http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/142522/index.do
Teranet Inc. v. The Queen (February 12, 2016 – 2016 TCC 42, V. Miller J.).
Précis: The underlying issue in this appeal was the disallowance of a portion of interest charges arising after a 2006 reorganization of a predecessor corporation of the appellant. The Crown took the position that the appellant had either refused or was unable to provide information about the 2006 reorganization. It therefore applied for an orders to discover third parties from two accounting firms that were involved in the 2006 reorganization. The Court concluded that the Crown had met the threshold for third party discoveries and granted the orders sought. Costs were awarded to the Crown.
Decision: The background to this case, although it involved a great deal of money, was not complex:
[2] The circumstances which gave rise to this appeal are as follows. The Appellant’s primary business is the operation and maintenance of Ontario’s electronic land registration system. As a result of two amalgamations, the Appellant became the successor to the corporation whose activities and tax liabilities are the subject of this appeal. On June 16, 2006, the Appellant and other corporate entities were part of a corporate reorganization which resulted in a corporate/income trust structure (the “2006 Reorganization”). As a consequence of this reorganization, the Appellant became liable for two unsecured demand promissory notes issued to Teranet Holdings Limited Partnership (“THLP”), a non-arm’s length partnership in the Appellant’s corporate structure. THLP owned all of the issued and outstanding shares of the Appellant.
[3] The principal amounts of the promissory notes were $1.215 billion and $10 million; both notes bore an interest rate of 9.75% per annum with interest payable monthly. The Appellant claimed interest deductions on these notes during the taxation years ending December 31, 2006, December 31, 2007, November 10, 2008 and February 28, 2009. The Minister of National Revenue (the “Minister”) reassessed the Appellant in respect of these years and disallowed a portion of the interest expense which had been claimed on the basis that a reasonable interest rate would not be higher than 5.45% per annum.
[4] The questions to be answered on appeal are whether the interest rate was reasonable and whether the interest was incurred for the purpose of earning income.
The person put forward by the appellant at discovery was new to the company and not knowledgeable about the 2006 reorganization:
[7] The Appellant’s nominee for discovery was Gregory Pope who is the vice president and chief financial officer of the Appellant. At the time of his examination for discovery on June 8, 2015, he had been employed with the Appellant for five years, always in this position. He testified that he informed himself of the matters raised in the pleadings by reading a number of documents considered pertinent to this appeal. Although he was not employed by the Appellant at the time of the 2006 Reorganization, he did not speak to anyone who had been involved with the 2006 Reorganization. According to Mr. Pope, there is no one remaining at the Appellant who was involved in the restructuring.
[8] I have read the transcript of Mr. Pope’s discovery evidence and it was readily apparent that he was not well informed. He could not answer the majority of the questions asked by counsel for the Respondent which resulted in 52 undertakings being given during his examination for discovery. It is my opinion that Mr. Pope did not prepare himself for the examination on discovery as is required by subsection 95(2) of the [ Tax Court of Canada Rules (General Procedure) (the “Rules”)].
As a result the Crown sought to examine persons from Deloitte and E&Y knowledgeable about the 2006 reorganization.
The Court held that the Crown had met the requirements for third party discovery found in section 99 of the Rules:
[47] It is my view that the Respondent has satisfied both conditions in paragraph 99(2)(a) of the Rules; that is, she was unable to obtain the information from the Appellant, EY or Deloitte.
(b) Unfairness to the Respondent to Proceed to Trial Without Examining the Third Party
[48] The Appellant argued that there is no unfairness to the Respondent if she is not allowed to examine third parties because the CRA is very familiar with income fund structures. Counsel also stated that the Respondent should not be permitted to discover someone from EY because EY’s involvement with respect to the interest rate and its interaction with the Appellant are irrelevant from a valuation perspective.
[49] The Respondent stated at the hearing of the motion, that should she be required to proceed to trial without having the opportunity to examine either EY or Deloitte, she would not be aware of the documents in their possession. As the Appellant has advised that few documents remain in its possession, proceeding to trial, without examining the non-parties, would likely result in a request for an adjournment to review the documents of EY and Deloitte.
[50] It is my view that, to the extent that the Respondent needs information from the third parties to litigate this case, it should have access to that information before trial: Sackman (supra) at paragraph 19.
(c) Unduly Delay the Hearing; Unreasonable Costs to the Other Parties; and Unfairness to the Third Parties
[51] The Respondent stated that if the Motions are granted, the trial will not be unduly delayed. The Respondent indicated that she would be able to proceed to trial in late May or early June as requested by the Appellant. The examinations for discovery of the third parties would be limited to one day for each party.
[52] At the motion, counsel for EY and counsel for Deloitte requested that they be reimbursed for costs in the event that the motion is granted. The Respondent indicated that she was prepared to cover reasonable costs to EY and Deloitte.
[53] Neither of the third parties nor the Appellant indicated that the examinations for discovery of EY and Deloitte would cause unfairness.
Conclusion
[54] For these reasons, I allow the Respondent’s motions. I will issue an order granting the Respondent leave to examine a third party from EY, namely Brian Allard and a knowledgeable nominee from Deloitte as a third party so that the Respondent can obtain answers to its questions. Both EY and Deloitte will produce documents in its control which are relevant to the issues in this appeal. These documents are to be given to the Respondent prior to the examination for discovery.
[Footnote omitted]
Costs were awarded to the Crown on both motions.