JP MORGAN ASSET MANAGEMENT (CANADA) INC. and MINISTER OF NATIONAL REVENUE AND CANADA REVENUE AGENCY REASONS FOR ORDER AND ORDER

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1 Date: Docket: T Citation: 2012 FC 1366 Ottawa, Ontario, November 26, 2012 PRESENT: The Honourable Mr. Justice Mandamin BETWEEN: JP MORGAN ASSET MANAGEMENT (CANADA) INC. Applicant (Responding Party) and MINISTER OF NATIONAL REVENUE AND CANADA REVENUE AGENCY Respondents (Moving Party) REASONS FOR ORDER AND ORDER [1] The Minister of National Revenue and Canada Revenue Agency [the Minister or MNR], the Moving Party Respondent in the judicial review proceeding, brings a motion to quash a decision of Prothonotary Aalto in which he dismissed MNR s motion to strike the application for judicial review by JP Morgan Asset Management (Canada) Inc. [JPM], the Responding Party Applicant in the proceeding. For the reasons that follow, the motion fails.

2 Page: 2 [2] On May 28, 2012, the Prothonotary dismissed MNR s application to strike JPM s application for judicial review of the Minister s decision to issue notices of assessment under s. 227(10) of the Income Tax Act RSC 1985 c 1 (5 th Suppl) [ITA], JP Morgan Asset Management (Canada) Inc v Minister of National Revenue and Canada Revenue Agency, 2012 FC 651. [3] Prothonotary Aalto reviewed the facts in his Order. I have reproduced them here: [4] Much of the issue revolves around the corporate structure of what is called in the notice of application the JP Morgan Group of Companies. The Applicant (JP Morgan) is a British Columbia corporation which carries on business in Ontario and British Columbia and is a resident of Canada for purposes of the ITA. In turn, JP Morgan is a wholly-owned subsidiary of another company, being JP Morgan Asset Management Holdings Inc. (Holdings), a U.S.corporation. Holdings is a wholly-owned subsidiary of JP Morgan Chase & Co. (JP Morgan U.S.) another U.S. corporation. [5] Mixed into this are two other corporations: JF Asset Management Inc. (JFAM), a Hong Kong company which is a wholly-owned subsidiary of JP Morgan Asset Management (Asia) Inc. (JPAM), a U.S. corporation. JPAM is a wholly owned subsidiary of Holdings. [6] JP Morgan s business includes providing investment advisory services to its Canadian clients. JP Morgan refers its Canadian clients to other companies in the JP Morgan Group of Companies, including JFAM, to obtain investment advice services. [7] JP Morgan s clients pay fees to JP Morgan on the value of assets invested. JP Morgan, in turn, pays 75% of the fees it earns to other members of the JP Morgan Group of Companies, including JFAM, the Hong Kong company. The Notice of Application states that the fee represents the market value of the services provided and is in accordance with the JP Morgan Group of Companies global transfer pricing policy and market practice. [8] The fees which are paid by JP Morgan to other companies in the JP Morgan Group of Companies are the subject of the discretionary decision of the Minister and have been the subject of assessments. [9] In 2009, the Canada Revenue Agency (CRA) commenced an audit of the Applicant s 2007 and 2008 tax years. At the conclusion of the audit CRA

3 Page: 3 assessed the Applicant s Part XIII tax in respect of the fees paid by JP Morgan to JFAM for all its fiscal periods December 31, 2002 to December 31, The Notices of Assessment were dated June 15, 2011 for 2002, 2003 and 2004 taxation years. The applicant received the Notices of Assessment on July 6, 2011 due to a Canada Post mail strike. Neither the Minister of National Revenue nor the CRA sent any correspondence to the Applicant subsequent to the issuance of Notices of Assessment dated June 15, [10] JP Morgan then brought this application for an order, inter alia, in the nature of certiorari quashing the decision of the Minister of National Revenue (the Minister or MNR) and CRA, to assess JP Morgan for amounts payable under Part XIII of the ITA. As alternative relief, JP Morgan also seeks an order that the decision to issue the Assessments was an invalid and unlawful exercise of a statutory power under subsection 227(10) of the ITA. It is alleged the discretion was exercised for an improper purpose and thus JP Morgan is entitled to an order setting aside the assessments. [4] JPM s application set out the grounds for judicial review as being that: a. the Canada Revenue Agency [CRA]commenced an audit of JPM s 2007 and 2008 taxation years; b. at the conclusion of the audit, the CRA changed the audit period and assessed JPM for taxes for the years for the fiscal period from December 31, 2002 to December, ; c. by doing so JPM alleges the CRA improperly exercised its discretion by, among other things, not considering CRA s own policies and guidelines; and d. the issue on judicial review is the number of years for which the CRA will assess JPM. [5] MNR s submission was that the integrity and efficacy of the statutory system of tax assessments and appeals must not be circumvented by collateral attacks through judicial review.

4 Page: 4 Canada v Addison & Leyen Ltd, 2007 SCC 33 [Addison & Leyen]. It submits JPM s application for judicial review is just that and should have been dismissed. [6] JPM contends it is challenging the improper exercise of the Minister s discretion to issue notices of assessment under s 227(10) of the Income Tax Act [ITA] because the discretion was exercised contrary to an established policy of the Minister. [7] The Prothonotary was well aware that the question was the extent of the jurisdiction of the Federal Court concerning matters that involve the jurisdiction of the Minister regarding assessments relating the imposition of tax. [8] After a considered discussion of the issues, the Prothonotary dismissed MNR s motion to strike JPM s application for judicial review of the Minister s decision to reassess JPM s tax liabilities for the years [9] I may only disturb Prothonotary Aalto s decision if either (a) he was clearly wrong, in the sense that the exercise of discretion was based upon a wrong principle or a misapprehension of the facts, or (b) in making the decision, he improperly exercised his discretion on a question vital to the case. Z.I. Pompey Industrie v ECU-Line N.V., [2003] 1 SCR 450, 2003 SCC 27 at para 18.

5 Page: 5 Was the Order clearly wrong? [10] In his reasons, the Prothonotary considered MNR s position which it drew from Addison & Leyen. MNR submitted that, applying the principles enunciated in Addison & Leyen, judicial review should not be used to develop a new form of litigation designed to circumvent the taxation regime. The Prothonotary agreed Addison & Leyen generally stands for the proposition that tax assessment matters must be brought in the Tax Court of Canada. [11] However, the Prothonotary went on to take three points from Addison & Leyen: first, the decision of the Supreme Court turned on the unique facts of the case; second, the Minister is a decision maker who is covered by section 18.5 of the Federal Courts Act, and third, judicial review is available for a decision of the Minister for an abuse of power or abusive delay where there is no other avenue of appeal. [12] The Prothonotary went on to observe that, in a similar case, Chrysler Canada Inc v Canada 2008 FC 727, he had stated: [24] It is to be noted from these passages that the Supreme Court of Canada [Addison & Leyen] left open the door for judicial review of a discretionary decision of the Minister in certain circumstances. The Federal Court is not precluded from hearing judicial review applications in relation to discretionary decisions to issue assessments under the ITA. Nor is the Federal Court without jurisdiction in tax cases to grant fact-specific remedies such as those requested in this Application. The only limitation placed on the Federal Court s jurisdiction to hear a judicial review application is that it is not available if the matter is otherwise appealable. Even so, judicial review is available to control an abuse of power. This approach to judicial review not only preserves the integrity and efficiency of the system of tax assessments and the exclusive

6 Page: 6 jurisdiction of the Tax court to deal with those matters, but also avoids unnecessary and incidental litigation. [13] In Chrysler Canada Inc. v Canada, 2008 FC 1049 at para 7, Justice Hughes affirmed the Prothonotary s decision in Chrysler on this point: Undoubtedly there are controversial matters raised in this application including, in particular, the jurisdiction of this Court to hear and determine the matters sought to be raised by CCI. These matters are sufficiently controversial such that it would not be proper to deal with them on an appeal from a refusal to strike. [14] In my view, the same reasoning applies here. [15] In its written submissions, MNR argues that the use of the word may [in s 227(10)] refers to the ability of the Minister to issue or not issue a notice of assessment where there is no dispute as to the assessment of tax; it does not grant the Minister a discretion not to assess where a tax liability has been identified. [16] The MNR submission that the Minister no longer has discretion under s 227(10) when the Minister s duty to enforce the Act seems potentially inconsistent with the Interpretation Act RSC 1985 c I-21, which states at s 11: The expression shall is to be construed as imperative and the expression may as permissive. [17] JPM submits that s 227(10) of the ITA presents the Court with a diversity of potential interpretations preferring the statutory statement that the Minister may exercise discretion under s 227(10).

7 Page: 7 [18] The Prothonotary stated in the reasons for the Order: which interpretation is to be preferred need not be decided. But the diverse interpretations support the proposition that this application is not bereft of any chance of success. [emphasis added]. [19] MNR invites me to accept its argument the Minister does not have discretion in the case at hand but that is not my role. Rather, I am to decide if there is a controversy which requires resolution. I find there is and agree with the Prothonotary a serious question concerning interpretation of s 227(10) arises in JPM s application for judicial review. [20] I reiterate what Justice Hughes wrote in Chrysler, at para 6: controversial matters raised in the context of an application should not be resolved on an appeal from a Prothonotary who refused to strike an application but should be left to the hearing of the application itself. In this way, there would not be an unnecessary waste of the Court s resources. [21] In result, I do not find the Prothonotary s Order to be clearly wrong in that the exercise of discretion was based upon a wrong principle or a misapprehension of the facts Did the Prothonotary improperly exercise his discretion on a question vital to the case? [22] Justice Hugessen in Peter G White Management Ltd v Canada, 2007 FC 686 wrote that barring extraordinary circumstances, a decision of a prothonotary not to strike out a statement of

8 Page: 8 claim is not determinative of any final issue in the case. Justice Hughes adopted this reasoning in Chrysler, at para 4. [23] The Prothonotary s decision not to strike out the application for judicial review is not determinative in this case. Indeed, had the Prothonotary struck the application on the question of the interpretation of s 227(10), the judicial review would have been effectively determined. [24] In allowing the application to proceed, the Prothonotary properly left the issue to be determined on full judicial review. [25] I conclude there was no improper exercise of discretion on a question vital to the case arising with the Prothonotary s dismissal of the MNR motion.

9 Page: 9 ORDER THIS COURT ORDERS that: 1. The motion is dismissed. 2. Costs are in favour of the Applicant (Respondent on this Motion) JP Morgan Asset Management (Canada) Inc. Leonard S. Mandamin Judge

10 FEDERAL COURT SOLICITORS OF RECORD DOCKET: T STYLE OF CAUSE: JP MORGAN ASSET MANAGEMENT (CANADA) INC. V. THE MINISTER OF NATIONAL REVENUE AND CANADA REVENUE AGENCY PLACE OF HEARING: TORONTO, ONTARIO DATE OF HEARING: AUGUST 20, 2012 REASONS FOR ORDER AND ORDER: MANDAMIN J. DATED: NOVEMBER 26, 2012 APPEARANCES: Gerald Ranking Naomi Goldstein Laurent Bartleman FOR THE APPLICANT FOR THE RESPONDENT SOLICITORS OF RECORD: Fasken Martineau DuMoulin LLP Toronto, Ontario William F. Pentney Deputy Attorney General of Canada Toronto, Ontario FOR THE APPLICANT FOR THE RESPONDENT