J. Arthur Carson and T. Geoffrey Bertram v. Her Majesty the Queen, [1995] 2 CTC 2364

Mogan J.T.C.C.:-These are two motions each brought by the respondent for an order requiring the appellant to reattend at his own expense to answer certain questions which he failed to answer on his examination for discovery. The motions are brought in the appeals of J. Arthur Carson v. The Queen, 93-1853, and T. Geoffrey Bertram v. The Queen, 93-1855.

Messrs. Carson and Bertram are two members of a large group who bought interests in a joint venture around 1980 connected with an apartment development called "Lookout Village" someplace in the Niagara Peninsula. They and approximately eight of their associates in that investment have appeals set down which, I understand, will be heard on common evidence later this spring. The two examinations for discovery of Carson and Bertram were conducted in anticipation of that trial. The issues in the two appeals are identical. Therefore, I propose to deal with the Carson motion by itself and what I say in relation to the Carson motion will apply equally to the Bertram motion.

Apparently, all the taxpayer appellants purchased interests in a syndicate which constructed a very significant apartment building. The building was sold five or six years after the syndicate interests were purchased. It appears there was a gain realized upon the sale of the building. The participants recorded the transaction as a capital gain. Sometime around 1990, approximately four years after the sale of the building, Revenue Canada concluded that the transaction was on income account and issued reassessments to the participants treating the gain on sale as income and not capital. Therefore, the issue in the appeal will be a familiar one, sometimes referred to as a trading case, where the only issue is whether the character of a gain realized on the purchase and sale of certain property is of an income character or a capital character.

Before the last reassessment was issued, there were negotiations between Revenue Canada and the two appellants Carson and Bertram, and I assume other members of the syndicate. Specifically, Revenue Canada wrote to the parties what Revenue Canada refers to as a "proposal letter" stating that they proposed to add as income to the reported income of Carson and the other members the gain realized on the sale of the building. The proposal letter is a common mechanism used by Revenue Canada to inform a taxpayer of a significant adjustment, usually an upward adjustment, to his income in order to give the taxpayer an opportunity to make representations to Revenue Canada as to why the proposed assessment should not be made.

In this case, the taxpayers retained a prominent law firm. A lawyer in that firm, representing two or more of the syndicate members, arranged for a meeting which I understand occurred in Ottawa in October 1991, at which representations were made with a view to settling the matter. I use the word "settling" in a broad sense; not in the usual sense of give-and-take because in this kind of proposed assessment, it frequently comes down to an all or nothing situation and it is quite common for taxpayers and their representatives to try and persuade Revenue Canada that their proposal is wrong and that the proposed reassessment should simply be dropped or abandoned. In any event, the object of the meeting was to avoid litigation. So, in that sense, I would refer to it as a settlement meeting. It was attended by Mr. Carson, two lawyers from the law firm representing many members of the syndicate and perhaps other persons, I am not sure.

The meeting was not successful from the taxpayers’ point of view because they did not persuade the Minister to withdraw his position. Indeed, the Minister persevered in his original proposal and issued assessments adding to the income of the appellants and their associates the respective gains realized on the sale of their interests in the syndicate.

In the examination for discovery of Carson, there were many questions to which counsel for the appellant objected and advised his client not to answer. Mr. Carson followed the advice and so we have a whole series of questions itemized in the notice of motion to which the respondent seeks answers.

Let me say at the beginning that my own view of discoveries-and I think it is reflected in the jurisprudence-is that they generally should be broad and permissive as to the scope and subject matter of the discovery and if the discovery proceeds into areas which either may not be relevant or may be objectionable for other reasons, there is an opportunity at trial, or on motion to the trial judge before the trial commences, to determine what parts of a discovery may be excluded. Therefore, my inclination is to be permissive in respect of the scope to which a party may be examined on discovery.

In response to the argument put forward by counsel for the respondent, counsel for the appellants grouped the unanswered questions into two general groups. She had four questions which she said were clearly not related to the investigation conducted by Revenue Canada prior to the assessment; and then she said that all the other questions she was prepared to treat as being related to the investigation by Revenue Canada. Because the four were so easily identified, we dealt with them first and, indeed, I made my determination on those questions in the course of listening to counsel for the appellants as follows:

On the examination of Carson, questions 212 and 290 are to be answered as put. Question 218 is an appropriate question but not adequately precise. If the respondent wants to put that question, the respondent will have to put it in a more precise fashion. On the examination of Bertram, Ms. Michaelson stated that the appellants were content that question 456 was a proper question and should be answered. That disposes of the four questions which do not relate to the investigation by Revenue Canada.

All the other questions, in the view of the appellants, relate to the investigation by Revenue Canada, being the accumulation of information by Revenue Canada prior to the issuing of the reassessments under appeal. In particular, as I understand the position of the appellants, all of the remaining questions really relate to this meeting that was held in Ottawa on October 9, 1991.

In a nutshell, as I understand the argument for the appellants, they take the position that, under the decision of the Exchequer Court in a famous judgment by Mr. Justice Noël in Racine, Demers and Nolin v. M.N.R., [1965] C.T.C. 150, 65 D.T.C. 5098 (Ex. Ct.), it is the circumstances surrounding the transaction from which the inferences will be drawn to determine whether it was trading or not. Therefore, it is what was in the minds of these people around 1980 or 1981 when they purchased their interests in the syndicate that will determine whether they had an investment intent or a trading intent; and whatever happened in the meeting with Revenue Canada on October 9, 1991 is not relevant to the determination of what their intention was at the time they entered into the transaction.

Secondly, even if those questions do relate to intent, the appellant objects to certain of them because counsel for the appellant at the discovery took the position that the questions were intended to test the credibility of the taxpayer being examined and, as such, it was an improper question.

On the motion today, counsel for the appellants referred me to the Rules of this Court and, in particular, Rule 95(1) as it relates to the scope of examination for discovery. That Rule provides:

95.(1) A person examined for discovery shall answer, to the best of that person’s knowledge, information and belief, any proper question relating to any matter in issue in the proceeding or to any matter made discoverable by subsection (3) and no question may be objected to on the ground that....

and there are three grounds, (a), (b) or (c), which are specifically identified as not being grounds for objection. The only one of relevance here is (b):

(b) the question constitutes cross-examination, unless the question is directed solely to the credibility of the witness.

Now, to apply that Rule to the questions in issue requires a little more explanation of what this case seems to be about.

Apparently, there was a brochure or a sales circular of some kind published or produced by the developer and the promoter of the syndicate who was selling units in the syndicate. I was referred to copies of that brochure as exhibits to the affidavit of John Shipley which was filed in support of the respondent’s motion. I will call it a sales brochure. It is about 12 pages long and contains the usual kind of information one would expect: a description of the proposed building, its location, its units, the market, whether it is rentable, and that kind of thing. Apparently, at some point in the negotiations with Revenue Canada, they were given two or more copies of this sales brochure and, accepting the word of counsel for the appellants at the hearing today, it appears there are now a number of different versions of the sales brochure. In particular, one apparently had an index showing that there was a part ten or part nine to the brochure and, at some other time, a copy of the brochure was presented to an official of Revenue Canada in which the index was removed and part nine or part ten was removed. Apparently, the parts removed refer to the possibility of a resale of the property.

There was an implication in the argument put forward to me and in the affidavit supporting the motion that Revenue Canada has two or more of these brochures and suspects that either there was only one brochure and it has been tampered with, or there were a number of different brochures. That position was not made clear.

Most of the questions objected to relate to questions asked by counsel for the respondent on one or more of these brochures and whether either Carson or Bertram had knowledge of the brochures; when they came into their possession; whether, in Carson’s case, he had it at the meeting or whether it was later delivered to Revenue Canada; whether they saw them at the time they invested in the syndicate or whether one of them got it from the other sometime in the 1990s, long after the units were disposed of and when Revenue Canada was thinking of reassessing. These questions generally were objected to on the basis that they were not relevant because they do not relate to what was in the mind of the appellant at the time he decided to purchase the property. Also, if they are relevant for that purpose, they fail to be excluded under Rule 95(1 )(b) because they are directed solely to the credibility of the witness. I gather that relates to the question of whether one or more of these sales brochures has been tampered with or had one or more pages removed.

I have concluded that all of these questions should be answered and that the appellants should reattend, in the terms of the respondent’s notice of motion, at their own expense to answer the questions. My reasons are as follows:

Generally, the scope of a discovery is to be broad. Counsel for the respondent provided me with authorities showing the purpose of discovery, from Williston and Rolls, being to enable the examining party to know the case he has to meet; to enable him to procure admissions which will dispense with other formal proof of his case; or to procure admissions which will destroy his opponent’s case. The acknowledgement by both parties that there are a number of different versions of the sales brochure in existence, in my view, is telling in favour of the respondent because the respondent is certainly entitled to ask, if there is more than one brochure, which one any appellant had in his possession, if an appellant ever had any one in his possession, or if he had two or more in his possession.

With regard to the meeting on October 9, I would also hold that the respondent is entitled to ask what any one of the appellants brought to that meeting; if Carson or one of the others came, if they delivered a brochure. The question is not only to go against their credibility, if one of the brochures has been tampered with. It goes just as much to what they knew at what point in time. Did they have the brochure when the transaction took place, when they initially invested in the syndicate? If they did have it, did they rely on it? If they did not, why did they not have it if the sales brochure was being used? If they came into possession of it only at the time of the meeting and one of them brought it to the meeting, was it delivered to Revenue Canada at that time?

I cannot think that the questions are directed solely to the credibility of the witness, although there may be a fallout from some of the answers if it turns out that a taxpayer has brought to the meeting a brochure that has been tampered with. The sales brochures are so relevant to the formation of intent to purchase, I would think that the respondent is entitled to ask just about any question related to those brochures, whether they were being used by the taxpayer in 1980 or whether they were brought to the meeting in October 1991 which was, by admission of all the parties, intended to avoid litigation if possible.

The appellants rely strongly on the affidavit of Terrance Young, a lawyer with Fraser & Beatty, the solicitors for the appellants, who was representing many members of the syndicate back in 1991. He was instrumental in setting up the meeting in Ottawa. He attended the meeting along with Mr. Carson and one of the other members of the syndicate and another lawyer from Fraser & Beatty. He states that the purpose of requesting and attending at the meeting in October 1991 was solely to attempt to achieve a settlement of the issues in dispute between the respondent and the group of 14 former members of Lookout Village. This is confirmed in paragraph nine of the affidavit of John Shipley filed in support of the respondent’s notice of motion. So there is no question that the purpose of the meeting was to effect a settlement.

In Mr. Young’s affidavit, he goes on to state in paragraph six, and I quote the last sentence:

The meeting was attended on the basis that all representations made would be without prejudice.

He does not offer any contemporaneous document to support the proposition that the meeting was without prejudice. There is no letter from him prior to the meeting stating that it would be without prejudice, nor is there a letter from him immediately after the meeting reminding all those in attendance that it was without prejudice. Apparently, the two lawyers from Fraser & Beatty were the only lawyers in attendance with some of their clients. They met with senior officials of Revenue Canada who apparently were without counsel. Therefore, if the meeting was to be without prejudice, I should think there was a special duty on Mr. Young and his colleague from Fraser & Beatty to make that clear because they were the only lawyers in attendance.

Admitting that the purpose of the meeting was to effect some kind of settlement to avoid litigation, and even if I were to accept the fact that the meeting was without prejudice, it does not necessarily indicate, to me, that everything which happened at the meeting was without prejudice. Certainly, any offer or concession or admission made by the appellants which might prejudice them at trial as, for example, an offer to pay tax on half the gain, would be an offer which prejudiced them which could be regarded as falling within the concept of ’’without prejudice" when two parties meet to see if they can settle litigation. But, as I understand the position of the respondent, the respondent is not trying to pursue any statement, concession, admission or offer that may have been made by one or more of the appellants at that meeting in Ottawa in October 1991. Quite the contrary, it seems that Revenue Canada is trying to pursue the role that was played by these brochures in the minds of the appellants and, if there are two or more versions of the brochures, where they came from and who had what version at what point in time. If it should turn out that one of the brochures was changed by removing certain pages, that may go to the credibility of any appellant if it can be established that a particular appellant changed one of the brochures by removing the pages. But the brochures in themselves are so fundamental to the formation of intent that, as I stated earlier, it seems to me that the Minister can ask just about any question relating to those brochures and it would be sustainable on the basis that it was primarily relevant and not directed solely to the credibility of any one of the appellants. If credibility becomes relevant out of the Minister’s questions, it is a fallout to the function of the brochures in themselves.

Motion granted.