Connolly v. R. – FCA: Federal Court of Appeal reverses Tax Court on error of fact – orders new hearing before new judge

Bill Innes on Current Tax Cases New Window

Connolly v. Canada (December 3, 2014 – 2014 FCA 283) was an appeal of a Tax Court decision which I blogged previously on this site: New Window

The Tax Court Judge dismissed the appellant’s appeal of a section 160 assessment on the basis that she did not accept the appellant’s evidence that the transfers in question were repayments of previous advances made by her to her common law spouse. Before the Tax Court Ms. Connolly was represented by a well known tax counsel. In the Federal Court of Appeal somewhat surprisingly she represented herself. Remarkably however the Court of Appeal concluded that the Tax Court Judge had made a fundamental error by holding that the Ms. Connolly’s evidence of the existence of a loan was a recent fabrication:

[3] Before the Tax Court, the appellant argued that she did not receive any benefit as a result of receiving the cheques in issue. Once the appellant cashed the cheques, the proceeds were either applied to reduce the common law spouse’s indebtedness to the appellant or were given to her common law spouse.

[4] The Judge rejected this explanation. In her view, the appellant was not credible (reasons, at paragraph 36). The first reason given by the Judge for this credibility finding was that the appellant’s explanation to the Canada Revenue Agency about the cheques in issue changed. According to the Judge, when the appellant was first contacted in November 2007, she advised the Canada Revenue Agency that the funds were immediately withdrawn and given to the common law spouse. The Judge went on to conclude that it was only at the objection stage that the appellant alleged that she made loans to her common law spouse and that the cheque proceeds represented payments of those loans (reasons, at paragraph 37).

[5] As conceded by counsel for the respondent at the hearing of this appeal, this was a finding that the appellant had, at the objection stage, fabricated a new explanation. This finding was therefore the lens through which all of the evidence was assessed by the Judge. As such, this finding was essentially dispositive of the issue of the appellant’s credibility.

[6] In fact, the appellant’s explanation was not a recent fabrication made at the objection stage.

[7] On April 4, 2004, in response to an inquiry from the Canada Revenue Agency with respect to a cheque deposited into the appellant’s account on November 7, 2003, the appellant stated, in the closing paragraph of her response, that:

“As I stated on the telephone, I did not keep and nor do I have any of this money therefore I have not benefit from this cheque. The only money that has passed from Mr. MacVicar to myself are amounts that were owing to me as a result of incurring living expenses and his borrowing money from me.” (Appeal Book volume 1, Tab 18)

[8] The finding of recent fabrication was therefore based upon a misunderstanding of the evidence, and constituted a palpable and overriding error.

As a result the Court of Appeal allowed the appeal and remitted the matter back to the Tax Court for redetermination by a different judge. Ms. Connolly was awarded her expenses in the Court of Appeal and costs in the Tax Court.

The Court of Appeal did however admonish Mrs. Connolly about her alternate grounds of appeal, i.e, perjury and bias:

[10]           I also find that it is not necessary to deal with the two other grounds of appeal raised by the appellant namely that counsel for the respondent committed fraud or perjury and that the Judge was biased, as both are clearly unfounded. I believe the appellant must be cautioned from making bold assertions that have no foundation whatsoever and that can tarnish the reputation of officers of the Court if left unchallenged. Perjury and bias are defined terms they should never be used lightly.