Citation:
2016 TCC 43
Date:
20160212
Docket: 2012-4038(IT)G
BETWEEN:
CANADIAN
FOREST NAVIGATION CO. LTD.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR DETERMINATION
Lamarre A.C.J.
[1]
By order dated February 19, 2015,
Graham J. of this Court ordered that a question of law be determined
before the hearing of the appeal, in the following terms:
WHEREAS the
Appellant’s foreign affiliates transferred amounts to the appellant during the
2004, 2005 and 2006 years and declared such transfers to be dividends;
WHEREAS foreign
rectification orders were rendered by the Supreme Court of Barbados and the
District Court of Nicosia, Cyprus on March 28, 2001 [sic] and August 13, 2010 respectively;
WHEREAS the
foreign rectification orders declared that the amount transferred from the
Appellant’s foreign affiliates to the Appellant are not dividends but rather,
are transfers that resulted in indebtedness by the Appellant to the foreign
affiliates in the amount of the transfers;
WHEREAS in
computing its Canada income tax, the Minister of National Revenue (the
“Minister”) assessed the Appellant on the basis that the transfers were
dividends within the meaning of sections 12 and 90 of the Income Tax Act;
WHEREAS the
assessments are the subject of this Appeal; and
WHEREAS one of
the issues in this Appeal is whether or not the transfers are taxable as dividends:
Is the Minister
required to not treat the transfers as dividends, or to not take the position
that the transfers are dividends in this Appeal, by virtue of the foreign
rectification orders, but rather to treat the transfers as resulting in
indebtedness by the Appellant to the foreign affiliates in the amount of the
transfers?
[2]
In support of the motion, the parties have filed
a Statement of Agreed Facts, which is reproduced at the end of these Reasons
for Determination.
[3]
The appellant submits that this Court should
answer the above question in the affirmative. According to the appellant, the
Barbadian and Cypriot judgments (Foreign Judgments) declared the
transfers made to it by its subsidiaries, Canfornav Inc. (Barbados Subco)
and Canfornav Limited (Cyprus Subco), which transfers were declared
initially as dividends in its 2005 and 2006 taxation years, to be retroactively
rectified as being loans and other debt (resulting in indebtedness of the appellant
toward its subsidiaries). In the appellant's view, those Foreign Judgments
constitute the judicial reality, which should not be ignored by the respondent.
Consequently, the respondent is bound to take into account the Foreign
Judgments and is precluded from taking the position that the appellant received
dividends rather than amounts in the form of loans and other indebtedness.
[4]
The respondent, on the other hand, asks this
Court to answer the question in the negative. She submits that the appellant resorted
to the foreign rectification proceedings without notifying the Minister of
National Revenue (Minister) after having been audited and advised that
the dividend deductions claimed pursuant to paragraph 113(1)(a) of
the Income Tax Act (ITA) would be denied. In her view, the
appellant used the foreign rectification proceedings to recharacterize the
dividends as loans or other indebtedness for the purpose of avoiding
unanticipated Canadian tax consequences. The respondent’s position is that she
is not bound by the Foreign Judgments because they were obtained without notice
to the Minister, constitute retroactive tax planning and have not been
recognized in Canada by a court of competent jurisdiction.
[5]
For the reasons that follow, I will answer the question raised in
this motion in the negative.
Analysis
[6]
The parties agree that the only Canadian
province with which the appellant has a nexus is the province of Quebec. Therefore, the application of the Foreign Judgments before this Court is subject to the
law of that province, hence to the Civil Code of Québec (CCQ) and the Quebec
Code of Civil Procedure.
[7]
The relevant articles are sections 2822,
3155 and 3158 CCQ, which read as follows:
2822. An act purporting to be issued by a competent foreign public officer
makes proof of its content against all persons and neither the quality nor the
signature of the officer need be proved.
Similarly, a copy of
a document of which the foreign public officer is the depositary makes proof of
its conformity to the original against all persons and substitutes for the
original, if it purports to be issued by that officer.
3155. A decision rendered outside Québec is
recognized and, where applicable, declared enforceable by the Québec authority,
except in the following cases:
(1) the authority of the State
where the decision was rendered had no jurisdiction under the provisions of
this Title;
(2) the decision, at the place
where it was rendered, is subject to an ordinary remedy or is not final or
enforceable;
(3) the decision was rendered in
contravention of the fundamental principles of procedure;
(4) a dispute between the same
parties, based on the same facts and having the same subject has given rise to
a decision rendered in Québec, whether or not it has acquired the authority of
a final judgment (res judicata), is pending before a Québec authority,
in first instance, or has been decided in a third State and the decision meets
the conditions necessary for it to be recognized in Québec;
(5) the outcome of a foreign
decision is manifestly inconsistent with public order as understood in international
relations;
(6) the decision enforces
obligations arising from the taxation laws of a foreign State.
3158 The Québec authority confines itself
to verifying whether the decision with respect to which recognition or
enforcement is sought meets the requirements prescribed in this Title, without
considering the merits of the decision.
[8]
The author Henri Kélada (Reconnaissance et exécution
des jugements étrangers (Cowansville, Que: Éditions Yvon Blais, 2013)
at p. 37) explains:
La décision
étrangère est considérée comme un fait
La décision étrangère constitue
un fait dont les effets ne peuvent être ignorés par nos tribunaux québécois, et
ce, même en l’absence de reconnaissance par voie d’action en exemplification128.
En tant qu’instrumentum, le jugement étranger peut aussi être utilisé
comme moyen de preuve (art. 2822 C.c.Q.). Le juge québécois devra tenir
compte du fait qu’il a été rendu129.
128 J.‑G. CASTEL, Droit
international privé québécois. Toronto, Butterworths, 1980,
p.846.
129 S. GAUDET et P. FERLAND, « Les effets indépendants de
la procédure de reconnaissance », dans Collection de droit 2008‑2009,
Contrats, sûretés, publicité des droits et droit international privé,
Cowansville, Éditions Yvon Blais, 2008. Voir G.C. c. A.Ca., EYB 2011‑187198
(C.S.), juge Michel Girouard.
[9]
This means that foreign judgments, even without
being homologated by a local court in the province, constitute a fact which
cannot be ignored by the courts in the province. A foreign judgment may be used
as evidence and the Quebec judge will have to acknowledge that a foreign
judgment has been rendered.
[10]
However, under Quebec private international law,
foreign judgments are not enforceable in and of themselves. Article 3155
CCQ states that, except where certain exceptions apply, any foreign judgment is
recognized by the Quebec court that declares it to be enforceable in the Quebec
legal system. The application for enforcement is a judicial demand that gives
rise to an adversarial relationship. Even though article 3158 CCQ provides
that the Quebec court may not examine the merits of the foreign decision, this
rule does not change the legal nature of the application for enforcement (Kuwait
Airways Corp. v. Iraq, 2010 SCC 40, [2010] 2 S.C.R. 571, at
par. 20).
[11]
This procedure is even more necessary in the
case of a non‑money foreign judgment. A domestic court enforcing that
kind of judgment may have to interpret and apply another jurisdiction’s law.
The recognition and enforcement of such judgments will require a balanced
measure of restraint and involvement by the domestic court that is otherwise
unnecessary when the court merely agrees to use its enforcement mechanisms to
collect a debt. This means that the domestic court may have to consider
relevant factors so as to ensure that the foreign judgments do not disturb the
structure and integrity of the Canadian legal system and do not conflict with
domestic law (Pro Swing Inc. v. ELTA Golf Inc., 2006 SCC 52, [2006]
2 S.C.R. 612, at par. 13‑18).
[12]
In Chevron Corp. v. Yaiguaje,
2015 SCC 42, at paragraph 43, the Supreme Court of Canada stated:
“Canadian law recognizes that the purpose of an action to recognize and enforce
a foreign judgment is to allow a pre‑existing obligation to be fulfilled;
that is, to ensure that a debt already owed by the defendant is paid.” At
paragraph 48, the Supreme Court of Canada added: “The enforcing court has
no interest in adjudicating the original rights of the parties. Rather, the
court merely seeks to assist in the enforcement of what has already been
decided in another forum.” This reflects the principle of comity, which is
grounded on the concepts of order and fairness. At paragraph 54, the
Supreme Court went on to say: “. . . in recognition and enforcement
proceedings, order and fairness are protected by ensuring that a real and
substantial connection existed between the foreign court and the underlying
dispute. If such a connection did not exist, or if the defendant was not
present in or did not attorn to the foreign jurisdiction, the resulting
judgment will not be recognized and enforced in Canada.”
[13]
Thus, relying on comity is a balancing exercise.
It requires a careful review of the relief ordered by the foreign court. “This
review ensures that the Canadian court does not extend judicial assistance if
the Canadian justice system would be used in a manner not available in strictly
domestic litigation.” (Pro Swing, supra, par. 30)
[14]
In Canada, rectification orders requested by the parties to a
transaction in order to rectify the transaction following unforeseen tax
consequences are not automatically granted. Basically, it is open to the courts
to intervene to find that the amendments made by the parties to the acts at
issue are legitimate and necessary (Quebec (Agence du revenu) v. Services Environnementaux
AES inc., 2013 SCC 65, [2013] 3 S.C.R. 838 at par. 51) (AES).
However, the judicial recognition of the validity of the amendments made by the
parties in the context of tax planning is to be approached cautiously. In AES,
the Supreme Court of Canada stated at paragraph 54: “Taxpayers should not
view this recognition of the primacy of the parties’ internal will – or common
intention – as an invitation to engage in bold tax planning on the assumption
that it will always be possible for them to redo their contracts retroactively
should that planning fail. A taxpayer’s intention to reduce his or her tax
liability would not on its own constitute the object of an obligation within
the meaning of art. 1373 C.C.Q., since it would not be sufficiently determinate
or determinable.”
[15]
In Canada (Attorney General) v. Groupe Jean
Coutu (PJC) inc., 2015 QCCA 838 (leave to appeal to the Supreme Court of
Canada granted on November 19, 2015), the Quebec Court of Appeal analyzed
the AES decision and sated the following:
[28] Accordingly,
in my view, the judgment of the Supreme Court in AES & Riopel is
authority for the proposition that as between related parties, who choose to
effect a legitimate corporate transaction for the purpose of avoiding,
deferring or minimizing tax and who commit an error in giving effect to such
transaction (for example, by miscalculating the ACB, by the timing of certain
corporate steps or the attributions of a new class of shares) may correct that
error to achieve the tax consequence originally and specifically intended and
agreed upon.
[29] However,
LeBel J. did not set aside all the previous case law in tax matters, to the
effect that the parties cannot rewrite history and change their transactions
because of unintended tax consequences. Those principles continue to apply.
[30] Even though
the tax authorities have no acquired rights in civil law, LeBel J., in my view,
does not sanction a general license to travel back through time with the
benefit of hindsight to reverse or correct unintended tax consequences of
commercial dealings. LeBel J. merely approved the parties restoring their
agreement to what it should have been in circumstances where there was no
mistake in the transaction itself but rather a mistake in the way the
transaction had been expressed in writing.
[31] Tax
liability is based on what happened and not on what a party in retrospect would
have rather done.
. . .
[38] . . .The
general intent of the Respondents that their transaction be “tax neutral” is
not sufficiently determinate, in the words of Justice LeBel, to serve as the
basis of a modified agreement which a court should recognize with retroactive
effect to cancel unintended tax consequences. . . .
[16]
The AES case was governed by Quebec civil
law and the Supreme Court of Canada did not find it appropriate in that case to
reconsider the common law remedy of rectification, which appears to have been
given a broader scope of application in tax cases.
[17]
The Supreme Court also stated in AES that
“[t]he revenue agencies were impleaded, as they had to be, in accordance with
art. 5 C.C.P and the fundamental rules of procedure.” (par. 51)
[18]
Considering all of the above, it may well be
that a Quebec court would enforce the Foreign Judgments as between the parties concerned
in those judgments (i.e., as between Canfornav Inc. and the appellant and as
between Canfornav Limited and the appellant), as the court’s role would then be
limited to facilitating the execution of the obligation validated by the Foreign
Judgments on the consent of both parties (for example, if Canfornav Inc. or
Canfornav Limited were asking the appellant to repay the amount of the debt
initially declared as a dividend).
[19]
The situation is different, however, when only
one of the parties at which a foreign order is directed is asking the court to
enforce that order for the purposes of cancelling unintended tax consequences.
As seen above, the Canadian case law in the matter of rectification of
transactions for tax purposes is not linear and the courts will follow it or not
on a case‑by‑case basis. For instance, in AES, the Supreme Court
had to decide whether the parties’ juridical acts which led to the notices of
assessment were consistent with their true common intention. This raised an
interpretation issue. In AES, the Supreme Court approved a correction to
allow the parties to avoid a tax consequence that their transactions were originally
intended to avoid. On the other hand, in Groupe Jean Coutu, the Quebec
Court of Appeal found that the commercial transaction initially entered into
achieved the intended purpose of neutralizing the effect of exchange
fluctuations. The Court accordingly refused to rectify the transaction, doing
so on the basis that the general intent of the taxpayer that the transaction be
“tax neutral” was not sufficiently determinate to serve as the basis of a
modified agreement that a court should recognize with retroactive effect to
cancel unintended tax consequences.
[20]
In the present case, the appellant argues that
the Foreign Judgments were requested because the intent had been, from the
beginning, to take the profits out of the Barbados Subco and the Cyprus Subco
on a tax‑free basis, in order to comply with the international shipping
rules set out in subsection 250(6) of the ITA.
[21]
In my view, the approach that must be taken in
the present case is the same as that which would be applicable for non-money
foreign judgments. This means that, as stated in Pro Swing, supra,
the domestic court may have to consider relevant factors so as to ensure that
the Foreign Judgments do not disturb the structure and integrity of the
Canadian legal system and do not conflict with domestic law. It is not merely a
matter of facilitating the execution of a debt or an obligation that was
adjudicated upon by the foreign tribunal. A careful review of the Foreign Judgments
is required in order to ensure that the Canadian court does not extend judicial
assistance if the Canadian justice system would be used in a manner not
available in strictly domestic litigation.
[22]
That is why I conclude that the Foreign Judgments
would have to be homologated by a competent tribunal in the province of Quebec in
order to bind the respondent. This is all the more true since the respondent
never had a chance to intervene to present her own arguments or to test the
stated common intentions of the parties at the time the transfers of money
occurred (or to ensure that all necessary information and all the tax
ramifications were squarely before the foreign courts), especially given that the
context was one in which the Foreign Judgments were issued after the Canada
Revenue Agency had sent a notice of proposed reassessment (in the case of the
Barbados application) and notices of reassessment (in the case of the Cyprus
application) with respect to taxing the dividend income that was intended to be
distributed tax‑free (see AES, supra, at par. 51; Dale
v. Canada, [1997] 3 F.C. 235, at par. 50, [1997] F.C.J. No. 476
(QL), at par. 17; Beals v. Saldanha, 2003 SCC 72, [2003]
3 S.C.R. 416, at par. 62; Aim Funds Management Inc. v. Aim Trimark
Corporate Class Inc., [2009] O.J. No. 2408 (QL) (Ontario Superior Court of
Justice), at par. 22; A c. B, 2013 QCCS 575, at par. 42-43 and
50).
[23]
Unfortunately, this Court does not have
jurisdiction to grant an equitable remedy of rectification. Nevertheless, it is
still open to the appellant to rely on the Foreign Judgments in presenting its
evidence before this Court at trial, and it will be up to the presiding judge
to determine the weight to be given to the Foreign Judgments when ruling on the
correctness or incorrectness of the assessments being appealed.
[24]
For all these reasons, I answer in the negative
to the question raised by the parties in this section 58 motion, and I conclude
that the respondent is not bound by the Foreign Judgments and is not precluded
from taking the position that the appellant received dividends rather than amounts
in the form of loans and other indebtedness during the period at issue.
[25]
The respondent is entitled to her costs on the
motion.
Signed at Ottawa,
Canada, this 12th day of February 2016.
"Lucie Lamarre"
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