There is a rule in provincial court civil actions that if you give documents to the other side during "discovery", that other party may not use the documents for any other purpose apart from the same court action. It can't show the documents to others and it can't start a different proceeding relying on that information without the Court's permission. (See e.g., Ontario Rules of Civil Procedure, r. 30.1.) This is called the "deemed undertaking" rule because you are "deemed" to promise or "undertake" to the other party that you will not use the information except for the current proceeding.
As Justice D'Arcy said: " This Court has held on numerous occasions that the implied undertaking rule applies to pre-trial discovery under the Tax Court of Canada Rules (General Procedure)..."
In this case, on the same day she filed the Notice of Appeal in the Tax Court, the taxpayer's lawyer:
"provided the Respondent’s counsel (the Department of Justice) with the following documents:- A copy of the Appellant’s notice of appeal
- Its list of documents (partial disclosure)
- Seven binders containing the 260 documents noted in its list of documents
- A Request to Admit
- An annotated Request to Admit." (Para. 5)
The lawyer included a letter explaining: "This package has been prepared with the goal of minimizing time and cost in resolving this appeal." (Para. 6.)
Giving the Department of Justice lawyers a full package to aid settlement as soon as you can seems an excellent and laudable practice. But 6 months later, the CRA reassessed the taxpayer again, for the same tax years, effectively over-riding the earlier reassessments that the taxpayer had appealed to the Tax Court. The taxpayer brought this motion before Justice D'Arcy to challenge those reassessments as a breach of the deemed (or "implied") undertaking rule.
Justice D'Arcy agreed with the taxpayer, and (1) forbade the Government from relying on the documents it got from the taxpayer after the Appeal started; (2) ordered the Government to pay the taxpayer $25,000 for its legal costs of the motion; and (3) gave the Government 30 days to ask for permission to use the documents despite the Court's order. Because the new reassessments void the old ones, the effect of this order may be to make the Crown unable to prove its new reassessments or, at least, make it harder.
As Justice D'Arcy said, relying on the SCC decision Juman v. Doucette, 2008 SCC 8, there are two main reasons for the deemed undertaking rule: "In the first place, pre-trial discovery is an invasion of a private right to be left alone with your thoughts and papers, however embarrassing, defamatory or scandalous." The second goal is to encourage "a more complete and candid discovery." And, because the goal is to encourage disclosure, an undertaking "should only be set aside in exceptional circumstances." (See paras. 17-18, and 56, citing Juman paras. 24-26 and 38.)
The Crown argued that the deemed undertaking rule could not apply to it in tax cases the same way that it applies to taxpayers or parties in civil actions. Here are the Crown's reasons, with some added context:
- In tax law, the taxpayer does not have a strong privacy right against the government for tax documents. (See R. v. Mckinlay Transport Ltd.,  1 SCR 627, Wilson at 649-50: "A taxpayer's privacy interest with regard to these documents vis-à-vis the Minister is relatively low.")
- The ITA already offers taxpayers limited statutory protection. (See McKinlay in the same para.: "the taxpayer's privacy interest is protected as much as possible since s. 241 of the Act protects the taxpayer from disclosure of his records or the information contained therein to other persons or agencies.")
- The "Minister has a duty to assess what she believes is the correct amount given the information in her possession, and is authorized under the ITA to assess even after a tax appeal has been initiated." (Para. 25.) (See Transalta Corporation v. Canada, 2013 FCA 285 for a recent confirmation of the rule that "'the Minister has a statutory duty to assess the amount of tax payable on the [facts] as he finds them in accordance with the law as he understands it.'" Transalta at para. 23.)
- The reassessment related to the same taxpayer, the same tax year, and the same issues.
(See TCC at paras. 25-28.)
Justice D'Arcy dismissed all the Crown's reasons essentially because in his view "most of the Respondent’s arguments do not relate to the issue of whether the implied undertaking rule applies but rather relate to the issue of whether the Court should grant leave to allow the CRA to use the Discovery Documents to reassess the Appellant." (Para. 52.) He believed that "if the Court were to grant such a permanent exclusion [for CRA from the deemed undertaking rule], appellants would be hesitant to come to this Court and disclose documents and provide answers to the Respondent." (Para. 49.)
Though Justice D'Arcy had referred to other TCC cases that say that the deemed undertaking rule applies in Tax Court, none of those cases dealt with the rule as it might apply to the Crown for reassessments. (See the three cases at para. 19, n. 14.) And though he dismissed the Crown's arguments, he didn't offer much analysis on some key points.
For example, though risk of being reassessed may discourage taxpayers from disclosing documents or facts, at least until the normal reassessment period expires, taxpayers must answer questions under audit, where the answers can lead to reassessment. Also, Tax Court rules put an extra burden on taxpayers to prove their cases against the Minister's assumptions. So, the Court process offers other examples than the implied undertaking rule to show that exceptions exist for the Crown from normal civil procedure rules.
In effect, Justice D'Arcy says that the CRA must use its audit powers to get all the documents it can; it cannot rely on the Court's discovery process. But what is the essential merit of the distinction? Why should we say that CRA may rely on ITA ss. 231 to 231.7 (or similar ETA rules) but may not achieve the same result in TCC discovery?
Under this TCC decision, taxpayers might choose to rush to Court as soon as possible after reassessment, disclosing documents they had not given the auditor. It's common for taxpayers to give new information during the course of objections and appeals: "Our case file review found that new information was provided and considered in 50% of the decisions made by the Tax Court. An internal study ... found that taxpayers provided new information to the Tax Appeals Program, at the notice of objection stage, in 73.7% of audits conducted in the Small and Medium Enterprises Audit Program." See CRA Tax Appeals Evaluation (May 2012), s. 5.14.) So, relying on this TCC decision, some taxpayers might use this TCC rule as a strategy: filing a quick appeal, without waiting for the objection to be heard (ITA s. 169(1)(b)), delivering documents quickly, and then resisting further reassessment based on the deemed undertaking rule. It may be hard for the Crown to show that this was abuse of the deemed undertaking rule, rather than an effort at speedy settlement of issues.
As far as the Court's concerns about increasing delay or chilling taxpayer disclosure, is there any rule that prevents CRA from conducting a further audit of the same tax year while the Tax Court process is ongoing? And would this become a proper response for the CRA? Would it be proper for the Court to forbid it?
So, though Justice D'Arcy's decision may be right, this is a case that will benefit from a fuller consideration on appeal.
See Fio Corporation v. The Queen, (2014 TCC D'Arcy)
Justice D'Arcy's decision was overturned on appeal. The FCA agreed that the deemed ("implied") undertaking rule applies to TCC cases but concluded that in this case the taxpayer had disclosed the documents to the CRA during the audit, i.e., before the TCC appeal. So, the documents were not covered by the deemed undertaking rule.
See Canada v. Fio Corporation, 2015 FCA 236 especially at paras. 2, 21 and 22.