Thompson Bros. – Tax Court Requires Crown to Disclose Relevant Materials Not Reviewed by CRA Auditor

The Tax Court recently released an important decision regarding the relevance test for production of documents and information during discoveries. In Thompson Bros. (Constr.) Ltd. v. The Queen, 2021 TCC 15 (“Thompson Bros.”), the Tax Court was asked to determine whether the Crown had correctly refused to satisfy various requests made by the taxpayers in the course of the examination for discovery of the Crown on the basis that the documents and information requested were not relevant. The Court sided with the Taxpayers in relation to the majority of the requests, and in doing so provided valuable guidance regarding the relevance test.

In particular, the Tax Court rejected the long-standing position of the Crown that only documents and information relied upon by the auditor in issuing the specific reassessments under appeal are relevant.  Instead, the Court reaffirmed the overarching principle that questions on discovery must be relevant to some matter expressed in either party’s pleadings, and held that this test is broader than simply asking whether the CRA auditor viewed a particular document.

The reassessments under appeal in Thompson Bros. related to certain transactions involving foreign currency forward (“FCF”) contracts, commonly referred to as “straddle” transactions. The CRA reassessed the taxpayers on the basis that the FCF contracts were sham agreements and therefore had no legal effect.

During the examination for discovery, the taxpayers requested various documents and information from the CRA, including copies of documents regarding the FCF contracts, position papers, working papers and proposal letters issued in other audits involving similar transactions, some of which were stored in a CRA “shared drive” that would have been available to (but not necessarily reviewed by) the auditor in performing the audit of the taxpayers.  The Crown refused to produce the requested documents on the basis that the auditor had not actually relied on them in the course of the audit of the taxpayers.

The Court relied on prior decisions to affirm the following two principles in respect of the relevance test:

• Relevance is extremely broad and should be liberally construed. The threshold for relevance on discovery is very low but does not allow for a fishing expedition, abusive questions, delaying tactics or completely irrelevant questions.

• Everything is relevant that may directly or indirectly assist the party seeking the discovery to maintain its case or combat that of its adversary. If the questions are broadly related to the issues raised [in the pleadings], they should be answered.

Based on the foregoing principles, the Tax Court held that the auditor’s reliance on documents and information to issue the reassessments under appeal is not the yardstick against which relevance is to be measured. Rather, the Court took an expansive approach and considered all the documents and information that could have influenced the CRA at large (including auditors, team leaders and other CRA officials) in the determination of the tax liability during the audit or at a later stage (at the CRA appeals level, for example) to be relevant.

In reaching this conclusion, the Court noted that the Respondent in Tax Court appeals is Her Majesty the Queen in right of Canada and not the CRA auditor, such that what is pertinent is what is in Her Majesty’s – not the auditor’s – possession, authority or control that relates to any of the matters in issue in the appeals.

The Court, however, upheld the Crown’s refusal to satisfy the taxpayers’ request for copies of proposal letters issued to other taxpayers involved in foreign currency trading with the same brokerage.  The Court held that the manner in which one taxpayer is assessed is not relevant to another taxpayer’s challenge to an assessment, regardless of whether they are based on the same factual matrix.

Thompson Bros. is a positive development for taxpayers as it confirms that the Crown may not refuse disclosure of relevant documents merely because the CRA auditor did not review them. This decision may be particularly important in cases derived from CRA project audits involving large groups of taxpayers who participated in similar transactions or in cases where the CRA takes a position, such as sham, relying on extrinsic evidence that may have been gathered from third party sources.

The decision in Thompson Bros. has recently been appealed, such that the Federal Court of Appeal will be given the opportunity to provide further guidance in relation to the relevance test.