Appeal Court Orders Retrial On Heron Bay

In a judgment in Heron Bay Investments Ltd. v. The Queen (2010 FCA 203), delivered on July 26, 2010, the Canadian Federal Court of Appeal found that there was a "want of procedural fairness" in the proceedings of the Tax Court which resulted in its decision of September 8, 2009 (2009 TCC 337) and, as requested by the appellant, Heron Bay, in its pleadings, returned the matter to the Tax Court "for retrial by a different judge".

The case concerned a deduction for doubtful/bad debts claimed for tax purposes by Heron Bay in the amount of $3,770 million in its return for its taxation year ended August 31, 1995. Heron Bay was a member of the Conservancy Group of related companies controlled by four brothers. In November of 1994, it made a loan in the amount of the claim to Viewmark Homes Ltd., another member of the Conservancy Group, to assist it in financing the acquisition of a significant interest (95%) in real property acquired for $24.5 million in a series of transactions. The purchase price was later, based on independent valuations, determined to be inflated in that the value of the real property ($17,235 million) was significantly less than the price agreed.

Heron Bay, in order to support the claimed deduction, was required under the relevant provisions of the Canadian tax legislation to establish that its ordinary business included the lending of money in the year in which the deduction was claimed, that the loan contracted with Viewmark was made in the ordinary course of that lending business, and that at the end of its taxation year in respect of which the claim was made, there was a reasonable doubt as to whether the loan would be collectible.

The Tax Court found that Heron Bay was in the ordinary business of lending money but found that Heron Bay did not meet the second and third conditions necessary as the basis for the claim.

While the substantive questions in the case are also relevant, the principal argument made by Heron Bay, as appellant before the Federal Court of Appeal, was that the judge in the Tax Court deprived Heron Bay of procedural fairness by considering authorities not cited by either party without giving the parties an opportunity to make submissions on those authorities, by considering issues not pleaded by either party without giving the parties the opportunity to make submissions on those issues and by intervening excessively in the examination of witnesses giving rise to an apprehension of bias.

The judgment of...