Tax & Trade Blog
Tax Litigation and the Implied Undertaking Rule: The Samaroo Case
Disgruntled taxpayers have often attempted to seek remedies against tax authorities through civil actions – albeit with very limited success. A 2014 BC Supreme Court’s decision in Leroux v. CRA (2014 BCSC 720) did confirm that CRA owes a duty of care to the taxpayer, and has likely lead to an increase in these types of proceedings.
A recent motions decision in the BCSC case in Samaroo v. CRA et al. (2016 BCSC 531), deals with the extent to which a taxpayer in one of these types of suits against the Crown is able to rely on information produced by the Crown in that action during the Tax Court of Canada appeal – and the news was good for the taxpayer! But the case remains an interesting example of the “implied undertaking rule” – perhaps a little known rule to anyone other than a litigator – and the balance of this article explains the in’s and the out’s of that rule, with reference to the Samaroo decision.
In Samaroo, the taxpayers (a married couple and their corporations) operated a hotel and nightclub in Nanaimo, BC and were issued Notices of Re-Assessment by the CRA (i.e., a civil action) on the basis that they understated income, thus underpaying GST (the under-reported cash sales being allegedly deposited into their own personal accounts). Shortly after that, the taxpayers were also charged criminally for 21 separate offences under the ITA and ETA.
The criminal charges were all ultimately dismissed, with the Trial Judge considering the Crown’s case “weak”, and supported by “unreliable” and “highly uncertain” evidence which contained “significant flaws” and “discrepancies” (see: 2011 BCPC 503).
Despite the loss on the criminal side, the CRA doggedly maintained the prior civil Assessments (which are still on-going in the Tax Court of Canada).
The taxpayer’s response was a civil claim against the CRA, brought in the BCSC, alleging “negligent investigation and malicious prosecution”. The taxpayer also sued the law firm and lawyer (the “Prosecutor”) that was retained by the Public Prosecution Service of Canada to prosecute the criminal proceeding.
The crux of the motion that is the subject of the decision first referenced above (and this article) was the taxpayer’s desire to use information it had obtained in the discovery process in the malicious prosecution case, to assist it in its appeal in the Tax Court of Canada. In effect, the taxpayer was seeking relief from the “implied undertaking rule” – a rule that holds that documents and testimony obtained during discovery in one particular civil action must be kept confidential by the party that obtained them unless otherwise waived by the Court. “Waiver” of this requirement can be obtained from the Court with jurisdiction over the civil action only if the public interest in waiving the rule outweighs the values the rule is designed to protect – namely, privacy and the efficient conduct of civil litigation.
The BCSC hearing the motion concluded that in this instance, the implied undertaking rule should be waived, and ordered that the taxpayers be released from the implied undertaking over the information and documents provided by the Prosecutor during discovery. In the result, the taxpayers were left free to use the information and documentation in the Tax Court proceedings (to the extent relevant, and if accepted by the TCC).
The Court’s decision was based on evidence that the Prosecutor had already disclosed much of the information to the CRA, such that CRA would already have knowledge of it for the purposes of the Tax Court appeals – eliminating all privacy concerns. The Court also concluded that there was no public interest in denying the taxpayer the right to use this information in the Tax Court process, effectively concluding that the public interest went the other way: there is a public interest in allowing that information to be used if the taxpayers wish to use it to demonstrate that another branch of the Federal Government is abusing the process in a similar way (to the criminal proceeding).
Finally, the Court rejected the defendants’ suggestion that the taxpayers should not have release from the implied undertaking because there is no ability to make an abuse of process claim in Tax Court, since there was little or no privacy interest at stake. The Court relied on prior precedent from a motion decision in this action, which had held that “[i]n cases involving an allegation of unconscionable behaviour by government or its agents, there is an argument in favour of disclosure as the government cannot be permitted to hide behind secrecy in order to facilitate improper conduct…”: see: (2014 BCSC 1349, aff’d in 2015 BCCA 116).
By way of commentary, we think that the Court properly granted relief from the implied undertaking rule in this case. The implied undertaking rule was not designed to place a straitjacket on information obtained in discovery, but to ensure privacy and complete disclosure. There was no evidence that either of the implied undertaking rule’s two purposes were at risk in the Samaroo case.
More generally, the Court’s decision to err on the side of disclosure and openness is very much welcome in civil and criminal cases relating to tax disputes and their related Tax Court appeals. Tax Court litigation should not be conducted in a vacuum, to the overall detriment of taxpayers, particularly where the taxpayer is up against the limitless resources of the CRA and Department of Justice, often defending itself in both the civil and criminal forums.
While the Samaroos have achieved some early litigation success in their defence of the CRA’s civil Assessments (and are four for four in reported decisions thus far), the reverse-onus that they will face in their upcoming Tax Court appeals may well mean that their biggest challenge lies ahead.
A version of this article appeared in the April 2016 edition of the GST & Commodity Tax Newsletter.