General Electric Canada Company v. The Queen

General Electric Canada Company v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2011-12-19
Neutral citation
2011 TCC 564
File numbers
2010-3493(IT)G
Judges and Taxing Officers
Diane Campbell
Subjects
Income Tax Act
Decision Content
Docket: 2010-3493(IT)G
BETWEEN:
GENERAL ELECTRIC CANADA COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2010-3494(IT)G
AND BETWEEN:
GE CAPITAL CANADA FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard on June 13, 2011 at Toronto, Ontario
Before: The Honourable Justice Diane Campbell
Appearances:
Counsel for the Appellant:
Joseph M. Steiner
Al Meghji
Martha K. MacDonald
Neil Paris
Counsel for the Respondent:
Naomi Goldstein
Thang Trieu
____________________________________________________________________
ORDER
Upon a Motion by the Appellants for an Order:
1. Striking out various portions of the Respondent’s Replies to the Notices of Appeal on the basis that those paragraphs failed to meet the requirements of sections 49 and 53 and subsection 51(2) of the Tax Court of Canada Rules (General Procedure);
2. Costs of the motion, payable forthwith; and
3. Such further and other relief as counsel may advise and this Honourable Court deems just.
And upon hearing submissions by the parties;
And upon review of all of the documentation submitted by the parties;
IT IS ORDERED THAT:
The Appellants’ Motion to Strike is dismissed, with leave to the Respondent to amend paragraph 9 of the General Electric Canada Company Reply, Court File Number 2010‑3493(IT)G, together with costs to the Respondent.
Signed at Ottawa, Canada, this 19th day of December 2011.
“Diane Campbell”
Campbell J.
Citation: 2011 TCC 564
Date: December 19, 2011
Docket: 2010-3493(IT)G
BETWEEN:
GENERAL ELECTRIC CANADA COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Docket: 2010-3494(IT)G
AND BETWEEN:
GE CAPITAL CANADA FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Campbell J.
[1] The Appellants brought a Motion to strike various portions (the “Subject Paragraphs”) of the Respondent’s Replies to the Notices of Appeal in accordance with sections 49 and 53 and subsection 51(2) of the Tax Court of Canada Rules (General Procedure) (the “Rules”).
Background:
[2] The Appellants appealed assessments respecting various taxation years. The Appellant, General Electric Canada Company (“GECC”) is a successor by amalgamation of a number of corporate entities, including the following three corporate predecessors: GE Capital Canada Retailer Financial Services Company (“Retailer”), GE Card Services Canada Inc. (“Card Services”) and General Electric Capital Canada Inc. (“GECCI”). The assessments for Retailer are in respect to its 1997 to 1999 taxation years, for Card Services its 2000 to 2002 taxation years and for GECCI its 2002 and 2004 taxation years. The second Appellant, GE Capital Canada Funding Company (“Funding”) was assessed in respect to its 1998 to 2006 taxation years.
[3] These appeals are closely tied to the Tax Court decision of Hogan J. in General Electric Capital Canada Inc. v The Queen, 2009 TCC 563, 2010 D.T.C 1007, and to that of the Federal Court of Appeal, 2010 FCA 344, 2011 D.T.C. 5011, which affirmed Hogan J.’s decision (the “Concluded Litigation”). In fact, an understanding of the issue and subject matter in the Concluded Litigation is central to dealing with the disposition of this Motion.
[4] The Concluded Litigation dealt with GECCI’s taxation years 1996 to 2000, GECCI being one of the three predecessor corporations to GECC. Those assessments were based on the transfer pricing sections of the Income Tax Act (the “Act”), being paragraphs 247(2)(a) and (c) and for the earlier years, its predecessor subsection, 69(2). The general subject matter of the Concluded Litigation, as well as the present appeals, involves the disallowance of the deduction of guarantee fees paid by the Appellants to the non-resident parent company.
[5] In the Concluded Litigation, GECCI paid “guarantee fees” of 1 per cent of the principal amount of the debt to its U.S. parent company, General Electric Capital Corporation (“GECUS”) in exchange for GECUS guaranteeing GECCI’s debt, which it had borrowed in Canada’s capital markets by issuing commercial paper and unsecured debentures. GECCI deducted those guarantee fees as business expenses. The Minister of National Revenue (the “Minister”) reassessed based on Canada’s transfer pricing rules contained in subsection 247(2) of the Act to reduce the arm’s length price of the GECUS guarantee fee from 1 per cent to zero. In the appeal which was before Hogan J., the Crown argued that the guarantees had little or no value to GECCI because the funds could have been borrowed at the same rates without the guarantees that GECUS gave. The Crown argued that, since GECCI received the “implicit support” of its parent company, GECUS, the guarantees were not essential. The Minister relied on the theory of “implicit support” which can be briefly summarized in the following manner:
(1) GECUS would not have allowed the Appellants to default on their debt regardless of the formal guarantee.
(2) The credit rating agencies and borrowers in the market understood this and would have treated the Appellants the same way regardless of the formal guarantee.
(3) Therefore, the formal guarantee had little or no value to the Appellants and the arm’s length price for the guarantee fee would be negligible or nil.
This Court concluded that the guarantee afforded GECCI a substantially higher credit rating than it would otherwise have had, which allowed it to borrow at lower interest rates. Hogan J. allowed the appeal since the guarantee had a tangible value and the guarantee fees paid to GECUS were not greater than the arm’s length price.
[6] In the Motion before me, the Appellants contended that the Crown is attempting to rehabilitate the basis of the assessment which both the Tax Court and the Federal Court of Appeal rejected in the previous appeal and, in doing so, is putting forth “new theories” to support the position that an arm’s length price for the guarantee fees should be zero. Although the present appeals relate to different taxpayers and different years, the Appellants argued that the Crown is precluded from relitigating facts and issues that were determined in the Concluded Litigation, or pleading new arguments raised in the first litigation but abandoned before the hearing.
[7] The Appellants seek to strike various paragraphs in the Respondent’s Replies to the Notices of Appeal based on the following:
(a) As a result of the outcome of prior litigation (the “Concluded Litigation”) between the Respondent and General Electric Capital Canada Inc., one of the predecessors of the [A]ppellant, the Respondent is precluded, on the grounds of res judicata and issue estoppel, from disputing the deductibility of guarantee fees paid in respect of debt issuances by General Electric Capital Canada Inc.
(b) The Respondent is precluded, on the grounds of issue estoppel and abuse of process, from pleading facts contrary to the facts found by the Tax Court of Canada and affirmed by the Federal Court of Appeal in the Concluded Litigation.
(c) The Respondent is precluded, on the grounds of issue estoppel and abuse of process, from advancing arguments that the Tax Court of Canada and the Federal Court of Appeal considered and rejected in the Concluded Litigation, and is equally precluded from pleading facts in support of such arguments.
(d) The Respondent is precluded, on the grounds of issue estoppel and abuse of process, from relying upon paragraphs 247(2)(b) and (d) of the Income Tax Act (Canada) (the “Act”) and from pleading facts in support of the applicability of those provisions by reason of the fact that the assessments at issue were raised solely on the basis of paragraphs 247(2)(a) and (c) of the Act, and to plead paragraphs 247(2)(b) and (d) of the Act is tantamount to raising a new assessment which is beyond the power of the Respondent.
(e) In the alternative to paragraph (d) above, if the Respondent is entitled to plead paragraphs 247(2)(b) and (d) of the Act at this stage, then the pleading of paragraphs 247(2)(a) and (c) of the Act must be struck because the two arguments proceed from contradictory factual premises and are not pleaded in the alternative.
(f) The Attorney-General is not permitted to plead the legal form of GE Capital Canada Retailer Financial Services Company, a predecessor of the [A]ppellant, as a ground for upholding the assessments as the Minister of National Revenue knew but did not rely upon this fact in raising the assessments at issue.
(Appellant’s Motion Record, pages 2 to 3, paragraph 4)
[8] To summarize briefly, the Appellants argued that the doctrines of res judicata and abuse of process operate to prevent the Crown from relitigating arguments and issues which were decided in the previous appeal; that the Crown’s pleadings improperly put in issue the basis of the Minister’s assessments; that it is too late for the Crown to raise new bases of assessments; and finally, that if some of these paragraphs are permitted to stand, then some of the Crown’s arguments must be pleaded in the alternative, rather than as concurrent allegations. In addition, the Appellants argued that they were denied the benefit of review by the Transfer Pricing Review Committee concerning the application of paragraphs 247(2)(b) and (d) of the Act to the guarantee fees payable to GECUS.
The Law:
[9] Section 53 of the Rules governs the power of the Court to strike portions or all of the pleadings:
Striking out a Pleading or other Document
53. The Court may strike out or expunge all or part of a pleading or other document, with or without leave to amend, on the ground that the pleading or other document,
(a) may prejudice or delay the fair hearing of the action,
(b) is scandalous, frivolous or vexatious, or
(c) is an abuse of the process of the Court.
[10] The Federal Court of Appeal in Main Rehabilitation Co. Ltd. v The Queen, 2004 FCA 403, 2004 D.T.C. 6762, at paragraph 3, expressed the test for striking out pleadings in the following manner:
[3] The test to be applied for striking out pleadings is whether it is plain and obvious that Main's Notice of Appeal to the Tax Court discloses no reasonable claim. Only if its appeal is certain to fail should the relevant portions of the Notice of Appeal be struck out. …
[11] To prevent the relitigation of a matter that has been previously before the Court, the doctrines of res judicata and abuse of process may be used. The abuse of process doctrine is focussed on the integrity of the adjudicative process as opposed to that of the parties. Like the doctrine of res judicata, abuse of process should only be applied at the Court’s discretion.
[12] The doctrine of res judicata, which provides finality to the litigation and fairness to the parties to the litigation, has two branches: cause of action estoppel and issue estoppel. In Angle v M.N.R., [1975] 2 S.C.R. 248, Dickson J., at page 254, explained the distinction as follows:
… The first, “cause of action estoppel”, precludes a person from bringing an action against another when that same cause of action has been determined in earlier proceedings by a court of competent jurisdiction. … The second species of estoppel per rem judicatam is known as “issue estoppel”, a phrase coined by Higgins J. of the High Court of Australia in Hoystead v. Federal Commissioner of Taxation, [(1921), 29 C.L.R. 537] at p. 561:
I fully recognize the distinction between the doctrine of res judicata where another action is brought for the same cause of action as has been the subject of previous adjudication, and the doctrine of estoppel where, the cause of action being different, some point or issue of fact has already been decided (I may call it “issue-estoppel”).
Cause of Action Estoppel:
[13] The decision of the High Court of Chancery of England, in Henderson v Henderson, (1843) 3 Hare 100, 67 E.R. 313, at page 319, provides the following comment concerning the doctrine of cause of action estoppel:
In trying this question I believe I state the rule of the [115] Court correctly when I say that, where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time. …
[14] In McFadyen v The Queen, 2008 TCC 441, 2008 D.T.C. 4513, Rip C.J. found that cause of action estoppel applied where the taxpayer was attempting to appeal the Minister’s assessments of several taxation years after the assessments had already been the subject of litigation in the Tax Court of Canada. At paragraph 25 of the decision, he stated the following concerning the Henderson decision:
[25] Henderson not only forecloses the relitigation of issues that have been conclusively decided by a court of competent jurisdiction. It also enunciates what has been referred to as the "might or ought" principle (See Donald J. Lange, The Doctrine of Res Judicata in Canada, 2nd ed. (Markham: LexisNexis Canada Inc., 2004) at page 127.) - matters that properly should have been part of the original litigation but that a party failed to argue cannot be raised in subsequent litigation. (I note that other decisions of the Tax Court of Canada have used the principle of res judicata to preclude an appellant from making new arguments to attack an assessment that has previously been litigated. See, for example, Modlivco Inc. v. Canada, [95 DTC 692] [1995] 2 C.T.C. 2880 (T.C.C.) and Ahmad v. R., [2004 DTC 2355] [2004] 2 C.T.C. 2766 (T.C.C. [Informal Procedure]).
[15] The necessary conditions for the application of the doctrine of cause of action estoppel were set out in Bjarnarson v Manitoba (Government of) (1987), 38 D.L.R. (4th) 32. Hewak C.J.Q.B. of the Manitoba Court of Appeal, on page 3, relied on the Supreme Court of Canada decision in Town of Grandview v. Doering (1975), 61 D.L.R. (3d) 455, and summarized the conditions as follows:
1. There must be a final decision of a court of competent jurisdiction in the prior action;
2. The parties to the subsequent litigation must have been parties to or in privy with the parties to the prior action [mutuality];
3. The cause of action in the prior action must not be separate and distinct; and
4. The basis of the cause of action and the subsequent action was argued or could have been argued in the prior action if the parties had exercised reasonable diligence.
[16] Generally, each taxation year for each taxpayer will represent a new cause of action. For this reason, tax appeals are entertained even where the parties may have litigated very similar facts in respect of a previous taxation year. In Kindree v M.N.R., 70 D.T.C. 1054, at page 1055, the Tax Appeal Board relied on the following statement from Lord Hanworth, M.R., of the English Court of Appeal in Inland Revenue Commissioners v. Sneath, (1932) 17 T.C. 149:
I am . . . of the opinion that the assessment is final and conclusive between the parties only in relation to the assessment for the particular year for which it is made. No doubt, a decision reached in one year would be a cogent factor in the determination of a similar point in a following year, but I cannot think that it is to be treated as an estoppel binding upon the same party for all years.
[17] The Respondent relied on the Merrins appeals (Merrins v The Queen, 2006 TCC 392, 2006 D.T.C. 3216 [Merrins #3] affirmed 2007 FCA 295, 2007 D.T.C. 5579; Merrins v The Queen, 2005 TCC 470, 2005 D.T.C. 1273 [Merrins #2], affirmed by the Federal Court of Appeal in Merrins v The Queen, 2007 FCA 295, 2007 D.T.C. 5579 and Merrins v The Queen 2002 D.T.C. 1848 [Merrins #1]. In Merrins #3, Paris J., at paragraphs 8 and 9, stated the following:
[8] The Appellant raised these same issues in two previous appeals to this Court, …
[9] There are no material differences between the facts as they relate to the Appellant's 2002 and 2003 taxation years and the facts upon which the earlier appeals were decided. The Appellant's sources of income were the same in all of the years, and the reassessment of the Appellant's tax was made in the same manner for each year, as set out below. However, given that these appeals involve separate taxation years, an independent review of the facts and issues is required.
Issue Estoppel:
[18] Issue estoppel prevents parties from relitigating facts or issues which have already been decided in another court proceeding. Referring to the Supreme Court of Canada decision in Angle, Binnie J., in the decision in Danyluk v Ainsworth Technologies, 2001 SCC 44, [2001] 2 S.C.R. 460, in paragraph 25, reiterated the three preconditions that must exist before issue estoppel may apply:
(1) that the same question [or issue] has been decided;
(2) that the judicial decision which is said to create the estoppel was final; and
(3) that the parties to the judicial decision or their privies were the same persons as the parties to the proceedings in which the estoppel is raised or their privies.
When these three conditions are satisfied, it is still in a court’s discretion, considering the entirety of the circumstances of the case, to refuse to give effect to the application of this doctrine. In other words, issue estoppel should not be applied indiscriminately even where all preconditions are met.
Abuse of Process:
[19] The doctrine of abuse of process may be applied, in the Court’s discretion, to preserve the Court’s processes and maintain the consistency and integrity of the administration of justice. This doctrine engages the “… inherent power of the Court to prevent the misuse of its procedure, in a way that would … bring the administration of justice into disrepute” (Canam Enterprises Inc. v. Coles (2000), 51 O.R. (3d) 481 (C.A.), at paragraph 55, per Goudge J.A., dissenting (approved [2002] 3 S.C.R. 307, 2002 SCC 63)) (Toronto (City) v Canadian Union of Public Employees, (C.U.P.E.), Local 79, 2003 SCC 63, [2003] 3 S.C.R. 77, at paragraph 37 [“CUPE”]).
[20] The doctrine of abuse of process has been applied by Canadian courts to prevent relitigation of cases where the stricter requirements and preconditions of res judicata are not met. Even where the privity/mutuality requirement is not met, relitigation should nevertheless be precluded if it would “…violate such principles as judicial economy, consistency, finality and the integrity of the administration of justice.” (CUPE, paragraph 37).
A. Analysis – Privity:
[21] Both the Appellants and the Respondent agreed that the Concluded Litigation produced a final result. This prong of the test for cause of action estoppel and issue estoppel is clearly met.
[22] The parties disagreed, however, on whether the requirement of privity/mutuality had been satisfied.
[23] The Appellants contended that privity exists where two parties “share a common interest”. They cited Wilson v Servier Canada Inc., 119 A.C.W.S. (3d) 733 as support for the proposition that “…affiliated corporations are privies if they are subject to a common directing mind and common control.” (Appellant’s Written Submissions, paragraph 49).
[24] The Respondent argued that belonging to the same corporate group does not establish privity. The Respondent contended that there is insufficient evidence on a Motion, such as this, for the Court to properly determine that privity exists. The Respondent’s view was that the concept of privity has no place in income tax appeals because the scheme of the Act makes a conscious decision to tax each entity separately and each entity has its own right to appeal. Neither counsel provided any case law where privity was found for the purposes of res judicata in income tax cases.
[25] Even if the Appellants’ view, that privity could be found for the purpose of applying res judicata in income tax appeals, was correct, I am unable to accept the Appellants’ argument. The Appellants relied on the Wilson decision, which references the 1997 decision of Hoffmann-La Roche Ltd. v Canada (Minister of National Health and Welfare), 72 C.P.R. (3d) 362. In the Hoffmann-La Roche case, Richard J. (as he then was) noted that there was a “…dearth of authority upon the question of who are ‘privies’”. Quoting from Buanderie centrale de Montréal Inc. v Montreal City, [1994] 3 S.C.R. 29, at page 689, he stated the following:
Additionally, in Smith, Stone & Knight, Ltd. v. Birmingham Corp., [1939] 4 All E.R. 116 (K.B.), Atkinson J. came to the conclusion that a parent company could sue the persons responsible for damage caused to one of its subsidiaries. For the case at bar, and regardless of this latter conclusion, most relevant is the way in which the judge arrived at the finding that the subsidiary was not operating on its own account but solely as an integral part of the parent company's activities. To this end he consulted a number of decisions, all of which involved tax law, which needless to say is not without relevance to the case now before the Court. Using these decisions, he identified, at p. 121, six factors that could justify treating two corporations as one for tax purposes. I set them out below:
(1) Were the profits treated as the profits of the [parent] company?
(2) [W]ere the persons conducting the business appointed by the parent company?
(3) [W]as the [parent] company the head and the brain of the trading venture?
(4) [D]id the [parent] company govern the adventure, decide what should be done and what capital should be embarked on the venture?
(5) [D]id the [parent] company make the profits by its skill and direction?
(6) [W]as the [parent] company in effectual and constant control?
[26] Justice Richard went on, at pages 689 to 690, to quote Rand J. in Aluminum Co. of Canada Ltd. as follows:
Finally, I note Aluminum Co. of Canada Ltd. v. Toronto (City), [1944] S.C.R. 267, which this time clearly dealt with tax law, and the following passage from Rand J., at p. 271, which illustrates the special relationship sought by the courts in order to justify treating two corporations as one for tax purposes:
…
The question, then, in each case, apart from formal agency which is not present here, is whether or not the parent company is in fact in such an intimate and immediate domination of the motions of the subordinate company that it can be said that the latter has, in the true sense of the expression, no independent functioning of its own.
[27] The Appellants are part of the same corporate group, as evidenced by the Minister’s assumption that GECUS had control over the Appellants’ ultimate business decisions. It is my view, however, that, based on the factors referenced in Hoffman-La Roche, there is insufficient evidence on this Motion for me to conclude that privity exists for the application of res judicata. It requires more than simple affiliation and accountability to the same corporate head office to establish that two corporations are “alter-egos of one another”, in the sense that Richard J. employed that term in Hoffmann-La Roche.
[28] Each taxation year for each taxpayer is a different cause of action. Accordingly, the Appellants’ position that the Crown’s arguments should have been raised in the appeal of a different taxpayer, or in the appeal of the same taxpayer for a different year, cannot be supported. Consequently, whether or not privity may exist between these entities, cause of action estoppel does not apply.
[29] The abuse of process doctrine does not require the presence of privity. The Appellants asked that I apply the abuse of process doctrine to strike certain portions of the Replies. Following is an analysis of the Appellants’ arguments and my reasons as to why I have concluded that the Subject Paragraphs are not abusive of the Court’s processes.
B. Income Earning Purpose and Recharacterization Arguments:
[30] The Appellants asked the Court to strike those portions of the Replies that raise the income-earning purpose argument and the recharacterization argument. Relying on paragraphs 18(1)(a) and 20(1)(e.1) of the Act (the “income-earning purpose argument”), the Appellants argued that the Concluded Litigation settled the question of whether the guarantee fees were an expense incurred for the purpose of earning income. The Appellants also requested that arguments based on paragraphs 247(2)(b) and 247(2)(d) of the Act (the “recharacterization argument”) be struck from the Respondent’s pleadings because the bona fide commercial purpose of these fees was established in the Concluded Litigation.
[31] The Appellants contended that, because these appeals will deal with the same debt that was at issue in the Concluded Litigation, they will also deal with the same guarantee fee agreements. Therefore, findings of fact and law in the Concluded Litigation respecting those agreements should not be open to scrutiny in the present litigation. The Appellants also argued that the Respondent’s present allegations, that the guarantee fees were introduced for tax reasons, that they were not incurred for the purpose of earning income and that they had no bona fide non-tax purpose, directly contradict Hogan J.’s finding that the guarantee was a commercial necessity for GECCI.
[32] The Respondent did not dispute that the issued debt guaranteed by GECUS is the same debt that was at issue in the Concluded Litigation. However, the Respondent contended that there is no evidence before me that would allow me to conclude that the guarantee fee agreements were the same for the other Appellant or for the other years in issue. The Respondent also argued that its pleadings put in issue the “purpose of the guarantee fees”, which is distinct from the “purpose of the guarantees”.
[33] In response to this argument, the Appellants, in rebuttal submissions, stated that the two items are part of the same transaction, that is, the guarantee fees were paid in exchange for the guarantees. Therefore, the Appellants concluded that it was inappropriate for the Respondent to argue that the guarantees were tax motivated and that they were commercially necessary but that payment of the fees was not necessary for the purpose of earning income.
[34] The Respondent emphasized that there are differences between the Appellants’ circumstances in these appeals and the circumstances of GECCI between 1996 and 2000. Those differences included the fact that Unlimited Liability Companies (“ULCs”), incorporated in the Province of Nova Scotia, are involved in these appeals, as well as differences in debt to equity ratio and other economically relevant circumstances. Accordingly, the Respondent argued that the purpose of the guarantees may be potentially different than in the Concluded Litigation.
[35] The evidence indicated that the debt of GECCI is the same debt that was at issue in the Concluded Litigation (Affidavit of David Daubaras, paragraph 20). However, I do not believe that the guarantee fee agreements necessarily remained the same for GECCI for other years. The Appellants submitted a lengthy Motion Record but it contained no evidence regarding those agreements. There is no reason for me to conclude that the guarantee fee agreements for the other Appellants were the same as those at issue in the Concluded Litigation. Therefore, I am not prepared to strike these sections because there is insufficient evidence before me on this Motion to do so.
C. Respondent’s Claims of “No Knowledge”:
[36] Paragraphs 23 and 24, of the Notice of Appeal in the GECC appeal, provide background information regarding GECCI’s commercial paper program, while paragraph 32 discusses the Guarantee Fee Agreements.
23. GECCI issued commercial paper under a short term promissory note program established in 1989 (the “Commercial Paper Program”). GECCI ceased issuing commercial paper after GE Capital Canada Funding Company, a related corporation, began issuing commercial paper in 1998.
24. GECCI issued commercial paper in Canadian and United States dollars for terms not exceeding 270 days. GECCI’s commercial paper traded on the Canadian commercial paper market. At all material times, the maximum aggregate principal amount outstanding under the Commercial Paper Program was $7,000,000,000.
…
32. Pursuant to the Guarantee Fee Agreements, the guarantee fees payable by Retailer, Card Services and GECCI to GECUS during the years under review were as set out in Schedule C.
[37] The Respondent admitted the allegations in paragraph 23, but stated the following in respect to paragraphs 24 and 32:
8. With respect to paragraph 24 of the Notice of Appeal, he admits that GECCI issued commercial paper. He otherwise has no knowledge of and puts in issue the remaining allegations of fact stated therein.
…
10. With respect to paragraph 32 of the Notice of Appeal, he has no knowledge and puts in issue that the guarantee fees payable were pursuant to the “Guarantee Fee Agreements”. He also has no knowledge of and puts at issue the amount in Schedule C for Retailer’s 1997 taxation year. He states that the amount in Schedule C for Card Services’ 2002 taxation year should be $5,934,247 and not $5,937,247. He otherwise admits the remaining allegations of fact stated therein.
(Reply of Respondent, dated February 15, 2011, pages 3 and 4, paragraphs 8 and 10).
[38] The Appellants seek to strike paragraph 8 of the Respondent’s GECC Reply, arguing that allegations, contained in paragraph 24 of that Notice of Appeal, were conclusively proved in the Concluded Litigation.
[39] The Appellants also seek to have the following clause: “…he has no knowledge and puts in issue that the guarantee fees payable were pursuant to the “Guarantee Fee Agreements”…” struck from paragraph 10 of the GECC Reply, since the guarantee fees in the Concluded Litigation were found to be payable pursuant to the guarantee fee agreements. The Appellants argued that the Respondent’s claims of “no knowledge” are either barred by issue estoppel or are abusive of the Court’s processes.
[40] The Respondent admitted that GECCI issued commercial paper and that it stopped issuing in 1998. The Respondent questioned why there would be any debt outstanding between 2001 and 2004 when the maximum term of the debt was 270 days. The Respondent argued that this issue should be open for exploration during discovery proceedings.
[41] The Respondent also stated that GECC had neither alleged nor tendered any evidence to suggest that the commercial paper program in 2001, 2002 and 2004 was carried out in the same manner as in those years that were at issue in the Concluded Litigation. The Respondent again argued that there is no evidence that the Agreements in issue in the present appeals share the same terms and conditions as those that were in issue in the Concluded Litigation.
[42] Finally, the Concluded Litigation dealt only with those agreements GECCI entered into but not those into which Retailer, Card Services or Funding are alleged to have entered.
[43] I do not believe that the aforementioned paragraphs should be struck for the following reasons:
(1) The Respondent’s point is a valid one. The phrases “at all material times” in paragraph 24 and “during the years under review” in paragraph 32 of the GECC Notice of Appeal indicate that GECC is not simply reviewing the Agreed Facts set out in the Concluded Litigation, but, rather, it is alleging that the terms and conditions remained the same in the years in this appeal.
(2) Although the entire Statement of Agreed Facts was not reproduced in the Concluded Litigation, it would appear that most of the agreed facts were not fundamental findings to which issue estoppel could apply.
(3) The Appellants did not suggest that they were essential to, or that they were even mentioned in the analysis of Hogan J.. The issue in the Concluded Litigation was the arm’s length price of the guarantee fees. Nothing in particular appears to have turned on the details of the commercial paper program or the question of whether fees were paid “pursuant” to the guarantee fee agreements.
[44] Aside from this, I am still grappling with why the Crown would dispute facts in the present appeals that were apparently part of the Agreed Statement of Facts in the Concluded Litigation. I am equally mystified that the Respondent’s Reply would claim, on the one hand, no knowledge of whether “the guarantee fees payable were pursuant to the Guarantee Agreements” and yet, on the other hand, allege that “GECUS required the Companies to enter into the Guarantee Fee Agreements whereby the Companies agreed to pay” a certain amount (GECC Reply at paragraph 16(j)(vii)).
D. The New Theories / Basis of Assessment:
[45] The Appellants argued that the Crown may not raise new theories or conclusions of law at this stage in order to justify a transfer price of zero where those theories are totally unrelated to the basis of assessment.
[46] In addition to the implicit support theory, the Respondent’s Replies to the Notices of Appeal raised two additional arguments or theories:
(1) The Unlimited Liability Companies Theory:
[47] During the relevant period, both Funding and Retailer were ULCs, incorporated pursuant to the laws of Nova Scotia. Paragraph 15 of the Respondent’s Reply to the Notice of Appeal concerning GECC implies that GECCI and Card Services were also ULCs at some point. The Crown intends to argue that GECUS’s explicit guarantees were superfluous because, as ULC members, GECUS was already liable for the debts without any limit according to the “inherent corporate structure”. Accordingly, the guarantees at issue had little or no value to the ULCs.
[48] The relevant portions of the pleadings, which the Appellants are asking this Court to strike because they raise the ULC theory, are highlighted in bold and are contained in Schedule “A” attached to these Reasons.
(2) The Recharacterization Theory:
[49] The Appellants contended that the Minister assessed them pursuant to paragraphs 247(2)(a) and (c) of the Act. Although there is no specific reference to these paragraphs in either the proposal letters or the Transfer Pricing Report, the Respondent did not dispute this contention.
[50] In the present appeals, the Respondent argued that both branches of subsection 247(2) apply. The Appellants referred to the Respondent’s reliance on paragraphs 247(2)(b) and (d) of the Act as the “recharacterization theory” and asked that those portions of the Replies that reference these paragraphs be struck.
[51] The stated administrative position of the Minister respecting proposed assessments pursuant to paragraph 247(2)(b) is that they will be referred to the Transfer Pricing Review Committee before an assessment is issued. However, the evidence before me indicates that no such referral was made. Where paragraph 247(2)(b) is engaged, paragraph 247(2)(d) allows the Minister to ignore the transaction that was actually entered into by the non-arm’s length parties and to calculate the tax based on a notional transaction which arm’s length parties would have entered into.
[52] Attached to my Reasons as Schedule “B” are the relevant portions that the Appellants seek to strike on this basis.
The Appellants’ View:
[53] The Appellants’ legal argument was focussed on the meaning of the term “assessment” as it is used in the income tax system. They argued that the Crown is using the Court’s processes to reassess the Appellants by conducting an audit through the litigation process in order to ascertain whether these new theories will be worth pursuing. The statutory power to reassess belongs to the Minister, not the Crown.
[54] The Appellants relied on the case of Pure Spring Co. Ltd. v Minister of National Revenue, [1946] Ex.C.R. 471, 2 D.T.C. 844, where, at page 857, Thorson J. referred to the assessment as “… the summation of all the factors representing tax liability, ascertained in a variety of ways, and the fixation of the total after all the necessary computations have been made”.
[55] The Appellants suggested that, while case law has allowed the Crown leeway to advance new facts or alternative arguments, it is precluded from turning the litigation process into a reassessment process in which a new theory that is advanced is entirely different from the basis of the Minister’s assessment.
[56] During oral submissions, Appellants’ Counsel argued that the Courts have struggled with the scope of subsection 152(9) of the Act because the Courts are balancing competing policy objectives: the need for finality and the need for limitation periods for assessments to be enforced against the Minister.
[57] In the later case of The Queen v Anchor Pointe Energy Ltd., 2003 FCA 294, 2003 D.T.C. 5512, Rothstein J. allowed the Crown to advance an alternative argument pursuant to subsection 152(9) of the Act and, at paragraph 39, distinguished Pedwell as follows:
[39] … This case is unlike cases such as Pedwell v. The Queen, 2000 DTC 6405 (F.C.A.), where the Minister sought to take into account different transactions than the ones that formed the basis of the reassessments that were made within the normal reassessment period. I do not say that taking into account other transactions is the only thing the Minister cannot do after expiry of the normal reassessment period. Anything that increases tax payable from what would have been the case prior to expiry of the normal reassessment period would be objectionable.
[58] The Appellants contended that the discussions in The Queen v Loewen, 2004 FCA 146, 2004 D.T.C. 6321 and The Queen v Honeywell Limited, 2007 FCA 22, 2007 D.T.C. 5073, are further examples of the Courts’ attempts to find the line between a new assessment and an alternative argument in support of the same assessment. In Loewen, the Federal Court of Appeal overturned the decision of Bowman, A.C.J. (as he then was) who had concluded that one of the arguments brought by the Crown should be struck because it constituted a new and different assessment.
[59] In Honeywell, 2006 TCC 325, 2006 D.T.C. 3124, at paragraph 13, Bowman, C.J., venting his frustration with the Federal Court of Appeal decision in Loewen stated that “… the Federal Court of Appeal’s interpretation of subsection 152(9) … permits the Crown to do anything it likes in pleadings...”. He nevertheless struck the Crown’s argument based on foreign accrual property rules because the waiver of the reassessment period specified an assessment under the general anti-avoidance rule. The Federal Court of Appeal confirmed that the Crown was bound by the terms of the waiver and did not venture further into the actual scope of subsection 152(9).
[60] Subsequently, in the case of Jeannette Walsh v The Queen, 2007 FCA 222, 2007 D.T.C. 5441, at paragraph 18, the Federal Court of Appeal placed the following three restrictions on the Crown’s use of subsection 152(9):
[18] The following conditions apply when the Minister seeks to rely on subsection 152(9) of the Act:
1) the Minister cannot include transactions which did not form the basis of the taxpayer’s reassessment;
2) the right of the Minister to present