Sim v The King: Examining Non-Parties in Tax Court Proceedings
Individuals involved with closely held private corporations, whether as directors, former directors, or employees, may find themselves called upon to be examined by the CRA or at Tax Court. Motions at the Tax Court of Canada under sections 99 and 86 illustrate the complexities that can arise when non-parties—those not directly involved in the litigation—are required to provide crucial information. The case of Sim v. The King, 2025 TCC 22, highlights how the proximity of such individuals to a corporation and their knowledge of key transactions can lead the CRA to call non-parties for examinations.
In this case, the Respondent filed a motion under Section 99 of the Tax Court of Canada Rules (General Procedure), requesting an order for Robert Sim, the father of Appellants, Curtis and Shawn Sim, to attend an examination for discovery. Rule 99 allows for the examination of non-parties under specific circumstances when they possess information relevant to the issues at hand. The court reiterated that Rule 99 provides an extraordinary remedy that should be applied sparingly and only where there is strict compliance with the laid-out criteria.
Relevant Facts of the Case
At the heart of the case were two closely held private corporations, Curtis Co. and Shawn Co., owned by Curtis and Shawn Sim, respectively. These companies were alleged to have been involved in trading shares of a U.S.-based private company, Manchester Inc., between 2004 and 2006.
The Respondent argued that Robert Sim had firsthand knowledge of these transactions, making his testimony crucial. Curtis and Shawn Sim, during their examinations for discovery in October 2023, stated that they lacked detailed knowledge of these dealings and referenced the roles played by their father. As a result, the Respondent sought to compel Robert Sim to attend an examination for discovery, believing his testimony would contain probative evidence on the material issues in the case.
The Court’s Reasoning & The Importance of Relevant Questions
The court’s decision to grant the Respondent’s motion hinged on several factors, including the relevance of the questions posed to Mr. Sim and the availability of information from other sources. Under Section 99(1) of the Tax Court of Canada Rules, the Respondent argued that Mr. Sim’s knowledge of the transactions in question were vital to the case, particularly because Curtis and Shawn had indicated during their own examinations that they were unaware of key details.
The court’s review focused on the string of question to determine their relevancy. This analysis is designed to safeguard against parties conducting a “fishing expedition.”. The Respondent sought to explore how Curtis Co. and Shawn Co. dealt with their respective shares of Manchester Inc. This included inquiries about the decision-making process behind the stock trades, the role Mr. Sim played in facilitating or overseeing these transactions, and whether there were any tax implications that had been overlooked by the companies and their shareholders.
Referencing the 2012 case Allan McLarty v. The Queen (2012 TCC 79), the court emphasized that for an examination to be warranted, the moving party must clearly outline the relevance of the questions being asked. The court noted that a line of questioning that is overly broad or speculative could be dismissed as a fishing expedition—an attempt to gather information without a clear connection to the material issues in the case.
In this case, the court determined that the Respondent had adequately demonstrated that the questions regarding how Curtis Co. and Shawn Co. managed their shares of Manchester Inc. were directly related to the material issues at hand, specifically the potential tax liabilities of the companies and their shareholders. The court acknowledged that such questions were highly relevant to determining the amount of income that could be attributed to the Appellants, and was therefore probative.
Conclusion: The Role of Non-Parties in Closely Held Corporations
This case serves as a critical reminder for those involved with closely held private corporations. Proximity to key individuals who have firsthand knowledge of corporate transactions can play a significant role in Tax Court proceedings. It’s important to recognize that individuals outside the direct scope of the litigation—such as family members or business associates—may still be compelled to provide testimony if their knowledge is deemed essential to resolving material issues. While non-party examinations remain an extraordinary remedy, this decision may pave the way for more robust fact-finding in future tax appeals, shaping the landscape of Canadian tax litigation for years to come.
***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 this article. If you have specific legal questions, you should consult a lawyer.
Michelle Kosarnia
