T-4277-78
Quemet Corp. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, August 13;
Ottawa, August 28, 1979.
Practice — Parties — Joinder — Income tax — In action
objecting to reassessment, application by defendant to join
party and for composition of question to be determined by the
Court pursuant to s. 174 of the Income Tax Act — Plaintiff
and proposed party alleged to have been involved in scheme
over a number of years where plaintiff allegedly bought goods
from proposed party and others, and deducted the cost as an
expense, and where the proposed party allegedly included that
amount in income but set off against it expenses, in the same
amount less commission, that were substantiated by fictitious
invoices — Although different taxation years are involved for
plaintiff and proposed party currently reassessed, Minister's
intention is to reassess for all taxation years — Question as to
the composition of the question to be determined by the Court
— Whether or not proposed party should be joined — Income
Tax Act, S.C. 1970-71-72, c. 63, s. 174.
Defendant applies by motion under section 174 of the Income
Tax Act to join Magog Metal Co. Inc. to this appeal filed by
plaintiff and for an order pursuant to section 174(3) to deter
mine the common question set forth in the application affecting
the income assessments for 1972-76 for plaintiff and Magog. It
is alleged that plaintiff deducted for its taxation years 1972 to
1975 amounts as alleged purchases from Magog (one of several
suppliers) that were substantiated by invoices made by plaintiff
in the name of Magog. Magog added to its declared income the
amount of the sales allegedly made, but claimed expenses
corresponding to the amounts added to income less commis
sions resulting from sales, which were kept by Magog, and to
substantiate these expenses Magog allegedly prepared fictitious
invoices. Magog contended that none of the amounts represent
ed sales made by it to plaintiff, the money less commission
being handed back to officers or employees of plaintiff, and
therefore objects to its assessment. Plaintiff, however, contends
that the purchases allegedly made by it from Magog were true
and actual, and therefore deductible expenses. The Minister
seeks a determination of whether or not these expenses were
true and factual, and hence deductible for it would affect both
the reassessments before the Court and those contemplated.
The use of section 174 would suspend the time for making
reassessments until final determination of the question and
would avoid a multiplicity of actions.
Held, the application is allowed. Plaintiffs objection to the
use of section 174, on the ground that its taxation year in issue
is not the same as the taxation years in issue for Magog Metal
Co. Inc., cannot be sustained since section 174(1) refers to a
question of law, fact or mixed law and fact arising out of the
same transaction or series of transactions and the alleged false
invoicing practices were carried on during a period including all
the taxation years in question of both companies. Furthermore,
section 174(2)(c) requires the application to the facts and
reasons on which the Minister bases or intends to base assess
ments. The assessments need not have already been made for
each of the given years for each corporation provided it is the
intention to make these assessments. Plaintiff argues that two
distinct issues are involved—the allegedly false invoicing of
sales by Magog to plaintiff, and the question of whether other
purchases by Magog from other parties were actually made and
hence a deductible expense—and that proof with respect to the
second issue should not be introduced in the present action.
Whether or not it can be established that plaintiff was privy to
Magog's allegedly fictitious purchases, Magog is involved in
both and the Minister has justifiable reason to inquire into both
transactions. The two transactions are of necessity connected; it
is practical to permit evidence respecting both by use of section
174. The Court cannot accept the argument that because that
section breaks new ground and may be somewhat difficult in its
application it should not be used if the better administration of
the Act and the convenience of the Court by avoiding multi
plicity of actions indicate the desirability of invoking it. That its
application may be inconvenient to one of the taxpayers, wheth
er it is the taxpayer already before the Court or the other
taxpayer, is not a principal consideration which should be taken
into account, provided their respective contentions can be fully
and completely presented to the Court. The questions to be
determined are: (1) whether plaintiffs alleged payments to
Magog were bona fide and received by Magog or resulted from
fictitious invoices and never received by Magog, and (2) if the
sales were bona fide, whether Magog created fictitious invoices
disbursements to be set off against its income receipts.
Minister of National Revenue v. Les Meubles de Mas-
kinongé Inc. [1978] C.T.C. 2285, considered. Crevier and
Gasex Ltée and York Lambton Corp. Liée (unreported),
considered. Crown Trust Co. v. The Queen [1977] 2 F.C.
673, considered. Minister of National Revenue v. Ouel-
lette [1971] C.T.C. 121, considered. Blauer v. Minister of
National Revenue [1971] C.T.C. 154, considered.
APPLICATION.
COUNSEL:
Mario Ménard for plaintiff.
G. Du Pont and J. Bélair for defendant.
Yvon Daigle for added party Magog Metal
Co. Inc.
SOLICITORS:
Verchère & Gauthier, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: Defendant applies by motion under
section 174 of the Income Tax Act, S.C. 1970-71-
72, c. 63, to join Magog Metal Co. Inc.
("Magog") to the appeal filed herein by plaintiff
and for an order pursuant to section 174(3) to
determine the common question set forth in the
application which question will affect assessments
in respect of Quemet Corp. ("Quemet") and
Magog for their 1972, 1973, 1974, 1975 and 1976
taxation years. This section of the Act reads as
follows:
174. (1) Where the Minister is of the opinion that a ques
tion of law, fact or mixed law and fact arising out of one and
the same transaction or occurrence or series of transactions or
occurrences is common to assessments in respect of two or more
taxpayers, he may apply to the Tax Review Board or the
Federal Court—Trial Division for a determination of the
question.
(2) An application under subsection (1) shall set forth
(a) the question in respect of which the Minister requests a
determination,
(b) the names of the taxpayers that the Minister seeks to
have bound by the determination of the question, and
(c) the facts and reasons on which the Minister relies and on
which he based or intends to base assessments of tax payable
by each of the taxpayers named in the application,
and a copy of the application shall be served by the Minister on
each of the taxpayers named in the application and on any
other persons who, in the opinion of the Tax Review Board or
the Federal Court—Trial Division, as the case may be, are
likely to be affected by the determination of the question.
(3) Where the Tax Review Board or the Federal Court—
Trial Division is satisfied that a determination of the question
set forth in an application under this section will'affect assess
ments in respect of two or more taxpayers who have been
served with a copy of the application and who are named in an
order of the Board or the Court, as the case may be, pursuant
to this subsection, it may
(a) if none of the taxpayers so named has appealed from
such an assessment, proceed to determine the question in
such manner as it considers appropriate, or
(b) if one or more of the taxpayers so named has or have
appealed, make such order joining a party or parties to that
or those appeals as it considers appropriate.
(4) Where a question set forth in an application under this
section is determined by the Tax Review Board or the Federal
Court—Trial Division, the determination thereof is, subject to
any appeal therefrom in accordance with the Federal Court
Act, final and conclusive for the purposes of any assessments of
tax payable by the taxpayers named by it pursuant to subsec
tion (3).
(5) The time between the day on which an application under
this section is served on a taxpayer pursuant to subsection (2),
and
(a) in the case of a taxpayer named in an order of the Tax
Review Board or the Federal Court—Trial Division, as the
case may be, pursuant to subsection (3), the day on which
the question is finally determined pursuant to paragraph
(3)(a) or on which an order is made under paragraph (3)(b),
Or
(b) in the case of any other taxpayer, the day on which he is
served with notice that he has not been named in an order of
the Board or the Court, as the case may be, pursuant to
subsection (3),
shall not be counted in the computation of
(c) the 4-year period referred to in subsection 152(4),
(d) the time for service of a notice of objection to an
assessment under section 165, or
(e) the time within which an appeal may be instituted under
section 169 or subsection 172(2),
for the purpose of making an assessment of the tax payable by
the taxpayer, serving a notice of objection thereto or instituting
an appeal therefrom, as the case may be.
Magog appeared through its counsel and did not
oppose the application provided it would not be
liable for costs and would be given a full opportu
nity to participate in the pleadings and discoveries.
The latter request is reasonable and normal and
with respect to costs there will be no costs in this
motion against it since it is not contesting. Subse
quent costs will be at the discretion of the judge
trying the question which defendant seeks to have
determined or a Trial Judge in the event that the
decision of the question is left for trial. Plaintiff
Quemet however through its counsel contested the
present application, contending that the situation
is not an appropriate one for the use of section
174, that there are no legal grounds for joining
Magog, that a normal trial of the present proceed
ings without that company being joined would
decide the issue, that in any event the determina
tion of question would not resolve the issues
common to both parties, and finally that a hearing
on the facts in the event that Magog is joined
would be prejudicial to plaintiff Quemet.
The facts are set out at length in defendant's
motion and for the purpose of the present decision
must be deemed to be true, the decision being
based on the situation which would be created if
this were the case. The application states that the
Minister of National Revenue on September 7,
1977 reassessed plaintiff by disallowing an amount
of $17,471.83 in computing its income for its 1972
taxation year. After notice of objection, and con
firmation of the disallowance by reassessment
dated August 15, 1978, plaintiff appealed directly
to this Court in the present proceedings. Plaintiff
was also reassessed on July 27, 1978, the sum of
$27,509.56 being disallowed as a deduction in
computing its income for its 1973 taxation year.
This also was duly objected to and the reassess
ment has not been confirmed, vacated or varied.
No further assessments have yet been issued
against plaintiff for its taxation years 1974 and
1975 to disallow similar claims.
With respect to Magog notices of reassessment
were issued against it on September 22, 1978
disallowing a deduction of $57,120.62 for its 1974
taxation year, $62,763.63 for its 1975 taxation
year, and $10,281.83 for its 1976 taxation year.
Notices of objection were duly made and the reas
sessments have not been confirmed, vacated or
varied.
The Minister alleges that during the taxation
years 1972 to 1976 both corporations were in the
business of buying and selling non ferrous metal,
which Quemet purchased from different suppliers,
one being Magog. Quemet's taxation year ends on
December 31 while Magog's ends on April 30. In
computing its income for its taxation years 1972 to
1975 Quemet deducted the following amounts as
alleged purchases from Magog:
1972 $17,471.83
1973 $27,509.56
1974 $89,349.49
1975 $21,908.85
these purchases being substantiated by invoices
made by Quemet in the name of Magog. Magog
added to its declared income the amount of these
sales allegedly made, but claimed expenses corre
sponding to the amounts added to the income less
commissions which were kept by Magog resulting
from the sales, and to substantiate these expenses
Magog allegedly prepared invoices made out in the
name of different individuals. Invoices were
allegedly made out in fictitious names, some being
names of employees of Quemet and the President
of Magog has allegedly admitted this to a repre
sentative of the Minister of National Revenue,
providing him with a list of such invoices and
substantiated this by an affidavit produced on
March 17, 1977 which stated that the moneys
remitted in payment of the alleged purchases to
Magog by Quemet were in fact returned to
Quemet less $0.01 per pound kept as a commis
sion. Magog contended that none of the amounts
represented sales made by it to Quemet the money
being handed back to officers or employees of
Quemet. The accommodation invoices issued by
Magog for purchases which it allegedly never
made were as follows:
1972 $ 2,698.80
1973 $ 14,065.94
1974 $ 57,120.62
1975 $ 62,763.63
1976 $ 10,281.83
TOTAL $146,930.82
It will be noted that the amounts for the 1974,
1975 and 1976 years are those which have been
deducted by the Minister in reassessing Magog for
those years. Magog's notice of objection is based
on the fact that these amounts should not be
considered as income since in fact the moneys were
remitted to Quemet with the exception of the
commission earned in the transaction. Quemet for
its part contends that the purchases allegedly
made by it from Magog were true and actual
purchases which it should be allowed to claim as
expenses in computing its income for the 1972 and
1973 taxation years the only years which have so
far been assessed.
Defendant in reassessing Quemet relies on sec
tion 18(1)(a) of the Act which disallows as a
deduction an outlay or expense save to the extent
that it was made or incurred by a taxpayer for the
purpose of gaining or producing income for the
business or property. Attention is also directed to
section 152(7) of the Act which reads as follows:
152....
(7) The Minister is not bound by a return or information
supplied by or on behalf of a taxpayer and, in making an
assessment, may, notwithstanding a return or information so
supplied or if no return has been filed, assess the tax payable
under this Part.
and to section 163(2) which provides for a penalty
of 25% against a person who knowingly or under
circumstances amounting to gross negligence
makes, participates in, or assents to the making of
a statement or omission in a return. The Minister
seeks the determination of a question as to whether
the purchases made by Quemet from Magog were
true and factual purchases, the expense of which
would be deductible, or whether the purchases
were not in fact true and factual purchases and
therefore not deductible, but the proceeds thereof
would consequently not be included in Magog's
income with the exception of the commissions.
Quemet's 1972 reassessment is the only reassess
ment before the Court in the present proceedings
as it has not yet appealed to the Court its reassess
ment for its 1973 taxation year. The Minister
indicates however that it is his intention to issue
new assessments against Quemet for its 1974 and
1975 taxation years, and also to disallow the
amounts claimed as expenses for those years and
to confirm the reassessment for the 1973 taxation
year. Pending the outcome of Quemet's appeal to
this Court the Minister intends to reassess Magog
for its 1972 and 1973 taxation years which have
not yet been reassessed and to confirm the reas
sessments issued with respect to the 1974, 1975
and 1976 taxation years. It is contended that the
determination of the question set forth in the
present application will affect all these assess
ments. An order is therefore sought to join Magog
to the appeal of Quemet herein, to determine the
question in a manner which is considered appropri
ate for all the years in issue, that Quemet and
Magog be bound by the decision of the Court in
the present appeal filed by Quemet and by the
decision of the Court on the determination of the
common question for all the years in issue with
costs. If the facts as set out are correct it would
appear that there was a conspiracy between the
two corporations, most probably of a criminal
nature, although counsel for defendant advises me
that no charges have yet been laid, to defraud the
Minister of National Revenue of amounts legally
due as income tax. It is apparent however that the
Minister cannot duplicate the claim for taxation
on the sums in question, nor does he seek to do so.
If in fact Quemet never purchased from Magog
the amounts for which fictitious invoices were
allegedly made out it cannot of course claim the
amount of these purchases as an expense item in
its return, but conversely these amounts could not
be considered as receipts by Magog in the calcula
tion of its income. Magog in its returns has
indicated receipt of these sums but to avoid tax
liability has created another series of fictitious
invoices for purchases of metal never made by it in
order to set off these amounts as expense items
against the payments allegedly received from
Quemet. If the facts as set out are correct it would
not be taxable on income never received but nei
ther would it be able to deduct expenses never
incurred. It is evident that the proof to be eventu
ally made would be relevant to the assessments of
both companies and that the proof may well be
shortened if by determination of a question it is
first decided which company should be assessed for
the fiscal consequences of the alleged fraud. If
Magog had instituted proceedings in this Court
contesting the reassessments made for its 1974,
1975 and 1976 taxation years the two actions
would properly be joined for hearing. Defendant
contends that by the use of section 174 a multi
plicity of actions will be avoided and that it can be
guided with respect to its reassessments for the
years not yet reassessed by the decision of the
Court, and pursuant to section 174(5) (supra) the
time for making reassessments is suspended pend
ing the final determination of the question.
Plaintiff objects to the use of section 174 in that
only its 1972 taxation year is in issue in this action
and with respect to Magog only its 1974, 1975 and
1976 taxation years have been reassessed so that
the same years are not being dealt with. This
contention cannot be sustained since section
174(1) refers to a question of law, fact or mixed
law and fact arising out of one and the same
transaction or occurrence or "series of transactions
or occurrences" and it is apparent that the alleged
false invoicing practices were carried on for a
period of five years from 1972 to 1976 inclusive.
Furthermore, section 174(2)(c) requires the
application to set out the facts and reasons on
which the Minister relies and on which he bases
"or intends to base" assessments and the declara
tion of intent is contained in the motion. It is
evident that the assessments need not have already
been made for each of the given years for each
corporation provided it is the intention to make
these assessments.
Plaintiff further contends that there are two
distinct issues, one being the allegedly false invoic
ing of sales by Magog to Quemet which alone
should be dealt with in these proceedings, and that
Magog in its tax returns has admitted receiving
these sums, but that in considering the reassess
ments of Magog the question is whether its alleged
purchases of metal from other parties, whether
fictitious, or employees of Quemet's, were actually
made - and hence deductible as an expense or not,
and that proof with respect to this cannot be
properly introduced in the present action. This is a
serious argument but it appears to me that wheth
er or not on the facts it can be established that
plaintiff Quemet was in any way privy to or
involved in the purchases by Magog which alleged
ly were fictitious, the latter corporation is certainly
involved in both transactions and the Minister has
justifiable reason for inquiring into both transac
tions, whether in the present proceedings or in
some proceedings to be instituted by or against
Magog. The two transactions are of necessity con
nected and it appears to me practical to permit
evidence respecting both in the present proceedings
by the use of section 174 of the Income Tax Act.
While Quemet may or may not have any interest
in the alleged fictitious purchases made by Magog
in the present proceedings as they stand, the join-
der of the latter corporation to the proceedings will
then open the door to this proof and appropriate
questions can be put which will deal with both
transactions.
Quemet's counsel further contended that proce
dural difficulties have occurred in cases in which
section 174 was invoked before the Tax Review
Board to add another taxpayer to an appeal by a
taxpayer already taken before the Board, and that
some procedural difficulties may be encountered in
the order of proof, burden of proof, and calling of
certain witnesses whose interests may be adverse
to those of the party calling them and so forth. I
cannot accept this argument that because the sec
tion breaks new ground and may be somewhat
difficult in its application it should not be used if
the better administration of the Act and the conve-
nience of the Court by avoiding multiplicity of
actions indicate the desirability of invoking it.
That its application may be inconvenient to one of
the taxpayers, whether the taxpayer already before
the Court, or the other taxpayer, is not a principal
consideration which should be taken into account,
provided both taxpayers and the Minister all have
a full and complete opportunity to participate in
the pleadings, by pleadings of their own, to answer
each other's pleadings, and participate in the
examinations for discovery so that their respective
contentions can be fully and completely presented,
before the Court is called upon to decide the
question. I have examined the jurisprudence to
which I was referred in the two decisions of the
Tax Review Board namely that of M.N.R. v. Les
Meubles de Maskinongé Inc', and Emile Crevier
and Gasex Limitée and York Lambton Corpora
tion Limitée, a judgment of May 24, 1978 not yet
reported, as well as the only decision which
appears to have dealt with the matter in this Court
namely that of Crown Trust Company as Trustee
of Suburban Realty Trust v. The Queen 2 . In the
latter case, in allowing costs on a solicitor and
client basis to both taxpayers Addy J. strongly
criticized the practice of the Minister in making
contradictory assessments. The facts in that case
were much clearer than in the present case, the
issue being the division of the selling price of a
property between land and buildings for capital
cost allowance purposes. The vendor claimed a
higher evaluation for the land than the purchaser
who was added in accordance with section 174.
The assessors while still maintaining a lower value
in the proceedings before the Court had made an
assessment of the added party by giving the higher
value to the land for which plaintiff was contend
ing in its action. While I fully agree with my
learned colleague that inconsistent and contradic
tory assessments of different taxpayers arising out
of the same transaction are highly undesirable
there are circumstances in which the Minister has
little choice. There are many such cases, for exam
ple that of M.N.R. v. Ouellette 3 and the converse
case of Blauer v. M.N.R. 4 , confirmed in the
Supreme Courts. In the present case the Minister
in contending that plaintiff Quemet never made
' [1978] C.T.C. 2285.
2 [1977] 2 F.C. 673.
3 [1971] C.T.C. 121.
"[1971] C.T.C. 154.
5 [1975] C.T.C. 111 and 112 respectively.
the purchases which it claims to have made from
Magog was forced to go further with respect to the
assessment of the latter company and contend that
if in fact it did receive as revenue the proceeds of
bona fide sales to Quemet, it did not itself make
bona fide purchases from third persons to set off
as expenses against the proceeds of these sales.
Failure to do so might have left both taxpayers
free from assessments on profits resulting from an
alleged conspiracy by the creation of the fictitious
invoices.
If the Minister had chosen he could have pro
ceeded to confirm the notices of reassessments
issued to Magog and reassessed the years not yet
reassessed for both companies. This would then
have led to a multiplicity of litigation. I therefore
conclude this is an appropriate situation in which
to apply section 174 of the Act.
By the application of section 174(3)(b) an order
will therefore be made joining Magog to the
appeal brought by Quemet to the Court in the
present proceedings. The questions which will be
set forth for determination are:
1. Whether for the fiscal years 1972 to 1976
respective Quemet's alleged payments to Magog
for used metal were bona fide payments or
resulted in whole or in part from the creation of
fictitious invoices and hence were never received
by Magog or if received retained by them as
proceeds of bona fide sales.
2. In the event that it be found that these
receipts by Magog resulted from bona fide sales
to Quemet whether Magog then created by ficti
tious invoices disbursements which were not
bona fide made by it, to set off against such
income receipts in whole or in part.
ORDER
1. Magog Metal Co. Inc. is joined to the appeal
brought herein by plaintiff Quemet Corp. as an
added party pursuant to section 174(3)(b) of the
Income Tax Act.
2. The heading of the proceedings is amended so
as to read:
QUEMET CORP.,
Plaintiff,
— and—
HER MAJESTY THE QUEEN,
Defendant,
— and—
MAGOG METAL CO. INC.,
Added Party.
3. Two questions are set forth for determination:
a) Whether for the fiscal years 1972 to 1976
respective Quemet Corp.'s alleged payments to
Magog Metal Co. Inc. for used metal were bona
fide payments or resulted in whole or in part
from the creation of fictitious invoices and hence
were never received by Magog Metal Co. Inc. or
if received retained by them as proceeds of bona
fide sales.
b) In the event that it be found that these
receipts by Magog Metal Co. Inc. resulted from
bona fide sales to Quemet Corp. whether Magog
Metal Co. Inc. then created by fictitious
invoices disbursements which were not bona fide
made by it, to set off against such income
receipts in whole or in part.
4. Quemet Corp., Magog Metal Co. Inc. and
defendant will be bound by the decision of the
Trial Division of this Court on the determination
of the common questions for all years in issue,
subject to any appeal therefrom.
5. The defendant shall within 15 days file and
serve upon the added party copies of all pleadings
and proceedings in this action (save for the
application under section 174 which has already
been served), and of this order, and the added
party shall serve a defence to the material in
defendant's said application on plaintiff and
defendant within 15 days after service of this
order, and defendant and plaintiff shall be at
liberty to file and serve an answer or reply and
joinder of issue to the defence of the added party
within 15 days after service thereof.
6. The plaintiff, defendant, and added party may
have production and discovery each from the other
in the same manner as between a plaintiff and
defendant.
7. The order of trial of the action shall be as the
Trial Judge may direct.
8. The added party shall be at liberty to file and
serve a defence to plaintiff's declaration or state
ment of claim within 15 days after service upon
the added party of copies of the pleadings and
proceedings in this action and plaintiff shall be at
liberty to deliver an answer or reply and joinder of
issue to the defence filed by the added party within
15 days after service thereof.
9. Notice shall be given to all parties of all exami
nations for discovery between any of them, and all
parties may be present at such examinations and
take part therein.
10. The costs of this application are in favour of
defendant against plaintiff. All other costs shall be
in the cause as determined by the Trial Judge.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.