Citation: 2009 TCC 480
Date: 20090928
Docket: 2008-2315(IT)G
BETWEEN:
4145356 CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Campbell J. Miller
[1]
Both parties have
brought motions pursuant to Rule 110 of the Tax Court of Canada Rules
(General Procedure) (the “Rules”) for orders directing the other
party to answer questions refused at Examinations for Discovery. The facts in
connection with this matter are complex, though the issues involved are not.
The issue is simply whether the Appellant is entitled to a Foreign Tax Credit
(the "FTC") pursuant to subsection 126(2) of the Income Tax Act
(the "Act"). This credit is based on a determination of
whether the Appellant paid business‑income tax in respect of a business
carried on by it, in this case, in the United States. "Business‑income tax" paid by a
taxpayer means, according to subsection 126(7) of the Act,
“the portion of any income or profits tax paid by the taxpayer for the
year to the government of a country other than Canada that can reasonably be
regarded as tax in respect of the income of the taxpayer from a business
carried on by the taxpayer in the business country…”.
[2]
It is helpful to repeat
the brief version of the facts as summarized by the Respondent in her
submissions:
A. Summary of the Facts Alleged in the
Pleadings
The parties in Canada
1. The Appellant was incorporated on June 26,
2003 for the purpose of making an investment in a limited partnership the Bank
of America group.
2. The Appellant was a wholly-owned
subsidiary of Royal Bank Holding Inc., which in turn was at all material times
a wholly-owned subsidiary of Royal Bank of Canada.
The parties in the United States
3. Altier LLC was an indirect, wholly-owned
subsidiary of Bank of America National Association
("BANA"), itself a wholly-owned subsidiary of Bank of America.
4.
Gaskel Management LLC was a wholly-owned subsidiary
of Altier LLC.
5.
Mecklenburg Park, Inc. was a wholly-owned
subsidiary of BANA.
The U.S. Partnership
6.
On December 12, 2002, Crown Point Investments GP
was formed under the laws of the State of Delaware as a general partnership. It was later converted from a general
partnership to a limited partnership, called Crown Point Investments LP
("Crown Point LP").
7.
On September 3, 2003, Gaskell Management LLC, as
general partner, and Altier LLC, as the limited partner, entered into an
Amended and restated Agreement of Limited Partnership (the " Partnership
Agreement").
8.
As of September 3, 2003, the partnership units
of Crown Point LP were held as follows:
|
Partners
|
Contributed
Captital
|
Limited Partner Units
|
General
Partner Units
|
|
Altier LLC
|
Cdn
$1,600,000,000
|
1,600,000,000
|
0
|
|
Gaskell Mgt. LLC
|
Cdn
$15,000,000
|
0
|
15,000,000
|
9.
On September 5, 2003, the Appellant, Royal Bank
Holding Inc. and Altier LLC entered into a purchase and sale agreement
whereby the Appellant acquired 25% of the limited partnership units of Crown Point LP,
for a total consideration of Cdn $ 400,000,000.
10.
During the years in issue, Crown Point LP
engaged in the following transactions:
a)
it made a loan in U.S. dollars to Mecklenberg
Park Inc. in the amount of US$ 1,150,840,000 at a floating interest rate of
US$ LIBOR plus 1.545%;
b)
it entered into a coupon swap with BANA under
which Crown Point LP would, for the term of the loan, pay US$ LIBOR plus
1.545% to BANA on a notional amount of US$ 1,150,840,000 and receive fixed Cdn$
7.2774% from BANA on a notional amount of $1,602,999,308.
11.
Effective September 5, 2003, the Royal Bank of
Canada entered into a cross currency swap agreement with Altier LLC under which
Royal Bank of Canada paid US$ 287,171,677.21 to Altier plus ongoing
payments at the Cdn$ fixed rate of 5.6275% over a period of 20 years. Altier
agreed to pay Royal Bank of Canada Cdn $400 million plus ongoing payments at
the 3 month interpolated US$-LIBOR-BBA over 20 years.
12.
In the 2003 taxation year, Crown Point LP earned
income from these operations and filed a tax return with the Internal Revenue
Service and paid tax to the United States government.
13.
Crown Point LP made an election to be treated as
a corporation for U.S. federal
tax purposes.
14.
In computing its income for the 2003 taxation year,
the Appellant reported 25% of the income of Crown Point LP.
15.
In computing its tax payable for the 2003
taxation year, the Appellant deducted from its tax otherwise payable under Part
I of the Income Tax Act (the "Act") a foreign tax
credit pursuant to subsection 126(2) of the Act.
16.
In calculating this foreign tax credit, the
Appellant claimed 25% of the U.S. taxes paid by Crown Point LP as business-income taxes paid by
itself.
[3]
Initially, the
Respondent assumed that the Appellant was entitled to a 25% share of the
profits realized by Crown Point LP, but in the Reply to the Notice of Appeal,
the Respondent has now denied this assumption, claiming the Appellant was not
entitled to a 25% share of such profits, but was entitled to a fix return of no
more than 4.7303% per annum on the amount it advanced to Altier.
[4]
The Minister of
National Revenue (the "Minister") was requested by the Appellant to
conduct an audit to determine the question of the FTC. This investigation took four
years and included an internal inquiry to the General Anti‑Avoidance
Rules Review Committee, which
determined that a General Anti-Avoidance Rule
(“GAAR”) assessment should not proceed. Ultimately, the Appellant was assessed
on the technical basis that it did not qualify pursuant to subsection 126(2)
for the FTC.
[5]
The Appellant claims
that the Minister’s assumptions set out in the Reply do not fully and properly
reflect the assumptions the Minister in fact relied upon in reaching its
assessment. The Respondent sought full disclosure pursuant to Rule 82 of
the Rules, but as the Appellant balked, the Respondent withdrew its
Motion for full disclosure.
[6]
With that brief
background, I will now turn to the Respondent’s Motion, in which it seeks
answers to five questions.
1. Question 76 - Requests
that copies of any correspondence, emails and other documents exchanged between
the Bank of America group and the Royal Bank of Canada group in connection with the discussions and
negotiations leading to this transaction be provided.
[7]
The Respondent advises
that four individuals, including the Appellant’s nominee for discovery, Mr. D.
Flynn, were involved in email negotiations over a six‑month period. The
Respondent argues that these circumstances are relevant in construing the
Partnership Agreement and in determining whether the payment of tax by Crown
Point LP can be "tax paid by the Appellant" and further in
determining the Appellant’s entitlement to profits. The Respondent refers to
the Saskatchewan Court of Appeal decision of SaskPower International Inc. v.
UMA/B&V Ltd.,
in which the Court quoted from the House of Lords decision Reardon Smith
Line Ltd. v. Yngvar Hansen-Tangen:
No contracts are made in a vacuum: there
is always a setting in which they have to be placed. The nature of what is legitimate
to have regard to is usually described as ‘the surrounding circumstances’ but
this phrase is imprecise; it can be illustrated but hardly defined. In a
commercial contract it is certainly right that the court should know the
commercial purpose of the contract and this in turn presupposes knowledge of
the genesis of the transaction, the background, the context, the market in
which the parties are operating.
[8]
The Respondent argues
that the emails will:
a) shed light on the intentions of the
parties to the Partnership Agreement and related transactions as well as assist
in explaining the genesis and circumstances surrounding the transactions;
b) support the Respondent’s position that the
taxes paid by Crown Point LP cannot be characterized as tax paid by the
Appellant;
c) damage the Appellant’s case to the extent
the correspondence between individuals involved in the negotiation show an
intention by the parties to the effect that the Appellant would not be
personally liable for any U.S. tax paid by Crown Point LP;
d) damage the Appellant’s case to the extent
it demonstrates the parties intentions with respect to the obligations of
Gaskell Management LLC, as general partner of the Partnership, and whether it
was intended that it would pay the U.S. tax as agent for the Partnership or the
Appellant;
e) support the Respondent’s case by
establishing that, as a matter of legal substance, the Appellant’s entitlement
to profits under the Partnership Agreement were limited to the amounts
that it was entitled to receive under the Distribution provisions of the
partnership agreement (4.7303% per annum), regardless of the definition of
"share of net profits" contained there;
f) support the Respondent’s case by
establishing how the transactions were treated for U.S. tax purposes to the extent that the exchanges between the parties
contain admissions in that regard.
[9]
I accept subparagraphs
b), c), d), and e) above, though have some doubts about the intention of the
Appellant vis-à-vis the Partnership Agreement, given the Appellant was
not an original signatory to that agreement.
[10]
The Appellant has
concerns that this email discovery will be time consuming, is far too broad,
and at best, may only produce some evidence of subjective intention, which, as
made clear by the Federal Court of Appeal in The Queen v. General Motors of Canada Ltd. is inadmissible. Further, as the
Partnership Agreement is not ambiguous, there is no need to resort to
"surrounding circumstances". But keep in mind, the Partnership
Agreement was originally entered into by Altier and Gaskell: the Appellant then
bought in.
[11]
It has been oft-stated that
the scope of discovery is wide and relevancy is to be construed liberally, but
these broad parameters are not to be extended into permitting a fishing expedition.
In this regard, see recent comments of Justice V. Miller in General
Electric Capital Canada Inc. v. The Queen.
I am not here dealing with a situation where there have already been extensive
examinations. It is a situation, though, where there are complex transactions,
different tax jurisdictions and different legal entities that can impact on the
key issue in the appeal. The greater understanding of how all the pieces of the
puzzle fit together can only assist the parties in fully comprehending each
others’ case.
[12]
The Appellant suggests
that if I were to allow this question I should narrow its ambit. For
example, the Appellant maintains that the detail of the cross-currency swap has
no bearing on the issue. I find that carving out any one aspect of the overall
transaction on the basis it does not relate to an issue, in a matter that has a
number of intertwined transactions, runs the risk of leaving gaps in the track
on the train of inquiry. I conclude that this is not a fishing expedition.
Having said that, it was clear from the Respondent’s counsels’ comments that
they were prepared to limit the search for documents to email correspondence
between Mr. Flynn and/or Mr. White from the RBC Group on the one hand, and Mr.
Salamare and/or Mr. Elasingham from the Bank of America group on the other
hand, for a limited period of time, being from December 2002 to September 5,
2003. I note that the Appellant was not an original signatory to the Amended
and Restated Partnership Agreement, which was between Altier and
Gaskell, so when the Respondent asked for emails in connection with discussions
and negotiations leading to "this transaction", I take "this
transaction" to include the Appellant’s acquisition of units in the
partnership from Altier, the Crown Point LP’s loan to Mecklenburg
Park, Inc., the coupon swap and the cross‑currency swap.
2. Question 184 - Request
that any documents exchanged between the Bank of America and the
Royal Bank of Canada regarding the topic of using a Delaware limited partnership and regarding using a limited partnership as
opposed to a general partnership be provided.
[13]
The Respondent
acknowledged that this question is subsumed in the previous question. Given
that, there is no need for a specific direction with respect to this question.
3. Question 330 -
Request that all documents in the Appellant’s possession, control, and power
pertaining to discussions about the terms of the coupon swap be provided.
[14]
This question goes
beyond email correspondences. The Appellant fails to see any relation between
discussions about the terms of the coupon swap and the Appellant’s liability
for tax and entitlement to the Foreign Tax Credit. The coupon swap, the
Respondent points out, allows Crown Point LP to receive precisely the amount
necessary to pay a fixed distribution of 4.7303% on the Appellant’s investment.
I find that this does go to help understand exactly what profits the Appellant
was entitled to. That is the very matter the Respondent has raised in its
pleading as a shift away from a previous assumption. This is relevant and this
request should be answered.
4. Question 389 –
Request that copies of any documents in the possession, control, and power of
the Royal Bank of Canada group dealing with a determination of the
term for the cross currency swap that appears at Tab 23 of the Appellant’s
documents be provided.
[15]
This is a very narrow
question directed solely at documents that address the term of the cross
currency swap, as its term (20 years) is different from the term of the
underlying transactions (25 years). Pursuant to this swap, the $400 million
invested by the Appellant in Crown Point LP is paid over the same day to Royal Bank
of Canada. It is a piece, albeit a small piece, of
the puzzle that may shed light on how the Appellant’s profits were to be
determined. The Respondent is entitled to an answer.
5. Question 394 –
Request that copies of any documents within the Appellant’s or the Royal Bank
of Canada group’s control, possession, or power which discuss the feature of
the limited partnership agreement dealing with allocating specific expenses to
the general partner Gaskell be provided.
[16]
Once I have been
convinced that circumstances surrounding the entering into of these
transactions is relevant, it becomes difficult to exclude documents which
"discuss the feature of the partnership". The Appellant buys into the
limited partnership and this goes to its understanding of what it believed it
was buying into. I find this relevant and the Respondent is entitled to an
answer.
[17]
I turn now to the
Appellant’s motion. The Appellant seeks answers to five questions.
1. Questions 45 – 46 - The Appellant
requested the Respondent "to produce the contents of all of those files
that you have just mentioned".
[18]
It is important to
review the transcripts to gain an understanding of what files the Respondent’s
nominee mentioned. The following is an exchange between Mr. Meghji, for the
Appellant, and Simmin Hirji, for the Respondent:
41 Q. Which of those files have you
reviewed for purposes of preparing for this Examination for Discovery?
A: I viewed the large file auditor’s file, I reviewed
the local tax avoidance file, I reviewed the appeals file, and I did not - become
familiar of the events that had transpired at the rulings level and the Ottawa level of the tax avoidance group in Ottawa.
42. Q. But you haven’t reviewed their files?
A.
My understanding is they have nothing.
43. Q. Your understanding is that they,
meaning tax avoidance Ottawa,
has nothing?
A.
That’s right.
44. Q. Does that make sense to you in
light of the fact that before a referral is presented to the GAAR Committee it
has to go through tax avoidance in Ottawa?
A. Well, I shouldn’t say they
have nothing. My understanding – I don’t know, I might be incorrect and the
Attorney general can let me know, all they have is what I have sent up to them.
45. Q. What I’d like you to do is to
give me an undertaking to produce the contents of all of those files that
you’ve just mentioned.
[19]
What I take from this
discourse is that there are three files which the nominee mentioned: the large
file auditor’s file, the local tax avoidance file, and the appeals file.
[20]
Mr. Meghji later
clarified his request at the Examination as follows:
46. Q. And if you come back and tell me
that you’re producing Documents A to C because they’re relevant, but E to F are
irrelevant, and G to Z are privileged, maybe you can tell me what you’re not
producing on the basis of relevance, so we at least have a basis on which we
can decide if we have a fight. Is that fair?
Mr. Bourgeois stated:
That’s
fair.
[21]
Recent comments of this
Court (see Concept Plastics Limited v. The Queen) and the Federal
Court of Appeal (see Kossow v. The Queen)
have been clear that documents in the Canada Revenue Agency files
that led to the assessment are relevant. With respect to the rulings file, the
Appellant argues the assessment was based on an opinion of the Rulings
directorate of July 28, 2007. The Appellant states that the backup analysis for
this is in the Rulings file and must therefore be relevant. While this does not
appear to be a file specifically mentioned by Mr. Hirji, it can be and
should be lumped with the three files mentioned above. Finally, the Appellant,
argues the assumptions in the Minister’s Reply do not accurately represent
assumptions relied upon and the Appellant requires the contents of the files as
they may assist demolishing those assumptions.
[22]
The Respondent counters
that the request is overly broad and vague and is nothing more than a fishing
expedition. The Respondent also argues that this approach to obtaining Government
documents goes even beyond a Rule 82 full disclosure requirement, which
provides for disclosure of relevant documents and does not insist on a listing
of irrelevant documents. The Appellant had that avenue available but opposed
the Respondent’s suggestion in that regard.
[23]
The Appellant’s request
is broad. It smacks of a one-way full disclosure, yet it appears to be an
acceptable approach given Rule 105(3), which neither party raised. It
seems the difference between a Rule 82 full disclosure or Rule
105(3) approach and the Appellant’s questions at examination is that the
Appellant not only wants all relevant documents from the Respondent’s files,
but a list of those documents the Respondent claims are irrelevant. The
Appellant supports this request, relying on comments of former Chief Justice
Bowman in Rezek et al v. The Queen
case, where, in dealing with a Crown refusal to provide a list of documents in
their file, with reasons why each of the documents is not produced, the former Chief Justice
stated:
Whatever may be the reason, it is incumbent on the person refusing
to produce the document to provide the person seeking production with
sufficient information to permit him or her to determine whether the basis of
refusal is justified or whether it should challenged. Certainly no one party
can refuse to produce a document on the basis of a unilateral view of
irrelevancy.
The respondent is directed to provide to the appellants detailed and
specific reasons for the refusal to produce particular documents in the convertible
hedge file, with sufficient information to allow them to be identified. If the
respondent does not do so, the file is to be produced subject to ensuring that
confidential information relating to taxpayers is not disclosed.
[24]
First, to be clear, a
request for a file is a request for all the documents in the file – what is a
file if not its contents. This may become somewhat trickier with electronic
files, but presumably the same theory applies. It may be that an appeals file
or avoidance file will have documents that the Minister determines will not be
used in evidence (thereby escaping Rule 81 disclosure), but remain relevant
to the issues between the Respondent and taxpayer, and discoverable on full
disclosure (Rule 82) or on examination pursuant to Rule 105(3). What
this boils down to is not a question of relevance, but whether the request is
simply too broad, given the Appellant’s earlier objection to a Rule 82
disclosure. The request for documents in a Canada Revenue Agency file, a file
that is prima facie relevant as it is the Government’s file on this
taxpayer, is itself not a broad or vague request. If the file had just one
document in it, one could hardly call the request broad. No, it is not the
breadth of the answer but the breadth of the inquiry. I do not find the request
for documents in a specific taxpayer’s file, that lead to an assessment on one
specific issue, too broad.
[25]
The only file that
causes me to hesitate is the Ottawa tax avoidance file, as the materials in
that file did not lead to this particular assessment. The Respondent’s nominee
reviewed the local tax avoidance file to prepare for the examination,
suggesting some prima facie relevance. This does not extend to the Ottawa tax avoidance file.
[26]
The Respondent also
argues that this type of request is an abuse of process as it goes beyond a Rule
82(1) disclosure, by requesting a listing of irrelevant documents. Further, it
is abusive because particular documents are not specified. I reject both these
issues. There is nothing abusive about the request, especially in light of the
former Chief Justice Bowman’s comments in Rezek cited earlier.
[27]
The Respondent relies
on assumptions which are meant to be set out accurately in the Reply. The
taxpayer is required to demolish those assumptions if they are untrue. The
basis for the assumptions and, indeed, with the Respondent’s case, is to be
found in the Respondent’s files. A request from the taxpayer to see those
files, especially in light of concerns that the assumptions may not accurately
represent all the assumptions relied upon by the Respondent, is not an abusive
request. While there may have been other ways for the Appellant to obtain this
information, and although the Appellant previously rebuffed an attempt for full
disclosure, these are not reasons to deny the Appellant’s current request.
[28]
My remaining concern is
the request from the Appellant to obtain a listing of irrelevant documents. The
Respondent has a choice. She can provide all the documents in the files (other
than those to which privilege can be claimed) and leave it to the Appellant to
sort out what is relevant, or the Respondent can produce only the relevant
documents in its files, based on its on own assessment of relevance. What is the
risk to the Respondent following the former approach – that some irrelevant
documents may come to light? While I can conceive of situations of irrelevant documents
being in the Respondent’s files, that possibility is slim when the assessment only
pertains to one issue. The files can only relate to that issue and are prima
facie relevant to it. However, Mr. Meghji acknowledged he sought relevant
documents along with a list of those documents withheld on the basis they are
not relevant. I order the production of documents in the files mentioned by
Simmin Hirji in examination and reviewed by her, being the large file auditor’s
file, the appeals file and the local tax avoidance file. I also find the
Rulings file is relevant and the documents therein are to be produced. Any
documents not produced shall be identified as privileged or irrelevant.
2. Question 146 - The
Respondent refused to identify documents in the Attorney General’s possession
that speak to the Respondent’s allegation that it was not entitled to a 25%
share of profits of Crown Point LP.
[29]
The Respondent
distinguishes between a request for facts, which support an allegation (which
the Respondent acknowledges is proper) versus a request for the evidence to
support that allegation. The Respondent did answer that the Partnership
Agreement was the fact that spoke to this allegation. While this is
always a fine distinction (see comments in Sandia Mountain Holdings Inc. et
al v. The Queen)
I find that the phrasing of the Respondent’s request falls off the fence as
fact-seeking as opposed to proof-seeking and is therefore proper. The Appellant
is entitled to an answer.
3. Question 185 - Is
the Minister going to take the position that the Appellant incorrectly reported
income in respect of the Crown Point LP?
[30]
I find this both a
curious question and a more curious refusal. The Minister assessed on the basis
of the Appellant’s reported partnership income, but denied the Foreign Tax Credit.
That is a fact. What is there to answer or refuse? There has been nothing in
the pleadings suggesting income reported is incorrect and there has been no
inkling of possible amendments. This is a tempest in a teapot.
4. Question 235 - Will
the Respondent urge the Court not to follow the Minister’s administrative
practice as described in IT-270R3 because it is wrong in law?
[31]
The Respondent claims
this goes beyond seeking their legal position and is looking for an opinion on
the state of the law. I agree. The Appellant appears to be engaging in tactics
best left for argument at trial. The Appellant referred me to a number of
decisions (notably Silicon Graphics Ltd. V. The Queen and Canadian Occidental
US Petroleum Corp. v. The Queen)
commenting on the use of IT Bulletins. These comments were raised in the context
of legal argument. If Mr. Meghji believes the Respondent has acted
inconsistently with an Interpretation Bulletin, the trial judge may certainly
take that into consideration. Discovery is not the place to obtain the
Government’s opinion on its IT Bulletin. It is what it is. The Respondent’s
legal position is not to be crafted by the Appellant seeking opinions on IT
Bulletins.
5.
Questions 237 – 238 - Explain
the relevance or significance of the documents in the Respondent’s Book of
Documents.
[32]
The Appellant relies
on former Chief Justice Bowman’s reasoning in Loewen et al v. The Queen
where he stated:
A party is entitled to know why a document is being produced. One
must bear in mind that section 81 of Rules, in contrast with section 82,
is rather unique in that requires only that the party produce a list of
documents that is intended will be used in evidence. If the answers given were
acceptable, it would mean that a litigant could swamp the other side by
producing cartons of documents and leave it to the other side to go through
them in an attempt to anticipate what use, if any, will be made of them. I
think a litigant is entitled to know why the other party thinks a document is
relevant. It is insufficient to say, in effect, that a document is being put in
the list of documents on the off-chance that it may be useful to rebuke some
unspecified point that the other side may wish to make.
[33]
I limit these comments
to the unique Rule 81 disclosure rule, which I believe was former Chief
Justice Bowman’s approach. If a party lists a document that might be used in
evidence, the other party is entitled to know which allegation of fact to which
it relates for purposes of either establishing or rebutting that allegation.
The Respondent referred me to comments of Justice Bonner in Smithkline
Animal Health Inc. v. The Queen
though those comments were limited in their application to a section 82 full
disclosure. I am not dealing with that situation. The Appellant is entitled to
an answer.
[34]
In summary:
1. The Respondent’s
motion is allowed and the Appellant is directed to answer the following:
- Question
76, though limited to email correspondences between Mr. Flynn and/or Mr. White
from Royal Bank of Canada group on the one hand and Mr. Salamare and/or
Mr. Elasingham from the Bank of America group on other hand for the period
December 2002 to September 5, 2003.
- Question 330
- Question 389
- Question 394
2. The Appellant’s
motion is allowed and the Respondent is directed to answer the following:
- Question 45 and 46
in connection with the large file auditor’s file, the local tax avoidance file,
the appeals file, and the rulings file, identifying privileged and irrelevant
documents not produced from those files.
- Question 145 and
146
- Question 237 and
238
[35]
The parties wish to
move this matter along and suggested certain timelines. I therefore order that
examinations for discovery be completed within three months of the date of this
order with an additional month to complete undertakings and a further month for
reporting back to the court advising as to the need for a pre-hearing or the
setting of a trial date.
[36]
The parties asked that
I not make any order with respect to costs but allow them the opportunity to
provide written submissions after receiving these reasons. I ask that they
provide those written submissions to the court within two weeks of the date of
this order.
Signed at Ottawa, Canada,
this 28th day of September 2009.
“Campbell J. Miller”
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