Citation: 2008TCC668
Date: 20081215
Docket: 2006-1385(IT)G
2006-1386-(IT)G
BETWEEN:
GENERAL ELECTRIC CAPITAL CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
V.A. Miller, J.
[1]
The Respondent has
brought a motion and the Appellant has cross-motioned for an Order that the
opposite party provide answers to certain questions which it refused to answer
or for which it provided insufficient answers at the examinations for
discovery. The ground relied on in each motion is that the questions are
relevant to the issues under appeal.
[2]
The issue in appeal
2006-1385(IT)G is whether for the 1996 and 1997 taxation years, subsection
69(2) of the Income Tax Act (“the Act”) applies, and for the
1998, 1999 and 2000 taxation years subsection 247(2) of the Act applies,
to disallow the deduction of guarantee fees paid by the Appellant to its
non-resident parent company, General Electric Capital Corporation (“GE
Capital”). This issue involves the former and the current transfer pricing
sections of the Act (“the Part I appeal”).
[3]
During the years in
issue, GE Capital charged the Appellant a fee of 1% per annum of the principal
amount of the Debt Securities outstanding during the year, in exchange for
guaranteeing the Debt Securities. The Minister of National Revenue (the
“Minister”) reassessed the Appellant to disallow the deduction of the guarantee
fees. It was the Minister’s position that the value of the guarantee fee was
nil. At the hearing of these appeals the question to be answered will be: “What
would the guarantee fee have been if the Appellant and GE Capital were dealing
at arm’s length?”
[4]
The issue in appeal
2006-1386(IT)G is whether the Appellant was liable for Part XIII withholding
tax in respect of the amounts paid to GE Capital as guarantee fees during the
taxation years 1996 to 2000 (“the Part XIII appeal”).
RESPONDENT’S
MOTION
[5]
The Respondent’s motion
was supported by the affidavit of Karen Hodges, a paralegal in the Toronto
Regional office of the Department of Justice, who has worked on these files
since 1996. Attached to her affidavit were exhibits which contained the
questions which the Respondent says the Appellant’s nominee, David Daubaras,
refused or improperly answered. I will speak to the questions using the
headings chosen by the Respondent.
A. Questions pertaining to the Arthur
Andersen financial analysis (Schedule A attached
[6]
At the audit stage, the
Appellant, through its solicitors, retained the accounting firm of Arthur
Andersen to support its position. Arthur Andersen prepared a Transfer Pricing
Analysis (“the report”) which was not accepted by the Canada Revenue Agency
(CRA). The Appellant does not intend to rely on the report at the hearing of
these appeals nor does it intend to call any witnesses from Arthur Andersen. It
has however, included the report in its list of documents and the Respondent
has the report. The Respondent has rejected the analysis in this report and
does not intend to rely on it at the hearing of these appeals.
[7]
The Respondent has
asked the Appellant eight questions which would require it to contact Arthur
Andersen, or in reality its former employees as Arthur Andersen no longer
exists, to ask questions concerning its analysis and to obtain its working
paper files with respect to the report. It is the Respondent’s position that
these materials may “reveal something that is helpful” and may lead to a train
of inquiry.
[8]
The Appellant refused
to contact Arthur Andersen to ask the questions or to obtain the materials
requested on the grounds that these materials are not relevant; they are part
of an expert’s opinion and as such are not a proper subject for discovery; and
the Respondent is really asking for discovery of a third party.
[9]
It is the Respondent’s
position that just because a party does not intend to rely on a document does
not lead to the conclusion that the document is irrelevant. This is not a
reason to deny a party’s right to examine upon it. The Respondent has relied on
the decisions in Boast v. Canada[1]
and Felesky Holdings Limited et al v. The Queen[2] in
support of its position.
[10]
The decision in Boast
deals with the right of a taxpayer to have discovery of an officer of the Crown
on documents which the Crown did not intend to rely on at trial. Chief Justice
Bowman, as he then was, allowed the taxpayer’s motion and granted him the right
to examine the officer. The facts in the present case are totally unlike those
in Boast. Here the Respondent is attempting to examine a non-party on
its opinion and She is attempting to perform this examination through the Appellant.
[11]
In Felesky Holdings
the taxpayer filed an affidavit stating that there were no documents either
within or which had been within its power, possession or control relevant to
any matter in issue in the action. The court found that there were documents
which should have been listed in the affidavit. The fact that the documents
were in the Respondent’s possession or would not be relied on at trial was not
a reason to not list the documents in the affidavit. This case as well, has no
application to the issue in this motion.
[12]
In my opinion, the
position taken by the Appellant is correct. Neither party intends to rely on
the report or to have witnesses from Arthur Andersen testify at the hearing of
this appeal. I fail to see how Arthur Andersen’s working paper files or their
considerations in producing the report are relevant.
[13]
The questions at count
1 and 2 are the same and seek an opinion from Arthur Andersen. The questions at
counts 3, 5, 6, 7 and 9 seek to cross examine Arthur Andersen on their report.
The question at count 8 requests the Appellant to obtain Arthur Andersen’s
working paper file. The questions and requests at counts 1, 2, 3, 5, 6, 7, 8
and 9 were properly refused by the Appellant. The Respondent is in essence
attempting to conduct a discovery of Arthur Andersen through the Appellant. If She
wishes to discover Arthur Andersen, the Respondent can make an application
pursuant to Rule 99 of the Tax Court of Canada Rules (General Procedure)
(“Rules”).
[14]
The purposes of
discovery are to enable the parties to know the case they have to meet; to find
out the facts on which the opposite party relies; to narrow or eliminate
issues; to obtain admissions that will facilitate the proof of matters in issue
and to avoid surprises at trial[3].
I am mindful that the scope of discovery is wide and that at the discovery
stage relevancy is to be construed liberally[4].
Justice Bonner, as he then was, had this to say about relevance in Fink v.
The Queen[5],
There was
little dispute regarding the principles applicable to the resolution of issues
of relevance. The law on the point is well settled. Any fact which may assist
the examining party to destroy the opponent's case or to establish the position
which he has taken on the issues raised by the pleadings is relevant for
purposes of the discovery process.
[15]
In the present case, counsel
for the Respondent is seeking an opinion from Arthur Andersen and is seeking to
cross examine them on their report which is opinion evidence. This is a
“fishing expedition”. She is seeking evidence of facts of which she has no
prior knowledge[6]
which she hopes will lead to a train of inquiry.
[16]
The question at count 4
of exhibit A must be answered. If it exists, the engagement letter is a
document that would be in the possession of the Appellant or its solicitors.
The scope of section 95 of the Rules is broad and allows a party
to ask any proper question relating to any matter in issue. The question at
count 4 is a proper question as it relates to the issue between the parties. It
naturally follows that since the Respondent has received the report, counsel would
want to have a copy of the engagement letter.
B. Information in the possession of
third party entities (Schedule B attached)
[17]
The Appellant had
Dominion Bond Ratings Service (“DBRS”) and Standard & Poors (“S&P”)
prepare draft credit ratings that it used in its discussions with CRA at the
audit stage. The Appellant does not intend to rely on these opinions at the
hearing of these appeals.
[18]
In its questions at
Schedule B, counts 1 to 5, the Respondent has asked the Appellant to contact
S&P and DBRS and ask them for any information they used to form their
opinions. In counts 4 and 5 the Respondent has also asked the Appellant to
contact Moody’s to request any materials in its files with respect to the
Appellant. Counsel for the Appellant was not sure whether there was ever a
request to have Moody’s prepare an opinion.
[19]
The Appellant does not
have to answer the questions at counts 1 to 5. The reasons that I have given in
paragraphs 12, 14 and 15 above are applicable to these questions as well.
[20]
The question at count 6
contains two requests. The first is “to provide all documents that were
provided to S&P in conjunction with the stand-alone rating that it
undertook”. If these documents, or copies thereof, are in the Appellant’s
possession, then they should be given to the Respondent. It is my opinion that
this request relates to the issue between the parties. Unlike the other
requests in this Schedule, the Appellant does not have to consult with third
parties nor does the request ask for the opinion of a third party nor does this
request deal with opinion evidence. This is a proper request.
[21]
The second request at
count 6 is “to provide the information that Arthur Andersen had with respect to
the Debt Rater analysis that it undertook”. I do not think this is a proper
question for the reasons I have given in paragraphs 12, 14 and 15 above. It
need not be answered.
C. Questions regarding financial
support for GE and GE Capital subsidiaries (Schedule C attached)
[22]
Counsel for the
Respondent advised that the Appellant has agreed to answer the questions at
Schedule C attached.
D. Questions pertaining to
guarantee fees paid by GE companies to related GE companies (Schedule D
attached)
[23]
The Appellant has
agreed to answer the question at count 18 of this schedule. Counsel for the Respondent
has divided the remaining questions in this schedule into two groups. There are
those questions that result from paragraph 14 of the Notice of Appeal (counts
1, 2, 3, 4, 5, 6, 7 8 9, 10, 11, 12 and 13) and a second group of questions
(counts 14, 15, 16, and 17) that deal with a guarantee fee charged to a
GE-related company in Japan.
[24]
In paragraph 14 of the
Notice of Appeal the Appellant plead the following:
14. The Appellant issued unsecured debentures under individual
offerings and as part of a Euro Medium Term Note Program which was established
in 1994 (the “Euro MTN Program”). During the taxation years under review, a
number of Canadian, Australian and United States companies in the GE group, including the Appellant, issued
unsecured debentures under the Euro MTN Program.
The Respondent plead that She had no
knowledge of and put in issue these allegations of fact.
[25]
It is the Respondent’s
position that the questions asked with respect paragraph 14 are relevant on two
bases. First, the fact that in its Notice of Appeal, the Appellant has raised
the transactions between GE Capital and its subsidiaries in Australia and the United States, makes the questions relevant. Second, the Appellant
did initially provide responses to questions as to whether those transactions
in paragraph 14 involved guarantee fees. The Appellant did advise that a
guarantee fee of 1% per annum was charged by GE Capital to the subsidiaries. As
the response was not qualified, the Appellant cannot now say that the
information is irrelevant.
[26]
It is the Appellant’s
position that any answers to the Respondent’s questions would not assist Her or
the court with the hypothetical question that is before the court in this
appeal.
[27]
In my view the facts
alleged in paragraph 14 have been put in issue by the Appellant. After opening
the door, it cannot now say that those same facts are not relevant to the
appeal. The Respondent is able to ask questions that pertain to the pleadings.
I note that the answer written on Schedule D under count 1 is incorrect. The
Appellant claimed privilege to all documents relating to the reason for
the fees and not to the documents concerning the calculation of the rate. The
questions at counts 1, 6, 7, 8, 9, 10, 11, 12 and 13 are to be answered.
[28]
The questions at counts
2, 3 and 5 are overly broad and would be onerous to answer. These questions do
not have to be answered.
[29]
The question at count 4
is not relevant and does not have to be answered.
[30]
The Respondent has not
established that the questions at counts 14, 15, 16 and 17 are relevant. They do
not bear a semblance of relevance to the issue raised by the pleadings in these
appeals and these questions do not have to be answered.
E. Questions pertaining to the
Appellant’s intended position at trial (Schedule E attached)
[31]
The Respondent advised
that it was no longer proceeding with the questions at counts 1, 2, 3, 4 and 9.
At the hearing of the motion, counsel for the Appellant answered the questions
at counts 5, 6, 7 and 8. However, he did say that he would also give the
responses in writing.
[32]
In its letter dated
August 29, 2008, the Appellant denied that it would necessarily be classified
as a core subsidiary. The answer given to question 10 is sufficient. Question
11 is a proper question and follows from the answer given by the Appellant to
question 10. It should be answered. The reasons stated in paragraph 48 below
apply to this question as well.
F. Additional
questions not properly answered (Schedule F attached)
[33]
The Appellant has
agreed to answer the questions at counts 1, 9, 10, 14, 17 and 20.
[34]
The questions at counts
2, 3 and 4 are relevant to the issue between the parties and are to be
answered.
[35]
The notes requested in
count 5, if they exist, are protected from disclosure by litigation privilege
and do not have to be given to the Respondent.
[36]
With respect to the
relevancy of the documents requested under counts 6 and 19, the parties are not
in agreement as to the information that is required to perform a “stand-alone
analysis”. The Appellant has argued that all that is required to perform a
“stand-alone analysis” is to notionally sever the non-arm’s length relationship
between the Appellant and GE Capital. Whereas the Respondent has argued that a
“stand-alone analysis” would require the elimination of all inter-company
transactions.
[37]
The threshold of
relevancy at the discovery stage is low. In particular, as it was held in Baxter[7],
the relevancy on discovery “must be broadly and liberally construed and wide
latitude should be given”. As Baxter cautioned, “a motions judge should
not second guess the discretion of counsel by examining minutely each
question”.
[38]
The method of
calculating the appropriate arm’s length price for the guarantee fees and the
“stand-alone analysis” should be left to the trial judge. The relevance of the
related party transaction documents would require the court to examine closely
what is the required analysis under subsections 69(2) and 247(2) of the Act.
This is an exercise that should be carried out by the trial judge and not a
motions judge.
[39]
The request for
information about related party transactions and financial statements is not
“patently irrelevant or abusive”. The documents may provide information which
may directly or indirectly enable the Respondent to advance Her own case or to
damage the case of the Appellant. As a result, the documents requested at
counts 6 and 19 are to be provided to the Respondent.
[40]
At counts 7 and 8 the
Respondent has asked the Appellant to request documents from Federal Guarantee
Insurance Corporation (“FGIC”), a company which had been a wholly owned GE
company and whose business was to guarantee third party debt. FGIC was sold in
2003. At present, there is no relationship between the Appellant, GE Capital
and FGIC. The Appellant does not have to answer the Respondent’s request in
counts 7 and 8.
[41]
At count 11 the
Respondent has requested the credit ratings of the Appellant, GE Capital and GE
Capital’s parent. The Appellant has given all of the documents that it had in
this regard. It is my opinion that the request has been satisfied.
[42]
The question at count
12 was sufficiently answered by the Appellant in its letter dated August 29,
2008.
[43]
Count 13 asks a
question concerning the reports written by the credit rating agencies S&P
and Moody. The question at count 13 was answered at the hearing of this motion.
Counsel for the Appellant stated that the Appellant was not the author of the
credit rating reports; it did not know which credit support agreements the
rating agencies were referring to when it made the statement that “GE Capital’s
AAA rating was based on GE Capital’s financial strength, its relationship with
GE Company and the explicit credit support agreements from GE Company”; and,
the Appellant cannot say to whom, if anyone, the credit support agreements were
provided. This is a sufficient answer.
[44]
Counts 15 and 16 ask if
the Appellant has an opinion on what S&P and Moody meant by the term
“implicit support”. These are proper questions and should be answered. The
questions do not ask the Appellant to interpret the S&P guidelines.
[45]
The question at count
18 is relevant and should be answered.
APPELLANT’S CROSS-MOTION
[46]
The Appellant’s
cross-motion was supported by the affidavit of Teresa Azzopardi, a legal
secretarial assistant at the firm of Osler, Hoskin & Harcourt LLP. Attached
to her affidavit were exhibits, one of which set out the questions which the
Appellant says were either not answered or not sufficiently answered. These
questions are on Schedule G attached.
Question on page 448 and question 1833
[47]
The Appellant has asked
the Respondent to confirm whether it is the Respondent’s position that the
hypothetical arms-length guarantor referred to in the answer to the question on
page 448 is not GE Capital. At the hearing of the motion the Respondent
confirmed that the hypothetical arms-length guarantor was not GE Capital but an
entity that has the same characteristics as GE Capital.
[48]
As a follow up question
the Appellant asked for a list of the characteristics of the hypothetical
guarantor. The Appellant is entitled to ask questions to know the Respondent’s
position[8]
and this question is to be answered. The answer does not require an expert
opinion as stated by the Respondent in the written response. At the hearing
counsel for the Respondent was able to list one of the characteristics.
[49]
The Appellant was
reassessed on the basis that the value of the guarantee fee was nil. As a
result of the discovery process, the Respondent does not agree with this value
for the guarantee fee. Counsel for the Respondent now says that the guarantee
fees have a minimal value which she cannot specify as it is not known. The
specific value will be a matter for expert evidence.
[50]
The Appellant is entitled
to know why the Respondent has changed its position. Question 1833 is to be
answered.
Question 1326
[51]
The Appellant obtained
a document from the CRA pursuant to an access to information request. At the
discovery, the Respondent gave an undertaking to inquire behind the document
and to have her nominee inform himself about the document. The Respondent’s
initial response to the undertaking appears on Schedule G. At the hearing,
counsel for the Respondent read into the record a further response that had
been provided to the Appellant. That response was as follows:
“The Appellant
is misstating the Crown’s position. As was noted in the written response to
question 2037, the implicit support is “factored out” in valuing the arm’s
length guarantee. That is consistent with Mr. Nayak’s statement that “Whether
we can use implicit guarantee argument in the valuation/pricing…. My opinion is
No”. In both instances, the value (if any) of a third party guarantee is
calculated after factoring out the implicit guarantee.
Mr. Nayak was
contacted and he confirmed this interpretation; namely that his opinion is that
the implicit guarantee is not a factor in valuing the arm’s length guarantee
and he reiterated that the document in question represented his thoughts for an
in-house brainstorming session. The only document he reviewed was the OECD
guidelines and his recollection is that no minutes or other documents came out
of the meeting.”
This response has
satisfied the undertaking. The Appellant has now asked as a follow up question
that the Respondent provide all facts, information and documents relating to
CRA’s considerations and conclusions on the issue discussed in the document.
[52]
I am not persuaded that
this is a proper follow up question. There is not the appropriate connection
between the answer to the undertaking and the subject matter of the question.
The Respondent does not have to provide an answer to this question.
Question 2028
[53]
This question has been
answered.
Question 2037
[54]
This question was not
addressed by either party at the hearing of the motion nor is it addressed in
the Appellant’s Factum. I take it that the question has been sufficiently
answered.
Question at page 475
[55]
In response to the
question at page 475, the Respondent stated that “A reasonable guarantee fee in
the circumstances is the difference in value between the implicit support
derived from being a member of the GE Group and the explicit guarantee
specified in the Offering Memoranda. The quantum is a matter for expert
evidence to be adduced at trial.” The follow up questions ask the Respondent
to provide the value of those variables. The Appellant asserted that this
information is necessary in order for the Appellant to carry out the same
analysis as the Respondent.
[56]
In my view the values
to be assigned to the implicit support and the explicit guarantee are opinions.
This will be the subject of expert evidence at the trial. The question does not
have to be answered.
Question 2049
[57]
The question has been
answered.
[58]
Costs will be in the cause.
Signed at Halifax, Nova Scotia, this 15th day of December 2008.
“V.A. Miller”
Email this Content