Date: 20010703
Docket: 2001-568-IT-G
BETWEEN:
DAVID J.T. MUNGOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Order
BOWMAN, A.C.J.
[1] The appellant moves to strike out subparagraphs 8(c), (d), (e) and (o) of the Amended Reply to the Notice of Appeal.
[2] Paragraph 8 of the amended reply comprises approximately nine pages and about 65 subparagraphs. Its apparent function is to set out in great detail the so-called "assumptions" upon which the Minister acted in assessing.
[3] The issue in the appeal is whether the amounts of $106,993 and $38,916 are deductible under subsection 66.1(3) of the Income Tax Act as Canadian Exploration Expenses ("CEE"). There are other very small amounts in issue but essentially the question is as I have stated it. It involves the purchase, or alleged purchase, of seismic data. A number of subsidiary points are pleaded by the respondent and a large number are pleaded as alternative arguments.
[4] Some of these arguments are
(a) the amounts claimed are not CEE;
(b) the promissory note given was a contingent amount;
(c) the amounts claimed in excess of the cash paid was not reasonable;
(d) the amounts paid were not laid out for the purpose of gaining or producing income and were capital in nature.
[5] The assumptions, so called, endeavour to paint a picture of a tax motivated scheme in which inflated prices were paid for seismic data.
[6] The paragraphs to which the appellant objects are 8(c), (d), (e) and (o). They read as follows.
(c) Shapiro arranged many similar pre-ordained series of transactions in which he would obtain seismic at market price through an intermediary; cause the intermediary to transfer the seismic to a middle person (a member of the Shapiro group) at a price inflated by the use of limited recourse promissory notes; and they cause the middle person to transfer it to the Appellant at the same inflated price, for roughly 15% cash and a limited recourse promissory note for the remainder;
(d) The primary purpose of these pre-ordained transactions was the selling of tax deductions which generated management fees for one or more of the Shapiro group;
(e) One of these purchases involved a sale of seismic from TDHL to Global Communications Limited ("Global") in 1991 (the "Global sale");
...
(o) Kondrat approached Geosignal in the summer of 1992 to purchase its seismic, but because Geosignal wanted $2 million for its data, negotiations broke off.
[7] They form part of about 65 pleaded assumptions containing facts, law, evidence and argument. Mr. Mungovan's position is set out in his notice of motion as follows.
(a) Subparagraphs (c), (d), (e) and (o) of paragraph 8 of the Reply are scandalous, frivolous and vexatious and will undoubtedly prejudice and delay the fair hearing of the action. The subparagraphs refer to prior irrelevant transactions which allegedly occurred prior to the matters concerning this action. These prior irrelevant transactions are unconnected to this respondent and no connection is alleged. Furthermore, the respondent by these subparagraphs raises irrelevant and prejudicial issues concerning the intention of a person to those earlier transactions to which the appellant has no connection whatsoever nor is any connection alleged.
(b) The appellant is being smeared with guilt by alleged association with earlier irrelevant transactions to which he has no actual connection or actual association. As a result, the respondent is also abusing the process of this Court.
(c) That there may have been an aborted attempt by Kondrat to purchase seismic at a date before the transaction involved in this case as alleged in subparagraph (o) of paragraph 8 of the Reply but this is also irrelevant and frivolous. It is inserted to colour the legitimacy of the subject transaction in a scandalous and vexatious manner.
[8] He submitted a written argument as well. It reads
1. This appellant states that subparagraphs (c), (d), (e) and (o) of paragraph 8 of the Reply allege in substance that the vendor of the seismic data in which the appellant is an investor was provided by the vendor as part of fraudulent schemes to evade tax that had been performed by the vendor on a number of occasions before the appellant was solicited to invest. Although the appellant is not alleged to have been involved in those alleged earlier schemes, his case is being unfairly and prejudicially tainted by them. Such pleading is nothing but an improper and scandalous attempt to colour the legitimacy of the transaction that is the subject matter of this appeal by alleging matters wholly unrelated and immaterial to the transaction at issue under the guise that they were "assumptions of fact" made by the Minister.
2. In fact, they may or may not have been something that motivated the Minister but they certainly are not facts that are relevant and material to this case.
3. The allegations in subparagraphs (c), (d) and (e) of paragraph 8 of the Reply that Mr. Shapiro arranged on other occasions for the sale of seismic data to investors in what the respondent characterizes as being tantamount to a fraud on investors and that this appellant was defrauded in the same way is not only scandalous but also frivolous, and vexatious.
4. If such allegations are permitted to continue to be a part of this case, then the appellant will be put to the expense of having to investigate and determine the accuracy of such allegations when he has had no involvement in them nor is any such involvement alleged.
5. Accordingly, it would be grossly unfair to this appellant and will delay the hearing of the action to leave these allegations in the Reply.
6. The allegation in subparagraph (o) of paragraph 8 of the Reply that there may have been an aborted attempt to acquire seismic prior to this transaction is also improper as it is no less than an attempt to present frivolous and irrelevant information in the Reply that has no legitimate purpose. The allegation is vexatious and will prejudice the appellant and delay a fair trial because it will require the investigation by the appellant and eventually the Court into an area wholly unrelated to the facts in issue in this case.
[9] I am not prepared to strike out these paragraphs of the assumptions. The reasons are as follows.
[10] Assumptions are not quite like pleadings in an ordinary lawsuit. They are more in the nature of particulars of the facts on which the Minister acted in assessing. It is essential that they be complete and truthful. The conventional wisdom is they cast an onus upon an appellant and as Mr. Mungovan observes with some considerable justification they may force him to endeavour to disprove facts that are not within his knowledge. Superficially this may be true, but this is a matter that can be explored on discovery. The trial judge is in a far better position than a judge hearing a preliminary motion to consider what effect should be given to these assumptions. The trial judge may consider them irrelevant. He or she might also decide to cast upon the respondent the onus of proving them. The rule in M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184, is a rule of general application but it is not engraved in stone. For example in Hickman Motors Limited v. The Queen, 97 DTC 5363, L'Heureux-Dubé J. said at page 5377:
In the present case, without any evidence, both the Trial Division and the Court of Appeal purported to transform the Minister's unsubstantiated and unproven assumptions into "factual findings", thus making errors of law on the onus of proof. My colleague Iacobucci, J. defers to these so-called "concurrent findings" of the courts below, but, while I fully agree in general with the principle of deference, in this case two wrongs cannot make a right. Even with "concurrent findings", unchallenged and uncontradicted evidence positively rebuts the Minister's assumptions: MacIsaac, supra. As Rip, T.C.J., stated in Gelber v. M.N.R., 91 DTC 1030, at p. 1033, "[the Minister] is not the arbiter of what is right or wrong in tax law". As Brulé, T.C.J., stated in Kamin, supra, at p. 64:
...
the Minister should be able to rebut such [prima facie] evidence and bring forth some foundation for his assumptions.
...
The Minister does not have a carte blanche in terms of setting out any assumption which suits his convenience. On being challenged by evidence in chief he must be expected to present something more concrete than a simple assumption.
[Emphasis added.]
In my view, the above statement is apposite in the present case: the respondent, on being challenged by evidence in chief, failed to present anything more concrete than simple assumptions and failed to bring forth any foundation. The respondent chose not to rebut any of the appellant's evidence. Accordingly, the respondent failed to discharge her onus of proof.
I note that, in upholding the Minister's unproven assumptions, my colleague Iacobucci, J. may be seen as reversing the above-stated line of caselaw, without explicitly providing the rationale for doing so. With respect for the contrary opinion, in my view, changes in the jurisprudence regarding the onus of proof in tax law should be left for another day. Furthermore, on the facts of the case at bar, sanctioning the respondent's total lack of evidence could seem unreasonable and perhaps even unjust, given that the appellant complied with a well-established line of jurisprudence as regards its onus of proof.
[11] I think that we are seeing an evolution in the rôle of assumptions in income tax appeals. The day may be near when there will be a modification in the rigid rule that whatever the Crown may choose to say the Minister assumed has to be demolished by the taxpayer. It is well settled, for example, that the respondent cannot by dressing evidence up in the guise of assumptions expect the court to accept such evidence as proved. However a motion to strike out certain assumptions is not the place to reconsider the rule.
[12] It is entirely possible, as Mr. Mungovan points out, that some of the impugned assumptions are irrelevant. This is a matter for the trial judge to determine after the evidence has been presented. It is not a matter that can or should be determined on a preliminary motion to strike. It may well be that the paragraphs contain allegations that lie exclusively within the respondent's knowledge. It is a matter for the trial judge to determine whether the onus should be cast upon the respondent to establish them. The rule that the onus is upon a taxpayer who challenges an assessment is based on the passage in the Supreme Court of Canada by Duff J. in Anderson Logging Co. v. The King, 52 DTC 1209 (S.C.C.) aff'd 52 DTC 1215 (J.C.P.C.), at p. 1211:
On behalf of the appellant company it is contended, first, that the onus was upon the Crown to shew that the profit was earned in an operation which was a part of the business carried on in fact by the company; and, secondly, that from what is described as the isolated case of the purchase and sale of these timber limits no inference as to the course of the company's business can properly be drawn.
First, as to the contention on the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.
[13] One should not press the conventional rule about the appellant having the onus so far that one loses sight of its original purpose and of all considerations of procedural fairness. In The Cadillac Fairview Corporation Limited v. The Queen, 97 DTC 405, aff'd 99 DTC 5121 (F.C.A.), at p. 407 the following observation was made.
The appellant pleaded that the payments were made pursuant to the guarantees and this allegation was denied. Counsel for the appellant argued that since the Minister had not pleaded that he "assumed" that the payments were not made pursuant to the guarantees the Minister had the onus of establishing that the payments were not made pursuant to the guarantees. The question is, if not a pure question of law, at least a mixed one of law and fact. In any event the basic assumption made on assessing was that the appellant was not entitled to the capital loss claimed and it was for the appellant to establish the several legal components entitling it to the deduction claimed. An inordinate amount of time is wasted in income tax appeals on questions of onus of proof and on chasing the will-o'-the-wisp of what the Minister may or may not have "assumed". I do not believe that M.N.R. v. Pillsbury Holdings Ltd. [1964] DTC 5184 has completely turned the ordinary rules of practice and pleading on their head. The usual rule — and I see no reason why it should not apply in income tax appeals — is set out in Odgers' Principles of Pleading and Practice, 22nd edition at p. 532:
The "burden of proof" is the duty which lies on a party to establish his case. It will lie on A, whenever A must either call some evidence or have judgment given against him. As a rule (but not invariably) it lies upon the party who has in his pleading maintained the affirmative of the issue; for a negative is in general incapable of proof. Ei incumbit probatio qui dicit, non qui negat. The affirmative is generally, but not necessarily, maintained by the party who first raises the issue. Thus, the onus lies, as a rule, on the plaintiff to establish every fact which he has asserted in the statement of claim, and on the defendant to prove all facts which he has pleaded by way of confession and avoidance, such as fraud, performance, release, rescission, etc.
[14] The trial judge may well decide that the Crown has some onus that goes beyond the mere recitation of a bald assumption. The weight to be put on these paragraphs is a matter for the trial judge, as is the onus of proof. This is not, however, a reason for striking the paragraphs before trial.
[15] The respondent has an obligation to disclose all of the facts upon which the assessment was based. Conceivably some of the facts assumed are wrong or irrelevant. They should still be disclosed. I would not wish to discourage the full disclosure of facts. The mere fact that the lawyer drafting the reply may have thought an assumption was wrong, irrelevant or embarrassing to the Crown's case is no reason for failing to disclose it. Indeed, in Bowens v. The Queen, 94 DTC 1853, aff'd 96 DTC 6128, the effect of failing to plead assumptions that were central to an assessment was discussed. The Federal Court of Appeal at p. 6129 suggested that the Crown's Reply might have been struck out for failing to plead a fact that was at the basis of the assessment.
[16] I do not think that the pleaded assumptions to which the appellant takes exception are scandalous, frivolous or vexatious. They may be irrelevant or wrong but, unless the evidence at trial discloses otherwise, they remain nonetheless to be treated as the assumptions on which the Minister acted.
[17] The motion is dismissed.
[18] Costs will be costs in the cause.
Signed at Toronto, Ontario, this 3rd day of July 2001
"D.G.H. Bowman"
A.C.J.
COURT FILE NO.: 2001-568(IT)G
STYLE OF CAUSE: Between David J.T. Mungovan and
Her Majesty The Queen
PLACE OF HEARING: Conference call
DATE OF HEARING: June 15, 2001
REASONS FOR ORDER BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF ORDER: July 3, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Wendy Burnham
Deborah Horowitz
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-568(IT)G
BETWEEN:
DAVID J.T. MUNGOVAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard by way of conference call on June 15, 2001, by
The Honourable D.G.H. Bowman, Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Wendy Burnham
Deborah Horowitz
ORDER
Upon motion by the appellant for an order striking out subparagraphs 8(c), (d), (e) and (o) of the Amended Reply to the Notice of Appeal
And upon hearing what was alleged by the parties
It is ordered that the motion be dismissed.
Costs will be costs in the cause.
Signed at Toronto, Canada, this 3rd day of July 2001.
|
"D.G.H. Bowman" |
A.C.J.