Burlington Resources Finance Company v. The Queen

Burlington Resources Finance Company v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2015-03-20
Neutral citation
2015 TCC 71
File numbers
2012-2683(IT)G, 2013-2595(IT)G
Judges and Taxing Officers
Diane Campbell
Subjects
Income Tax Act
Decision Content
Docket: 2012-2683(IT)G
BETWEEN:
BURLINGTON RESOURCES FINANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard consecutively with the motion of Conoco Funding Company (2013-2595(IT)G) on December 9 and 10, 2014 at Toronto, Ontario
Before: The Honourable Justice Diane Campbell
Appearances:
Counsel for the Appellant:
Martha MacDonald
Brynne Harding
Counsel for the Respondent:
Jenny Mboutsiadis
Erin Strashin
ORDER
UPON Motion by the Appellant for an Order for the following relief:
1. directing the Respondent’s nominee to re-attend at the Respondent’s own expense and answer the questions set out in Schedule A (the “Disputed Questions”), and any proper question arising from the answer, from the discovery examinations held on June 2, 3, 4 and 5 and November 13 and 14, 2014, which the Respondent has refused to answer or has not fully answered;
2. awarding costs of the within Motion; and
3. granting such other relief as the Appellant may submit and this Honourable Court may allow.
AND UPON hearing the submissions of the parties;
IT IS ORDERED THAT:
The Respondent’s nominee, at the Respondent’s own expense, shall re‑attend a continuation of examinations for discovery, to be held within 60 days of the date of this Order, to answer the questions listed in the following categories:
1. Questions relating to the Crown’s position on the basis of the assessment: 1071, 2338 and 2339 (provided questions 2338 and 2339 are re-stated)
2. Questions relating to the Crown’s position on the capitalization of the Appellant: Questions 192, 2720, 2721, 2723, 2726, 2727
3. Questions relating to Burlington’s credit rating under the “Yield Approach”: Questions 2638 and 2639
4. Questions relating to requests for the lender’s view of the guarantee: Questions 107, 108, 112, 113, 2695 and 2790 are to be answered. Question 2788 should be answered but the Respondent is not required to give the proof of those facts. Questions 2789 and 2791 are to be answered insofar as they are confined to seeking the position the Respondent will adopt at trial.
5. Questions relating to the request for the nature of the guarantee fee payments: None
6. Questions respecting the Crown’s position on sham: Questions 33, 34, 35 and 36
7. Questions relating to the Crown’s position under paragraph 18(1)(b): Question 2616. Question 2617 should be answered, but only to the extent that this question is aimed at having the Respondent divulge the relevant facts in connection with its reliance on paragraph 18(1)(b) and is not seeking evidence.
8. Questions relating to requests for the Crown to describe the primacy of its arguments at trial: Questions 2766 and 2767
9. Questions respecting requests for the Crown’s position on the assessment of penalties: As per the parties’ agreement, to be resolved between the parties or through case management.
10. Questions respecting requests for the Crown’s position in respect of paragraphs 247(2)(b) and (d): Questions 2587, 2588, 2593, 2594 and 2610
11. Questions relating to the use of documents at trial: Question 2105 should be answered. I anticipate that response should also respond to questions 2708, 2711 and 2712. Questions 2298, 2299, 2301, 2303 and 2304 should be answered provided the Appellant rephrases those questions so that they refer to specific production numbers, or in some other manner, identifies those specific documents to which they require a response. Question 2310 should be answered. Questions 2311 and 2313 should be answered if the Appellant provides identification/production numbers for the intercompany agreements it is referencing in 2311 and the item 57 number it is referencing in 2313.
12. Questions relating to requests for audit records in respect of tax avoidance: Questions 897, 2327 and 2328
Any further proper questions arising from those answers shall be provided within 14 days of the completion date of the further examinations.
Costs shall be in the cause.
Signed at Ottawa, Canada, this 20th day of March 2015.
“Diane Campbell”
Campbell J.
Docket: 2013-2595(IT)G
BETWEEN:
CONOCO FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Motion heard consecutively with the motion of Burlington Resources Finance Company (2012-2683(IT)G) on December 9 and 10, 2014 at Toronto, Ontario
Before: The Honourable Justice Diane Campbell
Appearances:
Counsel for the Appellant:
Martha MacDonald
Brynne Harding
Counsel for the Respondent:
Jenny Mboutsiadis
Erin Strashin
ORDER
UPON Motion by the Appellant for an Order for the following relief:
1. directing the Respondent’s nominee to re-attend at the Respondent’s own expense and answer the questions set out in Schedule A (the “Disputed Questions”), and any proper question arising from the answer, from the discovery examinations held on June 5 and 6 and November 12 and 13, 2014, which the Respondent has refused to answer or has not fully answered;
2. awarding costs of the within Motion; and
3. granting such other relief as the Appellant may submit and this Honourable Court may allow.
AND UPON hearing the submissions of the parties;
IT IS ORDERED THAT:
The Respondent’s nominee, at the Respondent’s own expense, shall re-attend a continuation of examinations for discovery, to be held within 60 days of the date of this Order, to answer the questions listed in the following categories:
1. Questions relating to the Crown’s position on the basis of the assessment: Question 807
2. Questions relating to the Crown’s position on the capitalization of the Appellant: Questions 1068 and 1343
3. Questions relating to the Crown’s position on the Appellant’s credit rating under the “Yield Approach”: None.
4. Questions relating to the Crown’s position on the nature of the guarantee fee payments: Question 1127
5. Questions relating to the Crown’s position on the legal effectiveness of documents, sham and authenticity: Question 1224 has been answered at this point, but it will be incumbent upon the Respondent to provide its position in due course. Question 1290 should be answered, as long as it is limited to the facts and not the evidence or proof of those facts that the Respondent will rely on to support its position. Questions 1319, 1322, 1323, 1330 and 1331 should be answered.
6. Questions relating to the Crown’s position regarding the application of subsection 247(2) to the “Arrangements”: Questions 1454 and 1455
7. Questions relating to the Crown’s position under paragraph 18(1)(b): Questions 1160, 1161, 1164, 1428 and 1429 should be answered. Question 1435 should be answered, however, the Crown need not, in responding to this question, state how it intends to prove its case in this respect.
8. Questions relating to the Crown’s position respecting its primary argument: Questions 1664, 1666, 1667, 1668 and 1669.
9. Questions relating to the Crown’s position under paragraphs 247(2)(b) and (d): Question 1081 should be answered. Question 1215 should be answered as it pertains to paragraphs 247(2)(b) and (d). Questions 1216, 1653, 1656, 1657, 1658, 1659, 1660, 1661 1662 and 1663 should be answered. Questions 1404, 1406, 1407, 1408, 1409 and 1410 should be answered with further specifics. Question 1423 should be answered in respect to the facts that relate to the assertion that no arm’s length party would provide a guarantee. The Crown, however, need not provide the evidence that will prove that assertion.
10. Questions relating to the request for factual positions: Questions 1628, 1630 and 1671 should be answered. Question 1580 should be answered in respect to any facts that relate to the assertion that the guarantee fees were not incurred. However, this does not include the disclosure of the Crown’s evidence that will prove this assertion.
11. Questions about the use of documents at trial: Questions 942, 944, 945, 946, 948 and 949.
Any further proper questions arising from those answers shall be provided within 14 days of the completion date of the further examinations.
Costs shall be in the cause.
Signed at Ottawa, Canada, this 20th day of March 2015.
“Diane Campbell”
Campbell J.
Citation: 2015 TCC 71
Date: 20150320
Docket: 2012-2683(IT)G
BETWEEN:
BURLINGTON RESOURCES FINANCE COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2013-2595(IT)G
AND BETWEEN:
CONOCO FUNDING COMPANY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Campbell J.
[1] The Appellants, Burlington Resources Finance Company (“Burlington”) and Conoco Funding Company (“Conoco”) have brought motions, pursuant to Rules 4, 7, 95 and 110 of the Tax Court of Canada Rules (General Procedure) for the following:
1. directing the Respondent’s nominee to re-attend at the Respondent’s own expense and answer certain questions (the “Disputed Questions”), and any proper question arising from the answer, from the discovery examinations held on June 2, 3, 4 and 5 and November 13 and 14, 2014 (in the case of Burlington) and on June 5 and 6 and November 12 and 13, 2014 (in the case of Conoco) which the Respondent has refused to answer or has not fully answered;
2. costs of the within Motion; and
3. such other relief as the Appellant may submit and this Honourable Court may allow.
[2] The Appellants contend that the Disputed Questions are relevant to the matters in issue but that the Respondent has not answered, or has not fully answered, those questions.
[3] These motions for each Appellant were heard consecutively on December 9 and 10, 2014.
[4] The Respondent opposed the motions on the basis that all proper questions have been answered and that improper questions have been correctly refused.
The Facts [5] Briefly, the facts in the appeal of Burlington are as follows:
1. Burlington is a Nova Scotia unlimited liability company and a wholly-owned subsidiary of Burlington Resources Inc. (“BRI”), a resident U.S. corporation.
2. Burlington’s business is principally involved in obtaining financing to fund the operations of affiliated Canadian companies and, specifically, to borrow funds from public markets and to “on-loan” those proceeds to its affiliated Canadian entities, which were conducting businesses related to crude oil and natural gas assets.
3. Burlington, BRI and the affiliated corporations engaged in a series of transactions including the issuance of inter-company promissory notes, subscription and security agreements which, according to Burlington, were to ensure its payments due under the notes.
4. In 2001 and 2002, the Appellant borrowed approximately U.S. $3 billion and issued notes to arm’s length parties.
5. BRI unconditionally guaranteed the payment of the notes and Burlington “on-loaned” the proceeds to Canadian sister companies.
6. Burlington and BRI agreed that Burlington would pay guarantee fees to its non-resident parent corporation based on an annual guarantee fee of 50 basis points of the principal amount of the outstanding notes. According to the Appellant, the fees were incurred in exchange for BRI’s guarantees and were based upon advice received from investment banks.
7. During the 2002 to 2005 taxation years, Burlington paid approximately U.S. $83 million as guarantee fees to BRI and also incurred financing costs in the course of the issuance of its notes.
8. In calculating its income, in each of the 2002 to 2005 taxation years, Burlington deducted the guarantee fees that were paid annually to its parent company, BRI, pursuant to section 9 of the Income Tax Act (the “Act”), together with certain financing costs, deducted for each of the taxation years.
9. The Minister of Finance (the “Minister”) reassessed the Appellant, in respect to those taxation years, denying those deductions and imposing transfer pricing penalties pursuant to subsection 247(3) of the Act because Burlington failed to make reasonable efforts to determine the arm’s length transfer price in respect to the guarantees.
10. The Minister relied on paragraphs 247(2)(a) and (c) of the Act in reducing the amount of the guarantee fees to nil in each taxation year and claiming that the terms and conditions of this fee arrangement between Burlington and its parent company were not terms and conditions which would have existed between arm’s length parties. The Minister also relied on paragraphs 247(2)(b) and (d) in its pleadings to argue that the series of transactions giving rise to the fees would not have been entered into between arm’s length parties and cannot be considered to have been entered into primarily for bona fide purposes other than to obtain a tax benefit.
11. The Minister relied on paragraph 18(1)(a) of the Act to deny the financing costs, claiming that they were not incurred in order to earn income in respect of the Appellant’s business.
[6] The facts in the appeal of Conoco are similar to those of Burlington. Briefly, those facts include:
1. Conoco is also a Nova Scotia unlimited liability company and a wholly-owned subsidiary of Conoco Inc., a resident U.S. corporation.
2. Similarly to Burlington, this Appellant’s primary business involved obtaining financing from public markets in order to fund the operations of its affiliated Canadian corporations. It did so by having the parent company, Conoco Inc., guarantee the borrowing debt on the notes and it then proceeded to “on-loan” the funds to the affiliated entities.
3. Like Burlington, this Appellant and its parent company engaged in a series of transactions, including promissory notes, forward share subscription agreements and limited security agreements, in respect to the guarantees, in order to ensure its payments under the debt offerings.
4. In 2001, Conoco borrowed approximately $3.5 billion and issued notes to arm’s length parties for the purpose of financing the acquisition of Gulf Canada Resources Limited by related Canadian parties.
5. The Appellant’s parent company, Conoco Inc., unconditionally guaranteed the payment of the notes and Conoco “on-loaned” the proceeds to Canadian sister companies.
6. Like Burlington, the Appellant paid annual guarantee fees to the guarantor parent company in the amount of 50 basis points of the principal amount of the outstanding debt. Conoco claimed that the fees were incurred in exchange for the parent corporation’s guarantees.
7. During the 2002 to 2005 taxation years, Conoco paid approximately U.S. $109 million as guarantee fees to its parent corporation, Conoco Inc.
8. In calculating its income in each of the 2002 to 2005 taxation years, Conoco, like Burlington, deducted the guarantee fees paid annually to its parent company.
9. The Minister reassessed Conoco and denied the deductions thereby reducing the guarantee fees to nil in each taxation year and also imposing transfer pricing penalties pursuant to subsection 247(3) of the Act.
10. The Minister relied on paragraphs 247(2)(a) and (c) of the Act in reducing the amount of the guarantee fees to nil by claiming that the terms and conditions of the fee arrangement were not the terms and conditions which would have been entered into between arm’s length parties. The Minister also relied on paragraphs 247(2)(b) and (d) to argue that the series of transactions or arrangements giving rise to the fees would not reasonably be entered into between arm’s length parties and, consequently, were entered into, not for bona fide purposes, but for obtaining a tax benefit.
The Issues [7] The primary issues in respect to both appeals are the following:
(a) Whether the Minister properly reduced the guarantee fees to nil in each taxation year in determining that the Appellants could not deduct the guarantee fees in the calculation of their respective income in those taxation years; and
(b) Whether the Minister properly applied sections 247(3) and (4) of the Act in assessing the Appellants with the transfer pricing penalties.
[8] In respect to the guarantee fees in both appeals, the Respondent lists five separate sub issues:
(a) whether the Guarantee Fees were incurred by the Appellant for the purpose of earning or producing income from its business;
(b) whether the terms or conditions, including the Guarantee Fees, made or imposed in respect of the guarantees differed from those that would have been made between persons dealing at arm’s length;
(c) whether the terms or conditions, including the Guarantee Fees, made or imposed in respect of the Arrangements differed from those that would have been made between persons dealing at arm’s length;
(d) whether the guarantees would have been entered into between persons dealing at arm’s length and can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit;
(e) whether the arrangements would have been entered into between persons dealing at arm’s length and can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit;
…
(Reply to the Notice of Appeal in Conoco, para 9)
These are the same sub issues set out at paragraph 11 of the Further Amended Reply to the Appellant’s Notice of Appeal in Burlington.
[9] Since relevancy of a question posed in discovery is determined by reference to the pleadings, the basis of the reassessments in each appeal are worth noting. In the written submissions of the motion on behalf of Burlington, counsel states the following:
Basis of Reassessment: Paragraph 247(2)(a) and (c)
• The Minister of National Revenue (the “Minister”) reassessed the Appellant’s 2002 to 2005 taxation years to reduce the amount of the guarantee fees to nil, based solely on paragraphs 247(2)(a) and (c) Income Tax Act (Canada) (the “Act”). The basis of assessment was as follows:
• The “Price of the Guarantee Fee is Zero” theory – the Appellant should not pay for the guarantee because the Appellant had no employees and no capital.
• The “Price of the Guarantee Fee is Not Correct” theory – assuming the credit ratings provided by the Appellant in its contemporaneous documentation, the guarantee fee should have been between nil and the spread.
• The “Duplication of Service” theory – the Appellant’s status as an unlimited company formed under the laws of Nova Scotia was duplicative of the guarantee from the Appellant’s perspective.
Questions 1896-1920, Examination for Discovery Transcript of Kathy Fawcett held on June 3, 2014, Appellant’s Motion Record, Volume 2, Tab 6 at pages 494-500 [“Fawcell June 3 Transcript”]; Questions 2040-2083, Examination for Discovery Transcript of Kathy Fawcett held on June 4-5, 2014 at pages 532-540 [“Fawcett June 4-5 Transcript”].
(Outline of Appellant’s Submissions, page 5)
[10] In respect to the appeal of Conoco, the Appellant stated the following in respect to the basis of the Minister’s reassessment:
Basis of Reassessment: Paragraphs 247(2)(a) and (c)
• The Minister of National Revenue (the “Minister”) reassessed the Appellant’s 2002 to 2005 taxation years to reduce the amount of the guarantee fees to nil, based solely on paragraphs 247(2)(a) and (c) Income Tax Act (Canada) (the “Act”).
• The basis of assessment under paragraphs 247(2)(a) and (c) was as follows:
• Theory #1 – “There should not be a fee for this guarantee as in the absence of negative covenants on payment of dividends and/or return of capital, the guarantee only assuages the concerns of the bondholders which arose because of the nature of the non-arm’s length relationship.”
• Theory #2 – “There is no credit spread as the guarantor and the guaranteed parties have the same rating and thus, there should not be a guarantee fee for interest rate savings that clearly do not exist.”
• Theory #3 – “The guarantee fees are considered redundant because [the Appellant] is a NSULC, thus [the parent] would have been already liable for [the Appellant’s] unsatisfied debts. Moreover, we believe that [the Appellant] will not pay any guarantee fee with a subscription agreement in place to cover its debt obligations.”
Question 864-895, Examination for Discovery Transcript of Kathy Fawcett held on June 5 and 6, 2014, Appellant’s Motion Record, Volume 1, Tab 5 pages 202-209 [“Fawcett June Transcript”].
(Outline of Appellant’s Submissions, page 5)
The Principles of Discovery [11] Caselaw is clear and abundant. The core of discovery principles is that its scope should be wide, with relevancy construed liberally, without, however, allowing it to enter the realm of a fishing expedition. These basic principles are essential because the purpose of discovery is to enable parties to know the case they have to meet at trial, to know the facts upon which the opposing party relies, to narrow or eliminate issues, to obtain admissions that will facilitate the proof of matters in issue and, finally, to avoid surprise at trial (General Electric Capital Canada Inc. v The Queen, 2008 TCC 668, 2009 DTC 1186, at para 14). This is all with a view to making the hearing of an appeal streamlined and to ensure that the parties are focussed on the appropriate issues.
[12] In the decision of Baxter et al v The Queen, 2004 TCC 636, 2004 DTC 3497, at paragraph 13, Chief Justice Bowman, as he was then, summarized the principles concerning relevancy of questions in discoveries as follows:
(a) relevancy on discovery must be broadly and liberally construed and wide latitude should be given;
(b) a motions judge should not second guess the discretion of counsel by examining minutely each question or asking counsel for the party being examined to justify each question or explain its relevancy;
(c) the motions judge should not seek to impose his or her views of relevancy on the judge who hears the case by excluding questions that he or she may consider irrelevant but which, in the context of the evidence as a whole, the trial judge may consider relevant;
(d) patently irrelevant or abusive questions or questions designed to embarrass or harass the witness or delay the case should not be permitted.
[13] A summary of the general principles gleaned from the caselaw was provided by Justice V. Miller at paragraph 60 of Kossow v The Queen, 2008 TCC 422, 2008 DTC 4408, as follows:
1. The principles for relevancy were stated by Chief Justice Bowman and are reproduced at paragraph 50.
2. The threshold test for relevancy on discovery is very low but it does not allow for a “fishing expedition”: Lubrizol Corp. v. Imperial Oil Ltd., [1997] 2 FC 3, at para. 19.
3. It is proper to ask for the facts underlying an allegation as that is limited to fact-gathering. However, it is not proper to ask a witness the evidence that he has to support an allegation: Sandia Mountain Holdings Inc. v. The Queen, [2005] 2 CTC 2297, at para. 19(iii).
4. It is not proper to ask a question which would require counsel to segregate documents and then identify those documents which relate to a particular issue. Such a question seeks the work product of counsel: SmithKline Beecham Animal Health Inc. v. The Queen, [2001] 2 CTC 2086, at para. 11.
5. A party is not entitled to an expression of the opinion of counsel for the opposing party regarding the use to be made of documents: SmithKline Beecham Animal Health Inc. v. The Queen, Ibid.
6. A party is entitled to have full disclosure of all documents relied on by the Minister in making his assessment: Amp of Canada v. Canada, [1987] F.C.J. No. 149.
7. Informant privilege prevents the disclosure of information which might identify an informer who has assisted in the enforcement of the law by furnishing assessing information on a confidential basis. The rule applies to civil proceedings as well as criminal proceedings: Webster v. The Queen, 2003 DTC 211, at para. 14.
8. Under the Rules a party is not required to provide to the opposing party a list of witnesses. As a result a party is not required to provide a summary of the evidence of its witnesses or possible witnesses: Loewen v. The Queen, [2007] 1 CTC 2151, at para. 14.
9. It is proper to ask questions to ascertain the opposing party’s legal position: Six Nations of the Grand River Band v. Canada (Attorney General), [2000] OJ No. 1431, at para. 14.
10. It is not proper to ask questions that to go the mental process of the Minister or his officials in raising the assessments: Webster v. The Queen, Ibid.
[14] Justice C. Miller in HSBC Bank Canada v The Queen, 2010 TCC 228, 2010 DTC 1159, at paragraphs 14 and 15, after quoting the Kossow principles, added the following to his review of the scope of discovery questions:
[14] The following additional principles can be gleaned from some other recent Tax Court of Canada case authority:
1. The examining party is entitled to “any information, and production of any documents, that may fairly lead to a train of inquiry that may directly or indirectly advance his case, or damage that of the opposing party”: Teelucksingh v. The Queen, 2010 TCC 94, 2010 DTC 1085.
2. The court should preclude only questions that are “(1) clearly abusive; (2) clearly a delaying tactic; or (3) clearly irrelevant”: John Fluevog Boots & Shoes v. The Queen, 2009 TCC 345, 2009 DTC 1197.
[15] Finally in the recent decision of 4145356 Canada Limited v. The Queen, 2009 TCC 480, 2009 DTC 1313, I concluded:
(a) Documents that lead to an assessment are relevant;
(b) Documents in CRA files on a taxpayer are prima facie relevant, and a request for those documents is itself not a broad or vague request;
(c) Files reviewed by a person to prepare for an examination for discovery are prima facie relevant; and
(d) The fact that a party has not agreed to full disclosure under section 82 of the Rules does not prevent a request for documents that may seem like a one-way full disclosure.
[15] The Federal Court of Appeal in The Queen v Lehigh Cement Limited, 2011 FCA 120, 2011 DTC 5069, at paragraphs 34 and 35, described the general limits respecting discoveries:
[34] The jurisprudence establishes that a question is relevant when there is a reasonable likelihood that it might elicit information which may directly or indirectly enable the party seeking the answer to advance its case or to damage the case of its adversary, or which fairly might lead to a train of inquiry that may either advance the questioning party’s case or damage the case of its adversary. Whether this test is met will depend on the allegations the questioning party seeks to establish or refute. See Eurocopter at paragraph 10, Eli Lilly Canada Inc. v. Novopharm Ltd. 2008 FCA 287, 381 N.R. 93 at paragraph 61 to 64; Bristol-Myers Squibb Co. v. Apotex Inc. at paragraphs 30 to 33.
[35] Where relevance is established the Court retains discretion to disallow a question. The exercise of this discretion requires a weighing of the potential value of the answer against the risk that the party is abusing the discovery process. See Bristol-Myers Squibb v. Apotex Inc. at paragraph 34. The Court might disallow a relevant question where responding to it would place undue hardship on the answering party, where there are other means of obtaining the information sought, or where “the question forms part of a ‘fishing expedition’ of vague and far-reaching scope”: Merck & Co. v. Apotex Inc., 2003 FCA 438, 312 N.R. 273 at paragraph 10; Apotex Inc. v. Wellcome Foundation Ltd., 2008 FCA 131, 166 A.C.W.S. (3d) 850 at paragraph 3.
[16] Finally, a party may be compelled to answer questions that relate to any issue contained in the pleadings, regardless of whether a party has advised or undertaken that it will no longer place reliance on that position or provision (ExxonMobil Canada Hibernia Co. v The Queen, 2014 FCA 168, 2014 DTC 5086).
[17] The jurisprudence is comprehensive and the guidelines well established. As many cases have noted, there is no formula that can be applied in determining whether questions should be answered. The ultimate purpose is to fairly, reasonably and expeditiously move matters along to a hearing. Given those parameters, it is nonetheless surprising that such a multitude of questions are before me. It is even more surprising that, shortly before issuing these reasons, as the case management Judge, I received a request from the Respondent stating that the Crown was intending to bring a motion with respect to the Appellant’s answers to undertakings that was expected to last one day. I cannot conclude that common sense is the driving force behind these motions which come increasingly before this Court. In fact, it appears common sense is so uncommon in these types of motions that it is almost non-existent. I would have thought that Respondent counsel might at least want to review my reasons respecting its refusals in the Appellant’s questions before embarking on yet another motion. That might well negate the necessity of bringing a further motion or, at the very least, limit it in scope. After all, that would be the prudent, common sense and economical approach in acting in a client’s best interests.
BURLINGTON RESOURCES FINANCE COMPANY [18] Against this background, I turn now to the motions of the Appellants. I will first address the motion of Burlington. Counsel for the Appellants in both motions grouped the questions into various categories and I intend to follow those groupings.
[19] First, counsel advised that there are a number of questions that are no longer part of this motion. Those are: 2574, 2575, 2576, 2577, 2579, 2580, 2581, 2582, 2583, 2584, 2585, 2586, 2591, 2595, 2596, 2597, 2598, 2599, 2600, 2601, 2602, 2693, 2694, 2707, 2771, 2772, 2773, 2774, 2775, 2776, 2777, 2778, 2783 and 2784.
[20] Second, during the hearing of this motion, the Respondent advised that it would no longer be relying on paragraphs 247(2)(b) and (d) as a basis to argue that no deduction should be allowed in respect to the guarantee fees. However, there has been no amendment to the pleadings and no steps taken to amend since the date of the hearing of this motion in December, 2014.
I. Questions on the Crown’s Position A. Questions Relating to the Crown’s Position on the Basis of the Assessment: Re: Questions 1071, 2333, 2338, 2339 and 2340
The Appellant’s Position [21] The Appellant argues that these questions should be answered because they relate to the Crown’s legal position respecting the three proposed theories that were relied upon in raising the assessment. The Appellant states that it is entitled to know whether the Crown will be adopting any of these three theories at trial or whether all three theories will be rejected. This will enable the Court to properly assign the burden of proof so that the Appellant can properly prepare for trial.
The Respondent’s Position [22] The Respondent contends that it answered questions 2333 and 2340. It states that question 1071 is too onerous a request as it would require the Respondent to review a large draft document before it could advise if it was going to adopt any part of it. Questions 2338 and 2339 should not be answered as they are poorly worded and confusing.
The Court’s Direction [23] These questions relate to three theories proposed in an economist’s report that was produced for the Canada Revenue Agency (“CRA”) as part of its audit of the Appellant. These theories, respecting the deductibility of the guarantee fees, supported the assessment. If the Respondent has not answered these questions and if in fact they relate to the legal position to be taken at trial, then they should be answered provided they are not inquiring into the evidence or the reasoning that may support those relevant facts or the opposing party’s legal research.
[24] Question 1071 is proper and must be answered. The Respondent must commit itself to whether it is adopting all of the economist’s report, none of it or parts of it.
[25] Question 2333 was answered but it led to further questions 2338 and 2339 in order to clarify the response at question 2333. Questions 2338 and 2339 are proper questions as they relate to the Crown’s legal position. Therefore, they must be answered. I would ask that the Appellant, however, re-state both questions as they are lengthy and confusing in their present format.
[26] Question 2340 was answered and the Respondent’s answer was “yes”.
B. Questions Relating to the Crown’s Position on the Capitalization of the Appellant: Re: Questions 192, 217, 218, 2720, 2721, 2723, 2724, 2726, 2727, 2728, 2729
The Appellant’s Position [27] The Appellant believes that, according to the Respondent’s pleadings, considerable significance is attached to the role of capitalization and, particularly, the Appellant’s lack of capitalization in applying subsection 247(2). The Appellant states that it is unsure whether there is an issue between the parties respecting the Appellant’s capitalization but if there is then the Appellant argues that it is entitled to know whether and how the Crown is departing from the Minister’s basis of assessment respecting capitalization under the “Price of the Guarantee Fee is Zero” theory.
The Respondent’s Position [28] The Respondent states that it has answered questions 192, 217 and 218; that questions 2720 and 2721 actually seek to know whether and how the Respondent will rely on the fact of how the Appellant was capitalized at trial and therefore seek the Respondent’s legal analysis and evidence; that questions 2723 to 2727 are improper as they seek the evidence that the Respondent will rely on to support its allegations in the pleadings; and that questions 2728 and 2729 were improper because they ask why the Crown made litigation decisions which would be protected by litigation privilege.
The Court’s Direction [29] Question 192 is related to the several questions leading up to it. Question 192 asks whether the Respondent, in light of its pleaded argument that no arm’s length party would agree to guarantee the Appellant’s debts given its lack of capitalization, would be taking the position that the arm’s length principle in section 247 requires that the Appellant be capitalized other than it had been. At question 183, the Appellant asks what the Appellant’s level of capitalization was, as that phrase was used in the Further Amended Reply to the Notice of Appeal. The Respondent answered that the Minister made the assumption set forth in paragraph 6(k). Then, at question 187, when asked whether the Respondent was intending to depart from the point‑in‑time analysis reference in (k), the Respondent responded in the affirmative. If the Respondent is departing from its stated position, it should disclose its new legal position. Question 192 is proper and should be answered.
[30] Questions 217 and 218 have been answered. The Respondent advised that, if and when it turned its mind to the possible position suggested by the Appellant, it would so advise the Appellant. I consider this an ongoing undertaking.
[31] Questions 2720 and 2721 are simply asking the Respondent whether capitalization remains in issue under paragraphs 247(2)(a) and (c) and paragraphs 18(1)(a) and 20(1)(e.1). They are not seeking evidence and are therefore proper questions that require an answer.
[32] Question 2723 should be answered. It relates to question 1289 which was answered in respect to a subsequent undertaking. The Respondent must advise whether it will be adopting this same position at trial.
[33] Question 2724 requests information from the Respondent in respect to its view of the appropriate levels of capitalization. This is an improper question and need not be answered as it seeks evidence that the Respondent will use to argue its position at trial.
[34] Questions 2726 and 2727 are proper questions as they ask the Respondent to identify the provisions which it will use in adopting a particular allegation.
[35] Questions 2728 and 2729 are not proper as they go to the thought processes of the Crown in respect to what facts led it to abandon a position.
C. Questions Relating to Burlington’s Credit Rating Under the “Yield Approach”: Re: Questions 486, 487, 488, 2492, 2493, 2494, 2495, 2621, 2624, 2625, 2638, 2639, 2644, 2645, 2646, 2647, 2648, 2649, 2650, 2780, 2781, 2782
The Appellant’s Position [36] The decision of this Court in General Electric, which was upheld by the Federal Court of Appeal, considered and applied the yield approach in respect to the arm’s length transfer price for a financial guarantee under paragraphs 247(2)(a) and (c). The questions under this category are about “… yield approach, the rating without the guarantee, whether certain specific particular factors are in or out, are proper questions because they are relevant to paragraph 247(2)(a) and (c)” (Transcript, page 27). The Crown has pleaded as an assumption that “… the Appellant could not obtain an investment worthy credit‑rating without the guarantee provided by its Parent.” (Outline of Appellant’s Written Submissions, page 10). Yet the Respondent has refused to answer questions pertaining to the Appellant’s credit rating for the purposes of applying the yield approach or of the facts and methodology which relate to and should be used to ascertain that credit rating.
The Respondent’s Position [37] The Respondent stated that questions 2638 and 2639 were refused because they seek the facts upon which the Respondent places reliance to prove its allegations contained in the pleadings. Questions 2781 and 2782 were refused because they are hypothetical questions and call for conjecture. The Respondent contends that the balance of the questions under this category have either been answered or refused because they had been previously answered.
The Court’s Direction [38] Questions 486, 487 and 488 concern the Appellant’s credit rating for the purposes of applying the yield approach. The questions as posed have been answered.
[39] Questions 2492, 2493, 2494 and 2495 relate to the Crown’s position on whether the Appellant could issue debt without the guarantee and whether the Appellant’s credit rating would have been lower than BBB-. These questions were answered by the Respondent in its undertakings.
[40] Question 2621 is a follow-up question to question 488 but, since it is essentially the same question as 488, it has already been answered.
[41] Questions 2624 and 2625 seek information respecting the Crown’s opinion on the appropriate method to be employed in a determination of the Appellant’s credit rating for the purposes of applying the yield approach. These questions are improper and need not be answered because a determination of the appropriate method in resolving the Appellant’s credit rating is an issue that would be before the trial judge and, in all likelihood, requires the assistance of expert evidence.
[42] Questions 2638 and 2639 ask the Crown for the facts that it will reply upon to say that, if the imputed rating allegation applies, the Appellant’s credit rating would be the same as that of the parent company or the same as that of the corporation holding the underlying debt owing to the Appellant. These questions should be answered to the extent the responses are limited to the facts because the evidence respecting the Respondent’s allegations in both questions need not be provided.
[43] Questions 2644, 2645, 2646, 2647, 2648, 2649 and 2650 are proper questions but were answered at questions 486 to 488.
[44] Question 2780 has been answered.
[45] Questions 2781 and 2782 are hypothetical questions and need not be answered.
D. Questions Relating to Requests for the Lender’s View of the Guarantee: Re: Questions 107, 108, 112, 113, 2695, 2788, 2789, 2790 and 2791
The Appellant’s Position [46] The Appellant requires responses to those questions as they will inform the Appellant of the essential components of the Crown’s legal position and the case it has to meet at trial in respect to paragraphs 18(1)(a), 20(1)(e.1) and 247(2)(a) and (c). These questions arise because the