Citation: 2014 TCC 179
Date: 20140527
Dockets: 2012-739(IT)G
2012-4194(IT)G
BETWEEN:
GERBRO
INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Woods J.
[1]
Three interlocutory motions have been brought by
the parties:
(a) the Crown seeks
an Order to quash a notice to attend for examination on an affidavit,
(b) Gerbro Inc. (“Gerbro”)
seeks an Order to strike out certain assumptions set out in the Replies, and
(c) the Crown seeks
an Order for disclosure of solicitor-client communications.
[2]
By way of background, Gerbro is a
Canadian-controlled private corporation, the sole shareholder of which is the
Marjorie Bronfman Trust. Gerbro appeals in respect of assessments made under
the Income Tax Act for the 2005 and 2006 taxation years.
[3]
The appeals concern the application of section
94.1 of the Act in respect of shares that Gerbro owned in four foreign
investment entities (the “Funds”). The pleadings identify two issues, which for
the purpose of these motions may generally be described as whether the Funds
primarily held portfolio investments and whether Gerbro’s interest in the Funds
was tax motivated (the “purpose test”).
[4]
These motions were brought after the parties had
completed discoveries and satisfied undertakings.
Motion 1 - Crown’s
motion to quash a notice to attend
Background
[5]
The Crown seeks an Order to quash a notice to attend
for examination on an affidavit.
[6]
The relevant background facts are set out below.
(a) June 28, 2013 -
The Crown provided clarifications and corrections to answers given on discovery
by Ginette Phisel, who was the auditor on this file on behalf of the Canada
Revenue Agency (CRA). The Crown was required to provide this information
pursuant to subsection 98(1) of the Tax Court of Canada Rules (General
Procedure) (the “Rules”).
(b) August 28, 2013 -
Gerbro requested that the clarifications and corrections be confirmed by
affidavit pursuant to s. 98(2)(a) of the Rules.
(c) September 12,
2013 – An affidavit of Ms. Phisel was provided to Gerbro which confirmed the
clarifications and corrections.
(d) September 30,
2013 - Gerbro informed the Crown that it would not require further examinations
for discovery by written questions. Gerbro had earlier agreed that any further
discovery would be conducted only in writing.
(e) October 31, 2013
- Gerbro informed the Crown that it wished to cross-examine Ms. Phisel on her
affidavit pursuant to section 74 of the Rules.
(f) November 11,
2013 - Gerbro serves a notice to attend for Ms. Phisel to be examined on her
affidavit.
Position of
parties
[7]
The Crown seeks to quash the notice to attend on
grounds that the Rules do not permit the examination, and that it would
be unfair for Gerbro to go behind its agreement that discoveries were completed.
[8]
Gerbro submits that s. 98(2)(a) permits the
further examination of Ms. Phisel, and that in any event it has an inherent
right to cross-examine on an affidavit. With respect to its agreement to end
discoveries, Gerbro submits that this agreement only applied to general
discoveries and it does not limit Gerbro’s right to cross-examine on the
affidavit.
[9]
For clarity, Gerbro does not rely on section 74
of the Rules as it did in its letter of October 31, 2014. This section
clearly has no application.
Analysis
[10]
By letter dated June 28, 2013, the Crown
provided several clarifications and corrections to answers given by Ms. Phisel
on discovery. Gerbro seeks to examine Ms. Phisel on the corrections, however counsel’s
submissions at the hearing focussed on only one correction that it says is key
to Gerbro’s case. I will therefore limit my consideration to this one item.
[11]
On discovery, Ms. Phisel was asked whether a
number of findings in the auditor’s report were based on a template developed
by the CRA. The auditor’s finding that is relevant here is that Gerbro
satisfied the purpose test in s. 94.1. The conclusion is stated in paragraph 81
of the report, which reads:
81. As a
result, in our view, using the precise wording of current section 94.1 (OIF
regime), one of the main reasons of the holdings of the OIFs was to derive a
benefit in such a manner that the taxes on the income, profits and gains from
such assets are significantly less than the tax that would have been applicable
if the income, profits and gains had been earned directly by Gerbro.
[12]
When asked on discovery whether the finding in
paragraph 81 was based on a template, Ms. Phisel answered that it was. She subsequently
corrected this answer and stated that paragraph 81 was specific to Gerbro.
[13]
Following the correction, Gerbro requested an
affidavit confirming this pursuant to s. 98(2) of the Rules. Gerbro now
wishes to cross-examine Ms. Phisel on the affidavit to test the veracity of the
correction.
[14]
In my respectful view, Gerbro should not be
permitted to cross-examine Ms. Phisel on her affidavit. However, pursuant to s.
98(2)(a) Gerbro should be able to further examine Ms. Phisel regarding the
correction.
[15]
Subsection 98(2) of the Rules provides:
98.(2) Where a party
provides information in writing under subsection (1),
(a) the
adverse party may require that the information be verified by affidavit of the
party or be the subject of further examination for discovery, and
(b) the
writing may be treated at a hearing as if it formed part of the original
examination of the person examined.
[16]
Gerbro submits that there is an inherent right
to cross-examine on an affidavit. I was not referred to any specific Rule
or jurisprudence which provides for such a right, and this submission is
therefore rejected.
[17]
This is not the end of the matter, however,
because Gerbro also submits that s. 98(2) gives a right of further examination
of Ms. Phisel relating to her corrections. I agree with this view, which is
based on an inclusive meaning of the word “or” in s. 98(2)(a).
[18]
When interpreting the word “or” in this context,
I see no reason to depart from the meaning that this term has in statutes. In
this usage, the term “or” is presumptively used in an inclusive sense so that one
or both courses of action may be taken: Sullivan on the Construction of
Statutes (fifth edition). This meaning favours Gerbro’s position that it is
entitled under s. 98(2) to two courses of action, an affidavit and a further
examination.
[19]
The Crown submits that, even if s. 98(2) is
interpreted in this manner, further examination should not be permitted because
Gerbro itself agreed to end discoveries by its letter dated September 30, 2013.
[20]
The letter dated September 30, 2013 appears to
be ambiguous on this point. Gerbro submits that the agreement was only meant to
include general discoveries, and not a specific examination on the corrections.
This position is consistent with the material before me, and given the
importance of the issue to Gerbro, it should be given the benefit of the doubt
on this point.
[21]
Where does this leave us? I would note that the
notice to attend refers to an examination on Ms. Phisel’s affidavit. This is
not the examination that is provided for in s. 98(2) and the notice to attend should
be quashed on this basis. However, I conclude that Gerbro should be entitled to
further examine Ms. Phisel with respect to the correction that is at issue.
Motion 2 - Gerbro’s
motion to strike out parts of the Replies
Background
[22]
In the second motion, Gerbro seeks an Order to
strike out the parts of the Replies that purport to set out the Minister’s
assumptions concerning the purpose test. A separate, but identical, assumption is
set out for each of the four Funds that Gerbro held during the period at issue.
One of these assumptions is reproduced below.
19. In determining
the appellant’s tax liability for the 2005 taxation year, the Minister made the
following assumptions of fact:
[…]
zz) one of the
appellant’s main reasons for acquiring and holding an interest in Arden was to
derive a benefit from portfolio investments, directly or indirectly, in such a
manner to reduce or defer Canadian taxes otherwise applicable had the appellant
earned the income generated from the underlying assets of the fund directly;
Position of
parties
[23]
Gerbro submits that the assumptions relating to
the purpose test should be struck out because they just parrot the Act
and are statements of mixed fact and law on a central issue in the appeals.
Gerbro also submits that the contradiction of Ms. Phisel relating to this part
of her discovery and the failure of the Crown to comply with the notice to
attend (Motion 1) which relates to this issue suggests that these assumptions
were in fact never made.
[24]
Gerbro also submits that the fresh step rule in
section 8 of the Rules should not bar this motion because the motion was
delayed in order to expedite the appeals. It was only after Ms. Phisel
corrected her answer about the use of templates that Gerbro concluded that it
was appropriate that the purported assumptions be struck out.
[25]
The Crown submits that the assumptions about the
purpose test are statements of fact, and that in any event the motion should be
barred under the fresh step rule. The Crown submits that it is prejudiced
because it has conducted discoveries and planned its litigation strategy on the
basis that these assumptions are proper.
Analysis
[26]
I will first consider whether the assumptions
that concern the purpose test are impermissible as statements of mixed fact and
law or that they simply parrot the Act.
[27]
The relevant part of s. 94.1(1) reads:
94.1 (1) Offshore
investment fund property – Where […] it may reasonably be concluded,
[…]
that one of the main
reasons for the taxpayer acquiring, holding or having the interest in such
property was to derive a benefit from portfolio investments in assets described
in any of subparagraphs 94.1(1)(b)(i) to 94.1(1)(b)(ix) in such a
manner that the taxes, if any, on the income, profits and gains from such
assets for any particular year are significantly less than the tax that would
have been applicable under this Part if the income, profits and gains had been
earned directly by the taxpayer, there shall be included in computing the
taxpayer’s income for the year
[…]
[28]
Although the assumptions do parrot the statute
to some degree, I do not find this to be a helpful way to approach the issue.
Parroting the statute is not necessarily problematic in itself. The more important
question is whether the assumptions are statements of mixed fact and law.
[29]
It is instructive to consider the guidance
provided by Sharlow J.A. in paragraphs 92 to 94 of Canadian Imperial Bank of
Commerce v The Queen, 2013 FCA 122 (“CIBC”):
[92] It is now
well established that the statement of factual assumptions must contain no
statements of law (Anchor Pointe (2003) at paragraph 25), and where the
assessment under appeal is based on a conclusion of mixed fact and law, the
factual components must be extricated and stated as factual assumptions (Anchor
Pointe (2003) at paragraph 26). The Crown did not observe those principles
in many parts of its statement of assumptions, and the judge made no error in
requiring the assumptions to be revised accordingly.
[93] One
example will illustrate this point. Paragraph 28.22.7 of the reply reads, “the
Settlement Payments were not expenditures incurred by the appellant for the
purpose of earning income from the business it carried on”. That is nothing
more than an uninformative paraphrase of paragraph 18(1)(a). It would be
appropriate in the portion of the reply that states the Crown’s legal
arguments. It is not appropriate in a statement of the Minister’s factual
assumptions. Despite the difficulty of which the Crown complains in discerning
the difference between facts and law, it seems to me that paragraph 28.22.7 of
the reply could be revised without difficulty to extricate the facts and state
them as factual assumptions. There are potentially a number of factual elements
– the purpose of the payments, the business carried on by CIBC, the factual
connection or absence of a factual connection between the two – that might have
been the subject of factual assumptions made by the Minister in reaching the conclusion
that the income earning purpose in paragraph 18(1)(a) was not met. If
the Minister made no factual assumptions in reaching that conclusion, then no
factual assumptions can be stated, but the conclusion nevertheless may be
pleaded elsewhere in the reply.
[94] I have not
disregarded the cases cited by the Crown in which the Tax Court has permitted
statements similar to those in paragraph 28.22.7 to remain in the statement of
the Minister’s assumptions. It may well be that in certain situations it is
reasonable to allow a deficient pleading to stand if, for example, the facts
are relatively simple, there is little or no debate about the applicable legal
principles, or there is little risk that the other party will be prejudiced or
will be obliged to waste resources. However, this is manifestly not such a case.
[30]
In applying this principle to the assumption in
paragraph 19(zz) above, it is clear that the paragraph includes elements of
fact and law. It contains at least two impermissible elements of law: “What is
a portfolio investment?” and “When do tax considerations satisfy the purpose
test?”
[31]
If it were not for the potential application of
the fresh step rule, the purpose test assumptions should be struck out with
leave to amend to extricate the factual elements.
[32]
The second question to be decided is whether
this motion should be prohibited by the fresh step rule in section 8 of the Rules
because the motion was brought after Gerbro undertook discoveries.
[33]
Section 8 of the Rules provides:
8. A motion to attack
a proceeding or a step, document or direction in a proceeding for irregularity
shall not be made,
(a) after
the expiry of a reasonable time after the moving party knows or ought
reasonably to have known of the irregularity, or
(b) if
the moving party has taken any further step in the proceeding after obtaining
knowledge of the irregularity,
except with leave of
the Court.
[34]
Counsel for Gerbro stated that it did not
challenge the assumptions earlier because it felt that it “needed the necessary
tools to explore whether there were actual specific facts underpinning that
assumption […] in order to expedite the process.” (Transcript of hearing on
December 6, 2013, page 94.)
[35]
Presumably the tools referred to above are
Gerbro’s discovery of the Crown’s nominee.
[36]
In my view the Crown is at a disadvantage by the
lateness of this motion. The Crown filed lists of documents and completed the
discovery process believing that there was no irregularity with the
assumptions. The Crown may have conducted its case differently if that were not
the case.
[37]
I accept that Gerbro was attempting to expedite
the process, but this strategy appears to have backfired. Counsel for Gerbro
acknowledged at the hearing that if the assumptions are amended to extricate
the factual elements, it may require further discoveries. Section 8 is designed
to prohibit dragging out the process in this way. I would also note that the
parties advised the Court on April 23, 2014 that these appeals were ready for
hearing and trial dates have since been set.
[38]
I have concluded that the fresh step rule should
be a bar to Gerbro challenging the stated assumptions, which clearly are in the
nature of irregularities within the contemplation of section 8 (Sandia
Mountain Holdings Inc. v The Queen, 2005 TCC 136, at para. 7-10).
[39]
Finally, Gerbro submits that it only decided to
pursue this motion once it became aware that the assumptions may have been
based on a template.
[40]
I accept that this was Gerbro’s motivation for
bringing this motion, but it is not a sufficient reason to allow Gerbro to
raise this issue only after discoveries have been completed. Once having
proceeded with discoveries, Gerbro should not be allowed to go backwards in the
litigation to the prejudice of the Crown.
[41]
This motion should be dismissed.
Motion 3 –
Crown’s motion for disclosure of solicitor-client communications
[42]
In this motion, the Crown seeks disclosure of
legal advice provided to Gerbro concerning proposed amendments to section 94.1.
In particular, the Crown seeks disclosure of communications between Gerbro and
its lawyers with respect to the following statement in the notice of appeal for
the 2005 taxation year:
67. Until November
8, 2006, and particularly at the time of making the investments in the Funds,
it was Gerbro’s understanding that the proposed amendments to section 94.1 of
the ITA would come into force with retroactive effect to 2003.
[43]
Gerbro refused to disclose this information
during discoveries on grounds of privilege.
[44]
As a preliminary comment, at the hearing the
Crown appeared to be taking a very wide view of the legal advice that relates
to paragraph 67, namely that it encompasses all legal advice regarding the
proposed amendments. I would agree with Gerbro’s submission that the relevant
legal advice is only advice relating to the coming into force of the proposed
amendments.
Position of
parties
[45]
It is the Crown’s position that privilege was
waived by filing the notice of appeal because this document puts in issue
Gerbro’s state of mind regarding the law. Since Gerbro’s state of mind is at
issue, and it was informed by legal advice, privilege has been waived, it is
submitted. It is not determinative, it is suggested, that the pleading does not
refer to legal advice.
[46]
The position is set out at paragraph 75 of the
Crown’s written submissions:
Gerbro ought not to
be allowed to benefit from pleading its knowledge of the law which was based
partly on legal advice while shielding that very same legal advice from
disclosure. By pleading its state of mind, Gerbro rendered the privileged
communications compellable. The suppression of relevant information should be
minimized.
[47]
Gerbro advances two grounds for opposing the
motion. First, it submits that the Crown has failed to establish that the
reference to legal advice was voluntary. Rather, the matter of legal advice was
raised by the Crown in its examination of Gerbro’s nominee on discovery. In
addition, Gerbro submits that it has not made legal advice relevant to the
appeal, such as by justifying its conduct by relying on legal advice.
[48]
Finally, Gerbro submits that the statement in
paragraph 67 of the notice of appeal is not voluntary because Gerbro is forced
to prove its motives as a result of the assumptions made by the Minister.
Analysis
[49]
This motion concerns an important question as to
the breadth of the principle of implied waiver of solicitor-client privilege as
applied in income tax appeals. The principle was also recently considered by my
colleague D’Arcy J. in Imperial Tobacco Canada Limited v The Queen, 2013
TCC 144.
[50]
A general summary of the principles applicable
in considering whether there has been implied waiver of privilege can be found
in Mahjoub (Re), 2011 FC 887, at para. 10:
[10] The
jurisprudence supports the following propositions relating to implied waiver of
the privilege:
(a) waiver of privilege as to part of a communication will be
held to be waiver as to the entire communication. S. & K. Processors
Ltd. v Campbell Ave. Herring Producers Ltd (1983), 35 CPC 146, 45 BCLR 218
(SC) (S & K);
(b) where a litigant relies on legal advice as an element of
his claim or defence, the privilege which would otherwise attach to that advice
is lost. (S & K);
(c) in cases where fairness has been held to require implied
waiver, there is always some manifestation of a voluntary intention to waive
the privilege at least to a limited extent. The law then says that in fairness
and consistency, it must be entirely waived. (S & K);
(d) the privilege will deemed to have been waived where the
interests of fairness and consistency so dictate or when a communication
between a solicitor and client is legitimately brought into issue in an action.
Bank Leu Ag v Gaming Lottery Corp., [1999] OJ No 3949 (Lexis); (1999),
43 C.P.C. (4th) 73 (Ont. S.C.) at paragraph 5;
(e) the onus of establishing the waiver rests on the party
asserting waiver of the privilege. (S & K at paragraph 10).
[51]
This motion relates mainly to part (d) of the
summary above, which asks whether fairness or consistency dictate disclosure,
or whether the legal communication is legitimately brought into issue. Should
the legal advice relating to paragraph 67 be disclosed on either of these
grounds?
[52]
I will first consider whether legal advice is
brought into issue.
[53]
To place some context around paragraph 67, one
of Gerbro’s submissions is that the purpose test is not satisfied because it invested
in the Funds knowing that proposed amendments could adversely affect the
Canadian tax treatment of the investments.
[54]
In my view, paragraph 67 does not bring legal
advice into issue. This paragraph brings knowledge of the effective date of proposed
amendments into issue but it does not state, or even imply, that Gerbro intends
to rely on legal advice to establish this knowledge.
[55]
It appears that Gerbro has no intention of
waiving privilege by relying on this legal advice at trial. Of course, if Gerbro
does not waive privilege it takes the risk that the trial judge may find that
the evidence that was offered is insufficient. But as things currently stand,
Gerbro has not brought legal advice into issue.
[56]
The second question is whether fairness and
consistency dictate disclosure even if the legal advice is not put in issue.
[57]
The parties referred me to a great many judicial
decisions regarding implied waiver of privilege. Each case appears to depend on
its own particular facts, and the general approach that the courts have taken recognizes
the importance of upholding solicitor-client privilege.
[58]
In my view, these judicial decisions generally
follow the approach described by the British Columbia Court of Appeal in Procon
Mining & Tunnelling Ltd. v McNeil, 2009 BCCA 281, at para 19: “[t]o
establish waiver, the disclosure sought must be “vital” or necessary to the
opposing party’s ability to answer an allegation.”
[59]
The bar is set high for a court to require disclosure
when the legal advice has not been put in issue by a party. In this motion, the
Crown has not established that the legal communications are so important to
their case that they should be divulged.
[60]
It is the Crown’s position that Gerbro has the burden
to establish that the Funds were not held for tax reasons. Accordingly, it is
up to Gerbro to decide whether it wishes to satisfy this burden by divulging
solicitor-client communications. At this stage in the proceedings, it is not
vital to the Crown’s case that there be disclosure.
[61]
This motion will be dismissed.
Costs
[62]
As for costs, in light of the mixed success in
these motions, the parties should bear their own costs.
Signed at Toronto, Ontario this 27th day of May 2014.
“J.M. Woods”
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