O’Dwyer v The Queen, 2012 TCC 261

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Striking the Crown’s Entire Reply on the Basis that They Fail to disclose a Reasonable Grounds to Oppose the Taxpayer’s Appeal – Rule 58(1)(b)

O’Dwyer v The Queen, 2012 TCC 261

At issue in this case was whether the crown’s reply pleadings met the requires standards for pleadings, and therefore disclosed a reasonable basis for opposing the taxpayer’s appeal.

The Court held that the Crown had failed in two ways, and granted the motion to strike the Crown’s entire reply.  Specifically, the Court held that the Crown’s reply:

  • failed to provide sufficient assumptions and allegations of fact, as determine by reference to the legal test imposed by the penalty provisions for tax shelters in subsection 237.1(7.4) of the ITA, such that the taxpayer could not know the case to meet; and
  • contained paragraphs that were in the nature of argument, were superfluous, and did not appropriately disclose, or relate to, allegation which have as their underpinning peleaded facts or assumptions needed to establish prima facie the legal elements of the penalty.

The taxpayer argued, and the court accepted, that in order to succeed in opposing the taxpayer’s appeal, the MNR must in its reply plead facts that support the facts necessary to support the conclusion that a tax shelter exists at law, as defined in the ITA.

The Court stated that on “a motion to strike, if the facts, after being assigned their highest credibility, lack sufficient precision, clarity, fulsomeness and sequence to establish the elemental basis of an assessment (in this case a penalty with a clearly alleged Role Element), then liability for the Penalty cannot, on a plain and obvious basis, succeed” (para 34).  The Court also clarified that to the extent that pleadings are summaries, overview, reasoning or argument, they have no probative value; to the extent that they relate to other alleged facts,  they are superfluous; and to the extent that they are intended to be a general allegation, without further detail, precision, or clarity, they do not establish the legal elements of a penalty, and therefore ought to be struck out (para 35).

The court referred to Strother v. The Queen, 2011 TCC 251,  where Justice Rip stated:

[…] All these statements of fact are to be statements of material fact, not immaterial facts, not statements or principles of law and not statements mixing fact with law […]

It is poor and improper pleading when a litigant admits or denies a fact in a pleading but couples the admission or denial with a conclusion of law or some extraneous comments that add nothing to the process. The assumptions of fact should be facts the Minister relied on in assessing and the facts so relied on should be material facts. Otherwise, why were these facts relied on if they were not material? […]

[And by reference to Mudrick v Mississauga Oakville Veterinary Emergency Professional Corporation, that r]epetition should be avoided. Superfluous detail should be eliminated.  Editorialized comments should be removed. … This is not “the last chance” to tell the whole story – it is only an overview of what the case will be about […]

Thus, any pleadings that “relate inconsequentially to other alleged facts, are argument or law or are too general, they shall be struck, unless they are clearly identified as argument in which case they are not to be assumed for the purposes of this motion” (para 38).

Since the legal elements of the Penalty in respect of tax shelters require the MNR to have thoroughly and accurately understood the nature of “the property” related to the factual allegations against a taxpayer, the failure to identify the “property” with legal exactitude would mean that the crown could not possibly succeed. The Crown had identified the property as the LLP itself.  However, the LLP cannot be a tax shelter as defined by the ITA, because it is not “property”, but rather conduits of vehicles for taxpayers (para 39).  The LP units may well be property and a tax shelter, but this allegation was not assumed, pleaded or argued by the Crown.  Thus the crown has failed to establish a critical legal element of the transgression that gives rise to a penalty (para 40).

The Court also held that “the present Reply pleadings in respect of the Statement Element and Calculation Element of the Penalty are lacking in a level of factual specificity and disclosure which would otherwise allow the Appellant to meet the case that has been alleged against him as to statements and representations made relating to the actual loss accruing to the tax shelter property and the quantum of the loss in excess of the cost” (para 41).  There was a dearth of factual allegation, and “even a general description as to dates, addressees, meetings and time frames of such statements” (para 42), thus making it impossible for the taxpayer to attempt to demolish the facts establishing the legal elements of a penalty.

The Court continued at para 44:

Accordingly, although the Court agrees that the Reply and Notice of Confirmation do not identify property which can, by legal logic and analysis identified in the authorities, amount to a tax shelter (as assumed and defined within the pleadings by the Respondent), the Court also finds that the Reply does not contain a reasonable and sufficient description of facts concerning: (i) the statements or representations made in connection with the property of the tax shelter; (ii) statements of the quantum of the losses in excess of the cost; nor, (iii) the Appellant’s alleged actions as an agent or principal — all of which are not only legally required to afford the Appellant an opportunity to identify the case to be met by him, but also to factually establish the Legal Elements of the Penalty.

The Court, therefore, granted the motion to strike the reply under paragraph 58(1)(b) for failing to disclose reasonable grounds to opposed the appeal.

– Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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