Husky Energy Inc. v. The King

Husky Energy Inc. v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2023-12-13
Neutral citation
2023 TCC 167
File numbers
2017-1252(IT)G, 2017-3776(IT)G, 2018-388(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2017-1252(IT)G
BETWEEN:
HUSKY ENERGY INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on common evidence with the appeals of
Hutchison Whampoa Luxembourg Holdings S.À.R.L. (2017‑3776(IT)G) and L.F. Management and Investment S.A.R.L. (2018-388(IT)G) on January 9 to 12, 2023, January 16 to 19, 2023,
and January 23 and 26, 2023, at Toronto, Ontario
And further submissions received on July 7, 2023 from the Appellants
and on July 31, 2023 from the Respondent
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Nicolas X. Cloutier
Dominic Bédard-Lapointe
Robert Celac
Counsel for the Respondent:
Pascal Tétrault
Montano Cabezas
David McLeod
JUDGMENT
UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent;
IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of Husky Energy Inc. (“Husky”) by notice dated January 15, 2015 is dismissed with costs to the Respondent.
The parties have 60 days to agree on costs. If no agreement is reached by Husky and the Respondent, the Respondent has a further 30 days to provide written submissions on costs not to exceed 10 pages and Husky has a further 30 days to provide written submissions in response to the submissions of the Respondent not to exceed 10 pages.
Signed at Ottawa, Canada, this 13th day of December 2023.
“J.R. Owen”
Owen J.
Docket: 2017-3776(IT)G
BETWEEN:
HUTCHISON WHAMPOA LUXEMBOURG
HOLDINGS S.À.R.L.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on common evidence with the appeals of
Husky Energy Inc. (2017‑1252(IT)G) and L.F. Management and Investment S.A.R.L. (2018-388(IT)G) on January 9 to 12, 2023,
January 16 to 19, 2023, and January 23 and 26, 2023, at Toronto, Ontario
And further submissions received on July 7, 2023 from the Appellants
and on July 31, 2023 from the Respondent
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Margaret Nixon
Pierre-Louis Le Saunier
Zev Smith
Counsel for the Respondent:
Pascal Tétrault
Montano Cabezas
David McLeod
JUDGMENT
UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent;
IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of Hutchison Whampoa Luxembourg Holdings S.à.r.l. (“HWLH”) by notice dated August 1, 2016 is allowed with costs to HWLH, and the assessment is vacated.
The parties have 60 days to agree on costs. If no agreement is reached by HWLH and the Respondent, HWLH has a further 30 days to provide written submissions on costs not to exceed 10 pages and the Respondent has a further 30 days to provide written submissions in response to the submissions of HWLH not to exceed 10 pages.
Signed at Ottawa, Canada, this 13th day of December 2023.
“J.R. Owen”
Owen J.
Docket: 2018-388(IT)G
BETWEEN:
L.F. MANAGEMENT AND INVESTMENT S.A.R.L.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on common evidence with the appeals of
Husky Energy Inc. (2017‑1252(IT)G) and Hutchison Whampoa Luxembourg Holdings S.À.R.L. (2017-3776(IT)G) on
January 9 to 12, 2023, January 16 to 19, 2023,
and January 23 and 26, 2023, at Toronto, Ontario
And further submissions received on July 7, 2023 from the Appellants
and on July 31, 2023 from the Respondent
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
Louise R. Summerhill
Josh Kumar
Monica Carinci
Counsel for the Respondent:
Pascal Tétrault
Montano Cabezas
David McLeod
JUDGMENT
UPON hearing the evidence and submissions of counsel for the Appellants and counsel for the Respondent;
IN ACCORDANCE with the attached Reasons for Judgment, the appeal from the assessment of L.F. Management and Investment S.a.r.l. (“LFMI”) by notice dated August 1, 2016 is allowed with costs to LFMI and the assessment is vacated.
The parties have 60 days to agree on costs. If no agreement is reached by LFMI and the Respondent, LFMI has a further 30 days to provide written submissions on costs not to exceed 10 pages and the Respondent has a further 30 days to provide written submissions in response to the submissions of LFMI not to exceed 10 pages.
Signed at Ottawa, Canada, this 13th day of December 2023.
“J.R. Owen”
Owen J.
Citation: 2023 TCC 167
Date: 20231213
Docket: 2017-1252(IT)G
BETWEEN:
HUSKY ENERGY INC.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent;
Docket: 2017-3776(IT)G
AND BETWEEN:
HUTCHISON WHAMPOA
LUXEMBOURG HOLDINGS S.À.R.L.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent;
Docket: 2018-388(IT)G
AND BETWEEN:
L.F. MANAGEMENT
AND INVESTMENT S.A.R.L.,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Overview [1] Husky Energy Inc. (“Husky”), Hutchison Whampoa Luxembourg Holdings S.à.r.l. (“HWLH”) and L.F. Management and Investment S.a.r.l. (“LFMI”) (individually, an “Appellant” and, collectively, the “Appellants”) each appeals an assessment by the Minister of National Revenue (the “Minister”) that fixes the tax consequences to the Appellant in respect of dividends paid by Husky to two non‑resident persons on October 1, 2003. I will refer to the assessments of Husky, HWLH and LFMI as the “Husky Assessment”, the “HWLH Assessment” and the “LFMI Assessment”, respectively.[1]
[2] On October 1, 2003, Husky paid a quarterly dividend of $0.10 (the “Second Quarter Dividend”) and a special dividend of $1.00 (the “Special Dividend”) on each of its common shares outstanding at that time. I will refer to the Second Quarter Dividend and the Special Dividend collectively as the “Husky Dividends”.
[3] Husky paid $328,986,960 of the Husky Dividends (the “Dividends”) to two non-resident corporations that, on August 29, 2003, were listed in the register of common shareholders of Husky maintained by Computershare.
[4] One of the two payee corporations, Hutchison Whampoa Europe Investments S.à.r.l. (“HWEI”), had borrowed 146,548,737 common shares in Husky under the terms of a securities lending agreement with a predecessor of HWLH called U.F. Investments (Barbados) Limited (“UF Barbados”). HWEI was paid $161,203,610 of the Dividends (the “HWEI Dividends”) less $8,060,180.50 withheld by Husky and therefore received $153,143,429.50.
[5] The second of the two payee corporations, L.F. Luxembourg S.à.r.l. (“LF Luxembourg”), had borrowed a total of 152,530,319 common shares in Husky under the terms of securities lending agreements with two predecessors of LFMI called L.F. Investments (Barbados) Limited (“LF Barbados”) and H.F. Investments (Barbados) Ltd. (“HF Barbados”). LF Luxembourg borrowed 137,576,366 common shares of Husky from LF Barbados and 14,953,953 common shares of Husky from HF Barbados. LF Luxembourg was paid $167,783,350 of the Dividends (the “LF Luxembourg Dividends”) less $8,389,167.50 withheld by Husky and therefore received $159,394,182.50.[2]
[6] On September 25, 2003, LF Barbados and HF Barbados amalgamated with a third corporation, LFCB Holdings Ltd., to form L.F. Investments (Barbados) Limited (“New LF Barbados”). Consequently, at the time that the Dividends were paid by Husky, New LF Barbados was the lender under the securities lending agreement with LF Luxembourg.
[7] The parties agree that in 2003, UF Barbados, LF Barbados, HF Barbados and New LF Barbados were resident in Barbados for the purposes of the Canada–Barbados Income Tax Convention (the “Barbados Treaty”). The parties also agree that in 2003, HWEI and LF Luxembourg (collectively, the “Luxcos”) were resident in Luxembourg for the purposes of the Canada–Luxembourg Income Tax Convention (the “Luxembourg Treaty”). There is no evidence that contradicts these concessions.[3]
[8] The Minister’s position is that tax under Part XIII of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.)(the “ITA”) was exigible on the Dividends at the rate of 15%, which is the rate under Article X(2) of the Barbados Treaty (“Article X(2)”).[4] Husky withheld and remitted tax under Part XIII at the rate of 5%, which is the lower of the two rates provided under Article 10(2) of the Luxembourg Treaty (“Article 10(2)”). I will refer to the difference in the amount of Part XIII tax levied on the Dividends at the rates of 15% and 5% as the “shortfall”.
[9] In support of the Husky Assessment, the Minister submits that:
1. UF Barbados and New LF Barbados, not HWEI and LF Luxembourg, were the beneficial owners of the Dividends. Therefore, the tax rate applicable to the Dividends was the 15% rate under Article X(2) and Husky was required to withhold and remit tax at that rate.
2. If HWEI and LF Luxembourg were the beneficial owners of the Dividends, neither controlled directly or indirectly at least 10% of the voting power in Husky. Therefore, the applicable rate under Article 10(2) was 15% rather than 5% and Husky was required to withhold and remit tax under Part XIII of the ITA at the 15% rate.
3. In the alternative, under the general-anti avoidance rule in section 245 of the ITA (the “GAAR”), the Minister is entitled to assess Husky for the shortfall.
[10] In support of the HWLH Assessment and the LFMI Assessment, the Minister submits that:
1. UF Barbados and New LF Barbados, not HWEI and LF Luxembourg, were the beneficial owners of the Dividends. Therefore, the tax rate applicable to the Dividends was the 15% rate under Article X(2) and HWLH and LFMI, as the successors of UF Barbados and New LF Barbados, respectively, is each liable for its respective share of the shortfall.
2. In the alternative, under the GAAR, the Minister is entitled to assess each of HWLH and LFMI, as the successors of UF Barbados and New LF Barbados, respectively, for its share of the shortfall.
II. The Partial Agreed Statement of Facts and the Joint Book of Documents [11] The parties submitted a partial agreed statement of facts (the “PASF”), the contents of which are appended to these reasons as Appendix “A”, and two volumes of the documents referenced in the PASF. The basis on which the documents referenced in the PASF are entered into evidence is described in the “Preliminary Matters” section of the PASF.
[12] In addition, the parties submitted a joint book of documents in two volumes (the “Joint Book”). The basis on which the documents included in the Joint Book are entered into evidence is described in a documents agreement included at the beginning of the Joint Book.[5]
III. The Evidence A. General [13] The appeals were heard on common evidence.
B. The Witnesses [14] The Appellants called six witnesses:
1. Martin John Gardiner Glynn. In 2003, Mr. Glynn was a member of the board of directors of Husky and was chairman of the audit committee of Husky.
2. Neil Douglas McGee. In 2003, Mr. McGee was a vice-president and the chief financial officer of Husky.
3. Donald Jeffrey Roberts. In 2003, Mr. Roberts was the group deputy chief financial officer of Hutchison Whampoa Limited (“HWL”) in Hong Kong.
4. Wai Ying Fung. In 2003, Mr. Fung was group chief accountant of HWL in Hong Kong.
5. Kenneth Albert Cameron. Mr. Cameron was an auditor with the Canada Revenue Agency (the “CRA”) who participated in the audit of the Appellants. Mr. Cameron was subpoenaed to testify by the Appellants.
6. Laurie Marie Wills. Ms. Wills was an auditor with the CRA who participated in the audit of the Appellants. Ms. Wills was subpoenaed to testify by the Appellants.
[15] The Respondent called two witnesses, one of whom was qualified as an expert witness:
1. Bing Zhang. Mr. Zhang is an exchange of information officer with the Competent Authority Exchange of Information division of the CRA.
2. Werner Haslehner. Professor Haslehner testified as an expert in Luxembourg tax law.
C. The Credibility and Reliability of the Witnesses [16] The credibility of a witness refers to the honesty of the witness, or the readiness of the witness to tell the truth. A finding that a witness is not credible is a finding that the evidence of the witness cannot be trusted because the witness is deliberately not telling the truth.
[17] The reliability of a witness refers to the ability of the witness to recount facts accurately. If a witness is credible, reliability addresses the kinds of things that can cause even an honest witness to be mistaken. A finding that the evidence of a witness is not reliable goes to the weight to be accorded to that evidence.
[18] Reliability may be affected by any number of factors, including the passage of time. In R. v. Norman, [1993] O.J. No. 2802 (QL), 68 O.A.C. 22, the Court of Appeal for Ontario explained the importance of reliability at paragraph 47:
. . . The issue is not merely whether the complainant sincerely believes her evidence to be true; it is also whether this evidence is reliable. Accordingly, her demeanour and credibility are not the only issues. The reliability of the evidence is what is paramount. . . .
[19] With respect to each fact witness, I have considered all relevant factors[6] and I have concluded that each fact witness is credible.
[20] With respect to reliability, as much of the oral evidence of the Appellants addressed the purpose of the transactions in issue, I note the following observation of Bowman, C.J. in Makuz et al. v. R., 2006 TCC 263 at paragraph 32:
I will outline briefly the evidence of the appellants but I should preface the outline with the caveat that statements of subjective intention about the reasons for entering into a transaction are considerably less persuasive than the objective facts and circumstances surrounding the transaction. Without suggesting that there was any conscious dishonesty in a person’s statements of subjective intention, they tend to be unreliable because they are influenced by many extraneous factors. What actually happens is often a more reliable indication of a taxpayer’s purpose.
D. Hearsay Issues [21] The documentary evidence includes several public disclosure documents issued by Husky and other corporations. To the extent that the information in these documents is submitted for its truth, the evidence is hearsay.
[22] However, for the Husky documents such as its 2003 Annual Report at tab 1 of the Joint Book and its press releases, I find that the information in such documents is admissible under the principled exception as being both necessary and reliable.[7]
[23] With respect to the meaning of “necessary”, in R. v. F. (W.J.), [1999] 3 S.C.R. 569 at page 585, paragraph 31, the Court stated:
Hearsay evidence may be necessary to enable all relevant and reliable information to be placed before the court, so justice may be done.
[24] In R. v. U. (F.J.), [1995] 3 S.C.R. 764 at page 787, paragraph 35, Lamer, C.J. stated:
Necessity is met here in the same way it was met in B. (K.G.): the prior statement is necessary because evidence of the same quality cannot be obtained at trial.
[Emphasis added.]
[25] I find that the evidence is necessary because the numerous detailed facts in Husky’s publicly disclosed documents for 2003 are unlikely to be available to the Court in another form as a result of the effluxion of time and the frailties of human memory. Therefore, the evidence would not otherwise be available if not admitted under the principled exception.
[26] The standard for “reliability” is threshold reliability, not absolute reliability. To meet this standard, circumstantial guarantees of trustworthiness must be established.[8]
[27] Husky disclosed the information in documents such as its 2003 Annual Report and its press releases in accordance with applicable Canadian securities laws, which require disclosure of material facts and impose sanctions for failure to do so accurately and completely. In my view, the circumstances in which the information in these documents is collected and presented by Husky provide circumstantial guarantees of its trustworthiness. In addition, there is no evidence that contradicts the detailed information in these materials or otherwise calls into question the veracity of this information.[9]
[28] I will identify information obtained from such documents as “excepted hearsay evidence”. Generally, I have included the information in my reasons solely to provide a more detailed account of events described in general terms by the witnesses. I note that the admission of such evidence for its truth is not an indication of the weight, if any, accorded to the evidence.
E. Summary of the Evidence 1. Introduction
[29] The PASF provides many detailed facts that I do not propose to repeat in these reasons. However, I will reference these facts as needed.
[30] In general, the oral evidence of the Appellants’ witnesses focused on the reasons for which UF Barbados, LF Barbados and HF Barbados (collectively, the “Barbcos”[10]) entered into the securities lending arrangements described in the PASF (the “securities lending arrangements”); the effect of the securities lending arrangements; the ownership structure above the Barbcos and Luxcos; Husky’s reasons for paying the Special Dividend in 2003; and Husky’s role in the securities lending arrangements.
2. Husky’s Evidence
[31] Mr. McGee and Mr. Glynn testified on behalf of Husky.
[32] Mr. McGee testified that he joined Husky in 1997 as CFO when it was a private corporation known as Husky Oil Limited (“HOL”). At that time, the common shares of HOL were owned 49% by UF Barbados, 46% by LF Barbados and 5% by an indirect wholly owned subsidiary of the Canadian Imperial Bank of Commerce (“CIBC”). The capital of HOL also included Class A special voting shares owned by corporations not relevant to these appeals.
[33] Mr. McGee testified that in 2000, HOL merged with a listed corporation called Renaissance Energy Ltd. (“Renaissance”) and thereby became a publicly traded corporation listed under the name Husky Energy Inc. Following the merger, Husky had only common shares outstanding with one vote per share and no unanimous shareholder agreement.[11]
[34] Mr. Glynn testified that Husky chose to declare the Special Dividend because at the time that the dividend was declared at a meeting of the board of directors of Husky on July 23, 2003 (the “July 23 Meeting”), Husky was in a very strong financial position and wished to address the discount that the market placed on its common shares by generating revenue for its minority shareholders. Mr. Glynn stated that because share buybacks were not common at the time, the Special Dividend was the only way to accomplish Husky’s objective.[12]
[35] Mr. McGee testified that in 2003, Husky’s cash flow was particularly strong because commodity prices were higher than predicted in Husky’s budget for 2003.[13]
[36] On July 24, 2003, Husky issued a press release describing its second quarter financial results as well as the Second Quarter Dividend and the Special Dividend.[14]
[37] Mr. McGee had no specific recollection of when he first heard about the Special Dividend but stated that he would have been involved in the preparation of the materials given to the board of directors of Husky for the July 23 Meeting, which meant that he would have been made aware of the Special Dividend about one week before that meeting.[15]
[38] Mr. McGee testified that Husky had to comply with the covenants accompanying its debt and that he would have checked with the treasury group at Husky to confirm that the Special Dividend was not offside those covenants.[16] Mr. McGee also stated that it was fundamental to Husky’s business that it maintain its credit ratings and that paying down Husky’s bond debt was not economic because of make-whole requirements.[17]
[39] Mr. McGee testified that the excess cash at the end of the second quarter of 2003 was $460 or $470 million.[18] With respect to using the excess cash for investment opportunities, Mr. McGee stated:
There was the issue, I guess of alternate use of the funds. I guess you could say, you could take the money and invest it in additional businesses, additional assets; but we’re always looking for new investments, but they didn’t always arrive when you wanted them. So we looked at the cash flow, the budget was fully funded, the plan itself provided that there would be no debt at the end of the five years. So even though we paid special dividend, there was still being sufficient financial flexibility to take advantage of an acquisition. And indeed in the following months we did make an acquisition, Marathon.[19]
[40] In cross-examination, Mr. McGee stated that he did not know how the figure of $400 million was chosen but that the amount could be met out of Husky’s cash resources.[20]
[41] Mr. Glynn testified that a week to 10 days prior to the July 23 Meeting, he received a call from Mr. Frank Sixt alerting him that the Special Dividend would be an item on the agenda. Mr. Glynn stated:
A. . . . And it was of particular relevance to me, because as chairman . . . of the audit committee, there would have been some discussion about that at the audit committee and its capacity, Husky’s capacity to pay dividends.[21]
[42] Subsequently, Mr. Glynn had the following exchange with counsel for Husky:
Q. . . . Based on your knowledge, tell us how the principal shareholders influenced the decision to pay the special dividend.
A. How they influenced the decision? They simply obviously talked to management and formed the view and consulted board members individually in advance. And then there was an agenda item at the board for discussion, there was a vote, I’m sure it was unanimous, that it be approved.[22]
[43] In cross-examination, Mr. Glynn had the following exchange with counsel for the Respondent:
Q. And so he [Mr. Sixt] calls you to brief you on -- I will use your word -- this proposal, and I imagine he wanted you to vote in favour of the proposal?
A. I didn’t say that instantly, I wanted to read the material that he prepared to support the recommendation.
Q. I don’t doubt that, sir, you wanted to read the materials, but Mr. Sixt, he wanted you to vote in favour of the proposal? Is that fair?
A. No, he just simply said that this was coming up for consideration and explained a rationale for it.
Q. And your response was that you wanted to see the papers and consider the matter before the July 23rd meeting?
A. I recognized it was on the agenda and I would come prepared to have a view.[23]
[44] Following the declaration of the Husky Dividends at the July 23 Meeting, Husky was presented with the opportunity to purchase Marathon Oil Corp. (“Marathon”), which it did on October 1, 2003 for $831 million. Husky sold certain of Marathon’s assets for $431 million for a net purchase cost of $400 million.[24]
[45] Mr. Glynn testified that there was no discussion regarding Marathon at the July 23 Meeting. He described the $400 million net cost of Marathon as “not a large amount in the scheme of things” because at the time, Husky had a market capitalization of $15 to $20 billion.[25]
[46] In cross-examination, Mr. Glynn confirmed that the Marathon transaction was not discussed at the July 23 Meeting and stated that he had no knowledge of whether the possible acquisition of Marathon was identified by, or being contemplated by, Husky’s management at that time.[26]
[47] Because the purchase of Marathon closed on the same day as the payment of the Husky Dividends, Husky drew down on its line of credit but repaid these amounts by the end of 2003.[27] Husky’s 2003 Annual Report states that despite the Special Dividend and the acquisition of Marathon, Husky’s net debt fell to $1.8 billion at the end of 2003 compared to $2.1 billion at the end of 2002.[28] Referencing page 58 of Husky’s 2003 Annual Report, Mr. McGee testified that Husky’s long-term debt at the end of 2003 was $1.698 million compared to $2.385 million at the end of 2002.[29] The same page of the Husky’s 2003 Annual Report states that at the end of 2003, Husky had no balance on its syndicated line of credit.
[48] Mr. McGee testified that he had no specific recollection of when he was told of the proposed securities lending arrangements. However, on the basis of the e‑mail trail, he believed that it was one week before the July 23 Meeting,[30] which would have been around July 16, 2003. Mr. McGee stated that to the best of his knowledge, Husky was not involved in the decision to implement the securities lending arrangements, nor was it involved in the drafting of the associated documents; he also stated that he had no recollection of internal discussions regarding the securities lending arrangements.[31]
[49] In cross-examination, Mr. McGee repeated that he did not recall when he became aware of the securities lending arrangements but that it was likely one week before the July 23 Meeting.[32]
[50] Mr. McGee testified that his role with respect to the securities lending arrangements related to the fact that Husky common shares were being transferred and the resulting change in registered shareholders, which in turn raised withholding tax considerations.[33]
[51] Mr. McGee stated that there were no instructions from the Barbcos to obtain the 5% withholding tax rate. Mr. McGee also stated that the withholding tax rate did not affect Husky’s financial position since it paid the gross amount of the Dividends.[34]
[52] Mr. McGee testified that Computershare maintained the share register for Husky, paid the dividends declared on Husky common shares and issued tax forms to the shareholders that received dividends.[35] Mr. McGee helped HWL with Computershare[36] and Computershare did register the transfer of the Husky common shares to the Luxcos that occurred because of the securities lending arrangements.[37]
[53] In cross-examination, Mr. McGee acknowledged that an e-mail to him from Don Roberts dated July 23, 2003[38] asked for his help with Computershare and included an e-mail from Computershare that referenced the Barbcos. In the e-mail, Mr. Roberts states: “This is exactly why we needed your involvement so the registrar is well aware that Husky knows the shareholder and all of this bureaucracy can be smoothly handled.” Mr. McGee identified his handwritten note on the e‑mail which states: “Spoke to Jim Girgulis. He advised that the issues raised by HWL had been resolved.”[39]
[54] In cross-examination, Mr. McGee was asked about a series of e-mails that ends with an e‑mail from him to Dino Farronato, head of global taxation for HWL, dated July 31, 2003.[40] Mr. McGee states: “Our tax group have advised that, based on the documentation received, the withholding tax on HEI dividends paid to Hutchison Whampoa Europe Investments S.A.R.L. and L.F. Luxembourg S.A.R.L. would be at the rate of 5%.”
[55] In response to questions from counsel for the Respondent regarding the earlier e-mails in the chain between him and David Weekes of Stikeman Elliott, Mr. McGee acknowledged that he must have requested a legal opinion from Stikeman Elliott regarding the rate of Part XIII tax on the Dividends as the opinion was addressed to him.[41] Mr. McGee did not however recall whether he had requested the documents identified by David Weekes in an e-mail from David Weekes to Dino Farronato and others dated July 18, 2003.
[56] Mr. McGee testified that HOL paid dividends on its shares in United States dollars and that, after its merger with Renaissance, Husky continued to pay dividends to the Barbcos in United States dollars. Mr. McGee described the process as follows:
. . . So what happened when Husky Oil became Husky Energy, that practice continued so that on a dividend payment date Computer Share [sic] would do their run of all the dividend warrants. They would -- I think this is the way it was -- it would cancel the two warrants for the two shareholders because Husky would pay those two shareholders directly. It would take the exchange rate on the dividend payment date of Canadian dollar and U.S. dollar and then remit the U.S. dollar funds to the shareholder.[42]
[57] In cross-examination, Mr. McGee again stated that Husky had been paying dividends to the principal shareholders directly since 2000 when HOL merged with Renaissance.[43] Mr. McGee acknowledged that this arrangement was not reflected in Husky’s Transfer Agent, Registrar and Dividend Disbursing Agent Agreement with Montreal Trust Company of Canada dated July 14, 2000. Mr. McGee suggested that “it was probably an arrangement that wasn’t documented” and that so far as he was aware, Computershare had never refused to pay dividends to Husky’s principal shareholders notwithstanding ambiguous (double hearsay) comments in an e-mail from Ian McNair to John Evans dated September 12, 2003.[44]
[58] In re-examination, Mr. McGee stated that as far as he was aware, Computershare had never paid dividends to the principal shareholders of Husky and that Husky had paid the dividends because the principal shareholders wanted their dividends paid in United States dollars.[45]
[59] Mr. Glynn testified that the securities lending arrangements were never “flagged” at any board of directors meeting or audit committee meeting of Husky and that “[o]ther than being asked . . . today, I don’t recall ever knowing about it.”[46] As well, Mr. Glynn stated that Husky’s tax department would provide regular updates to the audit committee, but that tax risk associated with the Special Dividend was never raised either with the audit committee or with the board of directors of Husky.[47]
[60] In cross-examination, in response to questions as to whether a change of control was brought to his attention or brought up at a Husky board of directors meeting held in 2003, Mr. Glynn stated “no”.[48] Mr. Glynn also stated that a change in the voting rights of Husky common shares was never discussed.[49]
[61] In re-examination, Mr. Glynn had the following exchange with counsel for Husky:
Q. . . . To your knowledge, in your 20 years with Husky, were the decisions of any of the independent board members dictated or directed by the principal shareholders?
12 A. In my experience, no. I don’t know I can’t think of a case where an independent director was directed by one of the personal [sic, principal] shareholders. There was a great level of cordiality, respect, and seniority on the board that would have presented [sic, prevented] that from happening.[50]
[62] In chief, Mr. Glynn was asked about the directors of Husky. Mr. Glynn testified that nine of the 14 directors were considered “independent”. He identified as not being “independent” Mr. Victor Li, Mr. Canning Fok, Ms. Poh Chan Koh, Mr. John Lau, and Mr. Frank Sixt.
[63] With respect to what he meant by “independent”, Mr. Glynn stated:
A. . . . You’re either independent or you’re not. And I just described who I believe to be independent.
After I left the audit committee, I subsequently became chair of the governance committee. So on a regular basis we would go to outside counsel and make sure that there was no doubt as to the independence, because we had to state that in our circulars.
. . .
So in reading this list I believe nine out of 14 are independent.[51]
[64] Mr. Glynn also stated that the members of the audit and governance committees of Husky were all independent directors.[52]
[65] In cross-examination, counsel for the Respondent observed, and Mr. Glynn agreed, that the list of directors on pages 117 and 118 of Husky’s 2003 Annual Report showed that two of the directors identified by Mr. Glynn as independent, Mr. Shurniak and Mr. Kwok, were also on the boards of HWL and Cheung Kong (Holdings) Limited (“CKHL”), respectively.
[66] In chief, Mr. Glynn was asked about the nomination process for members of Husky’s board of directors. Mr. Glynn stated:
A. The governance committee had a role to play. They had a skills matrix. They had the desire for competence, diversity, and this was built up around the springtime where in advance of the AGM were the circulars and the slate of the directors were proposed. So the co-chairs differently [sic, definitely] had a big role to play in in [sic] giving advice and listening to advice from governance committee. And so a slate was proposed and voted on by the AGM, and my recollection is we had pretty favourable results including from minority shareholders to the slate of directors total.[53]
[67] In cross-examination, Mr. Glynn stated that Mr. Victor Li—Mr. Li Ka‑Shing’s son—indirectly asked him to be a director of Husky through the Chairman of HSBC. At the time, Mr. Glynn was the CEO of HSBC. Mr. Glynn described the request as somewhat unusual given his duties as CEO and stated that “we needed to check with people to see whether that was okay” given the time commitment.[54] In response to being asked whether Mr. Fok was involved in the request for him to become a director of Husky, Mr. Glynn answered, “I don’t remember him being involved, no.”[55]
[68] Also in cross-examination, Mr. Glynn testified that when he became a director of Husky in 2000, he knew two members of Husky’s board of directors, one by reputation and another because he was a customer of HSBC. As well, he may have known Mr. Frank Sixt, who was previously a lawyer in Vancouver.[56]
3. HWLH’s Evidence
[69] Mr. Roberts testified on behalf of HWLH. Mr. Roberts acquired his chartered accountant designation in Canada in 1975. Mr. Roberts joined HWL in 1988 as group chief accountant and became the group deputy chief financial officer in 2000. UF Barbados was one of the companies under his purview.[57] Mr. Wai Ying Fung reported to him on the affairs of UF Barbados.[58] Mr. Roberts frequently referred to Mr. Fung as WY Fung.
[70] Mr. Roberts described his role as group deputy chief financial officer as follows:
My roles and responsibilities were the accounting policies for the listed entity and the group worldwide, the accounting for the headquarters, and the holding companies that were -- the accounts were maintained in head office. I was in charge of tax planning and tax compliance. I was also in charge of financial reporting and preparing the annual report in accordance with the stock exchange requirements in Hong Kong.[59]
[71] In cross-examination, Mr. Roberts agreed that the operations of the HWL group of companies were mainly in HWL’s wholly owned subsidiary, Hutchison International Limited (“HIL”), and that he was employed by HIL. Mr. Roberts confirmed that he reported to Mr. Frank Sixt, who was the group chief financial officer of and an executive director of HWL, as well as a director of CKHL, and to Ms. Susan Chow, who was the deputy managing director of HWL.[60]
[72] Mr. Roberts testified that at the relevant time, UF Barbados was an indirect wholly owned subsidiary of HWL.[61] HWL was listed in Hong Kong and had its headquarters in Hong Kong. HWL was involved in five major business sectors and had operations in 30 countries. The HWL group of companies consisted of about 2,500 companies.[62]
[73] UF Barbados was registered in Barbados as a regular business company and was the holding company for investments in Canada such as Husky.[63] HWL included UF Barbados’ financial results in its consolidated financial statements.[64]
[74] Mr. Roberts testified that 49.97% of the shares of HWL were owned by CKHL and that CKHL did not consolidate its financial results with those of HWL.[65]
[75] Later in his testimony, Mr. Roberts stated that HWL and CKHL were associated under the accounting rules, but that CKHL did not own 50% or more of HWL. He explained that if CKHL had a 50% or greater shareholding in HWL, it would have been required to consolidate CKHL’s and HWL’s financial results under the applicable accounting rules. Mr. Roberts testified that the financial results of CKHL and HWL were not consolidated and that CKHL accounts for HWL as an associated company.[66]
[76] I recognize that such statements include an element of opinion. However, Mr. Roberts is a chartered accountant who in 2003 was the group deputy chief financial officer of HWL. Mr. Roberts testified that he played a material role in the preparation of HWL’s 2003 financial statements and 2003 annual report. In my view, Mr. Roberts’s evidence regarding the accounting rules followed by HWL and CKHL falls under the exception for participant experts.[67]
[77] UF Barbados started to receive quarterly dividends from Husky in the second quarter of 2001. During 2001 and 2002, on a gross basis, UF Barbados was entitled to approximately Can$150 million of dividends. These dividends net of 15% Part XIII tax were settled in United States dollars.[68]
[78] For Barbados tax purposes, UF Barbados reported the net amount of the dividends that it received from Husky as dividend income. A copy of the 2003 Barbados tax return of UF Barbados is included at tab 86 of the PASF. Mr. Roberts understood that the rate of Barbados tax for 2001 and 2002 was the 36% rate stated on the 2003 tax return.[69]
[79] UF Barbados offset its dividend income from Husky with interest expense so that no tax was payable in Barbados. The interest was paid by UF Barbados to U.F. Holdings Limited (“UF Holdings”), the immediate parent of UF Barbados; to Union Faith Energy (UK) Limited, the immediate parent of UF Holdings; and to a sister corporation called Holodeck Limited.[70]
[80] Mr. Roberts testified that UF Barbados owned approximately 35% of the common shares of Husky and that to the best of his knowledge, there was no contractual arrangement between UF Barbados and another shareholder of Husky to establish joint control over the economic activities of Husky.[71]
[81] Dino Farronato advised Mr. Roberts of the special dividend on July 2 or 3, 2003. Mr. Farronato was the head of group taxation for HWL, reported directly to Mr. Roberts and had an office next door to Mr. Roberts. Mr. Roberts discussed with Mr. Farronato if it was possible to reduce the tax of UF Barbados as much as possible.[72]
[82] In cross-examination, Mr. Roberts agreed that he would ask their Canadian tax advisors to consider the Canadian tax consequences of whatever it was they were planning to do and that tab 18 of the Joint Book addresses the potential tax savings from the securities lending arrangements.[73] More generally, Mr. Roberts had the following exchange with counsel for the Respondent:
Q. Right. So but my question, it was to reduce as much as possible the taxation with respect to that dividend of Husky, and that included two components, one being the 36 per cent Barbados tax, the second one was the 15 per cent withholding tax. Is that a fair statement?
A. It’s a fair statement on the basis that we were always trying to reduce taxes. So if this is one of them, we will try to reduce it, yes.[74]
[83] Mr. Roberts testified that he worked with Mr. Farronato and discussed the Barbados tax consequences to UF Barbados with Ernst & Young’s (“E&Y”) office in Barbados on July 3 or 4, 2003.[75] Mr. Farronato described the tax consequences of the special dividend to UF Barbados and UF Holdings and Husky’s obligation to withhold Part XIII tax in an e-mail to Mr. Roberts and other senior officers of HWL sent July 5, 2003.[76]
[84] Mr. Roberts testified as to his understanding of the tax consequences of the special dividend to UF Barbados based on his daily conversations with Mr. Farronato. Mr. Roberts understood that UF Barbados would pay tax under Part XIII of the ITA equal to 15% of the special dividend and would receive a tax credit in Barbados for that tax. As a result, the effective tax rate in Barbados was 21%.[77]
[85] Mr. Roberts testified that initially, two options were considered: migrating UF Barbados to another jurisdiction and increasing the interest rate on the debt owed by UF Barbados. The first option was rejected because it would take too long and was too difficult. For th