CIT Group Securities (Canada) Inc. v. The Queen

CIT Group Securities (Canada) Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-07-04
Neutral citation
2016 TCC 163
File numbers
2012-950(IT)G, 2013-1251(IT)G, 2013-1252(IT)G, 2013-1253(IT)G, 2013-1254(IT)G, 2013-2961(IT)G, 2013-2962(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Dockets: 2012-950(IT)G, 2013-1251(IT)G,
2013-1252(IT)G, 2013-1253(IT)G,
2013-1254(IT)G, 2013-2961(IT)G,
and 2013-2962(IT)G
BETWEEN:
CIT GROUP SECURITIES (CANADA) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on January 19, 20, 21 and 22, 2015 and
November 9, 10, 12, 13, 16, 17, 19 and 20, 2015, at Toronto, Ontario
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Edwin G. Kroft, Q.C.,
Paul K. Tamaki and Deborah J. Toaze
Counsel for the Respondent:
Elizabeth Chasson, Darren Prevost and Leonard Elias
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeals from the reassessments made under the Income Tax Act (“ITA”) for the 2003, 2004, 2005, 2006, 2007, 2008 and 2009 taxation years (“relevant period”) are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the income of CCG Trust Corporation throughout the relevant period was not subject to the application of paragraph 95(2)(l) of the ITA. The parties have 30 days from the date of this Judgment to make submissions as to the award of costs.
Signed at Ottawa, Canada, this 4th day of July 2016.
“J.R. Owen”
Owen J.
Citation: 2016 TCC 163
Date: 20160704
Dockets: 2012-950(IT)G, 2013-1251(IT)G,
2013-1252(IT)G, 2013-1253(IT)G,
2013-1254(IT)G, 2013-2961(IT)G,
and 2013-2962(IT)G
BETWEEN:
CIT GROUP SECURITIES (CANADA) INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Introduction [1] These reasons address the appeals by CIT Group Securities (Canada) Inc. (the “Appellant”) from reassessments (collectively, the “Reassessments”) of its 2003, 2004, 2005, 2006, 2007, 2008 and 2009 taxation years (collectively, the “Taxation Years”). The appeals were heard on common evidence.
[2] The Reassessments included in the income of the Appellant, as income from shares, amounts in respect of income earned by controlled foreign affiliates (“CFAs”) of the Appellant during 2003 through 2009 (the “relevant period”), on the basis that such income was “foreign accrual property income” (“FAPI”) as defined in subsection 95(1) of the Income Tax Act (the “ITA”).[1] The additional amount assessed for each of the Taxation Years is as follows:
Taxation Year
FAPI[2]
2003
$41,366,142
2004
$37,710,239
2005
$44,024,634
2006
$29,047,662
2007
$23,375,091
2008
$23,891,920
2009
$20,950,086
[3] The sole issue in these appeals is whether paragraph 95(2)(l) applies to include the income earned by CCG Trust Corporation (“CCG”) during the relevant period in its income from property. If paragraph 95(2)(l) does apply, the Reassessments must stand, subject only to an agreed-upon adjustment to reflect the correct relevant tax factor for each of the Taxation Years.[3] If paragraph 95(2)(l) does not apply, the Appellant must be reassessed for each of the Taxation Years to delete the amounts set out in the chart above together with any interest and penalties that resulted from the inclusion of such amounts in the income of the Appellant.
[4] At the commencement of the hearing, the Respondent conceded that throughout the relevant period the Appellant met the requirements of subparagraph 95(2)(l)(iv).[4] Accordingly, the only questions that need be addressed are whether the income of CCG earned during the relevant period is caught by the opening words of paragraph 95(2)(l) and, if it is, whether CCG meets the requirements in subparagraph 95(2)(l)(iii) for the exception from inclusion of that income in CCG’s income from property.
[5] Four witnesses testified for the Appellant. The first witness for the Appellant was Mr. James Shanahan, who is the chief regulatory counsel of CIT Group Inc. (“CITG”), a United States corporation and the ultimate parent of the Appellant. Mr. Shanahan has been employed by CITG since 1987 and is based at CITG’s office in Livingston, New Jersey. He has held his current position for approximately 10 years and reports to the general counsel of CITG.
[6] The other three witnesses[5] are former managing directors of CCG each of whom held that office during a portion of the relevant period. Following their employment by CCG, two of the three former managing directors continued to be employed in the CITG group of companies and the third sought employment elsewhere.
[7] I found all four of these witnesses to be straightforward and credible.
[8] The Appellant also presented two expert witnesses: Sir Trevor Carmichael, Q.C. and Mary Mahabir, Q.C. Sir Trevor Carmichael, Q.C. is a lawyer who was called to the Middle Temple in London and to the Barbados Bar in December 1977. Sir Trevor Carmichael’s practice includes the area of commercial law. Ms. Mary Mahabir, Q.C. is a lawyer who was called to the Barbados Bar in October 1981. Ms. Mahabir’s practice is in the areas of corporate and commercial law. Neither expert had acted for CCG or the Appellant at any time in the past.[6]
[9] The expert witnesses submitted expert reports and testified regarding the relevant corporate law and commercial law of Barbados and their application to CCG during the relevant period. In particular, the experts described their understanding of the Financial Intermediaries Regulatory Act, Chapter 324A of the Laws of Barbados (the “FIRA”), the Financial Institutions Act, Chapter 324A of the Laws of Barbados (the “FIA”),[7] the Companies Act, Chapter 308 of the Laws of Barbados (the “BCA”) and the Central Bank of Barbados Act, Chapter 323C of the Laws of Barbados (the “CBA”) and the application of those statutes to CCG during the relevant period.
II. Facts A. Overview of the Structure [10] The structure in place during the relevant period is reproduced in Appendix A of these reasons.
[11] The Appellant was the sole shareholder of eight international business corporations incorporated and resident in Barbados,[8] and the Appellant and CIT Financial Ltd. (“CITF”) were the only shareholders of a ninth international business corporation incorporated and resident in Barbados.[9] I will refer to the nine international business corporations collectively as the “IBCs”.
[12] The eight IBCs wholly owned by the Appellant each owned a single separate class of voting common shares in CCG.[10] Collectively, these shares represented 76,000 votes in CCG. The ninth IBC owned 1,000 Class A common shares in CCG carrying 1,000 votes per share - for a total of 1 million votes - and 1,650,000 Class P non-voting common shares. The total issued share capital of CCG throughout the relevant period was $1,659,000.[11]
[13] The shareholders of the Appellant were CITF and CCG Partners 1 Limited Partnership (“CCG LP”). CITF owned 20 special shares in the Appellant that entitled it to 100 million votes per share for a total of 2 billion votes.[12]
[14] CCG LP owned all of the issued Class A common shares in the Appellant, which represented approximately 38% of the voting shares in the Appellant.[13] Each limited partner in CCG LP owned a class of units in the partnership that tracked the performance of one of the IBCs owned by the Appellant. This means that if a particular partner’s interest tracked a particular IBC and the IBC declared and paid a dividend to the Appellant, the Appellant would declare and pay a dividend in the same amount to CCG LP and CCG LP would allocate and distribute the amount of the dividend to the partner.
[15] CITG owned all of the issued shares of CIT Bank (“CITB”), a corporation incorporated in the state of Utah, USA.[14]
[16] CITF was an indirect subsidiary of CITG.[15] CITF in turn held the majority of votes in the Appellant.
[17] The Appellant controlled each of the IBCs, and the ninth IBC, Adams, controlled CCG. Accordingly, the Appellant also controlled CCG.
[18] The parties agree that throughout the relevant period each of the IBCs and CCG was a “controlled foreign affiliate” of the Appellant as defined in subsection 95(1) of the ITA.[16]
B. CITG and CITB [19] CITG is a corporation incorporated and resident in the United States the shares of which are listed on the New York Stock Exchange.[17] Mr. Shanahan described his role in CITG as follows:
I have to oversee the attorneys who handle review of our securities filings, bank regulatory work, sanctions issued through OFAC, through OSFI, through Bank of England.
We work with the compliance department on anti-money laundering, advising them on anti-money laundering.
It is basically a variety of regulatory aspects other than tax. We have a separate tax department for that.[18]
[20] Mr. Shanahan described the business of CITG during the relevant period as follows:
We provided financing and leasing services to small- and medium-size businesses, the transportation industry, and for a portion of that period, we would also provide certain consumer loans, in terms of home equity, student loans, and I think some manufactured housing.[19]
[21] Mr. Shanahan described the principal purpose of the business of CITG over the same period as being to provide “financing and leasing to small businesses, middle market companies, and the transportation industry.”[20]
[22] The largest portion of CITG’s business was in the United States and the second largest was in Canada. CITG also conducted business in Europe, Latin America and Asia.[21] During the relevant period, the CITG group of companies had anywhere from 4,000 to 7,700 employees worldwide and assets in the range of US$45 billion to US$90 billion.[22]
[23] The business of CITG was conducted through business units that each targeted specific business segments. The business units were referred to as Business Segments.[23] A business unit was managed as a single entity even though it might actually comprise a large number of legal entities within the CITG group of companies. For example, one business unit (or Business Segment) was equipment financing, which was conducted through perhaps 15 separate legal entities.[24]
[24] CITG files a form 10-K with the United States Securities and Exchange Commission (the “SEC”) on an annual basis.[25] In addition, CITG files form 10-Q quarterly and form 8-K periodically, and also files proxy statements.[26]
[25] Mr. Shanahan stated that he “put together certain sections of the 10-K related to risk factors and the description of our regulatory environment”.[27] As well, Mr. Shanahan would review each such 10-K to “see if there is anything that looks out of character with my understanding of the business.”[28] When asked if CITG tried to be accurate in the 10-Ks, Mr. Shanahan stated that “. . . we endeavour to make sure that it [the 10-K] gets checked by multiple parties in order to ensure it is as accurate as we can.”[29] He also stated that the SEC reviewed the 10-Ks and provided a comment letter in which they could ask for clarification of certain issues or for justification of the accounting treatment of certain issues.[30]
[26] The Respondent objected to any reliance on the contents of the 10-Ks for determining matters of U.S. law on the basis that such matters were the purview of a suitably qualified expert.[31]
[27] I agree with the Respondent that the testimony of Mr. Shanahan and the descriptions in the 10-Ks of the U.S. regulatory environment cannot be used as a substitute for expert evidence on relevant U.S. law, nor can these sources be used as a substitute for expert evidence on the status of CITG or CITB under relevant U.S. law.[32]
[28] Mr. Shanahan testified to his understanding that the only bank subsidiary of CITG throughout the relevant period was CITB, which he stated was chartered by the Utah division of Financial Institutions.[33] The regulation section of each of the 10-Ks identifies CITB by the name “CIT Bank”.
[29] Mr. Shanahan described the business of CITB during the relevant period in the following exchange with counsel:
Q. What did CIT Bank do between 2003 and 2009?
A. It changed over time. It was initially formed to provide financing for some of our vendor programs, particularly for the Dell program. It expanded into doing programs -- that was generated originally by our vendor finance unit. It started expanding into doing other programs that it generated with various third-party companies where it was providing financing.
Over time, it also got started getting into home equity loans. I think around 2007, it started making corporate finance loans.
Q. Its customers were whom?
A. Initially its customers were consumers. By 2007, it started developing into small- and medium-size businesses, and somewhere in there they also made SBA loans, which would be small businesses.
Q. What about accepting deposits?
A. They funded themselves with a combination of equity from the parent, loans from the parent, and deposits they accepted. Initially it was through broker deposits. In other words, if someone went to Merrill Lynch and said, “Can you find me a bank that is going to give me a good interest rate on a certificate of deposit,” they would look around, and CIT Bank would be one of the ones they would look at. It was primarily CDs at the beginning.[34]
C. CCG (1) The Employees of CCG [30] The senior employee of CCG throughout the relevant period was its managing director. The primary role of the managing director was to oversee CCG’s portfolio and to seek out and vet opportunities for CCG consistent with CCG’s business objectives. In addition, the managing director was responsible for the preparation of an annual “President’s Report” (which was tendered at the annual general meeting), managing the staff of CCG, overseeing the preparation of financial statements, tax returns and reports to the Central Bank of Barbados, and liaising with the auditors of CCG.[35]
[31] During the relevant period, the managing directors of CCG were as follows:
Name of Managing Director
Tenure as Managing Director
John Walker
February 1997 to December 2006[36]
Bruce Ells
November 2006 to March 2009[37]
Steven Blazevic
January 2009 to July 2014[38]
[32] In addition to the managing director, CCG had six other full-time employees during the relevant period, and each employee had a distinct role to play.[39]
[33] At the time of his appointment as managing director in February 1997, Mr. Walker had nine years’ experience as an investment analyst focusing on private and public debt, which he acquired through his employment with Confederation Life in Canada and the United States.[40] Mr. Walker spent his last years at Confederation Life in the United States managing the liquidation of its assets. After leaving CCG, Mr. Walker returned to Canada, where he is currently the director of corporate finance at CITF in Calgary.[41]
[34] At the time of his appointment as managing director, Mr. Ells had relevant experience acquired over 18 years through his employment by the Export Development Corporation (now Export Development Canada), RBC Dominion Securities, Newcourt Credit Group and CITG.[42] Mr. Ells described this experience as follows:
In some ways, much of what I had done in my working life until then was actually very direct preparation for that role [as managing director of CCG]. I had broad international experience both in origination and risk and treasury operations from my time at EDC.
I had worked on the bond desk in London for RBC Dominion Securities, so I had some capital markets background from the point of view of a market maker, which was actually useful for some of the capital markets transactions and administration we had to do at CCG.
Then my work at Newcourt and CIT was on the risk side of those businesses, so managing the portfolio and the quality of the incoming assets and credit surveillance and addressing or understanding and characterizing for the board any underperformance by our existing financial assets. All of that was very familiar from what by then was almost 20 years of experience in related roles.[43]
[35] Mr. Ells left the CITG group of companies in March 2009. For the past two years, Mr. Ells has been the chief credit officer of rail and aviation at Element Financial Corporation, a competitor of CITG, and before that he was senior vice president, project finance at Dominion Bond Rating Service for 3 years.[44] Mr. Ells was subpoenaed by the Appellant to testify.[45]
[36] At the time of his appointment as managing director, Mr. Blazevic had 12 years’ experience in lending and lease financing, which he had obtained through his employment by TD Bank, Newcourt Financial Ltd., GE Capital and GE Fleet Services. In 2006, Mr. Blazevic left his position as VP, risk management of GE Fleet Services and took the position of assistant VP, credit at CITF, where he was responsible for the commercial and industrial financing and syndication portfolio. He remained in this position until he was appointed managing director of CCG on January 5, 2009. After leaving CCG on July 31, 2014, Mr. Blazevic was appointed director, energy and infrastructure at CITF in Toronto.[46]
[37] The testimony of Mr. Walker, Mr. Ells and Mr. Blazevic regarding CCG differed only in the specific details relating to the periods that they each served as managing director. Each painted a similar picture regarding the business objectives of CCG, the operations of CCG, the interaction of CCG with the authorities in Barbados, the role of the managing director of CCG, the role of the board of directors of CCG, and the activities of the employees of CCG. The following facts represent a composite drawn from the evidence provided by these three witnesses.
(2) The Operations of CCG (a) General [38] The operations of CCG throughout the relevant period were conducted from its offices at Chelston Park, Collymore Rock, St. Michael, Barbados, which was CCG’s only location.[47] The operations were overseen by CCG’s board of directors, which included a representative of the IBCs and high-profile Barbadian residents.[48]
[39] The managing director would meet with the board on a regular basis and present the board with opportunities consistent with the business objectives of CCG, and the board would decide whether to pursue these opportunities.[49] The witnesses’ description of CCG’s business objectives was consistent and is well summarized by Mr. Blazevic and Mr. Ells as follows:
The business philosophy was to lend money to third-party corporations. The focus was on investment-grade transactions or loans, predominantly in the project finance, rail, and corporate finance spaces.[50]
. . .
CCG Trust was primarily a lender. The purpose was to optimize yield on fixed-income investments.
. . .
CCG Trust was primarily a buy-and-hold shop, meaning that we invested in long-term assets, investment grade, typically investments vetted by a primary market process, and those investments were intended to be held to maturity on the expectation that they would continue to have a high credit quality.[51]
[40] To enforce the long-term hold philosophy vis-à-vis the loans it originated, CCG would negotiate a “make-whole premium” that required the borrower to make a payment if it chose to repay its debt early. The payment of the premium was triggered by early repayment and was intended to place CCG in the same position as it would have been in if it had held the debt to maturity. The existence of the make-whole premium removed the incentive for a borrower to repay its debt early.[52]
[41] An example of the triggering of a make-whole premium occurred in 2005. In that year, a debtor prepaid a debt owed to CCG in respect of the financing of four ships. The transaction had been funded in 1997 and was otherwise scheduled to mature in 2008. CCG received a make-whole premium as a result of the early repayment, which was made because the debtor was acquired by a new owner, who wished to prepay the debt.
[42] The managing director sourced opportunities for CCG through third party agents and brokers, mainly on Wall Street. The initial contacts were developed by Mr. Walker from individuals he had dealt with while at Confederation Life.[53] His successors continued to use those contacts and others.[54] The contacts included individuals at Deutsche Bank, Citibank, Credit Suisse, Lehman Bros., Merrill Lynch and Bank of America.
[43] Each year during the relevant period the managing director prepared a President’s Report, which was presented at the annual general meeting of CCG.[55] Each report would take 5 or 6 weeks to prepare and was modelled on the prior year’s report. The managing director would receive assistance from the other employees of CCG in preparing the report.
[44] The first paragraph of the 2003 through 2007 reports stated:
The business of CCG Trust Corporation (“CCG”) is the lending of money through international asset-based financings, primarily for high value transportation and industrial equipment. CCG was established in 1989 for participation by a number of large Canadian life insurance companies as an element of their extensive domestic and international investment portfolios. Since its formation, the company has structured and provided in excess of $1 billion of debt financing.[56]
[45] Each report provided details regarding the year’s activities (i.e., the 2003 report addressed activities in 2003), the composition, distribution and performance of CCG’s portfolio, including the swap transactions it had in place, the terms of each financing funded by CCG and the credit characteristics of the borrowers. In addition, each report provided an operational overview which included a description of the staffing of CCG, the regulation of CCG, the aircraft inspection program (2003, 2004, 2005), the auditors of CCG, the board of directors, the executive committee, government relations and the Barbados economy.
[46] The managing director would make a presentation at each annual general meeting of CCG. Mr. Walker described this presentation as follows:
I would do almost like a state of the union, I guess, and go through the operations of the business over the previous year, what the portfolio looked like, additions, maturities, things like that, anything they should be aware of. Just anything I felt was prudent to bring to their attention.
Even looking forward, if there was anything, the Barbados economy we would talk about or if there was a rumour of a change of legislation, just anything that I felt was germane to what they needed to know.[57]
(b) The Funding of CCG [47] The business of CCG was funded entirely by loans provided by the IBCs. Specifically, CCG borrowed from the IBCs in either Canadian or U.S. dollars at varying rates of interest secured by CCG’s assets. The outstanding balance of the loans at the end of 2002 and at the end of each fiscal year in the relevant period was as follows:[58]
YEAR
BALANCE (Cdn $)
2002
586,799,542
2003
498,967,904
2004
429,152,116
2005
328,617,544
2006
390,911,567
2007
346,097,930[59]
2008
369,596,019
2009
353,914,032
[48] The manner in which these loans were made to CCG was described by Mr. Walker in cross-examination as follows:
We would have made requests to the IBCs at different times for funding. They would provide that funding to CCG. CCG then had that funding, that cash within CCG. We would then with cash make an investment. We would fund a borrower, whatever transaction we happened to be looking at at the time that was approved by the board.[60]
[49] A specific IBC might choose to fund CCG so that CCG could enter in specific investment or an IBC might choose not to fund a specific investment.[61] If one or more of the IBCs funded a specific investment by CCG, the IBCs’ loan to CCG would be secured by the investment under the terms of the inter-lenders agreement among CCG and the IBCs.[62] The IBCs’ security interests in the assets of CCG were reported in a chart in the annual President’s Reports and were also reported to the Central Bank of Barbados.[63] However, CCG was the owner of the assets, not the IBCs.[64]
[50] The notes to the financial statements of CCG state that the “scheduled maturity dates of loans payable to shareholders are consistent with that of the loans receivable”.[65] Mr. Walker confirmed that the terms of the loans by the IBCs to CCG were “consistent with that of the loans receivable on the loan portfolio with third parties”.[66]
(c) CCG’s Portfolio [51] For the most part, the portfolio of CCG consisted of long-term debt obligations originated by CCG (i.e., CCG was the original creditor), or acquired by CCG in the secondary market, that related to the long-term financing of large assets such as rail cars, ships and aircraft. The make-up of the portfolio is well documented in CCG’s financial statements and in the annual President’s Reports for the relevant period. I do not see any need to describe the underlying transactions in detail.
[52] There was one exception to CCG’s focus on high quality, long-term debt obligations. In 2004, CCG acquired a credit linked note (“CLN”) from Deutsche Bank. The CLN was acquired due to the low interest rate environment at the time and provided a return to CCG in exchange for credit exposure to an underlying basket of 100 individual credit default swaps.[67] The CLN was acquired in March 2004 and matured on June 20, 2009.[68] CCG did not purchase the CLN for cash but rather was liable to Deutsche Bank to the extent that there were defaults in the underlying portfolio exceeding a specified threshold.
[53] CCG would typically invest surplus cash in short-term deposits until a suitable long-term investment opportunity came along. In 2006, CCG entered into convertible asset swaps (“CAS”) with Deutsche Bank. The CAS were short-term debt obligations that were used by CCG to replace term deposits because of the low interest rate provided on such deposits in 2006. The CAS involved the purchase by CCG of callable and puttable bonds with a term of 1 to 3 years and the entering into of an arrangement with Deutsche Bank that provided CCG with a premium in addition to the interest payable to CCG on the bonds.[69]
[54] The low interest rate environment in 2004 to 2006 resulted in a higher proportion of short-term debt than was considered ideal for CCG. Mr. Ells described the steps taken by CCG to move from short-term obligations back into long-term obligations as follows:
When I first arrived, CCG had about $150 million of $400 million in total balance sheet was in short-term instruments and deposits. When I say short-term instruments, that includes the convertible asset swaps and includes ordinary short-term cash deposits.
That was considered not an ideal circumstance in that CCG made better returns by doing long-term transactions in transportation and project assets, mainly.
Over that year, the change was deploying those short-term cash instruments into longer-term private placements. Actually, it took longer than the first year. It was really at the end of 2007, we did a $50 million loan as part of a larger deal to Swisscom, not coincidentally based in Switzerland, and then five more transactions in 2008, and that reduced substantially the amount of so-called undeployed or short-term cash instruments replaced by these longer-term higher-yielding private placements.[70]
[55] Throughout the relevant period, CCG was a party to swap transactions that were structured to ensure that CCG received fixed-rate Canadian dollar cash flows from its portfolio, which included significant U.S.-dollar-denominated obligations.[71] Mr. Walker, Mr. Ells and Mr. Blazevic described the swap transactions as follows:
. . . As I mentioned, we didn’t like to sell transactions. We liked to buy and hold them, and part of that was that we wanted fixed-rate Canadian dollar securities. A lot of the securities we would purchase, while most of them were fixed rate to begin with, they were U.S. dollar, so we entered into a swap to convert over the life of the transaction those U.S. dollar cash flows to Canadian. We therefore built up a fairly significant swap book that I would report on, as well.[72]
. . .
. . . Most of the transactions were U.S. dollar denominated, so we swapped them from fixed-rate U.S. dollar financing through floating-rate U.S. dollar financing into fixed-rate Canadian.[73]
. . .
Yes, the swaps were entered into to hedge any currency risk, so the primary market that CCG Trust dealt in was the U.S., so most private debt issuances were done in U.S. dollars, and we reported in Canadian dollars, so we swapped the U.S. dollar interest and principal payments to Canadian dollar interest and principal payments.[74]
(d) CCG’s Income [56] The financial statements of CCG for 2003 through 2008 show that interest income represented in excess of 96% of CCG’s total realized revenue for 2003 to 2008. In 2009, the adoption of International Financial Reporting Standards and the restatement of the 2008 financial statements to reflect fair market value instead of amortized cost resulted in a change in the accounting presentation, but interest continued to be a very significant component of CCG’s realized revenues for 2008 and 2009.[75]
[57] The interest paid by CCG to the IBCs on the loans from the IBCs would be slightly less than the interest received by CCG on its debt portfolio. For example, in 2004, CCG’s interest income was approximately $39.7 million while its interest expense was approximately $38.9 million.[76]
(e) CCG’s Interaction with the Authorities in Barbados [58] In response to a request to admit under subsection 130(1) of the Tax Court of Canada Rules (General Procedure)(the “Rules”), the Respondent admitted that “[o]n November 21, 1995, a license (‘the CCG license’) was issued to CCG Trust pursuant to part 3 of the Financial Intermediaries Regulatory Act, 1992-13, of Barbados.”[77] I will address the import of this licence in my review of the expert evidence tendered by the Appellant.
[59] CCG paid to the Central Bank of Barbados (the “Central Bank”) an annual licence fee of Barbados $25,000.[78] As well, CCG filed monthly and quarterly reports with the Central Bank.[79] The monthly and quarterly reports for the Central Bank were prepared by the controller of CCG using a template provided by the Central Bank. The managing director signed the reports.
[60] In addition to the filing of reports, representatives of CCG would meet with representatives of the Central Bank, and the Central Bank performed two audits of CCG, one of which was in 2009.[80]
[61] CCG also filed annual tax returns with the Barbados Department of Inland Revenue.[81] The income tax returns of CCG for the relevant period were prepared in Barbados dollars by Ernst and Young on the basis of the audited financial statements of CCG. The managing director of CCG signed the income tax returns for the 2003, 2004, 2006, 2007, 2008 and 2009 taxation years. The return for the 2005 taxation year was signed by David Gittens, a member of the CCG board of directors, because Mr. Walker was away from Barbados at the time.[82]
(f) Other Information [62] In cross-examination, each of the three witnesses confirmed that CCG did not accept deposits, offer chequing or other types of accounts to the public, or act as a trustee, executor or fiduciary. As well, CCG did not offer insurance products or collect insurance premiums.[83]
D. Expert Evidence [63] Sir Trevor Carmichael and Ms. Mahabir submitted expert reports and testified as expert witnesses. In their respective expert reports, Sir Trevor Carmichael and Ms. Mahabir provided the following opinions regarding Barbados law and the status of CCG under that law:
1. On October 26, 1989, CCG was incorporated under the Companies Act of Barbados as CCG Equipment Limited.[84] As a company incorporated under the laws of Barbados, CCG was subject to and governed by the laws of Barbados during the relevant period. CCG was duly incorporated and validly existing throughout the relevant period.[85] These opinions were based upon, and supported by, searches by the experts of the Register of Companies in Barbados. Each expert included in his or her expert report a copy of the certificate of incorporation of CCG and a copy of the certificates of amendment of CCG’s Articles of Incorporation, whereby its name was changed to CCG Trust Corporation and its share capital was amended.
2. On November 21, 1995, CCG was issued a licence by the Minister of Finance under Part III of the FIRA, which entitled CCG to carry on the business of a trust and finance company in accordance with the provisions of paragraphs 24(1)(b), (c) and (d) of the FIRA.[86]
3. The FIRA was replaced by the FIA effective July 1, 1997. Under section 116 of the FIA, a company licensed under Part III of the FIRA on July 1, 1997 was deemed from that date to be licensed under the FIA, and the provisions of the FIA applied accordingly.[87] Consequently, effective July 1, 1997, paragraphs 24(1)(b), (c) and (d) of the FIRA were replaced by paragraphs 23(1)(b), (c) and (d) of the FIA. Section 22, subsection 23(1) and sections 24 and 27 of the FIA state:
22. In this Part [Part III], “licensee” means a company licensed under this Part to carry on business as a trust company, a finance company or a merchant bank or similar financial institution licensed under this Part.
23.(1) The business of a trust company, a finance company or a merchant bank or similar financial institution is
(a) banking business; or
(b) the business of the acquisition of funds by
(i) the acceptance of deposits,
(ii) the issue of shares,
(iii) the grant of loans,
(iv) the collection of premiums, and the investment of such funds;
(c) performing functions as trustee, administrator or executor; and
(d) the business of broker, investment analyst, investment adviser and such other business that is not specifically prohibited by the Central Bank by notice published in the Official Gazette for the purposes of this Part.
. . .
24. No person other than a bank licensed under Part II of the Offshore Banking Act shall carry on the business of a trust company, a finance company or a merchant bank without a licence issued under this Part.
. . .
27.(1) A licence issued under this Part shall show the class or classes of business to be carried on by the licensee.
(2) A licence issued under this Part is subject to such conditions as the Minister may specify in respect of the class or classes of business to be carried on by the licensee.
(3) A licence under this Act remains valid until revoked pursuant to this Part but it is a condition of every licence that an annual fee be paid by the licensee in the amount and at the time prescribed.
4. The language of paragraphs 23(1)(b), (c) and (d) of the FIA differed from the language of paragraphs 24(1)(b), (c) and (d) of the FIRA only in the placement of the words “and the investment of such funds” in paragraph 23(1)(b) of the FIA. Notwithstanding the different placement, those words continue to qualify all of the activities listed in subparagraphs 23(1)(b)(i) to (iv) of the FIA.[88]
5. As a company licensed to carry on the business of a trust and finance company in accordance with the provisions of paragraphs 23(1)(b), (c) and (d) of the FIA,[89] CCG was permitted to carry on the business of a trust company and the business of a finance company.[90] However, CCG was not required to carry on both businesses at the same time or to carry them on at all.[91]
6. The activities of CCG during the relevant period were permitted under the licence issued to CCG under Part III of the FIA.[92] The nature and extent of the activities carried on by CCG in Barbados during the relevant period required CCG to be licensed under Part III of the FIA.[93] CCG would have been subject to a penalty under section 102 of the FIA if it conducted its business without the required licence.[94]
7. A licensee under Part III of the FIA is required to pay to the Central Bank an annual licence fee of Barbados $25,000.[95]
8. During the relevant period, CCG was a trust company under the FIA because it was licensed to act in that capacity.[96] However, CCG did not fit within the generally understood meaning of trust company in the sense of “a corporate entity that was formed for the purpose of and was carrying on the business of acting as a trustee or fiduciary and providing related trust services”.[97]
9. During the relevant period, CCG was regulated in accordance with the provisions of the FIA.[98] The Central Bank enforced the regulatory provisions in the FIA.[99] The FIA required CCG to fulfil its various obligations under threat of penalty. These obligations included a requirement to provide monthly and quarterly reports to the Central Bank, to provide such other returns as the Central Bank might require and to publish its audited financial statements in the Official Gazette and in a daily newspaper.[100] In addition, CCG was required to appoint an auditor,[101] to seek approval for certain changes,[102] to maintain a certain level of capital[103] and to manage risk in accordance with published guidelines.[104]
[64] Sir Trevor Carmichael and Ms. Mahabir each included a copy of the licence issued to CCG with his/her expert report.
[65] The copy of the licence included with the TC Report at Tab G has under the signature the title “Minister responsible for Finance”. As well, the certificate has a square stamp with the date “05 DEC 1995” and the inscription “Bank Supervision Dept.” Sir Trevor Carmichael testified that a partner in his firm had sent a request to the Central Bank by e-mail and that the copy of the licence at Tab G was enclosed with the letter received from the Central Bank in response to that query. The letter is included with the TC Report at Tab H. The letter at Tab H is on Central Bank letterhead, is addressed to the Head, Commercial and Tax, at Sir Trevor Carmichael’s law firm, is dated March 4, 2015 and is from Mrs. Cheryl A. Greenidge, Deputy Director, Bank Supervision Department. The letter states:
We refer to your email request of March 3, 2015 and confirm that CCG Trust Corporation has been licensed since November 21, 1995 under the Financial Intermediaries Regulatory Act, 1992-13, has paid its licence fees and has been regulated from said date by the Central Bank of Barbados.
[66] Sir Trevor Carmichael explained that the Bank Supervision Department is the department that oversees the licensing and ongoing regulation of banks and of entities licensed under Part III of the FIRA.[105] He stated that he knew Mrs. Greenidge personally and that he recognized her signature from past dealings with her.[106]
[67] Sir Trevor Carmichael understood the document included with the letter to be a copy “of the original certificate, of the original licence” issued pursuant to Part III of the FIRA to CCG on November 21, 1995.[107] Sir Trevor Carmichael provided the following explanation regarding the stamp:
This stamp, which says received, I would have to give an explanation for that. Maybe I will take you above the stamp first. The document is signed by the Minister of Finance, and that is the signature of Owen Arthur, who at that time was Minister of Finance.
The procedure is such that when a license is signed by the Minister of Finance, that license is then sent back to the Central Bank of Barbados, and typically, on the license, the Central Bank will stamp the date that it was received, and that is what that stamp is about. It is signed by the Minister of Finance, the signature, which I readily recognize and know.[108]
[68] The copy of the certificate included with Ms. Mahabir’s report was obtained from instructing counsel.[109] Ms. Mahabir testified that as part of her due dilige