Citation:
2014 TCC 266
Date: 20140904
Docket: 2008-2949(IT)G
2008-3471(IT)G
BETWEEN:
MCKESSON
CANADA CORPORATION,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR RECUSAL
Boyle J.
[1]
I rendered my Reasons and judgment on the merits
of the Appellant’s case on December 13, 2013. That decision has been appealed
by the Appellant to the Federal Court of Appeal.
[2]
I remain seized with the remaining issue of
costs to be awarded in respect of the trial. I received written submissions on
costs from the Respondent in March 2014 and from the Appellant in April 2014.
On April 30, 2014, the Appellant confirmed to the Court that it did not want an
oral hearing on costs, the Respondent having earlier communicated to the Court
that it was not requesting an oral hearing on costs.
[3]
I also remain seized with deciding the
appropriateness of the parties’ written proposal of April 2014 for dealing with
the satisfactory identification of any notionally or actually sealed
confidential information and the public versions of documents prior to this
Court’s file being made generally open to the public. This involves a
reconsideration of the pre-trial confidential information order of Justice
Hogan issued in March 2010.
[4]
As detailed below, I have, of my own motion,
decided that I am compelled to consider whether I need to recuse myself from
the two remaining issues before this Court. A consideration of this issue is
required because I became aware that the Appellant and Appellant’s counsel,
together with its co-counsel in the Federal Court of Appeal in respect of the
appeal of the trial decision, had made certain public written statements about
me in its factum in the Federal Court of Appeal (the “Factum”) which, upon
reflection, appear to me to clearly include:
(i)
allegations that I was untruthful and deceitful
in my Reasons;
(ii)
clear untruths about me, what I said and heard
in the course of the trial, as well as the existence of evidentiary foundations
supporting what I wrote in my Reasons; and
(iii)
allegations of impartiality on my part.
[5]
This requires me to consider whether:
(i)
I believe that a reasonable person reading the Factum,
my Reasons, and the relevant portions of the transcript would believe that the
trial judge so strongly complained of by McKesson Canada might not be able to
remain impartial in his consideration of costs and confidential information;
(ii)
I believe I can impartially consider, weigh and
decide the costs and confidential information issues before me; and
(iii)
whether the public challenge of my impartiality
expressed by McKesson Canada and its co-counsel in the Factum is itself
sufficient to warrant recusing myself at this stage.
[6]
Points (i) and (iii) above require the
consideration of the matter from the point of view of a notional reasonable and
fair minded person, who is informed on the issue, and who takes time to reflect
on whether he or she has an apprehension or reasoned suspicion of bias, actual
or perceived, on my part.
[7]
It is not my habit to review the factums filed
in the Federal Court of Appeal in respect of my decisions. In this case, the
Appellant’s Factum was drawn to my attention or sent to me by several prominent
Canadian tax lawyers as well as by a colleague on the Court.
[8]
A trial judge’s job on the merits ends with the
rendering of reasons and judgment. There is rightly no role for the trial judge
in the appeal of the trial decision. Counsel on each side in the appellate
court is free to make whatever arguments they wish, including claiming or
denying support in the record, the use of emphasis and spin, or even trying to
argue a case it thinks it can win instead of the case it has. That is all of
counsel’s choosing and to be ultimately considered and decided by the appellate
court. For that reason, I will limit myself to only considering the specific
issues set out above, and will restrict myself to statements in the Factum,
statements in the Reasons, and statements from the trial transcripts (the
“Transcript”).
This does have the effect of making these reasons more lengthy, more clinical,
and more awkward than they might otherwise be, but I believe this is
necessitated by considerations of fairness to the parties and the appellate
court.
1. Where
it Appears in the Factum that McKesson Canada States that the Trial Judge is
Untruthful and Deceitful
[9]
This concern arises from paragraphs 84 through
89 of the Factum relating to the loss discount analysis, including my reliance
upon the testimony of the Appellant’s witness Barbara Hooper with respect to
the objective and effect of two specific termination triggering events in the
RSA, as well as to the issue of notional ongoing corporate control.
[10]
In paragraphs 128 to 132 of the Reasons, I wrote
the following on the issue of the relevance of notional ongoing corporate
control:
(e) Factors that
Exist Only because of the Non-Arm’s Length Relationship
[128] Within a transfer pricing review, the
question arises whether factors that exist only because of the non-arm’s length
relationship are assumed away in the notional arm’s length analysis or remain
relevant characteristics and circumstances.
[129] This question may not arise to any
extent in the context of a single purchase at a fixed price. The question does
appear significant in the context of a long-term commitment to do things over a
period of time. For example, in transactions such as those involving the RSA,
does the Court assume a notional arm’s length MIH would still enjoy the benefit
of the Irish company loan supported by the MIH2 guarantee and indemnity? In
looking at transactions like the RSA, does the Court assume the notional arm’s
length MIH still has the power throughout the term of the notional arm’s length
contract to change McKesson Canada’s name, sell McKesson Canada, or do something else in order to trigger a termination event at will? Does the Court assume
that the notional arm’s length purchaser still has the right to cause McKesson Canada to agree to change terms as they apply to future transactions under the agreement?
Does the Court assume that the notional arm’s length MIH still has access to
all of the financial information of McKesson Canada and information regarding
its receivables portfolio and its entire business even though it may not be
specified or required in the RSA?
[130] This issue was addressed by Justice
Pizzitelli in Alberta Printed Circuits v. The Queen, 2011 TCC
232:
It is important to note that factors or
circumstances that exist solely because of the non-arm’s length relationship of
the parties should not be ignored, otherwise the reasonable businessman would
not be standing entirely in the Appellant’s shoes. . .
… In General Electric, the
Federal Court of Appeal confirmed that no error of law was made in taking into
consideration the Appellant in that case, as a sub of its larger parent
company, stood in the position of having an implicit guarantee by its parent of
its bank debts.
[131] Based on this, all circumstances,
including those that arise from, derive from or are rooted in the non-arm’s
length relationship should be taken into account.
[132} I think
the better view is therefore that the Court can and should consider notional
continued control type rights in appropriate circumstances when looking at term
or executory contract rights. Not to do so would be to not look at all of the
relevant characteristics and circumstances of the relationships. If these
were to be ignored by a Court, companies within wholly controlled corporate
groups could enter into skeletal agreements conferring few rights and
obligations to the non-resident participant, (such as financial information
disclosure, use of funds, financial covenants et cetera), all with the view to
obtaining a more favourable transfer price to reduce Canadian taxes. Not
approaching this issue this way would seem entirely inconsistent with this
Court and the Federal Court of Appeal in G.E. Capital having focused on
implicit unwritten, unenforceable guarantees of the parent company of the
borrower. However, in this case, I do not need to do so in order to fully
dispose of the appeal with respect to the proper transfer pricing adjustment,
as detailed below. This too can be left for another day.
[11]
In the Reasons I wrote the following on the
issue of termination triggering events and their relevance to loss discount:
[26] MIH could
terminate its obligations to purchase any further McKesson Canada receivables upon the occurrence of certain defined termination events, generally designed to
identify or anticipate deteriorating creditworthiness of McKesson Canada or its pool of customers generating the receivables. These events included financial
defaults of McKesson Canada or its affiliates, increases in the delinquency
ratio or loss ratio of the receivables beyond specific thresholds, a
downgrade in the credit rating of McKesson U.S., McKesson Canada’s name being
changed to drop the word McKesson, McKesson Canada ceasing to be controlled by
McKesson U.S., McKesson U.S. ceasing to guarantee McKesson Canada’s bank and
commercial paper lenders, and any event occurring which materially adversely
affected the enforceability or collectibility of the receivables or MIH’s
rights under the agreements It can be noted that the termination events were
not limited to things in McKesson Canada’s control, and included events in the
control of its direct and indirect shareholders/parent corporations.
[. . . ]
b) Termination Events
[59] TDSI is satisfied that the triggers
in the RSA definition of termination event are within the range of normal in an
arm’s length transaction “of this nature”. I repeat my earlier observations
about her use of this phrase in the TDSI opinion.
[60] The TDSI opinion makes specific
reference to the role of such termination triggers as protection for poor
performance of receivables or declining creditworthiness of the seller. It
identifies McKesson Canada’s creditworthiness as seller as relevant in part
because of its obligations to remit collections to MIH. TDSI is of the express
view that “because [McKesson Canada] is so closely tied and important to
[McKesson U.S.], it is reasonable to use the public debt ratings of [McKesson U.S.] as an indication of [McKesson Canada’s] creditworthiness”.
[61] The TDSI opinion goes on to
specifically consider i) the receivables pool’s delinquency ratio trigger in the
RSA, and ii) the receivables pool’s loss ratio trigger in the RSA.
(i) Delinquency Ratio Trigger
[62] TDSI considered the improving two
year historical trend in the delinquency ratio of McKesson Canada’s receivables and the recently maintained 1.0% rate. The 2.5% trigger rate in the RSA would,
in TDSI’s opinion, represent a significant adverse deviation from the current
steady state of 1% and so considered reasonable. TDSI highlighted the
importance of the dynamic four-month rolling average approach to measuring the
delinquency ratio in the RSA, and uses this approach in its analysis. TDSI
confirmed that this is consistent with the three to six month periods generally
used for such purposes.
(ii) Loss Ratio Trigger
[63] TDSI
looked at three years of historic bad debt experience on McKesson Canada’s receivables portfolio. TDSI identified the difference between accounting
write-offs and the 90 day delinquency definition of losses for purposes of the
loss ratio in the RSA, with the result that the latter ratio could be expected
to exceed the former. TDSI opined that a dynamic loss ratio, which measured
a four-month average 90 day delinquency, and with a trigger of 0.25%, appeared
reasonable given that, although write-offs to sales on a monthly basis at times
reached this level, it had never exceeded 0.10% on a four-month rolling
average.[footnote 21: It was acknowledged in Ms. Hooper’s cross-examination
that, in fact, it had not exceeded 0.04%, much less 0.10%. That is, it was not
that TDSI considered a 2.5 times multiple reasonable, it considered a 6 + times
multiple reasonable but did not expressly say so.]
[. . . ]
[194] Ms. Hooper
added that the delinquent portfolio performance trigger serves as an early
warning system. Typically with receivables one will see delinquencies increase
in advance of seeing losses increase. For this reason, she explained one wants
the trigger rate to permit termination of the agreement early enough for there
to not be material losses. She clearly understood that when the transaction
could be terminated would have a fairly significant affect on the overall risk
that was being transferred. According to Ms. Hooper, portfolio performance
triggers, delinquency and default rate triggers, were designed to limit the
ultimate losses to the purchaser by ceasing the acquisition of new receivables
that might not be expected to perform as well as receivables originated
previously.
[. . . ]
[306] The RSA was signed at a time when the
receivables pool’s write-offs to sales performance had been in the range of
0.04%. This was well known and tracked by McKesson Canada and McKesson Group. The
RSA gave MIH an immediately exercisable termination right in the event the
pool’s Delinquency Ratio or Loss Ratio increased by specific measures.
[307] Ms. Hooper’s evidence was that
these two termination event triggers in particular were designed to effectively
stop the transfer of additional receivables once the portfolio does not perform
as well as it did in the past. The Delinquency Ratio was designed as an early
warning system. Given that delinquencies can be expected to increase in advance
of seeing losses increase, the termination right was designed to occur early
enough that one is not going to have very material losses. According to Ms.
Hooper’s testimony, the Loss Ratio and Delinquency Ratio combined should allow
the purchaser to stop acquiring additional receivables in time to not suffer
materially higher losses than expected based on past performance. Ms.
Hooper testified that she and her team at TDSI looked at both the historical
loss and delinquencies in the McKesson Canada receivables pool as part of its
engagement in preparing the TDSI Report.
[308] I do not necessarily accept the
TDSI Report’s opinions on the reasonableness, normalcy or arm’s length nature
of these two termination triggers in the RSA. Indeed, I would expect they
might suffer from the same shortcomings as affects the rest of the TDSI Report,
which is primarily that the RSA is not a securitization and is in that respect
outside the expertise of Ms. Hooper and her group. In any event, given that
these two ratios are defined in the RSA to include McKesson Canada financial
information that is not in evidence, or at least certainly not adequately
explained in the evidence, and that these defined ratios and their volatility
leading up to the RSA were not put in evidence, I can not reach the conclusion
that I am satisfied with the TDSI’s Report’s conclusions on their terms.
[309] However, I fully accept Ms.
Hooper’s explanation of their purpose and effectiveness as designed. That is, I
find that the purpose and effect of the Delinquency Ratio termination event
trigger and the Loss Ratio termination event trigger in the RSA were designed
and fully expected to limit MIH’s risk of purchasing any day’s receivables from
McKesson Canada that could be expected to have materially higher losses than
had been experienced on the pool historically.
[310] The historic loss performance on
McKesson Canada’s receivables pool was in the range of 0.04%. I conclude
from all of this that a notional arm’s length MIH would have been able to and
would have terminated its obligations under the RSA before it was obligated to
purchase receivables that would have a materially higher credit loss risk than
something in the range of 0.04%.
[311] Allowing for a 50% to 100% increase
as an extremely generous interpretation of what Ms. Hooper could have meant by
material (in part to compensate for the lack of elegance in this approach),
I find that a notional arm’s length MIH’s credit loss risk on its continuing
purchase of receivables is that, at some future point in the RSA term (but
not in the very short term), it could have purchased about four months of
receivables with an anticipated write-offs to sales number in the range of 0.06%
to 0.08%. These lesser quality receivables would only be expected to have been
purchased in the last four months of the RSA prior to termination. Those
bought on December 16, 2002 and for the other months prior to the four months
preceding termination could continue to be expected to be of a better quality.
[312] Using this approach, the Court
concludes that a Loss Discount component of the Discount Rate in the range of
0.06% to 0.08% is at the generous end of what a notional arm’s length MIH
and McKesson Canada would agree to.
[313] This range is consistent with the
number arrived at by Mr. Finard’s structured finance approach. That
approach identified that the 0.04% historic write–offs to sales number for
McKesson Canada’s receivables pool was comparable to Moody’s published
information for companies rated between A and Baa, which in turn had credit
risk spreads according to TDSI of 0.50% and 1.00% per annum, and was computed
on a weighted average basis by Mr. Finard at 0.68%. Once adjusted for a DSO of
30 days, a 0.68% annual credit spread reflects a discount of 0.06%.
[314] For
these reasons, the Court finds based upon what evidence was provided that an
arm’s length Loss Discount for purposes of the RSA would be in the range of
0.06% to 0.08%.
[12]
In the Factum the Appellant stated, at
paragraphs 73 and 83 to 89:
73. . . . the Trial Judge disregarded the
consensus view of the taxpayer and the Crown and made a critical error: in his
hypothetical transaction, he believed that he was required to assume that
the hypothetical purchased somehow would control the supposedly unrelated
hypothetical seller. . . .
83. The “loss discount” – the amount
notionally included to compensate the purchaser (here, MIH) from assuming
credit risk – was a key component in the discount rate. It is clear from the
Trial Judge’s analysis of this component that he concluded that MIH assumed no
material risk in the transaction because, in the Trial Judge’s misconstrued
hypothetical, MIH could have triggered a termination event whenever it chose by
simply changing McKesson Canada’s name, for example. In so finding, the Trial
Judge simply ignored the relevant contractual terms agreed by the parties and
expressed in the Agreement, and the actual functional allocation and assumption
of risk by the parties.
84. Such an approach may be entirely
legitimate in a case involving GAAR, or paragraph 247(2)(b). But neither of
these grounds for challenging the Agreement was advanced by the Crown; they are
not relevant to this litigation. The Trial Judge, without
acknowledging it, has challenged whether the written terms of the
Agreement reflected the “real” allocation of risk between MIH and McKesson Canada. He has effectively treated the Agreement as a sham, without legal authority
or evidentiary basis. Indeed, the weight of evidence adduced by the
Crown suggested that a holdback or reserve of about 20% (or $90 million) would
have been needed in order to eliminate MIH’s risk.
85. In assuming his own version of the
facts with respect to risk, and re-writing (by ignoring) critical terms of the
Agreement related to risk, the Trial Judge priced a transaction that never
occurred. The loss discount then identified and relied upon in the Trial
Judge’s Reasons can only be reconciled with a transaction in
which the purchaser (here, MIH) assumes no risk. The Trial Judge says:
I conclude from all of this that a
notional arm’s length MIH would have been able to and would have terminated
its obligations under the [Agreement] before it was obligated to purchase
receivables that would have a materially higher credit loss risk than something
in the range of 0.04%. . .
Using this approach, the Court concludes
that a Loss Discount component of the Discount Rate in the range of 0.06% to
0.08% is at the generous end of what a notional arm’s length MIH and McKesson Canada would agree to.
86. At no point in the trial did the
Crown assert that, at arm’s length, MIH “would have been able to” terminate its
obligations under the Agreement whenever losses exceeded a “materially higher”
threshold of 0.06%-0.08%. Nor did any of the Crown’s expert witnesses provide
evidence that would tend to support this erroneous proposition.
87. This assertion is in any event
patently wrong. In fact, MIH was obliged under the Agreement to continue funding
McKesson Canada for up to $900 million for the full five year term absent a
defined termination event – including if losses increased significantly. The
Trial Judge’s suggestion that MIH “would have been able to” terminate the
Agreement if losses exceeded 0.06-0.08% is palpably wrong. The threshold
established under the plain terms of the Agreement for such termination was in
fact 0.25%, not 0.06-0.08%. In fact, recent history was that losses exceeded
0.06%. How could MIH have been “able to” terminate if losses reached, for
example, 0.10%?
88. Given that it is plainly inconsistent
with the terms of the Agreement, the Trial Judge’s assertion that, in
the hypothetical transaction, a notional arm’s length MIH would have
terminated its obligations under the Agreement if losses exceeded 0.06%-0.08%,
can only be explained as follows: The Trial Judge assumed
that a notional, arm’s length MIH would control McKesson Canada, and would
therefore be in a position to trigger a termination event under the Agreement
by causing McKesson Canada to default under its terms. This is so
notwithstanding the Trial Judge’s contention, at paragraph 132 of his Reasons,
that “in this case, I do not need to [consider notional continued control] in
order to fully dispose of the appeal with respect to the proper transfer
pricing adjustment”.
89. Indeed,
in at least two place in his Reasons, the Trial Judge alludes specifically to
MIH’s ability – qua shareholder of McKesson Canada – to trigger
termination of the Agreement: At paragraph 26, he notes the “termination events
were not limited to things in McKesson Canada’s control, and included events in
the control of its direct and indirect shareholders/parent corporations”. At
paragraph 129, excerpted above, the Trial Judge asked himself “[i]n looking at
transactions like the [Agreement], does the Court assume the notional arm’s
length contract to change McKesson Canada’s name, sell McKesson Canada, or do
something else in order to trigger a termination event at will?” The Trial
Judge did not, in fact, leave this question for another day, as he claims to
have done. Rather, the Trial Judge answered this question in the
affirmative in his analysis of the loss discount. This critical legal error
undermines the Trial Judge’s entire analysis.
[13]
In these circumstances, I am deeply troubled by
the statement by the Appellant in paragraph 89 of the Factum that “[t]he Trial
Judge did not, in fact, leave this question for another day, as he claims to
have done”.
[14]
I am similarly deeply troubled by the statement
by the Appellant in paragraph 84 of the Factum that “[t]he Trial Judge, without
acknowledging it, has challenged whether the written terms of the Agreement
reflected the “real” allocation of risk between MIH and McKesson Canada”.
[15]
I am equally concerned by the statement of the Appellant
in paragraph 88 of the Factum that “[t]his is so notwithstanding the Trial
Judge’s contention, at paragraph 132 of his Reasons, that “in this case, I
do not need to [consider notional continued corporate control] in order to
fully dispose of the appeal with respect to the proper transfer pricing
adjustment”.
[16]
There are no polite qualifiers in any of theses
three sentences.
[17]
These allegations of the Appellant are said in
paragraphs 85 and 88 of the Factum to critically turn upon there being no other
way to reconcile what I wrote, and that I therefore must have in fact done
something different than I said I was doing.
[18]
It appears to me that the Appellant has chosen
to challenge my truthfulness, honesty and integrity in my Reasons in order to
allow it to advance the argument that I was somehow, notwithstanding what I
clearly said about ongoing corporate control issues being able to put entirely
aside in deciding the appeal, (and what I clearly said about the Delinquency
and Loss Ratios triggers and Ms. Hooper’s evidence on their objective and
effect) somehow doing just that.
[19]
I believe that paragraphs 307-310 of the Reasons
are very clear and do not permit of ambiguity, uncertainty, or any lacuna or
leap for the reader to fill in. The only termination rights discussed were
those triggered by breaches of the Delinquency Ratio and the Loss Ratio as
defined and set out in the RSA. It is equally clear that I grounded my findings
on the preceding paragraph which summarized the testimony of Ms. Hooper of
TDSI, the Appellant’s witness who issued the TDSI Report, on the purpose and
effectiveness of these two termination right triggering events. There is no
basis for the Appellant stating that the only way to reconcile my conclusion is
that I did something entirely different, that I specifically said I wasn’t
doing, which was looking at continuing corporate control rights such as
changing the company’s name.
[20]
For these Reasons, it is my view that the Appellant
has wrongly accused me of being untruthful, dishonest and deceitful. I am
simply unable to read their Factum or the Reasons any other way on this point.
[21]
I believe they have wrongly written these things
in the Appellant’s Factum about me intentionally under the guise of fearlessly
advancing and representing the interests of McKesson Canada. I believe this
clearly crosses the line as to what is appropriate.
[22]
For purposes of deciding whether or not to
recuse myself, it is my opinion and my view of the parties and their counsel
that are relevant, along with what a reasonable person would apprehend my views
and opinions to be. Whether my reading of the Factum is correct or not, like
whether my decision on the merits is correct or not (and whether or not I am
reading the Factum correctly), remains for the appellate court and others to
decide.
[23]
On a related point, it is surely apparent to the
Appellant from the evidence of its own witness, Ms. Hooper, the TDSI Report,
and the Reasons, that historical losses expressed as write-offs to sales
(historically in the 0.04 cents on the dollar range), are distinctly different
in material ways from the Delinquency Ratios and the Loss Ratios which are
defined in the RSA and which triggered MIH termination rights under the terms
of the RSA. There is nothing whatsoever that appears unclear about this from
paragraphs 194 and 306 and 307 of the Reasons. The Appellant does not in its
Factum attempt to suggest or explain why that is in fact not the case.
[24]
This appears to me to have been done in order to
advance confusion not clarity or accuracy as they write in paragraph 87 of the Factum:
“[t]he Trial Judge’s [assertion] is palpably wrong. The threshold
established under the plain terms of the Agreement for such termination was in
fact 0.25%, not 0.06-0.08%. In fact, recent history was that losses exceeded
0.06%. How could MIH have been “able to” terminate if losses reached, for
example, 0.10%?” I find it exceedingly hard to believe that the Appellant could
remain unaware of the difference between historical loses computed as
write-offs to sales on the one hand, and either a delinquency ratio which
measures time to receive payment, or a deemed 90 day delinquency in computing
loss ratios. (Indeed as noted below, they clearly understand this in other
parts of their Factum and in the Appellant’s written submissions at trial).
2. Where
it Appears That the Appellant States in its Factum Untruthful Things About the
Trial Judge
[25]
Most of my concerns under this heading are
rooted in the very first paragraph of the Appellant’s Factum which states that:
1. In this case, the Trial Judge
discarded the case pleaded and argued by the parties and decided the appeal
on grounds that were not raised in the pleadings or argued at trial,
but made their first appearance in the Trial Judge’s Reasons well after
the trial was over.
[26]
In paragraph 18 of the Reasons I wrote that “the
predominant purpose of McKesson Canada entering into the transactions
was the reduction of its Canadian tax on its profits.” I return to this in
paragraph 274 of the Reasons using very similar language:
[274] I find as a fact that the predominant
purpose and intention of McKesson Canada participating in the RSA and
related transactions with the other McKesson Group members was not to access
capital or to lay off credit risk. Those were results of the transactions but
did not motivate them. The purpose was to reduce McKesson Canada’s Canadian tax liability (and therefore McKesson Group’s worldwide tax liability) by paying
the maximum discount under the RSA that McKesson Group believed it could
reasonably justify. For the McKesson Group this appears to have been much
more of a tax avoidance plan than a structured finance product. No reason
was ever given for wanting to transfer risk to Luxembourg.
[27]
In paragraph 7 of the Factum, the Appellant
states:
7. First, the Trial Judge made key
factual findings on matters that were not raised in the assessment or put
in issue at trial: . . . that the receivable sale was devoid of
commercial purpose and contrived to achieve a tax benefit. There was
next to no hint at trial that these issues were of concern to the trial Judge.
. . .
[28]
The Appellant restates this in paragraph 42 of
its Factum:
42. The Trial Judge’s analysis and
ultimate decision rely critically on three key propositions, each of which
amounts to an error of law: . . . that the receivable sale was entirely
tax-motivated and devoid of commercial purpose. . .
[29]
In paragraph 43 of the Factum, the Appellant
again states that this tax motivation proposition was “not put to McKesson Canada in the trial of this matter.”
[30]
The Appellant restates this another time in
paragraph 53 of the Factum in Part B “The Trial Judge Erred In Law By Relying
On Propositions That Were Never Put To McKesson Canada”:
“the receivable sale was entirely tax motivated, and devoid of
commercial purpose.”
[31]
This point is referred to yet again in paragraph
65 of the Factum: “and, as the matter of motive was never in issue in
the litigation, McKesson Canada was deprived of any
opportunity to lead evidence and make submissions on the point”.
[32]
In paragraph 67 of the Factum, the Appellant
continues this with “the taxpayer’s motivation was never in issue
. . . .”
[33]
In paragraph 70 of the Factum, the Appellant
states “…the Trial Judge’s analysis is infected by his pejorative and unfair
comments about McKesson Canada’s motivation, a matter that was . . . never
argued at trial.”
[34]
Was the issue never put to the Appellant? Was
the Appellant deprived of the opportunity to address this in the proceedings?
Let us turn to the record of the trial proceedings.
[35]
On the third day of this trial (October 19,
2011), during the third day of testimony from the Appellant’s first witness,
Mr. Brennan, after listening to the Vice-President Tax’s testimony in-chief, I
was called upon to respond to an objection by Appellant’s counsel to a line of
questioning by Respondent’s counsel in cross-examination. The objection is
raised, debated and addressed on pages 58 through 62 of Volume 3 of the Transcript.
On page 62 I said:
And, frankly, this
whole line of questioning, I note this was a tax oriented transaction, they
did it for tax purposes. Mr. Brennan was absolutely clear about that in direct.
And there is not a VP of tax in the world who didn’t think about tax
consequences.
[36]
Appellant’s counsel did not then or later
challenge, address or even speak to my clear and early communication of my
overall impression of his witness’ testimony as lead by him in-chief. Appellant’s
counsel did not ask any questions at all in his opportunity for redirect.
[37]
In course of the first morning of Appellant’s
oral argument, on January 31, 2012, I said to Appellant’s counsel, who had just
completed his summary of the background to the RSA and was turning to the RSA
itself (at page 3514 of Volume 22 of the Transcript):
Sorry, before the
RSA, I believe in-chief Mr. Brennan acknowledged [that] with an Irish company,
a couple of Luxembourg companies and a Nova Scotia unlimited liability company
[,] this was a tax-driven structure. [While] it had
the commercial purpose as you’ve outlined [,] I thought it was in-chief that he
acknowledged that taxes play a part. Not that anything turns on it.”
[38]
To this, counsel’s response (at page 3515) was
“[o]ne of the advantages of this structure was tax advantages for sure. . . .”
[39]
In the Appellant’s first Supplemental Written Submissions
filed with the Court after the hearing (those of March 2012), the Appellant
devoted pages 39 to 43 to addressing, in counsel’s words the “related question
that arose in argument whether the approach being advocated by the Appellant,
if accepted by this Court, might appear to condone abusive structures”. In
these five pages the Appellant relies upon the Duke of Westminster
principle, and argues that the RSA transactions compare favourably to “plain
vanilla” planning.
[40]
It appears very clear to me that, while the
Appellant may have every right to seek to challenge the evidentiary foundation
of my conclusions and findings, they have simply told clear untruths about me
and what I did or did not say when they state that McKesson’s tax motivation
was not ever put to them during the trial and that they were therefore deprived
of any opportunity to address it.
[41]
I certainly believe I clearly put it to Appellant’s
counsel during his first witness’ testimony, and raised it again with counsel
at the start of his oral argument. The Appellant made written submissions on
the issue of tax planning as he acknowledges it arose in argument. One can read
what they will into the Appellant’s decision not to argue the point or conduct
redirect examination, but it appears to me to be patently untrue that I did not
raise it with the Appellant early, at times when they could respond with
additional evidence, with a summary of the evidence to change my impression, or
with whatever legal argument they chose.
[42]
I would also note that I never said in my Reasons
that the RSA transactions were devoid of commercial purpose. I believe it would
take a very tortured reading of paragraph 18 of my Reasons (above) to find any
support for that allegation, which is similarly repeated throughout the Factum.
[43]
Further, I remain of the view that my Reasons
accurately describe the evidence on motivation and use of funds where I wrote
at paragraph 9 that:
[9] At that time, McKesson Canada had no identified business need for a cash infusion or borrowing, nor did McKesson Group need
McKesson Canada to raise funds for another member of the group. There was a
so-called double-dip Nova Scotia Unlimited Liability Company or ULC financing
which was coming to maturity and would need to be recapitalized in some
fashion; this was for a fraction of the amount of the new receivables facility.
McKesson Canada did not approach its traditional lenders or conventional
financial institutions (nor anyone else) before entering into its own non-arm’s
length receivables facility and related transactions. The McKesson Group had
previously put in place a tax-effective international corporate structure and
inter-group transactions that allowed it to amass very large amounts of cash in
Ireland. The non-Canadian members of the McKesson Group were able to use this
money to finance all of the purchases of McKesson Canada’s receivables under
the facility.
And where I wrote at paragraph 214 that: “There was no evidence that McKesson Canada or McKesson Group was
even interested in considering factoring its receivables to any arm’s length
financial institution player in factoring markets, presumably because profits
would then have left the McKesson Group.”
And where I wrote at paragraph 274 that: “No
reason was ever given for wanting to transfer risk to Luxembourg.”
And where I wrote at paragraph 348:
[348] There was no satisfactory evidence
tendered that would suggest that McKesson Canada was driven to seek receivables
financing from a high cost of funds/high cost factoring company and not a
better funded/lower yield/lower cost major financial player described in the
taxpayer’s own evidence. I was not, however, provided with evidence of the cost
of capital associated with receivables factoring by major well-funded players.
[44]
The Appellant states in paragraph 37 of the Factum:
37(e) Similarly, the Trial Judge asserts
that “[t]here is credit risk or credit default
insurance available in the market from arm’s length commercial players in the
financial markets,” and that he “found it somewhat surprising that neither side
tendered any such evidence.” With respect to Mr. Reifsnyder, he states “[n]otwithstanding his
extensive knowledge, experience and presentations on credit insurance for
structured finance transactions, and his reference to its availability in his
testimony, Mr. Reifsnyder
seemingly never considered the cost of insuring the receivables in his pricing
approach, nor to test the results of his approach. Nor did he explain why he
did not do so”. This point was never raised at trial. . .
[45]
The opening words of paragraph 37 of the Factum
says this concern was “. . . never
articulated at trial, such that McKesson Canada had no opportunity to
respond to them. . . .”
[46]
Was this never raised at trial? Did the
Appellant have no opportunity to respond? Let us again turn to the record of
the trial proceedings.
[47]
At the outset of Mr. Reifsnyder’s testimony during the trial, Appellant’s counsel asked him to tell
the Court what kind of consultant work he was doing. His response included (at
pages 833-4 of Volume 7 of the Transcript):
And now with my wife I am building a financial
advisory risk management business for small businesses and individuals,
focusing primarily on insurance solutions.
[48]
From page 851 through page 859 of Volume 7 of
the Transcript for October 27, 2012, Appellant’s counsel led Mr. Reifsnyder through only his credit risk
insurance experience with securities and structured finance over the period
1997 to 2008 working in senior roles for significant players in this market,
namely,
•
Capital Markets Assurance Corporation or CAP MAC
and MBIA Insurance Corporation, where he ran the group that was “providing
insurance on mortgage back securities and CDOs to people that had bought pieces
of those without insurance and came to us and said would you please insure it”;
he described CAP MAC and their leaders as having “a vision to take that kind of
insurance [on municipal bonds and securities issued by public authorities] into
the structured finance market. So they focused very heavily on insuring
transactions, financial transactions that were structured finance transactions:
so receivables, loans, asset back deals of all sorts, that was their specialty”;
•
CFIG, where he “ran teams that insured financial
transactions”, and;
•
a Bear Stearns subsidiary that was “intended to
function like an insurance company taking on risks to corporate asset backed or
CDO type risks in the financial market by writing credit derivative contracts.”
Appellant’s
counsel later took Mr. Reifsnyder back to confirm that while at CAP MAC and MBIA, he worked on
Canadian-related deals, being U.S. commercial paper deals managed by two of Canada’s major banks.
[49]
Later in his testimony (at pages 930 through 933
of Volume 9 of the Transcript), Appellant’s counsel asked Mr. Reifsnyder to “elaborate about the different
ways in which receivables get sold and what different structures can or
cannot be used to address the issue of risk and price.” In answering this
question, Mr. Reifsnyder
described three “ways you can treat risk in transactions like this”. And later
he continued:
The third thing is you can sometimes [i]nsure
away the risk in a transaction like this. You can get a third party to [i]nsure
the performance of the receivables or the performance of some set of the
assets. You can transfer the risk by reallocating risk in a deal to a third
party that agreed to assume the risk for some price or you can absorb the risk.
[50]
With respect to argument, there were several
exchanges during the submissions of Appellant’s counsel that addressed this
issue.
[51]
On January 31, 2012, the first day of oral
argument, the following exchange appears on page 3651 of Vol 22 of the
Transcript:
Justice Boyle: McKesson has paid a remarkable
premium to do this for the benefit of primarily shedding risk, including the
risk of going up to 100% of receivables, but that is shedding risk. It’s a lot
more than the McKesson US borrows at. It’s a lot more than what they were
paying previously to the extent they used this money to refinance and aren’t
they paying much, much more to offload risk? And I don’t have evidence of what
the costs of laying off that risk would be. There are all sorts of other ways
of moving the risks to see if X + Y should equal Z.
Mr. Schabas: There could be that evidence. The
Department of Justice hasn’t called that evidence to suggest there was another
alternative like the one you suggested that would be less expensive than that.
[52]
Later, at pages 3653 and 3654 of the Transcript,
this discussion continues:
Justice Boyle: Don’t I have evidence that
McKesson Canada did a transaction when they needed [funds] to refinance with a
cost of funds of Z?
Mr. Schabas: Sure.
Justice Boyle: I have evidence that their cost
of funds up until then was X; McKesson US’s rating and its facility which
included a tranche available to Canada was in the range of X so I have a big
delta between X and Z we’ll call Y, and I’m having trouble seeing there was
more than risk transfer they got for Y. So I am on the evidence up until
there and can’t Boyle say[:] what evidence do I have of whether Y is
reasonable? Because that’s a surprising delta.
Mr. Schabas: No you can’t start to get into – I
submit you’re getting into the slippery slope of saying this isn’t a
transaction that would be done, which has not been pleaded and on the law is
not before you. The issue is there is this risk transfer, there is this
virtually 100% financing and the benefits that come with it. The only thing
left is to say what is the arm’s length price? And the evidence before you is
the arm’s length price is what [Ms.] Hooper said it would be. You have to get
away from the feeling of discomfort, well, they could have borrowed money at a
lower rate so the financing charges would have been lower, but there are other
benefits. It’s not a comparable transaction. The economists say I can’t compare
this. Both of them do. That’s the evidence. There is the evidence of a risk
transfer and that’s what this is about. None of these other transactions
transfer risk and the experts are saying the price for transferring the risk in
an arm’s length transaction is this. If there was another comparable
transaction that would transfer the risk it hasn’t been led.
So you don’t have any basis to come to the
conclusion there is some other lower price for the risk transfer. You just have
the evidence that you have.
Justice Boyle: Does that bring you to what is
the onus on the taxpayer [to] show the assessment is wrong?
[53]
This exchange continues for the next 4 pages of
the Transcript. This continued exchange included my observation to Appellant’s counsel: “We weren’t identifying
and avoiding risk. We need to price risk”. It included Appellant’s
counsel reminding me that Mr. Reifsnyder “acted for buyers and sellers and issuers and insurers of risk”.
It included my questioning Appellant’s counsel as follows on Mr. Reifsnyder’s use of a
bond fund index: “Remind me, did he say he’d ever seen
that done before or had done it himself before in all his experience?”. It
ended with the following exchange (at page 3657-58 of the Transcript):
Justice Boyle: In direct, did he tell me this
is how markets price risk; in a private deal they would use a junk bond? He
doesn’t say that. It’s not up to Mr. Laperriere in cross. You’re to be telling
me on what arm’s length parties would have done.
Mr. Schabas: Mr. Reifsnyder said I looked at
this. I looked at the credit quality. I had to figure out how do I price this.
It’s not a securitization. I’m not structuring a reserve. I’ve got these
designated obligors which imposes risk and there is a credit risk there. I know
how to do this. I have an unconcentrated pool of small obligors. What do I do
for that? I think about market. Mr. Laperriere didn’t go to him and say “why
didn’t you look at something else”. My job is to present him [Mr. Reifsnyder]
and explain what steps he followed and how he got there. It’s not my job to say
why didn’t you do this and that.
Justice Boyle: It’s your job and his to tell me
what terms and conditions would have been made between persons dealing at arm’s
length. I’m sure if he used this regularly in pricing private deals with
unrated people and told them they were junk I would have heard about it.
[54]
This discussion picked up again later. Pages
3669-70 the Transcript records the following:
Justice Boyle: At 50,000 feet, the one
paragraph summary of the issue raised by these facts is McKesson begins with a
cost of funds nearing 5% and they do this transaction and the cost of the terms
and conditions have multiples of that. Say it is 5 and 20, we have a 15, a
quadrupling for risk. So am I wrong to think somehow I need to be made
comfortable that paying that 15 percentage point premium was a reasonable
valuation of the cost to McKesson of laying off that risk because that is what
a market that takes on that risk does? And aren’t [there] insurance markets and
the whole credit derivative - -
[55]
Later on February 1, at page 3785 of Volume 23
of the Transcript, the following is recorded:
Justice Boyle: And I’m charged with deciding if
McKesson paid too much to move that risk: Isn’t that what I am charged with?
Mr. Schabas: I think what you just said, I
would agree with.
[56]
It appears very clear to me that the issues of
Mr. Reifsnyder’s considerable
expertise in credit risk insurance of receivables and other securities and
structured financial transactions, and the availability of credit risk
insurance to transfer risk with respect to receivables, was raised by the
Appellant in evidence and in argument, and that Appellant’s counsel took each
as far as he wanted to, entirely unrestrained by me. For the Appellant to state
in their Factum that I am the one who raised these issues, without them ever
being raised at the trial, and that I raised them independently for the first
time in my Reasons, appears to me to be the Appellant again telling clear
untruths about me.
[57]
In paragraphs 42 and 44 of the Factum, the Appellant
states:
42. Although the
Trial Judge purports to proceed in accordance with the above principles,
in fact the Trail Judge’s calculation of an arm’s length discount rate
flows from a functional analysis premised on MIH assuming no material risk . .
. The Trial Judge’s analysis and ultimate decision rely critically on three key
propositions . . .
(iii) that, in
applying paragraph 247(2)(a), and more specifically, in constructing the
hypothetical transaction against which to compare the McKesson Canada-MIH
transaction, the hypothetical purchaser would control the hypothetical vendor.
[. . .]
44. As
for proposition (iii), in determining whether arm’s length parties would agree
to the discount rate agreed by McKesson Canada and MIH, the Trial Judge said
that the notional arm’s length purchaser would have the power to “…
change McKesson Canada’s name, sell McKesson Canada, or do something else in
order to trigger a termination event at will.” . . .
[58]
In paragraph 10 of the Factum, the Appellant
asserts that the trial judge made a “. . . finding that MIH could
effectively terminate the Agreement at will as a result of its status as
McKesson Canada’s sole shareholder”.
[59]
The Appellant also sets out in paragraph 38 (b)
of the Factum that one of the four specific issues in their appeal is whether
the Trial Judge erred when he held that he was to assume the
purchaser MIH controlled the seller McKesson Canada.
[60]
In paragraph 52 of the Factum, the Appellant states:
52. . . . Instead
of deciding the case based on the way it was framed in the pleadings and evidence
led at trial, he devised new theories, purporting to conduct quantitative
analysis of his own . . . It is difficult indeed to discern much of a
connection between the proceedings at trial and the independent analysis
contained in the Trial Judge’s Reasons.
[61]
In paragraph 73 of the Factum (quoted from
above) the Appellant wrote that a “critical error” made by the trial judge is
that “in his hypothetical transaction, he believed that he was required
to assume that the hypothetical purchaser somehow would control the supposedly
unrelated hypothetical seller.”
[62]
Again, we can turn to the record of the trial
proceedings to see if the judge said or held such things, made such a finding,
or decided this issue otherwise than based on the evidence led at trial.
[63]
The issue of notional continued corporate control
rights and the termination event triggers were addressed during the course of
the trial in at least the following exchanges.
[64]
On January 31, pages 3540 and 3541 of Vol 22 of
the Transcript record:
Justice Boyle: If we had an open arm’s length
Dutch auction of the right to be MIH, the buyer --
Mr. Schabas: But you don’t. You have to accept
the fact the guarantee comes from the parent that wholly owns and controls MIH.
That’s why I went to the transfer pricing methodology and the law that says you
have to not just take the agreement, but accept the underlying facts that the
guarantee comes from its wholly owned parent. We don’t disregard that aspect of
the underlying facts.
Justice Boyle: What do we do with the flip
side? It’s a 5 year agreement, whether it is 5 year risk is [dependent] on how
we define that, it’s a 5 year agreement but terminable upon a number of events,
including a change of name from McKesson. Since the buyer is the shareholder
and has the right to change the name, do I assume that the arm’s length
buyer gets to terminate on demand by changing the name? Does the change of name
go from the parent to my theoretical arm’s length person?
Mr. Schabas: I
suppose it would in the sense it’s economically relevant.
[. . .]
Justice Boyle: One of the terms defined, the
second last one, is the change of name to remove the word “McKesson”. Does
my theoretical arm’s length parent have the right the parent has to change the
name? Do they have the right the shareholder parent has to access underlying
financial information about the obligors that aren’t provided for in the RSA?
Mr. Schabas: Potentially, and I
suppose that would be true in any transfer pricing case.
[65]
At pages 3544 and 3545 of the Transcript, the
following exchanges were recorded:
Justice Boyle: Taking that to an arguably logical
point, if I accept that, wouldn’t virtually every Canadian subsidiary, private
company, a subsidiary of a foreign multi-national, public or otherwise, be
re-pricing to 5 year junk rates? We are not going to give you any information
under the loan agreement, you are buying a pig in a poke under the loan
agreement. You have access to everything else qua shareholder. You can only
look to the loan agreement. G.E. will be redoing their deal the day after my Reasons
come out. Everybody will be re-pricing to basically junk bond status.
Mr. Schabas: I want to think about my answer
to that.
Justice Boyle: That’s the difficulty I am
having, why is there a compelling distinction? And I think you explained it,
but why is there a compelling distinction between accepting the related group
shareholding obligations and rights from the buyer’s point of view but breaking
it at the buyer seller, and I think your position was because the Act tells you
that’s the one relationship you have to assume is arm’s length?
Mr. Schabas: Right.
Justice Boyle: If I assume that, why would
you have conceded the buyer must also get the right to rename McKesson
something else? Because that only comes from the same relationship?
Mr. Schabas: It does.
Justice Boyle: I think 247 looks really simple,
and maybe in application to a widget or drug it may be, but when we get into
financial services, it gets a lot more complicated. If you look at G.E., if you
were right, how would this Court or the Court of Appeal have spent time
addressing implicit support in G.E.? The implicit support is based upon G.E.
being G.E.’s sub?
Mr. Schabas: I’ll come back to this. I want
to reflect on this.
[66]
Appellant’s counsel
returned to this beginning at page 3598 of the Transcript:
Mr. Schabas: Related to this is the other
question you left me with, which relates more generally to the arm’s length
principle and the termination provision, the parent company can change their
name and terminate at any time. First, I would comment a provision like that
is a provision arm’s length parties would agree to.
[67]
This exchange carried on through pages 3599,
3600 and 3601, wherein Appellant’s counsel makes it clear that he doesn’t think he can say anything more on
this issue, and that this concludes what he wanted to say on the subject.
[68]
The issue is raised again on page 3634 of the
Transcript:
Justice Boyle: The question I have been posing
a couple of times today is this: It troubles me, whether it’s non or low
investment grade as between two experts, what is to prevent Boyle from stating
the obvious, that MIH knows exactly the credit risk and position of MCC? We all
know MCC is not rated because MCC didn’t need a rating because MCC isn’t in the
public markets. So why would I be inclined to think either of those two
approaches, low investment grade or non investment grade, are my two choices?
Mr. Schabas: Because that’s the evidence before
you.
Justice Boyle: That’s the expert evidence. It’s
opinion. Am I bound to experts?
Mr. Schabas: With respect, your Honour, I think
you are bound to decide this case by the evidence. That’s your job, to hear the
evidence, not bring in some other theories and other approaches not defined by
the pleadings on which evidence is not led. And that’s why I said at the outset
this is about laying the evidence before you as a factual matter and deciding
which evidence is more persuasive and compelling. That’s what a trial is. And
you have to decide this case on the evidence. And that’s the evidence that has
been presented to you, for example, on this very point.
Justice Boyle: It’s not baseball arbitration; I
don’t have to choose between your expert and Mr. Laperriere’s expert on this
point, do I?
I also have evidence
that MIH is the parent and holds [100]% of shares of MCC and implicit in this
is full access to its books and records in real time.
Mr. Schabas: True enough. You have to divorce
that from your assessment in this case.
[69]
In one set of the Appellant’s Supplementary Submissions
filed after the hearing (that of March 2012), the Appellant returns to this discussion
in argument and writes:
22. In oral argument, the following
question (paraphrased here) was raised regarding the scope of the hypothetical
situation: If the hypothetical requires the Court to treat the parties as if
they were dealing at arm’s length, is the Court required (or even permitted) to
take account of any economically relevant factors that derive specifically
from, or are rooted in, the non-arm’s length relationship between the parties?
[70]
Appellant’s supplemental submissions on this
question run from page 9 to page 18. After quoting from the General Electric
case on the very question, Appellant’s submission was:
24. Accordingly, all circumstances,
including those that derive from, or are rooted in, the non-arm’s length
relationship, must be taken into account; the only fiction is that the
relationship between the parties is replaced with the assumption that the
parties are independent.
[71]
The Appellant’s submissions continued (in
paragraph 31) that the application of this to the RSA transactions was the “the
analysis must assume that, lacking any special relationship, each party would
seek to negotiate a discount rate that maximized its own position.”
[72]
In my view, the exchanges during the trial are
entirely consistent with and reflected in paragraph 128 through 132 of my Reasons,
above. Further, as described already above, the exchanges at trial and these
paragraphs of my Reasons do not relate grammatically, actually or historically
in any way to Ms. Hooper’s evidence of the objective and effectiveness of the
termination right trigger events based upon delinquency ratios and loss ratios.
[73]
In paragraph 9 of the Factum and the footnote to
this sentence, the Appellant states:
9. . . . It is simply wrong to call
into question the credibility and integrity of a party for failing to answer a
case that was not put to it.
It is noteworthy that the Crown never
argued that there was any issue as to the credibility of McKesson’s witness, nor
did the Trial Judge indicate any such concern during the trial. In fact,
the Trial Judge’s contemporaneous observation of the witnesses’ credibility was
as follows: “subject to ruminating until I affix my signature at the bottom of
the page, I don’t have a whole lot of doubts about the credibility of any of
the witnesses in this trial …” … It appears that only after reframing the
dispute and issues, and examining the evidence through this new prism, did
the trial judge find that the witnesses were not credible.
[74]
What I said to Appellant’s counsel according to
pages 3738 and 3739 of Volume 23 of the Transcript was:
I can say this at this stage, subject to
ruminating until I affix my signature at the bottom of the page, I don’t have a
whole lot of doubts about the credibility of any of the witnesses in this
trial. I do question the relevance of parts of their testimony on certain
points to how I’m currently viewing it. It doesn’t mean that what they were
telling me wasn’t correct and was not credible. I find it less helpful than
they seem to think it is or I’m being asked to accept it as. So I have
weight and relevance issues, but I don’t have any fundamental credibility
issues with anybody at this stage, and it would be bizarre, it seems to me,
for me and you to have agreed to allow a Crown’s expert in, and then for me to
find there was no credibility attached to anything they said for the first
reason given they had this limited experience. That goes to weight.
[75]
As detailed below, this was not the only
exchange on the relationship between credibility and weight as Appellant’s
counsel several times advocated that I should find each of the Respondent’s
experts to not be credible at all or to attach no weight at all to anything
they said.
[76]
In paragraph 37(c) of the Factum, the Appellant
states:
McKesson Canada’s expert, Mr. Reifsnyder is dismissed
by the Trial Judge as “in large measure a partisan advocate quick to point
out the specks in the Respondent’s expert reports and downplaying, if not
refusing to acknowledge, the weak points in his own. That conclusion is flatly
inconsistent with the Trial Judge’s comment in closing argument that
“subject to ruminating until I affix my signature at the bottom of the page, I
don’t have a whole lot of doubts about the credibility of any of the witnesses
in this trial. . .”
[77]
My concern quoted in part in paragraph 37(c) of
the Factum about Mr. Reifsnyder coming across as being in large measure a
partisan advocate appears in paragraph 245 of my Reasons as subparagraph (r).
The seventeen subparagraphs preceding that, (a) through (q), detail specific
substantive concerns with his chosen approach and methodology detailed in his
expert report and discussed in his supporting testimony at trial. Virtually all
of these concerns came out at trial in the evidence, and/or in argument, raised
either by Respondent’s counsel in cross-examination and/or in argument, or by
the trial judge in questioning the witnesses, or as a concern raised with
Appellant’s counsel during argument. Subparagraph (r) is the only subparagraph
which briefly addresses the contrast between Mr. Reifsnyder’s approach in his
rebuttal reports and his testimony critiquing the Respondent’s experts and
their reports, with his own performance when his opinion or supporting
testimony was questioned. I did not list specific examples in my Reasons and it
would be inappropriate to supplement my Reasons at this stage. However, the
record and Transcript speak for themselves.
[78]
Paragraph 9 of the Appellant’s Factum continues:
As for the trial Judge’s sharp conclusion that
“never have I seen so much time and effort by an Appellant to put forward such
an untenable position so strongly and seriously” McKesson Canada says that, had
the Trial Judge focused on the propositions pleaded and contested by the
parties, instead of reframing the case in his Reasons after the trial was
over, he would not have found the taxpayer’s case to be without merit.
[79]
We need turn to the Reasons to see what the
trial judge did say, and turn again to the record of the proceedings to see if
the trial judge indicated any such concerns in the course of the trial.
[80]
The Appellant has quoted from paragraph 246 of
my Reasons in its paragraph 9. It immediately follows subparagraph 245(r) about
my concern that Mr. Reifsnyder came across as a partisan advocate at the
end of my listing of concerns with his chosen method. It is the final paragraph
under subheading E The Reifsnyder Expert Report of heading 8, The Witnesses,
The Expert Reports and the PwC Report. It is clearly a conclusion about the
Reifsnyder approach and nothing else. I know with certainty that Appellant’s co-counsel
has re-read it carefully. To suggest in their Factum that I wrote this about
the taxpayer’s whole case as opposed to Mr. Reifsnyder’s opinion is to be
deliberately misleading. Maybe that is considered acceptable in professional
appellate advocacy.
[81]
However, for the Appellant to say I reached a
conclusion about an expert report and a witness’s testimony because I reframed
the case after the trial was over appears to me to be saying another untruth
about me.
[82]
The issues of credibility and weight were the
subject of several exchanges between Appellant’s counsel and the trial judge. Appellant’s
counsel starts on the issue of credibility of experts on page 3700 of Volume 23
of the Transcript. On pages 3708 and 3709 I said:
I can tell you the Court is very used to
witnesses, including expert witnesses going on message track, and some loop
more than others, but I’m not sure that the fact one wants to think they’re
entitled to stick to their message means they are not credible. It’s clearly a
popular style among witnesses in courts.
[83]
Appellant’s counsel went on urging me to
disregard Mr. Glucksman’s evidence and said at page 3709:
Judges are the ones that have the opportunity
to spend the days listening to three day cross-examinations that should have
been a day and see someone that doesn’t want to accept the facts give the
answers that will hurt his case. And trial judges write decisions and say one
of the Reasons I reject this witness or the reason I reject this witness is
that he clearly came in with a bias and agenda and that was demonstrated
repeatedly in cross-examination because he repeatedly fails to give answers to
the most straight-forward questions instead of giving long, rambling and often
incoherent answers. And I am paraphrasing passages in our brief and that
applies over and over again to the evidence of Mr. Glucksman.
[84]
On page 3711 I responded:
It may be bad style and form, but not conceding
the strength of the other side’s case doesn’t mean what he is telling me about
his expert opinion is necessarily reflective of the fact it’s not credible. One
of the reasons I will list for accepting a witness’s evidence, expert or
otherwise, will often include a reference to whether they were evasive.
[85]
And at page 3712 I responded:
It’s of great concern to this trial judge when
they’re evading giving the information that nobody else can give me. Then you
start to wonder. Simply wanting to stick to his message doesn’t drive me,
necessarily. That’s all I am saying.
[86]
The following exchange is at page 3714 of the
Transcript:
Justice Boyle: All the nice legal statements
aside, experts are paid advocates. It’s a function of their role.
Mr. Schabas: You
have to cut through that. Sure they’re paid and they come to conclusions, and the
role of counsel is to see to what extent they’re being an advocate as opposed
to an expert, and that’s the difference between Mr. Reifsnyder and Mr.
Glucksman.
[87]
The sentence of mine on credibility quoted in
the Factum twice, which I set out in greater context above, was followed at
page 3738 of the Transcript by:
Justice Boyle: If nothing they said should be
given [any] weight, we’re not talking about weight, we’re talking about
expertise. We’re past that point, aren’t we?
Mr. Schabas: I am not sure. My submission – -
Justice Boyle: Zero’s a number. I agree.
Mr. Schabas: Where Mr. Glucksman’s evidence
differs from the evidence of [Ms.] Hooper or Mr. Reifsnyder, it should be
completely disregarded.
Justice Boyle: You said the whole thing?
Mr. Schabas: I was going to finish my sentence.
I was going to say that with respect to any other evidence he gave it should be
given no weight. It just should be given no weight. And you don’t need to give
it any weight.
Justice Boyle: I want people to know where I am
on the issues so they can gauge their time accordingly. Which wasn’t to shut
you down. That may mean you have to beat me up more and make the obvious more
apparent to me. That’s where I am.
Mr. Schabas: There is an evidentiary process at
a trial where a witness’ evidence contradicts, judges have to describe whose
evidence is more compelling and the major aspect of that comes from assessing
credibility. Because if you have conflicting numbers and approaches, then we
look to the trier of fact, the trial judge, to assess the credibility and the
rigor of their analysis and decide which evidence to prefer. And similarly,
even when you have admitted someone with the qualifications to give an opinion,
they give other testimony that based on their demeanour, their inconsistencies,
the doubts you have about the rigor of their analysis or confusion that’s
exposed, the corrections, the unwillingness to acknowledge things, that’s
another thing we rely on the trier of fact to assess and decide that this
witness, I just don’t want to give this witness any weight, it’s not reliable
evidence. And that’s up to you. You certainly have our submission.
[88]
Appellant’s co-counsel at trial, Mr. Gilliland,
also addressed the weighing of evidence in the context of Mr. Schabas’ use of
the word “credibility” at pages 3821 and 3822 of the Transcript.
[89]
The Appellant returns in paragraph 47 of its
April 2012 further Supplemental Written Submissions to the relationship between
“credibility” and “weight” when used in respect of experts.
[90]
There are also several occasions in argument
where I question Appellant’s counsel regarding some of my significant concerns
with Mr. Reifsnyder’s approach.
[91]
For example, on page 3752 I asked:
But Reifsnyder goes out and he starts with the
one thing that this absolutely isn’t, a five year bond. And it’s not in the
public market. So it’s the starting point I’m having trouble with picturing me
writing my Reasons and justifying rationally in a way that everybody from the
Supremes to an intelligent high school student could understand[,] faced with
all of this information, Boyle started where[?]
[92]
And at pages 3753-3754 I asked:
Why does he go to the rating agencies? If I
skip over that I know where you are going and how to write the rest of my Reasons,
but why do I go to the rating agency for five year junk debt?
[93]
And later on page 3754:
It [Mr. Reifsnyder’s chosen bond fund index]
included a defaulted issuer whose implicit rate, what it was trading at, was
399 or 299 percent.
[94]
In Volume 22 of the Transcript, at pages
3637-3638, the following exchange is recorded:
Justice Boyle: Am I to close my eyes to the
fact I think we all know private companies in Canada are not paying junk bond
rates to their lender?
Mr. Schabas: Sure.
Justice Boyle: Even if they would be charged a
junk bond rate if they tried to issue it into the public markets without
getting a rating, whether it’s the Katz’s, the Reichmans before these people were
in the public markets, we all know they weren’t [paying] junk bond rates.
This continued
through page 3639.
[95]
At page 3661 of Volume 22 of the Transcript I
said:
The problem I’m having, and I’m sure you’re
sensing it, is Mr. Reifsnyder couldn’t tell me he’d ever done a deal like
this. He can tell me that’s the way he thinks it might be priced from the
lender’s point of view working within a toolbox that begins with defaulting to
ratings, but the fact he’s never done one doesn’t cause me to question his expertise
or experience, but does cause me to think that that’s because from the
borrower’s perspective they would say [“W]e’re a very profitable, financially
solvent private company. We didn’t come to borrow money from you lender, as if
we’re going into the public markets, we’re not. That’s why we came to you,
custom made private deal. You can’t begin from telling me I should have gone to
the markets and will charge me as though I went to the markets and failed. Look
at my books. That’s what the bond rating and other rating agencies would do.
That’s what a lender does[”].
[96]
And at page 3662 I asked:
247 tells me to look at arm’s length parties,
both of them. The financier may well look at it that way but the fact he can’t
tell me they’ve ever done a deal, isn’t it, to state the obvious, there’s
nobody on the other side that would do a deal like that unless they’re worse
than junk bond status?
[97]
At pages 3755-3756 of Volume 23 of the Transcript
the following exchange is recorded:
Justice Boyle: The evidence is McKesson and Mr.
Trossman in structuring a trade receivable transaction, they thought first of
the securitization. They went to TD and [Ms.] Hooper didn’t say[: w]hat are you
here for? You want to talk to the Reifsnyders or my desk. My desk can tell you
what your bonds are trading at.
Mr. Schabas: She did talk to her desk.
Justice Boyle: About one small aspect of
dealing with the risk identification process of a trade receivable transaction.
So this very player and its very sophisticated advisor, your firm, view this as
a good starting point. You are not married to it, but how do I write my Reasons
to get over that and say where I really want to go is start with Reifsnyder?
Mr. Schabas: You don’t have to reject one and
adopt the other you can say they both got to the same result. That supports
both analyses. Sure they approach them differently but got to the same range
and Glucksman properly approached got there too. You don’t have to say
Reifsnyder is right and Hooper is wrong. Absolutely not.
Justice Boyle: I’m not talking about in the
analysis, it’s in the starting point. My question remains why would I start
with a public bond rating?
[98]
At page 3766 of the Transcript I said:
We’ve charged the man with looking at a
hypothetical transaction, he [said] I’ve never priced one in this manner
before, but I think I would price it this way. So he is taking a hypothetical
approach to pricing a hypothetical transaction and coming up with a 25 and a 40
[percent adjustments]. I’m starting to feel not well tethered.
[99]
At pages 3767-3768 I said to Mr. Schabas:
He didn’t tell me why it should be right. He
acknowledged that was a key difference and it needed a significant adjustment
and he gave me a range of numbers that looks pretty significant. Given that I’m
also a little concerned about the starting point, to be needing to make a big
adjustment, a big adjustment we can’t explain or substantiate in a hypothetical [-] never used by him or in the market to his knowledge [-] pricing
approach, his other adjustments may be as well supported and tethered as those,
but I’m feeling untethered on this key point. You said that is as tethered as
we can get with what he’s able to tell me.
[100] At the end of Mr. Reifsnyder’s testimony, I asked the witness a
number of questions to more clearly and better understand his testimony,
approach and opinion. I asked Mr. Reifsnyder about the lack of adjusting for
actual historical performance of the receivables at any time on any basis
during the five-year term at pages 1287-1288 of Volume 9 of the Transcript. I
asked about the volatility of the numbers for and within his chosen bond fund
index on page 1289, and about the extreme outliers within his bond fund index
on page 1291. I asked whether he had looked to see if any of McKesson Canada’s obligors had actually issued public debt in the time frame at page 1293, and he
told me he had not looked. I asked him to reconcile how his ‘smaller obligors
are riskier’ adjustment fit with a high yield junk bond index and whether that
need be adjusted for at page 1293. I asked him to clarify whether he was saying
that markets ignore history, or that markets should ignore history but don’t,
at page 1299; his answer speaks for itself. I asked him if he was aware of the
terms of MIH’s financing of its purchase of the receivables, including the
guarantee from its parent company at page 1302, and he said he was not given
that information nor information on MIH’s financial condition. I asked
Mr. Reifsnyder about his reference in his rebuttal report to Standard
& Poor’s structured finance trade receivables report’s statement criteria
that “the use of three year historical data is common” at page 1303.
[101] I then asked counsel at page 1306 if they had any questions arising
out of any of my questions of Mr. Reifsnyder. Appellant’s
counsel said he did not.
[102] I need add that a substantial part of the Appellant’s Supplemental Written
Submissions of April 2012 address the limitations of Mr. Reifsnyder’s approach
and his evidence identified by the Respondent in its Supplemental Written Submissions,
including starting with a bond fund index.
[103] It appears to me that my concerns with credibility and weight issues
were communicated clearly on several occasions during the trial, as noted above
with both Mr. Schabas and Mr. Gilliland, and as noted above with
Mr. Reifsnyder at the end of his testimony. It appears to me that the
Appellant writing that “nor did the trial Judge indicate any such concern
during the trial”, and that paragraph 245(r) of my Reasons is “flatly
inconsistent” with my quoted comment are inherently and demonstrably untrue.
That is, I believe the Appellant was telling untruths about me that go beyond
the appellate advocacy craft of colour, spin and innuendo.
[104] I am also of the view that I clearly tabled my concerns with
Mr. Reifsnyder while he was still able to better or fully explain himself
or adjust his thinking, or for his counsel to conduct further redirect. Again,
this means I am of the view it would be untrue to say that my concerns with Mr.
Reifsnyder’s approach and opinion arose only after I reframed the case after
the trial was over.
[105] In paragraph 54 of the Factum, the Appellant accuses me of being
misleading in the sentence in my Reasons wherein I deal with financing costs,
discount rates and interest rates. Specifically footnote 87 to that paragraph
in the Factum says:
. . . The Trial Judge equates the
assessed discount rate to an annual interest rate of 12-13 percent, when in
fact almost all of the 1% percent discount rate consists of cost recovery, so
it is not all equivalent to an interest rate. Similarly, the Trial Judge makes
the inflammatory and misleading comment at paragraph 14 that the actual
2.2% discount rate was equivalent to a 27% annual interest rate.
[106] In my Reasons, paragraphs 14 and 16, and the footnotes thereto,
refer to this issue. They read as follows:
[14] The CRA has challenged these related
party transactions for McKesson Canada’s 2003 taxation year on the basis that
the amounts paid to the non-Canadian McKesson entity pursuant to the
receivables purchase transactions differ from those that would have been paid
between arm’s length persons transacting on arm’s length terms and conditions.
The discount upon the purchase of the receivables in accordance with the
revolving facility was a 2.206% discount from the face amount. While this
discount rate and the overall transactions between the parties are considered
in greater detail below, this discount rate for receivables that on
average were expected to be paid within about 30 days can be restated as an
annual financing cost payable by McKesson Canada for its rights under the
facility in the range of 27% per annum.
[Footnote 5:] The discount was in fact recorded
as a financing charge on McKesson Canada’s financial statements. The
Appellant’s expert Mr. Reifsnyder confirmed that, while there are
differences, one can look at annual interest rates and discount rates as
being roughly the same thing.
[16] The taxation year of McKesson Canada under appeal ending March 29, 2003 was a short taxation year of approximately three
and a half months, having started upon its amalgamation as part of a Canadian
restructuring of the McKesson Group’s Canadian interests. Its taxation and
financial year ends on the last Saturday in March of each year. Its financial
year is divided into 13 four week Accounting Periods. CRA’s 2003 transfer
pricing adjustment was approximately $26,610,000, reflecting a 1.013% discount
for the purchased receivables. [Footnote 6:] This works out to an annual
effective financing cost rate in the range of 12%to 13%. This is more
than twice the annual interest rates on the available credit lines
described above. No transfer pricing penalty was assessed.
[107] It can be noted that in my Reasons I clearly equate the discount
rate on the purchase of the receivables rate to an annual financing cost.
[108] As noted in footnote 5, Mr. Reifsnyder testified during the trial
that one can look at annual interest rates and discount rates as being roughly
the same thing.
[109] We need return to the record of the proceedings to see what each of
Mr. Reifsnyder and Appellant’s counsel said about the differences and
equivalency of interest rates and discount rates in looking at financing costs.
[110] In Mr. Reifsnyder’s testimony at pages 1005 and 1006 of the
Transcript the following exchange of question and answers with Appellant’s counsel in direct examination
are recorded:
Question: We’ll come back to all of these
points in detail and you[’ve] given them on the next page. I just want to go
back to one part of your report I haven’t addressed prior to that, which is
your discussion on pages 8, 9 and 10 about the yield rate and some discussions
you have about time periods and things like that. Can you tell us what you’re
addressing here?
Answer: Yes. When I talked about cash flow
earlier I didn’t mention the fact those of us who have been actively doing
transactions for a long time are acutely sensitive to issues like time period,
what is the so called day basis of the transaction.
And also we’re acutely sensitive to the
difference between discounted rates and interest rates. They’re not the
same. They do not have the same numerical result. I wanted to think about
those with this transaction and decide if it was critical to an analysis of
this transaction to parse the transaction around those values and variables
and, at the end of the day, what I am trying to say is in the report on pages 8
and 9.
I think the way to look at this deal is to look at the days in each period as being roughly 28 days which
is the number of days in a settlement period, the McKesson accounting period,
and also to look at annual interest rates and discount rates as being
roughly the same thing. So mathematically I acknowledge if you ran a
calculation using a 28 day period or 32 day period you would come up with a
different result, but in the context of this transaction I don’t regard those
adjustments as being meaningful in the context of negotiation of an overall
price.
[111] The following exchange between Mr. Reifsnyder and the trial judge is
recorded at page 1071 of Volume 8 of the Transcript:
Justice Boyle: Can I interrupt for a second,
just because I’m confused. The bottom of 15, the first two lines on the chart,
the 1306 to the 1.0049.
The Witness: Yes.
Justice Boyle: This time we are converting a
rate to a discount directly?
The Witness: Yes.
Justice Boyle: Maybe that’s what I
misunderstood, is the effective yield not expressed as a rate and - - it’s a
discount, not an interest rate?
The Witness: Yes and as I stated yesterday - -.
Justice Boyle: I remembered that. This time I
thought you were converting, but you’re not?
The Witness: I’m not converting the
effective interest to discount rate. I’m taking an annual interest rate and
dividing it by 13 and saying good enough to consider this a discount rate.
Justice Boyle: I knew it was either that or you
were dividing by 12 after converting an interest rate to a discount rate. Did I
confuse anybody? It certainly helped me. Thank you. Carry on.
[112] The following exchange is recorded during the cross-examination of
Mr. Reifsnyder by Mr. Laperriere at page 1164 of the Transcript:
Question: In your rebuttal report you criticize
both the Finard and Glucksman reports for converting the discount rate on the
RSA into an annual interest rate, remember those parts of your rebuttal?
Answer: Yes.
Question: I am asked again to ask you where, in
either of the Glucksman reports or Finard reports, do they claim that the RSA
has a stated annual rate of interest?
Answer: I am not sure they make that statement.
They simply characterize the financing costs as being equivalent to an annual
interest rate, as I recall.
[113] And at page 1165:
Question: Let me put the following question to
you: have both of the reports just converted the discount rate on the RSA to
an annual interest rate for the sake of comparison purpose to alternative
financing arrangements?
Answer: We compare to an annual interest rate
in terms of index here. Let’s be clear, this is a yield, a discounted yield on
a portfolio. That’s my only point.
Question: In your experience do companies
typically want to compare the potential financing costs they would obtain under
different finance structures?
Answer: Yes.
Question: If a CFO was trying to understand
related financing costs, if we take a receivable sales transaction similar to
the RSA and, say, a bank loan, would it be necessary to convert the discount
rate on the RSA into an annual interest rate?
Answer: To an effective annual rate, yes.
But depends - - I don’t think it is to be confused with an interest rate. It’s
not a stated rate of interest. It’s a risk related point. It’s not earned at
that rate until the transaction matures.
Question: You also appreciate the purpose, that
is to do a kind of an apples to apples comparison?
Answer: Yes. Quick and dirty, as we say.
[114] I can restate what I said in footnote 5 above that the evidence was
that the discount on the RSA was in fact recorded by McKesson Canada as a financing charge on its financial statements.
[115] When reading transcripts from the discovery into evidence following
Mr. Reifsnyder’s testimony, Appellant’s counsel at pages 1310 and 1311 of Volume 9 of the Transcript said the
following to me by way of walking me through the highlights of the read-ins (which
were not read verbatim into the record, but were taken as read):
Justice Boyle: I’ll ask you now since it’s
lawyer and judge and no witness. What is the relevance of this? CRA was slow
getting to the game and they had to really hurry up because they had a deadline
and you think they screwed up. How does that help me?
Mr. Schabas: It
relates to context of the assumptions. At Tab 2A, it’s again the fact that it
wasn’t until they meet with an economist that they realized that the 2.2
percent discount, if you accepted at a certain approach to this, could
be equated to a much higher rate of interest and that’s the point at 2A. 2B
makes the point, as we’ll get to later that the auditor - -.
Justice Boyle: Have they worked through what
Sears charges them on the balance every year?
Mr. Schabas: That might come up in argument
too, your Honour. Two is the auditor acknowledged she had not dealt with a
factoring case and, again, at 2C is more references to the fact that it was Mr.
St. Pierre, the economist who they met with in December, that brought to their
attention that 2.2 was not an annual discount rate and they believe that was a
reasonable discount rate until they met with him. That’s specifically dealt
with on page 356 of question 1633, they’re saying until they met with the
economist the team was operating on the basis that the discount rate was
reasonable.
Justice Boyle: You just told me that’s
because they thought it was 2.2 percent.
Mr. Schabas: They didn’t appreciate it could
be equated to 28 percent, as far as the evidence goes.
[116] It appears to me to be very hard indeed based on this evidence from
Mr. Reifsnyder and from McKesson Canada’s financial statements, and on this
exchange with Appellant’s counsel in argument, to imagine, that I was trying to
mislead.
[117] In paragraph 28 of the Factum filed by the Appellant they allege:
28. Myron Glucksman, the Crown’s final
expert, had two analyses: an “affirmative analysis” with a risk-shifting 18.5%
reserve, and an alternative analysis that attempted to determine an arm’s
length discount rate under the Agreement without fundamentally altering the
transaction. Under the second approach, never mentioned by the
Trial Judge . . .
[118] In the Reasons both approaches are described by me in paragraph 265:
[265] In addition to critiquing the Discount
Rate approaches in the TDSI Report (and in the PwC Report), the Glucksman
Report computes an Affirmative Estimate of an arm’s length Discount Rate for
the RSA.
[119] Since there are only two approaches set out in the Glucksman Expert Report
and in his testimony (largely referred to during the hearing as the “as-is”
approach and the “substantive” or “affirmative” approach), I believe it would
be difficult for someone familiar with or informed of the proceedings to read
this paragraph in my Reasons as not referring to and describing both of Mr.
Glucksman’s approaches.
[120] It is my view that paragraph 28 of the Factum filed on behalf of the
Appellant states an untruth about me and what I did or did not say.
[121] In paragraph 4 of the Factum, the Appellant states:
4. By the end of the trial, however,
the Crown had abandoned its idea of a 20 percent reserve, and
effectively conceded that, without this (risk shifting) reserve, the
Minister’s original one percent discount rate was indefensible.
[122] Similarly, in paragraph 25 of the Factum, the Appellant writes:
25. The Crown ultimately relied on
evidence that supported a conclusion that, without significant risk-shifting
loss reserves, arm’s length parties would have agreed to a discount rate of
around 1.35 percent.
[123] Paragraph 28 of the Factum (already discussed under the preceding
heading) refers to Mr. Glucksman’s testimony about his reserve in this regard.
[124] In paragraphs 35 and 36 of the Factum, the Appellant states:
35. In his Reasons, the Trial Judge
rejects the 20 percent reserve initially advocated by the Crown on the basis that
adding such a term would be tantamount to rewriting the actual transaction;
however, he ignores the impact the Crown conceded this would have on the
discount rate. The Crown conceded that pricing the actual
transaction without adding a risk shifting reserve would result in a discount
rate as high as 1.35 percent.
36. Rather than consider the Crown’s
evidence or its position, the Trial Judge proceeded to arrive at a
discount rate based on his own conjecture about what arm’s length parties would
or would not have agreed, and then concluded that the discount rate relied upon
by the Minister in the reassessment fell within an arm’s length range. The
Trial Judge viewed a discount rate as low as 0.92 percent as producing an arm’s
length benchmark for McKesson Canada’s transaction, one with no reserve, while
the Crown’s own witnesses (Mr. Finard and Mr. Glucksman) viewed a number in
this order as acceptable only with a 90 million dollar reserve.
[125] We can return to the record of the proceedings to see if the trial
judge ignored any such concessions by the Crown or failed to consider the
Crown’s evidence on this point, and to see if any such concession was made by
the Crown.
[126] It is clear from the record that the Respondent’s counsel never
conceded such a point, even after being reminded of Mr. Glucksman’s testimony
giving rise to the 1.3 and 1.35. (This appears to be indirectly acknowledged in
the last sentence of paragraph 30 of the Factum.)
[127] The following exchange during argument with Appellant’s counsel occurred
towards the end of their second day of arguing the transfer pricing adjustment
issue at pages 3806 and 3807 of Volume 23 of the Transcript:
Justice Boyle: … I asked Mr. Laperriere the
question[,] is 1.3 now my floor[,] for the reason you’re advocating, but you’re
saying I have to. I’m asking the question. It puts pressure on him to ask
the question.
Mr. Gilliland: He’s still thinking about it
two days later. I don’t disagree you could reject all the evidence and in
however manner you see fit arrive at the 1.1. My submission is that on the
evidence before you you’d be hard pressed to do that given the fact the Crown’s
own witness is 1.3 and my tag onto that is that if I’m right and we are at the
1.3, a gap between that those two preponderance of evidence.
By now as Appellants we pushed you past 1.1.
I am saying if we gotten there, it looks like we have gone a long way
toward that given the evidence and the change of position. My only point is
then we are at a preponderance of evidence. If we’re not, the burden was on us
to move things.
Justice Boyle: The burden was on you to
displace the assumptions of fact. I think that’s been done. I don’t think I’m
going to hear argument to the contrary from Mr. Laperriere.
Now you’re in the position of every person
bringing an application before a court, you have the burden on the balance of
probabilities of showing me what they did was wrong and I’m saying what they
did was still 1.1. You’re saying it looks like practically and maybe legally it
is 1.3. Apart from this disagreement, I think we are saying the same thing.
They don’t have to show me 1.1 is right even if the assumption is off the
table. You have to show me it’s wrong.
[128] I believe this last exchange speaks for itself. I believe it is
untrue for the Appellant to say that I ignored a Crown concession and that I
didn’t consider the evidence of the Crown’s expert on this point.
[129] In paragraph 9 of the Factum, the Appellant writes about the trial
judge’s “palpable antipathy” towards the taxpayer, its witnesses and its
counsel. They refer to one of my statements as “sharp”.
[130] They conclude paragraph 34 by writing:
What is clear from the Reasons is the
unflattering view taken of McKesson Canada, its witnesses, and its counsel.
[131] In paragraph 70 they refer to my analysis being “infected by his
pejorative and unfair comments”.
[132] I have already addressed above under my first heading my concerns
that in paragraphs 84, 88 and 89 the Appellant appears to be saying I was
untruthful.
[133] I view these as public allegations by a party to the costs and
confidential information matters remaining before this Court that, regardless
of the merits of their reasoning or their thoughts, I am unable to decide the
remaining matters impartially. I believe that a reasonable person reading only
these phrases from the Factum, without reviewing my Reasons or the trial Transcript,
would believe that such strong complaints by McKesson Canada and its counsel
may give rise to a serious doubt that I will be seen to be able to dispose of
the two remaining issues and discharge my duties on an impartial basis.
[134] Before concluding, it appears appropriate for me to acknowledge an
error in my Reasons that the Appellant has correctly identified in its Factum.
In paragraph 56 of the Factum, the Appellant refers to the phrase in the
sentence in paragraph 13 of my Reasons that “a portion was loaned for a period
to another Canadian corporation to permit its tax losses to be used”. I can
confirm that they are correct in saying that there was no support in the
evidence that the purpose of that loan was for the Vancouver affiliate to use
its tax losses. I sincerely apologize for using the words “to permit its tax
losses to be used”. It will be for others to decide, of course, the relevance
of my mistaken phrase to my overall Reasons and decision.
[135] By way of explanation and not excuse, I can see that I mistook a
two-part question I had intended to ask Mr. Brennan by way of clarification at
the end of his testimony, as a question and an answer. In his
examination-in-chief, Mr. Brennan, the VP Tax at McKesson US, described the Vancouver affiliate as a large R&D centre, and later referred to it as a very
large physical R&D practice that was well educated. He later described the
92 million dollars as being “we just lent it to one of our companies that are
located in Vancouver, Canada. We had the cash to have paid that immediately. We
didn’t have to do it, but we did it. And, you know, and, actually, this note
was paid off over two years thereafter but we could have paid it off through Ireland much sooner if we wanted to.” Later he said “all we did is we on-lent it to one of
our Canadian subsidiaries.” And “but, anyways, this is McKesson Canada’s money, and we have asked it to lend it to its, not a subsidiary, it’s an
affiliate, a Canadian affiliate, and we can now do that because of the
restructuring.” That is all of the evidence I had. My question was to be, in
these circumstances, why was this loan made. The second half of my question,
had I asked it, was to be whether it was for tax loss utilization purposes. In
the end, I decided not to ask Mr. Brennan the question at all. However, in
preparing my Reasons it appears I confused the second half of my question for an
answer to the first. Again, I was mistaken in this regard in my Reasons and I
do apologize.
[136] For the Reasons identified above, I have decided I have to recuse
myself from the remaining costs and confidential information issues in McKesson
Canada’s proceeding in this Court.
[137] It may be that some of the perceived untruths about the trial judge
described above under heading II might individually not warrant recusal, and
may be within an appellate advocate’s licence to overstate through the use of
absolutes like ‘never’, ‘only’ and ‘any’.
[138] However, I am satisfied that a reasonable fair-minded Canadian,
informed and aware of all the issues addressed above, would entertain doubt
that I could remain able to reach impartial decisions. I believe that such a reasonable
fair-minded and informed person, viewing this realistically and practically
would, after appropriate reflection, be left with a reasoned suspicion or
apprehension of bias, actual or perceived. Canadians should rightly expect
their trial judges to have broad shoulders and thick skins when a losing party
appeals their decision, but I do not believe Canadians think that should extend
to accusations of dishonesty by the judge, nor to untruths about the judge. Trial judges should not have to defend their honour and integrity
from such inappropriate attacks. English is a very rich language; the Appellant
and its counsel could have forcefully advanced their chosen grounds for appeal
without the use of unqualified extreme statements which attack the personal or
professional integrity of the trial judge.
[139] For these reasons, I will be advising my Chief Justice that I am
recusing myself from completing the McKesson Canada proceeding in the Tax
Court. This extends to the consideration and disposition of the costs
submissions of the parties in this case, as well as to the 2010 confidential
information order of Justice Hogan in this case and its proper final
implementation by the Tax Court and its Registry.
Signed at Ottawa, Canada, this 4th day of September 2014.
“Patrick Boyle”
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