Citation: 2009TCC301
Date: 20090605
Docket: 2004-4083(IT)G
BETWEEN:
JEANNETTE WALSH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2004-4085(IT)G
BETWEEN:
THE ESTATE OF DAVID G. WALSH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Rip, C.J.
[1]
Her Majesty the Queen,
the respondent, has filed notices of motion in the income tax appeals of
Jeannette Walsh for 1996 and the Estate of her late husband,
David Walsh for 1995 and 1996, for Orders pursuant to section 116 of
the Tax Court of Canada Rules (General Procedure) ("Rules")
directing the appellants "to provide details of every stock option
agreement entered into by [each of them] and Bre‑X Minerals Ltd. ("Bre‑X"), Bresea Resources Ltd. ("Bresea")
and Bro‑X Minerals Ltd. ("Bro‑X") during the period
1993-1996 including production of the agreements and details regarding the
timing and number of options exercised, the number of shares purchased and sold
and the purchase and sale price of the shares acquired through the exercise of
stock options." The motions were heard together.
[2]
In assessing
Mr. Walsh for 1995 and 1996 and Mrs. Walsh for 1996, the Minister of
National Revenue ("Minister") included
in income, in accordance with sections 2, 3 and paragraph 7(1)(a)
of the Income Tax Act ("Act"), stock option benefits from Bre‑X
and Bresea on the basis that each appellant resided in Canada during their respective
years under appeal. In the alternative, the respondent submits if Mr. and
Mrs. Walsh were not resident in Canada as of September 18, 1995, then
the amounts of stock option benefits are to be included in computing their
income in the relevant taxation years pursuant to sections 3 and 114,
subsection 2(3), paragraph 7(1)(a) and
subparagraph 115(1)(a)(i) of the Act. The value of the stock
option benefits, therefore, according to the respondent, constitutes income
from the duties of an office and employment performed by each of the appellants
in Canada; the stock options were
granted at the times each appellant was an employee of Bre‑X and Bresea.
[3]
The respondent alleges
that the appellants have refused to answer a "proper question" at the
examinations for discovery concerning stock option benefits received or enjoyed
by each appellant qua employees of Bre‑X and Bresea during their
taxation years in appeal. I assume that with respect to the Estate appeals the purported
benefits were received or engaged personally by Mr. Walsh qua
employee of these corporations.
[4]
Examinations for
discovery were provided by written questions and answers pursuant to
section 92 of the Rules. The
appellants objected to answer certain questions on the grounds that they were
irrelevant to the matters in issue. More specifically, the appellants refused
to answer questions 20 and 21 of the Written Questions for Discovery:
20. Give full details of every stock option agreement entered
into by Mr. Walsh and Bre X, Bresea or Bro X from 1993 to 1996.
More specifically:
a) Provide the stock option agreements;
b) Indicate when the options were exercised;
i) Indicate how many options were exercised;
ii) Indicate how many shares were acquired;
iii) Indicate the price paid to acquire the options;
iv) Indicate the price paid to acquire the shares through the
options;
c) Indicate when the shares acquired through the options were
sold;
d) Indicate the amount of the proceeds of disposition of the
shares.
The respondent says that the
questions are relevant.
[5]
Correspondence was
exchanged between counsel but counsel for the appellants was adamant that the
questions were irrelevant to the issues in the appeals and his clients refused
to provide answers. As a result, the respondent filed these motions.
[6]
In her affidavit, Sarah
Stewart, a legal assistant employed by the appellants’ solicitors, stated that
included in the respondent’s list of documents delivered to the appellants was
a share option agreement between Bre-X and Mr. Walsh, dated September 19, 1995.
Appellant’s Position
[7]
The appellants submit that the
Minister did not limit its questions concerning the stock option benefits to
the options exercised in the relevant period. Rather, the Minister sought "full
details" of "every" stock option agreement entered into by the
appellants from 1993 to 1996. The request referred to agreements with a
corporation, Bro‑X, whose securities appear not to be subject to any reassessment
in issue.
[8]
The appellants contend that the
Minister is overreaching given that the request is too broad and encompasses
documents and information that do not enable the respondent to advance its case
or damage that of the appellants. Accordingly, the appellants want the motions
dismissed.
Respondent’s Position
[9]
Counsel for the respondent argued
that the appellants refused to answer a proper question at the discovery stage
in respect of stock option benefits received or enjoyed by David Walsh qua
employee during the 1995 and 1996 taxation years as well as by Jeannette Walsh
during the 1996 taxation year. Counsel claims that the question posed is proper
seeing as it is relevant to the material issues under appeal.
Rules
[10]
The respondent relies on section
116 of the Rules. Subsections (2) and (4) of section 116 read as
follows:
|
(2) Where the person being examined refuses or fails to answer
a proper question or where the answer to a question is insufficient, the
Court may direct the person to answer or give a further answer to the
question or to answer any other question either by affidavit or on oral
examination.
…
|
(2) Si la personne interrogée refuse de répondre à une
question légitime ou n'y répond pas ou que sa réponse à une question est
incomplète, la Cour peut lui ordonner de répondre à la question, de compléter
sa réponse ou de répondre à une autre question, au moyen d'une déclaration
sous serment ou d'un interrogatoire oral.
…
|
|
(4) Where a person refuses or fails to answer a proper
question on a written examination or to produce a document which that person
is required to produce, the Court may, in addition to imposing the sanctions
provided in subsections (2) and (3),
(a) if the person is a party or a person
examined on behalf of or in place of a party, dismiss the appeal or allow the
appeal as the case may be,
(b) strike out all or part of the person's
evidence, and
(c) give such other direction as is just.
|
(4) Si une personne refuse ou omet de répondre à une question
légitime posée dans un interrogatoire écrit ou de produire un document
qu'elle est tenue de produire, la Cour peut, en plus d'imposer les sanctions
prévues aux paragraphes (2) et (3) :
a) rejeter ou accueillir l'appel,
selon le cas, si la personne interrogée est une partie ou une personne
interrogée à la place ou au nom d'une partie;
b) radier, en totalité ou en partie,
la déposition de la personne interrogée;
c) donner une autre directive
appropriée.
|
[11]
Section 95 of the Rules
applies to examination for discovery by written questions as it does for oral
examinations. The relevant portion of the Rule provides that:
|
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 . . .
|
95. (1) La
personne interrogée au préalable répond, soit au mieux de sa connaissance
directe, soit des renseignements qu’elle tient pour véridiques, aux questions
pertinentes à une question en litige [...]
|
[12]
In their notices of appeal,
the appellants state that Mr. Walsh and Mrs. Walsh were not residents
of Canada since September 18, 1995 when they severed their personal
relationship in Canada and settled permanently in the Bahamas. The notices of appeal do not refer to any stock
options in respect of Bre‑X and Bresea which would describe the
components of the additional income. These matters are also generally raised at
the objection level. The allegations of benefits arising out of stock options
in respect of Bre‑X and Bresea are set out in the respondent's amended replies
to the notices of appeal.
[13]
The respondent's
position in these appeals is simple: at all material times the appellants were
residents of Canada and the amounts of the stock option
benefits received or enjoyed by each appellant are to be included in income as
assessed. The Walshes were also resident of Canada in 1995 or part of the year. It is the respondent’s alternative position, that is, if the appellants
were not residents of Canada at all material times, that the amounts of
the stock option benefits are to be included in income, as assessed, since,
among other things, the appellants were employees or officers of Bre‑X
and Bresea. The appellants do not refer to the respondent’s alternative
position in their pleadings.
[14]
Respondent's counsel argues that
the stock option agreements are at the heart of the matter as the crux of the
appeal is the unreported stock option benefits. Counsel further asserts that
the agreements sought may very well contain a preamble, a clause, or a
statement that would go to what Mr. and Mrs. Walsh were doing in 1995 or 1996.
The respondent is unsure of the contents of the agreements and that is the
reason why she seeks to view them.
[15]
In addition, the respondent's counsel
acknowledges that he must establish, in the event that it is found that the appellants
were non-residents during the years under appeal, that the stock option
benefits are from duties performed in Canada. Thus, the agreements are relevant given that they
may contain clauses, statements, or preambles that state the reason why Mr. and
Mrs. Walsh were granted the stock options and whether certain tasks were
required to be performed in Canada.
[16]
Counsel for the appellants states that
while the Minister has pointed out the possibility that there may be preambles
or information in the agreements that may go to residency or may go to issues
concerning section 115 of the Act, that is also true of other
documents that the Minister might have asked for that involved either the
companies whose securities were traded or anything else in issue. In his view, the
Minister has not discharged his onus to satisfy me that there is a reasonable
likelihood that the materials in question will advance its case or damage the
appellants’ case.
[17]
As noted in SmithKline Beecham
Animal Health v. Canada
the scope and application of Rule 95, cited earlier, will depend on
the phrase "relevant to any matter in issue in the proceeding". Also,
the meaning of the words "relating to any matter in question between ...
them in the appeal" in Rule 82(1)
may be of some assistance in determining the scope and application of
Rule 95. In SmithKline, Sharlow J.A., at paragraph 24,
cited Brett L.J. about the meaning of the phrase "a document relating
to any matter in question in the action":
The scope and application of the rules
quoted above depend upon the meaning of the phrases "relating to any
matter in question between ... them in the appeal" and "relating to
any matter in issue in the proceeding". In Compagnie Financiere et
Commerciale du Pacifique v. Peruvian Guano Company (1882), 11 Q.B.D. 55 (C.A.), Brett, L.J. said this about the meaning of the phrase
"a document relating to any matter in question in the action" (at
page 63):
It seems to me that every document
relates to the matters in question in the action, which not only would be
evidence upon any issue, but also which, it is reasonable to suppose, contains
information which may -- not which must -- either directly or indirectly enable
the party requiring the affidavit either to advance his own case or to damage
the case of his adversary. I have put in the words "either directly or
indirectly," because, as it seems to me, a document can properly be said
to contain information which may enable the party requiring the affidavit
either to advance his own case or to damage the case of his adversary, if it is
a document which may fairly lead him to a train of inquiry, which may have
either of these two consequences
[18]
Appellants' counsel also referred
to SmithKline, at paragraphs 26 and 29, for the proposition that
the question of whether a document relates to an issue under appeal depends
upon a reasonable interpretation of the pleadings.
[19]
The appellants contend that the
onus is on the party demanding a document to demonstrate that the information
therein may advance his case or damage that of its adversary’s. The moving
party must show that the document or information sought is one which may fairly
lead to a train of inquiry which would enable him to advance his own case or to
damage the case of his adversary. Therefore, the Minister must demonstrate that
the information and documents sought may fairly lead him to a train of inquiry
which would enable him to advance his case or damage that of the appellants. The
respondent must demonstrate that the documents and information requested relate
to the issue of whether the appellants were residents in Canada during the
years under appeal or that the benefits triggered by exercising stock options
during the relevant period relates to the duties of offices and employments
performed in Canada.
[20]
Respondent's counsel referred to Baxter
v. R.
for the proposition that the threshold level of relevancy is quite
low. In Baxter, the respondent sought an Order compelling the appellant
to answer a number of questions which his counsel had instructed him not to
answer on discovery. The reason for the objection was that the questions and
answers were irrelevant. Bowman A.C.J. (as he then was) made the following
comments in respect of relevancy:
12 The
principles to be applied in allowing or disallowing questions on examination
for discovery are fairly well settled. 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. The tactics
on a discovery vary from counsel to counsel and the style of questioning may
simply be a reflection of the counsel's own particular style. …
[21]
Bowman A.C.J. summarized the
principles that should be applied in respect of relevancy in discovery
proceedings at paragraph 13:
13 From
these and other authorities referred to by counsel, I can summarize the
principles that should be applied:
(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.
[22]
Thus, respondent's counsel stated that
the stock option agreements sought may very well be relevant to his theory of
the case which is that the appellants were residents of Canada, or in the
alternative, if they were non- residents, that the stock option benefits were
from duties performed in Canada. The agreements may assist the respondent in
establishing residency or the alternative issue under appeal given that the agreements
may contain preamble statements or assertions as to what the appellants were
doing back in 1995 and 1996 and why the stock options were granted.
[23]
Counsel for the appellants argued that
the decision rendered in Baxter dealt with Oral Examinations for
Discovery. He declared that the test set out in Baxter refers specifically
to oral discovery and issues concerning tactics. He noted that although Baxter
was decided subsequent to the SmithKline case, it did not seem like
Bowman A.C.J. had the benefit of the reasons in SmithKline given that
the parties did not put the case before him. However, counsel for the
appellants viewed the test in Baxter as not so different from the test
adopted in SmithKline. Counsel asserted that although Bowman A.C.J.
adopted a generous test in Baxter, he was not so generous in allowing
the questions requested to be answered.
[24]
A discovery is a discovery,
whether it is oral or in writing. I do not agree with the appellants that
Bowman A.C.J.'s comments apply only to oral discovery. The Rules
relating to Examinations for Discovery, including section 95, apply to
Written Examinations for Discovery except where expressed otherwise and in the
matters before me there is no contrary expression.
[25]
In AstraZeneca Canada Inc. v.
Apotex Inc.,
Hughes J. of the Federal Court reviewed the discovery system in Canadian
Courts. He cited a paper
of James Farley, Q.C., previously Farley J. of the Ontario Superior Court,
Commercial Court, who strongly criticized the type of discovery that "itself
becomes the objective – to uncover as much as possible from the other side
however marginally relevant". The danger in this type of discovery –
referred to as "autopsy discovery" – is that one is in danger of
losing perspective and becoming enmeshed in the discovery rather than "focusing
on obtaining only matters necessary and relevant for the trial on issues as
defined by the pleadings".
[26]
Appellants' counsel contends that
the issues in the pleadings center on the residency of the appellants and
whether they performed duties in Canada during the relevant time. He submits that the
Minister must satisfy this Court that the agreements “entered into” are
relevant to these issues and that there is a reasonable basis for requesting
such information. The Minister, he states, cannot satisfy this onus given that
there is no reasonable basis to suppose that the stock option agreements, more
than any other kinds of agreements or documents, will lead to a train of
inquiry that might assist his case.
[27]
The questions in issue relate to
the pleadings. As mentioned earlier, the facts in the appellants’ notices of
appeal relate exclusively to the status of the appellants’ residence during the
years in appeal. Essentially, they claim that they were not residents of Canada at the
time, and therefore, not subject to income tax under the Act. It is the
respondent, in her amended replies to the notices of appeal, who alleges the
quantum of the stock option benefits from Bre-X and Bresea and how they were
determined and calculated. The appellants did not deliver any answers and
therefore, in accordance with Rule 50(2), are deemed to have denied the
allegations of fact made in the amended replies.
[28]
The stock option agreements, the
acquisition of the options, the acquisition of the shares as a result of
exercising the options, and the prices paid and received all relate to matters
in issue in the appeal since, among other things, the reassessments are based
on option agreements, the exercise of the options, the acquisition of shares
and their costs, whether or not the appellants were residents of Canada. The
appellants are deemed to have denied amounts of benefits set out in the amended
replies. The stock option agreements may contain information which may enable
the respondent to advance her case or damage the case of the appellants. These
questions are not irrelevant or elusive nor are they designed to embarrass the
appellants or delay the appeals.
[29]
The respondent is entitled to ask
questions of the appellants relating to the amounts assessed derived from stock
options they may have received from Bre-X and Bresea. However, this applies
only to production of stock option agreements, the exercise of which, resulted
in the benefits included in the appellants' income for tax purposes in each of
the years assessed. This would also require answers as to how many options were
acquired in accordance with these options and eventually exercised as well as
the price paid for the options and the price for which shares in these
companies were acquired.
[30]
The request for "full details
of every stock option agreement entered into by the appellants from 1993 to
1996" is too general. There may be agreements in these years that have
nothing to do with the reassessments in issue. The fact that Mr. or
Mrs. Walsh may be described as a resident of Canada in an agreement made
in 1993 or 1994 does not mean that Mr. Walsh was resident in Canada in 1995
or 1996 or Mrs. Walsh was resident in 1996. Only agreements entered into
between either or both of Mr. and Mrs. Walsh and Bre‑X or Bresea in
1993 and 1994 that were subject to the exercise of options by Mr. and
Mrs. Walsh and relating to the reassessments in issue are to be provided
to the respondent. Stock option agreements, if any, entered into by Mr. and
Mrs. Walsh in 1995 and 1996 with Bre‑X or Bresea are also to be
produced. The information requested in Question 20, paragraph b,
subparagraphs i) to iv), paragraphs c) and d) are to be provided with
respect to stock option agreements, the exercise of which by Mr. and
Mrs. Walsh, eventually resulted in benefits included in the making of the reassessments
under appeal.
[31]
The option agreements from Bro‑X,
if any, and any exercise of the options are not the subject of the reassessments
in issue according to the pleadings and do not appear to be relevant. They need
not be provided to the respondent.
[32]
Costs shall be in the cause.
Signed at Ottawa, Canada, this 5th day of June 2009.
"Gerald J. Rip"
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