Date: 20031007
Docket: A-346-02
Citation: 2003 FCA 371
CORAM: LINDEN J.A.
ROTHSTEIN J.A.
BETWEEN:
EUGENE KAULIUS, STEVEN M. COOK, CHARLES E. BEIL,
CRAIG C. STURROCK, AMALIO DE COTIIS, JOHN N. GREGORY,
347059 B.C. LTD., FRANK MAYER, JOHN R. OWEN,
VERLAAN INVESTMENTS INC., WILLIAM JOHN MILLAR,
NSFC HOLDINGS LTD., TFTI HOLDINGS LIMITED,
DOUGLAS H. MATHEW, IAN H. PITFIELD, THE ESTATE OF THE
LATE LORNE A. GREEN AND INNOCENZO DE COTIIS
Appellants
and
HER MAJESTY THE QUEEN
Respondent
Heard at Vancouver, British Columbia, on September 15, 2003.
Judgment delivered at Ottawa, Ontario, on October 7, 2003.
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: LINDEN J.A.
SEXTON J.A.
Date: 20031007
Docket: A-346-02
Citation: 2003 FCA 371
CORAM: LINDEN J.A.
ROTHSTEIN J.A.
SEXTON J.A.
BETWEEN:
EUGENE KAULIUS, STEVEN M. COOK, CHARLES E. BEIL,
CRAIG C. STURROCK, AMALIO DE COTIIS, JOHN N. GREGORY,
347059 B.C. LTD., FRANK MAYER, JOHN R. OWEN,
VERLAAN INVESTMENTS INC., WILLIAM JOHN MILLAR,
NSFC HOLDINGS LTD., TFTI HOLDINGS LIMITED,
DOUGLAS H. MATHEW, IAN H. PITFIELD, THE ESTATE OF THE
LATE LORNE A. GREEN AND INNOCENZO DE COTIIS
Appellants
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
ROTHSTEIN J.A.
[1] This is a consolidation of appeals from the decision of the Tax Court (Mathew et al. v. The Queen, 2002 D.T.C. 1637, [2003] 1 C.T.C. 2045) in which Dussault J. denied the appellants' appeals from notices of reassessment issued by the Minister of National Revenue.
Facts
[2] The facts are set out in detail in the judgment of Dussault J. and it is only necessary to summarize them for purposes of this appeal. For practical purposes, the facts in this appeal are the same as those in OSFC Holdings Ltd. v. The Queen, [2002] 2 F.C. 288, 2001 FCA 260 [OSFC]. In oral argument, counsel agreed that the appellants are essentially in the same position as OSFC Holdings Ltd.
[3] Standard Trust Company lent money on the security of mortgages on real property. Standard became insolvent and, in 1991, the Ontario Court of Justice (General Division) ordered that Standard be wound up and appointed a liquidator for the company. In order to maximize the recovery from the disposition of Standard's assets, the liquidator caused a series of transactions to take place which, through the operation of subsection 18(13) and the Partnership Rules in section 96 of the Income Tax Act, allowed the appellants to use the losses that had accrued on a portfolio of Standard's mortgages. The transactions can be summarized as follows:
1. Standard incorporated a wholly-owned subsidiary;
2. Standard and the subsidiary formed the STIL II partnership in which Standard had a 99% interest and the subsidiary a 1% interest;
3. Standard transferred the mortgage portfolio to the STIL II partnership as its contribution to the partnership capital and lent the subsidiary sufficient cash to make its capital contribution;
4. by reason of subsection 18(13), the cost of the mortgage portfolio to the STIL II partnership for income tax purposes was Standard's historical cost ($85,368,872), even though the then current market value (approximately $33,262,000) was much less;
5. Standard sold its 99% interest in the STIL II partnership to OSFC, a company that dealt at arm's length with Standard;
6. OSFC formed the SRMP partnership with a number of investors, including the appellants in this case;
7. OSFC transferred its 99% interest in the STIL II partnership to the SRMP partnership in return for a 24% interest in SRMP and other consideration;
8. in its fiscal year ending September 30, 1993, the STIL II partnership incurred a net loss for income tax purposes of some $52 million, by reason of the sale of mortgaged properties for proceeds much less than Standard's original investment and the write-down of the remaining properties from Standard's original investment to their fair market value; and
9. through the application of the Partnership Rules in section 96, 99% of this loss was allocated to the SRMP partnership on September 30, 1993. The loss was then allocated to the partners of the SRMP partnership at its October 1, 1993 year end.
[4] The appellants deducted their shares of the partnership loss in computing their 1993 and 1994 taxable incomes. The Minister disallowed the deduction of the losses, relying on section 245 of the Income Tax Act (the General Anti-avoidance Rule - GAAR). The appellants appealed to the Tax Court of Canada. Dussault J. held, following this Court's decision in OSFC, that the transactions were a series of avoidance transactions that conferred a tax benefit on the appellants. He also found that the transactions were an abuse of the Income Tax Act as a whole and held that the GAAR was properly applied by the Minister.
[5] In addition, he rejected the appellants' constitutional arguments. As a result, he denied the appellants' appeals.
Issues
[6] The appellants concede that the transactions in question were avoidance transactions and that they obtained a tax benefit as a result of them.
[7] The appellants raise three issues:
1. whether the subsection 245(4) abuse analysis in OSFC, which was relied upon by Dussault J., was correct;
2. whether the GAAR is unconstitutional as being contrary to section 53 of the Constitution Act, 1867;
3. whether the GAAR is unconstitutional as being contrary to section 7 of the Charter of Rights and Freedoms.
Analysis
Issue 1: Whether the Section 245(4) Abuse Analysis in OSFC is Correct
[8] The appellants argue that the Court should overrule its prior decision in OSFC in respect of the abuse analysis under subsection 245(4) of the Income Tax Act.
[9] Subsection 245(4) provides:
|
(4) For greater certainty, subsection 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole. |
(4) Il est entendu que l'opération dont il est raisonnable de considérer qu'elle n'entraîne pas, directement ou indirectement, d'abus dans l'application des dispositions de la présente loi lue dans son ensemble -- compte non tenu du présent article -- n'est pas visée par le paragraphe (2). |
[10] The question of when the Court will overrule one of its prior decisions was recently addressed in Miller v. Canada (A.G.) (2002), 220 D.L.R. (4th) 149, 2002 FCA 370. In paragraphs 8 and 9 of Miller, the Court noted that while it may overrule its own prior decisions, in the interests of certainty and consistency, save in exceptional circumstances, the Court should follow its prior decisions. In paragraph 10, the Court stated that the basic test for overruling a decision of another panel of the Court is that the prior decision is manifestly wrong in that the Court overlooked a relevant statutory provision or a case that ought to have been followed.
[11] In OSFC, the Court determined that the abuse analysis under subsection 245(4) involves a two-stage process. The first stage requires the identification of the relevant policy of the Act read as a whole. The second requires assessment of the facts to determine whether the avoidance transactions constituted an abuse, having regard to the identified policy (paragraph 67).
[12] In OSFC, the Court determined that the general policy of the Income Tax Act is against the transfer of non-capital losses between taxpayers. However, this general policy was subject to some exceptions. For example, a partner entering into the partnership may take advantage of losses that were incurred by the partnership in that year before he or she became a partner. On the change of control of a corporation, losses of prior years are deductible in limited circumstances. But the general policy is that every person has independent status for income tax purposes and that losses cannot be transferred between taxpayers dealing with each other at arm's length.
[13] In the circumstances in OSFC, the losses originated with Standard. Through the application of subsection 18(13) and the Partnership Rules in section 96 of the Income Tax Act, the avoidance transactions resulted in the transfer of Standard's loss to an arm's length taxpayer, OSFC. However, having regard to the GAAR, the Court found that the transfer of Standard's loss to OSFC through the mechanism of subsection 18(13) and the Partnership Rules in combination, violated the general policy of the Income Tax Act against the transfer of losses between taxpayers and was, therefore, an abuse of the Act read as a whole.
[14] Additional arguments were made in OSFC, with reference to a number of provisions of the Income Tax Act, that Parliament had comprehensively legislated rules relating to the treatment of losses and that Parliament had therefore completely addressed the issue of when losses may be transferred and when they may not. It was submitted that subsection 18(13), employed in OSFC as the vehicle for effecting the transfer of the loss, was one of those rules. The Court acknowledged that if, by reason of rules and exceptions, no clear contrary policy could be ascertained, adherence to statutory provisions would prevail (paragraph 115). However, the Court found that the policy of the Act against the transfer of losses between arm's length taxpayers was clear and that this policy was violated in OSFC.
[15] In the present appeal, the appellants argue that, having regard to provisions such as paragraphs 40(2)(g) and 53(1)(f) and subsections 85(5.1), 85(4), 93(2), 112(3) to (3.12) and 18(13), the policy of the Income Tax Act does not prohibit the transfer of "unrealized" or "pregnant" losses by a transferor to a transferee. Counsel explained to the Court that "unrealized" or "pregnant" losses were potential losses that exist because the cost of a property for income tax purposes is greater than the property's fair market value. They only become "realized" or "historic" losses that can be offset against income when the property is sold or written-down. The appellants argue that most of the provisions they cite were not brought to the attention of the Court in OSFC, resulting in the Court making a manifest error in finding that the general policy of the Income Tax Act, read as a whole, is against the transfer of losses between arm's length taxpayers.
[16] While not every provision referred to in argument before this Court appears to have been raised in OSFC, the thrust of the argument here is the same as that in OSFC. The Court dealt with the argument in OSFC and rejected it.
[17] As they read at the relevant times, paragraph 53(1)(f) and subsections 85(4) and (5.1), like subsection 18(13), apply when property is transferred to certain kinds of parties who do not deal with the transferor at arm's length. Subsection 85(5.1) also applies to transfers to a member of a group that controls the transferor or to a partnership in which the transferor is a majority interest partner. All the provisions apply where there is a particular type of relationship set out in the Income Tax Act. They do not apply to transfers made when there is no such specified relationship. Paragraph 40(2)(g) and subsections 93(2) and 112(3) to (3.12) are true stop loss rules that limit the recognition of certain losses altogether. None of these provisions detract from the general policy of the Income Tax Act against transferring losses between arm's-length taxpayers.
[18] This is not a case in which it has been demonstrated that the Court in OSFC overlooked a statutory provision that is determinative. The appellants only raise some additional provisions in support of an argument that was previously made. That is insufficient to cause the Court to consider overruling its prior decision.
Issue 2: Whether the GAAR is Unconstitutional, Having Regard to Section 53 of the Constitution Act, 1867
[19] Section 53 of the Constitution Act, 1867 provides:
|
53. Bills for appropriating any Part of the Public Revenue, or for imposing any Tax or Impost, shall originate in the House of Commons. |
53. Tout bill ayant pour but l'appropriation d'une portion quelconque du revenu public, ou la création de taxes ou d'impôts, devra originer dans la Chambre des Communes. |
[20] In making their Constitution Act, 1867 argument, the appellants rely upon OECTA v. Ontario (A.G.), [2001] 1 S.C.R. 470, 2001 SCC 15 which provides that the delegation of the imposition of a tax by Parliament is constitutional only if express and unambiguous language is used in making the delegation (paragraph 74). The appellants say that the GAAR is so vague that it gives plenary taxing power to the Minister without clear and unambiguous language in contravention of section 53.
[21] In OECTA, the issue was whether the delegation to the Ontario Minister of Finance of the power to prescribe tax rates for school purposes was constitutional. The tax rate along with the tax base and time unit are defining features of a tax (paragraph 73). In OECTA, the Supreme Court found that the Minister set the applicable tax rate pursuant to a specific legislative grant of authority; and further, that the delegation of the setting of the rate took place within a detailed statutory framework setting out the structure of the tax, the tax base and the principles for its imposition.
[22] I do not interpret the GAAR as allowing the Minister to set a defining feature of income tax such as the setting of the tax base or rates as in OECTA. In enacting the GAAR, Parliament has provided the Minister with an additional basis for reassessment of a taxpayer within the detailed structure for reassessing set forth in the Income Tax Act. Even though section 245 permits the Minister to base that reassessment on the policy of the Act rather than the explicit provisions of the Act other than section 245, that policy is created by Parliament and interpreted by the courts. The Minister has not been delegated any power to make policy or to impose a new tax on his own initiative.
Issue 3: Whether the GAAR is Unconstitutional, Having Regard to Section 7 of the Charter of Rights and Freedoms
[23] Section 7 provides:
|
7. Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice. |
7. Chacun a droit à la vie, à la liberté et à la sécurité de sa personne; il ne peut être porté atteinte à ce droit qu'en conformité avec les principes de justice fondamentale. |
[24] The appellants argue that since the decision of the Supreme Court of Canada in Gosselin v. Quebec (A.G.), 2002 SCC 84, the right to be free from arbitrary and indeterminate taxation is included within the right to liberty and security of the person under section 7.
[25] The appellants also submit that the term "abuse" in subsection 245(4) is incapable of being infused with "core" meaning and is therefore unconstitutionally vague.
[26] In Gosselin, the Court considered whether the provision of inadequate welfare benefits could result in a violation of section 7. McLachlin C.J.C., writing for the majority, noted that most section 7 jurisprudence has arisen out of individuals' interaction with the administration of justice (paragraph 77). She held, however, that it was unnecessary to attempt to state an exhaustive definition of the administration of justice as it was clear that Gosselin had not interacted with it (paragraph 79). McLachlin C.J.C. also refused to decide whether section 7 could apply in circumstances wholly unconnected with the administration of justice because Gosselin had not established a deprivation of her life, liberty or security of the person and the case was not an appropriate one to expand section 7 to place positive obligations on the state to ensure that each person enjoys life, liberty or security of the person (paragraphs 81 to 83).
[27] The appellants' arguments must be rejected for two reasons. First, I am not satisfied that denial of a tax deduction is the type of state action that engages section 7 protection. I acknowledge that the majority of the Supreme Court in Gosselin confirmed that section 7 protects against state action implicating the administration of justice and that the definition of the administration of justice has not been exhaustively defined (paragraphs 77 to 79).
[28] However, I do not agree with the applicant's theory that as a result of Gosselin, every state action implicating the administration of justice gives rise to section 7 protection. Although the Court in Gosselin may have broadened the circumstances in which a deprivation of life, liberty, or security of the person could give rise to a section 7 violation, it did not question the need to establish such a deprivation in the first place (paragraphs 75, 77, and 81).
[29] I will accept that the power of reassessment of a taxpayer implicates the administration of justice. However, I do not accept that reassessments of taxpayers result in a deprivation of liberty or security of the person.
[30] If there is a right at issue in the case of reassessments in income tax, it is an economic right. In Gosselin, McLachlin C.J.C., for the majority, observed that in Irwin Toy Ltd. v. Quebec (A.G.), [1989] 1 S.C.R. 927 at 1003, Dickson C.J.C., for the majority, left open the question of whether section 7 could operate to protect "economic rights fundamental to human...survival". However, there is no suggestion in Gosselin that section 7 is broad enough to encompass economic rights generally or, in particular, in respect of reassessments of income tax. I am, therefore, of the view that the appellants have not demonstrated a deprivation of any right protected by section 7 of the Charter.
[31] Second, I do not accept that subsection 245(4) is unconstitutionally vague. As stated in Ontario v. Canadian Pacific Ltd., [1995] 2 S.C.R. 1031, the question is whether a law provides the basis for legal debate and coherent judicial interpretation. If judicial interpretation is possible, an impugned law is not vague (paragraph 79).
[32] In the case of section 245, the Tax Court and this Court have, on several occasions, had occasion to interpret the section and apply it. Indeed, on the facts in OSFC which are, for practical purposes, the same facts applicable to this case, the Court was able to interpret subsection 245(4) and apply it. Subsection 245(4), having been interpreted and applied on numerous occasions by the Courts, is capable of supporting legal debate and coherent judicial interpretation. It is therefore not unconstitutionally vague.
Conclusion
[33] For these reasons I would dismiss the appeal with costs.
"Marshall Rothstein"
J.A.
"I agree
A.M. Linden J.A."
"I agree
J. Edgar Sexton J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-346-02
STYLE OF CAUSE: Eugene Kaulius et al. v.
Her Majesty the Queen
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: September 15, 2003
REASONS FOR JUDGMENT: ROTHSTEIN J.A.
CONCURRED IN BY: LINDEN and SEXTON JJ.A.
DATED: October 7, 2003
APPEARANCES:
|
Mr. David J. Martin |
FOR THE APPLICANTS
|
|
Mr. Robert Carvalho |
FOR THE RESPONDENT |
SOLICITORS OF RECORD:
|
Mr. David J. Martin Vancouver, British Columbia |
FOR THE APPLICANTS |
|
Deputy Attorney General of Canada |
FOR THE RESPONDENT |