Tax Court of Canada Rules (General Procedure)

The taxpayer (Shell) realized a capital loss on its disposition of its interest in a partnership (“SCU”) to Canadian subsidiaries of PetroChina in connection with establishing a joint venture with the PetroChina group (the “Groundbirch Joint Venture”) for the development and production of natural gas. Such natural gas production was required in order to satisfy their obligations to provide their respective shares of natural gas to a joint venture (the “LNG Canada Project”) among them and three other parties who otherwise were competitors. Shell and PetroChina did not wish those other parties to know the details of the Groundbirch Joint Venture and, to that end, made various confidentiality agreements and covenants.

CRA denied the above capital loss pursuant to GAAR and, in order to satisfy the onus on it of establishing that the realization of that loss was not an avoidance transaction or did not result in an abuse, it needed to disclose various JV documents whose disclosure would be prohibited by the confidentiality covenants and whose disclosure would be commercially damaging to it and PetroChina. Shell brought a motion for a confidentiality order pursuant to s.16.1 of the Tax Court of Canada Rules (General Procedure), in respect of 58 documents (Subject Documents), so that they could be disclosed to the Crown on discovery, but shielded from public view.

After referring to the “open courts” principle set out inter alia in Sherman Estate, and before allowing the motion, Sommerfeldt J stated (at para. 32):

I am satisfied that Shell has established that, if a confidentiality order is not granted, there will be a serious risk to one or more of the following important public interests:

(a) the general commercial interest of preserving confidential information;

(b) the general public interest of protecting the right to a fair trial, also described as the public interest of enabling “commercial litigants to vindicate their legal rights without exposing themselves to the real risk of harm”;

(c) the public interest of enabling a litigant, when “compelled by the rules of discovery to divulge sensitive and confidential information, ... to maintain the confidentiality of that information”;

(d) the public interest of promoting commercial certainty and protecting proprietary information; and

(e) the public interest of protecting fair competition.

He also referred (at para. 46) sympathetically to the dilemma faced by Shell that “in order to put its best foot forward in this Appeal, Shell will need to breach the confidentiality agreements” absent the motion being granted.

In 2016, Silver Wheaton appealed reassessments for Cdn.$353M made pursuant to s. 247(2), and reached a settlement on Dec. 13, 2018. Almost all documents filed with the TCC in that appeal were subject to a sealing order. On December 18, 2015, seven individuals (the “Non-parties”) filed a U.S. federal securities class action referencing the drop in Silver Wheaton’s share price when the reassessments were announced. The Non-parties brought this motion requesting an order declaring that the implied undertaking of confidentiality did not apply, or alternatively, if it did apply, that it was waived with respect to Silver Wheaton’s discovery evidence.

Before dismissing the motion, D'Arcy J stated (at paras 90, 94, 95, 97, 98 and 99):

…[T]he Non-parties …bear the burden of demonstrating that the implied undertaking of confidentiality should be waived.

… [T]he parties are not the same in the Tax Court Appeal and the U.S. Class Action. The only common party is Silver Wheaton. Further, there are no similarities between the class of litigants in the U.S. Class Action, represented by the Non-parties, and the Crown, the other party in this appeal.

In addition, the issues are not the same or similar. The issue in the Tax Court Appeal is the amount of Silver Wheaton’s taxable income under the Canadian Income Tax Act for each year from 2005 to 2010. The issue in the U.S. Class Action concerns a breach of U.S. securities law that allegedly occurred beginning in February of 2011.

… [T]he Non-parties have not been able to refer to a specific document in this appeal whose disclosure would be in the public interest.

… [T]he Non-parties’ motion is a fishing expedition… .

The granting of the Non-parties’ motion would result in the very evil the Supreme Court cautions against: defeating the objective of the implied undertaking of confidentiality, which is to encourage open and generous discovery by assuring the parties being discovered of confidentiality.

CRA issued Notices of Determination to deny losses of a limited partnership (TSI). Both TSI and its partners launched appeals to the Tax Court. However, TSI then filed a Notice of Discontinuance, which resulted in its appeal being deemed by s. 16.2(2) of the Tax Court of Canada Act to have been dismissed. The individual partners continued with their appeals, arguing that the Notices of Determination had been statute-barred.

D’Auray J first indicated that there was potential merit in the individuals’ argument that s. 152(1.7), which provides that a notice of determination is binding on the partners respecting their income, taxes and amounts refundable, did not preclude them from arguing that the Notices of Determination were invalid on procedural grounds. However, that success did not help the individuals, as she agreed with the Crown that their continuing with their appeals was an abuse of process. A previous case had found that generally “dismissal under section 16.2 of the TCC Act carries the same effect as a judgment of dismissal by the Court” – and the action which thus had constructively been decided against them was one in which they could have, but failed to, raised their statute-barring arguments.

The corporate Appellant and three individual Appellants applied to be represented in their respective appeals by their accountant, rather than retaining counsel to represent them, on the grounds that they lacked financial resources to retain legal counsel. After referencing the finding in Masa Sushi that a corporate appellant in a general procedure appeal may not be represented by non-counsel and the opposite conclusion reached in BCS Group, Russell J indicated his preference for the latter approach, stating (at paras 9, 16):

… [A] corporation, being an inanimate person, cannot literally represent itself. Applying the presumption against tautology, Parliament thus intended a corporate party to be able to be represented by either counsel or some third party individual who was not a lawyer. …

… [M]eaning must be given to the clear subsection 17.1(1) Parliamentary language that a party, a term encompassing both corporate and non-corporate parties, may appear in person in a general procedure appeal.

However, Russell J dismissed the applications, stating (at paras 20, 22 and 23):

… [N]o evidentiary material was provided supporting that the corporation was financially unable to retain counsel for this general procedure appeal. Having a lawyer represent an appellant is important, for a lawyer would be expected to know applicable jurisprudence, courtroom procedure and pre-hearing procedures. General procedure is not informal procedure.

Additionally, …the “outside accountant” potentially … would be an important if not key witness at any hearing of this appeal. …

For these two reasons I will dismiss the corporate Appellant’s application per Rule 30(2)… .

The Rules do not seem to provide for an application for individuals who are appellants in general procedure appeals to be represented by anyone other than either counsel or themselves. …

The appellant brought a motion pursuant to Rule 30(2) of the Tax Court of Canada (General Procedure) Rules (the “Rules”) to have its sole shareholder, director and principal officer act on its behalf in its tax appeal. Subsection 17.1(1) of the Tax Court of Canada Act read:

A party to a proceeding in respect of which this section applies may appear in person or be represented by counsel, but where the party wishes to be represented by counsel, only a person who is referred to in subsection (2) shall represent the party.

In disagreeing with the finding in Masa Sushi and subsequent cases that Rule 30(2) conflicted with section 17.1, and the latter section did not allow a corporation to be represented other than by counsel, Miller J stated (at paras 5, 8):

A corporate taxpayer, like an individual taxpayer, has the choice to appear in person or by counsel. If it chooses to appear “in person,” how does it do that? It turns to Rule 30(2), which provides how a corporation may appear in person in the Tax Court of Canada – by means of leave of a judge of the Court with possible conditions. … Yes, there is common law jurisprudence to the effect that “in person” can only mean by the presence of a visible person … but there has been no such jurisprudence, until Masa Sushi, from the Tax Court of Canada. The jurisprudence referenced by Justice Graham is not founded in legislation that explicitly allows a corporation to appear in person.

…Surely we can give the drafters of the legislation and the drafters of the Rules credit for recognizing the uniqueness of the Court, unencumbered by the traditional common law findings of other Courts.

He went on to allow the appellant to appear in person through the individual on stipulated conditions.

Two individuals and two corporations of which they were shareholders brought motions to be represented by a non-lawyer who was not an officer or employee of the corporations (the “CPA”). After finding that, as the CPA was an agent and not counsel, Rule 30(1) did not give the Court discretion to allow the CPA to represent the two individuals, Graham J went on to find that Rule 30(2) could not be used to authorize the CPA to represent the two corporations, stating (at paras 9, 11, 12):

…[T]he Rules may not override the Act. …

…[S]ubsection 17.1(1) gives parties two choices. Parties may appear in person or be represented by counsel. …

The words “in person” mean “physically present”. A human can be physically present in court. A corporation, being a creation of law with no physical substance, cannot.

Graham J further stated (at paras 18, 19, 23 - 25):

A historical contextual analysis of subsection 17.1(1) supports the traditional common law interpretation. There have been three versions of Rule 30(2). The original version was created at the same time as the Act and required corporations to be represented by counsel. It read:

Except as expressly provided by or under any enactment, a body corporate may not begin or carry on a proceeding otherwise than by counsel. [Emphasis added]

Rule 30(2) was amended in 1993 to allow corporations to be represented by an officer with leave of the Court in special circumstances. …

If I interpret subsection 17.1(1) as only allowing corporations to be represented by counsel, then the original version of Rule 30(2) exactly paralleled subsection 17.1(1) and was intra vires. However, both the 1993 and current versions of Rule 30(2) would be ultra vires… because… [b]oth of these provisions allow representation in a manner inconsistent with a requirement in subsection 17.1(1) that corporations be represented by counsel.

By contrast, if I interpret subsection 17.1(1) as allowing corporations to appear in person or be represented by counsel, all three versions of Rule 30(2) would be ultra vires as they would unduly restrict a corporation’s ability to appear in person. …

…[T]he Court was created at the same time that the Rules came into effect. … [I]it is far more likely that the original version of Rule 30(2) paralleled subsection 17.1(1) than that it violated it. It appears that, when the 1993 amendment was made, the fact that Rule 30(2) could not be changed without first amending subsection 17.1(1) was overlooked. A similar error appears to have occurred in 2007.

Graham J concluded (at paras 42, 48):

I conclude that subsection 17.1(1) does not allow a corporation to appear in person. In the general procedure, the only option available to a corporation is to be represented by counsel. Accordingly, until such time as subsection 17.1(1) is repealed or amended, Rule 30(2) should be read down to read:

Where a party to a proceeding is not an individual, that party shall be represented by counsel.

In the alternative, if I am wrong, and corporations are able to appear in person, I would still deny the Corporate Appellants’ motions. … . I am not aware of any interpretation of subsection 17.1(1) by which a corporation could be said to appear in person through its external accountant.

The taxpayer invested in what CRA viewed as a software tax shelter scheme that was developed and promoted by, inter alia, a Calgary law firm, Shea Nerland and a Canadian corporation, Softech Asset Management Corp (“SAM”). The taxpayer appealed the disallowance by the Minister of various related losses claimed by him on the basis that the interest acquired by the taxpayer in the software was a tax shelter, as defined in s. 237.1(1). The Minister brought a motion to remove Shea Nerland as counsel of record on the basis that SAM was directed and managed by a partner at Shea Nerland, and a former associate of the firm.

In granting the motion, Campbell J stated (at paras 46, 52-3):

[T]here is a strong likelihood that Appellant counsel will be required to cross-examine his partner and a former associate on matters bearing directly on the quality of the legal services provided to the Appellant and the law firm’s participation in the alleged tax shelter scheme. …

Essentially, all of the factors outlined in Essa [[1993] OJ No 229]… favour the granting of this motion. The degree to which Shea Nerland appears to be immersed in the promotion and management of the alleged tax shelter scheme and the likely importance of the testimony of Mr. Nerland and Mr. Mamdani, necessitate an order for the removal of Appellant counsel and the law firm in order to maintain the reputation of the administration of the judicial system and to avoid the appearance of impropriety to the public.

…[I]t is unrealistic to conclude that Mr. Clark will be able to balance his obligations to his partners and colleagues with his professional obligations to his client, Mr. Woessner.

Before striking the Reply of the Crown in its entirety (but with leave to the Crown to file a fresh Reply that complied with the Rules), Lafleur J referred (at para. 34) to the principle:

Where the deficiencies in a pleading are extensive, lack specificity or are vague, the proper remedy is to set the pleadings aside with leave to file a new pleading that meets the requirements set out in the Rules.

Examples of around six heads of deficiencies that she identified included:

• admitting or denying facts that had not been pleaded;
• referring to assumptions of fact made by CRA in assessing which instead were assumptions of mixed fact and law, e.g., that specified parties did not deal with each other at arm’s length and that contracts were shams; and
• including Schedules that contained evidence, as well as materials from which it was difficult or impossible to extract clear factual allegations.

Graham J concluded his reasons by stating:

Paragraphs 49(1)(a) to (c) … require that a reply to a notice of appeal state the facts in the notice of appeal that are admitted, the facts that are denied and the facts of which the respondent has no knowledge and puts in issue.

The Respondent did not comply with that rule in this appeal. The Respondent admitted certain facts, denied certain facts and stated that she had no knowledge of certain facts. However, the Respondent also pleaded that she “took note of” certain facts and “ignored” other facts. Taking note of a fact and ignoring a fact are not options available to the Respondent under Rule 49(1).

Before striking the Reply of the Crown in its entirety pursuant to Rule 53(1) (but with leave to the Crown to file a fresh Reply that complied with the Rules), Lafleur J stated (at para. 34):

Where the deficiencies in a pleading are extensive, lack specificity or are vague, the proper remedy is to set the pleadings aside with leave to file a new pleading that meets the requirements set out in the Rules.

She concluded (at para. 179):

I agree with the Appellant that given the extent of the deficiencies found in the Reply, the Reply cannot be cured by simple amendment. If the Reply were to stand, the scope of discoveries would be unmanageable … . The Reply has to be struck as, for the reasons detailed above, it will either prejudice or delay the fair hearing of the appeal, or is scandalous, frivolous and vexatious, or is an abuse of the process of this Court.

Examples of Crown pleadings which Lafleur J accepted as falling within the scope of deficiencies referred to in Rule 49(1) included:

• Overreaching admissions (i.e., “admitting” facts that were not alleged by the taxpayer);
• Overreaching denials (i.e., denying facts which were not pleaded);
• Stating assumptions of fact made by the Minister in assessing which instead were assumptions of mixed fact and law (i.e., “’applying a legal standard to a set of facts’”, para. 70) such as pleading that specified parties did not deal with each other at arm’s length, that contracts were shams, that specified parties did not have a “valid creditor-debtor” relationship, and that loan agreements were not for “bona fide” loans.
• Making repetitive pleadings (and also adding a Schedule that “did not contain any material facts as it [was] drafted with generic words – para. 108).
• Providing a chart which disclosed confidential information about third parties and a diagram which the appellant could not properly answer (par. 139)_ - and also referring to a third-party partnership without explaining its relevance (para. 146).
• The inclusion of evidence on which the Crown intended to rely (e.g., the inclusion of Schedules which had the look of working papers – para. 166).

The Minister reassessed most of the taxation years for 2005 to 2014 taxation years, with only the 2012 to 2014 taxation years being within the normal reassessment period. The other issues were whether dispositions of shares in an offshore fund were on income or capital account, and whether dividends paid in various years exceeded the taxpayer’s capital dividend account.

The taxpayer applied under Rule 58 for the determination of three questions prior to the eventual hearing of this appeal: (a) Whether a misrepresentation (i.e. “présentation erronée des faits”) within the meaning of s. 152(4)(a)(i) meant a misrepresentation of fact, and not mixed law and fact; (b) Whether the characterization of gains as being on capital versus income account were a question of mixed law and fact and therefore outside the meaning of s. 152(4)(a)(i); and (c) Whether the statute-barred reassessments were invalid.

Wong J noted (at para. 15) the taxpayer’s submission that, in the context of “the distinction between the French version of subparagraph 152(4)(a)(i) which reads ‘une présentation erronée des faits’ while the English version reads ‘any misrepresentation’ … the income-versus-capital issue is one of mixed law and fact and as a result, cannot constitute a misrepresentation for the purposes of subparagraph 152(4)(a)(i).”

Wong J stated (at para. 23) that the “English and French versions are of equal force and effect, and there is no basis to prefer one version over the other without further context.” In dismissing the motion, she stated (at paras. 24-25, 28):

I cannot agree with the Appellant’s proposition … that a question of income versus capital necessarily amounts to a difference in opinion… [T]he factual circumstances of the appeal will determine whether the issue of income versus capital is purely a difference of opinion or not. …

The question of whether a misrepresentation under subparagraph 152(4)(a)(i) contemplates fact only or mixed-law-and-fact, should properly remain with the trier of fact to determine in conjunction with the related substantive issues.

… . In the present case, documents have not yet been exchanged nor have discoveries been conducted. … While the mechanics of the transactions may not be in dispute, the factual circumstances have yet to be determined for the purposes of confirming or rebutting the Minister’s assumptions.

The taxpayer was a member of a limited partnership (Action LP) that held most of the interest in a subsidiary partnership (Thompson GP). Before signing and delivering a waiver that CRA proposed referring to “Partnership income of $99,991 reported on Schedule 1,” 632 added a reference to such amount being income of 632 from Thompson GP.

In affirming the finding of the Tax Court (in a “stage 1”preliminary hearing) that holding a “stage 2”hearing so as to make a Rule 58 determination as to whether a CRA reassessment of 632 to increase pursuant to s. 103 the income allocated to it by Action LP was outside the scope of the waiver, would be unfair to the Crown and was a question that “should not be determined in advance of the trial” (para. 15), Woods JA indicated:

• It was “clearly arguable that the waiver itself [was] inherently ambiguous” (para. 29)
• There was no reversible error in the Tax Court’s finding “that a stage 2 hearing would unfairly preclude the Crown from conducting examinations for discovery of the individual who signed the waiver” (para. 30)
• Similarly, it was arguable that the Crown should not be precluded from introducing of the factual circumstances that led to the reassessment (paras. 32-33).

The unrepresented appellant appealed the determination by the Tax Court that four questions that he had sought to have determined under Rule 58, including whether evidence relied on by CRA in assessing him had been obtained in violation of his Charter rights, were not appropriate for determination under that rule. In dismissing the appeal, Rivoalen J.A. stated (at paras. 21-22):

Rule 58(2) requires the Tax Court to examine the proposed questions and decide if by answering them before the hearing, those answers may dispose of all or part of the proceeding or result in a substantially shorter hearing or a substantial saving of costs. The Tax Court judge did exactly that, and committed no reviewable errors in his analysis. In these proceedings, the trial judge will be tasked with answering questions on the admissibility of evidence in light of alleged Charter breaches. The Crown intends on calling witnesses such as the auditor to testify and establish part of the evidentiary record. It was therefore open to the Tax Court judge to conclude that no time or costs would be saved by having any of the Questions dealt with by a motions judge.

Furthermore, as the Tax Court judge rightfully pointed out, given the circumstances of the present case, he declined to order under Rule 58 the determination of the Questions because “[t]he Rule 58 Questions 1, 2, and 3, however answered, would require testimony before the motion judge which would most likely need be repeated before a trial judge. The prospects of two judges, after considerable testimony, opining on the credibility and weight of the same witnesses in the same appeals is neither fair, nor consistent to the parties nor the interests of justice.” (reasons, para. 45).

The taxpayer was assessed under s. 84(2) regarding his sale of his interest in an insurance company (RBP) that was structured as a hybrid sale transaction. The taxpayer took the position that he was not required to produce on discovery a six-page memo that had been prepared by the accounting firm for the purchaser and which had been shared with him (as vendor) and his advisors, on the grounds that it contained nothing but a description of transactions of which the Minister was already aware and matters of “subjective opinion” and that it contained no mention of or discussion of s. 84(2). In finding that the memo should be produced, St-Hillaire J noted the absence of accountant-client privilege, and stated (at paras. 61-62, TaxInterpretations translation):

[T[he Memorandum is relevant to the issues in this case. … [A] document is relevant to the issues in dispute when it contains information that may, directly or indirectly, enable the party requesting disclosure either to plead its own case or to prejudice that of its adversary, or to initiate an investigation. The … Memorandum, deals in large part with the transactions at issue; it followed the agreement concerning the sale of RBP, which contained a clause on [minimization of] taxation and … the parties followed what was provided for in the Memorandum. It is also worth recalling the jurisprudential principles according to which the preferred approach to the interpretation of subsection 84(2) involves an examination of the circumstances surrounding the transactions in question.

Issues in the appeal of the taxpayer respecting whether it could deduct a payment of Cdn.$2.9 billion made to settle actions against it in connection with the Enron bankruptcy included whether the settlement amount should have been reimbursed to it by subsidiaries whose conduct may have been the primary basis for the actions. Before finding (at para. 22) that CIBC internal “investigations on various Enron-related actions by CIBC and related entities, including actions implicated in the litigation that led to CIBC deducting the Settlement Amounts, would be relevant to the Respondent’s arguments on which entity’s business incurred or should have incurred the Settlement Amounts,” so that the Minister was entitled to discovery, and after discussing authorities on the scope of discovery, Rossiter CJ stated (at para. 18):

The above principles governing discovery thus reveal the following salient points:

• Relevancy is extremely broad and should be liberally construed. The threshold for relevancy on discovery is very low but does not allow for a fishing expedition, abusive questions, delaying tactics or completely irrelevant questions;
• Everything is relevant that may directly or indirectly aid the party seeking the discovery to maintain its case or combat that of its adversary. If the questions are broadly related to the issues raised, they should be answered;
• Discovery is limited by the pleadings to some extent; and
• The examining party conducting the discovery is doing so for the purposes of: supporting his or her own case; obtaining admissions; attacking the opponent’s case; limiting the issues at trial; and revealing the case that he or she must meet at trial and the facts that the opponent relies upon.

Questions respecting the procedures and decision-making respecting booking the settlement amount (including choice of entity, but not peripheral bakground information) also were relevant (paras. 255-322).

In finding that the production of a mediation agreement with plaintiffs in a settled action, and other settlement-related documents such as those generatd in the mediation, was required, Rossiter CJ, after noting (at para. 132) that the Supreme Court had stated (2013 SCC 37, at para. 19) “that overruling settlement privilege requires a 'competing public interest' to outweigh the public interest in encouraging settlement,” he stated (at para. 158):

This case, however, involves two different subject matters. The Newby and MegaClaim Litigations were about CIBC’s liability relating to certain Enron transactions. The tax appeals, however, are about the deductibility of the Settlement Amounts that arose out of the litigation. There is no danger that disclosure from the first subject matter will prejudice CIBC in litigation surrounding that subject matter; that litigation is concluded. Many of the policy reasons for protecting settlement privilege thus fall away. …Communications and information from the first litigation are certainly relevant to resolving the tax litigation, since they will go to whether the Settlement Amounts are deductible… .

He stated (at para. 362):

This particular motion seems in large part to be the result of obstruction by CIBC...[which] I...do not believe...is the proper way to litigate, and there are certainly consequences to that strategy that the Court should and will consider.

See summary under s. 232 - solicitor-client privilege.

Regarding whether the taxpayer, who had been assessed under s. 245(2) to deny the carryforward of losses and credits, was entitled to discovery of proposals to two unrelated taxpayers that set out the CRA’s understanding of the facts and its legal analysis of those facts, in addition to a memorandum to the GAAR Committee regarding the transactions undertaken by a third unrelated taxpayer, Owen J stated (at paras. 39-40, 42):

[I]n GAAR cases, the legal analysis of the Minister in support of the policy relied upon is subject to discovery. …

[However] this right does not extend to legal argument in support of the existence of the policy and its application to the taxpayer’s transaction(s).

In addition, while the Appellant is entitled to disclosure of the policy relied upon by the Minister to apply the GAAR to know the case that the Appellant must meet, this disclosure is likely not admissible at trial because the existence or non‑existence of the policy is a question of law … .

After finding that the CRA auditor had considered such documents (which he had placed in the file) but had not relied on them in auditing the taxpayer, Owen J determined that they were discoverable, stating (at para. 60):

[R]eliance is not the test for relevance. … [C]onsideration of the documents in the context of the audit of the Appellant is sufficient to make them relevant for the purposes of discovery.

CRA had relied on the GAAR Committee’s analysis of a similar case in deciding to assess the taxpayer under GAAR, so that a GAAR Committee review of the taxpayer’s transactions was considered unnecessary.

After noting (at para. 85) that “[i]f the GAAR Committee had considered the Appellant’s case, there is no doubt that the Appellant would be entitled to discovery of all non‑privileged documents considered by the GAAR Committee in deciding to assess the Appellant under the GAAR,” Owen J stated (at para. 86):

[T]he Appellant is equally entitled to all non-privileged documents considered by the GAAR Committee in deciding to assess under the GAAR the unrelated taxpayer described in the Similar Case Excerpt because that decision directly resulted in the subsequent decision to assess the Appellant under the GAAR. Consequently, the documents considered by the GAAR Committee in making the first decision are in effect the basis for the CRA’s subsequent decision to assess the Appellant … .

Accordingly, such documents were discoverable, subject to redaction of all information identifying third parties, and subject to any claims of solicitor-client privilege.

The three taxpayers had appealed the imposition of gross negligence penalties based on what Boyle J characterized as “nonsensical misstatements” regarding them “claiming to be agent for themselves” (para. 98). It might be inferred from his reasons that CRA, with the assistance of Crown counsel, sought to hide from the taxpayers that they had been the subject of criminal investigation by CRA, then downplay that fact, in clear breach of the Rules regarding the requirement for the CRA representative on discovery to be knowledgeable and informed (Rules 93(3) and 95), and for incorrect answers given to be corrected (Rule 98(1) and relevant documents provided (e.g., Rules 81 and 87).

The taxpayers brought two motions before Boyle J, and he issued orders directing the Crown to comply with its discovery-disclosure obligations. This third motion was now brought based on the Crown’s essential non-compliance with the two previous orders. Boyle J noted (at para. 94) the position of Crown counsel during the hearing of this third motion that “that no remedy was warranted because all questions asked had been answered.”

In allowing the taxpayer’s appeals from their penalty assessments with costs on a solicitor-and-client scale, Boyle J stated (at paras. 92, 97):

The Respondent has adopted and demonstrated a consistent pattern of non-compliance with this Court’s Orders and Rules with respect to CRA’s audits and investigations involving the Appellants. I find this to have been intentional and deliberate, and that it was undertaken to frustrate these Appellants’ rights to pre-trial discovery on the subject of CRA’s investigation involving them relevant to their appeals. …

The Respondent’s egregious history of defaults and non-compliance in these appeals, that there is no alternative available that could reasonably be expected to cause the Respondent to now comply, and that this has caused prejudice to the Appellants, are reason enough to allow these appeals. This disposition is also necessary to protect the integrity of the judicial process and the rules of law that apply to all parties.

Predecessors of the appellants had been acquired for their losses in transactions where less than 50% of their voting shares, but more than 90% of their non-voting participating shares, had been acquired. The Minister had reassessed to deny the acquired losses primarily on the basis that there had been an acquisition of control, but secondarily on the basis of an application of the general anti-avoidance rule.

Counsel filed an Access to Information request with Finance and CRA seeking all written communication for 2001 to 2012 between them relating to loss utilization transactions. Many of the documents received in response to the ATIP request were redacted. The taxpayers requested that the Respondent be compelled to give them the unredacted version of many of the documents provided in redacted form.

V.A. Miller J found (at para 32):

… It is my view that in a GAAR appeal, draft documents prepared in the context of a taxpayer’s audit or considered by officials involved in or consulted during the audit and assessment of the taxpayer should be disclosed. They inform the Minister’s mental process leading up to an assessment. They may also inform the Minister’s understanding of the policy at issue.

V.A. Miller J examined the documents under appeal individually, finding that most of the redacted portions did not have to be produced on the basis that there was no evidence that the particular document was considered by CRA during the audit, that the redacted portions contained taxpayer information which was protected by s.241, that the redacted portion was not relevant to the taxpayers or to the appeals, or that the document was subject to solicitor-client privilege. Some requested documents were refused on the basis of being part of a “fishing expedition of vague and far-reaching scope”.

Issues in the appeal of the taxpayer respecting whether it could deduct a payment of Cdn.$2.9 billion made to settle actions against it in connection with the Enron bankruptcy included whether the settlement amount should have been reimbursed to it by subsidiaries, whose conduct may have been the primary basis for the actions, in accordance with the transfer pricing rules. The Crown asked questions about non-Enron litigation and settlements where a CIBC entity was sued along with an arm’s-length co‑defendant, on the basis that these might represent potential “internal comparables” for transfer pricing purposes. In finding that these questions were not to be answered on the grounds of irrelevancy, Rossiter CJ stated (at para. 251):

Even where there was litigation with an arm’s-length co-defendant, and even if that litigation involved some CIBC group members, the litigation could still be completely different so as to be utterly useless as a comparator.

See summaries under s. 232(1) – solicitor-client privilege and Tax Court Rule 82(2).

The taxpayer was assessed under s. 103(1). The individual wholly-owning it refused to answer questions posed on his examination for discovery, that were aimed at eliciting the reason for which various transactions were engaged in by the taxpayer and other group companies, on the grounds that he and the taxpayer did not have any information pertaining to those questions that could be provided without disclosing information that was protected by solicitor-client privilege.

Sommerfeldt J found, in the context of a Crown motion brought for an order for the individual to answer the questions, that the taxpayer had not impliedly waived solicitor-client privilege by disputing the s. 103(1) assessment (which put in issue its principal reason for the transactions) given that in its pleadings and on discovery it had not relied on legal advice as part of its position. He then stated (at paras. 79-80):

Although I will not issue an order that would require the Appellant, in response to any of the Disputed Questions, to disclose information that is subject to solicitor-client privilege, I will note that … unless the Appellant furnishes the information in writing to the Respondent no later than ten days after this Appeal is set down for trial, the Appellant will require leave of the trial judge [under Rule 96(1)], in order to introduce that information at trial.

I suspect that the Appellant is of the view that it can make its case without introducing the privileged information at trial.

As a result of a 2006 reorganization for the conversion of the Teranet group to an income fund structure, the taxpayer became liable to its immediate shareholder (an LP held by the new income fund through a two-tier trust structure) under two unsecured promissory notes totalling $1.225 billion and bearing interest at 9.75% p.a. CRA reassessed on the basis that a reasonable interest rate was not higher than 5.45% p.a. On discovery, the Crown asked various questions - respecting how the interest rate was determined, and the rationale behind the structuring of the particular reorganization steps - of the taxpayer’s representative, who was its CFO. He could not answer these questions because, according to him, no one remained at the taxpayer who had been involved in the reorganization.

V. Miller, J. found that in these circumstances, it was appropriate to grant the Crown leave to examine a knowledgeable representative of the accounting firm (E&Y) that had prepared a study before the reorganization in support of the reasonableness of the interest rate chosen (naming a Mr. Allard), and of a second accounting firm (Deloitte) which had been involved in structuring the transactions, stating (at para. 33):

When a party chooses not to respond to proper questions put to it or not to inform itself, section 99 of the Rules provides an extraordinary remedy so that the purpose of discoveries is not defeated.”

She also ordered (at para 54):

Both EY and Deloitte will produce documents in its control which are relevant to the issues in this appeal. These documents are to be given to the Respondent prior to the examination for discovery.

CRA disallowed, in full, under s. 247(2)(a), the deduction by the taxpayer (“Burlington”) of guarantee fees paid to its U.S. parent. Justice brought a motion respecting 1200 of their questions posed in the examination for discovery, on the basis that Burlington had either improperly refused to answer, or not fully answered, the questions. Approximately 1700 questions were taken “under advisement.” D’Auray J stated (at para. 80):

In my view, the practice of using the quasi-objection “under advisement” needs to stop. It is not a response contemplated by section 107 of the Rules. According to the Rules, a nominee either answer the question, refuses to answer and explains the basis for such refusal, or takes an undertaking if he or she does not know the answer. The “under advisement” quasi-objection is often a tactic used to gain time to reflect on which basis the question will be refused, without the party having to explain, at the time of discovery, why such question was refused. It deprives the party asking the question or the opportunity to rephrase the question. In my view, taking a question under advisement amounts to a “refusal”.

Sommerfeldt J found that counsel’s omission of invoices for one of the years in issue form the book of documents that he compiled was an innocent and inadvertent compilation error (at para. 55). Consistently with the two-part test referenced in Sagaz (would the evidence, if presented have changed the result; and could the evidence have been obtained before trial with the exercise of due diligence – in that regard, notign that counsel had shown due diligence) , and applying Rule 138(1) permitting a judge to reopen a hearing “for such purposes … as are just,” Sommerfeldt J allowed the invoices to be admitted after the hearing, after having given the Crown an opportunity to cross-examine the taxpayer on this evidence (which the Crown declined to do).

The report of the taxpayer's expert, which compared returns on Canadian and non-Canadian hedge funds in support of the commerciality of the taxpayer's decision to invest in particular hedge funds operating in low-tax jurisdictions (the "Funds"), did not list the data used to calculate the returns on the Funds. Lamarre ACJ stated (at para. 148):

The concerns about the missing data relate to the question of whether there were any Canadian funds comparable to the Funds in the Relevant Period. I give no weight to Mr. Seco's conclusion on this point because of the missing data and some inconsistencies in the application of the criteria he used in his comparison.

The Appellant had complete success in its appeal of a CRA challenge of its input tax credit methodology regarding its ferry operation. D’Arcy J made a costs award to the Appellant (of 60% of its counsel’s fees of $1.3 million, plus disbursements and a gross-up for unrecoverable HST) that reflected a substantial enhancement for the improper conduct of Crown counsel.

First, the Appellant and Crown agreed in July 2013 to be bound by two relevant findings in BC Ferries which, when decided in 2014, favoured the Appellant’s position. Nonetheless, the Crown did not agree to be bound by those findings until the eve of trial – and this delay in following BC Ferries caused the Appellant to incur substantial costs.

Second, the Crown had improperly sought to introduce evidence of a CRA auditor through an affidavit rather than through court testimony. Furthermore, the use of the affidavit in this instance had been found by D’Arcy J in his prior decision to be “trial by ambush” and resulted in “trial days being thrown away” (para. 99).

Third, the Crown submission on costs challenged D’Arcy J’s finding that use of the affidavit was “trial by ambush.” D’Arcy J stated (at paras. 55-56):

This is improper; a party should never use cost submissions to question a finding made by the Court in the related appeal.

Further, the Respondent’s submissions indicate that he is prepared to engage in similar offensive behaviour in the future.

Similarly, the Crown submissions improperly and falsely challenged D’Arcy J’s findings that CRA had inappropriately threatened to impose gross negligence penalties on the Appellant.

Madison Pacific (2023 TCC 180) held that there was a GAAR abuse of s. 111(4) when two unrelated companies acted in concert to acquire 46.6% of the voting rights and 92.8% of the taxpayer’s equity (through being issued inter alia Class C non-voting shares) so as to access the taxpayer’s losses. Graham J granted the Crown’s request for costs of $408,834, being 35% of its actual legal costs, plus disbursements. Of the factors listed in Rule 147(3), those arguing for increased costs were:

1. the costs at issue ($2.2 million for the taxation year at issue, similar amounts for two other taxation years, and $10 million in a number of related appeals);
2. the complexity of the issue (including taking into account reported proceedings in Deans Knight, requiring the parties to “regularly … rework their arguments” (para. 14); and
3. the taxpayer’s failure to concede until oral argument that there was an avoidance purpose for the creation of Class C non-voting shares.

Regarding the last factor, Graham J stated (at para. 22):

[W]here the weakness of the evidence in support of an argument are as apparent as they were in this case, it is appropriate to deal with the pursuit of that argument through costs. Significant trial time (in particular, significant time spent preparing for and conducting cross-examinations) could have been saved had the Appellant conceded this issue up front.

Although “this factor argue[d] for significantly higher costs” (para. 24) of approaching 40%, the Crown had only requested 35% of its legal costs (para. 32).

The taxpayer was substantially successful in its appeals for eight taxation years of denials of around $49 million in net losses from “straddle trading.”

Spiro J found the taxpayer’s total disbursements of $996,550 were reasonable given that the Crown’s disbursements were only somewhat lower ($710,000) notwithstanding “the significant burden that rested on the Appellant to demolish the Minister’s assumptions of fact in respect of sham, ineffective transactions, etc” (para. 13). However, the disbursements allowed were reduced by $270,000 to reflect that only 25% of an expert’s opinion evidence was useful. Regarding the experts being foreign experts, he noted (at para. 36):

[T]he global centres of forward foreign exchange trading are all located outside Canada. There is no "“buy Canadian”" requirement when it comes to expert witnesses.

Spiro J otherwise would have allowed 55% of the taxpayer’s legal fees of $3,365,500 in light inter alia of the amounts at stake, the taxpayer’s complete success for all but one year, challenges in displacing the Crown’s allegations of sham and legally ineffective transactions, the complexity of the straddle trading transactions, and the novelty and complexity of those issues. However, he reduced that percentage by 5% to reflect the waste of trial time resulting from the taxpayer’s failure to concede at trial that he had failed to report $8 million of income for one of the years, and spending the better part of a morning seeking to qualify an expert on English law even though English law was not at issue. The percentage was reduced by a further 5% to reflect the partial success of the Crown (regarding that same $8 million) for one of the taxation years.

The taxpayer (“Univar”) was wholly successful in reversing, in the Federal Court of Appeal, a Tax Court decision that had confirmed the application of s. 245(2) to it on the basis that the transactions in question had abused the s. 212.1 rules. Univar brought a motion to have costs determined in accordance with Rule 147, requesting a lump sum award of costs for its appeal of approximately $450,000, being 75% of its counsel fees including GST and PST. The Crown maintained that the Tariff amount of $6,500 was appropriate.

After noting that a large amount had been at issue ($40 million) and rejecting the relevance of the Crown initially having been successful in the Tax Court and of there being a Budget amendment, after the appeal in the Tax Court had been argued, that dealt with transactions of the type engaged in by the taxpayer, Boyle J stated (at para. 33):

I am satisfied that both the volume and complexity of the work in this case need to be reflected in the amount of costs awarded and that both favour enhanced costs.

Boyle J concluded (at para 40):

… I am satisfied that the appropriate contribution from the Respondent to Univar’s legal fees in this appeal is $300,000. I have arrived at this by applying a factor of 50% to the fees (including GST and PST) recorded by the two partners who appeared in Court, the senior litigation counsel at the firm advising on the appeal, and the associate who recorded the vast majority of the remaining time. In recognition of some inherent duplication and inefficiencies … , I am not allowing anything for the other two associates who each had recorded less than 5% of the total time. …[or] for the two articling students.

He then added (at para. 51):

I believe that the Crown’s stubborn clinghold to the Tariff amount, and its incorrect view that this Court needs to identify a principled reason to depart from the Tariff, gives rise to Rule 147(3)(g), (h) and (i) considerations. These, in addition to (a), (b) and (e) considerations, all favour a higher award of costs on this costs motion. …

Owen J made a lump sum award for legal fees of Osler borne by Cameco in its successful appeal of transfer-pricing adjustments for its 2003, 2005 and 2006 taxation years (being only three of the assessed years) of $10.25M, which represented about 35% of the legal fees charged for those years. Factors mentioned by Owen J included:

• Settlement offers made by Cameco (one less than 30 days before trial, and one after trial) did not have any real bearing given their “de minimis nature” (i.e., although Cameo offered “$32 million of additional taxable earnings in 2006 … no additional tax in any of the three years under appeal” was offered (paras. 20-21).
• The “volume of work was significantly increased by the Respondent’s reliance on sham” (para. 26), i.e., “the Appellant [Cameco had] to address minute administrative details of how it and its subsidiaries carried on business’.” (para. 24)
• "[I]n circumstances involving significant stakes for the appellant, efficiency and frugality may take a back seat to thoroughness." (para. 47).
• He did “not accept the Respondent’s submission that it could not have anticipated the costs incurred by the Appellant given the Respondent’s vigorous pursuit of the allegation of sham.”

Cameo also incurred disbursements in connection with its appeal of $17.9M. He ordered that these should be taxed largely in accordance with the Rules.

The Minister prevailed in assessing the taxpayer for the realization of $473 million of foreign accrual property income (FAPI) between 2001 and 2010 through a wholly-owned Barbados subsidiary (GBL) that was licensed in Barbados as an international bank, but only on the basis that GBL’s business was not conducted principally with arm’s length persons. The taxpayer had made an offer to the Minister on what C Miller J had described as a principled basis, namely, that the Minister would apply GAAR to GBL’s 2006 to 2013 years – but not to the earlier years on the basis that they were not covered by waivers provided. The Crown rejected this offer and made its own offer (which was made too close to trial to qualify under Rule 147(3.2), and was also rejected) that provided a concession on the characterization of foreign exchange gains and losses realized by GBL

In finding that the Crown should not receive an award of costs notwithstanding its total success, C Miller J stated (at para. 11):

[T]he Respondent had success in the ultimate result, but it was due to the one issue – the conduct of business principally with persons with whom it did not deal at arm’s length. That is it. Given Loblaw’s success on virtually all other issues, I am not convinced that the result favours a cost award to the Respondent.

Respecting the Crown’s submission that it should receive an award of 30% of solicitor-client costs incurred after its counteroffer, he agreed (at para. 19) with the taxpayer that this offer “was neither a compromise nor a good faith attempt to settle, given the relative insignificance of the [FX] issue.”

The Crown had made a settlement offer to the taxpayer under which the taxpayer would conced that it was not carrying on an insurance business in Bermuda in 2006, but the Crow would concede that the taxpayer was carrying on business in Bermuda in 2007 – and each party would bear its own costs.

In finding that Rule 147(3) applied, and before finding that the taxpayer was liable for 80% of the Crown’s costs incurred after the settlement offer date (other than some fees of Crown junior counsel, which he pared back), Pizzitelli J noted that the Crown had achieved complete success at trial (so that the taxpayer was found by him not to be carrying on business in Bermuda in 2007 as well as 2006), and stated (at paras 11 &12):

Unlike in Mckenzie above [2012 TCC 329], the settlement offer in question does not just contemplate that only costs would be waived. The Respondent’s settlement offer contemplated allowing the Appellant to participate in the subsection 138(11.3) regime fully one taxation year earlier than my decision allows it to do at the earliest by agreeing the Appellant was carrying on business in 2007, the latter as argued by the Appellant. This alone takes the settlement offer beyond a cost waiver only type of offer.

…[H]aving regard to the substantially large tax savings it would have achieved over the next 5 years had it been successful in this appeal, somewhere between $200,000,000 to $250,000,000 by the admission of its own witness, accessing the regime as a multi-national one year earlier had the possibility of generating a clear benefit to the Appellant…

The appellant, DTI claimed entitlement to substantial indemnity costs per Rule 147(3.1) on the basis that in its appeal, it had achieved greater success than that reflected in an offer to settle made by it, which would have reduced the assessed HST for the reporting periods at issue to $15,000, which was explained to represent approximately 50% of the Canadian portion of the total amount of HST at issue of $118,300 (relating also to supplies considered by DTI to have been made in the US).

In rejecting this claim, Russel J stated (at paras. 12-14):

CIBC World Markets [2012 FCA 3] … affirmed that the Minister of National Revenue can only assess tax consistent with his/her view of the underlying facts and law. …

Here, DTI’s settlement offer … was simply a “let’s split it down the middle” settlement offer.

As DTI’s arbitrary settlement offer was not based on facts in accordance with the law, consequently it could not be entertained by the respondent Crown. As such, this settlement offer was not within the scope of Rule 147(3.1).

However, although the $4,000 amount of costs initially awarded was based on the Court’s Tariff B for party and party costs, he considered this to be on the “lean side,” and increased the award to $8,110, not only to reflect some missing items, but also because (para. 18):

My judicial discretion as to costs does not require that I award costs on a tariff basis. Tariff B has not been updated in recent years. While DTI’s success was mixed in this appeal, it did succeed with respect to a substantial portion of the total amount at issue.

He indicated (at para. 19) that the bill of costs should be “increased by a factor of 1.6 as the tariff is not at all current.”

At 2020 TCC 102, the Court determined that reassessments of sales of homes by the taxpayer and his wife in 2007, 2008 and 2009, to treat the gains as on income account rather than eligible for the principal residence exemption, were statute-barred, but sustained similar assessments made of the taxpayer for his 2011 and 2012 taxation years. This judgment was numerically more favourable to the taxpayer than an offer dated January 10, 2018 that he had made.

D’Auray J. applied s. 147(3.1) of the Rules to award the taxpayer party and party costs to the date of service of the offer, but awarded him 85% rather than 80% of solicitor and client costs thereafter. She stated (at para. 32):

I agree that the Court may use its discretion to override the application of subsection 147(3.1) of the Rules. … However, taking into account the language of the rest of the subsection, I am of the view that exceptional or extraordinary circumstances must exist before the Court exercises its discretion. …

In explaining the increase to 85%, she noted that the Crown had not admitted that the homes were owned in equal co-ownership by the taxpayer and his wife, rather than by the taxpayer alone, until one week before trial, even though this fact had been admitted in the discoveries by a CRA representative more than a year earlier. Furthermore, the Crown had never responded to the taxpayer’s offer.

The taxpayer appealed the denial of employment expenses and a GST rebate. Crown counsel, on the basis that the taxpayer had now provided a properly completed GST rebate form, indicated to the Court that the rebate issue was no longer in issue. In reliance on this concession, Jorré DJ dismissed the appeal respecting the employment expenses but allowed the GST rebate amount. However, if the employment expenses were nil, it was a legal impossibility for there to be a GST rebate, and the Crown applied for the judgment to be varied to dismiss the appeal in its entirety.

Jorré DJ refused, stating (at para. 24):

The reasons and the judgment both deal with the rebate issue. Clearly the rebate issue has not been overlooked and has been adjudicated.