Tax & Trade Blog
Privilege and Production in the TCC Discovery Process: The CIBC Case
The discovery process allows litigating parties to collect and consider all pertinent facts, to use those facts to assess the strengths and weaknesses of their case and to otherwise prepare for trial. A general exception to the requirement to disclose relevant documentation and information during the discovery process relates to documents or information that are “privileged”.
The recent decision of the Chief Justice of the Tax Court of Canada in CIBC v. The Queen (2015 TCC 280) is an excellent review of the strict rules surrounding privilege in this context, and a cautionary tale for litigants taking an overly obstructionist approach to the principles of full and proper disclosure.
In CIBC, CIBC had appealed to the Tax Court the CRA’s denial of certain deductions against income related to approximately $3 billion in settlement payments made to various plaintiffs, arising out of lawsuits against CIBC from transactions with Enron Corp. (the “Enron Litigation”). The CRA had assessed on the basis that the deductions were not permitted because, among other things, the costs truly belonged to other CIBC’s subsidiaries and affiliates – but not CIBC itself, which was attempting to make the deduction on its own account.
After initial examinations for discovery, the Crown brought a motion to, among other things, compel answers to a large number of discovery questions, and to otherwise adjudicate privilege claims made by CIBC during the discovery process.
CIBC’s position, in resisting various of the Crown’s discovery questions, was essentially that the information/documents at issue were privileged and/or irrelevant, primarily based on the fact that they related to details of the Enron Litigation. The Crown argued that privilege was either unfounded or impliedly waived, and that its questions ought to be answered, and the related documentation completely disclosed.
While a complete review of the Chief Justice’s 364 paragraph decision is out of place here, the key points can be usefully summarized as follows. First, “relevancy” during discovery is extremely broad and should be liberally construed, provided that it does not allow for a fishing expedition, abusive questions, delaying tactics or completely irrelevant questions. Second, the fact that particular items may be privileged in one context does not mean that they will be privileged in another context, hence “litigation privilege” and “settlement privilege” relevant to one case (e.g., the Enron Litigation) would generally be expected to be lost after the conclusion of the particular litigation in question. Third, although “settlement privilege” can apply beyond the date of settlement, disclosure might still be required if there is a competing public interest outweighing the rationale for such privilege – as, for example, the desire to encourage full and frank exchanges between parties during settlement negotiations. Fourth, a relatively restrictive approach can be expected with respect to “implied waiver” of solicitor-client privilege, such that demonstrating implied waiver will require the privilege-holder to have: (1) taken a course of action, (2) relied on legal advice to do so, and (3) somehow placed that reliance in issue at trial.
In applying these principles to the matters at hand, the TCC first concluded an exception to “settlement privilege” in fact applied on the case before it, and concluded that some of the information/documentation relating to the Enron Litigation settlement ought to be disclosed to the Crown because it was (1) relevant to an issue in the tax appeal (i.e. whether CIBC’s affiliates/subsidiaries should have taken the deductions), (2) did not impact CIBC’s liability in the Enron Litigation and (3) did not weaken CIBC’s defence in the already concluded Enron Litigation.
The Crown argued that CIBC’s pleading that it was “legally and commercially prudent to settle” had constituted an “implied waiver” of certain of the information/documentation because it put CIBC’s state of mind in issue – a state of mind which was based on legal advice according to the Crown. The TCC disagreed, primarily because the pleading was merely a fact, and CIBC placed no reliance on legal advice that it received in forming that conclusion, nor did it put any such reliance on legal advice at issue in issue in this case. A similar conclusion was reached with respect to CIBC’s statements about its understanding of the source of its legal exposure. The TCC agreed that CIBC’s liability in the Enron Litigation was largely derived through its own conduct, which is primarily a factual issue as opposed to an issue of its state of mind derived from legal advice.
As a practice point, the TCC served notice that in order to claim privilege over documents during the discovery process, they must be reflected in a sworn Affidavit of Documents and any amendments made to the list of privileged documents must be included in a new sworn Affidavit of Documents.
By way of commentary, in forcing CIBC to disclose significant documentation/information that CIBC had previously refused to disclose, the TCC served notice that litigating parties are not entitled to obstruct the discovery process through inappropriate positions based on claims of non-existent privilege. Perhaps somewhat remarkably, the Chief Justice described CIBC’s actions as “obstruction” by CIBC in the discovery process, seemingly promising a harsh consequence for these actions: “This particular motion seems in large part to be the result of obstruction by CIBC when it comes to the discovery process. Discovery is about allowing both sides to fully prepare for trial and identify all relevant facts and issues. Full and open discovery promotes settlement and proper and efficient trials. Discovery is not about curtailing information production – it is about production of relevant information. … I for one do not believe that obstruction is the proper way to litigate, and there are certainly consequences to that strategy that the Court should and will consider.”
CIBC will probably stand as a “go-to” decision for tax practitioners in terms of determining whether particular material is privileged. It also will be interesting to review the TCC’s decisions on costs in this matter.
On another level of analysis, one empathizes with Counsel for CIBC, which was required to walk an exceedingly fine line between preserving the sanctity of what may well have initially appeared to be privileged information/documentation, and the duty to disclose otherwise relevant information during the discovery process. An Ontario lawyer’s duty to his Client is to “raise fearlessly every issue, advance every argument, and ask every question, however distasteful, which the lawyer thinks will help the client's case and to endeavour to obtain for the client the benefit of every remedy and defence authorized by law” (see the Commentary to Rule 4(1) of the Law Society of Upper Canada’s Rules of Professional Conduct).
In that context, we would have thought that the best approach – if there were legitimate questions as to privilege – would be to refuse the questions on the grounds of privilege, and leave it to the Court to determine the matter on the motion.
A version of this article was published in the January 2016 version of Canadian Tax Highlights.