AMENDED
AMENDED REASONS FOR JUDGMENT
The
Amended Reasons for Judgment are issued in substitution for the Reasons for
Judgment dated July 20th, 2016
Hogan J.
I. Overview
[1]
The Appellant, Rio Tinto Alcan Inc. (“Alcan”), incurred
significant fees for legal, investment banking and other services (the “Disputed Expenses”), broadly speaking, in the context of the acquisition of the shares
of Pechiney SA (“Pechiney”) and the spin-off of Alcan’s rolled products business to its
shareholders (the “Spin-off”). The Spin-off was implemented by transferring the shares of Arcustarget
Inc. (“Archer”), the parent corporation of the rolled products business, to
Alcan’s shareholders through Novelis Inc. (“Novelis”). In filing its tax returns
for the taxation years in respect of which the Disputed Expenses were incurred,
the Appellant deducted a significant amount of those expenses under
subsection 9(1) and various paragraphs of subsection 20(1) of the Income
Tax Act (Canada)
(the “Act”). With respect to the Pechiney transaction, the Minister of
National Revenue (the “Minister”) disallowed the amounts deducted by the Appellant on the grounds
that the expenses were inextricably linked to a capital transaction and the deductions
under subsection 20(1) did not apply. With respect to the Novelis
transaction, the Minister disallowed the amounts deducted by the Appellant on
the grounds that the expenses were incurred for the purpose of effecting the
disposition of the Archer shares and the deductions under subsection 20(1)
did not apply. In the Minister’s opinion, these expenses should be added to the
adjusted cost base of the Pechiney shares or deducted from the proceeds of
disposition of the Novelis shares,
as the case may be.
[2]
The reassessments prompted the Appellant to
reconsider its initial filing position. The Appellant now claims that the full amount
of the Disputed Expenses is deductible under a combination of
subsection 9(1) and paragraphs 20(1)(e), (bb) and (cc)
of the Act. Alternatively, the Appellant contends that any Disputed Expenses
that are not deductible under the aforementioned provisions are eligible
capital expenditures.
[3]
The Appellant’s appeal from the assessment
issued by the Minister in respect of its 2007 taxation year raises a number of
issues, only one of which is addressed in these Reasons for Judgment. Prior to
the hearing, the parties agreed, with the Court’s consent, that only the
question of the deductibility of the expenses incurred by the Appellant in
respect of the Novelis transaction for its 2005 taxation year would be dealt
with at this stage. Therefore, in these Reasons for Judgment, the Court
addresses only the amount of the non‑capital loss that can be carried
forward by the Appellant from its 2005 taxation year and deducted in the
calculation of its taxable income for the 2007 taxation year. The remaining
issues will be determined at a later date in accordance with the agreement of
the parties.
II. Parties’ Positions
A. Appellant’s
Position
[4]
In its Reply to the Respondent’s Written
Arguments, the Appellant provided a breakdown of the Disputed Expenses together
with the corresponding provisions of the Act under which each Disputed Expense
is claimed. That breakdown is reproduced below:
a) DISPUTED EXPENSES (PECHINEY) – Total $77,374,669
INVESTMENT
BANKERS
|
Morgan Stanley
|
Total: $26,051,194
|
|
Alcan’s position is that:
|
|
$18,887,115 should
be allowed under 9(1); and
|
|
$7,164,079 should be
allowed under 20(1)(bb).
|
|
Or
|
|
$26,051,194 should
be allowed under 20(1)(bb).
|
|
Or
|
|
Any portion of the
total amount not deductible under 9(1) and/or 20(1)(bb) should be deductible
under 20(1)(b).
|
|
Or
|
|
Any portion of the
total amount not deductible under 9(1) and/or 20(1)(bb) and/or 20(1)(b)
should be deductible up to a maximum amount of $2,605,119 under 20(1)(e).
|
|
Lazard Frères
|
Total: $8,150,233
|
|
Alcan’s
position is that:
|
|
$5,297,652 should be
allowed under 9(1); and
|
|
$2,852,581 should be
allowed under 20(1)(bb).
|
|
Or
|
|
$8,150,233 should be
allowed under 20(1)(bb).
|
|
Or
|
|
Any portion of the
total amount not deductible under 9(1) and/or 20(1)(bb) should be deductible
under 20(1)(b).
|
|
Or
|
|
Any portion of the
total amount not deductible under 9(1) and/or 20(1)(bb) and/or 20(1)(b)
should be deductible up to a maximum amount of $407,512 under 20(1)(e).
|
ADVERTISING FEES
|
Publicis and Valmonde
|
Total: $19,089,946
|
|
Subsection 9(1)
or paragraph 20(1)(b):
|
$19,089,946
|
REPRESENTATION TO
GOVERNMENT AGENCIES
Anti-Competition Regulators
|
Freshfields Bruckhaus
|
Total:
|
$4,954,777
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$4,954,777
|
|
Sullivan Cromwell
|
Total:
|
$2,566,609
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$2,566,609
|
|
McMillan
|
Total:
|
$552,186
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$552,186
|
|
Various other law firms
|
Total:
|
$432,810
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$432,810
|
|
National Economic Res.
Ass.
|
Total:
|
$241,539
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$241,539
|
|
Monitor Company Group
|
Total:
|
$755,227
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$755,227
|
|
Frontier Economics
|
Total:
|
$177,349
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$177,349
|
|
SCEHR Patrick Rey
|
Total:
|
$10,008
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$10,008
|
|
Federal Trade Commission
|
Total:
|
$392,112
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$392,112
|
REPRESENTATION TO
GOVERNMENT AGENCIES
Securities Regulators
|
Sullivan Cromwell
|
Total:
|
$6,801,202
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$6,801,202
|
|
Darrois Villey
|
Total:
|
$3,088,260
|
|
|
Paragraph 20(1)(cc) or 20(1)(b):
|
$3,088,260
|
PRINTING AND ISSUING FINANCIAL REPORTS
|
PwC
|
Total:
|
$1,104,875
|
|
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
|
$1,104,875
|
|
Bowne
|
Total:
|
$868,736
|
|
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
|
$868,736
|
|
SEC
|
Total:
|
$321,572
|
|
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
|
$321,572
|
|
Various other regulators
|
Total:
|
$34,858
|
|
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
|
$34,858
|
|
|
|
|
OTHER MISCELLANEOUS EXPENSES
|
Sullivan Cromwell
|
Total:
|
$967,152
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$967,152
|
|
Davis Polk and ADP
|
Total:
|
$187,739
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$187,739
|
|
Ogilvy Renault
|
Total:
|
$20,054
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$20,054
|
|
Various small
suppliers – communication
|
Total:
|
$152,180
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$152,180
|
|
Ernst & Young
|
Total:
|
$449,963
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$449,963
|
|
Ritz‑Carlton
Montreal
|
Total:
|
$2,660
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$2,660
|
|
Various small
suppliers –
others
|
Total:
|
$1,048
|
|
Subsection 9(1) or paragraph 20(1)(b):
|
$1,048
|
b)
DISPUTED EXPENSES (NOVELIS) – Total $19,759,339
INVESTMENT BANKERS
|
Morgan Stanley
|
Total:
|
$296,863
|
|
Subsection
9(1), paragraph 20(1)(bb) or 20(1)(b):
|
$296,863
|
|
Lazard Frères
|
Total:
|
$16,031,657
|
|
Subsection
9(1), paragraph 20(1)(bb) or 20(1)(b):
|
$16,031,657
|
PRINTING AND ISSUING FINANCIAL REPORTS
|
PwC
|
Total:
|
$1,803,192
|
|
Subsection 9(1), subparagraph
20(1)(g)(iii) or
paragraph
20(1)(b):
|
$1,803,192
|
|
Bowne
|
Total:
|
$1,025,849
|
|
Subsection 9(1), subparagraph
20(1)(g)(iii) or
paragraph
20(1)(b):
|
$1,025,849
|
|
Ernst & Young
|
Total:
|
$601,778
|
|
Subsection 9(1), subparagraph
20(1)(g)(iii) or
paragraph
20(1)(b):
|
$601,778
|
B. Respondent’s Position
[5]
The Respondent’s position with respect to the
Pechiney transaction is that all of the fees paid to various service providers
are in the nature of capital expenditures and should be added to the adjusted
cost base of the Pechiney shares. Specifically, the Respondent argues that the
impugned expenses were made in connection with the acquisition of the Pechiney
shares, which produced an enduring benefit to the Appellant. The Respondent
further contends that none of the deductions provided for in paragraphs 20(1)(bb),
20(1)(cc) or 20(1)(g) of the Act are applicable in the
circumstances.
[6]
The Respondent’s position with respect to the
Novelis transaction is that all of the fees paid to various service providers
are in the nature of outlays or expenses made or incurred for the purpose of effecting
the disposition of the rolled products business and should be deducted from the
proceeds of disposition of the Archer shares
pursuant to paragraph 40(1)(a) of the Act.
III. Factual Background and General Credibility
Observations
A. Factual
Background
(1)
Alcan
[7]
During the relevant period, Alcan was the parent
company of Alcan Group, an international group of companies involved in the
aluminum industry. Alcan’s shares were traded on various stock exchanges,
including the Toronto, New York and London stock exchanges.
[8]
Directly and through subsidiaries, joint
ventures and related companies around the world, the activities of the Alcan
Group included bauxite mining; alumina refining; power generation; aluminum
smelting, manufacturing and recycling; and work in research and technology. The
Alcan Group was a leading producer of primary metal and a global producer and
marketer of rolled aluminum products. Alcan was a leading converter of flexible
packaging in Europe and one of the world’s leading suppliers of packaging
materials for the consumer goods, pharmaceutical, and cosmetics industries.
[9]
One of Alcan’s business priorities was the
maximization of shareholder value, which it accomplished by seeking out additional
opportunities for increased revenues, earnings and economic value. Alcan had a
long history of major acquisitions and transactions it had entered into for
this purpose. Alcan sold its products to its subsidiaries and also received
management fees and dividends from its subsidiaries.
(2)
The Pechiney Acquisition
[10]
Alcan initially set its sights on Pechiney as a
potential partner in the early 1990s. In 1999, Alcan intended to merge with
Pechiney and Alusuisse Lonza Group Ltd. (“Algroup”). Pechiney and Algroup were
two of the largest industrial enterprises in France and Switzerland, with core
businesses in the aluminum sector. Alcan successfully merged with Algroup in
2000, but Pechiney was not a part of that merger. According to the testimony of
Mr. David McAusland, who was Alcan’s Senior Vice-President of Mergers and
Acquisitions and Chief Legal Officer during the relevant period, the
transaction with Pechiney failed due to social and regulatory complications. In
particular, the European Commission Merger Task Force, a competition regulator,
raised concerns regarding the competitive overlap of two significant assets in
Europe: a German rolling mill owned by Alcan and a French rolling mill owned by
Pechiney.
[11]
At the end of 2002, the law was amended in
France to allow for hostile bids that were subject to regulatory approvals.
Prior to this amendment, it was prohibited in France to make a hostile takeover
bid that had regulatory conditions attached to it. In light of the regulatory
change, Alcan again considered the possibility of a transaction with Pechiney.
[12]
In order to analyze the merits and feasibility
of a potential transaction with Pechiney, Alcan engaged two investment banking
firms, Morgan Stanley & Co. Incorporated (“Morgan Stanley”) and Lazard Frères & Co. LLC (“Lazard Frères”).
Morgan Stanley and Lazard Frères were tasked with analyzing the business and financial conditions of
Alcan and Pechiney and preparing financial models of the potential transaction.
Morgan Stanley was the lead investment firm assisting Alcan and made a number
of presentations of its financial model to the Alcan board of directors
(working together with Alcan in some instances) from December 2002 through
July 2003. Lazard Frères
played a role supplementary to the work done by Morgan Stanley and became
involved later in the process than Morgan Stanley. In particular, Lazard Frères, being a French firm, had the
necessary connections and experience to assist with issues arising in France
and with the analysis of French capital markets.
[13]
On July 2, 2003, the Alcan board of
directors approved a purchase offer proposal for the share capital of Pechiney.
[14]
On July 7, 2003, Alcan filed its initial offer
for Pechiney’s securities at €41 per share (60% in cash and 40% in new Alcan shares), subject to
three conditions: (i) the American and European competition authorities
granting authorizations; (ii) the Ministère de
l’Économie, des Finances et de l’Industrie française authorizing the proposed transaction; and (iii) more than 50%
of the share capital and voting rights of Pechiney, calculated on a diluted
basis, being obtained by the expiry of Alcan’s offer. This initial offer was
rejected by Pechiney’s board of directors on July 8, 2003.
[15]
In July and August 2003, Alcan and Pechiney
engaged in discussions regarding the initial offer, particularly in relation to
the price offered by Alcan. During this period, Morgan Stanley and Lazard Frères revisited their respective
financial models, giving specific consideration to the price.
[16]
On August 31, 2003 and at Pechiney’s
request, Alcan submitted an amended offer, which valued the shares at a maximum
price of between €47 and €48 per share. Pechiney’s board of directors rejected the amended offer on the same day.
Shortly thereafter, Pechiney and Alcan again resumed communications.
[17]
On September 12, 2003, Pechiney’s board of
directors recommended the acceptance of a Revised Offer at €47.5 plus a premium of €1 should 95% or more of the
Pechiney shares be acquired. The Revised Offer was subject to certain
conditions, including authorization from the Conseil
des marchés financiers (France) and approval by the
American and European competition authorities. After receipt of the requisite
approvals from governmental and regulatory authorities, the revised offer was
presented to the French and American shareholders on October 7 and October 27,
2003, respectively. The revised offer had an expiry date of November 24,
2003.
[18]
By November 24, 2003, Alcan had obtained
the acceptance of the revised offer to the extent of 92.21% of the share
capital and 93.55% of the voting rights of Pechiney. Alcan acquired the
Pechiney shares that were tendered during this offering period on
December 15, 2003.
[19]
Alcan reopened the revised offer from
December 9 through December 23, 2003 in order to secure more
than 95% of the shares and voting rights of Pechiney. By December 23,
2003, Alcan obtained the acceptance of the revised offer to the extent of
97.95% of the share capital and 97.92% of the voting rights of Pechiney. On
February 6, 2004, Alcan acquired all of the Pechiney securities that had
been tendered during the reopening period.
[20]
In the context of the Pechiney transaction,
Alcan retained professional advisors, incurred costs for preparing, printing
and issuing various documents, and incurred other miscellaneous expenses. The
details of these expenditures are described below.
(a) Investment
Bankers
[21]
From 2002 to 2004, Morgan Stanley and Lazard Frères independently worked on
financial models, by means of which they analyzed various strategies and
alternatives for developing Alcan’s business. The firms prepared financial and
valuation opinions as well as industry, market and price analyses with respect
to various opportunities offered to Alcan and possible financial arrangements
regarding Pechiney. During that period, many presentations were made to the
Alcan board of directors.
[22]
Alcan signed an engagement letter with Morgan
Stanley on June 1, 2003 to formalize the terms upon which Morgan Stanley
had been engaged by Alcan. The engagement letter confirms that Morgan Stanley
was hired as a financial advisor. The fees payable by Alcan are stated in the
engagement letter as being a US$3,750,000 “Announcement Fee” and a success-based
“Transaction Fee” set at a maximum of US$21,600,000. The Announcement Fee would be
credited towards the Transaction Fee if the transaction was concluded. If the
acquisition had not been completed, Alcan would have been charged an “Advisory Fee”
of US$100,000 per month for Morgan Stanley’s services. Ultimately, Morgan Stanley
was paid an amount of CAN$26,051,194 for its services.
[23]
Alcan signed a similar engagement letter with Lazard Frères on July 4, 2003 to
formalize the terms upon which Lazard Frères had been engaged by Alcan. The engagement letter confirms that Lazard Frères was hired as a financial
advisor. The fees payable by Alcan are stated in the engagement letter as being
€1,000,000 upon the announcement of the transaction, €4,000,000 payable upon completion of the transaction, and €2,500,000 payable within two years of the announcement of the
transaction. The second and third payments were contingent on Alcan acquiring
more than 80% of the shares of Pechiney. Lazard Frères was paid an amount of CAN$8,150,233 for its services.
(b) Advertising
Services
[24]
Alcan engaged Publicis Consultants (“Publicis”), a
French firm providing corporate communications and public relations services,
to promote Alcan’s reputation in Europe and the proposed acquisition of
Pechiney. The hostile takeover of Pechiney posed political challenges since, as
Mr. McAusland explained in his testimony, there had been very few hostile
takeovers in France prior to Alcan’s bid and Pechiney was considered a “fleuron” or “technological
darling” of France. One of Alcan’s motivations
for engaging Publicis was to enlist the services of Mr. Maurice Levy, the
Chief Executive Officer of Publicis. According to Mr. McAusland, Mr. Levy
was a highly influential and well‑connected businessperson in France.
Bolstered by the assistance of Publicis and Mr. Levy, Alcan was able to
strengthen its reputation with the French public and officials.
[25]
Specifically, Publicis organized social events
and press conferences, published the Alcan offer to acquire Pechiney, ran
publicity campaigns and purchased advertising space in French newspapers,
including those owned by Valmonde & Cie (“Valmonde”). Publicis was paid
$18,983,316 for its services and Valmonde was paid $106,630 for the advertising
space.
(c) Representations
to Government Agencies
[26]
Alcan engaged several law firms and service
providers to assist with antitrust and securities law representations to
government agencies in various jurisdictions worldwide. These representations
were required to assist government bodies in understanding Alcan’s business and
to obtain clearance to issue Alcan’s shares as part of the Pechiney
transaction.
Anti‑Competition Regulations
[27]
McMillan Binch Mendelsohn LLP (“McMillan”)
was engaged to make representations to Canadian anti-competition regulators and
to supervise other law firms making similar representations to government
regulators in various jurisdictions.
[28]
Freshfields Bruckhaus Deringer LLP (“Freshfields”)
provided services in relation to Alcan’s representations to the European
Commission Merger Task Force.
[29]
Sullivan & Cromwell LLP (“Sullivan Cromwell”) provided legal assistance in making representations to various
government entities, and in particular, the United States Department of Justice
and Federal Trade Commission.
[30]
Monitor Company Group, Frontier Economics, SCEHR
(Patrick Rey) and National Economic Research Associates Inc. provided the
background information and economic data relating to Alcan’s business to
support the representations made to the various anti-competition regulators.
[31]
In total, Alcan incurred expenses of $10,082,617
in relation to representations made to anti-competition regulators.
Securities Regulations
[32]
In order to gain clearance for undertaking the
Pechiney transaction, Alcan was obligated, as a public issuer, to make
representations and filings in compliance with securities regulations.
[33]
Darrois Villey Maillot Brochier Avocats (“Darrois Villey”) assisted with making representations to European securities
regulators and the French defence department.
[34]
Sullivan Cromwell assisted with making
representations to the United States Securities and Exchange Commission.
[35]
Darrois Villey and Sullivan Cromwell also
assisted with the preparation of documents that were required to be filed with
regulatory authorities, such as a Form S-4, a “note d’information”, and a prospectus. The Form S-4 is a registration statement with
respect to the exchange offer to Pechiney’s shareholders, which was filed with
the United States Securities and Exchange Commission. The “note d’information” is a similar document for the French securities regulator, the Autorité des marchés financiers.
[36]
In total, Alcan incurred $9,889,462 in relation
to representations made to securities regulators.
(d) Preparing,
Printing and Issuing Documents
[37]
Alcan incurred costs in the course of preparing,
printing and issuing the Form S-4, the “note d’information” and the prospectus.
Alcan also incurred share registration fees, transfer fees and listing fees in
relation to these documents.
[38]
PricewaterhouseCoopers LLP (“PwC”)
assisted with the preparation and issuance of the Form S-4 and “note d’information”, the filings with the United Kingdom Listing Authority and the amendments
to an annual report and a quarterly report.
[39]
Bowne Financial Print and Bowne International (“Bowne”)
provided printing services, including typesetting, proofing, printing and
distributing, with regard to the Form S-4, the “note d’information”, and the prospectus.
(e) Other
Miscellaneous Expenses
[40]
Alcan incurred other miscellaneous expenses,
including communication and translation costs, legal services by Sullivan
Cromwell in respect of ongoing advice to the board of directors, legal services
by Ogilvy Renault LLP (“Ogilvy
Renault”), a cancellation fee by the Ritz‑Carlton
Montreal and advisory services by Ernst & Young on various corporate tax
matters. The Appellant also claimed amounts paid to Davis Polk & Wardwell
LLP (“Davis Polk”) and ADP Investor Communication Services (“ADP”) under
this category.
(3)
The Novelis Spin‑Off
[41]
I now turn to the facts underlying the Novelis
Spin‑off. While pursuing the Pechiney transaction, Alcan was aware that
it would have to divest itself of certain assets in order to satisfy the
European competition regulator. Alcan provided undertakings to European and
American competition regulators in respect of two requirements: the European
competition regulators required Alcan to separate the ownership of a French
rolling mill (Neuf Brisach) and of a German rolling mill (Norf), while the
American competition regulators required Alcan to separate the ownership of an
Oswego, New York, rolling mill and of a Ravenswood, West Virginia, rolling
mill.
[42]
Morgan Stanley worked on a financial model to
consider two options that would allow Alcan to fulfil its regulatory
undertakings: a spin-off of the divested assets or a sale of the shares held by
Alcan in the entities in which the divested assets would be located. Morgan
Stanley presented its financial model to the Alcan board of directors.
[43]
On February 15, 2004, a strategy of
splitting out the major portion of Alcan’s rolled products businesses and transferring
such businesses to Archer was submitted to the board of directors. This
strategy was determined to be the most suitable way of meeting the competition
regulators’ restrictions while maintaining profitability for Alcan’s
shareholders and enhancing shareholder value. From February 2004 through May
2004, the board reviewed the divestiture plan and the two options for carrying
out the divestiture.
[44]
On May 17, 2004, the board of directors
approved the announcement of the divestiture. The public announcement of the
divestiture was made on May 18, 2004. In its public announcement,
Alcan stated that the German rolling facility (Norf) and an American rolling
facility (Oswego) would be included in Archer, while Alcan would retain the
French rolling facility (Neuf Brisach) and another American rolling facility
(Ravenswood).
[45]
After the public announcement, several investors
advised that they wished to acquire Alcan’s rolled products businesses. Alcan’s
management held discussions with these potential investors. The best offers
were submitted to the board of directors on November 23, 2004.
[46]
The board also considered an alternate spin‑off
transaction, specifically contemplating a spin-off to Alcan’s shareholders by
way of a so‑called “butterfly” transaction such that Alcan’s shareholders would hold the shares
of Archer through a new company, Novelis.
[47]
At the November 23, 2004 meeting, Morgan
Stanley and Lazard Frères each
provided to the board a fairness opinion which indicated that the Spin‑off
offered the best value and was fair for Alcan’s shareholders. The board
formally approved the Spin‑off at this meeting.
[48]
On December 22, 2004, Alcan announced that
its shareholders had voted in favour of the plan of arrangement for the spin-off
of the rolled products businesses grouped under Archer.
[49]
The plan of arrangement came into effect on
January 6, 2005. The steps were undertaken in accordance with an advance ruling
obtained by Alcan from the Canada Revenue Agency (the “CRA”), and were, inter alia,
as follows:
(a)
Alcan restructured its capital by amending its
articles of incorporation to create and authorize the issuance of a new class
of common shares and special shares;
(b)
The existing holders of Alcan’s common shares
exchanged their common shares for shares of the new class of common shares and
the new class of special shares of Alcan;
(c)
The Alcan shareholders transferred their special
shares of Alcan to Novelis in exchange for shares of Novelis, and Alcan
transferred the Archer shares to Novelis as consideration for special shares of
Novelis; and
(d)
Alcan and Novelis each redeemed the special shares
each held in the other in exchange for non-interest-bearing demand notes, which
were immediately set off against each other.
[50]
The Alcan shareholders of record received one
common share of Novelis for every five special shares of Alcan they held.
Following the Spin‑off, the common shares of Novelis were listed and
traded on the Toronto and New York stock exchanges. As a result of the Spin‑off,
Alcan shareholders ended up as shareholders of two public entities, Alcan and
Novelis. Pursuant to the Spin‑off, Novelis acquired, through its
acquisition of the shares of Archer, substantially all of the rolled aluminum
product business held by Alcan prior to its acquisition of Pechiney in 2003 as
well as certain alumina and primary‑metal‑related businesses in
Brazil and four rolling facilities in Europe that Alcan acquired indirectly through
the Pechiney transaction.
(a) Investment
Bankers
[51]
Morgan Stanley was the principal financial
advisor in respect of the divestiture. From late 2003 to May 17, 2004,
Morgan Stanley provided Alcan with strategic advice concerning the financial
consequences of various divestiture options. From May 18, 2004 to November 22,
2004, Morgan Stanley provided Alcan with strategic advice concerning the
financial consequences of the various options for disposing of the Archer
shares. Morgan Stanley issued a fairness opinion on the Spin‑off and on
November 23, 2004, recommended the Spin‑off as the best divestiture
option. From November 23, 2004, Morgan Stanley continued to provide advice
and opinions to ensure compliance with securities legislation, and participated
directly in finalizing the Spin‑off. The fees paid to Morgan Stanley were
conditional on the transaction being finalized.
[52]
Lazard Frères was the
secondary advisor that provided financial services with respect to the
divestiture. Lazard Frères
provided independent advice and fairness opinions with respect to the same
issues as those analyzed by Morgan Stanley. According to the testimony of Mr. McAusland
and Mr. Healy, Lazard Frères was mainly involved in the analysis of an alternative sale
transaction.
(b) Preparing,
Printing and Issuing Documents
[53]
Ernst & Young had two main responsibilities
in assisting Alcan through its restructuring in 2004. First, Ernst & Young
prepared documents for Alcan’s shareholders in order to comply with Canadian
and American securities legislation. This task involved reviewing, analyzing
and preparing pro forma financial statements for Alcan’s rolled products
businesses for the five previous years. Second, in support of Alcan’s in-house
tax department, Ernst & Young reviewed the tax implications of the various
divestiture options, analyzed the various options for grouping the assets under
Archer, and assisted in the preparation of the request for an advance ruling
submitted to the CRA.
[54]
In support of Alcan’s in-house accounting
department, PwC audited various financial statements.
[55]
Bowne printed the notice of the meeting of
Alcan’s shareholders, the management proxy circular in connection with the plan
of arrangement, the non‑offering prospectus, and Form 10, which all contained
mandatory information that was sent to Alcan’s shareholders.
B. General
Credibility Observations
[56]
The Respondent led no testimonial evidence. In
addition, the Respondent’s counsel posed few questions on cross‑examination.
I surmise that counsel for the Respondent had a clear litigation strategy that
was based on the well‑defined objectives of her client. The CRA has a
long‑standing policy that expenses incurred in the context of a takeover
bid or the distribution of capital property to a corporation’s shareholders are
capital expenditures. I speculate that this is why the Respondent chose, for
the most part, not to challenge the Appellant’s proposed allocation of the
Disputed Expenses between current and capital expenditures. I further suspect
that the Respondent feared that, had she challenged the demarcation between
current and capital expenses, it may have created a pathway for the Court to
accept a bifurcation of the expenses based on the distinction between the
decision‑making and implementation phases of both transactions.
[57]
The drawback of this strategy is that it creates
an easier route for the Appellant to establish a prima facie case
regarding the factual matrix (the “Evidentiary Burden”) to which it contends
that the law must be applied. As will be seen later on in these Reasons for
Judgment, this has worked out in the Appellant’s favour with respect to some of
the issues in the present appeal. However, on a few points, the Appellant’s
evidence has fallen well short of the mark.
[58]
I will now comment on my overall impression of
the testimonial evidence presented by the Appellant’s witnesses.
[59]
I found Mr. McAusland to be quite
knowledgeable about the events that transpired on his watch while he was employed
as a senior executive of the Appellant. He was a reliable and credible witness,
particularly as to the Appellant’s vision, strategy and structure with respect
to the Pechiney and Novelis transactions. He provided a clear overview of the
general objectives of each transaction. By his own admission, he was not
steeped in tax matters. In this regard his testimony cannot serve as a reliable
substitute for the testimony of the tax advisors who actually worked on the
transactions. This explains why I find below that the Appellant has failed to
satisfy its Evidentiary Burden with respect to the fees paid for tax advisory
services. Finally, Mr. McAusland offered no insight into the work
performed by the Appellant’s auditors with respect to the financial information
presented in the Form S‑4, the “note d’information” and the prospectus
that were required to be filed. There was no oral evidence on the breakdown of
the printing costs incurred, as regards the public documents, with respect to
the printed pages containing financial and other information concerning, for
example, the terms and conditions of the transaction. No one from PwC or Ernst
& Young was called upon to testify on the work performed in connection with
the financial information.
[60]
Mr. Miller was the lead partner at Sullivan
Cromwell, the transnational law firm that played a leading role with respect to
the Pechiney transaction. It appears that his firm played a slightly lesser role, although an important one nonetheless, with respect to
the Novelis transaction. I also found him to be a credible, reliable and
knowledgeable witness.
[61]
Mr. Brian Healy testified on behalf of
Morgan Stanley. Mr. Healy is an investment banker with Morgan Stanley and
was involved with the Pechiney and Novelis transactions. I found him equally to
be a reliable and credible witness.
[62]
I cannot say the same for Mr. Erik Maris,
who worked on both transactions on behalf of Lazard
Frères. On common agreement of the parties, he
testified by video conference from Paris. While counsel for the Appellant read
his questions from his written notes, I observed that Mr. Maris was typing
on his smart phone, which was hidden from view under the table. He constantly glanced
down at it. At times, he paced around the room. Unlike his counterpart from
Morgan Stanley, his answers often struck me as rehearsed. As he was double‑tasking
throughout his testimony, he appeared to have had little opportunity to
carefully consider the questions posed to him and to elaborate on his answers. Tellingly,
his answers to counsel’s questions were very short. For these reasons, I attach
less weight to his testimony. This is not altogether fatal for the Appellant,
as at times the documentary evidence is sufficient to establish a fact critical
to the Appellant’s case.
[63]
Mr. Eric Giuily was called upon to testify
on the purpose of the communication strategy developed by Publicis. Mr. Giuily
was the president and managing director of Publicis during the relevant period.
Mr. Giuily and Publicis were tasked with the mission of promoting the
Appellant’s vision for Pechiney. The Respondent pointed out notable
inconsistencies between his testimony and prior statements of his and
documentary evidence. For the reasons noted in paragraph 118 of these
Reasons for Judgment I share the Respondent’s view that little weight
should be attached to his testimony.
[64]
Finally, the Appellant called Mr. Jocelin Paradis
as a witness. Presently, he is the vice‑president of taxation for the
Appellant. He previously worked for Rio Tinto and became involved with Alcan
after its acquisition by Rio Tinto in 2007. Therefore, he has no contemporaneous
knowledge of the transactions at issue in this appeal. He was not called for the
purpose of providing such knowledge. In his position, he had to work on
different audits and on the settlement of files, including those pertaining to
the Pechiney and Novelis transactions. He was asked to provide guidance on the
way Alcan’s activities are structured. In particular, he was asked to provide
information on the management fees and dividends received by Alcan from its
subsidiaries. The Respondent did not object to his testimony regarding these
facts, which can be discerned through a simple examination of the Appellant’s
financial records and working papers produced in the ordinary course of
business. In that regard, I found him to be a reliable and credible witness.
IV. Issues
[65]
In her written representations, the Respondent
frames the issues as follows:
27. In
the appeal bearing number 2013‑3028(IT)G [pertaining to the Pechiney
transaction], the issues to be decided are:
a) Whether the
appellant is entitled to deduct expenses totalling $77,374,669 in computing its
income with respect to fees paid to various services providers by Alcan during
its 2003 taxation year . . .
b) More specifically, whether the Appellant is entitled to deduct
the following amounts under the provisions of the Act mentioned in the
following table:
|
Service provider
|
Amount claimed as
a deduction in
Notice of Appeal
|
Provision of the
Act under which
deduction claimed in
Notice of Appeal
|
|
Morgan Stanley
|
18,887,115
or 26,051,194
|
9(1) [and]
20(1)(bb)
[or 20(1)(b)]
|
|
Lazard Frères
|
5,297,651
or 8,150,233
|
9(1)
20(1)(bb)
[or 20(1)(b)]
|
|
Publicis Consultants
|
18,983,316
|
9(1)
[or 20(1)(b)]
|
|
Valmonde & Cie
|
106,630
|
9(1)
[or 20(1)(b)]
|
|
US Federal Trade
Commission
|
392,112
|
20(1)(cc)
[or 20(1)(b)]
|
|
Freshfields [Bruckhaus]
|
4,954,777
|
20(1)(cc)
[or 20(1)(b)]
|
|
McMillan Binch
|
552,186
|
20(1)(cc)
[or 20(1)(b)]
|
|
Sullivan Cromwell
|
967,152
9,367,811
|
9(1)
20(1)(cc)
[or 20(1)(b)]
|
|
Miscellaneous
anti‑trust matters
(other Law Firms)
|
432,810
|
20(1)(cc)
[or 20(1)(b)]
|
|
Darrois Villey
|
3,088,260
|
20(1)(cc)
[or 20(1)(b)]
|
|
National Economic Research
[Ass.]
|
241,539
|
20(1)(cc)
[or 20(1)(b)]
|
|
PricewaterhouseCoopers
|
1,104,875*
|
9(1) or 20(1)(g)(iii)
[or 20(1)(b)]
|
|
Bowne Printing
|
868,736
|
9(1) or 20(1)(g)(iii)
or 20(1)(b)
|
|
Securities and
Exchange
Commission
|
321,572*
|
9(1) or 20(1)(g)(iii)
[or 20(1)(b)]
|
|
Other securities
commissions
|
34,858*
|
9(1) or 20(1)(g)(iii)
[or 20(1)(b)]
|
|
Davis Polk &
Wardwell
and ADP
|
188,119
|
9(1) or 20(1)(g)(iii)
[or 20(1)(b)]
|
|
Communication Costs
[(Various small suppliers)]
|
152,180
|
9(1) [or 20(1)(b)]
|
|
Ernst & Young
|
449,963
|
9(1)[or 20(1)(b)]
|
|
[Ogilvy Renault]
|
20,054
|
91(1) [or 20(1)(b)]
|
|
Monitor Company Gr.
|
755,227
|
9(1)
20(1)(cc)
[or 20(1)(b)]
|
|
Frontier Economics
|
177,349
|
9(1)
20(1)(cc)
[or 20(1)(b)]
|
|
SCEHR Patrick Rey
|
10,008
|
9(1)
20(1)(cc)
[or 20(1)(b)]
|
|
Miscellaneous
deductions [(Various small suppliers – Others)]
|
3,708
|
9(1)
[or 20(1)(b)]
|
|
|
|
Amounts no longer contested by
the Appellant*
|
|
|
|
RBC
|
140,892**
|
|
|
Sullivan Cromwell
|
1,873,562**
|
|
* A total of
$131,397 was allowed as a deduction at the time of reassessment but is still
being claimed by the Appellant: $93,760 PwC; $2,397 SEC; $34,858 Other
Securities Commissions.
** See page 11, Note 2 of Appellant’s Written Arguments.
c) Whether expenses totalling $77,243,274 ($79,389,124 -
$2,014,454 - $131,397) incurred . . . during Alcan’s
2003 taxation year should be added to the appellant’s cumulative eligible
capital;
d) Whether expenses totalling $77,243,274 should be added to the
“adjusted cost base” of the Pechiney shares by the Minister. . . .
. . .
29. With
respect to the appeal bearing number 2012-4808(IT)G [pertaining to the Novelis transaction],
the issues to be decided are:
a) Whether the Appellant is entitled deduct the following amounts
under the provisions of the Act mentioned in the table:
|
Service Provider
|
Amount Claimed
by Alcan
|
Provisions of the Act
pursuant to which Alcan
claimed the deduction
|
|
Bowne
|
$1,025,849
|
[9(1) or]
20(1)(g)(iii)
[or 20(1)(b)]
|
|
Ernst & Young
|
$601,778
|
9(1)
[or 20(1)(g)(iii)
or 20(1)(b)]
|
|
PwC
|
$1,803,192
|
9(1) [or 20(1)(g)(iii)
or 20(1)(b)]
|
|
Lazard Frères
|
$16,031,657
|
[9(1) or] 20(1)(bb)
[or 20(1)(b)]
|
|
Morgan Stanley
|
$296,863
|
9(1) and 20(1)(bb)
[or 20(1)(b)]
|
|
Total
|
$19,759,339
|
|
b) Whether
expenses totalling $19,759,339 were correctly deducted from the proceeds of
disposition of the Novelis shares in accordance with paragraph 40(1)(a)
of the Act.
[66]
I agree with how the Respondent has framed the
issues, subject to my comments in footnotes 8 to 12.
V. Analysis
(A) Current Versus
Capital Treatment
(1) General Principles
[67]
The Appellant claims deductions under subsection 9(1)
of the Act in respect of fees incurred for investment banking services,
advertising services, printing and issuing documents, and other miscellaneous
expenses. Subsection 9(1) provides that a taxpayer’s income from a
business or property is the taxpayer’s “profit” from the business or property
for the year. Generally speaking, “profit” is understood to mean the
difference between revenue and the expenses incurred to earn the revenue unless
otherwise limited under the Act. Paragraphs 18(1)(a) and (b)
are two provisions that limit the deductions which may be claimed under
subsection 9(1).
[68]
Paragraph 18(1)(a) of the Act
provides that an outlay or expense can be deducted under section 9 only to
the extent that the outlay or expense was made or incurred for the purpose of
earning income from a business or property.
[69]
It appears to be common ground that the Disputed
Expenses that were incurred in the context of the Pechiney transaction are not affected
by the limitation set out in paragraph 18(1)(a). However, in her
written arguments, the Respondent does not concede this point with respect to
the Disputed Expenses that were incurred in the context of the Novelis
transaction (the “Novelis
Disputed Expenses”). This being said, I agree
with the Appellant’s submission that this argument was not properly raised by
the Respondent in her pleadings.
[70]
In paragraph 92 of her Reply to the Amended
Notice of Appeal, with regard to the 2005 taxation year the Respondent relies specifically
on paragraph 18(1)(a) of the Act in respect of other expenses
totalling $1,459,233 that do not form part of the Novelis Disputed Expenses. In
contrast, the Minister’s assumptions of fact make no reference to the Minister having
assumed that the Novelis Disputed Expenses were not incurred for the purpose of
earning income from a business or property. Instead, the Respondent’s Reply to
the Amended Notice of Appeal indicates that the Minister disallowed the
Appellant’s deduction on current account for the Novelis Disputed Expenses
because the Minister found that they were capital expenditures deductible under
paragraph 40(1)(a) of the Act.
Thus, the Respondent is barred from arguing that the Novelis Disputed Expenses were
not incurred for the purpose of earning income from a business or property
under paragraph 18(1)(a). Finally, as noted by Abbott J. in British
Columbia Electric Company Limited,
“[s]ince the main purpose of every business undertaking
is presumably to make a profit, any expenditure made ‘for the purpose of
gaining or producing income’ comes within the terms of s. 12(1)(a)
whether it be classified as an income expense or as a capital outlay.”
[71]
Paragraph 18(1)(b) of the Act is of
particular relevance to the outcome of the instant case. Paragraph 18(1)(b)
prohibits the deduction of an outlay or expense that is a capital expenditure. The
Respondent relies on this provision to argue that the Disputed Expenses are not
deductible as current expenses because they were incurred in connection with
the Pechiney transaction, which was carried out on capital account.
[72]
In contrast, the Appellant argues that the
Disputed Expenses were incurred as part of its ordinary business operations and
not on capital account. In particular, the Appellant contends that the
investment banking fees that it seeks to deduct under subsection 9(1) of
the Act are current expenses because they relate to costs for professional advice
relied upon by the Appellant’s board of directors in deciding whether or not the
Pechiney and Novelis transactions should be approved. For the purposes of my
Reasons for Judgment, I designate fees for services that assist the board in
the decision-making process and in the fulfilment of its oversight function as
“Oversight Expenses”. I designate fees for services that facilitate the execution of a
capital transaction as “Execution
Costs”.
[73]
While paragraph 18(1)(b) of the Act
provides that no deduction can be claimed for an outlay or expense made or
incurred “on account of capital”, the Act does not define what is meant by that expression.
Instead, Parliament has left it to the courts to define the principles that are
to be used to distinguish capital expenses from current expenses. In Johns‑Manville Canada
Inc. v. The Queen,
Judge Estey of the Supreme Court of Canada provided an overview of the
case law that elucidated these principles. The highlights of his review of the
case law merit consideration here (at pages 56, 57 and 58-59):
. . . This Court encountered
s. 12(1)(b) in Minister of National Revenue v. Algoma Central
Railway, [1968] S.C.R. 447. Fauteux J., as he then was, at p. 449,
stated:
Parliament did not define the
expressions "outlay ... of capital" or "payment on account of
capital". There being no statutory criterion, the application or
non-application of these expressions to any particular expenditures must depend
upon the facts of the particular case. We do not think that any single test
applies in making that determination. . . .
The Court thereupon expressed agreement with
the decision of the Privy Council in B.P. Australia Ltd. v. Commissioner of
Taxation of the Commonwealth of Australia, [1966] A.C. 224. . . .
After reviewing a number of different approaches to the problem of classifying
in law and accounting the nature of the expenditure, Lord Pearce stated, at pp. 264-65:
The solution to the problem is not to
be found by any rigid test or description. It has to be derived from many
aspects of the whole set of circumstances some of which may point in one
direction, some in the other. One consideration may point so clearly that it
dominates other and vaguer indications in the contrary direction. It is a
common sense appreciation of all the guiding features which must provide the
ultimate answer. Although the categories of capital and income expenditure are
distinct and easily ascertainable in obvious cases that lie far from the
boundary, the line of distinction is often hard to draw in border line cases;
and conflicting considerations may produce a situation where the answer turns
on questions of emphasis and degree. That answer:
"depends
on what the expenditure is calculated to effect from a practical and
business point of view rather than upon the juristic classification of the
legal rights, if any, secured, employed or exhausted in the process":
per
Dixon J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation
(1946), 72 C.L.R. 634, 648.
[Emphasis added.]
. . .
In the Hallstroms
case . . . Dixon J., as he then was, in discussing the
difference between capital and income expenditures, stated, at p. 647,
that the difference lay:
. . . between the acquisition
of the means of production and the use of them; between establishing or
extending a business organisation and carrying on the business; between the
implements employed in work and the regular performance of the work …; between
an enterprise itself and the sustained effort of those engaged in it.
Other tests have been adopted in other tax
systems. Also in Australia, in the High Court decision in Sun Newspapers Ltd.
v. Federal Commissioner of Taxation (1938), 61 C.L.R. 337, the court,
speaking through Dixon J. enunciated three principles to be applied in
determining the character of an expenditure by a taxpayer for the purposes of
applying the taxation statute. He stated, at p. 363:
There are, I think, three matters to
be considered, (a) the character of the advantage sought, and in
this its lasting qualities may play a part, (b) the manner in which it
is to be used, relied upon or enjoyed, and in this and under the former head recurrence
may play its part, and (c) the means adopted to obtain it; that is,
by providing a periodical reward or outlay to cover its use or enjoyment for
periods commensurate with the payment or by making a final provision or payment
so as to secure future use or enjoyment.
On the preceding page, His Lordship, in
explaining the test from another aspect, said:
...
the expenditure is to be considered of a revenue nature if its purpose
brings it within the very wide class of things which in the aggregate form the
constant demand which must be answered out of the returns of a trade or its
circulating capital and that actual recurrence of the specific thing need not
take place or be expected as likely.
[Emphasis added.]
[74]
In the absence of legislative guidelines, the
Courts have developed at least three tests for distinguishing capital expenditures
from current expenditures. The first test characterizes an expenditure by
reference to its recurring or single outlay characteristic (the “Recurring Expense Test”). Under this test, recurring expenses are considered to be current
expenditures. In contrast, if the expense takes the form of a single outlay, it
is likely a capital expenditure.
[75]
In the House of Lords decision of British
Insulated and Helsby Cables v. Atherton,
Viscount Cave clarified that the Recurring Expense Test is not decisive in
every case, stating, “it is
easy to imagine many cases in which a payment, though made ‘once and for all,’
would be properly chargeable against the receipts for the year.”
Professors Hogg, Magee and Li comment on the shortcomings of the Recurring Expense
Test, first identified in British Insulated, as follows:
It has been suggested, although not as a
conclusive test, that a “capital expenditure is a thing that is going to be
spent once and for all, and an income expenditure is a thing that is going to
recur every year”. If a payment is one‑time expenditure, it is generally
a capital expenditure and if it is part of an ongoing periodic number of
payments, it is generally a current expenditure. This can be seen, for example,
in the facts of the two cases discussed above: the current expense in B.P.
Australia Ltd. [v. Commissioner of Taxation of the Commonwealth of
Australia (1966)] was a recurring expenditure whereas the capital
expenditure in Sun Newspapers [Ltd. v. Federal Commissioner of
Taxation (1938)] was not.
However, the recurring expenditure test
simply does not ask the right question. The idea that a capital expenditure is
made “once and for all” is not always true because many businesses purchase new
capital assets every year. Annual expenditures to purchase new machines,
trucks, etc., for example, are recurring, but they are capital expenditures
because each provides an enduring benefit to the business. On the other hand, a
current expenditure, which provides a benefit to the business which is exhausted
in the current year, could be of an unusual or non‑recurring kind. An
example is a severance payment made when a senior employee is dismissed. Despite
its weaknesses as a test, the distinction between recurring and non‑recurring
expenses is still useful as it provides a very crude, but perhaps workable,
demarcation between those capital expenditures that can feasibly [be] capitalized
and those that cannot be.
[Emphasis added.]
[76]
In British Insulated, Viscount Cave
proposed an additional test that focuses on the effect of the outlay rather
than its form, stating:
. . . when
an expenditure is made, not only once and for all, but with a view to bringing
into existence an asset or an advantage for the enduring benefit of a trade, I
think that there is very good reason (in the absence of special circumstances
leading to an opposite conclusion) for treating such an expenditure as properly
attributable not to revenue but to capital.
Thus, if the expense gives rise to a lasting
or enduring benefit, it should be treated as a capital expenditure (the “Enduring Benefit Test”). By contrast, if the impact of the expense does not extend beyond
the taxation year in which it was incurred, a current expenditure deduction
should be available.
[77]
The final test focuses on the purpose or
rationale underlying the expense. This test is widely attributed to
Judge Dixon in Sun Newspapers.
Under this test, if an expense is incurred with respect to a matter related to
the income earning process, this suggests that it was incurred on current account.
In contrast, an expenditure is capital in nature if it is incurred as part of the
actual implementation of a transaction that results in the acquisition of a
capital asset or the creation, enhancement, or expansion of a taxpayer’s business.
[78]
In Ikea Ltd. v. Canada, the Supreme Court
of Canada indicates that the underlying purpose of an expenditure is to be
considered within the context of the taxpayer’s business. Judge Iacobucci endorsed
the Tax Court judge’s treatment of a tenant inducement payment as an income
receipt, since that judge’s conclusion was “based upon a total analysis of the role of the [payment] in the
business operated by Ikea and of the purposes for which it was negotiated and
obtained.”
The Federal Court of Appeal confirmed in Morguard Corp. v. The Queen
that the test from Ikea included the consideration of “the commercial purpose of the payment and
its relationship to the business operations of the recipient”.
[79]
In light of the above, expenses can be
classified by reference to their form (recurring or single outlay), effect
(enduring benefit) or purpose. Because expenses can be incurred for a myriad of
reasons, the courts have cautioned that the aforementioned tests must be
applied on a case‑by‑case basis. In other words, there is no set
formula as to their application. The courts must apply a common‑sense
approach, taking into account the particular facts and circumstances
surrounding the expense in issue and considering what the expense is calculated
to effect from a practical and business standpoint.
(2) Expenses Incurred in the Decision‑Making or Oversight Process
[80]
The Appellant provided extensive submissions on
the deductibility of fees incurred during the decision‑making or
oversight process. As the Appellant correctly points out, the case law supports
the line of demarcation that it has drawn between Oversight Expenses and
Execution Costs. For example, in Bowater Power Co. Ltd. v. M.N.R., the Federal Court ruled that
the costs of engineering studies to determine the feasibility of power
development sites were current expenses. In ruling in favour of Bowater, the
Federal Court observed as follows (at page 5481):
I do not indeed feel that merely because
the expenditure was made for the purpose of determining whether to bring into
existence a capital asset, it should always be considered as a capital
expenditure and, therefore, not deductible. In
distinguishing between a capital payment and a payment on current account,
regard must always be had to the business and commercial realities of the
matter. While the hydroelectric development, once it becomes a business or
commercial [reality] is a capital asset of the business giving rise to it, whatever
reasonable means were taken to find out whether it should be created or not may
still result from the current operations of the business as part of the every
day concern of its officers in conducting the operations of the company in a
business-like way. I can, indeed, see no difference in principle between all of
these cases.
[Emphasis added.]
[81]
The Federal Court’s reasoning in Bowater
mirrors the Appellant’s reasoning in the instant case.
[82]
In Wacky Wheatley’s TV & Stereo Ltd. v. M.N.R., this Court adopted reasoning
similar to that expressed by the Federal Court in Bowater. In the Wacky
Wheatley’s case, the taxpayer incurred travel costs in exploring the
feasibility of its plan to expand its audio business into Australia. The Crown
argued that the travel expenses should be capitalized because they were
potentially linked to the creation of a new business structure in Australia. Judge Brulé,
ruling in favour of the taxpayer, noted (at page 579):
. . . Robert
Wheatley testified that Wacky Wheatley’s was “expansion minded” and
opportunities in various markets in the United States and Canada had previously
been explored, and at times acted upon. During its ten years of operation,
Wacky Wheatley’s had grown to include eight retail stores and further expansion
was anticipated.
. . .
In the present
case, the evidence shows that expansion into new markets was an on-going
concern of the appellants. It is my opinion that the expenditures in question
resulted from the current operations of each of the appellants “as part of the
every day concern of its officers in conducting the operations of the company
in a business-like way.”
A major
expenditure of many businesses today is monies expended to maintain or increase
market share under increasingly competitive conditions. To this purpose, many corporations spend significant amounts each
year in advertising, promotions and market surveys. The expenditures in issue
in these appeals, in my view, related to such an endeavour. They were monies
spent to determine the profit potential of the Australian market and were
current expenses of the appellants. This characterization reflects the
“business and commercial realities of the matter”.
[Emphasis added.]
[83]
The Appellant also notes that the CRA has
publicly endorsed the principles enunciated in Bowater and Wacky
Wheatley’s in its interpretation bulletin IT‑475 “Expenditures on Research and for Business
Expansion”, as follows:
3. A taxpayer may carry out a continuous
research program the purpose of which is to ensure that the taxpayer's business
maintains or improves its position in its industry. Expenses of such a research
program are treated as current expenditures deductible from income in the years
in which they are incurred, notwithstanding the fact that from time to time the
acquisition of capital assets may be a result of the research program.
. . .
5. Expenditures made as part of a taxpayer's
ordinary business operations in respect of research to determine whether a
capital asset should be created or acquired, but which themselves are not
directly linked to the creation or acquisition of a capital asset, are current
operating expenses which are deductible in the year incurred. However, once
the commitment is made to proceed with the particular project all expenditures
which are directly linked to the creation or acquisition of a capital asset
form part of the capital cost of that asset unless that asset is not, in
fact, created or acquired. In this latter case, architectural, engineering and
other expenses relating to the proposed creation or acquisition of a specific
capital asset are eligible capital expenditures (as defined in paragraph
14(5)(b)) for which an allowance is permitted by virtue of paragraph 20(1)(b)
of the Act, provided that the expenses are incurred in connection with a
business carried on by the taxpayer. If there is no such business at the time
the expenses were incurred, no deduction for the expenses may be made.
[Emphasis added.]
[84]
The Appellant, in its written submissions,
observes that Oversight Expenses are treated as current
expenses for tax purposes in the United Kingdom. This result is based on
section 75 of the Income and Corporation Taxes Act 1988 (the “ICTA”), which provides that “expenses
of management” are deductible on a current basis without defining what
is meant by “expenses of management”. In HM
Inspector of Taxes v Camas Plc,
the Court of Appeal ruled that fees for third party advice given in the
decision‑making process with regard to a potential acquisition were “expenses of management” because the advice “. . . was preparatory to the making of a
decision to purchase, not part of the implementation of a purchase already
decided upon.”
[Emphasis added.]
[85]
While the Act does not contain a provision
analogous to section 75 of the ICTA, the decisions in Bowater and Wacky
Wheatley’s reflect very similar reasoning that is based on the general
principles laid out in the Canadian case law. The CRA’s position on
investigatory expenses set out in IT‑475 is also similar to the Court of
Appeal’s reasoning in Camas.
[86]
The Respondent correctly notes that the
Appellant acquired the Pechiney shares for the long term with a view to
obtaining an enduring benefit. It is common ground that the shares are capital
property. As noted earlier, the Respondent argues that, because the Disputed
Expenses were incurred in the context of the Pechiney transaction, they are
capital in nature. The Respondent relies on the decisions in Neonex
International Ltd. v. R.,
Rona Inc. v. Her Majesty the Queen
and Firestone v. Canada
to support her argument in this regard.
[87]
I observe that the cases cited by the Respondent
do not specifically consider the tax treatment of expenses incurred for work
performed to assist board members in the oversight and decision‑making
process. Furthermore, Neonex and Firestone were decided prior to
the Ikea decision. Ikea emphasizes the importance of the purpose
test and the need for courts to critically examine the underlying purpose of an
expenditure in the context of the taxpayer’s business. In recent times, there
has been an increasing demand by shareholders for directors to exercise greater
oversight over the activities of public corporations. In the modern corporate
world, shareholders of corporations expect that directors will review material
transactions with the same level of scrutiny as that undertaken by well‑advised
investors. Shareholders expect that board members will challenge proposals
brought to them by management and seek independent professional advice to guide
them in their decision‑making process. Shareholders will hold directors
personally liable if they fail in their duty of care in this regard.
[88]
Simply put, Oversight Expenses are current
expenses because they relate to the management of a corporation’s income‑earning
process. Proper management includes the judicious allocation or reallocation of
capital for the purpose of maximizing the income earned by the corporation.
Ineffective oversight over the capital allocation process is a formula for
disaster that often leads to a decline in earnings and cash flow and, as a
result, the destruction of shareholder value. In this context, Oversight
Expenses serve an income‑earning purpose. Oversight Expenses per se do
not create enduring benefits for taxpayers. Rather, it is the actual
implementation of an approved capital transaction that creates the enduring
benefit. In this context, the Court must carefully scrutinize the evidence,
with proper regard to the applicable evidentiary burden, in order to ensure
that the expenses that are treated by a taxpayer as current expenses actually
pertain to advice given to the board of directors to assist it in the decision‑making
process undertaken as part of the exercise of the board’s oversight function.
This is to be contrasted with expenses incurred as part of the implementation
of a transaction leading to the acquisition of capital property. In that
context, the Court must look at the primary purpose of the work performed. Was
the work commissioned primarily to assist in the oversight or management
process, or was it primarily linked to the implementation of a transaction
carried out on capital account?
[89]
I will now apply these principles in my analysis
of the parties’ positions and in my review of the evidence. With respect to the
advisory fees paid to Morgan Stanley and Lazard Frères, I will examine whether the evidence supports the Appellant’s
assertion that these fees were linked to the decision-making and oversight
process.
B. Are
any of the Disputed Expenses deductible as current expenses under
subsection 9(1) of the Act?
(1) Are the fees paid to Morgan Stanley and Lazard
Frères deductible as current
expenses under subsection 9(1) of the Act?
(a)
Pechiney
[90]
The Appellant seeks to deduct, under subsection 9(1)
of the Act, $18,887,115 out of the total amount of $26,051,194 that it paid
Morgan Stanley for services in connection with the Pechiney transaction. This
works out to 72.5% of the total amount paid to Morgan Stanley. This percentage
is based on the following breakdown of fees provided by Morgan Stanley in a
letter dated June 18, 2004:
(a) 30% attributed to general advisory services
prior to June 1, 2003;
(b) 25% attributed to investigative and due
diligence efforts prior to July 7, 2003 (the date the offer was publicly
announced). These activities included among other things, reviewing general
financial information, market and industry analyses and capital structure
analysis to evaluate the advisability of the transaction;
(c) 10% attributed to rendering prior to
July 7, 2003 (the date the offer was publicly announced), a financial
opinion to Alcan with respect to the fairness of the consideration; and
(d) 7.5%
(or half of the total of 15%) attributed to the analysis related to the amended
and revised offers.
[91]
The evidence shows that Morgan Stanley had a
long-standing relationship with Alcan prior to the Pechiney transaction. They
were also involved in Alcan’s failed attempt to merge with Pechiney in 1999.
They began working on Alcan’s renewed proposal to acquire Pechiney at or around
the end of 2002, approximately six months prior to the public announcement of
the initial offer on July 7, 2003.
The uncontradicted testimony of Mr. McAusland and Mr. Healy confirms
that Morgan Stanley worked on the financial model for the transaction and
prepared financial and valuation opinions, all for the purpose of providing the
Appellant’s board of directors with the necessary material to conduct a
critical review of the proposed transaction prior to approving it. For example,
on December 13, 2002, Morgan Stanley prepared for the Appellant’s board a
presentation on the financial impact and financing considerations relevant to a
possible transaction with Pechiney.
Similar presentations were made in the period from April 2003 to July 2,
2003, when the transaction was finally approved by Alcan’s board of directors.
[92]
I observe that the Appellant spent approximately
$2,605,119
on the fairness opinion that was delivered by Morgan Stanley to its board of
directors.
This opinion represented the culmination of the financial analysis provided to
the Appellant’s directors. The purpose of the opinion was to document the
financial considerations that were taken into account by the Appellant’s directors
in deciding to approve the transaction.
[93]
A fairness opinion is not required by law. The
Appellant’s directors could have approved the transaction without one. The
purpose of the opinion was thus to document the fact that the Appellant’s
directors has discharged their oversight duties by acting on a fully informed
basis. The fairness opinion is evidence that can be used to demonstrate that
the directors acted with due care in approving the transaction. In this
context, the work that went into the fairness opinion was not, as argued by the
Respondent, carried out in the course of the actual implementation of the Pechiney
transaction.
[94]
The Respondent claims that the evidence points
to the fact that the Appellant pursued the acquisition of Pechiney as far back
as the Appellant’s first failed attempt to acquire Pechiney through a three‑way
friendly merger. The Appellant waited for an opportune time to try again. According
to the Respondent, the Appellant simply changed its tactics by appealing to
Pechiney’s shareholders directly through a hostile takeover bid, which would
circumvent any opposition from Pechiney’s management.
[95]
In my opinion, the Respondent’s version of
events is an oversimplification of what occurred. Markets change rapidly.
Transactions may be accretive to value under certain market conditions and not
under others. Financial modelling must take into account the changing
landscape. Interest rates, blended costs of capital, commodity prices, growth prospects,
and anticipated synergies are but a few of the factors that the board must carefully
consider before committing to an acquisition. Another important consideration
is the interests of the various stakeholders in a transaction. Different
stakeholders may attempt to block a takeover bid if they see the acquisition as
conflicting with their interests. In France, at the time of the Pechiney
transaction, the law had been recently amended to allow for hostile bids that
were subject to regulatory approvals. With that background in mind, I surmise
that the shareholders could have easily influenced the public authorities if
they had felt that the Appellant’s offer negatively affected their interests. For
example, an offeror may be asked to increase its offer price or to guarantee
employment and certain levels of capital spending in order to overcome
opposition. In light of all these factors, a contemporaneous financial model
must be prepared to provide the board with the material information necessary
to evaluate the terms and conditions upon which a transaction might prove
beneficial to the corporation’s shareholders.
[96]
The evidence shows that the above was done in
the instant case. This is not surprising. As part of the oversight process, directors
must constantly ask themselves whether the matters that they are called upon to
oversee will increase or subtract from the corporation’s earnings. In view of
the numerous acquisitions completed by the Appellant prior to its acquisition
of Pechiney, a careful evaluation of corporate opportunities appears to have
been an ongoing quest for the Appellant’s directors and was intrinsically linked
to the income‑earning process.
[97]
I suspect that the Minister would not have
disallowed the Disputed Expenses had the Appellant simply hired additional
employees to carry out the advisory work provided by Morgan Stanley and Lazard Frères. There would have been no
demand by the Minister for the Appellant to track the salaries and benefits
paid to such employees and to allocate them to work performed in connection
with the financial analysis of the Pechiney transaction. In the case at hand,
there is no suggestion that part of Mr. McAusland’s salary and benefits
and the director’s fees paid by the Appellant are not deductible because they
were amounts paid in connection with the Pechiney and Novelis transactions.
While internal advice often costs less, it is not a reliable substitute for
independent third party advice. Effective oversight requires independent advice
to ensure that the advice on which the board relies to approve a capital
expenditure is not skewed by personal interests. My view on this point is
supported by the Federal Court of Appeal’s decision in Pantorama Industries
Inc. v. Canada
In that case, the taxpayer hired a contractor to find locations for its stores
and negotiate leases and lease renewals on its behalf. In finding that the fees
paid to the contractor were current expenses, Judge Noël (as he then was)
determined that “the fact that
the appellant made a decision to outsource this aspect of its business should
have no bearing on the tax treatment of the expenditure”.
[98]
I conclude that Oversight Expenses are
deductible by the Appellant. The evidence shows that Oversight Expenses are of
a frequent and recurring nature for this taxpayer. More importantly, the
Oversight Expenses are deductible because they were incurred to facilitate the board
of directors’ oversight over the income‑earning process, which includes,
as noted earlier, oversight over the allocation of capital. Ineffective
oversight by directors has a destructive domino effect for a corporation; it is
a pathway to poor decision‑making, which in turn leads to poor earnings,
which then results in poor share price performance. In this regard, the
Appellant’s Oversight Expenses form part of the Appellant’s annual costs of
business.
[99]
I do not agree with the Appellant’s submission that
the expense incurred for work performed by Morgan Stanley in connection with the
amended and revised offers qualifies as a current expense. The evidence shows
that the Appellant was engaged in negotiations with the Pechiney board on the
terms of an increased offer in or around August 2003. These negotiations
culminated in an increase in the offer price for the Pechiney shares. The
Appellant’s board did not adopt a new resolution to approve the revised offer.
I surmise that the Appellant’s legal advisors concluded that the initial board
resolution was drafted broadly enough to authorize amendments to the Appellant’s
offer. Viewed in this light, the initial offer served to create a framework for
negotiations which led to a higher offer that was ultimately recommended for
acceptance by Pechiney’s board of directors. In my opinion, the work performed by
Morgan Stanley in the context of active negotiations was more closely linked to
the implementation of the transaction.
[100] Considering all of the foregoing, I conclude that the Appellant is
entitled to deduct, as a current expense, 65%
of the fees paid to Morgan Stanley for the advisory services performed in
connection with the Appellant’s board of directors’ review and approval of the
Pechiney transaction.
[101] The Appellant also seeks to deduct under subsection 9(1) of the
Act, $5,297,652 out of the total amount of $8,150,233 that it paid Lazard Frères for services in connection
with the Pechiney transaction. This works out to 65% of the total amount paid
to Lazard Frères. At the
request of the Appellant, Lazard Frères provided a breakdown of the fees associated
with the various services provided in connection with the Pechiney transaction. Thirty-five per cent of the Lazard Frères fees were
attributed to professional advice provided to the Appellant’s board of
directors as to whether, and on what terms, the board should approve an offer
for all of the Pechiney shares. The evidence shows that this work included valuation
work and the modelling of potential synergies that could be derived from the
transaction.
At trial, Mr. Maris testified that Lazard Frères started to work for Alcan on the Pechiney
transaction 18 months prior to the public announcement of the transaction,
which occurred in July 2003.
For the reasons noted earlier, I am satisfied that the fees payable for this
work are deductible on current account.
[102] For the reasons also noted earlier, I do not share the Appellant’s
view that the fees charged by Lazard Frères for work performed in connection with the negotiation
and revision of the Appellant’s offer are deductible as current expenses.
Therefore, only 35% of the fees paid to Lazard Frères for advice provided in connection with the
Pechiney transaction qualify for deduction under subsection 9(1) of the
Act.
(b) Novelis
[103] The Appellant argues that its board retained Morgan Stanley and Lazard Frères to provide advice as to which
of the possible divestiture scenarios would be most favourable for its
shareholders. Therefore, the Appellant argues, these expenses were incurred in
connection with the board’s decision‑making and oversight functions
rather than the implementation of the Spin‑off.
[104] Mr. Maris testified that Lazard Frères began its advisory work on the Novelis transaction immediately following
the closing of the Pechiney transaction. Lazard Frères was tasked with conducting the financial analysis and modelling for
two alternative transactions. His evidence on this point was not challenged by
the Respondent in her cross-examination or written argument. On the one hand, Lazard Frères was asked to advise the
Appellant’s board on financial considerations relevant to an outright sale of
Novelis. At the same time, Lazard Frères was to advise the board on the financial considerations relevant to
a Spin‑off of Novelis.
[105] To accomplish its mandates, Lazard Frères pursued a dual‑track financial review
and advisory process.
With respect to the outright sale option, Lazard Frères recommended that the Appellant seek expressions of interest from
private equity sponsors and institutional and strategic buyers. Lazard Frères organized
the expression of interest process in order to validate the financial advice
that it ultimately provided to the Appellant’s board of directors to enable it
to choose between the two options. A second team worked on the financial
modelling of the Spin‑off.
[106] The evidence shows that the financial advisory process for the Novelis
transaction extended over a long period of time because of the complexities
arising from the simultaneous investigation of both alternatives. For this
reason, the fairness opinion was delivered to the board of directors on
November 23, 2004. The Board of Directors formally approved the Spin‑off
at this same meeting.
The Spin‑off was finalized on January 6, 2005.
[107] I agree with the Appellant’s submission that the evidence
demonstrates that substantially all of the work performed by Lazard Frères in connection
with the Novelis transaction related to financial advice provided in the course
of the oversight process. I observe that Lazard Frères spent approximately 345 days, out of a total of 389 days they
spent on the Novelis transaction, working on that transaction prior to its
final approval. This works out to 88.69% of the total number of days they spent
providing advice in connection with the transaction. In the absence of contrary
evidence, I conclude that 88.69% of the total amount of $16,031,657 claimed by
the Appellant as a deduction for its 2005 taxation year is deductible on current
account.
[108] With respect to the Novelis transaction, Morgan Stanley also
provided strategic advice in relation to the two alternate divestiture options.
As indicated by Mr. Healy in his testimony at trial, Morgan Stanley’s work
was performed from October 1, 2003 to January 5, 2005. A substantial portion of the
fees paid to Morgan Stanley in connection with the Novelis transaction was claimed
as a deduction by the Appellant in its 2004 taxation year, which was statute‑barred
at the time the audit commenced in respect of that transaction. Therefore, the
Minister did not disallow the deduction for Morgan Stanley’s fees that was claimed
by the Appellant for 2004.
[109] The Appellant seeks to deduct the amount of $296,863 paid to
Morgan Stanley, which relates to reimbursable expenses incurred in connection
with the Novelis Spin‑off. There is insufficient evidence for the Court
to determine whether these expenses were incurred in relation to advice
provided to the Appellant’s directors in connection with their oversight
function. The invoice for this amount does not explain the nature of these
expenses and the services they relate to. The testimony of Mr. Healy and
Mr. McAusland did not provide any additional guidance in this respect.
Consequently, the Appellant has not satisfied its Evidentiary Burden with
respect to this expense.
(2) Are the fees paid to
Valmonde and Publicis deductible as current expenses under subsection 9(1)
of the Act?
[110] The Appellant hired Publicis to handle its communication strategy
for the purpose of supporting its hostile takeover bid of Pechiney. The
Appellant formalized its relationship with Publicis on June 11, 2003, a few weeks prior to the
approval of the Pechiney transaction by the Appellant’s board on
July 2, 2003.
[111] The Appellant paid a total amount of $18,983,316 to Publicis. The
Appellant submitted that 50% of the fees were incurred to promote Alcan’s
brand, while the other 50% were incurred to obtain the support of Pechiney’s
shareholders for its bid. Initially the Appellant deducted $9,491,658 as a
current expense on the basis that the fees for the communication advisory
services were advertising expenses incurred to increase the Appellant’s profit
from its business operations. The balance of the fees was added to the adjusted
cost base of the Pechiney shares. The Appellant now says that the full amount
is deductible as a current expense because advertising fees should benefit from
the broad principle of deductibility. The Appellant also contends that one of
the objects of the promotional and advertising services provided by Publicis
was the development of a market for the shares of its capital stock that it
issued as partial consideration for the Pechiney shares.
[112] With respect, I disagree with the Appellant that these expenses were
incurred to increase business profits or to address a current business concern.
On the evidence before me, I find that the underlying purpose of the Publicis
expenses was to facilitate a smooth implementation of the Pechiney takeover.
The evidence shows that this was the first hostile takeover bid to be launched
for a company that was viewed as a French national jewel. The Appellant had
reason to believe that its bid might meet strong resistance from affected
stakeholders. It was of paramount importance for the Appellant to develop a
communication strategy to address the stakeholders’ legitimate concerns and to
prevent the decision‑making process from becoming overly politicized. To
have got bogged down in a political quagmire could have led to a costly failed
transaction.
[113] The evidence shows that one of the reasons the Appellant retained
Publicis was to obtain the services of Mr. Levy and Mr. Giuily. The
evidence shows that Mr. Giuily was well connected in the political world
in France. As shown by a letter from Publicis Consultants to Alcan confirming
its mandate, Mr. Giuily had previously worked within the French Ministry
of the Interior (Ministère de l’Intérieur). Therefore, he was extremely well‑placed to lobby the
political decision makers and to influence their views of the Pechiney
transaction. It is common knowledge that the opponents of a hostile offer will
raise various factors to justify opposition to the offer, including the spectre
of job losses, capital spending reductions and the dismantling of head office
infrastructure, the impact on local suppliers and the reduction of local and
national tax revenue. If constituents are concerned, so will be their elected
representatives. The Appellant had to promote a positive vision of its plan for
Pechiney. Publicis was asked to develop and implement a strategy to overcome
the anticipated natural opposition to the Appellant’s bid. It did so by
promoting the Appellant as a good steward of Pechiney’s operations.
[114]
All of the above is borne out by the evidence. As
the Respondent points out, the mandate given to Publicis was correctly spelled
out in the engagement letter, which reads as follows:
[TRANSLATION] At our recent meetings, you
were so good as to inform us of your desire to entrust us with a mission to
provide assistance and advice with regard to defining and implementing your
communication and public relations strategy in connection with the stock
transaction you are presently considering (Project Blue).
Lors de nos
récentes réunions, vous avez bien voulu nous faire part de votre souhait de
nous confier une mission d’assistance et de conseil sur la définition et la
mise en oeuvre de votre communication et de vos relations publiques, dans le
cadre de l’opération boursière que vous étudiez actuellement (Projet Blue).
[115] Project Blue refers to a takeover of Pechiney. Mr. McAusland acknowledged
during his cross-examination that Publicis was hired to “instil confidence in the public regarding
Alcan’s stewardship of the Pechiney assets.”
[116] The Respondent drew attention to the following testimony given by
Mr. McAusland during his examination for discovery:
“So, to have advertising at which there was
probably some -- but my point is advertising with Alcan only completely
without reference to the Pechiney transaction, you know, wouldn’t necessarily
make sense. You have the promotion of Alcan as a corporate citizen, as a
credible company, as a steward of the enterprise and as opposed to value
being paid for the company. So there’s promotion of the offer, the value of the
offer, the desirability from the financial perspective as accepting the offer
because it’s a good deal. It’s one thing. And then promoting Alcan as a steward
and as an excellent corporate citizen and owner is another thing. But the second
the stewardship is also related to the Pechiney offer, but not the
financial side and not how good a deal it is for the shareholders, it’s the
stewardship side and that the public should have confidences [sic] in
Alcan as a steward of these incredibly important assets going forward.” (As
read.)
[Emphasis added.]
[117] On the evidence, it is apparent that Publicis was hired to promote a
positive vision for the transaction for the purpose of winning over the
different stakeholders affected by a takeover of Pechiney.
[118] As noted in my credibility observations, there were some
inconsistencies in Mr. Giuily’s testimony. Mr. Giuily had prepared a
breakdown of Publicis’ fees to support an allocation favourable to current
account treatment; however, as the Respondent also correctly points out in her
written submissions, the invoices that Mr. Giuily relied on to prepare his
allocation of the Publicis fees do not support his position.
[119] On the evidence before me, I find that the expense relating to the communication
strategy, and thus the Publicis expense, was incurred for the underlying
purpose of implementing the Pechiney transaction. The Appellant did not present
any credible evidence that the communication strategy was undertaken in
connection with its business. I note that the Appellant did not sell its
products directly to the public. Its manufactured products are sold to
distributors and other manufacturers. There is no evidence to demonstrate that
consumers of products containing aluminum sourced from the Appellant were
targeted by the communication strategy developed. Additionally, the Appellant
did not present any evidence to demonstrate that these expenses would have been
incurred in the absence of the Pechiney transaction. Therefore, I conclude that
the total amount of the Publicis fees is a capital expenditure because this
amount was incurred to facilitate the implementation of the Pechiney
transaction.
[120] The Appellant also sought to deduct the amount of $106,630 paid to
Valmonde for ancillary services rendered to assist in its communication
strategy. For the reasons noted above, I conclude that those services were
provided to the Appellant in the execution of its takeover bid and are
therefore not deductible under subsection 9(1) of the Act.
(3) Are the other Miscellaneous Expenses incurred by the Appellant in
the context of the Pechiney transaction deductible under subsection 9(1)
of the Act?
[121] The Appellant claims a deduction for a total amount of $1,780,796 with
respect to miscellaneous expenses that it contends were current expenses
incurred in connection with its business.
[122] The Appellant claims as a current expense a total amount of $967,152
paid to Sullivan Cromwell on the basis that the expense was incurred in
connection with advice provided to the board of directors with respect to their
ongoing fiduciary duties.
In addition, the description of the services refers to “[o]ther legal advice and services”, including advice regarding fiduciary duties. The invoice itself
refers to work performed in connection with the Pechiney transaction. In light
of the fact that a large portion pertained to rent and in view of the fact that
Mr. Miller provided very little evidence with respect to these fees, I
conclude that the Appellant has failed to satisfy its Evidentiary Burden with
respect to the amounts being deductible on current account. For these reasons,
I conclude that these amounts must also be capitalized.
[123] The Appellant claims a total amount of $20,054 paid to the law firm
then known as Ogilvy Renault on the basis that Ogilvy Renault assisted the
board of directors and officers in complying with legal requirements in
connection with their duties. In making its claim, the Appellant relied on an
invoice from Ogilvy Renault which briefly describes its services. I am unable to discern from
the invoice whether the fees pertained to advice given in the course of the
oversight process or are linked to Execution Costs. The majority of the
descriptions on the invoice indicate that the services pertain to preparing and
drafting the “Project JEDI
Transaction Manual”. The Appellant also relied
on testimony from Mr. McAusland and Mr. Miller. Mr. McAusland
testified that the advice from Ogilvy Renault pertained to general corporate
law issues such as the issuing of securities and the registration requirements
in connection with the Pechiney transaction. Mr. Miller testified that
Sullivan Cromwell supported Ogilvy Renault in advising the board, but I cannot
discern from that statement the precise nature of the services Ogilvy Renault
provided. Overall, the testimony regarding Ogilvy Renault’s services was vague.
For these reasons, I conclude that the amount paid to Ogilvy Renault was a
capital expenditure.
[124] The Appellant claims a total amount of $449,963 paid to Ernst &
Young on the basis that these fees were incurred for tax advice. No one from
Ernst & Young was called by the Appellant to explain the detailed summary
of the invoice. I draw a negative inference from this. I am unable to determine
from the descriptions shown on the invoice whether the tax advice pertains to
the pre‑closing or post‑closing structuring of the Pechiney
transaction, or to other matters. I surmise that the services provided by Ernst
& Young pertained to advice as to tax structuring that related to the
implementation of the transaction and the post‑closing reorganization
transactions. On this basis, I conclude that the Appellant has failed to
satisfy its Evidentiary Burden with regard to establishing that the amount of
$449,963 is deductible on current account.
[125] The Appellant claims a total amount of $187,739 paid to Davis Polk
and ADP. The Appellant presented invoices issued by Davis Polk and ADP as
evidence in support of its claim. The invoice from Davis Polk indicates that
the advisory services pertained to the Appellant’s relationship with Morgan
Stanley, Morgan Stanley’s role in the transaction, and the Appellant’s
obligations under U.S. securities regulations.
The only description on the invoice for ADP indicates that the services
pertained to “66 shareowner
positions of the reorg for Pechiney”. The Appellant has failed to
satisfy its Evidentiary Burden with respect to this amount. Therefore, I
conclude that the legal advice pertained to the implementation of the Pechiney
transaction and that the expense was incurred on capital account.
[126] The Appellant claims an amount of $152,180 described as
communication costs on the basis that these costs related to conference calls,
translation services and other communication services. My review of the
invoices indicates that these expenses were incurred as part of the Appellant’s
communication strategy to implement the Pechiney transaction. For the reasons
noted in paragraphs 110 to 120 of these reasons, I am of the view that
these expenses are capital expenditures.
[127] The Appellant also claims an amount of $2,660 paid to the Ritz‑Carlton
Montreal for a cancellation fee. It appears that this expense related to the
implementation of the transaction. Therefore, it is a capital expenditure.
[128] Finally, the Appellant claims an amount of $1,048 paid to various
small suppliers. No evidence was presented on this amount. The Appellant’s
claim for a deduction for this amount as a current expense is therefore denied.
[129] For all these reasons, I conclude that the miscellaneous expenses
totalling $1,780,796 are not deductible as current expenses. They are capital
expenditures.
(4) Are the Disputed Expenses incurred in printing and issuing documents
in the Pechiney transaction or the Novelis transaction deductible under either
subsection 9(1) of subparagraph 20(1)(g)(iii) of the Act?
[130] The Appellant is claiming that the expenses totalling $2,517,780
that it incurred in relation to printing and issuing the documents directed to
the Pechiney shareholders are deductible under subsection 9(1) or
alternatively under paragraph (20)(1)(g)(iii) of the Act. With
respect, I disagree.
[131] The Appellant’s argument is based on this Court’s finding in Boulangerie St‑Augustin
Inc. v. The Queen.
In that case, the taxpayer was a target corporation whose shareholders were
asked to tender their shares in takeover bids. The taxpayer argued that — in
accordance with section 134 of the Quebec Securities Act and the Quebec Companies
Act —
it was its legal obligation to furnish information circulars to its
shareholders. Therefore, the fees incurred to prepare the circulars should be
deductible as a current expense.
[132] Judge Archambault held that the obligation to keep shareholders
informed was similar to the taxpayer’s obligation under the Companies Act
to provide the corporation's financial statements. He noted that “business people consider these expenses as
necessary business expenses and that they are deductible as general
administrative expenses”.
[133] However, Boulangerie St‑Augustin is distinguishable
from the present case. Although the taxpayer in that case was required by law
to distribute the information circulars, it was a target corporation issuing
circulars to its own shareholders. In the case at bar, the Appellant was
required by law to file forms such as the S‑4, which are akin to a
prospectus. These documents were directed to the shareholders of Pechiney.
These documents contain information that is considered material to the
shareholders’ decision to accept or reject the Appellant’s offer. The Appellant was required to
provide this information to the Pechiney shareholders in the course of the
implementation of its takeover bid with respect to Pechiney. The preparation
and delivery of the documents were an essential step in the implementation of
the Appellant’s takeover of Pechiney. Therefore, the expenses pertaining to the
preparation and filing of these documents were incurred on capital account.
[134] In Boulangerie St-Augustin, Judge Archambault gave guidance
with respect to paragraph 20(1)(g)(iii) of the Act specifically. In
order for costs to be deductible under this provision, the annual reports
contemplated should be financial in nature. The Appellant maintains that the
reports to be filed with the regulatory authorities and provided to Pechiney’s
shareholders were financial in nature, containing historical financial data and
pro forma financial statements, among other information. As the
shareholders of Pechiney were entitled to this information by law, these
expenses should also be deductible under paragraph 20(1)(g)(iii) of
the Act.
[135] In my opinion, the Appellant’s claim under paragraph 20(1)(g)(iii)
of the Act must also be rejected. In short, the Appellant failed to satisfy its
Evidentiary Burden. No one who provided services in connection with the
presentation of the financial information was asked to testify. The Court is
unable to discern whether these expenses were incurred specifically for the
purpose of printing financial information and issuing it to the Appellant’s shareholders
or to the Pechiney shareholders. The documents contained much more than
financial information.
[136] I arrive at the same conclusion with respect to the fees labelled by
the Appellant as “Printing and
Issuing Financial Reports and Other Professional Fees” in respect of the Spin‑off of Novelis. These expenses are
clearly capital in nature. The management circular and plan of arrangement were
sent to the Appellant’s shareholders to provide them with the material
information required in order for them to approve or reject the Spin‑off.
The Appellant has also failed to satisfy its Evidentiary Burden with respect to
the deductibility of the fees under paragraph 20(1)(g)(iii) of the
Act. For example, the printing costs have not been allocated between pages containing
financial information and pages containing other information, such as the terms
and conditions of the plan of arrangement and the non‑financial
information pertaining to Novelis. Finally, no one was called from PwC or
Ernst & Young to explain the work performed by those
organizations and the breakdown of their fees.
C. Are
any of the Disputed Expenses capital expenditures deductible in whole or in part
under subsection 20(1) of the Act?
(1) Are the fees paid to Morgan Stanley and Lazard
Frères deductible under paragraph 20(1)(bb)
of the Act?
[137]
The Appellant argues that the amounts paid to
Morgan Stanley and Lazard Frères in connection with the Pechiney and Novelis transactions would also
be deductible under paragraph 20(1)(bb) of the Act.
[138] The English and French versions of paragraph 20(1)(bb)
of the Act read as follows:
|
(bb) an amount, other than a commission, that
|
bb) une somme, autre qu'une commission, qui, à
la fois :
|
|
(i) is paid by the taxpayer in the year
to a person or partnership the principal business of which
|
(i) est versée par le contribuable au cours de
l'année à une personne ou à une société de personnes dont l'activité
d'entreprise principale consiste :
|
|
(A) is advising others as to the
advisability of purchasing or selling specific shares or securities,
or
|
(A) soit à donner des avis sur l'opportunité d'acheter
ou de vendre certaines actions ou valeurs mobilières,
|
|
(B) includes the provision of services in
respect of the administration or management of shares or securities, and
|
(B) soit, entre autres choses, à assurer des
services relatifs à l'administration ou à la gestion d'actions ou de valeurs
mobilières,
|
|
(ii) is paid for
|
(ii) est versée :
|
|
(A) advice as to the advisability of
purchasing or selling a specific share or security of the taxpayer, or
|
(A) soit pour obtenir un avis sur
l'opportunité d'acheter ou de vendre certaines actions ou valeurs mobilières
du contribuable,
|
|
(B) services in respect of
the administration or management of shares or securities of the taxpayer.
|
(B) soit pour la prestation de services relativement
à l'administration ou à la gestion d'actions ou de valeurs mobilières du
contribuable.
|
[139] As the parties agreed in their written arguments, the amounts paid to Morgan
Stanley and Lazard Frères by
the Appellant are deductible under this provision only if the following three
conditions are satisfied:
(a)
the amounts paid are not commissions;
(b)
the fees were paid for advice as to the
advisability of purchasing or selling specific shares; and
(c)
the fees were paid to a person whose principal
business is advising others as to the advisability of purchasing or selling specific
shares.
[140] The Respondent argues that the first and second of these conditions
set out in paragraph 20(1)(bb) have not been met with respect to either
transaction. The Respondent did not challenge the third condition. In any event, considering the
evidence as a whole, it is indisputable that the principal business of Morgan
Stanley and Lazard Frères
consists of providing advice on the advisability of purchasing or selling shares
or securities.
(a) Pechiney
[141] The Respondent contends that the first and second conditions have
not been satisfied because the Appellant paid “commissions” for advice related to
the takeover of Pechiney rather than the advisability of purchasing or selling specific
shares of the Appellant.
(i) Were the amounts paid to Morgan Stanley and Lazard
Frères commissions?
[142] I observe that the term “commission” is not defined in the Act;
however, the courts have considered the meaning of this term in other tax
contexts.
[143] The modern approach to statutory construction is described in the
Supreme Court of Canada decision Canada Trustco Mortgage Co. v. Canada. This approach involves a textual,
contextual and purposive analysis and, more precisely, looks at the grammatical
and ordinary sense of a provision with reference to its entire context, the
purpose of the legislation and the intention of Parliament. Furthermore, an
important objective in interpreting the Act is to achieve consistency,
predictability and fairness.
[144]
In Canada Trustco, the Supreme Court also
provided the following guidance on undertaking the modern approach of statutory
interpretation:
10 . . . When the
words of a provision are precise and unequivocal, the ordinary meaning of the
words play [sic] a dominant role in the interpretive process. On the
other hand, where the words can support more than one reasonable meaning, the
ordinary meaning of the words plays a lesser role. The relative effects of
ordinary meaning, context and purpose on the interpretive process may vary, but
in all cases the court must seek to read the provisions of an Act as a
harmonious whole.
[145]
In their written submissions, both parties rely
on different passages of this Court’s decision in ITA Travel Agency Ltd. as authority for the meaning
of the term “commission”. This decision involved the determination of whether amounts received
from air carriers were commissions, and as a result, consideration for a taxable
supply to which GST would be applicable. My colleague Judge Lamarre (as she then
was) focused on the ordinary meaning of the word “commission”,
citing the following definitions:
34 The Concise Oxford Dictionary
(Oxford: Oxford University Press, 1990) defines a commission as "a percentage
paid to the agent from the profits of goods etc. sold, or business
obtained". According to that definition, something must be actually paid
to someone in order for an amount to constitute a commission, and that amount
must be expressed as a percentage.
35 In Black's Law Dictionary
(St. Paul, Minn: West Publishing Co., 1990), the definition of commission reads
as follows:
The recompense, compensation or
reward of an agent, salesman, executor, trustee, receiver, factor, broker, or
bailee, when the same is calculated as a percentage on the amount of his
transactions or on the profit to the principal. Weiner v.
Swales, 217 Md. 123, 141 A.2d 749, 750. A fee paid to an agent or employee for
transacting a piece of business or performing a service. Fryar v. Currin, App.,
280 S.C. 241, 312 S.E. 2d 16, 18. Compensation to an administrator or other
fiduciary for the faithful discharge of his duties.
36 From this definition, we see that
commission entails the actual payment of an amount of money calculated as a percentage
on the amount of a transaction or on the profit to the principal.
. . .
38 In Consolboard Inc. v.
MacMillan Bloedel (1982), 63 C.P.R. (2d) 1, [varied by 74 C.P.R. (2d) 199
(F.C.A.), but not with respect to the question addressed here], Cattanach J. of
the Federal Court, Trial Division spoke about the meaning of the words
"commission" and "discount". In that case, the defendant,
the producing mill, shipped its products to a sales subsidiary which warehoused
the finished product and sold it to the trade. As compensation for its efforts,
and as the basis for its income and ultimate profit, the sales subsidiary
received a predetermined percentage of the sale price to the consumer. The
sales subsidiary also arranged direct car sales and those cars were shipped
directly to the customer by the mill from the mill by various means of
transport. The sales subsidiary was paid an allowance of five per cent on the
sale price to the purchaser to allow it a profit for its efforts in making the
sale. During the evidence and in argument, this allowance had been called a
"discount" or a "commission". Cattanach J. of the Federal
Court, Trial Division defined the words "commission" and
"discount" in these terms at page 22:
... Those words cannot be words of
art in a commercial sense, neither are they technical words in any art or
science. Therefore they must be given their meaning as used in common
parlance.
In commerce a commission is a
percentage of a price of a product paid to an agent or like person who
transacts business on behalf of others, as compensation for his efforts.
Likewise in commerce a discount on
the sale of an article of trade is an abatement or deduction from the nominal
value or price of that article.
The nub of the controversy is whether
the allowance paid to the sales subsidiary is a "commission" or a
"discount".
If it is the former it is an expense
in the mill's operation and is properly deducted from income.
If it is the latter then it is not
part of the price to the consumer and should be deducted from the net mill
return.
[Emphasis added.]
[146]
In light of the above, the term “commission” signifies
an amount calculated by reference to a percentage of the price of a product
sold or a percentage of the profit earned by a principal in connection with a
transaction. Relying on this definition, the Appellant contends that the fees
paid to Morgan Stanley and Lazard Frères in the context of the Pechiney transaction are
not commissions because the amounts were not determined by reference to a
percentage on sales or volume; rather, the amounts were fixed fees. The
Appellant also points to evidence indicating that Morgan Stanley and Lazard Frères provided their services as
independent contractors and not as agents for the Appellant.
[147] I agree with the Appellant’s submission that the fees paid to Morgan
Stanley and Lazard Frères in connection with the Pechiney transaction were not determined by
reference to a percentage on sales or volume. In both cases, the fees were
fixed. While portions of the advisory fees were contingent on the Appellant acquiring
a certain number of Pechiney shares, the amount paid was nonetheless fixed
prior to the completion of the transaction.
[148] In contrast, the Respondent relies on paragraph 41 of the same decision
to argue that the word “commission” can be interpreted to include a lump sum or fixed fee:
41 Therefore,
there seems to be two defining characteristics of a commission. First, a
commission is an amount that is actually paid or credited to someone. It does
not include artificial, notional or fictitious payments or credits. In my view,
an accounting entry cannot be a commission. Second, a commission is usually
expressed as a percentage, or if it is expressed as a lump sum amount, it must
at least be proportionate to the work done or to the value of the item sold.
. . .
[149] On review of ITA Travel, it appears that Judge Lamarre relied
on her understanding of the ratio decidendi in Campbell v.
National Trust Co. Ltd.
as authority for the proposition that the term “commission” can include a lump sum or
fixed amount:
37 In Campbell v. National Trust
Co. Ltd., [1931] 1 W.W.R. 465, Lord Russell of the Privy Council defined a
commission as follows at page 471:
The verbal agreement between Campbell
and Wallberg stipulated for the payment of "a commission," but
there was no indication of the amount thereof, or how such amount was to be
ascertained. Nor does the evidence contain any suggestion that there
existed any custom applicable to the present case, by reference to which the
amount of commission could be ascertained. In these circumstances the
contract can only mean that Campbell shall be paid a proper lump sum in
remuneration for his services in introducing Clarke. It is no objection to this
view that a commission frequently, or even commonly, takes the form of a
percentage. The word "commission" may quite properly, both from a
legal and commercial point of view, be employed as denoting a lump sum which
represents no percentage on anything, as, for instance, an agreement to pay a
commission of £ 500.
[Emphasis added.]
[150]
It is apparent from the above passage that the
Court construed the term “commission” by taking into account the entire context of the parties’ agreement.
In Campbell, the Privy Council noted that the parties intended that a “commission”
would be paid, without defining how it was to be determined. Because of this,
the Privy Council concluded that the parties had envisaged the payment of a
lump sum amount. In contrast, the context in which the term “commission”
is used in the Act does not favour a departure from the ordinary meaning of
that term.
[151] The Appellant also referred me to the decision in Minister of
National Revenue v. Yonge-Eglinton Building Ltd. That decision concerned the
scope of paragraph 11(1)(cb) of the Act, which read, at the time,
as follows:
11. (1) Notwithstanding paragraphs (a),
(b) and (h) of subsection (1) of section 12, the following
amounts may be deducted in computing the income of a taxpayer for a taxation
year:
. . .
(cb) an
expense incurred in the year,
(i)
in the course of issuing or selling shares of
the capital stock of the taxpayer, or
(ii)
in the course of borrowing money used by the
taxpayer for the purpose of earning income from a business or property (other
than money used by the taxpayer for the purpose of acquiring property the
income from which would be exempt),
but not including
any amount in respect of
(iii)
a commission or bonus paid or payable to a
person to whom the shares were issued or sold or from whom the money was
borrowed, or for or on account of services rendered by a person as a salesman,
agent or dealer in securities in the course of issuing or selling the shares or
borrowing the money, or
(iv)
an amount paid or payable as or on account of
the principal amount of the indebtedness incurred in the course of borrowing
the money, or as or on account of interest;
[152]
In Yonge‑Eglinton Building, Thurlow J.
determined the meaning of the term “commission” by referring to the Shorter
Oxford Dictionary, which defines a commission as “a pro rata remuneration for work done as
agent”.
Judge Thurlow noted that a similar definition is found in the Living
Webster Encyclopedic Dictionary. The Appellant relies on that decision and
passages from the ITA Travel decision to contend that an amount must be
paid to an agent in order for it to be a commission. While I do not need to
determine this specific issue to dispose of this matter, I am satisfied that
the evidence shows that Morgan Stanley and Lazard
Frères did not act as agents for the Appellant.
[153] In conclusion, I find that the amounts paid to Morgan Stanley and Lazard Frères in relation to the Pechiney
transaction were not commissions.
(ii) Advice as to the advisability of buying or selling a specific share
or services in respect of the administration or management of shares
[154] With respect to the second condition referred to in
paragraph 139 above, relying on the principles of bilingual statutory
interpretation, the Respondent submits that the meaning of the expressions “specific share” and “certaines
actions” in clause 20(1)(bb)(i)(A)
excludes advice with respect to the takeover of an entire entity.
[155] In R. v. Daoust,
Judge Bastarache referred to cases that elucidate the principles that
should be used in the context of bilingual statutory interpretation. After
reviewing the case law, he endorsed a two‑step procedure, as follows:
26 . . .
I would also draw attention to the two-step
analysis proposed by Professor Côté in The Interpretation of Legislation in
Canada (3rd ed. 2000), at p. 324, for resolving discordances resulting from
divergences between the two versions of a statute:
Unless otherwise provided,
differences between two official versions of the same enactment are reconciled
by educing the meaning common to both. Should this prove to be impossible, or
if the common meaning seems incompatible with the intention of the legislature
as indicated by the ordinary rules of interpretation, the meaning arrived at by
the ordinary rules should be retained.
27 There is, therefore, a specific
procedure to be followed when interpreting bilingual statutes. The first step
is to determine whether there is discordance. If the two versions are
irreconcilable, we must rely on other principles: see Côté, supra, at p.
327. A purposive and contextual approach is favoured: see, for example, Bell
ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559, 2002 SCC 42, at
para. 26; Chieu v. Canada (Minister of Citizenship and Immigration),
[2002] 1 S.C.R. 84, 2002 SCC 3, at para. 27; R. v. Sharpe, [2001] 1
S.C.R. 45, 2001 SCC 2, at para. 33.
28 We must determine whether there is
an ambiguity, that is, whether one or both versions of the statute are
"reasonably capable of more than one meaning": Bell ExpressVu,
supra, at para. 29. If there is an ambiguity in one version but not the
other, the two versions must be reconciled, that is, we must look for the
meaning that is common to both versions: Côté, supra, at p. 327. The
common meaning is the version that is plain and not ambiguous: Côté, supra,
at p. 327; see Goodyear Tire and Rubber Co. of Canada v. T. Eaton Co.,
[1956] S.C.R. 610, at p. 614; Kwiatkowsky v. Minister of Employment and
Immigration, [1982] 2 S.C.R. 856, at p. 863.
29 If neither version is ambiguous,
or if they both are, the common meaning is normally the narrower version: Gravel
v. City of St-Léonard, [1978] 1 S.C.R. 660, at p. 669; Pfizer Co. v.
Deputy Minister of National Revenue For Customs and Excise, [1977] 1 S.C.R.
456, at pp. 464-65. Professor Côté illustrates this point as follows, at p.
327:
There is a third possibility: one
version may have a broader meaning than another, in which case the shared
meaning is the more narrow of the two.
30 The second step is to determine
whether the common or dominant meaning is, according to the ordinary rules of
statutory interpretation, consistent with Parliament's intent: Côté, supra,
at pp. 328-329. At this stage, the words of Lamer J. in Slaight
Communications Inc. v. Davidson, [1989] 1 S.C.R. 1038, at p. 1071, are
instructive:
First of all, therefore, these two
versions have to be reconciled if possible. To do this, an attempt must be made
to get from the two versions of the provision the meaning common to them both
and ascertain whether this appears to be consistent with the purpose and
general scheme of the Code.
31 Finally,
we must also bear in mind that some principles of interpretation may only be
applied in cases where there is an ambiguity in an enactment. As Iacobucci J.
wrote in Bell ExpressVu, supra, at para. 28: “Other principles of
interpretation -- such as the strict construction of penal statutes and the “Charter
values” presumption — only receive application where there is ambiguity as
to the meaning of a provision.”
[156] These sources indicate that, when there is a discrepancy between the
two versions of the same legislation, the principles of bilingual statutory
interpretation guide us towards an interpretation that educes the common
meaning of both provisions. However, this common meaning has to be consistent
with Parliament’s intent.
[157] I agree with the Appellant’s interpretation of the English
expression “specific”. In the context of
paragraph 20(1)(bb), “specific”
implies that the advice must pertain to the purchase or sale of particular
shares or securities. For example, a fixed fee charged for a recommendation to
buy common shares of an identified corporation would be deductible under this
provision.
[158] The English term “specific”
translates into French as “spécifique”. The French expression “certaines actions” translates into
English as “some shares”. The English word “specific” and the French word “certaines” do
not have the same meaning. The English word “specific”
is more restrictive.
[159] Relying on the French version, the Respondent contends that “all of the shares” of Pechiney are not “certaines actions” or “some shares”. According to the Respondent, this is the meaning that should be preferred.
With respect, I do not agree with the Respondent’s interpretation. As noted
above, the principles of bilingual statutory interpretation require that we
search for a common meaning or, if there is no common meaning, the more
restrictive of the two meanings. The Respondent’s construction gives rise to an
interpretation that favours only the French version of the provision. More
importantly, the analysis presented by the Respondent in her written
submissions does not reflect Parliament’s intention. The context in which the
terms are used suggests that Parliament used the expressions
“specific shares” and “certaines actions” to exclude generic investment advice such
as a recommendation that 10% of an investor’s savings be invested in preferred
shares. In summary, the wording and context of the provision suggest that
Parliament intended that a deduction would be available where the investment
advice is clear and concerns shares of a particular issuer.
[160] Finally, the French expression “certaines actions” does not imply that the advice must be given for less than all of
the shares of a particular entity. All of the shares of a particular entity are
“some shares” in the sense that there remain
other shares of different entities that a taxpayer could acquire. In my
opinion, the French version of the provision would have to be worded as follows for the Respondent’s interpretation to prevail:
soit pour obtenir un avis sur l’opportunité
d’acheter ou de vendre seulement certaines actions ou valeurs mobilières
d’une société donnée.
[Emphasis added.]
Corresponding changes would also have to be
made to the English version of the provision. It is certainly not the Court’s
role to modify the wording of a provision.
(iii) Services rendered after the approval of the Pechiney transaction
[161] In the alternative, the Respondent argues that the fees paid by the
Appellant for the services provided by Morgan Stanley and Lazard Frères after the board’s approval of
the Pechiney transaction on July 2, 2003, are not deductible under
paragraph 20(1)(bb) of the Act. The Respondent contends that after
that time the fees payable for advisory services were not incurred for “advice as to the advisability” of buying the Pechiney shares.
[162] I agree that the evidence put forward by the Appellant must be
scrutinized to determine whether the expenses were actually incurred for advice
as to the advisability of buying the Pechiney shares. As shown in Morgan
Stanley’s letter dated June 18, 2004,
30% of Morgan Stanley’s work is associated with general advisory services, 25%
relates to the analysis of the transaction and 10% relates to the preparation
and rendering of the fairness opinion. This work meets the criterion of
providing advice as to the advisability of purchasing or selling a specific
share. The other 35% of the work does not fit this criterion because it relates
to work performed to facilitate the execution of the transaction.
[163] The same analysis applies to Lazard Frères in connection with the Pechiney transaction. As shown in Lazard Frères’s letter dated June 22, 2004, 35% of the fees charged related
to professional advice “as to
whether, and on what terms, to purchase the shares of Pechiney, including
valuation work, and modelling of price and potential synergies to be derived
from the acquisition”. However, the other 65% of the
fees did not relate to advice as to the advisability of purchasing specific
shares.
[164] In light of all of the foregoing, if I am wrong on the first issue
and the investment advisory fees pertaining to the Pechiney transaction that I
have allowed as deductions under subsection 9(1) of the Act are capital
expenditures, the Appellant could deduct the same amounts, and no more, under
paragraph 20(1)(bb) of the Act.
(b) Novelis
[165] With respect to the Novelis transaction and, specifically, the fees
paid to Lazard Frères in
connection therewith, the Respondent contends that the first and second
conditions have not been satisfied because the Appellant paid a commission for
advice related to the disposition of its flat rolled products division rather
than the advisability of purchasing or selling specific shares of the
Appellant.
[166] I will begin my analysis with the Respondent’s second contention,
namely, that the fees paid to Lazard Frères were not paid for advice as to the advisability of purchasing or
selling a specific share of the Appellant nor for the management or
administration of specific shares of the Appellant. As noted, the Respondent’s
view is that the fees were paid for the disposition of Alcan’s flat rolled
products division by way of the Spin‑off transaction.
[167] With respect, I do not agree with the Respondent’s argument since
the engagement letter signed by the Appellant and Lazard
Frères covers more than the disposition of the flat
rolled products division. The introduction of this letter states:
Pursuant to our recent discussions, we are
pleased to enter into this agreement under which Lazard
Frères (Lazard) will assist Alcan Inc. (Alcan) as its financial advisor in
connection with (i) the possible acquisition by Alcan of Corus Aluminium,
in whole or in parts (a Corus Transaction) and (ii) maximizing Alcan
shareholders value through the planned divestment of its commodity Aluminum
rolling activities (Rollco), which transaction may take the form of a
demerger or spinoff of Rollco or, alternatively, a sale of assets or equity
securities or other interests in Rollco or other similar transaction (a
Rollco Transaction and, together with a Corus Transaction, the Transactions and,
individually, a Transaction).
[Emphasis added.]
[168] Even if the Appellant ultimately chose to undertake the Spin‑off
transaction, Lazard Frères’s
fees covered work performed with respect to the alternative sale transaction as
well. To support this argument, the Appellant submitted letters which had been sent to
potential buyers by Lazard Frères. Thus, I do not agree with the Respondent’s position that Lazard Frères was not providing advice as to
the advisability of selling a specific share or security of the Appellant.
[169] Furthermore, the Respondent makes a critical mistake in seeking to
define the Spin‑off transaction solely by reference to its substance. The
evidence, particularly the advance ruling delivered by the Income Tax Rulings Directorate
of the CRA,
at paragraphs 41 to 44, is that the Appellant in fact sold the shares of Archer
to Novelis in consideration of the receipt of preferred shares (the “Rollover Preferred Shares”). The Appellant filed a joint election with Novelis under
subsection 85(1) in order for section 85 to apply to the transfer of
the Archer shares to Novelis. The elected amount, which became the Appellant’s
proceeds of disposition, appears to have been equal to the Appellant’s adjusted
cost base of the Archer shares.
[170] In reassessing the Appellant in respect of the Novelis transaction,
the Minister treated the Lazard Frères fees as an amount deductible from the proceeds of disposition on
the basis that they were not current expenses or “commissions”
with the meaning of the Act. The Minister did not assess on the basis of the substance
of the series of transactions implemented to give effect to the Spin‑off.
The Minister determined that the Appellant was entitled to a deduction of the Lazard Frères fees from the proceeds of
disposition realized in connection with the sale of Archer to Novelis. Therefore,
I am satisfied that the Appellant received advice with respect to the advisibility
of selling the Archer shares to either private equity sponsors or strategic
investors or, as ultimately decided, to Novelis for preferred shares of that
corporation that were subsequently redeemed.
[171] I now turn to the issue of whether the amount paid to Lazard Frères is a commission. The
engagement letter signed by the Appellant and Lazard
Frères provides a different basis on which the fee is
defined in respect of the Novelis transaction. The relevant clause reads as
follows:
5. Fees
and expenses
In compensation for the Services, Alcan will
pay to Lazard the following
fees:
(a) A fee of USD 2,000,000 payable on the earlier of (i) closing of
a Rollco Transaction or (ii) June 30, 2005 (the Advisory fee),
creditable against any fee payable under (b) below; and
(b) A fee payable upon
closing of a Rollco Transaction (the Rollco Success Fee) as set forth in
the table below calculated by reference to the difference, if positive, between
(i) the Aggregate Value of the Rollco Transaction (as defined below) and (ii)
the Base Enterprise Value of Rollco (as defined below):
|
Aggregate Value of the Rollco Transaction (AVRT)
|
Rollco Success Fee
|
|
BEV < AVRT< BEV + USD 200M
|
1.50% (AVRT – BEV)
|
|
BEV + USD200M < AVRT < BEV + USD 300M
|
1.75% (AVRT – BEV)
|
|
BEV + USD300M < AVRT < BEV + USD 400M
|
2.00% (AVRT – BEV)
|
|
BEV + USD400M < AVRT < BEV + USD 500M
|
2.25% (AVRT – BEV)
|
|
BEV + USD500M < AVRT
|
USD 10M + 3% (AVRT – (BEV + USD 500M))
|
and
(c) A Fee of USD 500,000 payable on announcement of a Corus
Transaction (i.e., approval by the Corus Supervisory Board of a Corus
Transaction), creditable against any fee payable under (d) below; and
(d) A fee of USD 3,000,000 payable upon closing of a Corus
Transaction (the Corus Success Fee).
In all cases, the
sum of the Corus Success Fee and the Rollco Succes Fee shall not exceed USD
15,000,000.
[172] The Respondent contends that the “Rollco Success Fee” was an increasing
percentage of the difference between the AVRT and the BEV. This argument is based
on Mr. Maris’ testimony. He testified that the Aggregate Value of the
Rollco Transaction was the value of the transaction and that Lazard Frères would
aim for a higher value because it would influence the fee that it would receive
under the engagement letter. Therefore, the Respondent argues that the Rollco
Success Fee paid to Lazard Frères should be considered a commission.
[173] The fees paid to Lazard Frères were not determined by reference to the amount received by the
Appellant in connection with the sale of Archer as described above, namely, the
value of the Rollover Preferred Shares. In short, the fees payable to Lazard Frères had nothing to do with the
consideration received by the Appellant. Furthermore, Lazard
Frères did not act as agents of the Appellant in
providing advice with respect to the Spin‑off and the alternative sale
transaction. Therefore, the amount paid to Lazard
Frères in connection with the Novelis transaction was
not a commission.
[174] In accordance with my analysis in the context of the Pechiney
transaction, I find that the services provided by Lazard
Frères prior to the board’s approval of the Spin‑off
pertain to advice as to the advisability of selling specific shares of the
Appellant. Therefore, if I am wrong on the first issue and the amount paid to Lazard Frères in connection with the Novelis
transaction that I have allowed as a deduction under subsection 9(1) of
the Act is a capital expenditure, the Appellant could deduct the same amount, and
no more, under paragraph 20(1)(bb) of the Act.
[175] With respect to the Appellant’s claim for the fee paid to Morgan
Stanley in connection with the Novelis transaction, I maintain my view that
there is insufficient evidence to determine whether this expense was incurred
in relation to advice as to the advisability of selling a specific share of the
Appellant. Therefore, the Appellant’s claim for the amount of $296,863 paid to
Morgan Stanley does not succeed under paragraph 20(1)(bb).
(2) Are the fees claimed by the Appellant for representations to
government authorities deductible under paragraph 20(1)(cc) of the
Act?
[176] The Appellant claims a total amount of $19,972,079 under paragraph 20(1)(cc)
of the Act on the basis that this amount was incurred in making representations
relating to the Appellant’s business to government authorities. Paragraph 20(1)(cc)
of the Act reads as follows:
|
20.(1) Notwithstanding paragraphs 18(1)(a),
18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a
taxation year from a business or property, there may be deducted such of the
following amounts as are wholly applicable to that source or such part of the
following amounts as may reasonably be regarded as applicable thereto
|
20.(1) Malgré les alinéas 18(1)a),
b) et h), sont déductibles dans le calcul du revenu tiré par un
contribuable d’une entreprise ou d’un bien pour une année d’imposition celles
des sommes suivantes qui se rapportent entièrement à cette source de revenus
ou la partie des sommes suivantes qu’il est raisonnable de considérer comme
s’y rapportant :
|
|
Expenses of representation
|
Frais de démarches
|
|
(cc) an amount paid by the taxpayer in the
year as or on account of expenses incurred by the taxpayer in making any
representation relating to a business carried on by the taxpayer,
|
cc)
une somme payée par le contribuable au cours de l’année au titre des frais
qu’il a engagés pour effectuer les démarches concernant une entreprise
exploitée par lui :
|
|
(i) to the government of a country, province or
state or to a municipal or public body performing a function of government in
Canada, or
|
(i) auprès du gouvernement d’un pays, d’une province
ou d’un État ou auprès d’un organisme municipal ou public remplissant des
fonctions gouvernementales au Canada,
|
|
(ii) to an agency of a government or of a
municipal or public body referred to in subparagraph 20(1)(cc)(i) that
had authority to make rules, regulations or by-laws relating to the business
carried on by the taxpayer,
|
(ii) auprès d’une agence d’un
gouvernement ou d’un organisme municipal ou public, visés au sous-alinéa (i),
qui était autorisé à édicter des règles ou des règlements concernant
l’entreprise exploitée par le contribuable,
|
|
including any representation for the
purpose of obtaining a licence, permit, franchise or trade-mark relating to
the business carried on by the taxpayer;
|
y compris les démarches faites en vue
d’obtenir une licence, un permis, une concession ou une marque de commerce
pour cette entreprise;
|
[Emphasis added.]
[177] The Respondent contends that the fees claimed by the Appellant are
not deductible under that provision because the representations did not concern
matters relating to the Appellant’s business. In the Respondent’s view, the
representations concerned matters relating to the businesses of the Appellant’s
subsidiaries and the acquisition of Pechiney.
They did not concern matters that had an impact on the Appellant’s business.
[178] With respect, I disagree with the Respondent’s analysis. The fact
that the representations were necessitated by the Pechiney acquisition does not
preclude them from being related to the Appellant’s business. In my view, the
Pechiney transaction directly enhanced the Appellant’s business since the
Pechiney shares were used by the Appellant in the course of carrying on its
business. The evidence shows that, after the Appellant acquired new entities
such as Pechiney, it soon earned income from sales to those entities, from management
fees, from other service fees and from dividends. While dividends are generally
considered to be income from property, that characterization is not inconsistent
with a finding that the Appellant used the Pechiney shares in the course of
carrying on a business. In fact, the Act explicitly recognizes that shares may
be used in a business the purpose of which is to earn dividend income. The
definition of a “specified
investment business” found in subsection 125(7)
of the Act is based on that concept. The relevant part of that definition reads
as follows:
125(7) . . .
specified investment business, carried on by a corporation . . .
means a business . . . the principal purpose of which
is to derive income (including interest, dividends, rents and
royalties) from property . . .
[Emphasis added.]
[179] Prior to the enactment of that definition, income from property
earned through a modicum of activity was considered by the case law to be
income from an active business for the purpose of the small business deduction.
For example, in Canadian Marconi v. Canada, the Supreme Court of Canada determined
that the taxpayer was carrying on a business when it used the excess cash from
its electronics business to buy investment assets. Outside the realm of a “specified investment business”, the factors considered by the Supreme Court in Marconi
remain relevant.
[180] While shares can be used in carrying on a business, it does not
follow that those shares are any less capital property than are plant,
equipment or rental property used in a business to earn income. In summary,
fees incurred for services that are directly linked to a capital transaction
are capital expenses. Similarly, the shares are capital property. This does not
preclude the Pechiney shares having been used by the Appellant in the course of
carrying on a business.
[181] I also disagree with the Respondent’s contention that the
representations to government authorities related to the businesses of the
Appellant’s subsidiaries, and not to the Appellant’s business. The Appellant’s
business included income‑earning activities conducted through a global
structure of subsidiaries and related entities. The evidence shows that the
Appellant sold alumina and other partially manufactured products to
distribution and manufacturing subsidiaries throughout the world. It also sold
its products to independent distributors and manufacturers. I infer from the
evidence that the regulators could easily have affected the transactions
carried out by the Appellant in the foreign jurisdictions. This type of risk is
very hard to quantify because it affects future revenue and can give rise to
significant legal costs. I surmise that the Appellant’s directors would have
been unwilling to authorize the Pechiney transaction without the regulatory
requirements being met. The evidence also shows that they approved the Novelis
transaction only after it was structured to give effect, inter alia, to
the competition undertakings given by the Appellant in the context of the
Pechiney transaction. The Appellant could not have afforded to do otherwise.
[182] I will now examine the evidence relating to the breakdown of the
fees of the service providers to determine whether the services actually pertain
to representations made to government authorities.
[183] The Appellant claims a total amount of CAD $9,367,811 with respect
to services rendered by Sullivan Cromwell. Mr. Miller was the lead partner
on the Appellant’s account.
In his letter dated June 23, 2004,
Mr. Miller indicated that 75% of Sullivan Cromwell’s services, for which
the Appellant was invoiced a total of US $9,648,833 converted to CAD
$12,490,415, pertained to government representation work conducted on behalf of
the Appellant, as follows:
•
representation with respect to U.S. securities
regulation (20%);
•
representation with respect to securities and
takeover authorities in France (35%);
•
representation with respect to U.S. anti‑trust
matters (20%).
[184] Mr. Miller’s testimony was not contradicted by the Respondent. As
noted in my credibility observations, I found him to be a reliable and credible
witness. Therefore, on the basis of Mr. Miller’s allocation, the amount of CAD $9,367,811
is deductible under paragraph 20(1)(cc) of the Act.
[185] The Appellant also deducted the amount of $4,954,777 under
paragraph 20(1)(cc) of the Act for the services rendered by
Freshfields. In paragraph 178 of her written arguments, the Respondent
accepts that this amount was incurred for European competition law advice. The
Respondent’s only argument is that the expenses were incurred in respect of the
Pechiney takeover. On the evidence,
I am equally satisfied that the work pertained to competition law
representations made on behalf of the Appellant to European government
authorities. Therefore, the full amount is deductible under
paragraph 20(1)(cc) of the Act.
[186] The Appellant paid Darrois Villey, $3,088,260, which it deducted
under paragraph 20(1)(cc). On the evidence provided in Mr. McAusland’s
testimony, I am satisfied that this amount pertained to representations made to
government agencies in Europe and to the French Defence Department to gain the
required regulatory approvals in connection with the transaction and the
Appellant’s business. Therefore, the full amount is deductible under paragraph 20(1)(cc)
of the Act.
[187] The Appellant also deducted a total amount of $1,618,647 with respect to fees paid to
McMillan, the Federal Trade Commission, National Economic Research and other
law firms in various jurisdictions. On the basis of the testimonies of
Mr. McAusland and Mr. Miller and the documentary evidence, I am
satisfied that these amounts pertain to services relating to representations
made to government authorities by the Appellant in connection with regulatory
compliance and clearance. Therefore, the full amount is deductible under
paragraph 20(1)(cc) of the Act.
[188] The Appellant paid $755,227 to the Monitor Company Group, $177,349
to Frontier Economics and $10,008 to SCEHR Patrick Rey, for a total of $942,584
which was claimed as a deduction by the Appellant under paragraph 20(1)(cc)
of the Act. The Respondent argues that these amounts are not deductible since
they relate to the takeover of Pechiney. Mr. McAusland testified that
these fees “relate to supporting
the filings made to regulatory authorities”. Mr. Miller testified to
the same effect. Therefore, I am satisfied that these amounts pertain to
services relating to representations made by the Appellant in connection with
regulatory compliance. The full amount claimed is deductible under paragraph 20(1)(cc)
of the Act.
[189] In summary, in view of all of the above, the Appellant is entitled
to deduct amounts of $7,025,858 and $10,604,268 under paragraph 20(1)(cc)
of the Act.
(3) Are any of the Disputed Expenses deductible under
paragraph 20(1)(e) of the Act?
[190] In paragraphs 490 to 503 of its written arguments, the
Appellant contends that, in the alternative, a portion of the Disputed Expenses
incurred in relation to the Pechiney transaction is deductible under paragraph
20(1)(e) of the Act because the Appellant also issued shares of its
capital stock to the Pechiney shareholders. The Appellant seeks to deduct the printing
costs for the offering documents directed to the Pechiney shareholders, 10% of
the fees paid to Morgan Stanley, 5% of the fees paid to Lazard Frères and 5% of the fees paid to
Sullivan Cromwell.
[191] The Respondent takes the position that this argument was not raised
in the Notice of Objection or in the Notice of Appeal and, as a result, the
Appellant is barred under subsection 169(2.1) of the Act (the “Large Corporation Rule”) from raising this argument.
In the Notice of Objection, the Appellant listed paragraph 20(1)(e)
as one of the provisions relied upon, but made no further reference to that
paragraph in its reasons supporting its position. The pleadings reveal that the
only expenses specifically claimed by the Appellant under paragraph 20(1)(e)
were fees in the total amount of $2,104,454, consisting of $1,873,562 paid to
Sullivan Cromwell and $140,892 paid to RBC, which the Minister had allowed. Similarly, in its Notice of
Appeal, the Appellant listed paragraph 20(1)(e) as one of the
provisions relied upon, but made no further reference to that paragraph in its
reasons supporting its position.
[192] Subsection 169(2.1) of the Act provides:
169(2.1) Notwithstanding subsections 169(1)
and 169(2), where a corporation that was a large corporation in a taxation year
(within the meaning assigned by subsection 225.1(8)) served a notice of
objection to an assessment under this Part for the year, the corporation may
appeal to the Tax Court of Canada to have the assessment vacated or varied only
with respect to
(a) an issue in respect of which the corporation has
complied with subsection 165(1.11) in the notice, or
(b) an issue described in subsection 165(1.14) where the
corporation did not, because of subsection 165(7), serve a notice of objection
to the assessment that gave rise to the issue
and, in the case of an issue described in
paragraph 169(2.1)(a), the corporation may so appeal only with respect
to the relief sought in respect of the issue as specified by the corporation in
the notice.
It is common ground that the Appellant is a
large corporation. Therefore, in its Notice of Objection, the Appellant was
required to comply with subsection 165(1.11) of the Act with respect to
each issue on which it wished to appeal to this Court. Subsection 165(1.11)
of the Act provides:
165(1.11) Where a corporation that was a
large corporation in a taxation year (within the meaning assigned by subsection
225.1(8)) objects to an assessment under this Part for the year, the notice of
objection shall
(a) reasonably describe each issue to be decided;
(b) specify in respect of each issue, the relief sought,
expressed as the amount of a change in a balance (within the meaning assigned
by subsection 152(4.4)) or a balance of undeducted outlays, expenses or other
amounts of the corporation; and
(c) provide
facts and reasons relied on by the corporation in respect of each issue.
[193] The Appellant contends that it has complied with subsection 169(2.1)
of the Act because it put forward the issue of “[w]hether the Deducted Expenses are deductible in computing Alcan’s
income for the Period” in its Notice of
Objection and relied upon various paragraphs of subsection 20(1) of the
Act in the reasons supporting its position.
[194] As the Respondent correctly notes, the purpose of the Large
Corporation Rule is to allow the Crown to know at the objection stage the
nature of the tax litigation and the quantum at issue. In The Queen v. Potash
Corp. of Saskatchewan Inc.,
the Federal Court of Appeal provided guidance on the requirement under
paragraph 165(1.11)(a) to reasonably describe each issue to be
decided:
22 . . . While a
large corporation is not required to describe the issue “exactly”, as the Judge
states, it is required to describe the issue “reasonably”. What is
reasonable will differ in each case and will depend on what degree of
specificity is required to allow the [Minister] to know each issue to be
decided.
. . .
24 Contrary to the Judge’s
suggestion, it would not have been reasonable to simply say that the
computation of “Resource Allowance” or “resource profits” was in issue, without
specifying the particular elements of that computation that required a
determination by the Minister or the Tax Court, as the case may be. That
level of generality would render the Large Corporation Rules meaningless,
defeating the purpose of their enactment.
[Emphasis added.]
[195] In Bakorp Management Ltd. v. The Queen, the Federal Court of Appeal
reiterated the need for some level of specificity in framing each issue,
stating: “[a] general statement
or question related to an amount that is to be determined for the purposes of
the Act that would not allow the Minister to determine what is actually in
dispute will not be a sufficient description of the issue”.
[196] In Devon Canada Corp. v. The Queen, the Federal Court of
Appeal had the opportunity to consider whether the taxpayer met the
requirements under subsection 165(1.11) in the context of a claim for a
deduction under subsection 9(1) or paragraphs 20(1)(b) or (e)
of the Act. The Federal Court of Appeal’s comments offer insight into what
would constitute a reasonable description of the issues that would sufficiently
indicate the nature of the tax litigation in that context:
21 . . . In this case the
nature of the tax litigation related to a particular deduction that was claimed
by the predecessors of Devon. The Act is a statutory scheme. In order to
claim a deduction in computing income or taxable income there must be a
provision of the Act which would allow for such deduction. Therefore, it would
seem to me that the nature of the litigation in this context would relate to
the particular deduction that the taxpayer is seeking to claim. . . .
. . .
25 Devon could have included
alternative arguments in its notice of objection that would be inconsistent
with its original position . . . However, having failed to do
so, in my view, the issue raised by Devon in its original notice of objection
that the Surrender Payments were deductible under section 9 of the Act (and
therefore not on account of capital) cannot be considered to include the
alternative and inconsistent arguments related to paragraphs 20(1)(b)
and 20(1)(e) of the Act. When Devon was seeking, on behalf of AXL and
Numac, to claim a deduction under either paragraph 20(1)(b) or 20(1)(e)
of the Act it was raising new issues. Each of these paragraphs
applies to amounts that would be on account of capital and contain [sic]
conditions that must be satisfied in order for these provisions to be
applicable. Therefore, the nature of the claims is different because the new
deductions claimed are based on a different premise (payments on account of
capital versus a current expense) and on different statutory provisions
each with its own set of conditions.
[Emphasis added.]
Thus, it appears that, in the context of the
deductibility of expenses, each statutory provision on which the taxpayer
grounds an entitlement to the deduction sought may entail its own distinct issue
so as to change the nature of the tax litigation. In this case, the Appellant
seeks to claim a deduction under paragraph 20(1)(e) and raises a
new issue by doing so.
[197] In this case, the Appellant’s statement of the issue as “[w]hether the Deducted Expenses are deductible in computing
Alcan’s income for the Period” is simply too broad to constitute a
description sufficient to inform the Minister of what is actually in dispute.
As in Bakorp, “[t]his description of the issue
does not indicate anything about the question that must be answered to resolve
this dispute.”
There is no indication of the particular elements of the computation of the
deduction.
[198] The Appellant suggests that, since it has raised the alternative
argument that certain paragraphs of subsection 20(1) could apply to allow
the deductibility of the Disputed Expenses, the nature of the issue has not
changed with the introduction of paragraph 20(1)(e) as an
additional reason. At paragraph 218 of its Reply to the Respondent’s Written
Arguments, it states: “Alcan
has always contended that the expenses are deductible; it is only providing
paragraph 20(1)(e) of the Act as a reason for this issue.” The Appellant continues at paragraph 219 of its Reply by
stating: “Alcan has always
asserted that the provisions of subsection 20(1) of the Act may be
applicable and it is not changing the nature of its claims or adding a new
issue.” The implication is that, by arguing the
applicability of subsection 20(1) of the Act, the Appellant could
potentially raise in argument any one of the paragraphs thereunder. I
respectfully disagree. The issue as framed by the Appellant casts too wide a
net over the range of entitlements that could potentially be raised. If the
Appellant’s position is correct, the Minister would have to guess at which of
the numerous paragraphs in subsection 20(1) could hypothetically apply to
the Appellant’s situation. I do not believe that this result accords with the
purpose underlying the Large Corporation Rule. Citing paragraph 20(1)(e)
in the Notice of Objection, without more, does not reasonably describe the
issue of entitlement to deduct the Disputed Expenses under that paragraph.
[199] Even if the issue had been reasonably described by the Appellant,
the Appellant did not satisfy the condition set out in paragraph 165(1.11)(c),
which requires a large corporation to provide the facts and reasons relied upon
in respect of each issue. Bakorp indicates that simply listing a
provision as a provision that is being relied upon does not identify the legal
argument being put forward under that provision. As noted, the Appellant
listed paragraph 20(1)(e) as one of the provisions relied upon, but
did not provide any further reasons with regard thereto. On the other hand, the
Appellant specifically referred to paragraphs 20(1)(g), (bb),
and (cc) of the Act in its reasons supporting its position and
elaborated upon which of the Disputed Expenses were being claimed under those
provisions and why. Therefore, the Appellant has failed to comply with the
requirements of subsection 165(1.11) of the Act.
[200] Leaving aside the Large Corporation Rule, procedural fairness alone
dictates that the Appellant should not be allowed to raise this issue at this
late stage.
The Appellant never advised the Respondent that it would raise this issue. Needless
to say, on discovery, the Respondent did not probe the Appellant’s case with
regard to paragraph 20(1)(e). Furthermore, the Appellant did not
raise this argument during the hearing. I emphasize that neither of the parties
made an opening statement. Therefore, the Respondent found out about this argument
for the first time when the Appellant raised it in its written arguments filed
many weeks after the hearing. Evidence was closed by then. It would be manifestly
unfair if I allowed the Appellant to raise this argument this late in the
process.
[201] If I am wrong on the above points, I also find that the Appellant
failed to satisfy its Evidentiary Burden with respect to the amounts that would
be deductible under paragraph 20(1)(e) of the Act. The Appellant’s
offer in the context of the Pechiney transaction was cash and shares. The cash
component exceeded the share component. The Appellant has offered no basis for its
allocation of the printing costs between the documents and information required
to be disclosed for the non‑share consideration and the documents and
information pertaining to the share consideration. Similarly, the Appellant has
offered no evidence to justify an allocation of the fees of the service providers
(Morgan Stanley, Lazard Frères
and Sullivan Cromwell) to the services required with respect to the share
consideration and those required with respect to the non‑share consideration.
There is no prima facie evidence to support the allocation now suggested
for the first time by the Appellant in its written submissions. Therefore, no
deduction is allowed pursuant to paragraph 20(1)(e) of the Act.
(4) Are any of the Disputed Expenses eligible capital expenditures
deductible under paragraph 20(1)(b) of the Act?
[202] The Appellant’s final argument is that, to the extent that the
Disputed Expenses are considered capital expenditures that are not deductible
under the specific provisions discussed earlier in
these reasons, they are “eligible capital expenditures”
(“ECE”) giving rise to a
deduction under paragraph 20(1)(b) of the Act.
[203] The Appellant relies on Judge Hershfield’s analysis in Potash
Corporation of Saskatchewan Inc. v. The Queen to justify its claim for ECE
treatment. The Appellant contends that this decision stands for the principle
that, when fees are incurred to enhance the economic and financial viability of
a business, they may relate to the business of the taxpayer and thus not be part
of the capital cost of the asset.
[204] First, with respect to the Pechiney transaction, the underlying
facts are very different than those considered in Potash. In the instant
case, as the Respondent suggested in her written arguments, the Appellant actively spent
the capital portion of the Disputed Expenses to implement the transaction
whereby it acquired the Pechiney shares. Unlike the situation in Potash,
the funds were not spent to enhance the international tax position of the
Appellant. They were Execution Costs as defined earlier in these reasons.
[205] With respect to the Novelis transaction, the Appellant exaggerates
when it claims that the Spin‑off was accomplished to satisfy its
competition undertakings. The Spin‑off embraced a much larger enterprise
than the plants in the USA and Europe that were seen by the competition
authorities as giving rise to a substantial lessening of competition. I do not
believe that the Appellant undertook the Spin‑off simply to comply with its
competition undertakings, as it suggested in its written arguments. The
evidence, considered as a whole, shows that the Appellant wished to enhance
shareholder value through the Spin‑off, which resulted in its shareholders
holding shares in two separate public corporations that had a value greater
than the value of the Appellant’s shares before the Spin‑off. In my
opinion, the principles elucidated in Potash should not be expanded
beyond the facts and circumstances of that case.
[206] The definition of “eligible
capital expenditure” specifically excludes
expenses described in paragraphs (a) to (f) of the definition,
found in subsection 14(5) of the Act. Subparagraph (f)(iii) of
the definition specifically excludes “any amount that is the cost of, or any part of the cost of” a share. The Disputed Expenses that I have found to be capital
expenditures that are not deductible under specific provisions of subsection 20(1)
are part of the Appellant’s cost of the Pechiney shares in the same way that the
consideration paid to the Pechiney shareholders forms part of the Appellant’s
cost of the shares.
[207] Slightly different reasoning applies to the Novelis Disputed
Expenses. In short, the Appellant is not in the business of disposing of
subsidiaries in favour of its shareholders pursuant to a corporate
reorganization implemented on capital account. Those expenses are not amounts
incurred in respect of a business of the taxpayer. Therefore, paragraph 20(1)(b)
of the Act is not applicable in the Appellant’s case with respect to either
transaction.
VI. Conclusion
[208] Considering all of the foregoing, with respect to the Pechiney
transaction, the assessment issued by the Minister for the Appellant’s 2003
taxation shall be returned to the Minister for reconsideration and reassessment
to allow the deductions of the following amounts at the proper exchange rate,
if applicable:
DISPUTED EXPENSES (PECHINEY)
|
Service Provider
|
Amount Deductible
|
Corresponding Provision
|
|
Investment Bankers
|
|
|
|
Morgan Stanley
|
$16,933,276
|
9(1) or 20(1)(bb)
|
|
Lazard Frères
|
$2,852,582
|
9(1) or 20(1)(bb)
|
|
Advertising Fees
|
|
|
|
Publicis and Valmonde
|
$0
|
n/a
|
|
Representations to Government
Agencies
|
|
|
|
Freshfields Bruckhaus
|
$4,954,777
|
20(1)(cc)
|
|
Sullivan Cromwell
|
$9,367,811
|
20(1)(cc)
|
|
McMillan
|
$552,186
|
20(1)(cc)
|
|
Various other law firms
|
$432,810
|
20(1)(cc)
|
|
National Economic Res. Ass.
|
$241,539
|
20(1)(cc)
|
|
Monitor Company Group
|
$755,227
|
20(1)(cc)
|
|
Frontier Economics
|
$177,349
|
20(1)(cc)
|
|
SCEHR Patrick Rey
|
$10,008
|
20(1)(cc)
|
|
Federal Trade Commission
|
$392,112
|
20(1)(cc)
|
|
Darrois Villey
|
$3,088,260
|
20(1)(cc)
|
|
Printing and
Issuing Documents
|
|
|
|
PwC
|
$0
|
n/a
|
|
Bowne
|
$0
|
n/a
|
|
SEC
|
$0
|
n/a
|
|
Various other regulators
|
$0
|
n/a
|
|
Other Miscellaneous Expenses
|
|
|
|
Sullivan Cromwell
|
$0
|
n/a
|
|
Davis Polk and ADP
|
$0
|
n/a
|
|
Ogilvy Renault
|
$0
|
n/a
|
|
Various small suppliers - communication
|
$0
|
n/a
|
|
Ernst & Young
|
$0
|
n/a
|
|
Ritz-Carlton Montreal
|
$0
|
n/a
|
|
Various small suppliers - others
|
$0
|
n/a
|
[209]
The balance of the Disputed Expenses that
pertain to the Pechiney transaction is to be added to the ACB of the Pechiney
shares.
[210]
With respect to the assessment issued by the
Minister of National Revenue in respect of the Appellant’s 2007 taxation year,
the Court’s judgment is a pro tanto judgment because other issues
remain to be determined after future hearings. To the extent that, following
the hearing of the other matters, the Court determines that the assessment
issued for the Appellant’s 2007 taxation year must be returned for
reconsideration and reassessment, the Appellant shall be allowed the deductions
set out in the table below in the calculation of the non‑capital loss
arising in respect of its 2005 taxation year that was carried forward and
deducted by the Appellant in the calculation of its taxable income for its 2007
taxation year, the whole in accordance with these reasons for judgment.
DISPUTED EXPENSES (NOVELIS)
|
Service Provider
|
Amount Deductible
|
Corresponding Provision
|
|
Investment Bankers
|
|
|
|
Morgan Stanley
|
$0
|
n/a
|
|
Lazard Frères
|
$14,218,477
|
9(1) or 20(1)(bb)
|
|
Printing and Issuing Documents
|
|
|
|
PwC
|
$0
|
n/a
|
|
Bowne
|
$0
|
n/a
|
|
Ernst & Young
|
$0
|
n/a
|
[211]
The balance of the expenses, not shown above, are
deductible from the proceeds of disposition of the Archer shares pursuant to
paragraph 40(1)(a) of the Act.
Signed at Ottawa, Canada, this 9th day of December 2016.
“Robert J. Hogan”
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