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Citation: 2006TCC325
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Date: 20060622
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Docket: 2005-2502(IT)G
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BETWEEN:
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HER MAJESTY THE QUEEN,
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Applicant (Respondent),
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and
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HONEYWELL LIMITED,
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Respondent (Appellant).
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REASONS FOR ORDER
Bowman, C.J.
[1] In these reasons I shall, to avoid confusion, refer to Her Majesty the Queen, the applicant in this motion and the respondent in the appeal, as the respondent or the Crown and Honeywell Limited, the appellant and the respondent in the motion as the appellant or Honeywell.
[2] The motion is by the Crown to amend its pleadings to put forward an alternative justification for the assessment. The specific amendments sought are set out as an appendix to the affidavit of Gordon Parr, filed on the motion. Counsel for Honeywell consented to certain amendments and opposed others. The principal objection to the amendments related to the attempt to plead that the assessments could be justified on the basis of the foreign accrual property ("FAPI") rules (section 95). Whether it is called an alternative argument in support of the assessment within the meaning of subsection 152(9) of the Income Tax Act or a new basis of assessment as that expression was used by Bastarache J., in Continental Bank of Canadav. Canada, [1998] 2 S.C.R. 358, in the final analysis it may not matter because the Federal Court of Appeal has held that there is no difference between the two. Counsel for the Crown refers to a statement in Gould v. The Queen, 2005 DTC 1311:
[16] The appellant contends that paragraph 35 of the Reply cannot stand because the respondent cannot put forward a new basis of assessment for 2000 that disallowed 100% of the donation as opposed to 80%. As I understand the decision of the Federal Court of Appeal in Her Majesty the Queen v. Charles B. Loewen, 2004 DTC 6321, there is virtually no restriction on what the Crown can plead in a reply and there is no distinction between a new basis of assessment (Continental Bank Leasing Corporation v. The Queen, 98 DTC 6505) and a new argument in support of the assessment (ss. 152(9) of the Income Tax Act).
[3] The following is the factual context in which the motion arises. The facts set out below are taken from the material filed on the motion. They are not intended to be findings of fact which will bind the trial judge if the case comes to trial. They simply represent the factual framework in which I must decide the issue of the Crown's request to amend.
[4] Honeywell is a Canadian subsidiary of Honeywell Inc., a U.S. corporation. Honeywell Inc. owned, directly or indirectly, a number of European subsidiaries, among others, specifically, a Dutch company, Honeywell B.V. ("BV"), Honeywell S.A. ("SA") and Honeywell Europe S.A. ("Europe"). The latter two are Belgian companies.
[5] The appellant incorporated a wholly owned subsidiary in the Netherlands Antilles, Honeywell Limited Finance N.V. ("NV").
[6] In December 1991, the appellant borrowed $115,000,000 and invested it in NV as a contribution of capital. NV loaned it to BV. BV paid interest to NV. Such interest would normally be foreign accrual property income ("FAPI"). However, there is an exception where the conditions of paragraph 95(2)(a) are met. That provision reads:
(2) Determination of certain components of foreign accrual property income. For the purposes of this subdivision,
(a) in computing the income from an active business of a foreign affiliate of a taxpayer there shall be included
(i) any income from sources in a country other than Canada that would otherwise be income from property or a business other than an active business, to the extent that it pertains to or is incident to an active business carried on in a country other than Canada by the affiliate or any other non-resident corporation with which the taxpayer does not deal at arm's length, and
(ii) any amount paid or payable to the affiliate by, and, where the affiliate is a member of a partnership, the affiliate's share of any amount paid or payable to the partnership by,
(A) another foreign affiliate of the taxpayer, or
(B) any other non-resident corporation with which the taxpayer does not deal at arm's length
to the extent that, in computing the amount prescribed to be its earnings from an active business other than a business carried on by it in Canada, such amount is deductible or would be deductible if the non-resident corporation were a foreign affiliate of the taxpayer;
[7] At the risk of oversimplification this means that if the interest is paid to the foreign affiliate by another foreign affiliate or a non-arm's length corporation and the interest is on money borrowed for use in the payor's active business, the interest is not FAPI in the hands of the recipient foreign affiliate.
[8] The Minister of National Revenue concluded that all of the technical requirements of paragraph 95(2)(a) had been met. Nonetheless, he did not like the result and therefore applied the General Anti-Avoidance Rule ("GAAR") in section 245 of the Act on the basis that the transactions were avoidance transactions that resulted in a misuse of subsection 15(2.2) and clause 95(2)(a)(i.i)(B) of the Act. Therefore, he recharacterized the transactions and taxed the appellant on the interest income NV received from BV and also imposed withholding tax on the amount of the loan.
[9] Implicit in the Minister's acceptance that the technical requirements of subsection 95(2) had been met is the assumption that BV was using the funds that it borrowed from NV for active business purposes.
[10] The Minister now alleges that on the basis of further material received from Honeywell he should not have assumed that BV was using the borrowed funds in an active business carried on by it but rather was acting as a conduit through which the money originally borrowed by the appellant and invested in NV and loaned to BV was moved into a group of other foreign subsidiaries of Honeywell Inc. and ultimately to Honeywell Inc. In short, the allegation is that it was part of an elaborate scheme whereby the appellant borrowed money which ended up in Honeywell Inc.'s hands. If this view of the matter is correct, BV was not using the borrowed money in carrying on an active business then the interest is FAPI in NV's hands and it was not necessary to invoke the GAAR. Mr. Chambers agrees but says that the GAAR may also be useful in permitting the Crown to trace the funds from BV to the various other European subsidiaries.
[11] I make no comment on the merits of these assertions. My only function as a motions judge is to decide whether the Crown is entitled to amend its reply to raise these new arguments.
[12] My general approach with respect to amendments of pleadings was set out in Continental Bank Leasing Corporation et al. v. The Queen, 93 DTC 298 at 301-2.
Courts subsequently have applied a more liberal test which permitted amendments or withdrawal of admissions where a triable issue of fact or law is thereby raised and where the amendment or withdrawal would not result in a prejudice to the opposing party that was not compensable in costs. Counsel for the appellant contended that no evidence had been adduced to show that the proposed amendments raised a triable issue. I think that this submission involves an unduly narrow reading of the cases. The triable issue of the nature and substance of the partnership transaction is clearly before the court and the admission of paragraph 29 of the notice of appeal is inconsistent with the other allegations in the reply, some of which were already pleaded and some of which are proposed to be added, without objection. New paragraphs 23 and 24 are simply a more elaborate articulation of the basic position taken by the Minister, the best evidence of which is the making of the assessment itself. In these circumstances there is no need for further evidence.
It was also contended that the party moving for the amendment had an onus of showing no prejudice by the amendment to the party opposing. Counsel for the appellant did not suggest that there was any prejudice and I should have thought that if there were prejudice that was not compensable in costs it would be reasonable to expect the opposing party to adduce evidence to that effect. It is difficult in any event to see what significant prejudice the appellant has suffered apart from the delay in proceeding with the examination for discovery of an officer of the respondent and the loss of the tactical advantage of not having to prove an allegation that had been inadvertently admitted by the respondent. Either the allegation in paragraph 29 is true or it is not true. If it is true it should be readily provable in considerably less time than this motion has taken. If it is not true it should not have been admitted and the court should not be required to base its decision on an erroneous factual premise. While I do not doubt the authority of the Attorney General of Canada to make admissions of fact in litigation to which the Crown is a party, it must be recognized that there is a public interest in income tax appeals and the court should be in a position to decide cases on the basis of correct facts and properly defined issues. It would do no credit to our system of justice in Canada if the courts were restricted in their consideration of the merits of a case by an ill-considered admission that is inconsistent with another position that is being advanced, particularly where it is sought to withdraw such an admission at an early stage in the proceeding. This is equally true whether the party seeking to change its position is the taxpayer or the Crown.
In the cases in the courts of Ontario and of British Columbia to which I was referred a number of tests have been developed - whether an admission was inadvertent, whether there is a triable issue raised by an amendment or the withdrawal of an admission and whether the other party would suffer a prejudice not compensable in costs. Although I find that these tests have been met I prefer to put the matter on a broader basis: whether it is more consonant with the interests of justice that the withdrawal or amendment be permitted or that it be denied. The tests mentioned in cases in other courts are of course helpful but other factors should also be emphasized, including the timeliness of the motion to amend or withdraw, the extent to which the proposed amendments would delay the expeditious trial of the matter, the extent to which a position taken originally by one party has led another party to follow a course of action in the litigation which it would be difficult or impossible to alter and whether the amendments sought will facilitate the court's consideration of the true substance of the dispute on its merits. No single factor predominates nor is its presence or absence necessarily determinative. All must be assigned their proper weight in the context of the particular case. Ultimately it boils down to a consideration of simple fairness, common sense and the interest that the courts have that justice be done.
The last part of this quotation was approved by the Federal Court of Appeal in Candarel v. The Queen, 93 DTC 5357 at 5361.
[13] There are basically two arguments that might be put against granting the amendment. The first is that the Crown is raising a new basis of assessment and it is not entitled to do so in light of the decision of the Supreme Court of Canada in The Queen v. Continental Bank of Canada, (1998) 52 DTC 6501. The short answer to this is that the Federal Court of Appeal's interpretation of subsection 152(9) in The Queen v. Loewen, 2004 DTC 6321, permits the Crown to do anything it likes in pleadings, as observed in Gould, quoted above.
[14] The second argument is that the waivers signed by Honeywell read as follows:
Interest income being reassessed under paragraph 12(1)(c) of the Income Tax Act, by reason of the application of Section 245 of the Income Tax Act.
and that therefore the inclusion in Honeywell's income of interest received by NV from BV must be based on section 245 alone and cannot, at least where a waiver is involved, be justified on any other basis.
[15] As a matter of fact the reassessments were made under section 245 of the Act. The Crown argues that it is not reasonable to interpret subparagraph 152(4)(a)(ii) as saying that if the waiver specifies section 245 and paragraph 12(1)(c), the Minister cannot, after issuing a GAAR assessment in accordance with the waiver, justify the same amount of tax on some other basis. Paragraph 152(4)(a) reads as follows:
(4) Assessment and reassessment. The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year; or
Subparagraph 152(4.01)(a)(ii) reads in part:
(4.01) Assessment to which para. 152(4)(a) or (b) applies - Notwithstanding subsections (4) and (5), an assessment, reassessment or additional assessment to which paragraph (4)(a) or (b) applies in respect of a taxpayer for a taxation year may be made after the taxpayer's normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to,
(a) where paragraph (4)(a) applies to the assessment, reassessment or additional assessment,
. . . . .
(ii) a matter specified in a waiver filed with the Minister in respect of the year; and
. . . . .
[16] The relevant portion of the French version of section 4.01 is as follows:
(4.01) Malgré les paragraphes (4) et (5), la cotisation, la nouvelle cotisation ou la cotisation supplémentaire à laquelle s'appliquent les alinéas (4)a) ou b) relativement à un contribuable pour une année d'imposition ne peut être établie après l'expiration de la période normale de nouvelle cotisation applicable au contribuable pour l'année que dans la mesure où il est raisonnable de considérer qu'elle se rapporte à l'un des éléments suivants:
a) en cas d'application de l'alinéa (4)a);
. . . . .
ii) une question précisée dans une renonciation présentée au ministre pour l'année;
. . . . .
[17] It seems reasonable to conclude that the treatment of interest income received by NV from BV as interest income of the appellant under paragraph 12(1)(c) by reason of section 245 falls broadly within the wording of the waivers and in any event it is not suggested in this motion that the reassessment made by the Minister does not conform to the waivers. It is however less clear that it is reasonable to conclude that the inclusion of income received by NV as FAPI under paragraph 95(2)(a), where the GAAR is not utilized, falls within the wording of the waiver. Prima facie, interest under paragraph 12(1)(c) based on a recharacterization of a transaction under section 245 is something quite different from FAPI under paragraph 95(2)(a).
[18] One step in the analysis would be to ask the question:
"In light of the wording in the waivers and of the restrictions in them and in subsection 152(4.01) could the Minister have reassessed applying paragraph 95(2)(a) but without applying section 245?"
The answer would in my view be "no". Including interest in income under paragraph 12(1)(c) because of a GAAR recharacterization is entirely different from including in a Canadian company's income a foreign affiliate's passive income applying the FAPI rules. This is not, however, a complete or satisfactory answer to the question. Having assessed on the basis specified in the waivers is it now open to the Crown to seek to justify the amount assessed on an entirely different basis? If the answer to this question is affirmative, it would mean that the Crown could abandon the original basis specified in the waiver and rely solely on the new basis.
[19] Learned counsel for the Crown points out that the amount to be included under FAPI is almost identical to the amount included on assessment in accordance with the waiver. I agree but it does not follow that just because the same dollar amount might be exigible on one basis (FAPI) and also on the other (GAAR) it is reasonable to say that an inclusion of FAPI is a matter that reasonably relates to a GAAR assessment specified in the waiver.
[20] If I am right in that conclusion, can the Respondent get where it wants to by assessing in the manner permitted by the waiver (GAAR) and then coming up with a brand new basis (FAPI) which was explicitly rejected by the Minister on assessing and seeking to justify it under subsection 152(9)?
[21] I reject this notion for several reasons:
(a) To do so would be to write subsection 152(4.01) completely out of the Act.
(b) To do so would violate rules of simple fairness. The taxpayer was induced to sign a waiver on the basis that the Minister would apply only GAAR and paragraph 12(1)(c). The Minister, having gotten in under the wire on one basis now says that the field is wide open. Perhaps if there were no waiver the Minister has the sort of carte blanche that Loewen suggests but once there is a waiver some effect must be given to the restrictions imposed by subsection 152(4.01). One cannot do an end run around them and in effect come in the back door when the front door is locked.
(c) I do not interpret the words "matter specified in an election" ("question précisée dans une renonciation") as meaning simply an amount of money, nor do I read the waiver as saying "anything arising generally out of your relations with your subsidiary Honeywell NV". Some effect must be given to the words "reasonably" and "to the extent that but only to the extent that..." I think a "matter" in subsection 152(4.01) means a separate subject matter or a discrete head of taxation. An obvious example would be where a taxpayer signed a waiver specifying that the Minister could reassess to treat a disposition of property as being on revenue as opposed to capital account. Could the Minister then, after assessing in the manner specified in the waiver, argue that the net amount of tax assessed could be justified on the basis that even if the disposition was on capital account the taxpayer had claimed expenses in an unrelated matter that were not allowable? I think not. The matters are different. By the same token, I think a GAAR recharacterization of a foreign affiliate's income as interest received by a parent is a fundamentally different subject matter or head of taxation, and therefore a different matter, from a FAPI assessment.
[22] I am therefore allowing the motion to amend the reply as follows: (The references are to the draft amended reply attached to Mr. Parr's affidavit.) Paragraph 5, paragraph 8, paragaph 8A, paragraph 13(g), paragraph 13(k), paragraph 13A, paragraph 15, paragraph 17, paragraphs 21E and 22A.
[23] I am not permitting the amendments sought in paragraphs 18A, 21A, 21B, 21C and 21D.
[24] The order of March 17, 2006 is vacated in accordance with the notice of motion.
[25] Costs will be in the cause.
Signed at Ottawa, Canada, this 22nd day of June 2006.
Bowman, C.J.
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