Roseland Farms Ltd. v. The Queen, 90 DTC 6512, [1990] 2 CTC 348 (FCTD)

Muldoon, J.:—This is the defendant's application to compel answers and compliance with undertakings on discovery, as well as production of documents, pursuant to Rules 455(18) and 455(2). The individual being questioned to provide answers for the plaintiff has been Murdoch MacKay, Q.C., of Winnipeg, the president and former corporate secretary of the plaintiff corporation.

The case is that type of income tax case sometimes known as a "trading case" but, more accurately, a dispute about whether the amount realized upon the sale of property was obtained from a transaction in the nature of trade, or was a Capital gain. It is a very common type of case among income tax cases.

The principles to be applied to the issues in cases of this sort are well known. The foremost is the giving of effect to the taxpayer's intention, either primary or secondary, as an operating motivation at the time of the acquisition of the property, which is later sold for a gain of income or capital. If such intention be to sell for profit in the near future, the gain is characterized as income and not capital. The same principle applies to a taxpayer which is a corporation, and not an individual. Here is how Associate Chief Judge Christie of the Tax Court of Canada put it in Leonard Reeves Inc. v. M.N.R., [1985] 2 C.T.C. 2054; 85 D.T.C. 419 at 2058 (D.T.C. 421):

If the appellant [taxpayer] is a corporation, the relevant intentions to be attributed to it are those which the natural person by whom it was managed and controlled had for it: Metropolitan Motels Corporation v MNR, [1966] CTC 246; 66 DTC 5208 per Jackett, P (as he then was) at 247 (DTC 5209).

This is an area of trite law which requires careful attention to detail in the findings of fact. Thus, the Appeal Division's unanimous judgment, expressed by Mahoney, J.A., in Crystal Glass Ltd. v. The Queen, [1989] 1 C.T.C. 330; 89 D.T.C. 5143, runs this way at 330-31 (D.T.C. 5143):

The learned trial judge misstated the test of secondary intention propounded in Racine et al. v. M.N.R., [1965] C.T.C. 150; 65 D.T.C. 5098, when he asked himself “did Mr. Bean have in his mind the thought that he might sell at a profit?” Secondary intention requires not only the thought of sale at a profit but that the prospect of such a sale be an operating motivation in the acquisition of the capital property.

That misstatement of the test taken with his failure to find facts that brought the transaction within the test, that is his failure to find that the prospect of the resale of Crystal Manor at a profit had, in fact, been an operating motivation in its acquisition, leads us to conclude that the learned trial judge erred in law in finding that the disposition of Crystal Manor resulted in a trading profit.

In this case, then, the matter of the principals’ intentions, (if any), in regard to sale of the property at a profit, and whether the prospect of such a sale were an operating motivation in the acquisition of the property are all matters in issue and therefore highly relevant subject for examination for discovery and production of documents.

The plaintiff was unsuccessful in its appeal from the Minister's reassessment of its 1980 taxation year's return, before the Tax Court of Canada. This further appeal, by way of trial de novo required the plaintiff to file a statement of claim. Here are the pertinent passages therein, in regard to the instant proceedings to compel answers and documents.

1. The Plaintiff was incorporated in Manitoba in 1976 to acquire and operate farm lands. Two parcels of land were acquired shortly thereafter.

2. That in the year 1980, the company wished to sell its holdings, as a principal shareholder who was to operate the farm could not come to Canada with the result that part of the land was being custom farmed with a part time farm manager.

7. The Plaintiff objected to the said reassessment by Notice of Objection dated July 19th, 1982, which stated:

(d) The principals of the company wished to remove their capital from a country on the brink of communism. They made arrangements for landed immigrant status for Canada but unforeseen matters arose in Europe which prevented immigration and finally caused the farm lands to be listed and sold.

The transcript of the examination of Mr. MacKay, president of the plaintiff, for discovery is replete with lengthy passages recording exchanges of opinion and assertions of various sorts between the respective counsels. The pertinent pages of that discovery transcript are appended as Exhibit "A" to the filed affidavit of Sandra Phillips, a lawyer employed by the Department of Justice.

On page 34 of the transcript, it is recorded that Mr. MacKay was questioned in the following sequence about the farm manager mentioned in paragraph 2 of the statement of claim:

144 Q. This would have been the farm manager that you've made reference to?

A. I don't know that I’d call him a farm manager. He had his own farm, but he did theirs too. He looked after theirs and said you should put in this crop, you should put in that crop, and here's a guy who will do the custom work, and we would draw the contract.

145 Q Who was this fellow? Is there any reason you can't name this fellow?

A. I'd like not to name him. He's dead now anyways so you couldn't get anything from him, but he was a farmer from nearby who was a landed immigrant. He was Italian.

146 Q. Did the two unnamed parties or the plaintiff have any written contract with this fellow?

A. No. No, I really think it was done when things fell apart. I think it was done probably through the consultants who said there's this chap there and he kept an eye on it and just shepherded it for them, that's all.

147 Q. What sort remuneration did he receive?

A. I don't think he received anything.

148 Q. So he did it gratis.

A. I think so. I mean, I don't recall paying him any money.

Then, on page 38 of that transcript, the following passage is recorded, which is recited in schedule "A" to the defendant's notice of motion here:

161 Q. Just so there's no confusion, I'm reserve [sic] my right to pursue the question of the identity of the farm manager as well.

Mr. Green: Yes.

Mr. Shipley: In the event that we have a motion on this.

It is beyond dispute that the identity of the farm manager is relevant to the issues in dispute not only because his or her existence and activities are pleaded by the plaintiff, but also in order to enable the defendant to investigate and verify or not the pleading itself, and the principals’ intentions and operating motivations, in so far as possible. It is necessary and legitimate to have that information placed factually and on oath, or its equivalent, on the record so that at trial the defendant would not have to adduce evidence to prove the deceased manager's identity (name, address, farm management capacities and any remuneration, for example) and the plaintiff would not be credibly able to deny it or remain obstructively passive about it. Now, in giving the purposes and reasons for compelling answers on discovery, it may be observed that the parties and their respective counsels are all adults and knowledgeable about litigation; so there ought to be no risk of personally offending anyone.

The questions relating to the identity of the part-time farm manager, as well as any reasonably and relevantly flowing from their answers, are all to be fully answered, at the usual peril to the existence of the plaintiff's action.

Legally and logically the same conclusion arises in regard to the identification of the allegedly non-resident "principals" of the plaintiff for whom Mr. MacKay and his two law partners (one of whom is now a Queen's Bench judge) held all of the plaintiff corporation's shares in trust. In this regard the plaintiff, by counsel, makes vociferous heavy weather, indeed. In considering this particular matter, let it be noted that the Court is quite mindful of the plentiful passages of the discovery transcript which counsel read to the Court, as well as of counsel's forceful argumentation on the question. Two objective points are raised, along with one subjective leitmotiv woven into the argument, as reason for refusing to identify the two equitable shareholders pleaded in subparagraph 7(d) of the statement of claim.

In Schedule "A" to the defendant's notice of motion, the following passages on page 6 of the transcript are recited, which along with preceding ones run thus:

25 Q. Am I also correct in understanding that ultimately a total of 100 shares in the corporation were issued?

A. Correct.

26 Q. Is that the maximum amount that was ever outstanding at any given time?

A. Correct, yes.

27 Q. How were those hundred shares distributed among the various shareholders?

A. There were—it was 80 per cent to one shareholder and 20 per cent to another. It turned out to be 79 and 21, but I think that was a mistake in transferring the shares. It was 80, 20.

28 Q. And can you identify for me the party who held the 80 shares?

A. His name, you mean?

29 Q. Yes.

A. I could. I don't want to.

30 Q. I'm asking you to. I think I’m entitled to it.

Mr. Green: You have the information. The department has the information. They've already indicated they have the information. You want it to appear on a public record. For the moment we don't see the necessity of it. I don't know why you want to do it. You have the information.

The first objective point taken by the plaintiff's counsel against identifying the equitable shareholders is that through disclosures made to the Minister, no doubt under the umbrella of confidentiality accorded by the Income Tax Act (but neither counsel was precise on that score) the defendant already knows the identity of the two beneficial, equitable shareholders. So, what? So, says counsel for the plaintiff, the defendant does not need Mr. MacKay actually to identify them, even although, as Mahoney, J.A. stated in the Crystal Glass case, their intentions, primary and secondary and their operating motivation in the acquisition of the farm property, are fundamental matters in issue in this litigation. This is a tactical, if not strategic, ploy, on the defendant's counsel's part says the plaintiff's counsel. Just adduce evidence about the background, trading history and competence about the two owners, or either of them, and if it be true the plaintiff will admit it at trial, without the need to reveal their identification, he urges.

In any event, he notes, the Tax Court judge found for the Minister without having those equitable owners' names forced onto the record. Again, so what? The defendant's counsel notes that the plaintiff does not offer to have the trial de novo conducted wholly on the tax court transcript of proceedings. This is a new proceeding, the defendant's counsel notes, and the defendant is entitled to full discovery of the plaintiff's case, including of course, that which the plaintiff has pleaded in its statement of claim. Amen. The defendant is entitled to have the equitable owners' names on the record, under oath or its equivalent, without further proof being needed from the defendant. Not only that, but the defendant is entitled to have the plaintiff's president swear to their nationality and inform himself of why they believed their country, by name, was on the brink of communism, what arrangements they made for landed immigrant status, and what the unforeseen matters were which arose in Europe.

The plaintiff's assertion that the defendant or her Minister, or his minions, or their counsel already know the identities is a lame excuse for not answering.

The second objective point taken by the plaintiff's counsel is some species of solicitor and client privilege. The discovery transcript, Exhibit "A" to Ms. Phillips’ affidavit records the following passage beginning at page 11:

33 Q. Your evidence earlier this afternoon was to the effect that there were other parties who had the beneficial interest in this corporation. Is that correct?

A. We held the shares in trust. That's correct.

34 Q. Was there a trust agreement drafted?

A. Yes.

35 Q. Do you have that trust agreement?

A. Yes.

36 Q. Would you produce that trust agreement.

A. No.

Mr. Green: No.

Witness: Solicitor and client.

Mr. Green: I wish to make it clear that there is no attempt here not to reveal. The department has the information that is now being requested of Mr. MacKay—Mr. Shipley: I take issue with that, Mr. Green. I’ve never seen the trust agreement— Mr. Green: I'm not talking about the trust agreement. I am talking about the names of the people. In so far as the trust agreement is concerned, it merely would provide the names of the people. We will give you the trust agreement if you leave out the names of the people from the record, which you have.

This position is put so obliquely in the plaintiff's brief on this motion that the Court asked the plaintiff's counsel at the hearing whether he had abandoned Mr. MacKay's incomplete assertion of “solicitor and client” [privilege]. To the surprise of the defendant's counsel, it was stated that such basis of refusal, although not frontally addressed in the plaintiff's brief, is nevertheless, not abandoned. Here is the passage on page 4 of the plaintiff's brief which barely suggests the privilege, if at all, since it would have to be the client's privilege:

8. The Plaintiff takes the further position that the Defendant is not seeking information which it already has, but something else, [amended during oral argument] Rather, being aware of the resistance of Mr. MacKay to reveal what he considers he should not reveal for the protection of his clients in matters not associated with the issues involved herein, the Defendant is attempting to take unfair advantage of this embarrassment to assist in having the case dealt with other than on its merits.

The resolution of this plea must be that the client, if the client has truly instructed Mr. MacKay to raise the client's privilege cannot parlay that alleged privilege into all or part of his affairs and dealings simply by the device of appointing his solicitor to be the, or a, legal shareholder as trustee for him in his corporation now involved in litigation. That notion, of course, applies equally to both unnamed equitable owners of the plaintiff.

To be privileged, "the communication must be made in order to elicit professional advice from the lawyer based on his expertise in the law”. So it is stated at page 163 in The Law of Evidence in Civil Cases, by Sopinka and Lederman, 1974, Butterworths, Toronto. It surely requires no professional skill to suppress the identity of another. At pages 163-64 in the same volume there is the following passage (here recited without footnotes):

Very often a solicitor for a corporation may play a dual role. In addition to being its solicitor, he may also be one of its directors or officers. In such cases, it is not easy to discern whether a communication was made to him in his professional legal capacity, or in his corporate executive capacity. In Canary et al. v. Vested Estates Ltd., an application was brought to examine for discovery the director of the defendant company, who was also its solicitor. On behalf of the company, he negotiated with the plaintiffs an agreement to lease certain property, the terms of which he reduced to writing and had signed by the plaintiffs. The plaintiffs, however, never saw the document again, nor was a copy given to them. In an action brought by the plaintiffs against the company for breach of the agreement, discovery of the document was sought. The solicitor claimed privilege submitting that he acted solely in his legal capacity and not as a servant or agent of the company. In holding that privilege could not be claimed in these circumstances, Macdonald C.J.B.C. stated:

The fact that a person is by profession a solicitor and is instructed with and performs duties which can be and usually are, performed by an official, servant or agent of a company does not render him immune from examination on discovery if he performs those duties. In this particular transaction I am inclined to believe that the defendant company is advised to take refuge behind one who in reality was an agent or servant engaged for this particular negotiation along with his associate Austin. He was not clothed for this particular transaction with the professional duties of a solicitor by the defendants. Mr. Brougham, as agent or servant or agent ad hoc of the defendants being in possession of knowledge which is relevant to the issues herein and which is necessary for the proper and final determination of the matters in dispute, I think must submit to be examined as applied for.

The character of Mr. MacKay's activity, despite his status as a barrister learned in the law, does not indicate that in the role of president of the plaintiff corporation he is excused from revealing the names and any other known identifying characteristics of the equitable owners of the corporation. The moreso, indeed, because the crucial relevance of their identity is apparent from the nature of a “trading case" and the relevant mention of their existence and their wishes as "principals" of the corporation in paragraph 7(d) of that corporation's own statement of claim, in the present litigation.

The trust agreement whereby Mr. MacKay and his partners held legal ownership of the plaintiff corporation's share as trustees for the unnamed equitable owners, the “principals” is itself a relevant document, but not even disclosed in the plaintiff's list of relevant documents filed pursuant to Rule 447, on September 13, 1988. At the hearing the plaintiff's counsel reiterated the offer made on discovery, to furnish a copy of that trust agreement, with the "principals" names blanked out. The wanly asserted, almost overlooked claim of solicitor/client privilege is no better or more effective than if it had been resolutely asserted. No such privilege arises here by which Mr. MacKay can decline to give identifying information about the plaintiff corporation's equitable owners and principals, on oath or its equivalent, and for and on the record, as and for proof, without more, of those identities. He must inform himself of all relevant matters, including the questions set out in schedule “B” to the notice of motion. If he should still decline, the usual peril to the plaintiff's pleading and position in this litigation will arise.

Finally, the one subjective theme woven into the plaintiff's argument, both oral and written, is expressed in the last paragraph of the plaintiff's brief:

9. It has been made known to the solicitors for the Defendant that the Plaintiff will permit the appeal to lapse by default rather than prejudice the persons involved, of whom the Defendant has full particulars.

So be it. Mr. MacKay testified that he does not want to identify his corporation's principals because they do not want to be identified.

That the plaintiff corporation's equitable owners and principals would be prejudiced by being identified is boldly asserted, but no such prejudice as would legally enlist the Court's assistance is demonstrated by or on behalf of them or the plaintiff corporation. They wanted to acquire interests in a propertied corporation which is capable of, and engaged in legal relationships but, in effect, they want to be "masked" farmers, traders, gainers or whatever without revealing their identity in litigation precipitated by their corporation, in which their intentions and operating motivations are material. If the unnamed principals cannot bear that exposure, or if Mr. MacKay harbours some sense of obligation to them in regard to some undemonstrated prejudice, then it is his and their affair solely to terminate their action herein lest it be dismissed. Such is their subjective consideration for which they have laid no basis upon which the Court can give them relief.

In effect Mr. MacKay and the plaintiff's counsel are stating that they merely do not want to reveal that which the defendant is entitled to have placed on the record in this litigation without guessing, inference, or further proof, and their best argument, apart from the non-existent solicitor/client privilege, is that they the legal shareholders and the plaintiff corporation ought not to be compelled to answer because they are honourable, respectable good fellows. This third point fails because sympathy for the plaintiff's plight, of its own making, is insufficient to deny the defendant that which the defendant is entitled to have formally proved on the record, despite any private knowledge.

In summation, proceeding according to the schedules appended to the defendant's notice of motion, the dispositions will be as asked therein.

Crown's motion granted.