JAFT Corp v Jones et al, 2015 MBCA 77

Citation: JAFT Corp v Jones et al, 2015 MBCA 77 Date: 20150820 Docket: AI14-30-08207 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Barbara M. Hamilton Madam Justice Holly C. Beard Mr. Justice Christopher J. Mainella BETWEEN : JAFT CORPORATION ) P. K. Grower and ) A. M. Hanson (Applicant) Appellant ) for the Appellants - and - ) ) DAVID A. JONES AND LANCE C. LAUFER ) ) (Respondents) Appellants ) A. N. Schroeder and - and - ) L. L. Benham ) for the Respondent WILLIAM C.

JONES ) ) (Respondent) ) - and - ) Appeal heard: ) March 3, 2015 THE ATTORNEY GENERAL OF CANADA ) ) Judgment delivered: (Intervener) Respondent ) August 20, 2015 HAMILTON JA [ 1 ] This is an appeal of the dismissal of an application seeking the equitable remedy of rescission. The appellants seek to overturn the primary decision of the application judge to decline to exercise her jurisdiction because of “parallel” proceedings in the Tax Court of Canada (the Tax Court).

They also appeal her decision, in the alternative, not to grant rescission. [ 2 ] The individual appellants, David Jones and Lance Laufer (respectively, Jones and Laufer), are the shareholders and directors of the corporate appellant, JAFT Corporation (JAFT). Jones and Laufer were also employees of JAFT, as was the respondent William Jones (W. Jones).

These three individuals are collectively referred to as “the employees”. [ 3 ] The proceedings in the Tax Court concern various assessments by Canada Revenue Agency (CRA) of JAFT, along with Jones and Laufer in their capacity as directors, for unpaid source deductions arising from the salaries paid by JAFT to the three employees in 2005 and 2006.

The salaries were for work that JAFT was unsuccessful in claiming for scientific research and experimental development tax credits under the Income Tax Act , RSC, 1985, c 1 (SR&ED tax credits). [ 4 ] The appellants applied under Queen’s Bench Rule 14.05(2)(d), ManReg 553/88, to have the employment contracts and the related salaries for 2005 and 2006 rescinded.

Their intent, if successful, was to use that ruling in the proceedings before the Tax Court, which does not have the jurisdiction to grant equitable relief. [ 5 ] The Attorney General of Canada (Attorney General), on behalf of CRA, was granted intervener status as a party. It opposed the application. [ 6 ] For the reasons that follow, I would dismiss the appeal. The appellants have not demonstrated any reason for this

court to intervene with the application judge’s exercise of discretion to decline to exercise her jurisdiction in these circumstances. Given that, I need not address the judge’s alternate ruling not to grant the remedy of rescission. Background [ 7 ] For the taxation years 2003, 2004, 2005 and 2006, JAFT filed claims with CRA for SR&ED tax credits related to research and development expenses in connection with its work with respect to sick building syndrome. The claims included salaries paid to the three employees. CRA allowed JAFT’s claim for the taxation years 2003 and 2004.

When JAFT received the related tax credit refunds for those years, it used that money to fund the employee source deductions for federal and provincial income tax, employment insurance and Canada Pension Plan that arose from the payment of the salaries. [ 8 ] CRA denied JAFT’s claims for SR&ED tax credits for the taxation years 2005 and 2006.

This has resulted in numerous proceedings in the Tax Court which will require the Tax Court to consider, among other circumstances, the wording and effect of an agreement dated August 20, 2004, between JAFT and the three employees called “the development agreement”. [ 9 ] The development agreement describes the three employees as “members of the development group” and provides for the repayment of compensation that does not qualify for SR&ED tax credits. It reads as follows: The members of the development group shall develop the SolutionAir product line for JAFT.

It is the sole responsibility of the members of the development group that the requirements of the SR&ED program are met. The members of the development group will, as individuals, be compensated based solely on the work done that meets the requirements of SR&ED. The amount of compensation shall be claimed as part of JAFT’s annual SR&ED claim. Should any part of JAFT’s SR&ED claim, related to the compensation of the members of the development group, be reduced or denied, the member(

s) acknowledges that they are not entitled to that compensation related to the reduction and agree to repay the over compensation to JAFT. [ 10 ] The salaries were initially unpaid but were claimed in the application for the SR&ED tax credits as a future contingent liability of JAFT to avoid immediate liability for the payment of employee source deductions. In November 2004, CRA advised JAFT that, for the payment of salaries to be considered for the SR&ED tax credit program, they could not be contingent payments.

As a result, JAFT paid the salaries in 2005 and 2006 and the employees immediately lent the money back to JAFT, which was in difficult financial circumstances. [ 11 ] JAFT did not remit the applicable employee source deductions at the time the 2005 and 2006 salaries were paid, as the intention was to use the tax credit refunds to pay these amounts.

The appellants assert that they honestly believed that JAFT’s SR&ED claims for 2005 and 2006 would be allowed, based on the fact that they had been allowed for 2003 and 2004 and on conversations with the CRA personnel assigned to its file. [ 12 ] JAFT filed a notice of objection with CRA for the denial of its SR&ED claims. CRA confirmed the original assessment. JAFT did not file an appeal of this decision in the Tax Court. [ 13 ] As provided in the development agreement, in September 2007, JAFT repaid the employees the amounts that had been loaned to it by them from the salaries paid in 2005 and 2006.

The employees then immediately repaid JAFT the salaries that they received from JAFT for 2005 and 2006.

JAFT attempted to amend the T4s for the salaries to eliminate the salary paid out to each of the employees. [ 14 ] CRA assessed JAFT, and Jones and Laufer as directors of JAFT, for unpaid employee source deductions for the years 2005 and 2006, did not allow JAFT’s amendments to the T4s issued for those years and denied Jones and Laufer, as employees of JAFT, a 2007 tax deduction for repayment of the salaries paid out by JAFT in 2005 and 2006. [ 15 ] Currently JAFT, Jones and Laufer have several appeals with respect to federal and provincial income tax matters before the Tax Court and the Court of Queen’s Bench, which were put in abeyance pending the determination of the appellants’ application for equitable relief. [ 16 ] On February 28, 2012, the appellants filed their application under Queen’s Bench Rule 14.05(2)(d), seeking an order that the employment contracts with respect to the 2005 and 2006 taxation years, and the payments of salaries for those years, be declared “ void ab initio ” and, in the alternative, an order that the employment contracts and salaries be rescinded.

The applicant is JAFT, and Jones, Laufer and W. Jones are named as the respondents. Laufer and Jones consented to the application. W. Jones did not participate. [ 17 ] Queen’s Bench Rule 14.05(2)(

d) contemplates applications “in respect of any matter where it is unlikely there will be any material facts in dispute”.

[18] The Attorney General was granted intervener status to enable it to oppose the application. [19] At the hearing before the application judge, JAFT’s counsel acknowledged that the focus should be on the equitableremedy of rescission. The Application Judge’s Decision [20] The application judge explained that JAFT was seeking equitable relief that was not available from the Tax Court,which is a superior court of record but not a court of inherent jurisdiction.

She noted that, “there has been a demonstrated reluctance bycourts to exercise their jurisdiction where parallel litigation exists with the [Tax Court]” (at para 21), referring to Canada v Addison &Leyen Ltd, 2007 SCC 33, [2007] 2 SCR 793; Felsen Foundation v Jabs Construction Ltd, [1998] BCJ No 532 (QL) (SC); GLP NT Corpv Canada (Attorney General), (ON SC), [2003] OJ No 2904 (QL), 65 OR (3d) 840; Baxter v Canada (AttorneyGeneral) et al, 2013 ONSC 3153; and Quebec (Agence du revenu) v Services Environnementaux AES inc, 2013 SCC 65, [2013] 3 SCR838. [21] With respect to the Tax Court’s jurisdiction and the impact of an order of rescission, the application judge wrote (atparas 24, 26): The TCC has the necessary jurisdiction to consider issues such as employment contracts, the nature of an employment relationship, andagreements reached between the parties.

Without question, the TCC has jurisdiction to determine matters surrounding the payment ofwages, the necessity for remittances, and other issues such as whether salaries were appropriately paid, as well as other relevant taxationissues. The rescission of the employment contract(

s) would have or could have a very significant effect on the issues presentlyoutstanding in the appeals before the TCC. In all the circumstances, and based on the referenced case law, I have concluded that I should decline to exercise jurisdiction to grant therelief sought. The TCC may make findings in its tax appeal decisions which will include contractual, employment and commercialmatters. Much of what is being argued by JAFT relates to such issues.

In accordance with decisions such as Quebec (Agence duRevenu), GLP NT Corp., Felsen Foundation, and Baxter, I am satisfied that it would be inappropriate to allow a parallel running oflitigation with respect to these matters. This is particularly so when rescission, if granted, would serve to alter the essence of thelitigation before the TCC and, hence, inappropriately interfere with the jurisdiction assigned to a specialized tribunal. As GLP NTCorp. stated, it is more efficient to have one court determine these types of litigious matters.

The Appellants’ Position [22] The appellants assert that the application judge erred in declining jurisdiction in these circumstances and in not grantingthe remedy of rescission. They say that the circumstances at issue arise from honest and fundamental mistakes which have resulted insignificant, and unexpected, tax liabilities.

As such, these are the sort of circumstances for which equity has provided the remedy ofrescission. [23] With respect to the decision to decline to exercise jurisdiction, they argue that the application judge erred in law whenshe concluded that the application was a parallel proceeding to those in the Tax Court because the Tax Court does not have thejurisdiction to grant the remedy of rescission.

They say that the cases relied on by the application judge are those where the Tax Courthad the same jurisdiction to make the findings at issue: whether a gift was valid for the purposes of the common law, as in Felsen;whether an entity is an “open-ended mutual fund”, as in GLP; and whether a trust existed, as in Baxter.

Here, they argue that the TaxCourt cannot find that an employment agreement and the salaries paid are rescinded unless that remedy has already been granted by acourt of inherent jurisdiction. [24] They submit that the equitable remedy is being sought to ensure that matters which cannot be determined by the TaxCourt are dealt with prior to the Tax Court making a decision on the appeals before it and not to influence, upset or interfere with theproceedings before the Tax Court.

They rely on AES. [25] They also say that the application judge erred in not finding that the Attorney General had attorned to the jurisdiction ofthe Court of Queen’s Bench.

Position of the Attorney General [26] The Attorney General’s position is that the application judge’s decision to decline to exercise her jurisdiction is adiscretionary decision and is entitled to deference. [27] It argues that the application judge made no error of law and exercised her discretion soundly, given that Parliamentconferred exclusive original jurisdiction to hear appeals on matters arising under the Income Tax Act on the Tax Court.

As a superiorcourt of record, it says that the Tax Court’s jurisdiction includes the power to make incidental and ancillary findings of law that arenecessary to determine tax appeals, including deciding matters of commercial, contract, employment and property law. See GLP andAES. [28] The Attorney General asserts that the sole purpose of the application was to obtain an order of rescission to influencethe evidentiary basis for the appeals in the Tax Court.

It says that the judge correctly relied on Addison, in which the Supreme Court ofCanada cautioned against the development of incidental litigation that is used to interfere with the tax appeal process created by

Parliament. While stated in the context of judicial review, the Attorney General says that the Supreme Court’s caution in Addison isdirectly applicable to these circumstances. The Attorney General also says that the appellants provide no authority for their propositionthat the application judge had to exercise her jurisdiction because the Tax Court cannot grant an equitable remedy. [29] Furthermore, the Attorney General argues that the application and appeal are an inefficient use of judicial resources.

Itnotes that if the relief is granted, the Tax Court must still determine the same issues. [30] With respect to the appellants’ attornment argument, the Attorney General says that the issue of declining jurisdiction isnot a contest about whether the Court of Queen’s Bench had jurisdiction and that, as intervener, it was entitled to ask the judge to declineto exercise her jurisdiction. Therefore, it asserts that there is no issue of attornment or forum conveniens, as relied on by the appellants. Standard of Review [31] The decision to decline to exercise jurisdiction is a discretionary one.

See Mills v The Queen, (SCC),[1986] 1 SCR 863 (at p 894); Moore v British Columbia, (1988) (BC CA), 50 DLR (4th) 29 (at p 38) (BCCA), Neira etal v Canada (Secretary of State) (1994), 50 BCAC 94 (at para 18). [32] As is well-known, the standard of review of a discretionary decision is deferential.

Recently, the Supreme Court ofCanada explained this deferential approach in Penner v Niagara (Regional Police Services Board), 2013 SCC 19, [2013] 2 SCR 125 (atpara 27): A discretionary decision of a lower court will be reversible where that court misdirected itself or came to a decision that is so clearlywrong that it amounts to an injustice: Elsom v. Elsom, (SCC), [1989] 1 S.C.R. 1367, at p. 1375. Reversing a lowercourt’s discretionary decision is also appropriate where the lower court gives no or insufficient weight to relevant considerations: Friendsof the Oldman River Society v.

Canada (Minister of Transport), (SCC), [1992] 1 S.C.R. 3, at pp. 76-77. [33] A misdirection can be with respect to the law or the facts. A question about whether there was a misdirection about therelevant considerations is a question of law. A question about whether the judge gave no or insufficient weight to relevant considerationsis a question of fact. The standard of review for a question of law is correctness. The standard of review for a question of fact, or mixedfact and law, is palpable and overriding error. See Housen v Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235.

Decision [34] The appellants assert that the application judge erred in law in declining jurisdiction because the Tax Court does nothave the jurisdiction to grant an equitable remedy, in this case, rescission, which is only available from a superior court.

This raises thecrucial issue of whether the Tax Court can grant any acceptable alternative remedies, if it cannot grant rescission. [35] The appellants’ claim for rescission of the employment contracts and the 2005 and 2006 salaries is based on theirposition that there was an honest and fundamental mistake as to the effect of the agreements and transactions that led to the tax liabilitiesthat are now in dispute. That is the very issue that the appellants have appealed to the Tax Court.

If there is a finding that no tax liabilityis owing, then there will have been no mistake and no basis upon which to grant rescission. Therefore, the determination of whether thetax liability is owing is fundamental to the appellants’ position. [36] The Tax Court has “exclusive original jurisdiction” to determine references and appeals arising under the Income TaxAct.

See sections 3 and 12(1) of the Income Tax Act. [37] The Supreme Court of Canada stressed the importance, and integrity, of a specialized Tax Court in Addison (at para 11): Reviewing courts should be very cautious in authorizing judicial review in such circumstances. The integrity and efficacy of the systemof tax assessments and appeals should be preserved. Parliament has set up a complex structure to deal with a multitude of tax-relatedclaims and this structure relies on an independent and specialized court, the Tax Court of Canada.

Judicial review should not be used todevelop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and thejurisdiction of the Tax Court. Judicial review should remain a remedy of last resort in this context.

While the context for these remarks was an application for judicial review, I agree with the Attorney General that these comments arejust as applicable to other types of applications, such as occurred here. [38] In Danso-Coffey v Ontario, 2010 ONCA 171, 265 OAC 345, the Ontario Court of Appeal also provided a strongcautionary statement against other courts exercising jurisdiction in tax cases. While that case dealt with Ontario retail sales tax, asopposed to federal taxation issues, the comments of Weiler JA are applicable (at para 33):

Superior Courts must be cautious in exercising their jurisdiction in order to preserve the efficacy of the system of tax assessments. Theyshould respect the structure set up by the legislature and not develop a new form of incidental litigation. See by analogy: Canada v.Addison at paras. 8 and 11…. [39] Felsen and Baxter are examples of cases where the presiding judge declined to exercise jurisdiction.

In Felsen, Low J(as he then was) wrote the following about the petitioner who sought a declaration that a transfer of property was a gift (at para 7): The petitioner does not seek a legal remedy in these proceedings. Rather, it seeks an opinion of the court under the guise of a declaratoryorder. The sole use of that opinion would be for Jabs Construction to place it before the Tax Court of Canada and argue that the giftissue has been determined by a court of competent jurisdiction contrary to the rulings already made under the Income Tax Actproceedings.

Determination of the gift issue by this court would be merely hypothetical. This court is not in the business of decidingissues solely for the purpose of instructing other courts. [40] In Baxter, Grace J pointed out that there was (at para 16) “no lis between the Applicant and any of the respondentsexcept the A.G.” and “there is absolutely no part of the dispute that is unrelated to the C.R.A.’s determination that the trust did not exist”(at para 17). [41] I agree with the appellants that the remedies sought in Felsen and in Baxter were not equitable ones, but the foregoingcomments are pertinent nonetheless.

In both cases, the sole purpose of the court application was to obtain a court decision to influencethe proceedings in the Tax Court. In effect, that is what the application judge found to be the case here. JAFT would not have broughtits application except for the unfavourable tax rulings. Using the words from Baxter, there is no “lis” between the parties that needsadjudication.

The contest arises because of the CRA rulings and the Attorney General’s intervention. [42] Furthermore, most of the cases relied on by the appellants concern successful applications for the equitable remedy ofrectification where there are pending proceedings in the Tax Court or its provincial equivalent.

See for example, Canada (AttorneyGeneral) v Juliar, (ON CA), [2000] 50 OR (3d) 728 (QL); McPeake et al v Canada (Attorney General), 2012 BCSC132; S & D International Group Inc v Canada (Attorney General) et al, 2011 ABQB 230, 512 AR 118; 0741508 BC Ltd et al, Re, 2014BCSC 1791; and Fairmont Hotels Inc v Canada (Attorney General), 2014 ONSC 7302, 123 OR (3d) 241 (QL). Additionally, theappellants rely on AES, which also concerned the remedy of rectification, but under Quebec civil law. There is an important distinctionbetween the remedy of rectification and rescission.

Courts can order rectification of a document so that its words express the true natureof a transaction. The document, as rectified, remains in effect. Here, the appellants do not seek that remedy. Rather, they are seeking anorder that the employment contracts and the 2005 and 2006 salaries be rescinded. In effect, they seek a declaration that the contractualarrangements that they entered into did not exist. [43] Another relevant consideration is judicial economy.

The proceedings in the Tax Court will not be resolved bypermitting the application to proceed and they overlap with the determinations sought by the appellants through this application. Asstated by Cumming J in GLP (at para 19): It is simpler and more efficient to have one court determine a litigious matter. It is an inefficient use of court resources to have onedispute unnecessarily following a parallel path in this Court and in the TCC.

See also Holmes (Sheila) Spousal Trust v Canada (Attorney General), 2013 ABQB 489 at para 72, 568 AR 364; and Stephkan HoldingsInc v Canada Revenue Agency, 2013 QCCS 643, [2013] QJ No 1340 (QL) aff’d QCCA (at para 15). [44] I turn now to the issue of adequate alternative remedies. While the Tax Court cannot grant the remedy of rescissionsought by the appellants, I am of the view that it has the jurisdiction to provide an adequate alternative remedy. Through their appeals inthe Tax Court pursuant to section 169(1) of the Income Tax Act, the appellants are seeking to have various assessments vacated orvaried.

The Tax Court has the jurisdiction pursuant to section 171(1) of the Income Tax Act to dismiss an appeal, or allow it and providethe remedy of vacating, varying, or referring the assessment back to the Minister for reconsideration and reassessment. [45] As noted earlier, the appellants’ position before the Tax Court, which is inconsistent with seeking to have theemployment contracts and salaries rescinded, is that the development agreement and the reversal of their original salary transactionsshould be upheld, and their assessments vacated or varied.

The Tax Court could provide that remedy or it could refer the assessmentsback to the Minister after ruling on the effect of the agreements and the salary transactions and applying the applicable income taxlegislation. [46] These are substantial remedies, in the sense described by Sharlow JA in Webster v Canada, 2003 FCA 388, [2003] FCJNo 1569 (QL), where, in the course of dismissing an application for judicial review for lack of jurisdiction, she wrote (at para 21): I would add that the right to appeal an income tax assessment to the Tax Court is a substantial one.

The mandate of the Tax Court is todecide, on the basis of a trial at which both parties will have the opportunity to present documentary and oral evidence, whether theassessments under appeal are correct in law, or not. If the assessments are incorrect as a matter of law, it will not matter whether the

objection process was flawed. If they are correct, they must stand even if the objection process was flawed. [ 47 ] As explained in Lloyd v Canada , [2002] TCJ No 119 , [2002] DTC 1493 (QL) (at para 19 ): Obviously this court cannot make declarations that bind the parties to a transaction, or set aside or rectify transactions as between parties. That is a matter for the courts of the provinces or territories.

Nonetheless, this does not mean that this court must, where the validity of a transaction is relevant to the determination of a tax dispute between a taxpayer and the Government of Canada, stand impotently by and decline to make a determination that is essential to the exercise of its jurisdiction.

Clearly our court must decide the validity or legal effect of a transaction between subjects in the context of a determination of its tax consequences. [ 48 ] The important consideration is not whether the alternative remedies available in the Tax Court are the same as rescission, but whether they are adequate; that is “not whether it is perfect”.

See Froom v Canada (Minister of Justice) , 2004 FCA 352 , 327 NR 304 (at para 12 ). [ 49 ] Furthermore, there is case law and commentary that speaks to the ability of the Tax Court to “decide a case as if the instrument had been rectified.” See Joel Nitikman, “Many Questions (and a Few Possible Answers) About the Application of Rectification in Tax Law” (2005) 53: 4 Canadian Tax Journal . The author wrote (at p 966): Can the Tax Court rectify an instrument?

Not in the usual sense: the Tax Court is not a court of equity, and in general only one of the parties to the contract will be a party before the Tax Court; the other party to the contract will not have been assessed and will not be seeking rectification. In my view, however, the Tax Court can decide a case as if the instrument had been rectified: the Tax Court has the implied jurisdiction to decide provincial legal matters in the course of exercising its exclusive jurisdiction to decide tax cases. The Tax Court often applies equitable principles in the course of deciding a tax matter.

In GLP NT, it was suggested that the Tax Court has no power to rectify a document. In my view, that statement is technically right, but it is wrong if it is meant to suggest that the Tax Court could not treat an instrument as having been rectified. See also GLP; Lloyd; and McLaughlan v Canada , 2007 TCC 209 , [2007] TCJ No 148 (QL) . [ 50 ] These cases and commentary are instructive with respect to how broadly the Tax Court has viewed its powers under the Income Tax Act . [ 51 ] In

summary, the issue at the heart of this matter is whether the tax assessment is correct and the tax liability is owing. This is a matter for the Tax Court, which is a specialized court created by Parliament with expertise in tax matters. The application here was contrary to the principle of judicial economy as, whatever the outcome in the Court of Queen’s Bench, the appeal of the tax assessments must still be heard by the Tax Court.

Finally, while the Tax Court cannot grant an order of rescission that will be effective for all purposes, it can rule on the validity of the employment contracts, the development agreement and the salary transactions as part of its role in determining whether the tax assessments are correct. It will then use those determinations to decide whether to dismiss the appeal, vary or vacate the tax assessments or refer the matter back to the Minister.

This, in my view, is an adequate alternative remedy. [ 52 ] Finally, the appellants’ attornment argument is not persuasive for the reasons argued by the Attorney General. [ 53 ] I wish to note that earlier this month, counsel jointly brought to the panel’s attention two recent decisions: Fairmont Hotels Inc et al v Canada (Attorney General) , 2015 ONCA 441 ; and Pallen Trust Re 2015 BCCA 222 . These cases did not call for further submission, given that neither appeal court had to address a ruling of the lower court judge exercising her discretion not to exercise the court’s jurisdiction.

Furthermore, in both appellate decisions, the appeal courts upheld the orders of rectification ( Fairmont ) and rescission ( Pallen Trust ), citing the deference owed to the specific factual findings and exercise of discretion of the lower court judges.

Conclusion [ 54 ] The application judge considered the applicable law and addressed numerous considerations relevant to the question of whether she should exercise her discretion to decline jurisdiction, including the specialized nature of the Tax Court and its ability to consider applicable law and make relevant findings, the pending proceedings before it, the intended purpose of the application and the importance of judicial economy. She did not act on a wrong principle or fail to give weight to relevant considerations.

Furthermore, she did not misdirect herself, nor is her decision so clearly wrong as to amount to an injustice. Rather, in my view, her decision was the appropriate one in the circumstances. [ 55 ] I would dismiss the appeal, with costs in favour of the Attorney General. J.A.

I agree: J.A. I agree: J.A.