Stack v. The King

Stack v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-12-18
Neutral citation
2024 TCC 164
File numbers
2021-2269(IT)G, 2021-2270(IT)G
Judges and Taxing Officers
Randall S. Bocock
Subjects
Income Tax Act
Decision Content
Citation: 2024 TCC 164
Date: 20241218
Dockets: 2021-2270(IT)G
2021-2269(IT)G
BETWEEN:
MARGARET STACK and LOUIS STACK
Appellants,
and
HIS MAJESTY THE KING,
Respondent.
COMMON REASONS FOR ORDER
Bocock J.
I. INTRODUCTION
PART ONE – MOTIONS TO COMPEL
A tale of two motions to compel
[1] Mrs. Margaret Stack (“Margaret”) and Mr. Louis Stack (“Louis”) (together, the “Appellants”) appeal the Minister of National Revenue’s (the “Minister”) reassessments under the Income Tax Act[1] in respect of both of their 2017 taxation year.
[2] These reasons concern two motions to compel answers (or better answers) to questions posed at oral examinations for discovery: one brought by the Respondent heard on May 13, 2024 (the “Respondent’s Motion”); the other by the Appellants heard on May 15, 2024 (the “Appellants’ Motion”). As well, the Respondent’s Motion also contained a request that the Appellants provide more responsive details to a demand for particulars served and re-served in regards to the notices of appeals.
[3] The Respondent also included a request for leave of the Court to amend the replies. The Court reviews that issue distinctly in PART TWO of these common reasons. As well, the Court already decided by separate order and reasons published on October 24, 2024 the more sensitive while related issue of documents redacted because of asserted privilege.
[4] The parties helpfully devised categories categorizing the rationale behind their inquiries rather than ordering them sequentially. In doing so, the Respondent’s Motion put in issue all of the demands for particulars where logical which were repeated at discovery and re-served just before the return date of the Respondent’s Motion.
Factual background to the appeals
[5] Largely because there is no critical evidential findings of the facts before it, the Court synthesized a background fact set from the pleadings and submissions. While lengthy, the facts display the breadth of the two starkly different bases of the Minister’s reassessments: allegation of sham transaction(s) versus application of the general ant-avoidant rule (“GAAR”). That essential fact set, extracted from the materials filed largely based on the parties’ views, is as follows. The Court notes the actual factual findings after any trial could be dramatically different.
[6] In 1985, Louis founded Fitter International Inc. (“Fitter International”), a Calgary based company that carries on the business of manufacturing and distributing fitness, balance, movement, and wellness products.
[7] Margaret and Louis were shareholders of Fitter International.
[8] 862 Alberta is a holding company that owns 33% of Fitter International’s common shares.
[9] At the beginning of 2017:
a)Louis owned 50 Class A shares of 862 Alberta, 565,000 Class D shares of Fitter International, and 200 Class E shares of Fitter International;
b)Margret owned 50 Class B shares of 862 Alberta and 46,000 Class D shares of Fitter International; and,
c) 862 Alberta owned 100 Class A of Fitter International.
[10] Bob Hahn (“Bob”) is an accountant who advises Margaret, Louis, Fitter International, and 862 Alberta. Bob’s accounting firm is Hahn Lukey Houle LLP (“HLH LLP”). Fitter International’s business includes the sale of products that could cause serious injury. Fitter International maintains insurance and pays insurance premiums to mitigate the business risks associated with selling its products.
The need for capital to fund expansion
[11] In 2016, Fitter International was growing and sought out an external investor to invest capital.
[12] Tecate Northern Trust (“TNT”) is a trust that carries on the business of a private equity fund. On April 12, 2017, the Appellants approached TNT about the possibility of participating in its two-stage investment transaction, whereby TNT would initially invest in Fitter International through the purchase of the Appellants’ shares, with the possibility of TNT’s long-term investment in Fitter International. On May 11, 2017, TNT issued non-binding letters of intent (“LOIs”) to the Appellants.
The Appellants’ corporate reorganization and share purchases
[13] On July 31, 2017, TNT purchased from the Appellants the following shares (the “Purchase Transactions”):
a)From Louis, 565,800 Class “D” Preferred Shares of Fitter International and 334,200 Class “L” Preferred Shares of 862 Alberta for a total purchase price of $810,000; and,
b) From Margaret, 46,000 Class “D” Preferred Shares of Fitter International (collectively with Louis’ shares, the “Fitter Shares”) and 854,000 Class “L” Preferred Shares of 862 Alberta (collectively with Louis’ shares, the “862 Alberta Shares”, and collectively with the Fitter Shares, as the “Shares”) for a total purchase price of $810,000.
After sober second thought… “no”
[14] Fitter International and 862 Alberta decided against a long-term investment from TNT, informed TNT of their decision, and passed resolutions to redeem the Shares.
[15] Effective August 17, 2017, Fitter International repurchased 611,800 Class “D” Preferred Shares (including the Fitter Shares) from TNT for a total purchase price of $611,800. Also effective August 17, 2017, 862 Alberta repurchased 1,188,200 Class “L” Shares (including the 862 Alberta Shares) from TNT for a total purchase price of $1,188,200 (the “Redemption Transactions”).
How the reassessments arose
[16] The Appellants were flagged for audit by the Promoter Compliance Centre (“PCC”) within the Canada Revenue Agency (“CRA”). The PCC was, at the time, “aware of promotions by TECATE the Minister’s agents do mostly capitalize this proper noun - to assist high net worth shareholders of qualified small business corporations to extract corporate surplus from their corporations.” As the Appellants had reported that they and their corporations had undertaken transactions with TNT in 2017, the PCC identified them as “entities of concern” and referred them for audit. The PCC prepared a brief “risk analysis” memo (the “PCC Risk Analysis”) that summarized relevant information about the Appellants and their companies contained on the CRA’s computer systems, and attached a few documents, including TNT promotional brochure.
[17] The PCC Risk Analysis was reviewed as part of a limited “desk audit.” The Appellants were advised that their 2017 taxation year was under audit.
[18] CRA prepared an “Audit Plan” in order to “to outline a plan to conduct the audit at the beginning.” In July 2019, the review was elevated to a full audit after the regional tax services office technical committee approved.
[19] During the audit of the Appellants’ transactions, various officials at the CRA were consulted in order to comment on the GAAR position being formulated, including the section at CRA headquarters that prepares memos for consideration by the CRA’s GAAR Committee (the “GAAR section”).
The CRA agents involved
[20] The continuous open memo, the T2020, reveals two key CRA staff (with positions in parentheses): Mr. Panth (auditor) and Mr. Ives (technical advisor). Mr. Ives also kept copies of emails he and Mr. Choulli exchanged with Mr. Ives and other CRA officers with whom they consulted during the audit, such as Dominic Laroche, Victor Wang, and Michel Osvath-Langlais from the GAAR section. The T2020s were produced to the Appellants as part of the audit file, as were Mr. Panth’s emails, and the emails and documents related to the audit retained by other CRA officers.
[21] Mr. Ives put Mr. Panth and Mr. Choulli in touch with Victor Wang in the GAAR Section in November 2020. Mr. Wang had just prepared a general memorandum for the GAAR Committee in a file involving transactions between TNT and several other taxpayers (the “Other GAAR case”). Mr. Ives thought Mr. Wang might be able to offer useful input on the GAAR position Mr. Panth was developing in the Appellants’ case. The Respondent produced the emails pursuant to which these consultations took place as part of the Appellants’ “audit file.”
[22] Mr. Panth and Mr. Choulli also communicated with Michel Osvath- Langlais, who was assigned to review the GAAR position Mr. Panth and Mr. Choulli had developed in the Appellants’ case, and which would be considered by the GAAR Committee. The Respondent produced this internal correspondence (including emails that did not involve Mr. Panth or Mr. Choulli), the memo that Mr. Osvath-Langlais provided to the GAAR Committee, and the GAAR Committee’s file for the Appellants (the “GAAR file”) to the Appellants prior to discovery.
[23] To the extent that Mr. Panth and Mr. Choulli obtained information from others that they considered during the audit, they recorded this information and noted their consideration of it in the audit file, either by referring to it in the T2020s, by preparing and retaining meeting summaries, or by retaining copies of documents and emails. Mr. Panth and Mr. Choulli also drew upon experience they had gained working on other audits, including other audits involving participants that had undertaken similar transactions with TNT. For example, it would seem a common, customized general questionnaire was employed with the Appellants and other similar files. Mr. Choulli confirmed at discovery similar timing and steps occurred in other TNT transactions.
[24] It is likely that at the time the Appellants were being audited, the CRA was aware of a tax strategy being marketed by TNT (the “Tecate Strategy”), as other potential participants had been identified and under audit. Any related impact on the Minister’s audit of the Appellants remains unknown. The CRA contends there was no common or linked approach.
[25] Unsurprisingly perhaps, the recommendation the CRA made in the Appellants’ case reflects the position taken in the other GAAR case. As a result of this audit, the Appellants were both reassessed on April 7, 2021.
PART TWO – LEAVE TO AMEND REPLIES
The sought amendments
[26] The Respondent seeks leave to file amended replies. That leave is needed because the Appellants withhold their consent to one of the proposed amendments. The disputed, substantively identical, amendment is the addition of a new paragraph to both replies which provides as follows:
For the purpose of this appeal, the Attorney General of Canada does not rely on the following facts, which were assumed by the Minister and pleaded at the paragraphs listed below:
a)the fact assumed by the Minister and pleaded directly at paragraph 16(dd) that TNT, Margaret, and Louis retained Felesky Flynn in connection with Margaret and Louis’s Tecate Strategy;
b)the fact assumed by the Minister and pleaded directly at paragraphs 16(qqq) and 16(zzz), by implication at paragraphs 16(rrr), 16(sss), 16(ttt), 16(uuu), 16(aaaa), 16(bbbb), 16(cccc), 16(dddd), and by reference at paragraphs 17(x), that Felesky Flynn received funds from TNT in trust for Margaret and/or Louis.
The impact of the amendments
[27] The consequential impact of the contested amendment is to “provide notice that the [Respondent] no longer relies on two assumptions… made in raising the assessment… ”. There were some additional “housekeeping” amendments sought which are not disputed.
[28] The salient two assumptions are that:
a) the Appellants and TNT retained Felesky Flynn LLP as counsel concerning the transactions; and,
b) that Felesky Flynn LLP received funds from TNT in trust for the Appellants.
II. APPLICABLE LAW GENERALLY
PART ONE – THE MOTIONS
[29] The general jurisprudence concerning the scope of discovery, nature of these appeals and the species of the basis to compel further or better answers are dealt with at the outset. This is because they apply to both motions, more or less.
a) Scope of Discovery [30] The scope of discovery should be wide. Relevancy should be construed liberally, without allowing it to enter the realm of a fishing expedition. The purpose of discovery is to enable parties to know the case they have to meet at trial, know the facts that the opposing party relies on, narrow or eliminate issues, obtain admissions, and avoid surprises at trial.[2]
[31] On a motion, the threshold for relevance is low and, when in doubt, the motions judge should err on the side of allowing the question.[3] Nonetheless, the exercise cannot amount to a “fishing expedition.”[4] The examining party is entitled to “any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party.”[5]
[32] A question is relevant when there is a reasonable likelihood that it might elicit information that may directly or indirectly enable the party seeking the information to advance its case or damage the case of the opposing party, or which fairly may lead to a train of inquiry that may advance the party’s care or damage the opposing party’s case.[6]
[33] In MP Western Properties Inc.,[7] the Court provided a summary of principles applicable to the disclosure of documents at discovery. There is no “magic formula” and whether or not a particular document should be produced will require a fact-based inquiry on a case-by case basis. Justice Miller found that the following principles apply when considering an Appellant’s request for disclosure:
21. The Appellants’ request for disclosure is supported by the following general principles:
a) Relevancy on discovery ought to be "broadly and liberally construed and wide latitude should be given": Baxter v. R., 2004 TCC 636 (T.C.C. [General Procedure]) at paragraph 13.
b) Relevancy at discovery is a lower threshold than that at trial: 4145356 Canada Ltd. v. R., 2010 TCC 613 (T.C.C. [General Procedure]). In fact, Rule 90 of the Rules expressly provides that the production of a document at discovery is not an admission of its relevance or admissibility.
c) All documents relied on or reviewed by the Minister in making his assessment must be disclosed to the taxpayer: Amp of Canada Ltd. v. R., [1987] 1 C.T.C. 256 (Fed. T.D.).
d) Documents that lead to an assessment are relevant: HSBC v. The Queen, (supra) at paragraph 15.
e) Documents in CRA files on a taxpayer are prima facie relevant, and a request for those documents is itself not a broad or vague request: HSBC (supra) at paragraph 15.
f) The examining party is entitled to have any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party: Teelucksingh v. R., 2010 TCC 94 (T.C.C. [General Procedure]) at paragraph 15.
22. Whereas, the Respondent's refusal to disclose the documents is supported by the following general principles:
a) An indiscriminate request for the production of documents in the hope of uncovering helpful information or the hope of it leading to a train of inquiry is not permitted: Harris v. R., 2001 D.T.C. 5322 (Fed. T.D.) at paragraph 45; Fluevog (supra) at paragraph 18.
b) Earlier drafts of a final position paper do not have to be disclosed. The mental process of the Minister or his officials in raising the assessments is not relevant: Rezek (supra) at paragraph 16.
c) A party is entitled to know the position of the other party with respect to an issue of law, but it is not entitled to have access to either the legal research or the reasoning by which that position is arrived at: Teelucksingh (supra) at paragraph 15.
d) Even where relevance is established, the Court has a residual discretion to disallow the production of documents. This principle was described in Lehigh (supra) at paragraph 35 as follows:
The exercise of this discretion requires a weighing of the potential value of the answer against the risk that a party is abusing the discovery process. See Bristol-Myers Squibb Co. v. Apotex Inc. at paragraph 34. The Court might disallow a relevant question where responding to it would place undue hardship on the answering party, where there are other means of obtaining the information sought, or where "the question forms part of a 'fishing expedition' of vague and far reaching scope": Merck & Co. v. Apotex Inc., 2003 FCA 438, 312 N.R. 273 at paragraph 10; Apotex Inc. v. Wellcome Foundation Ltd., 2008 FCA 131, 166 A.C.W.S. (3d) 850 at paragraph 3.[8]
[34] In Baxter, Chief Justice Bowman summarized the concept of relevance in the context of discoveries:
a) Relevancy on discovery must be broadly and liberally construed and wide latitude should be given;
b) A motions judge should not second guess the discretion of counsel by examining minutely each question or asking counsel for the party being examined to justify each question or explain its relevancy;
c) The motions judge should not seek to impose his or her views of relevancy on the judge who hears the case by excluding questions that he or she may consider irrelevant but which, in the context of the evidence as a whole, the trial judge may consider relevant;
d)Patently irrelevant or abusive questions or questions designed to embarrass or harass the witness or delay the case should not be permitted.[9]
[35] Even if relevant, the Court maintains a residual discretion to disallow questions under the principle of proportionality:[10]
[34] The jurisprudence establishes that a question is relevant when there is a reasonable likelihood that it might elicit information which may directly or indirectly enable the party seeking the answer to advance its case or to damage the case of its adversary, or which fairly might lead to a train of inquiry that may either advance the questioning party’s case or damage the case of its adversary. Whether this test is met will depend on the allegations the questioning party seeks to establish or refute. See Eurocopter at paragraph 10, Eli Lilly Canada Inc. v. Novopharm Ltd., 2008 FCA 287, 381 N.R. 93 at paragraphs 61 to 64; Bristol-Myers Squibb Co. v. Apotex Inc. at paragraphs 30 to 33.
[35] Where relevance is established the Court retains discretion to disallow a question. The exercise of this discretion requires a weighing of the potential value of the answer against the risk that a party is abusing the discovery process. See Bristol-Myers Squibb Co. v. Apotex Inc. at paragraph 34. The Court might disallow a relevant question where responding to it would place undue hardship on the answering party, where there are other means of obtaining the information sought, or where “the question forms part of a ‘fishing expedition’ of vague and far-reaching scope”: Merck & Co. v. Apotex Inc., 2003 FCA 438, 312 N.R. 273 at paragraph 10; Apotex Inc. v. Wellcome Foundation Ltd., 2008 FCA 131, 166 A.C.W.S. (3d) 850 at paragraph 3.[11]
[36] Restating those principles, in Contractor v. R,[12] Justice Owen went further and added that this discretion also extends to questions that are relevant but not proper, for example if the question is “materially ambiguous, vague, imprecise, misleading, scandalous (e.g., defamatory) or vexatious (e.g., harassing); or seeks privileged information, seeks the work product of counsel, seeks the disclosure of evidence rather than fact or seeks an opinion (i.e., inference from facts) rather than fact.”[13]
[37] Overall, the motions judge has broad discretion when determining relevancy at the discovery stage; the motions judge is to provide a ruling and briefly state the reason for the decision, but is not required to provide a detailed explanation of the Court’s ruling.[14] On that basis, the Court deals with the broad species of demands to compel, the basis for denial and a conclusion of whether a party is compelled to answer a specific request.
[38] Nonetheless, a party that is asked to produce a relevant document can only produce it if it exists and is within its power or control.[15] Pursuant to Rule 78(2), a document is “deemed to be in a party’s power if that party is entitled to obtain the original document or a copy of it and the party seeking it is not so entitled.” The Federal Court of Appeal (“FCA”) indicated that a document that in the possession, control or power of party includes the non-privilege documents the party was entitled to receive from a third party.[16]
[39] Furthermore, examination for discovery cannot amount to a fishing expedition even if the basis is relevant. A fishing expedition has been defined as “an indiscriminate request for production, in the hope of uncovering helpful information.”[17] In other words:
the plaintiff wishes to maintain his questions, and to insist upon answers to them, in order that he may find out something of which he knows … nothing now, which might enable him to make a case of which he has not knowledge at the present. If that is the effect of the interrogatories, it seems to me that they come within the description of “fishing” interrogatories and on that ground cannot be allowed.[18]
[40] In Grand River Enterprises Six Nations Ltd., the issue on appeal was whether Grand River was required to remit excise duty on its tobacco products.[19] Grand River had requested that the Crown provide “the names of First Nation tobacco manufacturers who were licensed as tobacco manufacturers under the Act and were located on reserves in the Province of Ontario.”[20]
[41] In finding the request to be a fishing expedition the Federal Court of Appeal explained that “[t]he basis for Grand River’s request is that it “suspects, but does not know” that there are First Nation tobacco manufacturers who are licensed under the ITA but who do not pay excise duty on all their tobacco products.[21] Thus, a party cannot ask for facts that would lead to the creation of a new argument, they can only discover information that sustains an already pleaded argument.
[42] Fundamentally and logically however, the motions judge must be both diligent and wary to ensure, in the context of the appeal contested, that each party receives full measure of the discovery process to prepare for trial: discerning the issues; preparing full answers to the opposing case theory; promoting settlement through informed risk assessment of the unhidden viewscape of the matter.[22] To that end, the more complex the pleadings and legal concepts afoot – sham and GAAR are certainly counted – the greater the breadth for both parties to trawl deeper and longer.
1.Context of Sham
[43] Keeping the issue of sham in mind, the parties and the trial judge needs information concerning the objective reality of the arrangements. The factors that can inform the Court include:
i) the circumstances surrounding the development of the transaction structure;
ii) the Appellants’ due diligence, involvement and oversight, or lack thereof, in evaluating and participating in the transactions;
iii) the ordinary business and investment practices of the Appellants;
iv) the parties’ stated goals and reasons for entering into the transactions; and,
v) the legal rights and obligations as defined in the transaction documents.[23]
[44] In Paletta, Justice Hogan indicated that this list is non-exhaustive and that, taken together, “these factors inform a court’s analysis of whether the legal rights and obligations described in the transaction documents are consistent with the parties’ avowed intent.”[24]
[45] The meaning of sham was defined in Snook v London & West Riding Investments Ltd.[25] as follows:
means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. One thing I think, however, is clear in legal principle, morality and the authorities . . . that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.
[46] Canadian courts have adopted that definition, notably in Stubart Investments Ltd. v. R:
a transaction conducted with an element of deceit so as to create an illusion calculated to lead the tax collector away from the taxpayer or the true nature of the transaction; or, simple deception whereby the taxpayer creates a facade of reality quite different from the disguised reality[26]
[47] In Paletta, Justice Hogan indicated that, in a tax context, “a Court will arrive at a finding of sham when the evidence shows that the parties misrepresented their arrangements in a bid to achieve a tax benefit that would be denied if the nature of their arrangements was properly disclosed. In tax matters, the party that is deceived by the sham is the Canada Revenue Agency”.[27]
[48] As previously established, the Court will examine the objective reality surrounding the arrangements to discern whether the transaction documents truly reflect the parties’ intent. It is rare to find direct evidence of sham. Thus, the Respondent in the absence of an admission has to present circumstantial evidence. To do so, the party logically must question deeper.
Context of GAAR
[49] With respect to a GAAR appeal, the Court in MP Western Properties Inc. provided that the above-noted general principles should be applied more broadly. Specifically, the Tax Court referred to the Federal Court of Appeal decisions in Lehigh[28] and Superior Plus[29] that:
…documents not specific to a taxpayer but relating to the policy of the ITA may be ordered to be disclosed in certain circumstances in a GAAR case. The Tax Court referred to the circumstances in Lehigh as an example of when such broader disclosure is warranted (Reasons, para. 29). The Tax Court also noted at paragraph 32 of its Reasons that, while draft documents prepared by the Minister or considered by officials in the context of a taxpayer's audit are not normally producible in a non-GAAR case, they should be disclosed in a GAAR appeal as they inform the Minister's mental process leading up to an assessment and reflect the Minister's understanding of the policy at issue. The Tax Court noted that such documents may lead to a train of inquiry that meets the lower threshold for disclosure in a GAAR case.[30]
[50] In a GAAR appeal, the Court must determine whether transactions are abusive because they frustrated the object, spirit, and purpose of the relevant provisions. In CHR Investment, the Federal Court of Appeal indicated, since the Minister has the obligation to identify the rationale of the provisions in a GAAR appeal, “it would be appropriate at the discovery examination to ask questions intended to clarify the Minister’s current position on the applicable rationale.”[31]
[51] In Ahamed v. Canada,[32] the Federal Court of Appeal found that the Tax Court did not err in refusing to order that the respondent provide information concerning factual assumptions surrounding the object, spirit and purpose, and the policy behind the provision at issue:
[41] In my view, the Tax Court did not err either in observing that factual assumptions are matters for pleading, not discovery, or in finding that the respondent has already communicated its legal position. The Appellant has not convinced me that the Tax Court made a palpable and overriding error or erred on an extricable question of law in concluding that the respondent had already made its position clear and that ordering answers to the questions in issue would invite legal argument.
[52] Although the Court did not decide Ahamad in the context of a GAAR assessment, the issue in dispute related to the interpretation of an ITA provision.
Questions to Ascertain Party’s Legal Position
[53] As held by the Ontario Superior Court of Justice in Six Nations of the Grand River Band v. R,[33] it is proper to ask questions to ascertain the opposing party’s legal positions. The party that is being examined is not required to swear to truth of law, but merely to state what its current legal position is. The court also stated that a party may be ordered to give particulars of its legal position during the discovery process, in rare occasion, where the complexity of the litigation requires it to help a party to prepare for trial.[34]
[54] In Lehigh, the taxpayer sought to compel the Crown to answer the following question: “If the shares […] had been owned by the appellant instead of a non-resident company related to the appellant, would the Crown have contested the arrangement”? The taxpayer’s objective was to have a better understanding of the Crown’s position on the scope, and object and spirit of paragraph 95(6)(b) ITA. More specifically, the question was asked with the intention of ascertaining whether the provision was applied at reassessment because the shares were owned by a non-resident. The Crown argued that the question was hypothetical and a pure question of law, and that its purpose was to elicit from the Crown details pertaining to its legal argument.
[55] The Federal Court of Appeal dismissed the Crown’s appeal on the basis that they had not demonstrated that the Tax Court judge erred in compelling them to answer. In fact, the taxpayer was entitled to be informed of the rationale behind the reassessment and the circumstances that led the CRA to conclude that the purpose was to avoid the payment of taxes.[35]
[56] In Burlington TCC 2015, Justice Campbell held that questions related to the legal position to be taken at trial must be answered, unless the questions “are inquiring into the evidence or the reasoning that may support those relevant facts or the opposing party’s legal research.”[36] The questions that rely on facts that support a legal position are proper.[37] Nevertheless, the Court indicated that it is improper to seek for a legal opinion when asking a question.[38]
[57] In HSBC Bank Canada v. R,[39] Justice Miller refused to compel the appellant to respond to a hypothetical question that was an expression of opinion and called for speculation regarding the ultimate issue:
[33] As I have indicated, the question of implicit support at this stage of the litigation cannot be ruled irrelevant. The Respondent argues basically that as implicit support is relevant, these questions are proper. I note that it was in paragraph 64 of the Respondent’s Reply where she raises additional facts in support of the assessment that one finds the statement: "The Appellant would have been fully supported by HBAP and HHBV even in the absence of the Deed of Guarantee." The Appellant argues that as a new argument from the Respondent, the Respondent should not be allowed to shift the burden to the Appellant by having the Court order it to answer "what if" questions. The Appellant maintains hypothetical questions calling for speculation and an expression of an opinion are not proper. I agree. It is for the trial judge to determine this key fact, based on a review of all of the evidence presented as to what occurred those many years ago. It does not follow that just because the question of implicit support may be relevant, the Appellant should be required to speculate regarding the ultimate issue pertaining to implicit support. This is unfair and improper. The facts relating to the respective financial strengths of parent and subsidiary, their respective policies and all other surrounding circumstances leading to the explicit guarantee will have to be assessed and weighed. An officer of the Appellant, 14 and 23 years after the fact hypothesizing to what might have been without a guarantee is simply not appropriate.
[58] While it is true that a party is entitled to know the position of the other party as to an issue of law, a question should not be answered when:
the question is an hypothetical question of law;
the question asks for speculation;
the question elicits details of the legal argument of the party;
the question is not necessary to know the case he has to meet;
the question seeks particulars of the legal position in a non-complex litigation.
[59] The basic guidelines of discovery is for each party to know the case it has to meet in order to be prepared for trial. While the Crown bears the burden of proving that the transactions constitute an abuse of the provisions at issue, the Crown also bases its GAAR reassessment on the underlying policy of specific ITA provisions.[40]
b) Documents Protected by Privilege [60] Solicitor-client privilege limits the scope of discovery when potential information gathering during the discovery process conflicts with privilege.[41] The law of privilege protects information from disclosure in court. It also protects communications between a lawyer and client, including an agent of the client.[42] Further expansion of the jurisprudence on the issue of privilege was otherwise fulsomely explored in the court’s reasons published on October 24, 2024.
c) Requests for Particulars [61] The Respondent has served a request for particulars related to the Appellants’ notices of appeal. Before this Court, at inception appellants bear the onus of demolishing the Minister’s assumptions on a balance of probabilities. In order to do so, an appellant must “establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negative.”[43]
[62] Pursuant to Rule 48 of the Tax Court of Canada Rules (General Procedure),[44] a “notice of appeal shall be in Form 21(1)(a), (d), (e) or (f).” For an appeal of an assessment under the general procedure, Form 21(1)(a) provides that the notice of appeal has to include “the material facts relied on”. The absence of material facts required to support the tax return does not result in any burden being shifted to the Minister.[45]. That responsibility does not change because the Minister makes similar factual assumptions.[46]
[63] There is no bright line between material facts and bald allegations. In Mancuso v. Canada (National Health and Welfare),[47] the Federal Court of Appeal held that material facts are the foundation of a proper pleading. More specifically, they frame the discovery and trial process as they establish the parameters of relevancy of evidence. Thus, the pleadings must define the issues “with sufficient precision to make the pre-trial and trial proceedings both manageable and fair.”[48]
[64] In order to determine what constitutes a material fact, the Court has to look at the pleading as a whole in light of the cause of action:
[19] What constitutes a material fact is determined in light of the cause of action and the damages sought to be recovered. The plaintiff must plead, in summary form but with sufficient detail, the constituent elements of each cause of action or legal ground raised. The pleading must tell the defendant who, when, where, how and what gave rise to its liability.[49]
[65] In Imperial, the Federal Court of Appeal noted that particulars are provided for the purpose of pleadings so that a party can properly respond.[50] Particulars are not supplied because they will make a pleading better, but rather because without them the party cannot plead in response to an important point.[51] A party is not entitled to request particulars of information within their knowledge unless the pleading is otherwise faulty through its failure to plead a necessary material fact.[52]
[66] In order to determine what constitutes a material fact, the Court has to look at the pleading as a whole in light of the cause of action:
[19] What constitutes a material fact is determined in light of the cause of action and the damages sought to be recovered. The plaintiff must plead, in summary form but with sufficient detail, the constituent elements of each cause of action or legal ground raised. The pleading must tell the defendant who, when, where, how and what gave rise to its liability.[53]
[67] Rule 52 allows the Court to order that either party deliver particulars within a specified time if the opposite party failed to provide them upon request. While the Court may order particulars to be delivered, the Respondent repeated his request at discovery in asking the Appellants to provide “a list and a ‘description of the transactions that took place,’ including the ‘parties,’ to the transactions for each of the terms ‘Purchase Transactions’ and ‘Redemption Transaction’”.[54] They agreed to that request.
[68] When an undertaking to produce documents has been given on an examination for discovery, relevance is acknowledged. Indeed, in Towne v. Miller,[55] the Ontario Superior Court of Justice, which was later quoted by the Tax Court of Canada in Merchant Law Group v. R,[56] stated that:
An undertaking is an acknowledgement that the question is proper and that the subject-matter of the undertaking is relevant. Put crudely, should counsel be permitted to renege on a production-undertaking when he or she subsequently comes to the belief that a document or part thereof is not relevant in the action? This question invades the sanctity of a solicitor’s undertaking.
An undertaking is an unequivocal promise to perform a certain act. I do not see any material difference between, for example, an undertaking given in the context of a real estate transaction (when lawyers undertake to do, or obtain, something necessary to complete the transaction) and an undertaking given on an examination for discovery. Each involves a promise. In an examination for discovery, the undertaking may be given by the litigant been examined or it may come from his or her counsel. Both are equally binding.[57]
[69] Moreover, the Tax Court of Canada followed the approach of Towne in Bathurst Machine Stop Ltd. v. R [58] and stated that “[…] once an unqualified undertaking has been given, it is too late to refuse to provide an answer on grounds of relevance […]”.
PART TWO – LEAVE TO AMEND REPLIES
[70] The general jurisprudence regarding granting leave to amend pleadings, and particularly a reply, is longstanding and nonetheless evolving before the Court.
[71] Rule 54 permits a party to amend their pleadings either with the consent of all other parties or with leave of the Court. Rule 132 permits a party to withdraw an admission in the party’s pleading on consent or with leave of the Court.
[72] Based on the relevant jurisprudence, the test for amending pleadings is the same as withdrawing an admission. Therefore, it is irrelevant whether the amendment constitutes a withdrawal of admission.
[73] In Continental Bank, Justice Bowman articulated that Rule 54 gives the Court a broad discretion to permit the withdrawal of admissions and the amendment of pleadings where it is in the interest to do so:
In the cases in the courts of Ontario and of British Columbia to which I was referred a number of tests have been developed – whether an admission was inadvertent, whether there is a triable issue raised by an amendment or the withdrawal of an admission and whether the other party would suffer a prejudice not compensable in costs. Although I find that these tests have been met I prefer to put the matter on a broader basis: whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied. The tests mentioned in these cases in other courts are of course helpful but other factors should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has