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Citation: 2004TCC636
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Date: 20041006
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Docket: 2002-4035(IT)G
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BETWEEN:
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R. DAREN BAXTER,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR ORDER
Bowman, A.C.J.
[1] In this motion the respondent
seeks an order compelling the appellant to answer a number of
questions which his counsel had instructed him not to answer on
discovery. Generally, the reason for the objection was that the
questions and answers were irrelevant.
[2] By way of background the appeal is
from an assessment whereby the Minister of National Revenue
disallowed a claim for capital cost allowance ("CCA") made by the
appellant in respect of a computer software licence.
[3] The notice of appeal states that
the appellant acquired from TCL Trafalgar B.V., a Netherlands
corporation, a non-exclusive limited-use licence to use
software consisting of a program for trading S & P Contracts,
in exchange for a licence fee.
[4] It further states that the
appellant entered into an agency agreement authorizing Trafalgar
Trading Limited, a Bermuda corporation, to use the software
licence on his behalf for a period of ten years.
[5] The appellant paid 35 percent of
the licence fee as a down payment and the balance by way of a
promissory note to be paid out of his profits generated under the
agency agreement.
[6] The notice of appeal further
states that the claim for CCA was denied on assessment.
Paragraph 9 of the notice of appeal alleges that the denial
of the CCA was based on four grounds:
(a) The licence was a tax shelter as defined
in subsection 237.1(1) of the Income Tax Act
("ITA") and was therefore a tax shelter investment
as defined in subsection 143.2(1) of the ITA and
"computer software tax shelter property" under
subsection 1100(20.2) of the Income Tax Regulations.
Therefore, subsection 237.1(6) denied the deduction claimed,
subsection 143.2(6) would reduce the capital cost of the
software by the amount of the rate because it was a "limited
recourse amount" under subsection 143.2(1) of the ITA
or an "amount or benefit" under subsection 143.2(2) of the
ITA and that subsection 1100(20.1) of the Income
Tax Regulations would limit the CCA to his net income, before
CCA, from the business in which the software was used.
(b) Trafalgar
Trading was trading on its own behalf and not the appellant's and
therefore the appellant was not in the business of trading but
was investing in units and in an investment pool.
(c) The note
was a contingent liability.
(d) The value
of the licence was inflated and the CCA was therefore
unreasonable within the meaning of section 67 of the
ITA.
[7] The reply to the notice of appeal
does not admit that the above were the grounds given by the
Canada Customs and Revenue Agency ("CCRA") but states rather
coyly that the notice of assessment speaks for itself.
[8] The notice of appeal states that
the issues are:
a) Whether the
licence was a "tax shelter", as defined in subsection 237.1(1) of
the Act, and therefore a "tax shelter investment", as defined in
subsection 143.2(1) of the Act, and "computer software tax
shelter property" under subsection 1100(20.2) of the Income
Tax Regulations;
b) Whether the
license is a class 12 asset of the Appellant;
c) Whether the
note is a contingent liability, and its amount excluded from the
capital cost of the licence; and
d)
Whether the CCA claimed in respect of the license is unreasonable
in amount and not deductible by reason of section 67 of the
Act.
[9] The reply to the notice of
appeal states that the issues are as set out in the notice of
appeal and are also in paragraph 13:
a) The value
of the subject Software and License;
b) Whether the
Appellant was in the business of trading; and
c) Whether the
Investment had a business purpose.
[10] I have set out these provisions
of the pleadings because it is well established that relevancy is
defined by the pleadings.
[11] The notice of motion originally
set out a number of questions and undertakings. By the time the
matter came before the court these had been reduced somewhat and
the following were the questions that were in issue.
"SCHEDULE B"
BY CATEGORY
Appellant's Knowledge/Purpose
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QUESTION/UNDERTAKING
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REF
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1.
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To advise whether the Appellant has been involved in
engagements where a determination of fair market value has
been required (R-Q.2)
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q. 60, p. 20-23
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2.
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To advise of the Appellant's understanding of the term
"fair market value" (R-Q.3)
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q. 62, p. 23-24
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3.
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To advise whether the Appellant has ever engaged people
to prepare valuation reports on behalf of clients
(R-Q.4)
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q. 63, p. 24
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4.
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To advise from the Appellant's experience or knowledge
whether Chartered Business Evaluators are qualified to
assess fair market value (R-Q.5)
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q. 65, p. 24
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5.
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To advise of the Appellant's understanding of what a tax
shelter is (UA-Q.1)
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q. 66, p. 24-26
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6.
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To advise whether Appellant in his practice has ever
advised people in tax shelters (R-Q.6)
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q. 69, p. 27
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7.
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To advise whether the Appellant has provided tax advice
or tax opinions on tax shelters in the past (R-Q.7)
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q. 70, p. 27
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8.
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To advise whether the Appellant has a greater knowledge
with respect to tax shelters compared to the man on the
street (R-Q.8)
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q. 71, p. 27
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9.
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To advise whether the Appellant has changed his
investment philosophy throughout the years
(R-Q.9)
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q. 82, p. 30
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10.
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To advise what the Appellant's investment objective is,
short-term capital gains or long-term capital
appreciation (R-Q.10)
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q. 94, p. 33
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11.
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To advise what the Appellant's average holding period is
on an investment (R-Q.11)
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q. 95, p. 34-36
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12.
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To describe the level of risk the Appellant is willing
to tolerate in an investment (R-Q.12)
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q. 98, p. 36-38
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13.
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To advise whether the Appellant attempts to diversify
his investments (R-Q.13)
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q. 101, p. 38
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14.
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To produce statements for the Appellant's investment
portfolio accounts at the time for 1998 (R-U/T.1)
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q. 107, p. 40-42
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15.
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To advise whether the Appellant reviews financial
statements before investing (R-Q.14)
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q. 112, p. 43-47
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16.
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To advise what investments the Appellant profited from
in 1999 (R-Q.15)
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q. 343, p. 87
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17.
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To advise what the Appellant's plans would be if he
decided not to enter into the licensing agreement
(R-Q.16)
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q. 374, p. 93
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18.
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To advise whether the Appellant is familiar with the
term "limited recourse [sic] financing" (R-Q.18)
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q.478
p.116-118
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19.
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To advise whether the Appellant agrees with the opinion
that is expressed in paragraph 2 of tab 5 of the
Appellant's documents (R-Q.19)
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q. 491
p. 120-121
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20.
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To advise whether the Appellant agrees with Fraser
Milner's view of the tax consequences of software
acquisition at page 2, paragraph 4, tab 5 of
the Appellant's documents (R-Q.20)
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q. 493
p. 121-123
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22.
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To advise whether the Appellant thought the two
appraisals would have been important documents to read
prior to making the agreement (R-Q.26)
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q. 571, p. 151
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23.
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To advise what the Appellant's conclusions on the fair
market value of the software (R-Q.27)
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q. 574, p. 152
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24.
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To advise if the terms in paragraph 38 of the EMC
appraisal cause the Appellant any anxiety with respect to
how the investment scheme is going to perform
(R-Q.28)
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q. 578, p. 153
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Valuation
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QUESTION/UNDERTAKING
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REF
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26.
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To advise whether the Appellant would have acquired the
software if the license agreement, the agency agreement and
the Promissory Note were not in place (R-Q.22)
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q. 496
p. 124-125
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27.
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To advise whether the Appellant attaches any value to
the agreements as opposed to the software
(R-Q.23)
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q. 497
p. 125-127
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Representations
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QUESTION/UNDERTAKING
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REF
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39.
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To advise whether the Appellant ever saw on a commercial
that should Trafalgar Trading not meet its covenant of the
8% return that Trafalgar BV would not be seeking to enforce
its note with respect to the difference (R-Q.17)
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q. 474-477,
p. 115-116
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40.
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To advise whether the Appellant asked Mr. Langille
if the Trafalgar Index Program was a tax shelter
(R-Q.24)
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q. 537
p. 142-145
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41.
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To advise whether the Appellant asked Mr. Langille
if an identification number had been sought for the tax
shelter (R-Q.25)
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q. 538, p. 145
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Miscellaneous
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QUESTION/UNDERTAKING
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REF
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42.
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To advise whether the Appellant was getting more money
back by way of deduction than he ever put in by way of cash
(R-Q.29)
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q. 614, p. 161
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[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. Some counsel seek to
achieve their purpose by being aggressive and intimidating.
Others seek to lull the witness into a sense of security by
asking a series of seemingly innocent and possibly pointless
questions until one key question is tossed out with apparent
nonchalance and the witness answers it. The principle is stated
in Leeds v. Alberta, [1989] AJ No. 755 (CA) at
p. 10 (QL) as follows:
The scope of questions which
may be properly asked in examination for discovery has been
considered in several reported decisions. In Czuy and Czuy v.
Mitchell, Edmonton General Hospital and the General Hospital
(Grey Nuns) of Edmonton (1976) 1 A.R. 434
(S.C. App. Div.) the respondent plaintiff wished to
compell [sic] answers to certain questions.
Prowse, J.A. noted that to hold that these matters could not
be examined upon would amount to striking out a cause of action
alleged in the statement of claim and so refused to do so. At
p. 439-440 he further commented that:
"Although generally a Court will not seek to control the
manner in which Counsel conducts an Examination, it will
interfere where it appears that the purposes for which they are
being held are being abused, such as where the conduct of Counsel
is abusive, the length of the Examination supports the conclusion
that it is being conducted as a delaying tactic, or the questions
touch and concern matters which are clearly irrelevant. On the
other hand, the Court, on the limited material available on such
an application, where the relevant documents are not before it,
will not conduct a minute examination of each question to
determine its relevancy. In my view, a Court, in ruling on such
applications, should not unduly restrict an Examination by
excluding questions broadly related to the issues when it appears
that their relevance may well be resolved by other evidence not
before the Court on the application."
Haddad, J.A., who agreed with Prowse, J.A., expanded upon the
issue of what questions are relevant. At p. 440 he said:
"The general rule, as I conceive it, which has emerged
from the leading authorities is expressed with clarity and
simplicity in the headnote of the report of Rural Municipality
of Mount Hope No. 279 v. Findley, [1919] 1 W.W.R. 397,
as follows:
'The 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."
At p. 444 he said:
"In my view then, it is the scope of the examination for
discovery with which we are concerned in this appeal. Wide
latitude is to be permitted. The examination may be searching and
exploratory. Questions on discovery are relevant so long as they
touch 'the matters in question' and fall within bounds that are
reasonable. If the questions asked are relevant to the matters in
issue or can possibly affect the issues between the parties - if
they are questions which may be permitted on cross-examination -
then they must be answered."
The question of the scope of examination for discovery was
also considered in Drake v. Overland and Southam Press
Ltd. (1979) 19 A.R. 472 (C.A.). Laycraft, J.A. (as
he then was) said at p. 483-84:
"It is trite law in Alberta that an examination for
discovery is a wide ranging cross-examination on everything
relevant to the issues, though it may not go to questions of
credibility. Its scope it [sic] very wide. Its purpose is not
limited merely to determining the unknown. Questions may be
designed to be used as proof at trial and to pin down the
opposite party so that one can be certain as to his evidence at
trial. Questions may be asked which only indirectly assist a
party in proving his own case or in disproving his opponent's
case. A counsel's approach may be circuitous in arriving at
the issue he attacks and he is not bound to explain his ultimate
purpose in any question. Only those questions which are clearly
irrelevant should be rejected at this stage since in the absence
of all the evidence to be produced at trial the Court can
form only a general impression as to their relevance."
In Montana Band v. Canada, [2000] 1 F.C. 267,
Hugessen J. discussed at length the permissible scope of an
examination for discovery:
The general purpose of examination for discovery is to render
the trial process fairer and more efficient by allowing each
party to inform itself fully prior to trial of the precise nature
of all other parties' positions so as to define fully the issues
between them. It is in the interest of justice that each party
should be as well informed as possible about the positions of the
other parties and should not be put at a disadvantage by being
taken by surprise at trial. It is sound policy for the Court to
adopt a liberal approach to the scope of questioning on discovery
since any error on the side of allowing questions may always be
corrected by the trial judge who retains the ultimate mastery
over all matters relating to admissibility of evidence; on the
other hand any error which unduly restricts the scope of
discovery may lead to serious problems or even injustice at
trial.
Also, in Owen Holdings Ltd. v. The Queen, 97 DTC 5401
at 5405, Marceau J.A. said:
Thus the phrase "relating to
any matter in question" requires that, at the discovery stage,
relevancy must be construed generously, or with fair latitude.
Nonetheless, "semblance of relevancy" should not be interpreted
so broadly that it allows one party to engage in a fishing
expedition, or simply harass the other. A semblance of relevancy
exists only where the documents sought may lead the party seeking
discovery to a train of inquiry which may directly or indirectly
advance its case or damage that of its adversary. Thus the Tax
court Judge adopted the correct standard for production of
documents under Rule 82(1).
Application to the documents in category (ix)
The Tax Court Judge, then,
would have been correct in ordering production of the technical
interpretations and unpublished advance rulings if those
documents might have led the appellant to a train of inquiry
which might advance its case or damage that of the respondent. In
this case, however, neither the technical interpretations nor the
advance rulings were capable of assisting the appellant in this
way.
[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.
[14] I turn then to the specific
questions in issue. The numbers correspond to those in the list.
Quite frankly, I personally do not think that it would affect the
outcome of the case if none of the questions were answered.
Similarly, if they were answered, the outcome would not be
affected by what the answer was. Nonetheless, I shall endeavour
to draw a line between questions that are clearly irrelevant and
those that a trial judge might arguably be asked by counsel to
consider of some possible relevance in the context of all the
evidence. I asked counsel for the appellant why, if the questions
are as irrelevant as he contends, he does not simply let his
witness answer. The objection gives to the question the
appearance of importance that it might not otherwise have.
l.
The nature of the appellant's practice does not bear on his
investing in software, although possibly counsel sees in this
question a relevance that is not obvious to me. I am not prepared
to allow it.
2. With respect, I can see no
conceivable relevance in this question. The appellant is a tax
lawyer. He is undoubtedly aware of the usual meaning of fair
market value which has, in any event, attained the status of a
principle of law. The particular legal definition of the
expression adopted by Mr. Baxter strikes me as nihil ad
rem.
3. I cannot see how this has any
conceivable bearing on the case.
4.
This is a matter of opinion that can be left to the trial. It is
not appropriate to ask the appellant's view.
5.
This is a question of law. It need not be answered.
6.
Whether the appellant has advised clients on tax shelters appears
to me to have no bearing on the case.
7.
This is just a variation on 6.
8.
This is not an appropriate question. Indeed, it is somewhat
meaningless. Why ask it? The appellant is a tax lawyer. One could
as easily ask what the appellant's understanding is of the
knowledge of tax shelters of the man on the Clapham omnibus.
9.
I think the question may be relevant. Counsel may invite the
trial judge to consider it relevant in the context of the case as
a whole. One of the issues is whether the appellant is a
trader.
10. Same as
9.
11. Same as
9.
12. Same as
9.
13. Same as
9.
14. I would
draw the line here. The questionable relevancy of this line of
enquiry makes it inappropriate that the appellant's investment
portfolio be made public.
15. This
should be answered.
16. Same as
9.
17. This calls
for conjecture by the witness. It is, even on the most liberal
interpretation of relevancy, beyond the pale.
18. The
question as it stands seems innocuous enough provided it is not
followed by a question about the witness' legal definition of the
expression.
19. I do not
think it is appropriate to ask a witness if he agrees with a
legal opinion.
20. Same as
19.
22. I think this is a proper question.
23. At the risk of being inconsistent with my
conclusions on questions 1, 2 and 3 it might conceivably be
relevant if the appellant does not believe that the property had
a fair market value that supported his case. Therefore this
question can be answered.
24. It is doubtful if this rather infelicitously
worded question is relevant but I see no particular harm in
letting the witness answer it.
26. This is a
proper question.
27. This is
arguably a proper question.
39. This
question should be answered.
40. This
question should be answered.
41. Same as
40.
42. I see no
reason why this question should not be answered if the
information is available.
[15] Success is mixed. Costs should be
in the cause.
Signed at Ottawa, Canada, this 6th day of October
2004.
Bowman, A.C.J.
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