Date: 20010330
Docket: T-2072-87
T-2073-87
T-2074-87
T-2075-87
Neutral Citation: 2001 FCT 265
Between:
VANCOUVER ART METAL WORKS LTD.,
Plaintiff,
- and -
HER MAJESTY THE QUEEN,
Defendant.
REASONS FOR JUDGMENT
Muldoon, J.
This is an appeal pursuant to subsections 165(7), 169 and 172(2) [Repealed by R.S.C. 1988, Chap. 61, s. 18(1)] of the Income Tax
Act, R.S.C. 1952, Chap. 148, as am. ("the Act") from the decision of the Audit Division - Canada Customs and Revenue Agency (CCRA). The plaintiff seeks to have the reassessment of the 1983 taxation year referred back to the Minister of National Revenue for reconsideration on the basis that the gains realized by it from the disposition of managed investments constitute capital gains and not income from a business.
Facts
[1] Prior to 1976, the plaintiff owned all of the shares in Coast Steel Fabricators Ltd.; it was a business in which the plaintiff was actively employed. The plaintiff earned dividends from said shares, thus distributing a portion to the shareholders and retaining the remainder to acquire investments for the benefit of the plaintiff. In 1974, the plaintiff entered into an agreement with Trend Management Ltd. (Trend) whereby Trend would administer some of the investments for a fee. In 1976, all the shares of the plaintiff were sold because the shareholders wished to retire. The proceeds of this sale were also used to acquire investments. In 1978, the original agreement with Trend Management Ltd. was terminated and a new agreement was made, whereby management of the investments was assumed by Trend for a fee on the basis of a five year term.
[2] Between 1975 and 1986, the plaintiff placed various amounts of money on deposit with Trend for investment purposes, the plaintiff received a gross income from the investments and realized fluctuating capital gains and capital losses as a result of the disposition of the Trend managed investments.
[3] In 1977, the plaintiff disposed of a Canadian security and elected to have the rules expressed in subsection 39(4) of the Income Tax Act, apply in regard to every Canadian security owned by it in that year or any subsequent taxation year. In the taxation year in question, 1983, every investment managed by Trend on behalf of Vancouver Art Metal Works Ltd. constituted a Canadian security as defined by the Act.
[4] Respecting the taxation years between 1982 and 1985, the Minister of National Revenue informed the plaintiff that reassessments of said claims had occurred on the basis that the gains and losses realized on the disposition of the Trend managed investments constituted income and losses from a business, and not capital gains and capital losses as reported by the plaintiff. The latter served the Minister, in 1986, with a Notice of Objection in relation to the 1983 taxation year reassessment. The further reassessment conducted in accordance with the said objection indicated that the Minister of National Revenue had again determined that the gains realized by the plaintiff from the disposition of the Trend-managed investments constituted income from a business.
[5] In 1993, the Federal Court of Appeal determined that the words "‘trader or dealer in securities' are broad enough to include anyone other than a person engaged in an adventure or concern in the nature of trade." Thus, if deemed to be a "trader" and carrying on a business, the plaintiff faces the possibility of losing the election right under subsection 39(4) of the Act.
[6] The question now remains whether the plaintiff was carrying on a business and is subject to treatment as for income and losses from a business, or involved in an adventure in the nature of trade and therefore able to claim capital gains and capital losses from the disposition of the Trend-managed investments.
[7] At the examination for discovery held 19 February 1999, Mr. Peter Ling, CCRA auditor, admitted that during the tax reassessment he considered the 1983 gains realized from the disposition of the Trend investments to result from an adventure in the nature of trade. This could potentially dispose of the present matter. At the trial on 26 January 2000, the plaintiff's counsel read this portion of the discovery into evidence at the trial and closed the plaintiff's cases. He subsequently argued that such an admission is formal and renders the lis of the trial null. At the continuation of the trial on 13 July 2000, Mr. Ling stated that he had misunderstood the discovery questions and had, therefore, been mistaken in his answers. (Trial transcript, vol. 2: p. 247 lines 5-20; pp. 261-62 to line 3; p. 315 lines 15-22; p. 322 line 8 to end; p. 323 to line 8; pp. 323-324-325). This Court would never mock the witness, but for an assessment of his credibility, it is significant to note that, as recorded in the trial transcript, p. 321, Mr. Ling did acknowledge that English is his "second language" and not his "mother tongue". This he answered to the question: "Were you still confused, Mr. Ling?". Such admissions do not instill confidence in his testimony's accuracy and responsiveness. In support, the Minister asserted that an admission made at discovery is informal and that the defendant should, therefore, be permitted to rebut Mr. Ling's statement with further evidence. If this be so, the admission must then be considered in conjunction with the other evidence presented, and should not be taken as determinative of the issue. Moreover, the Minister asserted that if the defendant is bound by the contents of the admission, then the Minister must be allowed to amend the statement of defence to include an alternative explanation of the issues.
ISSUE 1
Whether an admission made during an examination for discovery is defined as "formal" or "informal" and the subsequent effect of that definition on the proceedings.
Text
[8] The Law of Evidence in Canada[1] defines a formal admission as "made for the purpose of dispensing with proof at trial." (That was once considered to be one of the purposes of discovery, itself.) Thus, it is, or ought to be, conclusive with regard to the matters admitted. The authors note that where a formal admission is made, all other evidence is precluded as being irrelevant. There are five circumstances under which a formal admission may be constituted. They are: 1) a statement made in the pleadings or by a failure to deliver pleadings; 2) by an agreed statement of facts filed at trial; 3) by an oral statement made by counsel at trial or counsel's silence in the face of statements made by opposing counsel on which the judge is to rely; 4) by a written response of a party's counsel prior to trial; and 5) by a reply or failure to reply to a request for an admission of facts (971).
[9] Formal admissions are starkly contrasted with informal admissions which are admitted into evidence as an "exception to the hearsay rule and [do] not bind the party making it, if it is overcome by other evidence."
[10] Cross and Tapper on Evidence[2] notes that "unlike formal admissions, informal admissions are an item of evidence. Their maker may endeavour to explain them away at the trial at which they are proved" (77).
[11] Phipson on Evidence[3] further contrasts the two categories by stating that formal admissions are usually in a written form. The author further illustrates the difference:
the depositions of viva voce testimony of a party's witnesses, even when printed in the appendix to a case ... are not receivable against such a party in subsequent proceedings as admissions. (723)
[12] The 1988 text, Evidence[4], provides perhaps the most succinct definition of an informal admission and its potential effect on the conduct of a party at trial. It is stated that:
at trial the party who made an informal admission may always adduce evidence to explain or contradict it. The circumstances in which the admission was made may deprive it of any probative value. (482)
Here a danger of logic resides in according reverence to the formality of a statement, while discounting its probative value even though its truth is supported by solemn affirmation or oath.
Law
[13] The most persuasive information regarding the use of admissions made during an examination for discovery at trial is found in the Federal Court Rules, 1998 (Rules) and the related jurisprudence. Specifically, rule 288 states:
Reading in examination at trial - A party may introduce as its own evidence at trial any part of its examination for discovery of an adverse party or of a person examined on behalf of an adverse party, whether or not the adverse party or person has already testified.
The reference to the introduction of the examination for discovery as "evidence" indicates that the rules deem an admission made under the circumstances of an examination for discovery as informal. This is due to the fact that they have not been made in a manner in "which a party has expressly caused to be made or knowingly used as true, in a judicial proceeding, [those admissions] for the purpose of proving a particular fact ... " (Phipson, 15th ed. at 723). This view is supported in the recent jurisprudence. So, one is made to wonder how a party's or a designated substitute's testimony expressed on oath, or solemn affirmation, ever got to be taken as merely informal, and not binding. Is this judge's outlook "old fashioned"?
[14] In the brief order of Canada v. Crosson, [1999] F.C.J. No. 223 (F.C. T.D.), Evans, J. stated:
when a party reads into the evidence the examination for discovery of an opponent's witness, any statements that it contains that are adverse to the party become a part of the evidence in the case, but evidence that must be weighed with the totality of the evidence.
This suggests that evidence may be presented which has the potential to contradict that which was revealed on discovery. This denotes a view that such a process is informal and, therefore, subject to contradiction. Does it matter that it is, as specified, "an opponent's witness", as distinct from the opposing party himself or herself, or a deputy minister?
[15] Perhaps the clearest explanation as to why admissions made on discovery are seen as informal is to be found in Dennison Manufacturing Co. of Canada Ltd. v. DYMO of Canada Ltd.(1975), 23 C.P.R. (2d) 155 (F.C. T.D.). In his reasons, Mahoney, J. emphasised that "admissions obtained on examination for discovery are not voluntary; they are obtained by lawful coercion." Because an essential component of "formal" admissions is that they must be made voluntarily, this statement unequivocally asserts that "formally" is not how admissions made during discovery are to be viewed, even although made on oath or solemn affirmation.
[16] The learned judge went on to quote Middleton, J. of the Ontario Supreme Court in Graydon v. Graydon (1921), 67 D.L.R. 116, with regard to the purposes of the examination for discovery:
It is primarily for the purpose of enabling the opposite party to know what is the case he is to be called upon to meet, and its secondary and subsidiary purpose is to enable the party examining to extract from his opponent admissions which may dispense with more formal proof at the hearing. (117-18)(emphasis added)
Middleton, J. made a further point of stating that
an examination for discovery is not, and is not intended to be, a cross-examination at all ... Discovery is intended to be an engine to be prudently used for the extraction of truth, but it must not be made an instrument of torture ... (118)
These clever observations indicate that the process of an examination for discovery must not be viewed with the same rigidity as that with which one views a cross-examination, and/or that the examined person does not need to regard his or her own promise to speak the truth with much, or any, solemnity.
[17] In the mid-1980's, Mr. Justice Strayer of the Federal Court Trial Division had the opportunity to address this unusual issue again on several occasions. The first was in Amfac Foods Inc. v. Irving Pulp & Paper, Ltd., [1984] F.C.J. No. 105. As there was some question as to how certain admissions, made in various forms, were to be qualified, Strayer, J. dealt with the distinction. In concordance with text discussions, it was determined that "formal" admissions, such as those presented in affidavits, cannot be contradicted by evidence at trial. However, in almost the same situation as exists in the present case, the assertion by counsel that a "clear admission in the examination for discovery" means that "no further evidence could be received to contradict these admissions", was not a view adopted by the Court.
As regards the "admissions" in the examination for discovery, I held that as informal admissions they could be qualified, enlarged upon, or even contradicted by evidence in court. (12)(emphasis added)
[18] Strayer, J., in Preston v. 20th Century Fox Corp. (1987), 15 F.T.R. 54 (F.C. T.D.), also addresses the issue of admissions made during an examination for discovery.
It should also be kept in mind that admissions made on examination for discovery are informal only and can be amplified or even contradicted by the plaintiff by further evidence in court.
Why should an oath or solemn affirmation complicate matters?
[19] The Federal Court of Appeal in F.P. Bourgault Industries v. Flexi-Coil Ltd. (1990), 35 C.P.R. (3d) 154, reiterated the position of Strayer, J. In discussing why it would not accept the admissions made by the respondent on discovery as determinative of the issue, the Court stated that "the tenor of the testimony was not so clear and obvious as claimed by the appellant." (Perhaps it is only a matter of opinion upon which reasonable persons could differ.) It was determined that the respondent should be given the opportunity to bring evidence that could potentially contradict the admissions made on discovery. One wonders, why bother with discovery as it is known, if the witness can always be excused from speaking the truth? Perhaps counsel should be more adept at presenting "clear and obvious" issues upon which to posit issues.
Conclusion
[20] Although witnesses examined during the discovery process solemnly promise to tell the truth, they are not being cross-examined nor are they purposely creating a document which, in their minds, will be used conclusively to dispense with the issues at trial. Thus, what is created in the examination is merely a detailed description of the events which preceded and followed that which led to the trial. Some good folks say that it is not testimony. If one party intends to provide the other with statements for the purpose of proving the issues in question, he, she or it must utilize such "formal" means as, inter alia, affidavits, written admissions and statements made during cross-examination. Thus, the admissions will then be in such a form as the witnesses may expect that the evidence will be used against them. But, of course, the party being discovered (as they say) has put before the Court his, her or its pleadings with no hope or expectation that such pleadings will be treated with the kind of insincerity now becoming possible on examination for discovery.
[21] As the use of an examination for discovery at trial is entirely within the discretion of opposing counsel, witnesses cannot expect that statements will be used against them nor can they expect that such statements will outweigh their actual testimony. Thus, the treatment of such statements made during discovery must be informal and allowed to be contradicted by further evidence as they cannot be viewed with the same weight as an affidavit or letter of admission. This is the view which has been increasingly enunciated in the Federal Court Trial Division and is supported by the Federal Court of Appeal. The courts have made it apparent that adverse statements made during discovery are to be afforded no more weight than the rest of the evidence. One wonders why solemn oaths and affirmations are accorded such little weight as to be disregarded, as if riddled with insincerity.
[22] Based on the information gleaned from the available texts, legislation and jurisprudence, it would appear that the admissions made by the Minister's representative, Mr. Ling, during the examination for discovery are informal. Thus, high judicial authority suggests that the Crown is not bound by their contents, and, thus, should be permitted to present contradictory evidence at trial. Does that assertion not mock the solemnity of the deponent's oath or affirmation? What high purpose is served by permitting anyone - or everyone - to contradict sworn or affirmed testimony?
[23] One purpose, which is unworthy of the testimony's solemnity, is to permit the deponent to deceive the opposite party, simply because adhering to the sworn truth has become inconvenient and the deponent wishes to wriggle out of being bound by sworn or affirmed testimony. This purpose is based on deceit, and is plainly unconscionably, injuriously mischievous. This purpose is insupportable, especially if the contradictory intent be sprung on the examining party after the trial has been opened. The judge who permits such conduct by a party seems truly to be permitting dilution of the solemnity of the judicial function, unless the law be clearly otherwise stated and known. The circumstances here ought to be considered with care.
[24] The actual testimony offered by Mr. Ling ought to be examined. It is of course voluminous and indeed, too voluminous simply to be inserted into the Court's reasons for judgment and so, some of it appears at the end of these reasons in the appendices. All of the cross-examination transcript in volume 2, to line 20 on page 325 is illuminating and illustrates the Court's conclusions on the witness' testimony. It must be understood that he was testifying after an 18 year gap. The Court regrets that by the end of the trial Mr. Ling's credibility was seriously damaged. The defendant's case is also seriously damaged and the Court rejects the witness' testimony as not believable.
ISSUE 2
Whether the respondent ought to be able to amend its pleadings to include an alternative explanation once the trial has commenced and the plaintiff has rested if the respondent be bound by the admissions made on discovery.
Text
[25] With regard to the amendment of pleadings, Federal Court of Canada: a manual of practice states that the principles to be applied in granting or refusing leave, within a wide purview, are a matter of judicial discretion which must be exercised with consideration of the particular circumstances of the case. In making the motion, the onus is on the applicant to demonstrate that the specific circumstances warrant the granting of leave. Essentially, this involves the applicant showing how the position of having to amend arose. While leave to amend pleadings is often sought during the early stages of the proceedings, the situation has arisen, as in the present case, where a party has sought to amend during the more advanced phases of the action. However, it must be noted that "an amendment has been refused at a late stage of a lawsuit because it was not necessary to bring out the real question between the parties" (Jackett at 56).
Law
[26] The Rules again provide particular guidance in this area. Rules 75 and 76 must be read together to gain a greater understanding of what will be permitted and when.
75. (1) Amendments with leave - Subject to subsection (2) and rule 76, the Court may, on motion, at any time, allow a party to amend a document, on such terms as will protect the rights of all parties.
(2) Limitation - No amendment shall be allowed under subsection (1) during or after a hearing unless
(a) the purpose is to make the document accord with the issues at the hearing;
(b) a new hearing is ordered; or
(c) the other parties are given an opportunity for any preparation necessary to meet any new or amended allegations.
76. Leave to amend - With leave of the Court, an amendment may be made
(a) to correct the name of a party, if the Court is satisfied that the mistake sought to be corrected was not such as to cause a reasonable doubt as to the identity of the party, or
(b) to alter the capacity in which a party is bringing a proceeding, if the party could have commenced the proceeding in its altered capacity at the date of commencement of the proceeding,
unless to do so would result in prejudice to a party that would not be compensable by costs or an adjournment.
[27] The jurisprudence relating to the amendment of pleadings is also quite illuminating. Should the respondent seek to amend the pleadings, the applicable test is outlined in Canderel Ltd. v. Canada, [1994] 1 F.C. 3 (C.A.), where it was determined that an amendment should be allowed at any stage of an action. However, it cannot be permitted to cause injustice to the other party. Furthermore, while an amendment may be sought at any stage, the closer a party is to the end of a trial the more difficult it will be to demonstrate that the proposed amendment will not result in an inequity. This position was followed by the Federal Court of Appeal in Andersen Consulting v. Canada, [1998] 1 F.C. 605. The principles of reasonability are exposed in paragraphs [14] and [15] on p. 612. Justice and flexibility are key concepts here.
[28] Beloit Can. Ltd. v. Valmet Oy (1986), 7 C.I.P.R. 205 (F.C.A.), is pivotal in relation to the immediate case as it states that once all the evidence has been entered at trial and counsel are prepared to begin argument, it is too late to seek leave to amend the pleadings. Here the plaintiff was prepared to begin argument after counsel introduced the discovery extracts, and closed his case. Then the defendant's counsel sought to amend his pleadings, and there seemed no powerful reason to refuse an amendment at that time. But now the feeble credibility of the defendant's auditor on discovery makes the proposed amendments not believable, and not just.
[29] The judgment of the Court of Appeal in The Queen v. Furukawa, 97 DTC 5117, rendered by Stone, J.A. is instructive. It was an appeal from the Tax Court of Canada whose judgment had determined that shares of Lumberton Mines Ltd. issued to the respondent were "flow-through shares" within the meaning of paragraph 66(15)(d.1) of the Income Tax Act and that they were not "prescribed shares" under subparagraph 6202.1(2)(b)(i) of the Income Tax Regulations. In computing his income for the 1992 taxation year the respondent was therefore allowed to deduct $7,500 as Canadian exploration expenses which had been renounced by the corporation. Mr. Justice Stone continued as follows:
The learned Tax Court Judge did not in his written reasons take up the appellant's contention that the shares in question were not "flow-through shares" because they were "prescribed shares" under subparagraphs 6202.1(1)(b)(iii) or (iv)3 of the Regulations. It is clear from the transcript of the proceedings that he confined the submissions of the parties to the applicability of subparagraph 6202.1(2)(b)(i) because, in his view, at the examination for discovery of the appellant's witness the respondent had succeeded in narrowing the issue for trial to that of whether the shares were "prescribed shares" under that subparagraph. The issue in this appeal is whether the Tax Court Judge erred in so ruling.
***
Upon examination of the appellant's witness for discovery, three letters written by the witness to the respondent became the focus of counsel's questions4. At pages 57-58 of the Appeal Book the following exchange appears:
And you explained to us, in the letters, that these are considered proscribed [sic] shares because of the attachments to the shares, as detailed in the 1991 share offering. You lay out the four conditions, you tell me the sections of the Act, you tell me, and then you tell me that these benefits were conferred at no cost, and that is the basis of your assessment, here, on your assumptions, here, that these were not flowthrough shares.
A. Correct, yes.
Q. Okay, and to the best of your knowledge, that hasn't change? [sic]
A. Yes, that is -
Q. - that is still the Minister's position.
A. That is correct. Yes.
This was followed a little later by a further exchange, at page 59 of the Appeal Book:
Now, sir, you didn't - the information that is contained in this letter, was all gathered from the information that was provided to you by Mr. Hoi, correct?
A. That is correct.
Q. And you are aware that the position that was formulated by Mr. Hoi was done through discussion with people at head office, correct?
A. Yes.
Q. And Mr. Hoi, then, advised you, this is the legal argument on the basis of which you are re-assessing. And you looked at the secitions [sic] of the Act, that he cited to you, and you said to Mr. Furukawa, "Here is a section of the Act, Mr. Furukawa, and here are the facts, and this is the basis of the reassessment", correct?
A. Yes, yeah.
Q. To the best of your knowledge, none of that has changed.
A. That is correct. Yes.
In Johnston v. Minister of National Revenue, [1948] S.C.R. 486, at pages 489-490, Rand, J. explained the function of the pleadings in income tax litigation, when he stated for the majority:
The allegations necessary to the appeal depend upon the construction of the statute and its application to the facts and the pleadings are to facilitate the determination of the issues. It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of facts and rulings of law which have given rise to the controversy.
While it is not disputed that one of the purposes of an examination for discovery is to narrow the issues as pleaded5, we are not satisfied that the respondent succeeded in doing so in the case at bar. The questions and answers revolved around the significance of certain statements made in the correspondence, and were at best ambiguous. The questions put to the witness referred in a general way to a "section" or "sections" "of the Act", rather than to the provisions of the Regulations that had been specifically pleaded. If the intention of the respondent was of seeking to cut down the scope of the pleading, in our view it was incumbent upon that party to draw from the appellant's witness such concession as clearly had that effect. That objective could no doubt have been accomplished in a variety of ways, but the method chosen must have had the clear effect of narrowing the issues as defined by the pleadings. In our view, the questions put to the appellant's witness at the examination for discovery and the answers elicited thereby did not have that effect. The Tax Court Judge erred in ruling that they did.
This Furukawa decision is dated January 20, 1997. This Court declines to permit the defendant to amend the statement of defence to allege that the plaintiff was carrying on a business - following in so doing the judgment of the Court of Appeal in The Queen v. Canderel Limited, 93 DTC 5357 (F.C.A.).
[30] This case was well argued by counsel on both sides. The Court was however much persuaded by the arguments of the plaintiff's counsel, which are recorded particularly in trial transcript volume 3, at p. 448 (line 6) and proceeding through to p. 464 (line 24). This Court adopts and ratifies counsel's arguments on the plaintiff's behalf as so recorded, as if they were included in the Court's reasons for judgment.
[31] There is one other article of written argument which this Court is inclined to adopt and ratify and does so in the reasons for judgment in these cases: T-2072-87, T-2073-87, T-2074-87 and T-2075-87. It is the Plaintiff's Argument Re: Procedural Issues filed June 30, 2000. Appendix B.
[32] Several other recent cases further illustrate the criteria to be considered. Merck Frosst Can. Inc. v. Canada (Min. of Health) (1997), 76 C.P.R. (3d) 468 (F.C.T.D.), states that one must examine whether an amendment would assist in the determination of the real issues and whether it would be prejudicial to either of the parties if it were allowed.
[33] Hoechst Aktiengesellschaft v. ADIR (1998), 82 C.P.R. (3d) 344 (F.C. T.D.), notes that amendments should only be denied where the matter is beyond doubt. Where the governing law is not settled with certainty, the matter is to be seen as still in question and the amendment should then be permitted. The Canderel judgment has imparted much certainty to this matter even since August, 1993. This is no case for further delay without incurring costs.
[34] In Nidek Co. v. Visx Inc. (1998) 234 N.R. 94 (F.C.A.), the Court found that no matter how lengthy the delay or careless an omission, if the proposed amendment can be made without prejudice to the opposing side it ought to be allowed. This is especially so if any resulting prejudice could be compensated for in costs. It truly does not appear to this Court that the defendant's proposed amendments to the statement of defence could be effected without prejudice to the plaintiff, and so the plaintiff's counsel asserts.
Conclusion
[35] While it is unlikely that the plaintiff would suffer any injustice if the proposed amendment to add an alternative explanation to the statement of defence was allowed, the timing provides additional concerns. As it was suggested in the midst of the trial after the plaintiff presented its evidence and rested, it is arguable that one ought to follow the lead of the Federal Court of Appeal in Beloit Can. Ltd. and deny the amendment due to the advanced stage of the action. The judge's discretion, for the reasons above discussed, inclines against permitting the amendments to the defendant's pleadings so as to avoid injustices against the plaintiff, at this late stage of the trial[5]. The defendant's proposed amendments to the pleadings shall not be permitted.
[36] The defendant has conceded, as the Court now confirms, that a proper election under subsection 39(4) was made.
Capital Gains or Income
[37] The plaintiff's counsel in argument characterized these cases as "your everyday garden variety capital gains versus income case, the subject matter of the transactions being securities, i.e. mutual funds." (trial transcript: volume 3, page 445, line 17 et seq.)
[38] The plaintiff's counsel further explained the plaintiff's cases in this manner:
Now, that so-called garden variety capital gains case is complicated somewhat by virtue of these peripheral issues, one being the question of the admissions made on the discovery and the other being this peripheral question regarding whether or not one of the assessments, that the so-called Part III assessment is statute barred by being outside the limitation date.
If Your Lordship should conclude that the gains in question are capital gains, then these other issues all become academic, because there is no liability under Part III and therefore the timing question, the statute barred issue is academic. And then, of course, it would be irrelevant and I would suggest unnecessary to even determine whether or not the admission made by Mr. Ling binds the Minister to that position, i.e. the assumption upon which the assessment is made.
If Your Lordship should find that the Minister is not bound by that admission but should still find as a matter of fact that the gains are not on capital account, are adventures in the nature of trade, then of course they're deemed to be capital gains anyway, because that makes the election good, all three requirements then having been met: Firstly Canadian securities as agreed by the parties; and secondly the making of the election, in this case not by prescribed form because it didn't exist at that time, but simply by virtue of filing, which has been accepted by the Minister here as being the appropriate making of the election under these particular circumstances in this time frame; and then thirdly, if these are not on capital account but are adventures in the nature of trade, then of course that's the third requirement for the so-called lifetime capital gains election under section 39(4) of the Act. (trial transcript: vol. 3, pp. 445-47)
[39] The plaintiff's argument is recorded in very concentrated form right through to p. 497 of volume 3 of the transcript. The Court has compared and contrasted the respective arguments of counsel and, giving care and attention to what was alleged by counsel, finds the plaintiff's counsel's submissions to be correct and therefore persuasive. The Court adopts the plaintiff's submissions by counsel as if they were incorporated into these reasons. The Court finds the gains to be capital gains.
[40] In cases in which the Court is obliged to determine if activities constitute carrying on a trade or business, each determination must stand on its own particular facts. As counsel pointed out, such cases are "fact driven". Most important are the words and thoughts of our Court of Appeal recorded in the earlier Vancouver Art Metal Works decision in the Court's conclusion, p. 5120:
In conclusion, a taxpayer does not necessarily lose his election right under subsection 39(4) when he buys and sells securities for his own account. However, he loses such right to elect when he becomes a trader or dealer. That is to say when he professionally engages in the business of dealing in securities, or when his dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade.
This Court accepts counsel's submission that the plaintiff fits within that category of investor's transactions, or adventures, or concerns in the nature of trade - transactions which are on capital account - known well in the plaintiff's history of transactions. The Court expressed it as "adventures or concerns in the nature of trade".
[41] Counsel's submissions are too long to recite, or just to summarize here, so the Court thoughtfully adopts them, as recorded through to p. 497 of volume 3.
[42] In action T-2072-87 there is an issue of Part III tax which was assessed against the plaintiff, Vancouver Art Metal Works Ltd. At the outset of the argument, the defendant's counsel stated:
If it is found that the plaintiff properly reported its revenue from mutual fund sales as capital gains, then it is conceded by the defendant that there is no tax owing under Part III of the Income Tax Act and the plaintiff should be successful on that particular file. (Trial transcript: vol.3, page 422).
[43] The defendant argues, however, that if the defendant properly re-assessed the plaintiff for gains on account of income, then the issue regarding Part III tax is whether or not the re-assessment were effected within the time prescribed by the Income Tax Act. In 1984 Parliament amended subsection 152(4) of the Act to permit the Minister three years from the original assessment's date to re-assess rather than the span of four years previously provided. The amendment was enacted in the year 33 Elizabeth II, as Chapter 45 and was accorded Royal Assent on December 20, 1984; in subsection 59(1) it replaces all of subsection 152(4) of the said Act following subparagraph (a)(i) with:
(ii) has filed with the Minister a waiver in prescribed form within 3 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,
***
(c) within 3 years from the day referred to in subparagraph (a)(ii) in any other case.
***
(5) Subsections (1) and (3) are applicable to the 1983 and subsequent taxation years.
(Defendant's authorities: tab 8, pp. 1702, 1704.)
[44] The Minister purported to make the assessment on April 16, 1987 (exhibit 3, tab 145), as the notice records in regard to (T2054), an election dated December 17, 1982. The defendant's counsel argues that if the defendant be correct and the four-year period applies, then the assessment of Part III tax was timely. However, if the three-year period applies, then the assessment is statute barred and the plaintiff must succeed on this issue.
[45] Under subsection 89(2) of the Income Tax Act a private corporation could elect to treat a dividend as a capital dividend and the dividend is deemed to be such to the extent of the corporation's capital dividend account as defined in paragraph 89(1)(b) of the Act. The corporation was entitled to add to such account one-half of all capital gains which it realized. Where the dividend in respect of which the election is made exceeds the corporation's capital dividend account, the corporation is liable to a penalty tax, under Part III, equal to 75% of that excess. Subsection 184(2).
[46] On December 17, 1982 the plaintiff declared and paid to its shareholders a dividend of $690,000 (exhibit 2, tab 47). Since the dividend did not exceed the sum of the capital dividend account, Vancouver Art Metals elected to have the rules expressed in subsection 83(2) applied to the dividend's full amount. (Parties' pleadings: paragraph 3). All this occurred in the plaintiff's 1983 tax year: - i.e. May 1 to April 30. In April, 1983, the Minister issued a Notice of Assessment under subsection 185(1) stating no tax was payable under Part III (exhibit 2, tab 55). Later on the Minister assessed the gains as income, not capital gains, and on April 16, 1987 the Minister issued a Notice of Re-assessment (exhibit 3, tab 145) re-assessing the plaintiff to tax under Part III.
[47] That re-assessment was made by the Minister later than 3 years following the date of mailing the initial assessment, and is therefore statute barred, pursuant to paragraph 152(4)(c) and subsection 152(5). In fact and in law, the plaintiff's gains were capital gains. The Court now adopts and ratifies the plaintiff's "Legal Argument" set out in the plaintiff's Part III Re-assessment submissions filed on July 14, 2000. The facts and the law simply do not support the defendant's submissions in this regard. The 3 year period applies.
Judgment and costs
[48] Success in this trial is the plaintiff's, despite the defendant's counsel's undeniable skill and persistence. This case, or these cases, have been outstanding for a long time, with docket numbers dating back to the year 1987. It would seem that there are two sides to that story, for no litigant is powerless in the face of an adversary's delay. Unless the parties can agree on costs, which would be sensible, costs will have to be assessed with all the painstaking trouble which that entails. The plaintiff ought to be compensated in costs. There are four actions involved. This Court will order that the plaintiff shall recover from the defendant (unless the parties come to an agreement) costs on the middle values of column V, of tariff B, in the one case of the plaintiff's choice, times four. Item 26 of the table for preparing and attending upon assessment shall be assessed at full value or more generously.
[49] The plaintiff's solicitors are directed to prepare a draft judgment to implement the Court's reasons herein, pursuant to rule 394.
Judge
APPENDIX A
Vancouver Art Metal Works Ltd. v. Her Majesty The Queen
T-2072-87, T-2073-87, T-2074-87, T-2075-87
(1) Examination for discovery of Peter Ling, exhibit 1 in the trial starting January 26, 2000.
PETER LING, Sworn:
EXAMINATION BY MR. STURROCK:
1. Q. Mr. Ling, your full name is Peter Ling?
A. Yeah, L-I-N-G.
2. Q. I take it you are employed with Revenue Canada?
A. Yes.
3. Q. At where, the Vancouver district office?
A. Yes.
4. Q. You are produced today as an officer of the Crown on this examination, pursuant to the Federal Court rules?
A. Thank you.
5. Q. You are, right?
A. I am.
6. Q. You've made yourself aware, have you, or refreshed your memory with respect to these somewhat old events concerning --
A. Oh, yeah.
7. Q. -- concerning the reassessment against Vancouver Art Metal Works Limited?
A. Yes.
9. Q. Now, you were the auditor on the Vancouver Art Metal Works file?
A. Yes.
28. Q. Now, we're quite close together here and we can share this document, if you like, rather -- unless you've got one at your fingertips. Perhaps I could just show you the Crown's defense in action T-2075-87. And the Crown's defenses are pretty much all identical, as the plaintiff's Statements of Claim are, but there are separate Statements of Claim, and therefore, separate defenses for each taxation year. Perhaps by way of example -- I've written this in pencil, 1983. I've gone back and checked it. So the defense starts off under heading A, statement of facts, and certain facts as alleged in the Statement of Claim are admitted, then in paragraph 2, certain facts are denied?
A Um um.
39. Q. Paragraph 8 says, and as all these pleadings in tax cases do, the assumptions of fact upon which the assessment is based are set forth here. So in paragraph 8, it states that -- I'll just paraphrase that - in reassessing, the Minister of National Revenue relied inter alia on the following assumptions: (a) the plaintiff had a fiscal year end of April 30th?
A. Um um.
52. Q. Okay. Then paragraph 8 (e) the primary objective in selection under the managed account agreement with Trend was to achieve maximum results through capital gains combined with maximum possible protection against capital losses. That was another assumption of fact relied upon by the Minister as stated in paragraph 8, correct?
A. Yes.
125. Q. It appears here that throughout the years 1979 to 1984, there was one really big year, 1983, for Trend, $719,000. It sort of sticks out amongst -- or larger than all the others.
A. Yeah, that is the peak of all these years. We look at this timeframe, that is top of all the others. But compared to other years, capital gain is a significant amount.
126. Q. Right. By far, the biggest year?
A. Yeah.
127. Q. Now, I understand, and there's some documentation here we can get to, that throughout these years and throughout all prior years, Vancouver Art Metal Works always reported its transactions, whether there be a net gain or loss, as being on capital account?
A. Yes.
128. Q. There was an audit done in 1981 with respect to --
A. By Mr. Lee.
129. Q. And he left that unchanged?
A. Yes.
130. Q. And we can get to that later. There is some specific documents.
A. There's a memo on my working paper to explain the situation, and he was not there to look at whole company activities. He was particularly look at certain transactions, the ACB of the company, so he didn't really look into the other areas.
131. Q. With respect though, he did look at the capital gains versus income issue, and he confirmed capital gains treatment?
A. According to my conversation with him, he said his idea, his object of looking into it is not determining whether there is a capital gain income. What he look at is whether they are properly recorded, and his major concern is something else. He is looking at the dividends and ACB of the company shares, and that is his major emphasis in that year.
170. Q. Right. It is Mr. and Mrs. Shives at their home and their accountant and their lawyer. So it's not carrying on business, but it is, according to you, buying and selling stock or mutual funds through Trend to an extent because of the volume of the transactions where the gains should be on income account?
A. Particularly for the Trend Management.
171. Q. I'm talking about for Trend.
A. Yes.
172. Q. Well, it doesn't -- it doesn't have to be carrying on in business though, does it, for it to be income? Business is broadly described in the Income Tax Act to include any calling or trade including an adventure or concern in the nature of trade?
A. Yes.
173. Q. I'm assuming your position is it doesn't have to be carrying on business?
A. Yes.
174. Q. It could be an adventure in the nature of trade, in which event these gains are on income account?
A. Yes.
175. Q. Is that the position you are taking, these are adventures concerning the nature of trade, or one or more --
A. Yes.
176. Q. Now, this was referred to head office? In your auditor's report, it says something about referral to head office. At repeated request of the taxpayer -- the taxpayer sent this to head office. We're upset. And the head office concurred with your view?
A. Exactly. It was referred to head office, and then head office confirm we should consider as income rather than capital. That was head office decision. That's why we went ahead. The taxpayer's representative accountant are very strongly -- feel very strongly about not referring to head office.
177. Q. I see.
A. So we eventually went to head office for a decision.
178. Q. Okay. Later on in your auditor's report, you say important items not requiring change. Here you're talking about the transactions other than Trend to other brokers. That's what you were saying before, you left those alone as capital?
A. Yes.
231. Q. So I'll read it, but you can go along with me and confirm I'm not making mistakes here. September 15, '84, at ten a.m. This is your writing?
A. Yes.
232. Q. You are recording a conversation with Mr. Lee?
A. Yes.
233. Q. Bob Lee was the previous auditor of the taxpayer, Vancouver Art Metal Works Ltd., for taxation years 1977 to 1979. He was asked whether he questioned the Trend Management account transactions. He said he reviewed only the interest and dividend income and capital gains from Trend Management in order to clear the T133 lead on file and to ensure they were properly reported. What's a T133 lead?
A. It is third party lead.
234. Q. Oh.
A. Some other taxpayer has some transaction with this taxpayer, and they makes the auditor -- when auditor make -- auditing another company, notice there is some transactions with this taxpayer, then they put up this T133 lead for another auditor to check that the other taxpayer reported that type of transaction.
235. Q. He added the main thrust of the audit was on the ACB?
A. Adjust cost base.
254. Q. Right, 1983. Here it is here. This is what -- tab 104, Copy form T2020, notes on conversation with Peter Salvatori, Non-corporate Rulings, July 4, 1985. So this is your T2020?
A. This is my group head conversation with head office
255. Q. I see. I'm sorry. That is not you. That is Mr. Dungate. So he is talking to Peter Salvatori. He is at head office?
A. Yes.
256. Q. He's confirming your view of the matter as you already expressed to me earlier today, and indeed just 20 or 30 minutes ago, because he says, 39(4) election has not been filed. P. Salvatori stated that in his opinion, the gain should be assessed as an adventure in the nature of trade and that it was not necessary to send to head office. That's just what you told me before, right?
A. Yes.
306. Q. We're almost finished here. Tab 144 is described as a Copy of Round Trip Memorandum from P. Burden to L. Worsfold re 1983 and 1984 taxation years. That would be Phil Burden and Len Worsfold, both at Revenue Canada?
A. Yes.
307. Q. So Mr. Burden's handwritten round trip memo to Mr. Worsfold, it is fairly short. When this T2, referring to Vancouver Art Metal Works, was initially audited, it was the opinion of the auditor that the capital dividend account balance was lower than stated by the taxpayer. That is what you have already agreed to?
A. Yes.
308. Q. This would normally result in a part III assessment. As you know, an election can be filed by T2 and T1 taxpayers to convert excess capital dividends into regular taxable dividends. The auditor leapfrogged and assessed the T1 with a taxable dividend. However, before this step may be taken, there must first be a part III tax raised and then an election filed. RCT cannot arbitrarily assess a taxable dividend. The T1 assessment was therefore incorrect as there was no excess dividend tax under part III nor an election filed to treat the excess as a regular taxable dividend. Fortunately this oversight was identified by the ever diligent appeals division and the appropriate action initiated to recover Her Majesty's lucre. If you follow up on Mizuyabu's RTM, please advise your auditor to avoid the same mistake. Is this correct, that you --
A. I told you that was my mistake. He confirmed that, but I --
309. Q. But you -- the auditor leapfrogged and assessed the T1?
A. No, that's not correct. I did not assess the T1. I think the Surrey people --
310. Q. The Surrey people issued all your assessments?
A. Yes.
(2) Testimony of Peter Ling at trial, July 13, 2000, transcript.
PETER LING, sworn
EXAMINATION IN CHIEF BY MR. CARVALHO.
pp.226-227
Q. And your connection with this particular case of Vancouver Art Metals Limited is that you raised the reassessments for 1983 and 1984?
A. Yes.
...
Q. You didn't raise the 1985 reassessment, is that correct?
A. Because I was not the auditor at that time. Some auditor took over my file.
...
Q. Okay. Now, with respect to 1983 and 1984, what assumption did you make with respect to the trading activity of the Plaintiff through Trend Management Limited?
A. All the gains was treated as income account.
Q. Okay, and what material did you have before you in coming to that conclusion? What material did you look at?
A. I look at the history of the transactions of the company, through management, through Trend Management and also through the transactions with other stock brokers in U.S., and I also look at the details of the transactions through management.
pp. 228-229
Q. You stated you assumed the trading activity of the Plaintiff through Trend Management was done on income account. What facts led you to that?
A. Based on the recommendations of the IT Bulletin 479, paragraph 10 and look at the frequency of transactions, holding period, the experience of the taxpayer and the type of -- the nature of the stocks or the mutual funds the taxpayer held. So I look at all these factors, eh, to determine whether that should be treated on income account or capital account.
Q. Okay, well you looked at, one you mentioned was holding period.
A. From my working papers, eh, he seems to -- at that time I have a detailed breakdown of the holding periods, eh? Most of the mutual funds was held around 16 days or two weeks, and some maybe three months. Mostly 16 days or two weeks.
Q. What was the shortest holding period you recall?
A. Again, a few days I guess.
Q. Now, were you aware if the Plaintiff ever borrowed money to make its mutual fund purchases?
A. Of course, when I did the analysis, eh, I reviewed the management contract with Trend Management, and under the contract, eh, Trend Management has the authority to borrow money on behalf of the taxpayer at Trend's discretion. They have the borrowing power of $190 over $100 of security.
Q. What did you know about the relation or the authority given to Trend Management by Vancouver Art Metals?
A. The full power given to Trend Management.
Q. Did you know anything about Trend Management itself?
A. Trend Management was a mutual fund manager. It buys and sells, eh, on behalf of Trend Management's investors. So Trend Management was dealers, eh, and brokers, eh, in mutual funds.
p.230
Q. Okay. At the time you were doing your audit were you aware that Vancouver Art Metals had filed an election under 39(4) to treat all its gains as being on capital account?
A. I didn't find an election, but according to our department policies, eh, the first time they filed the tax returns, if they file consistently, that would constitute something of an election.
Q. During the course of your audit did you become aware of their election?
A. No. What I understand was all the treatments -- that all the gains, they were treated as capital gain.
Q. So you'd determined that the Plaintiff had filed its tax returns for previous years treating all its gains as capital gains?
A. Yes.
p.247
Q. Now, in the examination for discovery you seemed to state that you assumed this was an adventure in the nature of trade.
A. I think it was -- I didn't think too clearly about the question, and I understand trading -- adventure in the nature of trade is also part of the income treatment.
Q. So did you make a mistake --
A. Yeah, I guess, eh. Because before he ask me that question he gave me a question saying carrying on a business as a calling or as adventure in the nature of trade, all these can be treated as income. Then he follow, ask me the questions. So I have that term of reference in mind, eh, so when he ask me that question I thought, eh, he was referring to that type of income, so I say yes.
Q. You thought you were still dealing with the income --
PETER LING cross-examination by Mr. Sturrock:
pp.261-262
Q. And in your audit report and as reflected in the subsequent reassessments, you left the gains and losses alone, i.e. left them as capital account with these other firms, right?
A. Yes.
Q. And that included I think some stock that sometimes is referred to as penny stock, but it includes some good stock, like Tech Corporation, B.C. Sugar, Sceptre Resources. Do you remember those names?
A. No.
Q. That's okay.
A. It's 15 years now.
pp.272-273
Q. ... somebody else, asserted that Section 39(4), lifetime capital gains election had been filed, you didn't see one.
A. I didn't see one.
Q. And in fact there wasn't one.
A. There wasn't one.
Q. There wasn't one, correct?
A. Yeah.
Q. And just to clarify matters here, I think the problem was, is that when 39(4) was put into the Act in 197 -- I forget, '76 or something like that -- it made provision for an election and a proscribed form, but there was no proscribed form made up by Revenue Canada for two or three years subsequent to that.
A. Mm-hmm.
Q. That's correct, is it not?
A. Yeah.
Q. And you alluded earlier to Revenue Canada's policy that if a taxpayer consistently filed on a capital gains or loss basis, in this hiatus before the form anyway, that would -- policy was that that was --
A. Constituted --
Q. -- that that constituted election, correct?
pp. 295-296
[Cross-examination on document, tab. 141, the T401 report, page four]
Q. The second to last paragraph is marked or numbered 6-B, and there's a statement here and I just want to ask you if you agree with it or not. And this paragraph reads as follows:
Taxpayer's gain and losses from transactions in stocks and mutual funds. Having consistently reported it as being on account of capital and the audit of the taxpayer's 1977 to 1979 years the department accepted this treatment of the gains and losses."
Do you agree with that? Does that accord with your review of the file?
A. Yes.
p. 298
Q. Well, with respect, I think he said that he primarily looked at the ACB and the dividend.
A. Exactly.
Q. But he did look at the trades, too.
A. He didn't, he did not look at the transaction, these transactions. He look at ACB of the company and the recording of the dividends. So that's why he did not look into the transactions activities.
Q. Didn't he say that primarily that's what he looked into?
A. Primarily looked --
Q. Primarily.
A. Right.
p. 311
Q. But your recommendation wasn't that well defined, was it? It wasn't carrying on a business. Your recommendation was simply income account, and when you refer to carry on business that was in reference to paragraphs 10 and 11 of the IT Bulletin and 11 is expanded by 12 and says carrying on business includes adventure in the nature of trade, correct?
A. No, I think all my report say, clearly indicates it's a business, carry on a business.
p. 312
Q. ...And indeed as this document 110 indicates from head office, in the second paragraph. They say it's a question of fact as to whether or not there's -- you're a trader or dealer with reference to 39(4). So you were aware of this issue when you were doing your audit?
A. The issue of?
Q. Of the capital gains election.
A. Oh yeah.
Q. Right, but you thought that an election hadn't been filed, and in fact you were right it hadn't in the sense that -- because, as you said before, there's no prescribed form back then, right? But you were aware of the issue?
p.313
A. I was aware of the issue and even if I found there is an elections, but the situation may change. If they change it into a -- to be treated on income account. So the election would not be valid if that is the case.
Q. If what is the case?
A. If, for example, during the audit I found, during the year under review if I found that it should not be treated as capital gain, should be treated as income as a result of the deeming provision, to deem the taxpayer as a dealer and brokers, eh, then I would consider that the election is not valid, if that is the case. Even if I found that there is an election.
So to me at that time, eh, whether there is an election or not, it's not relevant. As long as I consider that period of time should be treated as income, so in that case the taxpayer's not eligible for an election.
Q. Isn't this what happened? Isn't this a fact, and I think you agree at least with the first part of this proposition, that you didn't see that an election had been filed.
A. No.
Q. Therefore whether the gain should be deemed to be capital gains and a lifetime election wasn't in your mind relevant at all, because as I said and as you've agreed, an election form had not been filed. (p. 314)
pp.322-323
Q. Well look it, you know, again it's some time ago, maybe you don't recall being asked these questions and giving these answers.
A. As I said earlier, eh, if you ask me to make -- I'm sorry, I think I make a mistake of saying yes, but if you ask me at that time to differentiate between "business" and "adventure in the nature of trade" I can tell you the difference, nor or at that time.
Q. Well, is this --
A. But at that time you didn't, you didn't ask me to differentiate between these two terms, eh, so I got mixed up.
Q. Well, you've been an auditor for 20 years?
A. Mm-hmm.
Q. And you know -- you've done a lot of capital gains cases I imagine in that period of time.
A. Oh yeah, yeah.
pp. 323-324-325
MR. STURROCK : Thank you.
Q. Now, these questions and answers may not have been accurately reported, so I'm depending upon you to advise me. Is this --
A. If you ask me the same question now, I say no.
Q. Right, but this transcript, is it accurate?
A. Yes.
Q. Does it accurately report the questions --
A. Seems to me, yes.
Q. And those are the answers you gave at that time?
A. Yes.
Q. And you know the difference between adventure or concern in the nature of trade --
A. Yes.
Q. -- and carrying on business?
A. Yes.
Q. And you said earlier in this transcript adventure in the nature of trade, and here you said in response to -- in reference to Mr. Salvatori's memorandum you said that this confirmed what you said earlier, correct? Adventure in the nature of trade. But you say now that you were mistaken both here and in this earlier series of questions?
A. This is not an adventure in nature of trade. I say yes, referring to the questions, eh, that Mr. Dungate recorded of Mr. Salvatori's answer or opinion that it should be treated as a -- can be treated as adventure in the nature of trade. This is why I answer yes, because that was the statement made in that memo.
Q. But I asked you, I said, "Does this confirm the answers that you gave me earlier on in the discovery to the same effect, adventure in the nature of trade?" But any way, you're saying that you were mistaken both in this part of the discovery and prior to that.
A. Yes.
Q. That I should have said to you, "What is the difference between the two?"
A. Exactly, yeah, then I would tell you the difference.
Q. Rather than just ask you if that's the basis you assess on.
A. Yeah.-
Q. But you've been an auditor for 20 years and you've done a lot of capital gains cases, right?
A. Yes.
Q. And you understand the concept adventure or concern in the nature of trade?
A. Oh yeah, definitely.
Q. And you understand that concept in reference to section 39(4) of the Income Tax Act?
A. Yes.
Q. Okay. Those are all my questions, My Lord. Thank you very much, but Mr. Ling, please answer His Lordship's questions or re-direct.
MR. CARVALHO: I have nothing, My Lord.
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