Docket: 2005-4451(IT)G
BETWEEN:
BERNHARD SCHIESSER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on September 11, 2009, at Victoria,
British Columbia, and by way of a
conference call on September 24, 2009, at Ottawa, Canada.
Before: The Honourable Justice Patrick
Boyle
Appearances:
|
Counsel for the
appellant:
|
D. Laurence Armstrong
|
|
Counsel for the
respondent:
|
Ron D. F. Wilhelm
Robert Carvalho (for September 24, 2009 only)
|
|
Counsel for Feil
& Co., Mr. Feil and Mr. Pomponio:
|
Emily Boyle
|
____________________________________________________________________
ORDER
UPON motion made by the appellant for an
order pursuant to Rule 99 of the Tax Court of Canada Rules (General
Procedure);
AND UPON hearing submissions of the parties and of counsel
for the third parties;
The appellant’s motion is allowed.
IT IS ORDERED THAT:
a)
the taxpayer has the right
to discover each of Mr. Feil and Mr. Pomponio on the matters relating
to the issues of
(i)
the qualified
investment status of the shares of Avtel Financial Corporation;
(ii)
the fair market value
of such shares;
(iii)
the roles of other
persons involved with Avtel Financial Corporation, its affiliates, or its
shares in respect of the share sale; and
(iv)
the use, application
and tracing of the funds from Mr. Schiesser’s RRSP used to purchase the
shares.
b)
Mr. Feil and
Mr. Pomponio will make themselves available for discovery within
30 days of the date hereof and will satisfy any undertakings within 15 days
of the discovery in which they are given;
c)
the taxpayer will pay
the reasonable attendance costs of Mr. Feil and Mr. Pomponio at the
discovery, reasonable counsel fees for their counsel’s preparation and
participation in the discovery process, and all other costs of the discoveries;
d)
the taxpayer will pay
the reasonable counsel fees of counsel for Mr. Feil and Mr. Pomponio
on this motion.
Signed at Ottawa, Canada, this 14th day of October 2009.
"Patrick Boyle"
Citation: 2009 TCC 513
Date: 20091014
Docket: 2005-4451(IT)G
BETWEEN:
BERNHARD SCHIESSER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Boyle J.
[1]
The appellant in this
appeal has brought a motion under Rule 99 of the Tax Court of Canada Rules (General Procedure) to have two
non-parties discovered. The respondent supports the motion. The third parties oppose
it.
[2]
The hearing of this
appeal is scheduled for two weeks in December 2009. The case as pleaded by
the Crown involves what is commonly called an RRSP strip. The term used in the
Crown’s reply is an RRSP liberation scheme. The two third parties are Certified
General Accountants, Mr. Feil and Mr. Pomponio. These two accountants,
through their respective professional corporations, carry on a joint accounting
practice under the name Feil & Co.
[3]
While this is not
formally a so-called test case, the taxpayer’s counsel represents a further
approximately 90 taxpayers pursuing tax appeals in respect of the same or
similar investments purchased by their RRSPs.
[4]
In each of these cases
Mr. Feil or Mr. Pomponio signed the Feil & Co. certification in
respect of the shares’ “qualified investment” status under the Income Tax
Act (the “Act”). Specifically, those Feil & Co. certifications
contain the firm’s opinion that the shares are qualified investments as well as
a statement of belief that the price paid for the shares by the RRSP is equal
to the shares’ fair market value. Whether or not an investment is a qualified
investment as defined in the Act depends upon a number of specific
factual tests. Mr. Scheisser’s RRSP invested in shares of Avtel Financial
Corporation. Mr. Pomponio signed the certification in respect of that
particular investment on Feil & Co. letterhead. Mr. Feil has also
signed certificates on Feil & Co. letterhead in respect of Avtel Financial
Corporation in connection with RRSP investments by other investors.
[5]
In its reply the respondent
Crown is specifically challenging the qualified investment status of the shares
purchased by Mr. Schiesser’s RRSP when they were acquired, and the fair
market value of those shares at that time. Both the qualified investment status
of the shares and their fair market value involve factual issues that will be
relevant and material to the determination that will be required of this Court
in deciding the taxpayer’s appeal in this case.
[6]
An action has been
commenced in the Supreme Court of British Columbia by the investor group, of
which Mr. Schiesser is a member, against the two accountants, their firm,
and two lawyers. This has been at the endorsed writ stage for several years. A
statement of claim has not yet been filed by agreement between the plaintiffs’
and the defendants’ lawyers and, to date, with the written concurrence of the
accountants.
[7]
Apparently the parties
agree that the civil action should await the disposition of the tax appeals
before this Court since, if the investors are successful in their tax appeals,
there will have been significantly lesser damages, if any, resulting from any
wrongful actions of the defendant accountants and lawyers. I agree that this is
an eminently sensible approach for the parties to seek to maintain. Indeed, counsel
for the accountants did not suggest that discovery in the civil action could
provide an alternative method for the taxpayer to obtain the information sought
relating to the shares’ qualified investment status or their fair market value
for purposes of this tax appeal.
[8]
Under the rules
applicable to British Columbia civil actions, the plaintiffs’ right to discover
the accountants cannot be exercised until pleadings are closed. This cannot happen
before the commencement of the tax appeal in this Court.
[9]
Several affidavits were
filed by the appellant and the third parties. It is apparent from these that
recollections differ. No one sought to cross-examine any of the affiants.
[10]
There is evidence that
Mr. Schiesser’s counsel did seek to contact Mr. Feil of Feil &
Co. by telephone in connection with the actions of the Canada Revenue Agency
(the “CRA”) against the investors. The telephone message left for Mr. Feil went unanswered. This initial attempt was
some time ago and preceded the commencement of the civil action against the
accountants. Since that time Mr. Schiesser
had not attempted to contact Mr. Feil, Mr. Pomponio or the lawyer who
communicated with his counsel regarding the civil action against the
accountants until after bringing this motion.
[11]
There is evidence that,
since bringing this motion, Mr. Schiesser’s counsel has on two occasions
requested meetings with Mr. Feil, through his counsel, to seek some of the
information. Specifically, one of Mr. Armstrong’s affidavits indicates he
offered to withdraw this motion if Mr. Feil would agree on a without
prejudice basis to meet and answer questions, unsworn and unrecorded, limited
to the shares’ qualified investment status and fair market value as set out in
the certificates. The evidence is that no reply has been made to these requests.
[12]
The state of the
evidence in this matter is disappointing. The sworn affidavits of two counsel
contradict each other, including as to whether Mr. Armstrong did recently
make the requests just referred to. In any event, while it is possible that the
accountants may be willing to provide some explanations, responses and
documents at this stage, counsel for the accountants clearly did not have any
instructions in this regard at the hearing of the motion. I am of the
opinion that it is reasonable to assume that, given the civil proceeding
pending against them by the investors, their possible voluntary cooperation
would not approach the level of fact-finding, information discovery and
document discovery that will be available to the appellant if he is able to
examine them for discovery viva voce under the Rules of this Court.
[13]
While the taxpayer has
not asked Mr. Pomponio directly if he would provide information, I am
satisfied that Mr. Feil’s position is that of Feil & Co. of which Mr. Pomponio is the other member.
[14]
There is evidence that
the respondent has asked Mr. Feil of Feil & Co. to meet to discuss and
answer questions relating to the factual issues in Mr. Schiesser’s tax
appeal in this Court. Mr. Feil refused that request but did agree to
receive written questions. The questions were asked in May of this year. He has
replied to some of those questions but, as of the hearing of this motion, he
had not yet replied at all to some of the questions. Mr. Feil agreed to
provide some documents to the respondent but, as of the hearing of this motion,
he had yet to provide any documents at all. Given the respondent’s position on
this motion and its submissions, I assume the respondent has been providing the
information contained in Mr. Feil’s answers to the taxpayer’s counsel. I
assume the accountants are making a similar assumption.
[15]
Ms. Boyle, the
accountants’ counsel on this motion, expressly confirmed that there is no
suggestion on her part that the taxpayer is seeking to discover the accountants
in this tax appeal for an improper purpose such as getting early discovery for
purposes of pursuing the investors’ civil action. This motion is not a
collateral approach to advance the British Columbia civil action.
[16]
The accountants’
counsel acknowledged that this motion was not part of a fishing expedition by
the appellant, nor an attempt to nail down the potential evidence of
Mr. Feil or Mr. Pomponio at this stage, nor was it being brought for
any other ulterior motive.
[17]
The accountants’
counsel did not take the position that any unfairness would result to the
accountants if the taxpayer’s motion is granted.
[18]
The taxpayer has
offered to pay the accountants’ reasonable attendance expenses if an order for
discovery is made, as well as their reasonable counsel fees for preparing for
and attending to the discoveries.
[19]
The opposition of the
accountants to this motion is grounded solely on the basis that the taxpayer
cannot show that he has been unable to obtain the information sought on
discovery from the accountants. They do not suggest it could be obtained by the
taxpayer from the respondent. The accountants’ counsel points out that the
taxpayer has not made reasonable, recent attempts to obtain the information
sought from Mr. Feil and has never sought to ask Mr. Pomponio
personally for any information.
[20]
It is her position
that, in such circumstances, Rule 99(2)(a) has not been complied
with and, for that reason alone, orders for discovery should not be issued
because the motion is premature. When asked by the Court if she was in a
position to confirm that Mr. Feil and Mr. Pomponio were willing to
receive and reply to either written or oral questions, or to provide documents
in their possession, her reply was that she did not have any instructions.
[21]
The respondent’s
position is that it supports the taxpayer’s motion. Given the responses received
from Mr. Feil of Feil & Co. to the respondent’s written questions to
date, his failure to address some of the questions in his written reply and
the fact that no documents have yet been received, the Crown believes the
information sought would best be received only if an oral examination for
discovery proceeds. The Crown believes that, in these circumstances, an oral
discovery can be expected to be more productive, more efficient, and provide
greater ease for follow-up. I share these views of the respondent. In my
opinion, an oral discovery will best obtain the information sought in these
proceedings in a manner that can be expected to be efficient, to minimize the
risk of any request to delay the trial, and to allow for the information
provided to be tested for its completeness and accuracy.
[22]
It is clear that most
of the requirements of Rule 99 have been met. However, non-party
discoveries are an extraordinary procedure that should, subject to the possible
application of Rule 9, only be granted if all of the requirements are met.
Even then such orders remain discretionary.
[23]
I am satisfied that
each of Mr. Feil and Mr. Pomponio has information relevant to the
material issues in Mr. Schiesser’s tax appeal, being the fair market value
of the shares and the facts needed to determine the shares’ qualified investment
status. Similarly, I believe that, because of their professional involvement
with the share investments and their certifications in respect of the shares,
they have information that is relevant to the respondent’s position in this
appeal that the share investments were in essence an unsuccessful tax avoidance
scheme. Further, I believe that, for the same reasons, they each have
information relevant to what happened to the money invested by the taxpayer’s
RRSP in the shares in question, as well as information relevant to the roles of
other persons involved with the share sale, with the company and with the
proceeds. Each of these is a material issue in this appeal as well.
[24]
I am satisfied that it
would be unfair to the taxpayer to conduct the hearing of his tax appeal in
this Court without having been given the opportunity to discover each of
Mr. Feil and Mr. Pomponio. They have each signed Feil & Co.
certifications in respect of Avtel Financial Corporation. If Mr. Schiesser
is unsuccessful in demonstrating in his appeal that the shares purchased by his
RRSP were qualified investments and that the price paid was the shares’ fair
market value, he will be responsible for the adverse tax consequences. However,
in making the investment decision he relied upon the Feil & Co. review,
opinion, belief and certification regarding the underlying facts relating to
the company and its shares. To deny Mr. Schiesser access to the underlying
information in the minds and hands of those who assembled it and reviewed it,
for the purpose of him and other similarly situated investors relying on it,
would be manifestly unfair. (That is not to say the taxpayer should necessarily
expect an adjournment of the December trial date if his opportunity for
discovery is not, for whatever reason, as fruitful as he may hope. That would
be a separate matter for another day and subject to further and different
considerations.)
[25]
There is no suggestion
that permitting discoveries on a reasonable timetable will unduly delay the
commencement of the trial set down for December. A schedule requiring the
accountants to attend for discovery within the next 30 days and requiring
that undertakings be satisfied within a further 15 days need not necessarily
delay the trial at all.
[26]
The taxpayer has agreed
to pay the reasonable attendance and counsel costs of the discovery so there is
no unreasonable expense to be borne by the accountants.
[27]
As already stated, the
accountants have not suggested any unfairness would result.
[28]
Thus, the only
remaining requirement is that I be satisfied that the taxpayer “has been
unable” to obtain the information from the Crown or from the accountants. I am
satisfied on the facts of this case that this final requirement is also met for
the following reasons:
a)
there is evidence that taxpayer’s
counsel contacted Mr. Feil of Feil & Co. to seek information relating
to the issues in question and those calls went unreturned;
b)
there is evidence that
taxpayer’s counsel again sought such information more recently from
Mr. Feil of Feil & Co. via his counsel and that those requests went
unanswered;
c)
Mr. Feil of Feil
& Co. refused the respondent’s request for oral questions, has yet to
respond at all to some of the written questions, and has yet to produce any of
the documents he agreed he would;
d)
at the hearing of the
motion the accountants’ counsel was unable to say if either of the accountants
would consider written questions from the taxpayer if asked;
e)
the accountants are
being sued by the investors and it is therefore reasonable to assume their
current limited cooperation with the parties to the tax appeal will not
improve;
f)
this trial is set for
December and, at the current pace, the respondent will not have much of the
sought information to share with the taxpayer sufficiently before the trial to
make further investigations or to use it in preparing for the trial, if it is
received before the trial at all; and
g)
I accept that
Mr. Feil’s failure to return the taxpayer’s telephone calls and
Mr. Feil’s position regarding the respondent’s request for information are
the actions of Feil & Co. and therefore extend to Mr. Pomponio.
[29]
The evidence of
Mr. Armstrong’s initial attempt to contact Feil & Co. for information
is sufficient notwithstanding that it may have pre-dated Mr. Schiesser
becoming his client or identifying himself as a member of the group of investors
in the civil action. While Rule 99 requires that the taxpayer has been unable
to obtain the information from the person sought to be examined, I am satisfied
that this requirement was met in the circumstances of this case with respect to
Mr. Schiesser once he identified himself to Mr. Armstrong as a member
of the investor group for purposes of the British Columbia group action and
retained Mr. Armstrong to act on his income tax appeal. Rule 99
should not be interpreted and applied so strictly as to defy common sense and
the realities of the day-to-day business and professional worlds. In any event,
the evidence of Mr. Armstrong’s more recent attempts clearly satisfies the
requirements of Rule 99.
[30]
I am allowing the
taxpayer’s motion and ordering that:
a)
the taxpayer has the
right to discover each of Mr. Feil and Mr. Pomponio on matters
relating to the issues of
(i)
the qualified investment
status of the shares of Avtel Financial Corporation;
(ii)
the fair market value
of such shares;
(iii)
the roles of other
persons involved with Avtel Financial Corporation, its affiliates, or its
shares in respect of the share sale; and
(iv)
the use, application and
tracing of the funds from Mr. Schiesser’s RRSP used to purchase the
shares.
b)
Mr. Fiel and
Mr. Pomponio will make themselves available for discovery within
30 days of the date hereof and will satisfy any undertakings within 15 days
of the discovery in which they are given;
c)
the taxpayer will pay
the reasonable attendance costs of Mr. Feil and Mr. Pomponio at the
discovery, reasonable counsel fees for their counsel’s preparation and
participation in the discovery process, and all other costs of the discoveries;
d)
the taxpayer will pay
the reasonable counsel fees of counsel for Mr. Feil and Mr. Pomponio on
this motion.
[31]
If any issues arise
relating to compliance with the terms of this order, I may be approached in
writing via the Registry of the Court.
Signed at Ottawa, Canada,
this 14th day of October 2009.
"Patrick Boyle"
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