REASONS
FOR ORDER
Graham J.
[1]
The Respondent has brought a motion to strike various portions of
two Notices of Appeal filed by Devon Canada Corporation on the ground that those
portions of the Notices of Appeal do not comply with the large corporation
rules in subsection 169(2.1) of the Income Tax Act.
[2]
Devon was formed as a result of a number of amalgamations.
In 2001, two of Devon’s predecessor companies made significant payments to
their employees in exchange for those employees surrendering various share
purchase options (the “Surrender Payments”). The predecessor companies deducted
the Surrender Payments on current account in their respective year ends. The
Minister of National Revenue reassessed Devon to deny the deductions. Devon
objected to the reassessments. The
Minister issued Notices of Confirmation and Devon appealed.
[3]
In its Notices of Appeal, Devon raises the
following arguments:
(a) Devon’s primary argument is that the Surrender Payments are
deductible as current expenses under subsection 9(1) of the Income Tax Act.
(b) In the alternative, Devon argues that the Surrender Payments are
eligible capital expenditures that, once added to cumulative eligible capital,
would result in deductions pursuant to paragraph 20(1)(b). It further
argues that, due to the fact that there were acquisitions of control of both of
the predecessor companies during the taxation periods in which the Surrender
Payments were made, subsection 111(5.2) applies to cause significant
additional deductions of cumulative eligible capital.
(c) In the further alternative, Devon claims that the Surrender Payments
are financing expenses deductible under paragraph 20(1)(e).
[4]
Devon was a large corporation in the years in
question. Accordingly, subsection 169(2.1) limits the issues and relief upon
which Devon may appeal to those issues and the related relief in respect of
which Devon complied with subsection 165(1.11) in its Notices of Objection. The
Respondent seeks to strike the portions of Devon’s Notices of Appeal dealing
with its two alternative arguments on the basis that Devon did not comply with
subsection 165(1.11) in respect of those arguments.
Questions to be Determined on this
Motion
[5]
There are three questions that I must determine
on this Motion.
(a) The first question I must determine is whether Devon reasonably
described the issue or issues to be decided in its Notices of Objection.
(b) If I find that Devon reasonably described the issue or issues, then
the second question that I must determine is whether Devon adequately described
the relief sought in respect of that issue or issues in its Notices of
Objection.
(c) If I find that Devon did not reasonably describe the issue or issues
or did not adequately describe the relief sought, I must then consider an
alterative argument raised by Devon. Devon argues that if the Minister confirms
a reassessment on a basis that differs from the basis upon which the taxpayer
objected, then the taxpayer may appeal to court in respect of that basis
notwithstanding the restrictions in subsection 169(2.1).
Did Devon
Reasonably Describe Each Issue or Issues to be Decided?
Summary of Devon’s Position
[6]
Devon submits that there are two bases upon
which it can be said to have reasonably described the issue or issues in its
Notices of Objection.
[7]
Devon’s principle argument is that the issue
under objection / appeal is, and has always been, whether the Surrender
Payments are deductible. Devon says that there are three different reasons
why the Surrender Payments may be deductible (i.e. on current account under
section 9; as part of cumulative eligible capital under paragraph 20(1)(b)
and subsection 111(5.2); or as a financing expense under paragraph 20(1)(e))
but that the presence of those individual reasons does not change the
overall issue of deductibility.
[8]
Devon’s alternative argument is that, if its
Notices of Objection did not reasonably describe the issue or issues, then the
Minister’s acceptance of a detailed supplemental memo (the “Supplemental Memo”)
from Devon during the objection process and the Minister’s consideration and
confirmation of the Notices of Objection on the basis of the arguments
contained in the Supplemental Memo had the effect of amending Devon’s Notices
of Objection to include the arguments set out in the Supplemental Memo as
issues.
Summary of the Respondent’s
Position
[9]
The Respondent’s principle argument is that the
three “reasons” described by Devon are, in fact, three separate issues and thus
that Devon was required to comply with subsection 165(1.11) in respect of each
of those issues.
[10]
The Respondent further submits that Devon’s
alternative argument must fail first because the Supplemental Memo cannot have
amended the Notices of Objection because there is no mechanism in the Income
Tax Act for making such an amendment and second because the actions of the
Minister in accepting and considering the Supplemental Memo cannot override the
restrictions of subsection 165(1.11).
Analysis of the Law
[11]
The courts have not yet had the opportunity to
fully consider the parameters of subsections 165(1.11) and 169(2.1) but there
are themes that have emerged from the cases that have been decided:
(a) a taxpayer is not required to describe each issue exactly but is
required to describe it reasonably (Potash Corporation of Saskatchewan Inc. v.
The Queen);
(b) the determination of what degree of specificity is required for an
issue to have been described reasonably is to be made on a case by case basis (Potash);
(c) a taxpayer may add new facts or reasons on appeal but not new issues
(British Columbia Transit v. The Queen);
(d) if the proposed additional argument would result in the large
corporation seeking greater relief than was previously sought, the courts are
more likely to consider the argument to be a new issue rather than a reason (Potash;
Telus Communications (Edmonton) Inc. v. The Queen);
(e) if the proposed additional argument would result in the large
corporation seeking the same relief that was previously sought, the courts are
more likely to consider the argument to be the same issue (British Columbia
Transit; Canadian Imperial Bank of Commerce v. The Queen); and
(f)
if the proposed additional argument would result
in the large corporation seeking completely different relief than was
previously sought, the courts are more likely to consider the argument to be a
new issue rather than a reason (Bakorp Management Ltd. v. The Queen).
Application of the Law
[12]
In order to determine whether Devon’s
alternative arguments represent new issues or new reasons, I must first
determine what issue was set out in Devon’s Notices of Objection and then
determine whether those alternative arguments represent alternative reasons in
support of that issue or whether they represent alternative issues.
[13]
Devon’s Notices of Objection make no reference
to paragraphs 20(1)(b) and (e) or subsection 111(5.2). The issue
and statutory provisions are described as follows in one of the Notices of
Objection:
ISSUE
TO BE DECIDED
The issue to be
decided is whether the Stock Option payment of $20,884,041 is a deductible
business expense under section 9 and not denied by section 18 of the Act for
[predecessor company’s] February 11, 2001 tax year, thus reducing the taxable
income by an amount of $15,663,031 ($20,884,041 less an associated resource
allowance adjustment of $5,221,010).
STATUTORY
PROVISIONS RELIED ON
[Predecessor
company] relies on, inter alia, subsections 3, 9, and
paragraph 20(1)(v.1) of the Act.
[14]
There is a similar description of the issue and
statutory provisions in the other Notice of Objection.
[15]
In my view, the sole issue set out in the
Notices of Objection is whether Devon can deduct the Surrender Payments. The
Notices of Objection propose one reason why the deduction should be permitted
but that does not preclude Devon from raising other reasons in its Notices of
Appeal.
[16]
In reaching this conclusion, I am fully aware
that, prior to the Supreme Court of Canada’s decision to refuse leave to appeal
in Imperial Tobacco Canada Ltd. v. The Queen, Devon was making no argument other than its primary argument and
that it was only after leave was refused that Devon sought to introduce the
alternative arguments. I am also aware of the fact that Devon’s counsel was also
counsel in Imperial Tobacco and that Devon’s objection had effectively
been held in abeyance pending the outcome of Imperial Tobacco. These
facts do nothing to change my view that the issue in this Appeal has not
changed. The setback that Devon suffered after the Imperial Tobacco
decision merely caused it to consider alternative reasons that it could use to
support its claim for deduction. In Potash, the Federal Court of Appeal
quoted from a paper prepared by R.M. Beith entitled “Draft Legislation on Income
Tax Objections and Appeals” that was presented at the 1994 Canadian Tax
Foundation Annual Conference. In
that paper, Mr. Beith expressed concerns about large corporations being “able
to raise new issues based on emerging interpretations and the outcome of court
decisions challenged by other taxpayers”. My understanding is that Mr. Beith
was concerned about taxpayers who were disputing one issue (say the deduction
of legal fees) being able to add a completely different issue (say the
calculation of resource allowances) to their appeal as a result of a favourable
court decision obtained by another taxpayer. In my view, that is not what is
happening in Devon’s case. Devon has always been disputing the deduction of the
Surrender Payments. It is still disputing that deduction. All that has changed
as a result of the Imperial Tobacco decision is that Devon is now
arguing that the Surrender Payments are deductible for different reasons.
[17]
Having concluded that the sole issue has always
been the deductibility of the Surrender Payments, I must now consider whether
the alternative arguments put forward by Devon fall within that sole issue.
[18]
I will consider Devon’s paragraph 20(1)(e)
argument first. The Minister denied the deduction of the Surrender Payments on
the basis that they were capital in nature and thus that paragraph 18(1)(b)
precluded their deduction. Devon’s primary argument is that paragraph 18(1)(b)
does not apply because the Surrender Payments were on income account. Paragraph
20(1)(e) is an exception to paragraph 18(1)(b). It simply permits
certain types of financing expenses to be deducted despite the fact that they
would otherwise be on capital account. In essence, Devon’s primary argument is
that the Surrender Payments were on income account because that was their
nature and its alternative argument is that they were on income account because
paragraph 20(1)(e) says so. Devon’s paragraph 20(1)(e)
argument is therefore nothing more than an alternative reason why the Minister
should permit the deduction of the Surrender Payments. There is nothing in the
themes that have emerged from the caselaw that would cause me to question this
conclusion. In fact, Devon’s case falls squarely in line with the reasoning in
the decisions in Canadian Imperial Bank of Commerce and British
Columbia Transit.
[19]
I will now turn to Devon’s paragraph 20(1)(b)
and subsection 111(5.2) argument. If Devon were simply claiming a deduction in
respect of the Surrender Payments under paragraph 20(1)(b), I would
accept that no new issue was being raised for the same reasons that I reached
that conclusion in respect of the paragraph 20(1)(e) argument as
paragraph 20(1)(b) is simply another exception to paragraph 18(1)(b).
However, this is not what Devon is doing. Devon is also claiming a deduction
under subsection 111(5.2). That deduction is not optional. It must be claimed
if certain preconditions are met. The preconditions have been met in Devon’s
case. As a result, if Devon convinced a trial judge that the Surrender Payments
should be added to its cumulative eligible capital, subsection 111(5.2)
would cause Devon to be entitled to a deduction in respect of other amounts in
its cumulative eligible capital that are totally unrelated to the Surrender
Payments. The Federal Court of Appeal was clear in Potash that there
will be a new issue if a taxpayer attempts to deduct additional amounts even if
those amounts fall within the same category of deductions. Based on the
foregoing, I find that Devon’s paragraph 20(1)(b) and subsection
111(5.2) alternative argument is a new issue that cannot be raised at appeal.
[20]
In reaching this conclusion on the paragraph
20(1)(b) and subsection 111(5.2) argument, I have given
consideration to Devon’s submission that the Supplemental Memo had the effect
of amending its Notices of Objection to include the argument. I do not accept
Devon’s position. There is no mechanism in the Act that would permit a
large corporation to amend its Notice of Objection. Reading in such a mechanism
would defeat the entire purpose of the large corporation rules.
Did Devon
Adequately Describe the Relief Sought?
[21]
Having concluded that Devon reasonably described
the sole issue in its Notices of Objection and that its section 9 and paragraph
20(1)(e) arguments were merely reasons, I must now consider whether
Devon adequately described the relief sought. Paragraph 165(1.11)(b)
requires a large corporation to specify the relief in respect of each issue,
not in respect of each reason. However, the Respondent argues that because the
relief sought would be different for each reason, Devon should nonetheless have
specified that the issue itself could result in different potential relief.
[22]
Devon did not describe the relief sought in
respect of its paragraph 20(1)(e) argument. Devon’s Notices of Objection
did not specify any relief other than allowing the deduction in full. The
Respondent submits that the total relief sought under paragraph 20(1)(e)
is greater than the relief sought under section 9 and that Devon should not be
permitted to increase the amount of relief sought. Devon acknowledges that the
relief sought under paragraph 20(1)(e) would be greater over a 5 year
period but submits that the relief sought in the years in question is far less
than the relief sought under its section 9 argument. Devon argues that the
relief for the purposes of subsection 165(1.11) is the relief in the year in
question, not the relief over time. I accept Devon’s position on this point. I
find that the relief sought under the paragraph 20(1)(e) argument is
less than the relief sought under the section 9 argument.
[23]
In Potash, the Federal Court of Appeal
implicitly accepted that if a certain amount of relief is specified in a Notice
of Objection, a less favourable amount of relief is automatically included:
… I prefer to leave
open the question of whether the obligation to “specify in respect of each
issue, the relief sought, expressed as the amount of a change in a balance
(within the meaning assigned by subsection 152(4.4)) or a balance of undeducted
outlays, expenses or other amounts of the corporation” necessarily binds a
large corporation to the stated amount, or a less favourable amount. It is
arguable that there may be situations where an amendment to a notice of appeal
could be permitted if the amendment goes only to quantum and does not entail
the raising of a new issue.
[emphasis added]
[24]
This approach is logical. If a large
corporation’s appeal involves numerous small expenses some of which may
ultimately be allowed and some of which may not, it would be unreasonable to
expect the large corporation to express its relief sought in its Notice of
Objection on an expense-by-expense basis. It would seem to be sufficient if the
large corporation simply stated the total relief sought; it being understood
that the relief would decrease for every expense it was not permitted to
deduct. Similarly, an absurd result would ensue if a large corporation were
expected to express alternative relief in a valuation case. I cannot imagine
that Parliament would have intended a large corporation to have to state that
it would like $X of relief if a certain asset was valued at $4,000,000 (being
the valuation favoured by the large corporation), $Y of relief if the asset was
valued at $3,999,999, $Z of relief if the asset was valued at $3,999,998 and so
on all the way down to whatever value the Minister believed the asset to be
worth.
[25]
I do not see a significant difference between
the foregoing examples and Devon’s situation. Devon seeks to deduct the
Settlement Payments. Deduction under paragraph 20(1)(e) would result in
less relief in the years in question but I do not think that it was necessary
for Devon to spell that relief out in detail.
[26]
Based on the foregoing, I find that Devon’s
paragraph 20(1)(e) argument complies with the requirement to specify the
relief sought.
Devon’s Alternative
Argument
[27]
As set out above, Devon argues that if the
Minister confirms a reassessment on a basis that differs from the basis upon
which a large corporation objected, then the large corporation may appeal to
court in respect of that new basis despite the restrictions in subsection
169(2.1). As I have concluded that Devon was in compliance with respect to its
paragraph 20(1)(e) argument, I will only consider this alternative
argument in respect of the paragraph 20(1)(b) and subsection 111(5.2)
argument.
[28]
Parliament has contemplated a situation where
the Minister assesses a large corporation in respect of certain issues, the
large corporation objects to those issues and then the Minister reassesses the
same year but adds new issues. Subsection 165(1.14) and paragraph 169(2.1)(b)
together allow the large corporation to appeal to court in respect of the new
issues despite the fact that those issues were not described in the original
Notice of Objection.
[29]
There appears, however, to be a gap in the Act
in the somewhat unlikely situation where the Minister assesses a large
corporation in respect of certain issues, the large corporation objects to
those issues and then the Minister confirms the assessment, but on an entirely different
basis than the basis of the original assessment. I am unaware of anything in the Act that would specifically
allow the large corporation to appeal on the basis of the new issues in this
situation.
[30]
Devon submits that it is caught by the foregoing
scenario. Devon says that, when the Minister confirmed the reassessments, the
Minister relied on paragraph 20(1)(b) and subsection 111(5.2) as an
alternative basis for the confirmation. Devon therefore asks me to address the
perceived gap in the Act by effectively reading in to paragraph
169(2.1)(b) the ability for Devon to appeal in respect of any
alternative issue relied upon by the Minister in confirming the reassessments.
[31]
While there may be an argument to be made for
that type of relief in a different case, this is not an appropriate case to do
so. This is not a case where the Minister has abandoned the original basis of
assessment and substituted a new one. The Minister still maintains that its
original basis of assessment is correct. The Minister merely added the
additional explanation regarding paragraph 20(1)(b) and subsection
111(5.2) to address the points raised by Devon in the Supplemental Memo. In
fact, the Notices of Confirmation only mention those provisions when describing
the arguments raised by Devon. The stated reason for confirming the
reassessments is paragraph 18(1)(b). While the Reports on Objection make
it clear that the Minister considered Devon’s argument, they in no way indicate
that the Minister abandoned the Minister’s original argument.
[32]
Based on the foregoing, I am not prepared to
allow Devon to appeal the paragraph 20(1)(b) and subsection 111(5.2)
issue on the basis of this alternative submission.
Conclusion
[33]
Based on all of the foregoing, the Respondent’s
Motion is allowed on the following basis.
[34]
The following portions of the Notice of Appeal
in appeal number 2013‑1066(IT)G are hereby struck:
(a) the phrase “as eligible capital expenditures (“ECEs”) under
subsection 14(5) and paragraph 20(1)(b), or” in paragraph 8;
(b) the phrase “as ECEs under subsection 14(5) and paragraph 20(1)(b),
or” in paragraphs 16 and 19;
(c) the references to section 14, paragraph 20(1)(b) and
subsection 111(5.2) in paragraph 17; and
(d) the phrase “as ECEs at the time of the acquisition of control
pursuant to subsection 111(5.2) and paragraph 20(1)(b), or” in paragraph
20(a).
[35]
The following portions of the Notice of Appeal
in appeal number 2013‑1327(IT)G are hereby struck:
(a) the phrase “as eligible capital expenditures (“ECEs”) under
subsection 14(5) and paragraph 20(1)(b), or” in paragraph 8;
(b) the phrase “as ECEs under subsection 14(5) and paragraph 20(1)(b),
or” in paragraphs 15 and 18;
(c) the references to section 14, paragraph 20(1)(b) and
subsection 111(5.2) in paragraph 16; and
(d) the phrase “as ECEs at the time of the acquisition of control
pursuant to subsection 111(5.2) and paragraph 20(1)(b), or” in paragraph
19(a).
Costs
[36]
Given the mixed success of the parties, costs of
the Motion in appeal number 2013-1066(IT)G are awarded in the cause. Since the two Motions are virtually identical, no costs are awarded
in respect of the Motion in appeal number 2013-1327(IT)G other than
disbursements.
Signed at Ottawa, Canada, this 29th day of August 2014.
“David E. Graham”
Email this Content