http://decisions.fca-caf.gc.ca/site/fca-caf/decisions/en/item/62832/index.do 
The Queen v. O’Dwyer[1] (September 5, 2013) involved appeals by the Crown from decisions of the Tax Court which struck the Crown’s reply and allowed the appellant’s appeal.[2]
The taxpayer was assessed a very large penalty for being involved in the sale of an alleged tax shelter:
[2] Thomas O’Dwyer was assessed a penalty under subsection 237.1(7.4) of the Act in the amount of $2,352,500 in relation to certain transactions that occurred in 2006. Accrued interest was also assessed in the amount of $485,312.34. Subsection 237.1(7.4) of the Act provides for the assessment of a penalty if a person sells, issues, or accepts consideration in respect of a tax shelter before the Minister has issued an identification number for such tax shelter.
There are essentially four aspects of this decision:
1. Was the property adequately described in the reply?
The issue here was whether the reply referred to the tax shelter “property” with sufficient specificity. The alleged tax shelter involved the sale of units of a limited partnership. The reply however referred to the limited partnership itself as the tax shelter and not the limited partnership units. On this issue the court was prepared to grant some latitude:
[13] However, while stating that “SRLP is a tax shelter” in paragraphs 14, 15 and 16 was not correct, it does not seem to me that this error alone would justify striking the entire reply. The term “SRLP” is used consistently throughout paragraph 11 as a shorthand reference to the limited partnership (and not the collection of the units of the limited partnership). The error made is in paragraphs 14, 15 and 16 (which is part of the argument). The paragraphs as written may well leave the reader with the impression that the author of those paragraphs was not careful with respect to the use of the term “SRLP” and in identifying the property that is alleged to be the tax shelter. However, it seems to me that when the reply is read in its entirety, it is reasonable to infer that the property that was alleged to be a tax shelter was a unit of the limited partnership. Therefore, although the term “SRLP” was not used correctly in paragraphs, 14, 15 and 16 of the reply and these paragraphs do not correctly identify the property that is alleged to be the tax shelter, these errors would not justify striking the entire reply.
2. Were the alleged tax shelter representations adequately described in the reply?
The Crown was not as successful on this issue:
[17] There are only two references to statements or representations that were made before the units of the limited partnership were acquired by the investors. These are in paragraphs 11 (m) and (r) of the reply and are as follows:
m) The Offering Memorandum states that the majority of the partnership’s expenses would occur in 2006;
…
r) SRLP made statements or representations that would cause an investor to believe that the loss that would be deductible in respect of their partnership interest would exceed the cost to the investor of the partnership interest less the value of the investor’s promissory note;
[18] Counsel for the Crown confirmed during the hearing that to the extent that paragraph (r) referred to statements or representations, it was simply a summary of the statements or representations referred to above. It was not intended to refer to any other statements or representations. As a result, the only allegation of fact related to any representation or statement made prior to the purchase of the units of the limited partnership is the allegation contained in paragraph (m).
[19] Assuming that the allegation of fact in paragraph (m) is true, this is well short of what would be required to find that the units of the limited partnership were a tax shelter. The representation that the majority of the partnership’s expenses would be incurred in 2006 does not:
(a) provide any indication of the amount of such expenses;
(b) indicate whether such expenses would be deductible in computing income for the purposes of the Act;
(c) provide any indication of the expected revenue of the limited partnership for 2006 (and therefore without knowing the amount of revenue and the amount of expenses it is not possible to determine if there would be a loss for 2006 as determined for the purposes of the Act);
(d) provide any indication of the amount of any anticipated losses as determined for the purposes of the Act; and
(e) provide any indication of whether such anticipated losses will be deductible by the holders of the units of the limited partnership in computing their income for the purposes of the Act.
[20] Therefore, there are no allegations in the reply that the statements or representations that would be required to support a finding that there was a tax shelter were made in this case. As a result, assuming that all of the facts as alleged are true, these facts would not support a finding that the units of the limited partnership were a tax shelter. The claim of the Crown that the penalty was properly imposed under subsection 237.1(7.4) of the Act does not have a reasonable prospect of success and therefore, in my opinion, the reply must either be struck or amended.
3. Was the role of the appellant in the transactions adequately described in the reply?
The issue here was whether the reply adequately described in the capacity in which the appellant acted to justify the imposition of penalties. Again the court found the reply inadequate in this regard:
[26] Although the above finding is sufficient to dispose of the appeals, the third criticism of the reply warrants some comments. The penalty under subsection 237.1(7.4) of the Act is imposed if a person “whether as a principal or as an agent, sells, issues or accepts consideration in respect of a tax shelter” before the identification number is issued. In the reply (paragraph 18), the provisions of subsection 237.1(7.4) of the Act are reiterated without identifying what specific role Thomas O’Dwyer is alleged to have played:
18. The Appellant is liable for a penalty because he acted as principal or agent to sell, issue or accept consideration in respect of the SRLP tax shelter before the Minister issued a tax shelter identification number, pursuant to subsection 237.1(7.4) of the Act.
…
[30] The alleged facts in relation to the role of Thomas O’Dwyer are set out in subparagraphs 11 (bb) to (mm) of the reply. However it is not clear how these alleged facts would lead to the conclusion that Thomas O’Dwyer is liable for the penalty. The only paragraph that purports to provide the basis for the assessment of the penalty is paragraph 18 and this paragraph does not provide any clear indication of how the alleged facts would result in Thomas O’Dwyer being liable for the penalty.
[31] In setting out the basis upon which the penalty was assessed, the Minister should clearly identify the role that Thomas O’Dwyer is alleged to have played and not simply reiterate every possible permutation or combination that could satisfy the statutory conditions to impose the penalty. Any taxpayer who has been assessed a penalty should know why the penalty was assessed. Simply reiterating the multiple combinations of possibilities that could result in the imposition of the penalty does not tell a taxpayer what specific act (that would result in the imposition of the penalty) he or she is alleged to have committed.
4. Should the Crown be permitted to amend the reply at this stage of the proceedings?
An unusual aspect of this decision is the Crown’s failure to move to amend its reply at any point prior to the conclusion of the respondent’s argument in the Federal Court of Appeal. This was not treated favourably by the court:
[23] After counsel for Thomas O’Dwyer had completed his oral submissions, counsel for the Crown made an oral request for leave to amend the reply. This was the first time that any request to amend the reply had been made and it was made when Thomas O’Dwyer had no reasonable opportunity to oppose it.
[24] There are cases where amendments to pleadings are allowed, even at a late stage in a proceeding. Several factors that should be taken into account in deciding whether a particular amendment to a pleading should be allowed are identified in The Queen v. Canderel Limited, 93 DTC 5357 (FCA). However, since in this case the only request to amend the reply was made during the oral submissions of the Crown in reply to the submissions of Thomas O’Dwyer and the Crown acknowledged that the only statements or representations that had been made were those already identified in the reply, this is not a case where the request to amend the reply should be granted and I would not grant the request of the Crown to amend the reply.
[25] I would, therefore, dismiss the appeal from the order striking the reply. Since I would strike the reply, I would also dismiss the appeal of the Crown from the order of the Judge allowing Thomas O’Dwyer’s appeal from the assessment of the penalty.
It is rare to see a reply struck and a taxpayer’s appeal allowed. In the case of tax shelter penalties it seems logical however that the taxpayer should know the case he or she has to meet with considerable clarity. This decision is a refreshing addition to the jurisprudence on tax shelters.
[1] 2013 FCA 200.
[2] The decision striking the Crown’s reply is reported at 2012 TCC 261. The subsequent judgment allowing Thomas O’Dwyer’s appeal appears to have been in a Supplementary Order and Judgment dated October 12, 2012. That decision does not seem to be reported but is referred to in para. [1] of the FCA decision.