Pre-trial steps in tax litigation, such as discovery examinations, typically involve two parties - the taxpayer and the Minister of National Revenue. Pre-trial steps can occasionally involve third parties, but generally only in extraordinary circumstances. The recent Tax Court of Canada decision in Sim v. HMK, 2025 TCC 22 illustrates circumstances in which third parties can be ordered to provide information.
In Sim, the Respondent sought to involve two third parties in two different ways. First, the Respondent sought to discover the father of the two taxpayers under s. 99 of the Tax Court of Canada Rules (General Procedure) (the “Rules”). Second, the respondent sought to obtain the taxpayers’ account records under the control of a third-party brokerage, under s. 86 of the Rules.
While the Court reiterated that these remedies should be applied sparingly, and only where there is demonstrably strict compliance with the Rules, it found that in this case, the Respondent did meet the threshold required. In doing so, the Court ordered the taxpayers’ father to attend examinations for discovery, and ordered the brokerage to produce the requested records, if such records exist.
S. 99 of the Rules
To discover a third party under s. 99 of the Rules, the moving party must clearly demonstrate that (1) the third party has information relevant to a material issue in the appeal; (2) the moving party has been unable to obtain the information from other persons whom the moving party is entitled to examine for discovery, or from the person sought to be examined; (3) it would be unfair to require the moving party to proceed to hearing without having had the opportunity of examining the third party; and (4) the examination will not unduly delay the hearing, entail unreasonable expenses for the other parties, or result in unfairness to the third party.
With respect to the first criterion – that the third party has information relevant to a material issue in the appeal – the moving party is required to clearly state the line of questioning they wish to pursue in examining the third party and demonstrate the relevance of this information. This is to guard against a third party discovery devolving into a “fishing expedition”.
In Sim, the Court declined to grant one of two lines of questioning the Respondent wished to pursue on the basis that the Respondent failed to demonstrate how that line of questioning related to the issues under appeal. The Respondent wanted to question the third party as to the underlying activities of the taxpayers’ companies. At issue was whether the corporations provided shareholder benefits (s. 15 of the Income Tax Act (the “Act”)); paid or transferred property (s. 56(2) of the Act); or conferred benefits on the taxpayers (s. 246 of the Act). The Court determined that the Respondent failed to demonstrate how the underlying activities of the companies were relevant to the determination of the amount of income to be attributed or imputed to the taxpayers. However, there is a possible alternate view, that if these corporations made significant amounts of money and their assets were depleted, then potentially the assets went to the taxpayers or were transferred at their direction or concurrence.
With respect to the second criterion – that the moving party has been unable to obtain the information – the moving party must demonstrate that they could not obtain this information from the nominee being discovered or through inquires of the third party sought to be discovered.
In Sim, the Court made it clear that the moving party is not required to have made inquiries of the third party directly, and that a failure to get a response from that third party by way of the taxpayer’s own undertaking is sufficient. In the circumstances, the Court found that the undertaking responses provided by the taxpayers to inquiries directed at their father – that he had no knowledge of the answer, or did not recall any specific transfers – was sufficient to satisfy the criterion that the Respondent has been unable to obtain the information sought.
With respect to the third criterion – that the Respondent needs the information from the third party to litigate its case – the Court summarily concluded that this was the case. Likewise, with respect to the fourth criteria – fairness and unreasonable delay – the Court addressed these in its order, setting out timelines for the third party discovery, as well as ordering the Respondent to pay reasonable costs incurred by the third party.
S. 86 of the Rules
S. 86 of the Rules involves third parties, but only indirectly. Under S. 86, a moving party can seek documents from a third party if it can be established that the documents sought are in the possession of a non-party to the appeal, and that the production of documents at a hearing might be compelled, i.e. the evidence is likely to be material.
The Respondent in Sim sought all records under the control of the third party brokerage related to the accounts held by the taxpayers or their related corporations, along with records relating to any deposit and withdrawals for the relevant taxation years. The Respondent’s position was that these documents were probative to the key issued under appeal – such as directions the taxpayers’ provided in respect of payments made and beneficiaries of the payments. The taxpayers did not oppose the Respondent’s position that these documents might be probative.
The Court found that the documents in the possession of the third party are likely relevant to the issues on appeal. Specifically, the records from the brokerage relating to the accounts of the taxpayers and their related corporations are relevant as to whether the corporations made payments to the taxpayers, directly or with their concurrence.
Despite finding that the documents are relevant, the Court did determine that the Respondent did not sufficiently query the third party in advance of the hearing, and that no one appeared on behalf of the brokerage. This hindered the Court’s ability to determine if the records requested, even if relevant, are in fact within the possession of the third party brokerage.
Nevertheless, and based on answers from the discovery examinations, the Court agreed with the Respondent that it was reasonable to conclude the third party had the documents requested. Accordingly, the Court ordered the third party to examine its records and advise whether it possessed the requested documents. If the third party brokerage does have the documents, it is ordered to produce them.
Observations
This case reaffirms that where a party cannot obtain the evidence it seeks from a party to the litigation, it can move to involve a third party. Additionally, this case provides some practical insights. For example:
- While the examination of a third party is noted as an extraordinary remedy, the ability to obtain documents from a third party is not. Its limit rests on the evidence being likely material at the hearing.
- Individuals intimately involved in a taxpayer’s business or affairs – including family members – must be aware that, if their knowledge is deemed material to the appeal, they may be discovered or ordered to produce evidence.
- Maintaining comprehensive and accurate records may mitigate the opposing party’s ability to seek the information from third parties, which could extend beyond the scope of documents the taxpayer is required to possess. As well, since a taxpayer may be unaware of the contents of the third party’s records, this could lead to unexpected surprises or have unintended consequences.
Also, while not considered in this case, ss. 86 and 99 of the Rules may also be used by taxpayers. With the increasing complexity of audits and information sharing by the Canada Revenue Agency, ss. 86 and 99 of the Rules could be used to obtain third party information where that information is relevant to the appeal and has not been made available to the taxpayer.
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