Date: 20000224
Dockets: 98-806-IT-G; 96-2737-IT-G
BETWEEN:
GORDON REZEK et al., PHILIP HAYES et al.,
Appellants,
and
HER MAJESTY THE QUEEN,
(Respondent's Motion)
Respondent,
REASONS FOR ORDER
Bowman, J.T.C.C.
[1] The two appellants referred to in the style of cause are part of a group of "lead cases" that counsel have agreed will be heard. There are in fact many more cases that are being held in abeyance pending the disposition of the lead cases. Although they may differ in certain respects they all have in common transactions that have come to be known as "convertible hedge" transactions.
[2] The appellants involved in the lead cases are the following:
Appellant TCC Court File No.
Gordon Rezek 98-806(IT)G
Stephen Stephens 97-749(IT)G
Stephen Stephens 97-653(IT)G
Muriel Scott 98-2507(IT)G
Roman Orenchuk 98-9211(IT)G
Roman Orenchuk 98-1299(IT)G
Sylvia Orenchuk 98-1298(IT)G
Philip Hayes 96-2737(IT)G
Pat Hayes 96-2573(IT)G
[3] It is agreed that the orders given on these motions will apply to all of the lead cases.
[4] The appellants' motion is for an order that the respondent provide answers to certain undertakings and questions refused to be answered at the examination for discovery of the respondent's nominee. The respondent's motion is for an order directing production of certain documents.
[5] It is sufficient for the purposes of these motions that I describe in general terms the convertible hedge transactions.
[6] They usually involved two individuals, but counsel informs me that this was not invariable. They did however require two stock market positions – one long and one short. When the transactions were closed out a loss would occur from one position, a gain from the other. The loss, I am informed by counsel, would be reported as being on income account and the gain would be treated as capital.
[7] The Crown's position is that the long and short transactions were related, and if only one individual was involved they would be treated consistently. If two individuals were involved they were treated as partners or as being in a principal and agent relationship.
[8] Since relevancy is to be determined by the pleadings, the issues as pleaded by the respondent are the following:
a) whether the subject transactions in the Convertible Hedge Strategy ought to be considered independent of each other;
b) if they were not independent transactions, whether the Convertible Hedge Strategy was carried out by the Appellant and the Other Party;
c) whether any loss was incurred when positions were transferred from one account to another account;
d) whether the transactions, that is both long purchases and short sales, must be treated consistently either on account of income or on account of capital;
e) in the alternative, whether the claimed losses or expenses were disbursements or expenses made or incurred in respect of a transaction or operation that if allowed would unduly or artificially reduce income within the meaning of subsection 245(1) of the Act, and
f) in the further alternative, whether the activity of the Appellant which resulted in the expense and losses claimed, was a business within the meaning of the Act.
[9] The respondent's motion is relatively straightforward.
[10] The documents of which production is sought are set out in Schedule B to the affidavit of Verena Zbyrovski filed in support of the respondent's motion. They are all brokerage statements from various brokers as well as account opening statements relating to the lead appellants.
[11] Some have been produced, but many have not. They are obviously relevant and counsel for the appellants does not disagree. He points however to the difficulty in assembling them, given that in some cases they go back as far as 1985 and some of them are with brokerage firms that have since merged with others.
[12] Obviously I cannot order the appellants to do the impossible. I assume however that they either have possession of the documents or can obtain them from the brokerage firms. There is no suggestion that the documents have been destroyed. The appropriate order I believe is the following:
(a) that within 3 months from the date of this Order the appellants produce to the respondent the documents referred to in Schedule B to the affidavit of Verena Zbyrovski that are in their possession, control or power, to the extent that they have not already been produced;
(b) that within 3 months from the date of this Order the appellants use their best efforts to produce to the respondent either originals or copies of such of the documents referred to in Schedule B to the affidavit of Verena Zbyrovski as are in the possession of the brokerage firms listed in that affidavit, or their successors;
(c) that within one month from the date of this Order the appellants execute and deliver to the respondent directions addressed to those brokerage firms or their successors authorizing and directing them to release to the respondent or her solicitors the originals or copies of the documents referred to in Schedule B to the affidavit of Verena Zbyrovski.
[13] I am aware that the order in (c) was requested in the alternative. Nonetheless, I think that the existence of such directions may serve to expedite matters.
[14] I turn now to the appellants' motion. To the extent that the refusal is based on relevancy it may be taken as settled that the threshold of relevancy is lower on discovery than at trial: 569437 Ontario Inc. v. The Queen, 94 DTC 1923; Route Canada Real Estate Inc. v. The Queen, 95 DTC 502.
[15] The questions to which answers are sought are:
Questions Taken Under Advisement
99 2 Please advise as to Mr. Holt's understanding in this regard with respect to the other taxpayers (other than the Lead Case appellants) who were involved in similar transactions.
543 14 Please provide a list of the documents in the "convertible hedge" file and the respective reasons why each of the documents listed are not being produced.
622 15 Please advise as to whether the respondent takes the position that the subject transactions undertaken by Roman Orenchuk were a sham.
623 16 Please advise as to whether the respondent takes the position that the subject transactions undertaken by each of the Lead Case appellants were a sham.
1319 26 Please advise as to whether you are in a position to provide an answer to this question and if not, what additional information you require.
Questions Refused to be Answered
86 To produce an analysis showing the total business losses claimed, total carrying costs claimed and total income reported on a global basis.
101 To provide any information that Revenue Canada may have of the amount that clients of J.K. Maguire & Associates made and reported as net profits through these investments.
103 To make inquiries and advise if there has been any analysis done of that and, if so, to produce the analysis.
139 To make inquiries and produce earlier versions or earlier drafts of the final position paper.
738 To advise as to whether there is any dispute that hedge fees were paid by Philip Hayes in 1984 and 1985.
741 To advise as to whether there is any dispute that accounting/management fees were paid by Philip Hayes in 1984 and 1985.
754 To advise as to what items of income were neglected to be included in the assessment of income for the 1986 taxation year for Philip Hayes.
772 To advise as to whether any further representations were provided subsequent to the preparation of the T401 report for Philip Hayes for the 1986 taxation year.
[16] The questions fall into 5 broad categories:
A Questions relating to whether the convertible hedge transactions resulted, on a global basis, in profits or losses
Questions 86, 99, 101 and 103
Since the Crown alleges that the hedge transactions were not a business it may be of some marginal relevance to determine whether the respondent has any evidence that would either support or refute the view that overall Mr. Maguire's clients made or lost money from these transactions. In a letter of February 10, 2000 Crown counsel states that "if viewed separately (neither partnership nor agency), there is no reasonable expectation of profit from the subject transactions". In the same letter, it is said "The Respondent accepts that it is possible to realize a profit from the hedging transactions".
I am therefore ordering, with respect to these questions, that:
(a) Questions 86, 99, 101 and 103 be answered, subject to the qualification that
(i) only information in the possession of the Crown need be provided;
(ii) if an analysis has been made, the analysis should be produced, but no analysis need be prepared;
(iii) the names of other taxpayers who engaged in the convertible hedge transactions may not be disclosed.
B Earlier versions or drafts of the final position paper
Question 139
The final position paper has been produced. Whatever relevance it may have, if any, earlier drafts or versions which have been amended or rejected cannot in my opinion be of any assistance in establishing the correctness or incorrectness of the assessments. We are, after all, not dealing with travaux préparatoires that may be useful in interpreting international treaties. The essential question is whether the assessment is right or wrong, not what thoughts may have been going through the mind of an employee of the Department of National Revenue as he or she drafted a position paper. (See The Cadillac Fairview Corporation Limited v. The Queen, 97 DTC 406 at 407, footnote 2).
Question 139 need not be answered.
C The convertible hedge file
Question 543
This file contains, apparently, a lot of material on convertible hedges generally, none of which relates specifically to any particular lead case appellant. It consists of 3 binders about 3 inches thick.
The reasons for not producing the file are not altogether clear. Initially it was said they were irrelevant. It is also possible that the position is that the contents of the file are confidential under section 241, or are privileged.
Whatever may be the reason, it is incumbent upon the person refusing to produce a document to provide the person seeking production with sufficient information to permit him or her to determine whether the basis of refusal is justified or whether it should be challenged. Certainly no one party can refuse to produce a document on the basis of a unilateral view of its irrelevancy.
The respondent is directed to provide to the appellants' detailed and specific reasons for the refusal to produce particular documents in the convertible hedge file, with sufficient information to allow them to be identified. If the respondent does not do so, the file is to be produced subject to ensuring that confidential information relating to taxpayers is not disclosed.
D Appeals of Philip Hayes for 1984 and 1985
Questions 738, 741, 754 and 772
Answers to these questions were refused because the 1984 and 1985 taxation years were not at that time before the court as lead cases. They have now been added to the list of lead cases and there is no reason for refusing to answer the questions.
Questions 738, 741, 754 and 772 should be answered.
E Sham
Questions 622, 623 and 1319
I was not given a transcript of question 1319 but I assume it relates to the same matter as questions 622 and 623.
The questions are essentially whether the respondent takes the position that the hedging transactions were shams. The respondent has never pleaded that they were and that should have been the end of the matter. Nonetheless, the question was asked and the answer given was the following:
It is not necessary, for purposes of the issues raised in the pleadings, for the court to make a finding of sham.
The ambiguity of the response was worthy of the oracle at Delphi. The appellant is entitled to an unequivocal answer such as "yes" or "no". Counsel stated that the reason the answer was framed in this way was to make it clear that the respondent would not be advancing at trial the position that the transactions were shams. If it was clarity at which the respondent was aiming, the answer fell somewhat short of the mark.
The respondent is directed to give a clear, unambiguous and unequivocal answer to questions 622 and 623.
[17] If the parties require any further clarification in connection with these orders or if the time limits referred to in paragraph 12 of these reasons are inconvenient I can be spoken to.
[18] Costs of the motions are in the cause.
Signed at Ottawa, Canada, this 24th day of February 2000.
"D.G.H. Bowman"
J.T.C.C.