Smithkline Beecham Animal Health Inc. v. Canada

Smithkline Beecham Animal Health Inc. v. Canada Court (s) Database Federal Court of Appeal Decisions Date 2002-05-31 Neutral citation 2002 FCA 229 File numbers A-86-01 Decision Content Date: 20020531 Docket: A-86-01 Neutral citation: 2002 FCA 229 CORAM: STONE J.A. SHARLOW J.A. MALONE J.A. BETWEEN: SMITHKLINE BEECHAM ANIMAL HEALTH INC. Appellant and HER MAJESTY THE QUEEN Respondent Heard at Toronto, Ontario, on April 10, 2002. Judgment delivered at Ottawa, Ontario, on May 31, 2002. REASONS FOR JUDGMENT BY: SHARLOW J.A. CONCURRED IN BY: STONE J.A. MALONE J.A. Date: 20020531 Docket: A-86-01 Neutral citation: 2002 FCA 229 CORAM: STONE J.A. SHARLOW J.A. MALONE J.A. BETWEEN: SMITHKLINE BEECHAM ANIMAL HEALTH INC. Appellant and HER MAJESTY THE QUEEN Respondent REASONS FOR JUDGMENT SHARLOW J.A. [1] This appeal raises the issue of the scope of pre-trial discovery under the Tax Court of Canada Rules (General Procedure), SOR/90-688a, as amended. The appellant Smithkline appeals the decision of the Tax Court, reported as Smithkline Beecham Animal Health Inc. v. Canada, 2001 D.T.C. 192, [2001] 2 C.T.C. 2086, [2001] T.C.J. No. 86 (T.C.C.), dismissing Smithkline's application to compel the Crown to disclose certain information in preparation for an appeal of assessments under Part I and Part XIII of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended, and predecessor statutes. [2] Smithkline is a manufacturer of pharmaceutical products. During the period relevant to this appeal, 1981 to 1986, Smithkline manufactured a drug named Tagamet, the active ingredient of which is cimetidine. During those years, Smithkline bought cimetidine from related corporations outside Canada. All of the assessments under appeal are based on the Crown's allegation that the price paid by Smithkline for cimetidine during that period was $66,982,990 more than would have been reasonable in the circumstances if Smithkline and its suppliers had been dealing at arm's length. [3] The assessments impose tax under Part I and Part XIII of the Income Tax Act. The Part I assessments increase Smithkline's taxable income for 1981 to 1986 by a total of $66,982,990, and also reflect consequential adjustments to the investment tax credits for 1986 and 1987 and non-capital losses for 1987 to 1990. Smithkline takes issue with the income increases and all consequential adjustments. The Part XIII assessments impose tax on the same $66,982,990 amount. Smithkline takes issue with the assessment of the Part XIII tax and also with interest for the period prior to February 16, 1984. [4] Smithkline filed notices of objection against all of these assessments. The assessments were not confirmed or varied within 90 days, and on March 14, 1995 Smithkline appealed to the Tax Court as it was entitled to do. Pre-trial discoveries have not yet been completed. [5] Broadly speaking, Smithkline wishes to compel the production of documents and answers to questions asked in the examination for discovery of the Crown's nominee about the profitability of pharmaceutical manufacturers who are not parties to this appeal. Its entitlement to that information depends primarily on the pleadings. The relevant provisions in the pleadings read as follows: Notice of Appeal 9. During the relevant period, in the course of carrying on its business, the Appellant acquired SmithKline cimetidine from two corporations (hereinafter "Affiliates") resident outside Canada with whom the Appellant did not deal at arm's length as that phrase is used in subsection 69(2) of the Income Tax Act. The SmithKline cimetidine purchased by the Appellant during the relevant period was manufactured by the Affiliates in their respective dedicated manufacturing facilities i.e. no other products were produced in those facilities. [...] 22. During the reassessed period, in the case of each purchase of SmithKline cimetidine to which the Minister has purported to apply subsection 69(2) of the Income Tax Act in determining the amounts of the aforesaid reassessments, the amount that the Appellant paid or agreed to pay as price for SmithKline cimetidine was reasonable in the circumstances. 23. In the case of each purchase referred to in paragraph 22 supra, the price for SmithKline cimetidine that it would have been reasonable for the Appellant to have paid or agreed to pay to a vendor in the same circumstances, had the vendor and the Appellant been dealing at arm's length, as that phrase is used in subsection 69(2) of the Income Tax Act, is no less than the amount that the Appellant in fact paid or agreed to pay to the Affiliates. Amended Reply to Notice of Appeal 9. In answer to paragraph 9 of the Notice of Appeal, he admits only that, during the relevant period, the Appellant acquired cimetidine from two corporations (the "Affiliates") resident outside Canada with which the Appellant did not deal at arm's length. He further says that: (a) the Appellant paid or agreed to pay to the Affiliates amounts for the cimetidine that were greater than the amounts that would have been reasonable in the circumstances if the Appellant and the Affiliates had been dealing at arm's length; [...] 20. In answer to paragraphs 22 and 23 of the Notice of Appeal, he says that the Minister has applied subsection 69(2) of the Income Tax Act and denies that the amounts the Appellant paid or agreed to pay to the Affiliates for cimetidine, set out below, as the cost of goods sold, were reasonable in the circumstances. He says that the amounts that would have been reasonable in the circumstances if the Affiliates and the Appellant had been dealing at arm's length are set out below and he consequently disallowed amounts in excess thereof: Year Amount Claimed as Cost of Goods Sold Reasonable Amount Difference Amount Disallowed (includes inventory Adjustment) 1981 $28,601,l08 $17,875,693 $10,725,415 $ 5,388,389 1982 $22,950,979 $ 9,818,953 $13,132,026 $13,803,842 1983 $21,869,720 $ 6,560,777 $15,308,943 $14,778,753 1984 $ 9,439,808 $ 2,241,133 $ 7,198,675 $ 9,731,626 1985 $13,642,098 $ 2,113,850 $11,528,248 $11,796,197 1986 $10,658,489 $ 1,568,806 $ 9,089,683 $ 6,421,868 1987 ­ ­ __________ $ 5,062,315 $66,982,990 $66,982,990 ­ No transfer pricing issue 21. In assessing the Appellant under Part I of the Income Tax Act, the Minister, in addition to the facts stated in paragraph 20 hereof, made inter alia, the following assumptions of fact: [...] (f) the Appellant paid or agreed to pay amounts aggregating $66,982,990 in excess of the price that would have been reasonable in the circumstances if the Appellant and the Affiliates had been dealing at arm's length during the relevant period. [...] 25. The Respondent respectfully submits that: (a) the amounts assessed under Part I of the Income Tax Act reflect that the amounts payable by the Appellant to the Affiliates for cimetidine were greater than the amounts that would have been reasonable in the circumstances if the Appellant and the Affiliates had been dealing at arm's length, within the meaning of subsection 69(2) of the Income Tax Act; [...] [6] To explain the significance of these pleadings, both parties rely on the 1979 OECD Guidelines (Transfer Pricing and Multinational Enterprises: Report of the OECD Committee on Fiscal Affairs (Paris: Organization for Economic Co-operation and Development, 1979); there is at least one later edition of the OECD Guidelines, but in terms of the broad propositions to be considered in this case, the differences between the editions may be disregarded.) [7] The OECD Guidelines are referred to in Information Circular 87-2, International Transfer Pricing and Other International Transactions, dated February 2, 1987, which is intended to advise taxpayers about international pricing issues. Information Circular 87-2 was cancelled on September 27, 1999 and replaced by Information Circular 87-2R, International Transfer Pricing, which also refers to the OECD Guidelines. [8] It appears to be common ground that the OECD Guidelines inform or should inform the interpretation and application of subsection 69(2) of the Income Tax Act. The OECD Guidelines state the principles for determining international transfer prices and, where possible, the agreement among OECD members with respect to the practices to be followed. According to the OECD Guidelines, there are a number of methods for determining an arm's length price in the context of international transactions. The method that is said to be in principle the most appropriate and in theory the easiest is the comparable uncontrolled price method, or "CUP" method. In general, the CUP method requires a direct reference to prices in comparable transactions between enterprises that are independent of each other. [9] The OECD Guidelines also describe a number of other pricing methods that could be used in situations where the CUP method cannot be used. For example, the CUP method cannot be used if reliable information as to comparability cannot be obtained, or the available comparisons result in too many unquantifiable differences. [10] The basis for the assessments under appeal is the Crown's determination of the "arm's length price" for cimetidine, using the CUP method. The comparator transactions are purchases of cimetidine by three manufacturers of generic pharmaceutical products, F.S. Horner Ltd., Apotex Ltd. and Novopharm Ltd. [11] Following the close of pleadings, both parties produced lists of documents and copies of the documents themselves. The parties have also conducted examinations for discovery. The Crown's nominee for examination for discovery is Tim Truckle. The main session of the examination was completed on February 23, 1999, subject to the usual reservations as to questions arising from undertakings, advisements and refusals. Counsel for Smithkline had asked Mr. Truckle the following questions and had been given the following answers (Affidavit of Martin Sorensen, Appeal Book Volume II, pages 259-60): 1811 Q. Am I right when I state this total adjustment of $66,982,990 is the culmination of the use of the price for the transactions considered as CUP by Revenue Canada and which we looked at under Tabs 5, 6, 7, 8 and 9 of Binder 9? A. I believe that is correct. 1812 Q. I would like you to review paragraph 21 of the Reply to the Notice of Appeal, please. Is this paragraph a fair summary of all the facts we talked about during this examination? A. I believe it is. 1813 Q. Aside from what we reviewed during this examination, is Revenue Canada aware of any other facts which would have formed the basis of the reassessments presently under appeal? A. I am not presently aware of any other facts. 1814 Q. I would like to draw your specific attention to subparagraph 21(f) of the Reply as well as paragraph 20 of the Reply. I would invite you to review those paragraphs for your recollection, if you so need. After having looked at those paragraphs, could you tell me if the circumstances which are referred to in paragraph 20 of the Reply are the same as those which are described in subparagraph 21(f) of the Reply? [...] A. Since the circumstances are not completely detailed in paragraph 21(f) to any specific nature, I would agree that the circumstances referred to in 21(f) are the same or similar to circumstances relayed in paragraph 20. 1815 Q. I would ask you to now look at subparagraph 25(a) of the Reply and invite you to review it for your recollection, please. Could you tell me if the circumstances that are referred to in both paragraph 20 and subparagraph 21(f) of the Reply which we just examined are the same circumstances referred to in subparagraph 25(a) of the Reply? A. Similar to my previous answer: Although the circumstances are not detailed, I would say that they are in fact the same. 1816 Q. I would also invite you to review subparagraph 9(a) of the Reply to the Notice of Appeal for your recollection. I would ask you if the circumstances which are referred to in subparagraph 21(f), paragraph 20 and subparagraph 25(a) of the Reply are the same circumstances as those referred to in subparagraph 9(a) of the Reply. A. I believe they are the same. [12] In a letter dated June 25, 1999, counsel for the Crown provided answers to some questions that had been the subject of refusals or objections (Exhibit H to the Affidavit of Martin Sorensen, Appeal Book Volume II, pages 334-9). In this letter, the Crown disclosed that the audit that preceded the assessments originated with a lead from the Special Investigations Unit, and that the tax authorities had also relied on information supplied by Horner, Apotex and Novopharm. The letter also contains these comments (page 337): Revenue Canada has conducted numerous audits of companies in the pharmaceutical industry over the past many years. These audits have included the review of transfer prices. We would advise that each audit has been concluded on the basis of the facts particular to the individual file and a reassessment issued (or not) based on the merits of the information obtained in the particular case. We can provide you with no further information concerning other cases. In the present case, the reassessments were based on a CUP, using generic comparables. We would also advise that Revenue Canada endorses the OECD guidelines and the primary pricing method; i.e. the use of a CUP. [13] The reference to "generic comparables" apparently reflects the fact that the price the Crown finally determined to be a reasonable arm's length price for cimetidine was based on comparisons with transactions involving Horner, Apotex and Novopharm. The quoted comment is said to relate to the following exchange during the February 23, 1999 examination for discovery of Mr. Truckle (Exhibit H.1 to the Affidavit of Martin Sorensen, Appeal Book Volume II, pages 340-4): 1710 Q. Did Revenue Canada ever attempt to validate its CUP method by any other method? A. As I explained earlier, we were certainly attempting to look at various pricing methods, including cost plus and resale price method. However, there was never sufficient information available from the taxpayer to allow us to get a clear determination of cost plus, nor, I believe, to do an analysis fully enough to understand the various components of the retail price method. 1711 Q. In your last answer you referred to including cost plus and resale price method. Did you have in mind other methods apart from those two? A. No, I don't believe so. Mr. McMechan [Crown]: There was an undertaking about functional analysis which we had given you earlier during the discovery. Mr. Bernier [Smithkline]: I do remember that undertaking. It was given in the context of the method used by Revenue Canada for purposes of the assessment. My last question, as I recall, related to the validation of the CUP method. You saw a distinction, but I - The Witness: Functional analysis would be part of trying to perform a resale price method by applying a percentage to functions performed by the entity. Mr. Bernier [Smithkline]: Thank you, Mr. McMechan. 1712 Q. Are there any instances where Revenue Canada did not use generic ingredients as to comparables? A. No. In this case. 1713 Q. What do you mean by that? A. If we are only speaking of transfer pricing with respect to this case, no, we use the generic comparables. 1714 Q. Outside this case, sir? A. Outside this case there may have been, and I am not aware of them all. 1715 Q. Which ones are you aware of? A. In terms of earlier cases, in transfer pricing we certainly used something approximating CUP, but not necessarily the same. As well, we looked at possibly profit splits as well as resale price method, functional analysis type of results. But I cannot be specific as to all of them that were used. 1716 Q. As regards to cases which were contemporaneous to this case? A. To my knowledge, with respect to cases being conducted within our office, the Toronto West Tax Services Office, or Mississauga District Office at the time, the CUP method was the predominant method. 1717 Q. How about within Revenue Canada generally? A. Again we tend to follow, as per our policy guidelines and the information circular, the preferred methods of the OECD starting with the CUP method. Other forms of transfer pricing analysis, I cannot be certain of them all. 1718 Q. Who is "we", the District Office or Revenue Canada? A. Revenue Canada. 1719 Q. How about cases subsequent to this case? Mr. McMechan [Crown]: Mr. Bernier, for the record, I have to object to an examination about cases other than this case. I don't think there is a foundation for it and it involves taxpayer confidentiality, and there is an issue of relevance. [14] From January to September of 2000, through an exchange of correspondence and a continuation session of the examination for discovery, counsel for Smithkline pressed for a better answer to his questions about the "circumstances" referred to in the reply. Finally counsel for Smithkline made the following demand in a letter dated September 22, 2000 (Exhibit Q to the Affidavit of Martin Sorensen, Appeal Book, Volume II, pages 389-90): In the January 10 letter, you advised us that the Respondent had taken the view that the circumstances captured by paragraph 20 of the reply were not restricted to the circumstances known to the Minister when the assessments were made but encompass all the circumstances he has become aware of. Without admitting the construction you are trying to give to paragraph 20 of the reply, we are hereby demanding that you provide us in writing within the next 30 days with the following particulars: - What are the circumstances referred to by the Respondent in paragraph 20; - When did the Respondent become aware of these circumstances; and - How did the Respondent become aware of these circumstances. We are also demanding the same particulars with respect to the circumstances the Respondent refers to in paragraphs 9(a), 10, 12 and 25(a) of the reply. [15] The Crown's response is found in a letter dated October 20, 2000 (Exhibit S to the Affidavit of Martin Sorensen, Appeal Book Volume II, pages 449-52), which reads in part as follows: 1. On several occasions the Respondent has advised that the "circumstances" referred to in paragraph 20 of the Reply to Notice of Appeal encompass all the circumstances of which the Respondent has become aware, such as: - by letter dated January 10, 2000 - SmithKline's corporate tax department told it in the 1970s that its transfer price was unreasonable; - SmithKline didn't meet its own objective of pre-tax profit for Canada having regard to risks assumed by the Appellant in Canada; - the end selling price of Tagamet in Canada was dramatically lower than it was in most other world markets with the result that the high transfer price to Canada precluded it from earning profits in this country commenserate [sic] with its activities here; - by letter dated March 2, 2000 - the SmithKline parent continued its $400 U.S. per kilo transfer price to the Appellant in spite of its realization that the transfer price caused a profitability problem for the Canadian entity, - the SmithKline parent continued its $400 U.S. per kilo transfer price to the Appellant in spite of the advent of substantial competition in Canada from Glaxo's Zantac and cimetidine products sold by other Canadian drug companies, - the Appellant paid service fees and royalties to members of the SmithKline group of companies (other than Penn and Franklin) for any supposed benefits that it derived by virtue of its membership in that group, - the Affiliates (Penn and Franklin) which sold cimetidine to the Appellant for $400 U.S. per kilo did not own any intangibles related to the development of cimetidine or to the formulation or sale of Tagamet, and did not provide any services to the Appellant other than supplying it with cimetidine which they manufactured under licensing agreements with SK & F Labs Ltd., - the Appellant incurred substantial losses from the activities of formulating and selling Tagamet in Canada and did not earn a rate of return commensurate with its activities here, - the Appellant and the other Canadian drug companies performed essentially the same activities subsequent to the purchase of cimetidine, i.e. secondary manufacturing, sales and marketing of cimetidine based products, - the assumptions set out in the Reply to Notice of Appeal; - by letter dated March 27, 2000 - The Respondent has not, to date, established a particular rate of return which would be commensurate with the Appellant's activities in Canada, and bases this answer on the conclusion that the reported losses which the Appellant reported in Canada do not reflect such a rate of return, and on SmithKline's own recognition that its transfer price for cimetidine caused a profitability problem in Canada. - by letter dated May 19, 2000 - The Respondent became aware through the examination for discovery of the Appellant that SmithKline officers were of the view that the Appellant was not earning a rate of return in Canada commensurate with the activities that it carried on here. The Appellant's reported losses and low rate of return on its activities in Canada corroborate that view. The reassessments under appeal were not based upon an assumption that the Appellant ought to have earned a particular rate of return in this country. However, it is implicit in the Minister's reassessments that the Appellant ought to have earned at least the rate of return that results from the reassessments. If the Respondent comes to an understanding as to any other particular rate of return that the Appellant should have earned in Canada, we will advise the Appellant of that understanding. [16] On October 26, 2000 the examination for discovery of Mr. Truckle resumed to deal with matters still outstanding (Exhibit R to the Affidavit of Martin Sorensen, Appeal Book Volume II, pages 391-448). Counsel for Smithkline opened the examination with a comment to the effect that there remained a disagreement between counsel as to whether or not the Crown would be entitled to rely on circumstances other than those relied upon at the time of assessment. [17] Mr. Truckle adopted the comments referred to above in the various letters from counsel for the Crown, including the October 20, 2000 letter. Counsel for Smithkline attempted to obtain further particulars about those comments, including Mr. Truckle's understanding of the phrases "profits in this country commensurate with its activities here", "low rate of return" and Smithkline's "profitability problem". [18] It appears that counsel for Smithkline took those references as implicitly suggesting that some comparisons have been or would be made between the profit margins or profitability of Smithkline with the profit margins or profitability of other pharmaceutical companies. The Crown had until then consistently denied that any such comparisons formed part of the basis of the assessments under appeal. Nevertheless, in the October 26, 2000 continuation of the examination for discovery of Mr. Truckle, counsel for Smithkline asked a number of questions about the profitability and rates of return of other pharmaceutical companies. [19] Counsel for the Crown objected to all of these questions on the basis that Revenue Canada had not made any comparisons between the profitability or profit margins of Smithkline and other pharmaceutical companies, and that the questions did not arise out of any answers given in the examination for discovery or in subsequent correspondence relating to the examination for discovery. [20] The affidavit of Martin Sorensen (Appeal Book, Volume II, pages 257-66) sets out, in paragraph 14 (pages 264-5), the questions which Smithkline says the Crown refused to answer and must now be required to answer. These were the subject of the motion before the Tax Court Judge. In this appeal, only the following questions remain outstanding: (1) How does the "rate of return" referred to in the Crown's letters dated March 2, 2000 and October 20, 2000 compare with that of other Canadian pharmaceutical companies (paragraph 14(c) of the Sorensen affidavit)? (2) Provide all financial information within the knowledge of the Canada Customs and Revenue Agency showing or tending to show the profitability of pharmaceutical companies in Canada from 1977 to today, including and without restricting the generality of the foregoing the profitability of pharmaceutical companies obtained through audits (paragraph 14(d) of the Sorensen affidavit). [21] The Tax Court Judge refused to require the Crown to answer these questions. He explains why in paragraphs 15 and 16 of his reasons: 15. [...] The rates of return of other pharmaceutical companies are not relevant to any issues raised by the pleadings. The central issue, as I have already noted, is whether the price paid or payable by the Appellant was greater than that which would have been reasonable in the circumstances if the Appellant and the Affiliated companies had been dealing with each other at arm's length. It is the circumstances surrounding the supply of cimetidine to the Appellant which are relevant under subsection 69(2) of the Act. There is nothing in the materials to suggest that a factual or logical linkage exists between the price that would have been paid if the Appellant had dealt with the Affiliated companies at arm's length and the rate of return of other Canadian pharmaceutical companies. 16. The demand for financial information [...] is equally irrelevant. There is no link between the information sought and any pleaded issue. [22] The Tax Court of Canada Rules (General Procedure) contain extensive and detailed rules for pre-trial disclosure of documents and oral examinations for discovery. The main provisions relating to the issues in this appeal read as follows (emphasis added): DISCOVERY OF DOCUMENTS List of Documents (Full Disclosure) 82. (1) The parties may agree or, in the absence of agreement, either party may apply to the Court for a judgment directing that each party shall file and serve on each other party a list of all the documents which are or have been in that party's possession, control or power relating to any matter in question between or among them in the appeal. COMMUNICATION DES DOCUMENTS Liste de documents (communication intégrale) 82.(1) Les parties peuvent convenir ou, en l'absence d'entente, demander à la Cour de prononcer un jugement obligeant chaque partie à déposer et à signifier à l'autre partie une liste de tous les documents qui sont ou ont été en la possession, sous le contrôle ou sous la garde de cette partie et qui portent sur toute question en litige entre les parties à l'appel. EXAMINATION FOR DISCOVERY General 92. An examination for discovery may take the form of an oral examination or, at the option of the examining party, an examination by written questions and answers, but the examining party is not entitled to subject a person to both forms of examination except with leave of the Court. [...] INTERROGATOIRE PRÉALABLE Dispositions générales 92. L'interrogatoire préalable peut être fait oralement ou par écrit, au gré de la partie interrogatrice, mais celle-ci ne peut soumettre une personne aux deux formes d'interrogatoire sans l'autorisation de la Cour. [...] Scope of Examination 95.(1) A person examined for discovery shall answer, to the best of that person's knowledge, information and belief, any proper question relating to any matter in issue in the proceeding ... Portée de l'interrogatoire 95.(1) La personne interrogée au préalable répond, soit au mieux de sa connaissance directe, soit des renseignements qu'elle tient pour véridiques, aux questions légitimes qui se rapportent à une question en litige ... [23] There are numerous additional rules that apply if material provided under these rules needs to be corrected or supplemented, or if there is a question about the accuracy or completeness of the material provided. [24] The scope and application of the rules quoted above depend upon the meaning of the phrases "relating to any matter in question between ... them in the appeal" and "relating to any matter in issue in the proceeding". In Compagnie Financiere et Commerciale du Pacifique v. Peruvian Guano Company (1882), 11 Q.B.D. 55 (C.A.), Brett, L.J. said this about the meaning of the phrase "a document relating to any matter in question in the action" (at page 63): It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may - not which must - either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words "either directly or indirectly," because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences. [25] The "train of inquiry" test for documentary discovery was expressly approved by this Court in Everest & Jennings Canadian Ltd. v. Invacare Corp., [1984] 1 F.C. 856, 55 N.R. 73, 79 C.P.R. (2d) 138 (F.C.A.), adopting the test from Boxer v.Reesor (1983), 43 B.C.L.R. 352, 35 C.P.C. 68 (B.C.S.C.). See also Ikea Ltd. v. Idea Design Ltd., [1987] 3 F.C. 317, 13 F.T.R. 306, 16 C.P.R. (3d) 65 (F.C.T.D.) and Oro Del Norte, S.A. v. The Queen (1990), 35 F.T.R. 107, [1990] 2 C.T.C. 67, 90 D.T.C. 6373 (F.C.T.D). [26] The Tax Court has consistently applied the same test; see, for example, Ouellet v. Canada, [1994] 1 C.T.C. 2645, 94 D.T.C. 1315 (T.C.C.). In Owen Holdings Ltd. v. Canada, [1997] 3 C.T.C. 2286, 97 D.T.C. 380 (T.C.C.), the test was stated as follows at paragraph 29: The party demanding a document must demonstrate that the information in the document may advance his own case or damage his or her adversary's case. [27] The judgment in Owen Holdings was varied on appeal to this Court, but the statement of the test was approved: Owen Holdings Ltd. v. Canada (1997), 216 N.R. 381, [1997] 3 C.T.C. 351, 97 D.T.C. 5401 (F.C.A.). Marceau J.A., for the majority, said this at paragraph 6: ... It is our opinion, therefore, that the learned Tax Court judge adopted the proper approach and his findings with respect to the documents in categories (i), (ii), (v) and (vi) should not be disturbed. His assessment that those documents, which did not tend to establish "legislative facts" but rather set forth the "opinions of writers," were so remotely related to the issues in controversy that they could not lead to a line of inquiry that could be of any use to the appellant, appears to us to be perfectly sound. [28] Isaac C.J., as he then was, dissented in part in the result, but he approved the "train of inquiry" test. [29] The cases cited above also establish that the question of whether a document or question "relates to" an issue in the case depends upon a reasonable interpretation of the pleadings, see particularly: Compagnie Financiere, supra; Boxer v.Reesor, supra; and The Queen v. Special Risks Holdings Inc., [1983] 2 F.C. 743, 46 N.R. 361, [1983] C.T.C. 36, 83 D.T.C. 5046 (F.C.A.). [30] In this case, the Tax Court Judge cited R. v. Stinchcombe, [1991] 3 S.C.R. 326 as the basis of his understanding of the test of relevance at the pre-trial discovery stage. This appears at paragraph 10 of his reasons: On discovery the examining party may seek information and admissions which will assist it not only to defeat its opponent's case but also to advance the case which it seeks to put forward. [31] In my view, this statement of the test is substantially the same as the "train of inquiry" test and thus is correct. It remains only to consider the argument of Smithkline that the test has not been correctly applied in this case. [32] In this regard, it must be recalled that the Crown, based on the OECD Guidelines, has chosen to employ the CUP method for determining an arm's length price for cimetidine. However, the OECD Guidelines also describe alternative pricing methods that the Crown has chosen not to employ. The choice of method depends upon finding appropriate comparators, which in turn depends upon analysis of points of difference and similarity between the structure, operations and activities of Smithkline and the various candidates for comparison (in this case, potentially all other Canadian pharmaceutical manufacturers). That might, at least in theory, include such things as profit margins and profitability. [33] At the commencement of the pre-trial discovery process, Smithkline might have had a basis for attempting to discover information in the possession of the Crown that could lead to a train of inquiry that would explain why and how the CUP method was used in this case, or that would discredit either the use of the CUP method or the manner in which it was used, including the choice of comparator. In theory, such information might be subject to disclosure even if the Crown undertook not to use it at trial, because such an undertaking would not derogate from the fact that the information might have proven to be of assistance to Smithkline in strengthening its own case or weakening that of the Crown. [34] However, in this case, the examinations for discovery took quite a different course, with the result that it is not necessary to reach any conclusion as to whether information about the profitability or profit margins of other pharmaceutical manufacturers is discoverable in pre-trial proceedings on the basis of a liberal reading of the pleadings. Nor is it necessary to deal with the arguments of the Crown that the degree of relevance associated with the requested information is so marginal that it would not justify the extraordinary effort it would require for the Crown to assemble and present it, or that section 241 of the Income Tax Act obliges the Crown to keep the information confidential despite Smithkline's entitlement to pre-trial discovery. [35] Prior to the commencement of the examination for discovery, Smithkline must have been aware of the theoretical connection between subsection 69(2) of the Income Tax Act and the many factual problems that may arise when trying to compare enterprises and their transactions. If information about the relative profit margins and profitability of potentially comparable pharmaceutical manufacturers was ever in the Crown's possession (and there is a factual dispute on that question), the door to its discoverability closed on February 23, 1999 when counsel for Smithkline completed the examination for discovery of Mr. Truckle without asking for it. [36] The door could have been reopened in one of two ways. First, it could have been reopened with leave of the Tax Court in a motion under subsection 93(1) of the Tax Court of Canada Rules (General Procedure). The hurdle faced by Smithkline in a motion to reopen an examination for discovery is well illustrated by the following comments of Prothonotary Hargrave in McLeod Lake Indian Band v. Chingee (1998), 149 F.T.R. 113 (T.D.), dealing with a similar provision of the Federal Court Rules, 1998. He said this at paragraph 18 (emphasis added): To require Harry Chingee, whose discovery has been concluded, to answer further questions, the Plaintiffs must establish a special reason to do so. Here I have in mind Rule 235 which provides that "Except with the leave of the Court, a party may examine for discovery any adverse party only once.". This rule is a watering down of what was, until about 1990, Rule 465(19) which required special reason in an exceptional case in order to obtain further discovery. The present form of the rule, however, ought not to be interpreted so as to easily allow further discovery, once an examination has been concluded, for discovery must, at some point, come to an end. In the present instance I would deny further discovery because the material on which counsel wishes to examine was available at the time of the discovery of Harry Chingee and, with diligence, might have been [put] to him at that time. [37] Second, the door could have been reopened in the context of a question arising out of information provided after February 23, 1999 to fulfil an undertaking, to correct or clarify a previous answer, to answer a question taken under advisement, or to answer a question to which an objection had been made. [38] Counsel for Smithkline argues that the Crown, in its various letters after February 23, 1999 culminating in the October 20, 2000 letter, opened the door by implicitly suggesting a comparison between the profit margins and profitability of Smithkline and other companies. I do not interpret the Crown's comments in those letters as suggested by counsel for Smithkline. The Tax Court Judge correctly held that those comments address Smithkline's own circumstances and nothing more. [39] In my view, the Tax Court Judge was correct to refuse the motion to require the Crown to respond to the questions referred to above. I would dismiss this appeal with costs. "K. Sharlow" J.A. "I agree A.J. Stone J.A." "I agree B. Malone J.A." FEDERAL COURT OF APPEAL NAMES OF COUNSEL AND SOLICITORS OF RECORD DOCKET: A-86-01 STYLE OF CAUSE: Smithkline Animal Health Inc. v. Her Majesty the Queen PLACE OF HEARING: Toronto, Ontario DATE OF HEARING: April 10, 2002 REASONS FOR JUDGMENT BY: Sharlow, J.A. CONCURRED IN BY: Stone, J.A. Malone, J.A. DATED: May 31, 2002 APPEARANCES: Mr. Jacques Bernier for the Appellant Ms. Robyn M. Ryan Bell Mr. Robert McMechan for the Respondent Ms. Tracey McCann SOLICITORS OF RECORD: Bennett Jones LLP for the Appellant Toronto, Ontario Mr. Morris Rosenberg for the Respondent Deputy Attorney General of Canada