Docket: A-125-14
Citation:
2015 FCA 236
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CORAM:
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GAUTHIER J.A.
WEBB J.A.
NEAR J.A.
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BETWEEN:
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HER MAJESTY THE
QUEEN
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Appellant
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and
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FIO CORPORATION
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Respondent
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REASONS
FOR JUDGMENT
WEBB J.A.
[1]
The issue in this appeal is the application of
the implied undertaking rule to the specific facts of this case. D’Arcy J, of
the Tax Court of Canada, issued an Order dated February 20, 2014 (2014 TCC 58).
This Order prohibited the Crown from using certain documents that had been
submitted by Fio Corporation (when it commenced its appeal to the Tax Court of
Canada) in any other proceeding. Costs in the amount of $25,000 were also
awarded to Fio Corporation and the Crown was given 30 days to file an
application for leave to use the prohibited documents in another proceeding.
[2]
The Crown has appealed this Order. For the
reasons that follow, I would allow this appeal.
Background
[3]
Fio Corporation in 2007 and 2008 was working “on the development of a portable medical diagnostic
instrument … that can screen a specimen of human blood and detect the presence
of one or more of a wide range of human diseases…” (Affidavit of Stephen
Petes, Chief Information Officer for Fio Corporation, dated April 17, 2013).
[4]
In filing its tax returns for 2007 and 2008 under
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act), Fio
Corporation claimed scientific research and experimental development tax
credits (SRED Credits). In 2009, the Canada Revenue Agency (CRA) audited these
claims. In particular, on October 2, 2009 Gary Kakis, a science auditor, and
Amir Giga, a financial auditor, attended at the offices of Fio Corporation.
Stephen Petes confirmed that a number of documents were made available to the CRA
auditors.
[5]
The Minister of National Revenue (the Minister) reassessed
Fio Corporation in relation to its SRED Credits that were claimed in 2007 and 2008
by notices of reassessment dated March 2, 2011 and March 11, 2011. Fio
Corporation served notices of objection to these reassessments. On April 12,
2012, Fio Corporation filed a notice of appeal to the Tax Court of Canada
without having received a response from the Minister in relation to the notices
of objection. At the same time that Fio Corporation filed its notice of appeal,
it also forwarded to the Department of Justice a list of documents under Rule 81
(Partial Disclosure) of the Tax Court of Canada Rules (General Procedure)
(the Rules) and copies of the documents that were on this list. The Tax Court
Judge referred to the documents that were sent to the Department of Justice on
April 12, 2012 as the Discovery Documents and for ease of reference I will use
the same term in referring to these documents.
[6]
The Department of Justice forwarded the Discovery
Documents to the Minister. Upon reviewing these documents, additional
reassessments were issued for 2007 and 2008 in October 2012 to reduce the SRED
Credits for 2007 and 2008. In 2013, following the issuance of these reassessments,
Fio Corporation brought the motion before the Tax Court of Canada that is the
subject of this appeal. This motion was for an Order vacating the reassessments
issued in October 2012 on the basis that the making of these reassessments was “a violation of the implied undertaking rule and a contempt
of this Court” (paragraph 7 of the Notice of Motion of Fio Corporation).
Decision of the Tax Court
[7]
At paragraph 15 of his reasons, the Tax Court
Judge made the following finding of fact:
[15] Counsel for the Respondent
admitted that the Minister based the Second Reassessments, at least in part, on
documents that she obtained for the first time in the course of
pre-trial discovery, specifically, documents that were included in the
Appellant's List of Documents and provided to counsel for the Respondent on
April 12, 2012 (the Discovery Documents).
(emphasis added; citation omitted)
[8]
The Tax Court Judge then referred to certain
passages from the decision of the Supreme Court of Canada in Juman v.
Doucette, 2008 SCC 8, [2008] 1 S.C.R. 157 [Juman]. The Tax Court
Judge determined that Fio Corporation’s appeal commenced when it filed its
notice of appeal and that since the Discovery Documents were obtained by
counsel for the Crown “in the course of discovery”
(paragraphs 40 and 50 of his reasons), the implied undertaking rule was
applicable. The Tax Court Judge also concluded that the reassessments issued in
October 2012 “gave rise to new litigation”.
[9]
However, having made these findings, the Tax
Court Judge did not grant the request of Fio Corporation to vacate the October
2012 reassessments but rather he granted the following Order:
In accordance with the attached Reasons for
Order:
a) The Court orders the [Crown] not to use any documents
obtained by the [Crown] in the course of the discovery relating to [Fio
Corporation’s] appeal instituted on April 12, 2012 in any other proceeding
before this Court or any other court. The Court's order does not apply to any
documents that the Canada Revenue Agency obtained prior to the date [Fio
Corporation] instituted its appeal.
b) Costs
are awarded to [Fio Corporation] in the amount of $25,000.
c) The [Crown] shall have 30 days to file an application
with the Court for leave to use the relevant documents in another proceeding.
Standards of review
[10]
The standards of review are those standards as
set out in Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 (Decor
Grates Inc. v. Imperial Manufacturing Group Inc., 2015 FCA 100, [2015] F.C.J.
No. 503). In Housen v. Nikolaisen, the Supreme Court of Canada confirmed
that the standard of review for appeals from decisions of the lower courts for
questions of law is correctness. Findings of fact (including inferences of
fact) will stand unless it is established that the Tax Court Judge made a
palpable and overriding error. For questions of mixed fact and law, the
standard of correctness will apply to any extricable question of law and
otherwise the standard of palpable and overriding error will apply. An error is
palpable if it is readily apparent and it is overriding if it changes the
result.
Issue
[11]
The issue in this appeal is whether, based on
the facts of this case, the implied undertaking rule was applicable to the
Discovery Documents.
Implied undertaking rule
[12]
There is no implied undertaking rule in the
Rules. However, there is no dispute in this appeal that the implied undertaking
rule applies to litigants before the Tax Court of Canada. In order to determine
whether this rule applies to the Discovery Documents in this case it is necessary
to review the rule.
[13]
In Juman, the issue was whether alleged
criminal activity discovered in a civil proceeding could be disclosed to the
police. Binnie J, writing on behalf of the Supreme Court of Canada, stated at
paragraph 1 that:
The principal issue raised on this appeal is
the scope of the “implied undertaking rule” under which evidence compelled
during pre-trial discovery from a party to civil litigation can be used by the
parties only for the purpose of the litigation in which it was obtained….
[14]
The implied undertaking rule applies to evidence
(which would include documents) that a party to civil litigation is compelled
to disclose in the course of that litigation. The requirement that the
disclosure is compelled in the course of the litigation is emphasized several
times by Binnie J. (see, for example, paragraphs 4, 5, 24, 25 and 27). This
requirement is also consistent with the rationale for the rule as set out in
paragraphs 23 to 27 of Juman:
[23] Quite apart from the cases of
exceptional prejudice, as in disputes about trade secrets or intellectual
property, which have traditionally given rise to express confidentiality
orders, there are good reasons to support the existence of an implied (or, in
reality, a court-imposed) undertaking.
[24] In the first place, pre-trial
discovery is an invasion of a private right to be left alone with your thoughts
and papers, however embarrassing, defamatory or scandalous. At least one side
in every lawsuit is a reluctant participant. Yet a proper pre-trial discovery
is essential to prevent surprise or “litigation by ambush”, to encourage
settlement once the facts are known, and to narrow issues even where settlement
proves unachievable. Thus, rule 27(22) of the B.C. Rules of Court
compels a litigant to answer all relevant questions posed on an examination for
discovery. Failure to do so can result in punishment by way of imprisonment or
fine pursuant to rules 56(1), 56(4) and 2(5). In some provinces, the rules of
practice provide that individuals who are not even parties can be ordered to
submit to examination for discovery on issues relevant to a dispute in which
they may have no direct interest. It is not uncommon for plaintiff's counsel
aggressively to “sue everyone in sight” not with any realistic hope of recovery
but to “get discovery”. Thus, for the out-of-pocket cost of issuing a statement
of claim or other process, the gate is swung open to investigate the private
information and perhaps highly confidential documents of the examinee in
pursuit of allegations that might in the end be found to be without any merit
at all.
[25] The public interest in getting at
the truth in a civil action outweighs the examinee's privacy interest, but the
latter is nevertheless entitled to a measure of protection. The answers and documents
are compelled by statute solely for the purpose of the civil action and the law
thus requires that the invasion of privacy should generally be limited to the
level of disclosure necessary to satisfy that purpose and that purpose alone.
Although the present case involves the issue of self-incrimination of the
appellant, that element is not a necessary requirement for protection. Indeed,
the disclosed information need not even satisfy the legal requirements of
confidentiality set out in Slavutych v. Baker, [1976] 1 S.C.R. 254. The
general idea, metaphorically speaking, is that whatever is disclosed in the
discovery room stays in the discovery room unless eventually revealed in the
courtroom or disclosed by judicial order.
[26] There is a second rationale
supporting the existence of an implied undertaking. A litigant who has some
assurance that the documents and answers will not be used for a purpose
collateral or ulterior to the proceedings in which they are demanded will be
encouraged to provide a more complete and candid discovery. This is of
particular interest in an era where documentary production is of a magnitude (“litigation
by avalanche”) as often to preclude careful pre-screening by the individuals or
corporations making production. See Kyuquot Logging Ltd. v. British Columbia
Forest Products Ltd. (1986), 5 B.C.L.R. (2d) 1 (C.A.), per Esson J.A.
dissenting, at pp. 10-11.
[27] For good reason, therefore, the
law imposes on the parties to civil litigation an undertaking to the court not
to use the documents or answers for any purpose other than securing justice in
the civil proceedings in which the answers were compelled (whether or not such
documents or answers were in their origin confidential or incriminatory in
nature)….
[15]
The rationales for this rule are only applicable
if the evidence in question is disclosed as part of the litigation and such
disclosure is compulsory. If the evidence has previously been disclosed, there is
no invasion of privacy in relation to such evidence as a result of the pre-trial
discovery. Any invasion of privacy would have occurred earlier when the
evidence was first disclosed. If the evidence has previously been disclosed,
there is also no need to encourage “a more complete and
candid discovery”. As well, if the disclosure is made voluntarily and
the person is not compelled to make that disclosure, the concerns about the
invasion of privacy are reduced as the person chose to make the particular
disclosure. The lack of compulsion would also reduce the likelihood of a more
complete and candid discovery as the person could choose what to disclose or
keep secret.
[16]
As a result, in my view, in relation to appeals
before the Tax Court of Canada, the implied undertaking rule does not apply to:
(a) any evidence that was disclosed prior to the commencement of the
proceedings in the Tax Court of Canada; or
(b) any evidence that a party produced in the course of such proceedings
but which such party was not compelled to produce as part of such proceedings.
Analysis
[17]
The first question that must be addressed is
whether the Discovery Documents had previously been disclosed to the Minister. In
my view, the Tax Court Judge made a palpable and overriding error in finding
that the Discovery Documents were first disclosed to the Minister following the
delivery of such documents to the Department of Justice on or about April 12,
2012. As noted above, the Tax Court Judge made this finding at paragraph 15 of
his reasons. In the footnote for this paragraph he referred to the transcript
of the hearing, pages 85 and 97, as support for this finding.
[18]
However, page 85 of the transcript reveals that
counsel for the Crown made the following submissions:
Ms. Linden: … Stephen Petes, the Appellant’s
affiant admitted in his affidavit and on cross-examination - - this is very
important. My friend made no reference to this fact, and in our respectful
submission, this is the key fact - - that the documents at issue - - that is,
actually, not only the four [sic] document, but the seven volumes as I
take as evidence - - had already been available to the auditor in 2009.
The reference for that to the evidence is
the Affidavit of Mr. Petes at paragraph 31. It’s in the Appellant’s Motion
Record at Tab C.
"All 314 documents that were
disclosed on our behalf in the Tax Court appeal were available to both Mr.
Kakis, the science auditor and Mr. Giga, the financial auditor, during the
reviews in 2009 and 2010."
I asked him about that on his
cross-examination. You have the transcript. I started to discuss it at question
205, but I think a cleaner question and answer can be found at question 243 of
the examination.
Here’s my question:
"So then I take it that it’s
your evidence that all of the documents that have been produced under the list
of Documents for partial disclosure, the three sets - -"
The three sets - - it’s only the first set
that was the 261 documents from which the four that are relevant to this come.
"- - including the biggest set,
which went in advance of the Notice of Appeal, having been ascribed a court -
-"
I should have said "having not yet been
ascribed a court file number."
"- - which were in those seven
books, according to your affidavit were all disclosed on your behalf, were all
available to Mr. Kakis, the science auditor, and Mr. Giga, the financial
auditor. So all those taxpayer records were available to both sets of auditors,
the science auditor and the financial auditor."
And the answer is, "Plus a lot more."
[19]
These submissions are not an admission that the
Minister obtained the Discovery Documents for the first time following the
submission of these documents by Fio Corporation on April 12, 2012. These are
detailed submissions, with references to the affidavit of Steven Petes that had
been filed by Fio Corporation in support of its motion and also to the transcript
of his cross examination that confirmed that the Discovery Documents had
previously been made available to the CRA, who were acting on behalf of the
Minister.
[20]
The Tax Court Judge also referred to page 97 of
the transcript of the hearing. However, the only relevant statement disclosed
on this page is the confirmation by the Tax Court Judge that the reassessments
issued in October 2012 were based on documents that were included as part of
the Discovery Documents. There is no indication that counsel for the Crown was
retracting her earlier submissions that these documents had previously been
made available to the CRA auditors. Subsequent to the statements that appear at
page 97 of the transcript of the hearing, counsel for the Crown, in submissions
that appear at page 127 of this transcript, reiterated her position that “by the Appellant’s own admission, they had already been made
available to the CRA auditors in 2009, well before and quite apart from any
obligation to do so under the discovery rules in a tax appeal”.
[21]
As a result there was no basis upon which the
Tax Court Judge could have concluded that the first time that the Discovery Documents
were disclosed to the Minister was after April 12, 2012 and the evidence
presented at the Tax Court hearing (which Fio Corporation did not dispute in
this appeal) was that all of the Discovery Documents had previously been made
available to the CRA auditors in 2009 and 2010. Although the CRA auditors may
not have appreciated the significance of some of the documents, and in
particular the four documents upon which the October 2012 reassessments were
based, this does not change the fact that these documents had been disclosed to
them prior to the commencement of the appeal to the Tax Court of Canada.
[22]
The error of the Tax Court Judge in finding that
the documents were first disclosed in April 2012 was a palpable and overriding
error. The evidence does not support this finding and this finding would have a
direct impact on the result. Since, based on the evidence submitted, the
documents were previously disclosed to the CRA auditors in 2009, the implied
undertaking rule does not apply to the Discovery Documents.
[23]
The Tax Court Judge also made additional
comments with respect to section 241 of the Act that he noted were not needed
in this matter. In his view, Fio Corporation was compelled to disclose the
Discovery Documents under the Rules.
[24]
In this case, Fio Corporation provided the
Discovery Documents under Rule 81 (the partial disclosure rule). Since I have
found that the Discovery Documents had previously been disclosed to the CRA, it
is not necessary, in this appeal, to decide whether documents disclosed under
Rule 81 would be documents that the taxpayer is compelled to disclose. It is also
not necessary to decide whether the reassessments issued in October 2012 gave
rise to new litigation. As a result I would defer these questions to another appeal
where it would be necessary to make such determinations. Nothing herein should
be construed as an endorsement of the Tax Court Judge’s conclusions on these
questions.
[25]
Fio Corporation had also made submissions with
respect to the different roles of the Minister and the Crown in assessing tax
under the Act and in tax appeals. In light of my finding that the implied
undertaking rule does not apply to the Discovery Documents, it is not necessary
to address these arguments. However, I would note that since the appeal before
the Tax Court of Canada is in relation to the reassessments issued by the
Minister, it was appropriate, in my view, for the Department of Justice to send
the Discovery Documents to the CRA, who are acting on behalf of the Minister in
enforcing the Act. In doing so, the Department of Justice was simply sending
documents to the CRA that had previously been made available to the CRA
auditors who were reviewing the SRED Credits claimed by Fio Corporation under
the Act.
Conclusion
[26]
The Order of the Tax Court stated that the Order
did not apply to any documents that the CRA had obtained prior to the date that
Fio Corporation had instituted its appeal. Since the Discovery Documents had
been made available to the CRA prior to Fio Corporation instituting its appeal,
it would appear that the Order does not apply to these documents. From reading
the reasons and the other parts of the Order awarding costs of $25,000 to Fio
Corporation and providing that the Crown “shall have 30
days to file an application with the Court for leave to use the relevant
documents in another proceeding”, it is clear that the Tax Court Judge
intended that the first part of his Order prohibiting the use of the documents
would apply to the Discovery Documents. To remove any doubt I would set aside the
Order of the Tax Court.
[27]
As a result, I would allow the appeal, with
costs, set aside the Order of the Tax Court of Canada, and dismiss the motion
of Fio Corporation for an Order vacating the October 2012 reassessments, with
costs in the Tax Court of Canada.
"Wyman W. Webb"
“I agree.
Johanne Gauthier J.A.”
“I agree.
D.G. Near J.A.”
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