Implied Undertakings in the Tax Court of Canada
An undertaking is a legally binding promise to do or provide something, or to refrain from doing something or providing something. Undertakings can exist in different forms depending on the context. For example, the seller in a real estate transaction may agree to an undertaking to produce certain documents related to the property. Alternatively, in criminal cases, bail is a form of undertaking where the accused is released under the promise to appear in court when required. For this article, we will be discussing undertakings in the context of Tax Court proceedings and appeals.
Examination for Discovery
Examination for Discovery is an official court proceeding where each party may examine the opposing side under oath. The process can take the form of Oral Discovery, where parties are examined in person; or it can take the form of Written Discovery, where parties are examined through written requests. Discovery facilitates the exchange of information before trial, thus ensuring the litigation process remains fair and efficient.
What is the Implied Undertaking Rule?
The Implied Undertaking Rule limits each party’s right to use the information obtained through the Examination for Discovery process, with some exceptions. The rule prohibits each party from using information obtained through discovery for any other purpose or in any other context other than the specific proceeding. The rule is critical to ensure fairness in the litigation process by protecting the privacy interests of the litigants, and in turn, encourage a complete and truthful Discovery process.
The Implied Undertaking Rule is set out in Juman v. Doucette (2008 SCC 8). The rule has a broad scope: it applies to all documentary and oral information obtained during discovery. Parties are not allowed to use the information except for that litigation, with certain exceptions.
However, according to Juman, a court may exercise its discretion to relieve a party from an undertaking under certain conditions. The Court decide whether, on a balance of probabilities, the public interest in permitting the disclosure outweighs the privacy interests of the party and the goal of promoting efficiency in the court system.
In the context of Tax proceedings, one important factor to consider when balancing public and private interests is whether the parties and issues are similar to another action. In Juman, the Supreme Court of Canada found that there is virtually no prejudice to the discovered party, and leave will generally be granted where the discovery material in one action is sought to be used in another action with similar parties and similar issues.
What are the Consequences of Breaching the Implied Undertaking Rule?
The consequences of breaching an implied undertaking can vary depending on the context. These consequences can range from a stay of proceedings, substantial costs awards, or contempt proceedings. However, in other cases, it may not result in a remedy at all.
Fio Corporation v. The Queen (2014 TCC 58) is an example of a particular costly consequence of breaching the Implied Undertaking Rule. In this case, the Taxpayer brought a motion to direct the Minister of National Revenue (the “MNR”) and the Attorney General of Canada (the “AGC”) to pay $100,000 as “punishment for her/their contempt of [the Tax Court of Canada]” and costs on a full indemnity basis for breach of the Implied Undertaking Rule.
In Fio, the Taxpayer filed a Notice of Appeal to the Tax Court of Canada in response to a reassessment by the MNR and provided the MNR with the Notice of Appeal along with several supporting documents. The Taxpayer made it clear in a letter to the MNR that the supporting documents were provided to minimize time and costs and to reach a settlement. However, the MNR reassessed the Taxpayer using the supporting documents for tax years beyond the scope of the original appeal.
The Tax Court of Canada held that an implied undertaking exists the moment a taxpayer provides discovery documents to the MNR and AGC. This implied undertaking prohibits the MNR and AGC from using the documents for purposes outside of the appeal. Furthermore, the court found the use of the material without leave constitutes an abuse of process, which was also deliberate.
In the end, the Court awarded substantial costs of $25,000 to the appellant against the MNR for breach of the implied undertaking rule. Furthermore, the Court ordered the documents not to be used by the MNR for additional reassessments.
Due to the nature and scope of the implied undertaking rule and the potential remedies available for a breach, litigants should be mindful of how they handle discovery documents and the potential implications from the implied undertaking rule.
If you are having trouble with an appeal to the Tax Court of Canada, contact us today to schedule an appointment with our team of experts at R&A Tax Law.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.
Jason Rosen