CRA Not Above Law: The Implied Undertaking Rules

Taxpayers can take comfort that the “implied undertaking rule” still protects them when dealing with the CRA in pre-trial discovery, thanks to recent jurisprudence.

Any documents exchanged during pre-trial discovery cannot be used in the trial of another matter, unless leave (permission) is expressly granted by the court.

In Fio Corporation v. The Queen (2014) TCC 58, the taxpayer was reassessed in March 2011 for its 2007 and 2008 tax years, then appealed. During the pre-trial discovery process, Fio provided information that lead CRA to make further audit inquiry. After this, they used this information to reassess Fio again on its 2007 and 2008 taxation years.

Fio’s legal counsel objected, stating that this was contrary to the implied undertaking rule. The Honourable Justice D’Arcy had to decide whether the rule applied, and if it did and was breached, what the remedy would be for the wronged taxpayer.

The Supreme Court of Canada decision Juman v. Doucette (2008) 1 S.C.R. is the highest authority in the country on the implied undertaking rule. In that case Justice Binnie stated the rule as follows:

The implied undertaking rule is that both documentary and oral information obtained on discovery, including information thought by one of the parties to disclose some sort of criminal conduct, is subject to the implied undertaking. It is not to be used by the other parties except for the purpose of that litigation, unless and until the scope of the undertaking is varied by a court order or other judicial order or a situation of immediate and serious danger emerges. 

The reasons justifying the rule are the invasive nature of the pre-trial discovery process and the need for complete and candid discovery in the courts.

The CRA argued that the rule should not apply in circumstances such as those at issue because the relationship between the litigants is of a unique nature. The Court denied this argument.

Honourable Justice D’Arcy now had to decide what would best remedy the situation. While he chose not to hold the subsequent reassessments invalid, he awarded costs to Fio in the amount of $25,000 and forbade the use of the documents in any other proceeding.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.