CBS Canada Holdings, 2017 FCA 65: an affidavit proving a settlement is not hearsay about the losses it mentions

2017 FCA 65 · Federal Court of Appeal

Author: Sas Tullo

This is a procedural decision about evidence in a Tax Court appeal, but the dispute behind it matters to anyone who settles with the Canada Revenue Agency. CBS Canada Holdings Co. settled its appeal about non-capital losses, the Minister then said the settlement could not be implemented, and CBS moved to enforce it. The Tax Court struck the affidavit CBS filed in support of that motion; the Federal Court of Appeal set that order aside. The affidavit was tendered to prove that a settlement had been made, not that the losses existed, so it was not hearsay, and the Minister could not use cross-examination on it to probe the losses themselves.

Facts

CBS appealed reassessments; the issue was whether it had non-capital losses to apply against its income (para 2). On April 24, 2014, its counsel made a settlement offer that included a schedule of losses, Schedule A, and after some eight months of exchanges counsel concluded minutes of settlement incorporating that schedule. On January 7, 2015, counsel told the Tax Court that the matter was settled (para 3). Shortly afterwards, counsel for the Minister wrote that the Minister had determined there were no non-capital losses available to CBS and could not issue a reassessment contrary to the Income Tax Act (para 4).

CBS moved to enforce the settlement, supported by an affidavit of Ms. Toaze, a lawyer in the firm acting for CBS, which set out the course of events by reference to exhibited documents (para 5). On cross-examination she declined to disclose privileged information, would not confirm or deny the existence of the losses in Schedule A, and would not say whether she was counsel for CBS. The Minister moved to strike the affidavit (para 6).

The Tax Court judge (2016 TCC 85) granted that motion. She found that the controversial issue was the accuracy, truth, and origin of the losses in Schedule A (para 7), applied Rule 72 of the Tax Court of Canada Rules (General Procedure) on statements of information and belief (para 8), held that the limits on cross-examination made Schedule A unreliable hearsay (para 9), criticized the choice of affiant (para 10), and found the Minister prejudiced (para 11), while giving CBS leave to file another affidavit (para 13).

Issues

The Court of Appeal framed four questions: the test for striking an affidavit; whether Schedule A was hearsay; the proper scope of cross-examination on an affidavit; and whether Ms. Toaze was a proper affiant (para 14).

Holding

The appeal was allowed with costs, the Tax Court’s order was set aside, and the motion to strike was dismissed with costs (para 43). The Tax Court judge erred in principle by concluding prematurely that the affidavit was tendered to prove the truth of its contents; that error infected her conclusions on cross-examination and on the affiant, and striking the affidavit was a palpable and overriding error (para 43).

The court’s reasoning

Pelletier J.A. held that a decision to strike an affidavit is discretionary and reviewable for palpable and overriding error, save for an extricable error in principle: Hospira Health Care Corporation v. Kennedy Institute of Rheumatology, 2016 FCA 215 (para 15). An affidavit may be struck, rather than merely discounted, where it is abusive or clearly irrelevant, contains opinion, argument, or legal conclusions, or where early resolution of admissibility serves an orderly hearing: Canada (Attorney General) v. Quadrini, 2010 FCA 47 at para 18 (para 17).

Hearsay is an out-of-court statement tendered as proof of its contents, and because the characterization depends on the purpose for which the statement is tendered, “no evidence is, on its face, hearsay”: R. v. Baldree, 2013 SCC 35 at para 3 (paras 19-20). The Tax Court judge had found that Schedule A was tendered to demonstrate the existence of the losses (para 21), but nothing in the affidavit argued that position and the memoranda on the enforcement motion had not yet been filed (para 22). It was the Minister who alleged that the settlement was void as contrary to the Act, so CBS had no apparent need to prove the losses (para 23). Documents evidencing a settlement are admissible independently of the hearsay rule to prove that the undertakings were given: Pfizer Canada Inc. v. Teva Canada, 2016 FCA 161 at para 89 (para 24). The Tax Court judge “erred in attributing to CBS an intention which it had not manifested”; paragraphs that failed to state the source of information and belief stand on their own and did not justify striking the whole affidavit (paras 26-27).

On cross-examination, the court accepted the statement in Ottawa Athletic Club Inc. v. Athletic Club Group Inc., 2014 FC 672 at para 132, that an affiant must answer questions on the matters in the affidavit and on collateral questions arising from the answers (para 29). Questions exploring the factual basis of the losses in Schedule A were neither about the information in the affidavit nor collateral to it (paras 30-31). If the losses are in issue on the enforcement motion, CBS is bound by its evidentiary choices and bears the onus on necessity and reliability; if they are not, the Minister suffered no prejudice (para 32). At most the Minister lost a tactical advantage, and “the loss of a tactical advantage is not a breach of procedural fairness”: Canada v. ACI Properties Ltd., 2014 FCA 45 at para 25 (para 33).

The criticism of the affiant fell with the hearsay finding. All negotiations were conducted between counsel, so a lay witness would have been in no better position to depose to them (para 36). Ms. Toaze was not counsel, the lawyer who speaks for the client in court, but a witness (paras 38-39); privilege belongs to the client, so her invocation of it was a false issue (para 40); and the implication that she had breached the Rules of Professional Conduct was an unfortunate slight on her reputation and unnecessary to the motion (paras 41-42).

Practical implications

The decision confirms that an affidavit filed to prove the making and terms of a settlement is judged by what it is tendered for, not by what the opposing party would like to cross-examine about. A party resisting enforcement on the ground of a mistake of fact cannot convert the moving party’s affidavit into hearsay on that fact and then strike it for want of testing.

Rule 74 of the Tax Court of Canada Rules (General Procedure) permits cross-examination on an affidavit filed on a motion, and Rule 72 governs statements on information and belief; both remain in the current text of the Rules on the Justice Laws website. The Court of Appeal did not read them as opening the affiant to questions on every matter relevant to the motion.

In my view the more consequential point is the one the court left open: whether the Minister can resile from concluded minutes of settlement because the losses do not exist. The court said only that, if the existence of the losses becomes the issue, the onus will be on CBS as the party tendering the evidence (para 32). Advisers should therefore expect that a schedule of losses attached to minutes of settlement may later have to be proved by a witness with knowledge of the underlying facts, and should keep that evidence available. Whether an appeal was taken is not verified here.

For taxpayers the takeaway is simple. An affidavit that tells the court how a settlement was reached is admissible for that purpose, and the other side cannot strike it because the affiant will not be examined on the merits of the tax dispute. Whether the Minister was bound by the minutes of settlement went back to the Tax Court.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

CBS Canada Holdings Co. v. Canada, 2017 FCA 65, decided March 31, 2017, Federal Court of Appeal (Pelletier, Rennie, and Woods JJ.A.; reasons by Pelletier J.A.), on appeal from the order of Lyons J. of the Tax Court of Canada reported as 2016 TCC 85. Reasons on the Federal Court of Appeal’s site. Also on CanLII.