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This article originally appeared on Taxnet Pro TaxNews Tax Disputes & Resolution Centre.
The Tax Court of Canada found that CBS’ lawyer’s affidavit and appended exhibited constituted inadmissible hearsay. The Federal Court of Appeal disagreed, finding that the Tax Court was premature in determining that the documents would be tendered for the truth of their contents. The underlying motion proceeded and revealed that CBS in fact did rely on the documents for the truth of their contents. The documents were admitted by the Tax Court despite the earlier finding that they were neither reliable nor necessary. The case demonstrates ongoing confusion in the Federal Courts as to how to identify and deal with hearsay evidence.
- Underlying Facts of CBS Canada Holdings Co v Canada[1]
CBS made an offer to the Minister of National Revenue (“the Minister”) to settle a tax liability dispute. The offer included “Schedule A”, a list of CBS’s purported losses in the amount of $24,366,301. The Minister accepted the offer and CBS prepared Minutes of Settlement and appended the Schedule A. The Minutes were executed by both parties. Five weeks later, the Minister advised CBS that the Minutes could not be implemented because the losses set out on Schedule A did not exist. The Minister refused to implement the settlement on the basis of mistake of fact. CBS brought a motion to the Tax Court (“TCC”) seeking enforcement of the Minutes[2].
CBS’ enforcement motion was supported by an affidavit sworn by a lawyer with CBS’s law firm. Attached to the affidavit were a number of exhibits, including the Schedule A. The Crown cross-examined the lawyer on her affidavit, and she refused to answer questions about the information contained in Schedule A on the basis that the information sought was privileged[3]. The lawyer would not confirm nor deny whether the losses listed in Schedule A existed, or even if she was in fact counsel for CBS. Consequently, the Crown moved to strike the affidavit[4].
The motion to strike was brought on the grounds that CBS failed to permit effective cross-examination of its affiant by invoking privilege over the information and exhibits, and by refusing to answer relevant and proper questions. The Crown argued that the affidavit contained unnecessary and unreliable hearsay evidence and putting forward counsel as an affiant prevented meaningful cross-examination on a controversial issue.
- Tax Court Granted the Motion Finding It Contained Inadmissible Hearsay
The motion judge found that the affidavit constituted inadmissible hearsay. CBS argued that the sole function of the affidavit was to merely append exhibits. The motion judge disagreed, pointing out that several paragraphs asserted facts without appending exhibits and thus the function of the affidavit went beyond merely indicating what was sent and received[5]. The motion judge concluded that the affidavit went beyond merely proving that the statements were made, and the statements were therefore hearsay[6].
Part of the reason for the motion judge’s conclusion was the fact the affiant deposed that she had personal knowledge to which she deposed. The motion judge stated that contents of an affidavit made with the personal knowledge of the deponent are not hearsay, while information given on information and belief is hearsay[7]. This statement appears to indicate a misapprehension of the legal definition of hearsay[8], and may have unintentionally conflated the colloquial meaning of the phrase with the legal definition of hearsay.
Notwithstanding this statement, the motion judge ultimately held that the affidavit and in particular Schedule A were going to be tendered for the truth of their contents, were out of court statements and were therefore hearsay. The motion judge stated that in order to determine if the evidence is reliable, the trier of fact must have a satisfactory basis to evaluate the truth and accuracy of the statement. The Crown argued that the information was inherently unreliable because, given that the affiant refused to answer questions on the basis of privilege, there would be no opportunity to test the truth and accuracy of the information on cross-examination[9]. The motion judge agreed and held that CBS could not take advantage of ambiguity of its own making. Since Schedule A was offered for the purpose of proving the contents, and its veracity could not be tested by cross-examination, it failed to meet the threshold for the principled exception to the rule against hearsay[10].
By using counsel as an affiant, CBS intentionally thwarted both the necessity of the evidence contained in the affidavit and the reliability of that evidence[11]. The motions judge concluded by advising CBS that if the information was put forward as part of an affidavit of a person who could answer questions, the barrier to reliability may be removed[12].
- The Federal Court of Appeal Found the Affidavit Did Not Constitute Hearsay[13]
The Federal Court of Appeal (“FCA”) considered that the Tax Court Judge found that the pivotal or controversial issue in CBS’ enforcement motion was the “accuracy, truth and origin” of the losses listed in Schedule A[14]. The FCA found that the motion judge erred by improperly inferring that Schedule A was being put forward for the truth of its contents. The FCA said that as the factum had not yet been filed on the enforcement motion and consequently the motion judge had no basis to conclude that the purpose of the document was to prove the truth of its contents[15]. The FCA went on to make its own inference about the use of Schedule A, and decided to infer that it would be used for the proposition that a party may tender documents to prove a settlement was entered into but not relied on for the truth of the contents[16]. Accepting its own inference, the FCA held the affidavit and exhibits were not hearsay and there was therefore no need to consider necessity and reliability[17].
- The Ultimate Use of the Affidavit – Purpose was Truth of The Contents of Schedule A
This case offers a unique ability to examine how the affidavit was ultimately used. The affidavit and Schedule A were put forward for the truth of its contents. The TCC’s inference was correct, and because the Order striking the affidavit was reversed by the FCA, the affidavit was never subject to proper cross-examination. The TCC accepted that the losses listed in the Schedule A did in fact exist, proven solely by the contents of Schedule A.
CBS’ argument at the enforcement motion turned on the factual existence of the losses. The Crown argued that the affidavit and appended documentation were tendered only to establish facts leading to the settlement, and not for the proof of the contents, and CBS should be held to its evidentiary choices as asserted at the FCA[18]. The Tax Court, in finding for CBS, held that it was an agreed fact, recorded in the Minutes that the losses existed, the $24,366,301 was available, and that finding of fact was “grounded in objective reality”[19] evidenced by Schedule A. The truth of Schedule A was therefore the centerpiece of CBS’s argument and TCC, obligated to adhere to the FCA judgment, had no option but to rely on it as evidence of the truth of its contents.
The FCA dismissed the Crown’s appeal from the enforcement motion, but not on the basis of the accuracy of Schedule A. Instead, the FCA ignored the argument that Schedule A was evidence of the losses, and instead held that the parties should be bound by the agreements that they make[20]. The accuracy or inaccuracy of the facts underlying the agreement were not considered by the FCA, and the FCA stated that “it would not be appropriate for the Court to wade into the merits of the agreement”[21]. This approach enabled the FCA to avoid addressing the fact that it had incorrectly concluded, in its earlier decision, that the affidavit and Schedule A were not hearsay.
The TCC motions judge was correct in her initial determination of the purpose of the affidavit and Schedule A. The FCA ought to have deferred to the motion judge when considering the purpose of the evidence, or at least specified in its decision that if the evidence were to be put forward for the truth of its contents, then it could at that time be excluded if CBS continued to impede cross-examination.
- Jenna Clark (Counsel, Department of Justice)
Click here to read the judgement in CBS Canada Holdings Co v Canada, 2016 TCC 85.
Click here to read the judgement in CBS Canada v The Queen, 2018 TCC 188.
Click here to read the decision in CBS Canada Holdings v Canada, 2017 FCA 65
Click here to read the decision in CBS Canada Holdings Co v Canada, 2020 FCA 4.
[1] CBS Canada Holdings Co v Canada, 2016 TCC 85 (Tax Court of Canada), (hereinafter “CBS”).
[2] CBS, supra note 1 at 1, 2, 3, 6, 10.
[3] CBS, supra note 1 at 36.
[4] CBS, supra note 1 at 1, 2, 3, 4.
[5] CBS, supra note 1 at 24.
[6] CBS, supra note 1 at 25.
[7] CBS, supra note 1 at 28, 29, 30.
[8] Bryant, Lederman, Fuerst, Sopinka, Lederman & Bryant: The Law of Evidence in Canada, 5th ed. (Toronto: Lexis Nexis 2018) at 6.3.
[9] CBS, supra note 1 at 33.
[10] CBS, supra note 1 at 36.
[11] CBS, supra note 1 at 52 and 63.
[12] CBS, supra note 1 at 39, 48, 63.
[13] CBS Canada Holdings v Canada, 2017 FCA 65 (Federal Court of Appeal).
[14] CBS, supra note 13 at 7.
[15] CBS, supra note 13 at 22.
[16] CBS supra note 13 at 25.
[17] CBS, supra note 13 at 26 and 27.
[18] CBS Canada v The Queen, 2018 TCC 188 (Tax Court of Canda) at 64.
[19] CBS, supra note 18 at 78 and CBS Canada Holdings Co v Canada, 2020 FCA 4 (Federal Court of Appeal) at 17.
[20] CBS, supra note 19 at 35.
[21] CBS, supra note 19 at 36.