Citation: 2010 TCC 540
Date: 20101022
Docket: 2008-265(IT)G
BETWEEN:
FRANK SPUTEK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Hogan J.
[1]
The Respondent has
brought a motion for an order:
(a) to compel the
Appellant to produce copies of the passbooks and account statements for all bank
accounts over which he had control for the years 2000 and 2001 (the “Account
Documents”);
(b) to answer questions
relating to his dealings with charitable organizations subsequent to 2000 (the
“Post-2000 Questions”) identified as questions 30, 143 to 145, 194, 226 to 228
and 230 to 232 in Exhibit A that accompanied the affidavit filed with the
motion; and
(c) to answer questions
identified as questions 332 and 333 in Exhibit C to the affidavit filed with
the motion, pertaining to communications sent from the Appellant to the CRA and
marked “without prejudice” (the “Without Prejudice Letters”), identified as the
Respondent’s documents 27, 29, 34 and 38 filed with the affidavit.
Facts
[2]
The Appellant is
appealing an assessment made against him by the Minister of National Revenue
(the “Minister”) for his 2000 taxation year. In 2000, the Appellant made
contributions to the Global Institute and claimed corresponding tax credits for
charitable donations on his return. The Minister reassessed, disallowing the
credits on the basis that the contributions to the Global Institute were not
made with donative intent. This case is in the pretrial phase of litigation,
and the motion arises out of the examination for discovery.
[3]
During the examination for
discovery, the Appellant was asked to produce the Account Documents. He refused
on the basis that they were not relevant. He also refused to answer the Post-2000
Questions. Those questions related, inter alia, to the following:
(a) whether the Appellant
had phoned the director or another employee of any charities besides the Global
Institute and asked them about the charity before making a donation (questions
143 and 144);
(b) the information returns
of the Global Institute (question 145); and
(c) whether the Appellant
contributed to the Global Institute and his reasons for doing so (questions
194, 226 to 228 and 230 to 232).
The Appellant claimed that these questions were not
relevant, constituted a “fishing expedition” and were therefore not permissible.
[4]
Finally, the Appellant
refused to answer questions relating to the Without Prejudice Letters on the
basis that these letters are protected by settlement privilege.
Issues
[5]
The issues are the
following:
(a) Are the Account
Documents subject to discovery? In other words, are they relevant to a matter
in issue in the proceedings?
(b) Are the Post-2000
Questions relevant to a matter in issue in the proceedings or are they a
“fishing expedition” undertaken by the CRA?
(c) Are the Without
Prejudice Letters protected by settlement privilege?
Analysis
Question 1
[6]
Section 81 of the Tax
Court of Canada Rules (General Procedure) (the “Rules”) deals with
discovery of documents and states the following:
List of Documents (Partial Disclosure) – 81(1) A party shall, within thirty days
following the closing of the pleadings, file and serve on every other party a
list of the documents of which the party has knowledge at that time that might
be used in evidence,
(a) to establish or to assist in establishing any allegation
of fact in any pleading filed by that party, or
(b) to rebut or to assist in rebutting any allegation of fact
in any pleading filed by any other party.
[7]
Section 89 of the Rules
prohibits the use of documents at a hearing unless those documents have been
referenced by a party in that party’s pleadings, have been produced by one of
the parties or another person at the examination for discovery, or have been
produced by a witness who is not under the control of the party. The Court may
also direct that a document be permitted to be used at a hearing even if it
does not fall into one of these categories.
[8]
Furthermore, section 95
of the Rules reads as follows:
Scope of Examination – 95(1) A person examined for discovery shall answer, to the best of that
person’s knowledge, information and belief, any proper question relevant to
any matter in issue in the proceeding . . . and no question may
be objected to on the ground that
(a) the information sought is evidence or hearsay,
(b) the question constitutes cross-examination, unless the
question is directed solely to the credibility of the witness, or
(c) the question constitutes cross-examination on the
affidavit of documents of the party being examined.
[Emphasis added.]
[9]
This rule governs
examinations for discovery, which is the stage of the present proceedings
during which it was asked that the Account Documents be provided to the Respondent.
Explaining the test of relevance, Professor Thayer wrote:
There is a principle — not so much a rule of evidence as
a presupposition involved in the very conception of a rational system of
evidence, as contrasted with the old formal and mechanical system —
which forbids receiving anything irrelevant, not logically probative. How are
we to know what these forbidden things are? Not by any rule of law. The law
furnishes no test of relevancy. For this, it tacitly refers to logic and
general experience, — assuming that the principles of reasoning are known to its judges
and ministers, just as a vast multitude of other things are assumed as already
sufficiently known to them.
[10]
Cudmore, writing in Choate
on Discovery, explains:
The broad relevance test applicable to the production of documents
is that a party entitled to discovery of a document or record if it directly or
indirectly enables it to advance its own case or to destroy that of an
adversary, or may fairly lead to a train of inquiry which may have either of
these consequences.
[11]
The courts, in applying
this test to discovery in tax litigation, have spoken in the following terms:
It seems to me that the clear right of the plaintiffs to have access
to documents which may fairly lead them to a train of inquiry
which may directly or indirectly advance their case or damage the
defendant’s case particularly on the crucial question of one party's version of
the agreement being more probably correct than the other . . . .
[Emphasis added. Italics in original.]
[12]
The law states that the
right of discovery of documents is wide and the threshold of relevance is low.
The Respondent’s case is based upon the view that the Appellant had no
“donative intent” when contributing to the Global Institute. In its decision in
The Queen v. Friedberg,
the Federal Court of Appeal defined “donative intent” as a lack of expectation
that a benefit or consideration would flow back to the donor, either directly
or indirectly, as a result of the contribution.
[13]
The CRA seeks to have
access to the Account Documents. If, as the CRA alleges, the contribution to
the Global Institute was part of a scheme whereby the Appellant had all or part
of his contribution returned to him via surreptitious payback transactions,
then the Appellant’s assertion that he possessed donative intent would be refuted. The Account
Documents could serve as evidence that consideration did indeed flow back to
the Appellant as a result of his contributions. They are “relevant document[s]
in a party’s possession, control or power”. They are thus subject to discovery,
and the Appellant should be required to disclose them, as per section 88 of the
Rules.
Question 2
[14]
The law regarding oral
examinations for discovery is substantively similar to the law pertaining to
the production of documents.
[15]
Cudmore, writing in Choate
on Discovery, explains:
. . . The tendency of the courts in recent years, in
dealing with examination for discovery, is to broaden and enlarge the right of
the parties to interrogate as to any facts the existence or non-existence of
which is relevant to the existence or non‑existence of the facts directly
in issue. This extends to hypothetical and theoretical
questions. . . .
An examination for discovery is a cross-examination in the true
sense, a searching and thorough examination, limited, however, to the issues
raised by the pleadings between the parties, and any question is
permissible, the answer to which may be relevant to the issues. The party
being examined must disclose any information touching the matters in question
which he has either of his own knowledge or has received from third persons.
[Emphasis added.]
[16]
It is a
well-established and oft-repeated principle that the threshold for relevancy on
discovery is very low, but “fishing expeditions” are not permitted. My colleague, C.
Miller J., has stated that by now:
16 . . . [c]ounsel should be well aware that at one
end of the spectrum fishing expeditions are discouraged and at the other end of
the spectrum very little relevance need be shown to render a question
answerable.
[17]
Cudmore refers to a
summary of the principles regarding what constitutes such a “fishing
expedition”, which was given by Middleton J. of the Ontario Supreme Court,
Appellate Division:
35 The aim of a plaintiff who does not know whether he has a
cause of action or not, sometimes is to launch an action, and then to seek to
ascertain, by discovery, whether he has any ground of complaint. This has more
than once been declared to be an abuse of the practice. Discovery is in aid of
the case as pleaded, and an examining party has no right to ask questions for
the purpose of finding out something of which he knows nothing now, and which
may enable him to formulate a case which is not in truth the subject-matter of
suit, as it lies entirely outside of the plaintiff’s present knowledge. . . .
[18]
On the other hand, as
stated above, the threshold for relevancy on discovery is very low.
Additionally:
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.
[19]
In a leading case, the
Alberta Court of Appeal expressed the view that:
[t]he greatest latitude should be allowed to a party who is
examining an adverse party for discovery so that the fullest inquiry may be
made as to all matters which can possibly affect the issues between the
parties.
[Italics in original.]
[20]
A “fishing expedition”
constitutes a line of inquiry that seeks to ascertain whether the Respondent
has any ground of complaint. The line of inquiry must go outside of the bounds
of the case as pleaded; the questions must be intended to determine if a case
other than the one currently being pleaded might be established against the
Appellant.
[21]
Because of the latitude
which should be afforded to counsel for the CRA during examination for
discovery, coupled with the desire to ensure that the trial judge be provided
with all evidence which he might consider relevant, only clearly irrelevant or
abusive questions should not be permitted.
[22]
The questions posed by
the Respondent with respect to years subsequent to the taxation year under
appeal relate to the following:
(a) whether the Appellant ever
phoned the director or another employee of a charity and asked them about the
charity before making a donation (questions 143 and 144);
(b) the information
returns of the Global Institute (question 145); and
(c) whether the Appellant
contributed to the Global Institute and his reasons for doing so (questions
194, 226 to 228 and 230 to 232).
[23]
These questions were
likely directed to the Appellant because of the Respondent’s need to establish
the Appellant’s frame of mind in contributing to the Global Institute in 2000.
They relate to the Respondent’s assumption that the Appellant’s mental process
leading to the contribution in question differed in important respects from that
which was involved in other donations that he made. This connection between
the questions posed and the Respondent’s case against the Appellant — as set forth in the pleadings — lifts them out of the realm of “fishing
expeditions”.
[24]
The Respondent contends
that “the more [the Appellant’s] understanding of Global’s activities matches
what the Respondent alleges were Global’s activities, the more likely it is
that the last step alleged by the Respondent — the Appellant receiving a return on the
amounts he gave — is also
true”.
The questions put to the Appellant may lead the Respondent to a train of
inquiry which may directly or indirectly advance the Respondent’s case or
damage the case of the Appellant. Accordingly, the questions should be allowed
and the Appellant should be ordered to answer all of the Post-2000 Questions.
Question 3
[25]
Sopinka summarizes as
follows the current state of the law with regard to settlement privilege:
§14.313 It has long been
recognized as a policy interest worth fostering that parties be encouraged to
resolve their private disputes without recourse to litigation, or, if an action
has been commenced, encouraged to effect a compromise without resort to trial.
. . .
§14.315 In furthering these objectives, the
courts have protected from disclosure communications, whether written or oral,
made with a view to reconciliation or settlement. In the absence of such
protection, few parties would initiate settlement negotiations for fear that
any concession they would be prepared to offer could be used to their detriment
if no settlement agreement was forthcoming.
. . .
§14.320 The privilege applies to oral
or written communications. It also applies at either the discovery or the
trial stage. The judge, however, may examine the documents to determine if
the privilege should apply.
[Emphasis added.]
[26]
In order for the
privilege to apply, three essential conditions must be met:
(a) A litigious dispute
must be in existence or within contemplation.
(b) The communication must
be made with the express or implied intention that it would not be disclosed to
the court in the event negotiations failed.
(c) The purpose of the
communication must be to attempt to effect a settlement.
[27]
The first two of these
conditions are relatively straightforward in their meaning and application.
The third is more difficult in those regards.
[28]
The first condition
simply means that the parties must be involved in some dispute which might
require resolution by the courts or which might also be settled by negotiation
and compromise; it is not necessary that proceedings have commenced.
[29]
The second condition
means only that:
. . . if there is no settlement, the party making the
offer is free to assert all its rights, unaffected by anything stated or done
in the negotiations.
[30]
With regard to the
third condition, some decisions have held that the communication does not have
to contain an actual offer of settlement in order to be covered by settlement
privilege; others have suggested that a bona fide offer of settlement
must be contained within the documents in order for the communication to
receive protection.
[31]
Sopinka suggests that
the following compromise is the appropriate response:
. . . [L]etters designed to open such negotiations, or
letters or discussions which attempt to convince the opponent of the strengths
of the other’s position, but which also recognize weaknesses, in the hope that
some settlement can be effected once each other’s positions are on the table,
should be subject to the privilege, whether or not they contain an actual offer
of settlement.
[32]
In Woodland, my colleague Campbell J. found that, where an advisory
letter was sent to a taxpayer in advance of a reassessment, this did not meet
the standard of a litigious dispute (that was either in existence or within
contemplation).
This is precisely the situation that the Appellant was in at the time he wrote
the Without Prejudice Letters. He was being audited by the CRA, but no
reassessment had been made. It is perhaps true that a reassessment was being
contemplated by the CRA, but a reassessment does not inherently involve the
courts and is not litigious by nature. A taxpayer must comply with audit
requests from the CRA and the result of such compliance will not necessarily be
a reassessment. As in Woodland, the Without Prejudice Letters were
written “in an attempt to dissuade the CRA from issuing an assessment”.
[33]
Furthermore, in my
opinion, the letters were not drafted for the purpose of effecting a settlement
with the CRA. They certainly contain no clear offer to settle or to enter into
negotiations. Even if we accept the lesser standard outlined above, that is,
that the letters need only have been written with the goal of an eventual
compromise, they still arguably fail to meet that standard. Their tone is
frequently belligerent, they do not outline the relative strengths and
weaknesses of both parties’ positions, and they contain very little in the way
of compromise.
[34]
Bertram et al. v.
The Queen, relied upon by the Appellant, is
instructive. Writing for the Federal Court of Appeal, Hugessen J.A.
explains:
. . . Most litigation is between parties who have a
pre-existing relationship (landlord and tenant, vendor and purchaser, employer
and employee, etc., to say nothing of domestic litigation) and common sense
tells us that they will be in frequent contact with one another before suit is
brought. Not all, or even most, of those meetings are aimed at settlement of
the impending litigation and many may in fact be the cause of it. . . .
In the present case, and bearing in mind that the meeting in
question took place in the context of a self-assessing tax system where the
taxpayer has an obligation to make full and open disclosure to the taxing
authorities and where it is common for taxpayers and their advisers to meet
with the latter with a view to attempting to persuade them that no, or no
greater, tax is due, I would require much clearer evidence than exists in this
record to persuade me that a meeting qualifies as a settlement negotiation so
as to shield everything that takes place from subsequent use by either side. . . .
[Emphasis added.]
[35]
The Without Prejudice
Letters therefore fail to meet two of the three criteria for being afforded the
protection of settlement privilege. They were not sent in the context of a
litigious dispute, and they did not constitute an attempt to settle with the
CRA. They are not subject to settlement privilege and the Appellant should be
ordered to answer questions pertaining to them.
Signed at Ottawa, Canada, this 22nd
day of October 2010.
"Robert J. Hogan"
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