Promex Group Inc. v. R., [1998] 3 CTC 2120

Bowman T.C.J.:

This motion is brought by the appellant for an order

(a) allowing the appeal; or

(b) in the alternative compelling the respondent to deliver to the appellant copies of certain documents referred to in the respondent’s list of documents unedited and without whiting out or blacking out.

The issue is this: among the documents produced by the respondent are a number of departmental memoranda and assessor’s working papers containing, it seems, the name or names of persons who gave to officials of the Department of National Revenue information that may have led to the assessments in question. The respondent does not wish to divulge the identity of its informants and relies upon a doctrine known as “informant’s privilege”. Accordingly it has delivered copies of the documents with the name(s) of the informant(s) blacked out, as well as any information that might enable the appellant to identify such persons.

To complicate matters the appellant surmises (but is not sure) that one of the informants is Israel Katz. Mr. Katz has died, thereby presumably ending the informant’s privilege. The respondent refuses either to admit or deny that the late Mr. Katz was an informant on essentially two bases:

(a) That the informant’s privilege is a Crown privilege and does not attach solely to the informants.

(b) Either an admission or a denial might enable the appellant, by a process of elimination, to find out who the informant is. Of course, if the informant is indeed the late Mr. Katz, I have some difficulty in understanding just why the Crown is so reluctant to say so.

Counsel for the respondent invited me to examine the unedited version of the documents and counsel for the appellant did not object. The offer was of course made in good faith, but I declined to do so, simply because it is inappropriate that the court should be made privy to confidential information to which one of the parties does not have access. Section 232 of the Income Tax Act appears to contemplate such a procedure in the case of a claimed solicitor client privilege but as a matter of simple procedural fairness I would not wish to extend the practice in the absence of clear statutory authority.

The background to this application is that the appellant was assessed withholding tax on certain interest payments that it made to a non-resident corporation on money borrowed from it. The sole issue, at least insofar as is relevant to this motion, is whether the appellant and the non-resident lender are at arm’s length. This has a bearing on whether withholding tax is eligible under section 212 of the Income Tax Act or is exempt under the provisions of subparagraph 212(1 )(/?)(vii). It also affects the extent to which the deductibility of the interest may be restricted under subsection 18(4), the so-called thin capitalization rule.

This is largely a factual question and to succeed the appellant would have the onus of establishing the component elements of its claim to deductibility of the interest and its claim to an exemption under subparagraph 212(1 )(/?)(vii), matters that should be entirely within the knowledge of the appellant.

It appears from the affidavit dated December 30, 1997 of Ms. Margaret J. Nott of the Department of Justice that at some point an official in the Special Investigations Branch of the Department of National Revenue (the branch that investigates tax fraud) had made certain allegations of possible fraudulent activity by the appellant. I set out in full the portions of Ms. Nott’s affidavit relating to the claim of informant’s privilege:

Informant’s Privilege

7. I am advised and verily do believe that some time in the fall of 1991, an informant contacted Revenue Canada Taxation, Special Investigations by making a telephone call to the Special Investigations Hotline. The information provided by the informant at that time concerned possible fraudulent activity being carried on by the Appellant or persons related to the Appellant. This information was provided by the informant in confidence to Special Investigations.

8. I am advised and verily do believe that the information provided was screened within Special Investigation in order to determine whether criminal investigation of the Appellant or persons related to the Appellant was warranted. The decision was made not to commence a criminal investigation but to refer the information provided and the names of the Appellant and persons related to the Appellant to the Audit Division of Revenue Canada Taxation for review.

9. I am advised and verily do believe that Michael Vantil was the individual in the Audit Division of Revenue Canada Taxation assigned to review the information provided and the Appellant and persons related to the Appellant. The purpose of this review was to determine whether there had been compliance by the Appellant and persons related to the Appellant with provisions of the Income Tax Act.

10. I am advised and verily do believe that sometime during February or March 1992, while reviewing the tax affairs of the Appellant and persons related to the Appellant, Mr. Vantil made an informal referral to the Special Investigations regarding certain loan transactions that had been entered into by the Appellant and Rie Comm International, a Cayman Island corporation. The basis for the informal referral included information provided by the informant. The informal referral was rejected by Special Investigations because the evidence was too old, there was no direct evidence and because of insufficient resources.

11. I am advised and verily do believe that in February 1994, while conducting an audit on Arie Lapsker, the brother of Joshua Lapsker who is the principle shareholder of the Appellant, Mr. Vantil made a second written referral to Special Investigations regarding the relationship between the Appellant and persons related to the Appellant and Rie Comm International. The basis for the written referral included information provided by the informant. Special Investigations declined the written referral, again because the evidence was too old, there was no direct evidence and because of insufficient resources.

In the course of argument, I asked counsel what possible relevance the identity of the informer had and his reply was that he needed the information to prepare his case. I do not think that is appropriate, generally speaking, for a motions judge in an interlocutory application to base his or her disposition of the motion on a determination of relevancy. This is a matter to be determined by the trial judge in light of all of the evidence. I will observe however that I am personally unable to see what conceivable bearing the identity of the informant has on the issue that is before the court.

In Cadillac Fairview Corp. v. R. (1996), 97 D.T.C. 405 (T.C.C.), I observed at page 407, footnote 2:

The appellant pleaded that the payments were made pursuant to the guarantees and this allegation was denied. Counsel for the appellant argued that since the Minister had not pleaded that he “assumed” that the payments were not made pursuant to the guarantees the Minister has the onus of establishing that the payments were not made pursuant to the guarantees. The question is, if not a pure question of law, at least a mixed one of law and fact. In any event the basic assumption made on assessing was that the appellant was not entitled to the capital loss claimed and it was for the appellant to establish the several legal components entitling it to the deduction claimed. An inordinate amount of time is wasted in income tax appeals on questions of onus of proof and on chasing the will-o’-the-wisp of what the Minister may or may not have “assumed”. I do not believe that M.N.R. v. Pillsbury Holdings Ltd. [1964] DTC 5184 has completely turned the ordinary rules of practice and pleading on their head. The usual rule — and I see no reason why it should not apply in income tax appeals — is set out in Odgers’ Principles of Pleading and Practice, 22nd edition at p. 532:

The “burden of proof” is the duty which lies on a party to establish his case. It will lie on A, whenever A must either call some evidence or have judgment given against him. As a rule (but not invariably) it lies upon the party who has in his pleading maintained the affirmative of the issue; for a negative is in general incapable of proof. Ei incumbit probatio qui dicit, non qui negat. The affirmative is generally, but not necessarily, maintained by the party who first raises the issue. Thus, the onus lies, as a rule, on the plaintiff to establish every fact which he has asserted in the statement of claim, and on the defendant to prove all facts which he has pleaded by way of confession and avoidance, such as fraud, performance, release, rescission, etc.

It appears to me that these attempts to obtain or conceal the name of the informant will serve no purpose whatever in assisting the court to determine the central issue of the arm’s length or non-arm’s length relationship between the appellant and the non-resident lender. The issue is the correctness of the assessment, not the name of the person who may have set off the sequence of events that led to it.

I prefer, however, not to dispose of the matter on this basis. Informant’s privilege is a doctrine of respectable lineage and antiquity. It stems from the public policy that allows informants to give information to the police in confidence and with the knowledge that it will not be disclosed. The matter was discussed at some length by Lacourciere J.A., speaking for himself, Jessup and Brooke, JJ.A. in the decision of the Ontario Court of Appeal in Reference re Legislative Privilege (1978), 39 C.C.C. (2d) 226 (Ont. C.A.) at pages 234-5:

The common law has recognized certain types of communications which are privileged, subject to certain exceptions, and not subject to judicially enforced disclosure. The exempted classes include communications between solicitor and client; communications between husband and wife; communications concerning the deliberations of a jury; and, finally, communications with Government and Government officials. We are no concerned with the first three classes, which respectively rest upon social policy to promote freedom of consultation with legal advisers in the defence of legal rights, the need to preserve mutual trust and confidence in domestic relations and the obvious necessity in the administration of justice of preserving the secrecy of jury deliberations. The privilege respecting government documents creates an exclusion which is limited to the requirements of the public interest in maintaining the confidentiality of its internal communications. We adopt the apt words of Lord Simon of Glaisdale in D. v. National Society for Prevention of Cruelty to Children, [1977] 2 W.L.R. 201 at pp. 221-2:

The various classes of excluded relevant evidence may for ease of exposition be presented under different colours. But in reality they constitute a spectrum, refractions of the single light of a public interest which may outshine that of the desirability that all relevant evidence should be adduced to a court of law.

An extension of the so-called Crown privilege has been accorded, in the public interest, to protect from disclosure the identity of police informers. The rationale for this extension was clearly the importance to the public of the detection of crimes, and the necessity of preserving the anonymity of police informers to maintain the sources of information. This necessity has generally outweighed the public interest of full disclosure of relevant facts to the adjudicating tribunal. This privilege, however, is not absolute and is subject to one important exception, stated by Lord Diplock in D. v. N.S.P.C.C., supra, at p. 207:

By the uniform practice of the judges which by the time of Marks v. Beyfus, 25 Q.B.D, 494 had already hardened into a rule of law, the balance has fallen upon the side of non-disclosure except where upon the trial of a defendant for a criminal offence disclosure of the identity of the informer could help to show that the defendant was innocent of the offence. In that case, and in that case only, the balance falls upon the side of disclosure.

The House of Lords in D. v. N.S.P.C.C., supra, extended the protection for the non-disclosure of police informants to protect the identity of an informant to the National Society for the Prevention of Cruelty to Children.

It is clear that the classes of evidence which give rise to privileged communications have foundations in social policy in which the general liability of every person to give testimony upon all facts inquired of in a Court gives way to more important social considerations: Wigmore on Evidence, McNaughton Revision (1961), vol. 8, p.531, states:

Looking back upon the principle of Privilege, ... four fundamental conditions may be predicated as necessary to the establishment of a privilege against the disclosure of communications between persons standing in a given relation:

(1) The communications must originate in a confidence that they will not be disclosed;

(2) This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties;

(3) The relation must be one which in the opinion of the community ought to be sedulously fostered; and

(4) The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.

These four conditions being present, a privilege should be recognized; and not otherwise.

This passage was quoted and adopted by Spence, J. in Slavutych v. Baker et al. (1975), 55 D.L.R. (3d) 224 at p. 229, [1976] 1 S.C.R. 254 at p. 261, 38 C.R.N.S. 306, where he referred to it as “the doctrine of privilege as so ably considered in Wigmore”.

In Bisaillon v. Keable, [1983] 2 S.C.R. 60 (S.C.C.), Beetz J., speaking for the court, at pages 88-93 discussed the nature and scope of the common law rule. The passage is lengthy and I do not think that it is necessary that I quote extensively from it. I shall endeavour to summarize my understanding of the salient points insofar as they are relevant to this application. Beetz J. refers to and quotes from the judgment of the majority of the Supreme Court of Canada in Canada (Solicitor General) v. Ontario (Royal Commission of Inquiry into Confidentiality of Health Records), [1981] 2 S.C.R. 494 (S.C.C.). The judgment of Beetz J. appears to establish the following:

(1) The rule is one of great antiquity. It was recognized as early as 1794 and has frequently been followed in Canada and in England this and the last century.

(2) It is rule of law based on public policy and is not a matter of discretion.

(3) Its application is not restricted to criminal prosecutions. It is applicable in all civil proceedings.

(4) It is not confined to informants who disclose information to the police. It applies to informants who supply information to other public authorities (provided, of course that the conditions mentioned in Wigmore and adopted by Spence J. in Slavutych v. Baker [(1975), 55 D.L.R. (3d) 224 (S.C.C.)] (supra) are met).

(5) The application of the rule is not subject to any formal requirement. If no one raises it the court must apply it of its own motion.

(6) It is subject to only one exception, imposed by the need to prove an accused’s innocence in a criminal proceeding. There are no other exceptions.

(7) The Crown cannot waive the privilege, although the informant can. (8) One must be careful not to confuse the secrecy rule regarding police informers with Crown privilege. At page 94 of the judgment of Beetz J. he paraphrases Martland J.’s observation to the effect that:

the privilege in question is not given to the informer, and the latter’s misconduct therefore does not destroy the privilege: the privilege is that of the Crown, which is in receipt of information under an assurance of secrecy.

Beetz J. discusses at page 97 the procedural differences between the invoking of Crown privilege and the rule relating to the secrecy of the identity of police informers. I need not deal with this aspect in this application. We have a sworn statement that the information was given in confidence to officials of the Department of National Revenue.

The privilege was recognized and discussed by Sopinka J. in R. v. Stinchcombe, [1991] 3 S.C.R. 326 (S.C.C.) at page 335 and by McLachlin J. in R. v. Leipert, [1997] 1 S.C.R. 281 (S.C.C.) at page 288.

The rule is too firmly entrenched for me to attempt to find ways to avoid applying it. It is based upon sound considerations of public policy that should not be eroded. Clearly it is not restricted to criminal matters and I can see no reason not to apply it to informants who give information in confidence to officials of the Department of National Revenue. Without diminishing in any way the obligation of the Crown to make full disclosure of its case to an appellant in an income tax appeal, I think the rule as it applies to informants who give information in confidence to the tax authorities is a rule that should be fostered. In my opinion, the four elements set out by Wigmore have been met. While, as I stated above, I would be reluctant to base my decision in an interlocutory matter on a determination of relevancy

— a matter that falls generally within the province of the trial judge — I feel fortified in my conclusion by my view that the appellant appears to suffer no prejudice in the prosecution of its appeal by being denied information on the identity of the informant.

The motion is therefore dismissed with costs.

Motion dismissed.