Executive Summary: Key Legal and Evidentiary Issues

• The central dispute concerns the Minister's denial of dividend deductions under subsection 112(2.3) of the Income Tax Act on the basis of disqualifying dividend rental arrangements across the Banks' taxation years.
• Appellants BNS and BMO moved to strike portions of the Crown's reply, arguing the impugned provisions merely restated statutory language rather than pleading material facts (the "Impugned Provisions Issue").
• Whether subsections 260(5) and 260(5.1) introduced an entirely new issue—raised for the first time in the reply rather than at audit or reassessment—drove much of the pleadings dispute (the "New Issue").
• Sufficiency of the Crown's particulars was contested, with the Appellants alleging that the Respondent's December 2, 2024 response to their demand failed to clarify the case to meet.
• Respondent moved to strike paragraphs in the three notices of appeal challenging the quantum of disallowed dividends, raising the large corporation rules in subsections 165(1.11) and 169(2.1) (the "Dividend Quantum Issue").
• Costs were reserved rather than awarded, given the mixed outcome of the competing motions.

Facts of the case

The Bank of Nova Scotia ("BNS"), BMO Nesbitt Burns Inc. ("NBI"), and Bank of Montreal ("BMO") are among the "big 6" Schedule A Canadian chartered banks engaged in tax litigation with the Minister of National Revenue concerning various taxation years from the last decade. The appeals centre on the dividend rental arrangement rules (the "Bank DRA Rules") embedded in the Income Tax Act. The primary issue in each appeal stems from reassessments in which the Minister reduced or denied the banks' claims for dividend deductions, based on the Minister's interpretation and application of subsection 112(2.3) of the Act, on the basis that disqualifying dividend rental arrangements existed. The Banks were broadly reassessed for taxation years spanning 2008 to 2014, and all such appeals are case managed under Section 126.1 of the Tax Court of Canada Rules. Before Justice Randall Bocock, two sets of competing motions to strike were heard on September 24 and 25, 2025 at Toronto: BNS and BMO moved to strike certain reply paragraphs, the Respondent cross-moved to file amended replies, and the Respondent separately moved to strike paragraphs from the notices of appeal in all three appeals.

Policy terms and statutory provisions at issue

Subsection 112(2.3) of the Act provides that no deduction may be made under subsection (1) or (2) or 138(6) in computing a corporation's taxable income in respect of a dividend received on a share where there is, in respect of the share, a dividend rental arrangement. A "dividend rental arrangement," defined in subsection 248(1), broadly captures arrangements where a corporation receives a taxable dividend that would otherwise be deductible while being obligated to pay another person compensation for that dividend, as well as specified hedging transactions, synthetic equity arrangements, and arrangements that eliminate substantially all of the person's risk of loss and opportunity for gain on a DRA share. The competing motions also engaged subsections 260(5) and 260(5.1), which govern when "SLA compensation payments" and "dealer compensation payments" are deemed to be taxable dividends, subject to a "main purpose" carve-out where amounts are received under an arrangement and it may reasonably be considered that one of the main reasons for entering it was to receive deductible compensation payments. The Appellants' motions targeted reply provisions—including the phrase in paragraph 5 (BNS) / paragraph 7 (BMO) that the amounts "are also not deductible to the extent that they were claimed in respect of certain compensation payments"—on the basis that they offended Rules 49 and 53. The disputed reply paragraphs referenced amounts up to $554,012,438 that BNS sought to deduct in respect of the Acquired CEs.

Reasoning and analysis

The Court applied the settled principle from R v Imperial Tobacco Canada Ltd that a pleading is struck only where it is plain and obvious there is no reasonable prospect of success and the defect is plain and obvious, together with the principle from Lancan Investments Inc v The Queen that Section 49 of the Rules requires a truthful, clear, and precise pleading defining the issues so the taxpayer knows the exact case to be met. Reviewing the impugned and proposed reply provisions against the statute in Appendices A and B, the Court found that several provisions closely tracked the language and structure of subsections 260(5) and 260(5.1) and amounted to a summative restatement of the statutory scheme rather than pleadings of material fact. Paragraph 28 (31) simply reproduced the proposition in subsection 112(1); paragraphs 30 (32) and 31 (33) mirrored the wording of subsection 260(5), including its "arrangement" and "main reason" formulation, without particularizing the alleged arrangement or the facts supporting the main-reason allegation. The proposed provisions, the Court held, repeated this pattern. The Court observed that a properly particularized pleading might have identified the specific arrangement, described its material terms, the structure and timing of the securities lending transactions, the absence of economic exposure to dividend risk, any offsetting agreements, or internal documentation evidencing a tax-driven purpose. On the Dividend Quantum Issue, the Court drew on Devon Canada Corporation v The Queen for the principle that an argument yielding the same or lesser relief is subsumed within the larger pleaded issue, while a ground yielding greater relief is a new issue; it found the quantum challenge sought no greater relief than the primary argument and was therefore an alternative issue, not a new one. Following Propak Systems Ltd v The King, the Court noted that gross pleading deficiencies are not mere irregularities under the Fresh Step rule, though that rule was not applicable as the issue was decided on other grounds.

Ruling and overall outcome

The outcome was mixed across the competing motions. The Respondent's motions to strike the notice of appeal paragraphs (44(b) and 54 for BNS, 42(b) and 53 for BMO, and 48(c) and 58 for NBI) were denied. The Appellants succeeded on their motions in the BNS and BMO appeals: the Court allowed the striking of the identified reply phrase and paragraphs, rejected the filing of the draft amended replies dated August 29, 2025, and granted the Respondent leave to serve and file a further amended compliant reply on or before June 19, 2026, in accordance with the Common Reasons for Order. No costs were ordered, and the Court reserved any such determination for subsequent issues arising from the leave granted and for any trial judge in the context of final cost awards. Because the Court ordered no costs and the result was characterized as mixed, no monetary amount was awarded to any party—the costs amount is best described as Not Specified, as the Court expressly reserved it.