Tax Court of Canada Judgments

Date: 20020923

Docket: 2000-2864-IT-G

BETWEEN:

ANCHOR POINTE ENERGY LTD.,

Applicant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Order

Rip, J.

[1]            The applicant (appellant) Anchor Pointe Energy Ltd. ("Anchor Pointe") has brought a motion to this Court under section 53 of the Tax Court of Canada Rules (General Procedure) ("Rules") for an order striking out certain paragraphs in the respondent's Reply to the appellant's Notice of Appeal ("Reply") fromreassessments of tax for 1991. The applicant wants to expunge paragraphs alleging facts that the Minister of National Revenue ("Minister") was purported to have assumed in making the reassessments under appeal and stating new reasons adopted by the Minister for the reassessments after the reassessments were issued.

[2]            On December 4, 1991, five corporations amalgamated to create the appellant.[1] In October 1991, each predecessor company purchased seismographic material ("seismic data") from various vendors, and in preparing their respective tax returns for their 1991 taxation year, each claimed a Canadian Exploration Expense ("CEE") within the meaning of subsection 66.1(6) of the Income Tax Act ("Act").

[3]            By reassessment, notice of which is dated February 17, 1994, the Minister reduced the CEE deduction of API and by reassessments, notices of which are dated March 14, 1994, the Minister reduced the CEE deductions of the four other predecessor corporations, all for the 1991 taxation year.

[4]            The applicant filed the affidavit of Mr. Ola S. Juvkam-Wold, director and president of the applicant. Attached to the affidavit were copies of 14 documents. In a letter dated September 17, 1993, officials of Revenue Canada, at the time, proposed reassessing API on the basis of a determination of the fair market value of certain seismic data.[2] The report of the auditor for Revenue Canada, dated December 15, 1993, establishes that the reassessment was based on the fact that "the valuation reports provided by [the taxpayer] are not representative of the [fair market value] of the seismic data as at October 28, 1991".[3]

[5]            Notices of Objection to the reassessments for 1991 were filed by the applicant on or about March 10, 1994 with respect to API and on or about March 14, 1994 with respect to the other four predecessor corporations.

[6]            Apparently, by agreement between the applicant and the tax authority, the objections were held in abeyance awaiting the decision of the Federal Court of Appeal in the case of Global Communications Limited v. The Queen.[4] The decision of the Federal Court of Appeal was rendered on June 18, 1999. In short, the Federal Court of Appeal held that seismic data purchased for the purpose of resale or licensing does not qualify as CEE within the meaning of paragraph 66.1(6)(a) of the Act.

[7]            The Minister then confirmed the reassessments "based on the findings in the Global case", according to the Canada Customs and Revenue Agency ("CCRA") Report on Objection or Appeal, dated March 17, 2000. The Minister was of the view that there was no evidence that any of the seismic data purchased by the predecessor corporations was to be used by the corporations themselves for the purpose of oil and gas exploration.

[8]            Had the tax authority originally reassessed applying the reasons in the Global Communications decision, it would have denied all CEE deductions claimed by the predecessor corporations. However, the CCRA permitted the CEE deductions, denying only the portion of the CEE deduction that related to the cost of the seismic data that was above fair market value. The author of the Report on Objection or Appeal acknowledges "our view of the law that upward reassessments to statute barred years are not to be done. This means we cannot increase the amount of tax payable . . . [w]e are prohibited from issuing a reassessment to disallow the CEE allowed by audit . . . for the 1991 taxation year".

[9]            The Notifications of Confirmation ("Notification" or "Notifications") sent to the applicant stated that the reassessments were confirmed on the basis that:

Seismic data purchased for the purpose of resale or licensing does not qualify as Canadian exploration expense ("CEE") within the meaning of paragraph 66.1(6)(a) of the Act.

In addition, even if the activities satisfied the purpose test set out in paragraph 66.1(6)(a) of the Act, you have failed to establish that the seismic data in issue had a fair market value as claimed of $328,000.

[10]          In other words, the main reason the reassessments were confirmed was because of the reasons in Global Communications; the original basis of the reassessments became the alternative basis for the confirmations. The applicant appealed and in its Notice of Appeal alleged that the predecessor corporations did not pay an excessive amount for the seismic data. The applicant also denied the primary basis of the confirmations stating that the seismic data was purchased "with the intention that it would be used for the purpose of determining the existence, location, extent and quality of accumulations of petroleum and national gas in Canada, and it has been used for that purpose". The applicant also described the exploration activities undertaken by it and its predecessor corporations in connection with the seismic data.

[11]            The applicant requests that subparagraphs 10(q), (r) and (z), paragraph 11 and subparagraph 12(b) of the Reply be expunged. The applicant also wants subsections 66.1(6) and 66(3) of the Act be expunged from the several statutory provisions the respondent relies on in its defence of the appeal in paragraph 13 of the Reply. The grounds relied on by the respondent in paragraphs 15 and 16 of the Reply should also be expunged, applicant's counsel added.[5]

[12]          In the Reply, the Deputy Attorney General of Canada declared, at subparagraphs 10(q), (r) and (z), that:

In reassessing, the Minister assumed the following facts:

. . .

(q)      API, APII, APIII, APIV and APV did not purchase the seismic data for the purpose of determining the existence, location, extent or quality of an accumulation of oil or gas;

(r)       the seismic was not used for exploration purposes;

. . .

(z)       the seismic data purchased by API, APII, APIII, APIV and APV does not qualify as a Canadian Exploration Expense ("CEE") within the meaning of s. 66.1(6)(a) of the Income Tax Act (the "Act").

[13]            Paragraph 11 of the Reply states:

             In answer to the Notice of Appeal as a whole, he [the Attorney General of Canada] says that the Minister incorrectly reassessed the 1991 taxation years of API, APII, APIII, APIV and APV by allowing any deduction for CEE. He now says that:

(a)         Any amounts incurred in the purchase of the seismic data were not incurred by API, APII, APIII, APIV or APV for the purpose of determining the existence, location, extent or quality of oil or gas, but were incurred for the purpose of obtaining a tax deduction; and

(b)         by permitting deduction of amounts equivalent to the fair market value of the seismic data purchased by API, APII, APIII, APIV and APV, the Minister has understated the income of API, APII, APIII, APIV and APV.

[14]            In Section B of the Reply, entitled "Issues to be Decided", at paragraph 12(b), the Attorney General submits that:

The issues in this appeal are whether:

(a)         . . .

(b)         the Appellant's predecessors are entitled to CEE deductions, and if so, how much.

[15]            The applicant submits that the Minister never assumed the facts in subparagraphs 10(q), (r) and (z) when he made the reassessments in 1994. Thus, these assumptions of fact and the related portions of the Reply with respect to the "issues to be decided" and the "statutory provisions" also should be expunged.

[16]            The applicant also states that if the assumptions were validly made, they purport to reassess the applicant on an entirely different basis than the reassessments under appeal and were made outside the "normal reassessment period"; the said reassessments, to that extent, are accordingly barred by the effluxion of time.

[17]            Ordinarily I would have adjourned this application to have it heard by the trial judge. However, the parties are presently at loggerheads with respect to the discovery of Mr. Juvkam-Wold. If I strike out those provisions of the Reply requested by the applicant, Mr. Juvkam-Wold may not be required to answer questions relating to whether the cost of the seismic data qualified as CEE. The affidavit of Mr. Juvkam-Wold includes a letter dated May 31, 2002 from respondent's counsel with respect to the adjournment of the discovery of Mr. Juvkam-Wold and to which is attached a list of questions referring to 38 of the appellant's documents and areas in which seismic data was purchased. Applicant's counsel advises that his client has 25 cartons of documents that may contain the information sought by the Crown. Counsel's view is that the CCRA is attempting to audit anew the applicant and its predecessor's corporations. The original audits related to valuation and the valuation basis of the reassessments is no longer the primary basis of the reassessments. The applicant fears that the CCRA now wishes to audit anew through the discovery process applying the reasoning in the Global Communications decision. The Crown desires to do now what it should have and could have done before 1994, according to the applicant. This may be costly to the applicant.

[18]          Crown's counsel argues that the respondent only wishes to ask questions on the applicant's own documents, that is, documents included in the appellant's List of Documents. This is not a question of an audit. The respondent has a right to ask questions relating to the documents because they relate to an issue under appeal and the applicant has an obligation to answer them, she declared.

[19]          Section 53 of the Rules provides that:

The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,

              (a) may prejudice or delay the fair hearing of the action,

              (b) is scandalous, frivolous or vexatious, or

              (c) is an abuse of the process of the Court.

[20]          Respondent's counsel argues that none of the grounds to strike or expunge pleadings in section 53 of the Rules are present in the Reply. In her view, the applicant wishes these portions of the pleading to be struck so as to avoid replying to questions as to whether it is eligible for CEE.

[21]          Counsel for the respondent acknowledges that the Minister reassessed to allow a portion of the CEE claimed by the applicant's predecessors on the basis that the fair market value of the seismic data acquired was less than the amount claimed, and disallowed the excess.

[22]          However, respondent's counsel argues that where a Notice of Objection has been filed, the Minister is not bound by the normal reassessment period.[6] In her view, the filing of an objection results in a continuation of the reassessment process which, on the facts before me, she states, ended when the Minister issued the respective Notifications. She relies on the comments of Cattanach J. in Parsons et al. v. M.N.R.,[7] to the effect that the reconsideration of an assessment by the Minister following the filing of a Notice of Objection is not an appeal but "continues to be part and parcel of the assessment process".

[23]          The assumptions in issue, respondent's counsel acknowledges, "were made by the Minister in reconsidering his reassessments and were made prior to the confirmation". The limitation period for the reassessments had not expired at the time the Minister adopted the reasoning of the Federal Court of Appeal in Global Communications and confirmed the reassessments. The principle enunciated by the Supreme Court of Canada in The Queen v. Continental Bank of Canada,[8] that the Crown is not permitted to advance a new basis for reassessment after the limitation period has expired, does not apply to the facts at bar, counsel argued.

[24]          Once a Notice of Objection is filed, the Minister, in accordance with subsection 165(3) of the Act, must take one of four actions after reconsidering an assessment: vacate the assessment, confirm the assessment, vary the assessment or reassess. Each is a separate and distinct process. While the confirmation of an assessment may be part of the assessment process, it would be a distortion of language to call a confirmation an assessment. Confirmation is the action of ratifying or verifying an assessment, without an assessment there can be no confirmation of the assessment. The Minister first must assess an amount of tax and then, if the taxpayer objects, the Minister may confirm that the assessed tax amount is correct. When the Attorney General states in pleadings that "in assessing, the Minister assumed the following facts . . ." it is the facts the Minister assumed "in assessing" that must follow, not facts he or she assumed subsequently on reconsidering the assessment in the objection or appeal stage.

[25]          Associate Chief Judge Bowman commented in Mungovan v. The Queen,[9] that "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." In an appeal the taxpayer is fighting an assessment of money. In Johnston v. M.N.R.,[10] the Supreme Court of Canada explained that:

. . . since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact . . . he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. . . . but the onus was his to demolish the basic fact on which the taxation rested.

[26]          The Crown has a serious obligation to set out honestly and fully the actual assumptions upon which the Minister acted in making the assessment, whether they support the assessment or not. Pleading that the Minister assumed facts that he could not possibly have assumed is not a fulfilment of that obligation.[11]

[27]          Subparagraphs 10(q), (r) and (z) of the Reply, ought to be expunged. It is not true that "in assessing, the Minister assumed" the facts the Attorney General stated the Minister assumed in these provisions. This is, to my mind, an abuse of the process of the Court. The assessment process may include both the making of the assessment and the reconsideration of the assessment that may lead to a confirmation of the assessment[12] but reference to an assessment itself is a reference to an administrative act distinct from a confirmation.[13]

[28]          I am more than somewhat disturbed that the Attorney General constantly includes conclusions of law among the facts purportedly assumed by the Minister in assessing. Subparagraph 10(z) is one of these conclusions of law that has no place among the Minister's assumed facts and should be expunged in any event.

[29]          The Crown is not restricted in its Reply to alleging only facts the Minister assumed in assessing, as is its tendency. In accordance with subsection 49(1) of the Rules, a Reply shall state not only "the findings or assumptions of fact made by the Minister when making the assessment" but also "any other material fact". There is no reason the Attorney General could not have stated the facts in subparagraphs 10(q) and (r) elsewhere in the respondent's Statement of Facts of the Reply.

[30]          The applicant's application to expunge the other portions of the Reply must fail.

[31]          Until the Supreme Court decision in Continental Bank, supra, the general view was that the Crown could plead new reasons to support an assessment, but it would bear the onus of proof regarding any facts not assumed at the time of the assessment.[14]

[32]          Continental Bank of Canada was assessed tax for several reasons. Before the Supreme Court, the Crown argued for the first time that the taxpayer had sold depreciable leasing assets or that the taxpayer was otherwise liable for recaptured capital cost allowance under subsection 88(1) of the Act. No evidence relating to the Minister's new argument was adduced at trial. Bastarache J. held that the Minister should not be permitted to raise new arguments in the Supreme Court "simply because other arguments failed in the courts below".[15] This is not new law; parties cannot raise new arguments in an appellate court in respect of which the other party had no opportunity to call evidence at trial.[16] He concluded that "to allow the appellant to proceed with its new assessment without the benefit of findings of fact made at trial would require this Court to become a court of first instance with regard to the new claim".[17] McLachlin J., as she then was, also refused to entertain an argument raised for the first time in the Supreme Court. She agreed that the Minister should not be allowed to advance a new basis for a reassessment after the limitation period has expired.[18]

[33]          In Continental Bank, Bastarache J. approved the reasons of the Federal Court in The Queen v. McLeod.[19] The facts before me are quite different from those in McLeod, where Collier J. rejected the Crown's motion for leave to amend pleadings to include a new statutory basis for the assessment. He held that the Crown's attempt to plead a new section of the Act was, in effect, an attempt to change the basis of the assessment appealed from and "tantamount to allowing the Minister to appeal his own assessment, a notion which has specifically been rejected by the courts". In the application at bar there has been no application by the Crown to amend pleadings to change the basis of the assessments.

[34]          In any event, as a result of Continental Bank, Parliament enacted subsection 152(9) "to ensure that the Minister of National Revenue may advance an alternative argument in support of an income tax assessment after the normal reassessment period has expired".[20]

[35]          Subsection 152(9) reads as follows:

The Minister may advance an alternative argument in support of an assessment at any time after the normal reassessment period unless, on an appeal under this Act	Le ministre peut avancer un nouvel argument à l'appui d'une cotisation après l'expiration de la période normale de nouvelle cotisation, sauf si, sur appel interjeté en vertu de la présente loi:
(a) there is relevant evidence that the taxpayer is no longer able to adduce without the leave of the court; and	a) d'une part, il existe des éléments de preuve que le contribuable n'est plus en mesure de produire sans l'autorisation du tribunal;
(b) it is not appropriate in the circumstances for the court to order that the evidence be adduced.	b) d'autre part, il ne convient pas que le tribunal ordonne la production des éléments de preuve dans les circonstances.

[36]          The limitations found in paragraphs 152(9)(a) and (b), according to the Technical Notes of the Department of Finance, "are intended to import the Court protection afforded to taxpayers that an alternative argument cannot be advanced to the prejudice of the right of a taxpayer to introduce relevant evidence to rebut the argument".[21]

[37]          Applicant's counsel acknowledges that by virtue of subsection 152(9) of the Act the Crown "can raise a new, that is alternative ground and in doing so allege new facts and submit additional statutory provisions to support an assessment even after the expiration of the normal assessment period", but adds that the Crown cannot raise a new basis to assess the taxpayer to tax without issuing a new assessment within the normal reassessment period.

[38]          The term "normal reassessment period" for a taxpayer is defined in subsection 152(3.1):

For the purposes of subsections (4), (4.01), (4.2), (4.3), (5) and (9), the normal reassessment period for a taxpayer in respect of a taxation year is	Pour l'application des paragraphes (4), (4.01), (4.2), (4.3), (5) et (9), la période normale de nouvelle cotisation applicable à un contribuable pour une année d'imposition s'étend sur les périodes suivantes:
(a) where at the end of the year the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation, the period that ends 4 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year; and	a) quatre ans suivant soit le jour de mise à la poste d'un avis de première cotisation en vertu de la présente partie le concernant pour l'année, soit, s'il est antérieur, le jour de mise à la poste d'une première notification portant qu'aucun impôt n'est payable par lui pour l'année, si, à la fin de l'année, le contribuable est une fiducie de fonds commun de placement ou une société autre qu'une société privée sous contrôle canadien;
(b) in any other case, the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year and the day of mailing of an original notification that no tax is payable by the taxpayer for the year.	b) trois ans suivant le premier en date de ces jours, dans les autres cas.

[39]          The Minister is restricted by subsection 152(4) of the Act from reassessing or making additional assessments after the taxpayer's "normal reassessment period", as defined in subsection 152(3.1). In certain cases, however, the reassessment record may be extended by three years to either six or seven years to take into account the effect of a deduction claimed in respect of losses, tax credits or other deductions carried back from later taxation years, for example: paragraph 152(4)(b).[22]

[40]          Subsection 152(4.01) limits the circumstances in which the Minister can reassess where a reassessment to which paragraphs 152(4)(a) or (b) applies is made beyond the taxpayer's normal reassessment period.

[41]          When a taxpayer objects to an assessment the Minister is to reconsider the assessment with all due dispatch in accordance with subsection 165(3) of the Act. Subsection 165(3) states:

On receipt of a notice of objection under this section, the Minister shall, with all due dispatch, reconsider the assessment and vacate, confirm or vary the assessment or reassess, and shall thereupon notify the taxpayer in writing of the Minister's action.

Sur réception de l'avis d'opposition, le ministre, avec diligence, examine de nouveau la cotisation et l'annule, la ratifie ou la modifie ou établit une nouvelle cotisation. Dès lors, il avise le contribuable de sa décision par écrit.

[42]          The Minister must consider the facts alleged in the Notice of Objection as well as any statutory provisions relied on by the taxpayer. The Minister must also take into account any case law that has been decided after the issuance of the assessment. Surely, if case law is in favor of the taxpayer, a new assessment ought to be issued. On the other hand, if new case law favors the fisc, then the assessment ought to be confirmed. The Minister's hands should not be tied when considering an assessment under objection. The objection stage grants the opportunity to the Minister and the taxpayer, frequently for the first time, to make their respective positions known. The Minister may learn more about the issues that lead to the assessment and may reassess, vary or vacate the assessment in favor of the taxpayer or confirm the assessment because he or she is satisfied the assessment was issued for proper reasons. Indeed, the Minister may even have found greater support for the assessment. If the Minister confirms the assessment, the Minister gives the taxpayer the basis for the confirmation in the Notification.

[43]          While the Minister considers the assessment the limitation periods in subsections 152(4) and (4.01) are stayed: subsection 165(5). Parliament recognizes that the Minister may have to vary or vacate the assessment under objection or reassess or confirm the assessment and the Minister should not have to fight a deadline. However, since the confirmation is part of the assessment procedure, it is only common sense that the limitations in subsections 152(4) and (4.01), which include the normal reassessment period, be suspended until one of the four actions described in subsection 165(3), including a confirmation, is made by the Minister.

[44]          In the application at bar, the Minister informed the applicant of the basis of the confirmations. The applicant knew the basis of the confirmation before litigation commenced. In its Notice of Appeal the applicant answered to the basis of the confirmation contained in the Notifications. Thus, it cannot be said that the applicant is not in a position to advance the relevant evidence that the expenses were incurred to acquire seismic data that qualify as CEE. This is not a situation where the Minister is seeking to substitute a reassessment because the first reassessment did not succeed.[23] The Minister's new basis for the reassessments was determined as part of the assessment process and was made within the normal reassessment period of the taxpayer for the year. The limitations improved under subsections 152(4) and (4.01) include both the normal reassessment period and an extended period. These time limits do not apply when a Notice of Objection has been filed. The taxpayer's normal reassessment period for 1991 had not expired. Thus, I need not concern myself with whether the basis of the confirmations in issue was an alternative basis for the reassessments or an alternative or new argument in support of the reassessments.

[45]          I see no reason why the other provisions of the Reply that the applicant wished to have expunged cannot remain. In the main, the facts set out in these provisions are material facts or submissions related to these facts. The Minister informed the taxpayer of the basis of the confirmations of the reassessments, the applicant denied the basis of the confirmations in its Notice of Appeal and during the trial of the appeals the applicant will be able to adduce the relevant evidence.

[46]          At the conclusion of her submissions, counsel for the Crown requested that if the assumptions of fact in paragraph 10 of the Reply are expunged, the Crown be given leave to amend the Reply to include these facts "outside the assumptions". The applicant's submissions related only to its application. I am therefore reluctant to grant the Crown leave to amend without the benefit of the applicant's representations. The respondent should therefore obtain the consent of the appellant or seek leave to amend pursuant to section 54 of the Rules. This should be done as expeditiously as possible so that the discoveries may continue without much further delay.

[47]          Costs shall be in the cause.

Signed at Ottawa, Canada, this 23rd day of September 2002.

"Gerald J. Rip"

J.T.C.C.COURT FILE NO.:                                   2000-2864(IT)G

STYLE OF CAUSE:                                               Anchor Pointe Energy Ltd. v. The Queen

PLACE OF HEARING:                                         Ottawa, Ontario

REASONS FOR JUDGMENT BY:      The Honourable Judge Gerald J. Rip

DATE OF JUDGMENT:                                       September 23, 2002

APPEARANCES:

Counsel for the Appellant: Craig C. Sturrock

Counsel for the Respondent:              Wendy Burnham

                                                                                Deborah Horowitz

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Craig C. Sturrock

                                         

Firm:                  Thorsteinssons

                                          27th Floor, 3 Bentall Centre

                                          595 Burrard Street

                                          Vancouver, British Columbia V7X 1J2

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-2864(IT)G

BETWEEN:

ANCHOR POINTE ENERGY LTD.,

Applicant,

and

HER MAJESTY THE QUEEN,

Respondent.

Motion heard on August 7, 2002, at Ottawa, Ontario, by

the Honourable Judge Gerald J. Rip

Appearances

Counsel for the Applicant: Craig C. Sturrock

Counsel for the Respondent:              Wendy Burnham

                                                                                Deborah Horowitz

ORDER

                Upon motion by counsel for the applicant to have certain portions of the Reply to the Notice of Appeal expunged in accordance with section 53 of the Tax Court of Canada Rules (General Procedure);

                Upon reading the Affidavit of Ola S. Juvkam-Wold, filed;

                And upon hearing what was alleged by the parties;

                It is ordered that subparagraphs 10(q), (r) and (z) of the Reply to the Notice of Appeal be expunged. Costs shall be in the cause.

Signed at Ottawa, Canada, this 23rd day of September 2002.

"Gerald J. Rip"

J.T.C.C.