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Westerhoff and McCallum: More from the OCA on Expert Evidence

The Ontario Court of Appeal released its decision last week in Westerhof v. Gee Estate and McCallum v. Baker (2015 ONCA 206), which are the companion cases to Moore v. Getahun.  All three appeals were heard together.

The legal issue before the Court in Westerhof  and McCallum was whether participant experts and non-party experts could give opinion evidence without having to comply with Rule 53.03, which describes the deadlines and content requirements for expert reports.

The Court of Appeal held that the Divisional Court erred in concluding that the type of evidence – whether fact or opinion – is the key factor in determining to whom Rule 53.03 applies.

Rather, the Court of Appeal was unanimous in that participant experts and non-party experts may give opinion evidence without complying with Rule 53.03.  As a result, Rule 53.03 does not apply to the opinion evidence of a non-party expert or participant expert where he or she has formed a relevant opinion based on personal observations or examinations relating to the subject matter of the litigation for a purpose other than the litigation.

Background

At the trial of Mr. Westerhof, the plaintiff proposed to call evidence from nine medical witnesses.  From the outset, the trial judge ruled that the medical witnesses who treated or assessed the plaintiff but did not comply with Rule 53.03 would not be entitled to give opinion evidence concerning their diagnosis or prognosis, even though they had not been retained for the purpose of the litigation. Those witnesses were also prevented from giving evidence of the history they had taken from Westerhof. The Divisional Court upheld the trial judge’s conclusion.  The Court of Appeal did not agree and reversed the decision, ordering a new trial.

At the trial of Mr. McCallum, the defendant appealed that decision on the basis, inter alia, that the trial judge erred by allowing treating medical practitioners who had not complied with Rule 53.03 to give “an avalanche” of opinion evidence.  The Court of Appeal dismissed this appeal.

Principles set out by the Court of Appeal

Simmons J.A., writing on behalf of the Court of Appeal, concluded that a witness with special skill, knowledge, training or experience who has not been engaged by or on behalf of a party to the litigation may give opinion evidence for the truth of its contents without complying with Rule 53.03 where:

  • The opinion to be given is based on the witness’s observation of or participation in the events at issue; and
  • The witness formed the opinion to be given as part of the ordinary exercise of his or her skill, knowledge, training and experience while observing or participating in such events.

The Court also tried to clear the confusion that often arises from referring to these witnesses as “fact witnesses” because their evidence is derived from their observations of or involvement in the underlying facts.  Simmons J.A. preferred to refer to these witnesses as “participant experts,” which takes into account that in addition to providing evidence relating to their observations of the underlying facts, they may also give opinion evidence admissible for its truth.  As with all evidence, and especially opinion evidence, the Court reiterated that it retains its gatekeeper function in relation to opinion evidence from participant experts and non-party experts.

Six factors were cited by the Court as reasons why the Divisional Court erred:

  1. The Divisional Court failed to refer to a single case under the pre-2010 jurisprudence, which support the conclusion that Rule 53.03 does not apply to opinion evidence given by participant experts. The Court reiterated its view in Moore that “the 2010 amendments to rule 53.03 did not create new duties but rather codified and reinforced … basic common law principles.”  The Court found no basis for the Divisional Court to conclude that the pre-2010 jurisprudence did not continue to apply following the 2010 amendments to the Rules relating to expert witnesses.
  2. Apart from Westerhof, no cases were brought to the Court’s attention that support the view that participant experts are obliged to comply with Rule 53.03 when giving evidence concerning treatment opinions.
  3. There was nothing in Justice Osborne’s Report on the Civil Justice Reform Project that indicated an intention to address participant experts or non-party experts; rather, the focus was litigation experts – expert witnesses engaged by or on behalf of a party to provide opinion evidence in relation to a proceeding.
  4. The use of the words “expert engaged by or on behalf of a party to provide [opinion] evidence in relation to a proceeding” in Rule 4.1.01 and Form 53 makes it clear that an expert must be “engaged by or on behalf of a party to provide [opinion] evidence in relation to the proceeding before the rule applies.  The Court concluded that witnesses, albeit ones with expertise, testifying to opinions formed during their involved in a matter, do not come within this description.  They are not engaged by a party to form their opinions, and they do not form their opinions for the purpose of the litigation.
  5. The Court was not persuaded that disclosure problems exist in relation to the opinions of participant experts and non-party experts requiring that they comply with Rule 53.03.  Quite often, these experts will have prepared documents summarizing their opinions about the matter contemporaneously with their involved, which can be obtained as part of the discovery process.  In addition, it is open to a party to seek disclosure of any opinions, notes or records of participant experts and non-party experts the opposing party intends to rely on at trial.
  6. Requiring participant witnesses and non-party experts to comply with Rule 53.03 can only add to the cost of the litigation, create the possibility of delay because of potential difficulties in obtaining Rule 53.03 compliant reports, and add unnecessarily to the workload of persons not expected to have to write Rule 53.03 compliant reports.

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Westerhoff and McCallum: More from the OCA on Expert Evidence

Moore v. Getahun: Expert Witnesses

On January 29, 2015, the Ontario Court of Appeal released its widely-anticipated reasons in Moore v. Getahun (2015 ONCA 55).

In the lower court’s controversial decision released last year, the court criticized the practice of counsel reviewing draft expert reports and communicating with experts. The court stated that counsel should not review or comment on draft expert reports because of the risk that such reports could be shaped by the views expressed by counsel. This criticism caused considerable concern in the legal profession, as well as in the community of expert witnesses (see our previous post on the Moore case here).

The Court of Appeal dismissed the appeal, holding that the determinations made on the expert evidence issue by the lower court judge did not affect the actual outcome of the trial.

Importantly, Justice Sharpe, writing for the majority of the Court of Appeal, held that the trial judge erred in concluding that it was improper for counsel to assist an expert witness in the preparation of the expert’s report.

Justice Sharpe stated that “the ethical and professional standards of the legal profession forbid counsel from engaging in practices likely to interfere with the independence and objectivity of expert witnesses” and that “it would be bad policy to disturb the well-established practice of counsel meeting with expert witnesses to review draft reports.”

Justice Sharpe further stated that “[C]ounsel play a crucial mediating role by explaining the legal issues to the expert witness and then by presenting complex expert evidence to the court.  It is difficult to see how counsel could perform this role without engaging in communication with the expert as the report is being prepared.”

With respect to the issue of continuous disclosure of consultations regarding draft reports, Justice Sharpe held that “absent a factual foundation to support a reasonable suspicion that counsel improperly influenced the expert, a party should not be allowed to demand production of draft reports or notes of interactions between counsel and expert witnesses.”  In Justice Sharpe’s view, making preparatory discussions and drafts subject to automatic disclosure would be contrary to existing doctrine and would inhibit careful preparation.  Further, compelling production of all drafts, good and bad, would discourage parties from engaging experts to provide careful and dispassionate opinions, but would instead encourage partisan and unbalanced reports.  Moreover, allowing open-ended inquiry into the differences between a final report and an earlier draft would run the risk of needlessly prolonging proceedings.

Accordingly, the Court of Appeal rejected the trial judge’s holding that counsel should not review draft reports with experts, as well as her holding that all changes in the reports of expert witnesses should be routinely documented and disclosed.

The Court of Appeal’s decision in Moore seems to have lifted the haze caused by the trial judge’s decision and clarified the role of the expert and the manner in which expert reports are to be prepared under the 2010 amendments to rule 53.03 of the Ontario Rules of Civil Procedure. Further, the Court of Appeal’s decision is important guidance in respect of the preparation and presentation of expert reports in trial courts across the country.

Moore v. Getahun: Expert Witnesses

Brent Kern Family Trust: FCA Dismisses Appeal

In Brent Kern Family Trust v. The Queen (2014 FCA 230), the Federal Court of Appeal dismissed the taxpayer’s appeal with reasons delivered from the bench. The taxpayer had argued that the decision of Canada v. Sommerer (2012 FCA 207) should not apply in this case and, in the alternative, that Sommerer was wrongly decided and ought not to be followed.

Brent Kern Family Trust was a case in which the taxpayer undertook a series of transactions whereby a taxpayer (Mr. K) completed an estate freeze for two corporations (the underlying facts are described in detail in the Tax Court decision (2013 TCC 327)).

Following the estate freeze, two family trusts were set up each with Mr. K and his family as beneficiaries as well as each trust having a separate corporate beneficiary. Next, each of the trusts subscribed for common shares in the corporate beneficiary of the other trust.

Once the structure was in place, a dividend was flowed through the structure and, as a final step, one of the trusts paid funds to Mr. K but relied on the application of subsection 75(2) of the Act to deem the dividend income received by the trust to be income in the hands of one of the corporate beneficiaries. Accordingly, if subsection 75(2) of the Act applied, the income would not be subject to tax as a result of section 112 of the Act and Mr. K could keep the gross amount of the funds.

In the decision rendered at trial, the Tax Court held that Sommerer case applied and subsection 75(2) of the Act did not apply on the basis that the trust purchased the property in question for valuable consideration and no “reversionary transfer” occurred.

In Brent Kern Family Trust, the Court of Appeal found that there was no reviewable error in the trial judge’s finding that Sommerer applied, that the Court of Appeal in Sommerer “spent considerable time analyzing the text, content and purpose of subsection 75(2)”, and no reviewable error had been brought to the Court’s attention in the present case.

The Court of Appeal dismissed the taxpayer’s appeal and upheld the Tax Court’s decision.

We note also that at least one taxpayer has brought an application in a provincial court to correct a transaction where the taxpayer never intended for Sommerer to apply. In Re Pallen Trust (2014 BCSC 405), the B.C. Supreme Court rescinded two dividends, the effect of which was to eliminate the tax liability in the trust. Re Pallen Trust is under appeal to the B.C. Court of Appeal.

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Brent Kern Family Trust: FCA Dismisses Appeal

Whose Mistake? Ontario Sup. Ct. Rectifies Trust Deed

Most tax rectification cases address situations in which a professional advisor has made a mistake in the planning and execution of a transaction with the result that an unintended tax consequence follows (i.e., payment of a capital dividend at a time when the company did not have a sufficient balance in its capital dividend account).

These are the relatively simple cases. However, in certain situations, the taxpayer and the CRA may take a different view on the interpretation and effect of a document, which could lead to an unintended tax result. Does the doctrine of rectification operate in these situations?

This was the situation considered by the Ontario Superior Court of Justice in Kaleidescape Canada Inc. et al. v. Computershare Trust Company of Canada et al. (2014 ONSC 4983), in which the Court was asked to determine whether the parties intended that a company remain a Canadian-controlled private company (“CCPC”) for the purposes of obtaining certain scientific research and development tax credits under the Income Tax Act (Canada) (the “Act”).

The Court granted the rectification, and Kaleidescape is a helpful case for those situations in which the “mistake” in a transaction arises as a result of competing interpretations of a parties’ document(s).

Facts

Kaleidescape Canada Inc. (“K-Can”) was a research and development company in Waterloo, Ontario. Under the Act, a CCPC is a Canadian corporation that is not controlled by a public company or a non-resident (or a combination of such persons). K-Can was structured as a “deadlock” corporation so that it would not be controlled by a non-resident and therefore would qualify as a CCPC.

From 2006 to 2008, K-Can’s shareholdings were restructured. In 2008, K-Can shares were owned by Kaleidescape Inc. (“K-US”), a Delaware company with head offices in California, and Kaleidescape Canada Employment Trust (the “Trust”). Computershare Trust Company of Canada (“Computershare”) became the sole corporate trustee. A Restated and Amended Trust Deed was entered into with K-Can as the settlor and Computershare as the sole trustee.

K-US and Computershare held equal voting rights. Additionally, a unanimous shareholders agreement relieved K-Can’s directors of their powers and conferred those powers on the shareholders. There was no provision to resolve a deadlock, and neither the shareholders nor directors had the right to make unilateral decisions.

K-Can received notices from the CRA advising that, in its view, K-Can was not a CCPC for the tax years ending December 31, 2008 and December 31, 2009. As a result, K-Can’s federal SR&ED and Ontario ITCs were denied. The CRA’s position was that the combined effect of the provisions of the Restated and Amended Trust Deed was to give a non-resident authority to direct Computershare how to vote its shares of K-Can, such that a non-resident controlled K-Can and the definition of CCPC was not met.

In response to the CRA’s reassessments, K-Can and Computershare entered into a “Deed of Rectification”, which revised the wording of Restated and Amended Trust Deed to protect K-Can’s CCPC status.

At the rectification application hearing, the Applicants argued that their common and continuing intention at all times was to structure and operate the company in a manner that would establish and preserve its CCPC status. The Respondent argued that the Applicants could not prove common intention, did not admit that a mistake had been made, and could not show the precise form of a corrected document that would express their prior intention.

Decision

In its analysis, the Court cited only two non-tax cases dealing with rectification (Performance Industries Ltd. v. Sylvan Lake Golf and Tennis Club Ltd. (2002 SCC 19) and Shafron v. KRG Insurance Brokers (Western) Inc. (2009 SCC 6)). (For tax rectification cases see Juliar v. Canada (A.G.) ([2000] O.J. No 3706), 771225 Ontario Inc. et al. v. Bramco Holdings Co. Ltd. et al. ([1995] O.J. No 157), McPeake v. Canada (A.G.) (2012 BCSC 132)Graymar Equipment (2008) Inc. v. Canada (A.G.) (2014 ABQB 15), and Re: Pallen Trust (2014 BSCS 305)).

Turning the facts of the current case, in several short paragraphs the Court stated that, on the entire record and history of the Applicants, the intention throughout was to ensure that K-Can – as an R&D body, with no other functions than research and development – qualified for CCPC status and the relevant research tax credits.

The Court held that wording chosen in the Restated and Amended Trust Deed was chosen by mistake and did not give K-US de jure control over K-Can. In respect of the proposed correction, the Deed of Rectification corrected the mistake in the original wording. The Court stated that Deed made it clear that the decision-making body was the board of directors and that the trustee was only to accept a direction in written form.

The Court granted the rectification sought by the Applicants.

 

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Whose Mistake? Ontario Sup. Ct. Rectifies Trust Deed

Leroux: CRA owes duty of care to taxpayer

* This article was co-authored with Mr. Christopher Funt of Funt & Company.

Can a Canadian taxpayer successfully sue the Canada Revenue Agency?

In recent years, taxpayers have brought a number of civil actions against the Canada Revenue Agency (the “CRA”).  The allegations in such cases ranged from negligence to fraud, extortion and deceit.  Often, taxpayers’ claims are brought as the tort of misfeasance in public office or as claims in negligence.  So far, the courts have not clearly determined the scope of CRA’s civil liability.  The recent decision of the British Columbia Supreme Court in Leroux v. Canada Revenue Agency (2014 BCSC 720) provides guidance on the application of common law torts to CRA conduct.

Mr. Leroux, the taxpayer, alleged that he was threatened, deceived and blackmailed by a CRA auditor who was reviewing Mr. Leroux’s GST and income tax returns. After reassessments were issued, the CRA claimed Mr. Leroux owed more than $600,000 in taxes, interest and penalties. After an appeal to the Tax Court, some payments by Mr. Leroux and a successful application for interest relief, Mr. Leroux was actually refunded $25,000. In the meantime, Mr. Leroux lost his business and home. He sued the CRA for misfeasance in public office. The CRA argued that it owed no private law duty of care to an individual taxpayer.

In several other cases before Leroux, the courts have agreed with the CRA’s position. A successful negligence action requires a finding of a duty of care to the injured party.  As such, judicial acceptance of CRA’s position has presented a major barrier to bringing a civil claim against CRA.

In Leroux, the court splashed cold water on the CRA’s long-standing position and held the CRA did owe a duty of care to Mr. Leroux. The court also held the CRA had breached its duty of care to Mr. Leroux with respect to the imposition of gross negligence penalties. In a stinging rebuke to the case put forth by the CRA and its counsel, the court stated:

[348] To call Mr. Leroux’s tax characterizations “grossly negligent” is especially objectionable because, as mentioned above, CRA now uses the complexity of the issues involved in these characterizations as a reason why their decisions on exactly the same issue could never be termed negligent.  It is simply not logical for CRA to assess penalties against Mr. Leroux for being grossly negligent in having characterized his income in a particular way and to resist the application of the concept of negligence to their own characterization of the same income, one which was ultimately agreed to be wrong.  Or, to put it in the reverse, since CRA now takes the position that the characterization of capital loss versus revenue and the issue of “matching” are difficult and complex, it cannot be said that the assumption of contrary positions by Mr. Leroux, positions that were eventually accepted as correct, was grossly negligent.  To call them so, and to assess huge penalties as a result, ostensibly for the purpose of getting around a limitation period, is unacceptable and well outside the standard of care expected of honourable public servants or of reasonably competent tax auditors.  While being wrong is not being negligent, nor are [the auditor's] mistakes in fact or law negligent, it is the misuse and misapplication of the term “grossly negligent” that is objectionable.

The court continued:

[353] … CRA must live up to their responsibilities to the Minister and to the Canadian public, nearly all of whom are taxpayers, by applying a little common sense when the result is so obviously devastating to the taxpayer.  It is a poor response to say “we put together our position without regard to the law; leave it to the taxpayer to appeal to Tax Court because we are immune from accountability.”

Despite the finding that CRA owed a duty of care to Mr. Leroux, and that the CRA had breached this duty, the taxpayer’s claim was dismissed because the court held that Mr. Leroux’s losses were not the result of the CRA’s negligent conduct.

The Leroux judgment is a welcome development in the law regarding the CRA’s accountability for its assessing actions. Most CRA agents are diligent and very well-intentioned.  It is a rare case where the CRA’s conduct can properly be alleged to be actionable.  That said, the principles of civil liability shape what can and cannot be done by the CRA in the course of a tax assessment. While Leroux offers very insightful guidance, the broader scope of CRA’s civil law duties to taxpayers remains to be fully defined.

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Leroux: CRA owes duty of care to taxpayer

More on Rectification in Quebec

Rectification continues to be a topic of heated debate in Quebec. After a series of decisions by the Court of Appeal last year on the subject, the Quebec Superior Court rendered an important judgment on June 19, 2012 (Mac’s Convenience Stores Inc. v. Couche-Tard Inc., 2012 QCCS 2745) on a motion for declaratory judgment involving a well-known Canadian business.

This case is a reminder that rectification is not always available to correct errors made in the planning of a transaction, even if the unintended tax consequences result in a loss of several million dollars for a taxpayer.

The Facts

On April 14, 2005, Mac’s Convenience Store Inc. (“Mac’s”) borrowed $185 million from a U.S. corporation, Sildel Corporation (“Sildel”), which was a “specified non-resident” for purposes of the thin capitalization rules in subsection 18(4) of the Income Tax Act (the “Act”). Under this loan, Mac’s paid interest to Sildel ($911,854 in 2006, $11,069,590 in 2007, and $10,674,247 in 2008). These interest payments were deducted in computing the income of Mac’s for income tax purposes in the relevant years. This loan was fully repaid by Mac’s in 2008.

On April 25, 2006, Mac’s declared and paid a dividend of $136 million to Couche-Tard Inc. (“CTI”) out of its retained earnings. The decision to declare this dividend was taken after consultation with professional advisers.

More than 18 months later, it was discovered that the dividend of $136 million paid to CTI had the effect of raising the “debt” portion of Mac’s debt-to-equity ratio vis-a-vis Sildel for thin capitalization purposes beyond the then statutory limit of 2:1 under subsection 18(4) of the Act. In early 2008, Mac’s notified the CRA of the situation. After conducting an audit, the CRA issued notices of reassessment to Mac’s denying the deduction of all the interest it paid to Sildel during taxation years 2006, 2007, and 2008.

Mac’s filed a motion for declaratory judgment with the Quebec Superior Court requesting that the dividend of $136 million declared on April 25, 2006 and paid to the respondent CTI be cancelled retroactively and replaced by a reduction of Mac’s paid-up capital in the same amount. This rectification would have required no transfer of funds between the parties, but it would have allowed Mac’s to deduct the interest paid to Sildel in computing Mac’s income under the thin capitalization rules.

To read the full article, click here.

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More on Rectification in Quebec

Trust Me, This Isn’t What It Looks Like

Tax law geeks call it “form over substance” – how Canadians are taxed on their actual relationships and transactions rather than what they intended those to be.

However, mistakes can be made – and sometimes the tax assessed is not reflective of the true nature of the situation at hand.

In the March 16, 2012 issue of The Lawyers Weekly, I discuss the ways in which mistakes may be fixed so as to avoid unintended and adverse tax consequences.

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Trust Me, This Isn’t What It Looks Like

Brick Protection Corp. v. Alberta (Treasury) – Are Warranty Providers Subject to Insurance Corporation Tax Under Part IX of the Alberta Tax Act?

The Alberta Court of Appeal released its decision in this appeal on July 21, 2011.  Brick Protection Corp. (Brick Protection; now Trans Global Warranty Corp.) was a sister corporation of the Brick Warehouse Corp. (The Brick).  Brick Protection sold extended warranties to consumers on appliances and furniture purchased through The Brick.  The issue: Was Brick Protection Corp. doing business as an insurance company in Alberta?  If so, they would be subject to insurance corporation tax under Part IX of the Alberta Tax Act (the Act; now in the Alberta Corporate Tax Act).

For more on the decision of the Alberta Court of Appeal in Brick Protection Corp. v. Alberta (Treasury), read the commentary in FMC’s Focus on Tax.

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Brick Protection Corp. v. Alberta (Treasury) – Are Warranty Providers Subject to Insurance Corporation Tax Under Part IX of the Alberta Tax Act?