Pierre Duquette, Gérard Grenon and Louis Geoffroy v. Her Majesty the Queen, [1995] 1 CTC 2264

Garon J.T.C.C.:-Each of the three appellants submitted an "amended motion for particulars" [translation] pursuant to section 52 of the Tax Court of Canada Rules (General Procedure) ("the Court Rules"). The wording of each of these motions, which is for all practical purposes identical, further sets out 125 demands for particulars contained in a 42-page document. Unless the contrary is indicated I will refer in these reasons for convenience’ sake only to the case of the appellant, Dr. Pierre Duquette. However, these reasons shall be taken to apply to the amended motions for particulars of the appellants Dr. Louis Geoffroy and Dr. Gérard Grenon.

The hearing of the instant motions was preceded by a judgment of the undersigned dated December 16, 1992 on other motions made by the same appellants in the cases now before the Court pursuant to section 53 of the Court Rules, asking the Court to strike out in full the three replies to the notice of appeal or alternatively to strike out "paragraphs or allegations which in the Court’s opinion should be struck". In the judgment in question I allowed the appellants’ motions to the extent stated in that judgment. Following that judgment an "amended reply to the notice of appeal" was filed and served by the respondent on each of the appellants in late January 1993.

In order to indicate the background against which these demands for particulars were made I feel it is worth giving a general review of the allegations and arguments put forward by the appellant Dr. Pierre Duquette in the notice of appeal and by the respondent in the "amended reply to the notice of appeal".

In my judgment of December 16, 1992 on the motions made by the appellants under section 53 above, I said the following regarding the facts and arguments put forward for the appellant in the notice of appeal:

The appellant is a medical doctor specalized in neurology, a member in good standing of the Corporation profesessionnelle des médecins du Québec. He resides in Montréal. In 1985, the appellant became a partner in the corporation Les Associés de Recherche Médicale Canadienne ("ARMC"), incorporated under the laws of Ontario. The following year, in 1986, he became a partner in the corporation Les Associés de Recherche Médicale canadienne No. 2 ("ARMC No. 2"), also incorporated under the laws of Ontario. The appellant claimed that the purpose of ARMC and ARMC No. 2 was to have Canadian or foreign laboratories carry on various scientific research activities in the area of monoclonal antibodies. The appellant alleged that he hoped to earn a profit from his investments in both those corporations. The appellant also argued that, in order to achieve the scientific objective just described, ARMC and ARMC No. 2 assigned responsibility for planning, directing and organizing a vast scientific research project on monoclonal antibodies to the Brazilian corporation “Coral Sociedade Brasileira de Pesquisas e Desenvolvimento Ltda" ("Coral").

During 1985 and 1986 ARMC and ARMC No. 2 incurred substantial losses. The appellant’s share in the non-capital loss suffered by ARMC during the fiscal year ending during the 1985 taxation year and claimed as a deduction by the appellant in the computation of his income for the 1985 taxation year apparently amounted to $215,148, according to paragraph 16 of the notice of appeal. The appellant also deducted $300,094 from his income as a non-capital loss for the 1986 taxation year, according to paragraph 21 of the notice of appeal.

[Translation.]

The notice of appeal of the appellant Dr. Pierre Duquette was followed by a "reply to the notice of appeal" and, following my judgment of December 16, 1992, as I have already indicated, by an "amended reply to the notice of appeal". Paragraphs 60, 61, 110, 118, 119, 122, 128, 129, 130, 138, 151, 157, 158 and 161 of the "amended reply to the notice of appeal" set out the most general arguments made by the respondent in support of the Minister of National Revenue’s assessments:

60. In 1985 the appellant paid an amount in cash to ARMC in this way and further signed a promissory note in favour of ARMC payable in Brazilian cruzeiros commencing in 1992, in accordance with the procedure set out above.

61. In 1986 the appellant paid an amount of money in cash to ARMC No. 2 and further signed a promissory note in favour of ARMC No. 2 payable in Brazilian cruzeiros beginning in 1993, in accordance with the procedure set out above.

110. The activities which ARMC and ARMC No. 2 consider to be research do not in the circumstances involve any reasonable expectation of profit, so that in this regard ARMC and ARMC No. 2 are not operating a business.

118. Coral was described as a corporation having substantial interests in Brazil, which is not true.

119. Coral was described as a corporation having substantial interests in Brazil in an attempt to justify use of the Brazilian currency in connection with projects undertaken by Coral.

122. For the promoters and members of ARMC and ARMC No. 2 use of the Brazilian currency was an essential aspect of the "tax shelter" of which they were reciprocally the sellers and purchasers.

128. In view of the precipitous depreciation of the Brazilian currency standard business practices in transactions in Brazilian currency are to limit the term of obligations, to provide for an annual monetary adjustment factor in contracts and to agree on a rate of interest which does not apply until after the annual monetary adjustment.

129. The promissory notes signed by ARMC and ARMC No. 2 in favour of Coral and the debts to Coral mentioned in the documents titled "Research and Development Proposal and Agreement" do not in any way follow standard business practices for transactions in Brazilian currency.

130. The promissory notes signed by ARMC and ARMC No. 2 in favour of Coral and the debts to Coral mentioned in the documents titled "Research and Development Proposal and Agreement" also do not in any way follow standard business practices in research, as a laboratory does not ordinarily undertake to complete work in less than a year and receive 80 per cent of the agreed price some seven to ten years later in a currency which is notoriously weak, all without any monetary adjustment.

138. The notes signed by ARMC and ARMC No. 2 in favour of Coral and the debts to Coral mentioned in the documents titled "Research and Development Proposal and Agreement" have absolutely no value.

151. ARMC and ARMC No. 2 made no expenditures in the relevant fiscal years on scientific research and experimental development.

157. The amounts put forward as research cost expenses by ARMC and ARMC No. 2 in their financial statements are not reasonable in the circumstances.

158. The promoters of ARMC and ARMC No. 2 created these companies and signed the documents titled ''Research and Development Proposal and Agreement" with Coral strictly for tax purposes, namely unduly or fictitiously reducing the income of members of the companies for the purposes of the Income Tax Act.

161. Deduction of the amounts described by ARMC and ARMC No. 2 as research costs, if it were allowed, would unduly or artificially reduce the income of ARMC, ARMC No. 2 and the members of these two companies.

[Translation.]

At the hearing of these motions by the three appellants counsel for the respondent indicated that the latter was prepared to provide particulars on the following points:

1. the identity of the promoters mentioned, in particular in paragraph 33 of the "amended reply to the notice of appeal";

2. the identity of the Canadian brokerage firm referred to in particular in paragraph 35 of the "amended reply to the notice of appeal";

3. the allegations made in paragraphs 118 and 119 of the "amended reply to the notice of appeal” regarding the Coral company; these paragraphs read as follows:

118. Coral was described as a corporation having substantial interests in Brazil, which is not true.

119. Coral was described as a corporation having substantial interests in Brazil in an attempt to justify use of the Brazilian currency in connection with projects undertaken by Coral.

4. The allegations contained in paragraphs 139 and 140 of the "amended reply to the notice of appeal" regarding the applicable business and accounting principles; the wording of these two paragraphs is set out below:

139. The financial statements of ARMC and ARMC No. 2 for the relevant fiscal years are not consistent with generally recognized business and accounting principles, particularly as regards the item "research costs" in the statement of operating results.

140. The loss of $70,009,324 (1985) posted by ARMC and that of $73,293,641 (1986) posted by ARMC No. 2 are not consistent with generally recognized business and accounting principles and do not accurately reflect the income of ARMC and ARMC No. 2 for the fiscal years in question.

The Court notes this consent by the respondent to provide particulars on the four aforementioned points, and it accordingly orders that reasonable particulars be provided on those points.

I now turn to the other demands for particulars made by the appellant in connection with its "amended motion for particulars". Given the prolixity of this motion and the great number of paragraphs where these particulars are sought, I did not feel it was necessary to deal with each of these demands separately.

First, for the paragraphs having nos. 2, 3, 4, 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 21 [1] of this "amended motion for particulars", the appellant wishes to obtain particulars from the respondent as to the facts and, in several cases, the reasons relied on by the latter in making these partial or complete denials of allegations in the notice of appeal referred to by the respondent.

In this regard it was argued on the respondent’s behalf that the appellant was automatically entitled to particulars on all paragraphs of the notice of appeal which were thus simply denied. This argument is ill-founded. We must instead look at the whole pleading, here the "amended reply to the notice of appeal", and determine whether reasonable particulars were provided elsewhere in the pleading in question. This conclusion leads me to consider the demands for particulars made by the appellant more expressly in its instant motion.

Apart from the four questions on which counsel for the respondent agreed to provide particulars and must now do so, these demands for particulars dealt with the following points:

1. the nature and other details of the tax shelter used by the promoters in question;

2. the function and activities of one Allen F. Campbell, a U.S. citizen, and a joint stock company A.F. Campbell & Co. Inc. in connection with a company known in the pleadings as "Coral";

3. the background, composition, function, activities, organization and income of ARMC and ARMC No. 2;

4. the prosecutions brought by the U.S. government against Allen F. Campbell and A.F. Campbell & Co. Inc. and the knowledge that certain persons may have concerning the bringing of those prosecutions;

5. the function and activities of Coral, particularly in Brazil, the nature and location of its operations and where its premises are located;

6. the transactions and arrangements entered into or concluded between ARMC and ARMC No. 2 and Coral regarding, in particular, research work and the function of the promoters of ARMC and ARMC No. 2;

7. the use of Brazilian currency by Coral and by the promoters and members of ARMC and ARMC No. 2, the characteristics of that currency, the anticipated depreciation of the currency, the measures taken by the Brazilian government regarding it and the business practices followed in the transactions conducted in the currency;

8. the "hedge agreement" between Coral, ARMC and ARMC No. 2 and the protection provided to ARMC and ARMC No. 2;

9. the nature and value of the notes signed by ARMC and ARMC No. 2 in favour of Coral and the assignment of those notes to a trustee, M.R.T. Medical Research Trust;

10. the deduction for research costs by ARMC and ARMC No. 2 and the amounts paid for this item by these companies;

11. the purpose of the agreements titled "Research and Development Proposal and Agreement" concluded between ARMC and ARMC No. 2 and Coral;

12. adjustments or corrections mentioned in paragraphs 162, 163, 165 and 177 of the "amended reply to the notice of appeal".

On this point it should be noted that the allegations in the notice of appeal which were the subject of a simple denial in the "amended reply to the notice of appeal" and on which, as I indicated above, the appellant wished to obtain particulars of the facts and reasons relied on by the respondent in making these denials relate in all cases to points which are the subject of specific demands for particulars in the various paragraphs of this motion.

I have considered all these demands for particulars in connection with the subjects just listed and the application of the various allegations of fact contained in the "amended reply to the notice of appeal" in light of the abundant case law cited by counsel for the parties concerned. In this connection the judgment of the Federal Court of Appeal in Gulf Canada Ltd. v. The "Mary Mackin", 42 C.P.C. 146, 52 N.R. 282, seems to me to provide a good summary of the principles applicable to demands for particulars or details regarding pleadings. In that case Heald J.A., for the majority of the Court, relied on a passage from a judgment by Sheppard J.A. in Anglo-Canadian Timber Products Ltd. v. B.C. Electric Company Ltd. (1960), 31 W.W.R. 604, 23 D.L.R. (2d) 656 (B.C.C.A.), an extract of that judgment reads as follows:

On the other hand the purpose of particulars is to require a party to clarify the issues he has tried to raise by his pleading, so that the opposite party may be able to prepare for trial, by examination for discovery and otherwise. The purpose of particulars was stated in Thorp v. Holdsworth (1876), 3 Ch. D. 637, 45 L.J. Ch. 406 (U.K.), by Jessel M.R. at page 639, as follows:

The whole object of pleadings is to bring the parties to an issue, and the meaning of the rules of Order XIX, was to prevent the issue being enlarged, which would prevent either party from knowing when the cause came on for trial, what the real point to be discussed and decided was. In fact, the whole meaning of the system is to narrow the parties to definite issues, and thereby to diminish expense and delay, especially as regards the amount of testimony required on either side at the hearing.

That purpose of particulars was stated in Spedding v. Fitzpatrick (1888), 38 Ch. D. 410, 58 L.J. Ch. 139 (U.K.), by Cotton L.J. at page 413, as follows:

The object of particulars is to enable the party asking for them to know what case he has to meet at the trial, and so to save unnecessary expense, and avoid allowing parties to be taken by surprise.

Also the particulars operate as a pleading to the extent that "They tie the hands of the party, and he cannot without leave go into any matters not included" (Annual Practice, 1960, page 460) and they may be amended only by leave of the court (Annual Practice, 1960, page 461).

When pleadings are so vaguely drawn that the opposing party cannot tell what are the facts in issue or, in the words of Cotton L.J. in Spedding v. Fitzpatrick, supra, "what case he has to meet," then in such circumstances the particulars serve to define the issue so that the opposite party may know what are the facts in issue. In such instances the party demanding particulars is in effect asking what is the issue which the draftsman intended to raise and it is quite apparent that for such a purpose an examination for discovery is no substitute in that it presupposes the issues have been properly defined.

The same judge of the Federal Court of Appeal later goes on to refer to a passage from a judgment by Lambert J.A. in a subsequent judgment of the British Columbia Court of Appeal in Cansulex Ltd. v. Perry et al., dated March 18, 1982, case C785837, not reported. In that passage Lambert J.A. reproduced with approval the following passage from the White Book dealing with the English Practice [2] regarding the purpose of particulars or details on pleadings:

(1) to inform the other side of the nature of the case they have to meet as distinguished from the mode in which that case is to be proved....

(2) to prevent the other side from being taken by surprise at the trial....

(3) to enable the other side to know what evidence they ought to be prepared with and to prepare for trial....

(4) to limit the generality of the pleadings....

(5) to limit and decide the issues to be tried, and as to which discovery is required....

(6) to tie the hands of the party so that he cannot without leave go into any matters not included....

Counsel for the respondent argued that this ’’amended motion for particulars" should have been accompanied by a sworn statement. This is not required by the Court Rules and I see no need for it in the instant case.

Reference was made several times on the appellant’s behalf to the need for the particulars requested in order to prepare an adequate answer. Section 45 of the Court Rules does not require an appellant to file and serve an answer. That section reads as follows:

An answer, if any, shall be filed and served within thirty days after service of the reply.

Subsection 50(2) of these Rules states that:

An appellant shall be deemed to deny the allegations of fact made in the reply if an answer is not delivered.

The number of demands for particulars made in the instant motion seems clearly excessive. The need to allege relevant facts should not be confused with points of evidence or the proof of those facts. The appellant’s motion seems to go beyond the limits of what is reasonable on a number of points. On the other hand, the point that the facts are known to the party seeking particulars is not necessarily a bar to obtaining those particulars in view of a party’s fundamental right to know the main aspects of the case it must answer.

I have come to the conclusion that in general the respondent has discharged her duty to make her position known on the facts alleged in the notice of appeal and to indicate particularly the findings or assumptions of fact on which the Minister of National Revenue relied when he made the assessments appealed from, as she is required to do by section 49 of the Court Rules. In this regard I feel I should point out that the "amended reply to the notice of appeal" is a 34-page document containing 203 paragraphs. A great number of these paragraphs mention allegations of fact which are quite detailed. However, it appeared that the appellant was justified in obtaining particulars on the following points in addition to the four mentioned earlier:

1. paragraph 129(a) of the motion;

2. paragraphs 130(a) and (c) of the motion;

3. paragraph 141(a) of the motion;

4. paragraph 153(a);

5. paragraph 165(a).

In coming to this conclusion I have taken into account the complexity of the facts, the considerable number of documents and the diversity of points involved and the difficulties which those questions may entail. A review of the case law leads me to think that the courts are perhaps more willing nowadays to allow demands for particulars.

I therefore consider that the appellant’s motion should be allowed to the extent indicated in these reasons. The particulars which I have ordered to be produced must be provided by December 10, 1993 at the latest.

Costs to follow the outcome of the appeals.

Motions allowed.