Citation: 2011 TCC 563
Date: 20111222
Docket: 2008-54(IT)G
BETWEEN:
DEAN JONES,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
AMENDED REASONS FOR ORDER
Jorré J.
THE MOTIONS
[1]
Both parties have
brought motions. The hearing took about a day spread over two hearing days.
[2]
The appellant seeks an order:
(a) directing the
Respondent to make full disclosure under Rule 82;
(b) directing the
Respondent to answer certain questions that they refused or failed to answer at
their examination for discovery as set out in Exhibit “A” to the Affidavit of
Brent Pearce attached hereto;
(c) directing the
Respondent to re-attend at its own expense a continuation of the examination
for discovery to answer all proper questions that the Respondent previously
refused or failed to answer, and to also answer any proper questions arising
from those answers;
[(d)] directing the
Respondent to pay forthwith the costs of this motion, costs thrown away and the
costs of the continuation of the examination for discovery.
[3]
The respondent seeks:
1. An Order pursuant
to sections 110(b) and subsection 125(7) of the Tax Court of Canada Rules
(General Procedure) (the “Rules”),
a) dismissing the
appeal of the appellant.
2. In the
alternative, an Order pursuant to section 110 of the Rules,
a) directing the
appellant to answer the unsatisfied undertakings given during his examination
for discovery held on February 18, 2010, as set out in Schedule “A” hereto;
b) directing the
appellant to answer certain questions that he refused or failed to answer at
his examination for discovery, including questions taken under advisement, as
set out in Schedule “B” hereto;
c) directing the
appellant to reattend at his own expense for a continuation of the examination
for discovery to answer all proper questions that the appellant previously
refused or failed to answer, to answer any questions that arise from the
answers on undertakings, and to also answer any proper questions arising from
those answers; and
d) directing that
the appellant pay forthwith the costs of the motion in any event of the cause,
any costs thrown away, and the costs of any continuation of the examination.
3. Such further
relief as counsel advises and this Court deems just.
GENERAL NATURE OF THE APPEAL
[4]
The Minister of
National Revenue (Minister) reassessed the appellant to add an amount of
$200,000 to the appellant’s income for the 2001 taxation year and also assessed
gross negligence penalties pursuant to subsection 163(2) of the Income Tax
Act in respect of the added income.
[5]
According to the
pleadings:
(a) the
Minister assessed on the basis that:
(i) the
appellant, a chartered accountant, owns 2.68 units out of the 5 units of a
limited partnership called Prolessons 1, a registered tax shelter;
(ii) the
general partner of Prolessons is 1451958 Ontario Inc. (hereinafter “145”);
(iii) the
appellant is the sole director and sole shareholder of 145;
(iv) the
appellant prepared and filed the 2001 T2 return of 145;
(v) the
appellant controlled Prolessons and 145;
(vi) Prolessons
paid 145 a general partner fee in the amount of $200,000 in 2001;
(vii) the
appellant directed 145 to direct the payment to himself, which direction 145
complied with, and the appellant received a payment of $200,000;
(viii) the
said payment was income to the appellant in 2001; and
(ix) the
appellant did not report the amount in his tax return.
(b) The
Minister also alleges that:
(i) the
appellant prepared the partnership financial statements of Prolessons;
(ii) in
2000, Prolessons paid 145 a general partner fee in the amount of $250,000 which
was directed to the appellant; and
(iii) the
appellant reported the $250,000 as other income in his 2000 tax return.
(c) The
appellant alleges that:
(i) he
never received directly or indirectly any such amount of $200,000 from 145 and
he has no information with respect to such sum being paid; and
(ii) the
reassessment in issue is beyond the applicable limitation period under section
152 of the Income Tax Act.
[6]
There appears to be
agreement that 145 in its statement of income and retained earnings for the
year ended December 31, 2001 shows, for the 2001 year, a revenue of $200,000
from Prolessons, operating costs of $1,050 and, under the heading “Cost of Sales”,
expenses of $200,000 for subcontractors.
[7]
The respondent’s
position is that this $200,000 amount was income to the appellant. The
appellant’s position is that this $200,000 amount was for the services of
lawyers and accountants.,
[8]
It is also worth noting
that at an earlier stage there was an investigation of the tax shelter and
search warrants were executed.
The appellant claims not all seized documents were returned. The Crown claims
everything was returned.
GENERAL COMMENT
[9]
The critical question
seems relatively straightforward: Did the appellant earn the $200,000 in income
in issue, income reflected in the subcontractor expense of $200,000 shown by
145 in its statement of income and retained earnings for the year ended
December 31, 2001?
[10]
Given that, given that
the appellant says that the subcontractors who provided the services giving
rise to the $200,000 in expenditures shown by 145 in its statement of income
were accounting and law firms, one wonders if it would not have been possible
for the parties to have avoided these motions.
Having said that, I turn to the motions.
APPELLANT’S MOTION
FOR FULL LIST
Principles
Regarding Rule 82
[11]
The basic principles
are set out by Bowman C.J. in Mintzer v. The Queen:
14 . . . In this court
making an order for full disclosure under Rule 82 is not unusual if the party
seeking the order can demonstrate reasonable grounds for such an order. There
should however be some basis for putting the other party to the expense and
trouble of assembling a large number of documents. . . .
However, the Court may impose terms where appropriate
to balance the benefits of full discovery with the need to contain discovery
within reasonable bounds.
Application to this Case
[12]
Applying those
principles to this case, considering all the circumstances, including that while
the Crown states that it has returned everything that was seized, it is
possible that the Crown may still have relevant documents, or copies thereof,
that for one reason or another the appellant does not possess or no longer
possesses and which may assist the appellant in his case.
[13]
Accordingly, there will
be an order for the production of a Rule 82 list. It will be on terms, however.
[14]
First, given the nature
of the dispute I have described and the fact that in many ways the actual issue
seems to be relatively narrow, the order shall be limited to the following
category of documents relevant to the dispute:
(a) to
the extent that they have not already been produced under Rule 81, any
documents, including the auditor’s report and the appeals report for the appellant’s
2001 taxation year, that may be found in files relating to the 2000 or 2001
taxation year of the appellant, Prolessons or 145:
(i) relevant
to the assumptions of fact set out in paragraph 8 of the reply to notice of appeal,
other than paragraph 8c), or
(ii) relevant
to the allegations in paragraph 9 or 10 of the reply;
(b) for
greater certainty, this does not include documents related to any
investigation, examination or audit of Prolessons or 145, including those
relating to any investigation, examination or audit:
·
of the tax shelter(s)
or
·
for GST purposes,
except where the
particular document contains information relevant to (a)(i) or (ii).
Thus, to take a simple example, if in
documents relating to the tax shelter investigation there are documents about,
or receipts for, the $200,000 shown as an expense to subcontractors by 145 in
2001, that would be relevant.
[15]
Secondly, the
respondent took the position that if there were such an order it should be
applied to both parties. The appellant was agreeable to that. Accordingly,
both sides shall be subject to such an order.
APPELLANT’S MOTION TO COMPEL ANSWERS
Principles Regarding Scope of Discovery
[16]
In HSBC Bank Canada v. The Queen,
C. Miller J. reviews the relevant principles set out by
V. Miller J. in Kossow v. The Queen and adds a few
additional comments:
Law
13 Both parties
provided useful summaries of how this Court has in the past addressed the
question of the scope of examinations for discovery. Justice Valerie Miller
recently summarized some of the principles in the case of Kossow v. R.:
1. The principles
for relevancy were stated by Chief Justice Bowman and are reproduced at
paragraph 50:
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.
2. The threshold
test for relevancy on discovery is very low but it does not allow for a “fishing
expedition”: Lubrizol Corp. v. Imperial Oil Ltd.
3. It is proper to
ask for the facts underlying an allegation as that is limited to fact-gathering.
However, it is not proper to ask a witness the evidence that he had to support
an allegation: Sandia Mountain Holdings Inc. v. The Queen.
4. It is not proper
to ask a question which would require counsel to segregate documents and then
identify those documents which relate to a particular issue. Such a question
seeks the work product of counsel: SmithKline Beecham Animal Health Inc.
v. R.
5. A party is not
entitled to an expression of the opinion of counsel for the opposing party
regarding the use to be made of documents: SmithKline Beecham Animal
Health Inc. v. The Queen.
6. A party is
entitled to have full disclosure of all documents relied on by the Minister in
making his assessment: Amp of Canada Ltd. v. R.
7. Informant
privilege prevents the disclosure of information which might identify an
informer who has assisted in the enforcement of the law by furnishing assessing
information on a confidential basis. The rule applies to civil proceedings as
well as criminal proceedings: Webster v. R.
8. Under the Rules a
party is not required to provide to the opposing party a list of witnesses. As
a result a party is not required to provide a summary of the evidence of its
witnesses or possible witnesses: Loewen v. R.
9. It is proper to
ask questions to ascertain the opposing party’s legal position: Six
Nations of the Grand River Band v. Canada.
10. It is not proper
to ask questions that go to the mental process of the Minister or his officials
in raising the assessments: Webster v. The Queen.
14 The following additional principles
can be gleaned from some other recent Tax Court of Canada case authority:
1. 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”: Teelucksingh v. The
Queen.
2. The court should
preclude only questions that are “(1) clearly abusive; (2) clearly a delaying
tactic; or (3) clearly irrelevant”: John Fluevog Boots & Shoes Ltd.
v. The Queen.
15 Finally in the recent decision of 4145356
Canada Limited v. The Queen I concluded:
(a) Documents that
lead to an assessment are relevant;
(b) 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;
(c) Files reviewed by
a person to prepare for an examination for discovery are prima facie
relevant; and
(d) The fact that a
party has not agreed to full disclosure under section 82 of the Rules does not
prevent a request for documents that may seem like a one-way full disclosure.
16 So, there has been a great deal
written by myself, my colleagues and former colleagues on this question of the
scope of discovery. These comments are all helpful guides to ensure some
consistency on how litigation in this Court is to proceed. Yet it is an art and
not a science, and it would be counterproductive to dwell on each and every
principle as though applying a formula. Rather, it must always be borne in mind
what the Parties and the Court are trying to achieve with examinations for
discovery; that is, a level of disclosure so that each side can proceed
efficiently, effectively and expeditiously towards a fair hearing, knowing
exactly the case each has to meet. . . .
[Footnotes omitted.]
Preliminary Objections of the Respondent to
the Appellant’s Motion to Compel Answers
[17]
The respondent made two
preliminary objections to the appellant’s motion.
First Objection
[18]
First, she took the
position that the affidavit of Mr. Pearce in support of the appellant’s
motion should be struck out because the appellant failed to make Mr. Pearce
available for cross-examination prior to the hearing of the motion.
[19]
This request was made
in writing twice by letters of June 14, 2010 and June 29, 2010.
[20]
One reason motivating
the motion was the failure of the affidavit to include the correspondence of
May 7, 2010 from the respondent containing further responses to the
discovery questions in issue.
[21]
With respect to the
first preliminary objection, counsel for the appellant stated that he had not
received the letters of June 14 and 29.
[22]
He further took the
position that, in essence, there was little to cross-examine in the affidavit
and, also, that he would be willing to have paragraph 4 of the affidavit
struck.
[23]
Rule 74 of the Tax
Court of Canada Rules (General Procedure) gives a right to cross-examine on
an affidavit. It states:
A deponent whose affidavit has been filed may
be cross-examined on it by a party who is adverse in interest on the motion,
and the evidence adduced may be used at the hearing of the motion.
[24]
While I agree that
there is not much to cross-examine on in the affidavit, and I am not sure that
it would have served much purpose, the rule does provide for cross-examination
and the respondent should have been able to cross-examine before the hearing. It
is not for one party to decide if the other should examine its affiant.
[25]
The respondent sought
to have the affidavit struck and the appellant offered to have paragraph 4
struck.
[26]
As a practical matter,
the question is academic insofar as, in the circumstances, the affidavit adds
nothing to the issues raised by the motions.
Consequently, it is unnecessary to deal with this.
Second Objection
[27]
Secondly, it was the
respondent’s position that the appellant’s motion with respect to refusals was
now moot due to answers provided by the respondent in correspondence dated May
7, 2010. The respondent contended that the answers in the May 7, 2010 correspondence
were a full answer to the refusals which were the subject of the motion.
[28]
Several of those
answers were given after first stating an objection for the purpose of Rule
107(2).
[29]
I will deal with this
objection at the same time as I deal with the refusals.
APPELLANT’S MOTION WITH RESPECT TO REFUSALS
BY THE RESPONDENT
[30]
At the hearing the
appellant only pursued his motion with respect to refusals to answer in respect
of the refusals listed below. I have used the refusal numbering from the list
that is at Tab A of the appellant’s motion materials.
[31]
I will deal with the
remaining refusals in turn.
Refusal 4
[32]
The question was
whether the respondent had a general investigative file for the appellant not
just limited to the 2001 assessment.
[33]
In her May 7, 2010
letter the respondent objected to the relevance of the question for the
purposes of Rule 107(2) and then answered that Mr. White did have files
relating to the appellant.
[34]
I agree with the
respondent that this answers the question.
Refusal 5
[35]
The question was
whether the respondent had disclosed all the documents in her investigative
file to the appellant.
[36]
Again, in her letter of
May 7, 2010 the respondent objects for the purposes of Rule 107(2) and
then proceeds to answer that all the documents relating to the 2001
reassessment were disclosed to the appellant’s counsel as a result of
disclosure in the earlier criminal proceedings.
[37]
That answers the
question.
[38]
The discussion of
refusal 8 below is also relevant to this.
Refusal 8
[39]
This question seeks the
production of all the documents in the files relating to the investigation of a
number of other entities including 145, Brant Group Limited or Hadrian
Management Limited.
[40]
In essence, the
respondent gives the same answer as for refusal 5.
[41]
First, I would note
that nothing in the pleadings suggests that the activities of Brant Group
Limited or Hadrian Management Limited are in any way relevant to the amount
assessed to the appellant.
[42]
Secondly, this question
and the previous question in substance raise the same question as that raised
by the part of a motion seeking a full list.
[43]
The two questions
deserve the same answer as the request for a full list. The same principles
apply.
[44]
The discovery threshold
is low but it must not be what is referred to as a “fishing expedition” but
might also be described as discovery of areas which have little likelihood of
producing information that may assist a party.
[45]
Given that my order
with respect to a full list on terms will bring out those documents which
should be produced, to the extent that they are not already in the respondent’s
Rule 81 list, there is no point in ordering a further answer to these
questions. However, see as well the discussion of further examination below.
Refusal 10
[46]
The question here was
whether, aside from the documents already produced in the appeal, there were
any other documents provided to the appellant prior to the delivery of the
notice of appeal.
[47]
The respondent again
objected for the purposes of Rule 107(2) and then answered that to the best of her
knowledge the schedule produced at Tab 8 of the respondent’s documents was the
only attachment to the proposal letter dated July 17, 2006; the respondent
further relied on the same response as for refusal 5.
[48]
I am satisfied that
this responds to the question. I would add that since process is not normally
an issue in an appeal, I fail to see the relevance of this question.
Refusal 13
[49]
In this case the
question was that the respondent produce the documents that indicate
that everything that was seized in December 2005 was returned.
[50]
The respondent’s
position is that this is not relevant to any fact in issue and the appeal.
[51]
I have difficulty in
seeing how such a document could be relevant at trial. However, if there is a
receipt or similar document which contains a description or inventory of what
was returned, then it is possible that it might describe a document that could
be relevant to the issues.
[52]
Accordingly, I will
order that, if there exists a receipt, a note to file or any similar document
regarding the return of the seized documents, that document shall be produced.
Ruling on the Relevance of the Answers to
the Above Refusals (Apart from Refusal 13)
[53]
At the hearing there
was a debate about whether I should rule on the relevance of these answers
given that Rule 107(2) states the ruling shall be obtained from the Court
before the evidence objected to shall be used at the hearing.
[54]
Rule 107(2) says that a
ruling shall be obtained from the Court before the evidence is used at trial
but leaves open when that should occur.
[55]
While it is not
immediately apparent to me how these answers, in themselves, will assist in
determining any of the facts relevant to the appeal, a ruling on relevance for
the purpose of the hearing is best left to the trial judge.
Further Examination Sought by the Appellant
[56]
The appellant seeks
further examination in respect of the above refusals.
[57]
Given that the core of
what he seeks are additional documents and given that, if there are any
additional documents to which he is entitled they will arise as a result of my
order with respect to a full list, I will not order further discovery specifically
in respect of any of the above questions but the appellant will be entitled to
further discovery in respect of any new documents produced by either party, as
a result of my Rule 82 orders.
[58]
Further, with respect
to refusal 13, if it turns out that such a document, or documents, exist(s),
then, if the document(s) make(s) a reference to a document relevant to the
issues in this appeal as set out in paragraph 14(a) above, the appellant may
have further examination in relation to that.
RESPONDENT’S
MOTION SEEKING DISMISSAL OF THE APPEAL
[59]
Nothing in the
circumstances here would make it appropriate to dismiss the appeal.
RESPONDENT’S
MOTION TO COMPEL ANSWERS
[60]
With respect to the
respondent’s motion to compel answers, I will be referring to the numbering
found in schedules A and B at Tab 1 of the respondent’s motion record.
[61]
The first group of questions
listed as A1 to A14 relates to what the respondent says are unanswered
undertakings.
[62]
Undertaking A1 asked
who prepared the financial statements for 145 for the year ended December 31,
2001 and further asked for any documents in support of that answer. By way of
background it is important to note that at the discovery the appellant answered
that the statements were either prepared by him, Mohamed or someone in his
office.
[63]
The appellant’s answer
is to the effect that no evidence was located to determine who prepared the
documents but that an absolute determination was impossible because the Canada
Revenue Agency had not returned all documents seized.
[64]
The answer implies that
the appellant was unable to determine any more precisely who prepared the
statements that he previously stated at discovery. If that is the case the
respondent is entitled to have that clearly stated. If not, that should be
clear as well. Accordingly, the appellant should provide a further answer to
A1.
[65]
With respect to A2, the
appellant agreed to answer the question.
[66]
As to A3, it is clear
on the face of the response in the appellant’s schedule that it has not yet
been answered; the appellant did not disagree. The appellant should get on with
answering it.
[67]
Similarly, the
appellant agreed that A4 had not been answered. It should be
answered and the appellant has indeed given a partial answer in the July 29,
2010 letter from his counsel prior to the second hearing day. The appellant
should complete the answer.
[68]
With respect to A5 the
appellant stated at discovery that he did not know when the return of 145 was
filed. The undertaking was to search his records and advise as to his position
as to the date upon which the return for 145 was filed. The appellant’s answer
is that it cannot be determined because of the way the software operates.
[69]
While it may well be
implicit that the appellant found no other documents enabling him to determine
a date, if that is the case, that should be said explicitly.
[70]
With respect to A6,
while I agree with the appellant that there is an answer, I am not convinced
that it is complete. When I look at both pages 58 and 59 of the transcript, the
context suggests that the question includes any documentary evidence. The
answer should be completed to include any documentary evidence if it exists or
to state that it does not exist.
[71]
With respect to A7, it
is clear on the face of the appellant’s schedule that it had not yet been
responded to. The appellant should finish his search and answer the
undertaking.
[72]
With respect to A8, the
appellant agreed on the first day of the hearing that it had not been answered.
The appellant gave an answer in the July 29, 2010 letter from his counsel.
Although it may be intended to be implicit in the answer, the appellant should
confirm, if that is the case, that he found no records.
[73]
With respect to A9,
since the appellant agreed to continue to look for a copy of the general
partnership agreement, he should do so and supply a copy. Given the
appellant’s rights, it would be surprising if, as a limited partner and as the
owner of the general partner, he were unable to do so.
[74]
With respect to A10 and
A11, again on the face of the appellant’s schedule these two undertakings have
not yet been answered. They should be answered.
[75]
However, with respect
to A11, I accept the appellant’s point that the question should be restricted
in time and only apply to bank accounts in 2000 and 2001. The appellant
has answered for 2001 in the July 29, 2010 letter from his counsel; the
year 2000 remains to be answered.
[76]
With respect to A12,
the appellant’s answer was incomplete; the appellant stated in his schedule
that the information was not returned by the Canada Revenue Agency following
the seizure. That is fine as far as it goes. However, it was incomplete; the
undertaking was to supply the financial statements to the extent the appellant
was in possession of them. The appellant did not disagree.
[77]
In the letter of July 29,
2010 from his counsel, the appellant answered that he could not find any financial
statement for years after 2001. The answer still needs to be completed for
years prior to 2001.
[78]
Undertakings A13 and A14
have not been answered and should be answered.
[79]
I now turn to the respondent’s
schedule B. By the beginning of the second day on which this was heard, there
were only four items in schedule B in dispute.
[80]
The first is B11. At
the hearing the appellant agreed to respond and advise that he either admitted
or denied the facts alleged in paragraph 10 of the notice of appeal.
[81]
The second and third
were B14 and B15: a request for the general ledgers or books showing the
credits and debits of Prolessons and a request for copies of the bank statements
for the 2001 taxation year of Prolessons.
[82]
The appellant’s
schedule said that he refused to answer this on the basis that he has no
control or authority over this information. At the hearing the appellant said he
would be willing to ask Prolessons but could not compel them.
[83]
In view of the appellant
being owner of 145, the general partner of Prolessons, and in view of his also
being a limited partner owning units, I am completely unable to understand the
basis for the appellant’s position. The appellant controls 145 which has
a statutory right to inspect and copy the information; as a limited partner he
also has the same statutory rights. The
appellant will be ordered to respond.
[84]
The last remaining
disputed item is B17. In this case the appellant’s response in his counsel’s
letter of July 29, 2010 was that he would seek any such documentation but
that to date he had not found anything.
[85]
That is not a complete
answer and the appellant shall complete his search and finish his answer.
Further Examination
Sought by the Respondent
[86]
The respondent will be
entitled to further discovery (i) in respect of questions arising out of any
new documents produced by either party as a result of my Rule 82 orders, and (ii)
in respect of the questions from schedules A and B as described above.
CONCLUSION
Timing
[87]
The parties shall
prepare and serve their respective Rule 82 lists, and provide the opposing
party with copies of the listed documents no later than February 21, 2012.
[88]
Any further discoveries
in accordance with this order shall be completed no later than April 25,
2012.
[89]
The parties shall
communicate with the hearings coordinator in writing no later than May 25,
2012 to advise the Court whether the case will settle, whether a settlement conference
would be beneficial or whether a hearing date should be set. In the latter
event, the parties shall file a joint application to fix a time and place for
the hearing in accordance with section 123 of the Tax Court of Canada Rules
(General Procedure) by said date.
[90]
For these reasons an
order will be issued accordingly.
[91]
I will leave the
question of costs to the trial judge.
These amended reasons for order
are issued in substitution for the reasons for order signed on December 14,
2011.
Signed at Ottawa, Ontario, this 22nd day of December 2011.
“Gaston Jorré”
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