Executive Summary: Key Legal and Evidentiary Issues

• The Respondent (Crown) sought leave to file a Further Amended Reply and withdraw admissions regarding the fair market values of preferred shares in two related tax appeals filed in 2016

• Repeated delays — including a bifurcation application in 2018 and an abeyance pending the Federal Court of Appeal's Microbjo Properties decision — gave the Respondent excessive time to reconsider its position multiple times

• Application of subsection 160(1) of the Income Tax Act and the general anti-avoidance rule (GAAR) to a structured series of transactions involving the sale of research companies for over $76 million is central to both appeals

• The Continental Bank test for withdrawing admissions was applied, weighing timeliness, trial delay, prejudice to the opposing party, and whether the withdrawal serves the true substance of the dispute

• Although the motion was found untimely and the Respondent failed to properly analyze its position, the Court concluded the interests of justice favoured permitting the withdrawal of admissions

• Costs on the motion and costs for additional pre-trial steps were awarded to the Appellants despite the Respondent being the successful party on the motion itself

The underlying tax dispute and the parties involved

Piyush Patel and Paul Benninger are the Appellants in two related income tax appeals heard together before the Tax Court of Canada. Through their numbered companies (1245816 Ontario Limited, known as "Patelco," and 2129369 Ontario Limited, known as "Benningerco") and other entities, the Appellants sold their research companies — Allied Canada and Allied Miami — to a third-party purchaser for over $76 million. The Minister of National Revenue alleged that Dr. Patel received $63,546,674 and Mr. Benninger received $5,833,552 from these transactions, while the numbered companies were liable for capital gains tax resulting from the sale. That tax liability remained unpaid, prompting the Minister to invoke subsection 160(1) of the Income Tax Act to recover over $24 million from the Appellants — specifically, $23,062,019.34 from Dr. Patel and $1,133,706.96 from Mr. Benninger, both amounts inclusive of penalty and interest.

The procedural history and repeated delays

The Appellants filed their appeals in October 2016, before the Minister issued decisions in response to their objections. The Respondent filed Replies to the Notices of Appeal in March 2017, relying on subsection 160(1) and the GAAR in the alternative. The Appellants filed Answers in May 2017. Pre-trial steps were completed and trial dates were set for April 2019. However, a bifurcation request made in November 2018 to separate the question of the validity of the underlying tax debts introduced the first major delay. After a successful interlocutory appeal to the Federal Court of Appeal, the Court subsequently granted the bifurcation request in October 2020. In December 2020, the Respondent filed amended replies on consent, making minor corrections throughout, revising two assumptions of fact and adding three new assumptions, adding 15 new paragraphs with additional subsection 160(1) arguments, deleting and modifying paragraphs to narrow its GAAR argument, and adding additional facts in support of the revised subsection 160(1) and GAAR arguments. The Appellants filed Amended Answers in January 2021, and the parties completed a second set of discoveries in March 2021. A second major delay began in May 2021 when the parties asked that the hearing be delayed until the Federal Court of Appeal rendered a decision in the Crown's appeal in Damis Properties. The Federal Court of Appeal issued that decision, Microbjo Properties, on July 5, 2023.

The Respondent's motion to further amend and withdraw admissions

On March 27, 2024, the Respondent asked the Appellants to consent to the filing of further amended replies that would remove arguments regarding consideration, add alternative arguments regarding arm's length factors and two successive transfers under subsection 160(1), and correct two assumptions of fact regarding shares received. The Respondent sent a second request on August 8, 2024, containing the same amendments as well as the withdrawal of admissions with respect to assertions of the fair market values of certain shares. The Appellants did not respond to the Respondent's request to file the further amended replies on consent. On November 25, 2024, the Respondent filed a motion in writing seeking leave to further amend the replies and to withdraw the admissions. The Appellants consented to the amendments, subject to being permitted to conduct additional written examinations for discovery related to the successive transfers argument, but opposed the withdrawal of the admissions on various grounds. After receiving the Appellants' response, the Respondent revised its request to only withdraw the admissions regarding the fair market values of the preferred shares — paragraph 9(h) of the Patel Notice of Appeal (stating the fair market value of Dr. Patel's 34,229,198 Class B preferred shares of 124 Ontario at $34,229,198) and paragraph 10(g) of the Benninger Notice of Appeal (stating the fair market value of Mr. Benninger's 3,136,307 Class B preferred shares of 212 Ontario at $3,136,307).

The fair market value dispute and the Respondent's revised position

The Respondent's expert report concluded that the fair market value of Dr. Patel's preferred shares (Patelco) was $19,601,737 at Step 8 of the transaction series and nil at Step 10, while the fair market value of Mr. Benninger's preferred shares (Benningerco) was $2,456,477 at Step 8 and nil at Step 10. The reductions — from $34,229,198 to $19,601,737 for Dr. Patel and from $3,136,307 to $2,456,477 for Mr. Benninger — were almost identical to the respective companies' underlying tax liabilities of $14,813,732 and $679,885. The Respondent argued that the Appellants' asserted fair market values did not account for existing tax liabilities of the numbered companies, relying on a principle the Federal Court of Appeal referenced in Microbjo Properties — that the case law unequivocally holds that an arm's length purchaser of shares would discount any existing tax liability of the underlying corporation in determining their value.

The Continental Bank test and the Court's analysis

The Court applied the Continental Bank test for withdrawing admissions under Section 132 of the Tax Court of Canada Rules (General Procedure), which asks whether the interests of justice are served more if the withdrawal is permitted. Justice Hill considered several factors. First, the motion was not timely: the Court agreed with the Appellants that the withdrawals were the result of the Respondent failing to properly analyze their position in a timely way, noting that the Microbjo Properties decision was issued a year before the Respondent informed the Appellants it wanted to withdraw the admissions, and that the decision did not change established principles regarding fair market value of shares. Second, the withdrawal would not delay an expeditious trial because the appeals had not been set down for trial, and both parties were responsible for the previous delays. Third, the Appellants could alter their course of action: the withdrawal of the admissions did not constitute a radical departure that rendered prior work meaningless, and the Appellants had been aware of the inconsistency between the admissions and the Respondent's arguments since the Respondent filed their Amended Replies in December 2020, a point the Appellants themselves highlighted in their Amended Answers filed in January 2021. The Court also agreed with the Respondent that there was no prejudice that could not be compensated by costs. Fourth, the withdrawals spoke to the true substance of the dispute, as fair market value is an essential component of the application of subsection 160(1) and the value of shares transferred between entities was particularly important in these appeals. The Court also referenced the El Ad Ontario Trust decision, in which the Federal Court of Appeal upheld the established principle that admissions are not binding on trial judges of this Court.

The ruling and outcome

Justice Joanna Hill granted the Respondent's motion to file a Further Amended Reply and withdraw the admissions regarding the fair market values of the preferred shares, finding that, on balance, the interests of justice weighed in favour of a proper determination of the questions at issue. However, despite the Respondent being the successful party on the motion, the Court awarded costs to the Appellants on the motion, and costs in any event of the cause for any resulting additional pre-trial steps — recognizing that the Respondent's conduct had significantly delayed the conduct of the appeal and required additional pre-trial steps, including a third round of discoveries and a revised expert report for the Appellants. The Court noted the Respondent had sought to amend its pleadings without proper consideration of the full implications of withdrawing the admissions or the existing related inconsistencies in the amended replies, and had to retract its request to withdraw the admissions regarding the fair market values of the common shares and its position that the preferred shares had no value at all. The Respondent was ordered to file and serve a Further Amended Reply by April 10, 2026, and the parties were directed to file a timetable with deadlines for the remaining steps in the appeals by May 29, 2026. No specific monetary award in favour of either party was determined at this stage, as the decision addressed a procedural motion rather than the merits of the underlying tax dispute.