Citation: 2008TCC44
Date: 20080118
Docket: 2005-4286(IT)G
BETWEEN:
FORD CREDIT CANADA LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR TAXATION
Alan Ritchie, T.O., T.C.C.
[1] This matter came on
for hearing by way of a telephone conference call on Wednesday, November 21,
2007. It follows a Judgment of the Honourable Chief Justice Bowman of this
Court issued on August 4, 2006, allowing the appeal, with costs to the
Appellant.
[2] The Appellant was
represented by Mr. David E. Spiro, and the Respondent by Mr. Harry Erlichman.
[3] An Amended Bill of Costs
in the amount of $66,687.25 was submitted by the Appellant, which was reduced at
the taxation by mutual agreement to the amount of $63,225.09. The only item in
dispute is an amount of $50,347.04 claimed as a disbursement for the services
of an expert witness who prepared a report and appeared at trial. An amount of
$3,462.16 for GST on the fees and disbursements for the expert witness was
struck off, which accounts for the reduction in the total amount claimed, as noted
above.
[4] The expert was
retained to speak to Generally Accepted Accounting Principles (GAAP) in general
and CICA Handbook section 3860 in particular. The issue at trial was whether or
not the Appellant should include the amount of its Class C retractable
preferred shares in its capital for the purposes of the Large Corporations Tax
(LCT). The Respondent took the position that it should be included in the
Appellant's capital stock, regardless of the GAAP recommendations for the
purposes of preparing financial statements.
[5] There was no dispute
that the hourly rates charged by Deloitte & Touche LLP for the expert and
his associate were reasonable. A rate of $600 per hour was charged for the
services of Mr. Robert Lefrançois, partner, and $400 per hour for Mr. Eric Graham,
Senior Manager. Mr. Graham assisted in the writing of the expert report. The
Appellant also provided estimates from two other firms for hourly rates for
similar services which in both cases were higher than the rates charged by
Deloitte & Touche.
[6] There was also no
dispute as to the qualifications of Mr. Lefrançois as an expert witness in this
matter.
APPELLANT
[7] Counsel for the
Appellant outlined the work performed by the expert and his associate in the
writing of the report and the preparation for, and attendance at, trial. His
role was not only to speak to the correct accounting treatment of retractable
preferred shares on the balance sheet under GAAP, but that the evolution of the
accounting profession in treating such shares as debt was well founded and
should be applied with respect to the calculation of the LCT. Although the
proper treatment of the shares on the balance sheet as debt under GAAP was
never questioned by the Respondent, the Appellant set out to demonstrate that
for accounting purposes substance prevails over form and that the same
principle should apply with respect to the LCT.
[8] Counsel for the
Appellant noted that the Chief Justice, at paragraph 11 and onwards in his
reasons, stated that the report and oral testimony of Mr. Lefrançois were
comprehensive, and that he was unequivocal in outlining that the treatment of
the shares in question on the balance sheet as debt rather than shareholders’
equity was in accordance with GAAP. He also noted that exchanges between the Court and the expert and further
references by the Chief Justice to his testimony and reasoning in the decision demonstrated
that it had had an impact on his ultimate decision in favour of the Appellant.
[9] Counsel for the Appellant stated that the
amounts claimed were not unreasonable, as Mr. Lefrançois – although an expert
in his field – did not appear regularly as a witness nor was he a professional
writer. The preparation time for the report and testimony, as well as the
assistance of Mr. Graham, was warranted given the importance of the question at
issue. He saw no principled basis upon which the Respondent had proven
otherwise.
[10] Counsel for the Appellant summarized his
position that there was nothing being claimed that was outside the bounds of what
was “reasonable and necessary” for the conduct of the appeal and that the
amount should be allowed in full.
RESPONDENT
[11] Counsel for the Respondent questioned
whether the contribution of the expert was both essential and reasonable.
[12] He noted that in the Agreed Statement of
Facts appended to the decision, it is clear that the Respondent agreed from the
outset that the treatment of the shares on the balance sheet was in accordance
with GAAP. Further, he noted that this treatment was mandatory under GAAP –
that there was no other option available. He characterized the testimony of the
expert and the content of the report as “interesting” in terms of providing
background on GAAP and the reasoning for treating retractable preferred shares
as debt, but did not see it as “essential” to the conduct of the appeal.
[13] As the accounting treatment of the shares
was not at issue, the Respondent's position is that the contribution of the
expert can therefore not be considered essential as required by the Tariff.
[14] Counsel for the Respondent also questioned
whether or not the amounts claimed for the services of the expert should be
considered reasonable. He submitted that a recognized expert such as Mr.
Lefrançois should have been able to prepare his report and prepare to give
testimony in a matter of a few hours – not the 28.5 and 8.5 hours claimed,
respectively. The Respondent's written submission details the amounts claimed
for research by both Mr. Graham and Mr. Lefrançois which he finds unreasonable,
and notes that the report included very little “value added” beyond citing GAAP
information, reproducing extracts from the Agreed Statement of Facts and the
CICA Handbook.
[15] Counsel for the
Respondent noted that there
was a lack of detail as to the actual work done as outlined by Mr. Lefrançois
in his summary of fees charged – that there were some 20 hours charged for
which there is no explanation or detail at all. His view was that this fell
well short of the responsibility to clearly demonstrate what the hours claimed
actually represented in order to determine whether or not it was a reasonable
claim. He suggested that 7 hours for Mr. Lefrançois and 6 hours for Mr. Graham
should be allowed at most.
DECISION
[16] The accounting treatment of the retractable
preferred shares on the Appellant's balance sheet under GAAP was never at
issue, as evidenced by the Agreed Statement of Facts appended to the decision. However,
it seems clear that the argument put forth in the Reply to the Notice of Appeal
and at trial by the Respondent was that, notwithstanding the accounting
treatment of the shares as debt under GAAP, that they form part of the
Appellant's capital for the purposes of Part I.3 of the Income Tax Act. The
basis upon which such shares are treated as debt under GAAP was the underlying justification
and argument put forth by the Appellant that they should similarly be treated
as debt in the case at bar.
[17] The contribution of the expert witness
served to support this premise. Had the Court not taken the general view that
Parliament defers to GAAP in computing stock for the purposes of Part I.3, the
argument would have been solely about the appropriate treatment of such shares,
notwithstanding GAAP. The value of the expert witness to the Appellant's case
would have been even greater as a result. I find it entirely reasonable for the
Appellant to have brought in an expert to explain, in terms of substance over
form, why the shares in question should not only be treated as debt on the
balance sheet under GAAP but that the same principle should extend in the
computation of stock for the purposes of the LCT.
[18] The Honourable Chief Justice had
considerable exchanges at trial with the expert, reproduced extracts from his
report in the Reasons for Judgment, and made numerous references to the expert's
views in his reasons as well.
[19] With respect to the amounts claimed for the
services of the expert and his assistant, the only issue is the number of hours
charged and related justification for the work done.
[20] As noted in a recent decision on costs in Canada
Trustco Mortgage Company v. H.M.Q., 2007TCC500, file number
2003-3554(GST)G, I am not an expert in the area of consultants or expert
witnesses and the rates they command nor the hours that would be reasonably
claimed for work done. I therefore exercise my discretion in determining the
amounts allowed; on one hand, the Appellant seeks the full amount charged while
the Respondent suggests 7 and 6 hours be allowed for the work done by Mr.
Lefrançois and Mr. Graham, respectively.
[21] Mr. Lefrançois claimed 6.5 hours for
“Pre-Engagement Letter Discussions”, 28.5 hours for report preparation, 8.5
hours for preparation for trial and 5 hours for time in Court. Mr. Graham
claimed 6.8 hours for “Pre-Engagement Letter Discussions” and 46.2 hours for
report preparation.
[22] I find the number of hours claimed by Mr.
Lefrançois to be reasonable. His contribution was to the substance of the
report, based on his expertise. Counsel for the Appellant noted that Mr.
Lefrançois is an accountant and not a “report writer” and therefore required
the assistance of Mr. Graham. Mr. Graham no doubt contributed more to the final
report than his word processing skills, however I find the 46.2 hours claimed
for his services to be very high.
[23] With respect to the expert witness fees, I
will allow 20 hours for the services of Mr. Graham, for a total of $6,600. I
will allow the other amounts claimed in full, minus the GST as noted at
paragraph 3, for a total of $39,408.56.
[24] The Bill of Costs is taxed, and I allow the
sum of $52,286.61.
Signed at Ottawa, Canada, this 18th day of January 2008.
"Alan Ritchie"
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