Citation: 2007TCC480
Date: 20070510
Docket: 2004-1415(IT)G
BETWEEN:
HUGH STANFIELD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Rip, A.C.J.
[1] The appellant
brings two motions: the first seeks an order pursuant to paragraphs 53(a)
and (c) of the Tax Court of Canada Rules (General Procedure)
("Rules"), to strike or expunge all or part of the
respondent's reply to the notice of appeal ("Motion to Strike"); and
the second seeks an order compelling the respondent's nominee to reattend an
examination for discovery, to produce documents, to answer questions relating
to the production of these documents ("Motion to Reattend").
[2] The respondent also
seeks a motion for an order to compel the appellant to reattend the examination
for discovery ("Respondent's Motion to Reatttend").
[3] The appellant's
appeal is from a reassessment for 1998, notice of which is dated July 17, 2002.
On August 3, 2002, the appellant served a notice of objection to the
reassessment on the Minister of National Revenue ("Minister"). The
issues in appeal include whether certain transactions were shams, if a business
was carried on by the appellant, if transactions were a "tax shelter"
within the meaning of subsection 237.1 of the Income Tax Act ("Act")
and if the appellant has deducted a purported loss in 1998 in accordance with
the provisions of the Act.
Appellant's Motion to
Strike
[4] The appellant's
motion is to strike out or expunge all or part of the paragraphs 14(b), (c),
(d), (f), (g), (h), (j), (l), (u), (v), (z), (aa), (bb), (cc), (dd), (ee),
(ff), (ii), (jj), (mm), (xx), (ccc), (ddd), (eee) and (iii) (the "Subject
Paragraphs") of the reply.
The grounds for the
motion are as follows:
1. The Subject Paragraphs are prefaced with the phrase "in so
reassessing the appellant, the Minister relied on the following
assumptions";
2. The Audit Division of the Canada Revenue Agency ("CRA")
did not assume all or part of the Subject Paragraphs in issuing the Notice of
Reassessment; dated July 17, 2002 to the appellant with respect to his 1998
taxation year;
3. The Appeals Division of the CRA did not review or analyse the
merits of the contents of the Appellant's Notice of Objection prior to the date
(April 7, 2004) on which the appellant filed the Notice of Appeal to this
Honourable Court; and
4. In reassessing the appellant for the 1998 taxation year, the
Minister did not assume all or part of the Subject Paragraphs.
[5] Paragraphs 53(1)(a) and (c) of
the Rules read:
|
Striking out a Pleading or other
Document
|
Radiation d'un acte de procédure ou d'un
autre document
|
|
53. The Court may strike out or expunge
all or part of a pleading or other documents, with or without leave to amend,
on the ground that the pleading or other document,
|
53. La Cour peut radier un acte de
procédure ou un autre document ou en supprimer des passages, en tout ou en
partie, avec ou sans autorisation de le modifier parce que l'acte ou le
document:
|
|
(a) may prejudice or delay the
fair hearing of the action,
|
a) peut compromettre ou retarder l'instruction
équitable de l'appel;
|
|
(b) is scandalous, frivolous or
vexatious, or
|
b) est sandaleux, frivole ou vexatoire;
|
|
(c) is an abuse of the process of the
Court.
|
c) constitue un recours abusif à la Cour.
|
[6] Counsel for the appellant's
primary argument is that the Subject Paragraphs were not assumed before or at
the time of reassessment, as required by paragraph 49(1)(d) of the Rules.
Therefore, they are not material facts and are an abuse of process.
[7] Appellant's counsel also
suggested that evidence brought by way of the transcripts from the examination
for discovery indicates that certain of the Subject Paragraphs are not relevant
to the issue in appeal, as they pertain to third parties and do not relate
directly to the appellant or his reassessment. As a result, counsel for the
appellant maintains these Subject Paragraphs should be struck because it would
be prejudicial to the appellant to have to disprove these assumptions, pursuant
to paragraph 53(1)(a) of the Rules.
1. Subject Paragraphs were not
assumed at the time of reassessment
[8] The appellant bears the onus
of proving that the Minister did not make the assumption at the time of
reassessment.
Additionally, the onus is high on the party seeking to strike pleadings.
[9] Rule 49(1)(d)
states:
|
49.(1) Subject to subsection (1.1), every reply
shall state
|
49.(1) Sous réserve du paragraphe (1.1),
la réponse indique :
|
|
(d) the findings or assumptions of fact
made by the Minister when making the assessment,
|
d) les conclusions ou les hypothèses de fait sur
lesquelles le ministre s'est fondé en établissant sa cotisation;
|
[10] The Subject Paragraphs follow:
14. In so
reassessing the Appellant, the Minister relied on the following assumptions:
. . .
Global Prosperity
b) Global
Prosperity is one of the names given by a group of individuals to a program
which promoted taxpayers' "opting out" of the Canadian and American
tax systems by means of:
i) getting
refunds for taxes paid in the current and past taxation years and obtaining
access to registered retirement funds on a tax free basis;
ii)
removing assets from the jurisdiction such that tax cannot be collected; and
iii) moving assets to low or
no tax jurisdictions;
c) Global
Prosperity offered a number of schemes in order to generate losses and refunds,
including the following:
i) the
generating of a tax loss sufficient to wipe out an individual's income for the
current, plus the prior three years, but purportedly entering into foreign
currency futures or forward contracts through a United Kingdom broker called
Union Cal Limited ("Unioncal") and then purporting to enter into
offsetting currency futures or forward contracts, with the individual claiming
the loss leg in 1998 and the gain leg in 1999; and
ii) the
generating of a tax loss sufficient to wipe out the 1999 gain leg by
purportedly carrying on trading through another non-resident broker such as LFG
or LLC (the "Permanent Loss Scheme");
d) in
1998, the Appellant and numerous other individuals entered into the scheme
outlined in paragraph 14(c) by way of their purported participation in one or
more joint ventures through Unioncal (the "Union Joint Ventures");
. . .
f) the
tax refund so obtained was in some cases used by individuals to access the
Permanent Loss Scheme, as cash was needed to pay the promoter associated with
Global Prosperity to access the various Permanent Loss Schemes, commissions to
the accommodating non-resident broker, such as LFG or LLC, and for capital for
the purported trades in 1999;
g) the
cash needed by an individual wanting to enter into a Permanent Loss Scheme was
13% of the loss they wanted to generate;
h) the
Appellant purportedly entered into currency futures or forward contracts with
Unioncal in 1998 and a Permanent Loss Scheme in 1999, pursuant to the promotion
by various individuals connected with Global Prosperity, including Gordon Feil
("Feil");
. . .
j) the
Appellant's claimed 1999 "trading losses and expenses" of $3,952,543
was claimed on the basis of the Appellant entering into the Permanent Loss
Scheme;
Gordon Feil
. . .
l) Feil is
associated with Global Prosperity, and is one of a number of individuals who
promoted the Unioncal Joint Ventures, the Permanent Loss Scheme and various
other schemes offered by Global Prosperity;
. . .
The Unioncal Joint
Ventures
. . .
u) the
majority of the Participants paid cash for their units, while the remainder
borrowed funds from a company called 16857 Yukon Inc. ("Yukon")
to purchase their units;
v) Yukon
was incorported in the Yukon, and had a non-resident director and shareholder,
but at all times Feil had Power of Attorney and signing authority with respect
to Yukon's bank accounts and those bank accounts were under Feil's name;
. . .
z) 33 of
the Participants purportedly participated in the Unioncal Trading Joint Venture
1998 and, in total, subscribed for 97 joint venture units while also
purportedly participating in another Global Prosperity promoted joint venture
called the Futures Trading Joint Venture, claiming losses of $13,229,945 from
the Unioncal Trading Joint 1998 and $1,593,654 from the Futures Trading Joint
Venture;
aa) Nelson
Bayford ("Bayford"), administrator of the Futures Trading Joint
Venture, was associated with Global Prosperity and was also one of a number of
individuals who promoted the Unioncal Joint Ventures, the Permanent Loss Scheme
and various other schemes offered by Global Prosperity;
bb) 32 of
the Participants purportedly participated in the Unioncal Trading Joint
Ventures #1 and, in total, subscribed for 90 joint venture units and claimed
losses of $20,431,672 and interest expenses of $760,264;
cc) 23 of
the Participants who purportedly participated in the Unioncal Trading Joint
Venture #1 also purportedly participated in another purported joint venture
promoted by Feil called the Westview, LLC ("Westview"), and claimed
further losses of $4,714,543 while being allocated a greater proportion of the
Unioncal Trading Jointe Venture #1 losses on a ratio of US $1.6667 to every US
$1 for the non-Westview Participants;
dd) the
Participants who purportedly participated in Westview borrowed money from Yukon to
finance their entire Westview investment and subscription costs;
ee) only
three of the nine Participants in the Unioncal Trading Joint Venture #1 who did
not participate in Westview put up any funds for their investment and
subscription costs;
ff) most
of the Participants in the Unioncal Joint Ventures were middle-income earners
with little or no investment or trading history;
. . .
ii) other
than Feil, none of the Participants provided Unioncal with any information with
respect to their net worth or financial position before being issued units in a
Unioncal Joint Venture;
jj) on or
about December 17, 1998, Feil purportedly signed a Client Agreement and opened
a trading account with Unioncal;
. . .
mm) no
further funds were ever asked for or deposited into Feil's Unioncal account or
any other account with Unioncal respecting the Participants, and no margin
calls were ever made or satisfied;
. . .
xx) one
Swiss Francs contract was not offset and was never reflected on the Open
Position Statement for 1998;
. . .
ddd) when
the results of all the contracts were netted there was a gain of $63,765, and
when the purported trading ceased on February 4, 1999 there was a cash balance
of $739,007 in the Feil's Unioncal account;
eee)
between January 11, 1999 and February 2, Feil's Unioncal cash account was in an
overdraft position ranging from US$37,350,174 as at January 11, 1999 to
$66,539,854 as at January 22, 1999;
. . .
iii) no
commissions were payable under the standard form Client Agreement purportedly
entered into between Feil and Unioncal;
[11] It is obvious that assumptions
of facts which were not assumed at the time they were claimed cannot meet the
test articulated in Rule 49 and they should be struck.
[12] In The Queen v. Anchor
Pointe Energy Ltd.,
the Court of Appeal stated that the pleadings of assumptions are a powerful
tool of shifting the onus to the taxpayer to demolish the Minister's
assumptions:
. . . The facts in a tax appeal
are peculiarly within the knowledge of the taxpayer. The practice is for the
Crown to disclose in its pleadings, assumptions of fact made by the Minister
upon which his determination of the tax owing is based. Where peladed, the
assumptions have the effect of reversing the burden of proof and casting on the
taxpayer the onus of disproving that which the Minister has assumed. (See Pollock
v. The Queen (1993), 94 DTC 6050 at 6053 per Hugessen, J.A. (as he then was).)
Therefore, it is important to determine whether assumptions made at the time of
the Minister's confirmation of a reassessment may be included in the Crown's
pleadings.
. . .
. . . The facts pleaded as
assumptions must be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[13] The Court emphasized that
The Crown has a serious
obligation to set out honestly and fully the actual assumptions upon which the
Minister acted in making the assessment, whether they support the assessment or
not. Pleadings that the Minister assumed facts that he could not possibly have
assumed is not a fulfillment of that obligation.
[14] Soon after its decision in Anchor
Pointe, supra, the Court of Appeal made the following comments in Canada
v. Loewen:
8 The Minister's factual assumptions,
as stated in the Crown's pleadings, are taken as fact unless they are disproved
or it is established that the Minister did not make the assumptions that are
said to have been made. The taxpayer has the onus of proving that the
Minister's assumptions are not true or that they were not made. It is also open
to the taxpayer to attempt to establish by [page9] argument that, even if the
assumed facts are true, they do not justify the assessment as a matter of law: Johnston v. Minister of National Revenue, [1948] S.C.R. 486;
Minister of National Revenue v. Pillsbury Holdings Ltd.,
[1965] 1 Ex. C.R. 676.
9 It is the obligation of the Crown to ensure that the
assumptions paragraph is clear and accurate. For example, the Crown cannot say
that the Minister assumed, when making the assessment, that a certain car was
green and also that the same car was red, because it is impossible for the
Minister to have made both of those assumptions at the same time: Brewster, N C v. The Queen, [1976] CTC 107 (F.C.T.D.).
10 Nor is it open to the Crown to plead
that the Minister made a certain assumption when making the assessment, if in
fact that assumption was not made until later, for example, when the Minister
confirmed the assessment following a notice of objection. The Crown may,
however, plead that the Minister assumed, when confirming an assessment,
something that was not assumed when the assessment was first made: Anchor Pointe Energy Ltd. v. Canada, 2003 DTC 5512
(F.C.A.).
11 The constraints on the Minister that
apply to the pleading of assumptions do not preclude the Crown from asserting,
elsewhere in the reply, factual allegations and legal arguments that are not
consistent with the basis of the assessment. If the Crown alleges a fact that
is not among the facts assumed by the Minister, the onus of proof lies with the
Crown. This is well explained in Schultz v. Canada, [1996] 1 F.C. 423
(C.A.) leave to appeal to S.C.C. refused, [1996] S.C.C.A. No. 4.
[15] The appellant claims that the
reassessment in question was based solely on the auditor's assessment. At the
objection stage the officials failed to review or analyze the merits of the
content of the appellant's notice of objection. No facts assumed by the tax
officials after reassessment should be included in the reply under the heading
of Assumption of Fact. To do so would be an abuse of this powerful tool by the
respondent.
[16] Counsel for the appellant
relies on transcript excerpts from the examination for discovery to prove that
the Minister did not assume the Tax Shelter theory or the Permanent Loss Scheme
theory at the time of reassessment on or before July 17, 2002. Counsel
also relied on documents provided by the respondent, in particular an Audit
Letter dated February 12, 2002; the Auditor's Report dated April 29, 2002; and a
Position Paper dated July 11, 2002.
[17] Counsel for the respondent
disagrees with the appellant's position. She claims that the contested Subject
Paragraphs were assumed by the Minister at the time of reassessment in 2002,
and therefore should not be struck. Further, her counsel argues the obligation
of the Crown is to inform the appellant of the full case he must meet and
therefore she is justified in alleging the Subject Paragraphs under the heading
of Assumptions of Fact.
[18] Respondent's counsel claims
that the Subject Paragraphs were known by the Minister at the time of
reassessment and this is demonstrated by the excerpts of transcripts from the
examination for discovery that took place on June 1, 2 and 8, 2006. Counsel
also states that the Audit Letter, Audit Report and Position Papers all make it
clear that the facts in the Subject Paragraphs were all assumed at the time of
reassessment.
[19] In Status-One Investment
Inc. c. R., I
discussed the role of an Examination for Discovery:
18 It should be emphasized that, while all the pleadings have
been filed in the instant case, no examinations for discovery have been held so
far. Thus, the appellant is not yet in a situation where it can no longer
examine an officer of the Crown for discovery to determine exactly which facts
the Minister assumed in making the assessments under appeal and which evidence
the appellant will have to rebut.
[20] Footnote 13 of the same
case reads:
Naturally, if the appellant doubts that the
Minister actually assumed the facts set out in paragraph 11 when it made the
assessments, the appellant may, in the course of discovery, obtain evidence
indicating precisely which facts the Minister relied on to assess it.
[21] In Foss v. Canada, my colleague Bowie J. refused to
strike out assumptions of fact pursuant to Rule 8. This rule requires
that a motion to attack a proceeding for irregularity shall not be made after
the expiry of a reasonable time or if the moving party has taken further steps
in the proceeding after obtaining knowledge of the irregularity. In the case at
bar, counsel for the appellant informed the Court of its intention to seek a
motion in the fall of 2006. The motion was filed in late December 2006 after
conducting the examination for discovery between March and June 2006. This
seems to be well within a "reasonable time" required by Rule 8.
Additionally, no fresh steps were undertaken outside the examination for discovery
to adduce evidence. Consequently, both counsel are justified in relying on the
transcripts of the examination for discovery to prove their respective
positions.
[22] The appellant relies on
transcripts of the respondent's nominee during the examination for discovery.
In many instances the nominee explicitly states that two theories for
assessment, the Permanent Loss Scheme theory and the Tax Shelter theory, were
developed after the appellant was reassessed. Additionally, the transcripts
demonstrate that the general scheme of Global Prosperity was not directly
related to the appellant until after the reassessment. The following are some
of the excerpts from the examination for discovery.
53.
Q So the big picture then was a factor in the reassessment of Mr. Stanfield?
A
Well, to the extent that it would affect the tax shelter position that we had
taken that this was one of a number of tax shelters that were promoted by
Global Prosperity.
54.
Q But again, these were facts in paragraph 14 that the Minister relied
upon, or assumptions the Minister relied upon in reassessing Mr. Stanfield,
and you gave evidence yesterday the tax shelter argument wasn't developed until
2003, long after Mr. Stanfield was reassessed. So what do you have to say about
that?
A That
that tax shelter position was developed subsequent to the date of the
reassessment of the Union CAL trading joint venture.
. . .
58.
Q So the fact that many others not just the Lisoways were investing in
these types of arrangements promoted by Global Prosperity was a factor in
reassessing Mr. Stanfield?
A Well,
as I said is this fact is a description of – of what was going on and how these
– how these schemes were being promoted, and it's – it's made in the interest
of explaining the general picture of what was going on. And to the extent that
it relates to a promotion of tax shelters and the tax shelter argument the
Minister has put forward, then it is relevant to – to that.
.
. .
60.
Q Was it a factor in the reassessment of Mr. Stanfield for 1998 other than
for the tax shelter argument?
A No.
.
. .
88.
Q But, sir, I'll make the comment once again, it says in so reassessing
the Appellant. Maybe you misunderstand my question to begin with. The Minister
didn't rely on any assumptions regarding permanent loss schemes in raising the
assessment for 1998 against Mr. Stanfield did it?
A Not
for permanent loss schemes.
. . .
195. Q But
the tax shelter reassessment position was developed after July 17th, 2002 as
you've given evidence about, correct?
A Yes.
196.
Q So this audit strategy that was shown related only to the raising of the
tax shelter argument in 2003 and not to the reassessment position taken when
raising the reassessment on July 17th, 2002?
.
. .
A Well,
the – the tax shelter position was developed starting at this time and forward
for – for – as a consideration for all the arrangements, including the Union
CAL trading joint venture.
197.
Q But not for Mr. Stanfield's 1998 taxation year at that time? In other
words, he was already being reassessed without the tax shelter argument ever
having been considered?
A He
was at that point, yes.
198.
Q So that argument was developed later?
A Yes.
199. Q Therefore,
what you're suggesting, Mr. Kuhn, and I'm understanding is that the audit
strategy found in paragraphs 23 through 27 was strategy that was to support an
argument for tax shelter, which was added later.
A For
the Union CAL trading joint ventures, yes, it would – it would have been.
[23] The Subject Paragraphs
pertaining to Global Prosperity as a general Tax Shelter theory and Permanent
Loss Scheme theory were not assumed by the Minister at the time of
reassessment. As a result, they should be struck from the pleading. The
following Subject Paragraphs are struck from the reply: 14(b), (c), (d) and
(f).
[24] For the same reasons I
would strike parts of subparagraphs 14(h), (j) and (l). They are as follows: in subparagraph 14(h), the words "and
a Permanent Loss Scheme in 1999" and "connected with Global Prosperity";
in subparagraph 14(j) the words "on the basis of the Appellant entering
into the Permanent Loss Scheme"; in subparagraph 14(l), the words
"is associated with Global Prosperity, and" and "the Permanent
Loss Scheme and various other schemes offered by Global Prosperity"; in
subparagraph 14(z), the words "Global Prosperity promoted"; and in
subparagraph 14(aa), the words "associated with Global Prosperity and was
also" and "the Permanent Loss Scheme and various other schemes
offered by Global Prosperity".
[25] A subsidiary issue
which arises as a result of this discussion is that certain Subject Paragraphs
ought to be struck because they are evidence rather than material facts and
thus breach Rule 49.
[26] In Foss, supra,
my colleague Bowie J. commented on the basic rule of pleadings, canvassing case
law pertaining to the unique nature of assumptions of fact in tax litigation.
He also surveyed the onus of proof placed on the taxpayer, the obligation of
the Crown in drafting its pleadings and the difference between materiality and
relevance.
[27] At paragraph 6, he
summarizes the rule of pleading:
This is the rule of pleading: all of the other
pleading rules are essentially corollaries or qualifications to this basic rule
that the pleader must state the material facts relied upon for his or her claim
or defence. The rule involves four separate elements: (1) every pleading must
state facts, not mere conclusions of law; (2) it must state material facts and
not include facts which are immaterial; (3) it must state facts and not the
evidence by which they are to be proved; (4) it must state facts concisely in a
summary form.
[28] Bowie J. concludes his
analysis by stating at paragraph 11:
The
purpose of pleadings is to define the issues between the parties for the
purposes of discovery, both documentary and testamentary, and trial. That
requires no more than a statement of the "precise findings of fact"
that underpin the assessment. It is potentially prejudicial to the appellant to
plead more -- certainly to plead more by way of assumptions of fact. The
appellant is, of course, entitled to particulars of the evidence that the Crown
intends to lead at trial, but these are properly obtained on discovery, not
disguised as material facts as to which the Crown at trial may claim a
presumption of truth.
[29] I agree with Justice
Bowie. Those Subject Paragraphs that are evidence rather than material facts
are to be striked from the reply. The Motion to Strike is granted in part with
respect to Subject Paragraph 14(g), (ddd), (eee) which are not material facts,
but rather evidence.
2. Subject Paragraphs not
relevant to the appellant's appeal
[30] The evidence
(particularly the documents provided by the respondent to the appellant)
demonstrates that the remaining Subject Paragraphs were known by the Minister
at the time of reassessment. The appellant's counsel argued many of the
remaining Subject Paragraphs do not relate directly or indirectly to the
appellant's reassessment of his 1998 taxation year and they should be struck
for being irrelevant.
[31] The appellant alleged
that the respondent has failed to "plead assumptions directly related to
issues raised in appeal of [the] reassessment". In particular, the appellant
maintains that certain Subject Paragraphs made by the respondent are not
relevant to the particular appellant, Mr. Stanfield, but rather pertain to
third parties. As such, leaving these questionable Subject Paragraphs under the
heading of Assumptions of Fact is prejudicial to the appellant.
[32] Striking out
assumptions of fact on the basis that the pleadings are not relevant has been
discussed in recent case law. Following the reasoning of Global
Communications Limited v. The Queen,
I found in Status-One, supra, that while sometimes
assumptions of facts may demonstrate a relationship between an appellant and a
third party, the Minister must assess the taxpayer on his or her conduct and
not that of a third party. At paragraph 30 I wrote:
Subparagraphs 11(uu) and (ww) muddy
the appeal process. At this stage of the process, Equicap's actions appear to
have no direct bearing on the fundamental issues raised by the appeals.
Considerable caution should be exercised when third parties are involved. The
relevant actions are those of the appellant, which has been assessed and is
entitled to know why. In some cases, it is quite possible that relationships or
ties between an appellant and third parties will be relevant. Among other
things, I have in mind cases involving securities trading. However, I have found
nothing in the parties' pleadings to indicate that the facts alleged in
subparagraphs 11(uu) and (ww) are relevant. An appellant must always make his
own case. The Minister must assess taxpayers based on what the taxpayers have
or have not done, and not, generally, on the conduct of a third party.
[33] Rule 53 is a
discretionary rule, which empowers the Court to strike the relevant parts of
the pleadings, but the Court is not under any obligation to do so. Rather, as I
stated in Status-One, supra, at paragraph 14:
Lastly,
this Court has stated on several occasions that the question of whether a
pleading should be struck out in whole or in part is one for the trial judge to
determine, and is not matter to be determined in an interlocutory motion: . . .
The trial judge is in a far better position than a judge hearing a preliminary
motion to consider which assumptions of fact, if any, should be stuck out. It
is up to the trial judge to decide what is relevant and what is not.
[34] In Mungovan v. The
Queen, the
Court explained:
Assumptions
are not quite like pleadings in an ordinary lawsuit. They are more in the
nature of particulars of the facts on which the Minister acted in assessing. It
is essential that they be complete and truthful. . . .
[35] While a motion judge
should be cautious in striking out pleading, case law provides several examples
where it is appropriate to strike out part or all of the assumptions of fact.
[36] The Federal Court of
Appeal asserted in The Queen v. Enterac Property Corporation that the appellant must prove that it
is "clear and obvious" that the Subject Paragraphs are not relevant. This
test, the "plain and obvious" test, is found in the Supreme Court of
Canada's decision in Hunt v. Carey Canada Inc. This test now applies to both Rules
53 and 58 of this Court. In Status-One, supra, which was
upheld by the Federal Court of Appeal, the relevance of impugned paragraphs was
critical:
Similarly,
in Enterac Property Corp. v. R., the Court hesitated to strike out a
pleading in whole or in part, having found that the requesting party had not
made it clear and obvious that the impugned paragraphs were not relevant.
[37] Notwithstanding the
foregoing, in Gould v. Canada
Bowman C.J. stated that there is nothing wrong with describing generally a
"scheme" in which the appellant participated. Relevancy is to be left
to the trial judge, unless it is "plain and obvious" that the
pleadings are not relevant:
11 I can
see nothing wrong with the Overview. It describes generally the "scheme"
in which the Minister alleges the appellant participated. I think it is
arguably relevant that the appellant's charitable donations are not an isolated
phenomenon but form part of a larger pattern. What weight if any should be
given to this fact will be a matter for the judge who hears the case. It would
be premature and indeed inappropriate for me, sitting as a motions judge,
without the benefit of having heard any evidence to decide whether so broad a
description of an alleged "scheme" is relevant. To do so would be to
usurp the function of the trial judge.
12 One must bear in mind that in tax
litigation pleadings serve several functions. For example, the reply should set
out fully the respondent's position. It should plead honestly and comprehensively
the assumptions upon which the assessment is based. It should be informative to
the judge so that he or she will know the Crown's position and the issues that
must be decided, matters that are being put in issue and the facts the Crown
assumes or intends to prove. It should also inform the appellant of the case
that is to be met. The essential and important function that pleadings serve in
litigation is a practical one of providing information about the party's case.
[38] The appellant submits
several of the Subject Paragraphs, particularly those dealing with the role of
16857 Yukon Inc. ("Yukon Inc."), other investor and joint ventures
other than the Unioncal Trading Joint Ventures are not relevant to the
appellant's appeal. On several occasions during
the examination for discovery, the witness for the respondent indicated that
certain Subject Paragraphs respecting Yukon and other joint ventures were not directly related to
the appellant,
as the latter never participated in or was involved with these entities.
[39] Yukon Inc. is a corporation that allegedly provided
loans to prospective investors for the various alleged Joint Ventures. However,
the evidence submitted clearly indicates that the Subject Paragraphs
referencing Yukon Inc. do not pertain to this particular appellant. As such,
counsel argues that pleadings referring to Yukon Inc. are irrelevant to the
appeal in issue. Furthermore, they should be struck because they pertain to
third parties which the appellant could never disprove. Lastly, counsel for the
appellant argued that the existence of these Subject Paragraphs does not assist
the respondent’s case of a general scheme in relation to the appellant.
[40] On the other hand, counsel for the respondent relies heavily on the Gould
decision, which states the weight and relevance of assumptions of fact are
best left to the trial judge. He argued that the Subject Paragraphs involving
third parties and the existence of the general scheme of the joint ventures are
relevant to the Crown’s case and therefore ought not to be struck.
[41] Respondent's counsel also contends that the Motion
Judge should make the distinction between the relevance to the reassessment
versus the relevance to the issue in appeal. Unlike Status-One, supra,
the Subject Paragraphs in the current case dealing with the tax shelter support
directly the reassessment and are relevant to the issue in appeal. Relevance to
the reassessment would entail an allegation with respect to the factual
situation surrounding the reassessment, whereas the relevance to the issue in
appeal would be determining whether the losses claimed by the appellant are
actual business losses.
[42] The appellant is not likely to be prejudiced by these Subject
Paragraphs. Although the Subject Paragraphs may not directly relate to the appellant,
his counsel can disprove their relevance at trial. Again in Gould, supra,
Bowman C.J. found that it may be to the appellant’s advantage to demonstrate
the contradictions and illogic of the respondent’s pleadings.
[43] With regard to third parties, Bowman C.J. at paragraph 21 of Gould states:
. . . A central component in the assessment which disallowed
the charitable donations is the existence of a "scheme" in which it
is alleged that the appellant participated and which enabled the participants
to obtain what the Crown sees as artificial or inflated charitable tax credits.
It of necessity involved third parties and if the existence of a scheme is
essential to the Crown's case it should be able to plead and prove all of the components
of the scheme. To say, as the appellant does, that Global and Status-One
preclude any reference to third party transactions unless the appellant knows
of or is privy to those transactions goes too far. If the existence of a scheme
is germane to the disallowance it cannot be ignored whether or not the Minister
assumed that the appellant knew about or was a party to the third party
transactions that, according to the Reply, were an integral part of the scheme.
If any of the facts assumed are truly within only the Crown's knowledge the
Crown probably has the onus of proving them although this is ultimately for the
trial judge to decide.
[44] While the Gould decision does not prevent the Motion
Judge from striking out assumptions of fact which are clearly and obviously not
relevant to the appeal and would be an abuse of process, it encourages the respondent
to make full disclosure of the case the appellant must meet as well as extends
the scope of pleadings to include assumptions of fact pertaining to third party
involvement in general schemes.
[45] The Motion to Strike is dismissed with respect to Subject Paragraph
14(u), (v), (bb), (cc), (dd), (ee), (ff), (ii), (jj), (mm), (xx), (ccc), and
(iii). They remain in the reply for the meantime. Whether these subparagraphs
should remain permanently in the reply is best left for the trial judge to
determine. While their contents may be evidence, or even irrelevant, they do
not appear at this time to have the same degree of prejudice to the appellant
as the Subject Paragraphs I have chosen to strike.
3. Subsidiary Matter –
leave to amend Reply
[46] Counsel for the respondent has pled under Other Material Fact at
paragraph 15 of the reply that the contracts of Unioncal Trading Joint
Venture meet the factual conditions to constitute a “tax shelter” pursuant to
subsection 237.1(1). Further, the respondent has already been granted an
extension of time to prepare the reply and ought to have properly drafted it at
that time. I shall permit the respondent to file an amended reply to the notice
of appeal within 60 days provided that she does not repeat facts alleged in
paragraph 15 of the reply. The appellant shall be entitled to his costs.
Appellant's Motion to Reattend
[47] The appellant also filed a Motion to Reattend, pursuant to 110(1)(a)
of the Rules, for an Order directing the respondent’s nominee, Mr. Larry
Kuhn (“Mr. Kuhn”):
1)
to reattend the examination for
discovery, at the Respondent’s expense;
2)
to answer the list of questions
enumerated in Schedule “A” to these reasons;
3)
to produce a list of documents enumerated
in Schedule “B” to these reasons; and
4)
to answer question pertaining to the
documents requested.
[48] Paragraph 110(1)(a) of the Rules read as follows:
|
Sanctions for Default or Misconduct by Person to be
Examined
|
Sanctions en cas de défaut ou d'inconduite de la
personne devant être interrogée
|
|
110. Where
a person fails to attend at the time and place fixed for an examination in
the notice to attend or subpoena, or at the time and place agreed on by the
parties, or refuses to take an oath or make an affirmation, to answer any
proper question, to produce a document or thing that that person is required
to produce or to comply with a direction under section 108, the Court may,
|
110. Si une personne ne se présente pas à l'heure, à la
date et au lieu fixés pour un interrogatoire dans l'avis de convocation ou le
subpoena, ou à l'heure, à la date et au lieu convenus par les parties, ou
qu'elle refuse de prêter serment ou de faire une affirmation solennelle, de
répondre à une question légitime, de produire un document ou un objet qu'elle
est tenue de produire ou de se conformer à une directive rendue en
application de l'article 108, la Cour peut :
|
|
(a) where an objection to a question is held
to be improper, direct or permit the person being examined to reattend at
that person's own expense and answer the question, in which case the person
shall also answer any proper questions arising from the answer,
|
a) en cas d'objection jugée injustifiée à une question, ordonner ou
permettre à la personne interrogée de se présenter à nouveau, à ses propres
frais, pour répondre à la question, auquel cas elle doit répondre aussi aux
autres questions légitimes qui découlent de sa réponse;
|
[49] The appellant’s Motion to Reattend relies on the following grounds:
1.
Mr. Kuhn was selected by the Respondent as its nominee for discovery.
2.
During the examination for discovery of Mr. Kuhn, Mr. Kuhn refused to or
was instructed not to answer the questions listed in Schedule “A” to this
Notice of Motion, even though such questions relate to the matters in issue in
this Appeal, are relevant to this Appeal and are proper questions.
3.
During the examination for discovery of Mr. Kuhn, Mr. Kuhn refused to or
was instructed not to produce the documents referred to in Schedule “B” to this
Notice of Motion, even though such documents relate to matters in issue in this
Appeal and are relevant to this Appeal.
4.
The Respondent relied on some or all of the documents sought in Schedule
“B” to this Notice of Motion according to the affidavit to Ron D.F. Whilhelm
dated and filed in this appeal on June, 18, 2004 in support of the Respondent’s
Motion dated June 18, 2004 to extend the time to file and serve the reply and
should therefore be compelled to produce such documents to answer all proper
questions relating to such documents.
[50] The appellant filed excerpts of the transcript of the examination for discovery
and an affidavit in support of the Motion to Reattend. In addition to the
excerpts and affidavit, the appellant has provided two Schedules outlining the
questions he seeks answers to and documents he would like the respondent to
produce. These schedules are found in Appendix 1 and 2 of these reasons.
[51] Counsel
for the appellant submits Mr. Kuhn refused to answer proper questions and
counsel for the respondent has refused to produce relevant documents.
[52] There is a vast amount of case law explaining what constitutes a proper
question during examination for discovery, which has its basis under the rule
for the scope of examination, pursuant to Rule 95, as follows:
|
Scope of Examination
|
Portée de l'interrogatoire
|
|
95.
(1) A person examined for discovery shall answer, to the best of that
person's knowledge, information and belief, any proper question relating to
any matter in issue in the proceeding or to any matter made discoverable by
subsection (3) and no question may be objected to on the ground that,
|
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 légitimes qui se rapportent à une question en
litige ou aux questions qui peuvent, aux termes du paragraphe (3), faire
l'objet de l'interrogatoire préalable. Elle ne peut refuser de répondre pour
les motifs suivants :
|
|
(a) the information sought is evidence
or hearsay,
|
a) le renseignement demandé est un élément de preuve ou du
ouï-dire;
|
|
(b) the question constitutes
cross-examination, unless the question is directed solely to the credibility
of the witness, or
|
b) la question constitue un contre-interrogatoire, à moins qu'elle
ne vise uniquement la crédibilité du témoin;
|
|
(c) the question constitutes
cross-examination on the affidavit of documents of the party being examined.
|
c) la question constitue un contre-interrogatoire sur la
déclaration sous serment de documents déposée par la partie interrogée.
|
|
(2) Prior to the examination for discovery,
the person to be examined shall make all reasonable inquiries regarding the
matters in issue from all of the party's officers, servants, agents and
employees, past or present, either within or outside Canada and, if
necessary, the person being examined for discovery may be required to become
better informed and for that purpose the examination may be adjourned.
|
(2) Avant l'interrogatoire préalable, la
personne interrogée doit faire toutes les recherches raisonnables portant sur
les points en litige auprès de tous les dirigeants, préposés, agents et
employés, passés ou présents, au Canada ou à l'étranger; si cela est
nécessaire, la personne interrogée au préalable peut être tenue de se
renseigner davantage et, à cette fin, l'interrogatoire préalable peut être
ajourné.
|
|
(3) A party may on an examination for
discovery obtain disclosure of the findings, opinions and conclusions of an
expert engaged by or on behalf of the party being examined that relate to a
matter in issue in the proceeding including the expert's name and address,
but the party being examined need not disclose the information or the name
and address of the expert where,
|
(3) Une partie qui interroge au préalable peut
obtenir la divulgation de l'opinion et des conclusions de l'expert engagé par
la partie interrogée, ou en son nom, sur une question en litige dans
l'instance ainsi que ses nom et adresse. Toutefois, la partie interrogée
n'est pas tenue de divulguer le renseignement demandé, ni les nom et adresse
de l'expert, si :
|
|
(a)
the findings, opinions and conclusions of the expert relating to any matter
in issue in the appeal were made or formed in preparation for contemplated or
pending litigation and for no other purpose, and
|
a) l'opinion et les conclusions de l'expert sur
une question en litige dans l'instance ont été formulées uniquement en
prévision d'une poursuite envisagée ou en cours;
|
|
(b) the party being examined undertakes
not to call the expert as a witness at the hearing.
|
b) la partie interrogée s'engage à ne pas
appeler l'expert à témoigner à l'audience.
|
|
(4) A party may on an examination for
discovery obtain disclosure of the names and addresses of persons who might
reasonably be expected to have knowledge of transactions or occurrences in
issue in the proceeding, unless the Court orders otherwise.
|
(4) Sauf ordonnance contraire de la Cour, une
partie qui interroge au préalable peut obtenir la divulgation des noms et
adresses des personnes dont on pourrait raisonnablement s'attendre à ce
qu'elles aient connaissance des opérations ou des situations en litige en
l'instance.
|
[53] When considering whether a refused question should be answered, the
court has to determine 1) whether the question is relevant, which is a matter
of law, and 2) whether the question is proper, which is a matter of discretion. Given that the
determination of a proper question is discretionary, the relevancy of the question
will be a significant determination in allowing the reattendance.
[54] Proper questions must first relate to any matter in issue. Proper
questions defined under the scope of examination are questions that seek
evidence, constitute cross-examination and relate to the names of witnesses.
[55] Given the general purpose of an examination for discovery is to render
the trial process fairer and more efficient and it is in the interest of
justice that each party be well informed as to the case they must meet and the
position of the opposing party, it has been the policy of this Court to adopt a
liberal approach to the scope of questioning permitted on discovery.
[56] In Baxter, supra, Bowman A.C.J. (as he then was)
enumerated the principles pertaining to the “threshold level of relevancy”
during examination for discovery:
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 question 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.
[57] The notion of proper questions on examination for discovery is perhaps
better addressed by determining what constitutes an improper question, as under
the purview of Rule 108. This rule reads:
|
Improper Conduct of Examination
|
Déroulement irrégulier de l'interrogatoire
|
|
108.
(1) An examination may be adjourned by the person being examined or by a
party present or represented at the examination, for the purpose of moving
for directions with respect to the continuation of the examination or for an
order terminating the examination or limiting its scope, where,
|
108. (1) Un interrogatoire peut être ajourné à la
demande de la personne interrogée ou d'une partie présente ou représentée à
l'interrogatoire afin d'obtenir, par voie de requête, des directives quant à
la poursuite de l'interrogatoire ou une ordonnance y mettant fin ou en
limitant la portée, dans les cas suivants :
|
|
(a) the right to examine is being
abused by an excess of improper questions or interfered with by an
excess of improper interruptions or objections,
|
a) le droit d'interroger est utilisé
abusivement en raison d'un nombre excessif de questions injustifiées ou
l'exercice de ce droit est entravé par un nombre excessif d'interruptions ou
d'objections injustifiées;
|
|
(b) the examination is being conducted
in bad faith, or in an unreasonable manner so as to annoy, embarrass or
oppress the person being examined,
|
b) l’interrogatoire est effectué de mauvaise
foi ou déraisonnablement de manière à importuner, à gêner ou à accabler la
personne interrogée;
|
|
(c) many of the answers to the
questions are evasive, unresponsive or unduly lengthy, or
|
c) de nombreuses réponses sont évasives, vagues
ou indûment longues;
|
|
(d) there has been a neglect or
improper refusal to produce a relevant document on the examination.
|
d) on a négligé ou refusé à tort de produire un
document pertinent à l'interrogatoire.
|
|
(2) Where the Court finds that,
(a) a
person's improper conduct necessitated a motion under subsection (1), or
(b) a
person improperly adjourned an examination under subsection (1),
the Court may direct the person to
pay personally and forthwith the costs of the motion, any costs thrown away
and the costs of any continuation of the examination and the Court may fix
the costs and give such other direction as is just.
|
(2) La Cour, si elle conclut :
a) que la conduite irrégulière d'une personne a
rendu nécessaire la présentation d'une requête en application du paragraphe
(1);
b) qu'une personne a obtenu l'ajournement prévu
au paragraphe (1) sans raison valable,
peut lui ordonner de payer sans délai et
personnellement les dépens de la requête, ceux qui ont été engagés
inutilement et ceux de la poursuite de l'interrogatoire. La Cour peut fixer
le montant des dépens et rendre une autre directive appropriée.
|
[58] Where proper questions are determined by the relevancy to the matter in
issue, improper questions are considered outside the scope of examination on
the grounds of them being irrelevant or because they are directed solely to the
credibility of the witness. Improper questions also include questions covered
by solicitor-client privilege. Under Rule 108, improper questions
include those questions that are conducted in bad faith or in an unreasonable
manner.
[59] Counsel for the respondent maintains the motion to compel should be
dismissed due to solicitor-client privilege, relevancy and the fact that the
questions at issue have already been answered. Furthermore, the respondent
refuses to answer some questions on the grounds that the appellant is on a
fishing expedition.
[60] This being said, it is my view that although I may impose other
sanctions as alternatives to compelling attendance and production of documents, it is in the best interest
of the parties to grant the motion to compel.
[61] Therefore, the motion is granted to compel the reattendance of Mr. Khun
to answer the questions in Schedule “A”, to answer all proper questions that
arise from the answers and to produce documents listed in Schedule
"B".
[62] Costs of the Motion to Reattend
shall be in the cause.
Respondent’s Motion to Reattend
[63] The respondent’s Motion to Reattend seeks an Order, pursuant to 110(a)
of the Rules, directing the appellant to reattend the examination for
discovery at the appellant's expense and answer all questions which either the
appellant refused to answer or was instructed not to answer at the examination
for discovery on March 7, 8 and 9, 2006.
[64] The following are the questions
that the respondent seeks the appellant to answer.
1) Question 157-158: stocks, trading, securities
between 1970 and 1999. In addition to all trades with or through Gordon Feil or
Global Prosperity between 1970 and 1999 – Tab E;
2) Question 102-117: hard drive of computer, provide those documents which
can be restored – Tab G;
3)
Question 161-169: Involvement of Appellant with Gordon Feil, pertaining to the
UnionCAL Trading Joint Venture regardless of date – Tab H;
4)
Question 244-245: all records respecting the joint venture and the trades, up
until 2002 – Tab I and D at page 9;
5)
Question 132: question respecting relevant facts that occurred in 1999 (not a
taxation under appeal), as they relate to 1998 transactions in issue – Tab J;
6)
Question 425-426 – provide emails and addresses – Tab E;
7)
Question 432-442 – provide copies of communications Appellant had with up until
2002 – Tab E.
[65] For the reasons discussed
above, and given the late filing has not caused the appellant any prejudice,
the respondent's motion to compel the appellant's nominee to reattend is
granted. The appellant shall be entitled to costs since the respondent's motion
was brought after the time period set out in previous direction of the Court.
Signed at Ottawa, Canada, this 10th
day of May 2007.
"Gerald J. Rip"
Email this Content