2012 TCC 408
Court File Nos. 2010‑3936(IT)G
2011-463(IT)G
TAX COURT OF CANADA
BETWEEN:
TERASEN INTERNATIONAL
INC.
Appellant
-
and -
HER MAJESTY THE QUEEN
Respondent
* * * * *
TELECONFERENCE
PROCEEDINGS AT MOTION BEFORE
THE
HONOURABLE MR. JUSTICE GASTON JORRÉ
held in the Courts
Administration Service, Room 6048,
Federal Judicial
Centre, 180 Queen Street West, Toronto, Ontario,
on Monday,
October 1, 2012 at 1:10 p.m.
AMENDED REASONS FOR
ORDER
1.
THE
REGISTRAR: The teleconference is now open. . . .
2.
The
Court calls File No. 2010‑3936(IT)G and 2011‑463(IT)G between
Terasen International Inc. and Her Majesty the Queen. Court is now resumed.
3.
JUSTICE
JORRÉ: Thank you. I will now give my reasons for order in respect of the
Respondent's motions to amend its replies to notice of appeal in these two
matters.
4.
I
first wish to thank counsel for their very thorough examination of the issues
in argument at the hearing a week ago.
5.
At
the end of the hearing, I forgot to thank the Registrar for making himself available
so he could sit until ten minutes before 7:00 and complete the hearing. Indeed
because of certain things he has to do after the end of a hearing, he was there
for some time after. Consequently, for the record, I wish to thank our
Registrar last Monday.
6.
As
I indicated to you at the end of the last hearing, because the matter is
already set for hearing on November 19 and is estimated to last for five
days, I recognize the need for a rapid decision, and I indicated the only way I
could do that was by doing so verbally.
7.
Finally,
I would note the following: One of the appeals deals with Part 1 assessments
whereas the other deals with Part 13 assessments. The underlying facts appear
in large measure to be the same. Both parties were agreed that for the purposes
of the motion, nothing turns on the differences between the two appeals.
Accordingly, I have focused on one of the appeals, the appeal in relation to
the Part 1 assessments.
8.
It
is useful to begin by examining the nature of the cases revealed by the Notice
of Appeal and the Reply to Notice of Appeal. The Appellant is part of the
Terasen group of companies, formerly BC Gas. The main business of the group is
the distribution of natural gas. It has a number of other businesses.
9.
Over
time, the group has developed significant expertise in natural gas transmission
and distribution and decided that it should sell on the world market its
expertise in the form of consulting services. In the late 1990s, the group
decided to extend its international business by also entering into engineering
procurement and construction contracts.
10.
Eventually
the Appellant became interested in an engineering procurement and construction
contract for a gas distribution project in the Emirate of Sharjah in the United Arab Emirates. It submitted a joint bid with a local company in the Emirate, S.S.
Lootah, to the Sharjah Electricity and Water Authority. Without entering into
the precise timing or sequence of events set out in the pleading, one can say
that subsequently the Sharjah Electricity and Water Authority signed a
nonbinding letter of intent saying that it intended to accept the tender.
11.
A
company, BVICo, was incorporated in the British Virgin Islands. A Canadian
trust was established with the Appellant as the sole beneficiary of that trust,
and all the shares of BVICo were held by the trust.
12.
In
addition, BVICo entered into a joint venture agreement with S.S. Lootah.
The two joint venture partners agreed that the profits were to be split
evenly between them. The joint venture eventually entered into a binding
contract with the Sharjah Electricity and Water Authority.
13.
Prior
to the date on which the joint venture entered into the binding contract with
the Sharjah Electricity and Water Authority, BVICo entered into a subcontract,
the inter‑entity services agreement, with the Appellant. Under the
subcontract, the Appellant billed BVICo for the services it provided it, at
cost plus a percentage markup.
14.
Later,
the joint venture was also successful in being awarded contracts for subsequent
phases in the Sharjah Gas Project.
15.
I
would also note that the Appellant entered into a parent company guarantee in
favour of the Sharjah Electricity and Water Authority, under which it would
indemnify the Authority for any default that BVICo under the contract between
the joint venture and the Sharjah Electricity and Water Authority.
16.
It
is not disputed that BVICo and the Appellant did not deal with each other at
arm's length. The description I have given above is based on what is not
contested in the Notice of Appeal and Reply to Notice of Appeal.
17.
The
Reply to Notice of Appeal in paragraphs 25(a) to (ggg) set out numerous facts
assumed by the Minister in reassessing. I do not propose to read them all
given the time that it would take, although all of these assumptions in their
totality are important in respect of this motion.
18.
It
is worth noting, however, that among these assumed facts, there are: dealings
between the Appellant and S.S. Lootah in the initial stages of providing a
tender to the Sharjah Electricity and Water Authority prior to the existence of
BVICo; the negotiation between the Appellant and Lootah of the terms of the
joint venture entered into between Lootah and BVICo; the Appellant's
expenditure of tender development costs for which it was not reimbursed and
certain other staff costs of the Appellant in relation to the Sharjah project
for which it was never reimbursed.
19.
Continuing
with some of the assumed facts: that BVICo was only a flow‑through entity
with only one employee, a controller; BVI merely converted the Appellant's
invoices from Canadian dollars to U.S. dollars before issuing the invoice on
its own letterhead; that all the substantial risks were borne by the Appellant
in its parent corporation; that certain losses were indeed incurred and
absorbed by the Appellant.
20.
Based
on the Reply, it appears that what the reassessment did was to increase the
Appellant's income in the years in question by an amount that resulted in the
Appellant including in its income BVICo's entire 50 per cent share of the joint
venture profits from the Sharjah project. See subparagraph 25(ggg) of the
Reply.
21.
In
the Reply, the Minister has pleaded that it was justified in including the
added amounts in the Appellant's income on the basis of a transfer pricing
adjustment made pursuant to paragraphs (2)(a) and (c) of section 247.
22.
The
proposed amendments add in certain allegations of further facts as well as
references to additional provisions of the Income Tax Act, and
additional grounds relied on.
23.
In
essence, there are two aspects to the changes: First, the Minister would
invoke paragraphs (b) and (d) of subsection (2) of section 247 in addition to
paragraphs (a) and (c). Secondly, the Minister seeks to invoke the doctrine of
sham with respect to BVICo.
24.
The
Minister has of course the onus to prove any further facts alleged that were
not assumed.
25.
I
note, however, that in some measure, some of these further facts alleged appear
to be, in effect, in the nature of inferences of fact that might arise at the
end of the trial if the Court finds that the facts are indeed those as set out
in the assumed facts of the Minister.
26.
The
Appellant opposes the proposed amendments.
27.
Based
on the affidavit of Mr. Gagnon, the Appellant says that the process has
been a very long one; that the years in question are the 1999, 2001, and 2002
taxation years, which were assessed in 2007 and 2008 as a result of an audit
that began in 2002; that the Appellant objected in October 2007 and
March 2008; that as of December 23, 2010, when the Part 1 appeal was
filed, the Minister has made no decision in respect of the notices of
objection; that the Appellant is keen to get the matter resolved rapidly; that
the Appellant is of the view that they would require discovery on the newly-raised
issues and would need an adjournment if the amendments are allowed; further,
that the additional issues would make it necessary for the Appellant to obtain
and present additional evidence in the form of documents and witnesses, some of
which are in the United Arab Emirates and which may or may not be available and
that Mr. Guy Gagnon estimates that it would take six to nine months
to obtain and review the necessary documentation.
28.
In
cross‑examination, it was established that Mr. Gagnon had not yet
made any inquiries about this additional evidence but that his testimony was
based on his experience and judgment including his experience of the time it
would likely take in dealing with entities in the UAE.
29.
I
also note, and there is no dispute about this between the parties, that in
order to get a faster hearing date, even though the parties were initially
going to have the matter heard in Montreal, the parties agreed to ask for a
hearing in Toronto; that the joint application was made before the completion
of the discovery process; that the discovery process was completed on
July 6, 2012 with the Appellant providing its last undertakings; and that
on July 31, 2012, the Respondent sought the Appellant's consent to the
proposed amendments, which consent was refused.
30.
I
should note that neither party felt that there was a distinction to be made for
the purposes of this motion between the proposed amendments relating to
paragraphs (b) and (d) of subsection (2) of section 247 of the Income Tax
Act and the proposed amendments raising the doctrine of sham.
31.
I
am satisfied on the basis of what is before me that if the motion is granted,
then the Appellant may well seek to adduce additional evidence that it might
not otherwise adduce. I am also satisfied that the Appellant would need an
adjournment to seek and examine such evidence.
32.
While
I am satisfied that paragraph (b) of subsection 247(2) does raise somewhat
different issues from paragraph (a) of the same subsection, and in some senses
they are quite different, it is also true that to some extent it is a question
of coming at the same matter from a different perspective.
33.
It
would appear that under either approach, the majority, indeed perhaps the vast
majority of the relevant facts, are the same facts. Under either approach, the
Minister's argument is that the profits of BVICo should be taxed in the hands
of the Appellant.
34.
While
the tax years in issue date back some time, the earliest being the 1999 year
assessed in August 2007, and I note 2001 and 2002 were assessed in 2008,
it is worth remembering that Parliament specifically legislated an extended six‑year
period for reassessments in respect to transactions between taxpayers and
non-resident persons with whom they do not deal at arm's length.
35.
The
appeals of themselves before this Court had been moving at a reasonable pace
considering the nature of the issues. The Part 1 Notice of Appeal was filed at
the end of December 2010, and the Part 13 Notice of Appeal was filed in
mid‑February 2011.
36.
With
respect to Rule 54 of the General Procedure Rules, the parties cite a number of
cases. The General Rule is well set out in this passage from paragraph 10 of
the decision of the Federal Court of Appeal in Canderel Limited v. The Queen,
[1994] 1 F.C. 3:
The general rule is that an
amendment should be allowed at any stage of an action for the purpose of
determining the real questions in controversy between the parties, provided,
notably, that the allowance would not result in an injustice to the other party
not capable of being compensated by an award of costs and that it would serve
the interests of justice.
37.
In
Canderel, the amendment was sought on the fifth or sixth day of trial;
it was refused. The Appellant says, simply put, that this would be
fundamentally unfair because after all this time, it would have to defend
against radical new allegations requiring additional evidence and further
delay.
38.
I
do not agree. While there would be delay and indeed additional costs, those
costs could be compensated for. I do not see the delay in this case as causing
the kind of injustice that would prevent an amendment. I agree that the right
to amend is not open‑ended. There is a balance to be maintained, and
there are limits to the right to amend. Neither the time this matter has taken
so far in court nor a delay of possibly six to nine months if an adjournment is
granted nor the nature of the amendments are such as to take this matter beyond
those limits. However, here in terms of Rule 54, I think the appropriate
approach is that adopted by Mr. Justice Bowie in Loewen v. The Queen,
2007 TCC 703. See in particular paragraphs 25 and 26.
39.
I
would briefly point out that the situation here is different from that in a
number of cases cited by the Appellant.
40.
In
Mr. Justice Campbell Miller's decision in Walsh v. The Queen, I
would note that no amendment was sought. Walsh is reported at
2008 TCC 282.
41.
As
I understand it, by the opening of the trial, the Minister had abandoned
entirely the basis of the assessment and took the position that the Appellant
had to prove the fair market value that it used even though the Minister made
no assumption with respect to fair market value and it had simply pleaded that
it had no knowledge of the Appellant's assertions in its pleading of fair
market value of the shares. Justice Miller agreed with the Appellant that the
fair market value of the shares was simply not put in issue by the pleadings.
42.
The
Appellant also relied on the Federal Court decision of Apotex Inc. v. Shire
Canada Inc., 2011 FC 1159, affirming the decision of the Prothonotary in
2011 FC 436. Apotex in turn relied on the Federal Court decision of Montana
Band v. Canada, 2002 FCT 583, which was affirmed by the Federal Court of
Appeal at 2002 FCA 331.
43.
I
would first note that the decision in Montana Band, where leave was
denied in May 2002 in a matter where the trial was scheduled to begin in
September, involves circumstances simply not comparable to the circumstances
here. When one examines the May 22, 2002 decision of Mr. Justice
Hugessen, one discovers that the trial was expected to last for six months,
that the matter involved nine lawsuits and three actions, and based on the
Federal Court docket numbers, it would appear that they were filed in 1985,
1997, and 1997 respectively.
44.
Indeed,
it was an extremely long trial. When one looks at the final trial decision of
Madam Justice Hansen, one discovers on the page that is found immediately after
the end of the judgment that the actual trial lasted nine to ten months.
45.
In
Apotex, while the situation is quite different from Montana, we
find that the Applicant, Shire, had brought previous motions to amend
its pleadings, that it would radically change the nature of the pleadings by,
as I understand it, bringing a counterclaim. See paragraphs 18 to 21 of the
decision of Mr. Justice Near. Justice Near also stated at paragraph 22:
In addition, it is evident
that the proposed amendments will cause significant delays in the expeditious
trial of the matter, an objective pursued by Apotex since the commencement of
proceedings. As Apotex asserts, it will cast the matter back to the pleadings
phase. Apotex has also provided persuasive evidence of delays measured in years
currently plaguing section 8 proceedings when an infringement allegation is
included.
46.
Again,
that is not the situation here.
47.
Turning
now to subsection (9) of section 152 of the Income Tax Act, what is the
impact of that provision? Both parties have invoked it in their favour. The
provision reads:
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.
48.
This
was enacted in response to the decision of the Supreme Court of Canada in Continental
Bank, [1998] 4 C.T.C. 77, which held that the Minister was restricted in
his argument to the basis of the assessment relied on within the limitation
period for reassessing. See the decision of Justice Bastarache at paragraphs 8
to 14.
49.
Subsection
9 is permissive and not restrictive. On its face, it shows a clear intention to
expand the arguments that may be made by the Minister in support of an
assessment in comparison with what the Supreme Court held in Continental
Bank.
50.
The
Appellant cites the Department of Finance technical notes to the effect that
the new argument cannot be advanced to the prejudice of the right of the
taxpayer to introduce relevant evidence; I agree. Here, such prejudice can be
removed by an adjournment giving the Appellant time to bring such evidence.
51.
The
Appellant also cited paragraph 18 of the decision of the Federal Court of
Appeal in the case of the Estate of Walsh v. The Queen, 2007 FCA 222.
Paragraph 18 reads:
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.
52.
The
Appellant says that the amendments introduced new transactions contrary to the
first restriction set out in Walsh. The Appellant says that the
assessment made under paragraph (a) of subsection (2) of 247 of the Income
Tax Act includes one single transaction between the Appellant in BVI,
whereas paragraph (b) in sham bring in a series of transactions involving not
only the Appellant and BVI but others as well.
53.
Even
if the first restriction in Walsh is to be understood this way, a point
to which I shall come back, I have difficulty with this approach.
54.
The
assessment pursuant to paragraph (a) relates to the allocation of income
between the Appellant and BVI. In reaching the determination, the basis of the
Minister's assessment apply in paragraph (a) took into account a number of
transactions involving the Appellant, BVI, S.S. Lootah, and the Sharjah
Electricity and Water Authority. All of those transactions, set out at length
in the assumptions, form part of the facts assumed in the assessment.
55.
Now
with respect to the proposed amendment, the Minister wishes to rely on
paragraph (b), again in relation to the allocation of income between the
Appellant and BVICo, and again the Minister will be relying on those same
various transactions that I just alluded to in relation to (a). I do not see
how this is contrary to the first rule in Walsh.
56.
In
addition, I am not convinced that the word "transaction" as it is
used in that rule is meant to be understood in such a technical sense. Four
paragraphs prior to paragraph 18, in paragraph 14, the Court of Appeal
says:
As phrased by
Justice Rothstein in Anchor Pointe Energy Ltd. v. The Queen, . . .
2003 FCA 294, at paragraph 40, the Minister is not introducing a new
transaction.
57.
If
one turns to Justice Rothstein's decision in Anchor Pointe at
paragraph 39, one sees that he says that the case is unlike Pedwell
where the Minister sought to take into account different transactions.
58.
When
one goes to the Pedwell case, one sees that the different transactions
were in relation to three different lots. The taxpayer was assessed in respect
to the first lot but not the second and the third. At the trial, the assessment
was upheld in part on the basis that the taxpayer should be taxed in relation
to the second and the third lots but not the first.
59.
It
seems to me that this is rather different from the situation here where we are
talking about the same profits of BVICo and whether and to what extent they
should be taxed in the hands of the Appellant.
60.
With
respect to the second condition in Walsh, prejudice, I think I have
already dealt with that.
61.
The
third rule is that section 152(9) cannot be used to reopen statute‑barred
years. The Appellant argues that, in effect, this is what the proposed
amendments would do because the transactions in question would include
transactions in 1998, which is not under appeal and which became statute‑barred
long ago.
62.
I
have difficulty with this submission for the simple reason that there is no
question of 1998 being reopened. The proposed amendments to replies are simply
in relation to the assessments before the Court. There is no question of
increasing the amount of tax assessed in 1998.
63.
Accordingly,
for these reasons the Respondent will be allowed to amend its replies in
both actions on terms. The terms are, first, that the existing hearing date
shall be adjourned in order to give the Appellant sufficient time to seek out
any additional evidence that it needs; secondly, a case management judge will
be appointed to deal, inter alia, with making such orders as are
appropriate with respect to amending lists of documents and further discovery.
64.
With
respect to costs, the appropriate principle is that the Appellant should have
its incremental costs that are reasonably resulting from the amendments. Put
another way, it should have its costs which would not otherwise have been
incurred in the absence of the amendments.
65.
At
this point, it does not appear that we are yet in a situation where there are
lost costs, or lost costs of any significance.
66.
It
is clear that those costs include the costs of this motion.
67.
However,
what are the incremental costs caused by the amendment apart from this motion
is something that will be much easier to determine with hindsight by the trial
judge at the end of the matter than to determine in advance. For example, it is
impossible to know in advance whether the trial would be longer than it would
otherwise be because of these amendments. That of course should be more readily
determinable once the trial is over.
68.
Accordingly,
with the exception of costs on this motion, I will leave costs to the trial
judge. As far as this motion is concerned, the Appellant shall have its costs
on a solicitor‑client scale.
69.
Finally,
one minor matter, I noted that the Respondent indicated, and I am satisfied,
that there was a typo in the draft replies and that the reference to the date
of December 7, 1998 should in fact read, "December 7, 1997".
70.
I
will be signing the order this afternoon sometime. Thank you.
71.
THE
REGISTRAR: Thank you, parties. The telephone conference has now concluded.
This amended
edited transcript of reasons for order is issued in substitution for the edited
transcript of reasons for order issued on December 14, 2012.
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