Citation: 2009 TCC 231
Date: 20090427
Dockets: 2007-2715(IT)G,
2007-2716(IT)G,
2007-2717(IT)G, 2007-2718(GST)G
BETWEEN:
RICHARD SHANNON,
LUCILLE SHANNON,
R & L PIPELINE SERVICES LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Hogan J.
[1]
The Respondent seeks an
order to compel the Appellants to answer questions posed in requests for
undertakings, which were refused, or in the alternative, an order striking
documents No. 7 (“Documents No. 7”) from the Appellants’ lists of
documents for failure to comply with sections 81 and 84 of the Tax Court of
Canada Rules (General Procedure) (the “Rules”).
Factual Background
[2]
During the relevant
period, the corporate Appellant entered into contracts to provide pipeline
welding services throughout western Canada and overseas.
[3]
There are four related
actions dealing with contested expenses of the corporate taxpayer, R & L
Pipeline Services Ltd. (“Pipeline”), and alleged shareholder benefits. The
Respondent reassessed the Appellants, denying the deduction of expenses
incurred by the corporate Appellant on the basis that they were personal and
living expenses of the individual Appellants, who received the benefit of the
expenditures in their capacity as shareholders.
[4]
The Appellants provided
identical lists of documents for the four actions, each containing “documents”
identified as follows:
7.
Various expense support documents including
invoices, sales receipts, credit card statements, various working papers,
summaries and reconciliations prepared by Appellant’s accounting advisors.
(Herein referred to as Documents No. 7.)
[5]
Discovery in the
Appellants’ cases took place on May 29, 2008. Lucille Shannon
testified as the officer of Pipeline, on her own behalf, and on behalf of
Richard Shannon, who adopted her testimony as his evidence.
[6]
At the examination for
discovery, a number of undertakings were requested by the Respondents with
respect to documents No. 5 (“Documents No. 5”) and Documents No. 7 on the
Appellants’ lists of documents. These undertakings were allegedly refused on
the basis of relevance.
[7]
The Respondent requested
undertakings to provide answers to the following questions with respect to
Documents No. 7 :
a) Which specific documents
in the bundle of Documents No. 7 will be relied upon at trial?
b) What facts contained in
each of those specific documents support the Appellants’ position?
[8]
Documents No. 7 on
the Appellants’ list of documents contain various components of the working
papers prepared by the accountant for the Appellants in support of the
financial statements of the corporate Appellant. These working papers were used
to prepare the financial statements which served in the preparation of the
corporate income tax returns that are under dispute in the present appeals.
[9]
The Respondent, during
the examination for discovery of Lucille Shannon for the Appellants, assembled Documents
No. 7 in four bundles identified as follows:
a) stack beginning with
R & L year-end June 30, 1993,
b) stack beginning with
R & L year-end June 30, 1994,
c) stack beginning with
R & L year-end June 30, 1995.
[10]On review of excerpts from the examination for
discovery transcript, I note that Lucille Shannon admitted she had little
familiarity with the material contained in each bundle.
[11]The Appellants allege that Documents No. 7 were reviewed
in considerable detail by the Respondent’s auditor in the course of the audit
that resulted in the reassessments that are the subject of these appeals. The
Respondent’s auditor, they maintained, understands the information contained in
these documents, and the undertakings requested would duplicate the
explanations provided during the audit process.
Undertakings Relating to Business Expenses
[12]The remaining undertakings in dispute, namely undertakings
Nos. 8 to 12, are all in relation to Documents No. 5 on the lists of
documents. Documents No. 5 are a copy of the CRA audit report with a covering
letter.
[13]For each business expense claimed, the Respondent
inquired as to the specific business purpose. The Appellants took the position
that they were not obliged to provide information beyond the characterization
of the expenses as being of a “business” nature. Furthermore, the Appellants
pointed out that Lucille Shannon testified that only legitimate business
expenses were deducted in the calculation of Pipeline’s income for tax
purposes.
Issues
[14]Should the Appellants be required to provide answers pursuant
to the undertakings requested in relation to Documents No. 7 on the lists
of documents (questions 20 to 23)?
[15]If the Appellants’ objection to answering the Respondent’s
questions in this regard is upheld on the basis that Documents No. 7 and
the related undertakings are not relevant, should Documents No. 7 then be
struck from the lists of documents for non-compliance with sections 81 and 84
of the Rules?
[16]Should the Appellants be required to answer the
questions posed in relation to alleged business expenses referenced in Documents
No. 5 (questions 8 to 12)?
Analysis
[17]The Appellants’ counsel argues that, in considering
the Respondent’s motion to compel the Appellants to answer questions posed in
requests for undertakings or, alternatively, to strike Documents No. 7
from the Appellants’ lists of documents, I must bear in mind that the issue in
the appeals is simply whether expenses incurred by the corporate Appellant were
business expenses or not. According to counsel, because this issue is simple
and straightforward, it should influence the extent of the Respondent’s
entitlement to “discover” the Appellants’ cases. In addition Documents No. 7
were fully examined by the Respondent’s auditor during the audit process.
Detailed explanations of these documents were given by the Appellants during that
audit process.
[18]The Appellants agree with the general principles of
discovery set out in paragraphs 8 through 13 of the Respondent’s written
submissions, but dispute that the inclusion of Documents No. 7 on the
Appellants’ lists of documents affects in any substantive way these general
principles.
[19]In particular, the Respondent alleges that the aim of
ensuring a fair and expeditious proceeding that is facilitated by the discovery
process is not thwarted in any way by the inclusion of Documents No. 7,
given the extensive review of those documents performed by the Respondent’s
auditor in the course of the audit of the Appellants. In brief, there is no
element of surprise resulting from inclusion, on the Appellants’ lists’ of
documents already thoroughly reviewed by the Respondent. Likewise, for the same
reason, the aim of providing a discovering party with meaningful, reliable and
complete disclosure is not compromised by inclusion of Documents No. 7 on
the Appellants’ lists. Documents No. 7 have a single constituent: working
papers prepared by the Appellants’ accountant in furtherance of the preparation
of the Appellants’ financial statements and tax returns.
[20]Former Chief Justice Bowman, in Loewen v. The Queen
(2006),
addresses as follows the question of the level of detail that a party must give
to the other party in producing a bundle of documents:
8 … A party is entitled to know why a document is being produced.
One must bear in mind that section 81 of the Tax Court of Canada Rules
(General Procedure), in contrast with section 82, is rather unique in that
it requires only that the party produce a list of documents that it is intended
will be used in evidence. If the answers given were acceptable it would mean
that a litigant could swamp the other side by producing cartons of documents
and leave it to the other side to go through them in an attempt to anticipate
what use, if any, will be made of them. I think a litigant is entitled to know
why the other party thinks a document is relevant. It is insufficient to say,
in effect, that a document is being put in the list of documents on the off
chance that it may be useful to rebut some unspecified point that the other
side may wish to make.
In addressing whether the Appellants should accede to
the Respondent’s requests for undertakings to provide particulars regarding the
documents listed by the Appellants, I will use the general principle succinctly
enunciated by Bowman C. J.
[21]While I agree with the Appellants’ position that the
issue in the appeals is relatively straightforward, I do believe that the
Respondent is entitled to know more about why Documents No. 7 appear on their
lists. The Appellants provide an answer to this question in their written
submissions, as follows:
6. #7 was reviewed in considerable detail by the
Respondent’s auditor in the course of the audit that resulted in the
reassessments that are the subject of these appeals.
7. Notwithstanding this extensive review of #7 by
the Respondent’s auditor, it is the Appellants’ position that the #7 reveals at
least two errors were committed by the auditor in reassessing the Appellants,
namely:
(i) basing a portion of the reassessment of the
corporate Appellant on a figure for “travel expense” that was a thousand times
higher than the figure actually claimed by the corporate Appellant;
(ii) assessing a standby charge benefit on a vehicle
the reassessed individual Appellant owned personally.
[22]In brief, the Appellants are alleging that the auditor
made basic errors that are obvious from a review of Documents No. 7.
[23]I believe that it would be sufficient for the Appellants
to provide this answer to the Respondent’s question as to why the documents appear
on the lists or to provide some answer along the same lines.
[24]I also believe that the Appellants should respond to
the Respondent’s request for particulars as to which of Documents No. 7
will be relied upon by the Appellants. For example, the Appellants could reply
by stating that they will be relying on all the documents to show that the
internal and external auditors reviewed the working papers and other financial
documents included in Documents No. 7 and that they accepted the contested
expenses as legitimate business expenses of the corporate Appellant by
accepting the use of these working papers to prepare the financial statements
and tax returns of the corporate Appellant. I do not believe that the
Appellants need to be more precise than this in their reply.
[25]Finally, I agree with the Respondent that the
Appellants should indicate what facts are set out in each document that
supports the Appellants’ position. For example, the Appellants could fulfil the
undertaking requested in this regard by stating that the financial working
papers, etc. show that the Appellants’ advisors were satisfied that the
contested expenses were legitimate business expenses of the corporate
Appellant. The outside auditors were satisfied that the expenses were
deductible, otherwise they would have had to make a deferred tax adjustment to
account for the potential tax liability, subject to the level of materiality of
this item. Obviously, the Appellants could provide a different answer that could
be along the same generic lines as this example.
Undertakings Relating to Business Expenses
[26]The Respondent made requests for undertakings that the
Appellants provide information in response to the following questions posed in
relation to the matters listed below:
|
Undertaking Request
|
Related Document
|
Transcript
|
|
Reference
|
|
|
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(8) Identify,
for the travel expenses, for each expense claimed, what the purpose of the
business trip was.
|
#5 of Appellants’ Lists of Documents
(Exhibit B to Affidavit of Monique Van Damme)
|
Pages 22-30
(Exhibit D to the Affidavit of Monique Van Damme)
|
|
|
|
|
|
(9) April
25, 2002, Travel Lodge, Calgary Airport: Advise what the business purpose of the trip to the Calgary airport was.
|
#5 of Appellants’ Lists of Documents
(Exhibit B to Affidavit of Monique Van Damme)
|
Pages 31-33
|
|
|
|
|
|
(10) Advise
as to the business purpose of the trip by which the dinosaur trail RV expense
for $105.75 was incurred on July 14th of 2002
|
#5 of Appellants’ Lists of Documents
(Exhibit B to Affidavit of Monique Van Damme)
|
Pages 33-35
|
|
|
|
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|
(11) Advise
what the business purpose of the particular expense on July 25th,
2002, no description on invoice, accommodation trailer $100 was.
|
#5 of Appellants’ Lists of Documents
(Exhibit B to Affidavit of Monique Van Damme)
|
Pages 36-37
|
|
|
|
|
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(12) Advise
what the business purpose of the expense for July 30th, 2002,
Thunderbird Hotel in Red Deer,
$62.75 was for.
|
#5 of Appellants’ Lists of Documents
(Exhibit B to Affidavit of Monique Van Damme)
|
Pages 37-38
|
[27]Once again, I believe that the Appellants should
provide answers to the questions posed by the Respondent. These responses can also
be of a generic nature. For example, if particular travel expenses relate to
travel to and from work sites or travel for the purpose of obtaining work, the
Appellants could answer by grouping the similar expenses together and stating
that the particular travel expenses listed relate to travel to and from work
sites. This type of answer, in my opinion, is sufficient to remove any element
of surprise to the Respondent. Counsel for the Respondent can use this
information to formulate her cross-examination questions.
[28]In summary, in view of the simple nature of the issue in
dispute, I believe it is sufficient for the Appellants to provide to each of
the questions listed above generic answers similar to the hypothetical
responses that I have offered for illustration purposes. Responses of this type
strike the proper balance between informing the Respondent of the purpose for which
the documents will be produced and avoiding the danger that the Appellants will
be overburdened with requests for specificity.
[29]The Appellants shall provide responses of the generic
type noted above within 10 days of the Order.
Signed at Ottawa, Canada, this 27th day of April 2009.
"Robert J. Hogan"
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