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506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

On a procedural motion in 506913 N.B. Ltd. v. The Queen (2016 TCC 286), the Tax Court ordered the Respondent to answer all questions refused on discovery, reattend at a further discovery, and pay the Appellant’s costs on the motion.

The Tax Court also referred to the fictional interminable estate case of Jarndyce v. Jarndyce from Charles Dickens’ novel Bleak House in describing the slow progress of the litigation in 506913.

In 506913, the taxpayers filed their appeals in 2003 in respect of GST/HST for reporting periods in 1998 to 2000. The parties filed amended Notices of Appeal and Replies in 2010, and the Respondent was permitted to file further amended Replies in 2015.

The Tax Court judge’s reasons address the scope of discovery under sections 95 and 107 of the Tax Court of Canada Rules (General Procedure) and the test to be applied on a refusals motion. The Court considered the leading cases on this issue (see Canada v. Lehigh Cement Limited (2011 FCA 120)Canadian Imperial Bank of Commerce v. The Queen (2015 TCC 280)Baxter v. The Queen (2004 TCC 636) and Shell Canada Ltd. v. Canada, [1996] T.C.J. No. 1313), and included a comprehensive summary of the applicable principles (see para. 11 of 506913).

Additionally, regular observers of the Tax Court will be interested to see the Court’s reference to Jarndyce:

[34]        These are appeals that, in Dickensian language, drag their weary length before the Court. There have been several case management and motions judges involved in the more than thirteen years these appeals have been before this Court. A previous case management judge ordered that no further motions or other proceedings could be brought before the Court in these appeals prior to the hearing of the appeals. The Respondent’s motions to amend its replies were brought just before the deadline imposed on further motions. These appeals can be expected to proceed promptly to a hearing — and it would be best if the parties make that happen themselves.

The text of the first chapter of Bleak House states ” … but Jarndyce and Jarndyce still drags its weary length before the court, perennially hopeless.”

The only other reference in a Tax Court decision to Jarndyce that we’re aware of is found in the reasons of former Chief Justice Donald G.H. Bowman in Garber v. The Queen (2005 TCC 635) (see para. 6).

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506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

Wilson: SCC Overhauls Standard of Review?

Tax professionals who advise clients on judicial review of the CRA’s discretionary decisions should monitor developments in the standard of review in light of the Supreme Court of Canada’s decision in Wilson v Atomic Energy of Canada Ltd (2016 SCC 29).

In Wilson, the appellant was a non-unionized procurement specialist who worked for Atomic Energy of Canada Ltd. for four and a half years. He was dismissed in November 2009 and filed an unjust dismissal complaint under the Canada Labour Code. At issue was whether the significant severance package provided to Mr. Wilson rendered the dismissal just.

The labour adjudicator found that a severance payment did not exempt an employer from a determination with respect to whether a dismissal was just. Applying a standard of review of reasonableness, the application judge reversed the decision of the labour adjudicator, finding that the Code permitted the dismissal of non-unionized employees without cause. The Federal Court of Appeal agreed, but held that the appropriate standard of review was one of correctness.

The Supreme Court of Canada allowed the appeal and restored the decision of the labour adjudicator. The Court split 5-3 and issued several sets of reasons in its decision.

On the merits, Justice Abella wrote for the Court that the standard of review with respect to a labour arbitrator was one of reasonableness, to be assessed in the specific context under review. In this case, Justice Abella found the interpretation of the labour adjudicator was reasonable. However, Justice Abella remarked – albeit in obiter – that the line between reasonableness and correctness had begun to blur in the case law. A single standard of reasonableness, she stated, would operate to both protect deference and give effect to one correct answer where the rule of law required it. This would give effect to the different gradations of deference to be given to administrative decision makers in different contexts.

Chief Justice McLachlin and Justices Karakatsanis, Wagner and Gascon concurred with Justice Abella’s reasons and expressed appreciation for her attempt to galvanize constructive conversation about the standard of review. However, they declined to recast the standard of review. Justice Cromwell also concurred in the result, but rejected Justice Abella’s attempt to define a new framework, finding that the correctness/reasonableness distinction that emerged in Dunsmuir was still appropriate.

Justices Cote, Brown and Moldaver dissented. Agreeing with the Federal Court of Appeal, they stated that a standard of correctness applied and that the contradictions inherent in a growing body of labour decisions called for judicial clarity. Specifically, they held that “where there is lingering disagreement on a matter of statutory interpretation between administrative decision-makers, and where it is clear that the legislature could only have intended the statute to bear one meaning, correctness review is appropriate”.

What does Wilson mean for tax litigators? First, even though four members of the Court declined to overhaul the Dunsmuir framework, they lauded Justice Abella’s attempt to refine this area of law. The views expressed in the reasons indicate that the Court may be willing to revisit and clarify Dunsmuir (which also contained three sets of reasons).

Second, to the extent that members of the Court wish to supplant the Dunsmuir test with a single standard of reasonableness (containing gradients of deference), attempts to challenge the CRA’s discretionary decisions could be met with increased difficulty in the future.

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Wilson: SCC Overhauls Standard of Review?

Tax Court Introduces Common Books of Authorities Project

The Tax Court has implemented a new common books of authorities program for its Toronto courtrooms that will eliminate the need for taxpayers to print copies of certain frequently-cited (and lengthy) authorities. The pilot project will apply only to general procedure appeals in which both parties are represented by counsel.

Parties will not be required to include in their book of authorities those cases that are included in the Court’s list of 27 commonly-cited decisions (i.e., those on statutory interpretation, source, onus of proof, capital/income, GAAR, CPP/EI, etc.). However, the Court will require the parties to include in their book of authorities printed copies of the passages from those cases on which they intend to rely (rather that the entire decision). A list of the cases included in the Court’s common books of authorities is detailed on the Court’s Notice to the Public and the Profession (March 31, 2016).

The Tax Court stated that this pilot project may be expanded to other cities in the future.

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Tax Court Introduces Common Books of Authorities Project

FC Dismisses JR Application for Delay

A party may bring an application pursuant to section 18.1 of the Federal Courts Act for review of a discretionary decision of a government board, commission or other tribunal.  Generally, the application must be made within 30 days of the decision.

In R & S Industries (2016 FC 275), the Federal Court dismissed a taxpayer’s application for judicial review of a discretionary decision of the CRA because the Court held that the taxpayer had missed the 30-day deadline and no extension of time should be granted.

In R & S, the taxpayer made some errors in a T2059 form in connection with a subsection 97(2) rollover of property to a partnership. The CRA reassessed, and the taxpayer objected.

The CRA Appeals Officer told the taxpayer that an amended T2059 must be filed in order to properly deal with the reassessment.  Accordingly, the taxpayer filed an amended T2059 pursuant to subsection 96(5.1) of the Income Tax Act, which allows a subsection 97(2) rollover election to be amended where “in the opinion of the Minister, the circumstances of a case are such that it would be just and equitable” to permit the taxpayer to amend an election.

A CRA officer (other than the Appeals Officer) denied the application under subsection 96(5.1) and various letters were sent to the taxpayer to that effect.  The Appeals Officer then confirmed the reassessment on the basis that the taxpayer’s request under subsection 96(5.1) had been denied.

When the taxpayer appealed the reassessment to the Tax Court, the Crown alleged that the Tax Court had no jurisdiction to review the CRA’s decision to reject the taxpayer’s application under subsection 96(5.1) to amend the T2059 because it was a discretionary decision of the Minister of National Revenue and not subject to an appeal to the Tax Court.

The taxpayer then commenced a judicial review application in the Federal Court on the basis that the decision under subsection 96(5.1) was both procedurally unfair and unreasonable. The Crown rejected both arguments and further argued that the application was out of time and no extension should be granted.

In dismiss the taxpayer’s application, the Federal Court stated that it was clear that the taxpayer had missed the 30-day deadline because there had been a lengthy delay from the date of the decision (January 31, 2014) to the filing of the application for judicial review (May 19, 2015).

The Federal Court refused to consider the subsequent correspondence between the taxpayer and the CRA as having created a later date on which the decision was communicated.

The Court did not accept the taxpayer’s argument that the character of the decision as an exercise of Ministerial discretion was not conveyed to the taxpayer until sometime after January 2014. Further, the Federal Court noted that the taxpayer had counsel throughout the process, and counsel was knowledgeable about the CRA’s decision-making process. The Court held that the CRA had no obligation to inform the taxpayer of the availability of judicial review of the discretionary decision.

In respect of an extension of time to file the application, the Federal Court held that the taxpayer had failed to establish that (i) it had a continuing intention to pursue the judicial review application, (ii) no prejudice arose to the Minister of National Revenue, (iii) there was a reasonable explanation to the delay, and (iv) there was merit to the application (see Exeter v. Canada, 2011 FCA 253).

Despite having found that the taxpayer was out of time to pursue a judicial review application, the Federal Court considered the taxpayer’s arguments in respect of the merit of the application, and held that the CRA’s decision was neither unfair nor unreasonable.

The appeal in the Tax Court continues. It is still an open question whether or not the Tax Court has jurisdiction to consider the taxpayer’s arguments regarding subsection 96(5.1) in the context of an appeal of the reassessment.

This case is an important reminder to tax professionals that if the CRA communicates a discretionary decision to a taxpayer, the appropriate relief is sometimes in Federal Court rather than Tax Court. Identifying and quickly responding to those discretionary decisions is key to preserving the client’s right to pursue a remedy.

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FC Dismisses JR Application for Delay

Kruger: Appeal Allowed … Crown Awarded Costs

How should the Tax Court award costs where the taxpayer’s appeal was allowed but no changes were made to the assessment at issue?

This unusual situation was considered by the Tax Court in Kruger Incorporated v. The Queen (2016 TCC 14).

In the main appeal (2015 TCC 119, under appeal to the Federal Court of Appeal (A-296-15)), the Tax Court had allowed the taxpayer’s appeal on the basis that certain foreign exchange option contracts should be valued in accordance with subsection 10(1) of the Income Tax Act (see our previous post here). However, success in the appeal was divided because certain of the taxpayer’s other foreign exchange option contracts were to be valued on a realization basis, as assessed.

The Tax Court asked the parties to provide submissions on costs.

The taxpayer asked for costs on the basis that the appeal had been allowed. The Crown asked for costs on the basis that the result of the proceeding was substantially in its favour as to the amounts in issue and the determination of the issue.

Interestingly, after the Court’s decision allowing the appeal, the parties discovered that the underlying assessment would not change. The Tax Court called this an “anomaly”.

The Tax Court stated that, despite its decision allowing the appeal, the Crown was the successful party. The case law on costs cautions against awarding amounts based on the success of particular arguments (see, for example, General Electric Capital Canada Inc. v. The Queen (2010 TCC 490)). However, the Tax Court noted that this was not a case in which a party won a Pyrrhic victory, as each party had been successful to different degrees.

The Court considered the factors listed in section 147 of the Tax Court of Canada Rules (General Procedure), including the amounts in issue, the volume of work, the complexity of the matter, and the conduct of the parties. The Court noted that two of the Crown’s witnesses were of significant assistance to the Court.

The Court concluded that no rule prohibits a judge from distributing costs between the parties, although this is not encouraged. In this case, it was appropriate to recognize the Crown’s success.

The Court awarded costs to the Crown in respect of two witnesses, and 50 percent of all other costs. In the Court’s view, this was an unconventional but reasonable award.

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Kruger: Appeal Allowed … Crown Awarded Costs

Tax Court Establishes Motion Days in Toronto

The Tax Court of Canada has established a pilot project for regular motion days in Toronto for the period of February to September 2016. The Court will review the initiative in September 2016. The project may be expanded to other cities.

The first motion day is scheduled for Monday February 22, 2016, followed by Monday March 21 and Tuesday March 29. Subsequently, motions will be scheduled every first and third Monday through to the end of September. If the motion day falls on a statutory holiday, the motion day will be scheduled the following week.

The Court also reminded the public and counsel of the Court’s practice for the requirements and scheduling of motions under the General Procedure, as described in the Court’s Practice Note No. 2 (amended).

Tax Court Establishes Motion Days in Toronto

Tax Court: CRA Employee May Not Testify as Expert

In HLP Solution Inc. v. The Queen (2015 TCC 41 ) the Tax Court held that a CRA employee lacked the necessary impartiality to testify as an expert witness because of her prior involvement in auditing the taxpayer.

Background

The taxpayer was a software company that claimed Scientific Research and Experimental Development (SR&ED) tax credits for the 2009 taxation year. The CRA reassessed to deny the SR&ED credit claims.

In the Tax Court, the taxpayer challenged the qualification of the CRA’s expert witness on the basis that she did not have the necessary impartiality to testify as an expert witness in the appeal. The Tax Court held a voir dire to determine whether the Crown’s proposed expert witness could testify in the appeal.

The proposed expert witness held a doctorate in computer science and was employed with the CRA as a Research and Technology Advisor (RTA). The taxpayer’s allegation of impartiality was not based on the fact that the proposed expert witness was employed with the CRA. Rather, the taxpayer argued that it was the proposed expert witness’s involvement in every stage of the file that impugned her impartiality.

The Crown submitted that it is rare for a court to refuse to hear the testimony of an expert witness, and that there must be clear evidence of bias, which, according to the Crown, was not present in this case. Moreover, the Crown submitted that it was in the capacity as an expert that the opinion was given, irrespective of whether this occurred at the audit stage, objection stage, or during appeal.

Analysis

In analyzing whether to admit the evidence by the Crown’s witness, the Tax Court reviewed the leading case on the admission of expert evidence, the Supreme Court of Canada decision R. v. Mohan ([1994] 2 SCR 9), in which the Court set out the criteria for determining whether expert evidence should be admitted, namely: relevance, necessity in assisting the trier of fact, the absence of an exclusionary rule, and a properly qualified expert.

In Mohan, the Supreme Court established that the question of relevancy is a threshold requirement for the admission of expert evidence and a matter to be decided by the judge as a question of law. There must first be logical relevance in order for the evidence to be admitted. The judge must then perform a cost-benefit analysis to determine whether the value of the testimony is worth the costs, in the sense of its impact on the trial process.

The Tax Court also reviewed R. v. Abbey (2009 ONCA 624), in which the Ontario Court of Appeal applied Mohan but also distinguished between the preconditions to admissibility and the judge’s role as a gatekeeper. The Ontario Court of Appeal noted that while the inquiry into the preconditions to admissibility is a rules-based analysis that tends to yield “yes” or “no” answers, the gatekeeper function does not involve the application of bright line rules and frequently requires the exercise of judicial discretion. The gatekeeper function is more subtle and involves weighing the benefits of the probative value of the evidence against the prejudice associated with admitting the evidence.

In HLP, the Tax Court held that it was preferable to disqualify the expert at the qualification stage. The Court based its conclusions on many of the taxpayer’s allegations, including the following:

  • the proposed expert witness was involved with the audit and objection;
  • the proposed expert witness delivered the opinion (the technical review report) that served as the basis for the assessment;
  • following the taxpayer’s representations, the proposed expert witness also wrote an addendum to the technical review report in which she maintained the same position;
  • the proposed expert witness participated in every meeting with the taxpayer as the CRA’s representative;
  • the proposed expert witness confused her role as an RTA with that as an expert witness; and
  • the proposed expert witness reproduced word-for-word paragraphs from her technical review report.

The Tax Court was careful to note that it was not disqualifying the expert on the basis of her employment with the CRA but rather on the basis of her close involvement throughout the audit and objection stages of the file.

The Tax Court allowed the Crown to submit a new expert report.

The Tax Court’s decision in HLP will have a direct impact on future cases in which proposed expert witnesses were involved in the audit and objection processes as CRA employees. Such employees – though they may have the required professional qualifications to testify as an expert witness – cannot be qualified as expert witnesses because they lack the necessary impartiality to testify.

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Tax Court: CRA Employee May Not Testify as Expert

Tax Court Continues “New Approach” to Cost Awards

The Tax Court’s approach to cost awards has evolved significantly in recent years. The Court’s interpretation and application of the factors under subsection 147(3) and the new settlement offer rules in subsections 147(3.1) to (3.8) of the Tax Court of Canada Rules (General Procedure) indicate that the Court continues to formulate a “new approach” to costs that is much closer to the manner in which other Canadian courts use cost awards to compensate successful parties and control the conduct of the parties during litigation.

The Tax Court’s new approach can be traced to the costs decision in Velcro Canada Inc. v. The Queen (2012 TCC 273) (see our previous blog post here), in which the Court articulated an approach to costs that provided for a reduced role for the “Tariff” amounts (see in Tariff B of Schedule II of the General Procedure Rules) and much greater emphasis on and consideration of the factors under subsection 147(3). Further, the new settlement offer rules in subsections 147(3.1) to (3.8) create a default entitlement to substantial indemnity costs (i.e., 80% of solicitor and client costs) after the date of a settlement offer for a successful party that achieved a result in the appeal that was as good or better than the settlement offer.

This new approach is a welcome development in that it creates a fair system in the Tax Court for compensating a winning party, and raises the stakes for both parties to an appeal.

Three recent costs decisions of the Tax Court provide good examples of the Court’s analysis and awards under this new approach.

Repsol Canada Ltd. 

In Repsol Canada Ltd. v. The Queen (2015 TCC 21) (under appeal), the Tax Court allowed the taxpayer’s appeal and held that certain of the taxpayer’s assets were Class 43 assets for the purposes of the capital cost allowance provisions in the Income Tax Act. The Court awarded costs to the taxpayer.

On its motion for increased costs, the taxpayer asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, an additional 10% of legal fees incurred after the issuance of its settlement offer, 75% of its legal fees incurred before the issuance of its settlement offer, and reasonable disbursements.

The Tax Court (2015 TCC 154) refused to reduce the taxpayer’s costs that would be subject to the substantial indemnity rule in subsection 147(3.1), held that the substantial indemnity rule applies to the legal fees for a costs motion, and refused to grant additional costs above the substantial indemnity amount for fees incurred after the issuance of its settlement offer.

The Court awarded post-settlement offer costs at 80% of solicitor-client costs ($264,334), pre-settlement offer costs at 50% of solicitor-client costs ($262,051), disbursements ($35,308), and 80% of solicitor-client costs plus reasonable disbursements for the costs motion.

The Crown has appealed the costs decision to the Federal Court of Appeal.

Standard Life Assurance Company of Canada

In Standard Life Assurance Company of Canada v. The Queen (2015 TCC 97) (under appeal), the Tax Court dismissed the taxpayer’s appeal and held that the taxpayer was not entitled to a bump in the cost base of certain insurance properties. The Court awarded costs to the Crown.

On its motion for increased costs, the Crown asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, 50% of legal fees incurred before the issuance of its settlement offer, and reasonable disbursements throughout.

The Tax Court (2015 TCC 138) held that the Crown’s settlement offer was a valid settlement offer that contained an element of compromise (see also the earlier case of Mckenzie v. The Queen (2012 TCC 329)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

The Tax Court made a minor adjustment for the hourly rate of junior counsel and awarded a lump sum amount of $474,663 (which included $37,818 in disbursements).

Sun Life Assurance Company of Canada

In Sun Life Assurance Company of Canada v. The Queen (2015 TCC 37), the Tax Court allowed the taxpayer’s appeal and held that the taxpayer was entitled to certain input tax credits. The Court awarded costs to the taxpayer.

On its motion for a enhanced costs, the taxpayer asked for a lump sum amount of $200,000, which approximated 80% of counsel fees of $157,430, plus taxes of $20,465 and disbursements of $21,365.

The Tax Court (2015 TCC 171) considered the taxpayer’s settlement offer, and concluded that it was a valid settlement offer that was capable of being accepted by the Crown (see also the earlier case of CIBC World Markets Inc. v. The Queen (2012 FCA 3)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

However, the Court reduced the amount of legal fees that would be subject to the 80% substantial indemnity rule because there was no evidence that the client had agreed to pay its counsel’s hourly fees (rather the fee charged to the client was a percentage of the amount recovered). Also, the taxpayer had not provided a detailed breakdown of the fees incurred before and after the issuance of the settlement offer.

Accordingly, the Court awarded substantial indemnity costs of $91,792, plus $1,050 for the Tariff amount for services rendered prior to examination for discovery, plus HST on these amounts (less any amount recoverable as an input tax credit), and disbursements of $21,356.

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Tax Court Continues “New Approach” to Cost Awards

Baytex: ABQB Grants Rectification

In Baytex Energy Ltd. et  al. v. The Queen (2015 ABQB 278), the Alberta Court of Queen’s Bench considered whether rectification and/or rescission were available to address mistakes that could result in the taxpayer being taxed on additional resource income of $135 million for 2003-2006 and $528 million for 2007-2010.

The Court determined that the requirements for rectification had been satisfied and thus granted the rectification of certain documents to accord with the parties’ original intention.

Facts

Baytex Energy Trust (the “Trust”) was a publicly-traded mutual fund trust (the Trust later converted to Baytex Energy Corp. (“BEC”), a publicly-traded dividend-paying corporation). The Trust wholly-owned Baytex Energy Ltd. (“BEL”), which owned and operated oil and gas properties prior to transferring the properties to Baytex Energy Partnership on January 1, 2010.

The Baytex companies were subject to the pre-2007 oil and gas royalty regime in the Income Tax Act, which required certain additional resource income for an oil and gas producer (referred to in the judgment as “Phantom Income”) and denied certain deductions for provincial Crown royalties and taxes. A 25% resource allowance was available to the producer. The Phantom Income could be transferred by the producer to another party, and a non-deductible and off-setting reimbursement would be made back to the producer. In this case, BEL and the Trust agreed that BEL would transfer 99% of its income and cash flow to the Trust.

In the Budget of February 18, 2003, the federal government announced the phase-out of the oil and gas royalty regime and the elimination of the regime as of January 1, 2007.

Parties’ Agreements

BEL and the Trust executed a Net Profits Interest Agreement (the “Original Agreement”) in September 2003 for the transfer of income and the off-setting reimbursement. However, the written terms of the Original Agreement failed to address the transfer of Phantom Income. A subsequent agreement (the “Collateral Agreement”) – not all of the terms of which were reduced to writing – addressed the transfer of Phantom Income.

The parties intended that the transfer and reimbursement would cease effective January 1, 2007 because of the elimination of the oil and gas royalty regime in the Income Tax Act.

However, from January 1, 2007 to December 31, 2010, the parties continued the practice of transferring and reimbursing the Phantom Income. When this error was initially discovered in 2008, the Baytex companies’ tax professionals advised that the Original Agreement should be amended to provide for the reimbursement beyond 2006 to be consistent with the practice of the parties. The Baytex companies were told this amendment would have no adverse tax consequences. Based on this advice, the parties entered into an Amended Agreement.

The CRA reviewed the Baytex companies’ arrangements and concluded that an additional $135 million was taxable income to BEL for 2003-2006, and that the Trust earned an additional $528 million of taxable income for 2007-2010.

Rectification/Rescission

The Baytex companies sought rectification of the agreements. The CRA did not oppose the rectification of the agreements for the pre-2007 period, but did oppose the rectification for the post-2006 period on the basis that the Baytex companies had intentionally amended the Original Agreement, based on professional advice, to reflect the practice of transfer and reimbursement, and thus the parties mistaken assumption about the tax consequences would not meet the test for rectification. The taxpayers argued that the evidence (which consisted of two affidavits of BEC’s Chief Financial Officer) established that the parties always intended to transfer and reimburse the Phantom Income and that no transfers would occur after January 1, 2007.

The Court considered the authorities on rectification and concluded that the test for granting rectification had been met. The uncontroverted evidence was that the parties’ common intention was to transfer BEL’s income to the Trust, and that this practice would cease as of January 1, 2007. The Original Agreement and the Amended Agreement were inconsistent with this common intention. The precise form of the corrected agreement was not in dispute. And there were no other considerations that would limit/prevent the availability of rectification. Accordingly, the Court granted the rectification.

While this determination was sufficient to dispose of the application, the Court did go on to consider whether, if the Court was wrong on rectification, rescission was available to the parties. The Court held that the Amended Agreement triggered an unintended tax consequence that constituted a fundamental mistake that went to the root of the contract. The Court concluded that rescission was available to rescind the Amended Agreement, which would restore the parties to their Original Agreement, which the Crown had agreed should be rectified.

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Baytex: ABQB Grants Rectification

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion