A-985-82
The Queen (Appellant)
v.
The Consumers' Gas Company Ltd. (Respondent)
Court of Appeal, Urie, Stone JJ. and Lalande
D.J.—Toronto, November 15; Ottawa, December
15, 1983.
Practice — Pleadings — Statutory provision as defence —
Preliminary objection to appeal on ground pleading not raising
position taken by appellant at trial after close of case —
Statement of defence only raising issue of whether respondent
able to include gross receipts (reimbursements) in undepreciat-
ed capital cost for purpose of capital cost allowance —
Argument at trial raising question of whether receipts included
as income — Kingsdale Securities Co. Limited v. Minister of
National Revenue, [1974] 2 F.C. 760 (C.A.) holding Court
must be satisfied beyond reasonable doubt all requisite evi
dence adduced to enable defendant to rebut plaintiffs new
position — Respondent alleging different witnesses would have
been called and cross-examination of appellant's experts
would have been different had issues advanced in argument at
trial been known — Test in Kingsdale not met — Respondent
also advancing new position for first time on appeal — At trial
appellant submitting reimbursements amortizable over depre-
ciable life of assets — On appeal, appellant relying on s.
12(1)(a) Income Tax Act to take reimbursements into account
— The Queen v. Transworld Shipping Ltd., 11976J 1 F.C. 159
(C.A.) holding specific statutory provision relied upon must be
pleaded together with facts disclosing why provision applicable
— Character of reimbursements not properly considered at
trial nor on appeal because not properly put in issue — Income
Tax Act, S.C. 1970-71-72, c. 63, ss. 9(1), 12(1)(a).
Income tax — Income calculation — Capital cost allowance
— Appeal from trial judgment allowing respondent's appeals
from reassessments for 1971 to 1974 — Respondent receiving
reimbursements for costs of relocating pipelines at customers'
request — Respondent adding gross cost of relocations to
undepreciated capital cost of class and claiming capital cost
allowance on gross amount — Respondent not including reim
bursements in income — Trial Judge holding respondent
entitled to add relocation costs to undepreciated capital cost of
class 2 assets and reimbursements not included in income but
capitalized — The Queen v. Canadian Pacific Limited, 11978J
2 F.C. 439 (C.A.) holding actual cost to taxpayer equals
amount paid by taxpayer — Trial Judge erred in considering
character of reimbursements because not properly put in issue
— Case indistinguishable from Canadian Pacific case —
Respondent entitled to add relocation costs to undepreciated
capital cost of class 2 assets regardless of reimbursements
received — Appeal dismissed.
Appeal from trial judgment allowing the respondent's
appeals from income tax assessments for 1971 to 1974 inclu
sive. The respondent periodically relocates gas pipelines at the
request of its customers who then reimburse the respondent for
all or part of the relocation costs. Subsequent to the decision in
The Queen v. Canadian Pacific Limited, [1978] 2 F.C. 439
(C.A.), where it was held that the actual cost to the taxpayer
was the amount paid by him, the respondent (1) added the
gross costs of the relocations to the undepreciated capital cost
of the class and claimed capital cost allowance on the gross
amount and (2) did not include the reimbursements in the
calculation of its revenues. The notices of reassessment revised
the respondent's income only on the basis that the expenditures
for relocations could not be added to the undepreciated capital
cost for the purpose of capital cost allowance. The appeals were
from those reassessments. The statement of defence alleged
that "both the amounts paid and the reimbursements received
by the Plaintiff ... were on income account". The appellant
submits that this meant that the Minister of National Revenue
viewed the reimbursements as revenue for inclusion in the
calculation of the taxpayer's taxable income in the years in
which they were received. The respondent interpreted the
pleading as indicating that the Minister viewed the reimburse
ments as income so that relocation expenditures could be
chargeable as deductible expenses. Because of the Canadian
Pacific case, however, expenditures were required to be added
to undepreciated capital cost. The receipt of reimbursements
had, therefore, to be on account of capital. It was argued that
the statement of defence gave no clue that the Minister would
add the expenditures to capital cost, but the reimbursements
had to be on income account. The Trial Judge concluded that
the respondent was entitled to include the gross cost of reloca-
tions in the undepreciated capital cost of its class 2 assets and
not to include the reimbursements in its revenue. The appellant
submits that the Trial Judge erred in holding that the reim
bursements were not income and that the issue of whether the
reimbursements constituted income was not decided in the
Canadian Pacific case. Alternatively, the appellant argues that
the Canadian Pacific case was not applicable. The respondent
submits that the Court should not entertain the appellant's
principal submission that the respondent is obliged to include
the reimbursements in the computation of its income because it
was not pleaded or argued in the Trial Division nor did it form
the basis of the reassessments. Also, the appellant changed her
position on appeal from that at trial where it was contended
that the reimbursements should be amortized over the depre-
ciable life of the assets. On appeal she relied on paragraph
12(1)(a) of the Income Tax Act to take the reimbursements
into income in the year in which they were received. The
respondent submits that the reimbursements are not profit
derived from a "taxpayer's income for a taxation year from a
business or property" within the meaning of subsection 9(1) of
the Income Tax Act. Finally, the appellant submits that the
issue in this appeal is whether the reimbursements must be
taken into account in determining the respondent's income for
tax purposes. The respondent alleges that the issue is whether
the reimbursements may properly be applied to reduce the
respondent's undepreciated capital cost of class 2 assets.
Held, the appeal should be dismissed. No reasonable reader
of the statement of defence would anticipate that if the princi
ple of the Canadian Pacific case were followed, that the
respondent's position would be that the receipt of the reim
bursements would be on income account although the expendi
ture would be for capital account. Given this and the fact that
the respondent objected at trial to the advancement of this
position when not pleaded, the Trial Judge should not have
permitted the argument to be advanced nor to have made a
finding on the character of the reimbursements. If the Minister
intended to put in issue the question of how the reimbursements
should be treated for tax purposes, it should have been done in
clear and unmistakable terms to enable the respondent to know
the case it had to meet. As to the issue raised on appeal, in The
Queen v. Transworld Shipping Ltd., [1976] 1 F.C. 159 (C.A.)
it was held that, where a statutory provision is to be relied upon
it must be pleaded together with the facts disclosing why the
provision is applicable. The amended statement of defence does
not do so. The pleading does not provide the underpinning
required for the argument advanced for the first time after the
case was closed. In Kingsdale Securities Co. Limited v. Minis
ter of National Revenue, [1974] 2 F.C. 760 (C.A.), the alterna
tive position was raised during argument at trial after the cases
for both parties had been closed. It was held that the Court
must be satisfied beyond all reasonable doubt that all requisite
evidence had been adduced to enable the defendant to rebut the
plaintiff's new position. Here counsel for the respondent stated
that had he understood from the pleadings that the defence
raised at the conclusion of the trial was to be advanced, he
would have called expert accounting evidence to support his
client's position and would have cross-examined the appellant's
expert differently. The requirement of the Kingsdale case has
not been met. The appellant's argument both at trial and on
appeal as to the character of the reimbursements received
ought not to be considered since it was not properly put in issue
at trial. This case is indistinguishable from the Canadian
Pacific case. The respondent was entitled to add to the unde-
preciated capital cost of its class 2 assets its expenditures
incurred in relocating or modifying pipelines on the request of
third parties regardless of reimbursements received from those
third parties.
CASES JUDICIALLY CONSIDERED
APPLIED:
The Queen v. Canadian Pacific Limited, [1978] 2 F.C.
439 (C.A.); Her Majesty the Queen v. Littler Sr, [1978]
CTC 235 (F.C.A.); The Queen v. Transworld Shipping
Ltd., [1976] 1 F.C. 159; 61 D.L.R. (3d) 304 (C.A.);
Kingsdale Securities Co. Limited v. Minister of National
Revenue, [1974] 2 F.C. 760; [1975] CTC 10 (C.A.).
COUNSEL:
Gaston Jorré and B. Moon for appellant.
M. S. Bistrisky for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
appellant.
Aird & Berlis, Toronto, for respondent.
The following are the reasons for judgment
rendered in English by
URIE J.: This appeal is from a judgment of the
Trial Division (now reported at [1983] 1 F.C. 314)
which allowed the appeals of the respondent from
assessments made by the Minister of National
Revenue in respect of the respondent's 1971, 1972,
1973 and 1974 taxation years.
In the course of its business, the respondent
from time to time, at the request of its customers,
relocates portions of its pipelines for the transmis
sion of natural gas. Those customers reimburse the
respondent for all or part of such relocation costs.
According to the appellant the issue to be deter
mined in this appeal is whether or not the reim
bursements must be taken into account in deter
mining the respondent's income for tax purposes.
The respondent, on the other hand, avers that the
sole issue is whether or not the reimbursements
referred to may properly be applied to reduce the
respondent's undepreciated capital cost of class 2
assets. Which is the correct characterization of the
issue will become clarified later in these reasons.
I
The Relevant Facts
The respondent is a public company having its
head office in Toronto, Ontario. It is engaged in
the business of distribution of natural gas to over
725,000 residential, commercial and industrial
customers in Ontario, and, as well, in the produc
tion of natural gas, primarily from wells in Lake
Erie and in the sale and rental of gas appliances.
Its business activities, including its rates and
accounting methods and practices, are subject to
the approval of the Ontario Energy Board. The
vast bulk of its revenue (approximately 95%) in
the years in issue, was attributable to its gas
distribution business. The gas is mainly received
from trunk pipelines at a gate station outside its
operating area. From the gate station the respond
ent distributes the gas through steel gas mains
which generally run beneath the surface of streets
and roads. The individual customers are provided
with gas through pipes leading from the mains.
Various persons and organizations such as gov
ernment departments, municipalities, utilities, tele
phone companies and other private companies
from time to time require the relocation of por
tions of the pipeline network in order to do con
struction work for their own purposes. Usually
such relocations are required because of some
physical conflict arising from the construction
work but they may also be undertaken for safety
reasons. The parties requesting the relocations
may or may not be customers of the respondent.
Whenever it can the respondent attempts to
recover the full cost of the relocations from the
party requesting them. However, the amount it
can recover may be limited by the provisions of
either The Public Service Works on Highways
Act, R.S.O. 1970, c. 388 or the Railway Act,
R.S.C. 1970, c. R-2. The respondent in all cases
carefully calculates all elements of cost associated
with the relocations and bills the parties in full for
such costs or such part thereof as is permitted by
statute.
Upon completion of the relocations the original
pipe is usually abandoned and left in the ground
although certain above-ground equipment such as
parts of regulator stations may be salvaged. In the
latter event credit is presumably given for the
value of the salvaged equipment.
The average annual number of relocations in the
taxation years in question was about 225.
Prior to the decision of the Court in The Queen
v. Canadian Pacific Limited' the respondent treat
ed reimbursements received from the parties for
whom relocations were undertaken in essentially
the same manner as it did for financial statement
purposes, i.e., it reduced the amount of the gross
cost of its relocated pipe by the amount of the
reimbursements and added the net amount only to
the undepreciated capital cost of the class (class
2). In substance, it took capital cost allowance on
the net cost only. Incidentally, for rate-fixing pur
poses that is one of the methods for treating the
reimbursements authorized by the Ontario Energy
Board. After the Canadian Pacific case the
respondent took the position that for tax purposes
it (a) was entitled to add the gross cost of the
relocations to the undepreciated capital cost of the
class and to claim capital cost allowance on the
gross amount, and (b) was not obliged to include
the reimbursements in the calculation of its reve
nues for tax purposes.
II
Alleged Errors
The appellant's principal objection to the judg
ment appealed from is that the learned Trial Judge
erred in concluding that the respondent is entitled
to include the gross cost of relocations in the
undepreciated capital cost of its class 2 assets and
not to include the reimbursements in its revenue
for the purpose of computing its income under the
Income Tax Act [S.C. 1970-71-72, c. 63]. In
particular counsel for the appellant submitted that
the Trial Judge erred in that the issue of whether
the reimbursements constituted income was decid
ed in the Canadian Pacific case and in holding
that, in this case, the reimbursements were not
income. In the alternative, in effect, he said that
1 [1978] 2 F.C. 439 (C.A.).
the Canadian Pacific case was not applicable on
the facts of this case.
III
Preliminary Objection
In his memorandum of fact and law, counsel for
the respondent argued that the principal position
taken by the appellant in her memorandum of fact
and law ought not to be entertained by this Court
in that it presents a position that was neither
pleaded nor argued in the Trial Division nor did it
form the basis of the reassessments against which
the respondent's action was directed. The principal
position to which the respondent refers, as
expressed in the appellant's memorandum, is as
follows:
38. The Deputy Attorney General of Canada submits that,
assuming Canadian Pacific to be applicable, then for tax
purposes Consumers':
(a) is entitled to add the gross cost of the relocations to its
Class 2 undepreciated capital cost and take capital cost
allowance on the whole of the relocation cost
BUT
(b) is obliged to include the reimbursements in the computa
tion of its profit and, consequently, in its income for tax
purposes.
In order to appreciate this argument, reference
should first be made to the Canadian Pacific case
following which an analysis of the pleadings shall
be made in light of the ratio decidendi of that case
and the allegations of the respondent as to what
was or was not pleaded.
The decision of this Court in the Canadian
Pacific case arose out of an appeal from the Trial
Division and the headnote accurately sets forth the
facts relating to that part of the judgment dealing
with capital cost allowance.
(2) The Capital Cost Allowance: Respondent, acting at the
request of third parties, made capital expenditures or expendi
tures deemed to be so, after it had been agreed that the third
party would pay respondent an amount not exceeding that
expenditure. Respondent calculated the capital cost allowance
in respect of those assets, but the amounts received from the
third parties were not taken into consideration in determining
their capital cost. Appellant contends that the capital cost of
those assets must be diminished by an amount equal to that
received from the third parties. Appellant divided the eight
transactions under consideration into two categories: (1)
instances in which the respondent made expenditure on its own
account and (2) cases in which respondent made the expendi
ture for the account of a third party who ultimately paid for it.
Those cases in the second category were considered
individually.
In respect of the first category of cases (which
are similar to the relocations undertaken by the
respondent in that the expenditures were made by
the respondent after it had been agreed that the
third party would pay the respondent amounts not
exceeding the amounts of the expenditures) Pratte
J., speaking for the Court had this to say at page
445 of the Report:
The contention of the appellant in respect of these transac
tions is that the "capital cost to the taxpayer of depreciable
property", within the meaning of section 20(5)(e), is the net
cost to the taxpayer and that the expenditure to which section
84A(3) refers is what the taxpayer "has actually expended in
net". Therefore, in the five cases under consideration, the
"capital cost to" the respondent, or the expenditure incurred by
it, is, according to the appellant, the amount of the respondent's
outlay less the contribution of the third party.
The learned Trial Judge, in my opinion, rightly rejected that
contention which appears to me to be inconsistent with the
decision of the House of Lords in Birmingham Corp. v. Barnes
([1935] A.C. 292) where it was held that "the actual cost to" a
taxpayer of depreciable property is equal to the amount paid by
the taxpayer. As Lord Atkin said in that case (at page 298):
What a man pays for construction or for the purchase of a
work seems to me to be the cost to him: and that whether
someone has given him the money to construct or purchase
for himself; or, before the event, has promised to give him the
money after he has paid for the work; or, after the event, has
promised or given the money which recoups him what he has
spent.
It was on the basis of this reasoning that the
respondent changed its treatment of the reim
bursements in the calculation of its undepreciated
capital cost. In its principal submission counsel for
the appellant contended that while the reasoning
in the Canadian Pacific case may entitle the
respondent to add the gross cost of the relocations
to its class 2 undepreciated capital cost and to
calculate capital cost allowance on the whole of
the relocation cost, the case neither considered nor
decided the issue of whether such receipts were
income which had to be included in the respond
ent's revenues for tax purposes.
The learned Trial Judge, rightly, I think, found
that he was bound by the principle expressed in the
Canadian Pacific case in so far as the treatment of
the reimbursements as an addition to undepreciat-
ed capital cost is concerned. However, he went
further and, after reviewing considerable jurispru
dence concluded that in the Canadian Pacific case
contributions were not taken into revenue but were
capitalized 2 and, therefore, found as follows: 3
I have concluded that the plaintiff in the present case was
justified in considering that contributions received towards the
relocation of its pipelines done, not for its benefit, but for the
benefit of the parties making the contributions, can be carried
to a contributed capital account without passing through
income.
Counsel for the respondent submitted that the
appellant's contention as to the accounting treat
ment to be accorded the reimbursements (supra),
for tax purposes, ought not to be considered for
two reasons:
(1) because the appellant neither pleaded this
position nor argued it at trial and, therefore, it
cannot be argued in this Court, and
(2) in any event, although the judgment of this
Court in Canadian Pacific did not deal with the
question of whether or not the reimbursements
should be taken into income or form part of the
shareholders' equity, on the facts of this case the
reimbursements are not profit derived from a
"taxpayer's income for a taxation year from a
business or property ..." within the meaning of
subsection 9(1) of the Income Tax Act 4 as
alleged by counsel for the appellant. If the
respondent's argument with respect to (1) is
sustained, it will, of course, be unnecessary to
deal with the second argument, unless the
learned Trial Judge was right in concluding that
the Canadian Pacific case determined that such
reimbursements were capital in nature and the
facts of this case being indistinguishable from
those in the Canadian Pacific case the same
2 A.B. p. 458 (p. 18 of the reasons for judgment) [now
reported at p. 332 F.C.].
3 A.B. p. 462 (p. 22 of the reasons for judgment) [now
reported at p. 336 F.C.].
4 9. (1) Subject to this Part, a taxpayer's income for a
taxation year from a business or property is his profit therefrom
for the year.
conclusion must follow.
Counsel for the appellant relied on paragraphs
11, 12, 15 and 16 of the amended statement of
defence as providing the basis for entitling him to
argue that the reimbursements form part of the
respondent's revenue for purpose of the calculation
of taxable income. Those paragraphs read as
follows:
11. He says that both the amounts paid and the reimburse
ments received by the Plaintiff pursuant to its agreements with
third parties and in each case arising out of the same agreement
were on income account.
12. He says that if the amounts disbursed by the Plaintiff under
its agreements with third parties were on capital account, which
is not admitted but denied, either
a) the capital cost to the Plaintiff of each of its relocated
pipelines built pursuant to its respective agreement with a
third party is the amount disbursed by it under each agree
ment less the reimbursement received from the third party
thereunder; or
b) in each case a pipeline was disposed of for proceeds of
disposition equal to the amount the Plaintiff was reimbursed
under its respective agreement with the third party.
15. He further submits that both the amounts paid and the
reimbursements received by the Plaintiff pursuant to its agree
ments with third parties and in each case arising out of the
same agreement were on income account and accordingly those
amounts are properly deductible and those reimbursements
received are properly included in calculating the Plaintiffs
income for each respective taxation year.
16. In the alternative, if the amounts disbursed by the Plaintiff
under its agreements with third parties were on capital account,
which is not admitted but denied, he submits that either
a) the capital cost to the Plaintiff for each of its relocated
pipelines built pursuant to its respective agreement with a
third party is the amount disbursed by it under each agree
ment less the reimbursement received from the third party
thereunder; or
b) in each case a pipeline was disposed of for proceeds of
disposition equal to the amount the Plaintiff was reimbursed
under its respective agreement with the third party so that
although the amount disbursed by it pursuant to that agree
ment would properly be added to its undepreciated capital
cost of pipelines, that undepreciated capital cost is reduced
by those proceeds of disposition.
Counsel also said that paragraph 5 of the partial
agreement statement of facts supports his conten
tion. It reads as follows:
5. It is further agreed that if this Honourable Court should find
wholly in favour of the Plaintiff (i.e. that the Plaintiff is
entitled to include the amounts referred to in paragraph 2(a) in
its Class 2 capital cost and that those amounts do not result in
any other offsetting effect on taxable income), then (as com
pared with the reassessments) (i) the Plaintiffs undepreciated
capital cost ("UCC") at the [sic] at the end of each taxation
year (prior to any cost allowance being taken) should be
increased by the amounts shown in Table 3 below and (ii) the
Plaintiffs capital cost allowance ("CCA") for each year should
be increased by the amount shown in Table 3.
Since heaviest reliance was placed on para
graphs 11 and 15, it should be observed at the
outset that each states that "both the amounts
paid and the reimbursements received by the
Plaintiff ... were on income account". (Emphasis
added.) This, in appellant counsel's submission,
could only mean to the draftsman of an answering
plea, or in counsel's preparation for trial, that the
Minister of National Revenue viewed the reim
bursements as revenue for inclusion in the calcula
tion of the taxpayer's taxable income in the years
in which they were received.
Counsel for the respondent, on the other hand,
says that the meaning that he ascribed to those
words, particularly because of the use of the word
"both" in relation to expenditures and receipts as
being for "income account", was that the Minister
viewed the reimbursements as income in the hands
of the respondent so that the expenditures incurred
for the relocation could be chargeable as deduct
ible expenses in the year in which they were
incurred, a result which would be financially
advantageous to the respondent. However, because
of the Canadian Pacific case the respondent's
counsel knew that the expenditures were, for the
reasons given in that case, to be added to the
undepreciated capital cost of the class 2 assets.
Flowing from that knowledge the receipt of the
reimbursement must, as he saw it, also be on
account of capital. The plea in the statement of
defence as drafted gave him no clue, he said, that
the Minister would now take the position that
while the expenditures could be added to the capi
tal cost, the receipt of the reimbursements would
be on income account. They were inconsistent
positions in his view.
I agree. I am of the opinion that no reasonable
reader of the aforementioned paragraphs of the
amended statement of defence would anticipate
that if the Court were to find that the principle of
the Canadian Pacific case were followed (notwith-
standing the denial in the defence that the case
was not relevant) that the respondent's position
would be that the receipt of the reimbursements
was on income account although the expenditure
would be for capital account. That being so and, as
well, the Court having been advised by counsel for
the respondent that he had objected strenuously at
trial against the advancement of this position when
not pleaded, it is my opinion that the Trial Judge
should not have permitted the argument to be
advanced nor to have made a finding on the
accounting treatment to be accorded the receipt of
the reimbursements for tax purposes; namely that
the reimbursements were on the contributed capi
tal account.
That this is the correct view of how the matter
should have been dealt with is supported by the
fact that it appears that the notices of reassess
ment in the taxation years in question, from which
the respondent appealed, revised the respondent's
income in each year on the basis, inter alia, that
the expenditures for relocations could not be added
to the undepreciated capital cost for the purpose of
calculation of capital cost allowance. The respond
ent's appeals to the Trial Division were from those
reassessments claiming, in so far as the 1971, 1972
and 1973 taxation years were concerned, that it
was entitled to claim capital cost allowances on the
additional amounts comprising the reimburse
ments received from relocations during the respec
tive years by virtue of the Canadian Pacific case, it
having amended its returns after that decision was
handed down. In so far as its 1974 taxation year
was concerned, it took the position that its return
had correctly included in the undepreciated capital
cost of its class 2 properties the gross expenditures
made for relocations regardless of reimbursements
received from various sources during that year. It
relied on the Canadian Pacific case as its authority
for so doing. Having so pleaded, it seems to me
that if the Minister intended to put in issue the
question of how the receipt of the reimbursements
should be treated for tax purposes, (assuming that
the respondent was found to be correct in relying
on the Canadian Pacific case), she should have
done so in clear and unmistakable terms to enable
the respondent to know the case it had to meet and
to adduce such evidence as it deemed necessary to
meet that contention. As earlier stated, I am of the
opinion that the appellant failed to do so.
The difficulty is further exacerbated by the fact
that the appellant changed the position she took at
trial to that which her counsel took during this
appeal. In his reasons for judgment the learned
Trial Judge described the appellant's position at
trials, in the following way [at page 332]:
The defendant contends that the plaintiff's tax position is not
in accordance with either accounting or economic reality, and
now contends that preferably the entire cost of relocation
should be included in the capital account for capital cost
allowance purposes, and does not suggest that the whole contri
bution should be brought into income in the year when it was
received, provided that it be brought in in such a way that it
will be amortized in the current year and future years at a rate
equal to the amount claimed by plaintiff as capital cost allow
ance on the costs of relocation. The end result will be the same.
At the hearing of the appeal, counsel for the
appellant agreed that he could not, on the basis of
the Act, sustain his position that the reimburse
ments should be amortized over the depreciable
life of the assets and that, therefore, he now relied
on paragraph 12(1) (a) 6 as his authority for taking
them into income in the year in which they were
received. In counsel for the respondent's submis
sion this change constituted the raising of a new
defence on the appeal and was an additional
reason for refusing to consider the appellant's
A.B. v. 1, p. 458 (p. 18 of the reasons for judgment).
6 12. (1) There shall be included in computing the income of
a taxpayer for a taxation year as income from a business or
property such of the following amounts as are applicable:
(a) any amount received by the taxpayer in the year in the
course of a business
(i) that is on account of services not rendered or goods not
delivered before the end of the year or that, for any other
reason, may be regarded as not having been earned in the
year or a previous year, or
(ii) under an arrangement or understanding that it is
repayable in whole or in part on the return or resale to the
taxpayer of articles in or by means of which goods were
delivered to a customer;
argument on this branch of the case.
IV
The Jurisprudence
As can be seen from the foregoing there are two
aspects to the objection taken by the respondent.
First, that the pleadings did not raise the position
taken by the appellant during argument at trial
after the close of the case. Second, that a new
position was advanced by the respondent for the
first time on appeal.
Quite aside from any rules of Court in respect of
pleadings and the necessity for pleading particular
defences, it is trite to say that one of the purposes
of a statement of defence is to raise all grounds of
defence which, if not raised, would be likely to
take the opposite party by surprise. A fortiori
where, as here, a particular statutory provision is
to be relied upon it must be pleaded together with
the facts disclosing why the provision is applicable.
Jackett C.J. in Her Majesty the Queen v. Littler
Sr' put the principle in this way:
In my view, when a cause of action is to be supported on the
basis of a statutory provision, it is elementary that the facts
necessary to make the provision applicable be pleaded (prefer-
ably with a direct reference to the provision) so that the
opposing party may decide what position to take with regard
thereto, have discovery with regard thereto and prepare for trial
with regard thereto. In this case, the Minister's decision on the
objection referred to section 137 but, when complying with
section 99 in the preparation of his defence in the Trial
Division, the respondent not only did not refer to that section
although he referred to others, he did not plead facts showing
that "the result of one or more ... transactions ... is that a
person confers a benefit...". Had that been pleaded, other
facts might well have been the subject of evidence in addition to
those that were brought out at trial. In my view, it is no mere
technicality", but a matter of elementary justice to abstain, in
the absence of very special circumstances, from drawing infer
ences from evidence adduced in respect of certain issues in
order to make findings of fact that were not in issue during the
course of the trial.
7 [1978] CTC 235 (F.C.A.), at p. 240.
In The Queen v. Transworld Shipping Ltd.' a
contract to enter a charter-party required Trea
sury Board approval and no such approval had
been obtained. These facts were not pleaded nor
made the subject-matter, as such, of discovery or
evidence at trial. Jackett C.J. for the Court viewed
the onus as being on the appellant to plead such a
defence, together with the facts on which it was
based, in its statement of defence. He then made
the following observation:
In my view, justice requires that any defence based on special
statutory provisions must be pleaded, particularly if it is based
on specific facts, so that the opposite party may have discovery
with regard to such facts and prepare to adduce evidence with
regard thereto.
While a statutory requirement, the absence of
which provides a defence for the appellant, was not
present in the case at bar, the principle nonetheless
applies. The new defence was based on the alleged
fact that the reimbursements in issue were to be
viewed as falling within the ambit of paragraph
12(1) (a) of the Income Tax Act.
That contention, thus, ought to have been plead
ed together with the facts which disclosed why that
provision was applicable. I do not see that the
amended statement of defence does so. I am of the
opinion, therefore, that the pleading does not pro
vide the underpinning required for the argument
advanced for the first time after the case was
closed and during final argument at the end of the
trial.
As to the raising of the argument for the first
time on the appeal that the reimbursements were
income in the hands of the respondent in the
taxation year in which they were received, there is
ample authority as to when new arguments are
permitted to be maintained on appeal. Some of the
authorities were reviewed in the judgment of this
Court in Kingsdale Securities Co. Limited v. Min
ister of National Revenue and in particular in the
following passage from my reasons for judgment,
with which Ryan J. concurred:
8 [1976] 1 F.C. 159, at p. 170; 61 D.L.R. (3d) 304 (C.A.), at
p. 314.
9 [1974] 2 F.C. 760, at pages 772-773; [1975] CTC 10
(C.A.), at pp. 18-19.
Secondly, the amended notice of appeal from the re-assess
ments based the appeal on the partnership agreement in which
each of the limited partners is one of the trusts and each is
described as "a Trust created by Deed of Trust, dated the 2nd
day of December A.D. 1963 through its Trustees for the time
being ...". No plea was made, even in the alternative, that the
trusts were declaratory trusts and not trusts settled by the
Oklahoma relatives pursuant to the trust deeds. It was not until
during the course of argument at trial that this line of reason
ing was adopted by the appellant. In my view, the appellant
having proceeded to trial on the basis of the validity of certain
documents, ought not to be permitted to invite either the Trial
Judge or this Court to consider the case on an entirely different
basis.
In The Owners of the Ship Tasmania v. Smith (1890) 15
A.C. 223 at p. 225, Lord Herschell, dealing with a point which
was taken by the plaintiff for the first time in the Court of
Appeal, had this to say:
My Lords, I think that a point such as this, not taken at the
trial, and presented for the first time in the Court of Appeal,
ought to be most jealously scrutinised. The conduct of a
cause at the trial is governed by, and the questions asked of
the witnesses are directed to, the points then suggested. And
it is obvious that no care is exercisedin the elucidation of
facts not material to them. (The emphasis is mine.)
It appears to me that under these circumstances a Court of
Appeal ought only to decide in favour of an appellant on a
ground there put forward for the first time, it be satisfied
beyond doubt, first, that it has before it all the facts bearing
upon the new contention, as completely as would have been
the case if the controversy had arisen at the trial; and next,
that no satisfactory explanation could have been offered by
those whose conduct is impugned if an opportunity for
explanation had been afforded them when in the witness
box. * (The emphasis is mine.)
In Lamb v. Kincaid (1907) 38 S.C.R. 516 at 539, Duff J. as he
then was, referred to the Tasmania case (supra) with approval
and stated:
Had it been suggested at the trial that the plaintiffs ought
to have proceeded in the manner now suggested, it is impos
sible to say what might have proved to be the explanation of
the fact that the plaintiffs did not so proceed. Many explana
tions occur to one, but such speculation is profitless; and I do
not think the plaintiffs can be called upon properly at this
stage to justify their course from the evidence upon the
record. A court of appeal, I think, should not give effect to
such a point taken for the first time in appeal, unless it be
clear that, had the question been raised at the proper time,
no further light could have been thrown upon it.
There are many other authorities to the same effect but unlike
those cases in which the new ground was first raised on appeal,
the alternative position was in this case raised during argument
before the learned Trial Judge. However, at that time the cases
for both parties had been closed, so that no further evidence
* The italics are mine.
could have been adduced by the defendant at that stage to
rebut the argument and the same principles should, therefore,
apply. Presumably, the defendant had led evidence which was
material in defending the case pleaded against him. Neither
this Court nor the Trial Judge ought to be put in a position of
deciding whether or not all possible evidence had been adduced
to counter any argument made by the other party unless it is
satisfied beyond all reasonable doubt that all requisite evidence
had been adduced to enable the defendant to rebut the plain
tiffs new position. I am not so satisfied and thus, I do not think
that the appellant's submissions that declaratory trusts may
have been created ought to be considered by this Court or need
to have been considered by the learned Trial Judge.
As can be seen, the circumstances in which the
introduction of the new argument occurred in that
case are much like those which are present in this
case.
The question thus becomes, would additional
evidence have assisted the respondent in rebutting
the new argument? Counsel for the respondent in
answering questions put to him by the Court stated
that, had he understood from the pleadings that
the defence raised by the appellant at the conclu
sion of the trial was to be advanced, he would have
called expert accounting evidence to support his
client's treatment of the reimbursements as con
tributed capital and, as well, would have cross-
examined the appellant's expert in the hope of
eliciting support from him that the treatment of
the reimbursement as contributed capital was as
acceptable a method as including them in the
income of his client. To paraphrase what was said
in the Kingsdale case, in the face of these state
ments, I cannot be satisfied beyond reasonable
doubt that all requisite evidence had been adduced
to enable the respondent to rebut the appellant's
new position either at trial or in this Court.
For all of the above reasons, therefore, I am of
the opinion that the appellant's argument both at
trial and in this Court as to the character of the
reimbursements received for the pipe relocations,
ought not to have been considered at trial nor
should it be considered in this Court since it was
not properly put in issue at trial.
V
The Merits of the Appeal
I am respectfully of the opinion that this case is
indistinguishable from the Canadian Pacific case.
It follows, therefore, that the respondent, as found
by the Trial Judge, was entitled to add to the
undepreciated capital cost of its class 2 assets its
expenditure incurred in relocating or modifying
pipelines on the request of third parties regardless
of reimbursements received from those third par
ties, the character of which was not an issue.
The appeal should thus be dismissed with costs.
STONE J.: I concur.
LALANDE D.J.: I agree with Mr. Justice Urie's
disposition of this appeal for the reasons given by
him.
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.