Date: 20130705
Docket: A-428-11
Citation: 2013 FCA 176
CORAM: PELLETIER
J.A.
TRUDEL
J.A.
MAINVILLE
J.A.
BETWEEN:
INDUSTRIES PERRON INC.
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
PELLETIER J.A.
INTRODUCTION
[1]
This
is an appeal from the decision of the Tax Court of Canada reported as Industries
Perron Inc. v. Canada, 2011 TCC 433, 2011 T.C.J. No. 367. As a result of
certain preliminary determinations made by American trade authorities, the appellant,
Industries Perron Inc. (Perron) was required to post security to cover its
potential liability for countervailing and anti-dumping duties with respect to
goods which it exported to the United States. The arrangement by which Perron
posted security involved its bank, the Royal Bank of Canada (the Royal Bank or
the Bank) and an insurance company, the Washington International Insurance
Company (the Insurance Company). Under that arrangement, Perron deposited funds
with the Royal Bank in term deposits which were then hypothecated in favour of
the Bank as security for obligations undertaken by the Bank in favour of the
Insurance Company. The issue in this appeal is the deductibility of the amount
of these term deposits.
FACTS
[2]
Perron
is a softwood lumber producer who exports softwood lumber to the United States.
[3]
In
March 2001, the Canada-U.S. Softwood Lumber Agreement expired. Days later, the
American softwood lumber industry filed a petition with the U.S. Department of
Commerce (DOC) seeking the imposition of countervailing and anti-dumping
duties. In the United States, the responsibility for assessing allegations of
unfair subsidies and dumping is divided between the DOC and the International
Trade Commission (the ITC).
[4]
On
May 23, 2001, the ITC made a preliminary determination that there were
reasonable grounds to believe that imports of Canadian softwood lumber
constituted a threat of serious injury to the U.S. softwood lumber industry. On
August 17, 2001, the DOC made a preliminary determination that Canadian softwood
lumber exports to the United States were unfairly subsidized and fixed the
“estimated subsidy rate” at 19.31%. As a result, the U.S. customs authorities
ordered “[t]he posting of a cash deposit, bond, or other
security, as the administering authority deems appropriate, for each entry of
the subject merchandise …”: United States Code, Title 19, article 1671b(d)(1)(B).
[5]
On November 6, 2001, the DOC made a preliminary
determination that there were reasonable grounds to believe that certain
softwood lumber products were being dumped into the U.S. market. The DOC
determined that the “estimated weighted average dumping margin” was 12.58%. As
a result, the U.S. authorities ordered “[t]he posting of a cash deposit, bond,
or other security, as the administering authority deems appropriate, for each
entry of the subject merchandise…”: United States Code, Title 19,
article 1673b(d)(1)(B).
[6]
These preliminary determinations were subject to a
final determination which was to be made on a broader evidentiary basis than the
preliminary determinations. In the meantime, however, Canadian exporters had to
comply with the requirement that they post a cash deposit or other security
with respect to each entry of their goods into the American market. In other
words, in order to continue doing business in the United States, Canadian
exporters had to put up a cash deposit or other security in an amount
sufficient to cover their potential liability should the preliminary
determinations be confirmed.
[7]
Perron chose to post security but, rather than
simply paying a bonding company a fee for a bond or guarantee in the
appropriate amount, it entered into a more complicated arrangement. The Insurance
Company agreed to guarantee a Perron’s potential liability to a maximum of US
$1,530,000 (CAN $2,371,500) to allow it (Perron) to continue to do business in
the United States. In these reasons, I will use the words “bond” and “guarantee”
interchangeably to refer to the obligation undertaken by the Insurance Company
on behalf of Perron.
[8]
One of the conditions of the bond was that the full
amount of the bond be secured by irrevocable letters of credit in favour of the
Insurance Company. The Royal Bank issued the letters of credit but it, in turn,
required Perron to purchase term deposits for the full amount of the letters of
credit and to hypothecate them to the Bank as security for the letters of
credit. Pursuant to these arrangements, Perron deposited $2,371,500, in term
deposits with the Royal Bank and hypothecated the term deposits in favour of
the Bank. The result was that the amount of $2,371,500 stood to Perron’s credit
on the Royal Bank’s books but Perron was unable to access those funds in any
way so long as the Bank remained liable to pay on the irrevocable letters of
credit.
[9]
Following the preliminary determinations referred to
above, the U.S. Government continued its examination of the status of the
Canadian softwood lumber industry to see if it was unfairly subsidized and
whether it was dumping softwood lumber into the American market to the detriment
of American producers. The U.S. Government confirmed the preliminary determinations
by orders dated April 2, and May 22, 2002. However, it also decided that no
countervailing duties or anti-dumping duties were payable for entries prior to
May 22, 2002 and ordered the release of cash deposits or bonds guaranteeing the
payment of duties for entries prior to that date. As a result, the Insurance
Company was released from any further obligation, the letters of credit were
allowed to expire and the hypothecation of the term deposits was discharged.
[10]
In filing its income tax return for its fiscal year
ending December 31, 2001, Perron deducted from its income the sum of
$3,576,088. In its income tax return for the 2002 taxation year, Perron
recognized as income the same $3,576,088 which it had deducted in the previous
year, given that the hypothecation agreement with respect to its terms deposits
was discharged.
[11]
The amount which Perron deducted from its income for
the 2001 taxation year, and included in its income in the subsequent year,
includes the $2,371,500 invested in term deposits hypothecated to the Royal
Bank as well as a further $1,204,588 which, according to the Perron’s
Memorandum of Fact and Law represents the amount of security which would have
been required on Perron’s exports to the United States from May 2001 to August
2001, had such security been required. No security was required with respect to
that period and no amounts were paid by Perron with respect to that period,
though it may have been restricted in its ability to dispose of goods which entered
the U.S. during that period: see Appellant’s Memorandum of Fact and Law, paragraph
3 (note 1) and paragraph 17. Perron made no argument with respect to this
amount and so, while it may not have abandoned the argument, it did not pursue
it. As a result, I am of the view that the only amount in issue in this appeal
is the amount of the term deposits hypothecated to the Royal Bank.
[12]
On February 3, 2005, the Canada Revenue Agency
disallowed the deduction of $3,576,088 from Perron’s income for the 2001 taxation
year. Perron filed a notice of objection to the reassessment. When the reassessment
was confirmed, Perron launched this appeal.
THE DECISION UNDER
APPEAL
[13]
After
setting out the Agreed Statement of Facts which the parties had put before him,
Mr. Justice Angers (the Tax Court Judge, or simply the Judge) identified the
issue as whether the $2,371,500 was “an outlay or
expense made or incurred for the purpose of gaining or producing income from
business”, as provided in paragraph 18(1)(a) of the Income Tax Act,
R.S.C. 1985 c. (5th Supp.)(the Act). Specifically, the Tax Court
Judge asked himself whether the amount in issue was non-deductible because it
was paid in connection with a reserve, a contingent liability or a sinking
fund, contrary to paragraph 18(1)(e) or whether the deduction was
permitted pursuant to paragraph 20(1)(vv) of the Act as an amount paid
in respect of an existing or proposed countervailing or anti-dumping duty.
[14]
For
ease of reference, these statutory provisions are set out below:
|
18. (1) In
computing the income of a taxpayer from a business or property no deduction
shall be made in respect of
(a) an outlay or expense except to the
extent that it was made or incurred by the taxpayer for the purpose of
gaining or producing income from the business or property;
(e) an amount as, or on account of, a
reserve, a contingent liability or amount or a sinking fund except as
expressly permitted by this Part;
20. (1) Notwithstanding
paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in
computing a taxpayer’s income for a taxation year from a business or
property, there may be deducted such of the following amounts as are wholly
applicable to that source or such part of the following amounts as may
reasonably be regarded as applicable thereto
…(vv) an amount paid in the
year by the taxpayer as or on account of an existing or proposed countervailing
or anti-dumping duty in respect of property (other than depreciable
property); and
|
18. (1) Dans le calcul du revenu du contribuable tiré d’une
entreprise ou d’un bien, les éléments suivants ne sont pas déductibles :
a) les dépenses, sauf dans
la mesure où elles ont été engagées ou effectuées par le contribuable en vue
de tirer un revenu de l’entreprise ou du bien;
e) un montant au titre
d’une provision, d’une éventualité ou d’un fonds d’amortissement, sauf ce qui
est expressément permis par la présente partie;
20. (1) Malgré
les alinéas 18(1)a), b) et h), sont déductibles
dans le calcul du revenu tiré par un contribuable d’une entreprise ou d’un
bien pour une année d’imposition celles des sommes suivantes qui se
rapportent entièrement à cette source de revenus ou la partie des sommes
suivantes qu’il est raisonnable de considérer comme s’y rapportant :
…
vv) un montant
payé par le contribuable au cours de l’année au titre d’un droit compensateur
ou antidumping en vigueur ou proposé sur des biens (sauf des biens
amortissables);
|
[15]
The Tax Court
Judge found that the first question before him was whether Perron was bound to
make a payment in the 2001 taxation year. He rejected Perron’s submission that
the amount of the term deposits was a deductible expense, given that the term
deposits were shown on Perron’s financial statements as an asset, albeit
subject to the contingency that they could be used to reimburse the Bank, should
it be required to honour the irrevocable letters of credit in favour of the
Insurance Company.
[16]
The Tax Court
Judge also found that there was no obligation to pay countervailing and
anti-dumping duties until a final determination had been made by the competent U.S. authorities that
such
duties were payable. Since no such determination was made in 2001, Perron had
no obligation to pay countervailing duties or anti-dumping duties. Perron was
simply faced with an estimate of its potential liability for those duties and
an obligation to post security in respect of that potential liability.
[17]
In substance,
the Tax Court Judge found that even though Perron had paid the face amount of
the term deposits to the Royal Bank, the deposits remained in Perron’s name and
were merely hypothecated to the Bank. This did not amount to a change in the
title to the term deposits. In effect, the Tax Court Judge found that there had
been no alienation or divesting of Perron’s interest in the funds sufficient to
constitute an expense or an outlay.
[18]
The Tax Court
Judge then turned his attention to the argument that the $2,371,500 payment was
deductible pursuant to paragraph 20(1)(vv) as an amount paid in
respect of “existing or proposed” duties. Perron argued that $2,371,500
was in fact paid to the Royal Bank and that the payment was in respect of proposed
duties.
[19]
The
Tax Court Judge rejected the paragraph 20(1)(vv) argument on the basis
that Perron did not pay any amount in respect of countervailing or anti-dumping
duties. Perron chose to post security for any amounts for which it might become
liable. Its only liability was to the Bank, initially to deposit funds to
secure the Bank’s exposure under the irrevocable letters of credit, and
contingently, to reimburse the Bank from the security deposits for any amounts
which the Bank was required to pay under those letters of credit. The Tax Court
Judge found that any payments made by Perron were not made in respect of
countervailing or anti-dumping duties.
[20]
As
a result, the Tax Court Judge dismissed the appeal.
STATEMENT OF ISSUES
[21]
In
this Court, Perron makes many of the same arguments which it made before the
Tax Court Judge. It says that the Tax Court Judge erred in failing to recognize
that Perron was under an obligation to make payment to a third party and that
the obligation did not constitute a contingent liability. In addition, Perron
argues that the amounts were deductible under paragraph 20(1)(vv) since
they were paid pursuant to an obligation to pay proposed countervailing or
anti-dumping duties.
ANALYSIS
[22]
This
is an appeal of the decision of a trial court made after a trial. As such, the
standard of review is that set out in Housen v. Nikolaisen, 2002 SCC 33,
[2002] 2 S.C.R. 235 (Housen). Findings of fact are reviewable on a
standard of palpable and overriding error: Housen, at paragraph 10.
Questions of law are reviewable on a standard of correctness: Housen, at
paragraph 8. Questions of mixed fact and law are reviewable on the standard of
palpable and overriding error, unless one can identify an extricable question
of law; if so, that question is reviewed on a standard of correctness: Housen,
at paragraph 36.
[23]
I
agree with Perron that it had a present obligation with respect to each
shipment of softwood lumber it exported to the United States after the
effective date of the preliminary determinations by the DOC and the ITC. If
Perron was to continue to export softwood lumber to the United States, it could
only do so by satisfying the obligation imposed on it by articles 1671b(d)(1)(B)
and 1673b(d)(1)(B) of Title 19 of the United States Code, specifically
by either making a cash deposit or by arranging for a bond or other security.
To that extent, the obligation to provide a cash deposit or security was a
present obligation, but this fact is not determinative of the deductibility of
the amounts used to satisfy that obligation. I agree with the respondent that
Perron did not have an obligation to pay countervailing or anti-dumping duties
in 2001.
[24]
Perron did
not make a cash deposit. Perron chose to satisfy the obligation imposed on it
by U.S. law by posting security. Any premium or fee charged by the Insurance
Company would presumably be deductible from income as an expense or outlay made
or incurred for the purpose of gaining income from its business. But, on the
record before us, Perron did not pay a fee or premium to the Insurance Company.
Instead, it entered into a complex arrangement which required it to deposit
funds with the Royal Bank in an amount equal to the Bank’s liability under the
irrevocable letters of credit it issued in favour of the Insurance Company.
[25]
Perron argues
its obligation to purchase term deposits and to hypothecate them to the Bank gives
rise to a deductible expense.
[26]
This case is
comparable to Canada v. Nomad Sand and Gravel Ltd, [1991] 2 F.C. 172
(C.A.), [1990] F.C.J. No. 1105 (Q.L.) (Nomad). The issue in Nomad
was whether an outlay which was deductible from income for accounting purposes
was, by that fact, deductible from income for tax purposes. The outlay was an
amount levied on each ton of material removed from a pit or quarry which amount
was returned to the operator if the pit or quarry was properly rehabilitated at
the end of its useful life. If it was not, the levies paid were forfeited to
the Crown, to be used for rehabilitation purposes. The expert evidence before
the Tax Review Board was that, in accounting terms, these amounts were properly
deductible from income in the year in which they were paid. The Minister took
the position that, as a matter of law, these amounts were not deductible as
they were caught by paragraph 18(1)(e) as an amount paid on account of a
reserve or a contingent liability.
[27]
This Court
decided that the correct treatment of these amounts for income tax purposes was
a question of law to be decided “having regard to the facts of the particular
case”: see Nomad, at page 139. After reviewing the facts, Urie J.A.,
writing for the Court, found that while the payments were required to be made
for the purpose of earning income, they were not deductible:
…while the annual
payments made pursuant thereto have to be made in order to earn income, in
that to obtain and maintain the licence issued under that Act (subsection 4(1))
to operate the pit and thereby to earn that income the payments had to be made,
they do not have the characteristic of deductible expenses for tax purposes, in
that they are not made once and for all, without recourse. [Emphasis in the original.]
Nomad,
at page 180
[28]
The notion
that a deductible expense is one made “once and for all without recourse”
suggests that a deductible expense is one where the payor retains no interest
in the amount paid. Urie J.A.’s analysis led him to conclude that this was not
the case with the levies in question::
There is no doubt in
my mind that the foregoing analysis demonstrates that the annual payments are
made as deposits to secure the rehabilitation of the site. That they may be
insufficient to achieve that purpose does not change their character to that of
an expense incurred for the purpose of gaining or producing income. The
deposits do not become the absolute property of the province until they are
forfeited as a result of the operation of the Act, for the purpose of paying,
or to assist in paying, the Respondent's obligations under the Act to
rehabilitate. If they are not forfeited they will be returned to the
taxpayer together with simple interest calculated at 6% per annum. That is
the substance of their character as well as their form, and clearly
differentiates them from business expenses deductible under paragraph 18(1) (a).
[My emphasis.]
Nomad, at
pages 181-182
[29]
In this case,
it is clear that the amounts deposited in term deposits with the Royal Bank
remained to Perron’s credit. Perron’s financial statements showed them as an
asset, though subject to a contingent liability: see Appeal Book, pages 70 and
74. Perron was a creditor of the Bank to the extent of the principal amount of
the term deposit together with any accrued interest. As a result, these amounts
were not deductible pursuant to paragraph 18(1)(a) since they were not
made “once and for all, without recourse”, as Perron retained an interest in
the funds.
[30]
Furthermore,
the amounts paid to the Royal Bank were in the nature of a reserve, or a fund
set up to cover a contingent liability, as was the case in Nomad. Perron
had no liability for countervailing or anti-dumping duties until such time as a
final determination was made. Until that time, Perron simply had an obligation
to ensure that it was in a position to pay the duty owing in the event of an
adverse final determination. If no adverse determination was made, the funds
would be returned to Perron. On the facts, that is exactly what happened. I am
therefore of the view that the amounts paid to the Royal Bank were not
deductible because they were in respect of a contingent liability, as provided
in paragraph 18(1)(e) of the Act.
[31]
Perron’s
second argument seeks to avoid the issue of whether the deposit of funds with
the Royal Bank was “an expense or an outlay” by focusing on the words “an
amount paid” and “as or on account of countervailing or anti-dumping duties” as
provided in paragraph 20(1)(vv) of the Act. Perron’s argument is one of economic
substance. It says that it is in exactly the same position financially as a
result of acquiring the term deposits as it would have been had it satisfied
its obligations to the U.S. authorities by making a cash deposit.
[32]
Perron says
that if it had deposited the same funds with the U.S. Government, as it was
entitled to do, paragraph 20(1)(vv) would have allowed it to deduct the
amount paid from its income in the year of payment. Paragraph 12(1)(z.6)
would have required it to include in income any amounts returned to it by the
U.S. Government as a result of the ruling that no countervailing or
anti-dumping duties were payable prior to May 22, 2002.
[33]
Perron argues
that the deposit of funds with the Royal Bank so as to secure the payment of
existing or proposed countervailing or anti-dumping duties should be treated
the same as would a cash deposit. The two transactions are undertaken to
satisfy the same legal obligation (existing or proposed duties) and they do it
in the same way, that is by making the funds available to satisfy Perron’s
ultimate liability for countervailing and anti-dumping duties. Paragraph 20(1)(vv)
does not specify the person or entity to whom the payment must be made so that
the fact that the payment was made to the Royal Bank is not determinative, as
long as the payment was made “as or on account of countervailing or
anti-dumping duties.”
[34]
The parties
are agreed that paragraph 12(1)(z.6) of the Act was enacted to deal with
the problem described in Nomad, namely that funds paid as a deposit
against an eventual liability are not deductible from income as an expense or
outlay. In the case of duties, it frequently takes many months before a final
determination is made, which imposes a hardship on exporter firms as their
funds are tied up for a period of time and are unavailable to discharge other
obligations. The deductibility of these amounts pursuant to paragraph 12(1)(z.6)
provides exporter firms with financial relief during this process.
[35]
Does it
follow from this that any payment made by a taxpayer will come within paragraph
12(1)(z.6) so long as the ultimate goal is to provide security against
an eventual liability to pay countervailing and anti-dumping duties? In my
view, it does not.
[36]
In tax law,
form matters. In Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622,
[1999] S.C.J. No. 30 (Shell), the Supreme Court of Canada held that the
courts are not to re-characterize a taxpayer’s transaction unless the label
attached by the taxpayer to the transaction does not properly reflect its
actual legal effect:
To the contrary, we
have held that, absent a specific provision of the Act to the contrary or a
finding that they are a sham, the taxpayer's legal relationships must be
respected in tax cases. Recharacterization is only permissible if the label
attached by the taxpayer to the particular transaction does not properly
reflect its actual legal effect: Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, at para. 21, per Bastarache J.
Shell,
cited above, at paragraph 39
[37]
The corollary
of this proposition is that the taxpayer will be held to the form of
transaction which it has chosen so long as that form is consistent with the actual
legal effect of the transaction.
[38]
In this case,
Perron satisfied its obligation with respect to existing or proposed duties by
arranging for the Insurance Company to guarantee its potential liability for those
duties. Having done so, Perron had satisfied its obligations under U.S. law. The Insurance Company’s requirements for assuming this obligation on Perron’s
behalf are a matter between it and Perron. The fact that Perron looked to its
bank for assistance in meeting the Insurance Company’s requirements is a matter
between Perron and the Bank. Having chosen to satisfy its obligations to the U.S. authorities in a particular way, Perron is not well placed to argue that it should be
treated as though it had satisfied those obligations in a different way.
[39]
In order to
come within paragraph 20(1)(vv) of the Act, Perron must have paid an
amount as or on account of existing or proposed duties. This argument turns on
the nature of the transaction by which Perron placed $2,371,500 in the Bank’s hands to be held
in a term deposit account which bore interest at a rate which varied between
1.35% and 2.05%. Perron qualifies this as an amount paid to the Bank. It can
equally be qualified as a deposit of funds with the Bank by which Perron became
a creditor of the Bank to the extent of the sum deposited plus accrued
interest. The fact that this transaction was part of a series of transactions
does not change its character. Consequently, even if the placement of funds
with the Bank is treated as having been paid to the Bank, it was not paid on
account of duties, existing or proposed.
[40]
In the Tax
Court of Canada, Perron made an argument based on the definition of “payment”
in article 1553 Civil Code of Québec which provides that “payment means
not only the turning over of a sum of money in satisfaction of an obligation,
but also the actual performance of whatever forms the object of the
obligation.” I am unable to see how this argument assists Perron. It’s
obligation under U.S. law was to post a cash deposit or to post security for
its potential liability for countervailing and anti-dumping duties. It
satisfied that obligation by posting security. According to article 1553 of the
Civil Code of Québec, the posting of security constituted payment of the
obligation created under American law. I am unable to accept that all of the steps
which preceded or accompanied the posting of security also constituted payment.
[41]
As a result,
I would dismiss the appeal with costs.
"J.D. Denis
Pelletier"
“I
agree.
Johanne
Trudel J.A.”
“I
agree.
Robert M. Mainville J.A.”
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