http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/179878/index.do
1716790 Ontario Inc. v. The Queen (August 31, 2016 – 2016 TCC 189, D’Auray J.).
Précis: Although this case involves very detailed refusal issues it boils down to whether the corporate taxpayer can be forced to answer questions about a non-majority, but major, shareholder who is alleged in the Crown’s Reply to be its controlling mind. The central issue in the case is whether the corporate taxpayer was in the business of building and selling retirement homes, as was alleged by the Crown, or whether it held the homes as capital property. (This decision involved both an income tax appeal and a GST appeal.) The individual in question, Mr. Réjean Lemay, was alleged to have a long history of building and selling retirement homes.
After an extensive review of the jurisprudence the Court basically concluded that the corporate taxpayer could be ordered to answer a number of questions arising out of the business activities and history of Mr. Lemay. Of the 13 disputed questions the taxpayer was ordered to answer 8; 3 were held to be irrelevant dealing with Mr. Lemay’s personal affairs, 1 was held to ask for a conclusion of law and 1 was held to be overly vague. Costs were ordered to follow the cause.
Decision: The decision essentially turned on the Crown’s argument that the taxpayer was in the business of building and selling nursing homes guided by the influence of Mr. Lemay who acted as its controlling mind:
[5] The appellant’s position is that its business is operating retirement residences and not building and selling retirement residences. Therefore, the appellant argues that it correctly reported a capital gain on the sale of the Stonehaven Manor retirement residence in its 2008 taxation year.
[6] The respondent’s position is that the appellant is in the business of building and selling retirement residences at a profit and that consequently the Minister has correctly reassessed the appellant to include the sale of the Stonehaven Manor residence as income from a business.
…
[19] The corporate structure of the appellant is as follows:
− Mr. Réjean Lemay (Mr. Lemay) owns 30% of the outstanding shares of the appellant through a wholly-owned corporation 1323456 Ontario Inc.;
− The remaining shares of the appellant are owned directly or indirectly by Jacques Potvin (30%), Paul Cuerrier (30%) and Diane Thauvette (10%).
[20] The Minister reassessed the appellant for its 2008 taxation year relying on different assumptions of fact, namely, that Mr. Lemay was the controlling mind of the appellant and of other corporate entities involved in the building and selling of retirement residences and that the intention of Mr. Lemay and the other shareholders of the appellant was to build retirement residences and to sell them at a profit.
The 13 questions in dispute on this refusal motion all related to the activities and history of Mr. Lemay.
The Court concluded after a careful examination of the case law on discovery relating to third parties that Mr. Lemay’s business activities and history were properly the objects of the Crown’s inquiries:
[57] From these cases, it is clear that the taxpayer does not have to be the alter ego of the third party to be required to provide information from the third party.
[58] Therefore, since the decision of Crestbrook, the courts have required taxpayers to answer questions seeking third party information, if the information sought is relevant to the matter in litigation, defined by the pleadings and if it is in the interests of the administration of justice to do so.
[59] That said, the case law does recognize limits on what can be asked. As already mentioned, relevance is the principal limitation. Other limitations exist. Questions that are vague, hypothetical, broad, over-reaching, abusive, need not be answered. Nor need questions amounting to a fishing expedition be answered. Equally, questions need not be answered where responding would place undue hardship on the answering party.
Of the 13 disputed questions the taxpayer was ordered to answer 8; 3 were held to be irrelevant dealing with Mr. Lemay’s personal affairs, 1 was held to ask for a conclusion of law and 1 was held to be overly vague. Costs were ordered to follow the cause.