Date: 19990928
Dockets: 97-3114-IT-G; 97-3116-IT-G; 97-3119-IT-G; 97-3210-IT-G
BETWEEN:
STANDARD MORTGAGE INVESTMENT CORPORATION, NARDAQ INVESTMENTS INC. MAY DEVELOPMENTS LTD. VAL BRUNA HOLDINGS LTD.,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Order
Mogan J.T.C.C.
[1] In each of the above appeals, the parties filed a joint application to fix a time and date for hearing. In each case, this Court issued an Order dated December 11, 1998 directing that the parties exchange documents by March 31, 1999; that the parties hold examinations for discovery by June 30, 1999; that any undertakings resulting from the examinations for discovery be satisfied by July 31, 1999; and that the hearing of the appeals commence on Monday, October 25, 1999. By a subsequent Order dated August 17, 1999, the above four appeals were set down to be heard together in Vancouver to start on Tuesday, October 26, 1999 for a period of three days.
[2] By Notice of Motion dated September 15, 1999, the four Appellants gave notice that they would make a motion on Wednesday, September 22, 1999 at 1:00 o'clock in the afternoon, Eastern Standard Time seeking Orders in respect of the following four matters:
1. An order pursuant to Tax Court Rule 93(3) that the Appellants be permitted to examine Mr. David Turner of the Appeals and Referrals Division of the Department of National Revenue (the "Department") in the examination for discovery, instead of Mr. Brian Ellis.
2. An order pursuant to Tax Court Rule 4, 88 or 95(1) that all documents in the possession or control of the Respondent relating to third party taxpayers which were reviewed, consulted and/or relied upon by the Respondent in assessing the Appellants be produced for inspection by the Appellants. In particular, the Appellants seek production of all documents that were reviewed, consulted and/or relied upon by Mr. Turner in the preparation of his report dated April 2, 1997 (the "Turner Report") or that relate to the involvement of Michael Stastny, John O'Carroll or FRM Commodities Ltd. or the Respondent's assumption that the Appellants did not acquire any foreign exchange contracts.
3. An order pursuant to Tax Court Rule 95(3) that the Respondent adequately fulfil its undertaking to the Appellants to provide the Appellants with the findings, opinions and conclusions of the Respondent's expert.
4. An order pursuant to Tax Court Rule 137 for an adjournment of the trial in this matter.
[3] The pleadings in Val Bruna Holdings Ltd. v. The Queen, 97-3210(IT)G, may be summarized as follows:
1. The Appellant claims to have loaned funds to each of two wholly-owned subsidiaries (Company A and Company B) to fund their business activities; and each loan was evidenced by a promissory note.
2. The Appellant claims that it acquired certain foreign exchange contracts for the purpose of earning a profit and then transferred part of those contracts to Company A and the remainder to Company B in consideration for common shares and the assumption by each subsidiary of certain obligations connected with the foreign exchange contracts.
3. Company A later paid a dividend to the Appellant in an amount approximately equal to the accrued gain on its foreign exchange contracts; and the Appellant included the amount of the dividend in computing income.
4. The Appellant then sold its shares in Company A and the outstanding promissory note owed by Company A to an unrelated third party at fair market value thereby realizing a loss.
5. Company B was liquidated and its assets, on liquidation, passed up to the Appellant at their tax costs. The Appellant disposed of the foreign exchange contracts obtained on the winding-up of Company B and suffered a loss on such disposition.
6. Having regard to the above transactions, the Appellant stated that the issue was whether, in computing its income for a particular taxation year, it was entitled to deduct the losses on the disposition of the foreign exchange contracts and/or the note and apply the residual losses to the computation of taxable income for subsequent years.
7. The Respondent filed a Reply to the Appellant's Notice of Appeal and, in that Reply, stated that when the Minister of National Revenue was assessing tax with respect to the Appellant's relevant taxation years, the Minister assumed certain facts including:
(a) that the Appellant did not acquire or dispose of any foreign exchange contracts, for the purpose of earning a profit or otherwise;
(b) that the Appellant's subsidiaries did not engage in business activities;
(c) that the Appellant did not transfer foreign exchange contracts to the subsidiaries; and
(d) that the Appellant did not have a loss resulting from the disposition of foreign exchange contracts or promissory note.
8. According to the Respondent, the principal issues are:
(a) whether the Appellant acquired or disposed of any foreign exchange contracts, for the purpose of earning a profit or otherwise; and
(b) whether the Appellant realized a deductible loss on the disposition of foreign exchange contracts or promissory note;
[4] For all practical purposes, the pleadings in May Developments Ltd. v. The Queen, 97-3119(IT)G, Standard Mortgage Investment Corporation v. The Queen, 97-3114(IT)G and Nardaq Investments Inc. v. TheQueen, 97-3116(IT)G are identical to the pleadings in Val Bruna. See question number 109 on the transcript of the discovery. I have summarized the pleading above to demonstrate that the issues in these appeals are questions of fact. In particular, the following two questions of fact are apparent. First, did the Appellant acquire any foreign exchange contracts for the purpose of earning a profit or for any other purpose. And second, did the Appellant transfer any foreign exchange contracts to either of the subsidiaries described in the Notice of Appeal. There are other collateral issues like whether the Appellant can deduct certain losses resulting from the disposition of foreign exchange contracts; whether those losses are reasonable within the meaning of section 67 of the Income Tax Act; and whether section 245 of the Act has any application to the transactions described in the pleadings; but these collateral issues are based upon the two fundamental questions of fact already described in this paragraph.
[5] I will now turn to the four items of relief sought by the Appellants on this motion. Item number 1 is a request for an Order pursuant to Rule 93(3) that the Appellants be permitted to examine David Turner instead of Brian Ellis. Mr. Ellis was examined on discovery at Vancouver on June 29, 1999. At the examination for discovery, Thomas Boddez was counsel for the Appellants and David Spiro was counsel for the Respondent. For the purposes of this motion, Mr. Boddez filed an affidavit in support of the Appellants and Mr. Spiro filed an affidavit on behalf of the Respondent. Specifically, the Appellants seek relief under subsection 93(3) of the Rules which states:
93(3) The Crown, when it is the party to be examined, shall select a knowledgeable officer, servant or employee, nominated by the Deputy Attorney General of Canada, to be examined on behalf of that party, but if the examining party is not satisfied with that person, the examining party may apply to the Court to name some other person.
[6] In his affidavit, Mr. Boddez makes the following statements at paragraphs 6 and 7:
6. During the course of the Discovery of Mr Ellis it became apparent that Mr. Ellis is not sufficiently knowledgeable or informed in respect of the Department's assumptions of fact and the matters in issue in these appeals. ...
7. During the course of the Discovery of Mr. Ellis it became apparent that the person most knowledgeable or informed as to the matters sought to be examined on, and as such the most appropriate representative of the Crown in this case, is Mr. David Turner of the Appeals and Referrals Division of the Department. ...
For the reasons set out below, I will not grant the Appellants' motion on the first item concerning an examination of Mr. Turner instead of Mr. Ellis. First, under Rule 93(3), there is no obligation on the Crown to put forward the most knowledgeable person but only an obligation to select a knowledgeable officer, servant or employee. One of the tests of whether a person is knowledgeable is that person's ability to answer questions. In the passages of transcript which were read to me on the presentation of this motion, Mr. Spiro interjected himself on many occasions to answer questions in place of Mr. Ellis but his interventions were not objected to by Mr. Boddez. Indeed, on many occasions Mr. Boddez asked Mr. Ellis if he adopted the answers given by Mr. Spiro. Section 97 of the Rules contemplates that counsel may answer questions on discovery and that such answers by counsel are binding on the person being examined. The Appellants do not claim that any questions were not answered on the discovery of Mr. Ellis and they do not seek an order compelling the answer to any question. They have simply formed an impression that Mr. Turner may know more than Mr. Ellis.
[7] Second, the Appellants have not demonstrated that Mr. Turner would be more knowledgeable than Mr. Ellis. Relying on the material submitted by both sides for the purposes of this motion and certain statements by counsel in arguing the motion, I have concluded (i) that Mr. Knight (an auditor employed in the Vancouver office of Revenue Canada) issued the first assessments to the Appellants which disallowed the application of the losses resulting from the disposition of foreign exchange contracts; (ii) that the notices of objection filed by the Appellants were reviewed by Mr. Brian Ellis (an appeals review officer in the Vancouver office of Revenue Canada); and (iii) that David Turner (an employee at the head office of Revenue Canada in Ottawa) was consulted by Mr. Knight and by Mr. Ellis in the course of the processing the assessments and the notices of objection, respectively. Certain memorandums and letters of Mr. Turner are in the material before me and they indicate that he, on behalf of head office Revenue Canada, was advising both Mr. Knight and Mr. Ellis. Mr. Turner's head office advice does not mean that he is more knowledgeable than Mr. Ellis with respect to the questions of fact in these appeals.
[8] On balance, I am of the view that the field auditor who issued the original assessments or the district office appeals person who reviewed the notices of objection would be more knowledgeable about a particular taxpayer's affairs than a person in the head office of Revenue Canada who was consulted by either the field auditor or the appeals person or both. I am not prepared to infer from the letters and memos sent by Mr. Turner from Ottawa to the Vancouver district office that Mr. Turner knows more about the business transactions of the Appellants than those persons in the Vancouver district office who were dealing directly with the Appellants' files. The dominant issues in these appeals are questions of fact and not refined interpretations of some obscure sections of the Income Tax Act. The facts concerning a particular taxpayer's transactions are generally better known by the field auditor who issued the original assessment or by the local appeals person who reviewed a taxpayer's notice of objection. It should go without saying, of course, that the facts concerning a particular taxpayer's transactions are better known by the taxpayer than by any employee of Revenue Canada.
[9] Finally, in connection with this first item, if Mr. Boddez was concerned at the time of the discovery (June 29, 1999) with whether Mr. Ellis was adequately informed, his remedy was to seek an adjournment of the discovery under Rule 95(2) so that Mr. Ellis could become better informed. According to paragraph 5 of Mr. Spiro's affidavit, he first learned that the Appellants wanted to examine Mr. Turner when he read the Notice of Motion herein dated September 15, 1999.
[10] The second Order sought in this motion is set out above. In summary, the Appellants seek the production of all documents in the possession or control of the Respondent relating to third party taxpayers which were reviewed or relied on in assessing the Appellants. In particular, the Appellants seek production of all documents (i) which were reviewed or relied on by Mr. Turner in preparing his report of April 2, 1997; (ii) which relate to the involvement of Michael Stastny, John O'Carroll or FRM Commodities Ltd.; or (iii) which relate to the Respondent's assumption that the Appellants did not acquire any foreign exchange contracts. I return to the basic questions of fact in these appeals concerning whether each Appellant acquired any foreign exchange contracts and whether each Appellant transferred any foreign exchange contracts to one or more subsidiaries. All of the facts relevant to those questions should be more in the hands of the Appellants than in the hands of Revenue Canada.
[11] I am reluctant to order a head office employee of Revenue Canada to produce documents relating to third party taxpayers who are not before the Court in these four appeals. Referring to certain statements made by counsel, if one or more of the Appellants had transactions with Michael Stastny or John O'Carroll or FRM Commodities Ltd., then any one of the Appellants is free to contract those persons and obtain whatever information is available or helpful in the prosecution of these appeals. On the other hand, if Michael Stastny or John O'Carroll or FRM Commodities Ltd. had transactions with some other third party taxpayer which Mr. Turner thought, correctly or incorrectly, were similar to the Appellants' transactions, then I would hold that Mr. Turner's thoughts in connection with those possible similar transactions are not relevant in determining the questions of fact before the Court in these four appeals.
[12] In applying for this second order, the Appellants rely on the decision of the Federal Court of Appeal in M.N.R. v. Huron Steel Fabricators (London) Ltd., 73 DTC 5347. In Huron Steel, the Minister had based his assessment of the appealing taxpayers on certain information found in the income tax returns of Pelon Holdings Limited; and the Minister was required to produce the Pelon returns. In these four appeals, the Appellants know what was in Mr. Turner's mind from the production of his memorandums and letters to Mr. Knight or Mr. Ellis. If any one of the Appellants had transactions with Michael Stastny or John O'Carroll or FRM, then those transactions would be better known to the respective Appellant than to Mr. Turner. If not one of the Appellants had any transaction with any of those three persons, then Mr. Turner's knowledge of those three persons is not relevant.
[13] In a written submission accompanying the affidavit of David Spiro, counsel for the Respondent states:
It was Mr. Turner's report that formed a basis for assumptions made by the Minister of National Revenue in reassessing the Appellants. In his report, Mr. Turner refers to certain facts which were noted in earlier audits of other taxpayers who had engaged in a similar pattern of "forward foreign exchange trading" with FRMC Ltd. or related entities. There is no evidence that anyone at Revenue Canada who worked on the reassessments of the Appellants reviewed any of the documents of other taxpayers that Mr. Turner examined in making his report. Mr. Turner's report has been produced in its entirety.
According to this statement, Mr. Turner's report formed "a basis" for the Minister's assumption but not necessarily the only basis; and the Appellants have that report in its entirety. I will not grant the second order sought by the Appellants.
[14] I am not required to consider the third order sought by the Appellants because, in accordance with Rule 95(3), the Respondent has given an undertaking not to call the expert who prepared the draft report in 1994.
[15] With respect to the Appellants' request for an adjournment, by a Court Order dated December 11, 1998, these appeals were set down to be heard at Vancouver during the week of October 25, 1999. The issues are questions of fact and the parties have had adequate time to prepare. I will not adjourn the hearing of these four appeals.
[16] The Respondent is entitled to costs of this motion in the amount of $2,000 in any event of the cause.
Signed at Ottawa, Canada, this 28th day of September, 1999.
"M.A. Mogan"
J.T.C.C.