Citation: 2012 TCC 213
Date: 20120612
Docket: 2011-137(IT)G
BETWEEN:
D & D LIVESTOCK LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Bocock J.
[1]
The Respondent has instituted a
motion for an Order compelling the Applicant to provide written responses to
examinations for discovery queries conducted by written questions.
[2]
The Respondent in its motion
materials states that the appeal relates to a determination under section 55(2)
of the Income Tax Act (the “Act”) as to whether a transaction or
a series of transactions was entered into for the purposes of reducing the
amount of a capital gain in the Appellant’s hands. Subsection 55(2) of the Act
re-characterizes dividend income as capital gains if the taxpayer has
entered into a transaction event or series of transactions, the purpose of
which is, or are, to reduce the portion of capital gains attributable to
something other than safe income.
[3]
The Respondent further states that
its Reply refers to a total of 15 steps in the alleged series of transactions
(the “Series of Transactions”). The Respondent argues that assumptions 7(g)(xi)
through (xiv) contained in its Reply relate to Steps 12 through 15 of the
Series of Transactions. The Respondent further submits that the following
unanswered questions asked of the Appellant (the “Unanswered Questions”) relate
to the Series of Transactions:
Question 10 (parts (l) – (o))
Do you admit the Series of Transactions, which are outlined more
particularly at the attached appendix A, including the following transactions:
(…)
l) Step 12 — On May 31, 2005 at 10:00 a.m., HLL disposes of
1000 class A common share in Newco 3 to Newco 2, and
vi) the ACB of the shares was reported to be $1,018,658;
vii) the PUC of the shares was reported to be $517,727; and
viii) the parties filed a joint election pursuant to ss.85(1) of
the Income Tax Act in respect of this transaction;
m) Step 13 — On May 31, 2005 at 11:00 a.m., Newco 3 is
wound up;
n) Step 14 — On May 31, 2005 at 12:00 noon, HLL disposes of
1,100 class A common shares of Newco 2 to HLAL, and
i) the FMV of the shares was reported to be $7,050,000;
ii) the ACB of the shares was reported to be $4,483,658;
iii) he PUC of the shares was reported to be $1,983,293; and
iv) the parties file a joint election pursuant to ss.85(1) of
the Income Tax Act in respect of this transaction;
o) Step 15 — On June 1, 2005 at 9:00 a.m., HLAL sells Newco 2
RBTL for $7,050,000. HLAL reports its disposition of Newco 2 as follows:
Proceeds: $7,050,000
ACB: $4,483,658
Capital Gain $2,566,342
If you do not
admit these statements of fact, please explain why you have not admitted this
statement of fact and provide a detailed explanation of what the correct facts
are.
Answer:
If is not admitted that the transactions attached at Appendix A are a Series of
Transactions. With respect to transactions described in paragraphs 10(a) to
10(o), I provide the following comments:
(…)
(l) This
transaction took place after the wind-up of the Appellant and therefore is not
relevant.
(m) This
transaction took place after the wind-up of the Appellant and therefore is not
relevant.
(n) This
transaction took place after the wind-up of the Appellant and therefore is not
relevant.
(o) This
transaction took place after the wind-up of the Appellant and therefore is not
relevant.
Follow up question: These
statements of fact are from paragraph 10(xi) – x(iv) of the Reply to Notice of
Appeal, which, in part, form the basis for position taken by the Minister in
this appeal. You have not moved to strike those portions of the Reply. The Respondent’s
position is that a question is relevant if it is relevant to the issues raised
in the pleadings, including the Reply. Based on this, please confirm that you
continue to refuse to answer the question and that your only basis for not
answering is your assertion that it is not relevant.
Question 12
((s) - (x))
Please provide all documentation directly
supporting the following occurrences:
s) May 31, 2005, 10:00 a.m.: Heatherington Livestock Ltd
disposes of 1000 class A common shares in Heatherington Holdings (Alberta) Ltd
to 118313 Alberta Ltd;
t) May 31, 2005, 10:00 a.m.: Joint election filed pursuant to
ss.85(1) of the Income Tax Act;
u) May 31, 2005, 11:00 a.m.: Heatherington Holdings (Alberta)
Ltd is wound up;
v) May 31, 2005, 12:00 noon: Heatherington Livestock Ltd
disposes of 1,100 class A common shares of 118313 Alberta Ltd to Heatherington
Livestock (Alberta) Ltd;
w) May 31, 2005, 12:00 noon: Joint election filed pursuant to
ss.85(1) of the Income Tax Act; and
x)
June 1, 2005, 9:00 a.m.: Heatherington Livestock (Alberta) Ltd sells
118313 Alberta Ltd to Roberge Brothers Transport Ltd for $7,050,000.
Answer:
Please find attached the documents listed in paragraphs 12(a) through 12(r) in
Tabs A through R. The documents indicated in paragraphs 12(s) through 12(x) are
not relevant to the matters at issue.
Follow up
question: This question relates directly to the facts in sub-paragraphs
10(xi) – x(iv) of the Reply to Notice of Appeal, which, in part, form the basis
for position taken by the Minister in this appeal. You have not moved to strike
those portions of the Reply. The Respondent’s position is that the request is
relevant because it is relevant to the issues raised in the pleadings,
including the Reply. Based on this, please confirm that you continue to refuse
to answer the question and that your only basis for not answering is your
assertion that it is not relevant.
[4]
The Appellant’s responding motion
materials submit that the Unanswered Questions are not relevant to the issues
framed in the pleadings for the following reasons:
13. It is clear
[emphasis added] from the pleadings, and not in issue between the parties, that
the following requirements of subsection 55(2) were satisfied:
(a) A
corporation resident in Canada (the Appellant) received a taxable dividend
(Stock dividend #2) from HHL (Newco #3 in the Reply) in respect of which it was
entitled to a deduction under subsection 112(1);
(b) Stock
Dividend #2 was received by the Appellant as part of a transaction or event or
a series of transactions or events;
(c) The amount
of Stock Dividend #2 was $517,427.
(d) Although
not specifically pled, the amount of Stock Dividend #2 was added to the
adjusted cost base of the shares of HHL (Newco #3) owned by the Appellant
pursuant to paragraph 53(1)(b) of the Income Tax Act, as it read for the 2005
taxation year.
(e) As a
result, one of the purposes of Stock Dividend #2 was to effect a significant
reduction in the portion of the capital gain on the shares of HHL (Newco #3)
that, but for the dividend, would have been realized on a disposition at fair
market value of the shares of HHL (Newco #3) immediately before the dividend.
[emphasis
added]
It is noted by the Court that sub-paragraph
(d) contains the preamble clause, “Although not specifically pled…” subsequent
to the preceding opening sentence of the same paragraph …“It is clear from the
pleadings…”
[5]
The Respondent, on the other hand,
has plainly pled in sub-paragraph 10(g) and (k) of its Reply that the purpose and
goal of the Series of Transactions, pled and defined by the Respondent, include
Steps 1 through 15, inclusive.
[6]
The applicable legal test for
relevancy and the related latitude of a motion judge when hearing a motion to
compel a discovery question response has been thoroughly enumerated by Bowman, A.C.J.,
as he then was, in the case of Baxter v. Her Majesty The Queen 58 DTC
3497. Specifically the Court states at paragraph 12 that:
[…] The
threshold level of relevancy is quite low. Counsel should not be inhibited in
the questions he or she asks simply because the question may, standing alone,
seem irrelevant. […]
[7]
In addition the Court further
states that:
[…] in ruling
on such applications, should not unduly restrict an Examination by excluding
questions broadly related to the issues when it appears that their relevance
may well be resolved by other evidence not before the Court on the application.
[8]
Similarly at paragraph 13 of Baxter,
after consideration of all the authorities, the Court summarizes the principles
that should be applied when considering relevancy as follows:
a) Relevancy on discovery must be broadly and liberally
construed and wide latitude should be given;
b) A motions judge should not second guess the discretion of
counsel by examining minutely each question or asking counsel for the party
being examined to justify each question or explain its relevancy;
c) The motions judge should not seek to impose his or her
views of relevancy on the judge who hears the case by excluding questions that
he or she may consider irrelevant but which, in the context of the evidence as
a whole, the trial judge may consider relevant;
d)
Patently irrelevant or abusive questions or questions designed to
embarrass or harass the witness or delay the case should not be permitted.
[9]
In applying the foregoing
principles, reference must also be had to the scope of examination permitted
under the Tax Court of Canada Act and also the applicable rules of this
Court related to the general procedure. Upon examination, Section 95(1) states:
A person
examined for discovery shall answer […] any proper question relevant to any
matter in issue in the proceeding or any matter made discoverable […]
[10]
It is not the purpose of this
Court upon motion to determine whether the alleged facts and assumptions in the
pleadings are probative or determinative of the allegations they represent, but
whether, prima facie, the discovery questions posed in respect of those
facts and assumptions so alleged offend the principles in Baxter. On the
basis of the pled assumptions, the Series of Transactions are not patently
unrelated nor prima facie lacking in nexus to the application and
operation of subsection 55(2) of the Act.
[11]
Factually, the winding up of the
Appellant and the related evidence, testimony and conclusions may well demolish
the Minister’s assumptions, but that conclusion must be argued and decided at
trial before the panoramic eye and attentive ear of the trial judge viewing and
hearing all of the adduced evidence after being tasked specifically with
determining such issues at trial.
[12]
In summary, based upon the principles established in Baxter, it is clear
that the Unanswered Questions on the face of the pleadings are not patently
irrelevant nor are they abusive or designed to embarrass or harass the party or
to delay the case. Therefore, given the principles enunciated in Baxter,
this Court orders that the Appellant be compelled to provide answers to the
Unanswered Questions and that such responses be delivered within 30 days from
the date of the issuance of this decision and Order.
[13]
With respect to the balance of the
requests by the Respondent, namely: (i) extending the time to communicate with
the hearings coordinator and (ii) requiring the Appellant to pay the costs of
this motion forthwith: the Court orders that, (i) the time to communicate with
the hearings coordinator under the subsisting timetable order be extended until
thirty days after receipt of the responses to the written questions ordered
herein; and, (ii) costs are awarded against the Appellant in the amount of $300
payable within 30 days of the date of this Order to the Respondent.
Signed at Ottawa, Canada, this 12th day of June 2012.
“R.S. Bocock”
Email this Content