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Correcting Tax Mistakes after Fairmont and Jean Coutu

I was very glad to be a panelist for the Canadian Tax Foundation’s conference on the Supreme Court of Canada’s decisions in Fairmont and Jean Coutu.

During the discussion the panelists were asked about the ways taxpayers may correct tax mistakes after these two decisions of the Supreme Court.

In my remarks, I suggested taxpayers would be wise to review the revised requirements for rectification, and to consider the other remedies that may be available. I cited a list of potential remedies and, as a starting point, a selection of cases on these remedies:

The Supreme Court’s decision in Fairmont did not diminish or alter the other remedies that may be available to a taxpayer following an unintended tax result. I suggest that these other remedies may become more significant as taxpayers and their professional advisers determine how a particular tax mistake may be corrected following Fairmont and Jean Coutu.

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Correcting Tax Mistakes after Fairmont and Jean Coutu

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

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

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 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

New Judges Appointed to the Tax Court of Canada and the Federal Court of Appeal

A new judge has been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointment:

The Honourable Guy R. Smith, a sole practitioner in Ottawa, is appointed a judge of the Tax Court of Canada to replace Mr. Justice J.E. Hershfield, who elected to become a supernumerary judge as of June 1, 2015.

Mr. Justice Smith received a Bachelor of Arts from the University of Manitoba (Collège universitaire de St-Boniface) and a Bachelor of Arts (History) (cum laude) from the University of Ottawa in 1982. He received a Bachelor of Laws (French Common Law Program) in 1985.

Mr. Justice Smith had been a sole practitioner since 2014. Previously, he had been the Judicial Affairs Advisor for the Federal Minister of Justice and Attorney General of Canada from March 2009 to July 2014. In December 2005, he became an investment advisor with ScotiaMcLeod and in June 2007 he joined CANNACORD Capital, where he worked until 2009. He practised administrative law, constitutional law and litigation with Perley-Robertson, Hill & McDougall LLP from 1997 to 2005 and as a sole practitioner from 1991 to 1997. After he was admitted to the Bar of Ontario in 1988, he practised with the Law Office of Coderre, Smith, Barristers and Solicitors until 1991.

Mr. Justice Smith was a member of the Carleton County Law Association, the Canadian Tax Foundation and the Canadian Club of Ottawa.

Appointments to the country’s Superior Courts not only reflect the rich and diverse social fabric of our country, but also take into consideration the merit and legal excellence of each individual jurist. Through these appointments, the Government of Canada has demonstrated an awareness of the need to bring greater gender balance to the bench, to help ensure that the judiciary is more representative of Canadian society.

This appointment is effective immediately.

Additionally, two new judges were appointed to the Federal Court of Appeal:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Yves de Montigny, a judge of the Federal Court in Ottawa, is appointed a judge of the Federal Court of Appeal to replace Mr. Justice R. Mainville, who was appointed to the Court of Appeal of Quebec on July 1, 2014.

Mr. Justice de Montigny was appointed to the Federal Court in 2004. Prior to his appointment, he had held various positions in the Department of Justice Canada, including those of Chief of Staff to the Minister, Senior Advisor to the Deputy Minister, and Chief Legal Counsel, Public Law Group. He had also been Director General of Constitutional Strategy and Plans at the Privy Council Office. As well, he served as Special Advisor to the Executive Council of the Government of Quebec and Counsel in the Quebec Ministry of Justice. His main areas of practice included constitutional law, administrative law, criminal law and international and public law. He had been a professor at the University of Ottawa, Faculty of Law (1982-1997), and a lecturer at the École du Barreau du Québec and the Faculty of Law and Faculty of Continuing Education of the Université de Montréal.

Mr. Justice de Montigny received a Bachelor of Laws in 1978 and a Master of Laws in 1979, both from l’Université de Montréal. As well, he holds a Masters in Political Philosophy from Oxford University. He was admitted to the Bar of Quebec in 1983.

The Honourable Mary J.L. Gleason, a judge of the Federal Court in Ottawa, is appointed a judge of the Federal Court of Appeal to fill a new position created by Bill-C36.

Madam Justice Gleason was appointed to the Federal Court in 2011. Prior to her appointment, she had been a senior partner with Norton Rose LLP (formerly Ogilvy Renault LLP), where she practised labour and employment law in Ottawa after being admitted to the Bar of Ontario in 1986. Madam Justice Gleason held a number of management positions within her firm, including that of co-managing partner of its Ottawa office and Ottawa Chair of its Employment and Labour Group. She frequently guest lectured at the University of Ottawa and taught a course in employment law at the Faculty of Law of the University of Ottawa. She has written numerous articles and regularly presented papers to conferences hosted by a variety of organizations, including the Law Society of Upper Canada, the Canadian Bar Association, Insight, Lancaster House, the Council of Industrial Relations Executives of the Conference Board of Canada and the Canadian Association of Counsel to Employers (CACE), an association of Canadian management-side labour and employment practitioners. Justice Gleason was a founding member and past president of CACE. She also was active in the Canadian Bar Association and the Ottawa Human Resource Professionals’ Association, where she held the portfolio of Government Affairs Liaison on its Board of Directors for a number of years. Prior to her appointment she was a member of the Canada Industrial Relations Board’s Client Consultation Committee and the Federal Court Labour Law, Human Rights, Privacy and Access Review Liaison Group. She was recognized as a leading labour and employment practitioner by Best Lawyers in Canada, L’Expert, PLC Which Lawyer?, Guide to the World’s Leading Labour and Employment Lawyers, and Canadian HR Reporter’s Canada’s Employment Law Directory.

Madam Justice Gleason, from Regina, Saskatchewan, lived most of her earlier years in Calgary and then pursued her studies in Ottawa and Halifax. She received a Bachelor of Arts (Honours) in History (summa cum laude) from the University of Ottawa in 1981and a Bachelor of Laws from Dalhousie University in 1984.

Appointments to the country’s Superior Courts not only reflect the rich and diverse social fabric of our country, but also take into consideration the merit and legal excellence of each individual jurist. Through these appointments, the Government of Canada has demonstrated an awareness of the need to bring greater gender balance to the bench, to help ensure that the judiciary is more representative of Canadian society.

These appointments are effective immediately.

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New Judges Appointed to the Tax Court of Canada and the Federal Court of Appeal

Kruger: FX Derivatives Gains/Losses Taxed Only When Realized

In Kruger Incorporated v. The Queen (2015 TCC 119), the Tax Court held that the taxpayer could not value its foreign exchange options contracts on a mark-to-market basis, with the result that certain losses were not deductible by the taxpayer in a year. The Kruger case is another recent judgment of the Tax Court in the developing law on the Canadian tax treatment of financial derivative products (see George Weston Limited v. The Queen (2015 TCC 42)).

Facts

Kruger’s core business was manufacturing newsprint, paper-coated products and tissue paper. In the 1980s, Kruger started trading in foreign currency contracts, and over time these activities grew to involve more than 10 employees trading in currency, bonds and securities.

In 1997, Kruger was advised that it was required to start reporting its financial trading activities on a mark-to-market basis, which required the recognition of any change in market value in a year as an income gain or loss.

In 1998, certain of Kruger’s U.S. currency options contracts were “under water” due to fluctuations in the Canada-U.S. exchange rate. Accordingly, for its 1998 tax year, Kruger claimed losses totaling $91,104,379 from a business of trading in derivatives. The CRA reassessed to deny the deduction of $91,104,379, but excluded from income the amount of $18,696,881, which Kruger had included as the amortized portion of the net of premium income and expenses for the foreign exchange options contracts. The CRA also included the amount of $91,104,379 in Kruger’s taxable capital for the purposes of the large corporations tax (which has now been generally repealed).

Kruger appealed the reassessment on the basis that, in accordance with section 9 of the Act, it was entitled to value its foreign exchange options contracts using the mark-to-market method, and argued in the alternative that its foreign exchange options contracts were inventory and were to be valued at the lower of cost and fair market value under subsection 10(1) of the Act.

Analysis

The Court reviewed the key Canadian judicial authorities regarding the test for determining income under the Act, including Friedberg v. The Queen ([1993] 4 S.C.R. 285), Canderel Limited v. The Queen ([1998] 1 S.C.R. 147), Friesen v. The Queen ([1995] 3 S.C.R. 103). The Court referred to the oft-cited principles from Canderel that the determination of profit is a question of law, and a taxpayer is free to adopt any method for determining profit that is not inconsistent with the provisions of the Act, case law, and well-accepted business principles. Once the taxpayer has shown that it has provided an accurate picture of income, the onus shifts to the CRA to establish that the amount is not an accurate picture of profit or that another method would provide a more accurate picture.

The Court noted there were no provisions in the Act that required or authorized the valuation of property on a mark-to-market basis. Further, there is an important difference between financial and tax accounting:

[109] Financial accounting … is concerned with constructing a picture of profit from year to year in a consistent manner for the benefit of the audience for whom financial statements are prepared: shareholders, investors, lenders, etc. … FASB views mark to market valuation for the same reasons: to better enable investors, creditors and others to assess the entity’s performance. …

[110] Tax accounting normally is not overly concerned with the past; it wants a picture of income for a particular year and … the methodology used to calculate income in one year may be different from that used in an earlier year. … statements for tax purposes are solely concerned with the computation of income in achieving an accurate picture of income for the particular taxation year.

The Court noted that sections 142.2 to 142.5 of the Act require financial institutions and investment dealers to use mark-to-market, but these rules did not apply to Kruger. The Court stated,

[114] Mark to market accounting … would compel a taxpayer to include any loss or gain in value of the property at year-end in income for the year. This may be appropriate for financial statements for reasons discussed earlier. But, for income tax purposes, the taxpayer may be compelled to include an amount in income where there is no clear statutory language requiring him or her to do so. The realization principle is basic to Canadian tax law. It provides certainty of a gain or loss. Without some support of the statutory language or a compelling interpretation tool it ought not to be cast aside.

The Court also noted a difficulty in respect of the market prices for the foreign exchange options contracts, namely that such prices were formulated by the counter-parties to the contracts (i.e., Kruger’s banks). The Court held there was a “probably inconsistency in values” depending on the pricing method used by the counter-party.

In respect of Kruger’s alternative argument that the options contracts were inventory, the Court determined that Kruger was carrying on a business of speculating on foreign exchange currency options that was separate from its manufacturing business. Further, the Court determined that the foreign exchange options contracts were financial liabilities when such contracts were written by Kruger, and property (i.e., inventory) when purchased by Kruger.

The Court allowed the appeal only to permit Kruger to value its purchased foreign exchange options contracts in accordance with subsection 10(1) of the Act (which would have an effect similar to mark-to-market accounting in that the contracts would be valued each year at the lower of cost and fair market value). Additionally, the amount of $91,104,379 was to be added to Kruger’s taxable capital for the purposes of the large corporations tax.

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Kruger: FX Derivatives Gains/Losses Taxed Only When Realized

Two New Judges Appointed to Tax Court of Canada

Two new judges have been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Don R. Sommerfeldt, a counsel with Dentons Canada LLP in Edmonton, is appointed a judge of the Tax Court of Canada, to replace Madam Justice G. Sheridan who resigned effective May 1, 2014.

Mr. Justice Sommerfeldt received a Bachelor of Arts and Science from the University of Lethbridge in 1972 and a Bachelor of Laws from the University of Alberta in 1977.  He also received a Master of Arts from Brigham Young University in 1974 and a Master of Laws from Cornell University in 2004.  He was admitted to the Bar of Alberta in 1978 and to the bar of New York in 2004.

Mr. Justice Sommerfeldt has been with Dentons Canada LLP (formerly Fraser Milner Casgrain LLP) since 2000.  Prior to that, he practised taxation, estate planning and pensions with Edward A. Zelinsky Professional Corporation; Cruickshank Karvellas; Milner Fenerty; the Department of National Revenue (Rulings Directorate) while on secondment from Milner & Steer.

Mr. Justice Sommerfeldt is a member of the following associations: the Canadian Tax Foundation and is a past governor; the Society of trust and Estate Practitioners, the Canadian Bar Association; the Canadian Association of Law Teachers; the International Fiscal Association; and the New York State Bar Association.

The Honourable Henry A. Visser, a lawyer with McInnes Cooper in Halifax, is appointed a judge of the Tax Court of Canada, to replace Madam Justice D. Campbell, who elected supernumerary status as of June 19, 2015.  This appointment is effective June 19, 2015.

Mr. Justice Visser received a Bachelor of Commerce from Dalhousie University in 1988 and a Bachelor of Laws from the Dalhousie Law School (now the Schulich School of Law) in 1994.  He was admitted to the Bar of Nova Scotia in 1995 and to Prince Edward Island in 1998.

Mr. Justice Visser has been a lawyer with the firm McInnes Cooper since 1997 and became a partner in 2003.  His main areas of practice were tax law, corporate law, commercial law, labour law and employment law.  He was employed with Martin Visser and Sons, farming and export business, from June 1995 to May 1997.

These appointments are effective immediately, unless indicated otherwise.

Two New Judges Appointed to Tax Court of Canada

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