Citation: 2011 TCC 37
Date: 20110121
Docket: 2006-3579(IT)G
BETWEEN:
HSBC BANK CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
C. Miller J.
[1]
The Appellant, HSBC
Bank Canada, brings a motion pursuant to Rule 58(1)(a) of the Tax
Court of Canada Rules (General Procedure) (the "Rules")
for a Determination of questions before hearing and, pursuant to Rule
58(2)(a) for leave of the Court to consider certain evidence in support
of the first motion. This is a two-step process. This application is the first
step, in which, as Motion’s Judge, I decide whether the questions are
appropriate to be heard in a Determination hearing. If I decide they are, the
parties must file factums in accordance with Rule 62.
[2]
Since 2004, Rule
58 provides for a determination of questions of law, fact or mixed fact and
law. The questions put by the Appellant have been framed as questions of law
and are as follows:
1. Did section 21 of
the Canada Deposit Insurance Act require the Canada Deposit Insurance
Corporation ("CDIC") to assess and collect, from the Appellant, a
premium in respect of deposits insured by CDIC for each of the taxation years
at issue in this Appeal?
2. Was the Hongkong
and Shanghai Banking Corporation legally obligated to guarantee all of the
deposit liabilities of the Appellant’s depositors including those deposit
liabilities assumed by the Appellant from the Bank of British Columbia, during
the taxation year ended August 31, 1996 and the month of September 1996?
3. Was the deed of
guarantee, dated January 15, 1987 and issued by The Hongkong and Shanghai
Banking Corporation, an unconditional, continuing and unlimited guarantee
covering all of the deposit liabilities of the Appellant as those deposit
liabilities are defined in the deed of guarantee?
4. Was HSBC Holdings
plc or HSBC Holdings BV legally obligated to provide, to the depositors of the
Appellant or to CDIC, an unconditional, continuing and unlimited guarantee
covering all of the deposit liabilities of the Appellant and its subsidiaries
during the period of October 1, 1996 through December 31, 2000?
5. Was the deed of
guarantee dated October 1, 1996 and issued by HSBC Holding plc, an
unconditional, continuing and unlimited guarantee covering all of the deposit
liabilities of the Appellant and its subsidiaries, as those deposit liabilities
are defined in the deed of guarantee?
6. Was the deed of
guarantee (the "HHBV Guarantee"), dated October 1, 1996 and issued by
HSBC Holdings BV to CDIC, an unconditional continuing and unlimited guarantee
covering all of the deposit liabilities of the Appellant and its subsidiaries,
as those deposit liabilities are defined in the deed of guarantee?
7. Was the HHBV Guarantee
enforceable by CDIC directly and/or by CDIC as the subrogee to or assignee of
the rights and interest of any or all of the depositors of the Appellant and
the Appellant’s subsidiaries?
8. Effective October
1, 1996, was HSBC Holdings BV legally obligated to pay, to CDIC directly or as
subrogee to or assignee of all of the depositors of the Appellant, any and all
amounts which CDIC paid depositors of the Appellant in respect of the
Appellant’s failure to pay all principal and interest due in respect of the
deposit liabilities of the Appellant when such principal and interest was due?
9. Effective October
1, 1996, was HSBC Holdings BV legally obligated to pay, to CDIC directly or as
subrogee to or assignee of all of the depositors of the Appellant’s
subsidiaries, any and all amounts which CDIC paid depositors of the Appellant’s
subsidiaries in respect of the Appellant’s subsidiaries failure to pay all
principal and interest due in respect of the deposit liabilities of the
Appellant’s subsidiaries when such principal and interest was due?
10. Effective October 1,
1996, was HSBC Holdings BV legally obligated to indemnify HSBC Holdings plc,
against all actions, claims, demands, liabilities, losses, damages, costs,
charges and expenses of whatever nature which HSBC Holdings plc might sustain,
suffer or incur in connection with HSBC Holdings plc’s guarantee of the deposit
liabilities of the Appellant and the Appellant’s subsidiaries?
11. Was the Appellant
legally obligated pursuant to an agreement between the Appellant and HSBC
Holdings BV, dated October 1, 1996, to pay a fee (the "Guarantee
Fee"), to HSBC Holdings BV, equal to 16 2/3 basis points times the amount
of the Appellant’s deposits and the Appellant’s subsidiaries deposits which
enjoyed the benefit of the HHBV Guarantee?
12. Pursuant to section
9 and paragraph 18(1)(a) of the Income Tax Act (Canada), was the
Appellant entitled to deduct, in respect of the taxation years ended October
31, 1996, through December 31, 2000, the amount of the deposit liabilities also
insured by Canada Deposit Insurance Corporation?
[3]
The Appellant also
seeks an order that the Court consider as evidence a statement of facts,
attached to its Motion, along with the Affidavit of Susan Washbern, a legal
assistant with the Appellant’s counsel’s law firm, containing thirty two
attachments.
[4]
This litigation has
been rife with procedural issues; the parties have, notwithstanding platitudes
to the contrary, assumed strongly opposing views on several procedural matters
that has caused some frustrations on both sides. There is no question there is
a considerable amount at issue in this transfer pricing case. The Respondent
initially assessed on the basis that the Appellant was limited in deducting, as
a guarantee fee to its parents, an amount considerably less than what the
Appellant actually paid, but some amount nonetheless. In her Reply, the
Respondent raised additional allegations of fact, that, if proven, would mean
no amount of the guarantee fees were deductible as they were not incurred for
the purpose of gaining or producing income. The Crown acknowledges it has the
onus to prove such allegations.
[5]
As an alternative
position, the Crown raised in her pleadings that if the Appellant did pay
anything as a guarantee fee to its parents for the purpose of earning or
producing income, then it cannot deduct an amount paid that is equivalent to what
was in fact paid to CDIC for its guarantee of deposits. This issue was raised
in paragraph 65(b) of the Amended Reply as follows:
In the alternative, whether the payment of the guarantee fees in
relation to the portion of its deposit liabilities which were already covered
by the CDIC insurance was made for the purpose of earning or producing income
from its business pursuant to paragraph 18(1)(a) of the Act.
I will refer to this as the "CDIC
issue"
[6]
The
Appellant’s grounds as set out in its motion read:
The grounds for this Motion are that the determinations will dispose
of the issue raised in paragraph 65(b) of the Amended Reply, may substantially
shorten the hearing and result in a substantial savings of costs.
[7]
At the hearing of the
application, the Appellant’s counsel suggested that, notwithstanding how he
framed the grounds for the motion, it was open to me to consider the first 11
questions separately from the 12th question, which deals with the CDIC issue. I
am disinclined to separate the questions. My view is that the resolution of the
CDIC issue is what underlies the Appellant’s motion. However, Mr. Kroft went on
to argue that answers to the first 11 questions would clarify matters for
experts who will comment on the appropriate quantum of the guarantee fees,
would clarify the appropriate paradigm for the application of Section 69 and
Section 247 of the Income Tax Act (the "Act"), and
would assist the parties in getting an agreed statement of facts and joint book
of documents. With respect, I am not swayed by these arguments. The first
question deals with the interpretation of statutory law and the next 10 deal
with interpretation of contracts. The contracts are not in dispute. Although it
was pointed out to me that the contracts were authenticated, but that the
Respondent did not agree to the truth of the contents, there is no doubt they
will be in evidence at trial. They are not contentious. The parties do not, I
suggest, need a Motion’s Judge to interpret the contracts, especially without
the context of all the surrounding facts in connection with the creation of the
contracts, or to assist experts, or to establish some paradigm or to assist the
parties compile an agreed statement of facts or joint book of documents. The
experts can read the documents and determine the paradigm. If they believe
there is any ambiguity they can provide alternatives. As far as the
Determination on these questions to help the parties compile a joint of book of
documents or agreed statement of facts, I have great confidence in counsel
that, given little, if any contention regarding the documents they can and will
reach such an accord. All to say, I am not going to segregate the first 11
questions from the 12th question. I will deal with them all together with
emphasis on what I perceive to be the true issue the Appellant was addressing –
the impact of the payment by the Appellant of a guarantee fee to CDIC.
[8]
Rule 58(1) and (2) reads as follows:
58(1) A party may apply to the Court,
(a) for
the determination, before hearing, of a question of law, a question of fact or
a question of mixed law and fact raised by a pleading in a proceeding where the
determination of the question may dispose of all or part of the proceeding,
substantially shorten the hearing or result in a substantial saving of costs,
or
(b) to
strike out a pleading because it discloses no reasonable grounds for appeal or
for opposing the appeal,
and
the Court may grant judgment accordingly.
(2) No
evidence is admissible on an application,
(a) under
paragraph (1)(a), except with leave of the Court or on consent of the
parties, or
(b)
under
paragraph (1)(b).
…
[9]
The Appellant correctly
points out the three requirements for success at this first stage of a Rule 58
application:
a) there are
questions of law, fact or mixed fact and law. Here the Appellant claims there
are 12 questions of law;
b) they are
raised by the pleadings;
c) the
answers may dispose of all or part of the proceeding, may
substantially shorten the hearing of the appeal and may result in a
substantial savings of costs.
[10]
Mr. Kroft also urges me
to consider this provision in light of what he describes is an objective of the
Tax Court of Canada Rules to find ways to resolve issues without
the need for trial. He points out our new rules on pre-hearing and settlement
conferences as examples of this thrust. While I agree with the sentiment, I
remain of the view that a Determination is not a substitute for trial. This is
a view expressed in the case of Carma Developers Ltd. v. H.M.Q.. The Appellant
claims this request is not made as an alternative to trial, yet does
acknowledge that both sides may need to call evidence at the Determination.
[11]
Case law has also
established that on a Determination there should be no dispute as to the facts
underpinning the questions of law to be answered. The Appellant placed
considerable emphasis on the changes in 2004 to Rule 58 which extended
Determinations on questions of law to Determinations of fact or mixed fact and
law as well, suggesting the Rule now specifically contemplates that a Determination
of questions of law may first require a Determination of facts. That sounds
very much to me like a trial.
[12]
The Appellant attempted
to distinguish cases decided based on the Federal Court Rule (see Perera
for example) and pre-2004 Rule 58 on the one hand from cases decided pursuant
to the new Rule 58. I note, however, former Chief Justice Bowman’s
ruling in Banque National du Canada,
where he expressed concern about a Motion Judge under the new Rule
58 making a determination without evidence. He clearly did not contemplate Mr.
Kroft’s approach of the Motion’s Judge hearing considerable evidence.
[13]
The Respondent argues
that the major fact, over which there is dispute, underpinning the overriding
issue is whether any amount paid by the Appellant to its parents as a
guarantee fee was incurred for the purpose of producing income. The Respondent
has alleged as additional facts in its Reply that there is no such purpose and
acknowledges it is for the Respondent to prove this. Any Determination cannot
be complete without facing that dispute head-on. The Appellant invites the
Respondent to call evidence at the Determination. Notwithstanding the new
wording of Rule 58, I do not agree that calling such evidence at a
Determination of the 12 questions of law before me is in order. The CDIC issue
as framed in the Reply is a question of fact: was there the necessary purpose
to incur the fee to produce income. Interestingly, the Appellant has framed its
question for Determination as a question of law – is the fee to the parents
deductible vis-à-vis the deposit liabilities insured by CDIC. The answer to the
legal question can only be determined by answering the factual question, and
that notwithstanding the new wording of Rule 58, is a finding so
fundamental to the overall appeal that only a full-blown trial with all the
benefits of trial rules and procedures is the appropriate place for such an adjudication.
[14]
The Appellant maintains
there are two fundamental issues:
a) the reasonableness of the fee to
the parents; and
b) the impact of the fee for the CDIC
insurance.
The Appellant has jumped over the fundamental issue
from the Respondent’s perspective whether any amount of the fees was incurred
for the purpose of earning or producing income. In seeking a Determination on
the CDIC issue without a trial the Appellant is attempting to resolve the
Respondent’s major contentious issue. This goes to the very heart of what a
trial judge, with all the evidentiary rules and procedures at his or her
disposal, is to hear. No, I find the Appellant’s request for the resolution of
the CDIC issue is an attempt to bifurcate the trial, with the result a Motion’s
Judge may be forced to reach conclusions on facts which should, and
must, go to trial for a fair hearing, and to reach
those conclusions without the benefit of the evidentiary protections afforded
to both sides at a trial. I simply have not been convinced that the parties can
reach into this complicated mass of documents and surrounding circumstances and
pluck out only those facts that are necessary to answer the CDIC issue. It
simply cannot work.
[15]
Given my view that the
questions are not appropriate for a Determination, it is not necessary to
address the requirements that the answers may dispose of all or part of the
proceeding, substantially shorten the hearing or result in a substantial saving
of costs. Notwithstanding Mr. Kroft’s imploring tone that such a Determination
will also provide an additional benefit of spurring the parties into
settlement, that is not an objective of Rule 58. The Respondent, with
good reason, declined to comment on settlement. In any event, I do not see how
a Determination of the issue the Appellant wishes to have determined could be
handled in any fair way other than by a trial.
[16]
I conclude that the
most efficient manner both time-wise and cost-wise to proceed is to:
a) set a trial date
and work diligently towards completing all preliminary steps in a timely
fashion to meet that date;
b) set a date for a
settlement conference, where it is absolutely clear that the parties are to
prepare for settlement discussions, not for rehashing their legal positions
with a view to convincing a settlement judge whose position is stronger: in
this case that approach serves little purpose. The Appellant argued that a
Determination of the CDIC issue, if in its favour, would substantially move the
parties forward in settlement discussions. This was a delicate issue to address
for obvious reasons. However, I believe a diligent, well‑prepared,
open-minded settlement conference with parties intent on settling, and acting
reasonably, would be a far more expeditious and fruitful exercise than a
Determination, as rather than simply moving the parties forward towards
settlement, it could, and should, settle the matter.
[17]
The applications are
dismissed. Costs will be in the cause.
Signed at Ottawa, Canada, this 21st
day of January 2011.
"Campbell J. Miller"
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