Thomas Craig Moffat v. Her Majesty the Queen, [1994] 1 CTC 2756, 94 DTC 1408

Bell, J.T.C.C.:— These reasons are written in respect of a motion brought by the appellant prior to the hearing of an appeal instituted by the appellant under section 169 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The issue in such appeal is simple, namely whether a payment made by the appellant to the vendor of shares of a certain company was for such shares only or included the right to receive moneys owing by that company to the vendor.

The surprising parade of legal steps and documents pertaining to same include a notice of appeal, a reply to the notice of appeal, an amended notice of appeal, a status hearing setting a deadline for serving and filing a reply to such amended notice of appeal, fixing February 14, 1994 as the date for pre-trial motions to be completed and setting the matter down for hearing on April 5, 1994, a motion by the respondent to strike out a portion of the amended notice of appeal, an order of this Court directing the filing of a further amended notice of appeal and a reply to the further amended notice of appeal, the filing of the second amended notice of appeal, the filing of an amended reply to the second amended notice of appeal and the present motion brought by the appellant. That motion, now before this Court seeks the following:

1. An order striking out the respondent's amended reply to the second amended notice of appeal in respect of the appellant's 1985 and 1986 taxation years,

2. An order allowing the appellant’s appeal for his 1985 taxation year and vacating the assessment under appeal for that taxation year,

3. An order allowing the appellant's appeal in respect of his 1986 taxation year and referring the assessment under appeal for such taxation year back to the Minister of National Revenue for reconsideration and reassessment on the basis described in the notice of motion, and

4. The appellant’s cost of the motion and of his appeals.

The grounds for the motion set out by the appellant are that,

1. On the basis of a document entitled "Report On Objection Or Appeal (T-401 )" dated February 19, 1992 and produced by the respondent, the respondent has admitted and accepted as true the facts pleaded by the applicant in paragraph 2 of his second amended notices of appeal for his 1985 and 1986 taxation years and, accordingly, there are no material facts or issues in dispute between the parties; and

2. The decision of the officials of the Minister of National Revenue to confirm the assessments against the applicant for his 1985 and 1986 taxation years was made for an improper purpose and was based on extraneous factors and irrelevant considerations.

An affidavit made by Philip Martin Bogan Friedlan, a law partner of lan V. Maclnnis, who represented the appellant on this motion, was filed in support of the motion and was used by Mr. Maclnnis at the hearing. Exhibit "A" to Mr. Friedlan’s affidavit, the document to which Mr. Maclnnis stated he would "be making much reference" was described as "Report On Objection Or Appeal" and was referred to as a T-401. He was relying upon this document as evidence to support his motion. In response to my query as to whether he was seeking, by the motion, to obtain the results sought in the substantive part of his appeal to follow, Mr. Maclnnis said,

That is the very purpose of discovery and it's a motion procedure of this type contemplated by the rules of this Court. We feel that what has occurred would render nugatory any issues of fact or law between the parties, the result being that, yes, it will be a substantive order in the result and it’s far simpler and faster and more expeditious to all parties concerned including any possible witnesses, et cetera, to dispense with the need for a trial when it can be dealt with in this form.

In response to my next query as to what authority he had for the proposition that he would be, in effect, entitled to a determination of the appeal issue upon an interlocutory motion based on an internal document of the Department of National Revenue, Mr. Maclnnis replied,

I think it's inherent in the jurisdiction that the Court can hear the appeal. The rules contemplate interlocutory motions, and if it so happens that it results in a final order, so be it. It’s consistent with the efficient administration of the courts and the hearing of appeals before it.

He then stated that the rules for motions in the Court contemplate that motions can be brought by documentary evidence and that the “evidence is the affidavit". He then referred to Rule 71 of tne Tax Court of Canada Rules (General Procedure) ("Rules") which states, "evidence on a motion may be given by affidavit", and then stated that his motion was “entirely analogous to a motion for summary judgment".

He stated that by virtue of some of the Rules the T-401 was evidence. He expanded on this by stating that the T-401 would not be evidence if this were a trial “but it's not a trial and that makes the difference". In response to my statement that if this matter were raised at the hearing of the appeal it would be necessary to employ the best evidence rules Mr. Maclnnis said: "what then becomes of section 71 ?... we would just read that right out of the rules?”

Mr. Macinnis referred to section 13 of the Tax Court of Canada Act, R.S.C. 1985, c. T-2 ("Court Act") which reads as follows:

The Court has, with respect to the attendance, swearing and examination of witnesses, the production and inspection of documents and other matters necessary or proper for the due exercise of its jurisdiction, all such powers, rights and privileges as are vested in a superior court of record.

and also to Rule 4 of the Rules reading as follows:

4(1) These rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.

(2) Where matters are not provided for in these rules, the practice shall be determined by the Court, either on a motion for directions or after the event if no such motion has been made.

and then stated,

that sets out the principle if it’s not specifically prohibited then it can be permitted. What I seek to do here today in this Court is common practice in the Provincial Court on the civil side. To bring a motion for summary judgment it’s put together in this fashion. It’s not unusual in that sense.

In response to my query as to how he could presume to say that a document that says something is evidence of what it says Mr. Maclnnis responded,

I agree with you. If this were a trial we would have a big hurdle, but it’s not a trial. I keep coming back to the same point, I know, but. . . .

and

I think section 71 says it. If we didn't have section 71 there we would be back to the principle that you set out, that this would be just an ordinary trial. We would have to prove the evidence in the ordinary, usual way.

In addition, Mr. Maclnnis argued, in response to my statement that there is no provision in the Rules for summary judgment or its equivalent, that there was no provision specifically prohibiting it. In response to my statement that he could not, on the basis that evidence on a motion may be given by affidavit, transform what the Department has set out in an internal document, into evidence that could assist him, he replied,

I certainly dispute the last point. The document speaks for itself. We have an evidentiary problem even whether you're prepared to look at it.

When I asked Mr. Maclnnis whether in his view Rule 71 stated that what would be evidence on a motion would not be evidence at a trial Mr. Maclnnis responded,

That's right, hearsay. All of this evidence is hearsay and if it were at a trial it would not be admissible, but on a motion, the rules of this Court contemplate that aspect and they're modelled after the Federal Court and the Provincial Court rules. That is t e whole nature of it. It’s the basis on which evidence is accepted.

With respect to the T-401, Mr. Maclnnis' startling proposition can best be stated in his own words, namely,

At a trial, of course, we don't allow hearsay unless it’s one of the exceptions and that’s why for motions this rule is there, to permit evidence to go in that otherwise would not be evidence because of the hearsay rule, so that's why it’s permitted.

and

. . .I think that’s where we have a difference of opinion. I submit to you, and I can’t put it any more plainly, that that is the whole purpose of section 71 and section 72, to displace the ordinary rule of best evidence and the hearsay rule.

He then stated, as further support for his position,

I am treating it as such, Your Honour. I don't think the direction here really matters. We're saying the Department made an admission. That's our position, that's what we seek to try to convince you of. But your point that we're trying to elevate a document, a T-401 notice of objection report, to the level of evidence, yes, for the purposes of establishing an admission we would submit yes, it is evidence. If you were to reject it outright as not being probative or acceptable on whatever grounds, how else could a taxpayer ever obtain a concession from the Department?

Miss Tremblay, counsel for the respondent submitted that with respect to summary judgment, Rule 63 of the Rules provided for application for judgment in default in certain specified circumstances, that no other provision for same exists in the Rules and that the appellant is therefore precluded from seeking such relief on an interlocutory motion. She referred to the existence of specific rules of the Federal Court and of the Rules of the Ontario Court for summary judgment. She also referred to Rule 4 of the Rules and Section 13 of the Court Act and stated that they were not sufficient authority for summary judgment given the absence of specific provision for same. She also stated that Rule 71 is not a license to introduce any type of document as proof of the content by a person who has no knowledge whatsoever of the case or even by the appellant in this case.

I have considered the appellant’s position and have weighed his arguments and have concluded that his position is wholly untenable. There is no provision in the Court Act or the Rules for the equivalent of summary judgment, namely allowing the appeal. The appellant’s counsel’s submission that absence of a rule permitting same leaves it open for the Court to assume it exists is vacuous and unsupportable. Section 171 of the Act is clear about how an appeal may be disposed of, namely y

(a) dismissing it, or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

and section 12 of the Court Act provides that

The Court has exclusive original jurisdiction to hear and determine references and appeals to the Court on matters arising under (inter alia) the Income Tax Act. . . .

Section 13 of the Court Act and Rule 4 of the Rules do not confer authority on this Court to dispose of an appeal brought under the above legislation, on a motion. With respect to section 12 of the Court Act, West's Legal Thesaurus Dictionary, written by Professor William P. Statsky, describes “original jurisdiction" as “jurisdiction in the first instance” and "the power of a court to hear a case at its inception". This is all that section 12 means. Section 13 of the Court Act deals with "matters necessary or proper for the due exercise of its jurisdiction". It does not create jurisdiction nor can it be read to expand the defined jurisdiction of the Court. Rule 4(1), dealing with the "most expeditious and least expensive determination of every proceeding on its merits" obviously refers to proceedings properly taken; that is, within the jurisdiction of the Court, and, in no way creates specific additional jurisdiction. Rule 4(2) deals with "practice" being determined by the Court and obviously refers only to procedural matters.

Timothy D. Ray, in an article entitled "Disposition of Actions Without Trial" [1] which was submitted to the Montebello Conference on Civil Litigation in November 1993 provided a review of the history and peculiarities of the summary judgment rule. He notes that summary judgment is a statutory remedy which arose out of the English statutes of the mid 18005. Mr. Ray writes at page 6 that the early summary judgment rules did little to assist in remedying matters quickly:

Prior to 1985, the Ontario Rules governing motions for summary judgment certainly did little to ease the backlog of cases proceeding to trial and were not particularly useful, save for the manner described. It was not seen as being the function of a judge on these motions to determine any matters of law or fact that were in serious controversy.

[Emphasis added.]

These rules were amended to permit a more expansive scope for summary judgment to be awarded. This trend has been noted by Borins, J. in Thomas v. Transit Insurance Co. (1993), 12 O.R. (3d) 721 (Ont. Ct. Gen. Div.), as found at page 8 of Mr. Ray's article. Borins, J. at page 724 noted that the purpose of the new rules is to enable a party to,

. . I. avoid the expense and delay occasioned by a trial where a case presents no genuine issue requiring a trial for its resolution.

It appears clear from the foregoing that the courts are controlled by the parameters set out in the respective legislation and rules of procedure.

In this case there is an issue requiring trial for its resolution, namely, the details and nature of the contract giving rise to the whole matter under appeal. Mr. Ray also commented that the summary judgment provision in the Ontario rules is quite long as it prescribes tests and specifically stipulates the type of evidence that can be submitted. This simply reinforces the mistake that this Court would make attempting to read into its statutory jurisdiction the ability to dispose of an appeal in a manner other than as so statutorily provided.

The appellant seeks to strike out the entire reply to the notice of appeal filed by the respondent. Provision for striking out a pleading is found in Rule 53 of the Rules. That rule reads,

The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,

(a) may prejudice or delay the fair hearing of the action,

(b) is scandalous, frivolous or vexatious, or

(c) is an abuse of the process of the Court.

I cannot, based upon my reading of the pertinent documents, conclude that any such circumstances exist. Indeed, the appellant has not referred to any of the above grounds in support of his motion for allowing his appeal. Further, the appellant did not refer to his second ground set forth by him in support of the motion, namely that the decision of the Minister of National Revenue to confirm the assessments "was made for an improper purpose" and “was based on extraneous factors and irrelevant considerations”.

The annotation from Halsbury’s Laws of England, 4th ed., Volume 37, London: Butterworth & Co. Ltd., 1982 at page 318 states that,

On the other hand, it is not permissible, on an application to strike out the statement of claim, to try the action on affidavits when the facts and issues are in dispute in order to see whether the plaintiff really has a cause of action.

This statement is supported by an excerpt from Wenlock v. Moloney, [1965] 2 All E.R. 871, [1965] 1 W.L.R. 1238 (C.A.), at page 874 (W.L.R. 1244):

There is no doubt that the inherent power of the court remains; but this summary jurisdiction of the court was never intended to be exercised by a minute and protracted examination of the documents and facts of the case, in order to see whether the plaintiff really has a cause of action. To do that is to usurp the position of the trial judge, and to produce a trial of the case in chambers, on affidavits only, without discovery and without oral evidence tested by cross-examination in the ordinary way. This seems to me to be an abuse of the inherent power of the court and not a proper exercise of that power.

In Magrath v. National Parole Board of Canada, [1979] 5 W.W.R. 252, [1979] 2 F.C. 757 (F.C.T.D.), the plaintiff was impecunious and therefore asked the Court for the right to proceed in forma pauperis. In essence he did not want to pay the Court fees. The plaintiff said that the right was derived from English statute law which had subsequently been incorporated into the law of British Columbia. It had been specifically included in the Supreme Court as well. As a result, the Federal Court- Trial Division was not prepared to permit the plaintiff to proceed in forma pauperis. The Court made the following comment at page 258 (F.C. 763),

Whether or not it is part of the law of Canada, I find it difficult to accept the proposition that it should be applicable in proceedings in the Federal Court merely because the Federal Court Act contains nothing to prevent its being so applied, when by analogy Parliament saw fit to expressly confer upon the Supreme Court the right to permit appeals in forma pauperis. It would go against fundamental rules of interpretation of statutes to conclude that this omission was not deliberate.

Furthermore, the Court also noted at page 260 (F.C., 765) as follows:

. . .in view of the fact that Parliament deemed it necessary to provide for in forma pauperis appeals in the Supreme Court Act and did not provide for any such proceedings in the Federal Court Act, lead me to conclude that the English statute should not be applied in this Court to substitute for the absence of any such provision in the Court Rules.

This seems directly analogous to the case at bar. Both the Ontario Court Rules and the Federal Court Rules provide for summary judgment. Therefore, the omission of a similar provision from the Rules would imply that it was not intended that summary judgment be available.

This point is also made in Midway Mfg. Co. v. Bernstein (1989), 23 F.T.R. 295, 22 C.I.P.R. 295 (F.C.T.D.). In this case the plaintiff was seeking an order for security for costs. The Court noted that it did not have a rule which would specifically allow this award to be made. The Court made the following comment at page 299 (C.I.P.R. 300),

Both counsel seem to have assumed that the insolvency of a party in the position of a plaintiff or the weakness of his case could be relevant to making an order against that party for security for costs. This notion may arise from provincial rules of courts such as the Rules of Civil Procedure of Ontario. . . .

The Federal Court Rules contain no such provision, and I am of the view that I have no implied authority to make such an order.

These cases confirm the fact that on matters concerning major procedural questions, it is improper for the Court to assume jurisdiction for which no specific provision is made.

I express some procedural concern without needing to make a finding on it. appellant’s counsel submitted an affidavit in support of his motion which was taken by one of his law firm partners. Each and every deposition relating to the issues of the appeal therein was expressed to be on the advice from appellant's counsel and belief thereof. The situation is blurred where a solicitor is using an affidavit which has been sworn by a partner or associate. There seems to be two streams of thought on this issue.

The first is that expressed by the Canadian Bar Association—Code of Professional Conduct Rules. Chapter IX—Commentary 5 of the Code states as follows:

The lawyer who appears as an advocate should not submit the lawyer’s own affidavit to or testify before a tribunal save as permitted by local rule or practice or as to purely formal or uncontroverted matters. This also applies to the lawyer’s partners and associates; generally speaking, they should not testify in such proceedings, except as to merely formal matters. The lawyer should not express personal opinions or beliefs or assert as fact anything that is properly subject to legal proof, cross-examination or challenge.

The dangers involved with a lawyer acting on cases where they or their colleagues will be witnesses are evident from the following passage in Pari Air Ltd. v. Blue Sky Air Ltd., [1986] 3 W.W.R. 719, 48 Sask. R. 98 (Sask.Q.B.) at page 722 (Sask. R. 99-100):

Nevertheless, the significance of the anticipated testimony, the likelihood that in discussing the case in the office the testimony of the witness may become interwoven with the client’s best interests and thus, unconsciously, become tainted, and the stage in the proceedings at which the event occurs on which the testimony may be sought or at which the need for such evidence becomes apparent, are all factors (but not necessarily the only factors) to be considered.

Applying the views of the Supreme Court of Canada, it is obvious that neither Elash nor his firm should be involved in the conduct of the plaintiff's case. It would be highly ethical for his firm to invite their client to engage outside counsel, but, failing this, the Court is obliged to act.

The courts have not held this to be the case in all situations. The competing streams of thought are discussed in Heck v. Royal Bank of Canada (1993), 12 O.R.

(3d) 111, 15 C.P.C. (3d) 173 (Ont. Ct. Gen. Div.). During the course of his decision Ferguson, J. noted that neither the case law nor the rules of professional conduct were consistent on this issue. The Court cited the Canadian Bar Association prohibition of this conduct, but also took note of the fact that the Law Society of Upper Canada rules were silent as to the issue of partners swearing affidavits. In fact the Court quoted the following excerpt from a letter penned by the Law Society advising on this very issue at page 119 (C.P.C. 181-82):

You had wanted to be clear as to the position the Law Society takes with respect to a lawyer who appears on a motion and tenders the affidavit of a partner or an associate. It is the Law Society's opinion that this is quite proper and is a practice widespread in Ontario. The Law Society's position would also be the same where a lawyer was calling as a witness a partner, an associate, a student, a law clerk or a secretary from his firm to give testimony at a trial or in an administrative hearing.

In expressing this general opinion the Law Society is keenly cognizant that ultimate jurisdiction to make a binding ruling with respect to conflicts is vested in the courts.

It is apparent that the case law and the rules are mixed on this issue. In his own case Ferguson, J. held that a lawyer should not continue to act where his partner would be called as a witness. His discussion at page 129 (C.P.C. 192-93) of the competing interests provides a good summary of this area of the law:

I conclude that this practice should generally not be permitted because it may create an impression of impropriety and unfairness in the mind of the public and because it places counsel in an unacceptable conflict of interest where counsel's duty to the court conflicts with counsel’s duty of loyalty and protection to the witness who is a business associate and counsel's duty to provide objective advice and representation to the client. When any counsel’s business associate's skill, judgment, veracity or integrity is challenged that counsel would have difficulty being objective.

Where counsel has a connection to a witness who will testify on issues where factual or expert credibility is at issue there is a risk and a possible perception that counsel may be inappropriately influenced by that relationship to the detriment of counsel’s duties to the court and the client.

The role of counsel of record in our system requires the assumption of an independent position from which the counsel can represent the client with objectivity and fulfil counsel's duties to the court from a position of detachment. When a counsel calls as a witness a close relative or someone with whom counsel has an employment relationship, the client, the public and the presiding judge will not be assured that counsel will act with that degree of objectivity required by our adversary system.

This excerpt indicates that when a partner or associate will be giving evidence, issues such as credibility will be important.

The second major issue raised by the affidavit is hearsay. The particular point at issue is whether the alleged admission as to a material fact contained in form T-401 is admissible. Sopinka and Lederman in their work, The Law of Evidence in Canada supply the following definition of hearsay at page 156:

Written or oral statements, or communicative conduct made by persons otherwise than in testimony at the proceeding in which it is offered, are inadmissible, if such statements or conduct are tendered either as proof of their truth or as proof of assertions implicit therein.

The learned authors also offer the following explanation at page 157 to justify the rule:

The law assumes that all oral testimony is unreliable, and has accordingly built in such safeguards as the requirement of an oath, the right of cross-examination and the creation of the crime of perjury. Special attention has been given to hearsay as being particularly fraught with untrustworthiness because its evidential value rests on the credibility of an out-of-court asserter who is not subject to the oath, cross-examination or a charge of perjury. As Dickson, J. stated in R. v. Abbey, [1982] 2 S.C.R. 24, 138 D.L.R. (3d) 202 at page 41 (D.L.R. 216):

The main concern of the hearsay rule is the veracity of the statements made. The principle justification for the exclusion of hearsay evidence is the abhorrence of the common law to proof which is unsworn and has not been subjected to the trial by fire of cross-examination. Testimony under oath, and cross-examination, have been considered to be the best assurances of the truth of the statements of facts presented.

Other reasons ascribed for holding hearsay to be a poor form of testimony are the following:

1. The admission of such evidence lends itself to the perpetration of fraud;

2. Hearsay evidence results in a decision based upon secondary and therefore, weaker evidence rather than the best evidence available;

3. There is no opportunity to observe the demeanour of the declarant;

4. The introduction of such evidence will lengthen trials.

In the case at bar counsel for the taxpayer is trying to tender evidence of what a servant of the Crown said outside of Court. Evidence of the existence of the T-401 is being presented by his partner on the basis of information and belief. The fact that the evidence is supplied on information and belief is acceptable according to Rule 72. The problem rests with the fact that the evidence still relates to an out-of- court statement by an individual who is not subject to verification by cross- examination. This is hearsay.

This point is supported by the case of Peirson v. Bent (1993), 13 O.R. (3d) 429 (Ont. Ct. Gen. Div.). In this case the plaintiffs moved for summary judgment in a medical malpractice suit. The defendant responded with an affidavit sworn by a law clerk indicating that the firm had received certain medical reports. The medical reports were appended to the affidavit. At the motion counsel for the defendant sought to introduce the contents of the medical reports into evidence. Corbett, J. refused on the following grounds found at page 434:

. . .I am not admitting the contents of these reports on the motion for judgment as they are not presented so as to constitute the best evidence.

It would be necessary for such document to fall within an exception to the hearsay rule in order to be admissible. Sopinka and Lederman have offered the following factors at page 173 to be considered when deciding if an exception to the hearsay rule should be permitted:

Necessity has given rise to a number of exceptions to the rule against hearsay. The requirement that testimony be subjected to the test of cross-examination has been dispensed with in situations where the declarant of the words in question is unavailable and the oral or written statement was made under circumstances which, it can be presumed, would impress the remarks with a genuinely trustworthy quality. In many situations such declarations are the only cogent evidence available and to exclude them would result in considerable inconvenience.

Finally, even if the T-401 were admissible as evidence what would be its probative value? In my view there would be none. The Crown is not bound by the statements of its servants (see No. 320 v. M.N.R. (1956), 14 Tax A.B.C. 334, 56 D.T.C. 100; Barron v. M.N.R., [1975] C.T.C. 2279, 75 D.T.C. 221; Gibbon v. The Queen, [1977] C.T.C. 334, 77 D.T.C. 5193; and Ludco v. Canada, [1994] 1 C.T.C. 367, 94 D.T.C. 6143 (F.C.T.D.)). Even if the Crown were so bound, the T-401 is only an internal document of the Department of National Revenue describing the views of one or more employees at some time in the course of the appeal procedures taken.

Accordingly, the motion is dismissed with costs to the respondent in any event of the cause.

Motion dismissed.