Huron Steel Fabricators (London) Limited
(Plaintiff)
v.
Minister of National Revenue (Defendant)
and
Herman Fratschko (Plaintiff)
v.
Minister of National Revenue (Defendant)
Trial Division, Heald J.—Toronto, September
25; Ottawa, October 2, 1972.
Evidence—Income tax—Privilege from disclosure—Cer-
tificate of Minister that public interest precludes production
of income tax returns of non-litigant—Federal Court Act, s.
41(1).
The Minister of National Revenue assessed the Huron
Steel Co. and Fratschko, its controlling shareholder, to
income tax for certain years, alleging that certain agree
ments to which the Huron Steel Co., Fratschko and Pelon
were party were a sham, that money purporting to be paid
thereunder by the Huron Steel Co. to the Pelon Holdings
Limited for consulting services were in fact a payment by
Fratschko to Peckham for the latter's shares in the Huron
Steel Co., that the Pelon Holdings Limited rendered no
consulting services to the Huron Steel Co., and that Peck-
ham was the beneficial owner of all the shares in the Pelon
Holdings Limited at all relevant times. The Huron Steel Co.
and Fratschko appealed the assessments. On examination
for discovery it was admitted for the Minister that his
allegations were based on the Pelon Holdings Limited
income tax returns for the relevant years, but the Minister,
relying on section 41(1) of the Federal Court Act, refused to
produce those returns at plaintiffs' demand on the ground
that completeness and accuracy of income tax information
would be prejudiced if he was required to produce the
income tax returns of non-litigants. The Court examined the
income tax returns in question and found that they con
tained nothing which could adversely affect any public
interest.
Held, plaintiffs were entitled to production of the income
tax returns in question. The public interest in the adminis
tration of justice far outweighs in importance any public
interest that might be protected by upholding the claim of
privilege for a whole class.
Regina v. Snider [1954] S.C.R. 479, applied.
APPLICATION.
J. A. Giffen, Q.C. for plaintiffs.
E. A. Bowie for defendant.
HEALD J.—This is an application by notice of
motion for an order directing and requiring the
defendant in both of the above styled actions to
produce and show to counsel for the plaintiffs
the income tax returns for the fiscal years
ending in 1964, 1965 and 1966 of an Ontario
Corporation known as Pelon Holdings Limited
(hereafter Pelon).
These actions are tax appeals involving the
1965, 1966, 1967 and 1968 assessments of
Huron Steel Fabricators (London) Limited
(hereafter Huron Steel) and the 1965, 1966 and
1967 assessments of Herman Fratschko (here-
after Fratschko).
The notice of appeal, statement of defence
and lists of documents have been exchanged
and examinations for discovery of Fratschko,
of Huron Steel's representative and of one
Sterling Adams (hereafter Adams) one of the
Minister's assessors, were held in July of this
year. It was the refusal of defendant's counsel
to produce the aforementioned income tax
returns of Pelon on the examination of Adams
that has resulted in the bringing of this motion
by the plaintiffs. In its notices of appeal, the
plaintiffs allege the following facts:
On or about January 28, 1965, Huron Steel
entered into a written agreement with Pelon
whereby Pelon agreed to provide Huron Steel
with certain consulting services. The term of
the agreement was 260 weeks from February 5,
1965. Pursuant to the agreement, Huron Steel
paid Pelon $4,800 in 1965, $5,300 in 1966,
$5,200 in 1967 and $5,200 in 1968. On or about
the same date, Fratschko entered into a written
agreement with one Leslie Peckham (hereafter
Peckham) whereby Fratschko agreed to loan
Peckham $5,000 and Peckham agreed to put up
his 25% common share interest in Huron Steel
as collateral. Peckham defaulted under this
agreement and the 25% common share interest
so hypothecated by him was transferred to
Fratschko on or about April 6, 1965.
Prior to January 29, 1965, one Joseph Toth
(hereafter Toth) owned 371% of the common
share interest of Huron Steel. As stated above,
Peckham owned 25% at that time and the
remaining 371% was owned by Fratschko.
Fratschko purchased Toth's 371% interest on
or about January 29, 1965.
At issue in these appeals is the validity of the
above described agreements and the payments
alleged to have been made thereunder. In
effect, the defendant alleges that the agreement
between Huron Steel and Pelon and the agree
ment between Fratschko and Peckham are a
sham and a subterfuge. The Minister says that
Peckham and Fratschko entered into a course
of conduct whereby Fratschko acquired Toth's
shares and then acquired Peckham's shares by
virtue of the above two agreements which the
Minister says should be read together. The Min
ister says that the monies paid under the Pelon
and Huron Steel agreement are in effect a pay
ment by Fratschko to Peckham for his 25%
common share interest in Huron Steel, which
had been hypothecated as security by Peckham
for the $5,000 loan he received from Fratschko.
In both actions, the defendant in his state
ment of defence makes certain allegations with
respect to Pelon. In the Huron Steel action,
paragraph 2(c) of the statement of facts reads
as follows:
2. He does not admit paragraph 2 of the Notice of
Appeal and says that the facts which he alleges in support
of the assessments are as follows:
(c) One Leslie E. Peckham (hereinafter referred to as
"Peckham"), for some time prior to the 6th of April, 1965
was a shareholder and Director of the Plaintiff, and at all
relevant times owned beneficially the shares of Pelon
Holdings Limited (hereinafter referred to as "Pelon").
Paragraph 2(c) of the statement of defence in
the Fratschko action is substantially the same.
At the examination for discovery of Adams,
the Minister's assessor and representative,
plaintiff's counsel sought to question Adams on
the various assumptions of fact made by the
Minister in support of the subject assessments.
The pertinent questions and answers relating to
paragraph 2(c) of the statement of defence read
as follows:
48. Q. And then in paragraph (2) (c) you say that one
Leslie E. Peckham hereinafter referred to as Peck-
ham was some time prior to the 6th of April, 1965,
was a shareholder and director of the Plaintiff and
at all relevant times owned beneficially the shares
of Pelon Holdings Limited. Now let's just break
that in two. You say for some time. You mean
from the time of incorporation?
A. That's right.
49. Q. And that the Minister refers in the fourth line to
relevant times. What are the relevant times?
A. Let's put it I can't state authoritatively but from
the knowledge that I have is that he was at least a
shareholder for '63, '64 and '65 in Pelon Holdings.
50. Q. Well this is Director of Huron Steel?
A. You asked me about Pelon Holdings.
51. Q. Well how do you know that, that he owned benefi
cially the shares of Pelon Holdings?
A. Well from the return of the company Pelon
Holdings.
52. Q. Any other source of information?
A. No, there was no other source that could • be
located.
53. Q. So that there is no other evidence you rely on in
support of this allegation other than what you have
now told me?
A. That's right.
57. Q. Going back to (2) (c) do you have the tax returns
of Pelon Holdings Limited?
A. They are in the possession of the Department.
They are right here yes.
58. Q. They are in the possession of the Department?
A. That's right.
59. Q. Will you produce them?
A. No.
MR. RIP:
No we can't produce those.
MR. GRIFFEN [sic]:
60. Q. I want the record to show that I am requesting
their production. I believe I am entitled to them
under Section 133.
A. I think the Judge at the last Appeal Court made
that clear.
MR. RIP:
No, this is different.
A. I know but he said—
MR. RIP:
Just a moment.
MR. GRIFFEN:
61. Q. I have taken the position that they are producable
and should be produced under Section 133 of the
former Act under Section 241 of the present Act
and all of the cases decided thereunder and I am
demanding their production now.
MR. RIP:
A. They will not be produced at this time.
MR. GRIFFEN:
62. Q. They won't be produced without a Court order?
MR. RIP:
A. That's right.
MR. GRIFFEN:
63. Q. Will they be produced with the consent of Mr.
Peckham in writing?
A. I think not.
MR. RIP:
A. Well just a minute. I will say no for the moment.
The other allegation in the statements of
defence relative to the income tax returns of
Pelon is contained in paragraph 3(a) of the
statement of defence and reads as follows:
3. In further support of the assessments, the defendant
states that:
(a) Pelon provided no services of any kind or description
to the Plaintiff in the years 1965, 1966, 1967 and 1968
and in fact was an inactive corporation in the years 1966,
1967 and 1968, and therefore the Plaintiff did not pay
and Pelon did not receive any amount of money on
account of services.
Paragraph 3(a) of the statement of defence in
the Fratschko action contains the same
allegation.
At the examination for discovery of Adams,
plaintiff's counsel questioned him concerning
this allegation on Pages 42 to 46 inclusive of the
transcript covering questions and answers 381
to 417 inclusive. It is clear from the answers to
these questions that for the purposes of the
allegations of fact in paragraph 3(a) of the state
ment of defence, the defendant is relying in
whole or in part on the Pelon income tax
returns which he again refused to produce after
being requested to do so by plaintiff's counsel.
The defendant bases his right to refuse to
disclose the said income tax returns on the
provisions of section 41(1) of the Federal Court
Act which reads as follows:
41. (1) Subject to the provisions of any other Act and to
subsection (2), when a Minister of the Crown certifies to
any court by affidavit that a document belongs to a class or
contains information which on grounds of a public interest
specified in the affidavit should be withheld from produc
tion and discovery, the court may examine the document
and order its production and discovery to the parties, sub
ject to such restrictions or conditions as it deems appropri
ate, if it concludes in the circumstances of the case that the
public interest in the proper administration of justice out
weighs in importance the public interest specified in the
affidavit.
Pursuant to the provisions of said section
41(1) an affidavit of Elgin Armstrong, Deputy
Minister, Taxation, of the Department of
National Revenue was filed. The pertinent por
tions of said affidavit read as follows:
4. I have carefully examined the returns of income filed
by Pelon Holdings Limited for its 1964, 1965 and 1966
taxation years, and each return of income comprises the
corporate income tax return prescribed by the Defendant
together with a balance sheet and operating statement for
Pelon Holdings Limited.
5. I am of opinion that the completeness and the accura
cy of the information which a taxpayer is required by law to
disclose in his return of income would be prejudiced if the
Defendant was required on an examination for discovery or
by way or production or inspection of documents to pro
duce or disclose returns of income and attached financial
statements of persons who were not parties to the litigation.
6. I am of opinion that the practice of the Defendant in
refusing to make production on an examination for discov
ery of the returns of income filed by persons who are not
parties to the litigation is essential to the proper administra
tion of the Income Tax Act and for the protection of the
revenue.
7. On the grounds of the public interest set forth in the
previous two paragraphs, I am of opinion that the returns
and attached financial statements of Pelon Holdings Limit
ed filed with the Defendant for its 1964, 1965 and 1966
taxation years are documents which belong to a class and
which contain information which should be withheld from
production and discovery.
Following the rationale contained in the judg
ment of my brother Gibson J. in the case of
Churchill Falls (Labrador) Corporation Limited
v. The Queen (File No. T-1414-71 Judgment
dated June 22, 1972), I decided to exercise the
authority given to the Court under said section
41(1) of the Federal Court Act to examine the
said income tax returns. Accordingly, the said
documents were deposited with the Court in a
sealed envelope and they have now been exam
ined by me.
In my opinion, there is nothing in these par
ticular documents which could conceivably
affect adversely any public interest nor did
defendant's counsel make any such submission.
As I understand his submission, it was to the
effect that the whole of the class of documents,
that is to say, all income tax returns of persons
who are not parties to a particular litigation,
should be protected for the reasons stated in the
affidavit notwithstanding that no harm to any
public interest will be caused by disclosure of
the particular documents in a particular case.
The confidentiality of income tax returns was
discussed in detail in the Supreme Court case of
Regina v. Snider [1954] S.C.R. 479. At page
483, Mr. Justice Rand said:
... The disclosure of a person's return of income for
taxation purposes is no more a matter of confidence or
secrecy than that, say, of his real property which for gener
ations has been publicly disclosed in assessment rolls. It is
in the same category as any other fact in his life and the
production in court of its details obtained from his books or
any other source is an everyday occurrence. The ban
against departmental disclosure is merely a concession to
the inbred tendency to keep one's private affairs to one's
self. Now that, in this competitive society, is a natural and
unobjectionable tendency but it has never before been
elevated to such a plane of paramount concern. The most
confidential and sensitive private matters are daily made the
subject of revelation before judicial tribunals and it scarcely
seems necessary to remark on the relative insignificance to
any legal or social policy of such a fact as the income a man
has been able to produce. I should say, therefore, that the
only privilege furnished is that given by the statute and that
it is a privilege for the benefit of the individual and not the
Crown.
And at page 488, Kellock J. concurred in by
Kerwin, Taschereau and Fauteux JJ. (as they
then were) said:
In considering the proper answers to be given to the
questions asked, it is pertinent to consider whether, in the
legislation itself, Parliament has indicated whether or not
any secrecy, from the standpoint of the state, is to attach to
documents of this class. The situation will sufficiently
appear if I refer only to the provisions of the Income Tax
Act (1948) l l-12 Geo. VI, c. 52.
By s. 82(2), which deals with appeals by a taxpayer to the
Income Tax Appeal Board from the decision of the Minis
ter, it is not the Crown but the appellant who is given the
right to require a hearing in camera. The present form of the
section emphasizes the intention of Parliament in that the
right formerly given by the previous s. 68 to the Crown to
require the hearing to be in camera, no longer exists. It
would seem difficult to contend in the light of this legisla
tion that any state secrecy was intended by Parliament to
surround the class of document herein in question. S.93,
which deals with appeals to the Exchequer Court, is similar
to s.82(2). These provisions, in my view, indicate that any
secrecy which is in contemplation of the statute is for the
benefit of the taxpayer only.
I might add, parenthetically, that in the
present statute, (the Income Tax Act) the only
references to secrecy and confidentiality are
contained in section 179 (which gives the tax
payer (italics mine) a right to request that the
proceedings before the Tax Review Board and
the Federal Court be held in camera), and sec
tion 241 which deals with communication of
information. Section 241 has no application to
the situation here because subsection (3) there
of exempts the provisions of subsections (1)
and (2) from income tax proceedings such as
this. Subsections (1) and (2) are the provisions
dealing with confidentiality.
I accordingly have the opinion that the above
quoted remarks of Kellock J. apply with equal
force to the case at bar.
Again, Mr. Justice Estey had this to say at
page 493 of the Snider case:
We, are here concerned only with documents and informa
tion associated therewith filed pursuant to the requirements
of the above-named statutes. Issues are constantly being
tried before our courts relative to the liability of the taxpay
er as well as prosecutions for the failure to perform duties
imposed by these statutes. Accordingly, such documents
and information in relation thereto have been repeatedly
before the courts without any suggestion that the public
safety or security has been at all imperilled; nor does there
appear to be any reason in principle why these documents
and information in relation thereto should, under ordinary
circumstances, not be disclosed. It must follow that as a
class these documents, in the ordinary course, do not
involve questions of safety or security and as such their
production would not be prevented upon the basis of public
interest.
In my opinion, in the present case, the public
interest in the proper administration of justice
far outweighs in importance any public interest
that might be protected by upholding the claim
for privilege for the whole class.
In these cases, as in all income tax cases of
this kind, the Minister has detailed the assump
tions upon which he relies to defend his income
tax assessments of the plaintiffs. With respect
to Pelon, he has assumed that one Peckham
owned, beneficially, at all relevant times, all the
shares of Pelon. He has also assumed that no
services of any kind or description during the
relevant period were furnished to the plaintiffs
or either of them and that neither of the plain
tiffs paid any monies to Pelon as is claimed.
Counsel for the plaintiffs, in his examination
for discovery of the defendant's assessor, has
sought to challenge these assumptions. In the
course of the examination, it is established that
the sole basis for the assumption that Peckham
was the beneficial owner of all Pelon shares
comes from Pelon's income tax returns. It is
also established that said income tax returns
were relied on to a large extent for the Minis
ter's second assumption concerning services by
Pelon to the plaintiffs and payment by the plain
tiffs to Pelon.
In income tax appeals, the onus is on the
taxpayer to demolish the Minister's assess
ments. In order to do this, he must demolish the
assumptions of fact upon which the Minister's
assessments are based. And yet, in this case,
the Minister refuses to produce documents
upon which some of his assumptions are admit
tedly based.
The taxpayer is entitled to have full discovery
of all documents relied on by the Minister in
support of subject income tax assessments and,
in my opinion, that would certainly include the
income tax returns in question.
There will therefore be an order directing and
requiring the defendant in each of the above
styled actions to produce and show to counsel
for the plaintiff in each action the income tax
returns for the fiscal years ending in 1964, 1965
and 1966 of Pelon Holdings Limited. Costs in
the cause.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.