BETWEEN:
BLENK DEVELOPMENT CORP.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
(Delivered orally
from the bench on May 20, 2014, in Ottawa, Ontario.)
Bocock J.
[1]
These reasons for order are delivered orally
this May 20, 2014, after review and deliberation in respect of a motion brought
relating to matter 2012-4145(IT)G between Blenk Development Corp. and Her
Majesty The Queen at Vancouver, British Columbia on the 25th day
of April, 2014.
[2]
The Appellant, Blenk Development Corp.
(“Blenk”), brings this motion for an order of this Court to permit an expert to
attend at the examinations of discovery by the Appellant of the Respondent’s
representative.
[3]
The Minister reassessed Blenk and disallowed
deductions for interest expenses claimed under paragraph 20(1)(c) of the
Income Tax Act (the “Act”). The deduction was disallowed on the
basis that the rate of interest utilized by Blenk on a non-arm’s length loan
transaction, involving a friend of the 100% shareholder principal of Blenk, was
unreasonable given the Minister’s assumed terms and conditions, timing and the
market risks associated with the loan (the “comparative factors”). The deduction
has also been denied through assumptions relating to the non-existence of the
debt and loan in the first instance and its characterization as a sham.
[4]
In the Amended Reply, the Minister specifically
assumes that the terms and conditions, timing and market risks associated with
the alleged loan, when analyzed on a comparative basis, dictate that financial
institutions, both foreign and/or domestic, would have provided similar loans
at appreciably diminished rates of interest (the “economic analysis”). After
conducting the economic analysis of the loans, the rates of interest were
assumed to be inflated and the interest expense deduction was disallowed. This
is cumulatively reflected, inter alia, in subparagraphs 26(oo) through
(aaa) of the Amended Reply. Specifically, the Court references the following
subparagraphs:
oo) Gerhard Blenk would not have
been risky customer to a Canadian bank;
pp) the alleged loans were filly
secured by the assets owned by the Appellant and by a personal guarantee from
Gerhard Blenk;
qq) Gerhard Blenk’s personal
guarantee for the amounts allegedly borrowed would have secured mush better
interested rates for the alleged loans than those set out in the purported loan
agreements;
rr) the default rate for loan
personally pledged by Gerhard Blenk is zero;
ss) a Canadian bank would have
been willing to lend the Appellant the amounts allegedly borrowed for the prime
business rate;
ss) a Canadian bank would be
willing to resolve the alleged loans from one development phase of the Wilden
development to another under the same terms and conditions;
[…]
zz) Herhard Blenk could have
borrowed the amounts allegedly borrowed from banks in Germany and Liechtenstein at reasonable interest rates;
aaa) Herhard Blenk could have
borrowed the amounts allegedly borrowed from banks in Germany and Liechtenstein below the prime rate;
[…]
[5]
Counsel for the Appellant argues that the
knowledge of the methodology, definition and application of the comparative
factors and ensuing economic analysis is beyond the legal skill and knowledge
normally expected of legal counsel and may impede Appellant counsel’s ability
to conduct a proper examination without the assistance and presence of an
expert at examination for discoveries.
[6]
In opposing the motion, Respondent’s counsel
submits that the Appellant has failed to meet the required onus for three
reasons:
a.
no evidence is before the Court that Appellant
counsel’s level of skill and knowledge is exceeded by the comparative factors
and economic analysis to such a level where proper examinations for discovery
cannot take place without the presence of an expert;
b.
the question of the reasonableness of the rate
of interest, while requiring an economic analysis of comparative factors is at
the very low end of complexity of such a transfer pricing scenario, includes a
relatively simple fact situation and, even at that, involves only a small
component of this otherwise factually based appeal; and,
c.
the law in respect of the role of expert
witnesses generally has undergone recent changes by virtue of evolving case law
and by amendments to the Tax Court of Canada’s own rules which now arguably
disqualify an expert from examinations for discovery and/or trial where an
“advocacy” role is likely to be adopted.
[7]
Prior to an expanded analysis of the
Respondent’s position in this motion, a summary examination of the legal basis
upon which experts may be permitted at examination for discoveries will assist
the Court. Both counsel agreed on the test which has been cited with authority
by the Federal Court of Canada in S & M Brands Inc. v. Paul, 2003 FC
1035 where at paragraph 12, Justice Blais, as he then was, referenced with
approval Ormiston v. Matrix Financial Corp., 2002 SKQB 257, which in
turn was a decision of Justice Klebuc. These general principles applicable to
the question of the presence of non-parties at examination for discoveries are
summarized and customized by this Court to the Tax Court of Canada as follows:
a) generally only parties and counsel may attend, unless a motion’s
judge grants leave for a non-party;
b) a non-exclusive list of circumstances where such discretionary leave
may be granted are:
i.
where the level of expert knowledge, scientific,
technical or otherwise, relevant to an appeal and its underlying issues and
assumptions are beyond counsel and therefore preclude proper examinations for
discovery (this circumstance relevant in this motion);
ii.
a non-party is seized of ability or knowledge
which will assist or inform the examination for discovery process;
iii.
a party requires assistance specific in the
circumstances.
c) the burden is that of the party making the request and is usually
satisfied by an affidavit outlining the need, concern or assistance, as the
case may be; and,
d) once established factually, any prejudice or other ground for exclusion
rests with the opposing party.
[8]
Returning to further analysis of the
Respondent’s grounds for opposing the request, the Court will decide this
matter with reference to the test as customized from Ormiston above.
[9]
The Respondent argues that there is insufficient
evidence before the Court to afford a conclusion that Mr. Fellhauer, counsel of
record, lacks knowledge beyond that reasonably expected in order to conduct a
proper examination. Factually, counsel says there is no sworn testimony before
the Court of Mr. Fellhauer’s knowledge, one way or the other. Legally, in
relation to the appeal, the case will likely rest on factual findings of the
Court rather than issues and methodology related to the economic analysis of
the comparative factors. To support this argument, Respondent counsel
references a previous exchange of correspondence during the objection process
which it is alleged reconciled, narrowed and answered question relating to the
comparative factors and economic analysis.
[10]
As to this first assertion, the Court is not
convinced. Mr. Pratch, who appeared as counsel on this motion, on the
cross-examination of the affiant’s affidavit and has otherwise appeared
throughout the process to date, represented directly to the Court that he will
appear on discoveries. He also stated that the underlying assumptions related
to the intricacies of the comparative factors and economic analysis are beyond
a standard reasonably expected of general litigation counsel. Further the
affiant, whose credentials as an expert in this file are of national rank, has
attested to the fact that such understanding comes after years of study,
practice and experience in the area. This assertion was not challenged on
cross-examination. The Court finds that the use of the comparative factors and
economic analysis are not regularly included in the general practice of law and
general tax litigation.
[11]
Now, to the second point that the comparative
factors and economic analysis are no longer meaningfully in dispute, the Court
again must reference the affiant’s testimony that a critical part of the
assumptions in the Amended Reply require reference to a “transfer pricing
model” engaging OECD and CRA publications to guide the economic analysis of the
comparative factors. Whether Respondent’s counsel is correct or not that this
issue has been resolved is neither plain and obvious nor readily apparent from the
evidence before this motions Court. A trial judge may well determine this is
true, but that is not the role or within the capacity of this motions Court,
given the considerable reference, pleadings and argument to date related to
this issue.
[12]
Respondent’s counsel also asserts that even if
the test involves some transfer pricing principles engaging the analysis of
whether the interest expense deduction was reasonable, the present appeal is
among the simplest of such cases and lacks the complexity which requires an
expert at examinations for discovery. The two types of published guidance, the
CRA IC 87-2R and the OECD Transfer Pricing Guidelines have existed for some
time and will apply without little methodological variation. In any event, such
application will likely be neatly dealt with at trial by respective expert
testimony as to the comparative factors and quantum. Respondent’s counsel
argues that the remaining balance of the issues to be determined at trial,
which are the largest volume, are factual and fall to the Court, not experts.
[13]
The Court certainly agrees with Respondent’s
counsel that the determination of a reasonable rate of interest in relation to
the disallowed interest expense is not the sole issue which will be before the
Court: mere reference to the Notice of Appeal and Amended Reply provide that prima
facie evidence.
[14]
The Court disagrees with the position that the
determination of reasonableness, because it is a standard used frequently in
the Act and before the Court, has a level of familiarity, simplicity and
common experience in this context to render such a determination simple. The
deployment of that standard when combined with the Respondent’s own
assumptions, underlying analysis and conclusions in the amended Reply make it
deceivingly simple.
[15]
On the face of the evidence before the Court,
in arriving at the reassessing position, the Minister utilized the services of the
CRA International Tax Directorate’s own on-staff economist. The report
generated was on its face the basis for the factual assumptions regarding the
unreasonable, unrestrained and artificial interest rates allegedly used by the
Appellant. The Respondent has referenced that report, amendments and subsequent
updates as and when needed. Apart from that point, the methodology of a
transfer pricing model was used and forms a critical part of one the bases upon
which the interest expense was disallowed, albeit, at its generically highest
level as being “unreasonable”. The comparative factors and the economic
analysis of same to disallow the Appellant’s claimed interest expense deduction
embed the requirement of such expert knowledge in one of the issues in dispute
before the Court in this appeal. Subject to the restrictions which follow, the
need, concern of counsel and nature of assistance are established sufficiently
to warrant the presence of the sought expert at examinations for discovery.
[16]
The final basis for opposing the presence of the
expert involves recent developments in the case law and this Court’s own
rules. Respondent’s counsel by referencing the different emphasis taken by
various provincial superior courts has suggested that the more recent standard
is to exclude from presence at the discovery process an expert who may testify
at trial.
[17]
In digested form, the range of the case law may
be summarized as follows: the exclusion of an expert at discoveries from being
an expert witness at trial is possible, but it is difficult to imagine when
such an order would be proper: Ian MacDonald Library Services Ltd. v. P.Z.
Resort Systems Inc., 1985 CanLii 259 at paragraph 15. In considering the
argument of prejudice arising from the dual role of an expert at examinations
for discovery and at trial, the motion judge need not overly confront such an
issue because qualification for each separate stage embodies a different
standard and different role: Ormiston, supra at paragraph 24. Where a
Court’s rules impose an amicus curiae role for experts, numerous
substantive, private discussion, meetings and expert report revisions will
disqualify an expert witness at trial: Blake Moore v. Dr. Tajedin Getahun,
2014 ONSC 237 at paragraphs 50, 51 and 53. While the final case involved
excessive causal conclusions in medical-legal testimony, the Court in Blake
Moore did reference a portion of the Ontario Rules of Civil Procedure
Rule 53.03. That Rule provides the following form as an expert’s
duty to the Court:
[…]
(a) to provide opinion evidence that is
fair, objective and non-partisan;
(b) to provide opinion evidence that is
related only to matters that are within my area of expertise, and;
(c) to provide such additional
assistance as the court may reasonably require, to determine a matter in issue.
[…]
[18]
Respondent’s counsel contends the foregoing rule
is roughly analogous to the Tax Court of Canada’s own recent rule amendments
and, specifically, subsection 145(1) of the Tax Court of Canada Rules (General
Procedure) and the Expert Witness Code of Conduct which provide, inter
alia:
145. (1) In this
section, “expert report” means
(a) a solemn declaration made by a
proposed expert witness under section 41 of the Canada Evidence Act; […]
(2) An expert report shall
(a) set
out in full the evidence of the expert;
(b) set out the expert’s
qualifications and the areas in respect of which it is proposed that they be
qualified as an expert witness; and
(c) be accompanied by a certificate
in Form 145(2) signed by the expert acknowledging that they have read the
Code of Conduct for Expert Witnesses set out in Schedule III and agree to
be bound by it.
SCHEDULE
III
CODE OF CONDUCT FOR EXPERT WITNESSES
General Duty to the Court
1. An expert
witness has an overriding duty to assist the Court impartially on matters
relevant to his or her area of expertise.
2. […]. An expert witness must be
independent and objective and must not be an advocate for a party.
Expert Reports
3. An expert report shall include […]
(d) the facts and assumptions on which
the opinions in the report are based;
[19]
In concluding, counsel for the Respondent
asserts the expert’s presence at the examination for discoveries in this matter
will transform the expert into an advocate, and given the possibility he may be
an expert witness at trial, taint the required independent and objective duty
outlined in this Court’s Expert Witness Code of Conduct (“Expert Code of
Conduct”).
[20]
The Respondent’s arguments and submissions on
this point have some merit. They are also premature and otherwise generally
mitigated by the imposition of certain procedural requirements at this stage.
[21]
The new Expert Code of Conduct relates
specifically to an expert’s preparation and subsequent testimony regarding an
expert’s report. Any arguments to be marshalled by a party against a proposed
expert witness report logically arise when and if the report is served on
opposing counsel. The case of Blake Moore dealt with an inappropriate
expert report arising from “strategic” revisions and causal, factual
conclusions, rather than exclusion on the basis of the expert’s presence at
examinations for discovery. Moreover, inappropriate or erroneous factual
assumptions in any export report or testimony are anathema to credibility and
are the veins of gold mined by opposing counsel in cross-examination. However,
to the extent this expert witness who shall be present at examinations for
discovery seeks to be an expert witness at trial, then, in such an event a case
management judge may deal with this argument of prejudice and non-compliance
with the Expert Code of Conduct at that time. The content and context of the
expert report will be central to that determination precisely as such issues
were in Blake Moore. As such, the Respondent’s rights and the Court’s procedures
on that point will be protected.
[22]
As to the expert’s transformation to advocate
and the protection by the Court of its processes, namely examinations for
discovery, the Court observes the following: the purpose of the expert at
examination for discoveries is for Appellant counsel’s assistance only and not
to provide a distraction, deploy an extra advocate or gain any advantage. In
short, in participating solely in that role, the expert should be seen, but not
heard during the official proceedings.
[23]
For the foregoing reasons, the motion is granted
and the expert, Mr. Brad Rolph, shall be permitted to attend the Appellant’s
examinations for discovery of the Respondent’s representative provided that:
a.
Mr. Rolph shall sign an express covenant
addressed to the Respondent and this Court agreeing to comply with the implied
undertaking rule; with such form to be drafted by Respondent’s counsel to the
reasonable satisfaction of Appellant’s counsel;
b.
the expert shall ask no direct questions nor
shall he speak during the official examination process; and,
c.
any assistance provided to counsel shall be
delivered in advance, by inconspicuous notes during the official examination
process or during off the record and regularly scheduled breaks.
[24]
Given the nature of the motion, costs are fixed
at $1,000.00 in favour of the Appellant, but are reserved as to payment in the
event of the cause, or, as addressed further, when raised by counsel, before
any case management or trial judge of this Court in the event that an issue is
raised concerning prejudice caused by an expert report subsequently served and
authored by the same expert, Mr. Rolph.
Signed at Ottawa, Ontario, this 4th day
of June 2014.
“R.S. Bocock”
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