Citation: 2010 FCA 344
ELECTRIC CAPITAL CANADA INC.
is an appeal from a decision by Hogan J. of the Tax Court of Canada (the Tax
Court Judge), vacating assessments issued by the Minister of National Revenue
(the Minister) against General Electric Capital Canada Inc. (the respondent)
pursuant to Parts I and XIII of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp) (the Act) with respect to its 1996 to 2000 taxation years.
Part I assessments denied the full amount of the deductions claimed by the
respondent in computing its income with respect to fees paid to General
Electric Capital US (GECUS), its parent company, for guaranteeing its capital
market borrowings on the basis that such fees would not have been paid by an
arm’s length party for the guarantee provided. The Part XIII assessments reflect
consequential adjustments which result from the fees being deemed to be
dividends in the hands of GECUS for purposes of Part XIII in such
case concerns the application of the now repealed subsection 69(2) and
paragraphs 247(2)(a) and (c) which replace it. These provide the
Minister with the authority to make transfer pricing adjustments where, inter
alia, a taxpayer has paid to a non-resident person with whom it is not
dealing at arm’s length as payment for property or services an amount greater
than the amount which a person dealing with an arm’s length purchaser would
Tax Court Judge found as a fact that the guarantee fees paid by the respondent
to GECUS did not exceed the amount which a person dealing at arm’s length person
would have paid in similar circumstances. He therefore vacated the assessments.
Crown contends that in so holding the Tax Court Judge committed a number of
legal and factual errors. It asks this Court to allow the appeal on the basis
that an arm’s length party would not have paid the guarantee fee since it
provided no value. Alternatively, it contends that the behaviour of the Tax
Court Judge at trial was such as to give rise to a reasonable apprehension of
bias against it. It asks that the matter be remitted for a new trial before a
the reasons which follow, I am of the view that the appeal should be dismissed.
the years in issue, the respondent was wholly-owned by GECUS, a United States corporation,
which in turn was wholly-owned by General Electric Company (GE), also a United
corporation. Throughout this period, the respondent was in the business of
providing financial services and financed a substantial portion of its
operations with debt in the form of commercial paper and unsecured debentures
1988 and 1995, GECUS provided to the respondent, at no cost, an explicit
guarantee for its debt issuances. Starting with the 1996 taxation year, GECUS
began charging a fee equal to 1% of the face amount of the respondent’s debt
issuances for that same guarantee.
this percentage, fees totalling $135.4 million were paid and deducted by the
respondent in computing its income under Part I of the Act in respect of its
1996 through 2000 taxation years (Reasons at para. 2). The respondent also
withheld and remitted non-resident tax at the rate of 10% of the fee under Part
XIII of the Act, being the reduced rate applicable pursuant to article XI of
the Canada-United States Income Tax Convention (the Convention) to the interest
deemed to have been paid to GECUS by reason of the payment of the guarantee fee
(see subsection 214(15) of the Act).
 The Minister
disallowed the deduction claimed by the respondent in computing income under
Part I. The Part I assessments insofar as they relate to the 1996 and 1997
taxation years are based on subsection 69(2) of the Act:
69. (2) Where a taxpayer has paid
or agreed to pay to a non-resident person with whom the taxpayer was not
dealing at arm’s length as price, rental, royalty or other payment for or
for the use or reproduction of any property, or as consideration for the
carriage of goods or passengers or for other services, an amount greater
than the amount (in this subsection referred to as “the reasonable amount”)
that would have been reasonable in the circumstances if the non-resident
person and the taxpayer had been dealing at arm’s length, the reasonable
amount shall, for the purpose of computing the taxpayer’s income under this
Part, be deemed to have been the amount that was paid or is payable
69. (2) Lorsqu’un
contribuable exploitant une entreprise au Canada a versé ou
convenu de verser à une personne non résidante, avec laquelle il avait un
lien de dépendance, à titre de prix, loyer, redevance ou autre paiement
pour un bien ou pour l’usage ou la reproduction d’un bien, ou en contrepartie
du transport de marchandises ou de voyageurs ou d’autres services, une
somme plus élevée que la somme (ci-après appelée “la somme raisonnable”) qui
aurait été raisonnable eu égard aux circonstances si la personne non
résidante et le contribuable n’avaient eu aucun lien de dépendance, la somme
raisonnable est réputée, aux fins du calcul du revenu du contribuable
provenant de l’entreprise, avoir été la somme payée ou payable dans ce
 Subsection 247(2)
replaced subsection 69(2) effective for taxation years that begin after 1997.
Of relevance are paragraphs 247(2)(a) and (c):
247. (2) 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
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,
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
only paragraph 247(2)(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,
where paragraph 247(2)(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.
247. (2) Lorsqu’un
contribuable ou une société de personnes et une personne non-résidente
avec laquelle le contribuable ou la société de personnes, ou un associé
de cette dernière, a un lien de dépendance, ou une société de
personnes dont la personne non-résidente est un associé, prennent part à
une opération ou à une série d’opérations et que, selon le cas :
a) les modalités
conclues ou imposées, relativement à l’opération ou à la série, entre des
participants à l’opération ou à la série diffèrent de celles qui auraient été
conclues entre personnes sans lien de dépendance,
b) les faits
suivants se vérifient relativement à l’opération ou à la série :
(i) elle n’aurait
pas été conclue entre personnes sans lien de dépendance,
(ii) il est
raisonnable de considérer qu’elle n’a pas été principalement conclue pour des
objets véritables, si ce n’est l’obtention d’un avantage fiscal,
les montants qui,
si ce n’était le présent article et l’article 245, seraient déterminés pour
l’application de la présente loi quant au contribuable ou la société de
personnes pour une année d’imposition ou un exercice font l’objet d’un
redressement de façon qu’ils correspondent à la valeur ou à la nature des
montants qui auraient été déterminés si :
c) dans le cas où
seul l’alinéa a)
s’applique, les modalités conclues ou imposées, relativement à l’opération ou
à la série, entre les participants avaient été celles qui auraient été
conclues entre personnes sans lien de dépendance;
d) dans le cas où
s’applique, l’opération ou la série conclue entre les participants avait été
celle qui aurait été conclue entre personnes sans lien de dépendance, selon
des modalités qui auraient été conclues entre de telles personnes.
 The parties agreed and
the Tax Court Judge accepted that, for present purposes, there is no meaningful
difference between paragraphs 247(2)(a) and (c) and subsection
69(2) of the Act (Reasons at para. 179).
 The guiding assumption
made by the Minister in disallowing the deduction of the guarantee fee is that
in the event of a default by the respondent, GECUS would have supported the
respondent regardless of the guarantee (Amended Reply to the Notice of Appeal
at paras. 18hh), ii), jj) and 20a) and b), Appeal Book, Vol. I at p. 131). As
such, the guarantee was superfluous.
 Given the Minister’s
assumption that amounts were paid by the respondent to GECUS without anything
being received in return, further assessments were issued under Part XIII on
the basis that a benefit equal to the fee had been paid to GECUS. Such a
payment gives rise to a deemed dividend subject to withholding tax at the
reduced rate of 5% pursuant to article X of the Convention (because GECUS held
more than 10% of the voting stock of the respondent).
 The respondent objected
to both series of assessments alleging, inter alia, that the guarantee
fee was at least commensurate with an arm’s length price and that it had
properly computed and remitted the exigible Part XIII tax.
 The assessments were
subsequently confirmed and the appeal to the Tax Court of Canada ensued.
DECISION OF THE TAX COURT
 The Tax Court Judge in
describing the position of the parties, first identified the theory of the
Crown (Reasons at para. 168):
[Crown] submits that the [respondent]’s credit rating would be equalized with
that of GECUS by reason of affiliation in the absence of a guarantee
arrangement. On this theory, the [Crown] claims that the [respondent] could
have borrowed the same amount of money at the same interest rate without an
explicit guarantee as it did with such a guarantee. As a result, the
[respondent] did not receive an economic benefit from the guarantee. In this
case, the arm’s length price for the guarantee is nil. The guarantee
arrangement was simply a clearer indication of the implicit support that
already existed in favour of the [respondent].
 He then referred to the
method proposed by the Crown in order to establish that the explicit guarantee
would have been of no value to the respondent in an arm’s length context
(Reasons at para. 169):
invites me to consider the credit rating methodology developed and applied by [Standard & Poor’s (S&P)] in the
taxation years under review in assessing whether or not the [respondent]’s
credit rating would be equalized with that of its parent in the absence of an
explicit guarantee. Under S&P’s credit rating system, the [Crown] claims,
the [respondent] would be considered a “core subsidiary”. According to the [Crown],
the crucial point is that the [respondent’s] credit rating would be notched up
to the AAA rating of its parent, GECUS, on the grounds that both S&P and
the [respondent]’s debt holders would recognize that GECUS had a strong
economic incentive to provide financial support to the [respondent] in times of
financial stress, even if it was not contractually obliged to do so.
 According to the Crown,
this type of “implicit support” would be recognized by S&P in the case of
the respondent with the result that its credit rating would be the same as that
of GECUS (i.e. AAA) whether GECUS’ explicit guarantee was in place or
not. If the respondent’s credit rating was unaffected, the costs of its debt
issuances would be equally unaffected. In effect, the argument was that an arm’s
length party in the respondent’s shoes would not pay anything for something
which provided it with no benefit.
 The Tax Court Judge then
turned to the position of the respondent. In particular, he noted the
respondent’s submission that (Reasons at para. 180):
concept of “implicit support” relied on by the Crown to convince me that the [respondent]’s
credit rating would be equalized with that of GECUS requires that one preserve
the very non arm’s length relationship which subsection 69(2) and paragraph
247(2)(a) invite me to ignore. Stated differently, the reputational
pressures that may cause GECUS to support the [respondent] in times of
financial stress exist because the [respondent] is allegedly a core subsidiary.
This type of pressure does not exist in an arm’s length relationship. All
factors of influence flowing from the non arm’s length relationship must be
ignored to ensure an arm’s length result. …
 After a lengthy
analysis, he rejected the respondent’s contention on this point. He concluded
that, as proposed by the Crown, GECUS’ implicit support, which derives from the
respondent being a member of the GE family, was a relevant factor (Reasons at
paras. 199-201). He later identified as another relevant factor the impact
which the removal of the guarantee would have had if GECUS had made the
decision to remove it, a finding that is central to the Crown’s appeal (Reasons
at para. 247).
 The Tax Court
Judge then proceeded to the determination of the arm’s length price of the
guarantee transaction. He noted that the first step is to properly identify the
transaction at issue. In the case at bar, that entailed “identifying the
parties to the controlled transaction, the functions performed by each party
and the risk assumed as part of the transaction” (Reasons at para. 232).
 The Tax Court
Judge then considered the method for determining the arm’s length price. He
rejected the insurance-based model as unreliable. He explained that this method
would result in pricing the guarantee at an amount which would tend to be too
high given the manner in which insurers price the risk (Reasons at para. 254).
In addition, this method involved the use of a credit rating product called
“RiskCale” which did not take into account implied support (Reasons at para.
 The Tax Court
Judge also rejected the credit swap method proposed by the respondent. He found
that the opinion of the expert witness who proposed this method was based “on
assumed credit rating … provided to him by counsel for the [r]espondent” and
“the accuracy of his conclusion is entirely dependent on the accuracy of the
assumed credit rating” (Reasons at para. 258).
 In the
end, he accepted the Crown’s position that what should be measured is the value
of the benefit provided by the explicit guarantee and that the yield approach should
be used for this purpose (Reasons at para. 259):
… This should be done using
the yield approach. The benefit is equal to the interest cost savings for the
[respondent] determined by comparing the interest cost of unguaranteed debt to
that of guaranteed debt. To determine the interest savings for the
[respondent], one must arrive at a factual finding of the [respondent]’s credit
rating without the explicit support of its parent. …
 Earlier in his reasons, the
Tax Court Judge introduced the various witnesses who appeared before him
including thirteen experts, five for the Crown and eight for the respondent
(Reasons at paras. 4-166). The lead experts with respect to the yield approach were
William John Chambers, who holds a Ph.D. in economics from Columbia University and appeared for the
respondent, and Edward Emmer who appeared on behalf of the Crown. Both were
employed by S&P during most of their career, Mr. Emmer having spent the
better part of that time with the ratings division. They were asked to assess
the credit rating which the respondent would attract with and without the
guarantee provided by GECUS using the credit rating criteria used by S&P.
 The opinion expressed by
Mr. Emmer was that the respondent would maintain its AAA rating without GECUS’ explicit
guarantee by reason of the implicit support which results from the respondent’s
relationship with GECUS and GE. Dr. Chambers for his part opined, using the
same criteria, that the respondent’s credit rating would have been in a significantly
lower range without GECUS’ explicit guarantee. He expressed the view that the
rating would be between B+ to BB- at the lowest and BB+ to BBB- at the highest
(Reasons at para. 72).
 Preferring the
testimony of Dr. Chambers, the Tax Court Judge found that the respondent’s
credit rating without GECUS’ explicit guarantee would have been in the range of
BB+ to BBB-. He later reiterated relying on the testimony of Mr. Werner, a
former executive of GECUS, that the explicit guarantee was necessary (Reasons
at paras. 284-301).
 The Tax Court
Judge concluded (Reasons at para. 305):
… under the yield approach,
the interest cost savings based on the rating differential between [BBB-/BB+]and
AAA, the latter being the rate achieved with the GECUS guarantee in place, work
out to approximately 183 basis points or 1.83%. I am of the view that a 1%
guarantee fee is equal to or below an arm’s length price in the circumstances,
as [the respondent] received a significant net economic benefit from the transaction.
The net economic benefit exceeds the 1.83% calculated under the yield approach.
… [The parties confirmed at the hearing that the above quote in the original
reasons erroneously identifies the low end of the rating as BBB-/BBB+ as a
result of a clerical error.]
 Given this
conclusion, the Tax Court Judge rejected the Crown’s contention that for
purposes of the Part XIII non-resident tax, the guarantee fees were to be
treated as deemed dividends rather than deemed interest (Reasons at paras. 306
POSITION OF THE CROWN
 In support of
its appeal, the Crown identified what it describes as four errors of law. The
Crown also contends that the Tax Court Judge made a number of palpable and
overriding errors and that, in any event, his judgment cannot stand because his
behaviour during the trial gave rise to a reasonable apprehension of bias
Errors of law
 The Crown
first argues that the Tax Court Judge failed to identify the relevant
transaction because he took into account a fact which did not exist, namely the
removal of the explicit guarantee (Crown’s memorandum at para. 39). It follows
that the Tax Court Judge analyzed and valued a transaction different from the
one that took place (ibidem). According to the Crown, the lack of an
explicit guarantee should only be considered for the purpose of the valuation
exercise, an analysis conducted after the identification of the relevant
transaction (Crown’s memorandum at paras. 40-44).
 The Crown
further argues that the Tax Court Judge erred in preferring the evidence of the
respondent’s expert Dr. Chambers insofar as it failed to address four
significant characteristics which were relevant in assessing the value of the
explicit guarantee. The characteristics were (i) the control or management
assumed by both GECUS and the respondent; (ii) the risk that the respondent
would default and the impact it would have on GECUS; (iii) the fact that GECUS
and the respondent had common sources of capital and customers; and (iv) GE’s
public position, its impeccable track record, and the stated importance of
maintaining its AAA rating. The Tax Court Judge accepted that these four
characteristics were significant in the identification of the correct transfer
price. However, by relying on Dr. Chambers’ analysis, the Tax Court Judge, in
effect, gave no consideration to those factors (Crown’s memorandum at paras. 53
 The Crown
further contends that the Tax Court Judge committed a legal error in failing to
conduct a “reasonableness” check. In so saying, the Crown recognizes that a
“reasonableness” check is not essential in every case. However, it argues that
the Tax Court Judge, having recognized the need to conduct such a check,
dismissed or ignored “all methods offered by the parties save for one which he
had already concluded was unreliable” (Crown’s memorandum at para. 55).
 Finally, the
Crown alleges that the Tax Court Judge committed another legal error by relying
on the business judgment of Mr. Werner in reaching his conclusion on the
pricing issue. In particular, the Tax Court Judge erred in relying on Mr. Werner’s
subjective evidence despite the fact that the arm’s length principle requires
that the evidence adduced be of an objective character. Moreover, the Crown
argues that the Tax Court Judge failed to recognize that what was in issue was Mr.
Werner’s decision to implement the explicit guarantee back in 1988 and to begin
charging for it in 1995.
Palpable and overriding
 The Crown
argues that the Tax Court Judge’s conclusion that the respondent’s credit
rating would not have been close to AAA without the explicit guarantee was
based on three erroneous findings of fact: the rejection of Mr. Emmer’s evidence as
well as that of two other experts produced by the Crown; the adoption of the evidence
of Dr. Chambers; and the finding that the respondent would be unable to obtain
back-up lines of credit in the absence of GECUS’ explicit guarantee (Crown’s
memorandum at paras. 66-88). In making these arguments, the Crown does not
dispute the Tax Court Judge’s prerogative to prefer the evidence of one witness
over the other. It submits that the Tax Court Judge’s reasons for preferring
the respondent’s evidence were “unreasonable, improper or not based on the
evidence” (Crown’s memorandum at para. 67).
Principles of natural
justice and procedural fairness
 The Crown’s
submissions on this issue are two-fold. First, it argues that during the
conduct of the trial, the Tax Court Judge’s “interventions … were of a nature
and extent that transgressed permissible interventions and destroyed the image
of judicial impartiality” and that, as a result, the trial “was procedurally
unfair, giving rise to a reasonable apprehension of bias” (Crown’s memorandum
at para. 112). Second, the Crown argues that the reasons for judgment are
inadequate as they “do not address outstanding evidentiary objections, rely on
cases not raised at the hearing, treat evidence inconsistently, ignore
significant evidence of many witnesses and fail to provide adequate analysis on
pivotal issues, preventing meaningful appellate review” (Crown’s memorandum at
 At the
hearing, the submission of the Crown became much more focussed. Relying on the
recent decision of this Court in Heron Bay Investments Ltd. v. Canada,
2010 FCA 203 [Heron Bay], which was released after the respective
memoranda were filed, the Crown took the position that the Tax Court Judge
committed the same breach of procedural fairness as that identified in that
case, i.e. he introduced his own theory of the case which became the linchpin
for his conclusion.
POSITION OF THE
 Responding to
this last allegation, the respondent took the position during the hearing that Heron Bay has no
application on the facts of this case. Dealing with the bias argument as originally
framed by the Crown in its memorandum, the respondent submits that it is at
best an attempt to nullify what turned out to be a bad result from the Crown’s
perspective. In this respect, the respondent points to the absolute failure on
the part of the Crown to raise any sort of objection over the course of the
 Turning to
the first alleged error of law, the respondent maintains that the Crown should
not be allowed to argue that the Tax Court Judge erred in taking into account
the impact of the removal of the guarantee since the valuation methodology that
it proposed required the Tax Court Judge to do exactly that (Respondent’s
memorandum at paras. 40 and 41).
 With respect
to the allegation that the Tax Court Judge failed to consider relevant economic
factors, the respondent points out that the factors in question are not
mandatory. As to the alleged misapplication of the business judgment rule, the
respondent contends that, contrary to the Crown’s assertion, the Tax Court
Judge did not rely on this rule in determining the arm’s length price (Respondent’s
memorandum at paras. 42 and 43-46 respectively).
 Finally, the
respondent takes the position that no palpable and overriding errors of fact
have been demonstrated. Specifically, there was a basis in the evidence for the
conclusion that its debt issuances would not have been rated close to AAA
without the guarantee, that the guarantee was therefore a necessary part of its
business plan and that no back-up lines of credit could have been obtained
without it (Respondent’s memorandum at paras. 47 and 48).
 In the event
that any of these alleged errors were committed, the respondent submits that
the appeal nevertheless cannot succeed. According to the respondent, the Tax
Court Judge committed two fundamental errors in his application of the arm’s
length standard which, when corrected, can only lead to the dismissal of the
 First, the
arm’s length standard required the Tax Court Judge to situate the parties to
the transaction (GECUS and the respondent) as persons unaffiliated with each
other. In this context, implicit support would not arise, because “the concept
of implicit support is rooted in the familial relationship between affiliated
companies” (Respondent’s memorandum at para. 55). The Tax Court Judge therefore
misapplied the transfer pricing law by “reducing the arm’s length price for the
guarantee on account of implicit support” (Respondent’s memorandum at para.
 Second, the
respondent argues that the Tax Court Judge erred in adopting the “yield
approach” or “benefit to the borrower” approach. If the Tax Court Judge had
correctly applied the arm’s length standard, he “would have focused on the
market price for the guarantee – the price that [the respondent] would have had
to pay to acquire a guarantee from the market – rather than measuring its
benefit to [the respondent]” (Respondent’s memorandum at para. 56). The
respondent contends that if the Tax Court Judge had applied the correct
standard, there is no doubt that it would have prevailed, since the evidence
was undisputed that an “unrelated bank or insurance company would have charged
[the respondent] up to 300 basis points to guarantee $7 billion of debt”
(Respondent’s memorandum at para. 56).
respondent urges the Court to address these issues whether or not it is
necessary to do so in order to dispose of the appeal. It submits that “it would
be unfortunate if appellate silence were [sic] construed by the Minister,
taxpayers or foreign tax administrations as implied endorsement of the trial
judge’s approach” (Respondent’s memorandum at para. 61).
ANALYSIS AND DECISION
Scope and application of
the relevant provisions
 There is a
fundamental dispute between the parties as to the scope and application of
subsection 69(2) and paragraphs 247(2)(a) and (c) of the Act on
the facts of this case. Counsel for the respondent argued before the Tax Court that
affiliation benefits enjoyed by the respondent as a result of its non arm’s
length relationship with GECUS cannot be considered for the purpose of
assessing the reasonable arm’s length price under these provisions. It follows
that the concept of “implicit support”, relied upon by the Crown for its
proposition that the explicit guarantee was of no value to the respondent,
cannot be considered as it is a by-product of the non arm’s length
 The Crown on
the other hand maintained, and the Tax Court Judge agreed, that the arm’s
length principle requires a comparison of the transaction at issue between
related parties and the same transaction between independent parties. Only a
single fact is changed, namely the transaction is assumed to occur between
arm’s length parties. As such, affiliation benefits – as the implicit guarantee
in this case – are relevant and must be considered in determining the arm’s
length price. The issue therefore is how much an arm’s length party, benefiting
from the implicit guarantee, would be willing to pay for the explicit
speaking, it is not necessary to address this issue because, for the reasons
which follow, the appeal cannot succeed even if the view adopted by the Tax
Court Judge was found to be incorrect. However the issue goes to the core of
the decision and should be addressed.
 The Tax Court
Judge identified the position of the parties as follows (Reasons at para. 187):
… Do all
of the economically relevant factors have to be considered in the determination
of an arm’s length price for the transaction in order to arrive at a meaningful
comparison, as suggested by the Crown? Does the scheme of paragraphs 247(2)(a)
and (c) suggest that all factors which are particular to the non arm’s
length relationship must be discarded, as suggested by counsel for the [respondent]?
 The issue so
framed gives rise to a pure question of statutory construction which must be
assessed on a standard of correctness.
 It is
important to note that the respondent does not contend that the method adopted
by the Tax Court Judge has the effect of re-casting the transaction in an
impermissible way. The method identifies the transaction as it took place
between the respondent and GECUS and seeks to ascertain the benefit to the
respondent by comparing, based on recognized rating criteria, the credit rating
associated with the implicit support with that associated with the explicit
support. The only question is whether implicit support is a factor that can be
considered when applying subsection 69(2) and paragraphs 247(2)(a) and (c),
given that it arises by reason of the non arm’s length relationship.
 The Tax Court
Judge answered this question in the affirmative. I can detect no error in this
 The concept
underlying subsection 69(2) and paragraphs 247(2)(a) and (c) is
simple. The task in any given case is to ascertain the price that would have been
paid in the same circumstances if the parties had been dealing at arm’s length.
This involves taking into account all the circumstances which bear on the price
whether they arise from the relationship or otherwise.
interpretation flows from the normal use of the words as well as the statutory
objective which is to prevent the avoidance of tax resulting from price
distortions which can arise in the context of non arm’s length relationships by
reason of the community of interest shared by related parties. The elimination
of these distortions by reference to objective benchmarks is all that is
required to achieve the statutory objective. Otherwise all the factors which an
arm’s length person in the same circumstances as the respondent would consider
relevant should be taken into account.
 In the
present case, it is common ground that in the context of the yield method, implicit
support is a factor which an arm’s length person would find relevant in pricing
the guarantee. It follows that it had to be considered. The suggestion that implicit
support should be ignored would require the Court to turn a blind eye on a
relevant fact and deprive the transfer pricing provisions of their intended
 Paragraph 1.6
of the Organization for Economic Co-operation and Development’s Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations supports
this view. It states that the concept of independent parties is used to adjust
profits “by reference to the conditions which would have been obtained between
independent enterprises in comparable transactions in comparable circumstances”
(Reasons at para. 204). The Tax Court Judge properly notes that the concept of
independent enterprises is similar to the arm’s length concept in that both
presuppose that neither party controls the other or is subject to common
 This view is
consistent with the recent decision of this Court in Glaxosmithkline Inc. v.
Canada, 2010 FCA 201 [Glaxo] (leave to appeal pending before the
Supreme Court). The assessments in that case were based on the assumption that
Glaxo (a Canadian resident corporation) had paid more than an arm’s length
price for bulk active ingredients purchased from its foreign non arm’s length
supplier. The Tax Court Judge held that the only transactions that were
relevant for purposes of subsection 69(2) were the bulk purchase transactions.
 On appeal
before this Court, Glaxo argued successfully that all relevant circumstances
were to be taken into account, including the existence of a parallel licensing
agreement between Glaxo and another entity within the Glaxo group. In the words
of Nadon J.A., the relevant circumstances are those which “an arm’s length
purchaser, standing in the shoes of [Glaxo], would consider relevant in
deciding whether it should pay the price paid by [Glaxo] for the [active
ingredient]” (my emphasis) (Glaxo at para. 73). Applying this test,
there is no doubt that the existence of the implicit guarantee is relevant to
the inquiry and must be considered in identifying the arm’s length price.
 There is
equally no merit to the respondent’s argument that the method used by the Tax
Court Judge is flawed because it identifies the benefit which the explicit
guarantee procured rather than the arm’s length price which the respondent
would have to pay for this guarantee. No doubt, the method seeks to identify
the benefit which the explicit guarantee provides. However, it necessarily
follows that if the explicit guarantee provides no benefit, an arm’s length
person, standing in the shoes of the respondent, would not have paid anything
towards it. The assessment of the benefit is but a means to ascertain whether a
guarantee fee would have been paid by an arm’s length party.
respondent made the further argument that, with respect to the 1998 and
subsequent taxation years, only the invocation of paragraphs 247(2)(b)
and (d) would have allowed the Minister to disallow the full amount of
the claimed deduction. According to the respondent, disallowing the claimed
amount in full is akin to saying that the transaction would not have been
entered into between persons dealing at arm’s length. The respondent submits
that only paragraphs 247(2)(b) and (d) can be used in these
circumstances (Respondent’s memorandum at paras. 57-60).
 It is not
necessary to address this issue. Nowhere in his reasons does the Tax Court
Judge discuss or allude to paragraphs 247(2)(b) and (d). There is
therefore no basis for the respondent’s concern that appellate silence could be
viewed as sanctioning either one of the positions which it now says are in
issue (Respondent’s memorandum at para. 61).
The Crown’s appeal
 I now turn to
the arguments raised by the Crown in support of the appeal in the order in
which they were raised. The Crown alleges the commission of four errors of law.
The first is that the Tax Court Judge erred by removing the explicit guarantee
for purposes of identifying the relevant transaction. The submission is that he
could only do so in conducting the valuation exercise.
 As noted earlier,
the yield method was based on a comparison between the credit rating which an
arm’s length party, in the same circumstances as the respondent, would have
obtained and the credit rating which would have been obtained without the
explicit guarantee (Reasons at para. 259). No one takes issue with the fact
that the explicit guarantee had to be notionally removed in order to conduct
this exercise. This is what the Tax Court Judge did.
 However, the
Tax Court Judge went on to consider the impact which the removal of the
guarantee would have had if it had been removed (Reasons at para. 247):
note that due consideration must be given as well to the fact that the
[respondent]’s debt had been guaranteed by GECUS since 1998. The [respondent]’s
investors had grown accustomed to the fact that its debt had been guaranteed by
its much larger U.S. parent long before GECUS decided to charge the
[respondent] a fee for the guarantee arrangement. In arm’s length
negotiations, this fact would not go unnoticed. A prospective guarantor,
when approaching negotiations, would anticipate that it would be difficult for
the debtor to convince its investors to accept unguaranteed debt on the same
terms and conditions as debt guaranteed by its parent. Investors would
attribute less value to the parent’s implicit support in this scenario; most
likely, they would wonder why unguaranteed debt was now being issued. The cost
of borrowing money would likely be higher than it would be if the
[respondent]’s debt had never been guaranteed by GECUS. The arm’s length
guarantor could use this knowledge as leverage in negotiating with the
debtor. GECUS and the [respondent] are supposed to bargain as arm’s length
parties. This history of the guarantee places the [respondent] in a more
vulnerable position, as is shown by the evidence considered later on in these
He later criticizes Mr. Emmer for having
failed to consider the impact which a decision to drop the guarantee would have
had on the respondent’s credit rating (Reasons at paras. 282 and 283).
 In so saying,
the Tax Court Judge lost sight of the fact that the purpose of the yield
approach which he adopted was to measure the benefit which the explicit
guarantee brought to the respondent in comparison with implicit support. He
could not re-cast the transaction on the basis that the explicit guarantee had,
in fact, been removed and assess the impact of the removal.
 That being said,
I do not believe that this error would have altered the conclusion which the
Tax Court Judge reached. This conclusion essentially rests on the adoption of
the report of Dr. Chambers. As counsel for the Crown submitted herself during
the hearing – with an obvious eye towards her bias argument – the impact of the
removal of the guarantee was not an important factor in the reasoning adopted
by Dr. Chambers. He referred to it as one of twelve considerations that were
relevant according to the S&P credit rating criteria and it played a minor
role in the conclusion that he reached (Appeal Book, Vol. 13, pp 3725 and 3727
respectively). Significantly, Dr. Chambers’ rebuttal report does not criticize Mr.
Emmer for his failure to mention this factor (Rebuttal Report, Appeal Book, Vol.
13, pp. 3740-3772), and none of the other six experts who testified on behalf
of the respondent relied on this factor.
 This is not a
close case where a single factor can be said to tilt the balance. The report
produced by Dr. Chambers starts from the premise that, with an explicit
guarantee in place, the respondent would have benefited from a AAA credit
rating. He explains that an explicit guarantee provides for unconditional and
legally enforceable support limited only by the guarantor’s capacity to pay.
This is why such a guarantee will usually result in the subsidiary’s credit
rating being equalized with that of the parent (Appeal Book, Vol. 13, p. 3718).
In contrast, implicit support is based on an expectation of behaviour that is
dependent on future economic circumstances, a distinction which the Tax Court
Judge found significant after emphasizing the difficulty in predicting economic
trends (Reasons at para. 281).
 Dr. Chambers
explained in his report that it is conceivable that a subsidiary could attract
the same credit rating as its parent without an explicit guarantee, but this
would require particular circumstances – in essence where the relative economic
importance of the subsidiary or its role within the group make abandonment by
the parent virtually impossible – which are simply not present in this case
(Appeal Book, Vol. 13, p. 3721 and 3722). The Tax Court Judge accepted this
view. He found, after confronting the salient aspects of Mr. Emmer’s opinion
(Reasons at paras. 263-283), that “… it would be an unwarranted leap of faith
to conclude that the [respondent]’s credit rating would be equalized with that
of its parent if there were no guarantee in place. …” (Reasons at para. 290).
 The opinion
of Dr. Chambers both as to the existence and extent of a gap is corroborated by
independent evidence in the form of two quotes obtained by the respondent from
the Royal Bank of Canada (the Royal Bank) and the Bank of Nova Scotia.
The quotes were given in response to a strategic query made by the respondent and
GECUS in order to test the reasonableness of the proposed fee back in 1995. The
query sought to identify the credit rating which these banks would attribute to
the respondent on a “stand alone basis”, i.e. without the explicit
guarantee, in pricing the supply of comparable credit ($2 billion or more) over
an ongoing period of time (2, 3, 5 or more years). Both quotes confirm that
implicit support would attract a lower credit rating level (Reasons at para.
88-99) and the Royal Bank goes so far as to suggest a B rating with a fully
drawn cost of borrowing of 250 basis point (Reasons at para. 92).
 While these
quotes were exploratory in nature and not binding in any way, they nevertheless
evidence a spontaneous assessment of the credit risk which professional lenders
would have been willing to ascribe to the respondent on a stand alone basis
back in 1995.
 The Crown
insisted on the fact that the Tax Court Judge rejected two of its experts because
they had failed to consider the impact of the removal of the guarantee. That is
so. The Tax Court Judge referred to this on a number of occasions in discussing
the testimony of Mr. Emmer (Reasons at paras. 139 and 279). He even went so far
as to observe in a strange twist that Mr. Emmer was uncomfortable in answering
questions on this point (Reasons at para. 283). He also mentioned this in
rejecting the evidence of Dr. Saunders, another expert called by the Crown
(Reasons at para. 298).
 However, it
remains that this is but one factor amongst others referred to by the Tax Court
Judge in rejecting the testimony of Mr. Emmer and Dr. Saunders (as to Mr.
Emmer, see Reasons at paras. 265-268 and 274-278; and as to Dr. Saunders, see Reasons
at paras. 298-300). When regard is had to these other factors, it is clear that
their testimony would have suffered the same fate whether the Tax Court Judge
had placed reliance on the impact of the withdrawal of the guarantee or not.
 I therefore
conclude that the error committed by the Tax Court Judge had no impact on his finding
that a gap existed between the credit rating which the respondent would have
obtained with and without the explicit guarantee, and that the 1% guarantee fee
was within this gap.
 Turning to
the other alleged legal errors, the Crown argues that the Tax Court Judge erred
in law in failing to consider four relevant characteristics in assessing the
value of the explicit guarantee. A similar error is said to arise from his
failure to conduct a “reasonableness” check.
 As to the
former, the sole contention is that the Tax Court Judge preferred the evidence
of the respondent’s expert (Dr. Chambers) who did not rely on these four
characteristics (Crown’s memorandum at paras. 46-54). With respect, this does
not establish that the Tax Court Judge did not have these four characteristics
in mind. This is particularly so when regard is had to the fact that the Tax
Court Judge highlighted the importance of at least three of these four factors in
the course of his reasons (Reasons at paras. 231-305). The Crown’s real
complaint appears to be that the Tax Court Judge should have preferred the
evidence of Mr. Emmer over that of Dr. Chamber’s because his report did not
reflect these characteristics. This goes to the weighing of the evidence, and
as demonstrated earlier, the evidence amply justifies the decision of the Tax
Court Judge to prefer the evidence of Dr. Chambers.
 As to the
“reasonableness” check, the Crown itself recognizes that there is no legal
principle that requires such a check to be conducted in every case. The Crown
nevertheless maintains that the Tax Court Judge, having found that such a check
was required in this case, erred in conducting this check on the basis of a
method which he had rejected, i.e. the insurance-based method.
 With respect,
the Tax Court Judge did not hold that a reasonableness test was necessary in
this case and he did not purport to conduct such a check. He simply said, in
rejecting the insurance-based method, that it was unreliable for the reasons
that he identified “… save perhaps … as one method among others to be
considered at the stage of the ‘sanity check …’” (Reason at para. 257).
 In any event,
the reasonableness test proposed by the Crown seeks to demonstrate that a 2%
guarantee fee would be unreasonable because it represents an excessive portion
(i.e. 60%) of the respondent’s profits when computed without taking into
account the cost of the guarantee (Crown’s memorandum at paras. 57-59). With
respect, I do not see how this can assist the Crown given that the fee actually
charged and claimed as a deduction was 1%.
 Lastly, the Crown argues
that the Tax Court Judge improperly relied on the business judgment of Mr.
Werner in order to hold that the explicit guarantee was necessary (Reasons at
paras. 290-294). The Crown emphasizes that the transfer pricing adjustment is
based on the assumption that the explicit guarantee was superfluous from the
perspective of the respondent because it added nothing to what it already had.
As such, the question whether the explicit guarantee was necessary is at the
core of the transfer price adjustment, and had to be assessed by reference to objective
rather than subjective evidence.
 However, the reasons
show that the Tax Court Judge was mindful of this distinction. At the beginning
of the discussion regarding the necessity of the guarantee, he pointed out that
there was no need to address this issue because he had already held– after
applying the method proposed by the Crown – that the respondent’s unguaranteed
debt would not be rated close to AAA (Reasons at para. 284). It followed from
this that the guarantee was necessary. He nevertheless chose to address it
because of the novelty of the issue and the amounts at stake (ibidem).
 It can therefore be seen
that the Tax Court Judge considered Mr. Werner’s business judgment only after
having found, based on objective evidence, that the explicit guarantee was
necessary. I can see no error in this regard.
Palpable and overriding errors
 I have already expressed
the view that the evidence allowed for the conclusion that Dr. Chambers’
evidence was to be preferred over that of Mr. Emmer’s and the other experts
produced by the Crown who supported a similar view.
 The remaining allegation
is that the Tax Court Judge committed a palpable and overriding error in
finding that the respondent would be unable to obtain back-up lines of credit in
the absence of an explicit guarantee (Crown’s memorandum at paras. 85-88).
 Two experts provided
evidence on this issue, Mr. Coombs for the respondent and Mr. Meyerman for the
Crown. In the end, the Tax Court Judge accepted the opinion expressed by Mr. Coombs
(Reasons at paras. 39 and 40). The Tax Court Judge also explained why GECUS’
stand-by facilities could not support back-up lines of credit without GECUS’
explicit support (Reasons at para. 297). The conclusion reached by the Tax
Court Judge was open to him on the evidence.
 At the hearing, counsel
for the Crown placed great emphasis on the two quotes obtained from the Royal
Bank and the Bank of Nova Scotia (see para. 70 above). According to counsel,
the Tax Court Judge could not reach the conclusion that he did when regard is
had to this evidence.
 With respect, the quotes
in question were exploratory in nature. They fall substantially short of
establishing that the respondent had available to it the back-up facilities necessary
for an unguaranteed debt issue for the required amounts in its sole name
without explicit parental support. In any event, even if these quotes did
establish a capacity to obtain the required credit facilities, the quoted rates
were clearly beyond 1% with the result that any error on the part of the Tax
Court Judge on this point would not have affected the outcome.
 At the hearing of the
appeal, the Crown reconfigured its bias argument by reference to the recent
decision of this Court in Heron Bay, which involved the same judge. In that case,
this Court found that the judge had introduced his own theory of the case,
elicited the relevant evidence on this point from his own questioning of the witnesses
and relied on this evidence for a conclusion that was critical to his decision,
which in that case favoured the Crown.
 Similarly, the Crown
alleges that the Tax Court Judge in this case developed his own theory of the
case, i.e. that the removal of the guarantee was relevant and had negative
impact on the respondent’s credit rating, that he elicited the relevant
evidence on this point from the witnesses, and that he relied on this evidence
for a critical conclusion in favour of the respondent.
 With respect, two of
these three factors are plainly missing in this case. First, the Tax Court
Judge did not introduce the notion that the impact of the withdrawal of the
guarantee was a relevant consideration for the assessment of the respondent’s
credit rating. It was introduced by Dr. Chambers in his report. Second, for the
reasons already expressed, the Tax Court Judge’s finding that the withdrawal of
the guarantee was relevant did not play a critical role in the outcome.
 The record does show
that the Tax Court Judge, by his questions, engaged in an excessive pursuit of this
issue which made counsel from both sides at times uncomfortable (see for
instance, Appeal Book, Vol. 23, pp. 6408, 6409, 6454 and 6455; Vol. 32, pp.
8333, 8334, 8388 and 8389; Vol. 33, p. 8409; Vol. 34, pp. 8644-8651; Vol. 36,
pp. 9022-9031 and 9064-9070; Vol. 37, pp. 9240-9242). However, this line of questioning
does not establish that bias could reasonably be apprehended against the Crown.
What it shows is that the Tax Court Judge became overly concerned about an
issue that had no substantial connection with the outcome.
 As to the alleged
insufficiency of the reasons, it has not been shown that the elaborate reasons
given by the Tax Court Judge in this case do not allow for the conduct a
meaningful review (R. v. Sheppard, 2002 SCC 26,  1 S.C.R. 869 at
 I would dismiss the
appeal with costs.
J.D. Denis Pelletier J.A.”