Date:
20070126
Docket: A-291-06
A-406-06
Citation: 2007 FCA 22
CORAM: NOËL
J.A.
PELLETIER
J.A.
RYER
J.A.
BETWEEN:
HER MAJESTY
THE QUEEN
Appellant
and
HONEYWELL
LIMITED
Respondent
REASONS FOR
JUDGMENT
NOËL J.A.
[1]
These
reasons dispose of two appeals by the Crown which were consolidated by Order of
this Court. The first (A-291-06) is from an interlocutory Order of Bowman C.J.
of the Tax Court of Canada (2006 TCC 325), disallowing some of the substantive
amendments sought by the Crown in its Reply to the Respondent’s (“Honeywell” or
the “respondent”) Notice of Appeal.
[2]
The
second appeal (A-406-06) is from an amended Order issued by Bowman C.J. on
September 26, 2006, further to a motion for reconsideration in which he allowed
many of the sought amendments that were inadvertently omitted in the original
Order, but refused others.
[3]
Honeywell
by way of cross-appeal also challenges some of the amendments allowed by Bowman
C.J. in both his original and his amended Order.
[4]
The
underlying issue in the appeals and cross-appeals turns on the legal effect of
a waiver of the normal reassessment period and in particular the extent to
which the Minister of National Revenue (the “Minister”) is restricted in
defending a reassessment issued pursuant to a waiver by the matter specified
therein.
[5]
The
statutory provisions relevant to the analysis which follows are set out in
Appendix “A” to these reasons.
RELEVANT FACTS
[6]
The
respondent is the Canadian subsidiary of Honeywell Inc., an American
corporation (“Honeywell U.S.”). Honeywell U.S. owned a number of
European subsidiaries, including Honeywell B.V. (a subsidiary in the Netherlands), and
Honeywell S.A. Europe (a Belgian subsidiary).
[7]
The
respondent also incorporated a wholly owned subsidiary in the Netherlands
Antilles, Honeywell Limited Finance N.V. (“Honeywell N.V.”), in 1991. The
respondent borrowed Cdn. $115,000,000 from various financial institutions, with
interest payable, and used the funds to capitalize Honeywell N.V., which then
loaned the money to Honeywell B.V., with interest payable. These transactions
form the basis of the Minister’s reassessments issued against Honeywell with
respect to its 1992, 1993 and 1994 taxation years.
[8]
The
interest receivable by Honeywell N.V. from Honeywell B.V. in these transactions
would normally constitute foreign accrual property income (“FAPI”) to Honeywell
N.V. and as such would be taxable in the hands of Honeywell pursuant to
subsection 91(1) of the Income Tax Act, R.S.C. 1985, c.1 (5th
Suppl.) (“ITA”). However, where interest is paid to a foreign affiliate of a
taxpayer by another foreign affiliate of the taxpayer or another non-resident
corporation with which the taxpayer does not deal at arm’s length on borrowed
money for use in the payer’s active business, clause 95(2)(a)(ii)(B) of the ITA
provides an exception to the FAPI inclusion. Honeywell availed itself of this
exception in filing its tax returns for the relevant years.
[9]
Even
though the literal requirements of clause 95(2)(a)(ii)(B) were satisfied, the
Minister came to the view, before the expiration of the normal reassessment
period, that Honeywell had misused the ITA in its favour in a manner which
renders the General Anti-Avoidance Rule (“GAAR”) as provided under section 245
applicable. Specifically, the Minister considered that the unwritten policy
underlying this clause and the related FAPI provisions contemplate that the
foreign affiliate that wishes to take advantage of paragraph 95(2)(a) must be a
foreign affiliate of a Canadian based multinational corporation (Appellant’s
Memorandum, para. 11). As Honeywell N.V. did not fall within that description
(since it was owned by Honeywell U.S.), the Minister took the position that the FAPI provisions
had been misused and that section 245 should apply to recategorize the
transactions and tax Honeywell pursuant to paragraph 12(1)(c) on the interest
earned as though it had loaned $115,000,000 directly to Honeywell B.V.
[10]
However,
the Minister, relying on the waivers of the normal reassessment period filed by
Honeywell for the years in issue did not reassess immediately. The waivers in
question were given with respect to:
Interest income being
reassessed under paragraph 12(1)(c) of the Income Tax Act, by reason of the
application of Section 245 of the Income Tax Act.
[11]
The
Minister eventually issued the reassessments on a basis consistent with the
terms of the waiver.
[12]
Honeywell
brought an appeal before the Tax Court and in the Reply to the Notice of
Appeal, the Minister defended the reassessments in accordance with the analysis
summarized in para. [9] above.
[13]
During
the course of the exchange of documents leading to the examination for
discovery, the Minister came across information indicating in his view that the
transactions giving rise to the reassessments may have been part of a broad
series of transactions which involved the transfer of funds from Honeywell to
Honeywell U.S. by Honeywell borrowing funds and transferring them through
Honeywell N.V. and through the European subsidiaries of Honeywell U.S. to
enable Honeywell U.S. to pay off debt.
[14]
Relying
on that information, the Crown sought to amend its Reply to allege that since
the funds were not used in the active business of Honeywell B.V., the interest
payments made by it to Honeywell N.V. were income from property or FAPI to
Honeywell N.V. and to further allege under the GAAR that the FAPI rules were
misused, because the funds were not used in an active business. (The Crown refers
to these two groups of arguments as the “FAPI argument” and as the “alternative
GAAR argument” respectively (Appellant’s Memorandum, para. 6)).
[15]
Honeywell
contested these amendments and the matter came before Bowman C.J. for
adjudication.
TAX COURT DECISION
[16]
In
the reasons given in support of the first Order issued June 22, 2006, Bowman
C.J. began his analysis by noting that implicit in the Minister’s reassessments
is the acceptance that the requirements of subsection 95(2) had been met and
therefore, that the funds were used by Honeywell B.V. for active business
purposes (Reasons, para. 9).
[17]
Bowman
C.J. then identified the two arguments which were made against the grant of the
amendments. The first is that the Crown was attempting to raise a new basis of
assessment after the expiration of the normal reassessment period contrary to
what is permitted by subsection 152(9) of the Act. He quickly dismissed this
objection on his view that the decision of this Court in The Queen v. Loewen,
2004 DTC 6321, “permits the Crown to do anything it wants in pleadings” so long
as the assessed amounts are not increased (Reasons, para. 13).
[18]
The
second argument is that the Crown is limited by the wording of the waiver to
the particular ground on which the reassessments were issued. In this respect,
Bowman C.J. noted that including interest in income under paragraph 12(1)(c)
because of a GAAR recharacterization is entirely different from including in Honeywell’s
income a foreign affiliate’s passive income applying the FAPI rules (Reasons,
para. 18).
[19]
Bowman
C.J. rejected the notion that the Minister could under the authority of the
waivers assert a new basis to justify the reassessments because in his words (Reasons,
para. 21):
a.
To
do so would be to write subsection 152(4.01) completely out of the Act.
b. To do so
would violate rules of simple fairness. The taxpayer was induced to sign a
waiver on the basis that the Minister would apply only GAAR and paragraph
12(1)(c). The Minister, having gotten in under the wire on one basis now
says that the field is wide open. Perhaps if there were no waiver the Minister
has the sort of carte blanche that Loewen suggests but once there
is a waiver some effect must be given to the restrictions imposed by subsection
152(4.01). One cannot do an end run around them and in effect come in the back
door when the front door is locked.
c. I
do not interpret the words "matter specified in an election"
("question précisée dans une renonciation") as meaning simply an
amount of money, nor do I read the waiver as saying "anything arising
generally out of your relations with your subsidiary Honeywell NV". Some
effect must be given to the words "reasonably" and "to the
extent that but only to the extent that..." I think a "matter"
in subsection 152(4.01) means a separate subject matter or a discrete head of
taxation. (…) I think a GAAR recharacterization of a foreign affiliate's
income as interest received by a parent is a fundamentally different subject
matter or head of taxation, and therefore a different matter, from a FAPI
assessment.
[20]
Bowman
C.J. concluded his reasons by indicating the amendments which he was allowing
and those which he was not permitting (Reasons, paras. 22 and 23). An order
was issued accordingly.
[21]
The
Crown then invited Bowman C.J. to reconsider his decision on the ground that he
had failed to deal with a number of amendments which were before him. In a
separate set of reasons issued September 26, 2006, Bowman C.J. disposed of
these further amendments, allowing some and refusing others.
[22]
At
the conclusion of these supplemental reasons, Bowman C.J. explained that he had
disposed of these further amendments in a manner consistent with his original
reasons, that is (Supplemental Reasons, para. 14):
Broadly speaking, then,
the amendments which I am prepared to permit are those that are consistent with
the GAAR assessment. The amendments which I am not prepared to permit are
those that relate to the justification of the assessment under the FAPI rules.
POSITION OF THE PARTIES
[23]
In
support of both appeals, the Crown argues that Bowman C.J., after having recognized
that the FAPI argument would have been unobjectionable if the reassessments had
been made before the normal reassessment period, could not hold that the
restrictions imposed by the waivers lead to a different result with respect to
reassessments issued after the normal reassessment period (Appellant’s
Memorandum, para. 25a)).
[24]
In
this respect, the Crown contends that Bowman C.J. erred in holding that the
subject matter of the reassessments, as outlined in the waivers, is fundamentally
different from a FAPI assessment (Appellant’s Memorandum, para. 25 b)).
Because an assessment pertains to an amount of income, the “matter” referred to
in subparagraph 152(4.01)(a)(ii) by necessity refers to an amount of income,
and the only limitation imposed by a waiver is that no tax can be assessed in
excess of the amount which that “matter” gives rise to (Appellant’s Memorandum,
para. 37).
[25]
According
to the Crown, the Minister’s power to raise new arguments, whether legal or
factual, is governed by subsection 152(9) and is not restricted by the waiver
(Appellant’s Memorandum, para. 42). Bowman C.J. therefore erred in refusing
the amendments insofar as they relate to the FAPI argument on the ground that
they pertained to a matter other than that specified in the waiver.
[26]
For
the same reasons, Bowman C.J. also erred in denying the specific amendments that
he did with respect to the alternative GAAR argument.
[27]
The
paragraphs of the Draft Amended Reply which according to the Crown were
erroneously refused by reasons of the aforesaid arguments are paragraphs 18A,
21A, 21B, 21C, 21D, 23(a), 33A and 33B.
[28]
Lastly,
the Crown asserted that the supplementary reasons issued by Bowman C.J. again
failed to deal with the proposed amendment set out in paragraph 24 of the Draft
Amended Reply insofar as it seeks to incorporate a reference to subsection
248(10) of the Act. It asks that this error be remedied, and that the proposed
amendment be allowed.
[29]
In
responding to the appeals, Honeywell supports Bowman C.J.’s view that the
waiver provision (subsection 152(4.01)) does not support the amendments which
were refused but takes issue with Bowman C.J.’s suggestion that the Crown can
plead whatever it wants based on the existing state of the jurisprudence.
Honeywell maintains that the FAPI argument, as well as the amendments relating
to the alternative GAAR argument which were refused, raise an entirely new
ground of reassessment and subsection 152(9) can only assist the Crown when a
new argument is invoked.
[30]
By way
of its cross-appeals, Honeywell contends that Bowman C.J. erred in allowing the
amendments to a number of paragraphs pertaining to the GAAR argument
(paragraphs13A, 21E, 23(e), 23(f), 24, 25, 26, 29, 30 and 33 of the Draft
Amended Reply). It says that although Bowman C.J. correctly concluded that the
Crown is not permitted to advance the FAPI argument, he erred in permitting the
Crown to include those paragraphs which he allowed with respect to the GAAR
argument. In particular, Honeywell submits that these paragraphs are
inconsistent with the terms of the waiver (Honeywell’s Memorandum, para. 87(b))
and that in any event, the new grounds which they assert are not open to the
Minister pursuant to subsection 152(9) (Honeywell’s Memorandum, para. 87(c)).
ANALYSIS AND DECISION
[31]
Despite
the urging of the parties, it is not necessary or opportune to attempt to
settle the debate surrounding the interpretation of subsection 152(9) or to
determine whether as Bowman C.J. puts it, the Minister can “do anything it wants
in pleadings” (counsel for the Crown readily conceded that this last statement
was overly broad). The reassessments with which we are concerned were not
issued within the normal assessment period but thereafter in reliance on the
waivers filed by Honeywell. In my respectful view, Bowman C.J. properly
identified the question which must be answered in this case when he asked at
paragraph 18 of his reasons:
In light of
the wording in the waivers and of the restrictions in them and in subsection
152(4.01) could the Minister have reassessed applying paragraph 95(2)(a)
but without applying section 245?"
[32]
A
waiver when given by a taxpayer and accepted by the Minister gives rise to a
bargain of sorts. The taxpayer foregoes the benefit of the normal assessment
period for the particular year with respect to the matter specified in the
waiver, and the Minister, relying on the waiver, acquires the right to reassess
outside the normal assessment period, but only with respect to the matter
specified in the waiver. Just as the taxpayer cannot alter the waiver once
given, the Minister cannot issue a reassessment that does not reasonably relate
to the matter specified in the waiver. As pointed out by Bowman C.J., this is
made clear by the language of subparagraph 152(4.01)(a)(ii) which provides that
when relying on a waiver the Minister may reassess, “but only to the extent
that, [the reassessment] can reasonably be regarded as relating to, … a matter
specified in a waiver filed with the Minister in respect of the year, …”.
Accordingly, where a reassessment has been issued pursuant to a waiver, the
reference to a “reassessment” in subsection 152(4) can only mean a reassessment
as permitted by the waiver.
[33]
It
follows that if the Minister cannot reassess on the basis proposed by the
amendments because of the wording of the waivers, subsection 152(9) cannot be
construed as allowing these amendments. This is so regardless of the
interpretation which may be given to that provision in another context.
[34]
In
my view, Bowman C.J. provided the correct answer to the question that he asked
when he said that including interest in Honeywell’s income under paragraph
12(1)(c) because of a GAAR recharacterization is entirely different from
including the interest income of Honeywell N.V., its foreign affiliate, in
Honeywell’s income pursuant to the FAPI rules as the Crown now tries to assert
(Reasons, para. 18). Indeed, the premise underlying the reassessment is that Honeywell
B.V., a non-resident corporation which does not deal at arm’s length with the
respondent, was using the borrowed funds in the course of an active business
with the result that the requirements of subsection 95(2) had been met while
the premise underlying the latter is that the funds were not so used and
therefore subsection 95(2) has no application.
[35]
In
the end, Bowman C.J. concluded by reference to the words of subsection
152(4.01) that the proposed inclusion of FAPI in Honeywell’s income is not a
matter that reasonably relates to the matter specified in the waiver. This is
a conclusion that was open to him on the material before him, and in my
respectful view it is the correct conclusion.
[36]
The Crown
further argues that Bowman C.J. erred in refusing to allow those amendments
that he did with respect to the alternative GAAR argument. The Crown
recognizes in its memorandum that the alternative GAAR arguments are based on
the premise that the borrowed funds were not used by Honeywell B.V. in an
active business (Appellant’s Memorandum, para. 6) and it is apparent that
Bowman C.J. rejected the paragraphs that he did because they are inconsistent
with the premise underlying the waiver i.e., that the requirements of paragraph
95(2)(a) had been met. It was open to Bowman C.J. to conclude that the
paragraphs that he refused did not reasonably relate to the matter specified in
the waiver.
[37]
Finally,
with respect to the Crown’s submission that Bowman C.J. should have allowed the
reference to subsection 248(10) in its pleadings (paragraph 24 of the Draft
Amended Reply), the short answer is that this provision provides for a definition
which applies “For the purposes of the Act” whenever the facts giving rise to
its application are proven or presumed. There is accordingly no need to amend
the pleadings to make reference to this provision.
[38]
This
disposes of the Crown’s appeals.
[39]
The
cross-appeals can be disposed of rapidly. Bowman C.J. allowed some of the proposed
paragraphs relating to the GAAR argument to the extent that they did not assert
that the FAPI provisions had not been met or challenge the premise that the borrowed
funds had been used by Honeywell B.V. in an active business. Subject to this,
the paragraphs that he did allow permit the GAAR to be pleaded with respect to
the series of transactions as it is now alleged to have taken place.
[40]
In
this respect, Bowman C.J. in his reasons noted Mr. Chamber’s position that the
GAAR maybe useful in permitting the Crown to trace the funds trough the various
European subsidiaries (Reasons, para. 10). He then said (Para. 11):
I make no
comment on the merits of these assertions. My only function as a motions judge
is to decide whether the Crown is entitled to amend its reply to raise these
new arguments
[41]
Given
that the amendments in question purport to provide a complete picture of the
transactions which the reassessments seek to recharacterize pursuant to the
GAAR, it was open to Bowman C.J. to hold that they reasonably relate to the
matter set out in the waivers.
[42]
Finally,
if it is open to Minister to reassess on the basis now being proposed in these
paragraphs by virtue of the waivers, subsection 152(9) cannot logically be
construed as preventing the Minister from obtaining the amendments sought.
Accordingly, Honeywell’s alternative contention must also fail.
[43]
I
would therefore dismiss both the appeals and the cross-appeal and given the
result direct that the parties assume their respective costs.
“Marc
Noël”
“I
agree,
J.D. Denis Pelletier J.A.”
“I
agree,
C. Michael Ryer J.A.”
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