Scott v. The Queen

Scott v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-11-09
Neutral citation
2017 TCC 224
File numbers
2014-3260(IT)G, 2014-3263(IT)G, 2014-3265(IT)G, 2014-3266(IT)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Income Tax Act
Decision Content
Docket: 2014-3260(IT)G
BETWEEN:
JAMES SCOTT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3263(IT)G
BETWEEN:
SUSAN KENNEDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3265(IT)G
BETWEEN:
MARY ELLIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3266(IT)G
BETWEEN:
ANN MCCANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on August 25, 2016 and October 5, 2016,
at Ottawa, Ontario. Written Submissions filed by the Appellants and the Respondent on August 24, 2016; Supplementary Written Submissions filed by the Appellants on October 5, 2016; Supplementary Written Submissions filed by the Respondent on November 4, 2016; and Appellants’ Reply to Respondent’s Supplementary Written Submissions filed on November 24, 2016
By: The Honourable Justice Don R. Sommerfeldt
Appearances:
Counsel for the Appellant:
Mark Zigler, Roberto Tomassini, Brianna Sims
Counsel for the Respondent:
Bobby Sood, Rita Araujo
JUDGMENT
1. The Appeals of Mary Ellis (2014-3265(IT)G) and Susan Kennedy (2014-3263(IT)G) are allowed and the Assessments that are the subject of those Appeals are referred back to the Minister of National Revenue (the “Minister”) for reconsideration and reassessment in accordance with the attached Reasons, and, in particular, on the basis that the distributions in the amounts of $1,371 and $9,011.88 paid in 2011 by the Nortel Health and Welfare Trust (the “HWT”) to Ms. Ellis and Ms. Kennedy respectively in respect of the Nortel Group Term Life Insurance Plan are not to be included in computing their income for 2011.
2. The Appeal of Ann McCann (2014-3266(IT)G) is allowed and the Assessment that is the subject of that Appeal is referred back to the Minister for reconsideration and reassessment in accordance with the attached Reasons, and, in particular, on the basis that the amount of the distribution paid in 2011 by the HWT to her that pertained to her survivor transition benefits and that is to be included in computing her income for 2011 is $6,152.42 (and not $6,438.39).
3. The Appeal of James Scott (2014-3260(IT)G) is dismissed.
The Parties are invited to file written submissions on costs, or to request a hearing in respect of costs, within 90 days of this Judgment.
Signed at Ottawa, Canada, this 9th day of November, 2017.
“Don R. Sommerfeldt”
Sommerfeldt J.
Citation: 2017 TCC 224
Date: 20171109
Docket: 2014-3260(IT)G
BETWEEN:
JAMES SCOTT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3263(IT)G
BETWEEN:
SUSAN KENNEDY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3265(IT)G
BETWEEN:
MARY ELLIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2014-3266(IT)G
BETWEEN:
ANN MCCANN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION [1] The fallout and litigation arising from the financial difficulties experienced by Nortel Networks Corporation (“NNC”) and its subsidiaries (collectively, “Nortel”) in 2009 continues.[1] In these Appeals, although Nortel is not a litigant, some of its former employees, or the surviving spouses of former employees, are the Appellants.
[2] These Reasons apply to Appeals instituted by James Scott, Susan Kennedy, Mary Ellis and Ann McCann respectively, and relate to the taxability of distributions that were made in 2011 from a health and welfare trust established by Nortel in 1980. The Appellants filed their income tax returns for 2011 on the basis that those distributions formed part of their income. However, after the Canada Revenue Agency (the “CRA”), on behalf of the Minister of National Revenue (the “Minister”), issued notices of assessment (the “Assessments”) in accordance with the income tax returns as filed, the Appellants filed Notices of Objection, taking the position that the distributions were not taxable. After the CRA confirmed the Assessments, the Appellants instituted these Appeals.
II. FACTS [3] At the commencement of the hearing, the Appellants and the Respondent (collectively, the “Parties”) presented to the Court a Statement of Agreed Facts (the “SAF”).[2] The SAF is reproduced as Appendix A to these Reasons. Certain of the relevant facts are summarized in the ensuing paragraphs.[3]
A. Background [4] Until January 14, 2009, NNC was a publicly traded Canadian corporation and the direct or indirect parent of numerous subsidiaries. On January 14, 2009, most of the Nortel Entities filed for bankruptcy protection. In Canada, the Canadian corporations filed under the Companies' Creditors Arrangement Act (the “CCAA”).[4] Ernst & Young Inc. was appointed as the monitor (the “Monitor”) of the Nortel estate.
[5] During the CCAA proceeding, Nortel divested itself of substantially all of its assets and business units and terminated the employment of most of its employees in Canada.
B. Health and Welfare Plans [6] As of January 1, 1980, Nortel established health and welfare plans (the “HW Plans”) for the benefit of certain active and former employees. The HW Plans provided for various benefits, including health care (medical and dental) benefits, sickness and accident benefits, long term disability benefits, survivor income benefits and group life insurance.[5]
[7] Most of Nortel’s health and welfare benefits, including life insurance and survivor income/transition benefits, were delivered through the Nortel Health and Welfare Trust (the “HWT”) established pursuant to a trust agreement (the “Trust Agreement”), made effective as of January 1, 1980, between Montreal Trust Company and Northern Telecom Limited (which was then the name of NNC).[6] The HWT was a single trust fund created for the purpose of delivering health and welfare benefits to active and retired employees of Nortel and their eligible dependents in accordance with the HW Plans.
[8] Most of Nortel’s non-pension employee benefits, including group life insurance, long term disability, health care (medical and dental) and survivor income benefits, were funded by Nortel on a pay-as-you-go basis; however, as an administrative matter, they were paid using the HWT as a payment mechanism. Certain other benefits were funded, in part, by the HWT using its trust assets. Although the assets for the funded benefits were notionally allocated in the financial statements of the HWT, those assets were not segregated by benefit plan, and no separate bank accounts were established, with the result that all of the HWT assets were commingled.[7]
[9] By agreement dated December 1, 2005, Nortel appointed the Northern Trust Company, Canada (the “Trustee”) as the successor trustee under the HWT, and the Trust Agreement was amended to reflect this change. As of the same date, Nortel entered into a letter agreement with the Trustee, wherein Nortel agreed:
a) to be solely responsible for administering the HW Plans and for determining the contributions required to adequately fund the HW Plans, and
b) to indemnify the Trustee from all claims and liabilities incurred by the Trustee and arising out of the administration of the HW Plans or out of the contributions made (or not made) by Nortel to the HWT.
The letter agreement also stated that “to the extent necessary, this letter shall constitute an amendment to the Health and Welfare Trust.”
[10] As Nortel’s financial situation deteriorated and it ultimately became insolvent, it nevertheless continued to fund certain benefits for more than a year after the CCAA filing, but it became apparent that Nortel could not continue to do so indefinitely, which lead to the negotiation of an agreement concerning some of the issues related to the HW Plans and other plans.[8]
[11] Certain employment-related issues of former Nortel employees were addressed in an Amended and Restated Settlement Agreement made as of March 30, 2010 (defined above as the “ARSA”) among NNC, four other Nortel Entities, the Monitor, the court-appointed representatives of the former Nortel employees (the “Former Employee Representatives”), Susan Kennedy on behalf of the Represented LTD Beneficiaries,[9] and Representative Counsel[10] (collectively, the “Settlement Parties”).
[12] The ARSA was approved by the Ontario Superior Court of Justice (the “Superior Court”) by Order dated March 31, 2010 (the “Settlement Approval Order”). The Settlement Approval Order was affirmed by the Ontario Court of Appeal on June 3, 2010.
[13] The ARSA provided that, up to December 31, 2010, Nortel was to continue to pay life insurance benefits and survivor income/transition benefits. The ARSA also provided that no such benefits were to be paid by Nortel for any benefit coverage period after December 31, 2010.
[14] Pursuant to the ARSA, the affected employees and survivors, including the Appellants, were entitled to file an unsecured claim as ordinary creditors against the Nortel estate in the CCAA proceeding for any funding deficit in the HWT or for any HWT-related claims (the “HWT Claims”).
[15] Certain of the representative parties to the ARSA, on their own behalf and on behalf of the parties represented by them, released the Trustee of the HWT, the Monitor and others from any claims related to the HWT. Nothing in the ARSA released Nortel from any claim for any funding deficit in the HWT or for any HWT Claims, to the extent that such claims were allowed as ordinary unsecured claims against Nortel.[11]
[16] In the ARSA, the Settlement Parties agreed to “work towards developing a Court approved distribution of the HWT corpus in 2010 to its beneficiaries entitled thereto and the resolution of any issues necessarily incident thereto.” The ARSA did not affect “the determination on any basis whatsoever of the entitlement of any beneficiary to a distribution from the corpus of the HWT.”
[17] The HWT allocation agreed to by the Settlement Parties was submitted to the Superior Court for approval. The HWT allocation and the distribution of the HWT’s corpus were approved by the Superior Court by Order dated November 9, 2010 (the “HWT Allocation Order”). The methodology for allocation of the corpus of the HWT approved by the Superior Court provided that the amount of the allocation was to be calculated based on each approved participating benefit’s respective share of the present value of all the approved participating benefits.[12] The Order also provided that certain beneficiaries,[13] including the Appellants, were to receive distributions from the approved participating benefits’ pro rata share of the HWT corpus. The distribution of the corpus of the HWT was to be made by the Trustee (or an agent of the Trustee or Nortel) to the entitled individuals in accordance with the HWT Allocation Order.
[18] The date of the Notice of Termination for all purposes under and pursuant to the Trust Agreement was deemed by the HWT Allocation Order to be December 31, 2010. The HWT Allocation Order also provided that the requirement for and delivery of a Notice of Termination to the Trustee pursuant to section 2 of Article VI of the Trust Agreement was dispensed with for all purposes.[14] By way of background, the first two sentences of section 2 of Article VI of the Trust Agreement read as follows:
Upon sixty (60) days prior written notice to the Trustee, the Corporation may terminate its obligation to make employer’s contributions in respect of benefits after the date of written notice to the Trustee (hereinafter called the “Notice of Termination”). Upon receipt of the Notice of Termination the Trustee shall within one hundred twenty (120) days determine and satisfy all expenses, claims and obligations arising under the terms of the Trust Agreement and Health and Welfare Plan up to the date of the Notice of Termination.[15]
Thus, the term “Notice of Termination” refers to the termination of NNC’s obligation to make contributions in respect of benefits under the HW Plans, and not to the termination of the Trust. The date of the Notice of Termination marked the end of NNC’s obligation to make contributions to the HWT and the effective date for the determination and satisfaction of the expenses, claims and obligations of the HWT.[16]
[19] As at December 31, 2010, the HWT had insufficient assets to deliver the vested employee benefits. Nortel was then insolvent and could not fund the benefits.
[20] Distributions from the HWT, in accordance with the HWT Allocation Order, commenced in 2011, pursuant to various interim distribution orders issued by the Superior Court in 2011. The Appellants all received distributions, some of which are described below.[17]
[21] By Order dated November 19, 2013, the Superior Court further ordered and declared that “upon the posting of the Notice of Declared Distribution on the Monitor’s website and completion of the distributions from the HWT as provided for in this Order, the HWT will automatically terminate.”[18] As of August 2016, the distributions from the HWT had apparently not been completed.[19]
C. The HWT’s 2011 Income Tax Return [22] The hearing of these Appeals commenced on Thursday, August 25, 2016. On Monday, August 22, 2016, a trial management conference was held by telephone conference call. At that time, counsel for the Appellants advised that there would be no witnesses called at the hearing and that there would be a statement of agreed facts, as well as agreed-upon exhibits. Counsel for the Respondent concurred with the foregoing statements. Three days later, shortly after the beginning of the hearing, the SAF was entered as Exhibit AR-1 and a three-volume Joint Book of Documents (defined above as the “JBOD”) was entered as Exhibit AR-2.
[23] At the commencement of the hearing and before the above-mentioned documents were entered as exhibits, counsel for the Respondent requested leave to file, as contemplated by subsection 244(9) of the Income Tax Act[20] (the “ITA”), an affidavit (the “Affidavit”) sworn by a CRA auditor and containing, as exhibits, copies of the 2011 T3 Trust Income Tax and Information Return filed by the HWT and the 2011 Trust Notice of Assessment issued by the CRA to the HWT. Counsel for the Appellants objected to the admission of the Affidavit. I directed that the Affidavit be marked as Exhibit R-1 for Identification, and indicated that I would consider, and ultimately make a determination concerning, the admissibility of the Affidavit.
D. Mary Ellis (Pensioner Life Insurance Benefit) [24] In 2010, Ms. Ellis, who was a retired employee of Nortel, had a vested right, by virtue of her employment with Nortel, to receive life insurance benefits under the Nortel Group Term Life Insurance Plan (the “Group Life Plan”).[21] Ms. Ellis’ benefit consisted of group life insurance coverage and the payment by the HWT of the requisite insurance premiums during her lifetime. The amount of the insurance proceeds that would have been paid, on the death of Ms. Ellis, to her beneficiary, and which was based on her earnings while she was an active employee of Nortel, was $17,000. For taxation years ending before 2011, Ms. Ellis included, in computing her income, the amount of the group life insurance premiums paid on her behalf by the HWT.
[25] Pursuant to the ARSA, the HWT continued to pay the life insurance premiums in respect of Ms. Ellis until December 31, 2010, but no premiums were paid thereafter. The Monitor estimated that, as at December 31, 2010, the present value of Ms. Ellis’ claim was $6,855.
[26] As Ms. Ellis was a beneficiary of the HWT, when distributions from the corpus of the HWT were made in 2011, Ms. Ellis received $1,371. The Monitor subsequently issued to Ms. Ellis a T4A slip in respect of the $1,371 distribution. When Ms. Ellis prepared and filed her income tax return for 2011, she included the distributed amount of $1,371 in computing her income. Ms. Ellis’ 2011 tax return was assessed as filed, and she subsequently objected and later appealed.
E. Susan Kennedy (Long Term Disability Life Insurance Benefit) [27] In 2010, Ms. Kennedy was a former employee of Nortel who was receiving long term disability benefits (“LTD Benefits”) under the Nortel Long Term Disability Plan for full-time employees (the “LTD Plan”). As such, she had a vested right to receive life insurance coverage under the Group Life Plan (while she was in receipt of LTD Benefits), until attaining age 65, whereupon she would have been eligible for pensioner life insurance coverage under the Group Life Plan for her lifetime. The amount of the insurance proceeds that would have been paid, on the death of Ms. Kennedy, to her beneficiary was $62,000 for basic life insurance and $186,000 for optional life insurance. For taxation years ending before 2011, Ms. Kennedy included, in computing her income, the amount of the group life insurance premiums paid on her behalf by the HWT.
[28] The HWT paid the life insurance premiums in respect of Ms. Kennedy until December 31, 2010. No premiums were paid thereafter. The Monitor estimated the present value of Ms. Kennedy’s claim, as at December 31, 2010, to be $29,394.
[29] As Ms. Kennedy was a beneficiary of the HWT, she was entitled to receive a share of the distribution of the corpus of the HWT. She received lump-sum payments in the amounts of $7,281.88 and $1,730 in September 2011 and December 2011 respectively. The Monitor subsequently issued one or more T4A slips (presumably in the aggregate amount of $9,011.88, i.e., $7,281.88 + $1,730) to Ms. Kennedy, who, in preparing her income tax return for 2011, included the distributed amounts in computing her income.[22] The CRA assessed Ms. Kennedy’s 2011 income tax return as filed, after which Ms. Kennedy objected and later appealed.
F. James Scott (Management Survivor Income Benefit) [30] While she was alive, the spouse of Mr. Scott was an active non-unionized full-time employee of Nortel. After the death of his spouse, Mr. Scott, pursuant to the Management Survivor Income Benefit Plan (the “SIB Plan”), became entitled to receive monthly survivor income benefits (the “SIBs”), each in the amount of $871.46, by reason of his spouse’s employment with Nortel. In preparing his income tax returns, Mr. Scott reported the SIBs as death benefits, which he included in computing his income. Mr. Scott received SIBs until December 31, 2010, but not thereafter.
[31] Mercer (Canada) Limited (“Mercer”), which was Nortel’s actuary, estimated the present value of Mr. Scott’s SIBs, as at December 31, 2010, as being $124,345. When the corpus of the HWT was distributed in 2011, Mr. Scott received lump-sum payments of $724.18 in January 2011, $482.79 in May 2011 and $7,319.20 in July 2011 (resulting in aggregate distributions of $8,526.17 to him in 2011).[23] The Monitor subsequently issued one or more T4A slips to Mr. Scott in respect of the distributions, and Mr. Scott included the distributed amounts in computing his income for 2011. After his 2011 income tax return was assessed as filed, Mr. Scott objected and later appealed.
G. Ann McCann (Union Survivor Transition Benefit) [32] Before his death, the spouse of Ms. McCann was a unionized employee of Nortel. Upon the death of her spouse, Ms. McCann became entitled to receive monthly survivor transition benefits (“STBs”) under the Union Survivor Transition Benefit Plan (the “STB Plan”), by virtue of her spouse’s employment with Nortel. Specifically, under the STB Plan, Ms. McCann was entitled to receive a monthly payment in the amount of $725 for a fixed five-year term that would have expired on December 31, 2013. Pursuant to the ARSA, Ms. McCann continued receiving the monthly STBs until December 31, 2010, after which no further benefits were paid. The Monitor estimated the present value of Ms. McCann’s STBs, as at December 31, 2010, to be $24,644.
[33] As Ms. McCann was a beneficiary of the HWT, when distributions from the corpus of the HWT were made in 2011, she received $2,175 in January 2011, $285.97 in May 2011 and $3,691.45 in July 2011 (resulting in aggregate distributions of $6,152.42 to her in 2011).[24] The Monitor subsequently issued one or more T4A slips to Ms. McCann in respect of the distributions to her.
[34] When Ms. McCann filed her income tax return for 2011, she included the distribution of $6,152.42 in computing her income. The CRA subsequently assessed her return, apparently to include, in computing her income, STBs in the amount of $6,438.39, after which Ms. McCann objected and later appealed.[25]
III. ISSUES [35] The issues to be resolved in respect of these Appeals are the following:
A. Is the Affidavit, together with the HWT’s 2011 T3 Trust Income Tax and Information Return and 2011 Trust Notice of Assessment, admissible?
B. Are sections 104 through 108 of the ITA applicable to the disposition of these Appeals, and, if so, how?
C. Should the distribution in the amount of $1,371 by the HWT to Ms. Ellis in 2011 be included in computing her income for 2011?
D. Should the distributions in the aggregate amount of $9,011.88 by the HWT to Ms. Kennedy in 2011 be included in computing her income for 2011?
E. Should the distributions in the aggregate amount of $8,526.17 by the HWT to Mr. Scott in 2011 be included in computing his income for 2011?
F. Should the distributions in the aggregate amount of $6,152.42 by the HWT to Ms. McCann in 2011 be included in computing her income for 2011?
IV. ANALYSIS A. Admissibility of the Affidavit (1) Background [36] When drafting an agreement concerning the use of a statement of agreed facts or a joint book of documents, it is not uncommon for one or more of the parties to reserve the right to call one or more witnesses or to introduce additional documentary evidence at the hearing. There was no such reservation by either Party here, although the introductory paragraph of the SAF concludes by saying, “Nothing in this document precludes any parties from relying on the facts otherwise in the record before the court.” As mentioned above, counsel for the Respondent applied to have the Affidavit admitted as evidence so that it and its exhibits would be part of the record before the Court.
[37] It is my understanding that the primary reason for which the Respondent wanted to introduce the Affidavit (including the HWT’s 2011 tax return and notice of assessment) as evidence was to prove that the HWT existed in 2011 and that, in computing its income for 2011, the HWT deducted the amounts distributed by it to the Appellants in 2011. Counsel for the Respondent submitted that the matching principle was applicable, such that, assuming that the HWT deducted the distributed amounts, it would follow that those amounts should be included in computing the income of the recipients.
[38] Counsel for the Appellants objected to the admission of the Affidavit on the basis that the delivery of the Affidavit to him on the morning of the first day of the hearing constituted prejudicial “last-minute trial-by-ambush type tactics.”[26] Furthermore, counsel for the Appellants pointed out that the HWT is not a party to these Appeals and that its tax return and notice of assessment are confidential. In addition, counsel for the Appellants submitted that the matching principle does not exist and that the manner in which the HWT was taxed is not relevant to the taxability of the Appellants.
[39] While making his submissions concerning the admissibility of the Affidavit, counsel for the Appellants stated that, although the HWT Allocation Order provided that the date of the Notice of Termination (which, in my view, marked the end of NNC’s obligation to make contributions to the HWT and set the effective date for the determination and satisfaction of the expenses, claims and obligations of the HWT[27]) was deemed to be December 31, 2010, he was willing to concede that the winding-up of the affairs of the HWT continued into 2011, 2012 and subsequent years and that the HWT has filed tax returns for each year during which the winding-up has continued.[28]
(2) Rule 89(1) [40] Each of the Appellants filed a List of Documents (Partial Disclosure) on January 30, 2015. Each List referred to the 2011 Income Tax and Benefit Return of the particular Appellant, but did not refer to the 2011 T3 Trust Income Tax and Information Return of the HWT.
[41] On January 30, 2015 the Respondent filed a List of Documents (Partial Disclosure) in each of these Appeals. The Lists filed in respect of Mr. Scott’s and Ms. McCann’s Appeals referred to copies of the 2011 income tax returns of those two Appellants respectively.[29] The Lists filed by the Respondent in respect of Ms. Kennedy’s and Ms. Ellis’ Appeals referred to the 2011 Option C Printouts for those two Appellants,[30] rather than to their actual tax returns. The Lists filed by the Respondent did not refer to the HWT’s 2011 income tax return or notice of assessment.
[42] Subsection 89(1) of the Tax Court of Canada Rules (General Procedure)[31] (the “Rules”) states:
89(1) Unless the Court otherwise directs, except with the consent in writing of the other party or where discovery of documents has been waived by the other party, no document shall be used in evidence by a party unless
(a) reference to it appears in the pleadings, or in a list or an affidavit filed and served by a party to the proceeding,
(b) it has been produced by one of the parties, or some person being examined on behalf of one of the parties, at the examination for discovery, or
(c) it has been produced by a witness who is not, in the opinion of the Court, under the control of the party.
[43] The HWT’s 2011 tax return and notice of assessment do not come within paragraph 89(1)(b) or (c) of the Rules, nor are they referred to in the pleadings or in the Respondent’s List of Documents. They are, however, included as exhibits in the Affidavit, which was not filed with the Court before the commencement of the hearing and was only served on the Appellants on the morning of August 25, 2016 (the day when the hearing commenced). Paragraph 89(1)(a) of the Rules does not specify a deadline for filing and serving a list of documents or an affidavit containing a document. Subsection 81(1) of the Rules provides that a list of documents (partial disclosure) is to be filed and served within 30 days following the closing of the pleadings. This suggests that a list of documents should be filed sooner, rather than later.
[44] The context of sections 78 through 91 of the Rules suggests that, in paragraph 89(1)(a), the word “affidavit” means an affidavit of documents as contemplated by subsections 82(4) through (6) and section 88 of the Rules, rather than an affidavit of the type contemplated by subsection 244(9) of the ITA.
[45] If the Affidavit is not an affidavit of the type contemplated by paragraph 89(1)(a) of the Rules, unless the Court otherwise directs, the HWT’s 2011 tax return and notice of assessment may not be used in evidence by the Respondent. If the Affidavit is an affidavit of the type contemplated by paragraph 89(1)(a), and if I determine that the Affidavit is admissible, the service of the Affidavit on the Appellants on the morning of the commencement of the hearing placed the Appellants at a significant disadvantage.
(3) Jurisprudence concerning Rule 89(1) [46] Subsection 89(1) of the Rules has a salutary objective, which is to reduce the possibility of taking the other party by surprise (colloquially referred to as trial by ambush).[32] Hence, the general rule is to exclude from evidence a document that is not referred to in the pleadings or the list of documents of the party who seeks to introduce the document.[33] Absent some agreement between the parties, subsection 89(1) of the Rules and other evidentiary requirements relating to the production of documents should not readily be ignored.[34] A departure from the general rule requires some justification[35] or some reason.[36]
[47] The opening words of subsection 89(1) of the Rules provide the Court with a discretion to allow a document into evidence even if the requirements of subsection 89(1) have not been met.[37] As a foundation for the exercise of this discretion, there should be some reason provided to the Court in support of the proposition that a previously undisclosed document should be allowed into evidence.[38] The Court must exercise its discretion judicially, according to the rules of reason and justice, and not arbitrarily.[39] In determining whether to admit a previously undisclosed document, there must be a balancing of the competing interests of both parties, so as to avoid a miscarriage of justice.[40] The Court must also be mindful of the interests of justice and the overriding importance of having all of the relevant information before the Court to enable it to arrive at a proper and just disposition of the particular appeal.[41] Finally, the Court should not lose sight of subsection 4(1) of the Rules, which provides that the Rules are to “be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.”[42]
[48] During the discussion of the admissibility of the Affidavit, neither counsel specifically addressed the question of whether the Respondent’s failure to include the HWT’s 2011 tax return and notice of assessment in its List of Documents precludes, by reason of subsection 89(1) of the Rules, the Respondent from using that tax return and notice of assessment in evidence.[43] Given that subsection 89(1) of the Rules was not discussed expressly by either counsel, counsel for the Appellants did not urge me to exclude the Affidavit on the basis of subsection 89(1) of the Rules,[44] and counsel for the Respondent made no submission as to why the Court should exercise its discretion so as to allow the Affidavit to be admitted, nor did counsel for the Respondent provide a justification or reason for departing from the general rule in subsection 89(1) of the Rules. Counsel for the Respondent explained why they would like the HWT’s 2011 tax return and notice of assessment to be entered into evidence and why the desire to enter those documents into evidence arose only a day or two before the hearing, but they did not explain why I should ignore the general rule of exclusion in subsection 89(1) of the Rules.
[49] As the impact of subsection 89(1) of the Rules was not argued before me, I am reluctant to base my decision concerning the admissibility of the Affidavit solely on that particular rule.
(4) Subsections 241(1) and (3) of the ITA [50] Another ground for the objection by counsel for the Appellants to the admission of the Affidavit was that the exhibits to the Affidavit constitute taxpayer information (as defined in subsection 241(10) of the ITA), and, as such, are confidential and are, by reason of paragraph 241(1)(a) of the ITA, precluded from public disclosure. Paragraph 241(1)(a) of the ITA reads as follows:
241(1) Except as authorized by this section, no official or other representative of a government entity shall
(a) knowingly provide, or knowingly allow to be provided, to any person any taxpayer information….
[51] The opening phrase of subsection 241(1) of the ITA makes it clear that the remainder of section 241 may contain exceptions to the general prohibition contained in subsection 241(1) of the ITA. One such exception is found in paragraph 241(3)(b) of the ITA, which reads as follows:
241(3) Subsections (1) and (2) do not apply in respect of …
(b) any legal proceedings relating to the administration or enforcement of this Act, the Canada Pension Plan, the Unemployment Insurance Act or the Employment Insurance Act or any other Act of Parliament or law of a province that provides for the imposition or collection of a tax or duty.
(5) Jurisprudence Concerning Section 241 [52] In the Slattery case, Iacobucci J of the Supreme Court of Canada enunciated some of the principles that apply to the interpretation and application of section 241 of the ITA, as follows:
In my view, s. 241 involves a balancing of competing interests: the privacy interest of the taxpayer with respect to his or her financial information, and the interest of the Minister in being allowed to disclose taxpayer information to the extent necessary for the effective administration and enforcement of the Income Tax Act and other federal statutes referred to in s. 241(4).
Section 241 reflects the importance of ensuring respect for a taxpayer’s privacy interests, particularly as that interest relates to a taxpayer’s finances. Therefore, access to financial and related information about taxpayers is to be taken seriously, and such information can only be disclosed in prescribed situations. Only in those exceptional situations does the privacy interest give way to the interest of the state….
By instilling confidence in taxpayers that the personal information they disclose will not be communicated in other contexts, Parliament encourages voluntary disclosure of this information….
Parliament has also recognized, however, that if personal information obtained cannot be used to assist in tax collection when required, including tax collection by way of judicial enforcement, the possession of such information will be useless. Disclosure of information obtained through tax returns or collected in the course of tax investigations may be necessary during litigation in order to ensure that all relevant information is before the court, and thereby to assist in the correct disposition of litigation. But this necessity is sanctioned by Parliament in a very limited number of situations. Disclosure is authorized in criminal proceedings and other proceedings as set out in s. 241(3). Certain other situations are specified in s. 241(4), which have been described … as being “largely of an administrative nature” ….[45] [Emphasis added.]
[53] Iacobbuci J went on to discuss the two connecting phrases that appear in the statutory provision quoted above. In particular, he considered the phrase “in respect of,” which appears in the first line of subsection 241(3) of the ITA and the phrase “relating to” which appears in the first line of paragraph 241(3)(b) of the ITA. Quoting from the Nowegijick case, he noted that “[t]he phrase ‘in respect of’ is probably the widest of any expression intended to convey some connection between two related subject matters.”[46] He also stated that, in his view, the comments quoted from Nowegijick are equally applicable to the phrase “relating to”. He then observed:
So, both the connecting phrases of s. 241(3) suggest that a wide rather than narrow view should be taken when considering whether a proposed disclosure is in respect of proceedings relating to the administration or enforcement of the Income Tax Act.[47]
Later in his reasons, Iacobucci J reiterated his comments concerning the breadth of subsection 241(3) of the ITA, as follows:
As mentioned earlier, in my opinion the exception authorizing Revenue Canada to disclose tax related information in proceedings is very broad; that is, it operates in respect of proceedings relating to the enforcement of the Income Tax Act.[48] [Emphasis in original.]
[54] In my view, particularly in light of the broad interpretation given to subsection 241(3) of the ITA in Slattery, the Appeals instituted by Mr. Scott, Ms. Kennedy, Ms. Ellis and Ms. McCann constitute legal proceedings relating to the administration or enforcement of the ITA. I am not aware of any requirement that the legal proceedings in which the disclosure of otherwise confidential taxpayer information is sought must pertain to the taxpayer who is the subject of that information. In fact, the Federal Court of Appeal has previously ordered that the income tax returns of a third party, which were relied on by the Minister in assessing another taxpayer, were to be disclosed to the assessed taxpayer who had commenced legal proceedings to challenge its assessments.[49]
[55] Counsel for the Appellants referred me to the Tor Can Waste Management case, which dealt with a motion brought by a reassessed taxpayer for disclosure by the Crown of information and documentation obtained by the CRA from a third party from whom the reassessed taxpayer had purchased certain waste containers or bins. In the course of deciding the motion, Lyons J stated:
23. Subsections 241(1) and (2) of the Act embody the basic principles that restrict the release of confidential taxpayer information. Paragraph 241(3)(b) of the Act contains an exception to the prohibition in respect of legal proceedings relating to the administration or enforcement of the Act….
24. The prohibition against disclosure by the Minister of protected third-party taxpayer information and documentation applies if it is not relevant to nor was relied on by the Minister in reassessing a tax return.
25. Courts will not order the disclosure of third-party information where the Minister did not use the information nor if there was virtually no reason to use the information to make an assessment.
26. Courts have ordered disclosure of third-party information (income tax returns and information exchanged with the Minister) if the information was relied on by the Minister in making the assessment.
27. In the decision of Oro Del Norte S.A. v R., [1990] 2 CTC 67 (Fed. T.D.), the Court held that third-party information relevant to the issues between the parties or relied on by the Minister in assessing is disclosable. Recently, in Heinig …, Webb J. confirmed those principles (relevance and reliance).[50] [Footnote numbers omitted.]
There was no suggestion by counsel for the Respondent that the CRA relied on the HWT’s 2011 tax return in assessing Mr. Scott, Ms. Kennedy, Ms. Ellis or Ms. McCann. However, counsel for the Respondent asserted that, by reason of the matching principle, the HWT’s 2011 tax return is relevant to these Appeals. Counsel for the Appellants took the position that the manner in which the HWT was taxed is not relevant to the taxability of the Appellants. I will discuss the question of relevance below.
[56] In Tor Can Waste Management, Lyons J noted (in footnote 16) that in 9005-6342 Québec Inc.,[51] Hogan J had canvassed the principles relating to section 241 of the ITA. The 9005-6342 case, like many of the cases dealing with section 241 (including some of those referred to above), dealt with an application by a taxpayer to require the CRA to produce third-party tax information that was used by the CRA in assessing the taxpayer or that was relevant to the taxpayer’s appeal. Given that 9055-6342 did not deal with a situation where the CRA or the Crown was endeavouring to enter confidential third-party tax information as evidence in an appeal relating to another taxpayer, that case is not directly on point with the current situation. Nevertheless, some of the principles pertaining to section 241 of the ITA, as enunciated by Hogan J and paraphrased below, might have some application here:
a) Reasons of public policy and relevance might preclude the use of third-party tax information that would otherwise qualify for disclosure under paragraph 241(3)(b) of the ITA.[52]
b) Third-party tax information should not be disclosed to another taxpayer if the CRA had virtually no reason to use the information when assessing the other taxpayer.[53]
c) Even though subsection 241(3) of the ITA (which refers to any legal proceedings relating to the administration or enforcement of the ITA) is broader than paragraph 241(4)(a) of the ITA (which requires that the information contemplated by that provision be regarded as necessary for the purposes of the administration or enforcement of the ITA), and even though subsection 241(3) of the ITA does not specify that third-party