Citation: 2008TCC256
Date: 20080430
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
Rip, A.C.J.
[1] Her Majesty the
Queen, the respondent, has made a motion compelling the appellant General
Electric Capital Canada Inc. ("GECC") to answer questions put to it
at the examination for discovery of the appellant's nominee, David Daubaras,
which Mr. Daubaras refused to answer on the basis the answers were privileged.
The respondent submits that the questions that were posed to Mr. Daubaras
were relevant to the material issues in these appeals and that the appellant
has not provided sufficient particulars to enable respondent to determine
whether the privilege claim is proper.
[2] The motion is with
respect to appeals filed by GECC. The issue in the appeals is whether for the
taxation years 1996 and 1997, subsection 69(2) of the Income Tax Act ("Act")
applies, and for taxation years 1998, 1999 and 2000, whether subsection 247(2)
of the Act applies, to disallow the deduction of guarantee fees paid by
GECC to GE Capital, a non-arm's length United States corporation, in computing
its income for its respective taxation years. Appeals similar to these appeals
are sometimes referred to as transfer pricing cases. (I refer to the
aforementioned appeals as "Part I" appeals.) A second issue is
whether the Minister of National Revenue ("Minister") correctly
determined that Part XIII withholding tax was required to be remitted by GECC
in respect of the guarantee fees in issue, or any portion thereof, paid in the
taxation years in issue. (I refer to the latter appeals as "Part
XIII" appeals.)
[3] At the outset of
the hearing of the motion counsel advised me that the respondent had prepared
and served on the appellant amended replies to notices of appeal. The amended
replies had not yet been filed with the Registry of the Court but the parties
agreed that the hearing of the motion should proceed on the basis that the
amended replies were part of the Court record.
[4] There are seven
questions objected to by the appellant. They are questions 28, 38, 39, 136,
137, 598 and 599 (Mr. Noble is counsel for the respondent, asking the
questions; Mr. Meghji is counsel for the appellant):
26. Q. How have you informed yourself as to the reasons for
starting to charge the fee?
A. A number of ways. I've had discussions with Mr.
Parke; and Mr. Jeff Werner, who is the senior vice president and treasurer of
GE Capital in the United States; the assistant treasurer, a fellow named James
Tremante; Rick D'Avino, who is vice president and senior counsel. And I've read
the documents that we've produced and that the auditors have produced for this
case, and based on those discussions with those various individuals and the
documents I read, I've informed myself about the matter.
27. Q. So it would be correct that the requirement or the
decision to introduce the fee was something that was initiated by GE Capital
Corporation, not by the Appellant. Would that be correct?
A. They were the ones, yes, GE Capital Corporation was
the entity that started the project to work on implementing a charge for the
fee, yes.
28. Q. You've mentioned it was the decision of Mr. Parke based
on certain advice that he received and the amount of the fee was based on
certain advice or input that he received from another group within General
Electric Capital Corporation, but I'm not sure I understood your answer in
terms of what the reason for introducing the fee was. What concern was it
intended to address?
MR. MEGHJI: He can't answer that question. We're going
to take the position – Mr. Daubaras indicated to you in the answer he gave you
that the decision by Mr. Parke to introduce a fee was based upon advice he
received from the VP of tax or the tax counsel, and if he answers your
question, he would be communicating to you what that legal advice was. So we're
going to assert a privilege in terms of the advice and the information that led
Mr. Parke to the decision to charge a fee and, as for the amount, he got that
advice from treasury and I suspect that you may ask some questions about that.
. . .
38. BY MR. NOBLE: Q. All right. Could I also ask for an
undertaking that you review the relevant files, both your own and those of the
GE group, which shed light on the nature of this transfer pricing concern and,
to the extent that you can produce material that explains what the concern was
which motivated the introduction of the fee, produce non-privileged material?
MR. MEGHJI: Again, I'll take that under advisement. But
when I consider my position, may I ask you this question, Mr. Noble? It's been
on my mind. We have now got an amended pleading from you in which you have
withdrawn the allegations of motive respecting this. You alleged in your first
draft that – I can take you to the paragraph, but the paragraph dealing with
the 247(2)(b) purpose was tax, et cetera. You have now withdrawn that
allegation. So if we are not in that section, of what possible relevance does
this go to? Because as I understand the dispute between us now, it simply boils
down to is this an arm's length price.
MR. NOBLE: And whether this is an arm's length price
imports, certainly for purposes of 1996 and 1997, a concept of reasonableness,
and I would submit that the concept of reasonableness is also implicit in the
later year analysis as well when one turns to apply section 247. Reasonableness
is an extremely broad notion and I think that evidence as to the reasons for
the introduction of a guarantee fee could be relevant in assessing whether the
fee is a reasonable amount.
MR. MEGHJI: We'll take that under advisement. Thank you
for your help there.
39. BY MR. NOBLE: Q. Since I'm on this point, you may want to
take this under advisement as well, but Mr. Daubaras mentioned a number of
personnel within the GE group who were involved in the decision to introduce
the fee, and to the extent those individuals have records which could shed
light on the reasons for the introduction of the fee, could I ask for an
undertaking that those people be contacted and any records that they have
dealing with the reasons for the introduction of the fee be produced, subject
to any privilege claims you may wish to assert.
MR. MEGHJI: I'll take that under advisement as well.
. . .
136. BY MR. NOBLE: Q. Is it the Appellant's position that all
other documents that have been found that have some bearing on the reasons for
introducing the fee, other than what has been produced in the Appellant's list
of documents, are subject to privilege and, therefore, are not producible?
MR. MEGHJI: Are you basically asking me if we have
produced all of the documents that talk about the reasons? Is that what your
question is?
MR. NOBLE: Yes, subject to ones that may be privileged.
MR. MEGHJI: I'll take that under advisement as to
whether I will respond to that question.
137. BY MR. NOBLE: Q. I'd also like to be provided with a list
of the documents which do touch upon the reasons for the decision to introduce
the fee which you say are or may be subject to privilege, as well as a
description of the nature of the document (the author, the addressee, the date)
such that I can assess the privilege claim.
MR. MEGHJI: We'll take that under advisement.
. . .
598. BY MR. NOBLE: Q. Of course, and I asked yesterday for
particulars of the various documents or conversations or other communications
in respect of which the privilege claim is to be asserted such that I can
assess the merits of the claim, and just to supplement what I asked for
yesterday in case I wasn't clear or complete, I would like to know what the
identity of any individuals who were copied on the communications was. For
example, if there's a communication in respect of which privilege is asserted
which was copied to some third party such that the privilege may have been
waived, I'd like to know who those third parties were and in what capacity. . .
.
MR. MEGHJI: That's a fair undertaking, or I'll take that
under advisement, but what I'm going to do is I'm not going to disclose to you
everyone who may have been copied on it, but I will do this. I will undertake
to advise you if there were any third parties who were communicated on it, because
I don't think I have an obligation to tell you who in the company may have
received that legal advice. If it's a third party, that goes to waiver, but if
it's someone within the company, it doesn't go to waiver, and it's irrelevant
to your determination of whether – I don't think we should be obligated to give
you little pieces of information so you might try to spend the time trying to
figure out what that advice might be. I think, as you are well aware, privilege
is jealously guarded. So if your question is, give me an undertaking to tell me
under oath whether that information was communicated to a third party, I think
that's a fair undertaking.
599. BY MR. NOBLE: Q. I would include third parties as persons
or entities other than the immediate addressee of the communication and whether
they're with the GE corporate group or outside of GE altogether.
MR. MEGHJI: So your position is that if Mr. D'Avino
provided the advice to Mr. Parke and copied the CEO of the company on it,
that's a third party. That's your position.
MR. NOBLE: As I'm using that term in this exchange of
questions.
MR. MEGHJI: I can tell you right now that we will
respond to you by saying that ain't no third party.
MR. NOBLE: I have your position, then, and I thank you
for expressing it.
MR. MEGHJI: That's fine.
[5] The motion was
supported by affidavits of Karen Hodges, a paralegal in the Toronto Regional
Office of the Department of Justice. The original affidavit was sworn November
30, 2007, a supplementary affidavit was taken on December 13, 2007. Ms. Hodges
reviews correspondence between counsel for the parties describing undertakings,
answers as well as refusals to answer questions as well as refusal to provide a
listing of material in respect to which privilege was asserted, among other
things.
[6] Attached as an
exhibit to the supplementary affidavit of Ms. Hodges is a copy of a letter from
counsel for the respondent dated June 11, 2007. In that letter the respondent's
counsel declares that the line of questioning with respect to the reasons for
the guarantee fee is relevant, in addition to reasons declared during
discovery, "as it is capable of eliciting the factual contact within which
(1) the reasonableness of the amount of the fee can be assessed, and (2) the
extent to which the terms and conditions of the guarantee arrangement differed
from those that would have been made between person's dealing at arm's length,
can be assessed. The first point is referred in paragraphs 20(1)(i) and (ii) of
the Reply, and the second point is referenced in subparagraph 20(b)(i) of the
Reply".
[7] The appellant filed
affidavits by Richard D'Avino and Francesca Del Rizzo in opposition to the
respondent's motion. Mr. D'Avino is a Vice-President and Senior Tax Counsel at
General Electric Company in the United States and Senior Vice-President and Senior Tax Counsel of
General Electric Capital Corporation Inc. ("GE Capital"), the parent
of GECC. Mr. D'Avino is an active member of the District of Columbia Bar and an
inactive member of the Pennsylvania Bar. He is responsible for providing legal
advice to GE Capital on matters of tax compliance and planning, including
international tax matters such as transfer pricing issues.
[8] Because the grounds
for dismissing the respondent's motion are not based on any particular facts
set out in his affidavit, I do not intend to deal in any length with Mr.
D'Avino's affidavit. His affidavit is directed to support the claim of
privilege of documents and whether documents created or considered by a person
who was not a member of the bar, although a law graduate, are subject to
privilege.
[9] Mr. D'Avino
understood that GE Capital had originally guaranteed all of GECC's commercial
paper and short-term debt programs without any charge. This raised the question
of "whether the practice of not charging for explicit credit support
violated the arm's length terms required under transfer-pricing rules". He
and his staff co-ordinated an inquiry into the arm's length issue to provide an
opinion to the Chief Financial Officer of GE Capital, the person to whom Mr.
D'Avino reported. A guarantee fee was instituted in 1995. The amount of the fee
was determined by GE Capital's treasury department.
[10] Ms. Del Rizzo, a
legal assistant at the firm of Osler, Hoskin and Harcourt LLP, counsel for the
appellant, attached as exhibits to her affidavit copies of replies to
undertakings by the appellant and confirmation of appellant counsel's refusal
to produce other items.
[11] Appellant's counsel
delivered to me a binder of copies of the disputed documents for review. A covering
letter without the copies of documents was copied to respondent's counsel.
PLEADINGS
[12] In reviewing the
documents I have given considerable weight to the contents of the pleadings in
the notices of appeal and amended replies to the
notices of appeal. In Fink v.
Canada,
Bonner J. noted with approval the following passage from Holmested and
Watson, Ontario Civil Procedure:
It is a cardinal rule that discovery is
limited by the pleadings. Discovery must be relevant to the issues as they
appear on the record: Playfair v. Cormack (1913), 4 O.W.N. 817 (H.C.); Jackson
v. Belzburg, [1981] 6 W.W.R. 273 (B.C.C.A.). The party examining has no
right to go beyond the case as pleaded and to interrogate concerning a case
which he has not attempted to make by his pleadings.
[13] The nub of the
motion is the Attorney General's amended replies to the notices of appeal. The amended
reply to the notice of appeal for taxation years 1998 to 2000, inclusive,
apparently addressed matters that were the subject of a Demand for Particulars
by the appellant. In the original replies the Attorney General relied on
paragraphs 247(2)(a) and (b) of the Act. In the amended replies,
the Attorney General withdrew all references to paragraph 247(2)(b)
and facts and allegations relying on that provision. Paragraphs 247(2)(a)
and (b) read as follows:
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(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 and
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(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:
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(a) the 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, or
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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,
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(b) the transaction or series
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b) les faits suivants se vérifient relativement à
l'opération ou à la série:
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(i) would not have been entered into
between persons dealing at arm's length, and
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(i) elle n'aurait pas été conclue entre
personnes sans lien de dépendance,
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(ii) can reasonably be considered not
to have been entered into primarily for bona fide purposes other than
to obtain a tax benefit,
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(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,
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any amounts that, but
for this section . . . would be determined for the purposes of this Act in
respect of the taxpayer . . . for a taxation year . . . shall be adjusted . .
.
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Les montants qui, se ce n'était le present article
[…] seraient determines pour l'application de la présente loi quant au
contribuable […] pour une année d'imposition […] font l'objet d'un
redressement […]
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[14] In assessing
taxation years 1996 and 1997 the Minister applied subsection 69(2) of the Act:
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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 therefor.
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Lorsqu'un contribuable a payé ou est convenu de
payer à une personne non‑résidente avec qui il avait un lien de dépendance,
soit à titre de prix, loyer, redevance ou autre paiement pour un bien ou pour
l'usage ou la reproduction d'un bien, soit en contrepartie du transport de
marchandises ou de voyageurs ou d'autres services, une somme supérieure au
montant qui aurait été raisonnable dans les circonstances si la personne
non-résidente et le contribuable n'avaient eu aucun lien de dépendance, ce
montant raisonnable est réputé, pour le calcul du revenu du contribuable en
vertu de la présente partie, correspondre à la somme ainsi payée ou payable.
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[15] Motive is not referred to in subsection 69(2). Subsection
69(2) and any facts relating to it are not issues in this motion.
Provisions Withdrawn By Respondent
[16] The provision that was
struck from both Part I and Part XIII replies to the notices of appeal and does
not appear in the amended replies is the following paragraph:
Other Material Facts
19. It can
reasonably be considered that the guarantee fee arrangements at issue were not
entered into primarily for bona fide purposes other than to obtain tax
benefits.
[17] The provisions also struck
from the Part I reply to the notice of appeal are:
B. Issues To Be
Decided
20. The issues are
as follows:
. . .
b) in respect
of the Appellant's 1998, 1999 and 2000 taxation years, whether subsection
247(2) of the Act was correctly applied to increase the Appellant's income by
the full amount of the guarantee fees that were deducted, and:
. . .
(ii) whether the
guarantee arrangements entered into between GE Capital and the Appellant would
not have been entered into between persons dealing at arm's length, within the
meaning of paragraph 247(2)(b) of the Act;
(iii) whether the
guarantee arrangements entered into between GE Capital and the Appellant can
reasonably be considered not to have been entered into primarily for bona
fide purposes other than to obtain tax benefits within the meaning of
paragraph 247(2)(b) of the Act; . . .
[18] The issues to be
decided according to paragraph 20 of the Part I amended reply to the notice of
appeal are:
20. . . .
a) in respect of
the Appellant's 1996 and 1997 taxation years,
i) whether the payment of any guarantee
fees by the Appellant to GE Capital would have been considered reasonable in
the circumstances, had the Appellant and GE Capital been dealing at arm's
length within the meaning of subsection 69(2) of the Act;
ii) what amount of guaranteed fees, if
any, were reasonable in the circumstances;
b) in respect of
the Appellant's 1998, 1999 and 2000 taxation years, whether subsection 247(2)
of the Act was correctly applied to increase the Appellant's income by
the full amount of the guarantee fees that were deducted, and:
(i) whether the
terms or conditions made or imposed differed from those that would have been made
between persons dealing at arm's length, within the meaning of paragraph
247(2)(a) of the Act; and
(ii) if the
Minister was not correct in increasing the Appellant's income by the full
amount of fees that were deducted, what was the correct amount of the
adjustment to be made pursuant to subsection 247(2) of the Act.
[19] The issues to be
decided according to the Part XIII amended reply to the notice of appeal are:
a) whether the
Minister correctly denied the deduction, or any portion thereof, in respect of
the guarantee fee amounts in issue by the Appellant to GE Capital, in respect
of the Appellant's 1996 and 1997 taxation years pursuant to subsection 69(2) of
the Act, and in respect of the Appellant's 1998, 1999, and 2000 taxation
years, pursuant to subsection 247(2) of the Act; and
b) whether the
Minister correctly determined that Part XIII withholding tax at the rate of 5%
was required to be remitted by the Appellant in respect of the guarantee fees
in issue, or in respect of any portion thereof, for the Appellant's 1996, 1997,
1998, 1999, and 2000 taxation years.
[20] Respondent's counsel
argued that paragraphs 18, 20 and 21 of the notices of appeal constituted a
waiver of privilege. Respondent's counsel argues that the appellant has made
the motivation for the introduction of the guarantee fee an issue in paragraph
21 of the amended replies, and therefore has waived solicitor/client privilege
with respect to matters relating to that motivation, including reliance on
legal advice. These paragraphs read:
18. GE Capital
unconditionally and irrevocably guaranteed all payments due under all Debt
Securities issued by the Appellant after 1988 (the "Financial
Guarantees").
. . .
20. In 1995, GE
Capital began charging the Appellant a fee for the Financial Guarantees. These
guarantee fees were phased in so that no fee was payable with respect to Debt
Securities issued by the Appellant prior to the implementation of the guarantee
fees.
21. The Appellant
and GE Capital formalised the guarantee fees in written legal agreements
("Guarantee Fee Agreements"). Pursuant to the Guarantee Fee
Agreements, GE Capital agreed to guarantee the Appellant's Debt Securities in
order to induce investors to purchase them. The Appellant, in turn, agreed to
pay a fee to GE Capital equal to 1% (or 100 basis points) per annum of the
principal amount of the Debt Securities outstanding during a year.
[21] In counsel's view
paragraph 21 deals with the guarantee fee and that speaks to the motive of the
appellant in introducing the guarantee fee. She also refers to the recitals of
a Guarantee Agreement between GECC and GE Capital which read, in part:
WHEREAS, in order to induce . . . the
holders of the Notes . . . to purchase the Notes GE Capital has agreed to issue
one or more guarantees in favour of each of the Beneficiaries . . .
AND WHEREAS the subsidiary has agreed to
pay an annual fee to GE Capital in respect of the Guarantees,
and the Guarantee Agreement provides
for a fee equal to one per cent per annum times the principal amount of the
Notes outstanding.
[22] Counsel may also be
referring to the following excerpt from the examination for discovery of Mr.
Daubaras on May 1, 2007:
135. BY MR. NOBLE: Q. All right. The
suggestion has been made that these two pages of handwritten notes may have
some relationship with the decision to introduce the guarantee fee and mention
has also been made that searches have been done of a number of files for
information. Is it the Appellant's position that these are the only two pages
of documents that have been found in the searches that have been done that may
have some bearing on the decision to implement the fee?
MR. MEGHJI: No, that's not
the Appellant's position. The Appellant's position is there may be documents
that are privileged, for example.
136. BY MR. NOBLE: Q. Is it the
Appellant's position that all other documents that have been found that some
have bearing on the reasons for introducing the fee, other than what has been
produced in the Appellant's list of documents, are subject to privilege and,
therefore, are not producible?
MR. MEGHJI: Are you basically
asking me if we have produced all of the documents that talk about the reasons?
Is that what your question is?
MR. NOBLE: Yes, subject to
ones that may be privileged.
MR. MEGHJI: I'll take that
under advisement as to whether I will respond to that question.
137. BY MR. NOBLE: Q. I'd also like
to be provided with a list of the documents which do touch upon the reasons for
the decisions to introduce the fee which you say are or may be subject to
privilege, as well as a description of the nature of the document (the author,
the addressee, the date) such that I can assess the privilege claim.
MR. MEGHJI: We'll take that
under advisement.
[23] I cannot find any
evidence of a waiver of privilege in the materials presented to me. No question
of motive is raised in paragraphs 18, 19 and 20 of the notices of appeal. The
exchange between counsel during discovery is not a waiver of privilege by the
appellant. I have no idea what is written on the "two pages of handwritten
notes" referred to by Mr. Noble. As far as paragraph 21 and the recitals
of the Guarantee Agreement are concerned, they merely state that as between the
parties to the guarantee and loan are concerned, GE Capital guarantees the
debt for a fee so as to induce persons to lend money to GECC, no more, no less.
[24] Respondent's counsel
stated that "the reasons for the introduction of the guarantee fee could
be relevant in assessing whether the fee's a reasonable amount". No substantial
submissions were made by respondent's counsel on this point and I have
difficulty understanding how, in the circumstances at bar, motive may affect
reasonableness.
[25] Once the Minister
withdrew reference in the replies to paragraph 247(2)(b) the appeals for
1998, 1999 and 2000 are to be decided on basis of paragraph 247(2)(a)
of the Act. Thus the question of motive disappears in the appeals for
1998, 1999 and 2000. Motive was never an issue for the earlier years;
subsection 69(2) does not refer to any motive for the transaction. The
Part XIII appeals are related to the Part I appeals. The basic issue,
therefore, is whether the terms and conditions of the guarantee fees agreed to
by the appellant and GE Capital differ from those that would have been made by
GECC and a person with whom it dealt with at arm's length. Motivation for the
guarantee fee is not an issue in these appeals and motivation should not be
canvassed by the Crown.
[26] Any documents or
information as to the reason for introducing the fee (Questions 28, 39, 136 and
137), motivation for the introduction of the fee (Question 38) or persons
involved in advising or deciding to introduce a fee are not relevant. The
respondent, however, may obtain information on how the amount of the guarantee
fee was determined.
[27] With respect to
Questions 598 and 599, the respondent is not entitled to the various documents
or communications in respect of the privilege claimed and the names of persons
who originated the documents or to whom they were sent or copied. I have
determined the documents are irrelevant; the need to know the names of persons
attached to these documents is not necessary. In any event in preparing lists
of documents for trial, the parties proceeded by way of Rule 81 of the Tax
Court of Canada Rules (General Procedure) (Partial Disclosure) which does
not require a party to list its privileged documents. It is Rule 82, Full
Disclosure, that requires a party to list documents for which it claims
privilege and the grounds for the claim. In Shell Canada v. The Queen, Christie A.C.J., as he then was,
opined that:
. . . the words "and that are not
privileged" in this subsection relate only to the reference to section 82
because section 81 simply does not envisage the listing of documents by the
person producing the list in respect of which that person will seek to make a
claim of privilege.
The respondent, having elected to
proceed by way of Rule 81, cannot in the present motion accomplish what is
provided for in Rule 82.
[28] The motion is
dismissed. Costs will be in the cause.
Signed at Ottawa, Canada, this 30th
day of April 2008.
"Gerald J. Rip"
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