Citation: 2014 TCC 58
Date: 20140220
Docket: 2012-1452(IT)G
BETWEEN:
FIO CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
D’Arcy J.
[1]
The Appellant has
brought a motion for an order of this Court vacating the October 10, 2012
reassessments of the Appellant’s 2007, 2008 and 2009 taxation years, directing
the Minister of National Revenue and/or the Attorney General of Canada to pay
$100,000 to the Appellant as “punishment for her/their contempt of this Court”
and awarding the costs of this motion on a full indemnity basis.
[2]
This issue before the
Court is whether the Minister breached the “implied undertaking rule” by using
information obtained by the Respondent in the course of pre-trial discovery
proceedings to reassess the Appellant.
Outline of
Facts
[3]
The Minister reassessed
the Appellant on March 2, 2011 and March 11, 2011 for its 2007 and 2008
taxation years respectively (the “First Reassessments”). The Appellant filed a
notice of appeal from the First Reassessments with this Court on April 12,
2012.
[4]
The Appellant disagrees
with the Minister’s decision to disallow a portion of the amounts claimed by
the Appellant for its 2007 and 2008 taxation years as eligible scientific
research and experimental development expenses (“SR&ED”).
[5]
On the same day that
the Appellant filed its notice of appeal with the Court, the Appellant provided
the Respondent’s counsel (the Department of Justice) with the following
documents:
-
A copy
of the Appellant’s notice of appeal
-
Its
list of documents (partial disclosure)
-
Seven
binders containing the 260 documents noted in its list of documents
-
A
Request to Admit
-
An annotated Request to
Admit.
[6]
The letter sent with
those documents states in part:
Please
find enclosed a copy of the appellant’s notice of appeal, list of documents, a
copy of the documents in the list of documents, a request to admit and an
annotated request to admit. This package has been prepared with the goal of
minimizing time and cost in resolving this appeal. To this end, we ask that a
meeting be arranged with a CRA officer able to instruct DOJ counsel as quickly
as possible with the hope of reaching a settlement. Scheduling a settlement
meeting at this early stage will save the DOJ the time and expense of preparing
a reply, a list of documents, and answers to the request to admit.
[7]
On April 26, 2012, the
Respondent’s counsel served responses to the Appellant’s Requests to Admit.
[8]
On May 7, 2012, the
Court served the Appellant’s Notice of Appeal on the Deputy Attorney General of
Canada.
[9]
On May 28, 2012, the
Appellant filed its list of documents (partial disclosure), which had
previously been provided to the Respondent’s counsel, with the Court.
[10]
The Appellant filed
with the Court and served on the Respondent’s counsel supplementary lists of
documents on August 20 and 30, 2012. The Appellant’s counsel provided copies of
the listed documents to the Respondent’s counsel on the same dates.
[11]
On July 4, 2012, the
Respondent filed and served her reply.
[12]
On October 9, 2012, counsel
for the Respondent informed the Appellant’s counsel that their client, the
Canada Revenue Agency (the “CRA”), intended to reassess the Appellant’s 2007
and 2008 taxation years.
[13]
On October 11, 2012,
counsel for the Respondent provided the Appellant’s counsel with a copy of a
letter from the CRA to the Appellant dated October 5, 2012, in which the CRA
states that it is reassessing the Appellant’s 2007 and 2008 taxation years.
[14]
On or about October 12,
2012, the Minister issued reassessments in respect of the Appellant’s 2007,
2008 and 2009 taxation years (the reassessment with respect to the Appellant’s
2009 taxation year is a “consequential adjustment”). I will
refer to these reassessments as the “Second Reassessments”.
[15]
Counsel for the
Respondent admitted that the Minister based the Second Reassessments, at least
in part, on documents that she obtained for the first time in the course of
pre-trial discovery, specifically, documents that were included in the
Appellant’s List of Documents and provided to counsel for the Respondent on
April 12, 2012
(the “Discovery Documents”).
Implied Undertaking Rule
[16]
The leading decision on
the implied undertaking rule is the recent decision of the Supreme Court of
Canada, Juman v. Doucette, 2008 SCC 8, [2008] 1 S.C.R.
157 (“Juman”). Justice Binnie stated the rule as follows at paragraph 4:
Thus
the rule is that both documentary and oral information obtained on discovery,
including information thought by one of the parties to disclose some sort of
criminal conduct, is subject to the implied undertaking. It is not to be used
by the other parties except for the purpose of that litigation, unless and
until the scope of the undertaking is varied by a court order or other judicial
order or a situation of immediate and serious danger emerges.
[17]
He noted that there are
two good reasons for the rule.
The first reason is the invasive nature of pre-trial discovery. The Supreme
Court explained this reason as follows at paragraphs 24 and 25:
In
the first place, pre-trial discovery is an invasion of a private right to be
left alone with your thoughts and papers, however embarrassing, defamatory or
scandalous. At least one side in every lawsuit is a reluctant participant. Yet
a proper pre-trial discovery is essential to prevent surprise or “litigation by
ambush”, to encourage settlement once the facts are known, and to narrow issues
even where settlement proves unachievable. [. . .]
The
public interest in getting at the truth in a civil action outweighs the
examinee’s privacy interest, but the latter is nevertheless entitled to a
measure of protection. The answers and documents are compelled by statute
solely for the purpose of the civil action and the law thus requires that the
invasion of privacy should generally be limited to the level of disclosure
necessary to satisfy that purpose and that purpose alone. . . . The
general idea, metaphorically speaking, is that whatever is disclosed in the
discovery room stays in the discovery room unless eventually revealed in the
courtroom or disclosed by judicial order. [Emphasis added.]
[18]
The second reason is
the need for complete and candid discovery. As explained by the Supreme Court
of Canada at paragraph 26:
There
is a second rationale supporting the existence of an implied undertaking. A
litigant who has some assurance that the documents and answers will not be used
for a purpose collateral or ulterior to the proceedings in which they are
demanded will be encouraged to provide a more complete and candid discovery. This
is of particular interest in an era where documentary production is of a
magnitude (“litigation by avalanche”) as often to preclude careful
pre-screening by the individuals or corporations making production. [. . .]
[19]
This Court has held on
numerous occasions that the implied undertaking rule applies to pre-trial
discovery under the Tax Court of Canada Rules (General Procedure) (the “Rules”).
Position of the Appellant
[20]
Counsel for the
Appellant argued that the appeal of the First Reassessments commenced on April
12, 2012, the date the Appellant filed the Notice of Appeal with the Court.
[21]
The Appellant argued
that the Respondent breached the implied undertaking rule when the CRA used
documents provided in the course of discovery to issue the Second Reassessments.
It is the Appellant’s position that the Second Reassessments are a separate
proceeding from this appeal.
[22]
Counsel argued that
there would be a tremendous litigation chill in this Court if the CRA were
permitted to use documents provided on discovery to reassess an appellant. She
noted that such behaviour would significantly prolong the appeal process, since
an appellant who is reassessed will be required to file a new notice of appeal
and endure a second discovery. This would result in additional cost and delay.
[23]
She put forward the
proposition that, if the Court allows the Minister’s conduct to stand, the Minister
can effectively delay a dispute ad infinitum by reassessing, and that such a
situation would undermine the role of this Court and the administration of justice.
Position of the Respondent
[24]
The Respondent put
forward several different arguments to support her position, however, counsel
for the Respondent noted that the centrepiece of her argument is the fact that
the relationship between the Minister and the taxpayer is a different
relationship than that of normal litigants. Because of this relationship, the
implied undertaking rule does not apply to the Minister in the fact situation
before the Court.
[25]
Counsel noted that the
relationship arises from a number of factors, including an appellant’s
obligation, under the Income Tax Act, to maintain the information required for
determining its liability and to produce such information to the Minister, and
the Minister’s obligation under subsection 220(1) of the ITA to assess a
taxpayer. Further, the Minister has a duty to assess what she believes is the
correct amount given the information in her possession, and is authorized under
the ITA to assess even after a tax appeal has been initiated.
[26]
It is the Respondent’s
position that while the implied undertaking rule may apply to the Minister in
certain situations, it does not apply to the Minister when the taxpayer
provides the information in the course of discovery, and the Minister uses the
information to reassess the taxpayer with respect to the same issue and the
same taxation year.
[27]
The Respondent also
argued that section 241 of the ITA provides a complete code governing
how the Minister can use a taxpayer’s information. In effect, it overrides the
implied undertaking rule.
[28]
She also focused on the
Court’s use of partial disclosure in its discovery proceedings and the low
expectation of privacy that a taxpayer has, vis-à-vis the Minister, with regard
to its tax records.
[29]
Counsel for the
Respondent raised one “preliminary” issue. She argued that the implied
undertaking rule does not apply since the Appellant voluntarily provided the
documents to the Respondent on April 12, 2012. It is the Respondent’s position
that the Appellant’s appeal had not commenced at that point in time.
[30]
In the alternative, the
Respondent requests that she be provided with an opportunity to seek relief if
I find that she breached the implied undertaking rule.
Application of the Law to the Facts
[31]
I will first address
the preliminary issue.
[32]
With respect to when
the proceedings commenced, it is my view that the Appellant’s appeal commenced
on April 12, 2012, the day the Appellant filed its notice of appeal with the
Court.
[33]
This result is clear
from section 17.2 of the Tax Court of Canada Act. Subsection
17.2(1) of the TCCA states: “. . . a proceeding in respect of which this
section applies shall be instituted by filing an originating document in
the form and manner set out in the rules of Court. . . .”
[34]
Subsection 17.2(2) of
the TCCA provides that “[a]n originating document is deemed to be filed
on the day on which it is received by the Registry of the Court.”
[35]
The Appellant filed a
proper notice of appeal with the Registry on April 12, 2012. Pursuant to
subsection 17.2 of the TCCA, the Notice of Appeal was filed on that date
and the Appellant’s appeal was instituted on that date.
[36]
I do not accept the
Respondent’s argument that the appeal only commenced on May 7, 2012, the day
the Court served the Notice of Appeal on the Respondent. While the TCCA
provides that the Court shall serve the Notice of Appeal on the Respondent, there
is nothing in the TCCA or the Rules that would suggest that the
proceedings are held in abeyance until the Court serves the notice of appeal. In
fact, subsection 17.2(3) of the TCCA specifically refers to the Court
serving the notice of appeal on the Respondent after the proceedings have been
initiated.
[37]
Further, it is clear
from the Appellant’s April 12 letter to the Respondent’s counsel that
the Appellant had commenced an appeal in this Court.
[38]
The Respondent acted as
if the proceedings had commenced on April 12, 2012. On April 26, 2012, the
Respondent’s counsel served responses to the Appellant’s Requests to Admit.
[39]
In summary, the
Appellant did not voluntarily provide its list of documents and the noted
documents to the Respondent on April 12, 2012. It provided them pursuant to the
Court’s rules for discovery. The fact that the Appellant provided the documents
early on in an attempt to expedite the proceedings through a settlement did not
result in the disclosure of the documents being voluntary.
[40]
Having found that the
Respondent obtained the Discovery Documents on April 12, 2012, in the course of
discovery, I must determine whether the Respondent used those documents for a
purpose “other than securing justice in the civil proceedings in which the
answers were compelled . . . .”
[41]
It is clear to me, as a
question of fact, that the Respondent used the Discovery Documents for another
purpose when she used them to reassess the Appellant.
[42]
The Appellant provided
the Discovery Documents to the Respondent in the course of the discovery with
respect to its appeal from the First Reassessments. Those civil proceedings
involve an appeal under section 169 of the ITA. The result of such an
appeal is a judgment of the Court which in effect binds the Minister and the
Appellant (subject to their respective appeal rights).
[43]
Under the ITA,
the Appellant has a number of options with respect to the Second Reassessments:
it may file a notice of objection, immediately appeal the Second Reassessments
to the Court, or amend the appeal in respect of the First Reassessments by
joining thereto an appeal in respect of the Second Reassessments.
[44]
Regardless of the steps
the Appellant takes, the Second Reassessments gave rise to new litigation.
[45]
I will now consider the
Respondent’s main argument that the implied undertaking rule does not apply to
the Minister in the fact situation before the Court.
[46]
I do not agree with
this argument.
[47]
The Respondent has
previously relied on the implied undertaking rule in this Court. She now
appears to be arguing that, while that rule applies to the Appellant, it only
applies to the Respondent in limited circumstances.
[48]
I cannot accept an
argument that provides more favourable treatment to one of the parties before
the Court.
[49]
In my view, the
Respondent’s argument defeats the purpose of the implied undertaking rule. She
is arguing that the Court should grant the Minister a permanent exclusion from
the implied undertaking rule to allow the Minister to use any information she
obtained from an appellant during a discovery to reassess the appellant. Clearly,
if the Court were to grant such a permanent exclusion, appellants would be
hesitant to come to this Court and disclose documents and provide answers to
the Respondent.
[50]
The Respondent, like
all parties before the Court, is subject to the implied undertaking rule. Once
the Appellant provided the Discovery Documents to the Respondent in the
course of discovery, there was an undertaking by the Respondent to the
Court not to use the information for any purpose other than the appeal.
[51]
Counsel for the
Respondent noted that the CRA could have obtained the information in question
during the course of its audit of the Appellant. While such a fact may be
relevant when the Court is considering an application to modify or relieve
against the implied undertaking, it is not a relevant factor when determining
whether the Respondent has breached the implied undertaking. What is relevant
when making such a determination is how the Minister actually obtained the
information in question.
[52]
It appears to me that
most of the Respondent’s arguments do not relate to the issue of whether the
implied undertaking rule applies but rather relate to the issue of whether the
Court should grant leave to allow the CRA to use the Discovery Documents to
reassess the Appellant.
[53]
The Respondent should
have applied to the Court for leave for the CRA to use the Discovery Documents
to reassess the Appellant if she felt that either the Minister’s duty to assess
under the ITA or a specific provision of the ITA (such as section
241) constitutes a statutory override of the implied undertaking rule. Similarly,
she should have applied for leave if she felt that the CRA should be entitled
to use the information because a potential reassessment involved the same
taxpayer, the same issue and the same taxation year.
[54]
Further, the Respondent
should have applied for leave prior to the CRA using the information to
reassess the Appellant. As the Supreme Court noted in Juman at paragraph
30:
. .
. Thus, where the party being discovered does not consent, a party bound by the
undertaking may apply to the court for leave to use the information or
documents otherwise than in the action, as described in Lac d’Amiante,
at para. 77:
Before
using information, however, the party in question will have to apply for leave,
specifying the purposes of using the information and the reasons why it is
justified, and both sides will have to be heard on the application.
[55]
The Respondent appeared
to argue, particularly with respect to section 241, that the statutory
provisions clearly overrode the implied undertaking rule. In other words, since
the Court would automatically grant leave, there was no need to apply for
leave.
[56]
In my view, a court
will never automatically grant leave. The Supreme Court of Canada clearly
stated in Juman that there is no situation where a court should
automatically waive the implied undertaking rule. In fact, that Court
emphasized that the implied undertaking rule should only be waived or modified
in exceptional circumstances. For example, the Court stated at paragraph 38:
As
stated, the onus in each case will be on the applicant to demonstrate a superior
public interest in disclosure, and the court will be mindful that an undertaking
should only be set aside in exceptional circumstances. In what follows I
do not mean to suggest that the categories of superior public interest are
fixed. My purpose is illustrative rather than exhaustive. However, to
repeat, an undertaking designed in part to encourage open and generous
discovery by assuring parties being discovered of confidentiality will not
achieve its objective if the confidentiality is seen by reluctant litigants to
be too readily set aside.
[Emphasis added.]
[57]
Although not needed, I
wish to make an additional comment with respect to section 241 of the ITA.
Counsel for the Respondent spent a significant amount of time arguing that
section 241 permitted the Minister to use the Discovery Documents outside of
the appeal.
[58]
Section 241 is an
administrative provision that is intended to protect the confidentiality of
information given to the Minister by a taxpayer for the purposes of the ITA. Subsection
241(1) establishes a strict prohibition against the use of taxpayer
information. However, subsection 241(4) allows for the use of such information
in numerous situations relating to the effective application of the ITA.
This subsection only provides exceptions to the statutory prohibition contained
in subsection 241(1); it does not override common law rules, such as the
implied undertaking rule.
[59]
The Respondent also
argued that the implied undertaking rule was not meant to apply in this Court
because of the partial disclosure in our discovery proceedings and the low
expectation of privacy that a taxpayer has vis-à-vis the Minister with regard
to tax records.
[60]
The Court’s rules do
not in any way limit or diminish the implied undertaking rule. As the Supreme
Court of Canada noted in Juman at paragraph 20,
The
root of the implied undertaking is the statutory compulsion to participate
fully in pre-trial oral and documentary discovery. If the opposing party seeks
information that is relevant and is not protected by privilege, it must be
disclosed even if it tends to self-incrimination.
[61]
Regardless of whether
they proceed before this Court under the partial disclosure or full disclosure
rules,
the parties are required to disclose documents that are adverse to their
interests.
[62]
For example, the
Court’s partial disclosure rules allow an appellant to, in effect, only
disclose, in the first instance, documents that are favourable to its case.
However, under section 105,
an appellant is required to produce during discovery any document requested by
the Respondent that is in the possession or under the control of the appellant.
Clearly, this would include documents that are adverse to the appellant’s
interest.
[63]
The fact that the appellant
has a low expectation of privacy with respect to its tax records is irrelevant.
The implied undertaking rule applies whether or not the information in question
was confidential.
[64]
As I stated in 506913
N.B. Ltd.,
“A party may raise the privacy issue when seeking leave to have the undertaking
waived; however, privacy is not a condition for the imposition of the
undertaking in the first instance.”
Remedies
[65]
A number of forms of
relief are open to the Court to remedy a breach of an implied undertaking. The
Appellant is asking the Court to remedy the breach by vacating the Second
Reassessments. The Appellant also asks the Court to find either the Minister or
the Attorney General in contempt and to award the Appellant costs of this
motion of a full indemnity basis.
[66]
I will first address
the appropriate remedy to correct the breach. I will then address the
appropriate remedy for the conduct of the Respondent.
Remedy to correct the breach
[67]
I accept the
Appellant’s argument that the Court has the ability, in these circumstances, to
vacate the Second Reassessments.
[68]
The Tax Court of Canada
is the only superior court that has jurisdiction to vacate an assessment. The ITA
sets out certain situations where this Court may vacate an assessment that is
appealed to the Court. As the Federal Court of Appeal noted in Ereiser v. The
Queen,
when an appellant appeals an assessment (or reassessment) to this Court, the
Court should only vacate the assessment if it is found not to be valid or if it
is found not to be correct. The Court of Appeal explained the terms “valid” and
“correct” as follows at paragraph 21:
. .
. I use the term valid to describe an assessment made in compliance with the
procedural provisions of the Income Tax Act, and correct to describe an
assessment in which the amount of tax assessed is based on the applicable
provisions of the Income Tax Act, correctly interpreted and applied to
the relevant facts.
[69]
In my view, there is at
least one other situation where this Court may vacate an assessment. Specifically,
the Court may vacate an assessment under its implied jurisdiction to control
its own process and ensure its proper functioning as a court of law.
[70]
In R. v. Cunningham,
Rothstein J., wrote for the Supreme Court of Canada:
[18] Superior courts
possess inherent jurisdiction to ensure they can function as courts of law and
fulfil their mandate to administer justice (see I. H. Jacob, “The Inherent
Jurisdiction of the Court” (1970), 23 Curr. Legal Probs. 23, at pp.
27-28). Inherent jurisdiction includes the authority to control the process of
the court, prevent abuses of process, and ensure the machinery of the court
functions in an orderly and effective manner. . . .
[19] Likewise in the
case of statutory courts, the authority to control the court’s process and
oversee the conduct of counsel is necessarily implied in the grant of power to
function as a court of law. This Court has affirmed that courts can apply a
“doctrine of jurisdiction by necessary implication” when determining the powers
of a statutory tribunal:
. . . the powers
conferred by an enabling statute are construed to include not only those
expressly granted but also, by implication, all powers which are practically
necessary for the accomplishment of the object intended to be secured by the
statutory regime. . . .
(ATCO Gas and
Pipelines Ltd. v. Alberta (Energy and Utilities Board), 2006 SCC 4, [2006]
1 S.C.R. 140, at para. 51)
Although Bastarache
J. was referring to an administrative tribunal, the same rule of jurisdiction,
by necessary implication, would apply to statutory courts.
[71]
The Tax Court of Canada
is a both a superior court and a statutory court. In my view, in light of the
Supreme Court of Canada’s decision in Cunningham, any statutory limits
placed on the Tax Court’s jurisdiction when disposing of an appeal of an
assessment (or reassessment) do not apply in respect of a breach of an implied
undertaking. A breach of an implied undertaking is a breach of an undertaking to
the Court. Remedying such a breach is an exercise of the Court’s power to control
its own process. As a result, the Court may vacate an assessment if it believes
it is the appropriate remedy for the breach of an undertaking to the Court.
[72]
I do not believe that
vacating the Second Reassessments is the appropriate remedy in this motion. It
is not clear to me from the affidavit evidence before the Court, that the
Discovery Documents constitute the only information the CRA has to support the
Second Reassessments. It may very well be the case that the Minister can
support the Second Reassessments without the Discovery Documents. However, if
she decides to defend an appeal by the Appellant of the Second Reassessments,
she will have to do so without the Discovery Documents.
[73]
My order will state
that the Respondent cannot use the Discovery Documents in any other proceeding
before this Court or any other court. If the Discovery Documents constitute the
only evidence the Respondent has to support the Second Reassessments, my order
should have the same effect as an order vacating the Second Reassessments.
Remedy with respect to conduct of the Respondent
[74]
Contempt is an
exceptional remedy when there is a breach of an implied undertaking. As the
Supreme Court of Canada noted in Juman, it should only be used in the
absence of a less drastic remedy.
[75]
In my view, contempt is
not an appropriate remedy in this motion. The Court can deal with the conduct
of the Respondent through its award of costs.
[76]
The Appellant requests
costs on a full indemnity basis. I do not believe that the Respondent’s conduct
warrants an awarding of costs on a solicitor and client basis. Such costs are
reserved for cases of reprehensible, outrageous or scandalous behaviour.
[77]
However, it is my view
that the conduct of the Respondent requires an award of substantial costs. The
Respondent’s use of the Discovery Documents without leave of the Court constitutes
an abuse of process. That abuse was not inadvertent.
[78]
The Respondent knew how
the implied undertaking rule operates, and in particular, she knew of the need
to seek leave before using in another proceeding information obtained in the
course of discovery. Notwithstanding this knowledge, the Respondent elected to
use the information outside of this appeal. It appears to me that the CRA and
counsel for the Respondent decided to substitute their judgment with respect to
when the implied undertaking rules should be waived for the judgment of the
Court.
[79]
During counsel for the
Respondent’s argument, I was left with the impression that the Respondent
considered the Minister to have the same authority as the Court to determine
the use of documents provided in the course of discovery. This is simply not
correct. All parties who appear before the Court, including the Minister, are
subject to the authority of the Court.
[80]
In light of the
Respondent’s conduct, I have decided to award the Appellant costs of $25,000.
Finding of the Court
[81]
For the foregoing
reasons, the Court orders the Respondent not to use any documents she obtained
in the course of the discovery relating to the Appellant’s appeal instituted on
April 12, 2012 in any other proceeding before this Court or any other court. The
Court’s order does not apply to any documents that the CRA obtained prior to
the date the Appellant instituted its appeal. The Appellant is awarded costs of
$25,000.
[82]
The Respondent shall
have 30 days to file an application with the Court for leave to use the
Discovery Documents in another proceeding.
Signed at Ottawa, Canada, this 20th day of February 2014.
“J. D’Arcy”
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