Burlington Resources Finance Company v. The Queen

Burlington Resources Finance Company v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2017-08-03
Neutral citation
2017 TCC 144
File numbers
2012-2683(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 heard on June 27, 28, 29 and 30, 2016 at Toronto, Ontario.
Before: The Honourable Justice Johanne D’Auray
Appearances:
Counsel for the Appellant:
Alexander Cobb
Andrew Boyd
Counsel for the Respondent:
Erin Strashin
Naomi Goldstein
Donna Dorosh
ORDER
UPON Motion by the Respondent for the following relief:
1. an Order directing the Appellant’s nominee to re-attend at the Appellant’s own expense and answer the questions set out in the Amended Schedule “A” and any proper questions arising from the answers, from the examination for discovery held on July 16-18, July 23, July 29 and December 15-17, 2014, which the Appellant has refused to answer or has not fully answered;
2. in the alternative, an Order requiring the Appellant to fully respond in writing to, and produce all the documents requested in, all of the questions set out in the Amended Schedule “A” within 90 days of the Order of this Court to this motion;
3. in the alternative, and failing compliance with the Court’s Order, an Order dismissing the appeal;
4. costs of this motion; and
5. such further and other relief as this Court may deem just.
AND UPON hearing the submissions of the parties;
IT IS ORDERED THAT:
The motion is allowed in part, the Appellant will have to answer the questions in accordance with the attached Reasons for Order.
A conference call will be held to determine how to proceed, to establish time limits and to discuss the costs for the Motion.
Signed at Ottawa, Canada, this 3rd day of August 2017.
“Johanne D’Auray”
D’Auray J.
Citation: 2017 TCC 144
Date: 20170803
Docket: 2012-2683(IT)G
BETWEEN:
BURLINGTON RESOURCES FINANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
D’Auray J.
I. Introduction
[1] The Respondent has brought a motion pursuant to rules 4, 7, 95 and 110 of the Tax Court of Canada Rules (General Procedure)[1] (“the Rules”) for an Order:
1. directing the nominee of the Appellant, Burlington Resources Finance Company (“Burlington”), to re-attend at Burlington’s own expense and answer certain questions (the “Disputed Questions”), and any proper questions arising from the answers;
2. in the alternative, directing Burlington to fully respond in writing to, and produce all documents requested in, the Disputed Questions; and
3. directing that this appeal be dismissed if Burlington does not comply with the Order of this Court to this Motion.
[2] The Respondent argues that the Disputed Questions are relevant to the matters in issue and that Burlington has either improperly refused to answer, or not fully answered, the questions.
[3] Burlington opposes this motion and argues that all proper questions have been fully answered and that the Respondent’s improper questions have been correctly refused.
[4] Both parties ask for costs payable to them in any event of the cause, and for the opportunity to make submissions with respect to the amount.
II. Facts [5] The background to the underlying tax appeal is as follows:[2]
1. Burlington was incorporated in February 2000 as a Nova Scotia unlimited liability company (“NSULC”) and is wholly-owned subsidiary of Burlington Resources Inc. (“BRI”), a resident U.S. corporation.
2. Burlington’s business involved obtaining financing to fund the operations of affiliated Canadian companies. Specifically, Burlington was involved in borrowing funds from public markets and “on-loaning” those funds to its affiliated Canadian entities, which were conducting businesses related to crude oil and natural gas assets.
3. BRI unconditionally guaranteed the payment of the Notes and Burlington “on-loaned” the proceeds to its Canadian sister companies.
4. Prior to the issuance of the Notes, BRI ensured that Burlington would be able to make all the payments due under the bonds, by putting in place a series of transactions, which included intercompany promissory notes, forward purchase agreements, letters of direction, capital contribution agreements, contribution agreements, and swap agreements (collectively referred as the “Hybrid Instruments”).
5. Involved in these Hybrid Instruments were:
Burlington Resources Canada LTD. (“BRCL”);
Burlington Resources Canada Inc. (“BRCI”), which was predecessor to BRCL
Burlington Resources Canada (Hunter) Ltd. (“BRCH”);
Canadian Hunter Exploration Ltd.(“CHEL”), which was a predecessor to BRCH; and
Burlington Resources Canada Corporation (“BRCC”), which was a predecessor to BRCH.
6. In 2001 and 2002, Burlington borrowed approximately US $3 billion by issuing the below seven bonds (the “Notes”) to arm’s-length parties:
Issuance Date
Principal
Interest
Maturity
February 12, 2001
US $400 million
6.68%
February 15, 2011
August 24, 2001
US $178 million
6.40%
August 15, 2011
August 24, 2001
US $575 million
7.20%
August 15, 2031
November 16, 2001
US $500 million
5.60%
December 1, 2006
November 16, 2001
US $500 million
6.50%
December 1, 2011
November 16, 2001
US $500 million
7.40%
December 1, 2031
February 25, 2002
US $350 million
5.70%
March 1, 2007
7. Burlington and BRI agreed that Burlington would pay guarantee fees to BRI based on an annual guarantee fee of 50 basis points (or 0.5 percent) of the principal amount of the Notes. According to Burlington, the fees were incurred in exchange for BRI’s guarantees and were based upon advice received from investment banks.
8. During its 2002 to 2005 taxation years, Burlington paid approximately $83 million in guarantee fees to BRI.
9. The total tax in dispute for the years under appeal is $21,179,800, but this is a minimum since the liability issues continue until the last bond matures in 2031.
10. BRI and its subsidiaries, including Burlington, were acquired by ConocoPhillips in 2006.
11. Burlington deducted the guarantee fees in computing its income for the 2002 to 2005 taxation years pursuant to section 9 of the Income Tax Act[3] (the “Act”).
12. The Minister of National Revenue (the “Minister”) reassessed Burlington in respect of those taxation years, disallowing the deductions of the guarantee fees.
13. The Minister did so by relying on paragraphs 247(2)(a) and (c) of the Act to reduce the amount of the guarantee fees to nil in each taxation year, claiming that the terms and conditions of this fee arrangement between Burlington and its parent company were not terms and conditions which would have existed between arm’s-length parties.
14. The Minister also relied on subsection 247(3) of the Act to impose transfer pricing penalties, alleging that Burlington failed to make reasonable efforts to determine the arm’s-length transfer price in respect of the guarantees.
15. The basis of the Minister’s assessment is based on the following theories:
i. Yield Approach: if the yield approach is applicable, there was no economic incentive for Burlington to enter into the transactions in respect of the guarantee fees, because the implicit support of BRI would have equalized the credit rating of Burlington and BRI.
ii. Price of the guarantee fees: the terms or conditions made or imposed in respect of the guarantees differed from those that would have been made between persons dealing at arm’s-length such that the amount of the guarantee fees payable would have been nil had Burlington and BRI been dealing at arm’s-length.
iii. Duplication Factor: Burlington’s status as an unlimited liability company formed under the laws of Nova Scotia was duplicative of the guarantees from Burlington’s perspective.
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 NSULC 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.
III. Analysis - Principles of Discovery [6] The purpose of, and principles governing, examinations for discovery are well established in the jurisprudence. It is not surprising therefore that the parties generally referred to the same principles in support of their respective positions. Where they did disagree was on the weight I should give to certain of the principles and on the role played by the principle of proportionality.
[7] There was no disagreement on the purpose of discovery. Discovery is intended to enable the parties to know the case they have to meet at trial, to know the facts upon which the opposing party relies, to narrow or eliminate issues, to obtain admissions and to avoid surprises at trial. The scope of discovery is determined primarily by reference to the pleadings which set out the matters in issue between the parties.
[8] A party, and in the case of a corporation its nominee, is required by subsection 95(1) of the Rules to answer any proper question relevant to any matter in issue.
[9] In support of its position, the Respondent asked that I give particular weight to the following discovery principles:[4]
1. Relevancy is extremely broad and should be liberally construed. The threshold for relevancy on discovery is very low but does not allow for fishing expeditions, abusive questions, delaying tactics or completely irrelevant questions.[5]
2. Everything is relevant that may directly or indirectly aid the party conducting the discovery to maintain its case or damage that of its adversary. If the questions are broadly related to the issues raised, they should be answered.[6]
3. The examining party is entitled to any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party.[7]
4. Proportionality is not something to be used as a shield. Given that there are significant issues and a significant amount of tax at stake, proportionality should not be the primary focus in determining whether the Disputed Questions should be answered. Instead, relevancy should be the key driver.[8]
5. A motions judge should not second guess the discretion of counsel by examining minutely each question or by asking counsel to justify each question or explain its relevancy.[9]
6. A motions judge should not seek to impose his or her views of relevancy on the judge who hears the case by excluding questions that he or she may consider irrelevant but which, in the context of the evidence as a whole, the trial judge might consider relevant.[10]
7. The discovery process is the most significant stage of the litigation in allowing a party to prepare for trial. It allows the parties to prepare their respective case and prepare full answers to their opponent’s case. Full and open discovery gives parties the complete picture.[11]
8. Discovery fails when the parties engage in obfuscation. The purpose is no longer disclosure but how to avoid disclosure. When that occurs, discovery’s purposes are no longer being served, and neither is the administration of justice. Every effort should therefore be made to allow for full and proper disclosure, and courts must be guided by the well-established discovery principles and the low threshold for relevancy described in Baxter v The Queen, 2004 TCC 636.[12]
[10] In response, Burlington asked that I give weight to the following principles:[13]
1. The obligations of a party being discovered are not without limit.[14]
2. A party has no right to go beyond the case as pleaded to interrogate concerning a case it has not attempted to make in its pleadings. A party asking the questions must establish that they are relevant to issues raised in the pleadings.[15]
3. Discoveries should never become general fishing expeditions, that is, an indiscriminate request for production, in the hope of uncovering helpful information.[16]
4. Even where proportionality is not specifically codified, applying rules of court that involve discretion includes an underlying principle of proportionality which means taking account of the appropriateness of the procedure, its cost and impact on the litigation, and its timeliness, given the nature and complexity of the litigation.[17]
5. The role of an examination for discovery is to circumscribe the scope of the dispute to some degree, not to broaden it. A court may terminate an examination for discovery where it is clear that it has become excessive and unjustified.[18]
6. Where there are questions that are not relevant, that amount to a fishing expedition, or that are not proportional, or where the discovery process is being abused, the courts will not require that a party undertake the effort of responding. In determining whether to order a party to respond, this Court has indicated the ultimate purpose is to fairly, reasonably and expeditiously move matters along to a hearing.[19]
IV. Proportionality
[11] As already mentioned, the parties differed when it came to the role played by the principle of proportionality in discovery.
[12] Burlington argued that, while courts once took a “broad and liberal” approach to the concept of relevance in discovery, relevance must now be tempered by proportionality.[20]
[13] Burlington submitted that other courts have declared that “the “broad and liberal” principle has outlived its useful life and “should be abandoned in place of proportionality rules.”[21] Burlington suggested that this Court ought to do the same.
[14] In support of this argument, Burlington referred to the recent decisions of the Supreme Court of Canada in Hryniak v Mauldin and Association des parents de l’école Rose-des-vents v British Columbia (Education). According to Burlington, these decisions mean that the principle of proportionality should govern the application of our rules of court, including the discovery process.[22]
[15] The Respondent on the other hand, submitted that in this case, due to the complexity of the issues and the amount of tax at stake in this case, proportionality does not trump relevancy.
[16] While I agree that that proportionality needs to be taken into account, I do not agree with Burlington that it now trumps relevancy in all situations and that the “broad and liberal approach” to determining relevancy must now be ignored. In my view, both principles continue to exist and each situation needs to be examined on its own merits. In some situations, proportionality will trump relevancy and in others, relevancy will remain the key driver in determining whether a question needs to be answered.
[17] The starting point in an examination of the role of proportionality is subsection 4(1) of the Rules. It contemplates a role for proportionality in the application of the Rules: “[t]hese rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every proceeding on its merits.”
[18] The jurisprudence of this Court has also recognized the importance of proportionality. In Cameco Corp. v Canada,[23] Chief Justice Rip (as he then was) considered proportionality in the context of discovery in a transfer pricing case. However, he ultimately ordered Cameco to produce more relevant documents even though it had already produced 59,000 hard copy documents and 96,000 electronic documents. Chief Justice Rip reasoned at paragraph 44:
44 The facts in this appeal are complex. The Affidavit of Peter Macdonald describes the document collection process and it is apparent that the Appellant has dedicated significant resources including employing expertise, time and costs. Yet, given the complexity of this case and the amount at stake, it is not unreasonable for the Appellant to review and conduct additional searches and make further inquiries into certain documents.
[19] Similarly, in his recent decision in CIBC,[24] also involving a motion to compel answers, Chief Justice Rossiter recognized the importance of proportionality in the appropriate case. However, he concluded that proportionality does not always trump relevancy. At para. 276, the Chief Justice stated:
276 As for any issue of proportionality, the principle is certainly a worthy and important one, and efforts should certainly be made to keep costs down. But proportionality is not something to be used as a shield. In considering these appeals, and particularly the issues at stake and the quantum, proportionality is not the primary focus of decisions on discovery for these appeals. Relevancy is the key driver.
[20] The above two decisions are in my view consistent with the ruling in Hryniak. They both took proportionality into account and weighed it against the complexity of the issues at stake and the amount of tax at issue.
[21] Contrary to Burlington’s submission, Hryniak and Rose-des-vents do not call for proportionality to be the key driver in all situations. Indeed, while Justice Karakatsanis in Hryniak called on courts to actively manage the legal process in line with the principle of proportionality, she also emphasized the importance of taking into account the nature and complexity of the litigation:
31 Even where proportionality is not specifically codified, applying rules of court that involve discretion “includes ... an underlying principle of proportionality which means taking account of the appropriateness of the procedure, its cost and impact on the litigation, and its timeliness, given the nature and complexity of the litigation” (Szeto v. Dwyer, 2010 NLCA 36, 297 Nfld. & P.E.I.R. 311, at para. 53).
[22] In examining the Disputed Questions I therefore must take into account that “relevance” must be weighed against matters such as, the degree of relevance, how onerous it is to provide an answer, and whether the answer requires fact or opinion of law.[25]
[23] It is also clear that in considering proportionality, I will have to take into account that we are here dealing with a complex transfer pricing dispute involving a large amount of disputed tax. The total tax in issue is $21,179,800 at a minimum. As some of the Notes will be outstanding until the year 2031, the potential total tax recoverable by the Minister in relation to this tax appeal is much higher than this amount. In addition, I will be dealing with Conoco Funding Company involving the same issue as Burlington in a separate Order. ConocoPhillips purchased Burlington in 2006. Conoco Funding Company’s appeal also raises the issue of the deductibility of guarantee fees paid its parent corporation ConocoPhillips.
[24] Before leaving proportionality, I should mention that I carefully examined Burlington’s evidence on proportionality. This evidence did not convince me that proportionality should trump relevance in all situations.
[25] Burlington’s evidence on this issue comes from Ms. Lily Hoang (“Ms. Hoang”) who is employed by ConocoPhillips Company[26] as Senior Tax Counsel. Ms. Hoang provided an affidavit dated December 28, 2015 explaining how time-consuming, impractical and burdensome it would be for Burlington to carry out the necessary inquiries and searches to locate the information to respond to the Disputed Questions.
[26] Ms. Hoang explains that most documents that may be responsive to the Disputed Questions, and particularly those documents that relate to the guarantees and the guarantee fees, would have been stored in three cities, across a number of separate corporate departments: Houston - Treasury, Legal and Tax Planning; Bartlesville – Accounting; Calgary - Accounting, Tax Planning and Legal.[27] Ms. Hoang states that each of these departments maintains its own records and creates its own indexes as a means to locate files within its stored records.
[27] I understand that the indexes are, essentially, a list of the files in that department’s storage facility.[28] Each file item listed on an index corresponds to certain boxes of documents. If a file listed on an index is perceived to be relevant to a Disputed Question, then its corresponding boxes of documents must be pulled from the shelves and their contents reviewed to determine if the sought information is contained therein and is indeed responsive to a Disputed Question.[29]
[28] In terms of the number of boxes involved, Ms. Hoang notes that the treasury department has roughly 3,000 boxes in storage, as do the other departments.[30] Ms. Hoang emphasizes that while the indexes maintained by each of the departments are extensive, there is no guarantee that they are accurate or complete.[31]
[29] Ms. Hoang states that she has not been able to identify a single comprehensive index that would allow an individual to efficiently search all of the records by subject for any responsive documents.[32] In oral submissions, NSULC for Burlington summed the situation up: “The point is that, even though indexes exist, those indexes are not sufficient to allow Ms. Hoang or anyone else to quickly identify even the boxes where relevant documents or responsive documents might be found.”[33]
[30] In her affidavit, Ms. Hoang does not state how much time these searches would take or how expensive it would be to respond to the Disputed Questions. However, counsel for Burlington at the hearing stated that: “if the Respondents got everything they wanted, it would take months if not years to produce [this] colossal amount of information.”[34]
[31] Beyond the existence of the indexes and uncertainty around the time and cost required to conduct these searches, Ms. Hoang stresses three central difficulties inherent in responding to the Disputed Questions.
[32] The first difficulty is that there are no current employees within the ConocoPhillips Group with direct knowledge of the transactions in issue, or with knowledge of where or how the documents that may be responsive to the Disputed Questions might be located or organized.
[33] The second difficulty is that Ms. Hoang has been informed that there is no efficient or even reliable way to search all the records of the ConocoPhillips Group to identify documents that could be used to respond to the Respondent’s questions and requests as the documents are maintained in different mediums, in multiple locations, and indexed in different ways.
[34] The third difficulty is that, even if such a massive and unguided review were undertaken, it would not likely produce a material number of documents that are responsive to the Disputed Questions as many of the documents were likely destroyed according to their document retention policies. In other words, it is not just that these searches are inordinately time-consuming, it’s that they are time consuming and likely to be futile.
[35] There are a number of shortcomings in Ms. Hoang’s evidence. First, she does not indicate how many documents would need to be searched, how long it would take to conduct these searches (although we do have counsel’s statement), how many personnel would be required, or how much it would cost.
[36] Second, Ms. Hoang did not contact former employees of BRI who were involved in the transactions at issue. This notwithstanding the fact that she lists the former employees in her affidavit. I agree with the Respondent that Ms. Hoang could have at least attempted to reach out to these key former employees to obtain a better appreciation of the task of responding to the Disputed Questions.
[37] Third, I agree with the Respondent that Ms. Hoang has overstated the difficulty of responding to the Disputed Questions given the existence of these indexes. As the Respondent, pointed out, the indexes would be a useful tool to reduce the burden of responding and make it something less than the “massive and unguided review”[35] that Ms. Hoang alleges.
[38] Ms. Hoang estimated that there are approximately 12,000 boxes of documents stored between the relevant departments, housed in a few different locations. The indexes allow Ms. Hoang to, as she describes in her own words, “get a general understanding of whether there might be relevant documents” in the stored boxes.[36]
[39] While a “quick identification” of documents may not be possible, I agree with the Respondent that, with the help of the indexes, a careful and systematic identification of boxes with responsive documents is surely achievable.
[40] Fourth, counsel for Burlington submitted that responding to the Disputed Questions would necessitate going through the index referencing and box pulling “exercise described by Ms. Hoang again and again and again.”[37] Though I acknowledge that this is somewhat dependent on the breadth of the questions asked, I have a difficult time appreciating how boxes previously reviewed could not somehow be accounted for in a way that this exercise need not to be approached entirely anew with each subsequent Disputed Question.
[41] Importantly, the Respondent cannot be denied access to information and documents that it is legally entitled to solely because Burlington failed to systematically or adequately maintain a system of records thus making the location of information potentially onerous. If I were to conclude that taxpayers need not produce documents because their records were disorganized and could not be systematically searched, this would create a perverse incentive for taxpayers not to keep organized records of their tax affairs.
[42] The same logic applies to the Burlington’s retention policy. The Respondent should not be penalized because Burlington may have destroyed certain documents in accordance with their retention policy. This is entirely out of the Respondent’s control.
[43] Another shortcoming, in Ms. Hoang’s evidence is that she could not recall when either the IRS audit started or the CRA audit started. These dates are relevant to the application of the Retention Policy. She admitted that in accordance with the Retention Policy of Burlington and/or ConocoPhillips, they had to keep all documents relating to an audit or an appeal, such as this one. Therefore, unless Burlington can positively affirm that a relevant document no longer exists, it will have to search for the document.
[44] One concern of Ms. Hoang that I do find valid relates to the completeness and accuracy of the search.[38] Because the indexes purporting to catalogue the contents of the stored documents were created at different times by different groups, she states that there could be no guarantee that a search would be thorough.
[45] This is a legitimate concern and, correspondingly, a qualification of the exhaustive nature of the required search can be built-in. Where Burlington is ordered to answer questions, it will not need to search beyond the indexes. In other words, a truly unguided rifling through 12,000 boxes would not be required.
[46] In conclusion, I am not persuaded that the costs, time, and effort involved for Burlington to respond to any relevant questions would be disproportionate, given the amount of money involved which according to the Respondent is close to $100 million, the importance of the case and the complexity of the issues. Proportionality must not defeat the purposes of discovery, particularly in an appeal such as this. Where the issues are complex and fact based and where the amount at stake is considerable, both parties should be able to fully prepare for trial and know their case.
[47] Therefore, I will address proportionality in the following manner. If I find a question relevant, blanket concerns of proportionality will not override the need to respond and to look for documents relying upon the indexes. However, if I am convinced that a question is marginally relevant, and there are proportionality concerns, I may order Burlington not to answer the question, I will analyze each situation on its own merits.
V. Narrowing of the issues in dispute [48] The precise scope of the underlying dispute has also emerged as a point of contention in this motion.
[49] Burlington alleges that the scope of the underlying dispute has been substantially narrowed by admissions in the Answer with respect to some assumptions of fact made by the Minister and by comments made by the Respondent’s nominee at discovery. Accordingly, Burlington argues that many of the questions the Respondent is moving on do not relate to a live dispute between the parties and spending energy in discovery on an admitted fact or conceded issue is improper.
[50] Burlington particularly maintains that the transfer pricing issue is now “off the table”[39] in the appeal. Burlington explains that because the Respondent no longer relies on paragraphs 247(2)(b) and (d) of the Act, all that remains of the transfer pricing dispute is the question of the appropriateness of the guarantee fees under paragraphs 247(2)(a) and (c) of the Act.
[51] Burlington submitted that in assessing it, the Minister took into account as a presumption of fact that the fee an arm’s-length party would require to guarantee Burlington’s debts would have been so “exorbitant/more than 50 basis points”. Counsel for Burlington argued that since in its Answer to the Amended Reply to Notice of Appeal, Burlington admitted these facts, the Respondent cannot ask questions with respect to them. There is no longer a controversy about what the arm’s-length transfer price would have been.
[52] The Respondent argued that the presumptions of fact relied by the Minister, namely that its “exorbitant/more than 50 basis points” does refer to Burlington operating as a finance company on a stand-alone basis and, therefore, the admission by Burlington with respect to this fact, does not defeat its arguments under paragraphs 247(2)(a) and (c) of the Act.
[53] I agree with the Respondent. It is clear that the Respondent in her Amended Reply to the Notice of Appeal was referring to Burlington operating on a stand‑alone basis. Therefore, there is no agreement about the transfer price that an arm’s-length party would charge. This remains a live issue in this appeal. Burlington is attempting to crystallize an inaccurate characterization of the Respondent’s position. Therefore, the assertion that the dispute has been drastically narrowed cannot be sustained and the Respondent’s discovery rights will not be curtailed to deny her the opportunity discover on an issue that goes to the heart of the dispute.
[54] Burlington also submitted that the Respondent has pleaded that Burlington’s functional deficiency and inability to bear risk on a stand-alone basis made it imperative for any arm’s-length lender to require a guarantee from BRI.[40] Relying on these facts pleaded by the Respondent[41], Burlington alleges that I should conclude that the admission that the guarantee was necessary for arm’s-length lenders means that the guarantee was necessary for Burlington.
[55] I do not agree with Burlington, the Respondent’s position is that under 247(2) (a) and (c) of the Act, with arm’s-length party, in similar circumstances Burlington would have not pay anything for the guarantee since they were no benefit to be had. Therefore, the transfer pricing issue remains a live issue in this appeal.
[56] I turn now to address Burlington’s submissions in relation to the Respondent’s argument under paragraph 18(1)(a) of the Act. The Respondent’s position is that under paragraph 18(1)(a) of the Act no deductions should be allowed in respect of the guarantee fees as they were not incurred for the purpose of earning income.
[57] Burlington has asked me to conclude that the Respondent’s paragraph 18(1)(a) of the Act argument is so untenable that it does not warrant the type of onerous searches for information and documents that the Respondent is seeking.[42]
[58] Principally, Burlington alleges that the Respondent’s theory that the guarantee fees were not incurred for an incoming-earning purpose is untenable in light of the law regarding paragraph 18(1)(a) of the Act. Burlington cites a number of cases that found that a taxpayer is entitled to deduct an expense for valid services, even if a non-arm’s length party would have been willing to provide it for free.[43] Therefore, Burlington alleges that paragraph 18(1)(a) of the Act cannot be contorted to deny a deduction on the basis that perhaps BRI would have been willing to provide the guarantee without charging for it.
[59] The case law referred to by Burlington only suggests that it cannot be precluded from deducting the guarantee fees by virtue of the fact that BRI had, at one time, provided a guarantee without charging fees. It does not unquestionably lead to the conclusion that the guarantee fees were incurred for the purposes of earning income.
[60] In any event, since the theory of the Respondent with respect to 18(1)(a) of the Act is not based on the premises that at one point Burlington did not pay for the guarantee fees, Burlington argument’s do not hold.
VI. Recorded refusals [61] At the examination for discovery, counsel for Burlington refused to answer a number of questions on the ground that the questions were irrelevant. Now before me on some of these questions, Burlington is arguing that it would be too onerous and disproportionate to answer these questions. The Respondent states that a party cannot argue that a question is irrelevant and then later seek to ground its refusal to answer on the basis of proportionality. Proportionality pre-supposes that a question is relevant.
[62] The Respondent submits that support for this proposition can be found in CIBC where Chief Justice Rossiter rejected CIBC’s request to re-evaluate its reasons for refusals. CIBC had argued that, in the event that its claim for litigation privilege was defeated, it should be permitted to re-evaluate its documents to determine if their production could be refused on the basis of solicitor-client privilege. CIBC promised to then produce any relevant documents that were not covered by solicitor-client privilege. In denying this request, Chief Justice Rossiter said, essentially, enough is enough.
[63] However, CIBC is distinguishable here. CIBC was asking to re-evaluate its refusals after the hearing of the motion, in the event that it was unsuccessful in asserting litigation privilege due to an improper coding of documents by a third-party. In the event that CIBC’s subsequently asserted claim of solicitor-client privilege was not accepted by the other party, the parties would have had to return before the Chief Justice for further submissions. In denying this request, the Chief Justice stated at paragraph 185 that “[t]here must be some finality.”
[64] In this appeal, both parties knew that proportionality would be raised during this motion. It was the subject of evidence in the form of the affidavit of Ms. Hoang which the Respondent cross-examined on and it was addressed by both parties on the hearing of the motion.
[65] Although I agree with the Respondent that proportionality on a refusals motion is usually only considered if a question is first found to be relevant, I do not accept that a party cannot argue that a question is irrelevant and alternatively if the Court would find it relevant, that it would be disproportionate to require the party to answer it.
[66] Proportionality concerns are embedded within the scope of permissible discovery. When considering whether a party should be ordered to answer a question that they argue is irrelevant, this Court must determine first whether the question is relevant by having reference to the pleadings. Even if the question is relevant, this Court must be alive to the proportionality concerns implicit in the Rules.[44]
[67] Thus, Burlington will not be prevented from arguing proportionality where it originally refused to respond to a question on the basis of relevance.
VII. Allegations of attempts to create an alternative basis of assessment [68] Another issue raised by Burlington is whether the Respondent’s conduct is tantamount to creating an alternative basis of assessment.
[69] Burlington alleges that the Respondent’s questions on discovery amount to an effort to re-audit the taxpayer with an apparent view to developing an alternative basis of assessment that has not been identified or pleaded.[45] Burlington accuses the Respondent of taking an “Ever-Shifting Position” and points out that the Respondent will still attempt to amend her pleadings after this motion.[46] On this basis, Burlington has asked me to limit or terminate the Respondent’s discovery rights because she has no right to conduct a broad-range questioning aimed at trying to determine a case to plead.
[70] In terms of terminating the Respondent’s discovery rights altogether, Burlington cites the decision of Aventis Pharma Inc. v Canada.[47] In that case, the Federal Court of Appeal upheld the decision of Associate Chief Justice Lamarre of this Court to terminate the Respondent’s examination for discovery where it was obvious that her aim was to discover with a view to developing an alternative basis of assessment that had not been defined in the pleadings.
[71] Counsel for the Respondent strongly rejected Burlington’s submission that she was attempting to misuse the discovery process in an effort to uncover a new basis of assessment.[48] The Respondent admits that she will seek to amend her pleadings after the hearing but explained that the only function of the amendment will be to narrow the issues for trial. The intended amendment will result in the withdrawal of the transfer price re-characterization argument under paragraphs 247(2)(b) and (d) of the Act.
[72] Having read the transcript from the examination for discovery and, in light of the refusals that the Respondent is moving on, it is far from obvious to me that the Respondent has attempted to examine on a case which she has not made in her pleadings. I therefore decline to terminate outright the Respondent’s discovery rights in a manner akin to Aventis Pharma.
[73] This does not mean, however, that I will not intervene to prevent the Respondent from pursuing a particular question or line of questions if I find it to be irrelevant or unsupported by the pleadings.
VIII. Excessive number of questions taken under advisement [74] A further issue that must be addressed relates to the practice of taking questions “under advisement” during an examination for discovery.
[75] The Respondent argues that refusing to answer questions on the basis that the questions are being taken “under advisement” is a misuse of the examination for discovery process. Burlington’s nominee refused to answer a large number of questions on this basis.
[76] The examination for discovery of the nominee of Burlington lasted nine days. The Respondent asked 4122 questions, 1700 questions were taken under advisement, and 1200 of these questions were later refused.
[77] The Re