Citation: 2013 TCC 59
Date: 20130220
Docket: 2009-2099(IT)G
BETWEEN:
DAVID ARMSTRONG,
Appellant/Applicant,
and
HER MAJESTY THE QUEEN,
Respondent/Respondent on the motion,
AND BETWEEN:
CANGO INC.,
Applicant,
and
HER MAJESTY THE QUEEN and DAVID ARMSTRONG,
Respondents on the motion.
REASONS FOR ORDER
Angers J.
[1]
The applicant David
Armstrong is asking this Court's permission to use in one or more separate
proceedings commenced or to be commenced by the applicant in the Ontario Court
against his former employer, Cango Inc. (hereinafter Cango), and his former
solicitors, documents and information obtained in the examination for discovery
of the Minister’s nominee in an income tax appeal before this Court. The
applicant, in other words, is asking the Court to be relieved of his implied
undertaking with respect to those documents and the information (evidence)
obtained through the discovery process in his income tax appeal.
[2]
The applicant was
formerly employed by Cango from June 24, 1993 to November 11, 2002 as its president
and chief executive officer.
[3]
In early 2002, upon
receiving a whistleblower report from a former employee, Cango conducted an
investigation into the applicant. Following the investigation, Cango claimed to
have found that the applicant had misappropriated funds from several of Cango’s
car wash operations and consequently, terminated the applicant’s employment. A
further investigation by a forensic accounting firm produced a report that quantified
the alleged total misappropriation and Cango’s losses.
[4]
Cango commenced a civil
action in the Ontario Superior Court of Justice to recover the alleged
misappropriated funds, and the applicant pursued a wrongful dismissal claim
against Cango.
[5]
In June of 2004 or
thereabouts, the applicant and Cango resolved matters by settling their
respective civil claims, and both executed a full and final release arising out
of the facts and circumstances as pleaded in their respective actions.
[6]
Being concerned that it
may have misreported its income, Cango, relying on professional advice,
initiated a voluntary disclosure process with the Canada Revenue Agency (CRA)
around February 2003. At about the same time the CRA commenced an investigation
into the applicant’s earnings and assets. During this investigation, the CRA sent
to Cango on April 13, 2006, a requirement to provide financial documents
relating to the applicant pursuant to subsection 231.2(i) of the Income
Tax Act (the Act). Specifically, Cango was required to provide:
all
reasonable assistance including answering all proper questions and providing
all proper documentation relating to David J. Armstrong for the taxation years
1999, 2000 and 2001.
[7]
In August of 2006, the
CRA, using a comparative net worth analysis, reassessed the applicant for $1,713,630
of previously unreported income. In January 2007, the applicant was reassessed
to reflect adjustments allowed by the CRA, and the unreported income amount was
reduced to $462,481. The applicant filed a Notice of Appeal with this Court on
June 24, 2009.
[8]
An examination for
discovery took place on September 28 and 29 of 2010. Mr. Stephen
Kleinschmidt, the respondent’s nominee, was examined. Answers to undertakings
were provided on November 29, 2010, which included information obtained from
Cango in the form of seven binders full of documents.
[9]
The tax appeal was
settled in favour of the applicant by consent judgment on October 13, 2011. The
respondent consented to a judgment which allowed the appeal in full and
referred the reassessments back to the Minister for reassessment on the basis
that the applicant (appellant) had no unreported income for his 1999 to 2001 taxation
years.
[10]
It should be noted that
none of the discovery evidence was entered as evidence before this Court or
otherwise produced in open court.
[11]
On September 27, 2012,
the applicant commenced against Cango an action in the Ontario Superior Court
of Justice claiming damages for having provided to the CRA a series of false,
incomplete and misleading documents. In addition, it became clear from the
documents contained in the above-mentioned binders that the applicant’s former
law firm had disclosed privileged and confidential materials to Cango in the
context of his dispute with Cango. All of the above is disputed by Cango.
[12]
The applicant, as indicated
earlier, is seeking an order from this Court for the waiver of its implied
undertaking relating to information that was produced by the CRA in the course
of the discovery of Mr. Kleinschmidt.
[13]
The Tax Court of
Canada Rules (General Procedure) (Rules) do not contain
provisions regarding the subsequent use by a recipient of information disclosed
through the discovery process, nor do they include any provisions pertaining to
the actual motion to be made before the Court in that regard. This, however, is
no impediment to the application of the common law rule in all proceedings
before this Court, and motions such as the present one can be brought.
[14]
The Ontario Court of
Appeal describes as follows, in Kitchenham v. AXA Insurance Canada, 2008
ONCA 877, [2008] O.J. No. 5413 (QL), at paragraphs 30, 31 and 32, which I
reproduce below, the effect of Rule 30.1 (deemed undertaking) of the Ontario Rules
of Civil Procedure:
30 The implied undertaking promotes the due
administration of justice in the conduct of civil litigation in two ways.
First, it encourages full and frank disclosure on discovery by the parties. It
does so by interdicting, except with the court's permission, the subsequent use
of the disclosed material by the party obtaining that disclosure for any
purpose outside of the litigation in which the disclosure was made. Second, the
implied undertaking accepts that the privacy interests of litigants must,
subject to legitimate privilege claims, yield to the disclosure obligation
within the litigation, but that those interests should be protected in respect
of matters other than the litigation: Juman v. Doucette, at paras.
23-27; Richard B. Swan, "The Deemed Undertaking: A Fixture of Civil
Litigation in Ontario" (Winter 2008) 27 Advocates' Soc. J., No. 3, p. 16.
31 In Goodman v. Rossi at p. 369, Morden J.A. quotes
from Matthews and Malek's Discovery (1992), at p. 253, where the
rationale for the rule is described as follows:
·
The primary
rationale for the imposition of the implied undertaking is the protection of
privacy. Discovery is an invasion of the right of the individual to keep his
own documents to himself. It is a matter of public interest to safeguard that
right. The purpose of the undertaking is to protect, so far as is consistent
with the proper conduct of the action, the confidentiality of the party's
documents. It is in general wrong that one who is compelled by law to produce
documents for the purpose of particular proceedings should be in peril of
having those documents used by the other party for some purpose other than the
purpose of the particular legal proceedings ...
32 The promotion of full and frank disclosure, and the
protection of the privacy interests of those who are compelled to make
disclosure during discovery are both served by restricting the use that the
party obtaining the information can make of that information. Neither rationale
for the implied undertaking justifies any restriction on the subsequent use of
the information by the party who produced that information. To the contrary,
wrapping all information produced in the discovery process in one action in a
cloak of non-disclosure for any subsequent purpose, and requiring a court order
to remove that cloak of secrecy would inevitably interfere with the effective
operation of the discovery process.
[15]
It is also interesting
to note that, at paragraph 58, that same decision defines who the beneficiary
of the protection afforded by Rule 30.1 is. Paragraph 58 reads as follows:
58 The interests of the party who was compelled to disclose
the information are the only interests that can justify maintaining the
undertaking. My reading of subrule (8) is consistent with an
interpretation of the Rule that recognizes the party who gave up the
information as the sole beneficiary of the protection afforded by the Rule. It
is also consistent with subrule (4), which provides that the deemed undertaking
has no application if the party who disclosed the evidence consents to its use.
[16]
That being said, a
subsequent motion was also brought before this Court by Cango seeking an order
granting it leave to intervene in these proceedings. It has, as well, submitted
arguments in opposition to the original motion in the event that such leave should
be granted.
[17]
Leave to intervene
before this Court is usually obtained if the requirements found in section 28
of the Rules are met. Section 28 reads as follows:
28.
Leave to intervene — (1) Where it is claimed by a person who is not a party to
a proceeding
(a)
that such person has an interest in the subject matter of the proceeding,
(b)
that such person may be adversely affected by a judgment in the proceeding, or
(c)
that there exists between such person and any one or more parties to the
proceeding a question of law or fact or mixed law and fact in common with one
or more of the questions in issue in the proceeding,
such
person may move for leave to intervene.
(2)
On the motion, the Court shall consider whether the intervention will unduly
delay or prejudice the determination of the rights of the parties to the
proceeding, and the Court may,
(a)
allow the person to intervene as a friend of the Court and without being a
party to the proceeding, for the purpose of rendering assistance to the Court
by way of evidence or argument, and
(b)
give such direction for pleadings, discovery or costs as is just.
[18]
Although the
applicant’s appeal is no longer before this Court and section 28 of the Rules
was not designed to address a proceeding such as the original motion before
this Court, that section may no doubt serve as a guideline in determining
whether a person (Cango in this case) should be given leave to intervene as a
friend of the Court to render assistance to the Court in disposing of the
original motion.
[19]
The motion for leave to
intervene has come about because the respondent has not consented to use of the
discovery documents and information by the applicant. Had that occurred, the
matter would not have found its way before this Court as the deemed undertaking
rule would have had no application.
[20]
That being said, I have
read the affidavit of Warren Kettlewell of Cango as well as that of the
applicant David Armstrong filed in response to the motion for leave to
intervene.
[21]
The threshold test to
be met in order to obtain leave to intervene is that the person seeking leave must
show that he has an interest in the subject matter of the proceeding and that
he may be adversely affected by the judgment. In addition, there must be a
question of law or fact or mixed law and fact in common with a question in
issue in the proceeding, and the intervention must not cause undue delay or
prejudice.
[22]
Respecting the last
requirement, there will not be undue delay here as Cango has already provided
the Court with written submissions with regard to the waiver of the implied
undertaking, and the applicant has not argued that he will suffer prejudice if
leave to intervene is granted.
[23]
The original motion was
served on Cango by the applicant. I can only infer therefrom that the applicant
felt — and rightly so — that Cango was a person who would be affected by the
direction sought, as stated in subsection 67(1) of the Rules. Under
section 28, in order to obtain leave to intervene, the person requesting such
leave must show that he will be adversely affected by the direction or order
sought. The affidavit of Cango is sufficient to allow me to conclude that it will
be adversely affected. The information it provided to the respondent, along
with the other information it was compelled to provide, including financial
records, will be used in the action before the Ontario courts and have a
financial impact on Cango.
[24]
I am also satisfied
that the information Cango provided, both before and after it was compelled to
do so, through documents and evidence from the respondent’s nominee constitutes
the subject matter at issue in the original motion, and that gives Cango a
genuine and direct interest in the proceedings.
[25]
I will therefore grant
the motion and allow Cango to intervene as a friend of the Court for the
purpose of rendering assistance to the Court in dealing with the original
motion, which assistance already forms part of Cango's motion record. I will,
as well, take into consideration the evidence and arguments submitted by the
applicant in his reply.
The Original Motion
[26]
In Juman v. Doucette,
2008 SCC 8, [2008] 1 S.C.R. 157, [2008] S.C.J. No. 8 (QL), the Supreme
Court of Canada has set out the scope of an implied undertaking at common law. The
purpose of an implied undertaking is to provide a reasonable measure of
protection for an examinee’s privacy right where the production of documents
and information is compelled, and to encourage complete and candid discovery. The
Supreme Court stated that in order to obtain relief from the effect of an
implied undertaking, an applicant must demonstrate "on a balance of
probabilities the existence of a public interest of greater weight than the
values the implied undertaking is designed to protect, namely privacy and the
efficient conduct of civil litigation" (paragraph 32). The Supreme Court
of Canada stated as well, at paragraphs 25 and 26:
25 The
public interest in getting at the truth in a civil action outweighs the
examinee's privacy interest, but the latter is nevertheless entitled to a
measure of protection. The answers and documents are compelled by statute
solely for the purpose of the civil action and the law thus requires that the
invasion of privacy should generally be limited to the level of disclosure
necessary to satisfy that purpose and that purpose alone. Although the present
case involves the issue of self-incrimination of the appellant, that element is
not a necessary requirement for protection. Indeed, the disclosed information
need not even satisfy the legal requirements of confidentiality set out in Slavutych
v. Baker, [1976] 1 S.C.R. 254.
The general idea, metaphorically speaking, is that whatever is disclosed in the
discovery room stays in the discovery room unless eventually revealed in the
courtroom or disclosed by judicial order.
26 There
is a second rationale supporting the existence of an implied undertaking. A
litigant who has some assurance that the documents and answers will not be used
for a purpose collateral or ulterior to the proceedings in which they are
demanded will be encouraged to provide a more complete and candid discovery.
This is of particular interest in an era where documentary production is of a
magnitude ("litigation by avalanche") as often to preclude careful
pre-screening by the individuals or corporations making production. See Kyuquot
Logging Ltd. v. British Columbia Forest Products Ltd. (1986), 5 B.C.L.R. (2d) 1
(C.A.), per Esson J.A. dissenting, at pp. 10-11.
[27]
The Supreme Court of
Canada also stated that any perceived prejudice to the examinee is a factor
that will always weigh heavily in the balance.
[28]
In cases such as Goodman
v. Rossi, [1995] O.J. No. 1906 (QL) (Ont. C.A.) Disher v. Kowal, 56
O.R. (3d) 329 (Ont. S.C.), Ochitwa v. Bombino, [1997] A.J. No. 1157 (QL)
(Alta. Q.B.), Merck and Co. v. Apotex Inc., [1997] F.C.J. No. 1852 (QL)
(C.F.T.D.), the courts have considered various factors to assist them in
weighing public interest against the interest protected by the implied
undertaking. Those factors include such things as the fact that there are different
issues and parties, the existence of other ways to obtain the information, the
effect on third parties versus the right to privacy, and the interest in promoting
an efficient civil justice process.
[29]
Here, the parties and
the issues are different. The issue in the appeal before this Court had to do
with the applicant’s tax liability for unreported income and for penalties, and
with the fact that the assessment was made beyond the normal assessment period.
The issues in the Ontario action concern malicious prosecution and defamation.
There is no connection per se between the issues in the tax appeal and
those in the Ontario action, other than the matter of the reliability of the
facts assumed by the respondent in determining the unreported income, and those
facts were never adjudicated upon. The parties are the applicant and the Crown
in the appeal before this Court and the applicant and Cango in the Ontario action.
[30]
The evidence presented
by the applicant is unclear as to what efforts he made to obtain the
information and documents from other sources. There may be other avenues open
to him, such as undertakings obtained through the discovery process in the Ontario action. That is a factor that I have considered.
[31]
The applicant submits
that the greater public interest will be served by enabling the court to
ascertain the truth. In other words, Cango should not be permitted to hide its
alleged selective and misleading disclosures behind the protection of the
implied undertaking of the respondent, to whom the information was volunteered.
[32]
On the other hand, the
Ontario Court of Appeal, in Goodman (supra), held that the
process of the court cannot be or appear to be an instrument for the initiation
of litigation not otherwise contemplated or part of the cause of action which
disclosed the potentially new claim. Otherwise, full and frank disclosure by
the parties would be undermined. In the fact situation here, the applicant
became aware of Cango’s role in the proceeding through the tax appeal, in the
course of which were disclosed the facts now being alleged in the Ontario action.
[33]
One must also bear in
mind that in income tax assessments, particularly in net worth assessments, the
information that is obtained and used by the CRA auditors through the audit
process and which forms the basis of an assessment may sometimes be erroneous.
The information is either provided voluntarily by third parties or is obtained
through compulsion exercised in accordance with the law, but the fact remains
that the taxpayer is the person most knowledgeable about his affairs and the
person who is best able to demolish the Minister’s assumptions, which in this
case the applicant succeeded in doing.
[34]
This brings me to the
other compelling interests that the implied undertaking rule is designed to
protect, namely privacy and the efficient conduct of litigation, including tax
appeals. Some of the discovery documents were obtained through voluntary
disclosure by a third party (Cango), and that disclosure requires protection
for reasons of confidentiality, as provided for under the Act; some were
disclosed in advance of any order compelling their production, and others were
provided under such an order. It is fair to assume that documents that are
provided to the CRA in the audit process are reliable and, since the assessment
is founded on assumptions of fact, there is a need for confidentiality in the
tax appeal process. Any departure therefrom — that is, if the information
obtained could be used against the informant in a subsequent legal action could
create a chilling effect.
[35]
Although the applicant
may have a contentious issue to resolve and although he may be deprived of a means
of advancing his case, I believe it would be contrary to the public interest to
have the process of the Court be or appear to be an instrument for the initiation
of litigation not otherwise contemplated or part of the cause of action which
disclosed the potentially new claim (Goodman, supra).
[36]
I believe that, on a
balance of probabilities, the public interest asserted by the applicant does
not outweigh the values the implied undertaking is designed to protect.
[37]
The motion is denied.
There will be no costs on either motion.
Signed at Ottawa, Canada, this 20th day of February 2013.
"François Angers"
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