A common step in the Tax Court of Canada litigation process is the Examination for Discovery (“Discovery”).  A Discovery is where each side (the taxpayer and the Canada Revenue Agency or “CRA”) will have the opportunity to examine witnesses from the other side, under oath.  This is typically done with the assistance of a tax lawyer, and affords each side the opportunity to ask questions and request documents relevant to the issues in the tax appeal.  The Witnesses are under oath and must answer questions truthfully, with the Discovery recorded, and transcripts produced after-ward.

The purpose of Discoveries are to allow the parties to a dispute to know the case that they have to meet should an action proceed to trial, to know the facts relied upon by the other parties to the dispute, to narrow or eliminate issues, and to avoid “trial by ambush”.

The scope of Discovery is determined in regards to the issues outlined by the parties in their Tax Court documents (the “Notice of Appeal” for a taxpayer, and a “Reply” for the CRA).  As a general rule a party must answer any relevant question and the threshold for “relevancy” is very low (i.e., almost everything goes in a Discovery).  Where a party refuses to answer a question, it must disclose the reason for doing so.

A practice has developed in the Tax Court of Canada where instead of refusing to answer a question, the lawyer for the witness will indicate that the question is “taken under advisement”.   That ends up being a fancy was of saying that a party needs sometime to decide whether to answer or refuse a question, and will do so when providing final answers to any follow-ups required to the Discovery process. 

In the recent Tax Court case called Burlington Resources Finance Company v. The Queen, 2017 TCC 144 (Burlington Resources), the CRA brought a motion effectively asking for a new Discovery, because of the sheer number of questions that were refused,  only partially answered, or taken under-advisement.  (In the initial Discovery, the tax appellant took 1700 out of a total 4,122 questions “under advisement”).

On the motion, the Department of Justice Counsel argued on behalf of the CRA, and submitted that the reason that the tax appellant took so many questions under advisement was to circumvent subsection 107(1) of the Tax Court Rules which requires a party to provide reasons for refusing a question.  This in effect deprived the Crown of the opportunity to reformulate, reframe or narrow a question in response to a proper refusal (i.e. if a question was refused for being too broad or not clear).

The Tax Court judge agreed and ordered the tax appellant to re-attend an Examination for Discovery at its own expense, to answer many of the questions that it had refused, taken under advisement, or only partly answered.  The Tax Court indicated that “the practice of using the quasi-objection ‘under advisement’ needs to stop” because this is not a response contemplated by section 107 of the rules which says that a party being examined on discovery must either answer the question, refuse to answer with an explanation for the basis of the refusal, or provide an undertaking if he or she does not know the answer.

The Tax Court indicated that taking questions “under advisement” was simply being used as a tactic to gain time to reflect on what basis a question will ultimately be refused, without having to explain at the time of discovery, why such question was refused. Since this action deprives the questioning party from asking the question or the opportunity to rephrase the question, the Court found that this taking a question under advisement really amounted to a “refusal”.

While this case many only be of interest to tax litigators involved in tax disputes and tax appeals in the Tax Court of Canada, it does show the importance of being prepared for the tax litigation process, and being fully prepared with any reasons for any refusals during the Discovery process. 

Failure to do so may result in an order like the one issued in Burlington, requiring re-attendance on Discovery, and additional unnecessary cost to the taxpayer.

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