Mould v. R. – TCC: Crown allowed to conduct discovery of a third party in a tax promotion appeal

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Mould v. The Queen[1] (January 16, 2014) involved a request by the Crown to conduct an examination for discovery of a third party involved in the transactions at issue in a tax appeal that involved a form of tax promotion:

[1]             These are notices of motion by the respondent for: (1) an order granting leave to the respondent to examine for discovery a non‑party, namely Advantex Marketing International Inc. (“Advantex”) through a knowledgeable nominee of Advantex pursuant to subsection 99(1) of the Tax Court of Canada Rules (General Procedure) (“Rules”); and (2) for directions as to the conduct of the discovery under subsection 99(1) of the Rules, in particular:

(a)     a direction that the discovery be conducted under oath or solemn affirmation;

(b)     a direction that the scope of the discovery will be governed by section 95 of the Rules;

(c)      a direction that Advantex may be required to give undertakings to seek and to provide additional information and documents;

(d)     a direction that the transcript of the examination may be used at trial to impeach the testimony of the nominee of Advantex, if required;

(e)      directions that the respondent may be entitled to recover the costs of the examination for discovery from the appellants, at the discretion of the trial judge;

(f)      costs if the motion is opposed.

[2]             Advantex is a non‑party to the appellants’ tax appeals but was a party to the transactions that led to the assessments of tax in issue.

[3]             The respondent states that in 2003, Advantex, its subsidiary, Advantex Dining Corporation (“Advantex Dining”) and certain other subsidiaries purportedly entered into transactions by which property described as the Support Division Business of Advantex Dining was sold to Advantex Systems Limited Partnership for $12,000,000. The respondent alleges that the transactions in issue involve a tiered limited partnership structure. The appellants subscribed for limited partnership units in Madison Grant Limited Partnership (“MGLP”). MGLP, in turn, apparently subscribed for limited partnership units in the Operating Limited Partnership (“Operating LP”). The so‑called Support Division Business was classified as Class 12 property (software) for capital cost allowance (“CCA”) purposes and CCA claimed by the Operating LP in the fiscal periods ending December 31, 2003 and 2004 resulted in substantial limited partnership losses being allocated to MGLP. In turn, MGLP allocated limited partnership losses to the appellants which were claimed in the 2003 and 2004 taxation years. The transactions were unwound in 2005 when Advantex exercised an option to acquire the limited partnership units of the Operating LP held by MGLP. The promoter of the venture was Madison Grant Fund Inc. III (“MGFIII”).

Put simply, the appellant was unable to answer most questions with respect to third parties and Advantex refused to do so in the absence of a court  order:

[39]        The undertakings that concern non‑parties were given in the examinations of Messrs. Mould and Pickford. The undertakings were later summarized by Mr. Davies and the summary was produced with the appellants’ responses to undertakings on January 31, 2012.

[40]        The responses to undertakings were accompanied with a letter from Mr. Davies to Mr. Carvalho dated January 31, 2012; Mr. Davies informed Mr. Carvalho that:

… the Appellants have complied with their duties and have asked all questions of third parties required by the undertakings. However, the response at this stage has been minimal.

In furtherance of the Appellants’ ongoing disclosure obligations, when we receive additional documents from third parties in response to the undertakings, we will forward them to you as soon as practicable. In the event that Peter Charlton, Madison Grant, and/or Advantex state that they will no longer provide any further information or documents, we will let you know of the same.

[41]        In a further letter, dated May 15, 2012, Mr. Davies advised that:

1.         The Appellants were obligated by the undertakings given on discovery to pose certain questions to Advantex. Those questions were put to a representative of Advantex. The Advantex representative responded to counsel by email indicating that Advantex is unwilling, for a variety of reasons, to provide any substantive information in response to the queries posed. Indeed, no substantive responses have been received to date from Advantex.

2.         The Appellants were also obligated by the undertakings given on discovery to pose certain questions to Madison Grant and to Peter Charlton. I understand that Peter Charlton is the controlling shareholder, if not the sole shareholder, of Madison Grant. The questions were asked of Mr. Charlton (both with respect to the information requested of him personally and of Madison Grant). Mr. Charlton has responded and advises that he is in poor health and that he has been advised by his medical doctor not to work. Mr. Charlton has offered to provide the names of other individuals who may have access to the information requested. We are awaiting those other names and intend to pursue this further.

[42]        The respondent initially proposed to conduct further follow‑up examinations. But by letter to Mr. Davies dated June 11, 2012, Mr. Carvalho proposed that the follow‑up be done in writing. Mr. Davies agreed by letter dated June 22, 2012 to conduct further discoveries in writing.

[43]        By letter dated June 25, 2012 to Mr. Davies, Mr. Carvalho forwarded additional questions as part of the appellants’ undertakings. One of the questions asked was with respect to efforts made by the appellants to get answers and information from Advantex. Mr. Davies’ answer on December 21, 2012 follows:

Counsel for the appellants sent several emails to a representative of Advantex in and around November or December of 2011 with copies of the requisite inquiries that the Appellants undertook to make of Advantex. Counsel for the Appellants also participated in various phone calls and other communications with that representative with respect to those inquiries.

[44]        Later, on March 4, 2013, Mr. Carvalho wrote directly to Advantex asking if it would cooperate and respond to the respondent’s questions and requests. On March 8, 2013, Mr. Carvalho spoke by telephone to Mr. Dominic Belley, Advantex’s counsel, who, during the telephone conversation, informed Mr. Carvalho, as described in Mr. Carvalho’s letter to Mr. Belley of the same date, that “Advantex and its related subsidiaries refuse to answer any questions in the absence of a court order compelling them to do so.”

The court concluded that fairness required that the Crown should be entitled to the order sought:

[47]        It would be unfair to the respondent to proceed to trial without having the opportunity to have the undertakings of the appellants satisfied. The undertakings are germane to their case. And, based on normal maintenance of business records at least, the answers to the undertakings are or ought to be, within the knowledge of Advantex.

[48]        I am satisfied that the examination of Advantex will not unduly delay the commencement of the hearing of these appeals nor entail unreasonable expense for any party nor will the examination of Advantex result in unfairness to it.

[49]        There will be no costs against the appellants with respect to this motion. Counsel for Advantex asked that his client be reimbursed for out of pocket expenses, including salary to employee, photocopies, travel, etc. required to answer the undertakings, as well as costs to assist counsel to prepare the nominee of Advantex for the examination for discovery, the examination itself and to satisfy any undertakings on the examination. I will consider the question of costs after completion of the examination for discovery of the nominee and after considering submissions by counsel in respect of costs.

[1] 2014 TCC 21.