Court of Appeal Sets Aside "Breathtakingly Broad" Receivership Order

Akagi v Synergy Group (2000) Inc., 2015 ONCA 368, 14/4731,

 

In this case, the Ontario Court of Appeal overturned  a series of ex parte orders that put in place an investigative receivership over three judgment debtors from an initial fraud proceeding between Mr. Trent Akagi and Synergy Group ("Synergy"). The orders were overturned for two main reasons: first, they were deemed to be "breathtakingly broad" because while the initial proceeding involved only one plaintiff and three defendants, the applications for receivership listed 43 non-party "Alleged Offenders", and appeared to be concerned with the interests of over 3800 victims of potential fraud. Second, the applications were granted ex parte without full and fair disclosure from the Receiver. 

From 2006 to 2008, Mr. Akagi invested approximately $210,000 into small businesses managed by Integrated Business Concepts ("IBC") as part of a tax loss allocation program marketed and sold by Synergy Group ("Synergy"). Representatives of Synergy told Mr. Akagi that IBC's businesses would generate legitimate losses, thereby allowing him to claim his proportionate share of those losses on his tax returns in order to achieve tax savings. However, in 2008 the CRA and the RCMP launched fraud investigations into Synergy's tax allocation program. Mr. Akagi was disallowed from claiming the IBC tax losses, amounting to $104,000, on his 2006 tax return. He was required to pay approx. $55,000 in penalties to the CRA and sued Synergy and certain individuals associated with it for fraud. Mr. Akagi obtained summary judgment against Synergy, Shane Smith (president of Synergy), and David Prentice (vice-president). At the time of the ex parte orders that followed, there remained $182,000 outstanding in damages and costs from this initial action. Of that amount, the defendants had already paid $60,000 into court to the credit of the action pending the outcome of the proceedings, and so the remaining amount that Mr. Akagi could claim against the defendants was $122,000.

Less than two months following the judgment in the initial action, Mr. Akagi applied for and obtained an ex parte order appointing a Receiver over all assets, undertakings, and property of Synergy and IBC (note that IBC was not a party to the initial Akagi action). The ex parte order was obtained on the basis of affidavits from Mr. Akagi and from three CRA employees. The materials did not disclose that the CRA investigation had been terminated four months prior.

 

Following the initial ex parte receivership application, the order morphed into an wide-ranging "investigative receivership" which froze and otherwise reached the assets of 43 additional individuals and entities who were deemed to be "Alleged Offenders". The investigative receivership no longer acted solely in Mr. Akagi's interests, but rather in the interests of Synergy's some 3800 investors, none of whom had made efforts to advance their own claims and none of whom were parties to the initial action. The subsequent three orders empowered the Receiver to direct financial institutions to disclose information and documentation regarding payment and transfers of money not only by Synergy and IBC, but also by the list of "Alleged Offenders", any affiliates of those individuals, any corporations directly indirectly controlled by those individuals, any corporation in respect of which the listed individuals were entitled to conduct financial transactions, and any entity with a registered head office at the premises occupied by Synergy and IBC. The final order froze the accounts of these individuals and granted the Receiver a $500,000 borrowing charge against frozen funds to fund its activities, despite the fact that the maximum amount owing to Mr. Akagi from the initial action was $122,000. These ex parte applications were made with no notice of motion or application, no further evidence, and no factum. The appellants moved in a "come-back proceeding" to set aside the receivership orders. That application was dismissed.

In this case, Justice Blair clarified the concept of an "investigative receivership". He noted that the appointment of a Receiver under s. 101 of the Courts of Justice Act is "an extraordinary and intrusive remedy" which should "be granted only after a careful balancing of the effect of such an order on all of the parties and on others who may be affected by the order." Justice Blair makes specific reference to the case in Loblaw Brands Ltd. v Thornton [2009] O.J. No. 1228 (S.C.), in which the investigative Receiver's mandate was to "locate, investigate, and monitor". It was not empowered to seize and freeze assets, as the Receiver was in this case. Justice Blair asserts that, "the investigative receivership must be carefully tailored to what is required to assist in the recovery of the claimant's judgment while at the same time protecting the defendant's interests, and go no further than necessary to achieve these ends." This was misapplied here because (i) there was no indication that Mr. Akagi's right to recover on the initial judgment was in jeopardy, and (ii) there was no evidence of a "dramatic disparity" between the assets of Synergy, Smith, and Prentice, and the amount of the outstanding judgment. Justice Blair emphasized that the investigative receivership should not have the effect of creating a criminal investigation or public inquiry, as it did here.

 

On the issue of the orders being granted ex parte, Justice Blair states that the failure to disclose that the CRA investigation had been discontinued "sailed close to the line of failing to make full and fair disclosure." He reasons that ex parte proceedings are to "be taken sparingly" and "only where it is demonstrated that notice to other parties would undermine the purpose of the proceeding." This was not the case here. Thus, even if the receivership was not unnecessarily wide, it would fail on the grounds that it should not have been granted ex parte.

Regards,

Blair

 

 

Supreme Court overrules its own decision

In a recent tax case, the Supreme Court of Cananda discussed the circumstances in which it would overrule one of its own prior decisions:

Canada v. Craig (F.C. January 21, 2011)(34144)

"Section 31(1) of the Income Tax Act limits deductible losses “[w]here a taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income”.

In Moldowan v. The Queen, [1978] 1 S.C.R. 480, the Court found that a predecessor to s. 31(1) contemplated three classes of taxpayer involved in farming. In the first class are taxpayers for whom farming provides the bulk of income or the centre of work routine. Loss deductions are not limited for this class. In the second are taxpayers who do not look to farming, or to farming and some subordinate source of income, for their livelihood, but carry on farming as a sideline business. For this class, s. 31(1) limits loss deductions. The third class consists of taxpayers who carry on some farming activities as a hobby, not as a business, and whose losses are not deductible in any amount.

In Gunn v. Canada, 2006 FCA 281, [2007] 3 F.C.R. 57, the Federal Court of Appeal adopted a more generous interpretation of what could constitute a combination of farming and some other source of income.In this case, C’s primary source of income came from his law practice. He also had income from investments, stock options, and farming (buying, selling, training and maintaining horses for racing). He deducted losses from the horse‑racing business from his other income in 2000 and 2001. Based on Moldowan, the Minister reassessed and limited the deductions on the grounds that the combination of the law practice and the horse‑racing business was not C’s chief source of income. Following Gunn, the trial judge allowed C’s appeal, finding that the loss deduction limitation in s. 31(1) did not apply. The Federal Court of Appeal dismissed the Minister’s appeal, holding that it was required to follow its prior decision in Gunn."

The SCC held (unanimously) that the appeal should be dismissed.

Justice Rothstein wrote as follows (at paragraphs 24-25, 27-30, 37-47):
“The question of whether this Court should overrule one of its own prior decisions was addressed recently in Ontario (Attorney General) v. Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3. At para. 56, Chief Justice McLachlin and LeBel J., in joint majority reasons, noted that overturning a precedent of this Court is a step not to be lightly undertaken. This is especially so when the precedent represents the considered views of firm majorities (para. 57).Nonetheless, this Court has overruled its own decisions on a number of occasions. (See R. v. Chaulk, [1990] 3 S.C.R. 1303, at p. 1353, per Lamer C.J., for the majority; R. v. B. (K.G.), [1993] 1 S.C.R. 740; R. v. Robinson, [1996] 1 S.C.R. 683.)

However, the Court must be satisfied based on compelling reasons that the precedent was wrongly decided and should be overruled. (See R. v. Salituro, [1991] 3 S.C.R. 654, at p. 665; Minister of Indian Affairs and Northern Development v. Ranville, [1982] 2 S.C.R. 518, at p. 527; Hamstra (Guardian ad litem of) v. British Columbia Rugby Union, [1997] 1 S.C.R. 1092, at paras. 18-19; R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609, at para. 44.)… The vertical convention of precedent is not at issue with respect to the decision as to whether the Supreme Court should overrule one of its own precedents. Rather, in making this decision the Supreme Court engages in a balancing exercise between the two important values of correctness and certainty. The Court must ask whether it is preferable to adhere to an incorrect precedent to maintain certainty, or to correct the error. Indeed, because judicial discretion is being exercised, the courts have set down, and academics have suggested, a plethora of criteria for courts to consider in deciding between upholding precedent and correcting error. (See R. v. Bernard, [1988] 2 S.C.R. 833, at pp. 850-61, Chaulk, at p. 1353, Henry, at paras. 45-46.)

In this case, I am of the opinion that relevant considerations justify overruling Moldowan. First, Moldowan essentially read the combination test out of s. 31(1). In finding that taxpayers in the second class were subject to the loss deduction limitation where farming as a source of income was a sideline or subordinate to another source of income, the necessary inference was that farming had to be the taxpayer’s chief source of income. However, the section provides two distinct exceptions to its loss deduction limitation. One is where farming is the taxpayer’s chief source of income. The second is where the taxpayer’s chief source of income is a combination of farming and some other source of income. By requiring that the second exception apply only where the other source of income was subordinate to the farming source of income, Moldowan collapsed the second exception into the first. Having regard to the words of the provision, these are two separate exceptions to the loss deduction limitation and each must be given meaning.

Second, there has been significant judicial, academic and other criticism of Moldowan from its issuance in 1977. In light of this criticism, it is appropriate for this Court to take notice and acknowledge the difficulties identified with the Moldowan interpretation of s. 31(1).

Third, since Moldowan, this Court has held on a number of occasions that unexpressed legislative intention under the guise of purposive interpretation is to be avoided (Shell, at para. 43).
There is no doubt that s. 31(1) is, as Dickson J. recognized, an awkwardly worded and intractable section and the source of much debate. Nonetheless, the section is clear that two distinct exceptions to the loss deduction limitation can be identified. A judge-made rule that reads one of the exceptions out of the provision is not consistent with the words used by Parliament.… s. 31(1) does not contemplate a simple aggregation of two sources of income, but requires a wider inquiry into the amount of capital, time, effort, commitment and general emphasis on the part of the taxpayer with respect to the sources of income.

There is no requirement that the two sources of income must be connected in order to meet the combination test.However, before going further, two considerations must be borne in mind. First, it is necessary to interpret the provision having regard to its text, context and purpose (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 55). Nonetheless, purposive interpretation cannot justify finding unexpressed legislative intentions. See Shell, at para. 43. Second, the question as to whether the combination of farming and some other source of income constitutes the taxpayer’s chief source of income is a fact-based determination. I see nothing in the words or context in s. 31(1) to support the proposition that farming must be the predominant source of income when viewed in combination with another source, in order to avoid the loss deduction limitation of the section.

It is also not possible to relegate s. 31(1) to applying only to “hobby” or “gentleman” farmers because, for a loss to be deductable at all, farming must be a source of income. A taxpayer who is engaged in farming in a non-commercial manner, with no profit or intention to profit, does not have a source of income from farming and therefore no loss for income tax purposes, limited or not (Stewart v. Canada, 2002 SCC 46, [2002] 2 S.C.R. 645, at paras. 51-54).The provision is addressed to losses from farming businesses.

There is no loss deduction limitation where farming is the taxpayer’s chief source of income. That implies that such a taxpayer is investing significant funds and spending considerable time in that business. Otherwise, it is difficult to see such a business as a chief source of income.I do not think that characterization of farming changes under the combination test. The provision still contemplates that the taxpayer will devote significant time and resources to the farming business, even if he or she will also devote significant time and possibly resources to another business or employment. It seems to me that, as long as the taxpayer devotes considerable time and resources to the farming business, the fact that another source of income produces greater income than the farm does not mean that such a combination is not a chief source of income for the taxpayer.

The approach to the combination question described by Mr. Felesky, Dickson J. and Sharlow J.A., makes sense. It is grounded in the words of s. 31(1), which limits only a taxpayer’s losses “from all farming businesses”. where the taxpayer’s chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income. With respect to the combination, a simple aggregation of income from two sources cannot have been contemplated by the section, meaning that factors other than two sources of income alone must be taken into account.

The factors identified by Sharlow J.A., namely, the capital invested in farming and the second source of income, the income from each of the two sources of income, the time spent on the two sources of income, and the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations, are all factors involved in running a farming business together with another source of income. If these factors tend to show that the taxpayer places significant emphasis on both his farming and non-farming sources of income, there is no reason that such a combination should not constitute a chief source of income, avoiding the application of the loss deduction limitation of s. 31(1). The determination is a factual one for the trial judge.Such an interpretation is consistent with the general policy of the Income Tax Act that, subject to specific exceptions, taxpayers may offset losses from one business or source of income against profits from another without limitation (Gunn, at para. 20, citing Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147, at para. 53).

The only restriction in the case of farming losses is that the combination must constitute the taxpayer’s chief source of income. This does not imply that either source of income by the taxpayer need be the predominant source. But it does imply that they must be significant endeavours of the taxpayer.For s. 31 to apply and for a farming loss to be deductible at all, farming must be a source of income. At trial, the Crown conceded that Mr. Craig’s horse-racing operation was a business, as opposed to a personal endeavour, on the test articulated in Stewart. Accordingly, the trial judge did not have to engage in a Stewart analysis of the facts to determine whether Mr. Craig’s horse-racing operation was a source of income, but accepted that it was a business and not a personal endeavour (paras. 41-42). I see no reason to disturb this conclusion.Since the horse-racing activities were a source of income, it remains to determine whether to apply the loss deduction limitation in s. 31(1). Taking a contextual approach to the combination question, the relevant factors to consider are the capital invested in farming and the second source of income; the income from each of the two sources of income; the time spent on the two sources of income; and the taxpayer’s ordinary mode of living, farming history, and future intentions and expectations.

The approach must be flexible, recognizing that not each factor need be significant. The question is whether, looking at these factors together, the taxpayer places significant emphasis on each of the farming business and other earning activity, and if so, the combination will constitute a chief source of income and avoid the loss deduction limitation of s. 31(1).Hershfield T.C.C.J. found that the relevant factors, other than demonstrated profitability, clearly pointed to Mr. Craig’s farming business being more than a sideline business (para. 76). Even though Mr. Craig derived his principal income from the practice of law and the total hours spent at his law practice exceeded that devoted to the farming business, he devoted both a material amount of capital and a very significant part of his daily work routine to the farming business (para. 76).

Hershfield T.C.C.J. found that the horse-racing business was pursued as a major business preoccupation. Mr. Craig’s mornings, evenings and weekends were consumed by a dedication to enhancing the potential profitability of the operation, which was more than a distraction from his normal mode of living or an entertainment or sport (para. 76). Further, Mr. Craig was involved in his farming business beyond the stable and track. Hershfield T.C.C.J. gave weight to the fact that Mr. Craig was an active member of and contributor to the community of standard-bred racing (para. 77). He worked to improve the integrity of standard-bred racing so as to improve the potential profitability of his operation. His knowledge of the horse-racing competitions that were important for profitability was sufficient to place him as chairperson of the industry’s appeal board (para. 77). For these reasons, Hershfield T.C.C.J. determined that the horse-racing operation was a chief source of income on the basis of its contribution to the combination test in s. 31(1).Having considered the relevant factors, Hershfield T.C.C.J. found that farming, in combination with Mr. Craig’s law practice, was a chief source of income, and that the loss deduction limitation in s. 31(1) did not apply to the facts. There is no basis for this Court to disturb Hershfield T.C.C.J.’s factual conclusion and his finding that the loss deduction limitation was not applicable.”

Regards,

Blair