Date: 19980520
Docket: 95-1077-IT-G
BETWEEN:
SMITHKLINE BEECHAM ANIMAL HEALTH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Order
Hamlyn, J.T.C.C.
[1] This is a motion for:
- an Order requiring the Appellant to file and serve a further
and better affidavit of documents which includes the documents
which it permitted Revenue Canada auditors to inspect at the
offices of Gowling, Strathy & Henderson on January 11,
1991;
- an Order requiring the Appellant to produce for copying by
the Respondent the documents which it permitted Revenue Canada
auditors to inspect at the offices of Gowling, Strathy &
Henderson on January 11, 1991; and
- an Order requiring the Appellant to pay the costs of this
motion.
[2] The grounds for the motion are that the List of Documents
served by the Appellant is not in compliance with the
requirements of section 82 of the Tax Court of Canada Rules
(General Procedure) (the "Rules"), in that
it omits documents in the Appellant's possession, control or
power relating to matters in question in these appeals.
[3] The amended list order of this Court, dated February 9,
1998, that is the subject document list, reads:
1. Each party shall file and serve on the other on or before
February 2, 1998, a list of documents made in compliance
with section 82 of the Rules.
[4] One of the issues to be decided as defined in the Notice
of Appeal is:
24. ...
(a) Was the Minister authorized under subsection 69(2) of the
Income Tax Act to substitute a lower price in place of the
amount in fact paid by the Appellant for SmithKline cimetidine
during the relevant period on the basis that the amount in fact
paid by the Appellant to the Affiliates was greater than the
amount that would have been reasonable in the circumstances had
they been dealing at arm's length?
[5] From the Reply to the Notice of Appeal, the following is
pleaded:
21. In assessing the Appellant under Part I of the Income
Tax Act, the Minister, in addition to the facts stated in
paragraph 20 hereof, made, inter alia, the following
assumptions of fact:
(a) the Appellant paid or agreed to pay U.S. $400.00 per
kilogram to the Affiliates for cimetidine throughout the relevant
period;
(b) cimetidine was available from arm's length suppliers
between 1981 and 1986 at prices of U.S. $50.00 to $250.00 per
kilogram;
...
(f) The Appellant paid or agreed to pay amounts aggregating
$66,982,990 in excess of the price that would have been
reasonable in the circumstances if the Appellant and the
Affiliates had been dealing at arm's length during the
relevant period.
[6] From the March 10, 1998 affidavit of Timothy Ronald
Truckle of the Large Business Audit Section of the Department of
National Revenue in support of the motion:
10. I am informed by Wayne Voege of Revenue Canada,
International Audit Directorate and do believe that on or about
January 11, 1991, in the presence of counsel from Bennett Jones
Verchere, Revenue Canada auditors Wayne Voege and Alf Aylward
were permitted by the Appellant to inspect copies of documents at
the offices of Gowling & Henderson in Ottawa. Attached to
this affidavit and marked as Exhibit "6" are copies of
notes made by Wayne Voege during the inspection of those
documents, which included an agreement dated November 7, 1979
between Smith Kline Corporation and Smith Kline & French
Laboratories Limited. I am informed by Mr. Voege and believe that
he was not permitted to take copies of the documents, which are
listed in the Respondent's List of Documents in Schedule
"C." A copy of the Respondent's List of Documents
accompanies this affidavit as Exhibit "7."
[7] Schedule C reads in part:
Documents that were formerly in the possession, control or
power of the Respondent but are no longer in her possession,
control or power:
1. Expert Affidavit of Thomas Dyson which the Appellant
permitted Revenue Canada to inspect (but not to take a copy) on
January 11, 1991 at the offices of Gowling, Strathy &
Henderson at 160 Elgin Street, Ottawa.
[8] This document is the remaining document product in issue
on this motion. Of the balance of the documents (#2 to #8) sought
to be produced, the Appellant no longer objects to their
production.
[9] Further, in the affidavit of Timothy Ronald Truckle:
11. My review of the Appellant's four volume
"Affidavit of Documents" discloses that the documents
inspected by Revenue Canada with the Appellant's consent on
January 11, 1991 cannot be identified in the Appellant's
section 82 "Affidavit of Documents."
12. Based upon my review of the Revenue Canada auditor's
notes attached to this affidavit as Exhibit "6", I have
no hesitation in concluding that the documents inspected by
Revenue Canada with the Appellant's consent on January 11,
1991 clearly relate to matters in issue in the present
appeal.
[10] And, from the affidavit of Denise Aubin, a para-legal
officer with the Department of Justice, filed in support of the
motion:
3. Attached hereto and listed as Exhibit "l" to my
affidavit is a copy of the Appellant's production number
17376 which is described in Volume 4 of the Appellant's
Affidavit of Documents as "Report: 1985 Forecast."
[11] Exhibit 1, Report: 1985 Forecast, reads in part:
- In recent years the transfer price has come under
significant pressure.
- need to import precursor into Argentina
- Columbia setting maximum price of $95 for kilo for
importation
- Dyson report in Canada
...
THE PARTIES POSITION
[12] The Appellant resists the motion on the grounds that the
Expert Affidavit of Thomas B. Dyson (the "Dyson
Report") does not relate to the matter in issue. That report
was produced for constitutional litigation including the
appeal,[1] the tax
assessment was not related to the constitutional issue,[2] and that, the parties
are not the same. From the motion transcript (at pages 46 to
48):
[T]hat the financial information and the information of Smith
Kline & French Canada at the time, which is what the Dyson
affidavit is based on, is relevant and it has been provided to
Revenue Canada in its full disclosure under Section 82.
But the actual report of the affidavit itself is not relevant
to this appeal. ... The Dyson report was prepared in the context
of the constitutional litigation between similar but not
identical parties. The constitutional litigation was the sole
purpose for that report, and it's not relevant to the action
concerning the tax audit or the litigation arising from the
audit, and I would like to refer to the case of Smith Kline &
French Laboratories Limited against the Attorney General of
Canada, a decision of Mr. Justice MacKay, the Federal Court Trial
Division in 1989.
...
[A]t the conclusion of the constitutional litigation, the
Attorney General applied for access to the sealed documents, of
which the Dyson affidavit is one, for permission for officers
from Revenue Canada to inspect the documents and photocopy them
for the purposes of the income tax audit relating to transfer
pricing of cimetidine.
Mr. Justice MacKay, at page 5210, refers to the
confidentiality orders and states in the highlighted portion that
there is no reason -- or "... there is no reason on the
record in relation to the orders of the Trial Division of the
Court of Appeal" -- as -- we're talking about the
reasons for the confidentiality order -- "and those orders
provide in each case a complete ban on access, except for
purposes of the proceedings then underway, unless the Court
should order otherwise."
...
And on page 5213, ...
"The reason for varying the order should be truly
compelling, especially where the purpose for access is unrelated
in any way and is in that sense collateral or ulterior to the
action in which the documents are filed and sealed".
And ... my submission that the income tax audit and the
litigation arising from that audit are and continue to be
unrelated in any way to the actual purpose for the production of
the Dyson affidavit. And it's for those reasons that we
should not be ordered to produce document number 1.
[13] The Respondent argues the evidence on the motion is
uncontroverted that the Dyson Report is part of the documents
inspected by Revenue Canada auditors with the Appellant's
consent, which clearly relates to matters in issue and are
subject to Rule 82.
[14] From the motion transcript, the Respondent's response
to the Appellant's argument is as follows (at pages 49 to
52):
[T]he material which represents Revenue Canada's notes of
the inspection of the Dyson report in January 1991, when it was
doing its audit, the uncontradicted statement of Mr. Truckle in
his affidavit in Paragraph 12, that he has no hesitation in
concluding that the documents inspected by Revenue clearly relate
to matters in issue ...
And ... the appellant's document ... which is attached to
the Aubin affidavit, which sets out that Smith Kline's review
of the Dyson report in connection with pressure on its transfer
price discloses that this report prepared by the Canadian
government showed third party prices for the years 1981 to 1985
ranging from $288 down to $69 a kilo. ...
[W]hat's in issue ... by reference to the pleadings. What
price did Revenue Canada properly assess cimetidine at being
transferred into Canada during the years 1981 to 1986. ...
My learned friend goes on to say that the Dyson report
didn't involve the same parties exactly. ...
...
[T]he test is not whether or not the very same parties are
present in both pieces of litigation. The test is whether the
information in the documents is relevant to issues in the appeal.
...
The matter before Mr. Justice MacKay was completely different
than the matter before Your Honour. In the MacKay decision, the
question was that he had to consider, were there compelling
circumstances which would cause the Court to change its own
order.
...
[W]e're not trying to vary the Federal Court Trial
Division's order ... We're simply saying that there are
documents related to other matters in the tax appeal which are or
have been in the possession, control, or power of the appellant
which it's obliged to list.
JURISPRUDENCE
[15] Regarding relevancy of documents, from Owen Holdings
Ltd. v. R., [1997] 3 C.T.C. 351 (F.C.A.), at page
361:
[R]elevancy exists where the document sought may lead
the party seeking discovery to a train of inquiry which
may directly or indirectly advance its case or damage that
of its adversary.
[16] Regarding access to documents in a non-related,
non-identical proceeding, in AGT Ltd. v. Canada, [1997] 2
C.T.C. 275 (F.C.A.), at page 284:
The fact that the documents in issue were prepared for another
forum, namely providing the CRTC with information required under
a rate setting process, does not prevent the Minister from having
access to them since they are relevant to the potential tax
liability of the taxpayer.
[17] Regarding confidentiality orders in relation to documents
made in other Courts on consent. From Miller (ED) Sales &
Rentals Ltd. v. Caterpillar Tractor Co. et al. (no. 1),
September 8, 1988, 90 A.R. 323, the Alberta Court
of Appeal has concluded, at page 330, Laycraft, C.J.A. said:
I am unable to agree that a party can prevent production of a
relevant document, otherwise subject to production, in a Canadian
court by its own action (or inaction) in another
jurisdiction.
[18] From The Promex Group Inc. and The Queen.,
95-1950(IT)G, (T.C.C.), Judge Bowman of this Court has said at
paragraph [55]:
I find it somewhat absurd that a party to a proceeding in the
Tax Court of Canada can refuse to produce relevant documents
because it has, as a result of its own motion and on consent in
another court, caused those documents to be covered by a
confidentiality order — particularly long after the action
in which the order was made has been dismissed.
CONCLUSION
[19] In relation to document production and in respect of the
matter in question, the scope is broad, the relevancy threshold
is low.
[20] The documents in question - from a reading of the
pleadings and the evidence filed on the motion - and the Federal
Court of Canada decisions[3] containing references to the documents sought to be
produced relate to the matter in issue in this appeal. The
parties to the prior litigation being different from the present
litigation and the self-imposed confidentiality order as well as
the findings of the orders of the Federal Court of
Canada3 in relation to the document in question does
not prevent the Minister of National Revenue having access to
these since they relate to the potential tax liability as pleaded
in this proceeding.
DECISION
[21] There will be an Order requiring the Appellant to file
and serve a further and better affidavit of documents, which
includes the document which it permitted Revenue Canada auditors
to inspect at the offices of Gowling, Strathy & Henderson on
January 11, 1991.
[22] There will be an Order requiring the Appellant to produce
the documents which it permitted Revenue Canada auditors to
inspect at the offices of Gowling, Strathy & Henderson on
January 11, 1991, for copying by the Respondent.
COSTS
[23] The ultimate reason for a costs award is the transparency
of the relevancy issue in view of the jurisprudence and the
threshold test of relevancy at the stage of document
production.
[24] The relevance of the Dyson report to the issues under
appeal becomes clear from both a reading of the Reasons for
Judgment of Justice Strayer of the Federal Court Trial Division
in Smith, Kline & French Laboratories Ltd. (supra),
and from the affidavit of Mr. Truckle. In the case of Smith,
Kline & French Laboratories Ltd. (supra) it is clear that
Justice Strayer regarded the Dyson report as having significant
value in the determination of the costs, profits, and most
importantly the differentiation between competing prices for
cimetidine. From the affidavit of Mr. Truckle comes the
evidence of the notes made by Wayne Voege as to the table of
contents of the Dyson report. Such descriptions in the table of
contents as "comparison of actual cost to open market price
of raw cimetidine" or "open market cost or raw
cimetidine" were recorded by Mr. Voege during his inspection
of documents at the offices of Gowling, Strathy & Henderson
in Ottawa.
[25] From the Appellant’s statement as to the issues in
this appeal included 'whether the amount paid by the
Appellant to the Affiliates was reasonable in the circumstances
had they been dealing at arm’s length', is clear to me
that the Dyson report has real relevance in the determination of
what price was, or would have been, reasonable in arm’s
length circumstances.
[26] The jurisprudence for section 82 of the Rules is
clear that the test for relevance has a low threshold as to what
documents are required to be listed. On the basis of the evidence
before me it is obvious that the Dyson report was, and is,
relevant to the issues under appeal. The Appellant should have at
the very least listed the document in compliance with section 82
of the Rules. Had the Appellant an issue with its
production, it should have listed it under
paragraph 82(2)(b), and claimed privilege against its
production.
[27] Lastly, the Appellant's plea that this motion should
have been brought under section 83 of the Rules is not
supported by the evidence on this motion.
[28] Costs of this motion are to be awarded to the Respondent
on a party and party basis to be taxed at the conclusion of the
trial process.
Signed at Toronto, Canada, this 20th day of May 1998.
"D. Hamlyn"
J.T.C.C.
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