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Tax Court of Canada restricts use of information discovered in court proceeding

William Maclagan, QC and David Ross, of Blake, Cassels & Graydon explain why the Tax Court of Canada stopped the Canada Revenue Agency (CRA) from using evidence from litigation to support fresh reassessments against Fio Corporation.

The recent Tax Court of Canada decision, Fio Corporation v The Queen, 2014 TCC 54,holds that the implied undertaking rule in litigation applies to the government in tax litigation, and that the Canadian government breached the rule by using documents provided by the taxpayer as the basis for issuing fresh tax reassessments.

The implied undertaking rule holds that information obtained from a party in the litigation discovery process is subject to an implied undertaking not to be used by other parties except for the purposes of that litigation unless the scope of the undertaking is varied by court order.

The facts in Fio are simple. When the taxpayer instigated its appeal with the Tax Court, it also served a list of documents and provided the documents to the government’s counsel, with a goal of attempting to speed settlement.

After the government received the documents, the CRA reassessed the taxpayer for the years under appeal and a subsequent year in respect of the same issue. Counsel admitted that the CRA issued the second reassessments based, in part, on the documents provided.

The government’s main argument was that the relationship between the government and a taxpayer is not the same as between normal litigants, and thus the implied undertaking rule does not apply to the government.

The court ruled the government, like all parties, was subject to the rule and once the documents were provided in the course of discovery, there was an implied undertaking not to use the documents for any other purpose except in the litigation. It was irrelevant that the government could have obtained the information in the course of an audit. This argument was only perhaps relevant on an application for relief from the rule in a specific situation.

The court ordered that the government could not use the documents in any other proceeding. Thus, it was the court’s view that if the documents are the only evidence the government has, the taxpayer should win an appeal and the second reassessments should be vacated.

In many cases, the implied undertaking rule may be a hollow defence. If the taxpayer is compelled to keep and provide such documents or information in a subsequent audit, then it must do so and CRA can use them when provided in that audit. And once publicly disclosed in court, the CRA could use that evidence to commence an audit.

However, if CRA only knows of the documents or information through a previous Tax Court proceeding, then it will be prudent for the government to make application to vary the implied undertaking before proceeding with the audit. To do otherwise is an abuse of the Tax Court’s process.

The government has appealed.

Willam Maclagan, QC, (, is the managing partner; and
David Ross ( is an associate in the Vancouver office of Blake, Cassels & Graydon, the principal Canadian correspondents for the Tax Disputes channel of

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