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Docket: 2002-4035(IT)G |
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BETWEEN: |
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R. DAREN BAXTER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Motion heard on September 9, 2004, at Halifax, Nova Scotia.
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Before: The Honourable D.G.H. Bowman, Associate Chief Justice |
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Appearances: |
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Counsel for the Appellant: |
Edwin C. Harris, Q.C. Al Meghji |
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Counsel for the Respondent: |
John Smithers Cecil Woon |
____________________________________________________________________
ORDER
Upon motion for an order compelling the appellant to re attend the examination for discovery to answer questions to which objection was made.
It is ordered that the appellant re attend the examination for discovery and answer the questions which in the reasons for order the Court has ordered be answered.
Costs shall be in the cause.
Signed at Ottawa, Canada, this 6th day of October 2004.
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"D.G.H. Bowman" |
Bowman, A.C.J
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Citation: 2004TCC636 |
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Date: 20041006 |
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Docket: 2002-4035(IT)G |
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BETWEEN: |
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R. DAREN BAXTER, |
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Appellant, |
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And |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR ORDER
Bowman, A.C.J.
[1] In this motion the respondent seeks an order compelling the appellant to answer a number of questions which his counsel had instructed him not to answer on discovery. Generally, the reason for the objection was that the questions and answers were irrelevant.
[2] By way of background the appeal is from an assessment whereby the Minister of National Revenue disallowed a claim for capital cost allowance ("CCA") made by the appellant in respect of a computer software licence.
[3] The notice of appeal states that the appellant acquired from TCL Trafalgar B.V., a Netherlands corporation, a non-exclusive limited-use licence to use software consisting of a program for trading S & P Contracts, in exchange for a licence fee.
[4] It further states that the appellant entered into an agency agreement authorizing Trafalgar Trading Limited, a Bermuda corporation, to use the software licence on his behalf for a period of ten years.
[5] The appellant paid 35 percent of the licence fee as a down payment and the balance by way of a promissory note to be paid out of his profits generated under the agency agreement.
[6] The notice of appeal further states that the claim for CCA was denied on assessment. Paragraph 9 of the notice of appeal alleges that the denial of the CCA was based on four grounds:
(a) The licence was a tax shelter as defined in subsection 237.1(1) of the Income Tax Act ("ITA") and was therefore a tax shelter investment as defined in subsection 143.2(1) of the ITA and "computer software tax shelter property" under subsection 1100(20.2) of the Income Tax Regulations. Therefore, subsection 237.1(6) denied the deduction claimed, subsection 143.2(6) would reduce the capital cost of the software by the amount of the rate because it was a "limited recourse amount" under subsection 143.2(1) of the ITA or an "amount or benefit" under subsection 143.2(2) of the ITA and that subsection 1100(20.1) of the Income Tax Regulations would limit the CCA to his net income, before CCA, from the business in which the software was used.
(b) Trafalgar Trading was trading on its own behalf and not the appellant's and therefore the appellant was not in the business of trading but was investing in units and in an investment pool.
(c) The note was a contingent liability.
(d) The value of the licence was inflated and the CCA was therefore unreasonable within the meaning of section 67 of the ITA.
[7] The reply to the notice of appeal does not admit that the above were the grounds given by the Canada Customs and Revenue Agency ("CCRA") but states rather coyly that the notice of assessment speaks for itself.
[8] The notice of appeal states that the issues are:
a) Whether the licence was a "tax shelter", as defined in subsection 237.1(1) of the Act, and therefore a "tax shelter investment", as defined in subsection 143.2(1) of the Act, and "computer software tax shelter property" under subsection 1100(20.2) of the Income Tax Regulations;
b) Whether the license is a class 12 asset of the Appellant;
c) Whether the note is a contingent liability, and its amount excluded from the capital cost of the licence; and
d) Whether the CCA claimed in respect of the license is unreasonable in amount and not deductible by reason of section 67 of the Act.
[9] The reply to the notice of appeal states that the issues are as set out in the notice of appeal and are also in paragraph 13:
a) The value of the subject Software and License;
b) Whether the Appellant was in the business of trading; and
c) Whether the Investment had a business purpose.
[10] I have set out these provisions of the pleadings because it is well established that relevancy is defined by the pleadings.
[11] The notice of motion originally set out a number of questions and undertakings. By the time the matter came before the court these had been reduced somewhat and the following were the questions that were in issue.
"SCHEDULE B"
BY CATEGORY
Appellant's Knowledge/Purpose
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QUESTION/UNDERTAKING |
REF |
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1. |
To advise whether the Appellant has been involved in engagements where a determination of fair market value has been required (R-Q.2) |
q. 60, p. 20-23 |
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2. |
To advise of the Appellant's understanding of the term "fair market value" (R-Q.3) |
q. 62, p. 23-24 |
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3. |
To advise whether the Appellant has ever engaged people to prepare valuation reports on behalf of clients (R-Q.4) |
q. 63, p. 24 |
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4. |
To advise from the Appellant's experience or knowledge whether Chartered Business Evaluators are qualified to assess fair market value (R-Q.5) |
q. 65, p. 24 |
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5. |
To advise of the Appellant's understanding of what a tax shelter is (UA-Q.1) |
q. 66, p. 24-26 |
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6. |
To advise whether Appellant in his practice has ever advised people in tax shelters (R-Q.6) |
q. 69, p. 27 |
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7. |
To advise whether the Appellant has provided tax advice or tax opinions on tax shelters in the past (R-Q.7) |
q. 70, p. 27 |
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8. |
To advise whether the Appellant has a greater knowledge with respect to tax shelters compared to the man on the street (R-Q.8) |
q. 71, p. 27 |
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9. |
To advise whether the Appellant has changed his investment philosophy throughout the years (R-Q.9) |
q. 82, p. 30 |
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10. |
To advise what the Appellant's investment objective is, short-term capital gains or long-term capital appreciation (R-Q.10) |
q. 94, p. 33 |
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11. |
To advise what the Appellant's average holding period is on an investment (R-Q.11) |
q. 95, p. 34-36 |
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12. |
To describe the level of risk the Appellant is willing to tolerate in an investment (R-Q.12) |
q. 98, p. 36-38 |
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13. |
To advise whether the Appellant attempts to diversify his investments (R-Q.13) |
q. 101, p. 38 |
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14. |
To produce statements for the Appellant's investment portfolio accounts at the time for 1998 (R-U/T.1) |
q. 107, p. 40-42 |
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15. |
To advise whether the Appellant reviews financial statements before investing (R-Q.14) |
q. 112, p. 43-47 |
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16. |
To advise what investments the Appellant profited from in 1999 (R-Q.15) |
q. 343, p. 87 |
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17. |
To advise what the Appellant's plans would be if he decided not to enter into the licensing agreement (R-Q.16) |
q. 374, p. 93 |
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18. |
To advise whether the Appellant is familiar with the term "limited recourse [sic] financing" (R-Q.18) |
q.478 p.116-118 |
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19. |
To advise whether the Appellant agrees with the opinion that is expressed in paragraph 2 of tab 5 of the Appellant's documents (R-Q.19) |
q. 491 p. 120-121 |
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20. |
To advise whether the Appellant agrees with Fraser Milner's view of the tax consequences of software acquisition at page 2, paragraph 4, tab 5 of the Appellant's documents (R-Q.20) |
q. 493 p. 121-123 |
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22. |
To advise whether the Appellant thought the two appraisals would have been important documents to read prior to making the agreement (R-Q.26) |
q. 571, p. 151 |
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23. |
To advise what the Appellant's conclusions on the fair market value of the software (R-Q.27) |
q. 574, p. 152 |
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24. |
To advise if the terms in paragraph 38 of the EMC appraisal cause the Appellant any anxiety with respect to how the investment scheme is going to perform (R-Q.28) |
q. 578, p. 153 |
Valuation
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QUESTION/UNDERTAKING |
REF |
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26. |
To advise whether the Appellant would have acquired the software if the license agreement, the agency agreement and the Promissory Note were not in place (R-Q.22) |
q. 496 p. 124-125 |
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27. |
To advise whether the Appellant attaches any value to the agreements as opposed to the software (R-Q.23) |
q. 497 p. 125-127 |
Representations
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QUESTION/UNDERTAKING |
REF |
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39. |
To advise whether the Appellant ever saw on a commercial that should Trafalgar Trading not meet its covenant of the 8% return that Trafalgar BV would not be seeking to enforce its note with respect to the difference (R-Q.17) |
q. 474-477, p. 115-116 |
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40. |
To advise whether the Appellant asked Mr. Langille if the Trafalgar Index Program was a tax shelter (R-Q.24) |
q. 537 p. 142-145 |
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41. |
To advise whether the Appellant asked Mr. Langille if an identification number had been sought for the tax shelter (R-Q.25) |
q. 538, p. 145 |
Miscellaneous
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QUESTION/UNDERTAKING |
REF |
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42. |
To advise whether the Appellant was getting more money back by way of deduction than he ever put in by way of cash (R-Q.29) |
q. 614, p. 161 |
[12] The principles to be applied in allowing or disallowing questions on examination for discovery are fairly well settled. The threshold level of relevancy is quite low. Counsel should not be inhibited in the questions he or she asks simply because the question may, standing alone, seem irrelevant. The tactics on a discovery vary from counsel to counsel and the style of questioning may simply be a reflection of the counsel's own particular style. Some counsel seek to achieve their purpose by being aggressive and intimidating. Others seek to lull the witness into a sense of security by asking a series of seemingly innocent and possibly pointless questions until one key question is tossed out with apparent nonchalance and the witness answers it. The principle is stated in Leeds v. Alberta, [1989] AJ No. 755 (CA) at p. 10 (QL) as follows:
The scope of questions which may be properly asked in examination for discovery has been considered in several reported decisions. In Czuy and Czuy v. Mitchell, Edmonton General Hospital and the General Hospital (Grey Nuns) of Edmonton (1976) 1 A.R. 434 (S.C. App. Div.) the respondent plaintiff wished to compell [sic] answers to certain questions. Prowse, J.A. noted that to hold that these matters could not be examined upon would amount to striking out a cause of action alleged in the statement of claim and so refused to do so. At p. 439-440 he further commented that:
"Although generally a Court will not seek to control the manner in which Counsel conducts an Examination, it will interfere where it appears that the purposes for which they are being held are being abused, such as where the conduct of Counsel is abusive, the length of the Examination supports the conclusion that it is being conducted as a delaying tactic, or the questions touch and concern matters which are clearly irrelevant. On the other hand, the Court, on the limited material available on such an application, where the relevant documents are not before it, will not conduct a minute examination of each question to determine its relevancy. In my view, a Court, in ruling on such applications, should not unduly restrict an Examination by excluding questions broadly related to the issues when it appears that their relevance may well be resolved by other evidence not before the Court on the application."
Haddad, J.A., who agreed with Prowse, J.A., expanded upon the issue of what questions are relevant. At p. 440 he said:
"The general rule, as I conceive it, which has emerged from the leading authorities is expressed with clarity and simplicity in the headnote of the report of Rural Municipality of Mount Hope No. 279 v. Findley, [1919] 1 W.W.R. 397, as follows:
'The greatest latitude should be allowed to a party who is examining an adverse party for discovery so that the fullest inquiry may be made as to all matters which can possibly affect the issues between the parties."
At p. 444 he said:
"In my view then, it is the scope of the examination for discovery with which we are concerned in this appeal. Wide latitude is to be permitted. The examination may be searching and exploratory. Questions on discovery are relevant so long as they touch 'the matters in question' and fall within bounds that are reasonable. If the questions asked are relevant to the matters in issue or can possibly affect the issues between the parties - if they are questions which may be permitted on cross-examination - then they must be answered."
The question of the scope of examination for discovery was also considered in Drake v. Overland and Southam Press Ltd. (1979) 19 A.R. 472 (C.A.). Laycraft, J.A. (as he then was) said at p. 483-84:
"It is trite law in Alberta that an examination for discovery is a wide ranging cross-examination on everything relevant to the issues, though it may not go to questions of credibility. Its scope it [sic] very wide. Its purpose is not limited merely to determining the unknown. Questions may be designed to be used as proof at trial and to pin down the opposite party so that one can be certain as to his evidence at trial. Questions may be asked which only indirectly assist a party in proving his own case or in disproving his opponent's case. A counsel's approach may be circuitous in arriving at the issue he attacks and he is not bound to explain his ultimate purpose in any question. Only those questions which are clearly irrelevant should be rejected at this stage since in the absence of all the evidence to be produced at trial the Court can form only a general impression as to their relevance."
In Montana Band v. Canada, [2000] 1 F.C. 267, Hugessen J. discussed at length the permissible scope of an examination for discovery:
The general purpose of examination for discovery is to render the trial process fairer and more efficient by allowing each party to inform itself fully prior to trial of the precise nature of all other parties' positions so as to define fully the issues between them. It is in the interest of justice that each party should be as well informed as possible about the positions of the other parties and should not be put at a disadvantage by being taken by surprise at trial. It is sound policy for the Court to adopt a liberal approach to the scope of questioning on discovery since any error on the side of allowing questions may always be corrected by the trial judge who retains the ultimate mastery over all matters relating to admissibility of evidence; on the other hand any error which unduly restricts the scope of discovery may lead to serious problems or even injustice at trial.
Also, in Owen Holdings Ltd. v. The Queen, 97 DTC 5401 at 5405, Marceau J.A. said:
Thus the phrase "relating to any matter in question" requires that, at the discovery stage, relevancy must be construed generously, or with fair latitude. Nonetheless, "semblance of relevancy" should not be interpreted so broadly that it allows one party to engage in a fishing expedition, or simply harass the other. A semblance of relevancy exists only where the documents sought may lead the party seeking discovery to a train of inquiry which may directly or indirectly advance its case or damage that of its adversary. Thus the Tax court Judge adopted the correct standard for production of documents under Rule 82(1).
Application to the documents in category (ix)
The Tax Court Judge, then, would have been correct in ordering production of the technical interpretations and unpublished advance rulings if those documents might have led the appellant to a train of inquiry which might advance its case or damage that of the respondent. In this case, however, neither the technical interpretations nor the advance rulings were capable of assisting the appellant in this way.
[13] From these and other authorities referred to by counsel, I can summarize the principles that should be applied:
(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.
[14] I turn then to the specific questions in issue. The numbers correspond to those in the list. Quite frankly, I personally do not think that it would affect the outcome of the case if none of the questions were answered. Similarly, if they were answered, the outcome would not be affected by what the answer was. Nonetheless, I shall endeavour to draw a line between questions that are clearly irrelevant and those that a trial judge might arguably be asked by counsel to consider of some possible relevance in the context of all the evidence. I asked counsel for the appellant why, if the questions are as irrelevant as he contends, he does not simply let his witness answer. The objection gives to the question the appearance of importance that it might not otherwise have.
l. The nature of the appellant's practice does not bear on his investing in software, although possibly counsel sees in this question a relevance that is not obvious to me. I am not prepared to allow it.
2. With respect, I can see no conceivable relevance in this question. The appellant is a tax lawyer. He is undoubtedly aware of the usual meaning of fair market value which has, in any event, attained the status of a principle of law. The particular legal definition of the expression adopted by Mr. Baxter strikes me as nihil ad rem.
3. I cannot see how this has any conceivable bearing on the case.
4. This is a matter of opinion that can be left to the trial. It is not appropriate to ask the appellant's view.
5. This is a question of law. It need not be answered.
6. Whether the appellant has advised clients on tax shelters appears to me to have no bearing on the case.
7. This is just a variation on 6.
8. This is not an appropriate question. Indeed, it is somewhat meaningless. Why ask it? The appellant is a tax lawyer. One could as easily ask what the appellant's understanding is of the knowledge of tax shelters of the man on the Clapham omnibus.
9. I think the question may be relevant. Counsel may invite the trial judge to consider it relevant in the context of the case as a whole. One of the issues is whether the appellant is a trader.
10. Same as 9.
11. Same as 9.
12. Same as 9.
13. Same as 9.
14. I would draw the line here. The questionable relevancy of this line of enquiry makes it inappropriate that the appellant's investment portfolio be made public.
15. This should be answered.
16. Same as 9.
17. This calls for conjecture by the witness. It is, even on the most liberal interpretation of relevancy, beyond the pale.
18. The question as it stands seems innocuous enough provided it is not followed by a question about the witness' legal definition of the expression.
19. I do not think it is appropriate to ask a witness if he agrees with a legal opinion.
20. Same as 19.
22. I think this is a proper question.
23. At the risk of being inconsistent with my conclusions on questions 1, 2 and 3 it might conceivably be relevant if the appellant does not believe that the property had a fair market value that supported his case. Therefore this question can be answered.
24. It is doubtful if this rather infelicitously worded question is relevant but I see no particular harm in letting the witness answer it.
26. This is a proper question.
27. This is arguably a proper question.
39. This question should be answered.
40. This question should be answered.
41. Same as 40.
42. I see no reason why this question should not be answered if the information is available.
[15] Success is mixed. Costs should be in the cause.
Signed at Ottawa, Canada, this 6th day of October 2004.
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"D.G.H. Bowman" |
Bowman, A.C.J.
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CITATION: |
2004TCC636 |
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COURT FILE NO.: |
2002-4035(IT)G |
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STYLE OF CAUSE: |
R. Daren Baxter and Her Majesty The Queen |
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PLACE OF HEARING: |
Halifax, Nova Scotia |
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DATE OF HEARING: |
September 9, 2004 |
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REASONS FOR ORDER BY: |
The Honourable D.G.H. Bowman, Associate Chief Justice |
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DATE OF ORDER AND REASONS FOR ORDER: |
October 6, 2004 |
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APPEARANCES: |
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Counsel for the Appellant |
Edwin C. Harris, Q.C. |
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Al Meghji |
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Counsel for the Respondent: |
John Smithers Cecil Woon |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Edwin C. Harris, Q.C. |
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Firm: |
Patterson, Palmer Halifax, Nova Scotia |
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Name: |
Al Meghji |
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Firm: |
Osler, Hoskin & Harcourt LLP Toronto, Ontario |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |