Crestbrook Forest Industries Ltd. v. Her Majesty the Queen, [1992] 2 CTC 81, 92 DTC 6412

Jerome, A.C.J.:—This is an appeal by the defendant and a cross-appeal by the plaintiff, from the decision of the Associate Senior Prothonotary dated October 1, 1991, wherein it was ordered that the plaintiff and its representative being examined for discovery, inform themselves and provide answers to certain questions which they had failed to provide at examination for discovery.

The plaintiff company, incorporated under the laws of the Province of British Columbia, manufactures bleached kraft pulp at its pulp mill in Skookumchuck, British Columbia. From the summer of 1964 until the summer of 1966, negotiations with respect to a joint venture were conducted in Vancouver and Tokyo between the plaintiff and two Japanese companies, Honshu Paper Company Ltd. ("Honshu") and Mitsubishi Corporation ("Mitsubishi").

These negotiations culminated in a joint venture agreement dated August 15, 1966 which entitled both Honshu and Mitsubishi to purchase newly issued shares in the capital of the plaintiff in numbers sufficient to give each Japanese company just under 25 per cent of the plaintiff's outstanding capital. The agreement further provided that if Honshu and Mitsubishi acquired these shares they would ensure that a pulp mill, to be owned by the plaintiff, was built. The parties to the joint venture agreement were Honshu, Mitsubishi, Crestbrook Timber Ltd. and four principal shareholders of Crestbrook Timber Ltd. In March, 1967 Honshu and Mitsubishi each subscribed for 325,000 shares in the capital of the plaintiff.

At the same time, a pulp sales agreement, between the plaintiff as the seller and Honshu and Mitsubishi as the purchasers, was settled and constituted part of the joint venture agreement. The major terms of the pulp sales agreement provided that the plaintiff agreed to sell all of its pulp production to Honshu and Mitsubishi and the latter companies would, between them, purchase the entire pulp production of the plaintiff. The price for the pulp was based upon the actual resale price of the pulp as negotiated between Honshu or Mitsubishi and their third party customers and in accordance with a formula that provided for a discount.

For its 1984, 1985 and 1986 taxation years, the plaintiff, in calculating its income from pulp sales, included as revenue the price which it received from Honshu and Mitsubishi pursuant to the pulp sales agreement. By notice of reassessment dated February 28, 1989 the Minister of National Revenue restated the plaintiff's revenue from the proceeds of selling its pulp by an amount equal to those discounts. The discounts claimed by the plaintiff were approximately five per cent of its sales. The Minister took the position that a discount of only two and one-half per cent was appropriate and added the excess back to the plaintiff's income in the respective taxation years. The Minister also assessed the plaintiff under Part XIII of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") for withholding tax. Since only a two and one-half per cent discount was considered appropriate, the Minister concluded that a benefit had been conferred upon the two non-resident share- holders and that the plaintiff had been required to withhold income tax on their behalf on the amount of the benefit. The plaintiff subsequently filed notices of objection, but the Minister confirmed the reassessments by notice dated September 29, 1989.

The plaintiff appeals these reassessments in this action which has led to the disputed discovery questions. For the purposes of examination for discovery, the plaintiff presented as its nominee, Mr. Jack Croll, who joined the plaintiff company in 1987 as vice-president of finance and chief financial officer. On August 3, 1990, in responding to questions concerning written answers to undertakings given at examination for discovery on May 24 and 25, 1990, the plaintiff was unable to provide answers to certain of the defendant's questions, and undertook to ask for the information from Honshu and Mitsubishi.

By letter dated September 17, 1990, Mr. Croll asked Honshu and Mitsubishi for the answers to the questions posed by the defendants. In a reply dated November 21, 1990, Mitsubishi indicated that it would not respond to the questions; Honshu did not respond. Mr. Croll was subsequently cross- examined on his affidavit and wrote to the two Japanese companies again by letters dated May 23, 1991. Both companies again responded by declining to answer the questions. This response was in keeping with the initial position taken by Honshu and Mitsubishi, when, at the audit of the plaintiff for the taxation years 1984, 1985 and 1986, they refused Revenue Canada's request for the same information.

By notice of motion dated March 13, 1991, the defendant sought an order under Federal Court Rule 465(18) compelling answers to the questions, and an order under Federal Court Rule 465(20) striking out the plaintiff's action or, in the alternative, an order under Rule 477 for the issuance of a commission for the examination of witnesses on behalf of Honshu and Mitsubishi.

By order dated October 1, 1991, the Associate Senior Prothonotary granted the defendant's application in part. Of the 22 questions to which the defendant sought answers, he ordered the plaintiff to answer the three questions which related to matters arising after the signing of the joint venture agreement dated August 15, 1966.

Upon this appeal it is argued that the nominee of the plaintiff has failed to inform himself of relevant matters and has attributed such failure to the unwillingness of the Mitsubishi and Honshu to provide such information.

The plaintiff cross-appeals from the order by notice of motion dated October 15, 1991 on the grounds that it has tried to obtain the answers and documents from the two Japanese companies but each company, consistent with the initial position taken during the audit which led to the reassessments, has declined to provide the materials sought. Furthermore, it is submitted that neither of the two companies is related to the plaintiff under either corporate or tax law in the sense that neither alone controls the plaintiff directly or indirectly. The plaintiff maintains that it has no legal ability to compel either of its shareholders to do anything, either in Canada or in Japan, and that the information which the defendant seeks is marginally relevant at best.

The defendant relies on the decision in Monarch Marking Systems Inc. v. Esselte Metro Ltd., [1984] 1 F.C. 641, 75 C.P.R. (2d) 130 (F.C.T.D.), a patent infringement action in which some discovery questions put to the Canadian company were within the knowledge of a related German corporation. The German and Canadian company had a Swedish parent which controlled each of them. The Court held that questions concerning matters in the knowledge of foreign related companies of the party being examined should be answered. Mahoney, J., as he then was, made the following comments at pages 133-34:

Today's commercial reality, with international corporations, large and small, doing business through affiliates across much of the world and treating national boundaries as minor inconveniences to be coped with by organizational means, dictates that the corporate veil ought not be permitted to inhibit the administration of justice in Canada. Examination for discovery is an important tool in the administration of justice on its civil side. I have no doubt that, under proper sanctions by the court, Canadian companies can readily and economically obtain from their foreign affiliates answers to proper questions on discovery. I am convinced that they should be required to try and to pay the consequences of their failure or their affiliates' recalcitrance. International businesses ought not be permitted, either as an incident or object of their organization set-ups, to avoid full compliance with the law of Canada in respect of the business they do here.

I accept therefore, the defendant's submission that it is permissible to compel a party being examined for discovery to obtain answers from a non- party once the examining party establishes that there is an international business being carried on by a group of companies. However, in the present case, such a business came into existence on August 15, 1966, when the plaintiff, four of its then principal shareholders, Honshu and Mitsubishi signed the joint venture agreement, for the purpose of constructing a bleach kraft pulp mill at Skookumchuk, British Columbia. Of the 22 questions to which the defendant seeks answers, nineteen are related to matters which arose prior to that date and, require the plaintiff to obtain from two of its shareholders, information and documents relating to negotiations between the plaintiff and its principal shareholders, on the one hand, and Honshu, Mitsubishi and a Mitsubishi subsidiary, on the other hand.

The matters in issue between the parties arose subsequent to the signing of the joint venture agreement. Prior to August 15, 1966 there was no international business in existence nor had Honshu and Mitsubishi acquired any shares in the plaintiff company. The negotiations into which the defendant is inquiring pre-date the signing of the joint venture agreement, the content of which resulted in the defendant reassessing the plaintiff for the taxation years in question and from which the plaintiff appeals. Those questions, in my opinion, are outside the scope of the international business venture which has led to these proceedings. I am satisfied therefore, that the Associate Senior Prothonotary was correct in his finding that the defendant's questions relating to matters which arose prior to the date the joint venture agreement was entered into, do not need to be answered.

I turn now to the remaining three questions which the Associate Senior Prothonotary ordered to be answered but which the plaintiff contends it should not be required to answer.

Generally, the purpose of examination for discovery is to obtain admissions to facilitate proof of the matters in issue between the parties. The objective is to bring the issues more clearly into focus, thereby avoiding unnecessary proof and additional costs at trial. Pursuant to Federal Court Rules 465(15) and (17), the obligations of an individual nominated as the representative of a corporate body for the purposes of an examination for discovery are to answer questions pertaining to any fact within the knowledge or means of knowledge of the corporate party which may prove or disprove any unadmitted allegation of fact in any pleading filed by the party being examined or the examining party.

Often the representative of a corporate party, may be required to attempt to seek information from a person not under the party's control. In Control Data Canada Ltd. v. Senstar Corp., [1988] 1 F.C. 439, 13 C.P.R. (3d) 546, this Court had opportunity to examine the jurisprudence underlying the Federal Court Rules pertaining to examination for discovery. Referring specifically to Rules 465(15) and (17), which deal with a deponent's obligation to attempt to obtain the information sought upon discovery, Cullen, J. made the following comments at pages 547-48:

With the rule’s direction, and the clear statement by Cattanach, J. in Geo Vann Inc. v. N. L. Industries, Inc. (1984), 1 C.P.R. (3d) 277, the defendant makes a good point that the person being examined has an obligation to attempt to seek the information from the patent agent—Mr. A.J.S. Davidson. The Court cannot compel Mr. Davidson to answer, but it can compel the person being examined—in this case Mr. Patten—to seek the information. Should Mr. Davidson be unwilling or unable to provide the information sought, the plaintiff can so indicate by affidavit filed why he was unable to secure the information sought.

[Emphasis added.]

Accordingly, the nature of the obligation upon an individual being examined for discovery in cases of this nature, is that they must attempt to seek the information requested. The Court cannot compel Honshu and Mitsubishi to answer the defendants's questions, but it can compel the person being examined, in this case Mr. Croll, to seek the information.

I am satisfied that the plaintiff in the present case has satisfied the obligations under the Rules to have its officer inform himself of all relevant information which he could obtain from any source. Extensive discovery of the plaintiff's case has already taken place. When the questions in issue were posed to Mr. Croll at the examination for discovery, he undertook to try to obtain the answers; a response which was consistent with his obligations as a discovery deponent. Through Mr. Croll, the plaintiff has answered all questions within the knowledge of its officers and employees and exercised its best efforts in obtaining information from third parties.

Furthermore, although Honshu and Mitsubishi are shareholders of the plaintiff company, the plaintiff is not controlled by either Japanese company in the sense that either of them has ever had more than fifty percent of the outstanding shares of the plaintiff. There is no controlling relationship exercised by one corporate entity over other corporate entities. Neither Honshu nor Mitsubishi control the plaintiff which is a public company carrying on business in Canada. Both Japanese companies act in their own interests even though they may act in concert with respect to their dealings with the plaintiff. Accordingly, the plaintiff is not in a position to compel either of these two shareholders to answer the questions in issue.

Under the circumstances, I cannot accept the defendant's suggestion that a Canadian corporation, such as the plaintiff, which is a separate legal entity with its own board of directors can be compelled to obtain information from independently controlled Japanese corporations over which it has no legal control. There is simply no basis for the request that the lack of success should cause the appeal to be struck.

Finally, this is not a case in which the administration of justice in Canada is hindered by the fact that the information requested by the defendant cannot be obtained by the plaintiff. In an appeal under the Income Tax Act, the Minister of National Revenue is entitled to base his assessment on assumptions of fact based on the audit or other investigations undertaken by his officials. The onus is then on the taxpayer to destroy those assumptions and the Court hearing the appeal may find in favour of the Minister on any fact on which the taxpayer fails to adduce sufficient evidence, whether the Minister adduces any evidence supporting that fact or not.

Since the defendant has relied on this process in the present case, it simply does not follow that it will be prejudiced by not having the information which it seeks concerning the negotiating position and knowledge of third parties in the pre-contractual phase of the international business relationship now impugned. For these reasons, I am satisfied that the three questions which the plaintiff was ordered to answer need not be pursued. The plaintiff's crossappeal is allowed and the decision of the Associate Senior Prothonotary is set aside.

Costs in the case.

Appeal dismissed; cross-appeal allowed.