Route Canada Real Estate Inc. (In Receivership) v. Her Majesty the Queen (No. 1), [1995] 2 CTC 2421

Bell J.T.C.C.:—The applicant instituted a motion for an order requiring the respondent’s representative, Mr. Terence Hale, to reattend at the respondent’s own expense upon service of a notice to attend or in any case no later than five days from the date of the order and answer certain questions objected to and not answered and to answer any proper questions arising from the answers to those questions. The applicant further sought allowance of its appeal upon failure of such attendance. In addition, the applicant asked that the order require the respondent to pay costs of the motion, "costs thrown away" and the costs of any continuation of the examination for discovery on a solicitor and client basis.

A brief review of the pleadings is necessary for the exposition of the questions herein.

The applicant is a corporation in receivership of which Ernst & Young Inc. was receiver and manager. The appeal is from an assessment of the appellant (applicant) by the Minister of National Revenue ("Minister") dated November 14, 1989 in which the appellant was assessed under subsection 160(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the ’’Act") in the amount of $265,213.96 in respect of a transfer to it in January 1987 of real property from Transport Route Canada Inc. ("Transport”), a bankrupt corporation of which Deloitte & Touche Inc. was the trustee in bankruptcy.

The appellant filed a notice of objection dated February 5, 1990 principally, as it states, because the Minister had refused to provide details relating to the tax liability of Transport and to provide other "proper supporting documentation to support the assessment objected to".

The Minister subsequently advised the appellant that the outstanding liability on the original assessment had been reduced to $90,777.24.

Paragraphs 8 and 9 of the notice of appeal read as follows:

8. Ernst & Young Inc. has obtained a copy of the Minister’s letter to Deloitte & Touche Inc. dated June 27, 1991 in respect of the tax liabilities of Transport. That letter included a schedule setting out Transport’s tax liability which indicated that in December 1987, the balance owing was $2,880,241.69 and that at December 1989 this had been reduced to $262,477.36. The schedule also showed that since December 1987 the Minister has received garnishments, setoffs and settlement proceeds from Coopers & Lybrand, as agent for the Royal Bank of Canada in the aggregate amount of $3,480,500.50 in respect of Transport’s tax liability.

9. By letter dated April 16, 1992, the Minister advised Ernst & Young Inc. that the amount for which Transport had been assessed in November 1987 was $1,076,174.53 and that it was broken down as follows:

Federal Tax	$507,139.12
	$507,139.12
Canada Pension	$83,025.86
	$83,025.86
Unemployment Insurance	$75,759.27
	$75,759.27
Provincial Tax	$202,473.99
	$202,473.99
Penalty and Interest	$208,776.29
	$208,776.29

The appellant’s statement of issues in paragraph 11 of the notice of appeal is whether:

A. the appellant is liable under section 160 for any interest that accrued on any liability of Transport after 1987;

B. subsection 160(3) applies to payments by Transport on account of its interest or tax liability for years after 1987;

C. subsection 160(3) applies to amounts received by the Minister and described by him as garnishments, setoffs and settlement proceeds and, more generally, whether such amounts were properly allocated by the Minister to the outstanding liability of Transport under the Act;

D. the Minister’s assessment of the appellant under section 160 in respect of amounts payable under the Canada Pension Plan and the Unemployment Insurance Act and in respect of provincial tax liability is valid.

Exhibit 1 on the examination of Terence Hale is copy of a letter dated February 1990 from Revenue Canada to Ernst & Young Inc. together with an attached schedule which shows that the outstanding liability as at the date of bankruptcy of the transferor included tax of $861,882.43 for 1987 and tax of $1,960,910.37 for 1988. The addition of penalty and interest to both of these sums produces a total liability at that date of $3,742,072.87. The schedule then, under the heading ’’collections”, shows a total of $3,477,763.91. It appears that the difference between these two sums, namely $264,308.96 is part of the amount of $265,213.96 for which the appellant was assessed.

The appellant, in a description of grounds relied upon for its appeal, stated that under section 160 the appellant was not liable for any interest on any liability of Transport after 1987, Transport not being liable to pay that amount in or in respect of the 1987 taxation year or of any preceding taxation year.' [1] It further challenged the propriety of the application of funds received by the Minister to Ontario provincial tax, and amounts payable under the Canada Pension Plan and the Unemployment Insurance Act. Finally, the appellant submitted

that the assessment should be vacated, or, in the alternative, that the assessment should be varied to reduce the quantum to the extent of the tax liability of Transport for which the appellant is not liable under section 160 of the Act. [2]

In its reply to the notice of appeal, the respondent described the reduction of the appellant’s liability from $265,213.96 to $90,777.24 as resulting from certain setoffs and credits applied by the Minister to the outstanding liability of Transport. The respondent further pleaded that the appellant and Transport were not at arm’s length and that the value of the consideration for the transfer of real property from Transport to the appellant was substantially less than the fair market value thereof. Finally, it pleaded that the amount that Transport was liable to pay under the Act in or in respect of 1987 was not less than $2,880,241.69 and as at December 31, 1987, Transport was liable to pay under the Act in respect of the 1987 taxation year the amount of $265,213.96 on account of unremitted federal income tax deducted at source from its employees.

The respondent said that the issue was whether the Minister correctly assessed the appellant for the amount of $265,213.96 pursuant to section 160 of the Act in respect of the transfer of property to the appellant.

On examination for discovery, respondent’s counsel instructed the aforesaid Terence Hale not to answer ten questions respecting the nature of Transport’s tax liability for 1987 and the application of funds received by the Minister to Transport’s liability and also not to make any undertakings in connection therewith.

It is in respect of those questions that this motion was made. The appellant’s position is that Rule 95 of the Tax Court of Canada Rules (General Procedure) states that a person examined for discovery shall answer any proper question relating to any matter in issue and that relevance is determined by reference to the pleadings. Counsel referred to the judgment of Chilcott J. (McKeown J. concurring) in Algoma Central Railway v. Herb Fraser and Associations Ltd., Carswell's Practice Cases, 36 C.P.C. (2d) 8 where he said, at pages 15 and 16,

...we are of the view that...relevance is broader by the very nature of discovery than at the trial stage.

Counsel agreed that section 160 of the Act applies and stated that the issue relates only to subparagraph 160( 1 )(e)(ii). The relevant portion of that provision reads as follows:

Where a person has, on or after the 1st day of May, 1951, transferred property...to...a person with whom the person was not deal at arm’s length...the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to...the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.

[Emphasis added.]

With respect to respondent’s claim that the transferor’s liability was not in issue because it was not raised in the pleadings, appellant’s counsel stated that the respondent had raised this matter in its pleadings when it stated that the issue was whether the Minister correctly assessed the appellant for the amount of $265,213.96 pursuant to section 160 of the Act in respect of the transfer of property from Transport to the appellant. She also referred to paragraph 11(c) of the nntice of appeal above described. She stated that it was essential to the appellant’s case that it know whether payments were allocated by the Minister to Transport’s liability arising subsequent to the 1987 taxation year. She referred to the case of Thorsteinson v. M.N.R., [1980] C.T.C. 2415, 80 D.T.C. 1369, and referred to the words of D.E. Taylor, member of the Tax Review Board at page 2418 (D.T.C. 1372), namely:

It is open to a transferee assessed under subsection 160(2) of the Act to challenge the bona fides of the Minister’s claim that the liability for tax of the transferor actually existed at a particular point in time. The assessed transferee has available all the rights of any taxpayer, including the opportunity, indeed the obligation, to dislodge the basis for the liability, not merely to challenge the mechanics of the assessment of the transferor.

She also referred to Sarraf v. M.N.R., [1994] 1 C.T.C. 2519, 94 D.T.C. 1506, in which Bowman J. said at page 2523 (D.T.C. 1508):

It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so, or is, as is the case here, precluded from doing so.

At pages 2524-25 (D.T.C. 1510) the learned judge said:

This Court has not the power to order the Minister to give Mr. Sarraf a full accounting of the funds seized from the bank. There are other forums where such a remedy can be pursued. There is in my opinion, however, no question that he is clearly entitled to such an accounting.

With respect to this passage, appellant’s counsel stated that the order she sought was for an order that certain questions be answered and that it was not an order for an accounting.

With respect to section 241, appellant’s counsel submitted that although subsection (1) provided that "no official shall" provide any taxpayer information to any person, subsection (3) provided clearly that that prohibition does not apply in respect of any legal proceedings relating to the administration or enforcement of the Income Tax Act and cited Slattery v. Doane Raymond Ltd., [1993] 3 S.C.R. 430, [1993] 2 C.T.C. 243, 93 D.T.C. 5443, a Supreme Court of Canada decision, as authority for same. She then stated that paragraph 241 (4)(b) clearly applies, same reading as follows:

An official may...pro vide to any person taxpayer information that can reasonably be regarded as necessary for the purposes of determining any tax, interest, penalty or other amount that is or may become payable by the person....

In short, appellant’s position was that the ten questions are proper because they go to the heart of the dispute, that without answers and the information requested the appellant would not have the evidence to present its case fully and fairly, that allegations in the notice of appeal were based upon the Minister’s information which was contradictory and therefore unreliable, that the Minister’s refusals were untenable in law, that section 160 creates an assessment of the transferor’s tax on the transferee, that the pleadings properly put in issue the accuracy of the transferor’s tax vis a vis the appellant and that the appellant was entitled to the information it sought by virtue of subsection 241(3) and paragraph 241(4)(b) of the Act.

Respondent’s counsel stated that the Minister had been cooperative in agreeing to provide a reconciliation of the reduction of the assessment of the transferor from $2,880,241.69 to $265,000. She stated that other documentation with respect to the application of amounts was not properly available to the appellant and should not become public information. She argued that the applicant wanted answers to questions which were not relevant, that Judge Bowman’s statements clearly indicated that an accounting would have to be sought in a forum other than this Court and that this matter was really one of debtor-creditor law and not one properly to be pursued in the Tax Court of Canada. She stated that the issue raised in the pleadings is not the liability of the transferor, that an examination for discovery is not a fishing expedition, that questions must be relevant and that relevance is determined by the pleadings. She stated that the appellant was seeking information respecting collection and that that is a debtorcreditor matter.

Respondent’s counsel then referred to Pica v. M.N.R., [1990] 1 C.T.C. 296, 90 D.T.C. 6206 (F.C.T.D.). In this case O Inc. was assessed under the Act in respect of unremitted source deductions in the amount of $98,762. Two individual taxpayers were then personally assessed for this amount in their capacity as directors of O Inc. A third party demand was served upon K Ltd. requiring it to pay to Revenue Canada any amounts owing to O Inc. O Inc.’s counsel subsequently received from K Ltd.’s solicitors a cheque payable to Revenue Canada in the amount of $41,000 representing an amount for which O Inc. had been pursuing K Ltd. O Inc.’s counsel forwarded this cheque to Revenue Canada instructing that it be applied against the unremitted source deductions in the order in which O Inc.’s liabilities for these had arisen. Had Revenue Canada acted in accordance with these instructions, the taxpayer’s respective liabilities for the federal portion of the unremitted source deductions would have been substantially reduced and the directors’ personal liabilities in respect thereof would have been met. However, the Minister applied the sum to O Inc.’s arrears of provincial tax and CPP and UIC premiums. The directors instituted proceedings in the Federal Court for an order declaring that the $41,000 ought to have been applied in accordance with the instructions contained in the letter. Cullen J. said at page 311 (D.T.C. 6215):

It is clear in law that if no third party notice had been served by the defendant and Konvey had paid the $41,000 to counsel for the plaintiffs, the plaintiffs would have been entitled to have the money allocated as directed by Nichols in his letter of September 7, 1983. In those circumstances we would have had the fact of a debt owed by Ontario to the Crown.

Where no direction is given by the debtor then the creditor is free to apply the monies received as the creditor sees fit. The debtor must expressly authorize how the funds he is paying to the creditor are to be applied and failure to do so leaves the creditor to decide.

The learned justice then cites authorities for that statement. On page 312 (D.T.C. 6216) he said:

There was not in the circumstances here a payment by Ontario. It was a payment made by the garnishee to satisfy its obligations under the third party notice. The money when paid out and the cheque when received was not Ontario’s money nor did Ontario have the power to demand how it be appropriated. At best Ontario was a conduit. Accordingly, the Minister of National Revenue had the authority to apportion the payment as he in fact did.

Respondent’s counsel, on the strength of this decision, asserts that because the outcome of any request by the appellant for reallocation of funds by the Minister would not be successful, any questions with respect to same on an examination for discovery should not be answered by the respondent. She also stated that an allocation is a creditor-debtor issue and is not properly before this Court.

In summary she stated that Transport was assessed in 1987, that the debt thereby created became crystallized because no objection was filed in respect of the assessment and that under subsection 152(8) of the Act, the assessment was valid and binding. She then stated that the Minister had collected from third parties and allocated moneys so collected to maximize his recovery, allocating same to provincial tax first and then to Canada Pension Plan and Unemployment Insurance, leaving federal tax outstanding. The Minister then assessed the appellant with respect to such federal tax and stated that the liability of the transferor had not been legally challenged by it and that the pleadings were deficient in not raising the matter pursued by the appellant.

Although respondent’s counsel used section 241 of the Act as a reason for instructing Terence Hale not to answer certain questions, she did not pursue this at the hearing of this motion as support for respondent’s position.

I cannot agree with the position assumed by the respondent. I agree with the authorities cited that suggest that, respecting a section 160 assessment, the transferee can inquire into the nature of the assessment issued against the transferor thereby giving rise to the transferee’s liability. Logically, why should a transferee be prevented from raising the validity of and grounds for the reassessment of another taxpayer when that reassessment is the sole foundation for an assessment of the transferee? I express no opinion, nor should I do so, upon the potential outcome of this appeal or upon its merits, those issues not being before me. My function is solely to deal with the propriety of the questions objected to by the respondent at the examination for discovery. The outcome or the use of any information obtained by the appellant on its examination for discovery is not my concern. Indeed, in my view it would be inappropriate to conclude that any decision such as that in the Pica case would be applied in this appeal because I do not have the information necessary to make such decision. I am not required to determine here whether the quantum of the transferee’s tax liability established by the assessment is as portrayed by the respondent. I do, however, given the proposition that relevancy is broader in an examination for discovery than it is at trial, conclude that the appellant is entitled to the information sought. I quote from the July 20, 1994 reasons for order of Christie A.C.J., of this Court in 569437 Ontario Inc.

With reference to additional discovery it is noted that subsection 95(1) of the Tax Court of Canada Rules (General Procedure) ("the General Rules") requires that a person examined for discovery shall answer, to the best of that person’s knowledge, information and belief, any proper question relating to any matter in issue in the proceedings. Reference is also made to Sydney Steel Corp. v. Ship Omisalj et al., [1992], 52 F.T.R. 144, wherein Mr. Justice MacKay of the Federal Court-Trial Division said at page 147:

Counsel for the parties are essentially agreed that the standard for propriety of a question asked in discovery is less strict than the test for admissibility of evidence at trial and the appropriate standard is whether the information solicited by a question may be relevant to the matters which at the discovery stage are in issue on the basis of pleadings filed by the parties. As noted by the defendants the test is as set out by Norris, D.J.A., in McKeen & Wilson Ltd. v. Gulf of Georgia Towing Co. Ltd. et al., [1965] 2 Ex. C.R. 480, at page 482:

..the questions objected to may raise matters which are relevant to issues raised on the pleadings. This is all that the defendants are required to show. As to whether or not they are relevant and admissible at the trial is a matter for the learned trial judge.

And at page 148:

When objection is taken that a question is not proper because it is not relevant for reasons given, the party asking the question must satisfy the court that the information it seeks may be relevant to a fact in issue. That standard is not likely to be difficult to meet in light of the goal of openness which the rules seek to foster in pretrial proceedings, particularly discovery, a goal which is the same whether discovery be oral or by written questions. Moreover, it is settled that where there is doubt as to whether the question need be answered the benefit of that doubt, in light of the principal goal of openness, favours requiring the answer to be given: (Royal Specialty Sales v. Mayda Industries Ltd. (1986), 4 F.T.R. 77, per Madame Justice Reed at page 79).

I adopt these two propositions in the reasons for judgment delivered by Chilcott J., in Algoma Central Railway v. Herb Fraser and Associates Ltd. et al. (1988), 36 C.P.C. (2d) 8. He was sitting as a member of the Divisional Court of the Supreme Court of Ontario on an appeal from an order of Montgomery J. First, there is a broader standard of relevance regarding questions asked at the discovery stage of proceedings than at trial. Second, questions asked on examination for discovery may be proper bearing in mind that issues of admissibility and weight to be assigned to evidence at trial are for the trial judge to determine.

The apparent fact that the Minister applied moneys received by him to amounts of Transport’s liability arising after 1987 of itself suggests that the appellant is entitled, on an examination for discovery, both to the details of assessment of Transport and information respecting payments on account of same.

The questions which Terence Hale refused to answer must be answered. He shall, at respondent’s expense, reattend to be further examined for discovery. That examination will be conducted at a date to be agreed upon by counsel. In the absence of such agreement it will take place before December 16, 1994.

Respecting the appellant’s request for costs of any continuation of the examination for discovery on a solicitor-client basis, I refer to the words of McLachlin J. in Young v. Young, [1993] 4 S.C.R. 3, 160 N.R. 1, at page 17 (S.C.R.), namely,

Solicitor-client costs are generally awarded only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.

No such conduct has been shown to exist in this case.

Regardless of the outcome of this appeal, the respondent shall pay to the appellant costs of this motion and costs for attending at the further examination for discovery, such costs to be paid before January 20, 1995.

Order accordingly.