Abenaim v. The Queen

Abenaim v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2015-07-24
Neutral citation
2015 TCC 242
File numbers
2012-2005(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Docket: 2012-2005(IT)G
BETWEEN:
JACQUES ABENAIM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
KONICA MINOLTA BUSINESS SOLUTIONS
(CANADA) LTD.,
Applicant.
[OFFICIAL ENGLISH TRANSLATION]
Oral motion under section 65 of the Tax Court of Canada Rules (General Procedure) heard on February 2, 2015, at Montréal, Quebec.
Before: The Honourable Justice Johanne D'Auray
Appearances:
Counsel for the appellant:
Geneviève Léveillé
Counsel for the respondent:
Benoit Mandeville
Counsel for the applicant:
Christian Létourneau
ORDER
WHEREAS at the hearing, counsel for the applicant made an oral motion under section 65 of the Tax Court of Canada Rules (General Procedure);
And upon hearing the parties;
The motion is allowed with regard to the application to conduct the hearing in camera.
The appeal between Jacques Abenaim and Her Majesty the Queen, docket number 2012-2005(IT)G, will be heard in camera, at 30 McGill Street, Montréal, Quebec, at a date to be determined later.
The reasons for the order and the settlement agreements shall be treated as confidential. These documents shall be placed separately in envelopes and sealed. These envelopes shall be marked as follows:
These envelopes shall not be opened, nor shall their contents be disclosed, except upon order of the Court.
This order shall continue in effect until the Court orders otherwise, including for the duration of any appeal of the proceeding and after final judgment.
The transcript of the hearing of the motion relating to this order shall remain confidential and shall not be disclosed except to one of the parties to this order.
In all other respects, the motion is dismissed with costs against the applicant, in favour of the appellant, to be paid within 30 days of the date of this order.
Signed at Ottawa, Canada, this 24th day of July 2015.
“Johanne D'Auray”
D'Auray J.
Translation certified true
on this 25TH day of May 2016
François Brunet, Revisor
Citation: 2015 TCC 242
Date: 20150724
Docket: 2012-2005(IT)G
BETWEEN:
JACQUES ABENAIM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
and
KONICA MINOLTA BUSINESS SOLUTIONS
(CANADA) LTD.,
Applicant.
[OFFICIAL ENGLISH TRANSLATION]
NOTE TO READER
Pursuant to the order made in this case, the reasons for this order contain redactions. All references to the terms of the settlement agreement have been omitted.
REASONS FOR ORDER
D'Auray J.
I. Background [1] An oral motion was filed on February 2, 2015, in the Tax Court of Canada by Konica Minolta Business Solutions (Canada) Ltd. (the applicant) pursuant to section 65 of the Tax Court of Canada Rules (General Procedure).
[2] This motion pertains to an appeal from an assessment made under the Income Tax Act (the Act) by Jacques Abenaim (the appellant) against the Minister of National Revenue (the Minister), concerning the taxation of a lump sum paid by the applicant to the appellant after the appellant was dismissed, in accordance with a settlement agreement entered into by these same parties.
[3] The motion seeks to prohibit any testimony, including testimony by the appellant, regarding the terms of an agreement entered into by the applicant and the appellant. [Confidential].
II. Facts [4] On July 6, 1994, the applicant and the appellant signed a contract of employment for an indeterminate term under which the appellant agreed to become the company's chief executive officer as of July 1, 1994.
[5] The applicant terminated the appellant’s employment on June 9, 2009, by sending him a notice of termination effective July 20, 2006, in accordance with clause 5(d) of the contract of employment.
[6] On October 2, 2006, the appellant filed a civil suit against the applicant and its parent company in the Superior Court of Québec, District of Montréal, following the resiliation of his contract of employment. The motion seeks the following remedies:
− the resolution of the contract of sale of shares entered into on July 6, 1994, by which the appellant sold his shares in the company to the applicant, and the restitution of said shares;
− $2,000,000 in damages for the dividends lost as a result of selling the shares;
− the resiliation of the contract of employment dated July 6, 1994;
− all commissions and bonuses not paid since July 6, 1994;
− $2,000,000 in damages for lost income;
− the reinstatement of the appellant in his employment;
− damages of $500,000 per year, from July 20, 2006, for lost wages (or, in the alternative, a lump sum of $1,500,000 in lieu of notice);
− $150,000 in damages for extrajudicial fees; and
− $1,500,000 in damages for moral damage.
[7] [Confidential]. The parties resolved the dispute by signing a settlement agreement. Counsel representing the parties were Mr. Fournier for the appellant and Mr. Manzo for the applicant.
[8] [Confidential]
[9] The agreement also provided that its content would remain confidential. To this end, the appellant and the applicant undertook not to disclose the content of the agreement. [Confidential].
[10] [Confidential]
[11] [Confidential]
[12] [Confidential]
[13] [Confidential]
[14] [Confidential]
[15] [Confidential]
[16] [Confidential]
[17] However, the confidentiality clauses did not apply if disclosure of the terms of the agreement was required by law.
[Confidential]
[18] When he filed his tax return for the 2009 taxation year, the appellant included the full amount [Confidential] as a retiring allowance in computing his income.
[19] On June 3, 2010, the Minister issued a Notice of Assessment confirming the taxation of the amount [Confidential] as a retiring allowance.
[20] The appellant objected to the assessment dated June 3, 2010. Despite having reported the entire amount as a retiring allowance, the appellant argues that the Minister erred in taxing the entire amount. He submits that a portion of the amount [Confidential] is non-taxable.
[21] On February 21, 2102, the Minister confirmed the assessment dated June 3, 2010.
[22] On May 22, 2012, the appellant filed an appeal in this Court.
[23] On May 2, 2014, at the hearing to determine the nature of the payment for tax purposes, counsel for the appellant stated that she intended to call Mr. Fournier as a witness. Counsel for the respondent, meanwhile, stated that he intended to call Mr. Manzo as a witness. The testimony of Mr. Fournier and Mr. Manzo addressed in part their discussions during the negotiations leading to the settlement of the dispute between the appellant and the applicant that was before the Superior Court of Québec.
[24] The appellant argues that the testimony of Mr. Fournier is necessary for the Court to determine the true nature of the payment made by the applicant to the appellant.
[25] With regard to settlement privilege and the agreements signed by the applicant and the appellant, it was agreed at the hearing that the appellant and the respondent would notify the applicant of their intention to call Mr. Fournier and Mr. Manzo as witnesses, thereby giving the applicant the opportunity to challenge any disclosure of the terms of the agreements. The hearing was therefore adjourned.
[26] Between the adjournment and the resumption of the hearing, I did not hear from the parties. However, on February 2, 2015, when the hearing resumed, counsel for the applicant, Mr. Létourneau, made an oral motion in which he asks that Mr. Manzo and Mr. Fournier be barred from testifying on the existence and terms of the settlement agreement and the negotiations leading up to it. The applicant also asks that the appellant's testimony on the terms of the agreements be declared inadmissible. The motion is primarily based on settlement privilege, to which Mr. Fournier and Mr. Manzo are subject.
III. Positions of the parties The applicant [27] The applicant raises four arguments in support of his motion.
[28] First, it submits that Mr. Manzo cannot testify regarding the terms of the settlement because of professional secrecy. It states that professional secrecy applies not only between a client and his or her counsel, but also when counsel enters into settlement negotiations with opposing counsel or a mediator.
[29] Second, the applicant argues that the appellant, Mr. Manzo and Mr. Fournier cannot testify regarding the terms of the agreement because they are bound by settlement privilege.
[30] The applicant also submits that the confidentiality clauses in the agreement are absolute confidentiality clauses. As such, they take precedence over the exceptions to settlement privilege in common law, more specifically, the exception that permits disclosure when one party wants to establish the existence or scope of a settlement.
[31] Furthermore, the applicant submits that the exception allowing the disclosure of the terms of a settlement agreement apply only between the parties and not to third persons. On this point, the applicant further submits that, even if the Court ruled that the exception permitting disclosure applied to third persons, in the light of the absolute confidentiality clauses in the agreement, these clauses take precedence over the exception permitting disclosure with regard to the existence or scope of a settlement agreement.
[32] According to the applicant, the language of the confidentiality clauses in the settlement agreement is strict and severe. These are not standard clauses. The breach of these clauses carries serious financial consequences for the appellant and certain members of his family [Confidential].
[33] The applicant notes that the confidential nature of a settlement conference is codified in article 151.21 of the Code of Civil Procedure (CCP)[1] of Quebec. The Court must therefore give effect to this principle by refusing to hear the witnesses’ testimony.
[34] Finally, should the Court allow the appellant, Mr. Manzo and Mr. Fournier to testify on the terms of the settlement, the applicant asks that these witnesses be heard in camera, or by any other confidential process that it deems appropriate.
The appellant [35] The appellant objects to the motion, for four reasons.
[36] First, he submits that settlement privilege must be set aside to ensure that he has a fair trial. Although the appellant is appealing from an assessment by the Minister, he submits that the motion is designed to interfere with a related principle, the right to make “full answer and defence”.
[37] Second, the appellant argues that settlement privilege cannot apply because he was not physically present when Mr. Manzo and Mr. Fournier signed the agreement.
[38] Third, the appellant disputes the applicant's argument that settlement privilege can be set aside only between the parties. According to the appellant, the exception that permits disclosure has broad application and applies to the Minister.
[39] Finally, the appellant submits that the motion must be dismissed because Mr. Manzo, Mr. Fournier and he himself are free to discuss the terms of the agreement as required by law, [Confidential].
[40] Given that the Act requires that the appellant report the amount he received under the settlement agreement, he submits that it would be illogical to prevent persons who can shed light on the agreements from giving testimony so that the true nature of the amount can be determined for tax purposes.
The respondent [41] The respondent supports the applicant’s arguments. However, she raises two additional grounds.
[42] First, the respondent submits that the appellant cannot rely on the “as required by law” exception [Confidential]. According to the respondent, although reporting income is required by the Act, objecting to an assessment made on the basis of one’s own information is not. This exception to the settlement agreement therefore does not apply.
[43] Second, according to the respondent, the fact that the confidentiality clause was negotiated in the agreement itself, rather than as part of a distinct prearrangement, suggests that the parties undertook not to discuss the agreement no matter what the circumstances. According to the respondent, the form chosen by the parties shows that they intended to give the confidentiality clauses precedence over the exceptions to settlement privilege.
IV. Issues [44] (a) Is Mr. Manzo barred from testifying on the terms of the agreements because of professional secrecy?
(b) Are Mr. Manzo, Mr. Fournier and the appellant barred from testifying on the terms of the agreements because of settlement privilege?
(c) Do the confidentiality clauses in the settlement agreements defeat the exception allowing the terms of a settlement agreement to be disclosed?
(d) Do articles 151.14 et seq. of the CCP prevent Mr. Manzo, Mr. Fournier and the appellant from testifying on the terms of the agreement, owing to settlement privilege?
(e) If the testimonies of Mr. Manzo, Mr. Fournier and the appellant are admissible, should an application to hear the matter in camera or other appropriate processes for protecting the confidentiality of the settlement be granted?
V. Analysis (a) Is Mr. Manzo barred from testifying on the terms of the agreements because of professional secrecy?
Applicable law [45] In Quebec law, the professional secrecy of advocates has two components. First, there is a general obligation of confidentiality, which imposes a duty of discretion on lawyers and creates a correlative right to their silence on the part of their clients; then, in relation to third parties, there is an immunity from disclosure that protects confidential information, particularly in judicial proceedings.[2]
[46] This privilege exists forever in space-time. Indeed, professional secrecy is a personal and extra-patrimonial right which persists even after the death of the person who communicated the confidential information.[3]
[47] Professional secrecy is both a substantive rule and a rule of evidence.[4] The substantive rule [Translation] “protects information exchanged between counsel and clients by keeping it confidential in relation to the general public”,[5] while the rule of evidence [Translation] “concerns the right of clients not to be forced to disclose in court the communications that they have had with their counsel”.[6]
[48] The issue in the present case relates to, among other things, the second rule.
[49] The courts have noted on numerous occasions that professional secrecy is very broad in scope and “must be as close to absolute as possible”.[7] It must therefore be given a broad and liberal interpretation,[8] and statutory provisions that recognize exceptions to it must be interpreted restrictively.[9]
[50] That approach preserves the social importance that the case law attaches to this privilege for its role in “maintaining a properly functioning justice system and preserving the rule of law in Canada”.[10] Indeed, it “serves to both protect the essential interests of clients and ensure the smooth operation of Canada’s legal system”.[11]
[51] That said, there is a tendency to think that all facts and events that lawyers deal with in the execution of their mandates are covered by professional secrecy. But that is not the case:[12]
Despite the intense nature of the obligation of confidentiality and the importance of professional secrecy, not all facts and events that lawyers deal with in the execution of their mandates are covered by professional secrecy . . . .
[52] For professional secrecy to apply, the following three conditions must be met simultaneously:[13]
1. There must be a consultation with counsel;
2. There must be an intention to keep this consultation confidential; and
3. Counsel’s opinion must be given in his or her capacity as counsel.
[53] That list of conditions is derived from the following comments of Justice Lamer of the Supreme Court of Canada in Descôteaux et al. v Mierzwinski, supra:[14]
The following statement by Wigmore (8 Wigmore, Evidence, para. 2292 (McNaughton rev, 1961)) of the rule of evidence is a good summary, in my view, of the substantive conditions precedent to the existence of the right of the lawyer's client to confidentiality:
Where legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications relating to the purpose made in confidence by the client are at his instance permanently protected from disclosures by himself or by the legal adviser, except the protection be waived.
[54] When the above conditions are not met, counsel can be required to testify about facts involving their clients:[15]
[N]or does the legal institution of professional secrecy exempt lawyers from testifying about facts involving their clients in all situation.
Application to the facts [55] In my opinion, the communications with Mr. Manzo that led to the settlement are not protected by professional secrecy. He is therefore not barred from testifying because of this privilege.
[56] The applicant argues that professional secrecy applies not only to discussions between counsel and clients, but also to discussions between one’s own counsel and opposing counsel, or a mediator, in mediation cases.
[57] I do not share that opinion, as the applicant is trying to expand professional secrecy to Mr. Manzo’s entire mandate. That is precisely the reasoning that Justice Lebel rejected as incorrect in Wheeler Power Company Ltd. v Société intermunicipale de gestion et d'élimination des déchets (SIGED) inc.[16]
[58] As was mentioned above, the professional secrecy of advocates cannot apply unless (i) there was a consultation with counsel; (ii) there was an intention to keep the consultation confidential; and (iii) counsel's opinion must be given in his or her capacity as counsel.
[59] In my view, Justice Fish could not have been clearer in his choice of words in Blank v Canada (Minister of Justice), supra, when he characterized professional secrecy as “legal advice privilege”.[17] If there is no consultation between counsel and a client in which legal advice is provided, professional secrecy cannot apply. Therefore, the discussions between Mr. Manzo and Mr. Fournier are not covered by professional secrecy.
Waiver of professional secrecy [60] That said, even if the information exchanged by Mr. Manzo and Mr. Fournier were protected by professional secrecy, the applicant could not rely on this privilege because professional secrecy would have been waived by disclosing the information to the opposing party.
[61] When professional secrecy is waived, counsel can be called to testify to shed light on [Translation] “any action that may have been taken in a case and any discussions that may have been held with third parties".[18] On this point, the Quebec Court of Appeal justice stated as follows in Développement Bouchard et Lefebvre c Gagné:[19]
[Translation]
Whereas the letters described in the application for production (i.e., the exhibits filed as P-2) are not privileged communications between the parties' counsel for the purposes of resolving a dispute, there being no dispute at that time, but were intended as a response to an offer to purchase a piece of land of which the appellant was co-owner;
Whereas the appellant’s response to this offer to purchase does not constitute information protected by professional secrecy, from the time it was disclosed to another party’s counsel;
[Emphasis added.]
[62] In that case, the entire dispute centred on [Translation] “whether the offer to purchase a piece of land was accepted, and whether the draft contract was valid”.[20]
[63] To prove that the offer to purchase had been accepted, the plaintiffs wanted to have counsel for the defendant testify, particularly regarding the letters sent out on the defendant's behalf to explain its position on the offer to purchase. The defendant objected to the testimony on the basis of professional secrecy. The trial judge overruled the objection, and the Quebec Court of Appeal upheld her decision.
[64] According to the Court of Appeal, the letters were not protected by professional secrecy because sending them to opposing counsel constituted a waiver of that privilege.[21] Counsel was therefore [Translation] “competent to testify to recognize [the] letters that he apparently prepared and sent, for and on behalf of his client”.[22]
[65] I am therefore of the opinion that, in the case at hand, professional secrecy is not a bar to having Mr. Manzo testify. The discussions between him and Mr. Fournier do not meet the conditions set out by Justice Lamer in Descoteaux, supra, regarding the applicability of professional secrecy. The applicant's objection concerns, rather, settlement privilege.
(b) Are Mr. Manzo, Mr. Fournier and the appellant barred from testifying on the terms of the agreements because of settlement privilege?
Applicable law [66] Settlement privilege is a rule of evidence that makes communications inadmissible if they have been exchanged between parties as they try to settle a dispute:[23]
Settlement privilege is a common law rule of evidence that protects communications exchanged by parties as they try to settle a dispute. Sometimes called the “without prejudice” rule, it enables parties to participate in settlement negotiations without fear that information they disclose will be used against them in litigation. This promotes honest and frank discussions between the parties, which can make it easier to reach a settlement . . . .
[67] That rule of evidence applies to all communications exchanged for the purposes of settling a dispute:[24]
. . . For instance, settlement privilege applies to all communications that lead up to a settlement, even after a mediation session has concluded.
[68] Settlement privilege applies throughout Canada, in the common law provinces and in Quebec alike.[25]
[69] The purpose of this privilege is to promote the out-of-court settlement of disputes:[26]
Encouraging settlements has been recognized as a priority in our overcrowded justice system, and settlement privilege has been adopted for that purpose.
[70] Moreover, the privilege applies by operation of law, as it exists in the absence of any contractual or statutory provisions to that effect:[27]
Settlement privilege applies even in the absence of statutory provisions or contract clauses with respect to confidentiality, and parties do not have to use the words “without prejudice” to invoke the privilege . . . .
[71] Like professional secrecy, but unlike litigation privilege, settlement privilege does not expire. It continues to apply even after a settlement is reached.[28] Indeed, “successful negotiations are entitled to no less protection than ones that yield no settlement”.[29]
[72] If a settlement is reached, the privilege protects against disclosure of the settlement’s terms, the negotiations surrounding the settlement, and the settlement itself.[30]
[73] Despite all the protection it affords, settlement privilege includes exceptions.
[74] One of these exceptions is that protected communications may be disclosed “in order to prove the existence or scope of a settlement”.[31]
[75] The underlying objective of this exception is the same as that of the general principle, that is, promoting out-of-court settlements:[32]
. . . Far from outweighing the policy in favour of promoting settlements (Sable Offshore, at para. 30), the reason for the disclosure — to prove the terms of a settlement — tends to further it. The rule makes sense because it serves the same purpose as the privilege itself: to promote settlements.
[76] Another exception to settlement privilege arises where it is proved that “a competing public interest outweighs the public interest in encouraging settlement”.[33]
[77] More concretely, these countervailing interests have been found to include “allegations of misrepresentation, fraud or undue influence and preventing a plaintiff from being overcompensated”.[34]
[78] Although these exceptions are the only ones that will be addressed in this judgment, it is important to note that there are other exceptions.[35]
Application to the facts [79] According to the applicant, the settlement privilege exception relating to proving the existence or scope of a settlement can apply only when a dispute concerns the enforcement of the settlement between the parties. The applicant submits that the exception cannot apply to third parties.
[80] When considering whether settlement privilege applies to third parties, I think that it is important to distinguish between the privilege per se and the exceptions to it.
[81] Settlement privilege is not limited to the parties trying to resolve a dispute; it may be set up against third parties as well.
[82] The courts have recognized this principle on many occasions,[36] notably by the Supreme Court of Canada in Sable Offshore Energy Inc. v Ameron International Corp.[37] In that case, Justice Abella cited, with approval, the following passage by Chief Justice McEachern of the British Columbia Court of Appeal:[38]
. . . In my judgment this privilege protects documents and communications created for such purposes both from production to other parties to the negotiations and to strangers, and extends as well to admissibility, and whether or not a settlement is reached.
[Emphasis added.]
[83] Some authors hold a similar view:[39]
§14.336 If it is accepted that the basis of the privilege is a public policy to encourage settlement, then it follows that the privilege should extend to subsequent proceedings not related to the dispute which the parties attempted to settle. Any possibility of subsequent adverse use could deter full and frank discussion. The principle “once privileged, always privileged” applies. This is illustrated in I. Waxman & Sons Ltd. v. Texaco Canada Ltd. The issue in that proceeding was whether or not production could be compelled of letters written “without prejudice” and with a view to settlement of the issue between A and C, upon the demand of B, in subsequent litigation between A and B on the same subject matter. Justice Fraser, whose decision was affirmed by the Ontario Court of Appeal, concluded that a party to a correspondence within the “without prejudice” privilege is protected from being required to disclose it on discovery or at trial in proceedings by or against a third party. [Citations omitted.]
[84] In the light of the foregoing, it seems clear that settlement privilege must be maintained in a dispute between a party to the settlement and the Minister, even if the Minister was not involved in the action that gave rise to the settlement.
[85] That being said, the applicant submits that the exception which permits disclosure to prove the existence or terms of a settlement can apply only between the parties and cannot be raised in a dispute with a third party, in this case, the Minister.
[86] I do not have to rule on this issue, as I am of the opinion that in the present case, the appellant has established that settlement privilege was ousted by the exception where “a competing public interest outweighs the public interest in encouraging settlement”.[40] However, it should be noted that in Fink,[41] my colleague Judge Bonner appears to use the exception to settlement privilege to prove the terms of a settlement agreement vis-à-vis a third party, contrary to what the applicant is contending.
[87] In that case, the appellant’s company was under investigation by the Ontario Securities Commission. The appellant’s company and a Swiss bank reached an out-of-court settlement calling for the payment of $2.60 per share in the appellant’s company to a group of the shareholders that included that appellant.
[88] A dispute then arose between the appellant and the Minister regarding the nature of the payment made under the out-of-court settlement. To shed light on the situation, the Minister wanted details on the negotiations leading to the settlement, but the appellant objected, raising settlement privilege as a defence.
[89] Judge Bonner rejected the appellant’s argument on the basis that settlement privilege could not apply when disclosure is necessary to interpret the settlement agreement and to determine the nature of the payment for tax purposes. He stated the following at paragraph 28:
Counsel for the appellant asserts that a party to settlement negotiations is neither required nor permitted to disclose the contents of such negotiations in proceedings by or against the third party. He relies on a number of authorities none of which deal with disclosure in the context of tax litigation in which the true substance and nature of the payment and of the injury which the payment is intended to compensate are central to the issue. The settlement privilege is one which is intended to encourage the resolution of a dispute without litigation by permitting the parties to the dispute to discuss their differences frankly and without fear that admissions made by them for the purpose of arriving at a settlement will be used against them later. It does not prevent disclosure in later litigation between persons neither of whom was a party to the litigation in which the offer of settlement was made. Furthermore, in my view, when the ambit of the privilege is properly understood, it is evident that the privilege does not attach to cases where the discussion or settlement document is relevant to establish not the liability of a party to the settlement for the conduct which gave rise to the dispute but rather to arrive at a proper interpretation of the agreement itself. The appellant’s reliance on this privilege is in my view wholly unwarranted both as to the production of documents and as to discussions and events.
[Emphasis added.]
[90] It should be noted that Justice Little adopted Judge Bonner’s reasoning in Tremblay Estate v Canada.[42]
[91] In Sable Offshore Envery Inc. v Ameron International Corp, supra, the Supreme Court of Canada stated that an exception to settlement privilege applies when the person raising the exception is able to prove that, on balance, “a competing public interest outweighs the public interest in encouraging settlement”.
[92] On this point, the British Columbia Court of Appeal in Dos Santos v Sun Life Assurance of Canada[43] stated that settlement privilege is ousted when the defendant can show that the documents relating to the settlement are both relevant and necessary in the circumstances. Justice Finch stated as follows:
. . . [T]he defendant must shows that a competing public interest outweighs the public interest in encouraging settlement. An exception should only be found where the documents sought are both relevant, and necessary in the circumstances of the case to achieve either the agreement of the parties to the settlement, or another compelling or overriding interest of justice.
[93] In my opinion, the present case involves two competing public interests that outweigh the interest in encouraging out-of-court settlements.
Preserving Canada’s tax base [94] The first opposing public interest is the preservation of Canada’s tax base and the taxpayer’s right to not have to pay more than his or her fair share of tax. I will outline my reasoning in three steps.
[95] First, settlement privilege is in the public interest because it encourages out-of-court settlements. The practical effect of this privilege is that it “allow[s] parties to reach a mutually acceptable resolution to their dispute without prolonging the personal and public expense and time involved in litigation”.[44]
[96] When two parties reach a settlement in a tax dispute, how the negotiated amount is taxed is determined on the basis of the nature of the payment that the amount is intended to replace. This approach is called the “surrogatum principle”, which may be explained as follows:[45]
A person who suffers harm caused by another may seek compensation for (a) loss of income, (b) expenses incurred, (c) property destroyed, or (d) personal injury, as well as punitive damages. For tax purposes, damages or compensation received, either pursuant to a court judgment or an out-of-court settlement, may be considered as on account of income, capital, or windfall to the recipient. The nature of the injury or harm for which compensation is made generally determines the tax consequences of damages.
Under the surrogatum principle, the tax consequences of a damage or settlement payment depend on the tax treatment of the item for which the payment is intended to substitute: [citation omitted]
[Emphasis added.]
[97] This principle has been recognized by the courts, including the Supreme Court of Canada,[46] and most recently by the Federal Court of Appeal in Goff Construction Limited.[47]
[98] In general terms, compensation for lost income is taxable, but compensation for moral damage is not. It is therefore essential that an amount paid under an out-of-court settlement be characterized correctly for tax purposes.
[99] Upholding settlement privilege in this context would interfere with this inquiry into the true nature of the payment and, by extension, would undermine the integrity of government revenues, especially since Canada’s tax regime is based on a system of self-assessment.
[100] If, in a tax file, the Minister were unable to gain access to the documents and discussions leading to a settlement to determine the true nature of an amount received by a taxpayer, taxpayers would be able to evade their tax liabilities by characterizing the amount such that it was not taxable.
[101] In the case at hand, I am aware that the situation is different. Indeed, it is the appellant who is asking that the discussions surrounding the settlement between him and the applicant be disclosed to establish the true nature of the payment. The Minister is the one who wants to preserve privilege (at the appellant’s expense) to that the amount is taxed. In my opinion, it is not relevant that it is the taxpayer who is requesting that the discussions and documents surrounding the settlement be disclosed.
[102] Although the Minister must be able to ensure the integrity of Canada’s tax revenues, I am of the view that Canadian taxpayers have an interest in not being assessed more than their fair share by tax authorities. That view follows from the principle that taxpayers are entitled to order their affairs so as to reduce their tax burden.[48] This exception to settlement privilege thus applies to the Minister and to taxpayers.
[103] In Dos Santos v Sun Life Assurance Co of Canada,[49] the British Columbia Court of Appeal excluded the settlement privilege to ensure that the plaintiff was not overcompensated by receiving an indemnity from his insurer, under an insurance policy, as well as compensation from the party at fault, further to an action in tort. The exception in the present case would serve essentially the same purpose, that is, to ensure that the Canadian government does not benefit from a tax overpayment at the expense of the appellant.
[104] That competing public interest should also prevail because disclosure could have beneficial effects beyond its income tax consequences. As Wagott and Morris have explained, the need to properly characterize an amount paid under a settlement is also important in determining the mandatory contributions to the public employment insurance scheme, which funds itself from these contributions:[50]
In structuring a settlement, the tax implications related to proposed payments, from both the employer’s and the former employee’s perspective, will be an important consideration. Tax issues may include the appropriate tax characterization of the payments, the amount of tax to be deducted from the payments, the amount that may be contributed to a Registered Retirement Savings Plan (“RRSP”), and the amount of money, if any, that must be paid to Human Resources and Skills Development Canada as an Employment Insurance overpayment.
Right to a fair trial [105] Second, the countervailing public interest also takes precedence over the interest in encouraging out-of-court settlements when it can be shown that, without disclosure, the appellant will be denied a fair trial. In Dos Santos v Sun Life Assurance Co, Justice Finch, writing on behalf of the British Columbia Court of Appeal, cited Ruloff v Rockshore (1981) Ltd, BCSC 751, in which Justice Chamberlist applied the exception so that the party could defend herself adequately. He stated the following at paragraph 28 of his reasons:
. . . Chamberlist J. found an exception to settlement privilege where the plaintiff would otherwise be “muzzled in her attempts to justify her position taken in the petition or to adequately defend by evidence available to her”.
[106] The right to a fair trial also applies to administrative disputes, such as the present case, where the burden of proof falls on the party invoking this right:[51]
. . . Although in the context of a civil proceeding this does not engage a Charter right, the right to a fair trial generally can be viewed as a fundamental principle of justice: M. (A.) v. Ryan, [1997] 1 S.C.R. 157, at para. 84, per L’Heureux-Dubé J. (dissenting, but not on that point). Although this fair trial right is directly relevant to the appellant, there is also a general public interest in protecting the right to a fair trial. Indeed, as a general proposition, all disputes in the courts should be decided under a fair trial standard. The legitimacy of the judicial process alone demands as much. Similarly, courts have an interest in having all relevant evidence before them in order to ensure that justice is done.
[Emphasis added.]
[107] The right to fair trial is a fundamental principle of justice in the general public interest.[52] It cannot be said that such an interest is unique to the appellant. Moreover, a fair trial is key in seeking the truth and achieving a just result, which are in the interests of both the public and the judiciary.
[108] In the case at bar, the testimony of Mr. Manzo and Mr. Fournier is clearly essential to the appellant’s case. Without this testimony, he cannot adequately defend himself against the assessment made by the Minister, and his right to a fair trial would therefore be compromised.
[109] For these reasons, I conclude that the public interest in the right to a fair trial, too, must outweigh the interest in encouraging out-of-court settlements.
(c) Do the confidentiality clauses in the settlement agreements defeat the exception allowing the terms of a settlement agreement to be disclosed?
Applicable law [110] In Union Carbide Inc. v Bombardier, supra, the Supreme Court of Canada clearly decided that the parties may, by contract, expand the confidentiality afforded to communications by common law privilege. In a mediation, for example, the parties may enter into a contractual agreement under which their communications are given broader protection than is offered through settlement privilege:[53]
But mediation is also a “creature of contract” (Glaholt and Rotterdam, at p. 13), which means that parties can tailor their confidentiality requirements to exceed the scope of that privilege and, in the case of breach, avail themselves of a remedy in contract.
[111] That expanded protection is not limited to “litigation strategy”. As Justice Wagner explained, the justification for this may be based on concerns that go beyond the proceeding in which the parties are involved:[54]
. . . Owen V. Gray states the following in this regard in "Protecting the Confidentiality of Communications in Mediation" (1998), 36 Osgoode Hall L.J. 667:
When [the parties] have resorted to mediation in an attempt to settle pending or threatened litigation, they will be particularly alert to the possibility that information they reveal to others in mediation may later be used against them by those others in that, or other, litigation. The parties may also