AgraCity Ltd. v. R. - FCA: Crown can have inconsistent pleadings in related appeals

AgraCity Ltd. v. R. - FCA:  Crown can have inconsistent pleadings in related appeals

http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/127384/index.do

AgraCity Ltd. v. Canada  (December 16, 2015 – 2015 FCA 288,Gauthier, Webb (author), Near JJ. A.).

Précis:    The Tax Court struck a portion of the Crown’s reply in this case on the basis that it was dealt with transfer pricing while at the same time the Crown argued that there had been no transfer from the non-resident concerned.  The Federal Court of Appeal allowed the Crown’s cross-appeal on this point only.  The Crown’s cross-appeal on two other points was dismissed.  The taxpayer’s  appeal arguing that more provisions should have been struck was also dismissed.  The Court ordered costs to the Crown on the taxpayer’s appeal;  there were no costs awarded on the Crown’s cross-appeal.

Decision:   This was a convoluted appeal and cross-appeal:

[1]               The main issue in this appeal is whether the Crown can have inconsistent pleadings in relation to appeals filed in the Tax Court of Canada by different taxpayers. Justice C. Miller of the Tax Court of Canada partially allowed the motion of AgraCity Ltd. (AgraCity) to strike parts of the reply filed by the Crown (Docket 2014-1537 (IT)G). AgraCity is appealing the decision to not strike the other parts of the reply that AgraCity was seeking to have struck on the basis that such parts are inconsistent with another reply that has been filed by the Crown in response to an appeal of another taxpayer. AgraCity is also appealing the Order that it serve and file a list of documents in accordance with Rule 82 of the Tax Court of Canada Rules (General Procedure) (the Rules).

[2]               The Crown is cross-appealing the order to strike or rewrite parts of its reply. The main issue in the cross-appeal is whether the references to paragraphs 247(2)(a) and (c) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the Act) should have been struck.

The underlying facts dealt with profits on the sale of a chemical imported into Canada for use by farmers:

[4]               This matter is at the pleadings stage before the Tax Court of Canada. The actual facts of the case are not clear and are in dispute. It appears that there is no dispute that farmers in Canada wanted to buy a particular herbicide, ClearOut, which was to be imported into Canada. What is not clear is who was selling ClearOut.

[5]               There are three companies that are relevant in this matter:

  • AgraCity, which is wholly owned by Jason Mann;
  • 101072498 Saskatchewan Ltd. (SaskCo), which is indirectly owned by Jason Mann and his brother, James Mann; and
  • NewAgco-Barbados, a company incorporated under the laws of Barbados, which is wholly owned by SaskCo.

[6]               During the taxation years under appeal, NewAgco-Barbados reported significant profits from the sale of ClearOut and claimed that it had paid significant amounts to AgraCity as a service fee in relation to the sale of ClearOut.

[7]               In the reply filed by the Crown in relation to AgraCity’s appeal to the Tax Court of Canada, the Crown pled that NewAgco-Barbados did not sell any ClearOut and therefore should not have been entitled to any profit from the sale of ClearOut. The Crown determined, under section 247 of the Act, that the fair market value of the services provided by AgraCity was equal to the amount that had been paid by NewAgco-Barbados plus the net profit that had been reported by NewAgco-Barbados from the sale of ClearOut, thus effectively reallocating all of the profit reported by NewAgco-Barbados from the sale of ClearOut to AgraCity.

[8]               In the reply filed by the Crown in relation to SaskCo’s appeal to the Tax Court of Canada, the Crown pled that NewAgco-Barbados bought ClearOut and sold it to AgraCity. As noted by the Tax Court Judge, the pleadings of the Crown in relation to the appeals of AgraCity and SaskCo are irreconcilable.

[9]               The only reply that is the subject of this appeal, is the reply related to AgraCity’s appeal to the Tax Court of Canada.

The appeal boiled down to five issues:

[17]           The issues arising as a result of the appeal and the cross-appeal are whether the Tax Court Judge erred in:

(a)    not striking all of the parts of the reply that are inconsistent with the position of the Crown in the reply filed in relation to the appeal of SaskCo;

(b)   ordering each party to serve and file a list of documents under Rule 82;

(c)    striking the paragraphs from the reply that relate to paragraphs 247(2)(a) and (c) of the Act;

(d)   striking or ordering the Crown to move paragraphs of the reply that the Tax Court Judge determined to be statements of law; and

(e)    ordering the Crown to redraft its reply in relation to the assessment of penalties under subsection 163(2) of the Act.

The Crown was successful on point (c).  All other grounds of appeal and cross-appeal were dismissed.

As to point (a), inconsistent pleading, the Court held:

[19]           AgraCity and SaskCo, although they are related persons for the purposes of the Act, are two separate persons. The Minister of National Revenue (the Minister) is to assess (or reassess) each taxpayer under section 152 of the Act. Because each taxpayer is assessed (or reassessed) separately, this can result in inconsistent assessments (Peterson v. The Queen, 2005 FCA 263, [2005] F.C.J. No. 1269, at paragraph 4). If the Minister has issued inconsistent assessments, this will lead to inconsistent pleadings, if the taxpayers appeal to the Tax Court of Canada. In this case the Crown acknowledges that the assessments and hence the pleadings are inconsistent and that the Crown does not seek to have both assessments upheld.

[20]           Even though the Crown made certain admissions of fact in the reply filed in relation to the appeal of SaskCo, those admissions would only relate to that appeal, not to the appeal of AgraCity (Lederman, Bryant and Fuerst, The Law of Evidence in Canada, 4th ed. (Canada: LexisNexis Canada Inc., 2014) at para. 19.6). Since these appeals will be heard on common evidence, how any admission of facts will affect the outcome of the appeals is a matter best left to the trial judge who will be hearing all of the evidence and who will determine what facts have been established.

As to point (c) where the Crown’s cross-appeal was successful, the Court held:

[34]           However, this case was decided before this Court released its decision in Cameco Corp. v. The Queen, 2015 FCA 143, [2015] F.C.J. No. 774. In that case, the Crown was alleging that the non-resident corporation did not perform any services and therefore the amount that the resident corporation should have paid for services was nil. In confirming the Tax Court Judge’s decision to not strike the references to paragraph 247(2)(a) and (c) in that case, this court stated that:

51        No court has determined where paragraphs 247(2)(a) and (c) end and where 247(2)(b) and (d) begin and I agree with the Crown that it would be inappropriate to attempt to resolve this issue on a motion to strike (Hunt at paras. 18, 28 and 43). The question whether a nil price can give rise to the application of paragraphs 247(2)(a) and (c) -- in addition to paragraphs 247(2)(b) and (d) -- is best left to be decided by the trial judge in the fullness of the evidence (Reasons at para. 27).

[35]           In Cameco, the allegation of the Crown was that all of the services were provided by the company resident in Canada and therefore no amount should have been paid by that company to the non-resident corporation. The net effect was that the non-resident corporation, in the Crown’s view, was not entitled to any profit in relation to the transactions in issue.

[36]           Although in Cameco the issue was whether the company resident in Canada should have paid nothing while the issue in this case is whether the company resident in Canada should have received all of the amount related to the sale of ClearOut, in both cases the net effect is that all of the profit would be reallocated to the company resident in Canada. In both cases the Crown is arguing that paragraphs 247(2)(a) and (c) of the Act could effectively allocate all of the profit to the company resident in Canada. Just as in Cameco, it seems to me that at this stage of the proceedings the paragraphs of the reply related to paragraphs 247(2)(a) and (c) of the Act should not have been struck and the Tax Court Judge committed an error in doing so.

The Crown was awarded costs on AgraCity’s appeal.  There were no costs awarded on the Crown’s cross-appeal.