Canadian Tax Haiku of the week:

Tax court has its Rules

Follow them! Assumptions of

Fact and law don’t mix

Health Quest Inc. v. The Queen (2014 TCC 211)


The Canada Revenue Agency (“CRA”) and Minister of National Revenue (“Minister”) paid dearly in Health Quest Inc. v. The Queen[1]for failing to properly plead its assumptions. In this case, the taxpayer. Health Quest Inc. (“Health Quest”) was appealing a Harmonized Sales Tax (“HST”) decision to the Tax Court of Canada (“TCC”). The issue before the TCC was whether HST was applicable to certain types of footwear Health Quest sold.

Justice Campbell allowed the appeal, but not on the merits of the case. Rather, because the Minister failed to comply with the Rules of the TCC regarding pleadings. The Minister plead assumptions which contained mixed questions of law and fact, rather than facts alone, in its Reply to the Notice of Appeal (the “Reply”). The TCC held that this made it impossible for Health Quest to know the case it had to meet. As a result, the burden of proof shifted to the Minister to lead evidence to support its position. Since Justice Campbell was unsatisfied with the Minister’s evidence at the hearing, Health Quest won the appeal.


Health Quest was a distributor of therapeutic footwear for the relief of various disabling conditions of the feet. Section 24.1 in Part II of Schedule VI of the Excise Tax Act[2] stated that zero-rated supplies included footwear “designed for use by an individual who has a crippled or deformed foot or other similar disability, when the footwear is supplied on the written order of a medical practitioner.” Health Quest believed that most of its shoes met this definition, but nevertheless was instructed by the CRA to collect HST after an audit.[3]

At trial, Health Quest argued that since all of the shoes it sold were for a prescribed diagnosis they were zero-rated.[4] The Minister countered that the “off-the-shelf” shoes sold by Health Quest were not zero-rated and thus subject to HST because they were sold without modification.[5] But these arguments would all be for naught…

Rules of Procedure

Both the Tax Court of Canada Rules (General Procedure)[6] and Tax Court of Canada Rules of Procedure Respecting the Excise Tax Act (Informal Procedure)[7] prescribe procedural rules for all pleadings submitted to the court, including the Reply. The Reply must contain (among other things), “the findings or assumptions of fact made by the Minister when making the assessment”[8] and “the reasons the [Minister] intends to rely on”.[9]

Reply to the Notice of Appeal

In paragraph 7 of the Reply, the Minister pleaded the following assumptions:

(f) the Appellant also supplied other products which were not zero-rated pursuant to Schedule VI of the Act; and

(g) during the periods under appeal, the Appellant failed to collect tax of not less than $42,274.72 on its supply of products which were not zero-rated pursuant to Schedule VI of the Act.


With regard to the form of the pleadings, the TCC recognized that the Minister is not required to use the typical wording (i.e., “the Minister made the following assumptions”) for alleged facts to constitute assumptions of fact.[10] Unfortunately for her, the Minister assumed how the law would be applied to the facts and assumed the shoes were not zero-rated. The TCC noted that the assumptions by the Minister in the Reply must be limited to factual assumptions only.[11] However, since assumptions (f) and (g) both contained statements of mixed fact and law,[12] these mixed assumptions put Health Quest at a “distinct disadvantage” in the proceeding.[13]

This is because the pleading of assumptions allows the Minister to shift the onus to the taxpayer to “demolish” the Minister’s assumptions. If the assumptions are not precise and accurate, it will be unclear to the taxpayer exactly the case it has to meet[14] since the implication is that the taxpayer has the onus of demolishing the legal statement or conclusion.[15] Consequently, since the Minister did not set out any proper assumptions of fact in the pleadings, the burden of proof shifted to the Minister to establish the correctness of the assessment.[16]

The Minister’s only evidence was the testimony of the CRA appeals officer. The TCC held the testimony did not establish, on a balance of probabilities, that the footwear in question was not zero-rated.[17] As a result, the appeal was decided in favour of Health Quest, without costs.[18]

Additionally, the TCC noted that Health Quest had not produced sufficient evidence to demonstrate that the shoes could be zero-rated. Evidence the TCC felt was missing included product literature on the shoes and evidence from an expert or a medical practitioner.[19]


To quote a previous blog entry:

“In Kinglon, Justice Boyle further stated that the CRA is given a powerful advantage in tax litigation through the ability to plead assumptions of fact. But with great power comes great responsibility. The CRA has the responsibility to ensure “that the facts plead as assumptions be complete, precise, accurate and honestly and truthfully stated so that the taxpayer knows exactly the case and the burden that he or she has to meet”.

This judgement not only demonstrates the need for the Minister to properly plead the assumptions of fact in tax cases, but also shows that the CRA and Minister are not unbeatable. Justice Campbell felt the Minister’s assumptions stated the answer to the precise question that the TCC was tasked with deciding.[20] As a result, the Minister had to bear the burden of proof in this case because of the inadequacies with the assumptions of fact contained in the Reply.[21] The TCC has demonstrated that it will use these “technicalities” as reasons to decide certain issues before it.[22]

Going forward, taxpayers will most likely not have the luxury of this mistake being repeated. So perhaps a bigger take-away from this case is the importance of expert evidence; the court effectively told the taxpayer’s counsel what kind of evidence they ought to have presented at trial and did not. If it were not for the weakness of the opposing side’s pleadings, Health Quest would have lost a case that it perhaps could have won on the merits with the right evidence.

By Jonathan Garbutt, Barrister & Solicitor, and Raminder Pandher, Student-at-law

[1] 2014 TCC 211 [Health Quest].

[2] Excise Tax Act, RSC 1985, c E-15 [Excise Tax Act].

[3] Health Quest, supra note 1 at para 5.

[4] Ibid at para 15.

[5] Ibid at para 19.

[6] Tax Court of Canada Rules (General Procedure), SOR/90-688a [Rules].

[7] Rules of Practice and Procedure of the Tax Court of Canada in Respect of Appeals Under Part IX of the Excise Tax Act (Informal Procedure), SOR/92-42, section 6 [Excise Tax Act Rules].

[8] Rules 49(1)(d); Excise Tax Act Rules 6(1)(d).

[9] Rules 49(1)(h); Excise Tax Act Rules 6(1)(h).

[10] Health Quest, supra note 1 at para 26.

[11] Health Quest, supra note 1 at para 27

[12] Ibid.

[13] Ibid at para 31.

[14] Anchor Pointe Energy Ltd. v The Queen, 2003 FCA 294 at para 23.

[15] Health Quest, supra note 1 at para 25.

[16] Ibid at para 33.

[17] Ibid at para 36.

[18] Ibid at para 44.

[19] Ibid at para 2.

[20] Ibid at para 31.

[21] Ibid at para 25.

[22] Kinglon Investments Inc v The Queen, 2014 TCC 131 [Kinglon].