Canada: Appeal Court Orders Retrial On Heron Bay

In a judgment in Heron Bay Investments Ltd. v. The Queen (2010 FCA 203), delivered on July 26, 2010, the Canadian Federal Court of Appeal found that there was a "want of procedural fairness" in the proceedings of the Tax Court which resulted in its decision of September 8, 2009 (2009 TCC 337) and, as requested by the appellant, Heron Bay, in its pleadings, returned the matter to the Tax Court "for retrial by a different judge".

The case concerned a deduction for doubtful/bad debts claimed for tax purposes by Heron Bay in the amount of $3,770 million in its return for its taxation year ended August 31, 1995. Heron Bay was a member of the Conservancy Group of related companies controlled by four brothers. In November of 1994, it made a loan in the amount of the claim to Viewmark Homes Ltd., another member of the Conservancy Group, to assist it in financing the acquisition of a significant interest (95%) in real property acquired for $24.5 million in a series of transactions. The purchase price was later, based on independent valuations, determined to be inflated in that the value of the real property ($17,235 million) was significantly less than the price agreed.

Heron Bay, in order to support the claimed deduction, was required under the relevant provisions of the Canadian tax legislation to establish that its ordinary business included the lending of money in the year in which the deduction was claimed, that the loan contracted with Viewmark was made in the ordinary course of that lending business, and that at the end of its taxation year in respect of which the claim was made, there was a reasonable doubt as to whether the loan would be collectible.

The Tax Court found that Heron Bay was in the ordinary business of lending money but found that Heron Bay did not meet the second and third conditions necessary as the basis for the claim.

While the substantive questions in the case are also relevant, the principal argument made by Heron Bay, as appellant before the Federal Court of Appeal, was that the judge in the Tax Court deprived Heron Bay of procedural fairness by considering authorities not cited by either party without giving the parties an opportunity to make submissions on those authorities, by considering issues not pleaded by either party without giving the parties the opportunity to make submissions on those issues and by intervening excessively in the examination of witnesses giving rise to an apprehension of bias.

The judgment of the Federal Court of Appeal is interesting in that it carefully considers each of the complaints of the appellant and in so doing, provides some useful guidelines as to the role that a judge may play in court proceedings and as to what extent a judge may consider external references and issues not pleaded by a party to a dispute before the court.

The Federal Court of Appeal found in regard to the first complaint of Heron Bay that the Tax Court judge did not exceed the bounds of procedural fairness.

A breach of procedural fairness might have been demonstrated if the judge, by his reference to any of the 16 authorities referred to above, had introduced a principle of law that was not raised by either party expressly or by necessary implication, or had taken the case on a substantially new and different analytical path. para [24]

In regard to the second complaint pleaded by Heron Bay, that the judge had introduced a provision of the tax legislation (section 69) into the decision which was not pleaded by either party, the Federal Court of Appeal agreed with Heron Bay that the introduction of section 69 without inviting submissions from the parties was a breach of the rules of procedural fairness but agreed also with the Crown, and this was determinative, that "this breach did not result in a detriment to Heron Bay" and therefore did not justify a retrial.

The Federal Court of Appeal did, however, find for Heron Bay in regard to the third complaint in its pleadings. Heron Bay specifically argued that the judge's interventions in the examinations of Sheldon Libfeld, its only lay witness, raised issues of apprehension of bias. No allegation of actual bias was made. In this regard, the Court held that the Tax Court judge seemed to fall into the habit of "taking over the questioning", and more importantly, that "it is sufficiently clear from the judge's reasons that the evidence of Mr. Libfeld elicited by the judge provided the evidentiary base upon which the judge relied for a critical conclusion in favour of the Crown". The Court also noted that, in reproducing the information in the decision, the Tax Court judge omitted both the part of the record that indicated the information had been elicited by him and a further response of the witness that had a bearing on the conclusion reached.

The Court, also found that failure by a counsel to object to the conduct of the judge during the Tax Court proceedings, which was argued by the Crown as barring the appellant's right to raise the matter on appeal, was "significantly outweighed by the judge's use of the transcripts" in arriving at his conclusions.

The Federal Court of Appeal found that as a result of this procedural flaw the Trial Court judgment could not stand.

The record is such as to give a reasonable and well-informed observer the impression that the judge, during the examination of Mr. Libfeld and as a result of his own questioning, adopted a position in opposition to Heron Bay on a critical issue in the case, giving rise to a reasonable apprehension that the judge was not a fair and impartial arbiter. para [57]

The judgment may well have been a victory for Heron Bay but it remains, now, for it to again present its arguments in another trial before the Tax Court on the substantive issues. This is the second time that the Federal Court of Appeal has sent a matter back to the Tax Court in recent weeks. In the first case, GlaxoSmithKline v. The Queen (2010 FCA 201), the Court referred the matter back to the lower court on the basis that the trial judge had heard significant evidence presented at trial on the substantive issues and was, therefore, better able, with the benefit of the Court's Reasons, to make the determinations necessary on those substantive issues. In Heron Bay, the appellant pleaded, as a second basis of the appeal, that the judge in the Tax Court had erred in law in his decision. The Federal Court of Appeal made no finding on error in law. Similar issues remain to be decided on a further appeal to the same Court in General Electric Capital Canada Inc. v. The Queen (2008 DTC 3576) which has yet to be heard by the Court. It is of note, however, that the Appellant's Memorandum of Fact and Law in the General Electric case argues error of law as the first basis for its appeal and, as an alternative only, requests referral of the matter back for a new trial before a different judge of the Tax Court on the basis of interference with due process. It remains to be seen what the response of the Federal Court of Appeal will be in that case.

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