Rio Tinto Alcan Inc. v. The Queen

Rio Tinto Alcan Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-04-26
Neutral citation
2017 TCC 67
File numbers
2012-1020(IT)G, 2012-1921(IT)G, 2012-4808(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Dockets: 2012-1020(IT)G
2012-1921(IT)G
2012-4808(IT)G
BETWEEN:
RIO TINTO ALCAN INC.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Application heard on September 26, 27, 28 and 29, 2016 at Montréal, Quebec and October 6 and 7, 2016 at Toronto, Ontario.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Applicant:
Yves St-Cyr
Counsel for the Respondent:
Nathalie Labbé
Amelia Fink
ORDER
UPON application by the applicant, notice of which was filed on June 5, 2015, under section 58 of the Tax Court of Canada Rules (General Procedure) for:
An order declaring invalid the assessments issued to the applicant for the taxation years ending December 31, 2006, October 31, 2007, and December 31, 2007, (Appeal Books 2012-1020(IT)G, 2012-4808(IT)G and 2012-1921(IT)G) in respect of the expenditures and investment tax credits claimed by the applicant for scientific research and experimental development relating to the activities of Aluminerie Alouette inc., which were arbitrarily disallowed by the Canada Revenue Agency.
An order declaring invalid in part the assessment issued to the applicant on April 19, 2013, and October 3, 2013, respectively, for the taxation years ending December 31, 2006, (Appeal Book 2012-1020(IT)G) and October 31, 2007, (Appeal Book 2012-4808(IT)G), on the ground that they were made outside the “normal reassessment period.”
GIVEN the written submissions of the respondent, who objects to the application;
AND after having heard the parties;
The application is dismissed with costs.
Signed at Ottawa, Canada, this 26th day of April, 2017.
“Johanne D’Auray”
D’Auray J.
Translation certified true
on this 17th day of May 2018.
Francois Brunet, Revisor
Table of Contents
QUESTION A 1
I. BACKGROUND 2
II. HISTORY OF ASSESSMENTS FOR THE PERIOD AT ISSUE 4
A. 2006 4
B. Year ending October 31, 2007 5
C. Year ending December 31, 2007 5
III. POSITIONS OF THE PARTIES 5
A. RTA 5
B. Respondent 7
IV. ANALYSIS 8
A. SUBSECTION 152(1) – Validity of the reassessments 9
1) Was the review of the tax returns underway before the reassessments were made, notices of which were dated July 14, 2011, for 2006, September 22, 2011, for the year ending October 31, 2007, and November 10, 2011, for the year ending December 31, 2007, in accordance with subsection 152(1) of the ITA? 9
2) Reassessments for 2006 and 2007 issued by the Minister 15
3) Did Ms. Martin know that an examination was underway? 20
4) Subsection 152(1) of the ITA 23
5) Application of subsection 152(1) or subsection 152(4) of the ITA in this case 31
6) Saving provisions of the ITA 34
7) The American case law 40
8) Ms. Martin’s conduct 40
B. FACTS RELATING TO 2006 41
C. FACTS RELATING TO THE YEAR ENDING OCTOBER 31, 2007 42
D. POSITIONS OF THE PARTIES 45
1) RTA 45
2) Respondent 46
E. ANALYSIS 47
V. CONCLUSION 57
Glossary
Abbreviations:
AAI
Aluminerie Alouette inc.
EP
Experimental production
FAPI
Foreign accrual property income
FR
Financial Reviewer
ITCs
Investment tax credits
ITRD
Income Tax Rulings Directorate
Montréal TSO
Montréal Tax Services Office
NCLs
Non-capital losses
Québec TSO
Québec Tax Services Office
RTA
Research and Technology Advisor
RTA
Rio Tinto Alcan Inc.
SR&ED
Scientific research and experimental development
Participants :
RTA
Mr. Paradis, Vice President, Taxation, RTA
AAI
Mr. Nadeau, Director of Financial Services, AAI
[EN BLANC]
Hugo Lévesque, Superintendent of Technology Development
Mr. De Luca, Deloitte Chartered Accountant representing AAI
Ms. Bibeau, Novafisc, contract employee, assists in preparing AAI applications relating to SR&ED expenditures
Montréal TSO
Ms. Martin, FR
Québec TSO
Mr. Fournier, FR
[EN BLANC]
Mr. Dufour, RTA
Yvan Marceau, Assistant Director, SR&ED Division
Table of Important Dates
2006
Question A
Initial Assessment
Reassessment
End of the Normal Reassessment Period
[EN BLANC]
August 3, 2007
July 14, 2011
August 3, 2011
[EN BLANC]
[EN BLANC]
[EN BLANC]
[EN BLANC]
Question B
[EN BLANC]
[EN BLANC]
Extended period assessment 152(4.01)
[EN BLANC]
[EN BLANC]
April 19, 2013
August 3, 2014
[EN BLANC]
[EN BLANC]
[EN BLANC]
[EN BLANC]
Year ending October 31, 2007
Question A
Initial Assessment
Reassessment
End of the Normal Reassessment Period
[EN BLANC]
May 12, 2008
September 22, 2011 [1]
May 12, 2012
[EN BLANC]
[EN BLANC]
November 2, 2011
[EN BLANC]
[EN BLANC]
[EN BLANC]
May 11, 2012 [2]
[EN BLANC]
[EN BLANC]
Question B
[EN BLANC]
[EN BLANC]
Extended period assessment 152(4.01)
[EN BLANC]
[EN BLANC]
September 3, 2013
August 3, 2014
[EN BLANC]
[EN BLANC]
October 3, 2013
[EN BLANC]
[EN BLANC]
[EN BLANC]
[EN BLANC]
[EN BLANC]
Year ending December 31, 2007
Question A
Initial Assessment
Reassessment
End of the Normal Reassessment Period
[EN BLANC]
August 6, 2008
November 10, 2011
August 6, 2012
[EN BLANC]
[EN BLANC]
August 3, 2012
[EN BLANC]
For Question A, in my reasons, I made reference to the September 22, 2011, reassessment for the year ending October 31, 2007, as did the parties in their respective factums.
For Question B, I made reference to the May 11, 2012, reassessment, as did the parties in their respective factums.
Citation: 2017 TCC 67
Date: 20170426
Dockets: 2012-1020(IT)G
2012-1921(IT)G
2012-4808(IT)G
BETWEEN:
RIO TINTO ALCAN INC.,
Applicant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR ORDER
D’Auray J.
QUESTION A
[1] The first issue raised by Rio Tinto Alcan Inc. (“RTA”) before this Court, under section 58 of the Tax Court of Canada Rules, [3] can be formulated as follows:
Did the Income Tax Act [4] (the “ITA”) authorize the Minister of National Revenue (the “Minister”) [5] to make reassessments - on July 14, 2011, for the taxation year ending December 31, 2006, September 22, 2011 for the taxation year ending October 31, 2007, and on November 10, 2011, for the taxation year ending December 31, 2007, - disallowing the expenditures for scientific research and experimental development (“SR&ED”) and the investment tax credits (“ITCs”) claimed by the applicant in respect of Aluminerie Alouette inc.’s activities, without first having examined the facts relating to the applicant in order to determine its liability for tax and without having assessed the amount of tax payable based on such a determination?
[2] In the negative, are the reassessments valid with respect to the SR&ED expenditures and the ITCs disallowed for the Period?
I. BACKGROUND
[3] RTA is part of a consortium that owns Aluminerie Alouette inc. (“AAI”).
[4] AAI was incorporated in 1989 to manage and operate an aluminum smelter in Sept-Îles, Quebec.
[5] During the periods at issue, the AAI consortium included five co-owners: RTA (40%), Aluminium Austria Metall (Quebec) inc. (20%), Société en commandite Hydro Aluminium Canada (20%), Albecour Inc. (13.33%) and Marubeni Métaux & Minéraux (Canada) Inc. (6.67%).
[6] AAI conducts research and development activities on behalf of its co-owners.
[7] Under the agreement between the co-owners of AAI, the inputs and aluminum produced by AAI remain the property of the co-owners, based on the percentage of their respective ownership. Also under this agreement, expenditures incurred by AAI in connection with SR&ED work and ITCs are claimed by each co-owner based on the percentage of their ownership.
[8] During the years at issue, the 2006 taxation year, the taxation year ending October 31, 2007, and the taxation year ending December 31, 2007 (I will refer to “2007” for both years ending in 2007), RTA claimed the deduction for expenditures relating to its own research activities (“SR&ED expenditures specific to RTA”). RTA also claimed for 2006 and 2007, as a co-owner of AAI, its share of SR&ED expenditures and ITCs relating to research activities undertaken by AAI.
[9] With the exception of RTA, all AAI co-owners were under the Québec Tax Services Office’s (“TSO”) jurisdiction. The RTA file was handled by the Montréal TSO. As a result, the Montréal TSO processed all RTA tax affairs, including the financial and technological assessment of SR&ED projects specific to RTA.
[10] However, because AAI was under the Québec TSO’s jurisdiction, that office had to determine whether SR&ED activities undertaken by AAI were SR&ED activities within the meaning of section 248 of the ITA.
[11] Typically, SR&ED project audits include a technical review and a financial review. The technical review involves determining whether the claimed work meets the definition of SR&ED in subsection 248(1) of the ITA and resolving resolve any issues regarding the eligibility of the expenditures for which the deduction is claimed.
[12] Hélène Martin was one of the persons at the Canada Revenue Agency (“CRA”) who was involved in that issue. As a Financial Reviewer (“FR”) at the Montréal TSO, Ms. Martin was responsible for ensuring that expenditures for which the deduction was claimed by RTA were related to SR&ED and were therefore eligible.
[13] Marc Fournier was the FR at the Québec TSO and Martin Dufour was the RTA. The Québec TSO was to make reassessments for all AAI co-owners except RTA.
[14] Each year at issue, RTA filed several amended income tax returns with the CRA, which were all accepted.
[15] For 2006 and 2007, the Montréal TSO completed the RTA audit before the Québec TSO completed the audit of AAI’s SR&ED expenditures. As she had done for 2003 to 2005, Ms. Martin asked RTA to sign waivers for 2006 and 2007 to allow the Québec TSO to complete the AAI audit. The waivers prepared by Ms. Martin proposed to disallow the expenditures claimed by RTA regarding AAI’s SR&ED expenditures. Although RTA agreed to sign Ms. Martin’s waivers for 2003 to 2005, AAI’s new representative, Mr. De Luca, from Deloitte, refused to sign them on behalf of RTA, for 2006 and 2007. According to Mr. De Luca, there was no advantage for RTA to sign waivers under which AAI’s SR&ED expenditures were disallowed. The waivers prepared by Ms. Martin required RTA to file notices of objection.
[16] However, Mr. De Luca told Ms. Martin he was prepared to sign waivers for 2006 and 2007. AAI’s SR&ED expenditures and ITCs having already been allowed by the Minister, the waivers would have allowed the normal reassessment period to be suspended. As soon as the Québec TSO completed its AAI audit, Ms. Martin could have made reassessments on the basis of the audit results.
[17] Ms. Martin was of the view that the waivers that she had prepared conformed with the Act. Thus, wanting to give effect to the agreement that she had entered into with RTA regarding SR&ED expenditures specific to RTA, she made reassessments for 2006 and 2007 reflecting the terms and conditions of the agreement. However, she disallowed the portion of AAI’s SR&ED expenditures and ITCs claimed by RTA. That said, Ms. Martin had indicated that RTA would be reassessed as soon as the Québec TSO had completed the RTA audit for 2006 and 2007.
[18] RTA filed notices of objection against the reassessments for 2006 and 2007. However, RTA filed an appeal for each year at issue after the expiration of 90 days from the day the notices of objection were sent, pursuant to paragraph 169(1)(b) of the ITA. When RTA filed the notices of appeal, the Québec TSO had not completed its AAI audit.
[19] The respondent indicated in her factum and reiterated at the hearing that the Minister was prepared to consent to judgment. In this regard, the Minister offered RTA the same tax treatment as the Québec TSO gave to AAI’s other co-owners regarding SR&ED expenditures and ITCs for 2006 and 2007. [6]
II. HISTORY OF ASSESSMENTS FOR THE PERIOD AT ISSUE
A. 2006
[20] For the 2006 taxation year, the Minister issued an initial assessment to RTA, notice of which was dated August 3, 2007.
[21] The period established for issuing reassessments to RTA - commonly called the “normal reassessment period” - expired on August 3, 2011.
[22] By notice of assessment dated July 14, 2011, the Minister made a reassessment which disallowed the AAI SR&ED expenditures and ITCs claimed by RTA for the 2006 taxation year. This reassessment also allowed the SR&ED expenditures and ITCs specific to RTA.
B. Year ending October 31, 2007
[23] For the taxation year ending October 31, 2007, the Minister made an initial assessment, notice of which was dated May 12, 2008.
[24] The normal reassessment period expired on May 12, 2012.
[25] By notice of assessment dated September 22, 2011, the Minister made a reassessment which disallowed the AAI SR&ED expenditures and ITCs claimed by RTA for the taxation year ending October 31, 2007. This reassessment also allowed the SR&ED expenditures and ITCs specific to RTA.
C. Year ending December 31, 2007
[26] For the taxation year ending December 31, 2007, the Minister made an initial assessment, notice of which was dated August 6, 2008.
[27] The normal reassessment period expired on August 6, 2012.
[28] By notice of assessment dated November 10, 2011, the Minister made a reassessment which disallowed the AAI SR&ED expenditures and ITCs claimed by RTA for the taxation year ending December 31, 2007. This reassessment also allowed the SR&ED expenditures and ITCs specific to RTA.
III. POSITIONS OF THE PARTIES
A. RTA
[29] RTA submits that the reassessments are not valid. In this regard, RTA argued that according to subsection 152(1) of the ITA, the Minister must do three things:
The Minister shall, with all due dispatch,
- examine a taxpayer’s return of income for a taxation year,
- assess the tax for the year, the interest and penalties, if any, payable and
- determine
a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
b) the amount of tax, if any, deemed by subsection . . . to be paid on account of the taxpayer’s tax payable under this Part for the year.
[Emphasis added.]
[30] RTA submits that the Minister acting through its agent, Ms. Martin, did not meet the requirements set out in subsection 152(1) of the ITA.
[31] RTA submits that for the 2006 and 2007 taxation years, the Minister arbitrarily disallowed the SR&ED expenditures and ITCs that it claimed as a co-owner of AAI. According to RTA, when the reassessments were made, the Québec TSO officials had not initiated any audit or audit process of AAI SR&ED expenditures.
[32] RTA submits that, even if the Court were to decide that the audit process regarding AAI’s SR&ED activities for the years at issue had commenced, which RTA denies, Ms. Martin can not claim that she knew the audit was underway and that AAI was not cooperating, because there is no contemporaneous evidence that shows Ms. Martin was aware that the audit process was underway and that there was an alleged lack of cooperation on the part of AAI.
[33] RTA argues that Ms. Martin had no knowledge of AAI’s SR&ED activities. Thus, when the reassessments were made for 2006 and 2007, she had no factual basis upon which to make reassessments. According to RTA, a taxpayer is entitled to know the basis of an assessment, that is, the factual basis upon which the Minister made it.
[34] RTA also argues that it offered Ms. Martin waivers for 2006 and 2007 regarding AAI’s SR&ED and ITCs. Ms. Martin refused to accept such waivers and made reassessments that disallowed the deduction for AAI’s SR&ED expenditures claimed by RTA, without any review by the Québec TSO or her, and without having relied on any facts.
[35] RTA submits that these breaches by the Minister are substantial (procedural) defects in substance, not simple technicalities. Consequently, RTA argues that the saving provisions that validate the assessments despite certain errors, i.e. subsections 152(3) and 152(8) as well as section 166 of the ITA, do not apply in this case because these provisions cannot be used to correct palpable or overriding errors.
[36] RTA is asking this Court to refer the reassessments to the Minister for reassessment to have the AAI SR&ED expenditures and ITCs claimed by RTA allowed.
B. Respondent
[37] The respondent argues that subsection 152(4) of the ITA applied in this case, because the dispute pertains to reassessments. According to the respondent, the procedural requirements of subsection 152(4) were satisfied by the Minister. As a result, the reassessments are valid.
[38] The respondent submits that if RTA’s position waiss correct, and that it is subsection 152(1) of the ITA that applies in this case, the Minister satisfied the procedural requirements of subsection 152(1). As a result, the reassessments are valid. At any rate, the respondent submits that if the procedural requirements under subsection 152(1) were not satisfied, the saving provisions under subsections 152(3) and 152(8) and under section 166 of the ITA deem the reassessments for 2006 and 2007 valid.
[39] The respondent submits that the evidence showed that the AAI audit process performed by the Québec TSO was initiated on February 10, 2009, well before the Minister made the reassessments in 2011.
[40] In addition, the respondent argues that the documentary evidence clearly establishes the lack of cooperation on the part of AAI’s representatives. Many requests for information and documents for 2006 and 2007 were sent to AAI, and most of these requests were left unanswered.
[41] The respondent also argues that, at the hearing, it was shown that Ms. Martin knew that the review was underway, and furthermore, the absence of cooperation on the part of AAI was reported by Mr. Fournier to Ms. Martin during their discussions.
[42] Also, the respondent submits that Ms. Martin could not be criticized for not understanding the waiver procedure.
IV. ANALYSIS
[43] It is important to reiterate that the issue raised by the application before me concerns the validity of the reassessments, not their correctness.
[44] Thus, throughout my analysis, I will take into account the distinction between the validity of an assessment - that is to say the procedural process leading to the assessment - and the correctness of an assessment - which involves the amount of tax determined in accordance with the applicable provisions of the ITA, correctly interpreted and applied to the relevant facts. I have attached to Appendix A of these reasons, the relevant provisions.
[45] At the beginning of her arguments, the respondent submitted that it was subsection 152(4) of the ITA that apply in this case because the assessments at issue were reassessments and not initial assessments referred to in subsection 152(1). That said, the respondent’s oral argument primarily bore on subsection 152(1) in response to RTA’s argument, to the effect that subsection 152(1) applies in this case.
[46] In any event, according to the respondent, if the procedural requirements set out in subsection 152(1) of the ITA are met, it follows that the procedural requirements under subsection 152(4) are met as well.
[47] I will therefore commence by examining RTA’s argument and determine whether the reassessments are valid under subsection 152(1) of the ITA. To do this, I will determine whether the Minister has met the procedural requirements under subsection 152(1).
[48] I will also determine whether, as the respondent argued, subsection 152(4) of the ITA applies in this case, not subsection 152(1).
[49] I will also review the saving provisions in subsections 152(3) and 152(8) and under section 166 of the ITA to determine whether they apply in this case, and thus whether the reassessments are deemed valid.
A. SUBSECTION 152(1) – Validity of the reassessments
[50] Subsection 152(1) provides as follows:
152 (1) The Minister shall, with all due dispatch, examine a taxpayer’s return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine
(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year; or
(b) the amount of tax, if any, deemed, by subsection 120(2) or (2.2), 122.5(3), 122.51(2), 122.7(2) or (3), 122.8(2) or (3), 122.9(2), 125.4(3), 125.5(3), 127.1(1), 127.41(3) or 210.2(3) or (4) to be paid on account of the taxpayer’s tax payable under this Part for the year.
[Emphasis added.]
[51] According to this subsection, the Minister must do three things or fulfill three obligations with all due dispatch. The Minister shall, with all due dispatch, examine the taxpayer’s return of income, assess the tax and determine under paragraph (a) of that subsection the amount of refund or, under paragraph (b), the amount of tax deemed to be paid.
1) Was the review of the tax returns underway before the reassessments were made, notices of which were dated July 14, 2011, for 2006, September 22, 2011, for the year ending October 31, 2007, and November 10, 2011, for the year ending December 31, 2007, in accordance with subsection 152(1) of the ITA?
[52] During the hearing of the application, the parties spent a great deal of time on whether the Québec TSO had initiated the AAI audit process when RTA was reassessed as a co-owner of AAI.
[53] The importance of knowing whether an examination was underway arises from the duty to examine the return of income described in subsection 152(1) of the ITA, which provides that the “Minister shall, with all due dispatch, examine a taxpayer’s return of income.” [7]
[54] RTA argues that the Québec TSO had not initiated an audit when the Minister made the reassessments.
[55] For her part, the respondent argues that the AAI examination process had been underway since February 10, 2009, well before the reassessments were made. The respondent also argues that AAI did not send the Québec TSO the information and documents required, which would have allowed the audit to move forward.
[56] The Québec TSO’s examinations of the AAI SR&ED expenditures for 2003 to 2005 and 2006 and 2007 overlapped. Thus, a reading of the documents shows that the requests for information and documents for 2006 and 2007 were often mixed in with requests for information and documents for 2003, 2004 and 2005.
[57] On this subject, RTA argues that the Minister had not commenced the 2006 and 2007 audit because all the requests for information and documents sent to AAI before July 8, 2011, by the Québec TSO representatives, regarding 2006 and 2007 were sent as part of the 2003 to 2005 audit, which sought to determine the use of the equipment for 2003 to 2005, and not as part of the 2006 and 2007 audit.
[58] RTA also argues that the Québec TSO representatives had agreed, on October 7, 2009, to complete the 2003 and 2005 audit with respect to AAI’s research activities, before initiating the 2006 and 2007 audit.
[59] RTA also submits that by way of a letter dated July 8, 2011, addressed to Mr. Nadeau, Director of Financial Services at AAI, Yvan Marceau, Assistant Director, SR&ED Division of the Québec TSO, announced that the examination for 2006 and 2007 would commence in the fall of 2011. According to RTA, the July 8, 2011, letter is consistent with the timeline because in June 2011 the Québec TSO closed the AAI SR&ED files for 2003 to 2005.
[60] According to RTA, with respect to the documentary evidence, it is obvious that when the reassessments were made for 2006 and 2007, the audit of AAI’s SR&ED expenditures had not commenced. As a result, the reassessments are arbitrary because the Minister did not conduct any examination and did not have a factual basis for disallowing the deduction for AAI’s SR&ED expenditures.
[61] However, RTA only referred to the documentary evidence that favoured it. The evidence as a whole shows that Mr. Dufour and Mr. Fournier of the Québec TSO sent AAI several requests to obtain information or documents relating to 2006 and 2007, starting in 2009, which was well before the reassessments were issued to RTA that disallowed AAI SR&ED expenditures and ITCs.
[62] On February 10, 2009, Mr. Dufour first wrote Mr. Nadeau of AAI to reiterate that at the November 21, 2008, meeting, he had indicated that the information to be provided needed to cover the 2006 and 2007 financial years.
[63] On February 11, 2009, Mr. Fournier wrote AAI to indicate that 2006 and 2007 should be added to the audit period. To this end, we need to obtain the basis of calculation used to prepare the SR and E[D] claims for both [of those] years.
[64] On May 20, 2009, Mr. Dufour confirmed in an email to AAI that at the November 21, 2008, meeting, he had discussed [that] the new information also had to cover the 2006 and 2007 financial years, inter alia to more clearly establish the use of the equipment requested. In that regard, many of Mr. Fournier’s and/or Mr. Dufour’s communications ask AAI, using this wording, to provide documents or information for 2006 and 2007. Mr. Fournier testified that the information requested for 2006 and 2007 was not related solely to the use of the equipment for 2003 to 2005, which is why the words “inter alia” were used.
[65] On May 21, 2009, Mr. Fournier asked Mr. Nadeau for information on the basis of calculation and worksheets for the SR&ED expenditures for 2006 and 2007. On July 3, 2009, Mr. Fournier reminded Mr. Nadeau that he still had not received the information requested in his May 21, 2009 email.
[66] In addition, in a letter dated July 27, 2009, Mr. Fournier asked Marie Bibeau from Novafisc, an AAI contract employee, to send him documents relating to SR&ED expenditures incurred by AAI for 2006 and 2007. We should mention that Mr. Nadeau from AAI was aware of that correspondence, having received a true copy of the letter dated July 27, 2009.
[67] Several information requests from Mr. Fournier or Mr. Dufour addressed to AAI, made throughout 2010, were clearly solely for 2006 and 2007. Moreover, Ms. Bibeau provided Mr. Fournier with some documents regarding only 2006 and 2007 claims for AAI’s SR&ED expenditures.
[68] RTA also argues that Québec TSO representatives, including Mr. Fournier and Mr. Dufour, agreed, on October 7, 2009, to allow AAI to start by sending the documents for 2003, 2004 and 2005 and that the documents for 2006 and 2007 were to be forwarded subsequently. According to RTA, the Québec TSO had agreed to suspend the delivery of documents. The letter dated October 7, 2009, stated the following:
The CRA agrees to allow AAI to begin by working on preparing and sending the supporting documentation for the file on the 2003, 2004 and 2005 financial years. The supplementary information relating to 2006 and 2007 will the sent to the CRA subsequently, as soon as possible.
[69] During Mr. Fournier’s testimony regarding the letter dated October 7, 2009, he said the Québec TSO’s intention was that the documents for 2003 to 2005 be sent immediately and that the documents for 2006 and 2007 were to be sent subsequently, as soon as possible. In that regard, Hugo Lévesque, Superintendent of Technology Development at AAI, had indicated that he needed four to six months to prepare the 2006 and 2007 technical documents. According to Mr. Fournier, the audits for 2003 to 2005 and 2006 and 2007 were being conducted at the same time.
[70] The evidence corroborates Mr. Fournier’s testimony because, following the letter dated October 7, 2009, Ms. Bibeau of Novafisc sent Mr. Fournier documents on November 10, 2009, specifically regarding 2006 and 2007.
[71] In a November 2, 2010, email to Mr. Dufour, Mr. Nadeau from AAI offered to personally deliver the information to him relating to 2006 and 2008 (2008 was added to the audit, but this year is not in dispute) at a meeting whose date was not yet determined.
[72] Subsequently, Mr. Nadeau confirmed that AAI was garnering the documents requested for 2006 to 2008 and specified that the information would be sent in late January 2011.
[73] However, on February 18, 2011, in response to Mr. Fournier’s February 15, 2011, email, which pointed out that AAI had to comply with the July 19, 2010, request for documents for 2006 to 2008, Mr. Nadeau wrote the following to Mr. Fournier:
[TRANSLATION] For the time being, I cannot confirm a 2006+ meeting because our (Alouette) actions will be different depending on whether the answer is positive or negative for 2003–2005. . . .
Of course, if you provide us with the confirmation that 2003–2005 is approved, the meeting (possibly a one-day meeting) will be planned very quickly between you, Deloitte and Alouette.
[74] Following the February 18, 2011, email, there was a conference call on February 21, 2011, between Mr. Nadeau, Mr. Fournier and Mr. Dufour. During that conference call, Mr. Fournier and Mr. Dufour sent him their findings regarding AAI’s SR&ED activities for 2003 to 2005. These findings were not favourable to AAI because the experimental production (“EP”) was largely disallowed.
[75] In the light of these results, Mr. Nadeau indicated that the documents that AAI had prepared to support the 2006 to 2008 claims were “very similar to those presented for the 2003 to 2005 financial years,” and that he wanted to review the findings of the technical examination report for 2003 to 2005 before sending the documents for 2006 to 2008. The Québec TSO finalized the technical report for 2003 to 2005 on March 31, 2011.
[76] On July 8, 2011, AAI had not sent the documents for 2006 to 2008 to the Québec TSO.
[77] On this date, July 8, 2011, Mr. Fournier’s and Mr. Dufour’s manager, Yvan Marceau, sent a form letter to Mr. Nadeau at AAI. In that letter, Mr. Marceau explained the SR&ED program administered by the CRA. Mr. Marceau indicated the following:
[TRANSLATION] Here is a list of the stakeholders involved in the examination of your request and the dates of the planned agenda:
Canada Revenue Agency (CRA) representatives
Research and Technology Advisors (RTAs)
- Martin Dufour;
- Véronique Lambert.
Financial Reviewer (FR)
- Marc Fournier.
Proposed schedule:
Start of examination: Fall 2011
Closure of the file: Summer 2012
[78] RTA argued that that letter, dated July 8, 2011, proved that the audit was not underway when the reassessments were made for 2006 and 2007.
[79] Mr. Fournier from the Québec TSO explained that that form letter is generally sent to the taxpayer before the examination is initiated to inform the taxpayer of the dates and steps involved in the CRA examination process. However, that form letter is not generally sent in situations such as the one in this case, i.e. when previous years are already being audited. That is why Mr. Dufour and he did not send a similar letter at the start of the 2006 and 2007 audit, at the time when the first information request were sent in 2009. Such a letter was not necessary because all the players and issues were already known.
[80] However, Mr. Fournier indicated that the July 8, 2011, letter had been sent to AAI to reduce tensions between the AAI representatives and the Québec TSO representatives, and that the letter was a “courteous way to re-initiate the audit.” The tensions arose from Québec TSO’s findings that only part of the EP would be allowed for 2003, 2004 and 2005. As for the Québec TSO, after having sent AAI several requests for documents, Mr. Fournier and Mr. Dufour were told for the first time that AAI would not provide the documents needed to continue the 2006 and 2007 audit.
[81] RTA submits that the July 8, 2011, letter marked the start of the AAI examination for 2006 and 2007. I disagree. While I do not understand why Mr. Marceau from the CRA chose to send this form letter to AAI, I cannot depend only on the July 8, 2011, letter to determine whether the AAI examination was underway. The evidence as a whole does not raise any doubts; the 2006 and 2007 examination process was underway well before the Minister made the reassessments. Also, in the light of the evidence, AAI cannot claim that it did not know that the 2006 and 2007 examination was underway. The emails from the AAI representatives, including those sent by Mr. Nadeau, clearly show the opposite.
[82] I have only given a few examples of emails, but the evidence as a whole, including discussions, correspondence and emails, shows that the examination process was underway before the reassessments for 2006 were made on July 14, 2011. Upon reading all the documents, one sees that AAI indicated throughout the examination process that it would provide the CRA with the documents for 2006 and 2007, but never did.
[83] In this regard, Mr. Nadeau set conditions for the first time, on February 18, 2011, for providing the documents for 2006 and 2007, whereas his November 2, 2010, email indicated that he would deliver the documents for 2006 and 2007 at the next meeting, in accordance with the Québec TSO’s request dated July 19, 2010. According to Mr. Nadeau’s February 18, 2011, email, the meeting for 2006 and 2007, (and consequently the delivery of documents for these years) now depended on the findings for 2003 to 2005.
[84] In the light of these facts, I find that the examination of AAI’s SR&ED expenditures for 2006 and 2007 was underway before the Minister made the reassessments. More than two years had elapsed since the first information requests were sent in February 2009, and the reassessment for 2006 was made on July 14, 2011. On July 14, 2011, AAI had not provided most of the documents requested.
[85] I also find that by failing to deliver the documents required by the Québec TSO, AAI’s conduct only delayed the Québec TSO representatives’ work to determine whether AAI’s activities were, indeed, SR&ED activities within the meaning of section 248 of the ITA, with respect to 2006 and 2007.
2) Reassessments for 2006 and 2007 issued by the Minister
[86] To understand the reassessments made on July 14, 2011 for 2006, on September 22, 2011, for the year ending October 31, 2007, and on November 10, 2011, for the year ending December 31, 2007, an overview of the reassessments made for the 2003, 2004 and 2005 taxation years is required.
[87] Ms. Martin has been employed with the CRA since 1992 where she has been active in the field of SR&ED for 23 years. She started working on the RTA file as an FR in 2003. She was responsible for the RTA file from 2003 to 2013. Her role was to examine SR&ED expenditures that RTA claimed as deductions. She worked with the Montréal TSO RTA, which was responsible for technology issues.
[88] However, as I have already indicated, because RTA, as a co-owner of AAI, claimed its share of AAI’s SR&ED expenditures, and AAI taxation matters were handled by the Québec TSO, AAI expenditures were audited by Mr. Fournier, as the FR, and technology issues were handled by Mr. Dufour, as the RTA. Ms. Martin therefore had to include the result of the AAI audit in the RTA reassessments.
[89] That said, it was Ms. Martin who made the decisions, including those regarding waivers made by RTA, and, according to the evidence, Ms. Martin ensured that RTA was reassessed for 2006 and 2007.
[90] Thus, Ms. Martin, as the FR, examined the SR&ED expenditures specific to RTA for the 2003, 2004 and 2005 taxation years. Consequently, RTA and the CRA entered into agreements on October 7, 2008, for the 2003, 2004 and 2005 taxation years regarding SR&ED expenditures specific to RTA. However, the Québec TSO had not completed its AAI audit for 2003 to 2005.
[91] Ms. Martin, therefore, proposed a solution to RTA that would give effect to the agreement entered into regarding the SR&ED expenditures and ITCs specific to RTA while keeping 2003 to 2005 open for purposes of reassessments, once the AAI audit was completed. RTA would sign a waiver for 2003 to 2005 regarding AAI’s SR&ED expenditures and ITCs. Thus, as soon as the Québec TSO had completed its AAI audit, she would make reassessments in accordance with the audit results. However, all AAI SR&ED expenditures and ITCs claimed by RTA would be disallowed for the time being pending the findings of the Québec TSO. According to Ms. Martin, this approach protected the Minister’s interests. Ms. Martin was more comfortable with this approach because Mr. Fournier from the Québec TSO had informed her that several “things” claimed by AAI for the 2003 to 2005 taxation years would not be allowed.
[92] Ms. Martin therefore entered into an agreement with RTA. Regarding AAI’s SR&ED expenditures and ITCs, RTA agreed to waive the normal reassessment period for the 2003, 2004 and 2005 taxation years. Thus, Ms. Martin could make reassessments whereby SR&ED expenditures specific to RTA would be allowed for 2003, 2004 and 2005, and the AAI SR&ED expenditures and ITCs claimed by RTA would be disallowed.
[93] Consequently, on October 1, 2008, Mr. Paradis from RTA signed waivers for the normal reassessment period for 2003, 2004 and 2005.
[94] The language of the waivers produced by RTA clearly illustrates the process followed by Ms. Martin and her understanding of the waivers:
SR&ED expenditures and ITC relatively to the Aluminerie Alouette in which Rio Tinto Alcan […] has a participation. When Rio Tinto Alcan’s SR&ED claim for [2003-2004-] 2005 was closed, all expenditures and credit from Alouette had been refused because the audit done by the Québec was not finished. In order to close our file, we have agreed to [refuse] everything for Alouette and when a settlement is reached between CRA’s Québec office and Aluminerie Alouette, the taxpayer will be able to reopen the year [2003-2004-] 2005 SR&ED claim ONLY to claim the Alouette portion allowed following the settlement.
[Emphasis added.]
[95] According to Ms. Martin, the waiver mechanism worked as follows: even if a taxpayer waived the time limit in order to allow the Minister to make a reassessment after the normal reassessment period, the Minister had to disallow the deductions claimed by the taxpayer.
[96] On June 13, 2011, the Québec TSO completed the audit of AAI’s SR&ED expenditures and ITCs for the 2003, 2004 and 2005 taxation years.
[97] As a result, the Minister reassessed RTA in order to allow part of the AAI SR&ED expenditures and ITCs claimed by RTA, in accordance with the Québec TSO audit results. The reassessments were made on August 6, 2012, for the 2003 taxation year, August 22, 2012, for the 2004 taxation year and November 19, 2012, for the 2006 taxation year.
[98] For 2006 and 2007, Ms. Martin was still the FR for SR&ED expenditures specific to RTA. She therefore reviewed the research expenditures specific to RTA, and the Montréal TSO RTA reviewed the technology aspect of research expenditures specific to RTA. As with 2003 to 2005, the Québec TSO was responsible for examining AAI’s SR&ED activities.
[99] As with 2003 to 2005, the Montréal TSO audit was completed before the Québec TSO audit. In this regard, RTA and the Montréal TSO entered into an agreement for 2006 and 2007 regarding SR&ED activities specific to RTA.
[100] Ms. Martin wanted to use the same approach for 2006 and 2007 that she had used for 2003 to 2005, that is, make reassessments for 2006 and 2007 in order to:
- Give effect to the agreement entered into by RTA and the Montréal TSO regarding SR&ED expenditures and ITCs specific to RTA;
- Disallow all AAI SR&ED expenditures and ITCs claimed by RTA, keep the years open by way of waivers and make reassessments for 2006 and 2007 as soon as the Québec TSO completed the AAI audit.
[101] According to Ms. Martin, to this end, RTA had to waive the normal reassessment period for 2006 and 2007 regarding its share of the expenditures claimed for AAI’s SR&ED and ITCs.
[102] However, Mr. De Luca from Deloitte, as AAI’s new representative, indicated to Ms. Martin that her approach to waivers was not acceptable. Mr. De Luca indicated that RTA would provide a waiver for 2006 and 2007. However, Ms. Martin would have to wait until the Québec TSO had compl