Gramiak v. R. – TCC: Taxpayer Loses Motion to Strike Crown’s New Alternative Basis for Assessment

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Gramiak v. The Queen[1] (December 10, 2013) is a complex ruling on a motion by the taxpayer to strike portions of the Crown’s reply heard at the same time as a motion by the Crown to add two new paragraphs to its reply.  The background concerned an alleged RRSP stripping scheme:

[1]     The Appellant’s appeal is part of a group known as the Concentra-Olympia group of appeals which all relate to certain purported Registered Retirement Savings Plan “RRSP stripping” transactions. Mr. Gramiak is the lead Appellant for the purposes of the matter at issue in this motion.

[2]     Both parties agree that prior to the transactions in question the Appellant opened a self-directed RRSP account that had the Olympia Trust Company (“Olympia”) as its trustee. The Respondent alleges that the Appellant transferred funds into this RRSP account from a similar type of account with another financial institution.

[3]     In 2002 and 2003 respectively, $130,500 and $8,500 were removed from the Appellant’s RRPS account with Olympia.  The Respondent’s position is that the Appellant instructed Olympia to use the foregoing amounts to acquire certain debenture units in PI Ventures Inc. (“PI Ventures”) in 2002 and 2003.  The Appellant previously conveyed to the Canada Revenue Agency (“CRA”) that he believed at all material times that the RRSP funds were used to acquire debenture units in PI Ventures.  The Notice of Appeal filed now indicates that the Appellant’s position is that the debentures were never acquired.

[4]     It is now unclear if the RRSP funds were ever actually used to acquire the debenture units in PI Ventures, or were instead transferred into a trust account maintained by a Calgary law firm. Once in the law firm’s trust account, the Respondent argues that the amounts were used to invest in certain off-shore corporations, and that the reported yield from these investments were credited to the Appellant’s debit card accounts.

[5]     There was no agreement between the parties as to whether or not the debenture units in PI Ventures were “qualified investments” for the purpose of the Income Tax Act (“Act”), or if they would have been a “qualified investment” if they had been acquired.

[6]               In January of 2002, the Appellant received a Proposal Letter from the CRA wherein the CRA proposed to reassess the Appellant for the 2002 and 2003 taxation years.

[7]     Further into the audit process, the Minister of National Revenue (“the Minister”) obtained waivers from the Appellant with respect to the normal assessment period for the Appellant’s 2002 and 2003 taxation years. Both of the waivers were drafted by the Appellant, and were dated March 14, 2006.

[8]     The waiver with respect to the 2002 taxation year provided, in part, as follows:

The normal reassessment period referred to in subsection 152(4) of the Income Tax Act … is hereby waived for the taxation year indicated above in respect of:

Income inclusion of $130,500 relating to the acquisition of non-qualified investments (PI Ventures Corporation Convertible Debentures) for an RRSP subject to s. 146(9) and/or s. 146(10).

[9]     The waiver in respect to the Appellant’s 2003 taxation year is identical to the waiver to the 2002 taxation year except for the value of the income inclusion referred to therein.

[10]   The Appellant submits that subsection 146(9) and 146(10) were identified in the waiver based on the Proposal Letter and the Appellant’s understanding of the issues and provisions that were relevant for the reassessment.

[11]   On January 4, 2007, after the normal reassessment period in respect of the Appellant’s 2002 taxation year had expired, but before the normal reassessment period in respect to the Appellant’s 2003 taxation year had expired, the Minister reassessed the Appellant to include the amounts of the RRSP funds in the Appellant’s income. These reassessments applied subsections 146(9) and 146(10) of the Act, which generally apply to a taxpayer when funds or value are diverted out of a taxpayer’s RRSP in a certain way.

[12]   The Appellant argued for the first time in the Notice of Appeal that they did not in fact acquire the debenture units in question.  As such, the Respondent included an alternative argument in which they submitted that if the acquisition of the debenture units did not in fact take place then the Appellant received a benefit from his RRSP such that subsection 146(8) applies.

[13]   The Appellant objected to this reassessment, and it was confirmed by the Minister on October 14, 2011.

The portions of the reply which the appellant sought to strike were:

20.c: Whether the Appellant constructively received the total amount of the RRSP funds transferred out of his RRSP account.

28: Alternatively, if this Court concludes that the Appellant’s RRSP did not acquire the debenture units and/or did not acquire any property during the 2002 and 2003 taxation years, the Respondent submits that by directing Olympia Trust to transfer funds from his RRSP account into Singh Walters Bindal Trust Account, the Appellant constructively received the total amount of the funds transferred.

29. As a consequence, the amounts of $130,500 and $8,500 received by the Appellant constituted a benefit out of or under a RRSP and as such this amount should be included in his income for the 2002 and 2003 taxation years pursuant to subsection 146(8) and paragraph 56(1)(h) of the Act.

The bases for seeking to strike these provisions were threefold:

[21]   First, the alternative argument does not meet the conditions of subsection 152(9) of the Act. The Appellant argues that the Respondent is relying on transactions in the alternative argument that were not transactions that formed the basis of the reassessment.  The Appellant alleges that the “new transactions” introduced by the alternative argument are the transfer of funds out of the RRSP account, and the constructive receipt of the funds.  The Appellant submits that the acquisition of the debentures by the RRSP is not only fundamental to the Minister’s position in subsections 146(9) and (10), it is the sole transaction relied upon by the Minister in issuing the reassessment.  As such, they argue that to allow the Respondent to rely on a transaction that presupposes that debentures were never acquired would force the Minister to abandon the very assumption upon which the reassessment relies, and therefore should not be allowed.

[22]   Second, the Appellant argues that subparagraph 152(4.01)(a)(ii) and subsection 152(5) of the Act disallow the alternative argument because it is outside the scope of the waiver.  Their position relies on the assertion that the alternative argument does not “reasonably relate” to the matters specified in the waiver.  In fact, the Appellant submits that their representative consciously and deliberately drafted the waiver in narrow terms so as to limit its application to only reassessments issued pursuant to subsections 146(9) and (10) of the Act.

[23]   The Appellant lastly advances that the alternative argument would prejudice the fair hearing of the appeal within the meaning of subsection 53(a) of the Rules, and would constitute an abuse of process within the meaning of subsection 53(c) of the Rules.

The court did not accept the appellant’s “alternative argument” point:

[46]   It seems clear that the transactions underlying the reassessment and the alternative argument are the alleged transactions undertaken by the Appellant to circumvent tax on his RRSP funds. Naturally, all of the sections of the Act in question, subsection 146(8), (9) and (10), are all provisions aimed in part at preventing taxpayers from diverting funds out of their RRSPs on a tax-free basis.  It is the transactions relating to the “RRSP stripping”, and more particularly the diversion of funds from the RRSP account to the law firm’s trust account, that underpin both the reassessment and the alternative argument.

[47]   As such, I am of the view that the alternative argument does not “include transactions which did not form the basis of the taxpayer’s assessment” as described in Walsh, and as purported by the Appellant.

The court likewise rejected the argument that these paragraphs exceeded the scope of the waiver:

[65]   This case is unlike that of Honeywell, where the Minister reassessed the Appellant on an entirely new basis after receiving new information at the examination for discovery stage; Honeywell’s reassessment dealt with new facts, new issues, and new transactions that could not reasonably relate to the matters set out in the waiver.  Similarly, the case at bar can also be distinguished from the case in Mah, where Chief Justice Rip found that the only relationship between the two provisions was that they were triggered in the same year. In stark contrast, the instant case deals with the same transactions, the same issues, and there is a direct connection between the provisions pleaded.

[66]   I will address here the fact that the Appellant had maintained throughout the audit process that he had acquired the debenture units in question, however the Appellant changed his position in the Notice of Appeal, and now claims to have never acquired the units.  It would be absurd to disallow the Respondent’s alternative argument when one considers that the Appellant drafted the waiver attempting to limit the scope of the reassessment, then advanced a new argument in the Notice of Appeal that contradicts the information provided to the CRA during the audit, and now claims the Respondent cannot respond to their new position since it is outside the scope of the carefully crafted waiver.

[67]   Given the relationship between subsections 146(8), (9) and (10) and given the common factual matrix underlining both the alternative argument and the reassessment, I believe that the alternative argument can reasonably be regarded as relating to the matter specified in the waiver. As a result, it is my view that the Respondent should be entitled to raise the alternative argument in their Reply.

Similarly the appellant’s “prejudice” argument did not go far:

[71]   In this case, the Appellant could not have been reasonably surprised by the alternative argument advanced in the Reply since it was included in the Respondent’s pleadings in simple response to the Appellant’s new position in the Notice of Appeal.

[72]   The Appellant’s motion is therefore dismissed.

The Crown had more success on its motion.  It sought to add two paragraphs to its reply:

19A: During the years 2004 to 2007, the Appellant received the following funds from foreign source as shown on the statements issued by Syndicated Gold Depository and provided by the Appellant to the CRA:

         2004: US $ 5,950.00

         2005: US $ 32,351.86

         2006: US $ 40,000.00

         2007: US $ 40,000.00

         Total: US $ 118,301.86 (CND $135,297.60)

19B: These amounts represent a return of capital from the Appellant’s RRSP investment in PI ventures Inc. as stated by the Appellant tin a declaration dated June 20, 2008.

The court held that there was no prejudice to the appellant by introducing these two new paragraphs:

[77]   I cannot imagine how the Appellant would be prejudiced in any way by the addition of these facts given that it was made clear to the Appellant since the very beginning of the audit that the CRA was investigating what they believed to be an RRSP stripping scheme.  The Appellant has been anticipating this very argument from the Minister, and nothing with regard to the Respondent’s position has changed with the addition of the new paragraphs.  They are material facts that simply complete the Respondent’s pleadings.

In the result, the appellant’s motion was dismissed with costs to the Crown and the Crown’s motion was allowed with costs against the appellant.

Comment:  The most interesting aspect of this decision is probably the “waiver” argument raised by the appellant.  On its face it is a somewhat attractive argument in that the waiver specifically refers to the acquisition of the PI Ventures debentures and nothing else.  The flaw in the argument, which appears to have justifiably annoyed the court, is that the appellant all throughout the assessment process represented that the funds in question had been used to purchase PI Ventures debentures (and in fact drafted the disputed waiver on that basis) and subsequently first raised the allegation that the funds were not used to purchase the debentures in his notice of appeal.  Although the court did not find it necessary to go that far, it would appear that there are reasonable grounds to assert that it would offend public policy to permit the appellant to succeed on this argument.  It will be interesting to see if this point is pursued in the Federal Court of Appeal.

[1] 2013 TCC 383.