Date:
20080508
Docket: A-378-07
Citation: 2008 FCA 177
CORAM: LINDEN J.A.
NOËL
J.A.
RYER
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
JEFFREY SACKMAN
AND ARTISTIC IDEAS INC.
Respondents
REASONS FOR JUDGMENT
NOËL J.A.
[1]
This is an
appeal from a decision of Bowman C.J., which, inter alia, dismissed the
Crown’s motion for permission to examine for discovery a representative of a
third party, Artistic Ideas Inc. (“Artistic”), pursuant to section 99 of the Tax
Court of Canada Rules (General Procedure) SOR/90-688, as amended (the “Tax
Court Rules”). The motion sought leave to examine a knowledgeable nominee of
Artistic on a wide variety of questions – 86 in total – having to do with the
art donation program through which the respondent, Jeffrey Sackman, purchased
art and made the charitable donations that are in issue in the main appeal.
[2]
In
challenging Bowman C.J.’s refusal to grant leave, the Crown has departed
significantly from the motion as it was originally presented. It now proposes
to limit the scope of the examination which it wishes to conduct to a single
issue, thereby reducing the number of questions which it seeks to explore from
86 to 6.
RELEVANT FACTS
[3]
Artistic ran an art donation program whereby individual taxpayers,
described as “investors” would purchase prints in bulk for a low price.
Commencing in 1998, Artistic offered these investors groups of 11 prints,
appraised at a value of at least $1000, for $3,500. The investors would then
donate 10 of the 11 prints and receive a tax receipt of $10,000. Using the Ontario and
federal tax rates, each investor was said to achieve tax savings of $5,029 on a
$3,500 investment. Through its program, Artistic acted as agent for the
investors in acquiring the prints from one of two vendors – Coleman Fine Arts
Inc. and later in 2000, Silver Fine Arts Ltd - and finding one or more
charities to accept donations and issue charitable receipts.
[4]
Jeffrey Sackman bought several groups of prints and donated a total of
447 prints in 2000 through Artistic’s art donation program. For the 2000
taxation year, he reported total charitable gifts of $802,031 and claimed the
corresponding tax credit (Appellant’s Memorandum, para. 7).
[5]
The Minister of National Revenue (the “Minister”) reassessed Mr. Sackman
for the 2000 taxation year on the basis that the fair market value of the
prints donated could not exceed the amount he paid for them. As Mr. Sackman
produced no evidence of payment, the Minister assumed that the cost of the
prints, and consequently their fair market value, was nil. The Minister nevertheless
conceded that the prints must have had some value. Mr. Sackman appealed this
reassessment and the main issue before the Tax Court in the appeal (the
“Sackman Appeal”) concerns the fair market value of the donated prints.
Artistic, although it appears as a respondent in the present appeal, is not a
party to the Sackman Appeal. [Artistic
is currently awaiting a decision of the Tax Court on an appeal from a notice of
assessment for Goods and Services Tax (the “G.S.T. appeal”). As part of the
G.S.T. appeal, a representative of Artistic, Mark Pearlman, was examined and
cross-examined for discovery.]
[6]
This Court has twice considered similar appeals involving the fair
market value of prints purchased and donated by taxpayers through promoters
such as Artistic (see Klotz v. Canada, 2004 TCC 147, aff’d in Klotz
v. Canada, 2005 FCA 158 (“Klotz”) and Nash v. Canada, 2005
FCA 386 (“Nash”)). In both cases, the determination of the fair market
value for the prints was based on evidence establishing the volume and details
of the transactions by the promoters.
[7]
In August of 2004, several years prior to the commencement of the
examinations for discovery in the Sackman Appeal, the Crown formally requested
information and documents from Artistic. Artistic advised that the request was
inappropriate and refused to respond (Tringali Affidavit, No.2, paras. 18-20
and Exhibits “B”, “C” and “D” thereto, Appeal Book, Vol. I. Tab 6, p.77).
[8]
During the examination for discovery of Mr. Sackman, the Crown asked for
information concerning Artistic’s art donation program, including whether Mr.
Sackman would undertake to make inquiries of Artistic about the prints sold and
donated through the program. Some of the questions were directed at
establishing the volume and details of the transactions in the Artistic’s art
donation program in order to determine the market created by the donation
program and the fair market value of the prints. Mr. Sackman refused to make
the requested undertakings. He also refused to admit the accuracy of certain
facts contained in a report (the “Navigant Report”) prepared for the Crown
regarding certain of the transactions in Artistic’s art donation program.
[9]
Subsequently, on February 13, 2007, the Crown wrote to Artistic’s
counsel and again requested the information and documents. A list of 86
questions subdivided under a number of topics was attached as Schedule A to the
letter (Exhibit “G” of Tringali Affidavit No.2, Appeal Book, Vol.1, Tab 6(g),
p. 160). The Crown also asked whether Artistic would consent to an order for
third-party discovery. Artistic refused to answer the Crown’s questions or
consent to an order for third-party discovery.
[10]
In light of Mr. Sackman’s refusal to make inquiries and Artistic’s
refusal to informally provide information and documents, the Crown brought a
motion under rule 99 of the Tax Court Rules, for leave to examine
Artistic for discovery as a non-party through a knowledgeable nominee with
respect to the 86 questions which Artistic had refused to respond to (the
questions are set out at Appendix A of the decision under review). Rule 99
provides:
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99. (1) The Court may grant leave, on such terms respecting costs
and other matters as are just, to examine for discovery any person who there
is reason to believe has information relevant to a material issue in the
appeal, other than an expert engaged by or on behalf of a party in
preparation for contemplated or pending litigation.
(2) Leave under subsection (1) shall not be granted unless the Court is
satisfied that,
(a) the moving party has been unable to
obtain the information from other persons whom the moving party is entitled
to examine for discovery, or from the person sought to be examined,
(b) it would be unfair to require the
moving party to proceed to hearing without having the opportunity of
examining the person, and
(c) the examination will not,
(i) unduly delay the commencement of the
hearing of the proceeding,
(ii) entail unreasonable expense for other
parties, or
(iii) result in unfairness to the person the
moving party seeks to examine.
(3) A party who examines a person orally under this section shall, if requested,
serve any party who attended or was represented on the examination with the
transcript free of charge, unless the Court directs otherwise.
(4) The examining party is not entitled to recover the costs of the
examination from another party unless the Court expressly directs otherwise.
(5) The evidence of a person examined under this section may not be read
into evidence at the hearing under subsection 100(1).
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99. (1) La Cour peut
accorder, à des conditions appropriées, notamment quant aux dépens,
l'autorisation d'interroger au préalable une personne, à l'exception d'un
expert engagé en prévision d'un litige ou en instance par une partie, ou en
son nom, si elle a des raisons de croire que cette personne possède des
renseignements pertinents sur une question importante en litige.
(2) La Cour n'accorde l'autorisation selon le
paragraphe (1) que si elle est convaincue :
a) que le requérant n'a pas été en mesure d'obtenir ce
renseignement de l'une des personnes qu'il a le droit d'interroger au
préalable ou de la personne qu'il désire interroger;
b) qu'il est injuste d'exiger que l'instance soit instruite sans
que le requérant de la requête ait la possibilité d'interroger cette
personne;
c) que l'interrogatoire n'aura pas pour effet, selon le cas :
(i) de retarder indûment le
début de l'instruction de l'instance,
(ii) d'entraîner des dépenses
injustifiées pour les autres parties,
(iii) de causer une injustice
à la personne que le requérant désire interroger.
(3) Sauf directive contraire de la Cour, la partie qui
interroge oralement une personne en application du présent article signifie,
sur demande, une transcription gratuite de l'interrogatoire à toute partie
qui y a assisté ou qui s'y est fait représenter.
(4) Sauf directive expresse contraire de la Cour, la
partie interrogatrice n'a pas le droit de recouvrer d'une autre partie les
dépens de l'interrogatoire.
(5) La déposition d'une personne interrogée en
application du présent article ne peut être consignée en preuve à l'audience
aux fins du paragraphe 100(1).
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[11]
The motions judge denied the Crown’s motion on the basis that the 86
questions with respect to which discovery was being sought were oppressive,
excessive and aimed at the improper purpose of impeaching Mr. Pearlman.
POSITION OF THE PARTIES
[12]
On appeal, the Crown has narrowed down the questions with respect to
which it seeks to examine Artistic from 86 to 6. Those which remain in issue
are questions 41-44; 46 and 49, as summarized at paragraph 22 of the Crown’s
memorandum:
- Composition
of Groups: A listing of the composition of the groups of
prints and the number of each particular group sold in 1998, 1999 and
2000.
- Dates
of Sale and Donation and Prices Paid: A listing by
name of donor showing the date of purchase, the number of groups purchased,
the price paid per groups and the date of the gift for 1998, 1999 and
2000.
- Details
by Donor: A report for each donor showing the print titles
acquired and charity selected for 1998, 1999 and 2000.
- Details
by Title: A report by print title showing the names of the
donors and the number of each title purchased for 1998, 1999 and 2000.
- Details
by Charity: A report by charity showing the print titles and
number of each title donated for 1998, 1999 and 2000.
- If
Artistic cannot provide the above reports, what reports can be generated?
[13]
These questions are aimed at identifying the precise market into which
the prints were sold with a view of establishing their fair market value. The
position of the Crown, as I understand it, is that having regard to the 6 questions
which they wish to pursue and their limited scope, all the conditions precedent
for ordering a third party discovery under subsection 99(1) of the Tax Court
Rules are met and the concerns raised by Bowman C.J. in dismissing the original
application are no longer present.
[14]
In response, both Mr. Sackman and Artistic take the position that there
was nothing in the original 86 questions that can assist the Crown in advancing
its case and that the information sought was already in the possession of the
Minister. Otherwise, they contend that Bowman C.J. properly dismissed the
Crown’s application for the reasons that he gave.
ANALYSIS AND DECISION
[15]
The gist
of the reasoning of Bowman C.J. for rejecting the appellant’s motion as it was
originally framed is as follows:
[24] On
February 3, 2007, counsel for the respondent wrote to the solicitors for the
appellant asking that Artistic provide answers to 86 questions which are
attached as Schedule A to the letter. That schedule is attached as Appendix A.
These are the questions that the Crown wants to put to the representative of
Artistic. That representative (Mark Pearlman) has already been examined and
cross-examined in Artistic’s own appeal to the Tax Court of Canada [the G.S.T.
appeal]. The transcript of a third party’s examination cannot be used at trial
in the same way as the discovery of a party is used. The questions have to do
with the promotional activity of Artistic in selling the program. It may be
that the Crown wants to have the transcript of the representative of Artistic
on the off chance that he is called as a witness. The transcript might be
useful as a means of impeaching him. This is not a proper use of section 99.
There is absolutely nothing in the questions in Appendix A that can assist in determining
fmv. I regard the 86 questions in Schedule A as a case of overkill.
[16]
I believe
it can safely be said that in rejecting the appellant’s motion, Bowman C.J. was
not putting his mind to the issue as it is now presented before us. His
assessment of the 86 questions placed before him is that they had to do with Artistic’s
promotional activities. I do not dispute this general assessment. However, the six questions now
being pursued, when looked upon on their own, do not come within that
description. When regard is had to the remaining questions and the information
that they seek, the Crown’s motion can no longer be labelled as a case of
“overkill”.
[17]
The first
question to address on a motion under subsection 99(1) of the Tax Court
Rules is relevance. In this respect, there is no doubt that the information
sought by the six questions is relevant to the determination of the market in
which the artwork (i.e., the group of prints) is sold for the purpose of
determining its fair market value (Klotz, supra; Nash, supra). To
the extent that Bowman C.J. held otherwise, he was in error.
[18]
The second
issue is whether the moving party has established that the information sought
cannot otherwise be obtained either from persons whom it is entitled to examine
for discovery, or from the person sought to be examined. In this respect,
neither Mr. Sackman nor Artistic question the Crown’s allegation that they have
both refused, and continue to refuse, to provide the information sought.
Furthermore, given that Artistic is not willing to confirm the accuracy of the
facts underlying the Navigant Report, there is no basis for the respondents’
assertion that the Crown already has the information being sought.
[19]
As to the
third issue, an argument can be made that the Crown can defend its case on the
basis of the fair market value of the artwork that it has so far assumed and
that accordingly, no unfairness would result from the fact that the Crown is
not in a position to establish a more precise valuation. However, the Crown,
like the respondent, is entitled to put its best foot forward in this
litigation and to the extent that it needs information from Artistic in order
to place a more accurate figure on the value of the artwork, it should have
access to it before trial.
[20]
Counsel
for Artistic further argued that granting the motion would create unfairness
for its client. In support of this contention, counsel expressed the concern
that the information sought could be used against Artistic in the G.S.T. appeal
before the Tax Court. In so stating, counsel recognized that the G.S.T. appeal
has now been heard and that the matter is under advisement, so that there is no
longer any practical likelihood of prejudice. However, counsel argues that in
the event of an appeal, additional evidence can exceptionally be admitted. He
adds that in some instances, matters are remitted back by the Court of Appeal,
with directions that new evidence be allowed. That is the context in which counsel
claims that the examination sought could be prejudicial and hence unfair, to
his client.
[21]
The
concern so expressed is based on an unlikely scenario that is far too
speculative to support a conclusion of unfairness. Furthermore, the argument
ignores the implied undertaking imposed on parties to a civil litigation not to
use answers obtained for any other purpose than securing justice in the
proceeding in which the answers were compelled (Juman v. Doucette,
[2008] S.C.J. No. 8, para. 27). I should add that it is difficult to see how
the information being sought, which pertains to the identification of the
market into which the artwork was sold, could be relevant to the G.S.T. appeal
as it was described to this Court.
[22]
Finally, counsel for Artistic argued that responding to the questions
would entail unreasonable expenses. These expenses were estimated at $15,000
before Bowman C.J. at a time when 86 questions were in play. Counsel for the
Crown has reiterated his undertaking to reimburse Artistic for reasonable counsel
fees up to $10,000. Given the limited number of questions which are
outstanding, this is sufficient to address Artistic’s costs concerns.
[23]
For these
reasons, I would allow the appeal, set aside the decision of Bowman C.J.,
insofar as the six questions set out in paragraph 12 above are concerned, and
giving the decision which ought to have been given, I would issue an order
granting the Crown leave to examine a knowledgeable nominee of Artistic as a
third party so that the Crown can obtain an answer to the said questions. The
Crown should have its costs against both respondents.
“Marc
Noël”
“I agree
A.M. Linden”
J.A.
“I agree
C. Michael Ryer”
J.A.
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