Rio Tinto Alcan Inc. v. The Queen

Rio Tinto Alcan Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-07-15
Neutral citation
2016 TCC 172
File numbers
2012 4808(IT)G, 2013-3028(IT)G
Judges and Taxing Officers
Robert James Hogan
Subjects
Income Tax Act
Decision Content
Docket: 2013-3028(IT)G
BETWEEN:
RIO TINTO ALCAN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of
Rio Tinto Alcan Inc. (2012-4808(IT)G)
on October 19, 20, 21 and 22, 2015,
at Montreal, Quebec.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Larry Nevsky
Counsel for the Respondent:
Susan Shaughnessy
Nathalie Labbé
JUDGMENT
The appeal from the assessment made under the Income Tax Act (Canada) for the 2003 taxation year is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
The parties will have until September 8, 2016 to agree to costs, failing which they are directed to file their written submissions on costs no later than September 9, 2016. Such submissions are not to exceed ten pages.
Signed at Ottawa, Canada, this 15th day of July 2016.
“Robert J. Hogan”
Hogan J.
Docket: 2012-4808(IT)G
BETWEEN:
RIO TINTO ALCAN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of
Rio Tinto Alcan Inc. (2013-3028(IT)G)
on October 19, 20, 21 and 22, 2015,
at Montreal, Quebec.
Before: The Honourable Justice Robert J. Hogan
Appearances:
Counsel for the Appellant:
Yves St-Cyr
Larry Nevsky
Counsel for the Respondent:
Susan Shaughnessy
Nathalie Labbé
JUDGMENT
With respect to the assessment issued by the Minister of National Revenue with respect to the Appellant’s 2007 taxation year, the Court’s judgment is a pro tanto judgment because other issues remain to be determined after future hearings. To the extent that, following the Court’s disposal of all of the remaining issues, the Court determines that the assessment issued for the Appellant’s 2007 taxation year must be returned for reconsideration and reassessment, the Appellant shall be allowed the deductions set out in paragraph 210 of the attached Reasons for Judgment in the calculation of the non‑capital loss arising in respect of the Appellant’s 2005 taxation year that was carried forward and deducted by the Appellant in the calculation of its taxable income for its 2007 taxation year, the whole in accordance with the attached Reasons for Judgment.
The parties will have until September 8, 2016 to agree to costs, failing which they are directed to file their written submissions on costs no later than September 9, 2016. Such submissions are not to exceed ten pages.
Signed at Ottawa, Canada, this 15th day of July 2016.
“Robert J. Hogan”
Hogan J.
Citation: 2016 TCC 172
Date: 20160715
Dockets: 2013-3028(IT)G
2012-4808(IT)G
BETWEEN:
RIO TINTO ALCAN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED AMENDED REASONS FOR JUDGMENT
The Amended Reasons for Judgment are issued in substitution for the Reasons for Judgment dated July 20th, 2016
Hogan J.
I. Overview [1] The Appellant, Rio Tinto Alcan Inc. (“Alcan”), incurred significant fees for legal, investment banking and other services (the “Disputed Expenses”), broadly speaking, in the context of the acquisition of the shares of Pechiney SA (“Pechiney”) and the spin-off of Alcan’s rolled products business to its shareholders (the “Spin-off”). The Spin-off was implemented by transferring the shares of Arcustarget Inc. (“Archer”), the parent corporation of the rolled products business, to Alcan’s shareholders through Novelis Inc. (“Novelis”). In filing its tax returns for the taxation years in respect of which the Disputed Expenses were incurred, the Appellant deducted a significant amount of those expenses under subsection 9(1) and various paragraphs of subsection 20(1) of the Income Tax Act (Canada)[1] (the “Act”). With respect to the Pechiney transaction, the Minister of National Revenue (the “Minister”) disallowed the amounts deducted by the Appellant on the grounds that the expenses were inextricably linked to a capital transaction and the deductions under subsection 20(1) did not apply. With respect to the Novelis transaction, the Minister disallowed the amounts deducted by the Appellant on the grounds that the expenses were incurred for the purpose of effecting the disposition of the Archer shares and the deductions under subsection 20(1) did not apply. In the Minister’s opinion, these expenses should be added to the adjusted cost base of the Pechiney shares or deducted from the proceeds of disposition of the Novelis shares,[2] as the case may be.
[2] The reassessments prompted the Appellant to reconsider its initial filing position. The Appellant now claims that the full amount of the Disputed Expenses is deductible under a combination of subsection 9(1) and paragraphs 20(1)(e), (bb) and (cc) of the Act. Alternatively, the Appellant contends that any Disputed Expenses that are not deductible under the aforementioned provisions are eligible capital expenditures.
[3] The Appellant’s appeal from the assessment issued by the Minister in respect of its 2007 taxation year raises a number of issues, only one of which is addressed in these Reasons for Judgment. Prior to the hearing, the parties agreed, with the Court’s consent, that only the question of the deductibility of the expenses incurred by the Appellant in respect of the Novelis transaction for its 2005 taxation year would be dealt with at this stage. Therefore, in these Reasons for Judgment, the Court addresses only the amount of the non‑capital loss that can be carried forward by the Appellant from its 2005 taxation year and deducted in the calculation of its taxable income for the 2007 taxation year. The remaining issues will be determined at a later date in accordance with the agreement of the parties.
II. Parties’ Positions A. Appellant’s Position [4] In its Reply to the Respondent’s Written Arguments, the Appellant provided a breakdown of the Disputed Expenses together with the corresponding provisions of the Act under which each Disputed Expense is claimed. That breakdown is reproduced below:
a) DISPUTED EXPENSES (PECHINEY) – Total $77,374,669
INVESTMENT BANKERS
Morgan Stanley
Total: $26,051,194
Alcan’s position is that:
$18,887,115 should be allowed under 9(1); and
$7,164,079 should be allowed under 20(1)(bb).
Or
$26,051,194 should be allowed under 20(1)(bb).
Or
Any portion of the total amount not deductible under 9(1) and/or 20(1)(bb) should be deductible under 20(1)(b).
Or
Any portion of the total amount not deductible under 9(1) and/or 20(1)(bb) and/or 20(1)(b) should be deductible up to a maximum amount of $2,605,119 under 20(1)(e).
Lazard Frères
Total: $8,150,233
Alcan’s position is that:
$5,297,652 should be allowed under 9(1); and
$2,852,581 should be allowed under 20(1)(bb).
Or
$8,150,233 should be allowed under 20(1)(bb).
Or
Any portion of the total amount not deductible under 9(1) and/or 20(1)(bb) should be deductible under 20(1)(b).
Or
Any portion of the total amount not deductible under 9(1) and/or 20(1)(bb) and/or 20(1)(b) should be deductible up to a maximum amount of $407,512 under 20(1)(e).
ADVERTISING FEES
Publicis and Valmonde
Total: $19,089,946
Subsection 9(1) or paragraph 20(1)(b):
$19,089,946
REPRESENTATION TO GOVERNMENT AGENCIES
Anti-Competition Regulators
Freshfields Bruckhaus
Total:
$4,954,777
Paragraph 20(1)(cc) or 20(1)(b):
$4,954,777
Sullivan Cromwell
Total:
$2,566,609
Paragraph 20(1)(cc) or 20(1)(b):
$2,566,609
McMillan
Total:
$552,186
Paragraph 20(1)(cc) or 20(1)(b):
$552,186
Various other law firms
Total:
$432,810
Paragraph 20(1)(cc) or 20(1)(b):
$432,810
National Economic Res.
Ass.
Total:
$241,539
Paragraph 20(1)(cc) or 20(1)(b):
$241,539
Monitor Company Group
Total:
$755,227
Paragraph 20(1)(cc) or 20(1)(b):
$755,227
Frontier Economics
Total:
$177,349
Paragraph 20(1)(cc) or 20(1)(b):
$177,349
SCEHR Patrick Rey
Total:
$10,008
Paragraph 20(1)(cc) or 20(1)(b):
$10,008
Federal Trade Commission
Total:
$392,112
Paragraph 20(1)(cc) or 20(1)(b):
$392,112
REPRESENTATION TO GOVERNMENT AGENCIES
Securities Regulators
Sullivan Cromwell
Total:
$6,801,202
Paragraph 20(1)(cc) or 20(1)(b):
$6,801,202
Darrois Villey
Total:
$3,088,260
Paragraph 20(1)(cc) or 20(1)(b):
$3,088,260
PRINTING AND ISSUING FINANCIAL REPORTS
PwC
Total:
$1,104,875
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
$1,104,875
Bowne
Total:
$868,736
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
$868,736
SEC
Total:
$321,572
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
$321,572
Various other regulators
Total:
$34,858
Subsection 9(1), subparagraph 20(1)(g)(iii),
paragraph 20(1)(e) or paragraph 20(1)(b):
$34,858
OTHER MISCELLANEOUS EXPENSES
Sullivan Cromwell
Total:
$967,152
Subsection 9(1) or paragraph 20(1)(b):
$967,152
Davis Polk and ADP
Total:
$187,739
Subsection 9(1) or paragraph 20(1)(b):
$187,739
Ogilvy Renault
Total:
$20,054
Subsection 9(1) or paragraph 20(1)(b):
$20,054
Various small suppliers – communication
Total:
$152,180
Subsection 9(1) or paragraph 20(1)(b):
$152,180
Ernst & Young
Total:
$449,963
Subsection 9(1) or paragraph 20(1)(b):
$449,963
Ritz‑Carlton Montreal
Total:
$2,660
Subsection 9(1) or paragraph 20(1)(b):
$2,660
Various small suppliers –
others
Total:
$1,048
Subsection 9(1) or paragraph 20(1)(b):
$1,048
b) DISPUTED EXPENSES (NOVELIS) – Total $19,759,339
INVESTMENT BANKERS
Morgan Stanley
Total:
$296,863
Subsection 9(1), paragraph 20(1)(bb) or 20(1)(b):
$296,863
Lazard Frères
Total:
$16,031,657
Subsection 9(1), paragraph 20(1)(bb) or 20(1)(b):
$16,031,657
PRINTING AND ISSUING FINANCIAL REPORTS
PwC
Total:
$1,803,192
Subsection 9(1), subparagraph 20(1)(g)(iii) or
paragraph 20(1)(b):
$1,803,192
Bowne
Total:
$1,025,849
Subsection 9(1), subparagraph 20(1)(g)(iii) or
paragraph 20(1)(b):
$1,025,849
Ernst & Young
Total:
$601,778
Subsection 9(1), subparagraph 20(1)(g)(iii) or
paragraph 20(1)(b):
$601,778
B. Respondent’s Position [5] The Respondent’s position with respect to the Pechiney transaction is that all of the fees paid to various service providers are in the nature of capital expenditures and should be added to the adjusted cost base of the Pechiney shares. Specifically, the Respondent argues that the impugned expenses were made in connection with the acquisition of the Pechiney shares, which produced an enduring benefit to the Appellant. The Respondent further contends that none of the deductions provided for in paragraphs 20(1)(bb), 20(1)(cc) or 20(1)(g) of the Act are applicable in the circumstances.
[6] The Respondent’s position with respect to the Novelis transaction is that all of the fees paid to various service providers are in the nature of outlays or expenses made or incurred for the purpose of effecting the disposition of the rolled products business and should be deducted from the proceeds of disposition of the Archer shares[3] pursuant to paragraph 40(1)(a) of the Act.
III. Factual Background and General Credibility Observations A. Factual Background (1) Alcan [7] During the relevant period, Alcan was the parent company of Alcan Group, an international group of companies involved in the aluminum industry. Alcan’s shares were traded on various stock exchanges, including the Toronto, New York and London stock exchanges.
[8] Directly and through subsidiaries, joint ventures and related companies around the world, the activities of the Alcan Group included bauxite mining; alumina refining; power generation; aluminum smelting, manufacturing and recycling; and work in research and technology. The Alcan Group was a leading producer of primary metal and a global producer and marketer of rolled aluminum products. Alcan was a leading converter of flexible packaging in Europe and one of the world’s leading suppliers of packaging materials for the consumer goods, pharmaceutical, and cosmetics industries.
[9] One of Alcan’s business priorities was the maximization of shareholder value, which it accomplished by seeking out additional opportunities for increased revenues, earnings and economic value. Alcan had a long history of major acquisitions and transactions it had entered into for this purpose. Alcan sold its products to its subsidiaries and also received management fees and dividends from its subsidiaries.
(2) The Pechiney Acquisition [10] Alcan initially set its sights on Pechiney as a potential partner in the early 1990s. In 1999, Alcan intended to merge with Pechiney and Alusuisse Lonza Group Ltd. (“Algroup”). Pechiney and Algroup were two of the largest industrial enterprises in France and Switzerland, with core businesses in the aluminum sector. Alcan successfully merged with Algroup in 2000, but Pechiney was not a part of that merger. According to the testimony of Mr. David McAusland, who was Alcan’s Senior Vice-President of Mergers and Acquisitions and Chief Legal Officer during the relevant period, the transaction with Pechiney failed due to social and regulatory complications. In particular, the European Commission Merger Task Force, a competition regulator, raised concerns regarding the competitive overlap of two significant assets in Europe: a German rolling mill owned by Alcan and a French rolling mill owned by Pechiney.
[11] At the end of 2002, the law was amended in France to allow for hostile bids that were subject to regulatory approvals. Prior to this amendment, it was prohibited in France to make a hostile takeover bid that had regulatory conditions attached to it. In light of the regulatory change, Alcan again considered the possibility of a transaction with Pechiney.
[12] In order to analyze the merits and feasibility of a potential transaction with Pechiney, Alcan engaged two investment banking firms, Morgan Stanley & Co. Incorporated (“Morgan Stanley”) and Lazard Frères & Co. LLC (“Lazard Frères”). Morgan Stanley and Lazard Frères were tasked with analyzing the business and financial conditions of Alcan and Pechiney and preparing financial models of the potential transaction. Morgan Stanley was the lead investment firm assisting Alcan and made a number of presentations of its financial model to the Alcan board of directors (working together with Alcan in some instances) from December 2002 through July 2003. Lazard Frères played a role supplementary to the work done by Morgan Stanley and became involved later in the process than Morgan Stanley. In particular, Lazard Frères, being a French firm, had the necessary connections and experience to assist with issues arising in France and with the analysis of French capital markets.
[13] On July 2, 2003, the Alcan board of directors approved a purchase offer proposal for the share capital of Pechiney.
[14] On July 7, 2003, Alcan filed its initial offer for Pechiney’s securities at €41 per share (60% in cash and 40% in new Alcan shares), subject to three conditions: (i) the American and European competition authorities granting authorizations; (ii) the Ministère de l’Économie, des Finances et de l’Industrie française authorizing the proposed transaction; and (iii) more than 50% of the share capital and voting rights of Pechiney, calculated on a diluted basis, being obtained by the expiry of Alcan’s offer. This initial offer was rejected by Pechiney’s board of directors on July 8, 2003.
[15] In July and August 2003, Alcan and Pechiney engaged in discussions regarding the initial offer, particularly in relation to the price offered by Alcan. During this period, Morgan Stanley and Lazard Frères revisited their respective financial models, giving specific consideration to the price.
[16] On August 31, 2003 and at Pechiney’s request, Alcan submitted an amended offer, which valued the shares at a maximum price of between €47 and €48 per share. Pechiney’s board of directors rejected the amended offer on the same day. Shortly thereafter, Pechiney and Alcan again resumed communications.
[17] On September 12, 2003, Pechiney’s board of directors recommended the acceptance of a Revised Offer at €47.5 plus a premium of €1 should 95% or more of the Pechiney shares be acquired. The Revised Offer was subject to certain conditions, including authorization from the Conseil des marchés financiers (France) and approval by the American and European competition authorities. After receipt of the requisite approvals from governmental and regulatory authorities, the revised offer was presented to the French and American shareholders on October 7 and October 27, 2003, respectively. The revised offer had an expiry date of November 24, 2003.
[18] By November 24, 2003, Alcan had obtained the acceptance of the revised offer to the extent of 92.21% of the share capital and 93.55% of the voting rights of Pechiney. Alcan acquired the Pechiney shares that were tendered during this offering period on December 15, 2003.
[19] Alcan reopened the revised offer from December 9 through December 23, 2003 in order to secure more than 95% of the shares and voting rights of Pechiney. By December 23, 2003, Alcan obtained the acceptance of the revised offer to the extent of 97.95% of the share capital and 97.92% of the voting rights of Pechiney. On February 6, 2004, Alcan acquired all of the Pechiney securities that had been tendered during the reopening period.
[20] In the context of the Pechiney transaction, Alcan retained professional advisors, incurred costs for preparing, printing and issuing various documents, and incurred other miscellaneous expenses. The details of these expenditures are described below.
(a) Investment Bankers [21] From 2002 to 2004, Morgan Stanley and Lazard Frères independently worked on financial models, by means of which they analyzed various strategies and alternatives for developing Alcan’s business. The firms prepared financial and valuation opinions as well as industry, market and price analyses with respect to various opportunities offered to Alcan and possible financial arrangements regarding Pechiney. During that period, many presentations were made to the Alcan board of directors.
[22] Alcan signed an engagement letter with Morgan Stanley on June 1, 2003 to formalize the terms upon which Morgan Stanley had been engaged by Alcan. The engagement letter confirms that Morgan Stanley was hired as a financial advisor. The fees payable by Alcan are stated in the engagement letter as being a US$3,750,000 “Announcement Fee” and a success-based “Transaction Fee” set at a maximum of US$21,600,000. The Announcement Fee would be credited towards the Transaction Fee if the transaction was concluded. If the acquisition had not been completed, Alcan would have been charged an “Advisory Fee” of US$100,000 per month for Morgan Stanley’s services. Ultimately, Morgan Stanley was paid an amount of CAN$26,051,194 for its services.[4]
[23] Alcan signed a similar engagement letter with Lazard Frères on July 4, 2003 to formalize the terms upon which Lazard Frères had been engaged by Alcan. The engagement letter confirms that Lazard Frères was hired as a financial advisor. The fees payable by Alcan are stated in the engagement letter as being €1,000,000 upon the announcement of the transaction, €4,000,000 payable upon completion of the transaction, and €2,500,000 payable within two years of the announcement of the transaction. The second and third payments were contingent on Alcan acquiring more than 80% of the shares of Pechiney. Lazard Frères was paid an amount of CAN$8,150,233 for its services.[5]
(b) Advertising Services [24] Alcan engaged Publicis Consultants (“Publicis”), a French firm providing corporate communications and public relations services, to promote Alcan’s reputation in Europe and the proposed acquisition of Pechiney. The hostile takeover of Pechiney posed political challenges since, as Mr. McAusland explained in his testimony, there had been very few hostile takeovers in France prior to Alcan’s bid and Pechiney was considered a “fleuron” or “technological darling” of France. One of Alcan’s motivations for engaging Publicis was to enlist the services of Mr. Maurice Levy, the Chief Executive Officer of Publicis. According to Mr. McAusland, Mr. Levy was a highly influential and well‑connected businessperson in France. Bolstered by the assistance of Publicis and Mr. Levy, Alcan was able to strengthen its reputation with the French public and officials.
[25] Specifically, Publicis organized social events and press conferences, published the Alcan offer to acquire Pechiney, ran publicity campaigns and purchased advertising space in French newspapers, including those owned by Valmonde & Cie (“Valmonde”). Publicis was paid $18,983,316 for its services and Valmonde was paid $106,630 for the advertising space.
(c) Representations to Government Agencies [26] Alcan engaged several law firms and service providers to assist with antitrust and securities law representations to government agencies in various jurisdictions worldwide. These representations were required to assist government bodies in understanding Alcan’s business and to obtain clearance to issue Alcan’s shares as part of the Pechiney transaction.
Anti‑Competition Regulations [27] McMillan Binch Mendelsohn LLP (“McMillan”) was engaged to make representations to Canadian anti-competition regulators and to supervise other law firms making similar representations to government regulators in various jurisdictions.
[28] Freshfields Bruckhaus Deringer LLP (“Freshfields”) provided services in relation to Alcan’s representations to the European Commission Merger Task Force.
[29] Sullivan & Cromwell LLP (“Sullivan Cromwell”) provided legal assistance in making representations to various government entities, and in particular, the United States Department of Justice and Federal Trade Commission.
[30] Monitor Company Group, Frontier Economics, SCEHR (Patrick Rey) and National Economic Research Associates Inc. provided the background information and economic data relating to Alcan’s business to support the representations made to the various anti-competition regulators.
[31] In total, Alcan incurred expenses of $10,082,617 in relation to representations made to anti-competition regulators.
Securities Regulations [32] In order to gain clearance for undertaking the Pechiney transaction, Alcan was obligated, as a public issuer, to make representations and filings in compliance with securities regulations.
[33] Darrois Villey Maillot Brochier Avocats (“Darrois Villey”) assisted with making representations to European securities regulators and the French defence department.
[34] Sullivan Cromwell assisted with making representations to the United States Securities and Exchange Commission.
[35] Darrois Villey and Sullivan Cromwell also assisted with the preparation of documents that were required to be filed with regulatory authorities, such as a Form S-4, a “note d’information”, and a prospectus. The Form S-4 is a registration statement with respect to the exchange offer to Pechiney’s shareholders, which was filed with the United States Securities and Exchange Commission. The “note d’information” is a similar document for the French securities regulator, the Autorité des marchés financiers.
[36] In total, Alcan incurred $9,889,462 in relation to representations made to securities regulators.
(d) Preparing, Printing and Issuing Documents [37] Alcan incurred costs in the course of preparing, printing and issuing the Form S-4, the “note d’information” and the prospectus. Alcan also incurred share registration fees, transfer fees and listing fees in relation to these documents.
[38] PricewaterhouseCoopers LLP (“PwC”) assisted with the preparation and issuance of the Form S-4 and “note d’information”, the filings with the United Kingdom Listing Authority and the amendments to an annual report and a quarterly report.
[39] Bowne Financial Print and Bowne International (“Bowne”) provided printing services, including typesetting, proofing, printing and distributing, with regard to the Form S-4, the “note d’information”, and the prospectus.
(e) Other Miscellaneous Expenses [40] Alcan incurred other miscellaneous expenses, including communication and translation costs, legal services by Sullivan Cromwell in respect of ongoing advice to the board of directors, legal services by Ogilvy Renault LLP (“Ogilvy Renault”), a cancellation fee by the Ritz‑Carlton Montreal and advisory services by Ernst & Young on various corporate tax matters. The Appellant also claimed amounts paid to Davis Polk & Wardwell LLP (“Davis Polk”) and ADP Investor Communication Services (“ADP”) under this category.
(3) The Novelis Spin‑Off [41] I now turn to the facts underlying the Novelis Spin‑off. While pursuing the Pechiney transaction, Alcan was aware that it would have to divest itself of certain assets in order to satisfy the European competition regulator. Alcan provided undertakings to European and American competition regulators in respect of two requirements: the European competition regulators required Alcan to separate the ownership of a French rolling mill (Neuf Brisach) and of a German rolling mill (Norf), while the American competition regulators required Alcan to separate the ownership of an Oswego, New York, rolling mill and of a Ravenswood, West Virginia, rolling mill.
[42] Morgan Stanley worked on a financial model to consider two options that would allow Alcan to fulfil its regulatory undertakings: a spin-off of the divested assets or a sale of the shares held by Alcan in the entities in which the divested assets would be located. Morgan Stanley presented its financial model to the Alcan board of directors.
[43] On February 15, 2004, a strategy of splitting out the major portion of Alcan’s rolled products businesses and transferring such businesses to Archer was submitted to the board of directors. This strategy was determined to be the most suitable way of meeting the competition regulators’ restrictions while maintaining profitability for Alcan’s shareholders and enhancing shareholder value. From February 2004 through May 2004, the board reviewed the divestiture plan and the two options for carrying out the divestiture.
[44] On May 17, 2004, the board of directors approved the announcement of the divestiture. The public announcement of the divestiture was made on May 18, 2004. In its public announcement, Alcan stated that the German rolling facility (Norf) and an American rolling facility (Oswego) would be included in Archer, while Alcan would retain the French rolling facility (Neuf Brisach) and another American rolling facility (Ravenswood).
[45] After the public announcement, several investors advised that they wished to acquire Alcan’s rolled products businesses. Alcan’s management held discussions with these potential investors. The best offers were submitted to the board of directors on November 23, 2004.
[46] The board also considered an alternate spin‑off transaction, specifically contemplating a spin-off to Alcan’s shareholders by way of a so‑called “butterfly” transaction such that Alcan’s shareholders would hold the shares of Archer through a new company, Novelis.
[47] At the November 23, 2004 meeting, Morgan Stanley and Lazard Frères each provided to the board a fairness opinion which indicated that the Spin‑off offered the best value and was fair for Alcan’s shareholders. The board formally approved the Spin‑off at this meeting.
[48] On December 22, 2004, Alcan announced that its shareholders had voted in favour of the plan of arrangement for the spin-off of the rolled products businesses grouped under Archer.
[49] The plan of arrangement came into effect on January 6, 2005. The steps were undertaken in accordance with an advance ruling obtained by Alcan from the Canada Revenue Agency (the “CRA”),[6] and were, inter alia, as follows:
(a) Alcan restructured its capital by amending its articles of incorporation to create and authorize the issuance of a new class of common shares and special shares;
(b) The existing holders of Alcan’s common shares exchanged their common shares for shares of the new class of common shares and the new class of special shares of Alcan;
(c) The Alcan shareholders transferred their special shares of Alcan to Novelis in exchange for shares of Novelis, and Alcan transferred the Archer shares to Novelis as consideration for special shares of Novelis; and
(d) Alcan and Novelis each redeemed the special shares each held in the other in exchange for non-interest-bearing demand notes, which were immediately set off against each other.
[50] The Alcan shareholders of record received one common share of Novelis for every five special shares of Alcan they held. Following the Spin‑off, the common shares of Novelis were listed and traded on the Toronto and New York stock exchanges. As a result of the Spin‑off, Alcan shareholders ended up as shareholders of two public entities, Alcan and Novelis. Pursuant to the Spin‑off, Novelis acquired, through its acquisition of the shares of Archer, substantially all of the rolled aluminum product business held by Alcan prior to its acquisition of Pechiney in 2003 as well as certain alumina and primary‑metal‑related businesses in Brazil and four rolling facilities in Europe that Alcan acquired indirectly through the Pechiney transaction.
(a) Investment Bankers [51] Morgan Stanley was the principal financial advisor in respect of the divestiture. From late 2003 to May 17, 2004, Morgan Stanley provided Alcan with strategic advice concerning the financial consequences of various divestiture options. From May 18, 2004 to November 22, 2004, Morgan Stanley provided Alcan with strategic advice concerning the financial consequences of the various options for disposing of the Archer shares. Morgan Stanley issued a fairness opinion on the Spin‑off and on November 23, 2004, recommended the Spin‑off as the best divestiture option. From November 23, 2004, Morgan Stanley continued to provide advice and opinions to ensure compliance with securities legislation, and participated directly in finalizing the Spin‑off. The fees paid to Morgan Stanley were conditional on the transaction being finalized.
[52] Lazard Frères was the secondary advisor that provided financial services with respect to the divestiture. Lazard Frères provided independent advice and fairness opinions with respect to the same issues as those analyzed by Morgan Stanley. According to the testimony of Mr. McAusland and Mr. Healy, Lazard Frères was mainly involved in the analysis of an alternative sale transaction.
(b) Preparing, Printing and Issuing Documents [53] Ernst & Young had two main responsibilities in assisting Alcan through its restructuring in 2004. First, Ernst & Young prepared documents for Alcan’s shareholders in order to comply with Canadian and American securities legislation. This task involved reviewing, analyzing and preparing pro forma financial statements for Alcan’s rolled products businesses for the five previous years. Second, in support of Alcan’s in-house tax department, Ernst & Young reviewed the tax implications of the various divestiture options, analyzed the various options for grouping the assets under Archer, and assisted in the preparation of the request for an advance ruling submitted to the CRA.
[54] In support of Alcan’s in-house accounting department, PwC audited various financial statements.
[55] Bowne printed the notice of the meeting of Alcan’s shareholders, the management proxy circular in connection with the plan of arrangement, the non‑offering prospectus, and Form 10, which all contained mandatory information that was sent to Alcan’s shareholders.
B. General Credibility Observations [56] The Respondent led no testimonial evidence. In addition, the Respondent’s counsel posed few questions on cross‑examination. I surmise that counsel for the Respondent had a clear litigation strategy that was based on the well‑defined objectives of her client. The CRA has a long‑standing policy that expenses incurred in the context of a takeover bid or the distribution of capital property to a corporation’s shareholders are capital expenditures. I speculate that this is why the Respondent chose, for the most part, not to challenge the Appellant’s proposed allocation of the Disputed Expenses between current and capital expenditures. I further suspect that the Respondent feared that, had she challenged the demarcation between current and capital expenses, it may have created a pathway for the Court to accept a bifurcation of the expenses based on the distinction between the decision‑making and implementation phases of both transactions.[7]
[57] The drawback of this strategy is that it creates an easier route for the Appellant to establish a prima facie case regarding the factual matrix (the “Evidentiary Burden”) to which it contends that the law must be applied. As will be seen later on in these Reasons for Judgment, this has worked out in the Appellant’s favour with respect to some of the issues in the present appeal. However, on a few points, the Appellant’s evidence has fallen well short of the mark.
[58] I will now comment on my overall impression of the testimonial evidence presented by the Appellant’s witnesses.
[59] I found Mr. McAusland to be quite knowledgeable about the events that transpired on his watch while he was employed as a senior executive of the Appellant. He was a reliable and credible witness, particularly as to the Appellant’s vision, strategy and structure with respect to the Pechiney and Novelis transactions. He provided a clear overview of the general objectives of each transaction. By his own admission, he was not steeped in tax matters. In this regard his testimony cannot serve as a reliable substitute for the testimony of the tax advisors who actually worked on the transactions. This explains why I find below that the Appellant has failed to satisfy its Evidentiary Burden with respect to the fees paid for tax advisory services. Finally, Mr. McAusland offered no insight into the work performed by the Appellant’s auditors with respect to the financial information presented in the Form S‑4, the “note d’information” and the prospectus that were required to be filed. There was no oral evidence on the breakdown of the printing costs incurred, as regards the public documents, with respect to the printed pages containing financial and other information concerning, for example, the terms and conditions of the transaction. No one from PwC or Ernst & Young was called upon to testify on the work performed in connection with the financial information.
[60] Mr. Miller was the lead partner at Sullivan Cromwell, the transnational law firm that played a leading role with respect to the Pechiney transaction. It appears that his firm played a slightly ‎lesser role, although an important one nonetheless, with respect to the Novelis transaction. I also found him to be a credible, reliable and knowledgeable witness.
[61] Mr. Brian Healy testified on behalf of Morgan Stanley. Mr. Healy is an investment banker with Morgan Stanley and was involved with the Pechiney and Novelis transactions. I found him equally to be a reliable and credible witness.
[62] I cannot say the same for Mr. Erik Maris, who worked on both transactions on behalf of Lazard Frères. On common agreement of the parties, he testified by video conference from Paris. While counsel for the Appellant read his questions from his written notes, I observed that Mr. Maris was typing on his smart phone, which was hidden from view under the table. He constantly glanced down at it. At times, he paced around the room. Unlike his counterpart from Morgan Stanley, his answers often struck me as rehearsed. As he was double‑tasking throughout his testimony, he appeared to have had little opportunity to carefully consider the questions posed to him and to elaborate on his answers. Tellingly, his answers to counsel’s questions were very short. For these reasons, I attach less weight to his testimony. This is not altogether fatal for the Appellant, as at times the documentary evidence is sufficient to establish a fact critical to the Appellant’s case.
[63] Mr. Eric Giuily was called upon to testify on the purpose of the communication strategy developed by Publicis. Mr. Giuily was the president and managing director of Publicis during the relevant period. Mr. Giuily and Publicis were tasked with the mission of promoting the Appellant’s vision for Pechiney. The Respondent pointed out notable inconsistencies between his testimony and prior statements of his and documentary evidence. For the reasons noted in paragraph 118 of these Reasons for Judgment I share the Respondent’s view that little weight should be attached to his testimony.
[64] Finally, the Appellant called Mr. Jocelin Paradis as a witness. Presently, he is the vice‑president of taxation for the Appellant. He previously worked for Rio Tinto and became involved with Alcan after its acquisition by Rio Tinto in 2007. Therefore, he has no contemporaneous knowledge of the transactions at issue in this appeal. He was not called for the purpose of providing such knowledge. In his position, he had to work on different audits and on the settlement of files, including those pertaining to the Pechiney and Novelis transactions. He was asked to provide guidance on the way Alcan’s activities are structured. In particular, he was asked to provide information on the management fees and dividends received by Alcan from its subsidiaries. The Respondent did not object to his testimony regarding these facts, which can be discerned through a simple examination of the Appellant’s financial records and working papers produced in the ordinary course of business. In that regard, I found him to be a reliable and credible witness.
IV. Issues [65] In her written representations, the Respondent frames the issues as follows:
27. In the appeal bearing number 2013‑3028(IT)G [pertaining to the Pechiney transaction], the issues to be decided are:
a) Whether the appellant is entitled to deduct expenses totalling $77,374,669 in computing its income with respect to fees paid to various services providers by Alcan during its 2003 taxation year . . . [8]
b) More specifically, whether the Appellant is entitled to deduct the following amounts under the provisions of the Act mentioned in the following table:
Service provider
Amount claimed as
a deduction in
Notice of Appeal
Provision of the
Act under which
deduction claimed in
Notice of Appeal
Morgan Stanley
18,887,115
or 26,051,194
9(1) [and]
20(1)(bb)
[or 20(1)(b)]
Lazard Frères
5,297,651
or 8,150,233
9(1)
20(1)(bb)
[or 20(1)(b)]
Publicis Consultants
18,983,316
9(1)
[or 20(1)(b)]
Valmonde & Cie
106,630
9(1)
[or 20(1)(b)]
US Federal Trade
Commission
392,112
20(1)(cc)
[or 20(1)(b)]
Freshfields [Bruckhaus]
4,954,777
20(1)(cc)
[or 20(1)(b)]
McMillan Binch
552,186
20(1)(cc)
[or 20(1)(b)]
Sullivan Cromwell
967,152
9,367,811
9(1)
20(1)(cc)
[or 20(1)(b)]
Miscellaneous
anti‑trust matters
(other Law Firms)
432,810
20(1)(cc)
[or 20(1)(b)]
Darrois Villey
3,088,260
20(1)(cc)
[or 20(1)(b)]
National Economic Research [Ass.]
241,539
20(1)(cc)
[or 20(1)(b)]
PricewaterhouseCoopers
1,104,875*
9(1) or 20(1)(g)(iii)
[or 20(1)(b)] [9]
Bowne Printing
868,736
9(1) or 20(1)(g)(iii)
or 20(1)(b) [10]
Securities and Exchange
Commission
321,572*
9(1) or 20(1)(g)(iii)
[or 20(1)(b)] [11]
Other securities
commissions
34,858*
9(1) or 20(1)(g)(iii)
[or 20(1)(b)] [12]
Davis Polk & Wardwell
and ADP
188,119
9(1) or 20(1)(g)(iii)
[or 20(1)(b)]
Communication Costs
[(Various small suppliers)]
152,180
9(1) [or 20(1)(b)]
Ernst & Young
449,963
9(1)[or 20(1)(b)]
[Ogilvy Renault]
20,054
91(1) [or 20(1)(b)]
Monitor Company Gr.
755,227
9(1)
20(1)(cc)
[or