COURT FILE NO.: CV-13-477053CP
DATE: 2019/11/12
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
KENNETH GORDON Plaintiff
– and –
CANADA REVENUE AGENCY and DAVID DUFF Defendants
Bonnie Roberts Jones and Mary Peterson for the Plaintiff
Nancy Arnold and Angela Shen for the Defendants
Proceeding under the Class Proceedings Act, 1992
HEARD: November 12, 2019
PERELL, J.
REASONS FOR DECISION
A. Introduction
[1] In 2013, pursuant to the Class Proceedings Act, 1992,[^1] the Plaintiff Kenneth Gordon brought a proposed class action on behalf of investors who had invested in a tax-driven investment scheme developed by EquiGenesis Corporation. He sued the Canada Revenue Agency (“CRA”) and David Duff, a CRA employee.
[2] There were 364 investors in EquiGenesis’ programs broken down as follows: (a) 173 investors in EquiGenesis’ 2003 program; (b) 219 investors in its 2004 program; and (c) 59 investors in its 2009 program.
[3] CRA had reassessed the tax returns of these investors and denied their charitable donation claims that had been part of EquiGenesis’ investment program. CRA also disallowed partnership losses and expenses related to the investment programs, which involved purchasing units in a limited liability partnership, also a component of the investment scheme.
[4] Mr. Gordon alleged that the Defendants had engaged in a malicious course of conduct that was intended to harm EquiGenesis and to eradicate its legitimate programs, as well as to harm the investors. Mr. Gordon alleged that the Defendants intentionally and maliciously ignored their statutory obligations and misused their audit and assessment powers to pursue for an improper purpose a course of action that they knew was beyond their statutory authority with the intent of injuring EquiGenesis and the investors. Further, he alleged that Mr. Duff and other CRA employees wrongfully delayed tax reviews and appeals.
[5] Recently, Mr. Gordon negotiated a settlement to resolve the tax disputes and the civil claims.
[6] In order to implement the settlement, Mr. Gordon seeks a pre-certification order of the court allowing him to discontinue his proposed class action.
[7] For the reasons that follow, I grant Mr. Gordon’s request.
B. Procedural Background
[8] On March 26, 2013, Mr. Gordon and EquiGenesis commenced an action against CRA and Mr. Duff with respect to EquiGenesis investment programs for 2003, 2004, and 2009.
[9] Contemporaneous with the proposed class action, many investors had already served Notices of Objection pursuant to s. 165 (1) of the Income Tax Act. In 2013, six participants in the EquiGenesis 2009 Program filed Notices of Appeal in the Tax Court of Canada under paragraph 169(1)(b) of the Income Tax Act.
[10] On September 9, 2013, after the Defendants brought a motion to strike the claim as disclosing no reasonable cause of action, I, amongst other things, severed Mr. Gordon’s action from EquiGenesis' claim, and I granted him leave to deliver a Fresh as Amended Statement of Claim. I granted leave to EquiGenesis to deliver a Statement of Claim. I ordered the cases to be case managed together.[^2]
[11] On October 9, 2013, Mr. Gordon served his Fresh as Amended Statement of Claim. The following day, EquiGenesis delivered its pleading.
[12] On November 28, 2013, the Defendants brought a motion to strike certain paragraphs from the pleadings and for a stay of the actions. I dismissed the pleadings motion, and I ordered that after certain steps were taken, commencing February 16, 2014, there should be a temporary stay of the actions.
[13] I ordered that either party could apply for a lifting of the stay after the completion of tax proceedings, including appeals before the Tax Court of Canada brought by Lynn Cassan. I ordered the stay should be automatically lifted upon the final determination of Mr. Gordon’s Notice of Objection.
[14] In 2016, the Tax Court of Canada heard EquiGenesis’ appeal with respect to the 2009 program, and on September 8, 2017, the Tax Court released its decision.
[15] In the Casson Case, the Tax Court upheld CRA’s denial of a charitable donation tax credit, but the Court found for the investors with respect to the partnership investment issue. Specifically, the Court found that: no annual income was deemed to accrue to the partnership on the linked notes pursuant to the Income Tax Regulations; the interest payable under the unit loans was deductible under s. 20(1)(c) of the Income Tax Act and certain fees and expenses relating to the participation in the EquiGenesis 2009 Program were deductible.
[16] On October 10, 2017, the investors appealed the decision to the Federal Court of Appeal.
[17] Also, in 2017, 15 taxpayers in the EquiGenesis 2003 and 2004 programs filed Notices of Appeal to the Tax Court of Canada under section 169(1)(a) of the Income Tax Act.
[18] There are currently 15 tax appeals concerning the 2003 and 2004 investment program before the Tax Court of Canada. There are currently six appeals concerning the 2009 scheme. However, the Tax Court and Federal Court of Appeal appeals have been and held in abeyance pending the parties' attempts to reach a settlement.
[19] While the appeals were pending, the parties began intensive settlement negotiations, and on May 10, 2019, the parties agreed to a settlement that would resolve the two civil actions but also all outstanding tax matters concerning all of the EquiGenesis programs including programs not at issue in the two civil actions.
C. Settlement Agreement
[20] The scheme of the negotiated settlement is as follows:
a. The two civil actions are to be dismissed or discontinued.
b. Investors in the 2003 and 2004 program will be reassessed on the basis that the eligible amount of the charitable donation will be nil but that certain deductions for tax purposes on account of interest expenses and fees and certain partnership losses will be allowed.
c. Investors in the 2009 program will be reassessed on the basis that the eligible amount of the charitable donation will be nil but that certain deductions for tax purposes on account of interest expenses and fees will be allowed and that certain income inclusions will be eliminated.
d. Investors in the 2010, 2011, and 2012 programs will be reassessed on the basis that that the eligible amount of the charitable donation will be nil but that certain deductions for tax purposes on account of interest expenses and fees and certain partnership losses will be allowed.
e. For an investor to participate in the settlement, he or she must sign Minutes of Settlement pertaining to each EquiGenesis program in which they participated. There are discrete Minutes of Settlement for each program.
f. The Master Minutes of Settlement set out a detailed implementation process.
g. The Settlement Agreement is conditional on approval of 80% of the investors and 80% of the putative Class Members.
[21] On June 11, 2019, Mr. Gordon, on behalf of EquiGenesis, notified the Class Members and or their professional advisors and agents and other EquiGenesis investors of the proposed settlement. The Class Members are a finite number, and Mr. Gordon has notified all Class Members of the proposed settlement.
[22] The notice set a deadline of July 10, 2019, at 4:30 p.m. for participating in the proposed settlement. By the July 10, 2019 deadline, 93% of the investors and 91% of the putative Class Members had signed and delivered Master Minutes of Settlement. Therefore, the two 80% thresholds were exceeded.
[23] During the ratification process, some of the investors asked EquiGenesis about the nature of the release. EquiGenesis learned that several of the investors have potential or ongoing issues with the CRA that do not relate to their EquiGenesis participation.
[24] In order to address the matter of the releases, the parties agreed to add an addendum dated August 6, 2019 to the Settlement Agreement to amend the language of the releases.
[25] The addendum was sent to the investors. To date, almost 94% of the putative Class Members have signed the addendum and returned it to EquiGenesis.
[26] On August 29, 2019, the signed Program Minutes of Settlement, along with signed Addenda, were hand delivered to CRA, along with the executed Implementation Notice required by the Master Minutes of Settlement.
[27] On September 13, 2019, the CRA confirmed that the two required 80% thresholds had been met.
[28] The parties now move for an order lifting the stays and approving the discontinuance of the proposed class action.
[29] To ensure that non-settling Class Members are aware that the limitation period will resume should the proposed class action be discontinued, EquiGenesis will notify the non-settling Class Members by email or regular mail that the action was discontinued and that they are entitled to continue their tax objections or to continue or commence appeals at the Tax Court or to commence civil proceedings against the Defendants if they wish. They will be advised that the limitation period for proceedings will resume 60 days from the date of the court order approving a discontinuance of the proposed class action.
D. Discussion and Analysis
[30] Section 29 of the Class Proceedings Act, 1992 requires court approval for the discontinuance, abandonment, or settlement of a class action. Section 29 states:
Discontinuance, abandonment and settlement
- (1) A proceeding commenced under this Act and a proceeding certified as a class proceeding under this Act may be discontinued or abandoned only with the approval of the court, on such terms as the court considers appropriate.
Settlement without court approval not binding
(2) A settlement of a class proceeding is not binding unless approved by the court.
Effect of settlement
(3) A settlement of a class proceeding that is approved by the court binds all class members.
Notice: dismissal, discontinuance, abandonment or settlement
(4) In dismissing a proceeding for delay or in approving a discontinuance, abandonment or settlement, the court shall consider whether notice should be given under section 19 and whether any notice should include,
(a) an account of the conduct of the proceeding;
(b) a statement of the result of the proceeding; and
(c) a description of any plan for distributing settlement funds.
[31] Before giving approval of discontinuance or an abandonment, the court must be satisfied that the interests of the putative class members will not be prejudiced.[^3]
[32] A motion for discontinuance or abandonment should be carefully scrutinized, and the court should consider, among other things: whether the proceeding was commenced for an improper purpose, whether, if necessary there is a viable replacement party so that putative class members are not prejudiced, or whether the defendant will be prejudiced.[^4]
[33] The policy rationales for requiring court approval for the discontinuance of a proposed class action include: (1) deterring plaintiffs and class counsel from abusing the class action procedure by bringing a meritless class proceeding (a so-called strike suit) to extract a payment as the price of discontinuing the class proceeding; and (2) providing an opportunity to ameliorate any adverse effect of the discontinuance on class members who might be prejudiced by the discontinuance.
[34] Under s. 29 of the Class Proceedings Act, 1992, in approving a discontinuance, the court is required to consider whether notice of the discontinuance should be given to the putative class members.
[35] In the immediate case, the court should approve the discontinuance of the proposed class action. The action was brought in good faith and a discontinuance is not prejudicial and indeed it is beneficial to the proposed class members, the overwhelming majority of which have decided to participate in the settlement. The non-settling investors are free to litigate with CRA as they may be able. Investors that do not participate in the settlement are at liberty to continue any civil claims and tax objections or tax appeals.
[36] Therefore, for the above reasons, I lift the stay of the proposed class action and I approve the discontinuance of the proposed class action.
Perell, J.
Released: November 12, 2019
COURT FILE NO.: CV-13-477053CP
DATE: 2019/11/12
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
KENNETH GORDON Plaintiff
‑ and ‑
CANADA REVENUE AGENCY and DAVID DUFF Defendants
REASONS FOR DECISION
Perell, J.
Released: November 12, 2019.
[^1]: S.O. 1990, c. 6.
[^2]: Gordon v. Canada Revenue Agency, 2013 ONSC 5608
[^3]: Cappelli v. Nobilis Health Corp. 2019 ONSC 4521; Castrillo v. Workplace Safety and Insurance Board, 2018 ONSC 4421; Web Objective, Inc. v. SociaLabra, Inc., 2018 ONSC 664; Frank v. Farlie, Turner & Co., LLC, 2011 ONSC 7137; Durling v. Sunrise Propane Energy Group Inc., [2009] O.J. No. 5969 at paras. 14-29 (S.C.J.); Sollen v. Pfizer, 2008 ONCA 803, [2008] O.J. No. 4787 (C.A.), aff’g 2008 8618 (ON SC), [2008] O.J. No. 866 (S.C.J.); Coleman v. Bayer Inc., [2004] O.J. No. 1974 at paras. 30-39 (S.C.J.) and [2004] O.J. No. 2775 (S.C.J.).
[^4]: Logan v. Canada (Minister of Health), [2003] O.J. No. 418 (S.C.J.), aff’d (2004), 2004 184 (ON CA), 71 O.R. (3d) 451 (C.A.).