Judgments

[1993] 3 F.C. 251

A-891-92

Her Majesty the Queen (Appellant) (Defendant)

v.

Crestbrook Forest Industries Limited (Respondent) (Plaintiff)

Indexed as: Crestbrook Forest Industries Ltd. v. Canada (C.A.)

Court of Appeal, Isaac C.J., Stone J.A. and Craig D.J.—Vancouver, March 3; Ottawa, April 22, 1993.

Practice — Discovery — Examination for discovery — Income tax — Court may order Canadian company to obtain answers to questions posed on examination for discovery from non-resident controlling shareholder companies with which engaged in joint venture, though foreign companies not parties to action — Statement of claim to be struck if answers not forthcoming.

Practice — Evidence — Commission evidence — Commission will not normally issue to obtain discovery evidence — Circumstances insufficiently exceptional to warrant Commission.

Corporations — Examination for discovery — Court may order Canadian company to obtain answers to questions posed upon examination for discovery from non-resident controlling shareholder companies with which engaged in joint venture, even though foreign companies not parties to action — Appropriate to pierce corporate veil to determine principal beneficiaries of business carried out in Canada by respondent — Unconscionable to allow non-resident corporations to structure affairs such as to carry on profitable business in Canada without also being obliged to comply with Canadian law.

The respondent, Crestbrook Forest Industries Limited (Crestbrook), operated a pulp mill in British Columbia. In 1966, in order to raise capital for the construction of a pulp mill, it entered into a joint venture agreement with two Japanese companies. With the purchase of shares and appointments to the board of directors, the Japanese companies in effect took control of Crestbrook. The joint venture agreement also included a pulp sales agreement providing that Crestbrook would sell pulp to the Japanese companies at a generous discount (5.6%-6%) and would absorb the cost of resale or delivery to their customers.

In its income tax returns for the years 1984, 1985 and 1986, Crestbrook reported losses of $452,715, $22,632,915 and $934,534 respectively. Concluding that a pulp sales discount rate of 5.6% was excessive, the Minister added to Crestbrook’s income the amounts by which the discounts exceeded 2.5%, the rate considered reasonable: $2,116,665 for 1984, $1,758,275 for 1985 and $2,567,153 for 1986. The Minister also assessed Crestbrook for additional tax under Part XIII of the Income Tax Act on the basis that the amount of the discount over 2.5% amounted to a deemed dividend paid to non-resident taxpayers for which Crestbrook should have deducted and withheld at source any tax payable.

Crestbrook appealed the Minister’s decision. Upon examination for discovery, Crestbrook’s representative was asked a number of questions concerning the payment of the pulp price discounts. In fulfilment of his undertakings to inform himself and to provide answers, the representative wrote to the Japanese companies seeking answers to the questions. The companies declined to answer on a voluntary basis.

By notice of motion, the Crown sought an order under Rule 465(18) to compel Crestbrook to supply answers to 22 questions. In the alternative, it asked for an order under Rule 465(20) striking out Crestbrook’s action or an order under Rule 477 for the issuance of a commission to examine persons connected with companies in Japan.

The Associate Senior Prothonotary ordered that Crestbrook provide answers to 3 of the 22 questions in issue which related to matters which had arisen after the execution of the joint venture agreement. He ruled that the remaining 19 questions which related to events prior to the joint venture agreement need not be answered.

On appeal to the Trial Division, the Motions Judge found that the 19 questions need not be answered because they were outside the scope of the international business venture which gave rise to the proceedings before the Court. As to the 3 post-venture questions, the Motions Judge held that it was not open to the Court to compel a party to respond to a question, the answer to which was in the power of someone over whom he had no control. He noted that in an appeal under the Income Tax Act, the Minister was entitled to base his conclusions on his own assumptions of fact, and that the burden of disproof then fell on the taxpayer.

This was an appeal from that decision.

Held, the appeal should be allowed.

The general intention of the Federal Court Rules has been to provide all litigants with full and complete discovery prior to trial and to remove as much as possible what used to be known as the “ambush” tactics of the adversary system. The goal was to narrow the issues and reduce as much as possible matters to be determined at trial.

For the purposes of this case, the limit to those principles was that imposed by Rule 465(15): an individual being questioned was required to “answer any question as to any fact within the knowledge or means of knowledge” of the party for whom he had been put forward. The correct statement of the law on this issue was to be found in Monarch Marking Systems, Inc. v. Esselte Meto Ltd., [1984] 1 F.C. 641 (T.D.): in the appropriate circumstances, this Court does have the power to require the sort of answers sought by the Crown here, where it is shown as a prerequisite that it is in the interets of the administration of justice to look behind the sanctity of the corporate identity.

In this case, the three companies were in an affiliated relationship. The two Japanese companies own a substantial portion of Crestbrook’s stock, and the three are bound together in a long-term commercial relationship by the pulp sales agreement. In fact, Crestbrook was under the active control of the Japanese companies. The notion that the Japanese companies were one was supported by the documentary evidence.

The Motions Judge was therefore in error in concluding that the relationship of the Japanese companies vis à vis Crestbrook was such that Crestbrook ought not to be compelled to provide responses to the questions ordered by the Associate Senior Prothonotary to be answered.

Since all the questions were clearly relevant, it was inappropriate to make distinctions on the basis of whether questions related to events prior or subsequent to the execution of the joint venture agreement.

Crestbrook was the alter ego of the Japanese companies which exercised control over Crestbrook and always acted as one voice in the exercise of that control. It was within Crestbrook’s means to obtain responses to the questions.

In addition to the charge-back of sales commissions, the Japanese companies are alleged to have engaged in the process of “double dipping” whereby they received discounts on the price paid for pulp and thereby caused Crestbrook to incur further losses which were deducted against Crestbrook’s, their alter ego’s, income. It was therefore appropriate to look behind the corporate veil to see who were the principal beneficiaries of the business being carried out in Canada by Crestbrook. The interests of the administration of justice required that the operating minds behind Crestbrook be obliged to respond to the questions posed by the Crown. It would be unconscionable to allow non-resident corporations to structure their affairs so that they could be free to carry on a profitable business enterprise in Canada without also being obliged to comply with Canadian law.

Commissions will not normally issue to obtain discovery evidence and the circumstances herein were not exceptional enough to justify the issuance of a commission.

Crestbrook should answer all of the questions within a 90-day time limit under pain of the statement of claim being struck out.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Federal Court Act, R.S.C., 1985, c. F-7, s. 3.

Federal Court Rules, C.R.C., c. 663, RR. 465(1),(15), (17),(18),(20), 477.

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 231.6 (as enacted by S.C. 1988, c. 55, s. 175), 251 (as am. by S.C. 1974-75-76, c. 26, s. 126; 1980-81-82-83, c. 140, s. 129; 1984, c. 1, s. 105; c. 45, s. 94).

Rules of Civil Procedure, O. Reg. 560/84, R. 30.02(4).

Rules of the Supreme Court 1965, R.S.C., O. 24, rr. 2, 3 (Eng.).

CASES JUDICIALLY CONSIDERED

APPLIED:

Monarch Marking Systems, Inc. v. Esselte Meto Ltd., [1984] 1 F.C. 641; (1983), 75 C.P.R. (2d) 130 (T.D.); Leitch v. Grand Trunk R. W. Co. (1890), 13 P.R. 369 (Ont. C.A.); Irish Shipping Ltd. v. The Queen, [1974] 1 F.C. 445 (T.D.); Champion Truck Bodies Ltd. v. R., [1986] 3 F.C. 245; (1986), 6 F.T.R. 63 (T.D.); Dallas v. Dallas (1960), 24 D.L.R. (2d) 746 (B.C.C.A.); Doyle (JC) v. MNR, [1978] CTC 597 (F.C.T.D.); Zingre v. The Queen et al., [1981] 2 S.C.R. 392; (1981), 127 D.L.R. (3d) 223; 10 Man. R. (2d) 62; 61 C.C.C. (2d) 465; 23 C.P.C. 259; 38 N.R. 272.

NOT FOLLOWED:

Indalex Ltd. v. R. (1983), 40 C.P.C. 28; [1984] C.T.C. 51; 84 DTC 6018 (F.C.T.D.).

DISTINGUISHED:

Lonrho Ltd. v. Shell Petroleum Co. Ltd., [1980] Q.B. 358 (C.A.), affd [1980] 1 W.L.R. 627 (H.L.).

REFERRED TO:

Sperry Corporation v. John Deere Ltd. et al. (1984), 82 C.P.R. (2d) 1 (F.C.T.D.); Control Data Canada, Ltd. v. Senstar Corp. (1987), 13 C.P.R. (3d) 546; 10 F.T.R. 153 (F.C.T.D.); Indalex Ltd. v. The Queen, [1986] 1 C.T.C. 219; (1986), 86 DTC 6039; 1 F.T.R. 1 (F.C.T.D.); Indalex Ltd. v. The Queen, [1988] 1 C.T.C. 60; (1987), 88 DTC 6053; 83 N.R. 185 (F.C.A.); Indalex Ltd. v. Canada, [1987] 1 F.C. 570 (C.A.); Xerox of Canada Ltd. v. IBM Canada Ltd., [1976] 1 F.C. 213; (1975), 24 C.P.R. (2d) 175 (T.D.).

AUTHORS CITED

Williston, W. B. and R. J. Rolls. The Law of Civil Procedure. Toronto: Butterworths, 1970.

APPEAL from a Trial Division decision ((1992), 55 F.T.R. 146) that a corporate party to an action was not required to obtain answers to questions posed upon examination for discovery from the non-resident controlling shareholders with whom it is engaged in a joint venture and who are not party to the action. Statement of claim to be struck out if answers not furnished within 90 days. Appeal allowed.

COUNSEL:

John R. Shipley for appellant (defendant).

Loren A. Green and Ian H. Pitfield for respondent (plaintiff).

SOLICITORS:

Deputy Attorney General of Canada for appellant (defendant).

Thorsteinssons, Vancouver, for respondent (plaintiff).

The following are the reasons for judgment rendered in English by

Isaac C.J.: This is an appeal from the order of a Motions Judge in the Trial Division [(1992), 55 F.T.R. 146] which dismissed an appeal by the appellant, and allowed a cross-appeal by the respondent, from an order of the Associate Senior Prothonotary. By his order, the Associate Senior Prothonotary had directed an officer of the respondent to inform himself and to provide answers to certain questions put by the appellant during an examination for discovery.

This appeal concerns the obligation of a corporate party to an action, who is engaged in an international business arrangement with non-resident controlling shareholders, to obtain from those shareholders who are not parties to the action, answers to questions posed during examinations for discovery which are relevant to the issues in dispute. A related issue, if such an obligation is found to exist, is the legal consequence of failure in its fulfilment.

BACKGROUND

The respondent, Crestbrook Forest Industries Limited (“Crestbrook”), is a joint-stock company incorporated under the laws of British Columbia, with its head office in the city of Cranbrook, B.C. Crestbrook operates a pulp mill in Skookumchuck, in the south-eastern part of that province. Until 1967, Crestbrook’s corporate name was Crestbrook Timber Limited (“Crestbrook Timber”).

Between 1964 and 1966, in an attempt to raise capital for the construction of a pulp mill, Crestbrook Timber engaged in a series of negotiations with two Japanese companies, Honshu Paper Company (“Honshu”) and Mitsubishi Corporation (“Mitsubishi”), which culminated in the execution of a joint venture agreement dated August 15, 1966. The parties to the joint venture agreement were Crestbrook Timber, Honshu and Mitsubishi (who were referred to collectively in the agreement as “Honshu Mitsubishi”) and the four principal shareholders in Crestbrook Timber, namely Messrs. V. C. Brown, A. O. Farstad, Alphonse Fabro and Chester Chastek (who were referred to collectively as “the Principals”).

The joint venture agreement contained the following recitals, among others:

A. Crestbrook [Timber] has been negotiating with Honshu Mitsubishi for the establishing [sic] of a Pulp Mill in south eastern British Columbia on the basis of a Joint Venture involving the incorporation of a new company which would own and operate the Pulp Mill;

…

C. Crestbrook is a valid and subsisting company incorporated under the laws of the Province of British Columbia and having an authorized capital stock of $700,000 divided into 14,000 preferred shares of a nominal value of $50.00 each and being also authorized to issue 1,500,000 common shares without nominal or par value of which 664,064 common shares are outstanding and in respect of which it is proposed by Crestbrook and the Principals that there be issued a further 29,000 shares in pursuance of arrangements heretofore made, such additional 29,000 shares being for the purposes hereof considered also to be outstanding;

…

E. Crestbrook holds Tree Farm Licence No. 14 and a number of Timber Sale Contracts from the Forest Department of the Province of British Columbia for logging and lumbering operations in the East Kootenay area of the said Province and the same are valid and in good standing; and Crestbrook has saw mill operations located at Creston, Cranbrook, Canal Flats and Parson, B.C. and a subsidiary plywood operation located at Fort McLeod, Alberta and has a capacity to produce approximately 50,000 units of waste wood chips suitable for the operations of the proposed Pulp Mill;

…

G. The Parties have agreed upon the acquisition by Honshu Mitsubishi of an interest in Crestbrook, subject to the commitments of Honshu Mitsubishi hereinafter set forth;

By article 1.01 of the joint venture agreement, Crestbrook Timber offered to Honshu Mitsubishi 650,000 common shares of its capital stock at an issue price of $7.50 per share, to be taken up not later than March 31, 1967, which the latter agreed to accept upon the fulfilment of certain conditions specified in the agreement. The conditions included the following:

1. that the Principal, Farstad, would, forthwith after execution of the agreement, give to Honshu Mitsubishi or their nominees a proxy irrevocable for ten years to vote 25,000 of his shares at any and every general and extraordinary meeting of the shareholders held during that period (article 1.05);

2. that if Honshu Mitsubishi accepted the offer to purchase the 650,000 common shares, they would be free to try to acquire at least 22,000 additional shares in the capital stock of Crestbrook Timber, and that the Principal Shareholders would not impede or hinder Honshu Mitsubishi in their efforts to acquire these additional shares (Article 1.06).

Article 2.03 of the joint venture agreement provided that Honshu Mitsubishi would endeavour to arrange the entire major financing of the pulp mill project, which was estimated to involve an expenditure of approximately thirty three million dollars.

Article 3.02 provided that upon the acceptance of the offer to purchase shares by Honshu Mitsubishi, the principal shareholders would arrange for the resignation of a sufficient number of directors of Crestbrook Timber, and their replacement by nominees of Honshu Mitsubishi, so as to give control of the board of directors to the nominees.

By articles 3.03 and 3.11, Crestbrook Timber obliged itself to further amend its articles of association to provide for a twelve-person board of directors, six of whom would be chosen by Honshu Mitsubishi and the other six by the other shareholders. In addition, the revised articles were to provide that a nominee of Honshu Mitsubishi would be chairman of the board. The Chairman would preside at all meetings of the directors and have a second or casting vote in the event of a tie.

In article 3.06, Honshu Mitsubishi undertook to enter into a pulp sales agreement with Crestbrook Timber in substantially the same form as a draft of such an agreement which was attached to the joint venture agreement as a schedule. As will be seen, the dispute at the heart of the litigation between the Crown and Crestbrook concerns one of the terms of this pulp sales agreement.

Pursuant to the terms of the joint venture agreement, in March of 1967, Honshu and Mitsubishi each acquired 325,000 common shares in the capital stock of Crestbrook Timber. The pulp sales agreement was in turn executed by Crestbrook and Honshu Mitsubishi on September 30, 1967. By article 1 of the pulp sales agreement, Crestbrook agreed to sell to Honshu Mitsubishi all of the pulp produced by its pulp mill and the latter agreed to purchase such pulp jointly. Article 5 provided a formula for determining the price of pulp so sold. Among other things, article 5 distinguished between pulp sold to Honshu for its own consumption (Honshu being a paper manufacturing company) and that which was sold to Honshu Mitsubishi for resale to their customers.

For sales to Honshu for its own consumption, the price to be paid to Crestbrook was one that was “equal to the current quarterly lowest price at which Mitsubishi shall purchase pulp from [Crestbrook] for sales in Japan.” With respect to sales to Honshu Mitsubishi for resale to their customers, however, the price to be paid to Crestbrook was to be determined in accordance with a formula which can be summarized as follows:

(a) the actual selling price of the pulp to the customer of Honshu or Mitsubishi, less

(b) all expenses incurred by Honshu Mitsubishi in the delivery of the pulp to their customer from the point of delivery by Crestbrook to them, less

(c) a discount of 5.6% (or 6%, depending on the circumstances).

The pulp sales agreement also provided that Honshu Mitsubishi would review the discount rate after the first ten years of the term of the arrangement and at intervals of five years thereafter. For reasons which will become clear later, it is in my view of no little significance that the agreement spoke of a power of “review” vested in Honshu Mitsubishi as a single entity, rather than an obligation to renegotiate among three distinct parties.

An example of the means by which Honshu and Mitsubishi carried out business, and of the role played by Crestbrook therein, is provided by the case of Gottesman Company. Gottesman, a New York firm, was engaged by Mitsubishi International Corporation, a subsidiary of Mitsubishi, to act as a sales agent for pulp purchased by Mitsubishi from Crestbrook. A part of the arrangement, however, was that all commissions charged to Mitsubishi by Gottesman were, in effect, charged back to Crestbrook. In other words, even though it had ostensibly sold its pulp to Mitsubishi, Crestbrook was forced to bear the cost of its resale to end-consumers.

In filing its income tax returns for the years 1984, 1985 and 1986, Crestbrook reported losses of $452,715, $22,632,915 and $934,534, respectively. The discounts claimed by Crestbrook in these same taxation years were as follows:

	1984	1985	1986
Sales	$67,060,725	$55,591,118	$83,690,773
Discount	$  3,793,193	$  3,148,053	$  4,659,422
Discount as percentage	5.65%	5.66%	5.567%

By notice of reassessment issued under Part I of the Income Tax Act [S.C. 1970-71-72, c. 63], the Minister of National Revenue reassessed Crestbrook for those taxation years. Saying that a pulp sales discount rate of 5.6% was excessive, the Minister added to Crestbrook’s income the amounts by which the discounts exceeded 2.5%, the rate which he considered reasonable. For each of the years, the amounts added were:

(a) 1984 - $2,116,665

(b) 1985 - $1,758,275

(c) 1986 - $2,567,153

In addition, the Minister assessed Crestbrook for additional tax under Part XIII of the Income Tax Act in the following amounts:

(a) 1984 - $317,500

(b) 1985 - $263,741; and

(c) 1986 - $385,073 (all together with interest thereon)

The liability to pay additional tax was founded on the basis that the amount of the discount over and above 2.5% amounted to a deemed dividend paid to non-resident taxpayers for which Crestbrook should have deducted and withheld at source any tax payable.

Crestbrook filed notices of objection to the Part I reassessments and the Part XIII assessments, but the Minister confirmed his conclusions on the basis that the dealings between Crestbrook and Honshu Mitsubishi with respect to the discount arrangement did not reflect a bona fide business arrangement. As pleaded in his defence, the Minister’s position was that:

(a)       when negotiating the Pulp Sales Agreement, Crestbrook and Honshu Mitsubishi were not dealing at arm’s length;

(b)       the commercial reality was that Honshu and Mitsubishi controlled Crestbrook and moreover, that they “acted in concert and with a common mind to negotiate the discount rate”;

(c)        in the years in question, a reasonable pulp sales discount did not exceed 2%;

(d)       this being the case, the moneys received by Crestbrook from Honshu Mitsubishi in respect of sales of pulp for the years in question did not constitute reasonable amounts; and

(e)       in light of the circumstances, the excess discount would constitute in law a shareholder benefit or appropriation to non-residents which, under paragraph 214(3)(a) of the Income Tax Act, constitutes a deemed dividend.

By statement of claim filed in the Trial Division on November 23, 1989, Crestbrook appealed the Minister’s decision. On February 13, 1990, the Crown filed its defence. It is clear from the pleadings that the Minister’s decision respecting the reasonableness of the quantum of the discount was the central issue in the litigation.

Crestbrook offered as its representative for discovery during the litigation John R. Croll, its Vice-President and Chief Financial Officer. Mr. Croll had joined Crestbrook in March, 1987. Prior to that date, he had had no connection with the company.

During the examinations for discovery, Mr. Croll was asked a number of questions concerning the payment of the pulp price discounts. He admitted that this was something of which he had no knowledge, but he undertook to inform himself and to provide answers. As the transcript of the discovery examinations shows, the questions related to the part played by Honshu Mitsubishi in the establishment of the discount rate.[1]

In fulfilment of his undertakings, Mr. Croll wrote to Honshu and Mitsubishi seeking answers to the questions. Honshu did not respond at all to the request, but Mitsubishi responded by letter dated November 21, 1990, with a refusal to provide the information. Quoted in pertinent part, Mitsubishi’s reply reads as follows:

However we must decline, with regret, to answer on a voluntary basis the questions raised in the ‘Discoveries’ process. As we mentioned in our letter to Revenue Canada on February 1, 1988, we suggest that Revenue Canada will make such formal arrangements as are available to it to have these questions considered by us, and then we will be pleased to answer such questions as we may be required by Canadian and Japanese law to answer.[2]

The reference to correspondence with Revenue Canada was to a similar response which Mitsubishi had given to an earlier request for information made by Revenue Canada directly.

By notice of motion dated March 13, 1991, the Crown sought an order under the then Federal Court Rule 465(18) [C.R.C., c. 663][3] compelling Crestbrook to supply answers to twenty-two questions. In the alternative, it asked for an order under Rule 465(20) striking out Crestbrook’s action or an order under Rule 477 for the issuance of a commission to examine witnesses from Honshu Mitsubishi in Japan.

On May 23, 1991 (after the Crown had filed its notice of motion), Mr. Croll again wrote to Honshu and Mitsubishi. In his letters, he explained to the Japanese companies in some detail the remedies being sought by the Crown, but notwithstanding this second request, by letter dated May 28, 1991, Mitsubishi replied merely by reiterating its earlier position.[4] Honshu, in turn, responded with a letter dated May 31, 1991, which reads in part:

We have carefully considered your request but we regret that we must decline to answer the questions unless compelled to do so by the law of Canada and Japan.[5]

As the Motions Judge noted at pages 148-149 of his reasons, this was in keeping with the uncooperative attitude displayed by Honshu Mitsubishi to Revenue Canada when it had earlier sought the same information during its audit of Crestbrook.

By order dated October 1, 1991, the Associate Senior Prothonotary granted the Crown’s application in part and without written reasons ordered that Crestbrook provide answers to the three of the twenty-two questions in issue which related to matters which had arisen after the execution of the joint venture agreement. He concluded that the remaining nineteen questions which pre-dated the execution of the joint venture agreement need not be answered even though they were conceded by the respondent’s witness to be relevant to the issues in dispute.

The Crown appealed the Associate Senior Prothonotary’s order and Crestbrook filed a cross-appeal in respect of the three questions which it had been directed to answer.

The Motions Judge dismissed the Crown’s appeal, but he allowed the cross-appeal. He held that the Associate Senior Prothonotary was correct in holding that questions which related to events prior to the execution of the joint venture agreement need not be answered. This was so, the Motions Judge said, because they were outside the scope of the international business venture which gave rise to the proceedings before the Court.

As to the three post-joint venture questions which the Associate Senior Prothonotary had ordered be answered, the Motions Judge held that it was not open to the Court to compel a party to respond to a question, the answer to which was in the power of someone over whom he had no control. All the Court could do, he said, is to require a party to seek a response, which Crestbrook had already done. The Motions Judge also suggested that contrary to the Crown’s claim about the seriousness of its application, the administration of justice was not being hindered by the Crown’s inability to force Crestbrook to obtain a response. He noted that in an appeal under the Income Tax Act, the Minister is entitled to base his conclusions on his own assumptions of fact, and that the burden of disproof then falls on the taxpayer.

ISSUES

As noted, the question to be answered in this appeal is whether a corporate party to an action, who is engaged in an international business arrangement with non-resident controlling shareholders, can be required to obtain from those shareholders who are not parties to the action, answers to questions posed during examinations for discovery which are relevant to the issues in dispute. If the answer to this is in the affirmative, then a second issue is raised, namely, the consequence of failure to fulfil that requirement.

ANALYSIS

The Scope of Discovery in the Federal Court—General Principles

Since the action was commenced prior to 1990, this proceeding is governed by the discovery rules as they stood before the amendments already referred to. Rule 465 outlined the scope of examinations for discovery:

Rule 465. (1) For the purpose of this Rule, a party may be examined for discovery, as hereinafter in this Rule provided,

…

(b) if the party is a corporation … by questioning any member or officer of such corporation, body or group,

…

(15) Upon examination for discovery … the individual being questioned shall answer any question as to any fact within the knowledge or means of knowledge of the party being examined for discovery that may prove or tend to prove or disprove or tend to disprove any unadmitted allegation of fact in any pleading filed by the party being examined for discovery or the examining party.

…

(17) In order to comply with paragraph (15), the individual being questioned may be required to inform himself and for that purpose the examination may be adjourned if necessary.

…

(20) If any individual to be questioned fails without reasonable excuse to attend and submit to questioning as required by this Rule … the party being examined is liable, in the discretion of the Court, if a plaintiff to have his action dismissed. … The onus of proof of “reasonable excuse” for the purpose of this Rule is on the party being examined.

An historical outline of the evolution of the discovery process (including the practice of examining corporate parties through their officers) can be found in the judgment of Osler J.A. in Leitch v. Grand Trunk R. W. Co. (1890), 13 P.R. 369 (Ont. C.A.), but in Irish Shipping Ltd. v. The Queen, [1974] 1 F.C. 445 (T.D.), Collier J. succinctly captured the rationale underlying the framing of the rules pertaining to examination for discovery in such broad language. At page 449, he said:

The tendency in the Courts of this country in recent years has been to provide all litigants with full and complete discovery prior to trial and to remove as much as possible what used to be known as the “ambush” tactics of the adversary system. In my view that is the general intention of the Federal Court Rules.

Similarly, in Champion Truck Bodies Ltd. v. R., [1986] 3 F.C. 245 (T.D.) Strayer J. said at page 247:

It is in the interests of justice that examinations for discovery should be complete and this implies that the questioning should be as relevant as possible. The object is to explore fully the issues raised by the pleadings, to understand the position of the party being examined and to gain admissions from him. This is all in furtherance of the goal of narrowing the issues and reducing as much as possible matters to be determined at trial.

Limitations on the Scope of Examination

Despite this broad statement of principle, though, there are some limits on the ambit of the examination, perhaps the most obvious of which is that the Court will not permit the discovery process to be used as a “fishing expedition” (see, e.g., Sperry Corporation v. John Deere Ltd. et al. (1984), 82 C.P.R. (2d) 1 (F.C.T.D.)). For the purposes of this case, however, the relevant limit is that imposed by Rule 465 itself. To repeat, paragraph 15 required that an individual being questioned was to “answer any question as to any fact within the knowledge or means of knowledge” [underlining added] of the party for whom he had been put forward. In my view, this creates an obvious presumption that a party can only be expected to answer questions for which it has an ability to find an answer.

In Control Data Canada, Ltd. v. Senstar Corp. (1987), 13 C.P.R. (3d) 546 (F.C.T.D.), at page 547, Cullen J. reiterated this, holding that normally, the Court cannot compel a person to obtain information from a third party. In Indalex Ltd. v. R. (1983), 40 C.P.C. 28 (F.C.T.D.), Walsh J. went even further. Discussing a situation not dissimilar to the one before us, i.e., a case where the Crown sought to compel a related corporate entity to cooperate with proceedings against a corporate taxpayer, he said at pages 47-48:

While it is true that plaintiff has obtained a tax advantage as a result of the manner in which it was directed by the corporations controlling it to carry out its business, and this merits a careful scrutiny of what was done to ascertain whether the various transactions have in fact been carried out in such a manner that they do not constitute a sham, this does not, in my view, after a careful examination of the jurisprudence to which I have referred as well as a number of other cases referred to by both plaintiff and defendant, justify a full inquiry into the business dealings of corporations not parties to the action herein, even if these corporations do control the operations of plaintiff which has a distinct corporate personality, the consequences of which must be recognized and observed.[6]

However, in Monarch Marking Systems, Inc. v. Esselte Meto Ltd., [1984] 1 F.C. 641 (T.D.), Mahoney J. (as he then was), in ordering a corporate officer to answer questions in a patent action concerning matters in the knowledge of foreign affiliated companies, referred to a most important consideration which in my opinion must be taken into account in modern business litigation. At page 646, he said:

Today’s commercial reality, with international corporations, large and small, doing business through affiliates across much of the world and treating national boundaries as minor inconveniences to be coped with by organizational means, dictates that the corporate veil ought not be permitted to inhibit the administration of justice in Canada. Examination for discovery is an important tool in the administration of justice on its civil side. I have no doubt that, under proper sanctions by the court, Canadian companies can readily and economically obtain from their foreign affiliates answers to proper questions on discovery. I am convinced that they should be required to try and to pay the consequences of their failure or their affiliates’ recalcitrance. International businesses ought not be permitted, either as an incident or object of their organizational set-ups, to avoid full compliance with the law of Canada in respect of the business they do here.

In my view what Mahoney J. said was consistent with the philosophy underlying Rule 465 (and its successor, Rule 455). In the appropriate circumstances, this Court does have the power to require the sort of answers sought by the Crown here, but the Court will only do so in special situations, where it is shown as a prerequisite that it is in the interests of the administration of justice to look behind the sanctity of the corporate identity. To the extent, therefore, that the decision of the Court in Indalex is in conflict with that in Monarch Marking Systems Inc. v. Esselte Meto, the latter should be taken as the correct statement of the law on this issue.

This power, while for understandable reasons used by the courts only sparingly, has been recognized for some time. In Dallas v. Dallas (1960), 24 D.L.R. (2d) 746, for example, the British Columbia Court of Appeal ordered that a party to an action could be required to produce documents belonging to a company of which he was the alter ego. Sheppard J.A., speaking for the Court, said at page 748:

In this case the company is a juristic person with the capacity to exercise effective control over these documents, but the evidence shows that the company is an instrument of the defendant and under his sole direction and control. Any nominal control exercised by the company would in reality be the control of the defendant. I am not prepared to hold that the doctrine in Saloman v. Saloman, [1897] A.C. 22 does negative the control which this defendant has in fact so as to enable him to escape discovery of relevant documents in his possession by interposing this his controlled creature.[7]

Before leaving this point, I wish to say a few words about the judgment of Lord Denning M.R. in Lonrho Ltd. v. Shell Petroleum Co. Ltd., [1980] Q.B. 358 (C.A.), which counsel for Crestbrook offered in argument before us as authority for the proposition that we should not enter into an inquiry into the corporate arrangements standing behind its operations.

In Lonrho, the Court of Appeal declined to order the production of documents by African subsidiaries of Shell Petroleum in an action for damages for alleged breach of an oil pipeline agreement during the period of the embargo imposed against Rhodesia after its unilateral declaration of independence in 1965. Crestbrook is quite correct when it says that in the circumstances of that case (and, Crestbrook is quite right to point out, notwithstanding that the companies from whom the documents were sought were wholly-owned subsidiaries of the corporate party) Lord Denning declined to “lift” the corporate veil, as he put it, but in my view it is important to consider his Lordship’s judgment in its entirety when looking at its possible application to this case.

At page 371, for example, he said that in deciding whether to lift the veil, “a great deal depends on the facts of each individual case”. In particular, he envisioned lifting the veil in a situation where one company was the “alter ego” of another (ibid.). Furthermore, Lord Denning noted that the English Rules of the Supreme Court 1965 in question[8] spoke of an obligation to disclose all documents “which the party giving the discovery has or has had in his possession, custody or power” [underlining added] (pages 370-371). The speech of Lord Diplock upholding the Court of Appeal’s decision in the House of Lords ([1980] 1 W.L.R. 627) makes clear the importance of the specific wording of the English Rule (see pages 634-637).[9] As I have noted, Federal Court Rule 465(15) spoke of providing information within the “means of knowledge” of the person being examined, which arguably implies a somewhat lower standard. For these reasons, I do not think that Lonrho can be read as suggesting any limitation on the Court’s power beyond that which I have already stated.

In this case, it is common ground that the three companies, viz. Honshu, Mitsubishi and Crestbrook are in an affiliated relationship. The documentary evidence plainly shows that the two Japanese companies own a substantial portion of Crestbrook’s stock, and the three are bound together in a long-term commercial relationship by the pulp sales agreement. Moreover, I have no doubt whatsoever that the commercial reality, to borrow the words of Mahoney J., is that Crestbrook is under the active control of Honshu Mitsubishi. Not only does the joint venture agreement provide (as I have noted above) that together, Honshu and Mitsubishi were to have control of Crestbrook’s board of directors, but in argument before us, Crestbrook’s counsel admitted that Honshu Mitsubishi always voted together and acted as one.

This notion—that as far as Crestbrook was concerned, Honshu and Mitsubishi were one, is supported by the documentary evidence. Crestbrook’s response to one of the undertakings given during the examinations for discovery makes this clear:

Q:  Was the phrase ‘Japanese side’, used in various documents, intended to indicate that Honshu and Mitsubishi acted in concert during the negotiations? Did they ever take different positions and, if so, what were they?

A:   [Given by J.R. Croll, Crestbrook’s nominee during the examinations] Yes, from Crestbrook’s perspective they appeared to act together; no different positions were taken.[10]

The responses to the discovery undertakings also lead to the inference that Honshu Mitsubishi exercised active control over Crestbrook. Referring to the portion of the joint venture agreement by which the principal Farstad agreed to give Honshu Mitsubishi a proxy to vote 25,000 of his shares, the following exchange took place:

Q:  Was the Farstad voting trust put into place? From the Plaintiff’s perspective, what was the purpose of the arrangement?

A:   Yes. The purpose of the voting trust was to secure control of the company in the hands of Honshu and Mitsubishi.[11]

The discovery transcript, too, provides evidence on point. During the examination of Mr. Croll by counsel for the Crown, the following exchange took place:

MR. SHIPLEY [Counsel for the Crown]:…It’s my understanding that pursuant to this agreement [i.e. the joint venture agreement] Honshu and Mitsubishi collectively obtained 650,000 shares of Crestbrook and approximately a further 25,000 shares, so as to give Crestbrook effective control—excuse me, Honshu and Mitsubishi effective control of Crestbrook; is that correct?

MR. CROLL: Yes. I believe that is the case.

MR. GREEN [Counsel for Crestbrook]: They had voting rights over those latter shares.

MR. SHIPLEY: Approximately.

MR. GREEN: Yes.

MR. SHIPLEY: And the purpose of those—in fact the proxy rights in respect of those 25 additional thousand shares was to ensure that control was in the hands of Honshu and Mitsubishi; is that correct?

MR. CROLL: Yes.

Q:   And is it also correct that pursuant to the same agreement, the chairman of the board was to be a nominee of Honshu and Mitsubishi?

A:   Yes.

Q:   And that the chairman would have the casting vote?

A:   Yes.[12]

Finally, but not least of all, it is in my opinion telling that in the documentation creating the business relationship among the companies, Honshu Mitsubishi were referred to throughout as a single entity rather than as two companies each with its own interests.

Similarly, there does not appear to be any question that the Crown wants the answers to the questions in issue as part of a fishing expedition. Indeed, the very fact that Mr. Croll undertook to seek answers indicates that as far as Crestbrook was concerned, the questions were relevant to the matters in issue in the proceeding.

All of this being the case, I am of the view that the Motions Judge was in error in concluding that the relationship of Honshu Mitsubishi vis à vis Crestbrook was such that Crestbrook ought not to be compelled to provide responses to the questions ordered by the Associate Senior Prothonotary to be answered.

Turning to the questions that he said need not be answered, it is my view that although the Associate Senior Prothonotary was correct in holding that the events covered by them pre-date the contractual relationship among the three parties, they nevertheless provide a context against which the discount provisions of the pulp sales agreement can be properly understood. This was reinforced by the admission of their relevance made by Mr. Croll. In my opinion both the Associate Senior Prothonotary and the Motions Judge were in error in failing to appreciate the necessary connection between the events covered by those questions and the discount provision in issue in these proceedings. To my mind the only question is one of relevance and I am satisfied that, as Mr. Croll rightly concedes, it must be answered in the affirmative. It was, therefore, inappropriate to make distinctions on the basis of whether questions relate to events pre- or post-dating the execution of the joint venture agreement.

I conclude that Crestbrook was for all intents and purposes the alter ego of Honshu Mitsubishi. Together, these two corporations exercised control over Crestbrook and, as the documentary evidence suggests and as Crestbrook’s counsel admitted, they always acted as one voice in the exercise of that control. Accordingly, although evidence may be proffered to the contrary at the trial on the merits, I am satisfied for the purposes of this application that the commercial reality of the corporate arrangement was that the two Japanese companies were de facto engaged jointly in an enterprise in Canada using Crestbrook as their source of supply, and that it is within Crestbrook’s means to obtain responses to the questions in issue.

The matters which will have to be decided by the Trial Judge in this case are most serious. In addition to the charge-back of sales commissions already referred to, they include a claim that Honshu and Mitsubishi are engaged in a systematic process of “double dipping” whereby they receive discounts on the price that they pay for pulp and in the process cause Crestbrook to incur further losses which are deducted against Crestbrook’s, i.e., their alter ego’s, income. In light of the facts as they have been presented to us, it is in my view appropriate to look behind the corporate veil to see who were the principal beneficiaries of the business being carried out in Canada by Crestbrook. Having done so, it is plain to me that the interests of the administration of justice requires that the operating minds behind Crestbrook, namely Honshu and Mitsubishi, be obliged to respond to the questions posed by the Crown. It would in my view be unconscionable to allow non-resident corporations to structure their affairs so that they could be free to carry on a profitable business enterprise in Canada without also being obliged to comply with Canadian law.

In argument, counsel for Crestbrook advanced two arguments based on the Income Tax Act which I would like to address before leaving the main issue.

First, he said that since section 251 [as am. by S.C. 1974-75-76, c. 26, s. 126; 1980-81-82-83, c. 140, s. 129; 1984, c. 1, s. 105, c. 45, s. 94] of the Act defines in some detail the method by which corporate entities are deemed to be related for income tax purposes, the focus of this case should not be on “control” of Crestbrook by Honshu and Mitsubishi, but rather the deemed “relationship” of Crestbrook to the two Japanese companies. I have considered this argument in some depth, and while it may be of some importance with respect to the decision at trial, I do not see that it has any merit at this stage of the litigation. To repeat, what we are concerned with here is the degree to which each of the parties must supply the other with information in order to ensure that the issues raised by the pleadings are explored fully, to borrow the words of Strayer J. in Champion Truck Bodies Ltd. v. R. (supra). For all of the reasons I have outlined (not least of all including the admission of relevance by Mr. Croll, Crestbrook’s witness), I think that the information sought by the Crown is necessary for such an exploration.

In addition, Crestbrook’s counsel suggested that even if we were of the view that the information sought by the Crown was relevant, we ought not to grant the relief requested, but rather should make an order under section 231.6 [as enacted by S.C. 1988, c. 55, s. 175] of the Income Tax Act, which provides a mechanism whereby the Minister can require a person carrying on business in Canada to provide any “foreign-based information”. I have also considered this submission, but the remedy available under the provision, namely the prohibition of the introduction of the information by its owner, is plainly not adequate here.

The Issuance of a Commission with Letters Rogatory in Aid

Federal Court Rule 477 provides for the taking of evidence in a foreign jurisdiction by commission. Like Rule 465, Rule 477 is phrased in broad language—it says that “any party” desiring to have the evidence of “any person” may apply to the Court, and that the Court, if it is for any reason “convenient so to do”, “may order the issue of a commission under the seal of the Court for the examination”. Nonetheless, and also like Rule 465, the Court has read limitations into the scope of the Rule.

The circumstances when the Court will issue a commission generally have been summarized by Addy J. in Doyle (JC) v. MNR, [1978] CTC 597 (F.C.T.D.), at page 600,[13] Before a commission will be issued, the Court must be satisfied that: 1. the application is made bona fide; 2. the issue is one which the court ought to try; 3. the witnesses to be examined can give evidence material to the issue; and 4. there is some good reason why they cannot be examined within the jurisdiction. but for the purposes of this case, it is trite law that commissions will not normally issue to obtain discovery evidence. As Dickson J. (as he then was) said in Zingre v. The Queen et al., [1981] 2 S.C.R. 392, at page 403, it is only in exceptional circumstances that the Court will issue a commission to obtain evidence that would normally be obtained during examinations for discovery. Albeit speaking of the converse of the situation before us, i.e., a request from a foreign court for evidence to be used in a proceeding abroad, his judgment in my view represents an accurate statement of the principles to be applied here:

In general, our courts will only order an examination for the purpose of gathering evidence to be used at a trial, but that is not to say that an order will never be made at the pre-trial stage. … I do not think that it would be wise to lay down an inflexible rule that admits of no exceptions. The granting of an order for examination, being discretionary, will depend on the facts and particular circumstances of the individual case. … It may well be that, depending on the circumstances, a court would be prepared to order an examination even if the evidence were to be used for pre-trial proceedings.

Even assuming, without deciding the point conclusively, that this Court has the power to issue letters rogatory in aid of a commission granted under Rule 477,[14] in my view, this is not one of those exceptional cases and I would decline to issue such an order. I would also note that the Crown has never formally notified Crestbrook of the names of any Japanese representatives which it would like to examine. In light of the opinion from Japanese counsel produced by Crestbrook[15] which indicates that the Supreme Court of Japan would not grant an application to examine unnamed witnesses, even if I would be otherwise inclined to grant the Crown’s request for a commission, I would find that in these circumstances, it is premature to do so.

CONCLUSION

For all of the foregoing reasons, I would allow the appeal and set aside the order of the Motions Judge and of the Associate Senior Prothonotary in so far as it dismissed a portion of the Crown’s motion. I would restore the remainder of the order of the Associate Senior Prothonotary. I would allow costs to the Crown, both here and below. In addition, I would direct Crestbrook to provide answers to the twenty-two questions placed before the Associate Senior Prothonotary within ninety days from the date of issue of these reasons. If Crestbrook fails to provide the answers to all of the questions and such further questions as may properly arise out of the answers thereto within the time limited, I would order that its statement of claim be struck out.

Stone J.A.: I agree.

Craig D.J.: I agree.

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