2021 QCCQ 2913, 2021 QCCQ 2913

7049960 Canada inc. c. Agence du revenu du Québec 2021 QCCQ 2913 COURT OF QUEBEC (Administrative and Appeal Division) CANADA PROVINCE OF QUÉBEC DISTRICT OF MONTRÉAL N° : 500-80-040055-197 DATE : April 20, 2021 ______________________________________________________________________ BEFORE THE HONOURABLE ENRICO FORLINI, J.C.Q. ______________________________________________________________________ 7049960 CANADA INC. Plaintiff v.

AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ JUDGMENT ______________________________________________________________________ [ 1 ] 7049960 Canada inc. (“ 704 ”) asks the Court to stay its appeal of a notice of reassessment issued by the Agence du Revenu du Québec (“ Revenue Québec ”) until the Tax Court of Canada rules on an appeal of an assessment filed by 645302 B.C.

Ltd (“ 645 ”) in file no. 2016-2983(IT)G (the “ 645 TCC Appeal ”). [ 2 ] 704 argues that it is in the interest of justice to stay its appeal because the outcome of the 645 TCC Appeal will bear directly on this appeal given that Revenue Québec has already agreed to be bound by the outcome of the 645 TCC Appeal, and that there is an undeniable link between the two appeals given the close relationship between the parties and the nature of the underlying transactions.

It adds that a stay of proceedings would be consistent with the rule of proportionality, would avoid the risk of contradictory judgments, and would limit the multiplicity of proceedings and costs for both parties. [ 3 ] Revenue Québec contests the Application for a Stay of Proceedings on numerous grounds.

It argues it would suffer prejudice if the stay is ordered, that the rule of promptness of justice militates against a stay, that there is no risk of conflicting judgments, and finally that the guiding principles of procedure do not warrant a stay. [ 4 ] The only issue that the Court must decide is whether it is in the interests of justice to stay 704’s appeal in this proceeding until the Tax Court of Canada rules in the 645 TCC Appeal.

Analysis and Decision Is it in the interests of justice to stay 704’s appeal in this proceeding until the Tax Court of Canada rules in the 645 Appeal? [ 5 ] A stay of a proceeding will be ordered when the party seeking the stay establishes that it is in the interests of justice to do so and that the stay furthers the accomplishment of the guiding principles of procedure [1] . [ 6 ] In Landry v. Chelin , the Quebec Court of Appeal recently reiterated the criteria that must be taken into consideration when a judge must assess whether it is in the interests of justice to stay a proceeding.

These criteria are as follows: [2]

i) When there is an undeniable link between the two lawsuits ii) When the ultimate fate of a lawsuit in one proceeding depends to a large extent on the fate of a lawsuit in another proceeding; iii) When the suspension of the proceeding promotes the rule of proportionality; iv) Where there is a risk of conflicting judgments on certain issues before the two proceedings; and

v) When the absence of a stay would have the effect of unnecessarily increasing the procedures and costs for the parties. [ 7 ] The Court of Appeal also stated in Landry that the party seeking the stay need not satisfy all of these conditions for a stay to be ordered, but adds that the courts will be more inclined to grant the stay when several of them are met. [3] [ 8 ] The parties to this proceeding, 704 and the Agence du Revenu du Québec, agree that the criteria summarized above govern 704’s application to stay. However, they disagree as to whether 704 has met the test for a stay.

i. Is there a link between the 645 Tax Court of Canada Appeal and 704’s Appeal before the Court of Québec?

Background [ 9 ] 704’s appeal of the notices of reassessment issued by Revenue Québec for the 2009 tax year deals in large part with the tax treatment of gains (income) and losses arising from trading in forward foreign currency contracts and the use of a tax planning strategy known as straddle transactions. [4] [ 10 ] The gains (income) reported by 704 in its 2009 tax return are tied to losses reported by 645 in its tax returns for the 2008 tax year and stem from the same forward foreign exchange transactions. [ 11 ] 645 [5] and 704 are related companies. [ 12 ] 645 and Glenn Chamandy were at all times relevant to these proceedings, the shareholders of 7033125 Canada Inc. (‘’ 703 ’’). [ 13 ] 703 and Mr.

Chamandy in turn were shareholders of 704. [ 14 ] Mr.

Chamandy was a director of 645, 704 and 703. [ 15 ] To properly understand whether there is a link between the 645 TCC Appeal and the present appeal, it is important to explain the nature of forward foreign exchange contracts and straddle transactions since both the 645 TCC Appeal and 704’s Appeal to the Court of Québec arise in the context of income and losses resulting from trades in forward foreign exchange contracts and a tax planning strategy known as straddle transactions. [ 16 ] As Revenue Québec’s auditor explained, generally, a straddle transaction is a transaction in which a taxpayer concurrently enters into a number of forward foreign exchange contracts that are expected to generate equal and offsetting gains and losses. [6] [ 17 ] As the value of the foreign currency fluctuates, one of the contracts moves into an accrued gain position (the “gain leg”) and the other moves into an accrued loss position (the “loss leg”).

In a basic straddle transaction, the taxpayer disposes of the position with the accrued loss to realize that loss shortly before its taxation year-end. Then, shortly after the beginning of the following year, the taxpayer disposes of the other position to realize the accrued gain. [ 18 ] In the present case as explained in detail below, the accrued loss was reported by 645 for its 2008 taxation years, whereas, further to a number of rollovers, the gain was reported by 704 for its 2009 taxation year.

The 645 TCC Appeal [ 19 ] In 2008, 645 entered into numerous transactions involving forward foreign exchange contracts with a third party. [7] [ 20 ] Before the end of the 2008 taxation year, 645 closed out all these forward foreign exchange contracts that were in loss positions and thus realized a loss from its trading business of $68,248,352 (‘’ 2008 645 Trading Losses ’’). [ 21 ] During the same timeframe, 645 had approximately $68,000,000 in open forward foreign exchange contracts. [ 22 ] In October 2008, through a series of rollovers, 645 transferred its interests in the open forward foreign exchange contracts to 703, which in turn rolled then over to 704. [8] [ 23 ] During its 2009 taxation year, 704 closed out these open foreign exchange forward contracts and realized business income of $68,240,117 (‘’ 2009 Trading Income ’’). 704 reported this income in its tax return for the 2009 taxation year. [9] [ 24 ] As a result, close to $69,000,000 of 704’s reported income for the taxation 2009 results from forward foreign exchange trading contracts that were initiated by 645. [ 25 ] In November 2012, the Canada Revenue Agency reassessed 645 to disallow the 2008 645 Trading Losses. [ 26 ] 645 appealed this reassessment to the Tax Court of Canada. [10] [ 27 ] Revenue Québec’s similarly reassessed 645 to disallow the 2008 645 Trading Losses [11] for essentially the same reason as the CRA. [ 28 ] On July 31, 2013, 645 signed a R etrait conditionnel providing that Revenue Québec will apply any final decision rendered in respect of the 645 CRA reassessment for its 2008 taxation year to the 645 Revenue Québec reassessment. [12] [ 29 ] On July 18, 2016, 645 appealed the Canada Revenue Agency reassessment to the Tax Court of Canada. [13] [ 30 ] According to 645’s Notice of Appeal, the only issue to be decided by the Tax Court of Canada is whether the Canada Revenue Agency was correct to disallow 645’s 2008 Trading Losses in the amount $68,247,352 as resulting from a sham. [14] [ 31 ] The Attorney General of Canada agrees with 645’s framing of the issue to be decided before the Tax Court of Canada.

Indeed, in its reply to the Notice of Appeal, the Attorney General of Canada argues that all of the foreign exchange contracts that 645 entered into with the third party brokage firm were shams and were created to deceive the Minister of Revenue into believing that 645 had incurred a business loss. [15]

The Abacus Group of Appeals [ 32 ] The 645 TCC Appeal before the Tax Court of Canada is one of among many tax appeals pending before that Court that deal with the issue of the validity of straddle transactions stemming from trading in forward foreign exchange contracts. [ 33 ] Indeed, there are more than 50 tax appeals presently pending before the Tax Court of Canada which raise this issue. [ 34 ] These tax appeals have been given the informal name of the Abacus Group of appeals. [16] [ 35 ] The 645 TCC Appeal, while raising the same issues as those raised by the Abacus Group of appeals, is not strictly speaking among the appeals that form the Abacus Group of appeals. [ 36 ] However, counsel for 645 before the Tax Court of Canada (who are the same counsel as those who have appeared for 704 before the Court of Québec) are also counsel of record for all the appellants in the Abacus Group of appeals. [ 37 ] On September 28, 2018, the Tax Court of Canada granted 645’s and the CRA’s joint request to have the 645 TCC Appeal held in abeyance ‘’pending the determination of the Abacus Group of appeals’’. [17] 704’s Appeal [ 38 ] In its tax return for the 2009 taxation year, 704 reported a net loss of $2,194,649 calculated as follows: 2009 Trading Losses ($218,146,308) Taxable capital gain realized on a sale $107,449,357 2009 Trading Income $68,240,117 Taxable capital gain on disposition of shares of Gildan Active Wear $40,262,185 Net income (loss) ($2,194,649) [ 39 ] The 2009 Trading Income corresponds to the interest held by 645 in the 2008 foreign currency forward contracts which it transferred to 704 by way of the Rollover Agreement. [18] [ 40 ] The 2009 Trading Losses arise from similar forward foreign exchange transactions.

In November 2008, 704 along with two other corporations formed a general partnership, WAM Strategy Partners GP (‘’ WAM ’’) of which 704 held 99.93% of the partnership interest. [ 41 ] WAM was formed, among other reasons, to enter into forward foreign currency contracts and the same fashion that 645 did in 2008. [ 42 ] Hence, during the 2009 taxation year, WAM traded in foreign currency forward contracts on margin. Upon closing some of these contracts, WAM realised losses from its trading business totaling $218,291,690 in the 2009 taxation year.

Of this amount, $218,146,308 was allocated to 704. [ 43 ] 704 deducted a portion of its share of the trading losses amounting to $218,146,308 (“ 2009 Trading Losses ”) against its income for the 2009 taxation year. [ 44 ] In October 2015 and February 2019, Revenue Québec issued reassessments to 704 with respect to its taxation year ended January 31, 2009 (the “ 2009 Taxation year” ).

Revenue Québec disallowed the 2009 Trading Losses, notably on the grounds that the forward foreign exchange contracts entered into by WAM are shams. [19] This is the same argument that is raised by the CRA in the 645 TCC Appeal. [ 45 ] In December 2019, 704 filed an appeal of Revenue Québec’s reassessments for the 2009 Taxation year. [ 46 ] 704’s Appeal before the Court of Québec raises a number of issues including: 46.1. Whether the reassessments are time barred; 46.2.

Whether the Agence du Revenu du Québec denial of the 2009 Trading Losses, notably on the grounds that the foreign exchange forward contracts traded by WAM constitute a sham; 46.3. Whether the 2009 Trading Income which originated from the foreign exchange forward contracts traded by 645 are also shams; 46.4.

Whether the gross negligence penalties were validly imposed. [ 47 ] For the reasons that follow, the Court believes that there is an undeniable link between the present proceeding and the 645 TCC Appeal. [ 48 ] Both appeals raise the validity of straddle transaction in the context of forward foreign exchange contracts.

The tax authorities in both jurisdictions take the position that the trading losses and/or trading gains should be disallowed as the forward contracts entered into either by 645 or WAM with the third party (Insch) were shams and were created to deceive the tax authority into believing that the tax payers incurred business gains or losses. [ 49 ] While the sham issue is not the sole issue to be addressed in the present proceeding before the Court of Québec, it is nonetheless in important issue as it relates both to the disallowance of 704 Trading Losses amounting to more than $218,000,000 and with respect to the 2009 Trading Income reported of $68,240,117.

[ 50 ] As counsel for 704 argues, both 704’s 2009 Trading Income and 645’s 2008 Trading Losses derive from the same instruments and the same transactions. He adds that the tax treatment afforded to these mirrors transaction should be similar. This is a serious argument. [ 51 ] If the trades giving rise to the loss of $68,247,352 reported by 645 are determined by the Tax Court of Canada to be shams, then the Court believes that 704 has a serious argument to be made that the same transaction cannot give rise to the $68,240,117 in Trading Income that it declared in its 2009 tax return.

In other words, if the Tax Court of Canada determines these trades to be shams, 704 argues that it should be allowed to amend its 2009 tax return to remove the 2009 Trading Income from its business income. [ 52 ] The Court concludes that there is an undeniable link between 645 TCC Appeal and 704’s Appeal. ii.

Does the ultimate fate of 704’s Tax Appeal depend to a large extent on the fate of the 645 TCC’s Appeal? [ 53 ] The answer to this question is related to the issue of the link between both proceedings. [ 54 ] As stated above, 645’s 2008 Trading Losses and 704’s 2009 Trading income stem from the same set of instruments and trades. [ 55 ] The Attorney General of Canada will argue before the Tax Court of Canada that 645 was wrong to claim the 2008 Trading Losses since the trades that give rise to these reported losses are shams. [ 56 ] Revenue Québec has not yet audited 645 with respect to its 2008 taxation year.

However, it has adopted the Canada Revenue Agency’s position with respect to the disallowance of the 2008 Trading Losses: Nous avons traité la déclaration de votre société selon les informations reçues à la suite d’une vérification effectuée par l’Agence du revenu du Canada. [20] [ 57 ] In the context of forward foreign exchange contracts and straddle transactions, the loss reported by 645 in 2008 and the trading gain reported by 704 in 2009 are essentially mirror transactions. [ 58 ] Moreover, in July 2013, 645 signed a Retrait conditionnel and agreed to withdraw its Notice of opposition of the 645 Revenue Québec assessment because the Agency agreed to apply and abide by the decision of the Tax Court of Canada on the 645 TCC Appeal. [21] [ 59 ] The Tax Court of Canada’s decision in the 645 TCC Appeal could very well have a domino effect.

If that Court decides that the foreign currency forward contracts were legitimate and gave rise to valid business losses or profits, Revenue Québec has agreed to apply this decision with respect to 645’s Québec tax returns. [ 60 ] Considering that the 2009 Trading Income are mirror transactions of the 2008 Trading Losses, then the courts should logically afford their transactions similar tax treatment.

If the 2008 645 Trading Losses are to be disallowed for 645, this affects the qualification of the 2009 Trading Income. [ 61 ] The Court concludes that the decision in the 645 TCC Appeal will largely affect the outcome of the present appeal, both with respect to the 2009 Trading income as well as the 2009 Trading losses. iii. Does the suspension of the proceeding promote the rule of proportionality? [ 62 ] The amounts in issue in the 645 TCC Appeal and in the present appeal are substantial.

Likewise, both appeals raise complex questions of fact and of law. [ 63 ] Given the complexity of the issues raised by 704’s Appeal and the amounts in issue, one can expect that the parties will expend significant resources in this litigation. [ 64 ] The same holds true for the 645 TCC Appeal and the Abacus Group of appeals. [ 65 ] The suspension of the present proceeding would not promote the rule of proportionality given that the complexity and the amounts in issue in 704’s Appeal warrant that significant resources be allotted to this case. [ 66 ] This factor does not weigh in favor of staying the proceedings. iv.

Is there a risk of conflicting judgments on certain issues before the two proceedings? [ 67 ] As explained above, one of the issues raised by 704’s Appeal, namely whether Revenue Québec correctly disallowed 704’s 2009 Trading income, is closely related to the issue raised by 645’s Appeal before the Tax Court of Canada in regards to the Canada Revenue Agency’s disallowance of 645’s 2008 Trading Losses because of the losses and gains stem from the same transactions and because the similar arguments raised by both the CRA and Revenue Québec.

There is a risk of conflicting judgments with respect to the 2009 Trading Income. [ 68 ] Secondly, the other issues raised by 704’s Appeal, namely whether the Revenue Québec’s properly denied the 2009 Trading Losses, also raises the risk of conflicting judgments since Revenue Québec’s position on this issue is also based on the sham argument.

[ 69 ] Finally, the risk of conflicting judgments further exists because of the Retrait conditionnel that was signed by 645 in July 2013. [ 70 ] This Retrait conditionnel was agreed to buy 645 following the issuing in July 2012 by Revenue Québec of a notice of reassessment against 645 in which it notably disallowed its 2008 645 Trading Losses (more than 68.25 million dollars) that the Canada Revenue Agency similarly disallowed. [22] [ 71 ] On July 31, 2013, 645 signed a Retrait conditionnel with respect to this notice of reassessment whereby it agreed to withdraw its opposition of the notice and in turn Revenue Québec agreed to apply to this assessment the result of the settlement of 645’s Opposition with the Canada Revenue Agency or, if applicable, the decision to be rendered by Tax Court of Canada on 645’s Appeal before this Court. [ 72 ] By agreeing to this Retrait conditionnel , Revenue Québec has somewhat tied its hands with respect to 704’s Appeal given the similarities in the issues between the 645 TCC Appeal and the 704 Appeal. [ 73 ] In the Court’s view and for the foregoing reasons, there is a clear risk of conflicting judgments on a number of issues raised by the two proceedings. v.

Would the absence of a stay have the effect of unnecessarily increasing the procedures and costs for the parties? [ 74 ] There are at least 52 appeals pending before the Tax Court of Canada in what is known as the Abacus Group. [ 75 ] Five appeals within the Abacus Group have been identified as lead cases and the trial is already scheduled for their cases. [ 76 ] As stated above, given the amounts in issue and the complex issues raised by the 645 TCC Appeal, the Abacus Group of appeals, and the 704 Appeal, one can expect that the parties will allocate significant resources to this litigation. [ 77 ] However, as outlined above, given that the legitimacy of forward foreign exchange currency trading transactions are at the heart of all these appeals, it would be in the interests of justice to resolve this important issue before one forum rather than simultaneously litigate it before multiple forums. [ 78 ] Conversely, if 704’s Application for Stay is not granted, litigation will continue on multiple fronts thereby increasing the cost of litigation to both parties and to the justice system as a whole. [ 79 ] The Court believes that a stay would foster a more economical resolution to the legal issues raised by the lawsuits pending both before the Tax Court of Canada and the Court of Québec. [ 80 ] Revenue Québec argues that since the 645 Tax Court of Canada Appeal is itself stayed pending the resolution of the Abacus Group of appeals, it will suffer a prejudice because a stay in the present proceeding could be indefinite or at least for a considerable period of time. [ 81 ] Firstly, any prejudice that Revenue Québec may suffer is a result of its own doing considering that it agreed to the Retrait conditionnel . [ 82 ] Secondly, unlike the facts in Lavigne v. 6040993 Canada inc. , [23] , the Court believes that the facts of this case demonstrate that any prejudice that Revenue Québec may suffer is purely monetary and will be compensated by interest. [ 83 ] In Lavigne , the Court of Appeal mentioned that prejudice caused by staying a proceeding may be compensated by interest so long as the other proceeding is prosecuted diligently, which may be difficult to ensure when the party seeking the stay is not a party to this other proceeding. [24] [ 84 ] It is true that 704 is not strictly speaking a party to the 645 TCC Appeal or the Abacus Group of appeals, but it nonetheless has an important stake in seeing that the 645 TCC Appeal proceeds promptly given that 645 and 704 are closely related companies.

Moreover, counsel for 704 are also counsel for 645 and the parties to the Abacus Group and the Court does not doubt that they will prosecute these appeals diligently. 704 has the means to ensure that the 645 Appeal and Abacus Group of appeals proceed promptly and efficiently. [ 85 ] Thirdly, between April and November 2018, Revenue Québec issued four notices of assessment respectively to 703, 645, 9604774 Canada inc. and to Mr. Chamandy pursuant to sections 14.4 and 14.5 of the Tax Administration Act.

These steps as well as other remedies available to Revenue Québec under the Tax Administration Act minimize any prejudice. [ 86 ] Fourthly, on November 3, 2020, the Tax Court of Canada ordered that the parties in the 5 lead cases from the Abacus Group comply with the following timetable: i. The parties are to prepare and file a list of documents and serve this list on the opposing party by April 30, 2021; ii. Examinations for discovery shall be completed by September 30, 2021; iii.

Undertakings or responses to follow up written examinations for discovery questions shall be completed and delivered by December 31, 2021; iv. The hearing of the appeals is scheduled to take place before the Tax Court of Canada in Montréal on June 6, 2022 until June 30, 2022;

v. On or prior to March 31, 2022, the parties must communicate with the hearings coordinator of the Tax Court of Canada to advise whether the appeals have been settled or whether the hearings will proceed as scheduled. [25] [ 87 ] As it appears from the forgoing scheduling order, a trial is already scheduled to begin before the TCC on June 6, 2022 for the Lead Cases. We can reasonably expect that a judgment could be rendered by the TCC by end of 2022 or early in 2023. [ 88 ] The Court is satisfied that the litigation before the TCC is proceeding promptly. vi.

Conclusion [ 89 ] In conclusion, 704 has convinced the Court that it is in the interests of justice to stay its appeal.

There is an undeniable link between the 645 TCC Appeal and the present appeal, the fate of the 704 Appeal depends to a large extent on the fate of the 645 TCC Appeal, there exists a risk of conflicting judgments on some of the issues before the two proceedings, and the absence of a stay would be contrary to the guiding principles of procedure because it would lead to duplicative litigation before two courts and would increase the costs for the parties. [ 90 ] However, the Court is mindful that litigation is fraught with uncertainties and sometimes timetables are not rigorously followed and trial dates are pushed back. [ 91 ] Therefore, to avoid staying this appeal longer than is necessary should the trial in the Lead Cases be delayed, the Court will stay 704’s Appeal but only until April 29, 2022, roughly one month after March 31, 2022, the date on which the Tax Court of Canada has directed the parties to advise it with respect to the status of the Lead Cases appeals. [ 92 ] The Court will also order a case management conference to be held on April 21, 2022 or on any other date that the associate coordinating judge for the Administrative and Appeal Division of the Court of Québec may determine. [ 93 ] The purpose of this case management conference will be to inform the Court as to the status of the Lead Cases appeals in the Abacus Group and the status of the 645 TCC Appeal and to determine whether it is in the interests of justice to extend the stay ordered by this judgement until a final disposition of the 645 TCC Appeal. [ 94 ] Finally, the Court notes that on February 18, 2021, the Tax Court of Canada issued its reasons for judgement in Paletta (Estate of) v.

The Queen . [26] That case dealt with issues that are common to the 645 TCC Appeal and this proceeding. [ 95 ] In Paletta , the Tax Court held that the forward foreign exchange trading transactions which the taxpayer entered into were not shams, as the CRA had argued, allowed the appeals and vacated a number of assessments. [27] [ 96 ] While the Paletta case is not an Abacus Group case, the issues dealt with by the Tax Court are common, to a large extent, to those raised by the Abacus Group appeals and the 645 TCC Appeal. [ 97 ] Whether the findings of the Tax Court in Paletta will weigh heavily in the resolution of the Abacus group of Appeal and the 645 TCC Appeal remains to be seen, but nonetheless, the outcome of that case is another factor which weighs in favour of staying this proceeding.

FOR THESE REASONS, THE COURT: [ 98 ] GRANTS in

part 7049960 Canada Inc.’s Application for a Stay of Proceedings; [ 99 ] STAYS the present proceeding, and suspends the delay for readiness for trial of

article 173 of the Code of Civil Procedure , until April 29, 2022; [ 100 ] ORDERS the parties to file by no later than April 4, 2022, a Notice of Case Management Conference for a case management hearing to be held on April 21, 2022 or on any other date that may be determined by the associate coordinating judge of the Administrative and Appeals Division of the Court of Québec; [ 101 ] WITH LEGAL COSTS . __________________________________ ENRICO FORLINI, J.C.Q. Mtre Guy Du Pont Mtre Dov Whitman Ms.

Nesrine Laddoune, trainee Davies Ward Phillips & Vineberg s.e.n.c.r.l, s.r.l Plaintiff’s lawyers Me Antoine Lamarre Ms. Emma Taline Noradounkian, trainee Larivière Meunier Defendant’s lawyer Date of hearing: November 10, 2020