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McKesson: Taxpayer Seeks to Raise Additional Issue on Appeal

“Judges are expected to decide cases as framed by the parties, then step back and allow the appellate process to unfold. In this case, the trial judge did neither.”
- Taxpayer’s Supplemental Memorandum of Fact and Law

The transfer pricing case of McKesson v. The Queen has raised procedural issues that are without precedent in Canadian tax cases. This week, those procedural issues became a central part of the matters that will be considered by the Federal Court of Appeal.

In a Notice of Motion (and other materials) filed this week, the taxpayer has asked for a new trial before the Tax Court.

Background

McKesson is a case involving transfer pricing adjustments under section 247 of the Income Tax Act (Canada) in respect of the factoring of accounts receivable as well as the limitation period in Article 9(3) of the Canada-Luxembourg Tax Convention. The Tax Court dismissed the taxpayer’s appeal.

After the taxpayer had commenced an appeal in the Federal Court of Appeal, Tax Court Justice Patrick Boyle recused himself (2014 TCC 266) from the two remaining issues before the lower court (i.e., costs and the content of the Tax Court’s public file) on the basis that the taxpayer had, in its materials filed in the Court of Appeal, accused of him of bias (see our previous post here).

Notice of Motion

On November 3, the taxpayer filed a Notice of Motion in the Federal Court of Appeal for leave to file (i) an Amended Notice of Appeal, and (ii) a Supplementary Memorandum of Fact and Law. In its Motion, the taxpayer states that Justice Boyle’s reasons for recusal raise a further ground of appeal in addition to those already set out in the original Notice of Appeal. The proposed Amended Notice of Appeal and Supplementary Memorandum of Fact and Law address the following additional ground of appeal:

Do the trial judge’s Recusal Reasons compromise the appearance and reality of a fair process in this case such that a new trial is necessary?

Specifically, the proposed Amended Notice of Appeal states,

8. The Trial Judge’s Reasons for Recusal dated September 4, 2014 interfere with the fairness of the appellate process and compromise the appearance and reality fairness of both the trial and appeal.

The taxpayer has also hired additional counsel in respect of the motion, namely Henein Hutchison LLP, a Toronto-based litigation law firm.

Taxpayer’s Arguments

The taxpayer’s Written Representations in support of its Motion argue that the recusal reasons were directed at the Court of Appeal and have compromised the fairness of the case. The taxpayer argues that this “improper intervention” has compromised the integrity of the appeal process.

The taxpayer’s Supplementary Memorandum of Fact and Law states that the trial judge’s “intervention in this appeal was ill-advised and improper”. The taxpayer argues that the trial judge should have remained “above the fray” and should not have “put himself into the appellate arena”.

The taxpayer characterizes the recusal reasons as a “post-hoc attempt to justify to an appellate court a decision given many months earlier” [emphasis in original]. The taxpayer states that the “Recusal Reasons are nothing less than an explicit attempt by the trial judge to insert himself into the appellate process as an advocate against the Appellant and its lawyers.”

The taxpayer argues that the recusal reasons must be considered part of the record in the case before the Federal Court of Appeal. A new trial would, in the taxpayer’s view, give it “an opportunity to make its case at trial, free of the unfairness that has now tainted this proceeding.”

The taxpayer also argued that the recusal reasons have undermined the solicitor-client relationship, and retrospectively reveal the trial judge’s disposition against the taxpayer.

The taxpayer has requested that the appeal be allowed and the matter remitted to the Tax Court for a new trial before a different judge.

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The Crown has not yet filed its response to the taxpayer’s Notice of Motion.

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McKesson: Taxpayer Seeks to Raise Additional Issue on Appeal

McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

In McKesson v. The Queen (2014 TCC 266), Justice Patrick Boyle recused himself from the two remaining issues with which he was seized in the transfer pricing case – costs and the content of the court’s public file (i.e., the determination of whether certain information may be confidential).

This unusual decision arises as a result of the content of the Appellant’s factum filed in the Federal Court of Appeal in the appeal of Justice Boyle’s trial decision in McKesson (see our posts on the Tax Court case here and the Federal Court of Appeal proceeding here and here).

In his recusal reasons, Justice Boyle wrote:

[4]        As detailed below, I have, of my own motion, decided that I am compelled to consider whether I need to recuse myself from the two remaining issues before this Court. A consideration of this issue is required because I became aware that the Appellant and Appellant’s counsel, together with its co-counsel in the Federal Court of Appeal in respect of the appeal of the trial decision, had made certain public written statements about me in its factum in the Federal Court of Appeal (the “Factum”) which, upon reflection, appear to me to clearly include:

(i)         allegations that I was untruthful and deceitful in my Reasons;

(ii)         clear untruths about me, what I said and heard in the course of the trial, as well as the existence of evidentiary foundations supporting what I wrote in my Reasons; and

(iii)        allegations of impartiality on my part.

[5]        This requires me to consider whether:

(i)         I believe that a reasonable person reading the Factum, my Reasons, and the relevant portions of the transcript would believe that the trial judge so strongly complained of by McKesson Canada might not be able to remain impartial in his consideration of costs and confidential information;

(ii)         I believe I can impartially consider, weigh and decide the costs and confidential information issues before me; and

(iii)        whether the public challenge of my impartiality expressed by McKesson Canada and its co-counsel in the Factum is itself sufficient to warrant recusing myself at this stage.

 …

[133]     I view these as public allegations by a party to the costs and confidential information matters remaining before this Court that, regardless of the merits of their reasoning or their thoughts, I am unable to decide the remaining matters impartially. I believe that a reasonable person reading only these phrases from the Factum, without reviewing my Reasons or the trial Transcript, would believe that such strong complaints by McKesson Canada and its counsel may give rise to a serious doubt that I will be seen to be able to dispose of the two remaining issues and discharge my duties on an impartial basis.

[136]     For the Reasons identified above, I have decided I have to recuse myself from the remaining costs and confidential information issues in McKesson Canada’s proceeding in this Court.

[137]     It may be that some of the perceived untruths about the trial judge described above under heading II might individually not warrant recusal, and may be within an appellate advocate’s licence to overstate through the use of absolutes like ‘never’, ‘only’ and ‘any’.

[138]     However, I am satisfied that a reasonable fair-minded Canadian, informed and aware of all the issues addressed above, would entertain doubt that I could remain able to reach impartial decisions. I believe that such a reasonable fair-minded and informed person, viewing this realistically and practically would, after appropriate reflection, be left with a reasoned suspicion or apprehension of bias, actual or perceived. Canadians should rightly expect their trial judges to have broad shoulders and thick skins when a losing party appeals their decision, but I do not believe Canadians think that should extend to accusations of dishonesty by the judge, nor to untruths about the judge. Trial judges should not have to defend their honour and integrity from such inappropriate attacks. English is a very rich language; the Appellant and its counsel could have forcefully advanced their chosen grounds for appeal without the use of unqualified extreme statements which attack the personal or professional integrity of the trial judge.

[139]     For these reasons, I will be advising my Chief Justice that I am recusing myself from completing the McKesson Canada proceeding in the Tax Court. This extends to the consideration and disposition of the costs submissions of the parties in this case, as well as to the 2010 confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry.

No date has been set for the hearing of the main matter by the Federal Court of Appeal.

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McKesson: Trial Judge Recuses Self From Two Remaining Issues in Transfer Pricing Case

U.S. Supreme Court Justice Scalia on Advocacy and Judging

The U.S. Supreme Court’s Fall term began on October 7, and there has been no shortage of recent articles on the docket and Judges of the Court. In a previous post, David Spiro noted a remarkable piece on U.S. Supreme Court Chief Justice John Roberts’ advocacy practice before he was appointed to the Court, and in a recent issue of New York Magazine, Justice Antonin Scalia provided his candid views on advocacy and judging.

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U.S. Supreme Court Justice Scalia on Advocacy and Judging

What Kind of Appellate Lawyer was Justice Roberts?

I first heard of John Roberts Jr. when he was nominated to the United States Supreme Court as Chief Justice.  I watched the coverage on C-SPAN which replayed a seminar that he gave to a group of law students on advocacy.  I was quite impressed – but not as impressed as I was after reading this article from The American Lawyer magazine.  Appellate advocates have much to learn from the Chief Justice of the United States:

http://www.americanlawyer.com/PubArticleTAL.jsp?id=1202620317367

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What Kind of Appellate Lawyer was Justice Roberts?

GAAR at 25: Panelists Discuss Lessons Learned and Challenges

On September 26, 2013, the Canadian Tax Foundation Young Practitioners Group (Toronto) convened a panel discussion titled “GAAR at 25: Lessons Learned & Current Challenges” on the General Anti-Avoidance Rule (“GAAR”) in section 245 of the Income Tax Act (“ITA”).

The panelists included Justice Karen Sharlow (Federal Court of Appeal), Justice Patrick Boyle (Tax Court of Canada), Phil Jolie (formerly of the Canada Revenue Agency), Ed Kroft (Blake, Cassels & Graydon LLP), Patricia Lee (Department of Justice) and Shawn D. Porter (Deloitte LLP and formerly at Department of Finance).

The general view of the panelists was that the potential application of GAAR in a specific case is very fact-dependent, and that the jurisprudence on the legal analysis continues to evolve. In the future, the focus will remain on how to interpret the “misuse and abuse” test within section 245.

Impact of GAAR

The panel discussed whether the GAAR has had an impact in deterring taxpayers from engaging in aggressive tax planning. Phil Jolie was of the view that it has not been a major deterrent as some abusive transactions are still not caught under GAAR, whereas Ed Kroft and Shawn D. Porter noted that the GAAR has had somewhat of a “chilling” effect in tax planning, particularly with public companies concerned about reputational risk.

Smell Test

There was a general consensus among the panelists that there is an element of a “smell test” in the GAAR. When evaluating whether GAAR should apply, Justice Boyle admitted there is an element of using one’s “nose” or getting in touch with one’s “spidey sense” and Justice Sharlow noted that she would determine if something “weird” was happening before undertaking the legal analysis as to whether the GAAR may apply.

These comments, made in jest by the panelists, convey the difficulties of analyzing complex transactions to determine whether a situation fits within the object and spirit of the Act under GAAR.

The other panelists noted that this may raise difficulties for tax practitioners who are asked to provide GAAR opinions to clients. The panelists advised that prudent counsel should address the evolving nature of GAAR jurisprudence in any opinion to a client on an issue where the GAAR could be engaged.

Current Litigation

Patricia Lee noted that the Department of Justice is currently litigating 44 cases where GAAR is a “live” issue. The cases include the following types of transactions:

  • Value shifting and capital loss creations;
  • Reverse attributes with trusts;
  • Base averaging of shares sold to a spouse;
  • Surplus stripping and, in particular, cross-border surplus stripping;
  • Manipulation of adjusted cost base of property;
  • Acquisition of tax credits and change in control; and
  • Leveraged donation cases.

The panelists concluded that, even after 25 years, there remains a degree of uncertainty in respect of the engagement and application of the GAAR.

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GAAR at 25: Panelists Discuss Lessons Learned and Challenges

Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act

In Radonjic v. The Queen (2013 FC 916), the taxpayer brought an application for judicial review of the CRA’s refusal to make certain adjustments to the taxpayer’s tax returns after the normal reassessment period had expired.

In 2003, the taxpayer start playing online poker. After consulting with his accountant, the taxpayer treated his gambling winnings as income in 2004, 2005, 2006 and 2007. Later, he concluded that his gambling winnings were likely not taxable. Accordingly, the taxpayer filed a request for an adjustment under subsection 152(4.2) of the Income Tax Act asking that the income tax he had paid be returned to him.

The CRA denied the taxpayer’s adjustment request. The taxpayer then brought an application for judicial review of the decision to deny the adjustment request.

The Federal Court noted that the standard of review for the CRA’s exercise of discretion under subsection 152(4.2) is reasonableness (see Dunsmuir v. New Brunswick (2008 SCC 9), Caine v. C.R.A. (2011 FC 11), and Hoffman v. Canada (2010 FCA 310)). In other words, the court should intervene only if the decision was unreasonable in the sense that it falls outside the “range of possible, acceptable outcomes which are defensible in respect of the facts and law”.

The Federal Court considered the parties’ positions on the issue and the various court decisions that have addressed the taxation of gambling gains and losses (see, for example, Cohen v. The Queen (2011 TCC 262), and Leblanc v. The Queen (2006 TCC 680)).

The court concluded that the CRA had fully considered all of the taxpayer’s submissions, and that there was no evidence of procedural unfairness or bad faith by the CRA.

However, the court concluded that the CRA had misinterpreted or misunderstood the taxpayer’s activities, and had drawn unreasonable and unsupportable conclusions about the tax treatment of the taxpayer’s gambling winnings:

[51] … The Minister’s exercise of her discretion under subsection 152(4.2) of the Act in this case lacks intelligibility and justification and, in my view, falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.

Overall, the court found that the taxpayer was simply an enthusiastic and ever-hopeful poker player engaged in a personal endeavour.

The court quashed the CRA’s decision and returned the matter to the CRA for reconsideration in accordance with the court’s reasons.

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Take a Chance: Judicial Review of the CRA’s Discretionary Power under s. 152(4.2) of the Income Tax Act

Will the Tax Court of Canada entertain a determination of a question of law where the focus is on future assessments?

In Sentinel Hill Productions IV Corporation v. The Queen (2013 TCC 267), Justice Judith Woods of the Tax Court of Canada said no. In so doing, she shed light on the requirements for making an application for a determination of a question of law under Rule 58 of the Tax Court of Canada Rules (General Procedure).

Rule 58(1) states:

58. (1) A party may apply to the Court,

(a) for the determination, before hearing, of a question of law, a question of fact or a question of mixed law and fact raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or

(b) to strike out a pleading because it discloses no reasonable grounds for appeal or for opposing the appeal,

 and the Court may grant judgment accordingly.

The question proposed by the appellants involved the issue of whether notices of determination under subsection 152(1.4) of the Income Tax Act issued in respect of certain partnerships for 2000 and 2001 should be vacated and the appeals allowed on the basis that the Minister subsequently concluded that the partnerships did not exist for these years. Importantly, the Court found that “the focus of the Proposed Question is on whether the Minister of National Revenue is now statute barred from issuing reassessments to partners by virtue of subsection 152(1.8) of the Income Tax Act.” (para. 7)

The Court decided not to allow the Rule 58 application to proceed as it did not meet the two conditions in Rule 58(1)(a). First, the statute-barred issue had not been raised as an issue ”by a pleading”. Second, the proposed question would not have disposed of or shortened the proceeding or saved costs.  Although the validity and correctness of an assessment can be determined by the Tax Court of Canada, the proposed question would have challenged the validity of assessments not yet issued and, therefore, the determination of the question of law (whether the Minister is statute-barred from issuing future assessments) would not have disposed of or shortened the proceeding or saved costs.

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Will the Tax Court of Canada entertain a determination of a question of law where the focus is on future assessments?

Federal Court of Appeal deals a blow to the Canada Revenue Agency: Full disclosure must be made on ex parte applications

On February 21, 2013, the Federal Court of Appeal released two decisions related to the obligations of the Minister of National Revenue when making ex parte applications under subsection 231.2(3) of the Income Tax Act (the “Act”) for judicial authorization requiring taxpayers to produce certain information and documents relating to customers.  In Minister of National Revenue v. RBC Life Insurance Company et al., 2013 FCA 50, the FCA affirmed the decision of the Federal Court (reported at 2011 FC 1249) cancelling four authorizations issued by the Federal Court in relation to customers of the Respondent companies who had purchased a particular insurance product that has been described as “10-8 insurance plans”.  In Minister of National Revenue v. Lordco Parts Ltd., the FCA adopted its reasoning in RBC and again affirmed a judgment of the Federal Court cancelling an authorization that had required information in respect of certain employees of the Respondent.

In both cases, the FCA reaffirmed the Minister’s “high standard of good faith” and the powers of the Federal Court to curtail abuses of process by the Crown.

In RBC, the Minister argued that the facts that it failed to disclose on its ex parte application before the Federal Court were not relevant to the applications. Reviewing the judgment of the Federal Court, the FCA concluded that the Minister failed to disclose the following facts:

  • The Department of Finance’s refusal to amend the Act;
  • Information in an advance income tax ruling;
  • CRA’s decision to “send a message to the industry” to chill the 10-8 plans; and
  • The GAAR committee had determined the plans complied with letter of Act.

The FCA held that the Federal Court’s finding that these facts were relevant was a question of mixed fact and law and the Minister had not demonstrated palpable and overriding error by the Federal Court judge. At a minimum, this suggests the Crown may have to disclose information of the sort included in the enumerated list.  Examining that list is interesting and suggests a requirement to include in the disclosure to the Federal Court judge hearing an ex parte application facts related to legislative history and intent including discussions about potential problems and possible legislative “fixes”, internal analysis of issues within the CRA including other advance income tax rulings, motivations on the part of the CRA and its officers and agents that may extend beyond auditing the particular facts, and previous analysis of the facts known  to the CRA and indications that those facts might support compliance with the Act and inapplicability of the GAAR.  That is a very extensive list, and it is encouraging to know that Crown obligations extend into each of these areas.

Further, the FCA held that even if the Federal Court on review of an ex parte order determined that the Minister had a valid audit purpose, it was open to the Federal Court to cancel the authorization based on the Minister’s lack of disclosure.  Somewhat surprisingly, the Minister argued that section 231.2(6), unlike section 231.2(3), did not allow for judicial discretion. Once the statutory conditions are established, the Minister argued, the Federal Court judge MUST NOT cancel the authorizations, no matter how egregiously the Crown acted.  The FCA rejected this argument, reaffirming the importance of judicial discretion and the duty of the Minister to act in good faith:

[26] In seeking an authorization under subsection 231.2(3), the Minister cannot leave “a judge…in the dark” on facts relevant to the exercise of discretion, even if those facts are harmful to the Minister’s case: Derakhshani, supra at paragraph 29; M.N.R. v. Weldon Parent Inc., 2006 FC 67 at paragraphs 153-155 and 172. The Minister has a “high standard of good faith” to make “full disclosure” so as to “fully justify” an ex parte order under subsection 231.1(3): M.N.R. v. National Foundation for Christian Leadership, 2004 FC 1753, aff’d 2005 FCA 246 at paragraphs 15-16. See also Canada Revenue Agency, Acquiring Information from Taxpayers, Registrants and Third Parties (issued June 2010).

The Minister’s argument, the FCA held, also runs contrary to the inherent power of the Federal Court to “redress abuses of process, such as the failure to make full and frank disclosure of relevant information on an ex parte application” (para 33):

The Federal Courts’ power to control the integrity of its own processes is part of its core function, essential for the due administration of justice, the preservation of the rule of law and the maintenance of a proper balance of power among the legislative, executive and judicial branches of government. Without that power, any court – even a court under section 101 of the Constitution Act, 1867 – is emasculated, and is not really a court at all. (para 36)

Overall, the RBC decision strongly reaffirms the role of the Federal Court in ensuring the Minister acts in good faith when making ex parte applications.  Given the broad powers granted in subsection 231.2(3) and elsewhere in the Act, it is reassuring to know that the Courts can, and will, protect taxpayers and citizens generally by ensuring that the CRA puts all relevant information before the Court when it seeks to exercise those powers.

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Federal Court of Appeal deals a blow to the Canada Revenue Agency: Full disclosure must be made on ex parte applications

Extensive Amendments to Tax Court of Canada Rules (General Procedure) Published in Part I of the Canada Gazette

General Objectives of the Proposed Amendments

The general objectives of the proposed amendments are:

(1) to streamline the process of hearings and to codify the practice relating to litigation process conferences;

(2) to implement new rules and amend existing rules governing expert witnesses and the admissibility of their evidence in the Tax Court of Canada;

(3) to allow the Court to proceed with a hearing of one or more appeals, while other related appeals are stayed pending a decision on the lead cases heard by the Court;

(4) to encourage parties to settle their dispute early in the litigation process; and

(5) to make technical amendments.

Detailed Description of Proposed Amendments

(1) Streamlining the process of hearings and codifying the practice relating to litigation process conferences

A proposed definition of “litigation process conference” is added to section 2. That definition lists the hearings referred to in section 125 and the conferences referred to in subsection 126(2) and sections 126.1 and 126.2.

Amendments are proposed to subsection 123(4) to indicate that the Registrar or a designated person may fix the time and place for the hearing subject to any direction by the Court.

Proposed subsection 123(4.1) indicates that the Court may, on its own initiative, fix the time and place for the hearing.

Proposed subsection 123(6) indicates that, if the time and place for a hearing have been fixed after a joint application of the parties, the hearing should not be adjourned unless special circumstances justify the adjournment and it is in the interest of justice to adjourn it.

Amendments are required to be made to section 125 (Status Hearing) to provide that initial status hearings are ordered to take place approximately two months after the filing of the reply, and further status hearings can take place later in the appeal to ensure the appeal is ready for trial and to fix a trial date. Finally, proposed subsection 125(8) provides that where a party fails to comply with an order or direction made at a status hearing, or if a party fails to appear at a status hearing, the Court may allow or dismiss the appeal or make any other order that is appropriate.

Existing section 126 is replaced by proposed section 126, which is designed to allow the Chief Justice to assign a judge to manage an appeal that is complex, or slow moving, or for some other reason requires ongoing management by a judge. The judge takes responsibility for the progress of the appeal to ensure that the appeal proceeds to trial in a timely way while conserving judicial resources.

Proposed section 126.1 provides that a trial management conference can be held after the appeal hearing date has been set and is presided over by the judge assigned to preside at the hearing. The conference is to ensure that the hearing proceeds in an orderly and organized fashion.

Proposed section 126.2 permits the Court to direct that a conference be held for the purpose of exploring the possibility of settlement of any or all of the issues.

Amendments are required to section 127 to add references to sections 125 and 126, and to proposed section 126.1.

Amendments are required to section 128 to add references to matters related to a settlement or settlement discussions during a litigation process conference.

(2) Implementing new rules and amending existing rules governing expert witnesses and the admissibility of their evidence in the Tax Court of Canada

Subsection 145(1) is amended to replace the reference to “affidavit” by “expert report.”

Proposed subsection 145(2) provides that the expert’s report must set out the proposed evidence of the expert, the expert’s qualifications and be accompanied by a certificate signed by the expert acknowledging that the expert agrees to be bound by the Code of Conduct for Expert Witnesses that is added as a schedule to the Rules to ensure that expert witnesses understand their independent advisory role to the Court. Proposed subsection 145(3) indicates that if an expert fails to comply with the Code of Conduct, the Court may exclude some or all of the expert’s report.

Proposed subsection 145(4) requires a party to seek leave to the Court if they intend to call more than five expert witnesses at a hearing and proposed subsection 145(5) indicates what the Court has to consider in deciding to grant leave.

Proposed subsection 145(6) allows parties to name a joint expert witness.

Existing subsection 145(2) is renumbered subsection 145(7) and specifies the conditions that need to be met in order for evidence of an expert witness to be received at the hearing.

Existing subsection 145(4) is renumbered subsection 145(8) and indicates how evidence in chief of an expert witness is to be given at a hearing.

Proposed subsection 145(9) indicates what may be addressed during a litigation process conference, other than a settlement conference, in respect of expert witnesses.

Proposed subsections 145(10), (11), (12), (13) and (14) introduce new rules that deal with expert conferences.

Existing subsection 145(3) is renumbered subsection 145(15) and is amended to change the number of days, from 15 to 60, for a copy of rebuttal evidence to be served on all parties.

Proposed subsection 145(16) indicates when evidence of an expert witness can be led in surrebuttal of any evidence tendered under subsection (15).

Proposed subsections 145(17), (18), (19) and (20) allow the Court to require that some or all of the experts testify as a panel. Experts are only allowed to pose questions to each other with leave of the Court to ensure the orderly presentation of evidence. The rules governing cross-examination and re-examination will continue to apply to experts testifying concurrently.

(3) Allowing the Court to proceed with a hearing of one or more appeals, while other related appeals are stayed pending a decision on the lead cases heard by the Court

Proposed section 146.1 is intended to apply where there is more than one appeal which has common or related issues of fact or law. It allows the Court to proceed with the hearing of one of the appeals, the lead case, while other related appeals are stayed pending a decision on the lead case. The parties in a related appeal have to agree to be bound, in whole or in part, by the final decision on the lead case.

(4) Encouraging parties to settle their dispute early in the litigation process

The provisions of the Rules addressing offers to settle are designed to encourage parties to settle their dispute early in the litigation process. An early settlement has the added advantage of reducing the costs borne by the parties and conserving judicial resources.

Parties are entitled to make and accept offers of settlement at any time before there is a judgment and any written offer to settle will be considered by the Court in assessing costs under section 147. In addition to this general rule, there is a need to encourage parties to reach an early settlement, ideally before the beginning of the trial or hearing. This is the specific objective of adding subsections 147(3.1) to (3.8).

(5) Making technical amendments

To amend section 6 to provide that the Court may direct that any step in a proceeding may be conducted by teleconference, by videoconference or by a combination of teleconference and videoconference.

To amend section 52 by adding a new subsection to provide that a demand for particulars shall be in Form 52 and shall be filed and served in accordance with the Rules, and to add Form 52 to Schedule I.

To amend sections 53 and 58 to regroup all matters where the Court may strike out or expunge all or part of a pleading or other document under section 53, and all matters relating to the determination of questions of law, fact or mixed law and fact under section 58. As a consequence of these changes, sections 59, 60, 61 and 62 are repealed.

To add subsection 67(7) to provide for when proof of service of a motion must be filed.

To repeal subsection 95(3) as a result of the changes made to the expert witness rules.

To amend subsection 119(3) as a result of the changes made to the expert witness rules.

To amend paragraph 146(1)(d) to change the number of days for service from 10 to 5.

To add subsection 153(3) to provide that the taxing officer may direct that the taxation of a bill of costs be conducted by teleconference, videoconference or by combination of both.

To amend the reference to “issuing a judgment” by “rendering a judgment” in subsection 167(1).

To remove the reference to “and it shall be entered and filed there whereupon section 17.4 of the Act shall be complied with” in subsection 167(3).

*  *  *

The full text of the proposed amendments is here. Interested persons may make representations concerning the proposed Rules within 60 days after December 8, 2012. All such representations must cite the Canada Gazette, Part Ⅰ, and the December 8th date of publication of the notice, and be addressed to the Rules Committee, Tax Court of Canada, 200 Kent Street, Ottawa, Ontario K1A 0M1.

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Extensive Amendments to Tax Court of Canada Rules (General Procedure) Published in Part I of the Canada Gazette

Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed

In a decision released on November 26, 2012 in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency (Docket T-1278-11), Justice Leonard Mandamin of the Federal Court dismissed the Crown’s appeal of an order by Prothonotary Aalto in JP Morgan Asset Management (Canada) Inc. v. Minister of National Revenue and Canada Revenue Agency in which the Crown moved unsuccessfully to strike out a judicial review application on the basis that the taxpayer had no possibility of success in seeking to set aside the decision of the Minister of National Revenue (the “Minister”) to assess Part XIII tax in a manner contrary to the Minister’s own policy.

This decision is the latest in a series of defeats for the Crown on this issue.  Since the decision of the Supreme Court of Canada in Canada v. Addison & Leyen Ltd., [2007] 2 S.C.R. 793, there has been a vigorous debate around the limits of judicial review of Ministerial action involving the decision to issue an assessment and the scope of section 18.5 of the Federal Courts Act which reads as follows:

Despite sections 18 and 18.1, if an Act of Parliament expressly provides for an appeal to the Federal Court, the Federal Court of Appeal, the Supreme Court of Canada, the Court Martial Appeal Court, the Tax Court of Canada, the Governor in Council or the Treasury Board from a decision or an order of a federal board, commission or other tribunal made by or in the course of proceedings before that board, commission or tribunal, that decision or order is not, to the extent that it may be so appealed, subject to review or to be restrained, prohibited, removed, set aside or otherwise dealt with, except in accordance with that Act.

The Minister has consistently intepreted the decision of the Supreme Court in Addison & Leyen and section 18.5 of the Federal Courts Act as precluding judicial review of the Minister’s decision to issue an assessment.  Thus far, however, the Crown has been largely unsuccessful in striking out such judicial review applications in Federal Court.  See, for example, the decision of Prothonotary Aalto in Chrysler Canada Inc. v. Canada and the decision of Justice Hughes on appeal in Chrysler Canada Inc. v. Canada.

By way of background, the Minister assessed Part XIII tax against JP Morgan in respect of fees it had paid to non-resident affiliates between 2002 and 2008.  JP Morgan applied for judicial review of the Minister’s decision to assess it for amounts payable under Part XIII of the Income Tax Act.  In particular, JP Morgan alleged that in exercising discretion to assess for years other than the current year and the two immediately preceding years

. . . CRA did not consider, or sufficiently consider, CRA’s own policies, guidelines, bulletins, internal communiqués and practices which would otherwise have limited assessments to the current tax year and the two (2) immediately preceding years.  CRA thus acted arbitrarily, unfairly, contrary to the rules of natural justice and in a manner inconsistent with CRA’s treatment of other tax payers.

The Crown moved to strike the application for judicial review, relying on section 18.5 of the Federal Courts Act.  Citing his earlier decision in Chrysler Canada, the Prothonotary dismissed the Crown’s motion.  He held that JP Morgan’s judicial review application dealt with:

. . . the discretion to assess as described in various policies of CRA.  That decision to apparently depart from policies and assess is subject to judicial review and is the type of situation that is contemplated by Addison & Leyen.  The ITA provides that the Minister “may” assess not “shall” assess which connotes a discretionary decision.  The decision of the Minister to apparently depart from policies is not otherwise reviewable [by the Tax Court of Canada] and therefore is subject to judicial review.

Consistent with his earlier decision in Chrysler Canada, the Prothonotary held that “JP Morgan only seeks judicial review of the decision to reassess which is alleged to be contrary to policies of CRA which were in place.  No attack on the reassessments is in play.” In his view, the case was about the Minister’s discretion to assess, not the assessments themselves.

Justice Mandamin dismissed the Crown’s appeal of the Prothonotary’s decision as he did not find that the Prothonotary’s Order was clearly wrong in that the exercise of discretion was based upon a wrong principle or a misapprehension of the facts and there was no improper exercise of discretion on a question vital to the case arising with the Prothonotary’s dismissal of the Crown’s motion to strike.

It is not yet known whether the Crown will appeal the decision of Justice Mandamin in JP Morgan, but it would not be surprising in light of the fact that several Crown motions to strike such judicial review applications are currently before the Federal Court.

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Federal Court decides that JP Morgan’s judicial review application challenging the Minister’s decision to assess Part XIII tax may proceed