Pièces automobiles Lecavalier Inc. v. The Queen

Pièces automobiles Lecavalier Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2013-10-02
Neutral citation
2013 TCC 310
File numbers
2011-952(IT)G
Judges and Taxing Officers
Paul Bédard
Subjects
Income Tax Act
Decision Content
Docket: 2011-952(IT)G
BETWEEN:
PIÈCES AUTOMOBILES LECAVALIER INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on February 12 and 13, 2013, at Montreal, Quebec.
Before: The Honourable Justice Paul Bédard
Appearances:
Counsel for the appellant:
Louis Tassé
Marie-Claude Marcil
Counsel for the respondent:
Natalie Goulard
____________________________________________________________________
JUDGMENT
The appeals from the reassessments made under the Income Tax Act for the 2002, 2004 and 2005 taxation years are dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 2nd day of October 2013.
“Paul Bédard”
Bédard J.
Translation certified true
on this 23rd day of April 2014.
Erich Klein, Revisor
Citation: 2013 TCC 310
Date: 20140328
Docket: 2011-952(IT)G
BETWEEN:
PIÈCES AUTOMOBILES LECAVALIER INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
AMENDED REASONS FOR JUDGMENT
Bédard J.
[1] This is a reassessment for the appellant’s 2002, 2004 and 2005 taxation years. The Minister of National Revenue (Minister) applied the general anti-avoidance rule (GAAR) found in section 245 of the Income Tax Act, R.S.C. 1985), c. 1 (5th Supp.) (ITA) to a series of transactions involving the purchase of shares in Greenleaf Canada Acquisitions Inc. (Greenleaf) by the appellant.
[2] In December 2002, 3929761 Canada Inc. (which subsequently became the appellant) purchased from Ford U.S. all of the shares of its subsidiary Greenleaf in consideration of $1 and the assumption of a debt of $9,742,007 owed by Greenleaf to its parent company, Ford U.S. The amount of the debt owed by Greenleaf to Ford U.S. had been previously reduced from $24,369,439 to $9,465,163 by Ford U.S. as it had injected funds into Greenleaf by subscribing for additional common shares for a total of $14,843,596 and, on the same day, Greenleaf paid those funds to Ford U.S. as payment of part of the principal and the interest owing on the debt. In carrying out those transactions prior to the sale of its subsidiary’s shares, 3929761 Canada Inc. acquired the debt of Ford U.S. for an amount exceeding 80% of the principal amount of the debt at the time of acquisition. If 3929761 Canada Inc. had proceeded with the acquisition of the shares and the debt of Greenleaf without previously reducing the debt, subparagraph 80.01(6)(a)(ii) would have applied such that the debt would have been characterized as a “specified obligation”. This specified obligation would then have been considered a parked obligation under subsection 80.01(7) and the debt forgiveness scheme would have applied to the transaction under subsection 80.01(8). This would have resulted in the loss of the various tax consequences with respect to Greenleaf and in the immediate inclusion of $5,700,000 in the appellant’s income.[1]
[3] In determining the tax consequences that are reasonable in the circumstances in accordance with subsection 245(5) of the ITA, the Minister considered that the appellant had realized a gain of $14,944,275 on a forgiveness of debt and that this gain had to be subject to the rules under section 80 of the ITA. The Minister has therefore adjusted the tax consequences for the appellant for 2012 as follows:
Changes made pursuant to section 80
2002 taxation year
Reduction of balance of non-capital losses (subs. 80(3))
$414,964
Reduction with respect to UCC (subs. 80(5))
$2,462,028
Reduction of CEC (subs. 80(7): ¾ x $71,773 = $53,830)
$53,830
Half of the balance (subs. 80(13): ½ x $11,995,510 = $5,997,755)
$5,997,755
Less deduction allowed at the appellant’s request: (s. 61.3)
($5,997,755)
[4] After making the changes to the tax consequences with respect to Greenleaf pursuant to section 80 of the ITA, the Minister made certain adjustments to the appellant’s taxable income for the 2002, 2004 and 2005 taxation years.
Issues
[5] In order for the GAAR to apply, the following conditions must be met:
(i) there must be a tax benefit resulting from a transaction or a series of transactions;
(ii) the transaction must be an avoidance transaction in the sense that it cannot reasonably be said to have been undertaken or arranged primarily for a bona fide purpose; and
(iii) the avoidance transaction from which the tax benefit arises must be abusive in the sense that it cannot reasonably be concluded that obtaining the tax benefit would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.
[6] In this case, the appellant acknowledges that it obtained a tax benefit. The issue therefore is whether the tax benefit results from an avoidance transaction or a series of avoidance transactions, and if so, whether the avoidance transaction or series of avoidance transactions directly or indirectly results in abuse.
[7] The appellant submits that the purchase of the shares of Greenleaf by 3929761 Canada Inc. is not part of the same series of transactions as the avoidance transactions identified by the respondent because the transactions in the series were imposed by Ford U.S. The appellant also submits that the avoidance transactions identified by the respondent were entered into for bona fide purposes, that is to say, the American tax and economic considerations of Ford U.S. The appellant submits that the purchase transaction was one in which the vendor had created a structure without any regard for the tax consequences for the Canadian purchaser. Moreover, the appellant submits that there was no abusive tax avoidance because the transaction was not contrary to the object, spirit and purpose of section 80 of the ITA.
The context prior to the purchase of the shares
[8] Pièces Automobiles Lecavalier was originally a family-owned company of which Roger Fugère Senior had been the shareholder and director since the early 1980s. His sons, including Roger Fugère Junior (Mr. Fugère), all played an important role in the company.
[9] In 1993, following an estate freeze, the four children of Roger Fugère Senior became shareholders in the company. Mr. Fugère was acting at that time as director and chief executive officer.
[10] In 1999, Ford U.S., in conjunction with the implementation of a restructuring plan for its operations, purchased a number of automobile parts recycling centres in North America. On November 1, 2000, Ford U.S, through its subsidiary Greenleaf, purchased the shares of Gestion Phirobec Inc., the parent company of Pièces Automobiles Lecavalier, for approximately $18,600,000. Following the purchase, Mr. Fugère kept his position of chief executive officer at Pièces Automobiles Lecavalier.
[11] Over the course of the restructuring of Ford U.S., Greenleaf acquired several companies operating in the same field. From January 1 to May 1, 2001, the following companies were amalgamated with Greenleaf or wound up into Greenleaf: Plazek Auto Recycler Ltd., Cumberland Motor Sales Ltd., Cumberland Auto Parts Ltd. and Les entreprises Jules Harbec Inc.
[12] On May 1, 2001, Pièces Automobiles Lecavalier and Gestion Phirobec Inc. amalgamated and the company resulting from the merger was thereupon wound up into Greenleaf and dissolved. Ford U.S. then continued all of its automobile parts recycling operations in Canada through Greenleaf.
The process whereby 3929761 Canada Inc. purchased the shares of Greenleaf
[13] In April 2002, following a change of leadership, Ford U.S. took steps to cease its automobile recycling activities. Mr. Fugère saw this as an opportunity to buy back from Ford U.S. the Quebec division of Greenleaf, which at the time included several amalgamated corporations, including Pièces Automobiles Lecavalier.
[14] In September 2002, Ford U.S. held 13,050,001 common shares of Greenleaf. Greenleaf also owed Ford U.S. $24,369,439, which amount Ford U.S. had granted as advances.
[15] According to the testimony of Mr. Fugère, a first meeting was held between him and the representatives of Ford U.S. in April 2002. At that meeting, Mr. Fugère purportedly stated that he only wished to purchase the assets related to the recycling activities in Quebec. He also purportedly told the representatives of Ford U.S. that he did not wish to acquire the shares of Greenleaf as he was not interested in that subsidiary’s Ontario assets. Also according to him, Ford U.S. indicated instead at that time its firm intention to divest itself of all its Canadian activities in that field by selling the shares of Greenleaf. On July 25, 2002, Mr. Fugère said, he sent Ford U.S. an offer to purchase all of the shares of Greenleaf and the debt owed Ford U.S. by Greenleaf in consideration of $7,750,000. The offer was apparently refused by Ford U.S.
[16] On August 22, 2002, Mr. Fugère sent Ford U.S. a second offer, again to purchase the shares of Greenleaf and the debt owed by Greenleaf. The offer contemplated two payment scenarios. According to Mr. Fugère, those offers were also rejected.
[17] Around September 23, 2002, following a number of negotiating sessions, Mr. Fugère and Ford U.S. allegedly agreed on the purchase price for the shares of Greenleaf. The parties reached an agreement in principle whereby a company to be created, 3929761 Canada Inc. (which would eventually become the appellant, Pièces Automobiles Lecavalier), would acquire all of the shares of Greenleaf and the debt of $24,369,439 for $9,742,008.
The purchase of the shares of Greenleaf
[18] Following the agreement in principle, the following transactions occurred. The transactions were characterized by the parties as being [Translation] “debt clean-up”:
On October 15, 2002, there was a subscription by Ford U.S. for 1,000,000 additional common shares of Greenleaf for a paid consideration of $14,843,596. Ford U.S. now held a total of 14,050,001 shares in Greenleaf.
On October 15, 2002, there was a bank transfer of $14,944,302 to Ford U.S. as repayment of the advances, which amount consisted of $12,250,000 in principal and $2,694,301 in interest. At that time, the total debt balance was reduced from $24,369,439 to $9,465,163.
[19] On December 2, 2002, Ford U.S. sold all of the shares of Greenleaf to 3929761 Canada Inc. in consideration of $1. At the same time, Ford U.S. sold to 3929761 Canada Inc. for a consideration of $9,742,007 the Greenleaf debt of $9,750,000[2] that it held. The total consideration paid for all the shares and the debt was $9,742,008, being the amount negotiated on or about September 23, 2002.
General anti-avoidance rule (GAAR)
[20] The analytical framework that applies to the general anti-avoidance rule found in section 245 of the ITA was set out by the Supreme Court of Canada in Canada Trustco Mortgage Co. v. Canada[3] and confirmed in Lipson v. Canada[4] and Copthorne Holdings v. Canada.[5] Subject to the possible application of the GAAR, taxpayers are entitled to choose to conduct business or plan their affairs in such a way as to minimize their tax liability, this being in accordance with the principle stated in Commissioners of Inland Revenue v. Duke of Westminster.[6]
[21] The GAAR is a legal mechanism whereby Parliament has given the courts the unusual task of going behind the words of the legislation to determine the object, spirit or purpose of the provision or provisions relied upon by the taxpayer.[7] It must be remembered, however, that the GAAR is a “provision of last resort”[8] that may be invoked by the Minister if he believes that the taxpayer’s transactions are not in accord with the object, spirit, rationale or purpose of the provisions relied upon and thus thwart them or constitute an abuse thereof.[9]
The existence of a tax benefit
[22] The first requirement for the application of the GAAR is that of the existence of a tax benefit. The burden is usually on the taxpayer to refute the Minister’s assumption of the existence of such a benefit.[10] As mentioned earlier, the appellant acknowledges that it obtained a tax benefit, namely, the retention of tax consequences that would have otherwise been reduced pursuant to section 80 of the ITA. We must therefore go on to the second requirement for the application of the GAAR.
Avoidance transaction: legal framework
[23] The second requirement for the application of the GAAR, as stated in Trustco,[11] is that the transaction giving rise to the tax benefit be an avoidance transaction within the meaning of subsection 245(3) of the ITA:
(3) An avoidance transaction means any transaction
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
[24] The function of this requirement is to remove from the ambit of the GAAR transactions or series of transactions that may reasonably be considered to have been undertaken or arranged primarily for one or more non-tax purposes.[12] It is up to the taxpayer to refute the Minister’s claim or challenge the Minister’s factual assumption by showing that a bona fide non-tax purpose primarily drove the transaction.[13] Since the determination of the existence of an avoidance transaction involves a decision as to the facts, the burden of proof is the same as in any tax proceeding where the taxpayer disputes the Minister’s assessment: proof on the balance of probabilities.[14]
[25] Where, as here, the Minister assumes that the tax benefit resulted from a series of transactions rather than a single transaction, it is necessary to (1) determine if there is a series, which transactions make up the series, and whether the tax benefit resulted from the series,[15] and (2) determine if any transaction in the alleged series constitutes an avoidance transaction.[16] A series of transactions that results directly or indirectly in a tax benefit will be characterized as an avoidance transaction, unless each transaction in the series may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.[17] Finally, the person who undertakes or arranges the avoidance transaction need not be the one who obtains the tax benefit.[18]
Avoidance transaction: analysis
[26] The Minister argues that the two debt clean-up transactions undertaken on October 15, 2002, namely, the share subscription by Ford U.S. and the use by Greenleaf of the amount of the subscription to repay part of the debt, are avoidance transactions as they had no bona fide purpose and had only been executed in order to obtain a tax benefit, i.e., the retention of tax consequences. Together with the sale of the shares, these transactions constitute, according to the Minister, the series of transactions that resulted in that tax benefit.
[27] For its part, the appellant submits that the purchase of the shares of Greenleaf by 3929761 Canada Inc. was not part of the same series of transactions as the two debt clean-up transactions because those two transactions were imposed by Ford U.S., without regard to the appellant’s motives.
[28] With respect to the bona fide purpose of the transactions alleged to have been avoidance transactions, the appellant submits that they were entered into for reasons specific to Ford U.S. as well as for U.S. tax reasons. The appellant submits that these were bona fide purposes.
The existence of a series of transactions
[29] In Copthorne, the Supreme Court of Canada confirmed the position taken in Trustco with respect to the series of transactions concept. That position was itself based on the majority opinion of the Federal Court of Appeal judges in OSFC. In the determination of the existence of a series of transactions, the starting point is to be found in the English common law, under whose definition of a series “each transaction in the series [is] pre-ordained to produce a final result”.[19] Subsection 248(10) of the ITA broadens this definition by providing that “related transactions” completed “in contemplation of” or because of the series shall be deemed to form part of the series:
Series of transactions
248(10) For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.
[30] The appellant submits that the debt clean-up transactions did not form part of the same series of transactions as the purchase of the shares because they were transactions that had been unilaterally imposed by Ford U.S. The appellant asserted that the two debt clean-up transactions, namely, the subscription for shares of the capital stock and the repayment of the loan, had been imposed by Ford U.S. once the sale price was determined and hence constituted a series that was distinct from the purchase of the shares of Greenleaf by 3929761 Canada Inc.
[31] There were, according to the appellant, two separate series of transactions, each having been undertaken by different parties. I believe that this is the first time that this Court has considered the existence of a series of transactions from this perspective. It is therefore necessary to determine whether the two debt clean-up transactions, which resulted in the tax benefit, may be viewed as “related transactions” undertaken because of the purchase of the shares and thus as constituting a series of transactions.
[32] The appellant’s evidence in that regard was essentially based on the testimony of Mr. Fugère and Mr. Lacombe. Mr. Lacombe is a tax accountant and has been working for the Fugère family since the early 1990s. The appellant also filed, as Exhibit A‑2,[20] a two-page document indicating the different stages of the debt clean-up transactions that had to be completed prior to the purchase of the shares. According to Mr. Fugère’s testimony, the various transactions shown in that document had been imposed by Ford U.S., without any possibility of compromise. The document was apparently sent by fax a few days after the agreement in principle, that is, between September 23 and September 30, 2002. Also, according to those witnesses, the aforementioned stages of the transactions were never discussed or negotiated between the parties.
[33] At the outset, I must admit that the appellant has not satisfied me that Ford U.S. had imposed the debt clean-up transactions. Even though Messrs. Fugère and Lacombe testified to that effect, it would have been desirable, even necessary in this case, that a representative of Ford U.S. testify that Ford U.S had indeed unilaterally structured the transaction. When asked to comment on the absence of a representative of Ford U.S. on the stand, counsel for the appellant explained this absence by a lack of co-operation on the part of Ford U.S.
[34] Moreover, the document filed as Exhibit A‑2 is the only documentary evidence that Ford U.S. had imposed the debt clean-up transactions. While the document may have come from Ford U.S. and although its introduction in evidence was not challenged, I consider, for the following reasons, that the probative value of that document is relatively low. It is an undated, unsigned two-page document allegedly sent by fax. The document shows a series of transactions and stages presented in a [Translation] “bare-bones” format. I would be surprised if a company of the reputation and size of Ford U.S. had undertaken a transaction of more than 9 million dollars and dictated its various stages by faxing to its future purchaser a two-page document that I would call a [Translation] “draft”. Such a suggestion strikes me as lacking credibility, especially since the documentary evidence shows that American and Canadian tax specialists were called upon to work on this complex transaction.[21] Thus, in light of the evidence submitted at the hearing and having regard to the absence of certain evidence that should have been produced, I am not satisfied that the transactions in question were imposed by Ford U.S. as contended by the appellant. That said, even if the transactions had been imposed by Ford U.S., I believe that the debt clean-up and the purchase of the shares formed part of the same series of transactions for the reasons that follow. Mr. Fugère testified that 3929761 Canada Inc. had wished, at the beginning of the negotiation process, to acquire the assets of Greenleaf. However, Ford U.S. allegedly indicated at that point its firm intention to sell its shares in order to realize its latent capital loss[22] with respect to the shares. Furthermore, to realize that loss, Mr. Lacombe testified, Ford U.S. absolutely had to undertake the debt clean-up transactions. This entire portion of the testimony constitutes hearsay. However, even if I were to accept this portion of the testimony, I would arrive at the conclusion that Ford U.S. undertook the debt clean-up transactions in order to be able to realize its capital loss by selling the shares of Greenleaf to 3929761 Canada Inc. Ford U.S. wanted to sell its shares in order to realize its latent capital loss, which would only have been available if the debt clean-up had been carried out. Thus, had Ford U.S. not performed the debt clean-up, it would not have been able to benefit from its capital loss. In such a situation, it would have been a matter of indifference to Ford U.S. whether it was the shares or the assets of its subsidiary that were sold. Can it therefore be said that the debt clean-up transactions, which resulted in the tax benefit, may be considered “related transactions” undertaken because of the purchase by 3929761 Canada Inc. of the shares of Greenleaf? It seems to me that the answer is obvious.
[35] To conclude on this point, I am of the view that the debt clean-up transactions and the sale of the shares of Greenleaf formed part of the same series of transactions, on the one hand because the debt clean-up had been carried out because of the purchase of the shares and on the other hand because I am not satisfied that the clean-up transactions were imposed by Ford U.S.
Whether any transaction in the alleged series constitutes an avoidance transaction
[36] The determination of whether a transaction is undertaken primarily for a non‑tax purpose must be made objectively on the basis of all of the evidence available to the court.[23] At this stage, the burden of proof is still on the taxpayer, who must prove the existence of a bona fide non-tax purpose.[24]
[37] As the Supreme Court stated in Trustco, the Tax Court of Canada judge must weigh the evidence to determine whether it is reasonable to conclude that the transaction was not undertaken or arranged primarily for a non-tax purpose. Thus the possibility of different interpretations of the events must be objectively considered.[25]
[38] If at least one of the transactions forming part of the series of transactions constitutes an avoidance transaction, then the tax benefit that results from the series may be denied under the GAAR. Conversely, if each transaction in the series was undertaken primarily for bona fide non-tax purposes, the GAAR cannot be applied to deny the resulting tax benefit. Finally, I note that there may be a tax motive behind a transaction without it necessarily being inferred that the tax motive is the primary reason for the transaction.
[39] The appellant submits that the debt clean-up transactions were entered into for reasons specific to Ford U.S. as well as for U.S. tax reasons. The appellant submits that those are bona fide purposes.
[40] The respondent submits that the subscription for additional shares by Ford U.S. and the use by Greenleaf of the subscription amount to repay part of the debt owed to Ford U.S. constitute avoidance transactions as they had no bona fide purpose. Also according to the respondent, the sole purpose of these transactions was to preserve the tax consequences with respect to Greenleaf by preventing the application of the debt forgiveness rules of sections 80 and 80.01 of the ITA.
[41] From a reading of paragraph 245(3)(b) and the definition of “tax benefit” in subsection 245(1), I note that [Translation] “purely American” tax motivations are in themselves bona fide purposes. Indeed, although obtaining a tax benefit is not considered a bona fide purpose, the definition of tax benefit refers to the “reduction, avoidance or deferral of tax . . . payable under this Act”, which is a specific reference to the ITA:
245(1)
“tax benefit” means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty.
245 (3) An avoidance transaction means any transaction
. . .
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
(Emphasis added.)
[42] Thus, if it is reasonable to consider that the transaction was undertaken primarily for bona fide purposes, being in this case American tax motivations and reasons specific to Ford U.S., the debt clean-up transactions cannot be characterized as avoidance transactions.
[43] The evidence submitted by the appellant on this issue consisted essentially of the testimony of Mr. Lacombe and Brian Nerney. Mr. Lacombe testified that the debt clean-up transactions had been imposed by Ford U.S. for U.S. accounting and tax reasons and so that Ford U.S. could benefit from its capital loss when it disposed of the Greenleaf shares. Mr. Lacombe is a Canadian tax accountant. He was not designated by the Court as an expert on Canadian tax, much less as an expert on U.S. tax. Furthermore, having him so recognized does not appear to have been contemplated by counsel for the appellant. With respect, I cannot accept that part of his testimony pertaining to the U.S. tax consequences for Ford U.S. The appellant could have and should have called as a witness an expert on American tax in order to present the various impacts of the debt clean-up transactions. Moreover, Mr. Lacombe admitted to turning to a Canadian tax professional specializing in U.S. taxation to provide him with information in that regard. However, the appellant did not think it useful to call that person as a witness, stating that it was a matter of cost. The Court has no judicial knowledge of the law of the United States and is not required to make findings with respect to its application to certain transactions in a Canadian context. Accordingly, I cannot accept this aspect of Mr. Lacombe’s testimony.
[44] Brian Nerney was subpoenaed by the appellant to testify about his role in similar transactions which had occurred in the United States. More specifically, he had apparently been a director and shareholder of Greenleaf U.S., an automobile recycling company purchased by Ford U.S. during the restructuring of its operations.
[45] Essentially, his testimony was that Ford U.S. had imposed on him a transaction similar to that which is in question here. According to him, the transaction was so structured for the sole purpose of enabling Ford U.S. to benefit from a latent capital loss on the sale of the shares, as the extinguishing of a debt between parties not at arm’s length prevented the loss from being realized.
[46] It is important to note that Mr. Nerney was not qualified as an expert witness. His testimony is hearsay and, while it is interesting, its probative value is still very limited.
[47] The appellant did not think it useful or was unable to have a representative of Ford U.S. testify concerning the internal reasons that would have led Ford U.S. to structure the debt clean-up transactions as it did. Nor did the appellant deem it useful to call an expert in U.S. law to inform the Court regarding the U.S. tax consequences of those transactions. The respondent is asking me to draw a negative inference from this, which I am willing to do for the reasons set out hereunder.
Negative inference
[48] In civil matters, the general rule respecting adverse inferences from the failure to call a witness goes back to Blatch v. Archer,[26] a decision in which, at page 65, Lord Mansfield stated the following:
It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of the one side to have produced, and in the power of the other to have contradicted.
[49] And in The Law of Evidence in Civil Cases (John Sopinka and Sidney N. Lederman, Toronto. Butterworths, 1974), the authors explain at pages 535-36:
The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed.
(Emphasis added.)
[50] This principle was reiterated by the Supreme Court of Canada in 1970 in Lévesque v. Comeau:[27]
This is not all. Appellant Lola Levesque's expert examined her for the first time more than a year after the accident, and after she had consulted several doctors and undergone different examinations in the meantime. She alone could bring before the Court the evidence of those facts and she failed to do it. In my opinion, the rule to be applied in such circumstances is that a Court must presume that such evidence would adversely affect her case. The fact that those witnesses all live in Montreal does not make the rule any less applicable. Appellant Lola Levesque should, if necessary, have applied for a rogatory commission. Under the circumstances, her testimony and that of her husband respecting her good state of health before the accident could properly be considered insufficient evidence for the purpose of excluding the other possible causes of the deafness.
(Emphasis added.)
[51] This excerpt from Lévesque v. Comeau has often been accompanied, in recent case law,[28] by the following comments of James H. Chadbourn, ed., Wigmore on Evidence, vol. 2 (Boston: Little, Brown & Company, 1979), at page 192:
. . . The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so; and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavorable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which make some other hypothesis a more natural one than the party’s fear of exposure. But the propriety of such an inference in general is not doubted.
(Emphasis added.)
[52] The Supreme Court recently reminded us of this principle in R. v. Jolivet.[29] Although this is a criminal law judgment, the Court made some interesting remarks regarding the application of this principle in civil matters. For instance, the party against whom the adverse inference is sought may provide a satisfactory explanation of the reasons for the failure to call the witness.[30] The Court further noted that one must be precise about the exact nature of the adverse inference sought to be drawn. Quoting Sopinka,[31] the Court points out that the failure to call evidence may, depending on the circumstances, amount “to an implied admission that the evidence of the absent witness would be contrary to the party’s case, or at least would not support it.”[32]
[53] Again in Jolivet,[33] the Supreme Court also states that the circumstances in which trial counsel decides not to call a particular witness may restrict the nature of the appropriate adverse inference. For example, one may decide against calling a witness because the point has been adequately covered by another witness, or because an honest witness may have a poor demeanour, or on account of other factors unrelated to the truth of the testimony.[34]
[54] In Downey v. Canada,[35] the appellant was party to a sale between persons not at arm’s length and had to show that unrelated parties would have concluded the transaction at a similar price. The Tax Court Judge determined that the appellant had failed to provide sufficient evidence to refute the Minister’s assumptions: he did not call the co-contractor as a witness to provide evidence on the circumstances of the transaction and the determination of the price. That decision was affirmed by the Federal Court of Appeal.[36]
[55] In Teelucksingh v. Canada,[37] at paragraph 81, Justice Miller stated that, for a negative inference to be drawn, there must be a vacuum in the evidence.
[56] In order to draw a negative inference with respect to the absence of a witness, the trial judge must first be dissatisfied with the evidence before the court or, at least, have a real doubt as to its content. Where the trial judge has misgivings or expresses some doubt regarding the evidence and where the only person able to provide additional evidence or to corroborate that already submitted does not testify, a negative inference may be drawn from that absence unless it can be explained by plausible and credible circumstances. In that regard, the judge must consider whether the circumstances that led trial counsel not to call a particular witness may restrict the nature of the appropriate adverse inference.
[57] In the present appeal, the appellant is attempting to show that the debt clean-up transactions were imposed by Ford U.S. for its own U.S. tax and U.S. financial purposes. The appellant’s evidence to that end is based on the testimony of Mr. Fugère and Mr. Lacombe. Their testimony is self-serving and constitutes to a great extent hearsay. Some aspects of it are also dubious or implausible in light of the facts. In addition, the appellant submitted inadequate documentary evidence to which no great probative value can be given. Thus, there was clearly a vacuum in the evidence.
[58] Only a representative of Ford U.S. would have been able to corroborate the testimony of Mr. Fugère and Mr. Lacombe. The appellant submits that, owing to the lack of cooperation by Ford U.S., the Court was unable to have the benefit of the testimony of such a representative. As stated by Justice Archambault in Morley,[38] the Act and rules of practice provide for various means to ensure the attendance of a witness at the hearing.
[59] In addition, the appellant did not find it necessary to call an expert who could have enlightened the Court as to the U.S. tax consequences the debt clean-up transactions would have had, which consequences could have constituted bona fide purposes. Counsel for the appellant stated that the cost involved was what led to the decision not to call such a witness. I note, however, that the appellant had Mr. Nerney come from Texas to testify for about five minutes in total on subjects that were on their very face hearsay and which were of no assistance to the Court.
[60] Evidence of the terms and conditions of the sale was essential if the appellant wished to meet its burden with respect to the existence of avoidance transactions. Considering as well that it was the appellant that had the burden of disproving the existence of such a transaction, I have no hesitation in drawing a negative inference from the absence of testimony by a representative of Ford U.S. The importance of such testimony and the absence of explanations and justifications that would have been credible in the circumstances support that inference.
Finding on the series of avoidance transactions
[61] In conclusion, since the determination whether a transaction was undertaken primarily for a non-tax purpose is to be made objectively in light of all of the evidence presented to the Court, I am of the view that the appellant has failed to establish on a balance of probabilities that the debt clean-up transactions had been undertaken primarily for non-tax purposes.
[62] It is clear that the transactions had tax purposes. The appellant, however, had the burden of proving that there were non-tax purposes, and that the transactions had been undertaken primarily for those purposes. That was not done. U.S. tax considerations and internal considerations, whether accounting, economic or otherwise, can in some cases constitute bona fide non-tax purposes. Here, the evidence does not enable me to draw that conclusion. Accordingly, I find that both debt clean-up transactions constituted avoidance transactions which resulted in a tax benefit, namely, the preservation of tax consequences.
[63] Before moving on to the third stage of the analysis, I would like to make the following comments. The appellant repeatedly claimed that the tax aspects of the transaction were never considered until Ford U.S. sent the document describing the transactions to be undertaken. Mr. Fugère and Mr. Lacombe both testified that it was only when the transactions were imposed by Ford U.S., around September 30, 2002, that they asked themselves about the tax consequences of the purchase of the shares and the debt. It is unclear from the evidence submitted whether that argument was in relation to the existence of a series of transactions or whether it related to the avoidance transactions per se. In light of the analysis conducted in the preceding paragraphs, it is not necessary for me to entertain such an argument. I have already found that there was a series of transactions that included two avoidance transactions. Nevertheless, since the appellant has stressed this aspect, I believe it is important to address this part of its argument.
[64] Mr. Fugère and Mr. Lacombe testified that the negotiations pertaining to the purchase of the shares of Greenleaf by 3929761 Canada Inc. had begun in March 2002. According to their testimony, it was not until the end of September 2002, when Ford U.S. sent the document imposing the various transactions, that they considered the tax consequences of the purchase. I understand from their testimony that a period of approximately six months had elapsed between the start of the negotiations and the implementation of the transaction structure and that, prior to that, the tax aspects of the transaction had never been considered. While the testimony of Mr. Fugère and Mr. Lacombe were consistent, they failed to persuade me.
[65] Mr. Lacombe is an experienced tax accountant. He is a consultant and has been a close advisor to the Fugère family since the early 1990s. He explained at length his various coaching roles in the estate freeze relating to Pièces Automobiles Lecavalier, in the sale to Ford in 1999 and in the purchase at issue here. At all stages of the transaction that led to the purchase of the shares of Greenleaf, he was Mr. Fugère’s advisor.
[66] Mr. Lacombe was aware of the existence of th