Brelco Drilling Ltd. v. R., [1999] 4 CTC 2737

Bell 7.C.J.:

On March 6, 1998 I issued Judgment and Reasons for Judgment in this case allowing the appeal and referring the reassessment to the Minister of National Revenue for reconsideration and reassessment in accordance with those Reasons.

The Respondent, Her Majesty the Queen (“The Queen”) [1] appealed my decision to the Federal Court of Appeal. On May 11,1999 that Court issued Judgment delivered by the Chief Justice as follows:

The appeal is allowed with costs to the appellant. The judgment of the Tax Court of Canada is set aside and the matter is remitted to the Tax Court of Canada in order that it might determine, on the facts of this case, and in accordance with the contemporaneous reasons of this Court, the true value of “safe income” on hand, the portion of the capital gain accruing for the respondent that could reasonably be attributed to anything other than income earned or realized, the appropriate amount of tax-free dividends and the proper amount of deemed capital gain, if any.

Mr. Justice Linden, in his Reasons for Judgment, made the following statements:

...all the academic and judicial commentary regarding the factors which contribute to safe income agree on this: section 55(2) requires a calculation of safe income on hand based on the facts of each case. I regret to say that such a determination was not carried out in this case....

In this case, the Tax Court Judge did not undertake the task of deciding the amount of safe income on the facts of this case. With respect, it was an error not to do so. While it was correct for the Tax Court Judge to accept the agreed statement of facts, he was also under an obligation to determine the true value of safe income on hand given those facts....

In order to decide whether the calculation presented by Revenue Canada is reasonable, the Tax Court must hear evidence as to which factors do or do not reduce safe income on hand. The Tax Court must consider the Minister’s assumptions and decide whether they amount to a reasonable calculation of safe income. In this task, the parties will no doubt choose to call expert and other evidence regarding the reasonableness of Revenue Canada’s calculation of safe income. In this case, no such consideration of the evidence was undertaken.... I would therefore allow the appeal with costs to the Appellant, set aside the decision below, and remit the matter back to the Tax Court of Canada with instructions to determine, on the facts of this case, the true value of “safe income on hand”. That way, the portion of the capital gain which can reasonably be attributed to anything other than income earned or realized will be determined, following which the appropriate amount of tax-free dividends can be calculated and the proper amount of deemed capital gain, if any, can be determined.

Brelco, in section D of its Notice of Appeal to this Court defined the issue as follows:

The issue to be decided is whether the exempt deficit and Losses of each of the U.S. Subsidiaries is to be applied to reduce the Safe Income of Tried for the purposes of determining the portion of the dividend from Tricil to the Appellant which is deemed by subsection 55(2) of the Act to be a capital gain to the Appellant.

The issue was obviously framed in this fashion because the portion of the dividend in excess of “safe income” would be capital gain, the Appellant being concerned with the amount of non-business loss required to offset the taxable capital gain.

The Queen, in the Reply to such Notice of Appeal, under the heading ISSUES TO BE DECIDED stated:

The principal issue to be decided is as set out in section D of the Notice of Appeal. A secondary issue is whether the Appellant overstated its Safe Income by $451,946.00.

In my Reasons for Judgment I said, in defining the issue:

The issue is whether losses incurred in foreign affiliates of the Appellant reduce the “income earned or realized by any corporation after 1971” for the purposes of subsection 55(2) thereby affecting the amount of “safe income” available to the Appellant.

The parties agreed, at the hearing, that Brelco’s “safe income” was overstated by the aforesaid amount of $451,946. As stated in my Reasons for Judgment,

It was agreed that if the Appellant succeeds in this appeal, this calculation error will be rectified resulting in a reduction of the Appellant’s computation of “safe income”. If, however, the Appellant is unsuccessful, the calculation error will not be rectified because the result would be an increase in the amount determined by the Court to be payable by the Appellant.

This agreement left a simple statement of the issue.

With respect, my comments on the foregoing statements of Linden, J.A. are:

I. l was under no obligation to determine the amount of “safe income”. My sole task, in accordance with the above agreed statement of the issue, was to determine whether losses of Brelco’s U.S. subsidiaries should reduce “safe income”. That is precisely what I did.

2. The parties presented an Agreed Statement of Facts which, of course, was accepted by me. Counsel advised that no other evidence would be adduced. Accordingly, all evidence considered necessary by the parties to be before the Court was, in fact, before the Court. Part of the aforesaid Statement was a Schedule setting forth an Analysis of Safe Income Calculation. That Schedule, cast by me in slightly different form for purposes of clarification and included in my Reasons for Judgment, set forth Brelco’s share of losses in U.S. companies, in U.S. dollars, in the following amounts:

Tricil Ene Res	$2,843,670
Tricil Rec	$1,448,335
Tricil N.Y.	$	99,234
Tricil Env Man	$3,740,370
Redox Inc.	$	23,332
Tricil Inc.	$ 147,810

As set forth in the Schedule, upon conversion to Canadian dollars, The Queen determined the amount of safe income to be $23,149,721 and Brelco determined the amount to be $25,735,216.

The majority decision of the Federal Court of Appeal reversed my determination that the losses should not be deducted in determining the safe income. The Judgment of this Court was set aside and the matter was remitted to this Court:

in order that it might determine, on the facts of this case...

the amounts described in the Judgment as above set out.

In compliance with that Judgment the matter was set down for hearing on August 30, 1999. At that hearing, counsel for both parties advised that no new evidence, ordinary or expert, would be presented. They also advised that they had agreed on the resolution of the issue in that the above stated losses would not reduce Brelco’s “safe income” and that the amount of “safe income” would be $27,464,937 determined as follows:

With respect, when rendering judgment, I saw the computation of the capital gain portion of the dividend as a simple arithmetic exercise for Revenue Canada upon reassessment. However, in compliance with the Judgment of the Federal Court of Appeal, the amounts required by it to be determined are set forth as follows: