Written By Wesley R. Novotny and Jared A. Mackey

Overview of Rule 26

Section 26 of the Tax Court of Canada Rules (General Procedure)¹ (the "Tax Court Rules"), referred to as "Rule 26", can be useful where multiple taxpayers are involved in related matters and are simultaneously appealing their respective assessments before the Tax Court, or where a single taxpayer has separately appealed different reassessments. Rule 26 provides litigants before the Tax Court with the ability to consolidate two or more proceedings, have the proceedings heard at the same time or sequentially, or to stay a proceeding until the determination of another. The rule provides:

When Proceedings May be Consolidated

26  Where two or more proceedings are pending in the Court and:

(a) they have in common a question of law or fact or mixed law and fact arising out of one and the same transaction or occurrence or series of transactions or occurrences; or

(b) for any other reason, a direction ought to be made under this section;

the Court may direct that;

(c) the proceedings be consolidated or heard at the same time or one immediately after the other; or

(d) any of the proceedings be stayed until the determination of any other of them.

The underlying policy of Rule 26 is to avoid a multiplicity of proceedings, to promote expeditious and inexpensive determination of those proceedings, and to avoid inconsistent judicial findings. While the application of Rule 26 is technically limited to appeals involving the General Procedure, its application has been extended to appeals under the Informal Procedure.²

When is an Order Under Rule 26 Appropriate?

Paragraph (a) of Rule 26 provides that the Court may make a direction under Rule 26 where two or more proceedings have in common a question of law or fact, or mixed law and fact, arising out of one and the same transaction or occurrence or series of transactions or occurrences. An order under Rule 26 is appropriate where common issues of fact and law would result in a duplication of time, evidence, and costs if the proceedings were not heard together. An order under Rule 26 is also relevant where there is the potential for inconsistent results flowing from the same set of facts, such that it is important for one trial judge to hear all of the proceedings.

In many instances, the taxpayers and Crown may agree upon the best manner in which multiple proceedings should continue. In these circumstances, the parties typically write a joint letter (signed by both parties) to the Tax Court Registrar requesting an order or direction under Rule 26 to sanction the proposed solution, and providing a high level justification for the request.³ The Court generally allows such requests with few questions, if any. In practice, joint requests of this nature can be very effective if made at an early stage, such as following receipt of the Crown's reply to the taxpayers' notices of appeal.

In the absence of such a joint agreement, subsection 4(2) of the Tax Court Rules provides the authority for either the taxpayer or the Crown to apply to the Court for an order or direction under Rule 26. Often these orders or directions are sought after pleadings close, but before any litigation steps are commenced. The order or direction will coordinate the litigation steps and timeline, as well as the hearing, as discussed below.

Orders to consolidate proceedings, or requiring that they be heard together or sequentially are discretionary. When faced with a contested application under Rule 26, the applicant must first demonstrate that one or more criteria in paragraphs (a) or (b) of Rule 26 are met, which should be disclosed in the pleadings.⁴

The absence of a significant factual or legal overlap is not necessarily fatal to the Court granting an order under Rule 26. Paragraph (b) of Rule 26 provides that a Court may make an order under Rule 26 for any suitable reason, in the Court's discretion. If common factual or legal issues were required, paragraph (b) would be redundant.

If any of the criteria are met, the Court will then weigh several factors to determine what procedure will be the most efficient in terms of time and expense to the parties and the Court, without prejudicing any party. Relevant considerations include:

(1) the relationship between the taxpayers;

(2) whether there are common legal and factual issues;

(3) the potential to save time and resources in pre-trial procedures and at trial;

(4) the relative complexity and anticipated trial length of each of the appeals;

(5) the point in the proceedings in which the application is being made and how far advanced are each of the proceedings, relative to one another; and

(6) any potential prejudice to the Minister or a taxpayer which may arise, if, for example:

(a) one appeal is more advanced than another;

(b) the order will result in a prejudicial delay of a trial; or

(c) there is the potential for inconsistent and perverse verdicts if the proceedings are not consolidated or heard at the same time.⁵

Each application under Rule 26 must be assessed on its own merits with reference to the common issues and distinct issues between the taxpayers. Consideration of the foregoing factors requires analysis of both the pleadings and matters disclosed outside the pleadings.⁶

Notably, a single taxpayer objecting to multiple assessments has the right to join its objections through a single notice of appeal pursuant to section 25 of the Tax Court Rules. If the taxpayer files multiple notices of appeal, thereby commencing two or more proceedings, it would seemingly need to rely on Rule 26 to subsequently consolidate its appeals. This could occur, for example, where a taxpayer receives rolling reassessments as years progress and separately objects to and appeals the reassessments over time.

Alternatives Under Rule 26

Paragraph (c) of Rule 26 provides three distinct alternatives with important differences. One or more appeals may either be: (1) consolidated; (2) heard at the same time; or (3) heard one immediately after the other. If an order is to be granted under paragraph (c) of Rule 26, then the order must set out whether the appeals will be consolidated on the one hand, or heard together or sequentially, on the other hand.

As a further alternative to orders for consolidation and common or sequential hearings, the Court has the power under paragraph (d) of Rule 26 to direct that one or more proceedings be stayed pending the determination of another proceeding. While orders for stays are beyond the scope of this article and will not be discussed further, we note that in certain cases the Court may find that the determination of a single appeal (with the others either stayed and potentially bound by that determination), would represent the most efficient, expeditious, and inexpensive determination of all the appeals.⁷

Orders for Consolidation

The term "consolidation" has an established legal meaning in Canada. The effect of such an order is that two or more appeals are merged and effectively become one appeal for purposes of applying the relevant rules of court.⁸ As a result, depending on when the order for consolidation is made, it may be appropriate to have one set of pleadings, one set of documents, one set of examinations, one judgment, and one bill of costs. The status of each taxpayer in the consolidated appeal should be determined in the direction contained in the consolidation order. Accordingly, the Court should provide direction as to which appellant has primary carriage of the case.

With this legal effect in mind, consolidation is likely only appropriate where the appeals are sufficiently linked in facts and law such that it can be said that the findings in one of the appeals will necessarily dispose of the issues in the other appeal. Conversely, consolidation is likely not appropriate where the minister or taxpayers raises distinct legal issues in their pleadings. Even in these limited circumstances, an order for consolidation should require the consent of all of the affected taxpayers who would otherwise forego their right to have their appeals heard separately. This point was noted by the Tax Court in Gregory v The Queen⁹:

[5] … it is generally speaking inappropriate to consolidate the income tax appeals of two or more taxpayers. The effect of consolidation is convert [sic] the appeals of more than one taxpayer into one appeal and I do not think that this can be done given the fact that under the Income Tax Act every taxpayer has a right to have his, her or its appeal dealt with separately by the court.

On this basis, Tax Court judges may be hesitant to consolidate the appeals of multiple taxpayers in the absence of their agreement.

There appears to be confusion in the tax jurisprudence regarding the meaning of "consolidation" as many courts have referred to consolidation in a colloquial sense when making an order or direction under Rule 26, while generally ignoring the legal effect. For example, in certain cases, the courts have used the term "consolidation" when ordering that two more appeals be heard together.¹⁰

The distinction between an order for legal "consolidation" relative to an order for a common or sequential hearing has been particularly blurred in the tax context following the Federal Court of Appeal decision in 3488063 Canada Inc v The Queen¹¹. The Court held that an order for consolidation, while affecting the procedural steps of the appeals, did not result in the merger of the appeals into a single appeal. This finding may not be consistent with established non-tax Canadian jurisprudence that has frequently discussed the legal effect of "consolidation" as a merger of appeals. The basis for the Court's conclusion appears to be its finding that assessments under the Income Tax Act (Canada) must be treated separately.¹² Following the Court's holding, consolidation may have a different meaning in the unique legislative context applicable to tax appeals.

Orders for Common or Sequential Hearings

Where different factual or legal issues are raised in different appeals, consolidation is not appropriate. Nevertheless, where there is an interrelationship of one or more factual and legal issues, an order that the appeals be heard together or one after another may be granted. These are the most common form of order granted by the Tax Court under paragraph (c) of Rule 26, and when the Court may often refer to "consolidation" in a colloquial sense. In these circumstances, the appeals maintain their separate identities and there remains an adjudicative function which must be separately conducted for each appeal by the Court.

The Tax Court decision in AgraCity Ltd. v The Queen¹³, provides an example of an order by the Court for a common hearing. The minister assessed two related taxpayer corporations. While the assessments involved similar factual circumstances (the cross-border sale of herbicide), the grounds of assessment differed. The Court highlighted the risk of contradictory judgments and held the risk could be avoided by having the two appeals heard together on common evidence.¹⁴ Similarly, in Gregory, while the Court denied the taxpayers' request for consolidation, it held that the appeals should be heard together since they all dealt with the same group of transactions.

When ordering a common or sequential hearing, the Court will often order that the appeals be heard on common evidence, i.e., that the evidence in one appeal be taken as evidence in the other appeal or appeals. In such circumstances, the evidence before the Court in each appeal will include the evidence in all trial and pre-trial procedures, as if the appeals were consolidated. Evidence that is otherwise admissible and relevant, obtained at an examination for discovery in one appeal, will generally be admissible, both in that appeal and in the other appeal as if the evidence had been obtained in the other appeal. As a result, in most cases an order that one or more appeals be heard concurrently achieves the desired result of allowing the court to hear all of the relevant matters without the necessity of two separate hearings covering similar evidence and witnesses, and avoids potential confusion if the appeals were considered separately.

Notably, section 27 of the Tax Court Rules provides that, where a direction has been made that proceedings be heard either at the same time or one immediately after the other, the judge presiding at the hearing nevertheless has the discretion to direct otherwise. Accordingly, the trial judge retains the final discretion to dictate how the proceedings will be heard.

Combining Procedural Steps

From the foregoing discussion, there remains a meaningful difference between legal "consolidation" and an order for a common or sequential hearings. The difference is particularly significant where the relevant order is made at an early stage in the proceedings. Appeals ordered to be heard together or sequentially largely offer the parties a savings of time and money at trial, however, in the absence of an order for consolidation, the parties have no right to complete procedural steps jointly. In the absence of a Court order or direction with respect to procedural steps, there will continue to be separate pleadings, documents, examinations, judgments, and bills of cost.

Practically, however, when the Tax Court orders a common or sequential hearing under Rule 26, it often directs that certain procedural steps be completed together to avoid unnecessary costs or delay. The Court has extremely broad powers to control its own process, as evident by the case management rule in section 126 of the Tax Court Rules, and has discretion to deal with all issues that arise prior to a hearing, including giving directions that are necessary for the just, most expeditious and least expensive determination of one or more appeals. Under this broad power, the Court may order that certain procedural steps be combined. The Court is more likely to make such an order when the parties jointly agree.

The Tax Court decision in AgraCity Ltd. provides an example of a Court directing the combining of certain procedural steps. After ordering that two appeals be heard together, the Court held:

[35] Further, in the circumstances, I see no need for two sets of production of documents and two sets of examinations. The Parties shall combine the list of documents for the two cases and similarly shall produce one representative to be examined in connection with both cases. The Parties shall provide the Court with a schedule within 30 days of this Order setting out the timelines for the completion of these steps.

When the Court exercises its discretion in this manner, a savings of time and money can be achieved at an early stage in the proceedings without an order for legal "consolidation". The difference between legal "consolidation" on one hand, and an order directing that appeals be heard together coupled with an order to combine procedural steps, on the other hand, may therefore be more technical than real. The Court has broad discretion to direct the conduct of appeals from beginning to end, and can choose the procedure that represents the most efficient, expeditious, and inexpensive determination of all the appeals.

Conclusion

When two or more taxpayers have common questions of law or fact arising out of the same transaction or occurrence, or a single taxpayer has multiple related appeals, Rule 26 provides a means to prevent inconsistent dispositions, save time and expense to the parties, and protect court resources. In most circumstances, taxpayers with common legal or factual issues are best served by seeking an order under Rule 26 at an early stage in the proceedings. The technical shortcomings and strict legal effect of an order for consolidation can generally be overcome by requesting a common or sequential hearing, coupled with (if applicable) an order directing the combining of certain procedural steps.

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¹ SOR/90-688a.

² See e.g., Cheung v The Queen, 2005 TCC 83.

³ For example, stating that the appeals involve similar facts and legal issues.

⁴ See e.g., Merritt v Imasco Enterprises Inc., [1992] B.C.J. No. 160 (B.C. Master); Gulmani v Chandra, 2008 BCSC 179; Funk v Harder; 2015 BSCS 2152.

⁵ Mamut v The Queen, 2011 DTC 1130 (TCC); Baxter v The Queen, 2004 DTC 2126 (TCC); Panju v The Queen, 2010 DTC 3169 (TCC); Grenon v The Queen, 2002 DTC 1393 (TCC). See also Munro v Munro, 2011 ABCA 279; Mikisew Cree First Nation v Canada (1998), 224 AR 157 (QB); Frydman v Pelletier, 2013 ABQB 225; Mattson v. Quiggin, 2017 ONSC 984 (Ont SCJ).

⁶ Gulmani, supra.

⁷ See e.g., Baxter v The Queen, 2003 TCC 946

⁸ See e.g., Venngo Inc v Concierge Connection Inc, 2016 FCA 209, with reference the analogous provision in the Federal Court Rules, SOR/98-106.

⁹ 2001 DTC 163 (TCC).

¹⁰ See e.g., Mamut v The Queen, 2011 TCC 139.

¹¹ 2016 FCA 233.

¹² At paras 51-53.

¹³ 2014 Carswell 6140 (TCC). Appeal dismissed on other grounds 2015 FCA 288.

¹⁴ At para 33.