Date: 20010212
Docket: 95-1077-IT-G
BETWEEN:
SMITHKLINE BEECHAM ANIMAL HEALTH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for order
Bonner, J.T.C.C.
[1]
The Appellant applies for the following relief:
(a)
an order requiring the Respondent to answer questions refused at
the examination for discovery of Tim Truckle, on behalf of
the Respondent, which are referred to in paragraph 14 of the
Affidavit of Martin Sorensen;
(b)
an order requiring the Respondent to produce the documents
relating to the questions set out in paragraph (a) above or
alternatively, an order requiring the Respondent to file and
serve a further and better or supplemental affidavit of documents
in respect of the documents relating to the questions set out in
paragraph (a) above;
(c)
an order requiring Tim Truckle to re-attend at his examination
for discovery in respect of the matters referred to in paragraphs
(a) and (b) above.
[2]
The application is made in the context of an income tax appeal.
The general nature of the Appellant's business, the assessing
adjustments giving rise to the appeal and the theory of the
assessments in issue is set out in the reasons given for the
Order of November 4, 1999 permitting the Respondent to amend the
Reply to the Notice of Appeal.[1] I will not repeat all of that at this time. At
the heart of the dispute is the question whether the amount which
the Appellant paid or agreed to pay to its non-resident
Affiliates for cimetidine was greater than the amount that would
have been reasonable in the circumstances if the Appellant and
the Affiliates had been dealing with each other at arm's
length. If the amount was greater then the amount of the excess
is also in issue.
[3]
On February 23, 1999, counsel for the Appellant completed the
examination for discovery of Tim Truckle, the Respondent's
nominee, subject to a reservation of rights with respect to
undertakings, advisements, refusals and questions arising
therefrom. Shortly before that counsel for the Appellant had
asked the following questions and had been given the following
answers:
"1811
Q.
Am I right when I state this total adjustment of $66,982,990 is
the culmination of the use of the price for the transactions
considered as CUP[2] by Revenue Canada and which we looked at under Tabs 5,
6, 7, 8 and 9 of Binder 9?
A.
I believe that is correct.
1812
Q.
I would like you to review paragraph 21 of the Reply to the
Notice of Appeal, please. Is this paragraph a fair summary of all
the facts we talked about during this examination?
A.
I believe it is.
1813
Q.
Aside from what we reviewed during this examination, is Revenue
Canada aware of any other facts which would have formed the basis
of the reassessments presently under appeal?
A.
I am not presently aware of any other facts.
1814
Q.
I would like to draw your specific attention to subparagraph
21(f) of the Reply as well as paragraph 20 of the Reply. I would
invite you to review those paragraphs for your recollection, if
you so need.
After having looked at those paragraphs, could you tell me if the
circumstances which are referred to in paragraph 20 of the Reply
are the same as those which are described in subparagraph 21(f)
of the Reply?
[...]
A.
Since the circumstances are not completely detailed in paragraph
21(f) to any specific nature, I would agree that the
circumstances referred to in 21(f) are the same or similar to
circumstances relayed in paragraph 20.
1815
Q.
I would ask you to now look at subparagraph 25(a) of the Reply
and invite you to review it for your recollection, please. Could
you tell me if the circumstances that are referred to in both
paragraph 20 and subparagraph 21(f) of the Reply which we just
examined are the same circumstances referred to in subparagraph
25(a) of the Reply?
A.
Similar to my previous answer: Although the circumstances are not
detailed, I would say that they are in fact the same.
1816
Q.
I would also invite you to review subparagraph 9(a) of the
Reply to the Notice of Appeal for your recollection. I would ask
you if the circumstances which are referred to in subparagraph
21(f), paragraph 20 and subparagraph 25(a) of the Reply are
the same circumstances as those referred to in subparagraph 9(a)
of the Reply.
A.
I believe they are the same."
[4]
The parts of the Reply to the Notice of Appeal referred to in
those questions are:
"9.
In answer to paragraph 9 of the Notice of Appeal, he admits only
that, during the relevant period, the Appellant acquired
cimetidine from two corporations (the "Affiliates")
resident outside Canada with which the Appellant did not deal at
arm's length. He further says that:
(a)
the Appellant paid or agreed to pay to the Affiliates amounts for
the cimetidine that were greater than the amounts that would have
been reasonable in the circumstances if the Appellant and the
Affiliates had been dealing at arm's length;
20.
In answer to paragraphs 22 and 23 of the Notice of Appeal, he
says that the Minister has applied subsection 69(2) of the
Income Tax Act and denies that the amounts the Appellant
paid or agreed to pay to the Affiliates for cimetidine, set out
below, as the cost of goods sold, were reasonable in the
circumstances. He says that the amounts that would have been
reasonable in the circumstances if the Affiliates and the
Appellant had been dealing at arm's length are set out below
and he consequently disallowed amounts in excess thereof:
Amount
Amount
Claimed
Disallowed
as Cost
of
Reasonable
(includes inventory
Year Goods
Sold
Amount
Difference
Adjustment)
1981
$28,601,l08
$17,875,673
$10,725,415
$ 5,388,389
1982
$22,950,979
$
9,818,953
$13,132,026
$13,803,842
1983
$21,869,720
$
6,560,777
$15,308,943
$14,778,753
1984 $
9,439,808
$
2,241,133
$
7,198,675
$ 9,731,626
1985
$13,642,098
$
2,113,850
$11,528,248
$11,796,197
1986
$10,658,489
$
1,568,806
$
9,089,683
$ 6,421,868
1987
*
*
$ 5,062,315
__________
__________
$66,982,990
$66,982,990
* no transfer pricing issue
2l.
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:
(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.
25.
The Respondent respectfully submits that:
(a)
the amounts assessed under Part I of the Income Tax Act
reflect that the amounts payable by the Appellant to the
Affiliates for cimetidine were greater than the amounts that
would have been reasonable in the circumstances if the Appellant
and the Affiliates had been dealing at arm's length, within
the meaning of subsection 69(2) of the Income Tax
Act;"
[5]
By letter dated January 10, 2000, counsel for the Respondent
delivered a large number of "clarifications, corrections and
expansions" to the answers which had been given on
discovery. They included:
"Correction to answer to question 1814:
Paragraph 21(f) of the Reply to the Notice of Appeal is
restricted to the information known to the Minister when the
assessments were made. The circumstances referred to in paragraph
20 encompass all of the circumstances of which the Respondent has
become aware. For example:
-
the corporate tax department told SmithKline that is [sic]
transfer price was unreasonable;
-
SmithKline didn't meet its own objective of pre-tax profit
for Canada having regard to risks assumed by the Appellant in
Canada;
-
the end selling price of Tagamet in Canada was dramatically lower
than it was in most other world markets with the result that the
high transfer price to Canada precluded it from making a
profit."
[6]
In light of the words "for example" counsel for the
Appellant tried to pin down any other circumstances of which the
Respondent had become aware. On January 26, 2000, he asked the
Respondent's nominee the following question:
"Q. 2075 What I would like to know from you is all those
circumstances you are aware of and the time at which you became
aware of those and the documents to support all of those
circumstances."
The question was taken under advisement.
[7]
Counsel for the Respondent then sent the answer to question 2075
to counsel for the Appellant by letter dated March 2, 2000. It
read:
"In addition to the three previously communicated to the
Appellant at discovery, and without limiting the Respondent's
right at trial to rely upon any other circumstances which come to
the knowledge of the Respondent through the interviews of
witnesses before trial or are proved in evidence through
cross-examination of the Appellant's witnesses, additional
circumstances are:
•
the SmithKline parent continued its $400 US per kilo transfer
price to the Appellant in spite of its realization that the
transfer price caused a profitability problem for the Canadian
entity,
•
the SmithKline parent continued its $400 US per kilo transfer
price to the Appellant in spite of the advent of substantial
competition in Canada from Glaxo's Zantac and cimetidine
products sold by other Canadian drug companies;
•
the Appellant paid service fees and royalties to members of the
SmithKline group of companies (other than Penn and Franklin) for
any supposed benefits that it derived by virtue of its membership
in that group,
•
the Affiliates (Penn and Franklin) which sold cimetidine to the
Appellant for $400 US per kilo did not own any intangibles
related to the development of cimetidine or to the formulation or
sale of Tagamet, and did not provide any services to the
Appellant other than supplying it with cimetidine which they
manufactured under licensing agreements with SK & F Labs
Ltd.,
•
the Appellant incurred substantial losses from the activities of
formulating and selling Tagamet in Canada and did not earn a rate
of return commensurate with its activities here,
•
the Appellant and the other Canadian drug companies performed
essentially the same activities subsequent to the purchase of
cimetidine, i.e. secondary manufacturing, sales and marketing of
cimetidine based products,
•
the assumptions set out in the Reply to the Notice of
Appeal."
[8] A
protracted exchange of correspondence followed regarding the
adequacy of this response, the time the Respondent became aware
and the identity of the documents supporting each of the
circumstances referred to. Counsel for the Respondent, in a
letter to counsel for the Appellant dated March 27, 2000,
said:
"(1) You
have inquired when the Respondent became aware of circumstances,
which the Minister did not rely upon at the time of assessment.
The Respondent became aware of additional circumstances during
the discovery of the Appellant. The Respondent's position is
that it is not a proper question to ask which documents relate to
each of the circumstances, as that would require the nominee to
make a selection from all of the documents which have been
produced to date. The Respondent is unable to say whether all of
the circumstances have been enumerated at discovery, because the
Appellant has not provided answers to questions asked of it at
discovery, and the examination of the Appellant has not yet been
completed;"
The exchange of letters continued. By letter to counsel for
the Appellant of May 19, 2000 the Respondent reiterated its
position regarding time of awareness and the question whether it
was obliged to select documents. That letter reads in part:
"The Respondent is not refusing to advise the Appellant
of any discoverable facts of which the Respondent is presently
aware. The Respondent's position is that it is not a proper
question at examination for discovery to ask what particular
documents and what particular passages in transcripts of
examination for discovery are relied upon in support of
particular facts. This is particularly so in a case that involves
thousands of documents and many volumes of transcript of
examination for discovery.
The Respondent became aware through the examination for
discovery of the Appellant that SmithKline officers were of the
view that the Appellant was not earning a rate of return in
Canada commensurate with the activities that it carried on here.
The Appellant's reported losses and low rate of return on its
activities in Canada corroborate that view. The reassessments
under appeal were not based upon an assumption that the Appellant
ought to have earned a particular rate of return in this country.
However, it is implicit in the Minister's reassessments that
the Appellant ought to have earned at least the rate of return
that results from the reassessments. If the Respondent comes to
an understanding as to any other particular rate of return that
the Appellant should have earned in Canada, we will advise the
Appellant of that understanding."
[9]
On October 26, 2000 the examination for discovery of Mr. Truckle
continued, presumably limited to the matters reserved at the
conclusion of the February 23, 1999 discovery session.
Paragraph 14 of the Affidavit of Martin Sorensen filed
in support of this application sets out the following questions
which the Appellant says the Respondent has refused to answer and
must now be required to answer:
"(a) What
documents relate to a "rate of return commensurate with [the
Appellant's] activities" in Canada identified in the
Respondent's letter dated March 2, 2000 (Exhibit K) and in
the Respondent's letter dated October 20, 2000 (Exhibit S)?
If they have already been produced, kindly identify them. If not,
please produce them.
[Source: March 10, 2000 letter from the Appellant to the
Respondent (Exhibit L)]
(b)
What is the CCRA's information concerning those risks
identified in the Respondent's letters dated January 10, 2000
(Exhibit I) and October 20, 2000 (Exhibit S) and what is the
relationship between those risks and the profitability of
Canadian pharmaceutical companies?
[Source: Question 2166 of Mr. Truckle's examination
(Exhibit R), page 814]
(c)
How does the "rate of return" referred to in the
Respondent's letter dated March 2, 2000 (Exhibit K) and in
the Respondent's letter dated October 20, 2000
(Exhibit S) compare with that of other Canadian
pharmaceutical companies?
[Source: Question 2175 of Mr. Truckle's examination (Exhibit
R), page 819]
(d)
Provide all financial information within the knowledge of the
CCRA showing or tending to show the profitability of
pharmaceutical companies in Canada from 1977 to today, including
and without restricting the generality of the foregoing the
profitability of pharmaceutical companies obtained through audits
and profitability of pharmaceutical companies obtained through
the Advance Pricing Agreement process.
[Source: Question 2149 of Mr. Truckle's examination (Exhibit
R), page 806]
(e)
Disclose the documents to support all the circumstances relied
upon by the Respondent in addition to those circumstances relied
upon at the time of reassessment.
[Source: Question 2075 of Mr. Truckle's examination (Exhibit
J), page 761]"
[10] The scope
of production of documents and examinations for discovery in this
Court is governed by sections 82 and 95 respectively of the
Rules. That scope is very broad. The Rules are
intended to reflect the modern principle discussed in R. v.
Stinchcombe[3]:
"Production and discovery were foreign to the adversary
process of adjudication in its earlier history when the element
of surprise was one of the accepted weapons in the arsenal of the
adversaries. This applied to both criminal and civil proceedings.
Significantly, in civil proceedings this aspect of the adversary
process has long since disappeared, and full discovery of
documents and oral examination of parties and even witnesses are
familiar features of the practice. This change resulted from
acceptance of the principle that justice was better served when
the element of surprise was eliminated from the trial and the
parties were prepared to address issues on the basis of complete
information of the case to be met."
Thus section 95 permits "any proper question"
relating to "any matter in issue in the proceedings"
and section 82 requires production of "all the documents ...
relating to any matter in question ... in the appeal". What
is in issue in litigation is of course defined by the pleadings.
On discovery the examining party may seek information and
admissions which will assist it not only to defeat its
opponent's case but also to advance the case which it seeks
to put forward.
[11] I will
deal first with the question of disclosure of documents. There
can be no doubt that the parties to litigation in this Court are
obliged to file and serve a list of "all the documents"
as contemplated and required by section 82(1) of the
Rules. The question here is whether a party is required to
segregate the documents which the party has produced and to
identify for the benefit of the opposing party those documents
which relate to a particular issue. I note that there is nothing
in the express language of section 82 which supports the
Appellant's position. The language of the Rule
contemplates the production of documents and segregation into
separate schedules only in accordance with the section
82(2)(a), (b) and (c) categories. The Order
sought by the Appellant in reality seeks the work product of
counsel for the Respondent in the form of an analysis of the
relevance of each of the documents and segregation of the
documents accordingly. This goes far beyond the ambit of
pre-trial production as contemplated by section 82. A party is
not entitled to an expression of the opinion of counsel for the
opposing party regarding the use which may legitimately be made
of the documents produced by the opposing party.
[12] With
respect to the questions in paragraphs 14(a) and (e) of the
Sorensen Affidavit, the complaint as I understand it is that the
Respondent has failed to categorize the documents which it has
produced. It is not obliged to do this and this branch of the
application therefore fails.
[13] I turn
next to paragraph 14(b) of the Sorensen Affidavit. The question
has two parts. First it asks for the CCRA's information
concerning the risks identified in the Respondent's letters
of January 10, 2000 and October 20, 2000. The reference to risks
is set out in paragraph 5 above. Neither letter identifies the
risks referred to by the Respondent. It may be that the
Respondent is simply parrotting a statement made by one of the
Appellant's officials. If that is the case the Respondent
should say so. If not, the Respondent must reasonably identify
the risks. Essentially the Appellant is asking the Respondent to
identify one of the facts on which it relies. In Montana Band
v. Canada[4],
Hugessen J. set out the following analysis of compendious or
reliance questions and arrived at the following conclusions with
which I respectfully agree:
"[24] The
jurisprudence is divided as to "compendious" or
"reliance" questions; in Can-Air Services Ltd. v.
British Aviation Insurance Co., it was said to be improper to
ask a witness what evidence he had in support of an allegation or
how it was to be proved at trial. Such reliance questions do not
ask for facts that the witness knows or can learn but rather
require the witness to play the part of a lawyer and to select
which facts can be relied on to prove a given allegation.
[25] On the
other hand, many experienced trial judges take a broader view.
Thus in Rubinoff v. Newton Haines J. said:
The line of demarcation between disclosure of facts on which a
party relies and the evidence in support of the fact may at times
be very fine, and when it occurs, the resolution must be fact
disclosure. And I can think of no more simple and direct question
than, "On what facts do you rely?" ... The opposite
party is entitled to know the facts on which the acts of
negligence or recovery are alleged but not the evidence to
support it. To deny such facts would be to refuse the very
purpose of discovery which is to learn the facts, or often
equally more important, the absence of facts, pertaining to each
and every allegation in the pleadings.
[26] Likewise
in Brennan v. J. Posluns & Co. Ltd., McRuer C.J.
ordered a witness to state the facts relied on in support of an
allegation. In his view a question of this sort asks not so much
for a conclusion of law by a witness as for the facts behind such
conclusion. Where the witness is a party who is asserting that
conclusion it is reasonable to ask for the facts supporting
it.
[27] In my
view, the proper approach is to be flexible. Clearly the kinds of
questions which were aptly criticized in Can-Air,
supra, ..., can easily become abusive. On the other hand,
a too rigid adherence to the rules therein laid down is likely to
frustrate the very purpose of examination on discovery. While
it is not proper to ask a witness what evidence he or she has to
support an allegation, it seems to me to be quite a different
thing to ask what facts are known to the party being discovered
which underlie a particular allegation in the pleadings.
While the answer may have a certain element of law in it, it
remains in essence a question of fact. Questions of this sort may
be essential to a discovery for the purposes of properly defining
the issues and avoiding surprise; if the pleadings do not state
the facts upon which an allegation is based then the party in
whose name that pleading is filed may be required to do so."
(emphasis added)
The risks in question are said by the Respondent to be part of
the section 69(2) circumstances relevant in the appeal. It is the
Respondent's obligation to disclose the facts on which it
relies and the risks referred to form part of those facts.
[14] The
second part of the paragraph 14(b) question stands on a different
footing. The Respondent's correction to the answer to
question 1814 refers to the risks assumed by the Appellant
in Canada. The answer does not refer to risks assumed by other
Canadian pharmaceutical companies. Nothing in the
Respondent's corrected answer warrants questions related to
the profitability of Canadian pharmaceutical companies in
general. Neither the Appellant in its Notice of Appeal nor the
Respondent in its Amended Reply to the Notice of Appeal has made
any allegation of a material fact which could justify this
inquiry. There may be some linkage between the risks assumed by
an entrepreneur and the size of anticipated profits. However,
profits are affected by a multitude of variables which prevent
meaningful comparisons of the Appellant's profits (or losses)
with those of others. Financial analysts might, I imagine, write
lengthly treatises comparing the various elements entering into
the profitability of pharmaceutical companies. Such elements
might well include financing, ability of management, the value in
the treatment of disease of the various products produced by the
various companies, the prevalence of the particular diseases
treated by such products and, of course, the bearing which
arm's length and non-arm's length relationships
with the suppliers of raw materials might have on the cost of
goods produced. An inquiry of the sort contemplated by the second
part of the paragraph 14(b) question is not relevant.
[15] I turn
next to the question referred to in paragraph 14(c) of the
Sorensen Affidavit. The rates of return of other
pharmaceutical companies are not relevant to any issues raised by
the pleadings. The central issue, as I have already noted, is
whether the price paid or payable by the Appellant was greater
than that which would have been reasonable in the circumstances
if the Appellant and the Affiliated companies had been dealing
with each other at arm's length. It is the circumstances
surrounding the supply of cimetidime to the Appellant which are
relevant under subsection 69(2) of the Act. There is
nothing in the materials to suggest that a factual or logical
linkage exists between the price that would have been paid if the
Appellant had dealt with the Affiliated companies at arm's
length and the rate of return of other Canadian pharmaceutical
companies.
[16] The
demand for financial information in the paragraph 14(d) question
is equally irrelevant. There is no link between the information
sought and any pleaded issue.
[17]
Submissions were made with respect to the confidentiality of the
information in the files of the CCRA regarding the profitability
and rates of return of other taxpayers. Relevance is the
threshold issue when questions arise regarding the ambit of
discovery and, in my opinion, it is plainly lacking in respect of
the paragraph 14(c) and (d) questions and the second part of the
14(b) question. Although the questions asked are by any standard
irrelevant, I will add that in my opinion a particularly clear
demonstration of relevance is required where a taxpayer asks a
Revenue official on discovery for information which a competitor
has furnished to Revenue in accordance with the requirements of
the Income Tax Act. The Court must be alert to the
possibility that such an inquiry is an attempt to take advantage
of the fact that the protection afforded to taxpayer information
by section 241 of the Income Tax Act is limited by
subsection (3) which reads in part:
"241(3) Subsections (1) and (2) do not apply in respect
of
...
(b)
any legal proceedings relating to the administration or
enforcement of this Act, the Canada Pension Plan or the
Unemployment Insurance Act or any other Act of Parliament
or law of a province that provides for the imposition or
collection of a tax or duty."
Except in cases such as M.N.R. v. Huron Steel Fabricators
(London) Limited and Fratschko[5] where the Minister in making the
assessment in issue has relied on information garnered from
taxpayers other than the appellant, I can envisage few if any
circumstances in which information provided to the Minister by
taxpayers other than the appellant will be relevant in a tax
appeal.
[18] This
application therefore succeeds only in respect of the first part
of the paragraph 14(b) question. In light of the somewhat
extravagant nature of the questions which the Appellant has
sought unsuccessfully to justify I will award costs of the
application to the Respondent in any event of the cause.
Signed at Ottawa, Canada, this 12th day of February 2001.
"M.J. Bonner"
J.T.C.C.
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