Admitting Fresh or New Evidence on Appeal

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Admitting Fresh or New Evidence on Appeal

Brace v Canada, 2014 FCA 92

The FCA set out the test for admitting fresh evidence on Appeal, pursuant to Federal Court of Appeal Rule 351, by referring to the decision in Palmer v. The Queen, [1980] 1 S.C.R. 759; Shire Canada Inc. v . Apotex Inc., 2011 FCA 10.  The test is:

(1)                    The evidence should not be admitted if, by due diligence, it could have been adduced at trial.

(2)               The evidence must be relevant in the sense that it bears upon a decisive or potentially decisive issue in the trial.

(3)               The evidence must be credible in the sense that it is reasonably capable of belief.

(4)               The evidence must be such that if believed it could reasonably, when taken with the other evidence adduced at trial, be expected to have affected the result.

The FCA stated that even if the Palmer test is not met, the court has residual discretion to admit the new evidence on appeal if doing so is in the interest of justice (para 12).  The exercise of this residual discretion should, however, occur only in the clearest of cases and with great care: R. v. J.A.A., 2011 SCC 17.

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What Counts as Qualified Farm Property

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What Counts as Qualified Farm Property for purposes of the Farming Capital Gains Exemption

Otterson v The Queen, 2014 TCC 250

The Taxpayers, in response to unsolicited offers, sold property they had purchased and were preparing for tree farm operations. They claimed the maximum capital gains exemption on the basis of the property being a Qualified Farm Property, but the MNR reassessed them for failing to meet the qualification requirements.  The TCC allowed the taxpayers’ appeal.

NOTE that the criteria are complex and the summary here only covers some of the criteria. You must refer to the relevant provisions. 

FACTS

The Appellants purchased land for purposes of a tree farm operation, bought equipment for a tree farm operation, had a business plan for a tree farm operation, and had begun preparing for the operation on the basis of those plans.  During the periods they owned the land they made only a small amount of revenue from hay sales (lease to another farmer).  An aerial geological survey discovered significant grave deposits on the land, leading to a number of unsolicited offers to purchase, and finally resulting in the sale of the land for significant gains.

ANALYSIS

One problem the appellants faces was their inconsistent positions as to who owned the farm  – whether it was owned directly by the individuals to be used in the tree farm operation, or owned by the partnership to be used in the tree farm operation.  This is because the who owns the property and who uses the property for what affect the eligibility for the exemption.

Where individuals own the land and engage directly in a farming business, subsection 110.6(1.3) mandates that, among other things, in the last two years while the land was owned the gross revenues from farming must exceed the individuals’ income from all other sources.  No such requirement exists for the business run through a partnership.

The court held, as a fact, that the land was not transferred to a partnership.  The court then considered the Alberta Partnership Act definition of “partnership” and the enumerated factors that cannot be considered in determining whether there was a partnership. This is a fact specific determination, and the  “criteria applied to determine the existence of a partnership include the contribution by the parties of money, property, effort, knowledge, skills or other assets to a common undertaking, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts” (para 43): referring to Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, paras 23-24. The Courts must take a pragmatic approach: referring to Backman v. Canada, 2001 SCC 10 at para. 26.

The court referred to decisions that indicate a cautious approach to finding spouses to be partners ( Sedelnick Estate v. Minister of National Revenue, [1986] 2 C.T.C. 2102, 86 DTC 1563; Franklin v. The Queen, [1997] 3 C.T.C. 2914, 97 DTC 1485), but these cases were held to stand for the proposition that the subjective declaration of intent of parties must be supported by evidence of actual conduct (para 45).

In this case the evidence was held to establish the existence of tree farming operations in partnership, and the full engagement on a regular and continuous basis of the parties in that partnership.

To be “qualified farm property” as defined in subsection 110.6(1), the property must be property (i) owned by an individual, or spouse or common law partner of that individual, or a partnership, (ii) the interest in the partnership must be an interest in a “family farm partnership” of the individual, or the individual’s spouse or common law partner, (iii) that is, inter alia, real or immovable property used in the course of carrying on the business of farming in Canada by, inter aliai, the individual, a partnership (an interest in which is an interest in a family farm partnership of the individual, his/her spouse or common law partner).

The provision refers to how the property was used, and the actual use at the time of the disposition is not relevant (para 49).  The provision was also amended in 2006 to  delete the more onerous concept of “principal use” to the wider concept of “use” (para 49).  Subsection 110.6(1.3) supplements the ownership and use requirements, setting out mandatory criteria before a property can be considered to have been used in the course of carrying on the business of farming in Canada.  These criteria include ownership requirements for a period of at least 24 months prior to the relevant time, and gross revenue requirements for the last two years of ownership if the property was not used by a partnership or corporation actively engaged on a regular or continuous basis in the faming operation.

In short, where an individual is engaged in farming operations, there is a gross revenue requirement (gross revenue from farming business in past 2 years must exceed the income of that person from all other sources), but if the operations are conducted through a corporation or partnership there is no such requirement and only the need for the operator to have been engaged in the farming business on a continuous an regular basis during that period (see 110.6(1.3)(b)(i) and (ii)).

The court then referred to the definition of “interest in a family farm partnership” in subsection 110.6(1), which contains a requirement of more than 50% of the FMV of the property being attributable to property used principally in the course of carrying on the business of Farming in which the individual, the individual’s spouse or common law partner or child or parent or of beneficiaries of a personal trust were actively engaged in a regular and continuous basis (para 53).  There is also a requirement that at the relevant time, all or substantially all of the FMV of the property of the partnership be attributable to property that was used in the family farming operation (para 54).

The court noted that in the case of this appeal, it was unclear when the asset threshold requirements had to be met. The court held that the “more than majority threshold” must be met throughout the relevant use period, during which the partnership interest must qualify as an “interest in a family farm partnership”, AND that the “all or substantially all threshold” must NOT be met at the time immediately before the disposition  but throughout the use period (paras 55-56).

The court, however, noted that only part of the land was used by the partnership and the other part was leased to another farmer directly by the taxpayers (and not by the partnership). (para 58).  This portion of the land was used to earn rental income, and not used by the partnership to earn farming income.  The property is NOT to be considered as a whole, and the use of smaller sub-parts of the land must be considered (paras 60-61).  Therefor , in this case, only part of the land qualified for the exemption.

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Director’s Liability for Remittances – Effective Resignation and Failure to Act

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 Director’s Liability for Remittances – Effective Resignation and Failure to Act

Gariepy v The Queen, 2014 TCC 254

This was an appeal from director’s liability assessments issued pursuant to subsection 227.1(1) of the ITA, and the application of the due-diligence defense in subsection 227.1(3) of the ITA.

This decision is troubling. It appears to be based, at least in part, on sympathy for the directors and condemnation of ligation as a collection strategy by the CRA.  The conclusion – that inaction by a person who reasonable believes to have resigned as director is sufficient to meet the due diligence defense standard – is however valid.

FACTS

The Appellants claimed that they had resigned as directors two years prior to the assessments, or in the alternative that they had exercises due diligence.  The due diligence was based on them doing nothing because they reasonably believed that they had resigned as directors OR that it was reasonable for them to rely on a third-party lawyer who they believed had taken de facto control over the company.

ANALYSIS

The court referred to the summary of the applicable law in Deakin v. The Queen, 2012 TCC 270 at paragraphs 13 -16 and 24:

  • subsection 227.1 of the ITA and section 323 of the ETA make directors of corporations personally liable for the corporation’s failure to meet its remittance obligations;
  • This personal liability reflects the degree of management and control that directors have over the management and affairs of corporations;
  • Subsection 227.1(3) of the ITA and subsection 323(3) of the ETA provide protection against personal liability of a director, for failures of the corporation to make remittances, if the director exercised a degree of care, diligence and skills that a reasonable and prudent person would have exercised in similar circumstances to prevent the failure to remit;

The TCC referred to the FCA decision in Canada v. Buckingham, 2011 FCA 142, where the due diligence defense was considered.  The defense looks to proactive steps taken to prevent failures. Actions taken to remedy failures are generally not relevant, and are generally not sufficient to establish the due diligence defense (para 3).

Federal Court of Appeal in Balthazard v. Canada, 2011 FCA 331, set out the applicable test, and referred to the FCA decision in Buckingham, at paragraph 32:

[32]      In Buckingham, this Court recently summarized the legal framework applicable to the care, diligence and skill defence under subsection 323(3), as follows:

a.         The standard of care, skill and diligence required under subsection 323(3) of the Excise Tax Act is an objective standard as set out by the Supreme Court of Canada in Peoples Department Stores Inc.(Trustee of) v. Wise, 2004 SCC 68. This objective standard has set aside the common law principle that a director’s management of a corporation is to be judged according to his or her own personal skills, knowledge, abilities and capacities. However, an objective standard does not mean that a director’s particular circumstances are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard.

b.         The assessment of the director’s conduct, for the purposes of this objective standard, begins when it becomes apparent to the director, acting reasonably and with due care, diligence and skill, that the corporation is entering a period of financial difficulties.

c.         In circumstances where a corporation is facing financial difficulties, it may be tempting to divert these Crown remittances in order to pay other creditors and thus ensure the continuity of the operations of the corporation. That is precisely the situation which section 323 of the Excise Tax Act seeks to avoid. The defence under subsection 323(3) of the Excise Tax Act must not be used to encourage such failures by allowing a care, diligence and skill defence for directors who finance the activities of their corporation with Crown monies, whether or not they expect to make good on these failures to remit at a later date.

d.         Since the liability of directors in these respects is not absolute, it is possible for a corporation to fail to make remissions to the Crown without the joint and several, or solidary, liability of its directors being engaged.

e.         What is required is that the directors establish that they were specifically concerned with the tax remittances and that they exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the amounts at issue.

The Court did not have to turn to the due diligence defense as it held that the resignations of the Appellants was valid and effective. (para 10). This was despite the court finding that there were significant credibility issues, and doubting the truth of the statement of the witnesses for the Appellant (para 13).   The resignation was held to be valid from the date that the resignation was prepared by the law firm, despite not having been signed by the Appellants (para 17).

The conclusion was based on the law firm’s documents (see para 22).  The TCC relied on the decision in Perricelli v. Her Majesty the Queen, 2002 GSTC 71, Walsh v. Her Majesty the Queen, [2010] 1 CTC 2412, and Corkum v. Her Majesty the Queen, 2005 TCC 755 , each of which deals with the necessary form, content or communication of a valid director’s resignation for these purposes. This was also based on the Ontario Business Corporations Act which only requires that resignations be written, not that they be signed (para 25).  A written resignation meaningfully communicated to the corporation is acceptable: Irvine v Minister of National Revenue, 91 DTC 91; and  Cybulski v. Minister of National Revenue, 88 DTC 1531.

From paragraph 15 of the reasons, it appears that the TCC was looking down upon the CRA’s actions in assessing the wives (Appellants) as de jure directors while disregarding their husband’s as de facto directors.  The TCC suggests that this appears to be a strategic collection decision using litigation, and said at para 15:

Surprisingly, without any evidence of any further consideration being given to the issue, CRA assessed the wives as de jure directors and did not assess the husbands as de facto directors. No explanation was given for this by the Crown, but it was observed that Mr. Gariepy had an intervening bankruptcy which might have made collection difficult. I would certainly hope this was not the case. The Crown’s pursuit of litigation in this Court should not be used as a strategic collection mechanism. The prospect of collections against one taxpayer should not justify the pursuit of another taxpayer even if they are husband and wife.

The Court did consider the due diligence defense, and whether the complete failure to act was sufficient in the circumstances. (para 27).  The Court held that in the circumstances it was reasonable to assume that the appellant had resigned as director unless someone suggested otherwise (para 30).  The reasonable and continuing belief of valid resignation as director is one of the few circumstances where a complete failure to act fulfills the due diligence defense requirements (para 32).   However, in case of the second Appellant, the TCC held that, if the resignations were not valid, the evidence showed that the second appellant had not done everything a reasonable person would consider reasonable to resign, and therefore her inaction did not fulfil the due diligence requirement (para 37).  The alternative argument of being ousted as directors by de facto control passing to a rogue lawyer was also rejected.

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Director’s Liability for Remittances – Due Diligence When Relying on Employee

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Director’s Liability for Remittances – Due Diligence When Relying on Employee

Roitelman v The Queen, 2014 TCC 139

The appellant appealed a director’s liability assessment made pursuant to subsection 227.1(1).  The MNR issues assessments against the corporation for late-remitted or unremitted Federal and Provincial income taxes, EI premiums, and CPP contributions, plus penalties and interest, and registered a certificate of the corporate debt with the Federal Court. The Appellant argued against the personal assessment as director on the basis that he had exercised the degree of care, diligence and skill to prevent the failure that a reasonable prudent person would have exercised in comparable circumstances – the due diligence defense.

FACTS

The appellant made a lump some payment in respect to the principal owing by the corporation for outstanding source deductions, and later, the minister assessed the appellant as director for the balance (plus penalties and interest).

The Appellant has control over the corporate activities and operations during the relevant period, and was a Director of the corporation.  A bookkeeper and office manager was hired who was responsible for source deductions and remittances, and the Appellant provided training.  After the period of training, the Appellant did not consistently or directly supervise this person’s work.  The Appellant did check the work intermittently and relied on assurances that work has been completed.

Notices were sent by the MNR, but the Appellant claimed not to have received many of them because his employee kept them from him.  After he became aware of the failure to remit, he sought assurance from the employee that the mistake would not be repeated and increased supervision of her work temporarily.  The bookkeeper eventually left the service of the corporation.

ANALYSIS

The burden of proving the due diligence defense available under subsection 227.1(3) of the ITA is on the Appellant.  The applicable test is an objective one: Peoples Department Stores Ltd v Wise, 2004 SCC 68.  A director’s personal skills, knowledge, abilities, and capacities are not relevant, but the objective circumstances surrounding the actions of the director are relevant: The Queen v Buckingham, 2011 FCA 142, para 38.

To establish the due diligence defense in subsection 227.1(3) of the ITA, the director must establish that (The Queen v Buckingham, 2011 FCA 142, para 52):

  • They were specifically concerned with the tax remittances;
  • They exercised their duty of care, diligence and skill with a view to prevent a failure by the corporation to remit; and
  • Action to remedy the failure to remit is not sufficient.

However, after-the-fact behaviour and corrective measures can be relevant (Balthazard v The Queen, 2011 FCA 331), though the focus on the defense is the care, diligence and skill exercised in preventing a failure to remit (para 23).  Importantly, the oversight duties of the director cannot be delegated (Kaur v The Queen, 2013 TCC 227, at paragraph 18).  There is no requirement that the steps taken are actually effective in ensuring future compliance, but only that the proactive steps be taken and be reasonable and prudent  in the circumstances (para 28).  Perfection is not required and hind-sight bias must be avoided (Cloutier v MNR, 93 DTC 544, at paragraph 10).

The TCC accepted that the bookkeeper purposefully and actively kept the information from the Appellant.  The Court held that the Appellant took proactive steps to prevent the failure to remit, and felt that the steps were reasonable and sufficient in the circumstance of the case (para 26).  Hiring a bookkeeper, providing training, providing increased supervision when mistakes were made were sufficient and appropriate.

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Shareholder Loans – Capital or Non-Capital Losses

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Shareholder Loans – Capital or Non-Capital Losses

 SRI Homes Inc v The Queen, 2014 TCC 180

The TCC stated that the law surrounding the losses sustained on the disposition of a shareholder loan made to the corporation was canvassed by Justice Campbell in her decisions in Valiant Cleaning Technology Inc. v. The Queen, 2008 TCC 637, and Excell Duct Cleaning Inc. v. The Queen, 2005 TCC 776, at paragraph 7 where she stated:

In Easton v. R. (1997), 97 D.T.C. 5464 (Fed. C.A.), the Federal Court of Appeal stated the general proposition that an advance made by a shareholder to or on behalf of a corporation will be treated as a loan for the purpose of providing working capital to the corporation. Any resulting loss would therefore be capital in nature as either the loan was given to generate a stream of income or to secure an enduring benefit. However the Court in Eastonrecognized certain exceptions to this general proposition. One of these exceptions exists where the loan was made in the ordinary course of the business. This exception has been recognized as extending to cases where the loan was made for income producing purposes as it related to the taxpayer’s own business (R. v. Lavigueur (1973), 73 D.T.C. 5538 (Fed. T.D.) and Paco Corporation v. R. (1980), 80 D.T.C. 6328 (Eng.) (Fed. T.D.)). Other examples of this exception are where the loan was made for the purpose of increasing the profitability of the taxpayer’s own business (Williams Gold Refining Co. of Canada v. R., 2000 D.T.C. 1829 (T.C.C. [General Procedure])) and where the loan was made for the purpose of protecting the existing goodwill of the taxpayer’s business (Berman & Co. v. Minister of National Revenue (1961), 61 D.T.C. 1150 (Can. Ex. Ct.)).

Therefore, the default position is that the loss from the disposition of a shareholder loan is on account of capital (a capital loss), unless one of the exceptions applied to the case.

The Court agreed that the following activities were a money lending business: (i) Trade Receivables financing; (ii) Inventory financing; (iii) working capital/start-up financing; and (iv) consumer financing (see para 34).  But the shareholder loans in this case did not fall under either of those headings of money lending business. However, the shareholder did make the advance for purposes of earning money from its own business, thus satisfying one of the exceptions.

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Income Tax (Federal & Provincial) – HST/GST – International Tax