2020 QCCA 697, 2020 QCCA 697

Ludmer c. Attorney General of Canada 2020 QCCA 697 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-027787-183 (500-17-076229-130) DATE: May 28, 2020 CORAM: THE HONOURABLE ALLAN R. HILTON, J.A. MARK SCHRAGER, J.A. STÉPHANE SANSFAÇON, J.A. IRVING LUDMER 3488055 CANADA INC. 3488063 CANADA INC. 3488071 CANADA INC. 2534-2825 QUEBEC INC. 4077211 CANADA INC. 4431472 CANADA INC.

JOEL PINSKY, in continuance of proceedings for Mark Brender, in his capacity as liquidator of the estate of Arnold Steinberg PHIL NADLER, in his capacity as liquidator of the estate of Arnold Steinberg MARGOT STEINBERG, in her capacity as liquidator of the estate of Arnold Steinberg DONNA STEINBERG, in her capacity as liquidator of the estate of Arnold Steinberg HABLAND INVESTMENTS ULC, in continuance of proceedings for Habland Investments Inc. STONEVIEW INC. 3786986 CANADA INC. 3421848 CANADA INC. 4431481 CANADA INC. APPELLANTS/INCIDENTAL RESPONDENTS – Plaintiffs v.

ATTORNEY GENERAL OF CANADA CANADA REVENUE AGENCY RESPONDENTS/INCIDENTAL APPELLANTS – Defendants JUDGMENT [ 1 ] On appeal from a judgment of July 31, 2018 by the Superior Court, District of Montreal (the Honourable Stephen W. Hamilton), which granted in part the Appellants/Incidental Respondents’ action in damages against the Respondents/Incidental Appellants and condemned the latter solidarily to pay damages of $4,844,658, plus interest at the legal rate and the special indemnity provided by

article 1619 C.C.Q. from the date of institution of proceedings and judicial costs. [ 2 ] For the reasons of Schrager, J.A., with which Hilton and Sansfaçon, JJ.A. concur, THE COURT : [ 3 ] DISMISSES both the appeal and incidental appeal, total judicial costs for both appeals to be borne equally between the Appellants and the Respondents. ALLAN R. HILTON, J.A. MARK SCHRAGER, J.A. STÉPHANE SANSFAÇON, J.A. Mtre Douglas Mitchell Mtre David Grossman

Mtre Miriam Clouthier IMK For the Appellants/Incidental Respondents Mtre David Lucas Mtre Sarom Bahk Mtre Philippe Dupuis DEPARTMENT OF JUSTICE CANADA For the Respondents/Incidental Appellants Dates of hearing: December 2, 3 and 4, 2019 REASONS OF SCHRAGER, J.A. I. INTRODUCTION [ 4 ] This is an appeal from a judgment rendered on July 31, 2018 by the Superior Court, District of Montreal (the Honourable Mr. Justice Stephen W.

Hamilton), [1] that granted in part the Appellants/Incidental Respondents’ (“ Appellants ”) action in damages against the Respondents/Incidental Appellants (“ Respondents ” or “ CRA ”) with regard to an income tax audit and resulting assessments that were held to be unreasonable. The Respondents were condemned to pay damages of $4,844,658, though in excess of $117 million was sought. Both Appellants and Respondents have appealed. [ 5 ] The judgment is the 148-page culmination of a four-month trial during which 24 witnesses, including two experts, testified.

Tens of thousands of pages of documentary evidence were filed. Eighteen pages describing the tax concepts referred to are appended to the judgment. II. FACTS [ 6 ] In these reasons, I have briefly summarized the trial judge’s detailed account of the underlying facts.

The abbreviations used here are taken from the judgment and the parties’ briefs which included a glossary that I have appended in modified form to these reasons. [ 7 ] Irving Ludmer (“ Ludmer ”) and Arnold Steinberg (“ Steinberg ”), the latter now deceased, were successful Montreal businessmen who amassed considerable wealth, which included investments in an entity that became St-Lawrence Trading inc. (“ SLT ”), which is at the heart of the present matter. [ 8 ] All of the other Appellants are holding companies belonging to one or the other of Ludmer, Steinberg or persons related to them. [ 9 ] In the early 1980s, Ludmer and Steinberg invested in an offshore hedge fund operated by Global Asset Management Ltd. (“ GAM ”) whose principal was Gilbert De Botton (“ De Botton ”). [ 10 ] In 1987, De Botton created a new diversified investment fund in the British Virgin Islands – GAMCAN – whose shareholders/investors were restricted to a maximum of 50 Canadian residents.

Ludmer and Steinberg rolled their GAM investments into GAMCAN. [ 11 ] By 1994, GAMCAN assets were worth approximately US$337,000,000. De Botton recommended that GAMCAN merge with GAM Multi-Global US$ Fund Inc. (“ GAM Multi-Global ”), also managed by him. The idea was supported by GAMCAN’s directors (which included Ludmer and Steinberg) and approved by the shareholders. [ 12 ] The merger followed in 1995. As a consequence, the former shareholders of GAMCAN paid the higher fees charged by GAM Multi-Global, which was renamed GAM Diversity in 1995.

Sums equivalent to the increase in fees paid by the Canadian investors were paid by GAM Multi-Global to an offshore company, Sandringham Limited (“ Sandringham ”), controlled by Ludmer and Steinberg. Between 1995 and 2007, a total of $100,000,000 was paid to Sandringham (the “GAM paymentsˮ). Sandringham paid no taxes in Canada.

Ludmer and Steinberg took the position that the fees were not income but rather non-taxable capital receipts for the use of their names to induce and retain Canadian investors. [ 13 ] In 2007, the recipient of the payments was restructured to become Canadian entities controlled respectively by Ludmer and Steinberg. [2] [ 14 ] GAM and GAM Multi-Global did not pay taxes in the British Virgin Islands.

They also did not pay dividends so that their shareholders took the position that they were not required to pay taxes in Canada on their GAMCAN and GAM Multi-Global holdings, at least on an ongoing basis prior to any disposition of those interests. The trial judge explained: [17] In the February 1999 federal budget, the government announced proposed foreign investment entity (“ FIE ”) rules in the ITA that would replace the current offshore investment fund (“ OIF ”) rules. The effect of the proposed FIE rules was to do away with the “motive

test” under the current OIF rules and instead impute income on a taxpayer’s interest in an offshore entity that derived its value primarily from portfolio investments in listed passive properties. [18] There was a concern that the Canadian shareholders of GAM Diversity would be subject to substantial taxes on this undistributed income when the FIE rules came into force in 2001.

This would make GAM Diversity much less attractive to Canadian investors. [19] In anticipation of the adoption of the FIE rules, GAM Diversity proposed a reorganization as of November 30, 2001: • As a first step, the non-Canadian shareholders of GAM Diversity (representing approximately 45% of the total shareholdings) together with 45% of the assets of GAM Diversity were effectively rolled out of GAM Diversity and into a new GAM entity called GAM Global Diversity Inc., in what was essentially a reversal of the 1995 merger; • GAM Diversity was left with approximately 160 Canadian shareholders and approximately 55% of its assets; • GAM Diversity then sold its remaining assets to Scotiabank (Ireland) Limited (“ SIL ”) and TD Global Finance (“ TDGF ”), foreign subsidiaries of the Bank of Nova Scotia (“ BNS ”) and the Toronto Dominion Bank (“ TD ”), for an aggregate US$996 million; • GAM Diversity applied the proceeds from the asset sales to acquire two notes payable in 15 years (the “ Notes ”) issued by two other foreign subsidiaries of BNS and TD, Bank of Nova Scotia International Limited (Bahamas) (“ BNSIL ”) and Toronto Dominion International Inc. (Barbados) (“ TDII ”) and guaranteed by BNS and TD.

The value at maturity of the Notes would be determined by reference to a pool of assets made up of the assets that were sold to SIL and TDGF or assets which replaced them (the “ Reference Assets ”); • BNSIL, SIL, TDII, TDGF and GAM entered into a management agreement appointing GAM as manager of the Reference Assets; • GAM Diversity was given the right to terminate the Notes at any time, on 367 days’ notice, at the market value of the Reference Assets; [3] • The GAM Diversity shareholders were given the right to put their shares to SIL for a price equal to the proportionate share of the market value of the Reference Assets at the time of exercise of the put.

BNS guaranteed SIL’s obligations under the put facility; [4] • GAM Diversity changed its name to SLT. [20] The purpose of this reorganization was to ensure that SLT held no assets other than the Notes and generated no actual revenue until the maturity of the Notes, with the intention that its Canadian shareholders would thereby defer any income until they sold their shares or until the Notes matured in 2016.

Further, the intention was that the shareholders would sell their shares in SLT immediately before maturity of the Notes, so that the gain on the Notes would be a capital gain and not income. (…) [24] Ludmer and Steinberg and their holding companies (as well as the other SLT shareholders) took the position throughout the period starting in 1987 to the present that they did not owe any Canadian income taxes with respect to their investments in SLT and its predecessors. [25] They did not declare any income with respect to the predecessors of SLT for the period prior to the announcement of the proposed FIE rules in 2001 on the basis that the relevant test was the motive test and their motive for investing in GAMCAN was not to avoid tax but rather was to obtain the benefit of investment advice from the managers to whom GAM had access while they did not. [26] They did not declare any income with respect to SLT for the period after 2001 on the basis that the structure adopted by SLT was such that it did not have any income that could be attributed to its shareholders under the proposed FIE rules. (References omitted] [ 15 ] In 2005, during the course of a Canada Revenue Agency (“ CRA ”) initiative to audit high net worth individuals who paid relatively little tax, the CRA became aware of SLT.

An audit began in 2006. [ 16 ] Also in 2006, the CRA commenced an audit regarding some of the Appellants with respect to their investments in foreign hedge funds, including SLT. This audit lasted until 2012 and income tax assessments claiming millions of dollars were filed and challenged in the Tax Court of Canada, before the CRA abandoned its claims in 2014.

The Appellants (who were also SLT shareholders in first instance) argued that the CRA's conduct during the audit was unreasonable to the point of being abusive, that it affected their investments abroad and caused them to incur expenses in the nature of professional fees and lose interest on funds deposited with the CRA while contestations of the assessments were pending. They also claimed other amounts, including punitive damages which they attribute to the manner and intent with which the CRA conducted itself. They sought a total condemnation against the CRA in excess of $117 million, detailed as follows: 1.

Lost interest on amounts paid pursuant to the reassessments $4,455,588.24 2. Professional fees $16,441,919.66 3. Compensatory damages to Ludmer and Steinberg’s estate for reputational loss, stress, trouble and inconvenience $9,000,000.00

4. Compensatory damages to 4431472 and 4431481 for loss of future income $38,515,000.00 5. Refund of tax paid by 4431472 and 4431481 $9,092,323.00 6. Punitive damages $40,000,000.00 TOTAL $117,504,830.92 III. THE TRIAL JUDGMENT [ 17 ] In the Superior Court, the trial judge decided that, with respect to the standard of conduct to be followed in the course of an audit, the CRA must act reasonably and the Taxpayer Bill of Rights [5] is useful in determining how a reasonable auditor should act.

Negligence is sufficient to establish fault; it is not necessary to show that the CRA acted maliciously or with intent to harm the taxpayers. However, the demonstration of such intentional conduct is necessary for an award of punitive damages. The CRA does not commit a fault merely because it adopts an opinion that later turns out to be wrong. Finally, and overall, the CRA must exercise its powers under the Income Tax Act (“ ITA ”) [6] in a reasonable manner. [ 18 ] The trial judge concluded that the CRA committed a number of faults in the conduct of the audits as follows: (

i) It took an unreasonable position in the final determination of the tax payable, including withholding

interpretations of tax rulings different from its previous and subsequent positions regarding sums deemed to be earned by SLT; (ii) It did not apply or it misapplied its own policies in converting foreign currency for purposes of imposing tax; (iii) It failed to give 5 days' notice before filing reassessments in May 2012, despite its promise to the taxpayers in 2010, thus depriving them of the opportunity to apply to the Federal Court for orders prohibiting the reassessments.

The Appellants’ tax counsel had drafted the applications and had shared them with representatives of the CRA in 2010, which gave rise to the promise to provide a 5- day notice; (iv) In a request for information from the authorities in Bermuda, the CRA erroneously mentioned that there was an ongoing criminal tax investigation with respect to SLT shareholders; (

v) It proposed a settlement of the appeals over the assessments containing onerous conditions for the Appellants when it knew that it would abandon those positions; and (vi) In connection with nine requests under the Access to Information Act , [7] it unduly blocked and delayed by years the delivery of relevant documents that would explain its assessing positions, resulting in significant and unnecessary effort, delay and expense for the Appellants. [ 19 ] As indicated, the trial judge rejected the Appellants’ arguments that these faults were committed deliberately with the intent to harm the Appellants or some of them and bring about the end of SLT, or with the aim of some CRA employees obtaining higher bonuses tied to the collection of all or part of the millions of dollars of tax assessed. [ 20 ] The trial judge condemned the Respondents to pay $1,497,223 to the Appellants for the loss of interest on the mandatory payments they were obliged to make as a result of the reassessments.

He did not award lost interest on voluntary payments, because he felt that there was no risk that these assessments would be upheld. [ 21 ] The Appellants claimed the professional fees they paid to their lawyers and accountants in the context of the audit and throughout the proceedings before the Tax Court of Canada, the Federal Court and the Information Commissioner, arguing that the CRA knew or should have known that the audit was doomed to fail.

The trial judge did not award as damages any fees paid to the Appellants’ lawyers in the course of the instant litigation since the abuses alleged pertain not to the conduct during the instant proceedings but to the events preceding them. However, professional fees and other costs incurred prior to the litigation, and not for the purpose of preparing it, could be claimed to the extent the Appellants established that they would not have incurred such costs absent the Respondents' faults. Out of the $16,441,919 of fees and costs claimed, the trial judge awarded $3,097,435.

He eliminated fees other than those incurred in the period from 2011 to 2014, fees that would have been incurred irrespective of the unreasonable conduct of the CRA and fees that he deemed excessive or not sufficiently proved. [ 22 ] In addition, the CRA's statement to the Bermudian authorities that there was a criminal tax investigation ongoing with respect to SLT was damaging to the reputation of SLT's shareholders, particularly its principal shareholders, Ludmer and Steinberg.

However, the trial judge considered that the damages so incurred were minimal, given the limited dissemination of such statement and the fact that the CRA promptly corrected its error and apologized. Accordingly, the trial judge awarded $100,000 to Ludmer and $50,000 to Steinberg for reputational damage. Each of these parties was also awarded $50,000 for trouble, stress and inconvenience. [ 23 ] The Appellants also claimed that SLT's audit and the alleged harassment of its shareholders caused them to lose investment income and other revenues because SLT shareholders withdrew, thus cutting off the GAM payments.

However, the extent of the losses and the causal link with the CRA’s faults was not established, such that the trial judge rejected this claim. [ 24 ] In addition, the request to suspend the reassessments regarding Sandringham was dismissed. The trial judge ruled that these proposed assessments were not unreasonable and expressed no opinion on whether or not they are correct, as that issue belongs in the Tax Court of Canada, which has exclusive jurisdiction on the question. [ 25 ] Finally, and significantly, the claim for punitive damages of $40 million was dismissed.

Article 1621 of the Civil Code of Québec (“ C.C.Q. ”) limits such awards to cases provided for by law. The Appellants invoked the right to reputation and the right to the

peaceful enjoyment of their property, under Sections 4 and 6 of the Charter of Human Rights and Freedoms , [8] as well as punitive damages under

Section 49 of the Quebec Charter , which provides for punitive damages in the event of intentional infringement of rights recognized by the Quebec Charter . However, the trial judge concluded that, while the CRA was negligent and unreasonable, it did not act with the requisite intention to harm the Appellants nor to deprive them of their property. IV. ISSUES IN APPEAL [ 26 ] The issues in appeal as framed by the parties are as follows: By the Appellants on the principal appeal: (

A) Denial of Punitive Damages (

i) The Appellants submit that the trial judge committed an error of law by holding them to an incorrect legal standard in order for punitive damages to be awarded. The trial judge’s factual findings on their own were sufficient to justify an award of punitive damages for the Appellants. (ii) The Appellants further submit that the trial judge committed an error of mixed fact and law by not finding that the Respondents acted intentionally in committing faults in addition to those found by the judge. (

B) Denial of Full Compensation for Professional Fees (iii) The Appellants submit that the trial judge committed an error of mixed fact and law by refusing them full compensation for the professional fees incurred as a result of the Respondents’ faults. This error relates to the trial judge’s application of the notion of causation to the facts after having concluded that the CRA was at fault. (

C) Denial of Compensation for Payments Made Further to Reassessment (iv) The Appellants submit that the trial judge erred in law by holding that the Respondents were liable to pay interest as compensation only with respect to those payments made by the Appellants that were formally compelled by law. This alleged error relates to the trial judge’s

interpretation of the rules of causation. (

D) Denial of Compensation for Lost Payments (

v) The Appellants submit that the trial judge erred by refusing compensation to two of them for the lost GAM payments of which they were deprived because of the CRA’s faults. Specifically, the trial judge committed an error of law in denying compensation because he found the payments in question “offensive”; he committed errors of mixed fact and law in holding that the Appellants had failed to establish prejudice in addition to causation. (

E) Failure to Declare Abuse in the Sandringham Audit (vi) The Appellants submit that the trial judge committed an error of law by not holding that any assessment and/or collection action taken by the Respondents further to the Sandringham audit is abusive. This error was framed by the trial judge’s erroneous statement that the Sandringham audit could only be considered abusive in a “clear case” because the Minister had not abandoned the audit position. [ 27 ] The Respondents declare the following as issues in the incidental appeal: (

i) Did the trial judge make an error of law by awarding damages in respect of lost interest and unnecessary professional fees stemming from his finding that the CRA’s assessing position based on Regulation 7000 was inconsistent with its past practice? (ii) Did the trial judge make a palpable and overriding error in awarding damages in respect of lost interest and unnecessary professional fees as a result of his finding that the CRA should have given the Respondents the benefit of the coming-into-force rules (“ CIF ”) rules earlier? (iii) Did the trial judge make a palpable and overriding error in concluding that the position expressed by the CRA’s Rulings Directorate on the calculation of foreign exchange was not applied by the audit team when reassessing the Appellants? [ 28 ] The conclusions sought by the parties and flowing from the issues they raise are as follows: Respondents on the Incidental Appeal [ 29 ] The Respondents conclude in their brief for the reduction of the damage awards for (

i) lost interest on mandatory payments and for (ii) professional fees. [ 30 ] There is no direct impact on quantum stemming from the third issue raised with respect to foreign exchange, which, rather, is one element that led the trial judge to conclude that the CRA’s conduct was unreasonable and thus, constituted a fault under the civil law. [ 31 ] The Respondents, in their brief as Incidental Appellants, do not conclude for the reversal of the judgment in appeal and dismissal of the action in first instance.

However, in their notice of incidental appeal, they do articulate such a conclusion, and the body of the text of their brief and the lengthy submissions of counsel at the hearing on the issue of fault make it evident that such omission in the brief is a clerical error and not a renunciation.

Appellants [ 32 ] While they obviously support the trial judge’s findings of fault, the Appellants submit that the trial judge did not go far enough either in his characterization of the CRA’s conduct in the matter or in the consequences thereof. [ 33 ] Accordingly, under Issue A above, the Appellants seek before this Court, as they did in first instance, $40,000,000 in punitive damages. [ 34 ] The Appellants also seek an increase of $13,344,484 in the amount of compensation that the trial judge awarded for professional fees (Issue

B) and an increase of $2,958,365 for the amount he awarded for the interest on the voluntary advance payments (Issue C). [ 35 ] With regard to Issue D above, this claim is quantified as $38,515,000 and stems from the loss of business in SLT, which resulted in the loss of the benefit of the GAM payments. [ 36 ] With regard to Issue E, the Appellants also seek a declaration “to the effect that any attempt by the Respondent to assess or collect taxes in connection with the Sandringham payments is abusive”. V.

STANDARD OF REVIEW [ 37 ] There is no issue between the parties, nor in general, that questions of law are held to a standard of correctness while conclusions on questions of fact or mixed fact and law are only to be disturbed on the demonstration of a palpable and overriding error. Such an error must be close to self-evident, such that neither a long semantic debate nor a lengthy review of the evidence should be required. The error should jump up at the reviewer and not require an extensive investigation to locate the proverbial needle in the haystack.

The Court’s role is not to re-examine the evidence as a whole and draw its own conclusions, but rather to verify that a trial judge’s conclusions are supported by the evidence. [9] [ 38 ] Where a legal principle is not readily extricable from a mixed question, a more stringent standard may be applicable. [10] There is some difference between the parties as to whether certain of the issues and sub-questions thereunder raise questions of law or fact, so I will address the appropriate standard when dealing with particular issues in the appeal at the relevant places in these reasons. [ 39 ] Lastly, I would underline that, when the issue in appeal involves the trial judge’s

interpretation of the evidence as a whole, such as for a finding of negligence or unreasonable conduct as in the case at bar, the Court should not intervene, absent a palpable and overriding error. [11] VI. THE INCIDENTAL APPEAL – FAULT [ 40 ] I propose to deal with the trial judge’s findings of fault on the part of the CRA and, as such, dispose of the issues under the Incidental Appeal first. (

A) The Applicable Standard of Conduct [ 41 ] The civil liability of the CRA for the wrongful conduct of its agents when performing a tax audit is governed by the law of the jurisdiction where the acts were committed. [12] In Québec, the combined effect of the Crown Liability and Proceedings Act (“ CLPA ”) and the relevant provisions of the C.C.Q. is that the CRA is subject to the rules respecting extra-contractual civil liability set out in

Article 1457 C.C.Q . , and “to any other rules of law which may be applicable to [it]” . [13] [ 42 ] In Agence du revenu du Québec v. Groupe Enico inc. , this Court noted, referring to Finney v.

Barreau du Québec , that [ translation ] “[t]his reserve on the part of the legislature reflects the specific nature of governments, and the diversity and complexity of the duties assigned to them” [14] but that regardless of how broad the discretion conferred by the legislator on a specific public authority might be, it is not so broad as to exclude all liability for its actions. [15] As the trial judge underlined, the Court applied “both the notions of failing to meet a standard of conduct and abuse of discretionary powers in dealing with the liability of the Agence du revenu du Québec”. [16] [ 43 ] In the present case, the trial judge correctly concluded as follows on the standard of conduct: [17] • The CRA must act reasonably in the conduct of an audit.

The Taxpayer Bill of Rights helps define what a reasonable auditor would do; [18] • Negligence is sufficient to establish fault; [19] • It is not necessary to prove that the CRA acted maliciously with a view to hurting the Plaintiffs. Intentional conduct will be necessary for punitive damages; [20] • The CRA can be wrong without being at fault – the CRA does not commit a fault if it reasonably takes a position that turns out to be wrong; [21] • To the extent that the CRA has certain powers under the ITA , it must exercise those powers reasonably and not in an abusive

fashion; [22] [ 44 ] As previously mentioned, the trial judge’s findings regarding the CRA’s final assessing positions concerning its

interpretation of Regulation 7000, its position denying the application of the CIF rules and its calculation of foreign exchange, in addition to its proposed reassessments with respect to the Sandringham audit, are challenged on appeal. [ 45 ] Neither a breach of statute nor an invalid or unlawful decision are themselves sufficient to create a cause of action under the civil liability regime. [23] In fact, the issuance of a tax assessment, even erroneous, is not a fault in itself, [24] and neither is the misinterpretation of a statutory provision. [25] The incorrect application of a law or regulation may, however, result in compensation if the

interpretation applied was unreasonable or made in bad faith. [26] Consequently, the determination of the civil liability of the CRA must be examined in the context of the issuance of the assessments, and in light of whether or not there was negligence or carelessness having regard to the circumstances of the disputed acts or conduct. [27] (

B) Did the trial judge err in awarding damages pursuant to his finding that the CRA’s assessing position based on Regulation 7000 was unreasonable? [ 46 ] Under this ground of appeal, the Respondents’ submissions can be broken down into two main questions: (1) whether the CRA’s conduct in issuing final assessing positions based on Regulation 7000 was reasonable; and (2) whether the damages awarded by the trial judge are causally linked to the CRA’s fault regarding Regulation 7000? [ 47 ] The second question involves an analysis of whether the alternative assessing positions held by the CRA were dependent on its

interpretation of Regulation 7000, and if not, whether those secondary assessing positions were themselves reasonable regardless of the CRA’s application of Regulation 7000. Essentially, the Respondents argue that the assessments would stand on the alternate basis (under

Section 94.1 ITA and that the CRA was not at fault in denying the application of the CIF rules to the Appellants before their formal adoption and entry into force on June 26, 2013, nor was it at fault after June 19, 2014, when the Appellants opposed the CRA’s proposal to vacate the assessments before the Tax Court and apply the CIF rules.

Parties’ positions [ 48 ] The Respondents submit that the trial judge erred in law in concluding that the CRA’s assessing position based on the application of Regulation 7000 was reasonable in light of the statutory language, but that it was nevertheless at fault for adopting an assessing position that was inconsistent with its past practice on equity-linked notes. It adds that the Minister is not bound by the CRA’s past practice, but rather is bound to assess in accordance with the provisions of the ITA and the facts as he understands them.

Taking and applying a reasonable position is not a fault. [ 49 ] According to the Respondents, the context in which the position on Regulation 7000 was adopted could only lead to the conclusion that the CRA was not at fault. The CRA believed that it was assessing in accordance with the correct

interpretation of the law. The Montreal TSO consulted the ATP Division, which in turn obtained two technical

interpretations (“ TIs ”) from the Rulings Directorate confirming the application of Regulation 7000 to the Notes. Those two TIs had never been revoked, and Rulings maintained its support for the application of Regulation 7000 throughout. The Respondents contend that the fact that there were reservations expressed in the summer of 2011 by two senior directors at Rulings should not be determinative of the CRA’s position as an organization.

The Montreal TSO assessed the Appellants in May 2012, with the support of the ATP Division, the Rulings Directorate, and Finance. [28] [ 50 ] The Appellants are of the opinion that there are no extricable questions of law underlying the trial judge’s conclusion and that the finding of fault is a conclusion of mixed fact and law that should be assessed on a standard of palpable and overriding error. The Respondents raise a false debate in suggesting that the trial judge reduced the issue of fault to the simple matter of past practice.

The question is whether the inconsistent treatment of the Appellants was symptomatic of an unreasonable approach to taxing them. [ 51 ] The Appellants challenge the Respondents’ argument that the context in which the position on Regulation 7000 was adopted does not demonstrate wrongful conduct. They contend that the CRA did not act in a disinterested manner, but rather decided on a result, and “bullied” its way to getting it. When dissatisfied by an adverse First TI, the CRA obtained a second opinion that affirmed its position.

Faced with the inconsistency between the Second TI and its established tax treatment of equity-linked notes, the CRA, contrary to its well-established policy and practice, did not make the Second TI available to tax practitioners. [ 52 ] The Appellants submit that the CRA was well aware of the inconsistency, and acted consciously in treating them differently than other taxpayers. When its approach to Regulation 7000 met considerable resistance from Rulings, it simply “bullied and ignored those who opposed the company line”.

The CRA finally abandoned its position in May 2014, but not before trying to extract a favourable settlement from the Appellants, while hiding its intentions. It is in this context that the trial judge found that the CRA had committed a fault in not applying the ITA fairly and consistently to the Appellants.

Discussion [ 53 ] The determination of fault under the extra-contractual civil liability regime raises a question of mixed fact and law. [29] I agree with the Appellants that the issue is not whether the trial judge’s finding of fault rests on an incorrect statement of the legal standard, but rather whether the inconsistent treatment of the Appellants was symptomatic of an unreasonable approach to taxing them, which constitutes fault. As such, the trial judge’s conclusion cannot be overturned absent a palpable and overriding error.

The Supreme Court has held that when the question of mixed fact and law at issue is a finding of negligence, such finding by the trial judge should be deferred to by appellate courts. [30] Such deference is appropriate to the issue at hand.

[ 54 ] As argued by the Respondents, the Minister is not bound by its past practice, [31] but must instead “assess the amount of tax payable on the facts as [s]he finds them in accordance with the law as [s]he understands it”. [32] While not determinative, the administrative practice and

interpretation adopted by the Minister are important factors to be weighed in resolving doubt about the meaning of a tax provision. [33] Contrary to the Respondents’ submission, the trial judge did not base his finding of fault merely on the inconsistency of the Minister’s

interpretation of Regulation 7000 with the CRA’s prior position. Rather, he examined the distinction between the prevailing administrative practice and the

interpretation adopted by the CRA in his evaluation of the general reasonableness of the position. [34] [ 55 ] The trial judge evaluated the reasonableness of the CRA’s assessing position based on the application of Regulation 7000 from three angles: (

i) the inherent reasonableness of the position itself; (ii) the reasonableness of the process by which the position was arrived at; and (iii) the failure to publicize the position. [35] He found that the context surrounding the adoption of the

interpretation in question supported the conclusion that the CRA’s position was unreasonable, and thus it committed a fault. [36] The fact that the CRA eventually abandoned its position supports the trial judge’s findings. [ 56 ] The “inside put” theory as the basis of the CRA’s

interpretation is built on the premise that, contrary to other public market equity-linked notes, the SLT Notes could be terminated by SLT at any time before maturity on 367-days’ notice to the issuers. The distinction is that those other public notes could be resold by the holder before maturity on secondary markets, (sometimes to an entity related to the issuer), but not redeemed, and thus would remain outstanding. The possibility of terminating the SLT Notes on 367-days’ prior notice was considered sufficient to trigger an event to calculate their value at a point in time in a year .

Furthermore, a yearly calculation of the accrued value of the SLT Notes was possible prior to maturity, as shareholders had the option to redeem shares on a monthly basis, in consideration of a payment equal to a proportionate amount of the Reference Assets’ net value. [37] [ 57 ] In such regard, the trial judge observed as follows: [436] As a result, the “inside put” theory appears to be consistent with the language of Regulation 7000(2)(d). [437] However, it is not consistent with the past practice of the CRA with equity-linked notes. [438] Rulings issued a series of opinions that equity-linked notes are not taxable on an accrual basis but only on maturity, unless the taxpayer has the right to lock in the return before maturity and exercises that right .

The mere fact that something could have been done to crystallize the value was not sufficient with other notes. (Emphasis added) He stated that the mere existence of a secondary market or the possibility to lock in a bonus or return was not enough to deem income under Regulation 7000. [38] The trial judge then concluded that: [440] (…) the arguments put forth to justify the annual accrual of interest on the SLT Notes under Regulation 7000 represent a significant break from the prior practice of the CRA on equity-linked notes that cannot be justified by any distinction between the Notes and the prior equity-linked notes.

Essentially, the CRA applied an assessing position to the SLT shareholders that it did not apply to any other taxpayer. (References omitted) The evidence does not contradict this finding and the CRA has not demonstrated any palpable error in such regard. [ 58 ] The trial judge prefaced his analysis of the particular facts regarding the reasonableness of the process with the following remark: [442] It [the CRA] found a small group of Canadian taxpayers making a lot of money through an offshore investment vehicle and not declaring any income or paying any tax on it until maturity in 15 years.

Moreover, by selling the shares shortly before maturity, the taxpayers could realize a capital gain, only half of which was taxable. In other words, the structure would defer the payment of tax and convert the income into a capital gain. [ 59 ] The trial judge appears to identify three events that led him to doubt “(…) whether the process, starting at the latest in June 2011, was led in such a way as to reach the right conclusion, or whether it was led in order to maintain a certain result”: [39] (

i) the request for a Second TI; (ii) the abandonment of the “outside put” theory in the Fifth TI; and (iii) the doubts expressed by Rulings about its previous opinions. [40] [ 60 ] The trial judge went on to observe that, once the ATP division promoting the assessments did not get what it wanted from the Rulings division with regard to Regulation 7000, it excluded the Rulings Directorate representatives from the process. He then concluded as follows: [458] This is a very serious issue. If Rulings expresses reservations about a position, the ATP Division should act with caution.

What it must not do is try to bully Rulings in order to maintain a particular position. Again, this purely factual conclusion merits deference and is not affected by any palpable error. [ 61 ] Lastly, the trial judge examined the CRA’s decision not to publicize the six TIs issued in the SLT file and not to make them available to the TSOs. He considered that this factor was “very troubling”.

Given that they “represent[ed] a departure from [its] prior practice with respect to equity-linked notes, they were of interest to all participants in the Canadian equity-linked note market”. [41] [ 62 ] He did not accept the CRA’s attempts at an explanation for not publishing (i.e. privacy concerns) because there would be too much information with respect to the taxpayers. It was also put forward by the CRA that its decision not to publish the TIs was based on

provisions of the ATIA and policy considerations not to alarm the financial sector that equity-linked notes could be treated differently in the future, since Canadian financial institutions had many such notes outstanding to retail investors. It appeared to the trial judge that the decision not to publish the position was based on its inconsistency with the CRA’s prior practice in relation to equity-linked notes, which the CRA did not wish to change, and the concern about the impact of the second TI.

The trial judge concluded: [464] It would appear that the CRA was attempting to avoid the difficulties that this change in practice would represent by limiting it to SLT and keeping it secret. If that was its intent, it succeeded in that financial institutions continued to issue equity-linked notes without regard to the Second TI. [465] However, the lack of publicity suggests that the CRA knew that it was treating the SLT Notes differently and that it wanted to treat the SLT Notes differently. This is not acceptable.

The consistent application of taxation law is a fundamental principle set out in the Taxpayer Bill of Rights. This is clearly unreasonable. [ 63 ] This is underscored by the fact that the CRA’s

interpretation of Regulation 7000 was not adopted in the 2016 Budget provisions on equity-linked notes modifying the treatment of capital gains under Regulation 7000. Rather, the status quo on annual accrual rules was maintained. [ 64 ] Once again, these conclusions of the trial judge are purely factual. The Respondents argue that the judge committed errors of law since the question of the

interpretation of Regulation 7000 on which the assessments were based is a question of law. They also argue that the trial judge did not concede the CRA’s right to decide that a former

interpretation or position was incorrect. [42] [ 65 ] The Respondents misconstrue the judgment. [ 66 ] The trial judge did not merely say that the

interpretation or application of Regulation 7000 put forward by the CRA to assess the Appellants was per se unreasonable. The trial judge conceded that the CRA has the right to even be wrong as long as it acts reasonably. [43] [ 67 ] Rather, the assessing position under Regulation 7000 adopted by the CRA was controversial in the sense that it was subject to differences of opinion within the government taxation bureaucracy. [44] What the trial judge ruled as unreasonable was the lack of consistency and publicity.

The CRA sought to apply a position solely to the Appellants, choosing to ignore that other equity-linked notes had pre-maturity redemption rights (albeit at the initiative of the holder rather than the issuer as was the case with SLT). Moreover, the CRA did not publicize its position adopted with respect to the Appellants apparently because of the plethora of equity-linked notes issued by Canadian financial institutions. All of this led him to the conclusion that the result sought by those spearheading the assessments was dictated by an unreasonable approach.

I am consequently not convinced of any reviewable error in the trial judge’s conclusions that the conduct of the CRA in arriving at and applying the assessing position under Regulation 7000 was, in the circumstances of the case, unreasonable and, as such, constituted a fault.

Are the damages awarded by the trial judge causally linked to the CRA’s fault regarding Regulation 7000? [ 68 ] Although the Respondents frame their ground of appeal against the finding of fault in relation to the CRA’s application of Regulation 7000 as a question of law, the causal link between this fault and the compensable damages should be assessed against the standard of palpable and overriding error since causation is a question of fact. [45] [ 69 ] The Respondents submit that the CRA’s assessments were not solely dependent on the application of Regulation 7000.

Each assessment was in fact based on alternative assessing positions that relied on the application of

Section 94.1 ITA of the OIF rules. Those rules allowed the CRA to assess by “looking-through” the Notes (and SLT) to the income generated from the Reference Assets and assessing the taxpayer as if it received the income generated by the Reference Assets. [ 70 ] According to the Respondents, the trial judge held that those positions were reasonable, but he failed to consider their existence in awarding damages. The Respondents argue that, as a result of those alternative positions and regardless of the

interpretation of Regulation 7000, the Appellants would still have been assessed, and would therefore have made mandatory payments and incurred professional fees. Thus, there is no causal link between the CRA’s position on Regulation 7000 and those heads of damages, at least not for the total amount of the interest claimed and fees incurred. [ 71 ] The trial judge recognized that, in 2009, the Appellants had already been informed of those alternative assessing positions based on

Section 94.1 ITA : [41] Ludmer was advised on January 9, 2009 that his 2005, 2006 and 2007 income tax returns had been selected for audit. Steinberg was advised shortly thereafter that his 2005, 2006 and 2007 income tax returns had also been selected for audit. [42] On May 8, 2009, the CRA sent Ludmer a letter summarizing its position with respect to the Ludmer SLT Plaintiffs’ investments in SLT and in other foreign entities. [43] The CRA applied the current OIF rules and not the proposed FIE rules which had yet to come into force. It took the position that

Section 94.1 ITA and the motive test applied to 3488055, 3488063 and 3488071, for whom SLT was not a foreign controlled affiliate, and that the foreign accrual property income (“ FAPI ”) rules applied to 4077211, 2534-2825 and 34218148, for whom SLT was a controlled foreign affiliate .

The Court uses the expressions “ non-CFA taxpayer ” to describe a taxpayer for whom the foreign entity is not a controlled foreign affiliate, and “ CFA taxpayer ” to describe a shareholder for whom the foreign entity is a controlled foreign affiliate. (…) [45] The proposed reassessment letters sent to Steinberg on June 22, 2009 proposed to reassess Steinberg in respect of the Steinberg SLT Plaintiffs’ investments in SLT on the same basis, namely

Section 94.1 ITA for the non-CFA taxpayers and FAPI for the CFA

taxpayers . [46] The CRA had taken the same assessing positions with respect to a number of other taxpayers who held shares in SLT or other offshore investment funds (…). [47] (…) The CRA maintained its original positions throughout the audit , although the justification for the application of Regulation 7000 changed. [48] Further, on September 17, 2010, the CRA sent revised reassessments to the Ludmer SLT Plaintiffs and the Steinberg SLT Plaintiffs in which it added secondary positions which did not rely on Regulation 7000 to impute interest income on the Notes but instead focused on the indirect holding of the Reference Assets (…). [46] (Emphasis added; bold in original; references omitted) [ 72 ] Though the secondary position based on

Section 94.1 ITA of the OIF rules, which focused on the indirect holding of the Reference Assets, was already mentioned in the 2009 correspondence between the CRA and Ludmer and Steinberg, it was considered by the CRA only with respect to non-CFA Taxpayers. On September 17, 2010, the CRA added that the same reasoning applied to the CFA Taxpayers, but at the level of SLT. [ 73 ] The alternative assessing positions based on

Section 94.1 ITA of the OIF rules were ultimately followed in the final assessments with respect to both non-CFA and CFA Taxpayers. [ 74 ] Regulation 7000 is, according to the Respondents, irrelevant to the legal analysis required pursuant to

Section 94.1 ITA of the OIF rules when the Reference Assets are qualified as “portfolio investments” for the purpose of this provision. There was, however, doubt as to whether the SLT Notes were “portfolio investments”, such doubt having been expressed internally on the government side as well as externally by lawyers representing other SLT shareholders. Indeed, the SLT notes derived their value from portfolio investments though they were not themselves, strictly speaking, portfolio investments. [ 75 ] The trial judge held that, for the purpose of applying

Section 94.1 ITA of the OIF rules to the Appellants, it was reasonable for the CRA to consider the Reference Assets as portfolio investments [47] and to conclude that Ludmer and Steinberg met the motive test. [48] He also stated that it was reasonable for the CRA to have two alternative positions. [49] [ 76 ] However, the trial judgment stopped short of expressly stating that those secondary assessing positions were per se reasonable. [ 77 ] Instead, the trial judge considered that Regulation 7000 was essential to the assessing positions based on

Section 94.1 ITA of the OIF rules: [389] (…)

Section 94.1 ITA is an anti-avoidance provision. It cannot apply if no tax is avoided. The CRA cannot deem income under

Section 94.1 ITA and collect tax on the investments of an offshore entity where no tax would have been payable if the investment was held directly. [390] The Court therefore concludes that the CRA has the burden of establishing that an SLT shareholder would have paid tax if he held the Notes directly. This is where the Regulation 7000 argument comes into play . [391] Moreover, the CRA recognized this throughout the audit. There are numerous references to the robustness of the Regulation 7000 argument being key to the assessing position. It was only in 2014 when the Regulation 7000 argument was abandoned that the CRA first suggested that

Section 94.1 ITA could apply where no tax would have been payable if the investment was held directly. (Emphasis added) In other words, even if Ludmer and Steinberg (or their companies) held the SLT Notes instead of shares in SLT, they would still not be holders of the underlying investments (the Reference Assets), such that another justification (i.e. Regulation 7000) for deeming income in their hands was required. [ 78 ] The Respondents argue that, even if the Regulation 7000 position was unreasonable, the Appellants would nevertheless have been obligated to pay, albeit a lesser amount, under the

Section 94.1 ITA assessing positions. As such, they would have incurred the interest expense (albeit less) anyway. Essentially, this is a causality argument. [ 79 ] The position ignores the trial judge’s reasoning above and as such does not convince me to interfere with his conclusion that the lost interest was a damage caused by the reassessments and more particularly the unreasonable conduct of the CRA. [ 80 ] Firstly, as indicated above, the trial judge did not accept the reasoning that the

Section 94.1 ITA assessing positions stand completely on their own. Secondly, I would add that the reassessments, including the

Section 94.1 ITA positions, were abandoned following the CIF or grandfathering provisions coming into force in June 2013. The CRA’s records indicate that Ludmer and Steinberg’s counsel requested a standstill (i.e. no reassessment action by the CRA) until the CIF rules were to be enacted. Even if the trial judge’s view of the Respondents’

Section 94.1 ITA argument is not tenable, the overall behaviour of the CRA does not therefore become reasonable. In such regard, I underline that the CRA disregarded the Appellants’ request for a standstill pending enactment of the CIF rules.

If not before, then by September 2011, the CRA knew that the draft CIF rules were not likely to change. [ 81 ] Also in such regard, it should be remembered that one finding by the trial judge of an element of the CRA’s unreasonable behaviour was the failure to respect its undertaking to give five days’ notice prior to issuing the reassessments – in order to allow the Appellants’ attorneys to file their application for judicial review before the Federal Court with a view to prohibiting the reassessments under

Section 94.1 ITA until the grandfathering provisions that had been announced were enacted. Without in any way opining on the chances of success of such proceedings, I note that once the (CIF) grandfathering provisions came into force, the CRA abandoned its

Section 94.1 ITA assessing positions. Throughout, it was in possession of the draft application seeking just that. Again, the internal exchanges within the government tax bureaucracy indicate that, as of September 2011, the CRA knew or should have known that the draft CIF rules were unlikely to change.

The trial judge characterized the CRA’s refusal to grant the benefit of the (draft) CIF rules to the Appellants as “an attempt by the CRA to deny the benefit of the CIF rules in circumstances where the CIF rules clearly are intended to be available”. [50] Not to have let the grandfathering provisions take their course after undertaking to give the Appellants the opportunity to put forward that position before the Federal Court appears as an additional element of an unreasonable pattern of conduct directed at Ludmer and Steinberg. The excuse that the undertaking was forgotten does not erase negligence.

I add that any concern over time bars could have been covered by a request for waivers. [ 82 ] This is another reason not to disturb the trial judge’s finding on the award of lost interest as a damage resulting from the CRA’s unreasonable behaviour, overall and notwithstanding the alternative assessing position. [ 83 ] I underline as a closing remark and at the risk of repetition that the existence of the

Section 94.1 ITA assessing positions does not in any way change or affect the trial judge’s conclusions that the conduct of the CRA in promoting the Regulation 7000 primary assessing position was unreasonable and that the overall conduct of the CRA in dealing with the Appellants was equally unreasonable. This remains so even if the alternate justification for the assessments (Section 94.1 ITA ) might, considered in isolation, be reasonable.

Professional fees [ 84 ] The Respondents seek a reduction of the award for professional fees by excluding the portion regarding the period prior to June 26, 2013 (the coming into force of the CIF rules) and after June 17, 2014 (the date on which the CRA agreed that it would apply the CIF rules to the Appellants). [ 85 ] The logic of the position does not obtain for a reduction of the award of interest on the mandatory payments made by the Appellants pursuant to the reassessments.

For the same reasons expressed hereinabove, the argument does not succeed in reducing the award for the reimbursement of fees. [ 86 ] Moreover, and as I will develop below in dealing with the principal appeal, the award by the trial judge of professional fees is not merely a factual issue but one relating to the quantification of damages for which a particularly high degree of deference is due to trial judges given that the nature of the exercise is largely discretionary. [51] Calculation of Foreign Exchange [ 87 ] The last issue raised in the incidental appeal is that the CRA did not apply the proper method for calculating foreign exchange (as expressed by its own Rulings Directorate) when determining the amount of tax assessed. [ 88 ] Given that this goes to the reasonableness of the CRA’s conduct in respect of which I do not ascertain any reason to interfere with the trial judge’s conclusions, as expressed above, I do not see the necessity in addressing the foreign exchange issue – i.e. even if I were to come to the conclusion that the CRA was not unreasonable regarding the calculation of foreign exchange (contrary to the trial judge’s conclusions), [52] it would not change the conclusion that the CRA’s conduct overall constituted a fault given the various other findings of the trial judge in this regard. * * * [ 89 ] Thus and for all the foregoing reasons, I would dismiss the incidental appeal.

VII. THE PRINCIPAL APPEAL (

A) Denial of Punitive Damages [ 90 ] The Appellants argue that the trial judge applied the wrong legal standard when considering their submission that the CRA be condemned to pay punitive damages. They suggest that the proper standard was whether the CRA knew it was unjustly depriving the Appellants of their property.

The identification of such standard is itself reviewable on the basis of correctness. [ 91 ] The Respondents are of the view that the trial judge applied the correct standard and made no palpable and overriding error in concluding that the CRA had not intentionally interfered with the Appellants’ property rights.

The application of the standard and the determination of whether the requisite intent was proven is subject to review on a standard of palpable and overriding error, submit the Respondents. [ 92 ] In my view, the trial judge identified the proper legal standard in referring to the Supreme Court decisions in Hinse and St- Ferdinand . [53] However, he appears to have erred in applying the legal standard when he stated that: [T]he reassessments were not issued maliciously in an attempt to harm Ludmer or Steinberg.

As a result, the Court concludes that the CRA officers did not intentionally interfere with Ludmer and Steinberg’s property rights. [54] (Emphasis added) [ 93 ] Nonetheless, this is not sufficient to compel this Court to intervene as the error is not overriding. The foregoing statement should be understood in the context of the trial judge’s findings of fact and from a reading of his judgment as a whole, particularly with regard to the

section dealing with the claim for punitive damages. Moreover, the specific question of whether the CRA officials intended to unjustly deprive the Appellants of their property should be assessed against the trial judge’s findings of fact and the underlying evidence.

[94] Here is what the trial judge said in dealing with punitive damages: [820] Finally, the Plaintiffs claim $40,000,000 in punitive damages for interference with their right to the peaceful enjoyment anddisposition of their property and their right to reputation and for the abusive conduct of the Defendants. [821]

Article 1621 C.C.Q. limits the awarding of punitive damages to cases where punitive damages are provided for by law. [822] This means that a plaintiff claiming punitive damages must point to a statute that applies in the circumstances of the case and thatexpressly provides that the court can award punitive damages. [823] The Plaintiffs invoke the Québec Charter of Human Rights and Freedoms: 4. Every person has a right to the safeguard of his dignity, honour and reputation. 6.

Every person has a right to the peaceful enjoyment and free disposition of his property, except to the extent provided by law. [824] The interference with property rights relates to the reassessments which forced the Ludmer SLT Plaintiffs to pay $14 million onthe reassessments. The interference with reputation relates to the allegation of a criminal investigation to the Bermudan authorities. [825]

Section 49 provides for punitive damages if the interference with the right is unlawful and intentional: 49. Any unlawful interference with any right or freedom recognized by this Charter entitles the victim to obtain the cessation of suchinterference and compensation for the moral or material prejudice resulting therefrom. In case of unlawful and intentional interference, the tribunal may, in addition, condemn the person guilty of it to punitive damages. [826] The Supreme Court described as follows the operation of

Section 49: [164]

Section 49 of the Charter provides that, “[i]n case of unlawful and intentional interference, the tribunal may, in addition,condemn the person guilty of it to punitive damages.” This Court explained what “unlawful and intentional interference” means inQuebec (Public Curator) v.

Syndicat national des employés de l’hôpital St-Ferdinand, (SCC), [1996] 3 S.C.R. 211: Consequently, there will be unlawful and intentional interference within the meaning of the second paragraph of s. 49 of the Charterwhen the person who commits the unlawful interference has a state of mind that implies a desire or intent to cause the consequences ofhis or her wrongful conduct, or when that person acts with full knowledge of the immediate and natural or at least extremely probableconsequences that his or her conduct will cause.

This test is not as strict as specific intent, but it does go beyond simple negligence. Thus,an individual’s recklessness, however wild and foolhardy, as to the consequences of his or her wrongful acts will not in itself satisfy thistest. [Emphasis added; para. 121.] [165] In the instant case, given that the Ministers’ conduct cannot be equated with bad faith or serious recklessness, we cannotconclude that there was intentional interference. The evidence does not support a finding that the Ministers’ state of mind was such thatthey intended to harm Mr.

Hinse or had knowledge of the adverse consequences their conduct would have for him. This stringent testwas not met, and punitive damages should not have been awarded. (Emphasis in original) [827] The Court has already concluded that the mention of a criminal investigation was negligent but not intentional. No punitivedamages will be awarded for that fault. [828] With respect to the reassessments, the Court concludes that the CRA officers involved believed that the SLT investments shouldbe taxed and they were trying to find a basis on which to tax them.

In the process, they ultimately took a position that the Court finds tobe unreasonable. However, the reassessments were not issued maliciously in an attempt to harm Ludmer or Steinberg. As a result, theCourt concludes that the CRA officers did not intentionally interfere with Ludmer and Steinberg’s property rights. No punitive damageswill be awarded for that fault. [829] The remaining allegation is that the CRA acted abusively.

Even if that was true, it would not attract punitive damages in theabsence of a statute proving a right to punitive damages. (Some references omitted) [95] The trial judge expressly rejected the Appellants’ arguments that the CRA acted deliberately, in order to “get Ludmer or destroySLT or as an attempt to collect greater bonuses”.[55] His conclusion here is based largely on findings of credibility and the answersgiven by CRA employees to questions put to them on cross-examination. [96] The trial judge noted the refusal to accept Ludmer’s proposal to make a voluntary disclosure because an audit had alreadycommenced.

He found nothing actionable against the CRA in this regard and the Appellants have not pointed to any legal obligationrequiring the CRA to have accepted the disclosure. [97] Overall, the trial judge found that “the CRA officers involved believed that the SLT investments should be taxed and they weretrying to find a basis on which to tax them”.[56] This is not sufficient to conclude that the CRA had its mind made up from thebeginning. [98] The trial judge also dismissed the suggestion by the Appellants in first instance that the CRA’s employees were motivated bythe collection of bonuses they stood to receive on succeeding with a huge assessment and tax collection against the Appellants.[57]

[ 99 ] The trial judge added that, on review of the evidence as a whole, there was “no evidence of an attempt by the CRA to put SLT out of business”. [58] [ 100 ] I see no reason to interfere with these conclusions by the trial judge justifying the refusal to award punitive damages. [ 101 ] The CRA’s intent in the matter clearly was to assess tax – i.e. to assess tax based on income that would be deemed received by the Appellants based on the increase in the value of the SLT Notes. The intent to assess is not in itself wrongful. That is what the CRA is supposed to do.

The trial judge ruled that the CRA went about fulfilling that mandate in an unreasonable manner. It is not necessary to repeat all of the trial judge’s findings upon which he based his conclusion that a fault was committed. [ 102 ] The conduct of the CRA in performing the audits, driving the file, responding to ATIA requests and issuing the assessments and, finally, the manner of resolving the assessments was, as the trial judge ruled, abusive and constitutive of fault.

However, wrongful, even reckless or negligent conduct, is not sufficient to justify the imposition of punitive damages. [59] [ 103 ] In Groupe Enico , where this Court did award punitive damages against Revenu Québec, the facts were quite different and significantly egregious. Suffice it to say that the tax authorities did not merely assess in an abusive manner, but they also seized assets including the taxpayer’s bank account thereby jeopardizing the viability of the taxpayer and its business.

Indeed, Revenu Québec’s persistent conduct eventually succeeded in putting the taxpayer out of business and forcing it into a bankruptcy filing. That is not the situation of any of the Appellants nor is it comparable to the CRA’s behaviour in this matter. The trial judge, as mentioned, specifically found that there was no intention to put SLT out of business.

SLT’s loss of business was not ascribed to the CRA by the trial judge as will be seen below with regard to the claim for damages for the lost payments. [ 104 ] As the trial judge pointed out, to succeed, the claim for punitive damages must rest upon a finding of intentional conduct and an unlawful deprivation of property. In such regard, the trial judge referred to the Appellants’ reliance on

Section 6 of the Quebec Charter . A valid tax assessment leads to the payment of money. Such payments are the deprivation of property that are invoked by the Appellants in order to bring themselves within the statutory protection of

Section 6 of the Quebec Charter .

Section 6 protects against the deprivation of property except to the extent provided by law. The deprivation (if the word is appropriate) intended by the CRA was the payment of monies in satisfaction of tax assessments issued in accordance with the ITA and the Income Tax Regulations . However abusive the CRA’s conduct might have been, it is difficult to subscribe to the Appellants’ arguments that there was here an intention to unlawfully deprive the Appellants of their property. [ 105 ] Ultimately, I am not convinced of any error in the trial judge’s conclusion not to grant punitive damages that would justify appellate intervention. (

B) Denial of Full Compensation for Professional Fees [ 106 ] The Appellants stress that they were entitled to fight their case as best as they could given the CRA’s refusal to consider expedited means to resolve the dispute, the high stakes involved, the CRA’s unreasonable positions in relation to the ATIA request and its self-righteous positions generally.

They claim that the trial judge’s reduction of the fees charged by the Osler law firm by 67% was “arbitrary and unduly harsh”. [ 107 ] The Respondents highlight that the reduction of professional fees was based on the absence of a causal link between the fees incurred by the Appellants that were directly caused by the CRA’s faults, and the fees that would have been incurred anyway as well as the fees that were the result of the Appellants’ choices to engage in excessive and disproportionate lawyering.

The trial judge therefore exercised his judgment within the ambit of his discretion as a trier of fact to determine a just amount. [ 108 ] After a review of the evidence pertaining to this head of damage, consisting of billings from a number of professional firms, but principally the Osler law firm, the trial judge concluded as follows: [747] While it is difficult to calculate with any degree of accuracy which portion of the professional fees would have been incurred in any event and which was caused by the faults of the CRA, and which portion of the professional fees represents excessive work done by Oslers, the Court estimates that it would be fair to award the Plaintiffs one third of the professional fees claimed, after the deductions set out above.

He awarded $3,097,435.66 out of the approximately $16 million of professional fees claimed, stating that those fees were caused by the CRA’s fault. [ 109 ] The trial judge proceeded in his analysis here in part by way of process of elimination. He first (correctly and not directly challenged in appeal) eliminated fees for the present litigation. He excluded fees charged by various other professional firms since it was not clear from the evidence what services they had rendered and why.

The invoices filed into evidence that covered the period from 2009 to 2010 were eliminated, as were fees incurred after October 6, 2014, when the assessments were resolved. The trial judge concluded that virtually all of those post-2014 fees ($4.1 million) would relate to the present litigation. [ 110 ] In excluding fees incurred during the period 2009-2010, the trial judge said the following: [740] Further, the Court will exclude the professional fees incurred in 2009 and 2010. As mentioned above, the CRA was entitled to review carefully the SLT structure and Ludmer and Steinberg’s positions in SLT.

The process really goes off the rails in 2011 with the Sixth TI that is not followed and the doubts expressed by Adams, Jolie and others. [ 111 ] Lastly, the trial judge reduced the quantum of fees generally because, in many instances, the amount charged or at least the number of hours devoted were excessive. [ 112 ] The Appellants have not succeeded in identifying any error with respect to the impossibility to distinguish the fees that would have been incurred regardless of the CRA’s faults and those that were directly caused by the CRA’s faults. The trial judge’s exercise of

discretion in this respect merits deference. [ 113 ] The award of fees is part of the quantification of damages that is based on the exercise of discretion and an appreciation of the facts.

As such, not only is a palpable and overriding error required for appellate intervention, but a high degree of deference is due to the trial judge. [60] [ 114 ] As well, the case law recognizes the trial judge’s jurisdiction to arbitrate damages when faced with potentially conflicting evidence and the possibility of various outcomes. [61] [ 115 ] The Appellants particularly challenged the exclusion of the professional fees incurred in 2009 and 2010 ($2.5 million) on the basis that the trial judge erred in concluding that “[t]he process really goes off the rails in 2011”, noting that this formulation is not the proper legal standard and that the trial judge found that the CRA committed faults prior to 2011, more precisely with respect to the access to information procedures and the failure of the CRA to publish its early TIs relating to the SLT Notes. [ 116 ] As stated, the trial judge did not award damages for professional fees prior to 2011 despite his conclusions that the CRA “was at fault in the ATIA process and thereby delayed the inevitable disclosure of the relevant documents by years and put the [Appellants] to considerable expense”, [62] due to its “ numerous mistakes and poor decisions”, [63] including its “ initial failure to task anyone beyond the Montreal TSO” [64] after the first request for information filed in 2009. [65] This is underscored by an internal memo from Gilles Vallée [66] dated in December 2009, indicating that no part of the internal master audit file should be disclosed in response to the ATIA request so as not to compromise the audit given the huge amounts of tax involved. [ 117 ] Nonetheless, it is only the first ATIA request that predates the trial judge’s cut-off of 2011 for the fee award.

The appendix to the judgment outlining the ATIA requests indicates that the first request was filed on August 19, 2009, responded to by the CRA on January 2010, met with a complaint on February 18, 2010 and in turn followed by supplementary replies and a Federal Court contestation in 2012. As such, the trial judge’s refusal to award fees for the ATIA process prior to 2011 does not appear affected by palpable and overriding errors as the vast majority of activity occurred after 2010. I am thus unconvinced of any justification for intervening.

Fees incurred after October 6, 2014 [ 118 ] The Appellants argue that the present matter did not end in October 2014 as they incurred further fees to challenge the CRA’s unreasonable application of the “motive test” with regard to

Section 94.1 ITA in the remaining appeals. Their professionals had to continue to verify the completeness of the CRA’s disclosure and the accuracy of its refund calculations.

They ask for an additional amount of $4,100,000. [ 119 ] The trial judge found that the CRA’s reliance on the “motive test” was reasonable. [67] His reasons to exclude the fees incurred after October 2014 do not suffer from any reviewable error that could justify intervening in his exercise of discretion: [739] (…) It is difficult to see on what basis fees incurred after October 6, 2014 at the latest can be said to have been incurred in relation to the audit. After that date, there are only three tax appeals outstanding in the total amount of approximately $225,000.

Yet the professional fees claimed for the period after that date total approximately $4.1 million. These fees must relate to the current litigation and not to the remaining tax appeals. They will be excluded. [68] (References omitted) I would add that there is no finding of fault committed by the CRA for the period subsequent to October 2014. (

C) Denial of Compensation for Payments Made Following Reassessment [ 120 ] The Appellant corporations controlled by Ludmer are all “large corporations” as defined in

Section 225.1 ITA so that they were obliged to pay one half of the tax assessment despite contestation. They did so, but they also paid the other half which they were not strictly obliged to do by law. [ 121 ] All amounts were reimbursed after the assessments were vacated with interest of 1% as provided by law. These Appellants claim, as damages arising from the CRA’s fault, the difference between 1% on the one hand, and the legal rate and the special indemnity provided for in

Article 1619 C.C.Q. on the other hand. [ 122 ] The incentive to pay, as the trial judge points out, [69] is that, should the taxpayer fail in his contestation of the assessment, tax is due with interest compounded daily from the date it was payable.

The variable rate was generally 5% at the time periods relevant to this case: [724] As a result, a taxpayer who is challenging an assessment must make a choice: if he makes a voluntary payment, he reduces the interest that he will be required to pay if the assessment is maintained, but he gets very little interest on the refund if the assessment is set aside; on the other hand, if he does not make the voluntary payment, he runs the risk of paying substantial interest if the assessment is maintained.

The trial judge held as follows: [726] The Court will allow the claim with respect to the interest on the mandatory payments. The Plaintiffs should not have been required to pay those amounts. The Court accepts the calculation by the Plaintiffs, namely interest at the legal rate plus the additional indemnity, less the 1% interest paid on refunds. Further, the Court will include the lost interest on the mandatory payments to the Québec and Alberta tax authorities.

The Court is satisfied that the provincial tax authorities were simply following the CRA’s lead, such that there is a causal link between the CRA’s faults and the provincial reassessments and payments. [727] However, the Court is not satisfied that the SLT Plaintiffs are entitled to recover the lost interest on the voluntary payments. They

plead in very strong language that the position taken by the CRA on the reassessments was unreasonable. In those circumstances, there was no reason for the SLT Plaintiffs to make a voluntary payment, because there was no risk that they would be ordered to pay the reassessments. The Court will dismiss the claim for lost interest on the voluntary payments. [ 123 ] The Appellants qualify the distinction drawn by the trial judge between mandatory and voluntary payments for the purpose of establishing causation between the CRA’s faults and the lost interest on payments as an error of law.

According to the Appellants, the trial judge incorrectly subjected their entitlement to damages for lost interest to the requirement that the payments be compelled by law, obscuring the causal effect of the penalties to which the Appellants would have exposed themselves had they not made the voluntary payments. [ 124 ] The issue of whether the Appellants should be compensated for voluntary payments is a question of causation, and therefore a question of fact. [70] The trial judge did not impose a requirement that the payments be compelled by law in order to establish causation and entitlement to damages.

Rather, he found that “ there was no reason for the SLT Plaintiffs to make a voluntary payment, because there was no risk that they would be ordered to pay the reassessments”. [71] [ 125 ] I do not necessarily agree with the trial judge’s statement that there was no risk when looked at from the perspective of Ludmer or any of the Appellants at the time. I do agree with the Appellants’ counsel – who in essence submitted that no litigious situation can be characterized as risk free.

Consequently, the Appellants in question made a strategic decision to eliminate the risk of being obliged to pay an enormous amount of interest and late penalties should they lose their case. In effect, they purchased insurance against the risk of an unfavorable outcome in a litigious situation upon which they embarked obviously with the view that they would succeed but knowing that a sure thing is indeed rare. At the end of the day, however, there was no legal obligation to pay – just a strategic imperative.

Consequently, there was not an adequate causal link between this claim and the CRA’s fault, and hence, no error justifying this Court’s intervention. [ 126 ]

Article 1491 C.C.Q. dealing with restitution is not a segue to a claim for additional interest as the Appellants argue. The payment of interest and the applicable rate in this instance is specifically provided under the ITA when a taxpayer successfully appeals an assessment. Here the refund of the voluntary payments was due because the assessments were withdrawn – i.e. the taxpayers’ contestation succeeded. The application of

Article 1491 C.C.Q. and the case law developed thereunder asserted by the Appellants would, they submit, give rise to restitution of the payments with legal interest and the special indemnity under the C.C.Q. However, the suggestion to apply

Article 1491 C.C.Q. stems from the behaviour of the CRA surrounding the audit giving rise to the assessments, but not from the assessments themselves which, in law, are presumed valid. [72] The voluntary payments did acquit an existing debt, such that

Article 1491 C.C.Q. would not apply. [73] As we have seen, the CRA can be wrong in an assessment without incurring its civil responsibility. As such, I believe that the trial judge did not commit an error by not awarding as damages the additional interest claimed on the voluntary payments. (

D) Denial of Compensation for Lost Payments [ 127 ] The Appellants submit that the trial judge committed an error of law in holding that compensation for lost GAM payments (estimated at $38 million) should be denied on the basis that this claim was “offensive”. They underline that the payments were not illicit but rather were made pursuant to legitimate contractual obligations.

There was no evidence that the other investors would have found those payments offensive and being secretive about payments received by third parties from GAM does not render the payments themselves illicit. [ 128 ] The Appellants further suggest that the trial judge’s erroneous characterization of the claim as “offensive” tainted his perception of the proof of causation. They point to some evidence introduced during the trial to support their position that the CRA’s faults caused at least some investors to flee SL

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