Citation: 2011 TCC 433
Date: 20111011
Docket: 2009-3346(IT)G
BETWEEN:
INDUSTRIES PERRON INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal from
a reassessment of the appellant on February 3, 2005, in which the Minister of
National Revenue (the "Minister") disallowed the $3,576,088 deduction
in the calculation of its income for the 2011 taxation year. After receiving
the Notice of Objection, the Minister amended the reassessment in question on
May 2, 2005.
[2]
At the beginning of the
hearing, the parties submitted a partial agreed statement of facts and
documents or exhibits deemed relevant to the resolution of this case. The
relevant facts are as follows, with reference to exhibits attached to the
agreement.
[translation]
1.
The appellant is a Canadian-controlled private
corporation.
2.
The appellant's fiscal year ends on December 31
of each year.
3.
The appellant exports Canadian lumber to the US.
4.
On March 31, 2001, the Canada-US Softwood Lumber
Agreement expired. Two days later, the US lumber industry filed a petition with the US Department of Commerce
(DOC), for the introduction of countervailing and antidumping duties. The Canadian
industry is accused of benefiting from a subsidy for its lumber production and
selling it to the US at a price
less than its cost of production.
5.
Through its fiscal year ending December 31,
2001, the appellant accumulated an allowance (called an "allowance for
countervailing and antidumping duties" on its financial records) of
$3,578,088 in regard to the US
softwood lumber industry petition.
When calculating its accrued and tax revenues for the 2001 taxation year, the
appellant deducted $3,576,088.
US investigation into countervailing
and antidumping duties
6.
In the US, two authorities share responsibility of investigations into
countervailing and antidumping duties, the DOC and the International Trade
Commission (ITC).
7.
The relevant US legislation can be found in the Tariff Act of 1930,
19 U.S.C. § 1671
and § 1673.
8.
The DOC must determine whether the manufacture,
production or export of merchandise imported or sold for import to the US is
subsidized by a country's government, and whether the foreign merchandise is
sold, or is likely to be sold, in the US at a price less than its fair value
(dumping).
9.
The ITC is responsible for determining whether
there is a significant injury or threat of significant injury to an industry in
the US because of subsidized
imports or dumping.
10.
The investigation process has two stages: the
preliminary determination and the final determination. During the preliminary
determination, the ITC and the DOC establish whether there is a
"reasonable indication"/"reasonable basis to believe" in
the existence of facts necessary to impose countervailing and antidumping
duties (19 U.S.C. § 1671b(a) and (b); § 1671b(a) and (b)). During the final
determination, the ITC and the DOC establish the existence of these facts (19
U.S.C. § 1671d(a) and (b); § 1673d(a) and (b)).
Preliminary determinations
11.
On May 23, 2001, the ITC rendered a preliminary
determination that there was a reasonable indication that the Canadian exports
of softwood lumber to the US
constituted a threat of serious injury to the US industry.
This determination applies to both the countervailing and dumping duties.
12.
On August 17, 2001, the DOC rendered a
preliminary determination that there was a reasonable basis to believe that
subsidies were granted to Canadian lumber producers and exporters. Because of this
preliminary determination, the DOC set an estimated subsidy rate of 19.31% and
asked customs to require, in accordance with 19 U.S.C. § 1671b(d)(1)(B), a cash deposit
or bond based on this rate.
13.
On November 6, 2001, the DOC rendered a
preliminary determination that there was a reasonable basis to believe that
certain Canadian lumber products were sold, or were likely to be sold, in the US at a price less than their fair value. Considering this
preliminary determination, the DOC set an estimated weighted average dumping
margin of 12.58% and asked customs to require, in accordance with 19 U.S.C. § 1673b(d)(1)(B),
a cash deposit or bond based on this margin.
14.
In the months following the preliminary
determinations, the appellant purchased term deposits and placed them as a
guarantee with the Royal Bank of Canada.
These term deposits were to guarantee letters of credit issued by the Royal
Bank of Canada in favour of the Washington International Insurance Company (WIIC),
which agreed to guarantee the payment of part of the countervailing and
antidumping duties sought by the US lumber industry.
15.
The term deposit rates of return varied between
1.35% and 2.05%.
16.
The total amount of the term deposits was
$2,371,500.
17.
The total amount of the letters of credit issued
by the Royal Bank of Canada was
also $2,371,500.
18.
The total amount guaranteed by WIIC during the
appellant's fiscal year ending December 31, 2001, was US$1,530,000 (the
equivalent of CAN$2,371,500).
Final determinations
19.
On April 2, 2002, the DOC rendered a final
determination that subsidies were granted by the Canadian government for
certain Canadian lumber products exported to the US.
The DOC also rendered a final determination stating that merchandise was sold
or likely to be sold in the US
at prices less than their fair value.
20.
On May 22, 2002, the ITC rendered a final
determination that a US
industry was threatened with significant injury because of the importation of
Canadian lumber, subsidized and sold at a price less than its fair market
value.
The orders
21.
On May 22, 2002, the DOC published notices of
its orders regarding the countervailing
and antidumping duties.
22.
Moreover, the DOC determined that imposing
countervailing and antidumping duties for the period covered in its preliminary
determinations was not warranted in this case. Therefore, the countervailing
and antidumping duties are imposed only as of May 22, 2002, the publication
date of the DOC orders, and the DOC directs customs to repay the cash deposits
and release the bonds required as provisional measures following the
preliminary determinations of August 17 and November 6, 2001.
23.
All the bonds provided by WIIC on behalf of the
appellant in 2001 and the term deposits placed as guarantee by the appellant
with the Royal Bank of Canada were released in 2002.
24.
The appellant and one of its successors
included, for accounting and taxation purposes, $3,578,088 in their 2002
income.
25.
On February 3, 2005, the Canada Revenue Agency
issued reassessments disallowing the $3,576,088 deduction claimed by the
appellant in 2001 and deducting the same amount from the 2002 income of the
taxpayer and its successor.
26.
Ultimately, the DOC orders were revoked pursuant
to the Canada-US Softwood Lumber Agreement, signed on September 12, 2006.
[3]
The issue is therefore
whether the Minister was warranted in disallowing the $3,576,088 deduction in
the appellant's income calculation for the 2001 taxation year. Was it an
expense made or incurred by the appellant for the purpose of gaining income
from its business in accordance with paragraph 18(1)(a) of the Income
Tax Act (the Act)? Did this expense incurred by the appellant constitute a
reserve, a contingent amount or sinking fund pursuant to paragraph 18(1)(e)
of the Act or was the expense an amount paid by the appellant for an existing
or proposed countervailing or antidumping duty in respect of property pursuant
to paragraph 20(1)(vv) of the Act?
[4]
Here are the relevant legislative
provisions:
Section 18: General limitations
(1) In computing the income of a taxpayer from a business or property no
deduction shall be made in respect of
(a) General limitation — an outlay or expense except to the extent that it was made or
incurred by the taxpayer for the purpose of gaining or producing income from
the business or property;
…
(e) Reserves, etc. — an amount as, or on account of, a reserve, a contingent liability or
amount or a sinking fund except as expressly permitted by this Part;
…
(vv) Countervailing
or antidumping duty — an amount paid in the
year by the taxpayer as or on account of an existing or proposed countervailing
or antidumping duty in respect of property (other than depreciable property)
…
[5]
The parties agree that
paragraphs 18(1)(a) and 18(1)(e) of the Act should be
interpreted together since the issues I am called to decide are whether the
appellant had an obligation to pay an amount and whether the obligation was a
result of a contingent liability or amount. This goes without saying. Under
paragraph 18(1)(a), the expense must be incurred before it can be
deductible, which generally implies that the taxpayer must have a legal
obligation to pay this expense to a third party. According to the case law and
paragraph 18(1)(e) of the Act, this obligation cannot be a contingency.
[6]
That being said, the
issue is whether, in view of the facts of this case, the appellant had a legal
obligation to pay the amount in question and, if so, whether the obligation was
a contingent liability.
18(1)(a) and 18(1)(e)
[7]
The appellant submits
that it had the right to deduct the total amount of the estimated subsidy rate
of 19.31% and the estimated dumping margin of 12.58% since, once the
preliminary determinations were rendered, it had to conform. To this end, the
appellant had to conform to the requirements of the Washington International
Insurance Company, a US company that issues bonds and required a letter of
credit from the Royal Bank of Canada, supported by term deposits the appellant
purchased for a total of CAN$2.4 million. (See paragraphs 14, 16, 17, and 18 of
the Facts.)
[8]
The appellant submits
that, in view of this obligation to purchase term deposits, it was responsible
for paying this amount to the Royal Bank of Canada,
to mortgage them to the Bank in return for the Bank's issuing the letters of
credit. The appellant notes that this money was practically frozen in the sense
that the appellant could not do what it wanted as long as the term deposits
were mortgaged. The appellant submits that this obligation was not subject to a
contingency because it had to pay the $2.4 million to purchase the term
deposits.
[9]
The respondent's theory
is based on the fact that the appellant's only obligation for the 2001 taxation
year was one that depended solely on a tax determination by the US authorities regarding the existence of a subsidy or
threat to a US industry of significant injury, namely the
imposition of countervailing and antidumping duties. As long as the final
determination was not made, the obligation to pay the countervailing and
antidumping duties did not exist; they would only come into existence if
certain events occurred, which, in this case, did not happen.
[10]
The respondent submits
that this is in fact what paragraphs 18(1)(a) and 18(1)(e) of the
Act prevent. They prevent the deduction of an expense that is not certain
because it is only a preliminary determination that is subject to a
contingency, namely the final determination and order being issued regarding
the countervailing and antidumping duties. According to the respondent, an
expense is generally incurred by a taxpayer at the time an obligation to pay an
amount of money comes into existence.
[11]
The parties
respectively cited the same excerpts from the case law on what constitutes a
certain legal obligation. I will stand by McLarty v. R. 2008 D.T.C.
6366, a Supreme Court decision, in which Rothstein J. summarized the issue at
paragraph 18:
18 What constitutes a contingent liability was further clarified by
Sharlow J.A. in Wawang, at para. 15. By themselves, three
uncertainties will not determine whether a liability is contingent. I
paraphrase her reasons as follows:
·
(a)
Uncertainty as to whether the payment will be
made. For example, a liability may be incurred when the taxpayer is in financial
difficulty and there is a significant risk of non-payment. That does not
mean the obligation was never incurred;
·
(b)
Uncertainty as to the amount payable. There is
always uncertainty as to the amount that may be payable. There is never
certainty that the borrower will be able to pay the amount owing when the note
comes due. That type of uncertainty does not make a liability contingent;
·
(c)
Uncertainty as to the time by which payment shall be
made. An obligation is not contingent because payment may be postponed if
certain events occur.
The test is simply whether a legal obligation comes into existence
at a point in time or whether it will not come into existence until the
occurrence of an event which may never occur.
[Emphasis added]
[12]
First and foremost, in
this case, my view is that the appellant's obligation to pay a sum of money
during the 2001 taxation year must be identified. According to the appellant,
this obligation was to purchase certificates of deposit to meet the Bank's
requirements, whereas the respondent claims that the appellant's only
obligation in 2001 was to provide a cash deposit or bond based on the margins
established in the preliminary determination. The right to impose
countervailing and antidumping duties would be the subject of a final
determination later, such that the countervailing duties, if any, would be
established after the determination was made.
[13]
The purchase of term
deposits cannot, in my opinion, be considered a deductible expense in this
case, under paragraph 18(1)(a) of the Act, even if these term deposits
were mortgaged in favour of the Bank and the appellant temporarily lost
enjoyment. The appellant's financial records show, in its assets, the term
deposits in question with an explanatory note stating they were to be used to
guarantee letters of credit. The appellant acknowledges that it is a
contingency in explanatory note 18 of its financial records.
[14]
Pursuant to section
1671b of the US law on countervailing duties (tab 10), the preliminary
determination is based solely on information available at the time of the
determination that show a reasonable indication that a US company might be
injured or is threatened, and the effect of this determination means the US
authorities have the duty to establish an estimated rate for the countervailing
duties and order a deposit of money, bond or other guarantees for all entries
of merchandise. The same is true for antidumping duties. Until the final
determination is made, the appellant is under no obligation to pay the
countervailing duties. There was only an estimate of the countervailing rate
and a requirement to pay or produce bond to guarantee payment, which the
appellant did in the circumstances.
[15]
The appellant's
financial records indicate this state of affairs as I have already noted and a
provision of $3.6 million was accounted for accordingly. I therefore agree with
the respondent that in 2001, there was no obligation to pay the countervailing
and antidumping duties. I also feel that in this case, the fact the appellant
chose to guarantee its potential liabilities by purchasing term deposits is not
relevant to the determination of its legal obligations to the US authorities.
[16]
Therefore, in 2001,
there was no legal obligation regarding the appellant's countervailing and
antidumping duties. This legal obligation would only have existed upon the
final determination by the US authorities. There were therefore no
expenses incurred within the meaning of paragraphs 18(1)(a) and 18(1)(e)
of the Act. Even if the appellant claims it paid the amount of the term
deposits to the Royal Bank, the fact is, it only mortgaged them. Even if the
appellant agreed to not use them without the Bank's consent, which is not clear
according to the documents submitted to evidence, this would not be the
equivalent of a transfer of property rights. The amounts of money in question
are subject to a contingency, where the appellant defaults on the advances
granted by the Royal Bank.
20(1)(vv)
[17]
The appellant submits
that under paragraph 20(1)(vv) the appellant may at least deduct
the $2.4 million it paid to the Royal Bank for the term deposits, in the same
manner as a taxpayer who paid cash for the rate estimated by the US
authorities. In both cases, it would be a disbursement, no matter what. The
appellant submits that it is an amount paid by the taxpayer during the year for
existing or proposed countervailing or antidumping duties on property. It is a
different concept than the one at paragraph 18(1)(a) of the Act
that covers expenses incurred or made. According to the appellant, it is
possible to find that the payments made to the Royal Bank to purchase the term
deposits were actually paid as proposed countervailing and antidumping duties.
The appellant focuses on the English version of the provision that mentions an
amount paid as duty "or on account of an existing or proposed
countervailing or antidumping duty." In the French version, there is no
such advance account for countervailing or antidumping duties. According to the
appellant, it would be difficult to not find that in this case, the payment
made to the Royal Bank was a payment for the proposed countervailing and
antidumping duties.
[18]
The appellant also
raised the issue of the interpretation of the word "paid" as found at
paragraph 20(1)(vv) of the Act. It notes that the Civil Code of Québec
applies in this case, considering the provisions of articles 8.1 and 8.2 of the
federal Interpretation Act and the fact the concept of "paid"
is rather broad. Article 1553 of the Civil Code defines the word
"payment" as follows:
Payment means not only the turning over of a sum of money in
satisfaction of an obligation, but also the actual performance of whatever
forms the object of the obligation.
[19]
The respondent
acknowledges that, contrary to paragraphs 18(1)(a) and 18(1)(e),
paragraph 20(1)(vv) of the Act clearly provides for existing or proposed
countervailing and antidumping duties such that, if the other conditions are
met and the obligation is uncertain as is the case with a preliminary determination,
the deduction may be allowed. However, she insists that under paragraph 20(1)(vv)
of the Act, it must be an amount paid in cash for these duties, and therefore
an amount actually paid to meet the obligation to pay the duties in question.
The respondent claims that the usual and ordinary meaning of the verb "to
pay" means giving an amount of money and that paragraph 12(1)(z.6)
of the Act, which requires the amount received by a taxpayer during the year as
repayment for an amount deducted under paragraph 20(1)(vv) to be
included in the taxpayer's income, supports her interpretation that an amount
of money must be paid before it can be reimbursed. It is clear that we are not
talking about a guarantee or bond that would eventually be set aside, which is
what happened in this case.
[20]
It is true that article
1553 of the Civil Code defines payment to include not only the turning over of
a sum of money in satisfaction of an obligation, but also the actual
performance of whatever forms the object of the obligation. Many Quebec court decisions have confirmed this principle, see Dufresne
v. Paul Léger Ltd. (1980) EYB 137591 and Pisapia Construction Inc. v.
St-Fabien Industriel Inc. [1977] CA 528.
[21]
Didier Lluelles and
Benoit Moore, in Droit des obligations, make the following comments on
the meaning of the word “payment”:
[translation]
Through the payment, the debtor
completes his duty to meet the obligation and is released from it. This duality
of the payment makes it an extinguishing method that differs from other methods
such as debt release or limitation. The payment relates to all services
indiscriminately and not only those involving a monetary debt (art. 1553). Of
course, the tenant who pays monthly rent meets his obligation. But the building
painter who applies paint to the walls of his client's cottage or the diva who
sings at the Opéra de Québec also "pay" their obligation. Similarly,
the concept of payment also includes obligations to not act: by refraining from
operating a similar business, in accordance with a non-competition clause, the
cedant of a business "pays" his obligation. The Civil Code uses the
word "payment" in a broader sense than that in common language.
[22]
Article 1554 of the
Civil Code also provides that a payment can exist when no prior obligation
exists. This article reads as follows:
1554. Every payment presupposes an obligation; what has
been paid where there is no obligation may be recovered.
Recovery is not admitted, however, in the case of natural
obligations that have been voluntarily paid.
[23]
The above-noted authors
comment on the scope of article 1554 as follows:
[translation]
"Every payment presupposes an
obligation", article 1554 states, in its first paragraph. The payment can
therefore, to a certain extent, be subject to a "cancellation" at the
request of the payor or the payor's heirs, if there is no prior obligation. A
payment made in error is subject to recovery. The payment made before the
existence of a suspensive condition is also subject to recovery since the debt
did not yet exist. However, as we have seen, the voluntary payment of a natural
obligation is irretrievable. As for a payment made before a deadline arrives,
it is, in principle, valid because the debt was then in existence, although not
yet due. We must remember that the creditor may, in certain cases, object to a
pre-term payment.
[24]
It is therefore
necessary for an obligation to exist before a valid payment can be made.
Beaudoin and Jobin, in the 6th edition of Les obligations (Yvon Blais,
2005), explain what constitutes an obligation.
[translation]
In civilian terminology, the word "obligation" has a much
more specific meaning. It is a legal relationship
between two or more persons by which one person, called the debtor, is bound to
render a prestation to another person, called the creditor, and which consists
in doing or not doing something, subject to a legal compulsion.
[25]
Does this broad
interpretation of the word "payment" mean it is possible to find that
the appellant paid an amount for existing or proposed countervailing or
antidumping duties or as a deposit, as the English version implies?
[26]
In this case, the
appellant did not pay the US authorities any amount as existing or
proposed countervailing or antidumping duties. The appellant chose to provide bail
and, to do so, it had to pay the Royal Bank of Canada a sum of money to acquire
term deposits that the appellant then mortgaged in favour of the Bank so it
would issue letters of credit to the Washington International Insurance Company
for it to guarantee the payment of part of the duties in question.
[27]
Although the funds used
for the acquisition of the term deposits were mortgaged and the use of the
funds was restricted by the Royal Bank, they were still the appellant's
property. Even if the appellant claims it paid the amount of the term deposits
to the Royal Bank, in fact, it only mortgaged them and even if it committed to
only dispose of them with the Bank's consent, this does not amount to a
transfer of property.
[28]
The only obligation the
appellant had was to meet the Royal Bank's requirements in its relationship as
debtor and creditor, which was created by the purchase of the term deposits.
Moreover, at no relevant time during the 2001 taxation year were there existing
or proposed countervailing or antidumping duties since these duties would only
have been established in the final determination.
[29]
The respondent is
therefore warranted in disallowing the deduction in the calculation of the
appellant's income for the 2001 taxation year. The appeal is dismissed with
costs.
Signed, this 11th
day of October 2011.
"François Angers"
on this 12th day
of January 2012.
François Brunet,
Revisor
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