Citation:2005TCC723
Date: 20051103
Docket: 2002-479(IT)G
2002-4202(IT)G
BETWEEN:
UNIVAR CANADA LTD.,
(formerly Vopak Canada Ltd.
Van Waters & Rogers Ltd.)
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.
General
The statutory provisions referred to herein are all in
reference to the Income Tax Act (“Act”) unless otherwise stated.
ISSUES
I. In respect of the six August 9, 2002 reassessments (“six reassessments”) of the Appellant
for the following taxation years, namely:
1.
taxation year ended
February 29, 1996
2.
taxation year ended July 15, 1996
3.
taxation year ended
December 31, 1996
4.
1997 taxation year
5. 1998 taxation year
6.
1999 taxation year
could it be reasonably be considered that the
principal purpose for the acquisition by the Appellant of shares of Van Waters
& Rogers (Barbadosco) Ltd. (“Barbadosco”) was to permit the Appellant to
avoid, reduce or defer the payment of tax that would otherwise be payable under
the Act within the meaning of paragraph 95(6)(b) with the result
that:
(a) Barbadosco would
not be a foreign affiliate of the Appellant, and, therefore
(b) dividends received
by the Appellant from Barbadosco would not be deductible under subsection
113(1)?
II. Alternatively,
(a)
respecting the six
reassessments,
(i) was there an
“avoidance transaction” (subsection 245(3)), and, if so
(ii) by virtue of
subsection 245(4) does subsection 245(2) not apply in that it may reasonably be
considered that the transaction did not result directly or indirectly in
(i) a misuse of clause
95(2)(a)(ii)(A), respecting Part I tax,
or
(ii) an abuse having regard
to the provisions of the Act read as a whole?
(b)
respecting the August 6, 2001 reassessment for non-resident tax under Part XIII for
the 1995 taxation year,
(i) was there an
“avoidance transaction” (subsection 245(3)), and, if so
(ii) by virtue of
subsection 245(4) does subsection 245(2) not apply in that it may reasonably be
considered that the transaction did not result in
(i) a misuse of
subsection 15(2.2) respecting Part XIII tax, or
(ii) an abuse having
regard to the provisions of the Act read as a whole?
III. Was the September 3, 2002 reassessment for the taxation year ended July 15,
1996 respecting a penalty under subsection 162(1) for failure to file a return
of income as and when required and respecting the underlying tax, stature barred,
having been made after the expiration of the normal reassessment period?
CONCLUSIONS
I
have concluded that:
I. With
respect to the six reassessments, it cannot, under paragraph 95(6)(b) reasonably
be considered that the principal purpose for the acquisition of the shares of
Barbadosco was to permit the Appellant to avoid, reduce or defer the payment of
tax or any other amount that would otherwise be payable under the Act.
II. With
respect to the six reassessments, there was no avoidance transaction within the
meaning of subsection 245(3).
III. With respect to the August 6, 2001 reassessment
there was no avoidance transaction within the subsection of 245(3).
IV.
With respect to the September 3, 2002
reassessment for a penalty under subsection 162(1), the appeal will be allowed.
REASSESSMENTS
For ease of understanding the reassessments the
attached Appendix A showing transactions should be consulted.
[1] The Minister of National Revenue
(“Minister”) issued original Notices of Assessment to the Appellant in respect
of three 1996 taxation years (there having been three year-ends in that
calendar year), and in respect of the 1997, 1998 and 1999 taxation years. For
each of those taxation years, the Appellant included in its income dividends
from Barbadosco and, pursuant to the provisions of subsection 113(1), deducted
an equivalent amount.
[2] On September 7, 2001 the Minister reassessed
the Appellant for those six taxation years by adding, in each such year, an
amount described as:
Interest Income from Univar Europe N.V.
No other adjustments to income having been made, it is
apparent that the Minister simply added the aforesaid amounts characterized as
interest, making no reference to the former dividend income inclusion and
corresponding deduction. Each of the Notices of Reassessment bears the
endorsement:
Section 245 of the Income Tax Act is a position related to this
assessment.
Unfortunately, as is mostly the case, the Minister
neglects to include a statement of the basis of reassessment. Subsequent
information confirmed that the Minister’s basis for same was section 245.
[3] On August 9, 2002, the Minister again
reassessed the Appellant for those six taxation years. Each Notice of
Reassessment bears the following:
Adjustments to Active Business Income
Deduct:
Interest income previously assessed.
A notation on each such Notice of Reassessment reads
as follows:
The section 113 dividend deduction previously allowed, is now denied
pursuant to subsection 95(6) of the Act.
In the alternative, section 245 applies to include in income of
Univar Canada Ltd. interest received by Van Waters & Rogers (Barbados) Ltd. from loans made to various
non-Canadian companies.
As set out later, Barbadosco did not make such loans.
It simply purchased the debt owed by those companies to UC.
[4] On August 6, 2001
the Minister issued a Notice of Reassessment cancelling and replacing a Notice
of Assessment dated July 25, 2001 for the Appellant’s 1995 taxation year. The endorsement on the Notice of
Reassessment reads as follows:
This “Notice of Reassessment” cancels and
replaces “Notice of Assessment” No. 6161436 dated July 25, 2001. You had to
deduct and remit $232,201.00 of non-resident Part XIII tax on amounts paid or
credited to non-resident(s) of Canada.
As a result of this decrease, we have
adjusted the arrears balance accordingly.
We charge interest at the prescribed rate
on the unpaid balance.
This reassessment appears to have
arisen from the Minister’s view of recharacterizing the within transactions to
effect an assessment as a result of sections 15, 212, 214 and 215. Respondent’s
counsel stated that:
The tax benefit was Univar Europe’s
avoidance of its liability to pay, and the Appellant’s liability to deduct or
withhold and remit to the Receiver General of Canada, the tax imposed on the
indebtedness arising between Univar Europe and VWRB under Part XIII of the
Income Tax Act, in particular, by a combination of subsections 15(2), 15(2.1),
15(2.2), 212(2), 214(3), 215(1) and 215(6) of the Act.
[5] On September 3, 2002, the Minister
reassessed the Appellant for its taxation year ending July 15, 1996 consisting
of, in the words of the SUMMARY OF REASSESSMENT:
Penalties: Net
balance
Subsection 162(1) late-filing penalty $27,351.10
This was the third reassessment for
this taxation year.
The second reassessment dated August 9, 2002 stated:
We have cancelled the late-filing penalty
previously assessed under subsection 162(1) of the Income Tax Act.
This penalty is computed as a
percentage of tax payable.
The first reassessment dated
September 7, 2001 reassessed a late-filing penalty under subsection 162(1).
GENERAL
[6] The parties
submitted an AGREED STATEMENT OF FACTS with five charts showing companies in
the international Univar group of corporations appended (“UC Group”). Those
charts used several historical names of some companies rendering the corporate structure
difficult to comprehend. In addition, although I sought, at the beginning of
the hearing, to gain agreement on the use only of the ultimate changed name and
of a simple chart setting out readily identifiable names and the important
facts, neither that chart nor those names were used at the hearing. To avoid
reader confusion or early loss of interest I set forth a chart as Appendix A
hereto and forming part of these Reasons virtually identical to that I
presented in Court. It encapsules the corporate structure and the basic
transaction facts in readily comprehensible fashion.
[7] The Court has no
control over some aspects of the preparation and presentation of a case.
However, some comments in respect of this appeal may be of assistance to
counsel generally.
[8] The Minister of
National Revenue (“Minister”) followed unusual assessing procedures in this
matter. As set forth under REASSESSMENTS the Minister’s first reassessment of
six of the Appellant’s taxation years, adding interest to its income, was based
on section 245. The second reassessment, disallowing the subsection 113(1)
dividend deduction, was based upon subsection 95(6) and, in the alternative, on
section 245. Two other Notices of Reassessment were issued. One assessed a
non-resident Part XIII tax for the Appellant’s 1995 taxation year. The other
assessed a penalty for one of the Appellant’s three 1996 taxation years.
[9] The Appellant filed
a Notice of Appeal respecting the aforesaid first reassessments and the
withholding tax assessment. Then it filed another Notice of Appeal in respect
of a second reassessment of the six taxation years and the late filing penalty
reassessment. Obviously, the second reassessments, disallowing the subsection
113(1) deduction for those six taxation years, replaced the first reassessments
in respect of those years. However, the Part XIII tax reassessment for 1995
contained in the first Notice of Appeal survived and had to be addressed in
Court.
[10] The first Notice of
Appeal contained 90 paragraphs, a substantial number of which were unnecessary.
The form of Notice of Appeal prescribed by the General Procedure Rules requires
that the Appellant relate the material facts relied on, specify the issues to
be decided, refer to the statutory provisions relied on and set forth the
reasons upon which the Appellant intends to rely. The Reply to that Notice of
Appeal, although containing only 42 paragraphs, was not succinct and to the
point.
[11] The second Notice of
Appeal, containing 72 paragraphs, also lacked brevity and conciseness. The
Reply containing 47 paragraphs suffered similarly.
[12] I raise these
matters as a prelude to my statement that the content of the appeals and the
reason for the continued existence of two Notices of Appeal was not clearly
stated. In addition, the issues were not succinctly and clearly presented.
Indeed, at the opening of the hearing, I sought agreement on the issues. I
prepared a summary of what I perceived to be the issues and furnished counsel
with same. It was not until the end of the ninth day of the hearing that an
agreement on the issues was reached.
[13] A brief statement of
what was in issue from each Notice of Appeal, a brief description of the
reassessments and a brief description of the issues all could have been made by
a co-operative act of counsel before the hearing, thus saving hours and hours
of unnecessary search for comprehension of unfurnished detail. Further, the
transcript of evidence consisting of nine thick volumes totalled 2,053 pages.
The Appellant entered five thick volumes of documents and three volumes of
“read-ins” of the manager of GAAR and Technical Support Section of the Canada Revenue
Agency. The Appellant entered eleven volumes of documents as exhibits. The
Appellant’s written submission was a tome of 217 pages. Admittedly, there were
a great number of references to the transcript respecting certain facts and
statements. The Appellant’s oral submission took the better part of one and
one-half days. The Respondent’s written submission consisted of 52 pages with
163 paragraphs.
[14] This case is complex.
I understand counsel wanting to be certain that all facts which may be relevant
be placed before the Court. However, better selection and precision in
preparation would have made the presentation of evidence and submissions much
shorter.
FACTS
[15] The details of the
reassessments have already been presented. I now set forth a summary of the
facts upon which my conclusions are based. Those facts, together with related
facts, all in great detail, are set forth in Appendix B attached to and forming
part of these Reasons for Judgment. They include the Agreed Statement of Facts
filed by counsel and a presentation of the evidence of three of the Appellant’s
witnesses.
[16] The Appellant primarily carried on the business of
industrial and agricultural chemical processing and distribution. Pruitt
described Univar as a component that represented “maybe 15 to 20 percent of the
entire UC conglomerate. This being a seasonal business, it regularly financed
payments to suppliers of agricultural chemicals during the summer months and
received payment after harvest.
[17] The UC Group
policy was not to pay dividends. Only one dividend was paid by the Appellant to
UC, that being the amount of approximately $6,000,000 in 1980.
[18] In the early
1990s the Appellant and the UC Group were facing a number of related and
distinct problems.
Excess Cash
[19] The Appellant had
excess cash from increasingly profitable operations and a strong balance sheet.
It tried, to the fullest extent possible, to maximize monetary returns through
various acquisitions or investments. It used some of its excess cash to fund
acquisitions and the expansion of business operations. It expected the
generation of excess cash to escalate, thereby resulting in serious treasury
management issues. There were no further acquisition opportunities available
after those made in the 1991 to 1993 period. The Appellant undertook to
identify long-term investment opportunities that would produce a higher rate of
return than the interest rate on Canadian Bankers’ Acceptance Notes.
Leverage
[20] Pruitt, the Chief
Executive Officer of UC at the time of the transactions herein, believed that a
company’s debt to equity ratio should be one to one in that if the business was
under-leveraged (i.e., too little debt) it was not fully utilizing its capital.
The Appellant’s debt to equity ratio was significantly below the ideal ratio.
Pruitt described it as “woefully” under-leveraged. Pruitt testified that one
way of improving the ratio was for the company to borrow against its available
capital to make investments that had a rate of return in excess of the interest
rate on the fund borrowed.
Guarantee Fee Issue
[21] In the 1989
through 1992 fiscal years UC and its wholly owned US subsidiary,
the operating company, were borrowers under the 1989 Credit Agreement in
respect of which the Appellant was the sole guarantor. As a result of the
Appellant’s guarantee the Minister reassessed the Appellant for its 1989 to
1992 taxation years to include in its income an amount for providing a
guarantee of the obligations of UC. That issue was resolved, but not until
September, 1996. In the 1992 to 1995 fiscal years UC and some members of the
Group, including the Appellant, were borrowers under another credit
arrangement, the Appellant being an authorized borrower and jointly and
severally liable for the obligations of each. Pruitt and Lundberg testified
that although this should have eliminated the Appellant’s exposure to income
inclusion, both the Appellant and UC continue to be concerned that the Minister
would pursue this issue.
[22] As a result of
the Appellant’s status as a guarantor of the 1989 Credit Agreement and joint
and several liability of the 1992 Credit Agreement, the law firm, Baker
McKenzie, advised UC that it had a problem under Internal Revenue Code
provision 956. The advice was that it would deem UC to have received, as a
dividend, on most, if not all, of the Appellant’s earnings and related deemed
taxes.
Debt Within the Group
[23] In June 1991 UE
borrowed funds from its shareholders and loaned the proceeds of those loans to
the UK
and Swedish operating companies. Some loans were interest bearing and others
non-interest bearing. As a result, UC was holding a disproportionate amount of
the Group’s debt and was looking for strategies where it could equalize the
debt to equity ratios throughout the Group as a whole.
Other Issues
[24] The aforesaid
guarantee arrangements created American tax issues for UC involving the
application of US foreign tax credit rules and limitations on their use. Those
limitations created “excess foreign tax credits” subject to a two year
carry-back and five year carry-forward life. They could be used only to the
extent of “qualifying foreign source income”, the ability to earn same being
dependent on “overall foreign loss”. The “overall foreign loss” was a
significant deterrent to the use of foreign tax credits by UC. Lundberg was
preoccupied with resolving UC’s excess foreign tax credit issues.
[25] In addition,
there were too many tiers of Group in Europe which created US tax problems, the result of which
was that the operating companies had to be consolidated.
[26] In the early
1990s the Appellant and UC explored alternative investment strategies to
address the foregoing problems. In early 1993, based on professional advice,
Pruitt proposed and the Group decided to implement the following sequence of
events as an integrated solution to the problems which, over a two-year period,
evolved
into the following:
(a) The number of tiers within the
Group in Europe would be reduced.
(b) A greater amount of the
European loans would be restructured into interest bearing obligations so the
operating companies would bear their proportionate amount of the Group’s debt
and the notes receivable would become an attractive investment.
(c) The Appellant and UE would
enter into a Multi-Currency Line of Credit.
(d) The Appellant would establish
and capitalize an international financing subsidiary in a jurisdiction which
had a corporate tax rate of less than 90 percent of the prevailing US corporate
federal tax rate and would have no existed retained earnings or profits
(“NEWCO”).
(e) NEWCO would purchase the notes
receivable from UC, earn interest income thereon and pay dividends to the
Appellant.
(f) The Appellant would use a
combination of excess cash and borrowed funds to capitalize NEWCO and thereby
improve its debt to equity ratio while still generating a good return on its
investment, and
(g) These solutions would also
address a number of American tax issues.
[27] The Appellant
performed due diligence to ensure that the integrated solution was in its best
interests. Canadian tax issues were reviewed as part of its due diligence. The
Appellant determined that the investment in Barbadosco would be economically
viable and generate a reasonable return. Tole characterized the integrated
solution as an “elegant solution”.
[28] Barbados was suggested, and ultimately chosen, over a number
of other countries, as the jurisdiction in which to incorporate NEWCO because
of the low corporate tax rate and all the necessary corporate, legal and
banking requirements already extant due to the presence of many international
financing corporations.
[29] The integrated solution was implemented. UE would then pay interest to
Barbadosco which, after tax and administrative costs, would pay the remainder,
as a dividend, to the Appellant. The interest to Barbados would be active
business income and the Appellant would, accordingly, be entitled to deduct the
appropriate amount pursuant to paragraph 113(1)(a).
[30] I reiterate that
the evidence of Pruitt, Lundberg and Tole was clear that no consideration was
ever given to the Appellant acquiring the notes receivable itself because that
would not have resolved any problem.
ANALYSIS
Applicable Statutory Provisions
[31] In issuing the
six reassessments (other than the subsection 162(1) penalty reassessment) the
Minister relied upon subsection 95(6)(b). It reads as follows:
95(6) Where rights or shares issued, acquired or disposed of to
avoid tax – For the purposes of this subdivision (other than section 90),
(b) where a
person or partnership acquires or disposes of shares of the capital stock of a
corporation, either directly or indirectly, and it can reasonably be considered
that the principal purpose for the acquisition or disposition of the shares is
to permit a person to avoid, reduce or defer the payment of tax or any other
amount that would otherwise be payable under this Act, those shares shall be
deemed not to have been acquired or disposed of, as the case may be, and where
the shares were unissued by the corporation immediately prior to the
acquisition, those shares shall be deemed not to have been issued.
The Minister’s
alternative argument respected the application of section 245, reading as
follows:
245.(1) [Definitions] In this section,
"tax benefit" means a
reduction, avoidance or deferral of tax or other amount payable under this Act
or an increase in a refund of tax or other amount under this Act;
“transaction" includes an
arrangement or event.
(2) [General anti-avoidance
provision] Where a transaction is an avoidance transaction, the tax
consequences to a person shall be determined as is reasonable in the
circumstances in order to deny a tax benefit that, but for this section, would
result, directly or indirectly, from that transaction or from a series of
transactions that includes that transaction.
(3) [Avoidance transaction] An
avoidance transaction means any transaction
(a) that, but for this
section, would result, directly or indirectly, in a tax benefit, unless the
transaction may reasonably be considered to have been undertaken or arranged
primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a
series of transactions, which series, but for this section, would result,
directly or indirectly, in a tax benefit, unless the transaction may reasonably
be considered to have been undertaken or arranged primarily for bona fide
purposes other than to obtain the tax benefit.
(4) [Where s. (2)
does not apply] For greater certainty, subsection 245(2) does not apply to a
transaction where it may reasonably be considered that the transaction would
not result directly or indirectly in a misuse of the provisions of this Act or
an abuse having regard to the provisions of this Act, other than this section,
read as a whole.
(5) [Determination of
tax consequences] Without restricting the generality of subsection 245(2),
(a) any deduction in
computing income, taxable income, taxable income earned in Canada or tax
payable or any part thereof may be allowed or disallowed in whole or in part,
(b) any such deduction, any
income, loss or other amount or part thereof may be allocated to any person,
(c) the nature of any
payment or other amount may be recharacterized, and
(d) the tax effects that
would otherwise result from the application of other provisions of this Act may
be ignored,
in determining the tax consequences
to a person as is reasonable in the circumstances in order to deny a tax
benefit that would, but for this section, result, directly or indirectly, from
an avoidance transaction.
I now set forth in
table form, the comparative steps for analysis of the two aforesaid sections in
relation to the facts of this case:
|
Subsection
95(6)
|
Section
245
|
|
(a)
acquisition of shares of Barbadosco.
|
(a)
a “transaction” which includes an arrangement or event.
|
|
(b)
did the acquisition permit a person to avoid, reduce or defer payment of that
“that would otherwise be payable”?
|
(b)
did the transaction result in a “tax benefit” which “means a reduction,
avoidance or deferral of tax…”
|
|
(c)
can it reasonably be considered that the principal purpose for the
acquisition is to so avoid, reduce or defer tax otherwise payable?
|
(c)
would the transaction be an “avoidance transaction” and can it reasonably be
considered to have been undertaken or arranged primarily for bona
fide purposes other than to so reduce, avoid or defer a tax benefit?
|
|
|
(d)
if there is an “avoidance transaction” can it reasonably be considered that
it would result in a misuse of the provisions of the Act or an abuse having
regard to the provisions of the Act, other than section 245, read as a whole?
|
Respecting the
penalty reassessment, subsection 162(1) reads:
Every person who fails to file a
return of income for a taxation year as and when required by subsection 150(1)
is liable to a penalty equal to the total of
(a percentage formula
follows)
Respecting the
Minister’s ability to reassess the penalty subparagraph 152(4)(b)(iii)
reads:
The Minister may at any time make an
assessment, reassessment or additional assessment of tax for a taxation year,
interest or penalties, if any, payable under this Part by a taxpayer or notify
in writing any person by whom a return of income for a taxation year has been
filed that no tax is payable for the year, except that an assessment,
reassessment or additional assessment may be made after the taxpayer’s normal
reassessment period in respect of the year only if …
(b) the
assessment, reassessment or additional assessment is made before the day that
is 3 years after the end of the normal reassessment period for the taxpayer in
respect of the year and…
(iii) is made as a consequence of
a transaction involving the taxpayer and a non-resident person with whom the
taxpayer was not dealing at arm’s length.
Tax Benefit
[32] Essentially, the tax “that would otherwise be payable”
referred to in paragraph 95(6)(b) is equivalent to the “tax benefit”
under section 245.
[33] This is not a situation in which tax payable by Univar is
reduced, avoided or deferred by any transaction that is part of a series of
transactions.
[34] In McNichol v.
HMQ 97 D.T.C. 111 this Court said at page 119:
There is
nothing mysterious about the subsection 245(1) concept of tax benefit. Clearly
a reduction or avoidance of tax does require the identification in any given
set of circumstances of a norm or standard against which
reduction is to be measured.
(Emphasis
added.)
[35] In that case the
termination of a corporation’s affairs was desired. The relevant parties sought
a distribution of its funds in a manner other than by way of dividend. That
manner resulted in an arrangement producing capital gains taxed, because of
capital gains exemptions, in an amount appreciably less than otherwise
would
have occurred. The above continued as follows:
Difficulties
may exist in other cases in identifying the standard but in this case there is
no such difficulty. The benefit sought by the appellants is clearly identified
in the March 16, 1989 letter of Mr. Dunnett. It is the difference between tax
payable by the appellants upon receipt of taxable dividends and that payable
upon realization of capital gains from the disposition of shares. It is beside
the point that such benefit may also be described as the absence of a
detriment. It cannot be said that the standard against which reduction is to be
measured is nil on the basis that, absent a sale of shares, no tax would have
been payable. For the appellants doing nothing was never in the realm of the
possible, for their goal, present throughout, was the realization of the
economic value of their shares…Their choice was between distribution of that
accumulated surplus by way of liquidating dividend and sale of the shares and
in choosing the latter they chose a transaction that resulted in a tax benefit
within the subsection 245(1) definition.
[36] In Canada Trustco, 2005 SCC 54 the Supreme Court
of Canada said:
Whether a tax benefit exists is a factual
determination, initially by the Minister and on review by the courts, usually
the Tax Court.
The Court said further that in some instances:
…it may be that the existence of a tax benefit can
only be established by comparison with an alternative arrangement.
[37] Throughout the
appeal, the Respondent’s cross-examination of Pruitt, Lundberg and Tole and the
Respondent’s submissions clung to the hypothetical situation of the Appellant
having acquired the debt owing by UE to UC as “an alternative arrangement”.
Each of Pruitt, Lundberg and Tole were, without doubt, credible. The evidence
of Pruitt, Lundberg and Tole, including all comments with respect to all
documents presented to them by counsel for both parties form the factual basis
which I have considered in my analysis. The evidence of all three such
witnesses was clear that there was never any intent for Univar to acquire that
debt and, in fact, Univar did not acquire that debt. It was acquired by
Barbadosco with the monies used by Univar to subscribe for shares of
Barbadosco.
[38] An example of the
foregoing appears in the Respondent’s written submission
which
reads as follows:
The Respondent
submits that in some cases a reasonable measure of the taxes otherwise payable
under the Act might be ascertained by determining the amount of tax that
would have been paid by the shareholder on the income from the asset if it held
the asset that the corporation acquired with the funds invested in the shares.
It need not be contemplated that the shareholder would ever have contemplated
acquiring that asset directly particularly if the sole reason that it would not
be feasible to do so is the tax that would be payable under the Act on the
income from the assets. …
The focus of
paragraph 95(6)(b) is the receipt of money by shareholders from their
corporations. Such money can be received by dividends, loan or interest (if the
shareholder is a creditor of the corporation). In the present case, the basic
or core intent of the transactions in issue was that the interest payable on
the Univar Europe notes be received by the Appellant tax-free. The only way
this could be accomplished under the Act was to pay this interest income
to VWRB and the Appellant becoming a shareholder of VWRB, so that that money
could be paid to the Appellant by way of dividends, otherwise that interest
could come to the Appellant only if the Appellant became Univar Europe’s
creditor. The tax that could otherwise have been payable under the Act would,
had the shares not been acquired by the Appellant, have been the tax on that
interest.
I
underline what I have said above, namely that the Respondent’s case, both with
respect to paragraph 95(6)(b) and section 245 is built solely upon the
hypothetical premise that the debt of UE to UC was purchased by Univar, not by
Barbadosco.
[39] The Federal Court
of Appeal in Canadian Pacific Ltd. v. R. 2002 D.T.C. 6742 said at page
6750, paragraph 33:
A
recharacterization of a transaction is expressly permitted under section 245,
but only after it has been established that there has been an avoidance
transaction and that there would otherwise be a misuse or abuse. A transaction
cannot be portrayed as something which it is not, nor can it be recharacterized
in order to make it an avoidance transaction.
[40] In Canada
Trustco reference is made in paragraph 15 to the Explanatory Notes to
Legislation Relating to Income Tax issued by the Honourable Michael H.
Wilson, the Minister of Finance (June 1988) are an aid to interpretation. That
paragraph says that the explanatory notes state at the outset that they
are intended
for information purposes only and should not be construed as an official
interpretation of the provisions they describe.
[41] At paragraph 30
the Court continues as follows:
It is useful
to consider what will not suffice to establish an avoidance transaction under
s. 245(3). The Explanatory Notes, at p. 464
Subsection
245(3) does not permit the “recharacterization” of a transaction for the
purposes of determining whether or not it is an avoidance transaction. In other
words, it does not permit a transaction to be considered to be an avoidance
transaction because some alternative transaction that might have achieved an
equivalent result would have resulted in higher taxes.
[42] The Respondent
clearly cannot recharacterize what, in fact, happened in assuming that the
Appellant purchased the aforesaid notes. That is simply not in accordance with
the evidence of three credible witnesses for the Appellant. The attempted
recharacterization is not an appropriate alternative arrangement to establish
tax otherwise payable.
[43] The only
alternate arrangement that can be considered is the possibility of the alleged
avoidance transaction not having occurred. Had the shares of Barbadosco not
been acquired by the Appellant, there would be no tax otherwise payable which
could be avoided, reduced or deferred. The acquisition of such shares by the
Appellant does not change that.
[44] With respect to section 245 there was, as described in
(a) above a “transaction” which includes an arrangement or event. However, that
transaction did not, as set out above, result in a tax benefit in that there
was no reduction, avoidance or deferral of tax payable under the Act.
Avoidance Transaction
I turn now to a consideration of the questions raised under
(c) in the above chart, reproduced here.
|
Subsection
95(6)
|
Section
245
|
|
(c)
can it reasonably be considered that the principal purpose for the
acquisition is to so avoid, reduce or defer tax otherwise payable?
|
(c)
would the transaction be an “avoidance transaction” and can it reasonably be
considered to have been undertaken or arranged primarily for bona
fide purposes other than to so reduce, avoid or defer a tax benefit?
|
[45] Paragraph 95(6)(b) requires the principal purpose of
the share acquisition to be the avoidance, reduction or deferral of tax
otherwise payable. As I have already decided that there was no tax otherwise
payable to avoid, reduce or defer, subsection 96(5) cannot apply.
[46] If it were necessary for me to decide, under subsection
95(6), whether it could reasonably be considered that the principal purpose for
the acquisition of shares of Barbadosco by the Appellant was to permit the
Appellant
…to avoid,
reduce or defer the payment of tax…that would otherwise be payable.
I would have found on a factual basis that it could not be
so considered.
[47] Likewise, with respect to Section 245 there was, as
described, a “transaction” which includes an arrangement or event. However,
that transaction did not result in a tax benefit in that there was no
reduction, avoidance or deferral of tax payable under the Act.
Therefore, the transaction cannot be an avoidance transaction because it would
not result, directly or indirectly, in a tax benefit.
[48] If it were necessary for me to decide, under section
245, whether a transaction may reasonably be considered to have been undertaken
or arranged primarily for bona fide purposes other than to obtain a tax
benefit, I would have found on a factual basis that it could reasonably be
considered to have been so undertaken or arranged.
[49] I now turn to the reassessment of the Appellant for tax
payable under Part XIII respecting the August 6, 2001 reassessment for the 1995 taxation
year. The Respondent’s argument with respect to the imposition of such tax
rests in its view that the Appellant’s incorporation of Barbadosco and its use
of Barbadosco to purchase the aforesaid notes formerly held by UC resulted in a
misuse of subsection 15(2.2). Having made my conclusions above respecting
section 245, the misuse argument is not open to the Respondent. Accordingly,
the appeal respecting Part XIII tax will be allowed. No such tax will be
payable under Part XIII.
[50] In respect of the September 3, 2002 reassessment of a
subsection 162(1) late filing penalty, the reassessment was made after the
expiry of the time limit for doing so, it not having been made, within the
meaning of subparagraph 152(4)(b)(iii):
...as a
consequence of a transaction involving the taxpayer and a non-resident person
with whom the taxpayer was not dealing at arm’s length.
It
was made as a consequence of failing to file a tax return within the period
prescribed for so doing. It is noted that this is an alternative argument. In
respect of the taxation ending July 15, 1996
for which this penalty was assessed, no amount as reassessed will be includable
in the Appellant’s income and therefore no penalty will be payable.
RESPONDENT’S SUBMISSIONS
[51] I now turn to
submissions made by Respondent’s counsel.
[52] Respondent’s
counsel, in cross examination and in both the written and oral submission, dwelt
upon the potential of how the debt purchase transaction could have been
structured rather than of accepting the evidence as to how, in fact, it was
structured. I have discussed the matter of recharacterization above, it not
being available for the purpose of establishing an avoidance transaction but to
be used only after determining the existence of an avoidance transaction under
section 245. The same is true of paragraph 95(6)(b).
[53] Respondent’s
counsel, in discussing the Principal or Primary Purpose of Setting Up
Barbados in a written submission said:
The Respondent
submits at the outset that the only purposes that are relevant under both
paragraphs 95(6)(b) and section 245 of the Act are purposes that are
relevant to the Appellant. In particular, the only purpose that is relevant
under both paragraph 95(6)(b) and section 245, is the purpose of the share
purchase transactions, i.e., whether they could reasonably be considered to
have been entered into primarily for the purpose of avoiding, reducing or deferring
the tax that would otherwise have been payable under the Act. Thus, even
if it could be found that the principal or primary purpose of the transactions
was to avoid, reduce or defer U.S. tax, this would be irrelevant.2
In the Respondent’s submissions, the same principle applies to any of the other
alleged, non-tax, reasons, for the creation and operation of VWRB that are
ex-traneous (sic) to the Appellant as a tax paying Canadian entity. They are
also irrelevant to the issues under paragraph 95(c)(b) and section 245.2
RRM
Canadian Enterprises Inc. and Equilease Corporation 97 D.T.C. 302, at 312
(T.C.C.), per Bowman, T.C.C.J.
[54] Presumably, the
Respondent’s reasoning is derived from the statement by Bowman, J. that:
Section 245
operates within the context of Canadian tax law and it is within that context
that the primary purpose is to be determined.
The
Appellant’s position appears to be that where an avoidance transaction in
Canada results in greater inroads being made against the U.S. fisc than against
the Canadian fisc the primary purpose cannot be the avoidance of Canadian tax.
I do not accept that.
[55] Authorities for
propositions must be carefully presented in the full context of the decision
upon which those propositions are based. RMM, the Appellant, which was to be wound-up with a distribution dividend being
subject to withholding tax, together with its U.S. parent company, arranged instead, a convenient purchase of
the Appellant’s shares. This transaction was designed to reduce both Canadian
and U.S. income tax.
[56] The distinctions
between the RMM decision and this case are:
(1) In this case there was no tax
to be saved such as the Canadian withholding tax.
(2) The above quote acknowledges
the existence in RMM of a “Canadian tax avoidance scheme”. I have concluded
that there was no avoidance transaction in this case.
(3) The latter part of the quote
states that section 245 operates within the context of Canadian tax law and it
is within that context that the primary purpose is to be determined. This
cannot be interpreted to mean that one must not consider the entire fact
situation in whatever geographical location, relating to and giving rise to the
decisions made and the transactions implemented by a Canadian tax paying
entity.
(4) There is no argument in this
case that more tax was saved in any country or countries other than in Canada
and that the primary purpose, was not, therefore, to obtain a Canadian tax
benefit.
(5) The witnesses who testified in
this case included the three gentlemen, Pruitt, Lundberg and Tole who were
intimately familiar with the facts surrounding what took place, as stated
herein.
[57] Bowman, J., in
not accepting the Appellant’s position was obviously influenced by the fact
situation before him. The steps taken by that Appellant clearly related to and
resulted in the avoidance of tax which would have been owing had the Appellant
not sought to avoid the payment of tax that would inevitably have been owing on
the distribution of assets in the normal corporate fashion.
[58] Also, Bowman, J.’s,
comments in the above quote appear to be obiter dicta.
The
English Oxford Dictionary, second edition, defines obiter dictum as
follows:
…in Law,
An expression of opinion on a matter of law, given by a judge in court in the
course of either argument or judgement, but not forming an essential part of
the reasons determining the decision, and therefore not of binding authority;
[59] I do not believe
that the RMM case stands for the proposition that an analysis of the purposes
of transactions or events outside Canada should not be considered by this Court.
[60] In Will-Kare
Paving & Contracting Limited v. R. 97 D.T.C. 506, this Court said at
510:
The word
'primary' (and thus, primarily) means first in order of time, or development,
or in intention. The word 'principal' (which is virtually interchangeable with
the word 'primary') means chief; leading; most important or considerable;
primary; original, highest in rank, authority, character, importance, or
degree.
[61] In both written
and oral submissions, Respondent’s counsel stressed the importance of what was
contained in multitudes of documents accepting little, if any, of the oral
evidence given in Court. For example, undue reliance was placed on the oft used
term “tax strategy” in those documents, being used by counsel to establish that
the primary purpose of the transaction(s) was the reduction, avoidance or
deferral of tax. Indeed, counsel, at one point stated in oral argument with
respect to the guarantee fee issue, an absolute rejection of oral evidence as
evidenced by the following exchange:
Justice: So
you don’t believe that evidence.
Counsel: No.
[62] Further, a number
of counsel’s submissions, such as those respecting the new section 17 had nothing to do with the purpose
of the acquisition or any transactions involved in this appeal. They referred
to events subsequent to the period that must be examined in order to determine
that purpose. In this
regard, Rothstein, J.A. in OSFC Holdings Ltd. v. Canada 2001 F.C.A. 260
at paragraph 46 said:
The words ‘may
reasonably be considered to have been undertaken or arranged’ in subsection
245(3) indicate that the primary purpose test is an objective one. Therefore
the focus will be on the relevant facts and circumstances and not on statements
of intention. It is also apparent that the primary purpose is to be determined
at the time the transactions in question were undertaken. It is not a hindsight
assessment, taking into account facts and circumstances that took place after
the transactions were undertaken.
[63] Counsel also,
both in cross examination and in argument, placed great emphasis on the fact
that the tax rate in Barbados was only 2.5 percent whereas it was some 45 percent
in Canada. Counsel’s written submission contains this statement:
All that
changed was that the return on the notes was taxed at 2.5%, versus 45% in
Canada, and that there were other costs in Barbados. The only plausible
explanation that therefore offers itself for the purpose of in effect investing
in those interest-yielding securities offshore could only have been to avoid
paying Canadian tax on that income.
[64] Respondent’s
counsel refused to accept evidence to the effect that the Appellant had
approximately $12,000,000 cash on hand at the time it borrowed monies for the
two-fold purpose of acquiring shares of Barbadosco and paying suppliers during
the interim period preceding the harvest of crops raised by the Appellant’s
customers. The cross examination had posed numerous questions to the witnesses
respecting whether the entire amount of some $37,600,000 used for the share
acquisition had been borrowed. The answers given to those questions, that the
company had cash on-hand and that it was used for this purpose was ignored.
Finally, the last question asked by Respondent’s counsel on cross examination
of
Tole
was:
Q. You
will acknowledge, Mr. Tole, that the bulk of the $37,600,000 that was injected
in to Barbados was borrowed money?
A. I
would, there was just under $12 million cash in the bank, so the bulk would
have to be borrowed, I would agree.
I am satisfied by the evidence that, as always had been
planned, the cash on hand was used as part of the Barbadosco share
subscription. If any confusion existed respecting the analysis of the
Appellant’s bank statement entries on that date, one need only refer to the
witnesses’ testimony. In addition, money is fungible. In the words of the
Oxford English Dictionary, Second Edition,
One guinea…precisely supplies the place of another.
[65] Respecting the undue emphasis on “tax strategy”, all business transactions, if properly
analyzed, planned and implemented, must involve an acute awareness of the tax
effect of every aspect thereof. The failure to exercise great care in dealing
with that one aspect of a business transaction simply cannot exist in the
complicated modern business world.
CONCLUSION
[66] In accordance with the conclusions set out above the
appeal in respect of the following taxation years, namely:
(1) taxation year ended February 29, 1996;
(2) taxation
year ended July 15, 1996;
(3) taxation
year ended December 31, 1996;
(4) 1997
taxation year;
(5) 1998
taxation year;
(6) 1999
taxation year;
will
be allowed.
[67] The appeal respecting a penalty under subsection 162(1)
for failure to file a return of income as and when required for the taxation
year ended July 15, 1996, will be allowed.
[68] The appeal respecting Part XIII for the 1995 taxation
year will be allowed.
[69] Respecting costs, in accordance with the agreement of
counsel, I will be available for a telephone conference for that purpose. Counsel
can arrange this with the Trial Coordinator.
APPENDIX B
AGREED STATEMENT OF FACTS
The parties hereto by their respective solicitors
agree on the following facts, provided that this agreement is made for the
purpose of these Appeals only and may not be used against either party on any
other occasion, and provided that the parties may add further and other
evidence relevant to the issues and not inconsistent with this agreement.
1.
The Appellant is a “taxable Canadian
corporation”, within the meaning of subsection 89(1) of the Income Tax Act
(Canada) (the “Act”).
2.
For the period up to April 2, 2001, the Appellant was named Van
Waters & Rogers Ltd. (“VWRL”), then changed its name to Vopak Canada Ltd
(“Vopak Canada”).
Subsequently, on July 2, 2002, the Appellant’s name again changed to Univar
Canada Ltd. (“Univar Canada”).
3.
The Appellant is a corporation organized under
the laws of British Columbia
having its principal place of business at 9800 Van
Horne Way Richmond, British
Columbia.
4.
During the relevant period, the Appellant was a
wholly-owned subsidiary of Univar Corporation (“Univar”), a U.S.-resident
corporation that changed its name to Univar North America Corporation on July 3, 2002.
5.
On May 26, 1995, the Appellant incorporated a
wholly-owned subsidiary, Van Waters & Rogers (Barbados) Ltd (“Barbadosco”). At all material times Barbadosco was a
wholly-owned subsidiary of the Appellant.
6.
On May 29, 1995 the Appellant subscribed for
10,000 shares of Barbadosco for U.S. $2,703.66 a share, for a total of US
$27,036,660, whose Canadian dollar equivalent was CAD $37, 360,000.
7.
On June 14, 1995 Barbadosco paid CAD $37, 352,
574 (equivalent to US $27,036,625) to Univar to acquire interest-bearing debts
owed by the Univar Europe N.V., a Netherlands company, to Univar (the “Notes Receivable”).
8.
At all material times the Appellant and Univar
Europe were wholly-owned subsidiaries of Univar.
9.
Between 1995 and the end of 1999, Barbadosco
earned and received interest income from the Notes Receivable and bank
deposits.
10. Between 1995 and the end of 1999, Barbadosco paid the following
amounts to the Appellant by way of dividends (the “Dividends”):
Taxation Year-End Dividends (CAD$)
February 29, 1996
$1,810,855
July 15, 1996 $759,651
December 31, 1996
$1,313,172
December 31, 1997 $2,578,071
December 31, 1998
$2,090,000
December 31, 1999 $2,374,286
$10,926,035
11. In computing its Part I tax payable for the 1996 to 1999 taxation
years, the Appellant included the Dividends in its income and deducted the
Dividends in computing its taxable income.
12. In December 1998, the Appellant paid a CAD $70,000,000 dividend to
Univar and withheld and remitted non-resident withholding tax in the amount of
CAD $3,500,000 under Part XIII of the Act and the Candada-U.S. Income
Tax Convention.
13. On or about January 3, 2000, Barbadosco was dissolved. The Notes Receivable were distributed
to the Appellant as a liquidating dividend, which the Appellant, in turn,
distributed to Univar by way of dividend. The Appellant withheld and remitted
non-resident withholding tax in the amount of CAD $1,790,228 under Part XIII
of the Act and the Candada-U.S. Income Tax Convention.
14. The Appellant received Notices of Reassessment dated September 7,
2001 (collectively, the “Part I GAAR Reassessments”), in which the Minister of
National Revenue (the “Minister”) reassessed the Appellant in respect of its
1996 through 1999 taxation years for tax and interest under Part I of the Act.
15. The Appellant received a Notice of Reassessment dated August 6, 2001 (the “Part XIII Reassessment”)
which showed that the Minister reassessed the Appellant in respect of its 1995
taxation year for withholding tax and interest under Part XIII of the Act.
16. On October 12, 2001, the Appellant duly filed Notices of Objection
to the Part I GAAR Reassessments and Part XIII Reassessment.
17. By Notice of Confirmation dated November 9, 2001, the Minister confirmed
the Part I GAAR Reassessments and Part XIII Reassessment.
18. By Notice of Appeal filed on February 5, 2002, the Appellant
appealed the Part I GAAR Reassessment and the Part XIII Reassessment to this
Court (the “Vopak Appeal”).
19. On April 12, 2002,
the Respondent filed a Reply to the Appellant’s Notice of Appeal in the Vopak
Appeal in this Court.
20. The Appellant received Notices of Reassessment (the “2002
Reassessments”) dated August 9, 2002 with respect to the Appellant’s 1996-1999
taxation years. The Appellant was thereby reassessed for Part I tax and
interest for those taxation years pursuant to paragraph 95(6)(b) of the Act,
by reversing the previous interest inclusions in computing income and by
denying the deduction of the Dividends in computing taxable income.
21. The Appellant received a Notice of Reassessment dated September 3, 2002 (the “September Reassessment”)
for the taxation year ending July 15, 1996 which reflected a penalty under
subsection 162(1) of the Act.
22. On November 5, 2002,
the Appellant filed a Notice of Appeal (the “Univar Appeal”) in respect of the
2002 Reassessments and the September Reassessment.
23. On January 27, 2003, the Respondent filed a Reply to the Appellant’s
Notice of Appeal in the Univar Appeal.
24. On February 26, 2003,
the Appellant filed an answer to the Reply in the Univar Appeal.
25. The attached charts accurately describe the corporate structure and
ownership of the Univar group of corporations and are titled as follows:
(a)
Organization As of June 30, 1991 (Tab A);
(b)
Oraganization As of March 1, 1995 (at Tab B);
(c)
Organization As of June 14, 1995 Following
Formation of Van Waters & Rogers (Barbados) Ltd (at Tab C);
(d)
Organization After Acquisition of Univar
Corporation by Royal Pakhoed on July 16, 1996 (at Tab D); and
(e)
Organization After Liquidation of Van Waters
& Rogers (Barbados) Ltd on
January 3, 2000 (at Tab E).
26. The original Notices of Assessment issued to the Appellant for its
1996 to 1999 taxation years were dated as follows:
Taxation Year Date
February 29, 1996 December 5,
1996
July 15, 1996 September
18, 1997
December 31, 1996 September 22,
1997
December 31, 1997 August 31, 1998
December 31, 1998 December 29,
1999
December 31, 1999 September 21,
2000
EVIDENCE OF GARY EMMETT PRUITT
[1] Gary Pruitt (“Pruitt”)
started working with the Appellant in October 1978. He is a certified public
accountant (CPA) and has held a variety of positions in the UC empire. He
commenced with internal audit, was Assistant Treasurer, Treasurer,
Vice-President and Treasurer, Vice-President of Finance, Chief Financial
Officer, and a member of the Executive Board and Chairman of the Executive
Board and then Chief Executive Officer. Pruitt occupied these positions while
UC was American controlled. In July 1996 UC became wholly owned by a Netherlands company, Royal Pakhoed
NV. At the time of testifying, Pruitt was Chairman of the Executive Board and
Chief Executive Officer of Univar NV, a Netherlands company which carried on
the international business of product distribution, having, due to conflict,
separated from another part of Royal Pakhoed’s business.
[2] Pruitt said that:
the primary business principle or purpose
was to improve the overall value for shareholders through investing the full
capital of the corporation for the best appropriate or reasonable return that
the company could make.
this being corporate philosophy for
many many years and “certainly since it was a public company in the
mid-sixties.” UC was a public company traded on the New York stock exchange.
[3] The witness testified that
the four financial elements that needed to be carried out were, in his view and
the view of management overall:
(1) profitable growth
(2) increased return on equity
(3) strong cash flow, and
(4) effective capital management.
[4] He described profitable
growth as:
the continual increase and growth of
profitability that generates returns on total capital above our cost of
capital.
[5] He described increased return on equity
as referring to net profit as it relates to the total shareholder equity on the
balance sheet. He said that he was:
referring to the paid-in capital, the common share value and
retained earnings typically for a total shareholder equity.
[6] He described strong cash
flow as meaning:
that the corporation in carrying out its
efforts must generate positive and strong and growing positive cash flows for
the company.
[7] He said further that, in
order to obtain effective capital management, the company:
must utilize all of its capital available
to it, in the most efficient, or effective manner. That’s shareholder capital
as well as borrowing capacity.
He said that the companies must
employ aggressive sales efforts and must also have, as a priority, the
acquisition of businesses to improve the business conducted by them on a more
profitable basis
…so that they could fully utilize their
capital in a profitable way.
[8] He said that when
subsidiaries exhaust their opportunities to grow internally or to make acquisitions,
they become under-leveraged, being a huge problem in that they are not able to
utilize their leverage or debt capacity. Pruitt then stated that Univar fell
short of meeting that goal. He described it as highly profitable and growing
well but unable to grow at a pace that would keep up with the capital base it
was accumulating. Accordingly, he said that it would fall short in terms of
the level of new investments it was able to make. He said that if a company
underutilizes its capital and is unable to grow its business fast enough:
… then you end up with
unutilized cash and unutilized debt capacity, which actually deteriorates
shareholder value at the securities level, at the public company level. So you
must do both. It must be profitable above your cost of capital and fully
utilize your capital base.
[9] He said that Univar had
made acquisitions by buying competitors but that there was an insufficient
number of those available in order to keep up with using its capital base. He
said that it had been a constant problem for the Canadian company, Univar,
being a product of its highly successful business in the Canadian economy,
stating that it had:
been highly successful but was unable to
grow as fast as it would need to grow to continue to generate ultimate increase
in value.
[10] Pruitt said that the
companies on Chart 1 in the Agreed Statement of Facts other than Royal Pakhoed
and the unrelated shareholders would have been part of the consolidation at
that time.
[11] Pruitt stated that the corporate
philosophy was to have a debt-equity ratio of 1 to 1. He said:
That was the basic premise upon which the
public securities were valued in the marketplace in terms of return against
that capital base, and so, if we were underutilizing our capital, it would
deteriorate the securities value to our shareholders, and if we were
overperforming relative to that, it would improve it … and so the objective
would need to be, number one, that the corporation as a whole and each of its
operations would have to fully employ all of its capital, both equity and
available debt, and be able to utilize all of that capital in producing income
at an appropriate return.
He then emphasized that Univar was
not achieving those types of objectives. He said that the one to one debt
equity ratio was not being met in either Europe or Canada. He added that restructuring was
required in order to put Univar in a position where it could more effectively
utilize its overall capital.
[12] With respect to capital
management Pruitt said that capital is not only cash and other assets described
on the balance sheet but also the capacity to borrow money “at a reasonable
gearing ratio.” In response to a question from counsel as to why the European
and Canadian companies didn’t simply borrow money directly, Pruitt said that
they needed to be able to put borrowed money to appropriate use in order to
find effective business investments. He continued by saying that during this
period Univar was struggling with trying to find investments that produced
adequate returns, additional investments that produced adequate returns beyond
what they had already made. The following exchange then took place:
Q: Why don’t we just have the Canadian
company borrow the money and pay a huge dividend up to Univar Corporation? That
will rebalance everybody.
A: Well, that’s never been our policy to
do that. The reality is that … the worst thing about that from our
perspective, the approach we took in operating our businesses is that we were
very much a part of the companies and countries within which we operated. And
if all we did was to drag money out of those companies that are continuing to
be successful, we’ve always felt that it was de-motivating to the management
that worked hard to develop those businesses. And so we’ve typically not done
that, number one.
Number two… if you leave it there and
encourage them to fully utilize it, it puts pressure frankly on the management
and on their incentive programs… to continue to grow the business faster and
faster in those environments so that they are encouraged to grow the business
for the benefit of the shareholders and… because of the incentive compensation
designs.
Third, is that if you were to do what you
just suggested and were not able to do it in a tax efficient manner, it would
deteriorate the ultimate shareholder value at the securities holder level of
the public company. So we have never in our philosophy of approaching business
taken that approach. There are companies out there that do, but that’s never
been Univar’s philosophy.”
In support of this Pruitt said on a
note to the financial statements of UC for 1993 Summary of Accounting Policies:
No provision for foreign withholding or United States federal income taxes is necessary as it is management’s
intention that dividends will be paid only under circumstances which will not
generate additional net tax cost.
Pruitt explained that that would
hurt the overall share value at the consolidated level. His evidence
re-emphasized this point on several different occasions.
Pruitt then referred to the
acquisition of a company known as Harrison Crossfield, a competitor, which had
been acquired by Univar. He said that steps like that helped but the rapid
growth of business continued to produce cash flows to the point that those
acquisitions did not solve the problem.
[13] He then testified that the
business activities of the subsidiaries of Univar Europe were chemical
distribution businesses similar to those of Univar. He expanded by saying that
UC was, essentially, a holding company of a multi-national operation, not
becoming directly involved in the carrying out of the distribution activities.
He stated that it provided financing for the corporation in total, coordinated
treasury activities, provided the appropriate checks and balances, corporate
governance processes for the company, oversight management monitoring and
services such as legal services and tax services that would be needed to have
specialization to assist each of the operating units in those efforts. He also
said that Univar would not be authorized to make investments outside its core
business without going through the appropriate corporate governance process to
obtain authorization. Pruitt said:
That’s typical of every multinational
corporation I know that’s well run that has good corporate governance process.
[14] Pruitt underlined what is
said above when he stated:
The performance of the Canadian company
was good; there’s no question about it. The challenge that you run into when
companies’ return on total capital, reach 20 percent and 25 percent and so
forth are very, very high returns and can only really be achieved typically
when you’re underutilizing your capital base. So, the return on capital here is
on the actual capital deployed, not the capital including its borrowing
capacity, and what needed to happen was that the excess cash as well as the
borrowing capacity needed to be utilized and employed in the business …
typically the common view is that the less you owe the better it is but when
you owe too little in a corporation you’re underutilizing your capital base.
The witness then referred to
Univar’s acquisition of Wilber-Ellis, a business that expanded into
agricultural chemical distribution which he described as another good step in
the right direction but, again, facing the same problems of not being able more
rapidly to make these kinds of investments. He said that management was doing
everything that it could but these types of investments simply were not easily
available.
[15] Pruitt, when he was
referred to the minutes of the Board of Directors in the late summer of 1994
stated that Univar was still under leveraged while continuing to improve its
operating performance. He then said:
One of the challenges that was going on
at the time is because of this leverage problem in Canada, the leverage problem
being too little underutilization of cash and underutilization of debt capacity
is that the returns were getting so high that the incentive compensation levels
were inappropriately high and the Canadian employees were being overcompensated
relative to competitors and relative to the value they were generating.
[16] Pruitt described Univar as
a component that represented “maybe 15 to 20 percent of the entire UC
conglomerate”.
[17] He then referred to a 1988
general revolving credit agreement with several U.S. banks. He said that Univar was a
guarantor for UC borrowings. The second credit agreement was the U.S.
Revolving Credit Agreement, which replaced the 1988 credit agreement. Under
this new credit agreement, Univar “was a borrower” but “wasn’t a borrower at
the first instance”. He described Univar as just a guarantor in the first
instance. The third credit agreement was described as the multi-currency line
or credit agreement implemented in 1995. Under it, all non U.S. subsidiaries were
allowed to borrow “under their own currencies”.
[18] In answer to a query as to
why it wouldn’t have been appropriate to leverage Barbadosco, Pruitt said:
Well, Barbados was set up as a subsidiary of the Canadian operation, an investment of
the Canadian operation, for purposes of making - - investing in either loans or
making loans to other enterprises. So it was an investment subsidiary and at
least the initial capitalization that was provided in setting that up was
sufficient to meet its needs at that time.
Pruitt described the difficulties
and the occupation of many months of time necessary to implement a credit
agreement of that nature. He said further:
The idea was that the Canadian company
would make this investment in this finance company and it would make the
appropriate investments in acquiring loans or making loans to enterprises.
[19] Pruitt was referred to the
Revenue Canada assessment with respect to deemed income associated with
Univar’s guarantee of the UC Revolving Credit Agreement. He said that he had
been informed that the Canadian tax authorities had deemed that there was
income associated with the guarantee of some of the credit agreements and
wanted to assess tax on that assumed value. He said that he was referred to a
document written for a UC finance committee meeting on April 22, 1993 in which he said that
Revenue Canada had issued an assessment of $95,000 Canadian, and that a Notice
of Objection had been filed. He testified that conversations with the Bank of
America indicated that it attached no weight or value to the Canadian
guarantee. He then relayed this information to Revenue Canada.
[20] He stated that the Canadian
tax authorities were “still going after the Canadian company as of February 21,
1994.” Pruitt also wanted to take whatever steps were necessary to ensure that
the U.S. Internal Revenue Service (“IRS”) did not impute a dividend if Univar borrowed under the
line of credit. He said that he understood that in those circumstances “the
IRS could claim there was really a dividend made when there wasn’t one and no
intention of making one, and thereby taxed accordingly”. He said that this was
a U.S. tax issue that
concerned the corporation.
[21] The following exchange
pertaining to the overall corporate plan reads:
Q: Mr. Pruitt, you described these
issues. What solution did the U.S. company think
could be crafted for purposes of solving these various problems?
A: Well, Univar Corporation, you
know, is the parent company that oversaw the activities in Europe and Canada and U.S. We have multiple
… a plethora of problems going on if I might say that. We had recapitalization
issues that we needed to go through in Europe. We had U.S. deemed dividend exposures that didn’t make any sense because of how we
approached our businesses. We had ... under leverage situations in Canada,
other capitalization issues in Europe as well and it was a perplexing problem,
frankly, but our advisors came up with a process where we – and it seemed like
a really rational solution, to have an international investment company that
could allow appropriate investment by the Canadian company in an international
financing subsidiary that could then be utilized to finance or loan money to or
buy existing loans of, on the basis of business to go ahead and continue
growing the business. It would give a good return to the Canadian company. It
would give the opportunity to provide capital to grow in other areas, and it
seemed like a logical, very logical solution to me that would solve a number of
the finance and treasury problems that we had for our company and try to obtain
a better leverage situation to allow our shareholders to have the increase in
value overall for the shares, in that process.
Pruitt also described
recapitalization work to be done in Europe. He said that there were interest-bearing and
non-interest bearing loans that “needed to be sorted out.” The companies that
had greater than or less than target leverage needed to be dealt with as well.
He said that the recapitalization effort, the whole kind of reorganization was
designed to use more effectively the overall capital of the company:
which is what we had committed to the
shareholders we would do.
[22] Appellant’s
counsel presented Pruitt with Finance Committee meeting minutes of February 18,
1993 and read the following to Pruitt:
Mr. Pruitt then presented the
corporation’s plan for consolidation of Univar Europe’s subsidiaries. It was
noted that this activity is designed to bring the structure of the European
organization into compliance with United States tax
laws. These laws require that no more than three tiers of corporate layers
exist. Secondly, the consolidation will allow for review and evaluation of all
existing subsidiaries with an eye towards understanding why they exist.
Corporations working with local subsidiaries and personnel, as well as Cooper’s
& Lybrand’s on this issue.
In response to this, Pruitt said
that he was not a tax expert but that the issue was the deductibility of
certain interest levels if there were four or five tiers of foreign
subsidiaries owned ultimately by a U.S. parent. He then stated that too many corporate layers
affected the deductibility of interest at the U.S. tax level. He said that they
either allow or disallow interest expense or impute interest income in some
fashion, depending on the number of layers. He then said that this was
strictly an effort to reduce the number of tiers in the European network to
clean up that U.S.
tax issue that was really an accident on the mergers and consolidations that
took place. Pruitt also said that all transactions have tax elements to them
but that the key effort on each was outlined in terms of the finance, the
returns and the other efforts. He said:
Well, like most multi-national companies…
we go through planning sessions to try to understand how to organize our
affairs… including… ideas around tax planning and how to deal with foreign
source income was really this issue here, and then URECO was a real estate investment project
that was not tax related… all things have tax elements to it but it is
primarily how to more properly invest in our real estate efforts.
[23] The minutes of the Finance
Committee of UC dated April 22, 1993 read, in part:
Mr. Pruitt then presented a possible
strategy regarding recapitalization of Van Waters & Rogers Ltd. In essence, the strategy entails the
Canadian organization purchasing receivables held by Univar Corporation and
owed to it by Univar Europe Corporation. He reviewed the purpose of the
recapitalization and the benefits to be obtained therefrom and reported that as
a preliminary step and to allow the corporation the flexibility of executing
this possible strategy $15 million in leverage and execute in Canada as at the most recent year end. He reported that
preliminary research had uncovered a potential operational issue in Europe, and
we would like to continue strategy development.
On motion being obtained and seconded,
the committee authorized Management to continue development of its possible
Canadian recapitalization strategy.
With respect to the foregoing Mr.
Pruitt said:
What that paragraph is describing the
creation of a foreign subsidiary that ultimately ended up being Barbados, that
would be a foreign investment company that would be owned by the Canadian
organization, and that investment company would make… in this case the initial
transaction was contemplated to be the purchase of receivables that were
currently owned by Univar by the European businesses. It was a low risk
transaction for the new financing subsidiary because we knew the companies,
obviously. They had very good market rates of interest and made a good and a
relatively safe investment for this new subsidiary.
The following exchange
then took place:
Q: ... then you go on and you say:
“Mr. Pruitt presented the corporation’s plan for consolidation of Univar
Europe’s subsidiaries. It was noted there were several objectives of this process
including compliance with U.S. tax laws in preparation for compliance
with the Univar Europe shareholders agreement. In addition it was noted that
in order to have a successful Canadian recapitalization plan, there needed to
be a dovetailing of these two issues. Preliminary research indicates the
contemplated recapitalization requires that European subsidiaries are
consolidated such that interest payments on inter company loans held by Europe could be traced to an active corporation. We
continue to work with local subsidiary personnel as well as Cooper’s &
Lybrand on successful resolution of these issues.”
…
Q: What do you have to say about
that?
A: You know, all it’s really
saying is that this is an integrated solution. I mean as I described it
earlier, the whole effort was to try to get all of these various elements
accomplished through this process. So in order to have the receivables of such
quality that the Barbados subsidiary could - - would, could and should acquire
them, required us to reduce the number of tiers so we did not incur…
unfavourable and inappropriate U.S. tax consequences. The other issue had to
do with the fact that we needed to change some non-interest-bearing loans that
were held, to interest-bearing loans because the Barbados subsidiary would not
and should not and could not invest in receivables or buy loans that did not
have very favourable interest rates, market level and favourable interest
rates.
So these elements, all of these things
needed to happen in unison in order to make something that made sense at the
end of the day.
David Olsen (“Olsen”) was the
assistant treasurer of UC at the time of this meeting. His report to that
meeting read, in part:
Included in the discussion is an overview
of Univar Europe’s consolidated balance sheet as of its 1992 fiscal year
presented on a proforma basis for the long-term subordinating shareholder debt
reclassified to shareholder’s equity. These statements indicate that Univar
Europe is in a very healthy leverage situation at an appropriate 0.5 to 1 debt
to equity ratio. In addition, it was noted the corporation is pursuing
alternatives to more effectively utilize excess cash. He then discussed the
corporation’s plan to implement a multi-currency borrowing line in Europe, the
objectives of which would be to provide a vehicle to Univar Europe’s liquidity
management, establish banking relationships to facilitate corporate-wide
requirements, and to fit into an international multi-tiered relationship
strategy. It was reported that the corporation had held preliminary
discussions with Univar Europe financial personnel and they were favourably
disposed towards establishing such a line. In response to a question from Mr.
Rogers, it was noted that the line would be very carefully monitored with tight
controls such that it would not be utilized as a financing vehicle for
speculative currency positions.
Pruitt’s comments on the above read
as follows:
Well, it ties in in part. The total
recapitalization effort that was going on was a necessary and integral part of
this whole effort. The proforma balance sheets and long term subordinated
shareholder debt reclassification was the - - when I described it earlier as
non-interest bearing debt to interest bearing, that’s describing that very
act... And the statements indicated Univar is in a very healthy leverage
position at approximately .5 to 1 debt to equity ratio indicates that they
could afford and should take these subordinated non-interest bearing loans and
put them into interest bearing loans as they should have been, and that’s all
that’s saying.
The pursuing alternatives to more
effectively utilize cash, excess cash is still part of the overall effort that
I described before. First effort is to utilize all excess cash. Second effort
is to make sure that everybody is approximating this 1 to 1 leverage ratio that
we had discussed earlier in the day, and of course the description indicated by
the implement the multi-currency borrowing line in Europe was to - - was a
summary comment regarding the multi-currency line that we had previously - –
that I previously testified about in detail as to each of the borrowers being
non-U.S. borrowers and so forth, and that would also fit into an international
multi-tiered relationship, and that’s getting the tiers to the proper number...
And so, and he’s just indicating here that there have been preliminary
discussions with Univar Europe financial personnel and they’re favourably
disposed to this kind of multi-currency line and use it.
One of the challenges that you always
have in this effort is to get people from various cultures and countries to
agree to have a common solution. Not everybody, and rightfully so, wants their
independence, and so every time you take a move to add some sort of common
solution, it’s always difficult to work through because people are afraid that
you will no longer be Swedish and English, and we respect that but - – so it
takes a long time to work through these to where the management will still be
enthused and supportive of the organization. And so he’s just describing that
effort.
[24] Pruitt then described that
.5 to 1 debt to equity ratio should be altered by making non-interest bearing
debt interest bearing and that would more accurately reflect what the capital
structure would be in the European operations.
[25] An exchange between counsel
and Pruitt respecting the Canadian operation follows:
Q: Now Mr. Pruitt, this is a plan
that you’ve come up with regarding the Canadian operations. How did you communicate
this type of information to the Canadians? Did you just go and tell them this
is what’s going to happen...?
A: Well, first of all, I wouldn’t
characterize it as a solution for the Canadian situation because that would not
be an accurate characterization. It was a solution that addressed the
challenges in Europe as well as Canada in some of the U.S. tax issues in terms
of the risk of deemed dividends from the U.S. taxing authorities. So, it’s
really more than a Canadian issue. But the communication was really, I mean,
the reality is that then as we do today, there’s a team environment and the
Canadian management people Pat Tole and Fred Hermesmann the finance people more
so than the commercial operating people as well as the same their counterparts
in Europe, were all involved in working through the various solutions with
legal advisors, tax counsel and their own efforts as well as myself, Dave Olsen
and Wayne Lundberg out of my office in terms of working through the various
complexities. So that’s how it was - - so that the communication is really - -
it was a joint management effort to work through the various elements. Not
everybody knew all the elements, certainly. But everybody knew the concept in
total, and then they would work more in their area of expertise. And so, then
of course, it would be - - more senior management would be briefed from
time-to-time, and then the Boards of Canada as well as the Boards of European -
- the European subsidiaries would be briefed as well as our Finance Committee
and ultimately the Board of Univar before it was actually executed.
Pruitt stated that he was not a
director of the Appellant.
[26] In response to counsel’s
suggestion that it sounded like Pruitt was telling the Canadian company what to
do, Pruitt replied:
…No, what I was doing was sharing this
plan with them and it’s in its infancy in concept, of course, with the Board.
But this would have been after we had worked with the Canadian management as a
part of this team that I described and so this was where I was informing - -
not informing them like telling them what they’re going to do, but sharing.
That would not be - - my character, it wouldn’t be the character of our company
ever. And number one - - number two, the Canadian company that we have and the
Canadians I know in that company are pretty independent individuals as they
should be and proud of what they’re doing. They’re not going to - - you’re not
going - - you’re going to work with them. That’s my point, yeah.
[27] Pruitt then said that he
was in charge of the project and that he used various people to work with him
in coordination of efforts. He stated he predominantly used Wayne Lundberg as a
key coordinator. He
continued:
I’ve been working with him for many, many
years. He is a very detailed oriented guy, and but many others were involved
as well ... but Wayne was... on this particular project… the
key coordinator that involved Olsen working with the banking side and the
treasury issues. Very often Wayne would go actually visit subsidiaries to
explain what was going on because he had spent a lot of time in each of their
offices working with them on various tax issues, so he’s familiar with them.
With respect to Lundberg’s
presentation described in the minutes of UC Finance Committee dated June 22, 1994 Pruitt:
I had asked Mr. Lundberg to make the
presentation… as to the overall status of the recapitalization effort and plan,
which he did, and typical - - I mean it would be expected that Wayne would
focus more on tax issues than anything else. He was the Tax Director and so
that’s where most of his comments were. The Committee well understood, because
this has been talked about many times, what the effort was all about, why we
were doing it, and so this was really at the relatively final stages as I
recall.
[28] Appellant’s counsel referred to James Fletcher, who was
senior vice-president of UC, saying that he had presented an overview of two
potential European acquisitions currently under review. The minutes to which he
had referred read in part:
The proforma post-Pakhoed put the
financial position of consolidated Univar Corporation. The debt-to-equity
ratio is anticipated to be 0.8 to 1, demonstrates that there is sufficient
financial capacity to consummate both transactions.
When asked whether the paragraph
tied into the strategies he had described, Pruitt said:
Yes. First of all, I mean, the comment
speaks for itself with respect to the consolidated debt-to-equity ratio and the
capacity to make these acquisitions. The underlying - - or the plan in terms of
financing one or both of those would have been to utilize the financing
subsidiary in Barbados to finance those acquisitions.
Q: Which acquisitions are you
talking about?
...
A: Impag and Berk is really these
two were referring to on the - -
Q: Oh, I see, so there was a
discussion about Berk possibly as early as this stage.
A: I believe so.
Q: Now this talks about two
acquisitions that are under review in the second line, BP Norway and Impag in Switzerland.
A: Yeah. BP was a terminal
activity in Switzerland, or I mean in Sweden, that was also
looked at and consummated. That ended up being strictly a real estate
transaction. And Impag was an operating activity, which would have been a candidate
but did not end up going through.
[29] Then follows:
Q: …Now can you tell me anything
about the concept that management consider investigating a new corporate
structure whereby Univar would incorporate offshore?
A: Yeah. This resulted in me as
well as Wayne Lundberg meeting with a tax advisor in New York that Mr. Kesseler had arranged for a meeting that was, I think, referred
to by him as a flip transaction. I evaluated that and did not recommend that we
go forward with it, that there was no underlying business reason to do that, to
enter into that kind of transaction and it was strictly a tax mechanism. And we
simply have not in our history and do not today do things strictly for those
reasons.
… my experience is that typically they
don’t work out because laws change, circumstances change, these kind of
strategies and plans come under attack, and we simply passed.
[30] After some discussion
between Appellant’s counsel and Pruitt and reference to a Finance Committee of August 23, 1995 respecting the Berk
Ltd. acquisition which was said to be financed by Barbadosco with additional
funding provided as an equity contribution from Univar, Pruitt then stated that
Berk in the United Kingdom, had been acquired by UE. It was consolidated with K&K Greff into a
single United
Kingdom
company. Part of the transaction was to involve Barbadosco purchasing a UC
interest-bearing note payable in respect of that transaction. The management
of the Canadian company was seeking Board approval to provide additional equity
funding to Barbadosco but this was never achieved because UC was acquired by
Royal Pakhoed, UC becoming a wholly owned subsidiary of the Netherlands company “and they did
not want to approach the financing in this fashion.”
[31] Pruitt explained, in answer
to Counsel’s question that, Barbadosco did not buy the notes of Berk
corporation “or whatever the successor of Berk was” because Pakhoed had its own
investment company and its own approach and organization respecting financing
this type of acquisition and
...had its own approach to corporate
governance - - a different philosophy than… Univar.
[32] Pruitt’s description of the
Pakhoed’s philosophy was declamatory. He said that:
Royal Pakhoed had a very different
approach to multi-national businesses. Their approach is essentially to pillage
the companies, extracting all of the cash, all of its debt capacities,
crippling them. Their subsidiaries as well as the parent company of Univar had
no sensitivity whatsoever to the management of the companies or what their
feelings were, or the direction that they may feel that the companies need to
go forward with.
[33] Counsel discussed a
memorandum dated November 13, 1997 with Pruitt. It was entitled “Elimination of
Van Waters & Rogers (Barbados) Ltd.” It was a memorandum from Lundberg to Hugo Brink at Pakhoed. Pruitt said that:
…Pakhoed had the approach where they
would simply decide and instruct that this is what you will do, and although we
would engage them in discussions and try and debate the wisdom, my experience
was that once they made up their mind it was - - maybe you could delay the time
through discussions but they would make the decision and you’d be instructed to
go execute it.
That memorandum contained a
discussion about liquidation of Barbadosco.
[34] When Pruitt was asked by
Appellant’s counsel whether proposed changes to section 17 of the Income Tax
Act (“Act”) was a primary reason for winding up Barbados. Pruitt’s answer
was:
No. The primary reason for winding up of
Barbados was it was part of the process of
extracting the funds from the subsidiary back to Royal Pakhoed. It was part of
their process to take the money.
[35] Pruitt also testified that
Pakhoed caused the payment of dividends of $70,000,000 from the Appellant to UC.
Pruitt then said that in 2001 he was appointed to the executive board of the
ultimate parent corporation in the Netherlands. He became the Chairman and Chief
Executive of that company following which he set upon a strategy to separate
the companies between the terminal business and its distribution business. He
hired a new chief executive for the terminal business and the corporation
involved became a separate publicly held company. UC then, once again, became
a separate publicly held company in June 2002. He said that at that time they
reinstituted their previous policies and tried to recapitalize the companies
overall.
[36] On cross examination,
Respondent’s counsel, Luther Chambers (“Chambers”) asked Pruitt whether the
debt to equity ratio improved from 1997 to 1998 due to the payment of a huge
dividend to UC. After Pruitt answered affirmatively, counsel asked whether it
would not be correct to say that instead of entering into the transactions
which are in issue in this case the Appellant could have improved its debt to
equity ratio in 1995 by borrowing a large sum of money and paying a large
dividend to UC. Pruitt replied:
Not under Univar Corporation’s policy.
Pruitt restated that the dividend
payment was the result of Pakhoed’s instructions after the acquisition of UC.
Pruitt then said:
The challenge is that if there are taxes
as a result of moving monies around that incrementally cause tax burden that
isn’t a result of earning money and operating the company, then you deteriorate
the shareholder value at the public share holder value, in our opinion. And
thereby the philosophy was that we do not make these dividend declarations.
The other and more important factor is
that the key that you need to try to do is to keep the capital under the responsibility
of the management that earned that capital and grew that business, to encourage
them to further find ways to grow that business and invest that money within
their operations. And that’s the crux of the philosophy that we have, which is
totally different than the transactions that you saw here.
Counsel then asked questions
apparently designed to elicit information from Pruitt as to the comparative
return on investment if Univar had purchased the notes instead of Barbadosco
having purchased them. The following exchange took place:
Q. … For
the Barbados company the only source of income was the
interest received from Europe?
A. At this time, yes.
…
Q. So the Barbados
company did not carry on any chemical distribution business, did it?
A. No, it
was an investment company.
Q. Yes. So
I thought your policy was that the Canadian subsidiary was to find new
investments that were related to its core business?
A. Related
to operating company business, yes, as contrasted to investing in public securities.
…
A. Marketable
securities, like on the New York Stock Exchange or something like that.
Q. Yes. Now
you will see from all these financial statements that there were some expenses
from Barbados, not inconsiderable amounts, the Barbadian corporation income tax
payments albeit only two and a half percent, amounted to - - were in the range
of $60,000 per annum. The other expenses in excess of $100,000, so that only
the net remained available for distribution to the Appellant by way of
dividends, correct?
A. Yes,
sir. Yeah, the balance of the net income after those expenses would be the only
amounts that would be available from that year, yes. And dividends were paid,
in this year of $2,000,072.
Q. Right,
in ’97, right.
A. In 1997,
yes, sir.
Q. Whereas
if the Appellant had acquired these European notes itself, it would have
received interest income of $2,000,488. So the interposition of the Barbados
company decreased the Appellant’s income, didn’t it, because its dividends were
less than the interest income received.
A. No.
These notes were never owned by Van Water & Rogers Limited
so did not decrease - - I don’t understand the question.
…
Q. I’ll
merely pose the question of that if that happened, you would agree that the
interest income - - that the income to the Canadian company would have been
larger than what it received from Barbados.
A. I don’t
know that because I don’t know what all of the costs associated with it would
be in that kind of structure. It had never been evaluated so I never - - it was
never - - I simply - - it had never been proformaed so I had no idea what - - I
don’t know what the impact would be because there may be all kinds of
considerations it would have to have, have to be made. It has never been
presented, never been considered to be done.
Counsel then, in reference to
Barbadosco said:
So this was a tax plan, wasn’t it, in
essence?
Pruitt responded:
No, that’s not true. These were tax
people that were talking about specific tax rules and the implementation of the
plan and so every transaction that I’ve ever been aware of and that we’ve been
involved in, has tax aspects to it. And so you always need to have lawyers, tax
advisors and various technical people that have to address those elements of
the plan. It does not make it a tax plan, it simply makes it a - - I
acknowledge that there are tax aspects to everything, including this one, that
need to be carefully planned and worked through by the tax professionals. And
that’s what they’re doing.
Counsel for the Respondent, after
reading two paragraphs from the October 26, 1994 UC Finance Committee
meeting had this exchange with Pruitt:
Q: … My question, Sir, is: These
two paragraphs taken in conjunction show that there was at least a tax element
in this NEWCO plan, if it was not the only purpose of it.
A: The primary purpose was that
of debt restructuring and recapitalization which we have gone through. This was
being described by Mr. Lundberg which I’d asked him to cover the description.
Mr. Lundberg is a tax person so everything he describes is going to be
described from a tax perspective; its natural, and the first paragraph that you
referred to he was describing for the Finance Committee - - I remember this
very specifically – the overall structure of his department, how he goes about
things, what he’s doing - - typical, appropriate governance of the Committee to
understand how we manage our tax compliance and who does what, where and how
its organized. That’s really what this - - and what strategies and exercises
are going through or being worked on. I had also asked him to address the
restructuring and recapitalization project that we had been working on.
Many of the issues of implementation
related to tax issues of implementation, and so I felt that it was best that he
be the one that sort of is most heavily involved in this discussion in the
event that there were questions. For example, in one instance we had a ruling
from the U.K. that was necessary to obtain. A number
of other issues that needed to be dealt with so he was the logical person to
kind of coordinate the description of this. Naturally, his words would be tax
oriented and that’s also when we asked for approval from the Finance Committee
to go forward with the overall character - - or the overall project. So, it
does not mean or reflect that this is primarily a tax issue at all. There were
tax elements to it, of course, as with all transactions.
Pruitt then described the process
of obtaining a revenue ruling from the United Kingdom tax authorities to make
sure that they had clarity with them as to how the reclassification from
non-interest bearing loans to interest bearing loans were going to be treated
within the UK. He then said there were some issues in Scandinavia and said that
Canada was considered, the U.S. was considered, and Barbados was considered. Respondent’s
counsel then said:
Q: I’m not interested in the U.S.
or Scandinavian or UK tax considerations. I’m asking you
specifically: What Canadian tax considerations were there?
...
A: Frankly, I relied on tax
experts and I honestly - - the only specific ones I remembered I mentioned to
you and they did not relate to Canada so…
Counsel after reading a portion of
the minutes of Univar Board of Directors meeting on October 15, 1993 said:
I put it to you, Mr. Pruitt, that the
core intention here was that it was the Appellant that was to purchase this
interest bearing debt and that this purchase was to be affected through this Barbados company.
A: That would not be an accurate
statement. It would not be true.
Counsel did not continue with that
line of questioning.
[37] Pruitt also said:
... I think that the characterization and
the same would apply with my comments on the early one that we apply to the
characterization of a tax strategy more had to do with the implementation
elements which by that time, I think it was - - the language got to be somewhat
careless on occasion because so many of the issues that get talked about had to
do with taxation issues. And I give you - - a good example is the revenue
ruling or Inland Revenue ruling that we needed to have in the UK and so forth. But where so much of the discussion
centered around tax approvals and tax issues. With this comment that he made
as well as the comment on the minutes that … you just had me read where they
referred to tax strategies really that was not the only element.
Certainly tax was a portion of it, but
the primary element, again, was to the recapitalization process, the
debt-to-equity ratios that needed to be aligned, that had to do with alignments
of targets and alignments with incentive compensation. So there were many, many
factors that needed to go on here and so - - and everybody understood that well
including Mr. Rogers and myself in the previous one, just because Bill Butler
may have used the term “tax strategy” does not change its purpose or its
primary purpose at all.
This exchange followed:
Q. … My question to you, sir, is
this: You said in response to this that the Appellant’s performance was still
outstanding but that because there was no leverage at all in the Appellant the
excess cash continued to climb and therefore the Appellant had difficulty
finding investments, correct? He was looking for investments but had difficulty
finding investments that were close to the core of the Appellant’s business,
chemical distribution business, correct?
A. They were having trouble
finding adequate investments that related to operating businesses, yes, and in
sufficient amounts to utilize their excess cash or debt capacity. And even
though their returns are exemplary, certainly, and the operations of the
existing business was very, very good, no complaints, but the challenge is that
if you’re under utilizing your capital base you’re not expanding the share
value associated with the investments in that enterprise and so you need to be
able to go out and grow your business faster so that you could appropriately
utilize the capital that’s available in the business. That was the challenge.
[38] Respondent’s counsel then
suggested that it was open to the Appellant to ask UC to allow it to make
investments yielding interest income similar to the notes purchased by the
Appellant. Pruitt responded that “lots of things could have been done.”
This exchange followed:
Q. I’m suggesting to you, sir,
that the reason the Appellant - - sorry, the Appellant’s parent company, Univar
Corporation, was not interested and the Appellant was not interested in doing
this because this would have created interest income in Canada that would have
been fully taxable in Canada. Would I be right, sir?
A. I don’t accept that as a
premise because we had a tremendous amount of business in Canada and increasing
business in Canada, increasing taxable income and we were fully willing to pay
the full tax charge on that income, so I don’t understand the relevance - - I
mean, well, that’s not for me to say, it’s a speculation on speculation that -
- so I don’t know how to answer it. I’m sorry. If the answer would be is if
there’s taxable income in Canada would the company have paid its appropriate
tax on taxable income in Canada, absolutely yes.
Q. I’m suggesting to you, sir,
that one of the principal reasons for going through with this NEWCO plan,
Barbados Company plan, was to prevent the arising of interest income in Canada. Would I be right, sir?
A. I don’t recall that being a key
point in discussion, sir. I just don’t recall that being a key point of
discussion. Whatever income is in Canada we’re very
willing and have always been willing to pay tax on that.
[39] In a discussion as to why
Barbadosco was not liquidated until January 2000, and after reference by
counsel to a memorandum dated October 15, 1999 in which the following
appeared:
In the beginning of the year 1999 the
Canadian authorities published new tax legislation, effective January 1, 2000.
This change in the tax law makes the structure with Van Waters Ampersand Rogers
(Barbados LTD) no longer advisable.
Pruitt’s response to this was:
But that was written by Hugo Brink which
was an employee of Pakhoed and was never around during that period of time at
all. I mean this is in 1999. He wasn’t there when Pakhoed - - when we
developed Barbados, and so I wouldn’t - - I wouldn’t put
much credibility to it although I wouldn’t argue with the technical accuracy.
But it wouldn’t be reflective of what was in the minds of the people that
actually did - - created it and were trying to go through it. He’s a tax
person, would explain it from a tax perspective, and he wasn’t there at the time.
[40] On re-examination Pruitt
testified that Royal Pakhoed was much larger than UC and was capable of buying
UC, he assumed, without debt. He said that UC had 3,000 employees and that
Pakhoed would have had many more.
[41] Pruitt was then asked, with
respect to the winding of Barbadosco on January 3, 2000 why it took so long.
His reply reads as follows:
… it was tied to the major dividends to a
degree and the extraction of monies out of Europe and North America, and
frankly, some of us were trying to negotiate that they wouldn’t take as much as
they did, and that - - it was part of the reason for the delay as well as I
know. And, you know, again it’s not the major item. I mean, you know, you
would discuss it and then they would put it on the back burner for a while and
come back to it.
EVIDENCE OF WAYNE ARVID LUNDBERG
[42] Wayne Lundberg
(“Lundberg”), a certified public accountant, was vice-president of Corporation
Taxation. He joined UC in May 1977 and left in February, 1984, returned in
December 1987, and is still with that company. His title, initially, was
Manager of Corporate Taxation. In the mid-1990’s he stated that he was
Director of Corporate Taxation and in 2001 became Vice-President of Corporate
Taxation. He said that his primary responsibility is the management and
oversight of all issues of corporate taxation, managing the function of US
corporate taxation, any aspects of international taxation or
tax matters that would - - basically
between more than one jurisdiction.
He said that during the 1992
through 2000 period there were more European operations than in the early
1990’s. He said:
In order to perform the functions we have
engaged the accounting firm of Coopers & Lybrand to be the, what I call the
umbrella tax service providers. On special occasion we would also employ the
law firm of Baker MacKenzie as our consultants on both U.S. domestic and international tax matters.
He stated that the consulting
accountants were Arthur Anderson until 1992. He also stated that he reported to
Pruitt. He said that the Tax Department was considered an integral part of the
Finance Department. He said that UE joined the group of companies in 1991 and
that it used local companies providing tax services within a particular
country. He then said that his role was to manage and coordinate the services
that were provided. He stated further that he had no expertise in areas
outside U.S. tax law.
[43] Lundberg said that UC filed
its tax return on a consolidated basis, the only companies being consolidated
with it for that purpose being its main subsidiary, the U.S. operating company
(“Inc”) and one or two other small U.S. companies.
[44] Lundberg said that Univar
had paid only one dividend, namely, a dividend in 1980 of 6 million dollars and
that UC claimed a U.S.
foreign tax credit with regard to withholding tax and the underlying Canadian
tax that had been paid on the income that was distributed. He said that:
…the dividend would have been what we
call grossed up, so it was treated as having been on a pre-tax basis, and then
a U.S. tax would have been applied on that amount of grossed up dividend, and a
foreign tax credit claimed up to the amount of the U.S. tax on the dividend
income.
He then testified that there would
have been excess foreign tax credits to the extent that the withholding tax and
the taxes that came with the dividend, the deemed taxes paid, were in excess of
the U.S. thirty-five percent tax rate.
[45] He said that UC was
sensitive to the fact that Univar had, over a period of time, incurred Canadian
taxes at a rate greater than the U.S. tax rate. He explained that to the extent that the credits
could not be used in full, they would have become excess foreign tax credits,
subject to a carry-back period of two years and a carry-forward period of five
years.
[46] Lundberg then said:
The management of Univar Corporation had
had a long standing policy that a dividend would not be taken from any foreign
subsidiary if it could not be taken in manner that would be at least tax
neutral to the company on a consolidated basis.
[47] Notes to the financial
statements of UC respecting the 1993 taxation year, with comparative figures
for the previous two years stated in part:
No provision for foreign withholding or United States federal income taxes is necessary as it is
management’s intention that dividends will be paid only under circumstances
which will not generate additional net tax cost.
Lundberg, after reviewing the
Summary of Accounting Policy stated that UC management had a policy that it
would not make dividend payments in any situation if the result would be an
increase in income taxes. He also referred to UC’s
…inability to fully utilize the credits
that would come with such a dividend from Canada… either these deemed taxes or the withholding tax.
He also said:
The philosophies of the Tax Department of
the Univar Group were to manage the effective income tax rate for the Univar
group on a worldwide basis. An underlying policy that we would want to do tax
transactions or enter into transactions that had tax results only if they fit
into the general purposes of the company and they had a business purpose that
would be applied. The phrase that we used was that in our company the tax tail
wouldn’t wag the business dog.
[48] Lundberg was then referred
to the agenda of a Univar Tax Planning Meeting and especially to the following
agenda item:
3. “Recent U.S. ordinary tax business developments”, the Univar
multinational tax management strategy.
4. “Canadian Financing, purchase
of Univar Europe debt.”
8. “Creation of
international sourcing company”, referred to as ISCO.
9.
Regard UC, and its U.S. operating subsidiary to charge test subsidiary for
services provided (engineering, environmental, legal, insurance, human
resources).
He was then referred to an item in
an inter-office memorandum from him to Pruitt dated November 22, 1994. It referred to an
outstanding notice of objection filed by Coopers & Lybrand respecting
Revenue Canada’s assertion of guarantee income to Univar as a result of that
Canadian company guaranteeing U.S. debt.
[49] The second item
dealt with the reduction of Canadian withholding tax from ten percent to five
percent with the resulting lesser amount of withholding tax on any future
dividends:
…and therefore a lesser amount of
Canadian taxes that would be subject to utilization in the U.S. as foreign tax
credits, and it would be subject to any potential carry-forward if they
couldn’t be utilized to the fullest extent.
Lundberg then said that for a
period of time UC had been looking at means of trying to generate qualifying
foreign source income to UC that would be either low or untaxed by foreign
jurisdictions, therefore becoming available for use of the excess foreign tax
credit carry-forwards. He said:
One of the things that we had looked at
and discussed was having the possibility of the U.S. operating company make
sales directly into Canada to existing Canadian customers that would be taxable
in the United States currently but would be structured in such a manner that
they wouldn’t be taxed in Canada. Therefore, they would become valuable
foreign source income to the U.S. company for its U.S. international tax, foreign tax credit issues.
He then said that such plan was not
ultimately adopted because of potential perceptions by customers of the
Canadian company that would not be favourable, and Univar’s objection based on
its independent business operating method.
[50] Appellant’s counsel then
returned to agenda item number four asking if “the NEWCO plan was
implemented.” Lundberg said that is was connected to excess borrowing tax
credit utilization and then followed with:
From a U.S. foreign tax credit
utilization point of view, this NEWCO plan was effective in that it did not impair
the ability of the U.S. company to utilize its foreign tax
credits. It did not create a transaction that would have been determined to be
a deemed dividend, which would have in itself then triggered additional foreign
tax credits and related to excess foreign tax credit problems in the U.S., and
as part of the overall NEWCO plan there had been a recapitalization in Europe.
The result of that recapitalization was a higher level of interest bearing
debt, and therefore interest income payable by those companies.
And then finally, the results of the
NEWCO transaction enabled the U.S. company to
receive cash as a result of the sale of those notes to the Barbados company. That cash was used to pay down debt in
the U.S., and as a result of the pay down of the debt there was less interest
expense in the U.S., and there was a procedure, a calculation under U.S. tax
law that made it beneficial for us to - - for us, the U.S. company, Univar
Corporation, to have a lower level of domestic interest expense.
…
Under a U.S. tax rule, under Internal
Revenue Code Section 861, beginning in 1986 there has been a process, a
calculation that was made whereby annually the U.S. consolidated group of companies would do this, a calculation and a
certain portion of expenses that were incurred were considered to have been
incurred in the process of creating foreign income. The net result was that a
portion of foreign source income that would have otherwise qualified for U.S. foreign tax credit benefit was disallowed that benefit.
As a result, in and of itself in that transaction, there would have been a
higher excess foreign tax credit. Paying down the interest expense in the U.S. helped - - or alleviated some of the adverse impact
of that calculation.
He then said that the NEWCO plan
would not result in a deemed dividend and was therefore beneficial from the U.S. excess foreign tax
credit point of view. He referred to the Internal Revenue Code having
provisions that addressed certain circumstances that could result in a dividend
being deemed paid by a foreign subsidiary, “in this case the Canadian company,
to the U.S. parent company”. He
explained that in approximately 1988 Univar had been asked to sign as guarantor
on credit facilities of UC and under the Internal Revenue Code, a guarantee by
a foreign subsidiary of the U.S. parent’s debt was deemed to be a dividend payment from the
foreign subsidiary, i.e. from Univar to UC
[51] Lundberg went on to say
that although the Canadian company ceased to be a guarantor on the line of
credit, in its place a credit facility was established where the Canadian
company, along with other companies in the Univar group, became a joint and
several liability borrower under the credit facility. He said that
professional advice indicated that there was a significant exposure and a
significant chance that the condition of joint and several liability on the
debt would be considered, at least by the U.S. Internal Revenue Service, as
being equivalent to a guarantee “and therefore would have resulted in the same
deemed dividend situation.” He said that Univar ceased to be a joint and
several borrower on June 1, 1995 when a new multi-currency line of credit was established and Univar and
other foreign subsidiaries of UC were the designated borrowers on that credit
line. When asked by counsel why then Univar would not buy the notes receivable
from UC, the multi-currency line of credit having solved the deemed dividend
question, Lundberg replied:
I don’t know that there was ever an
opportunity for the Canadian company to borrow those - - to buy those notes
directly. My concern, based on advice that I had received, was that there was
a possibility that purchase of those notes by the Canadian company directly
could in fact amount to a deemed dividend distribution and investment in U.S.
property or an indirect loan to the U.S. company, which would have triggered
the conditions of Internal Revenue Code Section 956. In addition, the structure
that was in place beginning in 1991 when these interest bearing notes
receivable were first put in place, were done so specifically so the interest
income would be qualifying foreign source income to the U.S. company.
…
If the interest bearing notes receivable
had been held directly by the Canadian company that would have no longer been
in and of itself a qualifying foreign source income to the U.S. company, and we would have lost a very valuable
benefit in how we were managing the exposure for excess foreign tax credits
…
It was part of the reason why the Barbados subsidiary was incorporated. There were - - the
plan that had been designed by Baker and MacKenzie, and then further Cooper’s
& Lybrand for the company, for the companies combined was to basically
solve some underlying Treasury concerns that were in place for the company. Mr.
Pruitt had been, as I understand it, from conversations with him, had been
concerned for some period of time about the balance sheet of the Canadian
company and the fact that it had a great deal of equity and had virtually no interest-bearing
debt, which was not in accordance with what I understood to be the company’s
policy on treasury management. I also knew from conversations with Mr. Tole
over a period of time that Van Waters & Rogers Limited had become very profitable, was accumulating
a significant amount of cash, expected to be doing so in the foreseeable
future, and needed to have a vehicle by which it could effectively invest that
excess cash in a manner that was acceptable to the company.
…
and from the - - purely from a tax
management side, that I was concerned with, it was a solution that allowed the
transactions to take place without creating adverse tax consequences to the
U.S. company with regard to this foreign tax credit position and without
incurring additional tax that would have caused harm to the company.
[52] After some further
evidence, the following exchange took place between Appellant’s counsel and
Lundberg:
Q: And you gave evidence, I
recall, that the Barbados company was necessary to avoid the 956 problem
because Canada shouldn’t buy it directly? Am I
understanding that correctly?
A: You are understanding that
correctly from the standpoint of based on the advice that we had received,
there was a concern that having the Canadian company buy the notes directly
would have produced an exposure for deemed dividend treatment under Internal
Revenue Code Section 956. But that wasn’t as a guarantor. That is under the
other provisions of that Code section.
And as I also mentioned previously,
another reason that would have been detrimental to us from a foreign tax credit
management point of view was the interest on these notes receivable had to be
directly included in the U.S. corporate income tax return as qualifying foreign
source income, and it gave us some relief or some favourable benefit in the
overall management of this excess foreign tax credit position.
[53] After some discussion with
the Court Lundberg said that:
… the interest income received on those
notes by definition of U.S. tax law was qualifying foreign source
income. It was not taxed by any non-U.S. jurisdiction.
So as such, it came into the U.S. return without foreign tax directly.
…
It was earned by the U.S. company, the notes were held in the U.S.
…
And as such, there was no taxation of
that interest income other than in the U.S.
He then affirmed that this gave UC
foreign source income that would help its excess tax credit problem, that is
having the problem of the U.S. consolidated group.
[54] Mr. Lundberg explained that
if the notes were held by the Barbados company the rules and calculations
resulted in the interest income being included in the U.S. return in the same manner as they
would have been had they been made directly. He explained that this was
because they bore a very low rate of taxation in Barbados. He said further that those same
rules would determine that if the income was received directly by the Canadian
company, the Canadian tax on such income would have been high enough to prevent
the inclusion of that interest income in the U.S. returns simultaneously. He
explained that the distinguishing factor was that if the taxation of the income
was at a rate less than ninety percent of the U.S. rate, then the income was
automatically included in the U.S. He stated that the Canadian tax rate was greater than
ninety percent of the U.S. rate
and accordingly there was no inclusion in
the U.S. tax return at the same time.
In other words he was stating, as
he explained, that it would have not been foreign source income for the U.S.
[55] Lundberg explained that all
of this information would have been relayed to Pruitt.
[56] He then referred to some
documentary material with respect to professional advice respecting the
formation and use of “Barbados as an international financing company” because:
We wanted to have some assurance as to
what the results and the ramifications were from forming such a company.
[57] Lundberg said:
This is part of an integrated plan.
There were Canadian issues that were being looked after, to make sure that we
were in compliance with the rules and regulations. There were U.S. issues that were being looked at. There were
United Kingdom issues that were being looked, and there issues in Scandinavia,
as well as the Netherlands, those were being looked at. So this is
just part of what was a coordinated plan relative to the business transactions
that were being undertaken as proposed and actively being done by Mr. Pruitt
and Mr. Tole.
The following exchange then took
place between Appellant’s counsel and Lundberg:
Q: So are you telling me that this
wasn’t primarily done, the NEWCO plan, for Canadian tax reasons?
A: The NEWCO plan and the
formation of this new international financing company was not being done for
exclusively or particularly, primarily for Canadian tax purposes. It was being
done for treasury and for cash management purposes. It had certain tax
functions that were associated with it, but those were by far not the primary
purpose and plan why the NEWCO plan and the NEWCO structure was put in place.
[58] Mr. Lundberg was referred
by counsel to a memo written by him dated January 31, 1995 relative to the NEWCO
plan and the establishment of the finance company. He said that the
discussions were with regard to the economic profitability of NEWCO, the
Barbados company to be organized, interest rate spread, combination of cash and
borrowed funds to be invested in NEWCO, the long-term nature of the investment
versus the temporary leverage or borrowing that would take place that would be
subject to pay down – historic interest rate movements, potential for NEWCO as
the treasury centre
or this international financing centre
that was being planned for the use of that company.
When asked by counsel why he was
generating a lot of memos and letters he said:
Well first of all, I’m a pretty detailed
person. I deal with a lot of fairly complex tax issues. I write notes to
myself or detailed memoranda so that I can document what the issues are, what
concerns if any I may have, to leave a trail for myself, and where appropriate
to advise the people who were also participating in this plan as to what
certain circumstances or conditions were. But effectively I write a lot of
these things just because it seems to be the nature of the beast of tax
administration and that’s how I just conduct my affairs personally… I think
this is very typical of what I would do insofar as anything pertaining to
management of U.S. tax, overseeing the integration of
international tax plans.
[59] Lundberg then was referred
to RECO, a U.S. real-estate company.
It was a plan that would have allowed the Canadian company to use its balance
sheet and its leverage capacity to make investments in real property in the United States. He described it as a
plan in which Pruitt was interested. He said it had nothing to do with the
generation of foreign source income. He said it further was not adopted, it
being a less viable planning alternative to NEWCO.
[60] He described an
international sourcing company ISCO which was on the agenda. He said it would
have direct application to the creation of qualifying foreign source income
within the U.S. company. He said that
the concept was an international sourcing company, an international purchasing
company which would be set up to acquire chemical products, generally in
foreign jurisdictions and then sell the products to Univar and to Inc. It
would be entitled to generate income and it would come under U.S. tax rules, would be a
qualifying foreign source income and would have been an assistance in managing
UC’s foreign tax credit position.
He also discussed the concept of
charging certain expenses from UC and Inc. to Univar in order to position those
expenses in a forty-five percent rather than a thirty-five percent environment.
He said that it had nothing to do with foreign source income or foreign source
tax credits but was merely a discussion of charging expenses from UC to Univar
for services that UC provided, in a staff capacity, to Univar. He said that
that was undertaken for a year or so and then terminated. He summarized the
foregoing by saying that the company policy was not to enter into transactions
that have “a tax payoff” if it didn’t make business sense.
[61] Lundberg then described minutes
of a UC Finance Committee meeting on October 26th, 1994 in which his
presentation was, in his words:
…consistent with the overall tax profile
of the company and with my role in managing that profile. The presentation was
made basically at the request of one of the members of the Finance Committee to
try and have an overview presentation of how the corporate tax affairs were
being managed.
That memorandum referred to a
“flip” transaction described as a method of overcoming certain tax provision problems
that would require UC to be greater than fifty percent foreign owned. He said
that it was not pursued because it didn’t “make sense for our company”, it
having been brought to the meeting’s attention by a member of the Finance
Committee who had asked for a general overview of the tax management of the
company. He then referred to the discussion of excess tax credits which he
described as being very valuable to the company, and continued:
…and we needed to try and find ways to
plan the business of the company and to plan for sufficient and appropriate
foreign sources of income that could be used to utilize these credits.
[62] Lundberg was then referred
back to the UC Finance Committee Minutes of October 26th, 1994 which
contained the following words:
Mr. Lundberg described in detail one
strategy that involved the restructuring of the Univar Europe shareholder loans
from the holding company level to the European operating level.
When asked by Appellant’s counsel
whether that was a “Canadian tax strategy” he answered that it was a strategy
that was both European and related to the formation of the foreign offshore
financing subsidiary of Canada. He said that the benefit from a U.S. strategy
was as these loans were being restructured, as the recapitalization was
occurring into Europe, UC was creating more interest-bearing debt in the
European structure and as a result, created more qualifying foreign source
income to UC related to that interest income. The following exchange then took
place:
Q: Now sir, were these
transactions that are described here primarily done for tax reasons?
A: No sir. These transactions
that were done were the tax implementation processes of accommodating the
business plan… to accommodate the concerns of Mr. Pruitt over the balance sheet
position of the Canadian company, to accommodate Mr. Tole with regard to the
cash position for the Canadian company, and to allow that kind of a transaction
to go forward without creating additional adverse tax results.
[63] He then was referred to a
memorandum from him to Mr. Lougee (“Lougee”), Financial Director of UE. He said
that this was sent because they had planned a meeting with the board of MB Sveda AB, the Swedish operating
company, that was one of the companies to be involved in the recapitalization
of the European balance sheets. Lundberg said that with respect to any
transactions involving a local country or local jurisdiction personnel, he kept
those people involved in the process.
[64] Part of Lundberg’s memo
read:
Hopefully, this would make it apparent
that the Canadian tax rate of 45 percent makes it very advisable to structure a
plan that will allow the company to reduce the impact of Canadian taxes on a
multi-national consolidated basis.
With respect to that he said that
one of his responsibilities was to manage the effective tax rate of the UC
group on a worldwide basis. He said he was pointing out that tax rate to Mr.
Lougee and other people from the MB Sveda AB board so that they would understand the process involved,
…the leveraging up of the Canadian
company and that there would be a tax benefit related to that that would be
beneficial to the company.
[65] In a memo from Lundberg to
Mr. Elwood, Lougee and Pruitt, he said:
… that critically important operational
considerations should not be overlooked and that no action should be taken to
achieve a tax result which was counter-productive to operations.
[66] He explained, regarding a
discussion with Ingvar Severin, president of the Swedish company, with respect
to his concerns about debt reorganization that
no tax related transaction would be
undertaken if it didn’t meet sound qualifying business purposes.
Lundberg explained that the amount
of debt placed within the Swedish company was reduced in order to help meet the
UC’s overall policy.
[67] Lundberg was then referred
by counsel to a memorandum dated January 18, 1995 indicating the then
current status of plans to restructure debt in the Netherlands, the United Kingdom and Sweden and to place
new debt in Denmark. He said that it was necessary, as part of the European debt
restructuring, to collapse tiers of companies. He explained that as a result
of the manner in which the European companies were acquired in 1991 there were
four tiers of foreign companies in the United Kingdom and in Sweden, some of
the operating companies being at the fourth tier. He explained that this was a
concern because under U.S. foreign tax credit rules, foreign tax credits could only
be claimed “down to a third tier of a foreign entity.” Lundberg explained that
the first step was with regard to putting the interest expense directly at the
operating company level in the United Kingdom, in Sweden and in Denmark, to consolidate operations and to
eliminate idle companies or unnecessary companies. He said the second reason,
based upon advice received from advisors in respect of NEWCO was that:
…it would be appropriate for the debt to
be placed at the operating company levels in Europe.
He said that the purpose of the
European debt restructure wasn’t primarily for Canadian tax purposes but that
the reasons for the creation of NEWCO were predominantly treasury related. He
said:
They had to do with the Canadian company
and its excess cash position, and it had to do with Mr. Pruitt’s concern about
recapitalizing or appropriately leveraging the companies throughout the Univar
worldwide group.
Lundberg was then referred to a
number of memoranda which had to do with the implementation issues in the
United Kingdom and in Sweden and in Denmark. With respect to same, the following exchange occurred:
Q: Did Canadian tax considerations
primarily motivate the European debt restructure based on your comments in the
December 28th, 1994 memo?
A: No, Canadian tax considerations
didn’t primarily motivate that. There were motivations for tax issues that had
to be considered and implementations that had to occur in the United Kingdom,
in Sweden, in Denmark. They had connection to the transactions or the arrangements that were
in place relative to making sure we were in qualifications for the rules and
regulations on the NEWCO structure. But these were basically representing - -
or discussing a number of tax considerations … not primarily, exclusively with
regard to Canadian tax.
[68] Lundberg then described
UC’s foreign tax credits as an asset of the company in that they could be
monetized through the creation of qualifying foreign source income within the U.S. consolidated group,
thereby using the tax credit carry forwards.
[69] Lundberg also said:
The NEWCO plan itself was going to assist
with the foreign tax credit issues because as a part of the overall plan that I
referred to or that we referred to as the NEWCO plan, there was additional
interest bearing debt put in place in Europe. That increased the amount of
interest qualifying foreign source income in the United States and therefore gave us a better basis for utilizing
foreign tax credits in the future.
…
Adding interest bearing debt in Europe
increased the amount of interest income that the U.S. company received, and that interest income was qualifying foreign source
income that could be used to absorb excess foreign tax credits. So the greater
amount of interest income we had coming from Europe, the greater benefit we had
for our foreign tax credit purposes.
[70] Lundberg said further that
there was a second component, namely that through the NEWCO plan, UC was going
to receive cash in exchange for the notes that it sold and use that cash to pay
down its domestic debt. He said:
As a result of this transaction, the
NEWCO transaction to its conclusion, the U.S. company paid down debt, therefore had less domestic interest expense that
was subject to allocation to that foreign source income.
[71] In response to counsel’s
question as to why UC did not deal with the leverage issue by just causing the
Canadian company to declare a dividend, Lundberg replied that a deemed dividend
or an actual dividend would produce the same results, namely that UC would
receive them, the taxes would be fully creditable but there would be a
limitation on the U.S. side which would create excess tax credits - - foreign
tax credit carry forwards. He reiterated that the existence of the Barbados company was important
in helping monetize the excess foreign tax credits.
[72] He then described the
acquisition by the Barbados company, as an international finance subsidiary. Respecting Berk, he
said:
…the plan that we developed and were
counting on was that the Berk acquisition would be the next investment in what
we hoped would be a succession of investments, using the international
financing company in Barbados.
… and the Berk acquisition actually
occurred, I believe December 1st, 1995.
Lundberg stated that, as Tax
Manager, he knew that certain reductions had been vested and that he, of his
own accord, not having been asked by Pruitt, brought this to Pruitt’s
attention, saying:
I provided this information to Mr.
Pruitt. I saw this just as a responsibility that I had under the normal role
that I was playing…
There were some procedural things that
had to occur in order for us to get the right structure in place, and so the
plan was that Barbados was going to finance -- or acquire the
interest bearing note in the same way it had acquired the original interest
bearing notes.
He then described the purposes of
creating foreign source income to UC from these interest-bearing “notes
receivable”, and therefore enhancing the utilization of foreign tax credits by
UC in its consolidated tax return.
[73] With respect to tax
ramifications both in the United Kingdom and Canada Lundberg said:
It was my responsibility, in managing the
international tax function, to try and understand any potential issues that
would come into play on any of our transactions, take advice from the
appropriate people, in this case it was the people at Coopers & Lybrand,
and make sure that we structure transactions and implemented transactions in a
way that would be in accordance with the rules and then I relied upon the
opinion of Mr. Hornsby,
Mr. Bergen relative to this transaction.
[74] Lundberg then discussed the
sale of a Berk interest-bearing note to Barbadosco. He said that transaction
did not take place because, although it had been approved, in July, 1996, UC
which had been an independent company,
was acquired 100 percent by a company by the name of Royal Pakhoed, and on that
particular day the operations and the policies, everything with regard to
Univar Corporation and the tax management, the treasury management, everything
else changed dramatically because as we came to learn, Royal Pakhoed had a very
different manner of managing their corporate affairs.
…
They were very much interested in
extracting cash any place and every place that they could. And they managed all
of their affairs just very differently... from Univar Corporation.
…
I had been having meetings with Mr. Brink… and his particular point was they
had no desire to maintain the Barbados company would
like to liquidate it and take the investments out of Barbados and ultimately
put them into Europe where they managed their financial
affairs.
Lundberg described the negative
monetary effects on moving all money up to Royal Pakhoed including the adverse
effect of the U.S.
overall foreign tax loss, concerns with regard to the foreign tax credit issue,
et cetera. Lundberg explained that the overall foreign tax loss ties into the
excess foreign tax credit system because it eliminates the ability of UC to
claim foreign tax credit on a certain portion of foreign income that would
otherwise be eligible for foreign tax credit treatment. He said:
The overall foreign loss ties in to that
question because it eliminates the ability of the U.S. company to claim foreign tax credit on a certain portion of foreign
income that would otherwise be eligible for foreign tax credit treatment.
The U.S. rules go through the calculation, as I indicated before, and conceptually
treat certain domestic expenses as if they were associated with the production
of foreign income. In that regard they offset the foreign income with those
allocated expenses, and that then eliminates the ability of the U.S. company to claim the foreign tax credit on that
amount.
For instance, if the calculation was of
$10 million of allocated expense, either in the current year or cumulatively
over a period of time, and if a $20 million dividend was paid from the
Canadian company, these rules would eliminate the ability of the U.S. company to claim a foreign tax credit on that $10
million. In essence it would produce an additional U.S. tax expense of $3.5 million.
He said that this concept of
overall foreign tax loss was relevant in 1994 in planning the NEWCO transaction
in that it affected the ability of the U.S. parent company to utilize foreign
tax credits on a carryover - - either on a current year or as carryforward into
the future.
Lundberg then said that beginning
in very late 1998, in a 13 month period of time, Royal Pakhoed took $113
million out of the Canadian company.
[75] When Lundberg was asked
what impact Canadian laws had on the winding-up of Barbadosco and the
distribution of cash of $113 million from Canada to Royal Pakhoed, he replied that
the dividend payments in that amount were not affected in any way by the
proposed amendment of Section 17 of the Act. He said that Canadian tax
was not the only reason why Barbadosco was wound-up, specifying:
The changes in the law that came about
were … not necessarily more important or less important than the overall
consideration that Pakhoed had and how they wanted to manage the company.
Lundberg said that the liquidation
of Barbadosco was already being discussed in October, 1997 before the income
tax changes respecting Section 17 were announced. He also reiterated concern
over Section 956 or any other provision of the U.S. Revenue Code respecting the
use of foreign tax credits because of no qualifying foreign source income.
[76] With respect to a memo from
Mr. Brink, of Pakhoed, which read as follows:
History – Van Waters & Rogers (Barbados) Ltd. was created in 1995. For the founding of the
company there were several reasons:
- placing debt in Canada
- returning cash to the U.S.A.
- no Canadian withholding tax.
Lundberg said:
Well, I think with regard to the first
point of placing the debt in Canada, that certainly
was the treasury objective that Mr. Pruitt had in mind. As a result of placing
the debt in Canada it did, in fact, return cash to the United States, which was again part of the treasury transaction.
And the transaction was put in place, there was not a Canadian withholding tax
associated with that, which was related to the fact that the Barbados
transaction as it was structured needed to be done in the way that it did not
create additional tax to the company, which would have in turn given us a
problem with regard to foreign tax credits.
He then reiterated that Royal
Pakhoed had been intent on liquidating the Barbados company from the time it acquired
UC.
[77] On cross-examination,
Lundberg was referred to a memorandum and asked whether he generally understood
the advice received from Coopers & Lybrand respecting the definition of
“foreign accrual property income” (“FAPI”) and the significance of active
business earnings in the payor corporation. He was then asked if he understood
if NEWCO “which turned out to be Barbadosco was to earn interest income from
Europe, and pass it up to the Appellant by way of dividend. Lundberg replied
that, generally, that was his understanding as explained by the advisors.
Respondent’s counsel then referred him to portions of the memo which listed
three jurisdictions, namely Cyprus with a 4.5 percent tax corporate tax rate,
Ireland, with a 10 percent corporate tax rate, and Barbados with a 2.5 percent
corporate tax rate. Counsel then asked whether Barbados was selected as the jurisdiction
for NEWCO based on the fact that it had the lowest tax rates. Lundberg replied:
The selection of Barbados was exclusively based upon the recommendation of the advisors,
predominantly Coopers & Lybrand, who were managing this project. I couldn’t
say that the selection of the lowest tax rate was necessarily a factor plus or
minus. It was the recommendation of the advisors that in order to implement the
NEWCO plan, that the appropriate jurisdictions for NEWCO would be Barbados.
Lundberg also said that the
Appellant would borrow funds for the equity investment in Barbados, that the debt would be
in Canada and that the
corporation had about $10 to $12 million on hand and would borrow some
$27 million to purchase the debt owing to UC. He said he recalled seeing
reference to a draw on the multi-national line of credit facility of $37,360,00
and stated that it had drawn another $15 million. Lundberg then said that his
understanding was that on that day:
…they made an investment of $37 million
in the Barbados company through their bank account in
combination of cash and borrowed money.
[78] When Respondent’s counsel
suggested that there were:
…certain benefits, such as the
deductibility of interest in Canada and the non-taxability of dividends
expected in Canada.
Lundberg responded that those were
the conditions explained by Coopers & Lybrand in their advice in getting
together the treasury and cash management plan that was suggested that became
the project known as NEWCO.
[79] Respondent’s counsel then
referred to minutes of the Finance Committee of UC of October 26, 1994 and read the following:
Next, Mr. Lundberg presented an overview
of the Corporation’s tax strategies. He began by reviewing the objectives of
the Corporation’s multi-national tax management strategy, how the objectives
are being implemented and the makeup of the tax team that assists in strategy
development and execution. He then provided an overview of the current tax
circumstances in each of the four primary tax areas facing the Corporation: U.S., Canadian, European and consolidated tax planning
provision, and return issues. In addition, he reviewed the significant factors
affecting the consolidated income tax provisions of the Corporation and methods
to reduce the effective tax rates. He then provided an overview of previously
implemented or in process tax strategies. Additional strategies with probable
high payoffs and other strategies on a continuing consideration…
Mr. Lundberg described in detail one strategy that involved the
restructuring of the original Univar Europe shareholder loans from the holding
company level to the European operating company level. In addition there was a
conversion of some non-interest bearing debt into interest bearing
classification. Those transactions were in preparation for the subsequent sale
of those shareholder loans by Univar Corporation to a new Barbados subsidiary of Van Waters & Rogers Ltd., upon
implementation of the multi-currency line of credit. After discussion it was
moved and seconded and approved that the Corporation and each of its direct and
indirect subsidiaries were authorized to execute any and all documents.
At this point Mr. Lundberg said
that this was the NEWCO matter which was discussed at that meeting.
[80] Counsel then referred to a
memorandum from Mr. Tole to Pruitt, Lundberg and certain other persons. He read
the following portion:
This presentation specifically
concentrated on the impact of the 45 percent tax rate in Canada and the
planning opportunities available to reposition profitability from Canada to the United States and to reposition expenses
from the United States to Canada.
When asked what this meant,
Lundberg said that they were general statements and that one of the
responsibilities that he had in his role as Director of Corporate Taxation was
to manage and oversee the effective tax rate of the company. He said further
that this generally referred to issues that he would tend to look at and how
they would evaluate the tax rate of any of the countries that were involved or
any transactions they did – “just an effective tax rate management”. The
following exchange then took place:
Q. But just on repositioning of -
- reposition of profitability from Canada to the United States aspect, it was planned, was it not, that the
Appellant was to borrow money, incur interest expense, and therefore reduce - -
thereby reduce its profits in Canada, right?
A. That would have been the result
of the treasury strategy that was put in place that Mr. Pruitt was managing…to
manage the balance sheet of the Canadian company so that there was going to be
leverage put in place on that balance sheet. The end result would be that the
interest would be deductible in Canada no matter what
the purpose was, that the funds that were borrowed were used for.
When Respondent’s counsel referred
to another memorandum written by Lundberg he said:
…it sounds like Coopers & Lybrand
were telling you and the Appellant that this tax strategy complied with Canada income tax laws.
Lundberg replied:
This is consistent with any of the advice
that we had taken from Coopers & Lybrand over a significant period of time
relative to the transactions I mentioned this morning in my testimony. Univar
Corporation as an entire group does not enter into transactions that are tax
motivated only, that there must be a business purpose for the transaction.
We’re particularly careful of being in compliance with the rules and this was
not the first time that Mr. Bergen had advised that the NEWCO plan that had
been devised by Baker MacKenzie and by Coopers & Lybrand was not considered
to be an aggressive plan.
[81] Respondent’s counsel then
referred to an memorandum from Dieter Rechel (“Rechel”), an accounting manager
with Univar, dated December 9, 1994. Counsel read the following:
Various proposals were submitted by Rod
for Ltd to purchase Univar Europe’s debt from Univar.
Lundberg said that that comment was
not correct. He said:
There was not an intention for the
Appellant to purchase Univar’s debt from Univar Corporation. The intent - -
that’s just Mr. Rechel’s misreading of that. The intention from the very
beginning was that those debts instruments, those interest bearing notes
receivable were to be purchased by the Barbados company, not by the Appellant. …the only proposal that I was aware of was
the plan that was being developed just as we have discussed it throughout the
day relative to NEWCO.
[82] Lundberg referred to steps
that were going to occur to restructure the debt within the Swedish company and
within the Danish company. When asked about non-interest bearing loans to
Univar Europe, Lundberg said:
That goes back to the original
acquisition itself in 1991. The capitalization that was put in place was
accomplished in three pieces. A very small portion of share capital, and then
amounts of interest bearing debt and non-interest bearing debt. The real
benefit of the interest bearing debt was to Univar Corporation in the United States because it amounted to qualifying foreign source
income that we discussed this morning for foreign tax credit purposes.
The reason for the use of the
non-interest bearing debt was the intention at the date of the acquisitions
that we would make the best estimate possible of the ability of the Swedish
company and the U.K. company to service the debt that was in place, realizing
that at a later point in time, one time only, we would make a recapitalization
of those companies when it became clear exactly what their financial strength
was and how their balance would look. …you could think of the non-interest
bearing debt basically as an equity contribution. But because it was
non-interest bearing, we had the ability to make a final adjustment and a
recapitalization.
Lundberg said that the interest
bearing debt created qualifying foreign source income that was of great value
to UC. Lundberg also stated that the Danish company had not originally had any
debt “in place” and in recapitalizing, there was an opportunity for us to
utilize the debt capacity of the Danish company so that it could bear its fair
share of debt on the balance sheet. He added that this increased the amount of
interest bearing debt and, therefore, the interest income to UC for its foreign
tax credit planning purposes. He then emphasized that the same would be true
for all the other restructured European debts which included the Swedish debt,
the UK debt and the Danish
debt.
[83] When asked why it was
important that interest expense payments made from operating companies be treated
within the local jurisdiction as interest payments rather than dividend
distributions, Lundberg replied:
As I recall right now, it was just a
general condition that we wanted to ensure the deductibility of the interest at
the local company level. There was value to - - from a tax perspective and from
a tax management perspective, to have the interest expense deductible as such
by the operating companies, rather than some way having it to be interpreted as
being dividend income and not deductible locally.
[84] Respondent’s counsel then
asked questions respecting the deductibility of interest in Canada being important, the
monies received from Barbadosco not being FAPI, “non taxability in Canada of this interest on the
Univar Europe notes” being an important consideration for the Appellant and UC.
He also referred to a memo from Lundberg to Pruitt and to James Bernard respecting Coopers & Lybrand
advising that the management of Barbadosco should effectively reside outside Canada. He then asked the following:
So these were tax reasons, were they
not…?
Lundberg replied that he was
relying on the advice received from that firm.
[85] Lundberg then, in respect
of yet further questions respecting excess foreign tax credit issues, explained
the significance of that concern to UC. In response to other questions from
Respondent’s counsel Lundberg said:
As we had talked about yesterday during
my testimony, there were several reasons for the development of the NEWCO plan,
one of which was Mr. Pruitt’s treasury concerns. One reason was Mr. Tole’s
concerns over the effective use of cash. And the NEWCO plan as it was designed
was very helpful to us in that the implementation of the plan itself did not
produce additional tax expense to the company that it would be unable to use.
…we actually incurred a two and a half percent tax in Barbados, it was a
relatively small tax, and we were able to, through the estimation of generation
of foreign source income in the future, were able to record that two and a half
percent tax as a tax credit that we would use in a future period of time, and
although it could not be used in the tax returns at the moment, it became what
is referred to as a deferred tax asset, an asset on the balance sheet of a
company that was available for future use.
Lundberg explained that the overall
foreign loss is an allocation of U.S. domestic expense deemed to be attributed to foreign income
and, therefore, disallowing the use of foreign tax credit to a certain extent.
As a result of NEWCO purchasing debt owed to UC in the sum of approximately $27
million U.S., UC would pay down its
debt with the result that it would have lower interest expense and therefore a
lower allocation of interest expense in the overall foreign loss calculation.
This was beneficial to the overall plan for use of the foreign tax credits, the
overall foreign loss being reduced. Lundberg said:
The overall foreign loss was a bad thing
for foreign tax credit purpose uses.
because it eliminated the ability
to take the foreign tax credit. Respondent’s counsel continued, with the
following question:
If Univar Corporation had sold its Univar
Europe notes to the Appellant and received proceeds to pay on the debt the
result would have been the same, wouldn’t it?
Mr. Lundberg replied:
No sir. My understanding of the
operations of the Subpart F provisions of the Code, of the U.S. Internal
Revenue Code would have been that the interest income would not have been
taxable in the United States if those notes had been sold to the Appellant directly,
because one of the conditions of Subpart F of the U.S. Internal Revenue Code is
a calculation, and it says if the income is being subjected to a tax rate at
least 90 percent of the U.S. tax rate, then it’s not considered Subpart F
income and would not be included in the U.S. tax return. …if the notes had been
sold directly to the Appellant, as opposed to Barbados, the income would have
no longer been directly included in the U.S. corporate income tax return and
Univar Corporation would have lost the value in its foreign tax credit
management of the annual inclusion of approximately $2.5 million of interest
expense.
[86] On re-examination, Lundberg
reaffirmed that if the notes were going to be held other than directly by UC,
it was important for them to be held by the Barbados subsidiary:
…because under the provisions of Subpart
F of the U.S. Income Tax Rules, that income would continue to be taxed to the
U.S. company in the same manner as if it had been held directly by the U.S.
company.
[87] In response to further
questions Lundberg re-emphasized what he had said about overall foreign losses
as follows:
This was, as I was trying to describe
earlier in my testimony, as Univar Corporation received the cash in the
transaction of the sale of the notes, it now had cash available in the U.S. - -
that it could use to pay down debt, whatever the source of debt was, and to pay
down the debt. Paying down the debt then resulted in the U.S. company having less interest expense than it would
have otherwise had. The OFL is - - comes about as the result of allocation of
certain U.S. expenses, the most substantial of which
was interest expense. So to the degree U.S. interest expense is reduced, the amount of that interest expense that
would be allocated to the OFL is reduced, and the build up of the OFL is
reduced accordingly.
[88] The witness, Patrick Tole
(“Tole”) is a chartered accountant, having joined Univar in 1983 and having
been employed by the Univar group of companies since that time. He commenced as
a senior accountant, became Vice-President of Finance and in 2002 became the
Chief Financial Officer of the then ultimate Dutch parent corporation. He
testified that he attended all meetings of the Board Directors of Univar in the
period 1987 through 2000, in the capacity of controller. He said at that time
that Larry Bullock (“Bullock”) was Vice-President, western Canada, Fred Hermesmann
(“Hermesmann”) was Treasurer of Univar and Gary Pruitt was Vice President,
Finance of UC. He also said that Paul Hough (“Hough”) was President of Univar
and A.C. McNeight (“McNeight”), who was formerly President, was Chairman of the
Board of Univar. In May, 1994 James Fletcher (“Fletcher”) was the Senior
Vice-President of UC and James W. Bernard (“Bernard”) was President of UC.
William Butler (“Butler”) was Vice-President, General Counsel and Corporate Secretary of UC and
had become a director of Univar. By May 7, 1996 Hough had moved to the U.S. and had become
President of UC while Bullock had become President of Univar.
[89] Tole testified that the
Appellant was a distributor of industrial and agricultural chemicals throughout
Canada. He said the
Appellant’s cash position in 1990 was approximately $13.9 million and in 1991
was approximately $16.2 million. It had short-term trade accounts payable,
accrued liabilities and income taxes payable and a small amount of deferred
income tax but no debt whatsoever, the company being very profitable.
[90] He said that UC and its
operating subsidiary were borrowers under a credit facility with Univar
guaranteeing those loans, it not being a borrower under that credit facility.
In December, 1991, Univar acquired a competitor, Harcross Chemicals Canada,
using its existing cash to acquire same.
[91] At the end of Univar’s 1993
taxation year, its cash position was approximately $20.6 million. At the end of
its 1993 year Univar, under a second credit facility, had borrowings of $18.7
million. Tole said that because of U.S. tax advice, Univar borrowed money under the second credit
facility and, having no pending acquisitions or major capital spending
requirements at that time had invested the monies in interest-bearing bankers
acceptance notes. Tole then described the seasonal nature of its business in
Canada leading to Univar’s need to borrow under credit facilities that were
available in order to pay suppliers because most of its customers would not,
until the crop harvest production, be in a position to pay amounts owing to
Univar. As at February 28, 1994 Univar had a cash position of approximately $5.6 million
and had no bank borrowings. At that time, however, Univar was jointly and
severally liable for any outstanding borrowings of UC and or its subsidiary
even though Univar was not an authorized borrower thereunder. As at the end of
February, 1995 Tole testified, with reference to financial statements that
Univar had $11.4 million in cash, this sum not being used at year end.
[92] Tole, having been referred
to a memorandum from Hermesmann to Rogers, McNeight, Bernard, Samson, Pruitt
and Tole dated December 22, 1987, said that it was simply providing an estimate
of surplus cash to be available at year end and said that Univar had paid off
all its debt, had a healthy cash flow and “needed to begin thinking about what
we should be doing with that”. Tole explained that although the memo suggested
that $7 million could be available to UC, no such distribution was made, Tole
saying:
No, it was not done. Well, the problem
was that the company had a policy that it wouldn’t take dividends out of the
subsidiary companies if they were going to attract a sizeable amount of income
tax or withholding taxes…and the philosophy of the company remains today, that
to the extent that if we are able to leave funds within the operating companies
as long as they have good investment opportunities, that can generate
reasonable returns that’s where the cash will stay, but, essentially, there was
a policy to not repatriate dividends if they were going to attract additional
income tax.
He also said that there had been
only one dividend, namely a dividend of $6 million in 1980, that being the
only dividend between the incorporation in 1950 and 1995.
[93] Tole then explained that
Univar had purchased an agricultural distribution company in Canada in 1987, acquired Harcross
in 1991 and acquired a small agricultural corporation, Wilber-Ellis of Canada in 1992, and had a lot
of growth due to those acquisitions.
[94] Tole testified that UC had
a larger corporate staff than Univar and was providing a number of services, including
engineering services, when Univar was building new facilities and also services
respecting health and environmental matters as well as international tax
planning. He said:
…we were a relatively sizeable
international company and so we had to coordinate international tax issues, so
they had someone on staff that we worked with in those areas.
Tole also stated that the group of
companies had sales of approximately $1.8 billion in the 1993 year from the
sale and distribution of a broad range of chemicals. A portion of the prose in
a document that appears to be the annual report of UC was a statement that
Univar
is well positioned for future profitable
growth in Canada. Our facilities, information technology
systems, and experienced management team are well-suited to projected business
opportunities.
[95] Tole expanded upon a
statement under the heading “Business Acquisitions” in that report which read
in part:
During fiscal 1992, the Corporation
completed acquisitions which provided entry into the European market and
enhanced its competitive market position in the north eastern United States and
in Canada.
He referred to Univar Europe and a
number of operating companies in the UK, Sweden and Denmark, as well as companies in
Italy and Switzerland. In the foregoing chain
of companies, UC owned 51 percent of UE and Royal Pakhoed owned 49 percent
thereof. In 1995 Royal Pakhoed sold its said 49 percent to UC.
[96] The aforesaid report, under
the heading “Income Taxes” stated:
No provision for foreign withholding or United States federal income taxes is necessary, as it is
management’s intention that dividends will be paid only under circumstances
which will not generate additional net tax cost.
[97] Tole then testified that as
at February
28, 1995
Univar was jointly and severally liable for outstanding borrowings under the U.S. facility under which it
could also borrow. Tole was referred to the consolidated financial statements
of Univar as at February 28, 1991, a note which stated that as at February 28, 1991, UC and its operating
subsidiary had outstanding borrowings of $96,700,000 U.S. under various credit agreements in
which Univar was a co-guarantor.
[98] Tole then referred to the
financial statements of Univar for the year-ended February 29, 1996. A note to
the financial statements stated that Univar and its non-U.S. affiliated
companies were authorized borrowers under a U.S. $90 million
multi-currency credit facility. At February 29, 1996 Univar had borrowed $18
million Canadian under this facility.
[99] The witness was then
referred to a certificate of incorporation showing the incorporation of
Barbadosco on May 26, 1995. The directors of that company were Butler, General Counsel for UC
and Mr. Carmichael (“Carmichael”) who was an attorney living in Barbados. He
said that Barbadosco had issued 10,000 shares to Univar for a total price of
$27,036,600 U.S.
In describing the reasons for its incorporation Tole said:
From the Canadian perspective it had to
do with the excess cash that we’ve been talking about and the fact that cash
was building and was going to be available, and the Canadian company was
looking for investments. We haven’t talked much about - - although we’ve made
reference to the U.S. situation, whether it was a fair amount of debt on the
balance sheet of the American company, as well as on the American subsidiary –
little or no debt in Canada. So one of the issues that my friends in Kirkland were trying to address was to distribute the debt
of the corporation appropriately onto the balance sheets of the various
subsidiaries, including Canada.
He explained this by saying that it
was an objective to achieve an equal amount of debt between the various
operating units, to utilize the Canadian cash situation effectively. He said
that it was an inefficient situation to have excess cash available and they
wanted to have debt appropriately allocated throughout the corporation. He said
also that they were in the process of converting some non-interest bearing debt
in Europe to interest-bearing debt.
[100] Tole said that the objective
of debt re-organization, from UC’s perspective was:
…that was a treasury function of the
parent company and what they were trying to do was to allocate debt throughout
the corporation, not have it all in the U.S. They wanted there to be an appropriate balance of debt and equity, to
have strong balance sheets throughout each of the operating companies.
He said that Pruitt was the one
that was most concerned about addressing the leverage.
[101] Appellant’s counsel then
referred to the Canadian issue of cash as one reason and leverage as a second
reason and then asked whether there were any other reasons prompting the
formation of Barbadosco. Tole said, referring to leverage, that it meant the
amount of debt as compared to equity on the balance sheet of a company. He then
said that the third reason was income tax. He stated:
There were tax issues associated with the
Canadian company’s guarantee of the credit facilities, tax issues both in
Canada and in the U.S. …my understanding was that there was a concern that by
the Canadian company being either a guarantor or being jointly and severally
liable under U.S. debt but not participating in borrowing under those credit
facilities, there was a significant concern that there could be some sort of
deemed dividend issue that would have resulted in a significant amount of tax
being paid in the U.S.
He stated clearly that this was not
a Canadian tax issue but was a U.S. tax issue. Tole then described a Canadian tax issue in
1989, 1990, 1991 and, he thought, 1992 when Revenue Canada felt that there should be a fee
that would be charged under the circumstances where the Canadian company was a
guarantor but not a borrower. He then said that Univar had been assessed a
deemed guarantee fee. Tole said that the U.S. banks had requested UC to pledge
its assets as security for a credit facility and it had planned to do so but as
a result of securities problems UC found it easier to have Univar provide a
guarantee to those banks rather than pledge shares. Tole then said that the
Canadian tax problem was settled by the company agreeing to pay 15 percent of
the amount originally assessed.
[102] When asked what purpose
Barbadosco was to serve, Tole said:
…there were essentially…three reasons.
The excess cash that we needed to do something with, needed to find a
reasonable investment; the issue of Mr. Pruitt trying to re-balance the debt
and equity within the company; and then we were trying to address this tax
issue, as well as the U.S. tax issue that I described. …it was
essentially the setting up of the Barbados company was
to me a rather elegant solution to really all of those issues. From our
perspective, the primary one being the excess cash that was being generated. It
was going to result in an investment in a subsidiary that was going to generate
a flow of dividend income that would generate a better return than we were
receiving than from just investing in short-term term deposits or banker’s
acceptances, et cetera. …From Mr. Pruitt’s leverage situation, what it did is
it gave us not only a use for the cash that was being generated, but it
provided a vehicle for us to increase the borrowing in Canada. The proceeds from those borrowings would have ended up in the United States, which would have resulted in lower debt in the
U.S. …so that we’d have more debt in Canada, less debt in
the U.S.
Tole then explained that they took
the cash on hand along with borrowed funds to capitalize or acquire shares of
Barbadosco. Then Barbadosco used those proceeds to acquire the interest-bearing
notes that were payable from UE to UC. Tole said that it addressed the leverage
issue in that fashion. It generated a stream of dividend income to Univar:
…and we felt was going to go a long way
to addressing the tax issues that we had, because now, now the Canadian company
would be not only a guarantor and jointly and severally liable, but would in
fact be borrowing under the facility. …where their concern being that if there
was a subsidiary that was providing a guarantee but wasn’t borrowing, that the
IRS might deem there to be some sort of deemed dividend, and again, because of
the fact that the Canadian company was now borrowing under these credit
facilities, the risk of that occurring was somewhat reduced.
[103] Tole said that there was no
finance company other than Barbadosco in the Univar group. He said that it was
not considered to be a short-term solution and that Univar still had the issue
of continuing to generate a significant amount of cash. He said:
…in setting up an international financing
company, as Barbados was considered to be, it was essentially going to become a
vehicle within the Univar group for providing financing to other companies
within the group. At the same time, Canada would be able to utilize cash as it
became available, generate a stream of dividend income that provided a better
return than we could by just investing in short-term notes, and so it was kind
of an elegant solution for all of those issues – that it wasn’t just these notes
that - - the three notes in question here. We were, over the longer term, we
being Canada, looking at how we would invest the cash
that we had, but also the U.S. parent was looking for ways to provide
financing elsewhere within the corporation.
Tole then said that instead of
investing in the stock market, Univar would make an investment in the shares of
a subsidiary company and make an international financing company to be owned by
Univar to generate a reasonable, low-risk level of return. He said:
I mean, a stock market investment would,
I think you would agree, have a certain amount of risk associated with it.
That’s not what we do, invest in a stock market.
He also said that there were other U.S. issues and
inter-company financing but from the Canadian perspective it represented a
reasonable investment.
[104] In the minutes of a meeting
of the Board of Directors of Univar on May 14, 1993, under the heading “Other
Business”,
the following appears:
Mr. Pruitt informed the Board of a
transaction being contemplated whereby V.W.&R. Ltd. would purchase from
Univar a portion of the Interest Bearing Debt due from Univar Europe. The
amount of debt being recommended for purchase is approximately U.S. $8.2
million. The transaction would involve V.W.&R. Ltd. capitalizing an
offshore subsidiary with funds borrowed under the Univar Revolving Credit
Agreement. The subsidiary would use these funds to purchase the debt from
Univar Corporation. Mr. Pruitt indicated that planning for this transaction was
in a preliminary stage and that the Board would be kept apprised of its status
and that approval would be requested prior to implementation.
Tole said this was a general
description of transactions which occurred on June 14, 1995 and that the
company was making an investment in Barbados and Barbados would be the entity that was acquiring the notes. He then
explained why the sum of $8.2 million rose to approximately $27 million. He
said that borrowing under the Revolving Credit Agreement would assist the
leverage concept of which he had spoken in that Univar would take a combination
of cash on hand and borrowed funds to acquire the shares of the Barbados company. On the
acquisition of loans from UC, UC would have cash that it could apply against
its own debt and Univar’s debt would increase. He explained that Univar was
never given the opportunity to acquire the debt, that the investment was going
to made in Barbados and the idea from the
outset was that it would be the financing company that would acquire the debt.
He said that the acquisition by the Canadian company of the debt was never part
of the plan because it would not have satisfied all three of the issues that he
had earlier mentioned and would have resulted in additional tax being paid in Canada. Tole then explained that
the investment also concerned the consolidation activity of conversion of
non-interest bearing notes payable by UE to UC in to interest bearing notes.
[105] Tole stated that the
original proposal for the Barbados company came from UC, it knowing that Univar was
generating cash and looking for good investment. He stated that:
They had these other issues, tax,
treasury that I referred to earlier and so it was their suggestion that we work
with them and look at setting up the financing subsidiary.
[106] When asked why Univar chose Barbados as the jurisdiction,
Tole replied:
Well once, as the plan was developing we
were working with outside advisors and the suggestion was that we needed to
decide an appropriate jurisdiction for setting up a company such as this. And
there were, I believe, four or five different jurisdictions that were proposed,
and Barbados was on that list. Barbados happened to have the lowest corporate tax rate of
those particular jurisdictions. And it was a jurisdiction that was - - where
this type of international financing company there was a lot of these sorts of
companies that were in place in Barbados and they had the accounting and the
legal and the other professionals necessary to make sure that these things are
run properly. So it was essentially acting upon advice that we were receiving
from our advisors.
When asked whether the Canadian
board of directors abdicated its authority to Mr. Lundberg to handle the
transaction without consultation, Tole replied:
Not at all. I mean I had the ultimate
responsibility from the Canadian company’s point of view to make sure this was
properly implemented and I was quite comfortable in having Mr. Lundberg
work through some of them. I mean, after all, there were legal issues here, there
were tax issues, there were accounting, and we had no one better equipped than
Mr. Lundberg to take care of this part.
[107] Tole said that that was just
the beginning of the investment activity that Barbadosco would undertake. He
said that within the first several months of the initial investment in the
three notes there was another acquisition that was being anticipated in Europe.
This was a UK company called “Berk”
conducting a chemical distribution business. There would be interest bearing
notes, he said, that had a good rate of interest and would make an “interesting
investment for Barbados”. He stated that an additional capital contribution to Barbadosco would
have to be made to fund the acquisition of those notes.
[108] Tole was referred to an agenda
for a November
21, 1994
meeting which outlined the number of potential transactions and planning ideas
for a tax planning meeting. He said that none other than the Barbados proposal were
implemented because:
…there were none that had good, solid commercial
reasons…
He also referred to a memorandum
respecting “NEWCO Profitability Analysis”. He stated that Univar was embarking
on an investment in an international financing company and wanted to analyze
the amount of cash and the amount of borrowed funds that would be invested and
whether the dividend income receivable would be an acceptable amount of return.
He said that the company wanted to know if the dividend income would be a good
return even if all of the money was borrowed.
[109] In response to Appellant’s
counsel’s query as to how Univar paid for the shares of Barbadosco, meaning
with what, Tole replied:
The shares in Barbados were paid for with a combination of cash that was on hand immediately
prior to that purchase, which was approximately $12 million, was in the bank
account. And the balance would have been borrowed under the multi-currency
credit facility.
[110] With respect to how the
$37,360,000 used to subscribe for Barbadosco shares was constituted, extended
discussions took place in the attempt to analyze the true meaning of bank
statements respecting that transaction. Tole’s evidence was that the cash
balance in Univar’s account was approximately $11.9 million and that Univar
borrowed the sum of $15 million on the multi-currency line of credit together
with a second borrowing on that day under that line of credit of $37,360,000.
Tole said that Univar had, therefore, borrowed $52 million in one day, that it
paid $37,360,000 to acquire shares in Barbadosco and needed $26,958,863 on hand
to pay significant trade accounts owing to suppliers. The following exchange
between Appellant’s counsel and Tole describes the Appellant’s position
respecting payment:
Q. So Mr. Tole, when the Canadian
company made a share subscription and sent the money to Barbados for its shares
in the Barbados company, how much cash was on hand in the Canadian bank
account?
A. Approximately $11,970.
Tole then testified that as at
December 31, 1997 there were no outstanding amounts under the multi-currency
line of credit, the debt having been retired with company earnings. In fact,
Tole said that the borrowings in June 1995 began to be reduced almost
immediately and were repaid in full in early 1997.
[111] Tole’s final words
respecting the make-up of the monies paid to acquire shares of Barbadosco are:
…there was $12 million in the bank
account and … there were in fact two draws under the credit facility on that
date, which we saw, totalling just over $52 million. So there were a number of
things that were happening at the same time – cash plus the borrowings, less
payments to various agricultural suppliers, less the investment. It was all - -
all of the cash and the borrowings were pooled in one bank account and all the
transactions were taking place through there.
[112] After discussion about
Barbadosco acquiring the Berk acquisition notes Tole testified that no such
acquisition was made because “our world changed in June of 1996” when it was
announced on that day that Royal Pakhoed would be acquiring all of the
outstanding shares of UC. He said that at that time UC was de-listed from the
New York Stock Exchange and that Royal Pakhoed had its own international
financing company and was no longer interested in using Barbadosco to provide
financing. Tole then stated that over the next couple of years Univar made
dividend payments in excess of $100 million to UC.
[113] Tole then said that
Barbadosco was wound-up on January 3, 2000. He gave as reasons
that Royal Pakhoed wanted to hold all of the European assets within Europe
under the European structure, there being no longer a need for an international
financing company such as Barbadosco.
[114] Appellant’s counsel referred
Tole to a document faxed from Pricewaterhouse Coopers dealing with the windup
of Barbadosco. It stated in part,
This delay exposes VWRL to the provisions
of section 17 for a period of two days.
Tole said he did not understand
what that was referring to but that the changes in legislation, in his
understanding, would have resulted in some additional income tax being payable
in Canada. Tole said that there
were no further investment opportunities being considered for Barbadosco and
that it would have been wound-up in any event.
[115] On cross-examination,
Respondent’s counsel posed questions respecting the retained earnings of Univar
having been increased from $54 odd million to $57 odd million in 1992 to
$61 odd million in 1993, to $67 odd million in 1994, to $79 odd million in 1995
and $93 odd million in 1996. Counsel then said the retained earnings were only
about $6.6 million at December 31, 1996 and sought reason for
same. Tole replied that on change of control the balance is transferred to
“contributed surplus”, it being “accounting gymnastics”. Tole said that further
decreases in retained earnings were due to the dividend paying requirements
imposed by Royal Pakhoed.
[116] Counsel then referred to
Univar’s return on capital as a result of earnings.
[117] In discussing the conversion
of the European debt to interest-bearing from non-interest bearing note
Respondent’s counsel said:
The objective was that the interest that
these European companies generated was not to be taxable in Canada?
Tole replied that there was never
any contemplation that interest would be payable to Canada, that it was making
an investment in Barbados and
would be receiving dividend income.
He then said:
So I don’t - - wouldn’t characterize it
as you suggest.
[118] Counsel then asked whether
it was the objective that the Appellant be able to deduct interest on the money
borrowed in Canada for funding Barbadosco. Tole responded that it was one of the
considerations. He said that, as would be the case with any investment, one
concern was the extent that borrowing was necessary and that interest be
deductible for tax purposes. Tole also said that Univar was a party to the
fixing of interest to be paid on the European debt.
[119] Respondent’s counsel then
entered into the following exchange:
Q. Now, we know that the Appellant
borrowed $37,360,000 roughly for this injection into Barbados, capital injections?
A. No, I don’t know where we saw
that. On the date of the investment we started with just under $12 million in
cash, and during the course of that day borrowed a little over $52 million
under the credit facility and utilized the cash plus the $52 million in
borrowings to make payments to our suppliers and from that pool of cash to make
the initial investment in Barbados.
[120] Counsel then pursued, with
much repetition, a line of questioning concerning alternative investment use of
“this $37 odd million”. This was terminated upon objection by Appellant’s
counsel, the question already having been answered. Respondent’s counsel then
asked questions respecting whether Tole had been advised that the
re-structuring would not affect Univar’s ability to deduct interest payable on
its borrowings, and that the interest received by NEWCO would not constitute
foreign accrual property income. Tole then referred to prudent advice obtained
to the effect that since the income was being earned and taxed in Barbados it would not also be
taxable in Canada. Tole said that the
dividends received by Barbadosco would be paid out of earnings already taxed in
Barbados and it was therefore important that they not be taxed again when they
were distributed to Canada.
[121] Respondent’s counsel then
asked Tole whether the concept of transferring U.S. debt from the United States
to Canada was discussed at the time of a UC Finance Committee meeting in June,
1994. Tole answered the question affirmatively saying that:
…the whole leverage issue that we’ve
talked about where the parent company was looking to end up with more debt in Canada and less debt in the U.S. Yes, I was familiar with that.
Respondent’s counsel asked if that
was because the tax rate in Canada was higher than in the U.S. and Tole replied that
that would have been one of the reasons from the tax director’s point of view.
[122] Counsel then asked Tole
whether he was familiar with the concept of active business income and passive
investment income, “frequently referred to as FAPI”. Tole answered that his
concern once again was that the income not be taxed twice and said that as to
the underlying details, that was for the “tax advisors to help us deal with”.
When asked about whether he was apprised of what was to happen in the United Kingdom and Sweden regarding
the level of debt, Tole replied that he was only aware of the fact that some
re-structuring was taking place that would result in interest bearing notes
being available for purchase by Barbados. Tole also told Respondent’s counsel that no consideration
was ever given to the Appellant acquiring the debt from UE.
[123] Respondent’s counsel then
sought, through more questions, to characterize the acquisition as being one
which would have resulted in interest income taxable in Canada had it been
received by Univar. He even went on to ask Tole whether he agreed that there
would have been tax payable in Canada by Univar at the 45 percent rate. This hypothetical
question was met with the consistent response that the acquisition by Univar of
the debt was never a consideration.
[124] Respondent’s counsel then
discussed with Tole the matter of the Revenue Canada reassessment which had
been settled at 15 percent. This led to the reference to Univar being removed
as a guarantor and the suggestion by Respondent’s counsel that the dispute with
Revenue Canada was thereby resolved.
Tole said that Lundberg still considered that there was a significant exposure
in the U.S. even under circumstances
where Univar was either a guarantor or jointly and severally liable under
credit agreements of the parent company – that there was a risk of deemed
dividend issues in the U.S.
[125] Respondent’s counsel, in
repeated plodding fashion, asked whether the deductibility of the interest
expense to the Appellant was a “crucial part of the scheme”. Tole simply
responded that it was an important consideration for any borrower to ensure
that interest would be deductible for tax purposes.
[126] Continuing, Respondent’s
counsel asked why Tole might have thought the arrangement would not be
acceptable to Revenue Canada. Counsel asked Tole whether Subpart F of the U.S. Revenue
Code was a counterpart to Canadian FAPI rules. Tole replied that it was
entirely a U.S. income tax issue.
Counsel then pursued a series of questions having to do with the different
currencies involved in the Barbados transaction during which he was advised by
the Court that that was irrelevant, the reassessment having been made in
Canadian dollars.
[127] Respondent’s counsel then
sought to characterize the transaction as creating a benefit to Univar because
it had higher debt, the benefit arising because of interest deduction in Canada. Tole responded that
that was a minor benefit and that there were a number of benefits involved in
the transaction, treasury, the utilization of cash generated in Canada and the whole areas of
taxation.
[128] Respondent’s counsel even
asked why Univar’s share subscription for shares of Barbadosco was in U.S. dollars.
[129] At one time the following
exchange took place:
Justice: So, why are you doing it again?
If you want to use the information from these, they are already in evidence,
which is what Mr. Kroft’s point is. You referred to them in your submissions.
Mr. Chambers: Alright. I just have some
questions, sir.
Justice: I know, you keep
saying that. You will not listen to me. Now, why do you want to keep on asking
questions when the information is there and it’s in evidence? Are you
challenging the credibility of this witness who’s already answered questions
about these matters?
Mr. Chambers: No, I’m not.
[130] Respondent’s counsel then
asked whether the Appellant considered using the $37,600,000 in its business,
which was very successful, and earn it 30 percent or 20 percent rather
than just 8 or 7 or even less. Mr. Tole stated that there was excess cash
available and more was going to be generated. He said that more cash was being
generated than was necessary to invest in the chemical distribution business
and that Univar was doing everything available in that regard. He said that
they were investing excess cash in term deposits which were not generating a
very high return. He then said, referring to Barbadosco, that it generated a
higher rate of return and assisted the corporation in achieving a number of
other objectives. Then Respondent’s counsel pursued a line of questioning as to
why the notes were not brought into Canada. This was followed by the suggestion that the
winding-up of Barbadosco was because of changes to the Income Tax Act
which would have been disadvantageous to Univar. Tole said that the parent
company, Royal Pakhoed, was not interested in this structure.
[131] Respondent’s counsel
continued, after many other attempts, to characterize the share subscription of
Barbadosco by Univar as being entirely with borrowed funds. His
cross-examination ended with the following exchange:
Justice: You keep - - Mr. Chambers, you
will not abandon your line of questioning to, with your very own words,
characterize the sum of money that went to purchase the notes. You have never
ever, ever, ever, done anything but characterize that in your questions as
borrowed money. And I’m not going to listen to any of that evidence when the
question is answered that’s posed in that fashion. It’s irrelevant to me. I
mean, establishing that that money was borrowed is not going to happen through
a question that is phrased in that fashion, not at all. If there is evidence
around to indicate that result, that’s a different matter because I like to
look at the evidence as it exists. But characterizing a transaction by the form
of a question is not in my book.
Q: You will acknowledge, Mr. Tole,
that the bulk of the $37,600,000 that was injected into Barbados was borrowed money?
A: I would, there was just under
$12 million cash in the bank, so the bulk would have to be borrowed, I would
agree.
Respondent’s counsel asked no
questions with respect to this response.
[132] The re-examination of Tole
presented Tole’s statement that the simple borrowing of money does not generate
tax benefits. It has the ability to deduct interest but it still costs the
company money and there has to be a purpose for borrowing. Appellant’s counsel
referred to a UC inter-office memo dated January 11, 1995 to David E. Olsen
from Lundberg, the subject being the removal of Univar from revolving credit
agreements. He reminded Tole of the reference by Respondent’s counsel to the
guarantee by the Canadian company of some of the facilities extended to UC by
its lenders. He then asked if there was any discussion in that memorandum of
Canadian tax consequences. Tole replied that there were none, that it was
strictly a treasury issue and that the only tax issues mentioned in that memo
were U.S. taxes.
[133] Appellant’s counsel then
summarized Tole’s evidence respecting three different credit facilities. One
was effective in 1991-1992 in which Univar was not a borrower but only a
guarantor. In 1992 a new facility available to the U.S. under which Canada was a joint and several
borrower was established. Thirdly, in June 1995 the non-U.S. subsidiaries
became borrowers on a sole basis, not joint and several, under the
multi-currency line of credit.
Signed
at Ottawa, Canada, this 3rd day of November 2005.
Bell, J.
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