Burlington Resources Finance Company v. The Queen

Burlington Resources Finance Company v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-02-20
Neutral citation
2020 TCC 32
File numbers
2012-2683(IT)G, 2013-2595(IT)G
Judges and Taxing Officers
Johanne D’Auray
Subjects
Income Tax Act
Decision Content
Docket: 2012-2683(IT)G
BETWEEN:
BURLINGTON RESOURCES FINANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Motion held on October 31, 2019 at Toronto, Ontario
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Andrew Boyd
Alexander Cobb
Counsel for the Respondent:
Alexandra Humphrey
Erin Strashin
ORDER
UPON respondent’s Amended Notice of Motion to amend pleadings dated September 27, 2019 for the following relief:
an Order of the Court granting the respondent leave to file:
the proposed Amended Amended Reply to the Notice of Appeal;
the proposed Fresh as Amended Reply to the Notice of Appeal, which is simply the cumulative product of the various rounds of amendments made to the Reply.
such further and other relief as counsel may advise and the Court may permit.
AND UPON hearing the submissions of the parties;
IT IS ORDERED THAT:
The respondent’s Motion is allowed. Accordingly, the respondent is granted leave to file her Amended Amended Reply and Fresh as Amended Amended Reply.
The request of the appellant for costs thrown away is denied.
The costs of this Motion will follow the cause.
Signed at Ottawa, Canada, this 20th day of February 2020.
“Johanne D’Auray”
D’Auray J.
Docket: 2013-2595(IT)G
BETWEEN:
CONOCO FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion held on October 31, 2019 at Toronto, Ontario
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Andrew Boyd
Alexander Cobb
Counsel for the Respondent:
Alexandra Humphrey
Erin Strashin
ORDER
WHEREAS this Motion was brought on for hearing on October 31, 2019 to be heard concurrently with the Respondent’s motion in Burlington Resources Finance Company v. Her Majesty the Queen, Docket 2012-2683(IT)G, whereby the appellant requested that costs thrown away be awarded by this Court as a result of the respondent abandoning the transfer pricing issue;
WHEREAS the parties have advised the Court on November 14, 2019, that they have no objection to leave being granted to the Respondent to file the Amended Reply and Fresh as Amended Reply, without prejudice to the parties’ respective positions and submissions as to whether costs thrown away should be ordered as a term of such leave;
WHEREAS this Court issued an Order dated November 27, 2019, whereby the Court granted the respondent leave to file the Amended Reply and Fresh as Amended Reply;
IT IS ORDERED that the appellant is not entitled to an award of costs thrown away;
The costs of this Motion will follow the cause.
Signed at Ottawa, Canada, this 20th day of February 2020.
“Johanne D’Auray”
D’Auray J.
Citation: 2020 TCC 32
Date: 20200303
Docket: 2012-2683(IT)G
BETWEEN:
BURLINGTON RESOURCES FINANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2013-2595(IT)G
AND BETWEEN:
CONOCO FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR ORDER
D’Auray J.
I. BACKGROUND
[1] The respondent filed a Motion asking the Court to grant leave to file:
the proposed Amended Amended Reply to the Notice of Appeal in the Burlington Resources Finance Company (“Burlington”) appeal, which was filed with the Court on October 31, 2019;
the proposed Fresh as Amended Amended Reply to the Notice of Appeal in the Burlington appeal which was also filed with the Court on October 31, 2019.
[2] At the hearing of the Motion, counsel for Conoco Funding Company (“Conoco”) and Burlington stated that he was consenting to the filing and the serving of the Amended Reply with respect to the Conoco appeal. Accordingly, I issued an Order dated November 27, 2019 granting the respondent leave to file the Amended Reply.
[3] The proposed amendments to the Reply with respect to the Burlington appeal deal with the application of paragraph 20(1)(e.1) of the Income Tax Act (the “Act”), whether the amounts payable by Burlington to its parent Burlington Resources Inc. (“BRI”) as “guarantee fees” fell within the ambit of paragraph 20(1)(e.1), and whether the fee agreements are legally ineffective.
[4] The respondent has also abandoned the transfer pricing issue in her proposed Amended Amended Reply. Therefore she is no longer relying on the provision dealing with transfer pricing, namely section 247 of the Act.
[5] Burlington argues that the Court should not grant leave to the respondent to file an Amended Amended Reply since Burlington would be prejudiced by the proposed amendments.
[6] Neither Burlington nor Conoco takes issue with the respondent abandoning the transfer pricing issue. However, they argue that costs thrown away should be awarded to them, for the time and efforts they have wasted dealing with the transfer pricing issue so far.
II. PROCEDURAL HISTORY
[7] The Burlington appeal has a long procedural history beginning in 2012. This history is relevant to this Motion as the parties dispute the appropriateness of the timing of this Motion and its impact on a potential award of costs. In the procedural history, I only refer to the facts relevant to the respondent’s Motion to amend her Further Amended Reply in Burlington and the request by Burlington and Conoco to be awarded costs thrown away.
[8] Burlington, a Nova Scotia unlimited liability company, borrowed approximately $3 billion USD in 2001 and 2002 by issuing seven bonds (the “Notes”) guaranteed by BRI, its non-resident parent.
[9] The Minister of National Revenue (the “Minister”) reassessed Burlington’s 2002 to 2005 taxation years to deny deductions for annual payments made by Burlington to BRI for its unconditional guarantee of the Notes under the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Act. The Minister also disallowed deductions for financing expenses incurred by Burlington in issuing the Notes (the “Financing Costs”) and assessed transfer pricing penalties.
The Initial Pleadings
[10] On June 26, 2012, Burlington filed and served its Notice of Appeal.
[11] On October 9, 2012, the respondent filed her Reply with Burlington’s consent to an extension of time to file. In her initial Reply the respondent included additional arguments defending the Minister’s reassessment. In her initial Reply, the respondent also defined the annual guarantee fees paid as “Charges”. She relied on the following provisions in addition to paragraphs 247(2)(a) and (c) of the Act, 18(1)(a), (b), 20(1)(e), (e.1), 67, 152(9), 169(2.1), 212, 215, 227, 247(a), (b), (c) and (d), 248 and 251 of the Act.
[12] The respondent at paragraph 13 of the initial Reply defended the Minister’s reassessment, by addressing 18(1)(a) and 20(1)(e.1) of the Act in the following manner:
13. He [The Attorney General of Canada] submits that no deduction should be allowed in respect of the Charges, as they were not incurred for the purpose of earning or producing income under ss 18(1)(a) and 20(1)(e.1) of the Act:
a) the Charges were incurred for the purpose of obtaining a tax benefit for [Burlington];
b) the Charges were unnecessary and redundant due to [Burlington’s] status as an unlimited liability company.
[13] The respondent also relied on the transfer pricing provisions, 247(a), (b), (c) and (d) of the Act. Since these provisions are no longer in issue, I did not find it necessary to reproduce the respondent’s position on these provisions, as she has abandoned the transfer pricing issue all together.
Burlington’s Demand for Particulars
[14] On November 14, 2012, Burlington served a Demand for Particulars on the respondent.
[15] Burlington was not satisfied with by the particulars given by the respondent and, on March 28, 2013, Burlington filed a Notice of Motion seeking:
1. an Order striking the Reply filed by the Respondent on October 9, 2012, with leave to file and Amended Reply within 15 days of the Court’s Order, except with respect to Financing Costs (as defined in the Notice of Appeal);
2. in the alternative, and Order:
a. directing the Respondent to deliver particulars within 30 days of the Court’s Order in response to [Burlington’s] Demand for Particulars served on the Respondent on November 14, 2012; and
b. extending the time for the service and filing of an Answer to 15 days after the particulars are ordered to be delivered
[16] On April 10, 2013, Burlington filed an Amended Notice of Motion, which requested additional relief in the form of an Order striking the Reply in its entirety on the basis that none of the pleaded arguments had a reasonable prospect of success and the appeal be allowed with costs.
The Respondent’s First Proposed Amendment
[17] On April 19, 2013, the respondent served Burlington with a proposed Amended Reply entitled “Amended Reply”.
[18] In this Reply, the respondent abandoned the Financing Costs issue and no longer relied on section 67 of the Act. The respondent continued to rely on subsection 9(1), and paragraphs 18(1)(a) and 20(1)(e.1) of the Act, in the same manner as she did in her initial Reply.
[19] Burlington offered to accept the filing of the Amended Reply on the conditions that (i) its upcoming motion to strike the Reply be directed at the Amended Reply instead, and (ii) the respondent pay $5,000 in costs. The responded rejected this offer.
[20] On April 22, 2013, the respondent filed a Notice of Motion requesting an Order granting her leave to file the Amended Reply.
Burlington’s Motion to Strike the Amended Reply and the respondent’s first Motion to File an Amended Reply
[21] On April 30, 2013, Justice Hogan heard both Burlington’s and the respondent’s Motions.
[22] On July 17, 2013, Justice Hogan allowed Burlington’s Motion to strike the Amended Reply. However, Justice Hogan also granted the respondent leave to serve and file a Further Amended Reply addressing the deficiencies he had identified in the Amended Reply.
[23] In striking the Amended Reply, Justice Hogan agreed with Burlington that drafting deficiencies resulted in the respondent failing to adequately frame its case with regard to the transfer pricing issue, namely paragraphs 247(2)(a) and (c). Justice Hogan held that the respondent’s framing of the questions to be decided with respect to paragraphs 247(2)(a) and (c) was “manifestly incorrect.” The Amended Reply framed the issue as “whether the terms or conditions made or imposed in respect of the Charges differed from those that would have been made between persons dealing at arm’s length.” At paragraph 29 of the Order, Justice Hogan identified that the correct question was “whether the terms or conditions imposed in respect of the guarantee itself, not the terms or conditions of the guarantee fees, differed from those that would have been set between persons dealing at arm’s length.” Justice Hogan stated that without acknowledging the existence of the guarantee, the respondent could not challenge the price of that guarantee. Justice Hogan also noted in his reasons that the respondent must take a clear position on the facts, namely the facts dealing with the transfer pricing issue. Finally, Justice Hogan stated that the Burlington should not be forced to waste resources attempting to discern the respondent’s position on several of the key facts at issue.
[24] However, Justice Hogan rejected Burlington’s argument that the appeal should be allowed on the basis that none of the pleaded arguments had a reasonable prospect of success. He stated as follows at paragraph 40 of his reasons:
. . . In the Amended Reply, the respondent points out that the appellant was an NSULC. Under section 135 of the Companies Act, present and certain past shareholders are liable for an NSULC’s unpaid debts and liabilities if the NSULC is wound up and liquidated without sufficient assets. This means that BRI would be liable for the appellant’s debts if the appellant were wound up without sufficient assets. I agree with the respondent that it is legitimate to ask whether an arm’s length person standing in the appellant’s shoes would have been willing to pay the guarantee fees for BRI’s explicit guarantee knowing that BRI was potentially responsible for the appellant’s liabilities even without the guarantee.
Further Amended Reply
[25] On September 13, 2013, in compliance with Justice Hogan’s Order, the respondent served and filed with the Court an amended Reply entitled “Further Amended Reply”. In the Further Amended Reply, the respondent changed the word “Charges” to “Guarantee Fees’ as ordered by Justice Hogan. The respondent, as she did in her initial Reply, continued to argue the application of paragraphs 18(1)(a) and 20(1)(e.1) as well as the transfer pricing provisions. Her position was as follows:
13. He submits that no deduction should be allowed in respect of the Charges Guarantee fees, as they were not incurred for the purpose of earning or producing income under ss 18(1)(a) and 20(1)(e.1) of the Act:
a) the Charges Guarantee fees were incurred for the purpose of obtaining a tax benefit for [Burlington];
b) the Charges Guarantee fees were unnecessary and redundant due to [Burlington’s] status as an unlimited liability company.
Burlington’s Answer
[26] On November 12, 2013, Burlington filed its Answer to the Further Amended Reply.
Exchanging Lists of Documents and Discoveries
[27] Each of the parties served and filed their Lists of Documents on March 12, 2014.
[28] On April 15, 2014, Burlington requested that the timeline for the completion of examinations for discovery be extended to July 31, 2014. The request was granted and Justice Campbell ordered a corresponding amended timeline on June 12, 2014.
[29] On June 3, 2014, the respondent filed a supplementary List of Documents.
[30] Burlington examined the respondent’s nominee, Ms. Fawcett, for six days between June and November 2014.
[31] In July 2014, the respondent examined Burlington’s nominee, Mr. Delk, for four days and in December 2014 for an additional two days.
Burlington’s Motion to Compel Answers at Discovery
[32] On December 1, 2014, Burlington filed a Notice of Motion seeking an Order to compel the respondent’s nominee, Ms. Fawcett, to answer outstanding questions from discovery.
[33] On March 20, 2015, Justice Campbell ordered Ms. Fawcett to re-attend examination for discovery to answer questions that the respondent had previously refused to answer or to provide more complete answers. It is to be noted that the respondent advised Justice Campbell that she would no longer be relying on paragraphs 247(2)(b) and (d) as a basis to argue that no deduction should be allowed in respect to the guarantee fees. Justice Campbell noticed that there had been no amendment to the pleadings and no steps taken to amend since the date of the hearing of the Motion in December 2014. [1]
[34] The respondent filed a Notice of Appeal from Justice Campbell’s Order with the Federal Court of Appeal on March 30, 2015.
[35] On April 21, 2015, Justice Campbell Ordered Burlington to provide the respondent with the remainder of its outstanding answers on discovery together with updated answers to undertakings before June 19, 2015.
[36] On May 17, 2016, the respondent discontinued her appeal of Justice Campbell’s Order at the Federal Court of Appeal.
The Respondent’s Motion to Compel Answers at Discovery
[37] On December 14, 2015, the respondent filed a Notice of Motion seeking an Order to compel Burlington’s nominee, Mr. Delk, to answer outstanding questions from discovery.
[38] On January 5, 2016, the respondent filed an Amended Notice of Motion to include in the relief sought, alternative Orders requiring Burlington to respond to all fully disputed questions in writing and to produce all documents requested by the respondent within 90 days, and in the event Burlington failed to comply with the requested Order, an Order dismissing the Appeal.
[39] The parties were set to appear before Justice Woods on January 11, 2016 for what was scheduled to be four and a half days of submissions with respect to the respondent’s Motion. However, the hearing was adjourned after a day to allow Burlington time to provide the respondent and the Court with a written reply to the respondent’s Motion to compel Answers to Discovery Questions.
[40] On February 12, 2016, Burlington filed its Written Submission to the respondent’s Motion to Compel Answers to Discovery Questions.
[41] I heard the respondent’s Motion and on August 3, 2017, I issued an Order directing Burlington to answer certain of the disputed questions from discovery. In my Order, I summarized the respondent’s position. At paragraph 5 of my reasons, I summarized the position of the respondent that is relevant to the Motion at bar:
5. . . .
16. In her Amended Reply to Notice of Appeal, the Respondent also relied on paragraphs 18(1)(a) and 20(1)(e.1) of the Act. The paragraph 18(1)(a) argument falls under the duplicative theory, namely that the guarantee fees were not paid to ensure that the outside investors would get their money back, in light of the fact that Burlington was a [Nova Scotia Unlimited Liability Corporation] and due to the hybrid financing arrangements. Therefore, the guarantee fees were not incurred for the purposes of earning income from a business but for the purpose of obtaining a tax benefit.
17. With respect to paragraph 20(1)(e.1) of the Act, the Respondent’s theory is that the guarantee fees were not incurred for the purposes of borrowing money because BRI provided the guarantee to Burlington before it had to pay a guarantee fee and before it actually paid a guarantee fee. Therefore, the guarantee fees were not made for the purpose of borrowing money to be used by Burlington for the purpose of earning income from a business but to obtain a tax benefit.
18. In her Amended Reply, the Respondent also relied on paragraphs 247(2)(b) and (d) to deny the deduction of the guarantee fees; however, the Respondent has informed the Court that she is abandoning the argument that the guarantees were not entered into for bona fide purposes other than to obtain a tax benefit for Burlington pursuant to paragraphs 247(2)(b) and (d) of the Act.
[42] At the respondent’s Motion to compel Mr. Delk to answer . . . discovery questions, Burlington argued that the scope of the underlying dispute had been significantly narrowed by admissions it had made in its Answer and comments made by the respondent’s nominee at discovery. Burlington maintained that its appeal should be allowed because (1) the respondent no longer relied on paragraphs 247(2)(b) and (d) of the Act and (2) the admissions made by Burlington to some of the Minister’s assumptions with respect to 247(a) and (c) of the Act rendered the position of the respondent moot with respect to transfer pricing.
[43] In other words, Burlington reiterated the arguments that it unsuccessfully made before Justice Hogan. Specifically, Burlington argued that the position taken by the respondent on transfer pricing could not stand, in light of the assumptions made by the Minister. As I stated in my Reasons for Order dated August 3, 2017, Burlington’s position was based on a mischaracterization of the Minister’s assumption which referred to the price which a non-arm’s length party would require Burlington to pay in order to guarantee its debt if Burlington operated on a stand-alone basis. I held in that Order, that the transfer pricing issue remained a live issue in the appeal.
The Respondent’s Further Motion to Compel Answers
[44] At a case management conference in the summer of 2018, the respondent submitted that the answers given by Burlington and Conoco following my Order were not responsive.
[45] On November 30, 2018, the respondent filed a Notice of Motion seeking an Order that Burlington provide responsive answers and relevant documents relating to my Order dated August 3, 2017.
[46] On April 8, 2019, I issued an Order requiring Burlington to answer some, but not all, of the outstanding questions in issue and dealt with the issue of . . . privileged documents.
III. REQUESTED AMENDMENTS
The Respondent’s Present Motion to Amend
[47] After the respondent completed the examination for discovery of Burlington’s nominee, since Burlington did not consent to the respondent filing the proposed Amended Amended Reply, the respondent filed a Motion requesting leave to file the said Reply before this Court. The proposed Amended Amended Reply is dated August 13, 2019. In this proposed Amended Amended Reply, the respondent conceded the transfer pricing issue but added back section 67 of the Act, which she had previously removed.
[48] In the August 13, 2019 version of the Reply, the respondent continued to argue subsection 18(1)(a) and paragraph 20(1)(e.1) of the Act. With respect to paragraph 20(1)(e.1), the respondent took the position that the amounts paid by Burlington to BRI were not payable as guarantee fees within the meaning of paragraph 20(1)(e.1). She argued in the alternative, that if the amounts were “guarantee fees”, they were not incurred by Burlington for the purpose of borrowing money within the meaning of paragraph 20(1)(e.1) of the Act. She also argued that notes agreement was legally ineffective.
[49] On September 23, 2019, the respondent filed amended motion materials, including a further . . . Amended Amended Reply.
[50] On October 30, 2019, the day before the Amending Motion was scheduled to be heard, the respondent provided the Court and Burlington with another proposed Amended Amended Reply. In that Reply, the respondent abandoned her argument with respect to section 67 of the Act, but with respect to the arguments dealing with paragraph 20(1)(e.1) and legal ineffectiveness of the fees agreement, she took the same position as the one set out in the proposed Amended Amended Replies dated August 13, 2019 and September 23, 2019.
[51] On October 31, 2019, the morning of the Motion at bar, the respondent provided the Court and Burlington with a further proposed Amended Amended Reply which made typographical corrections but contained no substantive amendments.
[52] The respondent is requesting leave from this Court to file the proposed Amended Amended Reply dated October 30, 2019 and presented to the Court on the day of the hearing of the Motion, namely October 31, 2019. It states as follows:
12. He [The Attorney General of Canada] relies on ss 18(1)(a), (b), 20(1)(e.1), 152(9), 169(2.1), and 248 of the Income Tax Act, RSC 1985, c 1 (5th Supp), as amended (the “Act”) and s 135 of the Companies Act, RSNS 1989, c 81, as amended.
12.1 He [The Attorney General of Canada] submits that no deduction should be allowed in respect of the amounts the Appellant says were payable to BRI pursuant to the Agreements because:
a) no amounts were payable to BRI as “guarantee fees” in the years in issue within the meaning of paragraph 20(1)(e.1) of the Act; and
b) in the alternative, if the Court finds that the amounts were payable to BRI as “guarantee fees,” they were not incurred by the Appellant for the purpose of borrowing money, within the meaning of paragraph 20(1)(e.1) of the Act.
12.2 Though the Appellant needed an unconditional guarantee from BRI to borrow money from the public market under the notes, it did not need to agree to pay, and did not agree to pay, a fee to BRI to secure that guarantee or as consideration for that guarantee. To the extent that the Agreements purported to obligate the Appellant to provide BRI with a fee as consideration for BRI’s prior agreement to fully and unconditionally guarantee the Notes, or for BRI’s performance of its obligations under its prior agreement to fully and unconditionally guarantee the Notes, the Agreements were legally ineffective in doing so.
13. He [The Attorney General of Canada] submits that no deduction should be allowed in respect of the amounts because they were not made or incurred for the purpose of earning or producing income from a business, but were instead agreed to for the purpose of obtaining a tax benefit for the Appellant contrary to section 9 and paragraph 18(1)(a) of the Act. Furthermore, the amounts were unnecessary and redundant due to the Appellant’s status as an unlimited liability company and due to the effect of the Hybrid Instruments.
14. He [The Attorney General of Canada] requests that the appeal be allowed with respect to the Costs and the transfer pricing penalties only and dismissed in all other respects, with costs to the Respondent.
[53] The appeals are scheduled to be heard beginning on May 11, 2020 for three weeks with respect to Conoco’s appeal and on May 25, 2020 for three weeks with respect to the Burlington’s appeal.
[54] The proposed amendments deal with the characterization of the guarantee fees and the legal ineffectiveness of the fee agreements.
IV. POSITION OF THE PARTIES
[55] The respondent asserts that by abandoning the transfer pricing issue, the appeal has been narrowed. As to the proposed amendments, she argues that they only particularize the respondent’s pre-existing position that the amounts claimed were not guarantee fees and that the fee agreements were legally ineffective. Therefore the amounts claimed by Burlington are not deductible under section 9 and paragraphs 18(1)(a) and 20(1)(e.1) of the Act.
[56] The respondent argues that she has always taken the position that the amounts in issue were not “guarantee fees” within the meaning of paragraph 20(1)(e.1) of the Act, and has always denied Burlington’s claim that the amounts paid under the “Guarantee Fee Agreements” were paid as consideration for BRI’s guarantee. The respondent asserts that her position on 20(1)(e.1) was pleaded in her initial Reply, that Burlington canvassed her position on 20(1)(e.1) at discovery, and that she never admitted the amounts were guarantee fees within the ambit of 20(1)(e.1).
[57] The respondent also submits that Justice Hogan’s Order dealt solely with the transfer pricing issue. Complying with Justice Hogan’s Order, she referred to the amounts as guarantee fees in the Further Amended Reply for the purpose of the transfer pricing provisions. That said, the respondent submits that she never admitted that the amounts paid were guarantee fees for the purposes of paragraph 20(1)(e.1) of the Act. She further submits that this is quite clear from the examinations for discovery conducted after Justice Hogan’s Order was rendered.
[58] On the issue of the legal ineffectiveness of the fee agreements, the respondent asserts that it is not a new issue but is part of the broader issue of whether the amounts paid by Burlington to BRI were paid as consideration for BRI’s guarantee. The respondent argues that, while the parties agree that payments were made under the four agreements, the parties never agreed on the legal character of those amounts for tax law purposes. Additionally, the respondent asserts she never made an admission on either of these points. However, if this Court finds that she did, the respondent asserts that this Motion constitutes a request to withdraw those admissions.
[59] On the issue of timing, the respondent submits that she waited to finish the discovery of Mr. Delk to amend her Further Amended Reply, as she did not want to amend on piecemeal basis. The respondent submits that she acted reasonably; since she filed a Motion seeking leave to file the Amended Amended Reply two months after the discovery process was completed.
[60] Accordingly, the respondent submits that she meets the conditions for granting leave to amend pleadings as set out in the decision of the Federal Court of Appeal in Canderel Ltd v The Queen [2] (“Canderel”) and by the Tax Court of Canada in Continental Bank Leasing Corp. v The Queen [3] (“Continental”). As such, the respondent argues that this Court should grant leave permitting her to file and serve the Amended Amended Reply dated October 30, 2019.
[61] Burlington does not take issue with the respondent’s abandonment of the transfer pricing issue or the respondent’s reliance on paragraph 20(1)(e.1) as the respondent has always relied on paragraph 20(1)(e.1) of the Act. However, Burlington argues that this Court should not grant leave to the respondent permitting her to file the proposed Amended Amended Reply dated October 30, 2019 since it purports to withdraw:
a) admissions that Burlington agreed to pay BRI fees in exchange for the guarantee service it provided back in 2001 and 2002;
b) admissions that the amounts in issue were payable . . . as guarantee fees;
c) the related admission that the guarantee fee agreements were not legally ineffective.
[62] Burlington also submits that the respondent failed to explicitly request permission to withdraw the above noted admissions and failed to provide a basis for the withdrawal. In addition, granting permission to the respondent to file the Amended Amended Reply would prejudice Burlington since the proposed amendments and the purported withdrawals would raise new factual issues about what occurred nearly 20 years ago in 2001. With the passage of time, a number of documents have become unavailable and the employees have moved on.
[63] Burlington and Conoco submit that costs thrown away should be awarded as all the work and the costs associated with the transfer pricing issue have been wasted due to the respondent abandoning the transfer pricing issue at this stage of the litigation.
[64] The respondent argues that this is not an appropriate case for an award of costs thrown away as the respondent’s decision to abandon the transfer pricing issue does not render any of Burlington’s or Conoco’s costs wasted. Instead, the respondent argues that these costs led to the early resolution of a complex issue. In addition, the respondent submits that she did not conduct herself in a reprehensible, scandalous or outrageous manner as is required for an award of costs thrown away.
V. ISSUES
[65] Should the Court grant the respondent leave to amend, file, and serve the proposed Amended Amended Reply dated October 30, 2019?
[66] Should costs thrown away be awarded to Burlington and Conoco, as a result of the respondent abandoning the transfer pricing issue?
VI. ANALYSIS
[67] I will first deal the proposed amendments and then I will analyse whether costs thrown away should be awarded to Burlington and Conoco.
A. Proposed Amendments
[68] Section 54 of the Rules of the Tax Court of Canada (General Procedure), (the “Rules”) sets out the right to amend pleadings. Section 54 provides as follows:
A pleading may be amended by the party filing it, at any time before the close of pleadings, and thereafter either on filing the consent of all other parties, or with leave of the Court, and the Court in granting leave may impose such terms as are just.
[69] Section 54 of the Rules must be read in conjunction with section 4, which requires that the Rules be “liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.”
[70] Generally, this Court has allowed proposed amendments to pleadings where it is in the interests of justice to do so and where the proposed amendments will not cause prejudice to a party that cannot be compensated in costs.
Purported withdrawal of the respondent’s admission “the amounts paid were guarantee fees”
[71] Burlington argues that the respondent failed to explicitly request permission or provide a basis for withdrawing the admissions. To support its argument, Burlington relies on the Federal Court of Appeal’s holding in Canderel that a request for permission to withdraw an admission was a prerequisite to the Court’s exercise of its discretion to allow withdrawals of previous admissions under section 132 of the Rules. Additionally, Burlington relies on this Court’s decision in Nolasco v R, [4] (“Nolasco”) which held that a party must provide sufficient reasons regarding the withdrawal of an admission and that a failure to do so is fatal to their leave application.
[72] This argument by Burlington is only relevant if I were to find that the proposed amendments withdraw admissions made by the respondent. In light of the evidence, I do not agree that the respondent made admissions as contemplated by section 132 of the Rules.
[73] The section that deals with withdrawals of admissions is section 132 of the Rules. It states as follows:
A party may withdraw an admission made in response to a request to admit, a deemed admission or an admission in the party’s pleading on consent with leave of the Court.
[74] Section 132 of the Rules only applies to admissions of fact made in a request to admit or in a pleading, referred to as “formal admission”. Section 132 of the Rules does not apply to admissions made in the context of an examination for discovery, referred to as “informal admissions”. An answer given during an examination for discovery may be corrected without leave of the Court. Subsection 98(1) of the Rules deals with admissions made during an examination for discovery, it states as follows:
98 (1) Where a party has been examined for discovery or a person has been examined for discovery on behalf or in place of, or in addition to the party, and the party subsequently discovers that the answer to a question on the examination,
(a) was incorrect or incomplete when made, or
(b) is no longer correct and complete,
the party shall forthwith provide the information in writing to every other party.
[75] In addition, contrary to Burlington’s argument, Courts have taken a somewhat flexible approach with respect to withdrawals of admissions. In HMQ v Andersen Consulting, [5] the Federal Court of Appeal held that an application for leave to withdraw admissions did not require a separate Motion. In that decision, Justice Strayer states as follows:
7. The motions judge, in our view, wrongly held that an application for leave to withdraw admissions was required separate from, and in addition to, the Appellant’s motion to amend its pleadings which were said by the Respondent to involve withdrawals of admissions. We can find no reason in logic or doctrine as to why such a separate motion should be required. A motion to amend pleadings, if it involves some changes to the pleadings which might be construed as a withdrawal of admissions, is still a proper motion to amend pleadings pursuant to Rule 420. If there is any legitimate reason to object to any such withdrawal it may be addressed in the same proceeding where other types of amendments are considered.
[76] Justice Hughes of the Federal Court explains the distinction between an admission made in a pleading and one made during a discovery in the decision of Apotex v Astrazeneca Canada Inc. [6] He opines that leave is not required to withdraw an admission made during an examination for discovery. As the Rules of the Federal Court are similar to the Rules of this Court, his comments are relevant to this Motion. In that decision, he holds:
[20] It appears that this Court has extended the categories of the means by which “formal” admissions are made to certain kinds of admissions made by Counsel on discovery, as is illustrated by the decision of Justice Tremblay-Lamer in Archambault v Ministre du Revenu National, [1998] FCJ No 635, 189 FTR 37 (aff’d without discussion on the point: 264 NR 171 ). The reported reasons do not repeat what was actually said during the discovery, but what was said appears to have been said expressly for the purpose of trial if we take paragraph 6 of the reasons, which refer to another case, as being illustrative. At paragraph 5, Tremblay-Lamer J. states that, absent consent of the opposite party, a “formal” or “judicial” admission cannot be withdrawn without leave of the Court:
5 The case law is clear on the question of withdrawing admissions: a party may not withdraw a "formal admission" (or "judicial admission") without first obtaining leave of the Court or consent of the adverse party.
[21] On the other hand, this Court has treated answers on discovery as “informal” admissions which can be qualified, enlarged upon or even contradicted upon notice to the opposite party. Prothonotary Lafreniere in Apotex Inc v Wellcome Foundation Ltd, [2009] FCJ No 177, 343 FTR 41 wrote at paragraph 37:
37 Although the answers provided by GSK’s representative during examination for discovery are considered informal admissions, they can be qualified, enlarged upon, or even contradicted upon notice to the opposing party. The correction of inaccurate or deficient answers is specifically contemplated by Rule 245 which provides that a person who was examined for discovery and who discovers that the answer to a question in the examination is no longer correct or complete must provide the corrected or completed information in writing without delay.
[22] The Ontario Court of Appeal in Marchand v Public General Hospital Society of Chatham, [2000] OJ No 4428, 51 OR (3d) 97 dealt precisely with the issue of correction of an answer given on discovery where the correction was made during the trial itself. The Court distinguished between answers given on discovery and “formal” admissions. Discovery answers could be corrected, leaving the impact of the correction to be determined by the trial judge. The entire discussion on the point in the decision written by the Court at paragraphs 70 to 86 is instructive. I repeat only paragraphs 77 and 80:
77 First, Dr. Asher’s original discovery answer was not a formal admission. As such, it was always open to him to explain his discovery answer in his testimony. In Sopinka, Lederman and Bryant, The Law of Evidence in Canada, 3rd ed. (Toronto: Butterworths, 1999) at 1051-53, the authors distinguish between formal and informal admissions. A formal admission is conclusive as to the matter admitted, and cannot be withdrawn except by leave of the court or the consent of the party in whose favour it was made. The Law of Evidence states at 1051-52 that a formal admission may be made in the following ways:
1) by a statement in the pleadings or by failure to deliver pleadings;
2) by an agreed statement of facts filed at the trial;
3) by an oral statement made by counsel at trial, or even counsel’s silence in the face of statements made to the trial judge by opposing counsel with the intention that the statements be relied on by the judge;
4) by a letter written by a party’s solicitor prior to trial; or
5) by a reply or failure to reply to a request to admit facts.
In contrast, an informal admission does not bind the party making it, if it is overcome by other evidence. That is, a party making an informal admission may later lead evidence to reveal the circumstances under which the admission was made in order to reduce its prejudicial effect.
. . .
80 Holmested and Watson, supra, describe at 31 Subsection 25 the obligation under rule 31.09 as an ongoing duty to correct and complete the answers given. In general, parties are entitled to correct their discovery answers. The impact of corrections is a matter to be decided by the trial judge, who is entitled to examine both the original and the amended answers: See Machado v. Pratt & Whitney Canada Inc. (1993), 17 C.P.C. (3d) 340 (Ont. Master); Capital Distributing Company v. Blakey (1997), 33 O.R. (3d) 58 (Gen. Div).
[77] In Burlington’s examination for discovery of the respondent’s nominee in 2014, the respondent clearly expressed her position. Numerous times the respondent’s counsel stated that it was the respondent’s position that no amounts were payable as guarantee fees. For example, Ms. Goldstein answered the question posed by counsel for Burlington as follows:
21. BY MS. MacDONALD : Q. I would like to start by asking some questions about paragraph 20(1)(e.1). . .
. . .
22. BY MS. MacDONALD : Q. . . . So Looking at subsection 20(1),