Fletcher Challenge Investments Inc. v. R., [1998] 3 CTC 2101, 98 DTC 1721

Mogan T.C.J.:

This appeal is under the General Procedure Rules of the Court. In August 1997, the Respondent filed its Affidavit of Documents under section 82 providing for full disclosure. In January 1998, the Appellant filed its list of documents under section 81 providing for partial disclosure. By Notice of Motion dated February 24, 1998, the Respondent seeks an Order directing that the Appellant file and serve a list of documents pursuant to section 82 of the General Procedure Rules of this Court. The operative terms of the Notice of Motion are as follows:

THE MOTION IS FOR a judgment pursuant to section 82 of the General Procedure Rules, directing that the Appellant file and serve on the Respondent a list of all the documents which are or have been in the Appellant’s possession, control or power relating to any matter in question between them in the appeal.

THE GROUNDS FOR THE MOTION ARE that a fair trial of this appeal would not be possible and that the litigation of the issues between the parties would be impeded or unnecessarily delayed without the Appellant making full-disclosure production, as contemplated by section 82 of the General Procedure Rules.

The Respondent filed an affidavit of Steven Morris in support of its position on the motion; and the Appellant filed an affidavit of Patricia Sakai in support of its position. Section 81 of the General Procedure Rules of this Court is referred to as partial disclosure and section 82 is referred to as full disclosure. The relevant portions of those two sectionss are set out below:

81(1)

A party shall, within thirty days following the closing of the pleadings, file and serve on every other party a list of the documents of which the party has knowledge at that time that might be used in evidence,

(a) to establish or to assist in establishing any allegation of fact in any pleading filed by that party, or

(b) to rebut or to assist in rebutting any allegation of fact in any pleading filed by any other party.

81(2)

A list of documents to be filed under this section shall be in Form 81. 82(1)

The parties may agree or, in the absence of agreement, either party may apply to the Court for a judgment directing that each party shall file and serve on each other party a list of all the documents which are or have been in that party’s possession, control or power relating to any matter in question between or among them in the appeal.

82(2)

Where a list of documents is produced in compliance with this section, the list shall describe, in separate schedules, all documents relating to any matter in issue in the appeal,

(a) that are in the party’s possession, control or power and that the party does not object to producing,

(b) that are or were in the party’s possession, control or power and for which the party claims privilege, and the grounds for the claim,

and

(c) that were formerly in the party’s possession, control or power, but are no longer in the party’s possession, control or power, whether or not privilege is claimed for them, together with a statement of when and how the party lost possession or control of, or power over them and their present location.

82(4)

A list of documents made in compliance with this section shall be verified by affidavit ...

Having regard to the case law cited by counsel for the Respondent, there is no doubt that the Courts have applied a very broad test of relevance for the purposes of examinations for discovery. In Everest & Jennings Canada Ltd. v. Invacare Corp., [1984] 1 F.C. 856 (Fed. C.A.), the Federal Court of Appeal cited with approval the decision of the British Columbia Court in Boxer v. Reesor (1983), 43 B.C.L.R. 352 (B.C. S.C.). In Boxer, McEachern C.J.S.C. (in chambers), relied on the well-known quotation of Brett L.J. in Cie Financière du Pacifique v. Peruvian Guano Co. (1882), 11 Q.B.D. 55 (Eng. Q.B.):

It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may - not which must - either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words “either directly or indirectly”, because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences ...

After setting out the above quotation from Brett L.J., McEachern C.J.S.C. proceeded to make the following comment himself at page 359:

It seems to me that the clear right of the plaintiffs to have access to documents which may fairly lead them to a train of inquiry which may directly or indirectly advance their case or damage the defendant’ case particularly on the crucial question of one party’s version of the agreement being more probably correct than the other, entitles the plaintiffs to succeed on some parts of this application. Other parts seem to me, with respect, to be asking for too much.

And finally, in Algonquin Mercantile Corp. v. Dart Industries Canada Ltd. (1984), 79 C.P.R. (2d) 140 (Fed. T.D.), there was an application for an Order under Federal Court Rule 448 (comparable to section 82 of this Court) for production of documents. In Algonquin, Reed J. made the following statements at pages 143 and 145:

It is my view, therefore, that most of the categories of documents sought are relevant and should be produced. In coming to this conclusion I am mindful of the fact that, at this stage of the proceedings, it is wiser to err on the side of requiring production of documents than to adopt an overly restrictive approach.

..In this case delaying a Rule 448 order is more likely to cause than prevent delay. It is more expedient for the plaintiff to have the relevant documents in his hands prior to examination for discovery of the defendant.

Acknowledging the general principle that it is better to err on the side of disclosure than non-disclosure, I must consider the specific circumstances of the case before me. In July 1995, the Appellant requested the Minister of National Revenue to determine the Appellant’s non-capital loss for its 1987 taxation year. By notice dated October 24, 1995, the Minister determined that the non-capital loss of the Appellant for its 1987 taxation year was $118,526. The Appellant objected to the determination by the Minister; but the Minister confirmed the determination by notification dated July 8, 1996. In September 1996, the Appellant filed a Notice of Appeal from the Minister’s determination; and in December 1996, the Respondent filed a Reply to that Notice of Appeal. The only issue in this appeal is the amount of the Appellant’s non-capital loss for its 1987 taxation year.

On a narrow view of the issue, the Minister determined that the noncapital loss of the Appellant for its 1987 taxation year was only $118,526. The Appellant claims that its non-capital loss for 1987 should be increased by the amount $3,722,043. According to the Respondent’s pleading, that aggregate amount comprises the following three expenditures:

In simplistic terms, the narrow issue is whether the Appellant’s non-capital loss for 1987 should be the amount ($118,526) as determined by the Minister or whether that amount should be increased by the Appellant’s aggregate claimed expenditures of $3,722,043.

On a broader view of the issue, one must consider the circumstances in which those expenditures were paid to the Toronto-Dominion Bank or paid in respect of legal fees. In the Notice of Appeal, paragraphs 3 through 23 inclusive contain all of the allegations of fact. More specifically, paragraphs 3 through 17 describe the corporate transactions which led up to the three expenditures comprising the amount $3,722,043. The remaining allegations in paragraphs 18 through 23 describe the procedural steps which led to this appeal. It is not necessary to set out in full the allegations with respect to the corporate transactions but I propose to summarize them.

The Appellant is an indirect subsidiary of a large diversified multi-national corporation incorporated in New Zealand with its headquarters there. In the spring of 1987, the parent company decided to raise equity in the Canadian public markets. After consultations with a Canadian investment banker, it was decided that the Appellant company would issue its shares to Canadian investors pursuant to a public offer in Canada. The Canadian investment banker also advised that the shares of the Appellant would be more favourably received if the prospective shareholders could pay the purchase price for the shares by instalment. This led to certain problems under the relevant corporate legislation because a corporation may not issue shares unless they are fully paid. In order to get around these problems, the Appellant decided to follow a more circuitous process described below.

A separate corporation identified in the pleadings as Fletcher Challenge Investments (Canada) Limited (“FCICL”) agreed to purchase from the Appellant all of the shares which were destined for the Canadian public market and to pay cash for such shares so that they could be issued as fully paid. FCICL received the first instalment amount of approximately $100,000,000 from the buyers and borrowed approximately $100,000,000 from the To- ronto-Dominion Bank. FCICL then paid the aggregate amount of $200,000,000 directly to the Appellant in exchange for the shares. FCICL had sold the shares of the Appellant to the Canadian public on the basis that one-half of the price would be paid in June 1987, and the remaining half in November 1987. When FCICL received the second instalment from the buyers, it repaid the loan from the Toronto-Dominion Bank. In the course of this process, it appears that FCICL actually dispersed the three expenditures of $3,597,222 as interest to the Toronto-Dominion Bank; $100,000 as a loan arrangement fee to the Toronto-Dominion Bank; and $24,821 with respect to legal expenses.

There does not appear to be any dispute between the parties that these three expenditures were first incurred by FCICL, and FCICL was then reimbursed by the Appellant. The following are paragraphs 16 and 17 from the Notice of Appeal:

16. In the course of facilitating the issuance, sale and delivery of the 8,510,640 Exchangeable Shares of the Appellant to the public FCICL paid expenses (the “Expenses”) in the aggregate amount of $3,722,043.

17. Pursuant to its agreement with FCICL, the Appellant was required to reimburse FCICL in respect of the Expenses on December 31, 1987. Accordingly, the Appellant deducted the amount of $3,722,043 in computing its income for its taxation year ending December 31, 1987 in respect of its obligation to reimburse FCICL in respect of the Expenses. The Appellant thereby increased the amount of its non-capital loss for that taxation year by the said amount of $3,722,043.

The Respondent answered the allegations in paragraphs 16 and 17 of the Notice of Appeal as follows:

6. He admits that for the purpose of purchasing the Exchangeable Shares from the Appellant and reselling them to the public FCICL paid or incurred expenses in the aggregate of $3,722,043, but he has no knowledge of the other allegations in paragraph 16 of the Notice of Appeal, and he does not admit them.

7. He admits that the Appellant deducted the said $3,722,043 in computing its income for the taxation year ended on December 31, 1987, thereby increasing its noncapital loss for that year by that amount, but he has no knowledge of the other allegations in paragraph 17 of the Notice of Appeal, and he does not admit them.

Each party stated in its respective pleading what it regarded the issue to be. Set out below are paragraphs 24 and 25 from the Notice of Appeal “Issues to be Decided” and paragraph 10 from the Respondent’s Reply to the Notice of Appeal:

Notice of Appeal - Issues to be Decided

24. Was the amount payable by the Appellant in order to reimburse FCICL in respect of the Expenses deductible by the Appellant in computing its income for its taxation year ending December 31, 1987?

25. What was the amount of the non-capital loss of the Appellant for its 1987 taxation year?

Reply to Notice of Appeal - Issue to be Decided

10. ...the sole issue to be decided in this appeal is whether the amount of $3,722,043 paid or incurred by FCICL is deductible in computing the Appellant’s income and hence its noncapital loss for its taxation year ended December 31, 1987.

The affidavit of Steven Morris filed in support of the Respondent’s motion contains the following statements:

7. I have perused the Appellant’s List of Documents and found that all it appears to contain are documents pertaining to the issuance of the Appellant’s shares, 1.e., a matter that is not in issue in this appeal, but no documents pertaining to the matter that is in issue, i.e. why and by whom the interest, loan arrangement fee and legal costs, totalling $3,722,043, were incurred and how these amounts were accounted for. I very (sic) believe that transactions of the magnitude involved in the present case are likely well documented in bookkeeping records, correspondence, notes, memoranda and other documents that are in the Appellant’s possession, control or power, and that the issue of the deductibility of the said amounts, totalling $3,722,043, cannot be properly litigated, let alone adjudicated upon, without the production of such documents.

8. I also found that the Appellant’s List of Documents does not appear to contain any documents that pertain to the Appellant’s allegations in paragraphs 4, 5, 6, 7, 8, 9, 10, 11 and 14 of the Notice of Appeal. The Respondent has no knowledge of these allegations, and I am informed by counsel for the Respondent, and I verily believe that the Respondent is unable to defend against these allegations without access to all of the documents in the Appellant’s possession, control or power that pertain to these allegations.

9. I am also informed by counsel for the Respondent, and I verily believe, that full-disclosure production would also serve considerably to shorten the Appellant’s Examination for Discovery by the Respondent, as numerous undertakings to look for and produce particular documents that might otherwise have to be given and subsequent Examinations for Discovery on such documents would thereby be avoided.

The affidavit of Patricia Sakai filed in support of the Appellant’s position on this motion contains the following statements:

3. In paragraph 7 of his Affidavit, Mr. Morris states that the matter in issue is “why and by whom the interest, loan arrangement fee and legal costs, totalling $3,722,043 (the “Amount”) were incurred and how these amounts were accounted for.

4. I believe that in paragraph 6 of the Reply the Respondent admits that Fletcher Challenge Investments (Canada) Limited (“FCICL”) incurred the Amounts (the “Expenses”). Consequently, I believe that the question of who incurred the Amounts is not in issue in this matter.

5. The Appellant will admit that the facts assumed by the Minister of National Revenue as set out in paragraphs 9(f), 9(g) and 9(h) of the Reply are correct. Consequently, the question of how the Amounts were accounted is not in issue in this matter.

6. I have read the document entitled “Auditor’s Report” that is attached hereto as Exhibit “C” to my affidavit. I believe the report was prepared by and for Revenue Canada, Customs, Excise and Taxation. I believe, based on my view of this Auditor’s Report, that the Minister of National Revenue based the Determination in issue, in part, on the fact that FCICL “recharged” the Appellant for the Amounts and that the Appellant deducted, in computing its income for its 1987 taxation year, the amount of $3,722,043 in respect of the reimbursement of the Amounts.

9. I am also informed by counsel for the Appellant, and I verily believe, that the Respondent has not inspected the documents described in the Appellant’s List of Documents, Consequently, the Respondent is unable to determine whether or not the documents described in the List of Documents pertain to the matter that he says is in issue.

With respect to paragraph no. 5 in the Patricia Sakai affidavit, the following are the facts assumed by the Minister of National Revenue and set out in his Reply which the Appellant now admits:

9(f) that the Appellant recorded on its books of account the said aggregate

amount of $3,722,043, consisting of the said interest of $3,597,222.22, the said “loan arrangement fee” of $100,000.00 and legal fees paid or incurred by FCICL in the amount of $24,821.53, as an amount payable to FCICL,

9(g) that in its books of account the Appellant charged the said aggregate amount of $3,722,043 against its share capital account,

9(h) that in filing its income tax return for its taxation year ended on December

31, 1987, the Appellant deducted the said aggregate amount of $3,722,043 in computing its income for that year,

The Notice of Appeal describes the corporate transactions in which FCICL facilitated the sale of the Appellant’s shares to the public, and those transactions are admitted by the Respondent. By pleading those transactions, the Appellant has made them relevant for purposes of discovery. The fact that those transaction are pleaded and are relevant for purposes of discovery does not necessarily mean that the Appellant is required to make full disclosure with respect to those transactions when they are not in dispute or even at the heart of the issue between the parties. According to the Respondent’s own pleading, the sole issue is “whether the amount of $3,722,043 paid or incurred by FCICL is deductible in computing the Appellant’s income”.

Exhibit “C” to the affidavit of Patricia Sakai is an auditor’s report written by D.E. Harder of Revenue Canada with respect to the Appellant’s 1987 taxation year. I do not find anything in that report which indicates that Revenue Canada is interested in the way in which the Appellant used the $200,000,000 it received upon the issue of its shares. The interest of Revenue Canada seems to be focused on whether certain expenses of FCICL reimbursed by the Appellant can be deducted in computing the Appellant’s income. Upon examination for discovery, the Respondent can explore the circumstance in which FCICL incurred certain expenses, and why the Appellant reimbursed FCICL with respect to those expenses.

In my opinion, whether a party is required to make full disclosure under section 82 depends upon the issues of fact disclosed in the pleadings and the nature of the facts in dispute. Having regard to the facts admitted by the Respondent in its Reply, and the facts now admitted by the Appellant in paragraphs 9(f), 9(g) and 9(h) of the Respondent’s Reply, I conclude that there are few facts left in dispute. Indeed, after full examinations for discovery, I think there is a strong possibility that this case will be argued on agreed facts.

Section 82 of the General Procedure Rules states that “either party may apply to the Court” for an order directing each party, etc. The section does not state that the Court “shall grant” such an order and counsel did not refer me to any cases which held that such an order must be granted. In other words, the Court appears to have some discretion as to whether such an order will be granted.

In the special circumstances of this case when there are few facts left in dispute, I am not satisfied that the Respondent has made out a case for full disclosure. I will not impose on the Appellant at this point in the proceed- ings the burden of full disclosure under section 82. In order to provide the Respondent with specific information prior to examinations for discovery, I will issue a restricted order directing the Appellant to make full disclosure with respect to the following items:

1. All amounts of interest paid by FCICL to the Toronto-Dominion Bank with respect to money borrowed in connection with the Appellant’s issue of shares to the public. If such amounts of interest exceed $3,597,222, how is the “disallowed” amount of interest distinguished from the balance?

2. All loan arrangement fees paid by FCICL to the Toronto-Dominion Bank with respect to money borrowed in connection with the Appellant’s issue of shares to the public.

3. All legal fees paid by FCICL with respect to the Appellant’s issue of shares to the public. If such legal fees exceed $24,821, how is the “disallowed” amount of fees distinguished from the balance?

The Respondent may, of course, renew its application under section 82 at a later point in the proceedings. Left to myself, I would not grant further relief to the Respondent under section 82 unless I were satisfied that counsel for the Respondent had read with care the documents in the Appellant’s list already filed under section 81. Also, I would want counsel for the Respondent to identify those issues of fact which he or she regarded as outstanding.

Costs of this motion shall be costs in the cause.

Motion granted in part.