Dow Chemical Canada ULC v. The Queen

Dow Chemical Canada ULC v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-12-18
Neutral citation
2020 TCC 139
File numbers
2017-2616(IT)G
Judges and Taxing Officers
Siobhan Monaghan
Subjects
Income Tax Act
Decision Content
Docket: 2017-2616(IT)G
BETWEEN:
DOW CHEMICAL CANADA ULC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Application heard on May 14, 2019 at Toronto, Ontario and submissions in writing received on January 10, 2020, January 31, 2020 and February 14, 2020, pursuant to section 58 of the
Tax Court of Canada Rules (General Procedure)
Before: The Honourable Justice K.A. Siobhan Monaghan
Participants:
Counsel for the Appellant:
Daniel Sandler
Allison Blackler
Counsel for the Respondent:
Henry Gluch
Samantha Hurst
Aleksandrs Zemdegs
ORDER
UPON the Appellant filing an application, on consent, on October 23, 2018, seeking an order for a determination of the following question of law before the hearing of the appeal pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure):
Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ITA”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under section 12 of the Tax Court of Canada Act and section 171 of the ITA?
AND IN ACCORDANCE with the attached Reasons for Order;
The Court has determined that where the Minister has decided, pursuant to subsection 247(10) of the Income Tax Act (Canada) [the ITA], to deny a taxpayer’s request for a downward transfer pricing adjustment, that decision is not outside the exclusive original jurisdiction granted to the Court under section 12 of the Tax Court of Canada Act and section 171 of the ITA provided that the assessment resulting from that decision has been properly appealed to the Court; and
Each party shall bear its own costs with respect to this Application.
Signed at Ottawa, Canada, this 18th day of December 2020.
“K.A. Siobhan Monaghan”
Monaghan J.
Citation: 2020 TCC 139
Date: 20201218
Docket: 2017-2616(IT)G
BETWEEN:
DOW CHEMICAL CANADA ULC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Monaghan J.
I. INTRODUCTION
[1] This decision is about the jurisdiction of the Tax Court of Canada [the Tax Court], or perhaps more accurately about the scope of an appeal of an assessment. It arises in the context of an appeal by Dow Chemical Canada ULC [the Appellant or Dow Chemical] of a reassessment of its 2006 taxation year. The reassessment increased Dow Chemical’s income under the transfer pricing provisions in section 247 of the Income Tax Act. [1]
[2] Where the relevant conditions are satisfied, the transfer pricing provisions mandate adjustments to amounts that increase a taxpayer’s income (or decrease a taxpayer’s loss). However, adjustments that would decrease a taxpayer’s income (or increase a taxpayer’s loss) cannot be made unless “in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made”.
[3] In reassessing Dow Chemical for its 2006 and 2007 taxation years, the Minister increased Dow Chemical’s income in respect of certain transactions with non-residents to which Dow Chemical is related. The Minister initially indicated that the transfer pricing provisions also would result in a downward adjustment to Dow Chemical’s income in those taxation years in respect of another transaction. However, the most recent reassessment of Dow Chemical’s 2006 taxation year did not reflect the downward adjustment, although the reassessment of its 2007 taxation year did. Dow Chemical has appealed the 2006 reassessment.
[4] The appeal raised two issues associated with the downward adjustment. The parties apparently resolved the first. The second concerns the Minister’s decision to deny Dow Chemical the benefit of the downward adjustment. While the amount of the adjustment is not in dispute, the Minister, as she is entitled to do, determined that it is not appropriate in the circumstances to give effect to the adjustment. The dispute concerns whether that determination was proper.
[5] The issue faced by Dow Chemical is where to bring the remaining issue in dispute. The Tax Court has the jurisdiction to consider an appeal of an assessment. The Federal Court has jurisdiction to judicially review a decision of the Minister, but only if the matter is not otherwise appealable. The uncertainty concerning the proper forum for the dispute led the parties to submit a question of law to the Tax Court under section 58 of the Tax Court of Canada Rules (General Procedure) [Rule 58]. This decision addresses that question.
II. CONTEXT
A. The Transfer Pricing Provisions in Part XVI.1 of the ITA
[6] Part XVI.1 of the ITA contains the transfer pricing provisions. Part XVI.1 does not create or impose a separate tax (although it does impose a penalty). Rather, the transfer pricing provisions (with the exception of the penalty provision) are rules applied to compute amounts relevant to tax imposed under other Parts of the ITA, particularly (but not exclusively) Part I.
[7] The transfer pricing provisions in Part XVI.1 of the ITA embody the “arm’s length principle” in transactions between a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length. Where transactions between a taxpayer and a non-arm’s length non-resident occur on terms that do not reflect arm’s length terms, subsection 247(2) mandates that amounts be increased or decreased as necessary to reflect the amounts that would have been agreed to had the parties been dealing with each other at arm’s length.
[8] Read alone, subsection 247(2) makes no distinction between adjustments that increase a taxpayer’s income and those that decrease a taxpayer’s income:
. . . any amounts that, but for this section and section 245, would be determined for the purposes of this Act in respect of the taxpayer . . . for a taxation year . . . shall be adjusted (in this section referred to as an “adjustment”) to the quantum or nature of the amounts that would have been determined if [the participants had been at arm’s length] . . .
[9] However, subsection 247(10) expressly precludes any adjustment under subsection 247(2) that does not result in or increase a transfer pricing capital adjustment or a transfer pricing income adjustment for a taxation year unless, in the opinion of the Minister, the circumstances are such that it would be appropriate that the adjustment be made.
[10] Transfer pricing capital adjustments and transfer pricing income adjustments both result in an increase in a taxpayer’s income or a decrease in the taxpayer’s loss. [2] They are mandated. In contrast, transfer pricing income setoff adjustments and transfer pricing capital setoff adjustments both result in a decrease in income or an increase in loss. [3] They cannot be made unless the Minister is of the opinion that it would be appropriate in the circumstances to make the adjustment. Nonetheless, both subsection 247(2) and 247(10) are rules that are to be applied to compute income (or some other relevant amount), and thus tax (or some other liability) under Part I (or some other Part) of the ITA.
[11] Dow Chemical’s appeal concerns only a transfer pricing income setoff adjustment – interest expense. For purposes of these reasons, consistent with the terminology the parties used, the term “downward transfer pricing adjustment” refers to a transfer pricing income setoff adjustment or transfer pricing capital setoff adjustment.
B. The Underlying Appeal
[12] The parties filed a Statement of Agreed Facts, which I have attached to these reasons as Appendix A. However, I have summarized what I view as the salient facts here.
[13] The Appellant, Dow Chemical, is a Canadian resident company governed by the Companies Act (Nova Scotia) [4] and indirectly owned by The Dow Chemical Company, a US corporation [Dow US]. The Appellant, as borrower, entered into a revolving loan agreement dated February 17, 2009, effective January 1, 2004, with Dow Europe GmbH [DowEur], as lender. DowEur is a Swiss operating company also indirectly owned by Dow US. Pursuant to that loan agreement, the Appellant was obliged to pay DowEur interest of $15,279,034 in respect of the Appellant’s 2006 taxation year, and interest of $6,694,341 in respect of its 2007 taxation year.
[14] In 2011, the Minister reassessed the Appellant’s 2006 and 2007 taxation years relying on the provisions of section 247. The 2011 reassessment of the 2006 taxation year increased the Appellant’s income related to toll manufacturing services it provided to DowEur [DowEur Manufacturing Amounts]. The Appellant objected to that reassessment and requested the assistance of the Canadian competent authority with respect to the DowEur Manufacturing Amounts. The Appellant did not seek the assistance of the competent authority with respect to the DowEur loan.
[15] Shortly thereafter, the Minister sent a proposal letter to the Appellant regarding downward transfer pricing adjustments. In particular, the Minister proposed to increase the interest expense with respect to the DowEur loan by $3,260,704 for the Appellant’s 2006 taxation year and by $1,509,275 for its 2007 taxation year. However, subsequently the Minister advised the Appellant that the 2006 interest expense would not be changed because of a limitation period in the Canada-Switzerland Tax Treaty.
[16] The Minister again reassessed the Appellant’s 2006 and 2007 taxation years by notices of reassessment dated December 12, 2012. Those reassessments reflected an increase in the Appellant’s interest expense related to the DowEur loan for 2007, but not for 2006. However, the reassessment of the 2006 taxation year included transfer pricing adjustments that increased the Appellant’s income related to transactions it had with Dow US [the Dow US Amounts]. The Appellant objected and requested the assistance of the Canadian competent authority in respect of the Dow US Amounts.
[17] On January 14, 2013, the Appellant asked the Minister to make a downward transfer pricing adjustment for its 2006 taxation year related to the interest expense associated with the DowEur loan. That request was denied on the basis that the additional interest was prohibited by Article 9(3) of the Canada-Switzerland Tax Treaty and would result in the amount not being taxed in either jurisdiction (i.e., double non-taxation).
[18] Subsequently, the Minister reassessed:
the Appellant’s 2006 taxation year, by notice dated December 14, 2015, in accordance with the resolution of the transfer pricing adjustments by the Canadian and Swiss competent authorities regarding the DowEur Manufacturing Amounts, but made no adjustment in respect of the DowEur loan; and
the Appellant’s 2006 taxation year, by notice dated April 13, 2017, in accordance with the resolution of the transfer pricing adjustments by the Canadian and US competent authorities regarding the Dow US Amounts, but again made no adjustment in respect of the DowEur loan.
[19] The April 13, 2017 reassessment of the 2006 taxation year has been appealed to the Tax Court and has given rise to the question addressed in this decision.
[20] While the Appellant’s notice of appeal challenged the Minister’s view of Article 9(3) of the Canada-Switzerland Tax Treaty, I understand that the parties have resolved that issue. The amount of the downward transfer pricing adjustment is not in dispute. Accordingly, the only remaining issue relates to the Minister’s determination under subsection 247(10) that it would not be appropriate in the circumstances to increase the Appellant’s interest expense for its 2006 taxation year by $3,260,704. The Appellant states that that determination was not proper and that therefore the reassessment is incorrect.
III. THE QUESTION
[21] The parties have relied on Rule 58 for a determination of the following question:
Where the Minister of National Revenue has exercised her discretion pursuant to subsection 247(10) of the Income Tax Act (“ITA”) to deny a taxpayer’s request for a downward transfer pricing adjustment, is that a decision falling outside the exclusive original jurisdiction granted to the Tax Court of Canada under section 12 of the Tax Court of Canada Act and section 171 of the ITA?
[22] In essence, the question is whether a challenge to the Minister’s exercise of the discretion given to her under subsection 247(10) falls within the Tax Court’s appellate jurisdiction or is outside of that jurisdiction and is a matter for judicial review in the Federal Court.
[23] Before I proceed, I want to comment on the word “discretion”. That word is not used in subsection 247(10), but it is used in the question before me and is used repeatedly in the jurisprudence. However, the term “power” or “discretionary power” or “decision” or “determination” might equally be used – under subsection 247(10), the Minister is given the power to determine whether a downward transfer pricing adjustment is appropriate in the circumstances. In these reasons, I may use “power”, “discretion”, “discretionary power”, “decision”, “determination” or “opinion” to refer to the Minister’s action taken under subsection 247(10). What is intended by each of these expressions is that the Minister has the power (and the obligation) to determine if the downward transfer pricing adjustment is appropriate in the circumstances and that, in the context of a downward transfer pricing adjustment, what matters is the Minister’s opinion.
IV. THE POSITIONS OF THE PARTIES
[24] The Respondent seeks an affirmative answer to the question, advocating that any review of the Minister’s decision is beyond the jurisdiction of the Tax Court although it may be the subject of judicial review in the Federal Court.
[25] The Appellant seeks a negative answer, arguing that, properly viewed, a challenge to the Minister’s decision under subsection 247(10) is an appeal of the assessment [5] that reflects that decision and therefore is within the exclusive appellate jurisdiction of the Tax Court.
[26] The circumstances illustrate the dilemma faced by the Appellant: is the Tax Court or the Federal Court the proper forum for the dispute regarding the Minister’s exercise of her discretionary power? Notwithstanding that the Appellant asserts that the Tax Court has the jurisdiction, the Appellant has sought judicial review of the Minister’s decision before the Federal Court. That proceeding is being held in abeyance pending a determination of the question in this case.
[27] Assessments issued under the ITA can be appealed only to the Tax Court; the Tax Court has the exclusive original jurisdiction to hear appeals of assessments. It is equally clear that the Federal Court has the jurisdiction to consider applications for judicial review, including decisions of the Minister or employees of the Canada Revenue Agency, but only to the extent that an Act of Parliament does not provide for an appeal to another body, including the Tax Court.
[28] Therefore, the answer to the question turns on whether the Minister’s decision under subsection 247(10) goes to the correctness of the assessment and so is properly the subject of an appeal to the Tax Court – the position taken by the Appellant – or whether any challenge to the Minister’s decision under subsection 247(10) must be by way of judicial review in the Federal Court – the position taken by the Respondent.
V. THE ANSWER
[29] For the reasons that follow, I have decided that the answer to the question is no. In my view, the Minister’s decision under subsection 247(10) is an essential component of the assessment, goes to the correctness of the assessment, and accordingly may be reviewed by the Tax Court under its exclusive appellate jurisdiction to determine the correctness of the assessment (i.e., whether the assessment is supported by the facts and applicable law). [6] I believe this conclusion is entirely consistent with the jurisprudence, the statutory provisions, and the remedies available to the Tax Court once it reaches a decision on an appeal of an assessment.
[30] However, this is not to say that the Tax Court may substitute its opinion for that of the Minister. That question is not before me. While much of the jurisprudence reviewed below suggests that the Tax Court may not (because Parliament intended the decision to be that of the Minister), that approach was not applied universally. Moreover, more recent jurisprudence, including from the Supreme Court of Canada [7] and the Federal Court of Appeal, has considered courts’ powers and duties when reviewing discretionary decisions. This jurisprudence would clearly be relevant to that question. These reasons should not be interpreted as expressing any conclusion on whether the Tax Court may substitute its decision for that of the Minister when the Tax Court reviews the Minister’s decision under subsection 247(10) in the context of an appeal of an assessment resulting from that decision.
VI. DOES SUBSECTION 247(11) PROVIDE THE RIGHT TO APPEAL THE MINISTER’S DECISION?
[31] In support of its argument that the ministerial decision under subsection 247(10) is appealable to the Tax Court, the Appellant relies in part on subsection 247(11). Subsection 247(11) states:
(11) Sections 152, 158, 159, 162 to 167 and Division J of Part I apply to this Part, with such modifications as the circumstances require.
[32] Division I of Part I is titled “Returns, Assessments, Payment and Appeals”, and Division J of Part I is titled “Appeals to the Tax Court of Canada and the Federal Court of Appeal”.
[33] Provisions of this nature are found throughout the ITA. For ease of reference, I will refer to them as mutatis mutandis provisions, while acknowledging that that traditional language is no longer used in the ITA. The purpose of these provisions in the ITA is to provide the same rights to object to and appeal assessments issued in reliance on Parts of the ITA other than Part I without replicating all of the provisions in each of those other Parts of the ITA.
[34] The Respondent asserts that subsection 247(11) is relevant only to an assessment of penalties under subsection 247(3), because the only assessment that can be made under Part XVI.1 is an assessment of penalties under subsection 247(3). Any other assessment relying on the transfer pricing provisions is made pursuant to another Part of the ITA.
[35] The Appellant argues that subsection 247(11) has a broader application than to accommodate the appeal of a penalty assessed under subsection 247(3). The Appellant suggests that subsection 247(11) was drafted to apply to all of Part XVI.1 (the provisions are stated to apply “to this Part”) and to ensure that the objection and appeals process in Part I is available to challenge all of the Minister’s actions under the transfer pricing rules, including the Minister’s decision to deny a downward transfer pricing adjustment under subsection 247(10). The Appellant submits that the references to subsections 162 to 167 and Division J in subsection 247(11) bring the Minister’s discretionary decision within the Tax Court’s appellate jurisdiction.
[36] In advancing this position, the Appellant’s largely relies on two arguments:
The phrase “with such modifications as the circumstances require” permits the provisions adopted by subsection 247(11) to be read as if the reference to assessment or notice of assessment referred to “the Minister’s decision regarding a downward transfer pricing adjustment pursuant to subsection 247(10)”; and
Subsection 247(11) applies as of a date that precedes the application date for the penalty provision, indicating that its purpose includes providing taxpayers with the right to appeal all of the Minister’s actions under Part XVI.1, including in particular her decision under subsection 247(10).
[37] Provisions in the ITA must be interpreted using the textual, contextual and purposive principles described by the Supreme Court of Canada in Canada Trustco Mortgage Co. v. Canada. [8] The language of a statutory provision is to be interpreted alongside its context and legislative purpose “to find a meaning that is harmonious with the Act as a whole”. [9] Where the words used are capable of more than one meaning, the ordinary meaning of the words, while relevant, will play a lesser role in the interpretive process than the context and purpose of the statutory provisions. The context includes not only the surrounding language (i.e., the language of the specific provision) but also the broader context of the related provisions and the ITA as a whole.
A. Substitution of “Decision of the Minister” for “Assessment”
[38] Some mutatis mutandis provisions in the ITA use the phrase “with any modifications” while others use the phrase “with such modifications”. The Respondent submits that because subsection 247(11) allows only such modifications (rather than any modifications) as the circumstances require, the scope of subsection 247(11) is narrower than it might otherwise be. For the reasons the Appellant gives in its written submission, I am not convinced that the difference between the two expressions is meaningful in the circumstances before me. However, it is not necessary for me to decide that question in this case.
[39] In my view, neither expression would permit substituting “the Minister’s decision denying a downward transfer pricing adjustment under subsection 247(10)” for “assessment” or “notice of assessment” in the relevant provisions. Had Parliament intended subsection 247(11) itself to extend rights of objection and appeal to the Minister’s decision as directly as the Appellant suggests, I would anticipate much clearer language such as appears in other mutatis mutandis provisions in the ITA.
[40] For example, the ITA requires the Minister to make certain determinations; [10] the provisions governing notices of objection and rights of appeal expressly are made applicable to those determinations, leaving no doubt. [11] Similarly, where the Minister gives notice of an intention to revoke registration of a taxpayer as a qualified donee, the ITA specifies that the relevant provisions apply “with any modifications that the circumstances require, as if the notice [of revocation] were a notice of assessment.” [12] A similar approach is taken in Part V to a notice of suspension [13] and in Part X to a notice of refund. [14] These examples of explicit language support a narrower view of the modifications contemplated and permitted by subsection 247(11) than the Appellant advocates.
[41] In coming to my conclusion on the Appellant’s first argument regarding the scope of subsection 247(11), I considered Lord Rothermere Donation v. The Queen. [15] There the Tax Court said that the “any modifications” formulation of these provisions permits a broader range of substitutions or modifications than might have been permitted under a traditional “mutatis mutandis” provision, suggesting that the updated language could accommodate changes that went beyond “a point of detail”. However, I view the substitution made there to be of an entirely different nature than that proposed here by the Appellant.
[42] In that case, it is clear from the relevant mutatis mutandis provision that subsection 164(3) – which mandates interest on tax refunds - is incorporated by reference for purposes of a refund of Part XIII taxes. [16] Subsection 164(3) requires identification of the date from which the interest is calculated. To apply subsection 164(3) to a non-resident, the Tax Court sought to identify something comparable to a return filed under section 150 to identify the start of the relevant period. For that purpose, given the similarities in the effect of, and the information provided in, a Part I tax return filed under section 150 (giving rise to an assessment under Part I) and an application for a refund of Part XIII taxes (the means by which a non-resident obtains an assessment of Part XIII tax), the Tax Court concluded that it could treat the application for a refund as equivalent to a return filed under section 150.
[43] Those circumstances are not comparable to the circumstances here. Subsection 247(11) can have full effect without being applied as the Appellant has suggested; it applies to and is necessary to object to and appeal an assessment of a penalty.
[44] I note that subsection 247(11) requires the Minister to decide whether a downward transfer pricing adjustment is appropriate in the circumstances, and that subsection 152(1.2) refers to a “determination or redetermination”. While subsection 152(1.2) is a provision included among those referred to in subsection 247(11), I do not think this assists the Appellant. Subsection 152(1.2) is concerned with determinations of amounts (not decisions). Subsection 247(10) does not give the Minister the power to determine an amount and does not itself use the word “determine” or “determination” or refer to a “notice of determination”.
[45] To read subsection 247(11) as the Appellant suggests would be to stray too far into the realm of legislating, rather than applying, the law. As stated by the Federal Court of Appeal in Zen v. Canada (National Revenue), [17] decided after Lord Rothermere:
[73] A statutory modification provision confers an unusual power on courts. The normal role of the judicial branch of government with respect to legislation is to interpret and apply the law as enacted by the Legislature. A cornerstone of parliamentary democracy is that changes to the law require the authorization of the Legislature. However, the exigencies of administration in the modern state have also long required Legislatures to delegate extensive law-making powers. In Canada, these powers are most often delegated to politically accountable bodies and officials with an institutional expertise in public administration, such as the Governor (or Lieutenant Governor) in Council, individual Ministers of the Crown, and municipalities.
[74] The fact that courts have neither of these qualities counsels a cautious approach to the scope of the power delegated to them to modify provisions of the ITA, and indicates that it should be interpreted more narrowly than the current text suggests. Thus, determining whether a proposed modification is permitted by the delegated power (to use the terminology associated with mutatis mutandis: is it a change in detail or in substance?) requires a court to consider whether considerations of efficiency outweigh the benefits of subjecting it to the scrutiny of the normal legislative process.
[Emphasis added.]
[46] Finally, I have considered statements made in the context of the introduction of Part XVI.1. While comments in budget statements or explanatory notes that accompany draft legislation are not dispositive, they may provide insight into Parliament’s intention. Nowhere in the 1997 Budget Message, [18] the explanatory notes accompanying the draft legislation released on September 11, 1997, [19] or the explanatory notes accompanying the revised draft legislation released on December 8, 1997, [20] is there any suggestion that the mutatis mutandis provision in the transfer pricing rules was intended to allow the reading that the Appellant suggests.
[47] Thus, while the text of subsection 247(11) is broad (leaving aside the “any/such” debate), it nonetheless must be read and applied narrowly in the context of legislation that circumscribes the jurisdiction of the Tax Court as the ITA does. Other provisions in the ITA that expressly direct that the reference to “notice of assessment” be read as a reference to something else – an approach not taken in subsection 247(11) – support that conclusion. In my view the text and context of subsection 247(11), interpreted under the Canada Trustco principles, do not support the Appellant’s position that “decision of the Minister” may be substituted for “assessment” or “notice of assessment” in applying the sections referred to in subsection 247(11).
B. Purpose of Subsection 247(11)
(1) Date of Application
[48] Amendments to the transfer pricing rules were announced in the February 1997 Budget. While the rules in section 247 were not enacted until 1998, [21] from enactment, most of the provisions in section 247, [22] including subsection (11), were made applicable for taxation years or fiscal periods that began after 1997. However, the penalty provision in subsection 247(3), and the related provisions in subsections 247(4), (5) and (9) [collectively, the penalty-related provisions], were applicable only for taxation years and fiscal periods that began after 1998.
[49] The Appellant argues that if subsection 247(11) is intended to be restricted to an assessment of penalties, one would expect it to become applicable contemporaneously with the penalty-related provisions. The earlier application date was chosen, suggests the Appellant, so that a taxpayer could dispute a decision by the Minister to deny a downward transfer pricing adjustment under subsection 247(10).
[50] The Appellant points out that in the initial publicly-released draft transfer pricing provisions, the mutatis mutandis provision appeared as subsection (3) of proposed section 247.1. All of proposed section 247.1 related to the proposed penalties in proposed section 247. Proposed subsection 247.1(1) set out the time for payment of the penalty and proposed subsection 247.1(2) imposed interest on a penalty not paid by the due date. The mutatis mutandis provision in proposed subsection 247.1(3) was to apply contemporaneously with the application of the transfer pricing provisions other than the penalty-related provisions. In contrast, the first two subsections of section 247.1 (related to payment of and interest on the penalty) were to become applicable contemporaneously with the penalty-related provisions.
[51] This distinction between the application dates within proposed section 247.1 itself, the Appellant asserts, supports its position that the scope of subsection 247(11) is broader than to permit an objection to and appeal of the assessment of a penalty. Had Parliament intended the mutatis mutandis provision to be relevant to the penalty only, the Appellant submits, all three parts of section 247.1 would have been proposed to become applicable at the same time – on the date the penalty itself was proposed to become applicable.
[52] The Respondent’s position is that subsection 247(11) applies only to an assessment under Part XVI.1. Only penalties may be assessed under Part XVI.1 and accordingly, says the Respondent, subsection 247(11) applies only to an assessment of penalties. [23]
[53] The Respondent submits that draft legislation that was not enacted should be viewed with caution. Moreover, while the commentary does not explain why a provision that the Respondent asserts applies only to penalties was made applicable before the penalties could be assessed, the Respondent submits that the delay in the application date of the penalty-related provisions was an exception to the application date for all of the other transfer pricing provisions. The penalty applies where a taxpayer has not satisfied what (then) were new contemporaneous documentation obligations. The Respondent suggests that the purpose of the delay was to give taxpayers time to adjust to the new requirements before penalties became applicable.
[54] The Respondent points out that the earlier application date for subsection 247(11), a provision the Respondent argues relates only to assessments of penalties under section 247, also extends to definitions in subsection 247(1) relevant only to the penalty-related provisions. Although subsection 247(11), like those definitions, applied for taxation years and fiscal periods that began after 1997, no delay in their application was necessary because they imposed no obligations on taxpayers. Although applicable, these provisions could have no consequence unless and until the penalty-related provisions became applicable (i.e., to a taxation year or fiscal period commencing after 1998).
[55] The explanatory notes dated September 11, 1997 that accompanied the draft legislative proposals do not address this difference in proposed application dates for draft section 247.1. Similarly, the explanatory notes that accompanied the December 8, 1997 draft legislation (the version of section 247 that ultimately was enacted) is similarly silent on why subsection 247(11) applied from a date earlier than the penalty provisions.
[56] Although the distinction in dates of application may be viewed as supporting the Appellant’s view of the purpose of subsection 247(11), I am not prepared to conclude that that view is correct solely on that basis. Rather, this distinction suggests to me that it is necessary to consider the purpose of subsection 247(11) by interpreting it in the context of the other provisions in Part XVI.1 and in the context of the ITA as a whole.
(2) Assessments Based on the Transfer Pricing Provisions
[57] With the exception of any penalty assessed under subsection 247(3), an assessment based on the provisions of section 247 will be made pursuant to another Part of the ITA, most notably Part I or Part XIII. [24] For example, a transfer pricing adjustment may result in an increase to a taxpayer’s income and a reassessment reflecting that increase will be issued under Part I. Subparagraph 152(4)(b)(iii) specifically contemplates a longer period of reassessment for transactions subject to the transfer pricing provisions. Because the assessment is issued under Part I, the provisions in Part I governing objection and appeal of that assessment automatically apply. Subsection 247(11) has no role to play.
[58] In this respect, Part XVI.1 operates like Part XVI. That Part contains the general anti-avoidance rule [the GAAR [25] ] and a benefit provision which, when applicable, applies to add the benefit to income for purposes of Part I or to treat the benefit as a payment to a non-resident for purposes of Part XIII. Like the transfer pricing provisions, Part XVI does not impose tax but rather contains rules that are applied for the purpose of computing liability under other Parts of the ITA. Where those rules apply, as with the transfer pricing provisions, adjustments are made that affect computations under other Parts of the ITA. Accordingly, the assessment based on the application of the rules in Part XVI arises under the other Part of the ITA.
[59] With respect to the GAAR this is made abundantly clear. Subsection 245(7) states that:
. . . the tax consequences to any person, following the application of this section [245], shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.
[Emphasis added.]
[60] The assessment is made following the application of the GAAR but is made under the appropriate Part of the ITA, not Part XVI. Similarly, an assessment made following the application of subsection 247(2) and (10) is made not under Part XVI.1, but under the appropriate Part of the ITA.
[61] Where a particular person has been reassessed with respect to a transaction, or has received a notice of determination under subsection 152(1.11), involving the application of the GAAR, another person may ask the Minister to assess, or make a determination under subsection 152(1.11), with respect to that same transaction. [26] In that event, the Minister must consider the request and assess or make a determination. [27] The obligation to make the assessment is found in Part XVI, but again the assessment would be made under another Part of the ITA.
[62] Despite these specific provisions addressing assessments based on section 245, Part XVI does not contain a mutatis mutandis provision. None is necessary because an assessment made consequential on the application of the provisions in Part XVI is not made under Part XVI, but is made under another Part. [28] The right to object to or appeal that assessment is found in that other Part. Similarly, where the Minister makes a determination under subsection 152(1.11), following the application of section 245, the taxpayer’s right to object and appeal are found in Part I. [29]
[63] With two exceptions, the Appellant agrees with this analysis. The Appellant agrees that an adjustment to income based on subsection 247(2) or (10) would be processed as an adjustment to income determined and assessed under Part I and that the objections and appeals provisions in Part I would govern. However, the Appellant states that the “reasons for the objection” and the “issue to be decided” would relate solely to Part XVI.1, where the substantive dispute is grounded. While that may be true, that is not different than an assessment based on the GAAR or on section 246. The reason for the objection and the issue to be decided would be grounded, at least in part, in Part XVI – for example, is there a tax benefit, is there an avoidance transaction, what are the reasonable tax consequences to deny the tax benefit, and has a benefit been conferred, directly or indirectly, on a taxpayer?
[64] The Appellant argues that the difference between Part XVI and Part XVI.1 is not only that Part XVI does not have a penalty provision but that Part XVI does not have a provision that relies on the Minister’s exercise of a discretion. That, says the Appellant, is one of the reasons it does not have a mutatis mutandis provision. I do not agree that that distinction is meaningful in the context of the Appellant’s argument that subsection 247(11) allows the Minister’s decision to be the subject of an appeal.
[65] Subsection 247(10) requires a decision, but so does subsection 245(2). Under subsection 247(10) the Minister must decide whether, in her opinion, a downward transfer pricing adjustment is appropriate in the circumstances. Under subsection 245(2), the Minister must decide what tax consequences are reasonable in the circumstances in order to deny a tax benefit. While in the former case the Minister’s opinion is the one that matters, and in the latter the Tax Court may come to a different conclusion regarding the reasonable tax consequences than the Minister, in both cases the Minister’s decision results in an assessment under another Part of the ITA.
[66] The second distinction between Parts XVI and XVI.1, says the Appellant, is that in some circumstances the Minister’s refusal to make a downward transfer pricing adjustment will not result in a reassessment, but a decision letter. In such circumstances, unless subsection 247(11) is read as extending the right of appeal to the Minister’s decision letter, argues the Appellant, a taxpayer would have to seek a judicial review, even though another taxpayer who is in the same circumstances but who has received a reassessment would be able to appeal the reassessment to the Tax Court. Therefore, to avoid what the Appellant calls an absurdity, the purpose of subsection 247(11) should be seen as extending the right to object or appeal found in Part I to the Minister’s decision under subsection 247(10), regardless of whether that decision is reflected in an assessment.
[67] With respect, I am not persuaded by this argument either. It seems likely to me that a downward transfer pricing adjustment would arise only in the context of an audit, or a reassessment or perhaps a taxpayer’s request for an adjustment because of one made under transfer pricing rules in another foreign jurisdiction. It seems unlikely to arise because the Minister chooses to review a transaction in isolation and to send a letter to a taxpayer stating that a downward transfer pricing adjustment was identified but will not be made.
[68]