Laurentian Bank of Canada v. The Queen

Laurentian Bank of Canada v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-08-21
Neutral citation
2020 TCC 73
File numbers
2016-4706(IT)G
Judges and Taxing Officers
Sylvain Ouimet
Subjects
Income Tax Act
Decision Content
Docket: 2016-4706(IT)G
BETWEEN:
LAURENTIAN BANK OF CANADA
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on April 5 and 8, 2019, at Montreal, Quebec.
Before: The Honourable Justice Sylvain Ouimet
Appearances:
Counsel for the appellant:
Wilfrid Lefebvre
Jonathan Lafrance
Counsel for the respondent:
Michel Lamarre
JUDGMENT
The appeal from the assessments made pursuant to the Income Tax Act for the 2012, 2013 and 2014 taxation years is allowed, with costs, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 21st day of August 2020.
"Sylvain Ouimet"
Ouimet, J.
Translation certified true
on this 17th day of March 2021.
François Brunet, Revisor
Citation: 2020 TCC 73
Date: 20200821
Docket: 2016-4706(IT)G
BETWEEN:
LAURENTIAN BANK OF CANADA
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Ouimet, J.
I. INTRODUCTION
[1] Laurentian Bank of Canada (Laurentian Bank) is appealing from three assessments made on January 7, 2016, by the Minister of National Revenue (the Minister) [1] . These assessments are for the Laurentian Bank taxation years ending October 31, 2012, 2013 and 2014 (years at issue) [2] . By making these assessments, the Minister denied the Laurentian Bank deductions of $960,000 in the computation of its income for each year at issue [3] . These deductions were claimed pursuant to paragraph 20(1)(e) of the Income Tax Act (ITA) and relate to transaction fee payments made by Laurentian Bank under share subscription agreements.
[2] For each year at issue, the deductions claimed represented twenty percent (20%) of a total amount of $4,800,000, i.e. the total transaction fees paid by Laurentian Bank to Caisse de dépôt et placement du Québec (CDPQ) and the Fonds de solidarité des travailleurs du Québec (FSTQ) under share subscription agreements dated June 6, 2012 (subscription agreements) [4] . In accordance with the subscription agreements, Laurentian Bank paid fees of $3,999,999.56 to CDPQ and $799,999.56 to the FSTQ [5] . Pursuant to subparagraph 20(1)(e)(iii) of the ITA, the amount deductible from a taxpayer's income for expenses incurred in the course of an issuance of shares is limited to 20% per taxation year.
[3] The Minister denied the deductions claimed by Laurentian Bank on the ground that the transaction fees paid under the subscription agreements could not be qualified as "expenses incurred" in the course of an issuance of shares within the meaning of paragraph 20(1)(e) of the ITA for the following reasons:
1- CDPQ and the FSTQ did not render services to Laurentian Bank in return for the transaction fees they received [6] .
2- CDPQ and the FSTQ did not act as salespersons, agents or dealers in securities for Laurentian Bank [7] .
3- The amounts of $3,999,999.56 and $799,999.56 that Laurentian Bank paid CDPQ and the FSTQ, respectively, were in fact discounts granted by Laurentian Bank on the subscription price of its shares [8] .
[4] In the alternative, the respondent argued that the deductions claimed by Laurentian Bank should be denied for the following reason:
The transaction fees of $3,999,999.56 and $799,999.56 were unreasonable in the circumstances. Consequently, pursuant to section 67 of the ITA [9] , these sums could not be deducted in computing Laurentian Bank's income.
[5] The following persons testified on behalf of the appellant at the hearing:
- Stéphane Lanthier, Vice President, Taxation at Laurentian Bank.
- FrançoisBoudreault, Vice-President, Private Equity, North America and Latin America at CDPQ.
[6] The respondent did not call any witnesses to the hearing.
II. ISSUE
[7] The issue is as follows:
Did the Minister correctly denied a $960,000 deduction in the computation of Laurentian Bank's income for each year at issue?
[8] In order to answer this question, the Court will have to answer the following four questions:
a) Did Laurentian Bank incur expenses of $3,999,999.56 and $799,999.56?
b) Were these expenses incurred in the course of the issuance of shares?
d) Were the transaction fees of $799,999.56 that Laurentian Bank paid the FSTQ reasonable in the circumstances?
c) Were the transaction fees of $3,999,999.56 that Laurentian Bank paid CDPQ reasonable in the circumstances?
III. RELEVANT STATUTORY PROVISIONS
[9] The relevant statutory provisions are as follows:
Income Tax Act, R.S.C., 1985, c. 1 (5th Supp).
PART I - Income Tax
DIVISION B - Computation of Income
SUBDIVISION B - Income or Loss from a Business or Property
Income
9(1) Subject to this Part, a taxpayer's income for a taxation year from a business or property is the taxpayer's profit from that business or property for the year.
. . .
Deductions
General limitations
18(1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of
. . .
Capital outlay or loss
(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;
. . .
Deductions permitted in computing income from business or property
20(1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such [part] of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
. . .
Expenses re financing
(e) such part of an amount (other than an excluded amount) that is not otherwise deductible in computing the income of the taxpayer and that is an expense incurred in the year or a preceding taxation year
(i) in the course of an issuance or sale of units of the taxpayer where the taxpayer is a unit trust, of interests in a partnership or syndicate by the partnership or syndicate, as the case may be, or of shares of the capital stock of the taxpayer,
. . .
(including a commission, fee, or other amount paid or payable for or on account of services rendered by a person as a salesperson, agent or dealer in securities in the course of the issuance, sale or borrowing) that is the lesser of:
(iii) that proportion of 20% of the expense that the number of days in the year is of 365 and
(iv) the amount, if any, by which the expense exceeds the total of all amounts deductible by the taxpayer in respect of the expense in computing the taxpayer's income for a preceding taxation year
and for the purposes of this paragraph,
(iv.1) excluded amount means
(A) an amount paid or payable as or on account of the principal amount of a debt obligation or interest in respect of a debt obligation,
(B) an amount that is contingent or dependent on the use of, or production from, property, or
(C) an amount that is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation,
. . .
SUBDIVISION F - Rules Relating to Computation of Income
General limitation re expenses
67 In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.
Interpretation Act, R.S.C., 1985, c. I-21.
Rules of Construction
Property and Civil Rights
Duality of legal traditions and application of provincial law
8.1 Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.
Civil Code of Québec, CQLR, c. CCQ-1991
BOOK FIVE – OBLIGATIONS
TITLE ONE – OBLIGATIONS IN GENERAL
CHAPTER II – CONTRACTS
DIVISION IV – INTERPRETATION OF CONTRACTS
1425. The common intention of the parties rather than adherence to the literal meaning of the words shall be sought in interpreting a contract.
1426. In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account.
1427. Each clause of a contract is interpreted in light of the others so that each is given the meaning derived from the contract as a whole.
1428. A clause is given a meaning that gives it some effect rather than one that gives it no effect.
1429. Words susceptible of two meanings shall be given the meaning that best conforms to the subject matter of the contract.
1430. A clause intended to eliminate doubt as to the application of the contract to a specific situation does not restrict the scope of a contract otherwise expressed in general terms.
1431. The clauses of a contract cover only what it appears that the parties intended to include, however general the terms used.
1432. In case of doubt, a contract is interpreted in favour of the person who contracted the obligation and against the person who stipulated it. In all cases, it is interpreted in favour of the adhering party or the consumer.
BOOK SEVEN – EVIDENCE
TITLE TWO – MEANS OF PROOF
CHAPTER II – TESTIMONY
2843. Testimony is a statement whereby a person relates facts of which he has personal knowledge or whereby an expert gives his opinion.
To make proof, testimony shall be given by deposition in a judicial proceeding unless otherwise agreed by the parties or provided by law.
TITLE THREE – ADMISSIBILITY OF EVIDENCE AND MEANS OF PROOF
CHAPTER II – MEANS OF PROOF
2864. Proof by testimony is admissible to interpret a writing, to complete a clearly incomplete writing or to impugn the validity of the juridical act which the writing sets forth.
CHAPTER III – CERTAIN STATEMENTS
2869. . A statement made by a person who does not appear as a witness, concerning facts to which he could have legally testified, is admissible as testimony on application and after notice is given to the adverse party, provided the court authorizes it.
Bank Act, S.C. 1991, c. 46.
PART X – Capital, Liquidity and Capacity to Absorb Losses
Adequacy of capital and liquidity
485 (1) The Laurentian Bank shall, in relation to its operations, maintain (a) adequate capital, and (b) adequate and appropriate forms of liquidity, and shall comply with any regulations in relation thereto.
Canada Evidence Act, R.S.C. 1985, c. C-5
PART I
Provincial Laws of Evidence
How applicable
40 In all proceedings over which Parliament has legislative authority, the laws of evidence in force in the province in which those proceedings are taken, including the laws of proof of service of any warrant, summons, subpoena or other document, subject to this Act and other Acts of Parliament, apply to those proceedings.
IV. FACTS
A. Background
[10] Laurentian Bank is incorporated under the Bank Act [10] . In 2012, Laurentian Bank took steps to have one of its subsidiaries, B2B Trust, acquire a company called AGF Trust.
[11] According to the testimonies at the hearing, before the transaction took place, Laurentian Bank knew that the acquisition of AGF Trust by B2B Trust would lower the level of its capital below the limits allowed under the Bank Act [11] . In anticipation of the acquisition of AGF Trust, Laurentian Bank therefore decided to issue common shares to increase the level of its capital [12] .
[12] On June 1, 2012, CDPQ sent Laurentian Bank a letter of intent informing the bank that it was interested in subscribing for subscription receipts in connection with B2B Trust's acquisition of AGF Trust [13] . The letter indicated that CDPQ intended to complete a private placement of subscription receipts to raise $100,000,000 that would be used "to increase [Laurentian] Banks required regulatory capital" [14] . This transaction was conditional on the acquisition of AGF Trust by B2B Trust on terms acceptable to CDPQ [15] . The price of each subscription receipt was to be equal to the weighted average price of the common shares of Laurentian Bank trading on the Toronto Stock Exchange for the five-day market period ending on May 31, 2012 [16] . Laurentian Bank agreed to a two percent (2%) discount on this price [17] . The subscription receipts were to be converted into common shares of Laurentian Bank on the closing date of the transaction between B2B Trust and AGF Trust on the basis of one common share of Laurentian Bank for each subscription receipt [18] . The total amount of the subscription was to be deposited in trust by CDPQ on the date stipulated in the subscription agreement and kept in trust until the closing of the transaction, that is to say until B2B Trust acquired AGF Trust [19] .
[13] Taking into account the two percent (2%) discount, CDPQ therefore announced its intention to purchase $100,000,000 of common shares of Laurentian Bank at a price of $41.85 per share [20] .
[14] The subscription was conditional on negotiating and signing a subscription agreement. In particular, the agreement was to include provisions regarding certain conditions set out in the document entitled "Summary of terms and conditions" attached to the letter of intent. Pursuant to these conditions, CDPQ's subscription was conditional on Laurentian Bank's reimbursement of certain fees and expenses to be incurred by CDPQ in connection with the subscription. Laurentian Bank was to reimburse CDPQ for the reasonable fees and expenses of its legal advisers, up to a maximum of $100,000. Laurentian Bank was also required to pay CDPQ a transaction fee of four percent (4%) of the total amount of the subscription ($100,000,000), upon closure of the transaction [21] .
[15] On June 4, 2012, the FSTQ sent Laurentian Bank a letter of intent informing Laurentian Bank that it was interested in subscribing for subscription receipts in connection with B2B Trust's acquisition of AGF Trust. The letter indicated that the FSTQ intended to complete a $20,000,000 private placement of subscription receipts, subject to the acquisition of AGF Trust by B2B Trust [22] . The price of each subscription receipt was to be equal to the weighted average price based on the volume of the common shares of Laurentian Bank trading on the Toronto Stock Exchange for the five‑day market period ending on May 31, 2012, with a two percent (2%) discount [23] . The subscription receipts were to be converted into common shares of Laurentian Bank on the closing date of the transaction between B2B Trust and AGF Trust, on the basis of one common share of Laurentian Bank for each subscription receipt [24] . The total amount of the subscription was to be deposited in trust by CDPQ on the date stipulated in the subscription agreement and kept in trust until the closing of the transaction [25] .
[16] Taking into account the two percent (2%) discount, the FSTQ intended to purchase $20,000,000 of common shares of Laurentian Bank at a price of $41.85 per share [26] .
[17] Similarly to CDPQ's case, the FSTQ's subscription was conditional on negotiating and signing a subscription agreement. In particular, the agreement was to include provisions regarding certain conditions set out in a document also entitled "Summary of terms and conditions" attached to the letter of intent. In its letter, the FSTQ expressly mentioned that it was aware of the $100,000,000 private placement of subscription receipts that CDPQ intended to complete and that, subject to certain terms and conditions described in the letter, it agreed to the same conditions of its possible subscription as those agreed upon with CDPQ [27] .
[18] Pursuant to these conditions, the FSTQ's subscription was conditional on Laurentian Bank's reimbursement of certain fees and expenses to be incurred by the FSTQ in connection with the subscription. Laurentian Bank was to reimburse the FSTQ fifty percent (50%) of the reasonable fees and expenses of its legal advisers, up to a maximum of $30,000 [28] . Laurentian Bank was also required to pay the FSTQ a transaction fee of four percent (4%) of the total amount of the subscription ($20,000,000), upon closure of the transaction [29] .
[19] On June 4, 2012, Laurentian Bank notified the Toronto Stock Exchange of the private placements, at a price of $41.85 for each subscription receipt, contemplated by CDPQ and the FSTQ [30] .
[20] On June 6, 2012, a subscription agreement was signed between CDPQ and Laurentian Bank regarding CDPQ's subscription for 2,389,486 subscription receipts at a unit price of $41.85, for a total of $99,999,989.10 [31] . On the same day, a subscription agreement was signed between the FSTQ and Laurentian Bank regarding the FSTQ's subscription for 477,897 subscription receipts at a unit price of $41.85, for a total of $19,999,989.45 [32] .
[21] Also on June 6, 2012, B2B Trust entered into a share purchase agreement with AGF Management Limited regarding the acquisition of all the issued and outstanding shares of AGF Trust [33] .
[22] On June 12, 2012, Laurentian Bank entered into a subscription receipt agreement with CDPQ and Computershare Trust Company of Canada (Computershare Company). Computershare Company was to act as registrar and transfer agent of the subscription receipts. It was also to act as escrow agent and custodian of all funds to be held in escrow and agent on behalf of the subscription receipt holders and Laurentian Bank [34] . On the same day, Laurentian Bank entered into a subscription receipt agreement with the FSTQ and Computershare Company for the same purposes [35] .
[23] On August 1, 2012, B2B Trust acquired the shares of AGF Trust [36] .
[24] Also on August 1, 2012, upon closure of the transaction involving the purchase of AGF Trust by B2B Trust, and as stipulated in the subscription agreements and subscription receipt agreements, Laurentian Bank issued 2,389 486 common shares to CDPQ and 477,897 common shares to the FSTQ at a price of $41.85 per share [37] . On the same day, Laurentian Bank made bank transfers of $3,999,999.56 and $799,999.56 to pay CDPQ and the FSTQ, respectively, for the transaction fees [38] .
B. Testimony
1. Stéphane Lanthier
[25] Mr. Lanthier holds a master's degree in taxation from the École des hautes études commerciales de Montréal and is a chartered professional accountant (CPA). He served as Vice President, Taxation, at Laurentian Bank during the years at issue and still holds the same position. During the years at issue, Mr. Lanthier's team was responsible for preparing Laurentian Bank's tax returns, under his supervision, and he was the signatory.
[26] Mr. Lanthier testified that as a result of B2B Trust's acquisition of AGF Trust, the Laurentian Bank's level of capital would have dropped below the minimum threshold required under the Bank Act [39] . Consequently, Laurentian Bank had to find the capital required to fund this acquisition. Since Laurentian Bank had recently completed a public issuance of shares, the bank's treasury department found that it was best not to make another public issuance of shares. The department decided to issue common shares, but to put them on the market as a "private placement."
[27] According to the explanations provided by Mr. Lanthier, a private placement like the one made by CDPQ is an investment made by acquiring shares privately, rather than as part of a public offering [40] . Mr. Lanthier provided the Court with an explanation of the difference between a situation where shares are issued for sale to the public through an "underwriter", for example a group of banks, and a situation where the shares are issued for sale directly to the investor as part of a private placement. According to him, there is a difference in the level of risk incurred by the underwriter because, theoretically, it undertakes to buy the shares with the aim of reselling them. However, as a practical matter, the risk is low because the underwriter has normally ensured that it has buyers before it commits to buying the shares [41] .
[28] When counsel for the appellant asked Mr. Lanthier about the two percent (2%) discount that Laurentian Bank granted to CDPQ and the FSTQ, he first indicated that it was a market practice. Mr. Lanthier also said the purpose of offering a discount was to attract an investor because the discount was not available to those buying stocks on the secondary market. Mr. Lanthier explained that a discount reduces the risk incurred by the buyer in the event of a decrease in the share price between the time the subscription agreement is signed and the time the subscription receipts are converted into shares [42] . Regarding the percentage of the discount, Mr. Lanthier said a discount greater than two percent (2%) can be offered, but that would have an adverse effect on the market. Mr. Lanthier also explained that as a company listed on the Toronto Stock Exchange, Laurentian Bank had to comply with certain rules regarding the maximum discount it could grant, and that offering a discount exceeding fifteen percent (15%), for example, could be problematic [43] .
[29] Mr. Lanthier was then asked about the transaction fees. He said it "made sense" for Laurentian Bank "to pay fees to secure the necessary financing and capital." He said the acquisition of Laurentian Bank shares by CDPQ and the FSTQ made sense because it sent a strong positive message to the market regarding the acquisition of AGF Trust since these share investments are made after due diligence has been conducted. This due diligence sends a message to the public that this is a good acquisition. Mr. Lanthier qualified this as goodwill and added value that went beyond simply raising capital. In addition, according to him, a "private placement" was advantageous for Laurentian Bank because it did not have to issue a prospectus and because the due diligence process was faster [44] .
[30] Mr. Lanthier confirmed that the transaction fees were paid on the closing date of the transaction. A bank transfer was made to the CDPQ's account at the Royal Bank. Because the FSTQ was a Laurentian Bank client, the fees were deposited directly into its account at Laurentian Bank. According to Mr. Lanthier, the share subscription payment and the transaction fee payment were two separate transactions. First, Laurentian Bank received the proceeds from the issuance of common shares, and then it paid the transaction fees by bank transfers [45] .
[31] Regarding the accounting treatment of the transaction fees, Mr. Lanthier said he followed the applicable accounting rules. Laurentian Bank therefore reduced its common equity by the amount of the transaction fees. According to Mr. Lanthier, the fees were to be deducted from the common shares item. Therefore, they were not on the income statement because they had to be posted on the balance sheet as a reduction of equity. Mr. Lanthier confirmed that the transaction fees were treated as a capital expense by Laurentian Bank and that this was the same accounting treatment it would have received if the fees had been paid to an "underwriter" [46] .
[32] Finally, during cross-examination, Mr. Lanthier was asked about the source of his knowledge regarding the share price discount rates and the transaction fee rate normally granted for this type of transaction. Mr. Lanthier first said he had not participated in the subscription agreement negotiations. He said he had obtained the information from Michel Lauzon, Laurentian Bank's chief financial officer (CFO), and from the staff working in the treasury department. He obtained this information for the purpose of preparing for his testimony at this hearing. Therefore, his knowledge of the rates normally agreed upon for this type of transaction did not come from knowledge acquired personally by Mr. Lanthier, but from conversations with the aforementioned persons [47] . When cross-examined on the transaction fees paid to CDPQ, Mr. Lanthier said they were discussed during a phone conversation with colleagues. Also during cross-examination, an undertaking made during Mr. Lanthier's examination for discovery was entered into evidence. This undertaking indicated that, unlike the transactions with CDPQ and the FSTQ, in the case of a recent transaction with an "underwriter", the costs and disbursements were the responsibility of the "underwriter" while the transaction fees were the same, i.e. four percent (4%) [48] .
[33] CDPQ and the FSTQ expressed their respective interest in such investments. According to Mr. Lanthier, the FSTQ demanded and obtained the same conditions as those granted to CDPQ, with one exception.
2. François Boudreault
[34] In 2012, Mr. Boudreault held the position of Director, Investments at CDPQ. Mr. Boudreault's duties included being responsible for CDPQ's investments in the financial sectors in Quebec, the United States and Europe. When this appeal was heard, Mr. Boudreault was responsible for CDPQ's "direct investments" in North America and Latin America. Mr. Boudreault holds a master's degree with a specialization in finance from École des hautes études commerciales de Montréal. He is also a chartered financial analyst (CFA).
[35] Mr. Boudreault testified that Laurentian Bank contacted CDPQ regarding B2B Trust's acquisition of AGF Trust in order to secure financing for this acquisition [49] . CDPQ viewed its participation in the financing of this acquisition as an investment. Mr. Boudreault was in charge of the team that performed the analysis required for this type of investment, and he participated in the negotiations leading to the signing of the subscription agreement with CDPQ [50] . He is the one who signed the agreement on behalf of CDPQ. Mr. Lauzon represented Laurentian Bank during these negotiations.
[36] Mr. Boudreault explained that after Laurentian Bank contacted CDPQ, CDPQ sent Laurentian Bank a letter of interest indicating that it was interested in granting $100,000,000 in financing [51] . The terms and conditions of a possible subscription agreement for Laurentian Bank shares were summarized in that letter. The parties had negotiated these conditions beforehand. The transaction fees, as well as the discount granted by Laurentian Bank, were negotiated. Mr. Boudreault explained that the starting point for negotiating the terms and conditions of the subscription agreement was the previous comparable transactions in which Laurentian Bank had participated [52] . More specifically, the terms and conditions of the external share issuances made by Laurentian Bank were analyzed. One of these issuances had been completed a few months earlier [53] . Laurentian Bank had agreed to a two percent (2%) discount for this issuance and paid transaction fees of four percent (4%). Mr. Boudreault explained that this information was public because it was available in prospectuses. Mr. Boudreault added that some brokers could also have this type of information. However, Mr. Boudreault did not specify whether brokers had been contacted in order to obtain such information in this case.
[37] Mr. Boudreault also said he considered a two percent (2%) discount reasonable when shares of a public company are issued to secure public or private financing. According to him, issuers usually grant a two percent (2%) discount rate in these cases.
[38] Mr. Boudreault said the four percent (4%) transaction fee rate was negotiated based on his team's analysis of comparable transactions. Transaction fees typically paid to secure $100,000,000 financing deals were considered, including financing deals made through share issuances. According to Mr. Boudreault, transaction fees are costs [TRANSLATION] "to secure financing on the market", i.e. financing costs [54] . On cross-examination, he added that CDPQ offered Laurentian Bank financing services that included certain [TRANSLATION] "very valuable" features. Mr. Boudreault said that CDPQ's purchase of the Laurentian Bank shares for its own account ensured that the transaction would be completed. It offered a private placement, which is faster and less expensive than financing provided by an underwriter. In addition, this type of financing from CDPQ could send a positive signal to the market because, following the acquisition of AGF Trust, CDPQ became Laurentian Bank's largest shareholder [55] .
[39] On cross-examination, Mr. Boudreault also confirmed that when comparable transactions were analyzed, the fact that CDPQ is exempt from taxation and therefore does not pay taxes on receivable transaction fees was not taken into account when the fee rate was negotiated. Mr. Boudreault was unable to confirm whether the transactions that his team considered comparable included transactions with underwriters. Mr. Boudreault was also unable to explain why Laurentian Bank had granted the same percentage of transaction fees to the FSTQ when the FSTQ invested a much smaller amount. CDPQ treated the fees as income from an accounting standpoint according to audits that Mr. Boudreault allegedly performed with his colleagues.
V. ANALYSIS
[40] According to paragraph 20(1)(e) and subparagraph 20(1)(e)(i) of the ITA, such part of an amount (other than an excluded amount) that is not otherwise deductible in computing the income of the taxpayer and that is an expense incurred in the year or a preceding taxation year is deductible if the expense was incurred in the course of an issuance of shares of the capital stock of a taxpayer.
[41] The relevant parts of paragraph 20(1)(e) of the ITA read as follows:
Deductions permitted in computing income from business or property
20(1) Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto
. . .
Expenses re financing
(e) such part of an amount (other than an excluded amount) that is not otherwise deductible in computing the income of the taxpayer and that is an expense incurred in the year or a preceding taxation year
(i) in the course of an issuance or sale of units of the taxpayer where the taxpayer is a unit trust, of interests in a partnership or syndicate by the partnership or syndicate, as the case may be, or of shares of the capital stock of the taxpayer,
. . .
(including a commission, fee, or other amount paid or payable for or on account of services rendered by a person as a salesperson, agent or dealer in securities in the course of the issuance, sale or borrowing) that is the lesser of: . . .
[42] Therefore, an expense incurred in the course of an issuance of shares of the capital stock of a taxpayer is deductible pursuant to paragraph 20(1)(e) of the ITA if the following requirements are met:
1. An expense must have been incurred;
2. The expense must have been incurred "in the course of" an issuance of shares of the capital stock of a taxpayer;
3. The expense must have been incurred in the year or a preceding taxation year;
4. The deduction claimed must not be an "excluded amount" within the meaning of subparagraph 20(1)(e)iv.1 of the ITA;
5. The expense must not be deductible under any other provision of the ITA.
[43] Only the first two requirements are at issue in this case.
A. Did Laurentian Bank incur expenses of $3,999,999.56 and $799,999.56?
[44] In order to obtain a deduction under paragraph 20(1)(e) of the ITA, an expense must have been incurred.
[45] In The Queen v. Burns. [56] , the Federal Court of Appeal held that to incur an expense, the taxpayer must have been obliged to pay the amount of money. The Federal Court of Appeal stated as follows in this regard:
In our opinion, an expense, within the meaning of paragraph 18(1)(a) of the Income Tax Act [R.S.C. 1952, c. 148, (amended by S.C. 1970-71-72, c. 63, section 1)] is an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone. Contrary to what was decided by the Trial Judge, an obligation to do something which may in the future entail the necessity of paying money is not an expense. [57]
[Emphasis added.]
[46] The Court does not see any reason not to follow this reasoning with respect to paragraph 20(1)(e) of the ITA. Consequently, for an expense to be deductible pursuant to this provision, it is sufficient that there be an obligation to pay a sum of money.
[47] The versions of clause 15 of the subscription agreements entered into among Laurentian Bank and CDPQ and the FSTQ are identical. They read as follows:
[translation]
FEES
Laurentian Bank agrees to pay the Subscriber a transaction fee equivalent to 4% of the Subscription Price payable on the Closing date of the underlying Transaction. [58]
[48] It is clear that pursuant to these clauses, Laurentian Bank was obliged to pay CDPQ and the FSTQ, transaction fees equivalent to four percent (4%) of the subscription price of the shares. In addition, the evidence indicated that Laurentian Bank paid CDPQ and the FSTQ amounts equivalent to this percentage on the closing date of the transaction, when B2B Trust purchased AGF Trust.
[49] In the light of this evidence, the Court held that Laurentian Bank was obliged to pay CDPQ and the FSTQ, transaction fees equivalent to four percent (4%) of the subscription price of the shares. As a result, Laurentian Bank incurred transaction fee expenses equivalent to that percentage, i.e. $3,999,999.56 and $799,999.56.
B. Were these expenses incurred in the course of the issuance of shares?
1. Determination of the reason for which Laurentian Bank incurred expenses of $3,999,999.56 and $799,999.56
[50] First, the Court must determine the reason for which Laurentian Bank incurred expenses of $3,999,999.56 and $799,999.56 since paragraph 20(1)(e) of the ITA only allows the deduction of an expense insofar as it was incurred "in the course" of an issuance of shares.
[51] As previously mentioned, according to the evidence presented at the hearing, Laurentian Bank paid CDPQ and the FSTQ transaction fees pursuant to clause 15 of their respective subscription agreements. However, after having reviewed these clauses, it is impossible to determine the basis upon which the transaction fees were paid. It is therefore necessary to apply the legal rules governing the interpretation of contracts.
[52] Pursuant to subsection 8.1 of the Interpretation Act [59] , in order to apply the ITA in the province of Quebec, if in interpreting an enactment it is necessary to refer to rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in Quebec. Consequently, because in this case the subscription agreements were signed in the province of Quebec, the Court must apply sections 1425 and following of the Civil Code of Québec (C.C.Q.) in order to interpret these agreements.
[53] Pursuant to section 1425 of the C.C.Q., in order to interpret a contract, the Court shall determine the common intention of the parties rather than adhere to the literal meaning of the words. Indeed, in Quebec civil law, a contract is interpreted first and foremost based on the intention of the parties [60] .
[54] It should be noted that the phrase "transaction fees" in subscription agreements cannot be binding on the parties if it does not reflect what they mutually intend that phrase to mean. The Supreme Court of Canada has also rejected the argument that the parties are bound by an erroneous transcription of the intention in the written contract [61] .
[55] When the Court must interpret a writing in order to determine the common intention of the parties, proof by testimony is admissible under section 2864 of the C.C.Q., which provides as follows:
2864. Proof by testimony is admissible to interpret a writing, to complete a clearly incomplete writing or to impugn the validity of the juridical act which the writing sets forth.
[56] The only witness that the Court heard who had personal knowledge of the reason for which CDPQ received transaction fees was Mr. Boudreault. Mr. Boudreault participated in the negotiations relating to clause 15 of the subscription agreement signed by CDPQ. He was therefore the only witness able to enlighten the Court on the intention of the parties in relation to the services rendered by CDPQ as consideration for the payment of transaction fees. However, Mr. Boudreault testified that the transaction fees were paid for two services. First, CDPQ provided Laurentian Bank with a financing service. Mr. Boudreault confirmed that the transaction fees were in fact costs for "securing financing on the market", i.e. financing costs. [62] .
[57] Second, Mr. Boudreault also confirmed that "private placement" financing such as the financing provided by CDPQ gave a positive signal on the market because, following the acquisition of AGF Trust, CDPQ became Laurentian Bank's largest shareholder. Therefore, CDPQ provided Laurentian Bank with an additional service.
[58] According to counsel for the respondent, the content of Mr. Boudreault's testimony is not sufficient to allow the Court to conclude that services were rendered. The Court disagree. There is nothing in the evidence presented at the hearing that casts doubt on the veracity of Mr. Boudreault's testimony on this matter. His testimony was credible and not contradicted.
[59] As a result, the Court considers that Mr. Boudreault's testimony is sufficient to determine the intention of the parties. His testimony is therefore sufficient to refute the Minister's assumption that CDPQ did not in fact provide Laurentian Bank with a service. It is also sufficient to refute the Minister's assumption that the payment of transaction fees to CDPQ was in fact made as a discount on the subscription price of the Laurentian Bank shares. Based on this testimony, the Court concludes that, upon preponderance of evidence, Laurentian Bank paid CDPQ transaction fees for financing services as well as for a service that Mr. Boudreault qualified as sending a positive signal to the market.
[60] As for the transaction fees paid to the FSTQ, the Court reaches the same conclusion as it did in the case of CDPQ with regard to the financing services that CDPQ provided to Laurentian Bank. The Court is therefore of the view that there is sufficient evidence to reasonably conclude that the Minister's assumption that the FSTQ had not in fact rendered a service to Laurentian Bank has been refuted. Upon preponderance of evidence, Laurentian Bank paid the FSTQ transaction fees for financing services.
[61] However, in reaching this conclusion, the Court did not accept Mr. Lanthier's testimony because he did not have personal knowledge of the reasons for which transaction fees were paid to the FSTQ. The Court only accepted the fact that the purpose of both subscription agreements was to secure capital to finance the acquisition of AGF Trust and that, furthermore, they were also practically identical. In that regard, the Court also definitely gave weight to the content of the letters of intent dated June 1 and 4, 2012, that CDPQ and the FSTQ respectively sent to Laurentian Bank, in which they expressed their interest in purchasing subscription receipts in connection with B2B Trust's acquisition of AGF Trust.
[62] Those facts a