http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/109782/index.do 
Kinglon Investments Inc. v. Canada (May 22, 2015 – 2015 FCA 134, Gauthier, Webb (author), Rennie JJA).
Précis: This case involved what the Crown alleged to be an unregistered tax shelter. Part of the Crown’s Reply dealt with statements allegedly made concerning the tax shelter. The Reply did not however allege on whose behalf the statements were made. The Tax Court struck those portions of the Reply, giving the Crown leave to file an amended Reply. The taxpayer appealed the decision to allow the Crown to file an amended Reply. The Crown cross-appealed the striking of those portions of its Reply. The Federal Court of Appeal concluded that it was not necessary for the Crown to allege on whose behalf the statements in question were made in the case of an alleged tax shelter. Accordingly it reversed the Tax Court’s decision to strike portions of the Crown’s Reply. The cross-appeal of the Crown was allowed, with costs. The taxpayer’s appeal was dismissed, without costs. No costs were awarded in respect of the Tax Court proceeding. In addition the Court of Appeal granted the Crown leave to file an amended Reply clarifying its position on why the transaction in question was a tax shelter.
Decision: The underlying case concerned deductions arising from the acquisition of a license to market a heart medication:
[2] Kinglon was reassessed for several taxation years to deny all of the amounts that it had claimed as capital cost allowance in relation to a licence that it had purchased to market a certain heart drug. While the Minister of National Revenue relied on a number of grounds for the reassessments, the ground that is in issue in this appeal is the claim by the Minister that the licence is an unregistered tax shelter.
Part of the requirement in identifying a tax shelter is the making of statements or representations. The Tax Court Judge understood the law to be that the pleadings must allege on whose behalf those representations were made and struck portions of the Crown’s for failing to do so:
[3] There are a number of conditions that must be satisfied in order for the licence to be a tax shelter for the purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (Act). In particular, certain statements or representations must be made with respect to the amount that would be deductible if the licence is acquired. In this case, the Tax Court Judge struck the parts of the Reply related to the claim that the licence was an unregistered tax shelter because, although the Crown identified the particular individuals who were assumed to have made the required statements or representations, the Crown did not specify on whose behalf those individuals were acting when such statements or representations were being made.
The Tax Court Judge relied upon two seemingly contradictory paragraphs from
Baxter v. The Queen, 2007 FCA 172, [2007] F.C.J. No. 605, an earlier decision of the Federal Court of Appeal:
9. The definition requires that statements or representations must be made, at some time, in connection with the property that is offered for sale. If no statements or representations have ever been made in connection with a property, then that property cannot constitute a tax shelter. Because the property that is contemplated by the definition of tax shelter is a property that is assumed to have been acquired by the prospective purchaser and the statements or representations are required to have been made in connection with that property, it follows that the statements or representations must have been made prior to any actual sale of the property that is offered for sale. Further, while the definition does not specify to whom or by whom the statements or representations must be made, in my view they must be made to the prospective purchasers of the property by or on behalf of the person who proposes to sell the property.
...
44. While neither of the parties to this appeal, nor the TCC in its decision, focused much attention on the identity of the party who must have made the statements or representations, in my view, it would be reasonable to conclude that it must be each person who constitutes a promoter, as defined in subsection 237.1(1) (a "promoter").
(emphasis added [by the Court of Appeal in
Kinglon])
The Court of Appeal held that the portions of
Baxter concerning the identity of the person making the statements or representations were
obiter and therefore it was not plain and obvious that the Crown’s pleading was deficient and should be struck:
[19] Since the Tax Court Judge acknowledged that one possible interpretation of the relevant provisions of the Act is that a tax shelter could be found to “exist regardless of who makes the statements or representations so long as they are made to the taxpayer”, it was a palpable and overriding error on his part to then find that the Reply was deficient because the Crown did not specify on whose behalf the two individuals were making the statements or representations.
[20] The issue before this court in Baxter was not related to whether the person making these statements or representations had to be acting on behalf of any other person. Therefore, the comments in paragraphs 9 and 44 of Baxter would be obiter. While another Court may adopt these comments, the issue in relation to striking pleadings is not whether a person will be successful but whether it is plain and obvious that such person will not be successful. Since these comments are obiter and since there is no specific requirement in the definitions of tax shelter or promoter that the person making the required statements or representations must be the person who is attempting to sell the property or must be making such statements or representations on behalf of such person, it is not plain and obvious that the Crown will not be successful.
[21] Since no facts would have to be pled in support of this argument of the Crown, the parts of the Reply related to the allegation that the licence was a tax shelter should not have been struck.
In the result the Court of Appeal allowed the Crown’s cross-appeal, with costs, and dismissed the taxpayer’s appeal without costs. The Crown was also given leave to file an amended Reply clarifying their position as to why the license was a tax shelter:
[25] Therefore, I would:
(a) dismiss Kinglon’s appeal;
(b) allow the Crown’s cross-appeal;
(c) set aside the Order issued by the Tax Court and dismiss Kinglon’s motion to strike the parts of the Reply related to the issue of whether the licence is a tax shelter;
(d) grant the Crown leave to file and serve, within 30 days of the date of the order of this Court, an amended Reply to clarify the reasoning of why, in the Crown’s view, the licence was a tax shelter;
(e) not award either party costs in the Tax Court; and
(f) award the Crown costs only in relation to the cross-appeal to this Court.
TAGS: Income Tax Act, Tax Litigation, Tax Shelter, For Whom Representations Made