Citation:
2015 TCC 157
Date: 20150622
Docket: 2012-2156(IT)G
BETWEEN:
TOR
CAN WASTE MANAGEMENT INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Lyons J.
[1]
The appellant brought a motion pursuant to Rule 110
of the Tax Court of Canada Rules (General Procedure) for an Order directing
the respondent to:
1. answer certain follow-up questions and
produce documents refused set out in Schedule “A” referred to in the Notice of Motion
and attached to these Reasons;
2. re-attend at its own expense a continuation
of the examination for discovery of the respondent to answer all proper
questions that the respondent previously refused or failed to answer and also
to answer any proper questions arising from those answers;
3. pay forthwith the costs of this motion and
the costs of the continuation of the examination for discovery.
[2]
The background of this dispute involves appeals
by the appellant of reassessments made by the Minister of National Revenue (the
“Minister”) under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) (the “Act”). The Minister disallowed deductions in the amounts of
$205,578 in 2007 and $358,500 in 2008 claimed by the appellant as deductible business
expenses for used waste containers or bins that it allegedly purchased.[1]
[3]
Some factual and procedural context would be
useful before turning to the motion. It is undisputed that the appellant
operates a waste management business in Brampton, Ontario.[2] It collects waste from its
customers through the provision of bins to its customers. It then passes the
waste to transfer stations for recycling and disposing.
[4]
According to the appellant, it allegedly
purchased a portion of waste containers or bins by cheques that it issued
directly to Lans Financial Services (“Lans”). These transactions were recorded by
the appellant as asset purchases.[3]
[5]
The appellant also allegedly purchased the remaining
portion of the waste containers or bins (the “Bins”) indirectly from a
competitor through Lans, as a financial intermediary, by cheques it issued to Tor
Can (Contracting) Services (“Services”) for the Bins.[4] The cheques issued to Services
– totalling the amounts of $205,518 in 2007 and $358,500 in 2008 taxation years
– were endorsed on behalf of Services (“the Amounts” in issue). These cheques were
then provided to, cashed and received by Lans allegedly as payment for the
purchase price of the Bins. According to the appellant, the transactions were
not recorded as asset purchases and were deducted by the appellant, allegedly
in error, as payments to subcontractors for accounting and tax purposes.
[6]
The appellant was owned by Mrs. Antonella
Gurreri. Services was owned by Mr. Liborio Gurreri, spouse of Mrs. Gurreri.
[7]
The appellant asserts the Amounts are deductible
business expenses pursuant to paragraph 20(1)(a) of the Act, in its
taxation years ending July 31, 2007 and July 31 2008, constituting the capital
cost of depreciable property (the Bins) qualifying as class 10, paragraph
(h), assets in Schedule II of the Income Tax Regulations, C.R.C., c. 945.
[8]
According to the Minister, although the Amounts
were made by the appellant to Services, she alleges that the Amounts were not
for the purchase of the Bins; were not incurred to gain or produce income from the
business; were not used to acquire capital property; and were personal expenses
of the appellant’s sole shareholder and spouse pursuant to sections 3 and 9,
and paragraphs 18(1)(a), (h) and 20(1)(a) of the Act.
[9]
May 14, 2013 was the date of the examination for
discovery of the respondent’s nominee, Raja Sivaguru. At
discovery, he acknowledged that subsequent to the completion of his audit of
the appellant, Latif Merali stated to him that the appellant’s cheques issued
to Services, in the Amounts (payments), were cashed by Mr. Merali. Mr. Merali retained
an amount from each cheque and then wrote a cheque on Lans’ account for the
remaining discounted amount. After cashing the Lans cheque, he gave the cash to
Mr. Gurreri (the “discount theory”). This statement formed the basis for
Mr. Sivaguru concluding that the $577,226, which includes the Amounts,
constitutes personal expenses received by Mr. and Mrs. Gurreri as shareholder
withdrawals.[5]
Mr. Merali provided copies of cheques and deposit slips to the Canada
Revenue Agency (“CRA”) relating to the
transactions.[6]
[10]
On July 22, 2013, the respondent sent a letter to
the appellant providing answers to fulfill undertakings, answers to certain questions
taken under advisement and refusals to the remaining questions taken under
advisement given during the discovery of Mr. Sivaguru.
[11]
On September 17, 2013, the appellant sent a
letter to the respondent with follow-up questions to the respondent’s answers
to undertakings and reiterating questions to refusals relating to advisements.
[12]
The respondent responded to the appellant by letter
dated November 15, 2013, with an attached table containing the follow-up
questions, complete answers, partial answers and refusals.[7] Other documentation was also
attached to the letter. Schedule “A” sets out the eight follow-up questions
asked and documentation requested (“information”) which were refused and
are the subject of this motion.[8]
[13]
The appellant is seeking an Order requiring the
respondent to provide all the information the Minister received from the third
parties asserting that these were used to support the Minister’s position that
the $577,226 were personal expenses. It is the position
of the appellant that the respondent improperly refused to provide the
information requested even though the eight questions are directly relevant to
the issues in dispute within the broad purposes of discovery to assist the
appellant in knowing the case it has to meet which will lead the appellant to the
train of inquiry in ascertaining if the appellant purchased the Bins.[9]
[14]
The parties agree as to the legal test and the
governing principles of this motion except that the appellant seeks production
of everything the Minister received from Lans and Mr. Merali (“third parties”) and appeared to suggest that it is not for
the respondent to determine relevance.
[15]
The respondent asserts that the operative
principle is that the appellant is to be permitted access to all documents, or
parts thereof, that are relevant or were relied on by the Minister in
reassessing.
I. Analysis
[16]
The applicable legal test for relevancy and the
latitude of a motion judge when hearing a motion to compel a response to a
discovery question was extensively canvassed by Bowman A.C.J., as he then was,
in the case of Baxter v Canada, 2004 TCC 636, 2004 DTC 3497 [Baxter]
and as applied in recent jurisprudence.
[17]
The compendium of principles that have emerged identify
that the key to any question on discovery is limited by relevance which must be
broadly and liberally construed with wide latitude to be given. Relevance is
driven by the issues in the pleadings. Thus, questioning allowed at discovery
is broad and relevance has a low threshold.[10]
[18]
Rule 95(1) of the Tax Court of Canada Rules
(General Procedure), SOR/90‑688a is the starting point which
governs the scope of oral discovery. It states that:
95(1) A person
examined for discovery shall answer … any proper question relevant to any
matter in issue in the proceeding …
[19]
The Federal Court of Appeal in Canada v
Lehigh Cement Ltd., 2011 FCA 120, [2011] 4 CTC 112 (FCA) [Lehigh Cement],
recently confirmed that a question is relevant which might fairly lead to a train
of inquiry that may either advance the questioning party’s case or damage the
case of its adversary.[11]
[20]
However, fishing expeditions of vague and
far-reaching scope are discouraged. Thus, the Court retains discretion to
disallow such questions or relevant questions if abusive, disproportionate,
designed to embarrass or harass the witness, delays the case, causes undue
hardship on the answering party or if there is another way to obtain the information. [12]
[21]
A motion judge ruling on an application should not
unduly restrict an examination by excluding questions broadly related to the
issues, nor seek to impose his or her views of relevancy on the trial judge 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. Nor
should a motion judge second guess the discretion of counsel by examining
minutely each question or justification of each question.[13]
[22]
The appellant also referred to the purpose of
discovery established in the jurisprudence and referenced the decision in HSBC
Bank of Canada v Canada, 2010 TCC 228, 2010 DTC 1159.[14] The appellant noted that C. Miller
J., at paragraph 16, referred to the aim of discovery as providing a level of
disclosure so as to allow each party to “proceed efficiently, effectively and
expeditiously towards a fair hearing, knowing exactly the case each has to meet.”
[23]
Subsections 241(1) and (2) of the Act embody
the basic principles that restrict the release of confidential taxpayer information.[15] Paragraph 241(3)(b) of the Act contains an exception
to the prohibition in respect of legal proceedings relating to the
administration or enforcement of the Act and provides:
241(3) Subsections 241(1) and 241(2) do not
apply in respect of
…
(b) any
legal proceedings relating to the administration or enforcement of this Act,
the Canada Pension Plan, the Unemployment Insurance Act or the Employment
Insurance Act or the Employment Insurance Act or any other Act of
Parliament or law of a province that provides for the imposition or collection
of a tax or duty.
[24]
The prohibition against disclosure by the
Minister of protected third-party taxpayer information and documentation applies
if it is not relevant to nor was relied on by the Minister in reassessing a tax
return. [16]
[25]
Courts will not order the disclosure of
third-party information where the Minister did not use the information nor if
there was virtually no reason to use the information to make an assessment. [17]
[26]
Courts have ordered disclosure of third-party information
(income tax returns and information exchanged with the Minister) if the
information was relied on by the Minister in making the assessment.[18]
[27]
In the decision of Oro Del Norte, S.A. v
Canada, [1990] 2 CTC 67 (FCTD), the Court held that third-party information
relevant to the issues between the parties or relied on by the Minister in
assessing is disclosable. Recently, in Heinig v Canada, 2009 TCC 47,
2009 DTC 1072 [Heinig], Webb J. confirmed those principles (relevance
and reliance).
[28]
This Court is to ascertain whether, prima facie,
the follow-up questions put in respect of the issues in the pleadings offend
the above principles. I now turn to the appellant’s motion in which it seeks
answers to the eight follow-up questions. At the
motion, the appellant informed the Court that questions 1 to 8 on Schedule “A” can be categorized
into four groups.
Questions 1, 5 and 2
1. Did CRA
audit third party and/or Mr. Merali? If so, what were the results of this
audit?
5. Did CRA
audit Lans Financial or any other entity with which the third party or Mr.
Merali was associated as an employee, shareholder, officer, director or
consultant?
2. Did CRA
perform a “net worth” analysis on this third party or
Mr. Merali. If so, what were the results of the net worth analysis?
[29]
The appellant submits that the crux of
the case relates to the payments totalling the amount of $577,226, which
includes the Amounts. Specifically, whether the Amounts were for the purchase
of the Bins to earn business income or for personal expenses of the
shareholders, as alleged by the Minister, based on Mr. Merali’s statement
relating to the remaining discounted amounts. Questions 1, 5 and 2 were asked
in relation to the Minister’s allegation because the appellant believes that
there was “something” other
than Mr. Merali’s statement.
[30]
The appellant contends
that the audits and net worth analyses would
assist in “figuring out” where those funds went and
possibly reveal or not whether the third parties reported the Amounts in income
and lead to certain suppositions such as possibly finding that Mr. Merali had
unreported income because he cashed the cheques.[19] Relying on the decision in Amp
of Canada, Ltd. v Canada, 87 DTC 5157 (FCTD) [Amp], the appellant asserts
it should obtain all the third party information, as in the Amp
decision, and construed the decision as also suggesting it is not for the
respondent to determine relevance.
[31]
At the hearing, the respondent confirmed that
all relevant third party information has been produced to the appellant. The
information sought relates to the third parties’ tax liabilities, is unrelated
to the correctness of the appellant’s reassessments and was not relied on by
the Minister in reassessing. In contradistinction to the appellant, the
respondent submitted that she has a duty to review documents to determine what
it views as relevant.
[32]
The appellant’s position - everything is
disclosable - disregards the principle that access to third-party information
is permissible provided that the Minister relied on the information in
reassessing or it is relevant. There is nothing to suggest that the information
sought (results of the audits or net worth analyses of the third parties) was
relied on nor, as confirmed by respondent counsel, did the Minister make any
such admission. As well, the respondent acknowledged her ongoing obligation
under the Rules of Court to produce any additional relevant information that
she obtains.
[33]
Contrary to the appellant’s interpretation of the
decision in Amp, in my view, it is premised on the
fact that it was impossible for Amp to know what segments of the competitor’s
financial statements and tax returns that the CRA relied on and for that reason
it obtained full disclosure. However, it is clear that the overarching
principle is that of reliance.[20]
In Huron, it was clearly established that the third-party competitor’s
tax returns had been relied on by the Minister. Unlike the present case, in Amp and Huron, it was admitted at discovery that
the Minister had actually relied on the information in formulating the Minister’s assumptions. No such question was asked by the appellant
in the present case at the discovery to establish what documents the Minister
relied on.
[34]
At the discovery, Mr. Sivaguru was asked “And
what facts do you have to demonstrate that Mr. Gurreri received the funds?” He answered
“Based on Mr. [Merali’s] statement”[21] Appellant
counsel then asked “That’s the only thing” and Mr. Sivaguru said “Yes”.[22]
[35]
In framing the questions
as to whether audits or net worth analyses “if
any” had occurred, the appellant is seeking to ascertain the results relating to
audits (verification of income) and net worth analyses (indirect verification
of income) of third parties. Aside from the appellant’s suppositions and the
hypothetical nature of those questions, how the third parties chose or not to
report income is not relevant to the issues as to whether the Amounts were
incurred by the appellant to purchase the Bins. I also agree that the appellant
is seeking information relating to the third parties’ tax liabilities which is
unrelated to the correctness of the appellant’s reassessments.
[36]
I find that there is no basis in the materials
showing the CRA drew on or relied on audits or net worth audits of the third
parties in support of the appellant’s reassessments.
[37]
I disagree with the appellant that it is not for
the respondent to determine relevance. Necessarily, the respondent has a duty to
review documents in the CRA file to ascertain if a document, or part thereof,
is relevant based on her own assessment of relevance. If challenged, relevance
is ultimately decided by the Court.
[38]
The appellant asserts because the third parties
were on the opposite side of the transactions with the appellant, the
information is relevant and goes to the crux of the case. To determine if the appellant has satisfied the relevance test,
regard must be had to the essence of its appeal. The dispute in the pleadings
in ascertaining if questions are relevant, centres on whether the Amounts were expended
by the appellant to purchase the Bins, via Services, from Lans for the purpose
of earning business income.
[39]
Again, whether third parties chose, or not, to
report income has no bearing on whether the Amounts were deductible by the
appellant as business expenses for the purchase of the Bins or in establishing
that these were personal expenses. I find that the nature of the requests
sought by the appellant constitute irrelevant third party protected taxpayer information
unrelated to the appellant’s tax liability thus there is no semblance of relevancy
[40]
With respect to question 5, the appellant failed
to explain as to how it is relevant to the issues that the CRA audited an
entity that Mr. Merali was otherwise associated.
[41]
I conclude that the third party information
sought was not relied on in reassessing nor relevant to the issues. The
questions amount to fishing. The Minister correctly applied the prohibition
from disclosure in section 241 of the Act. The respondent need not
answer these questions.
Questions 4 and 7
4. Please
provide a list and a copy of all letters, reports, memoranda or other
correspondence written by Mr. Sivaguru or any other CRA employee or
consultant to or in respect of the third party, Mr. Merali or Lans
Financial.
7. Please
provide a list and a copy of all letters, reports, memoranda or other
correspondence written by Mr. Sivaguru or any other CRA employee or
consultant to or in respect of Lans Financial or any other such entity.
[42]
The appellant pleads that the only information
it received “in respect of” the third parties
comprise the CRA’s March 27, 2012 letter (“CRA letter”) sent to the third parties
and the T2020 detailing communications and meetings between the CRA and Mr.
Merali between February 29, 2012 to May 11, 2012.
[43]
The respondent confirmed that the CRA letter and
the T2020, produced as part of the response to question 3, are the only two relevant
documents written. She objected to separately listing documents on the basis
that the requests were overly broad and of unclear relevance.
[44]
Absent a suggestion by the appellant that
documents have been improperly withheld, and there has been no such suggestion,
and since the respondent has confirmed that she has provided the relevant
documents written by the CRA in respect of the third parties, I find that the
respondent has adequately answered that part of the question.
[45]
I also find that the request to separately list
documentation is too broad and it is unnecessary to answer this part of the
question.
[46]
I conclude that the respondent has answered the
questions and need not respond further to these questions.
Questions 3 and 6
3. Please
provide a list and a copy of each document reviewed or received by CRA from the
third party and/or Mr. Merali.
6. Please
provide a list and a copy of each document reviewed or received by CRA in
respect of Lans Financial or any other such entity.
[47]
The appellant pleads that it is entitled to
everything obtained by the CRA from the third parties which relates directly to
Mr. Merali’s statement relating to the discount theory. It referred to examples
such as the documents listed in the CRA letter and the contents of eight
folders detailed in the T2020.
[48]
The respondent confirmed that everything that had
been obtained from the third parties that was asked for and relevant to the
issues or was relied on was produced to the appellant. It was noted that not
all of the documents listed in the CRA letter were obtained from Mr. Merali.
The documents produced by the respondent included some deposit slips that had
been redacted to remove the identities of third party entities unrelated to
this appeal and involving years beyond those under appeal.
[49]
The respondent’s response to the questions are
as follows:
Question 3
Refused in part.
This question is overly broad and its relevance is unclear. The respondent
refuses [to] separately list the documents obtained. However we state that the
documents produced by Mr. Merali in respect of the appellant’s 2007 and 2008
taxation years were:
a.
the deposit slips and cheques set out in Exhibit
R-3, with the available backs of the cheques that were produced in Iris
Kingston’s letter dated July 22, 2013. We have located four additional deposit
slips (being 6-F, 6-L, 6-N and 6-P) that Mr. Merali provided that were not
included in R-3.
b.
a loan agreement, with related cheques, which we
attach.
The documents have been redacted to remove third party information
not relevant to this matter. Please note that deposit slips 6-E, 6-K, 6-M, and
6-0 are included, but redacted in full, as they do not relate to the appellant’s
2007 or 2008 taxation years. They are included in the production as they were
copied on the same page as slips 6-E-, 6-K, 6-M, and 6-O, respectively.
Question 6
Refused. This question is overly broad and its relevance is unclear.
In any event, the documents received from Mr. Merali in respect of the
appellant’s 2007 and 2008 taxation years have already been produced or are
attached.
[50]
In Heinig, Webb J. allowed the motion for
disclosure, in part, after applying the principle that a taxpayer must be permitted
access to all relevant documents and construed “all documents” as any document
or segment of a document provided that the relevant segment can be severed
without rendering the document incomprehensible, otherwise the entire document
would need to be disclosed.[23]
At paragraph 10, he states that:
10. It seems to
me that the reference to all documents does not necessarily mean that an entire
document should be disclosed to an appellant if only part of that document is
relevant to the appeal and another part contains confidential third party
information that is not relevant to the appeal. In my opinion it would not be
appropriate for the entire document to be disclosed if these parts could be
severed. …
[51]
In seeking to obtain all documents obtained from
the third parties, including the redacted documents, the appellant has failed
to apply the relevance test and the approach in Heinig and cannot
succeed with respect to these requests. In providing the cheques, deposit
slips, redacted deposit slips with irrelevant information, loan agreement and
related cheques, I find that the respondent has adequately answered that part
of the question.
[52]
I also find that the request to separately list
documentation is too broad and unnecessary.
[53]
I conclude that the respondent has answered the
question, was correct in redacting irrelevant, protected third-party
information and the provision of a list is unnecessary. The respondent need not
respond further to these questions.
Question 8
8. Were all or
any portion of the payments made to Lans Financial by the Appellant directly or
indirectly through Tor Can Contracting reported by Lans Financial in computing
its income for income tax purposes.
[54]
The appellant plead at the hearing that it is
relevant to know whether the discount payments, or portions, were included in
Lans income as it would relate to the Minister’s discount theory.[24]
[55]
The respondent had refused to answer these
questions on the basis the information sought is unrelated to the correctness
of the appellant’s assessment, related to the tax liabilities of third parties
thus irrelevant to any issue in the appeal and is protected from disclosure
pursuant to section 241 of the Act.
[56]
Respondent counsel submitted at the hearing that
whilst Lans is obliged to produce certain documents to the CRA under the
regulations, the CRA is not responsible for approaching Lans to obtain the
subcomponents of the net income that Lans had arrived at and reported as its
net income. Further, assuming it is even possible for Lans to obtain that level
of detail, does that create an issue out of an issue as to whether Lans
properly reported, or not, its income or would the appellant accept the reporting
or debate that as an issue?
[57]
The issue in this dispute is not whether or how
Lans chose to report its income. I agree that the CRA is not obliged to approach
Lans to obtain information which may or may not be further debated by the
appellant. Having regard to the principles and noting that to be efficient,
effective and expeditious the request for such a breakdown is more
appropriately ascertained by the appellant at a third-party discovery should it
choose to pursue that option. For those reasons and the reasons set out under
questions 1, 5 and 2, I find the question is not relevant. The respondent need
not answer the question.
[58]
For the foregoing reasons, the appellant’s
application for an Order from the Court directing the respondent to answer the
follow up questions and produce documents is denied.
[59]
The parties are directed to communicate with the
Hearings Coordinator, in writing, within ten (10) days of receiving the
decision and the Order of the Tax Court of Canada on this motion.
[60]
The costs of this motion will be in the cause.
[61]
Signed at Ottawa, Canada, this 22nd day of June 2015.
“K. Lyons”
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