Citation: 2024 TCC 164

Date: 20241218

Dockets: 2021-2270(IT)G

2021-2269(IT)G

 

BETWEEN:

MARGARET STACK and LOUIS STACK

Appellants,

and

HIS MAJESTY THE KING,

Respondent.

COMMON REASONS FOR ORDER

Bocock J.

I. INTRODUCTION

PART ONE – MOTIONS TO COMPEL

A tale of two motions to compel

[1] Mrs. Margaret Stack (“Margaret”) and Mr. Louis Stack (“Louis”) (together, the “Appellants”) appeal the Minister of National Revenue’s (the “Minister”) reassessments under the Income Tax Act[1] in respect of both of their 2017 taxation year.

[2] These reasons concern two motions to compel answers (or better answers) to questions posed at oral examinations for discovery: one brought by the Respondent heard on May 13, 2024 (the “Respondent’s Motion”); the other by the Appellants heard on May 15, 2024 (the “Appellants’ Motion”). As well, the Respondent’s Motion also contained a request that the Appellants provide more responsive details to a demand for particulars served and re-served in regards to the notices of appeals.

[3] The Respondent also included a request for leave of the Court to amend the replies. The Court reviews that issue distinctly in PART TWO of these common reasons. As well, the Court already decided by separate order and reasons published on October 24, 2024 the more sensitive while related issue of documents redacted because of asserted privilege.

[4] The parties helpfully devised categories categorizing the rationale behind their inquiries rather than ordering them sequentially. In doing so, the Respondent’s Motion put in issue all of the demands for particulars where logical which were repeated at discovery and re-served just before the return date of the Respondent’s Motion.

Factual background to the appeals

[5] Largely because there is no critical evidential findings of the facts before it, the Court synthesized a background fact set from the pleadings and submissions. While lengthy, the facts display the breadth of the two starkly different bases of the Minister’s reassessments: allegation of sham transaction(s) versus application of the general ant-avoidant rule (“GAAR”). That essential fact set, extracted from the materials filed largely based on the parties’ views, is as follows. The Court notes the actual factual findings after any trial could be dramatically different.

[6] In 1985, Louis founded Fitter International Inc. (“Fitter International”), a Calgary based company that carries on the business of manufacturing and distributing fitness, balance, movement, and wellness products.

[7] Margaret and Louis were shareholders of Fitter International.

[8] 862 Alberta is a holding company that owns 33% of Fitter International’s common shares.

[9] At the beginning of 2017:

• a)Louis owned 50 Class A shares of 862 Alberta, 565,000 Class D shares of Fitter International, and 200 Class E shares of Fitter International;

• b)Margret owned 50 Class B shares of 862 Alberta and 46,000 Class D shares of Fitter International; and,

c) 862 Alberta owned 100 Class A of Fitter International.

[10] Bob Hahn (“Bob”) is an accountant who advises Margaret, Louis, Fitter International, and 862 Alberta. Bob’s accounting firm is Hahn Lukey Houle LLP (“HLH LLP”). Fitter International’s business includes the sale of products that could cause serious injury. Fitter International maintains insurance and pays insurance premiums to mitigate the business risks associated with selling its products.

The need for capital to fund expansion

[11] In 2016, Fitter International was growing and sought out an external investor to invest capital.

[12] Tecate Northern Trust (“TNT”) is a trust that carries on the business of a private equity fund. On April 12, 2017, the Appellants approached TNT about the possibility of participating in its two-stage investment transaction, whereby TNT would initially invest in Fitter International through the purchase of the Appellants’ shares, with the possibility of TNT’s long-term investment in Fitter International. On May 11, 2017, TNT issued non-binding letters of intent (“LOIs”) to the Appellants.

The Appellants’ corporate reorganization and share purchases

[13] On July 31, 2017, TNT purchased from the Appellants the following shares (the “Purchase Transactions”):

• a)From Louis, 565,800 Class “D” Preferred Shares of Fitter International and 334,200 Class “L” Preferred Shares of 862 Alberta for a total purchase price of $810,000; and,

b) From Margaret, 46,000 Class “D” Preferred Shares of Fitter International (collectively with Louis’ shares, the “Fitter Shares”) and 854,000 Class “L” Preferred Shares of 862 Alberta (collectively with Louis’ shares, the “862 Alberta Shares”, and collectively with the Fitter Shares, as the “Shares”) for a total purchase price of $810,000.

After sober second thought… “no”

[14] Fitter International and 862 Alberta decided against a long-term investment from TNT, informed TNT of their decision, and passed resolutions to redeem the Shares.

[15] Effective August 17, 2017, Fitter International repurchased 611,800 Class “D” Preferred Shares (including the Fitter Shares) from TNT for a total purchase price of $611,800. Also effective August 17, 2017, 862 Alberta repurchased 1,188,200 Class “L” Shares (including the 862 Alberta Shares) from TNT for a total purchase price of $1,188,200 (the “Redemption Transactions”).

How the reassessments arose

[16] The Appellants were flagged for audit by the Promoter Compliance Centre (“PCC”) within the Canada Revenue Agency (“CRA”). The PCC was, at the time, “aware of promotions by TECATE the Minister’s agents do mostly capitalize this proper noun - to assist high net worth shareholders of qualified small business corporations to extract corporate surplus from their corporations.” As the Appellants had reported that they and their corporations had undertaken transactions with TNT in 2017, the PCC identified them as “entities of concern” and referred them for audit. The PCC prepared a brief “risk analysis” memo (the “PCC Risk Analysis”) that summarized relevant information about the Appellants and their companies contained on the CRA’s computer systems, and attached a few documents, including TNT promotional brochure.

[17] The PCC Risk Analysis was reviewed as part of a limited “desk audit.” The Appellants were advised that their 2017 taxation year was under audit.

[18] CRA prepared an “Audit Plan” in order to “to outline a plan to conduct the audit at the beginning.” In July 2019, the review was elevated to a full audit after the regional tax services office technical committee approved.

[19] During the audit of the Appellants’ transactions, various officials at the CRA were consulted in order to comment on the GAAR position being formulated, including the section at CRA headquarters that prepares memos for consideration by the CRA’s GAAR Committee (the “GAAR section”).

The CRA agents involved

[20] The continuous open memo, the T2020, reveals two key CRA staff (with positions in parentheses): Mr. Panth (auditor) and Mr. Ives (technical advisor). Mr. Ives also kept copies of emails he and Mr. Choulli exchanged with Mr. Ives and other CRA officers with whom they consulted during the audit, such as Dominic Laroche, Victor Wang, and Michel Osvath-Langlais from the GAAR section. The T2020s were produced to the Appellants as part of the audit file, as were Mr. Panth’s emails, and the emails and documents related to the audit retained by other CRA officers.

[21] Mr. Ives put Mr. Panth and Mr. Choulli in touch with Victor Wang in the GAAR Section in November 2020. Mr. Wang had just prepared a general memorandum for the GAAR Committee in a file involving transactions between TNT and several other taxpayers (the “Other GAAR case”). Mr. Ives thought Mr. Wang might be able to offer useful input on the GAAR position Mr. Panth was developing in the Appellants’ case. The Respondent produced the emails pursuant to which these consultations took place as part of the Appellants’ “audit file.”

[22] Mr. Panth and Mr. Choulli also communicated with Michel Osvath- Langlais, who was assigned to review the GAAR position Mr. Panth and Mr. Choulli had developed in the Appellants’ case, and which would be considered by the GAAR Committee. The Respondent produced this internal correspondence (including emails that did not involve Mr. Panth or Mr. Choulli), the memo that Mr. Osvath-Langlais provided to the GAAR Committee, and the GAAR Committee’s file for the Appellants (the “GAAR file”) to the Appellants prior to discovery.

[23] To the extent that Mr. Panth and Mr. Choulli obtained information from others that they considered during the audit, they recorded this information and noted their consideration of it in the audit file, either by referring to it in the T2020s, by preparing and retaining meeting summaries, or by retaining copies of documents and emails. Mr. Panth and Mr. Choulli also drew upon experience they had gained working on other audits, including other audits involving participants that had undertaken similar transactions with TNT. For example, it would seem a common, customized general questionnaire was employed with the Appellants and other similar files. Mr. Choulli confirmed at discovery similar timing and steps occurred in other TNT transactions.

[24] It is likely that at the time the Appellants were being audited, the CRA was aware of a tax strategy being marketed by TNT (the “Tecate Strategy”), as other potential participants had been identified and under audit. Any related impact on the Minister’s audit of the Appellants remains unknown. The CRA contends there was no common or linked approach.

[25] Unsurprisingly perhaps, the recommendation the CRA made in the Appellants’ case reflects the position taken in the other GAAR case. As a result of this audit, the Appellants were both reassessed on April 7, 2021.

PART TWO – LEAVE TO AMEND REPLIES

The sought amendments

[26] The Respondent seeks leave to file amended replies. That leave is needed because the Appellants withhold their consent to one of the proposed amendments. The disputed, substantively identical, amendment is the addition of a new paragraph to both replies which provides as follows:

For the purpose of this appeal, the Attorney General of Canada does not rely on the following facts, which were assumed by the Minister and pleaded at the paragraphs listed below:

• a)the fact assumed by the Minister and pleaded directly at paragraph 16(dd) that TNT, Margaret, and Louis retained Felesky Flynn in connection with Margaret and Louis’s Tecate Strategy;

• b)the fact assumed by the Minister and pleaded directly at paragraphs 16(qqq) and 16(zzz), by implication at paragraphs 16(rrr), 16(sss), 16(ttt), 16(uuu), 16(aaaa), 16(bbbb), 16(cccc), 16(dddd), and by reference at paragraphs 17(x), that Felesky Flynn received funds from TNT in trust for Margaret and/or Louis.

The impact of the amendments

[27] The consequential impact of the contested amendment is to “provide notice that the [Respondent] no longer relies on two assumptions… made in raising the assessment… ”. There were some additional “housekeeping” amendments sought which are not disputed.

[28] The salient two assumptions are that:

a) the Appellants and TNT retained Felesky Flynn LLP as counsel concerning the transactions; and,

b) that Felesky Flynn LLP received funds from TNT in trust for the Appellants.

II. APPLICABLE LAW GENERALLY

PART ONE – THE MOTIONS

[29] The general jurisprudence concerning the scope of discovery, nature of these appeals and the species of the basis to compel further or better answers are dealt with at the outset. This is because they apply to both motions, more or less.

a) Scope of Discovery

[30] The scope of discovery should be wide. Relevancy should be construed liberally, without allowing it to enter the realm of a fishing expedition. The purpose of discovery is to enable parties to know the case they have to meet at trial, know the facts that the opposing party relies on, narrow or eliminate issues, obtain admissions, and avoid surprises at trial.[2]

[31] On a motion, the threshold for relevance is low and, when in doubt, the motions judge should err on the side of allowing the question.[3] Nonetheless, the exercise cannot amount to a “fishing expedition.”^[4] The examining party is entitled to “any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party.”[5]

[32] A question is relevant when there is a reasonable likelihood that it might elicit information that may directly or indirectly enable the party seeking the information to advance its case or damage the case of the opposing party, or which fairly may lead to a train of inquiry that may advance the party’s care or damage the opposing party’s case.[6]

[33] In MP Western Properties Inc.,[7] the Court provided a summary of principles applicable to the disclosure of documents at discovery. There is no “magic formula” and whether or not a particular document should be produced will require a fact-based inquiry on a case-by case basis. Justice Miller found that the following principles apply when considering an Appellant’s request for disclosure:

21. The Appellants’ request for disclosure is supported by the following general principles:

a) Relevancy on discovery ought to be "broadly and liberally construed and wide latitude should be given": Baxter v. R., 2004 TCC 636 (T.C.C. [General Procedure]) at paragraph 13.

b) Relevancy at discovery is a lower threshold than that at trial: 4145356 Canada Ltd. v. R., 2010 TCC 613 (T.C.C. [General Procedure]). In fact, Rule 90 of the Rules expressly provides that the production of a document at discovery is not an admission of its relevance or admissibility.

c) All documents relied on or reviewed by the Minister in making his assessment must be disclosed to the taxpayer: Amp of Canada Ltd. v. R., [1987] 1 C.T.C. 256 (Fed. T.D.).

d) Documents that lead to an assessment are relevant: HSBC v. The Queen, (supra) at paragraph 15.

e) Documents in CRA files on a taxpayer are prima facie relevant, and a request for those documents is itself not a broad or vague request: HSBC (supra) at paragraph 15.

f) The examining party is entitled to have any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party: Teelucksingh v. R., 2010 TCC 94 (T.C.C. [General Procedure]) at paragraph 15.

22. Whereas, the Respondent's refusal to disclose the documents is supported by the following general principles:

a) An indiscriminate request for the production of documents in the hope of uncovering helpful information or the hope of it leading to a train of inquiry is not permitted: Harris v. R., 2001 D.T.C. 5322 (Fed. T.D.) at paragraph 45; Fluevog (supra) at paragraph 18.

b) Earlier drafts of a final position paper do not have to be disclosed. The mental process of the Minister or his officials in raising the assessments is not relevant: Rezek (supra) at paragraph 16.

c) A party is entitled to know the position of the other party with respect to an issue of law, but it is not entitled to have access to either the legal research or the reasoning by which that position is arrived at: Teelucksingh (supra) at paragraph 15.

d) Even where relevance is established, the Court has a residual discretion to disallow the production of documents. This principle was described in Lehigh (supra) at paragraph 35 as follows:

The exercise of this discretion requires a weighing of the potential value of the answer against the risk that a party is abusing the discovery process. See Bristol-Myers Squibb Co. v. Apotex Inc. at paragraph 34. The Court might disallow a relevant question where responding to it would place undue hardship on the answering party, where there are other means of obtaining the information sought, or where "the question forms part of a 'fishing expedition' of vague and far reaching scope": Merck & Co. v. Apotex Inc., 2003 FCA 438, 312 N.R. 273 at paragraph 10; Apotex Inc. v. Wellcome Foundation Ltd., 2008 FCA 131, 166 A.C.W.S. (3d) 850 at paragraph 3.[8]

[34] In Baxter, Chief Justice Bowman summarized the concept of relevance in the context of discoveries:

a) Relevancy on discovery must be broadly and liberally construed and wide latitude should be given;

b) A motions judge should not second guess the discretion of counsel by examining minutely each question or asking counsel for the party being examined to justify each question or explain its relevancy;

c) The motions judge should not seek to impose his or her views of relevancy on the judge who hears the case by excluding questions that he or she may consider irrelevant but which, in the context of the evidence as a whole, the trial judge may consider relevant;

• d)Patently irrelevant or abusive questions or questions designed to embarrass or harass the witness or delay the case should not be permitted.[9]

[35] Even if relevant, the Court maintains a residual discretion to disallow questions under the principle of proportionality:[10]

[34] The jurisprudence establishes that a question is relevant when there is a reasonable likelihood that it might elicit information which may directly or indirectly enable the party seeking the answer to advance its case or to damage the case of its adversary, or which fairly might lead to a train of inquiry that may either advance the questioning party’s case or damage the case of its adversary. Whether this test is met will depend on the allegations the questioning party seeks to establish or refute. See Eurocopter at paragraph 10, Eli Lilly Canada Inc. v. Novopharm Ltd., 2008 FCA 287, 381 N.R. 93 at paragraphs 61 to 64; Bristol-Myers Squibb Co. v. Apotex Inc. at paragraphs 30 to 33.

[35] Where relevance is established the Court retains discretion to disallow a question. The exercise of this discretion requires a weighing of the potential value of the answer against the risk that a party is abusing the discovery process. See Bristol-Myers Squibb Co. v. Apotex Inc. at paragraph 34. The Court might disallow a relevant question where responding to it would place undue hardship on the answering party, where there are other means of obtaining the information sought, or where “the question forms part of a ‘fishing expedition’ of vague and far-reaching scope”: Merck & Co. v. Apotex Inc., 2003 FCA 438, 312 N.R. 273 at paragraph 10; Apotex Inc. v. Wellcome Foundation Ltd., 2008 FCA 131, 166 A.C.W.S. (3d) 850 at paragraph 3.[11]

[36] Restating those principles, in Contractor v. R,[12] Justice Owen went further and added that this discretion also extends to questions that are relevant but not proper, for example if the question is “materially ambiguous, vague, imprecise, misleading, scandalous (e.g., defamatory) or vexatious (e.g., harassing); or seeks privileged information, seeks the work product of counsel, seeks the disclosure of evidence rather than fact or seeks an opinion (i.e., inference from facts) rather than fact.”[13]

[37] Overall, the motions judge has broad discretion when determining relevancy at the discovery stage; the motions judge is to provide a ruling and briefly state the reason for the decision, but is not required to provide a detailed explanation of the Court’s ruling.[14] On that basis, the Court deals with the broad species of demands to compel, the basis for denial and a conclusion of whether a party is compelled to answer a specific request.

[38] Nonetheless, a party that is asked to produce a relevant document can only produce it if it exists and is within its power or control.[15] Pursuant to Rule 78(2), a document is “deemed to be in a party’s power if that party is entitled to obtain the original document or a copy of it and the party seeking it is not so entitled.” The Federal Court of Appeal (“FCA”) indicated that a document that in the possession, control or power of party includes the non-privilege documents the party was entitled to receive from a third party.[16]

[39] Furthermore, examination for discovery cannot amount to a fishing expedition even if the basis is relevant. A fishing expedition has been defined as “an indiscriminate request for production, in the hope of uncovering helpful information.”[17] In other words:

the plaintiff wishes to maintain his questions, and to insist upon answers to them, in order that he may find out something of which he knows … nothing now, which might enable him to make a case of which he has not knowledge at the present. If that is the effect of the interrogatories, it seems to me that they come within the description of “fishing” interrogatories and on that ground cannot be allowed.[18]

[40] In Grand River Enterprises Six Nations Ltd., the issue on appeal was whether Grand River was required to remit excise duty on its tobacco products.[19] Grand River had requested that the Crown provide “the names of First Nation tobacco manufacturers who were licensed as tobacco manufacturers under the Act and were located on reserves in the Province of Ontario.”[20]

[41] In finding the request to be a fishing expedition the Federal Court of Appeal explained that “[t]he basis for Grand River’s request is that it “suspects, but does not know” that there are First Nation tobacco manufacturers who are licensed under the ITA but who do not pay excise duty on all their tobacco products.^[21] Thus, a party cannot ask for facts that would lead to the creation of a new argument, they can only discover information that sustains an already pleaded argument.

[42] Fundamentally and logically however, the motions judge must be both diligent and wary to ensure, in the context of the appeal contested, that each party receives full measure of the discovery process to prepare for trial: discerning the issues; preparing full answers to the opposing case theory; promoting settlement through informed risk assessment of the unhidden viewscape of the matter.[22] To that end, the more complex the pleadings and legal concepts afoot – sham and GAAR are certainly counted – the greater the breadth for both parties to trawl deeper and longer.

• 1.Context of Sham

[43] Keeping the issue of sham in mind, the parties and the trial judge needs information concerning the objective reality of the arrangements. The factors that can inform the Court include:

i) the circumstances surrounding the development of the transaction structure;

ii) the Appellants’ due diligence, involvement and oversight, or lack thereof, in evaluating and participating in the transactions;

iii) the ordinary business and investment practices of the Appellants;

iv) the parties’ stated goals and reasons for entering into the transactions; and,

v) the legal rights and obligations as defined in the transaction documents.[23]

[44] In Paletta, Justice Hogan indicated that this list is non-exhaustive and that, taken together, “these factors inform a court’s analysis of whether the legal rights and obligations described in the transaction documents are consistent with the parties’ avowed intent.”[24]

[45] The meaning of sham was defined in Snook v London & West Riding Investments Ltd.[25] as follows:

means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities . . . that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.

[46] Canadian courts have adopted that definition, notably in Stubart Investments Ltd. v. R:

a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality[26]

[47] In Paletta, Justice Hogan indicated that, in a tax context, “a Court will arrive at a finding of sham when the evidence shows that the parties misrepresented their arrangements in a bid to achieve a tax benefit that would be denied if the nature of their arrangements was properly disclosed. In tax matters, the party that is deceived by the sham is the Canada Revenue Agency”.[27]

[48] As previously established, the Court will examine the objective reality surrounding the arrangements to discern whether the transaction documents truly reflect the parties’ intent. It is rare to find direct evidence of sham. Thus, the Respondent in the absence of an admission has to present circumstantial evidence. To do so, the party logically must question deeper.

2. Context of GAAR

[49] With respect to a GAAR appeal, the Court in MP Western Properties Inc. provided that the above-noted general principles should be applied more broadly. Specifically, the Tax Court referred to the Federal Court of Appeal decisions in Lehigh[28] and Superior Plus[29] that:

…documents not specific to a taxpayer but relating to the policy of the ITA may be ordered to be disclosed in certain circumstances in a GAAR case. The Tax Court referred to the circumstances in Lehigh as an example of when such broader disclosure is warranted (Reasons, para. 29). The Tax Court also noted at paragraph 32 of its Reasons that, while draft documents prepared by the Minister or considered by officials in the context of a taxpayer's audit are not normally producible in a non-GAAR case, they should be disclosed in a GAAR appeal as they inform the Minister's mental process leading up to an assessment and reflect the Minister's understanding of the policy at issue. The Tax Court noted that such documents may lead to a train of inquiry that meets the lower threshold for disclosure in a GAAR case.[30]

[50] In a GAAR appeal, the Court must determine whether transactions are abusive because they frustrated the object, spirit, and purpose of the relevant provisions. In CHR Investment, the Federal Court of Appeal indicated, since the Minister has the obligation to identify the rationale of the provisions in a GAAR appeal, “it would be appropriate at the discovery examination to ask questions intended to clarify the Minister’s current position on the applicable rationale.”[31]

[51] In Ahamed v. Canada,[32] the Federal Court of Appeal found that the Tax Court did not err in refusing to order that the respondent provide information concerning factual assumptions surrounding the object, spirit and purpose, and the policy behind the provision at issue:

[41] In my view, the Tax Court did not err either in observing that factual assumptions are matters for pleading, not discovery, or in finding that the respondent has already communicated its legal position. The Appellant has not convinced me that the Tax Court made a palpable and overriding error or erred on an extricable question of law in concluding that the respondent had already made its position clear and that ordering answers to the questions in issue would invite legal argument.

[52] Although the Court did not decide Ahamad in the context of a GAAR assessment, the issue in dispute related to the interpretation of an ITA provision.

3. Questions to Ascertain Party’s Legal Position

[53] As held by the Ontario Superior Court of Justice in Six Nations of the Grand River Band v. R,[33] it is proper to ask questions to ascertain the opposing party’s legal positions. The party that is being examined is not required to swear to truth of law, but merely to state what its current legal position is. The court also stated that a party may be ordered to give particulars of its legal position during the discovery process, in rare occasion, where the complexity of the litigation requires it to help a party to prepare for trial.[34]

[54] In Lehigh, the taxpayer sought to compel the Crown to answer the following question: “If the shares […] had been owned by the appellant instead of a non-resident company related to the appellant, would the Crown have contested the arrangement”? The taxpayer’s objective was to have a better understanding of the Crown’s position on the scope, and object and spirit of paragraph 95(6)(b) ITA. More specifically, the question was asked with the intention of ascertaining whether the provision was applied at reassessment because the shares were owned by a non-resident. The Crown argued that the question was hypothetical and a pure question of law, and that its purpose was to elicit from the Crown details pertaining to its legal argument.

[55] The Federal Court of Appeal dismissed the Crown’s appeal on the basis that they had not demonstrated that the Tax Court judge erred in compelling them to answer. In fact, the taxpayer was entitled to be informed of the rationale behind the reassessment and the circumstances that led the CRA to conclude that the purpose was to avoid the payment of taxes.[35]

[56] In Burlington TCC 2015, Justice Campbell held that questions related to the legal position to be taken at trial must be answered, unless the questions “are inquiring into the evidence or the reasoning that may support those relevant facts or the opposing party’s legal research.”[36] The questions that rely on facts that support a legal position are proper.[37] Nevertheless, the Court indicated that it is improper to seek for a legal opinion when asking a question.[38]

[57] In HSBC Bank Canada v. R,[39] Justice Miller refused to compel the appellant to respond to a hypothetical question that was an expression of opinion and called for speculation regarding the ultimate issue:

[33] As I have indicated, the question of implicit support at this stage of the litigation cannot be ruled irrelevant. The Respondent argues basically that as implicit support is relevant, these questions are proper. I note that it was in paragraph 64 of the Respondent’s Reply where she raises additional facts in support of the assessment that one finds the statement: "The Appellant would have been fully supported by HBAP and HHBV even in the absence of the Deed of Guarantee." The Appellant argues that as a new argument from the Respondent, the Respondent should not be allowed to shift the burden to the Appellant by having the Court order it to answer "what if" questions. The Appellant maintains hypothetical questions calling for speculation and an expression of an opinion are not proper. I agree. It is for the trial judge to determine this key fact, based on a review of all of the evidence presented as to what occurred those many years ago. It does not follow that just because the question of implicit support may be relevant, the Appellant should be required to speculate regarding the ultimate issue pertaining to implicit support. This is unfair and improper. The facts relating to the respective financial strengths of parent and subsidiary, their respective policies and all other surrounding circumstances leading to the explicit guarantee will have to be assessed and weighed. An officer of the Appellant, 14 and 23 years after the fact hypothesizing to what might have been without a guarantee is simply not appropriate.

[58] While it is true that a party is entitled to know the position of the other party as to an issue of law, a question should not be answered when:

1. the question is an hypothetical question of law;

2. the question asks for speculation;

3. the question elicits details of the legal argument of the party;

4. the question is not necessary to know the case he has to meet;

5. the question seeks particulars of the legal position in a non-complex litigation.

[59] The basic guidelines of discovery is for each party to know the case it has to meet in order to be prepared for trial. While the Crown bears the burden of proving that the transactions constitute an abuse of the provisions at issue, the Crown also bases its GAAR reassessment on the underlying policy of specific ITA provisions.[40]

b) Documents Protected by Privilege

[60] Solicitor-client privilege limits the scope of discovery when potential information gathering during the discovery process conflicts with privilege.[41] The law of privilege protects information from disclosure in court. It also protects communications between a lawyer and client, including an agent of the client.[42] Further expansion of the jurisprudence on the issue of privilege was otherwise fulsomely explored in the court’s reasons published on October 24, 2024.

c) Requests for Particulars

[61] The Respondent has served a request for particulars related to the Appellants’ notices of appeal. Before this Court, at inception appellants bear the onus of demolishing the Minister’s assumptions on a balance of probabilities. In order to do so, an appellant must “establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negative.”[43]

[62] Pursuant to Rule 48 of the Tax Court of Canada Rules (General Procedure),[44] a “notice of appeal shall be in Form 21(1)(a), (d), (e) or (f).” For an appeal of an assessment under the general procedure, Form 21(1)(a) provides that the notice of appeal has to include “the material facts relied on”. The absence of material facts required to support the tax return does not result in any burden being shifted to the Minister.[45]. That responsibility does not change because the Minister makes similar factual assumptions.[46]

[63] There is no bright line between material facts and bald allegations. In Mancuso v. Canada (National Health and Welfare),[47] the Federal Court of Appeal held that material facts are the foundation of a proper pleading. More specifically, they frame the discovery and trial process as they establish the parameters of relevancy of evidence. Thus, the pleadings must define the issues “with sufficient precision to make the pre-trial and trial proceedings both manageable and fair.”[48]

[64] In order to determine what constitutes a material fact, the Court has to look at the pleading as a whole in light of the cause of action:

[19] What constitutes a material fact is determined in light of the cause of action and the damages sought to be recovered. The plaintiff must plead, in summary form but with sufficient detail, the constituent elements of each cause of action or legal ground raised. The pleading must tell the defendant who, when, where, how and what gave rise to its liability.[49]

[65] In Imperial, the Federal Court of Appeal noted that particulars are provided for the purpose of pleadings so that a party can properly respond.[50] Particulars are not supplied because they will make a pleading better, but rather because without them the party cannot plead in response to an important point.[51] A party is not entitled to request particulars of information within their knowledge unless the pleading is otherwise faulty through its failure to plead a necessary material fact.[52]

[66] In order to determine what constitutes a material fact, the Court has to look at the pleading as a whole in light of the cause of action:

[19] What constitutes a material fact is determined in light of the cause of action and the damages sought to be recovered. The plaintiff must plead, in summary form but with sufficient detail, the constituent elements of each cause of action or legal ground raised. The pleading must tell the defendant who, when, where, how and what gave rise to its liability.[53]

[67] Rule 52 allows the Court to order that either party deliver particulars within a specified time if the opposite party failed to provide them upon request. While the Court may order particulars to be delivered, the Respondent repeated his request at discovery in asking the Appellants to provide “a list and a ‘description of the transactions that took place,’ including the ‘parties,’ to the transactions for each of the terms ‘Purchase Transactions’ and ‘Redemption Transaction’”.[54] They agreed to that request.

[68] When an undertaking to produce documents has been given on an examination for discovery, relevance is acknowledged. Indeed, in Towne v. Miller,[55] the Ontario Superior Court of Justice, which was later quoted by the Tax Court of Canada in Merchant Law Group v. R,[56] stated that:

An undertaking is an acknowledgement that the question is proper and that the subject-matter of the undertaking is relevant. Put crudely, should counsel be permitted to renege on a production-undertaking when he or she subsequently comes to the belief that a document or part thereof is not relevant in the action? This question invades the sanctity of a solicitor’s undertaking.

An undertaking is an unequivocal promise to perform a certain act. I do not see any material difference between, for example, an undertaking given in the context of a real estate transaction (when lawyers undertake to do, or obtain, something necessary to complete the transaction) and an undertaking given on an examination for discovery. Each involves a promise. In an examination for discovery, the undertaking may be given by the litigant been examined or it may come from his or her counsel. Both are equally binding.[57]

[69] Moreover, the Tax Court of Canada followed the approach of Towne in Bathurst Machine Stop Ltd. v. R [58] and stated that “[…] once an unqualified undertaking has been given, it is too late to refuse to provide an answer on grounds of relevance […]”.

PART TWO – LEAVE TO AMEND REPLIES

[70] The general jurisprudence regarding granting leave to amend pleadings, and particularly a reply, is longstanding and nonetheless evolving before the Court.

[71] Rule 54 permits a party to amend their pleadings either with the consent of all other parties or with leave of the Court. Rule 132 permits a party to withdraw an admission in the party’s pleading on consent or with leave of the Court.

[72] Based on the relevant jurisprudence, the test for amending pleadings is the same as withdrawing an admission. Therefore, it is irrelevant whether the amendment constitutes a withdrawal of admission.

[73] In Continental Bank, Justice Bowman articulated that Rule 54 gives the Court a broad discretion to permit the withdrawal of admissions and the amendment of pleadings where it is in the interest to do so:

In the cases in the courts of Ontario and of British Columbia to which I was referred a number of tests have been developed – whether an admission was inadvertent, whether there is a triable issue raised by an amendment or the withdrawal of an admission and whether the other party would suffer a prejudice not compensable in costs. Although I find that these tests have been met I prefer to put the matter on a broader basis: whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied. The tests mentioned in these cases in other courts are of course helpful but other factors should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter and whether the amendments sought will facilitate the Court’s consideration of the true substance of the dispute on its merits. No single factor predominates nor is its presence or absence necessarily determinative. All must be assigned their proper weight in the context of the particular case. Ultimately it boils down to a consideration of simple consideration of simple fairness, common sense and the interest that the courts have that justice be done.[59]

[74] Canderel [60] is the leading case from the FCA on the applicable principles to consider in whether to grant leave to amend. Canderel confirmed Justice Bowman’s above comments in Continental Bank, and elaborated that:

The general rule is that an amendment should be allowed at any stage of an action for the purpose of determining the real questions in controversy between the parties. Provided, notably, that the allowance would not result in an injustice to the other party not capable of being compensated by an award of costs and that it would serve the interests of justice.[61]

[75] The Court in Burlington TCC 2020 also referred to its prior decision in Continental Bank and described the factors for the Court to consider as follows:

“In Continental, Chief Justice Bowman of this Court…held that these ‘provisions give the court a broad discretion to permit the withdrawal of admissions and the amendment of pleadings where it is in the interest of justice to do so.’

…Justice Bowman held that courts should consider ‘whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied.’ Additionally, Justice Bowman highlighted factors to consider in determining whether the amendments are consonant with the interests of justice. However, Justice Bowman was clear that no single factor was predominant or determinative and, instead, that each had to be weighted in the context of the specific case. Those factors include:

a) the timeliness of the Motion to amend or withdraw;

b) the extent to which the proposed amendments would delay the expeditious trial of the matter;

c) the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter; and

d) whether the amendments sought will facilitate the Court’s consideration of the true substance of the dispute on its merits.”[62]

[76] The Court later added that “before allowing leave to a party to amend, the Court must consider whether the amendment would cause an injustice that cannot be compensated by costs.”[63] The Court notes that the Federal Court of Appeal cited Continental Bank with approval in subsequent decisions.[64]

[77] These cases demonstrate that Courts generally allow amendments where the proposed amendment:

(i) assists in determining the real question in controversy between the parties;

(ii) furthers the interests of justice; and,

(iii) does not cause prejudice which can not be compensated by costs.

[78] In addition, the Court will consider the following factors from Continental Bank when determining whether the amendments are consonant with the interests of justice:

(i) the timeliness of the motion;

(ii) the extent to which the proposed amendments would delay an expeditious trial;

(iii) the extent to which the original position led another party to follow a course in the litigation which would be difficult to alter; and

(iv) whether the amendments would assist the Court in considering the substance of the dispute.

III. STRUCTURE OF THE TWO MOTIONS GENERALLY

A. Respondent’s Motion to Compel (May 13^th)

[79] In his written submissions, the Respondent organized the questions and refusals at issue into the following five categories based on the nature of the questions asked:

1. Category A – particulars of the “Purchase Transactions” and “Redemption Transactions” referred to in the Appellants’ Notices of Appeal

2. Category B – the transacting parties’ understanding of the transactions at issue in the appeals, their intentions with respect to those transactions, and their purpose(s) for entering into those transactions

3. Category C – the representations the transacting parties (and their representatives) made regarding the transactions at issue in these appeals, and their purpose(s) for entering into those transactions

4. Category D – the Appellants’ refusal to disclose their legal position with respect to various matters in issue in these appeals

5. Category E – the Appellants’ refusal to provide documents, or to provide unredacted versions of documents, on the basis of unspecified and unsubstantiated claims of privilege

[80] The bulk of the demands for particulars are substantially merged into Category “A” above, and to a lesser degree in “B” and “D”. As such, these reasons and reflective orders also incorporate and answer the disputed responses to the demands for particulars.

[81] Conversely, the Appellants organized their responsive submissions into the following distinct five categories, each outlining the basis for its refusal to answer or identifying where it had already provided responsive answers:

1. Questions to which the Appellants have provided responsive answers

2. Questions that are irrelevant, disproportionate, or fishing expeditions

3. Questions for the Appellants’ legal argument

4. Redacted privileged information

5. Questions with corrections or clarifications to undertaking responses

[82] The parties’ submissions do not align neatly. As such, in providing its responses, and in order to assure the parties the Court tracked the assertions and counter-arguments, the Court notes the following table of concordance:

Respondent Category	Sections containing Appellants’ matching responsive arguments in their submissions
Category A	(a)(i) and (d)
Category B	(a)(i), (a)(ii), (a)(iii), (a)(iv), (b)(i), (b)(ii), (b)(iv), (b)(v), and (e)
Category C	(b)(ii) and (b)(iii)
Category D	(b)(iv), (b)(vi), (c)(i), and (c)(ii)
Category E	(a)(i), (a)(iv), (b)(ii), (b)(v), and (d)

[83] In reconciling this, the Court has retained the Respondent’s categories, considered the Appellant’s counter-arguments and provided its general statement of the determinative legal test in these common reasons. These reasons inform the more refined itemized decisions in the directive order reduced to a more granular basis correlated to micro question containing the specific refusal.

B. Appellants’ Motion to Compel (May 15^th)

[84] The Appellants’ Motion seeks an order, inter alia, to compel the Respondent to answer questions he refused to answer, or provided unresponsive answers to, arising from the discovery process. The Appellants’ motion provides the refusals or unresponsive answers relate to:

1. assumptions the Respondent pleaded in his reply about a non-party – the Midnight Group or other related parties – as set out in Schedule A to the motion; and

B. the Respondent’s other pleaded assumptions, as set out in the attached Schedule B to the motion.

[85] The Appellants then appended each such list as the corresponding, respective Appendix A and B to its submissions, and further subdivided each Appendix into respective six and four categories, as follows:

[86] The questions in Appendix A generally fall into six categories:

1. Category 1 – the entities, individuals, trusts, and corporations that make up the Midnight Group;

2. Category 2 – names and addresses of persons who might reasonably be expected to have knowledge of the transactions in issue;

3. Category 3 – other TNT files the Minister reviewed as part of the group audit;

4. Category 4 – Minister’s audit of the Midnight Group;

5. Category 5 – Promotor Compliance Centre’s files for the Midnight Group, TNT, and other related taxpayers; and,

6. Category 6 – Minister’s knowledge of the Midnight Group’s pleaded “tax arbitrage opportunities”.

[87] The questions in Appendix B generally fall into four categories:

1. Category 1 – questions about the Minister’s review and knowledge of transactions and entities raised in the Reply;

2. Category 2 – questions requesting the Attorney General’s legal position on sham and window dressing, including the authenticity of documents;

3. Category 3 – questions requesting the Attorney General’s GAAR position; and,

4. Category 4 – other questions requesting the Attorney General’s factual or legal position.

[88] The Respondent’s submissions respond to each of the ten categories directly. The Court refers to the categories by the appendix letter followed by the category number e.g. “Category A4 – Minister’s audit of the Midnight Group.”

[89] Similar to the method followed in the Respondent’s motion, the Court will summarize the parties’ submissions as they pertain to each of the Appellants’ categories, save for privilege generally. These reasons then provide the relevant law generally applicable to the categories with a view that the incoming clerk can apply the analysis to the parties’ submissions and the questions within each category.

IV. ANALYSIS AND ANSWERS TO MOTIONS (PART ONE)

A. Respondent’s Motion to Compel (May 13^th)

CATEGORY A – Particulars of the “Purchase” and “Redemption” Transactions

The Specifically Applicable Law

[90] Where counsel undertakes to answer a question, it is their responsibility to provide a full and binding answer in response to the undertakings, and they cannot simply provide thin answers and provide the requesting party ask for more.[65] However, courts should not enforce undertakings that did not reflect the question asked, especially where such framing of the undertaking is overly broad or imprecise.[66]

Analysis

[91] In light of the Appellants’ provision of closing books, one for each set of the Purchase Transactions and the Redemption Transactions, it appears the issue is whether that provision satisfies the Appellants’ undertaking to provide a description of the transactions that took place, including the parties to each of the transactions.[67]

[92] From examination of the closing book indices and descriptions, it is uncertain what further description specifically referential to the Purchase Transactions and Redemption Transactions the Respondent seeks, or could expect. The Court expressed this during submissions. Occasionally, it is not always immediately clear which parties are involved in which specific transactions, nor is there always a clear delineation on what page one transaction begins and another ends. Although it appears the Respondent seeks more, the Court shall direct the Appellants to provide a numbered list of each transaction with a brief description that identifies which party was responsible for what in the context of each set of transactions, as well as which documents in the closing book are associated with which transaction. The Court notes the descriptions need not include much more substantive information than what is already provided in the closing books, except where the involved parties’ actions are not yet clearly identified and may be construed ambiguously. Further, and without indicating strategic conclusions, no further explanation (i.e. a non-answer) may ultimately assist the Respondent’s case.

[93] The latter half of the Respondent’s submissions on Category A, at paragraphs 37-46, argue the importance of the particulars related to the Appellants’ pleadings. However, the thread of rationale in these paragraphs is that the Appellants’ particulars should shed light on the “true nature” of the transactions, evidenced by intention or other details. Category A, as sorted by the Respondent, does not explicitly ask questions that go to intention or a bona fide non-tax purpose, so that element of the analysis is better ascribed to Category B.

CATEGORY B – the transacting parties’ understanding of the transactions at issue in the appeals, their intentions with respect to those transactions, and their purpose(s) for entering into those transactions

The Specifically Applicable Law

[94] An examining party is entitled to have any information that may fairly lead to a train of inquiry that may directly or indirectly advance their case, or damage that of the opposing party.[68] Where an inquiry is relevant, proportionality of the request must be measured against the nature, complexity and amount at stake in the litigation in order for it to trump over relevance.[69] Proportionality should not be used as a shield in discovery as it must not defeat the purposes of discovery.[70] Courts should weigh the potential value of the answer against the risk that a party is abusing the discovery process.[71]

[95] In Burlington TCC 2017, the Court held that the Respondent’s requests for correspondence regarding a company’s “going concerns”, “other types of valuations”, and communications with “external advisors” were too vague and too broad.[72] In Total Energy Services Inc., an appellant’s request for correspondence was too broad because it was not limited to particular employees or time periods, nor was there any evidence that the requested correspondence was used in the Appellants’ audit, making it a fishing expedition.[73] Documents in CRA files on a taxpayer are prima facie relevant, and a request for those documents is itself not a broad or vague request.[74]

[96] With respect to electronic discovery, the Court has considered The Sedona Canada Principles Addressing Electronic Discovery by taking into account:

1. the nature and scope of the litigation, including the importance and complexity of the issues, interest and amounts at stake;

2. the relevance of the available electronically stored information;

3. its importance to the court's adjudication in a given case; and,

4. the costs, burden and delay that may be imposed on the parties to deal with electronically stored information.[75]

[97] Factors that can inform the Court of the objective reality of arrangements in the context of sham allegations include:

1. the circumstances surrounding the development of the transaction structure;

2. the appellants’ due diligence, involvement and oversight, or lack thereof, in evaluating and participating in the transactions;

3. the ordinary business and investment practices of the appellants;

4. the parties’ stated goals and reasons for entering into the transactions; and,

5. the legal rights and obligations as defined in the transaction documents.[76]

[98] An undertaking given on a “best efforts” basis is a qualified promise that requires a real and substantive diligent attempt, not simply a cursory one, to carry out the obligation.[77] Whether a party made its “best efforts” depends on what a reasonable person would conclude was a best effort to obtain the answers based on the specific facts of the case and the nature of the undertakings.[78]

Analysis

[99] A “best efforts” undertaking is one that may be beyond the ability of the lawyer to fulfil, thus transforming it into a qualified promise.[79] However, in lieu of such a qualification, an undertaking remains an unqualified promise. The Appellants state they “made best efforts to provide Bob’s recollection” of certain items, but unless the undertaking was qualified, the burden on the Appellants to fulfill any unqualified undertakings should not be lessened. Further, the Appellants stated they will update their response to certain undertakings on a number of instances in their submissions.[80] It is unclear why those updates are necessary if the undertakings were clear. To the extent that the Appellants failed to fulfill their undertakings and are just now doing so, the Court reserves its discretion to address such a failure with costs.[81]

[100] The Appellants’ corrections and clarifications at paragraphs 74 and 77 of their submissions do not seem as egregious as the others discussed below. Further, the response to the particular undertakings seem prima facie responsive if the submissions have framed the requests accurately.

[101] The Appellants’ clarification regarding the cheques at paragraph 81 of their submissions is possibly a failure to fulfill their undertakings in the first instance. Their mistake described at paragraph 84 seems less blameworthy, though it is a significant misdirection.

[102] The Appellants’ pleadings describe the nature of its products as a “business risk” and then continue to plead an external investor was sought out for a number of reasons.[82] These paragraphs are grouped under the heading “Fitter International’s Business Needs”, which go directly to the Appellants’ purported purpose of entering into the transactions. This is logically relevant to allegations of sham, as well as if there were a bona fide non-tax purpose in the context of GAAR. The Appellants do not provide a substantive basis for the assertion that the requests for insurance related information are disproportionate.[83] Therefore, relevance is the driving factor and the Court allows the request.

[103] The Appellants refused the Respondent’s requests for correspondence between the Appellants, Bob, the relevant corporations, TNT, and Doug, inter alia, on the basis that the requests were irrelevant, overbroad, and disproportionate.[84] However, many of the Respondent’s requests pertain the correspondence between specific parties named in the pleadings in a defined time period.[85] These requests are relevant and seem appropriately limited in scope given the decisions of Burlington TCC 2017, Total Energy Services Inc., and MP Western Properties Inc. However, other requests of the same nature target HLH LLP and “others at HLH LLP.”[86] These requests seem overbroad in the sense that HLH LLP is a limited liability partnership and requests for correspondence from unnamed persons seems too vague and overbroad.[87] Finally, the request for correspondence in “whatever form”[88] also seems overbroad, but any requests made for correspondence in this section with a method of specificity otherwise appear prima facie relevant.

[104] The Appellants cite GLP NT Corp. v. R, 2004 TCC 738 at paras 55-63 to argue Margaret should not be compelled to disclose whether she received any of the information in the TNT brochure prior to entering into the transactions on July 31, 2017. With respect, the GLP NT Corp. excerpt does not support such a conclusion. In the GLP NT Corp. excerpt, the Court refused to compel the Respondent to access a third party’s tax information to confirm the total dividends the appellant received, and to compel the Respondent to opine on the actual fair market value of shares.[89] These requests seek disclosure of third party information and legal analysis, whereas the question the Respondent asks is a factual one that goes to the heart of the intention and due diligence elements of sham concerning a document.

[105] The Respondent is correct in stating that the request for the August 17, 2017 phone records is clearly relevant since whether or not the phone call occurred is directly relevant to the sham issue. The question is whether the request is overbroad or disproportionate. A request for call records pertaining to a single day is not disproportionate or overbroad, particularly when the record may inform the Appellants’ credibility and a key factual finding.

[106] The Respondent’s request pertaining to the flow of Felesky Flynn LLP trust funds is relevant, the question is whether it is subject to privilege.

[107] There is a certain level of fog around what has been produced in the context of privileged information: by whom, concerning what and to what degree. The Court will put a pin in this, aspirationally at least, once and for all.

[108] If Bob’s correspondence between the Appellants exists and has not been produced, it shall be. The same holds for Bob’s representational discussions, negotiations and liaisons with TNT, the Midnight Group and all related parties, who are not legal counsel, namely Felesky Flynn LLP.

[109] Court claims, demands and settlements related to product liability claims are relevant, material and invocative of the Appellants’ justification for the transactions, by their own hand and word. They are properly compellable.

[110] Similarly, correspondence, save for privileged correspondence between counsel and client is relevant in the circumstances of these appeals. On the issue of the TNT and related brochures, the questions concerning receipt of referenced enumerated materials is relevant, as a direct question. The Appellants present view and interpretation of never previously reviewed material is not.

[111] The phone records of Bob corresponding to the timeframe of the purported April 17, 2017 meeting is relevant only to the extent of whether such meeting occurred. To that extent, there is no basis for withholding them.

[112] To avoid slippage betwixt hand and mouth, the Court repeats and directs:

a) Where a document is sought that does not exists, counsel shall clearly say that as a representation on the record;

b) Where privilege is claimed, it shall be clearly stated, asserted and, where upheld as such by this Court, redacted minimally with the copy produced without further reticence; and,

c) Clarifications, corrections and modifications designed to correct errors, remediate oversights and comply with continuous disclosure shall be made fulsomely, clearly and without equivocation.

[113] As regard such corrections or clarifications to undertaking responses provided in paragraphs 170-171 of the Appellants submissions in order to correct “typos” or “supplement existing responses” to undertakings, the consequences of same shall be borne out. It is unclear why, in the case of the clarifications, the Appellants provided deficient answers in the first instance. The Court has reserved on costs to the trial judge. The Respondent will undoubtedly raise this point at the approximate time should circumstances warrant.[90]

CATEGORY C – the representations the transacting parties (and their representatives) made regarding the transactions at issue in these appeals, and their purpose(s) for entering into those transactions

The Specifically Applicable Law

[114] One of the factors that can inform the Court of the objective reality of the impugned arrangements in the context of sham is the parties’ stated goals and reasons for entering into the transactions, while another is the Appellants’ due diligence in evaluating and participating in the transactions.[91] The deceit in a sham context can be evident from looking at both how the transactions were constructed and how they were conducted.[92] Does the objective reality of action match the subjective record or narrative? Evidence to conclude there was deceit can often be circumstantial.[93]

Analysis

[115] No clear authority exists concerning whether it is inappropriate to look at evidence arising after the conducting of impugned transactions to determine an Appellant’s stated goals or due diligence. Neither party cites any authority for their respective positions on this issue. There is nothing attaching privilege or any other sort of protection to Bob’s correspondence with the Appellants during the audit, save where he acts as agent or conduit for otherwise privileged communication. Since intention to deceive is central to the sham analysis, the Court concludes the requests for information in Category C are relevant and directs they be answered, save where the questions leach into privileged information, which, even then, may only be redacted minimally as directed above.

CATEGORY D – the Appellant’s refusal to disclose their legal positions with respect to various matters in the issue in these appeals

The Specifically Applicable Law

[116] Documents prepared by the Minister or considered by officials in the context of a taxpayer’s audit may be disclosable in a GAAR appeal as they inform the Minister’s mental process leading up to an assessment and reflect the Minister’s understanding of the policy at issue.[94] Further, files reviewed by a person to prepare for an examination for discovery are prima facie relevant.[95]

[117] The textual, contextual, and purposive interpretation of ITA provisions for the purpose of discerning their underlying policy is essentially a question of law.[96] In GAAR cases, the Minister must provide the disputed policy set out in the Minister’s pleadings,[97] and the taxpayer should be entitled to proceed along a train of inquiry related to that policy that the Minister considered or relied on in making the GAAR assessment.[98]

Analysis

[118] The Appellants’ legal view or position or legal effect of specific documents, as mentioned previously, is a blessing and a curse for the Crown. To assert sham, the Respondent has formed legal conclusions regarding the effect, or lack thereof, of such documents. The possibly fay; in both senses of the word, responses of the Appellants will all be before the Court at trial. Compelling an opinion, particularly of the legal effect from a layperson, is not the purpose of discovery. The circumstances are relevant. The documents are not overly layered, complex or mysterious. Generally, they speak for themselves. The real question is “whether the Appellants really meant them to have legal effect or… did you have your fingers crossed?” A receipt for a cheque is just that. Repeated questions will not alter the character or ostensible effect.

[119] Despite the Respondent’s submissions, the imposition to provide a GAAR policy is only on the Minister as a matter of fairness.[99] There is no authority to suggest the taxpayer has a similar burden to generate and disclose a GAAR policy rationale pertaining to the ITA provisions at issue. If the Appellants make the relevant disclosures under Category A, i.e. clearly identifying the relevant transactions and their descriptions, the legal position of the Appellants is clear both as it pertains to the transactions specifically, and in the context of GAAR. The Respondent’s requests for the Appellants’ GAAR policy amounts to a request for the Appellants’ legal opinion, which it does not need to disclose.[100] The Appellant’s opinion on GAAR is irrelevant.

[120] However, to the extent Bob provided the Appellants with his GAAR opinion or perspective on certain provisions of the ITA, there is no reason that such correspondence is protected for similar reasons to those provided in the Category C, above.

B. Appellants’ Motion to Compel (May 15^th)

CATEGORY A1 – the entities, individuals, trusts and corporations that make up the Midnight Group

The Specifically Applicable Law

[121] A “fishing expedition” is an indiscriminate request for production in the hope of uncovering useful information.[101]

[122] In Paletta, the Respondent was required to produce documents provided to auditors from other offices of the CRA in an attempt to ensure that the CRA assessed in a consistent manner.[102] The Court held the documents clearly related to the issues in the appeal and the auditor reviewed the documents to varying degrees – the question of whether or not she relied on them in developing her assessing position was not a deciding factor.[103] The Court ordered taxpayer that names in those documents be redacted.[104]

[123] In Thompson, the Court held there was no indication that the auditor either accessed or relied on the position papers which were prepared by other CRA offices regarding other taxpayers and the subject of disclosure requests.[105] The Court distinguished this case from Paletta, where the auditor had significant interactions with other CRA offices and had relied on positions developed in another office.[106] There needs to be a sufficient link between the transactions involving the other taxpayers and the appellant to make the line of inquiry relevant to the issue at hand.[107] The case was also in the context of sham, and the Court refused to order the production of documents outlining the transactions involving ODL (analogous to Midnight Group) and other taxpayers.[108]

[124] In Coopers Park, the Court considered Paletta and reiterated that “reliance” is not the test for “relevance” and that consideration of documents in the context of an audit was sufficient to make them relevant for the purposes of discovery.[109] The Court held that, subject to the redaction of all information identifying the third parties, documents pertaining to the unrelated taxpayers were disclosable as they were in the electronic audit file and the auditor read them.[110]

Analysis

[125] The documents and information requested, at least prima facie, are the genesis of the Minister’s formulation of a file theory and approach to reassess consequential transactions where taxpayers, by the Minister’s own assertions and/or assumptions, engaged with the Midnight Group. The documents requested pre-date and are referential to reassessments of this nature. This seeds relevance, even if reliance was remote, unnecessary or “studiously avoided” in drafting the pleadings.

[126] The non-production of these documents risks an incomplete picture of the Minister’s foundational landscape of assessment. The Appellants are entitled to know that landscape if they have a balanced hope of meeting the case. It is the information, analysis and conclusions the Appellants are entitled to, not the names, identities or specific roles of the CRA agents.

[127] The Court directs that the requested documents be produced, subject to appropriate and suitable redaction to protect personal information and protected proprietary and privileged information.

CATEGORY A2 – names and addresses of persons who might reasonably be expected to have knowledge of the transactions in issue

The Specifically Applicable Law

[128] Subsection 95(4) does not entitle taxpayers to contact information of every person who had any connection with their file no matter how remote.[111] In Roseland Farms Ltd v. Canada, the Court ordered the appellant to disclose the identity of shareholders of a trust and production of the trust deed despite arguments that the Department of National Revenue already had the information.[112] Questions that deal with publicly available documents, the appellant’s own documents, or answers that are within the knowledge of the appellant may be irrelevant and thus not producible.[113]

Analysis

[129] The Court’s direction on this point is similar to its response in Category D above. There is no person on the list requested unknown to the Appellants. What the Appellants press for is the desire to know the Minister’s conclusions regarding the TNT structure. To the extent there exist additional documents or persons, those items are producible. However, that is not the request. The request effectively desires a reveal of the connection among persons and information related to TNT which informs the Minister’s legal conclusions.

[130] The Appellants, and more importantly their counsel, are more than equipped to understand such legal conclusions of the Minister related to persons and documents which are, after all, more proprietary to the Appellants than the Minister.

[131] The Court will direct that the Respondent simply confirm there are no other persons beyond those previously identified whom the Minister concluded were involved with TNT or the Midnight Group.

CATEGORY A3 – other TNT files the Minister reviewed as part of the group audit

The Specifically Applicable Law

[132] The applicable law is similar to the law outlined above concerning Category A1 (entities that comprise the Midnight Group). The crux of the issue is whether the Respondent must disclose information about third parties mentioned in the pleadings. The cases above cover “group audits” or files the CRA treats in a consistent fashion, at least partly.

Analysis

[133] The Minister need not divulge the names or identifying details of other taxpayers under audit or appeal and for which there is no public proceeding and record. That said, the non-identifying details in relation to documents forming the basis for (re)assessment approaching the general analysis of Midnight Group type matters may be relevant and referential, even if not directly replied upon in the public pleadings.

[134] Therefore, the Court will direct that appropriately redacted portions of relevant analyses be provided to the Appellants. Precise and specific names, identities and granular, identifying particularities of transactions are not relevant for the Appellants to know and otherwise meet the case against them. As such, they may be redacted.

CATEGORY A4 – Minister’s audit of the Midnight Group

The Specifically Applicable Law

[135] In Superior Plus, the Court refused to order production of an internal Department of Finance (“DoF”) document or for other internal DoF documents in the same file because they were not relevant to the appeal.[114] The Court presumably accepted the Respondent’s argument that the document was never shared with the CRA and that it already produced all DoF correspondence addressed to the GAAR Committee.[115] The Respondent also refused to make further inquiries for internal DoF communications that did not arise in the context of the taxpayer’s audit or that were not considered by officials engaged in the taxpayer’s audit.[116]

[136] In Paletta, the Court required disclosure of information gathered by different CRA auditors about parties other than the taxpayer because the taxpayer’s auditor worked on the audit with the help of other CRA officials.[117] It appears the Respondent may have succeeded in arguing that other information possessed by the CRA was irrelevant had the auditor not relied on other officials.

[137] In Thompson[118], the Federal Court of Appeal partially overturned this Court, which had ordered the Respondent to produce documentation in its possession that it had objected to on the basis that it was not considered by anyone involved in the taxpayer’s audit.[119] The Federal Court of Appeal distinguished Paletta on the basis that the auditor in that case had relied on other CRA officers and there were issues other than sham at play.[120] However, in Thompson, the Federal Court of Appeal stated that it was far from clear how a statement by another taxpayer that there was a sham would assist the taxpayer or damage the Respondent’s case.[121] If requested documents are in the auditor’s files or considered in the relevant audit, then the relevance is established, otherwise relevance must be established in another way.[122] In Thompson, the taxpayer failed to identify a sufficient link between the transactions involving other taxpayers and their own file, making the line of questioning a fishing expedition.[123]

Analysis

[138] To the extent there is need for the Appellants to identify linkages and multiple bases of assessment in order to compel the answers, that need has been met. The assertion that other analyses were not considered by the Minister’s auditors concerning the Appellants is possible, but not necessarily more likely than not. The probable existence of such recorded information gives life to the conclusion it was employed to some degree. The only real way for the Appellants to know is to see the analyses, again redacted for personal, identifying and proprietary information. Repetition may also be avoided in production provided an appropriate reassurance is given by way of representation.

[139] This is not a baseless connection by the Court. The presence in each reply at the very outset of the references to the Midnight Group, its objects and profligacy concerning these alleged shams or GAAR transactions is a marquis of pre-existing analyses, research and knowledge by the Minister. This raises relevance by the Respondent’s own hand. The co-existence in the pleadings of alleged sham and engagement of GAAR, which are broad and diverse bases of assessment, militate towards subsisting and relevant collateral analyses and research.

[140] Therefore, the Court will direct that the Minister, as stated, produce appropriately redacted and protected versions of such documents.

CATEGORY A5 - Promoter Compliance Centre’s files for the Midnight Group, TVT, and other related taxpayers

The Specifically Applicable Law

[141] In Page, the Court ordered the disclosure of documents concerning third party taxpayers that may have influenced the decision of the Crown respecting the Appellants’ director’s liability.[124] It is important to note that the issue in Page was director’s liability and both the assessed taxpayers and the third parties were directors of the same corporation at the same time. Therefore, the actions of one could have a direct impact on the liability of another. Such facts are distinguishable from these appeals.

[142] The paramount issue in any tax appeal is the validity of the assessment and not the process by which it is established.[125] Wrongful conduct by an official is not relevant to the determination of the validity or correctness of an assessment.[126] Questions related to the audit process would not be part of a proper train of inquiry during the examination for discovery as it is the validity of the assessment that is in issue, not the process by which it is established.[127]

[143] Draft documents prepared by the Minister or considered by officials in the context of an audit are not normally producible, but may be producible in a GAAR context as they inform the Minister’s thought process leading up to an assessment and reflect the Minister’s understanding of the policy at issue.[128] Although not judicially considered, the same cognitive formulation may be concluded in an alleged sham arrangement.

Analysis

[144] Again, the challenge for the Minister in these appeals is the co-existence of the GAAR and sham bases for assessment. The validity of a GAAR assessment is dependent upon the Minister’s formulation of the abuse or misuse of the Act, including of course the steps of the transaction(s), policy intentions behind the Act and the sections themselves. The Minister’s determination of sham imbeds itself in a theory of ruse and pretense. The Appellants are entitled to know the foundational and embryonic formulation of such spectral opposite conclusions, all importantly to meet the case at trial.

[145] On a constrained basis, the Court will direct that relevant portions of documents containing analyses and conclusions by the Minister’s agents at the PCC concerning the “Midnight Tecate Scheme” be produced. Again, this redaction may be carried out generously to remove identifying, proprietary, privileged and irrelevant considerations.

CATEGORY A6 – Minister’s knowledge of the Midnight Group’s pleaded “tax arbitrage opportunities”

The Specifically Applicable Law

[146] The relevant law for this section has been discussed above as it pertains to disclosure about the Midnight Group or any third parties.

Analysis

[147] Relevance in this group of questions is critical. Simply, the Minister is required to produce its understanding and analysis of the relevant “opportunities” and “strategies”. Logically, the foundational pleadings and the replies do all of that. The Appellants and any judge alike must weigh and value the assumptions and assess the case to be met through the prism of such concepts in the pleadings.

[148] Further, these descriptions in the reply are generic and broadly worded; how do they fit into sham and/or GAAR? Logically, one need not speculate too far to conjure critical questions regarding the asserted “opportunities” and “strategies”: how many, how devious, how serious and how deployed? These questions are begged by the Respondent’s pleadings, no-one else’s. Situated as preamble overtures in the replies, frankly, features rather than diminishes such salvos.

[149] The Respondent shall provide a description of the “strategies” and “opportunities” considered and a description by list of those ignored and irrelevant.

CATEGORY B1 – questions about the Minister’s review and knowledge of transactions and entities raised in the Reply

The Specifically Applicable Law

[150] The relevant law for this section is already discussed several times above as it pertains to disclosure about any third parties.

Analysis

[151] As described above, a redacted description of relevant “transactions” is to be provided.

CATEGORY B2 – questions requesting the Attorney General’s legal position on sham and window dressing, including the authenticity of documents

The Specifically Applicable Law

[152] Questions relating to a party’s legal position at trial should be answered unless the question is inquiring into the evidence or the reasoning that may support those relevant facts or the opposing party’s legal research.[129]

[153] The broad right to discovery of the GAAR policy relied on by the Minister does not extend to legal argument in support of the existence of the policy and its application to the taxpayer’s transaction.[130] A party may not use discovery to question an opposing party as to which of the documents on record will be relied on for which legal arguments.[131] A question seeking proof of a legal position is improper.[132]

Analysis

[154] This request is easily answered. The Minister may simply list which transactions, if not all, it seeks to establish are sham. Sham is fraud. Fraud allegations are not a question of subjective belief by a third party. Fraud and pretense exist with the purported executors of documents and doers of action. The Minister has, and must have, some view of where the fraud lives: certain documents and actions, certain step(s), collateral arrangements and/or the result in toto. The Minister needs to provide some specificity regarding his theory. The evidence of which documents are probative of the sham is not required. Some answers are required.

CATEGORY B3 – questions regarding the Attorney General’s GAAR position

The Specifically Applicable Law

[155] In the context of GAAR, draft documents prepared by the Minister or considered by officials in the context of a taxpayer’s audit should be disclosed as they inform the Minister’s thought process leading up to a GAAR assessment and reflect what the Minister understands of the policy at issue.[133]

[156] Additionally, it may well be incumbent on the Minister to set out the disputed policy in the Minister’s pleadings as a matter of fairness.[134]

[157] In CHR Investment, the Federal Court of Appeal held that “it would be appropriate at the discovery examination to ask questions intended to clarify the Minister’s current position on the applicable rationale.”[135] The documents are correspondence between officials at CRA and DoF, sought to determine if such officials expressed an opinion on the rationale of the applicable provisions inconsistent with or in conflict with the current position of the Respondent.[136] While the Minister’s or Respondent’s interpretation of the rationale may change over time, the position set out in the reply is the one at issue unless a different rationale is proposed before then.[137] The Federal Court of Appeal states that the position at issue will be “what was Parliament’s rationale of the provisions in issue, not what was the Minister’s or the Respondent’s rationale of these provisions at any particular point in time [sic].”[138]

Analysis

[158] The Minister needs to revisit this issue. GAAR is a reassessment process uniquely initiated by the Minister based upon the Minister’s view of the object, spirit and purpose of the identified abused sections. To meet and challenge that view, the Appellants must know the basis of both, fulsomely and unequivocally. In a way, the Minister must proclaim it. From a policy perspective, allowing the Minister a pass feeds the argument that taxpayers cannot ever anticipate, know or approach knowledge or applicability of the GAAR.

[159] Therefore, the Court will direct the Minister to revisit these questions and provide a more fulsome exploration of the object, spirit and purpose of the abused section.

CATEGORY B4 – other questions requesting the Attorney General’s factual or legal position

The Specifically Applicable Law

[160] Paragraphs 49(1)(a) to (c) of the Tax Court of Canada Rules (General Procedure) require that a reply to a notice of appeal state the facts in the notice of appeal that are admitted, the facts that are denied and the facts of which the respondent has no knowledge and puts in issue.

…

Rule 49(2) deems all allegations of fact contained in a notice of appeal that are not denied in the reply to be admitted unless the respondent pleads that she has no knowledge of them.”[139]

Analysis

[161] The Respondent’s view or position on product liability claims is not material to the contested material facts or issues in dispute. The relevant issue is whether their existence, threat and degree influenced the Appellants’ corporate reorganization. Similarly, the Respondent’s interpretation of the USA, particularly given it never subsisted as an operational legal document for more than a few days, is also not material to the factual basis of the reassessments relating to sham and GAAR. These requests need not be answered by the Respondent.

PART TWO – LEAVE TO AMEND REPLIES

[162] The parties’ positions concerning the contested new paragraph 19 to the replies are summarized below. The proposed amended paragraph 19 appears at the outset of these reasons in paragraph 26.

The Specifically Applicable Law

[163] The parties are required to plead concisely and fully, and parties are not permitted to withdraw admissions of historical fact.[140] In Goldman Holdings, the Court denied the Minister’s motion to delete an assumption from her pleadings that the appellant’s partnership held an 80% interest in real property. In its decision, the Court relied on the Loewen[141] decision of the FCA, which held that it is the Crown’s obligation to ensure the assumption paragraph is clear and accurate. The respondent argued that, based on Canderel, amendments should generally be permitted, and the court should consider whether the amendment was made due to an inadvertence or error in the original pleading. However, the Court rejected this argument, as the assumption made by the appeals officer was not a “slip” or inadvertent or typographical error. Rather, it went to the heart of the issues to be decided in the appeal.

Analysis

[164] The Minister is not attempting to delete an assumption relied upon in assessing the Appellants. In fact, deleting the assumption is prima facie consistent with one theory of the case and reassessment: sham. However, greater clarity could be achieved and the Appellants’ arguments on that point are well placed. Amendments should not settle fog upon the issues to be decided. As drafted, clarity and accuracy are absent. The Minister may have the benefit of an amendment of this nature to the replies provided the revisions are clearer and more exact in achieving these stated goals. In short, the withdrawal of the assumption should particularize within the Minister’s pleaded understanding, whether:

1. no one or someone, and if so, who, retain(ed) Felesky Flynn LLP?; and,

2. Felesky Flynn LLP received funds or not, and if so, what amounts, from whom and in what capacity: in trust, beneficially, agent, etc.?

[165] The Court is confident and anticipates the parties can resolve this inter se, failing which the Court will re-enter the fray.

C. Conclusion and Costs

[166] Generally, the results of the motions are mixed. As such, the Court will not award costs, but reserve that for any trial judge in the context of a final costs order, with obvious opportunity for any party to reference these motion reasons and results at such time.

Signed at Ottawa, Canada, this 18^th day of December, 2024.

“R.S. Bocock”

 

CITATION:	2024 TCC 164
COURT FILE NOs.:	2021-2270(IT)G 2021-2269(IT)G
STYLE OF CAUSE:	MARGARET STACK and LOUIS STACK v. HIS MAJESTY THE KING
PLACE OF HEARING:	Toronto, Ontario
DATE OF HEARING:	May 13 and 15, 2024
REASONS FOR ORDER BY:	The Honourable Justice Randall Bocock
DATE OF ORDER:	December 18, 2024

APPEARANCES:

Counsel for the Appellant:	Kristen Duerhammer Justin Kutyan Marta Porodko
Counsel for the Respondent:	Alexandra Humphrey Amin Nur Caroline Ahn

COUNSEL OF RECORD:

For the Appellant:

Name:	Kristen Duerhammer Justin Kutyan Marta Porodko
Firm:	KPMG Law LLP Toronto, Ontario
For the Respondent:	Shalene Curtis-Micallef Deputy Attorney General of Canada Ottawa, Canada