Shell Canada Ltd. v. R., [1997] 1 CTC 2208, 97 DTC 247

Christie A.C.J.T.C.: - This motion came on for hearing at Toronto on September 26, 1996. The litigation to which it relates is an appeal by Shell Canada Limited (“Shell”) under the Income Tax Act (“the Act”) in respect of its 1992 and 1993 taxation years.

In computing its income for those years Shell sought to deduct interest under debenture agreements in the amounts of $15,519,491 and $5,621,113 regarding 1992 and 1993 respectively. In reassessing Shell the Minister of National Revenue (“the Minister”) disallowed $4,874,796 for 1992 and $1,675,643 for 1993. There is also a dispute about the nature of the gain realized by Shell on the disposition of debentures in 1993.

Paragraph 17 of the Amended Notice of Appeal reads:

17. The issues to be decided in this appeal are as follows:

(i) whether the Minister erred in disallowing a portion of the interest in respect of the debentures in computing the Appellant’s income for the 1992 and 1993 taxation years; and

(ii) whether the Minister erred in treating the gain realized from the disposition of the New Zealand debentures in 1993 as being ‘profit’ within the meaning of section 9 of the Act.

Paragraph 13 of the Amended Reply to the Notice of Appeal reads:

13. The issues to be decided are the following:

(a) what is the actual amount of interest paid or payable by the Appellant?

(b) what portion of the amount claimed as interest paid or payable is a reasonable amount within the meaning of paragraph 20(1 )(c) of the Income Tax Act?

(c) does the disallowed interest reflect a payment on account of principal that is not deductible under paragraph 20(1 )(c), or any other provision, of the Act?

(d) is the deduction of the disallowed interest reasonable in the circumstances

within the meaning of section 67 of the Income Tax Act?

(e) would the deduction of the disallowed interest unduly or artificially reduce the Appellant’s income within the meaning of subsection 245(1) of the Income Tax Act?

(f) are the pre-ordained gains from the New Zealand dollar forward

transactions in the amount of $26,191,686 on income or capital account?

(g) is the Appellant obliged to include the pre- ordained gains from the New Zealand dollar forward transactions in the amount of $26,191,686 in computing its income pursuant to section 9 of the Income Tax Act and, if so, over what period of time?

Subsection 95(1) and paragraph 110(a) of the Tax Court of Canada Rules (General Procedure^ [1] (“the Rules”) provide:

95. (1) 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 proceeding or to any matter made discoverable by subsection (3) [2] and no question may be objected to on the ground that:

(a) the information sought is evidence or hearsay,

(b) the question constitutes cross-examination, unless the question is directed solely to the credibility of the witness, or

(c) the question constitutes cross-examination on the affidavit of documents of the party being examined.

110. Where a person fails to attend at the time and place fixed for an examination in the notice to attend or subpoena, or at the time and place agreed on by the parties, or refuses to take an oath or make an affirmation, to answer any proper question, to produce a document or thing that person is required to produce or to comply with a direction under section 108, the Court may

(a) where an objection to a question is held to be improper, direct or permit the person being examined to reattend at that person’s own expense and answer the question, in which case the person shall also answer any proper questions arising from the answer,

The Notice of Motion states that: “THE MOTION IS FOR an order pursuant to section 110(a) of the Tax Court of Canada Rules (General Procedure) (the “Rules”) directing the Respondent’s nominee, Mr. William Hillen, to attend at a continuation of the examination for discovery in the within matter and answer the following questions and any further questions that arise from those answers:

THE GROUNDS FOR THE MOTION ARE that the above-noted questions put to the Respondent’s nominee were proper questions within the meaning of paragraph 110(a) of the Rules and the objections of counsel for the Respondent to the said questions was improper.

At the hearing counsel for Shell dealt with the questions in this order: 1, 2, 3, 4, 12, 13, 6, 7, 8, 9, 10, 5, 11, 14, 15, 16. In these reasons the questions are dealt with seriatim in the order set out in the Notice of Motion which is the sequence in which they arose at the examination for discovery.

In 569437 Ontario Inc. v. R., (sub nom. 569437 Ontario Inc. v. Canada) [1994] 2 C.T.C. 2399, 94 D.T.C. 1922 (T.C.C.) this is said, at page 2399 (D.T.C. 1923):

Subsection 95(1) of the Tax Court of Canada Rule (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, [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., [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., (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.

See also Holmested & Watson, Ontario Civil Procedure, under the heading “SCOPE OF EXAMINATION: GENERAL, Rule 31.06(1)” at 31-48:

What is relevant to the matters in issue, as defined by the pleadings, is extremely broad. The examining party is entitled to discover for the purpose of supporting her own case and to put that case to the opponent to obtain admissions and to limit the issues. She is entitled to interrogate to destroy the adversary’s case or to find out the case she has to meet and the facts (and now the evidence) that are relied upon by the adversary in support of his case. And it is not a valid objection that the examining party already knows those facts. The examiner is entitled - indeed, it is a major purpose of discovery — to obtain admissions that will facilitate the proof of that party’s case or will assist in destroying the adversary’s case. See generally Williston and Rolls, The Law of Civil Procedure (1970), 782-787.

And at page 31-49:

It is a cardinal rule that discovery is limited by the pleadings. Discovery must be relevant to the issues as they appear on the record: Playfair v. Cormack (1913), 4 O.W.N. 817 (H.C.); Jackson v. Belzburg, [1981] 6 W.W.R. 273 (B.C.C.A.). The party examining has no right to go beyond the case as pleaded and to interrogate concerning a case which he has not attempted to make by his pleadings. But “everything is relevant upon discovery which may directly or indirectly aid the party seeking discovery to maintain his case or to combat that of his adversary”: McKergow v. Comstock (1906), 11 O.L.R. 637 (C.A.). While clearly irrelevant matters may not be inquired into, relevancy must be determined by the pleadings construed with fair latitude: ibid. The court should not be called upon to conduct a minute investigation as to the relevance of each question and where the questions are broadly related to the issues raised, they should be answered: Czuy v. Mitchell (1976), 2 C.P.C. 83 (Alta. C.A.). The tendency is to broaden discovery and the “right to interrogate is not confined to the facts directly in issue, but extends to any facts the existence or non- existence of which is relevant to the existence or nonexistence of the facts directly in issue”: Marriott v. Chamberlain (1886), 17 Q.B.D. 154.

And at page 31-55 and 56:

Not only must a party examined give his information. he must inform himself. In Rubinoff v. Newton, above, Haines J. said: “I can think of no more simple and direct question than, On what facts do you rely?”. The witness may not know those facts but he must be informed by his counsel. It must be kept in mind that on an examination for discovery a party must qualify himself to give an intelligent statement of his case.

At the hearing it was agreed that only the third of the first three questions in the Notice of Motion need be specifically dealt with because it also encompasses questions 1 and 2. Question 3 is: “Sir, apart from the calculation illustrating how you arrived at 8.7034, did you have any other facts in your possession to support your contention that that was a reasonable rate of interest?

Counsel for Shell referred to a document produced pursuant to discovery of documents by counsel for the respondent. It is dated August 22, 1994 and is a memo from the person being examined, Mr. William Hillen, to Mr. G.A. Lawrence, Chief - Tax Avoidance, Calgary District Office, Revenue Canada. It reads in part at pages 16 and 17:

Pursuant to working paper 850, two effective rates were calculated as follows:

$100,755,000

Principal amount of debentures U

Total interest USS	$ 67,025,805		$67,025,805
Less: exchange gain US$	21,165,000		21,165,000
Less: premium received USS (Note 1)		2.012.133)		Wa
Net interest expense USS
Approximate effective rate	, 17^	9.1034°/»

Pages 59 to 63 of the transcript of the examination for discovery read: [3]

Mr. Meghji: Now, I’m going to ask - the next question I invite Mr. Erlichman, if he feels more comfortable answering it, to answer it, I will not yell or scream or jump up or down. Apart from the analysis that has been done in this working paper to arrive at the 8.7034, what other facts does the respondent have in its possession to support the allegation that a reasonable rate of interest was 8.7034 percent?

Mr. Erlichman: What other facts? Well, we have —

Mr. Meghji: Just to make this easy for you, this is not a trick question. Basically what I have been told by this witness, there is nothing in the pleadings on it, the pleadings say this is an unreasonable rate or this is an unreasonable interest amount, and I am trying to find out, well, then the Crown obviously has a view on what is reasonable. And this witness has told me what is reasonable is 8.7034, and he has told me, “we say it is unreasonable because of, and here is a calculation telling you why we come up with 8.7034”.

Mr. Erlichman: Why arithmetically, yes.

Mr. Meghji: Yes, he explains to me the principles that he used to arrive at the 8.7034. He tells me he took the interest, backed out the discount, backed out the premium, came up with a net figure and that was 8.7034.

That is your evidence, isn’t it, sir?

Mr. Erlichman: Yes.

Mr. Meghji: So he has explained to me the principles and explained to me how he came up. I want to know if there are any other facts in your possession which support the allegation that 8.7034 is a reasonable rate?

Mr. Erlichman: At the time of the assessment, the respondent obviously looked at all of the material and information that was available, and whatever the facts are contained in all of that material, which I am sure you are totally aware of. The particular calculation which arrives at the arithmetic result, Mr. Hillen and you have discussed, so I am not aware of any other arithmetic calculation which arrives at that particular percentage.

Mr. Meghji: Let’s set aside the arithmetic calculation. Let’s ask the question: Are there any other facts that the Minister relied upon in saying that the reasonable rate of interest is 8.7034? Actually, the witness can answer this one, because he was there when he did this, he calculated it.

Sir, tell me if you know of any other facts, other than the ones we have just been over that you relied on in support of the position that 8.7034 was a reasonable rate?

Mr. Erlichman: In fact I am going to keep the invitation that you proffered to me earlier to answer this because in fact —

Mr. Meghji: Well, I think you should just tell the witness not to answer it, put your objection on the record and tell us why, and we can move on.

Mr. Erlichman: No, because in fact it is exactly the same point. It is entirely clear to me that the only purpose of asking that — of continuing to ask that question the way it is phrased, after you have been advised that there is no other calculation of how the interest rate, which the Crown relies upon, and after you have been told that of course this is a transaction with numerous parties and numerous pieces of paper and so on, and that the facts which are found in those documents, and the facts which were reviewed for purposes of assessment, when you continue to ask the question, it can only be for the purpose of obtaining some type of answer unfairly obtained for some inappropriate purpose. I don’t know how much more we can answer other than what we have already answered.

Mr. Meghji: Let me use a hypothetical to illustrate to you what I am getting at, Mr. Erlichman. If this witness tells me that in addition to doing this calculation, I talked to my aunt who is an investment banker, and she said to me, “You know, 8.7034 is a pretty reasonable rate”, I would like to know that. That is the nature of the question. I want to know — he has gone through this, he told me he took the principal amount, backed out the discount, backed out the premium and came up with 8.7034. And I said, my question is: Well, that’s how you arrived at a reasonable rate. Is there anything else you did to conclude that was a reasonable rate?

Mr. Erlichman: We have answered the question.

Mr. Meghji: So you are not going to let the witness answer the question that I have just asked on the basis that it has been asked and answered? The reason I keep repeating this is because when - look, I don’t mean to be aggressive or cheeky, but I would like us for the record when we go before a judge to be clear on the basis on which you are asking the witness not to answer. I asked - let me put my question again, Mr. Erlichman, you can then put your objection on the record and we can get on.

Sir, apart from the calculation illustrating how you arrived at 8.7034, did you have any other facts in your possession to support your contention that that was a reasonable rate of interest ?* [4]

Mr. Erlichman: I’m continuing to object. I think the question has been fairly answered.

In my opinion, on the basis of the authorities previously cited, question 3 should have been answered and, consequently, the objection to doing so was improper within the meaning of paragraph 110(a) of the Rules.

With respect to question 4 counsel for the respondent informed the Court that this question will be answered and it was agreed that it is no longer in issue. Question 5 was withdrawn by Mr. Meghji.

Questions 6, 7, 8, 9, 10 were dealt with as a group. It was agreed that answers to questions 6 and 9 would suffice in respect of all five. Regarding question 6, Mr. Meghji made reference to another document produced on discovery. It is dated April 14, 1994 and was also prepared by Mr. Hillen and is addressed to Mr. Lawrence. This is said at page 18 under the heading “Deferred Foreign Exchange Gain”:

This suggests that if the debentures could be considered as capital debt obligations, the gain when realized at maturity should be reported on account of capital.

Mr. Meghji then again pointed to the previously mentioned Hillen to Lawrence memorandum of August 22, 1994. This is said at page 20 thereof:

Pursuant to the May 10, 1988 “Confidential Private Placement Memorandum” (working paper 4700), Shell indicates that the net proceeds from the sale of the debentures will be used for general corporate purposes. Although this intended use of the funds is extremely general in nature, the stated purposes suggests that the gain, when realized, should be included in income as an income gain.

In the March 16, 1988 internal Shell memo, the writer indicates that the company is planning to use the $100 million US$ Kiwi proceeds to redeem the 15.75 per cent US$ debentures due September 15, 1988.... This indicates that the foreign exchange gain should be taxed on account of capital when realized.

Consequently, how the foreign exchange gain will be taxed when realized in 1993 is not of direct consequence at this time. As the foreign exchange gain appears to have resulted from transactions on account of capital, for purposes of the subsequent discussion it will be accepted that the gain would be a capital gain when realized.

What follows is at pages 69-71 of the transcript of the examination for discovery:

Q. Mr. Meghji: Let’s go to page 19 of your report, sir, this is still the April 14th report?

A. Yes.

Q. Actually let me take you to the first full paragraph on page 19. Now, can I just ask you that first full paragraph, the last sentence of that paragraph says: “This indicates that the foreign exchange gain should be taxed on account of capital when realized?”

A. It does state that, yes.

Q. Now, so you had as a result of your analysis come to that as an initial conclusion?

A. May I read it?

Mr. Meghji: Sure.

A. Can you repeat the question, please.

Q. So would it be fair for me to say after reading that paragraph that you had initially come to a view that the foreign exchange gain should be taxed on account of capital when realized?

A. Yes.

Q. Sir, what in your analysis was subsequently determined to be wrong so as to warrant a change to that conclusion ? [5]

Mr. Erlichman: Don’t answer that question, totally irrelevant.

(Objection)

Mr. Meghji: Totally irrelevant, is that -

Mr. Erlichman: Yes.

Mr. Meghji: Can you go to the second paragraph on page 19.

Am I correct in concluding that you, in the second paragraph, also concluded that “when the gain is realized in 1993, it will be accepted that the gain would be a capital gain when realized”, am I correct in saying at the time you did this report you had formulated the view that the gain would be taxed as capital?

A. I will read it, just a second.

I think I state in here “for subsequent discussion purposes we will accept it as being on account of capital”.

Q. Okay.

A. I believe at the time of preparation of this paper, the 1993 return had not been assessed, so we did not, I believe, know what the treatment was.

Q. You mean the tax treatment by the taxpayer or by Revenue Canada?

A. By the taxpayer, that’s correct.

Q. But you in your analysis had come to a preliminary view, if I can use that phrase, that when the gain would be realized, it would be taxed as a capital gain; is that a fair comment? I accept the fact that this is not a concluded view, I grant you that.

A. Yes.

Q. So you had a preliminary view?

A. I think for discussion purposes we said the capital gain, we are probably not going to be addressing this issue within this tax avoidance audit, and therefore we will recognize it as being a capital gain.

Q. But you had done some analysis previous to your conclusion so as to give you an indication of which way this might go?

A. Yes.

Q. And, sir, what I want you to do is tell me what facts were subsequently brought to your attention that changed your analysis? [6]

Mr. Erlichman: Don’t answer that question.

(Objection)

Mr. Meghji: Okay.

the basis of the objection?

Mr. Erlichman: It is totally irrelevant.

Mr. Meghji: Okay. [7]

This exchange occurred at the hearing of the motion:

His Honour: But assuming that he had a preliminary view of the gain being on capital account, and the final view is that it was on income account, so what?

Mr. Meghji: Well, that’s where I’m going to. I’m going to that now, Your Honour. The question that I asked him - now, this is where we’re sitting. We’re sitting at August 22nd, 1994. He has a preliminary view that the gain is capital, based upon certain facts.

The assessment comes out, and it’s income. What am I trying to find out: Tell me, Mr. Auditor, what did you find after August 22nd, 1994? What new facts? What happened that resulted in the Minister saying the gain is now income?

I’m not concerned about his preliminary view. What I’m concerned about is understanding how they got to where they’re going, because presumably there were some new facts that changed it.

His Honour: Now, just a moment. Why do you say there were new facts? They may just have reconsidered the previous facts and come to the conclusion that indeed it was on income account. They didn’t have to have new facts.

Mr. Meghji: Your Honour, that’s absolutely correct. And all they had to tell me was: We don’t have any new facts. I would have been happy with that. But surely my inquiry as to how the change happened is appropriate.

They could simply tell me: That’s the evidence of the auditor under oath, that no new facts were discovered. We simply changed our minds. Fine, tell me that.

Regarding question 6 much emphasis was placed on what was said by Mr. Justice Rand, speaking for a majority of the Court in Johnston v. Minister of National Revenue, [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182, at pages 489-90 (C.T.C. 202, D.T.C. 1183). [8] The appeal had to do with the interpretation of provisions of the Income War Tax Act pertaining to the rate of taxation for certain married and unmarried persons and persons with dependants.

His Lordship stated that as taxation rests on the basis of certain facts and related provisions of the law then on an appeal from taxation those facts or the application of the law is challenged. He then went on as follows:

Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife within the meaning of the Rules mentioned he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

It must, of course, be assumed that the Crown, as is its duty, has fully disclosed to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy. But unless the Crown is to be placed in the position of a plaintiff or appellant, I cannot see how pleadings shift the burden from what it would be without them. Since the taxpayer in this case must establish something, it seems to me that that something is the existence of facts or law showing an error in relation to the taxation imposed on him.

In Johnston Rand J. was addressing appeals at large against the imposition of income tax and he was not in any way focusing on examinations for discovery. I do not regard that decision as authority for any suggestion that an official of Revenue Canada being examined for discovery is required to expound on matters of law with reference to what is in issue on an appeal under the Act. This is subject to what I say later about “Administrative Interpretation”. With respect to disclosing law paragraph 49(1 )(g) of the Rules requires that every Reply to a Notice of Appeal shall state the statutory provisions relied on and that was done in the Amended Reply to the Notice of Appeal in this case. Further I do not think that what is said in Johnston about full disclosure of precise findings of fact adds to or detracts from what judicial pronouncements directly concerned with examinations for discovery have said about disclosing facts in the course of such examinations.

I am dealing with question 6 on the assumption that the words hereinafter underlined are there by implication. I think that is borne out by question 7 that quickly followed question 6 and which, I believe, was intended to be a restatement of that question. The assumed wording of question 6 is: “Sir, what in your analysis was subsequently determined to be wrong on the basis of new facts so as to warrant a change to that conclusion?”

If there are new facts upon which the final reassessment pertaining to the gain on the disposition of the debentures is based they should be disclosed. Indeed they are subject to disclosure on an examination for discovery even in the absence of evidence suggesting a change of mind. What has already been said in these reasons about the looser requirements of relevancy on examinations for discovery should be borne in mind. But it should also be remembered that there is a line of irrelevancy that is not to be crossed which can be drawn on examinations for discovery.

With reference to examining into the process whereby tax is assessed I refer to Consumers’ Gas Co. v. R., (sub nom. Consumers’ Gas Co. v. The Queen) [1987] 1 C.T.C. 79, 87 D.T.C. 5008 (F.C.A.). Mr. Justice Hugessen, speaking for the Court said, at page 83 (D.T.C. 5012):

What is put in issue on appeal to the courts under the Income Tax Act is the Minister’s assessment. While the word ‘assessment’ can bear two constructions, as being either the process by which tax is assessed or the product of that assessment, it seems to me clear, from a reading of sections 152 to 177 of the Income Tax Act, that the word is there employed in the second sense only. This conclusion flows in particular from subsection 165(1) and from the well established principle that a taxpayer can neither object to nor appeal from a nil assessment.

Bowater Mersey Paper Co. v. R., (sub nom. The Queen v. Bowater Mersey Power Co. Ltd.), (sub nom. R. v. Bowater Mersey Paper Co.) [1987] 2 C.T.C. 159, 87 D.T.C. 5382 (F.C.A.) was decided a few months later. In Abrahams (No. I) v. Minister of National Revenue, [1966] C.T.C. 690, 66 D.T.C. 5451 (Ex. Ct.) Jackett P. held that a reassessment of a taxpayer’s total tax for a year nullifies and replaces any previous income tax assessment for that year. In Bowater Mersey the Crown made application for judgment summarily dismissing an appeal from nil reassessments dated March 6, 1984. The trial judge dismissed the application on two grounds, one of which was that Abrahams only applied where as a consequence of a reassessment there is no longer any issue related to the previous assessment that remains outstanding and unresolved. He was of the view that the reassessments of March 6, 1984 “... left outstanding the question whether the calculation of the tax for those years had been properly made. More precisely, they left unresolved the question of the proper classification for capital cost allowance purposes of that asset which, according to the respondent, was to be treated as falling within Class 29 of Schedule II of the Income Tax Regulations.” The appeal from the dismissal was allowed. Mr. Justice Pratte, speaking for the Court, said at page 161 (D.T.C. 5383):

This appeal, in my mind, must succeed. The reassessments of March 6, 1984, were reassessments of the totality of the tax payable by the respondent for 1981 and 1982. They, therefore, replaced prior assessments that had been made for those years. Those prior assessments were no longer in existence and could not, for that reason, be the subject of an appeal.

I see no merit in the reasons invoked by the judge of the first instance in support of his conclusion.

First, it is simply untrue that the rule in Abrahams does not apply in cases where, in spite of the reassessment, the taxpayer retains an interest in the solution of an issue relating to a prior assessment. This presupposes that a taxpayer may appeal from alleged errors made by the Minister in calculating the tax owed by him. There is no such right of appeal. The right of appeal that exists is from the result of the calculation made by the Minister, not from those calculations.

Question 9 and the position of counsel for the Crown is at page 77 of the transcript of the examination for discovery:

Mr. Meghji: Sir, do you have any facts subsequent to your August 22nd, 1994 letter (memorandum) that leads you to the conclusion that the gain was in fact properly assessed as income?

Mr. Erlichman: Don’t answer the question. It is clearly an issue of law. The factual aspects are not relevant at this time.

(Objection)

I said regarding question 6 that if there are new facts upon which the final reassessment is based they should be disclosed. That also applies to question 9.

We now come to question 11. On March 29, 1995 Mr. Hillen wrote to Mr. John Armstrong of Shell in part as follows:

2. Deferred Foreign Exchange Gain: As a consequence of the disallowance of the “excessive” interest claimed by the company and in accordance with current Departmental policy, the foreign exchange gain realized in 1993 has been reclassified from the reported capital basis to on account of income, and reduced from $26,191,688 to $2,534,509.

This was carried forward in a reassessment notice of which is dated June 15, 1995. By a further reassessment notice of which is dated March 1, 1996 the $2,534,506 was increased to $26,191,686. This reassessment post-dated the original Notice of Appeal and Reply thereto. The following extracts are from the transcript of the examination for discovery:

Mr. Meghji: Now, sir, were you responsible for this reassessment (1.e. of March 1, 1996)?

Mr. Erlichman: As the tax avoidance auditor or Revenue Canada?

Q. Why don’t you tell me, as a starting point, what role you personally played in raising this assessment?

A. None.

Q. Who exactly was responsible for putting together this explanation, the explanation page - you prepared the explanation page in the 1995 reassessment?

A. Yes.

Q. Why prepared the explanation page in the 1996 reassessment?

A. I’m not sure.

Q. Because this reassessment, sir, as you will agree with me, changes the amount of the gain in 1993?

A. Yes.

Q. Do you know what led to the issuance of a reassessment which bumped the gain by whatever the number was, can you give me an explanation of what were the reasons for the Department issuing the subsequent reassessment?

Mr. Erlichman: The question is what is the basis for the reassessment?

Mr. Meghji: Yes.

Mr. Erlichman: All right.

A. I would say that the initial reassessments were prepared in error.

Mr. Meghji: Let me get this straight, isn’t it true, sir, that you told Shell, you have told them verbally and you have told them in correspondence that when the gain was calculated in 1993, that the Department would back out the disallowed interest; didn’t you say that?

A. Yes.

Q. Now, what was the error, sir?

A. At the time of preparation of the first reassessments, we felt it was - we did not clearly understand the policy as conveyed by in the September 22nd, 1994, memo.

Q. And so who directed, who is it that conveyed the policy, or who is it that said, Hey, guys, you have got this wrong?

Mr. Erlichman: Don’t answer that question, it is totally irrelevant.

(Objection)

Mr. Meghji: Did Mr. Gauthier’s office direct the issuance of these new assessments?

Mr. Erlichman: Don’t answer that question, it’s irrelevant.

(Objection)

Mr. Meghji: Okay, tell me why the first assessment was wrong? [9]

Mr. Erlichman: Don’t answer that question. We are getting into the entire area here of law, the area we are going to be arguing about ultimately. I’m instructing him not to answer the question.

(Objection)

Mr. Meghji: Can you tell me if the Department became aware of any facts after the issuance of the first assessment, any new facts that led to the issuance of the second reassessment?

Mr. Erlichman: I will undertake to provide that answer.

Mr. Meghji: No, I would like the witness to answer that question. If the witness tells me he doesn’t know, maybe we will ask for an undertaking.

A. I’m not sure.

Q. Why am I not surprised at that answer, Mr. Hillen? I would like an -

Mr. Erlichman: I resent that. In other circumstances, I would ask for an apology. I won’t bother today.

Mr. Meghji: Well, Mr. Erlichman, the witness is in a position to explain to me why he raised the second reassessment.

Mr. Meghji: Sir, maybe your counsel can answer this question, I want to know whether it is the Crown’s position that — is the Crown asking the Court to, one, disallow all of the interest, and two, to include in the taxpayer’s income the gain of the full amount, or is the Crown saying these are alternative positions?

Mr. Erlichman: I think the assessment speaks for itself.

Mr. Meghji: I’m asking you about what your position in the pleading is because the pleading is unclear to me.

Mr. Erlichman: Well, it is clear to me.

Mr. Meghji: Maybe you can tell me what it is?

Mr. Erlichman: It speaks for itself.

Having regard to the context in which question 11 was asked it can be read as asking upon what facts is the reassessment based. On that under- standing the question should be answered.

Turning now to questions 12, 13, 14, 15, none of which were answered. Question 12 is: “Can you tell me all the facts and evidence that the Deputy Attorney General of Canada relies on in support of the allegation that the disallowed interest is not a reasonable amount?” This has reference to paragraph 16 of the Amended Reply to the Notice of Appeal. It reads: “He submits that the disallowed interest is not a reasonable amount in respect of the money borrowed by the appellant within the meaning of paragraph 20(1 )(c) of the Income Tax Act.” Question 12 was carried forward in questions 13, 14, 15 in relation to:

(i) paragraph 18 of the Amended Reply to Notice of Appeal which reads:

18. He submits that the deduction of the disallowed interest is not reasonable in the circumstances within the meaning of section 67 of the Income Tax Act.;

(ii) paragraph 19 of the Amended Reply to Notice of Appeal which reads:

19. He submits that the deduction of the disallowed interest would unduly or artificially reduce the Appellant’s income within the meaning of subsection 245(1) of the Income Tax Act.; and

(iii) paragraphs 12(h) and 20 of the Reply which read:

12. In so assessing, the Minister relied, inter alia, on the following assumptions of fact:

(h) the pre-ordained gains from the New Zealand dollar forward transactions in the amount of $26,191,686 are on income account.

20. He submits that the pre-ordained gains from the New Zealand dollar forward transactions are on income account and are to be included in computing the Appellant’s income for its 1993 taxation year.

My initial reaction to these questions was that they may impinge on litigation privilege. If that were so they need not be answered. Paragraph 5(d) of the Department of Justice Act provides:

5. The Attorney General of Canada

(d) shall have the regulation and conduct of all litigation for or against the Crown or any department, in respect of any subject within the authority or jurisdiction of Canada;

The Attorney General of Canada discharges these responsibilities through the Deputy Attorney General and other counsel employed in the Department of Justice and, occasionally, by counsel in private practice who are employed to act in the capacity of agents of the Attorney General of Canada. In Buffalo v. Canada, (sub nom. Buffalo v. Canada (Minister of Indian Affairs & Northern Development)) 184 N.R. 139, (sub nom. Samson Indian Band & Nation v. Canada) 125 D.L.R. (4th) 294 (F.C.A.) the Judgment of the Court was delivered by MacGuigan and Décary, JJ.A. This is said at page 143:

The recognition of privileged communications between lawyers and their clients, as fundamental to the due administration of justice, dates back some four centuries, and originally was only an exemption from testimonial compulsion. The privilege has gradually been extended to include communications exchanged during other litigation, those made in contemplation of litigation, and ultimately, any consultation for legal advice, whether litigious or not.

Today, it is generally recognized that there are two distinct branches of solicitor and client privilege: the litigation privilege and the legal advice privilege. The litigation privilege protects from disclosure all communications between a solicitor and client, or third parties, which are made in the course of preparation for any existing or contemplated litigation. The legal advice privilege protects all communications, written or oral, between a solicitor and a client that are directly related to the seeking, formulating or giving of legal advice; it is not necessary that the communication specifically request or offer advice, as long as it can be placed within the continuum of communication in which the solicitor tenders advice; it is not confined to telling the client the law and it includes advice as to what should be done in the relevant legal context.

The principles relating to solicitor and client privilege apply in both civil and criminal cases, and they apply regardless of whether the solicitor is in private practice or is a salaried or government solicitor. (See Solosky v. Canada, [1980] 1 S.C.R. 821; 30 N.R. 380, at 386; Descôteaux v. Mierzwinski, [1982] 1 S.C.R. 860; 44 N.R. 462; R. v. Littlechild (1979), 19 A.R. 395; 108 D.L.R. (3d) 340 (C.A.); Susan Hosiery Ltd. v. Minister of National Revenue, [1969] 2 Ex. C.R. 27; Weiler v. Canada (Minister of Justice) (1991), 46 F.T.R. 163 (T.D.); Balabel v. Air India, [1988] 2 All E.R. 246 (C.A.); Shell Canada Ltd., Re (1975), 7 N.R. 157; 55 D.L.R. (3d) 713 (F.C.A.); Crompton (Alfred) Amusement Machines v. Customs and Excise Commissioners (No. 2), [1973] 2 All E.R. 1169 (H.L.); Xerox of Canada Ltd. and Xerox Corp. v. IBM Canada Ltd. - IBM Canada Ltée, [1978] 1 F.C. 513; 15 N.R. 11 (F.C.A.); Canada (Minister of Industry, Trade and Commerce) v. Central Cartage Co. (1978), 10 F.T.R. 225 (T.D.)).

On further reflection, however, I think that properly construed they are questions about whether these pleadings are founded on any new facts that arose since the making of the reassessments under appeal. Regarded in that light they should be answered.

Finally, there is question 16. Mr. Meghji referred Mr. Hillen to a memorandum for file that the latter had prepared regarding a telephone conversation he had with Mr. J. Armstrong of Shell on November 3, 1994. It reads in part:

He further enquired as to whether the current policy is being consistently applied to all taxpayers as he is aware of numerous similar arrangements across the country. I indicated that the assessing policy is primarily in respect of post GAAR arrangements, and that the policy may not be currently applied on a consistent basis to pre GAAR arrangements. He enquired as to what basis other cases have been challenged. I stated that the interest expense was not challenged, but that the capital gain was being challenged on account of income. He enquired as to why Shell is being challenged in this manner and not similarly to other chosen courses of action. Told him that this question should be addressed by the manager. Also noted that as D. Glennie is becoming involved, G. Lawrence may withdraw due to a conflict of interest. Told him that his questions and concerns would be conveyed to management. He found that satisfactory.

This was said on the examination for discovery:

Mr. Meghji: Now, sir, you told Mr. John Armstrong that the Minister’s policy at the time with respect to some of these cases was not to challenge the interest but that was being done in Shell; is that correct? Is that what that means?

A. I’m sorry, I didn’t follow the question.

Q. If you read the sentence that says “T stated”?

A. Yes.

Q. “I stated that the interest expense was not challenged but that the capital gain was being challenged on account of income”.

A. Correct.

Q. It appears to me that what you are saying is that in other cases the Minister has not challenged interest but has challenged the capital gain on the transaction. Is that an accurate statement of what you are saying there. [10]

Mr. Erlichman: Don’t answer the question, we are not going to get into other taxpayers’ affairs.

(Objection)

Mr. Meghji: I’m simply asking him what he said there. You are objecting to that question?

Mr. Erlichman: Yes.

Mr. Meghji: Okay.

In support of his position that the objection was improper counsel for Shell referred to Fibreco Pulp Inc. v. R., (sub nom. Fibreco Pulp Inc. v. Canada) [1995] 2 C.T.C. 172, (sub nom. R. v. Fibreco Export Inc.) 95 D.T.C. 5412 (F.C.A.). The issue was whether a certain chemical pulp mill was a “certified property” within the meaning of subsection 127(9) of the Act. At trial counsel for the Crown sought to introduce evidence about “administrative practice”. This was refused. Hugessen J.A., speaking for the Court said, at page 174 (D.T.C. 5413):

We have very serious doubts about the Trial judge’s view that the pulp mill is not part of a “resource-based industry”. We also think that the Trial judge was wrong to do as he did and refuse to admit certain proffered evidence as to administrative practice and parliamentary history; while the law appears to us to be in a state of some uncertainty as to the use which may be made of such materials in the interpretation of statutes, it seems to us that the debate turns upon questions of weight rather than of admissibility, and that it is error for a Trial judge to exclude such evidence.

In Harel v. Quebec (Deputy Minister of Revenue), [1978] 1 S.C.R. 851, (sub nom. Harel v. Deputy Minister of Revenue (Que.)) [1977] C.T.C. 441, 77 D.T.C. 5438 the question was whether $11,958.30 received by the appellant on his retirement from the City of Montreal police force came within section 45 of the Quebec Income Tax Act that prescribes a lesser rate of taxation for income described in that section than that which is applied to ordinary income. It was held that section 45 applied. The judgment of the Court was delivered by de Grandpre J. He said at pages 858-59 (C.T.C. 447, D.T.C. 5442):

As the Provincial Court and the Court of Appeal pointed out, the provincial income tax statute was modelled on the federal Act. It was by c. 43, section 2 of the Statutes of Canada 1944-45, that Parliament introduced into the Income War Tax Act the concept of recognition of long service. This philosophy was further developed two years later in subsection 8(2) of c. 55 of the 1946 Statutes of Canada. In 1948, the Act was completely rewritten and became c. 52 of the Statutes of Canada for that year. With some amendments, the 1948 Act became

c. 148 of the Revised Statutes of 1952 and the section dealing with situations similar to the one before this Court became subsection 36(1) of the federal Act.

That was the situation in 1954 when the provincial law closely modelled on the federal law was adopted. At that time, the provincial legislator was familiar not only with the wording of subsection 36(1) of the federal Act but also, undoubtedly, with the administrative interpretation there, which was to the effect that taxpayers in Mr. Harel’s situation could avail themselves of the averaging provided for in the section. Although the wording of section 45 of the provincial Act differs somewhat from that of subsection 36(1) of the federal Act, the concept is the same. Consequently, when c. 17 of the Statutes of Quebec, 1953-54 was adopted, the administrative interpretation of the federal Act gave it a colour that the provincial legislator could not ignore. The 1954 Act became c. 69 of the 1964 Revised Statutes, and in 1965 c. 26 of 13-14 Eliz. II revoked section 45 and replaced it with the section currently in effect. At that time, the administrative interpretation of the provincial Act was consistent with that of the federal Act, so that in 1965 a case similar to that of appellant would have been decided in his favour. This administrative interpretation was maintained until 1968, at which time, for reasons that have not been explained, the department reversed its policy.

Once again, I am not saying that the administrative interpretation could contradict a clear legislative text; but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor. In order not to unduly lengthen these reasons, I will refer only to the following authorities: The Commissioners for special purposes of the Income Tax v. Pemsel, [1891] A.C. 531, in particular at page 591; Protestant Old Ladies’ Home v. Provincial Treasurer of Prince Edward Island, [1941] 2 D.L.R. 534, in particular at page 540; Kemochan - Statutory Interpretation: An Outline of Method (1976), 3 Dal. L.J. 333, in particular at page 359.

To my mind the phrase “administrative practice”, in the context referred to and in relation to the proceedings at hand, must be taken to mean a practice promulgated by someone at National Revenue authorized to do so and which employees thereof are generally expected to follow and apply in the administration and enforcement of that portion or portions of the Act with which the practice is concerned. It does not include ad hoc decisions pertaining to particular cases. With reference to the matter at hand it means a practice that Mr. Hillen would be expected to adhere to without specific direction in assessing or reassessing Shell’s liability to tax.

What has just been said about “administrative practice” also applies to “administrative interpretation” and “ministerial policy”.

When question 16 is contextually perceived it appears to me that Mr. Meghji was addressing ministerial policy or, even though he did not specifically refer to them, administrative practice or administrative interpretation. On that understanding question 16 should be answered.

In the light of the applicant’s substantial success on the motion the costs related thereto and the further examination for discovery are awarded to it in any event of the cause.

Motion granted.