In the recent decision in Clearwater Seafoods Holdings Trust (2013 FCA 180), the Federal Court of Appeal considered the scope and purpose of Rule 29(1) of the Tax Court of Canada Rules (General Procedure) (the “Rules”). When a trust ceases to exist during the course of a tax appeal, with tax liability shifting to a new person, may the new person continue the appeal? The Court answered that question in the affirmative and unanimously held that this scenario falls within the language and intended purpose of Rule 29(1).
In 2011, Clearwater Seafoods Holdings Trust (the “Trust”) appealed an income tax assessment to the Tax Court of Canada. In 2012, the Trust transferred all of its assets to Clearwater Seafoods Income Fund, which subsequently transferred the assets to Clearwater Seafoods Incorporated (the “Corporation”). This transfer occurred in the context of the Trust “converting” to avoid application of the SIFT rules under the Income Tax Act.
At the Tax Court (2012 TCC 186), both parties accepted that the Trust had been terminated as a result of the disposition of all its property; however, this did not automatically bring the income tax appeal to an end. The issue in Clearwater was whether the tax appeal could be continued with the Corporation as appellant in place of the Trust. To obtain an order permitting the Corporation to assume the position of appellant going forward, a motion was brought by the Trust pursuant to section 29 of the Rules, which states,
29 (1) Where at any stage of a proceeding the interest or liability of a person who is a party to a proceeding in the Court is transferred or transmitted to another person by assignment, bankruptcy, death or other means, no other proceedings shall be instituted until the Registrar is notified of the transfer or transmission and the particulars of it. [emphasis added]
Once notice has been given to the Registrar, Rule 29 provides that the Chief Justice or a judge designated by him may direct the continuation of the proceeding. At the Tax Court, the taxpayer brought a motion arguing that the Corporation is the appropriate party to continue the tax appeal as it now owned the property and would be liable if the appeal is unsuccessful. The Crown argued that the tax appeal should be dismissed for want of an appellant. The Tax Court held that the matter were not within the scope of Rule 29(1) and the motion was dismissed. The order was appealed to the Federal Court of Appeal.
The Court of Appeal held that the lower court had construed Rule 29(1) too narrowly. In arriving at this conclusion, the Court of Appeal addressed the rule’s underlying rationale. The Court found that the purpose of Rule 29(1) is to deal with instances in which the circumstances of a litigant have changed and special accommodations are required in order to continue the proceeding. Such changes may include bankruptcy, incapacity due to illness or injury, death of a litigant or the dissolution of a litigant that is a corporation. The Court also considered such changes to include circumstances where a litigant that is a trust is terminated as a result of the disposition of all of its property.
The Federal Court of Appeal found that the transfer of the property to the Corporation, in effect, placed tax liability on the Corporation and the trustees in the event of an unsuccessful tax appeal. The termination of the existence of the Trust was found to be within the meaning of “other means” in Rule 29(1). Consequently, it was held that there was a transmission of liability from the Trust to “another person” by “other means”. The Court held that this scenario falls within the language and purpose of Rule 29(1). As a result, the appeal was allowed and the matter was sent back to the Tax Court to be reconsidered with a view to directing the continuation of the proceedings.
The decision in Clearwater highlights the Court’s willingness to interpret Rule 29(1) in a broad manner. It also raises the question of what constitutes “other means” for the purposes of Rule 29. As a result, it is important for any taxpayer, or party which may acquire tax liability, to consider the implications of Clearwater prior to an income tax appeal.