March 06, 2012

Robert Strother, Sentinel Hill Productions IV Corporation, in its capacity as designated member of Sentinel Hill No. 207 Limited Partnership, and Sentinel Hill Productions IV Corporation, in its capacity as designated member of Shaae (2001) Master Limited Partnership (Appellants) v. Her Majesty The Queen (Respondent)

2011 DTC 1199
Neutral Citation: 2011 TCC 251
Tax Court of Canada
Date: May 12, 2011

Amended Date: June 20, 2011
Court File Nos. 2007-329(IT)G, 2009-2247(IT)G, 2009-2248(IT)G (General Procedure)

Appeals — Motions to strike portions of replies — Whether taxpayers entitled to orders striking portions of Minister’s replies — Tax Court of Canada Rules (General Procedure), SOR/90-688a, s. 8, 49(1), 53.

Facts: The taxpayers’ appeals related to investments in film production limited partnerships. The taxpayers’ concern was that the Canada Revenue Agency allegedly did not honour some advance tax rulings, so that the Minister’s determinations of losses did not agree with the taxpayers’ loss calculations. The taxpayers moved for orders striking portions of the Minister’s replies on the grounds that they were scandalous, frivolous, vexatious, and an abuse of the Court. The Minister argued, in part, that the motion of the individual taxpayer, S, should be dismissed under the fresh step rule in s. 8 of the Tax Court of Canada Rules (General Procedure).

Held: The taxpayers’ motions were granted in part. After the Minister raised the fresh step issue, both parties filed new pleadings, so that the Minister would not be prejudiced by granting S leave to go forward with his motion. It is poor and improper pleading to admit or deny a fact, coupled with a conclusion of law or some extraneous comments that add nothing to the process. A non-arm’s length relationship is a question of fact, so that any mention of such a relationship cannot be struck on the ground that pleading a conclusion of law is involved. Similarly, applying the facts to determine whether there has been a common intention to mislead is a conclusion of mixed fact and law, since it involves the applications of the facts to the legal test for a sham. In such situations, the facts should be extricated, and mentions of sham or façade should be eliminated from the pleadings. Pleadings involving reasonable expectation of profit (“REOP”) are governed by the fact that the REOP test for deductibility of expenses under s. 9 of the Income Tax Act was replaced by the Supreme Court of Canada in Stewart v. The Queen (2002 DTC 6969) with a pursuit of profit test. However, the REOP test is still relevant when determining whether a taxpayer’s activity has been carried on in a commercial manner. Finally, in the context of a tax shelter arrangement, no pleading can be considered scandalous if it is relevant. Applying all of the foregoing principles, portions of the Minister’s replies were ordered to be struck.