In litigation there are winners and losers. In Deans Knight Income Corp. v. The Queen, 2015 TCC 143 the Appellant lost in its attempt to have the court strike GAAR from the Minister’s pleadings and the court’s reasons leading to the result are worth noting.
In this case the Appellant claimed certain losses and was reassessed on grounds that included that GAAR precluded the losses from being claimed. On appeal, the Minister’s Reply continued to assert reliance upon GAAR and the Appellant applied to strike the Reply or portions of it on the basis that it disclosed no proper grounds on which the appeal could be opposed.
In arriving at the result, the Court applied the well- known test for striking pleadings, which is that a pleading will be struck only if it is “plain and obvious, assuming the facts to be true, that the pleading discloses no reasonable causes of action.” On the basis of this test, the Court denied the Appellant’s application and permitted the GAAR related pleadings to remain intact. The Court held:
I disagree with the Appellant’s position. The object, spirit or purpose of the provisions in question is something that the trial judge has to determine. It is not something that simply comes from the object, spirit or purpose that has been culled from the Act by judges in previous GAAR cases. It can hardly be said that the courts have completed an exhaustive analysis and description of the object, spirit and purpose of all provisions in the Act. As a result, I find it very difficult to conceive how it could ever be said that it was plain and obvious that the Respondent could not succeed on a GAAR argument in respect of a series of transactions of a type that had not previously been ruled upon. By its very nature, the misuse or abuse test in GAAR is something that can only be determined after the detailed analysis that a trial permits. Accordingly I dismiss the Appellant’s motion to strike the Respondent’s GAAR argument. (Emphasis added)
In 2005, in Canada Trustco Mortgage Co. v. Canada the Supreme Court of Canada said of GAAR that it “draws a line between legitimate tax minimization and abusive tax avoidance [however] [t]he line is far from bright.” Six years later not much had improved in terms of bringing clarity and certainty to the application of GAAR and in Copthorne Holdings Ltd. v. Canada the Supreme Court of Canada observed: “It is relatively straightforward to set out the GAAR scheme. It is much more difficult to apply it.”
The result in Deans Knight Income Corp. is certainly consistent with the observations by the Supreme Court of Canada that the line between legitimate tax minimization and abusive avoidance is far from bright and that GAAR is difficult to apply. However, this result also illustrates the very practical legal issues that can arise from such a broad and uncertain principle of law.
The purpose that is served by allowing a court to strike pleadings is that it is both unfair to a litigant and a poor use of resources for time and effort to be spent on pleadings that are destined to fail. In Deans Knight Income Corp. the Court held that as long as a specific application of GAAR has not been determinatively ruled upon, a GAAR based pleading by the Minister will never be struck because the application of the rule “is something that can only be determined after the detailed analysis that a trial permits.” In other words, as long as the Minister is able to draft a GAAR based pleading in a manner that is at least marginally different from any previously decided case, the pleading will not be struck and the issue will have to be decided by a judge, after discoveries and after trial.
With the potential that arises from this judgement for making some GAAR related litigation to become more protracted, it is that much more unfortunate that the line between legitimate tax minimization and abusive avoidance is not a little brighter from what has so far been drawn.