Citation: 2011 TCC 564
Date: December 19, 2011
Docket: 2010-3493(IT)G
BETWEEN:
GENERAL ELECTRIC CANADA COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2010-3494(IT)G
AND BETWEEN:
GE CAPITAL CANADA FUNDING
COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Campbell J.
[1]
The Appellants brought a
Motion to strike various portions (the “Subject Paragraphs”) of the
Respondent’s Replies to the Notices of Appeal in accordance with sections 49
and 53 and subsection 51(2) of the Tax Court of Canada Rules (General
Procedure) (the “Rules”).
Background:
[2]
The Appellants appealed
assessments respecting various taxation years. The Appellant, General Electric
Canada Company (“GECC”) is a successor by amalgamation of a number of corporate
entities, including the following three corporate predecessors: GE Capital
Canada Retailer Financial Services Company (“Retailer”), GE Card Services
Canada Inc. (“Card Services”) and General Electric Capital Canada Inc. (“GECCI”).
The assessments for Retailer are in respect to its 1997 to 1999 taxation years,
for Card Services its 2000 to 2002 taxation years and for GECCI its 2002 and
2004 taxation years. The second Appellant, GE Capital Canada Funding Company
(“Funding”) was assessed in respect to its 1998 to 2006 taxation years.
[3]
These appeals are
closely tied to the Tax Court decision of Hogan J. in General Electric
Capital Canada Inc. v The Queen, 2009 TCC 563, 2010 D.T.C 1007, and to that
of the Federal Court of Appeal, 2010 FCA 344, 2011 D.T.C. 5011, which affirmed
Hogan J.’s decision (the “Concluded Litigation”). In fact, an understanding of
the issue and subject matter in the Concluded Litigation is central to dealing
with the disposition of this Motion.
[4]
The Concluded
Litigation dealt with GECCI’s taxation years 1996 to 2000, GECCI being one of
the three predecessor corporations to GECC. Those assessments were based on the
transfer pricing sections of the Income Tax Act (the “Act”),
being paragraphs 247(2)(a) and (c) and for the earlier years, its
predecessor subsection, 69(2). The general subject matter of the Concluded
Litigation, as well as the present appeals, involves the disallowance of the
deduction of guarantee fees paid by the Appellants to the non-resident parent
company.
[5]
In the Concluded
Litigation, GECCI paid “guarantee fees” of 1 per cent of the principal amount
of the debt to its U.S. parent company, General Electric Capital Corporation
(“GECUS”) in exchange for GECUS guaranteeing GECCI’s debt, which it had
borrowed in Canada’s capital markets by issuing commercial
paper and unsecured debentures. GECCI deducted those guarantee fees as business
expenses. The Minister of National Revenue (the “Minister”) reassessed based on
Canada’s transfer pricing rules contained in subsection 247(2) of the Act
to reduce the arm’s length price of the GECUS guarantee fee from 1 per cent to
zero. In the appeal which was before Hogan J., the Crown argued that the
guarantees had little or no value to GECCI because the funds could have been borrowed
at the same rates without the guarantees that GECUS gave. The Crown argued that,
since GECCI received the “implicit support” of its parent company, GECUS, the
guarantees were not essential. The Minister relied on the theory of “implicit
support” which can be briefly summarized in the following manner:
(1)
GECUS would not have
allowed the Appellants to default on their debt regardless of the formal
guarantee.
(2)
The credit rating
agencies and borrowers in the market understood this and would have treated the
Appellants the same way regardless of the formal guarantee.
(3)
Therefore, the formal
guarantee had little or no value to the Appellants and the arm’s length price
for the guarantee fee would be negligible or nil.
This Court concluded that the guarantee afforded GECCI
a substantially higher credit rating than it would otherwise have had, which allowed
it to borrow at lower interest rates. Hogan J. allowed the appeal since the
guarantee had a tangible value and the guarantee fees paid to GECUS were not
greater than the arm’s length price.
[6]
In the Motion before
me, the Appellants contended that the Crown is attempting to rehabilitate the
basis of the assessment which both the Tax Court and the Federal Court of
Appeal rejected in the previous appeal and, in doing so, is putting forth “new theories”
to support the position that an arm’s length price for the guarantee fees
should be zero. Although the present appeals relate to different taxpayers and
different years, the Appellants argued that the Crown is precluded from relitigating
facts and issues that were determined in the Concluded Litigation, or pleading
new arguments raised in the first litigation but abandoned before the hearing.
[7]
The Appellants seek to
strike various paragraphs in the Respondent’s Replies to the Notices of Appeal
based on the following:
(a)
As a result of the outcome of prior litigation
(the “Concluded Litigation”) between the Respondent and General Electric
Capital Canada Inc., one of the predecessors of the [A]ppellant, the Respondent
is precluded, on the grounds of res judicata and issue estoppel, from
disputing the deductibility of guarantee fees paid in respect of debt issuances
by General Electric Capital Canada Inc.
(b)
The Respondent is precluded, on the grounds of
issue estoppel and abuse of process, from pleading facts contrary to the facts
found by the Tax Court of Canada and affirmed by the Federal Court of Appeal in
the Concluded Litigation.
(c)
The Respondent is precluded, on the grounds of
issue estoppel and abuse of process, from advancing arguments that the Tax
Court of Canada and the Federal Court of Appeal considered and rejected in the
Concluded Litigation, and is equally precluded from pleading facts in support
of such arguments.
(d)
The Respondent is precluded, on the grounds of
issue estoppel and abuse of process, from relying upon paragraphs 247(2)(b) and
(d) of the Income Tax Act (Canada) (the “Act”) and from pleading
facts in support of the applicability of those provisions by reason of the fact
that the assessments at issue were raised solely on the basis of paragraphs
247(2)(a) and (c) of the Act, and to plead paragraphs 247(2)(b) and (d)
of the Act is tantamount to raising a new assessment which is beyond the
power of the Respondent.
(e)
In the alternative to paragraph (d) above, if
the Respondent is entitled to plead paragraphs 247(2)(b) and (d) of the Act
at this stage, then the pleading of paragraphs 247(2)(a) and (c) of the Act
must be struck because the two arguments proceed from contradictory factual
premises and are not pleaded in the alternative.
(f)
The Attorney-General is not permitted to plead
the legal form of GE Capital Canada Retailer Financial Services Company, a
predecessor of the [A]ppellant, as a ground for upholding the assessments as
the Minister of National Revenue knew but did not rely upon this fact in
raising the assessments at issue.
(Appellant’s Motion Record, pages 2 to 3,
paragraph 4)
[8]
To summarize briefly,
the Appellants argued that the doctrines of res judicata and abuse
of process operate to prevent the Crown from relitigating arguments and issues which
were decided in the previous appeal; that the Crown’s pleadings improperly put
in issue the basis of the Minister’s assessments; that it is too late for the
Crown to raise new bases of assessments; and finally, that if some of these
paragraphs are permitted to stand, then some of the Crown’s arguments must be
pleaded in the alternative, rather than as concurrent allegations. In addition,
the Appellants argued that they were denied the benefit of review by the Transfer
Pricing Review Committee concerning the application of paragraphs 247(2)(b)
and (d) of the Act to the guarantee fees payable to GECUS.
The Law:
[9]
Section 53 of the Rules
governs the power of the Court to strike portions or all of the pleadings:
Striking out a Pleading or other
Document
53. The Court may
strike out or expunge all or part of a pleading or other document, with or
without leave to amend, on the ground that the pleading or other document,
(a) may
prejudice or delay the fair hearing of the action,
(b) is
scandalous, frivolous or vexatious, or
(c) is
an abuse of the process of the Court.
[10]
The Federal Court of
Appeal in Main Rehabilitation Co. Ltd. v The Queen, 2004 FCA 403, 2004
D.T.C. 6762, at paragraph 3, expressed the test for striking out pleadings in
the following manner:
[3] The test to be applied for striking out
pleadings is whether it is plain and obvious that Main's Notice of Appeal
to the Tax Court discloses no reasonable claim. Only if its appeal is certain
to fail should the relevant portions of the Notice of Appeal be struck out. …
[11]
To prevent the
relitigation of a matter that has been previously before the Court, the
doctrines of res judicata and abuse of process may be used. The abuse of
process doctrine is focussed on the integrity of the adjudicative process as
opposed to that of the parties. Like the doctrine of res judicata, abuse
of process should only be applied at the Court’s discretion.
[12]
The doctrine of res
judicata, which provides finality to the litigation and fairness to the
parties to the litigation, has two branches: cause of action estoppel and issue
estoppel. In Angle v M.N.R., [1975] 2 S.C.R. 248, Dickson J., at
page 254, explained the distinction as follows:
… The first, “cause of action estoppel”, precludes a person from
bringing an action against another when that same cause of action has been
determined in earlier proceedings by a court of competent jurisdiction. … The
second species of estoppel per rem judicatam is known as “issue
estoppel”, a phrase coined by Higgins J. of the High Court of Australia in Hoystead
v. Federal Commissioner of Taxation, [(1921),
29 C.L.R. 537] at
p. 561:
I fully recognize the distinction between the
doctrine of res judicata where another action is brought for the same
cause of action as has been the subject of previous adjudication, and the
doctrine of estoppel where, the cause of action being different, some point or
issue of fact has already been decided (I may call it “issue-estoppel”).
Cause of Action Estoppel:
[13]
The decision of the
High Court of Chancery of England, in Henderson v Henderson, (1843) 3 Hare 100, 67 E.R. 313, at page 319, provides the following comment
concerning the doctrine of cause of action estoppel:
In trying this question I believe I state the rule of the [115]
Court correctly when I say that, where a given matter becomes the subject of
litigation in, and of adjudication by, a Court of competent jurisdiction, the
Court requires the parties to that litigation to bring forward their whole
case, and will not (except under special circumstances) permit the same parties
to open the same subject of litigation in respect of matter which might have
been brought forward as part of the subject in contest, but which was not
brought forward, only because they have, from negligence, inadvertence, or even
accident, omitted part of their case. The plea of res judicata applies,
except in special cases, not only to points upon which the Court was actually
required by the parties to form an opinion and pronounce a judgment, but to
every point which properly belonged to the subject of litigation, and which the
parties, exercising reasonable diligence, might have brought forward at the
time. …
[14]
In McFadyen v The
Queen, 2008 TCC 441, 2008 D.T.C. 4513, Rip C.J. found that cause of action
estoppel applied where the taxpayer was attempting to appeal the Minister’s
assessments of several taxation years after the assessments had already been
the subject of litigation in the Tax Court of Canada. At paragraph 25 of the
decision, he stated the following concerning the Henderson decision:
[25] Henderson not only forecloses the relitigation of issues that have
been conclusively decided by a court of competent jurisdiction. It also
enunciates what has been referred to as the "might or ought"
principle (See Donald J. Lange, The Doctrine of Res Judicata in Canada,
2nd ed. (Markham: LexisNexis Canada Inc., 2004) at page 127.) - matters that properly
should have been part of the original litigation but that a party failed to
argue cannot be raised in subsequent litigation. (I note that other decisions
of the Tax Court of Canada have used the principle of res judicata to
preclude an appellant from making new arguments to attack an assessment that
has previously been litigated. See, for example, Modlivco Inc. v. Canada,
[95 DTC 692] [1995] 2
C.T.C. 2880 (T.C.C.) and Ahmad v. R., [2004 DTC 2355] [2004] 2
C.T.C. 2766 (T.C.C. [Informal Procedure]).
[15]
The necessary conditions
for the application of the doctrine of cause of action estoppel were set out in
Bjarnarson v Manitoba (Government of) (1987), 38 D.L.R. (4th) 32. Hewak C.J.Q.B.
of the Manitoba Court of Appeal, on page 3, relied on the Supreme Court of
Canada decision in Town of
Grandview v. Doering (1975), 61 D.L.R. (3d) 455, and summarized the conditions as follows:
1. There must be a
final decision of a court of competent jurisdiction in the prior action;
2. The parties to the
subsequent litigation must have been parties to or in privy with the parties to
the prior action [mutuality];
3. The cause of action
in the prior action must not be separate and distinct; and
4. The basis of the
cause of action and the subsequent action was argued or could have been argued
in the prior action if the parties had exercised reasonable diligence.
[16]
Generally, each
taxation year for each taxpayer will represent a new cause of action. For this
reason, tax appeals are entertained even where the parties may have litigated
very similar facts in respect of a previous taxation year. In Kindree v M.N.R.,
70 D.T.C. 1054, at page 1055, the Tax Appeal Board relied on the following
statement from Lord Hanworth, M.R., of the English Court of Appeal in Inland Revenue Commissioners v. Sneath, (1932) 17 T.C. 149:
I am . . . of the opinion
that the assessment is final and conclusive between the parties only in relation
to the assessment for the particular year for which it is made. No doubt, a
decision reached in one year would be a cogent factor in the determination of a
similar point in a following year, but I cannot think that it is to be treated
as an estoppel binding upon the same party for all years.
[17]
The Respondent relied on the Merrins appeals (Merrins
v The Queen, 2006 TCC 392, 2006 D.T.C. 3216 [Merrins #3] affirmed
2007 FCA 295, 2007 D.T.C. 5579; Merrins v The Queen, 2005 TCC 470, 2005
D.T.C. 1273 [Merrins #2], affirmed by the Federal Court of Appeal in Merrins
v The Queen, 2007 FCA 295, 2007 D.T.C. 5579 and Merrins v The Queen
2002 D.T.C. 1848 [Merrins #1]. In Merrins #3, Paris J., at
paragraphs 8 and 9, stated the following:
[8] The Appellant raised these
same issues in two previous appeals to this Court, …
[9] There
are no material differences between the facts as they relate to the Appellant's
2002 and 2003 taxation years and the facts upon which the earlier appeals were
decided. The Appellant's sources of income were the same in all of the years,
and the reassessment of the Appellant's tax was made in the same manner for
each year, as set out below. However, given that these appeals involve separate
taxation years, an independent review of the facts and issues is required.
Issue Estoppel:
[18]
Issue estoppel prevents
parties from relitigating facts or issues which have already been decided in
another court proceeding. Referring to the Supreme Court of Canada decision in Angle,
Binnie J., in the decision in Danyluk v Ainsworth Technologies, 2001 SCC 44,
[2001] 2 S.C.R. 460, in paragraph 25, reiterated the three
preconditions that must exist before issue estoppel may apply:
(1) that the same question [or issue] has been
decided;
(2) that the judicial decision which is said
to create the estoppel was final; and
(3)
that the parties to the judicial decision or
their privies were the same persons as the parties to the proceedings in which
the estoppel is raised or their privies.
When these three conditions are satisfied, it is still
in a court’s discretion, considering the entirety of the circumstances of the
case, to refuse to give effect to the application of this doctrine. In other
words, issue estoppel should not be applied indiscriminately even where all
preconditions are met.
Abuse of Process:
[19]
The doctrine of abuse
of process may be applied, in the Court’s discretion, to preserve the Court’s
processes and maintain the consistency and integrity of the administration of
justice. This doctrine engages the “… inherent power of the Court to prevent
the misuse of its procedure, in a way that would … bring the administration of
justice into disrepute” (Canam Enterprises Inc. v. Coles (2000), 51 O.R. (3d) 481
(C.A.), at paragraph 55, per Goudge J.A., dissenting
(approved [2002] 3 S.C.R. 307, 2002 SCC 63)) (Toronto (City) v Canadian Union of Public Employees, (C.U.P.E.), Local
79, 2003 SCC 63, [2003] 3 S.C.R. 77, at paragraph 37 [“CUPE”]).
[20]
The doctrine of abuse
of process has been applied by Canadian courts to prevent relitigation of cases
where the stricter requirements and preconditions of res judicata are not
met. Even where the privity/mutuality requirement is not met, relitigation
should nevertheless be precluded if it would “…violate such principles as
judicial economy, consistency, finality and the integrity of the administration
of justice.” (CUPE, paragraph 37).
A. Analysis – Privity:
[21]
Both the Appellants and
the Respondent agreed that the Concluded Litigation produced a final result.
This prong of the test for cause of action estoppel and issue estoppel is
clearly met.
[22]
The parties disagreed,
however, on whether the requirement of privity/mutuality had been satisfied.
[23]
The Appellants contended
that privity exists where two parties “share a common interest”. They cited Wilson v Servier Canada Inc., 119 A.C.W.S. (3d) 733 as support for the proposition
that “…affiliated corporations are privies if they are subject to a common
directing mind and common control.” (Appellant’s Written Submissions, paragraph
49).
[24]
The Respondent argued
that belonging to the same corporate group does not establish privity. The
Respondent contended that there is insufficient evidence on a Motion, such as
this, for the Court to properly determine that privity exists. The Respondent’s
view was that the concept of privity has no place in income tax appeals because
the scheme of the Act makes a conscious decision to tax each entity
separately and each entity has its own right to appeal. Neither counsel provided
any case law where privity was found for the purposes of res judicata in
income tax cases.
[25]
Even if the Appellants’
view, that privity could be found for the purpose of applying res judicata
in income tax appeals, was correct, I am unable to accept the Appellants’
argument. The Appellants relied on the Wilson decision, which references the 1997 decision of Hoffmann-La Roche
Ltd. v Canada (Minister of National Health and Welfare), 72 C.P.R. (3d) 362. In the Hoffmann-La
Roche case, Richard J. (as he then was) noted that there was a “…dearth of
authority upon the question of who are ‘privies’”. Quoting from Buanderie centrale de Montréal Inc. v Montreal City, [1994] 3 S.C.R.
29, at page 689, he stated the following:
Additionally, in Smith, Stone &
Knight, Ltd. v. Birmingham Corp., [1939] 4 All E.R. 116 (K.B.), Atkinson J.
came to the conclusion that a parent company could sue the persons responsible
for damage caused to one of its subsidiaries. For the case at bar, and
regardless of this latter conclusion, most relevant is the way in which the
judge arrived at the finding that the subsidiary was not operating on its own
account but solely as an integral part of the parent company's activities. To
this end he consulted a number of decisions, all of which involved tax law,
which needless to say is not without relevance to the case now before the
Court. Using these decisions, he identified, at p. 121, six factors that could
justify treating two corporations as one for tax purposes. I set them out
below:
(1) Were the profits treated as the profits of the
[parent] company?
(2) [W]ere the persons conducting the business appointed by
the parent company?
(3) [W]as the [parent] company the head and the brain of
the trading venture?
(4) [D]id the [parent] company govern the adventure, decide
what should be done and what capital should be embarked on the venture?
(5) [D]id the [parent] company make the profits by its
skill and direction?
(6) [W]as the [parent] company in effectual and constant
control?
[26]
Justice Richard went on,
at pages 689 to 690, to quote Rand J. in Aluminum Co. of Canada Ltd. as
follows:
Finally, I note Aluminum Co. of
Canada Ltd. v. Toronto (City), [1944] S.C.R. 267, which this time clearly dealt with tax
law, and the following passage from Rand J., at p. 271, which illustrates the
special relationship sought by the courts in order to justify treating two
corporations as one for tax purposes:
…
The question, then, in each case, apart
from formal agency which is not present here, is whether or not the parent company
is in fact in such an intimate and immediate domination of the motions of the
subordinate company that it can be said that the latter has, in the true sense
of the expression, no independent functioning of its own.
[27]
The Appellants are part
of the same corporate group, as evidenced by the Minister’s assumption that
GECUS had control over the Appellants’ ultimate business decisions. It is my
view, however, that, based on the factors referenced in Hoffman-La Roche,
there is insufficient evidence on this Motion for me to conclude that privity
exists for the application of res judicata. It requires more than simple
affiliation and accountability to the same corporate head office to establish
that two corporations are “alter-egos of one another”, in the sense that
Richard J. employed that term in Hoffmann-La Roche.
[28]
Each taxation year for
each taxpayer is a different cause of action. Accordingly, the Appellants’
position that the Crown’s arguments should have been raised in the appeal of a different
taxpayer, or in the appeal of the same taxpayer for a different year, cannot be
supported. Consequently, whether or not privity may exist between these
entities, cause of action estoppel does not apply.
[29]
The abuse of process
doctrine does not require the presence of privity. The Appellants asked that I
apply the abuse of process doctrine to strike certain portions of the Replies.
Following is an analysis of the Appellants’ arguments and my reasons as to why
I have concluded that the Subject Paragraphs are not abusive of the Court’s
processes.
B. Income Earning Purpose and
Recharacterization Arguments:
[30]
The Appellants asked
the Court to strike those portions of the Replies that raise the income-earning
purpose argument and the recharacterization argument. Relying on paragraphs
18(1)(a) and 20(1)(e.1) of the Act (the “income-earning purpose argument”),
the Appellants argued that the Concluded Litigation settled the question of whether
the guarantee fees were an expense incurred for the purpose of earning income.
The Appellants also requested that arguments based on paragraphs 247(2)(b)
and 247(2)(d) of the Act (the “recharacterization argument”) be
struck from the Respondent’s pleadings because the bona fide commercial
purpose of these fees was established in the Concluded Litigation.
[31]
The Appellants contended
that, because these appeals will deal with the same debt that was at issue in
the Concluded Litigation, they will also deal with the same guarantee fee
agreements. Therefore, findings of fact and law in the Concluded Litigation
respecting those agreements should not be open to scrutiny in the present
litigation. The Appellants also argued that the Respondent’s present allegations,
that the guarantee fees were introduced for tax reasons, that they were not
incurred for the purpose of earning income and that they had no bona fide
non-tax purpose, directly contradict Hogan J.’s finding that the guarantee
was a commercial necessity for GECCI.
[32]
The Respondent did not
dispute that the issued debt guaranteed by GECUS is the same debt that was at
issue in the Concluded Litigation. However, the Respondent contended that there
is no evidence before me that would allow me to conclude that the guarantee fee
agreements were the same for the other Appellant or for the other years in
issue. The Respondent also argued that its pleadings put in issue the “purpose
of the guarantee fees”, which is distinct from the “purpose of the guarantees”.
[33]
In response to this
argument, the Appellants, in rebuttal submissions, stated that the two items are
part of the same transaction, that is, the guarantee fees were paid in exchange
for the guarantees. Therefore, the Appellants concluded that it was
inappropriate for the Respondent to argue that the guarantees were tax
motivated and that they were commercially necessary but that payment of the fees
was not necessary for the purpose of earning income.
[34]
The Respondent emphasized
that there are differences between the Appellants’ circumstances in these
appeals and the circumstances of GECCI between 1996 and 2000. Those differences
included the fact that Unlimited Liability Companies (“ULCs”), incorporated in
the Province of Nova Scotia, are involved in these appeals, as well as differences in debt to
equity ratio and other economically relevant circumstances. Accordingly, the
Respondent argued that the purpose of the guarantees may be potentially different
than in the Concluded Litigation.
[35]
The evidence indicated
that the debt of GECCI is the same debt that was at issue in the Concluded Litigation
(Affidavit of David Daubaras, paragraph 20). However, I do not believe that the
guarantee fee agreements necessarily remained the same for GECCI for other
years. The Appellants submitted a lengthy Motion Record but it contained no
evidence regarding those agreements. There is no reason for me to conclude that
the guarantee fee agreements for the other Appellants were the same as those at
issue in the Concluded Litigation. Therefore, I am not prepared to strike these
sections because there is insufficient evidence before me on this Motion to do
so.
C. Respondent’s Claims of “No Knowledge”:
[36]
Paragraphs 23 and 24,
of the Notice of Appeal in the GECC appeal, provide background information regarding
GECCI’s commercial paper program, while paragraph 32 discusses the Guarantee
Fee Agreements.
23. GECCI issued commercial paper under a short
term promissory note program established in 1989 (the “Commercial Paper
Program”). GECCI ceased issuing commercial paper after GE Capital Canada
Funding Company, a related corporation, began issuing commercial paper in 1998.
24. GECCI issued commercial paper in Canadian
and United States dollars for
terms not exceeding 270 days. GECCI’s commercial paper traded on the Canadian
commercial paper market. At all material times, the maximum aggregate principal
amount outstanding under the Commercial Paper Program was $7,000,000,000.
…
32. Pursuant to the Guarantee Fee Agreements,
the guarantee fees payable by Retailer, Card Services and GECCI to GECUS during
the years under review were as set out in Schedule C.
[37]
The Respondent admitted
the allegations in paragraph 23, but stated the following in respect to
paragraphs 24 and 32:
8. With respect to paragraph 24 of the Notice
of Appeal, he admits that GECCI issued commercial paper. He otherwise has no
knowledge of and puts in issue the remaining allegations of fact stated
therein.
…
10. With respect to paragraph 32 of the Notice
of Appeal, he has no knowledge and puts in issue that the guarantee fees
payable were pursuant to the “Guarantee Fee Agreements”. He also has no
knowledge of and puts at issue the amount in Schedule C for Retailer’s 1997
taxation year. He states that the amount in Schedule C for Card Services’ 2002
taxation year should be $5,934,247 and not $5,937,247. He otherwise admits the
remaining allegations of fact stated therein.
(Reply of
Respondent, dated February 15, 2011, pages 3 and 4, paragraphs 8 and 10).
[38]
The Appellants seek to
strike paragraph 8 of the Respondent’s GECC Reply, arguing that allegations,
contained in paragraph 24 of that Notice of Appeal, were conclusively proved in
the Concluded Litigation.
[39]
The Appellants also
seek to have the following clause: “…he has no knowledge and puts in issue that
the guarantee fees payable were pursuant to the “Guarantee Fee Agreements”…” struck
from paragraph 10 of the GECC Reply, since the guarantee fees in the Concluded
Litigation were found to be payable pursuant to the guarantee fee agreements. The
Appellants argued that the Respondent’s claims of “no knowledge” are either
barred by issue estoppel or are abusive of the Court’s processes.
[40]
The Respondent admitted
that GECCI issued commercial paper and that it stopped issuing in 1998. The
Respondent questioned why there would be any debt outstanding between 2001 and
2004 when the maximum term of the debt was 270 days. The Respondent argued that
this issue should be open for exploration during discovery proceedings.
[41]
The Respondent also
stated that GECC had neither alleged nor tendered any evidence to suggest that
the commercial paper program in 2001, 2002 and 2004 was carried out in the same
manner as in those years that were at issue in the Concluded Litigation. The
Respondent again argued that there is no evidence that the Agreements in issue
in the present appeals share the same terms and conditions as those that were
in issue in the Concluded Litigation.
[42]
Finally, the Concluded
Litigation dealt only with those agreements GECCI entered into but not those into
which Retailer, Card Services or Funding are alleged to have entered.
[43]
I do not believe that
the aforementioned paragraphs should be struck for the following reasons:
(1)
The Respondent’s point
is a valid one. The phrases “at all material times” in paragraph 24 and “during
the years under review” in paragraph 32 of the GECC Notice of Appeal indicate
that GECC is not simply reviewing the Agreed Facts set out in the Concluded
Litigation, but, rather, it is alleging that the terms and conditions remained
the same in the years in this appeal.
(2)
Although the entire
Statement of Agreed Facts was not reproduced in the Concluded Litigation, it
would appear that most of the agreed facts were not fundamental findings to which
issue estoppel could apply.
(3)
The Appellants did not
suggest that they were essential to, or that they were even mentioned in the
analysis of Hogan J.. The issue in the Concluded Litigation was the arm’s
length price of the guarantee fees. Nothing in particular appears to have
turned on the details of the commercial paper program or the question of
whether fees were paid “pursuant” to the guarantee fee agreements.
[44]
Aside from this, I am
still grappling with why the Crown would dispute facts in the present appeals
that were apparently part of the Agreed Statement of Facts in the Concluded
Litigation. I am equally mystified that the Respondent’s Reply would claim, on
the one hand, no knowledge of whether “the guarantee fees payable were pursuant
to the Guarantee Agreements” and yet, on the other hand, allege that “GECUS
required the Companies to enter into the Guarantee Fee Agreements whereby the
Companies agreed to pay” a certain amount (GECC Reply at paragraph 16(j)(vii)).
D. The New Theories / Basis of Assessment:
[45]
The Appellants argued
that the Crown may not raise new theories or conclusions of law at this stage
in order to justify a transfer price of zero where those theories are totally
unrelated to the basis of assessment.
[46]
In addition to the implicit
support theory, the Respondent’s Replies to the Notices of Appeal raised two
additional arguments or theories:
(1) The Unlimited Liability Companies
Theory:
[47]
During the relevant
period, both Funding and Retailer were ULCs, incorporated pursuant to the laws
of Nova Scotia. Paragraph 15 of the Respondent’s Reply to
the Notice of Appeal concerning GECC implies that GECCI and Card Services were
also ULCs at some point. The Crown intends to argue that GECUS’s explicit
guarantees were superfluous because, as ULC members, GECUS was already liable
for the debts without any limit according to the “inherent corporate structure”.
Accordingly, the guarantees at issue had little or no value to the ULCs.
[48]
The relevant portions
of the pleadings, which the Appellants are asking this Court to strike because
they raise the ULC theory, are highlighted in bold and are contained in Schedule
“A” attached to these Reasons.
(2) The Recharacterization Theory:
[49]
The Appellants contended
that the Minister assessed them pursuant to paragraphs 247(2)(a) and (c)
of the Act. Although there is no specific reference to these paragraphs
in either the proposal letters or the Transfer Pricing Report, the Respondent did
not dispute this contention.
[50]
In the present appeals,
the Respondent argued that both branches of subsection 247(2) apply. The
Appellants referred to the Respondent’s reliance on paragraphs 247(2)(b)
and (d) of the Act as the “recharacterization theory” and asked
that those portions of the Replies that reference these paragraphs be struck.
[51]
The stated
administrative position of the Minister respecting proposed assessments
pursuant to paragraph 247(2)(b) is that they will be referred to the
Transfer Pricing Review Committee before an assessment is issued. However, the
evidence before me indicates that no such referral was made. Where paragraph
247(2)(b) is engaged, paragraph 247(2)(d) allows the Minister to
ignore the transaction that was actually entered into by the non-arm’s length
parties and to calculate the tax based on a notional transaction which arm’s
length parties would have entered into.
[52]
Attached to my Reasons
as Schedule “B” are the relevant portions that the Appellants seek to strike on
this basis.
The Appellants’ View:
[53]
The Appellants’ legal
argument was focussed on the meaning of the term “assessment” as it is used in
the income tax system. They argued that the Crown is using the Court’s
processes to reassess the Appellants by conducting an audit through the
litigation process in order to ascertain whether these new theories will be
worth pursuing. The statutory power to reassess belongs to the Minister, not
the Crown.
[54]
The Appellants relied
on the case of Pure Spring Co. Ltd. v Minister of National Revenue,
[1946] Ex.C.R. 471, 2 D.T.C. 844, where, at page 857, Thorson J. referred to
the assessment as “… the summation of all the factors representing tax
liability, ascertained in a variety of ways, and the fixation of the total
after all the necessary computations have been made”.
[55]
The Appellants suggested
that, while case law has allowed the Crown leeway to advance new facts or
alternative arguments, it is precluded from turning the litigation process into
a reassessment process in which a new theory that is advanced is entirely
different from the basis of the Minister’s assessment.
[56]
During oral
submissions, Appellants’ Counsel argued that the Courts have struggled with the
scope of subsection 152(9) of the Act because the Courts are balancing
competing policy objectives: the need for finality and the need for limitation
periods for assessments to be enforced against the Minister.
[57]
In the later case of The
Queen v Anchor Pointe Energy Ltd., 2003 FCA 294, 2003 D.T.C. 5512,
Rothstein J. allowed the Crown to advance an alternative argument pursuant to
subsection 152(9) of the Act and, at paragraph 39, distinguished Pedwell
as follows:
[39] … This
case is unlike cases such as Pedwell v. The Queen, 2000 DTC 6405 (F.C.A.), where the Minister sought to take into account
different transactions than the ones that formed the basis of the reassessments
that were made within the normal reassessment period. I do not say that taking
into account other transactions is the only thing the Minister cannot do after
expiry of the normal reassessment period. Anything that increases tax payable
from what would have been the case prior to expiry of the normal reassessment
period would be objectionable.
[58]
The Appellants contended
that the discussions in The Queen v Loewen, 2004 FCA 146, 2004 D.T.C.
6321 and The Queen v Honeywell Limited, 2007 FCA 22, 2007 D.T.C. 5073, are
further examples of the Courts’ attempts to find the line between a new
assessment and an alternative argument in support of the same assessment. In Loewen,
the Federal Court of Appeal overturned the decision of Bowman, A.C.J. (as he then
was) who had concluded that one of the arguments brought by the Crown should be
struck because it constituted a new and different assessment.
[59]
In Honeywell, 2006
TCC 325, 2006 D.T.C. 3124, at paragraph 13, Bowman, C.J., venting his
frustration with the Federal Court of Appeal decision in Loewen stated
that “… the Federal Court of Appeal’s interpretation of subsection 152(9) …
permits the Crown to do anything it likes in pleadings...”. He nevertheless
struck the Crown’s argument based on foreign accrual property rules because the
waiver of the reassessment period specified an assessment under the general
anti-avoidance rule. The Federal Court of Appeal confirmed that the Crown was
bound by the terms of the waiver and did not venture further into the actual
scope of subsection 152(9).
[60]
Subsequently, in the
case of Jeannette Walsh v The Queen, 2007 FCA 222, 2007 D.T.C. 5441, at
paragraph 18, the Federal Court of Appeal placed the following three
restrictions on the Crown’s use of subsection 152(9):
[18] The following
conditions apply when the Minister seeks to rely on subsection 152(9) of the
Act:
1) the
Minister cannot include transactions which did not form the basis of the
taxpayer’s reassessment;
2) the
right of the Minister to present an alternative argument in support of an
assessment is subject to paragraphs 152(9)(a) and (b), which
speak to the prejudice to the taxpayer; and
3)
the Minister cannot use subsection 152(9) to reassess outside the
time limitations in subsection 152(4) of the Act, or to collect tax
exceeding the amount in the assessment under appeal.
[61]
The Appellants also
made a number of arguments to support their view of the scope of the applicable
law based on rules and policies of the tax system.
[62]
The first argument was
based on fairness to the Appellants. Paragraph 169(2.1)(a) of the Act
prevents large corporations such as the Appellants from raising an issue in
litigation unless the issue, the facts and the reasoning are described in the
Notice of Objection. If the Crown is permitted to introduce new theories during
court proceedings, then a strict application of paragraph 169(2.1)(a) could
potentially have the absurd result of preventing large corporations from
answering those new theories.
[63]
The second argument
involved the Appellants’ fear that the discovery process will become an audit
if the Crown is allowed to argue new theories in its pleadings.
[64]
In the third argument,
the Appellants contended that, if the Crown is permitted to formulate new
theories, this would usurp the Minister’s assessing functions, which are vested
exclusively in the Minister. The Court’s role is, in the words of Rothstein J.,
to “…decide only whether the Minister, on the basis on which he chooses to
assess, is right or wrong.” (Appellants’ Written Submissions at paragraph 107,
quoting Canada v McLarty, 2008 SCC 26 at paragraph 75). I note, however, that
the Respondent rightly pointed out that McLarty did not deal with the
application of subsection 152(9) of the Act.
The Respondent’s View:
[65]
The Crown took the view
that it is permitted to advance new theories in a tax appeal. However, it
acknowledged that there are some limitations on its pleadings, including
several of the same limitations which the Appellants pointed out. Although
there are fairly rigid boundaries for pleading of assumptions, which must
reflect the facts that the Minister took into account in making the assessment,
the Crown argued that it has wide latitude elsewhere in the Reply to advance
different factual and legal bases to support the assessment, including those
which may not necessarily be consistent with the original basis.
[66]
The Respondent relied
on the decisions in Loewen and RCI Environment Inc. v The Queen, 2008
FCA 419, [2008] F.C.J. No. 1762, to support its contention that alternative
arguments may be advanced at any time and the expiry of the normal reassessment
period does not preclude the Crown from defending an assessment on any ground.
[67]
The Respondent cited Loewen
as authority for its proposition that the Crown may advance new legal arguments
if they arise from the evidence presented. In addition, paragraph 49(1)(e) of
the Rules explicitly permits the Crown to plead “other material facts” –
those that did not form part of the Minister’s assessment.
[68]
In the Respondent’s
view, the effect of subsection 152(9) of the Act is to codify these
rules.
ANALYSIS:
[69]
The parties to this
Motion have different views of what the applicable law is in respect to “fresh
assessments”. This dispute arises in respect to the scope of subsection 152(9)
of the Act and what this subsection allows the Crown to do in its
pleadings. Subsection 152(9) provides:
(9) Alternative basis for
assessment.
The Minister may advance an alternative argument in support of an
assessment at any time after the normal reassessment period unless, on an
appeal under this Act
(a) there
is relevant evidence that the taxpayer is no longer able to adduce without the
leave of the court; and
(b) it
is not appropriate in the circumstances for the court to order that the
evidence be adduced.
(a) The ULC Theory:
[70]
First, I will deal with
the decision in Pure Spring which the Appellants relied upon for their
definition of assessment. It is important to set the background of this
decision. Pure Spring was decided in 1946 under the Income War Tax
Act, R.S.C. 1927, c. 97. The Minister had exercised the power of
“discretionary determination” under subsection 6(2) of this 1927 Act,
which gave the Minister the power to disallow an expense which was, in his
view, in excess of what was reasonable for the taxpayer’s business. The
question that the Court in Pure Spring had to answer was whether the
Minister’s exercise of this discretionary power constituted an assessment, in
violation of the statutory ambit of the Act which provided only for
appeals from assessments.
[71]
In The Queen v Anchor Pointe
Energy Ltd., 2007 FCA 188, [2007] F.C.J. No. 687, Létourneau J., at
paragraphs 32-33, quoted comments made in obiter by Hugessen J.A. in Canada v
Consumers’ Gas Co., [1987] 2 F.C. 60
(F.C.A.) as follows:
[32] Second,
while it is true that assessment, reassessment and confirmation refer to three
specific actions by the Minister under the Act in the process of determining
the tax liability of a taxpayer, the word “assessment” also refers to the
product of that process. Hugessen J.A. nicely described the two meanings of the
word in Canada v. Consumers’ Gas Co. [1987] 2 F.C. 60 (F.C.A.).
At page 67 he wrote:
What is put in issue on an appeal to the courts under
the Income Tax Act is the Minister’s assessment. While the word
“assessment” can bear two constructions, as being either the process by which
tax is assessed or the product of that assessment, it seems to me clear, from a
reading of sections 152 to 177 of the Income Tax Act, that the word is
there employed in the second sense only. This conclusion flows in particular
from subsection 165(1) and from the well established principle that a taxpayer
can neither object to nor appeal from a nil assessment.
[33] I
agree with the motions judge that the appeal is not from the confirmation of
the assessment. The appeal is, to use the words of Hugessen J.A., from the
product of that assessment: …
[72]
Justice Hugessen’s
comments in Consumers’ Gas seem to contradict the definition of
assessment which the Appellants urged me to accept. If, as Hugessen J.
states, “assessment” in sections 152 to 177 of the Act refers to the “result”
of the assessing process, rather than the “process” itself, the Appellants’
argument is flawed.
[73]
Justice Sharlow cited
the decision in Pure Spring in her reasons in Loewen and, at
paragraph 6, she stated the following:
[6] An assessment is the determination by the Minister of the
amount of a person’s tax liability: Pure Spring Co. v. Minister of National
Revenue, [1946] Ex.C.R. 471, [1946] C.T.C. 169, (1946) 2 DTC 844. A
taxpayer’s initial assessment for a taxation year typically takes into account
what is reported by the taxpayer in an income tax return. An initial assessment
may be appealed, but most appeals are from reassessments, in which the Minister
assesses additional tax to reflect specific changes to the taxpayer’s taxable
income. The word “assessment” is used to refer to assessments and
reassessments.
[74]
Although Sharlow J. cites
Pure Spring, she does not do so to distinguish between two
constructions of the word “assessment” as discussed in Consumers’ Gas.
Her comments, taken as a whole, are equally consistent with the view that the
“assessment”, which is appealed under the Act and defended by the Crown,
is the “result” of the assessing process and not the process itself.
[75]
The Appellants were
correct when they stated that subsection 152(9) of the Act does not
allow the Crown to “do anything it likes” in its pleadings. It is clear that if
the Crown wants to rely on subsection 152(9) it must abide by the three
restrictions stated by Chief Justice Richard in Jeannette Walsh.
[76]
However, the Appellants
argued that advancing a different basis for the assessment would amount to
reassessing outside the time limitations, which is contrary to the third
restriction listed in the Jeannette Walsh decision. They also relied on
the distinction between an argument in support of an assessment (Appellants’
Written Submissions at paragraphs 33 and 36) and a new basis of assessment,
which has been rejected by the Courts.
[77]
The three limitations outlined
in the Jeannette Walsh decision, as well as C. Miller J.’s comments
contained in his decision in Walsh, support the overriding principle
that avoiding unfairly prejudicing a taxpayer is the focus. In my opinion, the
Appellants are incorrect in offering the distinction between an alternative
argument and a new assessment as the guiding principle in determining whether
pleadings fall within the scope of subsection 152(9) of the Act.
[78]
According to the
Appellants’ submissions, both the recharacterization theory and the ULC theory
are entirely different from the Minister’s original assessment and, therefore, are
tantamount to fresh assessments. The Respondent argued that it should be
permitted to advance these theories because they are alternative arguments
which are permitted by subsection 152(9).
[79]
The Appellants argued that
the Respondent should not be permitted to rely on the ULC theory because it is
entirely different from the Minister’s original basis of assessment. The
Appellants relied on the proposed letters and the Transfer Pricing Report,
neither of which mention the possibility that the taxpayers’ status as ULCs
might impact the arm’s length price of the guarantee fees. The Appellants
contended that in advancing the ULC theory, the Crown is attempting to
introduce matters that were not part of the Minister’s original assessments.
This would be contrary to the first condition contained in Jeannette Walsh.
Although it is not clear from either the oral submissions or from the
Appellants’ Written Submissions, it appears that this argument referred to
paragraph 15(g) of the Reply in the Funding appeal and paragraph 16(j) of the Reply
in the GECC appeal. In those paragraphs, the Respondent outlined “a transaction
or series of transactions” and included the incorporation as a Nova Scotia ULC
in one of the steps or transactions.
[80]
The Respondent viewed
the ULC theory as an alternative argument and not the basis for a new
assessment. While the Appellants have indicated that it would be unfair to
allow the Crown to raise these arguments, they have not alleged the prejudice,
if any, that would result. The Respondent argued that the transaction at issue
has not changed from the original assessment. The issue remains the deduction
of the guarantee fees. The transaction that the Crown is attacking is the
guarantee fee arrangement, as referenced in the Minister’s original assessments
(Transcript, page 179).
[81]
In Pedwell v The
Queen, 2000 D.T.C. 6405, Rothstein J. refused to allow the Crown to attack
a transaction that was different from the one which formed the basis of the Minister’s
assessment. In the present appeals, the Replies label “incorporation as a ULC”
as part of a transaction or series of transactions. However, the issue is still
the tax consequences arising from the payment of the guarantee fees and not the
tax consequences arising from some different transaction. The Appellants’
argument with respect to the ULC theory cannot succeed. It does not seem to me
that the “implicit support” theory and the ULC theory are “entirely different”.
[82]
Even if I were to
accept the Appellants’ view of the applicable law, I believe that the Crown
should be able to question the legal structure of a subsidiary and its legal
relationship with the parent corporation in the course of making the implicit
support argument and in spite of the fact that the Minister’s initial letter
and report made no reference to those particular subsidiaries being ULCs.
[83]
If I accepted the
Appellants’ argument, I would be compelling the Crown to closely follow the
exact analysis contained in the Minister’s proposed letters, which is clearly
contrary to subsection 152(9) of the Act.
(b) The Recharacterization Theory:
[84]
The Appellants divided subsection
247(2) of the Act into two branches. The first branch, contained in
paragraphs (a) and (c), allows the Minister to adjust a transfer
price to make it an arm’s length price while the second branch, contained in paragraphs
(b) and (d), has an anti-avoidance element and applies in
different circumstances than the first branch. In the Appellants’ view, the
recharacterization theory is not only different from the original basis of the
assessment, but it rests on a contradictory view of the facts. Paragraphs
247(2)(a) and (c) assume that the transaction was entered into
with a bona fide purpose, but that the terms and conditions of the
transaction must be adjusted to an arm’s length standard. Paragraphs 247(2)(b)
and (d) assume that arm’s length parties would not have entered into the
transaction at all and that its primary purpose would otherwise involve obtaining
a tax benefit. Since the recharacterization theory flows from a fundamentally
different understanding of the transaction, the Appellants contended that it is
a fresh assessment rather than a new argument in favour of the original
assessment for the purposes of subsection 152(9) of the Act.
[85]
The Respondent had a
different view of subsection 247(2). Paragraph 73 of the Respondent’s Written
Submissions stated the following:
73. If a transaction is one into which there is no
evidence that arm’s length parties would enter (and assuming no bona fide
non-tax purpose), the adjustment could be determined under paragraph 247(2)(c)
in the same amount as would be determined if arm’s length parties would enter
into such a transaction or the adjustment could be determined under paragraph
247(2)(d) on the basis of recharacterizing the transaction into one which arm’s
length parties would enter. It depends on whether a valuation method exists
which can replicate the price at which arm’s length parties would agree to
enter into the transaction or not. If one exists, usually the adjustment would
be under (c). If not, the only means of arriving at a transfer price for the
transaction is by way of recharacterization under (d).
The Respondent contended that the difference, between the
two branches, paragraphs 247(2)(a) and (c) and paragraphs 247(2)(b)
and (d), turns on whether a valuation method exists to determine an
arm’s length price (Respondent’s Written Submissions, paragraph 72). In
addition, the Respondent argued that the Appellants are asking this Court, on a
Motion, to endorse their interpretation of subsection 247(2) without the
benefit of the essential factual background. GECCI sought a similar ruling from
the Federal Court of Appeal in the Concluded Litigation. Justice Noël concluded
that it was unnecessary to address this issue as Hogan J. of this Court
had not discussed paragraphs 247(2)(b) and (d).
[86]
Subsection 247(2) of
the Act states:
(2) Transfer pricing adjustment. Where
a taxpayer or a partnership and a non-resident person with whom the taxpayer or
the partnership, or a member of the partnership, does not deal at arm's length (or
a partnership of which the non-resident person is a member) are participants in
a transaction or a series of transactions and
(a) the
terms or conditions made or imposed, in respect of the transaction or series,
between any of the participants in the transaction or series differ from those
that would have been made between persons dealing at arm's length, or
(b) the transaction or series
(i) would not have
been entered into between persons dealing at arm's length, and
(ii) can reasonably be considered
not to have been entered into primarily for bona fide purposes other
than to obtain a tax benefit,
any amounts that, but for this section and section 245,
would be determined for the purposes of this Act in respect of the taxpayer or
the partnership for a taxation year or fiscal period shall be adjusted (in this
section referred to as an "adjustment") to the quantum or nature of
the amounts that would have been determined if,
(c) where only paragraph (a) applies, the terms
and conditions made or imposed, in respect of the transaction or series,
between the participants in the transaction or series had been those that would
have been made between persons dealing at arm's length, or
(d) where paragraph (b) applies, the
transaction or series entered into between the participants had been the
transaction or series that would have been entered into between persons dealing
at arm's length, under terms and conditions that would have been made between
persons dealing at arm's length.
(Emphasis
added)
[87]
Paragraph 247(2)(c)
contains the word “only” in its text: “where only paragraph (a)
applies”. Paragraphs 247(2)(a) and (b) describe two factual
situations which, in my view, are not mutually exclusive. If no overlapping was
intended between those situations for which (a) applied and those
situations for which (b) applied, then, logically, there would be no
need to include the word “only” in paragraph 247(2)(c). Consequently, I
do not agree with the view expressed by either the Appellants or the Respondent
respecting subsection 247(2), as neither view is consistent with the actual
text of this provision. Contrary to the Appellants’ submission, there is no
contradiction because there is nothing logically inconsistent in arguing that,
on the facts of these appeals, both paragraphs (a) and (b) may
apply.
[88]
With respect to the
Respondent’s interpretation of this provision, the argument would appear to be
that the Court will choose to apply either (c) or (d), depending
on whether a valuation method for the arm’s length price can be established.
However, the text of subsection 247(2) is straightforward, that is, paragraph
247(2)(c) should be used where “only (a)” applies. In practice,
the Crown may choose not to argue that (b) applies but, in looking at subsection
247(2) in its entirety, I cannot see how its interpretation turns on the
availability of an appropriate valuation method.
[89]
While I agree that the
recharacterization argument advances a different legal basis to support this
assessment, I do not believe it violates any of the restrictions on the Crown’s
use of subsection 152(9) of the Act. It does not attempt to attack a
different transaction, to add to the amount of tax assessed or to assess after
the limitation period expired. I view it simply as another legal argument in
support of the Minister’s assessment and, consequently, permitted pursuant to
subsection 152(9). Justice Bowie, at paragraph 7 of the decision in Teelucksingh
v The Queen, 2010 TCC 94, 2010 D.T.C. 1085, confirms that it is “well
settled” that subsection 152(9) allows the Minister to place reliance on a
different basis of assessment:
[7] I turn now to the appellant’s attack on
the respondent’s pleading. It takes two forms. First, it was argued that the
Reply should be struck out because it pleads a different basis for the
assessment from that which the Minister relied on when the assessment was first
made. This argument is without merit. It is now well settled that subsection
152(9) of the Act allows the Minister to invoke a different basis for his
assessment from that originally relied upon, even after the expiry of the
normal reassessment period.
[90]
In summary, none of the
pleadings will be struck on the basis that they constitute a “fresh assessment”
or that they are a violation of subsection 152(9).
[91]
In any event, I would
not strike the Respondent’s pleadings because this is not one of those
“clearest and most obvious of cases” for doing so, which was referred to by Bowman
C.J. in 1072174 Ontario Ltd v The Queen, 2008 TCC 129, [2008] T.C.J. No.
163. In that case, the Appellant brought a motion to strike pleadings, alleging
that they were contradictory and that they purported to assess on a completely
different basis than the Minister’s original basis, contrary to subsection
298(6.1) of the Excise Tax Act, the equivalent to subsection 152(9) of
the Act. The Court agreed that some of the Crown’s pleadings were
inconsistent and that the Court was open to a fresh assessment argument.
However, in denying the motion to strike, the following comments were made:
[16] I agree with Mr. Wyslobicky that there are
inconsistencies in the Crown’s pleading of assumptions. … This may well relieve
the appellant of the traditional onus. The Crown can assert facts that are
inconsistent with assumptions if it is prepared to accept the onus.
[17] Moreover,
Mr. Wyslobicky contends that the Minister cannot, outside the time limit
for reassessing, argue that the appellant should not have been allowed the ITCs
in the first place. This may be true but it is not something that can be
readily dealt with on motion to strike under Rule 53 or Rule 58. It
should be dealt with at trial.
[18] There
have been many cases in this court and the Federal Court of Appeal about what
the respondent can plead in support of an assessment and what she cannot. They
are not all readily reconcilable. I do not think that any useful purpose would
be served by yet another lengthy analysis of the jurisprudence on practice and
procedure in this court. Some of the cases were decided by me, and they have
had mixed success in the Federal Court of Appeal. Virtually all of the cases
are contained in the appellant’s or the respondent’s books of authorities. I
rely on those authorities that support the view that a court should be
reluctant to strike out pleadings except in the clearest and most obvious of
cases.
(Emphasis added)
E. Alternative Pleadings:
[92]
The Appellants relied
on subsection 51(2) of the Rules, which states:
51. (2) A party may make inconsistent allegations in a pleading
where the pleading makes it clear that they are being pleaded in the
alternative.
[93]
The Appellants’
argument is that, if I do not strike the recharacterization theory (which I
have not), then paragraphs 247(2)(a) and (c) and paragraphs
247(2)(b) and (d) should be pleaded as alternative arguments so
that the Appellants will know the Respondent’s primary argument. The Appellants
relied on the Federal Court of Appeal in Remo Imports Ltd. v Jaguar Cars
Limited, 2007 FCA 258, [2007] F.C.J. No. 999, where, at paragraph 51, the
Court stated:
[51] …
It is one thing for a litigant to adopt alternative positions. It is quite
another for a litigant to simultaneously adopt positions in the same
proceedings based on diametrically opposed interpretations of the same facts,
and seek to have the benefit of both positions. …
[94]
The Respondent relied
on the same arguments related to the recharacterization theory being a new
assessment. First, the two branches of subsection 247(2) do not need to be
pleaded in the alternative because they are not inconsistent. Second, as a
Motions Judge, I must refuse to rule on the Appellants’ proposed interpretation
of subsection 247(2) where I would be doing so in a factual vacuum. The
Respondent relied on comments by Jorré J. in Kopstein v The Queen, 2010
TCC 448, 2010 D.T.C. 1307.
[95]
Unlike the examples
provided in both of the decisions in Kopstein and Remo Imports,
the Appellants have failed to point to any inconsistent factual allegations nor
have they suggested that either of the supposedly inconsistent legal arguments
cannot succeed if the facts alleged by the Respondent are proven. Their only
focus was on the submissions of law that, in their view, cannot stand together.
[96]
The Respondent’s
position was that, based on facts that can be proved, the expense deductions
should be disallowed pursuant to the following provisions: 247(2)(a) and
(c), 237(2)(b) and (d), 18(1)(a) and 20(1)(e.1). Whether
the Respondent is correct in its interpretation of the law or, alternatively, whether
my reading is the correct one, then there is no inconsistency and all of these
provisions may apply to the same set of facts.
[97]
According to subsection
51(2) of the Rules, there must be some inconsistency in the pleadings
that is required to be remedied in order for this Rule to apply. Interpreting
such untested legislation in a pre-trial motion should be avoided. It cannot
and should not be done at this stage. On the face of the Respondent’s
pleadings, it is not clear and obvious that such an inconsistency exists that
would require that contradictory allegations be pleaded as alternatives.
[98]
Since there is no
existing jurisprudence regarding paragraphs 247(2)(b) and (d), it
is only fair that the Respondent be permitted to proceed to a hearing based on
its interpretation of the law. Again, it is not “clear and obvious” on the face
of the Crown’s pleadings that any inconsistency exists for which subsection 51(2)
of the Rules should be applied to remedy. The power that this Court
possesses to strike pleadings must be exercised with great care and only in the
clearest and most obvious of cases. Since the matters raised transcend the
parameters of a pre-trial motion, they are best left to the Trial Judge.
F. Paragraph 247(2)(b) / Procedural
Fairness
[99]
The Appellants contended
that they were denied the opportunity of making submissions to the Transfer
Pricing Review Committee in respect to the application of paragraph 247(2)(b)
of the Act. The Canada Revenue Agency’s (the “CRA”) administrative
practice is to have the Committee consider all proposed reassessments under
paragraphs 247(2)(b) and (d) prior to issuing such assessments.
The Appellants argued that, if the Respondent is permitted to advance the
recharacterization theory, they will be denied procedural fairness because the
CRA has not followed its mandatory procedures.
[100]
The Respondent relied
on the decision in Collins & Aikman Products Co. v The Queen, 2009
TCC 299, [2009] T.C.J. No. 255, and particularly paragraph 33 of that decision,
to support the argument that a failure to comply with the Crown’s administrative
guidelines cannot be fatal to those pleadings respecting paragraphs 247(2)(b)
and (d). In Collins & Aikman, the Court stated that,
although there had been no referral to the General Anti-Avoidance Committee, as
set out in the administrative guidelines, little or no weight or significance
was placed on this failure. Similarly, in this Motion, I place no significance
on the fact that this procedural step in CRA’s administrative policy procedure
was omitted.
[101]
I do not believe that
the Appellants have been denied procedural fairness simply because they did not
have the opportunity to make submissions to this Committee. It is well established
that the CRA interpretive bulletins, information circulars and transfer pricing
memoranda, while helpful, are not binding on this Court. Nothing in subsection
247(2) requires the Minister to establish and make use of such a Committee. The
role of this Court is to apply the Act to determine a taxpayer’s
liability and not to rule on the administrative policies and procedures
followed, or, as in this case, not followed by the CRA.
G. Distinction Between “Guarantees” and
“Implicit Support”:
[102]
The Appellant took
issue with paragraph 9 of the Reply of the GECC appeal, because it conflates a
guarantee and implicit support. During the hearing of this Motion, Respondent
Counsel agreed to amend its pleadings to make clear “… the distinction between
legally binding guarantees and either implicit support, implicit guarantees, et
cetera.” (Transcript, page 173, lines 10 to 13).
Conclusion:
[103]
The Appellants’ motion
to strike is dismissed with leave to the Respondent to amend paragraph 9 of the
GECC Reply, Court File Number 2010-3493(IT)G, together with costs to the
Respondent.
Signed at Ottawa, Canada, this 19th day of December 2011.
“Diane Campbell”
Email this Content