In a previous blog (click here) we wrote about the case of CBS Canada Holdings Co. v. The Queen (2016 TCC 85), and the limitations that decision placed on a lawyer acting as an advocate. In particular, the Tax Court of Canada (the "TCC") held that the law firm representing CBS had sworn an affidavit on a controversial issue, and in doing so had crossed the line between being an advocate for the client and inappropriately become involved in the facts of the case as a witness.

As we noted at the time, the decision was appealed to the Federal Court of Appeal (the "FCA"). The FCA has now issued its decision (2017 FCA 65), completely exonerating the lawyers for CBS!

Briefly on the facts, CBS Canada and the Canada Revenue Agency (the "CRA") had entered into a settlement agreement wherein the CRA agreed that it would allow certain loss carry-forwards to CBS. Shortly thereafter the CRA advised that CBS actually didn't have any non-capital losses to carry-forward, so it could not carry out the settlement.

CBS brought a motion seeing to enforce the settlement, and included a sworn affidavit by one of the lawyers at its Canadian law firm that set out the chronology of the settlement and attached the relevant documents. The CRA cross-examined the lawyer on the affidavit seeking answers to questions about the origin of the non-capital losses described in the documents. The lawyer for CBS did not provide satisfactory answers, and claimed privilege as a reason to refuse some questions altogether. CRA brought a motion to strike the affidavit as being improper.

As noted briefly above, the TCC struck the affidavit (but allowed them leave to file another), taking the position that the Affidavit was inadmissible because it contained hearsay as it had been sworn by a lawyer, rather than someone with firsthand knowledge of the controversial facts. In the process the TCC criticized the lawyer for CBS for swearing an affidavit on such a controversial issue, and suggested it might have been a breach of the Rules of Professional Conduct.

The FCA saw this case very differently.

The FCA said the TCC had committed a significant error in concluding that the affidavit was hearsay. While hearsay is complicated enough to have entire textbooks dedicated to the subject, the basic issue was the purpose of the affidavit: If the affidavit was being introduced to merely prove that the documents were exchanged, then it would not be hearsay; if the affidavit was being introduced to prove the contents of the documents were true, then it would be hearsay. The FCA held that based on the wording of the affidavit it was clearly simply relating the chronology and facts of the settlement, and made no claims that the contents of the documents were accurate.

Since the affidavit was merely relating the accepted facts of the chronology of the settlement, it was not hearsay, and there was also nothing inappropriate about a lawyer for CBS swearing the affidavit. Similarly the CRA's questions ought to have been limited to the uncontroversial chronology issues, and not on the controversial accuracy of the underlying documents.

The FCA then took a moment to consider and clarify some of the TCC's comments regarding when lawyers should be permitted to swear affidavits. The TCC had suggested that it would be inappropriate for any lawyer at a law firm swear an affidavit, because the same law firm could then be acting both as a representative of the client, and a witness in the matter. The FCA drew a distinction between "counsel" and other lawyers who work at the same law firm. While "counsel" (i.e. the lawyer who speaks in court for the clients) should not become a witness in the matter by swearing an affidavit, other lawyers who work at the same firm do not have the same restriction. Accordingly other lawyers at the same firm should generally be permitted to swear affidavits and otherwise act as witnesses.

In the end, the FCA concluded that the TCC's entire analysis was flawed because of the ripple effect caused by one incorrect assumption of the purpose of the affidavit. The FCA also took the unusual step of noting that the TCC's comments were an "unfortunate slight upon a lawyer's professional reputation". The FCA's decision is therefore a complete vindication for the lawyer for CBS and the approach they took to the case.

With this preliminary hurdle behind them, the parties can now get down to the substantive matter at hand and determine whether CBS can force the CRA to abide by their Settlement Agreement.

A version of this article appeared in the May 2017 issue of Canadian Tax Highlights.