-processes. I would repeat what was said in The Cadillac Fairview Corporation Limited v. The Queen, 97 DTC 405, at page 407 (footnote 2):

The appellant pleaded that the payments were made pursuant to the guarantees and this allegation was denied. Counsel for the appellant argued that since the Minister had not pleaded that he "assumed" that the payments were not made pursuant to the guarantees the Minister had the onus of establishing that the payments were not made pursuant to the guarantees. The question is, if not a pure question of law, at least a mixed one of law and fact. In any event the basic assumption made on assessing was that the appellant was not entitled to the capital loss claimed and it was for the appellant to establish the several legal components entitling it to the deduction claimed. An inordinate amount of time is wasted in income tax appeals on questions of onus of proof and on chasing the will-o'-the-wisp of what the Minister may or may not have "assumed". I do not believe that M.N.R. v. Pillsbury Holdings Ltd. [1964] DTC 5184 has completely turned the ordinary rules of practice and pleading on their head. The usual rule - and I see no reason why it should not apply in income tax appeals - is set out in Odgers' Principles of Pleading and Practice, 22nd edition at p. 532:

The "burden of proof" is the duty which lies on a party to establish his case. It will lie on A, whenever A must either call some evidence or have judgment given against him. As a rule (but not invariably) it lies upon the party who has in his pleading maintained the affirmative of the issue; for a negative is in general incapable of proof. Ei incumbit probatio qui dicit, non qui negat. The affirmative is generally, but not necessarily, maintained by the party who first raises the issue. Thus, the onus lies, as a rule, on the plaintiff to establish every fact which he has asserted in the statement of claim, and on the defendant to prove all facts which he has pleaded by way of confession and avoidance, such as fraud, performance, release, rescission, etc.

[114] The motion is allowed and the provisions referred to in these reasons are struck out. If the Crown wishes to amend and if the parties cannot agree on the amendments a motion will have to be brought by the Crown.

[115] Counsel for the appellant asked for costs on a solicitor and client basis. I do not think this is appropriate. Success was mixed. A lump sum amount of $2,000 should adequately reflect the complexity and difficulty of the matter and the degree of success achieved by the appellant.

Signed at Toronto, Canada, this 14th day of March 2003.

"D.G.H. Bowman"

A.C.J.

CITATION:

2003TCC101

COURT FILE NO.:

2001-3839(IT)G

STYLE OF CAUSE:

Between Charles B. Loewen and Her Majesty The Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

February 10, 2003

REASONS FOR ORDER BY:

The Honourable D.G.H. Bowman Associate Chief Judge

DATE OF ORDER:

March 14, 2003

APPEARANCES:

Counsel for the Appellant:

A. Christina Tari Marcela S. Aroca

Counsel for the Respondent:

Elizabeth D. Chasson Jenna Clark

COUNSEL OF RECORD:

For the Appellant:

Name:

A. Christina Tari

Firm:

Richler and Tari Toronto, Ontario

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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