Citation: 2014 TCC 21
Date: 20140116
Dockets: 2010-921(IT)G
2010-922(IT)G
2010-923(IT)G
BETWEEN:
HER MAJESTY THE QUEEN,
Applicant,
(Applicant by application)
and
ADVANTEX MARKETING INTERNATIONAL INC.,
Non‑party.
(Respondent by application)
and
ROY
MOULD,
GERALD OSBORNE,
BARRY PICKFORD,
Appellants,
ORDER AND REASONS FOR ORDER
Rip C.J.
[1]
These are notices of
motion by the respondent for: (1) an order granting leave to the respondent to
examine for discovery a non‑party, namely Advantex Marketing International
Inc. ("Advantex") through a knowledgeable nominee of Advantex
pursuant to subsection 99(1) of the Tax Court of Canada Rules (General
Procedure) ("Rules"); and (2) for directions as to the
conduct of the discovery under subsection 99(1) of the Rules, in
particular:
(a) a direction that the discovery be
conducted under oath or solemn affirmation;
(b) a direction that the scope of the
discovery will be governed by section 95 of the Rules;
(c) a direction that Advantex may be
required to give undertakings to seek and to provide additional information and
documents;
(d) a direction that the transcript of
the examination may be used at trial to impeach the testimony of the nominee of
Advantex, if required;
(e) directions that the respondent may
be entitled to recover the costs of the examination for discovery from the
appellants, at the discretion of the trial judge;
(f) costs if the motion is opposed.
[2]
Advantex is a non‑party
to the appellants' tax appeals but was a party to the transactions that led to the
assessments of tax in issue.
[3]
The respondent states
that in 2003, Advantex, its subsidiary, Advantex Dining Corporation
("Advantex Dining") and certain other subsidiaries purportedly
entered into transactions by which property described as the Support Division
Business of Advantex Dining was sold to Advantex Systems Limited Partnership for
$12,000,000. The respondent alleges that the transactions in issue involve a
tiered limited partnership structure. The appellants subscribed for limited
partnership units in Madison Grant Limited Partnership ("MGLP"). MGLP,
in turn, apparently subscribed for limited partnership units in the Operating Limited
Partnership ("Operating LP"). The so‑called Support Division
Business was classified as Class 12 property (software) for capital cost
allowance ("CCA") purposes and CCA claimed by the Operating LP
in the fiscal periods ending December 31, 2003 and 2004 resulted in
substantial limited partnership losses being allocated to MGLP. In turn, MGLP
allocated limited partnership losses to the appellants which were claimed in
the 2003 and 2004 taxation years. The transactions were unwound in 2005 when
Advantex exercised an option to acquire the limited partnership units of the
Operating LP held by MGLP. The promoter of the venture was Madison Grant
Fund Inc. III ("MGFIII").
[4]
The motion has been set
down by the respondent as a result of undertakings on discovery of appellants
Mould and Pickford. The undertakings are described in
Schedule "H" of Mr. Tolmie's affidavit. These undertakings
were later summarized by appellants' counsel and the summary was produced with
the appellants' responses to the undertakings. The relevant excerpts from the
summary of the undertakings as they relate to Advantex and its subsidiaries are
attached as Exhibit "J" to Mr. Tolmie's affidavit. The
appellants undertook to make inquiries of Advantex and other non‑parties.
The appellants were unable to obtain answers from Advantex in respect of the
undertakings.
[5]
Respondent is of the
view Advantex has information and documents relevant to material issues in the
appeals or it has power and control over relevant information and documents in
the possession of its subsidiaries or Operating LP.
[6]
Mr. Derek Tolmie,
a chartered accountant and Tax Appeals Case Specialist in the Tax and Charities
Appeals Directorate of the Canada Revenue Agency ("CRA") swore an
affidavit in support of the motion.
[7]
Mr. Michael Sabharwal,
a chartered accountant and Vice‑President and Chief Financial Officer of
Advantex, swore an affidavit in support of Advantex's opposition to the
respondent's motion to examine Advantex through a knowledgeable nominee.
Mr. Sabharwal has worked for Advantex since 2005. He was not employed by
Advantex when the transactions in issue took place and was not personally
involved in these transactions nor, he states, is he knowledgeable of the
transactions. He has reviewed Advantex's books and records during the course of
the audit and consulted with Advantex's current employees, officers and
directors. He had reviewed the respondent's notice of motion and supporting
documents.
[8]
The affidavit of
Mr. Sabharwal lists a group of 17 persons referred to in Mr. Tolmie's
affidavit who, Mr. Sabharwal says, are not currently employees, officers
or directors of Advantex as well as one person who informed Mr. Sabharwal
he was not personally involved in the transactions and has no personal
knowledge of them.
[9]
However, exhibits to
Mr. Tolmie's affidavit indicate several of the 17 persons including
G. Randall Munger, Allison Smith, John Sadiq,
Wanda Dorosz and Marvin Singer were directors of Advantex at the
times the transactions were occurring. Mr. Sabharwal advised that he has
not been in touch with any of these former employees, officers or directors concerning
this matter asking if they could assist. He has consulted with current
employees, officers and directors in the company. Any current employees who
were with Advantex in 2003 have not responded to Mr. Sabharwal's requests that
they contact him.
[10]
Mr. Sabharwal
explained he did not consult with any former employees of Advantex because
"I wouldn't know how to reach them …"
[11]
I do not believe
Mr. Sabharwal or any other officer of Advantex has made reasonable efforts
to find a person currently employed or employed by Advantex during the time the
transactions in issue took place and who has knowledge of the transactions.
[12]
Mr. Sabharwal
confirms that since he is not knowledgeable about the relevant topics he is
unable to provide any additional information and documents sought in the appellants'
undertakings on discovery. He is also unable to appoint a nominee on behalf of
Advantex who is knowledgeable about and able to answer the relevant questions.
As well, he says, the respondent has not identified any person who could be a knowledgeable
nominee of Advantex.
[13]
Finally,
Mr. Sabharwal states that he co‑coperated with the CRA and provided
them with documents and information its officers requested during the course of
the audit for taxation years 2003, 2004 and 2005 of the transactions in issue.
Advantex's counsel argued that Advantex gave CRA the documents it wanted during
the audit and the CRA was satisfied. In his view, there is no need for Advantex
to search for any additional documents.
[14]
Mr. Sabharwal was
cross‑examined on his affidavit. Of the items requested by the respondent
was an organization chart for the Advantex group of companies in 2003.
Mr. Sabharwal stated that there was nobody in Advantex's current employ
who could attest to the existence of such a chart. He did acknowledge that he
was not sure if an organization chart existed and has not looked to see if one
did exist for 2003. He would be "severely challenged" to find what
chart he is looking for.
[15]
Mr. Sabharwal was
hesitant in providing financial statements for Advantex during the 2000 to 2003
fiscal years. He said he could have provided them to the CRA during the audit
but his counsel at the cross‑examination would not permit
Mr. Sabharwal to produce the documents unless there was an "order
from the Court that would force Mr. Sabharwal to testify".
[16]
Mr. Sabharwal
explained that Advantex is a "very small cap" company with a very
small finance department and that "we have a lot of work on the go just to
keep the company going and turning a profit and dealing with operational
issues". He complained that he has nobody helping him in his current work
and his work would suffer if he had to look for copies of annual financial
statements, for example.
[17]
Mr. Sabharwal was
also questioned as to the existence of certain software that was transferred by
Advantex as part of the transactions in issue. He could not answer whether or
not the software information still exists in Advantex in some other form
because he did not know.
[18]
The appellant Mould
gave over 200 undertakings during his examination for discovery. One
hundred and fifty, more or less, are still outstanding and serve as the basis
of the application.
[19]
An affidavit of Renee Johnson,
a former auditor at the CRA, was also produced in support of the motion.
Ms. Johnson audited the players, including Advantex, involved in the
transactions leading to the appeals. She was also the respondent's mominee at
the examination for discovery by appellants' counsel. She has reviewed the
affidavit of Mr. Tolmie.
[20]
In her affidavit
Ms. Johnson describes the contacts she had with Mr. Sabharwal of
Advantex and Mr. Charlton. Following telephone calls and correspondence in
June 2006, Ms. Johnson attended in July at Mr. Charlton's office in Toronto and received "certain" documents. She later spoke by telephone to
Mr. Sabharwal telling him that she received most of the documents she was
looking for from Mr. Charlton and suggested that rather than visiting
Mr. Sabharwal in Toronto, she send letters with specific questions to
Advantex and its subsidiaries. These letters are dated August 10, 2006.
[21]
In the meantime
Ms. Johnson followed up with Mr. Charlton for further information by
mail. There was also continuous exchange of correspondence and telephone calls
with Mr. Sabharwal. Ms. Johnson was receiving information from both
gentlemen, but not necessarily for all she asked.
[22]
Upon review of
Mr. Tolmie's affidavit Ms. Johnson confirmed that there were three
categories of requests concerning information or documents being sought by the
respondent:
a) those that were not
requested from Advantex or MGFIII during the audit;
b) those that were
requested and obtained only in part during the audit; and
c) those that were
requested but not obtained during the audit.
[23]
Subsections 99(1)
and (2) of the Rules provide that:
|
99(1) The Court may grant
leave, on such terms respecting costs and other matters as are just, to
examine for discovery any person who there is reason to believe has
information relevant to a material issue in the appeal, other than an expert
engaged by or on behalf of a party in preparation for contemplated or pending
litigation.
|
99(1) La
Cour peut accorder, à des conditions appropriées, notamment quant aux dépens,
l'autorisation d'interroger au préalable une personne, à l'exception d'un
expert engagé en prévision d'un litige ou en instance par une partie, ou en
son nom, si elle a des raisons de croire que cette personne possède des
renseignements pertinents sur une question importante en litige.
|
|
(2) Leave under subsection (1) shall
not be granted unless the Court is satisfied that,
|
(2) La Cour n'accorde l'autorisation
selon le paragraphe (1) que si elle est convaincue :
|
|
(a) the moving party has been unable to obtain the
information from other persons whom the moving party is entitled to examine
for discovery, or from the person sought to be examined,
|
(a) que le requérant n'a pas été en mesure d'obtenir
ce renseignement de l'une des personnes qu'il a le droit d'interroger au
préalable ou de la personne qu'il désire interroger;
|
|
(b) it would be
unfair to require the moving party to proceed to hearing without having the
opportunity of examining the person, and
|
(b) qu'il est injuste d'exiger que l'instance soit
instruite sans que le requérant de la requête ait la possibilité d'interroger
cette personne;
|
|
(c)
the examination will not,
|
(c) que l'interrogatoire n'aura pas pour effet,
selon le cas :
|
|
(i) unduly delay the
commencement of the hearing of the proceeding,
|
(i) de retarder
indûment le début de l'instruction de l'instance,
|
|
(ii) entail unreasonable
expense for other parties, or
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(ii) d'entraîner des
dépenses injustifiées pour les autres parties,
|
|
(iii) result in
unfairness to the person the moving party seeks to examine.
|
(iii) de causer une
injustice à la personne que le requérant désire interroger
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[24]
The remedy provided for
in Rule 99 is an extraordinary one and all the conditions described in
Rule 99(2) must be satisfied before the issuance of an Order can be
considered.
[25]
Advantex's counsel
argued that the Crown has failed to do what it is required to do: to identify a
knowledgeable nominee. Advantex itself cannot identify such a person.
[26]
Counsel for Advantex adds
that during the audit of the transactions in issue Advantex was "fully
transparent" with the CRA and gave CRA documents but because of the
"magnitude of the questions" some answers were not complete. He
questioned the reasons Advantex, having cooperated during the audit, is now
being put in a position where it is asked to duplicate its efforts. Counsel
argued that no court has issued a compliance order to Advantex in accordance
with Section 231.7 of the Income Tax Act ("Act") that
it provides any assistance, information or document to the Crown.
[27]
Section 99 of the Rules,
appellants' counsel submits, refers to examining a third party who may have
information that may be relevant. He distinguishes Rule 99 from
Subsection 231.7(1) of the Act which, if the judge is satisfied that
certain conditions exist, permits a judge, on application by the Minister, to
order a person to provide any access, assistance, information or documents
sought by the Minister. "Information", the word used in Rule 99,
counsel suggested, is not a "document", a word used in
Subsection 231.7(1), and therefore the respondent cannot succeed in
obtaining documents from Advantex by resorting to Rule 99.
[28]
I cannot agree with
Advantex's counsel. First of all, the Rules specifically set up a statutory
interpretation mandating the Court to give the Rules a liberal approach.
Rule 4(1) reads: "These rules shall be liberally construed to secure
the just, most expeditious and least expensive determination of every
proceeding on its merits". In light of this statutory interpretation
provision, the notion of "information" needs to be interpreted
broadly. Information is information whether it comes out of the mouth of a
witness or is disseminated from a document, a disc or other matter containing
information. What is obtained from an examination for discovery is information.
Section 98 of the Rules refers to a party providing "information
in writing" and the "information" being verified by affidavit.
The evidence received on discovery is from information.
[29]
As far as the Act
is concerned, Section 231.7 is a provision in Part XV of the Act
concerning the powers of the Minister of National Revenue in the administration
and enforcement the Act. Section 231.7 does not set out the rules
that the Minister needs to follow when arguing a case in front of the Tax
Court. The appellant's arguments lead to two problems. First, if counsel is
correct that a party to an appeal must resort to Section 231.7 of the Act
in order to examine for discovery a non‑party, then a party who is not
the Minister has no right to seek information in similar circumstances from a
non‑party because Subsection 231.7(1) is available only to the
Minister. Second, it may be arguable whether in an appeal to the Tax Court the
Minister is a party.
[30]
Further, for a judge of
a provincial superior court or a judge of the Federal Court to have
jurisdiction to blatantly interfere in the conduct of an appeal before the Tax
Court of Canada, also a superior court, by issuing an order contemplated by
Section 231.7
for purposes related to the appeal and not for the examination and enforcement
of the Act.
[31]
In any event,
Sections 231.1 to 231.7 provide tools to the Minister to administer and
enforce the Act; these provisions are not tools available to examine for
discovery a non‑party during the course of an appeal from an assessment
of tax in this Court. An application in accordance with Section 99 of the Rules
is the appropriate procedure when a party wants to examine for discovery a non‑party.
[32]
Respondent's counsel
submitted that Rule 99 refers to the examination for discovery of
"any person" who there is reason to believe has information, not
necessarily a "knowledgeable" person as is required by Rule 93.
However, in my view, once a person is identified as a non‑party being
examined for discovery, that person must have some knowledge or obtain
knowledge of the subject matter of the examination. If the person to be
examined lacks knowledge about the subject matter of the examination, the
examination probably will be useless.
[33]
The party examining a non‑party
to be examined, who is not an individual, should not be in any lesser position
then when he or she examines an opposing party. Thus Rules 93(2) and 95(2)
apply to a non‑party as well as to a party: the non‑party to be
examined, other than an individual, is to select a knowledgeable current or
former employee, officer or director to be examined on its behalf and prior to
the examination that individual is to make all reasonable inquiries regarding
the matters in issue in accordance with Rule 95(2).
[34]
That the CRA was able
to obtain information from Advantex during an audit does not preclude the
respondent from exercising its rights according to the rules of the Court. An
audit does not necessarily contemplate litigation and what a lawyer may require
in the litigation process is not necessarily what an auditor is looking for
during an audit.
[35]
I am satisfied that
Advantex and its subsidiaries have or should have information relevant to the
material issue in appeal. It and its subsidiaries were central players in the
transactions that are the subject matter of the appeals.
[36]
The affidavit of
Ms. Johnson outlines the attempts by the respondent to obtain the
information sought by the Crown during the audit of these transactions. It is
in Mr. Tolmie's affidavit that one learns of the efforts made by counsel
for the appellants to satisfy the appellants' undertakings.
[37]
The appellants,
Messrs. Mould, Pickford and Osborne, were examined for discovery on
consecutive days by Mr. Carvalho, counsel for the respondent, on
October 13 to 15, 2011, respectively. Mr. Derksen, counsel for
respondent, was also present. And Mr. David Davies was present as counsel
for each appellant.
[38]
Requests were made of
the appellants to make inquiries of non‑parties, including Advantex and
its subsidiaries, Peter Charlton and MGFIII, to obtain information and
documents. In turn, the appellants, through their counsel, Mr. Davies,
gave undertakings.
[39]
The undertakings that
concern non‑parties were given in the examinations of Messrs. Mould
and Pickford. The undertakings were later summarized by Mr. Davies and the
summary was produced with the appellants' responses to undertakings on
January 31, 2012.
[40]
The responses to
undertakings were accompanied with a letter from Mr. Davies to
Mr. Carvalho dated January 31, 2012; Mr. Davies informed
Mr. Carvalho that:
…
the Appellants have complied with their duties and have asked all questions of
third parties required by the undertakings. However, the response at this stage
has been minimal.
In
furtherance of the Appellants' ongoing disclosure obligations, when we receive
additional documents from third parties in response to the undertakings, we
will forward them to you as soon as practicable. In the event that
Peter Charlton, Madison Grant, and/or Advantex state that they will no
longer provide any further information or documents, we will let you know of
the same.
[41]
In a further letter, dated
May 15, 2012, Mr. Davies advised that:
1. The
Appellants were obligated by the undertakings given on discovery to pose
certain questions to Advantex. Those questions were put to a representative of
Advantex. The Advantex representative responded to counsel by email indicating
that Advantex is unwilling, for a variety of reasons, to provide any
substantive information in response to the queries posed. Indeed, no
substantive responses have been received to date from Advantex.
2. The
Appellants were also obligated by the undertakings given on discovery to pose
certain questions to Madison Grant and to Peter Charlton. I
understand that Peter Charlton is the controlling shareholder, if not the
sole shareholder, of Madison Grant. The questions were asked of
Mr. Charlton (both with respect to the information requested of him
personally and of Madison Grant). Mr. Charlton has responded and advises
that he is in poor health and that he has been advised by his medical doctor
not to work. Mr. Charlton has offered to provide the names of other
individuals who may have access to the information requested. We are awaiting
those other names and intend to pursue this further.
[42]
The respondent
initially proposed to conduct further follow‑up examinations. But by
letter to Mr. Davies dated June 11, 2012, Mr. Carvalho proposed
that the follow‑up be done in writing. Mr. Davies agreed by letter
dated June 22, 2012 to conduct further discoveries in writing.
[43]
By letter dated
June 25, 2012 to Mr. Davies, Mr. Carvalho forwarded additional
questions as part of the appellants' undertakings. One of the questions asked
was with respect to efforts made by the appellants to get answers and
information from Advantex. Mr. Davies' answer on December 21, 2012
follows:
Counsel
for the appellants sent several emails to a representative of Advantex in and
around November or December of 2011 with copies of the requisite inquiries that
the Appellants undertook to make of Advantex. Counsel for the Appellants also
participated in various phone calls and other communications with that
representative with respect to those inquiries.
[44]
Later, on March 4,
2013, Mr. Carvalho wrote directly to Advantex asking if it would cooperate
and respond to the respondent's questions and requests. On March 8, 2013,
Mr. Carvalho spoke by telephone to Mr. Dominic Belley,
Advantex's counsel, who, during the telephone conversation, informed
Mr. Carvalho, as described in Mr. Carvalho's letter to Mr. Belley
of the same date, that "Advantex and its related subsidiaries refuse to
answer any questions in the absence of a court order compelling them to do
so."
[45]
The condition of paragraph 99(2)(a)
is satisfied.
[46]
The appellants acquired
partnership units in MGLP. There is no evidence that they were involved in the
planning or organization of the events leading to the transaction or
participated in any transaction involving Advantex or its subsidiaries prior to
acquiring the units. Reading the affidavits of Mr. Tolmie and Ms. Johnson
as well as hearing what was alleged by respondent's counsel all indicate that
the appellants have satisfactorily answered to the best of their knowledge all
questions put to them during examinations for discovery and have exercised good
faith in attempting to answer their undertakings on discovery. The appellants
have not raised any objection to demands for undertakings on the grounds of
relevancy. They appreciate the relevance and importance of the questions they
undertook to answer.
[47]
It would be unfair to
the respondent to proceed to trial without having the opportunity to have the
undertakings of the appellants satisfied. The undertakings are germane to their
case. And, based on normal maintenance of business records at least, the
answers to the undertakings are or ought to be, within the knowledge of
Advantex.
[48]
I am satisfied that the
examination of Advantex will not unduly delay the commencement of the hearing
of these appeals nor entail unreasonable expense for any party nor will the
examination of Advantex result in unfairness to it.
[49]
There will be no costs
against the appellants with respect to this motion. Counsel for Advantex asked
that his client be reimbursed for out of pocket expenses, including salary to
employee, photocopies, travel, etc. required to answer the undertakings, as
well as costs to assist counsel to prepare the nominee of Advantex for the
examination for discovery, the examination itself and to satisfy any
undertakings on the examination. I will consider the question of costs after
completion of the examination for discovery of the nominee and after considering
submissions by counsel in respect of costs.
[50]
It is therefore ordered
that:
a) The respondent may
examine for discovery Advantex;
b) Advantex shall select a
knowledgeable current or former officer, director, member, partner or employee
to be examined on behalf of Advantex pursuant to Subsection 93(2) of the Rules;
c) The scope of the discovery will be
governed by section 95 of the Rules;
d) Advantex may be required to give
undertakings to seek and to provide additional information and documents;
e) The transcript of the examination
may be used at trial to impeach the testimony of the nominee of Advantex, if
required;
f) The respondent may be entitled to
recover the costs of the examination for discovery from the appellants, at the
direction of the trial judge;
g) The appellants may be represented
by counsel at the examination for discovery of the nominee of Advantex and have
the opportunity to object to any questions put to the nominee;
h) The appellants shall be liable for
costs only to the extent counsel for the appellants examines the nominee of
Advantex;
i) The respondent and Advantex shall
provide the appellants with copies of documents described in their Lists of
Documents filed and served in accordance with Sections 81 or 82 of the Rules
of the Court at least 30 days before the examination for discovery of the
nominee of Advantex; and
j) The appellants at their expense
shall be provided with a copy of the transcript of the examination for
discovery if the examination takes the form of an oral examination and a copy
of the questions and answers if the examination is in writing.
Signed at Ottawa, Canada, this 16th day of January 2014.
"Gerald J. Rip"
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