Citation: 2012 TCC 64
Date: 20120227
Docket: 2006-2167(IT)G
BETWEEN:
MICHAEL J. BARKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Sheridan J.
[1]
Pursuant to subsection 99(1) of the Tax Court of Canada
Rules (General Procedure), the Respondent brings a motion for leave to
examine for discovery a non-party, Peter Charlton (“Present Motion”). The trial
of this appeal is scheduled for March 12-14, 2012, than three weeks from the hearing
of the Present Motion.
Background
[2]
The Present Motion is
the Respondent’s second attempt to secure leave to examine Mr. Charlton. A similar
motion was filed on April 1, 2011 and scheduled for hearing on May 12, 2011 (“First
Motion”). After one unsuccessful attempt to serve Mr. Charlton, the Respondent
requested the First Motion be adjourned sine die. No further steps to
effect service of Mr. Charlton were taken.
[3]
In June 2011 the
Appellant unilaterally requested the matter be scheduled for hearing. By Order of this Court dated July 26, 2011, upon the
joint application of the parties, the appeal was set down for hearing in March
2012.
[4]
On December 9, 2011, the
Respondent wrote to Mr. Charlton requesting answers to some 23 detailed questions
and advising there were “additional matters” the Respondent wished to discuss
with him. The letter also indicated that the Respondent might renew the First
Motion.
[5]
On January 30, 2012, Mr. Charlton
replied to the Respondent’s letter by email as follows:
I have now
ready [sic] after the holidays, to deal with this matter. I am prepared
to answer the questions that I am capable of doing. I have been advised to get
legal advice. As this matter occurred approx. 14 to 15 years ago, I need to
provide my lawyer with materials so they can understand the transaction. …
[6]
Without further reply, two days
later, the Respondent filed the Present Motion on February 1, 2012 with service
effected on Mr. Charlton by email the following day.
Section
99 of the Tax Court of Canada Rules (General Procedure)
[7]
The key issue in the appeal is
whether a debt that the Appellant incurred in 1997 to finance the acquisition
of units in a limited partnership tax shelter (“Tax Shelter”) was a
“limited-recourse debt” as defined in section 143.2 of the Income Tax Act.
Under subsection 143.2(7) of the Act, the unpaid principal of an
indebtedness is deemed to be a limited-recourse debt unless interest is payable
at a rate equal, at least, to the prescribed rate and is, in fact, paid within
a certain time frame (“Interest Issue”).
[8]
According to paragraph 2 of the
Respondent’s Notice of Motion, an Order for the discovery of Mr. Charlton is
sought:
… to discover
the facts related to the Interest Issue. [Mr. Charlton], through a company
called UMED, was the person who liaised with partners like [the Appellant],
administered, sought and collected interest payments from the partners and even
purportedly paid 50% of the interest due on their behalf through his
wholly-owned corporation, Charlindea Inc.
[9]
The Respondent brings its Motion pursuant to
subsection 99(1) of the General Procedure Rules, the relevant portion of
which reads:
99. (1) The
Court may grant leave, on such terms respecting costs and other matters as are
just, to examine for discovery any person who there is reason to believe has
information relevant to a material issue in the appeal.
[10]
The grounds for the Respondent’s
motions are:
a)
the information sought from Mr. Charlton is narrow and relates directly
to the requirements of subsection 143.2(7) of the Income Tax Act,
specifically whether and how much interest was paid on behalf of the Appellant
on a debt that the Minister determined was a “limited recourse amount” within
the meaning of subsection 143.2(1) of the Income Tax Act (the “Interest
Issue”);
b)
the Respondent has done all it can do to obtain required information
from both the Appellant and Peter Charlton;
c)
a list of the unanswered undertakings that were given at the examination
for discovery that relate to the Interest Issue is at Schedule “A” to the
Notice of Motion;
d)
it would be unfair to require the respondent to proceed to trial without
having the opportunity to examine Peter Charlton, as the outcome of this matter
will have an impact on two other Tax Court appeals and 96 objections being held
in abeyance at the Canada Revenue Agency;
e)
the order sought is in the interests of justice and fairness to ensure
that the Respondent is not taken by surprise at trial;
f)
Peter Charlton is already deeply involved with this litigation and therefore
will be no unfairness to him if he is examined;
g)
the examination sought will not unduly delay this matter and will not
entail unreasonable expense for the Appellant;
h)
as set out in the Affidavit of Linda Aiello dated April 28, 2011, there
is reason to believe that Peter Charlton has the information sought and the
information is relevant to a material issue in the appeal, which is addressed
at paragraphs 13(w), 13(x), 13(y), 14(a), and 17 of the Reply to the Amended
Notice of Appeal; and
i)
sections 95 and 99 of the Rules.
[11]
That Mr. Charlton has information
relevant to a material issue in the Appellant’s appeal is not disputed.
However, before the Court may exercise its discretion under subsection 99(1),
it must be satisfied that the moving party has met the criteria set out in
subsection 99(2):
(2) Leave
under subsection (1) shall not be granted unless the Court is satisfied that,
(a) the moving party has been
unable to obtain the information from other persons whom the moving party is
entitled to examine for discovery, or from the person sought to be examined,
(b) it would be unfair to
require the moving party to proceed to hearing without having the opportunity
of examining the person, and
(c) the examination will not,
(i) unduly
delay the commencement of the hearing of the proceeding,
(ii) entail
unreasonable expense for other parties, or
(iii) result in
unfairness to the person the moving party seeks to examine. [Emphasis added.]
[12]
Both Mr. Charlton and the
Appellant take the position that the Respondent has not satisfied these
requirements. For the reasons set out below, I agree with their position. Accordingly,
the Respondent’s Motion is dismissed with the matter of costs to be left to the
trial judge.
Paragraph
99(2)(a): The Respondent has been unable to obtain the information
from the Appellant or from Mr. Charlton.
[13]
Notwithstanding the use of the
word “or” in paragraph 99(2)(a), the provision is to be read conjunctively,
thus putting the onus on the moving party to satisfy both prongs of the requirement.
[14]
Counsel for the Appellant
conceded that the Respondent was unable to obtain the information sought from
the Appellant. Counsel for Mr. Charlton, however, disagreed, arguing that it
was the Respondent’s choice, in making its undertaking requests to the
Appellant, to limit the source of such information to Mr. Charlton. He
submitted that there are several others involved in the Tax Shelter who might
also be able to answer the questions flowing from the Respondent’s examination
for discovery of the Appellant on January 23, 2009 and August 27, 2010. The
Respondent argued that attempting to examine such other non-parties would
likely be seen as a fishing expedition.
[15]
As I am not persuaded that the
Respondent has exhausted its means of obtaining this information directly from Mr.
Charlton, I need not decide whether the first prong of paragraph 99(2)(a)
has been satisfied.
[16]
Turning, then, to the second
criterion of paragraph 99(2)(a), at paragraph 3 of the Notice of Motion, the
Respondent alleges that Mr. Charlton “has always been actively involved with
this matter”, as early as the audit stage.
At paragraphs 4 and 6, the Respondent notes his involvement at the examination
for discovery of the Appellant. Mr. Charlton presented himself at the
examination for discovery of the Appellant on January 23, 2009 but was excluded
by the Respondent “on the basis that he [was] a material witness”. Following
the second day of discovery of the Appellant on August 23, 2009, the Respondent
had made some 59 requests for undertakings concerning Mr. Charlton. Those
undertakings were answered on December 17, 2010.
(Note: there is a typographical error in paragraph 10 of the Respondent’s Written
Submission showing this date as December 17, 2011.) At paragraph 5 of
the Notice of Motion, the Respondent suggests Mr. Charlton may be funding the
litigation.
[17]
Yet, notwithstanding the
Respondent’s acknowledged awareness of Mr. Charlton’s role, it did nothing to
obtain information directly from him until April 1, 2011 when it filed the subsequently
adjourned First Motion. The Respondent blamed its inability to serve the First
Motion materials on Mr. Charlton’s efforts to avoid service. In any event, the
Respondent made no further attempts to serve Mr. Charlton or to arrange for
substituted service.
[18]
Indeed, nothing more was done to obtain
information directly from Mr. Charlton until the Respondent’s December 9, 2011
letter. Given the detailed nature of the Respondent’s questions and the
intervening holiday period, I do not consider the fact that Mr. Charlton did not
respond until January 30, 2012 to constitute a refusal to provide the
information requested. Furthermore, his responding email shows a willingness to
make at least some effort to co-operate with the Respondent’s request. Rather than
following up on Mr. Charlton’s response, however, on February 1, 2012, the
Respondent filed the Present Motion materials with service on Mr. Charlton the
following day.
[19]
In my view, the Present Motion was
precipitated, not by the Respondent’s inability to obtain the information
requested from Mr. Charlton within the meaning of paragraph 99(2)(a),
but rather by the looming trial date and the untimeliness of the Respondent’s request.
Nothing in the Respondent’s materials provides a satisfactory explanation as to
why, notwithstanding its long-standing awareness of Mr. Charlton’s involvement
in the Tax Shelter, steps were not taken sooner to obtain information from him.
[20]
In these circumstances, I agree
with the submissions of counsel for the Appellant that the present matter is factually
similar to Teelucksingh v. The Queen, 2007 D.T.C. 511. At paragraph 2, Bowie, J. noted
that “… Rule 99 provides for an extraordinary remedy that ought to be applied
sparingly and only where there is demonstrably strict compliance with
subsection (2) of the Rule.” In the circumstances of that case, he found
“inadequate” the Minister’s efforts to elicit information from the non-party.
[21]
In my view, the same can be said
of the Respondent in the matter at hand. The Respondent’s failure to satisfy
the second prong of paragraph 99(2)(a) is sufficient to dispose of the
matter; however, out of an abundance of caution, the evidence in respect of the
other elements of subsection 99(2) are considered below.
Paragraph
99(2)(b): It would be unfair to require the Respondent to proceed
to hearing without having the opportunity of examining Mr. Charlton.
[22]
The Respondent’s contentions in
respect of paragraph 99(2)(b) are set out in subparagraphs 4(d) and (e)
of the Notice of Motion:
(d) it would
be unfair to require the respondent to proceed to trial without having the
opportunity to examine [Mr. Charlton], as the outcome of this matter will have
an impact on two other Tax Court appeals and 96 objections being held in
abeyance at the Canada Revenue Agency;
(e) the order
sought is in the interests of justice and fairness to ensure that the
respondent is not taken by surprise at trial.
[23]
For many of the same reasons set
out in respect of paragraph 99(2)(a), it seems to me that any “surprise”
that the Respondent may experience at trial is attributable to its not having
acted sooner to obtain information directly from Mr. Charlton. It must be
remembered that it is the Appellant who bears the onus of proving wrong the
assessments; it is for him to rebut, inter alia, the Minister’s
assumptions in respect of the Interest Issue that no interest payments were
made by the Appellant or the partnership. (See paragraphs 13(x) and (y) of the
Reply.)
[24]
As for the other appeals and
objections, the Respondent did not challenge counsel for the Appellant’s
assertion that the present appeal is not a “test case”, the outcome of which
will be binding on other taxpayers assessed in respect of the Tax Shelter. While
having the opportunity to examine Mr. Charlton in the Appellant’s appeal might
well assist the Respondent in future proceedings involving other taxpayers
involved in the Tax Shelter, I fail to see how that supports the Minister’s request
to examine Mr. Charlton for the purposes of the present appeal. Mere expediency
or convenience does not justify the granting of leave under section 99.
Subparagraph
99(2)(c)(i): The examination will not unduly delay the commencement of
the hearing of the proceeding.
[25]
Counsel for the Respondent noted
that there is precedent for granting leave to discover a third party as late as
the day before trial; Spruce Credit Union v. Her Majesty the Queen, 2009-3121(IT)G. While such an order may have been granted in that
case, it does not assist the Respondent in the present circumstances to satisfy
the subsection 99(2) criteria.
[26]
Counsel for the Respondent assured
the Court that, should the Present Motion be granted, the Respondent had no
intention of seeking “unduly difficult undertakings” from Mr. Charlton in
respect of the five questions
listed in Schedule ‘A’ to the Notice of Motion, or in any other way delaying
the commencement of the hearing scheduled for March 12, 2012.
[27]
While I take counsel for the
Respondent at his word, good intentions have a poor reputation as paving stones
to happy outcomes. As a practical matter, the trial will commence a scant 14 days
from the date of this Order. Counsel for the Appellant correctly noted that the
proposed questions involve records of transactions dating back some 15 years
and spanning a 12-year period.
[28]
Counsel for the Respondent
alternatively proposed that the Court could limit the scope of the discovery by
simply ordering that the questions be “related to the requirements of
subsection 143.2(7) of the Income Tax Act”. With respect, such broad
language strikes me as likely to have quite the opposite effect.
[29]
Even if Mr. Charlton were to
commence his responses with a willing spirit effective the date of this Order, I
am persuaded by the submissions of counsel for the Appellant that there is a
very real risk the hearing of the Appellant’s appeal would be delayed. Such
risk could have been averted if the Respondent had acted sooner. In these
circumstances, the Respondent has failed to satisfy me that the examination of
Mr. Charlton would not unduly delay the hearing of the appeal.
Subparagraph
99(2)(c)(ii): The examination will not entail unreasonable expense for the
Appellant.
[30]
Counsel for the Appellant
acknowledged that the Appellant could be reasonably compensated in costs for
such expenses as travel and accommodation, should they arise. The Respondent
takes the position that there would be no unreasonable expense to the Appellant
because he would be provided with a free copy of the transcript of the
examination of Mr. Charlton. However, the Respondent did not provide a
satisfactory response to the risk that the examination of Mr. Charlton would divert
counsel from trial preparation and any expense that might flow from that
contingency.
Subparagraph
99(2)(c)(iii): the examination will not result in unfairness to Mr.
Charlton.
[31]
Counsel for Mr. Charlton contended
that the Respondent’s real purpose in seeking to examine his client was to
impeach his client’s credibility at trial. (See paragraph 2(d) of the Notice of
Motion.) Such a motive does not justify an order under subsection 99(1) of the Rules. He also argued that
Mr. Charlton’s poor health made him a poor candidate for examination. (Affidavit
of Karen Singh.) I agree with counsel for the Respondent that the second-hand
nature of the information in the Singh affidavit weakens its force. Counsel for
Mr. Charlton also submitted that ordering the examination for discovery of his
client would put him to the expense of hiring lawyers and accountants to assist
in reviewing the documentation necessary to respond meaningfully to the
Respondent’s questions. I have some doubts in this regard, given the extent of
Mr. Charlton’s involvement in the litigation to date. However, as with all the
other criteria, it was for the Respondent to demonstrate the examination would not
result in unfairness to Mr. Charlton and the evidence falls short of the mark.
Conclusion
[32]
In all the circumstances, the
Respondent has failed to satisfy the criteria under subsection 99(2). The
Present Motion is dismissed, with the matter of costs to be left to the trial
judge.
Signed at Vancouver, British Columbia this 27th
day of February 2012.
“G. A. Sheridan”
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